Edgar Filing: RITE AID CORP

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 1, 2002

|_| 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
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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,
Camp Hill, Pennsylvania 17011
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (717) 761-2633

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(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 515,197,846 shares of its $1.00 par value common stock
outstanding as of June 14, 2002.

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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 June 1, 2002 and
March 2, 2002 ................................................ 2

Condensed Consolidated Statements of Operations for the
Thirteen Week Periods Ended June 1, 2002 and June 2, 2001 .... 3

Condensed Consolidated Statements of Cash Flows for the
Thirteen Week Periods Ended June 1, 2002 and June 2, 2001 .... 4

Notes to Condensed Consolidated Financial Statements ......... 5

ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 14

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ... 21

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings ............................................ 22

ITEM 2. Changes in Securities and Use of Proceeds .................... 22

ITEM 3. Defaults Upon Senior Securities .............................. 22

ITEM 4. Submission of Matters to a Vote of Security Holders .......... 22

ITEM 5. Other Information ............................................ 22

ITEM 6. Exhibits and Reports on Form 8-K ............................. 23

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; and

o access to capital.

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 our Annual Report on Form 10-K for the fiscal year ended March 2,
2002 ("the Fiscal 2002 10-K"), which we filed with the Securities and Exchange
Commission ("SEC") on May 7, 2002 and is available on the SEC's website at
www.sec.gov.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)

June 1, 2002 March 2, 2002
------------ -------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 386,519 $ 344,055
Accounts receivable, net ...................... 601,584 594,249
Inventories, net .............................. 2,238,836 2,262,111
Prepaid expenses and other current assets ..... 97,793 101,681
----------- -----------
Total current assets......................... 3,324,732 3,302,096
PROPERTY, PLANT AND EQUIPMENT, NET ............. 2,048,826 2,096,030
GOODWILL, NET .................................. 684,535 684,535
OTHER INTANGIBLES, NET ......................... 229,304 240,725
OTHER ASSETS ................................... 181,841 168,373
----------- -----------
Total assets................................. $ 6,469,238 $ 6,491,759
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of
convertible notes, long-term debt and lease
financing obligations........................ $ 211,995 $ 209,457
Accounts payable .............................. 823,767 830,535
Sales and other taxes payable ................. 46,395 49,407
Accrued salaries, wages and other current
liabilities.................................. 743,383 688,435
----------- -----------
Total current liabilities.................... 1,825,540 1,777,834
CONVERTIBLE NOTES .............................. 243,375 243,000
LONG-TERM DEBT, LESS CURRENT MATURITIES ........ 3,416,210 3,427,930
LEASE FINANCING OBLIGATIONS, LESS CURRENT
MATURITIES.................................... 174,466 176,081
OTHER NONCURRENT LIABILITIES ................... 769,752 837,737
----------- -----------
Total liabilities............................ 6,429,343 6,462,582
COMMITMENTS AND CONTINGENCIES .................. -- --
REDEEMABLE PREFERRED STOCK ..................... 19,586 19,561
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1 per share,
liquidation value $100 per share............. 368,734 361,504
Common stock, par value $1 per share .......... 515,108 515,136
Additional paid-in capital .................... 3,144,540 3,151,811
Accumulated deficit ........................... (4,003,459) (4,006,043)
Stock-based and deferred compensation ......... 8,641 463
Accumulated other comprehensive loss .......... (13,255) (13,255)
----------- -----------
Total stockholders' equity................... 20,309 9,616
----------- -----------
Total liabilities and stockholders' equity... $ 6,469,238 $ 6,491,759
=========== ===========

See accompanying notes to condensed consolidated financial statements.

RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

REVENUES ........................................ $3,925,116 $3,710,133
COSTS AND EXPENSES:
Costs of goods sold, including occupancy costs . 3,010,719 2,835,455
Selling, general and administrative expenses ... 883,587 820,242
Stock-based compensation expense ............... 8,094 43,092
Goodwill amortization .......................... -- 5,343
Store closing and impairment credits ........... (4,117) (364)
Interest expense ............................... 84,631 128,689
Interest rate swap contracts ................... 264 --
Loss on debt and lease conversions and
modifications................................. -- 132,713
Share of loss from equity investment ........... -- 5,883
Gain on sale of assets and investments, net .... (16,865) (49,818)
---------- ----------
3,966,313 3,921,235
---------- ----------
Loss before income taxes and extraordinary item (41,197) (211,102)
INCOME TAX BENEFIT .............................. (43,511) --
---------- ----------
Income (loss) before extraordinary item ........ 2,314 (211,102)
EXTRAORDINARY ITEM, gain on early extinguishment
of debt, net of income taxes of $0.............. 270 --
---------- ----------
Net income (loss) .............................. $ 2,584 $ (211,102)
========== ==========
COMPUTATION OF LOSS APPLICABLE TO COMMON
STOCKHOLDERS
Net income (loss) .............................. $ 2,584 $ (211,102)
Accretion of redeemable preferred stock ........ (25) --
Cumulative preferred stock dividends ........... (7,230) (6,680)
---------- ----------
Net loss attributable to common stockholders ... $ (4,671) $ (217,782)
========== ==========
BASIC AND DILUTED LOSS PER SHARE:
Loss before extraordinary item ................. $ (0.01) $ (0.56)
Gain from extraordinary item ................... -- --
---------- ----------
Net loss per share ............................. $ (0.01) $ (0.56)
========== ==========

See accompanying notes to condensed consolidated financial statements.

RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

OPERATING ACTIVITIES:
Net income (loss) .............................. $ 2,584 $(211,102)
Extraordinary gain ............................. 270 --
-------- ---------
Income (loss) from operations .................. 2,314 (211,102)
Adjustments to reconcile to net cash provided
by operations:
Depreciation and amortization .................. 75,019 90,841
Stock-based compensation expense ............... 8,094 43,092
Store closing and impairment credits ........... (4,117) (364)
Loss on debt and lease conversions and
modifications................................. -- 132,713
Gain on sale of assets and investments, net .... (16,865) (49,818)
Changes in income tax receivables and payables . (43,708) 5,315
Changes in operating assets and liabilities .... 17,376 35,065
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 38,113 45,742
-------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment . (20,244) (23,100)
Proceeds from the repayment/sale of AdvancePCS
securities.................................... -- 484,214
Intangible assets acquired ..................... (2,056) (3,700)
Proceeds from dispositions ..................... 18,866 6,300
-------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES..................................... (3,434) 463,714
-------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt ........... (4,500) (490,180)
Net change in bank credit facilities ........... (5,000) (56,247)
Change in zero balance cash accounts ........... 18,092 24,759
Proceeds from issuance of stock ................ 34 --
Deferred financing costs paid .................. (841) --
-------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES..................................... 7,785 (521,668)
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 42,464 (12,212)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 344,055 92,290
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...... $386,519 $ 80,078
======== =========
SUPPLEMENTARY CASH FLOW DATA:
Cash paid for interest (net of capitalized
amounts of $95 and $205)...................... $ 70,688 $ 127,305
======== =========
Cash payments (refunds) of income taxes ........ $ 412 $ (5,834)
======== =========
Conversion of debt to common stock ............. $ -- $ 376,193
======== =========

See accompanying notes to condensed consolidated financial statements

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended June 1, 2002 and June 2, 2001
(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 week period ended June 1,
2002 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 2002 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. Recent Accounting Pronouncements

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" effective March 3, 2002. SFAS No.
142 specifies that all goodwill and indefinite life intangibles shall no
longer be amortized. Goodwill must be allocated to reporting units and
evaluated for impairment on an annual basis with an initial impairment
assessment to be performed upon adoption of SFAS No. 142. The Company has
evaluated the provisions of SFAS No. 142, and determined that no cumulative
effect results from adopting this change in accounting principle. At June 1,
2002, the Company had unamortized goodwill of $684,535 and no indefinite life
intangibles.

The impact of the adoption of SFAS No. 142 on the thirteen weeks ended
June 2, 2001 is as follows:

Reported net loss .................................................. $(211,102)
Add back goodwill amortization ..................................... 5,343
---------
Adjusted net loss .................................................. $(205,759)
=========
Basic and diluted loss per share:
Reported net loss ................................................. $ (0.56)
Goodwill amortization ............................................. 0.01
---------
Adjusted net loss ................................................. $ (0.55)
=========

Intangible assets other than goodwill are separated into two categories,
finite-lived and indefinite lived. Intangible assets with finite useful lives
are amortized over their useful lives, while intangible assets with indefinite
lives are not amortized. Following is a summary of the Company's amortizable
intangible assets as of June 1, 2002 and March 2, 2002.

June 1, 2002 March 2, 2002
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------

Favorable leases and other ...................................... $312,992 $(162,566) $312,677 $(158,290)
Prescription files .............................................. $342,304 $(263,426) $341,422 $(255,084)
-------- --------- -------- ---------
Total .......................................................... $655,296 $(425,992) $654,099 $(413,374)
======== ========= ======== =========

RITE AID CORPORATION AND SUBSIDIARIES

2. Recent Accounting Pronouncements -- (Continued)

The amortization expense for these intangible assets was $12,750 for the
thirteen weeks ended June 1, 2002. The anticipated annual amortization expense
for these intangible assets is $43,690, $30,559, $15,088, $11,170 and $10,213
in fiscal 2003, 2004, 2005, 2006 and 2007, respectively.

The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" effective March 3, 2002. SFAS No. 144 addressed the
financial accounting and reporting for the impairment or disposal of long-
lived assets. There was no impact on the consolidated financial position or
results of operations as a result of the adoption of SFAS No. 144.

In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of FASB Statements No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets
of Motor Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements," Amendment of SFAS No. 13, "Accounting for Leases,"
and Technical Corrections."

The provisions of SFAS No. 145 that relate to the rescission of SFAS No. 4
are required to be applied in fiscal years beginning after May 15, 2002. Any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria in 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" for classification as an
extraordinary item shall be reclassified. The provisions related to SFAS No.
13 are effective for transactions occurring after May 15, 2002. All other
provisions of SFAS No. 145, which are effective for financial statements
issued on or after May 15, 2002, have been adopted without material impact.
The Company plans to adopt the remaining provisions of SFAS No. 145 based on
the required effective dates and the impact is not believed to be material.

3. Loss Per Share

Following is a summary of the components of the numerator and denominator of
the basic and diluted loss per share computation:

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

Numerator for earnings per share:
Income (loss) before extraordinary item ........ $ 2,314 $(211,102)
Accretion of redeemable preferred stock ........ (25) --
Cumulative preferred stock dividends ........... (7,230) (6,680)
-------- ---------
Net loss before extraordinary item attributable
to common stockholders........................ (4,941) (217,782)
Extraordinary item, gain on early
extinguishment of debt ....................... 270 --
-------- ---------
Net loss attributable to common stockholders ... $ (4,671) $(217,782)
======== =========
Denominator:
Basic weighted average shares .................. 515,119 386,996
Diluted weighted average shares ................ 515,119 386,996

Basic and diluted loss per share:
Loss from operations ........................... $ (0.01) $ (0.56)
Gain from extraordinary item ................... -- --
-------- ---------
Net loss per share ............................. $ (0.01) $ (0.56)
======== =========

RITE AID CORPORATION AND SUBSIDIARIES

3. Loss Per Share -- (Continued)

No potential shares of common stock have been included in the computation of
diluted earnings per share as the Company incurred losses attributable to
common shareholders for the thirteen week periods ended June 1, 2002 and
June 2, 2001, and the amount would be antidilutive. At June 1, 2002, an
aggregate of 169,764 potential common shares related to stock options,
convertible notes and preferred stock and warrants, have been excluded from
the computation of diluted earnings per share.

