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 December 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 23-1614034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Hunter Lane, 17011
Camp Hill, Pennsylvania (Zip Code)
(Address of principal executive offices)
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 515,085,296 shares of its $1.00 par value common
stock outstanding as of December 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 December 1, 2001 and March 3, 2001 2
Condensed Consolidated Statements of Operations for the Thirteen Week Periods
Ended December 1, 2001 and November 25, 2000 3
Condensed Consolidated Statements of Operations for the Thirty-Nine Week Periods
Ended December 1, 2001 and November 25, 2000 4
Condensed Consolidated Statement of Stockholders' Equity (Deficit) for the
Thirty-Nine Week Period Ended December 1, 2001 5
Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Week Periods
Ended December 1, 2001 and November 25, 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 29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 30
ITEM 2. Changes in Securities and Use of Proceeds 30
ITEM 3. Defaults Upon Senior Securities 30
ITEM 4. Submission of Matters to a Vote of Security Holders 30
ITEM 5. Other Information 30
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 and 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---Overview and 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 (the "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)
December 1, March 3,
2001 2001
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 94,272 $ 92,290
Accounts receivable, net 593,606 503,527
Inventories, net 2,528,870 2,444,525
Investment in AdvancePCS -- 491,198
Prepaid expenses and other current assets 93,481 85,292
--------------- ---------------
Total current assets 3,310,229 3,616,832
PROPERTY, PLANT AND EQUIPMENT, NET 2,253,554 3,041,008
GOODWILL AND OTHER INTANGIBLES, NET 986,179 1,067,339
OTHER ASSETS 183,394 188,732
--------------- ---------------
Total assets $ 6,733,356 $ 7,913,911
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt and current maturities of convertible notes,
long-term debt and lease financing obligations $ 220,695 $ 36,956
Accounts payable 839,614 896,390
Sales and other taxes payable 43,898 31,562
Accrued salaries, wages and other current liabilities 823,519 696,047
--------------- ---------------
Total current liabilities 1,927,726 1,660,955
CONVERTIBLE NOTES 242,625 357,324
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,287,550 4,428,871
LEASE FINANCING OBLIGATIONS, LESS CURRENT MATURITIES 208,558 1,071,397
OTHER NONCURRENT LIABILITIES 742,632 730,342
--------------- ---------------
Total liabilities 6,409,091 8,248,889
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK 19,536 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $100 per share 354,221 333,974
Common stock, par value $1 per share 516,226 348,055
Additional paid-in capital 3,161,005 2,065,301
Accumulated deficit (3,746,923) (3,171,956)
Stock-based and deferred compensation 20,822 19,782
Accumulated other comprehensive (loss) income (622) 50,409
--------------- ---------------
Total stockholders' equity (deficit) 304,729 (354,435)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 6,733,356 $ 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
-----------------------------------
December 1, November 25,
2001 2000
--------------- ---------------
REVENUES $ 3,732,079 $ 3,531,691
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs 2,923,759 2,713,988
Selling, general and administrative expenses 801,453 810,900
Goodwill amortization 5,200 5,058
Store closing and impairment charges 18,652 95,571
Interest expense 82,515 146,122
Interest rate swap contracts 10,382 --
(Gain) loss on debt and lease conversions and modifications, net (56) 8,306
Share of loss from equity investment 1,697 6,484
Loss (gain) on sale of assets and investments, net 694 (13,491)
--------------- ---------------
3,844,296 3,772,938
--------------- ---------------
Loss from continuing operations before income taxes (112,217) (241,247)
INCOME TAX EXPENSE 546 --
--------------- ---------------
Loss from continuing operations (112,763) (241,247)
DISCONTINUED OPERATIONS, reduction of loss on disposal of the PBM
segment (net of income tax expense of $0) -- 135,534
--------------- ---------------
NET LOSS $ (112,763) $ (105,713)
=============== ===============
BASIC AND DILUTED (LOSS) PER SHARE:
Loss from continuing operations $ (0.23) $ (0.74)
Reduction of loss from discontinued operations -- .40
--------------- ---------------
Net loss per share $ (0.23) $ (0.34)
=============== ===============
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)
Thirty-Nine Week Period Ended
-----------------------------------
December 1, November 25,
2001 2000
--------------- ---------------
REVENUES $ 11,133,286 $ 10,413,346
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs 8,636,889 8,005,474
Selling, general and administrative expenses 2,469,452 2,491,090
Goodwill amortization 15,823 16,759
Store closing and impairment charges 40,393 199,742
Interest expense 313,581 499,871
Interest rate swap contracts 41,429 --
Loss on debt and lease conversions and modifications, net 154,539 92,095
Share of loss from equity investment 12,092 30,554
(Gain) loss on sale of assets and investments, net (50,761) 3,035
--------------- ---------------
11,633,437 11,338,620
--------------- ---------------
Loss from continuing operations before income taxes (500,151) (925,274)
INCOME TAX EXPENSE 3,046 144,382
--------------- ---------------
Loss from continuing operations before extraordinary item (503,197) (1,069,656)
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) -- (199,229)
--------------- ---------------
Net loss before extraordinary item (503,197) (1,257,550)
EXTRAORDINARY ITEM, loss on early extinguishment of debt (net of
income taxes of $0) 66,589 --
--------------- ---------------
NET LOSS $ (569,786) $ (1,257,550)
=============== ===============
BASIC AND DILUTED (LOSS) PER SHARE:
Loss from continuing operations $ (1.15) $ (4.12)
Loss from discontinued operations -- (0.62)
Loss from extraordinary item (0.14) --
--------------- ---------------
Net loss per share $ (1.29) $ (4.74)
=============== ===============
See accompanying notes to condensed consolidated financial statements.
4
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Thirty-Nine Week Period Ended December 1, 2001
(Dollars and share information in thousands)
(unaudited)
Preferred Stock Common Stock Additional
----------------------------------- ----------------------------------- Paid-in
Shares Issued Shares Issued Capital
--------------- --------------- --------------- --------------- ---------------
BALANCE MARCH 3, 2001 3,340 $ 333,974 348,055 $ 348,055 $ 2,065,301
Net loss
Other comprehensive loss:
Sale of investment in
AdvancePCS
Cash flow hedge transition
liability adjustment
Cash flow hedge market
value adjustment
Elimination of cash flow
hedge accounting
Comprehensive loss
Bond conversions 86,386 86,386 649,797
Issuance of common stock 80,083 80,083 448,321
Issuance of common stock
warrants 982 982 8,018
Preferred stock conversion
reset (5,181) 5,181
Accretion of convertible
preferred stock 5,181
Deferred compensation plans 88 88 659
Stock options exercised 420 420 1,761
Issuance of common stock
for services 241 241 1,556
Stock forfeitures (29) (29) (53)
Dividends on preferred stock 202 20,247 (20,247)
Increase resulting from sale
of stock by equity method
investee 711
--------------- --------------- --------------- --------------- ---------------
BALANCE DECEMBER 1, 2001 3,542 $ 354,221 516,226 $ 516,226 $ 3,161,005
=============== =============== =============== =============== ===============
Stock-Based Accumulated
and Other
Accumulated Deferred Comprehensive
Deficit Compensation Income/(Loss) Total
--------------- --------------- --------------- ---------------
BALANCE MARCH 3, 2001 $ (3,171,956) $ 19,782 $ 50,409 $ (354,435)
Net loss (569,786) (569,786)
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 (620,817)
Bond conversions 736,183
Issuance of common stock 528,404
Issuance of common stock
warrants 9,000
Preferred stock conversion
reset --
Accretion of convertible
preferred stock (5,181) --
Deferred compensation plans 976 1,723
Stock options exercised 2,181
Issuance of common stock
for services 1,797
Stock forfeitures 64 (18)
Dividends on preferred stock --
Increase resulting from sale
of stock by equity method
investee 711
--------------- --------------- --------------- ---------------
BALANCE DECEMBER 1, 2001 $ (3,746,923) $ 20,822 $ (622) $ 304,729
=============== =============== =============== ===============
See accompanying notes to condensed consolidated financial statements.
