<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 25, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 1-5742
RITE AID CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 23-1614034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Hunter Lane, Camp Hill, Pennsylvania 17011
(Address of principal executive offices) (Zip Code)
</TABLE>
(Registrant's telephone number, including area code) (717) 761-2633
(Former name, former address and former fiscal year, if changed since last
report) Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The registrant had 341,230,563 shares of its $1.00 par value common stock
outstanding as of December 30, 2000.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
RITE AID CORPORATION
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Cautionary Statement Regarding Forward-Looking Statements................... 3
</TABLE>
PART I. FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of November 25, 2000
and February 26, 2000.......................................... 4
Condensed Consolidated Statements of Operations for the Thirteen
Weeks Ended
November 25, 2000 and November 27, 1999........................ 5
Condensed Consolidated Statements of Operations for the Thirty-
Nine Weeks Ended
November 25, 2000 and November 27, 1999........................ 6
Condensed Consolidated Statements of Cash Flows for the Thirty-
Nine Weeks Ended
November 25, 2000 and November 27, 1999 7
Notes to Condensed Consolidated Financial Statements............ 8
Management's Discussion and Analysis of Financial Condition and
ITEM 2. Results of Operations.......................................... 20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 30
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 32
ITEM 2. Changes in Securities and Use of Proceeds....................... 32
ITEM 3. Defaults Upon Senior Securities................................. 32
ITEM 4. Submission of Matters to a Vote of Security Holders............. 32
ITEM 5. Other Information............................................... 32
ITEM 6. Exhibits and Reports on Form 8-K................................ 33
</TABLE>
<PAGE>
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 failures to develop, implement and maintain reliable and adequate
internal accounting systems and controls.
Rite Aid undertakes no obligation to revise the forward-looking statements
included in this report to reflect any future events or circumstances. The
company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences are
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Our Future
Results" included in our Annual Report on Form 10-K/A for the fiscal year
ended February 26, 2000 ("the Fiscal 2000 10-K/A"), which was filed with the
Securities and Exchange Commission ("SEC") on October 11, 2000 and is
available on the SEC's website at www.sec.gov.
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
November 25, 2000 February 26, 2000
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................ $ 117,486 $ 179,757
Accounts receivable, net................. 521,175 152,035
Inventories, net......................... 2,724,042 2,472,437
Refundable income taxes.................. 60,937 147,599
Prepaid expenses and other current
assets.................................. 83,566 63,659
---------- ----------
Total current assets................... 3,507,206 3,015,487
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET......... 3,219,213 3,449,594
GOODWILL AND OTHER INTANGIBLES, NET........ 1,188,029 1,311,123
NET NON-CURRENT ASSETS OF DISCONTINUED
OPERATIONS................................ -- 1,743,828
DEFERRED TAX ASSET......................... -- 146,916
OTHER ASSETS............................... 587,213 242,899
---------- ----------
Total assets........................... $8,501,661 $9,909,847
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Short-term debt and current maturities of
long-term debt and lease financing
obligations............................. $ 106,226 $ 102,050
Accounts payable......................... 945,974 854,062
Other current liabilities................ 974,788 949,361
Net current liabilities of discontinued
operations.............................. -- 390,053
---------- ----------
Total current liabilities.............. 2,026,988 2,295,526
---------- ----------
CONVERTIBLE SUBORDINATED NOTES............. 392,324 649,986
LONG-TERM DEBT, LESS CURRENT MATURITIES.... 4,546,955 4,738,661
LEASE FINANCING OBLIGATIONS, LESS CURRENT
MATURITIES................................ 1,076,640 1,125,937
OTHER NONCURRENT LIABILITIES............... 602,951 647,771
---------- ----------
Total liabilities...................... 8,645,858 9,457,881
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10).... -- --
REDEEMABLE PREFERRED STOCK................. 19,457 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK, par value $1 per share.. 326,995 308,250
COMMON STOCK, par value $1 per share..... 341,144 259,927
ADDITIONAL PAID-IN CAPITAL............... 2,024,046 1,292,337
ACCUMULATED DEFICIT...................... (2,841,882) (1,421,817)
DEFERRED COMPENSATION.................... (13,957) (6,188)
---------- ----------
Total stockholders' equity (deficit) .. (163,654) 432,509
---------- ----------
Total liabilities and stockholders'
equity (deficit)...................... $8,501,661 $9,909,847
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
November 27, 1999
Thirteen Weeks Ended (as restated,
November 25, 2000 see note 6)
-------------------- --------------------
<S> <C> <C>
REVENUES............................. $3,531,691 $3,279,138
COSTS AND EXPENSES:
Costs of goods sold, including
occupancy costs.................... 2,713,988 2,521,365
Selling, general and administrative
expenses........................... 797,409 791,068
Goodwill amortization............... 5,058 6,096
Interest expense.................... 146,122 159,888
Store closing and impairment
charges............................ 95,571 33,119
Loss on debt conversions and
modifications, net................. 8,306 --
Share of loss from equity
investment......................... 6,484 --
---------- ----------
3,772,938 3,511,536
---------- ----------
Loss from continuing operations
before income taxes............... (241,247) (232,398)
INCOME TAX EXPENSE................... -- 17,403
---------- ----------
Loss from continuing operations.... (241,247) (249,801)
DISCONTINUED OPERATIONS:
Loss from discontinued operations
(including income tax benefit of
$0 and $3,390).................... -- (4)
Reduction of loss on disposal of
the PBM segment (including income
tax expense of $0)................ 135,534 --
---------- ----------
Net loss........................... $ (105,713) $ (249,805)
========== ==========
BASIC AND DILUTED (LOSS) INCOME PER
SHARE:
Loss from continuing operations..... $ ( .74) $ (1.00)
Reduction of loss from discontinued
operations......................... .40 --
---------- ----------
Net loss per share.................. $ (.34) $ (1.00)
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirty-NineWeeks
Ended
Thirty-NineWeeks November 27, 1999
Ended (as restated,
November 25, 2000 see note 6)
----------------- -----------------
<S> <C> <C>
REVENUES................................... $10,413,346 $9,837,723
COSTS AND EXPENSES:
Costs of goods sold, including occupancy
costs.................................... 8,005,474 7,425,434
Selling, general and administrative
expenses................................. 2,494,125 2,315,469
Goodwill amortization..................... 16,759 18,360
Interest expense.......................... 499,871 365,297
Store closing and impairment charges...... 199,742 117,451
Loss on debt conversions and
modifications, net....................... 92,095 --
Share of loss (income) from equity
investment............................... 30,554 (134)
----------- ----------
11,338,620 10,241,877
----------- ----------
Loss from continuing operations before
income taxes and cumulative effect of
change in accounting method............. (925,274) (404,154)
INCOME TAX EXPENSE (BENEFIT)............... 144,382 (19,836)
----------- ----------
Loss from continuing operations before
cumulative effect of accounting change.. (1,069,656) (384,318)
DISCONTINUED OPERATIONS:
Income from discontinued operations
(including income tax expense of $13,846
and $27,172)............................ 11,335 7,588
Loss on disposal of the PBM segment
(including income tax benefit of $734).. (199,229) --
CUMULATIVE EFFECT OF AN ACCOUNTING
CHANGE, NET OF TAX OF $18,200............. -- (27,300)
----------- ----------
Net loss................................. $(1,257,550) $ (404,030)
=========== ==========
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations........... $ (4.12) $ (1.52)
Loss (income) from discontinued
operations............................... (0.62) 0.03
Cumulative effect of an accounting change,
net of tax -- (0.11)
----------- ----------
Net loss per share........................ $ (4.74) $ (1.60)
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirty-NineWeeks
Ended
Thirty-NineWeeks November 27, 1999
Ended (as restated,
November 25, 2000 see note 6)
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................. $(1,257,550) $ (404,030)
Income from discontinued operations...... (11,335) (7,588)
Loss on disposal of discontinued
operations.............................. 199,229 --
----------- ----------
Loss from continuing operations.......... (1,069,656) (411,618)
Cumulative effect of a change in
accounting method....................... -- 27,300
Depreciation and amortization............ 278,004 345,446
Store closing and impairment charges..... 199,742 117,451
Loss on debt conversions and
modifications, net...................... 92,095 --
Gain on sale of assets................... (6,576) (80,109)
Changes in operating assets and
liabilities, net of acquisitions........ (261,592) (570,999)
----------- ----------
NET CASH USED IN CONTINUING OPERATIONS..... (767,983) (572,529)
----------- ----------
NET CASH PROVIDED BY DISCONTINUED
OPERATIONS................................ 8,881 321,096
----------- ----------
INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment............................... (78,923) (508,300)
Purchase of business, net of cash
acquired................................ -- (24,454)
Intangible assets acquired............... (5,200) (78,297)
Proceeds from sales of assets............ 92,774 169,537
Investment in joint venture.............. -- (8,125)
Proceeds from sale of discontinued
operations.............................. 675,000 --
----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................ 683,651 (449,639)
----------- ----------
FINANCING ACTIVITIES:
Principal payments on long-term debt..... (2,924,295) --
Net payments of commercial paper
borrowings.............................. (192,000) (1,243,285)
Net proceeds from bank loans............. 3,204,038 1,857,662
Proceeds from issuance of preferred
stock................................... -- 300,000
Proceeds from leasing obligations........ -- 74,899
Cash dividends paid...................... -- (89,159)
Deferred financing costs payments........ (73,071) (34,984)
Other financing activities, net.......... (1,492) 19,741
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.. 13,180 884,874
----------- ----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................... (62,271) 183,802
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.................................... 179,757 84,522
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................... $ 117,486 $ 268,324
=========== ==========
NON CASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of long-term debt and
convertible subordinated notes $ 554,832 $ --
Non-cash consideration received for sale
of discontinued operations $ 431,000 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying financial information does not include all disclosures
required under generally accepted accounting principles because certain
information included in the Company's fiscal 2000 Annual Report on Form 10-K/A
has not been included in this report. The accompanying financial information
reflects all adjustments (consisting primarily of normal recurring adjustments
except as described in these notes) which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods. The
results of operations for the thirteen and thirty-nine week periods ended
November 25, 2000 are not necessarily indicative of the results to be expected
for the full year. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's fiscal 2000 Annual Report on Form 10-K/A
filed with the SEC.
