Following is a summary of indebtedness and lease financing obligations at August 27, 2005 and February 26, 2005:
As of August 27, 2005, the existing senior secured credit facility consisted of a $446,625 term loan and $34,000 outstanding under a $950,000 revolving credit facility. On September 30, 2005, the Company amended its senior secured credit facility. In connection with the amendment, the Company increased the amount of borrowing capacity under the revolving credit facility, which was used, in part, to pay off the
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen and Twenty-Six Week Periods Ended August 27, 2005 and August 28, 2004
(Dollars and share information in thousands, except per share amounts)
(unaudited)
term loan portion of the existing senior secured credit facility. After closing on September 30, 2005, the amount outstanding on the revolver was $477,000. The amended senior secured credit facility consists solely of a $1,750,000 revolving credit facility. Borrowings under the amended senior secured credit facility currently bear interest at LIBOR plus 1.50%, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 0.50%. The interest rate can fluctuate depending upon the amount of revolver availability, as specified in the amended senior secured credit facility. The Company is required to pay fees of 0.25% per annum on the daily unused amount of the revolving credit facility. Full amounts drawn on the amended revolving credit facility become due and payable in September 2010.
The amended senior secured credit facility allows the Company to have outstanding, at any time, up to $1,800,000 in secured subordinated debt in addition to the amended senior secured credit facility (which amount is reduced by any additional unsecured debt that matures prior to December 31, 2010, as described below). The Company also has the ability to incur an unlimited amount of unsecured debt, if the debt does not mature or require scheduled payments of principal prior to December 31, 2010. The Company has the ability to incur additional unsecured debt of up to $750,000 with a scheduled maturity date prior to December 31, 2010. The maximum amount of additional secured subordinated debt and unsecured debt with a maturity prior to December 31, 2010 that can be incurred is $1,800,000. At September 30, 2005, remaining additional permitted secured subordinated debt under the amended senior secured credit facility was $797,975 in addition to what is available under the revolver; however, other debentures do not permit additional secured debt if the revolver is fully drawn. The amended senior secured facility also allows for the repurchase of any debt with a maturity on or before September 2010, and for the repurchase of debt with a maturity after September 2010, if the Company maintains availability on the revolving credit facility of at least $100,000.
The amended senior secured credit facility contains customary covenants, which place restrictions on the incurrence of debt beyond the restrictions described above, the payments of dividends, mergers and acquisitions and the granting of liens. The amended senior secured credit facility also requires the Company to maintain a minimum fixed charge coverage ratio, but only if availability on the revolving credit facility is less than $100,000.
The amended senior secured credit facility provides for customary events of default including nonpayments, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if the Company fails to make any required payment on debt having a principal amount in excess of $50,000 or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity of such debt.
The Company's ability to borrow under the amended senior secured credit facility is based upon a specified borrowing base consisting of inventory and prescription files. At September 30, 2005, the Company had $477,000 of borrowings outstanding under the revolving credit facility. At September 30, 2005, the Company also had letters of credit outstanding against the revolving credit facility of $112,135, which gave the Company additional borrowing capacity of $1,160,865.
Other Transactions
On July 15, 2005, the Company completed the early redemption of all of its outstanding $150,000 aggregate principal amount of 11.25% notes due July 2008 at their contractually determined early redemption price of 105.625%. The Company funded this redemption with borrowings under its receivable securitization agreements. The Company recorded a loss on debt modification of $9,186 related to this transaction.
On April 15, 2005 the Company paid at maturity the remaining outstanding principal amount of $170,500 of its 7.625% senior notes due April 2005.
15
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen and Twenty-Six Week Periods Ended August 27, 2005 and August 28, 2004
(Dollars and share information in thousands, except per share amounts)
(unaudited)
During the twenty-six week period ended August 28, 2004, the Company made open market purchases of the following securities (in thousands):
| | | | | | | | | | | | | | |
| Debt Re-purchased | | Principal
Amount
Re-purchased | | Amount
Paid | | Gain/
(loss) |
| 7.625% notes due 2005 | | $ | 27,500 | | | $ | 28,275 | | | $ | (795 | ) |
| 7.125% notes due 2007 | | | 26,000 | | | | 26,548 | | | | (605 | ) |
| 6.875% fixed rate senior notes due 2028 | | | 12,000 | | | | 9,660 | | | | 2,191 | |
| Total | | $ | 65,500 | | | $ | 64,483 | | | $ | 791 | |
|
Other
After taking into effect the amendment of the senior secured credit facility described above, the aggregate annual principal payments of long-term debt as of September 30, 2005 for the remainder of fiscal 2006 and the succeeding four fiscal years are as follows: 2006 – $38,279; 2007 – $573,221; 2008 – $632; 2009 – $150,329; 2010 – $120; and $2,090,250 in 2011 and thereafter. At August 27, 2005 and September 30, 2005, the Company was in compliance with restrictions and limitations included in the provisions of various loan and credit agreements.
Substantially all of Rite Aid Corporation's wholly-owned subsidiaries guarantee the obligations under the senior secured credit facility. The subsidiary guarantees are secured by a first priority lien on, among other things, the inventory, accounts receivable and prescription files of the subsidiary guarantors. Rite Aid Corporation is a holding company with no direct operations and is dependent upon dividends, distributions and other payments from its subsidiaries to service payments due under the senior secured credit facility. Rite Aid Corporation's direct obligations under the senior secured credit facility are unsecured. The 12.5% senior secured notes due 2006, the 9.5% senior secured notes due 2011, the 8.125% senior secured notes due 2010 and the 7.5% senior secured notes dues 2015 are guaranteed by substantially all of the Company's wholly-owned subsidiaries and are secured on a second priority basis by the same collateral as the senior secured credit facility.
The subsidiary guarantees related to the Company's senior secured credit facility and second priority bond issuances are full and unconditional and joint and several. Also, the parent company's assets and operations are not material and subsidiaries not guaranteeing the senior secured credit facility and bond issuances are minor. Accordingly, condensed consolidating financial information for the parent and subsidiaries is not presented.
10. Preferred Stock Transactions
During the thirteen week period ended August 27, 2005, the Company issued 4,600 shares of Series I Mandatory Convertible Preferred Stock ("Series I preferred stock") at an offering price of $25 per share. Dividends on the Series I preferred stock are $1.38 per share per year, and are due and payable on a quarterly basis beginning on November 1, 2005. The dividends are payable in either cash or common stock of the Company or a combination of both at the Company's election. The Series I preferred stock will automatically convert into common stock on November 17, 2008 at a rate that is dependent upon the adjusted applicable market value of the Company's common stock (as defined in the Series I Certificate of Designations). If the adjusted applicable market value of the Company's common stock is $5.30 per share or higher at the conversion date, then the Series I preferred stock is convertible at a rate of 4.7134 shares of the Company's common stock for every share of Series I preferred stock outstanding. If the adjusted applicable market value of the Company's common stock is less than or equal to $4.42 per share
16
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen and Twenty-Six Week Periods Ended August 27, 2005 and August 28, 2004
(Dollars and share information in thousands, except per share amounts)
(unaudited)
at the conversion date, then the Series I preferred stock is convertible at a rate of 5.6561 shares of the Company's common stock for every share of Series I preferred stock outstanding. If the adjusted applicable market value of the Company's common stock is between $4.42 per share and $5.30 per share at the conversion date, then the Series I preferred stock is convertible into common stock at a rate that is between 4.7134 and 5.6561 per share. The holder may convert shares of the Series I preferred stock into common stock at any time prior to the mandatory conversion date at the rate of 4.7134 per share. The Series I preferred stock is also convertible at the Company's option, but only if the adjusted applicable market value of the Company's common stock exceeds $9.55. If the Company is subject to a cash acquisition (as defined in the Certificate of Designations) prior to the mandatory conversion date, the holder may elect to convert the shares of Series I preferred stock into shares of common stock using a conversion rate set forth in the Certificate of Designations. The holder will also receive a payment equal to the present value of all scheduled dividends through the mandatory conversion date.