5
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Thirty-Nine Week Period Ended
-----------------------------------
December 1, November 25,
2001 2000
--------------- ---------------
OPERATING ACTIVITIES:
Net loss $ (569,786) $ (1,257,550)
Extraordinary loss 66,589 --
Income from discontinued operations -- (11,335)
Loss on disposal of discontinued operations -- 199,229
--------------- ---------------
Loss from continuing operations (503,197) (1,069,656)
Adjustments to reconcile to net cash used in operations:
Depreciation and amortization 266,913 278,004
Store closing and impairment charges 40,393 199,742
Non-cash stock charge 2,800 9,659
Interest rate swap contracts 41,429 --
Loss on debt and lease conversions and modifications, net 154,539 92,095
Gain on sale of assets and investments, net (50,761) (6,576)
Changes in operating assets and liabilities (261,938) (271,251)
--------------- ---------------
NET CASH USED IN CONTINUING OPERATIONS (309,822) (767,983)
--------------- ---------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 8,881
--------------- ---------------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (146,476) (78,923)
Proceeds from the repayment/sale of AdvancePCS securities 484,214 --
Intangible assets acquired (9,103) (5,200)
Proceeds from sale of assets 19,400 92,774
Proceeds from sale of discontinued operations -- 675,000
--------------- ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 348,035 683,651
--------------- ---------------
FINANCING ACTIVITIES:
Net proceeds from bank loans -- 3,204,038
Principal payments on long-term debt (2,113,237) (2,924,295)
Proceeds from the issuance of the senior credit facility 1,378,462 --
Proceeds from the issuance of convertible bonds 242,500 --
Net (payments) of commercial paper borrowings -- (192,000)
Deferred financing costs paid (74,522) (73,071)
Proceeds from issuance of stock 530,566 --
Other financing activities, net -- (1,492)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (36,231) 13,180
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,982 (62,271)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,290 179,757
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,272 $ 117,486
=============== ===============
(Continued)
6
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(unaudited)
Thirty-Nine Week Period Ended
-----------------------------------
December 1, November 25,
2001 2000
--------------- ---------------
SUPPLEMENTARY CASH FLOW DATA:
Cash paid:
Interest (net of capitalized amounts of $612 and $1,555) $ 314,490 $ 386,526
=============== ===============
Income tax refunds (payments) $ (1,108) $ 87,032
=============== ===============
Non-cash investing and financing activities:
Conversion of debt to common stock $ 588,711 $ 554,832
=============== ===============
Conversion of debt to debt $ 152,025 $ --
=============== ===============
Non-cash consideration received for sale of discontinued operations $ -- $ 431,000
=============== ===============
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 Thirty-Nine Week Periods Ended December 1, 2001
and November 25, 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 thirty-nine week periods ended December 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 Thirty-Nine Week Period Ended
----------------------------------- -----------------------------------
December 1, November 25, December 1, November 25,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Numerator for earnings per share:
Loss from continuing operations $ (112,763) $ (241,247) $ (503,197) $ (1,069,656)
Preferred stock beneficial conversion
and reset -- -- (5,181) (160,915)
Cumulative preferred stock dividends (6,879) (6,815) (20,247) (20,237)
--------------- --------------- --------------- ---------------
Net loss from continuing operations
attributable to common stockholders (119,642) (248,062) (528,625) (1,250,808)
Total income (loss) from discontinued
operations -- 135,534 -- (187,894)
Extraordinary item, loss on early
extinguishment of debt -- -- (66,589) --
--------------- --------------- --------------- ---------------
Net loss attributable to common
stockholders $ (119,642) $ (112,528) $ (595,214) $ (1,438,702)
=============== =============== =============== ===============
Denominator:
Basic weighted average shares 516,086 333,529 460,289 303,247
=============== =============== =============== ===============
Fully diluted loss per share is not presented as the Company incurred
losses for the thirteen and thirty-nine week periods ended December 1, 2001 and
November 25, 2000, and the amount would be antidilutive. At December 1, 2001, an
aggregate of 189,758 potential common shares related to stock options,
convertible notes, preferred stock, 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.
8
3. Business Segments
The Company operated in a single business segment during the
thirty-nine week period ended December 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 61.7% and 60.0% of total segment sales for the
thirty-nine week periods ended December 1, 2001 and November 25, 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 thirty-nine week
period ended November 25, 2000, the Retail Drug segment and the pharmacy benefit
management ("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 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 fiscal 2001 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
thirty-nine week periods ended November 25, 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 thirty-nine week
period ended November 25, 2000.
5. Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Thirteen Week Period Ended Thirty-Nine Week Period Ended
----------------------------------- -----------------------------------
December 1, November 25, December 1, November 25,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Impairment charges $ 8,060 $ 44,518 $ 24,613 $ 70,342
Store and equipment lease exit charges 10,590 22,601 15,437 23,703
Impairment of other assets 2 28,452 343 105,697
--------------- --------------- --------------- ---------------
$ 18,652 $ 95,571 $ 40,393 $ 199,742
=============== =============== =============== ===============
9
Impairment Charges
Impairment charges include non-cash charges of $8,060 and $44,518 for
the thirteen week periods ended December 1, 2001 and November 25, 2000,
respectively, for the impairment of long-lived assets (including allocable
goodwill) at 23 and 142 stores, respectively. Impairment charges include
non-cash charges of $20,413 and $70,342 for the thirty-nine week periods ended
December 1, 2001 and November 25, 2000, respectively, for the impairment of
long-lived assets (including allocable goodwill) at 53 and 244 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
thirty-nine weeks ended December 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
thirty-nine weeks ended November 25, 2000, the Company recorded an impairment of
its investment in drugstore.com's stock of $105,697 that the Company believes to
be other-than-temporary. As of December 1, 2001, the Company has no remaining
recorded value for its investment in drugstore.com's common stock.
