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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 November 27, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 1-5742
RITE AID CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1614034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Hunter Lane Camp Hill, Pennsylvania 17011
(Address of principal executive (Zip Code)
offices)
(Registrant's telephone number, including area code) (717) 761-2633
(Former name, former address and former fiscal year, if changed since last
report) Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The registrant had 329,491,633 shares of its $1.00 par value Common Stock
outstanding as of June 30, 2000.
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RITE AID CORPORATION
TABLE OF CONTENTS
Page
----
EXPLANATORY NOTE.......................................................... 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................. 3
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets November 27, 1999 and February
27, 1999............................................................ 4
Condensed Consolidated Statements of Operations Thirteen Weeks Ended
November 27, 1999 and November 28, 1998............................. 5
Condensed Consolidated Statements of Operations Thirty-nine Weeks
Ended November 27, 1999 and November 28, 1998....................... 6
Condensed Consolidated Statements of Cash Flows Thirty-nine Weeks
Ended November 27, 1999 and November 28, 1998....................... 7
Notes to Condensed Consolidated Financial Statements................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 15
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 23
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS................................................ 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................... 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................. 27
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS............... 27
ITEM 5.OTHER INFORMATION................................................ 27
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K................................. 27
2
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q contains financial and other information
for Rite Aid Corporation for the thirteen week and thirty-nine week periods
ended November 27, 1999. However, this Quarterly Report on Form 10-Q is being
filed with the Securities and Exchange Commission ("SEC") concurrently with
the filing of Rite Aid's Annual Report on Form 10-K for the fiscal year ended
February 26, 2000 (the "Fiscal 2000 10-K"). The Fiscal 2000 10-K contains Rite
Aid's audited financial statements for fiscal years 2000, 1999 and 1998, of
which the financial statements for fiscal years 1999 and 1998 have been
restated. The Fiscal 2000 10-K also contains unaudited financial information
for each of the four thirteen week periods comprising fiscal 2000 and fiscal
1999. Of these thirteen week periods, financial information has been restated
for all such periods except the thirteen week period ended November 27, 1999
and the thirteen week period ended February 26, 2000. The Fiscal 2000 10-K
contains information regarding these restatements, changes in the management
of Rite Aid Corporation and other material matters that have occurred since
November 27, 1999. This Quarterly Report on Form 10-Q should be read in
conjunction with the Fiscal 2000 10-K, which is available on the SEC's EDGAR
system.
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;
. The sale of PCS Health Systems, Inc. and other assets which we are
currently negotiating but which may not be consummated;
. 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 "Factors Affecting Our Future Results"
included in the Fiscal 2000 10-K, which is being filed with the SEC's EDGAR
system concurrently with the filing of this report.
3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
February 27, 1999
November 27, 1999 (As Restated, Note 9)
----------------- ---------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........... $ 272,344 $ 87,311
Accounts receivable, net............ 612,772 643,189
Inventories, net.................... 2,759,730 2,646,986
Prepaid expenses and other current
assets............................. 76,283 55,128
----------- -----------
Total current assets.............. 3,721,129 3,432,614
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET.... 3,939,974 3,645,099
GOODWILL AND OTHER INTANGIBLES........ 3,218,438 3,322,859
OTHER ASSETS.......................... 150,249 132,241
----------- -----------
Total assets...................... $11,029,790 $10,532,813
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current
maturities of long-term debt....... $ 27,912 $ 1,570,789
Accounts payable.................... 1,867,581 1,788,216
Other current liabilities........... 743,382 822,241
----------- -----------
Total current liabilities......... 2,638,875 4,181,246
----------- -----------
CONVERTIBLE SUBORDINATED NOTES........ 649,986 649,991
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATION, LESS CURRENT MATURITIES
..................................... 5,808,904 3,693,991
OTHER NONCURRENT LIABILITIES.......... 775,641 633,441
----------- -----------
Total liabilities................. 9,873,406 9,158,669
----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ........... 31,344 23,559
----------- -----------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, par value $1 per
share.............................. 300,000 --
COMMON STOCK, par value $1 per
share.............................. 258,938 258,861
ADDITIONAL PAID IN CAPITAL.......... 1,291,462 1,370,005
ACCUMULATED DEFICIT................. (725,360) (277,806)
ACCUMULATED OTHER COMPREHENSIVE
INCOME............................. -- (475)
----------- -----------
Total stockholders' equity........ 1,125,040 1,350,585
----------- -----------
Total liabilities and
stockholders' equity............. $11,029,790 $10,532,813
=========== ===========
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 Ended November 29, 1998
November 27, 1999 (As Restated, Note 9)
-------------------- ---------------------
REVENUES............................ $3,645,080 $3,123,169
COSTS AND EXPENSES:
Costs of goods sold, including
occupancy costs.................. 2,868,180 2,368,054
Selling, general and
administrative expenses.......... 824,626 820,234
Goodwill amortization............. 14,208 6,637
Interest expense.................. 161,247 68,218
Store closing, impairment and
other charges.................... 33,119 69,255
---------- ----------
3,901,380 3,332,398
---------- ----------
Loss before income taxes........ (256,300) (209,229)
INCOME TAX BENEFIT.................. (4,015) (63,007)
---------- ----------
Net loss........................ $ (252,285) $ (146,222)
========== ==========
BASIC LOSS PER SHARE................ $ (0.98) $ (0.57)
========== ==========
DILUTED LOSS PER SHARE.............. $ (0.98) $ (0.57)
========== ==========
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)
Thirty-nine
Thirty-nine Weeks Ended
Weeks Ended November 28, 1998
November 27, 1999 (As Restated, Note 9)
----------------- ---------------------
REVENUES............................... $10,775,871 $9,166,181
COSTS AND EXPENSES:
Costs of goods sold, including
occupancy costs..................... 8,229,633 6,942,000
Selling, general and administrative
expenses............................ 2,428,914 2,350,301
Goodwill amortization................ 42,624 19,911
Interest expense..................... 364,841 188,293
Store closing, impairment and other
charges............................. 117,451 157,633
----------- ----------
11,183,463 9,658,138
----------- ----------
Loss before income taxes and
cumulative effect of change in
accounting method................. (407,592) (491,957)
INCOME TAXES (BENEFIT)................. 11,102 (148,148)
----------- ----------
Loss before cumulative effect of
change in accounting method....... (418,694) (343,809)
Cumulative effect of change in
accounting method, net of income
tax benefit of $18,200............ (27,300) --
----------- ----------
Net loss........................... $ (445,994) $ (343,809)
=========== ==========
BASIC LOSS PER SHARE:
Loss before cumulative effect of
change in accounting method....... $ (1.83) $ (1.33)
Cumulative effect of change in
accounting method, net............ $ (0.11) $ --
----------- ----------
Net loss........................... $ (1.94) $ (1.33)
=========== ==========
DILUTED LOSS PER SHARE:
Loss before cumulative effect of
change in accounting method....... $ (1.83) $ (1.33)
Cumulative effect of change in
accounting method, net............ $ (0.11) $ --
----------- ----------
Net loss........................... $ (1.94) $ (1.33)
=========== ==========
See accompanying notes to condensed consolidated financial statements.
6
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Thirty-nine
Thirty-nine Weeks Ended
Weeks Ended November 28, 1998
November 27, 1999 (As Restated, Note 9)
----------------- ---------------------
OPERATING ACTIVITIES:
Net loss............................... $(445,994) $(343,809)
Depreciation and amortization........ 377,644 285,254
Store closing, impairment and other
non-cash charges.................... 38,859 158,091
LIFO charge.......................... 42,624 9,100
Changes in operating assets and
liabilities......................... (264,218) (204,968)
--------- ---------
NET CASH USED IN OPERATING
ACTIVITIES........................ (251,085) (96,332)
========= =========
INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment........................... (414,128) (572,016)
Purchases of businesses, net of cash
acquired............................ (24,454) --
Intangible assets acquired........... (30,703) (65,153)
Proceeds from dispositions........... 118,596 --
Other................................ (34,984) --
--------- ---------
NET CASH USED IN INVESTING
ACTIVITIES........................ (385,673) (637,169)
========= =========
FINANCING ACTIVITIES:
Proceeds from the issuance (payments)
of long-term debt................... (41,503) 196,077
Proceeds from the issuance of
redeemable preferred stock.......... 5,695 --
Proceeds from the issuance of
preferred stock..................... 300,000 --
Net proceeds (payments) of commercial
paper borrowings.................... 643,560 489,592
Cash dividends paid.................. (92,815) (83,779)
Other financing activities, net...... 6,854 138,550
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES........................ 821,791 740,440
========= =========
INCREASE IN CASH AND CASH EQUIVALENTS
...................................... 185,033 6,939
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 87,311 85,065
========= =========
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 272,344 $ 92,004
========= =========
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)
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 annual report has not been included in
this report; however, such information reflects all adjustments (consisting
primarily of normal occurring 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 thirteen week and thirty-nine week
periods ended November 27, 1999 are not necessarily indicative of the results
to be expected for the full year.