Proceeds from the issuance of the Series I preferred stock, along with borrowings under the revolver, were used to redeem all of the Company's shares of its Series F preferred stock, at 105% of the liquidation preference of $100 per share. The Company paid a premium to redeem the Series F preferred stock of $5,883, which was recorded as an increase in the accumulated deficit. This premium reduces net income available to common stockholders for the thirteen and twenty-six week periods ended August 27, 2005. The Company's Series F preferred stock was held by Green Equity Investors, III, L.P., a related party of the Company.
11. Retirement Plans
Net periodic pension expense recorded in the thirteen and twenty-six week periods ended August 27, 2005 and August 28, 2004, respectively, for the Company's defined benefit plans includes the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Defined
Benefit
Pension
Plan | | | | Nonqualified
Executive
Retirement
Plan | | | | Defined
Benefit
Pension
Plan | | | | Nonqualified
Executive
Retirement
Plan |
| | | Thirteen Week Period Ended | | | | Twenty-Six Week Period Ended |
| | | August 27,
2005 | | August 28,
2004 | | | | August 27,
2005 | | August 28,
2004 | | | | August 27,
2005 | | August 28,
2004 | | | | August 27,
2005 | | August 28,
2004 |
| Service cost | | $ | 687 | | | $ | 711 | | | | | | | $ | 19 | | | $ | 18 | | | | | | | $ | 1,374 | | | $ | 1,421 | | | | | | | $ | 38 | | | $ | 35 | |
| Interest cost | | | 1,176 | | | | 1,200 | | | | | | | | 304 | | | | 246 | | | | | | | | 2,352 | | | | 2,400 | | | | | | | | 609 | | | | 492 | |
| Expected return on plan assets | | | (539 | ) | | | (611 | ) | | | | | | | — | | | | — | | | | | | | | (1,078 | ) | | | (1,221 | ) | | | | | | | — | | | | — | |
| Amortization of unrecognized net transition obligation | | | — | | | | — | | | | | | | | 21 | | | | 22 | | | | | | | | — | | | | — | | | | | | | | 42 | | | | 43 | |
| Amortization of unrecognized prior service cost | | | 123 | | | | 175 | | | | | | | | — | | | | — | | | | | | | | 246 | | | | 350 | | | | | | | | — | | | | — | |
| Amortization of unrecognized net loss | | | 613 | | | | 475 | | | | | | | | 34 | | | | 89 | | | | | | | | 1,226 | | | | 950 | | | | | | | | 68 | | | | 178 | |
| Net pension expense | | $ | 2,060 | | | $ | 1,950 | | | | | | | $ | 378 | | | $ | 375 | | | | | | | $ | 4,120 | | | $ | 3,900 | | | | | | | $ | 757 | | | $ | 748 | |
|
12. Commitments And Contingencies
Federal Investigation
There are currently pending federal governmental investigations, both civil and criminal, by the United States Attorney, involving various matters related to prior management's business practices. The
17
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen and Twenty-Six Week Periods Ended August 27, 2005 and August 28, 2004
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Company is cooperating fully with the United States Attorney. The Company has begun settlement discussions with the United States Attorney of the Middle District of Pennsylvania. The United States Attorney has proposed that the government would not institute any criminal proceedings against the Company if the Company enters into a consent judgment providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on the Company's financial condition and results of operations. The Company recorded an accrual of $20,000 in fiscal 2003 in connection with the resolution for these matters; however, the Company may incur charges in excess of that amount and the Company is unable to estimate the possible range of loss. The Company will continue to evaluate the estimate and, to the extent that additional information arises or the Company's strategy changes, the Company will adjust the accrual accordingly.
These investigations and settlement discussions are ongoing, and the Company cannot predict their outcomes. If the Company were convicted of any crime, certain licenses and government contracts such as Medicaid plan reimbursement agreements that are material to the Company's operations may be revoked, which would have a material adverse effect on the Company's results of operations, financial condition or cash flows. In addition, substantial penalties, damages or other monetary remedies assessed against the Company, including a settlement, could also have a material adverse effect on the Company's results of operations, financial condition or cash flows.
Other
In June 2000, the Company was sued by the Lemelson Foundation in a complaint which alleges that portions of the technology included in the Company's point-of-sale system infringe upon a patent held by the plaintiffs. The Lemelson Foundation has brought similar suit against a significant number of major U.S. retailers. The amount of damages sought is unspecified and may be material. Management cannot predict the outcome of this litigation or whether it could result in a material adverse effect on the Company's results of operations, financial conditions or cash flows.
The Company is subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of the Company's management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on the Company's financial condition, results of operations or cash flows if decided adversely.
13. Subsequent Events
On August 29, 2005, Hurricane Katrina made landfall in Louisiana and proceeded to move into Mississippi and Alabama, causing one of the worst natural disasters in the history of the United States. As of September 30, 2005, the Company was still assessing damages and losses and had 24 stores still closed due to the hurricane. The Company maintains insurance coverage for inventory and property damage and also maintains business interruption insurance coverage. The Company does not believe that the damages and losses, net of insurance claim settlement proceeds, will have a material impact on the Company's financial position or results of operations for the remainder of fiscal 2006.
On September 24, 2005, Hurricane Rita made landfall in Texas. Hurricane Rita had a minimal impact on the Company's store base and will not have a material impact on the Company's financial position or results of operations.
On September 21, 2005, upon receiving notice from the underwriters exercising their option to purchase additional shares, the Company issued an additional 220 shares of its Series I preferred stock at a price of $25 per share. The net proceeds of $5,335 will be recorded in equity in the thirteen week period ending November 26, 2005.
18
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net loss for the thirteen week period ended August 27, 2005 was $1.6 million. Net income for the thirteen week period ended August 28, 2004 was $9.9 million. Our operating results for the thirteen week period ended August 27, 2005 were impacted by a decline in gross profit and margin and an increase in selling, general and administrative expenses ("SG&A"). The impact of these items was partially offset by a decrease in store closing and impairment charges and interest expense. These items are discussed in more detail in the Results of Operations section below. Our operating results were also impacted by a charge of $9.2 million that was recorded in connection with the early redemption of our 11.25% senior notes due July 2008. This item is discussed in more detail in the Liquidity and Capital Resources section below.