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 December 1, 2001 and
November 25, 2000 the Company recorded a provision for 9 and 72 stores,
respectively, that were designated for closure. During the thirty-nine week
periods ended December 1, 2001 and November 25, 2000, the Company recorded a
provision for 42 and 106 stores, respectively, that were designated for closure.
Also included in this line are charges of approximately $1,300 incurred in the
thirty-nine weeks ended December 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 Thirty-Nine Week Period Ended
----------------------------------- -----------------------------------
December 1, November 25, December 1, November 25,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Balance --- beginning of period $ 219,825 $ 200,057 $ 233,008 $ 212,812
Provision for present value of
noncancellable lease payments of
stores designated to be closed 7,690 45,331 27,927 73,639
Changes in assumptions about future
sublease income, terminations, and
changes in interest rates 2,953 (21,764) (7,140) (41,639)
Reversals of reserves for stores that
management has determined
will remain open (53) (966) (6,678) (8,298)
Interest accretion 2,042 2,760 6,725 8,751
Cash payments, net of sublease income (12,639) (14,643) (34,024) (34,490)
--------------- --------------- --------------- ---------------
Balance --- end of period $ 219,818 $ 210,775 $ 219,818 $ 210,775
=============== =============== =============== ===============
10
6. Indebtedness, Credit Agreements and Lease Financing Obligations
Following is a summary of indebtedness and lease financing obligations
at December 1, 2001 and March 3, 2001:
December 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 143,739 --
Other 11,942 12,447
--------------- ---------------
1,556,022 2,699,732
Lease Financing Obligations 223,879 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 85,050 187,650
6.0% fixed-rate senior notes due 2005 194,500 194,500
7.625% senior notes due 2005 198,000 198,000
4.75% convertible notes due 2006 242,625 --
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
--------------- ---------------
2,179,527 2,094,816
--------------- ---------------
Total debt 3,959,428 5,894,548
Short-term debt and current maturities of convertible notes,
long-term debt and lease financing obligations (220,695) (36,956)
--------------- ---------------
Long-term debt and lease financing obligations, less current
maturities $ 3,738,733 $ 5,857,592
=============== ===============
Refinancing Transactions
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 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 4, 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.
11
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 certain 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 credit
facility. Rite Aid Corporation's direct obligations under the senior credit
facility are unsecured.
The senior secured credit facility contains customary covenants, which
place restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions.
The 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,
the 6.0% dealer remarketable securities and the 4.75% convertible notes. As of
December 1, 2001, the Company had outstanding principal balances of $152,010,
$85,050 and $250,000 of the 5.25% convertible subordinated notes, 6.0% dealer
remarketable securities and 4.75% convertible notes, respectively.
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. As
of December 1, 2001, the Company is in compliance with these covenants.
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 December 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 December 1, 2001, the Company had no outstanding draws on the revolving
credit facility and the Company had additional available borrowing capacity of
$417,560, net of outstanding letters of credit of $82,440.
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 are
effectively 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 $600,000
of additional permitted debt, which includes increasing the senior secured
facility. As a result of the issuance by the Company of $250,000 of 4.75%
convertible notes in November 2001, the amount of additional other debt
permitted by the 11.25% senior notes decreased from $400,000 to $150,000,
although the Company may reclassify this debt to other permitted debt at any
time.
12
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, 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 thirty-nine weeks
ended December 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 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 thirty-nine week period ended December 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 which were previously afforded
sale and leaseback accounting treatment and 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 on lease
modifications of $21,882 in the thirty-nine weeks ended December 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.
13
Guarantees: Substantially all of Rite Aid Corporation's wholly-owned
subsidiaries guarantee the obligations under the new senior secured credit
facility. These 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 credit facility. Rite Aid Corporation's direct obligations under the
senior 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% 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. Accordingly, the Company recognized a
charge of $31,047 representing the amount that the Company would have to pay the
counter party to terminate these contracts as of that date. Subsequent changes
in the market value of the interest rate swaps of $10,382, inclusive of cash
payments, have been recorded on the income statement for the thirteen weeks
ended December 1, 2001. This amount represents an adjustment to the aggregate
expense projected to be recognized by the Company relating to the swaps. This
adjustment is due to a reduction in market interest rates over the thirteen week
period ended December 1, 2001. The termination liability was $31,276 as of
December 1, 2001.
Other: As a result of the above transactions, the Company has recorded
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 and deferred debt issue costs of
$73,972.
Other Transactions
Convertible Notes: The Company issued $250,000 of 4.75% convertible
notes due December 2006 in November 2001. These notes were issued at a 3%
discount resulting in cash proceeds of $242,500. These notes are unsecured and
are effectively subordinate to the secured debt of the Company. The notes are
convertible, at the option of the holder, into shares of the Company's common
stock at a conversion price of $6.50 per share, subject to adjustments to
prevent dilution, at any time.
Repurchase of Debt: The Company repurchased $22,715 of its 6.0% dealer
remarketable securities due 2003 during the thirteen weeks ended December 1,
2001.
Exchange: The Company is party to an agreement to exchange
approximately 3,000 shares of its common stock for $21,300 aggregate liquidation
preference of one of its subsidiary's 7% redeemable preferred stock. The number
of shares of common stock to be issued will be based upon the average trading
price of the common stock over a period of time to be determined. The
transaction has not been consummated as of December 1, 2001. The redeemable
preferred stock has a carrying value of $19,536 ($21,300 less unamortized
discount of $1,764) as of December 1, 2001.
Other: 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 facility, and $46,596 of borrowings under the Exchange Debt.
14
The aggregate annual principal payments of long-term debt and capital
lease obligations for the remainder of fiscal 2002 and for the four succeeding
fiscal years are as follows: 2002, $10,023; 2003, $223,849; 2004, $143,616;
2005, $84,967; 2006, $1,653,621 and $1,859,013 in 2007 and thereafter.
The aggregate annual minimum lease payments of operating leases for the
remainder of fiscal 2002 and for the four succeeding fiscal years are as
follows: 2002, $148,454; 2003, $586,591; 2004, $555,138; 2005, $521,569; 2006,
$478,937 and $4,554,939 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.
On October 5, 2001, the Company exchanged all outstanding shares of
Series B cumulative pay-in-kind preferred (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 our liquidation, distribution or winding up.
During the thirty-nine week period ended December 1, 2001, the Company
issued, as a dividend, 202 shares of 8% Series D preferred stock at $100 per
share, which is the liquidation preference. The Series D Preferred Stock is
convertible into shares of the Company's common stock at a conversion price of
$5.50 per share, subject to adjustments to prevent dilution.
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 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 a reduction of expense of $39,847 and $2,719 during the
thirteen and thirty-nine week periods ended December 1, 2001, respectively,
related to the repriced options.
As of December 1, 2001, the stock-based and deferred compensation
component of stockholders' equity is comprised of $31,026 related to the
repriced options offset by $10,204 of deferred compensation.
