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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended February 26, 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)
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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)
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Registrant's telephone number, including area code: (717) 761-2633
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value New York Stock Exchange
Pacific Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant based on the closing price at which such
stock was sold on the New York Stock Exchange on June 30, 2000 was
approximately $846,587,542. For purposes of this calculation, executive
officers, directors and 5% shareholders are deemed to be affiliates of the
company.
As of June 30, 2000, the registrant had outstanding 329,671,633 shares of
Common Stock, par value $1.00 per share.
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TABLE OF CONTENTS
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Page
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Explanatory Statement................................................... 1
Cautionary Statement Regarding Forward-Looking Statements............... 1
PART I
Item 1. Business................................................... 2
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................ 18
Item 6. Selected Financial Data.................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 22
Item 7A. Quantitative and Qualitative Disclosures About Market
Risks...................................................... 35
Item 8. Financial Statements and Supplementary Data................ 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant......... 37
Item 11. Executive Compensation..................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 48
Item 13. Certain Relationships and Related Transactions............. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 51
Signatures........................................................... S-1
Financial Statements................................................. F-1
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EXPLANATORY STATEMENT
After the filing of its Annual Report on Form 10-K for the fiscal year ended
February 26, 2000, Rite Aid announced that it had entered into an agreement to
sell its pharmacy benefits management ("PBM") segment. The PBM sale was
completed on October 2, 2000. Since Rite Aid is filing this amended Form 10-K,
the PBM segment has been reclassified as a discontinued operation.
After filing the 2000 10-K, 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 involved. 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 is immaterial, the company is further restating the
financial statements included in this amended Form 10-K because of the effect
of the adjustments 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.
For additional information, see "Business--Restatement of Historical
Financial Statements" and notes 23, 25 and 26 to the consolidated financial
statements.
The information contained in this amended Form 10-K is as of July 11, 2000,
except for the information relating to the sale of the PBM segment and the
further restatement of the consolidated financial statements, which have been
updated through October 2, 2000. This amended Form 10-K 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-K/A and is incorporated by
reference herein.
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 Operation"-"Factors Affecting Our Future
Prospects" below.
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PART I
ITEM 1. Business
We are the second largest retail drugstore chain in the United States based
on store count, serving customers in 30 states across the country and in the
District of Columbia. As of June 30, 2000, we operated 3,776 stores and had a
first or second place market position in 34 of the 65 major U.S. metropolitan
markets in which we operated. During the fiscal year ended February 26, 2000
("fiscal 2000") we operated in two business segments: the retail drug segment
and the pharmacy benefit management ("PBM") segment.
Retail Drug Segment. Through our retail drug segment, we sell prescription
drugs and a wide assortment of general merchandise. Prescription drug sales
represented approximately 58.4% of our total sales during fiscal 2000. Our
drugstores filled over 190 million prescriptions during fiscal 2000. Our
drugstores also offer non-prescription health and personal care items,
cosmetics, household items, beverages, convenience foods, greeting cards, one-
hour photo development, seasonal merchandise and numerous other everyday and
convenience products, which we refer to as our "front-end products."
PBM Segment. During fiscal 2000, Rite Aid owned PCS Health Systems, Inc.
("PCS"), one of the country's largest pharmacy benefits managers, or PBMs. PCS
provides pharmacy benefit management services to employers, insurance carriers
and managed care companies. During fiscal 2000, PCS processed approximately
300 million prescriptions, served more than 1,200 health plan sponsors and
assisted, through its customers, approximately 50 million people with their
pharmaceutical needs. On July 12, 2000 we announced that we had entered into
an agreement to sell PCS and the other assets of our PBM segment. This sale
was consummated on October 2, 2000. As a result of the sale, the PBM segment
is reported as a discontinued operation for all relevant periods in the
financial statements included elsewhere in this Annual Report on Form 10-K/A.
Our headquarters is located at 30 Hunter Lane, Camp Hill, Pennsylvania
17011, and our telephone number is (717) 761-2633. Our common stock is listed
on the New York Stock Exchange and the Pacific Stock Exchange under the
trading symbol "RAD."
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 problems that confronted Rite Aid. We believe that
these short term challenges have now been substantially resolved. 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
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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 strengthen the company's internal accounting systems
and controls. We believe that the successful implementation of these plans
will allow Rite Aid to meet the continuing challenges that it faces.
The Initial Problems
At the time of their arrival, the new management team faced a series of
immediate challenges. These included:
. Deteriorating Store Operations. Rite Aid experienced substantial
operational difficulties during fiscal 2000. The principal problem was a
decline in customer traffic and revenues due to inventory shortages,
reduced advertising and uncompetitive prices on front-end products. By
November 1999, our out-of-stock level had reached 29% and many popular
products were not available in our stores. This situation resulted from
liquidity constraints and concerns, tighter vendor credit terms
resulting from disputes over payments for outdated or damaged
merchandise and a delay in the opening of Rite Aid's new distribution
center in Perryman, MD which caused delays in the shipment of seasonal
merchandise. During fiscal 2000, Rite Aid also suspended its practice of
circulating regular newspaper advertising supplements. This disrupted
customer traffic and adversely affected revenues. In order to offset the
effects of these actions, former management raised the prices of front-
end products above competitive levels. Customers rejected the higher
prices and revenues continued to decline.
. Restatements of Financial Statements. On June 1, 1999, Rite Aid filed
its Annual Report on Form 10-K for the fiscal year ended February 27,
1999 ("fiscal 1999"). In that filing, Rite Aid restated its consolidated
financial statements for the fiscal years ended February 28, 1998
("fiscal 1998") and March 1, 1997, as well as the interim periods in
fiscal 1999 and 1998. The restatement followed discussions between Rite
Aid and the Staff of the Securities and Exchange Commission (the "SEC")
concerning the Staff's review of Rite Aid's filed registration
statement. On October 11, 1999, following further discussions with the
Staff, Rite Aid announced that it would again restate previously
reported interim and annual financial statements. In its quarterly
report for the second quarter of fiscal 2000, filed on November 2, 1999,
Rite Aid restated its interim financial statements for the thirteen
weeks ended May 29, 1999, the thirteen and twenty-six weeks ended August
29, 1998 and its balance sheet as of February 27, 1999. At that time,
Rite Aid indicated that additional adjustments to its financial
statements might be necessary. On November 11, 1999, KPMG LLP resigned
as Rite Aid's auditor and withdrew its report on the company's
consolidated financial statements for the three-year period ended
February 27, 1999.
. Deteriorating Financial Position. From March 1995 through February 2000,
Rite Aid spent $1.9 billion to build, renovate or relocate stores and
$1.5 billion to acquire PCS. These expenditures, together with the
substantial amounts paid to acquire 1,639 stores during the same period,
substantially increased Rite Aid's level of debt and placed a
significant strain on its short-term liquidity. The problems were
exacerbated by Rite Aid's inability to complete a planned public
offering of equity securities to repay the $1.3 billion short-term
credit facility, which had been established to support the commercial
paper issuances used to acquire PCS, which was due in October 1999. In
June 1999, Rite Aid borrowed $300.0 million from one of its banks under
a demand note because it had issued the maximum amount of commercial
paper that was permitted under its credit facilities. In September 1999,
Rite Aid informed its banks that it anticipated being in default on
various covenants under both its $1.3 billion PCS acquisition credit
facility (the "PCS credit facility") and its $1.0 billion general credit
facility (the "RCF credit facility") and in October 1999, Standard &
Poor's and Moody's downgraded Rite Aid's credit rating. Following these
events, Rite Aid lost access to the commercial paper market. On October
27, 1999, in connection with the preferred stock investment by an
affiliate of Leonard Green & Partners, L.P., Rite Aid's banks agreed to
extend the maturity date of the PCS credit facility, the RCF credit
facility and the $300.0 million demand note, but only until November 1,
2000.
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New Management's Response
Since arriving, Rite Aid's new management team has taken a series of steps to
address the serious problems that confronted the company in December 1999.
These have included:
. Stabilizing our Store Operations. Since their arrival, new management
has:
-- reduced the out-of-stock level in its distribution facilities from
29% in November 1999 to 11% for the week ended July 6, 2000;
-- significantly curtailed new store growth by reducing the number of
new and relocated stores planned for fiscal 2001 and 2002 from
approximately 150 each year to approximately 85 and 115 for the
respective years;
-- strengthened vendor relationships by substantially resolving the
major vendor disputes that had arisen during fiscal 1999 and 2000;
-- reduced the prices of key front-end products, including many popular
health and beauty aid products, by approximately 15%;
-- sold $300 million in retail value of discontinued product at a
substantial discount;
-- established a 52-week national advertising program highlighting key
product categories as well as vendor cooperative events;
-- established and executed effective product promotional programs; and
-- reorganized our management structure to focus specifically on
critical functions, such as store operations, pharmacy operations,
managed care and customer service.
These actions have begun to improve our operating results. For the four
weeks ended April 22, 2000, the five weeks ended May 27, 2000, and the
four weeks ended June 24, 2000, we reported increases in same store
sales of 7.1%, 6.6% and 9.7%, respectively, over the same periods in the
prior year. These increases compare favorably to February and March
2000, when our same store sales increases were 3.4% and 4.8%,
respectively.
. Re-Auditing our Financial Statements and Restoring Credibility in our
Financial Reporting. Following the resignation of KPMG LLP and the
withdrawal of their report, new management acted to identify, assess and
resolve Rite Aid's financial reporting issues. This process included a
re-evaluation of the accounting issues identified before December 1999
as well as an investigation and restatement of financial statements for
fiscal 1999 and 1998 and the first two quarters of fiscal 2000.
Following the arrival of our new management team we:
-- engaged Deloitte & Touche LLP, through our audit committee, as our
independent public accounting firm to audit our financial statements
for fiscal 2000 and our restated financial statements for fiscal 1999
and 1998;
-- engaged the law firm of Swidler Berlin Shereff Friedman LLP ("Swidler
Berlin"), through our audit committee, to conduct an investigation of
the company's reporting and accounting practices and Swidler Berlin
retained Deloitte & Touche LLP to assist them with forensic
accounting;
-- determined, based on new management's assessment of the situation,
not to make any further periodic filings with the SEC until the
review of the company's books and records was finished and a new
audit had been completed;
-- retained Arthur Andersen LLP to assist us in a reconciliation of Rite
Aid's books and records for fiscal years 2000, 1999 and 1998;
-- began to develop a plan to strengthen the company's internal
accounting systems and controls.
This process concluded with the preparation of the financial statements
contained in this annual report. In addition, the Swidler Berlin firm
conveyed the results of its investigation to the audit committee and to
management and these results were considered in connection with the
preparation and restatement of financial statements. There is a summary
of the principal accounting issues addressed in the restatement of the
financial statements under the caption "--Restatement of Historical
Financial Statements." See also notes 23 and 25 of the notes to
consolidated financial statements.
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. Stabilizing our Financial Condition and Liquidity. New management has
addressed Rite Aid's immediate liquidity needs and stabilized its
financial condition through a series of refinancing transactions
completed in June 2000. Since December 1999, Rite Aid has:
-- obtained consents from its various lenders and bondholders to
postpone the required filing dates under its debt agreements for the
third quarter and full year fiscal 2000 SEC reports until July 11,
2000;
-- entered into a new $1.0 billion senior secured credit facility that
matures in August 2002, including a $500.0 million term loan that
was used to refinance our $300.0 million receivables securitization
facility, pay transaction fees and provide funds for general
corporate purposes and a $500.0 million revolving credit facility;
-- restructured the terms of and extended the maturity dates of the
outstanding debt under the PCS credit facility and the RCF credit
facility until August 2002;
-- exchanged an aggregate of $374.3 million of our outstanding notes
due in December 2000 and 2001 for $374.3 million of our notes due in
September 2002;
-- exchanged $284.8 million of our outstanding debt for 51.8 million
shares of Rite Aid common stock and $274.8 million of our
outstanding debt which was due in 2000 and 2001 for an equivalent
amount of secured exchange debt due August 2002;
-- obtained the agreement of two financial institutions to purchase
$93.2 million of our notes due September 2002 when the balance of
our 5.5% notes mature in December 2000; and
-- exchanged $177.8 million in principal amount of our 5.25%
convertible subordinated notes due 2002 for 17.8 million shares of
our common stock.
Rite Aid continues to be highly leveraged and the covenants of our new
senior secured credit facility and our other credit facilities place
constraints on our operations. However, as a result of the actions
described above, we believe that Rite Aid now has the financial
flexibility and liquidity necessary to execute its long term business
strategy.
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
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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 quality 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 branded label, 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 an Adequate 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 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 plan 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. New management expects that Arthur Andersen LLP will
continue to provide assistance as needed until we are able to operate an
adequate and reliable 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 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 the SEC
and the United States Attorney;
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-- 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."
Restatements of Historical Financial Statements
The consolidated financial statements and summarized quarterly financial
information included in this annual report 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 million for fiscal 1998 and fiscal 1999, respectively and to reduce the
net loss by $10.0 million for fiscal 2000. On an aggregate basis, the
adjustments reduced Rite Aid's retained earnings at February 27, 1999 and
February 26, 2000 by $1.6 billion and $1.6 million, respectively.
The principal adjustments to Rite Aid's financial statements are summarized
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.
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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
charges 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 level to an
individual store level because this is the lowest level of independent cash
flows ascertainable for purposes of measuring impairment.
For additional information, including information relating to the further
restatement of the consolidated financial statements reflected in this amended
Form 10-K, see notes 23 and 25 of the notes to consolidated financial
statements.
Description of Business
Retail Drug Segment
Rite Aid's stores sell prescription drugs and a wide assortment of general
merchandise, including over-the-counter drugs, health and personal care items,
cosmetics, greeting cards, household items, convenience foods, photo
development services and seasonal merchandise. We distinguish our stores from
other national chain drugstores in part through the Rite Aid private label
brands, our "stores-within-Rite Aid stores" program with GNC and by our
Internet presence through our website and the drugstore.com website.
Products and Services. During fiscal 2000, sales of prescription drugs
represented approximately 58.4% of our total sales. Rite Aid has derived
revenues of $7.8 billion, $6.7 billion and $5.7 billion, respectively, from
prescription drug sales for each of its last three fiscal years. Rite Aid
sells approximately 20,000 different types of non-prescription, or front-end,
products. No single front-end product category contributed significantly to
Rite Aid's sales during fiscal 2000 although certain front-end product classes
contributed notably to Rite Aid's sales. Our principal classes of products are
the following:
<TABLE>
<CAPTION>
FY 2000
Percentage of
Product Class Sales/Revenues
------------- --------------
<S> <C>
Prescription drugs............................................ 58.4%
Vitamins and mineral supplements.............................. 2.0
Cosmetics..................................................... 3.0
Seasonal...................................................... 2.0
Photo Development............................................. 2.0
Beer, wine and liquor......................................... 2.0
Greetings cards............................................... 2.0
</TABLE>
Rite Aid offers over 1,500 products under the Rite Aid private label brand,
which contributed approximately 9.2% of our front-end sales in fiscal 2000.
During fiscal 2000, Rite Aid added 80 products under its private label. One of
new management's goals is to increase the number and the sales of our private
label brand products.
8
<PAGE>
In July 1999, Rite Aid acquired a 22% stake in drugstore.com, an online
source for health, beauty and pharmacy products, for cash of $8.1 million and
our agreement to provide access to our pharmacy networks and insurance
coverages, advertising contracts and exclusivity agreements. In connection
with this investment, Rite Aid and drugstore.com entered into a 10-year
exclusive strategic alliance pursuant to which drugstore.com became the
exclusive customer online link for prescriptions and other products and
services offered at all Rite Aid retail drugstores. The agreement gave Rite
Aid an immediate presence in the Internet drugstore business and resulted in
one of the first online pharmacies. We are focusing on leveraging our
relationship with drugstore.com to increase online sales and to generate
higher in-store sales to online customers who select in-store order pick-up.
At June 30, 2000, we owned approximately 18% of drugstore.com.
On January 7, 1999, Rite Aid announced a strategic alliance with GNC under
which Rite Aid agreed to open, own and operate a minimum of 1,500 GNC "stores-
within-Rite Aid-stores" across the country over a period of approximately four
years. GNC is a leading nationwide retailer of vitamin and mineral supplements
and personal care, fitness and other health-related products. As of June 30,
2000, we built 400 GNC stores-within-Rite Aid-stores. We plan to open 500 GNC
departments in our stores during fiscal 2001.
Rite Aid Stores. In February 1995, Rite Aid initiated a campaign to expand
and modernize its store base. During fiscal 1995, Rite Aid acquired 312 stores
located in the midwest and northeast regions in three acquisition transactions
for a total cost of approximately $175.7 million. In fiscal 1997, Rite Aid
acquired Thrifty PayLess, a drugstore chain with 1,006 stores located on the
west coast, for approximately $1.5 billion. In the same year, Rite Aid
acquired Taylor Drug Stores and Concord Drugs, Inc. for an aggregate cost of
$33.6 million. In fiscal 1998, Rite Aid acquired the K&B, Incorporated and
Harco, Inc. chains, with 186 and 146 stores, respectively, for a total cost of
$335.0 million, net of cash acquired. These stores were located in the
southern region of the United States. In February 1999, Rite Aid acquired
Edgehill Drugs, Inc., which had 25 stores in Maryland and Delaware, for $24.5
million in cash. As of June 30, 2000, we had fully integrated these acquired
stores into our operations.
Rite Aid also has been modernizing its storebase. Rite Aid began opening
prototype stores in 1995 that include features that we believe increase
customer satisfaction, including drive-through pharmacies, one-hour film
developing departments, 24-hour stores and a layout that is designed to be
attractive to our customers.
During fiscal 2000, Rite Aid opened 77 new stores, relocated 180 stores,
remodeled 14 stores and closed 181 stores. On a regular basis throughout the
year, we evaluate the performance of our stores. Stores that are redundant,
underperforming or otherwise unsuitable are closed or relocated. Our current
plan for fiscal 2001 is to open approximately 12 new stores, relocate 73
stores and close 53 stores.
As of June 30, 2000, Rite Aid operated 3,776 retail drugstores in the
eastern, southern and western regions of the United States and the District of
Columbia. Rite Aid's strategy is to locate its stores at convenient locations
in fast-growing metropolitan areas. As of June 30, 2000, Rite Aid has a first
or second place market position in 34 of the 65 major U.S. metropolitan
markets in which it operates.
9
<PAGE>
The table below identifies the number of stores by state as of June 30,
2000(/1/):
<TABLE>
<CAPTION>
Store
State Count
----- -----
<S> <C>
Alabama................. 118
Arizona................. 3
California.............. 624
Colorado................ 46
Connecticut............. 50
Delaware................ 26
District of Columbia.... 7
Georgia................. 36
Idaho................... 23
Indiana................. 36
Kentucky................ 129
Louisiana............... 103
Maine................... 85
Maryland................ 166
Michigan................ 353
Mississippi............. 35
</TABLE>
<TABLE>
<CAPTION>
Store
State Count
----- -----
<S> <C>
Nevada................... 37
New Hampshire............ 40
New Jersey............... 186
New York................. 397
Ohio..................... 292
Oregon................... 75
Pennsylvania............. 378
Tennessee................ 54
Texas.................... 5
Utah..................... 30
Vermont.................. 13
Virginia................. 166
Washington............... 146
West Virginia............ 116
Wyoming.................. 1
-----
Total................... 3,776
</TABLE>
--------
(1) As of February 26, 2000, we operated 3,802 stores throughout 30 states and
the District of Columbia.
Technology. All of our stores are connected to a common information system
which can be expanded to accommodate new stores. Additionally, each Rite Aid
store employs point-of-sale technology that facilitates inventory
replenishment, sales analysis and recognition of customer trends. Our
pharmacies employ technology that enables us to fill prescriptions with
increased accuracy and efficiency. In 1998, we began installing ScriptPro,
automated pharmacy dispensing units, which are linked to the pharmacist's
computer and which fill and label prescription drug orders. As of June 30,
2000 we had installed ScriptPro units in 845 stores and we plan to install
approximately 150 additional units in fiscal 2001. Our customers may also
order prescription refills over the Internet through drugstore.com, or through
our telephonic rapid automated refill systems.
Suppliers. During fiscal 2000, we purchased approximately 87% of the dollar
volume of our prescription drugs from a single supplier, McKesson HBOC, Inc.
("McKesson"). Pursuant to a long-term supply contract, McKesson has agreed to
sell to Rite Aid all of its branded pharmaceutical products on an exclusive
basis and generic pharmaceutical products on a non-exclusive basis. If Rite
Aid's relationship with McKesson were disrupted, we could have difficulty
filling prescriptions, which would negatively affect our business. Rite Aid
purchases its non-pharmaceutical merchandise from numerous manufacturers and
wholesalers. Rite Aid believes that competitive sources are readily available
for substantially all of the non-prescription merchandise we carry and that
the loss of any one supplier would not have a material effect on Rite Aid's
business.
Rite Aid sells private label and co-branded products that generally are
supplied by numerous competitive sources. The Rite Aid and GNC co-branded
PharmAssure(R) vitamin and mineral supplement products and the GNC branded
vitamin and mineral supplement products that we sell in our stores are
manufactured and developed by GNC as are the Rite Aid brand vitamin and
mineral supplements.
Customers. During fiscal 2000, Rite Aid served an average of 1.8 million
customers per day. The loss of any one customer would not have a material
adverse impact on the results of the operations of our retail drugstore
segment. No single customer accounts for more than 10% of the total sales of
our retail drug segment.
Competition. Based on the number of stores as of the end of fiscal 2000,
Rite Aid is the second largest retail drugstore chain in the United States. We
compete directly with national chain drugstores, including CVS and Walgreen.
The retail drugstore industry is highly competitive, with retail drugstore
chains not only facing
10
<PAGE>
competition within the industry, but also from mail order pharmacies and other
retail outlets offering pharmacy services, including Internet-based outlets.
Rite Aid competes on the basis of store location and convenient access,
customer service and product selection and price.
Employees. As of February 26, 2000, Rite Aid employed 77,258 employees in
the retail drug segment. Approximately 13% of these employees are pharmacists.
Rite Aid believes that its relationships with the employees in the retail drug
segment are good.
Working Capital. Rite Aid generally finances its inventory and capital
expenditure requirements with internally generated funds and borrowings. We
expect to use borrowings to finance inventories and to support our continued
growth. The majority of our front-end sales are in cash. Third-party insurance
programs, which typically settle in fewer than 30 days, accounted for 87.8% of
our pharmacy sales and 51.2% of our revenues in fiscal 2000. Our customer
returns are not significant.
Seasonality. Rite Aid's retail drug segment does not experience significant
fluctuations in results of operations as the result of seasonality.
Research and Development Rite Aid's retail drug segment does not make
significant expenditures for research and development. In fiscal 2000,
however, Rite Aid spent approximately $10.8 million in connection with the
development of the PharmAssure co-brand and other private label products. In
addition, we expended $500,000 to develop store floor plan prototypes and to
formulate marketing plans for our operating regions and on a nationwide basis.
Licenses, Trademarks and Patents. The Rite Aid name is our most significant
trademark and the most important factor in marketing our stores and private
label products. We hold licenses to sell beer, wine and liquor; cigarettes and
lottery tickets. Additionally, we hold licenses granted to us by the Nevada
Gaming Commission. We also hold licenses to operate our pharmacies and our
distribution facilities. Together, these licenses are material to our
operations.
PBM Segment
During fiscal 2000, our pharmacy benefit management segment, or PBM segment,
offered pharmacy benefit management services to employers, managed care
companies (HMOs) and insurance carriers for management of the wide variety of
pharmacy benefit programs that our customers may offer to their employees or
members. PCS also provides mail order pharmacy services. Rite Aid
significantly expanded its pharmacy benefit management business with the
acquisition of PCS from Eli Lilly and Company in January 1999. PCS is the
nation's second largest pharmacy benefits manager, providing pharmacy related
services to approximately 50 million people in the United States during fiscal
2000.
Sale of PCS. On July 12, 2000, the company 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 are 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. 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 prepayment prior to October
2, 2002, a ratable portion of the
11
<PAGE>
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 on 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 "Securities Act"). 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) 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.
The company applied $575.0 million of the proceeds to the outstanding
balance of the PCS facility and the PCS exchange debt and pledged the series A
preferred stock (and all securities issuable 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 the
PCS related exchange debt 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, which consists of an
estimated loss on disposal, transaction expenses and estimated net operating
income through the date the sale is consummated. In the first quarter of
fiscal 2001 ended May 27, 2000, the Company recorded a loss of $303.3 million
and in the second quarter of fiscal 2001 ended August 26, 2000, an additional
loss of $31.4 million will be recorded due to changes in estimates.
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.
PCS Services. PCS does business nationwide and offers its customers a
variety of pharmacy network choices, depending on a customer's needs in
serving its own employees or members. The networks can be broad, where
participating pharmacies may number more than 55,000, or narrow, where
participating pharmacies may be limited to a particular group or even a single
pharmacy. PCS manages its customer pharmacy benefits programs by providing
participants with access to electronic claims adjudication when purchasing
drugs from network pharmacies. The network pharmacy communicates with PCS to
verify plan coverage, plan benefits and participant cost share amounts. PCS
manages the information technologies and data used in these transactions and
also manages the billing and payment aspects of the claim by the pharmacy for
payment by PCS's customer. PCS managed approximately 300 million prescription
claims during fiscal 2000.
PCS also develops formularies that promote the reduction of prescription
drug costs for its pharmacy benefits plan customers. Formularies are lists of
preferred drugs that PCS designs with its customers for the administration of
the client's prescription drug benefit plan. The use of a formulary can reduce
drug costs by promoting generic or less costly drugs that provide and maintain
the desired medical effect of more costly drugs.
12
<PAGE>
In addition, PCS operates a mail order pharmacy for the participants in its
customers' prescription drug benefit plans. PCS fills mail order prescriptions
with drugs from its own inventory. During fiscal 2000, PCS processed an
aggregate of approximately 30,000 prescriptions a day from its two mail order
facilities in Birmingham, Alabama and Fort Worth, Texas. PCS intends to expand
its Internet operations in order to facilitate prescription ordering online.
PCS derives its revenues through contractual arrangements with its
customers, pharmacies and drug manufacturers. These contracts provide PCS with
revenues for pharmacy benefit management services, including claims processing
services and services related to the negotiation and implementation of drug
pricing arrangements with drug manufacturers.
Technology. PCS is focusing on the development of its Internet capabilities,
including its website, PCSRx.com. PCSRx is linked to the drugstore.com website
and to the intranets of many of its customers. PCS also is seeking to increase
its efficiency and reduce the costs of its operations through increased use of
the Internet.
Customers. PCS has several large customers. No single customer is
responsible for 10% or more of PCS's consolidated revenues. The loss of any
single large customer, however, could have a material adverse effect on the
PBM segment.
Competition. Competition in the PBM industry is intense. PCS competes with
numerous PBMs, including Merck-Medco Managed Care, a subsidiary of Merck &
Co., Inc., and Express Scripts, Inc., an affiliate of NYLIFE HealthCare
Management, Inc. PCS also competes with smaller companies, including Caremark
International, Inc. and Advance Paradigm, Inc. PCS competes on the basis of
its ability to provide high quality, cost-effective and reliable PBM services
that can meet the wide-ranging needs of its customer base.
Employees. At February 26, 2000, PCS employed 3,560 people. PCS is dependent
on its information technology employees and its technology and information
systems. Rite Aid believes its relationship with the PBM segment's employees
is good.
Working Capital. PCS generally finances its inventory and capital
expenditure requirements with cash generated from operations. The majority of
PCS's prescription drug sales are collected through third parties with
payments received by PCS, in most cases, within 30 days of the sale. PCS
maintains approximately two weeks of inventory to fill its mail order
prescription sales.
Licenses, Trademarks and Patents. PCS's name and its website address,
www.PCSRx.com are its most valuable license and trademark. PCS otherwise does
not rely on any licenses, trademarks or patents.
Regulation
Rite Aid's pharmacies and pharmacists must be licensed by the appropriate
state boards of pharmacy. Our pharmacies and distribution centers are also
registered with the Federal Drug Enforcement Administration. Applicable
licensing and registration requirements require our compliance with various
state statutes, rules and/or regulations. If Rite Aid were to violate any
applicable statute, rule or regulation, our licenses and registrations could
be suspended or revoked.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, either nationally or at the
state level. Such legislative initiatives include prescription drug benefit
proposals for Medicare participants. Although Rite Aid is well positioned to
respond to these developments, Rite Aid cannot predict the outcome or effect
of legislation resulting from these reform efforts. Also, in recent years both
the federal and state authorities have proposed and have passed new
legislation that imposes on healthcare providers, including pharmacies,
significant additional obligations concerning the protection of confidential
patient medical records and information.
13
<PAGE>
PCS is required to comply with various regulations including the Robinson-
Patman Act and various anti-remuneration laws under Medicare and Medicaid. PCS
also is subject to mail pharmacy regulation with respect to its mail service
pharmacies in Fort Worth, Texas and Birmingham, Alabama that may require PCS
to be registered or licensed in states where PCS delivers pharmaceuticals. In
addition, PCS is subject to consumer practice laws and network access
legislation, which may require PCS to admit retail pharmacies to, or maintain
pharmacies within, its pharmacy networks under certain circumstances, and to
comply with licensure and registration laws as applicable under state law.
PCS's business is also subject to the Employee Retirement Income Security Act
of 1974 ("ERISA"). Certain legislation at both the state and federal level is
developing or pending that may relate to PCS's business, such as legislation
that allows plan members to use non-network providers, and that concerns the
confidentiality of patient medical records. Rite Aid cannot predict how PCS
would be affected if any pending legislation concerning its business were
enacted in the future.
ITEM 2. Properties
We own our corporate headquarters, which is located in a 205,000 square foot
building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a 99,000
square foot building near Harrisburg, Pennsylvania for use by additional
administrative personnel. We lease most of our drugstore facilities under non-
cancellable leases, many of which have original terms of 15 to 20 years. In
addition to minimum rental payments, which are set at competitive market
rates, certain leases require additional payments based on sales volume, as
well as reimbursement for taxes, maintenance and insurance. Most of Rite Aid's
leases contain renewal options, some of which involve rent increases.
As of June 30, 2000, Rite Aid had 3,776 retail drugstores, of which 3,476
were leased. The overall average size of each store in the Rite Aid chain is
12,600 square feet. The stores on the east coast average 9,500 square feet per
store. The west coast stores average 21,300 square feet per store. The
southern stores average 12,100 square feet per store.
Rite Aid operates the following distribution centers and overflow storage
locations, which it owns or leases as noted:
<TABLE>
<CAPTION>
Approximate
Owned or Square
Location Leased Footage
-------- -------- -----------
<S> <C> <C>
Rome, New York........................................ Owned 291,000
Utica, New York(1).................................... Leased 106,800
Poca, West Virginia................................... Owned 280,000
South Nitro, West Virginia(1)......................... Leased 50,000
Perryman, Maryland.................................... Leased 875,000
Tuscaloosa, Alabama................................... Owned 285,000
Cottondale, Alabama(1)................................ Leased 104,832
Pontiac, Michigan..................................... Owned 370,000
Ogden, Utah(2)........................................ Owned 638,000
Woodland, California.................................. Owned 500,000
Woodland, California(1)............................... Leased 200,000
Wilsonville, Oregon................................... Leased 500,000
Lancaster, California................................. Leased 930,000
</TABLE>
--------
(1) Overflow storage locations.
(2) The Ogden, Utah distribution center was sold on March 23, 2000.
Stores serviced by the Ogden distribution center are now being
served by a new distribution center in Lancaster, California.
The terms of the leases for distribution centers range from five to 22
years. In addition to minimum rental payments, certain distribution centers
require tax reimbursement, maintenance and insurance. Most leases contain
renewal options, some of which involve rent increases.
14
<PAGE>
On a regular basis and as part of our normal business, we evaluate store
performance and may close or relocate a store if the store is redundant,
underperforming or otherwise deemed unsuitable. When we close or relocate a
leased store, we often continue to have leasing obligations, in which case
Rite Aid usually attempts to sublease the former store. As of February 26,
2000, Rite Aid subleased 5,811,993 square feet of space as a result of closing
or relocating stores and an additional 7,611,674 square feet of space in
closed stores was not subleased.
Rite Aid owns a 52,200 square foot ice cream manufacturing facility located
in El Monte, California.