Net income for the twenty-six week periods ended August 27, 2005 and August 28, 2005 was $31.9 million and $73.6 million, respectively. Our operating results for the twenty-six week period ended August 27, 2005 were impacted by a decline in revenues, an increase in SG&A and an increase in store closing and impairment charges. The impact of these items was partially offset by a decrease in interest expense. These items are discussed in more detail in the Results of Operations section below. Our operating results were also impacted by a charge of $9.2 million that was recorded in connection with the early redemption of our 11.25% senior notes due July 2008. This item is discussed in more detail in the Liquidity and Capital Resources section below.
Sales Trends: Our revenue decline for the twenty-six weeks ended August 27, 2005 compared to the twenty-six weeks ended August 28, 2004 was 0.2%. Factors affecting this decline are discussed more thoroughly in the Results of Operations section of this Item 2. Significant factors negatively impacting our revenue were customer concerns over the safety of certain categories of drugs and the continuing penetration of mail order prescription programs, particularly the mandatory mail program that the United Auto Workers implemented between January and June 2004. We are taking steps to address this declining revenue trend by working to increase sales at our existing stores through improved customer service and relocating and developing new stores in our strongest markets. These initiatives contributed to a 0.2% revenue increase in the thirteen week period ended August 27, 2005 compared to the thirteen week period ended August 28, 2004. However, we expect our revenue results to continue to face significant pressures from the existing competitive environment.
On August 29, 2005, Hurricane Katrina made landfall in Louisiana and proceeded to move into Mississippi and Alabama, causing one of the worst natural disasters in the history of the United States. As of September 30, 2005, we are still assessing damages and losses and had 24 stores still closed due to the hurricane. We maintain insurance coverage for inventory and property damage and also maintain business interruption insurance coverage. We do not believe that the damages and losses, net of insurance claim settlement proceeds will have a material impact on our financial position or results of operations for the remainder of fiscal 2006. We also do not expect Hurricane Katrina to have a significant impact on our sales for the remainder of fiscal 2006.
On September 24, 2005, Hurricane Rita made landfall in Texas. Hurricane Rita had a minimal impact on our store base and will not have a material impact on our financial position or results of operations.
19
Results Of Operations
Revenues and Other Operating Data
| | | | | | | | | | | | | | | | | | |
| | | Thirteen Week Period Ended | | Twenty-Six week Period Ended |
| | | August 27,
2005 | | August 28,
2004 | | August 27,
2005 | | August 28,
2004 |
| | | (dollars in thousands) |
| Revenues | | $ | 4,132,523 | | | $ | 4,123,906 | | | $ | 8,353,959 | | | $ | 8,368,263 | |
| Revenue growth (decline) | | | 0.2 | % | | | 1.8 | % | | | (0.2 | )% | | | 3.3 | % |
| Same store sales growth | | | 0.5 | % | | | 2.0 | % | | | 0.1 | % | | | 3.7 | % |
| Pharmacy sales (decline) growth | | | (1.1 | )% | | | 1.8 | % | | | (1.3 | )% | | | 3.4 | % |
| Same store pharmacy sales (decline) growth | | | (0.8 | )% | | | 2.1 | % | | | (1.0 | )% | | | 3.8 | % |
| Pharmacy sales as a % of total sales | | | 63.0 | % | | | 63.9 | % | | | 63.5 | % | | | 64.2 | % |
| Third party sales as a % of total pharmacy sales | | | 93.9 | % | | | 93.3 | % | | | 93.9 | % | | | 93.5 | % |
| Front-end sales growth | | | 2.4 | % | | | 1.4 | % | | | 1.7 | % | | | 3.0 | % |
| Same store front-end sales growth | | | 3.0 | % | | | 1.8 | % | | | 2.2 | % | | | 3.5 | % |
| Front-end sales as a % of total sales | | | 37.0 | % | | | 36.1 | % | | | 36.5 | % | | | 35.8 | % |
| Store data: | | | | | | | | | | | | | | | | |
| Total stores (beginning of period) | | | 3,354 | | | | 3,374 | | | | 3,356 | | | | 3,382 | |
| New stores | | | — | | | | 1 | | | | 2 | | | | 1 | |
| Closed stores | | | (11 | ) | | | (7 | ) | | | (16 | ) | | | (16 | ) |
| Store acquisitions, net | | | 2 | | | | 2 | | | | 3 | | | | 3 | |
| Total stores (end of period) | | | 3,345 | | | | 3,370 | | | | 3,345 | | | | 3,370 | |
| Relocated stores | | | 9 | | | | 2 | | | | 12 | | | | 5 | |
| Remodeled stores. | | | 60 | | | | 57 | | | | 107 | | | | 105 | |
|
Revenues
Revenue growth was 0.2% for the thirteen week period ended August 27, 2005. Revenues declined by 0.2% for the twenty-six week period ended August 27, 2005. Pharmacy sales declined by 1.1% and by 1.3% in the thirteen and twenty-six week periods ended August 27, 2005, while front-end sales grew by 2.4% in the thirteen week period ending August 27, 2005 and by 1.7% in the twenty-six week period ending August 27, 2005.
Pharmacy same store sales decreased 0.8% and 1.0% for the thirteen and twenty-six week periods ended August 27, 2005. The decrease is driven by an increase in the generic sales mix, which sell for less than branded products but have higher margins, lower inflation and a decrease in the number of prescriptions filled. The decrease in the number of prescriptions filled is due primarily to certain third party payors requiring or encouraging customers to use mail order and safety concerns in antiarthritic, psychotherapeutic and hormone therapy prescriptions.
Front-end same store sales increased 3.0% and 2.2% for the thirteen and twenty-six week periods ended August 27, 2005, respectively, primarily as a result of improvement in our consumable and food categories partially offset by a decrease in one-hour photo sales.
The 1.8% and 3.3% growth in revenues for the thirteen and twenty-six week periods ended August 28, 2004 were driven by pharmacy sales growth of 1.8% and 3.4%, respectively and front-end sales growth of 1.4% and 3.0%, respectively. The pharmacy sales growth is from a same store sales increase of 2.1% and 3.8% for the thirteen and twenty-six week periods ended August 28, 2004 respectively, due to an increase in price per prescription. These increases were driven by inflation, partially offset by an increase in generic sales mix and lower reimbursement rates. A shift in the Memorial Day holiday had a negative impact on the same store sales increases for the thirteen week period ended August 28, 2004. Partially offsetting the increase in price per prescription was a decrease in the number of prescriptions filled in the thirteen and
20
twenty-six week periods ended August 28, 2004 compared to the prior year. This reduction is due primarily to certain third party payors requiring or encouraging customers to use mail order, a reduction in hormone therapy prescriptions, the movement of certain prescription drugs to over-the-counter and the impact of a weaker cold and flu season in the beginning of the fiscal year. Front-end sales growth is from a same store sales increase of 1.8% and 3.5% in the thirteen and twenty-six week periods ended August 28, 2004. These increases were a result of our improvement in most core categories, such as over-the-counter items and consumables, and improved assortments, partially offset by a decrease in one-hour-photo sales.
