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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended February 26, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 1-5742
RITE AID CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant based on the closing price at which such
stock was sold on the New York Stock Exchange on June 30, 2000 was
approximately $846,587,542. For purposes of this calculation, executive
officers, directors and 5% shareholders are deemed to be affiliates of the
company.
As of June 30, 2000, the registrant had outstanding 329,491,633 shares of
Common Stock, par value $1.00 per share.
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TABLE OF CONTENTS
Page
----
Cautionary Statement Regarding Forward-Looking Statements............... 1
PART I
Item 1. Business................................................... 2
Item 2. Properties................................................. 13
Item 3. Legal Proceedings.......................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........ 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................ 16
Item 6. Selected Financial Data.................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 33
Item 8. Financial Statements and Supplementary Data................ 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant......... 35
Item 11. Executive Compensation..................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 46
Item 13. Certain Relationships and Related Transactions............. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 49
Signatures........................................................... S-1
Financial Statements................................................. F-1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are identified by terms and phrases such as "anticipate,"
"believe," "intend," "estimate," "expect," "continue," "should," "could,"
"may," "plan," "project," "predict," "will" and similar expressions and
include references to assumptions and relate to the future prospects,
developments and business strategies of Rite Aid Corporation.
Factors that could cause actual results to differ materially from those
expressed or implied in such forward-looking statements include, but are not
limited to:
. Our high level of indebtedness and our ability to refinance our
substantial debt obligations which mature in August and September 2002;
. Our ability to make interest and principal payments on our debt and
satisfy the other covenants contained in our credit facilities and other
debt agreements;
. Our ability to improve the operating performance of our existing stores,
and, in particular, our new and relocated stores in accordance with our
new management's long term strategy;
. The outcomes of pending lawsuits and governmental investigations, both
civil and criminal, involving our financial reporting and other matters;
. The sale of PCS Health Systems, Inc. and other assets which we are
currently negotiating but which may not be consummated;
. Competitive pricing pressures, continued consolidation of the drugstore
industry, third-party prescription reimbursement levels, regulatory
changes governing pharmacy practices, general economic conditions and
inflation, interest rate movements, access to capital and merchandise
supply constraints; and
. Our failure to develop, implement and maintain reliable and adequate
internal accounting systems and controls.
Rite Aid undertakes no obligation to revise the forward-looking statements
included in this report to reflect any future events or circumstances. The
company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences are
discussed in the section entitled "Factors Affecting Our Future Results"
below.
1
PART I
ITEM 1. Business
We are the second largest retail drugstore chain in the United States based
on store count, serving customers in 30 states across the country and in the
District of Columbia. As of June 30, 2000, we operated 3,776 stores and had a
first or second place market position in 34 of the 65 major U.S. metropolitan
markets in which we operated. We operate in two business segments: the retail
drug segment and the pharmacy benefit management ("PBM") segment.
Retail Drug Segment. Through our retail drug segment, we sell prescription
drugs and a wide assortment of general merchandise. Prescription drug sales
represented approximately 58.4% of our total sales during our fiscal year
ended February 26, 2000 ("fiscal 2000"). Our drugstores filled over 190
million prescriptions during fiscal 2000. Our drugstores also offer non-
prescription health and personal care items, cosmetics, household items,
beverages, convenience foods, greeting cards, one-hour photo development,
seasonal merchandise and numerous other everyday and convenience products,
which we refer to as our "front-end products."
PBM Segment. Rite Aid owns PCS Health Systems, Inc. ("PCS"), one of the
country's largest pharmacy benefits managers, or PBMs. Through PCS, we provide
pharmacy benefit management services to employers, insurance carriers and
managed care companies. During fiscal 2000, PCS processed approximately 300
million prescriptions, served more than 1,200 health plan sponsors and
assisted, through its customers, approximately 50 million people with their
pharmaceutical needs. We are currently involved in negotiations concerning the
possible sale of PCS and an agreement could be announced at any time. However,
there can be no assurance that an agreement will be signed or, if it is, that
any sale will be consummated. If no sale transaction is available on terms we
consider acceptable, we intend to continue to own and operate PCS.
Our headquarters is located at 30 Hunter Lane, Camp Hill, Pennsylvania
17011, and our telephone number is (717) 761-2633. Our common stock is listed
on the New York Stock Exchange and the Pacific Stock Exchange under the
trading symbol "RAD."
Recent Events
On October 18, 1999, Rite Aid announced that Martin L. Grass had resigned
his positions as chairman of the board and chief executive officer of the
company. On October 27, 1999, Rite Aid completed the sale of $300 million of
convertible preferred stock to an affiliate of Leonard Green & Partners, L.P.
Following the investment, Leonard I. Green joined Rite Aid's board of
directors and became a member of its executive committee. On November 15,
1999, Mr. Green became the chairman of the board.
On December 5, 1999, a new executive management team, led by Robert G.
Miller, was hired to address and resolve the business, operational and
financial challenges confronting the company. Mr. Miller also succeeded Mr.
Green as the chairman of the board of directors. The new management team,
which has 94 years of collective experience in retail businesses, consists of:
. Robert G. Miller, Chairman of the Board and Chief Executive Officer;
. Mary Sammons, President, Chief Operating Officer and Board Member;
. David Jessick, Chief Administrative Officer and Senior Executive Vice
President; and
. John Standley, Chief Financial Officer and Executive Vice President.
Upon arrival, the new management team began to address the immediate
operational and liquidity problems that confronted Rite Aid. We believe that
these short term challenges have now been substantially resolved. New
management has also developed a long term operational plan that seeks to
capitalize on the substantial investment that Rite Aid has made in its store
base and distribution facilities. By significantly scaling back our new store
development program and focusing our resources on the successful operation of
existing stores, new
2
management intends to increase prescription drug and front-end sales and
restore the profitability of our operations. New management is also developing
a comprehensive plan to strengthen the company's internal accounting systems
and controls. We believe that the successful implementation of these plans
will allow Rite Aid to meet the continuing challenges that it faces.
The Initial Problems
At the time of their arrival, the new management team faced a series of
immediate challenges. These included:
. Deteriorating Store Operations. Rite Aid experienced substantial
operational difficulties during fiscal 2000. The principal problem was a
decline in customer traffic and revenues due to inventory shortages,
reduced advertising and uncompetitive prices on front-end products. By
November 1999, our out-of-stock level had reached 29% and many popular
products were not available in our stores. This situation resulted from
liquidity constraints and concerns, tighter vendor credit terms
resulting from disputes over payments for outdated or damaged
merchandise and a delay in the opening of Rite Aid's new distribution
center in Perryman, MD which caused delays in the shipment of seasonal
merchandise. During fiscal 2000, Rite Aid also suspended its practice of
circulating regular newspaper advertising supplements. This disrupted
customer traffic and adversely affected revenues. In order to offset the
effects of these actions, former management raised the prices of front-
end products above competitive levels. Customers rejected the higher
prices and revenues continued to decline.
. Restatements of Financial Statements. On June 1, 1999, Rite Aid filed
its Annual Report on Form 10-K for the fiscal year ended February 27,
1999 ("fiscal 1999"). In that filing, Rite Aid restated its consolidated
financial statements for the fiscal years ended February 28, 1998
("fiscal 1998") and March 1, 1997, as well as the interim periods in
fiscal 1999 and 1998. The restatement followed discussions between Rite
Aid and the Staff of the Securities and Exchange Commission (the "SEC")
concerning the Staff's review of Rite Aid's filed registration
statement. On October 11, 1999, following further discussions with the
Staff, Rite Aid announced that it would again restate previously
reported interim and annual financial statements. In its quarterly
report for the second quarter of fiscal 2000, filed on November 2, 1999,
Rite Aid restated its interim financial statements for the thirteen
weeks ended May 29, 1999, the thirteen and twenty-six weeks ended August
29, 1998 and its balance sheet as of February 27, 1999. At that time,
Rite Aid indicated that additional adjustments to its financial
statements might be necessary. On November 11, 1999, KPMG LLP resigned
as Rite Aid's auditor and withdrew its report on the company's
consolidated financial statements for the three-year period ended
February 27, 1999.
. Deteriorating Financial Position. From February 1995 through February
2000, Rite Aid spent $1.9 billion to build, renovate or relocate its
stores and $1.5 billion to acquire PCS. These expenditures, together
with the substantial amounts paid to acquire 1,639 stores during the
same period substantially increased Rite Aid's level of debt and placed
a significant strain on its short term liquidity position. The problems
were exacerbated by the inability to complete a public offering of
equity securities to repay the $1.3 billion short-term credit facility,
which had been established to support the commercial paper issuances
used to acquire PCS and which was due in October 1999. In June 1999,
Rite Aid borrowed $300.0 million from one of its banks under a demand
note because it had issued the maximum amount of commercial paper that
was permitted under its credit facilities. In September 1999, Rite Aid
informed its banks that it anticipated being in default on various
covenants under certain of its credit facilities and in October 1999,
Standard & Poor's and Moody's downgraded Rite Aid's credit rating.
Following these events, Rite Aid lost access to the commercial paper
market. On October 27, 1999, in connection with the preferred stock
investment by an affiliate of Leonard Green & Partners, L.P., Rite Aid's
banks agreed to restructure its $2.3 billion of credit facilities and
the $300.0 million demand note. This resulted in an extension of the
$1.3 billion PCS acquisition credit facility (the "PCS credit
facility"), the $1.0 billion credit facility (the "RCF credit
facility"), the $300.0 million demand note and certain other
indebtedness, but only until November 1, 2000.
3
New Management's Response
Since arriving, Rite Aid's new management team has taken a series of steps to
address the serious problems that confronted the company in December 1999.
These have included:
. Stabilizing our Store Operations. Since their arrival, new management
has:
-- reduced the out-of-stock level in its distribution facilities from
29% in November 1999 to 11% for the week ended July 6, 2000;
-- significantly curtailed new store growth by reducing the number of
new and relocated stores planned for fiscal 2001 and 2002 from
approximately 150 each year to approximately 85 and 100 for the
respective years;
-- strengthened vendor relationships by substantially resolving the
major vendor disputes that had arisen during fiscal 1999 and 2000;
-- reduced the prices of key front-end products, including many popular
health and beauty aid products, by approximately 15%;
-- sold $300 million in retail value of discontinued product at a
substantial discount;
-- established a 52-week national advertising program highlighting key
product categories as well as vendor cooperative events;
-- established and executed effective product promotional programs; and
-- reorganized management structure to focus specifically on critical
functions, such as store operations, pharmacy operations, managed
care and customer service.
These actions have begun to improve our operating results. For the four
weeks ended April 22, 2000, the five weeks ended May 27, 2000, and the
four weeks ended June 24, 2000, we reported increases in same store
sales of 7.1%, 6.6% and 9.7%, respectively, over the same periods in the
prior year. These increases compare favorably to February and March
2000, when our same store sales increases were 3.4% and 4.8%,
respectively.
. Re-Auditing our Financial Statements and Restoring Credibility in our
Financial Reporting. Following the resignation of KPMG LLP and the
withdrawal of their report, new management acted to identify, assess and
resolve Rite Aid's financial reporting issues. This process included a
re-evaluation of the accounting issues identified before December 1999
as well as an investigation and restatement of financial statements for
fiscal 1999 and 1998 and the first two quarters of fiscal 2000.
Following the arrival of our new management team we:
-- engaged Deloitte & Touche LLP, through our audit committee, as our
independent public accounting firm to audit our financial statements
for fiscal 2000 and our restated financial statements for fiscal 1999
and 1998;
-- engaged the law firm of Swidler Berlin Shereff Friedman LLP ("Swidler
Berlin"), through our audit committee, to conduct an investigation of
the company's reporting and accounting practices and Swidler Berlin
retained Deloitte & Touche LLP to assist them with forensic
accounting;
-- determined, based on new management's assessment of the situation,
not to make any further periodic filings with the SEC until the
review of the company's books and records was finished and a new
audit had been completed;
-- retained Arthur Andersen LLP to assist us in a reconciliation of Rite
Aid's books and records which was completed in July 2000; and
-- began to develop a plan to strengthen the company's internal
accounting systems and controls.
This process concluded with the preparation of the financial statements
contained in this annual report. In addition, the Swidler Berlin firm
conveyed the results of its investigation to the audit committee and to
management and were considered in connection with the preparation and
restatement of financial statements. There is a summary of the principal
accounting issues addressed in the restatement of the financial
statements for fiscal 1999 and 1998 under the caption "--Restatement of
Historical Financial Statements." See also notes 22 and 24 of the notes
to consolidated financial statements.
4
. Stabilizing our Financial Condition and Liquidity. New management has
addressed Rite Aid's immediate liquidity needs and stabilized its
financial condition through a series of refinancing transactions
completed in June 2000. Since December 1999, Rite Aid has:
-- obtained consents from its various lenders and bondholders to
postpone the required filing dates under its debt agreements for the
third quarter and full year fiscal 2000 SEC reports until July 11,
2000;
-- entered into a new $1.0 billion senior secured credit facility that
matures in August 2002, including a $500.0 million term loan that
was used to refinance our $300.0 million receivables securitization
facility, pay transaction fees and provide funds for general
corporate purposes and a $500.0 million revolving credit facility;
-- obtained an extension of the maturity dates on the outstanding debt
under our PCS credit facility and our RCF credit facility until
August 2002;
-- exchanged $374.3 million of our outstanding notes due in December
2000 and 2001 for $374.3 million of our notes due in September 2002;
-- exchanged $284.8 million of our outstanding loans for 51.8 million
shares of Rite Aid common stock and $274.8 million of our
outstanding loans for an equivalent amount of secured exchange debt
due August 2002;
-- obtained the agreement of two financial institutions to purchase
$93.2 million of our notes due September 2002 when our 5.5% notes
mature in December 2000; and
-- exchanged $177.8 million in principal amount of our 5.25%
convertible subordinated notes due 2002 for 17.8 million shares of
common stock.
Rite Aid continues to be highly leveraged and the covenants of our new
senior secured credit facility and our existing facilities place
constraints on our operations. However, as a result of the actions
described above, we believe that Rite Aid now has the financial flexibility
and liquidity necessary to execute its long term business strategy.
Our Long Term Strategy
New management's long term strategic plan will scale back our new store
development program and focus on enhancing the performance of our existing
store base. We intend to improve the performance of our existing stores by (1)
capitalizing on our substantial investments in our stores and distribution
facilities; (2) enhancing our customer and employee relationships; and (3)
improving our product offerings in the stores. We will also build a
comprehensive plan to establish and maintain an adequate and reliable system
of controls.
Capitalize on Investments in Store Base and Distribution Facilities. Over
the last five years, we have opened 537 new stores, relocated 967 stores,
generally to larger or free-standing sites, remodeled 253 stores and closed
1,039 stores. We also acquired 1,639 stores during the same period. All of our
stores are now integrated into a common information system. Our investments
have given us one of the most modern store bases in the industry, with 36% of
our stores at June 30, 2000 having been constructed or relocated since the
beginning of fiscal 1998. We have also made significant improvements to our
distribution network to support these new stores, including the opening of two
new high capacity distribution centers and the closure of two older centers.
It generally takes two to four years for our new and relocated stores to
develop the critical mass of customers necessary to achieve profitability.
Because of the large percentage of our stores which have been built or
remodeled in the last three years, attracting more customers is a key
component of our long term strategy.
Enhance Customer and Employee Relationships. We have initiated various
promotional programs that are designed to improve our image with customers.
These include the weekly distribution of a nationwide advertising circular to
announce vendor promotions, weekly sales items and, in our expanded test
market, Rite Aid's customer reward program, "Rite Rewards." Through the use of
technology and attention to customers' needs and preferences, we are
increasing efforts to identify inventory and product categories to enable us
to offer more personalized products and services to customers. We are
developing employee-training programs to improve
5
customer service and educate our employees about the products we offer. We are
also developing new employee programs that create compensatory and other
incentives for employees to provide customers with quality service and to
promote Rite Aid's private label brands.
Improve Product Offerings. In recent years Rite Aid has added 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 are continuing to develop ideas for new product departments
and have begun to implement plans to expand the categories of front-end
products that we sell in our larger west coast stores. Another important focus
of our new management team is to increase our offerings and sales of private
label Rite Aid brand products by identifying leading product categories that
we can bring to market under our private label brands. We also want to
increase our sales of generic prescription drugs, which provide the same
desired medical benefits as brand name prescription drugs but provide cost
savings to us and our customers. 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 Rite Aid from
other national drugstore chains.
Build an Adequate and Reliable Financial Reporting System. Following our
comprehensive review of Rite Aid's books and records, new management concluded
it was first necessary to stabilize our accounting systems and procedures and
then to develop, implement and maintain appropriate improvements to assure
that we have adequate and reliable accounting systems and controls. The
company retained Arthur Andersen LLP to provide accounting support to assist
Rite Aid's financial personnel with the resources required to support the
audit of the company's financial statements. New management's long term
strategy includes the development of a comprehensive plan to address the
integrity and reliability of Rite Aid's reporting of financial information.
Accordingly, new management will undertake the first step of this long term
plan by developing policies and procedures that establish a foundation for its
financial and accounting functions, support ongoing improvements and provide
mechanisms for directing, controlling and monitoring our accounting and
financial organization. New management expects that Arthur Andersen LLP will
continue to provide assistance as needed until we are able to operate an
adequate and reliable system of internal accounting controls without outside
support.
Current Challenges and Risks
. Financial Challenges. We have a high level of debt. In June 2000, new
management completed a restructuring of our indebtedness, which extended
the maturities of a significant amount of our indebtedness until at
least August 2002 and provides us with additional borrowing capacity. We
will continue to have significant debt service obligations going forward
and we will be constrained by:
-- interest payment obligations with respect to a total of $5.6 billion
of borrowings and $1.1 billion of capital leases outstanding at June
24, 2000;
-- the financial covenants in our debt agreements, which must be
satisfied in order for us to continue borrowing funds under our
revolving credit facility and may limit our operating flexibility;
and
-- interest rate fluctuations in respect of our floating-rate
indebtedness.
Our ability to refinance our substantial indebtedness before August
2002 will depend, in part, on our ability to execute our long term
strategy and attract more customers to our new and relocated stores.
. Operational Challenges. Our modern, fully-integrated store base allows
us to focus on the challenges of improving our store operations and
increasing store productivity. In responding to the operational issues
that confronted us during fiscal 2000, new management instituted a
number of initiatives to improve store performance. To further improve
our operating performance, we will need to:
-- attract customers through new product offerings and better services;
-- price our products competitively;
-- resolve any issues that may arise with our suppliers; and
-- improve the image of our pharmacies.
. Other Risks. In addition to the foregoing, our business is subject to
other risks including:
-- pending lawsuits against us as well as civil and criminal
investigations by various governmental agencies, including the SEC
and the United States Attorney;
6
-- our ability to develop, implement and maintain reliable and adequate
accounting systems and controls;
-- our reliance on third-party suppliers;
-- changes in third-party reimbursement levels for prescription drugs;
-- our dependence upon key personnel;
-- competition in our markets; and
-- our ability to adhere to governmental regulations with respect to
our pharmacy business.
We describe these risks in greater detail under "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors
Affecting Our Future Prospects."
Restatement of Historical Financial Statements
The financial statements for fiscal 1998 and fiscal 1999 and the summarized
information for the first two quarters of fiscal 2000 included in this report
have been restated to reflect various adjustments. The aggregate effect of
these adjustments on the historical financial statements was to reduce net
income by $493.8 million and $535.9 million for fiscal 1998 and fiscal 1999.
On an aggregate basis, the adjustments for fiscal 1998 and 1999 reduced Rite
Aid's retained earnings at February 27, 1999 by $1.6 billion.
The principal adjustments to Rite Aid's fiscal 1998 and fiscal 1999
financial statements are summarized as follows:
Inventory/Cost of Goods Sold
The restated financial statements reflect adjustments to inventory and cost
of goods sold related primarily to reversals of unearned vendor allowances
previously recorded as a reduction to cost of goods sold, to correctly
applying the retail method of accounting, recording writedowns for slow moving
and obsolete inventory, recognizing certain selling costs including
promotional markdowns and shrink in the period in which they were incurred,
accruing for inventory cut-off, and to reflect vendor allowances in the
inventory balances.
Property, Plant and Equipment
The restated financial statements reflect adjustments to charge certain
items previously capitalized to expense in the period in which they were
incurred. Such items include certain costs for repairs and maintenance,
interest, and internal software expenditures. The adjustments also include
increases to depreciation expense to reverse the effects of retroactive
changes made to the useful lives of certain assets and to depreciate assets
misclassified as construction in-progress.
Lease Obligations
The restated financial statements reflect the sale-leaseback of certain
stores as financing transactions. Such transactions had previously been
accounted for as sales with corresponding operating leases. The adjustment to
correct these items resulted in the reversal of the asset sales and the
establishment of lease obligations. In addition, certain leases previously
accounted for as operating leases were determined to be capital leases.
Purchase Accounting
The company acquired Thrifty PayLess, Inc. in fiscal 1997 and Harco Inc. and
K&B Inc. in fiscal 1998. Certain liabilities associated with these
acquisitions that had previously been established with a corresponding
increase to goodwill have been either reduced or eliminated to correctly
reflect the fair value of the assets and liabilities acquired at the date of
acquisition.
7
Accruals for Operating Expense
The restated financial statements reflect adjustments to expense certain
operating costs in the period in which they were incurred and to record a
corresponding liability for those items not paid at the end of the period.
Such costs primarily consisted of payroll, vacation pay, incentive
compensation, executive retirement plans, scheduled rent increases, and
certain insurance claims.
Exit Costs and Impairment of Operating and Other Assets
The restated financial statements include adjustments to appropriately
reflect charges related to store closures in the period in which the decision,
and ability, to close a store had been made. Other charges not related to
exiting stores and gains from the sale of certain assets previously recorded
against the store exit liability have been reflected as income or expense in
the period in which they were incurred or realized. Adjustments have also been
made to record impairment charges for stores and other assets in the period in
which the impairment occurred. The company also determined that its previous
method of evaluating assets for impairment at a market level was not
appropriate, and that the evaluation should occur at the store level because
this is the lowest level of independent cash flows ascertainable.
For additional information, see note 24 of the notes to consolidated
financial statements.
Description of Business
Retail Drug Segment
Rite Aid's stores sell prescription drugs and a wide assortment of general
merchandise, including over-the-counter drugs, health and personal care items,
cosmetics, greeting cards, household items, convenience foods, photo
development services and seasonal merchandise. We distinguish our stores from
other national chain drugstores in part through the Rite Aid private label
brands, our "stores-within-Rite Aid stores" program with GNC and by our
Internet presence through our website and the drugstore.com website.
Products and Services. During fiscal 2000, sales of prescription drugs
represented approximately 58.4% of our total sales. Rite Aid has derived
revenues of $7.8 billion, $6.7 billion and $5.7 billion, respectively, from
prescription drug sales for each of its last three fiscal years. Rite Aid
sells approximately 20,000 different types of non-prescription, or front-end,
products. No single front-end product category contributed significantly to
Rite Aid's sales during fiscal 2000 although certain front-end product classes
contributed notably to Rite Aid's sales. Our principal classes of products are
the following:
FY 2000
Percentage of
Product Class Sales/Revenues
------------- --------------
Prescription drugs............................................ 58.4%
Vitamins and mineral supplements.............................. 2.0
Cosmetics..................................................... 3.0
Seasonal...................................................... 2.0
Photo Development............................................. 2.0
Beer, wine and liquor......................................... 3.0
Greetings cards............................................... 2.0
Rite Aid offers over 1,500 products under the Rite Aid private label brand,
which contributed approximately 9.2% of our front-end sales in fiscal 2000.
During fiscal 2000, Rite Aid added 80 products under its private label. One of
new management's goals is to increase sales and the number of private label
brand products we offer.
In June 1999, Rite Aid acquired a 22% stake in drugstore.com, an online
source for health, beauty and pharmacy products, for cash of $8.1 million and
the company's agreement to provide access to the company's pharmacy networks
and insurance coverages, advertising contracts and exclusivity agreements. In
connection with this investment, Rite Aid and drugstore.com entered into a 10-
year exclusive strategic alliance pursuant to which drugstore.com became the
exclusive customer online link for prescriptions and other products and
services offered at all Rite Aid retail drugstores. The agreement gave Rite
Aid an immediate presence in the Internet drugstore business and resulted in
one of the first online pharmacies. We are focusing on leveraging our
8
relationship with drugstore.com to increase online sales and to generate
higher in-store sales to online customers who select in-store order pick-up.
At June 30, 2000, we owned approximately 18% of drugstore.com.
On January 7, 1999, Rite Aid announced a strategic alliance with GNC under
which Rite Aid agreed to open, own and operate a minimum of 1,500 GNC "stores-
within-Rite Aid-stores" across the country over a period of approximately four
years. GNC is a leading nationwide retailer of vitamin and mineral supplements
and personal care, fitness and other health-related products. As of June 30,
2000, we built 400 GNC stores-within-Rite Aid-stores. We plan to open 500 GNC
departments in our stores during fiscal 2001.
Rite Aid Stores
In February 1995, Rite Aid initiated a campaign to expand and modernize its
store base. During fiscal 1995, Rite Aid acquired 312 stores located in the
midwest and northeast regions in three acquisition transactions for a total
cost of approximately $175.7 million. In fiscal 1997, Rite Aid acquired
Thrifty PayLess, a drugstore chain with 1,006 stores located on the west
coast, for approximately $1.5 billion. In the same year, Rite Aid acquired
Taylor Drug Stores and Concord Drugs, Inc. for an aggregate cost of $33.6
million. In fiscal 1998, Rite Aid acquired the K&B, Incorporated and Harco,
Inc. chains, with 186 and 146 stores, respectively, for a total cost of
$335.0 million, net of cash acquired. These stores were located in the
southern region of the United States. In February 1999, Rite Aid acquired
Edgehill Drugs, Inc., which had 25 stores in Maryland and Delaware, for $25.0
million in cash. As of June 30, 2000, we had fully integrated these acquired
stores into our operations.
Rite Aid also has been modernizing its storebase. Rite Aid began opening
prototype stores in 1995 that include features that we believe increase
customer satisfaction, including drive-through pharmacies, one-hour film
developing departments, 24-hour stores and a layout that is designed to be
attractive to our customers.
During fiscal 2000, Rite Aid opened 77 new stores, relocated 178 stores,
remodeled 14 stores and closed 181 stores. On a regular basis throughout the
year, we evaluate the performance of our stores. Stores that are redundant,
underperforming or otherwise unsuitable are closed or relocated. Our current
plan for fiscal 2001 is to open approximately 12 new stores, relocate 73
stores and close 53 stores.
As of June 30, 2000, Rite Aid operated 3,776 retail drugstores in the
eastern, southern and western regions of the United States and the District of
Columbia. Rite Aid's strategy is to locate its stores at convenient locations
in fast-growing metropolitan areas. As of June 30, 2000, Rite Aid has a first
or second place market position in 34 of the 65 major U.S. metropolitan
markets in which it operates.
The table below identifies the number of stores by state as of June 30,
2000(/1/):
Store
State Count
- ----- -----
Alabama................. 118
Arizona................. 3
California.............. 624
Colorado................ 46
Connecticut............. 50
Delaware................ 26
District of Columbia.... 7
Georgia................. 36
Idaho................... 23
Indiana................. 36
Kentucky................ 129
Louisiana............... 103
Maine................... 85
Maryland................ 166
Michigan................ 353
Mississippi............. 35
Store
State Count
- ----- -----
Nevada................... 37
New Hampshire............ 40
New Jersey............... 186
New York................. 397
Ohio..................... 292
Oregon................... 75
Pennsylvania............. 378
Tennessee................ 54
Texas.................... 5
Utah..................... 30
Vermont.................. 13
Virginia................. 166
Washington............... 146
West Virginia............ 116
Wyoming.................. 1
-----
Total................... 3,776
9
- --------
(1) As of February 26, 2000, we operated 3,802 stores throughout 31 states,
including the District of Columbia.
Technology. All of our stores are connected to a common information system
and network which can be expanded to accommodate new stores. Additionally,
each Rite Aid store employs point-of-sale technology that facilitates
inventory replenishment, sales analysis and recognition of customer trends.
Our pharmacies employ technology that enables us to fill prescriptions with
increased accuracy and efficiency. In 1998, we began purchasing ScriptPro
units, which can be linked to the pharmacist's computer to fill and label
prescription drug orders. As of June 30, 2000 we had installed ScriptPro units
in 845 of our stores and plan to install approximately 150 additional units in
fiscal 2001. Our customers may also order prescription refills over the
Internet through drugstore.com or through our telephonic rapid automated
refill systems.
Suppliers. During fiscal 2000, we purchased approximately 87% of the dollar
volume of our prescription drugs from a single supplier, McKesson HBOC, Inc.
("McKesson"), pursuant to a long term supply contract which expires in April
2000, subject to a three year renewal at Rite Aid's option. Pursuant to the
contract, McKesson has agreed to sell to Rite Aid all of its branded
pharmaceutical products on an exclusive basis and generic pharmaceutical
products on a non-exclusive basis. If Rite Aid's relationship with McKesson
were disrupted, we could have difficulty filling prescriptions, which would
negatively affect our business. Rite Aid purchases its non-pharmaceutical
merchandise from numerous manufacturers and wholesalers. Rite Aid believes
that competitive sources are readily available for substantially all of the
non-prescription merchandise we carry and that the loss of any one supplier
would not have a material effect on Rite Aid's business.
Rite Aid sells private label and co-branded products that generally are
supplied by numerous competitive sources. The Rite Aid and GNC co-branded
PharmAssure(R) vitamin and mineral supplement products and the GNC branded
vitamin and mineral supplement products that we sell in our stores are
manufactured and developed by GNC as are the Rite Aid brand vitamin and
mineral and supplements.
Customers. During fiscal 2000, Rite Aid served an average of 1.8 million
customers per day. The loss of any one customer would not have a material
adverse impact on the results of the operations of our retail drugstore
segment. No single customer accounts for more than 10% of the total sales of
our retail drug segment.
Competition. Based on the number of stores as of the end of fiscal 2000,
Rite Aid is the second largest retail drugstore chain in the United States. We
compete directly with national chain drugstores, including CVS and Walgreen.
The retail drugstore industry is highly competitive, with retail drugstore
chains not only facing competition within the industry, but also from mail
order pharmacies and other retail outlets offering pharmacy services,
including Internet-based outlets. Rite Aid competes on the basis of store
location and convenient access, customer service and product selection and
price.
Employees. As of February 26, 2000, Rite Aid employed 77,258 employees in
the retail drug segment. Approximately 13% of these employees are pharmacists.
Rite Aid believes that its relationships with the employees in the retail drug
segment are good.
Working Capital. Rite Aid generally finances its 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. The majority of our front-end sales are in cash. Third-party insurance
programs, which typically settle in fewer than 30 days, accounted for 87.8% of
our pharmacy sales and 47.8% of our revenues in fiscal 2000. Our customer
returns are not significant.
Seasonality. Rite Aid's retail drug segment does not experience significant
fluctuations in results of operations as the result of seasonality.
Research and Development Rite Aid's retail drug segment does not make
significant expenditures for research and development. In fiscal 2000,
however, Rite Aid spent approximately $10.8 million in connection with the
development of the PharmAssure co-brand and other private label products. In
addition, we expended $500,000 to develop store floor plan prototypes and to
formulate marketing plans for our operating regions and on a nationwide basis.
10
Licenses, Trademarks and Patents. The Rite Aid name is our most significant
trademark and the most important factor in marketing our stores and private
label products. We hold licenses to sell beer, wine and liquor; cigarettes and
lottery tickets. Additionally, we hold licenses granted to us by the Nevada
Gaming Commission. We also hold licenses to operate our pharmacies and our
distribution facilities. Together, these licenses are material to our
operations.
PBM Segment
Our pharmacy benefit management segment, or PBM segment, offers pharmacy
benefit management services to employers, managed care companies (HMOs) and
insurance carriers for management of the wide variety of pharmacy benefit
programs that our customers may offer to their employees or members. PCS also
provides mail order pharmacy services. Rite Aid entered into the pharmacy
benefit management business with the acquisition of PCS from Eli Lilly and
Company in January 1999. PCS is the nation's second largest pharmacy benefits
manager, providing pharmacy related services to approximately 50 million
people in the United States during fiscal 2000.
The Company is currently in negotiations concerning the possible sale of
PCS. The negotiations are on-going and an agreement could be announced at any
time. No agreement has been reached at the time of this filing. No assurance
can be given that an agreement will be reached or that, if an agreement is
entered into, that a sale of PCS will be completed. If no sale transaction is
available on terms we consider acceptable, we intend to continue to own and
operate PCS. Based on the current negotiations, we expect to incur a
substantial loss upon the commitment to sell PCS compared to the acquisition
cost of $1.5 billion. See "Management's Discussion of Results of Operations
and Financial Condition -- General."
PCS Services. PCS does business nationwide and offers its customers a
variety of pharmacy network choices, depending on a customer's needs in
serving its own employees or members. The networks can be broad, where
participating pharmacies may number more than 55,000, or narrow, where
participating pharmacies may be limited to a particular group or even a single
pharmacy. PCS manages its customer pharmacy benefits programs by providing
participants with access to electronic claims adjudication when purchasing
drugs from network pharmacies. The network pharmacy communicates with PCS to
verify plan coverage, plan benefits and participant cost share amounts. PCS
manages the information technologies and data used in these transactions and
also manages the billing and payment aspects of the claim by the pharmacy for
payment by PCS's customer. PCS managed approximately 300 million prescription
claims during fiscal 2000.
PCS also develops formularies that promote the reduction of prescription
drug costs for its pharmacy benefits plan customers. Formularies are lists of
preferred drugs that PCS designs with its customers for the administration of
the client's prescription drug benefit plan. The use of a formulary can reduce
drug costs by promoting generic or less costly drugs that provide and maintain
the desired medical effect of more costly drugs.
In addition, PCS operates a mail order pharmacy for the participants in its
customers' prescription drug benefit plans. PCS fills mail order prescriptions
with drugs from its own inventory. During fiscal 2000, PCS processed an
aggregate of approximately 30,000 prescriptions a day from its two mail order
facilities in Birmingham, Alabama and Fort Worth, Texas. PCS intends to expand
its Internet operations in order to facilitate prescription ordering online.
PCS derives its revenues through contractual arrangements with its
customers, pharmacies and drug manufacturers. These contracts provide PCS with
revenues for pharmacy benefit management services, including claims processing
services and services related to the negotiation and implementation of drug
pricing arrangements with drug manufacturers.
Technology. PCS is focusing on the development of its Internet capabilities,
including its website, PCSRx.com. PCSRx is linked to the drugstore.com website
and to the intranets of many of its customers. PCS also is seeking to increase
its efficiency and reduce the costs of its operations through increased use of
the Internet.
11
Customers. PCS has several large customers. No single customer is
responsible for 10% or more of PCS's consolidated revenues. The loss of any
single large customer, however, could have a material adverse effect on the
PBM segment.
Competition. Competition in the PBM industry is intense. PCS competes with
numerous PBMs, including Merck-Medco Managed Care, a subsidiary of Merck &
Co., Inc., and Express Scripts, Inc., an affiliate of NYLIFE HealthCare
Management, Inc. PCS also competes with smaller companies, including Caremark
International, Inc. and Advance Paradigm, Inc. PCS competes on the basis of
its ability to provide high quality, cost-effective and reliable PBM services
that can meet the wide-ranging needs of its customer base.
Employees. At February 26, 2000, PCS employed 3,560 people. PCS is dependent
on its information technology employees and its technology and information
systems. Rite Aid believes its relationship with the PBM segment's employees
is good.
Working Capital. PCS generally finances its inventory and capital
expenditure requirements with cash generated from operations. The majority of
PCS's prescription drug sales are collected through third parties with
payments received by PCS, in most cases, within 30 days of the sale. PCS
maintains approximately two weeks of inventory to fill its mail order
prescription sales.
Licenses, Trademarks and Patents. PCS's name and its website address,
www.PCSRx.com are its most valuable license and trademark. PCS otherwise does
not rely on any licenses, trademarks or patents.
Regulation
Rite Aid's pharmacies and pharmacists must be licensed by the appropriate
state boards of pharmacy. Our pharmacies and distribution centers are also
registered with the Federal Drug Enforcement Administration. Applicable
licensing and registration requirements require our compliance with various
state statutes, rules and/or regulations. If Rite Aid were to violate any
applicable statute, rule or regulation, our licenses and registrations could
be suspended or revoked.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, either nationally or at the
state level. Such legislative initiatives include prescription drug benefit
proposals for Medicare participants. Also, in recent years both the federal
and state authorities have proposed and have passed new legislation that
imposes on healthcare providers, including pharmacies, significant additional
obligations concerning the protection of confidential patient medical records
and information. Although Rite Aid is well positioned to respond to these
developments, Rite Aid cannot predict the outcome or effect of legislation
resulting from these reform efforts.
PCS is required to comply with various regulations including the Robinson-
Patman Act and various anti-remuneration laws under Medicare and Medicaid. PCS
also is subject to mail pharmacy regulation with respect to its mail service
pharmacies in Fort Worth, Texas and Birmingham, Alabama that may require PCS
to be registered or licensed in states where PCS delivers pharmaceuticals. In
addition, PCS is subject to consumer practice laws and network access
legislation, which may require PCS to admit retail pharmacies to, or maintain
pharmacies within, its pharmacy networks under certain circumstances, and to
comply with licensure and registration laws as applicable under state law.