During fiscal 2002, in connection with the vesting of certain
restricted shares of common stock, the Company made loans totaling approximately
$5,900 to executive officers to provide them with funds to pay federal and state
income taxes due upon the vesting. The loans bore interest and were secured on a
non-recourse basis by the vested shares. On December 10, 2001, the executive
officers repaid these loans utilizing the 1,140 shares securing those loans.
This will result in a charge of $1,315 during the fourth quarter of fiscal 2002.
During the thirteen week period ended December 1, 2001, the Company
finalized an agreement with a service provider whereby the provider would
receive shares of Company common stock in exchange for certain services. In
connection with this agreement, the Company issued 241 shares of its common
stock and recognized $1,797 of stock based compensation expense during the
thirteen weeks ended December 1, 2001.
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 financial condition and results
of operations.
15
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 and
financial condition. 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
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 the 10 day trading period which began January 11,
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.
16
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 investigations by the Attorneys
General of certain other states (all of which have been closed without any
significant cost to the Company) and the filing of several purported federal and
state class actions, all of which (other than one pending in New York that was
filed on October 5, 1999 and which the Company believes is without merit and
immaterial in amount) 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 similar allegations and which the trial court dismissed
for failing to state a claim upon which relief could be based was reinstated by
the appellate court.
The Company is being investigated by multiple state attorneys general
for its reimbursement practices relating to partially-filled prescriptions and
fully-filled prescriptions that are not picked up by ordering customers. The
Company is supplying similar information with respect to these matters to the
Department of Justice. The Company believes that these investigations are
similar to investigations which were, and are being, undertaken with respect to
the practices of others in the retail drug industry. The Company also believes
that its existing policies and procedures fully comply with the requirements of
applicable law and intend to fully cooperate with these investigations. The
Company cannot, however, predict their outcomes at this time. An individual
acting on behalf of the United States of America, has filed a lawsuit in the
United Stated 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 an agreement to settle these investigations and
the lawsuit filed by the private individual for $7,225, which is subject to
court approval. The Company has reserved $7,225 against this potential
liability.
These claims are ongoing and the Company cannot predict their outcome.
If any of these cases result in a substantial monetary judgement against the
Company or is settled on unfavorable terms, the Company's results of operations,
financial position and cash flows could be materially adversely affected.
Other
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 conditions 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.
9. Subsequent Events
In December 2001, the Company entered into an agreement with another
operator of retail drugstores under which the Company will exchange certain of
its prescription files, fixed assets and inventory for certain prescription
files, fixed assets and inventory owned by the other retailer. The party which
transfers assets having a lesser aggregate value will make a cash payment to the
other party in an amount necessary to equalize the value. The Company will
account for this transaction as an exchange of non-monetary assets, and
therefore, will record the assets received at the cost basis of the assets
relinquished. In connection with this transaction, the Company plans to close 36
stores which held prescription files that are being transferred to other stores.
The Company expects to incur a fourth quarter charge of approximately $40,000
related to these closings, which consists primarily of lease termination costs.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We operate 3,583 retail drugstores in 29 states and in the District
of Columbia. We sell prescription drugs, which accounted for approximately 61.7%
of our total sales during the first three quarters of 2002, and other products,
which we refer to as front-end products, including non-prescription medications,
health and beauty aids and personal care items, cosmetics, photo processing and
convenience items. Until October 2, 2000, we operated a pharmacy benefit
management services business.
From the beginning of fiscal 1997 until December 1999, we were
engaged in an aggressive expansion program. During that period, we purchased
1,554 stores, relocated 866 stores, opened 445 new stores, remodeled 308 stores
and acquired PCS. These activities had a significant negative impact on our
operating results, severely strained our liquidity and increased our
indebtedness to $6.6 billion as of February 26, 2000.
In October 1999, we announced that we had identified accounting
irregularities and our former chairman and chief executive officer resigned. In
November 1999, our former auditors resigned and withdrew their previously issued
opinions on our financial statements for the fiscal years 1998 and 1999.
Thereafter, the SEC and the U.S. Attorney for the Middle District of
Pennsylvania began investigations into our affairs. In addition, the complaint
in a securities class action lawsuit, which had been filed in March 1999, was
amended to include allegations based upon the accounting irregularities we
disclosed. In December 1999, a new senior management team was hired.
At the time of their arrival, the new management team faced a series
of immediate challenges. These included:
o Deteriorating Store Operations. We experienced substantial
operational difficulties during fiscal 2000. The principal problem was a decline
in customer traffic and revenues due to inventory shortages, reduced advertising
and uncompetitive prices on front-end products. By November 1999, our
out-of-stock level had reached 29% and many popular products were not available
in our stores. This situation resulted from liquidity constraints and concerns,
tighter vendor credit terms and a delay in the opening of our distribution
center in Perryman, MD, which caused delays in the shipment of seasonal
merchandise. During fiscal 2000, we also suspended our practice of circulating
regular newspaper advertising supplements. This disrupted customer traffic and
adversely affected revenues. In order to offset the effects of these actions,
former management raised the prices of front-end products above competitive
levels. Customers rejected the higher prices and revenues continued to decline.
o Inability to Access Capital Markets. From March 1995 through
February 2000, we substantially increased our level of debt and placed a
significant strain on our short-term liquidity. The problems were exacerbated by
our inability to complete a planned public offering of equity securities to
repay the $1.3 billion short-term credit facility due in October 1999, which had
been established to support the commercial paper issuances used to acquire PCS.
By June 1999, we had issued the maximum amount of commercial paper that was
permitted under our credit facilities. In September 1999, we informed our banks
that we anticipated being in default on various covenants under both our $1.3
billion PCS credit facility and our $1.0 billion general credit facility and in
October 1999, Standard & Poor's and Moody's downgraded our credit rating.
Following these events, we lost access to the commercial paper market.
In response to the situation we faced, we completed the following:
o Reduced our indebtedness from $6.6 billion on February 26, 2000 to
$4.0 billion on December 1, 2001;
o Improved our front-end same store sales growth from a negative
2.2% in fiscal 2000 to a positive 3.6% during the first three quarters of fiscal
2002 by improving store conditions and product pricing and launching a
competitive marketing program;
18
o Restated our financial statements for fiscal 1998 and fiscal 1999,
engaged new auditors to audit our financial statements for fiscal 1998, fiscal
1999 and fiscal 2000, and resumed normal financial reporting;
o Significantly reduced the amount of our indebtedness maturing
prior to March 2005;
o Settled, subject to appeal, the securities class action and
related lawsuits for $45.0 million to be funded with insurance proceeds and
$155.0 million of common stock, cash and/or notes to be issued and paid in
January 2002;
o Began implementing an initiative to improve all aspects of our
supply chain, including buying practices, category management systems and other
inventory issues;
o Continued developing and implementing a comprehensive plan, which
is ongoing, to address problems with our accounting systems and controls, and
also resumed normal financial reporting; and
o Completed the refinancing of our indebtedness. See "--Liquidity
and Capital Resources--Refinancing" for further details.