Pharmacy and front-end same store sale increases in the thirteen and twenty-six week periods ended August 28, 2004 benefited from increased business in our Southern California stores, driven by the migration of customers impacted by a union strike at several grocery store chains. The union strike ended in March 2004.
We include in same store sales all stores that have been open at least one year. Relocated stores are not included in same store sales. Stores in liquidation are considered closed.
Costs and Expenses
| | | | | | | | | | | | | | | | | | |
| | | Thirteen Week Period Ended | | Twenty-six Week Period Ended |
| | | August 27,
2005 | | August 28,
2004 | | August 27,
2005 | | August 28,
2004 |
| | | (dollars in thousands) |
| Cost of goods sold, including occupancy costs | | $ | 3,117,738 | | | $ | 3,098,211 | | | $ | 6,258,541 | | | $ | 6,289,667 | |
| Gross profit | | | 1,014,785 | | | | 1,025,695 | | | | 2,095,418 | | | | 2,078,596 | |
| Gross margin | | | 24.6 | % | | | 24.9 | % | | | 25.1 | % | | | 24.8 | % |
| Selling, general and administrative expenses | | | 935,688 | | | | 926,153 | | | | 1,883,141 | | | | 1,838,998 | |
| Selling, general and administrative expenses as a percentage of revenues | | | 22.6 | % | | | 22.5 | % | | | 22.5 | % | | | 22.0 | % |
| Store closing and impairment charges | | | 8,121 | | | | 13,461 | | | | 23,653 | | | | 8,866 | |
| Interest expense | | | 67,513 | | | | 76,519 | | | | 138,364 | | | | 154,320 | |
| Loss (gain) on debt and lease conversions and modifications and retirements, net | | | 9,186 | | | | (791 | ) | | | 9,186 | | | | (791 | ) |
| Gain on sale of assets and investments, net | | | (1,955 | ) | | | (254 | ) | | | (2,493 | ) | | | (2,172 | ) |
|
Cost of Goods Sold
Gross margin was 24.6% for the thirteen week period ended August 27, 2005 compared to 24.9% for the thirteen week period ended August 28, 2004. The decline in gross margin was driven by an increase in LIFO charges, due to increases in estimated inflation and increased occupancy expense caused by additional rent on owned stores that have been sold and leased back. Pharmacy gross margins continued to improve due to improved generic mix, but due to lower sales it did not have a significant positive contribution to consolidated gross margins. Front end gross margins declined due to an increase in markdowns and its negative contribution to consolidated gross margins offset pharmacy's positive contribution.
Gross margin was 25.1% for the twenty-six week period ended August 27, 2005 compared to 24.8% for the twenty-six week period ended August 28, 2004. The increase in gross margin was concentrated in pharmacy margin, and was due to an improved generic product mix.
We use the last-in, first-out (LIFO) method of inventory valuation, which is determined annually when inflation rates and inventory levels are finalized. Therefore, LIFO costs for interim period financial statements are estimated. Cost of sales includes LIFO charges of $7.6 million and $15.2 million for the thirteen and twenty-six week periods ended August 27, 2005 versus LIFO charges of $0.8 million and $11.5 million for the thirteen and twenty-six week periods ended August 28, 2004.
21
Selling, General and Administrative Expenses
SG&A as a percentage of revenues was 22.6% in the thirteen week period ended August 27, 2005 compared to 22.5% in the thirteen week period ended August 28, 2004. The increase in SG&A as a percentage of revenues for the thirteen week period ended August 27, 2005 was driven primarily by increases in pharmacy labor, advertising expense and securitization program fees. Partially offsetting these items was a decrease in self insured worker's compensation and general liability insurance costs and an increase in litigation settlement proceeds.
SG&A as a percentage of sales was 22.5% in the twenty-six week period ended August 27, 2005 compared to 22.0% in the twenty-six week period ended August 28, 2004. The increase in SG&A as a percentage of revenues for the twenty-six week period ended August 27, 2005 was due primarily to lower revenues and increases in pharmacy labor, advertising expenses and securitization program fees. Partially offsetting these items was a decrease in self-insured worker's compensation and general liability insurance costs and an increase in litigation settlement proceeds.
Store Closing and Impairment Charges
Store closing and impairment charges consist of:
| | | | | | | | | | | | | | | | | | |
| | | Thirteen Week Period Ended | | Twenty-six Week Period |
| | | August 27,
2005 | | August 28,
2004 | | August 27,
2005 | | August 28,
2004 |
| | | (dollars in thousands) |
| Impairment charges | | $ | 3,347 | | | $ | 70 | | | $ | 6,804 | | | $ | 899 | |
| Store and equipment lease exit charges | | | 4,774 | | | | 13,391 | | | | 16,849 | | | | 7,967 | |
| | | $ | 8,121 | | | $ | 13,461 | | | $ | 23,653 | | | $ | 8,866 | |
|
Impairment Charges: Impairment charges include non-cash charges of $3.3 million and $0.1 million in the thirteen week periods ended August 27, 2005 and August 28, 2004, respectively, for the impairment of long-lived assets at 16 and 11 stores, respectively. Impairment charges include non-cash charges of $6.8 million and $0.9 million in the twenty-six week periods ended August 27, 2005 and August 28, 2004, respectively, for the impairment of long-lived assets at 34 and 22 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.
Store and Equipment Lease Exit Charges: During the thirteen week periods ended August 27, 2005 and August 28, 2004, we recorded charges for 7 stores and 5 stores, respectively, to be closed or relocated under long-term leases. During the twenty-six week periods ended August 27, 2005 and August 28, 2004, we recorded charges for 12 and 6 stores, respectively, to be closed or relocated under long-term leases. Charges to close a store, which principally consist of lease termination costs, are recorded at the time the store is closed and all inventory is liquidated, pursuant to the guidance set forth in SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." We calculate our liability for closed stores on a store-by-store basis. The calculation includes the future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or favorable lease terminations. This liability is discounted using a risk free rate of interest. We evaluate these assumptions each quarter and adjust the liability accordingly. The decrease in closed store charges for the thirteen week period ended August 27, 2005 is due to lower average charges per closed store. The increase in closed store charges for the twenty-six week period ended August 27, 2005 is due to decreases in the risk free rate that is used to discount the closed store reserve.
As part of our ongoing business activities, we assess stores for potential closure. Decisions to close stores in future periods would result in charges for store lease exit costs and liquidation of inventory, as well as impairment of assets at these stores.
Interest Expense
Interest expense was $67.5 million and $138.4 million for the thirteen and twenty-six week periods ended August 27, 2005, compared to $76.5 and $154.3 million for the thirteen and twenty-six week periods
22
ended August 28, 2004. The decrease for the thirteen and twenty-six week periods ended August 27, 2005 was due to decreases in outstanding borrowings and a lower interest rate from our senior secured credit facility. Also contributing to the decrease in interest expense in the thirteen week period ended August 27, 2005 is the July 2005 redemption of our 11.25% senior notes due 2008. After taking into effect the terms of the amended senior secured credit facility, and assuming no further changes in LIBOR rates, we expect interest expense for the remainder of the year to be approximately $136.0 million. The weighted average interest rates, excluding capital leases, on our indebtedness for both the twenty-six week periods ended August 27, 2005 and August 28, 2004, was 7.4% and 6.8% respectively.
