UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 1, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From _____ To _____
Commission File Number 1-5742
RITE AID CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 23-1614034
incorporation or organization) (I.R.S. Employer
30 Hunter Lane, Identification No.)
Camp Hill, Pennsylvania 17011
(Address of principal executive offices) (Zip Code)
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 515,957,766 shares of its $1.00 par value common
stock outstanding as of September 29, 2001.
RITE AID CORPORATION
TABLE OF CONTENTS
Page
Cautionary Statement Regarding Forward Looking Statements 1
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 1, 2001 and March 3, 2001 2
Condensed Consolidated Statements of Operations
for the Thirteen Week Periods Ended September 1,
2001 and August 26, 2000 3
Condensed Consolidated Statements of Operations
for the Twenty-Six Week Periods Ended September
1, 2001 and August 26, 2000 4
Condensed Consolidated Statement of Stockholders'
Equity (Deficit) for the Twenty-Six Week
Period Ended September 1, 2001 5
Condensed Consolidated Statements of Cash Flows
for the Twenty-Six Week Periods Ended
September 1, 2001 and August 26, 2000 6
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 28
ITEM 2. Changes in Securities and Use of Proceeds 28
ITEM 3. Defaults Upon Senior Securities 30
ITEM 4. Submission of Matters to a Vote of Security Holders 30
ITEM 5. Other Information 31
ITEM 6. Exhibits and Reports on Form 8-K 31
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 our future prospects, developments and business
strategies.
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:
o our high level of indebtedness;
o 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;
o our ability to improve the operating performance of our existing
stores, and, in particular, our new and relocated stores in
accordance with our management's long term strategy;
o the outcomes of pending lawsuits and governmental investigations,
both civil and criminal, involving our financial reporting and
other matters;
o competitive pricing pressures, continued consolidation of the
drugstore industry;
o third-party prescription reimbursement levels and regulatory
changes governing pharmacy practices;
o general economic conditions, inflation and interest rate
movements;
o merchandise supply constraints or disruptions;
o access to capital; and
o our ability to further develop, implement and maintain reliable
and adequate internal accounting systems and controls.
We undertake no obligation to revise the forward-looking statements
included in this report to reflect any future events or circumstances. Our
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 Prospects" included in this
quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the
fiscal year ended March 3, 2001 ("the Fiscal 2001 10-K"), which was filed with
the Securities and Exchange Commission ("SEC") on May 21, 2001 and is available
on the SEC's website at www.sec.gov.
1
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)
September 1,
2001 March 3, 2001
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 109,140 $ 92,290
Accounts receivable, net 559,275 503,527
Inventories, net 2,562,561 2,444,525
Investment in AdvancePCS -- 491,198
Prepaid expenses and other current assets 86,542 85,292
----------- -----------
Total current assets 3,317,518 3,616,832
PROPERTY, PLANT AND EQUIPMENT, NET 2,313,772 3,041,008
GOODWILL AND OTHER INTANGIBLES, NET 1,009,842 1,067,339
OTHER ASSETS 193,152 188,732
----------- -----------
Total assets $ 6,834,284 $ 7,913,911
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt and current maturities of
long-term debt and lease
financing obligations $ 32,706 $ 36,956
Accounts payable 1,022,456 896,390
Sales and other taxes payable 47,961 31,562
Accrued salaries, wages and
other current liabilities 809,175 696,047
----------- -----------
Total current liabilities 1,912,298 1,660,955
CONVERTIBLE SUBORDINATED NOTES 152,010 357,324
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,342,227 4,428,871
LEASE FINANCING OBLIGATIONS, LESS CURRENT MATURITIES 212,483 1,071,397
OTHER NONCURRENT LIABILITIES 742,600 730,342
----------- -----------
Total liabilities 6,361,618 8,248,889
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK 19,510 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $1 per share 347,342 333,974
Common stock, par value $1 per share 515,939 348,055
Additional paid-in capital 3,166,207 2,065,301
Accumulated deficit (3,634,160) (3,171,956)
Stock-based and deferred compensation 58,450 19,782
Accumulated other comprehensive (loss) income (622) 50,409
----------- -----------
Total stockholders' equity (deficit) 453,156 (354,435)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 6,834,284 $ 7,913,911
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Thirteen Week Period Ended
----------------------------
September 1, August 26,
2001 2000
----------- -----------
REVENUES $ 3,691,074 $ 3,439,469
COSTS AND EXPENSES:
Costs of goods sold, including occupancy costs 2,872,390 2,630,258
Selling, general and administrative expenses 809,949 855,082
Goodwill amortization 5,280 5,627
Store closing and impairment charges 22,105 88,292
Interest expense 102,377 182,108
Interest rate swap contracts market value adjustment 31,047 --
Loss on debt and lease conversions and modifications, net 21,882 83,789
Share of loss from equity investment 4,512 12,496
(Gain) loss on sale of assets and investments, net (1,636) 6,850
----------- -----------
3,867,906 3,864,502
----------- -----------
Loss from continuing operations before income taxes (176,832) (425,033)
INCOME TAX EXPENSE 2,500 --
----------- -----------
Loss from continuing operations before extraordinary item (179,332) (425,033)
DISCONTINUED OPERATIONS, estimated loss on disposal of the PBM
segment (net of income tax benefit of $23,484) -- (31,433)
----------- -----------
Net loss before extraordinary item (179,332) (456,466)
EXTRAORDINARY ITEM, loss on early extinguishment of debt (net of
income taxes of $0) (66,589) --
----------- -----------
NET LOSS $ (245,921) $ (456,466)
=========== ===========
BASIC AND DILUTED (LOSS) PER SHARE:
Loss from continuing operations $ (0.40) $ (1.87)
Loss from discontinued operations -- (0.10)
Loss from extraordinary item (0.14) --
----------- -----------
Net loss per share $ (0.54) $ (1.97)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Twenty-Six Week Period Ended
-----------------------------
September 1, August 26,
2001 2000
----------- -----------
REVENUES $ 7,401,207 $ 6,881,655
COSTS AND EXPENSES:
Costs of goods sold, including occupancy costs 5,713,130 5,264,711
Selling, general and administrative expenses 1,667,999 1,706,965
Goodwill amortization 10,623 11,701
Store closing and impairment charges 21,741 104,437
Interest expense 231,066 353,483
Interest rate swap contracts market value adjustment 31,047 --
Loss on debt and lease conversions and modifications, net 154,595 83,789
Share of loss from equity investment 10,395 24,070
(Gain) loss on sale of assets and investments, net (51,455) 16,526
----------- -----------
7,789,141 7,565,682
----------- -----------
Loss from continuing operations before income taxes (387,934) (684,027)
INCOME TAX EXPENSE 2,500 144,382
----------- -----------
Loss from continuing operations before extraordinary item (390,434) (828,409)
DISCONTINUED OPERATIONS:
Income from discontinued operations (net of income tax expense
of $13,846) -- 11,335
Estimated loss on disposal of the PBM segment (net of income tax
benefit of $734) -- (334,763)
----------- -----------
Net loss before extraordinary item (390,434) (1,151,837)
EXTRAORDINARY ITEM, loss on early extinguishment of debt (net of
income taxes of $0) (66,589) --
----------- -----------
NET LOSS $ (457,023) $(1,151,837)
=========== ===========
BASIC AND DILUTED (LOSS) PER SHARE:
Loss from continuing operations $ (0.95) $ (3.48)
Loss from discontinued operations -- (1.12)
Loss from extraordinary item (0.15) --
----------- -----------
Net loss per share $ (1.10) $ (4.60)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Twenty-Six Week Period Ended September 1, 2001
(Dollars and share information in thousands)
(unaudited)
Stock-Based Accumulated
Preferred Stock Common Stock Additional and Other
------------------- -------------------- Paid-in Accumulated Deferred Comprehensive
Shares Class B Shares Issued Capital Deficit Compensation Income/(Loss) Total
--------- -------- --------- --------- ----------- ----------- ----------- ------------- -----------
BALANCE
MARCH 3, 2001 3,340 $333,974 348,055 $348,055 $2,065,301 $(3,171,956) $19,782 $50,409 $(354,435)
Net loss (457,023) (457,023)
Other
comprehensive
loss:
Sale of
investment in
AdvancePCS (51,031) (51,031)
Cash flow
hedge
transition
liability
adjustment (29,010) (29,010)
Cash flow
hedge market
value
adjustment (2,037) (2,037)
Elimination
of cash flow
hedge
accounting 31,047 31,047
-----------
Comprehensive
loss (508,054)
Bond
conversions 86,386 86,386 649,797 736,183
Issuance of
common stock 80,083 80,083 448,321 528,404
Issuance of
common stock
warrants 982 982 8,018 9,000
Preferred
stock
conversion
reset (5,181) 5,181 ---
Accretion of
convertible
preferred
stock 5,181 (5,181) ---
Deferred
compensation
plans 88 88 659 38,604 39,351
Stock options
exercised 374 374 1,640 2,014
Stock
forfeitures (29) (29) (53) 64 (18)
Dividends on
preferred
stock 133 13,368 (13,368) ---
Increase
resulting
from sale of
stock by
equity method
investee 711 711
--------- -------- --------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE
SEPTEMBER 1,
2001 3,473 $347,342 515,939 $515,939 $3,166,207 $(3,634,160) $58,450 $(622) $453,156
========= ======== ========= ========= =========== =========== =========== =========== ===========
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Twenty-Six Week Period Ended
----------------------------
September 1, August 26,
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (457,023) $(1,151,837)
Extraordinary loss 66,589 --
Income from discontinued operations -- (11,335)
Loss on disposal of discontinued operations -- 334,763
----------- -----------
Loss from continuing operations (390,434) (828,409)
Adjustments to reconcile to net cash used in operations:
Depreciation and amortization 180,176 188,601
Store closing and impairment charges 21,741 104,437
Non cash stock-charge 42,247 4,481
Interest rate swap contracts market value adjustment 31,047 --
Loss on debt and lease conversions and modifications, net 154,595 83,789
(Gain) loss on sale of assets and investments, net (51,455) 16,526
Changes in operating assets and liabilities (36,238) (131,460)
----------- -----------
NET CASH USED IN CONTINUING OPERATIONS (48,321) (562,035)
----------- -----------
NET CASH USED IN DISCONTINUED OPERATIONS -- (9,799)
----------- -----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (127,300) (59,930)
Proceeds from the repayment/sale of AdvancePCS securities 484,214 --
Intangible assets acquired (4,900) (3,300)
Proceeds from dispositions 12,684 43,000
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 364,698 (20,230)
----------- -----------
FINANCING ACTIVITIES:
Principal payments on long-term debt (2,134,435) (1,440,793)
Proceeds from the issuance of the senior credit facility 1,378,462 --
Net (payments) of commercial paper borrowings -- (192,000)
Deferred financing costs paid (73,972) (64,544)
Net proceeds from bank loans -- 2,181,724
Proceeds from issuance of stock 530,418 --
Other financing activities, net -- 215
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (299,527) 484,602
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,850 (107,462)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,290 179,757
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 109,140 $ 72,295
=========== ===========
6
SUPPLEMENTARY CASH FLOW DATA:
Cash paid:
Interest (net of capitalized amounts of $0 and $671) $ 250,070 $ 280,293
=========== ===========
Income tax refunds (payments) $ (7,675) $ 86,767
=========== ===========
Non-cash investing and financing activities:
Conversion of debt to common stock $ 588,711 $ 462,610
=========== ===========
Conversion of debt to debt $ 152,025 $ 411,442
=========== ===========
Components of conversion of leases from capital to operating:
Reduction in leased assets, net $ 704,191 --
=========== ===========
Reduction in lease financing obligations $ 850,792 --
=========== ===========
Increase in deferred gain $ 168,483 --
=========== ===========
See accompanying notes to condensed consolidated financial statements.
