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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 26, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 1-5742
RITE AID CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 00-0000000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
00 Xxxxxx Xxxx, Xxxx Xxxx, Xxxxxxxxxxxx 00000
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (000) 000-0000
(Former name, former address and former fiscal year, if changed since last
report) Not Applicable
Indicate by check xxxx 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 332,008,363 shares of its $1.00 par value common stock
outstanding as of September 23, 2000.
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RITE AID CORPORATION
TABLE OF CONTENTS
Page
Cautionary Statement Regarding Forward-Looking Statements................... 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of August 26, 2000 and
February 26, 2000............................................... 4
Condensed Consolidated Statements of Operations for the Thirteen
Weeks Ended August 26, 2000 and August 28, 1999................. 5
Condensed Consolidated Statements of Operations for the Twenty-
Six Weeks Ended August 26, 2000 and August 28, 1999............. 6
Condensed Consolidated Statements of Cash Flows for the Twenty-
Six Weeks Ended August 26, 2000 and August 28, 1999............. 7
Notes to Condensed Consolidated Financial Statements............. 8
Management's Discussion and Analysis of Financial Condition and
ITEM 2. Results of Operations........................................... 20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk....... 29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 31
ITEM 2. Changes in Securities and Use of Proceeds........................ 31
ITEM 3. Defaults Upon Senior Securities.................................. 31
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 31
ITEM 5. Other Information................................................ 31
ITEM 6. Exhibits and Reports on Form 8-K................................. 33
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are identified by terms and phrases such as "anticipate,"
"believe," "intend," "estimate," "expect," "continue," "should," "could,"
"may," "plan," "project," "predict," "will" and similar expressions and
include references to assumptions and relate to the future prospects,
developments and business strategies of Rite Aid Corporation.
Factors that could cause actual results to differ materially from those
expressed or implied in such forward-looking statements include, but are not
limited to:
. Our high level of indebtedness and our ability to refinance our
substantial debt obligations which mature in August and September 2002;
. Our ability to make interest and principal payments on our debt and
satisfy the other covenants contained in our credit facilities and other
debt agreements;
. Our ability to improve the operating performance of our existing stores,
and, in particular, our new and relocated stores in accordance with our
new management's long term strategy;
. The outcomes of pending lawsuits and governmental investigations, both
civil and criminal, involving our financial reporting and other matters;
. Competitive pricing pressures, continued consolidation of the drugstore
industry, third-party prescription reimbursement levels, regulatory
changes governing pharmacy practices, general economic conditions and
inflation, interest rate movements, access to capital and merchandise
supply constraints; and
. Our failure to develop, implement and maintain reliable and adequate
internal accounting systems and controls.
Rite Aid undertakes no obligation to revise the forward-looking statements
included in this report to reflect any future events or circumstances. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences are
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Our Future
Results" included in our Annual Report Form 10-K/A for the fiscal year ended
February 26, 2000 ("the Fiscal 2000 10-K/A"), which was filed with the
Securities and Exchange Commission on October 11, 2000 and is available on the
SEC's website at xxx.xxx.xxx.
3
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)
August 26, February
2000 26, 2000
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 72,295 $ 179,757
Accounts receivable, net........................... 476,832 152,035
Inventories, net................................... 2,767,821 2,472,437
Refundable income taxes............................ 60,937 147,599
Prepaid expenses and other current assets.......... 93,059 63,659
----------- -----------
Total current assets............................. 3,470,944 3,015,487
PROPERTY, PLANT AND EQUIPMENT, NET................... 3,340,259 3,449,594
GOODWILL AND OTHER INTANGIBLES....................... 1,246,069 1,311,123
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS.... 1,377,759 1,743,828
DEFERRED TAX ASSET................................... -- 146,916
OTHER ASSETS......................................... 201,451 242,899
----------- -----------
Total assets..................................... $ 9,636,482 $ 9,909,847
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term
debt and lease financing obligations.............. $ 105,537 $ 102,050
Accounts payable................................... 1,050,011 854,062
Other current liabilities.......................... 949,634 949,361
Net current liabilities of discontinued
operations........................................ 399,948 390,053
----------- -----------
Total current liabilities........................ 2,505,130 2,295,526
CONVERTIBLE SUBORDINATED NOTES....................... 472,196 649,986
LONG-TERM DEBT, LESS CURRENT MATURITIES.............. 5,017,425 4,738,661
LEASE FINANCING OBLIGATIONS, LESS CURRENT
MATURITIES.......................................... 1,107,799 1,125,937
OTHER NONCURRENT LIABILITIES......................... 677,984 647,771
----------- -----------
Total liabilities................................ 9,780,534 9,457,881
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
REDEEMABLE PREFERRED STOCK........................... 19,457 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK, par value $1 per share............ 320,653 308,250
COMMON STOCK, par value $1 per share............... 331,920 259,927
ADDITIONAL PAID-IN CAPITAL......................... 1,938,068 1,292,337
ACCUMULATED DEFICIT................................ (2,735,944) (1,421,817)
DEFERRED COMPENSATION.............................. (18,206) (6,188)
----------- -----------
Total stockholders' equity (deficit)............. (163,509) 432,509
----------- -----------
Total liabilities and stockholders' equity
(deficit)....................................... $ 9,636,482 $ 9,909,847
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Thirteen Weeks
Ended
Thirteen Weeks August 28, 1999
Ended (as restated,
August 26, 2000 see note 10)
--------------- ---------------
REVENUES........................................ $3,439,469 $3,203,964
COSTS AND EXPENSES:
Cost of goods sold, including occupancy
costs........................................ 2,633,559 2,403,790
Selling, general and administrative expenses.. 858,631 793,623
Goodwill amortization......................... 5,627 6,096
Interest expense.............................. 182,108 107,177
Store closing and impairment charges.......... 88,292 56,094
Loss on debt conversions and modifications,
net.......................................... 83,789 --
Share of loss (income) from equity
investment................................... 12,496 (134)
---------- ----------
3,864,502 3,366,646
Loss from continuing operations before
income taxes .............................. (425,033) (162,682)
INCOME TAX BENEFIT.............................. -- (8,280)
---------- ----------
Loss from continuing operations............... (425,033) (154,402)
DISCONTINUED OPERATIONS:
Income from discontinued operations (including
income tax expense of $15,611)............... -- 4,247
Estimated loss on disposal of the PBM segment
(including income tax benefit of $23,484).... (31,433) --
---------- ----------
Net loss...................................... $ (456,466) $ (150,155)
========== ==========
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations............... $ (1.87) $ (0.60)
(Loss) income from discontinued operations.... (0.10) 0.02
---------- ----------
Net loss per share............................ $ (1.97) $ (0.58)
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Twenty-Six Weeks
Ended
Twenty-Six Weeks August 28, 1999
Ended (as restated,
August 26, 2000 see note 10)
---------------- ----------------
REVENUES..................................... $ 6,881,655 $6,558,585
COSTS AND EXPENSES:
Cost of goods sold, including occupancy
costs..................................... 5,291,486 4,904,069
Selling, general and administrative
expenses.................................. 1,696,716 1,524,401
Goodwill amortization...................... 11,701 12,264
Interest expense........................... 353,749 205,409
Store closing and impairment charges....... 104,171 84,332
Loss on debt conversions and modifications,
net....................................... 83,789 --
Share of loss (income) from equity
investment................................ 24,070 (134)
----------- ----------
7,565,682 6,730,341
Loss from continuing operations before
income taxes and cumulative effect of
change in accounting method............. (684,027) (171,756)
INCOME TAX EXPENSE (BENEFIT)................. 144,382 (37,239)
----------- ----------
Loss from continuing operations before
cumulative effect of accounting change.... (828,409) (134,517)
DISCONTINUED OPERATIONS:
Income from discontinued operations
(including income tax expense of $13,846
and $30,562).............................. 11,335 7,592
Estimated loss on disposal of the PBM
segment (including income tax benefit of
$734)..................................... (334,763) --
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE,
NET OF TAX OF $18,200....................... -- (27,300)
----------- ----------
Net loss................................... $(1,151,837) $ (154,225)
=========== ==========
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations............ $ (3.48) $ (0.52)
Income (loss) from discontinued
operations................................ (1.12) 0.03
Cumulative effect of an accounting change,
net....................................... -- (0.11)
----------- ----------
Net loss per share......................... $ (4.60) $ (0.60)
=========== ==========
See accompanying notes to condensed consolidated financial statements.
6
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Twenty-Six Weeks
Ended
Twenty-Six Weeks August 28, 1999
Ended (as restated,
August 26, 2000 see note 10)
---------------- ----------------
OPERATING ACTIVITIES:
Net loss................................... $(1,151,837) $ (154,225)
Income from discontinued operations........ (11,335) (7,592)
Loss on disposal of discontinued
operations................................ 334,763 --
----------- -----------
Loss from continuing operations............ (828,409) (161,817)
Cumulative effect of a change in accounting
method.................................... -- 27,300
Depreciation and amortization.............. 188,601 241,100
Store closing and impairment charges....... 104,171 84,332
Loss on debt conversions and modifications,
net....................................... 83,789 --
Changes in operating assets and
liabilities, net of acquisitions.......... (110,187) (71,896)
----------- -----------
NET CASH (USED IN) PROVIDED BY CONTINUING
OPERATIONS.................................. (562,035) 119,019
CASH FLOWS USED IN DISCONTINUED OPERATIONS... (9,799) (216,548)
INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment................................. (59,930) (405,604)
Purchase of business, net of cash
acquired.................................. -- (24,454)
Intangible assets acquired................. (3,300) (51,700)
Proceeds from sales of assets.............. 43,000 22,860
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES........ (20,230) (458,898)
FINANCING ACTIVITIES:
Principal payments on long-term debt....... (1,440,793) (1,828,033)
Net (payments) proceeds of commercial paper
borrowings................................ (192,000) 286,802
Net proceeds from bank loans............... 2,181,724 2,099,484
Proceeds from leasing obligations.......... -- 74,899
Cash dividends paid........................ -- (59,931)
Deferred financing costs payments.......... (64,544) --
Other financing activities, net............ 215 7,059
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.... 484,602 580,280
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................. (107,462) 23,853
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... 179,757 84,522
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 72,295 $ 108,375
=========== ===========
See accompanying notes to condensed consolidated financial statements.
