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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended March 3, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 1-5742
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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)
Delaware
(State or other jurisdiction of
incorporation or organization)
30 Hunter Lane,
Camp Hill, Pennsylvania
(Address of principal executive offices)
Registrant's telephone number, including area code: (717) 761-2633
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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
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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 common 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 May 14, 2001 was
approximately $2,888,464,506. For purposes of this calculation, executive
officers, directors and 5% shareholders are deemed to be affiliates of the
registrant.
As of May 14, 2001 the registrant had outstanding 394,341,787 shares of
common stock, par value $1.00 per share.
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TABLE OF CONTENTS
Page
----
PART I................................................................... 2
ITEM 1. Business............................................... 2
ITEM 2. Properties............................................. 8
ITEM 3. Legal Proceedings...................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders.... 11
PART II.................................................................. 12
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 12
ITEM 6. Selected Financial Data................................ 14
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risks.................................................. 31
ITEM 8. Financial Statements and Supplementary Data............ 32
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 32
PART III................................................................. 33
PART IV.................................................................. 34
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................... 34
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are identified by terms and phrases such as "anticipate,"
"believe," "intend," "estimate," "expect," "continue," "should," "could,"
"may," "plan," "project," "predict," "will" and similar expressions and
include references to assumptions and relate to our future prospects,
developments and business strategies.
Factors that could cause actual results to differ materially from those
expressed or implied in such forward-looking statements include, but are not
limited to:
o our high level of indebtedness;
o our ability to make interest and principal payments on our debt and
satisfy the other covenants contained in our credit facilities and other
debt agreements;
o our ability to complete the financial restructuring contemplated by our
May 15, 2001 bank commitment letter;
o our ability to improve the operating performance of our existing stores,
and, in particular, our new and relocated stores in accordance with our
management's long term strategy;
o the outcomes of pending lawsuits and governmental investigations, both
civil and criminal, involving our financial reporting and other matters;
o competitive pricing pressures, continued consolidation of the drugstore
industry, 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
o our ability to further develop, implement and maintain reliable and
adequate internal accounting systems and controls.
We undertake no obligation to revise the forward-looking statements included
in this report to reflect any future events or circumstances. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences are discussed in this report
under the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Factors Affecting our Future Prospects"
herein.
1
PART I
Item 1. Business
Overview
We are the second largest retail drugstore chain in the United States based
on store count and the third largest based on sales. We operate our drugstores
in 30 states across the country and in the District of Columbia. As of March
3, 2001, we operated 3,648 stores and had a first or second place market
position in 34 of the 65 major U.S. metropolitan markets in which we operated.
Our stores are an average of 12,663 square feet.
Our headquarters are 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".
During all of the fiscal year ended March 3, 2001 ("fiscal 2001"), we
operated in the retail drug segment and for a portion of fiscal 2001, we also
operated in the pharmacy benefit management ("PBM") segment.
Through our retail drug segment, we sell prescription drugs, sales of which
represented approximately 59.5% of our total sales during fiscal 2001. Our
drugstores filled over 204 million prescriptions during fiscal 2001. Our
drugstores also offer non-prescription medications, health and beauty aids and
personal care items, cosmetics, household items, beverages, convenience foods,
greeting cards, photo processing, seasonal merchandise and numerous other
everyday and convenience products which we refer to as our "front-end
products."
Until October 2, 2000, when we sold it to Advance Paradigm, Inc. (now
AdvancePCS), we owned PCS Health Systems, Inc. ("PCS"), one of the nation's
largest providers of pharmacy benefit management services to employers,
insurance carriers and managed care companies. As a result of the sale, the
PBM segment is reported as a discontinued operation for all relevant periods
in the financial statements included in this Annual Report.
From the beginning of fiscal 1997 until December 1999, we were engaged in an
aggressive expansion program. During that period, we purchased 1,554 stores,
relocated 866 stores, opened 445 new stores, remodeled 308 stores and acquired
PCS. These activities had a significant negative impact on our operating
results, severely strained our liquidity and increased our indebtedness to
$6.6 billion as of February 26, 2000. In October 1999, we announced that we
had identified accounting irregularities and our former chairman and chief
executive officer resigned. In November 1999, our former auditors resigned and
withdrew their previously issued opinions on our financial statements for the
fiscal years 1998 and 1999. Thereafter, investigations were begun by the
Securities and Exchange Commission and the United States Attorney for the
Middle District of Pennsylvania into our affairs. In addition, the complaint
in a securities class action lawsuit, which had been filed in March 1999, was
amended to include allegations based upon the accounting irregularities we
disclosed. In December 1999, new senior management was hired. In response to
the situation we faced, we completed the following:
o Restated our financial statements for fiscal years 1998 and 1999, engaged
new auditors to audit our financial statements for fiscal years 1998,
1999 and 2000, and resumed normal financial reporting;
o Refinanced our near term indebtedness to defer virtually all principal
amortization to no earlier than August 2002;
o Improved our front end same store sales growth from a minus 2.2% in
fiscal 2000 to a positive 6.5% in fiscal 2001 by improving store
conditions and launching a competitive marketing program;
o Reduced our indebtedness by $1.4 billion from $6.6 billion on February
26, 2000 to $5.2 billion on April 28, 2001 with the proceeds from the
sale of PCS and as a result of debt for equity exchanges;
o Curtailed our expansion plans resulting in an approximately $441 million
reduction in capital expenditures from fiscal 2000 to fiscal 2001;
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o Pending court approval, settled the securities class action and related
lawsuits for $45 million to be funded with insurance proceeds and $155
million of common stock, cash and/or notes to be issued and paid in
January 2002; and
o Began development and implementation of a comprehensive plan to address
accounting systems and controls.