As described in Note 9, the Company has restated its financial statements
covering all periods in fiscal 1999, including the thirteen week and thirty-
nine week periods ended November 28, 1998.
2. Result of Operations and Financing
During the thirty-nine week periods ended November 27, 1999 and November 28,
1998, the Company incurred net losses of $445,994 and $343,809, respectively,
and during the thirty-nine week period ended November 27, 1999, net cash used
in operating activities was $251,085. The Company obtained a new senior credit
facility in June 2000.
Since December 1999, management of the Company has taken a series of steps
intended to stabilize and improve the operating results of the Company's
retail drug segment. Management believes that available cash and cash
equivalents together with cash flow from operations, available borrowings
under the new senior credit facility and other sources of liquidity (including
asset sales) will be sufficient to fund the Company's operating activities,
investing activities and debt maturities for fiscal 2001. In addition,
management believes that the Company will be in compliance with its existing
debt covenant requirements throughout fiscal 2001. However, a substantial
portion of its indebtedness which will mature in August and September 2002
will require the Company to refinance the indebtedness at that time.
3. 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 Thirty-nine
Weeks Ended Weeks Ended
Thirteen November 28, 1998 Thirty-nine November 28, 1998
Weeks Ended (As Restated, Weeks Ended (As Restated,
November 27, 1999 Note 9) November 27, 1999 Note 9)
----------------- ----------------- ----------------- -----------------
Numerator for earnings
per share:
Net loss............... $ (252,285) $ (146,222) $ (445,994) $ (343,809)
Accretion of redeemable
preferred stock....... -- -- -- --
Dividends on preferred
stock................. (1,395) (470) (1,395) (470)
------------ ------------ ------------ -----------
Loss before cumulative
effect attributable to
common stockholders... $ (253,680) $ (146,692) $ (447,389) $ (344,279)
Cumulative effect of
change in accounting
method................ $ -- $ -- $ (27,300) $ --
------------ ------------ ------------ -----------
Net loss............... $ (253,680) $ (146,692) $ (474,689) $ (344,279)
============ ============ ============ ===========
Denominator:
Basic weighted average
shares................ 258,927,000 256,557,000 258,905,000 258,421,000
Diluted weighted
average shares........ 258,927,000 256,557,000 258,905,000 258,421,000
Basic and diluted loss
per share:
Loss per share before
cumulative effect of
accounting change..... $ (0.98) $ (0.57) $ (1.83) $ (1.33)
Cumulative effect of
accounting change..... $ -- $ -- $ (0.11) $ --
------------ ------------ ------------ -----------
Basic and diluted loss
per share............. $ (0.98) $ (0.57) $ (1.94) $ (1.33)
============ ============ ============ ===========
8
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
4. Business Segments
The Company operates in two business segments; i) the Retail Drug segment,
and ii) the Pharmacy Benefit Management ("PBM") segment, that includes other
managed health care services and mail-order pharmacy 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 Company's drugstores' primary business is pharmacy services, with
prescription drugs accounting for approximately 55 percent of total segment
sales. 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.
Through the January 1999 acquisition of PCS Health Systems Inc. ("PCS"), the
Company operates a PBM segment. Through its PBM segment, the Company offers
pharmacy benefit management, mail-order pharmacy services, marketing
prescription plans and selling other managed health care services to
employers, health plans and their members and government-sponsored employee
benefit programs. Prior to fiscal 1999, the Company operated only the Retail
Drug segment.
In addition, segments are evaluated based upon a profit or loss measurement
on a FIFO basis. Accordingly, financial information for each segment is
reported on this basis. The following table presents selected financial
information for each business segment:
Retail PBM LIFO Consolidated
For the thirteen weeks ended Segment Segment Charge Totals
- ---------------------------- ---------- ---------- -------- ------------
November 27, 1999:
Revenues...................... $3,280,321 $ 364,759 $ -- $ 3,645,080
========== ========== ======== ===========
Net loss...................... $ (263,067) $ 29,189 (18,407) $ (252,285)
========== ========== ======== ===========
Total assets.................. $8,711,685 $2,318,105 $ -- $11,029,790
========== ========== ======== ===========
November 28, 1998 (As restated,
note 9):
Revenues...................... $3,123,169 $ -- $ -- $ 3,123,169
========== ========== ======== ===========
Net loss...................... $ (137,460) $ -- (8,762) $ (146,222)
========== ========== ======== ===========
Total assets.................. $7,629,306 $ -- $ -- $ 7,629,306
========== ========== ======== ===========
For the thirty-nine weeks ended:
- --------------------------------
November 27, 1999:
Revenues...................... $9,806,296 $ 969,575 $ -- $10,775,871
========== ========== ======== ===========
Net loss...................... $ (469,954) $ 41,460 (17,500) $ (445,994)
========== ========== ======== ===========
Total assets.................. $8,711,685 $2,318,105 $ -- $11,029,790
========== ========== ======== ===========
November 28, 1998 (As restated,
note 9):
Revenues...................... $9,166,181 $ -- $ -- $ 9,166,181
========== ========== ======== ===========
Net loss...................... $(325,609) $ -- (18,200) $ (343,809)
========== ========== ======== ===========
Total assets.................. $7,629,306 $ -- $ -- $ 7,629,306
========== ========== ======== ===========
9
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
5. Store Closing, Impairment and Other Charges
Store closing, impairment and other charges include non-cash charges of $5.6
million and $38.1 million for the thirteen weeks ended November 27, 1999 and
November 28, 1998, respectively, for the impairment of long-lived assets
(including allocable goodwill) at 26 and 139 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.
Costs incurred to close a store, which principally include lease termination
costs, are recorded at the time management commits to closing the store, which
is typically 909 days proceeding the closing date or in the case of a store to
be relocated, the resale 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 fassufmptyions each
quarter and adjusts the liability accordingly. Included in Sotre closing,
impairment and other charges are charges of $43,986 and $81,271 representing
the present value of the remaining lease obligation net of estimated lease
drecovferies for the thirty nine weeks ended November 27, 1999 and Novembfer
28f, 1998, respectively, and 410,j676 and $33,067 for the thirteen weeks ended
November 27f, 1999 and Nsovember 28, 1998, respectively.