4. Store Closing and Impairment Charges

Store closing and impairment charges (credits) consist of:

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

Impairment charges .............................. $ 860 $ 7,893
Store and equipment lease exit credits .......... (4,977) (8,568)
Impairment of other assets ...................... -- 311
------- -------
$(4,117) $ (364)
======= =======

Impairment charges

Impairment charges include non-cash charges of $860 and $7,893 for the
thirteen week periods ended June 1, 2002 and June 2, 2001, respectively, for
the impairment of long-lived assets (including allocable goodwill for the
thirteen week period ended June 2, 2001) at 13 and 17 stores, respectively.
These amounts include the write-down of long-lived assets at stores that were
assessed for impairment because of management's intention to relocate or close
the store or because of changes in circumstances that indicate the carrying
value of the asset may not be recoverable.

Store and equipment lease exit charges (credits)

Costs incurred to close a store, which principally include lease termination
costs, are recorded at the time management commits to closing the store, which
is 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 each quarter and adjusts the liability accordingly. The effect of
lease terminations and changes in assumptions in interest rates during the
thirteen week periods ended June 1, 2002 and June 2, 2001, had a positive
impact that exceeded the additional provision due to low closure levels and
resulted in a credit from closed store activity.

RITE AID CORPORATION AND SUBSIDIARIES

4. Store Closing and Impairment Charges -- (Continued)

The reserve for store and equipment lease exit costs includes the following
activity:

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

Balance -- beginning of period .................. $287,464 $233,008
Provision for present value of noncancellable
lease payments of stores designated to be
closed........................................ 1,093 3,091
Changes in assumptions about future sublease
income, terminations and changes in interest
rates......................................... (5,430) (8,144)
Reversals of reserves for stores that
management has determined will remain open.... (640) (3,515)
Interest accretion ............................. 2,457 2,333
Cash payments, net of sublease income .......... (12,749) (9,812)
-------- --------
Balance -- end of period ........................ $272,195 $216,961
======== ========

5. Sale of Investments

On April 29, 2002 and May 6, 2002, the Company sold shares of drugstore.com.
As a result of these transactions, the Company no longer has an equity
investment in drugstore.com. These sales resulted in a gain of $15,777, which
is included in the $16,865 gain on sale of assets and investments, net, for
the thirteen weeks ended June 1, 2002.

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.
Additionally, AdvancePCS repurchased the unsecured 11% senior subordinated
notes for $200,000 plus accrued interest.

6. Income Taxes

The tax benefit of $43,511 for the thirteen week period ended June 1, 2002
is comprised of two components. The first reflects an income tax benefit of
$44,011 based on the recent tax law change, enacted on March 9, 2002, which
increased the carryback period of net operating losses incurred in fiscal 2001
and 2002 from two years to five. The second component is the provision from
operations for state income taxes of $500.

The income tax benefit of the NOL generated in the thirteen week periods
ended June 1, 2002 and June 2, 2001 have been fully offset by a valuation
allowance as a result of the Company's determination that, based on available
evidence, it is more likely than not that the deferred tax assets will not be
realized.

The Company has undergone an ownership change for statutory purposes during
fiscal 2002, which resulted in a limitation on the future use of net operating
loss carryforwards. The Company believes that this limitation does not further
impair the net operating loss carryforwards because they are fully reserved.

RITE AID CORPORATION AND SUBSIDIARIES

7. Indebtedness and Credit Agreements

Following is a summary of indebtedness and lease financing obligations at
June 1, 2002 and March 2, 2002:

June 1, 2002 March 2, 2002
------------ -------------

Secured Debt:
Senior secured credit facility ................ $1,373,462 $1,378,462
10.5% senior secured notes due 2002 ........... 20,879 20,879
12.5% senior secured notes due 2006 ($152,025
face value less unamortized discount of
$7,429 and $7,857)........................... 144,596 144,168
Senior secured (shareholder) notes due 2006 ... 149,500 149,500
Other ......................................... 11,175 11,284
---------- ----------
1,699,612 1,704,293
---------- ----------
Lease Financing Obligations .................... 181,009 182,625
Unsecured Debt:
5.25% convertible subordinated notes due 2002 . 150,500 150,500
6.0% dealer remarketable securities due 2003 .. 79,050 83,550
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 ($250,000
face value less unamortized discount of
$6,625 and $7,000)........................... 243,375 243,000
7.125% notes due 2007 ......................... 350,000 350,000
6.125% fixed-rate senior notes due 2008 ....... 150,000 150,000
11.25% notes due 2008 ......................... 150,000 150,000
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
---------- ----------
2,165,425 2,169,550
---------- ----------
Total debt ..................................... 4,046,046 4,056,468
Short-term debt and current maturities of
convertible notes, long-term debt and lease
financing obligations......................... (211,995) (209,457)
---------- ----------
Long-term debt and lease financing obligations,
less current maturities....................... $3,834,051 $3,847,011
========== ==========

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, ending on June 26, 2002. 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, ending July 10, 2002.

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, changes in the market value
of the interest rate swaps of $264, inclusive of cash payments, have been
recorded on the income statement for the thirteen week period ended June 1,
2002. This amount represents an adjustment to the aggregate expense recognized
by the Company relating to the swaps. This adjustment is due to a reduction in
market interest rates coupled with the passage of time. The termination
liability was $6,424 as of June 1, 2002.

RITE AID CORPORATION AND SUBSIDIARIES

7. Indebtedness and Credit Agreements -- (Continued)

During the thirteen week period ended June 1, 2002, the Company redeemed
$4,500 of its 6.0% dealer remarketable securities due 2003 for $4,230. The
early redemption resulted in an extraordinary gain of $270, net of tax of $0.

The Company completed the following debt for equity exchanges during the
thirteen week period ended June 2, 2001:

Carrying Additional
Debt Exchanged Amount Common Paid-In Gain
-------------- Exchanged Stock Capital (Loss)
--------- ------- ---------- ---------

PCS facility ..................................................................... $ 5,000 $ 715 $ 5,076 $ (791)
RCF facility ..................................................................... 30,000 4,347 30,115 (4,462)
5.25% convertible subordinated notes ............................................. 205,308 29,750 307,686 (133,437)
6.00% dealer remarketable securities ............................................. 79,885 12,382 55,633 11,427
10.50% notes due 2002 ............................................................ 56,000 8,542 51,883 (5,450)
-------- ------- -------- ---------
$376,193 $55,736 $450,393 $(132,713)
======== ======= ======== =========

8. Stockholders' Equity

The Company issued 3,000 shares of Series B cumulative pay-in-kind preferred
stock at $100 per share, which is the liquidation preference. The Series B
Preferred Stock was convertible into shares of the Company's common stock at a
conversion price of $5.50 per share. On October 5, 2001, the Company exchanged
all outstanding shares of Series B cumulative pay-in-kind 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 the liquidation,
distribution or winding up of the Company.