Through PCS, Rite Aid also owned in fiscal 2000 a 363,000 square foot
building and leases an additional 140,000 square feet of office space for the
general offices and headquarters of PCS. Also through PCS, Rite Aid leases a
93,800 square foot mail order facility in Fort Worth, Texas and owns a 112,000
square foot mail order facility in Birmingham, Alabama.
ITEM 3. 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.
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 shareholders 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 and financial position could be materially adversely affected.
15
<PAGE>
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.
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
16
<PAGE>
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 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
17
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Rite Aid's common stock is listed on the New York and Pacific Stock
Exchanges under the symbol RAD. On June 30, 2000, Rite Aid had approximately
11,660 record shareholders. Quarterly high and low stock prices, based on the
New York Stock Exchange composite transactions, together with dividend
information are shown below:
<TABLE>
<CAPTION>
Fiscal Quarter High Low Dividend
------ ------- -------- ------- --------
<S> <C> <C> <C> <C>
2000..................................... First 41 3/8 21 $.1150
Second 26 15/16 17 1/2 $.1150
Third 20 1/8 4 1/2 $.1150
Fourth 13 1/4 6 3/8 $ -- (1)
1999..................................... First 36 9/16 29 3/4 $.1075
Second 45 1/8 34 5/8 $.1075
Third 49 1/16 33 9/16 $.1075
Fourth 51 1/8 39 9/16 $.1150
</TABLE>
--------
(1) No dividend was declared in the fourth quarter of fiscal 2000. Our current
credit facilities do not allow us to pay cash dividends.
Sales of unregistered securities On October 27, 1999, Rite Aid issued and
sold to Green Equity Investors III, L.P. 3,000,000 shares of Rite Aid's series
A cumulative convertible pay-in-kind preferred stock ("series A preferred
stock"), at a purchase price of $100.00 per share, for an aggregate purchase
price of $300.0 million. The series A preferred stock had an 8% cumulative
pay-in-kind dividend paid quarterly. On December 10, 1999, Green Equity
Investors III, L.P. exchanged all of its series A preferred stock for
3,000,000 shares of Rite Aid's series B cumulative convertible pay-in-kind
preferred stock ("series B preferred stock"). The series B preferred stock has
the same terms as the series A preferred stock, except that the series B
preferred stock will vote with the holders of Rite Aid common stock and each
holder of series B preferred stock will have one vote for each share of the
common stock issuable upon conversion of the holder's series B preferred
stock. When issued, the series B preferred stock was convertible into shares
of Rite Aid common stock at a conversion price of $11.00 per share subject to
adjustment: (1) to any price that is lower than the then current conversion
price at which Rite Aid issues common stock prior to October 27, 2000; or (2)
on March 1, 2002, to the lowest average price, but not less than $7.50, of
Rite Aid's common stock during any consecutive three-month period from October
27, 1999 through February 28, 2001, if such average price is lower than the
then current conversion price or, if not lower, to $11.50. As a result of the
exchange of Rite Aid's bank debt for shares of Rite Aid common stock at an
exchange rate of $5.50 per share, as discussed below, the conversion price for
the series B preferred stock was adjusted to $5.50 per share.
On October 27, 1999, Rite Aid issued a warrant to J.P. Morgan Ventures
Corporation, an affiliate of J. P. Morgan, to purchase 2,500,000 shares of
Rite Aid common stock. The exercise price for the common stock is $11.00 per
share, subject to certain adjustments. The warrant expires on September 23,
2002. The warrant was issued in connection with the extension and
restructuring of Rite Aid's PCS and RCF facilities in October, 1999. J. P.
Morgan is one of Rite Aid's principal lenders.
On June 14, 2000, certain lenders, including J.P. Morgan Ventures
Corporation, exchanged an aggregate of $284.8 million of their loans
outstanding under the PCS credit facility, the RCF credit facility and the
$300.0 million demand note into 51,785,434 shares of Rite Aid common stock at
an exchange rate of $5.50 per share.
On June 14, 2000, Rite Aid issued $374.3 million of 10.5% senior secured
notes due September 2002 in exchange for $52.5 million of Rite Aid's
outstanding 5.5% notes due December 2000 and $321.8 million of Rite Aid's
outstanding 6.7% notes due December 2001. Also, Rite Aid entered into an
agreement with J.P. Morgan and another financial institution under which they
agreed to purchase $93.2 million of the 10.5% senior secured notes due 2002
when the 5.5% notes that remain outstanding mature in December 2000.
18
<PAGE>
The series A preferred stock, the series B preferred stock, the warrant, the
10.5% senior secured notes due 2002, and the Rite Aid common stock issued in
exchange for certain Rite Aid bank debt were issued in transactions exempt
from registration in reliance on Section 4(2) of the Securities Act.
On June 26, 2000, the holders of $177.8 million principal amount of Rite
Aid's outstanding 5.25% convertible subordinated notes due 2002 exchanged
these notes for 17,779,000 shares of Rite Aid's common stock. The common stock
was issued in a privately negotiated transaction exempt from registration in
reliance on Section 3(a)(9) of the Securities Act.
19
<PAGE>
ITEM 6. Selected Financial Data
The following selected financial data of Rite Aid should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements appearing on pages F-1 through F-51. Selected financial data is
presented for three fiscal years. The company's financial statements have been
restated. These restatements supercede the prior restatements announced in
June and November 1999. Substantial time, effort and expense was required over
a six month period to review, assess, reconcile, prepare, and audit financial
statements for fiscal 2000, fiscal 1999 and fiscal 1998. Rite Aid believes it
would require an unreasonable effort and expense to conduct a similar process
to restate fiscal years 1997 and 1996 and that it is unlikely that periods
prior to March 1, 1997 could be restated. Therefore, financial data for fiscal
1997 and 1996 have not been restated and should not be relied upon. For a
further discussion of the restatements, including information relating to the
further restatement of the consolidated financial statements reflected in this
amended Form 10-K, see "Business--Restatement of Historical Financial
Statements" and note 25 of the notes to consolidated financial statements.
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------------
February 26, 2000 February 27, 1999 February 28, 1998
(52 weeks) (52 weeks) (52 weeks)(3)
(as restated)(1)(2) (as restated)(1)(2) (as restated)(1)(2)
------------------- ------------------- -------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Summary of Operations:
REVENUES................ $13,338,947 $12,438,442 $11,352,637
COSTS AND EXPENSES:
Cost of goods sold,
including occupancy
costs................ 10,242,377 9,411,600 8,396,239
Selling, general and
administrative
expenses............. 3,578,861 3,195,794 2,796,342
Gain on sale of
stores............... (80,109) -- (52,621)
Goodwill
amortization......... 24,457 26,055 26,169
Store closing and
impairment charges... 153,317 192,551 148,560
Interest expense...... 528,159 277,634 209,152
Share of loss from
equity investments... 15,181 448 1,886
----------- ----------- -----------
14,462,243 13,104,082 11,525,727
----------- ----------- -----------
Loss from continuing
operations before
income taxes and
cumulative effect of
accounting change ... (1,123,296) (665,640) (173,090)
INCOME TAX BENEFIT...... (8,375) (216,941) (28,064)
----------- ----------- -----------
Loss from continuing
operations before
cumulative effect of
accounting change.... (1,114,921) (448,699) (145,026)
INCOME (LOSS) FROM
DISCONTINUED
OPERATIONS, including
income tax expense
(benefit) of $30,903,
$(5,925) and
$(10,885).............. 9,178 (12,823) (20,214)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE, net
of income tax benefit
of $18,200............. (27,300) -- --
----------- ----------- -----------
Net loss............ $(1,133,043) $ (461,522) $ (165,240)
=========== =========== ===========
BASIC AND DILUTED (LOSS)
INCOME PER SHARE:
Loss from continuing
operations........... $ (4.34) $ (1.74) $ (0.58)
Income (loss) from
discontinued
operations........... 0.04 (0.05) (0.08)
Cumulative effect of
accounting change,
net.................. (0.11) -- --
----------- ----------- -----------
Net loss per share.. $ (4.41) $ (1.79) $ (0.66)
=========== =========== ===========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
February 26, 2000 February 27, 1999 February 28, 1998
(52 weeks) (52 weeks) (52 weeks)
(as restated)(1)(2) (as restated)(1)(2) (as restated)(1)(2)
------------------- ------------------- -------------------
(Dollars in thousands except dividends)
<S> <C> <C> <C>
Year-End Financial
Position:
Working capital
(deficit)............ $ 719,961 $ (892,115) $ 1,258,580
Property, plant and
equipment (net)...... 3,449,594 3,328,499 2,460,513
Total assets.......... 9,909,847 9,778,451 7,392,147
Total debt (4)........ 6,616,634 5,922,504 3,132,894
Redeemable preferred
stock................ 19,457 23,559 --
Stockholders' equity.. 432,509 1,339,617 1,898,203
Other Data:
Cash dividends
declared per common
share................ $ .3450 $ .4375 $ .4075
Basic weighted average
shares............... 259,139,000 258,516,000 250,659,000
Diluted weighted
average shares....... 259,139,000 258,516,000 250,659,000
Number of retail
drugstores........... 3,802 3,870 3,975
Number of employees... 77,258 89,900 83,000
</TABLE>
--------
(1) See note 25 of the notes to consolidated financial statements for a
description of the adjustments resulting from the restatements.
(2) PCS was acquired on January 22, 1999. On October 2, 2000, Rite Aid
completed the sale of PBM segment, see "Business--PBM Segment."
Accordingly, our PBM segment is reported as a discontinued operation for
all periods presented. See note 26 of the notes to consolidated financial
statements.
(3) K&B, Incorporated and Harco, Inc. were acquired in August 1997.
(4) Includes capital lease obligations of $1.2 billion, $1.1 billion and $622
million as of February 26, 2000, February 27, 1999 and February 28, 1998,
respectively.
21
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Management's Discussion and Analysis of Financial Condition and Results
of Operations for the years ended February 26, 2000, February 27, 1999 and
February 28, 1998 presented below reflects certain restatements to Rite Aid's
previously reported results of operations for these periods. See "Business--
Restatement of Historical Financial Statements" and note 25 of the notes to
consolidated financial statements for a discussion of these restatements.
Overview
Management believes that the following matters should be considered in
connection with the discussion of results of operations and financial
condition.
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 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.
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
22
<PAGE>
loss on conversion 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, 57,571,389
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
February 26, 2000, the common shares outstanding would have increased from
259,927,199 to 385,582,755. In light 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.
Sale of PCS. 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. Accordingly, 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 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, which consists of an estimated loss on disposal,
transaction expenses, and estimated net operating income through the date the
sale is consummated. In the first quarter of fiscal 2001 ended May 27, 2000
the company recorded a loss of $303.3 million and in the second quarter ended
August 26, 2000, an additional loss of $31.4 million will be recorded due to
changes in estimates. Additionally, 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. See "Business--Description of Business--PBM Segment."
Results of Operations
Consolidated Revenues
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
February
26, February 27, February 28,
2000 1999 1998
----------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Sales................................ $13,338,947 $12,438,442 $11,352,637
Sales growth......................... 7.2 % 9.6% *
Same store sales growth.............. 7.9 % 15.5% *
Pharmacy sales growth................ 15.6 % 18.2% *
Same store pharmacy sales growth..... 16.2 % 21.9% *
Pharmacy as a % of total sales....... 58.4 % 54.2% 50.2%
Third-party sales as a % of total
pharmacy sales...................... 87.8 % 85.4% 83.4%
Front-end sales growth............... (2.6)% 0.8% *
Same store front-end sales growth.... (2.2)% 6.6% *
Front-end as a % of total sales...... 41.6 % 45.8% 49.8%
Store data:
Total stores (beginning of period).. 3,870 3,975 3,750
New stores.......................... 77 163 132
Closed stores....................... (181) (330) (280)
Store acquisitions, net............. 36 62 373
Total stores (end of period)........ 3,802 3,870 3,975
Remodeled stores.................... 14 155 84
Relocated stores ................... 180 331 202
</TABLE>
-------------------------------------------------------------------------------
* See "Selected Financial Data" for a discussion of Rite Aid's inability to
present comparisons to fiscal 1997.
23
<PAGE>
The 7.2% growth in sales in fiscal 2000 was primarily due to the continuing
strong growth of our pharmacy sales, which more than offset a decline in our
front-end sales. Our revenues in fiscal 1999 grew 9.6% over the level in
fiscal 1998 as a result of strong growth in pharmacy revenues and a slight
increase in front-end sales. Growth in sales in fiscal 1999 also benefited
from full-year sales of $779.0 million from the Harco, Inc. ("Harco") and K&B,
Incorporated ("K&B") stores which contributed only $458.2 million of sales in
fiscal 1998 following their acquisition on August 27, 1997.
For fiscal 2000 and fiscal 1999, pharmacy revenues led sales growth with
same-store sales increases of 16.2% and 21.9%, 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, consuming a greater number of prescription drugs. The use of
pharmaceuticals to treat a growing number of healthcare problems and the
introduction of a number of successful new prescription drugs also contribute
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 fiscal 2000 from the prior year. Our front-end sales were
adversely affected by our elevated levels of out-of-stock merchandise in the
third and fourth quarters of fiscal 2000. Other factors adversely affecting
our front-end sales included the suspension by former management of our
newspaper advertising circular program and their decision to raise front-end
prices to levels that were not competitive. Fiscal 1999 front end sales
increased .83% over fiscal 1998, despite a 6.6% increase in same store front-
end sales in those stores which had been open more than one year. Same store
sales growth was driven by strong performance in health and beauty, photo,
seasonal and general merchandise categories. Total front-end sales remained
essentially flat as an increase in the number of closed stores and a decrease
in the number of acquired stores in fiscal 1999 resulted in a net reduction of
105 stores in operation at the end of fiscal 1999 compared to fiscal 1998.
Costs and Expenses
<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
Years Ended
---------------------------------------
February 26, February 27, February 28,
2000 1999 1998
------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Costs of goods sold................... $10,242,377 $9,411,600 $8,396,239
Gross margin.......................... 23.2% 24.3% 26.0%
Selling, general and administrative
expenses............................. $ 3,578,861 $3,195,794 $2,796,342
Selling, general and administrative
expenses as a percentage of
revenues............................. 26.8% 25.7% 24.6%
Gain on sale of stores................ $ (80,109) $ -- $ (52,621)
Goodwill amortization................. 24,457 26,055 26,169
Store closing and impairment charges.. 153,317 192,551 148,560
Interest expense...................... 528,159 277,634 209,152
Share of loss from equity
investments.......................... 15,181 448 1,886
-------------------------------------------------------------------------------
</TABLE>
Cost of Goods Sold
Gross margin was 23.2% for fiscal 2000 compared to 24.3% in fiscal 1999. The
decline in gross margin in fiscal 2000 from fiscal 1999 was attributable to
the incurrence of substantial additional costs related to our distribution
facilities and increased store occupancy costs. We incurred significant start-
up costs in fiscal 2000 in connection with the new distribution facility
located in Perryman, Maryland and also in connection with the processing of
merchandise received from our stores for shipment back to our vendors. These
increased costs were
24
<PAGE>
partially offset by a substantial credit to cost of goods sold resulting from
the receipt of vendor allowances following a restructuring of the terms of
certain vendor contracts. In fiscal 1999, prior to the restructuring of the
contracts, these vendor allowances were credited to selling, general and
administrative expense. Also partially offsetting the increases in cost of
goods sold in fiscal 2000 were improved store level margins for front-end and
pharmacy sales.
Gross margin declined to 24.3% in fiscal 1999 from 26.0% in fiscal 1998. The
decline in gross margin in fiscal 1999 from fiscal 1998 was a result of a
substantial decline in our pharmacy margins. A decline in occupancy costs in
fiscal 1999 was largely offset by increased costs related to our distribution
facilities.
Also negatively impacting gross margins in the periods presented was the
continuing industry 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 58.4%, 54.2% and 50.2% in fiscal 2000, 1999 and
1998, respectively.
The company uses the last-in, first-out (LIFO) method of inventory
valuation. The effective LIFO inflation rates were 1.01486% in fiscal 2000,
1.01594% in fiscal 1999 and 1.00909% in fiscal 1998 which resulted in charges
to cost of goods sold of $34 million in fiscal 2000, $36 million in fiscal
1999 and $7 million in fiscal 1998. The company has changed its method of
accounting for LIFO as of February 26, 2000. See "--Accounting Change."
Selling, General and Administrative Expenses
Selling, general and administrative expense ("SG&A") was 26.8% of sales in
fiscal 2000, 25.7% of sales in fiscal 1999 and 24.6% of sales in fiscal 1998.
The increase in SG&A as a percentage of revenues in fiscal 2000 is
attributable to a decrease in vendor allowances following the restructuring of
certain vendor contracts as described above, increased accruals for litigation
and other contingencies and a significant increase in legal and other
professional fees.
Store Closing and Impairment Charges
In fiscal 2000, 1999 and 1998, Store closing and impairment charges include
non-cash charges of $120.6 million, $87.7 million and $76.4 million,
respectively, for the impairment of long-lived assets (including allocable
goodwill) of 249, 270, and 252 stores. 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>
Year ended Year ended Year ended
February 26, 2000 February 27, 1999 February 28, 1998
----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C>
Store lease exit costs.. $ 32,724 $104,885 $ 72,118
Impairment charges...... 120,593 87,666 76,442
-------- -------- --------
$153,317 $192,551 $148,560
======== ======== ========
</TABLE>
During fiscal 2000, 1999 and 1998, we recorded charges for 224, 422, and 593
stores, respectively, for stores to be closed or relocated that were under
long-term leases. 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 store closing
date, or in the case of a store to be relocated, the date the new property is
leased or purchased. We calculate our 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.
25
<PAGE>
Subsequent to the recording of lease accruals, management determined that
certain stores would remain open. Included in the amounts stated above were
impairment write-downs of $4.0 million for 6 stores in fiscal 2000 and $1.4
million for 3 stores in fiscal 1999, that were written down to fair value but
were not relocated or closed. Also, the company reversed charges of $10.5
million and $1.1 million in fiscal 2000 and fiscal 1998, respectively for
lease accruals previously established for those stores.
In fiscal 2000, Rite Aid recorded an impairment charge of $7.6 million for
long-lived assets in connection with its decision to close and sell the Ogden,
Utah distribution center. The facility was sold in March 2000.
Interest Expense
Interest expense was $528.2 million in fiscal 2000 compared to $277.6
million in fiscal 1999 and $209.2 million in fiscal 1998. The substantial
increase in interest expense in fiscal 2000 is due to higher levels of
indebtedness throughout the year. The level of our indebtedness increased in
fiscal 2000 primarily as a result of the $1.3 billion borrowed in January 1999
under the PCS credit facility and the $300 million of demand note borrowings
incurred in June 1999 to supplement cash flows from operating activities and
to fund capital expenditures. The annual weighted average interest rates on
our indebtedness in fiscal 2000, fiscal 1999 and fiscal 1998 were 7.4%, 6.8%
and 6.7%, respectively.
Income Taxes
We had a net loss in fiscal 2000, fiscal 1999 and fiscal 1998. Tax benefits
of $26.6 million (including the benefit related to cumulative effect of
accounting change), $216.9 million and $28.1 million have been reflected for
fiscal 2000, fiscal 1999 and fiscal 1998, respectively. The full benefit of
the net operating losses ("NOLs") generated in each period 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 of the
deferred tax assets will not be realized. We expect to file amended tax
returns and utilize the NOL's against taxable income in prior years to the
maximum extent possible. Approximately $147.6 million is currently expected to
be recovered through carryback claims of which approximately $80.0 million had
been received as of June 30, 2000. See note 12 of the notes to consolidated
financial statements.
Discontinued Operations
Sales of the PBM segment, which includes the company's Eagle managed care
division, increased from $180.8 million in fiscal 1998 to $344.4 million in
fiscal 1999 and to $1.34 billion in fiscal 2000. The increase in sales in
fiscal 2000 resulted from the acquisition of PCS on January 22, 1999. The PBM
segment generated net income of $9.2 million in fiscal 2000 compared to net
losses of $12.8 million and $20.2 million in fiscal 1999 and fiscal 1998,
respectively.
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 fiscal 2000 and the fiscal quarter ended
May 27, 2000, cash provided by operations was not sufficient to fund our
working capital requirements, which have included the substantial accounting
and legal costs incurred in connection with the review and reconciliation of
our books and records, the restatement of our financial statements for fiscal
1999, fiscal 1998 and the audit of our financial statements for fiscal 2000,
fiscal 1999 and fiscal 1998. 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.
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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-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.
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 credit
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
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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 the related PCS exchange debt 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 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
debt 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 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 exchange debt have the same collateral as they
did with respect to their loans under the PCS and RCF credit facilities 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 approximately $89.0 million in the second quarter of fiscal 2001.
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 PCS and
RCF credit facilities, 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, $1,783.1 million
at February 27, 1999 and $400.0 million at February 28, 1998. During fiscal
2000, the reduction of commercial paper was achieved through borrowings on our
RCF and PCS credit facilities. All remaining commercial paper obligations were
repaid in March 2000.
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The increase in commercial paper in fiscal 1999 was due to the acquisition
of PCS in January 1999, which accounted for approximately $1.5 billion of the
total outstanding commercial paper at the end of fiscal 1999. Offsetting the
increase were net proceeds received from the issuance of $700.0 million in
long-term debt in December 1998 and net proceeds from the issuance of $200.0
million dealer remarketable securities in September 1998. Reductions in
commercial paper during fiscal 1998 were achieved through the issuance of
$650.0 million of our 5.25% convertible subordinated notes in the third
quarter of fiscal 1998.
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...................................................... 275
Synthetic lease guarantees......................................... 31
Other.............................................................. 16
Lease Financing Obligations......................................... 1,112
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...................................................... $6,755
======
</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 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.
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Net Cash Provided By (Used in) Operating, Investing and Financing Activities
We used $598.8 million of cash to fund continuing operations in fiscal 2000.
Operating cash flow was negatively impacted by $501.8 million of interest
payments. Operating cash flow was also negatively impacted from an increase in
current assets and a decrease in accounts payable partially offset by an
increase in other liabilities.
In fiscal 1999, we generated $278.9 million of cash flow from continuing
operations. Operating cash flow was negatively impacted by an increase in
accounts receivable, and a decrease in accounts payable, which was partially
offset by a decline in inventory and an increase in other liabilities.
Fiscal 1998 cash flow from continuing operations of $622.9 million benefited
from a $283.6 million reduction of accounts receivable. This reduction
resulted from the sale of accounts receivable through our accounts receivable
securitization program. Operating cash flows benefited from the utilization of
accounts payable to substantially finance the increase in inventories.
Cash used for investing activities was $552.1 million, $2,709.2 million and
$1,050.3 million for fiscal years 2000, 1999 and 1998, respectively. Cash used
for store construction and relocations amounted to $573.3 million for fiscal
2000, $1,222.7 million for fiscal 1999 and $716.1 for fiscal 1998. In
addition, cash of $1,390.6 million was used to acquire PCS in fiscal 1999 and
$335.0 million was used to acquire K&B and Harco in fiscal 1998.
Cash provided by financing activities was $905.1 million for fiscal 2000,
$2,660.3 million for fiscal 1999 and $535.0 million for fiscal 1998. Increased
borrowings under our RCF and PCS credit facilities which replaced our
commercial paper program and the sale of $300 million of preferred stock were
the main financing activities during fiscal 2000. In fiscal 1999, we issued
commercial paper to finance the acquisition of PCS. Also during fiscal 1999
net proceeds were received from the issuance of $700.0 million in long-term
debt and $200.0 million of dealer remarketable securities. Through the
issuance of $650.0 million of convertible subordinated notes in fiscal 1998,
reductions in then outstanding commercial paper were made. Supplemental cash
provided by financing activities were proceeds received from store sale-
leaseback transactions of $74.9 million, $505.0 million and $323.8 million for
fiscal 2000, 1999 and 1998, respectively.
Capital Expenditures
Rite Aid plans to make total capital expenditures of approximately $225.0
million during fiscal 2001, consisting 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 machines 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 available under our senior secured facility.
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 adequate to meet anticipated requirements for working
capital, debt service and capital expenditures until August 2002, when $2.6
billion of our indebtedness, 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 was a charge of
$27.3 million
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(net of income tax benefit of $18.2 million), or $.11 per diluted common
share. The pro forma effect of this accounting change would have been a
reduction in net income of $6.4 million, (net of income tax benefit of
$4.2 million) or $.02 per diluted common share, and $12.6 million (net of
income tax benefit of $8.4 million) or $.05 per diluted common share, for
fiscal 1999 and 1998, respectively.
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.
This statement, as amended, is effective in fiscal 2002. The company is
evaluating the effects that the adoption of SFAS No. 133 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 stockholders' 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 earnings would
have been insufficient to cover our fixed charges for the year ended February
26, 2000, by $1.2 billion. Our earnings for fiscal 2000 included non-cash
charges of $697.8 million. 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
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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
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.
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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 were adversely
affected by a number of factors, including our financial difficulties,
inventory shortages, 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 our lenders under
its RCF credit facility, PCS credit 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.
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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.
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.
34
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks
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 February 26, 2000.
<TABLE>
<CAPTION>
Fair Value
at
February 26,
2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ---------- -------- ------ ---------- ---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt,
including Current
portion
Fixed rate............ $76,086 $29,879 $1,121,490 $200,678 $2,289 $1,553,816 $2,984,238 $1,959,252
Average Interest
Rate................. 6.43% 6.77% 7.46% 6.01% 11.86% 7.00%
Variable Rate......... -- -- $2,480,495 -- -- -- $2,480,495 $2,480,495
Average Interest
Rate................. -- -- 9.38% -- -- --
</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 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 June 24, 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 June 24,
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 revolving credit 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%.
Further downgrades of Rite Aid's credit ratings would not impact the rate on
the borrowings under the credit facilities. The interest rate on the RCF and
PCS credit facilities and the exchange debt is subject to a 0.50% per
35
<PAGE>
annum increase if we have not received and applied $500 million of net
proceeds from asset sales by November 1, 2000 to reduce these obligations. As
a result of the application of the proceeds from the sale of PCS, the interest
rate will not be increased.
Changes in one month LIBOR affect Rite Aid's cost of borrowings because the
interest rate on Rite Aid's variable-rate obligations is based on LIBOR. If
the market rates of interest for one month LIBOR change by 10% (approximately
60 basis points) as compared to the LIBOR rate of 5.91% and 6.65% as of
February 26, 2000 and June 24, 2000, respectively, Rite Aid's annual interest
expense would change by approximately $14.9 million and $18.0 million,
respectively, based upon Rite Aid's variable-rate debt outstanding of
approximately $2.5 billion and $2.7 billion as of February 26, 2000 and June
24, 2000, respectively.
A change in interest rates generally does not impact future earnings and
cash flow for fixed-rate debt instruments. As fixed-rate debt matures,
however, and if additional debt is acquired to fund the debt repayment, future
earnings and cash flow may be impacted by changes in interest rates. This
impact would be realized in the periods subsequent to the periods when the
debt matures.
ITEM 8. Financial Statements and Supplementary Data
Rite Aid's consolidated financial statements and notes thereto are included
elsewhere in this Annual Report on Form 10-K/A and incorporated herein by
reference. See Item 14 of Part IV.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 19, 1999, Rite Aid filed a Current Report on Form 8-K disclosing
the resignation of its former auditors, KPMG LLP and the withdrawal of their
report on the company's financial statements. On December 6, 1999, Rite Aid
amended the Form 8-K dated November 19, 1999 to file a letter by KPMG LLP
concerning the disclosure in the Form 8-K. On December 10, 1999, Rite Aid
filed a Current Report on Form 8-K to announce that it had retained Deloitte &
Touche LLP to audit and report on the Company's consolidated balance sheets as
of February 27, 1999 and February 28, 1998 and the related consolidated
statements of income, stockholders equity, and cash flows for each of the
years in the three year period ended February 27, 1999. Deloitte & Touche LLP
would also audit the Company's consolidated financial statements for the
fiscal year ending February 26, 2000.
36
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of Registrant
The tables set forth below include certain information regarding Rite Aid's
directors and executive officers as of June 30, 2000.
(a) Directors of Registrant
<TABLE>
<CAPTION>
Name Age Position with Rite Aid
---- --- ----------------------
<S> <C> <C>
Robert G. Miller............ 56 Chairman and Chief Executive Officer
William J. Bratton.......... 51 Director
Alfred M. Gleason........... 69 Director
Alex Grass.................. 72 Director
Leonard I. Green............ 66 Director
Nancy A. Lieberman.......... 43 Director
Philip Neivert.............. 73 Director
Mary F. Sammons............. 53 Director, President and Chief Operating Officer
Stuart M. Sloan............. 56 Director
Jonathan D. Sokoloff........ 42 Director
Leonard N. Stern............ 62 Director
Preston Robert Tisch........ 73 Director
Gerald Tsai, Jr. ........... 70 Director
</TABLE>
Robert G. Miller has been chairman and chief executive officer since
December 5, 1999. Previously, Mr. Miller served as vice chairman and chief
operating officer of The Kroger Company, a retail food company. Mr. Miller
joined Kroger in May 1999, when The Kroger Company acquired Fred Meyer, Inc.,
a food, drug and general merchandise chain. From 1991 until the acquisition,
he served as chief executive officer of Fred Meyer, Inc.
William J. Bratton, is, and has been, a self-employed consultant since March
31, 2000. From January 1998 to March 2000, Mr. Bratton was president and chief
operating officer of Carco Group, Inc., a provider of employment background
screening services. From April 1996 through 1997, he was vice chairman of
First Security Services Corporation, and president of its subsidiary, First
Security Consulting, Inc. Mr. Bratton was Police Commissioner of the City of
New York from 1994 through April 1996. Mr. Bratton has been a member of Rite
Aid's board since July 1997.
Alfred M. Gleason is currently a self-employed consultant. Mr. Gleason
served as the president of the Port of Portland Commission in Portland,
Oregon, from October 1995 until June 1999. From 1985 until 1995, Mr. Gleason
held several positions with PacifiCorp, including chief executive officer,
president and director. PacifiCorp is the parent company of Pacific Power &
Light, Utah Power & Light and Pacific Telecom, Inc. Mr. Gleason served as a
director of Fred Meyer, Inc. until June 1999. Mr. Gleason has been a member of
Rite Aid's board since January 20, 2000.
Alex Grass is, and has been, the chief executive officer of Fleer/Skybox
International since February 1999. Mr. Grass is also the managing partner of
Oak Hall Industries, L.P., and Sera-Tec Biologicals L.P., positions he has
held since 1996 and 1995, respectively. Mr. Grass has been a member of Rite
Aid's board since the founding of the company in 1968.
Leonard I. Green has been an executive officer of Leonard Green & Partners,
L.P., an affiliate of Green Equity Investors III, L.P., since its formation in
1994. Mr. Green has also been, individually or through a corporation, a
partner in a merchant banking firm affiliated with Leonard Green & Partners,
L.P., since its inception in 1989. Mr. Green is also a director of
Communications & Power Industries, Inc., Liberty Group Publishing, Inc. and
Dollar Financial Group, Inc. Mr. Green was elected as a director pursuant to
the October 1999 agreement of Green Equity Investors III, L.P. to purchase
3,000,000 shares of preferred stock of Rite Aid. Mr. Green has been a member
of Rite Aid's board since October 1999.
37
<PAGE>
Nancy A. Lieberman has been a partner in the law firm of Skadden, Arps,
Slate, Meagher & Flom LLP since 1987. Skadden, Arps, Slate, Meagher & Flom LLP
provides legal services to Rite Aid. Ms. Lieberman has been a member of Rite
Aid's board since June 1996.
Philip Neivert is a private investor whose operations are based in
Rochester, New York. Mr. Neivert has been a member of Rite Aid's board since
1969.
Mary F. Sammons has been president and chief operating officer and a member
of Rite Aid's board since December 5, 1999. From April 1999 to December 1999,
Ms. Sammons served as president and chief executive officer of Fred Meyer
Stores, Inc., a subsidiary of The Kroger Company. From January 1998 to April
1999, Ms. Sammons served as president and chief executive officer of Fred
Meyer Stores, Inc., a subsidiary of Fred Meyer, Inc. From 1985 through 1997,
Ms. Sammons held several senior level positions with Fred Meyer Inc., the last
that of executive vice president. Ms. Sammons is also a director of
drugstore.com and of the National Association of Chain Drug Stores.
Stuart M. Sloan has been a principal of Sloan Capital Companies, a private
investment company since 1984. Mr. Sloan was also the chairman of the board of
directors from 1986 to 1998 and the chief executive officer from 1991 to 1996
of Quality Food Centers, Inc., a supermarket chain. He currently serves on the
board of directors of Anixter International Corporation. Mr. Sloan was elected
to Rite Aid's board effective June 19, 2000.