Store closings, impairments and other charges consist of:
For the thirteen
weeks ended For the thirty- nine weeks ended
------------------------- -----------------------------------
November 28, November 28, November 28, November 28,
1999 1998 1999 1998
------------ ------------ ---------------- ----------------
Store lease exit costs.. $ 5,992 $ 45,361 $ 33,383 $ 98,783
Impairment charges 27,127 23,894 84,068 58,850
------- -------- ---------------- ----------------
$33,119 $569,255 $117,451 $157,633
======= ======== ================ ================
A rollforward of the Company's lease exit liability follows:
Changes in Interest
Provision for assumpgtions Accretion
present value of about future Reversal of reserves Cash and
noncancellable lease sublease for stores that payments, changes
Balance, payments on stores income, management net of in Balance,
beginning designated to be terminations, determined will sublease interest end of
of period closed etc. remain open income rates year
--------- -------------------- ------------- -------------------- --------- --------- --------
Thirteen weeks ended
November 27, and
November 28,
1999................... 236,535 10,676 (2,358) (2,326) (13,435) 214 229,306
1998 (as restated, note
9).................... 232,748 33,067 12,294 -- (18,902) (1,515) 257,692
Thirty-nine weeks ended
November 27, and
November 28,
1999................... 246,805 43,976 (7,011) (3,582) (52,171) 1,289 229,306
1998 (as restated, note
9).................... 191,453 81,271 17,512 -- (42,600) 10,056 257,692
6. Indebtedness And Credit Agreements
In addition to store closing, thje Company has also closed or relocated
certain distribution centers in its efforts to conswolidated operationsa and
implements its regionaal exit straategies. During the second qfuarter of
fiscal 200f0, management approved a plan to close sits leased distribution
center in Las Vegas, Nevada and terminate all of its empfloyees and faccrued
terminationfs benefoit paymentj of #1.6 million in the second qfuarter of
2j000, with fthe charge ifncluded in Ssellfing,fds general and
admfinisjjtrative expenses (SG&A) on the
Following is a summary of indebtedness at November 27, 1999 and February 27,
1999:
November 27, February 27,
1999 1999
------------ ------------
Commercial paper borrowings under existing credit
facilities 5.2% and 5.5% weighted average rates in
fiscal years 2000, and 1999......................... $ 539,840 $ 1,783,125
Revolving credit facility (amended and restated)..... 311,655 --
Term loan due 2000 (amended and restated)............ 1,300,000 --
Term note due 2000 (amended and restated)............ 274,209 --
5.25% convertible subordinated notes due 2002........ 649,986 649,991
6.70% notes due 2001................................. 350,000 350,000
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............... 200,000 200,000
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........................................ 5,434 8,672
Obligations under capital leases..................... 1,074,746 1,141,700
Other................................................ 30,932 31,283
---------- -----------
6,486,802 5,914,771
Short-term debt and current maturities of long-term
debt................................................ (27,912) (1,570,789)
---------- -----------
Long-term debt less current maturities............... $6,458,890 $ 4,343,982
========== ===========
10
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
As of February 27, 1999, the Company had a $1,000,000 unsecured revolving
credit facility, expiring in July 2001 to support its commercial paper program
and a $1,300,000 unsecured revolving credit facility, expiring in October
1999, to support commercial paper borrowings to complete the acquisition of
PCS. In June 1999, the Company borrrowed an additional $300,000 from one of
its banks under a demand note. In September 1999, the Company determined it
was in default of certain financial covenants in the credit agreements. On
October 27, 1999, the Company's banks agreed to extend $2,700,000 of its
outstanding credit facilities. As a result, the due dates of the $1,300,000
revolving credit facility scheduled to mature on October 29, 1999 and the
$300,000 note that was due on demand were extended to November 1, 2000. The
Company's $1,000,000 revolving credit facility, which matured on July 19,
2001, was also amended and restated. Borrowings under the credit facilities
carry higher interest costs than commercial paper. The interest rates under
the Company's credit facilities are based on prime or LIBOR plus a risk
adjusted spread. As of November 27, 1999, borrowings under the $1,300,000
facility were at LIBOR plus 3.5%. Borrowings outstanding under the $1,000,000
facility and the $300,000 bank note were $311,655 and $274,209, respectively
as of November 27, 1999 with interest rates at LIBOR plus 4.00%. Borrowings
repaid under these credit facilities cannot be re-borrowed. These borrowings
have financial and restrictive covenants that among other things restrict our
ability to incur liens and debt, pay dividends, make redemptions and
repurchases of capital stock, make loans, investments and capital
expenditures, prepay, redeem, or repurchase debt, engage in mergers,
consolidations, asset dispositions, sale leaseback transactions and affiliate
transactions, change our business, amend certain debt and other material
agreements, issue and sell capital stock of subsidiaries, make distributions
from subsidiaries and grant negative pledges to creditors.
In connection with obtaining waivers of compliance with, and modification
to, certain of the covenants during the third and fourth quarter of fiscal
year 2000 and the subsequent extensions and restructuring described above, the
Company paid fees and transaction costs of approximately $62,777.
Additionally, the Company issued three-year warrants to purchase 2,500,000
shares of common stock at $11.00 per share and has agreed to a one-year
financial services advisory contract for a monthly fee of $2,000. These costs
are being amortized on a straight-line basis over the terms of the borrowings.
The fair value assigned to the warrants was $8,500 and is being amortized over
the term of the associated debt instruments. Additionally, as part of the
restructuring, the Company entered into a financial advisory agreement for a
period of one year.
7. Commitments and Contingencies
Legal Proceedings
The Company is party to numerous legal proceedings, as discussed below. Also
as discussed 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 our
financial reporting and other matters. The Company is cooperating fully with
the SEC and the United States Attorney. Also, as previously discussed, the
Company's audit committee engaged the law firm of Swidler Berlin Shereff
Friedman LLP to conduct an independent investigation of those matters. The
results of Swidler Berlin's investigation have been conveyed to the audit
committee and to management and were considered in connection with the
preparation and restatement of financial statements in this report and in the
Fiscal 2000 10-K.
11
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
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 Company common stock.
Purchases of Company 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. If the Company were convicted of
any crime, certain contracts and licenses that are material to operations may
be revoked, which would have a material adverse effect on results of
operations, financial condition, and cash flows. In addition, substantial
penalties, damages or other monetary remedies assessed against Rite Aid could
also have a material adverse effect on results of operations, financial
condition and cash flows.
Stockholder litigation
On March 12, 1999, the Company announced that the preliminary estimate for
fully diluted earnings per share for the fourth quarter of fiscal 1999 would
be approximately $0.30 to $0.32, as compared to the then existing First Call
analysts' consensus estimates of $0.52 per share. After the March 12
announcement, several purported class action lawsuits were commenced in the
U.S. District Court for the Eastern District of Pennsylvania and one suit, not
a class action, alleging violations of Florida securities laws, was brought in
state count and removed to the U.S. District Court for the Northern District
of Florida. The defendents in these cases include the Company and certain of
its former officers and directors, including Martin Grass, former chairman of
the board of directors and chief executive officer; Timothy Noonan, former
interim chief executive officer and a former director; Franklin Brown, former
vice chairman and a former director; and Frank Bergonzi, former senior
executive vice president and former chief financial and accounting officer.
The plaintiffs in these suits allege that the defendants violated certain
provisions of the federal securities laws by, among other things, failing to
make prompt public disclosure of the matters mentioned in its March 12
announcement. The plaintiffs also allege that the Company's financial
statements for fiscal 1997, 1998 and 1999 fraudulently misrepresented the
Company's financial position, results of operations and cash flows for those
periods. The plaintiffs, by their original and amended complaints, seek to
recover damages on behalf of all of the purchasers of Company common stock
between May 1997 and October 1999. On April 18, 1999, the Court approved a
stipulation among counsel that, among other things, provided for consolidation
of the class action suits. The plaintiffs have the right until August 10, 2000
to amend the complaints to include additional allegations of wrongdoing by the
defendants. In June 2000, the Company moved to transfer the Florida action to
the U.S. District Court for the Eastern District of Pennsylvania. The Company
is unable to predict the ultimate outcome of this litigation.
Since May 1999, various complaints have been filed in the U.S. District
Court for the Eastern District of Pennsylvania and in the Court of Chancery of
the state of Delaware, federal courts in Philadelphia, Pennsylvania and
Wilmington, Delaware, derivatively and on behalf of the Company, against the
same officers named in the stockholder lawsuits discussed above and against
certain former and current directors of the Company. The complaints allege
essentially the same wrongful acts as are alleged in the class action
lawsuits. Some of those complaints also allege that certain of the
transactions discussed in the Current Report on Form 8-K filed with the SEC by
the Company on February 9, 1999 constituted mismanagement, waste of corporate
resources and breach of fiduciary duty. The plaintiffs seek indemnity and
contribution on behalf of the Company from the individual defendants. The
Company is unable to predict the ultimate outcome of this litigation.
12
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
If any of these cases results 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.
Drug pricing and reimbursement matters
Civil proceedings are continuing involving the Company's pricing-related
practices for prescription drugs. On September 22, 1999, the Florida Attorney
General filed a complaint against the Company in the Second District, Leon
County, alleging violations of the Florida Deceptive and Unfair Trade
Practices Act and the state RICO statute. The Company no longer operates any
retail drugstores in Florida. In essence, Florida asserted that the Company's
former practice of allowing its pharmacists the discretion to charge non-
uniform prices through the use of positive overrides for cash purchases of
prescription drugs was unlawful. The Company discontinued its use of this
policy in June 1998 throughout its retail drugstores. On February 18, 2000,
the reviewing Florida state court dismissed with prejudice the Florida
Attorney General's complaint. On May 5, 2000, the same court denied Florida's
motion to rehear the case and affirmed the initial decision on the merits, but
granted Florida's motion to amend its complaint to raise allegations
concerning other pricing practices relating to discounts and generic drug
price notices. On July 5, 2000, the Company filed a motion to dismiss the
amended complaint.
