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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 June 2, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From To
--------------- ------------------
Commission File Number 1-5742
RITE AID CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-1614034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Hunter Lane, Camp Hill, Pennsylvania 17011
(Address of principal executive offices) (Zip Code)
(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 493,346,010 shares of its $1.00 par value common stock
outstanding as of June 30, 2001.
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-1-
RITE AID CORPORATION
TABLE OF CONTENTS
Page
Cautionary Statement Regarding Forward Looking Statements................. 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 2, 2001 and March 3, 2001. 4
Condensed Consolidated Statements of Operations for the Thirteen Week
Periods Ended June 2, 2001 and May 27, 2000............................... 5
Condensed Consolidated Statement of Stockholders' Deficit for the Thirteen 6
Week Period Ended June 2, 2001............................................
Condensed Consolidated Statements of Cash Flows for the Thirteen Week
Periods Ended June 2, 2001 and May 27, 2000............................... 7
Notes to Condensed Consolidated Financial Statements....................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................. 30
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................................... 31
ITEM 2. Changes in Securities and Use of Proceeds.................................. 31
ITEM 3. Defaults Upon Senior Securities............................................ 32
ITEM 4. Submission of Matters to a Vote of Security Holders........................ 32
ITEM 5. Other Information.......................................................... 32
ITEM 6. Exhibits and Reports on Form 8-K........................................... 33
-2-
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are identified by terms and phrases such as "anticipate," "believe,"
"intend," "estimate," "expect," "continue," "should," "could," "may," "plan,"
"project," "predict," "will" and similar expressions and include references to
assumptions and relate to our future prospects, developments and business
strategies.
Factors that could cause actual results to differ materially from those
expressed or implied in such forward-looking statements include, but are not
limited to:
o our high level of indebtedness;
o our ability to make interest and principal payments on our debt and
satisfy the other covenants contained in our credit facilities and other
debt agreements;
o our ability to improve the operating performance of our existing stores,
and, in particular, our new and relocated stores in accordance with our
management's long term strategy;
o the outcomes of pending lawsuits and governmental investigations, both
civil and criminal, involving our financial reporting and other matters;
o competitive pricing pressures, continued consolidation of the drugstore
industry ;
o third-party prescription reimbursement levels and regulatory changes
governing pharmacy practices;
o general economic conditions, inflation and interest rate movements;
o merchandise supply constraints or disruptions;
o access to capital; and
o our ability to further develop, implement and maintain reliable and
adequate internal accounting systems and controls.
We undertake no obligation to revise the forward-looking statements included
in this report to reflect any future events or circumstances. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences are discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Our Future Results" included in our
Annual Report on Form 10-K for the fiscal year ended March 3, 2001 ("the Fiscal
2001 10-K"), which was filed with the Securities and Exchange Commission ("SEC")
on May 21, 2001 and is available on the SEC's website at www.sec.gov.
-3-
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(unaudited)
June 2, 2001 March 3, 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 80,078 $ 92,290
Accounts receivable, net ............................... 544,100 503,527
Inventories, net ....................................... 2,497,829 2,444,525
Investment in AdvancePCS ............................... -- 491,198
Prepaid expenses and other current assets .............. 82,437 85,292
----------- -----------
Total current assets ............................... 3,204,444 3,616,832
PROPERTY, PLANT AND EQUIPMENT, NET ......................... 2,992,891 3,041,008
GOODWILL AND OTHER INTANGIBLES, NET ........................ 1,042,969 1,067,339
OTHER ASSETS ............................................... 161,208 188,732
----------- -----------
Total assets ....................................... $ 7,401,512 $ 7,913,911
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt
and lease financing obligations........................ $ 40,521 $ 36,956
Accounts payable ....................................... 1,034,330 896,390
Sales and other taxes payable .......................... 55,813 31,562
Accrued salaries, wages and other current liabilities .. 665,455 696,047
----------- -----------
Total current liabilities .......................... 1,796,119 1,660,955
CONVERTIBLE SUBORDINATED NOTES ............................. 152,016 357,324
LONG-TERM DEBT, LESS CURRENT MATURITIES .................... 3,717,511 4,428,871
LEASE FINANCING OBLIGATIONS, LESS CURRENT MATURITIES ....... 1,061,880 1,071,397
OTHER NONCURRENT LIABILITIES ............................... 756,270 730,342
----------- -----------
Total liabilities .................................. 7,483,796 8,248,889
COMMITMENTS AND CONTINGENCIES .............................. -- --
REDEEMABLE PREFERRED STOCK ................................. 19,457 19,457
STOCKHOLDERS' (DEFICIT):
PREFERRED STOCK, par value $1 per share ................ 340,654 333,974
COMMON STOCK, par value $1 per share ................... 403,762 348,055
ADDITIONAL PAID-IN CAPITAL ............................. 2,509,178 2,065,301
ACCUMULATED DEFICIT .................................... (3,383,058) (3,171,956)
STOCK-BASED AND DEFERRED COMPENSATION .................. 59,674 19,782
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME .......... (31,951) 50,409
----------- -----------
Total stockholders' (deficit) ...................... (101,741) (354,435)
----------- -----------
Total liabilities and stockholders' (deficit) ...... $ 7,401,512 $ 7,913,911
=========== ===========
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 Week Period
Ended
-----
June 2, 2001 May 27, 2000
------------ ------------
REVENUES ................................................ $ 3,710,133 $ 3,442,186
COSTS AND EXPENSES:
Costs of goods sold, including occupancy costs ........ 2,840,740 2,634,453
Selling, general and administrative expenses .......... 858,049 851,883
Goodwill amortization ................................. 5,343 6,074
Store closing and impairment charges (credits) ........ (364) 16,145
Interest expense ...................................... 128,689 171,375
Loss on debt conversions and modifications, net ....... 132,713 --
Share of loss from equity investment .................. 5,883 11,574
(Gain) loss on sale of assets and investments, net .... (49,818) 9,676
----------- -----------
3,921,235 3,701,180
----------- -----------
Loss from continuing operations before income taxes . (211,102) (258,994)
INCOME TAX EXPENSE ...................................... -- 144,382
----------- -----------
Loss from continuing operations ..................... (211,102) (403,376)
DISCONTINUED OPERATIONS:
Income from discontinued operations (including income
tax expense of $0 and $13,846)...................... -- 11,335
Estimated loss on disposal of the PBM segment
(including income tax expense of $0 and $22,750).... -- (303,330)
----------- -----------
Net loss ............................................ $ (211,102) $ (695,371)
=========== ===========
BASIC AND DILUTED (LOSS) PER SHARE:
Loss from continuing operations ....................... $ (0.56) $ (1.57)
Loss from discontinued operations ..................... -- (1.12)
----------- -----------
Net loss per share .................................... $ (0.56) $ (2.69)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
-5-
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)
For the Thirteen Week Period Ended June 2, 2001
(Dollars and share information in thousands)
(unaudited)
Stock-Based Accumulated
Additional And Other
Preferred Stock Common Stock Paid-in Accumulated Deferred Comprehensive
Shares Class B Shares Issued Capital Deficit Compensation Income/(Loss) Total
---------------------------------------------------------------------------------------------------------
BALANCE MARCH 3, 2001 3,340 $333,974 348,055 $348,055 $2,065,301 $(3,171,956) $ 19,782 $ 50,409 $(354,435)
Net loss (211,102) (211,102)
Other comprehensive loss:
Sale of investment in
AdvancePCS (51,031) (51,031)
Cash flow hedge
transition liability
adjustment (29,010) (29,010)
Cash flow hedge market
value adjustment (2,319) (2,319)
--------
Comprehensive loss (293,462)
Bond conversions 55,736 55,736 450,393 506,129
Stock-based and deferred
compensation 39,828 39,828
Stock forfeitures (29) (29) (53) 64 (18)
Dividends on preferred
stock 67 6,680 (6,680) -
Increase resulting from 217 217
sale of stock by equity
method investee
---------------------------------------------------------------------------------------------------------
BALANCE JUNE 2, 2001 3,407 $340,654 403,762 $403,762 $2,509,178 $(3,383,058) $ 59,674 $(31,951) $(101,741)
=========================================================================================================
See accompanying notes to condensed consolidated financial statements.
-6-
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Thirteen Week Period Ended
--------------------------
June 2, 2001 May 27, 2000
------------ ------------
OPERATING ACTIVITIES:
Net loss .................................. $(211,102) $(695,371)
Income from discontinued operations ....... -- (11,335)
Loss on disposal of discontinued operations -- 303,330
--------- ---------
Loss from continuing operations ........... (211,102) (403,376)
Depreciation and amortization ............. 90,841 91,684
Stock-based compensation .................. 39,828 2,000
Store closing and impairment charges
(credits)................................. (364) 16,145
Loss on debt conversions and
modifications, net........................ 132,713 --
(Gain) loss on sale of assets and
investments, net.......................... (49,818) 9,676
Changes in operating assets and liabilities 43,644 274,414
--------- ---------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATIONS .................................... 45,742 (9,457)
--------- ---------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS .. -- 37,149
--------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment................................. (23,100) (18,862)
Proceeds from the repayment/sale of
AdvancePCS securities..................... 484,214 --
Intangible assets acquired ................ (3,700) (1,131)
Proceeds from dispositions ................ 6,300 --
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES ................................... 463,714 (19,993)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt ...... (490,180) (70,407)
Net (payments) of commercial paper
borrowings................................ -- (192,000)
Net change in bank credit facilities ...... (31,488) 192,000
Proceeds from issuance of stock ........... -- 180
Other financing activities, net ........... -- (2,312)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ......... (521,668) (72,539)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ......... (12,212) (64,840)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ....................................... 92,290 179,757
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .... $ 80,078 $ 114,917
========= =========
SUPPLEMENTARY CASH FLOW DATA:
Cash paid for interest (net of capitalized
amounts of $205 and $719)................. $ 127,305 $ 115,300
========= =========
Cash refunds of income taxes .............. $ (5,834) $ (86,767)
========= =========
Conversion of debt to common stock ........ $ 376,193 $ --
========= =========
See accompanying notes to condensed consolidated financial statements
-7-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For
the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
annual financial statements. The accompanying financial information reflects all
adjustments (consisting primarily of normal recurring adjustments except as
described in these notes) which are, in the opinion of management, necessary for
a fair presentation of the results for the interim periods. The results of
operations for the thirteen week period ended June 2, 2001 are not necessarily
indicative of the results to be expected for the full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
fiscal 2001 Annual Report on Form 10-K filed with the SEC.