o Entered into a bank committment letter to refinance a significant
portion of our indebtedness, see "Recent Event".
Our long term operating strategy is to focus on improving the productivity
of our existing store base. We believe that improving the sales of our
existing stores is important to improving our future profitability and cash
flow. We also believe that the substantial investment made in our store base
over the last five years has given us one of the most modern store bases in
the industry. However, our store base has not yet achieved the level of sales
productivity that our major competitors achieve. We intend to improve the
performance of our existing stores by continuing to (i) capitalize on the
substantial investment in our stores and distribution facilities; (ii) enhance
our customer and employee relationships; and (iii) improve the product
offerings in our stores. Moreover, it is estimated that pharmacy sales in the
United States will increase more than 75% over the next five years. This
anticipated growth is expected to be fueled by the "baby boom" generation
entering their 50's, the increasing life expectancy of the American population
and the introduction of several new successful drugs and inflation. We believe
that this growth will help increase the sales productivity of our existing store
base.
Since the beginning of fiscal 1997, we have opened 466 new stores, relocated
945 stores, generally to larger or free-standing sites, remodeled 406 stores
and closed 1,139 stores. We also acquired 1,554 stores during the same period.
All of our stores are integrated into a common information system. At March 3,
2001, 49.8% of our stores had been constructed, relocated or remodeled since
the beginning of fiscal 1997. Our new and relocated stores are generally
larger and need to develop a critical mass of customers to achieve
profitability, which generally takes two to four years. Therefore, attracting
more customers is a key component of our long term operating strategy. We have
also improved our distribution network to support these new stores by, among
other things, opening two high capacity distribution centers.
We have initiated various programs that are designed to improve our image
with customers. These include our weekly distribution of a nationwide
advertising circular to announce vendor promotions, weekly sales items and, in
our expanded test market, our customer reward program, "Rite Rewards." We have
also initiated programs that are specifically directed to our pharmacy
business. These include reduced cash prices and an increased focus on
attracting and retaining managed care customers. Through the use of technology
and attention to customers' needs and preferences, we are increasing our
efforts to identify inventory and product categories that will enable us to
offer more personalized products and services to our customers. We continue to
develop and implement employee training programs to improve customer service
and educate our employees about the products we offer. We are also developing
employee programs that create compensatory and other incentives for employees
to provide customers with quality service, to promote our private label brands
and to improve our corporate culture.
We continue to add popular and profitable product departments, such as our
General Nutrition Companies, Inc. ("GNC") stores-within-Rite Aid-stores and
one-hour photo development departments. We continue to develop ideas for new
product departments and have begun to implement plans to expand the categories
of our front-end products. During fiscal 2001, we undertook several
initiatives to increase sales of our Rite Aid brand products and generic
prescription drugs. As private label and generic prescription drugs generate
higher margins than branded label, we expect that increases in the sales of
these products would enhance our profitability. We believe that the addition
of new departments and increases in offerings of products and services are
integral components of our strategy to distinguish us from other national
drugstore chains.
Recent Event
On May 16, 2001, we issued a press release announcing the details of a
comprehensive $3.0 billion refinancing package that includes a commitment for
a new $1.9 billion senior secured credit facility fully underwritten by
Citibank NA, J.P. Morgan Chase & Co., Credit Suisse First Boston and Fleet
Retail Finance, Inc. We announced that upon completion of the planned
transactions scheduled to close during our second
3
fiscal quarter, we will have significantly reduced our debt and the amount of
our debt maturing prior to March 2005.
The closing of the new credit facility is subject to the satisfaction of
customary closing conditions and our issuance of approximately $1.05 billion
in new debt or equity securities, of which $527 million, as of May 16, 2001,
has been committed or arranged, as described herein. We plan to raise, at a
minimum, the additional $523 million by issuing equity and fixed income
securities and through real estate mortgage financings in transactions which
are intended to close simultaneously with, and which will be conditioned upon,
the closing of the new credit facility. The new credit facility will be
secured by inventory, accounts receivable and certain other assets owned by
our subsidiaries. The facility will be used to repay our first and second lien
debt, pay expenses associated with the planned refinancing and for general
working capital purposes.
In the $527 million in new debt and equity securities that has already been
committed is a $149 million private placement comprised of 22.7 million shares
of common stock committed on March 22, 2001 at $5.50 per share and 3.8 million
shares of common stock committed on May 2, 2001 at $6.50 per share. The closing
of this equity investment will take place simultaneously with, and is contingent
upon, the completion of the new credit facility.