PCS's business is also subject to the Employee Retirement Income Security Act
of 1974 ("ERISA"). Certain legislation at both the state and federal level is
developing or pending that may relate to PCS's business, such as legislation
that allows plan members to use non-network providers, and that concerns the
confidentiality of patient medical records. Rite Aid cannot predict how PCS
would be affected if any pending legislation concerning its business were
enacted in the future. PCS may be required to comply with other regulations or
legislation as enacted or made applicable to it from time to time.
12
ITEM 2. Properties
We own our corporate headquarters, which is located in a 205,000 square foot
building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a 99,000
square foot building near Harrisburg, Pennsylvania for use by additional
administrative personnel. We lease most of our drugstore facilities under non-
cancellable leases, many of which have original terms of 15 to 20 years. In
addition to minimum rental payments, which are set at competitive market
rates, certain leases require additional payments based on sales volume, as
well as reimbursement for taxes, maintenance and insurance. Most of Rite Aid's
leases contain renewal options, some of which involve rent increases.
As of June 30, 2000, Rite Aid had 3,776 retail drugstores, of which 3,476
were leased. The overall average size of each store in the Rite Aid chain is
12,600 square feet. The stores on the east coast average 9,500 square feet per
store. The west coast stores average 21,300 square feet per store. The
southern stores average 12,100 square feet per store.
Rite Aid operates the following distribution centers and overflow storage
locations, which it owns or leases as noted:
Approximate
Owned or Square
Location Leased Footage
-------- -------- -----------
Rome, New York........................................ Owned 291,000
Utica, New York(1).................................... Leased 106,800
Poca, West Virginia................................... Owned 280,000
South Nitro, West Virginia(1)......................... Leased 50,000
Perryman, Maryland.................................... Leased 875,000
Tuscaloosa, Alabama................................... Owned 285,000
Cottondale, Alabama(1)................................ Leased 104,832
Pontiac, Michigan..................................... Owned 370,000
Ogden, Utah(2)........................................ Owned 638,000
Woodland, California(1)............................... Owned 500,000
Woodland, California.................................. Leased 200,000
Wilsonville, Oregon................................... Leased 500,000
Lancaster, California................................. Leased 930,000
--------
(1) Overflow storage locations.
(2) The Ogden, Utah distribution center was sold on March 23, 2000.
Stores serviced by the Ogden distribution center are now being
served by a new distribution center in Lancaster, California.
The terms of the leases for distribution centers range from five to 22
years. In addition to minimum rental payments, certain distribution centers
require tax reimbursement, maintenance and insurance. Most leases contain
renewal options, some of which involve rent increases.
On a regular basis and as part of our normal business, we evaluate store
performance and may close or relocate a store if the store is redundant,
underperforming or otherwise deemed unsuitable. When we close or relocate a
leased store, we often continue to have leasing obligations, in which case
Rite Aid usually attempts to sublease the former store. As of February 26,
2000, Rite Aid subleased approximately 5,811,993 square feet of space as a
result of closing or relocating stores and an additional 7,611,674 square feet
of space in closed stores was not subleased.
Rite Aid owns a 52,200 square foot ice cream manufacturing facility located
in El Monte, California.
Through PCS, Rite Aid also owns a 363,000 square foot building and leases an
additional 140,000 square feet of office space for the general offices and
headquarters of PCS. Also through PCS, Rite Aid leases a 93,800
13
square foot mail order facility in Fort Worth, Texas and owns a 112,000 square
foot mail order facility in Birmingham, Alabama.
ITEM 3. Legal Proceedings
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving our
financial reporting and other matters. Rite Aid is cooperating fully with the
SEC and the United States Attorney. Also, as previously discussed, Rite Aid's
audit committee engaged the law firm of Swidler Berlin Shereff Friedman LLP to
conduct an independent investigation of those matters. The results of Swidler
Berlin's investigation have been conveyed to the audit committee and to
management and were considered in connection with the preparation and
restatement of the financial statements.
The U.S. Department of Labor has commenced an investigation of matters
relating to Rite Aid's employee benefit plans, including its principal 401(k)
plan which permitted employees to purchase Rite Aid common stock. Purchases of
Rite Aid common stock under the plan were suspended in October 1999. Rite Aid
is cooperating fully with the Department of Labor.
These federal investigations are ongoing and we cannot predict their
outcomes. If Rite Aid were convicted of any crime, certain contracts and
licenses that are material to our operations may be revoked, which would have
a material adverse effect on our results of operations and financial
condition. In addition, substantial penalties, damages or other monetary
remedies assessed against Rite Aid could also have a material adverse effect
on our results of operation and financial condition.
Stockholder litigation
Rite Aid, 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 shareholders who
purchased Rite Aid securities on the open market between May 2, 1997 and
November 10, 1999. With one exception, the cases have been consolidated in the
U.S. District Court for the Eastern District of Pennsylvania, where plaintiffs
have filed a third amended complaint and have been given leave of court to
file a fourth amended complaint on or before August 10, 2000. Most of the
existing complaints assert claims against defendants under Sections 10 and 20
of the Securities Exchange Act of 1934, as amended, based upon the allegation
that Rite Aid's financial statements for its 1997, 1998 and 1999 fiscal years
fraudulently misrepresented its financial position and results of its
operations for those periods, among other allegations. Two actions also assert
claims against defendants under Section 18 of the Exchange Act and one action
asserts claims under the Florida Securities Act and Florida common law, all
based upon similar allegations.
If any of these cases were to result in a substantial monetary judgment
against Rite Aid, or is settled on unfavorable terms, Rite Aid's results of
operation and financial position could be materially adversely affected.
Certain of Rite Aid's former officers (Martin L. Grass, Timothy J. Noonan
and Frank Bergonzi), certain of its current and former directors (Alex Grass,
Philip Neivert, Franklin C. Brown, Leonard I. Green, Leonard N. Stern and
Nancy A. Lieberman), its former auditor, KPMG LLP, and Rite Aid as nominal
defendant, have been sued by Rite Aid shareholders derivatively on behalf of
Rite Aid in derivative actions brought in the U.S. District Court for the
Eastern District of Pennsylvania and the Chancery Court of the State of
Delaware. The derivative complaints purport to assert claims on behalf of Rite
Aid against the defendants for violation of duties asserted to be owed by such
defendants to Rite Aid, based upon allegations similar to those contained in
the complaints in the securities cases described above. The time for
defendants to respond to the derivative complaints has not yet run. Rite Aid
has made no determination yet as to how it will respond to the derivative
complaints and is unable to predict the ultimate outcome of this litigation.
14
Drug pricing and reimbursement matters
Civil proceedings are continuing involving Rite Aid's pricing-related
practices for prescription drugs. On September 22, 1999, the Florida Attorney
General filed a complaint against Rite Aid in the Second District, Leon
County, alleging violations of the Florida Deceptive and Unfair Trade
Practices Act and the state RICO statute. Rite Aid no longer operates any
retail drugstores in Florida. In essence, Florida asserted that Rite Aid's
former practice of allowing its pharmacists the discretion to charge non-
uniform prices through the use of positive overrides for cash purchases of
prescription drugs was unlawful. Rite Aid discontinued its use of this policy
in June 1998 throughout its retail drugstores. On February 18, 2000, the
reviewing Florida state court dismissed with prejudice the Florida Attorney
General's complaint. On May 5, 2000, the same court denied Florida's motion to
rehear the case and affirmed the initial decision on the merits, but granted
Florida's motion to amend its complaint. On July 5, 2000, Rite Aid filed a
motion to dismiss the amended complaint.
The filing of the complaint by the Florida Attorney General, and Rite Aid's
press release issued in conjunction therewith, precipitated the filing of
purported federal class actions in Alabama and California and purported state
class actions in New Jersey, New York, Oregon, and Pennsylvania. All of the
class actions are based on facts essentially identical to those contained in
the Florida complaint and none specify damages. Rite Aid has asserted in court
filings that its imposition of positive overrides was a legitimate utilization
of non-uniform pricing similarly engaged in by many other sectors of retail
commerce. Rite Aid filed motions to dismiss each of the uncertified class
action complaints for failure to state a claim for which relief could be
granted. Rite Aid's arguments have prevailed in each of the cases in which a
court decision has been rendered thus far. On December 27, 1999, the United
States District Court for the Northern District of Alabama dismissed the
federal RICO claims against Rite Aid with prejudice and the plaintiffs later
filed an appeal with the Eleventh Circuit. That appeal is currently pending.
On May 21, 2000, an Oregon state court judge granted Rite Aid's motion to
dismiss the purported class action there with prejudice. On June 12, 2000, the
United States District Court for the Central District of California dismissed
that case and on June 27, 2000, a New Jersey state court dismissed that class
action there. Motions to dismiss the state class actions in New York and
Pennsylvania are currently pending.
Rite Aid believes that all of the positive override lawsuits are without
merit under applicable state consumer protection laws and/or state or federal
RICO statutes. As a result, Rite Aid intends to continue to vigorously defend
each of the pending actions and does not anticipate, if fully adjudicated,
that any of the lawsuits will result in an award of damages and/or civil
penalties. However, such an outcome for each of the actions cannot be assured
and a ruling against Rite Aid could have a material adverse effect on the
financial position and operations of the company as well as necessitate
substantial additional expenditures to cover legal costs as it pursues all
available defenses.
Rite Aid has also recently been notified that it is being investigated by
multiple state attorneys general for its reimbursement practices relating to
partially-filled prescriptions and fully-filled prescriptions that are not
picked up by ordering customers. We are supplying similar information with
respect to these matters to the Department of Justice. Rite Aid believes that
these investigations are similar to investigations which were, and are being,
undertaken with respect to the practices of others in the retail drug
industry. Rite Aid also believes that its existing policies and procedures
fully comply with the requirement of applicable law and intends to fully
cooperate with these investigations. We cannot, however, predict their
outcomes at this time.
If any of these cases result in a substantial monetary judgment against Rite
Aid or is settled on unfavorable terms, Rite Aid's results of operations and
financial position could be materially adversely affected.
PCS legal proceedings
In November 1999, PCS received a subpoena from the Office of Inspector
General of the Department of Health and Human Services ("OIG"). The subpoena
requests general information about PCS's formulary programs and rebate
practices and makes no allegation of any wrongdoing by PCS. PCS is fully
cooperating
15
with the inquiry and believes that no regulatory action will be taken by OIG
against PCS that will have a material adverse effect on PCS's business. Rite
Aid cannot predict the outcome of this matter.
In January 1998, a purported class action was brought against PCS by a
participant in a plan managed by PCS in the federal district court in New
Jersey. The plaintiff alleged that PCS is an ERISA fiduciary and that, as such,
breached its fiduciary obligations under ERISA and that PCS received improper
kickbacks and rebates from certain drug manufacturers. PCS believes that the
plaintiff's action is without merit and is vigorously defending this action.
Rite Aid cannot predict the outcome of this action.
Other
In addition, Rite Aid is subject from time to time to lawsuits arising in the
ordinary course of business. In the opinion of management, these matters are
covered adequately by insurance or, if not so covered, are without merit or are
of such nature or involve such amounts as would not have a material adverse
effect on Rite Aid's financial condition, cash flow or results of operations if
decided adversely. Rite Aid, regardless of insurance coverage, does not believe
that it has a material, estimable, and probable liability in regard to these
claims and lawsuits as of February 26, 2000 or July 11, 2000.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Rite Aid's common stock is listed on the New York and Pacific Stock Exchanges
under the symbol RAD. On June 30, 2000, Rite Aid had approximately 11,660
record shareholders. Quarterly high and low stock prices, based on the New York
Stock Exchange composite transactions, together with dividend information are
shown below:
Fiscal Quarter High Low Dividend
------ ------- -------- ------- --------
2000..................................... First 41 3/4 21 $.1150
Second 26 15/16 17 1/2 $.1150
Third 21 1/16 4 1/2 $.1150
Fourth 13 1/4 6 3/8 $ -- (1)
1999..................................... First 36 9/16 29 3/4 $.1075
Second 45 1/8 34 5/8 $.1075
Third 41 9/16 33 9/16 $.1075
Fourth 51 1/8 39 9/16 $.1150
- --------
(1) No dividend was declared in the fourth quarter of fiscal 2000. Our current
credit facilities do not allow us to pay dividends.
Sales of unregistered securities On October 27, 1999, Rite Aid issued and
sold to Green Equity Investors III, L.P. 3,000,000 shares of Rite Aid's series
A cumulative convertible pay-in-kind preferred stock ("series A preferred
stock"), at a purchase price of $100.00 per share, for an aggregate purchase
price of $300.0 million. The series A preferred stock had an 8% cumulative pay-
in-kind dividend paid quarterly. On December 10, 1999, Green Equity Investors
III, L.P. exchanged all of its series A preferred stock for 3,000,000 shares of
Rite Aid's series B cumulative convertible pay-in-kind preferred stock ("series
B preferred stock"). The series B preferred stock has the same terms as the
series A preferred stock, except that the series B preferred stock will vote
with the holders of Rite Aid common stock and each holder of series B preferred
stock will have one vote for each share of the common stock issuable upon
conversion of the holder's series B preferred stock. When issued, the series B
preferred stock was convertible into shares of Rite Aid common stock at a
conversion price of $11.00 per share subject to adjustment: (1) to any price
that is lower than the then current conversion price at
16
which Rite Aid issues common stock prior to October 27, 2000; or (2) on March
1, 2002, to the lowest average price, but not less than $7.50, of Rite Aid's
common stock during any consecutive three-month period from October 27, 1999
through February 28, 2001, if such average price is lower than the then current
conversion price or, if not lower, to $11.50. As a result of the exchange of
Rite Aid's bank debt for shares of Rite Aid common stock at an exchange rate of
$5.50 per share, as discussed below, the conversion price for the series B
preferred stock was adjusted to $5.50 per share.
On October 27, 1999, Rite Aid issued a warrant to J.P. Morgan Ventures
Corporation, an affiliate of J. P. Morgan, to purchase 2,500,000 shares of Rite
Aid common stock. The exercise price for the common stock is $11.00 per share,
subject to certain adjustments. The warrant expires on September 23, 2002. The
warrant was issued in connection with the extension and restructuring of Rite
Aid's banking facilities. J. P. Morgan is one of Rite Aid's principal lenders.
On June 14, 2000, certain lenders, including J.P. Morgan Ventures
Corporation, exchanged $284.8 million of their loans under the PCS credit
facility and the $300.0 million demand note into 51,785,434 shares of Rite Aid
common stock at an exchange rate of $5.50 per share.
On June 14, 2000, Rite Aid issued $374.3 million of 10.5% senior secured
notes due 2002 in exchange for $52.5 million of Rite Aid's outstanding 5.5%
notes due 2000 and $321.8 million of Rite Aid's outstanding 6.7% notes due
2001. Also, Rite Aid entered into an agreement with J.P. Morgan and a financial
institution under which they agreed to purchase $93.2 million of the 10.5%
senior secured notes due 2002 when the 5.5% notes that remain outstanding
mature in December 2000.
The series A preferred stock, the series B preferred stock, the warrant, the
10.5% senior secured notes due 2002, and the Rite Aid common stock issued in
exchange for certain Rite Aid private bank debt were issued in transactions
exempt from registration in reliance on Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act").
On June 26, 2000, the holders of $177.8 million principal amount of Rite
Aid's outstanding 5.25% convertible subordinated notes due 2002 exchanged these
notes for 17,779,000 shares of Rite Aid's 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.
17
ITEM 6. Selected Financial Data
The following selected financial data of Rite Aid should be read in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements appearing on pages F-1 through F-39. Selected financial data is
presented for three fiscal years. The company's financial statements for
fiscal years ending February 27, 1999 and February 28, 1998 have been
restated. These restatements supercede the prior restatements of such periods
announced in June and November 1999. Substantial time, effort and expense was
required over a six month period to review, assess, reconcile, prepare, and
audit financial statements for fiscal 2000, fiscal 1999 and fiscal 1998. Rite
Aid believes it would require an unreasonable effort and expense to conduct a
similar process to restate fiscal years 1997 and 1996 and that it is unlikely
that periods prior to March 1, 1997 could be restated. Therefore, financial
data for fiscal years 1997 and 1996 have not been restated and should not be
relied upon. For a further discussion of the restatement see "Business--
Restatement of Historical Financial Statements" and note 24 of the notes to
consolidated financial statements.
February 27, February 28,
February 26, 1999 1998
2000 (52 weeks)(1) (52 weeks)(2)
(52 weeks) (as restated)(3) (as restated)(3)
------------ ---------------- ----------------
(In thousands, except per share amounts)
Summary of Operations:
REVENUES........................ $14,681,442 $12,782,890 $11,533,423
COSTS AND EXPENSES:
Cost of goods sold, including
occupancy costs.............. 11,412,774 9,743,835 8,603,318
Selling, general and
administrative expenses...... 3,712,279 3,144,134 2,835,395
Gain on sale of stores........ (80,109) -- (52,261)
Goodwill amortization......... 56,832 29,227 26,480
Store closing, impairment and
other charges................ 163,185 192,551 148,560
Interest expense.............. 520,336 277,226 209,152
Share of loss from equity
investment................... 11,893 448 1,886
----------- ----------- -----------
15,797,190 13,387,421 11,772,530
----------- ----------- -----------
Loss before income taxes...... (1,115,748) (604,531) (239,107)
INCOME TAX EXPENSE (BENEFIT) ... 8 (182,049) (52,916)
----------- ----------- -----------
Loss before cumulative effect
of accounting change......... (1,115,756) (422,482) (186,191)
Cumulative effect of
accounting change, net of
income tax benefit of $22,760
............................. (27,300) -- --
----------- ----------- -----------
Net loss.................... $(1,143,056) $ (422,482) $ (186,191)
----------- ----------- -----------
BASIC AND DILUTED LOSS PER SHARE
...............................
Loss before cumulative effect
of accounting change......... $ (4.34) $ (1.64) $ (0.74)
Cumulative effect of
accounting change, net....... $ (0.11) $ -- $ --
----------- ----------- -----------
Net loss.................... $ (4.45) $ (1.64) $ (0.74)
=========== =========== ===========
- --------
(1) PCS was acquired on January 22, 1999.
(2) K&B and Harco Stores were acquired in August 1998.
(3) See note 24 of the notes to consolidated financial statements for a
description of the adjustments resulting from the restatements.
18
February 27, February 28,
February 26, 1999 1998
2000 (52 weeks)(1) (52 weeks)(2)
(52 weeks) (as restated)(3) (as restated)(3)
------------ ---------------- ----------------
(Dollars in thousands except dividends)
Year-End Financial Position:
Working capital (deficit)..... $ 893,053 $ (787,926) $1,247,622
Property, plant and equipment
(net)........................ 3,629,919 3,645,099 2,453,754
Total debt (4)................ 6,608,901 5,914,771 3,125,161
Total assets.................. 10,807,854 10,512,540 7,398,250
Redeemable preferred stock.... 19,457 23,559 --
Stockholders' equity.......... 431,508 1,350,585 1,870,759
Other Data:
Cash dividends declared per
common share................. $ .4375 $ .4375 $ .4075
Basic weighted average
shares....................... 259,139 258,516 250,659
Diluted weighted average
shares....................... 259,139 258,516 250,659
Number of retail drugstores... 3,804 3,821 3,975
Number of employees........... 77,258 89,900 83,000
- --------
(4) Includes capital lease obligations of $1.1 billion, $1.1 billion and $612
million as of February 26, 2000, February 27, 1999 and February 28, 1998,
respectively.
19
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Management's Discussion and Analysis of Results of Operations for the
years ended February 27, 1999 and February 28, 1998 presented below reflects
certain restatements to Rite Aid's previously reported results of operations
for these periods. See "Business--Restatement of Historical Financial
Statements" and note of the notes to consolidated financial statements for a
discussion of these restatements.
Overview
Management believes that the following matters should be considered in
connection with the discussion of results of operations and financial
condition.
Maturing Store Base. Since the beginning of fiscal 1998, Rite Aid has built
376 new stores, relocated 727 stores and closed 791 stores. These new and
relocated stores represent approximately 29% of Rite Aid's total stores at
June 30, 2000. The new and relocated stores opened in recent years are
generally larger, free standing stores with higher operating expenses than our
older stores. New stores generally do not become profitable until a 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 between 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 our recent operating results. As new management continues to implement its
long term strategy, it will scale back Rite Aid's new store construction
program and focus on making the operations of its existing base of new and
relocated stores profitable. Management believes that as these newer stores
mature they should gain the critical mass of customers needed for profitable
operations. This continuing maturation should positively affect Rite Aid's
operating performance in future periods. If we are not able to improve the
performance of these new and relocated stores it will adversely affect our
ability to restore the profitability of our operations.
Reclassification of Lease Obligations. In connection with the restatement of
Rite Aid's operating results for fiscal 1999 and 1998, certain store leases
that had previously been classified as operating leases have now been
classified as capital leases. As a result of this restatement, our property,
plant and equipment and total debt balances at February 26, 2000 were
increased by $987.0 million and $1,072.3 million, respectively. The change in
classification of these lease obligations will result in an allocation of
depreciation charges to cost of goods sold and selling, general and
administrative expense. In addition, a portion of the lease payments will be
included in interest expense..
Substantial Investigation Expenses. The company has incurred substantial
costs in connection with the process of reviewing, reconciling and restating
its books and records, the investigation of its prior accounting practices and
the preparation of its audited financial statements. Included in these
expenses are the costs of the Deloitte & Touche LLP audit, the investigation
by Swidler Berlin, assisted by Deloitte & Touche LLP and the costs of
retaining Arthur Andersen LLP to assist management in reviewing and
reconciling its books and records. Management currently estimates that these
costs will total approximately $50.0 million, of which $10.1 million was
incurred in fiscal 2000, $19.5 million was incurred in first fiscal quarter of
fiscal 2001, and the balance is expected to be incurred in the second quarter
of fiscal 2001 and thereafter. Rite Aid anticipates that it will continue to
incur significant legal and other expenses in connection with the ongoing
litigation and investigations to which it is subject.
Possible Sale of PCS. We have had discussions with several parties and are
currently negotiating seriously with one interested party concerning a sale of
PCS. At the date of this filing no agreement has been reached. No assurance
can be given that an agreement will be reached or that, if it is, that any
sale will be consummated. If no sale transaction is available on terms we
consider acceptable, we intend to continue to own and operate PCS. Based on
current negotiations, it is likely that Rite Aid would recognize a significant
loss upon the commitment to sell. In addition, the sale of PCS will result in
a loss of significant tax benefits.
20
Dilutive Equity Issuances. In June 2000, Rite Aid completed a series of debt
restructuring transactions as described further below under "--Liquidity and
Capital Resources." In connection with these transactions an aggregate total
of 69,564,434 shares of Rite Aid's common stock were issued in exchange for
$462.6 million principal amount of outstanding indebtedness. In addition,
pursuant to the conversion price adjustment and pay-in-kind dividend
provisions of the convertible preferred stock issued to an affiliate of
Leonard Green and Partners, L.P. in October 1999, 57,571,389 shares of Rite
Aid common stock were issuable upon the conversion of such preferred stock at
June 30, 2000. Giving pro forma effect to these issuances and adjustments, the
basic and fully diluted average shares outstanding at February 26, 2000 would
have increased from 259,139,000 to 347,999,000. 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 Rite Aid common stock.
Accounting Systems. Following its review of the company's books and records,
management concluded that further steps were needed to establish and maintain
the adequacy of its internal accounting systems and controls. In connection
with the audit of the company's financial statements, Deloitte & Touche LLP
advised Rite Aid that it believed there were numerous "reportable conditions"
under the standards established by the American Institute of Certified Public
Accountants which relate to the company's accounting systems and controls and
could adversely affect the company's ability to record, process, summarize and
report financial data consistent with the assertions of management in the
financial statements. Management's long term strategy includes a comprehensive
plan to develop, implement and maintain adequate and reliable accounting
systems and controls which address the reportable conditions identified by
Deloitte & Touche LLP.
Results of Operations
Consolidated Revenues
- -------------------------------------------------------------------------------
FY 2000 FY 1999 FY 1998
----------- ----------- -----------
(dollars in thousands)
Sales.................................... $14,681,442 $12,782,890 $11,533,423
Sales growth............................. 14.9% 10.8% *
Retail drug segment...................... $13,416,747 $12,692,689 $11,533,423
PBM segment.............................. $ 1,264,695 $ 90,201 $ **
Store data:
Total stores (beginning of period)...... 3,865 3,970 3,745
New stores.............................. 77 163 132
Closed stores........................... (181) (330) (280)
Store acquisitions, net................. 35 62 373
Relocated stores ....................... 178 323 202
Remodeled stores........................ 14 155 84
Total stores (end of period)............ 3,802 3,865 3,970
- -------------------------------------------------------------------------------
* See "Selected Financial Data" for a discussion of Rite Aid's inability to
present comparisons to fiscal 1997.
** PCS was acquired on January 28, 1999
The acquisition of PCS on January 22, 1999 was the primary contributor to
the growth in our consolidated revenues in fiscal 2000 compared to fiscal
1999. The growth in consolidated sales in fiscal 1999 benefitted from full-
year sales of $779.0 million from the Harco, Inc. ("Harco") and K&B, Inc.
("K&B") stores which contributed only $458.2 million of sales in fiscal 1998
following their acquisition on August 27, 1997.
Because PCS was acquired late in fiscal 1999, there is insufficient
operating data for prior periods to present a meaningful comparison to its
operations in fiscal 2000. PCS derived 59.6% of its total revenues in fiscal
2000 from mail order programs. Revenues from manufacturer programs and claims
processing contributed 18.6% and 15.8%, respectively, of total PCS revenues in
fiscal 2000.
21
Retail Drug Segment
- -------------------------------------------------------------------------------
FY 2000 FY 1999 FY 1998
----------- ----------- -----------
Sales (thousands)..................... $13,416,747 $12,692,689 $11,533,423
Sales growth.......................... 5.8 % 9.9% *
Same store sales growth............... 7.9 % 15.5% *
Pharmacy sales growth................. 15.6 % 18.2% *
Same store pharmacy sales growth...... 16.2 % 21.9% *
Pharmacy as a % of total segment
sales................................ 58.1 % 53.1% 49.2%
Third-party sales as a % of total
pharmacy sales....................... 87.6 % 85.4% 83.4%
Front-end sales growth................ (2.5)% 0.1% *
Same store front-end sales growth..... (2.2)% 6.6% *
Front-end as a % of total segment
sales................................ 41.3 % 44.8% 48.9%
- ------------------------------------------------------------------------------
* See "Selected Financial Data" for a discussion of Rite Aid's inability to
present comparisons to fiscal 1997.
The 5.8% growth in retail drug segment sales in fiscal 2000 was primarily
due to the continuing strong growth of our pharmacy sales, which more than
offset a decline in our front-end sales. Our retail drug revenues in fiscal
1999 grew 9.9% over the level in fiscal 1998 as a result of strong growth in
pharmacy revenues and a slight increase in front-end sales.
For fiscal 2000 and fiscal 1999, pharmacy revenues led sales growth with
same-store sales increases of 16.2% and 21.9%, respectively. Our pharmacy
sales growth continued to benefit from our ability to attract and retain
managed care customers, our ongoing program of purchasing prescription files
from independent pharmacies and favorable industry trends. These trends
include an aging American population with many "baby boomers", now in their
fifties, consuming a greater number of prescription drugs. The use of
pharmaceuticals to treat a growing number of healthcare problems and the
introduction of a number of successful new prescription drugs also contribute
to the growing demand for pharmaceutical products.
Front-end sales, which include all non-prescription sales, such as seasonal
merchandise, convenience items and food and other non-prescription sales,
decreased in fiscal 2000 from the prior year. Our front-end sales were
adversely affected by our elevated levels of out-of-stock merchandise in the
third and fourth quarters of fiscal 2000. Other factors adversely affecting
our front-end sales included the suspension by former management of our
newspaper advertising circular program and their decision to raise front-end
prices to levels that were not competitive. Fiscal 1999 front end sales
increased 0.13% over fiscal 1998, despite a 6.6% increase in same store front-
end sales in those stores which had been open more than one year. Same store
sales growth was driven by strong performance in health and beauty, photo,
seasonal and general merchandise categories. Total front-end sales remained
essentially flat as an increase in the number of closed stores and a decrease
in the number of acquired stores in fiscal 1999 resulted in a net reduction of
105 stores in operation at the end of fiscal 1999 compared to fiscal 1998.
Costs and Expenses
- ------------------------------------------------------------------------------
FY 2000 FY 1999 FY 1998
----------- ---------- ----------
Costs of goods sold...................... $11,412,774 $9,743,835 $8,603,318
Gross margin............................. 22.3% 23.8% 25.4%
Selling, general and administrative...... $ 3,712,279 $3,144,134 $2,835,395
Selling, general and administrative as a
% of revenues........................... 25.3% 24.6% 24.6%
Gain on sale of stores................... $ (80,109) $ -- $ (52,261)
Goodwill amortization.................... $ 56,832 $ 29,227 $ 26,480
Interest expense......................... $ 520,336 $ 277,226 $ 209,152
Closed store, impairment and other
charges................................. $ 163,185 $ 192,551 $ 148,560
- ------------------------------------------------------------------------------
22
Cost of Goods Sold
Gross margin was 21.9% for fiscal 2000 compared to 23.8% in fiscal 1999.
Gross margins in fiscal 2000 declined from the prior year as a result of the
acquisition of PCS, which operates with lower margins than the retail drug
segment, and the continuing increase in third-party pharmacy sales as a
percentage of total retail drug segment sales. Gross margin declined to 23.8%
in fiscal 1999 from 25.4% in fiscal 1998.
The decline in gross margin in fiscal 2000 from fiscal 1999 was attributable
to the incurrence of substantial additional costs related to our distribution
facilities and increased store occupancy costs. We incurred significant start-
up costs in fiscal 2000 in connection with the new distribution facility
located in Perryman, Maryland and also in connection with the processing of
merchandise received from our stores for shipment back to our vendors. These
increased costs were partially offset by a substantial credit to cost of goods
sold resulting from the receipt of vendor allowances following a restructuring
of the terms of certain vendor contracts. In fiscal 1999, prior to the
restructuring of the contracts, these vendor allowances were credited to
selling, general and administrative expense. Also partially offsetting the
increases in cost of goods sold in fiscal 1999 were improved store level
margins for front-end and pharmacy sales.
The decline in gross margin in fiscal 1999 from fiscal 1998 was a result of
a substantial decline in our pharmacy margins. A decline in occupancy costs in
fiscal 1999 was largely offset by increased costs related to our distribution
facilities.
Also, negatively impacting gross margins in the periods presented was the
continuing industry trend of rising third-party sales coupled with decreasing
margins on third-party reimbursed prescription sales. Third-party prescription
sales typically have lower gross margins than other prescription sales because
they are paid by a person or entity other than the recipient of the prescribed
pharmaceutical and are generally subject to lower negotiated reimbursement
rates in conjunction with a pharmacy benefit plan. Pharmacy sales as a
percentage of total segment sales were 58.1%, 53.1% and 49.2% in fiscal 2000,
1999 and 1998, respectively. The ratios of third-party sales to total pharmacy
sales were 87.6%, 85.4% and 83.4% for fiscal 2000, 1999 and 1998,
respectively, as the percentage of third-party sales continued to grow in each
period.
The company uses the last-in, first-out (LIFO) method of inventory
valuation. The effective LIFO inflation rates were 1.01486% in fiscal 2000,
1.01594% in fiscal 1999 and 1.00909% in fiscal 1998 which resulted in charges
to cost of goods sold of $34 million in fiscal 2000, $36 million in fiscal
1999 and $7 million in fiscal 1998. The company has changed its method of
accounting for LIFO as of February 26, 2000. See "--Accounting Change."
Selling, General and Administrative Expenses
Selling, general and administrative expense ("SG&A") was 25.3% of sales in
fiscal 2000, 24.6% of sales in fiscal 1999 and 24.6% of sales in fiscal 1998.
The increase in SG&A as a percentage of revenues in fiscal 2000 is
attributable to a decrease in vendor allowances following the restructuring of
certain vendor contracts as described above, increased accruals for litigation
and other contingencies and a significant increase in legal and other
professional fees. These more than offset the effects of the acquisition of
PCS, which operates with a substantially lower SG&A margin than the retail
drug segment.
Goodwill Amortization
Goodwill amortization increased during fiscal 2000 over the level recorded
in fiscal 1999 due to the additional goodwill recorded in connection with the
company's acquisition of PCS in January 1999. The increased fiscal 2000
amortization expense attributable to PCS more than offset a slight reduction
in amortization expense for the company's prior acquisitions. Goodwill
amortization expense increased during fiscal 1999
23
compared to fiscal 1998 due to the amortization of goodwill recorded in
connection with the company's acquisitions of PCS in January 1999, and Harco
and K&B in fiscal 1998. Goodwill amortization expense in fiscal 1999 included
one month of expense associated with PCS and a full year's amortization of the
goodwill recorded in connection with the Harco and K&B acquisitions. Only 26
weeks of goodwill amortization for Harco and K&B was recorded in fiscal 1998.
Interest Expense
Interest expense was $520.3 million in fiscal 2000 compared to $277.2
million in fiscal 1999 and $209.1 million in fiscal 1998. The substantial
increase in interest expense in fiscal 2000 is due to higher levels of
indebtedness throughout the year. The level of the company's indebtedness
increased in fiscal 2000 primarily as a result of a full year's interest
expense on the $1.3 billion borrowed in January 1999 under the PCS credit
facility and the $300 million of demand note borrowings incurred in June 1999
to supplement cash flows from operating activities and to fund capital
expenditures. The annual weighted average interest rates on our indebtedness
in fiscal 2000, fiscal 1999 and fiscal 1998 were 7.4%, 6.8% and 6.7%,
respectively.
Closed Store, Impairment and Other Charges
During fiscal 2000, fiscal 1999 and fiscal 1998, the company recorded pre-
tax charges of $163.2 million, $192.5 million and $148.6 million, for the
closing of 181, 330 and 280 stores, respectively.
Store closings, impairments and other charges consist of:
For the For the For the
year ended year ended year ended
February 26, 2000 February 27, 1999 February 28, 1998
----------------- ----------------- -----------------
Store lease exit costs.. $ 32,724 $104,885 $ 72,118
Impairment charges...... 130,461 87,666 76,442
-------- -------- --------
$163,185 $192,551 $148,650
======== ======== ========
These charges are related entirely to operations in the retail drug business
segment.
Income Taxes
The company had a net loss in fiscal 2000. In addition, as a result of the
restatements of fiscal 1999 and 1998, Rite Aid had net losses in fiscal 1998
and fiscal 1999. Tax benefits of $52.9 million, $182.0 million and $18.2
million have been reflected for fiscal 2000, fiscal 1999 and fiscal 1998,
respectively. The full benefit of the net operating losses ("NOLs") generated
in each period has been partially offset by a valuation allowance based on
management's determination that, based on available evidence, it is more
likely than not that some of the deferred tax assets will not be realized. The
company expects to file amended tax returns and utilize the NOL's against
taxable income in prior years to the maximum extent possible. Approximately
$147.6 million is currently expected to be recovered through carryback claims.
See note 11 of the notes to consolidated financial statements.
Liquidity and Capital Resources
The company has two primary sources of liquidity: cash provided by
operations and the revolving credit facility under our new senior secured
credit facility. We may also generate liquidity from the sale of assets,
24
including sale- leaseback transactions. During fiscal 2000 and the fiscal
quarter ended May 27, 2000, cash provided by operations was not sufficient to
fund our working capital requirements, which have included the substantial
accounting and legal costs incurred in connection with the review and
reconciliation of our books and records, the restatement of our financial
statements for fiscal 1999, fiscal 1998 and the audit of our financial
statements for fiscal 2000, fiscal 1999 and fiscal 1998. As a result, we have
supplemented our cash from operations with borrowings under our credit
facilities. Our principal uses of cash are to provide working capital for
operations, service our obligations to pay interest and principal on our debt,
and to provide funds for capital expenditures.
Credit Facilities and Debt Restructuring
In June 2000, we completed a major financial restructuring that extended the
maturity dates of a substantial amount of our debt until at least August 2002
and converted a portion of our debt to equity. These refinancing transactions
are described below.
New Senior Secured Credit Facility. We entered into a new $1.0 billion
syndicated senior secured credit facility with a syndicate of banks led by
Citibank N.A., as agent. The new facility matures on August 1, 2002, and
consists of a $500.0 million term loan facility and a $500.0 million revolving
credit facility. We used the term facility to terminate our accounts
receivable securitization facility and repurchase $300.0 million of unpaid
receivables thereunder, to fund $66.4 million of transaction costs relating to
our financial restructuring and to provide $133.6 million of cash that will be
available for general corporate purposes. The revolving facility provides us
with borrowings for working capital requirements, capital expenditures and
general corporate purposes. Borrowings under the facilities generally bear
interest either at LIBOR plus 3.0%, if we choose to make LIBOR borrowings, or
at 2.0% plus Citibank's base rate. For additional information about the
interest rates applicable to our credit facilities, see "--Quantitative and
Qualitative Disclosures about Market Risks" below.