Jonathan D. Sokoloff has been an executive officer of Leonard Green &
Partners, L.P., an affiliate of Green Equity Investors III, L.P. since its
formation in 1994. Since 1990, Mr. Sokoloff has also been a partner in a
merchant banking firm affiliated with Leonard Green & Partners, L.P. Mr.
Sokoloff is also a director of Twinlab Corporation, Diamond Triumph Auto
Glass, Inc., Dollar Financial Group, Inc. and Gart Sports Company. Mr.
Sokoloff was elected as a director pursuant to the October 1999 agreement of
Green Equity Investors III, L.P. to purchase 3,000,000 shares of preferred
stock of Rite Aid. Mr. Sokoloff has been a member of Rite Aid's board since
October 1999.
Leonard N. Stern is chairman of the board and chief executive officer of The
Hartz Group, Inc. and affiliated companies, a position he has held since 1970.
These companies are engaged in the businesses of the manufacture and sale of
pet supplies, ownership and operation of hotels, real estate development and
investing. Rite Aid purchases pet supplies from Hartz Mountain, Inc. Mr. Stern
is also a director of Homes for the Homeless, a nonprofit organization. Mr.
Stern has been a member of Rite Aid's board since 1986.
Preston Robert Tisch has been co-chairman of Loews Corporation since
October 18, 1994. Loews Corporation is a holding company with interests
through its subsidiaries in selling insurance products, producing and selling
cigarettes, operating hotels, drilling for offshore oil and gas and
distributing watches and clocks. Mr. Tisch was co-chief executive officer of
Loews Corporation between October 18, 1994 and January 1, 1999. In addition,
since March 1991 he has been chairman of the board of the N.Y. Football
Giants, Inc. Rite Aid purchased tobacco products from Lorillard Tobacco
Company, an indirectly wholly-owned subsidiary of Loews Corporation, during
fiscal year 2000. Mr. Tisch is also a director of Loews Corporation, CNA
Financial Corporation, Bulova Corporation and Hasbro, Inc. Mr. Tisch has been
a member of Rite Aid's board since 1988.
Gerald Tsai, Jr. is currently the chairman of Satmark Media Group, an ATM
advertising company. Previously, Mr. Tsai was a private investor. From
February 1993 to October 1997, Mr. Tsai was chairman and chief executive
officer of Delta Life Corporation. Mr. Tsai is also a director of Saks
Incorporated, Triarc Companies, Sequa Corporation, Zenith National Insurance
Corp., IP*Network and United Rentals, Inc. Mr. Tsai has been a member of Rite
Aid's board since 1987.
38
<PAGE>
(b) Executive Officers of Registrant
<TABLE>
<CAPTION>
Name Age Position with Rite Aid
---- --- ----------------------
<S> <C> <C>
Robert G. Miller*....... 56 Chairman and Chief Executive Officer
Mary F. Sammons*........ 53 Director, President and Chief Operating Officer
David R. Jessick........ 47 Senior Executive Vice President and Chief Administrative Officer
Elliot S. Gerson........ 58 Senior Executive Vice President and General Counsel
John T. Standley........ 37 Executive Vice President and Chief Financial Officer
James P. Mastrian....... 57 Executive Vice President--Marketing
Christopher Hall........ 35 Senior Vice President and Chief Accounting Officer
</TABLE>
--------
* Mr. Miller's and Ms. Sammons' backgrounds are set forth above under the
caption "Directors of Registrant."
David R. Jessick has been senior executive vice president and chief
administrative officer since December 5, 1999. From 1997 to July 1999, Mr.
Jessick served as executive vice president of finance and investor relations
of Fred Meyer, Inc. From 1979 to 1997, Mr. Jessick held several senior
management positions at Thrifty PayLess Holdings, Inc., a west coast-based
drugstore chain which had annual sales of $5.0 billion before being acquired
by Rite Aid in 1996. Mr. Jessick was executive vice president and chief
financial officer of Thrifty PayLess Holdings, Inc. before Thrifty PayLess was
acquired by Rite Aid.
Elliot S. Gerson is senior executive vice president and general counsel of
Rite Aid. He has held those positions since October 1999 and July 1997,
respectively. Mr. Gerson also served as secretary from July 1997 to May 2000.
Mr. Gerson joined Rite Aid in November 1995 as senior vice president and
assistant chief legal counsel. Prior to joining Rite Aid, Mr. Gerson was a
partner in the law firm of Bolger, Picker, Hankin & Tannenbaum from May 1993
to November 1995.
John T. Standley has been executive vice president and chief financial
officer since December 5, 1999. Previously, he was executive vice president
and chief financial officer of Fleming Companies, Inc., a food marketing and
distribution company from May 1999 to December 1999. Between July 1998 and May
1999, Mr. Standley was senior vice president and chief financial officer of
Fred Meyer, Inc. Mr. Standley served as chief financial officer of Ralphs
Grocery Company between January 1997 and July 1998 and of Food 4 Less between
January 1997 to July 1998. Mr. Standley also served in an executive position
at Smith's Food & Drug from May 1996 to February of 1997 and as chief
financial officer of Smitty's Supervalue, Inc. from December 1994 to May 1996.
James P. Mastrian has been executive vice president, marketing since
November 15, 1999. Mr. Mastrian was also executive vice president, category
management of Rite Aid from July 1998 to November 1999. Mr. Mastrian was
senior executive vice president, merchandising and marketing of OfficeMax from
June 1997 to July 1998 and executive vice president, marketing of Revco D.S.,
Inc. from September 1990 to June 1997.
Christopher Hall has been senior vice president and chief accounting officer
since January 25, 2000. From April 1999 to January 2000. Mr. Hall was
executive vice president and chief financial officer at Golden State Foods.
Between July 1998 and March 1999, Mr. Hall served as senior vice president of
finance at Ralphs Grocery Company. Mr. Hall joined Ralphs Grocery as vice
president of accounting in June 1995.
(c) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Rite Aid's executive officers,
directors and 10% stockholders to file reports of initial beneficial ownership
and reports of changes in beneficial ownership with the SEC and the New York
Stock Exchange. Such persons are required by SEC regulations to furnish the
company with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to Rite Aid, the company has
determined that during the fiscal year ended February 26, 2000, no persons
subject to Section 16(a) reporting submitted late filings under Section 16(a)
of the Exchange Act.
39
<PAGE>
ITEM 11. Executive Compensation
Summary Compensation Table
The following table provides a summary of compensation paid during the last
three fiscal years to Rite Aid's current chief executive officer, the former
chief executive officer who served in that position until October 18, 1999,
the former interim chief executive officer, the four most highly compensated
executive officers who were serving as executive officers at the end of fiscal
year 2000 and two executive officers who would have been among the four most
highly compensated executive officers if they had been employed by Rite Aid at
the end of fiscal year 2000:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- ----------------------------------------
Securities
Restricted Underlying
Fiscal Other Annual Stock Option LTIP All Other
Name and Principal Position Year Salary(4) Bonus(1) Compensation(2) Awards Grants/SARs Payouts(3) Compensation
--------------------------- ------ ---------- -------- --------------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert G. Miller(5).. 2000 $ 328,462 $ -- $ -- $4,950,000(6) 3,000,000 $ -- $ 600,000(14)
Chairman & Chief
Executive Officer
Martin L. Grass(7)... 2000 807,870 -- -- -- -- -- --
Former Chairman & 1999 1,000,000 -- -- -- 1,000,000(11) -- --
Former 1998 1,000,000 898,000 -- -- -- -- 2,000
Chief Executive
Officer
Timothy J. 2000 702,542 -- 300,000 -- --
Noonan(8)........... 1999 700,000 -- -- -- 650,000 -- --
Former Interim Chief 1998 700,000 628,600 -- -- -- -- 2,000
Executive Officer,
Former President &
Former
Chief Operating
Officer
James P. Mastrian.... 2000 425,000 125,000 -- -- 450,000 -- --
Executive Vice 1999 266,538 145,900 -- -- 150,000 -- --
President--Marketing 1998 -- -- -- -- -- -- --
Elliot S. Gerson..... 2000 408,393 100,000 -- -- 535,000 -- --
Senior Executive 1999 375,000 -- -- -- 75,000 -- --
Vice President & 1998 330,000 174,475 -- -- -- -- --
General Counsel
Mary F. Sammons...... 2000 203,076 -- -- 1,650,000(12) 2,000,000 -- 200,000(15)
Director, President
& Chief Operating
Officer
David R. Jessick..... 2000 158,461 -- -- 825,000(13) 1,000,000 -- 150,000(16)
Senior Executive
Vice President &
Chief Administrative
Officer
Franklin C. 2000 503,589 -- -- -- 1,165,000 -- --
Brown(9)............ 1999 500,000 -- -- -- 300,000 -- --
Former Vice Chairman 1998 500,000 336,825 -- -- -- -- 2,000
Beth J. Kaplan(10)... 2000 428,615 -- -- -- -- -- --
Former Senior 1999 400,000 151,600 -- -- 300,000(11) -- --
Executive 1998 400,000 269,460 -- -- -- -- --
Vice President--
Marketing
</TABLE>
--------
(1) Represents annual performance bonuses determined by the Compensation
Committee of the Board under the Annual Performance-Based Incentive
Program. Bonuses for Martin Grass, Timothy Noonan, Franklin Brown and
Beth Kaplan were paid in the fiscal year following the fiscal year in
which they were earned.
(2) Did not exceed, for each named officer, the lesser of $50,000 or 10% of
such officer's total annual salary and bonus for such year.
40
<PAGE>
(3) Excludes payments purportedly owed for fiscal 1999 pursuant to Rite Aid's
Long-Term Incentive Plan. The company's restatement of its financial
statements for fiscal years 1998 and 1999, included in this report,
suggests that the stock performance tied to such payments would never
have been achieved had Rite Aid issued timely financial statements for
fiscal years 1998 and 1999 that complied with generally accepted
accounting principles. Therefore, any payments purportedly owed pursuant
to the Long-Term Incentive Plan would never have been earned and were not
made. Ms. Kaplan has asserted that Rite Aid should have paid to her the
amount owed under the Long-Term Incentive Plan based upon the company's
actual stock performance.
(4) Includes for Mr. Miller, Ms. Sammons and Mr. Jessick for fiscal 2000
amounts contributed by Rite Aid under the Supplemental Deferred
Compensation Plan, a non-qualified plan under which the members of the
new executive management receive fully vested contributions of deferred
compensation each month; and for the other named executive officers,
amounts contributed under the Rite Aid defined contribution plan.
(5) Mr. Miller became chief executive officer of Rite Aid on December 5,
1999.
(6) Mr. Miller was awarded 600,000 shares of Rite Aid common stock on
December 5, 1999, the effective date of his employment agreement with
Rite Aid. The transfer of these shares is restricted. The restrictions on
the restricted shares lapse in thirty-six equal monthly installments
commencing one month from the date of grant, unless accelerated under
certain circumstances. Mr. Miller has the right to vote the shares of
restricted stock and to receive any dividends paid on such shares. As of
February 26, 2000, the restrictions on 33,333 shares had lapsed and the
remaining 566,667 restricted shares had a market value of $4,108,335.
(7) Mr. Grass resigned as chairman of the board and chief executive officer
on October 18, 1999.
(8) Mr. Noonan served as interim chief executive officer from October 18,
1999 until December 5, 1999. Mr. Noonan also served as president and
chief operating officer until December 5, 1999, and retired from Rite Aid
on February 25, 2000.
(9) Mr. Brown resigned as an employee on February 25, 2000 and as a member of
the board on May 29, 2000.
(10) Ms. Kaplan resigned as senior executive vice president of marketing on
November 15, 1999.
(11) The options for these shares expired 90 days after Mr. Grass and Ms.
Kaplan ceased being employed with the company.
(12) On December 5, 1999, pursuant to her employment agreement with the
company, Ms. Sammons was awarded 200,000 shares of restricted common
stock of Rite Aid. The restrictions on those shares lapse in thirty-six
equal monthly installments commencing one month from the date of grant,
unless accelerated upon a change of control of the company. Ms. Sammons
has the right to vote the restricted shares and to receive dividends paid
on such shares. As of February 26, 2000, the restrictions on 11,110
shares had lapsed and the remaining 188,890 shares had a market value of
$1,369,452.
(13) On December 5, 1999, pursuant to his employment agreement with the
company, Mr. Jessick was awarded 100,000 shares of restricted common
stock of Rite Aid. The restrictions on those shares lapse in thirty-six
equal monthly installments commencing one month from the date of grant,
unless accelerated upon a change of control of the company. Mr. Jessick
has the right to vote the restricted shares and to receive dividends paid
on such shares. As of February 26, 2000, the restrictions on 5,555 shares
had lapsed and the remaining 94,445 shares had a market value of
$684,726.
(14) Represents a guaranteed bonus in the amount of $600,000 paid in April
2000 in respect of calendar year 1999 to compensate Mr. Miller for lost
bonus opportunities with his prior employer.
(15) Represents a guaranteed bonus in the amount of $200,000 paid in April
2000 in respect of calendar year 1999 to compensate Ms. Sammons for lost
bonus opportunities with her prior employer.
(16) Represents a guaranteed bonus in the amount of $150,000 paid in April
2000 in respect of calendar year 1999.
41
<PAGE>
Option Grant Table
The following table sets forth certain information regarding options granted
during fiscal year 2000 to the persons named in the Summary Compensation
Table:
<TABLE>
<CAPTION>
% of Total
Options
Number of Securities Granted to Total
Underlying Options Employees in Exercise Expiration Grant Date
Name Granted Fiscal Year Price(1) Date Present Value(2)
---- -------------------- ------------ -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Robert G. Miller........ 3,000,000 16.1% $7.35 12/05/09 $11,155,200
James P. Mastrian....... 33,546 2.4% 8.00 01/17/10 2,450,021
266,454 5.375 11/10/09
150,000 24.25 06/04/09
Elliot S. Gerson........ 26,278 2.9% 8.00 01/17/10 1,573,599
508,722 5.375 11/10/09
Mary F. Sammons......... 2,000,000 10.7% 7.35 12/05/09 8,720,000
David R. Jessick........ 1,000,000 5.4% 7.35 12/05/09 4,360,000
Martin L. Grass......... -- -- -- -- --
Timothy J. Noonan....... 300,000 1.6% 5.375 11/10/09 579,150
Franklin C. Brown....... 1,034,729 6.2% 5.375 11/10/09 2,931,050
130,271 8.00 01/17/10 554,732
Beth J. Kaplan.......... -- -- -- -- --
</TABLE>
--------
(1) Fair market value on the date of grant. Mr. Miller's option for 3,000,000
shares, Ms. Sammons' option for 2,000,000 shares and Mr. Jessick's option
for 1,000,000 shares vest in monthly installments over a 36 month period
beginning on January 5, 2000. Each of the options granted to Mr. Mastrian
and Mr. Brown vest ratably over a four-year period beginning on the first
anniversary of the date the option was granted. Of Mr. Gerson's shares,
options exercisable for 235,000 shares vest ratably over a four-year
period beginning on the first anniversary of the date the option was
granted and an option exercisable for 300,000 shares vested on the date
the option was granted. Mr. Noonan's option grant to purchase up to
300,000 shares of Rite Aid common stock vested in its entirety on the date
of the grant.
(2) The hypothetical present values on the grant date were calculated under
the Black-Scholes option pricing model which is a mathematical formula
used to value options traded on stock exchanges. The formula considers a
number of assumptions in hypothesizing an option's present value.
Assumptions used to value the options include the stock's expected
volatility rate of 57.95%, projected dividend yield of 0%, a risk-free
rate of return ranging from 6.115% to 6.597% and projected time of
exercise ranging from 3 to 6 years. The ultimate realizable value of an
option will depend on the actual market value of the company's common
stock on the date of exercise as compared to the exercise price of the
option. Consequently, there is no assurance that the hypothetical present
value of the stock options reflected in this table will be realized.
42
<PAGE>
Option Exercises and Year-End Value Table
The following table summarizes the value at February 26, 2000 of all shares
subject to options granted to the persons named in the Summary Compensation
Table. No options were exercised during fiscal 2000.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised In-the-Money Options
Shares Options at Year-End (#) at Year-End ($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert G. Miller........ 0 $ 0 166,666 2,833,334 $ 0 $ 0
James P. Mastrian....... 0 0 37,500 562,500 0 499,601
Elliot S. Gerson........ 0 0 452,500 317,500 562,500 391,353
Mary F. Sammons......... 0 0 111,110 1,888,890 0 0
David R. Jessick........ 0 0 55,555 944,445 0 0
Martin L. Grass......... 0 0 0 0 0 0
Timothy J. Noonan....... 0 0 1,495,625 650,000 562,500 0
Franklin C. Brown....... 0 0 1,015,000 0 0 0
Beth J. Kaplan.......... 0 0 0 0 0 0
</TABLE>
--------
(1) "In-the-Money" options are options whose base (or exercise) price was less
than the market price of the common stock on February 26, 2000. The value
of such options is calculated assuming a stock price of $7.25, which was
the closing price of the common stock on the New York Stock Exchange on
February 25, 2000.
The Executive Retirement Plans
Rite Aid has established the Deferred Compensation Program to provide
retirement benefits to long-term employees who hold a position of vice
president or higher and to select executives who may, pursuant to their
employment agreements, be deemed to be long term employees. Participants
generally are entitled to receive benefits upon retirement after age 65 or
upon death, in which case any length of service requirement is disregarded.
Generally, eligible participants receive an annual benefit, payable monthly
over 15 years, equal to a percentage, ranging from 40% to 60%, of the average
of the highest base annual salaries received over a specified period for each
participant during the ten-year period prior to the date of the event giving
rise to payment of the benefit. The program provides that benefits will not be
paid to employees who terminate employment for any reason other than
retirement, disability or death. Additionally, if, during the time a benefit
is being paid to a former employee, it is determined that the former employee
committed an act that could have resulted in a good cause discharge, the
company will cease paying benefits to the former employee. The retirement
benefit is payable to the executive officers named in the Summary Compensation
Table and, in addition to salary, their benefits are based also on the annual
bonuses they receive. The percentage of the average annual compensation
payable under the program to each of the persons named in the Summary
Compensation Table above is 60%.
Directors' Fees
In fiscal 2000, Rite Aid's non-employee directors received no compensation.
In fiscal 1999, each of Rite Aid's non-employee directors was granted a
restricted stock award of 2,000 shares of common stock. The award lapses if a
director fails to complete the term for which he or she was elected for any
reason other than death or disability. Directors who are officers and full-
time employees of Rite Aid receive no separate compensation for service as
directors or committee members. Directors are reimbursed for travel and
lodging expenses associated with attending Board meetings.
Employment and Employment-Related Agreements
On December 5, 1999, Rite Aid entered into employment agreements with the
executive members of the new management team, which include Robert G. Miller,
Mary F. Sammons and David R. Jessick (the "Executives"). Their employment
agreements provide that each Executive's employment with Rite Aid shall
commence on December 5, 1999 and terminate on December 5, 2002 (the
"Employment Period"), but will automatically renew for an additional year on
each anniversary of the effective date of the agreement (a "Renewal Date")
unless either the Executive or Rite Aid provides the other with notice of non-
renewal at least 180 days prior to a Renewal Date, or the agreement is
otherwise terminated.
43
<PAGE>
Pursuant to their December 5, 1999 individual agreements, Mr. Miller was
appointed chief executive officer and elected as chairman of the board of
directors of Rite Aid. Ms. Sammons was appointed president and chief operating
officer and as a member of Rite Aid's board. Mr. Jessick was appointed senior
executive vice president and chief administrative officer.
The respective agreements provide each Executive with a base salary and
incentive compensation, including:
(i) Mr. Miller receives an annual base salary of $1,250,000. To
compensate Mr. Miller for a lost bonus opportunity with his former
employer, Mr. Miller received a $600,000 bonus, and he has the opportunity
to receive future annual bonuses that shall equal or exceed his annual base
salary then in effect if Rite Aid's performance meets certain annual target
goals based on the business plan developed by the Executives and the Rite
Aid board (the "targets").
(ii) Ms. Sammons receives an annual base salary of $750,000. She
received a bonus of $200,000 as compensation for lost bonus opportunities
with her former employer, and may, if Rite Aid's performance meets the
targets, also receive an annual target bonus that, if paid, will equal or
exceed 75% of her annual base salary then in effect.
(iii) Mr. Jessick's annual base salary is $600,000. He was awarded a
bonus of $150,000 pursuant to his employment agreement. If Rite Aid's
performance meets the targets, Mr. Jessick will be paid an annual bonus
that will equal or exceed 60% of his annual base salary then in effect.
In addition to the base salary and bonus provisions of the Executives'
employment agreements, Rite Aid established the Special Deferred Compensation
Plan (the "New Plan") for the benefit of select members of its management
team, including Mr. Miller, Ms. Sammons and Mr. Jessick. Under the New Plan,
Rite Aid credits a specific sum to individual accounts established for each of
Mr. Miller, Ms. Sammons and Mr. Jessick. The sums are credited on the first
day of each month during the term of the Executives' Employment Period with
Rite Aid. Each of the Executives is fully vested, at all times, in his or her
account balance. Each month, $20,000 is credited to Mr. Miller's account,
$15,000 is credited to Ms. Sammons' account and $10,000 is credited to Mr.
Jessick's account. Under the New Plan, the Executives will be able to direct
the investment of the amounts credited to their individual accounts by
selecting one or more investment vehicles from a group of "measurement funds"
(meaning mutual fund sub-accounts) offered pursuant to the New Plan. The
Executives are currently exploring with Rite Aid which investment vehicles
should be offered under the New Plan. Additionally, although the amounts
credited to their accounts are always fully vested, Mr. Miller, Ms. Sammons
and Mr. Jessick generally may not receive payments from their accounts until
three years after an election to receive a payment.
Pursuant to their employment agreements, each of Mr. Miller, Ms. Sammons and
Mr. Jessick are also entitled to participate in Rite Aid's fringe benefit and
perquisite programs and savings plans. Benefits provided to each Executive
include receipt of benefits under all applicable welfare benefit plans,
practices, policies and programs of Rite Aid, an annual allowance of $10,000
for financial and tax planning advice, a monthly car allowance of $1,500,
$1,000 and $1,000, respectively, use of Rite Aid's aircraft for business
travel, reimbursement for country club dues, term life and disability
insurance and five weeks of vacation.
On December 5, 1999, Mr. Miller, Ms. Sammons, and Mr. Jessick also received,
pursuant to their employment agreements and individual stock option
agreements, awards of Rite Aid restricted common stock and were granted
options to purchase additional Rite Aid common stock. Mr. Miller was granted
an option to purchase 3,000,000 shares of common stock and was awarded 600,000
shares of restricted common stock. Ms. Sammons was granted an option to
purchase 2,000,000 shares of common stock and was awarded 200,000 shares of
restricted common stock. Mr. Jessick was granted an option to purchase
1,000,000 shares of common stock and was awarded 100,000 shares of restricted
common stock. All of the options granted and restricted common stock awarded
to each of Mr. Miller, Ms. Sammons and Mr. Jessick vest in thirty-six equal
monthly installments commencing one month after December 5, 1999. Upon a
"change in control" (as defined below and in the stock option agreements) of
Rite Aid, however, all of the options vest immediately and become fully
exercisable and the restrictions on the restricted common stock will lapse in
full.
44
<PAGE>
Pursuant to the grant of stock options and the award of restricted common
stock to each of Mr. Miller, Ms. Sammons and Mr. Jessick, Rite Aid is required
to register, under the Securities Act of 1933, as amended, and under all
applicable state securities laws, all of the options (and all of the common
stock issuable upon exercise of the options) granted to each Executive, as
well as all of the shares of restricted common stock awarded to each
Executive, under his or her employment agreement. Rite Aid is required to
effect this registration as soon as practicable, and to maintain the
effectiveness of such registration until the restricted shares of common stock
and the shares of common stock issuable upon exercise of the options are
freely transferable.
Mr. Miller's and Mr. Jessick's employment agreements provide for them to be
based in Portland, Oregon and that they be provided, for the convenience of
Rite Aid, with an apartment in the vicinity of Rite Aid's corporate
headquarters in the Harrisburg, Pennsylvania area. Ms. Sammons' employment
agreement required her to relocate to the Harrisburg, Pennsylvania area. In
connection with her relocation, Rite Aid paid $12,440 in relocation expenses
and paid closing costs of $11,167.
Pursuant to his employment agreement, Mr. Miller is entitled to recommend
two persons to serve on the board of directors of Rite Aid. Mr. Miller has
made two board recommendations to date and as a result, Alfred Gleason and
Stuart Sloan were elected to the board in January 2000 and June 2000,
respectively.
Pursuant to their employment agreements, Rite Aid has agreed to indemnify
each of Mr. Miller, Ms. Sammons and Mr. Jessick against any claim, loss, cost
or similar expense relating to their employment with Rite Aid. Rite Aid has
also agreed to maintain directors' and officers' liability insurance policies
for each of the Executives for a period of six years following the termination
of their employment with Rite Aid.
Upon written notice, the employment agreements of each of Mr. Miller, Ms.
Sammons and Mr. Jessick are terminable by either Rite Aid or the individual
Executive seeking termination. If the termination is by Rite Aid "without
cause" (as defined in the employment agreements of the Executives) or by an
Executive for "good reason" (as defined in the employment agreements of the
Executives), then each of Mr. Miller, Ms. Sammons and Mr. Jessick shall
receive an amount equal to three times the sum of the individual Executive's
annual base salary and target bonus plus any accrued but unpaid salary and
bonus, with the maximum bonus that the Executive is eligible to earn being
pro-rated through the date of termination. Each Executive shall be entitled to
receive the deferred compensation amounts which would otherwise have been
credited to the Executive pursuant to the New Plan had the Executive continued
employment with Rite Aid through the end of the then-remaining Employment
Period and certain medical benefits. In addition, all of the Executive's stock
options will immediately vest and be exercisable for the remainder of their
stated terms, the restrictions on the restricted common stock will immediately
lapse and any performance or other conditions applicable to any other equity
incentive awards will be considered to have been satisfied.
If Rite Aid terminates any of the Executives "for cause" (as defined in the
employment agreements), Rite Aid shall pay him or her all accrued benefits
within ten days after the date of termination and terminate any portion of any
then-outstanding stock option grant that was not exercised prior to the date
of termination, and any portion of any restricted stock award, or other equity
incentive award, to which the restrictions have not lapsed or as to which any
other conditions were not satisfied prior to the date of termination. Under
the agreement, any termination of employment by an Executive within the six
month period commencing on the date of a change in control of Rite Aid will be
treated as a termination of employment by the Executive for "good reason."
Each employment agreement also provides for certain benefits upon termination
of the Executive by reason of death or disability or by the Executive other
than for good reason. The employment agreements of each Executive prohibit the
Executive from competing with Rite Aid during his or her Employment Period and
for a period of one year thereafter.
As defined in the individual stock option and stock award agreements of each
of Mr. Miller, Ms. Sammons, and Mr. Jessick, the term "change in control"
means the occurrence of any one of the following events:
(i) the acquisition by any person or persons of beneficial ownership of
25% or more of Rite Aid's then-outstanding voting shares;
45
<PAGE>
(ii) the change in composition of the board of directors resulting in a
majority of the directors being directors for less than two years, unless
the election of each such director was approved by a majority of the
directors who were directors at the beginning of such two-year period;
(iii) the approval by stockholders of a merger or consolidation
resulting in Rite Aid's stockholders holding less than 60% of the voting
shares of the surviving entity; and
(iv) the approval by stockholders of a plan of liquidation or
dissolution of Rite Aid, or the sale or disposition to an entity where less
than 60% of the combined voting shares of Rite Aid do not hold
substantially the same interests in the other entity.
Elliot S. Gerson and James P. Mastrian are employed with Rite Aid at will.
Arrangement with Franklin C. Brown. In recognition of Mr. Brown's long term
employment with Rite Aid, Rite Aid entered into an Amended and Restated
Deferred Compensation Agreement with him on October 23, 1998. The agreement
provides that upon termination of Mr. Brown's employment with the company for
any reason, he will receive on an annual basis 60% of the sum of his highest
base salary plus the highest bonus that he received over the four years prior
to termination, with payment beginning on the first month after Mr. Brown's
termination and continuing through the later of the death of Mr. Brown or 240
months after termination. Upon a "change of control" of Rite Aid (as defined
in the agreement) after the date Mr. Brown's employment agreement terminates,
remaining retirement payments, discounted to present value, may become
immediately due and payable. The agreement also provides for Mr. Brown to
receive life insurance coverage for the rest of his life. All unvested options
held by Mr. Brown terminated upon termination of his employment.
Employment Agreement of Beth Kaplan. On August 14, 1996, Rite Aid entered
into an employment agreement with Beth Kaplan which commenced on September 9,
1996 and was to terminate on February 27, 1999, providing for her employment
as Executive Vice President--Marketing. Rite Aid takes the position that Ms.
Kaplan's agreement expired on February 27, 1999 pursuant to its terms and was
never renewed, but Ms. Kaplan has asserted that the agreement was effectively
renewed. The agreement provided for a minimum annual base salary of $400,000
and an initial target bonus of 45% of Ms. Kaplan's base salary. Pursuant to
the agreement, Rite Aid also loaned to Ms. Kaplan $1,900,000 on August 28,
1996 for the purpose of allowing Ms. Kaplan to exercise her option to purchase
shares of the capital stock of The Procter & Gamble Co. The amount loaned is
due and payable on August 14, 2000 and bears interest, compounded annually,
from the date advanced at the prime rate of interest announced by Morgan
Guaranty Trust Company of New York from time to time. The employment agreement
also provides that Ms. Kaplan would have received up to 93,029 shares of Rite
Aid's common stock (or their equivalent in cash if the shares are freely
transferable) within 90 days of the end of fiscal 1999 if the increase in the
company's annual earnings per share for fiscal years 1996 through 1999
averaged at least 8% per annum more than the company's earnings per share in
the fiscal year ended March 4, 1995. Ms. Kaplan, pursuant to the employment
agreement, was granted on the date of employment an option to purchase 32,000
shares of the company's common stock, at a price equal to $16.38. The options
were to be exercisable for 10 years from the date of grant in cumulative
annual installments of 25% commencing one year from the date of grant. The
agreement entitled Ms. Kaplan to participate in Rite Aid's Deferred
Compensation Program. The agreement also provided for certain executive
perquisites, such as a new automobile and driver and all related insurance
coverage and, from time to time, use of the corporate jet for business
purposes.
Ms. Kaplan's employment agreement provides that upon a termination for any
reason or an expiration pursuant to its terms, Ms. Kaplan would be entitled to
all salary due up to the termination or expiration date, any unpaid bonus or
incentive compensation pro-rated up until the date of termination or
expiration, expense reimbursements due and owing to Ms. Kaplan and payment for
accrued vacation as of the termination or expiration date. Ms. Kaplan would
also receive payment of health and medical benefits and life insurance
46
<PAGE>
premiums consistent with the company's prior practice. If Ms. Kaplan's
employment agreement expired pursuant to its terms, Ms. Kaplan would receive
payment pursuant to the Long-Term Incentive Plan of all the shares of common
stock (or the equivalent value if such shares are freely transferable) to
which she was then entitled and all right to the option subject to the terms
of the stock option plan. If Ms. Kaplan was terminated without "cause" (as
defined in the agreement), her option would be deemed fully vested and
exercisable for a period of five years following such termination. The
agreement also prohibited Ms. Kaplan from competing with the company during
the term of her employment and prohibits her from such competition with the
company for a period of one year thereafter.
Severance Agreement of Timothy J. Noonan. On February 25, 2000, Rite Aid
entered into an Executive Separation Agreement and General Release with
Timothy J. Noonan providing for Mr. Noonan's voluntary resignation from Rite
Aid. The agreement provides Mr. Noonan with severance benefits commencing
February 25, 2000 and ending on February 28, 2002, consisting of an amount
each year equal to his then effective annual base salary, medical benefits,
benefits under the Deferred Compensation Program and other benefits. The
agreement also provided for the termination as of February 25, 2000 of all of
Mr. Noonan's stock options which were then unvested, except for option grants
made on May 12, 1998 relating to the right to later purchase 650,000 shares of
Rite Aid's common stock at a price of $30.75 per share and on November 10,
1999 relating to the right to purchase 300,000 shares of Rite Aid's common
stock at a price of $5.375 per share. The May 12, 1998 grant of options to
purchase 650,000 shares of the company's common stock will continue to vest
and become exercisable in accordance with its terms through the end of the
severance period, whereas any option that vests before the end of the
severance period shall remain exercisable through the later of (i) February
28, 2002 and (ii) 90 days after the date on which the company is first able to
register under the Securities Act shares issuable upon exercise of the option,
but in no event later than the tenth anniversary of the date of grant. Rite
Aid will also provide Mr. Noonan continued medical coverage during the
severance period, applicable employee benefits as of February 25, 2000, and
with customary indemnification and continued insurance with respect to matters
relating to his services as an executive officer of the company.