7
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(unaudited)
1. Basis of Presentation
The accompanying financial information does not include all disclosures
required under generally accepted accounting principles because certain note
information included in the Company's fiscal 2000 Annual Report on Form 10-K/A
has not been included in this report; however, such information reflects all
adjustments (consisting primarily of normal recurring adjustments) 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 twenty-six week
period ended August 26, 2000 are not necessarily indicative of the results to
be expected for the full year. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's fiscal 2000 Annual Report on From 10-
K/A filed with the SEC.
2. Loss Per Share
Following is a reconciliation of the numerator and denominator of the basic
loss per share computation to the numerator and denominator of the diluted
loss per share computation:
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 26, 2000 August 28, 1999 August 26, 2000 August 28, 1999
--------------- --------------- --------------- ---------------
Numerator for earnings
per share:
Loss from continuing
operations........... $ (425,033) $ (154,402) $ (828,409) $ (134,517)
Preferred stock
conversion reset
(Note 7)............. (160,915) -- (160,915) --
Cumulative preferred
stock dividends...... (6,442) (465) (12,403) (935)
------------ ------------ ------------ ------------
Net loss from
continuing operations
attributable to
common stockholders.. (592,390) (154,867) (1,001,727) (135,452)
Net income from
discontinued
operations, net of
tax.................. -- 4,247 11,335 7,592
Estimated loss on
disposal, net of
tax.................. (31,433) -- (334,763) --
------------ ------------ ------------ ------------
Total (loss) income
from discontinued
operations........... (31,433) 4,247 (323,428) 7,592
------------ ------------ ------------ ------------
Cumulative effect of
accounting change,
net of tax........... -- -- -- (27,300)
------------ ------------ ------------ ------------
Net loss attributable
to common
stockholders......... $ (623,823) $ (150,620) $ (1,325,155) $ (155,160)
============ ============ ============ ============
Denominator:
Basic weighted average
shares............... 316,111,000 258,910,000 288,093,000 258,895,000
============ ============ ============ ============
Fully diluted shares are not presented as the Company incurred losses for
the thirteen and twenty-six weeks ending August 26, 2000 and August 28, 1999.
At August 26, 2000, an aggregate of 111,824,000 potential common shares
related to stock options, convertible notes and preferred stock and warrants,
have been excluded from the computation of diluted income per share.
3. Business Segments
The Company operated in two business segments during the reporting periods:
(i) the Retail Drug segment, and (ii) the Pharmacy Benefit Management ("PBM")
segment, which includes pharmacy benefit management, mail-order pharmacy
services, marketing prescription plans and other managed health care services.
The Company's business segments are organized according to the products and
services offered to its customers. The Company's dominant segment is the
Retail Drug segment, which consists of the operation of retail drugstores
across the United States. The drugstores' primary business is pharmacy
services, with prescription drugs
8
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
accounting for approximately 59.8 percent and 58.5 percent of total segment
sales for the twenty-six week periods ended August 26, 2000 and August 28,
1999, respectively. In addition, the Company's drugstores offer a full
selection of health and personal care products, seasonal merchandise and a
large private label product line.
The Company operated a PBM segment, principally through the operations of
PCS Health Systems, Inc. (PCS), which was acquired in January 1999. Through
its PBM segment, the Company offered pharmacy benefit management, mail-order
pharmacy services, marketing prescription plans and other managed health care
services to employers, health plans and their members and government-sponsored
employee benefit programs. On July 12, 2000, the Company announced that it had
entered into an agreement to sell its PBM segment to Advance Paradigm Inc. The
sale was consummated on October 2, 2000. As a result of the agreement and sale
of PCS, the PBM segment has been reclassified and is accounted for as a
discontinued operation in the accompanying financial statements. Accordingly,
the Company's continuing operations consist solely of the Retail Drug segment.
Discontinued Operations
On July 12, 2000, the Company announced that it had entered into an
agreement to sell PCS, its PBM segment, to Advance Paradigm, Inc. The sale of
PCS was consummated on October 2, 2000. The selling price of PCS consisted of
$675,000 in cash; $200,000 in principal amount of Advance Paradigm's unsecured
10 year senior subordinated notes (with warrants attached) and $125,000 in
liquidation preference of Advance Paradigm's 11% Series A Preferred Stock. The
senior subordinated notes bear interest at the rate of 11% per annum for the
first 18 months after their date of issuance (October 2, 2000), 12% for the
next six months and 13% thereafter until maturity. The warrants attached to
the senior subordinated notes are not exercisable until October 2, 2002. Once
exercisable, they will be transferable separately from the senior subordinated
notes and entitle the holders collectively to purchase, for $20 per share,
780,000 shares of Advance Paradigm's Class A Common Stock (subject to
adjustment for certain dilutive events). The senior subordinated notes may be
prepaid by Advance Paradigm in whole at any time; however, if less than the
entire outstanding principal amount is prepaid not more than an aggregate of
$75,000 principal amount may be prepaid from the date of issuance. Upon any
prepayment prior to October 2, 2002, a ratable portion of the warrants
attached to the senior subordinated notes will expire. The fair value of the
senior subordinated notes is estimated at 75% of their principal amount. The
fair value of the Series A Preferred Stock is estimated at its stated value.
The Company is in the process of obtaining an appraisal to determine the fair
value of the Series A preferred stock and warrants at the consummation date.
Commencing January 30, 2001 and until Advance Paradigm's stockholders
approve the issuance of Class B Common Stock upon conversion of the Series A
Preferred Stock, the Series A Preferred Stock will pay quarterly dividends,
solely in additional shares of Series A Preferred Stock, at the rate of 11%
per annum for the first six months, 13% for the next six months and 16%
thereafter. Upon approval by Advance Paradigm's stockholders, the Series A
Preferred Stock will be convertible, at Rite Aid's option, at $20 per share
(subject to adjustment for certain dilutive events), into shares of Class B
Common Stock of Advance Paradigm (which are convertible into shares of Class A
Common Stock which is publicly traded). Once converted, the Class B Common
Stock will be entitled to share ratably with the Class A Common Stock in
dividends declared. Holders of the Class A Preferred Stock (and of the Class B
Common Stock issuable upon its conversion) have the right to elect two members
of Advance Paradigm's board of directors.
The Company has the right to cause Advance Paradigm to register the senior
subordinated notes (and the attached warrants and the shares issuable upon
exercise of the warrants) and the Series A Preferred Stock (and if
9
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
converted, the shares issued upon conversion) for sale under the Securities
Act of 1933. The Company has agreed not to sell more than 50% of the shares of
Series A Preferred Stock (and the shares into which it may be converted) prior
to October 2, 2002 unless the stockholders of Advance Paradigm do not approve
its conversion into Class B Common Stock by January 30, 2001 or unless the
market price of Advance Paradigm's Class A Common Stock averages at least $40
per share for 20 consecutive trading days after April 2, 2001.
When the sale was consummated, the Company applied $575,000 of the cash
portion of the proceeds to reduce the outstanding balances of the PCS credit
facility and the PCS exchange debt, and pledged the Series A Preferred Stock
(and all securities issued upon its conversion) and the senior subordinated
notes to the lenders under the PCS credit facility, the RCF credit facility,
and the Exchange Debt to secure the Company's obligations thereunder. The
Company is required to use any net proceeds received from any sale of those
securities to further repay the then outstanding balances of the PCS credit
facility and the PCS exchange debt and, if repaid in full, to repay the then
outstanding balances of the RCF credit facility and the RCF exchange debt.
The PBM segment is reported as a discontinued operation for all periods
presented in the accompanying financial statements and the operating results
of the PBM segment are reflected separately from the results of continuing
operations. The estimated loss on the disposal of the PBM segment, subject to
closing adjustments and final determination of fair value of the Series A
Preferred Stock and warrants, is $334,763, which includes estimated
transaction expenses and estimated net operating income through the sale date
of October 2, 2000. In the first quarter of fiscal 2001 ended May 27, 2000,
the Company recorded the estimated loss of $303,330 and in the second quarter
of fiscal 2001 ended August 26, 2000, the Company recorded an additional loss
of $31,433, due to changes in estimates. Summarized operating results of the
PBM segment for the thirteen and twenty-six weeks ended August 26, 2000 and
August 28, 1999, are as follows:
Thirteen Weeks Thirteen Weeks Twenty-Six Twenty-Six
Ended Ended Weeks Ended Weeks Ended
August 26, 2000 August 28, 1999 August 26, 2000 August 28, 1999
--------------- --------------- --------------- ---------------
Net sales............... $322,931 $318,249 $ 656,250 $644,736
Income from operations
before income tax
expense................ -- 19,858 25,181 38,154
Income tax expense...... -- (15,611) (13,846) (30,562)
-------- -------- --------- --------
Income from discontinued
operations............. -- 4,247 11,335 7,592
Loss on disposal before
income tax expense..... (54,917) -- (335,497) --
Income tax benefit...... 23,484 -- 734 --
-------- -------- --------- --------
Loss on disposal........ (31,433) -- (334,763) --
-------- -------- --------- --------
(Loss) income from
discontinued
operations............. $(31,433) $ 4,247 $(323,428) $ 7,592
-------- -------- --------- --------
At August 26, 2000 and February 26, 2000, the assets of PCS consisted of
accounts receivable, property, plant and equipment and intangible assets, net
of liabilities. Net assets are comprised of $399,948 of net current
liabilities and $1,377,759 of net noncurrent assets at August 26, 2000 and
$390,053 of net current liabilities and $1,743,828 of net noncurrent assets at
February 26, 2000.
As a result of the decision to discontinue the operations of the Company's
PBM segment, the Company recorded an increase to the tax valuation allowance
and income tax expense of $146,916 in the twenty-six week period ended August
26, 2000.
10
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
4. Store Closing and Impairment Charges
Store closing and impairment charges include non-cash charges of $17,922 and
$41,249 for the thirteen weeks ended August 26, 2000 and August 28, 1999,
respectively, for the impairment of long-lived assets (including allocable
goodwill) at 60 and 83 stores, respectively. Store closing and impairment
charges include non-cash charges of $25,824 and $56,941 for the twenty-six
weeks ended August 26, 2000 and August 28, 1999, respectively, for the
impairment of long-lived assets (including allocable goodwill) at 102 and 159
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 closing and impairment charges consist of:
Thirteen Weeks Thirteen Weeks Twenty-Six Twenty-Six
Ended Ended Weeks Ended Weeks Ended
August 26, 2000 August 28, 1999 August 26, 2000 August 28, 1999
--------------- --------------- --------------- ---------------
Store lease exit costs.. $(6,875) $14,845 $ 1,102 $27,391
Impairment charges...... 17,922 41,249 25,824 56,941
Impairment of
xxxxxxxxx.xxx.......... 77,245 -- 77,245 --
------- ------- -------- -------
$88,292 $56,094 $104,171 $84,332
======= ======= ======== =======
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 typically 90 days preceding the closing date or in the case of
a store to be relocated, the date the new property is leased or purchased. The
Company calculates its liability for closed stores on a store-by-store basis.