Recent Actions Affecting Operating Results. During fiscal 2001 and
the first three quarters of fiscal 2002, we took a number of actions which had
the short-term effect of significantly reducing our operating results but which
management believes were nevertheless necessary. Actions taken in fiscal 2001
were: (i) the sale of PCS, which resulted in our recognizing a loss of $168.8
million and an increase in income tax expense of $146.9 million; (ii) the
exchange of approximately $597.3 million of our debt for shares of our common
stock, which resulted in an a net loss of $100.6 million; (iii) our decision to
close or relocate certain stores, which resulted in an approximately $149.2
million charge included in the $388.1 million recorded charges for store
closures and impairment; and (iv) the restatement and audit of our fiscal 1998
and fiscal 1999 financial statements and the related investigation conducted by
our audit committee of prior accounting irregularities, which resulted in our
incurring and recording $82.1 million of accounting and legal expense. In the
first three quarters of fiscal 2002, the actions taken were (i) completion of
the Refinancing, which extended the maturity of the majority of our debt,
converted a portion of our debt to equity, and reclassified capital leases to
operating leases, resulting in aggregate losses of $252.2 million and (ii) our
decision to close or relocate certain stores, which resulted in a charge of
$40.4 million. We anticipate taking actions in the future similar to some of
those described above that may have a material negative impact upon our
operating results for the period in which we take those actions or subsequent
periods.
Maturing Store Base. Since the beginning of fiscal 1997, we built
473 new stores, relocated 956 stores, remodeled 462 stores and closed 1,211
stores. These new, relocated and remodeled stores represented approximately 50%
of our total stores at December 1, 2001. The new and relocated stores opened in
recent years are generally larger, freestanding 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 our recent
operating results. However, we believe that as these newer stores mature they
should gain the critical mass of customers needed for profitable operations.
This continuing maturation should positively affect our 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 Accounting, Legal and Investigation Expenses. We have
incurred substantial expenses in connection with the process of reviewing and
reconciling our books and records, restating our fiscal 1998 and fiscal 1999
statements, investigating our prior accounting practices and preparing our
financial statements. Included in these expenses are the costs of the Deloitte &
Touche LLP audits, the investigation by the law firm of Swidler, Berlin,
Shereff, Friedman, LLP assisted by Deloitte & Touche LLP, conducted for our
audit committee concerning the accounting irregularities which led to the
restatement of our financial statements for fiscal 1998 and fiscal 1999 and the
costs of retaining Arthur Andersen LLP to assist management in reviewing and
reconciling our books and records. We incurred $82.1 million in fiscal 2001,
$14.5 million in the first three quarters of fiscal 2002, and we expect to incur
$2.0 million to $5.0 million in the remainder of fiscal 2002. We anticipate that
we will continue to incur significant legal and other expenses in connection
with the ongoing litigation and investigations to which we are subject.
19
Dilutive Equity Issuances. At December 1, 2001, 516.2 million shares
of common stock were outstanding and additional 189.8 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 three quarters of fiscal
2002, we issued 86.4 million shares of common stock in exchange for $588.7
million of indebtedness. See "--Liquidity and Capital Resources--Refinancing"
for further details. Included in the issuable shares are 38.5 million shares
issuable upon the conversion of the 4.75% convertible notes due 2006.
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 that 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.
Sale of PCS. On October 2, 2000, we sold PCS, our PBM segment, to
Advance Paradigm (now AdvancePCS). The selling price of PCS consisted of $710.5
million in cash, $200.0 million in principal amount of Advance PCS's 11%
promissory notes and AdvancePCS equity securities. Accordingly, the PBM segment
is reported as a discontinued operation for all periods presented in the
accompanying financial statements, and the operating income of the PBM segment
through October 2, 2000, the date of sale, is reflected separately from the
income from continuing operations. The loss on disposal of the PBM segment was
$168.8 million. Additionally, we recorded an increase to the tax valuation
allowance and income tax expense of $146.9 million in the first quarter of
fiscal 2001 in continuing operations.
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. Approximately 75% of our front-end sales are in cash. Third-party
insurance programs, which typically settle in fewer than 30 days, accounted for
90.3% and 92.0% of our pharmacy revenues and 53.7% and 56.9% of our revenues in
fiscal 2001 and the first three quarters of fiscal 2002, respectively.
Seasonality. We experience seasonal fluctuations in our results of
operations in the fourth fiscal quarter as the result of the seasonal nature of
Christmas and the flu season. We also tailor certain front-end merchandise to
capitalize on holidays and seasons. This leads to an increase in revenues during
our fourth quarter.
Industry Trends. It is anticipated that pharmacy sales in the United
States will increase 75% over the next five years. This anticipated growth is
expected to be driven by the "baby boom" generation entering their fifties, the
increasing life expectancy of the American population, the introduction of
several new drugs and inflation. The retail drugstore industry is highly
fragmented and has been experiencing consolidation. We believe that the
continued consolidation of the drugstore industry will further increase
competitive pressures in the industry. We expect to continue to compete on the
basis of price and convenience, particularly in front-end products and therefore
will continue to focus on programs designed to improve our image with customers.
Prescription drug sales continue to represent a greater portion of our new
business due to the general aging of the population, the use of pharmaceuticals
to treat a growing number of healthcare problems, and the introduction of a
number of successful new prescription drugs. In fiscal 2001 and the first three
quarters of fiscal 2002, we were reimbursed by third-party payors for
approximately 90.3% and 92.0%, respectively, of all of the prescription drugs
that we sold. If third-party payors reduce their reimbursement levels or if
Medicare covers prescription drugs at reimbursement levels lower than our
current retail prices, our margins on these sales would be reduced and the
profitability of our business could be adversely affected.
20
Results of Operations
Revenues and Other Operating Data
Thirteen Week Period Ended Thirty-Nine Week Period Ended
----------------------------------- -----------------------------------
December 1, November 25, December 1, November 25,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Revenues $ 3,732,079 $ 3,531,691 $ 11,133,286 $ 10,413,346
Revenue growth 5.7% 7.7% 6.9% 5.9%
Same store sales growth 6.9% 10.0% 8.3% 8.5%
Pharmacy sales growth 8.5% 9.1% 9.6% 8.0%
Same store pharmacy sales growth 10.6% 11.0% 11.4% 10.3%
Pharmacy as a % of total sales 62.5% 60.3% 61.7% 60.0%
Third party sales as a % of total pharmacy
sales 92.2% 90.7% 92.0% 90.1%
Front-end sales growth (decline) (0.8)% 5.5% 1.9% 3.2%
Same store front end sales growth 1.2% 8.4% 3.6% 5.9%
Front end sales as a % of total sales 37.5% 39.7% 38.2% 40.0%
Store data:
Total stores (beginning of period) 3,594 3,767 3,648 3,802
New stores 4 -- 7 5
Closed stores (15) (25) (72) (65)
Store acquisitions, net -- -- -- --
Total stores (end of period) 3,583 3,742 3,583 3,742
Relocated stores 3 14 11 57
Revenues
The 5.7% and 6.9% growth in revenues for the thirteen and thirty-nine
week periods ended December 1, 2001 were driven predominately by pharmacy sales
growth of 8.5% and 9.6%, respectively. Same store sales growth for the thirteen
and thirty-nine week periods ended December 1, 2001 was 6.9% and 8.3%,
respectively. As the prior fiscal year was a 53 week year, same store sales for
the thirteen and thirty-nine week periods ended December 1, 2001 are calculated
by comparing that period with the thirteen and thirty-nine week periods ended
December 2, 2000.