Income Taxes
We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We will continue to monitor all available evidence related to our remaining net deferred tax assets at least annually at the end of each fiscal year and at such time as events have occurred or are anticipated to occur that may change our most recent assessment. The estimation of required valuation allowances is based on a number of factors including our historical operating performance and our expectation that we can generate sustainable consolidated taxable income for the foreseeable future. As a result of our operating performance in fiscal 2005 and the more favorable near term outlook for profitability, a portion of the valuation allowance was reduced in the fourth quarter of 2005. Should we determine that it is more likely than not that we will realize additional deferred tax assets in the future, an additional adjustment would be required to reduce the existing valuation allowance.
The provision for federal and state and local income taxes for the twenty-six week period ended August 27, 2005 is net of the results from the receipt of a federal refund claim of $7.8 million which related to the conclusion in fiscal 2004 of the Internal Revenue Service examination for fiscal years 1996 through 2000. We expect to pay minimal cash taxes for the foreseeable future as we have approximately $2.3 billion of net operating losses available to offset future income.
The provision for income taxes for the twenty-six week period ended August 28, 2004 is for state and local income taxes. The federal income tax expense was fully offset by utilization of net operating loss carryforwards resulting in the reduction of previously recorded valuation allowances.
Liquidity and Capital Resources
General
We have five primary sources of liquidity: (i) cash equivalent investments, (ii) cash provided by operating activities, (iii) the sale of accounts receivable under our securitization agreements, (iv) borrowings under the amended senior secured credit facility, and (v) sale-leasebacks of owned property. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt, to provide funds for capital expenditures and to provide funds for repurchase of our publicly traded debt.
Credit Facility
As of August 27, 2005, the existing senior secured credit facility consisted of a $446.6 million term loan and $34.0 milllion outstanding under a $950.0 million revolving credit facility. On September 30, 2005, we amended our senior secured credit facility. In connection with the amendment, we increased the amount of borrowing capacity under the revolving credit facility and paid off the term loan portion of the senior secured credit facility. After closing on September 30, 2005, the amount outstanding on the revolver was $477.0 million. The amended senior credit facility consists solely of a $1.75 billion revolving credit facility. Borrowings under the amended senior secured credit facility currently bear interest at LIBOR plus 1.50%, if we choose to make LIBOR borrowings, or at Citibank's base rate plus 0.50%. The interest rate can fluctuate depending on the amount of revolver availability, as specified in the amended senior secured credit facility. We are required to pay fees of 0.25% per annum on the daily unused amount of the amended revolving credit facility.
23
The amended senior secured credit facility allows us to have outstanding, at any time, up to $1.8 billion in secured subordinated debt in addition to the amended senior secured credit facility (which amount is reduced by any additional unsecured debt that matures prior to December 31, 2010, as described below). We also have the ability to incur an unlimited amount of unsecured debt, if the debt does not mature or require scheduled payments of principal prior to December 31, 2010. We have the ability to incur additional unsecured debt of up to $750.0 million with a scheduled maturity date prior to December 31, 2010. The maximum amount of additional secured subordinated debt and unsecured debt with a maturity prior to December 31, 2010 that can be incurred is $1.8 billion. At September 30, 2005, remaining additional permitted secured subordinated debt under the amended senior secured credit facility was $798.0 million in addition to what is available under the revolver; however, other debentures do not permit additional secured debt if the revolver is fully drawn. The amended senior secured facility also allows for the repurchase of any debt with a maturity on or before September 2010, and for the repurchase of debt with a maturity after September 2010, if we maintain availability on the revolving credit facility of at least $100.0 million.
The amended senior secured credit facility contains customary covenants, which place restrictions on the incurrence of debt beyond the restrictions described above, the payment of dividends, mergers and acquisitions and the granting of liens. The amended senior secured credit facility also requires us to maintain a minimum fixed charge coverage ratio, but only if availability on the revolving credit facility is less than $100.0 million.
The amended senior secured credit facility provides for customary events of default including nonpayments, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity of such debt.
Our ability to borrow under the amended senior secured credit facility is based upon a specified borrowing base consisting of inventory and prescription files. At September 30, 2005, we had $477.0 million of borrowings outstanding under the revolving credit facility. At September 30, 2005, we also had letters of credit outstanding against the revolving credit facility of $112.1 million, which gave us additional borrowing capacity of $1,160.9 million.
Our amended senior secured credit facility is backed by a syndicate of banks. The lead banks in this syndicate, Citigroup Global Markets, Inc. and J.P. Morgan Securities, Inc. have provided certain financial advisory, investment banking and other services for us, for which they have received customary fees and commissions.
Other Transactions
On July 15, 2005, we completed the early redemption of all of our outstanding $150.0 million aggregate principal amount of 11.25% notes due July 2008 at their contractually determined early redemption price of 105.625%. We funded this redemption with borrowings under our receivable securitization agreements. We recorded a loss on debt modification of $9.2 million related to this transaction.
On April 15, 2005, we paid at maturity the remaining outstanding principal amount of $170.5 million of our 7.625% senior notes due April 2005.
During the twenty-six week period ended August 28, 2004, we made open market purchases of the following securities (in thousands):
24
| | | | | | | | | | | | | | |
| Debt Repurchased | | Principal
Amount
Re-purchased | | Amount
Paid | | Gain/
(loss) |
| 7.625% notes due 2005 | | $ | 27,500 | | | $ | 28,275 | | | $ | (795 | ) |
| 7.125% notes due 2007 | | | 26,000 | | | | 26,548 | | | | (605 | ) |
| 6.875% fixed rate senior notes due 2028 | | | 12,000 | | | | 9,660 | | | | 2,191 | |
| Total | | $ | 65,500 | | | $ | 64,483 | | | $ | 791 | |
|
Other
After taking into effect the senior secured credit facility amendment described above, the aggregate annual principal payments of long-term debt for the remainder of fiscal 2006, and the succeeding four fiscal years are as follows: 2006 - $38.2 million; 2007 - $573.2 million; 2008 - $0.6 million; 2009 - $150.3 million; 2010 - $0.1 million; and $2.1 billion in 2011 and thereafter. At August 27, 2005 and September 30, 2005, we were in compliance with restrictions and limitations included in the provisions of various loan and credit agreements.
Substantially all of Rite Aid Corporation's wholly-owned subsidiaries guarantee the obligations under the senior secured credit facility. The subsidiary guarantees are secured by a first priority lien on, among other things the inventory, accounts receivable and prescription files of the subsidiary guarantors. Rite Aid Corporation is a holding company with no direct operations and is dependent upon dividends, distributions and other payments from its subsidiaries to service payments due under the senior secured credit facility. Rite Aid Corporation's direct obligations under the senior secured credit facility are unsecured. The 12.5% senior secured notes due 2006, the 9.5% senior secured notes due 2011, the 8.125% senior secured notes due 2010 and the 7.5% senior secured notes dues 2015 are guaranteed by substantially all of our wholly-owned subsidiaries and are secured on a second priority basis by the same collateral as the senior secured credit facility.