The filing of the complaint by the Florida Attorney General, and the
Company's press release issued in conjunction therewith, precipitated the
filing of purported federal class actions in Alabama and California and
purported state class actions in New Jersey, New York, Oregon, and
Pennsylvania. All of the class actions are based on facts essentially
identical to those contained in the Florida complaint and none 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. 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 12, 2000, the United States District Court for the Central
District of California dismissed that case and on June 27, 2000, a New Jersey
state court dismissed that class action there. Motions to dismiss the state
class actions in New York and Pennsylvania are 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, operations and cash flows of the
Company as well as necessitate substantial additional expenditures to cover
legal costs as it pursues all available defenses.
The Company has also recently been notified that it 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
13
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
believes that its existing policies and procedures fully comply with the
requirement of applicable law and intends to fully cooperate with these
investigations. The Company cannot, however, predict the outcome of these
investigations.
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.
PCS legal proceedings
In November 1999, PCS received a subpoena from the Office of Inspector
General of the Department of Health and Human Services ("OIG"). The subpoena
requests general information about PCS's formulary programs and rebate
practices and makes no allegation of any wrongdoing by PCS. PCS is fully
cooperating with the inquiry and believes that no regulatory action will be
taken by OIG against PCS that will have a material adverse effect on PCS's
business. The Company cannot predict the outcome of this matter.
In January 1998, a purported class action was brought against PCS by a
participant in a plan managed by PCS in the federal district court in New
Jersey. The plaintiff alleged that PCS is an ERISA fiduciary and that, as
such, breached its fiduciary obligations under ERISA and that PCS received
improper kickbacks and rebates from certain drug manufacturers. PCS believes
that the plaintiff's action is without merit and is vigorously defending this
action. The Company cannot predict the outcome of this action.
If any of these proceedings results 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.
Risk Contracts
The Company enters into risk contracts with certain customers as part of its
PBM business. These contracts provide that the Company assume varying
percentages of the risk associated with claims experience differing from fixed
fee arrangements under managed care programs. In addition, the Company, in
certain limited circumstances, guarantees a specific amount of savings for
certain customers. Included in other current liabilities in the accompanying
consolidated balance sheets are management's estimates of the amounts required
to cover losses incurred under such contracts.
8. Subsequent Events
The Company's Fiscal 2000 10-K and Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2000 will contain discussions of events
material to the Company that have occurred subsequent to November 27, 1999.
Each of these filings is available on the SEC's EDGAR system.
14
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share amounts)
9. Restatement
The financial statements for fiscal 1999, including the financial statements
for the thirteen weeks and the thirty-nine weeks ended November 28, 1998, have
been restated to reflect various adjustments to the previously reported
financial statements. The restated results of operations reflect a net loss
and loss per share as follows:
Fiscal Year 1999
---------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 28 November 28
------------------------- -------------------------
As Previously As Previously
Reported(1) As Restated Reported(1) As Restated
------------- ----------- ------------- -----------
Revenues................ 3,122,930 3,123,169 9,166,640 9,166,181
Costs and Expenses
excluding store
closing, impairment,
and other charges...... 2,995,965 3,263,143 8,792,871 9,500,505
Store closing,
impairment, and other
charges................ (7,298) 69,255 256,906 157,633
Income (loss) before
income taxes and
cummulative effect of
change in accounting
method................. 134,263 (209,229) 116,863 (491,957)
Income taxes (benefit).. 53,705 (63,007) 46,745 (148,148)
Net income (loss)....... 80,558 (146,222) 70,118 (343,809)
Basic and diluted
earnings (loss) per
share:................. 0.31 (0.57) 0.27 (1.33)
(1) The amounts shown as previously reported for the thirteen weeks and the
thirty-nine weeks ended November 28, 1998 are as reported in the Company's
annual report on Form 10-K for the year ended February 27, 1999. These
amounts do not agree to the Company's Form 10-Q for the quarterly period
ended November 28, 1998, as filed, as these amounts were restated in the
Company's 1999 annual report on Form 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."
10. Store Sale
In September 1999, the Company signed a definitive contract to sell 38
drugstores in California to Longs Drug Stores California, Inc. ("Longs").
During the third quarter of fiscal 2000, a total of 32 stores were transferred
to Longs. In October 1999, the Company agreed to an amendment to its contract
with Longs whereby the closing of two stores was postponed due to delays in
obtaining waivers for existing lease provisions related to the assignment of
leases to the buyer. These two stores were ultimately closed in March 2000 and
transferred to the buyer at that time. The remaining four stores which were
originally included in the purchase agreement were retained by Rite Aid. A
pre-tax gain of $80,109 was recognized in the third quarter of fiscal year
2000, and included in selling, general and administrative expenses, for the
stores that were transferred in that year. The gain on the sale of the two
stores transferred in March 2000 was realized by the Company in the first
quarter of fiscal 2001.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Restatement of Historical Financial Statements
The financial statements for fiscal 1999, including the financial statements
for the thirteen week period and the thirty-nine week period ended November
28, 1998, have been restated to reflect various adjustments to the previously
reported financial statements for fiscal 1999. The aggregate effect of these
adjustments on the
15
historical financial statements was to reduce net income by $413.9 million for
the thirty-nine week period ended November 28, 1998. On an aggregate basis,
adjustments reduced Rite Aid's retained earnings at November 28, 1998 by
$1,460.2 million.
The principal adjustments to Rite Aid's financial statements for the
thirteen weeks and the thirty-nine weeks ended November 28, 1998 may be
categorized as follows:
Inventory/Cost of Goods Sold
The restated financial statements reflect adjustments to inventory and cost
of goods sold related primarily to reversals of unearned vendor allowances
previously recorded as a reduction to cost of goods sold, to correctly
applying the retail method of accounting, recording writedowns for slow moving
and obsolete inventory, recognizing certain selling costs including
promotional markdowns and shrink in the period in which they were incurred,
accruing for inventory cut-off, and to reflect vendor allowances in the
inventory balances.
Property, Plant and Equipment
The restated financial statements reflect adjustments to charge certain
items previously capitalized to expense in the period in which they were
incurred. Such items include certain costs for repairs and maintenance,
interest, and internal software expenditures. The adjustments also include
increases to depreciation expense to reverse the effects of retroactive
changes made to the useful lives of certain assets and to depreciate assets
misclassified as construction in-progress.
Lease Obligations
The restated financial statements reflect the sale-leaseback of certain
stores as financing transactions. Such transactions had previously been
accounted for as sales with corresponding operating leases. The adjustment to
correct these items resulted in the reversal of the asset sales and the
establishment of lease obligations. In addition, certain leases previously
accounted for as operating leases were determined to be capital leases.
Purchase Accounting
The company acquired Thrifty PayLess, Inc. in fiscal 1997 and Harco Inc. and
K&B Incorporated in fiscal 1998. Certain liabilities associated with these
acquisitions that had previously been established with a corresponding
increase to goodwill have been either reduced or eliminated to correctly
reflect the fair value of the assets and liabilities acquired at the date of
acquisition.
Accruals for Operating Expense
The restated financial statements reflect adjustments to expense certain
operating costs in the period in which they were incurred and to record a
corresponding liability for those items not paid at the end of the period.
Such costs primarily consisted of payroll, vacation pay, incentive
compensation, executive retirement plans, scheduled rent increases, and
certain insurance claims.
Exit Costs and Impairment of Operating and Other Assets
The restated financial statements include adjustments to appropriately
reflect charges related to store closures in the period in which the decision,
and ability, to close a store had been made. Other charges not related to
exiting stores and gains from the sale of certain assets previously recorded
against the store exit liability have been reflected as income or expense in
the period in which they were incurred or realized. Adjustments have also been
made to record impairment charges for stores and other assets in the period in
which the impairment occurred. The company also determined that its previous
method of evaluating assets for impairment at a market level was not
appropriate, and that the evaluation should occur at the store level because
this is the lowest level of independent cash flows ascertainable.
16
Results of Operations
Revenues Consolidated
- -------------------------------------------------------------------------------
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
November November 28,
Thirteen 28, 1998 Thirty-Nine 1998
Weeks Ended (As Weeks Ended (As
November Restated, November 27, Restated,
27, 1999 Note 8) 1999 Note 8)
----------- ----------- ------------ ------------
(dollars in thousands)
Sales........................ $3,645,080 $3,123,169 $10,775,871 $9,166,181
Sales growth................. 16.7% * 17.5% *
Retail drug segment.......... 3,280,321 3,123,169 9,806,296 9,166,181
PBM segment.................. 364,759 -- 969,575 --
Store data:
Total stores (beginning of
period)................... 3,854 3,900 3,870 3,975
New stores................. 22 40 65 96
Closed stores.............. (50) (71) (143) (240)
Store acquisitions, net.... 2 10 36 48
Relocated stores .......... 55 75 164 205
Total stores (end of
period)................... 3,828 3,879 3,828 3,879
- -------------------------------------------------------------------------------
The acquisition of PCS on January 22, 1999 was the primary contributor to
the growth in our consolidated revenues in the thirteen week period ended
November 27, 1999 compared to the same period of the previous year.