2. Loss Per Share
Following is a summary of the components of the numerator and denominator of
the basic loss per share computation:
<TABLE>
<CAPTION>
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
-------------------------- --------------------------
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for earnings
per share:
Loss from continuing
operations............ $ (241,247) $ (249,801) $ (1,069,656) $ (384,318)
Preferred stock
conversion reset (Note
9).................... -- -- (160,915) --
Cumulative preferred
stock dividends....... (6,815) (8,250) (20,237) (8,250)
------------ ------------ ------------ ------------
Net loss from
continuing operations
attributable to common
stockholders.......... (248,062) (258,051) (1,250,808) (392,568)
Net income (loss) from
discontinued
operations, net of
tax................... -- (4) 11,335 7,588
Gain (loss) on
disposal, net of
tax................... 135,534 -- (199,229) --
------------ ------------ ------------ ------------
Total income (loss)
from discontinued
operations............ 135,534 (4) (187,894) 7,588
------------ ------------ ------------ ------------
Cumulative effect of
accounting change, net
of tax................ -- -- -- (27,300)
------------ ------------ ------------ ------------
Net loss attributable
to common
stockholders ......... $ (112,528) $ (258,055) $ (1,438,702) $ (412,280)
============ ============ ============ ============
Denominator:
Basic weighted average
shares................ 333,529,000 258,927,000 303,247,000 258,905,000
============ ============ ============ ============
</TABLE>
Fully diluted loss per share is not presented as the Company incurred losses
for the thirteen and thirty-nine weeks ended November 25, 2000 and November
27, 1999, and the amount would be antidilutive. At November 25, 2000, an
aggregate of 105,888,000 potential common shares related to stock options,
convertible notes and preferred stock and warrants, have been excluded from
the above basic weighted average shares.
3. Business Segments
The Company operated in two business segments during the reporting periods:
(i) the Retail Drug segment, and (ii) the Pharmacy Benefit Management ("PBM")
segment, which includes pharmacy benefit management, mail-order pharmacy
services, marketing prescription plans and other managed health care services.
The
8
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
Company's business segments are organized according to the products and
services offered to its customers. The
Company's dominant segment is the Retail Drug segment, which consists of the
operation of retail drugstores across the United States. The drugstores'
primary business is pharmacy services, with prescription drugs accounting for
approximately 60.0% percent and 58.9% percent of total segment sales for the
thirty-nine week periods ended November 25, 2000 and November 27, 1999,
respectively. In addition, the Company's drugstores offer a full selection of
health and personal care products, seasonal merchandise and a large private
label product line.
The Company operated a PBM segment, principally through the operations of
PCS Health Systems, Inc. (PCS), which was acquired in January 1999. Through
its PBM segment, the Company offered pharmacy benefit management, mail-order
pharmacy services, marketing prescription plans and other managed health care
services to employers, health plans and their members and government-sponsored
employee benefit programs. The Company has sold its PBM segment to Advance
Paradigm Inc. As a result, the PBM segment has been reclassified and is
accounted for as a discontinued operation in the accompanying financial
statements. The Company's continuing operations consist solely of the Retail
Drug segment.
4. Change in Accounting Method
Retroactive to the first quarter of fiscal 2000, the Company changed its
application of the last-in, first-out ("LIFO") method of accounting by
restructuring its LIFO pool structure through a combination of certain
existing geographic pools. The reduction in the number of LIFO pools was made
to more closely align the LIFO pool structure to the Company's store
merchandise categories. The cumulative effect of the accounting change for
periods prior to fiscal 2000 was a charge of $27,300 (net of tax effect of
$18,200), or $0.11 per diluted common share. The effect of this accounting
change was a reduction in income of $5,130 (net of income tax effect of
$3,420), or $0.02 per diluted common share for the thirty-nine weeks ended
November 27, 1999.
5. Discontinued Operations
On October 2, 2000, the Company sold PCS, its PBM segment, to Advance
Paradigm, Inc. (now known as AdvancePCS). The selling price of PCS consisted
of $675,000 in cash, $200,000 in principal amount of AdvancePCS's unsecured 10
year senior subordinated notes (with warrants attached) and shares of
AdvancePCS's non-voting Series A Preferred Stock which are convertible to
6,250,000 shares of Class B Common Stock of AdvancePCS (subject to adjustment
for certain dilutive events). The senior subordinated notes bear interest at
the rate of 11% per annum for the first 18 months after 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 until October 2,
2002. 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 AdvancePCS's Class A Common Stock (subject to
adjustment for certain dilutive events). The senior subordinated notes may be
prepaid by AdvancePCS in whole at any time; however, if less than the entire
outstanding principal amount is prepaid not more than an aggregate of $75,000
of the principal amount may be prepaid from the date of issuance. Upon any
prepayment prior to October 2, 2002, the warrants attached to the senior
subordinated notes will expire ratably, based on the amount prepaid. The
senior subordinated notes and the preferred stock are recorded at their fair
value at the date of issuance, based on an appraisal, of $200,000 and
$231,000, respectively. The preferred stock is accounted for under the cost
method for equity investments. No value has been assigned to the contingently
exercisable warrants.
Effective December 7, 2000, the Series A Preferred Stock is 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 AdvancePCS
9
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
(which are convertible into shares of Class A Common Stock which is publicly
traded). The Series A Preferred Stock (and the Class B Common Stock) are
entitled to share ratably with the Class A Common Stock in dividends declared.
Holders of the Series A Preferred Stock (and of the Class B Common Stock
issuable upon its conversion) have the right to elect two members of
AdvancePCS's board of directors.
The Company has the right to cause AdvancePCS 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) prior to
October 2, 2002 unless the market price of AdvancePCS's Class A Common Stock
averages at least $40 per share for 20 consecutive trading days after April 2,
2001.
When the sale was consummated, the Company applied $575,000 of the cash
portion of the proceeds to reduce the outstanding balances of the PCS credit
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, the revolving credit (RCF)
facility, and the exchange debt 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 balances of the
PCS credit facility and the PCS exchange debt and, if repaid in full, to repay
the then outstanding balances of the RCF credit facility and the RCF exchange
debt.
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 through October 2, 2000, the date of sale, are reflected
separately from the results of continuing operations. The loss on the disposal
of the PBM segment is $199,229. This loss includes net operating results of
the PBM segment from July 12, 2000 to October 2, 2000, estimates for
transaction expenses, estimates for the final settlement of the purchase price
between the Company and AdvancePCS and final determination of fair value based
on appraisals of the non-cash consideration received which resulted in a
reduction in the loss of $156,000. The settlement of the purchase price could
further reduce the loss. Summarized operating results of the PBM segment for
the reporting periods ended October 2, 2000 and November 27, 1999, are as
follows:
<TABLE>
<CAPTION>
Five Thirteen Thirty-One Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 2, November 27, October 2, November 27,
2000 1999 2000 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................... $ 123,498 $367,252 $ 779,748 $1,011,988
Income (loss) from
operations before income
tax expense................ -- (3,394) 25,181 34,760
Income tax expense
(benefit).................. -- (3,390) 13,846 27,172
--------- -------- --------- ----------
Income (loss) from
discontinued operations.... -- (4) 11,335 7,588
(Loss) reduction of loss on
disposal before income tax
expense.................... 135,534 -- (199,963) --
Income tax benefit.......... -- -- 734 --
--------- -------- --------- ----------
(Loss) reduction of loss on
disposal................... 135,534 -- (199,229) --
--------- -------- --------- ----------
Total income (loss) from
discontinued operations.... $ 135,534 $ (4) $(187,894) $ 7,588
========= ======== ========= ==========
</TABLE>
At February 26, 2000, the assets of PCS consisted of accounts receivable,
property, plant and equipment and intangible assets. Net assets at February
26, 2000 are comprised of $390,053 of net current liabilities and $1,743,828
of net noncurrent assets.
10
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
As a result of the decision to discontinue the operations of the Company's
PBM segment, the Company recorded an increase to the tax valuation allowance
and income tax expense of $146,916 in the thirty-nine week period ended
November 25, 2000.
6. Restatements
The financial statements for the thirteen and thirty-nine weeks ended
November 27, 1999 have been restated to reflect various adjustments to the
previously reported financial statements. See the Company's 2000 Form 10-K/A
filed with the SEC on October 11, 2000 for further information. Additionally,
the PBM segment has been reclassified as a discontinued operation. The
following tables set forth the restated results of operations, net loss per
share and the impact of reclassifying the PBM segment as a discontinued
operation.