The subsidiary guarantees related to our senior secured credit facility and second priority bond issuances are full and unconditional and joint and several. Also, the parent company's assets and operations are not material and subsidiaries not guaranteeing the senior secured credit facility and bond issuances are minor. Accordingly, condensed consolidating financial information for the parent and subsidiaries is not presented.
Preferred Stock Transaction
During the thirteen week period ended August 27, 2005, we issued 4.6 million shares of Series I Mandatory Convertible Preferred Stock ("Series I preferred stock") at an offering price of $25 per share. Dividends on the Series I preferred stock are $1.38 per share per year, and are due and payable on a quarterly basis beginning on November 1, 2005. The dividends are payable in either cash or common stock or a combination of both at our election. The Series I preferred stock will automatically convert into common stock on November 17, 2008 at a rate that is dependent upon the adjusted applicable market value of our common stock (as defined in the Series I Certificate of Designations). If the adjusted applicable market value of our common stock is $5.30 per share or higher at the conversion date, then the Series I preferred stock is convertible at a rate of 4.7134 shares of our common stock for every share of Series I preferred stock outstanding. If the adjusted applicable market value of our common stock is less than or equal to $4.42 per share at the conversion date, then the Series I preferred stock is convertible at a rate of 5.6561 shares of our common stock for every share of Series I preferred stock outstanding. If the adjusted applicable market value of our common stock is between $4.42 per share and $5.30 per share at the conversion date, then the Series I preferred stock is convertible into common stock at a rate that is between 4.7134 and 5.6561 per share. The holder may convert shares of the Series I preferred stock into common stock at any time prior to the mandatory conversion date at the rate of 4.7134 per share. The Series I preferred stock is also convertible at our option, but only if the adjusted applicable market value of our common stock exceeds $9.55. If we are subject to a cash acquisition (as defined in the Certificate of Designations) prior to the mandatory conversion date, the holder may elect to convert the shares of Series I preferred stock into shares of common stock using a conversion rate set forth in the Certificate of Designations. The holder will also receive a payment equal to the present value of all scheduled dividends through the mandatory conversion date.
25
Proceeds from the issuance of the Series I preferred stock, along with borrowings under the revolver, were used to redeem all of our shares of its Series F preferred stock, at 105% of the liquidation preference of $100 per share. We paid a premium to redeem the Series F preferred stock of $5.9 million.
On September 21, 2005, upon receiving notice from our underwriters exercising their option to purchase additional shares, we issued an additional 0.2 million shares of our Series I preferred stock at a price of $25 per share. The issuance resulted in net proceeds of $5.3 million.
Off Balance Sheet Obligations
We maintain receivables securitization agreements with several multi-seller asset-backed commercial paper vehicles. Under the terms of the securitization agreements, we sell substantially all of our eligible third party pharmaceutical receivables to a bankruptcy remote Special Purpose Entity (SPE) and retain servicing responsibility. The assets of the SPE are not available to satisfy the creditors of any other person, including any of our affiliates. These agreements provide for us to sell, and for the SPE to purchase these receivables, and for the SPE to borrow funds secured by these receivables of up to $400.0 million. The amount of receivables funded at any one time is dependent upon a formula that takes into account such factors as default history, obligor concentrations and potential dilution. Adjustments to this amount can occur on a weekly basis. At August 27, 2005, proceeds from the sale of receivables to the SPE totaled $290.0 million. At August 27, 2005, we retained an interest in the third party pharmaceutical receivables in the form of overcollateralization of $220.6 million, which is included in accounts receivable, net, on the consolidated balance sheet at allocated cost, which approximates fair value.
We must pay an ongoing program fee of approximately LIBOR plus 1.125% on the amount sold to the SPE under the securitization agreements and must pay a liquidity fee of 0.375% on the daily unused amount under the securitization agreements. The program and the liquidity fees are recorded as a component of selling, general and administrative expenses. Rite Aid Corporation guarantees certain performance obligations of its affiliates under the securitization agreements, but does not guarantee the collectibility of the receivables and obligor creditworthiness.
The vehicles that make loans to the SPE have a commitment to purchase that ends September 2006 with the option to annually extend the commitment to purchase. Should any of the vehicles fail to renew their commitment, we have access to a backstop credit facility, which is backed by the entities that make loans to the SPE's. The backstop facility is committed through September 2007.
As of August 27, 2005, we had no material off balance sheet arrangements, other than the receivables securitization agreements described above and operating leases. Our contractual cash obligations and commitments, which consist primarily of debt, capital and operating leases, open purchase orders, lease guarantees and outstanding letters of credit have not changed materially from the amounts disclosed in our Fiscal 2005 Form 10-K.
Sale Leaseback Transactions
During the twenty-six week period ended August 27, 2005, we sold the land and buildings on a total of 19 owned stores to independent third parties. Net proceeds from these sales were approximately $53.3 million. Concurrent with these sales, we entered into agreements to lease the stores back from the purchasers over minimum lease terms of 20 years. We are accounting for 17 of these leases as operating leases. A gain on the sale of these stores of approximately $12.7 million has been deferred and is being recorded over the minimum term of these leases. We are accounting for the remaining 2 leases as capital leases, as the lease agreements contain a clause that allows the buyer to force us to repurchase the property under certain conditions. We have recorded capital lease obligations of approximately $5.4 million related to these leases. Future scheduled minimum lease payments under these leases for the remainder of fiscal 2006 and the succeeding four fiscal years are as follows: 2006 – $2.2 million; 2007 – $4.4 million; 2008 – $4.4 million; 2009 – $4.4 million; 2010 – $4.4 million and $71.4 million in 2011 and thereafter.
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Our operating activities provided $313.9 million of cash in the twenty-six week period ended August 27, 2005 and $232.5 million of cash in the twenty-six week period ended August 28, 2004. Operating cash
26
flow for the twenty-six week period ended August 27, 2005 was provided primarily by net income of $31.9 million, net proceeds of $140.0 million from the sale of certain of our third party receivables and increases in accounts payable, which were partially offset by increases in inventory. Operating cash flow for the twenty-six week period ended August 28, 2004 was provided through net income of $73.6 million, income tax refunds of $31.8 million, increases in accounts payable and decreases in accounts receivable, which were partially offset by increases in inventory.
Cash used in investing activities was $56.1 million for the twenty-six week period ended August 27, 2005 due to expenditures for property, plant and equipment and intangible assets, partially offset by proceeds from sale-leaseback transaction and proceeds from asset dispositions. Cash used in investing activities was $84.4 million for the twenty-six week period ended August 28, 2004 due to expenditures for property, plant and equipment and intangible assets, partially offset by proceeds from asset dispositions.
Cash used in financing activities was $330.5 million for the twenty-six week period ended August 27, 2005 due to the impact of scheduled debt payments, the early redemption of our 11.25% senior notes due July 2008, the change in zero balance cash accounts, the issuance and redemption of preferred stock, and preferred stock cash dividend payments. Cash used in financing activities was $75.9 million for the twenty-six week period ended August 28, 2004, due to the impact of scheduled debt payments and the change in zero balance cash accounts.