One of the holders has committed to exchange $152 million of our 10.5% senior
secured notes due 2002 for $152 million of new 12.5% senior secured notes
maturing in 2006. The new notes will be secured by a second lien on the
collateral securing the new credit facility. In connection with the exchange,
the holder will receive five-year warrants to purchase approximately 3.0 million
shares of our common stock at $6.00 per share. The exchange will take place
simultaneously with, and is contingent upon, the closing of the new credit
facility.
We also announced that included in the $527 million that has already been
committed are recently completed or contracted private exchanges of common
stock for $226.2 million of our bank debt and 10.5% senior secured notes due
2002, as described herein.
Once the refinancing transactions are completed, our remaining debt due
before March 2005 will be $152.0 million of our 5.25% convertible subordinated
notes due 2002, $107.8 million of our 6.0% dealer remarketable securities due
2003, $259.2 million of our 10.5% senior secured notes due 2002 and
amortization of the new credit facility. We expect to use internally generated
funds to retire both the 5.25% notes and the dealer remarketable securities at
maturity and to meet the amortization payments under the new credit facility.
We also announced that funds to repay the 10.5% notes at maturity are included
in the new credit facility.
We are being advised on the refinancing by Salomon Smith Barney Inc., J.P.
Morgan Chase & Co. and Credit Suisse First Boston.
The debt and equity securities that we will offer will not be registered
under the Securities Act of 1933, as amended, and may not be offered or sold
in the United States absent registration or an applicable exemption from such
registration requirements.
As described in our May 16, 2001 press release, the completion of the
proposed refinancing of our credit facility is subject to customary closing
conditions, some of which are beyond our control, and also to our ability to
successfully complete the additional financings required by the commitment
letter for the refinancing. While we believe we will successfully complete the
refinancing, there can be no assurance that the refinancing transactions will
be consummated.
Except as set forth herein, this Annual Report does not give effect to the
consummation of the refinancing.
Description of Business
Retail Drug Segment
Our stores sell prescription drugs and a wide assortment of general
merchandise that we call "front-end products," including over-the-counter
medications, health and beauty aids and personal care items, cosmetics,
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greeting cards, household items, convenience foods, photo processing services
and seasonal merchandise. We distinguish our stores from other national chain
drugstores, in part, through our private label brands, our "stores-within-Rite
Aid stores" program with GNC and by our Internet presence through our website,
www.riteaid.com, and the drugstore.com website. Our stores range in size from
approximately 5,000 to 40,000 square feet. The larger stores are concentrated
in the western United States. Substantially all of the stores we have opened
since 1995 are based on our prototype 12,500 square foot freestanding building
and such stores typically include a drive-thru pharmacy.
Products and Services. During fiscal 2001, sales of prescription drugs
represented approximately 59.5% of our total sales. In fiscal years 2001, 2000
and 1999, prescription drug sales were $8.6 billion, $7.8 billion and $6.7
billion, respectively, of our revenues. We sell approximately 24,600 different
types of non-prescription, or front-end, products. No single front-end product
category contributed significantly to our sales during fiscal 2001 although
certain front-end product classes contributed notably to our sales. Our
principal classes of products are the following:
Fiscal Year 2001
Percentage of
Product Class Sales/Revenues
------------- --------------
Prescription drugs ....................... 59.5%
Over-the-counter and personal care ....... 10.9
Health and beauty aids ................... 5.8
General merchandise and other ............ 23.8
We offer over 1,500 products under the Rite Aid private label brand, which
contributed approximately 10.0% of our front-end sales in fiscal 2001. During
fiscal 2001, we added 159 products under our private label. We intend to
increase the number and the sales of our private label brand products.
We have a strategic alliance with GNC under which we plan to open, own and
operate a minimum of 1,000 GNC "stores-within-Rite Aid-stores" across the
country by July 2003. GNC is a leading nationwide retailer of vitamin and
mineral supplements and personal care, fitness and other health-related
products. As of March 3, 2001, we operated 605 GNC stores-within-Rite Aid-
stores. We plan to open 220 GNC stores-within-our-stores during fiscal 2002.
Our strategy is to locate our stores at convenient locations in fast-growing
metropolitan areas. As of March 3, 2001, we have a first or second place
market position in 34 of the 65 major U.S. metropolitan markets in which we
operate. We have significantly reduced our store development program in order
to focus our efforts and resources on improving the operations of our existing
store base. Consistent with our operating strategy, during fiscal 2001, we
opened 9 new stores, relocated 63 stores, remodeled 98 stores and closed 163
stores. Our current plan for fiscal 2002 is to open approximately 6 new
stores, relocate 25 stores and remodel 76 stores. Our fiscal 2002 planned
store openings and relocations are not concentrated in any specific geographic
region.