<TABLE>
<CAPTION>
For the Thirteen Weeks ended November 27, 1999
-------------------------------------------------------------------------------
Restated
Restatement as
Adjustments as Previously
As Previously Reported Further As
Originally Reported in in 2000 Restatement Reclassifi- Restated and
Reported(1) 2000 10-K(2) 10-K(2) Adjustments(3) cations(4) Reclassified
----------- -------------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $3,645,080 $1,310 $3,646,390 $ -- $(367,252) $3,279,138
Costs and expenses
excluding store closing
and impairment
charges................ 3,868,261 1,310 3,869,571 (20,508) (370,646) 3,478,417
Store closing and
impairment charges..... 33,119 -- 33,119 -- -- 33,119
---------- ------ ---------- -------- --------- ----------
Income (Loss) from
continuing operations
before income taxes and
cumulative effect of an
accounting............. (256,300) -- (256,300) 20,508 3,394 (232,398)
Income tax (benefit)
expense................ (4,015) -- (4,015) 18,028 3,390 17,403
---------- ------ ---------- -------- --------- ----------
Income (Loss) from
continuing operations.. (252,285) -- (252,285) 2,480 4 (249,801)
Loss from discontinued
operations, net of
tax.................... -- -- -- -- (4) (4)
---------- ------ ---------- -------- --------- ----------
Net income (loss)....... $ (252,285) $ -- $ (252,285) $ 2,480 $ -- $ (249,805)
========== ====== ========== ======== ========= ==========
Basic and diluted income
(loss) per share:
Net loss (5)........... $ (1.01) $ -- $ (1.01) $ 0.01 $ -- $ (1.00)
========== ====== ========== ======== ========= ==========
</TABLE>
11
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Thirty-Nine Weeks ended November 27, 1999
---------------------------------------------------------------------------------
Restatement
Adjustments as Restated as
As Previously Previously Further As
Originally Reported in Reported in Restatement Reclassifi- Restated and
Reported(1) 2000 10-K(2) 2000 10-K(2) Adjustments(3) cations(4) Reclassified
----------- -------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $10,775,871 $ 73,840 $10,849,711 $ -- $(1,011,988) $9,837,723
Costs and expenses
excluding store closing
and impairment
charges................ 11,066,012 119,340 11,185,352 (83,698) (977,228) 10,124,426
Store closing and
impairment charges..... 117,451 -- 117,451 -- -- 117,451
----------- -------- ----------- ------- ----------- ----------
Income (loss) from
continuing operations
before income taxes and
cumulative effect of
change in accounting
method................. (407,592) (45,500) (453,092) 83,698 (34,760) (404,154)
Income tax expense
(benefit).............. 11,102 (18,200) (7,098) 14,434 (27,172) (19,836)
----------- -------- ----------- ------- ----------- ----------
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting method...... (418,694) (27,300) (445,994) 69,264 (7,588) (384,318)
Income from discontinued
operations, net of
tax.................... -- -- -- -- 7,588 7,588
Cumulative effect of an
accounting change, net
of tax................. (27,300) -- (27,300) -- -- (27,300)
----------- -------- ----------- ------- ----------- ----------
Net income (loss)....... $ (445,994) $(27,300) $ (473,294) $69,264 $ -- $ (404,030)
=========== ======== =========== ======= =========== ==========
Basic and diluted income
(loss) per share:
Income (loss) from
continuing operations.. $ (1.65) $ (0.11) $ (1.76) $ 0.27 $ (0.03) $ (1.52)
Income from discontinued
operations............. -- -- -- -- 0.03 0.03
Cumulative effect of an
accounting change, net
of tax................. (0.11) -- (0.11) -- -- (0.11)
----------- -------- ----------- ------- ----------- ----------
Net income (loss) (6)... $ (1.76) $ (0.11) $ (1.87) $ 0.27 $ -- (1.60)
=========== ======== =========== ======= =========== ==========
</TABLE>
-------
(1) The amounts shown are as previously reported in the fiscal 2000 Form 10-Q
for the thirteen and 39 weeks ended November 27, 1999 as filed on July 11,
2000.
(2) Reflects restatement adjustments previously reported in the Company's
fiscal 2000 10-K as filed on July 11, 2000. For a description of the
adjustments which resulted in the net loss and loss per share, see
"Management's
12
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
Discussion and Analysis of Financial Condition and Results of Operations-
Restatement of Historical Financial Statements" in the Company's Fiscal
2000 10K/A.
(3) To record adjustments identified subsequent to the filing of the Company's
2000 Form 10-K. Also, see notes 23 and 25 to the consolidated financial
statements in the Company's Fiscal 2000 Form 10-K/A.
(4) To reclassify the PBM Segment as a discontinued operation and to reflect
certain other reclassifications. See note 5 of the notes to the condensed
consolidated financial statements.
(5) Net loss of $0.98 as previously reported in the fiscal 2000 Form 10-Q for
the thirteen weeks ended November 27, 1999, and the fiscal 2000 Form 10-K,
differs by $0.03 due to a typographical error.
(6) Net loss of $1.94 as previously reported in the fiscal 2000 Form 10-Q for
the thirty nine weeks ended November 27, 1999, differs by $0.18 in the
period reported and by $0.14 as previously reported in the fiscal 2000 10-
K, due to typographical errors.
7. Store Closing and Impairment Charges
Store closing and impairment charges consist of:
<TABLE>
<CAPTION>
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
------------------------- -------------------------
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Impairment charges........ $44,518 $27,127 $ 70,342 $ 84,068
Store lease exit costs.... 22,601 5,992 23,703 33,383
Impairment of
drugstore.com............ 28,452 -- 105,697 --
------- ------- -------- --------
$95,571 $33,119 $199,742 $117,451
======= ======= ======== ========
</TABLE>
Impairment Charges
Impairment charges include non-cash charges of $44,518 and $27,127 for the
thirteen weeks ended November 25, 2000 and November 27, 1999, respectively,
for the impairment of long-lived assets (including allocable goodwill) at 142
and 26 stores, respectively. Impairment charges include non-cash charges of
$70,342 and $84,068 for the thirty-nine weeks ended November 25, 2000 and
November 27, 1999, respectively, for the impairment of long-lived assets
(including allocable goodwill) at 244 and 185 stores, respectively. These
amounts include the write-down of long-lived assets at stores that were
assessed for impairment because of management's intention to relocate or close
the store or because of changes in circumstances that indicate the carrying
value of the asset may not be recoverable.
Store Lease Exit Costs
Costs incurred to close a store, which principally consist of lease
termination costs, are recorded at the time management commits to closing the
store, which is the date that the closure is formally approved by senior
management, 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 calculation includes 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. As a result of focused efforts on cost recoveries for closed
stores during fiscal 2001, the Company has experienced improved results, which
has been reflected in the assumptions about future sublease income. This
liability is discounted using a risk-free rate of interest. The Company
evaluates these assumptions each quarter and adjusts the liability
accordingly.
13
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
A rollforward of the Company's lease exit liability follows:
<TABLE>
<CAPTION>
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
------------------------- -------------------------
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance--Beginning of
Period.................... $200,057 $236,535 $212,812 $246,805
Provision for present
value of noncancellable
lease payments of stores
designate to be closed.. 45,331 10,676 73,639 43,976
Changes in assumptions
about future sublease
income, terminations,
and changes in interest
rates................... (21,764) (4,960) (41,639) (14,051)
Reversals of reserves for
stores that management
has determined will
remain open............. (966) (2,326) (8,298) (3,582)
Interest accretion....... 2,760 2,816 8,751 8,329
Cash payments, net of
sublease income......... (14,643) (13,435) (34,490) (52,171)
-------- -------- -------- --------
Balance--End of Period..... $210,775 $229,306 $210,775 $229,306
======== ======== ======== ========
</TABLE>
Impairment of Drugstore .com
The Company has an investment in the common stock of drugstore.com, which is
accounted for under the equity method. The initial investment was valued based
upon the initial public offering price of drugstore.com. During the second and
third quarters ended August 26, 2000 and November 25, 2000, the Company
recorded an impairment of its investment in drugstore.com. This write-down was
based upon a decline in the market value of drugstore.com's stock that the
Company believes to be other than temporary.
14
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
8. Indebtedness, Credit Agreements and Lease Financing Obligations
Following is a summary of indebtedness and lease financing obligations at
November 25, 2000 and February 26, 2000:
<TABLE>
<CAPTION>
February
November 25, 26,
2000 2000
------------ ----------
<S> <C> <C>
Commercial paper borrowings.......................... $ -- $ 192,000
Term loan due 2000................................... -- 272,422
5.50% fixed-rate senior notes due 2000............... 76,926 200,000
6.70% notes due 2001................................. 7,818 350,000
5.25% convertible subordinated notes due 2002........ 392,324 649,986
Senior Facility...................................... 752,000 --
Revolving Credit facility due 2002 (amended and
restated) ("RCF")................................... 730,268 716,073
Term loan due 2002 (amended and restated) ("PCS").... 622,574 1,300,000
Exchange Debt........................................ 219,447 --
10.50% notes due 2002................................ 465,256 --
6.00% dealer remarketable securities due 2003........ 187,650 200,000
6.00% fixed-rate senior notes due 2005............... 200,000 200,000
7.625% senior notes due 2005......................... 200,000 200,000
7.125% notes due 2007................................ 350,000 350,000
6.125% fixed-rate senior notes due 2008.............. 150,000 150,000
6.875% senior debentures due 2013.................... 200,000 200,000
5.875% to 10.475% industrial development bonds due
through 2016........................................ 4,958 5,196
7.70% notes due 2027................................. 300,000 300,000
6.875% fixed-rate senior notes due 2028.............. 150,000 150,000
Lease financing obligations.......................... 1,103,831 1,151,901
Other................................................ 9,093 29,056
---------- ----------
6,122,145 6,616,634
Short-term debt, current maturities of long-term debt
and lease financing obligations..................... (106,226) (102,050)
---------- ----------
Long-term debt and lease financing obligations, less
current maturities.................................. $6,015,919 $6,514,584
========== ==========
</TABLE>
In June 2000, the Company entered into an interest rate swap contract that
fixes the LIBOR component of $500 million of the Company's variable rate debt
at 7.083% for a two-year period. In July 2000, the Company entered into an
additional interest rate swap that fixes the LIBOR component of an additional
$500 million of variable rate debt at 6.946% for a two-year period. The
Company entered into these contracts to hedge its exposure to fluctuations in
market interest rates. The differential to be paid or received as a result of
these swap agreements is accrued as an adjustment to interest expense. At
November 25, 2000, Rite Aid would have had to pay $10.3 million if the Company
had terminated these contracts on that date.