For the thirteen and thirty-nine week periods ended December 1, 2001,
pharmacy sales led revenue growth with same-store sales increases of 10.6% and
11.4%, respectively. Pharmacy same store sales increases are due to an increase
in both prescriptions filled and sales price per prescription. Factors
contributing to pharmacy same store sales increases include inflation, our
ability to attract and retain managed care customers, our 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 had same store sales growth of
1.2% and 3.6% in the thirteen and thirty-nine week periods ended December 1,
2001, 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.
21
Costs and Expenses
Thirteen Week Period Ended Thirty-Nine Week Period Ended
----------------------------------- -----------------------------------
December 1, November 25, December 1, November 25,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Cost of goods sold $ 2,923,759 $ 2,713,988 $ 8,636,889 $ 8,005,474
Gross profit 808,320 817,703 2,496,397 2,407,872
Gross margin 21.7% 23.2% 22.4% 23.1%
Selling, general and administrative
expenses 801,453 810,900 2,469,452 2,491,090
Selling, general and administrative
expenses as a percentage of revenues 21.5% 22.9% 22.2% 23.9%
Goodwill amortization 5,200 5,058 15,823 16,759
Store closing and impairment charges 18,652 95,571 40,393 199,742
Interest expense 82,515 146,122 313,581 499,871
Interest rate swap contracts 10,382 -- 41,429 --
(Gain) loss on debt and lease conversions
and modifications, net (56) 8,306 154,539 92,095
Share of loss from equity investment 1,697 6,484 12,092 30,554
(Gain) loss on sale of assets and
investments, net 694 (13,491) (50,761) 3,035
Cost of Goods Sold
Gross margin was 21.7% for the thirteen week period ended December 1,
2001 compared to 23.2% for the thirteen week period ended November 25, 2000.
Gross margin was negatively impacted by the continuing trend of inflation,
increased third party reimbursed prescription sales as a percent of total
prescription sales 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 92.2% for the thirteen week
period ended December 1, 2001 compared to 90.7% for the thirteen week period
ended November 25, 2000, respectively. In addition, the reclassification of
certain leases from capital to operating in the refinancing caused an increase
in occupancy costs in the thirteen weeks ended December 1, 2001.
Gross margin was 22.4% for the thirty-nine week period ended December
1, 2001, compared to 23.1% for the thirty-nine week period ended November 25,
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. In
addition, the reclassification of certain leases from capital to operating in
the refinancing caused an increase in occupancy costs.
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 $45.0 million
for the thirteen and thirty-nine week periods ended December 1, 2001 versus
$10.8 million and $22.4 million for the thirteen and thirty-nine week periods
ended November 25, 2000.
22
Selling, General and Administrative Expenses
The selling, general and administrative expense ("SG&A") for the
thirteen week period ended December 1, 2001 includes $5.5 million of expenses
incurred in connection with our defense of shareholder litigation and assisting
with various governmental investigations. Offsetting this amount is $39.4
million of non-cash income related to variable plan accounting on certain
management stock options, restricted stock grants and stock appreciation rights.
Excluding these items, SG&A as a percentage of revenues was 22.4% for the
thirteen week period ended December 1, 2001. SG&A for the thirteen week period
ended November 25, 2000, includes $21.9 million of costs incurred with the
restatement of our historical financial statements primarily offset by a $20.0
million increase in estimated insurance recovery related to the settlement of
the stockholder's class action lawsuit. Excluding these items, SG&A as a
percentage of revenue remained 22.9% for the thirteen week period ended November
25, 2000. SG&A exclusive of these items in the thirteen week period of the
current fiscal year of 22.4% is slightly favorable to the adjusted 22.9% of the
prior year's comparable period because of decreased labor charges and better
leveraging of our fixed costs resulting from our higher sales volume.
SG&A for the thirty-nine week period ended December 1, 2001 includes
$14.5 million of expenses incurred in connection with our defense of shareholder
litigation and assisting with various governmental investigations. Also
included in the SG&A expense for the thirty-nine week period ended December 1,
2001, is a net expense of $2.9 million for the accrual of anticipated loss on
certain legal matters and $2.9 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 $41.3
million for the settlement of litigation with certain drug manufacturers.
Excluding these items, SG&A as a percentage of revenues was 22.4% for the
thirty-nine week period ended December 1, 2001. SG&A for the thirty-nine week
period ended November 25, 2000 includes $73.4 million of costs incurred with the
restatement of our historical financial statements, offset by a receipt of $12.3
million related to the partial settlement of litigation with certain drug
manufacturers and a $20.0 million increase in estimated insurance recovery
related to the settlement of the shareholder's class action lawsuit. Excluding
these items, SG&A as a percentage of revenue was 23.5% for the thirty-nine week
period ended November 25, 2000. SG&A exclusive of these items in the period of
the current fiscal year of 22.4% compares favorably to the adjusted 23.5% of the
prior year's comparable period because of decreased labor charges, decreased
depreciation and amortization and occupancy charges resulting from a reduced
store count, and better leveraging of our fixed costs resulting from our higher
sales volume.
23
Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Thirteen Week Period Ended Thirty-Nine Week Period Ended
----------------------------------- -----------------------------------
December 1, November 25, December 1, November 25,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Impairment charges $ 8,060 $ 44,518 $ 24,613 $ 70,342
Store and equipment lease exit charges 10,590 22,601 15,437 23,703
Impairment of other assets 2 28,452 343 105,697
--------------- --------------- --------------- ---------------
$ 18,652 $ 95,571 $ 40,393 $ 199,742
=============== =============== =============== ===============
Impairment Charges. Impairment charges include non-cash charges of $8.1
million and $44.5 million for the thirteen week periods ended December 1, 2001
and November 25, 2000, respectively, for the impairment of long-lived assets
(including allocable goodwill) at 23 and 142 stores, respectively. Impairment
charges include non-cash charges of $20.4 million and $70.3 million for the
thirty-nine week periods ended December 1, 2001 and November 25, 2000,
respectively, for the impairment of long-lived assets (including allocable
goodwill) at 53 and 244 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 thirty-nine week period ended December 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 thirty nine
week period ended November 25, 2000, we recorded a write-down of $105.7 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. As of December 1, 2001, we have no remaining recorded value for our
investment in drugstore.com's common stock.