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 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 expense of $5,931 and $36,903 during the
thirteen week periods ended June 1, 2002 and June 2, 2001, respectively,
related to the repriced options.

The stock-based and deferred compensation component of stockholders' equity
is comprised of $14,383 and $8,453 related to the repriced options offset by
$5,742 and $7,990 of deferred compensation, as of June 1, 2002 and March 2,
2002, respectively.

RITE AID CORPORATION AND SUBSIDIARIES

9. Commitments and Contingencies

The Company is party to numerous legal proceedings, as discussed 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. In June of 2002, the SEC
issued a cease-and-desist order that completes their investigation into the
Company relating to certain financial reporting and accounting practices under
former management. The cease-and-desist order, in which Rite Aid neither
admits or denies the findings, was pursuant to Rite Aid's offer of settlement.
The Company will pay no fine under the SEC settlement. 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. The Company has accrued $20,000
during the thirteen week period ended June 1, 2002 in connection with the
resolution of these matters; however, the Company may incur charges in excess
of that amount and the Company is unable to estimate the range of possible
loss. The Company will continue to evaluate its estimate and to the extent
that additional information arises or its strategy changes, the Company will
adjust its accrual accordingly.

The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's associate benefit plans, including the principal
401(k) plan, which permitted associates 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 putative 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. As a
result of discussions with the independent trustee and the attorneys for the
putative class action plaintiff, the Company has arrived at a preliminary
understanding which would resolve all claims arising out of our associate
benefit plans by an agreement to maintain the current level of benefits and a
current payment that will cost, net of insurance, approximately $3,300, which
has been accrued. Various non-monetary terms and conditions remain to be
negotiated and agreed upon and any agreement reached will be subject to the
approval of the Department of Labor and the District Court. There can be no
assurance that a settlement of the matter will be agreed upon or, if agreed
upon, approved by the Department of Labor and the District Court.

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 operation's, financial
condition or cash flows.

RITE AID CORPORATION AND SUBSIDIARIES

9. Commitments and Contingencies -- (Continued)

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 issued $149,500 of senior secured notes due March 2006 and paid
$45,000 in cash, which was fully funded by the Company's officers' and
directors' liability insurance. As additional consideration for the
settlement, the Company has assigned to the plaintiffs all of the Company's
claims against the above named executives and KPMG LLP. On August 16, 2001,
the district court approved the settlement. Certain of the nonsettling
defendants have appealed the order. The Company cannot predict the outcome of
that appeal. If the settlement does not become final, this litigation could
result in a material adverse effect on the Company's results of operations,
financial condition or cash flows. Several members of the class have elected
to "opt-out" of the class and, as a result, approval of the settlement becomes
final and they will be free to individually pursue their claims. Management
believes that their claims, individually and in the aggregate, are not
material.

A purported class action has been instituted by a stockholder against the
Company in Delaware state court on behalf of stockholders who purchased shares
of the Company's common stock prior to May 2, 1997, and who continued to hold
them after November 10, 1999, alleging claims similar to the claims alleged in
the consolidated securities class action lawsuits described above. The amount
of damages sought was not specified and may be material. The Company has filed
a motion to dismiss this claim which is pending before the court. These claims
are ongoing and the Company cannot predict their outcome. An unfavorable
outcome could result in a material adverse effect on the Company's results of
operations, financial condition or cash flows.

Drug reimbursement matters

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 intends 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 intervened in this lawsuit, as is
its right under the law. 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 related to
this potential liability.

RITE AID CORPORATION AND SUBSIDIARIES

9. Commitments and Contingencies -- (Continued)

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 and
cash flows if decided adversely.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

Income (loss) before extraordinary item for the thirteen week periods ended
June 1, 2002 and June 2, 2001 was $2.3 million and $(211.1) million,
respectively. The substantial improvement is the net result of several
factors, the most important we believe to be: increased sales, expense
control, and reduced interest expense. These basic elements of our success are
described in further detail in the Results of Operations and Liquidity and
Capital Resources sections below. However, there are other items, some
negative and some positive, that must be noted in order to understand the
results of operations. Those items are:

Litigation Related Charges and Credits. In the thirteen week period ended
June 1, 2002, we recorded a charge of $20.0 million related to governmental
investigations. In the thirteen week period ended June 2, 2001, we recorded
$15.0 million of income related to proceeds received from litigation
settlements with certain drug manufacturers and reduced litigation-related
accruals $4.2 million.

Substantial Investigation Expenses. We continue to incur substantial
expenses, primarily in connection with defending the company
against various shareholder actions, cooperating with the U.S. Attorney's
Office in their investigations of former management and resolving business
practices of prior management. We incurred $6.7 million and $3.4 million in the
thirteen week periods ended June 1, 2002 and June 2, 2001, respectively, and we
expect to incur an additional $4.0 million to $9.0 million over the remainder of
fiscal 2003. We expect to continue to incur significant legal and other expenses
in connection with the ongoing litigation and investigations to which we are
subject.

Stock-Based Compensation Expense. We recorded stock-based compensation
expense of $8.1 million and $43.1 million in the thirteen week periods ended
June 1, 2002 and June 2, 2001, respectively, resulting primarily from the
impact of applying variable plan accounting to several of our stock-based
compensation plans.

Gain on Sale of Assets and Investments. In the thirteen week period ended
June 1, 2002, we recorded a gain of $15.8 million resulting from the sale of
our investment in drugstore.com. In the thirteen week period ended June 2,
2001, we recorded a gain of $53.2 million resulting from the sale of
AdvancePCS securities.

Loss on Debt and Lease Conversions and Modifications. In the thirteen week
period ended June 2, 2001, we recorded a pre-tax loss of $132.7 million on
debt conversions.