Refinancings
On June 14, 2000, the Company obtained a new $1,000,000 senior secured
credit facility (the Senior Facility) from a syndicate of banks. The Senior
Facility is guaranteed by substantially all of the Company's
15
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
wholly-owned subsidiaries, and the banks have a security interest in
substantially all of those subsidiaries' accounts receivable, inventory, and
intellectual property and a security interest in certain of their real
property. Of this amount, $500,000 is in the form of a term loan due in August
2002 with interest at LIBOR plus 3.00% and $500,000 is in the form of a
revolving credit facility under the Senior Facility due in August 2002. Funds
drawn under the term loan were used to repay $300,000 of drawings under the
accounts receivable securitization program and to pay $200,000 for working
capital and transaction expenses. Funds drawn under the revolving credit
facility are used to fund current operations.
On November 6, 2000, the Company entered into an amendment to the Senior
Facility, which provided additional term loans of $100,000. In addition,
certain coverage ratios were amended. The Company incurred fees of $3,528 in
connection with the amendment, which are being amortized over the period of
the new term loans.
The Senior Facility, as amended on November 6, 2000, 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 capital
expenditures. The Company was in compliance with its debt covenants as of
November 25, 2000. For the three quarters ending March 3, 2001, covenants
require the company to maintain a minimum interest coverage ratio and a
minimum fixed charge coverage ratio of .95:1, increasing to a minimum interest
coverage ratio of 1.40:1 and a minimum fixed charge ratio of 1.91:1 for the
four quarters ending June 1, 2002. For the three fiscal quarters ending
March 3, 2001, the Company must maintain consolidated EBITDA (as defined in
the Senior Facility) of no less than $364,000, increasing to $720,000 for the
four fiscal quarters ending on June 1, 2002. For the three fiscal quarters
ending March 3, 2001, capital expenditures are limited to $186,000, increasing
to $243,000 for the four fiscal quarters ending June 1, 2002.
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 2002. The Company arranged with certain financial
institutions to refinance $93,200 of the 5.5% notes when they become due with
the 10.50% senior secured notes due 2002. These financial institutions
purchased $16,710 of the 5.5% notes and $20,390 of the 6.7% notes on July 27,
2000, and $53,814 of the 5.5% notes on September 13, 2000, and exchanged the
purchased notes with the Company for the 10.50% senior secured notes due 2002.
The remaining 5.5% notes were retired in December 2000 with the Company's
general corporate funds and the remaining forward purchase commitment. The
Company recognized an aggregate loss of $6,200 in connection with the
refinancing.
On June 14, 2000, the Company exchanged certain credit facility debt with a
carrying amount of $284,820 for 51,785,434 shares of the Company's common
stock and extended the maturity of its remaining $2,147,188 of bank debt from
November 1, 2000 to August, 2002. As a result of this exchange, the Company
recognized a gain of $11,400, an increase of $51,785 in common stock and an
increase of $220,088 in paid in capital, in the second quarter of 2001. After
applying $575,000 of the cash proceeds from the sale of PCS to these credit
facilities, the remaining amount of this bank debt maturing in August 2002 is
$1,572,289.
On June 26, 2000, 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 this exchange, the Company
recognized a loss of $89,000, an increase of $17,779 in common stock and an
increase of $247,847 in paid in capital, in the second quarter of 2001.
16
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
On November 10, 2000, the Company exchanged a total of 9,222,200 shares of
Rite Aid common stock for $79,872 principal amount of the 5.25% convertible
subordinated notes due 2002, and $12,350 of its 6.00% dealer remarketable
securities due 2003. As a result of these exchanges, the Company recognized a
net loss of $8,306, an increase of $9,222 in common stock and an increase of
$91,248 in paid in capital, in the third quarter of 2001.
9. Stockholders' Equity
On October 27, 1999, the Company issued 3,000,000 shares of Series A
cumulative pay-in-kind preferred stock ("Series A Preferred Stock") at $100
per share. It subsequently exchanged all 3,000,000 shares of 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 the Company's common stock at a
conversion price of $11.00 per share of common stock. The conversion price of
the Series B Preferred Stock was subject to adjustment if the Company issued
common stock before October 27, 2000 at a per share price that was less than
the then current conversion price of the Series B Preferred Stock and in
certain other circumstances. In connection with the refinancing effected on
June 14, 2000, the Company 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. As a result of this adjustment the
Company increased its paid in capital, its accumulated deficit, and its loss
attributable to common stockholders by $160.9 million in June 2000
(representing the difference between $5.50 and the market price of the
Company's common stock on the original date of issuance of the Series A
Preferred Stock) in correspondence with the sale of stock by the investee.
For the thirty nine weeks ended November 25, 2000 the Company recognized an
increase to its investment in drugstore.com of $14,402 and a corresponding
increase to paid in capital, in connection with equity transactions of the
investee.
In June 2000, the Company issued 2,248,818 shares of restricted stock to
certain key executives. The Company recorded the issuances at fair value on
the date of grant of $17,428. Compensation expense related to all restricted
stock grants is being recorded over a one to three year vesting period of
these grants. For the thirty-nine weeks ended November 25, 2000 the Company
recognized $9,659 of expense related to restricted shares.
In November 2000, the Company changed the exercise price of 16.8 million
stock options issued after December 4, 1999 to $2.75 per share, which
represents fair market value of a share of common stock on the date of the
repricing. In connection with the re-pricing, the Company recognizes
compensation expense, representing the change in market value subsequent to
the repricing for those shares over the vesting period. As a result of the
repricing, compensation expense for these options are accounted for using
variable plan accounting. Under variable plan accounting, subsequent changes
in the market value of the Company's stock during the option period, or until
exercised, will generate changes in the compensation expense recognized on the
re-priced options.
10. Commitments and Contingencies
Legal proceedings
The Company is party to numerous legal proceedings, as described below. An
unfavorable resolution of certain of these matters could materially adversely
effect the Company's results of operations, financial position and cash flows.
17
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
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 the Company's common stock.
Purchases of the Company's common stock under the plan were suspended in
October 1999. The Company is cooperating fully with the Department of Labor.
These federal investigations are ongoing and the Company cannot predict
their outcomes. If the Company were convicted of any crime, certain contracts
and licenses that are material to its operations may be revoked, which would
have a material adverse effect on results of operations and financial
condition. In addition, substantial penalties, damages or other monetary
remedies assessed against the Company could also have a material adverse
effect on the Company's results of operations, financial condition and cash
flows.
Stockholder litigation
The Company, its former chief executive officer Martin Grass, its former
president Timothy Noonan, its former chief financial officer Frank Bergonzi,
and its former auditor KPMG LLP, have been sued in a number of actions, most
of which purport to be class actions, brought on behalf of stockholders who
purchased the Company's securities on the open market between May 2, 1997 and
November 10, 1999. All of these cases have been consolidated in the U.S.
District Court for the Eastern District of Pennsylvania. On November 9, 2000,
the Company announced that it has reached an agreement to settle the
consolidated securities class action lawsuits pending against it in the U.S.
District Court for the Eastern District of Pennsylvania and the derivative
lawsuits pending there and in the U.S. District Court of Delaware. Under the
agreement, which must be approved by the courts, the Company will pay $45
million in cash, which will be fully funded by its officers' and directors'
liability insurance, and issue shares of common stock in 2002. The shares will
be valued over a 10 day trading period in January 2002. If the value
determined is at least $7.75 per share, the Company will issue 20 million
shares, which could result in the Company recording additional expense related
to the settlement. If the value determined is less than $7.75 per share, the
Company has the option to deliver any combination of common stock, cash and
short-term notes, with a total value of $155 million. As additional
consideration for the settlement, the Company will assign to the plaintiffs
all of its claims against the above named executives and KPMG LLP. As a result
of this settlement in the thirteen week period ended November 25, 2000, the
Company recorded $20 million as a credit to SG&A to adjust the reserve on this
litigation to $155 million. This reserve is included in other non-current
liabilities in the accompanying balance sheet.
Drug pricing and reimbursement matters
Purported federal class actions lawsuits have been filed against the Company
in Alabama and California and purported state class actions have been filed
against the Company in New Jersey, New York, Oregon, and Pennsylvania. In all
of the class actions the plaintiffs allege 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 and none of those class actions specify damages. The Company has
asserted
18
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share amounts)
(unaudited)
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, other than the
California case. 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. On November 2, 2000, the United States Court of Appeals for
the Eleventh Circuit affirmed the action of the United States District Court
for Northern District of Alabama dismissing the federal RICO claims asserted
in a purported class action lawsuit alleging that certain of the Company's
non-uniform pricing practices for cash prescription purchases were unlawful.