We are required to pay fees of 0.50% per annum on the daily unused amount of
the commitment. Substantially all of our wholly-owned subsidiaries guaranteed
our obligations under the senior secured credit facility. These subsidiary
guarantees are secured by a first priority lien on the inventory, accounts
receivable, intellectual property and some of the real estate assets of the
subsidiary guarantors. Our direct obligations under the senior credit facility
are unsecured.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. The facility requires us to meet
various financial ratios and limits our capital expenditures. These ratios and
capital expenditure limits are subject to adjustment if we sell PCS. These
covenants require us to maintain a minimum interest coverage ratio of .75:1
(.72:1 if PCS is sold) for the quarter ended August 26, 2000, increasing to
1.40:1 (1.40:1 if PCS is sold) for the four quarter period ending June 1,
2002, and a minimum fixed charge coverage ratio of .88:1 (.88:1 if PCS is
sold) for the quarter ended August 26, 2000, increasing to 1.20:1 (1.19:1 if
PCS is sold) for the four quarter period ending June 1, 2002. We also must
maintain consolidated EBITDA (as defined in the senior secured credit
facility) of no less than $104.0 million ($81.0 million if PCS is sold) for
the quarter ended August 26, 2000, increasing to $894.0 million ($720.0
million if PCS is sold) for the four quarter period ending June 1, 2002. In
addition, our capital expenditures are limited to $70.0 million ($64.0 million
if PCS is sold) for the fiscal quarter ended August 26, 2000, increasing to
$265.0 million ($243.0 million if PCS is sold) for the four quarter period
ending June 1, 2002.
The facility provides for customary events of default, including nonpayment,
misrepresentation, breach of covenants and bankruptcy. It is also an event of
default if any event occurs that enables, or which with the giving of notice
or the lapse of time would enable, the holder of Rite Aid debt to accelerate
the maturity of debt equaling $25.0 million or more.
Our ability to borrow under the senior secured credit facility is based on a
specified borrowing base consisting of eligible accounts receivable and
inventory. At June 24, 2000, the $500.0 million term loan was fully drawn. We
had no outstanding borrowings under the revolving facility at June 24, 2000;
however, $39.8 million of the availability was being utilized to support trade
letters of credit.
25
Other Existing Facilities. We extended to August 2002 the maturity date of
our existing syndicated credit facilities, which consist of the RCF credit
facility and the PCS credit facility. Borrowings under the PCS credit facility
bear interest at LIBOR plus 3.25% and borrowings under the RCF credit facility
bear interest at LIBOR plus 3.75%. The interest rate on our borrowings under
these facilities will increase by 0.50% per annum if we have not received, and
applied to reduce principal, at least $500.0 million of net proceeds from
asset sales prior to November 1, 2000. These credit facilities contain
restrictive covenants which place restrictions on the assumption of debt, the
payment of dividends, mergers, liens and sale-leaseback transactions. These
credit facilities also require us to satisfy financial covenants which are
generally slightly less restrictive than the covenants in the new senior
secured credit facility. The facilities also limit the amount of our capital
expenditures to $70.0 million for the quarter ended August 26, 2000,
increasing to $265.0 million for the four quarters ending June 1, 2002. Any
net proceeds realized from a sale of PCS must be applied first to reduce the
outstanding balances of the PCS credit facility and then to reduce the then
outstanding balance of the RCF credit facility. The amounts repaid with the
proceeds of asset sales may not be reborrowed. The PCS credit facility
continues to be secured by a first lien on the stock of PCS and the RCF credit
facility continues to be secured by a first lien on the stock of drugstore.com
and a second lien on the stock of PCS. At June 24, 2000 we had $1.9 billion of
borrowings outstanding under these credit facilities. These facilities are
also guaranteed and secured as described below.
Exchange Offers. In June 2000, we completed the exchange of $52.5 million of
our 5.5% notes due 2000 and $321.8 million of our 6.7% notes due 2001 for an
aggregate of $374.3 million of our new 10.5% senior secured notes due 2002.
After the exchange, $147.5 million of the 5.5% notes due 2000 and
$28.2 million of the 6.7% notes due 2001 remained outstanding. In connection
with the exchange, we entered into a forward purchase agreement to sell $93.2
million of our 10.5% senior secured notes due 2002 to certain banks. The
proceeds from such sale will permit us to repay approximately $93.2 million of
the 5.5% notes due 2000 when they mature in December of this year. The
remaining 5.5% notes due in December 2000 and 6.7% notes due 2001 will be
retired with Rite Aid's general corporate funds.
Exchange of Debt for Equity and Exchange Debt. As part of our restructuring,
certain affiliates of J.P. Morgan, which had lent us $300.0 million under a
demand note in June 1999 and was also a lender under the RCF and PCS credit
facilities, together with certain other lenders under the two credit
facilities, agreed to exchange a portion of their loans for a new secured
exchange debt obligation and common stock. This resulted in a total of $284.8
million of debt under these facilities, including $200 million of the
outstanding principal of the demand note, being exchanged for common stock at
a price of $5.50 per share. An additional $274.8 million of borrowings under
the facilities were exchanged for the exchange debt, including the entire
remaining principal amount of the J.P. Morgan demand note. The terms of the
exchange debt are substantially the same as the terms of our RCF and PCS
credit facilities and the interest rate is currently LIBOR plus 3.25%. The
lenders of the exchange debt have the same collateral as they did with respect
to their loans under the credit facilities or demand note, as applicable, and
also received a first lien on our prescription files.
In addition, on June 26, 2000, we issued 17.8 million shares of our common
stock in exchange for $177.8 million in principal amount of our 5.25%
convertible subordinated notes due 2002.
Synthetic Leases. As part of our restructuring, we amended our existing
guarantees of two synthetic lease transactions to provide substantially the
same terms as the terms of our RCF and PCS credit facilities.
Second Priority Collateral. In connection with modifications to the existing
syndicated credit facilities, the exchange for exchange debt and the
guarantees of the synthetic lease transactions, substantially all of our
wholly-owned subsidiaries guaranteed our obligations thereunder on a second
priority basis. These subsidiary guarantees are secured by a second priority
lien on the inventory, accounts receivable, intellectual property and some of
the real estate assets of the subsidiary guarantors. Except to the extent
previously secured, our direct obligations under those facilities and
guarantees remain unsecured.
26
Commercial Paper. Until September 24, 1999, the company issued commercial
paper supported by unused credit commitments to supplement cash generated by
operations. Since the loss of our investment grade rating in fiscal 2000, we
are no longer able to issue commercial paper. Outstanding commercial paper of
the company
amounted to $192.0 million at February 26, 2000, $1,783.1 million at
February 27, 1999 and $400.0 million at February 28, 1998. During fiscal 2000,
the reduction of commercial paper was achieved through borrowings on our lines
of credit. All remaining commercial paper obligations were repaid in March
2000.
The increase in commercial paper in 1999 was due to the acquisition of PCS
in January 1999, which accounted for approximately $1.5 billion of the total
outstanding commercial paper at the end of fiscal 1999. Offsetting the
increase were net proceeds received from the issuance of $700.0 million in
long-term debt in December 1998 and net proceeds from the issuance of $200.0
million dealer remarketable securities in September 1998. Reductions in
commercial paper during 1998 were achieved through the issuance of $650.0
million of our 5.25% convertible subordinated notes in the third quarter of
fiscal 1998.
Debt Capitalization. The following table sets forth our debt capitalization
(in millions) at June 24, 2000, following the completion of the restructuring
transactions described above:
As of
June 24,
2000
--------
Secured Debt:
Senior facility(1)................................................. $ 500
PCS facility....................................................... 1,142
RCF facility....................................................... 730
10.5% senior secured notes due 2002(2)............................. 374
Exchange debt...................................................... 275
Prudential note.................................................... 31
Other.............................................................. 16
Lease Financing Obligations......................................... 1,074
Other Senior Debt:
5.5% notes due 2000................................................ 147
6.7% notes due 2001................................................ 28
6.0% notes due 2005................................................ 200
7.625% notes due 2005.............................................. 200
7.125% notes due 2007.............................................. 350
6.125% notes due 2008.............................................. 150
6.0% Drs SM due 2003............................................... 200
6.875% Senior debentures due 2013.................................. 200
7.7% notes due 2027................................................ 300
6.875% debentures due 2028......................................... 150
Subordinated Debt:
5.25% convertible subordinated notes due 2002(3)................... 650
------
Total Debt...................................................... $6,717
======
- --------
(1) Proceeds from the term loan portion of the senior facility were used to
repay the $300.0 million outstanding balance of our receivables
securitization facility, to pay approximately $66.4 million of expenses in
connection with the refinancing transactions and to provide $133.6 million
of incremental cash on our balance sheet. No borrowings under the
revolving credit portion of the senior facility were outstanding at June
24, 2000; however, $39.8 million of availability was being utilized to
support trade letters of credit. The receivables securitization facility
was an off-balance sheet liability and therefore was not included in the
company's balance sheet in prior periods.
(2) Outstanding amount of 10.5% Senior secured notes due 2002 at June 24, 2000
does not include $93.2 million of such notes which are held by a special
purpose subsidiary of the company and are subject to a forward purchase
commitment by certain financial institutions. The proceeds from the sale
of these notes will be used to retire an equivalent amount of the
remaining 5.5% notes due 2000 upon their maturity in December 2000. The
remaining 5.5% notes due 2000 will be retired with the company's general
corporate funds.
(3) Outstanding principal amount was reduced to $472.2 million with the
exchange offer for common stock consummated on June 26, 2000, pursuant to
which $177.8 million principal amount of these notes were exchanged for
common stock.
27
Net Cash Provided by Operations
The company used $349.3 million of cash to fund operations in fiscal 2000.
Operating cash flow was negatively impacted by $501.8 million of interest
payments. Operating cashflow benefited from an increase in other liabilities
partially offset by an increase in current assets.
In fiscal 1999, the company generated $151.9 million of cash flow from
operations. Operating cash flow was negatively impacted by an increase in
accounts receivable and a decrease in accounts payable, which was mostly
offset by a corresponding decline in inventory.
Fiscal 1998 operating cash flow of $558.1 million benefited from a $287.0
million reduction of accounts receivable. This reduction resulted from the
sale of accounts receivable through our accounts receivable securitization
program. Operating cash flows benefited from the utilization of accounts
payable to substantially finance the increase in inventories.
Cash used for investing activities was $508.1 million, $2,829.3 million and
$1,050.0 million for fiscal years 2000, 1999 and 1998, respectively. Cash used
for store construction and relocations amounted to $453.6 million for fiscal
2000, $1,347.1 million for fiscal 1999 and $700.2 for fiscal 1998. In
addition, cash of $1,390.6 million was used to acquire PCS in the prior fiscal
year and $335.0 million was used to acquire K&B and Harco in fiscal 1998.
Cash provided by financing activities was $945.8 million for fiscal 2000,
$2,679.6 million for fiscal 1999 and $573.8 million for fiscal 1998. Increased
bank borrowings, which replaced our commercial paper program and the sale of
$300 million of preferred stock were the main financing activities during
fiscal 2000. In fiscal 1999, the Company signed commercial paper to finance
the acquisition of PCS. Also during fiscal 1999 net proceeds were received
from the issuance of $700.0 million in long-term debt and $200.0 million of
dealer unmarketable securities. Through the issuance of $650.0 million of
convertible subordinated notes in fiscal 1998, reductions in outstanding
commercial paper were made. Supplemental cash provided by financing activities
were proceeds received from store sale and leaseback transactions of $74.9
million, $505.0 million and $358.8 million for fiscal year 2000, 1999 and
1998, respectively.
Capital Expenditures
Rite Aid plans to make total capital expenditures of approximately $260.0
million during fiscal 2001. Such expenditures consist of approximately $162.0
million related to new store construction, store relocation and other store
construction projects. An additional $57.0 million will be dedicated to other
store improvement activities including the purchase of Script Pro machines and
the purchase of script files from independent pharmacists. Management expects
that these capital expenditures will be financed primarily with cash flow from
operations and borrowings under our new revolving credit facility.
We are highly leveraged. Based upon current levels of operations and
expected improvements in our operating performance, management believes that
cash flow from operations, together with available borrowings under the new
senior secured credit facility and its other sources of liquidity (including
asset sales) will be adequate to meet anticipated requirements for working
capital, debt service and capital expenditures until August 2002, when $3.1
billion of our indebtedness matures, including the revolving credit facility
under the new senior secured credit facility. Our ability to replace,
refinance or otherwise extend these obligations will depend in part on our
ability to successfully execute our long-term strategy and improve the
operating performance of our stores. For a discussion of factors that could
affect our current assessment, see "--Factors Affecting Our Future Prospects"
below.
Accounting Change
In the fourth quarter of fiscal 2000, we changed our application of the
last-in, first-out ("LIFO") method of accounting by restructuring our LIFO
pool structure through a combination of certain geographic pools. The
reduction in the number of LIFO pools was made to more closely align the LIFO
pool structure to store
28
merchandise categories. The effect of this change in fiscal 2000 was to
decrease our earnings by $6.8 million (net of tax effect of $9.6 million), or
$.03 per diluted common share. The cumulative effect of the accounting change
was a charge of $27.3 million (net of tax effect of $18.2 million), or $.11
per diluted common share. The pro forma effect of this accounting change would
have been a reduction in net income of $6.4 million, net of income tax benefit
of $6.4 million or $.02 per diluted common share, and $12.6 million net of
income tax benefit of $8.4 million or $.05 per diluted common share, for
fiscal 1999 and 1998, respectively.
Recent Accounting Pronouncements
In November 1999, the SEC issued Staff Accounting Bulliten (SAB) 101,
"Revenue Recognition." This Bulletin sets forth the SEC Staff's position
regarding the point at which it is appropriate for a registrant to recognize
revenue. The Staff believes that revenue is realizable and earned when all of
the following criteria are met:
. persuasive evidence of an arrangement exists;
. delivery has occurred or service has been rendered;
. the seller's price to the buyer is fixed or determinable; and
. collectibility is reasonably assured.
The Company uses the above criteria to determine whether revenue can be
recognized, and therefore believes that the issuance of SAB 101 does not have
a material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). This statement, which
establishes the accounting and financial reporting requirements for derivative
instruments, requires companies to recognize derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
In May 1999, the FASB delayed the implementation date for this statement by
one year. We expect to adopt SFAS No. 133 in 2002. The company is evaluating
the effects that the adoption of SFAS 33 may have on consolidated financial
statements.
Factors Affecting Our Future Prospects
Risks Related to Our Financial Condition
We are highly leveraged. Our substantial indebtedness may severely limit
cash flow available for our operations and could adversely effect our ability
to service debt or obtain additional financing if necessary.
As of June 24, 2000, Rite Aid had $5.6 billion of outstanding indebtedness
for borrowed money and $1.1 billion of capital leases (including current
maturities but excluding letters of credit) and $429.3 million of stockholders
equity. As of the same date we had additional borrowing capacity under our
revolving credit facility of $460.2 million. On a pro forma basis, giving
effect to the debt restructuring transactions completed in June 2000, our
earnings would have been insufficient to cover our fixed charges for the year
ended February 28, 2000, by $1.1 billion. Our earnings for fiscal 2000
included non-cash charges of $697.8 million. Based on the indebtedness
outstanding, at June 24, 2000 (and then current interest rates) our annualized
interest expense would be approximately $574.0 million. Our high level of
indebtedness will have consequences on our operations. Among other things, our
indebtedness will:
. limit our ability to obtain additional financing;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry;
. place us at a competitive disadvantage relative to our competitors with
less debt;
. render us more vulnerable to general adverse economic and industry
conditions; and
. require us to dedicate a substantial portion of our cash flow to service
our debt.
29
A substantial portion of our indebtedness matures in August and September,
2002. Our ability to refinance this indebtedness will be substantially
dependent on our ability to improve our operating performance.
Approximately $3.8 billion of our indebtedness at June 24, 2000 will mature
in August and September 2002. In order to satisfy these maturing obligations,
we will need to refinance the obligations, sell assets to satisfy them or seek
postponement of the maturity dates from our existing lenders. Our ability to
successfully accomplish any of these alternative transactions will be
substantially dependent on the successful execution of our long term strategic
plan and the resulting improvements in our operating performance.
The interest rate on certain of our outstanding indebtedness is based upon
floating interest rates. If interest rates increase, our interest payment
obligations will increase.
Approximately $2.7 billion of our outstanding indebtedness as of June 24,
2000 bears an interest rate that varies depending upon LIBOR. If we borrow
additional amounts under our senior secured facility, the interest rate on
those borrowings will vary depending upon LIBOR. If LIBOR rises, the interest
rates on this outstanding debt also increases. An increase in LIBOR therefore
would increase our interest payment obligations under these outstanding loans
and have a negative effect on our cash flow and financial condition.
The covenants in our outstanding indebtedness impose restrictions that may
limit our operating and financial flexibility.
The covenants in the instruments governing our outstanding indebtedness
restrict our ability to incur liens and debt, pay dividends, make redemptions
and repurchases of capital stock, make loans, investments and capital
expenditures, prepay, redeem or repurchase debt, engage in mergers,
consolidations, asset dispositions, sale-leaseback transactions and affiliate
transactions, change our business, amend certain debt and other material
agreements, issue and sell capital stock of subsidiaries, make distributions
from subsidiaries and grant negative pledges to other creditors.
Moreover, if we are unable to meet the terms of the financial covenants or
if we breach of any of these covenants, then a default could result under one
or more of these agreements. A default, if not waived by our lenders, could
result in the acceleration of our outstanding debt and cause our debt to
become immediately due and payable. If such acceleration occurs, we would not
be able to repay our debt and it is unlikely that we would be able to borrow
sufficient additional funds to refinance such debt. Even if new financing is
made available to us, it may not be available on terms acceptable to us.
Risks Related to Our Operations
Major lawsuits have been brought against us and certain of our subsidiaries,
and there are currently pending both civil and criminal investigations by the
U.S. Securities and Exchange Commission and the United States Attorney's
Office. Any criminal conviction against the company may result in the loss of
licenses that are material to the conduct of our business, which would have a
negative effect on our financial condition and results of operations.
There are currently pending both civil and criminal governmental
investigations by the SEC and the United States Attorney concerning our
financial reporting and other matters. An investigation has also been
commenced by the Department of Labor concerning our employee benefit plans.
These investigations are ongoing and we cannot predict their outcomes.
Lawsuits have been filed against us, as well as certain of our past and
present officers and directors. Class action lawsuits have been filed in which
the plaintiffs allege numerous violations of the securities laws; we cannot
predict the outcome of these cases.
Suits in six states are outstanding alleging that our pricing practices
violated applicable consumer protection laws and racketeering laws. Cases
against us regarding consumer protection and racketeering allegations have
been dismissed in the state courts of Florida, Oregon and New Jersey and in
the federal courts in Alabama and
30
California, but we cannot predict the outcome of an appeal, if any, nor can we
predict the outcome of any of the other cases in other jurisdictions.
In addition, given the size and nature of our business, we are subject from
time to time to various lawsuits which, depending on their outcome, may have a
negative impact on our results of operations and financial condition.
We are substantially dependent on a single supplier of pharmaceutical
products and our other suppliers to sell products to us on satisfactory terms.
We obtain approximately 87% of our pharmaceutical supplies from a single
supplier, McKesson, pursuant to a long-term supply contract. Pharmacy sales
represented approximately 58.4% of our total sales during fiscal 2000, and
therefore our relationship with McKesson is important to us. Any significant
disruptions in our relationships with our suppliers, particularly our
relationship with McKesson, would make it difficult for us to continue to
operate our business, and would have a material adverse effect on our results
of operations and financial condition.
Several of our executive officers have joined Rite Aid very recently. We
cannot assure you that management will be able to successfully manage our
business or successfully implement our strategic plan.
Since December 1999, we have hired a new management team, including Robert
G. Miller as chief executive officer and chairman. Our management team has
considerable experience in the retail industry. Nonetheless, we cannot assure
you that management will be able to successfully manage our business or
successfully implement our strategic business plan.
We are now depending on our new management team, and the loss of their
services could have a material adverse effect on our business and the results
of our operations or financial condition.
The success of our business is materially dependent upon the continued
services of our chairman and chief executive officer, Mr. Miller, and the
other members of our new management team. The loss of Mr. Miller or other key
personnel due to death, disability or termination of employment could have a
material adverse effect on the results of our operations or financial
condition, or both. Additionally, we cannot assure you that we will be able to
attract or retain other skilled personnel in the future.
We are currently in negotiations to sell PCS but our efforts may not be
successful.
We acquired PCS for approximately $1.5 billion in January 1999. The
acquisition was financed exclusively with short-term debt. In the third
quarter of fiscal 2000, Rite Aid solicited indications of interest for the
possible sale of PCS to address its short-term liquidity problems. The
indications of interest received at that time were not deemed adequate and the
receipt by PCS and another major participant in the PBM industry of a subpoena
regarding certain customary business practices further complicated the efforts
to sell PCS. In connection with the debt restructuring completed in June 2000,
Rite Aid negotiated with its lenders to retain the ability to continue to own
and operate PCS. Following the completion of the refinancing, with the
flexibility to reject inadequate offers, management reopened discussions with
several parties concerning the possible sale of PCS. We are currently
negotiating seriously with one interested party; however, no agreement has
been entered into. While an agreement to sell PCS could be announced at any
time, it is also possible that our current negotiations will not lead to an
agreement and we will continue to own and operate PCS. Based on proposals
currently under discussion, we expect to incur a substantial loss upon a
commitment to sell of PCS. See "Management's Discussion of Results of
Operations and Financial Condition -- General."
We need to improve our operations in order to improve our financial
condition but our operations will not improve if we cannot effectively
implement our business strategy.
Our operations during the fiscal year ended February 26, 2000 were adversely
affected by a number of factors, including our financial difficulties,
inventory shortages, allegations of violations of the law, including drug
pricing issues, problems with suppliers and uncertainties regarding Rite Aid's
ability to produce audited
31
financial statements. To improve operations, new management developed and has
been implementing a business strategy to improve the pricing of products,
provide more consistent advertising through weekly, national circulars,
eliminate problems with shortages of inventory and out-dated inventory,
resolve all issues with our vendors, develop programs intended to enhance
customer relationships and provide better service and continue to improve our
stores and the product offerings within our stores. If we are not successful
in our efforts to implement our business strategy, or if our business strategy
is not effective we may not be able to improve our operations. Failure to
improve operations would adversely affect our ability to make principal or
interest payments on our debt.
The additional unregistered shares of Rite Aid common stock that we issued
may depress the market price of Rite Aid common stock because we have has
agreed to register those shares under the Securities Act to enable the holders
of the shares to sell them.
In connection with the refinancing of our debt, we agreed to register the
51,785,434 shares of Rite Aid common stock that it issued to the lenders under
its RCF credit facility, PCS credit facility and demand note. In addition, we
have agreed to register the 57,571,389 shares of Rite Aid common stock
underlying (as of June 30, 2000) the series B convertible preferred stock that
it issued in October 1999 and the 2,500,000 shares of Rite Aid common stock
underlying the warrant issued to J.P. Morgan Ventures Corporation in October
1999. The possible public sale of such large numbers of shares may have an
adverse effect on the market price of Rite Aid's common stock.
Risks Related to our Industry
The markets in which we operate are very competitive and further increased
competition could adversely affect us.
We face intense competition with local, regional and national companies,
including other drug store chains, independent drug stores, Internet retailers
and mass merchandisers. We may not be able to effectively compete against them
because our existing or potential competitors may have financial and other
resources that are superior to ours. In addition, we may be at a competitive
disadvantage because we are more highly leveraged than our competitors. We
believe that the continued consolidation of the drugstore industry will
further increase competitive pressures in the industry. As competition
increases in the markets in which we operate, a significant increase in
general pricing pressures could occur which would require us to increase our
sales volume and to sell higher margin products and services in order to
remain competitive. We cannot assure you that we will be able to continue to
effectively compete in our markets or increase our sales volume in response to
further increased competition.
Changes in third-party reimbursement levels for prescription drugs could
reduce our margins and have a material adverse effect on our business.
We are reimbursed by third-party payors for approximately 87% of all of the
prescription drugs that we sell. These third-party payors could reduce the
levels at which they will reimburse us for the prescription drugs that we
provide to their members. Furthermore, if Medicare is reformed to include
prescription benefits, Medicare may cover some of the prescription drugs that
we now sell at retail prices, and we may be reimbursed at prices lower than
our current retail prices. If third-party payors reduce their reimbursement
levels or if Medicare covers prescription drugs at reimbursement levels lower
than our current retail prices our margins on these sales would be reduced,
and the profitability of our business could be adversely affected.
We are subject to governmental regulations, procedures and requirements; our
noncompliance or their significant change could hurt our business, the results
of our operations or our financial condition.
Our pharmacy business is subject to several federal, state, and local
regulations. These include local registrations of pharmacies in the states
where our pharmacies are located, applicable Medicare and Medicaid
regulations, and prohibitions against paid referrals of patients. Failure to
properly adhere to these and other applicable regulations could result in the
imposition of civil and criminal penalties and could adversely affect the
continued operation of our business. Furthermore, our pharmacies could be
affected by federal and state reform
32
programs, such as health care reform initiatives which could, in turn,
negatively affect our business. The passing of these initiatives or any new
federal or state programs could adversely affect our business and results of
operations.
Certain risks are inherent in the provision of pharmacy services, and our
insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution
of pharmaceuticals and other health care products. Although we maintain
professional liability and errors and omissions liability insurance, we cannot
assure you that the coverage limits under our insurance programs will be
adequate to protect us against future claims, or that we will maintain this
insurance on acceptable terms in the future.
Any adverse change in general economic conditions can adversely affect
consumer-buying practices and reduce our sales of front-end products, which
are our higher margin products.
If the economy slows down and unemployment increases or inflationary
conditions worry consumers, consumers will decrease their purchases,
particularly of products other than pharmaceutical products that they need for
health reasons. We make a higher profit on our sales of front-end products
than we do on sales of pharmaceutical products. Therefore, any decrease in our
sales of front-end products will decrease our profitability.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks
Rite Aid's future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. The
company's major market risk exposure is changing interest rates. Increases in
interest rates would increase the company's interest expense. Since the end of
fiscal 1999, Rite Aid's primary risk exposure has not changed. The company
enters into debt obligations to support capital expenditures, acquisitions,
working capital needs and general corporate purposes. The company's policy is
to manage interest rates through the use of a combination of variable-rate
credit facilities, fixed-rate long-term obligations and derivative
transactions.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table
presents principal payments and the related weighted average interest rates by
expected maturity dates as of February 26, 2000.
Fair Value
at
February 26,
2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ---------- -------- ------ ---------- ---------- ------------
(Debt in thousands of dollars)
Long-term debt,
including Current
portion
Fixed rate............ $76,086 $29,879 $1,121,490 $200,678 $2,289 $1,553,816 $2,984,238 $1,959,252
Average Interest
Rate................. 6.43% 6.77% 7.46% 6.01% 11.86% 7.00%
Variable Rate......... -- -- 2,480,495 -- -- -- 2,480,495 2,480,495
Average Interest
Rates................ -- -- 9.38% -- -- --
In June 2000, Rite Aid refinanced certain variable- and fixed-rate
obligations maturing in fiscal years 2001 and 2002 and entered into an
interest rate swap that fixes the LIBOR component of $500.0 million of Rite
Aid's variable-rate debt at 7.083% for a two year period. In July 2000, Rite
Aid entered into an additional interest rate swap that fixes the LIBOR
component of an additional $500.0 million of variable rate debt at 6.946% for
a two year period. As a result of these financing activities, Rite Aid's ratio
of variable rate exposure changed from 37.7% as of February 26, 2000 to 27.3%
as of July 10, 2000.
Our ability to satisfy our interest payment obligations on our outstanding
debt will depend largely on our future performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service our
interest payment
33
obligations on our outstanding indebtedness and if we cannot borrow or obtain
equity financing to satisfy those obligations, our business and results of
operations will be materially adversely affected. We cannot assure you that
any such borrowing or equity financing could be successfully completed.
As of June 24, 2000, Rite Aid had three credit facilities: the new $1.0
billion senior secured credit facility entered into on June 14, 2000, and the
RCF credit facility and PCS credit facility. In addition, it had fixed-rate
obligations in the amount of $4.0 billion and exchange debt in the amount of
$274.8 million. In March 2000, all remaining commercial paper obligations were
repaid. The ratings on these credit facilities and obligations as of June 24,
2000 were as follows: the $1.0 billion RCF facility: B by Standard and Poor's
and B2 by Moody's; the $1 billion senior secured credit facility: BB- by
Standard & Poor's and Ba3 by Moody's; the $1.3 billion PCS facility: B by
Standard & Poor's and B2 by Moody's; the fixed-rate obligations: B- by
Standard & Poor's and Caa1 by Moody's; and the exchange debt is not rated yet.
The interest rates on the variable-rate borrowings are as follows: the $1.0
billion RCF revolving credit facility: LIBOR plus 3.75%, the $1.0 billion
senior secured credit facility: LIBOR plus 3.00%, and the $1.3 billion PCS
facility and the exchange debt: LIBOR plus 3.25%.
Further downgrades of Rite Aid's credit ratings would not impact the rate on
the borrowings under the credit facilities. The interest rate on the RCF and
PCS credit facilities and the exchange debt is subject to a 0.50% per annum
increase if we have not received $500 million of net proceeds from asset sales
by November 1, 2000.
Changes in one month LIBOR affect Rite Aid's cost of borrowings because the
interest rate on Rite Aid's variable-rate obligations is based on LIBOR. If
the market rates of interest for one month LIBOR change by 10% (approximately
60 basis points) as compared to the LIBOR rate of 5.91% and 6.65% as of
February 26, 2000 and June 24, 2000, respectively, Rite Aid's annual interest
expense would change by approximately $14.9 million and $16.1 million,
respectively, based upon Rite Aid's variable-rate debt outstanding of
approximately $2.5 billion and $2.7 billion as of February 26, 2000 and June
24, 2000, respectively.
A change in interest rates generally does not impact future earnings and
cash flow for fixed-rate debt instruments. As fixed-rate debt matures,
however, and if additional debt is acquired to fund the debt repayment, future
earnings and cash flow may be impacted by changes in interest rates. This
impact would be realized in the periods subsequent to the periods when the
debt matures.
ITEM 8. Financial Statements and Supplementary Data
Rite Aid's Consolidated Financial Statements and notes thereto are included
elsewhere in this annual report on Form 10-K and incorporated herein by
reference. See Item 14 of Part IV.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 19, 1999, Rite Aid filed a Current Report on Form 8-K disclosing
the resignation of its former auditors, KPMG LLP and the withdrawal of their
report on the company's financial statements. On December 6, 1999, Rite Aid
amended the Form 8-K dated November 19, 1999 to file a letter by KPMG LLP
concerning the disclosure in the Form 8-K. On December 10, 1999, Rite Aid
filed a Current Report on Form 8-K to announce that it had retained Deloitte &
Touche LLP to audit and report on the Company's consolidated balance sheets as
of February 27, 1999 and February 28, 1998 and, the related consolidated
statements of income, stockholders equity, and cash flows for each of the
years in the three year period ended February 27, 1999. Deloitte & Touche LLP
would also audit the Company's consolidated financial statements for the
fiscal year ending February 20, 2000.
34
PART III
ITEM 10. Directors and Executive Officers of Registrant
The tables set forth below include certain information regarding Rite Aid's
directors and executive officers as of June 30, 2000.
(a) Directors of Registrant
Name Age Position with Rite Aid
---- --- ----------------------
Robert G. Miller............ 56 Chairman and Chief Executive Officer
William J. Bratton.......... 51 Director
Alfred M. Gleason........... 69 Director
Alex Grass.................. 72 Director
Leonard I. Green............ 66 Director
Nancy A. Lieberman.......... 43 Director
Philip Neivert.............. 73 Director
Mary F. Sammons............. 53 Director, President and Chief Operating Officer
Stuart M. Sloan............. 56 Director
Jonathan D. Sokoloff........ 42 Director
Leonard N. Stern............ 62 Director
Preston Robert Tisch........ 73 Director
Gerald Tsai, Jr. ........... 70 Director
Robert G. Miller has been chairman and chief executive officer since
December 5, 1999. Previously, Mr. Miller served as vice chairman and chief
operating officer of The Kroger Company, a retail food company. Mr. Miller
joined Kroger in May 1999, when The Kroger Company acquired Fred Meyer, Inc.,
a food, drug and general merchandise chain. From 1991 until the acquisition,
he served as chief executive officer of Fred Meyer, Inc.
William J. Bratton, is, and has been, a self-employed consultant since March
31, 2000. From January 1998 to March 2000, Mr. Bratton was president and chief
operating officer of Carco Group, Inc., a provider of employment background
screening services. From April 1996 through 1997, he was vice chairman of
First Security Services Corporation, and president of its subsidiary, First
Security Consulting, Inc. Mr. Bratton was Police Commissioner of the City of
New York from 1994 through April 1996. Mr. Bratton has been a member of Rite
Aid's board since July 1997.
Alfred M. Gleason is currently a self-employed consultant. Mr. Gleason
served as the president of the Port of Portland Commission in Portland,
Oregon, from October 1995 until June 1999. From 1985 until 1995, Mr. Gleason
held several positions with PacifiCorp, including chief executive officer,
president and director. PacifiCorp is the parent company of Pacific Power &
Light, Utah Power & Light and Pacific Telecom, Inc. Mr. Gleason served as a
director of Fred Meyer, Inc. until June 1999. Mr. Gleason has been a member of
Rite Aid's board since January 20, 2000.
Alex Grass is, and has been, the chief executive officer of Fleer/Skybox
International since February 1999. Mr. Grass is also the managing partner of
Oak Hall Industries, L.P., and Sera-Tec Biologicals L.P., positions he has
held since 1996 and 1995, respectively. Mr. Grass has been a member of Rite
Aid's board since the founding of the company in 1968.
Leonard I. Green has been an executive officer of Leonard Green & Partners,
L.P., an affiliate of Green Equity Investors III, L.P., since its formation in
1994. Mr. Green has also been, individually or through a corporation, a
partner in a merchant banking firm affiliated with Leonard Green & Partners,
L.P., since its inception in 1989. Mr. Green is also a director of
Communications & Power Industries, Inc., Liberty Group
35
Publishing, Inc. and Dollar Financial Group, Inc. Mr. Green was elected as a
director pursuant to the October 1999 agreement of Green Equity Investors III,
L.P. to purchase 3,000,000 shares of preferred stock of Rite Aid. Mr. Green
has been a member of Rite Aid's board since October 1999.
Nancy A. Lieberman has been a partner in the law firm of Skadden, Arps,
Slate, Meagher & Flom LLP since 1987. Skadden, Arps, Slate, Meagher & Flom LLP
provides legal services to Rite Aid. Ms. Lieberman has been a member of Rite
Aid's board since June 1996.
Philip Neivert is a private investor whose operations are based in
Rochester, New York. Mr. Neivert has been a member of Rite Aid's board since
1969.
Mary F. Sammons has been president and chief operating officer and a member
of Rite Aid's board since December 5, 1999. From April 1999 to December 1999,
Ms. Sammons served as president and chief executive officer of Fred Meyer
Stores, Inc., a subsidiary of The Kroger Company. From January 1998 to April
1999, Ms. Sammons served as president and chief executive officer of Fred
Meyer Stores, Inc., a subsidiary of Fred Meyer, Inc. From 1985 through 1997,
Ms. Sammons held several senior level positions with Fred Meyer Inc., the last
that of executive vice president. Ms. Sammons is also a director of
drugstore.com and of the National Association of Chain Drug Stores.
Stuart M. Sloan has been a principal of Sloan Capital Companies, a private
investment company since 1984. Mr. Sloan was also the chairman of the board of
directors from 1986 to 1998 and the chief executive officer from 1991 to 1996
of Quality Food Centers, Inc., a supermarket chain. He currently serves on the
board of directors of Anixter International Corporation. Mr. Sloan was elected
to Rite Aid's board effective June 19, 2000.
Jonathan D. Sokoloff has been an executive officer of Leonard Green &
Partners, L.P., an affiliate of Green Equity Investors III, L.P. since its
formation in 1994. Since 1990, Mr. Sokoloff has also been a partner in a
merchant banking firm affiliated with Leonard Green & Partners, L.P. Mr.
Sokoloff is also a director of Twinlab Corporation, Diamond Triumph Auto
Glass, Inc., Dollar Financial Group, Inc. and Gart Sports Company. Mr.
Sokoloff was elected as a director pursuant to the October 1999 agreement of
Green Equity Investors III, L.P. to purchase 3,000,000 shares of preferred
stock of Rite Aid. Mr. Sokoloff has been a member of Rite Aid's board since
October 1999.
Leonard N. Stern is chairman of the board and chief executive officer of The
Hartz Group, Inc. and affiliated companies, a position he has held since 1970.
These companies are engaged in the businesses of the manufacture and sale of
pet supplies, ownership and operation of hotels, real estate development and
investing. Rite Aid purchases pet supplies from Hartz Mountain, Inc. Mr. Stern
is also a director of Homes for the Homeless, a nonprofit organization. Mr.
Stern has been a member of Rite Aid's board since 1986.
Preston Robert Tisch has been co-chairman of Loews Corporation since
October 18, 1994. Loews Corporation is a holding company with interests
through its subsidiaries in selling insurance products, producing and selling
cigarettes, operating hotels, drilling for offshore oil and gas and
distributing watches and clocks. Mr. Tisch was co-chief executive officer of
Loews Corporation between October 18, 1994 and January 1, 1999. In addition,
since March 1991 he has been chairman of the board of the N.Y. Giants
Football, Inc. Rite Aid purchased tobacco products from Lorillard Tobacco
Company, an indirectly wholly-owned subsidiary of Loews Corporation, during
fiscal year 2000. Mr. Tisch is also a director of Loews Corporation, CNA
Financial Corporation, Bulova Corporation and Hasbro, Inc. Mr. Tisch has been
a member of Rite Aid's board since 1988.