Because PCS was acquired late in fiscal 1999, there is insufficient
operating data for prior periods to present a meaningful comparison to its
operations in comparable periods of 2000. PCS derived 56.0% of its total
revenues in the thirteen week period ended November 27, 1999 and 58.6% in the
thirty-nine week period ended November 27, 1999 from mail order programs.
Revenues from manufacturer programs and claims processing contributed 16.2%
and 21.9%, respectively, of total PCS revenues in the thirteen week period
ended November 27, 1999 and 18.6% and 16.9%, respectively, in the thirty-nine
week period ended November 27, 1999.
Retail Drug Segment
- -------------------------------------------------------------------------------
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
November November 28,
Thirteen 28, 1998 Thirty-Nine 1998
Weeks Ended (As Weeks Ended (As
November Restated, November 27, Restated,
27, 1999 Note 8) 1999 Note 8)
----------- ----------- ------------ ------------
(dollars in thousands)
Sales (thousands)......... $3,280,321 $3,123,169 $9,806,296 $9,166,181
Sales growth.............. 5.0% * 7.0% *
Same store sales growth... 8.5% 8.4% 9.0% 14.9%
Pharmacy sales growth..... 14.7% 15.3% 17.4% 18.3%
Same store pharmacy sales
growth................... 15.2% 18.2% 18.2% 20.7%
Pharmacy as a % of total
segment sales............ 59.5% 56.2% 58.9% 54.4%
Third party sales as a %
of total pharmacy sales.. 88.1% 85.8% 87.6% 85.1%
Front end sales growth.... 0.1% -4.8% -2.0% 1.6%
Same store front end sales
growth................... -0.2% -2.0% -2.1% 6.8%
Front end as a % of total
segment sales............ 40.5% 43.8% 41.1% 45.6%
- -------------------------------------------------------------------------------
17
The growth in retail drug segment sales in the thirteen week period ended
November 27, 1999 compared to the same period of the previous year was
primarily due to the continuing strong growth of our pharmacy sales, which
more than offset the decline in our front end sales.
For the thirteen week period ended November 27, 1999 and the same period of
the previous year, prescription drug revenues led sales growth with same-store
sales increases of 15.2% and 18.2%, respectively. For the thirty-nine week
period ended November 27, 1999 and the same period of previous year,
prescription drug revenues led sales growth with same-store sales increases of
18.2% and 20.7%, respectively. Our pharmacy sales growth continued to benefit
from our ability to attract and retain managed care customers our ongoing
program of 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, were
essentially flat between the thirteen week period ended November 27, 1999 and
the same period of the prior year and decreased in the thirty-nine week period
ended November 27, 1999 from the same period of the prior year. Our front-end
sales were adversely affected by our elevated levels of out-of-stock
merchandise. Other factors adversely affecting our front-end sales included
the suspension by former management of our advertising circular program and
their decision to raise front-end prices to levels that were not competitive.
Costs and Expenses
- -------------------------------------------------------------------------------
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
Thirteen November 28, Thirty-Nine November 28,
Weeks Ended 1998 Weeks Ended 1998
November 27, (As Restated, November 27, (As Restated,
1999 Note 8) 1999 Note 8)
------------ ------------- ------------ -------------
(dollars in thousands)
Costs of goods sold..... $2,868,180 $2,368,054 $8,229,633 $6,942,000
Gross margin............ 21.3% 24.2% 23.6% 24.3%
Selling, general and
administrative......... $ 824,626 $ 820,234 $2,428,914 $2,350,301
Selling, general and
administrative as a %
of revenues............ 22.6% 26.3% 22.5% 25.6%
Goodwill amortization... $ 14,208 $ 6,637 $ 42,624 $ 19,911
Interest expense........ $ 161,247 $ 68,218 $ 364,841 $ 188,293
Closed store, impairment
and other charges...... $ 33,119 $ 69,255 $ 117,451 $ 157,633
- -------------------------------------------------------------------------------
Cost of Goods Sold
Gross margin was 21.3% for the thirteen week period ended November 27, 1999
compared to 24.2% in the same period of the previous year and was 23.6% for
the thirty-nine week period ended November 27, 1999, compared to 24.3% in the
same period of the previous year. Gross margins in fiscal 2000 declined from
the prior year as a result of the acquisition of PCS, which operates with
lower margins than the retail drug segment, and the continuing growth of third
party pharmacy sales as a percentage of total retail drug segment sales.
The decline in gross margin for the thirteen week and thirty-nine week
periods ended November 27, 1999 and the same periods of the previous year was
also attributable to the incurrence of substantial additional costs related to
our distribution facilities and increased store occupancy costs. We incurred
significant start-up costs in the thirty-nine weeks ended November 27, 1999 in
connection with the new distribution facility located in Perryman, Maryland
and also in connection with the processing of merchandise received from our
stores for shipment back to our vendors. These increased costs were partially
offset by a substantial credit to cost of goods sold resulting from the
receipt of vendor allowances following a restructuring of the terms of certain
vendor contracts. In the thirty-nine
18
week period ended November 28, 1998, prior to the restructuring of the
contracts, these vendor allowances were credited to selling, general and
administrative expense. Also partially offsetting the increases in cost of
goods sold in the thirty-nine week period ended November 27, 1999 were
improved store level margins for front-end and pharmacy sales.
Also, negatively impacting gross margins in the period presented was the
continuing trend of rising third party sales coupled with decreasing margins
on third party reimbursed prescription sales. Third party prescription sales
typically have lower gross margins than other prescription sales 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. These effects were
partially offset by front-end gross margin improvements.
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 for the thirteen week period
ended November 27, 1999 were increased $9.1 million versus a provision of $8.4
million for the same period a year ago and for the thirty-nine week period
ended November 27, 1999 was $27.3 million versus $25.3 million for the same
period a year ago. The company has changed its method of accounting for LIFO
as of February 26, 2000. This change is discussed in detail in the company's
Fiscal 2000 10-K, which is being filed with the SEC concurrently with the
filing of this report.
Selling, General and Administrative Expenses
Selling and administrative expenses were 22.6% of sales for the thirteen
week period ended November 27, 1999 compared to 26.3% of sales in the previous
year and for the thirty-nine week period ended November 27, 1999 were $2,429
million versus $2,350 million for the same period a year ago. The decrease in
("SG&A") selling, general and administrative expense as a percentage of
revenues in the thirteen week period ended November 27, 1999 is attributable
to the acquisition of PCS which operates with a substantially lower SG&A
margin than the retail drug segment. Without the effect of PCS, the SG&A
margin in the thirteen weeks ended November 27, 1999 would have increased
slightly over the prior year due to substantially higher corporate SG&A
expense in the period ended November 27, 1999.
Goodwill Amortization
Goodwill amortization increased during the thirteen and thirty-nine week
periods ended November 27, 1999 over the level recorded in the previous year
due to the additional goodwill recorded in connection with the company's
acquisition of PCS in January 1999.
Interest Expense
Interest expense was $161.2 million for the thirteen week period ended
November 27, 1999 compared to $68.2 million in the previous year and for the
thirty-nine week period ended November 27, 1999 was $364.8 million versus
$188.3 million for the same period a year ago. The substantial increase in
interest expense in the thirteen week period ended November 27, 1999 is due to
higher levels of indebtedness throughout the year. The level of the company's
indebtedness increased in the thirteen week period ended November 27, 1999
primarily as a result of the $1.3 billion credit facility arranged in January
1999 in connection with the purchase of PCS and the $300 million of demand
note borrowings incurred in June 1999 to supplement cash flows from operating
activities and to fund capital expenditures. The annual weighted average
interest rates, excluding capital leases, on the company's indebtedness for
the thirteen weeks ended November 27, 1999 and the thirteen weeks ended
November 28, 1998 was 7.0% and 6.3%, respectively. The rates for the thirty-
nine weeks ended November 27, 1999 and the thirty-nine weeks ended November
28, 1998 was 7.0% and 6.4%, respectively.