Certain reclassifications have been made to prior years' amounts to conform
to current year classifications.
2. Loss Per Share
Following is a summary of the components of the numerator and denominator of
the basic loss per share computation:
Thirteen
Week Period Ended
---------------------------------
June 2, 2001 May 27, 2000
---------------- -----------------
Numerator for earnings per share:
Loss from continuing operations........ $ (211,102) $ (403,376)
Cumulative preferred stock dividends... (6,680) (5,961)
---------------- -----------------
Net loss from continuing operations
attributable to common stockholders. (217,782) (409,337)
Net income from discontinued operations,
net of tax.......................... -- 11,335
Loss on disposal, net of tax........... -- (303,330)
---------------- -----------------
Net loss attributable to common
stockholders ........................ $ (217,782) $ (701,332)
================ =================
Denominator:
Basic weighted average shares.......... 386,996 260,076
================ =================
Fully diluted loss per share is not presented as the Company incurred losses
for the thirteen week periods ended June 2, 2001 and May 27, 2000, as the amount
would be antidilutive. At June 2, 2001, an aggregate of 120,990 potential common
shares related to stock options, convertible notes and preferred stock and
warrants, have been excluded from the computation of diluted earnings per share.
3. Business Segments
The Company operated in a single business segment during the thirteen
week period ended June 2, 2001, the Retail Drug segment. This segment consists
of the operation of retail drugstores across the United States. The drugstores'
primary business is pharmacy services, with prescription drugs accounting for
approximately 61.6% percent and 60.1% percent of total segment sales for the
thirteen week periods ended June 2, 2001 and May 27, 2000, respectively. In
addition, the Company's drugstores offer a full selection of health and personal
care products,
-8-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
3. Business Segments - (continued)
seasonal merchandise and a large private label product line.
The Company operated in two business segments in the thirteen week period
ended May 27, 2000, the Retail Drug segment and the PBM segment. Through its PBM
segment, which consisted primarily of PCS Health Systems, Inc. ("PCS"), the
Company offered pharmacy benefit management, mail-order pharmacy services,
marketing prescription plans and other managed health care services to
employers, health plans and their members and government-sponsored employee
benefit programs. The Company has sold its PBM segment to Advance Paradigm Inc.
(now known as "AdvancePCS"). As a result, the PBM segment has been reclassified
and is accounted for as a discontinued operation in the accompanying financial
statements. The Company's continuing operations consist solely of the Retail
Drug segment.
4. Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary, PCS, to
AdvancePCS. The proceeds from the sale of PCS consisted of $710,557 in cash,
$200,000 in principal amount of AdvancePCS's unsecured 11% senior subordinated
notes and equity securities of AdvancePCS.
During March 2001, the Company sold the AdvancePCS equity securities for
$284,214 resulting in a gain of $53,214, which was recognized during the
thirteen week period ended June 2, 2001. The recognition resulted in a reduction
of other comprehensive income of $51,031, which represented the appreciation in
the market value of the equity securities from date of acquisition of the
securities through March 3, 2001. Additionally, AdvancePCS repurchased the
unsecured 11% senior subordinated notes for $200,000 plus accrued interest.
PCS is reported as a discontinued operation for the thirteen week period
ended May 27, 2000, and the operating results of PCS are reflected separately
from the results of continuing operations.
As a result of the sale, the Company recorded an increase to the tax
valuation allowance and income tax expense of $146,917 in the thirteen week
period ended May 27, 2000.
-9-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
5. Store Closing and Impairment Charges
Store closing and impairment charges (credits) consist of:
Thirteen
-------------------------------
Week Period Ended
June 2, 2001 May 27, 2000
--------------- ---------------
Impairment charges........................ $ 7,893 $ 8,169
Store lease exit charges (credits)........ (8,568) 7,976
Impairment of other assets................ 311 --
--------------- ---------------
$ (364) $ 16,145
=============== ===============
Impairment Charges
Impairment charges include non-cash charges of $7,893 and $8,169 for the
thirteen week periods ended June 2, 2001 and May 27, 2000, respectively, for the
impairment of long-lived assets (including allocable goodwill) at 17 and 42
stores, respectively. These amounts include the write-down of long-lived assets
at stores that were assessed for impairment because of management's intention to
relocate or close the store or because of changes in circumstances that indicate
the carrying value of the asset may not be recoverable.
Store Lease Exit Charges (Credits)
Costs incurred to close a store, which principally consist of lease
termination costs, are recorded at the time management commits to closing the
store, which is the date that the closure is formally approved by senior
management, or in the case of a store to be relocated, the date the new property
is leased or purchased. The Company calculates its liability for closed stores
on a store-by-store basis. The calculation includes the future minimum lease
payments and related ancillary costs from the date of closure to the end of the
remaining lease term, net of estimated cost recoveries that may be achieved
through subletting properties or through favorable lease terminations. This
liability is discounted using a risk-free rate of interest. The Company
evaluates these assumptions each quarter and adjusts the liability accordingly.
During the thirteen week periods ended June 2, 2001 and May 27, 2000, the
Company recorded a provision for 7 and 18 stores, respectively, that were
designated for closure. The effect of lease terminations and changes in
assumptions in interest rates during the thirteen week period ended June 2,
2001, had a positive impact that exceeded the additional provision due to low
closure levels and resulted in an expense credit from closed store activity.
-10-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
5. Store Closing and Impairment Charges (continued)
The reserve for store lease exit costs includes the following activity:
Thirteen
---------------------------------
Week Period Ended
June 2, 2001 May 27, 2000
---------------- ----------------
Balance - Beginning of Period.............. $ 233,008 $ 212,812
Provision for present value of
noncancellable lease payments of
stores designated to be closed......... 3,091 19,357
Changes in assumptions about future
sublease income, terminations, and
changes in interest rates.............. (8,144) (7,035)
Reversals of reserves for stores that
management has determined will
remain open............................ (3,515) (4,346)
Interest accretion..................... 2,333 2,969
Cash payments, net of sublease income. (9,812) (10,051)
---------------- ----------------
Balance - End of Period.................... $ 216,961 $ 213,706
================ ================
-11-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
6. Indebtedness, Credit Agreements and Lease Financing Obligations
Following is a summary of indebtedness and lease financing obligations at
June 2, 2001 and March 3, 2001:
June 2, 2001 March 3, 2001
-------------- ----------------
6.70% notes due 2001............................ $ 7,342 $ 7,342
5.25% convertible subordinated notes due 2002... 152,016 357,324
Senior Facility................................. 626,000 682,000
Revolving Credit facility due 2002 (amended and
restated) ("RCF").............................. 700,268 730,268
Term loan due 2002 (amended and restated)
("PCS") ....................................... 148,883 591,391
Exchange Debt................................... 169,530 216,126
10.50% notes due 2002........................... 411,500 467,500
6.00% dealer remarketable securities due 2003... 107,765 187,650
6.00% fixed-rate senior notes due 2005.......... 194,500 194,500
7.625% senior notes due 2005.................... 198,000 198,000
7.125% notes due 2007........................... 350,000 350,000
6.125% fixed-rate senior notes due 2008......... 150,000 150,000
6.875% senior debentures due 2013............... 200,000 200,000
8.00% to 10.375% industrial development bonds due
through 2009............................... 4,740 4,740
7.70% notes due 2027............................ 300,000 300,000
6.875% fixed-rate senior notes due 2028......... 150,000 150,000
Lease financing obligations..................... 1,093,884 1,100,000
Other........................................... 7,500 7,707
-------------- ----------------
4,971,928 5,894,548
Short-term debt, current maturities of long-term
debt and lease financing obligations........... (40,521) (36,956)
-------------- ----------------
Long-term debt and lease financing obligations,
less current maturities........................ $ 4,931,407 $ 5,857,592
============== ================
On June 27, 2001, the Company completed a refinancing which significantly
altered the capital structure. See Note 9 for details.
The Company completed the following debt for equity exchanges during the
thirteen week period ended June 2, 2001:
Carrying Additional
Amount Common Paid-In Gain
Debt Exchanged Exchanged Stock Capital (Loss)
------------- -------------- -------------- ---------------
PCS facility................... $ 5,000 $ 715 $ 5,076 $ (791)
RCF facility................... 30,000 4,347 30,115 (4,462)
5.25% convertible subordinated
notes......................... 205,308 29,750 307,686 (133,437)
6.00% dealer remarketable
securities.................... 79,885 12,382 55,633 11,427
10.50% notes due 2002.......... 56,000 8,542 51,883 (5,450)
------------- -------------- -------------- ---------------
$ 376,193 $ 55,736 $ 450,393 $ (132,713)
============= ============== ============== ===============
In March 2001, the Company sold its investment in AdvancePCS. Proceeds
received from the sale were used to
-12-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
6. Indebtedness, Credit Agreements and Lease Financing Obligations (continued)
pay down $437,508 of borrowings under the PCS loan, and $46,596 of borrowings
under the Exchange Debt.