5
The table below identifies the number of stores by state as of March 3,
2001:
State
----- Store Count
-----------
Alabama................................................... 129
Arizona................................................... 3
California................................................ 598
Colorado.................................................. 31
Connecticut............................................... 45
Delaware.................................................. 26
District of Columbia...................................... 8
Georgia................................................... 52
Idaho..................................................... 22
Indiana................................................... 8
Kentucky.................................................. 124
Louisiana................................................. 96
Maine..................................................... 82
Maryland.................................................. 154
Michigan.................................................. 345
Mississippi............................................... 32
Nevada.................................................... 37
New Hampshire............................................. 40
New Jersey................................................ 177
New York.................................................. 406
Ohio...................................................... 281
Oregon.................................................... 72
Pennsylvania.............................................. 369
Tennessee................................................. 51
Texas..................................................... 5
Utah...................................................... 30
Vermont................................................... 13
Virginia.................................................. 162
Washington................................................ 139
West Virginia............................................. 110
Wyoming................................................... 1
-----
Total.................................................. 3,648
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Technology. All of our stores are integrated into a common information
system, which enables us to fill prescriptions with increased accuracy and
efficiency and that can be expanded to accommodate new stores. Additionally,
each of our stores employs point-of-sale technology that facilitates inventory
replenishment, sales analysis and recognition of customer trends. As of March
3, 2001, we had installed ScriptPro automated pharmacy dispensing units which
are linked to our pharmacists' computers and fill and label prescription drug
orders, in 871 stores. In fiscal 2001, we developed and implemented several
new technologies and applications, including productivity improvements related
to our piece picking and inventory movement management. We also made
modifications to our proprietary pharmacy information system in order to
improve its user interface and information output. We also simplified our cash
register or point of sale processes. Our customers may also order prescription
refills over the Internet through drugstore.com or over the phone through our
telephonic rapid automated refill systems.
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Suppliers. During fiscal 2001, we purchased approximately 93% of the dollar
volume of our prescription drugs from a single supplier, McKesson HBOC, Inc.
under a contract which runs until April 2004. Under the contract, McKesson
HBOC has agreed to sell to us all of our requirements of branded
pharmaceutical products. With limited exceptions, we are required to purchase
all of our branded pharmaceutical products from McKesson HBOC. We purchase
generic (non-brand name) pharmaceuticals from a variety of sources on an
exclusive basis and generic pharmaceutical products on a non-exclusive basis.
If our relationship with McKesson HBOC was disrupted, we could have difficulty
filling prescriptions, which would negatively affect our business. We purchase
our non-pharmaceutical merchandise from numerous manufacturers and
wholesalers. We believe that competitive sources are readily available for
substantially all of the non-pharmaceutical merchandise we carry and that the
loss of any one supplier would not have a material effect on our business.
During fiscal 2001, we made significant efforts to resolve prior issues and
disputes and to improve our relationships with our suppliers and vendors and
we believe these efforts have been successful.
We sell 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 developed by GNC,
and along with our Rite Aid brand vitamin and mineral supplements, are
manufactured by GNC.
Customers. During fiscal 2001, our stores served an average of 1.9 million
customers per day as compared to an average of 1.8 million customers per day
in fiscal 2000. The loss of any one customer would not have a material adverse
impact on our results of operations. No single customer accounted for more
than 10% of our total sales.
Competition. The retail drugstore industry is highly competitive. In the
sale of prescription drugs, we compete with, among others, retail drugstore
chains, independently owned drugstores, mass merchandisers, supermarkets,
discount stores and mail order pharmacies. We compete on the basis of store
location and convenient access, customer service, product selection and price.
Employees. As of March 3, 2001, we had 75,500 employees. Approximately 12%
of these employees are pharmacists. There is a national shortage of
pharmacists. Our management is implementing various employee incentive plans
in order to attract and retain qualified pharmacists. We believe that our
relationships with our employees are good.
Research and Development. We do not make significant expenditures for
research and development.
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.
Regulation
Our 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 we 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. The legislative initiatives include prescription drug benefit
proposals for Medicare participants. Although we believe we are well
positioned to respond to these developments, we cannot predict the outcome or
effect of legislation resulting from these reform efforts. Also, in recent
years, both 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.
7
PBM Segment
On October 2, 2000, we consummated the sale of PCS to Advance Paradigm (now
known as AdvancePCS) for $710.5 million in cash, equity securities of
AdvancePCS and AdvancePCS's $200.0 million 11% promissory notes. In March
2001, we sold the AdvancePCS equity securities in an underwritten public
offering for a total of $284.1 million (net of selling commissions) and
AdvancePCS paid the promissory note in full plus accrued and unpaid interest.
We applied $1,093.5 million of the proceeds from the sale of PCS to reduce our
debt. We recorded a loss on disposal of $168.8 million in fiscal 2001 as a
result of the sale.
Item 2. Properties
We own our corporate headquarters, which are 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 3,358 of our drugstore
facilities under non-cancelable leases, many of which have original terms of
10 to 22 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 our leases contain renewal options, some of which involve rent
increases.
As of March 3, 2001, we operated 3,648 retail drugstores. The overall
average size of each store in our chain is 12,663 square feet. The stores on
the east coast average 9,502 square feet per store. The west coast stores
average 20,802 square feet per store. The central stores average 10,323 square
feet per store.