Gerald Tsai, Jr. is currently the chairman of Satmark Media Group, an ATM
advertising company. Previously, Mr. Tsai was a private investor. From
February 1993 to October 1997, Mr. Tsai was chairman and chief executive
officer of Delta Life Corporation. Mr. Tsai is also a director of Saks
Incorporated, Triarc Companies, Sequa Corporation, Zenith National Insurance
Corp., IP*Network and United Rentals, Inc. Mr. Tsai has been a member of Rite
Aid's board since 1987.
36
(b) Executive Officers of Registrant
Name Age Position with Rite Aid
---- --- ----------------------
Robert G. Miller*....... 56 Chairman and Chief Executive Officer
Mary F. Sammons*........ 53 Director, President and Chief Operating Officer
David R. Jessick........ 46 Senior Executive Vice President and Chief Administrative Officer
Elliot S. Gerson........ 58 Senior Executive Vice President and General Counsel
John T. Standley........ 37 Executive Vice President and Chief Financial Officer
James P. Mastrian....... 59 Executive Vice President--Marketing
Christopher Hall........ 35 Senior Vice President and Chief Accounting Officer
- --------
* Mr. Miller's and Ms. Sammons' backgrounds are set forth above under the
caption "Directors of Registrant."
David R. Jessick has been senior executive vice president and chief
administrative officer since December 5, 1999. From 1997 to July 1999, Mr.
Jessick served as executive vice president of finance and investor relations
of Fred Meyer, Inc. From 1979 to 1997, Mr. Jessick held several senior
management positions at Thrifty PayLess Holdings, Inc., a west coast-based
drugstore chain which had annual sales of $5.0 billion before being acquired
by Rite Aid in 1996. Mr. Jessick was executive vice president and chief
financial officer of Thrifty PayLess Holdings, Inc. before Thrifty PayLess was
acquired by Rite Aid.
Elliot S. Gerson is senior executive vice president and general counsel of
Rite Aid. He has held those positions since October 1999 and July 1997,
respectively. Mr. Gerson also served as secretary from July 1997 to May 2000.
Mr. Gerson joined Rite Aid in November 1995 as senior vice president and
assistant chief legal counsel. Prior to joining Rite Aid, Mr. Gerson was a
partner in the law firm of Bolger, Picker, Hankin & Tannenbaum from May 1993
to November 1995.
John T. Standley has been executive vice president and chief financial
officer since December 5, 1999. Previously, he was executive vice president
and chief financial officer of Fleming Companies, Inc., a food marketing and
distribution company from May 1999 to December 1999. Between July 1998 and May
1999, Mr. Standley was senior vice president and chief financial officer of
Fred Meyer, Inc. Mr. Standley served as chief financial officer of Ralphs
Grocery Company between January 1997 and July 1998 and of Food 4 Less between
January 1997 to July 1998. Mr. Standley also served in an executive position
at Smith's Food & Drug from May 1996 to February of 1997 and as chief
financial officer of Smitty's Supervalue, Inc. from December 1994 to May 1996.
James P. Mastrian has been executive vice president, marketing since
November 15, 1999. Mr. Mastrian was also executive vice president, category
management of Rite Aid from July 1998 to November 1999. Mr. Mastrian was
senior executive vice president, merchandising and marketing of OfficeMax from
June 1997 to July 1998 and executive vice president, marketing of Revco D.S.,
Inc. from September 1990 to June 1997.
Christopher Hall has been senior vice president and chief accounting officer
since January 25, 2000. From April 1999 to January 2000. Mr. Hall was
executive vice president and chief financial officer at Golden State Foods.
Between July 1998 and March 1999, Mr. Hall served as senior vice president of
finance at Ralphs Grocery Company. Mr. Hall joined Ralphs Grocery as vice
president of accounting in June 1995.
(c) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires Rite Aid's executive officers,
directors and 10% stockholders to file reports of initial beneficial ownership
and reports of changes in beneficial ownership with the SEC and the New York
Stock Exchange. Such persons are required by SEC regulations to furnish the
company with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to Rite Aid, the company has
determined that during the fiscal year ended February 26, 2000, no persons
subject to Section 16(a) reporting submitted late filings under Section 16(a)
of the Exchange Act.
37
ITEM 11. Executive Compensation
Summary Compensation Table
The following table provides a summary of compensation paid during the last
three fiscal years to Rite Aid's current chief executive officer, the former
chief executive officer who served in that position until October 18, 1999,
the former interim chief executive officer, the four most highly compensated
executive officers who were serving as executive officers at the end of fiscal
year 2000 and two executive officers who would have been among the four most
highly compensated executive officers if they had been employed by Rite Aid at
the end of fiscal year 2000:
Annual Compensation Long-Term Compensation
----------------------------------- ----------------------------------------
Securities
Restricted Underlying
Fiscal Other Annual Stock Option LTIP All Other
Name and Principal Position Year Salary(4) Bonus(1) Compensation(2) Awards Grants/SARs Payouts(3) Compensation
- --------------------------- ------ ---------- -------- --------------- ---------- ----------- ---------- ------------
Robert G. Miller(5).. 2000 $ 232,307 $ $ $4,950,000(6) 3,000,000 $-- $ 600,000(14)
Chairman & Chief
Executive Officer
Martin L. Grass(7)... 2000 807,870 -- --
Former Chairman & 1999 1,000,000 -- -- -- 1,000,000(11) --
Former 1998 1,000,000 898,000 -- -- -- -- 2,000
Chief Executive
Officer
Timothy J. 2000 702,542 -- 300,000 --
Noonan(8)........... 1999 700,000 -- -- -- 650,000 --
Former Interim Chief 1998 700,000 628,600 -- -- -- -- 2,000
Executive Officer,
Former President &
Former
Chief Operating
Officer
James P. Mastrian.... 2000 425,000 125,000 -- -- 600,000 --
Executive Vice 1999 266,538 145,900 -- -- --
President--Marketing 1998 -- -- -- -- --
Elliot S. Gerson..... 2000 408,393 100,000 -- -- 770,000 --
Senior Executive 1999 375,000 -- -- -- --
Vice President & 1998 330,000 -- -- -- --
General Counsel
Mary F. Sammons...... 2000 203,076 -- -- 1,650,000(12) 2,000,000 -- 200,000(15)
Director, President
& Chief Operating
Officer
David R. Jessick..... 2000 158,461 -- -- 825,000(13) 1,000,000 -- 150,000(16)
Senior Executive
Vice President &
Chief Administrative
Officer
Franklin C. 2000 503,589 -- -- -- 1,165,000 --
Brown(9)............ 1999 500,000 -- -- -- 300,000 --
Former Vice Chairman 1998 500,000 336,825 -- -- -- -- 2,000
Beth J. Kaplan(10)... 2000 428,615 151,600 -- -- -- --
Former Senior 1999 400,000 151,600 -- -- 300,000(11) --
Executive 1998 400,000 269,460 -- -- -- --
Vice President--
Marketing
- --------
(1) Represents annual performance bonuses determined by the Compensation
Committee of the Board under the Annual Performance-Based Incentive
Program. Bonuses for Martin Grass, Timothy Noonan, Franklin Brown and
Beth Kaplan were paid in the fiscal year following the fiscal year in
which they were earned.
(2) Did not exceed, for each named officer, the lesser of $50,000 or 10% of
such officer's total annual salary and bonus for such year.
38
(3) Excludes payments purportedly owed for fiscal 1999 pursuant to Rite Aid's
Long-Term Incentive Plan. The company's restatement of its financial
statements for fiscal years 1998 and 1999, included in this report,
suggests that the stock performance tied to such payments would never
have been achieved had Rite Aid issued timely financial statements for
fiscal years 1998 and 1999 that complied with generally accepted
accounting principles. Therefore, any payments purportedly owed pursuant
to the Long-Term Incentive Plan would never have been earned and were not
made. Ms. Kaplan has asserted that Rite Aid should have paid to her the
amount owed under the Long-Term Incentive Plan based upon the company's
actual stock performance.
(4) Includes for Mr. Miller, Ms. Sammons and Mr. Jessick fiscal 2000: for Mr.
Miller, amounts contributed by Rite Aid under the Supplemental Deferred
Compensation Plan, a non-qualified plan under which the members of the
new executive management receive fully vested contributions of deferred
compensation each month; and for the other named executive officers,
amounts contributed under the Rite Aid defined contribution plan.
(5) Mr. Miller became chief executive officer of Rite Aid on December 5,
1999.
(6) Mr. Miller was awarded 600,000 shares of Rite Aid common stock on
December 5, 1999, the effective date of his employment agreement with
Rite Aid. The transfer of these shares is restricted. The restrictions on
the restricted shares lapse in thirty-six equal monthly installments
commencing one month from the date of grant, unless accelerated under
certain circumstances. Mr. Miller has the right to vote the shares of
restricted stock and to receive any dividends paid on such shares. As of
February 26, 2000, the restrictions on 33,333 shares had lapsed and the
remaining 566,667 restricted shares had a market value of $4,108,335.
(7) Mr. Grass resigned as chairman of the board and chief executive officer
on October 18, 1999.
(8) Mr. Noonan served as interim chief executive officer from October 18,
1999 until December 5, 1999. Mr. Noonan also served as president and
chief operating officer until December 5, 1999, and retired from Rite Aid
on February 25, 2000.
(9) Mr. Brown resigned as an employee on February 25, 2000 and as a member of
the board on May 29, 2000.
(10) Ms. Kaplan resigned as senior executive vice president of marketing on
November 15, 1999.
(11) The options for these shares expired 90 days after Mr. Grass and Ms.
Kaplan ceased being employed with the company.
(12) On December 5, 1999, pursuant to her employment agreement with the
company, Ms. Sammons was awarded 200,000 shares of restricted common
stock of Rite Aid. The restrictions on those shares lapse in thirty-six
equal monthly installments commencing one month from the date of grant,
unless accelerated upon a change of control of the company. Ms. Sammons
has the right to vote the restricted shares and to receive dividends paid
on such shares. As of February 26, 2000, the restrictions on 11,110
shares had lapsed and the remaining 188,890 shares had a market value of
$1,369,452.
(13) On December 5, 1999, pursuant to his employment agreement with the
company, Mr. Jessick was awarded 100,000 shares of restricted common
stock of Rite Aid. The restrictions on those shares lapse in thirty-six
equal monthly installments commencing one month from the date of grant,
unless accelerated upon a change of control of the company. Mr. Jessick
has the right to vote the restricted shares and to receive dividends paid
on such shares. As of February 26, 2000, the restrictions on 5,555 shares
had lapsed and the remaining 94,445 shares had a market value of
$684,726.
(14) Represents a guaranteed bonus in the amount of $600,000 paid in April
2000 in respect of calendar year 1999 to compensate Mr. Miller for lost
bonus opportunities with his prior employer.
(15) Represents a guaranteed bonus in the amount of $200,000 paid in April
2000 in respect of calendar year 1999 to compensate Ms. Sammons for lost
bonus opportunities with her prior employer.
(16) Represents a guaranteed bonus in the amount of $150,000 paid in April
2000 in respect of calendar year 1999.
39
Option Grant Table
The following table sets forth certain information regarding options granted
during fiscal year 2000 to the persons named in the Summary Compensation
Table:
% of Total
Options
Number of Securities Granted to
Underlying Options Employees in Exercise Expiration Grant Date
Name Granted Fiscal Year Price(1) Date Present Value(2)
- ---- -------------------- ------------ -------- ---------- ----------------
Robert G. Miller........ 3,000,000 16.1% $7.350 12/05/09 $11,155,200
James P. Mastrian....... 33,546 2.4% 8.00 01/17/10 2,450,021
266,454 5.375 11/10/09
150,000 24.25 06/04/09
Elliot S. Gerson........ 26,278 2.9% 8.00 01/17/00 1,573,599
508,722 5.375 11/10/09
Mary F. Sammons......... 2,000,000 10.7% 7.35 12/05/09 8,720,000
David R. Jessick........ 1,000,000 5.4% 7.35 12/05/09 4,360,000
Martin L. Grass......... -- -- -- -- --
Timothy J. Noonan....... 300,000 1.6% 5.375 11/10/09 579,150
Franklin C. Brown....... 1,034,729 6.2% 5.375 11/10/09 2,931,050
130,271 8.000 01/17/10 554,732
Beth J. Kaplan.......... -- -- -- -- --
- --------
(1) Fair market value on the date of grant. Mr. Miller's option for 3,000,000
shares, Ms. Sammons' option for 2,000,000 shares and Mr. Jessick's option
for 1,000,000 shares vest in monthly installments over a 36 month period
beginning on January 5, 2000. Mr. Mastrian's options vest as follows: An
option for 150,000 shares granted on July 6, 1998; an option for 150,000
shares granted on June 4, 1999; an option for 266,454 shares granted on
November 10, 1999; and an option for 33,546 shares granted on January 17,
2000, all of which vest in equal amounts beginning on the first
anniversary of the grant over a four-year period. Mr. Gerson's options
vest as follows: (i) An option for 100,000 shares granted on November 1,
1995; an option for 30,000 shares granted on October 16, 1996; an option
for 208,722 shares granted on November 10, 1999; and an option for 26,278
shares granted on January 17, 2000, all of which vest in equal amounts
beginning on the first anniversary of the grant over a four-year period.
(ii) An option for 30,000 shares granted on October 30, 1996, which shall
vest in full on October 30, 2001, or earlier, provided the following
conditions are met: (a) at such time Rite Aid common stock trades at an
average trading price of $60 per share for 30 consecutive trading days, or
(b) prior thereto in 1/3 increments when the stock price averages $45,
$50, and $55 per share for 30 consecutive trading days. (iii) An option
for 75,000 shares granted on May 12, 1998, of which 50% shall vest on May
12, 2000 and the remaining 50% on May 12, 2002. (iv) An option for 300,000
shares granted on November 10, 1999, which vested immediately upon the
grant date. Mr. Noonan's option grant to purchase up to 300,000 shares of
Rite Aid common stock vested in its entirety on November 10, 1999, the
date of grant. Mr. Brown's option grants to purchase up to 1,034,729
shares of Rite Aid common stock vest as follows: 25% vests on November 10,
2000; 25% vests on November 10, 2001; 25% vests on November 10, 2002; and
25% vests on 11/10/2003. Mr. Brown's option grant to purchase up to
130,271 shares of Rite Aid common stock vests as follows: 25% vests on
January 17, 2001; 25% vests on January 17, 2002; 25% vests on January 17,
2003; and 25% vests on January 17, 2004.
(2) The hypothetical present values on the grant date were calculated under
the Black-Scholes option pricing model which is a mathematical formula
used to value options traded on stock exchanges. The formula considers a
number of assumptions in hypothesizing an option's present value.
Assumptions used to value the options include the stock's expected
volatility rate of 57.95%, projected dividend yield of 0%, a risk-free
rate of return ranging from 6.115% to 6.597% and projected time of
exercise ranging from 3 to 6 years. The ultimate realizable value of an
option will depend on the actual market value of the company's common
stock on the date of exercise as compared to the exercise price of the
option. Consequently, there is no assurance that the hypothetical present
value of the stock options reflected in this table will be realized.
40
Option Exercises and Year-End Value Table
The following table summarizes the value at February 26, 2000 of all shares
subject to options granted to the persons named in the Summary Compensation
Table. No options were exercised during fiscal 2000.
Number of Securities Value of
Underlying Unexercised In-the-Money Options
Shares Options at Year-End (#) at Year-End ($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Robert G. Miller........ 0 $ 0 166,666 2,833,334 $ 0 $ 0
James P. Mastrian....... 0 0 37,500 562,500 0 499,601
Elliot S. Gerson........ 0 0 452,500 317,500 562,500 391,353
Mary F. Sammons......... 0 0 111,110 1,888,890 0 0
David P. Jessick........ 0 0 55,555 944,445 0 0
Martin L. Grass......... 0 0 0 0 0 0
Timothy J. Noonan....... 0 0 625,000 325,000 562,500 0
Franklin C. Brown....... 0 0 150,000 1,315,000 0 0
Beth J. Kaplan.......... 0 0 0 0 0 0
- --------
(1) "In-the-Money" options are options whose base (or exercise) price was less
than the market price of the common stock on February 26, 2000. The value
of such options is calculated assuming a stock price of $7.25, which was
the closing price of the common stock on the New York Stock Exchange on
February 25, 2000.
The Executive Retirement Plans
Rite Aid has established the Deferred Compensation Program to provide
retirement benefits to long-term employees who hold a position of vice
president or higher and to select executives who may, pursuant to their
employment agreements, be deemed to be long term employees. Participants
generally are entitled to receive benefits upon retirement after age 65 or
upon death, in which case any length of service requirement is disregarded.
Generally, eligible participants receive an annual benefit, payable monthly
over 15 years, equal to a percentage, ranging from 40% to 60%, of the average
of the highest base annual salaries received over a specified period for each
participant during the ten-year period prior to the date of the event giving
rise to payment of the benefit. The program provides that benefits will not be
paid to employees who terminate employment for any reason other than
retirement, disability or death. Additionally, if, during the time a benefit
is being paid to a former employee, it is determined that the former employee
committed an act that could have resulted in a good cause discharge, the
company will cease paying benefits to the former employee. The retirement
benefit is payable to the executive officers named in the Summary Compensation
Table and, in addition to salary, their benefits are based also on the annual
bonuses they receive. The percentage of the average annual compensation
payable under the program to each of the persons named in the Summary
Compensation Table above is 60%.
Directors' Fees
In fiscal 2000, Rite Aid's non-employee directors received no compensation.
In fiscal 1999, each of Rite Aid's non-employee directors was granted a
restricted stock award of 2,000 shares of common stock. The award lapses if a
director fails to complete the term for which he or she was elected for any
reason other than death or disability. Directors who are officers and full-
time employees of Rite Aid receive no separate compensation for service as
directors or committee members. Directors are reimbursed for travel and
lodging expenses associated with attending Board meetings.
Employment and Employment-Related Agreements
On December 5, 1999, Rite Aid entered into employment agreements with the
executive members of the new management team, which include Robert G. Miller,
Mary F. Sammons and David R. Jessick (the "Executives"). Their employment
agreements provide that each Executive's employment with Rite Aid shall
commence on December 5, 1999 and terminate on December 5, 2002 (the
"Employment Period"), but will automatically renew for an additional year on
each anniversary of the effective date of the agreement (a "Renewal Date")
unless either the Executive or Rite Aid provides the other with notice of non-
renewal at least 180 days prior to a Renewal Date, or the agreement is
otherwise terminated.
41
Pursuant to their December 5, 1999 individual agreements, Mr. Miller was
appointed chief executive officer and elected as chairman of the board of
directors of Rite Aid. Ms. Sammons was appointed president and chief operating
officer and as a member of Rite Aid's board. Mr. Jessick was appointed senior
executive vice president and chief administrative officer.
The respective agreements provide each Executive with a base salary and
incentive compensation, including:
(i) Mr. Miller receives an annual base salary of $1,250,000. To
compensate Mr. Miller for a lost bonus opportunity, Mr. Miller received a
$600,000 bonus, and he has the opportunity to receive a bonus that shall
equal or exceed his annual base salary then in effect if Rite Aid's
performance meets certain target goals based on the business plan developed
by the Executives and the Rite Aid board (the "targets").
(ii) Ms. Sammons receives an annual base salary of $750,000. She
received a bonus of $200,000 as compensation for lost bonus opportunities
with her former employer, and may, if Rite Aid's performance meets the
targets, also receive a target bonus that, if paid, will equal or exceed
75% of her annual base salary then in effect.
(iii) Mr. Jessick's annual base salary is $600,000. He was awarded a
bonus of $150,000 pursuant to his employment agreement. If Rite Aid's
performance meets the targets, Mr. Jessick will be paid a bonus that will
equal or exceed 60% of his annual base salary then in effect.
In addition to the base salary and bonus provisions of the Executives'
employment agreements, Rite Aid established the Special Deferred Compensation
Plan (the "New Plan") for the benefit of select members of its management
team, including Mr. Miller, Ms. Sammons and Mr. Jessick. Under the New Plan,
Rite Aid credits a specific sum to individual accounts established for each of
Mr. Miller, Ms. Sammons and Mr. Jessick. The sums are credited on the first
day of each month during the term of the Executives' Employment Period with
Rite Aid. Each of the Executives is fully vested, at all times, in his or her
account balance. Each month, $20,000 is credited to Mr. Miller's account,
$15,000 is credited to Ms. Sammons' account and $10,000 is credited to Mr.
Jessick's account. Under the New Plan, the Executives will be able to direct
the investment of the amounts credited to their individual accounts by
selecting one or more investment vehicles from a group of "measurement funds"
(meaning mutual fund sub accounts) offered pursuant to the New Plan. The
Executives are currently exploring with Rite Aid which investment vehicles
should be offered under the New Plan. Additionally, although the amounts
credited to their accounts are always fully vested, Mr. Miller, Ms. Sammons
and Mr. Jessick generally may not receive payments from their accounts until
three years after an election to receive a payment.
Pursuant to their employment agreements, each of Mr. Miller, Ms. Sammons and
Mr. Jessick are also entitled to participate in Rite Aid's fringe benefit and
perquisite programs and savings plans. Benefits provided to each Executive
include receipt of benefits under all applicable welfare benefit plans,
practices, policies and programs of Rite Aid, an annual allowance of $10,000
for financial and tax planning advice, a monthly car allowance of $1,500, use
of Rite Aid's aircraft for business travel, reimbursement for country club
dues, term life and disability insurance and five weeks of vacation.
On December 5, 1999, Mr. Miller, Ms. Sammons, and Mr. Jessick also received,
pursuant to their employment agreements and individual stock option
agreements, awards of Rite Aid restricted common stock and were granted
options to purchase additional Rite Aid common stock. Mr. Miller was granted
an option to purchase 3,000,000 shares of common stock and was awarded 600,000
shares of restricted common stock. Ms. Sammons was granted an option to
purchase 2,000,000 shares of common stock and was awarded 200,000 shares of
restricted common stock. Mr. Jessick was granted an option to purchase
1,000,000 shares of common stock and was awarded 100,000 shares of restricted
common stock. All of the options granted and restricted common stock awarded
to each of Mr. Miller, Ms. Sammons and Mr. Jessick vest in thirty-six equal
monthly installments commencing one month after December 5, 1999. Upon a
"change in control" (as defined below and in the stock option agreements) of
Rite Aid, however, all of the options vest immediately and become fully
exercisable and the restrictions on the restricted common stock will lapse in
full.
42
Pursuant to the grant of stock options and the award of restricted common
stock to each of Mr. Miller, Ms. Sammons and Mr. Jessick, Rite Aid is required
to register, under the Securities Act of 1933, as amended, and under all
applicable state securities laws, all of the options (and all of the common
stock issuable upon exercise of the options) granted to each Executive, as
well as all of the shares of restricted common stock awarded to each
Executive, under his or her employment agreement. Rite Aid is required to
effect this registration as soon as practicable, and to maintain the
effectiveness of such registration until the restricted shares of common stock
and the shares of common stock issuable upon exercise of the options are
freely transferable.
Mr. Miller's employment agreement provides for him to be based in Portland,
Oregon and that he be provided, for the convenience of Rite Aid, with an
apartment in the vicinity of Rite Aid's corporate headquarters in the
Harrisburg, Pennsylvania area. Ms. Sammons' employment agreement required her
to relocate to the Harrisburg, Pennsylvania area. In connection with her
relocation, Rite Aid paid $12,440 in relocation expenses and paid closing
costs of $11,167.
Pursuant to his employment agreement, Mr. Miller is entitled to recommend
two persons to serve on the board of directors of Rite Aid. Mr. Miller has
made two board recommendations to date and as a result, Alfred Gleason and
Stuart Sloan were elected to the board in January 2000 and June 2000,
respectively.
Pursuant to their employment agreements, Rite Aid has agreed to indemnify
each of Mr. Miller, Ms. Sammons and Mr. Jessick against any claim, loss, cost
or similar expense relating to their employment with Rite Aid. Rite Aid has
also agreed to maintain directors' and officers' liability insurance policies
for each of the Executives for a period of six years following the termination
of their employment with Rite Aid.
Upon written notice, the employment agreements of each of Mr. Miller, Ms.
Sammons and Mr. Jessick are terminable by either Rite Aid or the individual
Executive seeking termination. If the termination is by Rite Aid "without
cause" (as defined in the employment agreements of the Executives) or by an
Executive for "good reason" (as defined in the employment agreements of the
Executives), then each of Mr. Miller, Ms. Sammons and Mr. Jessick shall
receive an amount equal to three times the sum of the individual Executive's
annual base salary and target bonus plus any accrued but unpaid salary and
bonus, with the maximum bonus that the Executive is eligible to earn being
pro-rated through the date of termination. Each Executive shall be entitled to
receive the deferred compensation amounts which would otherwise have been
credited to the Executive pursuant to the New Plan had the Executive continued
employment with Rite Aid through the end of the then-remaining Employment
Period and such amounts sufficient to pay for three years of medical coverage
following the date of termination. In addition, all of the Executive's stock
options will immediately vest and be exercisable for the remainder of their
stated terms, the restrictions on the restricted common stock will immediately
lapse and any performance or other conditions applicable to any other equity
incentive awards will be considered to have been satisfied.
If Rite Aid terminates any of the Executives "for cause" (as defined in the
employment agreements), Rite Aid shall pay him or her all accrued benefits
within ten days after the date of termination and terminate any portion of any
then-outstanding stock option grant that was not exercised prior to the date
of termination, and any portion of any restricted stock award, or other equity
incentive award, to which the restrictions have not lapsed or as to which any
other conditions were not satisfied prior to the date of termination. Under
the agreement, any termination of employment by an Executive within the six
month period commencing on the date of a change in control of Rite Aid will be
treated as a termination of employment by the Executive for "good reason."
Each employment agreement also provides for certain benefits upon termination
of the Executive by reason of death or disability, by Rite Aid "for cause" or
by the Executive other than for good reason. The employment agreements of each
Executive prohibit the Executive from competing with Rite Aid during his or
her Employment Period and for a period of one year thereafter.
As defined in the individual stock option and stock award agreements of each
of Mr. Miller, Ms. Sammons, and Mr. Jessick, the term "change in control"
means the occurrence of any one of the following events:
(i) the acquisition by any person or persons of beneficial ownership of
25% or more of Rite Aid's then-outstanding voting shares;
43
(ii) the change in composition of the board of directors resulting in a
majority of the directors being directors for less than two years, unless
the election of each such director was approved by two-thirds of the
directors who were directors at the beginning of such two-year period;
(iii) the approval by stockholders of a merger or consolidation
resulting in Rite Aid's stockholders holding less than 60% of the voting
shares of the surviving entity; and
(iv) the approval by stockholders of a plan of liquidation or
dissolution of Rite Aid, or the sale or disposition to an entity where less
than 60% of the combined voting shares of Rite Aid do not hold
substantially the same interests in the other entity.
Elliot S. Gerson and James P. Mastrian are employed with Rite Aid at will.
Arrangement with Franklin C. Brown. In recognition of Mr. Brown's employment
with Rite Aid, by agreement dated October 23, 1996, Rite Aid entered into an
Amended and Restated Deferred Compensation Agreement with Franklin C. Brown.
This agreement provides Mr. Brown with retirement benefits that differ from
the retirement benefits provided to other executive officers pursuant to
standard deferred compensation agreements and also provides Mr. Brown with
benefits upon a change in control (as defined hereafter) of Rite Aid. The
agreement provides that upon termination of Mr. Brown's employment with the
company for any reason, he will receive on an annual basis 60% of the sum of
his highest base salary plus the highest bonus that he received over the past
four years, with payment beginning on the first month after Mr. Brown's
termination and continuing through the later of the death of Mr. Brown or 240
months after termination. Upon a "change of control" (as defined in the
agreement) of Rite Aid after the date Mr. Brown's employment agreement
terminates, remaining retirement payments, discounted to present value, may
become immediately due and payable. The agreement also provides that Mr. Brown
will receive life insurance coverage for the rest of his life. All unvested
options held by Mr. Brown terminated upon termination of his employment.
Employment Agreement of Beth Kaplan. On August 14, 1996, Rite Aid entered
into an employment agreement with Beth Kaplan which commenced on September 9,
1996 and was to terminate on February 27, 1999, providing for her employment
as Executive Vice President--Marketing. Rite Aid takes the position that Ms.
Kaplan's agreement expired on February 27, 1999 pursuant to its terms and was
never renewed, but Ms. Kaplan has asserted that the agreement was effectively
renewed. The agreement provided for a minimum annual base salary of $400,000
and an initial target bonus of 45% of Ms. Kaplan's base salary. Pursuant to
the agreement, Rite Aid also loaned to Ms. Kaplan $1,900,000 on August 28,
1996 for the purpose of allowing Ms. Kaplan to exercise her option to purchase
shares of the capital stock of The Procter & Gamble Co. The amount loaned is
due and payable on August 14, 2000 and bears interest, compounded annually,
from the date advanced at the prime rate of interest announced by Morgan
Guaranty Trust Company of New York from time to time. The employment agreement
also provides that Ms. Kaplan would have received up to 93,029 shares of Rite
Aid's common stock (or their equivalent in cash if the shares are freely
transferable) within 90 days of the end of fiscal 1999 if the increase in the
company's annual earnings per share for fiscal years 1996 through 1999
averaged at least 8% per annum more than the company's earnings per share in
the fiscal year ended March 4, 1995. Ms. Kaplan, pursuant to the employment
agreement, was granted on the date of employment an option to purchase 32,000
shares of the company's common stock, at a price equal to $16.38. The options
were to be exercisable for 10 years from the date of grant in cumulative
annual installments of 25% commencing one year from the date of grant. The
agreement entitled Ms. Kaplan to participate in Rite Aid's Deferred
Compensation Program. The agreement also provided for certain executive
perquisites, such as a new automobile and driver and all related insurance
coverage and, from time to time, use of the corporate jet for business
purposes.
Ms. Kaplan's employment agreement provides that upon a termination for any
reason or an expiration pursuant to its terms, Ms. Kaplan would be entitled to
all salary due up to the termination or expiration date, any unpaid bonus or
incentive compensation pro-rated up until the date of termination or
expiration, expense reimbursements due and owing to Ms. Kaplan and payment for
accrued vacation as of the termination or expiration date. Ms. Kaplan would
also receive payment of health and medical benefits and life insurance
44
premiums consistent with the company's prior practice. If Ms. Kaplan's
employment agreement expired pursuant to its terms, Ms. Kaplan would receive
payment pursuant to the Long-Term Incentive Plan of all the shares of common
stock (or the equivalent value if such shares are freely transferable) to
which she was then entitled and all right to the option subject to the terms
of the stock option plan. If Ms. Kaplan was terminated without "cause" (as
defined in the agreement), her option would be deemed fully vested and
exercisable for a period of five years following such termination. The
agreement also prohibited Ms. Kaplan from competing with the company during
the term of her employment and prohibits her from such competition with the
company for a period of one year thereafter.
Severance Agreement of Timothy J. Noonan. On February 25, 2000, Rite Aid
entered into an Executive Separation Agreement and General Release with
Timothy J. Noonan providing for Mr. Noonan's voluntary resignation from Rite
Aid. The agreement provides Mr. Noonan with severance benefits commencing
February 25, 2000 and ending on February 28, 2002, consisting of an amount
each year equal to his then effective annual base salary, medical benefits,
benefits under the Deferred Compensation Program and other benefits. The
agreement also provided for the termination as of February 25, 2000 of all of
Mr. Noonan's stock options which were then unvested, except for option grants
made on May 12, 1998 relating to the right to later purchase 650,000 shares of
Rite Aid's common stock at a price of $30.75 per share and on November 10,
1999 relating to the right to purchase 300,000 shares of Rite Aid's common
stock at a price of $5.375 per share. The May 12, 1998 grant of options to
purchase 650,000 shares of the company's common stock will continue to vest
and become exercisable in accordance with its terms through the end of the
severance period, whereas any option that vests before the end of the
severance period shall remain exercisable through the later of (i) February
28, 2002 and (ii) 90 days after the date on which the company is first able to
register under the Securities Act shares issuable upon exercise of the option,
but in no event later than the tenth anniversary of the date of grant. Rite
Aid will also provide Mr. Noonan continued medical coverage during the
severance period, applicable employee benefits as of February 25, 2000, and
with customary indemnification and continued insurance with respect to matters
relating to his services as an executive officer of the company.
45
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Executive Officers and Directors
The following table sets forth certain information regarding the beneficial
ownership of the outstanding shares of common stock as of June 30, 2000, by
the persons named in the Summary Compensation Table, Rite Aid's directors and
all directors and current executive officers as a group. Each stockholder
possesses sole voting and investment power with respect to the shares listed,
unless otherwise noted:
Number of Shares
of Common Stock Percentage
Name Beneficially Owned(1) of Class
- ---- --------------------- ----------
Robert G. Miller............................. 1,984,942(2) *
William J. Bratton........................... 3,900(3) *
Elliot S. Gerson............................. 490,000 *
Alfred M. Gleason............................ 70,200(4) *
Alex Grass................................... 2,777,129(5) *
Leonard I. Green............................. 58,561,789(6) 14.7%
David R. Jessick............................. 36,574 *
Nancy A. Lieberman........................... 7,000(7) *
James P. Mastrian............................ 75,000 *
Philip Neivert............................... 2,869,506(8) *
Mary F. Sammons.............................. 1,316,857(9) *
Stuart M. Sloan.............................. -- --
Jonathan D. Sokoloff......................... 57,254,527(10) 14.6
Leonard N. Stern............................. 40,000(11) *
Preston Robert Tisch......................... 10,000(12) *
Gerald Tsai, Jr.............................. 4,000(13) *
Martin L. Grass.............................. 1,148,102(14) *
Timothy J. Noonan............................ 715,959(15) *
Franklin C. Brown............................ 2,725,301(16) *
Beth J. Kaplan............................... 363 *
Ellioit S. Gerson............................ 494,000
David R. Jessick............................. 706,922
James P. Mastrian............................ 112,500
All current executive officers and directors
(23 persons)................................ 74,398,786 18.6
- --------
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), including options exercisable within 60 days of June 30, 2000.
(2) This amount includes 774,942 shares of Rite Aid common stock which may be
acquired beneficially within 60 days by exercising stock options and
1,100,000 of restricted shares of Rite Aid common stock.
(3) This amount includes 4,000 restricted shares of Rite Aid common stock and
400 shares of Rite Aid common stock owned by Mr. Bratton's wife.
(4) This amount includes 6,000 shares of Rite Aid common stock owned by Mr.
Gleason's wife.
(5) This amount includes 137,904 shares of Rite Aid common stock owned by the
Grass Family Foundation of which Alex Grass is a director, 90,982 shares
of Rite Aid common stock held in trust for the benefit of Martin L. Grass
and of which Alex Grass is a trustee, 370,568 shares of Rite Aid common
stock held in trust for the benefit of Lois Grass and of which trust Alex
Grass is an alternate trustee, and 1,600,000 shares of Rite Aid common
stock which may be acquired beneficially within 60 days by exercising
stock options.
(6) This amount includes 57,571,389 shares of Rite Aid common stock
beneficially owned by Green Equity Investors III, L.P., which is
affiliated with Leonard Green & Partners, L.P., of which Mr. Green is an
executive officer and equity owner, and 990,000 shares of Rite Aid common
stock owned by Verdi Group, Inc., over which Mr. Green has beneficial
ownership and 4,000 restricted shares of Rite Aid common stock.
(7) This amount includes 4,000 restricted shares of Rite Aid common stock.
(8) This amount includes 712,778 shares of Rite Aid common stock owned by Mr.
Neivert's wife. Mr. Neivert disclaims beneficial ownership of these
shares. This amount also includes 4,000 restricted shares of Rite Aid
common stock.
(9) This amount includes 516,857 shares of Rite Aid common stock which may be
acquired beneficially within 60 days by exercising stock options and
766,667 shares of restricted shares of Rite Aid common stock.
(10) This amount consists of 56,749,091 shares of Rite Aid common stock
beneficially owned by Green Equity Investors III, L.P., which is
affiliated with Leonard Green & Partners, L.P., of which Mr. Sokoloff is
an executive officer and equity owner.
(11) This amount includes 4,000 restricted shares of Rite Aid common stock.
(12) This amount includes 4,000 restricted shares of Rite Aid common stock.
(13) This amount includes 4,000 restricted shares of Rite Aid common stock.
(14) This amount includes 370,568 shares of Rite Aid common stock held in
trust for the benefit of Lois Grass of which trust Martin Grass is a
trustee.
(15) This amount includes 3,552 shares of Rite Aid common stock owned by Mr.
Noonan's wife and daughter and 625,000 shares of Rite Aid common stock
which may be acquired beneficially within 60 days by exercising stock
options. Mr. Noonan disclaims beneficial ownership of these shares owned
by his wife and daughter.
(16) This amount includes 383,360 shares of Rite Aid common stock owned by Mr.
Brown's wife.
*Represents less than 1.0% of the outstanding shares as of June 30, 2000.