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 27, 2000, a
New Jersey State court dismissed that class action there. On August 16, 2000,
a Pennsylvania State court dismissed that class action with prejudice. A
motion to dismiss the state class action in New York is currently pending. On
October 5, 2000, the Company settled, for an immaterial amount, and without
admitting any violation of law, the allegation by the Attorney General of
Florida that its non-uniform pricing policy for cash prescription purchases
was unlawful under Florida law.
The Company believes that the remaining positive override lawsuits are
without merit under applicable state consumer protection laws. 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. However, such an outcome for each
of the actions cannot be assured and a ruling against the Company could have a
material adverse effect on the financial position and operations of the
Company as well as necessitate substantial additional expenditures to cover
legal costs as it pursues all available defenses.
The Company is being investigated by multiple state attorneys general for
its reimbursement practices relating to partially-filled prescriptions and
fully-filled prescriptions that are not picked up by ordering customers. The
Company is supplying similar information with respect to these matters to the
Department of Justice. The Company believes that these investigations are
similar to investigations that were, and are being, undertaken with respect to
the practices of others in the retail drug industry. The Company also believes
that its existing policies and procedures fully comply with the requirements
of applicable law and intends to fully cooperate with these investigations.
The Company cannot, however, predict their outcomes at this time.
If any of these cases result in a substantial monetary judgment against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position and cash flows could be materially adversely
affected.
Other
In addition, the Company is subject from time to time to lawsuits arising in
the ordinary course of business. In the opinion of management, these matters
are covered adequately by insurance or, if not so covered, are without merit
or are of such nature or involve such amounts as would not have a material
adverse effect on the Company's financial condition, cash flow or results of
operations if decided adversely. The Company does not believe, regardless of
insurance coverage, that the ultimate resolution of these matters will have a
material adverse effect on the Company's financial condition, results of
operations and cash flows.
19
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Our current executive management team was hired in December 1999 following
the departure of our former chief executive officer. The company confronted
numerous operational and liquidity problems at that time. The aggressive
growth strategy pursued by the former management had significantly increased
the company's indebtedness and there were severe short-term liquidity
problems. The reliability of the financial reporting system was in doubt
because the company had announced the need to restate its previously reported
operating results. Finally, our store operations were experiencing substantial
difficulties and there was a serious decline in customer traffic.
In the past year, we have taken significant steps to address the challenges
that faced the company in late 1999. The immediate liquidity needs have been
addressed and our financial condition has been stabilized through a series of
refinancing transactions, as described in greater detail below. We have had a
new audit of our financial statements completed, and are restoring credibility
to our financial reporting system. Finally, we have made adjustments to our
store operations and have begun to experience consistent growth in our same
store sales.
The company continues to have significant operational and financial
challenges and there are a number of risk factors that will affect our results
of operations on a going forward basis. Certain of these key factors are
discussed below. A more complete discussion can be found in our Fiscal 2000
Form 10-K/A, including a discussion of certain risk factors, which appears
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Our Future Results."
Maturing Store Base. Since the beginning of fiscal 1998, Rite Aid has built
377 new stores, relocated 770 stores and closed 856 stores. These new and
relocated stores represent approximately 30.6% of the company's total stores
at November 25, 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 two to 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 recent operating results. However, we believe that as these newer stores
mature they should gain the critical mass of customers needed for profitable
operations. This continuing maturation should positively affect the company'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.
Substantial Investigation Expenses. Rite Aid 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 the law
firm of Swidler Berlin Shereff Friedman LLP, 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 $94.0 million, of which
$73.4 million was incurred in the first three fiscal quarters of fiscal 2001.
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. At November 25, 2000, 341,230,563 shares of
common stock were outstanding and an additional 105,888,000 shares of common
stock were issuable upon the exercise or conversion of outstanding stock
options, warrants, notes or preferred stock. During the third quarter, we
issued an additional 9.2 million shares of common stock to retire $92.2
million of indebtedness. We also agreed to issue common stock to settle our
securities class action lawsuit. Under the terms of the settlement, which is
subject to the
20
<PAGE>
approval of the courts, the company's insurers will pay $45 million in cash
and the company will issue shares of its common stock in 2002. The shares will
be valued over a ten day period in January, 2002. If the price determined is
at least $7.75 per share, the company will issue 20 million shares of its
common stock. If the value determined is less than $7.75 per share, the
company has the option to deliver any combination of common stock, cash and
short term notes with a total value of $155 million. If the company is not in
a position to utilize cash or notes in order to satisfy this obligation, it
could be required to deliver a substantially larger amount of its common
stock. In light of the company's substantial leverage and liquidity
constraints, management 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
common stock.
Accounting Systems. Following its review of the company's books and records,
management concluded that further steps were needed to establish and maintain
the adequacy of its internal accounting systems and controls. In connection
with the audit of the company's financial statements, Deloitte & Touche LLP
advised Rite Aid that it believed there were numerous "reportable conditions"
under the standards established by the American Institute of Certified Public
Accountants which relate to the company's accounting systems and controls and
could adversely affect the company's ability to record, process, summarize and
report financial data consistent with the assertions of management in the
financial statements. Management's long-term strategy includes a comprehensive
plan to develop, implement and maintain adequate and reliable accounting
systems and controls which address the reportable conditions identified by
Deloitte & Touche LLP.
Results of Operations
Consolidated Revenues
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Thirteen Thirty-nine
Weeks Ended Weeks Ended
------------------------ -------------------------
November November 27, November November 27,
25, 2000 1999 25, 2000 1999
---------- ------------ ----------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Sales.................... $3,531,691 $3,279,138 $10,413,346 $9,837,723
Sales growth............. 7.7% 5.4% 5.9% 7.5%
Same store sales growth.. 10.0% 8.5% 8.5% 9.0%
Pharmacy sales growth.... 9.1% 14.7% 8.0% 17.4%
Same store pharmacy sales
growth.................. 11.0% 15.2% 10.3% 18.1%
Pharmacy as a % of total
sales................... 60.3% 59.5% 60.0% 58.9%
Third party sales as a %
of total pharmacy
Sales................... 90.7% 88.1% 90.1% 87.6%
Front-end sales growth... 5.5% 0.1% 3.2% (2.0)%
Same store front end
sales growth............ 8.4% (0.2)% 5.9% (2.2)%
Front end sales as a % of
total sales............. 39.7% 40.5% 40.0% 41.1%
Store data:
Total stores (beginning
of period).............. 3,767 3,854 3,802 3,870
New stores............... 0 22 5 65
Closed stores............ (25) (50) (65) (143)
Store acquisitions, net.. 0 2 0 36
Total stores (end of
period)................. 3,742 3,828 3,742 3,828
Relocated stores......... 14 55 57 164
-------------------------------------------------------------------------------
</TABLE>
The 7.7% and 5.9% growth in sales for the thirteen and thirty-nine week
periods ended November 25, 2000 was primarily due to strong same store sales
growth of 10.0% and 8.5 % for the quarter and year-to-date periods,
respectively, partially offset by a decrease in total store count.
For the thirteen and thirty-nine week periods ended November 25, 2000,
prescription drug revenues led sales growth with same-store sales increases of
11.0% and 10.3%, respectively. The increases in same store sales growth were
due to increases in the average transaction size and, to a lesser extent,
increased prescription counts. Our pharmacy sales growth continued to benefit
from previously purchased prescription files from independent
21
<PAGE>
pharmacies and favorable industry trends. These trends include an aging
American population with many "baby boomers" now in their fifties and
consuming a greater number of prescription drugs. The use of pharmaceuticals
as the treatment of choice for a growing number of healthcare problems and the
introduction of a number of successful new prescription drugs also contributes
to the growing demand for pharmaceutical products.
Front-end sales, which include all non-prescription sales such as seasonal
merchandise, convenience items and food, also had strong same store sales
growth in the thirteen and thirty-nine week periods ended November 25, 2000,
increasing 8.4% and 5.9%, respectively. The same store sales increase was
primarily a result of the initiatives put into place, which included, among
other things, lowering prices on key items, distributing a nationwide weekly
advertising circular, expanding certain product categories and improving
general store conditions.
Costs and Expenses
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
------------------------- -------------------------
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cost of goods sold......... $2,713,988 $2,521,365 $8,005,474 $7,425,434
Gross profit............... 817,703 757,773 2,407,872 2,412,289
Gross margin............... 23.2% 23.1% 23.1% 24.5%
Selling, general and
administrative expenses... 797,409 791,068 2,494,125 2,315,469
Selling, general and
administrative expenses as
a percentage of revenues.. 22.6% 24.1% 24.0% 23.5%
Goodwill amortization...... 5,058 6,096 16,759 18,360
Interest expense........... 146,122 159,888 499,871 365,297
Store closing and
impairment charges........ 95,571 33,119 199,742 117,451
Loss on debt conversions
and modifications, net.... 8,306 -- 92,095 --
Share of loss (income) from
equity investment......... 6,484 -- 30,554 (134)
--------------------------------------------------------------------------------
</TABLE>
Cost of Goods Sold
Gross margin was 23.2% for the thirteen week period ended November 25, 2000
compared to 23.1% for the same period in the prior year. Although gross margin
is flat, it was negatively impacted by the continuing trend of increased third
party reimbursed prescription sales as a percent of total prescription sales
and the higher promotional costs resulting from the company's new weekly
advertising circular program. The increase in third party prescription sales
had a negative impact on gross margin rates 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. Third party sales as a percentage of total pharmacy
sales were 90.7% and 88.1% for the thirteen weeks ended November 25, 2000 and
November 27, 1999, respectively. Offsetting this trend was lower product costs
and lower product return costs.