The future minimum lease payments and related ancillary costs from the date of
closure to the end of the remaining lease term, net of estimated cost
recoveries that may be achieved through subletting properties or through
favorable lease terminations are computed. This liability is discounted using
a risk-free rate of interest. The Company evaluates these assumptions each
quarter and adjusts the liability accordingly.
A rollforward of the Company's lease exit liability is set forth below:
Reversal
of
reserves
Provision for Changes in for stores Interest
present value of assumptions that accretion
noncancellable about future management and Cash
lease payments sublease determined changes payments,
Balance, on stores income, will in net of Balance,
beginning designated to be terminations, remain interest sublease end of
of period closed etc. open rates income period
--------- ---------------- ------------- ---------- --------- --------- --------
Thirteen weeks ended
August 26, 2000........ $213,706 $ 8,952 $(17,683) $(2,985) $ 7,862 $ (9,795) $200,057
Thirteen weeks ended
August 28, 1999........ $238,821 $16,160 $ 238 $ (177) $ (128) $(18,379) $236,535
Twenty-six weeks ended
August 26, 2000........ $212,812 $28,309 $(24,985) $(7,332) $11,100 $(19,847) $200,057
Twenty-six weeks ended
August 26, 1999........ $246,805 $33,300 $ (2,438) $(1,256) $(1,140) $(38,736) $236,535
The Company has an investment in the common stock of xxxxxxxxx.xxx, which is
accounted for under the equity method. The initial investment was valued based
upon the initial public offering price of xxxxxxxxx.xxx.
11
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
During the second quarter ended August 26, 2000, the Company recorded an
impairment of its investment in xxxxxxxxx.xxx. This write-down was based upon
a decline in the market value of xxxxxxxxx.xxx's stock that the Company
believes to be other-than-temporary.
5. Indebtedness, Credit Agreements and Lease Financing Obligations
Following is a summary of indebtedness and lease financing obligations at
August 26, 2000 and February 26, 2000:
August 26, February
2000 26, 2000
---------- ----------
Commercial paper borrowings........................ $ -- $ 192,000
RCF facility....................................... 730,268 716,073
PCS facility....................................... 1,142,138 1,300,000
Term loan due 2000................................. -- 272,422
10.50% notes due 2002.............................. 411,442 --
Exchange Debt...................................... 274,782 --
Senior Facility.................................... 636,000 --
5.25% convertible subordinated notes due 2002...... 472,210 649,986
6.70% notes due 2001............................... 7,818 350,000
7.125% notes due 2007.............................. 350,000 350,000
7.70% notes due 2027............................... 300,000 300,000
5.50% fixed-rate senior notes due 2000............. 130,740 200,000
6.00% dealer remarketable securities due 2003...... 200,000 200,000
6.00% fixed-rate senior notes due 2005............. 200,000 200,000
7.625% senior notes due 2005....................... 200,000 200,000
6.875% senior debentures due 2013.................. 200,000 200,000
6.125% fixed-rate senior notes due 2008............ 150,000 150,000
6.875% fixed-rate senior notes due 2028............ 150,000 150,000
5.875% to 10.475% industrial development bonds due
through 2016...................................... 4,958 5,196
Lease financing obligations........................ 1,133,215 1,151,901
Other.............................................. 9,386 29,056
---------- ----------
6,702,957 6,616,634
Short-term debt, current maturities of long-term
debt and lease financing obligations.............. (105,537) (102,050)
---------- ----------
Long-term debt and lease financing obligations,
less current maturities........................... $6,597,420 $6,514,584
========== ==========
Refinancings
On June 14, 2000, the Company obtained a new $1,000,000 senior secured
credit facility from a syndicate of banks. The Senior Facility is guaranteed
by substantially all of the Company's wholly-owned subsidiaries, and the banks
have a security interest in substantially all of those subsidiaries' accounts
receivable, inventory, and intellectual property and a security interest in
certain of their real property. Of this amount $500,000 is in the form of a
term loan due in August 2002 with interest at LIBOR plus 3.00% and $500,000 is
in the form of a revolving credit facility under the Senior Facility due in
August 2002. Funds drawn under the term loan were used to repay $300,000 of
drawings under the accounts receivable securitization program and to pay
$200,000 for working capital and transaction expenses. Funds drawn under the
revolving credit facility are used to fund current operations.
12
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
In connection with the above refinancing on June 14, 2000, the Company
exchanged $52,500 of its 5.50% fixed-rate senior notes due in December 2000
and $321,800 of its 6.70% notes due in December 2001 for $374,300 of 10.50%
senior secured notes due 2002. The Company has arranged with certain financial
institutions to refinance $93,200 of the 5.5% notes when they become due with
the 10.50% senior secured notes due 2002. These financial institutions
purchased $16,710 of the 5.5% notes and $20,390 of the 6.7% notes on July 27,
2000, and $53,814 of the 5.5% notes on September 13, 2000, and exchanged the
purchased notes with the Company for the 10.50% senior secured notes due 2002.
The Company recognized an aggregate loss of $6.2 million in connection with
the above refinancings.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. The facility requires us to meet
various financial ratios and limits our capital expenditures. For the quarter
ended August 26, 2000, our covenants required us to maintain a minimum
interest coverage ratio of .75:1 and minimum fixed charge coverage ratio of
.88:1. Following the consummation of the sale of PCS, these covenants require
us to maintain a minimum interest coverage ratio of 1.40:1 for the four
quarter period ending June 1, 2002, and a minimum fixed charge coverage ratio
of 1.19:1 for the four quarter period ending June 1, 2002. We also must
maintain consolidated EBITDA (as defined in the senior secured credit
facility) of no less than $104.0 million for the quarter ended August 26,
2000, increasing to $720.0 million for the four quarter period ending June 1,
2002. In addition, our capital expenditures are limited to $70.0 million for
the fiscal quarter ended August 26, 2000 and $243.0 million for the four
quarter period ending June 1, 2002.
Also on June 14, 2000, the Company exchanged certain credit facility debt
with a carrying amount of $284,820 for 51,785,434 shares of the Company's
common stock and extended the maturity of its remaining $2,147,188 of bank
debt from November 1, 2000 to August 2002. As a result of this exchange, the
Company recognized a gain of $11.4 million.
On June 26, 2000 in a separate transaction, the Company exchanged a total of
17,779,000 shares of Rite Aid common stock for $177,790 principal amount of
the 5.25% convertible subordinated notes due 2002. As a result of this
exchange, the Company recognized a loss of $89.0 million.
6. Commitments and Contingencies
Legal proceedings
The Company is party to numerous legal proceedings, as described below. An
unfavorable resolution of certain of these matters could materially adversely
effect the Company's results of operations, financial position and cash flows.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving the
Company's financial reporting and other matters. The Company is cooperating
fully with the SEC and the United States Attorney. Also, as previously
announced, the Company engaged the law firm of Xxxxxxx Berlin Shereff Xxxxxxxx
LLP to conduct an independent investigation of those
13
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
matters. The results of Xxxxxxx Berlin's investigation have been conveyed to
the audit committee and to management and were considered in connection with
the preparation and restatement of the financial statements included in the
fiscal 2000 10-K/A and herein.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including its principal
401(k) plan, which permitted employees to purchase the Company's common stock.
Purchases of the Company's common stock under the plan were suspended in
October 1999. The Company is cooperating fully with the Department of Labor.
These federal investigations are ongoing and the Company cannot predict
their outcomes. If the Company were convicted of any crime, certain contracts
and licenses that are material to its operations may be revoked, which would
have a material adverse effect on results of operations and financial
condition. In addition, substantial penalties, damages or other monetary
remedies assessed against the Company could also have a material adverse
effect on the Company's results of operations, financial condition and cash
flows.
Stockholder litigation
The Company, its former chief executive officer Xxxxxx Xxxxx, its former
president Xxxxxxx Xxxxxx, its former chief financial officer Xxxxx Xxxxxxxx,
and its former auditor KPMG LLP, have been sued in a number of actions, most
of which purport to be class actions, brought on behalf of stockholders who
purchased the Company's securities on the open market between May 2, 1997 and
November 10, 1999. All of these cases have been consolidated in the U.S.
District Court for the Eastern District of Pennsylvania, where plaintiffs have
filed a third amended complaint and have been given leave of court to file a
fourth amended complaint on or before November 11, 2000. The complaints assert
claims against defendants under Sections 10, 18 and 20 of the Securities
Exchange Act of 1934, as amended, various state securities laws and common
law, based upon the allegation that the Company's financial statements for its
1997, 1998 and 1999 fiscal years fraudulently misrepresented its financial
position and results of its operations for those periods, among other
allegations.
If any of these cases were to result in a substantial monetary judgment
against the Company, or are settled on unfavorable terms, the Company's
results of operations, financial position and cash flows could be materially
adversely affected.
Certain of the Company's former officers (Xxxxxx X. Grass, Xxxxxxx X. Xxxxxx
and Xxxxx Xxxxxxxx), certain of its current and former directors (Xxxx Xxxxx,
Xxxxxx Xxxxxxx, Xxxxxxxx X. Xxxxx, Xxxxxxx X. Xxxxx, Xxxxxxx X. Xxxxx and
Xxxxx X. Xxxxxxxxx), its former auditor, KPMG LLP, and Rite Aid as nominal
defendant, have been sued by Company shareholders derivatively on behalf of
the Company in derivative actions brought in the U.S. District Court for the
Eastern District of Pennsylvania and the Chancery Court of the State of
Delaware. The derivative complaints purport to assert claims on behalf of the
Company against the defendants for violation of duties asserted to be owed by
such defendants to the Company, based upon allegations similar to those
contained in the complaints in the securities cases described above. The time
for defendants to respond to the derivative complaints has not yet run. The
Company has made no determination yet as to how it will respond to the
derivative complaints and is unable to predict the ultimate outcome of this
litigation.