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 December 1, 2001 and November 25, 2000 we
recorded a provision for 9 and 72 stores, respectively, that were designated for
closure. During the thirty-nine week periods ended December 1, 2001 and November
25, 2000, we recorded a provision for 42 and 106 stores, respectively, that were
designated for closure. Also included in this line are charges of $1.3 million
incurred in the thirty-nine weeks ended December 1, 2001, related to the early
termination of an equipment lease.
In December 2001, we entered into an agreement with another operator of
drugstores under which we will exchange certain of our prescription files, fixed
assets and inventory for certain prescription files, fixed assets and inventory
owned by the other retailer. In connection with this transaction, we plan to
close 36 stores which held prescription files that are being transferred to
other stores. We expect to incur a fourth quarter charge of approximately $40.0
million related to these closings, which consists primarily of lease termination
costs.
24
Interest Expense
Interest expense was $82.5 and $313.6 million for the thirteen and
thirty-nine week periods ended December 1, 2001, compared to $146.1 and $499.9
million in the thirteen and thirty-nine week periods ended November 25, 2000.
Interest expense for the thirteen and thirty nine week periods ended November
25, 2000 was favorably impacted by a reversal (resulting from the settlement of
a contract) of $20.0 million of previously amortized cost of issuance related to
financing effected in October 1999. The decrease was due to the reduction of
debt resulting from the sale of PCS, debt for equity exchanges and the June 2001
refinancing. The weighted average interest rates, excluding capital leases, on
our indebtedness for the thirteen week periods ended December 1, 2001 and
November 25, 2000 were 8.1% and 8.6%, respectively.
Interest Rate Swap Contracts
We entered 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
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.
Accordingly, we recognized a charge of $31.0 million representing the amount
that we would have to pay the counter party to terminate the contracts as of
that date. Subsequent changes in the market value of the interest rate swaps of
$10.4 million, inclusive of cash payments, has been recorded on the income
statement for the thirteen weeks ended December 1, 2001. This amount represents
an adjustment to the aggregate expense projected to be recognized relating to
the swaps. This adjustment is due to a reduction in market interest rates over
the thirteen weeks ended December 1, 2001. Our termination liability is $31.3
million as of December 1, 2001.
Income Taxes
The Federal tax benefit for the thirteen and thirty-nine week periods
ended December 1, 2001 and November 25, 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 thirty-nine
week periods ended November 25, 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 December 1, 2001 and November 25, 2000 was $112.8 million and $241.2
million, respectively. The net loss from continuing operations for the
thirty-nine week periods ended December 1, 2001 and November 25, 2000 was $503.2
million and $1,069.7 million, respectively. In addition to the matters discussed
above, our results in the thirteen and thirty-nine week periods ended December
1, 2001 and November 25, 2000 have been affected by other charges. In the
thirteen week periods ended December 1, 2001 and November 25, 2000, we recorded
$1.7 million and $6.5 million representing our share of drugstore.com losses. We
also recorded a loss of $8.3 million on debt and lease conversions and
modifications in the thirteen week period ended November 25, 2000. In the
thirty-nine week periods ended December 1, 2001 and November 25, 2000, we
recorded pre-tax losses of $154.5 million and $92.1 million on debt and lease
conversions and modifications and losses of $12.1 million and $30.6 million
representing our share of drugstore.com losses. In addition, we recorded an
extraordinary loss of $66.6 million in the thirty-nine week period ended
December 1, 2001, related to early extinguishment of debt in the refinancing. We
also recorded a gain of $53.2 million in the thirty-nine week period ended
December 1, 2001 resulting from the sale of AdvancePCS securities. Additionally,
for the thirteen and thirty-nine week periods ended November 25, 2000, we
recorded a reduction of loss (loss) net of income taxes of $135.5 million and
($199.2) million on the disposal of the PBM segment, respectively. As a result
of the decision to dispose of the PBM segment, we recognized an increase in the
income tax valuation allowance of $146.9 million for the thirty-nine week period
ended November 25, 2000.
25
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. The senior secured credit facility also allows us, at our
option, to issue up to $643.0 million of unsecured debt that is not guaranteed
by any of our subsidiaries, reduced by the following debt to the extent
incurred: (i) $150.0 million of financing transactions of existing owned real
estate; (ii) $393.0 million of additional debt secured by the facility's
collateral on a second priority basis; and (iii) $100.0 million of financing
transactions for property or assets acquired after June 27, 2001. The $643.0
million of permitted debt, whether secured or unsecured, is reduced by the
aggregate outstanding, undefeased balances of the 5.25% convertible subordinated
notes, the 6.0% dealer remarketable securities and the 4.75% convertible notes
(see "Other Transactions" below). As of December 1, 2001, we had outstanding
principal balances of $152.0 million, $85.1 million and $250.0 million of the
5.25% convertible subordinated notes, 6.0% dealer remarketable securities and
4.75% convertible notes, respectively. Our 11.25% senior notes due July 2008
also permit $150.0 million of real estate financing, $400.0 million of
additional other debt and $600.0 million of additional permitted debt, which
includes allowing us to increase our senior secured credit facility. The
issuance of 4.75% convertible notes reduced additional other debt permitted by
our 11.25% senior notes due 2008 to $150.0 million, although we may reclassify
this debt to other permitted debt at any time. During the thirty-nine week
period ended December 1, 2001, operations did not provide sufficient cash to
fund our working capital needs. 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 for equity and reclassified
capital 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. On December 1, 2001, the term loan was fully drawn except for $21.5
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 December 1, 2001, we had $417.6 million in additional available borrowing
capacity under the revolving credit facility net of outstanding letters of
credit of $82.4 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 are
effectively 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.
26
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, reclassified the related leases as operating
leases thereby reducing outstanding capital lease obligations by $850.8 million.
Impact on Results of Operations for 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, 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.
Other Transactions
Convertible Notes: In November 2001, we issued $250.0 million of 4.75%
convertible notes due December 2006. These notes were issued at a 3% discount
resulting in cash proceeds of $242.5 million. These notes are unsecured and are
effectively subordinate to our secured debt. The notes are convertible, at the
option of the holder, into shares of our common stock at a conversion price of
$6.50 per share, subject to adjustments to prevent dilution, at any time.
Repurchase and Debt: We repurchased $22.7 million of our 6.0% dealer
remarketable securities due 2003 during the thirteen weeks ended December 1,
2001.
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash Flows
Our operating activities used $309.8 million of cash in the thirty-nine
week period ended December 1, 2001 and $768.0 million of cash in the thirty-nine
week period ended November 25, 2000. Operating cash flow was negatively impacted
by $314.5 million in interest payments.