Gross margin was 23.1% for the thirty-nine week period ended November 25,
2000 compared to 24.5% for the same period in the prior year. Negatively
impacting gross margin for the current year thirty-nine week period was the
continuing trend of increased third-party reimbursed prescription sales as a
percentage of total prescription sales and the higher promotional costs
resulting from the company's new weekly advertising circular program. Third-
party sales as a percentage of total pharmacy sales were 90.1% and 87.6% for
the thirty-nine weeks ended November 25, 2000 and November 27, 1999,
respectively.
The company uses the last-in, first-out (LIFO) method of inventory
valuation, which can only be determined annually when inflation rates and
inventory levels are finalized. Therefore, LIFO costs for interim period
financial statements are estimated. Cost of sales includes a LIFO provision of
$10.8 million and $22.4 million for the thirteen and thirty-nine week periods
ended November 25, 2000, respectively, versus $9.1 million and $27.3 million
for the thirteen and thirty-nine week periods ended November 27, 1999,
respectively.
22
<PAGE>
Selling, General and Administrative Expenses
The selling, general and administrative expense ("SG&A") for the thirteen
weeks ended November 25, 2000 includes expenses of $21.9 million incurred in
connection with the restatement of the company's historical financial
statements primarily offset by a $20 million increase in estimated insurance
recovery related to the settlement of the shareholder's class action lawsuit.
If these nonoperating items are excluded, the company's SG&A as a percentage
of revenues would have been 22.6% in the thirteen weeks ended November 25,
2000. SG&A for the thirteen weeks ended November 27, 1999 includes an $80.0
million gain on the sale of certain stores in the third quarter for fiscal
2000. Excluding this nonoperating item results in an adjusted SG&A as a
percentage of revenue of 26.6% in the thirteen weeks ended November 27, 1999.
SG&A on an adjusted basis in the thirteen week period of the current fiscal
year of 22.6% compares favorably to the adjusted 26.6% of the prior year's
comparable period because of decreased labor charges, lower depreciation
expense resulting from a net reduction of our store count, the absence of
higher depreciation expense recorded in the prior year due to the reduction of
depreciable assets in the impaired stores and a better leveraging of fixed
SG&A costs resulting from our higher same store sales volume. The improvements
were partially offset by $5.3 million of charges incurred in the thirteen
weeks ended November 25, 2000 resulting from amortization of costs related to
previously granted restricted stock.
SG&A for the thirty-nine weeks ended November 25, 2000 includes expenses of
$73.4 million incurred in connection with the restatement of the company's
historical financial statements partially offset by a $20 million increase in
estimated insurance recovery related to the settlement of the shareholder's
class action lawsuit and $12.3 million received related to the partial
settlement of litigation with certain drug manufacturers. If these
nonoperating items are excluded, the Company's SG&A as a percentage of
revenues would have been 23.6% in the thirty-nine week period ended November
25, 2000. SG&A for the thirty-nine weeks ended November 27, 1999 includes the
reversal of stock appreciation rights accrued expense of $44.6 million and a
gain of $80.0 million recognized in fiscal 2000 for the sale of stores.
Excluding these nonoperating items results in an adjusted SG&A as a percentage
of revenue of 24.8% in the thirty-nine week period ended November 27, 1999.
SG&A on an adjusted basis in the thirty-nine week period of the current fiscal
year of 23.6% compares favorably to the adjusted 24.8% of the prior year's
comparable period because of decreased labor charges, lower depreciation
expense resulting from a net reduction of our store count and the better
leveraging of fixed SG&A costs resulting from our higher same store sales
volume.
Interest Expense
Interest expense was $146.1 million for the thirteen week period ended
November 25, 2000, compared to $159.9 million in the thirteen week period
ended November 27, 1999. The decrease was primarily due to the reversal
(resulting from the settlement of a contract) of $20 million of previously
amortized cost of issuance related to financing effected in October 1999. Also
contributing to the expense decrease is the paydown of $575.0 million on the
PCS facility, utilizing proceeds from the sale of the PBM segment. These
decreases are partially offset by higher interest rates. The weighted average
interest rates, excluding capital leases, on the Company's indebtedness for
the thirteen weeks ended November 25, 2000 and November 27, 1999 were 8.60%
and 6.99%, respectively.
Interest expense was $499.9 million for the thirty-nine week period ended
November 25, 2000 compared to $365.3 million in the thirty-nine week period
ended November 27, 1999. The increase in interest expense in fiscal 2001 is
due to higher levels of indebtedness throughout the period and higher interest
rates, partially offset by interest savings on debt that was converted to
equity in the second and third quarters of fiscal 2001.
23
<PAGE>
Store Closing and Impairment Charges
Store closing and impairment charges consist of:
<TABLE>
<CAPTION>
Thirteen Thirty-nine
Weeks Ended Weeks Ended
------------------------- -------------------------
November 25, November 27, November 25, November 27,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Impairment charges........ $ 44,518 $27,127 $ 70,342 $ 84,068
Store lease exit costs.... 22,601 5,992 23,703 33,383
Impairment of
drugstore.com............ 28,452 -- 105,697 --
-------- ------- -------- --------
$ 95,571 $33,119 $199,742 $117,451
======== ======= ======== ========
</TABLE>
Impairment Charges. Impairment charges include non-cash charges of $44.5
million and $27.1 million for the thirteen weeks ended November 25, 2000 and
November 27, 1999, respectively, for the impairment of long-lived assets
(including allocable goodwill) at 142 and 26 stores, respectively. Impairment
charges include non-cash charges of $70.3 million and $84.1 million for the
thirty-nine weeks ended November 25, 2000 and November 27, 1999, respectively,
for the impairment of long-lived assets (including allocable goodwill) at 244
and 185 stores, respectively. These amounts include the write-down of long-
lived assets at stores that were assessed for impairment because of
management's intention to relocate or close the store or because of changes in
circumstances that indicate the carrying value of an asset may not be
recoverable.
Store Lease Exit Costs. Costs incurred to close a store, which principally
consist of lease termination costs, are recorded at the time management
commits to closing the store, which is the date that closure is formally
approved by senior management, 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 calculation
includes the future minimum lease payments and related ancillary costs form
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 leases terminations. As a result of focused efforts on cost
recoveries for closed stores during fiscal 2001, the company has experienced
improved results, which has been reflected in the assumptions about future
sublease income. This liability is discounted using a risk-free rate of
interest. The company evaluates these assumptions each quarter and adjusts the
liability accordingly.
A rollforward of the company's lease exit liability follows:
<TABLE>
<CAPTION>
Thirteen Thirty-nine
Weeks Ended Weeks Ended
------------------ ------------------
November November November November
25, 2000 27, 1999 25, 2000 27, 1999
-------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance--Beginning of Period.......... $200,057 $236,535 $212,812 $246,805
Provision for present value of
noncancellable lease payments of
stores designated to be closed....... 45,331 10,676 73,639 43,976
Changes in assumptions about future
sublease income, terminations, and
changes in interest rates............ (21,764) (4,960) (41,639) (14,051)
Reversals of reserves for stores that
management has determined will remain
open................................. (966) (2,326) (8,298) (3,582)
Interest accretion.................... 2,760 2,816 8,751 8,329
Cash payments, net of sublease
income............................... (14,643) (13,435) (34,490) (52,171)
-------- -------- -------- --------
Balance--End of Period................ $210,775 $229,306 $210,775 $229,306
======== ======== ======== ========
</TABLE>
24
<PAGE>
Impairment of Drugstore.com. The company has an investment in the common
stock of drugstore.com, which is accounted for under the equity method. The
initial investment was valued based upon the initial public offering price of
drugstore.com. During the second and third quarters of fiscal 2001, the
company recorded an impairment of its investment in drugstore.com. This write-
down was based on a decline in the market value of drugstore.com's stock that
the company believes to be other-than-temporary.
Income Taxes
The company had net losses for the thirteen and thirty-nine week periods
ended November 25, 2000 and November 27, 1999. The full benefit of the net
operating losses generated in the thirteen week period ended November 25, 2000
has been fully offset and the thirteen week period ended November 27, 1999 has
been partially offset by a valuation allowance based on management's
determination that, based on available evidence, it is more likely than not
that some or all of the deferred tax assets will not be utilized.
The income tax provision for the thirteen and thirty-nine week periods ended
November 25, 2000 reflects the effect of the decision to sell PCS and to
discontinue the operations of the company's PBM segment. As a result of the
decision to dispose of the PBM segment, the company recognized an increase in
the valuation allowance of $146.9 million in the first quarter of fiscal 2001.
Other Significant Charges
The net loss for the thirteen week period ended November 25, 2000 and
November 27, 1999 was $105.7 million and $249.8 million, respectively. The net
loss for the thirty-nine week period ended November 25, 2000 and November 27,
1999 was $1,257.6 million and $404.0 million, respectively. In addition to the
operational matters discussed above, our results in the current fiscal year
have been adversely affected by other significant charges. As indicated, we
recorded a reduction of loss (loss) net of taxes of $135.5 million and
($199.2) million on the disposal of the PBM segment, for the thirteen week and
thirty-nine week periods ended November 25, 2000, respectively. As a result of
the decision to dispose of the PBM segment the company recognized an increase
in the income tax valuation allowance of $146.9 million for the thirty-nine
week period ended November 25, 2000. We also recorded a pre-tax loss of $8.3
million and $92.1 million on debt conversions and modifications in the
thirteen and thirty-nine week periods ended November 25, 2000, respectively.