We operate the following distribution centers and overflow storage
locations, which we own or lease as indicated:
Approximate
Owned or Square
Location Leased Footage
-------- ------ -------
Rome, New York ........................... Owned 291,000
Rome, New York(1) ........................ Leased 71,400
Utica, New York(1) ....................... Leased 115,000
Poca, West Virginia ...................... Owned 264,000
Dunbar, West Virginia(1) ................. Leased 61,000
South Nitro, West Virginia(1) ............ Leased 50,000
Perryman, Maryland ....................... Leased 885,000
Tuscaloosa, Alabama ...................... Owned 238,000
Tuscaloosa, Alabama(1) ................... Leased 27,000
Cottondale, Alabama(1) ................... Leased 125,000
Pontiac, Michigan ........................ Owned 362,000
Woodland, California ..................... Owned 521,300
Woodland, California(1) .................. Leased 200,000
Wilsonville, Oregon ...................... Leased 518,000
Lancaster, California .................... Leased 917,000
- ---------------
(1) Overflow storage locations.
The original terms of the leases for our 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.
We also own a 52,200 square foot ice cream manufacturing facility located in
El Monte, California.
On a regular basis and as part of our normal business, we evaluate store
performance and may reduce its size, close or relocate a store if the store is
redundant, under performing or otherwise deemed unsuitable. When we reduce in
size, close or relocate a store, we often continue to have leasing obligations
or own the property, but we attempt to sublease the space. As of March 3,
2001, we subleased 5,558,000 square feet of space and an additional 4,019,000
square feet of space in closed or relocated stores was not subleased.
8
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. We are cooperating fully with the SEC
and the United States Attorney.
The U.S. Department of Labor has commenced an investigation of matters
relating to our employee benefit plans, including our principal 401(k) plan,
which permitted employees to purchase our common stock. Purchases of our
common stock under the plan were suspended in October 1999. In January 2001,
we appointed an independent trustee to represent the interests of these plans
in relation to us and to investigate possible claims the plans may have
against us. Both the independent trustee and the Department of Labor have
asserted that the plans may have claims against us. The investigations, with
which we are cooperating fully, are ongoing and we cannot predict their
outcomes. In addition, a purported class action lawsuit on behalf of the plans
and their participants has been filed by a participant in the plans in the
United States District Court for the Eastern District of Pennsylvania.
These investigations are ongoing and we cannot predict their outcomes. If we
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 us could also
have a material adverse effect on our results of operations, financial
condition and cash flows.
Stockholder Litigation
We, certain of our directors, our former chief executive officer Martin
Grass, our former president Timothy Noonan, our former chief financial officer
Frank Bergonzi, and our former auditor KPMG LLP, have been sued in a number of
actions, most of which purport to be class actions, brought on behalf of
stockholders who purchased our securities on the open market between May 2,
1997 and November 10, 1999. All of these cases have been consolidated in the
U.S. District Court for the Eastern District of Pennsylvania. On November 9,
2000, we announced that we had reached an agreement to settle the consolidated
securities class action lawsuits pending against us in the U.S. District Court
for the Eastern District of Pennsylvania and the derivative lawsuits pending
there and in the Delaware Court of Chancery. Under the agreement, which has
been submitted to the U.S. District Court for the Eastern District of
Pennsylvania for approval, we will pay $45 million in cash, which will be
fully funded by our officers' and directors' liability insurance, and issue
shares of common stock in 2002. The shares will be valued over a 10 day
trading period in January 2002. If the value determined is at least $7.75 per
share, we will issue 20 million shares. If the value determined is less than
$7.75 per share, we have the option to deliver any combination of common
stock, cash and short-term notes, with a total value of $155 million. As
additional consideration for the settlement, we have assigned to the
plaintiffs all of our claims against the above named executives and KPMG LLP.
Several members of the class have elected to "opt-out" of the class and, as a
result, if the settlement is approved by the court, they will be free to
individually pursue their claims. Management believes that their claims,
individually and in the aggregate, are not material.
9
Drug Pricing and Reimbursement Matters
On October 5, 2000, we settled, for an immaterial amount, and without
admitting any violation of the law, the lawsuit filed by the Florida Attorney
General alleging that our non-uniform pricing policy for cash prescription
purchases was unlawful under Florida law.
The filing of the complaint by the Florida Attorney General, and our press
release issued in conjunction therewith, precipitated the filing of a
purported federal class action in California and several purported state class
actions, all of which (other than those pending in New York that were filed on
October 5, 1999 and those pending in California that were filed on January 3,
2000) have been dismissed. A motion to dismiss the action in New York is
currently pending. We believe that the remaining lawsuits are without merit
under applicable state consumer protection laws. As a result, we intend to
continue to vigorously defend against them and we do not anticipate that if
fully adjudicated, they will result in an award of damages. However, such
outcomes cannot be assured and a ruling against us could have a material
adverse effect on the financial position and results of operations of the
company as well as necessitate substantial additional expenditures to cover
legal costs as we pursue all available defenses.