In June 2000, the Company entered into an interest rate swap contract that
fixes the LIBOR component of $500,000 of the Company's variable rate debt at
7.083% for a two-year period. In July 2000, the Company entered into an
additional interest rate swap that fixes the LIBOR component of an additional
$500,000 of variable rate debt at 6.946% for a two-year period.
On March 4, 2001, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138. In connection with the adoption of the
new statement, the Company recorded $29,010 in Other Comprehensive Income
("OCI") as a cumulative change in accounting for derivatives designated as cash
flow type hedges prior to adopting SFAS 133. The Company enters into interest
rate swap agreements to hedge the exposure to increasing rates with respect to
its variable rate debt. The differential to be paid or received as a result of
these swap agreements is accrued as interest rates change and recognized as an
adjustment to interest expense. These interest rate swaps are accounted for as
cash flow hedges. Therefore, the effective portion of the change in fair value
of the interest rate swaps is recorded within OCI. Hedge ineffectiveness is
recorded as a component of net income. As of June 2, 2001, the market value of
these swaps is $31,945, which represents the amount that the Company would have
to pay the counter party to terminate these contracts as of that date. This
balance is included in other non-current liabilities on the accompanying balance
sheet. The Company has recorded a charge to interest expense of $616, which
represents the amount of the swaps' ineffectiveness. The remaining offset to the
hedge liability is included in other comprehensive income. Treatment of these
interest rate swaps as cash flow hedges is based on management's best
interpretation of SFAS No. 133. Certain issues currently under consideration by
the Derivatives Implementation Group ("DIG") may make it more difficult for the
Company's interest rate swaps to qualify for hedge accounting. If the Company's
swaps do not qualify for hedge accounting, changes in the fair value of these
interest rate swaps will be recorded as a component of net income.
-13-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
7. Stockholders' Equity
The Company issued 3,000 shares of Series B cumulative pay-in-kind preferred
at $100 per share, which is the liquidation preference The Series B Preferred
Stock is convertible into shares of the Company's common stock at a conversion
price of $5.50 per share.
In November 2000, the Company reduced the exercise price of approximately
16,684 stock options issued after December 4, 1999 to $2.75 per share, which
represents fair market value of a share of common stock on the date of the
repricing. In connection with the repricing, the Company recognizes compensation
expense for these options using variable plan accounting. Under variable plan
accounting, the Company recognizes compensation expense over the option vesting
period. In addition, subsequent changes in the market value of the Company's
common stock during the option period, or until exercised, will generate changes
in the compensation expense recognized on the repriced options. The Company
recognized expense of $36,903 during the thirteen week period ended June 2, 2001
related to the repriced options.
The stock-based and deferred compensation component of stockholders' equity
is comprised of $73,623 related to the repriced options offset by $13,949 of
deferred compensation.
On June 15 2001, in connection with the granting of certain restricted
shares of common stock, the Company issued approximately $5,500 of loans to plan
participants, including officers, in order to cover the participants' federal
and state withholding taxes. The loans bear interest at 4.25% per annum and are
due and payable upon the earlier of June 15, 2002 or the date the participant
sells the underlying shares of common stock.
8. Commitments and Contingencies
The Company is party to numerous legal proceedings, as described below.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving the Company's
financial reporting and other matters. Management is cooperating fully with the
SEC and the United States Attorney. Settlement discussions have begun with the
United States Attorney for the Middle District of Pennsylvania. The United
States Attorney has proposed that the government would not institute any
criminal proceeding against the Company if the Company enters into a consent
judgement providing for a civil penalty payable over a period of years. The
amount of the civil penalty has not been agreed to and there can be no assurance
that a settlement will be reached or that the amount of such penalty will not
have a material adverse effect on the Company's result of operations, financial
condition or cash flows.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including the Company's
principal 401(k) plan, which permitted employees to purchase the Company's
common stock. Purchases of the Company's common stock under the plan were
suspended in October 1999. In January 2001, the Company appointed an independent
trustee to represent the interests of these plans in relation to the Company and
to investigate possible claims the plans may have against the Company. Both the
independent trustee and the Department of Labor have asserted that the plans may
have claims against the Company. The investigations, with which the Company is
cooperating fully, are ongoing and their outcomes cannot be predicted. In
addition, a purported class action lawsuit on behalf of the plans and their
participants has been filed by a participant in the plans in the United States
District Court for the Eastern District of Pennsylvania.
-14-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Commitments and Contingencies (continued)
These investigations and settlement discussions are ongoing and their
outcome cannot be predicted. If the Company were convicted of any crime, certain
licenses and government contracts such as Medicaid plan reimbursement agreements
that are material to operations may be revoked, which would have a material
adverse effect on the Company's results of operations, financial condition or
cash flow. In addition, substantial penalties, damages or other monetary
remedies assessed against the Company, including a settlement, could also have a
material adverse effect on the Company's results of operation's, financial
condition or cash flows.
Stockholder litigation
The Company, certain directors, its former chief executive officer Martin
Grass, its former president Timothy Noonan, its former chief financial officer
Frank Bergonzi, and its former auditor KPMG LLP, have been sued in a number of
actions, most of which purport to be class actions, brought on behalf of
stockholders who purchased the Company's securities on the open market between
May 2, 1997 and November 10, 1999. Most of the complaints asserted claims under
Sections 10 and 20 of the Securities Exchange Act of 1934, based upon the
allegation that the Company's financial statements for fiscal 1997, fiscal 1998
and fiscal 1999 fraudulently misrepresented the Company's financial position and
results of operation for those periods. All of these cases have been
consolidated in the U.S. District Court for the Eastern District of
Pennsylvania. On November 9, 2000, the Company announced that it had reached an
agreement to settle the consolidated securities class action lawsuits pending
against us in the U.S. District Court for the Eastern District of Pennsylvania
and the derivative lawsuits pending there and in the Delaware Court of Chancery.
Under the agreement, which has been submitted to the U.S. District Court for the
Eastern District of Pennsylvania for approval, the Company will pay $45,000 in
cash, which will be fully funded by the Company's officers' and directors'
liability insurance, and issue shares of common stock in 2002. The shares will
be valued over a 10 day trading period in January 2002. If the value determined
is at least $7.75 per share, the Company will issue 20,000 shares. If the value
determined is less than $7.75 per share, the Company has the option to deliver
any combination of common stock, cash and short-term notes, with a total value
of $155,000. As additional consideration for the settlement, the Company has
assigned to the plaintiffs all of the Company's claims against the above named
executives and KPMG LLP. Several members of the class have elected to "opt-out"
of the class and, as a result, if the settlement is approved by the court, they
will be free to individually pursue their claims. Management believes that their
claims, individually and in the aggregate, are not material. On June 8, 2001,
the court issued a ruling indicating that it was prepared to approve the
settlement if certain technical changes were made in the order that the
plaintiffs and settling defendants requested be issued by the court. The Company
and the plaintiffs have modified the requested order and resubmitted it for
court approval. Management anticipates that the nonsettling defendants will
appeal any approved order. The outcome of any such appeal cannot be predicted.
If the settlement does not become final, this litigation could result in a
material adverse effect on the Company's results of operations, financial
condition or cash flows.
A purported class action has been instituted by a stockholder against the
Company in Delaware state court on behalf of stockholders who purchased shares
of our common stock prior to May 2, 1997, and who continued to hold them after
November 10, 1999, alleging claims similar to the claims alleged in the
consolidated securities class action lawsuits described above. The amount of
damages sought was not specified and may be material. The Company has filed a
motion to dismiss this claim which is pending before the court. These claims are
ongoing and their outcome cannot be predicted. An unfavorable outcome in this
litigation could result in a material adverse effect on the Company's results of
operations, financial condition or cash flows.
-15-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Commitments and Contingencies (continued)
Drug pricing and reimbursement matters
On October 5, 2000, the Company settled, for an immaterial amount, and
without admitting any violation of the law, the lawsuit filed by the Florida
Attorney General alleging that the Company's non-uniform pricing policy for cash
prescription purchases was unlawful under Florida law. The filing of the
complaint by the Florida Attorney General, and the Company's press release
issued in conjunction therewith, precipitated an investigation by the New Jersey
Attorney General which is ongoing and the filing of a purported federal class
action in California and several purported state class actions, all of which
(other than those pending in New York that were filed on October 5, 1999 and
those pending in California that were filed on January 3, 2000) have been
dismissed. A motion to dismiss the action in New York is currently pending and
the plaintiffs in the California action have agreed to a voluntary dismissal of
their complaint. On May 30, 2001, a complaint filed in New Jersey in which the
plaintiff made a similar allegation and which the trial court dismissed for
failing to state a claim upon which relief could be based was reinstated by the
appellate court. Management believes that the remaining lawsuits are without
merit under applicable state consumer protection laws. As a result, the Company
intends to continue to vigorously defend against them and does not anticipate
that if fully adjudicated, they will result in an award of damages. However,
such outcomes cannot be assured and a ruling against the Company could have a
material adverse effect on the Company's results of operations, financial
condition, or cash flows.
The Company is being investigated by multiple state attorneys general for
its reimbursement practices relating to partially-filled prescriptions and
fully-filled prescriptions that are not picked up by ordering customers. The
Company is supplying similar information with respect to these matters to the
Department of Justice. Management 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. Management also believes that
the Company's existing policies and procedures fully comply with the
requirements of applicable law and intend to fully cooperate with these
investigations. The outcome of these investigations cannot be predicted.
An individual acting on behalf of the United States of America has filed a
lawsuit in the United States District Court for the Eastern District of
Pennsylvania under the Federal False Claims Act alleging that the Company
defrauded federal healthcare plans by failing to appropriately issue refunds for
partially filled prescriptions and prescriptions which were not picked up by
customers. The Department of Justice has advised the court that it intends to
join this lawsuit, as is its right under the law; its investigation is
continuing. The Company has filed a motion to dismiss the complaint for failure
to state a claim.