Cash provided by investing activities was $348.0 million for the
thirty-nine week period ended December 1, 2001, due primarily to the sale of the
securities we received in our sale of AdvancePCS. Cash provided by investing
activities was $683.7 million for the thirty-nine week period ended November 25,
2000, due primarily to proceeds from the sale of discontinued operations. Cash
used for capital expenditures amounted to $146.5 million for the thirty
nine-week period ended December 1, 2001, see "Capital Expenditures" section
below for more detail.
Cash (used in) provided by financing activities was $(36.2) million and
$13.1 million for the thirty-nine week periods ended December 1, 2001 and
November 25, 2000, respectively. Proceeds from the issuance of the new senior
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 thirty-nine week
period ended December 1, 2001. Partially offsetting the cash used in financing
activities for the thirty-nine week period ended December 1, 2001 were proceeds
of $242.5 million from the issuance of convertible notes.
Working Capital
Working capital was $1,382.5 million at December 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, as well as the increase
in current maturities of 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.
27
Capital Expenditures
We plan capital expenditures of approximately $100.0 million to $110.0
million during fiscal 2002, consisting of $45.0 million to $50.0 million related
to new store construction, store relocation and other store construction
projects, and an additional $55.0 million to $60.0 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. We expect that
these capital expenditures will be financed primarily with cash flow from
operations and borrowings under the revolving credit facility available under
our senior secured facility. During the thirty-nine week period ended December
1, 2001, we spent $155.6 million on capital expenditures, consisting of $38.0
million related to new store construction, store relocation and other store
construction projects. An additional $35.0 million was 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. Our inability to obtain any
necessary consent or relief could have a material adverse effect on us.
Recent Accounting Pronouncements
In June 2001, the FASB issued two new pronouncements: 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 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). SFAS 142 is
effective for the 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 December 1, 2001 condensed consolidated financial
statements. At December 1, 2001, unamortized goodwill was $723.0 million.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 retains the requirements
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," to recognize an impairment loss if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and to measure an impairment loss as the difference between the
carrying amount and fair value of the asset. SFAS 144 modifies SFAS 121 in that
it eliminates the requirement to allocate goodwill to long-lived assets to be
tested for impairment. SFAS 144 also modifies APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," to require discounted operations presentation in the income
statement for a component of an entity that is to be disposed. SFAS 144 is
effective for fiscal years beginning after December 15, 2001, and early adoption
is encouraged. We are currently evaluating the provisions of SFAS 144 and have
not adopted such provisions in our December 1, 2001 condensed consolidated
financial statements.
28
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 December 1, 2001.
Fiscal Year
---------------
2002 2003 2004 2005 2006
--------------- --------------- --------------- --------------- ---------------
(dollars in thousands)
Long-term debt, including
current portion
Fixed rate $ 7,942 $ 205,441 $ 123,472 $ 62,528 $ 1,267,937
Average Interest Rate 6.80% 6.60% 7.39% 10.55% 9.37%
Variable Rate -- -- -- -- 378,462
Average Interest Rates -- -- -- -- 7.19%
Interest Rate Swaps -- -- -- -- --
Fair Value
at
Thereafter Total December 1, 2001
--------------- --------------- ----------------
Long-term debt, including
current portion
Fixed rate $ 1,705,428 $ 3,372,748 $ 2,999,077
Average Interest Rate 7.57% 8.22%
Variable Rate -- $ 378,462 $ 378,462
Average Interest Rates -- 7.19%
Interest Rate Swaps -- -- $ (31,276)
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 December 1, 2001, 10.1% 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 December 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%.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On December 24, 2001, the time for appeal of the judgement in the store
management overtime litigation expired and the judgement became final.
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:
o On November 19, 2001, we issued and sold to a group of
institutional investors $250.0 million aggregate principal
amount of new 4.75% Convertible Notes Due December 1, 2006. We
issued the 4.75% notes to the initial purchasers at a 3%
discount. The 4.75% convertible notes are convertible into
shares of our common stock at any time, unless we previously
have redeemed or repurchased the 4.75% convertible notes or
unless the 4.75% convertible notes previously have matured.
Holders of the 4.75% convertible notes called for redemption
or repurchase are entitled to convert their notes to and
including, but not after, the close of business on the date
fixed for redemption or repurchase, as the case may be. The
4.75% convertible notes were issued in a transaction exempt
from registration in reliance on Rule 144A 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
None.
Item 5. Other Information
None.
30
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 November 2, 1999
Incorporation dated October 25, 1999
3.3 Series C Preferred Stock Certificate of Designation dated June Exhibit 3.3 to Form S-1 filed on July 12, 2001
26, 2001
3.4 Certificate of Amendment to Restated Certificate of Exhibit 3.4 to Form S-1 filed on July 12, 2001
Incorporation dated June 27, 2001
3.5 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock Exhibit 3.5 to the 10-Q filed on October 12, 2001
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 12, 2001
Corporation, as issuer and State Street Bank and Trust Company,
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 12, 2001
Corporation, as issuer and BNY Midwest Trust Company, as
trustee, related to the Company's 11 3/4% Senior Notes due 2008
4.3 Indenture, dated as of November 19, 2001, between Rite Aid Filed herewith
Corporation as issuer, and BNY Midwest Trust Company, as
trustee, related to the Company's 4.75% Convertible Notes due
December 1, 2006.
4.4 Registration Rights Agreement, dated as of November 19, 2001, Filed herewith
between Rite Aid Corporation, as issuer, and Salomon Smith
Barney, Inc. and J.P. Morgan Securities Inc., as the initial
purchasers related to the Company's 4.75% Convertible Notes due
December 1, 2006.
10.1 Exchange Agreement, dated as of October 3, 2001, by and among Exhibit 10.60 to Form 10-Q filed on October 12, 2001.
Rite Aid Corporation and Green Equity Investors III, L.P.
31
10.2 Amendment Number 1 to the Registration Rights Agreement dated Exhibit 10.61 to Form 10-Q filed on October 12, 2001.
as of October 27, 1999, dated as of October 3, 2001, by and
among Rite Aid Corporation and Green Equity Investors III, L.P.
10.3 Amendment Number 1 to the Senior Credit Agreement dated June Exhibit 10.62 to Form 10-Q filed on October 12, 2001.
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.
10.4 Purchase Agreement dated as of November 13, 2001 between Rite Filed herewith
Aid Corporation, as issuer, and Salomon Smith Barney, Inc. and
J.P. Morgan Securities Inc., as representatives of the Initial
Purchasers of the Company's 4.75% Convertible Notes due 2006
11 Statements re Computation of Loss Per Share (See Note 2 to the
condensed consolidated financial statements)
------
(b) Rite Aid Corporation has filed the following Current Reports on Form 8-K in
the thirteen week period ended December 1, 2001:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 15, 2002
RITE AID CORPORATION
By: /s/ ELLIOT S. GERSON
Elliot S. Gerson
Senior Executive Vice President
and General Counsel
Date: January 15, 2002
By: /s/ JOHN T. STANDLEY
John T. Standley
Senior Executive Vice President
and Chief Financial Officer
32