We are being investigated by multiple state attorneys general for our
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. We believe 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. We also believe that our existing policies and
procedures fully comply with the requirements of applicable law and intend to
fully cooperate with these investigations. We cannot, however, predict their
outcomes at this time.
An individual acting on behalf of the United States of America, has filed a
lawsuit in the United States District Court for the Eastern District of
Pennsylvania under the Federal False Claims Act alleging that we defrauded
federal health care plans by failing to appropriately issue refunds for
partially filled prescriptions and prescriptions which were not picked up by
customers. The Department of Justice has not decided whether to join this
lawsuit, as is its right under the law, and its investigation is continuing.
We have filed a motion to dismiss the complaint for failure to state a claim.
If any of these cases result in a substantial monetary judgment against us
or is settled on unfavorable terms, our results of operations, financial
position and cash flows could be materially adversely affected.
Store Management Overtime Litigation
We are a defendant in a class action pending in the California Superior
Court in San Diego with three subclasses, comprised of our California store
managers, assistant managers and managers-in-training. The plaintiffs seek
back pay for overtime not paid to them and injunctive relief to require us to
treat our store management as non-exempt. They allege that we decided to
minimize labor costs by causing managers, assistant managers and managers-in-
training to perform the duties and functions of associates for in excess of
forty hours per week without paying them overtime. We believe that in-store
management were and are properly classified as exempt from the overtime
provisions of California law. We have filed a motion to decertify the class
which is currently pending. Our results of operations and financial position
could be materially adversely affected by an adverse judgment in this matter.
Other
We are subject from time to time to lawsuits arising in the ordinary course
of business. In the opinion of our management, these matters are adequately
covered by insurance or, if not so covered, are without merit or are of such
nature or involve amounts that would not have a material adverse effect on our
financial condition, results of operations or cash flows if decided adversely.
10
Item 4. Submission of Matters to a Vote of Security Holders
On December 6, 2000, we held our 2000 Annual Meeting of Stockholders. At the
2000 Annual Meeting, our stockholders:
1. Elected three directors to hold office until the Annual Meeting of
Stockholders in 2003 by the following votes:
(a) William J. Bratton ................... For: 313,733,384* Against: 70,375 Abstain: 7,560,123
(b) Stuart M. Sloan ...................... For: 314,415,440* Against: 65,175 Abstain: 6,883,267
(c) Jonathan D. Sokoloff ................. For: 314,366,614* Against: 70,375 Abstain: 6,926,893
Following the 2000 Annual Meeting of Stockholders, the following persons
continued to serve as our Directors: Robert G. Miller, Alfred M. Gleason, Alex
Grass (resigned January 4, 2001), Leonard I. Green, Nancy A. Lieberman, Mary
F. Sammons, Leonard N. Stern and Gerald Tsai, Jr.
2. Approved, adopted and ratified our 2000 Omnibus Equity Plan by the
following vote:
For: 156,023,933* Against: 22,955,892 Abstain: 2,323,130
3. Declined to adopt a stockholder proposal to sell our company to the
highest bidder by the following vote:
For: 17,029,174 Against: 160,168,193* Abstain: 4,126,718
4. Declined to adopt a stockholder proposal requesting that our management
prepare and make public an employment diversity report by the following vote:
For: 12,121,942 Against: 163,783,162* Abstain: 5,397,853
5. Declined to adopt a stockholder proposal to declassify our Board of
Directors by the following vote:
For: 23,303,172 Against: 153,228,708* Abstain: 4,768,656
An asterisk "*" indicates that the results include 58,722,800 votes cast in
respect of all of the outstanding shares at the time of the 2000 Annual
Meeting of Stockholders of our 8% series B cumulative convertible pay-in-kind
preferred stock.
There were 140,060,927; 140,039,797; 140,060,925; and 140,063,346 broker
non-votes for each of Item 2, Item 3, Item 4 and Item 5, respectively.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York and Pacific Stock Exchanges under
the symbol "RAD". On May 4, 2001, we had approximately 11,719 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 Year Quarter High Low Dividend
----------- ------- ---- --- --------
2002 (through May 18, 2001).............. First 9 5 1/4 --
2001..................................... First 8 1/2 4 3/4 --
Second 8 1/2 4 --
Third 4 3/8 2 7/16 --
Fourth 6 3/32 1 3/4 --
2000..................................... First 41 3/4 21 $.1150
Second 26 15/16 17 1/2 $.1150
Third 20 1/8 4 1/2 $.1150
Fourth 13 1/4 6 3/8 --
We have not declared or paid any cash dividends on our common stock since
the third quarter of fiscal 2000 and we do not anticipate paying cash
dividends in the foreseeable future. Our credit facilities do not allow us to
pay cash dividends and we anticipate that any credit facility we enter into in
connection with a refinancing of our indebtedness will not allow us to pay
cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Credit Facilities and Debt
Restructuring."