47
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Executive Officers and Directors
The following table sets forth certain information regarding the beneficial
ownership of the outstanding shares of Rite Aid common stock as of June 30,
2000, by the persons named in the Summary Compensation Table, Rite Aid's
directors and all directors and current executive officers as a group. Each
stockholder possesses sole voting and investment power with respect to the
shares listed, unless otherwise noted:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Percentage
Name Beneficially Owned(1) of Class
---- --------------------- ----------
<S> <C> <C>
Robert G. Miller............................. 1,959,423(2) *
William J. Bratton........................... 3,900(3) *
Alfred M. Gleason............................ 70,200(4) *
Alex Grass................................... 2,777,129(5) *
Leonard I. Green............................. 58,565,389(6) 14.9%
Nancy A. Lieberman........................... 7,000(7) *
Philip Neivert............................... 2,869,506(8) *
Mary F. Sammons.............................. 1,316,857(9) *
Stuart M. Sloan.............................. -- --
Jonathan D. Sokoloff......................... 58,076,825(10) 14.7
Leonard N. Stern............................. 40,000(11) *
Preston Robert Tisch......................... 10,000(12) *
Gerald Tsai, Jr.............................. 4,000(13) *
Martin L. Grass.............................. 1,148,102(14) *
Timothy J. Noonan............................ 1,911,377(15) *
Franklin C. Brown............................ 1,410,301(16) *
Beth J. Kaplan............................... 363 *
Elliot S. Gerson............................. 495,002(17) *
David R. Jessick............................. 706,922(18) *
James P. Mastrian............................ 112,500(19) *
All current executive officers and directors
(22 persons)................................ 74,371,154(20) 18.9
</TABLE>
--------
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), including options exercisable within 60 days of June 30, 2000.
(2) This amount includes 749,423 shares which may be acquired within 60 days
by exercising stock options and 1,200,000 of restricted shares.
(3) This amount includes 3,500 restricted shares and 400 shares owned by
Mr. Bratton's wife.
(4) This amount includes 6,000 shares jointly owned by Mr. Gleason and his
wife.
(5) This amount includes 137,904 shares owned by the Grass Family Foundation
of which Alex Grass is a director, 90,982 shares held in trust for the
benefit of Martin L. Grass and of which Alex Grass is a trustee, 370,568
shares held in trust for the benefit of Lois Grass and of which trust
Alex Grass is an alternate trustee along with Martin Grass and others,
and 1,600,000 shares which may be acquired within 60 days by exercising
stock options. This amount also includes 5,827 shares in Mr. Grass's
401(k) account.
(6) This amount includes 57,571,389 shares beneficially owned by Green Equity
Investors III, L.P., which is affiliated with Leonard Green & Partners,
L.P., of which Mr. Green is an executive officer and equity owner,
990,000 shares owned by Verdi Group, Inc., over which Mr. Green has
beneficial ownership, and 4,000 restricted shares.
(7) This amount includes 4,000 restricted shares.
(8) This amount includes 712,778 shares owned by Mr. Neivert's wife. Mr.
Neivert disclaims beneficial ownership of those shares. This amount also
includes 4,000 restricted shares.
(9) This amount includes 516,857 shares which may be acquired within 60 days
by exercising stock options and 800,000 restricted shares.
(10) This amount consists of 57,571,389 shares beneficially owned by Green
Equity Investors III, L.P., which is affiliated with Leonard Green &
Partners, L.P., of which Mr. Sokoloff is an executive officer and equity
owner.
(11) This amount includes 4,000 restricted shares.
(12) This amount includes 4,000 restricted shares.
(13) Those 4,000 shares are restricted shares.
(14) This amount includes 370,568 shares held in trust for the benefit of Lois
Grass of which trust Martin Grass is an alternate trustee along with Alex
Grass and other trustees and 1,350 shares owned by Mr. Grass's son and
daughter. This amount also includes 8,222 shares in Mr. Grass's 401(k)
account.
(15) This amount includes 10,000 shares jointly owned by Mr. Noonan and his
wife, 3,552 shares owned by Mr. Noonan's daughter and 1,820,625 shares
which may be acquired within 60 days by exercising stock options. Mr.
Noonan disclaims beneficial ownership of the shares jointly owned with
his wife and those owned by his daughter.
(16) This amount includes 383,360 shares jointly owned by Mr. Brown and his
wife and 11,941 shares in a 401(k) account. Mr. Brown disclaims
beneficial ownership of all shares he owns, including these jointly owned
by him and his wife, except for the 11,941 shares in his 401(k) account.
(17) This amount includes 490,000 shares which may be acquired within 60 days
by exercising stock options and 1,002 shares in his 401(k) account.
(18) This amount includes 258,428 shares which may be acquired within 60 days
by exercising stock options and 436,364 restricted shares.
(19) Represents shares which may be acquired beneficially by exercising
options.
(20) This amount includes: 6,821,261 shares which may be beneficially acquired
within 60 days by exercising stock options and with respect to which the
holders of the shares have no voting or investment power; 3,033,751
restricted shares with respect to which each holders of such shares has
sole voting power and no investment power; and 27,355 shares included in
Rite Aid's 401(k) plan and with respect to which each holder of such
shares shares voting and investment power with the trustee of the plan.
*Represents less than 1.0% of the outstanding shares as of June 30, 2000.
48
<PAGE>
Certain Other Beneficial Owners
The following table sets forth certain information regarding the holders of
shares of common stock known to Rite Aid to be the beneficial owners of more
than 5% of the outstanding common stock.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Percentage
Name and Address of Beneficial Owners Beneficially Owned of Class
------------------------------------- ------------------ ----------
<S> <C> <C>
Green Equity Investors III, L.P. ................ 57,571,389(1) 14.7%(2)
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
J.P. Morgan & Co. Incorporated................... 39,380,992(3) 10.2%(2)
60 Wall Street
New York, New York 10260
Janus Capital Corporation ....................... 24,855,230(4) 6.4%(2)
100 Fillmore Street #300
Denver, Colorado 80206
</TABLE>
--------
(1) Green Equity Investors III, L.P. beneficially owns 57,571,389 shares of
Rite Aid common stock. This number represents the number of shares
issuable within 60 days of June 30, 2000 upon the conversion of all Class
B Preferred Stock.
(2) Based upon the number of shares outstanding as of June 30, 2000 and
assuming conversion of all Class B Preferred Stock by Green Equity
Investors, L.P.
(3) This amount, as reflected in a report on Schedule 13G dated June 26, 2000
filed by J.P. Morgan & Co. Incorporated, consists of 39,380,992 shares of
Rite Aid common stock, of which the reporting person claims sole
dispositive power over 39,364,792 shares, shared dispositive power over
13,600 shares, sole voting power over 39,379,392 shares and shared voting
power over 1,600 shares. The report states that J.P. Morgan Ventures
Corporation, a subsidiary of J.P. Morgan & Co. Incorporated is the
beneficial owner of 39,136,363 of the shares.
(4) This amount, as reflected in a report on Schedule 13G dated February 15,
2000, filed by Janus Capital Corporation, consists of 24,855,230 shares of
Rite Aid common stock, of which the reporting person claims sole
dispositive and voting power.
ITEM 13. Certain Relationships and Related Transactions
Rite Aid leases 43,920 square feet of storage space in a warehouse in Camp
Hill, Pennsylvania, from a partnership in which Alex Grass, a director of Rite
Aid, has a 50% interest. Rent paid by the company under the lease during
fiscal year 2000 was $153,720 plus taxes, water and sewer. Rite Aid believes
that the terms of the lease are at least as favorable as those available from
unrelated third parties.
On August 28, 1996, the company loaned $1.9 million to Beth J. Kaplan, who
was then the Senior Executive Vice President, Marketing. The loan bears
interest at the prime rate announced from time to time by Morgan Guaranty
Bank. The loan is payable in full on August 14, 2000, together with all
accrued interest. The loan was secured by a pledge of any shares of common
stock issuable upon exercise of options granted to Ms. Kaplan under Rite Aid's
1990 Omnibus Stock Incentive Plan. No shares were issued to Ms. Kaplan under
the Plan. At June 30, 2000, principal under the loan remained at $1.9 million.
In 1998 and 1999 Rite Aid guaranteed loans of $2.5 million and $5.0 million,
respectively, made by a third-party to Ms. Kaplan. Interest under the loans
bear interest at LIBOR plus 2.0%. Rite Aid purchased both third-party loans
from the lender on June 30, 2000 and April 30, 2000, respectively.
Commencing on January 8, 1999, Rite Aid leased a 10,750 square foot store in
Sinking Springs, Pennsylvania, from Martin L. Grass' brother-in-law, a full-
time real estate developer, at a rent of $17.50 per square foot. Total rent
under the lease paid by Rite Aid during fiscal year 2000 was $188,125. Rite
Aid believes that the terms of the lease are at least as favorable as those
available from unrelated third parties.
Prior to his resignation on October 18, 1999, Martin L. Grass paid 51% of
the lease cost of a helicopter that Rite Aid leases. Prior to his resignation,
Mr. Grass was permitted unlimited personal use of the helicopter.
49
<PAGE>
On October 27, 1999, Rite Aid issued a warrant to J.P. Morgan Ventures
Corporation, a subsidiary of J.P. Morgan, to purchase 2,500,000 shares of Rite
Aid common stock at an exercise price of $11.00 per share, subject to certain
adjustments. The warrant was issued in connection with the extension of Rite
Aid's PCS credit facility and RCF credit facility in October 1999. J.P. Morgan
is one of Rite Aid's lenders. In connection with the issuance of the warrant,
J.P. Morgan and Rite Aid entered into a Registration Rights Agreement pursuant
to which Rite Aid agreed to register, under certain circumstances, the Rite
Aid common stock issuable upon exercise of the warrant. Rite Aid will pay all
expenses and fees (other than underwriting discounts and commissions) related
to any registration. J.P. Morgan beneficially owns more than 5% of Rite Aid's
common stock.
In June 2000, J.P. Morgan and another financial institution agreed to
purchase $93.2 million of 10.5% senior secured notes due September 2002 when
the 5.5% notes mature in December 2000.
In fiscal 2000, Rite Aid paid to J.P. Morgan fees and other amounts in
connection with the company's financing activities, including the extension in
October 1999, of $19.6 million. In fiscal 2001, Rite Aid has paid to J.P.
Morgan fees and other amounts in connection with the company's financing
activities, including the refinancing in June 2000, of $8.5 million and
anticipates paying J. P. Morgan fees and other amounts in connection with
financing activities, including the refinancing in June 2000, of $20.5
million.
On October 27, 1999, Green Equity Investors III, L.P., ("GEI") an affiliate
of Leonard Green & Partners, L.P., purchased 3,000,000 shares of series A
cumulative pay-in-kind preferred stock ("series A preferred stock") at $100
per share. GEI exchanged all 3,000,000 shares of its series A preferred stock
for 3,000,000 shares of series B cumulative pay-in-kind preferred stock
("series B preferred stock"). The series B preferred stock, when issued, was
convertible into shares of Rite Aid common stock at a conversion price of
$11.00 per share of common stock. The conversion price of the series B
preferred stock will be adjusted if Rite Aid issues common stock before
October 27, 2000 at a per share price that is less than the then current
conversion price of the series B preferred stock and in other circumstances.
In June 2000, in connection with the refinancing, effected on June 14, 2000
Rite Aid issued common stock at a per share price of $5.50. As a result of
this issuance, the per share conversion price for the series B preferred stock
was adjusted to $5.50. At June 30, 2000, after giving effect to the adjustment
and the receipt of pay-in-kind dividends, the series B preferred stock was
convertible into 56,749,091 shares of Rite Aid common stock. Leonard I. Green
and Jonathan D. Sokoloff, members of Rite Aid's board of directors, are equity
owners and executive officers of Leonard Green & Partners, L.P., an affiliate
of GEI. Rite Aid paid Leonard Green & Partners a $3 million fee for services
provided in connection with its preferred stock investment in October 1999 and
reimbursed $0.24 million of its out of pocket expenses. In June 2000, Rite Aid
paid a $3 million fee for services provided in connection with the financial
restructuring transactions which Rite Aid completed and reimbursed its out of
pocket expenses. In October 1999, Rite Aid agreed to pay Leonard Green &
Partners an annual fee of $1 million for consulting services. This fee was
increased to $1.5 million at the time of the June 2000 restructuring
transactions. The consulting agreement also provides for the reimbursement of
out-of-pocket expenses incurred by Leonard Green & Partners. Rite Aid has
agreed to register the common stock issuable upon conversion of the series B
preferred stock and to pay all expenses and fees (other than underwriting
discounts and commissions) related to any registration.
The law firm of Skadden, Arps, Slate, Meagher & Flom LLP providers legal
services to Rite Aid. Nancy Lieberman, a director of Rite Aid, is a partner of
that law firm. Fees paid by Rite Aid to Skadden, Arps Slate, Meagher & Flom
LLP did not exceed five percent of the law firm's gross revenues for its last
fiscal year.
50
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The consolidated financial statements of the Company and reports of
independent accountants identified in the following index are incorporated by
reference into this report from the individual pages filed as a part of this
report:
1.Financial Statements
The following financial statements and report of independent auditors
are included herein:
<TABLE>
<S> <C>
Independent Auditors' Reports......................................... F-1
Consolidated Balance Sheets as of February 26, 2000 and February 27,
1999................................................................. F-3
Consolidated Statements of Operations for the fiscal years ended
February 26, 2000, February 27, 1999 and February 28, 1998........... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998..... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
February 26, 2000, February 27, 1999 and February 28, 1998........... F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
2.Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not
required or the required information is included in the consolidated financial
statements or notes thereto.
Financial statements of 50% or less owned companies have been omitted since
they do not constitute significant subsidiaries.
3.Exhibits
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
2 Not Applicable --
3.1 Restated Certificate of Incorporation dated Exhibit 3(i) to Form 8-K
December 12, 1996 filed on November 2,
1999
3.2 Certificate of Amendment to the Restated Exhibit 3(ii) to Form 8-
Certificate of Incorporation dated October K filed on November 2,
25, 1999 1999
3.3 By-laws Exhibit 3(a) to Form S-1
Registration Statement
filed on April 26, 1968
3.4 Amendments to By-laws approved April 6, Exhibit 3 to Form 10-K
1983 filed on May 29, 1983
4.1 The rights of security holders of the
registrant are defined by a) the Laws of
the State of Delaware, b) the Certificate
of Incorporation of registrant and c) the
By-laws of registrant. The Certificate of
Incorporation and By-laws of the registrant
are hereby incorporated by reference in
accordance with Exhibit 3 above.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
4.2 Term Loan Agreement, dated as of October Exhibit 10.2 to Form 8-K
27, 1999, by and among Rite Aid filed on November 2,
Corporation, the banks from time to time 1999
parties thereto and Morgan Trust Company of
New York, as Administrative Agent
4.3 Amended and Restated Credit Agreement, Exhibit 10.3 to Form 8-K
dated as of October 27, 1999, by and among filed on November 2,
Rite Aid Corporation, the banks from time 1999
to time parties thereto and Morgan Guaranty
Trust Company of New York, as Agent
4.4 Pledge Agreement, dated as of October 25, Exhibit 10.4 to Form 8-K
1999, by and between Rite Aid Corporation filed on November 2,
and Morgan Guaranty Trust Company of New 1999
York, as Agent
4.5 PCS Junior Pledge Agreement, dated as of Exhibit 10.5 to Form 8-K
October 19, 1999, by and between Rite Aid filed on November 2,
Corporation and Morgan Guaranty Trust 1999
Company of New York, as Agent
4.6 Waiver dated as of January 11, 2000 to the Exhibit 4.1 to Form 8-K
Amended and Restated Credit Agreement dated filed on January 18,
as of October 25, 1999 and amended as of 2000
December 2, 1999 among Rite Aid Corporation
the Banks party thereto and Morgan Trust
Company of New York, as Agent
4.7 Amendment dated as of December 2, 1999 to Exhibit 4.2 to Form 8-K
the Amended and Restated Credit Agreement filed on January 18,
dated as of October 25, 1999 among Rite Aid 2000
Corporation, the Banks party thereto and
Morgan Guaranty Trust Company of New York,
as Agent
4.8 Waiver dated as of January 11, 2000 to the Exhibit 4.3 to Form 8-K
Term Loan Agreement dated as of October 25, filed on January 18,
1999 among Rite Aid Corporation, the Banks 2000
party thereto and Morgan Guaranty Trust
Company of New York, as Administrative
Agent
4.9 Amendment dated as of December 2, 1999 to Exhibit 4.4 to Form 8-K
the Term Loan Agreement dated as of October filed on January 18,
25, 1999 among Rite Aid Corporation, the 2000
Banks party thereto and Morgan Guaranty
Trust Company of New York, as
Administrative Agent
4.10 Waiver dated as of January 11, 2000 to the Exhibit 4.5 to Form 8-K
Term Loan Agreement dated as of October 27, filed on January 18,
1999 among Rite Aid Corporation, the Banks 2000
party thereto and Morgan Guaranty Trust
Company of New York, as Administrative
Agent
4.11 Term Loan Agreement dated as of October 27, Exhibit 4.6 to Form 8-K
1999 among Rite Aid Corporation, the Banks filed on January 18,
party thereto and Morgan Guaranty Trust 2000
Company of New York, as Administrative
Agent
4.12 Waiver dated as of January 11, 2000 to Exhibit 4.7 to Form 8-K
Guaranty dated as of March 19, 1998, as filed on January 18,
amended by Amendment No. 1, dated as of 2000
June 22, 1998, and as further amended by
Amendment No. 2, dated as of October 25,
1999, and as further amended by Amendment
No. 3, dated as of December 2, 1999 between
Rite Aid Corporation and RAC Leasing LLC
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
4.13 Amendment No. 3, dated as of December 23, Exhibit 4.8 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of March 19, 1998, (as 2000
amended by Amendment No. 1, dated as of
June 22, 1998, and Amendment No. 2 dated as
of October 25, 1999) between RAC Leasing
LLC and Rite Aid Realty Corp.
4.14 Amendment No. 3 dated as of December 2, Exhibit 4.9 to Form 8-K
1999 to Guaranty Dated as of March 19, filed on January 18,
1998, as amended by Amendment No. 1, Dated 2000
as of June 22, 1998, and as further amended
by Amendment No. 2, dated as of October 25,
1999, from Rite Aid Corporation to RAC
Leasing LLC
4.15 Amendment No. 2 dated as of October 25, Exhibit 4.10 to Form 8-K
1999 to Guaranty dated March 19, 1998 (as filed on January 18,
amended by Amendment No. 1, dated as of 2000
June 22, 1998) from Rite Aid Corporation to
RAC Leasing LLC
4.16 Amendment No. 1 dated as of June 22, 1998, Exhibit 4.11 to Form 8-K
to Guaranty dated March 19, 1998, from Rite filed on January 18,
Aid Corporation to RAC Leasing LLC 2000
4.17 Amendment No. 2 dated as of October 25, Exhibit 4.12 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of March 19, 1998 (as 2000
amended by Amendment No. 1, dated as of
June 22, 1998) between RAC Leasing LLC and
Rite Aid Realty Corp.
4.18 Amendment No. 1 dated as of June 22, 1998 Exhibit 4.13 to Form 8-K
to Master Lease and Security Agreement, filed on January 18,
dated as of March 19, 1998 between RAC 2000
Leasing LLC and Rite Aid Realty Corp.
4.19 Guaranty, dated as of March 19, 1998, from Exhibit 4.4 to Form 8-K
Rite Aid Corporation to RAC Leasing LLC filed on January 18,
2000
4.20 Master Lease and Security Agreement, dated Exhibit 4.15 to Form 8-K
as of March 19, 1998, between RAC Leasing filed on January 18,
LLC and Rite Aid Realty Corp. 2000
4.21 Waiver dated as of January 11, 2000 to Exhibit 4.16 to Form 8-K
Guaranty dated as of May 30, 1997, as filed on January 18,
amended by Amendment No. 1, dated as of 2000
October 25, 1999, and as further amended by
Amendment No. 2, dated as of December 2,
1999 between Rite Aid Corporation and
Sumitomo Bank Leasing and Finance, Inc.
4.22 Amendment No. 2 dated as of December 2, Exhibit 4.17 to Form 8-K
1999 to Guaranty dated as of May 30, 1997, filed on January 18,
as amended by Amendment No. 1, dated as of 2000
October 25, 1999, from Rite Aid Corporation
to Sumitomo Bank Leasing and Finance, Inc.
4.23 Amendment No. 1 dated as of October 25, Exhibit 4.18 to Form 8-K
1999 to Guaranty dated as of May 30, 1997 filed on January 18,
from Rite Aid Corporation to Sumitomo Bank 2000
Leasing and Finance, Inc.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
4.24 Amendment No. 4, dated as of October 25, Exhibit 4.19 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of May 30, 1997, as 2000
amended by Amendment No. 1, dated as of
March 11, 1998, and as further amended by
Amendment No. 2, dated as of June 22, 1998,
and as further amended by Amendment No. 3
dated as of May 26, 1999 between Sumitomo
Bank Leasing and Finance, Inc. and Rite Aid
Realty Corp.
4.25 Amendment No. 3, dated as of May 26, 1999, Exhibit 4.20 to Form 8-K
to Master Lease and Security Agreement, filed on January 18,
dated as of May 30, 1997, (as amended by 2000
Amendment No. 1, dated as of March 11,
1998, and as further amended by Amendment
No. 2, dated as of June 22, 1998) between
Sumitomo Bank Leasing and Finance, Inc. and
Rite Aid Realty Corp.
4.26 Amendment No. 2, dated as of June 22, 1998 Exhibit 4.21 to Form 8-K
to Master Lease Security Agreement, dated filed on January 18,
as of May 30, 1997, as amended by Amendment 2000
No. 1 to Master Lease and Security
Agreement, dated as of March 11, 1998
between Sumitomo Bank Leasing and Finance,
Inc. and Rite Aid Realty Corp.
4.27 Amendment No. 1, dated as of March 11, 1998 Exhibit 4.22 to Form 8-K
to Master Lease and Security Agreement, filed on January 18,
dated as of May 30, 1997 between Sumitomo 2000
Bank Leasing and Finance, Inc. and Rite Aid
Realty Corp.
4.28 Guaranty, dated as of May 30, 1997 from Exhibit 4.23 to Form 8-K
Rite Aid Corporation to Sumitomo Bank filed on January 18,
Leasing and Finance, Inc. 2000
4.29 Master Lease and Security Agreement, dated Exhibit 4.24 to Form 8-K
as of May 30, 1997, between Sumitomo Bank filed on January 18,
Leasing and Finance, Inc. and Rite Aid 2000
Realty Corp.
4.30 Waiver No. 1 dated as of January 10, 2000 Exhibit 4.25 to Form 8-K
to Note Agreement dated as of September 30, filed on January 18,
1996 (as previously amended pursuant to 2000
Amendment No. 1 dated as of October 25,
1999 and Amendment No. 2 dated as of
December 2, 1999) among Finco, Inc., Rite
Aid Corporation, The Prudential Life
Insurance Company of America and PruCo Life
Insurance Company and Waiver No. 1 dated as
of January 10, 2000 to Guaranty Agreement
dated as of September 30, 1996 (as
previously amended pursuant to Amendment
No. 1 dated as of October 25, 1999 and
Amendment No. 2 dated as of December 2,
1999) among Finco, Inc., Rite Aid
Corporation, The Prudential Life Insurance
Company of America and PruCo Life Insurance
Company
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
4.31 Amendment No. 2 dated as of December 2, Exhibit 4.26 to Form 8-K
1999 to Note Agreement dated as of filed on January 18,
September 30, 1996 (as previously amended 2000
pursuant to Amendment No. 1 dated as of
October 25, 1999) among Finco, Inc., Rite
Aid Corporation, The Prudential Insurance
Company of America and PruCo Life Insurance
Company and Amendment No. 2 dated as of
December 2, 1999 to Guaranty Agreement
dated as of September 30, 1996 (as
previously amended pursuant to Amendment
No. 1 dated as of October 25, 1999) among
Finco, Inc., Rite Aid Corporation, The
Prudential Insurance Company of America and
PruCo Life Insurance Company
4.32 Amendment No. 1 dated as of October 25, Exhibit 4.27 to Form 8-K
1999 to Note Agreement dated as of filed on January 18,
September 30, 1996 among Finco, Inc., Rite 2000
Aid Corporation, The Prudential Insurance
Company of America and PruCo Life Insurance
Company and Amendment No. 1 dated as of
October 25, 1999 to Guaranty Agreement
dated as of September 30, 1996 among Finco,
Inc., Rite Aid Corporation, The Prudential
Insurance Company of America and PruCo Life
Insurance Company
4.33 Guaranty Agreement dated as of September Exhibit 4.28 to Form 8-K
30, 1996 from Rite Aid Corporation to the filed on January 18,
Prudential Insurance Company of America and 2000
PruCo Life Insurance Company
4.34 Note Agreement dated as of September 30, Exhibit 4.29 to Form 8-K
1996 among Finco, Inc., The Prudential filed on January 18,
Insurance Company of America and PruCo Life 2000
Insurance Company
4.35 Amended and Restated Receivables Purchase Exhibit 4.30 to Form 8-K
Agreement dated as of January 11, 2000 filed on January 18,
among Rite Aid Funding LLC and Corporate 2000
Asset Funding Company, Inc. and Corporate
Receivables Corporation and Citibank, N.A.
and Citicorp North American, Inc., as agent
for the Investors and the Banks, and Rite
Aid Corporation, as Collection Agent
4.37 Supplemental Indenture, dated as of Exhibit 4.2 to Form 8-K
February 3, 2000, between Rite Aid filed on February 7,
Corporation and Harris Trust and Savings 2000
Bank, to the Indenture dated September 10,
1997, between Rite Aid Corporation and
Harris Trust and Savings Bank
4.38 Supplemental Indenture, dated as of Exhibit 4.3 to Form 8-K
February 3, 2000, between Rite Aid filed on February 7,
Corporation and Harris Trust and Savings 2000
Bank, to the Indenture dated September 22,
1998, between Rite Aid Corporation and
Harris Trust and Savings Bank
4.39 Supplemental Indenture, dated as of Exhibit 4.4 to Form 8-K
February 3, 2000, between Rite Aid filed on February 7,
Corporation and Harris Trust and Savings 2000
Bank, to the Indenture dated December 21,
1998, between Rite Aid Corporation and
Harris Trust and Savings Bank
4.40 Commitment Letter dated April 10, 2000 Exhibit 4.1 to Form 8-K
filed on April 11, 2000
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
4.41 Indenture, dated as of June 14, 2000, among Exhibit 4.1 to Form 8-K
Rite Aid Corporation, as Issuer, each of filed on June 21, 2000
the Subsidiary Guarantors named therein and
State Street Bank and Trust Company, as
Trustee.
4.42 Exchange and Registration Rights Agreement, Exhibit 4.2 to Form 8-K
dated as of June 14, 2000, by and among filed on June 21, 2000
Rite Aid Corporation, State Street Bank and
Trust Company and the Holders of the 10.50%
Senior Secured Notes due 2002.
4.43 Registration Rights Agreement, dated as of Exhibit 4.3 to Form 8-K
June 14, 2000, by and among Rite Aid filed on June 21, 2000
Corporation and the Lenders listed therein.
9 Not Applicable
10.1 Agreement with McKesson Dated April 10, Exhibit 10 to Form 10-Q
1998 filed on July 2, 1998
10.2 Salary Continuation Agreement with Key Exhibit 10(iii) to Form
Officers* 10-K filed on May 29,
1983
10.3 1990 Omnibus Stock Incentive Plan, as Exhibit 4 to Form S-8
amended* filed on July 12, 1996
10.4 Annual Performance-Based Incentive Program* Included in Proxy
Statement dated on June
7, 1995
10.5 Deferred Compensation Agreement* Exhibit 10(iii) to Form
10-K filed on May 31,
1996
10.6 Registration Rights Agreement, dated as of Exhibit 4.1 to Form 8-K
October 27, 1999, by and between Rite Aid filed on November 2,
Corporation and Green Equity Investors III, 1999
L.P.
10.7 Registration Rights Agreement, dated as of Exhibit 4.2 to Form 8-K
October 27, 1999, by and between Rite Aid filed on November 2,
Corporation and J.P. Morgan Ventures 1999
Corporation
10.8 Warrant to purchase Common Stock, par value Exhibit 4.3 to Form 8-K
$1.00 per share, of Rite aid Corporation, filed on November 2,
dated October 27, 1999, issued to J.P. 1999.
Morgan Ventures Corporation
10.9 Commitment Letter, dated October 18, 1999, Exhibit 10.1 to Form 8-K
by and between Rite Aid Corporation and filed on November 2,
Green Equity Investors III, L.P. 1999
10.10 Employment Agreement by and between Rite Exhibit 10.1 to Form 8-K
Aid Corporation and Robert G. Miller, dated filed on January 18,
as of December 5, 1999 * 2000
10.11 Rite Aid Corporation Restricted Stock and Exhibit 4.31 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and Robert G. Miller *
10.12 Employment Agreement by and between Rite Exhibit 10.2 to Form 8-K
Aid Corporation and Mary F. Sammons, dated filed on January 18,
as of December 5, 1999 * 2000
10.13 Rite Aid Corporation Restricted Stock and Exhibit 4.32 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and Mary F. Sammons *
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
10.14 Employment Agreement by and between Rite Exhibit 10.3 to Form 8-K
Aid Corporation and David R. Jessick, dated filed on January 18,
as of December 5, 1999 * 2000
10.15 Rite Aid Corporation Restricted Stock and Exhibit 4.33 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and David R. Jessick *
10.16 Employment Agreement by and between Rite Exhibit 10.4 to Form 8-K
Aid Corporation and John T. Standley, dated filed on January 18,
as of December 5, 1999 * 2000
10.17 Rite Aid Corporation Restricted Stock and Exhibit 4.34 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and John T. Standley *
10.18 Amended and Restated Deferred Compensation Exhibit 10.18 to Form
Agreement by and between Rite Aid 10-K filed on July 11,
Corporation and Franklin C. Brown, dated as 2000
of October 23, 1996 *
10.19 Employment Agreement by and between Rite Exhibit 10.19 to Form
Aid Corporation and Beth Kaplan, dated as 10-K filed on July 11,
of August 14, 1996 * 2000
10.20 Intentionally Omitted
10.21 Rite Aid Corporation Special Deferred Exhibit 10.20 to Form
Compensation Plan * 10-K filed on July 11,
2000
10.22 Senior Credit Agreement, dated as of June Exhibit 10.1 to Form 8-K
12, 2000, among Rite Aid Corporation, the filed on June 21, 2000
Banks party thereto, Citicorp 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.
10.23 Collateral Trust and Intercreditor Exhibit 10.2 to Form 8-K
Agreement, dated as of June 12, 2000, among filed on June 21, 2000
Rite Aid Corporation, each 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.
10.24 Senior Subsidiary Security Agreement, dated Exhibit 10.3 to Form 8-K
as of June 12, 2000, made by the Subsidiary filed June 21, 2000
Guarantors identified 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.
10.25 Senior Subsidiary Guarantee Agreement, Exhibit 10.4 to Form 8-K
dated as of June 12, 2000, among each of filed June 21, 2000
the Subsidiary Guarantors of Rite Aid
Corporation listed therein and Citicorp
USA, Inc., as Senior Collateral Agent.
10.26 Senior Indemnity, Subrogation and Exhibit 10.5 to Form 8-K
Contribution Agreement, dated as of June filed June 21, 2000
12, 2000, among Rite Aid Corporation, each
of the Subsidiary Guarantors listed therein
and Citicorp USA, Inc., as Senior
Collateral Agent.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
10.27 RCF Facility, dated as of June 12, 2000, Exhibit 10.6 to Form 8-K
among Rite Aid Corporation, the Banks from filed June 21, 2000
time to time parties thereto and Morgan
Guaranty Trust Company of New York, as
Administrative Agent, with JP Morgan
Securities Inc., as Lead Arranger and Book
Runner.