Drug pricing and reimbursement matters
Purported federal class actions lawsuits have been filed against the Company
in Alabama and California and purported state class actions have been filed
against the Company in New Jersey, New York, Oregon, and Pennsylvania. In all
of the class actions the plaintiffs allege that the Company's former practice
of allowing its
14
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
pharmacists the discretion to charge non-uniform prices through the use of
positive overrides for cash purchases of prescription drugs was unlawful and
none of those class actions specify damages. The Company has asserted in court
filings that its imposition of positive overrides was a legitimate utilization
of non-uniform pricing similarly engaged in by many other sectors of retail
commerce. The Company filed motions to dismiss each of the uncertified class
action complaints for failure to state a claim for which relief could be
granted. The Company's arguments have prevailed in each of the cases in which
a court decision has been rendered thus far, other than the California case.
On December 27, 1999, the United States District Court for the Northern
District of Alabama dismissed the federal RICO claims against the Company with
prejudice and the plaintiffs later filed an appeal with the Eleventh Circuit.
That appeal is currently pending. On May 21, 2000, an Oregon state court judge
granted the Company's motion to dismiss the purported class action there with
prejudice. On June 27, 2000, a New Jersey state court dismissed that class
action there. On August 16, 2000, a Pennsylvania state court dismissed that
class action with prejudice. A motion to dismiss the state class action in New
York is currently pending.
The Company believes that all of the positive override lawsuits are without
merit under applicable state consumer protection laws and/or state or federal
RICO statutes. As a result, the Company intends to continue to vigorously
defend each of the pending actions and does not anticipate, if fully
adjudicated, that any of the lawsuits will result in an award of damages
and/or civil penalties. However, such an outcome for each of the actions
cannot be assured and a ruling against the Company could have a material
adverse effect on the financial position and operations of the Company as well
as necessitate substantial additional expenditures to cover legal costs as it
pursues all available defenses.
The Company is being investigated by multiple state attorneys general for
its reimbursement practices relating to partially-filled prescriptions and
fully-filled prescriptions that are not picked up by ordering customers. The
Company is supplying similar information with respect to these matters to the
Department of Justice. The Company believes that these investigations are
similar to investigations 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.
If any of these cases result in a substantial monetary judgment against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position and cash flows could be materially adversely
affected.
Other
In addition, the Company is subject from time to time to lawsuits arising in
the ordinary course of business. In the opinion of management, these matters
are covered adequately by insurance or, if not so covered, are without merit
or are of such nature or involve such amounts as would not have a material
adverse effect on the Company's financial condition, cash flow or results of
operations if decided adversely. The Company, regardless of insurance
coverage, does not believe that the ultimate resolution of these matters will
have a material adverse effect on the Company's financial condition, results
of operations and cash flows.
7. Beneficial Conversion
On October 27, 1999, the Company issued 3,000,000 shares of Series A
cumulative pay-in-kind preferred stock ("Series A Preferred Stock") at $100
per share. It subsequently exchanged all 3,000,000 shares of Series
15
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
A Preferred Stock for 3,000,000 shares of Series B cumulative pay-in-kind
preferred stock ("Series B Preferred Stock"). The Series B Preferred Stock,
when issued, was convertible into shares of the Company's common stock at a
conversion price of $11.00 per share of common stock. The conversion price of
the Series B Preferred Stock is subject to adjustment if the Company issues
common stock before October 27, 2000 at a per share price that is less than
the then current conversion price of the Series B Preferred Stock and in
certain other circumstances. In connection with the refinancing effected on
June 14, 2000, the Company issued common stock at a per share price of $5.50.
As a result of this issuance, the per share conversion price for the Series B
Preferred Stock was adjusted to $5.50. As a result of this adjustment the
Company increased its paid in capital and increased its accumulated deficit by
$160.9 million in June 2000 (representing the difference between $5.50 and the
market price of the Company's common stock on the original date of issuance of
the Series A Preferred Stock).
8. Interest Rate Swap Contracts
In June 2000, the Company entered into an interest rate swap contract that
fixes the LIBOR component of $500 million of the Company's variable rate debt
at 7.083% for a two-year period. In July 2000, Rite Aid entered into an
additional interest rate swap that fixes the LIBOR component of an additional
$500 million of variable rate debt at 6.946% for a two year period. The
Company entered into these contracts to hedge its exposure to fluctuations in
market interest rates. The differential to be paid or received as a result of
these swap agreements is accrued as an adjustment to interest expense. As of
August 26, 2000, these contracts had a net loss position of $5.5 million.
9. Restricted Stock
In June 2000, the Company issued 2,248,818 shares of restricted stock to
certain key executives. The Company recorded the issuances at fair value on
the date of grant of $17,428. Compensation expense related to these grants is
being recorded over the three-year vesting period of these grants.
16
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
10. Restatements
The financial statements for the thirteen and twenty-six weeks ended August
28, 1999 have been restated to reflect various adjustments to the previously
reported financial statements. See the Company's 2000 Form 10-K/A filed with
the SEC on October 11, 2000 for further information. Additionally, the PBM
segment has been reclassified as a discontinued operation. The following tables
set forth the restated results of operations, net loss per share and the impact
of reclassifying the PBM segment as a discontinued operation.
For the Thirteen Weeks ended August 28, 1999
-------------------------------------------------------------------------------
Restated
Restatement as
Adjustments as Previously
As Previously Reported Further As
Originally Reported in in 2000 Restatement Reclassifi- Restated and
Reported(1) 2000 10-K(2) 10-K(2) Adjustments(3) cations(4) Reclassified
----------- -------------- ---------- -------------- ----------- ------------
Revenues................ $3,506,129 $ 16,084 $3,522,213 $ -- $(318,249) $3,203,964
Costs and expenses
excluding store closing
and impairment
charges................ 3,536,096 82,338 3,618,434 (9,491) (298,391) 3,310,552
Store closing and
impairment charges..... 29,343 26,751 56,094 -- -- 56,094
---------- --------- ---------- ------ --------- ----------
Loss from continuing
operations before
income taxes and
cumulative effect of
change in accounting
method................. (59,310) (93,005) (152,315) 9,491 (19,858) (162,682)
Income tax (benefit)
expense................ (43,908) 41,522 (2,386) 9,717 (15,611) (8,280)
---------- --------- ---------- ------ --------- ----------
Loss from continuing
operations............. (15,402) (134,527) (149,929) (226) (4,247) (154,402)
Income from discontinued
operations, net of
tax.................... -- -- -- -- 4,247 4,247
---------- --------- ---------- ------ --------- ----------
Net loss................ $ (15,402) $(134,527) $ (149,929) $ (226) $ -- $ (150,155)
========== ========= ========== ====== ========= ==========
Basic and diluted income
(loss) per share:
Loss from continuing
operations............. $ (0.06) $ (0.52) $ (0.58) $ -- $ (0.02) $ (0.60)
Income from
discontinued
operations............. -- -- -- -- 0.02 0.02
---------- --------- ---------- ------ --------- ----------
Net loss............... $ (0.06) $ (0.52) $ (0.58) $ -- $ -- $ (0.58)
========== ========= ========== ====== ========= ==========
17
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
For the Twenty-six Weeks ended August 28, 1999
------------------------------------------------------------------------------
Restated
Restatement as
Adjustments as Previously
As Previously Reported Further As
Originally Reported in in 2000 Restatement Reclassifi- Restated and
Reported(1) 2000 10-K(2) 10-K(2) Adjustments(3) cations(4) Reclassified
----------- -------------- ---------- -------------- ----------- ------------
Revenues................ $7,130,629 $ 72,692 $7,203,321 $ -- $(644,736) $6,558,585
Costs and expenses
excluding store closing
and impairment
charges................ 6,976,543 339,238 7,315,781 (63,190) (606,582) 6,646,009
Store closing and
impairment charges..... 42,439 41,893 84,332 -- -- 84,332
---------- --------- ---------- -------- --------- ----------
Income (loss) from
continuing operations
before income taxes and
cumulative effect of
change in accounting
method................. 111,647 (308,439) (196,792) 63,190 (38,154) (171,756)
Income tax expense
(benefit).............. 82,619 (85,702) (3,083) (3,594) (30,562) (37,239)
---------- --------- ---------- -------- --------- ----------
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting method...... 29,028 (222,737) (193,709) 66,784 (7,592) (134,517)
Income from discontinued
operations, net of
tax.................... -- -- -- -- 7,592 7,592
Cumulative effect of an
accounting change, net
of tax................. -- (27,300) (27,300) -- -- (27,300)
---------- --------- ---------- -------- --------- ----------
Net income (loss)....... $ 29,028 $(250,037) $ (221,009) $ 66,784 $ -- $ (154,225)
========== ========= ========== ======== ========= ==========
Basic and diluted income
(loss) per share:
Income (loss) from
continuing
operations........... $ 0.11 $ (0.86) $ (0.75) $ 0.26 $ (0.03) $ (0.52)
Income from
discontinued
operations........... -- -- -- -- 0.03 0.03
Cumulative effect of
change accounting
method............... -- (0.11) (0.11) -- -- (0.11)
---------- --------- ---------- -------- --------- ----------
Net income (loss)..... $ 0.11 $ (0.97) $ (0.86) $ 0.26 $ -- $ (0.60)
========== ========= ========== ======== ========= ==========
--------
(1) The amounts shown are as previously reported in the fiscal 2000 Form 10-Q
for the thirteen and twenty-six weeks ended August 29, 1999.
(2) Reflects restatement adjustments previously reported in the Company's
Fiscal 2000 10-K. For a description of the adjustments which resulted in
the net loss and loss per share, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Restatement of Historical
Financial Statements" in the Company's Fiscal 2000 10K/A.
(3) To record adjustments identified subsequent to the filing of the Company's
2000 Form 10-K. Also, see notes 23 and 25 to the consolidated financial
statements in the Company's Fiscal 2000 Form 10-K/A.
(4) To reclassify the PBM Segment as a discontinued operation and to reflect
certain other reclassifications. See note 3.
18
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
(unaudited)
11. Change in Accounting Method
Retroactive to the first quarter of fiscal 2000, the Company changed its
application of the last-in, first-out ("LIFO") method of accounting by
restructuring its LIFO pool structure through a combination of certain
existing geographic pools. The reduction in the number of LIFO pools was made
to more closely align the LIFO pool structure to the Company's store
merchandise categories. The cumulative effect of the accounting change for
periods prior to fiscal 2000 was a charge of $27,300 (net of tax effect of
$18,200), or $0.11 per diluted common share. The effect of this accounting
change was a reduction in income of $3,420 net of income tax effect of $2,280
or $0.02 per diluted common share for the twenty-six weeks ended August 28,
1999.