These claims are ongoing and their outcome cannot be predicted. If any of
these cases result in a substantial monetary judgement against the Company or is
settled on unfavorable terms, the Company's results of operations, financial
condition or cash flows could be materially adversely affected.
Store Management Overtime Litigation
The Company is a defendant in a class action pending in the California
Superior Court in San Diego with three subclasses, comprised of its California
store managers, assistant managers and managers-in-training. The plaintiffs seek
back pay for overtime not paid to them and injunctive relief to require the
Company to treat its store management as non-exempt. They allege that the
Company decided to minimize labor costs by causing managers, assistant managers
and managers-in-training to perform the duties and functions of associates for
in excess of forty hours per week without paying them overtime. Management
believes that in-store management were and are properly classified as exempt
from the overtime provisions of California law. On May 21, 2001, the Company
entered into a Memorandum of Agreement with the plaintiffs under which, subject
to approval of the court, the Company will settle
-16-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Commitments and Contingencies (continued)
this lawsuit for a maximum of $25,000, a charge for which was recorded in fiscal
2000. The settlement amount is payable in four equal installments of 25%, the
first of which is payable upon final court approval of the settlement and the
balance is payable 6, 12 and 18 months thereafter. On June 1, 2001 the court
entered an order granting preliminary approval of the settlement and authorizing
notice to the class.
Other
The Company, together with a significant number of major U.S. retailers, has
been sued by the Lemelson Foundation in a complaint which alleges that portions
of the technology included in the Company's point-of-sale system infringe upon a
patent held by the plaintiffs. The amount of damages sought is unspecified and
may be material. The outcome of this litigation cannot be predicted. An
unfavorable outcome could have a material adverse effect on the Company's
results of operations, financial condition or cash flows.
The Company is subject from time to time to lawsuits arising in the ordinary
course of business. In the opinion of management, these matters are adequately
covered by insurance or, if not so covered, are without merit or are of such
nature or involve amounts that would not have a material adverse effect on our
results of operations, financial condition, or cash flows if decided adversely.
-17-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Subsequent Events
Refinancing
On June 27, 2001, the Company completed a major financial restructuring that
extended the maturity dates of the majority of its debt to 2005 or beyond,
provided additional equity and converted a portion of its debt to equity. These
transactions are described below:
New Senior Secured Credit Facility: The Company entered into a new
$1,900,000 senior secured credit facility with a syndicate of banks led by
Citicorp USA, Inc. as senior agent. The new facility matures on June 27, 2005
unless more than $20,000 of the 7.625% senior notes due April 15, 2005 are
outstanding on December 31, 2004, in which event the maturity date is March 15,
2005. The new facility consists of a $1,400,000 term loan facility and a
$500,000 revolving credit facility. The term loan was used to repay the
outstanding balances of the old senior facility, PCS facility, RCF facility, the
Exchange Debt and all but $21,900 of the 10.5% senior secured notes due
September 2002. The revolving facility is available for working capital
requirements, capital expenditures and general corporate purposes. Borrowings
under the facilities generally bear interest either at LIBOR plus 3.5%, if the
Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 2.5%.
Amortization payments of the term loan begin March 2, 2002 of $5,000, increasing
to $7,500 for the quarters ending May 31, 2002 through August 31, 2003 and
$15,000 for the quarters ending November 30, 2003 through February 26, 2005.
The Company is required to pay fees of 0.50% per annum on the daily unused
amount of the revolving facility. Substantially all of the Company's wholly
owned subsidiaries guarantee the obligations under the senior secured credit
facility and the 10.50% senior secured notes due 2002. The subsidiary guarantees
are secured by a first priority lien on the inventory, accounts receivable,
prescription files, intellectual property and some real estate assets of the
subsidiary guarantors. The Company's direct obligations under the senior credit
facility are unsecured.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers, liens
and sale and leaseback transactions. Among the transactions permitted by the
facility to increase debt are transactions to finance existing owned real estate
not to exceed an aggregate $150,000 and $393,000 of additional debt secured by
the facility's collateral on a second priority basis.
The senior secured credit facility requires the Company to meet various
financial ratios and limits capital expenditures. Beginning with the nine months
ending December 1, 2001, the covenants require the Company to maintain a maximum
leverage ratio of 8.25:1 decreasing to 3.5:1 for the twelve months ending May
31, 2005. The Company must also maintain a minimum interest coverage ratio of
1.25:1 for the nine months ending December 1, 2001, increasing to 2.8:1 for the
twelve months ending May 31, 2005 and a minimum fixed charge coverage ratio of
0.9:1 for the nine months ending December 1, 2001 increasing to 1.25:1 for the
twelve months ending May 31, 2005. Capital expenditures are limited to $200,000
annually beginning with the twelve months ending March 2, 2002. These
expenditure limits are subject to upward adjustment based upon availability of
excess liquidity as defined in the Company's senior secured credit facility.
The senior secured credit facility provides for customary events of default,
including nonpayment, misrepresentation, breach of covenants and bankruptcy. It
is also an event of default if any event occurs that enables, or which with the
giving of notice or the lapse of time would enable, the holder of the Company's
debt to accelerate the maturity of debt having a principal amount of $25,000 or
more.
-18-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Subsequent Events (continued)
The Company's ability to borrow under the senior secured credit facility is
based on a specified borrowing base consisting of eligible accounts receivable
and inventory. At June 30, 2001, the term loan was fully drawn except for
$21,900 which is available and may be drawn to pay the remaining outstanding
10.5% senior secured notes when they mature on September 15, 2002. At June 30,
2001, the Company had no outstanding draws on the revolving credit facility and
the Company had additional available borrowing capacity of $403,600, net of
outstanding letters of credit of $96,400.
High Yield Notes: The Company issued $150,000 of 11.25% senior notes due
July 2008 in a private placement offering. These notes are unsecured and
subordinate to the secured debt of the Company. Among the transactions permitted
by the 11.25% senior notes to increase debt are transactions to finance existing
owned real estate not to exceed an aggregate $150,000 and $400,000 of other
debt. The 11.25% senior notes also allow for the senior secured credit facility
to be increased up to $2.5 billion.
Debt for Debt Exchange: The Company exchanged $152,025 of its existing 10.5%
senior secured notes due 2002 for an equal amount of 12.5% senior notes due
September 2006. In addition, holders of these notes received warrants to
purchase 3,000 shares of Company common stock at $6.00 per share. On June 29,
2001, the warrant holders exercised these warrants, on a cashless basis, and as
a result 1,000 shares of common stock were issued.
Tender Offer: On May 24, 2001, the Company commenced a tender offer for the
10.50% senior secured notes due 2002 at a price of 103.25% of the principal
amount of the notes. The tender offer was closed on June 27, 2001, at which time
$174,462 principal amount of the notes was tendered. The Company incurred a
tender offer premium of $5,670 as a result of the transaction. The Company used
proceeds from the new senior secured credit facility to pay for the notes
tendered.
Debt for Equity Exchanges and Sales of Capital Stock: On June 27, 2001, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock, $1.00
par value, from 600,000 to 1,000,000.
The Company completed the following debt for equity exchanges in the period
beginning June 3, 2001 and ended June 30, 2001.
Series C
Carrying Convertible Additional
Amount Common Preferred Paid-In
Debt Exchanged Exchanged Stock Stock Capital (Loss)
- --------------------------------------- -------------- -------------- -------------- --------------
PCS facility.......... $ 9,478 $ 1,054 -- $ 8,791 $ (367)
RCF facility.......... 139,905 806 $ 2,122 147,368 (10,391)
10.50% notes due 2002. 63,134 7,573 -- 62,340 (8,436)
-------------- -------------- -------------- -------------- --------------
$ 212,517 $ 9,433 $ 2,122 $ 218,499 $ (19,194)
============== ============== ============== ============== ==============
In addition to the debt for equity exchange transactions listed above, the
Company sold approximately 80,083 shares of its common stock for net proceeds of
$528,544 which resulted in an increase to common stock of $80,083 and additional
paid in capital of $448,461.
-19-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Subsequent Events (continued)
The Company issued approximately 2,122 shares of its Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock has a par value of
$1.00 per share and earns dividends at a rate of 8.7455% per annum, payable
quarterly in arrears. The Series C Convertible Preferred Stock converts, on a
ratio of ten shares of common stock for one share of Series C Convertible
Preferred Stock, immediately upon the earlier of (i) the effectiveness of a
registration statement pursuant to the Securities Act of 1933, as amended,
registering for resale the shares of common stock into which the Series C
Convertible Preferred Stock are convertible, or (ii) the Company's merger or
consolidation with or into any other corporation whereby the Company is not the
surviving corporation. The Series C Convertible Preferred Stock holders vote
together with the common stockholders, as a single class, with each share of the
Series C Convertible Preferred Stock having 10 votes.
Lease Obligations: The Company rescinded certain renewal options contained
in certain real estate leases on property previously sold and leased back to the
Company and as a result these leases were afforded sale and leaseback accounting
treatment and, accordingly have been reclassified as operating leases. This
restructuring resulted in a reduction of outstanding capital lease obligations
of $848,847. Accordingly, the Company will recognize a loss of $21,888 in the
second quarter of fiscal 2002, and will record a net deferred gain of $171,862,
which will be amortized over the remaining noncancellable lease terms. In
addition the Company terminated certain capital leases and purchased the related
leasehold improvements for $16,467.
Synthetic Leases: The Company terminated existing synthetic lease agreements
for certain land, buildings, equipment and aircraft, which were accounted for as
operating leases. A wholly owned subsidiary of the Company purchased the
equipment for $82,604, and is leasing the land, buildings and aircraft from
different parties. The obligations under the new synthetic lease for the land
and buildings are secured by a first priority lien on the equipment at the
leased buildings owned by the Company's subsidiary. The Company has guaranteed
certain of the obligations of the subsidiary. The Company will account for these
new leases as operating leases.