10.28 PCS Facility, dated as of June 12, 2000, Exhibit 10.7 to Form 8-K
among Rite Aid Corporation, the Banks from filed June 21, 2000
time to time parties thereto and Morgan
Guaranty Trust Company of New York, as
Administrative Agent, with JP Morgan
Securities Inc., as Lead Arranger and Book
Runner.
10.29 Exchange Debt Facility, dated as of June Exhibit 10.8 to Form 8-K
12, 2000, among Rite Aid Corporation, the filed June 21, 2000
Banks from time to time parties thereto and
Morgan Guaranty Trust Company of New York,
as Administrative Agent, with JP Morgan
Securities Inc., as Lead Arranger and Book
Runner.
10.30 Second Priority Subsidiary Guarantee Exhibit 10.9 to Form 8-K
Agreement, dated as of June 12, 2000, among filed June 21, 2000
each of the Subsidiary Guarantors of Rite
Aid Corporation listed therein and
Wilmington Trust Company, as Second
Priority Collateral Trustee.
10.31 Second Priority Subsidiary Security Exhibit 10.10 to Form 8-
Agreement, dated as of June 12, 2000, made K filed June 21, 2000
by the Subsidiary Guarantors 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.
10.32 Second Priority Indemnity, Subrogation and Exhibit 10.11 to Form 8-
Contribution Agreement, dated as of June K filed June 21, 2000
12, 2000, among Rite Aid Corporation, each
Subsidiary Guarantor listed therein and
Wilmington Trust Company, as Second
Priority Collateral Trustee.
10.33 First Priority Subsidiary Security Exhibit 10.12 to Form 8-
Agreement, dated as of June 12, 2000, made K filed June 21, 2000
by the Domestic Subsidiaries 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.
10.34 Amended and Restated Drugstore.com Pledge Exhibit 10.13 to Form 8-
Agreement, dated as of June 12, 2000, K filed June 21, 2000
between Rite Aid Corporation and Morgan
Guaranty Trust Company of New York, as
Agent.
10.35 Amended and Restated PCS Pledge Agreement, Exhibit 10.14 to Form 8-
dated as of June 12, 2000, between Rite Aid K filed June 21, 2000
Corporation and Morgan Guaranty Trust
Company of New York, as Agent.
10.36 Form of Second Priority Mortgage, Exhibit 10.15 to Form 8-
Assignment of Leases and Rents, Security K filed June 21, 2000
Agreement and Financing Statement, by the
Subsidiary Guarantor listed therein, to
Wilmington Trust Company, as Second
Priority Collateral Trustee.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
10.37 Amendment No. 3 to Note Agreement, Exhibit 10.16 to Form 8-
Amendment No. 4 to Guaranty Agreement, and K filed June 21, 2000
Amendment No. 1 to Put Agreement, 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.
10.38 Amendment No. 5 to Guaranty, dated as of Exhibit 10.17 to Form 8-
June 12, 2000, from Rite Aid Corporation, K filed June 21, 2000
as Guarantor, to RAC Leasing LLC, as
Lessor.
10.39 Amendment No. 4 to Master Lease and Exhibit 10.18 to Form 8-
Security Agreement, dated as of June 12, K filed June 21, 2000
2000, between RAC Leasing LLC, as Lessor,
and Rite Aid Realty Corp., as Lessee.
10.40 Amendment No. 4 to Guaranty, dated as of Exhibit 10.19 to Form 8-
June 12, 2000, from Rite Aid Corporation, K filed June 21, 2000
as Guarantor, to Sumitomo Bank Leasing and
Finance, Inc., as Lessor.
10.41 Amendment No. 5 to Master Lease and Exhibit 10.20 to Form 8-
Security Agreement, dated as of June 12, K filed June 21, 2000
2000, between Sumitomo Bank Leasing and
Finance, Inc., as Lessor, and Rite Aid
Realty Corp., as Lessee.
10.42 Promissory Note, dated April 30, 1999, in Exhibit 10.42 to Form
the amount of $5,000,000 between 10-K filed on July 11,
NationsBank, N.A. Banking Center, as lender 2000
and Beth Kaplan and Bruce Sholk as
borrowers.
10.43 Limited Guaranty, dated April 30, 1999, for Exhibit 10.43 to Form
the amount of $5,000,000 between 10-K filed on July 11,
NationsBank, N.A. Banking Center, as bank, 2000
Rite Aid Corporation as guarantor and Beth
Kaplan and Bruce Sholk, as borrowers.
10.44 Promissory Note, dated June 19, 1998, in Exhibit 10.44 to Form
the amount of $2,500,000 between 10-K filed on July 11,
NationsBank, N.A. Banking Center, as lender 2000
and Beth Kaplan and Bruce Sholk as
borrowers.
10.45 Limited Guaranty, date June 19, 1998, for Exhibit 10.45 to Form
the amount of $2,500,000 between 10-K filed on July 11,
NationsBank, N.A. Banking Center, as bank, 2000
Rite Aid Corporation as Guarantor and Beth
Kaplan and Bruce Sholk, as borrowers.
10.46 Executive Separation Agreement and General Exhibit 10.46 to Form
Release, dated February 28, 2000, between 10-K filed on July 11,
Rite Aid Corporation and Timothy Noonan. 2000
10.47 Letter Agreement, dated February 28, 2000, Exhibit 10.47 to Form
between Rite Aid Corporation and Timothy 10-K filed on July 11,
Noonan, amending Executive Separation 2000
Agreement and General Release, dated
February 28, 2000, between Rite Aid
Corporation and Timothy Noonan.
11 Not Applicable
12 Statement regarding computation of ratios Included herein
of earnings to fixed charges
13 Not Applicable
16 Not Applicable
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
<C> <S> <C>
18 Letter re change in accounting principles Exhibit 18 to the Form
10-K filed on July 11,
2000
21 Subsidiaries of the registrant Exhibit 19 to the Form
10-K filed on July 11,
2000
22 Not Applicable
23 Consent of Independent Certified Public Not applicable
Accountants
24 Not Applicable
27 Financial Data Schedules (EDGAR Filing Only) Filed Herewith
99.1 Press Release, dated June 14, 2000 Exhibit 99.1 to Form 8-K
filed June 21, 2000
99.2 Form 10-Q for second quarter of fiscal 2001 Filed Herewith
</TABLE>
--------
* Constitutes a compensatory plan or arrangement required to be filed with
this Form.
Reports on Form 8-K
(1) Rite Aid Corporation filed a Current Report on Form 8-K on December 10,
1999 disclosing under Item 4 that it had retained the accounting firm of
Deloitte & Touche LLP to audit and report on the Company's restated
consolidated balance sheets as of February 27, 1999 and February 28, 1998
and the related restated consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period
ended February 27, 1999 as well as auditing the Company's consolidated
financial statements for the fiscal year ending February 26, 2000.
(2) Rite Aid Corporation filed a Current Report on Form 8-K on January 18,
2000 disclosing under Item 5 a press release describing certain
agreements related to certain lenders and setting forth under Item 7
copies of the related agreements and certain employment agreements and
restricted stock and stock option award agreements.
(3) Rite Aid Corporation filed a Current Report on Form 8-K on February 7,
2000 disclosing under Item 5 a press release describing the receipt of
consents from certain debt holders and setting forth under Item 7 copies
of related Indentures as exhibits.
(4) 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 setting forth under Item 7 a copy of the
commitment letter.
(5) 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.
(6) 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.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: October 11, 2000 RITE AID CORPORATION.
/s/ Robert G. Miller
By: _________________________________
Robert G. Miller
Chairman of the Board of
Directors and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in their respective capacities on October 11, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ Robert G. Miller Chairman of the Board of Directors and
_________________________________ Chief Executive Officer
Robert G. Miller
/s/ Mary F. Sammons President, Chief Operating Officer and
_________________________________ Director
Mary F. Sammons
/s/ John T. Standley Chief Financial Officer and Senior
_________________________________ Executive Vice President
John T. Standley
/s/ Christopher Hall Chief Accounting Officer and Senior Vice
_________________________________ President
Christopher Hall
/s/ William Bratton Director
_________________________________
William J. Bratton
/s/ Alfred M. Gleason Director
_________________________________
Alfred M. Gleason
/s/ Alex Grass Director
_________________________________
Alex Grass
/s/ Leonard I. Green Director
_________________________________
Leonard I. Green
/s/ Nancy A. Lieberman Director
_________________________________
Nancy A. Lieberman
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Philip Neivert Director
_________________________________
Philip Neivert
/s/ Stuart M. Sloan Director
_________________________________
Stuart M. Sloan
/s/ Jonathan D. Sokoloff Director
_________________________________
Jonathan D. Sokoloff
/s/ Leonard N. Stern Director
_________________________________
Leonard N. Stern
/s/ Preston Robert Tisch Director
_________________________________
Preston Robert Tisch
/s/ Gerald Tsai, Jr. Director
_________________________________
</TABLE> Gerald Tsai, Jr.
S-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Rite Aid Corporation
Camp Hill, Pennsylvania
We have audited the accompanying consolidated balance sheets of Rite Aid
Corporation and subsidiaries as of February 26, 2000 and February 27, 1999,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended February 26,
2000. Our audits also included the consolidated financial statement schedule
listed in the Table of Contents at Item 14(a)(2). These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We did not
audit the consolidated financial statements of PCS Holding Corporation (a
consolidated subsidiary of Rite Aid Corporation), which has been included in
discontinued operations in the accompanying consolidated financial statements,
which statements reflect total assets constituting 17% and 18% of consolidated
total assets as of February 26, 2000 and February 27, 1999, respectively, and
revenues of $1,264.7 million and $104.3 million for the years ended February
26, 2000 and February 27, 1999, respectively. Those financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for PCS Holding
Corporation, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects,
the financial position of Rite Aid Corporation and subsidiaries at February
26, 2000 and February 27, 1999, and the results of their operations and their
cash flows for each of the three years in the period ended February 26, 2000,
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Notes 1 and 26 to the consolidated financial statements, on
July 12, 2000, the Company announced that it had entered into an agreement to
sell its pharmacy benefit management segment. Accordingly, the pharmacy
benefit management segment has been reclassified as a discontinued operation
in the accompanying consolidated financial statements.
As discussed in Note 25 to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
As discussed in Note 5 to the consolidated financial statements, the Company
changed its application of the last-in, first-out ("LIFO") method of
accounting for inventory in 2000.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
July 11, 2000
(October 2, 2000 as to the effects of the discontinued operation discussed in
Note 26 and as to the effects of the restatement discussed in the third
paragraph in Note 25)
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholder
PCS Holding Corporation
We have audited the consolidated balance sheets of PCS Holding Corporation and
Subsidiaries (the Company) as of February 27, 1999 and February 26, 2000, and
the related consolidated statements of operations, shareholder's equity, and
cash flows for the thirty-six days ended February 27, 1999 and the year ended
February 26, 2000 (not presented seperately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PCS Holding Corporation and Subsidiaries at February 27, 1999 and February
26, 2000, and the consolidated results of their operations and their cash
flows for the thirty-six days ended February 27, 1999 and the year ended
February 26, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
April 21, 2000
F-2
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
February 26, February 27,
2000 1999
(as restated, (as restated,
see note 25) see note 25)
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 179,757 $ 84,522
Accounts receivable, net ......................... 152,035 71,928
Inventories, net ................................. 2,472,437 2,618,235
Refundable income taxes........................... 147,599 --
Prepaid expenses and other current assets......... 63,659 26,327
----------- -----------
Total current assets.............................. 3,015,487 2,801,012
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET................. 3,449,594 3,328,499
GOODWILL AND OTHER INTANGIBLES..................... 1,311,123 1,463,443
OTHER ASSETS....................................... 242,899 260,658
DEFERRED TAX ASSET................................. 146,916 171,364
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS.. 1,743,828 1,753,475
----------- -----------
Total assets...................................... $ 9,909,847 $ 9,778,451
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current lease financing obligations............... $ 25,964 $ 31,522
Short-term debt and current maturities of long-
term debt ....................................... 76,086 1,539,267
Accounts payable.................................. 854,062 1,135,220
Sales and other taxes payable..................... 33,662 32,963
Income taxes payable ............................. 111,804 107,896
Deferred income taxes............................. -- 29,675
Accrued salaries, wages and other current
liabilities ..................................... 803,895 700,712
Net current liabilities of discontinued
operations....................................... 390,053 115,872
----------- -----------
Total current liabilities......................... 2,295,526 3,693,127
----------- -----------
CONVERTIBLE SUBORDINATED NOTES .................... 649,986 649,991
LONG-TERM DEBT LESS CURRENT MATURITIES ............ 4,738,661 2,583,813
LEASE FINANCING OBLIGATIONS LESS CURRENT
MATURITIES........................................ 1,125,937 1,117,911
OTHER NONCURRENT LIABILITIES....................... 647,771 370,433
----------- -----------
Total liabilities................................. 9,457,881 8,415,275
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 22)............
REDEEMABLE PREFERRED STOCK ........................ 19,457 23,559
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1 per share;
liquidation value $100 per share; 20,000,000
shares authorized: shares issued -- 3,082,500 and
0................................................ 308,250 --
Common stock, par value $1 per share; 600,000,000
shares authorized: shares issued and
outstanding-- 259,927,199 and 258,862,411 ....... 259,927 258,861
Additional paid-in capital........................ 1,292,337 1,370,005
Accumulated deficit............................... (1,421,817) (288,774)
Deferred compensation............................. (6,188) --
Accumulated other comprehensive income............ -- (475)
----------- -----------
Total stockholders' equity........................ 432,509 1,339,617
----------- -----------
Total liabilities and stockholders' equity........ $ 9,909,847 $ 9,778,451
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Year ended
-----------------------------------------
February 26, February 27, February 28,
2000 1999 1998
(52 weeks) (52 weeks) (52 weeks)
(as restated, (as restated, (as restated,
see note 25) see note 25) see note 25)
------------- ------------- -------------
<S> <C> <C> <C>
Summary of Operations:
REVENUES............................. $13,338,947 $12,438,442 $11,352,637
COSTS AND EXPENSES:
Cost of goods sold, including
occupancy costs................... 10,242,377 9,411,600 8,396,239
Selling, general and administrative
expenses.......................... 3,578,861 3,195,794 2,796,342
Gain on sale of stores............. (80,109) -- (52,621)
Goodwill amortization.............. 24,457 26,055 26,169
Store closing and impairment
charges........................... 153,317 192,551 148,560
Interest expense................... 528,159 277,634 209,152
Share of loss from equity
investments....................... 15,181 448 1,886
----------- ----------- -----------
14,462,243 13,104,082 11,525,727
----------- ----------- -----------
Loss from continuing operations
before income taxes and cumulative
effect of accounting change ...... (1,123,296) (665,640) (173,090)
INCOME TAX BENEFIT................... (8,375) (216,941) (28,064)
----------- ----------- -----------
Loss from continuing operations
before cumulative effect of
accounting change................. (1,114,921) (448,699) (145,026)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, including income tax
expense (benefit) of $30,903,
$(5,925) and $(10,885).............. 9,178 (12,823) (20,214)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, net of income tax benefit of
$18,200............................. (27,300) -- --
----------- ----------- -----------
Net loss......................... $(1,133,043) $ (461,522) $ (165,240)
=========== =========== ===========
BASIC AND DILUTED (LOSS) INCOME PER
SHARE:
Loss from continuing operations.... $ (4.34) $ (1.74) $ (0.58)
Income (loss) from discontinued
operations........................ 0.04 (0.05) (0.08)
Cumulative effect of accounting
change, net....................... (0.11) -- --
----------- ----------- -----------
Net loss per share............... $ (4.41) $ (1.79) $ (0.66)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY
28, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Additional Retained Other
------------------------- ---------------------------- Paid-in Earnings Deferred Comprehensive
Shares Class A Class B Shares Issued Treasury Capital (Deficit) Compensation Income
------ -------- -------- -------- -------- --------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 1,
1997
(As restated,
see note 25).... -- $ -- $ -- 129,347 $129,347 $(104,746) $1,371,361 $ 553,814 $ -- $(1,867)
Net income (As
restated, see
note 25)........ (165,240)
Other
comprehensive
income--
Minimum pension
liability
adjustment..... 1,080
Comprehensive
income.........
Stock options
exercised....... 404 404 9,293
Stock option
income tax
benefit......... 4,191
Stock grants..... 13 13 616
Bond conversion.. 5,875 5,875 196,777
Two-for-one stock
split........... 135,639 135,639 (135,639)
Cancel treasury
shares.......... (13,064) (13,064) 104,746 (91,682)
Cash dividends
paid on common
stock ($.4075
per share post
split).......... (102,715)
----- -------- -------- -------- -------- --------- ---------- ----------- ------- -------
BALANCE FEBRUARY
28, 1998 (As
restated, see
note 25)........ -- -- -- 258,214 258,214 -- 1,354,917 285,859 -- (787)
Net loss (As
restated, see
note 25)........ (461,522)
Other
comprehensive
income--
Minimum pension
liability
adjustment..... 312
Comprehensive
income.........
Stock options
exercised....... 633 633 8,603
Stock option
income tax
benefit......... 5,807
Stock grants..... 14 14 669
Bond conversion.. 9
Cash dividends
paid on common
stock ($.4375
per share post
split).......... (113,111)
----- -------- -------- -------- -------- --------- ---------- ----------- ------- -------
BALANCE FEBRUARY
27, 1999 (As
restated, see
note 25)........ -- -- -- 258,861 258,861 -- 1,370,005 (288,774) -- (475)
Net loss (As
restated, see
note 25)........ (1,133,043)
Other
comprehensive
income--
Minimum pension
liability
adjustment...... 475
Comprehensive
income.........
Issuance of
preferred
shares.......... 3,000 300,000
Exchange of
preferred
shares.......... (300,000) 300,000
Stock options
exercised....... 66 66 814
Stock option
income tax
benefit......... 243
Stock grants..... 1,000 1,000 7,250 (6,188)
Issuance of
common stock
warrants........ 8,500
Bond conversion.. 5
Dividends on
preferred
stock........... 83 8,250 (8,250)
Increase
resulting from
sale of stock by
equity method
investee........ 2,929
Cash dividends
paid on common
stock ($.3450
per share post
split).......... (89,159)
----- -------- -------- -------- -------- --------- ---------- ----------- ------- -------
BALANCE FEBRUARY
26, 2000 (As
restated, see
note 25)........ 3,083 $ -- $308,250 259,927 $259,927 $ -- $1,292,337 $(1,421,817) $(6,188) $ --
===== ======== ======== ======== ======== ========= ========== =========== ======= =======
<CAPTION>
Total
-----------
<S> <C>
BALANCE, MARCH 1,
1997
(As restated,
see note 25).... $1,947,909
Net income (As
restated, see
note 25)........ (165,240)
Other
comprehensive
income--
Minimum pension
liability
adjustment..... 1,080
-----------
Comprehensive
income......... (164,160)
Stock options
exercised....... 9,697
Stock option
income tax
benefit......... 4,191
Stock grants..... 629
Bond conversion.. 202,652
Two-for-one stock
split........... --
Cancel treasury
shares.......... --
Cash dividends
paid on common
stock ($.4075
per share post
split).......... (102,715)
-----------
BALANCE FEBRUARY
28, 1998 (As
restated, see
note 25)........ 1,898,203
Net loss (As
restated, see
note 25)........ (461,522)
Other
comprehensive
income--
Minimum pension
liability
adjustment..... 312
-----------
Comprehensive
income......... (461,210)
Stock options
exercised....... 9,236
Stock option
income tax
benefit......... 5,807
Stock grants..... 683
Bond conversion.. 9
Cash dividends
paid on common
stock ($.4375
per share post
split).......... (113,111)
-----------
BALANCE FEBRUARY
27, 1999 (As
restated, see
note 25)........ 1,339,617
Net loss (As
restated, see
note 25)........ (1,133,043)
Other
comprehensive
income--
Minimum pension
liability
adjustment...... 475
-----------
Comprehensive
income......... (1,132,568)
Issuance of
preferred
shares.......... 300,000
Exchange of
preferred
shares.......... --
Stock options
exercised....... 880
Stock option
income tax
benefit......... 243
Stock grants..... 2,062
Issuance of
common stock
warrants........ 8,500
Bond conversion.. 5
Dividends on
preferred
stock........... --
Increase
resulting from
sale of stock by
equity method
investee........ 2,929
Cash dividends
paid on common
stock ($.3450
per share post
split).......... (89,159)
-----------
BALANCE FEBRUARY
26, 2000 (As
restated, see
note 25)........ $ 432,509
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
February 26, February 27, February 28,
2000 1999 1998
(as restated, (as restated, (as restated,
see note 25) see note 25) see note 25)
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................. $(1,133,043) $ (461,522) $ (165,240)
Income (loss) from discontinued
operations.......................... 9,178 (12,823) (20,214)
----------- ----------- ----------
Loss from continuing operations...... (1,142,221) (448,699) (145,026)
Adjustments to reconcile to net cash
(used in) provided by operations:
Cumulative effect of change in
accounting method.................. 27,300 -- --
Depreciation and amortization....... 468,322 381,885 351,637
Store closings and impairment
charges............................ 153,317 192,551 148,560
Gain on sale of stores.............. (80,109) -- (52,621)
LIFO and other charges.............. 60,504 111,645 46,248
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable............... (79,156) (3,833) 283,625
Inventories....................... 43,349 378,990 (488,101)
Other assets...................... 5,689 (29,276) 152,829
Income taxes receivable/payable... 25,390 (278,652) (89,854)
Accounts payable.................. (278,073) (129,500) 438,465
Other liabilities................. 196,938 103,836 (22,897)
----------- ----------- ----------
Net cash (used in) provided by
continuing operations.......... (598,750) 278,947 622,865
Net cash provided by (used in)
discontinued operations........ 341,027 (230,017) (26,578)
----------- ----------- ----------
Net cash (used in) provided by
operating activities........... (257,723) 48,930 596,287
----------- ----------- ----------
INVESTING ACTIVITIES:
Expenditures for property, plant
and equipment...................... (573,287) (1,222,674) (716,052)
Purchases of businesses, net of
cash acquired...................... (24,454) (1,390,620) (335,014)
Net investment in joint venture..... (8,125) -- --
Intangible assets acquired.......... (67,783) (91,749) (66,158)
Proceeds from dispositions.......... 169,537 -- 66,902
----------- ----------- ----------
Net cash used in continuing
operations..................... (504,112) (2,705,043) (1,050,322)
Net cash used in discontinued
operations..................... (48,021) (4,205) --
----------- ----------- ----------
Net cash used in investing
activities..................... (552,133) (2,709,248) (1,050,322)
----------- ----------- ----------
FINANCING ACTIVITIES:
Net proceeds from the issuance of
long-term debt..................... 1,600,000 895,878 641,680
Net change in bank credit
facilities......................... 716,073 -- --
Net (payments) proceeds of
commercial paper borrowings........ (1,591,125) 1,383,125 (301,500)
Net proceeds from the issuance of
preferred stock.................... 300,000 -- --
Net proceeds from the issuance of
redeemable preferred stock......... -- 23,559 --
Repurchase of redeemable preferred
stock.............................. (10,000) -- --
Proceeds from leasing obligations... 74,898 504,990 323,803
Principal payments on long-term
debt............................... (68,113) (39,557) (36,482)
Cash dividends paid................. (89,159) (113,111) (102,715)
Net proceeds from the issuance of
common stock 880 683 629
Deferred financing costs paid....... (34,984) (5,928) (741)
Other............................... 6,621 10,702 10,392
----------- ----------- ----------
Net cash provided by financing
activities..................... 905,091 2,660,341 535,066
----------- ----------- ----------
INCREASE IN CASH AND CASH
EQUIVALENTS......................... 95,235 23 81,031
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................. 84,522 84,499 3,468
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................ $ 179,757 $ 84,522 $ 84,499
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH PAID
FOR INTEREST (NET OF AMOUNTS
CAPITALIZED OF $5,292, $7,069 AND
$4,102)............................. $ 501,813 $ 259,100 $ 194,618
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH PAID
FOR INCOME TAXES.................... $ 981 $ 47,667 $ 46,671
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Bond conversion..................... -- $ -- $ 202,652
Exchange of preferred shares........ $ 300,000 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
1. Summary of Significant Accounting Policies:
Description of Business
Rite Aid Corporation (a Delaware corporation), through its wholly-owned
subsidiaries, operates approximately 3,800 retail drugstores in the regions of
the Eastern, Southern, and Western United States (the "Retail Drug" segment).
During fiscal 2000, Rite Aid owned PCS Holding Corporation ("PCS"), one of the
country's largest pharmacy benefits managers ("PBM"). Through PCS, Rite Aid
provides pharmacy benefit management services to employers, insurance carriers
and managed care companies (the "PBM segment").
Discontinued Operations
On July 12, 2000, the Company announced that it had entered into an
agreement to sell its PBM segment (see note 26). The sale was consummated on
October 2, 2000. Accordingly, for financial statement purposes, the assets,
liabilities, results of operations and cash flows of this segment have been
segregated from those of continuing operations and are presented in the
Company's financial statements as discontinued operations.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 28 or
March 1. The fiscal years ended February 26, 2000, February 27, 1999 and
February 28, 1998 each include 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, and highly liquid
investments which are readily convertible to known amounts of cash and which
have original maturities of three months or less, when purchased.
Inventories
Inventories are stated at the lower of cost or market. Inventory balances
include capitalization of certain costs related to purchasing, freight, and
handling costs associated with placing inventory in its location and condition
for sale. The Company uses the last-in, first-out ("LIFO") method of
accounting for substantially all of its inventories. At February 26, 2000 and
February 27, 1999, inventories were $342,440 and $242,940, respectively, lower
than the amounts that would have been reported using the first-in, first-out
("FIFO") method. The Company calculates its FIFO inventory valuation using the
retail method for store inventories and the cost method for warehouse
inventories (see note 5).
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of.
For purposes of recognizing and measuring impairment of long-lived assets,
the Company categorizes assets of operating stores as "Assets to Be Held and
Used" and assets of stores that have been closed as "Assets to Be
F-7
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Disposed Of". The Company evaluates assets at the store level because this is
the lowest level of independent cash flows ascertainable to evaluate
impairment. Assets being tested for recoverability at the store level include
tangible long-lived assets, identifiable intangibles and allocable goodwill
that arose in purchase business combinations. Corporate assets to be held and
used are evaluated for impairment based on excess cash flows from the stores
that support those assets. Enterprise goodwill not associated with assets
being tested for impairment under SFAS No. 121 is evaluated based on a
comparison of undiscounted future cash flows of the enterprise compared to the
related net book value of the enterprise.
The Company reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If the sum of the undiscounted expected
future cash flows is less than the carrying amount of the asset, the Company
recognizes an impairment loss. Impairment losses are measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
When fair values are not available, the Company estimates fair value using the
expected future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the asset.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the following useful lives:
<TABLE>
<S> <C>
Buildings................................................ 30 to 45 years
Equipment................................................ 3 to 15 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful life of the asset or the term of the lease.
Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of
the net assets of acquired entities and is being amortized on a straight-line
basis over 40 years. The value of favorable and unfavorable leases on stores
acquired in business combinations are amortized over the terms of the leases
on a straight-line basis. Patient prescription files purchased and acquired in
business combinations are amortized over their estimated useful lives of five
to fifteen years. The value of assembled workforce acquired is being amortized
over its useful life of five years.
Internal-Use Software
The Company capitalizes direct internal and external development costs and
direct external application development costs associated with internal-use
software. Neither preliminary evaluation costs nor costs associated with the
software after implementation are capitalized. For fiscal years 2000, 1999 and
1998, the Company capitalized costs of approximately $4,595, $9,667 and
$7,770, respectively. The Company's capitalization policy for internal-use
software is consistent with the provisions of American Institute of Certified
Public Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
Therefore, the adoption of SOP 98-1 in fiscal year 2000 did not have a
significant effect on the Company's financial statements.
Investments in Fifty Percent or Less Owned Subsidiaries
Investments in affiliated entities for which the Company has the ability to
exercise significant influence, but not control over the investee, and
generally an ownership interest of the common stock of between 20% and 50%,
are accounted for under the equity method of accounting and are included in
Other assets. Under the equity
F-8
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
method of accounting, the Company's share of the investee's earnings or loss
is included in the consolidated statements of operations. The portion of the
Company's investment in an equity-method investee that exceeds its share of
the underlying net equity of the investee, if any, is amortized over 7 to 30
years.
Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS No. 123, companies can elect to account for stock-
based compensation using a fair value-based method or continue to measure
compensation expense using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to continue to account for its employee
and director stock-based compensation plans under APB Opinion No. 25. See note
19 for further information about the Company's incentive plans.
Revenue Recognition
The Company recognizes revenue from the sale of merchandise at the time the
merchandise is sold. The Company records revenue net of an allowance for
estimated future returns. Return activity is immaterial to revenues and
results of operations in all periods presented.
Vendor Rebates
Rebates received from vendors that are based on future purchases are
initially deferred and are recognized as a reduction of cost of goods sold
when the related inventory is sold. Rebates not tied directly to purchases are
recognized as a reduction of Selling, general and administrative expense on a
straight-line basis over the related contract term.
Store Preopening Expenses and Closing Costs
Costs incurred prior to the opening of a new store, associated with a
remodeled store, or related to the opening of a distribution facility, are
charged against earnings as administrative and general expenses when incurred.
When a store is closed, the Company expenses unrecoverable costs and accrues a
liability equal to the present value of the remaining lease obligations, net
of expected sublease income.
Advertising
Advertising costs are expensed as incurred. Advertising expenses, net of
reimbursements, for fiscal 2000, 1999 and 1998 were $194,880, $223,000 and
$216,835, respectively.
Insurance
The Company is self-insured for certain general liability and workers'
compensation claims that occurred prior to December 31, 1996. With respect to
claims occurring from January 1, 1997 to December 31, 1998, the Company used a
combination of self-insurance and fixed-cost premium-based policies. Effective
January 1, 1999, substantially all general liability and workers' compensation
claims were covered through a fixed-cost premium-based policy. The Company is
self-insured for all covered employee medical claims.
For claims that are self-insured, stop-loss insurance coverage is maintained
for workers' compensation and general liability occurrences exceeding
$250,000. The Company utilizes actuarial studies as the basis for developing
reported claims and estimating claims incurred but not reported relating to
the Company's self-insurance. Workers' compensation claims are discounted to
present value using a risk-free interest rate.
F-9
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
Deferred income taxes are determined based on the difference between the
financial reporting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the reporting period in the
deferred tax assets and deferred tax liabilities, net of the effect of
acquisitions and dispositions. Deferred tax assets include tax loss and credit
carryforwards and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Recent Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes the accounting and financial reporting requirements for
derivative instruments and requires companies to recognize derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. This statement, as amended, is effective in fiscal
year 2002. The Company is evaluating the effects that the adoption of SFAS No.
133 may have on the financial statements.
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 these financial statements.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant Concentrations
During fiscal 2000, the Company purchased approximately 87% of the dollar
volume of its prescription drugs from a single supplier, McKesson HBOC, Inc.
(McKesson). If Rite Aid's relationship with McKesson was disrupted, the
Company could have difficulty filling prescriptions, which would negatively
impact the business.
2. Results of Operations and Financing:
During fiscal 2000, 1999 and 1998, the Company incurred net losses of
$1,133,043, $461,522 and $165,240, respectively, and during fiscal 2000 net
cash used in operating activities from continuing operations was $598,750. As
discussed in note 11, 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 (see note 24).
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 and other sources of liquidity (including
asset sales) will be sufficient to fund the Company's operating
F-10
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 which will mature in August and
September 2002 will require the Company to refinance the indebtedness at that
time.
3. Acquisitions and Dispositions:
On March 3, 1999, the Company purchased 25 drugstores from Edgehill Drugs,
Inc. The purchase price was $24,454, net of cash acquired of $12. This
acquisition was accounted for under the purchase method of accounting. The
results of operations have been included in these consolidated financial
statements since the date of acquisition.
On August 27, 1997, the Company completed the acquisitions of Harco, Inc.
(Harco) and K&B, Incorporated (K&B). The combined consideration paid for these
companies was $335,014, net of cash acquired of $2,811 and was financed
through commercial paper borrowings. These acquisitions were accounted for
using the purchase method and, accordingly, the Company recorded the assets
and liabilities of Harco and K&B at the date of acquisition at their fair
values. The excess of the acquisition cost over the fair value of the recorded
assets and liabilities of $190,439 has been recorded as goodwill. The Company
has determined that the estimated useful life of the goodwill recorded with
the Harco and K&B acquisitions is primarily indeterminate and likely exceeds
40 years. Accordingly, the Company amortizes goodwill over the maximum
allowable period of 40 years.