7
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen and Twenty-Six Week
Periods Ended September 1, 2001, and August 26, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X and therefore do not include all of the information
and footnotes required by generally accepted accounting principles for complete
annual financial statements. 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 twenty-six week periods ended September 1, 2001
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 2001 Annual Report on Form 10-K filed with the SEC.
Certain reclassifications have been made to prior years' amounts to
conform to current year classifications.
2. Loss Per Share
Following is a summary of the components of the numerator and
denominator of the basic loss per share computation:
Thirteen Week Period Ended Twenty-Six Week Period Ended
-------------------------------- -----------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Numerator for earnings per share:
Loss from continuing operations $ (179,332) $ (425,033) $ (390,434) $ (828,409)
Preferred stock beneficial conversion
and reset (5,181) (160,915) (5,181) (160,915)
Cumulative preferred stock dividends (6,688) (6,442) (13,368) (12,403)
----------- ----------- ----------- -----------
Net loss from continuing operations
attributable to common stockholders (191,201) (592,390) (408,983) (1,001,727)
Total loss from discontinued operations
--- (31,433) --- (323,428)
Extraordinary item, loss on early
extinguishment of debt (66,589) --- (66,589) ---
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders $ (257,790) $ (623,823) $ (475,572) $(1,325,155)
=========== =========== =========== ===========
Denominator:
Basic weighted average shares 477,464 316,111 432,390 288,093
=========== =========== =========== ===========
Fully diluted loss per share is not presented as the Company incurred
losses for the thirteen and twenty-six week periods ended September 1, 2001 and
August 26, 2000 and the amount would be antidilutive. At September 1, 2001, an
aggregate of 147,268 potential common shares related to stock options,
convertible notes, preferred stock,
8
warrants and shares committed to be issued in connection with the settlement of
certain litigation, have been excluded from the computation of diluted earnings
per share.
3. Business Segments
The Company operated in a single business segment during the twenty-six
week period ended September 1, 2001, the Retail Drug segment. This segment
consists of the operation of retail drugstores across the United States. The
drugstores' primary business is pharmacy services, with prescription drugs
accounting for approximately 61.3% percent and 59.6% percent of total segment
sales for the twenty-six week periods ended September 1, 2001 and August 26,
2000, 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 in two business segments in the twenty-six week
period ended August 26, 2000, the Retail Drug segment and the PBM segment.
Through its PBM segment, which consisted primarily of PCS Health Systems, Inc.
("PCS"), 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.
(now known as "AdvancePCS"). 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. Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary, PCS,
to AdvancePCS. The proceeds from the sale of PCS consisted of $710,557 in cash,
$200,000 in principal amount of AdvancePCS's unsecured 11% senior subordinated
notes and equity securities of AdvancePCS.
During March 2001, the Company sold the AdvancePCS equity securities
for $284,214 resulting in a gain of $53,214, which was recognized during the
thirteen week period ended June 2, 2001. The recognition resulted in a reduction
of other comprehensive income of $51,031, which represented the appreciation in
the market value of the equity securities from date of acquisition of the
securities through March 3, 2001. Additionally, AdvancePCS repurchased the
unsecured 11% senior subordinated notes for $200,000 plus accrued interest.
PCS is reported as a discontinued operation for the thirteen and
twenty-six week periods ended August 26, 2000, and the operating results of PCS
are reflected separately from the results of continuing operations.
As a result of the sale, the Company recorded an increase to the tax
valuation allowance and income tax expense of $146,917 in the twenty-six week
period ended August 26, 2000.
5. Store Closing and Impairment Charges
Store closing and impairment charges (credits) consist of:
Thirteen Week Period Ended Twenty-six Week Period Ended
---------------------------------- -----------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
--------------- ------------- ---------------- --------------
Impairment charges $ 8,690 $ 17,922 $ 16,583 $ 25,824
Store and equipment lease exit charges
(credits) 13,415 (6,875) 4,847 1,368
Impairment of other assets --- 77,245 311 77,245
--------------- ------------- ---------------- --------------
$ 22,105 $ 88,292 $ 21,741 $ 104,437
=============== ============= ================ ==============
Impairment Charges
9
Impairment charges include non-cash charges of $4,490 and $17,922 for
the thirteen week periods ended September 1, 2001 and August 26, 2000,
respectively, for the impairment of long-lived assets (including allocable
goodwill) at 13 and 60 stores, respectively. Impairment charges include non-cash
charges of $12,383 and $25,824 for the twenty-six week periods ended September
1, 2001 and August 26, 2000, respectively, for the impairment of long-lived
assets (including allocable goodwill) at 30 and 102 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.
Also included in impairment charges for the thirteen and twenty-six weeks ended
September 1, 2001 are approximately $4,200 of costs related to software.
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
thirteen week period ended August 26, 2000, the Company recorded an impairment
of its investment in drugstore.com's stock of $77,245 that the Company believes
to be other-than-temporary.
Store and Equipment 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. This
liability is discounted using a risk-free rate of interest. The Company
evaluates these assumptions at each interim period and adjusts the liability
accordingly. During the thirteen week periods ended September 1, 2001 and August
26, 2000 the Company recorded a provision for 26 and 16 stores, respectively,
that were designated for closure. During the twenty-six week periods ended
September 1, 2001 and August 26, 2000, the Company recorded a provision for 33
and 34 stores, respectively, that were designated for closure. Also included in
this line are charges of approximately $1,300 incurred in the thirteen weeks
ended September 1, 2001, related to the early termination of an equipment lease.
The reserve for store and equipment lease exit costs includes the
following activity:
Thirteen Week Period Ended Twenty-six Week Period Ended
-------------------------------- ----------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
-------------- ------------- ---------------- --------------
Balance --- beginning of period $ 216,961 $ 213,706 $ 233,008 $ 212,812
Provision for present value of
noncancellable lease payments of
stores designated to be closed 18,474 8,952 21,565 28,309
Changes in assumptions about future
sublease income, terminations, and
changes in interest rates (1,949) (12,843) (10,093) (19,609)
Reversals of reserves for stores that
management has determined
will remain open (3,110) (2,984) (6,625) (7,332)
Interest accretion 2,350 3,021 4,683 5,724
Cash payments, net of sublease income (12,901) (9,795) (22,713) (19,847)
-------------- ------------- ---------------- --------------
Balance --- end of period $ 219,825 $ 200,057 $ 219,825 $ 200,057
============== ============= ================ ==============
6. Indebtedness, Credit Agreements and Lease Financing Obligations
10
Following is a summary of indebtedness and lease financing obligations
at September 1, 2001 and March 3, 2001:
September 1, 2001 March 3, 2001
---------------------------------------------------
Secured Debt:
Senior secured credit facility ("SCF") $ 1,378,462 $ ---
Senior facility --- 682,000
Revolving Credit Facility due 2002 ("RCF") --- 730,268
Term loan due 2002 ("PCS") --- 591,391
Exchange debt --- 216,126
10.5% senior secured notes due 2002 21,879 467,500
12.5% senior secured notes due 2006 143,311 ---
Other 11,977 12,447
--------------------- ------------------------
1,555,629 2,699,732
Lease Financing Obligations 224,180 1,100,000
Unsecured Debt:
6.7% notes due 2001 7,342 7,342
5.25% convertible subordinated notes due 2002 152,010 357,324
6.0% dealer remarketable securities due 2003 107,765 187,650
6.0% fixed-rate senior notes due 2005 194,500 194,500
7.625% senior notes due 2005 198,000 198,000
7.125% notes due 2007 350,000 350,000
6.125% fixed-rate senior notes due 2008 150,000 150,000
11.25% notes due 2008 150,000 ---
6.875% senior debentures due 2013 200,000 200,000
7.7% notes due 2027 300,000 300,000
6.875% fixed-rate senior notes due 2028 150,000 150,000
--------------------- ------------------------
1,959,617 2,094,816
--------------------- ------------------------
Total debt 3,739,426 5,894,548
Short-term debt, current maturities of long-term debt and
lease financing obligations (32,706) (36,956)
--------------------- ------------------------
Long-term debt and lease financing obligations, less current
maturities $ 3,706,720 $ 5,857,592
===================== ========================
On June 27, 2001, the Company completed a major financial restructuring
that extended the maturity dates of the majority of its debt to 2005 or beyond,
provided additional equity and converted a portion of its debt to equity. These
transactions are described below:
New Senior Secured Credit Facility: The Company entered into a new
$1,900,000 senior secured credit facility with a syndicate of banks led by
Citicorp USA, Inc. as senior agent. The new facility matures on June 27, 2005
unless more than $20,000 of the 7.625% senior notes due April 15, 2005 are
outstanding on December 31, 2004, in which event the maturity date is March 15,
2005. The new facility consists of a $1,400,000 term loan facility and a
$500,000 revolving credit facility. The term loan was used to repay the
outstanding balances of the old senior facility, PCS facility, RCF facility, the
Exchange Debt and all but $21,879 of the 10.5% senior secured notes due
September 2002. 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 3.5%, if the
Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 2.5%.
The Company is required to
11
pay fees of 0.50% per annum on the daily unused amount of the revolving
facility. Amortization payments of $5,000 related to the term loan begin March
2, 2002, increasing to $7,500 for the quarters ending May 31, 2002 through
August 31, 2003 and $15,000 for the quarters ending November 30, 2003 through
February 26, 2005.
Substantially all of Rite Aid Corporation's wholly owned subsidiaries
guarantee the obligations under the senior secured credit facility. The
subsidiary guarantees are secured by a first priority lien on the inventory,
accounts receivable, prescription files, intellectual property and some real
estate assets of the subsidiary guarantors. Rite Aid Corporation is a holding
company with no direct operations and is dependent upon dividends and other
payments from its subsidiaries to service payments due under the senior secured
credit facility. Rite Aid Corporation's obligations under the senior secured
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 senior secured credit facility has been amended to allow the
Company, at its option, to issue up to $643,000 of unsecured debt that is not
guaranteed by any subsidiaries of the Company, reduced by the following debt to
the extent incurred: (i) $150,000 of financing transactions of existing owned
real estate; (ii) $393,000 of additional debt secured by the facility's
collateral on a second priority basis; and (iii) $100,000 of financing
transactions for property or assets acquired after June 27, 2001. The $643,000
of permitted debt, whether secured or unsecured, is reduced by the aggregate
outstanding, undefeased balances of the 5.25% convertible subordinated notes and
the 6.0% dealer remarketable securities.