Income Tax Benefit. In the thirteen week period ended June 1, 2002, we
recorded a $44.0 million income tax benefit related to carryback of net
operating losses made possible by the recent tax law change.

Other. In the thirteen week period ended June 2, 2001, we recorded a
$5.9 million charge related to our share of loss in our investment in
drugstore.com. The investment had no carrying value as of March 3, 2002, and
therefore we recorded no losses in equity investments in subsidiaries in the
thirteen week period ended June 1, 2002. In the thirteen week period ended
June 2, 2001, we recorded a $5.3 million charge for goodwill amortization. We
recorded no charges for goodwill amortization in the thirteen week period
ended June 1, 2002, pursuant to the adoption of SFAS No. 142.

Recent Actions Affecting Operating Results

During fiscal 2001, 2002 and the first quarter of fiscal 2003 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. These actions include, but are not limited too, the sale of
subsidiaries and other assets, the exchange of our debt for shares of our
common stock, the closure, relocation or impairment of stores and the
refinancing of the company. 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.

Recent Event

On June 21, 2002, the Securities and
Exchange Commission ("SEC") issued a cease-and-desist order that completes an
investigation into the Company relating to certain financial reporting and ac-
counting and other matters. The cease-and-desist order, in which Rite Aid
neither admits or denies the findings, was issued pursuant to Rite Aid's offer
of settlement. We will pay no fine under the settlement.

Results of Operations

Revenues and Other Operating Data

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

Revenues ........................................ $3,925,116 $3,710,133
Revenue growth .................................. 5.8% 7.8%
Same store sales growth ......................... 8.3% 10.0%
Pharmacy sales growth ........................... 9.2% 12.6%
Same store pharmacy sales growth ................ 11.8% 12.7%
Pharmacy as a % of total sales .................. 63.5% 61.6%
Third party sales as a % of total pharmacy sales 92.5% 91.7%
Front-end sales growth .......................... 0.4% 5.7%
Same store front end sales growth ............... 2.7% 5.9%
Front end sales as a % of total sales ........... 36.5% 38.4%
Store data:
Total stores (beginning of period) ............. 3,497 3,648
New stores ..................................... 1 3
Closed stores .................................. (45) (20)
Store acquisitions, net ........................ 1 0
Total stores (end of period) ................... 3,454 3,631
Relocated stores ............................... 4 4

Revenues

The 5.8% growth in revenues for the thirteen week period ended June 1, 2002
was driven by pharmacy sales growth of 9.2%. Front end sales were relatively
flat, growing by 0.4% for the thirteen week period ended June 1, 2002. The
7.8% growth in revenues for the thirteen week period ended June 2, 2001 was
driven by pharmacy sales growth of 12.6% and front end sales growth of 5.7%.
Same store sales growth for the thirteen weeks ended June 1, 2002 was 8.3% as
compared to 10.0% for the thirteen weeks ended June 2, 2001.

For the thirteen week period ended June 1, 2002, and for the thirteen week
period ended June 2, 2001, pharmacy sales led revenues growth with same-store
sales increases of 11.8% and 12.7%, respectively. Factors contributing to
pharmacy same store sales increases include inflation, improved attraction and
retention of managed care customers, our reduced cash pricing, our increased
focus on pharmacy initiatives such as predictive refill, and favorable
industry trends. These trends include an aging population, the use of
pharmaceuticals to treat a growing number of healthcare problems and the
introduction of a number of successful new prescription drugs.

For the thirteen week periods ended June 1, 2002 and June 2, 2001, front-end
same store sales increased 2.7% and 5.9%, respectively. The same store sales
increase was primarily a result of increased sales volume due to improved
assortments, lower prices on key items, and distributing a nationwide weekly
advertising circular. Same store sales increases for the thirteen week period
ended June 2, 2001 benefited from comparison to weak sales results in the
period ended May 27, 2000.

Costs and Expenses

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

Cost of goods sold .............................. $3,010,719 $2,835,455
Gross profit .................................... 914,397 874,678
Gross margin .................................... 23.3% 23.6%
Selling, general and administrative expenses .... 883,587 820,242
Selling, general and administrative expenses as
a percentage of revenues....................... 22.5% 22.1%
Stock-based compensation expense ................ 8,094 43,092
Goodwill amortization ........................... -- 5,343
Interest expense ................................ 84,631 128,689
Interest rate swap contracts .................... 264 --
Store closing and impairment credits ............ (4,117) (364)
Loss on debt and lease conversions and
modifications.................................. -- 132,713
Share of loss from equity investment ............ -- 5,883
Gain on sale of assets and investments, net ..... (16,865) (49,818)

Cost of Goods Sold

Gross margin was 23.3% for the thirteen week period ended June 1, 2002
compared to 23.6% for the thirteen week period ended June 2, 2001. Gross
margin was negatively impacted by the continuing trend of increased pharmacy
sales as a percent of total sales and higher shrink costs. The increase in
pharmacy sales had a negative impact on gross margin rates because they have a
lower rate than front end sales. Partially offsetting the negative impact of
the change in sales mix, is an improvement in occupancy costs as a percent of
sales, due to the impact of store closures and higher sales volumes. These
factors offset the increase in occupancy due to the change in classification
of lease charges (from interest expense to rent expense) brought about by the
reclassification of certain leases from capital to operating in connection
with the June 27, 2001 refinancing.

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 $17.3 million for the thirteen week
period ended June 1, 2002 versus $15.0 million for the thirteen week period
ended June 2, 2001.

Selling, General and Administrative Expenses

The selling, general and administrative expense ("SG&A") for the thirteen
week period ended June 1, 2002 includes a charge of $20.0 million for the
accrual in connection with non-recurring litigation, and $6.7 million incurred
primarily in connection with our defense of shareholder litigation, cooperating
with various governmental investigations, and resolving business practices of
prior management. Excluding these items, SG&A as a percentage of revenues was
21.8% for the thirteen week period ending June 1, 2002. SG&A expenses for the
thirteen week period ended June 2, 2001 includes $3.4 million of expense
incurred in connection with our defense of shareholder litigation and
cooperating with various governmental investigations, offset by receipts of
$15.0 million for the settlement of litigation with certain drug manufactures
and an expense reduction of $4.2 million to revise our estimate of anticipated
loss on certain non- recurring litigation. Excluding these items, SG&A as a
percentage of revenues was 22.5% for the thirteen week period ending June 2,
2001. SG&A on an adjusted basis of 21.8% for the thirteen week period ended
June 1, 2002 compares favorably with SG&A on an adjusted basis of 22.5% for the
thirteen week period ended June 2, 2001 due to decreased depreciation and
amortization charges resulting from a reduced store count, reductions in
professional fees and better leveraging of our fixed costs resulting from higher
sales volume, partially offset by higher associate benefit costs.