46
Certain Other Beneficial Owners
The following table sets forth certain information regarding the holders of
shares of common stock known to Rite Aid to be the beneficial owners of more
than 5% of the outstanding common stock.
Number of Shares Percentage
of Common Stock of
Name and Address of Beneficial Owners Beneficially Owned(1) Class(1)
- ------------------------------------- --------------------- ----------
Green Equity Investors III, L.P. .............. 57,571,389(2) 14.7%
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
J.P. Morgan & Co. Incorporated................. 39,380,992(3) 10.2%
60 Wall Street
New York, New York 10260
Janus Capital Corporation ..................... 24,855,230(4) 6.4%
100 Fillmore Street #300
Denver, Colorado 80206
- --------
(1) Based upon the number of shares outstanding as of June 30, 2000.
(2) Green Equity Investors III, L.P. beneficially owns 57,571,389 shares of
Rite Aid common stock. This number represents the number of shares
issuable within 60 days of June 30, 2000 upon the conversion of
convertible preferred stock.
(3) This amount, as reflected in a report on Schedule 13G dated June 26, 2000
filed by J.P. Morgan & Co. Incorporated, consists of 39,380,992 shares of
Rite Aid common stock, of which the reporting person claims sole
dispositive power over 39,364,792 shares, shared dispositive power over
13,600 shares, sole voting power over 39,379,392 shares and shared voting
power over 1,600 shares. The report states that J.P. Morgan Ventures
Corporation, a subsidiary of J.P. Morgan & Co. Incorporated is the
beneficial owner of 39,136,363 of the shares.
(4) This amount, as reflected in a report on Schedule 13G dated February 15,
2000, filed by Janus Capital Corporation, consists of 24,855,230 shares of
Rite Aid common stock, of which the reporting person claims sole
dispositive and voting power.
ITEM 13. Certain Relationships and Related Transactions
Rite Aid leases 43,920 square feet of storage space in a warehouse in Camp
Hill, Pennsylvania, from a partnership in which Alex Grass, a director of Rite
Aid, has a 50% interest. Rent paid by the company under the lease during
fiscal year 2000 was $153,720 plus taxes, water and sewer. Rite Aid believes
that the terms of the lease are at least as favorable as those available from
unrelated third parties.
On August 28, 1996, the company loaned $1.9 million to Beth J. Kaplan, who
was then the Senior Executive Vice President, Marketing. The loan bears
interest at the prime rate announced from time to time by Morgan Guaranty
Bank. The loan is payable in full on August 14, 2000, together with all
accrued interest. The loan was secured by a pledge of any shares of common
stock issuable upon exercise of options granted to Ms. Kaplan under Rite Aid's
1990 Omnibus Stock Incentive Plan. No shares were issued to Ms. Kaplan under
the Plan. At June 30, 2000, principal under the loan remained at $1.9 million.
Rite Aid has guaranteed loans of $2.5 million and $5.0 million made by a
third-party to Ms. Kaplan. Interest under the loans bear interest at LIBOR
plus 2.0%. Rite Aid purchased both third-party loans from the lender on June
30, 2000 and April 30, 2000, respectively.
Commencing on January 8, 1999, Rite Aid leased a 10,750 square foot store in
Sinking Springs, Pennsylvania, from Martin L. Grass' brother-in-law, a full-
time real estate developer, at a rent of $17.50 per square foot. Total rent
under the lease paid by Rite Aid during fiscal year 2000 was $188,125. Rite
Aid believes that the terms of the lease are at least as favorable as those
available from unrelated third parties.
Prior to his resignation on October 18, 1999, Martin L. Grass paid 51% of
the lease cost of a helicopter that Rite Aid leases. Prior to his resignation,
Mr. Grass was permitted unlimited personal use of the helicopter.
47
On October 27, 1999, Rite Aid issued a warrant to J.P. Morgan Ventures
Corporation, a subsidiary of J.P. Morgan to purchase 2,500,000 shares of Rite
Aid common stock at an exercise price of $11.00 per share, subject to certain
adjustments. The warrant was issued in connection with the extension and
restructuring of Rite Aid's banking facilities. J.P. Morgan is one of Rite
Aid's lenders. In connection with the issuance of the warrant, J.P. Morgan and
Rite Aid entered into a Registration Rights Agreement (the "Agreement").
Pursuant to the terms of the Agreement, Rite Aid has agreed to register, under
certain circumstances, the Rite Aid common stock issuable upon exercise of the
warrant. Rite Aid will pay all expenses and fees related to any registration.
J.P. Morgan beneficially owns more than 5% of Rite Aid's common stock.
In June 2000, J.P. Morgan and another financial institution agreed to
purchase $93.2 million of 10.5% senior secured notes due September 2002 when
the 5.5% notes mature in December 2000.
In fiscal 2000, Rite Aid paid to J.P. Morgan fees and other amounts in
connection with the company's financing activities, including the refinancing
in October 1999, of $19.6 million. In fiscal 2001, Rite Aid has paid to J.P.
Morgan fees and other amounts in connection with the company's financing
activities, including the refinancing in June 2000, of $8.5 million and
anticipates paying J. P. Morgan fees and other amounts in connection with
financing activities, including the refinancing in June 2000, of $20.5
million.
On October 27, 1999, Green Equity Investors III, L.P., ("GEI") an affiliate
of Leonard Green & Partners, L.P., purchased 3,000,000 shares of series A
cumulative pay-in-kind preferred stock ("series A preferred stock") at $100
per share. GEI exchanged all 3,000,000 shares of its series A preferred stock
for 3,000,000 shares of series B cumulative pay-in-kind preferred stock
("series B preferred stock"). The series B preferred stock, when issued, was
convertible into shares of Rite Aid common stock at a conversion price of
$11.00 per share of common stock. The conversion price of the series B
preferred stock will be adjusted if Rite Aid issues common stock before
October 27, 2000 at a per share price that is less than the then current
conversion price of the series B preferred stock and in other circumstances.
In June 2000, in connection with the refinancing, Rite Aid issued common stock
at a per share price of $5.50. As a result of this issuance, the per share
conversion price for the series B preferred stock was adjusted to $5.50. At
June 30, 2000, after giving effect to the adjustment and the receipt of pay-
in-kind dividends, the series B preferred stock was convertible into
56,749,091 shares of Rite Aid common stock. Leonard I. Green and Jonathan D.
Sokoloff, members of Rite Aid's board of directors, are equity owners and
executive officers of Leonard Green & Partners, L.P., an affiliate of GEI.
Rite Aid paid Leonard Green & Partners a $3 million fee for service provided
in connection with its preferred stock investment in October, 1999 and
reimbursed $0.24 million of its out of pocket expenses. In June 2000, Rite Aid
paid a $3,000,000 fee for services provided in connection with the financial
restructuring transactions which Rite Aid completed and reimbursed its out of
pocket expenses. In October 1999, Rite Aid agreed to pay Leonard Green &
Partners an annual fee of $1 million for its consulting services. This fee was
increased to $1.5 million at the time of the June 2000 restructuring
transactions. The consulting agreement also provides for the reimbursement of
out-of-pocket expenses incurred by Leonard Green & Partners. Rite Aid has also
granted customary registration rights to GEI with respect to the Rite Aid
common stock issuable upon conversion of the series B preferred stock.
The law firm of Skadden, Arps, Slate, Meagher & Flom providers legal
services to Rite Aid. Nancy Lieberman, a director of Rite Aid, is a partner of
that law firm. Fees paid by Rite Aid to Skadden, Arps Slate, Meagher & Flom
LLP did not exceed five percent of the law firm's gross revenues for its last
fiscal year.
48
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The consolidated financial statements of the Company and reports of
independent accountants identified in the following index are incorporated by
reference into this report from the individual pages filed as a part of this
report:
1.Financial Statements
The following financial statements and report of independent auditors
are included herein:
Independent Auditors' Reports......................................... F-1
Consolidated Balance Sheets as of February 26, 2000 and February 27,
1999................................................................. F-3
Consolidated Statements of Operations for the fiscal years ended
February 26, 2000, February 27, 1999 and February 28, 1998........... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998..... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
February 26, 2000, February 27, 1999 and February 28, 1998........... F-6
Notes to Consolidated Financial Statements............................ F-7
2.Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not
required or the required information is included in the consolidated financial
statements of notes thereto.
Financial statements of 50% or less owned companies have been omitted since
they do not constitute significant subsidiaries.
3.Exhibits
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
2 Not Applicable --
3.1 Restated Certificate of Incorporation dated Exhibit 3(i) to Form 8-K
December 12, 1996 filed on November 2,
1999
3.2 Certificate of Amendment to the Restated Exhibit 3(ii) to Form 8-
Certificate of Incorporation dated October K filed on November 2,
25, 1999 1999
3.3 By-laws Exhibit 3(a) to Form S-1
Registration Statement
filed on April 26, 1968
3.4 Amendments to By-laws approved April 6, Exhibit 3 to Form 10-K
1983 filed on May 29, 1983
4.1 The rights of security holders of the
registrant are defined by a) the Laws of
the State of Delaware, b) the Certificate
of Incorporation of registrant and c) the
By-laws of registrant. The Certificate of
Incorporation and By-laws of the registrant
are hereby incorporated by reference in
accordance with Exhibit 3 above.
49
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
4.2 Term Loan Agreement, dated as of October Exhibit 10.2 to Form 8-K
27, 1999, by and among Rite Aid filed on November 2,
Corporation, the banks from time to time 1999
parties thereto and Morgan Trust Company of
New York, as Administrative Agent
4.3 Amended and Restated Credit Agreement, Exhibit 10.3 to Form 8-K
dated as of October 27, 1999, by and among filed on November 2,
Rite Aid Corporation, the banks from time 1999
to time parties thereto and Morgan Guaranty
Trust company of New York, as Agent
4.4 Pledge Agreement, dated as of October 25, Exhibit 10.4 to Form 8-K
1999, by and between Rite Aid Corporation filed on November 2,
and Morgan Guaranty Trust Company of New 1999
York, as Agent
4.5 PCS Junior Pledge Agreement, dated as of Exhibit 10.5 to Form 8-K
October 19, 1999, by and between Rite Aid filed on November 2,
Corporation and Morgan Guaranty Trust 1999
Company of New York, as Agent
4.6 Waiver dated as of January 11, 2000 to the Exhibit 4.1 to Form 8-K
Amended and Restated Credit Agreement dated filed on January 18,
as of October 25, 1999 and amended as of 2000
December 2, 1999 among Rite Aid Corporation
the Banks party thereto and Morgan Trust
Company of New York, as Agent
4.7 Amendment dated as of December 2, 1999 to Exhibit 4.2 to Form 8-K
the Amended and Restated Credit Agreement filed on January 18,
dated as of October 25, 1999 among Rite Aid 2000
Corporation, the Banks party thereto and
Morgan Guaranty Trust Company of New York,
as Agent
4.8 Waiver dated as of January 11, 2000 to the Exhibit 4.3 to Form 8-K
Term Loan Agreement dated as of October 25, filed on January 18,
1999 among Rite Aid Corporation, the Banks 2000
party thereto and Morgan Guaranty Trust
Company of New York, as Administrative
Agent
4.9 Amendment dated as of December 2, 1999 to Exhibit 4.4 to Form 8-K
the Term Loan Agreement dated as of October filed on January 18,
25, 1999 among Rite Aid Corporation, the 2000
Banks party thereto and Morgan Guaranty
Trust Company of New York, as
Administrative Agent
4.10 Waiver dated as of January 11, 2000 to the Exhibit 4.5 to Form 8-K
Term Loan Agreement dated as of October 27, filed on January 18,
1999 among Rite Aid Corporation, the Banks 2000
party thereto and Morgan Guaranty Trust
Company of New York, as Administrative
Agent
4.11 Term Loan Agreement dated as of October 27, Exhibit 4.6 to Form 8-K
1999 among Rite Aid Corporation, the Banks filed on January 18,
party thereto and Morgan Guaranty Trust 2000
Company of New York, as Administrative
Agent
4.12 Waiver dated as of January 11, 2000 to Exhibit 4.7 to Form 8-K
Guaranty dated as of March 19, 1998, as filed on January 18,
amended by Amendment No. 1, dated as of 2000
June 22, 1998, and as further amended by
Amendment No. 2, dated as of October 25,
1999, and as further amended by Amendment
No. 3, dated as of December 2, 1999 between
Rite Aid Corporation and RAC Leasing LLC
50
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
4.13 Amendment No. 3, dated as of December 23, Exhibit 4.8 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of March 19, 1998, (as 2000
amended by Amendment No. 1, dated as of
June 22, 1998, and Amendment No. 2 dated as
of October 25, 1999) between RAC Leasing
LLC and Rite Aid Realty Corp.
4.14 Amendment No. 3 dated as of December 2, Exhibit 4.9 to Form 8-K
1999 to Guaranty Dated as of March 19, filed on January 18,
1998, as amended by Amendment No. 1, Dated 2000
as of June 22, 1998, and as further amended
by Amendment No. 2, dated as of October 25,
1999, from Rite Aid Corporation to RAC
Leasing LLC
4.15 Amendment No. 2 dated as of October 25, Exhibit 4.10 to Form 8-K
1999 to Guaranty dated March 19, 1998 (as filed on January 18,
amended by Amendment No. 1, dated as of 2000
June 22, 1998) from Rite Aid Corporation to
RAC Leasing LLC
4.16 Amendment No. 1 dated as of June 22, 1998, Exhibit 4.11 to Form 8-K
to Guaranty dated March 19, 1998, from Rite filed on January 18,
Aid Corporation to RAC Leasing LLC 2000
4.17 Amendment No. 2 dated as of October 25, Exhibit 4.12 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of March 19, 1998 (as 2000
amended by Amendment No. 1, dated as of
June 22, 1998) between RAC Leasing LLC and
Rite Aid Realty Corp.
4.18 Amendment No. 1 dated as of June 22, 1998 Exhibit 4.13 to Form 8-K
to Master Lease and Security Agreement, filed on January 18,
dated as of March 19, 1998 between RAC 2000
Leasing LLC and Rite Aid Realty Corp.
4.19 Guaranty, dated as of March 19, 1998, from Exhibit 4.4 to Form 8-K
Rite Aid Corporation to RAC Leasing LLC filed on January 18,
2000
4.20 Master Lease and Security Agreement, dated Exhibit 4.15 to Form 8-K
as of March 19, 1998, between RAC Leasing filed on January 18,
LLC and Rite Aid Realty Corp. 2000
4.21 Waiver dated as of January 11, 2000 to Exhibit 4.16 to Form 8-K
Guaranty dated as of May 30, 1997, as filed on January 18,
amended by Amendment No. 1, dated as of 2000
October 25, 1999, and as further amended by
Amendment No. 2, dated as of December 2,
1999 between Rite Aid Corporation and
Sumitomo Bank Leasing and Finance, Inc.
4.22 Amendment No. 2 dated as of December 2, Exhibit 4.17 to Form 8-K
1999 to Guaranty dated as of May 30, 1997, filed on January 18,
as amended by Amendment No. 1, dated as of 2000
October 25, 1999, from Rite Aid Corporation
to Sumitomo Bank Leasing and Finance, Inc.
4.23 Amendment No. 1 dated as of October 25, Exhibit 4.18 to Form 8-K
1999 to Guaranty dated as of May 30, 1997 filed on January 18,
from Rite Aid Corporation to Sumitomo Bank 2000
Leasing and Finance, Inc.
51
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
4.24 Amendment No. 4, dated as of October 25, Exhibit 4.19 to Form 8-K
1999 to Master Lease and Security filed on January 18,
Agreement, dated as of May 30, 1997, as 2000
amended by Amendment No. 1, dated as of
March 11, 1998, and as further amended by
Amendment No. 2, dated as of June 22, 1998,
and as further amended by Amendment No. 3
dated as of May 26, 1999 between Sumitomo
Bank Leasing and Finance, Inc. and Rite Aid
Realty Corp.
4.25 Amendment No. 3, dated as of May 26, 1999, Exhibit 4.20 to Form 8-K
to Master Lease and Security Agreement, filed on January 18,
dated as of May 30, 1997, (as amended by 2000
Amendment No. 1, dated as of March 11,
1998, and as further amended by Amendment
No. 2, dated as of June 22, 1998) between
Sumitomo Bank Leasing and Finance, Inc. and
Rite Aid Realty Corp.
4.26 Amendment No. 2, dated as of June 22, 1998 Exhibit 4.21 to Form 8-K
to Master Lease Security Agreement, dated filed on January 18,
as of May 30, 1997, as amended by Amendment 2000
No. 1 to Master Lease and Security
Agreement, dated as of March 11, 1998
between Sumitomo Bank Leasing and Finance,
Inc. and Rite Aid Realty Corp.
4.27 Amendment No. 1, dated as of March 11, 1998 Exhibit 4.22 to Form 8-K
to Master Lease and Security Agreement, filed on January 18,
dated as of May 30, 1997 between Sumitomo 2000
Bank Leasing and Finance, Inc. and Rite Aid
Realty Corp.
4.28 Guaranty, dated as of May 30, 1997 from Exhibit 4.23 to Form 8-K
Rite Aid Corporation to Sumitomo Bank filed on January 18,
Leasing and Finance, Inc. 2000
4.29 Master Lease and Security Agreement, dated Exhibit 4.24 to Form 8-K
as of May 30, 1997, between Sumitomo Bank filed on January 18,
Leasing and Finance, Inc. and Rite Aid 2000
Realty Corp.
4.30 Waiver No. 1 dated as of January 10, 2000 Exhibit 4.25 to Form 8-K
to Note Agreement dated as of September 30, filed on January 18,
1996 (as previously amended pursuant to 2000
Amendment No. 1 dated as of October 25,
1999 and Amendment No. 2 dated as of
December 2, 1999) among Finco, Inc., Rite
Aid Corporation, The Prudential Life
Insurance Company of America and PruCo Life
Insurance Company and Waiver No. 1 dated as
of January 10, 2000 to Guaranty Agreement
dated as of September 30, 1996 (as
previously amended pursuant to Amendment
No. 1 dated as of October 25, 1999 and
Amendment No. 2 dated as of December 2,
1999) among Finco, Inc., Rite Aid
Corporation, The Prudential Life Insurance
Company of America and PruCo Life Insurance
Company
52
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
4.31 Amendment No. 2 dated as of December 2, Exhibit 4.26 to Form 8-K
1999 to Note Agreement dated as of filed on January 18,
September 30, 1996 (as previously amended 2000
pursuant to Amendment No. 1 dated as of
October 25, 1999) among Finco, Inc., Rite
Aid Corporation, The Prudential Insurance
Company of America and PruCo Life Insurance
Company and Amendment No. 2 dated as of
December 2, 1999 to Guaranty Agreement
dated as of September 30, 1996 (as
previously amended pursuant to Amendment
No. 1 dated as of October 25, 1999) among
Finco, Inc., Rite Aid Corporation, The
Prudential Insurance Company of America and
PruCo Life Insurance Company
4.32 Amendment No. 1 dated as of October 25, Exhibit 4.27 to Form 8-K
1999 to Note Agreement dated as of filed on January 18,
September 30, 1996 among Finco, Inc., Rite 2000
Aid Corporation, The Prudential Insurance
Company of America and PruCo Life Insurance
Company and Amendment No. 1 dated as of
October 25, 1999 to Guaranty Agreement
dated as of September 30, 1996 among Finco,
Inc., Rite Aid Corporation, The Prudential
Insurance Company of America and PruCo Life
Insurance Company
4.33 Guaranty Agreement dated as of September Exhibit 4.28 to Form 8-K
30, 1996 from Rite Aid Corporation to the filed on January 18,
Prudential Insurance Company of America and 2000
PruCo Life Insurance Company
4.34 Note Agreement dated as of September 30, Exhibit 4.29 to Form 8-K
1996 among Finco, Inc., The Prudential filed on January 18,
Insurance Company of America and PruCo Life 2000
Insurance Company
4.35 Amended and Restated Receivables Purchase Exhibit 4.30 to Form 8-K
Agreement dated as of January 11, 2000 filed on January 18,
among Rite Aid Funding LLC and Corporate 2000
Asset Funding Company, Inc. and Corporate
Receivables Corporation and Citibank, N.A.
and Citicorp North American, Inc., as agent
for the Investors and the Banks, and Rite
Aid Corporation, as Collection Agent
4.37 Supplemental Indenture, dated as of Exhibit 4.2 to Form 8-K
February 3, 2000, between Rite Aid filed on February 7,
Corporation and Harris Trust and Savings 2000
Bank, to the Indenture dated September 10,
1997, between Rite Aid Corporation and
Harris Trust and Savings Bank
4.38 Supplemental Indenture, dated as of Exhibit 4.3 to Form 8-K
February 3, 2000, between Rite Aid filed on February 7,
Corporation and Harris Trust and Savings 2000
Bank, to the Indenture dated September 22,
1998, between Rite Aid Corporation and
Harris Trust and Savings Bank
4.39 Supplemental Indenture, dated as of Exhibit 4.4 to Form 8-K
February 3, 2000, between Rite Aid filed on February 7,
Corporation and Harris Trust and Savings 2000
Bank, to the Indenture dated December 21,
1998, between Rite Aid Corporation and
Harris Trust and Savings Bank
4.40 Commitment Letter dated April 10, 2000 Exhibit 4.1 to Form 8-K
filed on April 11, 2000
53
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
4.41 Indenture, dated as of June 14, 2000, among Exhibit 4.1 to Form 8-K
Rite Aid Corporation, as Issuer, each of filed on June 21, 2000
the Subsidiary Guarantors named therein and
State Street Bank and Trust Company, as
Trustee.
4.42 Exchange and Registration Rights Agreement, Exhibit 4.2 to Form 8-K
dated as of June 14, 2000, by and among filed on June 21, 2000
Rite Aid Corporation, State Street Bank and
Trust Company and the Holders of the 10.50%
Senior Secured Notes due 2002.
4.43 Registration Rights Agreement, dated as of Exhibit 4.3 to Form 8-K
June 14, 2000, by and among Rite Aid filed on June 21, 2000
Corporation and the Lenders listed therein.
9 Not Applicable
10.1 Agreement with McKesson Dated April 10, Exhibit 10 to Form 10-Q
1998 filed on July 2, 1998
10.2 Salary Continuation Agreement with Key Exhibit 10(iii) to Form
Officers* 10-K filed on May 29,
1983
10.3 1990 Omnibus Stock Incentive Plan, as Exhibit 4 to Form S-8
amended* filed on July 12, 1996
10.4 Annual Performance-Based Incentive Program* Included in Proxy
Statement dated on June
7, 1995
10.5 Deferred Compensation Agreement* Exhibit 10(iii) to Form
10-K filed on May 31,
1996
10.6 Registration Rights Agreement, dated as of Exhibit 4.1 to Form 8-K
October 27, 1999, by and between Rite Aid filed on November 2,
Corporation and Green Equity Investors III, 1999
L.P.
10.7 Registration Rights Agreement, dated as of Exhibit 4.2 to Form 8-K
October 27, 1999, by and between Rite Aid filed on November 2,
Corporation and J.P. Morgan Ventures 1999
Corporation
10.8 Warrant to purchase Common Stock, par value Exhibit 4.3 to Form 8-K
$1.00 per share, of Rite aid Corporation, filed on November 2,
dated October 27, 1999, issued to J.P. 1999.
Morgan Ventures Corporation
10.9 Commitment Letter, dated October 18, 1999, Exhibit 10.1 to Form 8-K
by and between Rite Aid Corporation and filed on November 2,
Green Equity Investors III, L.P. 1999
10.10 Employment Agreement by and between Rite Exhibit 10.1 to Form 8-K
Aid Corporation and Robert G. Miller, dated filed on January 18,
as of December 5, 1999 * 2000
10.11 Rite Aid Corporation Restricted Stock and Exhibit 4.31 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and Robert G. Miller *
10.12 Employment Agreement by and between Rite Exhibit 10.2 to Form 8-K
Aid Corporation and Mary F. Sammons, dated filed on January 18,
as of December 5, 1999 * 2000
10.13 Rite Aid Corporation Restricted Stock and Exhibit 4.32 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and Mary F. Sammons *
54
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
10.14 Employment Agreement by and between Rite Exhibit 10.3 to Form 8-K
Aid Corporation and David R. Jessick, dated filed on January 18,
as of December 5, 1999 * 2000
10.15 Rite Aid Corporation Restricted Stock and Exhibit 4.33 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and David R. Jessick *
10.16 Employment Agreement by and between Rite Exhibit 10.4 to Form 8-K
Aid Corporation and John T. Standley, dated filed on January 18,
as of December 5, 1999 * 2000
10.17 Rite Aid Corporation Restricted Stock and Exhibit 4.34 to Form 8-K
Stock Option Award Agreement, made as of filed on January 18,
December 5, 1999, by and between Rite Aid 2000
Corporation and John T. Standley *
10.18 Amended and Restated Deferred Compensation Included herein
Agreement by and between Rite Aid
Corporation and Franklin C. Brown, dated as
of October 23, 1996 *
10.19 Employment Agreement by and between Rite Included herein
Aid Corporation and Beth Kaplan, dated as
of August 14, 1996 *
10.20 Intentionally Omitted
10.21 Rite Aid Corporation Special Deferred Included herein
Compensation Plan *
10.22 Senior Credit Agreement, dated as of June Exhibit 10.1 to Form 8-K
12, 2000, among Rite Aid Corporation, the filed on June 21, 2000
Banks party thereto, Citicorp USA, Inc., as
Senior Administrative Agent, Citicorp USA,
Inc., as Senior Collateral Agent, and
Heller Financial, Inc. and Fleet Retail
Finance Inc., as Syndication Agents.
10.23 Collateral Trust and Intercreditor Exhibit 10.2 to Form 8-K
Agreement, dated as of June 12, 2000, among filed on June 21, 2000
Rite Aid Corporation, each Subsidiary
Guarantor of Rite Aid Corporation listed
therein, Wilmington Trust Company, Citcorp
USA, Inc., Morgan Guaranty Trust Company of
New York, The Prudential Insurance Company
of America, State Street Bank and Trust
Company and The Sumitomo Bank, Limited, New
York Branch.
10.24 Senior Subsidiary Security Agreement, dated Exhibit 10.3 to Form 8-K
as of June 12, 2000, made by the Subsidiary filed June 21, 2000
Guarantors identified therein and any other
person that becomes a Subsidiary Guarantor
pursuant to the Senior Credit Facility, in
favor of Citicorp USA, Inc., as Senior
Collateral Agent.
10.25 Senior Subsidiary Guarantee Agreement, Exhibit 10.4 to Form 8-K
dated as of June 12, 2000, among each of filed June 21, 2000
the Subsidiary Guarantors of Rite Aid
Corporation listed therein and Citicorp
USA, Inc., as Senior Collateral Agent.
10.26 Senior Indemnity, Subrogation and Exhibit 10.5 to Form 8-K
Contribution Agreement, dated as of June filed June 21, 2000
12, 2000, among Rite Aid Corporation, each
of the Subsidiary Guarantors listed therein
and Citicorp USA, Inc., as Senior
Collateral Agent.
55
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
10.27 RCF Facility, dated as of June 12, 2000, Exhibit 10.6 to Form 8-K
among Rite Aid Corporation, the Banks from filed June 21, 2000
time to time parties thereto and Morgan
Guaranty Trust Company of New York, as
Administrative Agent, with JP Morgan
Securities Inc., as Lead Arranger and Book
Runner.
10.28 PCS Facility, dated as of June 12, 2000, Exhibit 10.7 to Form 8-K
among Rite Aid Corporation, the Banks from filed June 21, 2000
time to time parties thereto and Morgan
Guaranty Trust Company of New York, as
Administrative Agent, with JP Morgan
Securities Inc., as Lead Arranger and Book
Runner.
10.29 Exchange Debt Facility, dated as of June Exhibit 10.8 to Form 8-K
12, 2000, among Rite Aid Corporation, the filed June 21, 2000
Banks from time to time parties thereto and
Morgan Guaranty Trust Company of New York,
as Administrative Agent, with JP Morgan
Securities Inc., as Lead Arranger and Book
Runner.
10.30 Second Priority Subsidiary Guarantee Exhibit 10.9 to Form 8-K
Agreement, dated as of June 12, 2000, among filed June 21, 2000
each of the Subsidiary Guarantors of Rite
Aid Corporation listed therein and
Wilmington Trust Company, as Second
Priority Collateral Trustee.
10.31 Second Priority Subsidiary Security Exhibit 10.10 to Form 8-
Agreement, dated as of June 12, 2000, made K filed June 21, 2000
by the Subsidiary Guarantors identified
therein and any other person that becomes a
Subsidiary Guarantor pursuant to the Second
Priority Debt Documents, in favor of
Wilmington Trust Company, as Second
Priority Collateral Trustee.
10.32 Second Priority Indemnity, Subrogation and Exhibit 10.11 to Form 8-
Contribution Agreement, dated as of June K filed June 21, 2000
12, 2000, among Rite Aid Corporation, each
Subsidiary Guarantor listed therein and
Wilmington Trust Company, as Second
Priority Collateral Trustee.
10.33 First Priority Subsidiary Security Exhibit 10.12 to Form 8-
Agreement, dated as of June 12, 2000, made K filed June 21, 2000
by the Domestic Subsidiaries identified
therein and any other person that becomes a
Domestic Subsidiary pursuant to the
Exchange Debt Facility Documents, in favor
of Morgan Guaranty Trust Company of New
York, as Agent.
10.34 Amended and Restated Drugstore.com Pledge Exhibit 10.13 to Form 8-
Agreement, dated as of June 12, 2000, K filed June 21, 2000
between Rite Aid Corporation and Morgan
Guaranty Trust Company of New York, as
Agent.
10.35 Amended and Restated PCS Pledge Agreement, Exhibit 10.14 to Form 8-
dated as of June 12, 2000, between Rite Aid K filed June 21, 2000
Corporation and Morgan Guaranty Trust
Company of New York, as Agent.
10.36 Form of Second Priority Mortgage, Exhibit 10.15 to Form 8-
Assignment of Leases and Rents, Security K filed June 21, 2000
Agreement and Financing Statement, by the
Subsidiary Guarantor listed therein, to
Wilmington Trust Company, as Second
Priority Collateral Trustee.
56
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
10.37 Amendment No. 3 to Note Agreement, Exhibit 10.16 to Form 8-
Amendment No. 4 to Guaranty Agreement, and K filed June 21, 2000
Amendment No. 1 to Put Agreement, for
Adjustable Rate Senior Secured Notes due
August 15, 2002, among Finco, Inc., Rite
Aid Corporation, The Prudential Insurance
Company of America, and Pruco Life
Insurance Company, as of June 12, 2000.
10.38 Amendment No. 5 to Guaranty, dated as of Exhibit 10.17 to Form 8-
June 12, 2000, from Rite Aid Corporation, K filed June 21, 2000
as Guarantor, to RAC Leasing LLC, as
Lessor.
10.39 Amendment No. 4 to Master Lease and Exhibit 10.18 to Form 8-
Security Agreement, dated as of June 12, K filed June 21, 2000
2000, between RAC Leasing LLC, as Lessor,
and Rite Aid Realty Corp., as Lessee.
10.40 Amendment No. 4 to Guaranty, dated as of Exhibit 10.19 to Form 8-
June 12, 2000, from Rite Aid Corporation, K filed June 21, 2000
as Guarantor, to Sumitomo Bank Leasing and
Finance, Inc., as Lessor.
10.41 Amendment No. 5 to Master Lease and Exhibit 10.20 to Form 8-
Security Agreement, dated as of June 12, K filed June 21, 2000
2000, between Sumitomo Bank Leasing and
Finance, Inc., as Lessor, and Rite Aid
Realty Corp., as Lessee.
10.42 Promissory Note, dated April 30, 1999, in Included herein
the amount of $5,000,000 between
NationsBank, N.A. Banking Center, as lender
and Beth Kaplan and Bruce Sholk as
borrowers.
10.43 Limited Guaranty, dated April 30, 1999, for Included herein
the amount of $5,000,000 between
NationsBank, N.A. Banking Center, as bank,
Rite Aid Corporation as guarantor and Beth
Kaplan and Bruce Sholk, as borrower.
10.44 Promissory Note, dated June 19, 1998, in Included herein
the amount of $2,500,000 between
NationsBank, N.A. Banking Center, as lender
and Beth Kaplan and Bruce Sholk as
borrowers.
10.45 Limited Guaranty, date June 19, 1998, for Included herein
the amount of $2,500,000 between
NationsBank, N.A. Banking Center, as bank,
Rite Aid Corporation as Guarantor and Beth
Kaplan and Bruce Sholk, as borrower.
10.46 Executive Separation Agreement and General Included herein
Release, dated February 28, 2000, between
Rite Aid Corporation and Timothy Noonan.
10.47 Letter Agreement, dated February 28, 2000, Included herein
between Rite Aid Corporation and Timothy
Noonan, amending Executive Separation
Agreement and General Release, dated
February 28, 2000, between Rite Aid
Corporation and Timothy Noonan.
11 Not Applicable
12 Not Applicable
13 Not Applicable
16 Not Applicable
57
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ----------------
18 Letter re change in accounting principles Included herein
21 Subsidiaries of the registrant Included herein
22 Not Applicable
23 Consent of Independent Certified Public Not applicable
Accountants
24 Not Applicable
27 Financial Data Schedules (EDGAR Filing Only) Included herein
99.1 Press Release, dated June 14, 2000 Exhibit 99.1 to Form 8-K
filed June 21, 2000
- --------
* Constitutes a compensatory plan or arrangement required to be filed with
this Form.
Reports on Form 8-K
(1) Rite Aid Corporation filed a Current Report on Form 8-K on December 10,
1999 disclosing under Item 4 that it had retained the accounting firm of
Deloitte & Touche LLP to audit and report on the Company's restated
consolidated balance sheets as of February 27, 1999 and February 28, 1998
and the related restated consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period
ended February 27, 1999 as well as auditing the Company's consolidated
financial statements for the fiscal year ending February 26, 2000.
(2) Rite Aid Corporation filed a Current Report on Form 8-K on January 18,
2000 disclosing under Item 5 a press release describing certain
agreements related to certain lenders and setting forth under Item 7
copies of the related agreements and certain employment agreements and
restricted stock and stock option award agreements.
(3) Rite Aid Corporation filed a Current Report on Form 8-K on February 7,
2000 disclosing under Item 5 a press release describing the receipt of
consents from certain debt holders and setting forth under Item 7 copies
of related Indentures as exhibits.
(4) Rite Aid Corporation filed a Current Report on Form 8-K on April 11, 2000
disclosing under Item 5 a press release describing the receipt of a
commitment letter to provide a financing and to announce that one of the
Company's lenders had agreed to convert $200 million existing bank debt
into Rite Aid common stock setting forth under Item 7 a copy of the
commitment letter.
(5) Rite Aid Corporation filed a Current Report on Form 8-K on June 21, 2000
disclosing under Item 5 a press release announcing the completion of its
refinancing transactions and setting forth under Item 7 copies of the
related Indenture and agreements as exhibits.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: July 11, 2000 RITE AID CORPORATION.
/s/ Robert G. Miller
By: _________________________________
Robert G. Miller
Chairman of the Board of
Directors and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in their respective capacities on July 11, 2000.
Signature Title
--------- -----
/s/ Robert G. Miller Chairman of the Board of Directors
_________________________________ and Chief Executive Officer
Robert G. Miller
/s/ Mary F. Sammons President, Chief Operating Officer
_________________________________ and Director
Mary F. Sammons
/s/ John T. Standley Chief Financial Officer and Executive
_________________________________ Vice Presidents
John T. Standley
/s/ Christopher Hall Chief Accounting Officer and Senior
_________________________________ Vice President
Christopher Hall
/s/ William Bratton Director
_________________________________
William J. Bratton
/s/ Alfred M. Gleason Director
_________________________________
Alfred M. Gleason
/s/ Alex Grass Director
_________________________________
Alex Grass
/s/ Leonard I. Green Director
_________________________________
Leonard I. Green
/s/ Nancy A. Lieberman Director
_________________________________
Nancy A. Lieberman
S-1
Signature Title
--------- -----
/s/ Philip Neivert Director
_________________________________
Philip Neivert
/s/ Stuart M. Sloan Director
_________________________________
Stuart M. Sloan
/s/ Jonathan D. Sokoloff Director
_________________________________
Jonathan D. Sokoloff
/s/ Leonard N. Stern Director
_________________________________
Leonard N. Stern
/s/ Preston Robert Tisch Director
_________________________________
Preston Robert Tisch
/s/ Gerald Tsai, Jr. Director
_________________________________
Gerald Tsai, Jr.
S-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Rite Aid Corporation
Camp Hill, Pennsylvania
We have audited the accompanying consolidated balance sheets of Rite Aid
Corporation and subsidiaries as of February 26, 2000 and February 27, 1999,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended February 26,
2000. Our audits also included the financial statement schedule listed in the
Table of Contents at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We did not audit the
consolidated financial statements of PCS Holding Corporation (a consolidated
subsidiary of Rite Aid Corporation), which statements reflect total assets
constituting 25% and 24%, respectively, of consolidated total assets as of
February 26, 2000 and February 27, 1999, and total revenues constituting 9%,
and 1%, respectively, of consolidated total revenues for the years ended
February 26, 2000 and February 27, 1999. Those financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for PCS Holding
Corporation, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects,
the financial position of Rite Aid Corporation and subsidiaries at February
26, 2000 and February 27, 1999, and the results of their operations and their
cash flows for each of the three years in the period ended February 26, 2000,
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 24 to the consolidated financial statements, the
accompanying consolidated balance sheet as of February 27, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended February 27, 1999 and February 28, 1998 have been
restated.