Finally, we recorded a pre-tax loss of $28.5 million and $105.7 million
relating to the impairment of our investment in drugstore.com in the thirteen
and thirty-nine week periods ended November 25, 2000, as well as losses of
$6.5 million and $30.6 million representing our share of the drugstore.com
losses, in the thirteen week and thirty-nine week periods of the current year,
respectively.
Liquidity and Capital Resources
Rite Aid's primary sources of liquidity is 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, the issuance
of debt and equity securities and potential additional borrowings. During the
thirty-nine weeks ended November 25, 2000, operations used cash which was
funded with borrowings under our credit facilities. The company's principal
uses of cash are to provide working capital for operations, service our
obligations to pay interest and principal on debt, and to provide funds for
capital expenditures.
Credit Facilities and Debt Restructuring
In June 2000, a major financial restructuring was completed that 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 and subsequent transactions affecting our capitalization are
described below.
25
<PAGE>
Senior Secured Credit Facility. In June 2000 we entered into a new $1.0
billion syndicated senior secured credit facility was entered into with a
syndicate of banks led by Citibank N.A., as agent. The new facility matures on
August 1, 2002 and originally consisted of a $500.0 million term loan facility
and a $500.0 million revolving credit facility. The term facility borrowings
were used to terminate an accounts receivable securitization facility and
repurchase $300.0 million of unpaid receivables thereunder, to fund $66.4
million of transaction costs relating to the financial restructuring and to
provide $133.6 million of cash for general corporate purposes. On November 6,
2000, Rite Aid entered into an amendment of the senior secured credit
facility, which provided us with $100.0 million of additional term loans which
were also used for general corporate purposes. The revolving facility is
available 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 2.0%. 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 the company's wholly owned subsidiaries
guaranteed the 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. The company's direct obligations under the
senior credit facility are unsecured.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. The facility requires us to meet
various financial ratios and limits capital expenditures. In connection with
the additional term loan borrowings, on November 6, 2000 the company also
amended certain of the financial covenants in this facility to conform to the
less restrictive covenants in our other debt agreements for a limited period
of time. For the three quarters ending March 3, 2001, our covenants require us
to maintain a minimum interest coverage ratio and a minimum fixed charge
coverage ratio of .95:1, increasing to a minimum interest coverage ratio of
1.40:1 and a minimum fixed charge ratio of 1.19:1 for the four quarters ending
June 1, 2002. For the three fiscal quarters ending March 3, 2001, we must
maintain consolidated EBITDA (as defined in the senior secured credit
facility) of no less than $364.0 million, increasing to $720.0 million for the
four fiscal quarters ending on June 1, 2002. Our EBITDA (as so defined) was
$140.2 million and $294.0 million for the thirteen and thirty-nine weeks ended
November 25, 2000, respectively. For the three fiscal quarters ending March 3,
2001, our capital expenditures are limited to $186.0 million, increasing to
$243.0 million for the four fiscal quarters ending June 1, 2002.
The senior secured credit 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 the
company's debt to accelerate the maturity of debt having a principal amount of
$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 November 25, 2000, the $600.0 million term loan facility was
fully drawn and we had $335.3 million in additional available borrowing
capacity under the revolving facility.
PCS, RCF and Related Exchange Debt Facilities. In June 2000 we extended the
maturity dates of our RCF credit facility and our PCS credit facility to
August 2002. 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 that place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale-leaseback transactions. These credit facilities also require us
to satisfy financial covenants that are generally slightly less restrictive
than the covenants in the senior secured credit facility. The facilities also
limit the amount of our capital expenditures to $125.0 million for the two
quarters ended November 25, 2000, increasing to $243.0 million for the four
quarters ending June 1, 2002. Under the terms of these facilities, after
giving effect to the $100 million increase in the term loan, we are permitted
to incur up to an additional $35 million of indebtedness under the senior
secured credit facility without the further
26
<PAGE>
consent of the lenders. The PCS credit facility was originally secured by a
first lien on the stock of PCS and the RCF credit facility was originally
secured by a first lien on the stock of drugstore.com and a second lien on the
stock of PCS. Any amounts repaid under these facilities with the proceeds of
asset sales may not be reborrowed.
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 $274.8 million of their
loans for a new secured exchange debt obligation. The terms of the exchange
debt are substantially the same as the terms of our RCF and PCS credit
facilities and the interest rate is currently LIBOR plus 3.25%. The lenders of
the RCF and PCS credit facilities have the same collateral as they did with
respect to their loans under the credit facilities or demand note, as
applicable, and also received a first lien on our prescription files.
Upon consummation of the sale of PCS on October 2, 2000, we applied $575.0
million of the cash portion of the proceeds, to reduce the outstanding
balances of the PCS credit facility and the PCS exchange debt. We pledged the
series A preferred stock and the senior subordinated notes of AdvancePCS to
the lenders under the PCS credit facility and RCF credit facility, and the
related exchange debt to secure our 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 exchange debt and, once this facility has been repaid in full, to repay
the then outstanding balance of the RCF credit facility and the RCF exchange
debt. At November 25, 2000 we had $1.6 billion of borrowings outstanding under
the PCS, RCF and related exchange debt facilities.
Synthetic Leases. As part of our restructuring, we amended our existing
guarantees of two synthetic lease transactions to provide substantially the
same terms as the terms of our RCF and PCS credit facilities.
Second Priority Collateral. In connection with modifications to the RCF and
PCS credit facilities, the guarantee of the Prudential note, the exchange for
exchange debt and the guarantees of the synthetic lease transactions,
substantially all of our wholly-owned subsidiaries guaranteed our obligations
thereunder on a second priority basis. These subsidiary guarantees are secured
by a second priority lien on the inventory, accounts receivable, intellectual
property and some of the real estate assets of the subsidiary guarantors.
Except to the extent previously secured, our direct obligations under those
facilities and guarantees remain unsecured.
Commercial Paper. Until September 24, 1999, we issued commercial paper
supported by unused credit commitments to supplement cash generated by
operations. Since the loss of our investment grade rating in fiscal 2000, we
are no longer able to issue commercial paper. Our outstanding commercial paper
amounted to $192.0 million at February 26, 2000. All remaining commercial
paper obligations were repaid in March 2000.
Debt Covenants. We were in compliance with the covenants of the senior
secured credit facility and our other credit facilities and debt instruments
as of November 25, 2000. With continuing improvements in operating
performance, we anticipate that we will remain in compliance with our debt
covenants during the remainder of fiscal 2001. However, variations in our
operating performance and unanticipated developments may adversely affect our
ability to remain in compliance with the applicable debt covenants. As we
monitor future performance and developments, we may, from time-to-time, pursue
modifications or waivers with respect to particular covenants as we deem
appropriate. Although we believe that our relations with principal lenders are
generally good, there can be no assurance that any such modifications or
waivers, if sought, would be obtained.
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. These financial
institutions purchased $16.7 million of the 5.5% notes and $20.4 million of
the 6.7% notes on July 27, 2000, and $53.8 million of the 5.5% notes on
September 13, 2000, and exchanged the purchased notes with the company for the
10.50% Senior
27
<PAGE>
Secured Notes due 2002. The remaining $77.0 million of 5.5% notes due in
December 2000 have been, and the remaining $7.8 million of the 6.7% notes due
December 2001, will be retired at maturity with general corporate funds and
the $2.3 million remaining commitment under the forward purchase agreement.
Exchange of Debt for Equity. In June 2000 a total of $284.8 million of
indebtedness under the RCF and PCS credit facilities and the demand note was
exchanged for common stock at a price of $5.50 per share. As a result of this
exchange, we recorded a gain of $11.4 million in second quarter of fiscal
2001.
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 recorded a loss
on extinguishment of $89.0 million in the second quarter of fiscal 2001.
On November 10, 2000, we issued 9.2 million shares of our common stock in
exchange for $79.9 million of our 5.25% convertible subordinated notes due
September 1, 2002 and $12.4 million of our dealer remarkable securities due
October 1, 2003. As a result of these exchanges, we recorded a net loss on
extinguishment of $8.3 million in the third quarter of fiscal 2001.
Net Cash Used in Operating, Investing and Financing Activities
We used $768.0 million of cash to fund operations in the thirty-nine weeks
ended November 25, 2000. In addition to operating losses, operating cash flow
was negatively impacted by $300.0 million that was used to repurchase accounts
receivable when the accounts receivable securitization facility was
terminated. Operating cash flow was also negatively impacted by $397.7 million
in interest payments and by seasonal inventory builds, partially offset by an
increase in accounts payable.
In the thirty-nine weeks ended November 27, 1999, cash used by operations
was $572.5 million. Seasonal inventory builds and decreases in accrued
liabilities and accounts payable negatively impacted operating cash flow.
Cash provided by investing activities was $683.7 million for the thirty-nine
weeks ended November 25, 2000. Cash used in investing activities was $449.6
million for the thirty-nine weeks ended November 27, 1999. Cash used for store
construction and relocations amounted to $78.9 million and $508.3 million for
the thirty-nine weeks ended November 25, 2000 and November 27, 1999,
respectively. In addition, cash of $24.5 million was used to acquire the
assets of Edgehill in fiscal 2000.