Store Closing and Impairment Charges

Store closing and impairment charges (credits) consist of:

Thirteen Week Period Ended
---------------------------
June 1, 2002 June 2, 2001
------------ ------------

Impairment Charges. Impairment charges include non-cash charges of
$0.9 million and $7.9 million for the thirteen week periods ended June 1, 2002
and June 2, 2001, respectively, for the impairment of long-lived assets
(including allocable goodwill for the thirteen week period ended June 2, 2001)
at 13 and 17 stores, respectively. These amounts include the write-down of
long-lived assets at stores that were assessed for impairment because of
management's intention to relocate or close the store or because of changes in
circumstances that indicate the carrying value of the asset may not be
recoverable.

Store and Equipment Lease Exit Costs. Costs incurred to close a store,
which principally include lease termination costs, are recorded at the time
management commits to closing the store, which is the date that closure is
formally approved by senior management, or in the case of a store to be
relocated, the date the new property is leased or purchased. 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 leases terminations. This liability is discounted using a risk-free
rate of interest. We evaluate these assumptions each quarter and adjust the
liability accordingly. The effect of lease terminations and changes in
assumptions in interest rates during the thirteen week periods ended June 1,
2002 and June 2, 2001, had a positive impact that exceeded the additional
provision due to low closure levels and resulted in an expense credit from
closed store activity.

As a part of our ongoing business activities, we assess stores for potential
closure. Decisions to close stores in future periods would result in charges
for store lease exit costs and liquidation of inventory, as well as impairment
of assets at these stores.

Interest Expense

Interest expense was $84.6 million for the thirteen week period ended June 1,
2002, compared to $128.7 million for the thirteen week period ended June 2,
2001. The decrease was primarily due to the reduction of debt resulting from
the sale of PCS and the June 2001 refinancing. The weighted average interest
rates, excluding capital leases, on our indebtedness for the thirteen week
period ended June 1, 2002 and June 2, 2001 were 8.08% and 8.01%, respectively.

Interest Rate Swap Contracts

In fiscal 2001, 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 are required to be recorded
as a component of net loss. Accordingly, changes in the market value of the
interest rate swaps of $0.3 million, inclusive of cash payments, have been
recorded in this caption on the statement of operations for the thirteen week
period ended June 1, 2002. This amount represents an adjustment to the
aggregate expense recognized relating to the swaps. This adjustment is due to
a reduction in market interest rates coupled with the passage of time. The
termination liability was $6.4 million as of June 1, 2002. These contracts
expire in the second quarter of fiscal 2003.

Income Taxes

The tax benefit of $43.5 million for the thirteen week period ended June 1,
2002 is comprised of two components. The first reflects an income tax benefit
of $44.0 million based on the recent tax law change, enacted on March 9, 2002,
which increased the carryback period of net operating losses incurred in
fiscal 2001 and 2002 from two years to five. The second component is the
provision for state income taxes of $0.5 million.

The income tax benefit of the NOL generated in the thirteen week periods
ended June 1, 2002 and June 2, 2001 have been fully offset by a valuation
allowance as a result of management's determination that, based on available
evidence, it is more likely than not that the deferred tax assets will not be
realized.

We have undergone an ownership change for statutory purposes during fiscal
2002, which resulted in a limitation on the future use of net operating loss
carryforwards. We believe that this limitation does not further impair the net
operating loss carryforwards because they are fully reserved.

Liquidity and Capital Resources

General

We have two primary sources of liquidity: (i) cash provided by operations
and (ii) the revolving credit facility under our senior secured credit
facility. 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.

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 June 1, 2002, we had $387.3 million in additional available
borrowing capacity under the revolving credit facility net of outstanding
letters of credit of $92.5 million. In addition, 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.

The senior secured credit facility, as amended, also allows us, at our
option, to issue up to $893.0 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) $643.0 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
$893.0 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 and the senior secured notes. As of June 1, 2002, we had
outstanding principal balances of $150.5 million, $79.1 million, $250.0 million
and $149.5 million of the 5.25% convertible subordinated notes, 6.0% dealer
remarketable securities, 4.75% convertible notes and the senior secured notes,
respectively. As of June 1, 2002, our remaining permitted debt under the
senior secured credit facility is $263.9 million. 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. As
of June 1, 2002 our remaining permitted debt under the 11.25% senior notes due
2008 is $600.5 million.

The senior secured credit facility, as amended, requires us to meet various
financial ratios and limits capital expenditures. Beginning with the 12 months
ended March 2, 2002, the covenants require us to maintain a maximum leverage
ratio of 8.40:1, increasing to 9.50:1 for the twelve months ending June 1,
2002, and increasing again to 10.00:1 for the twelve months ending August 31,
2002, before gradually decreasing to 6.00:1 for the twelve months ending
May 31, 2005. We must also maintain a minimum interest coverage ratio of
1.20:1 for the twelve months ending March 2, 2002, decreasing to 1.15:1 for
the twelve months ending June 1, 2002 and decreasing again to 1.10:1 for the
twelve months ending August 31, 2002 before gradually increasing to 2.00:1 for
the twelve months ending November 30, 2004. In addition, we must maintain a
minimum fixed charge ratio of 0.9:1 for the twelve months ending March 2,
2002, gradually

increasing to 1.10:1 for the twelve months ending August 31, 2004. Capital
expenditures are limited to $150.0 million annually beginning with the twelve
months ending March 2, 2002. These capital expenditure limits are subject to
upward adjustment based upon availability of excess liquidity as defined in
our senior secured credit facility.