As discussed in Note 5 to the consolidated financial statements, the Company
changed its application of the last-in, first-out ("LIFO") method of
accounting for inventory in 2000.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
July 11, 2000
F-1
Report of Independent Auditors
Board of Directors and Shareholder
PCS Holding Corporation
We have audited the consolidated balance sheets of PCS Holding Corporation and
Subsidiaries (the Company) as of February 27, 1999 and February 26, 2000, and
the related consolidated statements of operations, shareholder's equity, and
cash flows for the thirty-six days ended February 27, 1999 and the year ended
February 26, 2000 (not presented seperately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PCS Holding Corporation and Subsidiaries at February 27, 1999 and February
26, 2000, and the consolidated results of their operations and their cash
flows for the thirty-six days ended February 27, 1999 and the year ended
February 26, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
April 21, 2000, except for Note 12
for which the date is June 15, 2000
F-2
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share amounts)
February 27,
1999
February 26, (as restated,
2000 see Note 24)
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 184,600 $ 87,311
Accounts receivable, net .......................... 756,182 643,189
Inventories, net .................................. 2,643,959 2,646,986
Refundable income taxes............................ 147,599 --
Prepaid expenses and other current assets.......... 73,130 55,128
----------- -----------
Total current assets............................... 3,805,470 3,432,614
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET.................. 3,629,919 3,645,099
GOODWILL AND OTHER INTANGIBLES...................... 3,131,070 3,322,859
OTHER ASSETS........................................ 241,395 111,968
----------- -----------
Total assets....................................... $10,807,854 $10,512,540
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current lease financing obligations................ $ 25,964 $ 31,522
Short-term debt and current maturities of long-term
debt ............................................. 76,086 1,570,789
Accounts payable................................... 1,771,198 1,788,216
Sales and other taxes payable...................... 35,053 33,944
Income taxes payable .............................. 127,691 110,784
Deferred income taxes.............................. -- 28,045
Accrued salaries, wages and other current
liabilities ...................................... 876,425 657,240
----------- -----------
Total current liabilities.......................... 2,912,417 4,220,540
----------- -----------
CONVERTIBLE SUBORDINATED NOTES ..................... 649,986 649,991
LONG-TERM DEBT LESS CURRENT MATURITIES ............. 4,738,661 2,552,291
LEASE FINANCING OBLIGATIONS ........................ 1,118,204 1,110,178
DEFERRED INCOME TAXES .............................. 79,220 81,314
OTHER NONCURRENT LIABILITIES........................ 858,401 524,082
----------- -----------
Total liabilities.................................. 10,356,889 9,138,396
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 21) -- --
REDEEMABLE PREFERRED STOCK ......................... 19,457 23,559
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1 per share; liquidation
value $100 per share. 20,000,000 shares authorized:
shares issued--3,082,500 and 0 .................... 308,250 --
COMMON STOCK, par value $1 per share, 600,000,000
shares authorized:
shares issued--259,927,199 and 258,862,411 ........ 259,926 258,861
ADDITIONAL PAID-IN CAPITAL.......................... 1,289,755 1,369,378
ACCUMULATED DEFICIT................................. (1,420,235) (277,179)
DEFERRED COMPENSATION............................... (6,188) --
ACCUMULATED OTHER COMPREHENSIVE INCOME.............. -- (475)
----------- -----------
Total stockholders' equity......................... 431,508 1,350,585
----------- -----------
Total liabilities and stockholders' equity......... $10,807,854 $10,512,540
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
February 27, February 28,
February 1999 1998
26, (as restated, (as restated,
2000 see Note 24) see Note 24)
----------- ------------- -------------
REVENUES.............................. $14,681,442 $12,782,890 $11,533,423
COSTS AND EXPENSES:
Cost of goods sold, including
occupancy costs.................... 11,412,774 9,743,835 8,603,318
Selling, general and administrative
expenses........................... 3,712,279 3,144,134 2,835,395
Gain on sale of stores.............. (80,109) -- (52,261)
Goodwill amortization............... 56,832 29,227 26,480
Store closing, impairment and other
charges ........................... 163,185 192,551 148,560
Interest expense.................... 520,336 277,226 209,152
Share of loss from equity
investment......................... 11,893 448 1,886
----------- ----------- -----------
15,797,190 13,387,421 11,772,530
----------- ----------- -----------
Loss before income taxes ......... (1,115,748) (604,531) (239,107)
INCOME TAXES EXPENSE (BENEFIT) ....... 8 (182,049) (52,916)
----------- ----------- -----------
Loss before cumulative effect of
accounting change................ (1,115,756) (422,482) (186,191)
Cumulative effect of accounting
change, net of tax benefit of
$18,200 ......................... (27,300) -- --
----------- ----------- -----------
Net loss.......................... $(1,143,056) $ (422,482) $ (186,191)
=========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE
Loss before cumulative effect of
accounting change.................. $ (4.34) $ (1.64) $ (0.74)
Cumulative effect of accounting
change, net........................ $ (0.11) $ -- $ --
----------- ----------- -----------
Net loss.......................... $ (4.45) $ (1.64) $ (0.74)
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY
28, 1998
(In thousands of dollars, except per share amounts)
Accumulated
Preferred Stock Common Stock Additional Retained Other
-------------------------- ---------------------------- Paid-in Earnings Deferred Comprehensive
Shares Class A Class B Shares Issued Treasury Capital (Deficit) Compensation Income
------- -------- -------- -------- -------- --------- ---------- ----------- ------------ -------------
BALANCE, MARCH 1,
1997
(As Restated,
see note 24).... -- $ -- $ -- 129,342 $129,342 $(104,746) $1,371,366 $ 547,320 $ -- $(1,867)
Net income (As
Restated, see
note 24)........ (186,191)
Other
comprehensive
income:
Minimum pension
liability
adjustment..... 1,080
-------
Other
comprehensive
income......... 1,080
Comprehensive
income..........
Stock options
exercised....... 404 404 9,293
Stock option
income tax
benefit......... 4,191
Stock grants..... 13 13 616
Bond conversion.. 5,875 5,875 196,777
Two-for-one stock
split........... 135,644 135,644 (135,644)
Cancel treasury
shares.......... (13,064) (13,064) 104,746 (91,682)
Cash dividends
paid on common
stock ($.4075
per share post
split).......... (102,715)
------- -------- -------- -------- -------- --------- ---------- ----------- ------- -------
BALANCE FEBRUARY
28, 1998 (As
Restated, see
note 24)........ -- -- -- 258,214 258,214 -- 1,354,917 258,414 -- (787)
Net loss (As
Restated, see
note 24)........ (422,482)
Other
comprehensive
income:
Minimum pension
liability
adjustment..... 312
-------
Other
comprehensive
income......... 312
Comprehensive
income.........
Stock options
exercised....... 633 633 8,603
Stock option
income tax
benefit......... 5,807
Stock grants..... 14 14 669
Bond conversion.. 9
Dividends on
redeemable
preferred
stock........... (627)
Cash dividends
paid on common
stock ($.4375
per share post
split).......... (113,111)
------- -------- -------- -------- -------- --------- ---------- ----------- ------- -------
BALANCE FEBRUARY
27, 1999 (As
Restated, see
note 24)........ -- -- -- 258,861 258,861 -- 1,369,378 (277,179) -- (475)
Net loss......... (1,143,056)
Other
comprehensive
income:
Minimum pension
liability
adjustment...... 475
-------
Other
comprehensive
income.......... 475
Comprehensive
income..........
Issuance of
preferred
shares.......... 300,000 300,000
Exchange of
preferred
shares.......... (300,000) 300,000
Stock options
exercised....... 65 65 815
Stock option
income tax
benefit......... 244
Stock grants..... 1,000 1,000 7,250 (6,188)
Issuance of
common stock
warrants........ 8,500
Bond conversion.. 5
Dividends on
redeemable
preferred
stock........... (1,860)
Dividends on
preferred
stock........... 8,250 (8,250)
Accretion of
redeemable
preferred
stock........... (97)
Increase
resulting from
sale of stock by
equity method
investee........ 2,929
Cash dividends
paid on common
stock ($.4375
per share post
split).......... (89,159) --
------- -------- -------- -------- -------- --------- ---------- ----------- ------- -------
BALANCE FEBRUARY
26, 2000........ 300,000 $ -- $308,250 259,926 $259,926 $ -- $1,289,755 $(1,420,235) $(6,188) $ --
======= ======== ======== ======== ======== ========= ========== =========== ======= =======
Total
-----------
BALANCE, MARCH 1,
1997
(As Restated,
see note 24).... $1,941,415
Net income (As
Restated, see
note 24)........ (186,191)
Other
comprehensive
income:
Minimum pension
liability
adjustment.....
Other
comprehensive
income......... 1,080
-----------
Comprehensive
income.......... (185,111)
Stock options
exercised....... 9,697
Stock option
income tax
benefit......... 4,191
Stock grants..... 629
Bond conversion.. 202,652
Two-for-one stock
split...........
Cancel treasury
shares.......... --
Cash dividends
paid on common
stock ($.4075
per share post
split).......... (102,715)
-----------
BALANCE FEBRUARY
28, 1998 (As
Restated, see
note 24)........ 1,870,758
Net loss (As
Restated, see
note 24)........ (422,482)
Other
comprehensive
income:
Minimum pension
liability
adjustment.....
Other
comprehensive
income......... 312
-----------
Comprehensive
income......... (422,170)
Stock options
exercised....... 9,236
Stock option
income tax
benefit......... 5,807
Stock grants..... 683
Bond conversion.. 9
Dividends on
redeemable
preferred
stock........... (627)
Cash dividends
paid on common
stock ($.4375
per share post
split).......... (113,111)
-----------
BALANCE FEBRUARY
27, 1999 (As
Restated, see
note 24)........ 1,350,585
Net loss......... (1,143,056)
Other
comprehensive
income:
Minimum pension
liability
adjustment......
Other
comprehensive
income.......... 475
-----------
Comprehensive
income.......... (1,142,581)
Issuance of
preferred
shares.......... 300,000
Exchange of
preferred
shares.......... --
Stock options
exercised....... 880
Stock option
income tax
benefit......... 244
Stock grants..... 2,062
Issuance of
common stock
warrants........ 8,500
Bond conversion.. 5
Dividends on
redeemable
preferred
stock........... (1,860)
Dividends on
preferred
stock........... --
Accretion of
redeemable
preferred
stock........... (97)
Increase
resulting from
sale of stock by
equity method
investee........ 2,929
Cash dividends
paid on common
stock ($.4375
per share post
split).......... (89,159)
-----------
BALANCE FEBRUARY
26, 2000........ $ 431,508
===========
The accompanying notes are an integral part of these consolidated financial
statements
F-5
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
February 27, February 28,
1999 1998
February (as restated, (as restated,
26, 2000 see Note 24) see Note 24)
----------- ------------- -------------
OPERATING ACTIVITIES:
Net loss.............................. $(1,143,056) $ (422,482) $ (186,191)
Adjustments to reconcile to net cash
provided by operations:
Cumulative effect of change in
accounting method.................. 27,300 -- --
Depreciation and amortization....... 500,997 399,283 349,631
Store closings and impairment
charges............................ 163,185 192,551 148,650
Gain on sale of stores.............. (80,109) -- (52,621)
LIFO and other charges.............. 44,334 36,469 26,192
Changes in operating assets and
liabilities, net of effects from
acquisitions.......................
Accounts receivable............... (112,993) (150,264) 286,975
Inventories....................... (69,087) 376,972 (450,934)
Other assets...................... (80,980) (25,279) (6,074)
Accounts payable.................. (17,018) (390,760) 446,703
Other liabilities................. 356,723 135,437 (37,647)
----------- ---------- ----------
Net cash (used in) provided by
operating activities........... (410,704) 151,927 524,684
INVESTING ACTIVITIES:
Expenditures for property, plant and
equipment.......................... (453,628) (1,347,088) (700,169)
Purchases of businesses, net of cash
acquired........................... (24,454) (1,390,620) (335,014)
Intangible assets acquired.......... (71,371) (81,677) (39,227)
Proceeds from dispositions.......... 146,677 -- 66,903
Other............................... (34,984) (9,941) (9,061)
----------- ---------- ----------
Net cash used in investing
activities..................... (437,760) (2,829,326) (1,016,568)
FINANCING ACTIVITIES
Net proceeds from the issuance of
long-term debt..................... 2,288,495 896,017 650,000
Net (proceeds) payments of
commercial paper borrowings........ (1,591,125) 1,397,201 (301,500)
Net proceeds from the issuance of
preferred stock.................... 300,000 -- --
(Redemption) issuance of redeemable
preferred stock.................... (5,695) 23,559 --
Proceeds from leasing obligations... 74,899 504,990 358,837
Principal payments on long-term
debt............................... (35,831) (38,615) (42,210)
Cash dividends paid................. (91,019) (113,738) (102,715)
Net proceeds from the issuance of
common stock 65 9,236 9,697
Other............................... 5,964 995 1,709
----------- ---------- ----------
Net cash provided by financing
activities..................... 945,753 2,679,645 573,818
INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 97,289 2,246 81,934
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR.............................. 87,311 85,065 3,131
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................. $ 184,600 $ 87,311 $ 85,065
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH PAID
FOR INTEREST (NET OF AMOUNTS
CAPITALIZED OF $5,292, $7,069 AND
$4,102).............................. $ 501,813 $ 259,100 $ 194,618
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH PAID
FOR INCOME TAXES..................... $ 981 $ 47,667 $ 46,671
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY
Bond conversion..................... -- -- $ 202,652
Exchange of preferred shares........ $ 300,000 -- --
The accompanying notes are an integral part of these consolidated financial
statements
F-6
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share and per share amounts)
1. Summary of Significant Accounting Policies:
Description of Business
Rite Aid Corporation (a Delaware corporation), through its wholly owned
subsidiaries, operates approximately 3,800 retail drugstores in the regions of
the Eastern, Southern, and Western United States (the "Retail Drug" segment).
Rite Aid owns PCS Holding Corporation ("PCS"), one of the country's largest
pharmacy benefits managers ("PBM"). Through PCS, Rite Aid provides pharmacy
benefit management services to employers, insurance carriers and managed care
companies (the "PBM Segment").
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 29 or
March 1. The fiscal years ended February 26, 2000, February 27, 1999 and
February 28, 1998 each includes 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, and highly liquid
investments which are readily converted to known amounts of cash and which
have original maturities of three months or less, when purchased.
Inventories
Inventories are stated at the lower of cost or market. Inventory balances
include capitalization of certain costs related to purchasing, freight, and
handling costs associated with placing inventory in its location and condition
for sale. The Company uses the last-in, first-out ("LIFO") method of
accounting for substantially all of its inventories. At February 26, 2000 and
February 27, 1999, inventories were $320,389 and $240,826, respectively, lower
than the amounts that would have been reported using the first-in, first-out
("FIFO") method. The Company calculates its FIFO inventory valuation using the
retail method for store inventories and the cost method for warehouse
inventories (see note 5).
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of.
For purposes of recognizing and measuring impairment of long-lived assets of
the Retail Drug Segment, the Company categorizes assets of operating stores as
"Assets to Be Held and Used" and assets of stores that have been closed as
"Assets to Be Disposed Of". The Company evaluates assets at the store level
because this is the lowest level of independent cash flows ascertainable to
evaluate impairment. Assets being tested for recoverability at the store level
include tangible long-lived assets, identifiable intangibles and allocable
goodwill that arose in purchase business combinations. Corporate assets to be
held and used are evaluated for impairment based on excess cash flows from the
stores that support those assets. Enterprise goodwill not associated with
assets being tested for impairment under SFAS No. 121 is evaluated based on a
comparison of undiscounted future cash flows of the enterprise compared to the
related net book value of the enterprise.
F-7
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-lived assets of the PBM segment consist principally of intangibles. The
Company compares the estimates of future undiscounted cash flows of its
service lines to which the intangibles relate to the carrying amount of those
intangibles to determine if an impairment has occurred. Long-lived assets and
certain identifiable intangibles to be disposed of, whether by sale or
abandonment, are reported at the lower of carrying amount or fair value less
cost to sell.
The Company reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If the sum of the undiscounted expected
future cash flows is less than the carrying amount of the asset, the Company
recognizes an impairment loss. Impairment losses are measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
When fair values are not available, the Company estimates fair value using the
expected future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the asset.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation using the straight-line method in amounts that allocate the cost
of the property, plant and equipment over the following useful lives:
Buildings................................................ 30 to 45 years
Equipment................................................ 3 to 15 years
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful life or the term of the lease.
Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of
the net assets of acquired entities and is being amortized on a straight-line
basis over 40 years. The value of the PCS trade name is being amortized over
its estimated useful life of 40 years. The value of favorable and unfavorable
leases on stores acquired in business combinations are amortized over the
terms of the leases on a straight-line basis. Patient prescription files
purchased and acquired in business combinations are amortized over their
estimated useful lives of five to fifteen years. The value of the customer
base and pharmacy network acquired in the purchase of PCS is being amortized
over their estimated lives of 30 years. The value of assembled workforce
acquired is being amortized over its useful life of five to six years.
Internal-Use Software
The Company capitalizes direct internal and external development costs and
direct external application development costs associated with internal-use
software. Neither preliminary evaluation costs nor costs associated with the
software after implementation are capitalized. For fiscal years 2000, 1999 and
1998, the Company capitalized costs of approximately $4,595, $9,667 and
$7,770, respectively. The Company's capitalization policy for internal-use
software is consistent with the provisions of American Institute of Certified
Public Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
Therefore, adoption of SOP 98-1 in fiscal year 2000 did not have a significant
effect on the Company's financial statements.
F-8
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments in Fifty Percent or Less Owned Subsidiaries
Investments in affiliated entities for which the Company has the ability to
exercise significant influence, but not control over the investee, and
generally an ownership interest of the common stock of between 20% and 50%,
are accounted for under the equity method of accounting and are included in
Other assets. Under the equity method of accounting, the Company's share of
the investee's earnings or loss is included in the consolidated statements of
operations. The portion of the Company's investment in an equity-method
investee that exceeds its share of the underlying net equity of the investee,
if any, is amortized over 7 to 30 years.
Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS 123, companies can elect to account for stock-based
compensation using a fair value-based method or continue to measure
compensation expense using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to continue to account for its employee
and director stock-based compensation plans under APB Opinion No. 25. See Note
18 for further information about the Company's incentive plans.
Revenue Recognition
Retail Drug Segment
The Company recognizes revenue from the sale of merchandise at the time the
merchandise is sold. The Company records revenue net of an allowance for
estimated future returns. Return activity is immaterial to retail drug revenue
and results of operations in all periods presented.
PBM Segment
The Company recognizes revenues from claims processing fees when the related
claim is adjudicated and approved for payment. Certain of the Company's
agreements require its customers to pay a fee per covered member rather than a
fee per claim. The Company recognizes these fees monthly based upon member
counts provided by its customers. Revenue from manufacturer programs is
recognized when claims eligible for rebate are adjudicated by the Company. The
customer portion of rebates collected is not included in revenue, and
correspondingly payments of rebates to customers are not included in expenses.
Mail order program revenue is recognized when prescriptions are shipped.
Vendor Rebates
Rebates received from vendors that are based on future purchases are
initially deferred and are recognized as a reduction of cost of goods sold
when the related inventory is sold. Rebates not tied directly to purchases are
recognized as a reduction of Selling, general and administrative expense on a
straight-line basis over the related contract term.
Store Preopening Expenses and Closing Costs
Costs incurred prior to the opening of a new store, associated with a
remodeled store, or related to the opening of a distribution facility, are
charged against earnings as administrative and general expenses when incurred.
When a store is closed, the Company expenses unrecoverable costs and accrues a
liability equal to the present value of the remaining lease obligations, net
of expected sublease income.
Advertising
Advertising costs are expensed as incurred. Advertising expenses for 2000,
1999 and 1998 were $198,412, $223,464 and $223,484, respectively.
F-9
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Insurance
The Company is self-insured for certain general liability and workers'
compensation claims that occurred prior to December 31, 1996. With respect to
claims occurring from January 1, 1997 to December 31, 1998, the Company used a
combination of self-insurance and fixed-cost premium-based policies. Effective
January 1, 1999, substantially all general liability and workers' compensation
claims were covered through a fixed-cost premium-based policy. The Company
maintains self-insurance for all covered employee medical claims.
For claims that are self-insured, stop-loss insurance coverage is maintained
for workers' compensation and general liability occurrences exceeding
$250,000. The Company utilizes actuarial studies as the basis for developing
reported claims and estimating claims incurred but not reported relating to
the Company's self-insurance. Workers' compensation claims are discounted to
present value using a risk-free interest rate.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial reporting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the reporting period in the
deferred tax assets and deferred tax liabilities, net of the effect of
acquisitions and dispositions. Deferred tax assets include tax loss and credit
carryforwards and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Earnings per Share
The Company adopted the provisions of SFAS No. 128, "Earnings per Share," in
the year ended February 28, 1998. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic earnings per share computation to
the numerator and denominator of the diluted earnings per share computation.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity. All share and per share data have also been restated to reflect a two-
for-one stock split distributed to stockholders on February 2, 1998.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes the accounting and financial reporting requirements for
derivative instruments and requires companies to recognize derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. In May 1999, the FASB delayed the implementation
date for this statement by one year. The Company expects to adopt SFAS No. 133
in fiscal year 2002. The Company is evaluating the effects that the adoption
of SFAS No. 133 may have on the financial statements.
In November 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition". This Bulletin sets forth the SEC Staff's position
regarding the point at which it is appropriate for a Registrant to recognize
revenue. The Staff believes that revenue is realizable and earned when all of
the following criteria are met:
.Persuasive evidence of an arrangement exists;
.Delivery has occurred or service has been rendered;
.The seller's price to the buyer is fixed or determinable; and
.Collectibility is reasonably assured.
F-10
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company uses the above criteria to determine whether revenue can be
recognized, and therefore believes that the issuance of this Bulletin does not
have a material impact on these financial statements.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant Concentrations
During fiscal 2000, the Company purchased approximately 87% of the dollar
volume of its prescription drugs from a single supplier, McKesson HBOC, Inc.
("McKesson"). If Rite Aid's relationship with McKesson was disrupted, the
Company could have difficulty filling prescriptions, which would negatively
impact the business.
2. Result of Operations and Financing:
During fiscal years 2000, 1999 and 1998, the Company incurred net losses of
$1,143,056, $422,482 and $186,191, respectively, and during fiscal 2000 net
cash used in operating activities was $340,315. As discussed in Note 11, the
Company obtained various loan covenant waivers and/or modifications, and
refinanced or extended maturity dates from certain of its lenders. In
addition, the Company obtained a new senior credit facility in June 2000 (see
note 24).
Since December 1999, management of the Company has taken a series of steps
intended to stabilize and improve the operating results of the Company's
retail drug segment. Management believes that available cash and cash
equivalents together with cash flow from operations, available borrowings
under the new senior credit facility and other sources of liquidity (including
asset sales) will be sufficient to fund the Company's operating activities,
investing activities and debt maturities for fiscal 2001. In addition,
management believes that the Company will be in compliance with its existing
debt covenant requirements throughout fiscal 2001. However, a substantial
portion of its indebtedness which will mature in August and September 2002
will require the Company to refinance the indebtedness at that time.
3. Acquisitions and Dispositions:
On January 22, 1999, the Company purchased PCS a pharmacy benefits
management subsidiary of Eli Lilly and Company. Total consideration was $1.5
billion, with $1.3 billion financed via commercial paper and $200 million paid
in cash. The PCS acquisition was accounted for using the purchase method. In
accordance with APB Opinion No. 16, the Company has recorded the assets and
liabilities of PCS at the date of acquisition at their fair values. The excess
of the cost of PCS over the fair value of the acquired assets and liabilities
of $1,286,089 has been recorded as goodwill. The Company has determined that
the estimated useful life of the goodwill recorded with the PCS acquisition is
primarily indeterminate and likely exceeds 40 years. This estimate is based
upon a review of the anticipated future cash flows and other factors the
Company considered in determining the amount that it was willing to incur for
the purchase of PCS. Additionally, management has found no persuasive evidence
that any material portion of these intangible assets will be depleted in less
than 40 years. Accordingly, the Company amortizes goodwill over the maximum
allowable period of 40 years. The results of operations for PCS have been
included in these consolidated financial statements since the date of
acquisition.
F-11
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro-forma results of operations for the year ended
February 27, 1999 reflects the PCS acquisition as if it had taken place as of
the beginning of fiscal year 1999:
Pro forma (Unaudited)
Year Ended February 27, 1999
----------------------------
Revenues..................................... $ 13,505
Costs and expenses........................... 14,083
Net loss..................................... (578)
Basic loss per share......................... (2.24)
Diluted loss per share....................... (2.24)
On August 27, 1997, the Company completed the acquisitions of Harco, Inc.
("Harco") and K&B, Incorporated ("K&B"). The combined consideration paid for
these companies was $335,014, net of cash acquired of $2,811 and was financed
through commercial paper borrowings. These acquisitions were also accounted
for using the purchase method and, accordingly, the Company recorded the
assets and liabilities of Harco and K&B at the date of acquisition at their
fair values. The excess of the acquisition cost over the fair value of the
recorded assets and liabilities of $190,439 has been recorded as goodwill. The
Company has determined that the estimated useful life of the goodwill recorded
with the Harco and K&B acquisitions is primarily indeterminate and likely
exceeds 40 years. Accordingly, the Company amortizes goodwill over the maximum
allowable period of 40 years.
In October 1996, the Company signed a definitive contract to sell for cash
of $450 each, plus the value of closing inventories all of its 193 drugstores
in North and South Carolina to J.C. Penney Company, Inc. (Penney).
Subsequently, Penney contracted to purchase Eckerd Corporation (Eckerd), a
chain of 1,748 drugstores. In order to proceed with the Eckerd purchase,
Penney agreed with the Federal Trade Commission not to take possession of 130
of the Company's stores. In February 1997, the Company agreed to an amendment
to its contract with Penney whereby the Company operated the stores until
Penney could find another buyer, but transfer of the stores was designated to
begin no later than May 30, 1997. Penney arranged for another drugstore chain
to begin taking possession of the stores in May 1997. A pretax gain of $29,969
was recognized in fiscal year 1997 for the stores that transferred in that
year. Upon transfer of the remaining stores in the first quarter of fiscal
1998, the Company recognized an additional pretax gain of $52,621.
In September 1999, the Company signed a definitive contract to sell 38
drugstores in California to Longs Drug Stores California, Inc. ("Longs").
During the third quarter of fiscal 2000, a total of 32 stores were transferred
to Longs. In October 1999, the Company agreed to an amendment to its contract
with Longs whereby the closing of two stores was postponed due to delays in
obtaining waivers for existing lease provisions related to the assignment of
leases to the buyer. These two stores were ultimately closed in March 2000 and
transferred to the buyer at that time. The remaining four stores which were
originally included in the purchase agreement were retained by Rite Aid. A
pre-tax gain of $80,109 was recognized in the third quarter of fiscal year
2000 for the stores that were transferred in that year. The gain on the sale
of the two stores transferred in March 2000 was recognized by the Company in
the first quarter of fiscal 2001.
4. Store Closing and Impairment Charges:
In fiscal years 2000, 1999, and 1998, Store closing, impairment and other
charges include non-cash charges of $130,461, $87,666, and $76,442
respectively, in the retail drug segment for the impairment of long-lived
assets (including allocable goodwill) at 259, 268, and 284 stores. These
amounts include the write-down of long-lived assets at stores that were
assessed for impairment because of management's intention to relocate or close
the store or because of changes in circumstances that indicate the carrying
value of an asset may not be recoverable.
F-12
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Store closing and impairment charges consist of:
For the For the For the
year ended year ended year ended
February 26, 2000 February 27, 1999 February 28, 1998
----------------- ----------------- -----------------
Store lease exit costs.. $ 32,724 $104,885 $ 72,118
Impairment charges...... 130,461 87,666 76,442
-------- -------- --------
$163,185 $192,551 $148,560
======== ======== ========
During fiscal years 2000, 1999, and 1998, the Company closed or relocated
224, 422, and 593 stores, respectively, that were under long-term leases. Costs
incurred to close a store, which principally include lease termination costs,
are recorded at the time management commits to closing the store, which is
typically 90 days preceding the store closing date, or in the case of a store
to be relocated, the date the new property is leased or purchased. The Company
calculates its liability for closed stores on a store-by-store basis. The
future minimum lease payments and related ancillary costs, from the date of
closure to the end of the remaining lease term, net of estimated cost
recoveries that may be achieved through subletting properties or through
favorable lease terminations are computed. This liability is discounted using a
risk-free rate of interest. The Company evaluates these assumptions each
quarter and adjusts the liability accordingly. Included in Store closing,
impairment and other charges are charges of $58,324, $94,404, and $90,697
representing the present value of the remaining lease obligation net of
estimated lease recoveries in 2000, 1999 and 1998, respectively. The discount
rates used to determine the liability were 6.60%, 5.22% and 5.59% for 2000,
1999 and 1998 respectively.
Subsequent to the recording of lease accruals, management determined that
certain stores would remain open. Included in the amounts stated above were
impairment write-downs for $3,954 at 6 stores in 2000 and $1,408 at 3 stores in
1999,that were written down to fair value but were not relocated or closed.
Also, the Company reversed charges of $10,490 and $1,052 in 2000 and 1998,
respectively for lease accruals previously established for those stores.
F-13
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reserve for store lease exit costs includes the following activity for
the fiscal years ended February 26, 2000, February 27, 1999 and February 28,
1998:
For the For the For the
year ended year ended year ended
February 26, 2000 February 27, 1999 February 28, 1998
----------------- ----------------- -----------------
Balance--Beginning of
Year................... $246,805 $191,453 $137,230
Provision for present
value of
noncancellable lease
payments of stores
designated to be
closed............... 58,324 94,404 90,697
Changes in assumptions
about future sublease
income, terminations,
etc. ................ (15,110) 10,481 (17,527)
Reversals of reserves
for stores that
management has
determined will
remain open.......... (10,490) -- (1,052)
Interest accretion and
changes in
interest rates....... (618) 10,877 13,489
Cash payments, net of
sublease income...... (66,099) (60,410) (31,384)
-------- -------- --------
Balance--End of Year.... $212,812 $246,805 $191,453
======== ======== ========
In addition to store closings, the Company has also closed or relocated
certain distribution centers in its efforts to consolidate operations and
implement its regional exit strategies. During the second quarter of fiscal
2000, management approved a plan to close its leased distribution center in Las
Vegas, Nevada and terminate all of its employees and accrued termination
benefit payments of $1.6 million in the second quarter of 2000, with the charge
included in Selling, general and administrative expenses (SG&A) on the
consolidated statement of operations. Severance payments of $1.1 million were
made during fiscal year 2000 leaving a remaining liability of $0.5 million at
February 26, 2000, with additional payments made during fiscal 2001. The
operating lease for the distribution center was terminated in May 2000 at the
end of the lease term with no additional liability to the Company.
In the third quarter of fiscal 2000, management announced plans to close its
South Nitro, West Virginia distribution center in the summer of 2000. As a
result of this exit plan, the Company accrued termination benefits of
$3.9 million in the third quarter of fiscal 2000 for all of the 480 employees
with the charge included in SG&A on the consolidated statement of operations.
Subsequently, in the fourth quarter of fiscal 2000 management decided to not
close the facility. However, prior to this decision the Company became
obligated to pay $1.1 million in severance costs related to 102 employees. The
Company paid $0.6 million in the fourth quarter of fiscal 2000 and the
remaining $0.5 million was accrued at February 26, 2000. The remaining reserve
of $2.8 million was reversed to SG&A in the fourth quarter of fiscal 2000.
In the third quarter of fiscal 2000, management approved a plan to close and
sell its Ogden, Utah distribution center. As a result of this exit plan, a
liability of $2.3 million for termination benefits for 500 employees was
recorded through SG&A in the third quarter of fiscal 2000. Additionally, an
impairment charge of $7.6 million for long-lived assets was recorded in the
third quarter of fiscal 2000. The facility was sold in March 2000.
During the second quarter of fiscal 1998, the Company closed its distribution
center in Ontario, California and terminated all of its 177 employees. The
costs associated with closing the California facility including termination
benefit payments of approximately $0.4 million were expensed as they were
incurred during fiscal 1998. The termination benefits were determined through
negotiations with the union representatives and were largely based on years of
service and included some health insurance benefits. The facility was sold in
the second quarter of fiscal 1998 for its adjusted carrying value of
approximately $11.4 million.
F-14
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the fourth quarter of fiscal 1997, the Company committed to construct a
new distribution center near Baltimore, Maryland. The new distribution center
was scheduled to be completed in August 1998 and would replace the existing
distribution facility in Shiremanstown, Pennsylvania. The Pennsylvania
distribution center was scheduled to close and all of its 734 employees would
have been terminated in October 1998 when the Maryland facility was scheduled
to be fully operational. As a result of this exit plan, a liability of
$3.4 million for termination benefits was recorded in the fourth quarter of
1997 and charged to SG&A expenses on the statement of income. The termination
benefits were determined through negotiations with the union representative
and based on years of service and included the continuation of health
insurance coverage after the termination date. As a result of subsequent
negotiations with union representatives, an additional liability of
$4.0 million for termination benefits was recorded in fiscal 1998. The
Pennsylvania facility was closed in March 1999, and all payments related to
the liability were made in the first quarter of fiscal 2000. The closure of
the Pennsylvania facility was delayed due to computer software problems
encountered in opening the Maryland facility.
5. Change in Accounting Method:
In the fourth quarter of fiscal 2000, the Company changed its application of
the LIFO method of accounting by restructuring its LIFO pool structure through
a combination of certain existing geographic pools. The reduction in the
number of LIFO pools was made to more closely align the LIFO pool structure to
the Company's store merchandise categories. The effect of this change in
fiscal 2000 was to decrease the Company's earnings by $6,840 (net of tax
effect of $4,560), or $.03 per diluted common share. The cumulative effect of
the accounting change on periods prior to fiscal 2000 was a charge of $27,300
(net of tax effect of $18,200), or $.11 per diluted common share. The pro
forma effect of this accounting change would have been a reduction in income
of $6,360 net of income tax effect of $4,240 or $.02 per diluted common share,
and $12,600 net of income tax effect of $8,400 or $.05 per common share, for
fiscal years 1999 and 1998, respectively.
6. Accounts Receivable:
During November 1997, the Company and certain of its subsidiaries entered
into an agreement to sell, on an ongoing basis, a pool of receivables to a
wholly owned bankruptcy-remote special purpose funding subsidiary (the
"funding subsidiary") of the Company. The funding subsidiary is a distinct
legal entity that engages in no trade or business in order to make remote the
possibility that it would enter bankruptcy or other receivership and is
consolidated for financial reporting purposes. The Company and certain
subsidiaries transfer all of their accounts receivable (principally
representing amounts owed by third-party prescription payers) to the funding
subsidiary for a beneficial interest in the funding subsidiary. The funding
subsidiary has sold and, subject to certain conditions, may from time to time
sell an undivided fractional ownership interest in the pool of receivables to
a multi-seller receivables securitization company. The securitization company
is free to pledge or exchange its interests and the Company is not entitled to
repurchase them. The accounts receivable sold to the funding subsidiary which
sold an undivided fractional ownership interest to the securitization company
have been derecognized on the Company's consolidated balance sheet. Upon the
sale, the Company allocates its basis in the receivables between the interest
sold and the interest retained in relation to their relative fair values. The
remaining receivables, representing retained interests of the Company and
certain of its subsidiaries in the funding subsidiary, continue to be carried
on the Company's consolidated balance sheet at the lower of their cost or
market value, which was $130,636 and $68,220 as of February 26, 2000 and
February 27, 1999.
Under the terms of the agreement, new receivables are added to the pool as
collections reduce previously sold accounts receivable. The Company services,
administers and collects the receivables on behalf of the purchaser. Total
proceeds outstanding from the securitization of receivables as of February 26,
2000 were approximately $294,140, representing an increase of approximately
$2,640 from the February 27, 1999 balance of $291,500. The additional proceeds
received during fiscal 2000 were used to reduce outstanding commercial
F-15
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
paper borrowings and are reflected as operating cash flows in the accompanying
consolidated statements of cash flows. The Company recognizes no servicing
asset or liability because the benefits of servicing are expected to represent
adequate compensation for the services performed. Expenses of $18,052 and
$15,532 associated with the securitization program were recognized as a
component of selling, general and administrative expenses for the years ended
February 26, 2000 and February 27, 1999.
The Company maintains an allowance for doubtful accounts receivable based
upon the expected collectibility of accounts receivable, including retained
interests in receivables sold. The Company recorded an allowance for
uncollectible accounts of $40,870 at February 26, 2000 and $40,190 at February
27, 1999. The Company's accounts receivable of the retail segment are due
primarily from third-party providers (e.g., insurance companies and
governmental agencies) under third-party payment plans and are booked net of
any allowances provided for under the respective plans. Since payments due
from third-party payers are sensitive to payment criteria changes and
legislative actions, the allowance is reviewed continually and adjusted for
accounts deemed uncollectible by management. Additionally, accounts receivable
for the Company's PBM Segment are due primarily from claims reimbursement
receivables, claims processing fees receivables and manufacturer program
receivables.