In October 1996, the Company signed a definitive contract to sell for cash
of $450 each, plus the value of closing inventories, all of its 193 drugstores
in North and South Carolina to J.C. Penney Company, Inc. (Penney).
Subsequently, Penney contracted to purchase Eckerd Corporation (Eckerd), a
chain of 1,748 drugstores. In order to proceed with the Eckerd purchase,
Penney agreed with the Federal Trade Commission not to take possession of 130
of the Company's stores. In February 1997, the Company agreed to an amendment
to its contract with Penney whereby the Company operated the stores until
Penney could find another buyer, but transfer of the stores was designated to
begin no later than May 30, 1997. Penney arranged for another drugstore chain
to begin taking possession of the stores in May 1997. A pretax gain of $29,969
was recognized in fiscal year 1997 for the stores that transferred in that
year. Upon transfer of the remaining stores in the first quarter of fiscal
1998, the Company recognized an additional pretax gain of $52,621.
In September 1999, the Company signed a definitive contract to sell 38
drugstores in California to Longs Drug Stores California, Inc. (Longs). During
the third quarter of fiscal 2000, a total of 32 stores were transferred to
Longs. In October 1999, the Company agreed to an amendment to its contract
with Longs whereby the closing of two stores was postponed due to delays in
obtaining waivers for existing lease provisions related to the assignment of
leases to the buyer. These two stores were ultimately closed in March 2000 and
transferred to the buyer at that time. The remaining four stores which were
originally included in the purchase agreement were retained by Rite Aid. A
pre-tax gain of $80,109 was recognized in the third quarter of fiscal year
2000 for the stores that were transferred in that year. The gain on the sale
of the two stores transferred in March 2000 was recognized by the Company in
the first quarter of fiscal 2001.
4. Store Closing and Impairment Charges:
In fiscal 2000, 1999, and 1998 Store closing and impairment charges include
non-cash charges of $120,593, $87,666 and $76,442 respectively, for the
impairment of long-lived assets (including allocable goodwill) at 249, 270 and
252 stores. 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.
F-11
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Store closing and impairment charges consist of:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 26, 2000 February 27, 1999 February 28, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
Store lease exit costs.. $ 32,724 $104,885 $ 72,118
Impairment charges...... 120,593 87,666 76,442
-------- -------- --------
$153,317 $192,551 $148,560
======== ======== ========
</TABLE>
During fiscal 2000, 1999, and 1998, the Company recorded charges for 224,
422, and 593 stores, respectively, to be closed or relocated that were under
long-term leases. 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 store 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. The discount rates used to determine the liability were 6.60%,
5.22% and 5.59% at February 26, 2000, February 27, 1999 and February 28, 1998,
respectively.
Subsequent to the recording of lease accruals, management determined that
certain stores would remain open. Included in the amounts stated above were
impairment write-downs of $3,954 for 6 stores in fiscal 2000 and $1,408 for 3
stores in fiscal 1999, that were written down to fair value but were not
relocated or closed. Also, the Company reversed charges of $10,490 and $1,052
in fiscal 2000 and 1998, respectively, for lease accruals previously
established for those stores.
The reserve for store lease exit costs includes the following activity for
the fiscal years ended February 26, 2000, February 27, 1999 and February 28,
1998:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 26, 2000 February 27, 1999 February 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance--Beginning of
Year................... $246,805 $191,453 $137,230
Provision for present
value of
noncancellable lease
payments of stores
designated to be
closed............... 58,324 94,404 90,697
Changes in assumptions
about future sublease
income, terminations,
etc. ................ (15,110) 10,481 (17,527)
Reversals of reserves
for stores that
management has
determined will
remain open.......... (10,490) -- (1,052)
Interest accretion and
changes in
interest rates....... (618) 10,877 13,489
Cash payments, net of
sublease income...... (66,099) (60,410) (31,384)
-------- -------- --------
Balance--End of Year.... $212,812 $246,805 $191,453
======== ======== ========
</TABLE>
In addition to store closings, the Company has also closed or relocated
certain distribution centers in its efforts to consolidate operations and
implement its regional exit strategies. During the second quarter of fiscal
2000, management approved a plan to close its leased distribution center in
Las Vegas, Nevada and terminate all of its employees and accrued termination
benefit payments of $1,634 in the second quarter of 2000, with
F-12
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the charge included in Selling, general and administrative expenses (SG&A) on
the consolidated statement of operations. Severance payments of $1,165 were
made during fiscal year 2000 leaving a remaining liability of $469 at
February 26, 2000, with additional payments made during fiscal 2001. The
operating lease for the distribution center was terminated in May 2000 at the
end of the lease term with no additional liability to the Company.
In the third quarter of fiscal 2000, management announced plans to close its
South Nitro, West Virginia distribution center in the summer of 2000. As a
result of this exit plan, the Company accrued termination benefits of $3,858 in
the third quarter of fiscal 2000 for all of the 480 employees with the charge
included in SG&A on the consolidated statement of operations. Subsequently, in
the fourth quarter of fiscal 2000 management decided to not close the facility.
However, prior to this decision the Company became obligated to pay $1,040 in
severance costs related to 102 employees. The Company paid $540 in the fourth
quarter of fiscal 2000 and the remaining $500 was accrued at February 26, 2000.
The remaining reserve of $2,818 was reversed to SG&A in the fourth quarter of
fiscal 2000.
In the third quarter of fiscal 2000, management approved a plan to close and
sell its Ogden, Utah distribution center. As a result of this exit plan, a
liability of $2,256 for termination benefits for 500 employees was recorded
through SG&A in the third quarter of fiscal 2000. Additionally, an impairment
charge of $7,600 for long-lived assets was recorded in the third quarter of
fiscal 2000. The facility was sold in March 2000.
During the second quarter of fiscal 1998, the Company closed its distribution
center in Ontario, California and terminated all of its 177 employees. The
costs associated with closing the California facility including termination
benefit payments of approximately $400 were expensed as they were incurred
during fiscal 1998. The termination benefits were determined through
negotiations with the union representatives and were largely based on years of
service and included some health insurance benefits. The facility was sold in
the second quarter of fiscal 1998 for its adjusted carrying value of
approximately $11,400.
In the fourth quarter of fiscal 1997, the Company committed to construct a
new distribution center near Baltimore, Maryland. The new distribution center
was scheduled to be completed in August 1998 and would replace the existing
distribution facility in Shiremanstown, Pennsylvania. The Pennsylvania
distribution center was scheduled to close and all of its 734 employees would
have been terminated in October 1998 when the Maryland facility was scheduled
to be fully operational. As a result of this exit plan, a liability of $3,425
for termination benefits was recorded in the fourth quarter of 1997 and charged
to SG&A expenses on the statement of income. The termination benefits were
determined through negotiations with the union representative and based on
years of service and included the continuation of health insurance coverage
after the termination date. As a result of subsequent negotiations with union
representatives, an additional liability of $4,000 for termination benefits was
recorded in fiscal 1998. The closure of the Pennsylvania facility was delayed
due to computer software problems encountered in opening the Maryland facility.
The Pennsylvania facility was closed in March 1999, and all payments related to
the liability were made in the first quarter of fiscal 2000.
5. Change in Accounting Method:
In fiscal 2000, the Company changed its application of the 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 effect of this change in fiscal 2000 was a charge
of $6,840 (net of income tax benefit of $4,560), or $.03 per diluted common
share. The cumulative effect of the accounting change on periods prior to
fiscal 2000 was a charge of $27,300 (net of income tax benefit of $18,200), or
$.11 per diluted common share. The pro forma effect of this accounting change
would have been a reduction in income of $6,360 (net of income tax benefit of
$4,240) or $.02 per diluted common share, and $12,600 (net of income tax
benefit of $8,400) or $.05 per common share, for fiscal 1999 and 1998,
respectively.
F-13
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Accounts Receivable:
During November 1997, the Company and certain of its subsidiaries entered
into an agreement to sell, on an ongoing basis, a pool of receivables to a
wholly owned bankruptcy-remote special purpose funding subsidiary (the funding
subsidiary) of the Company. The funding subsidiary is a distinct legal entity
that engages in no trade or business in order to make remote the possibility
that it would enter bankruptcy or other receivership and is consolidated for
financial reporting purposes. The Company and certain subsidiaries transfer all
of their accounts receivable (principally representing amounts owed by third-
party prescription payers) to the funding subsidiary for a beneficial interest
in the funding subsidiary. The funding subsidiary has sold and, subject to
certain conditions, may from time to time sell an undivided fractional
ownership interest in the pool of receivables to a multi-seller receivables
securitization company. The securitization company is free to pledge or
exchange its interests and the Company is not entitled to repurchase them. The
accounts receivable sold to the funding subsidiary which sold an undivided
fractional ownership interest to the securitization company have been
derecognized on the Company's consolidated balance sheet. Upon the sale, the
Company allocates its basis in the receivables between the interest sold and
the interest retained in relation to their relative fair values. The remaining
receivables, substantially representing retained interests of the Company and
certain of its subsidiaries in the funding subsidiary, continue to be carried
on the Company's consolidated balance sheet at the lower of their cost or
market value.
Under the terms of the agreement, new receivables are added to the pool as
collections reduce previously sold accounts receivable. The Company services,
administers and collects the receivables on behalf of the purchaser. Total
proceeds outstanding from the securitization of receivables as of February 26,
2000 were $294,140, representing an increase of $2,640 from the February 27,
1999 balance of $291,500. The additional proceeds received during fiscal 2000
were used to reduce outstanding commercial paper borrowings and are reflected
as operating cash flows in the accompanying consolidated statement of cash
flows. The Company recognizes no servicing asset or liability because the
benefits of servicing are expected to represent adequate compensation for the
services performed. Expenses of $18,052 and $15,532 associated with the
securitization program were recognized as a component of SG&A for the years
ended February 26, 2000 and February 27, 1999, respectively. In connection with
the Company's refinancing in June 2000 (see note 24) all borrowings under the
securitization program were repaid and the program was terminated.
The Company maintains an allowance for doubtful accounts receivable based
upon the expected collectibility of accounts receivable, including retained
interests in receivables sold. The Company recorded an allowance for
uncollectible accounts of $35,371 at February 26, 2000 and $30,296 at February
27, 1999. The Company's accounts receivable are due primarily from third-party
providers (e.g., insurance companies and governmental agencies) under third-
party payment plans and are booked net of any allowances provided for under the
respective plans. Since payments due from third-party payers are sensitive to
payment criteria changes and legislative actions, the allowance is reviewed
continually and adjusted for accounts deemed uncollectible by management.
7. Property, Plant and Equipment:
Following is a summary of property, plant and equipment at February 26, 2000
and February 27, 1999:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Land.............................................. $ 733,979 $ 773,084
Buildings......................................... 1,010,133 867,119
Leasehold improvements............................ 1,262,590 1,123,608
Equipment......................................... 1,469,881 1,240,777
Construction in progress.......................... 85,484 242,743
---------- ----------
4,562,067 4,247,331
Accumulated depreciation.......................... (1,112,473) (918,832)
---------- ----------
Property, plant and equipment, net.............. $3,449,594 $3,328,499
========== ==========
</TABLE>
F-14
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation expense, which includes the depreciation of assets recorded
under capital leases, was $326,873 in fiscal 2000, $269,184 in fiscal 1999 and
$250,151 in fiscal 1998.
Substantially all of the Company's owned properties on which it operates
stores are pledged as collateral under the Company's debt agreements. The
carrying amount of idle facilities is $113,454 and $153,517 at February 26,
2000 and February 27, 1999, respectively.
8. 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, 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 $149,900 and 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 $2,929 and a corresponding increase to equity in connection with
the sale of stock by the investee during fiscal 2000.
In June 1999, the Company sold its investment in Diversified Prescription
Delivery LLC, a provider of mail order prescription delivery services. The
sales price was $22,860 and resulted in a loss of $811. The investment was
accounted for on the equity method with a carrying amount of $23,671 at the
date of sale.
In February 2000, the Company sold its investment in Stores Automated
Systems, Inc. ("SASI"), a manufacturer of integrated point of sale systems.
The investment was accounted for on the equity method with a carrying amount
of $8,005 at the date of sale. The $8,805 sales price included cash and
forgiveness of payables, and resulted in a gain of $800.
The Company's share of undistributed earnings of fifty percent or less owned
subsidiaries accounted for on the equity method was $0 and $7,263 at February
26, 2000 and February 27, 1999, respectively.
9. Goodwill and Other Intangibles:
Following is a summary of intangible assets at February 26, 2000 and
February 27, 1999:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Goodwill............................................. $ 920,241 $ 979,482
Lease acquisition costs and favorable leases......... 739,770 731,175
Prescription files................................... 136,434 99,032
Assembled workforce.................................. 51,021 50,033
---------- ----------
1,847,466 1,859,722
Accumulated amortization............................. (536,343) (396,279)
---------- ----------
$1,311,123 $1,463,443
========== ==========
</TABLE>
F-15
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Accrued Salaries, Wages, and Other Current Liabilities:
Accrued salaries wages and other current liabilities consist of the
following at February 26, 2000 and February 27, 1999:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Accrued wages, benefits and other personnel costs...... $ 254,738 $ 326,166
Accrued legal and other professional fees.............. 168,643 53,929
Accrued interest....................................... 61,427 44,487
Reserve for lease exit costs........................... 42,413 48,528
Deferred rent.......................................... 53,987 47,664
Deferred income........................................ 44,339 56,262
Accrued property taxes................................. 44,490 44,271
Other.................................................. 133,858 79,405
--------- ---------
$ 803,895 $ 700,712
========= =========
</TABLE>
11. Indebtedness and Credit Agreements:
Following is a summary of indebtedness at February 26, 2000 and February 27,
1999:
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Commercial paper borrowings under existing credit
facilities--5.2% and 5.5% weighted average rates in
fiscal years 2000 and 1999.......................... $ 192,000 $ 1,783,125
Revolving credit facility due 2002 (amended and
restated)........................................... 716,073 --
Term loan due 2002 (amended and restated)............ 1,300,000 --
Term note due 2002 (amended and restated)............ 272,422 --
5.25% convertible subordinated notes due 2002........ 649,986 649,991
6.70% notes due 2001................................. 350,000 350,000
7.125% notes due 2007................................ 350,000 350,000
7.70% notes due 2027................................. 300,000 300,000
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
3.5% to 10.475% industrial development bonds due
through 2016........................................ 5,196 8,672
Other................................................ 29,056 31,283
---------- -----------
5,464,733 4,773,071
Short-term debt and current maturities of long-term
debt................................................ (76,086) (1,539,267)
---------- -----------
Long-term debt less current maturities............... $5,388,647 $ 3,233,804
========== ===========
</TABLE>
In December 1999, absent a waiver the Company would have failed to meet
certain reporting covenants contained in its bank credit and loan agreements
and public debt indentures, in particular the filing of quarterly financial
information in a timely manner. As a result, the Company obtained waivers of
these reporting requirements. These waivers relieve the Company from the
reporting requirements until July 11, 2000 at which time the Company is
required to submit all delinquent reports. In particular, the Company must
submit quarterly financial information for the quarters ended November 27,
1999 and May 27, 2000 and the fiscal year ended
F-16
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
February 26, 2000. These waivers enabled the Company to continue accessing
funds under the credit arrangements and provided a stay from debt acceleration
clauses contained under both the bank credit and loan agreements and the
public debt indentures. Company management subsequently renegotiated all of
its bank credit and loan agreements (see note 24). Management believes that
they are in compliance with the covenants contained within these new
agreements.
As of February 27, 1999, the Company had a $1,000,000 unsecured revolving
credit facility, expiring in July 2001, to support its commercial paper
program and a $1,300,000 unsecured revolving credit facility, expiring in
October 1999, to support commercial paper borrowings to complete the
acquisition of PCS. In June 1999, the Company borrowed an additional $300,000
from one of its banks under a demand note. In September 1999, the Company
determined it was in default on certain financial covenants in the credit
agreements. On October 27, 1999, the Company's banks agreed to extend
$2,600,000 of its outstanding credit facilities. As a result, the due dates of
the $1,300,000 revolving credit facility scheduled to mature on October 29,
1999 and the $300,000 note that was due on demand were extended to November 1,
2000. The Company's $1,000,000 revolving credit facility, which was to mature
on July 19, 2001, was also amended and restated. Borrowings under the credit
facilities carry higher interest costs than commercial paper. The interest
rates under the Company's credit facilities are based on prime or LIBOR plus a
risk adjusted spread. As of February 26, 2000, borrowings under the $1,300,000
facility were at LIBOR plus 3.5%. Borrowings outstanding under the $1,000,000
facility and the $300,000 bank note were $716,073 and $272,422, respectively,
as of February 26, 2000 with interest rates at LIBOR plus 4.00%. Borrowings
repaid under these credit facilities cannot be re-borrowed. These borrowings
have financial and restrictive covenants that, among other things, restrict
the Company's 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 its business, amend certain debt and other material
agreements, issue and sell capital stock of subsidiaries, make distributions
from subsidiaries and grant negative pledges to creditors.
As described in note 24, in connection with a refinancing on June 14, 2000,
the Company extended the maturity date of all its bank debt to 2002. In
addition, $52,500 of the Company's 5.50% senior notes due December 2000 were
exchanged for new 10.50% senior secured notes due September 2002. Another
$93,200 of the 5.50% senior notes will be refinanced in December 2000 with
proceeds received from the sale of 10.50% senior secured notes due September
2002 through a forward purchase agreement. All bank debt and notes with
extended maturities are reflected as long-term debt in the financial
statements.
In connection with obtaining waivers of compliance with, and modifications
to certain of the covenants during the third and fourth quarters of fiscal
2000 and the subsequent extensions and restructuring described above, the
Company paid fees and transaction costs of $63,332. Additionally, the Company
issued three-year warrants to purchase 2,500,000 shares of common stock at
$11.00 per share.
The fair value assigned to the warrants was $8,500 and is being amortized
over the term of the associated debt instruments. Additionally, as part of the
restructuring, the Company entered into a financial advisory agreement for a
period of one year. The Company is making payments under the advisory
agreement of $2,000 per month. These costs are being amortized over the life
of the contract, which approximates the term of restructured debt agreements.
On December 15, 1998, the Company completed the sale of securities
aggregating $700,000. The sale of securities included $200,000 of 5.50% fixed-
rate senior notes due December 15, 2000; $200,000 of 6.00% fixed-rate senior
notes due December 15, 2005; $150,000 of 6.125% fixed-rate senior notes due
December 15, 2008; and $150,000 of 6.875% fixed-rate senior notes due December
15, 2028. Interest is payable semi-annually on December 15 and June 15.
Financing costs for each issue are being amortized over the period until the
maturity date.
F-17
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 22, 1998, the Company issued $200,000 of dealer remarketable
securities ("DRS") due October 1, 2013. The DRS bear interest at a rate of
6.00% from September 22, 1998 until October 1, 2003 (the remarketing date).
Interest is payable semi-annually on April 1 and October 1 of each year
commencing April 1, 1999. Financing costs are being amortized over the period
until the remarketing date. If the remarketing dealer elects to remarket the
DRS, the DRS will be subject to mandatory tender on the remarketing date. If
the remarketing dealer elects not to remarket the DRS, or for any reason does
not purchase all of the DRS on the remarketing Date, the Company will be
required to purchase on the remarketing date any DRS that have not been
purchased by the remarketing dealer. Net proceeds from the sale of securities
were used to repay commercial paper previously issued by the Company. On
December 24, 1999, the remarketing dealer put their remarketing option back to
the Company resulting in a final maturity date for the DRS of October 1, 2003.
On September 10, 1997, the Company completed the sale of $650,000 of 5.25%
convertible subordinated notes due September 15, 2002. The notes are
convertible into shares of the Company's common stock at any time on or after
the 90th day following the last issuance of notes and prior to the close of
business on the maturity date, unless previously redeemed or repurchased. The
conversion price is $36.14 per share (equivalent to a conversion rate of 27.67
shares per $1 principal amount of notes), subject to adjustment in certain
events. Interest on the notes is payable semiannually on March 15 and
September 15 of each year, commencing on March 15, 1998. The notes may be
redeemed at the option of the Company on or after September 15, 2000, in whole
or in part. The proceeds from the sale of the notes were used to refinance and
repay commercial paper previously issued by the Company.
On December 20, 1996, the Company issued securities aggregating $1,000,000.
The sale of securities included $350,000 of 6.70% notes due December 15, 2001,
$350,000 of 7.125% notes due January 15, 2007 and $300,000 of 7.70% debentures
due February 15, 2027.
On April 20, 1995, the Company issued $200,000 of 7.625% senior notes due
April 15, 2005. Net proceeds from the sale of the notes were used for general
corporate purposes, including the repayment of outstanding commercial paper of
the Company. The notes may not be redeemed prior to maturity and will not be
entitled to any sinking fund.
In August 1993, the Company issued 6.875% senior debentures having an
aggregate principal amount of $200,000. These debentures are due August 15,
2013, may not be redeemed prior to maturity and are not entitled to any
sinking fund. The net proceeds from this issuance were used for working
capital and general corporate purposes, including the repayment of outstanding
commercial paper of the Company.
The Company had outstanding letters of credit of $41,624 at February 26,
2000 and $41,383, at February 27, 1999. Also, the Company had provided
permanent financing guarantees to certain of its store construction developers
to be effective, if such developers were unable to obtain their own permanent
financing upon completion of the store construction. These guarantees totaled
$33,774 at February 26, 2000 and $65,130 at February 27, 1999.
The annual weighted average interest rate on the Company's indebtedness was
7.4%, 6.8% and 6.7% for fiscal 2000, fiscal 1999 and fiscal 1998,
respectively.
The aggregate annual principal payments of long-term debt for the five
succeeding fiscal years are as follows: 2001, $76,086; 2002, $29,879; 2003,
$3,601,985; 2004, $200,678; 2005, $2,289; and $1,553,816 in 2006 and
thereafter. The Company is in compliance with restrictions and limitations
included in the provisions of various loan and credit agreements.
F-18
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Income Taxes:
The provision for income taxes from continuing operations is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- --------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal................................... $(19,017) $ 22,163 $ 20,944
State..................................... -- -- --
-------- --------- --------
(19,017) 22,163 20,944
-------- --------- --------
Deferred tax (benefit):
Federal................................... 20,677 (228,776) (44,740)
State..................................... (10,035) (10,328) (4,268)
-------- --------- --------
10,642 (239,104) (49,008)
-------- --------- --------
Total income tax benefit.................. $ (8,375) $(216,941) $(28,064)
======== ========= ========
A reconciliation of the provision for income taxes as presented on the
consolidated statements of operations is as follows:
<CAPTION>
2000 1999 1998
-------- --------- --------
<S> <C> <C> <C>
Income tax benefit from continuing
operations................................. $ (8,375) $(216,941) $(28,064)
Income tax expense (benefit) from
discontinued operations.................... 30,903 (5,925) (10,885)
Income tax benefit related to cumulative
effect of accounting change................ (18,200) -- --
-------- --------- --------
Total income tax expense (benefit)........ $ 4,328 $(222,866) $(38,949)
======== ========= ========
</TABLE>
A reconciliation of the statutory federal rate and the effective rate, for
continuing operations, is as follows:
<TABLE>
<CAPTION>
Percentage 2000 1999 1998
---------- ----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.. (35.0)% (35.0)% (35.0)%
Nondeductible expenses.. 3.4 3.7 12.7
State income taxes,
net.................... (4.1) (4.5) (3.8)
Tax credits............. (.8) (1.4) (5.0)
Valuation allowance..... 34.9 3.6 13.1
Other................... .9 1.0 1.7
----- ----- -----
Effective tax rate...... (0.7)% (32.6)% (16.3)%
===== ===== =====
</TABLE>
The difference between the statutory federal rate and the reported amount of
income tax expense attributable to discontinued operations is primarily due to
nondeductible goodwill.
F-19
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effect of temporary differences that give rise to significant
components of deferred tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................... $ 43,762 $ 44,618
Accrued expenses...................................... 141,332 70,954
Liability for lease exit costs........................ 113,907 122,370
Pension, retirement and other benefits................ 69,476 97,240
Deferred gain......................................... 59,863 --
Credits............................................... 69,840 53,840
Net operating losses.................................. 466,451 242,032
-------- --------
Total gross deferred tax assets..................... 964,631 631,054
Valuation allowance..................................... (475,174) (82,507)
-------- --------
Net deferred tax assets............................. 489,457 548,547
-------- --------
Deferred tax liabilities:
Inventory............................................. 121,119 190,772
Long-lived assets..................................... 218,793 214,320
Other................................................. 2,629 1,766
-------- --------
Total gross deferred tax liabilities................ 342,541 406,858
-------- --------
Net deferred tax assets................................. $146,916 $141,689
======== ========
Current deferred tax liabilities........................ $ -- $(29,675)
Noncurrent deferred tax assets.......................... 146,916 171,364
-------- --------
Net deferred tax assets................................. $146,916 $141,689
======== ========
</TABLE>
Net Operating Losses and Tax Credits
At February 26, 2000 and February 27, 1999, the Company has federal net
operating loss (NOL) carryforwards of $841,059 and $304,860, the majority of
which expire between fiscal 2017 and 2020.
At February 26, 2000 and February 27, 1999, the Company has state NOL
carryforwards of $1,662,602 and $927,614, the majority of which expire by
fiscal 2005 and the remaining balance by fiscal 2015.
At February 26, 2000 and February 27, 1999, the Company has federal business
tax credit carryforwards of $61,394 and $45,394, the majority of which expire
between fiscal 2017 and 2020. In addition to these credits, the Company has
alternative minimum tax credit carryforwards of $7,512 at fiscal 2000 and
1999.
Valuation Allowances
The valuation allowances as of February 26, 2000, and February 27, 1999 are
$475,174 and $82,507 respectively, and principally apply to NOL and tax credit
carryforwards. The Company believes that it is more likely than not that those
carryovers will not be realized. As a result of the decision to dispose of
PCS, the Company recognized an increase in the valuation allowance of $146,916
(unaudited) in the first quarter of fiscal 2001 (see note 26).
F-20
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Financial Instruments:
The carrying amounts and fair values of financial instruments at February
26, 2000 and February 27, 1999 are listed as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Variable rate indebtedness..... $2,480,495 $2,480,495 $1,783,125 $1,783,125
Fixed rate indebtedness........ 2,984,238 1,959,252 2,989,946 3,217,057
Note receivable................ 32,889 36,102 29,043 34,310
</TABLE>
Cash, trade receivables and trade payables are carried at market value,
which approximate their fair values due to the short-term maturity of these
instruments.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Commercial paper and LIBOR-based borrowings under credit facilities:
The carrying amounts for commercial paper indebtedness and LIBOR-based
borrowings under the credit facilities, term loan and term note approximate
their fair values due to the short-term nature of the obligations and the
variable interest rates.
Long-term indebtedness:
The fair values of long-term indebtedness are estimated based on the quoted
market prices of the financial instruments. If quoted market prices were not
available, the Company estimated the fair value based on the quoted market
price of a financial instrument with similar characteristics or based on the
present value of estimated future cash flows using a discount rate on similar
long-term indebtedness issued by the Company.
Note receivable:
The fair value of the fixed-rate note receivable was determined using the
present value of projected cash flows, discounted at a market rate of interest
for similar instruments.
14. Retirement Plans:
The Company and its subsidiaries have numerous retirement plans covering
salaried employees and certain hourly employees. The retirement plans include
a profit sharing retirement plan and other defined contribution plans.
Contributions for the profit sharing plan are a discretionary percent of each
covered employee's salary, as determined by the Board of Directors based on
the Company's profitability. Total expenses recognized for the profit sharing
plan were $9,945 in 2000, $6,091 in 1999, and $2,363 in 1998. Employer
contributions for other defined contribution plans are generally based upon a
percentage of employee contributions. The expenses recognized for these plans
were $10,375 in 2000, $7,847 in 1999, and $8,293 in 1998. There are also
several defined benefit plans that require benefits to be paid to eligible
employees based upon years of service with the Company or formulas applied to
their compensation. The Company's funding policy is to contribute the minimum
required by the Employee Retirement Income Security Act of 1974.
F-21
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic pension cost for the defined benefit plans includes the
following components:
<TABLE>
<CAPTION>
Nonqualified Retiree Health
Defined Benefit Pension Executive Retirement Benefits Plan
Plans Plan (PBM Segment)
------------------------- -------------------- --------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost............ $ 8,505 $ 5,363 $ 5,015 $ 671 $ 514 $ 402 $693 $57 $--
Interest cost........... 5,851 4,091 3,559 1,497 1,424 1,350 252 22 --
Expected return on plan
assets................. (7,670) (5,117) (4,219) -- -- -- -- -- --
Amortization of
unrecognized net
transition
(asset)/obligation..... (160) (160) (160) 1,163 1,163 1,163 -- -- --
Amortization of
unrecognized prior
service cost........... 376 473 390 -- -- -- -- -- --
Amortization of
unrecognized net gain.. (182) (202) -- -- -- -- -- -- --
------- ------- ------- ------ ------ ------ ---- --- ----
Pension expense......... $ 6,720 $ 4,448 $ 4,585 $3,331 $3,101 $2,915 $945 $79 $--
======= ======= ======= ====== ====== ====== ==== === ====
</TABLE>
Discontinued Operations
Included in the defined benefit pension plan data above is $3,434 of expense
related to the PBM segment for fiscal 2000. The expense associated with the
PBM segment for fiscal 1999 and fiscal 1998 is not material. Expenses related
to the Retiree Health Benefit Plan presented above are solely related to the
PBM segment. Employer contributions to the defined contribution plans for the
PBM Segment were $5,440 and $439 for fiscal 2000 and fiscal 1999,
respectively.
F-22
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below sets forth a reconciliation from the beginning of the year
for both the benefit obligation and plan assets of the Company's retirement
and health benefits plans, as well as the funded status and amounts recognized
in the Company's balance sheet as of February 26, 2000 and February 27, 1999:
<TABLE>
<CAPTION>
Nonqualified Retiree Health
Defined Benefit Executive Benefits Plans
Pension Plans Retirement Plan (PBM Segment)
----------------- ------------------ ----------------
2000 1999 2000 1999 2000 1999
-------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit
obligations:
Benefit obligation at
end of prior year.... $ 86,908 $58,048 $ 21,891 $ 20,906 $ 3,433 $ --
Service cost.......... 8,505 5,363 671 514 693 57
Interest cost......... 5,851 4,091 1,497 1,424 252 22
Distributions......... (9,844) (6,097) (1,224) (650) (60) (5)
Purchase of PCS....... -- 23,537 -- -- -- 3,359
Change due to change
in assumptions....... (4,655) 1,486 (1,281) (50) -- --
Change due to plan
amendment............ 187 665 18,891 -- -- --
Actuarial (gain) or
loss................. 2,425 (185) (5,754) (253) 323 --
-------- ------- -------- -------- ------- -------
Benefit obligation at
end of year............ $ 89,377 $86,908 $ 34,691 $ 21,891 $ 4,641 $ 3,433
======== ======= ======== ======== ======= =======
Change in plan assets:
Fair value of plan
assets at beginning
of year.............. $ 93,366 $58,212 $ -- $ -- $ -- $ --
Employer
contributions........ 5,611 7,315 1,224 651 60 5
Actual return on plan
assets............... 20,544 13,727 -- -- -- --
Purchase of PCS....... -- 21,507 -- -- -- --
Distributions
(including assumed
expenses)............ (10,601) (6,744) (1,224) (651) (60) (5)
-------- ------- -------- -------- ------- -------
Fair value of plan
assets at end of year.. $108,920 $94,017 $ -- $ -- $ -- $ --
======== ======= ======== ======== ======= =======
Funded status........... $ 19,543 $ 7,109 $(34,691) $(21,891) $(4,641) $(3,433)
Unrecognized net loss
(gain)................. (21,532) (7,369) (5,972) 1,064 323 --
Unrecognized prior
service cost........... 1,808 2,752 18,891 -- -- --
Unrecognized net
transition (asset) or
obligation............. (339) (498) 12,790 13,953 -- --
-------- ------- -------- -------- ------- -------
Prepaid or (accrued)
pension cost
recognized............. $ (520) $ 1,994 $ (8,982) $ (6,874) $(4,318) $(3,433)
======== ======= ======== ======== ======= =======
Amounts recognized in
consolidated balance
sheets consisted of:
Prepaid (accrued)
pension cost......... $ 4,787 $ 4,551 $ (8,982) $ (6,874) $ -- $ --
Adjustment to
recognize additional
minimum liability.... -- 1,039 (22,836) (12,536) -- --
Accrued pension
liability............ (5,307) (3,596) -- -- (4,318) (3,433)
Pension intangible
asset................ -- -- 22,836 12,061 -- --
Accumulated other
comprehensive
income............... -- -- -- 475 -- --
-------- ------- -------- -------- ------- -------
Net amount recognized... $ (520) $ 1,994 $ (8,982) $ (6,874) $(4,318) $(3,433)
======== ======= ======== ======== ======= =======
</TABLE>
F-23
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts recognized in the accompanying consolidated balance sheets as of
February 26, 2000 and February 27, 1999 are as follows:
<TABLE>
<CAPTION>
Retiree Health
Defined Benefit Nonqualified Executive Benefits Plan
Pension Plans Retirement Plan (PBM Segment)
---------------- ------------------------ ----------------
2000 1999 2000 1999 2000 1999
------- ------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Accrued benefit
liability.............. $(5,307) $(2,557) $ (8,982) $ (6,874) $(4,318) $(3,433)
Prepaid pension cost.... 4,787 4,551 -- -- -- --
------- ------- ----------- ----------- ------- -------
Net amount recognized... $ (520) $ 1,994 $ (8,982) $ (6,874) $(4,318) $(3,433)
======= ======= =========== =========== ======= =======
</TABLE>
The accumulated benefit obligation and fair value of plan assets for the
defined benefit pension plans with plan assets in excess of accumulated
benefit obligations were $58,798 and $84,084, respectively, as of February 26,
2000, and $30,579 and $24,836, respectively, as of February 27, 1999.