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
We expect the following factors to affect our results of operations on a
going forward basis.
Maturing Store Base. Since the beginning of fiscal 1998, Rite Aid has built
377 new stores, relocated 756 stores and closed 831 stores. These new and
relocated stores represent approximately 30% of Rite Aid's total stores at
August 26, 2000. The new and relocated stores opened in recent years are
generally larger, free standing stores with higher operating expenses than our
older stores. New stores generally do not become profitable until a xxxxxxxx
xxxx of customers is developed. Relocated stores also must attract additional
customers to achieve comparable profitability to the store that was replaced.
We believe that the period of time required for a new store to achieve
profitable operations is generally between two and four years. This period can
vary significantly based on the location of a particular store and on other
factors, including the investments made in purchasing prescription files for
the location and advertising. Our recent liquidity constraints have limited
our ability to purchase prescription files and make other investments to
promote the development of our new and relocated stores. We believe that our
relatively high percentage of new and relocated stores is a significant factor
in our recent operating results. As new management continues to implement its
long term strategy, it will scale back Rite Aid's new store construction
program and focus on making the operations of its existing base of new and
relocated stores profitable. Management believes that as these newer stores
mature they should gain the xxxxxxxx xxxx of customers needed for profitable
operations. This continuing maturation should positively affect Rite Aid's
operating performance in future periods. If we are not able to improve the
performance of these new and relocated stores it will adversely affect our
ability to restore the profitability of our operations.
Reclassification of Lease Obligations. In connection with the restatement of
Rite Aid's operating results for fiscal 1999 and 1998, certain store leases
that had previously been classified as operating leases have now been
classified as capital leases. As a result of this restatement, our property,
plant and equipment and total debt balances at February 26, 2000 were
increased by $964.9 million and $1,080.0 million, respectively. The change in
classification of these lease obligations will result in an allocation of
depreciation charges to cost of goods sold and selling, general and
administrative expense. In addition, a portion of the lease payments will be
included in interest expense.
Substantial Investigation Expenses. Rite Aid has incurred substantial costs
in connection with the process of reviewing, reconciling and restating its
books and records, the investigation of its prior accounting practices and the
preparation of its audited financial statements. Included in these expenses
are the costs of the Deloitte & Touche LLP audit, the investigation by the law
firm of Xxxxxxx Berlin Shereff Xxxxxxxx LLP, assisted by Deloitte & Touche LLP
and the costs of retaining Xxxxxx Xxxxxxxx LLP to assist management in
reviewing and reconciling its books and records. Management currently
estimates that these costs will total approximately $94.0 million, of which
$51.5 million was incurred in the first two fiscal quarters of fiscal 2001.
Rite Aid anticipates that it will continue to incur significant legal and
other expenses in connection with the ongoing litigation and investigations to
which it is subject.
Sale of PCS. On July 12, 2000 Rite Aid announced that it had entered into an
agreement to sell PCS, its pharmacy benefits management (PBM) segment, to
Advance Paradigm, Inc. for $1.0 billion of cash and securities. The sale was
consummated on October 2, 2000. Accordingly, the PBM segment is reported as a
discontinued operation for all periods presented in the accompanying financial
statements and the operating results of the PBM segment are reflected
separately from the results of continuing operations. The estimated loss on
disposal of the PBM segment, subject to closing adjustments and final
determination of fair value of the series A preferred stock and warrants, is
$334.8 million, which includes transaction expenses and estimated net
operating income through the sale date of October 2, 2000. Rite Aid recorded
an estimated loss of $303.3 million in the first quarter of fiscal 2001 and
recorded an additional loss of $31.4 million in the second quarter of fiscal
2001, due to changes in estimates. Additionally, the company recorded an
increase to the tax valuation allowance and income tax expense of $146.9
million in the first quarter of fiscal 2001. For more information on the sale
of PCS, see Item 5--Other Information.
20
Dilutive Equity Issuances. Pursuant to the conversion price adjustment and
pay-in-kind dividend provisions of the convertible preferred stock issued to
an affiliate of Xxxxxxx Xxxxx and Partners, L.P. in October 1999, 58,635,209
shares of Rite Aid's common stock were issuable upon the conversion of such
preferred stock at September 23, 2000. Giving pro forma effect to these
issuances and adjustments, the basic and fully diluted average shares
outstanding at August 26, 2000 would have increased from 331,920,451 to
390,220,996. In light of our substantial leverage and liquidity constraints,
we will continue to consider opportunities to use the company's equity
securities to discharge debt or other obligations that may arise. Such
issuances may have a dilutive effect on the outstanding shares of our common
stock.
Accounting Systems. Following its review of the company's books and records,
management concluded that further steps were needed to establish and maintain
the adequacy of its internal accounting systems and controls. In connection
with the audit of the company's financial statements, Deloitte & Touche LLP
advised Rite Aid that it believed there were numerous "reportable conditions"
under the standards established by the American Institute of Certified Public
Accountants which relate to the company's accounting systems and controls and
could adversely affect the company's ability to record, process, summarize and
report financial data consistent with the assertions of management in the
financial statements. Management's long term strategy includes a comprehensive
plan to develop, implement and maintain adequate and reliable accounting
systems and controls which address the reportable conditions identified by
Deloitte & Touche LLP.
Results of Operations
Consolidated Revenues
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 26, 2000 August 28, 1999 August 26, 2000 August 28, 1999
--------------- --------------- --------------- ---------------
(dollars in thousands)
Sales................... $3,439,469 $3,203,964 $6,881,655 $6,558,585
Sales growth............ 7.4 % 6.8 % 4.9 % 8.7 %
Same store sales
growth................. 9.9 % 6.6 % 8.0 % 9.4 %
Pharmacy sales growth... 8.5 % 17.5 % 7.8 % 18.8 %
Same store pharmacy
sales growth........... 10.9 % 17.7 % 10.3 % 20.0 %
Pharmacy as a % of total
sales.................. 59.0 % 58.8 % 59.6 % 58.5 %
Third party sales as a %
of total pharmacy
sales.................. 90.0 % 87.6 % 89.8 % 87.4 %
Front end sales growth.. 5.5 % (5.4)% 2.0 % (3.8)%
Same store front end
sales growth........... 8.5 % (6.2)% 4.8 % (2.9)%
Front end sales as a %
of total sales......... 41.0 % 41.2 % 40.4 % 41.5 %
Store data:
Total stores
(beginning of
period).............. 3,779 3,878 3,802 3,870
New stores............ 1 22 5 43
Closed stores......... (13) (47) (40) (93)
Store acquisitions,
net.................. -- 1 -- 34
Total stores (end of
period).............. 3,767 3,854 3,767 3,854
Relocated stores...... 19 59 43 109
The 7.4% and 4.9% growth in sales for the thirteen and twenty-six week
periods ended August 26, 2000 was primarily due to strong same store sales
growth of 9.9% and 8.0% for the quarter and year-to-date periods,
respectively, partially offset by a decrease in total store count.
For the thirteen and twenty six-week periods ended August 26, 2000,
prescription drug revenues led sales growth with same-store sales increases of
10.9% and 10.3%, respectively. The increases in comparable store sales growth
were due to increases in the average transaction size and, to a lesser extent,
increased customer
21
counts. Our pharmacy sales growth continued to benefit from our purchasing
prescription files from independent pharmacies and favorable industry trends.
These trends include an aging American population with many "baby boomers" now
in their fifties and consuming a greater number of prescription drugs. The use
of pharmaceuticals as the treatment of choice for a growing number of
healthcare problems and the introduction of a number of successful new
prescription drugs also contributes to the growing demand for pharmaceutical
products.
Front-end sales, which include all non-prescription sales such as seasonal
merchandise, convenience items and food and other non-prescription sales, also
had strong same store sales growth in the thirteen and twenty-six week periods
ended August 26, 2000, increasing 8.5% and 4.8%, respectively. The same store
sales increase was primarily a result of the initiatives put into place by new
management which included, among other things, lowering prices on key items,
weekly distribution of a nationwide advertising circular and expanding certain
product categories and an overall improvement in general store conditions.
Costs and Expenses
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 26, 2000 August 28, 1999 August 26, 2000 August 28, 1999
--------------- --------------- --------------- ---------------
(dollars in thousands)
Cost of goods sold...... $2,633,559 $2,403,790 $5,291,486 $4,904,069
Gross profit............ 805,910 800,174 1,590,169 1,654,516
Gross margin............ 23.4% 25.0 % 23.1% 25.2 %
Selling, general and
administrative
expenses............... 858,631 793,623 1,696,716 1,524,401
Selling, general and
administrative expenses
as a percentage of
revenues............... 25.0% 24.8 % 24.7% 23.2 %
Goodwill amortization... 5,627 6,096 11,701 12,264
Interest expense........ 182,108 107,177 353,749 205,409
Store closing and
impairment charges..... 88,292 56,094 104,171 84,332
Loss on debt conversions
and modifications,
net.................... 83,789 -- 83,789 --
Share of loss (income)
from equity
investment............. 12,496 (134) 24,070 (134)
Cost of Goods Sold
Gross margin was 23.4% for the thirteen week period ended August 26, 2000
compared to 25.0% for the same period the prior year and was 23.1% for the
twenty-six week period ended August 26, 2000 compared to 25.2% for the same
period in the prior year.
Negatively impacting gross margin for the current year thirteen and twenty-
six week periods were the continuing trend of increased third-party reimbursed
prescription sales as a percentage of total prescription sales and the higher
promotional costs resulting from the company's new weekly advertising circular
program. The increase in third-party prescription sales negatively impacted
gross margin rates because they are paid by a person or entity other than the
recipient of the prescribed pharmaceutical and are generally subject to lower
negotiated reimbursement rates in conjunction with a pharmacy benefit plan.
Third-party sales as a percentage of total pharmacy sales were 90.0% and 87.6%
for the thirteen weeks, and 89.8% and 87.4% for the twenty-six weeks, ended
August 26, 2000 and August 28, 1999, respectively.
The company uses the last-in, first-out (LIFO) method of inventory
valuation, which can only be determined annually when inflation rates and
inventory levels are finalized. Therefore, LIFO costs for interim period
financial statements are estimated. Cost of sales includes a LIFO provision of
$6.4 million for the thirteen weeks period ended August 26, 2000 versus $9.4
million for the same period a year ago.