Substantially all of the Company's wholly-owned subsidiaries guarantee
the Company's obligations under the new credit facility. These subsidiary
guarantees are secured primarily by a first priority lien on the inventory,
accounts receivable, intellectual property and prescription files of the
subsidiary guarantors. The Company's direct obligations under the new credit
facility will be unsecured. The $21,879 million aggregate principal amount of
outstanding 10.5% senior secured notes are secured on a shared first priority
basis with the new credit facility. The 12.5% senior secured notes due 2006 are
secured on a second priority basis.
As a result of the above transactions, the Company will record an
extraordinary loss on early extinguishment of debt of approximately $66,000
subject to certain valuations and will defer debt issue costs of approximately
$74,000 in the second quarter of 2002.
-20-
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Thirteen Week Periods Ended June 2, 2001 and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Subsequent Events (continued)
Capitalization
The following table summarizes the Company's capitalization at June 30,
2001, following the completion of the refinancing transactions described above:
As of June
30, 2001
---------------
Secured Debt:
Senior secured credit facility...................... $ 1,378,462
10.5% senior secured notes due 2002................. 21,879
12.5% senior secured notes due 2006................. 143,025
Other .............................................. 12,320
------------------
1,555,686
Lease Financing Obligations........................... 226,594
Other Senior Debt:
6.7% notes due 2001................................. 7,342
6.0% dealer remarketable securities due 2003........ 107,765
6.0% notes due 2005................................. 194,500
7.625% notes due 2005............................... 198,000
7.125% notes due 2007............................... 350,000
6.125% notes due 2008............................... 150,000
6.875% notes due 2013............................... 200,000
7.7% notes due 2027................................. 300,000
6.875% debentures due 2028.......................... 150,000
------------------
1,657,607
Subordinated / Unsecured Debt:
5.25% convertible subordinated notes due 2002....... 152,016
11.25% notes due 2008............................... 150,000
------------------
302,016
------------------
Total debt 3,741,903
Redeemable preferred stock............................ 19,457
Stockholders' equity.................................. 567,518
------------------
Total capitalization................................ $ 4,328,878
==================
-21-
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Our long term operating strategy is to focus on improving the productivity
of our existing store base. We believe that improving the sales of our existing
stores is important to improving our future profitability and cash flow. We also
believe that the substantial investment made in our store base over the last
five years has given us one of the most modern store bases in the industry.
However, our store base has not yet achieved the level of sales productivity
that our major competitors achieve. We intend to improve the performance of our
existing stores by continuing to (i) capitalize on the substantial investment in
our stores and distribution facilities; (ii) enhance our customer and employee
relationships; and (iii) improve the product offerings in our stores. Moreover,
it is estimated that pharmacy sales in the United States will increase more than
75% over the next five years. This anticipated growth is expected to be fueled
by the "baby boom" generation entering their 50's, the increasing life
expectancy of the American population, the introduction of several new
successful drugs and inflation. We believe that this growth will help increase
the sales productivity of our existing store base.
We have initiated various programs that are designed to improve our image
with customers. These include our weekly distribution of a nationwide
advertising circular to announce vendor promotions, weekly sales items and, in
our expanded test markets, our customer reward program, "Rite Rewards." We have
also initiated programs that are specifically directed to our pharmacy business.
These include reduced cash prices and an increased focus on attracting and
retaining managed care customers. Through the use of technology and attention to
customers' needs and preferences, we are increasing our efforts to identify
inventory and product categories that will enable us to offer more personalized
products and services to our customers. We continue to develop and implement
employee training programs to improve customer service and educate our employees
about the products we offer. We are also developing employee programs that
create compensatory and other incentives for employees to provide customers with
quality service, to promote our private label brands and to improve our
corporate culture.
We continue to add popular and profitable product departments, such as our
General Nutrition Companies, Inc. ("GNC") stores-within-Rite Aid-stores and
one-hour photo development departments. We continue to develop ideas for new
product departments and have begun to implement plans to expand the categories
of our front-end products. During fiscal 2001, we undertook several initiatives
to increase sales of our Rite Aid brand products and generic prescription drugs.
As private label and generic prescription drugs generate higher margins than
branded label, we expect that increases in the sales of these products would
enhance our profitability. We believe that the addition of new departments and
increases in offerings of products and services are integral components of our
strategy to distinguish us from other national drugstore chains.
Management believes that the following matters should be considered in
connection with the discussion of results of operations and financial condition:
Recent Actions. On June 27, 2001 we completed a major refinancing that
extended the maturity dates of the majority of our debt to 2005 or beyond,
provided additional equity, converted a portion of our debt for equity and
reclassified capital leases to operating leases. See "Refinancing" for further
details.
Maturing Store Base. Since the beginning of fiscal 1997, we built 469 new
stores, relocated 949 stores, remodeled 410 stores and closed 1,159 stores.
These new, relocated and remodeled stores represent approximately 50.3% of the
company's total stores at June 2, 2001. The new and relocated stores opened in
recent years are generally larger, free standing stores with higher operating
expenses than our older stores. New stores generally do not become profitable
until a critical mass of customers is developed. Relocated stores also must
attract additional customers to achieve comparable profitability to the store
that was replaced. We believe that the period of time required for a new store
to achieve profitable operations is generally two to four years. This period can
vary significantly based on the location of a particular store and on other
factors, including the investments made in purchasing prescription files for the
location and advertising. Our recent liquidity constraints have limited our
ability to purchase prescription files and make other investments to promote the
development of our new and relocated stores. We believe that our relatively high
percentage of new and relocated stores is a significant factor in recent
operating results. However, we believe that as these newer stores mature they
should gain the critical mass of
-22-
customers needed for profitable operations. This continuing maturation should
positively affect the company's operating performance in future periods. If we
are not able to improve the performance of these new and relocated stores it
will adversely affect our ability to restore the profitability of our
operations.
Substantial Investigation Expenses. We continue to incur substantial
expenses in connection with the process of defending the company against various
shareholder actions and cooperation with the U.S. Attorney's Office in their
investigations of former management. We incurred $3.4 million in the thirteen
week period ended June 2, 2001 and we expect to incur an additional $7.0 million
to $12.0 million over the remainder of fiscal 2002. We expect to continue to
incur significant legal and other expenses in connection with the ongoing
litigation and investigations to which we are subject.
Dilutive Equity Issuances. At June 2, 2001, 403.8 million shares of common
stock were outstanding and additional 121 million shares of common stock were
issuable upon the exercise or conversion of outstanding stock options, warrants,
notes or preferred stock. During the first quarter, we issued 55.7 million
shares of common stock to retire $376.2 million of indebtedness. Certain
transactions completed as part of our June 27, 2001 refinancing have further
diluted the existing share base. See "Refinancing" for further details.
Additionally we have previously committed to issue common stock to settle
our securities class action lawsuit. Under the terms of the settlement, which is
subject to the approval of the courts, the company's insurers will pay $45
million in cash and the company will issue shares of its common stock in 2002.
The shares will be valued over a ten day period in January, 2002. If the price
determined is at least $7.75 per share, the company will issue 20 million shares
of its common stock. If the value determined is less than $7.75 per share, the
company has the option to deliver any combination of common stock, cash and
short term notes with a total value of $155 million. If the company is not in a
position to utilize cash or notes in order to satisfy this obligation, it could
be required to deliver a substantially larger amount of its common stock.
In light of our substantial leverage and liquidity constraints, we will
continue to consider opportunities to use the company's equity securities to
discharge debt or other obligations that may arise. Such issuances may have a
dilutive effect on the outstanding shares of common stock.
Accounting Systems. Following its review of our books and records,
management concluded that further steps were needed to establish and maintain
the adequacy of our internal accounting systems and controls. In connection with
the audit of our financial statements, Deloitte & Touche LLP advised us that it
believed there were numerous "reportable conditions" under the standards
established by the American Institute of Certified Public Accountants which
relate to our accounting systems and controls and could adversely affect our
ability to record, process, summarize and report financial data consistent with
the assertions of management in the financial statements. We are further
developing and implementing comprehensive, adequate and reliable accounting
systems and controls which address the reportable conditions identified by
Deloitte & Touche LLP.
Working Capital. We generally finance our inventory and capital expenditure
requirements with internally generated funds and borrowings. We expect to use
borrowings to finance inventories and to support our continued growth. Over 75%
of our front-end sales are in cash. Third-party insurance programs, which
typically settle in fewer than 30 days, accounted for 91.7% of our pharmacy
sales and 56.5% of our revenues in the thirteen weeks ended June 2, 2001.
Seasonality. We experience seasonal fluctuations in our results of
operations in the fourth quarter as the result of the seasonal nature of
Christmas and the flu season. We tailor certain front-end merchandise to
capitalize on holidays and seasons.
-23-
Results of Operations
Revenues and Other Operating Data
Thirteen
Week Period Ended
June 2, 2001 May 27, 2000
--------------- ---------------
Revenues.................................. $3,710,133 $3,442,186
Revenues growth........................... 7.8% 2.6%
Same store sales growth................... 10.0% 6.2%
Pharmacy sales growth..................... 12.6% 7.2%
Same store pharmacy sales growth.......... 12.7% 9.6%
Pharmacy as a % of total sales............ 61.6% 60.1%
Third party sales as a % of total pharmacy
sales.................................... 91.7% 89.6%
Front-end sales growth.................... 5.7% (1.4)%
Same store front end sales growth......... 5.9% 1.4%
Front end sales as a % of total sales..... 38.4% 39.9%
Store data:
Total stores (beginning of period)........ 3,648 3,802
New stores................................ 3 4
Closed stores............................. (20) (27)
Store acquisitions, net................... 0 0
Total stores (end of period).............. 3,631 3,779
Relocated stores.......................... 4 24
Revenues
The 7.8% growth in revenues for the thirteen week period ended June 2, 2001
was driven by front end sales growth of 5.7% and pharmacy sales growth of 12.6%.