Closed Store, Impairment and Other Charges
During the thirteen week period ended November 27, 1999 and the same period
of the previous year, the company recorded pre-tax charges of $6.2 million and
$43.8 million, for the closing of 26 and 139 stores, respectively. During the
thirty-nine week period ended November 27, 1999 and for the same period of the
19
previous year, the company recorded pre-tax charges of $34.7 million and
$108.8 million for the closing of 193 and 357 stores, respectively. The
components of the pre-tax charges were comprised of the following costs:
February 27,
1999
November 27, (As Restated,
1999 Note 8)
------------ -------------
Balance--Beginning of Year.......................... $246,805 $191,453
Provision for present value of noncancellable
lease payments of stores designated to be
closed........................................... 43,976 81,271
Provision for changes in discount rates,
assumptions about future sublease income, etc. .. (7,011) 17,512
Reversals of reserves for stores that management
has determined will remain open.................. (3,582) --
Change in reserve resulting from interest......... 1,289 10,056
Cash Payments..................................... (52,171) (42,600)
Balance--End of Year................................ 229,306 257,692
These charges are related entirely to operations in the retail drug segment.
Income Taxes
Rite Aid had net losses in the thirteen week period ended November 27, 1999
and the same period of the previous year and in the thirty-nine week period
ended November 27, 1999 and the same period of the previous year. The full
benefit of the net operating losses generated in each period 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.
Income tax expense of the company varies from expected amounts principally
from the nondeductibility of goodwill amortization and an increase in the
valuation allowance for net operating loss carryforwards.
Liquidity and Capital Resources
Rite Aid used $251.1 million and $96.3 million of cash to fund operations
for the thirty-nine week periods ended November 27, 1999 and November 28,
1998, respectively. Operating cash flow was negatively impacted by interest
payments of approximately $341.8 million and $181.2 million for the
corresponding periods. Operating cash flow was also impacted by negative
working capital changes of $221.6 million and $195.9 million for the thirty-
nine week periods ended November 27, 1999 and November 28, 1998, respectively.
For the thirty-nine week period ended November 27, 1999 the negative working
capital was primarily a result of increases in inventory levels and decreases
in accruals partially offset by increases in accounts payable related to the
increased inventory levels. For the thirty-nine week period ended November 28,
1998, the negative working capital was primarily a result of decreases in
accrued liabilities and accounts payable, partially offset by a decrease in
inventory levels.
From February 1995 through February 2000, Rite Aid spent $1.9 billion to
build, renovate or relocate its stores and $1.5 billion to acquire PCS. During
the same period, we acquired a total of 1,639 stores for aggregate
consideration of $2.1 billion. These expenditures substantially increased Rite
Aid's level of debt and placed a significant strain on its short term
liquidity position. The problems were exacerbated by the inability to complete
a public offering of equity securities to repay the $1.3 billion short-term
credit facility, which had been established to support the commercial paper
issuances used to acquire PCS and which was due in October 1999. In June 1999,
Rite Aid borrowed $300.0 million from one of its banks under a demand note
because it had issued the maximum amount of commercial paper that was
permitted under its credit facilities. In September 1999, Rite Aid informed
its banks that it anticipated being in default on various covenants under
certain of its credit facilities and in October 1999, Standard & Poor's and
Moody's downgraded Rite Aid's credit rating. Following these events, Rite Aid
lost access to the commercial paper market. On October 27, 1999, in connection
with the preferred stock investment by an affiliate of Leonard Green &
Partners, L.P., Rite Aid's banks agreed to
20
restructure its $2.3 billion of credit facilities and the $300.0 million
demand note. This resulted in an extension of the $1.3 billion PCS acquisition
credit facility (the "PCS credit facility"), the $1.0 billion credit facility
(the "RCF credit facility"), the $300.0 million demand note and certain other
indebtedness, but only until November 1, 2000. At November 27, 1999,
therefore, Rite Aid confronted liquidity issues on both a short and long term
basis.
After arriving in early December 1999, new management addressed Rite Aid's
immediate liquidity needs and stabilized its financial condition through a
series of refinancing transactions completed in June 2000. Since December
1999, Rite Aid has:
-- obtained consents from its various lenders and bondholders to
postpone the required filing dates under its debt agreements for the
third quarter and full year fiscal 2000 SEC reports until July 11,
2000;
-- entered into a new $1.0 billion senior secured credit facility that
matures in August 2002, including a $500.0 million term loan that
was used to refinance our $300.0 million receivables securitization
facility, pay transaction fees and provide funds for general
corporate purposes and a $500.0 million revolving credit facility;
-- obtained an extension of the maturity dates on the outstanding debt
under our PCS credit facility and our RCF credit facility until
August 2002;
-- exchanged $374.3 million of our outstanding notes due in December
2000 and 2001 for $374.3 million of our notes due in September 2002;
-- exchanged $284.8 million of our outstanding loans for 51.8 million
shares of Rite Aid common stock and $274.8 million of our
outstanding loans for an equivalent amount of secured exchange debt
due August 2002;
-- obtained the agreement of two financial institutions to purchase
$93.2 million of our notes due September 2002 when our 5.5% notes
mature in December 2000; and
-- exchanged $177.8 million in principal amount of our 5.25%
convertible subordinated notes due 2002 for 17.8 million shares of
common stock.
At July 11, 2000, Rite Aid continues to be highly leveraged and the
covenants of our new senior secured credit facility and our existing
facilities place constraints on our operations. However, as a result of the
actions described above, which are discussed in greater detail in the Fiscal
2000 10-K, we believe that at July 11, 2000 Rite Aid has the financial
flexibility and liquidity necessary to execute its long term business
strategy.
21
Debt Capitalization. The following table sets forth our debt capitalization
(in millions) at June 24, 2000, following the completion of the restructuring
transactions described above:
As of
June 24,
2000
--------
Secured Debt:
Senior facility(1).................................................. $ 500
PCS facility........................................................ 1,142
RCF facility........................................................ 730
10.5% secured notes due 2002(2)..................................... 374
Exchange debt....................................................... 275
Prudential note..................................................... 31
Other............................................................... 16
Lease Financing Obligations......................................... 1,074
Other Senior Debt:
5.5% notes due 2000................................................. 147
6.7% notes due 2001................................................. 28
6.0% notes due 2005................................................. 200
7.625% notes due 2005............................................... 200
7.125% notes due 2007............................................... 350
6.125% notes due 2008............................................... 150
6.0% Drs SM due 2003................................................ 200
6.875% senior debentures due 2013................................... 200
7.7% notes due 2027................................................. 300
6.875% debentures due 2028.......................................... 150
Subordinated Debt:
5.25% convertible subordinated notes due 2002(3).................... 650
------
Total Debt...................................................... $6,717
- --------
(1) Proceeds from the term loan portion of the senior facility were used to
repay the $300.0 million outstanding balance of our receivables
securitization facility, to pay approximately $66.4 million of expenses in
connection with the refinancing transactions and to provide $133.6 million
of incremental cash on our balance sheet. No borrowings under the
revolving credit portion of the senior facility were outstanding at June
24, 2000; however, $39.8 million of availability was being utilized to
support trade letters of credit. The receivables securitization facility
was an off-balance sheet liability and therefore was not included in the
company's balance sheet in prior periods.
(2) Outstanding amount of 10.5% secured notes due 2002 at June 24, 2000 does
not include $93.2 million of such notes which are held by a special
purpose subsidiary of the company and are subject to a forward purchase
commitment by certain financial institutions. The proceeds from the sale
of these notes will be used to retire an equivalent amount of the
remaining 5.5% notes due 2000 upon their maturity in December 2000. The
remaining 5.5% notes due 2000 will be retired with the company's general
corporate funds.
(3) Outstanding principal amount was reduced to $472.2 million with the
exchange offer for common stock consummated on June 26, 2000, pursuant to
which $177.8 million principal amount of these notes were exchanged for
common stock.
22
Recent Accounting Pronouncement
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 May 1999, the FASB delayed the implementation date for this statement by
one year. We expect to adopt SFAS No. 133 in 2002. The adoption of SFAS No.
133 will not have a material impact on our financial position on results of
operations.
Year 2000
On November 2, 1999, we reported that approximately 99% of our IT systems
had been remediated, tested and determined compliant and approximately 85% of
our non-IT systems and business partners had been remediated, tested and
determined compliant. We also reported that the Rite Aid Dispensing system had
passed independent testing in cooperation with National Health Information
Network. As of November 2, 1999, we had incurred approximately $8.0 million in
Year 2000 costs.
As of June 24, 2000, we had experienced no material issues or consequences
as a result of Year 2000 and have incurred approximately $8.2 million in Year
2000 costs.