Recent sales of unregistered securities. On October 27, 1999, we sold to
Green Equity Investors III, L.P. 3,000,000 shares of our series A cumulative
convertible pay-in-kind 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 our 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 votes with the holders of our common
stock and each holder of series B preferred stock has one vote for each share
of the common stock issuable upon conversion of the holder's series B
preferred stock. The holders of our series B preferred stock are also entitled
to vote separately as a class to elect two directors to our Board of
Directors. Leonard I. Green and Jonathan D. Sokoloff are the series B
directors. When issued, the series B preferred stock was convertible into
shares of our common stock at a conversion price of $11.00 per share subject
to adjustment. As a result of the exchange of our bank debt for shares of our
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, we issued a warrant to J.P. Morgan Ventures
Corporation, an affiliate of J.P. Morgan, to purchase 2,500,000 shares of our
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 our
PCS and RCF facilities in October 1999.
On June 14, 2000, certain lenders, including J.P. Morgan Ventures
Corporation, exchanged an aggregate of $284.8 million of their loans
outstanding under the PCS credit facility, the RCF credit facility and the
$300.0 million demand note into an aggregate of 51,785,434 shares of our
common stock at an exchange rate of $5.50 per share.
On June 14, 2000, we issued $374.3 million of our 10.5% senior secured notes
due 2002 in exchange for $52.5 million of our outstanding 5.5% notes due
December 2000 and $321.8 million of our outstanding 6.7% notes due December
2001. We also entered into an agreement with J.P. Morgan and another 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.
12
The series A preferred stock, the series B preferred stock, the warrant, the
10.5% senior secured notes due 2002 and our common stock issued in exchange
for certain of our bank debt were issued in transactions exempt from
registration in reliance on Section 4(2) of the Securities Act.
On June 26, 2000, the holders of approximately $177.8 million principal
amount of our 5.25% convertible subordinated notes due 2002 exchanged these
notes for an aggregate of 17,779,000 shares of our common stock. The common
stock was issued in a privately negotiated transaction exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
On November 10, 2000, the holders of approximately $79.9 million principal
amount of our 5.25% convertible subordinated notes due 2002 and $12.3 million
principal amount of our 6.0% dealer remarketable securities due 2003 exchanged
these notes for an aggregate of 9,222,200 shares of our common stock. The
common stock was issued in a privately negotiated transaction exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
On January 23, 2001, the holders of approximately $5.5 million principal
amount of our 6.0% senior notes due 2005 and $2.0 million principal amount of
our 7.625% senior notes due 2005 exchanged these notes for an aggregate of
862,500 shares of our common stock. The common stock was issued in a privately
negotiated transaction exempt from registration in reliance on Section 3(a)(9)
of the Securities Act.
On January 26, 2001, the holders of approximately $15.0 million principal
amount of our 5.25% convertible subordinated notes due 2002 exchanged these
notes for an aggregate of 1,875,000 shares of our common stock. The common
stock was issued in a privately negotiated transaction exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
On January 30, 2001, the holders of approximately $20.0 million principal
amount of our 5.25% convertible subordinated notes due 2002 exchanged these
notes for an aggregate of 2,600,000 shares of our common stock. The common
stock was issued in a privately negotiated transaction exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
On March 14, 2001, the holders of approximately $201.4 million principal
amount of our 5.25% convertible subordinated notes due 2002 exchanged these
notes for an aggregate of 29,204,160 shares of our common stock. The common
stock was issued in an exchange offer exempt from registration in reliance on
section 3(a)(9) of the Securities Act.
On March 14, 2001, the holders of approximately $77.9 principal amount of
our 6.0% dealer remarketable securities due 2003 exchanged these notes for an
aggregate of 12,072,175 shares of our common stock. The common stock was
issued in an exchange offer exempt from registration in reliance on Section
3(a)(9) of the Securities Act.
On April 6, 2001, the holders of approximately $3.9 million principal amount
of our 5.25% convertible subordinated notes due 2002 and $2.0 million
principal amount of our 6.0% dealer remarketable securities due 2003 exchanged
these notes for an aggregate of 856,000 shares of our common stock. The common
stock was issued in a privately negotiated transaction exempt from
registration in reliance on Section 3(a)(9) of the Securities Act.
The following described transactions make up the $527 million in new equity
and debt securities we have committed to issue or have issued as of May 16,
2001 in connection with the refinancing plan we announced on May 16, 2001 and
which is described under the caption "Recent Event" in Item 1 of this Annual
Report.
o On March 22 and May 2, 2001, respectively, we agreed to issue 22.7
million and 3.8 million shares of common stock at $5.50 and $6.50 per
share, respectively (an aggregate of $149.6 million). The shares of
common stock will be issued in a transaction exempt from registration in
reliance on Section 4(2) of the Securities Act.
o On April 25, 2001, the holders of approximately $11.0 million principal
amount of our 10.5% senior secured notes due 2002 exchanged these notes
for an aggregate of 1,925,000 shares of our common
13
stock. The common stock was issued in a privately negotiated transaction
exempt from registration in reliance on Section 3(a)(9) of the Securities
Act.