The senior secured credit facility requires the Company to meet various
financial ratios and limits capital expenditures. Beginning with the nine months
ending December 1, 2001, the covenants require the Company to maintain a maximum
leverage ratio of 8.25:1 decreasing to 3.5:1 for the twelve months ending May
31, 2005. The Company must also maintain a minimum interest coverage ratio of
1.25:1 for the nine months ending December 1, 2001, increasing to 2.8:1 for the
twelve months ending May 31, 2005 and a minimum fixed charge coverage ratio of
0.9:1 for the nine months ending December 1, 2001 increasing to 1.25:1 for the
twelve months ending May 31, 2005. Capital expenditures are limited to $200,000
annually beginning with the twelve months ending March 2, 2002. These
expenditure limits are subject to upward adjustment based upon availability of
excess liquidity as defined in the Company's senior secured credit facility.
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 $25,000 or more.
The Company's ability to borrow under the senior secured credit
facility is based on a specified borrowing base consisting of eligible accounts
receivable and inventory. At September 1, 2001, the term loan was fully drawn
except for $21,538, which is available and may be drawn to pay the remaining
outstanding 10.5% senior secured notes when they mature on September 15, 2002.
At September 1, 2001, the Company had no outstanding draws on the revolving
credit facility and the Company had additional available borrowing capacity of
$423,898, net of outstanding letters of credit of $76,102.
High Yield Notes: The Company issued $150,000 of 11.25% senior notes
due July 2008 in a private placement offering. These notes are unsecured and
subordinate to the secured debt of the Company. Among the transactions permitted
by the 11.25% senior notes to increase debt are transactions to finance existing
owned real estate not to exceed an aggregate $150,000 and $400,000 of other
debt. The 11.25% senior notes also allow for the senior secured credit facility
to be increased up to $2,500,000.
Debt for Debt Exchange: The Company exchanged $152,025 of its existing
10.5% senior secured notes due 2002 for an equal amount of 12.5% senior notes
due September 2006. In addition, holders of these notes received warrants to
purchase 3,000 shares of Company common stock at $6.00 per share. On June 29,
2001, the warrant holders exercised these warrants, on a cashless basis, and as
a result approximately 982 shares of common stock were issued.
Tender Offer: On May 24, 2001, the Company commenced a tender offer for
the 10.50% senior secured notes due 2002 at a price of 103.25% of the principal
amount of the notes. The tender offer was closed on June 27,
12
2001, at which time $174,462 principal amount of the notes was tendered. The
Company incurred a tender offer premium of $5,670 as a result of the
transaction, which is included as a component of the extraordinary loss. The
Company used proceeds from the new senior secured credit facility to pay for the
notes tendered.
Debt for Equity Exchanges and Sales of Capital Stock: The Company has
completed the following debt for equity exchanges during the twenty-six weeks
ended September 1, 2001.
Debt Exchanged Carrying Common Additional
Amount Stock Paid-In
Exchanged Capital
------------------------------------------------
PCS facility $ 14,478 $ 1,769 $ 13,867
RCF facility 169,906 26,370 158,388
5.25% convertible subordinated notes 205,308 29,750 307,686
6.00% dealer remarketable securities 79,885 12,382 55,633
10.50% notes due 2002 119,134 16,115 114,223
-------------- ------------ ------------
$ 588,711 $ 86,386 $ 649,797
============== ============ ============
In addition to the debt for equity exchange transactions listed above,
the Company sold approximately 80,083 shares of its common stock for net
proceeds of $528,404, which resulted in an increase to common stock of $80,083,
and additional paid in capital of $448,321.
The Company issued approximately 2,122 shares of its Series C
Convertible Preferred Stock in connection with the debt for equity exchanges.
The Series C Convertible Preferred Stock was converted into 21,217 shares of
common stock on July 30, 2001, at which time the Series C Convertible Preferred
Stock was retired.
As a result of the above exchanges, the Company recognized an aggregate
loss of $151,907 for the twenty-six week period ended September 1, 2001. The
amount of this loss related to the exchange of debt convertible into the
Company's common stock is $132,713, and is classified as a component of
operations. The remaining loss of $19,194 is classified as a component of the
extraordinary loss.
Lease Obligations: The Company surrendered certain renewal options
contained in certain real estate leases on property previously sold and leased
back to the Company and as a result these leases were afforded sale and
leaseback accounting treatment and, accordingly have been reclassified as
operating leases. This action resulted in a reduction of outstanding capital
lease obligations of $850,792. Accordingly, the Company recognized a loss of
$21,882 in the thirteen weeks ended September 1, 2001, and recorded a net
deferred gain of $168,483, which will be amortized over the remaining
noncancellable lease terms. In addition, the Company repaid certain obligations
totaling $16,467 related to leasehold improvements.
Synthetic Leases: The Company terminated existing synthetic lease
agreements for certain land, buildings, equipment and aircraft, which were
accounted for as operating leases. A wholly owned subsidiary of the Company
purchased the equipment for $82,604, and is leasing the land, buildings and
aircraft from different parties. The obligations under the new synthetic lease
for the land and buildings are secured by a first priority lien on the equipment
at the leased buildings owned by the Company's subsidiary. The Company has
guaranteed certain of the obligations of the subsidiary. The Company accounted
for these new leases as operating leases.
Guarantees: Substantially all of Rite Aid Corporation's wholly-owned
subsidiaries guarantee the obligations under the senior secured credit facility.
The subsidiary guarantees are secured primarily by a first priority lien on the
inventory, accounts receivable, prescription files, intellectual property and
some real estate assets of the subsidiary guarantors. Rite Aid Corporation is a
holding company with no direct operations and is dependent upon dividends and
other payments from its subsidiaries to service payments due under the senior
secured credit facility. Rite Aid Corporation's obligations under the senior
secured credit facility are unsecured. The $21,879 aggregate principal amount of
outstanding 10.5% senior secured notes are guaranteed by substantially all of
the Company's wholly-owned subsidiaries, which are secured on a shared first
priority basis with the new credit facility. The 12.5%
13
senior secured notes due 2006 are guaranteed by substantially all of the
Company's wholly-owned subsidiaries, and are secured on a second priority basis
by the same collateral as the new senior secured credit facility.
Interest Rate Swap Contracts: In June 2000, the Company entered into an
interest rate swap contract that fixes the LIBOR component of $500,000 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 $500,000 of variable rate debt at 6.946% for a
two-year period.
On March 4, 2001, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138. In connection with the adoption of the
new statement, the Company recorded $29,010 in Other Comprehensive Income
("OCI") as a cumulative change in accounting for derivatives designated as cash
flow type hedges prior to adopting SFAS 133. The Company enters into interest
rate swap agreements to hedge the exposure to increasing rates with respect to
its variable rate debt. These interest rate swap agreements were accounted for
as cash flow hedges upon the initial adoption of SFAS 133.
As a result of the June 27, 2001 refinancing, the Company's interest
rate swaps no longer qualify for hedge accounting treatment and therefore, the
changes in fair value of these interest rate swap contracts is required to be
recorded as a component of net loss. For the thirteen week period ended
September 1, 2001, the Company has recognized a charge of $31,047 representing
the amount that the Company would have to pay the counter party to terminate
these contracts.
Other: As a result of the above transactions, the Company has recorded
in the thirteen week period ended September 1, 2001 an extraordinary loss on
early extinguishment of debt of $66,589 (including $40,735 of deferred debt
issue costs written-off), loss on debt and lease conversions and modifications
of $21,882, a charge of $31,047 related to interest rate swap contracts and
deferred debt issue costs of $73,972.
In March 2001, the Company sold its investment in AdvancePCS. Proceeds
received from the sale were used to pay down $437,508 of borrowings under the
PCS loan, and $46,596 of borrowings under the Exchange Debt.
The aggregate annual principal payments of long-term debt and capital
lease obligations for the five succeeding fiscal years are as follows: 2002,
$11,838; 2003, $223,847; 2004, $166,248; 2005, $84,903; 2006, $1,653,557 and
$1,599,033 in 2007 and thereafter.
7. Stockholders' Equity (Deficit)
On June 27, 2001, the stockholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock, $1.00 par value, from 600,000 to 1,000,000.
During the twenty-six week period ended September 1, 2001, the Company
issued, as a dividend, 133 shares of 8% Series B cumulative pay-in-kind
preferred ("Series B preferred stock") at $100 per share, which is the
liquidation preference. The Series B Preferred Stock is convertible into shares
of the Company's common stock at a conversion price of $5.50 per share.
On October 3, 2001, the Company agreed to exchange all outstanding
shares of Series B preferred stock for an equal number of shares of 8% Series D
cumulative pay-in-kind preferred stock ("Series D preferred stock"). The Series
D preferred stock differs from the Series B preferred stock only in that the
consent of holders of the Series D preferred stock is not required in order for
the Company to issue shares of the Company's capital stock that are on parity
with the Series D preferred stock with respect to dividends and distributions
upon liquidation, distribution or winding up.
In November 2000, the Company reduced the exercise price of
approximately 16,684 stock options issued after December 4, 1999 to $2.75 per
share, which represents the fair market value of a share of common stock on the
date of the repricing. In connection with the repricing, the Company recognizes
compensation expense for these
14
options using variable plan accounting. Under variable plan accounting, the
Company recognizes compensation expense over the option vesting period. In
addition, subsequent changes in the market value of the Company's common stock
during the option period, or until exercised, will generate changes in the
compensation expense recognized on the repriced options. The Company recognized
expense (reduction of expense) of $(2,750) and 37,129 during the thirteen and
twenty-six week periods ended September 1, 2001, respectively, related to the
repriced options.
As of September 1, 2001, the stock-based and deferred compensation
component of stockholders' equity is comprised of $70,873 related to the
repriced options offset by $12,423 of deferred compensation.
On June 15, 2001, in connection with the granting of certain restricted
shares of common stock, the Company issued approximately $5,500 of loans to plan
participants, including officers, in order to cover the participants' federal
and state withholding taxes. The loans bear interest at 4.25% per annum and are
due and payable upon the earlier of June 15, 2002 or the date the participant
sells the underlying shares of common stock.
8. Commitments and Contingencies
The Company is party to numerous legal proceedings, as described below.
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. Management is cooperating fully
with the SEC and the United States Attorney. Settlement discussions have begun
with the United States Attorney for the Middle District of Pennsylvania. The
United States Attorney has proposed that the government would not institute any
criminal proceeding against the Company if the Company enters into a consent
judgement providing for a civil penalty payable over a period of years. The
amount of the civil penalty has not been agreed to and there can be no assurance
that a settlement will be reached or that the amount of such penalty will not
have a material adverse effect on the Company's results of operations, financial
condition or cash flows.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including the Company's
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. In January 2001, the Company appointed an independent
trustee to represent the interests of these plans in relation to the Company and
to investigate possible claims the plans may have against the Company. Both the
independent trustee and the Department of Labor have asserted that the plans may
have claims against the Company. The investigations, with which the Company is
cooperating fully, are ongoing and the Company cannot predict their outcomes. In
addition, a purported class action lawsuit on behalf of the plans and their
participants has been filed by a participant in the plans in the United States
District Court for the Eastern District of Pennsylvania.