7. Property, Plant and Equipment:
Following is a summary of property, plant and equipment at February 26, 2000
and February 27, 1999;
2000 1999
---------- ----------
Land.............................................. $ 770,424 $ 809,304
Buildings......................................... 1,054,189 974,944
Leasehold Improvements............................ 1,263,076 1,124,094
Equipment......................................... 1,622,363 1,392,425
Construction in progress.......................... 89,902 291,401
---------- ----------
Property, plant and equipment, cost............. 4,799,954 4,592,168
Accumulated depreciation.......................... (1,170,035) (947,069)
---------- ----------
Property, plant and equipment, net.............. $3,629,919 $3,645,099
========== ==========
Depreciation and amortization expenses, which include the depreciation of
assets recorded under capital leases, were $322,107 in 2000, $272,321 in 1999
and $255,535 in 1998.
Substantially all of the Company's owned properties on which it operates
stores are pledged as collateral under the Company's debt agreements. The
carrying amount of idle facilities is $113,454 and $153,517 at February 26,
2000 and February 27, 1999.
8. Investments in Fifty Percent or Less Owned Subsidiaries:
In July 1999, the Company purchased 9,334,746 of Series E Convertible
Preferred Shares in drugstore.com, an on-line pharmacy (the "investee"), for
cash of $8,125 and the Company's agreement to provide access to the Company's
pharmacy networks and insurance coverages, advertising commitments, and
exclusivity agreements. Also in July 1999, each of the Company's Series E
Convertible Preferred Shares converted to one share of common stock at the
time of the investee's initial public offering representing 21.6% of the
voting stock immediately after the initial public offering. The initial
investment which is recorded in Other assets was valued at $168,025, equal to
the initial public offering price of $18 per share multiplied by the Company's
shares. The Company accounts for the investment on the equity method because
the Company has significant influence over
F-16
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the investee resulting from its share of the voting stock and its right to
appoint one board member and a number of significant operating agreements.
Included in Other noncurrent liabilities is the fair value of the operating
agreements of $159,900 which has been deferred and is being amortized over 10
years, the life of the arrangements described above. The excess of the initial
investment value over the Company's share of the underlying equity of the
investee is $77,320 and is being amortized over 7 years. As a result of the
start-up nature of the investee, the Company recorded an increase to its
investment of $2,929 and a corresponding increase to capital in connection
with the sale of stock by the investee during fiscal 2000.
In June 1999, the Company sold its investment in Diversified Prescription
Delivery LLC, a provider of pharmacy benefit management services and online
prescription delivery services. The sales price was $22,860 and resulted in a
loss of $811. The investment was accounted for on the equity method with a
carrying amount of $23,671 at the date of sale.
In February 2000, the Company sold its investment in Stores Automated
Systems, Inc. ("SASI"), a manufacturer of integrated point of sale systems.
The investment was accounted for on the equity method with a carrying amount
of $8,005 at the date of sale. The $8,805 sales price included cash and
forgiveness of payables, and resulted in a gain of $800.
The Company's share of undistributed earnings of fifty percent or less owned
subsidiaries accounted for on the equity method was $0 and $7,263 at February
26, 2000 and February 27, 1999, respectively.
9. Goodwill and Other Intangibles:
Following is a summary of intangible assets at February 26, 2000 and
February 27, 1999:
2000 1999
---------- ----------
Goodwill............................................. $2,218,761 $2,278,002
Trade name........................................... 113,300 113,300
Lease acquisition costs and favorable leases......... 739,406 730,893
Prescription files and customer lists................ 558,226 533,132
Assembled workforce.................................. 62,947 61,959
Other................................................ 21,900 21,900
---------- ----------
3,714,540 3,739,186
Accumulated amortization............................. (583,470) (416,327)
---------- ----------
$3,131,070 $3,322,859
========== ==========
10. Accrued Salaries, Wages, and other Current Liabilities:
Accrued salaries, wages and other current liabilities consist of the
following at February 26, 2000 and February 27, 1999:
2000 1999
--------- ---------
Accrued compensation.................................... $ 183,099 $ 277,862
Accrued interest........................................ 61,441 42,631
Reserve for lease exit costs............................ 42,651 49,588
Deferred rent........................................... 40,871 50,628
Deferred income......................................... 44,581 66,287
Other................................................... 503,782 170,244
--------- ---------
$ 876,425 $ 657,240
========= =========
F-17
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Indebtedness and Credit Agreements:
Following is a summary of indebtedness at February 26, 2000 and February 27,
1999:
2000 1999
---------- -----------
Commercial paper borrowings under existing credit
facilities--5.2% and 5.5% weighted average rates in
fiscal years 2000, and 1999......................... $ 192,000 $ 1,783,125
Revolving credit facility due 2002 (amended and
restated)........................................... 716,073 --
Term loan due 2002 (amended and restated)............ 1,300,000 --
Term note due 2002 (amended and restated)............ 272,422 --
5.25% convertible subordinated notes due 2002........ 649,986 649,991
6.70% notes due 2001................................. 350,000 350,000
7.125% notes due 2007................................ 350,000 350,000
7.70% notes due 2027................................. 300,000 300,000
5.50% fixed-rate senior notes due 2000............... 200,000 200,000
6.00% dealer remarketable securities due 2003........ 200,000 200,000
6.00% fixed-rate senior notes due 2005............... 200,000 200,000
7.625% senior notes due 2005......................... 200,000 200,000
6.875% senior debentures due 2013.................... 200,000 200,000
6.125% fixed-rate senior notes due 2008.............. 150,000 150,000
6.875% fixed-rate senior notes due 2028.............. 150,000 150,000
3.5% to 10.475% industrial development bonds due
through 2016........................................ 5,196 8,672
Other................................................ 29,056 31,283
---------- -----------
5,464,733 4,773,071
Short-term debt and current maturities of long-term
debt................................................ (76,086) (1,570,789)
---------- -----------
Long-term debt less current maturities............... $5,388,647 $ 3,202,282
========== ===========
In December 1999, absent a waiver the Company would have failed to meet
certain reporting covenants contained in its bank credit and loan agreements
and public debt indentures, in particular the filing of quarterly financial
information in a timely manner. As a result, the Company obtained waivers of
these reporting requirements. These waivers relieve the Company from the
reporting requirements until July 11, 2000 at which time the Company is
required to submit all delinquent reports. In particular, the Company must
submit quarterly financial information for the quarters ended November 27,
1999 and May 27, 2000 and the fiscal year ended February 26, 2000. These
waivers enabled the Company to continue accessing funds under the credit
arrangements and provided a stay from debt acceleration clauses contained
under both the bank credit and loan agreements and the public debt indentures.
Company management subsequently renegotiated all of its bank credit and loan
agreements (see note 23). Management believes that they are in compliance with
the covenants contained within these new agreements.
As described in Note 23, in connection with a refinancing on June 14, 2000,
the Company extended the maturity date of all its bank debt to 2002. In
addition, $52,500 of the Company's 5.50% senior notes due December 2000 were
exchanged for new 10.50% senior secured notes due September 2002. Another
$93,200 of the 5.50% senior notes will be refinanced in December 2000 with
proceeds received from the sale of 10.50% senior secured notes due September
2002 through a forward purchase agreement. All bank debt and notes with
extended maturities are reflected as long-term debt in the financial
statements.
As of February 27, 1999, the Company had a $1,000,000 unsecured revolving
credit facility, expiring in July 2001, to support its commercial paper
program and a $1,300,000 unsecured revolving credit facility, expiring in
October 1999, to support commercial paper borrowings to complete the
acquisition of PCS. In June 1999, the Company borrowed an additional $300,000
from one of its banks under a demand note. In September 1999, the Company
determined it was in default on certain financial covenants in the credit
agreements. On October 27, 1999,
F-18
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company's banks agreed to extend $2,600,000 of its outstanding credit
facilities. As a result, the due dates of the $1,300,000 revolving credit
facility scheduled to mature on October 29, 1999 and the $300,000 note that
was due on demand were extended to November 1, 2000. The Company's $1,000,000
revolving credit facility, which was to mature on July 19, 2001, was also
amended and restated. Borrowings under the credit facilities carry higher
interest costs than commercial paper. The interest rates under the Company's
credit facilities are based on prime or LIBOR plus a risk adjusted spread. As
of February 26, 2000, borrowings under the $1,300,000 facility were at LIBOR
plus 3.5%. Borrowings outstanding under the $1,000,000 facility and the
$300,000 bank note were $716,073 and $272,422, respectively, as of February
26, 2000 with interest rates at LIBOR plus 4.00%. Borrowings repaid under
these credit facilities cannot be re-borrowed. These borrowings have financial
and restrictive covenants that, among other things, restrict our ability to
incur liens and debt, pay dividends, make redemptions and repurchases of
capital stock, make loans, investments and capital expenditures, prepay,
redeem, or repurchase debt, engage in mergers, consolidations, asset
dispositions, sale leaseback transactions and affiliate transactions, change
our business, amend certain debt and other material agreements, issue and sell
capital stock of subsidiaries, make distributions from subsidiaries and grant
negative pledges to creditors.
In connection with obtaining waivers of compliance with, and modifications
to certain of the covenants during the third and fourth quarters of fiscal
year 2000 and the subsequent extensions and restructuring described above, the
Company paid fees and transaction costs of approximately $62,777.
Additionally, the Company issued three-year warrants to purchase 2,500,000
shares of common stock at $11.00 per share.
The fair value assigned to the warrants was $8,500 and is being amortized
over the term of the associated debt instruments. Additionally, as part of the
restructuring, the Company entered into a financial advisory agreement for a
period of one year. The Company is making payments under the advisory
agreement of $2,000 per month. These costs are being amortized over the life
of the contract, which approximates the term of restructured debt agreements.
On December 15, 1998, the Company completed the sale of securities
aggregating $700,000. The sale of securities included $200,000 of 5.50% fixed-
rate senior notes due December 15, 2000; $200,000 of 6.00% fixed-rate senior
notes due December 15, 2005; $150,000 of 6.125% fixed-rate senior notes due
December 15, 2008; and $150,000 of 6.875% fixed-rate senior notes due December
15, 2028. Interest is payable semi-annually on December 15 and June 15.
Financing costs for each issue are being amortized over the period until the
maturity date.
On September 22, 1998, the Company issued $200,000 of dealer remarketable
securities ("DRS") due October 1, 2013. The DRS bear interest at a rate of
6.00% from September 22, 1998 until October 1, 2003 (the remarketing date).
Interest is payable semi-annually on April 1 and October 1 of each year
commencing April 1, 1999. Finance costs are being amortized over the period
until the remarketing date. If the remarketing dealer elects to remarket the
DRS, the DRS will be subject to mandatory tender on the remarketing date. If
the remarketing dealer elects not to remarket the DRS, or for any reason does
not purchase all of the DRS on the remarketing Date, the Company will be
required to purchase on the remarketing date any DRS that have not been
purchased by the remarketing dealer. Net proceeds from the sale of securities
were used to repay commercial paper previously issued by the Company. On
December 24, 1999, the remarketing dealer put their remarketing option back to
the Company resulting in a final maturity date for the DRS of October 1, 2003.
On September 10, 1997, the Company completed the sale of $650,000 of 5.25%
convertible subordinated notes due September 15, 2002. The notes are
convertible into shares of the Company's common stock at any time on or after
the 90th day following the last issuance of notes and prior to the close of
business on the maturity date, unless previously redeemed or repurchased. The
conversion price is $36.14 per share (equivalent to a conversion rate of 27.67
shares per $1 principal amount of notes), subject to adjustment in certain
events. Interest on the notes is payable semiannually on March 15 and
September 15 of each year, commencing on March 15, 1998. The notes may be
redeemed at the option of the Company on or after September 15, 2000, in whole
or in part. The proceeds from the sale of the notes were used to refinance and
repay commercial paper previously issued by the Company.
F-19
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 20, 1996, the Company issued securities aggregating $1,000,000.
The sale of securities included $350,000 of 6.70% notes due December 15, 2001,
$350,000 of 7.125% notes due January 15, 2007 and $300,000 of 7.70% debentures
due February 15, 2027.
On April 20, 1995, the Company issued $200,000 of 7.625% senior notes due
April 15, 2005. Net proceeds from the sale of the notes were used for general
corporate purposes, including the repayment of outstanding commercial paper of
the Company. The notes may not be redeemed prior to maturity and will not be
entitled to any sinking fund.
In August 1993, the Company issued 6.875% senior debentures having an
aggregate principal amount of $200,000. These debentures are due August 15,
2013, may not be redeemed prior to maturity, and are not entitled to any
sinking fund. The net proceeds from this issuance were used for working
capital and general corporate purposes, including the repayment of outstanding
commercial paper of the Company.
The Company had outstanding letters of credit of $41,624 at February 26,
2000 and $41,383, at February 27, 1999. Also, the Company had provided
permanent financing guarantees to certain of its store construction developers
to be effective, if such developers were unable to obtain their own permanent
financing upon completion of the store construction. These guarantees totaled
$33,774 at February 26, 2000 and $ 65,130 at February 27, 1999.
The aggregate annual principal payments of long-term debt for the five
succeeding fiscal years are as follows: 2001, $76,086; 2002, $29,879; 2003,
$3,601,985, 2004; $200,678; 2005, $2,289; and $1,553,816 in 2006 and
thereafter. The Company is in compliance with restrictions and limitations
included in the provisions of various loan and credit agreements.
12. Income Taxes:
The provision for income taxes is as follows:
2000 1999 1998
-------- --------- --------
Current tax benefit:
Federal................................... $ 10,500 $ (19,453) $(10,059)
State..................................... -- -- --
-------- --------- --------
10,500 (19,453) (10,059)
-------- --------- --------
Deferred tax benefit:
Federal................................... (17,092) (190,789) (58,707)
State..................................... (11,600) (10,713) (4,268)
-------- --------- --------
(28,692) (201,502) (62,975)
-------- --------- --------
Total income tax benefit.................... $(18,192) $(182,049) $(52,916)
======== ========= ========
A reconciliation of the provision for income taxes as presented on the
consolidated statement of operations is as follows:
2000 1999 1998
-------- --------- --------
Income tax expense (benefit) from
operations................................. $ 8 $(182,049) $(52,916)
Income tax expense benefit related to
cumulative effect of accounting change..... (18,200) -- --
-------- --------- --------
Total income tax benefit.................. $(18,192) $(182,049) $(52,916)
======== ========= ========
F-20
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory federal rate and the effective rate is as
follows:
Percentage 2000 1999 1998
---------- ----- ----- -----
Federal statutory rate.. (35.0)% (35.0)% (35.0)%
Nondeductible expenses.. 3.3 4.0 9.2
State income taxes,
net.................... (4.3) (4.3) (3.5)
Tax credits............. .4 .8 1.9
Valuation allowance..... 33.3 3.1 4.0
Other................... 2.3 1.2 1.2
----- ----- -----
Effective tax rate...... -- % (30.2)% (22.2)%
===== ===== =====
The tax effect of temporary differences that give rise to significant
components of deferred tax assets and liabilities is as follows:
2000 1999
--------- --------
Deferred tax assets:
Accounts receivable................................... $ 45,392 $ 46,248
Accrued expenses...................................... 140,532 70,953
Liability for lease exit costs........................ 113,907 122,370
Pension, retirement and other benefits................ 73,745 97,240
Deferred gain......................................... 59,863 --
Credits............................................... 69,840 53,840
Net operating losses.................................. 471,947 242,556
--------- --------
Total gross deferred tax assets..................... 975,226 633,207
Valuation allowance..................................... (474,217) (91,765)
--------- --------
Net deferred tax assets............................. 501,009 541,442
--------- --------
Deferred tax liabilities:
Inventory............................................. 121,119 190,772
Long-lived assets..................................... 457,078 458,263
Other................................................. 2,032 1,766
--------- --------
Total gross deferred tax liabilities................ 580,229 650,801
---------
Net deferred tax liabilities............................ $ 79,220 $109,359
========= ========
Current deferred tax liabilities........................ -- 28,045
Noncurrent deferred tax liabilities..................... 79,220 81,314
--------- --------
Net deferred tax liabilities............................ $ 79,220 $109,359
========= ========
Net Operating Losses and Tax Credits
At February 26, 2000 and February 27, 1999, the Company has federal net
operating loss (NOL) carryforwards of approximately $855,610 and $305,207, the
majority of which expire between fiscal 2017 and 2020.
At February 26, 2000 and February 27, 1999, the Company has state NOL
carryforwards of approximately $1,662,602 and $927,614, the majority of which
expire by fiscal 2005 and the remaining balance by fiscal 2015.
F-21
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At February 26, 2000 and February 27, 1999, the Company has federal business
tax credit carryforwards of approximately $61,394 and $45,394, the majority of
which expire between fiscal 2017 and 2020. In addition to these credits, the
Company has alternative minimum tax credit carryforwards of $7,512 at fiscal
2000 and 1999.
Valuation Allowances
The valuation allowances as of February 26, 2000, and February 27, 1999 are
$474,217 and $91,765 respectively and principally apply to NOL and tax credit
carryforwards. The Company believes that it is more likely than not that those
carryovers will not be realized. The Company's valuation allowance may
increase significantly in the event that it disposes of PCS. (See note 23)
12-1. Financial Instruments:
The carrying amounts and fair values of financial instruments at February
26, 2000 and February 27, 1999 are listed as follows:
2000 1999
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Commercial paper and credit
facility indebtedness......... $2,480,495 $2,480,495 $1,783,125 $1,783,125
Long-term indebtedness
(excluding lease contracts)... 2,984,238 1,959,252 2,989,946 3,217,057
Note receivable................ 32,889 36,102 29,043 34,310
Cash, trade receivables and trade payables are carried at market value,
which approximate their fair values due to the short-term maturity of these
instruments.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Commercial paper and LIBOR-based borrowings under credit facilities:
The carrying amounts for commercial paper indebtedness and LIBOR-based
borrowings under the credit facilities, term loan and term note approximate
their fair market values due to the short-term nature of the obligations and
the variable interest rates.
Long-term indebtedness:
The fair values of long-term indebtedness are estimated based on the quoted
market prices of the financial instruments. If quoted market prices were not
available, the Company estimated the fair value based on the quoted market
price of a financial instrument with similar characteristics or based on the
present value of estimated future cash flows using a discount rate on similar
long-term indebtedness issued by the Company.
Note receivable:
The fair value of the fixed-rate note receivable was determined using the
present value of projected cash flows, discounted at a market rate of interest
for similar instruments.
F-22
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Retirement Plans:
The Company and its subsidiaries have numerous retirement plans covering
salaried employees and certain hourly employees. The retirement plans include
a profit sharing retirement plan and other defined contribution plans.
Contributions for the profit sharing plan are a discretionary percent of each
covered employee's salary, as determined by the Board of Directors based on
the Company's profitability. Total expenses recognized for the profit sharing
plan were $9,945 in 2000, $6,091 in 1999, and $2,363 in 1998. Employer
contributions for other defined contribution plans are generally based upon a
percentage of employee contributions. The expenses recognized for these plans
were $10,375 in 2000, $7,847 in 1999, and $8,293 in 1998. There are also
several defined benefit plans that require benefits to be paid to eligible
employees based upon years of service with the Company or formulas applied to
their compensation. The Company's funding policy is to contribute the minimum
required by the Employee Retirement Income Security Act of 1974.
Net periodic pension cost for the defined benefit plans includes the
following components:
Nonqualified
Defined Benefit Pension Executive Retirement Retiree Health
Plans Plan Benefits Plan
------------------------- -------------------- --------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------ ---- ---- ----
Service cost............ $ 8,505 $ 5,363 $ 5,015 $ 671 $ 514 $ 402 $693 $57 $--
Interest cost........... 5,851 4,091 3,559 1,497 1,424 1,350 252 22 --
Expected return on plan
assets................. (7,670) (5,117) (4,219) -- -- -- -- -- --
Amortization of
unrecognized net
transition
(asset)/obligation..... (160) (160) (160) 1,163 1,163 1,163 -- -- --
Amortization of
unrecognized prior
service cost........... 376 473 390 -- -- -- -- -- --
Amortization of
unrecognized net gain.. (182) (202) -- -- -- -- -- -- --
------- ------- ------- ------ ------ ------ ---- --- ----
Pension expense......... $ 6,720 $ 4,448 $ 4,585 $3,331 $3,101 $2,915 $945 $79 $--
======= ======= ======= ====== ====== ====== ==== === ====
F-23
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below sets forth a reconciliation from the beginning of the year
for both the benefit obligation and plan assets of the Company's retirement
and health benefits plans, as well as the funded status and amounts recognized
in the Company's balance sheet as of February 26, 2000 and February 27, 1999:
Nonqualified
Defined Benefit Executive Retiree Health
Pension Plans Retirement Plan Benefits Plans
----------------- ------------------ ----------------
2000 1999 2000 1999 2000 1999
-------- ------- -------- -------- ------- -------
Change in benefit
obligations:
Benefit obligation at
end of prior year.... $ 86,908 $58,048 $ 21,891 $ 20,906 $ 3,433 $ --
Service cost.......... 8,505 5,363 671 514 693 57
Interest cost......... 5,851 4,091 1,497 1,424 252 22
Distributions......... (9,844) (6,097) (1,224) (650) (60) (5)
Purchase of PCS....... -- 23,537 -- -- -- 3,359
Change due to change
in assumptions....... (4,655) 1,486 (1,281) (50) -- --
Change due to plan
amendment............ 187 665 18,891 -- -- --
Actuarial (gain) or
loss................. 2,425 (185) (5,754) (253) 323 --
-------- ------- -------- -------- ------- -------
Benefit obligation at
end of year............ $ 89,377 $86,908 $ 34,691 $ 21,891 $ 4,641 $ 3,433
======== ======= ======== ======== ======= =======
Change in plan assets:
Fair value of plan
assets at beginning
of year.............. $ 93,366 $58,212 $ -- $ -- $ -- $ --
Employer
contributions........ 5,611 7,315 1,224 651 60 5
Actual return on plan
assets............... 20,544 13,727 -- -- -- --
Purchase of PCS....... -- 21,507 -- -- -- --
Distributions
(including assumed
expenses)............ (10,601) (6,744) (1,224) (651) (60) (5)
-------- ------- -------- -------- ------- -------
Fair value of plan
assets at end of year.. $108,920 $94,017 $ -- $ -- $ -- $ --
======== ======= ======== ======== ======= =======
Funded status........... $ 19,543 $ 7,109 $(34,691) $(21,891) $(4,641) $(3,433)
Unrecognized net loss
(gain)................. (21,532) (7,369) (5,972) 1,064 323 --
Unrecognized prior
service cost........... 1,808 2,752 18,891 -- -- --
Unrecognized net
transition (asset) or
obligation............. (339) (498) 12,790 13,953 -- --
-------- ------- -------- -------- ------- -------
Prepaid or (accrued)
pension cost
recognized............. $ (520) $ 1,994 $ (8,982) $ (6,874) $(4,318) $(3,433)
======== ======= ======== ======== ======= =======
Amounts recognized in
consolidated balance
sheets consisted of:
Prepaid (accrued)
pension cost......... $ 4,787 $ 4,551 $ (8,982) $ (6,874) $ -- $ --
Adjustment to
recognize additional
minimum liability.... -- 1,039 (22,836) (12,536) -- --
Accrued pension
liability............ (5,307) (3,596) -- -- (4,318) (3,433)
Pension intangible
asset................ -- -- 22,836 12,061 -- --
Accumulated other
comprehensive
income............... -- -- -- 475 -- --
-------- ------- -------- -------- ------- -------
Net amount recognized... $ (520) $ 1,994 $ (8,982) $ (6,874) $(4,318) $(3,433)
======== ======= ======== ======== ======= =======
F-24
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amounts recognized in the accompanying consolidated balance sheets as of
February 26, 2000 and February 27, 1999 are as follows:
Defined Benefit Nonqualified Executive Retiree Health
Pension Plans Retirement Plan Benefits Plan
---------------- ------------------------ ----------------
2000 1999 2000 1999 2000 1999
------- ------- ----------- ----------- ------- -------
Accrued benefit
liability.............. $(5,307) $(2,557) $ (8,982) $ (6,874) $(4,318) $(3,433)
Prepaid pension cost.... 4,787 4,551 -- -- -- --
------- ------- ----------- ----------- ------- -------
Net amount recognized... $ (520) $ 1,994 $ (8,982) $ (6,874) $(4,318) $(3,433)
======= ======= =========== =========== ======= =======
The accumulated benefit obligation and fair value of plan assets for the
defined benefit pension plans with plan assets in excess of accumulated
benefit obligations were $58,798 and $84,084, respectively, as of February 26,
2000, and $30,579 and $24,836, respectively, as of February 27, 1999.
The significant actuarial assumptions used for all defined benefit pension
plans were as follows:
Defined Benefit Non-Qualified
Pension Plan Executive Defined Benefit
(Retail Drug Retirement Pension Plan
Segment) Plan (PBM Segment)
----------------- -------------- -----------------
Percentage 2000 1999 1998 2000 1999 1998 2000 1999 1998
---------- ----- ----- ----- ---- ---- ---- ----- ----- -----
Discount rate............ 7.25 6.75 7.00 7.83 9.00 7.93 7.80 7.80 --
Rate of increase in
future
compensation levels..... 4.50 4.75 4.75 3.00 3.00 3.00 5.90 -- --
Expected long-term rate
of return on
plan assets............. 9.00 9.00 9.00 9.00 9.00 9.00 9.00 -- --
Through its acquisition of PCS, the Company also assumed a retiree health
benefits plan that provides for certain health benefits at retirement for
covered employees. Healthcare cost trend rates were assumed to increase at an
annual rate of 6.5 percent in 1999 for participants under the age of 65, and
decrease one-half percent per year to 5.0 percent in 2002 and thereafter. For
participants over the age of 65, the rate was assumed to increase 5.0 percent
in 1999 and thereafter.
The assumed health care cost trend rates have a significant effect on the
retiree health benefits amounts reported. If these trend rates were to be
increased by one percentage point each future year, the accumulated post-
retirement benefit obligation would increase by 16.1 percent and the aggregate
service and interest cost components of the expense recognized in 2000 would
increase by 17.6 percent. A one percentage point decrease in these rates would
reduce the accumulated post-retirement benefit obligation by 13.9 percent and
the aggregate service and interest cost components of the expense recognized
in 2000 would decrease by 14.9 percent.
F-25
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Leases:
The Company leases most of its retail stores and certain distribution
facilities under noncancellable operating and capital leases, most of which
have initial lease terms ranging from 10 to 22 years. The Company also leases
certain of its equipment and other assets under noncancellable operating
leases with initial terms ranging from 3 to 7 years. In addition to minimum
rental payments, certain store leases require additional payments based on
sales volume, as well as reimbursements for taxes, maintenance, and insurance.
Most leases contain renewal options, certain of which involve rent increases.
Total rental expense, net of sublease income, was $423,926 in 2000, $330,513
in 1999 and $267,384 in 1998. These amounts include contingent rentals of
$19,124, $26,761, and $23,628, respectively. Deferred rent credits total
$6,078 and $5,267 at February 26, 2000 and February 27, 1999, respectively.
The company is a guarantor on certain leases transferred to third parties
through sales or assignments.
The Company leases certain facilities through sale-leaseback arrangements
accounted for using the financing method. Proceeds from sale-leaseback
programs were approximately $74,899 in 2000, $504,990 in 1999 and $323,803 in
1998.
The net book values of assets under capital leases and sale-leasebacks
accounted for under the financing method are summarized as follows:
February 26, February 27,
2000 1999
------------ ------------
Land............................................... 343,948 328,610
Buildings.......................................... 562,699 533,805
Equipment.......................................... 86,348 77,453
Accumulated depreciation........................... (36,043) (20,391)
-------- --------
$956,952 $919,477
Following is a summary of lease finance obligations at February 26, 2000 and
February 27, 1999:
2000 1999
---------- ----------
Sale-Leaseback obligations accounted for under the
financing method..................................... $ 989,908 $ 934,906
Obligations under capital leases...................... 154,224 206,794
---------- ----------
Total................................................. 1,144,132 1,141,700
Less current obligation............................... (25,928) (31,522)
---------- ----------
Long-term lease finance obligations................... $1,118,204 $1,110,178
========== ==========
Following are the minimum lease payments net of sublease income that will
have to be made in each of the years indicated based on non-cancellable leases
in effect as of February 26, 2000:
Financing obligation
under sale-leaseback
arrangements and
Capital Lease Operating
Fiscal year obligations Leases
----------- -------------------- -----------
2001....................................... $ 119,757 $ 460,252
2002....................................... 119,264 446,324
2003....................................... 116,687 424,387
2004....................................... 114,701 398,264
2005....................................... 114,201 380,415
Later years................................ 1,454,176 3,676,112
----------- -----------
Total minimum lease payments............... 2,039,286 $ 5,785,754
===========
Amount representing interest............... 895,154
-----------
Present value of minimum lease payments.... $ 1,144,132
===========
F-26
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Capital Stock:
In October 1999, the Company issued 3,000,000 shares of $1.00 par value 8%
Series A Convertible Preferred Stock for cash of $300,000. The shares have a
liquidation value of $100.00 per share with preference over all existing
classes of preferred stock. The shares are callable by the Company beginning
October 2004 at the liquidation value plus a 5% premium. The shares accrue
cumulative dividends at 8% of the liquidation value of the outstanding shares.
Dividends may be paid in cash or additional shares. In December 1999, the
shares were exchanged for Series B Convertible Preferred Stock with the same
characteristics except that each Series B share has voting rights equivalent
to one share of common stock. The terms of the shares provide that they are
convertible into common stock at an initial conversion rate of $11.00 per
common share subject to adjustment based on future declines in the quoted
price or subsequent equity transactions based on per share prices lower than
$11.00. As a result of the Company's equity transaction on June 14, 2000,
further described in note 23, the conversion price was subsequently adjusted
to a conversion price of $5.50 per share. The resulting beneficial conversion
feature of approximately $165 million (representing the difference between
$5.50 and the market price of the Company's common stock on the issuance date
of the preferred stock), will be accreted as a return on the preferred stock
and will decrease earnings available to common shareholders beginning in the
second quarter of fiscal 2001.
At a Special Meeting of Stockholders held on February 22, 1999, an amendment
to Rite Aid's Restated Certificate of Incorporation was approved to increase
the number of authorized shares of common stock, $1.00 par value, from
300,000,000 to 600,000,000. Accordingly, the authorized capital stock of the
Company consists of 600,000,000 shares of common stock and 20,000,000 shares
of preferred stock, both having a par value of $1.00 per share. Preferred
stock is issued in series subject to terms established by the Board of
Directors.
On February 2, 1998, the Company effected a two-for-one stock split of the
Company's common stock to stockholders of record at the close of business on
January 20, 1998. The stock split increased the number of shares outstanding
by 135,644,000 shares. All share and per share amounts have been restated to
give effect to the stock split.
16. Redeemable Preferred Stock:
In March 1999 and February 1999, Rite Aid Lease Management Company, a wholly
owned subsidiary of Rite Aid Corporation, issued 63,000 and 150,000, shares of
Cumulative Preferred Stock, Class A, par value $100 per share, respectively.
The Class A Cumulative Preferred Stock is mandatorily redeemable on April 1,
2019 at a redemption price of $100 per share plus accumulated and unpaid
dividends. The Class A Cumulative Preferred Stock pays dividends quarterly at
a rate of 7.0 percent per annum of the par value of $100 per share when, as
and if declared by the Board of Directors of Rite Aid Lease Management Company
in its sole discretion. The amount of dividends payable in respect of the
Class A Cumulative Preferred Stock may be adjusted under certain events. The
outstanding shares of the Class A Preferred Stock were recorded at the
estimated fair value of $5,695 and $13,559 for the 2000 and 1999 issuances,
respectively, which equaled the sale price on the date of issuance. Because
the fair value of the Class A Preferred Stock was less than the mandatory
redemption amount at issuance, periodic accretions to stockholders' equity
using the interest method are made so that the carrying amount equals the
redemption amount on the mandatory redemption date. Accretions were $97 in
fiscal year 2000 and $0 in 1999.
In March 1998, RX Choice, Inc., a wholly owned subsidiary of Rite Aid
Corporation ("Rite Aid"), issued 10,000 shares of preferred stock, par value
$0.01, with a liquidation preference per share of $1,000 per share. Granted to
the holder of each share of preferred stock was an option ("Put Option") to
sell to Rite Aid all or any portion of the preferred stock held by the holder
on the date the Put Option is exercised. Each Put Option may be exercised any
time after March 25, 2003 and before March 25, 2004. In addition, Rite Aid has
an option ("Call Option") to purchase from the holders of the preferred stock,
all or any portion of the shares of preferred stock upon the exercise of the
Call Option. The Call Option may be exercised by Rite Aid any time after
March 20, 2004 and before March 20, 2005. The preferred stock carries a
mandatory obligation to declare and
F-27
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pay preferential dividends at the rate of 7.70 percent per annum of the
liquidation preference per share, payable quarterly. As amended and restated,
the articles of incorporation of RX Choice, Inc. authorize the issuance of
10,000 shares of preferred stock, of which 10,000 shares were issued in 1999.
During 2000, the Company repurchased and retired all of the shares at the
redemption value of $10,000.
17. Reconciliation of Numerator and Denominator for Basic and Diluted Earnings
Per Share:
February 26, February 27, February 28,
2000 1999 1998
------------ ------------ ------------
Numerator for earnings per share:
Loss before cumulative effect of
accounting change................. $(1,115,756) $ (422,482) $ (186,191)
Accretion of redeemable preferred
stock............................. (97) -- --
Dividends on preferred stock....... (10,110) (627) --
----------- ----------- -----------
Loss before cumulative effect of
accounting change attributable to
common stockholders............... (1,125,963) (423,109) (186,191)
Cumulative effect of accounting
change............................ (27,300) -- --
----------- ----------- -----------
Net loss attributable to common
stockholders........................ $(1,153,263) $ (423,109) $ (186,191)
=========== =========== ===========
Denominator:
Basic weighted average shares...... 259,139,000 258,516,000 250,659,000
Diluted weighted average shares.... 259,139,000 258,516,000 250,659,000
Basic and diluted loss per share:
Loss per share before cumulative
effect of accounting change....... $ (4.34) $ (1.64) $ (0.74)
Cumulative effect of accounting
change............................ (0.11) -- --
----------- ----------- -----------
Basic and diluted loss per share... $ (4.45) $ (1.64) $ (0.74)
=========== =========== ===========
In fiscal years 2000, 1999 and 1998, no potential common shares have been
included in the calculation of diluted earnings per share because of the
losses reported.
18. Stock Option and Stock Award Plans:
The Company reserved 22,000,000 shares of its common stock for the granting
of stock options and other incentive awards to officers and key employees
under the 1990 Omnibus Stock Incentive Plan (the "1990 Plan"). Options may be
granted, with or without stock appreciation rights ("SARs"), at prices that
are not less than the fair market value of a share of common stock on the date
of grant. The 1990 Plan provides for the Compensation Committee to determine
both when and in what manner options may be exercised; however, it may not be
more than 10 years from the date of grant. The exercise of either a SAR or
option automatically will cancel any related option or SAR. Under the Plan,
the payment for SARs will be made in shares, cash or a combination of cash and
shares at the discretion of the Compensation Committee.
In November 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"), under which 10,000,000 shares of common stock are reserved for the
granting of stock options at the discretion of the Board of Directors. Under
the 1999 Plan, stock options may be granted at prices that are not less than
the fair market value of a share of common stock on the date of grant.
F-28
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is a summary of stock option transactions for the three fiscal
years ended February 26, 2000, February 27, 1999 and February 28, 1998:
Weighted
Average
Price
Per
Shares Share
---------- --------
Balance, March 1, 1997.................................. 12,168,650 $13.43
Granted............................................... 401,000 26.59
Exercised............................................. (771,500) 12.60
Canceled.............................................. (306,376) 12.89
---------- ------
Balance, February 28, 1998.............................. 11,491,774 13.96
Granted............................................... 4,054,000 32.74
Exercised............................................. (633,575) 14.58
Canceled.............................................. (241,500) 20.18
---------- ------
Balance, February 27, 1999.............................. 14,670,699 19.02
Granted............................................... 18,687,562 7.95
Exercised............................................. (64,650) 13.61
Canceled.............................................. (7,488,707) 14.60
---------- ------
Balance, February 26, 2000.............................. 25,804,904 $12.30
========== ======
For various price ranges, weighted average characteristics of outstanding
stock options at February 26, 2000 were as follows:
Outstanding Options Exercisable Options
---------------------------------- ---------------------
Remaining Weighted Weighted
Range of life Average Average
exercise prices Shares (years) Price Shares Price
--------------- ------ --------- -------- ------ --------
$ 5.38 5,855,308 9.70 $ 5.38 600,000 $ 5.38
$ 6.75 to $ 7.13 638,000 9.94 $ 6.94 -- --
$ 7.35 7,000,000 9.77 $ 7.35 388,889 $ 7.35
$ 7.44 to $ 9.25 3,059,416 5.82 $ 8.56 1,792,699 $ 9.22
$ 9.56 to $16.50 2,955,600 5.54 $13.85 2,481,450 $13.42
$16.63 to $23.00 2,871,000 7.35 $19.02 1,935,750 $17.16
$23.06 to $32.00 2,791,080 8.40 $29.29 132,000 $29.39
$32.06 to $48.81 634,500 8.61 $41.98 124,375 $43.89
---------------- ---------- ---- ------ --------- ------
$ 5.38 to $48.81 25,804,904 8.36 $12.30 7,455,163 $13.21
================ ========== ==== ====== ========= ======
F-29
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation cost.