Working Capital
Net working capital was $1,480.2 million at November 25, 2000, compared to
$720.0 million at February 26, 2000. The increase in working capital is
primarily due to the repurchase of securitized accounts receivable and
seasonal inventory build-up. The current ratios were 1.73% and 1.31%,
respectively.
Capital Expenditures
We plan capital expenditures of approximately $125.0 million to $150.0
million during fiscal 2001. Such expenditures consist of approximately $60.0
million to $85.0 million related to new store construction, store relocation
and other store construction projects. An additional $40.0 million to $50.0
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. We expect 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. During the thirty-nine weeks ended November 25, 2000, the
company spent $78.9 million on capital expenditures.
Future Liquidity
We are highly leveraged. Our high level of indebtedness: (a) limits our
ability to obtain additional financing; (b) limits our flexibility in planning
for, or reacting to, changes in our business and the industry; (c) places us
at
28
<PAGE>
a competitive disadvantage relative to our competitors with less debt; (d)
renders us more vulnerable to general adverse economic and industry
conditions; and (e) requires us to dedicate a substantial portion of our cash
flow to service our debt. Based upon current levels of operations and planned
improvements in our operating performance, management believes that cash flow
from operations together with available borrowing under the senior secured
credit facility and its other sources of liquidity will be adequate to meet
its anticipated annual requirements for working capital, debt service and
capital expenditures through the end of fiscal 2001. We will continue to
assess our liquidity position and potential sources of supplemental liquidity
in light of the company's operating performance and other relevant
circumstances. Should the company determine, at any time, that it is necessary
to seek additional short-term liquidity, we will evaluate our alternatives and
take appropriate steps to obtain sufficient additional funds. Obtaining any
such supplemental liquidity through the increase of indebtedness or asset
sales would require the consent of the lenders under one or more of our debt
agreements. There can be no assurance that any such supplemental funding, if
sought, could be obtained or that our lenders would provide the necessary
consents.
On a longer-term basis, after applying the proceeds from the sale of PCS,
approximately $2.3 billion of our indebtedness will mature in August 2002,
including the revolving credit facility under the new senior secured credit
facility. 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 liquidity and our ability to
execute our long term strategy, see the items discussed under "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Factors Affecting Our Future Prospects" in our Annual Report on Form 10K/A.
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
cumulative effect of the accounting change for periods prior to fiscal 2000
was a charge of $27.3 million (net of income tax benefit of $18.2 million), or
$0.11 per diluted common share. The effect of this accounting change was a
reduction in income of $5,130 (net of income tax effect of $3,420), or $0.02
per diluted common share for the thirty-nine weeks ended November 27, 1999.
Recent Accounting Pronouncements
In November 1999, the Staff of the SEC issued Staff Accounting Bulletin
(SAB) 101, "Revenue Recognition." This SAB sets forth the Staff's position
regarding the point at which it is appropriate for a Registrant to recognize
revenue. The Staff believes that revenue is realizable and earned when all of
the following criteria are met:
. persuasive evidence of an arrangement exists;
. delivery has occurred or service has been rendered;
.the seller's price to the buyer is fixed or determinable; and
. collectibility is reasonably assured.
We use the above criteria to determine whether revenue can be recognized,
and therefore believe that the issuance of SAB 101 does not have a material
impact on our financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). This statement,
which establishes the accounting and financial reporting requirements for
derivative instruments, requires companies to recognize derivatives as either
assets or liabilities on the balance sheet and measure those instruments at
fair value. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative
29
<PAGE>
Instruments and Certain Hedging Activities", an amendment of SFAS No. 133.
These statements, as amended, are effective in fiscal 2002. We are evaluating
the effects that the adoption of SFAS Nos. 133 and 138 may have on the
consolidated financial statements.
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and
industry, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Our Future Prospects"
in our Form 10-K/A for the 2000 fiscal year, filed with the SEC on October 11,
2000.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Rite Aid's future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. The major
market risk exposure is changing interest rates. Increases in interest rates
would increase our interest expense. Since the end of fiscal 2000, our primary
risk exposure has not changed. Our company enters into debt obligations to
support capital expenditures, acquisitions, working capital needs and general
corporate purposes. Rite Aid'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 November 25, 2000.
<TABLE>
<CAPTION>
Fair Value
Fiscal Year at
--------------------------------------------------------- November 25,
2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ---------- -------- ----- ---------- ---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt,
including Current
portion
Fixed rate...... $76,379 $ 8,528 $1,863,854 $188,232 $ 377 $1,556,525 $3,693,895 $1,984,540
Average Interest
Rate........... 6.04% 6.91% 9.54% 6.01% 8.27% 7.17%
Variable Rate... $ 130 -- $1,324,289 -- -- -- $1,324,419 $1,324,419
Average Interest
Rates.......... 3.25% -- 10.10% -- -- -- -- --
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt,
including Current
portion
Fixed rate......
Average Interest
Rate...........
Variable Rate...
Average Interest
Rates..........
</TABLE>
In June 2000, the company 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 the
company's variable-rate debt at 7.083% for a two-year period. In July 2000,
the company 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. The variable rate debt that had interest rates fixed by the
two interest rate swaps were included with fixed rate debt in the above table.
As of November 25, 2000, 26.4% of the company's total debt is exposed to
fluctuations in variable interest rates.
Our ability to satisfy 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 January 9, 2001, the company had three credit facilities: the $1.1
billion senior secured credit facility entered into on June 14, 2000 and
amended on November 6, 2000, the RCF credit facility and the PCS credit
facility. In addition, it had fixed-rate obligations in the amount of $4.8
billion, including $1.1 billion of lease
30
<PAGE>
financing obligations, and exchange debt in the amount of $219.5 million. In
March 2000, all remaining commercial paper obligations were repaid. The
ratings on these credit facilities and obligations were as follows: the $1.0
billion RCF facility: B- by Standard and Poor's and Caa1 by Moody's; the $1.1
billion senior secured credit facility: BB- by Standard & Poor's and B1 by
Moody's; the $1.3 billion PCS facility: B- by Standard & Poor's and Caa1 by
Moody's; the fixed-rate obligations: B- by Standard & Poor's and Caa3 by
Moody's; and the exchange debt is not rated yet. The interest rates on the
variable-rate borrowings are as follows: the $1.0 billion RCF facility: LIBOR
plus 3.75%, the $1.1 billion senior secured credit facility: LIBOR plus 3.00%,
and the $1.3 billion PCS facility and the exchange debt: LIBOR plus 3.25%.
31
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The following is a description of all material developments of legal
proceedings in the thirteen weeks ended November 25, 2000. For a complete
description of all material legal proceedings, see our Form 10-K/A for the
year ended February 26, 2000 and our Form 10-Q for the 13 weeks ended August
26, 2000.
On November 2, 2000, the United States Court of Appeals for the Eleventh
Circuit affirmed the action of the United States District Court for the
Northern District of Alabama dismissing the federal RICO claims asserted in a
purported class action lawsuit alleging that certain of Rite Aid's non-uniform
pricing practices for cash prescription purchases were unlawful.
On October 5, 2000, we settled, for an insubstantial amount, and without
admitting any violation of law, allegation by the Attorney General of Florida
that our non-uniform pricing policy for cash prescription purchases was
unlawful under Florida law.
On November 9, 2000, we announced that we had reached an agreement to settle
the consolidated securities class action lawsuits pending against it in the
U.S. District Court for the Eastern District of Pennsylvania and the
derivative lawsuits pending there and in the U.S. District Court for Delaware.
Under the agreement, which must be approved by the Courts, we will pay $45
million in cash, which will be fully funded by our officers' and directors'
liability insurance, and issue shares of common stock in 2002. The shares will
be valued over a 10-day trading period in January 2002. If the value
determined is at least $7.75 per share, we will issue 20 million shares. If
the value determined is less than $7.75 per share, we have the option to
deliver any combination of common stock, cash and short-term notes, with a
total value of $155 million. As additional consideration for the settlement,
we have assigned to the plaintiffs all of our claims against three former
executives--Martin Grass, former chairman and chief executive officer; Timothy
Noonan, former president and chief operating officer; and Frank Bergonzi,
former chief financial officer-and all of our claims against our former
outside auditors, KPMG LLP.
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the
thirteen-week period ended November 25, 2000.
ITEM 5. Other Information
Not applicable.
32
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
10 Form of Amendment No. 1, dated as of November 6, 2000, to the Senior
Credit Agreement, dated as of June 12, 2000, among Rite Aid
Corporation, the 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 (incorporated by reference to Exhibit 10 of our
Form 8-K filed with the Commission on November 13, 2000).
11 Statements re Computation of Per Share Earnings (See Note 2 to the
condensed consolidation financial statements)
</TABLE>
(b) Rite Aid Corporation has filed the following Current Report on Form 8-K
in the thirteen-week period ended November 25, 2000:
Rite Aid Corporation filed a Current Report on Form 8-K on November 13, 2000
disclosing under Item 5 an amendment of the bylaws of Rite Aid Corporation; an
amendment to the Senior Credit Agreement, originally dated as of June 12,
2000; a press release announcing an agreement to settle consolidated
securities class action lawsuits; and an agreement to exchange common stock
for outstanding debt.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 9, 2001 RITE AID CORPORATION
/s/ Elliot S. Gerson
By: _________________________________
Elliot S. Gerson
Senior Executive
Vice President and
General Counsel
Date: January 9, 2001
/s/ John T. Standley
By: _________________________________
John T. Standley
Senior Executive
Vice President and Chief
Financial Officer
33