These investigations and settlement discussions are ongoing and the
Company cannot predict their outcomes. If the Company were convicted of any
crime, certain licenses and government contracts such as Medicaid plan
reimbursement agreements that are material to operations may be revoked, which
would have a material adverse effect on the Company's results of operations,
financial condition or cash flows. In addition, substantial penalties, damages
or other monetary remedies assessed against the Company, including a settlement,
could also have a material adverse effect on the Company's results of
operations, financial condition or cash flows.
Stockholder litigation
The Company, certain directors, 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. Most of the complaints asserted
claims under Sections 10 and 20 of the Securities Exchange Act of 1934, based
upon the allegation that the Company's financial statements for fiscal 1997,
fiscal 1998 and fiscal 1999 fraudulently misrepresented the Company's financial
position and results of operation for those periods. 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 had reached an
agreement to settle the consolidated securities class action lawsuits pending
15
there and in the Delaware Court of Chancery. Under the agreement, the Company
will pay $45,000 in cash, which will be fully funded by the Company's 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 20,000
shares. 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 $155,000. As additional consideration for the
settlement, the Company has assigned to the plaintiffs all of the Company's
claims against the above named executives and KPMG LLP. On August 16, 2001, the
district court approved the settlement. Certain of the nonsettling defendants
have appealed the order. The Company cannot predict the outcome of that appeal.
If the settlement does not become final, this litigation could result in a
material adverse effect on the Company's results of operations, financial
condition or cash flows. Several members of the class have elected to "opt-out"
of the class and, as a result, approval of the settlement becomes final and they
will be free to individually pursue their claims. Management believes that their
claims, individually and in the aggregate, are not material.
A purported class action has been instituted by a stockholder against
the Company in Delaware state court on behalf of stockholders who purchased
shares of the Company's common stock prior to May 2, 1997, and who continued to
hold them after November 10, 1999, alleging claims similar to the claims alleged
in the consolidated securities class action lawsuits described above. The amount
of damages sought was not specified and may be material. The Company has filed a
motion to dismiss this claim which is pending before the court. These claims are
ongoing and the Company cannot predict their outcome. An unfavorable outcome
could result in a material adverse effect on the Company's results of
operations, financial condition or cash flows.
Drug pricing and reimbursement matters
On October 5, 2000, the Company settled, for an immaterial amount, and
without admitting any violation of the law, the lawsuit filed by the Florida
Attorney General alleging that the Company's non-uniform pricing policy for cash
prescription purchases was unlawful under Florida law. The filing of the
complaint by the Florida Attorney General, and the Company's press release
issued in conjunction therewith, precipitated an investigation by the New Jersey
Attorney General which is ongoing and the filing of a purported federal class
action in California and several purported state class actions, all of which
(other than one pending in New York that was filed on October 5, 1999) have been
dismissed. A motion to dismiss the action in New York is currently pending. On
May 30, 2001, a complaint filed in New Jersey in which the plaintiff made a
similar allegation and which the trial court dismissed for failing to state a
claim upon which relief could be based was reinstated by the appellate court.
Management believes that the remaining lawsuits are without merit under
applicable state consumer protection laws. As a result, the Company intends to
continue to vigorously defend against them and does not anticipate that if fully
adjudicated, they will result in an award of damages. However, such outcomes
cannot be assured and a ruling against the Company could have a material adverse
effect on the results of operations, financial position or cash flows of the
Company.
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. Management believes that these investigations are similar
to investigations, which were, and are being, undertaken with respect to the
practices of others in the retail drug industry. Management also believes that
the Company's existing policies and procedures fully comply with the
requirements of applicable law. An individual acting on behalf of the United
States of America has filed a lawsuit in the United States District Court for
the Eastern District of Pennsylvania under the Federal False Claims Act alleging
that the Company defrauded federal healthcare plans by failing to appropriately
issue refunds for partially filled prescriptions and prescriptions which were
not picked up by customers. The Department of Justice has advised the court that
it intends to join this lawsuit, as is its right under the law; its
investigation is continuing. The Company has filed a motion to dismiss the
complaint for failure to state a claim. The Company has reached a preliminary
agreement to settle these investigations and the lawsuit by the private
individual and recorded a charge in the thirteen weeks ended September 1, 2001
for $7,100. These claims are ongoing and if the preliminary settlement is not
finalized, the Company cannot predict their outcome. If any of these cases
result in a substantial monetary judgement against the Company, the Company's
results of operations, financial position or cash flows could be materially
adversely affected.
16
Store Management Overtime Litigation
The Company is a defendant in a class action pending in the California
Superior Court in San Diego with three subclasses, comprised of its California
store managers, assistant managers and managers-in-training. The plaintiffs seek
back pay for overtime not paid to them and injunctive relief to require the
Company to treat its store management as non-exempt. They allege that the
Company decided to minimize labor costs by causing managers, assistant managers
and managers-in-training to perform the duties and functions of associates for
in excess of forty hours per week without paying them overtime. Management
believes that in-store management were and are properly classified as exempt
from the overtime provisions of California law. On May 21, 2001, the Company
entered into a Memorandum of Agreement with the plaintiffs under which, subject
to approval of the court, the Company will settle this lawsuit for a maximum of
$25,000, for which a charge was recorded in fiscal 2000. The settlement amount
is payable in four equal installments of 25%, the first of which is payable upon
final court approval of the settlement and the balance is payable 6, 12 and 18
months thereafter. On June 1, 2001 the court entered an order granting
preliminary approval of the settlement and authorizing notice to the class.
Other
The Company, together with a significant number of major U.S.
retailers, have been sued by the Lemelson Foundation in a complaint which
alleges that portions of the technology included in the Company's point-of-sale
system infringe upon a patent held by the plaintiffs. The amount of damages
sought is unspecified and may be material. The Company cannot predict the
outcome of this litigation or whether it could result in a material adverse
effect on the Company's results of operations, financial condition or cash
flows.
The Company is subject from time to time to lawsuits arising in the
ordinary course of business. In the opinion of the Company's management, these
matters are adequately covered by insurance or, if not so covered, are without
merit or are of such nature or involve amounts that would not have a material
adverse effect on the Company's results of operations, financial condition or
cash flows if decided adversely.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Our long term operating strategy is to focus on improving the
productivity of our existing store base. We believe that improving the sales of
our existing stores is important to improving our future profitability and cash
flow. We also believe that the substantial investment made in our store base has
given us one of the most modern store bases in the industry. However, our store
base has not yet achieved the level of sales productivity that our major
competitors achieve. We intend to improve the performance of our existing stores
by continuing to (i) capitalize on the substantial investment in our stores and
distribution facilities; (ii) enhance our customer and employee relationships;
and (iii) improve the product offerings in our stores. Moreover, it is estimated
that pharmacy sales in the United States will increase more than 75% over the
next five years. This anticipated growth is expected to be fueled by the "baby
boom" generation entering their 50's, the increasing life expectancy of the
American population, the introduction of several new successful drugs and
inflation. We believe that this growth will help increase the sales productivity
of our existing store base.
We have initiated various programs that are designed to improve our
image with customers. These include our weekly distribution of a nationwide
advertising circular to announce vendor promotions, weekly sales items and, in
our expanded test markets, our customer reward program, "Rite Rewards." We have
also initiated programs that are specifically directed to our pharmacy business.
These include reduced cash prices and an increased focus on attracting and
retaining managed care customers. Through the use of technology and attention to
customers' needs and preferences, we are increasing our efforts to identify
inventory and product categories that will enable us to offer more personalized
products and services to our customers. We continue to develop and implement
employee training programs to improve customer service and educate our employees
about the products we offer. We are also developing employee programs that
create compensatory and other incentives for employees to provide customers with
quality service, to promote our private label brands and to improve our
corporate culture. We have also initiated a television advertising campaign.
We continue to add popular and profitable product departments, such as
our General Nutrition Companies, Inc. ("GNC") stores-within-Rite Aid-stores and
one-hour photo development departments. We continue to develop ideas for new
product departments and have begun to implement plans to expand the categories
of our front-end products. During fiscal 2001, we undertook several initiatives
to increase sales of our Rite Aid brand products and generic prescription drugs.
As private label and generic prescription drugs generate higher margins than
branded label, we expect that increases in the sales of these products would
enhance our profitability. We believe that the addition of new departments and
increases in offerings of products and services are integral components of our
strategy to distinguish us from other national drugstore chains.
Management believes that the following matters should be considered in
connection with the discussion of results of operations and financial condition:
Recent Actions. On June 27, 2001 we completed a major refinancing that
extended the maturity dates of the majority of our debt to 2005 or beyond,
provided additional equity, converted a portion of our debt for equity and
reclassified capital leases to operating leases. See "Liquidity and Capital
Resources - Refinancing" for further details.
Maturing Store Base. Since the beginning of fiscal 1997, we built 469
new stores, relocated 952 stores, remodeled 435 stores and closed 1,196 stores.
These new, relocated and remodeled stores represent approximately 50% of our
total stores at September 1, 2001. 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
18
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. We continue to incur substantial
expenses in connection with the process of defending us against various
shareholder actions and cooperation with the U.S. Attorney's Office in its
investigations. We incurred $9.0 million in the twenty-six week period ended
September 1, 2001 and we expect to incur an additional $3.0 million to $8.0
million over the remainder of fiscal 2002. We expect to continue to incur
significant legal and other expenses in connection with the ongoing litigation
and investigations to which we are subject.
Dilutive Equity Issuances. At September 1, 2001, 515.9 million shares
of common stock were outstanding and additional 147.3 million shares of common
stock were issuable related to outstanding stock options, convertible notes,
preferred stock, warrants and shares committed to be issued in connection with
the settlement of certain litigation. During the first and second quarters, we
issued 86.4 million shares of common stock in exchange for $588.7 million of
indebtedness. Certain transactions completed as part of our June 27, 2001
refinancing have further diluted the existing share base. See "Liquidity and
Capital Resources - Refinancing" for further details.
In light of our substantial leverage and liquidity constraints, we will
continue to consider opportunities to use our 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 our books and records in
connection with our fiscal 2000 audit, management concluded that further steps
were needed to establish and maintain the adequacy of our internal accounting
systems and controls. In connection with the audit of our financial statements,
Deloitte & Touche LLP advised us that it believed there were numerous
"reportable conditions" under the standards established by the American
Institute of Certified Public Accountants which relate to our accounting systems
and controls and could adversely affect our ability to record, process,
summarize and report financial data consistent with the assertions of management
in the financial statements. We are further developing and implementing
comprehensive, adequate and reliable accounting systems and controls which
address the reportable conditions identified by Deloitte & Touche LLP.
Working Capital. We generally finance our inventory and capital
expenditure requirements with internally generated funds and borrowings. We
expect to use borrowings to finance inventories and to support our continued
growth. Over 75% of our front-end sales are in cash. Third-party insurance
programs, which typically settle in fewer than 30 days, accounted for 91.9% of
our pharmacy sales in the twenty-six week period ended September 1, 2001.
Seasonality. We experience seasonal fluctuations in our results of
operations in the fourth quarter as the result of the seasonal nature of
Christmas and the flu season. We tailor certain front-end merchandise to
capitalize on holidays and seasons.