If the Company had elected to recognize compensation cost based upon the fair
value of the options granted at the grant date as prescribed by SFAS No. 123,
net income and earnings per share would have been reduced to the pro forma
amounts indicated in the table below:
February 26, February 27, February 28,
2000 1999 1998
------------ ------------ ------------
Net loss .......................... $(1,143,056) $(422,482) $(186,191)
Pro forma compensation expense
under fair value method........... (13,478) (9,658) (5,686)
Pro forma net loss................. (1,156,534) (432,140) (191,877)
Accretion of redeemable preferred
stock............................. (97) -- --
Dividends on preferred stock....... (10,110) (627) --
Pro forma net loss attributable to
common stockholders............... $(1,166,741) $(432,767) $(191,877)
Pro forma basic and diluted loss
per share......................... $ (4.50) $ (1.67) $ (0.77)
The pro forma amounts only take into account the options issued since March
5, 1995. The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
2000 1999 1998
--------- --------- -------
Expected stock price volatility.................. 58.0% 30.7% 25.0%
Expected dividend yield.......................... 0.0% 1.0% 1.5%
Risk-free interest rate.......................... 6.3% 5.6% 1.6%
Expected life of options......................... 4.2 years 6.7 years 5 years
The average fair value of each option granted during 2000, 1999 and 1998 was
$4.09, $12.36 and $3.55, respectively.
Restricted Stock
In December 1999, the new executive team received restricted stock grants of
1,000 shares. The Company recorded these grants at a fair value on the date of
the grant of $8,250. During fiscal 2000, the Company also made tax payments on
behalf of the executives to help defray the tax effects of the grant to the
executive. Under the restricted stock agreement, the restrictions placed on
the shares lapse over the period from December 1999 to November 2002. However,
in most circumstances the executive would only have to provide one year of
service to the Company to earn the total number of shares. Accordingly, the
Company is amortizing the cost of the stock grant over a period of one year
resulting in compensation expense of $2 million in 2000 relating to the
grants.
Stock Appreciation Units
The Company has issued stock appreciation units to various members of field
management. The grant price for each unit is the closing price of the
Company's common stock on the date of grant. The units vest four years from
the date of grant. For each outstanding unit, the Company is obligated to pay
out the difference between the grant price and the average market price of one
share of the Company's common stock for the last twenty trading days before
the vesting date. The payment may be in cash or shares, at the discretion of
the Company; however, the Company has historically made cash payments.
The Company's obligations under the stock appreciation units are remeasured
at each balance sheet date and amortized to compensation expense over the
vesting period.
At February 26, 2000 and February 27, 1999, there were 7.0 million and 3.4
million stock appreciation rights units outstanding, respectively. Grant
prices for units outstanding at February 26, 2000 ranged from $5.38 to $48.56
per unit. Amounts charged or (credited) to expense relating to the stock
appreciation rights units for the fiscal years ended 2000, 1999, and 1998 were
$(45,500), $32,200, and $22,200, respectively.
19. Business Segments:
The Company operates in primarily two business segments: i) the Retail Drug
segment, and ii) the Pharmacy Benefit Management ("PBM") segment, that
includes other managed health care services and mail-order pharmacy services.
The Company's business segments are organized according to the products and
services offered to its customers. The Company's dominant segment is the
Retail Drug segment, which consists of the operation of retail drugstores
across the United States. The Company is one of the largest retail drugstore
chains in the United States, with approximately 3,800 stores in operation as
of February 26, 2000. The Company's drugstores' primary business is pharmacy
services, with prescription drugs accounting for approximately 55 percent of
total segment sales. In addition, the Company's drugstores offer a full
selection of health and personal care products, seasonal merchandise and a
large private label product line.
Through the January 1999 acquisition of PCS, the Company also operates a PBM
segment. Through its PBM segment, the Company offers pharmacy benefit
management services to employees, insurance carriers and managed car companies
as well as mail-order pharmacy services. Prior to fiscal 1999, the Company
operated only the Retail Drug segment. The Retail Drug segment in 1998
includes the results of Eagle Managed Care, a PBM, which is not considered
significant and a LIFO charge of $7,222.
F-30
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accounting policies of each segment are substantially the same as those
described in Note 1, except that segments are evaluated based upon a profit or
loss measurement on a FIFO basis. Financial information for each segment is
reported on this basis. The following table presents selected financial
information for each business segment and a reconciliation to the selected
financial information on a consolidated basis:
Retail PBM LIFO Consolidated
Segment Segment Charge Totals
----------- ---------- -------- ------------
February 26, 2000:
Revenues..................... $13,381,882 $1,299,560 $ -- $ 14,681,442
Interest expense............. 520,336 -- -- 520,336
Depreciation and amortization
expense..................... 423,642 77,355 -- 500,997
Loss from investment
accounted for on the equity
method...................... (11,893) -- -- (11,893)
Income tax expense
(benefit)................... 8 -- -- 8
Cumulative effect of change
in accounting method........ -- -- (27,300) (27,300)
Net (loss) income............ $(1,128,876) $ 33,888 $(48,068) $(1,143,056)
Total assets................. $ 8,188,361 $2,619,493 $ -- $ 10,807,854
Total expenditures for
additions to long-lived
assets...................... $ 425,047 $ 28,581 $ -- $ 453,628
February 27, 1999:
Revenues..................... $12,490,309 $ 292,714 $ -- $ 12,782,890
Interest expense............. 277,007 219 -- 277,226
Depreciation and amortization
expense..................... 392,873 6,410 -- 399,283
Loss from investment
accounted for on the equity
method...................... (448) -- -- (448)
Income tax expense
(benefit)................... (182,049) -- -- (182,049)
Net income (loss)............ $ (385,440) $ (15,161) $(21,881) $ (422,482)
Total assets................. $ 9,784,970 $ 727,570 $ -- $ 10,312,540
Total expenditures for
additions to long-lived
assets...................... $ 1,347,088 $ -- $ -- $ 1,347,088
20. Related Party Transactions:
Included in Accounts receivable at February 26, 2000 and February 27, 1999,
were receivables from related parties, of $5,355 and $4,175, including
employee loans.
During fiscal 2000, 1999 and 1998, the Company sold merchandise totaling
$2,072, $6,225 and $25,041, respectively, to equity-method investees. During
fiscal 2000, 1999, and 1998, the Company purchased equipment totaling $26,115,
$27,119 and $44,105 from an equity-method investee.
In fiscal 2000, 1999 and 1998, the Company purchased $8,800, and $8,800 of
product from a manufacturer of private label over the counter medications in
which a director held an ownership interest until May 31, 1999. The Company
leases for $153.7 per year a 43,920 square foot storage space in a warehouse
in Camp Hill, Pennsylvania, from a partnership in which a director has a 50%
interest.
F-31
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company formerly operated an 8,000 square-foot store in a shopping
center in which Martin Grass, the former Chairman of the Board and Chief
Executive Officer, has a 50% ownership interest. The rent paid by the Company
was $96 per year. In February 1999, the lease was cancelled and the Company
was released from its obligation to pay over $300 in remaining lease
commitments.
Beginning in January 1999 the Company leased for $188 per year a 10,750
square-foot store in Sinking Springs, Pennsylvania, which it leases from a
relative of Martin Grass, the former Chairman of the Board and Chief Executive
Officer. The Company leases a 5,000 square-foot store in Mt. Carmel,
Pennsylvania, from a partnership in which Martin Grass is or was a partner.
The rent is $39 per year.
21. Commitments, Contingencies and Guarantees:
Legal Proceedings
This Company is party to numerous legal proceedings, as discussed below. The
Company has charged $232,778, $7,916, and $19,374, to expense for the years
ended February 26, 2000, February 27, 1999, and February 28, 1998,
respectively, for various pending and actual claims, litigation, and
assessments based upon its determination of its material, estimable and
probable liabilities in regard to the portion of these claims, lawsuits, and
assessments not covered by insurance.
In addition, as discussed below, an unfavorable resolution of certain of
these matters could materially adversely effect the Company's results of
operations, financial position and cash flows.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving our
financial reporting and other matters. The Company is cooperating fully with
the SEC and the United States Attorney.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including its principal
401(k) plan which permitted employees to purchase Company common stock. Plan
participants [held] approximately 2.8 million shares at December 31, 1998 and
3.9 million shares at December 31, 1999. Purchases of Company common stock
under the plan were suspended in October 1999. The Company is cooperating
fully with the Department of Labor.
These investigations are ongoing. If the Company were convicted of any
crime, certain contracts and licenses that are material to operations may be
revoked, which would have a material adverse effect on results of operations,
financial condition, and cash flows. In addition, substantial penalties,
damages or other monetary remedies assessed against Rite Aid could also have a
material adverse effect on results of operations and financial condition.
Stockholder litigation
On March 12, 1999, the Company announced that the preliminary estimate for
diluted earnings per share for the fourth quarter of fiscal 1999 would be
approximately $0.30 to $0.32, as compared to the then existing First Call
analysts' consensus estimates of $0.52 per share. After the March 12
announcement, several purported class action lawsuits were commenced in the
U.S. District Court for the Eastern District of Pennsylvania and one suit was
brought in the U.S. District Court for the Northern District of Florida
against the Company and certain of its former officers and directors,
including Martin Grass, former chairman of the board of directors and chief
executive officer; Timothy Noonan, former interim chief executive officer and
a former director; Franklin Brown, former vice chairman and a former director
and Frank Bergonzi, former senior executive vice president and former chief
financial and accounting officer. The plaintiffs in these suits allege that
the defendants
F-32
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
violated certain provisions of the federal securities laws by, among other
things, failing to make prompt public disclosure of the matters mentioned in
its March 12 announcement. The plaintiffs also allege that the Company's
financial statements for fiscal 1997, 1998 and 1999 fraudulently
misrepresented the Company's financial position, results of operations and
cash flows for those periods. The plaintiffs, by their original and amended
complaints, seek to recover damages on behalf of all of the purchasers of
Company common stock between May 1997 and October 1999. On April 18, 1999, the
Court approved a stipulation among counsel that, among other things, provided
for consolidation of these suits. The plaintiffs have the right until August
10, 2000 to amend the complaints to include additional allegations of
wrongdoing by the defendants. In June 2000, the Company moved to transfer the
Florida action to the U.S. District Court for the Eastern District of
Pennsylvania. The Company is unable to predict the ultimate outcome of this
litigation.
Since May 1999, various complaints have been filed in the U.S. District
Court for the Eastern District of Pennsylvania and in the Court of Chancery of
the state of Delaware, federal courts in Philadelphia, Pennsylvania and
Wilmington, Delaware, derivatively and on behalf of the Company, against the
same officers named in the stockholder lawsuits discussed above and against
certain former [and current] directors of the Company. The complaints allege
essentially the same wrongful acts as are alleged in the class action
lawsuits. Some of those complaints also allege that certain of the
transactions discussed in the Current Report on Form 8-K filed with the SEC by
the Company on February 9, 1999 constituted mismanagement, waste of corporate
resources and breach of fiduciary duty. The plaintiffs seek indemnity and
contribution on behalf of the Company from the individual defendants. The
Company is unable to predict the ultimate outcome of this litigation.
If any of these cases results in a substantial monetary judgment against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position and cash flows could be materially adversely
affected.
Drug pricing and reimbursement matters
Civil proceedings are continuing involving the Company's pricing-related
practices for prescription drugs. On September 22, 1999, the Florida Attorney
General filed a complaint against the Company in the Second District, Leon
County, alleging violations of the Florida Deceptive and Unfair Trade
Practices Act and the state RICO statute. The Company no longer operates any
retail drugstores in Florida. In essence, Florida asserted that the Company's
former practice of allowing its pharmacists the discretion to charge non-
uniform prices through the use of positive overrides for cash purchases of
prescription drugs was unlawful. The Company discontinued its use of this
policy in June 1998 throughout its retail drugstores. On February 18, 2000,
the reviewing Florida state court dismissed with prejudice the Florida
Attorney General's complaint. On May 5, 2000, the same court denied Florida's
motion to rehear the case and affirmed the initial decision on the merits, but
granted Florida's motion to amend its complaint to raise allegations
concerning other pricing practices relating to discounts and generic drug
price notices. On July 5, 2000, the Company filed a motion to dismiss the
amended complaint.
The filing of the complaint by the Florida Attorney General, and the
Company's press release issued in conjunction therewith, precipitated the
filing of purported federal class actions in Alabama and California and
purported state class actions in New Jersey, New York, Oregon, and
Pennsylvania. All of the class actions are based on facts essentially
identical to those contained in the Florida complaint and none specify
damages. The Company has asserted in court filings that its imposition of
positive overrides was a legitimate utilization of non-uniform pricing
similarly engaged in by many other sectors of retail commerce. The Company
filed motions to dismiss each of the uncertified class action complaints for
failure to state a claim for which relief could be granted. The Company's
arguments have prevailed in each of the cases in which a court decision has
been rendered thus far. On December 27, 1999, the United States District Court
for the Northern District of Alabama dismissed the federal RICO claims against
the Company with prejudice and the plaintiffs later filed an appeal with the
Eleventh Circuit. That appeal is currently pending. On May 21, 2000, an Oregon
state court judge
F-33
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
granted the Company's motion to dismiss the purported class action there with
prejudice. On June 12, 2000, the United States District Court for the Central
District of California dismissed that case and on June 27, 2000, a New Jersey
state court dismissed that class action there. Motions to dismiss the state
class actions in New York and Pennsylvania are currently pending.
The Company believes that all of the positive override lawsuits are without
merit under applicable state consumer protection laws and/or state or federal
RICO statutes. As a result, the Company intends to continue to vigorously
defend each of the pending actions and does not anticipate, if fully
adjudicated, that any of the lawsuits will result in an award of damages
and/or civil penalties. However, such an outcome for each of the actions
cannot be assured and a ruling against the Company could have a material
adverse effect on the financial position, operations and cash flows of the
Company as well as necessitate substantial additional expenditures to cover
legal costs as it pursues all available defenses.
The Company has also recently been notified that it is being investigated by
multiple state attorneys general for its reimbursement practices relating to
partially-filled prescriptions and fully filled prescriptions that are not
picked up by ordering customers. The Company is supplying similar information
with respect to these matters to the Department of Justice. The Company
believes that its existing policies and procedures fully comply with the
requirement of applicable law and intends to fully cooperate with these
investigations. The Company cannot, however, predict the outcome of these
investigations.
If any of these cases results in a substantial monetary judgment against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position and cash flows could be materially adversely
affected.
PCS Legal Proceedings
In November 1999, PCS received a subpoena from the Office of Inspector
General of the Department of Health and Human Services ("OIG"). The subpoena
requests general information about PCS's formulary programs and rebate
practices and makes no allegation of any wrongdoing by PCS. PCS is fully
cooperating with the inquiry and believes that no regulatory action will be
taken by OIG against PCS that will have a material adverse effect on PCS's
business. The Company cannot predict the outcome of this matter.
In January 1998, a purported class action was brought against PCS by a
participant in a plan managed by PCS in the federal district court in New
Jersey. The plaintiff alleged that PCS is an ERISA fiduciary and that, as
such, breached its fiduciary obligations under ERISA and that PCS received
improper kickbacks and rebates from certain drug manufacturers. PCS believes
that the plaintiff's action is without merit and is vigorously defending this
action. The Company cannot predict the outcome of this action.
PCS Customer Contracts
The Company enters into risk contracts with certain customers as part of its
PBM business. These contracts provide that the Company assume varying
percentages of the risk associated with claims experience differing from fixed
fee arrangements under managed care programs. In addition, the Company, in
certain limited circumstances, guarantees a specific amount of savings for
certain customers. Included in other current liabilities in the accompanying
consolidated balance sheets are management's estimates of the amounts required
to cover losses incurred under such contracts.
Vendor Arrangements
As of February 26, 2000, the Company had outstanding commitments to purchase
$140 million of merchandise inventory from a vendor for use in the normal
course of business. The Company expects to satisfy these purchase commitments
by fiscal 2005. Under the terms of a joint marketing agreement, the Company
and the vendor are each obligated to make contributions of $51 million to a
marketing fund to be used in connection with advertising and marketing of such
products through September 30, 2004.
F-34
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment Agreements
The Company has employment contracts with its executive officers and various
other members of senior management requiring payment of minimum annual base
salaries and, in some cases, minimum target bonuses and other compensation
arrangements. The terms of the agreements are three years.
Employment agreements with four executive officers contain change in control
provisions that entitle each of them to receive three times the sum of their
annual base salary and annual target bonus amount. The executive officers will
also receive the total amount of contributions that would have been made to
the deferred compensation plan if they had been employed through the end of
their employment contract. All outstanding stock options shall become fully
vested and all restrictions on stock awards shall immediately lapse.
Certain officers of PCS were provided with a financial incentive to remain
at the Company. Under this retention incentive program, the participating
officers vest annually in the financial benefits through January 22, 2002. The
value of the benefits is determined based upon the Rite Aid stock price during
the vesting period, but is not to be less than an established floor value. The
Company recognized compensation expense under this program of $706 of 1999 and
$7,137 in 2000. In the event of a change in control of PCS, the participating
officers immediately become fully vested in the program's benefits.
22. Interim Financial Results (Unaudited):
Fiscal Year 1999
------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------- ----------------------- ----------------------- ----------------------
As As As As
Previously As Previously As Previously As Previously As
Reported(1) Restated Reported(1) Restated Reported(2) Restated Reported(2) Restated
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Revenues................ $3,032,681 $3,086,505 $3,011,029 $3,057,095 $3,122,930 $3,185,386 $3,565,260 $3,453,904
Costs and expenses
excluding store
closing, impairment and
other charges.......... 2,902,230 3,232,024 2,894,676 3,105,926 2,995,965 3,325,360 3,482,123 3,531,560
Store closing,
impairment and other
charges................ -- 57,134 264,204 31,244 (7,298) 69,255 430 34,918
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 130,451 (202,653) (147,851) (80,075) 134,263 (209,229) 82,707 (112,574)
Income taxes (benefit).. 52,179 (61,027) (59,139) (24,114) 53,705 (63,007) 9,139 (33,901)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss................ $ 78,272 $ (141,626) $ (88,712) $ (55,961) $ 80,558 $ (146,222) $ 73,568 $ (78,673)
========== ========== ========== ========== ========== ========== ========== ==========
Basic earnings per
share:
Net income (loss)..... $ 0.30 $ (0.55) $ (0.34) $ (0.22) $ 0.31 $ (0.57) $ 0.28 $ (0.31)
========== ========== ========== ========== ========== ========== ========== ==========
- --------
(1) Financial data as previously reported in the Company's quarterly report on
Form 10-Q for the period ended August 28, 1999.
(2) Financial data as previously reported in the Company's annual report on
Form 10-K for the year ended February 27, 1999.
F-35
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the fiscal year ended February 26, 2000
(Dollars in thousands, except share amounts)
Fiscal Year 2000
---------------------------------------------------------------------
First Quarter Second Quarter
--------------------- ----------------------
As As
Previously As Previously As Third Fourth
Reported Restated Reported Restated Quarter Quarter
---------- ---------- ---------- ---------- ---------- ----------
Revenues................ $3,624,500 $3,681,108 $3,506,129 $3,522,213 $3,646,390 $3,831,731
Costs and expenses
excluding store
closing, impairment and
other charges.......... 3,483,358 3,697,347 3,536,096 3,618,434 3,884,571 4,448,653
Store closing,
impairment and other
charges................ 28,238 29,343 56,094 33,119 45,734
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
method................. 141,142 (44,477) (59,310) (152,315) (256,300) (662,656)
Income taxes............ 60,127 (697) (43,908) (2,386) (4,015) 7,106
Income (loss) before
cumulative effect of
change in accounting
method................. 81,015 (43,780) (15,402) (149,929) (252,285) (669,762)
Cumulative effect of
change in accounting
method, net............ -- (27,300) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 81,015 $ (71,080) $ (15,402) $ (149,929) $ (252,285) $ (669,762)
========== ========== ========== ========== ========== ==========
BASIC AND DILUTED
EARNINGS (LOSS) PER
SHARE
Income (loss) before
cumulative effect of
change in accounting
method .............. $ 0.31 $ (0.06) $ (0.06) $ (0.58) $ (0.98) $ (2.68)
Cumulative effect of
change in accounting
method, net.......... -- (0.11) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 0.31 $ (1.17) $ (0.06) $ (0.58) $ (0.98) $ (2.68)
========== ========== ========== ========== ========== ==========
During the third and fourth quarters of 2000, the Company incurred
significant non-recurring charges. These included charges of $235,000 for
litigation expenses, $62,500 for debt restructuring, $67,600 for sale of
discontinued merchandise, and $49,800 for markdowns at retail stores.
23. Subsequent Events:
Financing Transactions
On June 14, 2000, the Company obtained a new $1,000,000 senior secured
credit facility (the "Senior Facility") from a syndicate of banks. The Senior
Facility is guaranteed by substantially all of the Company's wholly-owned
subsidiaries, and the banks have a security interest in substantially all of
the Company's accounts receivable, inventory and intellectual property and a
security interest in certain real property. Of the $1,000,000 Senior Facility
amount, $500,000 is in the form of a term loan due in August 2002 with
interest at LIBOR plus 3.00% that was used to pay-off $300,000 of drawings
under the accounts receivable securitization program; $200,000 was used for
working capital and transaction expenses; and $500,000 remained available as a
revolving credit facility under the Senior Facility.
In connection with the above refinancing on June 14, 2000, the Company
exchanged $52,500 of its 5.50% fixed-rate senior notes due in December 2000
and $321,800 of its 6.70% notes due in 2000 for $374,300 of 10.50% senior
secured notes due 2002. The Company entered into an agreement with certain
banks under which they agreed to purchase $93,200 of the 10.50% senior secured
notes due 2002 when the 5.5% notes become due in December 2000.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. The facility requires us to meet
various financial ratios and limits our capital expenditures. These ratios and
capital expenditure limits are
F-36
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the fiscal year ended February 26, 2000
(Dollars in thousands, except share amounts)
subject to adjustment if we sell PCS. These covenants require us to maintain a
minimum interest coverage ratio of .75:1 (.72:1 if PCS is sold) for the
quarter ended August 26, 2000, increasing to 1.40:1 (1.40:1 if PCS is sold)
for the four quarter period ending June 1, 2002 and a minimum fixed charge
coverage ratio of .88:1 (.88:1 if PCS is sold) for the quarter ended August
26, 2000, increasing to 1.20:1 (1.19:1 if PCS is sold) for the four quarter
period ending June 1, 2002. We also must maintain consolidated EBITDA (as
defined in the senior secured credit facility) of no less than $104.0 million
($81.0 million if PCS is sold) for the quarter ended August 26, 2000,
increasing to $894.0 million ($720.0 million if PCS is sold) for the quarter
period ending June 1, 2002. In addition, our capital expenditures are limited
to $70.0 million ($64.0 million if PCS is sold) for the fiscal quarter ended
August 26, 2000, increasing to $265.0 million ($243.0 million if PCS is sold)
for the quarter period ending June 1, 2002.
Also on June 14, 2000, the Company exchanged certain credit facility debt
with a carrying amount of $284,820 for 51,785,434 shares of the Company's
common stock at $5.50 per share and extended the maturity of its remaining
$2,147,188 of bank debt to August 2002. As a result of the exchange of the
credit facility debt, the Company is expected to record a loss on
extinguishment of $13.3 million in the second quarter of fiscal 2001.
On June 26, 2000 in a separate transaction, the Company exchanged a total of
17,779,000 shares of Rite Aid common stock for $177,790 principal amount of
the 5.25% convertible subordinated notes due 2002. As a result of the
exchange, the Company is expected to record a loss on extinguishment of
approximately $88 million in the second quarter of fiscal 2001.
In the second quarter of fiscal year 2001 the Company entered into interest
rate swap agreements in order to reduce its exposure to floating rate debt.
The contracts extend through June 2002 and effectively fix the rate on $1,000
million of debt at 7.01% through the period.
The Company is currently in negotiations concerning the possible sale of
PCS. The negotiations are on-going and an agreement could be announced at any
time. No agreement has been reached at the time of this filing. No assurance
can be given that an agreement will be reached or that, if an agreement is
entered into, that a sale of PCS will be completed. If no sale transaction is
available on terms we consider acceptable, we intend to continue to own and
operate PCS. Based on the current negotiations, we expect to incur a
substantial loss upon the commitment to sell PCS compared to the acquisition
cost of $1.5 billion. See "Management's Discussion of Results of Operations
and Financial Condition -- General."
24. Restatement of Financial Statements
On June 1, 1999 the Company filed its annual report on Form 10-K which
included its consolidated financial statements covering fiscal years 1997 and
1998 that had been restated to correct certain accounting errors. Subsequent
to this restatement, the Company determined that the errors were greater than
originally discovered and, in its Quarterly Report on Form 10-Q for the second
quarter of fiscal 2000 filed on November 2, 1999, the Company restated its
previously reported interim financial statements and the fiscal year-end
balance sheet as of February 27, 1999.
F-37
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the fiscal year ended February 26, 2000
(Dollars in thousands, except share amounts)
Subsequent to the restatements described in the preceeding paragraph, the
Company determined that additional adjustments are required to correct
numerous errors in the previously issued financial statements. The adjustments
consist of numerous items; however, the principal reasons and significant
effects of the restatement on the accompanying financial statements from
amounts previously reported in the 1999 Annual Report on Form 10-K are
summarized as follows:
As of and for the For the fiscal As of
fiscal year ended year ended March 2,
February 27, 1999 February 27, 1998 1997
------------------------ ----------------- ----------
Increase Increase
(decrease) (decrease) Decrease
Decrease in to results to results in
Retained of of Retained
earnings operators operations earnings
------------ ---------- ----------------- ----------
Purchase accounting..... $ (300,767) $ (133,866) $ (152,060) $ (14,841)
Exit costs and
impairment of operating
and other assets....... (210,319) 44,694 (141,237) (113,776)
Accruals for operating
expenses............... (466,309) (123,143) (81,006) (262,160)
Property, plant, and
equipment.............. (506,210) (110,435) (246,223) (149,552)
Inventory and cost of
goods sold............. (635,995) (438,799) (63,385) (133,811)
Capital leases and sale-
leaseback accounting... (55,428) (13,683) (40,667) (1,078)
Other................... (163,965) (28,869) (31,097) (104,626)
Income taxes............ 727,163 237,933 263,614 225,616
------------ ---------- ---------- ----------
Total................... $ (1,611,830) $ (566,168) $ (492,061) $ (554,228)
============ ========== ========== ==========
A description of the principal adjustments follows:
Purchase Accounting
The Company acquired Thrifty PayLess, Inc. in fiscal 1997 and Harco Inc. and
K&B Incorporated in fiscal 1998. Certain liabilities associated with these
acquisitions that had previously been established have been either reduced or
eliminated with a corresponding decrease in goodwill, to correctly reflect the
fair value of the assets acquired and liabilities assumed at the dates of
acquisition.
Exit Costs and Impairment of Operating and Other Assets
The restated financial statements reflect adjustments to appropriately
recognize charges related to store closures in the period in which the
decision, and ability, to close a store had been made. In addition, other
charges not related to exiting stores and gains from the sale of certain
assets that had previously been recorded ad adjustments to the store exit
liability have been reflected as income or expense in the period in which they
were incurred or realized.
Adjustments have also been made to record impairment charges for stores and
other assets in the period in which the impairment occurred; adn to change the
method used ot evaluate evaluate assets for impairment from a market level to
an individuall store level because this is the lowest level of independent
cash flows ascertainable for purposes of measuring impairment.
Accruals for Operating Expenses
The restated financial statements reflect adjustments to expense certain
operating costs in the period in which they were incurred and to record a
corresponding liability for those items not paid at the end of the period.
Such costs primarily consisted of payroll, vacation pay, incentive
compensation, executive retirement plans, scheduled rent increases, and
certain insurance claims.
Property, Plant, and Equipment
The restated financial statements reflect adjustments to charge certain
items previously capitalized to expense in the period in which they were
incurred. Such items include certain costs for repairs and maintenance,
interest, and internal software development. The adjustments also include
increases in depreciation expense to
F-38
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the fiscal year ended February 26, 2000
(Dollars in thousands, except share amounts)
reverse the effects of retroactive changes made to the useful lives of certain
assets, and to depreciate assets misclassified as construction in-progress.
Inventory and Cost of Goods Sold
The restated financial statements reflect adjustments to inventory and cost
of goods sold related primarily to reverse unearned vendor allowances
previously recorded as a reduction to cost of goods sold; to correctly apply
the retail method of accounting, establish obsolescence reserves, recognize
certain selling costs including promotional markdowns and shrink in the period
in which they were incurred, recognize liabilities for inventory purchases in
the appropriatae periods; and reflect vendor allowances in the inventory
balances.
Lease Obligations
The restated financial that had statements reflect adjustments to recognize
sale-leaseback transactions for certain stores as financing transactions. Such
transactions had previously been accounted for as sales and the leasebacks
were accounted for as operating leases leases. The adjustment to correct these
items resulted in the reversal of the asset sales and the establishment of
lease obligations as capital leases as capital leases . In addition
adjustements were made to record , certain leases previously been accounted
for as operating lease.s
February 27, 1999
--------------------------------------
As Reported in Restatement
1999 Form 10-K Adjustments As Restated
-------------- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash.................................. $ 82,949 $ 4,362 $ 87,311
Accounts receivable, net.............. 749,606 (106,417) 643,189
Inventories, net...................... 2,893,143 (246,157) 2,646,986
Income taxes.......................... -- -- --
Prepaid expenses and other current
assets............................... 76,653 (21,525) 55,128
----------- --------- -----------
Total current assets................ 3,802,351 (369,737) 3,432,614
----------- --------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land.................................. 496,177 313,127 809,304
Buildings............................. 446,048 528,896 974,944
Leasehold improvements................ 1,140,313 (16,219) 1,124,094
Equipment............................. 1,546,738 (154,313) 1,392,425
Property held for sale................ -- -- --
Construction in progress.............. 201,300 90,101 291,401
----------- --------- -----------
3,830,576 761,592 4,592,168
Accumulated depreciation and
amortization......................... 962,523 (15,454) 947,069
----------- --------- -----------
Total property, plant and equipment,
net................................ 2,868,053 777,046 3,645,099
----------- --------- -----------
INTANGIBLE ASSETS:
Excess of cost over underlying equity
in subsidiaries...................... 3,106,582 (898,814) 2,207,768
Other intangible assets............... 440,881 674,210 1,115,091
----------- --------- -----------
Total intangible assets............. 3,547,463 (224,604) 3,322,859
----------- --------- -----------
OTHER ASSETS............................ 203,874 (71,633) 132,241
----------- --------- -----------
Total Assets........................ $10,421,741 $ 111,072 $10,532,813
=========== ========= ===========
F-39
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the fiscal year ended February 26, 2000
(Dollars in thousands, except share amounts)
February 27, 1999
---------------------------------------
As Reported in Restatement
1999 Form 10-K Adjustments As Restated
-------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current
maturities of long-term debt....... $ 1,550,211 $ 52,110 $ 1,602,311
Accounts payable.................... 1,455,516 332,700 1,788,216
Income taxes payable................ 246,833 (136,049) 110,784
Deferred income taxes............... -- 28,045 28,045
Sales and other taxes payable....... 34,464 (520) 33,944
Accrued salaries, wages and other
current liabilities................ 403,454 253,786 657,240
----------- ----------- -----------
Total current liabilities......... 3,690,478 530,062 4,220,540
----------- ----------- -----------
CONVERTIBLE SUBORDINATED NOTES........ 649,991 -- 649,991
LONG-TERM DEBT LESS CURRENT
MATURITIES........................... 2,584,255 (31,964) 2,552,291
CAPITAL LEASE OBLIGATIONS............. 69,994 1,040,184 1,110,178
DEFERRED INCOME TAXES................. 138,327 (57,013) 81,314
OTHER NONCURRENT LIABILITIES.......... 311,405 212,677 524,082
----------- ----------- -----------
Total liabilities................. 7,444,450 1,693,946 9,138,396
----------- ----------- -----------
REDEEMABLE PREFERRED STOCK............ 23,559 -- 23,559
STOCKHOLDERS' EQUITY:
PREFERRED STOCK....................... -- -- --
COMMON STOCK.......................... 258,862 (1) 258,861
ADDITIONAL PAID-IN CAPITAL............ 1,360,219 9,159 1,369,378
RETAINED EARNINGS (DEFICIT)........... 1,334,651 (1,611,830) (277,179)
ACCUMULATED OTHER COMPREHENSIVE
INCOME............................... -- (475) (475)
----------- ----------- -----------
Total stockholders' equity........ 2,953,732 (1,603,147) 1,350,585
----------- ----------- -----------
Total liabilities and
stockholders' equity............. $10,421,741 $ 90,799 $10,512,540
=========== =========== ===========
F-40
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the fiscal year ended February 26, 2000
(Dollars in thousands, except share amounts)
Fiscal Year 1999 Fiscal Year 1998
----------------------------------- -----------------------------------
As Reported As Reported
in 1999 Restatement in 1999 Restatement
Form 10-K Adjustments As Restated Form 10-K Adjustments As Restated
----------- ----------- ----------- ----------- ----------- -----------
REVENUES................ $12,731,900 $ 50,990 $12,782,890 $11,375,105 $ 158,318 $11,533,423
COSTS AND EXPENSES:
Costs of goods sold,
including occupancy
costs................ 9,396,432 347,403 9,743,835 8,290,888 $ 312,430 8,603,318
Selling, general and
administrative
expenses............. 2,639,739 504,843 3,144,582 2,375,636 461,645 2,837,281
Goodwill
amortization......... 44,090 (14,863) 29,227 36,452 (9,972) 26,480
Interest expense...... 194,733 82,493 277,226 159,752 49,400 209,152
Store closing,
impairment and other
charges.............. 257,336 (64,785) 192,551 148,560 148,560
----------- --------- ----------- ----------- --------- -----------
Gain on sales of
stores............... - - - - (52,261) (52,261)
12,532,330 855,091 13,387,421 10,862,728 909,802 11,772,530
----------- --------- ----------- ----------- --------- -----------
Income (loss) before
income taxes....... 199,570 (804,101) (604,531) 512,377 (751,484) (239,107)
INCOME TAXES............ 55,884 (237,933) (182,049) 206,507 (259,423) (52,916)
----------- --------- ----------- ----------- --------- -----------
Net income (loss)... $ 143,686 $(566,168) $ (422,482) $ 305,870 $(492,061) $ (186,191)
=========== ========= =========== =========== ========= ===========
BASIC AND DILUTED
EARNINGS (LOSS) PER
SHARE.................. $ 0.55 $ (2.19) $ (1.64) $ 1.22 $ (1.96) $ (0.74)
=========== ========= =========== =========== ========= ===========
F-41
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(Dollars in Thousands)
Allowances deducted from Additions Additions
accounts receivable Balance at Charged to Charged Balance at
for estimated Beginning Costs and to Other End of
uncollectible amounts: Of Period Expenses Accounts Deductions Period
- ------------------------ ---------- ---------- --------- ---------- ----------
Year ended February 26,
2000................... $40,189 $23,096 $ -- $22,415 $40,870
Year ended February 27,
1999 (c)............... 35,497 16,906 9,229(b) 21,443 19,379
Year ended February 28,
1998 (c)............... 32,561 26,358 1,800(a) 24,222 35,497
- --------
(a) Allowance for estimated uncollectible accounts acquired from Harco, Inc.
and K&B, Incorporated on August 27, 1997.
(b) Allowance for estimated uncollectible accounts acquired from PCS Health
Systems Inc. on January 22, 1999.
(c) As restated, sSee note 24 to the consolidated financial statements.
F-42
EXHIBIT 12
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(dollar amounts in thousands)
Year Ended Year Ended
February 27, February 28,
Year Ended 1999 1998
February 26, (as (as
2000 restated) restated)
------------ ------------ ------------
Fixed Charges:
Interest Expense...................... $ 520,336 $ 277,226 $ 209,152
Interest Portion of Net Rental
Expense(1)........................... 134,934 101,250 81,252
------------ --------- ---------
Fixed Charges Before Capitalized
Interest and Preferred Stock Dividend
Requirements......................... 655,270 378,476 290,404
Preferred Stock Dividend
Requirement(2)....................... 15,554 965 --
Capitalized Interest.................. 5,292 7,069 4,102
------------ --------- ---------
Total Fixed Charges................. $ 676,116 $ 386,510 $ 294,506
------------ --------- ---------
Earnings:
Income Before Income Taxes and
Cumulative Effect of Accounting
Change .............................. $ (1,115,748) $(604,531) $(239,107)
Fixed Charges Before Capitalized
Interest............................. 5670,824 374,441 290,404
------------ --------- ---------
Total Adjusted Earnings............. $ (444924) $(225,090) $ 51,297
------------ --------- ---------
Earnings to Fixed Charges,
Deficiency........................... (1,121,040) (611,600) (243,209)
============ ========= =========
- --------
(1) The Interest Portion of Net Rental Expense is estimated to be equal to
one-third of the minimum rental expense for the period.
(2) The Preferred Stock Dividend Requirement is computed as the pre-tax
earnings that would be required to cover preferred stock dividends.
F-43