Capital Expenditures
During the twenty-six week period ended August 27, 2005, we spent $117.1 million on capital expenditures, consisting of $68.1 million related to new store construction, store relocation and store remodel projects, $25.7 million related to technology enhancements, improvements to distribution centers and other corporate requirements and $23.3 million related to the purchase of prescription files from independent pharmacists. We plan to make total capital expenditures of approximately $350 to $400 million during fiscal 2006. These expenditures consist of approximately $225 to $245 million related to new store construction, store relocation and store remodel projects, $90 to $115 million dedicated to technology enhancements, improvements to distribution centers and other corporate requirements, and $35 to $40 million dedicated to the purchase of prescription files from independent pharmacies. Management expects that these capital expenditures will be financed primarily with cash flow from operating activities and proceeds from sale-leaseback transactions.
During the twenty-six week period ended August 28, 2004, we spent $88.5 million on capital expenditures, consisting of $46.2 million related to new store construction, store relocation and other store construction projects, $29.6 million related to other store improvement activities and $12.7 million related to the purchase of prescription files from independent pharmacists.
Future Liquidity
We are highly leveraged. Our high level of indebtedness: (i) limits our ability to obtain additional financing; (ii) limits our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) places us at a competitive disadvantage relative to our competitors with less debt; (iv) renders us more vulnerable to general adverse economic and industry conditions; and (v) 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 operating activities together with cash equivalent investments, sales of accounts receivable under our securitization agreements and available borrowings under the senior secured credit facility and other sources of liquidity will be adequate to meet our anticipated annual requirements for working capital, debt service and capital expenditures through the end of fiscal 2006. We will continue to assess our liquidity position and potential sources of supplemental liquidity in light of our operating performance and other relevant circumstances. Should we determine, at any time, that it is necessary to seek additional short-term liquidity, we will evaluate our alternatives and take appropriate steps to obtain sufficient additional funds. The restrictions on the incurrence of additional indebtedness in our senior secured credit facility and several of our bond indentures may limit our ability to obtain additional funds. There can be no assurance that any such supplemental funding, if sought, could be obtained or, if obtained, would be on terms acceptable to us.
27
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share-Based Payment." This Standard requires companies to account for share-based payments to associates using the fair value method of expense recognition. This standard is required to be adopted as of the first fiscal year beginning after June 15, 2005. We have not yet adopted SFAS No. 123R. However, we have adopted the fair value recognition provisions of SFAS No. 123; we do not expect the adoption of SFAS No. 123R to have a material impact on our financial position or results of operations.
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143." FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application for the interim financial information is permitted but not required. Early adoption of FIN 47 is encouraged. We have not quantified the impact of adopting FIN 47, but do not expect the adoption to have a material impact on our financial position or results of operations.
In June 2005, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 05-6, "Determining the Amortization Period for Leasehold Improvements". EITF 05-6 states that the amortization period that is to be used for a leasehold improvement that is purchased after the inception of a lease should be the lesser of the useful life of the acquired leasehold improvement or a period that reflects renewals that are reasonably assured upon the purchase of the leasehold improvement. EITF 05-6 is effective for periods beginning after June 29, 2005. We currently follow the guidance set forth in EITF 05-6, and therefore the adoption of EITF 05-6 will not have an impact on our financial position or results of operations.
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and industry, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview" and "Factors Affecting our Future Prospects" included in our Fiscal 2005 10-K.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. The major market risk exposure is changing interest rates. Increases in interest rates would increase our interest expense. Since the end of fiscal 2005, our primary risk exposure has not changed. We enter into debt obligations to support capital expenditures, acquisitions, working capital needs and general corporate purposes. Our policy is to manage interest rates through the use of a combination of variable-rate credit facilities, fixed-rate long-term obligations and derivative transactions.
The table below provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal payments and the related weighted average interest rates by expected maturity dates as of September 30, 2005, which reflects the maturity dates under the amended senior secured credit facility.
28
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | Thereafter | | Total | | Fair Value
at September 30,
2005 |
| | | (dollars in thousands) |
Long-term debt,
Including current portion | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate | | $ | 38,279 | | | $ | 573,221 | | | $ | 632 | | | $ | 150,329 | | | $ | 120 | | | $ | 1,613,250 | | | $ | 2,375,830 | | | $ | 2,281,967 | |
| Average Interest Rate | | | 6.01 | % | | | 7.46 | % | | | 8.00 | % | | | 6.13 | % | | | 8.00 | % | | | 8.11 | % | | | 7.80 | % | | | | |
| Variable Rate | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 477,000 | | | $ | 477,000 | | | $ | 477,000 | |
| Average Interest Rate | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5.36 | % | | | 5.36 | % | | | | |
|
As of September 30, 2005, 16.7% of our total debt is exposed to fluctuations in variable interest rates. The variable interest rate in this table assumes LIBOR borrowings, which we expect to do under our amended senior secured credit facility.
Our ability to satisfy interest payment obligations on our outstanding debt will depend largely on our future performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service our interest payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot assure you that any such borrowing or equity financing could be successfully completed.
In addition to the financial instruments listed above, the program fees incurred on proceeds from the sale of receivables under our receivables securitization agreements are determined based on LIBOR.
ITEM 4. Controls and Procedures
(a) Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately, and on a timely basis and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective at the reasonable assurance level.
(b) Changes In Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not sold any unregistered equity securities during the period covered by this report. During the thirteen week period ended August 27, 2005, we redeemed all of our Series F preferred stock.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 23, 2005, we held our 2005 Annual Meeting of Stockholders. At the 2005 Annual Meeting, our stockholders:
1. Elected four directors to hold office until the 2008 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified, by the following votes:
Common and LGP Preferred Stock
| | | | | | | | | | | | | | |
| John G. Danhakl | | For: 471,153,006 | | Against: 0 | | Abstain: 8,498,428 |
| Michael A. Friedman, MD | | For: 473,497,212 | | Against: 0 | | Abstain: 6,154,223 |
| Alfred M. Gleason | | For: 471,349,518 | | Against: 0 | | Abstain: 8,301,916 |
| Robert G. Miller | | For: 472,002,073 | | Against: 0 | | Abstain: 7,649,361 |
|
The LGP preferred stockholders votes of 62,760,078 were all for the election of the four directors listed above.
Elected one director to hold office until the 2007 Annual Meeting of Stockholders and until his successor is duly elected and qualified, by the following votes:
Common and LGP Preferred Stock
| | | | | | | | | | | | | | |
| Philip G. Satre | | For: 472,480,300 | | Against: 0 | | Abstain: 7,171,135 |
| LGP Preferred stockholders | | For: 62,760,078 | | Against: 0 | | Abstain: 0 |
|
2. Defeated a stockholder proposal requesting that the Board of Directors of the Company adopt a majority vote standard for the election of directors.
| | | | | | | | | | | | | | |
| Common stockholders | | For: 71,683,682 | | Against: 137,527,483 | | Abstain: 2,838,558 |
| LGP Preferred stockholders | | For: 0 | | Against: 62,760,078 | | Abstain: 0 |
|
3. Defeated a stockholder proposal requesting that the Company's Board of Directors prepare and make public a report concerning diversity of the Board of Directors.
| | | | | | | | | | | | | | |
| Common stockholders | | For: 22,056,792 | | Against: 186,426,754 | | Abstain: 3,566,177 |
| LGP Preferred stockholders | | For: 0 | | Against: 62,760,078 | | Abstain: 0 |
|
ITEM 5. Other Information
Not applicable.