19
Results of Operations
Revenues and Other Operating Data
Thirteen Week Period Ended Twenty-six Week Period Ended
-------------------------------- ----------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
-------------- ------------- ---------------- --------------
Revenues $ 3,691,074 $ 3,439,469 $ 7,401,207 $ 6,881,655
Revenues growth 7.3% 7.4% 7.5% 4.9%
Same store sales growth 8.9% 9.9% 9.1% 8.0%
Pharmacy sales growth 9.8% 8.5% 10.2% 7.8%
Same store pharmacy sales growth 11.7% 10.9% 11.8% 10.3%
Pharmacy as a % of total sales 61.0% 59.0% 61.3% 59.6%
Third party sales as a % of total pharmacy
sales 92.0% 90.0% 91.9% 89.8%
Front-end sales growth 3.0% 5.5% 3.2% 2.0%
Same store front end sales growth 4.8% 8.5% 5.0% 4.8%
Front end sales as a % of total sales 39.0% 41.0% 38.7% 40.4%
Store data:
Total stores (beginning of period) 3,631 3,779 3,648 3,802
New stores --- 1 3 5
Closed stores (37) (13) (57) (40)
Store acquisitions, net --- -- --- --
Total stores (end of period) 3,594 3,767 3,594 3,767
Relocated stores 4 19 8 43
Revenues
The 7.3% and 7.5% growth in revenues for the thirteen and twenty-six
week periods ended September 1, 2001 were driven by front end sales growth of
3.0% and 3.2%, respectively and pharmacy sales growth of 9.8% and 10.2%,
respectively. Same store sales growth for the thirteen and twenty-six week
periods ended September 1, 2001 was 8.9% and 9.1%, respectively. As the prior
fiscal year was a 53 week year, same store sales for the thirteen and twenty-six
week periods ended September 1, 2001 are calculated by comparing that period
with the thirteen and twenty-six week periods ended September 2, 2000.
For the thirteen and twenty-six week periods ended September 1, 2001,
pharmacy sales led revenues growth with same-store sales increases of 11.7% and
11.8%, respectively. Pharmacy same store sales increases are due to both an
increase in prescriptions filled and sales price per prescription. Also
contributing to pharmacy same store sales increases is our ability to attract
and retain managed care customers, our successful pilot markets for reduced cash
pricing, our increased focus on pharmacy initiatives such as will call and
predictive refill, 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 includes all non-prescription sales such as
seasonal merchandise, convenience items and food, also had same store sales
growth in the thirteen and twenty-six week periods ended September 1, 2001,
increased 4.8% and 5.0%, respectively. The same store sales increase was
primarily a result of increased sales volume due to lowering prices on key
items, distributing a nationwide weekly advertising circular, expanding certain
product categories and improving general store conditions.
20
Costs and Expenses
Thirteen Week Period Ended Twenty-six Week Period Ended
-------------------------------- ----------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
-------------- ------------- ---------------- --------------
Cost of goods sold $ 2,872,390 $ 2,630,258 $ 5,713,130 $ 5,264,711
Gross profit 818,684 809,211 1,688,077 1,616,944
Gross margin 22.2% 23.5% 22.8% 23.5%
Selling, general and administrative
expenses 809,949 855,082 1,667,999 1,706,965
Selling, general and administrative
expenses as a percentage of revenues 21.9% 24.9% 22.5% 24.8%
Goodwill amortization 5,280 5,627 10,623 11,701
Store closing and impairment charges
(credits) 22,105 88,292 21,741 104,437
Interest expense 102,377 182,108 231,066 353,483
Interest rate swap contracts market value
adjustment 31,047 --- 31,047 ---
Loss on debt and lease conversions and
modifications, net 21,882 83,789 154,595 83,789
Share of loss from equity investment 4,512 12,496 10,395 24,070
(Gain) loss on sale of assets and
investments, net (1,636) 6,850 (51,455) 16,526
Cost of Goods Sold
Gross margin was 22.2% for the thirteen week period ended September 1,
2001 compared to 23.5% for the thirteen week period ended August 26, 2000. Gross
margin was negatively impacted by the continuing trend of increased third party
reimbursed prescription sales as a percent of total prescription sales, higher
shrink costs, and lower cash prices on pharmacy sales. 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 92.0% for the thirteen week period ended
September 1, 2001 compared to 90.0% for the thirteen week period ended August
26, 2000, respectively. Partially offsetting this trend was a reduction in
losses from product returns, and better leveraging of our fixed costs resulting
from our higher sales volume.
Gross margin was 22.8% for the twenty-six week period ended September
1, 2001, compared to 23.5% for the twenty-six week period ended August 26, 2000.
Gross margin was negatively impacted by the continuing trend of increased third
party reimbursed prescription sales as a percent of total prescription sales,
higher shrink costs, and lower cash prices on pharmacy sales. Partially
offsetting this trend was a reduction in loss for product returns, an
improvement in liquor margin and better leveraging of our fixed costs resulting
from our higher sales volume.
We use the last-in, first-out (LIFO) method of inventory valuation,
which is 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 $15.0 and $30.0 million
for the thirteen and twenty-six week periods ended September 1, 2001 versus $6.4
million and $11.6 million for the thirteen and twenty-six week periods ended
August 26, 2000.
21
Selling, General and Administrative Expenses
The selling, general and administrative expense (SG&A) for the thirteen
week period ended September 1, 2001 includes $5.6 million of expenses incurred
in connection with our defense against shareholder actions and assisting the
U.S. attorney's office in its investigation. Also included in SG&A expense for
the thirteen week period ended September 1, 2001, is an expense of $7.1 million
for the accrual of anticipated loss on certain legal matters. Offsetting these
amounts is $.8 million of non-cash income related to variable plan accounting on
certain management stock options, restricted stock grants, and stock
appreciation rights, and receipt of $24.1 million for the settlement of
litigation with certain drug manufacturers. Excluding these items results in an
adjusted SG&A as a percentage of revenues of 22.3% for the thirteen week period
ended September 1, 2001. SG&A for the thirteen week period ended August 26,
2000, includes $26.1 million of costs incurred with the restatement of our
historical financial statements, offset by the receipt of $12.3 million related
to the partial settlement of litigation with certain drug manufacturers.
Excluding these items results in an adjusted SG&A as a percentage of revenue of
24.5% for the thirteen week period ended August 26, 2000. SG&A exclusive of
these items in the thirteen week period of the current fiscal year of 22.3%
compares favorably to the adjusted 24.5% of the prior year's comparable period
because of decreased labor charges, decreased depreciation and amortization and
store expenses resulting from a reduced store count, and better leveraging of
our fixed costs resulting from our higher sales volume.
SG&A for the twenty-six week period ended September 1, 2001 includes
$9.0 million of expenses incurred in connection with our defense against
shareholder actions and assisting the U.S. attorney's office in their
investigation of former management. Also included in the SG&A expense for the
twenty-six week period ended September 1, 2001, is a net expense of $2.9 million
for the accrual of anticipated loss on certain legal matters and $42.2 million
of non-cash expense related to variable plan accounting on certain management
stock options, restricted stock grants and stock appreciation rights. Offsetting
these amounts are receipts of $39.1 million for the settlement of litigation
with certain drug manufacturers. Excluding these items, SG&A as a percentage of
revenues was 22.3% for the twenty-six week period ended September 1, 2001. SG&A
for the twenty-six week period ended August 26, 2000 includes $51.5 million of
costs incurred with the restatement our historical financial statements, offset
by a receipt of $12.3 million related to the partial settlement of litigation
with certain drug manufacturers. Excluding these items results in an adjusted
SG&A as a percentage of revenue of 24.2% in the twenty-six week period ended
August 26, 2000. SG&A exclusive of these items in the period of the current
fiscal year of 22.3% compares favorably to the adjusted 24.2% of the prior
year's comparable period because of decreased labor charges, decreased
depreciation and amortization and store expenses resulting from a reduced store
count, and better leveraging of our fixed costs resulting from our higher sales
volume.
22
Store Closing and Impairment Charges
Store closing and impairment charges (credits) consist of:
Thirteen Week Period Ended Twenty-six Week Period Ended
-------------------------------- ----------------------------------
September 1, August 26, September 1, August 26,
2001 2000 2001 2000
-------------- ------------- ---------------- --------------
Impairment charges $ 8,690 $ 17,922 $ 16,583 $ 25,824
Store and equipment lease exit charges
(credits) 13,415 (6,875) 4,847 1,368
Impairment of other assets --- 77,245 311 77,245
-------------- ------------- ---------------- --------------
$ 22,105 $ 88,292 $ 21,741 $ 104,437
============== ============= ================ ==============
Impairment Charges. Impairment charges include non-cash charges of $4.5
million and $17.9 million for the thirteen week periods ended September 1, 2001
and August 26, 2000, respectively, for the impairment of long-lived assets
(including allocable goodwill) at 13 and 60 stores, respectively. Impairment
charges include non-cash charges of $12.4 million and $25.8 million for the
twenty-six week periods ended September 1, 2001 and August 26, 2000,
respectively, for the impairment of long-lived assets (including allocable
goodwill) at 30 and 102 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. Included in
impairment charges for the thirteen week period ended September 1, 2001 are $4.2
million of costs related to software.
We have 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 thirteen
week period ended August 26, 2000, we recorded a write-down of $77.2 million of
our investment in drugstore.com. This write-down was based on a decline in the
market price of drugstore.com's stock that we believe is other than temporary.
Store and Equipment Lease Exit Costs. Charges 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. We calculate our
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. This liability is discounted using a risk-free rate of interest.
We evaluate these assumptions each quarter and adjust the liability accordingly.
During the thirteen week periods ended September 1, 2001 and August 26, 2000 we
recorded a provision for 26 and 16 stores, respectively, that were designated
for closure. During the twenty-six week periods ended September 1, 2001 and
August 26, 2000, we recorded a provision for 33 and 34 stores, respectively,
that were designated for closure. Also included in this line are charges of $1.3
million incurred in the thirteen weeks ended September 1, 2001, related to the
early termination of an equipment lease.
Interest Expense
Interest expense was $102.4 and $231.1 million for the thirteen and
twenty-six week periods ended September 1, 2001, compared to $182.1 and $353.5
million in the thirteen and twenty-six week periods ended August 26, 2000. The
decrease was primarily due to the reduction of debt resulting from the sale of
PCS, debt for equity exchanges and the refinancing. The weighted average
interest rates, excluding capital leases, on the company's indebtedness for the
thirteen week periods ended September 1, 2001 and August 26, 2000 were 8.1% and
8.5%, respectively.
23
Interest Rate Swap Contracts Market Value Adjustment
We enter into interest rate swap contracts to hedge the exposure to
increasing rates with respect to our variable rate debt. As a result of the June
27, 2001 refinancing, the interest rate swap contracts no longer qualify for
hedge accounting treatment and therefore, the changes in fair value of these
interest rate swap contracts is required to be recorded as a component of net
loss. For the thirteen and twenty-six weeks ended September 1, 2001, we
recognized a charge of approximately $31.0 million representing the amount we
would have to pay the counter party to terminate these contracts.