We were in compliance with the covenants of the senior secured credit
facility, as amended, and our other credit facilities and debt instruments as
of June 1, 2002. With continuing improvements in operating performance, we
anticipate that we will remain in compliance with our debt covenants. However,
variations in our operating performance and unanticipated developments may
adversely affect our ability to remain in compliance with the applicable debt
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 our debt
to accelerate the maturity of debt having a principal amount of $25.0 million
or more.

Net Cash Provided by/Used in Operating, Investing and Financing Activities

Our operating activities provided $38.1 million of cash in the thirteen week
period ended June 1, 2002 and provided $45.7 million of cash in the thirteen
week period ended June 2, 2001. Operating cash flow for the thirteen week
period ended June 1, 2002 was negatively impacted by $70.8 million of interest
payments offset by increases in current liabilities. Operating cash flow for
the thirteen week period ended June 2, 2001 was negatively impacted by
$127.3 million in interest payments and increases in operating assets. This
was offset by increased current liabilities.

Cash used in investing activities was $3.4 million for the thirteen week
period ended June 1, 2002, due primarily to expenditures for property, plant
and equipment as well as intangible assets, offset by proceeds from asset
dispositions. Cash provided by investing activities was $463.7 million for the
thirteen week period ended June 2, 2001, due primarily to the sale of the
securities we received in our sale of AdvancePCS. Cash used for store
construction and relocations amounted to $13.2 million and $7.1 million for
the thirteen week period ended June 1, 2002 and June 2, 2001, respectively.

Cash provided by (used in) financing activities was $7.8 million and
$(521.7) million for the thirteen week periods ended June 1, 2002 and June 2,
2001, respectively. Proceeds from the sale of the securities we received from
our sale of AdvancePCS were used to pay down outstanding debt balances, which
significantly impacted cash used in financing activities in the thirteen week
period ended June 2, 2001.

Working capital was $1,499.2 million at June 1, 2002, compared to
$1,524.3 million at March 2, 2002.

Capital Expenditures

We plan capital expenditures of approximately $130.0 million during fiscal
2003, consisting of approximately $61.0 million related to new store
construction, store relocation and store remodel projects. An additional
$69.0 million will be dedicated to the purchase of prescription files from
independent pharmacists, improvements to distribution centers, technology
enhancements and other corporate requirements. Management expects that these
capital expenditures will be financed primarily with cash flow from operations
and borrowings under the revolving credit facility available under our senior
secured facility. During the thirteen week period ended June 1, 2002, we spent
$22.3 million on capital expenditures, consisting of $13.2 million related to
new store construction, store relocation and other store construction
projects. An additional $9.1 million was related to other store improvement
activities and the purchase of prescription files from independent
pharmacists.

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 its other sources of liquidity
will be adequate to meet our anticipated annual requirements for working
capital, debt service and capital expenditures through the end of fiscal 2003.
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 would require the consent of the lenders under one or more of our debt
agreements. There can be no assurance that any such supplemental funding, if
sought, could be obtained or that our lenders would provide the necessary
consents.

Recent Accounting Pronouncements

We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" effective March 3, 2002. SFAS No. 142
specifies that all goodwill and indefinite life intangibles shall no longer be
amortized. Goodwill must be allocated to reporting units and evaluated for
impairment on an annual basis with an initial impairment assessment to be
performed upon adoption of SFAS No. 142. We have evaluated the provisions of
SFAS No. 142, and determined that no cumulative effect results from adopting
this change in accounting principle. At June 1, 2002, we have unamortized
goodwill of $684.5 million and no indefinite life intangibles.

The impact of the adoption of SFAS No. 142 on the thirteen weeks ended
June 2, 2001 is as follows (in millions except per share amounts):

Reported net loss .................................................... $(211.1)
Add back goodwill amortization ....................................... 5.3
-------
Adjusted net loss .................................................... $(205.8)
=======
Basic and diluted loss per share:
Reported net loss ................................................... $ (0.56)
Goodwill amortization ............................................... 0.01
-------
Adjusted net loss ................................................... $ (0.55)
=======

We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" effective March 3, 2002. SFAS No. 144 addressed the financial
accounting and reporting for the impairment or disposal of long-lived assets.
There was no impact on the consolidated financial position or results of
operations as a result of the adoption of SFAS No. 144.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," Amendment
of SFAS No. 13, "Accounting for Leases," and Technical Corrections."

The provisions of SFAS No. 145 that relate to the rescission of SFAS No. 4
are required to be applied in fiscal years beginning after May 15, 2002. Any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria in 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" for classification as an
extraordinary item shall be reclassified. The provisions related to SFAS No.
13 are effective for transactions occurring after May 15, 2002. All other
provisions of SFAS No. 145, which are effective for financial statements
issued on or after May 15, 2002 have been adopted without material impact. We
plan to adopt the remaining provisions of SFAS No. 145 based on the required
effective dates and the impact is not believed to be material.

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--Overview" and "Factors Affecting our
Future Prospects" included in our Annual Report on Form 10-K for the fiscal
year ended March 2, 2002, which we filed with the SEC on May 7, 2002.

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 2002, our primary
risk exposure has not changed. We enter 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 the company's financial
instruments that are sensitive to changes in interest rates. The table
presents principal payments and the related weighted average interest rates by
expected maturity dates as of June 1, 2002.

Fiscal Year
---------------------------------------------- Fair Value at
2003 2004 2005 2006 2007 Thereafter Total June 2, 2002
------ ------ ------ -------- ------ ---------- -------- -------------
(dollars in millions)

Long-term debt, including current
portion
Fixed rate ............................ $197.8 $117.5 $ 62.5 $1,272.9 $738.5 $952.9 $3,342.1 $2,741.3
Average Interest Rate ................. 6.54% 7.55% 10.80% 9.55% 7.56% 7.71% 8.36%
Variable Rate ......................... $ 373.5 $149.5 $ 523.0 $ 523.0
Average Interest Rate ................. 5.63% 9.38% 6.70%
Interest Rate Swap .................... -- -- -- -- -- -- -- $ (6.4)

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 June 1,
2002, 13.5% 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 June 1, 2002, 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 B2 by Moody's. The interest rate on the variable rate
borrowings on this facility are LIBOR plus 3.75%.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are party to numerous legal proceedings related to our financial
reporting and other matters. For a further discussion regarding these
proceedings, refer to "Legal Proceedings" included in the Fiscal 2002 Form 10-
K, which we filed with the SEC on May 7, 2002.