Selling, General and Administrative Expenses
Selling, general and administrative expense ("SG&A") as a percentage of
revenues was 25.0% in the thirteen weeks ended August 26, 2000, essentially
flat from the level of 24.8% in the corresponding period of
22
the prior fiscal year. In the twenty-six week period of the current fiscal
year the SG&A percentage was 24.7%, an increase over the level of 23.2% in the
prior fiscal year. SG&A in the thirteen and twenty-six week periods of the
current fiscal year benefited from the receipt of $12.3 million related to the
settlement of litigation with certain drug manufacturers, lower depreciation
expense resulting from a net reduction of our store count, the absence of
higher depreciation expense recorded in the prior year due to acceleration of
depreciation in impaired stores and a better leveraging of fixed SG&A costs
resulting from our higher same store sales volume. These improvements were
offset by corporate expenses of $26.1 million and $51.5 million for the
thirteen and twenty-six week periods ended August 26, 2000 incurred in
connection with the restatement of the company's historical financial
statements. Selling, general and administrative expenses for the current year
quarter and year-to-date periods were also negatively impacted by lower
selling, general and administrative expenses in the prior year resulting from
the reversal of stock appreciation rights accruals in the amount of $8.5
million and $44.6 million, in the thirteen and twenty-six week periods ending
August 29, 1999, respectively, due to a decline in the company's stock price.
Interest Expense
Interest expense was $182.1 million and $353.7 million for the thirteen and
twenty-six week periods ended August 26, 2000 compared to $107.2 million and
$205.4 million in the thirteen and twenty-six week periods ended August 28,
1999. The increase in interest expense in fiscal 2001 is due to higher levels
of indebtedness throughout the period and higher interest rates, partially
offset by interest savings on debt that was converted to equity in the second
quarter of fiscal 2001. The annual weighted average interest rates excluding
capital leases on the company's indebtedness for the thirteen weeks ended
August 26, 2000 and August 28, 1999, were 8.5% and 6.1%, respectively.
Store Closing and Impairment Charges
Store closing and impairment charges include non-cash charges of $17.9
million and $41.2 million for the thirteen weeks ended August 26, 2000 and
August 28, 1999, respectively for the impairment of long-lived assets
(including allocable goodwill) at 60 and 83 stores, respectively. Store
closing and impairment charges include non-cash charges of $25.8 million and
$56.9 million for the twenty-six weeks ended August 26, 2000 and August 28,
1999, respectively for the impairment of long-lived assets (including
allocable goodwill) at 102 and 159 stores, respectively. These amounts include
the write-down of long-lived assets at stores that were assessed for
impairment because of management's intention to relocate or close the store or
because of changes in circumstances that indicate the carrying value of an
asset may not be recoverable.
Store closings and impairment charges consist of:
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
August 26, 2000 August 28, 1999 August 26, 2000 August 28, 1999
--------------- --------------- --------------- ---------------
(dollars in thousands)
Store lease exit costs.. $(6,875) $14,845 $ 1,102 $27,391
Impairment charges...... 17,922 41,249 25,824 56,941
Impairment of
xxxxxxxxx.xxx.......... 77,245 -- 77,245 --
------- ------- -------- -------
$88,292 $56,094 $104,171 $84,332
======= ======= ======== =======
23
A rollforward of the company's lease exit liability follows:
Thirteen Weeks Thirteen Weeks Twenty-Six Twenty-Six
Ended Ended Weeks Ended Weeks Ended
August 26, 2000 August 28, 1999 August 26, 2000 August 28, 1999
--------------- --------------- --------------- ---------------
(dollars in thousands)
Balance--Beginning of
Period................. $213,706 $238,821 $212,812 $246,805
Provision for present
value of
noncancellable lease
payments of stores
designated to be
closed............... 8,952 16,160 28,309 33,300
Changes in assumptions
about future sublease
income, terminations,
etc.................. (17,683) 238 (24,985) (2,438)
Reversals of reserves
for stores that
management has
determined will
remain open.......... (2,985) (177) (7,332) (1,256)
Interest accretion and
changes in interest
rates................ 7,862 (128) 11,100 (1,140)
Cash payments, net of
sublease income...... (9,795) (18,379) (19,847) (38,736)
-------- -------- -------- --------
Balance--End of Period.. $200,057 $236,535 $200,057 $236,535
======== ======== ======== ========
The company has an investment in the common stock of xxxxxxxxx.xxx, which is
accounted for under the equity method. The initial investment was valued based
upon the initial public offering price of xxxxxxxxx.xxx. During the second
quarter, the company recorded a write-down of its investment in xxxxxxxxx.xxx.
This write-down was based on a decline in the market price of xxxxxxxxx.xxx's
stock that the company believes to be other-than-temporary.
Income Taxes
The company had net losses for the thirteen and twenty-six week periods
ended August 26, 2000 and August 28, 1999. The full benefit of the net
operating losses generated in the thirteen week period ended August 26, 2000
has been fully offset and the thirteen week period ended August 28, 1999 has
been partially offset by a valuation allowance based on management's
determination that, based on available evidence, it is more likely than not
that some or all of the deferred tax assets will not be utilized.
The income tax provision for the thirteen and twenty-six week periods ended
August 26, 2000 reflects the effect of the decision to sell PCS and to
discontinue the operations of the company's PBM segment.
Net Loss
Our net loss for the thirteen week period ended August 26, 2000 and August
28, 1999 was $456.5 million and $150.2 million, respectively. Our net loss for
the twenty-six week period ended August 26, 2000 and August 28, 1999 was
$1.151.8 million and $154.2 million, respectively. In addition to the
operational matters discussed above, our results in the current fiscal year
have been adversely affected by significant non-operating charges. As
indicated, we recorded losses of $31.4 million and $334.8 million on the
disposal of the PBM segment for the thirteen week and twenty-six week periods
ended August 26, 2000, respectively. We also recorded a loss of $83.8 million
on debt conversions and modifications in the thirteen week and twenty-six week
periods ended August 26, 2000. Finally, we recorded a loss of $77.2 million
relating to the impairment of our investment in xxxxxxxxx.xxx in the thirteen
week period ended August 26, 2000, as well as losses of $12.5 million and
$24.1 million representing our share of the xxxxxxxxx.xxx losses, in the
thirteen week and twenty-six week periods of the current year, respectively.
Liquidity and Capital Resources
Rite Aid has two primary sources of liquidity: cash provided by operations
and the revolving credit facility under our new senior secured credit
facility. We may also generate liquidity from the sale of assets, including
sale-leaseback transactions, the issuance of debt and equity securities and
potential additional borrowings. During the twenty-six weeks ended August 26,
2000 and August 28, 1999, cash provided by operations was not sufficient
24
to fund our working capital requirements. As a result, we have supplemented
our cash from operations with borrowings under our credit facilities. Our
principal uses of cash are to provide working capital for operations, service
our obligations to pay interest and principal on our debt, and to provide
funds for capital expenditures.
Credit Facilities and Debt Restructuring
In June 2000, we completed a major financial restructuring that extended the
maturity dates of a substantial amount of our debt until at least August 2002
and converted a portion of our debt to equity. These refinancing transactions
are described below.
New Senior Secured Credit Facility. We entered into a new $1.0 billion
syndicated senior secured credit facility with a syndicate of banks led by
Citibank N.A., as agent. The new facility matures on August 1, 2002, and
consists of a $500.0 million term loan facility and a $500.0 million revolving
credit facility. We used the term facility to terminate our accounts
receivable securitization facility and repurchase $300.0 million of unpaid
receivables thereunder, to fund $66.4 million of transaction costs relating to
our financial restructuring and to provide $133.6 million of cash that will be
available for general corporate purposes. The revolving facility provides us
with borrowings for working capital requirements, capital expenditures and
general corporate purposes. Borrowings under the facilities generally bear
interest either at LIBOR plus 3.0%, if we choose to make LIBOR borrowings, or
at Citibank's base rate plus 2.0%. For additional information about the
interest rates applicable to our credit facilities, see "Quantitative and
Qualitative Disclosures about Market Risks" below.
We are required to pay fees of 0.50% per annum on the daily unused amount of
the commitment. Substantially all of our wholly-owned subsidiaries guaranteed
our obligations under the senior secured credit facility. These subsidiary
guarantees are secured by a first priority lien on the inventory, accounts
receivable, intellectual property and some of the real estate assets of the
subsidiary guarantors. Our direct obligations under the senior credit facility
are unsecured.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. The facility requires us to meet
various financial ratios and limits our capital expenditures. For the quarter
ended August 26, 2000, our covenants required us to maintain a minimum
interest coverage ratio of .75:1 and minimum fixed charge coverage ratio of
.88:1. Following the consummation of the sale of PCS, these covenants require
us to maintain a minimum interest coverage ratio of 1.40:1 for the four
quarter period ending June 1, 2002, and a minimum fixed charge coverage ratio
of 1.19:1 for the four quarter period ending June 1, 2002. We also must
maintain consolidated EBITDA (as defined in the senior secured credit
facility) of no less than $104.0 million for the quarter ended August 26,
2000, increasing to $720.0 million for the four quarter period ending June 1,
2002. In addition, our capital expenditures are limited to $70.0 million for
the fiscal quarter ended August 26, 2000 and $243.0 million for the four
quarter period ending June 1, 2002.
The facility provides for customary events of default, including nonpayment,
misrepresentation, breach of covenants and bankruptcy. It is also an event of
default if any event occurs that enables, or which with the giving of notice
or the lapse of time would enable, the holder of the company's debt to
accelerate the maturity of debt equaling $25.0 million or more.
Our ability to borrow under the senior secured credit facility is based on a
specified borrowing base consisting of eligible accounts receivable and
inventory. At August 26, 2000, the $500.0 million term loan was fully drawn.
We had $136.0 million in outstanding borrowings under the revolving facility
at August 26, 2000.