Income Taxes
The Federal tax benefit for the thirteen and twenty-six week periods
ended September 1, 2001 and August 26, 2000 is fully offset by a valuation
allowance based on management's determination that, based on available evidence,
it is more likely than not that certain of the deferred tax assets will not be
realized. The state tax provision reflects taxable income in certain states
which do not allow combined or consolidated returns which would have benefited
from the groups' loss. The income tax provision for the thirteen and twenty-six
week periods ended August 26, 2000 reflects the effect of the decision to sell
PCS and to discontinue the operations of our PBM segment.
It is foreseeable that an "ownership change" for statutory purposes
will occur during fiscal 2002 as a result of our refinancing efforts, including
issuances of equity and exchanges of debt for equity. An "ownership change"
would result in a limitation imposed on the future use of net operating losses
and any net unrealized built-in losses incurred or existing prior to the
"ownership change".
Other Significant Charges
The net loss from continuing operations for the thirteen week periods
ended September 1, 2001 and August 26, 2000 was $179.3 million and $425.0
million, respectively. The net loss from continuing operations for the
twenty-six week periods ended September 1, 2001 and August 26, 2000 was $390.4
million and $828.4 million, respectively. In addition to the matters discussed
above, our results in the thirteen and twenty-six week periods ended September
1, 2001 and August 26, 2000 have been affected by other charges. In the thirteen
week periods ended September 1, 2001 and August 26, 2000, we recorded pre-tax
losses of $21.9 million and $83.8 million on debt and lease conversions and
modifications and $4.5 million and $12.5 million representing our share of
drugstore.com losses. In addition, we recorded an extraordinary loss of $66.6
million in the thirteen week period ended September 1, 2001, related to
extinguishment of debt in the June 27, 2001 refinancing. In the twenty-six week
periods ended September 1, 2001 and August 26, 2000, we recorded pre-tax losses
of $154.6 million and $83.8 million on debt and lease conversions and
modifications and losses of $10.4 million and $24.1 million representing our
share of drugstore.com losses. In addition, we recorded a gain of $53.2 million
in the twenty-six week period ending September 1, 2001 resulting from the sale
of AdvancePCS securities.
Liquidity and Capital Resources
We have two primary sources of liquidity: (i) cash provided by
operations and (ii) 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. Among the transactions permitted
by our senior secured credit facility that will allow us to generate additional
liquidity are (with some limitations related to other outstanding debt):
transactions to finance existing owned real estate not to exceed an aggregate
$150.0 million, the issuance of $393.0 million of additional debt secured by the
facility's collateral on a second priority basis and $100.0 million of financing
transactions with respect to property acquired after June 27, 2001, or at our
option, we are permitted to issue unsecured debt, in lieu of any of the
foregoing permitted debt. Our 11.25% senior notes due July 2008 also permit
$150.0 million of real estate financing plus $400.0 million of additional other
debt and provides for the senior secured credit facility to be increased up to
$2.5 billion. Our 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.
Refinancing
On June 27, 2001, we completed a major refinancing that extended the
maturity dates of the majority of our debt to 2005 or beyond, provided
additional equity, converted a portion of our debt to equity and reclassified
capital
24
leases to operating leases. The components of the refinancing are described in
detail in the footnotes to the consolidated financial statements. Major
components of the refinancing are summarized below:
New Secured Credit Facility: We entered into a new $1.9 billion
syndicated senior secured credit facility with a syndicate of banks led by
Citicorp USA, Inc. as senior agent. The new facility matures on June 27, 2005
unless more than $20.0 million of our 7.625% senior notes due April 15, 2005 are
outstanding on December 31, 2004, in which event the maturity date is March 15,
2005. The new facility consists of a $1.4 billion term loan facility and a
$500.0 million revolving credit facility. The term loan was used to prepay
various outstanding debt balances.
Our ability to borrow under the senior secured credit facility is based
on a specified borrowing base consisting of eligible accounts receivable and
inventory. At June 30, 2001, the term loan was fully drawn except for $21.9
million, which is available and may be drawn to pay for the remaining
outstanding 10.5% senior secured notes when they mature on September 15, 2002.
At September 1, 2001, we had $423.9 million in additional available borrowing
capacity under the revolving credit facility net of outstanding letters of
credit of $76.1 million.
High Yield Notes: We issued $150.0 million of 11.25% senior notes due
July 2008 in a private placement offering. These notes are unsecured and
subordinate to our secured debt.
Debt for Debt Exchange: We exchanged $152.0 million of our existing
10.50% senior secured notes for an equal principal amount of 12.50% senior
secured notes due September 15, 2006. The 12.50% notes are secured by a second
priority lien on the collateral of the senior secured credit facility. In
addition, holders of these notes received warrants to purchase 3.0 million
shares of our common stock at $6.00 per share. On June 29, 2001, the warrant
holders elected to exercise these warrants, on a cashless basis, and as a result
1.0 million shares of common stock were issued.
Tender Offer: On May 24, 2001, we commenced a tender offer for the
10.50% senior secured notes due 2002 at a price of 103.25% of the principal
amount. The tender offer was closed on June 27, 2001, at which time $174.5
million principal was tendered. We incurred a tender offer premium of $5.7
million as a result of the transaction. We used proceeds from the new senior
secured credit facility to pay for the tender offer.
Debt for Equity Exchanges: We completed exchanges of $588.7 million of
debt for 86.4 million shares of common stock.
Sales of Common Stock: We issued 80.1 million shares of our common
stock for net proceeds of $528.4 million.
Lease Obligations: We relinquished certain renewal options which had
been available under the terms of certain real estate leases on property
previously sold and leased back and reclassified the related leases as operating
leases thereby reducing outstanding capital lease obligations by $850.8 million.
Impact on Results of Operations in the Second Quarter of Fiscal 2002:
As a result of the refinancing, we: i) recorded an extraordinary loss on early
extinguishment of debt of $66.6 million; ii) recognized a loss of $21.9 million
related to debt and lease conversions and modifications; and iii) recognized a
charge of $31.0 million related to our interest rate swap agreements.
On a prospective annual basis, the refinancing will reduce depreciation
and amortization expense by approximately $4.0 million but increase rent expense
by approximately $57.0 million. Interest expense is also expected to decrease
due to the refinancing, the debt for equity exchanges affected prior to June 3,
2001, and the repayment of debt related to the sale of the AdvancePCS
investments. Prospective annual interest expense is estimated to be $350.0
million to $370.0 million of which $300.0 million to $320.0 million is cash
interest.
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash Flows
Our operating activities used $48.3 million of cash in the twenty-six
week period ended September 1, 2001 and $562.0 million of cash in the twenty-six
week period ended August 26, 2000. Operating cash flow was negatively impacted
by $250.1 million in interest payments and increases in operating assets.
25
Cash provided by investing activities was $364.7 million for the
twenty-six week period ended September 1, 2001, due primarily to the sale of the
securities we received in our sale of AdvancePCS. Cash used in investing
activities was $20.2 million for the twenty-six week period ended August 26,
2000. Cash used for store construction and relocations amounted to $23.8 million
and $31.2 million for the twenty-six week periods ended September 1, 2001 and
August 26, 2000, respectively.
Cash (used in) provided by financing activities was $(299.5) million
and $484.6 million for the twenty-six week periods ended September 1, 2001 and
August 26, 2000, respectively. Proceeds form the issuance of the new senior
secured credit facility, issuance of common stock, and the sale of our
AdvancePCS securities were all used to pay down a significant portion of our
debt, which significantly impacted cash used in financing activities in the
twenty-six week period ended September 1, 2001.
Working Capital
Working capital was $1,405.2 million at September 1, 2001, compared to
$1,955.9 million at March 3, 2001. The decrease in working capital is primarily
due to the sale of the securities we received in our sale of AdvancePCS,
proceeds of which were used to pay down long-term debt. Net working capital was
also impacted by the reclassification of the previously classified non-current
portion of the liability relating to the stockholder litigation settlement as a
current liability.
Capital Expenditures
We plan capital expenditures of approximately $120.0 million during
fiscal 2002, consisting of $62.9 million related to new store construction,
store relocation and other store construction projects, and an additional $57.1
million which will be dedicated to other store improvement activities and the
purchase of prescription files from independent pharmacists. In addition, as
part of the June 27, 2001 refinancing, we expended $82.6 million related to the
termination of an operating lease and the corresponding purchase of equipment
bringing our total planned capital expenditures for the year to approximately
$202.6 million. 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
twenty-six week period ended September 1, 2001, we spent $132.2 million on
capital expenditures, consisting of $23.8 million related to new store
construction and relocation, $25.8 million related to other store improvement
activities and the purchase of prescription files from independent pharmacists,
and $82.6 million in conjunction with the refinancing.
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
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 our other sources of liquidity will be adequate to meet our
anticipated annual requirements for working capital, debt service and capital
expenditures for the next twelve months. We will continue to assess our
liquidity position and potential sources of supplemental liquidity in light of
our operating performance and other relevant circumstances. Should we 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 may 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, if required.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initiated after June 30, 2001;
and b) the provisions of SFAS 141 also apply to
26
all business combinations accounted for by the purchase method that are
completed after June 30, 2001 (that is, the date of the acquisition is July 2001
or later). There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS 142 is effective for fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those assets
were initially recognized. We are currently evaluating the provisions of SFAS
142 and have not adopted such provisions in our September 1, 2001 condensed
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 for the 2001 fiscal year, filed with the SEC on May
21, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our 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 2001, 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. Our 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 our 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 September 1, 2001.
Fiscal Year
----------- Fair Value
at
2002 2003 2004 2005 2006 Thereafter Total September
1, 2001
---------------------------------------------------------------------------------------
(dollars in thousands)
Long-term debt, including
current portion
Fixed rate $8,245 $205,439 $146,104 $62,464 $1,267,873 $1,446,659 $3,136,784 $2,830,360
Average Interest Rate 6.84% 6.60% 10.49% 10.56% 9.37% 7.90%
Interest Rate Swap --- --- --- --- --- --- --- $(31,047)
Variable Rate --- --- --- 378,462 --- $378,462 $378,462
Average Interest Rates --- --- --- --- 7.19% ---
In June 2000, we 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 our variable-rate debt at
7.083% for a two-year period. In July 2000, we 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 September 1, 2001, 10.8% of our
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 September 28, 2001, we had one credit facility: the $1.9 billion
syndicated senior secured credit facility. The ratings on this facility were BB-
by Standard & Poor's and B1 by Moody's. The interest rates on the variable rate
borrowings on this facility are LIBOR plus 3.50%.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 9, 2000, we announced that we had reached an agreement to
settle the consolidated securities class action lawsuits pending against us in
the U.S. District Court for the Eastern District of Pennsylvania and the
derivative lawsuits pending there and in the Delaware Court of Chancery. On
August 16, 2001, the court approved the settlement. Certain of the defendants in
those actions who were not included in the settlement have appealed the
approval.
Item 2. Changes in Securities and Use of Proceeds
(a) none
(b) none
(c) We sold the following equity securities during the period covered by
this report that were not registered under the Securities Act:
28
o On June 22, 2001, holders of approximately $41.3 million principal
amount of our 10.50% senior secured notes due 2002 exchanged these
notes for an aggregate of 4,681,221 shares of our common stock.