On June 21, 2002, the Securities and Exchange Commission ("SEC") issued a
cease-and-desist order that completes an investigation into the Company
relating to certain financial reporting and accounting and other matters. The
cease-and-desist order, in which Rite Aid neither admits or denies the
findings, was issued pursuant to Rite Aid's offer of settlement.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the security holders during the
thirteen week period ended June 1, 2002.

Item 5. Other Information

Not applicable.

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 Incorporation dated Exhibit 3(ii) to Form 8-K filed on
October 25, 1999 November 2, 1999
3.3 Certificate of Amendment to Restated Certificate of Incorporation dated June 27, Exhibit 3.4 to Form S-1, File No.
2001 333-64960, filed on July 12, 2001
3.4 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Exhibit 3.5 to Form S-1, File No.
Designation dated October 3, 2001 333-64960, filed on July 12, 2001
3.5 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
3.6 Amendment to By-laws, adopted January 30, 2002 Exhibit T3B2 to Form T-3 filed on
March 4, 2002
4.1 Indenture dated as of September 10, 1997 by and between Rite Aid Corporation, Exhibit 4.1 to Registration
as issuer, and Harris Trust and Savings Bank, as trustee, related to the Statement on Form S-3, File No. 333-
Company's 5.25% Convertible Subordinated Notes 39699, filed on November 6, 1997
4.2 Indenture dated as of September 22, 1998 by and between Rite Aid Corporation, Exhibit 4.1 to Registration
as issuer, and Harris Trust and Savings Bank, as trustee, related to the Statement on Form S-4, File No. 333-
Company's 6% Dealer Remarketable Securities 66901, filed on November 6, 1998
4.3 Indenture dated as of December 21, 1998, between Rite Aid Corporation, as Exhibit 4.1 to Registration
issuer, and Harris Trust and Savings Bank, as trustee, related to the Company's Statement on Form S-4, File No. 333-
5 1/2% Notes due 2000, 6% Notes due 2005, 6 1/8% Notes due 2008 and 6 7/8 Notes 74751, filed on March 19, 1999
due 2028
4.4 Supplemental Indenture dated as of February 3, 2000, between Rite Aid Exhibit 4.1 to Form 8-K, filed on
Corporation, as issuer, and U.S. Bank Trust National Association, to the February 7, 2002
Indenture dated as of August, 1993 and Morgan Guaranty Trust Company of New
York, relating to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007,
7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013
4.5 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Exhibit 4.2 to Form 8-K, filed on
Corporation and Harris Trust and Savings Bank, to the Indenture dated February 7, 2000
September 10, 1997, between Rite Aid Corporation and Harris Trust and Savings
Bank, related to the Company's 5.25% Convertible Subordinated Notes
4.6 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Exhibit 4.3 to Form 8-K, filed on
Corporation and Harris Trust and Savings Bank, to the Indenture dated February 7, 2000
September 22, 1998, between Rite Aid Corporation and Harris Trust and Savings
Bank, related to the Company's 6% Dealer Remarketable Securities
4.7 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Exhibit 4.4 to Form 8-K, filed on
Corporation and Harris Trust and Savings Bank, to the Indenture dated February 7, 2000
December 21, 1998, between Rite Aid Corporation and Harris Trust and Savings
Bank, related to the Company's 10.5% Senior Secured Notes due 2002

Exhibit
Numbers Description Incorporation by Reference to
------- ----------- -----------------------------

4.8 Indenture, dated as of June 14, 2000, among Rite Aid Corporation, as issuer, Exhibit 4.1 to Form 8-K, filed on
each of the Subsidiary Guarantors named therein and State Street Bank and Trust June 21, 2000
Company, as Trustee, related to the Company's 10.5% Senior Secured Notes due
2002
4.9 Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, Exhibit 4.7 to Registration
and State Street Bank and Trust Company, as trustee, related to the Company's Statement on Form S-1,
12.5% Senior Secured Notes due 2006 File No. 333-64950, filed on
July 12, 2001
4.10 Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, Exhibit 4.8 to Registration
and BNY Midwest Trust Company, as trustee, related to the Company's 11 3/4 Statement on Form S-1,
Notes due December 2008 File No. 333-64950, filed on
July 12, 2001
4.11 Indenture dated as of November 19, 2001, between Rite Aid Corporation, as Exhibit 4.3 to Form 10-Q, filed on
issuer, and BNY Midwest Trust Company, as trustee, related to the Company's January 15, 2002
4.75% Convertible Notes due December 1, 2006
4.12 Indenture dated as of April 4, 2002, between Rite Aid Corporation, as issuer, Exhibit T3C to Form T-3, filed on
and BNY Midwest Trust Company, as trustee, related to the Company's Senior March 4, 2000
Secured Notes due March 15, 2006
11 Statement regarding computation of earnings per share (See note 3 to the
condensed consolidated financial statements)

---------------

We did not file any Current Reports on Form 8-K in the thirteen week period
ended June 1, 2002.

Rite Aid Corporation filed a Current Report on Form 8-K on June 24, 2002
disclosing under Item 5 a press release dated June 21, 2002 announcing that
the Securities and Exchange Commission has issued a cease-and-desist order
that completes an investigation of the Company relating to certain financial
reporting and accounting practices under prior management. The cease-and-
desist order, in which Rite Aid neither admits or denies the findings, was
issued pursuant to Rite Aid's offer of settlement.

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: June 28, 2002

RITE AID CORPORATION

By: /s/ ROBERT B. SARI
--------------------------------------
Robert B. Sari
Senior Vice President, General
Counsel and Secretary

Date: June 28, 2002

By: /s/ CHRISTOPHER HALL
--------------------------------------
Christopher Hall
Executive Vice President and
Chief Financial Officer