Other Existing Facilities. We extended to August 2002 the maturity date of
our existing syndicated credit facilities, which consist of the RCF facility
and the PCS credit facility. Borrowings under the PCS credit facility bear
interest at LIBOR plus 3.25% and borrowings under the RCF credit facility bear
interest at LIBOR plus 3.75%. These credit facilities contain restrictive
covenants which place restrictions on the assumption of debt, the payment of
dividends, mergers, liens and sale-leaseback transactions. These credit
facilities also require us to satisfy financial covenants which are generally
slightly less restrictive than the covenants in the new senior
25
secured credit facility. The facilities also limit the amount of our capital
expenditures to $70.0 million for the quarter ended August 26, 2000 increasing
to $243.0 million for the four quarters ending June 1, 2002. Under the terms
of these facilities, the company is permitted to incur up to an additional
$135 million of indebtedness under the senior secured credit facility without
the further consent of the lenders under the PCS, RCF and related exchange
debt facilities. Any amounts repaid under the facilities with the proceeds of
asset sales may not be reborrowed. The PCS credit facility was secured by a
first lien on the stock of PCS and the RCF credit facility was secured by a
first lien on the stock of xxxxxxxxx.xxx and a second lien on the stock of
PCS. At August 26, 2000 we had $1.9 billion of borrowings outstanding under
these credit facilities. These facilities are also guaranteed and secured as
described below. Upon consummation of the sale of PCS on October 2, 2000, the
company applied $575.0 million of the cash portion of the proceeds, to reduce
the outstanding balances of the PCS credit facility and the PCS exchange debt.
The company has pledged the Series A Preferred stock (and all securities
issued upon its conversion) and the senior subordinated notes to the lenders
under the PCS credit facility and RCF credit facility, and the related
exchange debt described below to secure the company's obligations thereunder.
It is required to use any net proceeds received from any sale of those
securities to further repay the then outstanding balance of the PCS credit
facility and the PCS exchange debt and, once this facility has been repaid in
full, to repay the then outstanding balance of the RCF credit facility and the
RCF exchange debt. After applying the proceeds from the sale of PCS, we had
$842.0 million of outstanding borrowings under the PCS facility and the
exchange debt.
Exchange Offers. In June 2000, we completed the exchange of $52.5 million of
our 5.5% notes due December 2000 and $321.8 million of our 6.7% notes due
December 2001 for an aggregate of $374.3 million of our new 10.5% senior
secured notes due September 2002. After the exchange, $147.5 million of the
5.5% notes due December 2000 and $28.2 million of the 6.7% notes due December
2001 remained outstanding. In connection with the exchange, we entered into a
forward purchase agreement to sell $93.2 million of our 10.5% senior secured
notes due September 2002 to certain financial institutions. These financial
institutions purchased $16.7 million of the 5.5% notes and $20.4 million of
the 6.7% notes on July 27, 2000, and $53.8 million of the 5.5% notes on
September 13, 2000, and exchanged the purchased notes with the company for the
10.50% Senior Secured Notes due 2002. The remaining 5.5% notes due in December
2000 and 6.7% notes due December 2001 will be retired with the company's
general corporate funds and the $2.3 million remaining on the forward purchase
agreement.
Exchange of Debt for Equity and Exchange Debt. As part of our restructuring,
certain affiliates of X.X. Xxxxxx, which had lent us $300.0 million under a
demand note in June 1999 and was also a lender under the RCF and PCS credit
facilities, together with certain other lenders under the two credit
facilities, agreed to exchange a portion of their loans for a new secured
exchange debt obligation and common stock. This resulted in a total of $284.8
million of debt under these facilities, including $200 million of the
outstanding principal of the demand note, being exchanged for common stock at
a price of $5.50 per share. An additional $274.8 million of borrowings under
the facilities were exchanged for the exchange debt, including the entire
remaining principal amount of the X.X. Xxxxxx demand note. The terms of the
exchange debt are substantially the same as the terms of our RCF and PCS
credit facilities and the interest rate is currently LIBOR plus 3.25%. The
lenders of the RCF and PCS credit facilities have the same collateral as they
did with respect to their loans under the credit facilities or demand note, as
applicable, and also received a first lien on our prescription files. As a
result of this exchange, we recorded a gain of $11.4 million in second quarter
of fiscal 2001.
On June 26, 2000, we issued 17.8 million shares of our common stock in
exchange for $177.8 million in principal amount of our 5.25% convertible
subordinated notes due 2002. As a result of this exchange, we recorded a loss
on extinguishment of $89.0 million in the second quarter of fiscal 2001.
Synthetic Leases. As part of our restructuring, we amended our existing
guarantees of two synthetic lease transactions to provide substantially the
same terms as the terms of our RCF and PCS credit facilities.
Second Priority Collateral. In connection with modifications to the RCF and
PCS credit facilities, the guarantee of the Prudential note, the exchange for
exchange debt and the guarantees of the synthetic lease transactions,
substantially all of our wholly-owned subsidiaries guaranteed our obligations
thereunder on a second priority basis. These subsidiary guarantees are secured
by a second priority lien on the inventory,
26
accounts receivable, intellectual property and some of the real estate assets
of the subsidiary guarantors. Except to the extent previously secured, our
direct obligations under those facilities and guarantees remain unsecured.
Commercial Paper. Until September 24, 1999, we issued commercial paper
supported by unused credit commitments to supplement cash generated by
operations. Since the loss of our investment grade rating in fiscal 2000, we
are no longer able to issue commercial paper. Outstanding commercial paper of
the company amounted to $192.0 million at February 26, 2000. All remaining
commercial paper obligations were repaid in March 2000.
Debt Covenants. The company was in compliance with the covenants in its
senior secured credit facility and its other credit facilities and debt
instruments during the thirteen weeks ended August 26, 2000 and, with
continuing improvements in operating performance, anticipates that it will
remain in compliance with its debt covenants during the remainder of fiscal
2001. However, variations in the company's operating performance and
unanticipated developments may adversely affect its ability to remain in
compliance with the applicable debt covenants. As it monitors future
performance and developments, management may, from time-to-time, pursue
modifications or waivers with respect to particular covenants as it deems
appropriate. Although the company believes that its relations with its
principal lenders are generally good, there can be no assurance that any such
modifications or waivers, if sought, would be obtained.
Net Cash Used in Operating, Investing and Financing Activities
The company used $562.0 million of cash to fund operations in the twenty-six
weeks ended August 26, 2000. Operating cash flow was negatively impacted by
$300.0 million that was used to repurchase accounts receivable when the
accounts receivable securitization facility was terminated. In addition,
operating cash flow was negatively impacted by $280.1 million in interest
payments and by seasonal inventory builds. Operating cash flow benefited from
an increase in accounts payable partially offset by a decrease in other
liabilities.
In the twenty-six weeks ended August 28, 1999, cash provided by operations
was $119.0 million. Operating cash flow was negatively impacted by seasonal
inventory builds, which was partially offset by a corresponding increase in
accounts payable.
Cash used for investing activities was $20.2 million and $458.9 million for
the twenty-six weeks ended August 26, 2000 and August 28, 1999, respectively.
Cash used for store construction and relocations amounted to $59.9 million and
$405.6 million for the twenty-six weeks ended August 26, 2000 and August 28,
1999, respectively. In addition, cash of $24.5 million was used to acquire the
assets of Edgehill in fiscal 2000.
Working Capital
Net working capital was $965.8 million at August 26, 2000, compared to
$720.0 million at February 26, 2000. The current ratios were 1.39% and 1.31%,
respectively.
Capital Expenditures
The company plans to make total capital expenditures of approximately $160.0
million to $190.0 million during fiscal 2001. Such expenditures consist of
approximately $80.0 million to $100.0 million related to new store
construction, store relocation and other store construction projects. An
additional $40.0 million to $50.0 million will be dedicated to other store
improvement activities including the purchase of Script Pro automated
prescription dispensing machines and the purchase of script files from
independent pharmacists. 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 twenty-six weeks ended August 26, 2000, the company spent $59.9
million on capital expenditures.
27
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 new senior credit
facility and its other sources of liquidity will be adequate to meet its
anticipated annual requirements for working capital, debt service and capital
expenditures through the end of fiscal 2001. However, the third quarter is
generally the peak period for the company's liquidity needs as holiday season
inventories are purchased. Also, the company is required to retire
approximately $78 million of indebtedness as it matures in the fourth quarter
of the current fiscal year. Management will continue to assess the company's
liquidity position and potential sources of supplemental liquidity in light of
its operating performance and other relevant circumstances. Should Rite Aid
determine, at any time, that it is necessary to seek additional short-term
liquidity, it will evaluate its alternatives and take appropriate steps to
obtain sufficient additional funds. Obtaining any such supplemental liquidity
would require the consent of the lenders under one or more of the company's
debt agreements. There can be no assurance that any such supplemental funding,
if sought, could be obtained or that the company's lenders would provide the
necessary consents.
On a longer term basis, after applying the proceeds from the sale of PCS,
approximately $2.6 billion of our indebtedness with mature on August 2, 2002,
including the revolving credit facility under the new senior secured credit
facility. Our ability to replace, refinance or otherwise extend these
obligations will depend, in part, on our ability to successfully execute our
long-term strategy and improve the operating performance of our stores. For a
discussion of factors that could affect our liquidity and our ability to
execute our long term strategy, see the items discussed under "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Factors Affecting Our Future Prospects" in our Annual Report on Form 10K/A.
Accounting Change
In fiscal 2000, we changed our application of the LIFO method of accounting
by restructuring our LIFO pool structure through a combination of certain
geographic pools. The reduction in the number of LIFO pools was made to more
closely align the LIFO pool structure to store merchandise categories. The
effect of this change in fiscal 2000 was to decrease our earnings by $6.8
million (net of income tax benefit of $4.6 million) or $.03 per diluted common
share. The cumulative effect of the accounting change for periods prior to
fiscal 2000 was a charge of $27.3 million (net of income tax benefit of $18.2
million), or $.11 per diluted common share. The effect of this accounting
change was a reduction in net income of $3.4 million, net of income tax effect
of $2.3 million or $.02 per diluted common share for the twenty-six weeks
ended August 28, 1999.
Recent Accounting Pronouncements
In November 1999, the Staff of the SEC issued Staff Accounting Bulletin
(SAB) 101, "Revenue Recognition." This SAB sets forth the Staff's position
regarding the point at which it is appropriate for a Registrant to recognize
revenue. The Staff believes that revenue is realizable and earned when all of
the following criteria are met:
. persuasive evidence of an arrangement exists;
. delivery has occurred or service has been rendered;
. the seller's price to the buyer is fixed or determinable; and
. collectibility is reasonably assured.
28
The company uses the above criteria to determine whether revenue can be
recognized, and therefore believes that the issuance of SAB 101 does not have
a material impact on the company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). This statement, which
establishes the accounting and financial reporting requirements for derivative
instruments, requires companies to recognize derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS No. 133.