The common stock was issued in privately negotiated transactions
exempt from registration in reliance on Section 3(a)(9) of the
Securities Act.
o On June 25, 2001, a holder of approximately $9.8 million principal
amount of our 10.50% senior secured notes due 2002 exchanged these
notes for an aggregate of 1,136,108 shares of our common stock.
The common stock was issued in privately negotiated transactions
exempt from registration in reliance on Section 3(a)(9) of the
Securities Act.
o On June 26, 2001, holders of approximately $9.5 million principal
amount of our PCS credit facility, approximately $7.2 million
principal amount of indebtedness under our RCF credit facility and
approximately $15.3 million principal amount of our 10.50% senior
secured notes due 2002 exchanged this indebtedness for an
aggregate of 3,615,693 shares of our common stock. The common
stock was issued in privately negotiated transactions exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
o On June 27, 2001, holders of approximately $132.7 million
principal amount of indebtedness under our RCF credit facility
exchanged this indebtedness for an aggregate of 2,121,677 shares
of our Series C preferred stock. The preferred stock was issued in
privately negotiated transactions exempt from registration in
reliance on Section 3(a)(9) of the Securities Act.
o On June 27, 2001, we issued and sold to a group of institutional
investors an aggregate of 80,082,727 shares of our common stock
for aggregate consideration of approximately $551.3 million. The
common stock was issued in privately negotiated transactions
exempt from registration in reliance on Section 4(2) of the
Securities Act.
o On June 27, 2001, holders of approximately $152.0 million
principal amount of our 10.50% senior secured notes due 2002
exchanged these notes for approximately $152.0 million principal
amount of new 12.50% senior secured notes due 2006 and the
issuance to such holders of common stock purchase warrants
exercisable to purchase 3,000,000 shares of common stock at an
exercise price of $6.00 per share. The 12.50% senior secured notes
due 2006 and the common stock purchase warrants were issued in a
privately negotiated transaction exempt from registration in
reliance on Section 3(a)(9) of the Securities Act.
o On June 27, 2001, we issued and sold to a group of institutional
investors $150.0 million aggregate principal amount of new 11.25%
senior secured notes due 2008. The 11.25% senior secured notes due
2008 were issued in a transaction exempt from registration in
reliance on Rule 144A of the Securities Act.
o On July 5, 2001, we issued 866,320 shares of our common stock in
connection with the cashless exercise of stock warrants issued in
connection with the June 27, 2001 exchange of 10.50% senior
secured notes due 2002 for 12.50% senior secured notes due 2006 in
reliance on the exemption contained in Section 3(a)(9) of the
Securities Act.
o On July 6, 2001, we issued 115,921 shares of our common stock in
connection with the cashless exercise of stock warrants issued in
connection with the June 27, 2001 exchange of 10.50% senior
29
secured notes due 2002 for 12.50% senior secured notes due 2006 in
reliance on the exemption contained in Section 3(a)(9) of the
Securities Act.
o On August 1, 2001, we issued 21,216,770 shares of our common stock
in connection with the conversion of Series C Convertible
Preferred Stock issued in connection with the June 27, 2001
exchange of 10.50% senior secured notes due 2002 for 12.50% senior
secured notes due 2006 in reliance on the exemption contained in
Section 3(a)(9) of the Securities Act.
o On October 5, 2001, the holder of all 3,495,990 outstanding shares
of Series B preferred stock exchanged those shares for 3,495,990
shares of our Series D preferred stock. The Series D preferred
stock was issued in a privately negotiated transaction exempt from
registration under Section 3(a)(9) under the Securities Act.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On June 27, 2001, we held our 2001 Annual Meeting of Stockholders. At the 2001
Annual Meeting, our stockholders:
1. Elected two directors to hold office until the 2004 Annual Meeting of
Stockholders and until their respective successors are duly elected and
qualified, by the following votes:
Common and Series B Preferred stockholders:
Mary F. Sammons: For: 361,147,052* Against: 0 Abstain: 22,768,128
Leonard N. Stern: For: 358,650,223* Against: 0 Abstain: 25,264,956
Series B Preferred
stockholders:
Leonard I. Green For: 61,095,218 Against: 0 Abstain: 0
Following the 2001 Annual Meeting of Stockholders, the following persons
continued to serve as our Directors: Robert G. Miller, William J. Bratton,
Alfred M. Gleason, Nancy A. Lieberman, Stuart M. Sloan, and Jonathan D.
Sokoloff,
2. Approved the Amendment to our Amended Certificate of Incorporation to
increase our authorized number of shares of common stock from 600,000,000
to 1,000,000,000:
Common stockholders:
For: 317,229,535 Against: 4,753,678 Abstain: 836,748
Series B Preferred
stockholders:
For: 61,095218 Against: 0 Abstain: 0
3. Approved the proposal to ratify the appointment of Deloitte & Touche LLP as
our independent auditors:
Common and Series B Preferred stockholders:
For: 382,584,371* Against: 796,497 Abstain: 534,311
30
An asterisk "*" indicates that the results include 61,095,218 votes cast in
respect of all of the outstanding shares at the time of the 2001 Annual Meeting
of Stockholders of our Series B preferred stock.
Item 5. Other Information
On October 3, 2001, we entered into an exchange agreement with Green
Equity Investors III, L.P. pursuant to which Green Equity Investors agreed to
exchange all 3,495,990 shares of our 8% Series B preferred stock that it owns
for a like number of shares of a new series of 8% Series D Cumulative
Convertible Pay-in-Kind Preferred Stock; the exchange was completed on October
5, 2001. Following the exchange, we have no shares of Series B preferred stock
outstanding. The Series D preferred stock has the identical rights, privileges
and preferences as the Series B preferred stock except that the prior consent of
its holders is not required in order for the Company to issue shares of its
capital stock that are on parity with the Series D preferred stock with respect
to dividends and distributions upon our liquidation, distribution or winding up.
In connection with the exchange, on October 3, 2001, we also entered into an
amendment to our October 27, 1999 Registration Rights Agreement with Green
Equity Investors under which we made the terms of that agreement applicable to
the Series D preferred stock.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
Exhibit
Numbers Description Incorporation by Reference to
-------- ----------- -----------------------------
3.1 Restated Certificate of Incorporation dated December 12, 1996 Exhibit 3(i) to Form 8-K filed on
November 2, 1999
3.2 Certificate of Amendment to the Restated Certificate of Exhibit 3(ii) to Form 8-K filed on
Incorporation dated October 25, 1999 November 2, 1999
3.3 Series C Preferred Stock Certificate of Designation dated June Exhibit 3.3 to Form S-1 filed on July
26, 2001 12, 2001
3.4 Certificate of Amendment to Restated Certificate of Exhibit 3.4 to Form S-1 filed on July
Incorporation dated June 27, 2001 12, 2001
3.5 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock Filed herewith
Certificate of Designation dated October 3, 2001.
3.6 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
4.1 Indenture, dated as of June 27, 2001, between Rite Aid Exhibit 4.7 to Form S-1 filed on July
Corporation, as issuer and State Street Bank and Trust Company, 12, 2001
as trustee, related to the Company's 12.50% Senior Secured
Notes due 2006.
4.2 Indenture, dated as of June 27, 2001 between Rite Aid Exhibit 4.8 to Form S-1 filed on July
Corporation, as issuer and BNY Midwest Trust Company, as 12, 12, 2001
2001 trustee, related to the Company's 11 3/4% Senior Notes
due 2008.
4.3 Exchange and Registration Rights Agreement, dated as of June Exhibit 4.9 to Form S-1 filed on July
27, 2001, between Rite Aid Corporation and Salomon Smith Barney 12, 2001
Inc., Credit Suisse First Boston Corporation, J.P. Morgan
31
Securities Inc. and Fleet Securities, Inc., as initial
purchasers, for the benefit of the holders of the Company's
11 1/4% Senior Notes due 2008.
10.1 Amendment No. 1 to Employment Agreement by and between Rite Aid Exhibit 10.9 to Form 10-K filed on May
Corporation and Robert G. Miller, dated as of May 7, 2001 21, 2001
10.2 Amendment No. 1 to Employment Agreement by and between Rite Aid Exhibit 10.11 to Form
Corporation and Mary F. Sammons, dated as of May 7, 2001 10-K filed on May 21, 2001
10.3 Equity for Bank Debt Exchange Agreement between Rite Aid Exhibit 10.45 to Form
Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional 10-K filed on May 21, 2001
Value Fund, L.P., Fir Tree Value Partners LDC and Fir Tree
Recovery Master Fund, L.P.
10.4 Side Letter to Equity for Bank Debt Exchange Agreement, dated Exhibit 10.46 to Form 10-K filed on May
April 30, 2001, between Rite Aid Corporation, Fir Tree Value 21, 2001
Fund, L.P., Fir Tree Institutional Value Fund, L.P., Fir Tree
Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.5 Stock Purchase Agreement dated May 17, 2001 by and between Rite Exhibit 10.51 to Form
Aid Corporation and Transamerica Investment Management, LLC S-1 filed on July 12, 1001
10.6 Registration Rights Agreement dated May 31, 2001 by and between Exhibit 10.56 to Form
Rite Aid Corporation; Fir Tree Value Fund, L.P; Fir Tree S-1 filed on July 12, 2001
Institutional Value Fund, L.P.; Fir Tree Value Partners LDC;
and Fir Tree Recovery Master Fund, L.P.
10.27 Registration Rights Agreement dated as of June 14, 2001 by and Exhibit 10.27 to Registration Statement
between Rite Aid Corporation and Marathon Special Opportunity on Form S-1, File No. 333-64950, filed
Fund Ltd. and Marathon Master Fund, Ltd. on July 12, 2001
10.28 Registration Rights Agreement dated as of June 19, 2001 by and Exhibit 10.28 to Registration Statement
between Rite Aid Corporation and OZ Master Fund, Ltd. and OZF on S-1, File No. 333-64950, filed on
Credit Opportunities Master Fund, Ltd. July 12, 2001
10.29 Registration Rights Agreement dated as of May 24, 2001 by and Exhibit 10.29 to Form S-1 filed on July
between Rite Aid Corporation and Liberty View Fund, LP, Liberty 12, 2001
View Fund, LLC and Liberty View Global Volatility Fund LP
10.30 Senior Credit Agreement, dated as of June 27, 2001 among Rite Exhibit 10.30 to Registration Statement
Aid Corporation, the financial institutions party thereto, on S-1, File No. 333-64950, filed on
Citicorp USA, Inc., as senior administrative agent and as July 12, 2001
senior collateral agent, and The Chase Manhattan Bank, Credit
Suisse First Boston and Fleet Retail Finance Inc., as
syndication agents
10.31 Senior Subsidiary Guarantee Agreement, dated as of June 27, Exhibit 10.31 to Registration Statement
2001 among the Subsidiary Guarantors (as defined therein) and on S-1, File No. 333-64950, filed on
Citicorp USA, Inc., as senior collateral agent July 12, 2001
10.32 Senior Subsidiary Security Agreement, dated as of June 27, 2001 Exhibit 10.32 to Registration Statement
32
by the Subsidiary Guarantors (as defined therein) in favor of on S-1, File No. 333-64950, filed on
the Citicorp USA (senior collateral agent). July 12, 2001
10.33 Collateral Trust and Intercreditor Agreement, dated as of June Exhibit 10.33 to Registration Statement
27, 2001 among Rite Aid Corporation, the Subsidiary Guarantors on S-1, File No. 333-64950, filed on
(as defined therein), Wilmington Trust Company, as collateral July 12, 2001
trustee for the holders from time to time of the Second
Priority Debt Obligations (as defined therein), Citicorp USA
Inc., as collateral agent for the Senior Secured Parties (as
defined therein) under the Senior Loan Documents (as defined
therein), Citibank USA, Inc., as agent for the Synthetic Lease
Parties (as defined therein), State Street Bank and Trust
Company, as trustee under the Exchange Note Indenture (as
defined therein) for the holders of the Exchange Notes (as
defined therein) and each other Second Priority Representative
(as defined therein) which from time to time becomes a party
thereto.