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. The
company's major market risk exposure is changing interest rates. Increases in
interest rates would increase the company's interest expense. Since the end of
fiscal 1999, Rite Aid's primary risk exposure has not changed. The company
enters into debt obligations to support capital expenditures, acquisitions,
working capital needs and general corporate purposes. The company'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 February 26, 2000.
Fair Value
at
February 26,
2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ---------- -------- ------ ---------- ---------- ------------
(In thousands of dollars)
Long-term debt,
including Current
portion
Fixed rate............ $76,086 $29,879 $1,121,490 $200,678 $2,289 $1,553,816 $2,984,238 $1,959,252
Average Interest
Rate................. 6.43% 6.77% 7.46% 6.01% 11.86% 7.00%
Variable Rate......... -- -- $2,480,495 -- -- -- $2,480,495 $2,480,495
Average Interest
Rates................ -- -- 9.38% -- -- --
In June 2000, Rite Aid 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 Rite
Aid'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 $500.0 million of variable rate debt at 6.946% for
a two year period. As a result of these financing activities, Rite Aid's ratio
of variable rate exposure changed from 37.7% as of February 26, 2000 to 27.3%
as of July 10, 2000.
23
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 obligations on our outstanding indebtedness and if we cannot
borrow or obtain equity financing to satisfy those obligations, our business
and results of operations will be materially adversely affected. We cannot
assure you that any such borrowing or equity financing could be successfully
completed.
As of June 24, 2000, Rite Aid 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 $4.0 billion and exchange debt in the amount of
$274.8 million. In March 2000, all remaining commercial paper obligations were
repaid. The ratings on these credit facilities and obligations as of June 24,
2000 were as follows: the $1.0 billion RCF facility: B by Standard and Poor's
and B2 by Moody's; the $1 billion senior secured credit facility: BB- by
Standard & Poor's and Ba3 by Moody's; the $1.3 billion PCS facility: B by
Standard & Poor's and B2 by Moody's; the fixed-rate obligations: B- by
Standard & Poor's and Caa1 by Moody's; and the exchange debt is not rated yet.
The interest rates on the variable-rate borrowings are as follows: the $1.0
billion RCF revolving credit 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%.
Further downgrades of Rite Aid's credit ratings would not impact the rate on
the borrowings under the credit facilities. The interest rate on the RCF and
PCS credit facilities and the exchange debt is subject to a 0.50% per annum
increase if we have not received $500 million of net proceeds from asset sales
by November 1, 2000.
Changes in one month LIBOR affect Rite Aid's cost of borrowings because the
interest rate on Rite Aid's variable-rate obligations is based on LIBOR. If
the market rates of interest for one month LIBOR change by 10% (approximately
60 basis points) as compared to the LIBOR rate of 5.91% and 6.65% as of
February 26, 2000 and June 24, 2000, respectively, Rite Aid's annual interest
expense would change by approximately $14.9 million and $16.1 million,
respectively, based upon Rite Aid's variable-rate debt outstanding of
approximately $2.5 billion and $2.7 billion as of February 26, 2000 and June
24, 2000, respectively.
A change in interest rates generally does not impact future earnings and
cash flow for fixed-rate debt instruments. As fixed-rate debt matures,
however, and if additional debt is acquired to fund the debt repayment, future
earnings and cash flow may be impacted by changes in interest rates. This
impact would be realized in the periods subsequent to the periods when the
debt matures.
24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving our
financial reporting and other matters. Rite Aid is cooperating fully with the
SEC and the United States Attorney. Also, as previously discussed, Rite Aid's
audit committee engaged the law firm of Swidler Berlin Shereff Friedman LLP to
conduct an independent investigation of those matters. The results of Swidler
Berlin's investigation have been conveyed to the audit committee and to
management and were considered in connection with the preparation and
restatement of financial statements in this report and in the Fiscal 2000 10-
K.
The U.S. Department of Labor has commenced an investigation of matters
relating to Rite Aid's employee benefit plans, including its principal 401(k)
plan which permitted employees to purchase Rite Aid common stock. Purchases of
Rite Aid common stock under the plan were suspended in October 1999. Rite Aid
is cooperating fully with the Department of Labor.
These federal investigations are ongoing and we cannot predict their
outcomes. If Rite Aid were convicted of any crime, certain contracts and
licenses that are material to our operations may be revoked, which would have
a material adverse effect on our results of operation and financial condition.
In addition, substantial penalties, damages or other monetary remedies
assessed against Rite Aid could also have a material adverse effect on our
results of operations and financial condition.
Stockholder litigation
On March 12, 1999, Rite Aid announced that the preliminary estimate for
fully diluted earnings per share for the fourth quarter of fiscal 1999 would
be approximately $0.30 to $0.32, as compared to the then existing First Call
analysts' consensus estimates of $0.52 per share. After the March 12
announcement, several purported class action lawsuits were commenced in the
U.S. District Court for the Eastern District of Pennsylvania and one suit, not
a class action, alleging violations of Florida securities laws, was brought in
state court and removed to the U.S. District Court for the Northern District
of Florida. The defendants in these cases include Rite Aid and certain of its
former officers and directors, including Martin Grass, former chairman of the
board of directors and chief executive officer; Timothy Noonan, former interim
chief executive officer and a former director; Franklin Brown, former vice
chairman and a former director and Frank Bergonzi, former senior executive
vice president and former chief financial and accounting officer. The
plaintiffs in these suits allege that the defendants violated certain
provisions of the federal and state securities laws by, among other things,
failing to make prompt public disclosure of the matters mentioned in its March
12 announcement. The plaintiffs also allege that Rite Aid's financial
statements for fiscal 1997, 1998 and 1999 fraudulently misrepresented Rite
Aid's financial position and results of operations for those periods. The
plaintiffs, by their original and amended complaints, seek to recover damages
on behalf of all of the purchasers of Rite Aid common stock between May 1997
and October 1999. On April 18, 1999, the Court approved a stipulation among
counsel that, among other things, provided for consolidation of the class
action suits. The plaintiffs have the right until August 10, 2000 to amend the
complaints to include additional allegations of wrongdoing by the defendants.
In June 2000, Rite Aid moved to transfer the Florida action to the U.S.
District Court for the Eastern District of Pennsylvania. Rite Aid is unable to
predict the ultimate outcome of this litigation.
Since May 1999, various complaints have been filed in the U.S. District
Court for the Eastern District of Pennsylvania and in the Court of Chancery of
the state of Delaware, federal courts in Philadelphia, Pennsylvania and
Wilmington, Delaware, derivatively and on behalf of Rite Aid, against the same
officers named in the stockholder lawsuits discussed above and against certain
former and current directors of Rite Aid. The complaints allege essentially
the same wrongful acts as are alleged in the class action lawsuits. Some of
those complaints also allege that certain of the transactions discussed in the
Current Report on Form 8-K filed with the SEC by Rite Aid on February 9, 1999
constituted mismanagement, waste of corporate resources and breach of
fiduciary duty. The plaintiffs seek indemnity and contribution on behalf of
Rite Aid from the individual defendants. Rite Aid is unable to predict the
ultimate outcome of this litigation.
25
If any of these cases result in a substantial monetary judgment against Rite
Aid or is settled on unfavorable terms, Rite Aid's results of operations and
financial position could be materially adversely affected.
Drug pricing and reimbursement matters
Civil proceedings are continuing involving Rite Aid's pricing-related
practices for prescription drugs. On September 22, 1999, the Florida Attorney
General filed a complaint against Rite Aid in the Second District, Leon
County, alleging violations of the Florida Deceptive and Unfair Trade
Practices Act and the state RICO statute. Rite Aid no longer operates any
retail drugstores in Florida. In essence, Florida asserted that Rite Aid's
former practice of allowing its pharmacists the discretion to charge non-
uniform prices through the use of positive overrides for cash purchases of
prescription drugs was unlawful. Rite Aid discontinued its use of this policy
in June 1998 throughout its retail drugstores. On February 18, 2000, the
reviewing Florida state court dismissed with prejudice the Florida Attorney
General's complaint. On May 5, 2000, the same court denied Florida's motion to
rehear the case and affirmed the initial decision on the merits, but granted
Florida's motion to amend its complaint to raise allegations concerning other
pricing practices relating to discounts and generic drug price notices. On
July 5, 2000, Rite Aid filed a motion to dismiss the amended complaint.