30
ITEM 6. Exhibits
(a) The following exhibits are filed as part of this report.
| | | | | | | | | | |
Exhibit
Numbers | | Description | | Incorporation By Reference To |
| 3.1 | | Restated Certificate of Incorporation dated December 12, 1996 | | Exhibit 3(i) to Form 8-K, filed on November 2, 1999 |
| 3.2 | | Certificate of Amendment to the Restated Certificate of Incorporation dated February 22, 1999 | | Exhibit 3(ii) to Form 8-K, filed on November 2, 1999 |
| 3.3 | | Certificate of Amendment to the Restated Certificate of Incorporation dated
June 27, 2001 | | Exhibit 3.4 to Registration Statement on Form S-1, File No. 333-64950, filed on July 12, 2001 |
| 3.4 | | 7.0% Series E Mandatory Convertible Preferred Stock Certificate of Designation dated January 25, 2005 | | Exhibit 3.1 to Form 8-K, filed on February 1, 2005 |
| 3.5 | | 7% Series G Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Designation dated January 28, 2005 | | Exhibit 3.2 to Form 8-K, filed on February 2, 2005 |
| 3.6 | | 6% Series H Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Designation dated January 28, 2005 | | Exhibit 3.3 to Form 8-K, filed on February 2, 2005 |
| 3.7 | | 5.50% Series I Mandatory Convertible Preferred Stock Certificate of Designation dated August 22, 2005 | | Exhibit 3.1 to Form 8-K, filed on August 24, 2005 |
| 3.8 | | By-laws, as amended on November 8, 2000 | | Exhibit 3.1 to Form 8-K, filed on November 13, 2000 |
| 3.9 | | Amendment to By-laws, adopted January 30, 2002 | | Exhibit T3B.2 to Form T-3, filed on March 4, 2002 |
| 4.1 | | Indenture, dated August 1, 1993, by and between Rite Aid Corporation, as issuer, and Morgan Guaranty Trust Company of New York, as trustee, related to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013 | | Exhibit 4A to Registration Statement on Form S-3, File No. 033-63794, filed on June 3, 1993 |
| 4.2 | | Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation, as issuer, and U.S. Bank Trust National Association as successor to Morgan Guaranty Trust Company of New York, to the Indenture dated as of August 1, 1993, relating to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013 | | Exhibit 4.1 to Form 8-K filed on February 7, 2000 |
|
31
| | | | | | | | | | |
Exhibit
Numbers | | Description | | Incorporation By Reference To |
| 4.3 | | Indenture, dated as of December 21, 1998, between Rite Aid Corporation, as issuer, and Harris Trust and Savings Bank, as trustee, related to the Company's 5.50% Notes due 2000, 6% Notes due 2005, 6.125% Notes due 2008 and 6.875% Notes due 2028 | | Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-74751, filed on March 19, 1999 |
| 4.4 | | Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and Harris Trust and Savings Bank, to the Indenture dated December 21, 1998, between Rite Aid Corporation and Harris Trust and Savings Bank, related to the Company's 5.50% Notes due 2000, 6% Notes due 2005, 6.125% Notes due 2008 and 6.875% Notes due 2028 | | Exhibit 4.4 to Form 8-K, filed on February 7, 2000 |
| 4.5 | | Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, and State Street Bank and Trust Company, as trustee, related to the Company's 12.50% Senior Secured Notes due 2006 | | Exhibit 4.7 to Registration Statement on Form S-1, File No. 333-64950, filed on July 12, 2001 |
| 4.6 | | Indenture, dated as of November 19, 2001, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 4.75% Convertible Notes due December 1, 2006 | | Exhibit 4.3 to Form 10-Q, filed on January 15, 2002 |
| 4.7 | | Indenture, dated as of February 12, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 9½% Senior Secured Notes due 2011 | | Exhibit 4.1 to Form 8-K, filed on
March 5, 2003 |
| 4.8 | | Indenture, dated as of April 22, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 8.125% Senior Secured Notes due 2010 | | Exhibit 4.11 to Form 10-K, filed on
May 2, 2003 |
| 4.9 | | Indenture, dated as of May 20, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 9.25% Senior Notes due 2013 | | Exhibit 4.12 to Form 10-Q, filed on
July 3, 2003 |
| 4.10 | | Indenture, dated as of January 11, 2005, among the Company, the subsidiary guarantors described therein, and BNY Midwest Trust Company, as trustee, related to the Company's 7.5% Senior Secured Notes due January 15, 2005 | | Exhibit 99.2 to Form 8-K, filed on January 13, 2005 |
|
32
| | | | | | | | | | |
Exhibit
Numbers | | Description | | Incorporation By Reference To |
| 4.11 | | Third Amendment and Restatement dated as of September 30, 2005, to the Credit Agreement dated as of June 27, 2001, as amended and restated as of September 22, 2004, among Rite Aid Corporation, a Delaware corporation, the lenders from time to time party thereto, Citicorp North America, Inc., as administrative agent and collateral processing co-agent, JPMorgan Chase Bank, N.A., as syndication agent and collateral processing co-agent, Fleet Retail Group, Inc., as co-documentation agent and collateral agent, The CIT Group/Business Credit, Inc., as co-documentation agent, and General Electric Capital Corporation, as co-documentation agent. | | Filed herewith |
| 4.12 | | Definitions Annex to the Senior Loan Documents and the Second Priority Debt Documents | | Filed herewith |
| 4.13 | | Second Amendment, dated as of September 30, 2005, to the Amended and Restated Collateral Trust and Intercreditor Agreement, dated as of June 27, 2001, as amended and restated as of May 28, 2003, among Rite Aid Corporation and its subsidiaries that are a party thereto, the collateral trustees, the collateral processing co-agents and the trustees of various indentures covered by this agreement. | | Filed herewith |
| 11 | | Statement regarding computation of earnings per share (see note 3 to the condensed consolidated financial statements) | | Filed herewith |
| 31.1 | | Certification of CEO pursuant to Rule 13a-14 (a) /15d-14(a) under the Securities Exchange Act of 1934 | | Filed herewith |
| 31.2 | | Certification of CFO pursuant Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 | | Filed herewith |
| 32 | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
|
33
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 3, 2005 | | RITE AID CORPORATION |
| | | By: /s/ ROBERT B. SARI |
| | | Robert B. Sari
Senior Vice President and General Counsel |
| Date: October 3, 2005 | | By: /s/ KEVIN TWOMEY |
| | | Kevin Twomey
Chief Financial Officer,
Senior Vice President and
Chief Accounting Officer |
|
34
![[X]](https://capedge.com/proxy/10-Q/0000950136-05-006221/xbox.gif){kind=small}
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)![[ ]](https://capedge.com/proxy/10-Q/0000950136-05-006221/ebox.gif){kind=small}
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)