10.34 Second Priority Subsidiary Guarantee Agreement, dated as of Exhibit 10.34 to Registration Statement
June 27, 2001 among the Subsidiary Guarantors (as defined on S-1, File No. 333-64950, filed on
therein) and Wilmington Trust Company, as collateral agent. July 12, 2001
10.35 Second Priority Subsidiary Security Agreement, dated as of June Exhibit 10.35 to Registration Statement
27, 2001 by the Subsidiary Guarantors (as defined therein) in on S-1, File No. 333-64950, filed on
favor of Wilmington Trust Company, as collateral trustee. July 12, 2001
10.36 Each of the Mortgages, Deeds of Trust, Assignments of Leases Exhibit 10.36 to Registration Statement
and Rents, Security Agreements, Financing Statements and on S-1, File No. 333-64950, filed on
Fixture Filings, dated June 27, 2001 from the Subsidiary July 12, 2001
Guarantors (as defined therein) listed therein, to Citicorp
USA, Inc. as Senior Collateral Agent.
10.37 Each of the Mortgages, Deeds of Trust, Assignments of Leases Exhibit 10.37 to Registration Statement
and Rents, Security Agreements, Financing Statements and on S-1, File No. 333-64950, filed on
Fixture Filings, dated June 27, 2001, from the Subsidiary July 12, 2001
Guarantor listed therein, to Wilmington Trust Company, as
Second Priority Collateral Trustee.
10.38 Participation Agreement, dated as of June 27, 2001 among Rite Exhibit 10.38 to Registration Statement
Aid Realty Corp.; Rite Aid Corporation; Wells Fargo Northwest, on S-1, File No. 333-64950, filed on
National Association, not in its individual capacity except as July 12, 2001
expressly set forth therein but solely as trustee of the RAC
Distribution Statutory Trust; the persons named therein as note
holders and certificate holders; and Citicorp USA, Inc., in its
capacity as administrative agent
10.39 Lease, dated as of June 27, 2001 between Wells Fargo Northwest, Exhibit 10.39 to Registration Statement
National Association, not in its individual capacity, but on Form S-1, File No. 333-64950, filed
solely as trustee of the RAC Distribution Statutory Trust, and on July 12, 2001
Rite Aid Realty Corp.
10.40 Ground Lease Agreement dated as of June 27, 2001 between Exhibit 10.40 to Registration Statement
Thrifty Payless, Inc., and Wells Fargo Northwest, National on Form S-1, File No. 333-64950, filed
Association, not in its individual capacity, but solely as on July 12, 2001
trustee of the RAC Distribution Statutory Trust.
33
10.41 Security Agreement, dated as of June 27, 2001, made by Rite Aid Exhibit 10.41 to Registration Statement
Realty Corp., in favor of Wells Fargo Northwest, National on Form S-1, File No. 333-64950, filed
Association, not in its individual capacity, but solely as on July 12, 2001
trustee of the RAC Distribution Statutory Trust.
10.42 Parent Guarantee, dated as of June 27, 2001, by Rite Aid Exhibit 10.42 to Registration Statement
Corporation, to Wells Fargo Northwest, National Association, on Form S-1, File No. 333-64950, filed
not in its individual capacity, but solely as trustee of the on July 12, 2001
RAC Distribution Statutory Trust.
10.43 Instrument Guarantee, dated as of June 27, 2001, by Rite Aid Exhibit 10.43 to Registration Statement
Realty Corp., to each of the Note Holders and Certificate on Form S-1, File No. 333-64950, filed
Holders (each as defined in Participation Agreement, dated as on July 12, 2001
of June 27, 2001 among Rite Aid Realty Corp., Rite Aid
Corporation, Wells Fargo Northwest, National Association, not
in its individual capacity, but solely as trustee of the RAC
Distribution Statutory Trust; the Persons named therein as note
holders and certificate holders; and Citicorp USA, Inc., in its
capacity as administrative agent).
10.44 Loan Agreement dated as of June 27, 2001 among Wells Fargo Exhibit 10.44 to Registration Statement
Northwest, National Association, not in its individual on Form S-1, File No. 333-64950, filed
capacity, but solely as trustee of the RAC Distribution on July 12, 2001
Statutory Trust, the Persons named therein as note holders
and/or any assignee thereof.
10.45 Assignment and Security Agreement, dated as of June 27, 2001, Exhibit 10.45 to Registration Statement
by Wells Fargo Northwest, National Association, not in its on Form S-1, File No. 333-64950, filed
individual capacity, but solely as trustee of the RAC on July 12, 2001
Distribution Statutory Trust, in favor of Citicorp USA, Inc.,
as Agent.
10.46 Amended and Restated Declaration of Trust dated as of June 27, Exhibit 10.46 to Registration Statement
2001, between Wells Fargo Northwest, National Association and on Form S-1, File No. 333-64950, filed
the Certificate Holders as defined therein. on July 12, 2001
10.47 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.47 to Registration Statement
Rite Aid Corporation, American Century Mutual Funds, Inc. and on Form S-1, File No. 333-64950, filed
American Century World Mutual Funds, Inc. on July 12, 2001
10.48 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.48 to Registration Statement
Rite Aid Corporation, Bessent Global Equity Master and Quantum on Form S-1, File No. 333-64950, filed
Partners Bessent Global. on July 12, 2001
10.49 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.49 to Registration Statement
Rite Aid Corporation and various funds affiliated with or on Form S-1, File No. 333-64950, filed
controlled by FRM M Corp. (Fidelity holders). on July 12, 2001
10.50 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.50 to Registration Statement
Rite Aid Corporation; Putnam Investment Management, LLC; The on Form S-1, File No. 333-64950, filed
Putnam Advisory Company, LLC; and Putnam Fiduciary Trust on July 12, 2001
Company.
10.51 Stock Purchase Agreement dated May 17, 2001 by and between Rite Exhibit 10.51 to Registration Statement
Aid Corporation and Transamerica Investment Management, LLC. on Form S-1, File No. 333-64950, filed
on July 12, 2001
34
10.52 Exchange and Registration Rights Agreement dated as of June 27, Exhibit 10.52 to Registration Statement
2001 by and between Rite Aid Corporation and the Fidelity on Form S-1, File No. 333-64950, filed
holders. on July 12, 2001
10.53 Registration Rights Agreement dated June 27, 2001 by and Exhibit 10.53 to Registration Statement
between Rite Aid Corporation and the Fidelity holders. on Form S-1, File No. 333-64950, filed
on July 12, 2001
10.54 Registration Rights Agreement dated June 27, 2001 by and Exhibit 10.54 to Registration Statement
between Rite Aid Corporation, American Century Mutual Funds, on Form S-1, File No. 333-64950, filed
Inc.; American Century World Mutual Funds, Inc.; Bessent Global on July 12, 2001
Equity Master; Quantum Partners Bessent Global; the Fidelity
holders; Putnam Investment Management, LLC; The Putnam
Advisory Company, LLC; and Putnam Fiduciary Trust Company.
10.55 Registration Rights Agreement dated June 27, 2001 by and Exhibit 10.55 to Registration Statement
between Rite Aid Corporation and Transamerica Investment on Form S-1, File No. 333-64950, filed
Management, LLC. on July 12, 2001
10.57 Note Exchange Agreement dated June 27, 2001 by and between Rite Exhibit 10.57 to Registration Statement
Aid Corporation and the Fidelity holders. on Form S-1, File No. 333-64950, filed
on July 12, 2001
10.58 Form of Common Stock Purchase Warrant dated June 27, 2001 Exhibit 10.58 to Registration Statement
issued by Rite Aid Corporation to Fidelity and funds affiliated on Form S-1, File No. 333-64950, filed
with or controlled by Fidelity. on July 12, 2001
10.59 Purchase Agreement dated June 20, 2001 between Rite Aid Exhibit 10.59 to Registration Statement
Corporation and Salomon Smith Barney Inc., Credit Suisse First on Form S-1, File No. 333-64950, filed
Boston Corporation, J.P. Morgan Securities Inc. and Fleet on July 12, 2001
Securities Inc. as representatives of the initial purchasers of
the Company's 11 1/4% Senior Notes due 2008.
10.60 Exchange Agreement, dated as of October 3, 2001, by and among Filed herewith
Rite Aid Corporation and Green Equity Investors III, L.P.
10.61 Amendment Number 1 to the Registration Rights Agreement dated Filed herewith
as of October 27, 1999, dated as of October 3, 2001, by and
among Rite Aid Corporation and Green Equity Investors III, L.P.
10.62 Amendment Number 1 to the Senior Credit Agreement dated June Filed herewith
27, 2001, dated as of September 19, 2001, among Rite Aid
Corporation, the Banks (as defined therein), Citicorp USA,
Inc., as a Swingline Bank, as an Issuing Bank and as
administrative agent for the Banks, Citicorp USA, Inc., as
collateral agent for the Banks and The Chase Manhattan Bank,
Credit Suisse First Boston and Fleet Retail Finance Inc., as
syndication agents.
11 Statements re Computation of Loss Per Share (See Note 2 to the
condensed consolidation financial statements)
35
----------
(c) Rite Aid Corporation has filed the following Current Reports on Form
8-K in the thirteen week period ended September 1, 2001:
(1) Rite Aid Corporation filed a Current Report on Form 8-K on June
21, 2001 disclosing under Item 5 a press release dated June 19, 2001 announcing
that institutional investors who previously agreed to invest $302.4 million in
shares of Rite Aid Common stock increased their commitments to $402.4 million.
The private placement was part of Rite Aid's previously announced $3.0 billion
refinancing package.
(2) Rite Aid Corporation filed a Current Report on Form 8-K on June
28, 2001 disclosing under Item 5 a press release announcing (i) the completion
of Rite Aid's $3.0 billion refinancing package, and (ii) the results of Rite
Aid's previously announced tender offer for its 10.50% senior secured notes due
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 12, 2001
RITE AID CORPORATION
By: /s/ ELLIOT S. GERSON
Elliot S. Gerson
Senior Executive Vice President and
General Counsel
Date: October 12, 2001
By: /s/ JOHN T. STANDLEY
John T. Standley
Senior Executive Vice President and
Chief Financial Officer
36