The filing of the complaint by the Florida Attorney General, and Rite Aid's
press release issued in conjunction therewith, precipitated the filing of
purported federal class actions in Alabama and California and purported state
class actions in New Jersey, New York, Oregon, and Pennsylvania. All of the
class actions are based on facts essentially identical to those contained in
the Florida complaint and none specify damages. Rite Aid 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. Rite Aid filed motions to dismiss each of the uncertified class
action complaints for failure to state a claim for which relief could be
granted. Rite Aid's arguments have prevailed in each of the cases in which a
court decision has been rendered thus far. On December 27, 1999, the United
States District Court for the Northern District of Alabama dismissed the
federal RICO claims against Rite Aid 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 Rite Aid's motion to
dismiss the purported class action there with prejudice. On June 12, 2000, the
United States District Court for the Central District of California dismissed
that case and on June 27, 2000, a New Jersey state court dismissed that class
action there. Motions to dismiss the state class actions in New York and
Pennsylvania are currently pending.
Rite Aid 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, Rite Aid 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 Rite Aid 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.
Rite Aid has also recently been notified that it 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. We are supplying similar information with
respect to these matters to the Department of Justice. Rite Aid 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. Rite Aid also believes that its existing policies and procedures
fully comply with the requirement of applicable law and intends to fully
cooperate with these investigations. We cannot, however, predict at this time
their outcomes at this time.
If any of these cases result in a substantial monetary judgment against Rite
Aid or is settled on unfavorable terms, Rite Aid's results of operations and
financial position could be materially adversely affected.
PCS legal proceedings
In November 1999, PCS received a subpoena from the Office of Inspector
General of the Department of Health and Human Services ("OIG"). The subpoena
requests general information about PCS's formulary
26
programs and rebate practices and makes no allegation of any wrongdoing by
PCS. PCS is fully cooperating with the inquiry and believes that no regulatory
action will be taken by OIG against PCS that will have a material adverse
effect on PCS's business. Rite Aid cannot predict the outcome of this matter.
In January 1998, a purported class action was brought against PCS by a
participant in a plan managed by PCS in the federal district court in New
Jersey. The plaintiff alleged that PCS is an ERISA fiduciary and that, as
such, breached its fiduciary obligations under ERISA and that PCS received
improper kickbacks and rebates from certain drug manufacturers. PCS believes
that the plaintiff's action is without merit and is vigorously defending this
action. Rite Aid cannot predict the outcome of this action.
If any of these cases result in a substantial monetary judgment against Rite
Aid, Rite Aid's results of operations and financial position could be
materially adversely affected.
Other
In addition, Rite Aid 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 Rite Aid's financial condition, cash flow or results of
operations if decided adversely. Rite Aid, regardless of insurance coverage,
does not believe that it has a material, estimable, and probable liability in
regard to these claims and lawsuits as of November 27, 1999 or July 11, 2000.
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
Not applicable.
ITEM 5. Other Information
Nothing to report.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
3.1 Restated Certificate of Incorporation dated Exhibit 3(i) to Form 8-K
December 12, 1996 filed on November 2,
1999
3.2 Certificate of Amendment to the Restated Exhibit 3(ii) to Form 8-
Certificate of Incorporation dated October K filed on November 2,
25, 1999 1999
4.2 Term Loan Agreement, dated as of October Exhibit 10.2 to Form 8-K
27, 1999, by and among Rite Aid filed on November 2,
Corporation, the banks from time to time 1999
parties thereto and Morgan Trust Company of
New York, as Administrative Agent
4.3 Amended and Restated Credit Agreement, Exhibit 10.3 to Form 8-K
dated as of October 27, 1999, by and among filed on November 2,
Rite Aid Corporation, the banks from time 1999
to time parties thereto and Morgan Guaranty
Trust company of New York, as Agent
27
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
4.4 Pledge Agreement, dated as of October 25, Exhibit 10.4 to Form 8-K
1999, by and between Rite Aid Corporation filed on November 2,
and Morgan Guaranty Trust Company of New 1999
York, as Agent
4.5 PCS Junior Pledge Agreement, dated as of Exhibit 10.5 to Form 8-K
October 19, 1999, by and between Rite Aid filed on November 2,
Corporation and Morgan Guaranty Trust 1999
Company of New York, as Agent
4.11 Term Loan Agreement dated as of October 27, Exhibit 4.6 to Form 8-K
1999 among Rite Aid Corporation, the Banks filed on January 18,
party thereto and Morgan Guaranty Trust 2000
Company of New York, as Administrative
Agent
4.15 Amendment No. 2 dated as of October 25, Exhibit 4.10 to Form 8-K
1999 to Guaranty dated March 19, 1998 (as filed on January 18,
amended by Amendment No. 1, dated as of 2000
June 22, 1998) from Rite Aid Corporation to
RAC Leasing LLC
4.17 Amendment No. 2 dated as of October 25, Exhibit 4.12 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of March 19, 1998 (as 2000
amended by Amendment No. 1, dated as of
June 22, 1998) between RAC Leasing LLC and
Rite Aid Realty Corp.
4.23 Amendment No. 1 dated as of October 25, Exhibit 4.18 to Form 8-K
1999 to Guaranty dated as of May 30, 1997 filed on January 18,
from Rite Aid Corporation to Sumotomo Bank 2000
Leasing and Finance, Inc.
4.24 Amendment No. 4, dated as of October 25, Exhibit 4.19 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of May 30, 1997, as 2000
amended by Amendment No. 1, dated as of
March 11, 1998, and as further amended by
Amendment No. 2, dated as of June 22, 1998,
and as further amended by Amendment No. 3
dated as of May 26, 1999 between Sumitomo
Bank Leasing and Finance, Inc. and Rite Aid
Realty Corp.
4.32 Amendment No. 1 dated as of October 25, Exhibit 4.27 to Form 8-K
1999 to Note Agreement dated as of filed on January 18,
September 30, 1996 among Finco, Inc., Rite 2000
Aid Corporation, The Prudential Insurance
Company of America and PruCo Life Insurance
Company and Amendment No. 1 dated as of
October 25, 1999 to Guaranty Agreement
dated as of September 30, 1996 among Finco,
Inc., Rite Aid Corporation, The Prudential
Insurance Company of America and PruCo Life
Insurance Company
10.6 Registration Rights Agreement, dated as of Exhibit 4.1 to Form 8-K
October 27, 1999, by and between Rite Aid filed on November 2,
Corporation and Green Equity Investors III, 1999
L.P.
10.7 Registration Rights Agreement, dated as of Exhibit 4.2 to Form 8-K
October 27, 1999, by and between Rite Aid filed on November 2,
Corporation and J.P. Morgan Ventures 1999
Corporation
10.8 Warrant to purchase Common Stock, par value Exhibit 4.3 to Form 8-K
$1.00 per share, of Rite aid Corporation, filed on November 2,
dated October 27, 1999, issued to J.P. 1999.
Morgan Ventures Corporation
28
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
10.9 Commitment Letter, dated October 18, 1999, Exhibit 10.1 to Form 8-K
by and between Rite Aid Corporation and filed on November 2,
Green Equity Investors III, L.P. 1999
11 Statements re Computation of Per Share Not applicable
Earnings
27 Financial Data Schedules (EDGAR Filing Only) Included herein
(b) Reports on Form 8-K
(1) Rite Aid Corporation filed a Current Report on Form 8-K on October
12, 1999 disclosing under Item 5 a press release describing the Company's
preliminary second quarter sales and loss and its planned restatement of
historical financial information and setting forth as an exhibit under Item
7 a copy of its press release.
(2) Rite Aid Corporation filed a Current Report on Form 8-K on November
2, 1999 disclosing under Item 5 its issuance and sale to Green Equity
Investors III, L.P. 3,000,000 shares of Rite Aid's 8% Series A Cumulative
Pay-In-Kind Preferred Stock, par value $1.00 per share at a purchase price
of $100 per share, for an aggregate purchase price of $300,000,000 and
setting forth under Item 7 copies of the related agreements.
(3) Rite Aid Corporation filed a Current Report on Form 8-K on November
19, 1999, which was amended on December 6, 1999, disclosing under Item 4
the resignation of KPMG LLP as the Company's auditors and setting forth
exhibits under Item 7.
29
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.
RITE AID CORPORATION
Date: July 11, 2000 /s/ Robert G. Miller
By: _________________________________
Robert G. Miller
Chairman and Chief Executive
Officer
Date: July 11, 2000 /s/ John T. Standley
___________________________________
John T. Standley
Executive Vice President and
Chief Financial Officer
30