The 2.6% growth in revenues for the thirteen week period ended May 27, 2000 was
due to the 7.2% growth in pharmacy sales, which more than offset a decline in
our front end store sales. Same store sales growth for the thirteen weeks ended
June 2, 2001 was 10.0%. As the prior fiscal year was a 53 week year, same store
sales for the thirteen weeks ended June 2, 2001 are calculated by comparing that
period with the thirteen weeks ended June 3, 2000.
For the thirteen week period ended June 2, 2001, and for the thirteen week
period ended May 27, 2000, pharmacy sales led revenues growth with same-store
sales increases of 12.7% and 9.6%, respectively. Contributing to pharmacy same
store sales increases is our ability to attract and retain managed care
customers, our successful pilot markets for reduced cash pricing, our increased
focus on pharmacy initiatives such as will call and predictive refill, and
favorable industry trends. These trends include an aging American population
with many "baby boomers" now in their fifties and consuming a greater number of
prescription drugs. The use of pharmaceuticals as the treatment of choice for a
growing number of healthcare problems and the introduction of a number of
successful new prescription drugs also contributes to the growing demand for
pharmaceutical products.
Front end sales, which include all non-prescription sales such as seasonal
merchandise, convenience items and food, also had strong same store sales growth
in the thirteen week period ended June 2, 2001, increasing 5.9%. The same store
sales increase was primarily a result of increased sales volume due to lowering
prices on key items, distributing a nationwide weekly advertising circular,
expanding certain product categories and improving general store conditions.
-24-
Costs and Expenses
Thirteen
----------------------------------
Week Period Ended
June 2, 2001 May 27, 2000
--------------- -----------------
Cost of goods sold......................... $ 2,840,740 $ 2,634,453
Gross profit............................... 869,393 807,733
Gross margin............................... 23.4% 23.5%
Selling, general and administrative
expenses................................. 858,049 851,883
Selling, general and administrative
expenses as a percentage of revenues..... 23.1% 24.7%
Goodwill amortization...................... 5,343 6,074
Interest expense........................... 128,689 171,375
Store closing and impairment charges
(credits)................................ (364) 16,145
Loss on debt conversions and modifications,
net...................................... 132,713 --
Share of loss (income) from equity
investment............................... 5,883 11,574
(Gain) loss on sale of assets and
investments, net......................... (49,818) 9,676
Cost of Goods Sold
Gross margin was 23.4% for the thirteen week period ended June 2, 2001
compared to 23.5% for the thirteen week period ended May 27, 2000. Although
gross margin is relatively flat, it was negatively impacted by the continuing
trend of increased third party reimbursed prescription sales as a percent of
total prescription sales. The increase in third party prescription sales had a
negative impact on gross margin rates because they are paid by a person or
entity other than the recipient of the prescribed pharmaceutical, and are
generally subject to lower negotiated reimbursement rates in conjunction with a
pharmacy benefit plan. Third party sales as a percentage of total pharmacy sales
were 91.7% and 89.6% for the thirteen week period ended June 2, 2001 and May 27,
2000, respectively. Offsetting this trend was an improvement in cigarette and
liquor margin, a reduction in losses from product returns, and better leveraging
of our fixed costs resulting from our higher sales volume.
We use the last-in, first-out (LIFO) method of inventory valuation, which is
determined annually when inflation rates and inventory levels are finalized.
Therefore, LIFO costs for interim period financial statements are estimated.
Cost of sales includes a LIFO provision of $15.0 million for the thirteen week
period ended June 2, 2001 versus $5.3 million for the thirteen week period ended
May 27, 2000.
Selling, General and Administrative Expenses
The selling, general and administrative expense ("SG&A") for the thirteen
week period ended June 2, 2001 includes $43.1 million of non-cash expense
related to variable plan accounting on certain management stock options,
restricted stock grants and stock appreciation rights, offset by $15.0 million
received related to the partial settlement of litigation with certain drug
manufactures and a net benefit of $4.2 million in legal expense related to a
favorable legal settlement. Excluding these items, the company's SG&A as a
percentage of revenues would have been 22.5% in the thirteen week period ended
June 2, 2001. SG&A for the thirteen week period ended May 27, 2000 includes
$25.5 million of costs incurred with the restatement of the company's historical
statements. Excluding this item results in an adjusted SG&A as a percentage of
revenue of 24.0% in the thirteen week period ended May 27, 2000. SG&A exclusive
of these items in the thirteen week period of the current fiscal year of 22.5%
compares favorably to the adjusted 24.0% of the prior year's comparable period
because of decreased labor charges, and better leveraging of our fixed costs
resulting from our higher sales volume.
-25-
Store Closing and Impairment Charges
Store closing and impairment charges (credits) consist of:
Thirteen
-------------------------------
Week Period Ended
June 2, 2001 May 27, 2000
--------------- ---------------
Impairment charges........................ $ 7,893 $ 8,169
Store lease exit charges (credits)........ (8,568) 7,976
Impairment of investments................. 311 --
--------------- ---------------
$ (364) $ 16,145
=============== ===============
Impairment Charges. Impairment charges include non-cash charges of $7.9
million and $8.2 million for the thirteen week periods ended June 2, 2001 and
May 27, 2000, respectively, for the impairment of long-lived assets (including
allocable goodwill) at 17 and 42 stores, respectively. These amounts include the
write-down of long-lived assets at stores that were assessed for impairment
because of management's intention to relocate or close the store or because of
changes in circumstances that indicate the carrying value of the asset may not
be recoverable.
Store Lease Exit Costs. Costs incurred to close a store, which principally
consist of lease termination costs, are recorded at the time management commits
to closing the store, which is the date that closure is formally approved by
senior management, or in the case of a store to be relocated, the date the new
property is leased or purchased. The company calculates its liability for closed
stores on a store-by-store basis. The calculation includes the future minimum
lease payments and related ancillary costs from the date of closure to the end
of the remaining lease term, net of estimated cost recoveries that may be
achieved through subletting properties or through favorable leases terminations.
This liability is discounted using a risk-free rate of interest. We evaluate
these assumptions each quarter and adjust the liability accordingly. During the
thirteen week periods ended June 2, 2001 and May 27, 2000, we recorded a
provision for 7 and 18 stores, respectively, that were designated for closure.
The effect of lease terminations and changes in assumptions in interest rates
during the thirteen week period ended June 2, 2001, had a positive impact that
exceeded the additional provision due to low closure levels and resulted in an
expense credit from closed store activity.
Interest Expense
Interest expense was $128.7 million for the thirteen week period ended June
2, 2001, compared to $171.4 million in the thirteen week period ended May 27,
2000. The decrease was primarily due to the reduction of debt resulting from the
sale of PCS and debt for equity exchanges. The weighted average interest rates,
excluding capital leases, on the company's indebtedness for the thirteen week
period ended June 2, 2001 and May 27, 2000 were 8.01% and 8.10%, respectively.
Income Taxes
The tax benefit for the thirteen week period ended June 2, 2002 is fully
offset by a valuation allowance based on management's determination that, based
on available evidence, it is more likely than not that certain of the deferred
tax assets will not be realized. The income tax provision for the thirteen week
period ended May 27, 2000 reflects the effect of the decision to sell PCS and to
discontinue the operations of our PBM segment. It is foreseeable that an
"ownership change" for statutory purposes will occur during fiscal 2002 as a
result of our refinancing efforts, including issuances of equity and exchanges
of debt for equity. An "ownership change" would result in a limitation imposed
on the future use of net operating losses and any net unrealized built-in losses
incurred or existing prior to the "ownership change".
Other Significant Charges
The net loss from continuing operations for the thirteen week periods ended
June 2, 2001 and May 27, 2000 was $211.1 million and $403.4 million,
respectively. In addition to the matters discussed above, our results in the
thirteen week periods ended June 2, 2001 and May 27, 2000 have been affected by
other charges. In the thirteen week period ended June 2, 2001, we recorded a
pre-tax loss of $132.7 million on debt conversions and a loss of $5.9 million
representing our share of the drugstore.com losses partially offset by a gain of
$53.2 million resulting from the sale of AdvancePCS securities. In the thirteen
week period ended May 27, 2000, we recorded income tax expense of $144.4 million
due primarily to valuation allowances related to the decision to dispose of the
PBM segment and a $11.6 million loss from our share of drugstore.com losses.
-26-
Liquidity and Capital Resources
We have two primary sources of liquidity: (i) cash provided by operations
and (ii) the revolving credit facility under our new senior secured credit
facility. We may also generate liquidity from the sale of assets, including
sale-leaseback transactions, the issuance of debt and equity securities and
potential additional borrowings. Amoung the transactions permitted by our senior
secured credit facility that will allow us to generate additional liquidity are
transactions to finance existing owned real estate not to exceed as aggregate
$150.0 million and the issuance of $393.0 million of additional debt secured by
the facility's collateral on a second priority basis. Our 11.25% senior notes
due July 2008 also permit $150.0 million of real estate financing plus $400.0
million of additional other debt and provides for the senior secured credit
facility to be increased up to $2.5 billion. During the thirteen week period
ended June 2, 2001, operations provided sufficient cash to fund our working
capital needs. Our principal uses of cash are to provide working capital for
operations, service our obligations to pay interest and principal on debt, and
to provide funds for capital expenditures.
Refinancing
On June 27, 2001, we completed a major refinancing that extended the
maturity dates of the majority of our debt to 2005 or beyond, provided
additional equity, converted a portion of our debt for equity and reclassified
capital leases to operating leases. The components of the refinancing are
described in detail in the footnotes to the consolidated financial statements.