The significant actuarial assumptions used for all defined benefit pension
plans were as follows:
<TABLE>
<CAPTION>
Defined Benefit Nonqualified
Pension Plan Executive Defined Benefit
(Retail Drug Retirement Pension Plan
Segment) Plan (PBM Segment)
----------------- -------------- -----------------
Percentage 2000 1999 1998 2000 1999 1998 2000 1999 1998
---------- ----- ----- ----- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Discount rate............ 7.25 6.75 7.00 7.83 6.95 6.93 7.80 7.80 --
Rate of increase in
future
compensation levels..... 4.50 4.75 4.75 3.00 3.00 3.00 5.90 5.90 --
Expected long-term rate
of return on
plan assets............. 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 --
</TABLE>
Through its acquisition of PCS, the Company also assumed a retiree health
benefits plan that provides for certain health benefits at retirement for
covered employees. Healthcare cost trend rates were assumed to increase at an
annual rate of 6.5 percent in 1999 for participants under the age of 65, and
decrease one-half percent per year to 5.0 percent in 2002 and thereafter. For
participants over the age of 65, the rate was assumed to increase 5.0 percent
in 1999 and thereafter.
The assumed health care cost trend rates have a significant effect on the
retiree health benefits amounts reported. If these trend rates were to be
increased by one percentage point each future year, the accumulated post-
retirement benefit obligation would increase by 16.1 percent and the aggregate
service and interest cost components of the expense recognized in 2000 would
increase by 17.6 percent. A one percentage point decrease in these rates would
reduce the accumulated post-retirement benefit obligation by 13.9 percent and
the aggregate service and interest cost components of the expense recognized
in 2000 would decrease by 14.9 percent.
15. Leases:
The Company leases most of its retail stores and certain distribution
facilities under noncancellable operating and capital leases, most of which
have initial lease terms ranging from 10 to 22 years. The Company also leases
certain of its equipment and other assets under noncancellable operating
leases with initial terms ranging from 3 to 7 years. In addition to minimum
rental payments, certain store leases require additional payments based on
sales volume, as well as reimbursements for taxes, maintenance, and insurance.
Most leases contain renewal options, certain of which involve rent increases.
Total rental expense, net of sublease income, was $440,556 in 2000, $417,311
in 1999 and $365,082 in 1998. These amounts include contingent rentals of
$28,625, $32,960, and $30,720, in fiscal 2000, 1999 and 1998, respectively.
F-24
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is a guarantor on certain leases transferred to third parties
through sales or assignments.
The Company leases certain facilities through sale-leaseback arrangements
accounted for using the financing method. Proceeds from sale-leaseback
programs were approximately $74,899 in 2000, $504,990 in 1999 and $323,803 in
1998.
The net book values of assets under capital leases and sale-leasebacks
accounted for under the financing method are summarized as follows:
<TABLE>
<CAPTION>
February 26, February 27,
2000 1999
------------ ------------
<S> <C> <C>
Land............................................... $343,948 $328,610
Buildings.......................................... 570,604 541,710
Equipment.......................................... 86,348 77,453
Accumulated depreciation........................... (36,043) (20,391)
-------- --------
$964,857 $927,382
======== ========
</TABLE>
Following is a summary of lease finance obligations at February 26, 2000 and
February 27, 1999:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Sale-leaseback obligations accounted for under the
financing method................................. $ 944,805 $ 921,331
Obligations under capital leases.................. 207,096 228,102
---------- ----------
Total............................................. 1,151,901 1,149,433
Less current obligation........................... (25,964) (31,522)
---------- ----------
Long-term lease finance obligations............... $1,125,937 $1,117,911
========== ==========
</TABLE>
Following are the minimum lease payments net of sublease income that will
have to be made in each of the years indicated based on non-cancellable leases
in effect as of February 26, 2000:
<TABLE>
<CAPTION>
Financing obligation
under sale-leaseback
arrangements and
Capital Lease Operating
Fiscal year obligations Leases
----------- -------------------- ----------
<S> <C> <C>
2001........................................ $ 119,757 $ 448,580
2002........................................ 119,264 437,140
2003........................................ 116,687 419,024
2004........................................ 114,701 396,930
2005........................................ 114,701 379,860
Later years................................. 1,461,945 3,675,519
---------- ----------
Total minimum lease payments................ 2,047,055 $5,757,053
==========
Amount representing interest................ 895,154
----------
Present value of minimum lease payments..... $1,151,901
==========
</TABLE>
16. Capital Stock:
In October 1999, the Company issued 3,000,000 shares of $100 par value 8%
Series A Convertible Preferred Stock for cash of $300,000. The shares have a
liquidation preference of $100 per share with preference over all existing
classes of preferred stock. The shares are callable by the Company beginning
October 2004 at the liquidation value plus a 5% premium. The shares accrue
cumulative dividends at 8% of the liquidation value of
F-25
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the outstanding shares. Dividends may be paid in cash or additional shares and
have been paid in shares to date. In December 1999, the shares were exchanged
for Series B Convertible Preferred Stock with the same characteristics except
that each Series B share has voting rights equivalent to one share of common
stock. The terms of the shares provide that they are convertible into common
stock at an initial conversion rate of $11.00 per common share subject to
adjustment based on future declines in the quoted price or subsequent equity
transactions based on per share prices lower than $11.00. As a result of the
Company's equity transaction on June 14, 2000, further described in note 24,
the conversion price was subsequently adjusted to a conversion price of $5.50
per share. The resulting beneficial conversion feature of approximately $160.9
million (representing the difference between $5.50 and the market price of the
Company's common stock on the issuance date of the preferred stock), will be
accreted as a return on the preferred stock and will decrease earnings
available to common shareholders beginning in the second quarter of fiscal
2001.
At a Special Meeting of Stockholders held on February 22, 1999, an amendment
to Rite Aid's Restated Certificate of Incorporation was approved to increase
the number of authorized shares of common stock, $1.00 par value, from
300,000,000 to 600,000,000. Accordingly, the authorized capital stock of the
Company consists of 600,000,000 shares of common stock and 20,000,000 shares
of preferred stock, both having a par value of $1.00 per share. Preferred
stock is issued in series subject to terms established by the Board of
Directors.
On February 2, 1998, the Company effected a two-for-one stock split of the
Company's common stock to stockholders of record at the close of business on
January 20, 1998. The stock split increased the number of shares outstanding
by 135,640,000 shares. All share and per share amounts have been restated to
give effect to the stock split.
17. Redeemable Preferred Stock:
In March 1999 and February 1999, Rite Aid Lease Management Company, a wholly
owned subsidiary of Rite Aid Corporation, issued 63,000,000 and 150,000,000
shares of Cumulative Preferred Stock, Class A, par value $100 per share,
respectively. The Class A Cumulative Preferred Stock is mandatorily redeemable
on April 1, 2019 at a redemption price of $100 per share plus accumulated and
unpaid dividends. The Class A Cumulative Preferred Stock pays dividends
quarterly at a rate of 7.0 percent per annum of the par value of $100 per
share when, as and if declared by the Board of Directors of Rite Aid Lease
Management Company in its sole discretion. The amount of dividends payable in
respect of the Class A Cumulative Preferred Stock may be adjusted under
certain events. The outstanding shares of the Class A Preferred Stock were
recorded at the estimated fair value of $5,695 and $13,559 for the 2000 and
1999 issuances, respectively, which equaled the sale price on the date of
issuance. Because the fair value of the Class A Preferred Stock was less than
the mandatory redemption amount at issuance, periodic accretions to
stockholders' equity using the interest method are made so that the carrying
amount equals the redemption amount on the mandatory redemption date.
Accretions were $97 in fiscal year 2000 and $0 in 1999.
In March 1998, RX Choice, Inc., a wholly owned subsidiary of Rite Aid
Corporation (Rite Aid), issued 10,000,000 shares of preferred stock, par value
$0.01, with a liquidation preference per share of $1,000 per share. Granted to
the holder of each share of preferred stock was an option (Put Option) to sell
to Rite Aid all or any portion of the preferred stock held by the holder on
the date the Put Option is exercised. Each Put Option may be exercised any
time after March 25, 2003 and before March 25, 2004. In addition, Rite Aid has
an option (Call Option) to purchase from the holders of the preferred stock,
all or any portion of the shares of preferred stock upon the exercise of the
Call Option. The Call Option may be exercised by Rite Aid any time after
March 20, 2004 and before March 20, 2005. The preferred stock carries a
mandatory obligation to declare and pay preferential dividends at the rate of
7.70 percent per annum of the liquidation preference per share, payable
quarterly. As amended and restated, the articles of incorporation of RX
Choice, Inc. authorize the issuance of 10,000,000 shares of preferred stock,
of which 10,000,000 shares were issued in 1999. During 2000, the Company
repurchased and retired all of the shares at the redemption value of $10,000.
F-26
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Earnings Per Share:
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. All share and per share
data have also been restated to reflect a two-for-one stock split distributed
to stockholders on February 2, 1998.
<TABLE>
<CAPTION>
February 26, February 27, February 28,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Numerator for earnings per share:
Loss from continuing operations
before cumulative effect of
accounting change.............. $(1,114,921) $ (448,699) $ (145,026)
Accretion of redeemable
preferred stock................ (97) -- --
Dividends on preferred stock.... (10,110) (627) --
----------- ----------- -----------
Loss before cumulative effect of
accounting change attributable
to common stockholders......... (1,125,128) (449,326) (145,026)
Income (loss) from discontinued
operation...................... 9,178 (12,823) (20,214)
Cumulative effect of accounting
change......................... (27,300) -- --
----------- ----------- -----------
Net loss attributable to common
stockholders..................... $(1,143,250) $ (462,149) $ (165,240)
=========== =========== ===========
Denominator:
Basic weighted average shares... 259,139,000 258,516,000 250,659,000
Diluted weighted average
shares......................... 259,139,000 258,516,000 250,659,000
Basic and diluted loss per share:
Loss per share before cumulative
effect of accounting change.... $ (4.34) $ (1.74) $ (0.58)
Discontinued operations......... 0.04 (0.05) (0.08)
Cumulative effect of accounting
change......................... (0.11) -- --
----------- ----------- -----------
Basic and diluted loss per
share.......................... $ (4.41) $ (1.79) $ (0.66)
=========== =========== ===========
</TABLE>
In fiscal 2000, 1999 and 1998, no potential common shares have been included
in the calculation of diluted earnings per share because of the losses
reported. At February 26, 2000, an aggregate of 109,640,439 potential common
shares related to stock options, convertible preferred stock, convertible
notes, warrants, stock appreciation rights and other have been excluded from
the computation of diluted earnings per share.
19. Stock Option and Stock Award Plans:
The Company reserved 22,000,000 shares of its common stock for the granting
of stock options and other incentive awards to officers and key employees
under the 1990 Omnibus Stock Incentive Plan (the 1990 Plan). Options may be
granted, with or without stock appreciation rights (SARs), at prices that are
not less than the fair market value of a share of common stock on the date of
grant. The 1990 Plan provides for the Compensation Committee to determine both
when and in what manner options may be exercised; however, it may not be more
than 10 years from the date of grant. The exercise of either a SAR or option
automatically will cancel any related option or SAR. Under the Plan, the
payment for SARs will be made in shares, cash or a combination of cash and
shares at the discretion of the Compensation Committee.
In November 1999, the Company adopted the 1999 Stock Option Plan (the 1999
Plan), under which 10,000,000 shares of common stock are reserved for the
granting of stock options at the discretion of the Board of Directors. Under
the 1999 Plan, stock options may be granted at prices that are not less than
the fair market value of a share of common stock on the date of grant.
F-27
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is a summary of stock option transactions for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Price
Per
Shares Share
---------- --------
<S> <C> <C>
Balance, March 1, 1997.................................. 12,168,650 $13.43
Granted............................................... 401,000 26.59
Exercised............................................. (771,500) 12.60
Canceled.............................................. (306,376) 12.89
---------- ------
Balance, February 28, 1998.............................. 11,491,774 13.96
Granted............................................... 4,054,000 32.74
Exercised............................................. (633,575) 14.58
Canceled.............................................. (241,500) 20.18
---------- ------
Balance, February 27, 1999.............................. 14,670,699 19.02
Granted............................................... 18,687,562 7.95
Exercised............................................. (64,650) 13.61
Canceled.............................................. (7,488,707) 14.60
---------- ------
Balance, February 26, 2000.............................. 25,804,904 $12.30
========== ======
</TABLE>
For various price ranges, weighted average characteristics of outstanding
stock options at February 26, 2000 were as follows:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
---------------------------------- ---------------------
Remaining Weighted Weighted
Range of life Average Average
exercise prices Shares (years) Price Shares Price
--------------- ------ --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 5.38 5,855,308 9.70 $ 5.38 600,000 $ 5.38
$ 6.75 to $ 7.13 638,000 9.94 $ 6.94 -- --
$ 7.35 7,000,000 9.77 $ 7.35 388,889 $ 7.35
$ 7.44 to $ 9.25 3,059,416 5.82 $ 8.56 1,792,699 $ 9.22
$ 9.56 to $16.50 2,955,600 5.54 $13.85 2,481,450 $13.42
$16.63 to $23.00 2,871,000 7.35 $19.02 1,935,750 $17.16
$23.06 to $32.00 2,791,080 8.40 $29.29 132,000 $29.39
$32.06 to $48.81 634,500 8.61 $41.98 124,375 $43.89
---------------- ---------- ---- ------ --------- ------
$ 5.38 to $48.81 25,804,904 8.36 $12.30 7,455,163 $13.21
================ ========== ==== ====== ========= ======
</TABLE>
F-28
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation cost.
The pro forma impact on net loss and per share amounts are reported below as
if the Company had elected to recognize compensation cost based upon the fair
value of the options granted at the grant date as prescribed by SFAS No. 123;
<TABLE>
<CAPTION>
February 26, February 27, February 28,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss .......................... $(1,133,043) $(461,522) $(165,240)
Pro forma compensation expense
under fair value method........... (22,464) (10,463) (6,159)
----------- --------- ---------
Pro forma net loss................. (1,155,507) (471,985) (171,399)
Accretion of redeemable preferred
stock............................. (97) -- --
Dividends on preferred stock....... (10,110) (627) --
----------- --------- ---------
Pro forma net loss attributable to
common stockholders............... $(1,165,714) $(472,612) $(171,399)
=========== ========= =========
Pro forma basic and diluted loss
per share......................... $ (4.50) $ (1.83) $ (0.68)
=========== ========= =========
</TABLE>
The pro forma amounts only take into account the options issued since March
5, 1995. The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected stock price volatility................ 58.0% 30.7% 25.0%
Expected dividend yield........................ 0.0% 1.0% 1.5%
Risk-free interest rate........................ 6.3% 5.6% 6.0%
Expected life of options....................... 4.2 years 6.7 years 3.5 years
</TABLE>
The average fair value of each option granted during fiscal 2000, 1999 and
1998 was $4.09, $12.36 and $6.29, respectively.
Restricted Stock
In December 1999, the new executive team received restricted stock grants of
1,000,000 shares. The Company recorded these grants at a fair value on the
date of the grant of $8,250. During fiscal 2000, the Company also made tax
payments on behalf of the executives to help defray the tax effects of the
grants to the executives. Under the restricted stock agreement, the
restrictions placed on the shares lapse over the period from December 1999 to
November 2002. However, in most circumstances the executive would only have to
provide one year of service to the Company to earn the total number of shares.
Accordingly, the Company is amortizing the cost of the stock grant over a
period of one year resulting in compensation expense of $2 million in fiscal
2000 relating to the grants.
Stock Appreciation Units
The Company has issued stock appreciation units to various members of field
management. The grant price for each unit is the closing price of the
Company's common stock on the date of grant. The units vest four years from
the date of grant. For each outstanding unit, the Company is obligated to pay
out the difference between the grant price and the average market price of one
share of the Company's common stock for the last twenty trading days before
the vesting date. The payment may be in cash or shares, at the discretion of
the Company; however, the Company has historically made cash payments.
F-29
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's obligations under the stock appreciation units are remeasured
at each balance sheet date and amortized to compensation expense over the
vesting period.
At February 26, 2000 and February 27, 1999, there were 7.0 million and 3.4
million stock appreciation rights units outstanding, respectively. Grant
prices for units outstanding at February 26, 2000 ranged from $5.38 to $48.56
per unit. Amounts charged or (credited) to expense relating to the stock
appreciation rights units for fiscal 2000, 1999 and 1998 were $(45,500),
$32,200 and $22,200, respectively.
20. Business Segments:
The Company operated in primarily two business segments: i) the Retail Drug
segment, and ii) the Pharmacy Benefit Management ("PBM") segment, that
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 Company is one of the largest retail drugstore
chains in the United States, with approximately 3,800 stores in operation as
of February 26, 2000. The Company's drugstores' primary business is pharmacy
services in addition to a full selection of health and personal care products,
seasonal merchandise and a large private label product line.
The Company also 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 services to employees, insurance
carriers and managed care companies as well as mail-order pharmacy services.
As a result of the July 12, 2000 announcement regarding the agreement to
sell the PBM segment, the Company's continuing operations consists solely of
the retail drug segment. The Company's revenues from its retail drug stores
are derived from:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
February 26, 2000 February 27, 1999 February 28, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pharmacy.................. $ 7,788,404 $ 6,737,710 $ 5,698,744
Front-end................. 5,550,543 5,700,732 5,653,893
----------- ----------- -----------
$13,338,947 $12,438,442 $11,352,637
=========== =========== ===========
</TABLE>
21. Related Party Transactions:
Included in Accounts receivable at February 26, 2000 and February 27, 1999,
were receivables from related parties of $5,355 and $4,175, respectively,
including employee loans.
During fiscal 2000, 1999 and 1998, the Company sold merchandise totaling
$3,296, $6,225 and $25,041, respectively, to equity-method investees. During
fiscal 2000, 1999 and 1998, the Company purchased equipment totaling $26,115,
$27,119 and $44,105, respectively, from an equity-method investee.
In fiscal 2000, 1999 and 1998, the Company purchased $8,814, $9,430 and
$8,800, respectively, of product from a manufacturer of private label over the
counter medications in which a director held an ownership interest until May
31, 1999. The Company leases for $153.7 per year a 43,920 square foot storage
space in a warehouse in Camp Hill, Pennsylvania, from a partnership in which a
director has a 50% interest.
The Company formerly operated an 8,000 square-foot store in a shopping
center in which Martin Grass, the former Chairman of the Board and Chief
Executive Officer, has a 50% ownership interest. The rent paid by the Company
was $96 per year. In February 1999, the lease was cancelled and the Company
was released from its obligation to pay over $300 in remaining lease
commitments.
F-30
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Beginning in January 1999 the Company leased for $188 per year a 10,750
square-foot store in Sinking Springs, Pennsylvania, which it leases from a
relative of Martin Grass, the former Chairman of the Board and Chief Executive
Officer. The Company leases a 5,000 square-foot store in Mt. Carmel,
Pennsylvania, from a partnership in which Martin Grass is or was a partner.
The rent is $39 per year.
22. Commitments, Contingencies and Guarantees:
Legal Proceedings
This Company is party to numerous legal proceedings, as discussed below. The
Company has charged $232,778, $7,916, and $19,374, to expense for the years
ended February 26, 2000, February 27, 1999, and February 28, 1998,
respectively, for various pending and actual claims, litigation, and
assessments based upon its determination of its material, estimable and
probable liabilities in regard to the portion of these claims, lawsuits, and
assessments not covered by insurance.
In addition, as discussed below, an unfavorable resolution of certain of
these matters could materially adversely affect 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.
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 Company common stock. Plan
participants held approximately 2.8 million shares at December 31, 1998 and
3.9 million shares at December 31, 1999. Purchases of Company common stock
under the plan were suspended in October 1999. The Company is cooperating
fully with the Department of Labor.
These investigations are ongoing and the Company is unable to predict their
outcomes. If the Company were convicted of any crime, certain contracts and
licenses that are material to operations may be revoked, which would have a
material adverse effect on results of operations, financial condition and cash
flows. In addition, substantial penalties, damages or other monetary remedies
assessed against Rite Aid could also have a material adverse affect on results
of operations, financial condition and cash flows.
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 shareholders 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 compliant 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, and 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.
F-31
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 operation and financial position 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. Stem 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
had made no determination yet as 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 the Company's pricing-related
practices for prescription drugs. On September 22, 1999, the Florida Attorney
General filed a complaint against the Company in the Second District, Leon
County, alleging violations of the Florida Deceptive and Unfair Trade
Practices Act and the state RICO statute. The Company no longer operates any
retail drugstores in Florida. In essence, Florida asserted that the Company'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. The Company 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 to raise allegations
concerning other pricing practices relating to discounts and generic drug
price notices. 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
F-32
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
position, results of operations and cash flows 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 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 the outcome of these
investigations.
If any of these cases results 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.
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.
Vendor Arrangements
As of February 26, 2000, the Company had outstanding commitments to purchase
$140 million of merchandise inventory from a vendor for use in the normal
course of business. The Company expects to satisfy these purchase commitments
by fiscal 2005. Under the terms of a joint marketing agreement, the Company
and the vendor are each obligated to make contributions of $51 million to a
marketing fund to be used in connection with advertising and marketing of such
products through September 30, 2004.
Employment Agreements
The Company has employment contracts with its executive officers and various
other members of senior management requiring payment of minimum annual base
salaries and, in some cases, minimum target bonuses and other compensation
arrangements. The terms of the agreements are three years.
Employment agreements with four executive officers contain change in control
provisions that entitle each of them to receive three times the sum of their
annual base salary and annual target bonus amount. The executive officers will
also receive the total amount of contributions that would have been made to
the deferred compensation plan if they had been employed through the end of
their employment contract. All outstanding stock options shall become fully
vested and all restrictions on stock awards shall immediately lapse.
F-33
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
23. Interim Financial Results (Unaudited):
The information in this footnote has been revised from the information
previously reported to correct certain errors in annual and interim periods,
and to reflect the reclassification of the PBM segment as a discontinued
operation and certain other reclassifications. See notes 25 and 26.
<TABLE>
<CAPTION>
Fiscal Year 1999
------------------------------------------------------------------------------------------------------
First Quarter Second Quarter
--------------------------------------------------- --------------------------------------------------
Restated As As Restated As As
Previously Restated Previously Restated
As Reported in for Further As Restated As Reported in for Further As Restated
Previously 2000 Form Restatement and Previously 2000 Form Restatement and
Reported(1) 10-K Adjustments Reclassified Reported(1) 10-K Adjustments Reclassified
----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $3,032,681 $3,086,505 $3,086,505 $3,030,237 $3,011,029 $3,057,095 $3,057,095 3,010,237
Costs and expenses
excluding store
closing and
impairment charges... 3,009,279 3,232,024 3,232,364 3,171,532 2,939,376 3,105,926 3,104,719 3,053,617
Store closing and
impairment charges... 74,300 57,134 57,134 57,134 63,604 31,244 31,244 31,244
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Income (loss) from
continuing operations
before taxes......... (50,898) (202,653) (202,993) (198,429) 8,049 (80,075) (78,868) (74,624)
Income tax expense
(benefit)............ (25,221) (61,027) (61,161) (59,564) 3,961 (24,114) (23,637) (22,151)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Income (loss) from
continuing
operations........... (25,677) (141,626) (141,832) (138,865) 4,088 (55,961) (55,231) (52,473)
Loss from discontinued
operations, net of
tax.................. -- -- -- (2,967) -- -- -- (2,758)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Net income (loss)..... $ (25,677) $ (141,626) $ (141,832) $ (141,832) $ 4,088 $ (55,961) $ (55,231) (55,231)
========== ========== ========== ========== ========== ========== ========== =========
Basic and diluted
earnings (loss) per
share:
Loss from continuing
operations........... $ (0.10) $ (0.55) $ (0.55) $ (0.54) $ 0.02 $ (0.22) $ (0.21) $ (0.20)
Income (loss) from
discontinued
operations .......... -- -- -- (0.01) -- -- -- (0.01)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Net income (loss)..... $ (0.10) $ (0.55) $ (0.55) $ (0.55) $ 0.02 $ (0.22) $ (0.21) $ (0.21)
========== ========== ========== ========== ========== ========== ========== =========
</TABLE>
--------
(1) Financial data as previously reported in the Company's quarterly report on
Form 10-Q for the period ended August 28, 1999.
F-34
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Fiscal Year 1999
------------------------------------------------------------------------------------------------------
Third Quarter Fourth Quarter
--------------------------------------------------- --------------------------------------------------
Restated As As Restated As As
Previously Restated Previously Restated
As Reported in for Further As Restated As Reported in for Further As Restated
Previously 2000 Form Restatement and Previously 2000 Form Restatement and
Reported(2) 10-K Adjustments Reclassified Reported(2) 10-K Adjustments Reclassified
----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $3,122,930 $3,185,386 $3,185,386 $3,109,903 $3,565,260 $3,453,904 $3,453,904 $3,288,065
Costs and expenses
excluding store
closing and
impairment charges... 2,995,965 3,325,360 3,319,656 3,238,912 3,482,123 3,531,560 3,617,988 3,447,470
Store closing and
impairment charges... (7,298) 69,255 69,255 69,255 430 34,918 34,918 34,918
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before taxes......... 134,263 (209,229) (203,525) (198,264) 82,707 (112,574) (199,002) (194,323)
Income tax expense
(benefit)............ 53,705 (63,007) (60,753) (58,912) 9,139 (33,901) (77,315) (76,314)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations........... 80,558 (146,222) (142,772) (139,352) 73,568 (78,673) (121,687) (118,009)
Loss from discontinued
operations, net of
tax.................. -- -- -- (3,420) -- -- -- (3,678)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 80,558 $ (146,222) $ (142,772) $ (142,772) $ 73,568 $ (78,673) $ (121,687) (121,687)
========== ========== ========== ========== ========== ========== ========== ==========
Basic and diluted
earnings (loss) per
share:
Loss from continuing
operations........... $ 0.31 $ (0.57) $ (0.55) $ (0.54) $ 0.28 $ (0.31) $ (0.47) $ (0.46)
Income (loss) from
discontinued
operations .......... -- -- -- (0.01) -- -- -- (0.01)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 0.31 $ (0.57) $ (0.55) $ (0.55) $ 0.28 $ (0.31) $ (0.47) $ (0.47)
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
--------
(2) Financial data as previously reported in the Company's annual report on
Form 10-K for the year ended February 27, 1999.
F-35
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Fiscal Year 2000
------------------------------------------------------------------------------------------------------
First Quarter Second Quarter
-------------------------------------------------- ---------------------------------------------------
Restated as As Restated as As
Previously Restated Previously Restated
As Reported in for Further As Restated As Reported in for Further As Restated
Previously 2000 Form Restatement and Previously 2000 Form Restatement and
Reported(1) 10-K Adjustments Reclassified Reported(1) 10-K Adjustments Reclassified
----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............. $3,624,500 $3,681,108 $3,681,108 $3,354,621 $3,506,129 $3,522,213 $3,522,213 $3,203,964
Costs and expenses
excluding store
closing and
impairment charges... 3,440,447 3,697,347 3,643,648 3,335,457 3,536,096 3,618,434 3,608,943 3,310,552
Store closing and
impairment charges... 13,096 28,238 28,238 28,238 29,343 56,094 56,094 56,094
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before taxes and
cumulative effect of
change in accounting
method............... 170,957 (44,477) 9,222 (9,074) (59,310) (152,315) (142,824) (162,682)
Income tax expense
(benefit)............ 126,527 (697) (14,008) (28,959) (43,908) (2,386) 7,331 (8,280)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting method,
net.................. 44,430 (43,780) 23,230 19,885 (15,402) (149,929) (150,155) (154,402)
Income (loss) from
discontinued
operations, net of
tax.................. -- -- -- 3,345 -- -- -- 4,247
Cumulative effect of
change in accounting
method, net of tax... -- (27,300) (27,300) (27,300) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 44,430 $ (71,080) $ (4,070) $ (4,070) $ (15,402) $ (149,929) $ (150,155) $(150,155)
========== ========== ========== ========== ========== ========== ========== ==========
Basic and diluted
earnings (loss) per
share................
Loss from continuing
operations........... $ 0.17 $ (0.17) $ 0.09 $ 0.08 $ (0.06) $ (0.58) $ (0.58) $ (0.60)
Income (loss) from
discontinued
operations........... -- -- -- 0.01 -- -- -- 0.02
Cumulative effect of
change in accounting
method............... -- (0.11) (0.11) (0.11) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 0.17 $ (0.28) $ (0.02) $ (0.02) $ (0.06) $ (0.58) $ (0.58) $ (0.58)
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
--------
(1) Financial data as previously reported in the Company's quarterly report on
Form 10-Q for the period ended August 28, 1999.
F-36
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Fiscal Year 2000
---------------------------------------------------------------------------
Third Quarter Fourth Quarter
------------------------------------- -------------------------------------
As As
Previously Previously
Reported in As Restated Reported in As Restated
2000 Form As and 2000 Form As and
10-K(2) Restated Reclassified 10-K(2) Restated Reclassified
----------- ---------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............... $3,646,390 $3,646,390 $3,279,138 $3,831,731 $3,831,731 $3,501,224
Costs and expenses
excluding store closing
and impairment
charges................ 3,869,571 3,849,063 3,478,417 4,448,653 4,509,686 4,184,500
Store closing and
impairment charges..... 33,119 33,119 33,119 45,734 35,866 35,866
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before taxes and
cumulative effect of
change in accounting
method................. (256,300) (235,792) (232,398) (662,656) (713,821) (719,142)
Income tax expense
(benefit).............. (4,015) 14,013 17,403 7,106 15,192 11,461
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting method,
net.................... (252,285) (249,805) (249,801) (669,762) (729,013) (730,603)
Income (loss) from
discontinued
operations, net of
tax.................... -- -- (4) -- -- 1,590
Cumulative effect of
change in accounting
method, net of tax..... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (252,285) $ (249,805) $ (249,805) $ (669,762) $ (729,013) (729,013)
========== ========== ========== ========== ========== ==========
Basic and diluted
earnings (loss) per
share..................
Loss from continuing
operations............. $ (1.01) $ (1.00) $ (1.00) $ (2.58) $ (2.81) $ (2.82)
Income (loss) from
discontinued
operations............. -- -- -- -- -- 0.01
Cumulative effect of
change in accounting
method................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (1.01) $ (1.00) $ (1.00) $ (2.58) $ (2.81) $ (2.81)
========== ========== ========== ========== ========== ==========
</TABLE>
--------
(1) Financial data as previously reported in the Company's quarterly report on
Form 10-Q for the period ended August 28, 1999.
(2) Financial data as previously reported in the Company's annual report on
Form 10-K for the year ended February 27, 1999.