These statements, as amended, are effective in fiscal 2002. We are evaluating
the effects that the adoption of SFAS Nos. 133 and 138 may have on the
consolidated financial statements.
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and
industry, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors Affecting Our Future Prospects"
in our Form 10-K/A for the 2000 fiscal year, filed with the SEC on October 11,
2000.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Rite Aid's future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. Our major
market risk exposure is changing interest rates. Increases in interest rates
would increase the company's interest expense. Since the end of fiscal 2000,
Rite Aid's primary risk exposure has not changed. Our company enters into debt
obligations to support capital expenditures, acquisitions, working capital
needs and general corporate purposes. Rite Aid's policy is to manage interest
rates through the use of a combination of variable-rate credit facilities,
fixed-rate long-term obligations and derivative transactions.
The table below provides information about the company's financial
instruments that are sensitive to changes in interest rates. The table
presents principal payments and the related weighted average interest rates by
expected maturity dates as of August 26, 2000.
Fiscal Year Fair Value
-------------------------------------------------------------------- at August 26,
2001 2002 2003 2004 2005 Thereafter Total 2000
-------- ------ ---------- -------- ---- ---------- ---------- -------------
(dollars in thousands)
Long-term debt,
including
Current portion
Fixed rate Debt....... $132,694 $9,004 $1,887,682 $200,582 $377 $1,556,406 $3,786,745 $2,300,045
Average Interest
Rate................. 6.03% 6.90% 9.13% 6.01% 8.27% 7.17%
Variable Rate Debt.... -- -- $1,783,188 -- -- -- $1,783,188 $1,783,188
Average Interest
Rate................. -- -- 9.92% -- -- -- -- --
In June 2000, the company refinanced certain variable- and fixed-rate
obligations maturing in fiscal years 2001 and 2002 and entered into an
interest rate swap that fixes the LIBOR component of $500.0 million of the
company's variable-rate debt at 7.083% for a two year period. In July 2000,
the company entered into an additional interest rate swap that fixes the LIBOR
component of an additional $500.0 million of variable rate debt at 6.946% for
a two year period. The variable rate debt that had interest rates fixed by the
two interest rate swaps were included with fixed rate debt in the above table.
As of August 26, 2000, 32% of the company's total debt is exposed to
fluctuations in variable interest rates.
Our ability to satisfy our interest payment obligations on our outstanding
debt will depend largely on our future performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service our
interest payment
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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 October 11, 2000, the company had three credit facilities: the new
$1.0 billion senior secured credit facility entered into on June 14, 2000, and
the RCF credit facility and PCS credit facility. In addition, it had fixed-
rate obligations in the amount of $4.9 billion and exchange debt in the amount
of $219.5 million. In March 2000, all remaining commercial paper obligations
were repaid. The ratings on these credit facilities and obligations as of
September 30, 2000 were as follows: the $1.0 billion RCF facility: B by
Standard and Poor's and B2 by Xxxxx'x; the $1 billion senior secured credit
facility: BB- by Standard & Poor's and Ba3 by Xxxxx'x; the $1.3 billion PCS
facility: B by Standard & Poor's and B2 by Xxxxx'x; the fixed-rate
obligations: B- by Standard & Poor's and Caa1 by Xxxxx'x; and the exchange
debt is not rated yet. The interest rates on the variable-rate borrowings are
as follows: the $1.0 billion RCF facility: LIBOR plus 3.75%, the $1.0 billion
senior secured credit facility: LIBOR plus 3.00%, and the $1.3 billion PCS
facility and the exchange debt: LIBOR plus 3.25%.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The following is a description of all material developments of our legal
proceedings in the thirteen weeks ended August 26, 2000. For a complete
description of all material legal proceedings, see our Form 10-K/A for the
year ended February 26, 2000.
On August 16, 2000, a Pennsylvania state court dismissed with prejudice a
purported state class action lawsuit complaint insofar as it alleged that the
company's former pricing practices violate Pennsylvania law.
In September 2000, the United States District Court for the Central District
of California denied the company's motion to dismiss a purported class action
complaint insofar as it alleged that the company's former pricing practices
violate one section of the California Business and Professional Code.
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 August 26, 2000.
ITEM 5. Other Information
Sale of PBM Segment. On July 12, 2000, the company announced that it had
entered into an agreement to sell PCS, its PBM segment, to Advance Paradigm,
Inc. for $1.0 billion. The sale of PCS was consummated on October 2, 2000. The
selling price of PCS consisted of $675.0 million in cash; $200.0 million in
principal amount of Advance Paradigm's unsecured 10 year senior subordinated
notes (with warrants attached) and $125.0 million in liquidation preference of
Advance Paradigm's 11% Series A Preferred Stock. The senior subordinated notes
bear interest at the rate of 11% per annum for the first 18 months after their
date of issuance (October 2, 2000), 12% for the next six months and 13%
thereafter until maturity. The warrants attached to the senior subordinated
notes are not exercisable until October 2, 2002. Once exercisable, they will
be transferable separately from the senior subordinated notes and entitle the
holders collectively to purchase, for $20 per share, 780,000 shares of Advance
Paradigm's class A common stock (subject to adjustment for certain dilutive
events). The senior subordinated notes may be prepaid by Advance Paradigm in
whole at any time; however, if less than the entire outstanding principal
amount is prepaid not more than an aggregate of $75,000 principal amount may
be prepaid from the date of issuance. Upon any prepayment prior to October 2,
2002, a ratable portion of the warrants attached to the senior subordinated
notes will expire. The fair value of the senior subordinated notes is
estimated at 75% of their principal amount. The fair value of the series A
preferred stock is estimated at its stated value. The company is in the
process of obtaining an appraisal to determine the fair value of the series A
preferred stock and warrants at the consummation date.
Commencing January 30, 2001 and until Advance Paradigm's stockholders
approve the issuance of class B common stock upon conversion of the series A
preferred stock, the series A preferred stock will pay quarterly dividends,
solely in additional shares of series A preferred stock, at the rate of 11%
per annum for the first six months, 13% for the next six months and 16%
thereafter. Upon approval by Advance Paradigm's stockholders, the series A
preferred stock will be convertible, at Rite Aid's option, at $20 per share
(subject to adjustment for certain dilutive events), into shares of class B
common stock of Advance Paradigm (which are convertible into
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shares of class A common stock which is publicly traded). Once converted, the
series A preferred stock will be entitled to share ratably with the class A
common stock in dividends declared. Holders of the class A preferred stock
(and of the class B common stock issuable upon its conversion) have the right
to elect two members of Advance Paradigm's board of directors.
The company has the right to cause Advance Paradigm to register the senior
subordinated notes (and the attached warrants and the shares issuable upon
exercise of the warrants) and the series A preferred stock (and if converted,
the shares issued upon conversion) for sale under the Securities Act of 1933.
The company has agreed not to sell more than 50% of the shares of series A
preferred stock (and the shares into which it may be converted) for a period
of 24 months from their date of issuance unless the stockholders of Advance
Paradigm do not approve its conversion into class B common stock by January
30, 2001 or unless the market price of Advance Paradigm's class A common stock
averages $40 per share for 20 consecutive trading days after April 2, 2001.
When the sale was consummated, the company applied $575,000 of the cash
portion of the proceeds to reduce the outstanding balances of the PCS credit
facility and the PCS exchange debt, and pledged the Series A Preferred Stock
(and all securities issued upon its conversion) and the senior subordinated
notes to the lenders under the PCS credit facility, the RCF credit facility,
and the Exchange Debt to secure the company's obligations thereunder. The
company is required to use any net proceeds received from any sale of those
securities to further repay the then outstanding balance of the RCF credit
facility and the RCF exchange debt.
The PBM segment is reported as a discontinued operation for all periods
presented in the accompanying financial statements and the operating results
of the PBM segment are reflected separately from the results of continuing
operations. The estimated net loss on the disposal of the PBM segment, subject
to closing adjustments and final determination of fair value of the series A
preferred stock and warrants, is $334,763, which includes estimated
transaction expenses and estimated net operating income through the sale date
of October 2, 2000. In the first quarter of fiscal 2001 ended May 27, 2000,
the company recorded a loss of $303,330 and in the second quarter of fiscal
2001 ended August 26, 2000, the company recorded an additional loss of
$31,433, due to changes in estimates.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
Exhibit
Numbers Description
-------- -----------
10.20* Amendment No. 5 to Master Lease and Security Agreement, dated as of
June 12, 2000, between Sumitomo Bank Leasing and Finance, Inc., as
Lessor, and Rite Aid Realty Corp., as Lessee.
11 Statements re Computation of Per Share Earnings (See Note 3 to the
condensed consolidation financial statements)
27 Financial Data Schedules
(b) Rite Aid Corporation has filed the following Current Reports on Form 8-K
in the thirteen week period ended August 29, 2000:
(1) Rite Aid Corporation filed a Current Report on Form 8-K on June 21,
2000 disclosing under Item 5 a press release announcing the
completion of its refinancing transactions and setting forth under
Item 7 copies of the related Indenture and Agreements as exhibits.
(2) Rite Aid Corporation filed a Current Report on Form 8-K and Form 8-K/A
on July 14, 2000 and July 17, 2000, respectively, disclosing under
Item 5 a press release dated July 11, 2000 announcing its unaudited
financial results for the first quarter of fiscal year 2001 ended May
27, 2000, as well as its financial results for the fiscal year ended
February 26, 2000 and restated financial results for the fiscal years
ended February 27, 1999 and February 28, 1998. The Current Report also
disclosed under Item 5 that on July 12, 2000, Rite Aid Corporation and
Advance Paradigm, Inc. jointly issued a press release announcing that
they had entered into a definitive agreement under which Advance
Paradigm will acquire 100% of the equity of Rite Aid's PCS Health
Systems, Inc. subsidiary for $1 billion, consisting of $675 million in
cash, $200 million in senior subordinated notes and $125 million in
newly issued equity in Advance Paradigm.
* Incorporated by reference from Exhibit 10.20 to Form 8-K, filed on June
21, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 11, 2000 RITE AID CORPORATION
/s/ Xxxxxx X. Xxxxxx
By: _________________________________
Xxxxxx X. Xxxxxx
Senior Executive
Vice President and
General Counsel
Date: October 11, 2000
/s/ Xxxx X. Xxxxxxxx
By: _________________________________
Xxxx X. Xxxxxxxx
Senior ExecutiveVice President
and Chief Financial Officer
34