Major components of the refinancing are summarized below:
New Secured Credit Facility: We entered into a new $1.9 billion syndicated
senior secured credit facility with a syndicate of banks led by Citicorp USA,
Inc. as senior agent. The new facility matures on June 27, 2005 unless more than
$20.0 million of our 7.625% senior notes due April 15, 2005 are outstanding on
December 31, 2004, in which event the maturity date is March 15, 2005. The new
facility consists of a $1.4 billion term loan facility and a $500.0 million
revolving credit facility. The term loan was used to prepay various outstanding
debt balances.
Our ability to borrow under the senior secured credit facility is based on a
specified borrowing base consisting of eligible account receivable and
inventory. At June 30, 2001, the term loan was fully drawn except for $21.9
million which is available and may be drawn to pay for the remaining outstanding
10.5% senior secured notes when they mature on September 15, 2002. At June 30,
2001, we had no outstanding draws on the revolving credit facility, which
resulted in $403.6 million in additional available borrowing capacity under the
revolving credit facility net of outstanding letters of credit of $96.4 million.
High Yield Notes: We issued $150.0 million of 11.25% senior notes due July
2008 in a private placement offering. These notes are unsecured and subordinate
to our secured debt.
Debt for Debt Exchange: We exchanged $152.0 million of our existing 10.50%
senior secured notes for an equal principal amount of 12.50% senior secured
notes due September 15, 2006. The 12.50% notes are secured by a second priority
lien on the collateral of the senior secured credit facility. In addition,
holders of these notes received warrants to purchase 3.0 million shares of our
common stock at $6.00 per share. On June 29, 2001, the warrant holders elected
to exercise these warrants, on a cashless basis, and as a result 1.0 million
shares of common stock were issued.
Tender Offer: On May 24, 2001, we commenced a tender offer for the 10.50%
senior secured notes due 2002 at a price of 103.25% of the principal amount. The
tender offer was closed on June 27, 2001, at which time $174.5 million principal
was tendered. We incurred a tender offer premium of $5.7 million as a result of
the transaction. We used proceeds from the new senior secured credit facility to
pay for the tender offer.
Debt for Equity Exchanges: We completed exchanges of $212.5 million of debt
for 9.4 million shares of common stock and 2.1 million shares of Series C
Convertible Preferred Stock.
Sales of Common Stock: We issued 80.1 million shares of our common stock for
net proceeds of $528.5 million.
-27-
Lease Obligations: We restructured the terms of certain real estate leases
on property previously sold and leased back, thereby reducing the outstanding
capital lease obligations by $848.8 million.
Impact on Results of Operations in the Second Quarter of Fiscal 2002: As a
result of the refinancing, we will: i) record an extraordinary loss on early
extinguishment of debt of approximately $66.0 million subject to certain
valuations; ii) defer debt issue costs of $74.0 million; and iii) recognize a
loss of $21.9 million related to the reclassification of leases.
Capitalization
The following table summaries our capitalization at June 30, 2001, following
the completion of the refinancing transactions described above:
As of June 30,
2001 (in
millions)
----------------
Secured Debt........................................ $ 1,555.7
Lease Financing Obligations......................... 226.6
Other Senior Debt................................... 1,657.6
Subordinated / Unsecured Debt....................... 302.0
-------------------
Total debt.................................... 3,741.9
Redeemable preferred stock.......................... 19.5
Stockholder's equity................................ 567.5
-------------------
Total capitalization................................ $ 4,328.9
===================
On a prospective annual basis, the refinancing will reduce depreciation and
amortization expense approximately $4.0 million but increases rent expense
approximately $57.0 million. Interest expense is also expected to decrease due
to the refinancing, debt for equity exchanges effected prior to June 3, 2001,
and the repayment of debt related to the sale of the AdvancePCS investments.
Prospective annual interest expense is estimated to be $370.0 million to $390.0
million of which $320.0 million to $340.0 million is cash interest.
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash Flows
Our operating activities provided $45.7 million of cash in the thirteen week
period ended June 2, 2001 and used $9.4 million of cash in the thirteen week
period ended May 27, 2000. Operating cash flow was negatively impacted by $127.3
million in interest payments and increases in operating assets. This was offset
by increased current liabilities.
Cash provided by investing activities was $463.7 million for the thirteen
week period ended June 2, 2001, due primarily to the sale of the securities we
received in our sale of AdvancePCS. Cash used in investing activities was $20.0
million for the thirteen week period ended May 27, 2000. Cash used for store
construction and relocations amounted to $7.1 million and $18.9 million for the
thirteen week period ended June 2, 2001 and May 27, 2000, respectively.
Cash used in financing activities was $521.7 million and $72.5 million for
the thirteen week periods ended June 2, 2001 and May 27, 2000, respectively.
Proceeds from the sale of the securities we received from our sale of AdvancePCS
were used to pay down outstanding debt balances, which significantly impacted
cash used in financing activities in the thirteen week period ended June 2,
2001.
-28-
Working Capital
Net working capital was $1,408.3 million at June 2, 2001, compared to
$1,955.9 million at March 3, 2001. The decrease in working capital is primarily
due to the sale of the securities we received in our sale of AdvancePCS,
proceeds of which were used to pay down long-term debt.
Capital Expenditures
We plan capital expenditures of approximately $230.0 million to $240.0
million during fiscal 2002, consisting of approximately $82.6 million related to
the termination of an operating lease and the corresponding purchase of
equipment, $34.7 million related to new store construction, store relocation and
other store construction projects. An additional $89.2 million will be dedicated
to other store improvement activities and the purchase of prescription files
from independent pharmacists. We expect that these capital expenditures will be
financed primarily with cash flow from operations and borrowings under the
revolving credit facility available under our senior secured facility. During
the thirteen week period ended June 2, 2001, the company spent $26.8 million on
capital expenditures, consisting of $7.1 million related to new store
construction, store relocation and other store construction projects. An
additional $19.7 million was related to other store improvement activities and
the purchase of prescription files from independent pharmacists.
Future Liquidity
We are highly leveraged. Our high level of indebtedness: (a) limits our
ability to obtain additional financing; (b) limits our flexibility in planning
for, or reacting to, changes in our business and the industry; (c) places us at
a competitive disadvantage relative to our competitors with less debt; (d)
renders us more vulnerable to general adverse economic and industry conditions;
and (e) requires us to dedicate a substantial portion of our cash flow to
service our debt. Based upon current levels of operations and planned
improvements in our operating performance, management believes that cash flow
from operations together with available borrowing under the senior secured
credit facility and its other sources of liquidity will be adequate to meet its
anticipated annual requirements for working capital, debt service and capital
expenditures through the end of fiscal 2002. We will continue to assess our
liquidity position and potential sources of supplemental liquidity in light of
our operating performance and other relevant circumstances. Should we determine,
at any time, that it is necessary to seek additional short-term liquidity, we
will evaluate our alternatives and take appropriate steps to obtain sufficient
additional funds. Obtaining any such supplemental liquidity through the increase
of indebtedness or asset sales would require the consent of the lenders under
one or more of our debt agreements. There can be no assurance that any such
supplemental funding, if sought, could be obtained or that our lenders would
provide the necessary consents.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initiated after June 30, 2001;
and b) the provisions of SFAS 141 also apply to all business combinations
accounted for by the purchase method that are completed after June 30, 2001
(that is, the date of the acquisition is July 2001 or later). There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. SFAS 142 is effective
for fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. The
Company is currently evaluating the provisions of SFAS 141 and SFAS 142 and has
not adopted such provisions in its June 2, 2001 condensed consolidated financial
statements.
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and
industry, refer to "Risk Factors" in our Form S-1 filed with the SEC on July 12,
2001 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Affecting Our Future Prospects" in our Form 10-K
for the 2001 fiscal year, filed with the SEC on May 21, 2001.
-29-
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. The major
market risk exposure is changing interest rates. Increases in interest rates
would increase our interest expense. Since the end of fiscal 2001, our primary
risk exposure has not changed. Our company enters into debt obligations to
support capital expenditures, acquisitions, working capital needs and general
corporate purposes. Our policy is to manage interest rates through the use of a
combination of variable-rate credit facilities, fixed-rate long-term obligations
and derivative transactions.
The table below provides information about the company's financial
instruments that are sensitive to changes in interest rates. The table presents
principal payments and the related weighted average interest rates by expected
maturity dates as of June 2, 2001.
Fair Value at
Fiscal Year June 2, 2001
--------------------------------------------- -------------
2002 2003 2004 2005 2006 Thereafter Total
------- ---------- -------- ------- -------- ---------- ----------
(dollars in thousands)
Long-term debt, including
Current portion
Fixed rate............ $ 8,427 $1,567,566 $108,668 $ 2,528 $392,937 $1,153,237 $3,233,363 $2,902,180
Average Interest
Rate................ 6.87% 9.92% 6.03% 11.50% 6.82% 7.07%
Interest Rate Swap.... -- -- -- -- -- -- -- $ (31,945)
Variable Rate......... -- 644,681 -- -- -- -- $ 644,681 $ 644,681
Average Interest
Rates............... -- 8.59% -- -- -- --
In June 2000, we refinanced certain variable and fixed-rate obligations
maturing in fiscal years 2001 and 2002 and entered into an interest rate swap
that fixes the LIBOR component of $500.0 million of our variable-rate debt at
7.083% for a two-year period. In July 2000, we entered into an additional
interest rate swap that fixes the LIBOR component of an additional $500.0
million of variable rate debt at 6.946% for a two year period. The variable rate
debt that had interest rates fixed by the two interest rate swaps were included
with fixed rate debt in the above table. As of June 2, 2001, 16.6% of our total
debt is exposed to fluctuations in variable interest rates.
Our ability to satisfy interest payment obligations on our outstanding debt
will depend largely on our future performance, which, in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service our
interest payment obligations on our outstanding indebtedness and if we cannot
borrow or obtain equity financing to satisfy those obligations, our business and
results of operations will be materially adversely affected. We cannot assure
you that any such borrowing or equity financing could be successfully completed.