F-37
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the third and fourth quarters of fiscal 2000, the Company incurred
significant non-recurring charges. These included charges of $232,800 for
litigation expenses, $63,300 for debt restructuring, $67,600 for sale of
discontinued merchandise, and $49,800 for markdowns at retail stores.
24. Subsequent Events:
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
the Company's accounts receivable, inventory and intellectual property and a
security interest in certain real property. Of the $1,000,000 Senior Facility
amount, $500,000 is in the form of a term loan due in August 2002 with
interest at LIBOR plus 3.00% that was used to pay-off $300,000 of drawings
under the accounts receivable securitization program; $200,000 was used for
working capital and transaction expenses; and $500,000 remained available as a
revolving credit facility under the Senior Facility.
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 entered into an agreement
with certain banks under which they agreed to purchase $93,200 of the 10.50%
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 and 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 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 to
$265.0 million ($243.0 million if PCS is sold) for the quarter period ending
June 1, 2002.
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 at $5.50 per share and extended the maturity of its remaining
$2,147,188 of bank debt 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 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 $89.0 million in the
second quarter of fiscal 2001.
In the second quarter of fiscal 2001, the Company entered into interest rate
swap agreements in order to reduce its exposure to floating rate debt. The
contracts extend through June 2002 and effectively lock the rate on $1,000,000
of debt at 7.01% through the period.
F-38
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
25. Restatements of Financial Statements
On June 1, 1999 the Company filed its annual report on Form 10-K which
included its consolidated financial statements covering fiscal years 1997 and
1998 that had been restated to correct certain accounting errors. Subsequent
to this restatement, the Company determined that the errors were greater than
originally discovered and, in its Quarterly Report on Form 10-Q for the second
quarter of fiscal 2000 filed on November 2, 1999, the Company restated its
previously reported interim financial statements and the fiscal year-end
balance sheet as of February 27, 1999.
Subsequent to the restatements described in the preceeding paragraph, the
Company determined that additional adjustments are required to correct errors
in the previously issued financial statements. The adjustments consist of
numerous items; however, the principal reasons and significant effects of the
restatement on the accompanying financial statements from amounts previously
reported in the 1999 Annual Report on Form 10-K are summarized as follows:
<TABLE>
<CAPTION>
As of and for the fiscal For the fiscal As of
year ended year ended March 1,
February 27, 1999 February 28, 1998 1997
--------------------------- ----------------- ----------
Increase
Increase Increase Increase (decrease)
(decrease) (decrease) in (decrease) in in
in retained results of results of retained
earnings operations(1) operations(1) earnings
------------ ------------- ----------------- ----------
<S> <C> <C> <C> <C>
Purchase accounting..... $ (300,767) $ (133,866) $ (152,060) $ (14,841)
Exit costs and
impairment of operating
and other assets....... (210,319) 44,694 (141,237) (113,776)
Accruals for operating
expenses............... (466,309) (123,143) (81,006) (262,160)
Property, plant, and
equipment.............. (506,210) (110,435) (246,223) (149,552)
Inventory and cost of
goods sold............. (635,995) (438,799) (63,385) (133,811)
Capital leases and sale-
leaseback accounting... (55,428) (13,683) (40,667) (1,078)
Other................... (163,965) (28,869) (31,097) (103,999)
Income taxes............ 727,163 237,933 263,614 225,616
------------ ---------- ---------- ----------
Total................... $ (1,611,830) $ (566,168) $ (492,061) $ (553,601)
============ ========== ========== ==========
</TABLE>
--------
(1) Represents the effects of the restatement on previously reported amounts
prior to the reclassification of the PBM segment as a discontinued
operation.
Subsequent to the filing of the Company's 2000 Annual Report on Form 10-K
("2000 Form 10-K"), the Company identified errors that had been made when
processing the restatement adjustments described above. These errors affected
the restated results for all annual and interim periods in the Company's 2000
Form 10-K, and resulted in a $1,582 net decrease in retained earnings as of
February 26, 2000. Although the Company believes that the overall impact of
these errors on its financial position as of February 26, 2000 is immaterial,
because of the effect on certain previously reported annual and interim
periods the Company has restated its financial statements from the amounts
reported in its 2000 Form 10-K to reflect the following changes:
F-39
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
As of and for the fiscal As of and for the fiscal For the fiscal
year ended year ended year ended As of March
February 26, 2000 February 27, 1999 February 28, 1998 1, 1997
--------------------------- ------------------------- ----------------- -----------
Increase Increase Increase Increase Increase Increase
(decrease) in (decrease) in (decrease) (decrease) in (decrease) in (decrease)
retained results of in retained results of results of in retained
earnings operations(1) earnings operations(1) operations(1) earnings
------------- ------------- ----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Purchase accounting..... $ 11,032 $ -- $ 11,032 $ -- $ 11,032 $ --
Exit costs and
impairment of operating
and other assets....... (4,513) (19,596) 15,083 9,186 (8,800) 14,697
Accruals for operating
expenses............... 13,356 17,525 (4,169) (5,753) (725) 2,309
Property, plant, &
equipment.............. (22,165) 41,037 (63,202) (90,431) 33,411 (6,182)
Inventory and cost of
goods sold............. 260 260 -- -- -- --
Capital leases and sale
leaseback accounting... 3,884 (3,884) 7,768 7,768 -- --
Other................... (3,436) (2,809) (627) (627) -- --
Income taxes............ -- (22,520) 22,520 40,817 (13,967) (4,330)
-------- -------- --------- --------- -------- -------
Total .................. $ (1,582) $ 10,013 $ (11,595) $ (39,040) $ 20,951 $ 6,494
======== ======== ========= ========= ======== =======
</TABLE>
--------
(1) Represents the effects of the restatement on previously reported amounts
prior to the reclassification of the PBM segment as a discontinued
operation.
A description of the principal adjustments follows:
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 have been either reduced or
eliminated with a corresponding decrease in goodwill, to correctly reflect the
fair value of the assets acquired and liabilities assumed at the dates of
acquisition.
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
charges 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 level to an
individual store level because this is the lowest level of independent cash
flows ascertainable for purposes of measuring impairment.
Accruals for Operating Expenses
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.
F-40
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 development. The adjustments also include
increases in 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.
Inventory and Cost of Goods Sold
The restated financial statements reflect adjustments to inventory and cost
of goods sold primarily to reverse unearned vendor allowances previously
recorded as a reduction to cost of goods sold, to correctly apply the retail
method of accounting, establish obsolescence reserves, recognize certain
selling costs including promotional markdowns and shrink in the period in
which they were incurred, recognize liabilities for inventory purchases in the
appropriate periods, and reflect vendor allowances in the inventory balances.
Lease Obligations
The restated financial statements reflect adjustments to recognize sale-
leaseback transactions for certain stores as financing transactions. Such
transactions had previously been accounted for as sales and the leasebacks
were accounted for as operating leases. The adjustment to correct these items
resulted in the reversal of the asset sales and the establishment of lease
obligations as capital leases. In addition, adjustments were made to record
certain leases that had previously been accounted for as operating leases.
A summary of the effects of the restatement adjustments on the accompanying
consolidated balance sheets and statements of operations is as follows:
<TABLE>
<CAPTION>
February 26, 2000
---------------------------------------------------------------------
As Previously
Reported in Restatement As Restated
2000 Form 10-K Adjustments (1) Reclassifications (2) and Reclassified
-------------- --------------- --------------------- ----------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash.................. $ 184,600 $ -- $ (4,843) $ 179,757
Accounts receivable,
net.................. 756,182 10,285 (614,432) 152,035
Inventories, net...... 2,643,959 260 (171,782) 2,472,437
Refundable income
taxes................ 147,599 -- -- 147,599
Prepaid expenses and
other current
assets............... 73,130 (4,717) (4,754) 63,659
----------- -------- ---------- ----------
Total current
assets............. 3,805,470 5,828 (795,811) 3,015,487
----------- -------- ---------- ----------
PROPERTY, PLANT AND
EQUIPMENT, NET......... 3,629,919 (32,592) (147,733) 3,449,594
GOODWILL AND OTHER
INTANGIBLES............ 3,131,070 (3,726) (1,816,221) 1,311,123
OTHER ASSETS............ 241,395 4,237 (2,733) 242,899
DEFERRED TAX ASSET...... -- -- 146,916 146,916
NET NON-CURRENT ASSETS
OF DISCONTINUED
OPERATIONS............. -- -- 1,743,828 1,743,828
----------- -------- ---------- ----------
Total assets......... $10,807,854 $(26,253) $ (871,754) $9,909,847
=========== ======== ========== ==========
</TABLE>
--------
(1) Adjustments identified subsequent to the filing of the Company's 2000
Form 10-K.
(2) To reclassify the PBM segment as a discontinued operation and to reflect
certain other reclassifications. See note 26.
F-41
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
February 26, 2000
-------------------------------------------------------------------------
As Previously
Reported in Restatement As Restated
2000 Form 10-K Adjustments (1) Reclassifications (2) and Reclassified
-------------- --------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Short-term debt and
current maturities of
long-term debt....... $ 102,050 $ -- $ -- $ 102,050
Accounts payable...... 1,771,198 2,645 (919,781) 854,062
Sales and other taxes
payable.............. 35,053 -- (1,391) 33,662
Income taxes payable.. 127,691 -- (15,887) 111,804
Accrued salaries,
wages and other
current liabilities.. 876,425 (26,317) (46,213) 803,895
Net current
liabilities of
discontinued
operations........... -- -- 390,053 390,053
----------- -------- --------- ----------
Total current
liabilities........ 2,912,417 (23,672) (593,219) 2,295,526
----------- -------- --------- ----------
CONVERTIBLE SUBORDINATED
NOTES.................. 649,986 -- -- 649,986
LONG-TERM DEBT LESS
CURRENT MATURITIES..... 4,738,661 -- -- 4,738,661
CAPITAL LEASE
OBLIGATIONS............ 1,118,204 -- 7,733 1,125,937
DEFERRED INCOME TAXES... 79,220 -- (79,220) --
OTHER NON-CURRENT
LIABILITIES............ 858,401 (3,582) (207,048) 647,771
----------- -------- --------- ----------
Total liabilities.... 10,356,889 (27,254) (871,754) 9,457,881
----------- -------- --------- ----------
REDEEMABLE PREFERRED
STOCK.................. 19,457 -- -- 19,457
STOCKHOLDERS' EQUITY:
Preferred stock....... 308,250 -- -- 308,250
Common stock.......... 259,926 -- 1 259,927
Additional paid-in
capital.............. 1,289,755 2,583 (1) 1,292,337
Accumulated deficit... (1,420,235) (1,582) -- (1,421,817)
Deferred
compensation......... (6,188) -- -- (6,188)
----------- -------- --------- ----------
Total stockholders'
equity............. 431,508 1,001 -- 432,509
----------- -------- --------- ----------
Total liabilities
and stockholders'
equity............. $10,807,854 $(26,253) $(871,754) $9,909,847
=========== ======== ========= ==========
</TABLE>
--------
(1) Adjustments identified subsequent to the filing of the Company's 2000 Form
10-K.
(2) To reclassify the PBM segment as a discontinued operation and to reflect
certain other reclassifications. See note 26.
F-42
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended February 26, 2000
-------------------------------------------------------------------------
As Previously
Reported in Restatement As Restated
2000 Form 10-K Adjustments (1) Reclassifications (2) and Reclassified
-------------- --------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $14,681,442 $ -- $(1,342,495) $13,338,947
COSTS AND EXPENSES:
Cost of goods sold,
including occupancy
costs................ 11,412,774 (20,000) (1,150,397) 10,242,377
Selling, general and
administrative
expenses............. 3,712,279 (14,489) (118,929) 3,578,861
Gain on sales of
stores............... (80,109) -- -- (80,109)
Goodwill
amortization......... 56,832 -- (32,375) 24,457
Store closing and
impairment charges... 163,185 -- (9,868) 153,317
Interest expense...... 520,336 1,956 5,867 528,159
Share of loss from
equity
investments.......... 11,893 -- 3,288 15,181
----------- ------- ----------- -----------
15,797,190 (32,533) (1,302,414) 14,462,243
----------- ------- ----------- -----------
Income (loss) before
income taxes and
cumulative effect of
accounting change.... (1,115,748) 32,533 (40,081) (1,123,296)
INCOME TAX EXPENSE
(BENEFIT).............. 8 22,520 (30,903) (8,375)
----------- ------- ----------- -----------
Loss from continuing
operations........... (1,115,756) 10,013 (9,178) (1,114,921)
INCOME FROM DISCONTINUED
OPERATIONS, including
income tax expense of
$30,903................ -- -- 9,178 9,178
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE, net
of income tax benefit
of $18,200............. (27,300) -- -- (27,300)
----------- ------- ----------- -----------
Net loss.............. $(1,143,056) $10,013 $ -- $(1,133,043)
=========== ======= =========== ===========
BASIC AND DILUTED INCOME
(LOSS) PER SHARE
Loss from continuing
operations........... $ (4.34) $ 0.04 $ (0.04) $ (4.34)
Income from
discontinued
operations........... -- -- 0.04 0.04
Cumulative effect of
accounting change,
net.................. (0.11) -- -- (0.11)
----------- ------- ----------- -----------
Net loss per share.... $ (4.45) $ 0.04 $ -- $ (4.41)
=========== ======= =========== ===========
</TABLE>
--------
(1) Adjustments identified subsequent to the filing of the Company's 2000 Form
10-K.
(2) To reclassify the PBM segment as a discontinued operation and to reflect
certain other reclassifications. See note 26.
F-43
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
February 27, 1999
-------------------------------------------------------------------------------------------
Restatement
Adjustments Restated as
as Previously Previously
As Previously Reported Reported in Further As Restated
Reported in in 2000 Form 2000 Form Restatement and
1999 Form 10-K 10-K 10-K Adjustments (1) Reclassifications (2) Reclassified
-------------- ------------- ----------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash................... $ 82,949 $ 4,362 $ 87,311 $ -- $ (2,789) $ 84,522
Accounts receivable,
net................... 749,606 (106,417) 643,189 9,799 (581,060) 71,928
Inventories, net....... 2,893,143 (246,157) 2,646,986 -- (28,751) 2,618,235
Prepaid expenses and
other current
assets................ 76,653 (21,525) 55,128 (12,709) (16,092) 26,327
----------- --------- ----------- -------- ---------- ----------
Total current
assets.............. 3,802,351 (369,737) 3,432,614 (2,910) (628,692) 2,801,012
----------- --------- ----------- -------- ---------- ----------
PROPERTY, PLANT AND
EQUIPMENT, NET......... 2,868,053 777,046 3,645,099 (80,485) (236,115) 3,328,499
GOODWILL AND OTHER
INTANGIBLES............ 3,547,463 (224,604) 3,322,859 15,083 (1,874,499) 1,463,443
OTHER ASSETS............ 203,874 (91,906) 111,968 18,717 129,973 260,658
DEFERRED TAX ASSET...... -- -- -- 22,521 148,843 171,364
NET NON-CURRENT ASSETS
OF DISCONTINUED
OPERATIONS............. -- -- -- -- 1,753,475 1,753,475
----------- --------- ----------- -------- ---------- ----------
Total assets......... $10,421,741 $ 90,799 $10,512,540 $(27,074) $ (707,015) $9,778,451
=========== ========= =========== ======== ========== ==========
</TABLE>
--------
(1) Adjustments identified subsequent to the filing of the Company's 2000 Form
10-K.
(2) To reclassify the PBM Segment as a discontinued operation and to reflect
certain other reclassifications. See note 26.
F-44
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
February 27, 1999
--------------------------------------------------------------------------------------------
Restatement
Adjustments Restated as
as Previously Previously
As Previously Reported Reported Further As Restated
Reported in in 2000 in 2000 Restatement and
1999 Form 10-K Form 10-K Form 10-K Adjustments (1) Reclassifications (2) Reclassified
-------------- ------------- ----------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Short-term debt and
current maturities of
long-term debt........ $ 1,550,211 $ 52,100 $ 1,602,311 $ -- $ (31,522) $1,570,789
Accounts payable....... 1,455,516 332,700 1,788,216 (2,075) (650,921) 1,135,220
Sales and other taxes
payable............... 34,464 (520) 33,944 -- (981) 32,963
Income taxes payable... 246,833 (136,049) 110,784 -- (2,888) 107,896
Deferred income
taxes................. -- 28,045 28,045 -- 1,630 29,675
Accrued salaries,
wages and other
current liabilities... 403,454 253,786 657,240 (14,031) 57,503 700,712
Net current
liabilities of
discontinued
operations............ -- -- -- -- 115,872 115,872
----------- ----------- ----------- -------- --------- ----------
Total current
liabilities......... 3,690,478 530,062 4,220,540 (16,106) (511,307) 3,693,127
----------- ----------- ----------- -------- --------- ----------
CONVERTIBLE SUBORDINATED
NOTES.................. 649,991 -- 649,991 -- -- 649,991
LONG-TERM DEBT LESS CUR-
RENT MATURITIES........ 2,584,255 (31,964) 2,552,291 -- 31,522 2,583,813
CAPITAL LEASE
OBLIGATIONS............ 69,994 1,040,184 1,110,178 -- 7,733 1,117,911
DEFERRED INCOME TAXES... 138,327 (57,013) 81,314 -- (81,314) --
OTHER NONCURRENT
LIABILITIES............ 311,405 212,677 524,082 -- (153,649) 370,433
----------- ----------- ----------- -------- --------- ----------
Total liabilities.... 7,444,450 1,693,946 9,138,396 (16,106) (707,015) 8,415,275
----------- ----------- ----------- -------- --------- ----------
REDEEMABLE PREFERRED
STOCK.................. 23,559 -- 23,559 -- -- 23,559
STOCKHOLDERS' EQUITY:
Common stock........... 258,862 (1) 258,861 -- -- 258,861
Additional paid-in
capital............... 1,360,219 9,159 1,369,378 627 -- 1,370,005
Retained earnings
(deficit)............. 1,334,651 (1,611,830) (277,179) (11,595) -- (288,774)
Accumulated other
comprehensive
income................ -- (475) (475) -- -- (475)
----------- ----------- ----------- -------- --------- ----------
Total stockholders'
equity.............. 2,953,732 (1,603,147) 1,350,585 (10,968) -- 1,339,617
----------- ----------- ----------- -------- --------- ----------
Total liabilities and
stockholders'
equity.............. $10,421,741 $ 90,799 $10,512,540 $(27,074) $(707,015) $9,778,451
=========== =========== =========== ======== ========= ==========
</TABLE>
--------
(1) Adjustments identified subsequent to the filing of the Company's 2000 Form
10-K.
(2) To reclassify the PBM Segment as a discontinued operation and to reflect
certain other reclassifications. See note 26.
F-45
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended February 27, 1999
-------------------------------------------------------------------------------------------
Restatement
Adjustments Restated as
As Previously as Previously Previously
Reported Reported Reported in Further As Restated
in 1999 in 2000 Form 2000 Form Restatement and
Form 10-K 10-K 10-K Adjustments (1) Reclassifications (2) Reclassified
------------- ------------- ----------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $12,731,900 $ 50,990 $12,782,890 $ -- $(344,448) $12,438,442
COSTS AND EXPENSES:
Costs of goods sold,
including occupancy
costs................ 9,396,432 347,403 9,743,835 -- (332,235) 9,411,600
Selling, general and
administrative
expenses............. 2,639,739 504,395 3,144,134 79,230 (27,570) 3,195,794
Goodwill
amortization......... 44,090 (14,863) 29,227 -- (3,172) 26,055
Store closing and
impairment charges... 257,336 (64,785) 192,551 -- -- 192,551
Interest expense...... 194,733 82,493 277,226 627 (219) 277,634
Share of loss from
equity investments... -- 448 448 -- -- 448
----------- ---------- ----------- -------- --------- -----------
12,532,330 855,091 13,387,421 79,857 (363,196) 13,104,082
----------- ---------- ----------- -------- --------- -----------
Income (loss) before
income taxes......... 199,570 (804,101) (604,531) (79,857) 18,748 (665,640)
INCOME TAX EXPENSE
(BENEFIT).............. 55,884 (237,933) (182,049) (40,817) 5,925 (216,941)
----------- ---------- ----------- -------- --------- -----------
Income (loss) from
continuing
operations........... 143,686 (566,168) (422,482) (39,040) 12,823 (448,699)
Loss from discontinued
operations, including
income tax benefit of
$5,925............... -- -- -- -- (12,823) (12,823)
----------- ---------- ----------- -------- --------- -----------
Net income (loss)..... $ 143,686 $ (566,168) $ (422,482) $(39,040) $ -- $ (461,522)
=========== ========== =========== ======== ========= ===========
BASIC AND DILUTED INCOME
(LOSS) PER SHARE
Income (loss) from
continuing
operations........... $ 0.55 $ (2.19) $ (1.64) $ (0.15) $ 0.05 $ (1.74)
Loss from discontinued
operations........... -- -- -- -- (0.05) (0.05)
----------- ---------- ----------- -------- --------- -----------
Net income (loss) per
share................ $ 0.55 $ (2.19) $ (1.64) $ (0.15) $ -- $ (1.79)
=========== ========== =========== ======== ========= ===========
</TABLE>
--------
(1) Adjustments identified subsequent to the filing of the Company's 2000 Form
10-K.
(2) To reclassify the PBM Segment as a discontinued operation and to reflect
certain other reclassifications. See note 26.
F-46
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended February 28, 1998
-------------------------------------------------------------------------------------------
Restatement
Adjustments Restated as
As Previously as Previously Previously
Reported in Reported Reported in Further As Restated
1999 in 2000 Form 2000 Form Restatement and
Form 10-K 10-K 10-K Adjustments (1) Reclassifications (2) Reclassified
------------- ------------- ----------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $11,375,105 $ 158,318 $11,533,423 $ -- $(180,786) $11,352,637
COSTS AND EXPENSES:
Costs of goods sold,
including occupancy
costs................ 8,290,888 312,430 8,603,318 -- (207,079) 8,396,239
Selling, general and
administrative
expenses............. 2,375,636 459,759 2,835,395 (34,918) (4,135) 2,796,342
Gain on sales of
stores............... -- (52,261) (52,261) -- (360) (52,621)
Goodwill
amortization......... 36,452 (9,972) 26,480 -- (311) 26,169
Store closing and
impairment charges... -- 148,560 148,560 -- -- 148,560
Interest expense...... 159,752 49,400 209,152 -- -- 209,152
Share of loss from
equity investments... -- 1,886 1,886 -- -- 1,886
----------- ---------- ----------- ------- --------- -----------
10,862,728 909,802 11,772,530 (34,918) (211,885) 11,525,727
----------- ---------- ----------- ------- --------- -----------
Income (loss) before
income taxes......... 512,377 (751,484) (239,107) 34,918 31,099 (173,090)
INCOME TAX EXPENSE
(BENEFIT).............. 206,507 (259,423) (52,916) 13,967 10,885 (28,064)
----------- ---------- ----------- ------- --------- -----------
Income (loss) from
continuing
operations........... 305,870 (492,061) (186,191) 20,951 20,214 (145,026)
Loss from discontinued
operations, including
income tax benefit of
$10,885.............. -- -- -- -- (20,214) (20,214)
----------- ---------- ----------- ------- --------- -----------
Net income (loss)..... $ 305,870 $ (492,061) $ (186,191) $20,951 $ -- $ (165,240)
=========== ========== =========== ======= ========= ===========
BASIC AND DILUTED INCOME
(LOSS) PER SHARE
Income (loss) from
continuing
operations........... $ 1.22 $ (1.96) $ (0.74) $ 0.08 $ 0.08 $ (0.58)
Loss from discontinued
operations........... -- -- -- -- (0.08) (0.08)
----------- ---------- ----------- ------- --------- -----------
Net income (loss) per
share................ $ 1.22 $ (1.96) $ (0.74) $ 0.08 $ -- $ (0.66)
=========== ========== =========== ======= ========= ===========
</TABLE>
--------
(1) Adjustments identified subsequent to the filing of the Company's 2000 Form
10-K.
(2) To reclassify the PBM Segment as a discontinued operation and to reflect
certain other reclassifications. See note 26.
26. 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. for $1.0
billion. 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 are 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
F-47
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 on 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, Inc. (which are convertible into shares of Class A Common Stock
which is publicly traded). Once converted, 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) for a period
of 24 months from their date of issuance unless the stockholders of Advance
Paradigm, Inc. 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.
The Company applied $575,000 of the proceeds to the outstanding balance of
the PCS facility and the PCS facility released exchange debt and pledged the
Series A Preferred Stock (and all securities issuable 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, after income tax expense is $334,763
(unaudited), which consists of an estimated loss on disposal, estimated
transaction expenses and net operating income through the date the sale is
consummated. In the first quarter of fiscal 2001 ended May 27, 2000, the
Company recorded a loss of $303,330 (unaudited) and in the second quarter of
fiscal 2001 ended August 26, 2000, an additional loss of $31,433 (unaudited)
will be recorded due to changes in estimates. Additionally, 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 (unaudited) in the first quarter of fiscal 2001.
F-48
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized operating results of the PBM segment for the years ended February
26, 2000, February 27, 1999 and February 28, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
February 26, February 27, February 28,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales........................... $1,342,495 $344,448 $180,786
Income (loss) from operations before
income tax expense................. 40,081 (18,748) (31,099)
Income tax expense (benefit)........ 30,903 (5,925) (10,885)
---------- -------- --------
Income (loss) from discontinued
operations......................... $ 9,178 $(12,823) $(20,214)
========== ======== ========
</TABLE>
Summarized balance sheet data of discontinued operations is as follows:
<TABLE>
<CAPTION>
February February
26, 2000 27, 1999
---------- ----------
<S> <C> <C>
Net current liabilities:
Cash and cash equivalents............................ $ 4,843 $ 2,789
Accounts and other receivables, net.................. 614,432 581,060
Other currents assets................................ 42,707 35,217
Claims and rebates payable........................... (924,951) (654,634)
Other current liabilities............................ (127,084) (80,304)
---------- ----------
$ (390,053) $ (115,872)
========== ==========
Net non-current assets:
Property and equipment, net.......................... $ 147,733 $ 117,115
Goodwill and intangibles, net........................ 1,816,221 1,874,499
Noncurrent liabilities............................... (220,126) (238,139)
---------- ----------
$1,753,475
$1,743,828
========== ==========
</TABLE>
Acquisition of Discontinued Operations
On January 22, 1999, the Company purchased PCS, a pharmacy benefits
management subsidiary of Eli Lilly and Company. Total consideration was $1.5
billion, with $1.3 billion financed via commercial paper and $200 million paid
in cash. The PCS acquisition was accounted for using the purchase method. In
accordance with APB Opinion No. 16, the Company has recorded the assets and
liabilities of PCS at the date of acquisition at their fair values. The excess
of the cost of PCS over the fair value of the acquired assets and liabilities
of $1,286,089 has been recorded as goodwill.
Intangible Assets of Discontinued Operations
<TABLE>
<CAPTION>
February February 27,
26, 2000 1999
---------- ------------
<S> <C> <C>
Goodwill............................................ $1,298,520 $1,298,520
Prescription files and customer lists............... 434,100 434,100
Trade name.......................................... 113,100 113,100
Internally developed software....................... 21,900 21,900
Assembled workforce................................. 13,400 13,400
---------- ----------
1,881,020 1,881,020
Accumulated amortization............................ (64,799) (6,521)
---------- ----------
$1,816,221 $1,874,499
========== ==========
</TABLE>
F-49
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At acquisition, the Company determined that the estimated useful life of the
goodwill recorded with the PCS acquisition is primarily indeterminate and
likely exceeded 40 years. This estimate was based upon a review of the
anticipated future cash flows and other factors the Company considered in
determining the amount that it was willing to incur for the purchase of PCS.
Additionally, management found no persuasive evidence that any material
portion of these intangible assets would be depleted in less than 40 years.
Accordingly, the Company amortizes goodwill over the maximum allowable period
of 40 years on a straight-line basis.
The value of the PCS trade name is being amortized over its estimated useful
life of 40 years. The value of the customer base and pharmacy network acquired
in the purchase of PCS are being amortized over their estimated lives of 30
years. The value of assembled workforce and internally developed software
acquired are being amortized over their useful lives of six and five years,
respectively.
Impairment of Long-Lived Assets
Long-lived assets of the PBM segment consist principally of intangibles. The
Company compares the estimates of future undiscounted cash flows of its
service lines to which the intangibles relate to the carrying amount of those
intangibles to determine if an impairment has occurred. Long-lived assets and
certain identifiable intangibles to be disposed of, whether by sale or
abandonment, are reported at the lower of carrying amount or fair value less
cost to sell.
Revenue Recognition of Discontinued Operations
Revenues are recognized from claims processing fees when the related claims
are adjudicated and approved for payment. Certain of the agreements require
the customers to pay a fee per covered member rather than a fee per claim.
These fees are recognized monthly based upon member counts provided by the
customers. Revenue from manufacturer programs is recognized when claims
eligible for rebate are adjudicated by the Company. The customer portion of
rebates collected is not included in revenue, and correspondingly payments of
rebates to customers are not included in expenses. Mail order program revenue
is recognized when prescriptions are shipped.
Commitments and Contingencies of Discontinued Operations
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 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.
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.
F-50
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PCS Customer Contracts
The PBM Segment enters into risk contracts with certain customers. These
contracts provide that the Company assume varying percentages of the risk
associated with claims experience differing from fixed fee arrangements under
managed care programs. In addition, the Company, in certain limited
circumstances, guarantees a specific amount of savings for certain customers.
Included in other current liabilities of discontinued operations in the
accompanying consolidated balance sheets are management's estimates of the
amounts required to cover losses incurred under such contracts.
Employment Agreements
Certain officers of PCS were provided with a financial incentive to remain
at the Company. Under this retention incentive program, the participating
officers vest annually in the financial benefits through January 22, 2002. The
value of the benefits is determined based upon the Rite Aid stock price during
the vesting period, but is not to be less than an established floor value. The
Company recognized compensation expense under this program of $7,137 in fiscal
2000 and $706 in fiscal 1999. In the event of a change in control of PCS, the
participating officers immediately become fully vested in the program's
benefits.
See note 14 for retirement plan information related to the PBM segment.
F-51
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the years ended February 26, 2000, February 27, 1999 and February 28, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Allowances deducted from Additions Additions
accounts receivable Balance at Charged to Charged Balance at
for estimated Beginning Costs and to Other End of
uncollectible amounts: Of Period Expenses Accounts Deductions Period
------------------------ ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended February 26,
2000................... $30,296 $21,268 $ -- $16,193 $35,371
Year ended February 27,
1999 (b)............... 47,268 15,916 -- 32,888 30,296
Year ended February 28,
1998 (b)............... 31,758 27,976 800(a) 13,266 47,268
</TABLE>
--------
(a) Allowance for estimated uncollectible accounts acquired from Harco, Inc.
and K&B, Incorporated on August 27, 1997.
(b) As restated, see note 25 to the consolidated financial statements.
F-52
<PAGE>
EXHIBIT 12
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 26, February 27, February 28,
2000 1999 1998
(as restated)(3) (as restated)(3) (as restated)(3)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed Charges:
Interest Expense........... $ 528,159 $ 277,634 $ 209,152
Interest Portion of Net
Rental Expense(1)......... 146,852 139,104 121,694
------------ ---------- ----------
Fixed Charges Before
Capitalized Interest and
Preferred Stock Dividend
Requirements.............. 675,011 416,738 330,846
Preferred Stock Dividend
Requirement(2)............ 15,554 965 --
Capitalized Interest....... 5,292 7,069 4,102
------------ ---------- ----------
Total Fixed Charges...... $ 695,857 $ 424,772 $ 334,948
------------ ---------- ----------
Earnings:
Loss From Continuing
Operations Before Income
Taxes and Cumulative
Effect of Accounting
Change.................... $ (1,123,296) $ (665,040) $ (173,090)
Fixed Charges Before
Capitalized Interest...... 690,565 417,703 330,846
------------ ---------- ----------
Total Adjusted Earnings.. (432,731) (247,337) 157,756
------------ ---------- ----------
Earnings to Fixed Charges,
Deficiency................ $ (1,128,508) $ (672,109) $ (177,192)
============ ========== ==========
</TABLE>
--------
(1) The Interest Portion of Net Rental Expense is estimated to be equal to
one-third of the minimum rental expense for the period.
(2) The Preferred Stock Dividend Requirement is computed as the pre-tax
earnings that would be required to cover preferred stock dividends.
(3) See note 25 of the notes to consolidated financial statements.
F-53