As of June 30, 2001, we had one credit facility: the $1.9 billion syndicated
senior secured credit facility. The ratings on this facility were BB- by
Standard & Poor's and B1 by Moody's. The interest rates on the variable rate
borrowings on this facility are LIBOR plus 3.50%.
-30-
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On November 9, 2000, we announced that we had reached an agreement to settle
the consolidated securities class action lawsuits pending against us in the U.S.
District Court for the Eastern District of Pennsylvania and the derivative
lawsuits pending there and in the Delaware Court of Chancery. On June 8, 2001,
the court issued a ruling indicating that it was prepared to approve the
settlement if certain technical changes were made in the order that the
plaintiffs and settling defendants requested be issued by the court. We and the
plaintiffs have modified and resubmitted the requested order for court approval.
We anticipate that the nonsettling defendants will appeal the approved order.
We are a defendant in a class action lawsuit pending in the California
Superior Court in San Diego with three subclasses, comprised of our California
store managers, assistant managers and managers in training. On May 21, 2001, we
entered into a Memorandum of Agreement with the plaintiffs under which, subject
to approval of the court, we will settle this lawsuit for a maximum of $25
million. The settlement amount is payable in four equal installments of 25%, the
first of which is payable upon final court approval of the settlement and the
balance is payable 6, 12 and 18 months thereafter. On June 1, 2001 the court
entered an order granting preliminary approval of the settlement and authorizing
notice to the class.
A purported class action has been instituted by a stockholder against us in
Delaware state court on behalf of stockholders who purchased shares of our
common stock prior to May 2, 1997, and who continued to hold them after November
10, 1999, alleging claims similar to the claims alleged in the consolidated
securities class action lawsuits described above. The amount of damages sought
was not specified and may be material. We have filed a motion to dismiss this
claim which is pending before the court. These claims are ongoing and their
outcome cannot be predicted.
ITEM 2. Changes in Securities and Use of Proceeds
We sold the following equity securities during the period covered by this
report that were not registered under the Securities Act:
o On March 14, 2001, holders of approximately $201.4 million principal
amount of our 5.25% convertible subordinated notes due 2002 exchanged
these notes for an aggregate of 29,204,160 shares of our common stock.
The common stock was issued in an exchange offer exempt from
registration in reliance on section 3(a)(9) of the Securities Act.
o On March 14, 2001, holders of approximately $77.9 million principal
amount of our 6.0% dealer remarketable securities due 2003 exchanged
these notes for an aggregate of 12,072,175 shares of our common stock.
The common stock was issued in an exchange offer exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
o On April 6, 2001, holders of approximately $3.9 million principal amount
of our 5.25% convertible subordinated notes due 2002 and $2.0 million
principal amount of our 6.0% dealer remarketable securities due 2003
exchanged these notes for an aggregate of 856,000 shares of our common
stock. The common stock was issued in privately negotiated transactions
exempt from registration in reliance on Section 3(a)(9) of the
Securities Act.
o On April 25, 2001, holders of approximately $11.0 million principal
amount of our 10.5% senior secured notes due 2002 exchanged these notes
for an aggregate of 1,925,000 shares of our common stock. The common
stock was issued in privately negotiated transactions exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
-31-
o On April 25, 2001, holders of approximately $5.0 million principal
amount of our 10.5% senior secured notes due 2002 exchanged these notes
for an aggregate of 785,000 shares of our common stock. The common stock
was issued in a privately negotiated transaction exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
o On May 15, 2001, a holder of $10.0 million principal amount of
indebtedness under our RCF credit facility exchanged this indebtedness
for an aggregate of 1,473,405 shares of our common stock. The common
stock was issued in a transaction exempt from registration in reliance
on Section 3(a)(9) of the Securities Act.
o On May 29, 2001, holders of $5.0 million principal amount of
indebtedness under our PCS credit facility and $10.0 million principal
amount of indebtedness under our RCF credit facility exchanged this
indebtedness for an aggregate of 2,144,936 shares of common stock. The
common stock was issued in privately negotiated transactions exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
o On May 29, 2001, holders of $40 million principal amount of our 10.5%
senior secured notes due 2002 exchanged this indebtedness for an
aggregate of 5,831,159 shares of our common stock. The common stock was
issued in privately negotiated transactions exempt from registration in
reliance on Section 3(a)(9) of the Securities Act.
o On May 31, 2001, holders of $10.0 million principal amount of
indebtedness under our RCF credit facility exchanged this indebtedness
for an aggregate of 1,443,814 shares of common stock. The common stock
was issued in privately negotiated transactions exempt from registration
in reliance on Section 3(a)(9) of the Securities Act.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the
thirteen week period ended June 2, 2001.
ITEM 5. Other Information
Not applicable.
-32-
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ------------
3.1 Restated Certificate of Incorporation dated December 12, 1996 Exhibit 3(i) to Form 8-K filed on
November 2, 1999
3.2 Certificate of Amendment to the Restated Certificate of Exhibit 3(ii) to Form 8-K filed on
Incorporation dated October 25, 1999 November 2, 1999
3.3 Series C Preferred Stock Certificate of Designation dated Exhibit 3.3 to Form S-1 filed on
June 26, 2001 July 12, 2001
3.4 Certificate of Amendment to Restated Certificate of Exhibit 3.4 to Form S-1 filed on
Incorporation dated June 27, 2001 July 12, 2001
3.5 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
4.1 Indenture, dated as of June 27, 2001, between Rite Aid Exhibit 4.7 to Form S-1 filed on
Corporation, as issuer and State Street Bank and Trust Company, July 12, 2001
as trustee, related to the Company's 12.50% Senior Secured Notes
due 2006.
4.2 Indenture, dated as of June 27, 2001 between Rite Aid Exhibit Exhibit 4.8 to Form S-1 filed on
4.8 to Form S-1 filed on July Corporation, as issuer and BNY July 12, 2001
Midwest Trust Company, as 12, 2001 trustee, related to the
Company's 11 3/4% Senior Notes due 2008.
4.3 Exchange and Registration Rights Agreement, dated as of June 27, Exhibit 4.9 to Form S-1 filed on
2001, between Rite Aid Corporation and Salomon Smith Barney July 12, 2001
Inc., Credit Suisse First Boston Corporation, J.P. Morgan
Securities Inc. and Fleet Securities, Inc., as initial
purchasers, for the benefit of the holders of the Company's
11 1/4% Senior Notes due 2008.
10.1 Amendment No. 1 to Employment Agreement by and between Rite Aid Exhibit 10.9 to Form 10-K filed on
Corporation and Robert G. Miller, dated as of May 7, 2001 May 21, 2001
10.2 Amendment No. 1 to Employment Agreement by and between Rite Aid Exhibit 10.11 to Form 10-K filed on
Corporation and Mary F. Sammons, dated as of May 7, 2001 May 21, 2001
10.3 Equity for Bank Debt Exchange Agreement between Rite Aid Exhibit 10.45 to Form 10-K filed on
Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional May 21, 2001
Value Fund, L.P., Fir Tree Value Partners LDC and Fir Tree
Recovery Master Fund, L.P.
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Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ------------
10.4 Side Letter to Equity for Bank Debt Exchange Agreement, dated Exhibit 10.46 to Form 10-K filed on
April 30, 2001, between Rite Aid Corporation, Fir Tree Value May 21, 2001
Fund, L.P., Fir Tree Institutional Value Fund, L.P., Fir Tree
Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.29 Registration Rights Agreement dated as of May 24, 2001 by and Exhibit 10.29 to Form S-1 filed on
Exhibit 10.29 to Form S-1 filed on between Rite Aid July 12, 1001
Corporation and Liberty View Fund, LP, Liberty July 12, 2001
View Fund, LLC and Liberty View Global Volatility Fund LP
10.5 Stock Purchase Agreement dated May 17, 2001 by and between Exhibit 10.51 to Form S-1 filed on
Rite Exhibit 10.51 to Form S-1 filed on Aid Corporation and July 12, 1001
Transamerica Investment Management, LLC July 12, 2001
10.6 Registration Rights Agreement dated May 31, 2001 by and between Exhibit 10.56 to Form S-1 filed on
Rite Aid Corporation; Fir Tree Value Fund, L.P; Fir Tree July 12, 2001
Institutional Value Fund, L.P.; Fir Tree Value Partners LDC; and
Fir Tree Recovery Master Fund, L.P.
11 Statements re Computation of Loss Per Share (See Note 2 to the
condensed consolidation financial statements)
(b) Rite Aid Corporation has filed the following Current Report on Form 8-K
in the thirteen week period ended June 2, 2001:
(1) Rite Aid Corporation filed a Current Report on Form 8-K on March 20,
2001 disclosing under Item 5 press releases announcing (i) the
payment on March 13, 2001 of $200 million plus accrued and unpaid
interest in connection with the repayment of Senior Subordinated
Notes of AdvancePCS and (ii) the sale 5,434,783 shares of
AdvancesPCS Class A Common Stock to a syndicate of underwriters for
net proceeds of approximately $247.1 million, and the exercise by
the underwriter of an over-allotment option in respect of a further
815,117 shares, resulting in net proceeds of approximately $37.1
million.
(2) Rite Aid Corporation filed a Current Report on Form 8-K on May 17,
2001 disclosing under Item 5 a press release dated May 16, 2001
announcing details of a $3.0 billion refinancing package.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 16, 2001
RITE AID CORPORATION
By: /S/ ELLIOT S. GERSON
--------------------
Elliot S. Gerson
Senior Executive
Vice President and
General Counsel
Date: July 16, 2001
By: /S/ JOHN T. STANDLEY
--------------------
John T. Standley
Senior Executive
Vice President and
Chief Financial Officer
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