o On April 25, 2001, the holders of approximately $5.0 million principal
amount of our 10.5% senior secured notes due 2002 exchanged these notes
for an aggregate of 785,000 shares of our common stock. The common stock
was issued in a privately negotiated transaction exempt from registration
in reliance on Section 3(a)(9) of the Securities Act.
o On April 27, 2001, we agreed with (i) holders of our RCF credit facility
to exchange $10.0 million principal amount of indebtedness under the RCF
credit facility, and (ii) holders of our PCS credit facility to exchange
$5.0 million principal amount of indebtedness under the PCS credit
facility, for an aggregate of 2,144,936 shares of our common stock. The
common stock will be issued in a transaction exempt from registration in
reliance on Section 4(2) of the Securities Act.
o As amended on April 30, 2001, pursuant to an agreement entered into on
April 12, 2001, we agreed to exchange approximately $132.7 million
principal amount of indebtedness under our RCF credit facility for
21,216,772 shares of our common stock. The shares of common stock will be
issued in a transaction exempt from registration in reliance on Section
4(2) of the Securities Act.
o On May 2, 2001, holders of our RCF credit facility agreed to exchange
$10.0 million principal amount of indebtedness for an aggregate of
1,443,814 shares of our common stock. The shares of common stock will be
issued in a transaction exempt from registration in reliance on Section
4(2) of the Securities Act.
o On May 15, 2001, a holder of our RCF credit facility exchanged $10.0
million principal amount of indebtedness under the credit facility for an
aggregate of 1,473,405 shares of our common stock. The common stock was
issued in a transaction exempt from registration in reliance on Section
4(2) of the Securities Act.
o On May 16, 2001, we agreed to issue five year warrants to purchase
approximately 3.0 million shares of common stock at $6.00 per share.
These warrants will be issued in connection with the exchange by a
holder of $152.0 million of our 10.5% senior secured notes due 2002 for
a like principal amount of new 12.5% senior secured notes due 2006. The
warrants will be issued in a privately negotiated transaction exempt
from registration in reliance on Sections 3(a)(9) of the Securities
Act.
o We have also committed in three additional transactions to issue shares
of our common stock in exchange for an aggregate of $40.3 million of our
10.5% senior secured notes due 2002 and $2.2 million of our RCF credit
facility. The number of shares to be issued in each transaction will
depend on the average price of our common stock in the pricing period
contained in the agreement relating to the transaction. The shares of
common stock will be issued in privately negotiated transactions exempt
from registration in reliance on Section 3(a)(9) and Section 4(2),
respectively, of the Securities Act.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and related
notes appearing on pages F-1 through F-40. Selected financial data is
presented for four fiscal years. As previously discussed in our 10-K/A dated
October 11, 2000, substantial time, effort and expense was required over a six
month period to review, assess, reconcile, prepare and audit our financial
statements for fiscal 2000, fiscal 1999 and fiscal 1998. We believe it would
require an unreasonable effort and expense to conduct a similar process
related to fiscal year 1997. Certain reclassifications have been made to prior
years' amounts to conform to current year classifications.
14
Fiscal Year Ended
--------------------------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999 February 28, 1998
(53 weeks) (52 weeks) (52 weeks) (52 weeks)
------------- ----------------- ----------------- -----------------
(In thousands, except per share amounts and other data)
Summary of Operations:
REVENUES ............................................ $ 14,516,865 $ 13,338,947 $ 12,438,442 $ 11,352,637
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs ...... 11,151,490 10,213,428 9,406,831 8,419,021
Selling, general and administrative expenses ....... 3,458,307 3,607,810 3,200,563 2,773,560
Goodwill amortization .............................. 20,670 24,457 26,055 26,169
Store closing and impairment charges ............... 388,078 139,448 195,359 155,024
Interest expense ................................... 649,926 542,028 274,826 202,688
Loss on debt conversions and modifications ......... 100,556 -- -- --
Share of loss from equity investments .............. 36,675 15,181 448 1,886
Gain on sale of fixed assets ....................... (6,030) (80,109) -- (52,621)
------------ ------------ ------------ ------------
15,799,672 14,462,243 13,104,082 11,525,727
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes
and cumulative effect of accounting change........ (1,282,807) (1,123,296) (665,640) (173,090)
INCOME TAX EXPENSE (BENEFIT) ........................ 148,957 (8,375) (216,941) (28,064)
Loss from continuing operations before cumulative
effect of accounting change....................... (1,431,764) (1,114,921) (448,699) (145,026)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
including income tax expense (benefit) of $13,846,
$30,903, $(5,925) and $(10,885).................... 11,335 9,178 (12,823) (20,214)
Loss on disposal of discontinued operations, net of
tax benefit of $734............................... (168,795) -- -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net of
income tax benefit of $18,200...................... -- (27,300) -- --
------------ ------------ ------------ ------------
Net loss.......................................... $ (1,589,224) $ (1,133,043) $ (461,522) $ (165,240)
============ ============ ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations................... $ (5.15) $ (4.34) $ (1.74) $ (0.58)
Income (loss) from discontinued operations ......... (0.50) 0.04 (0.05) (0.08)
Cumulative effect of accounting change, net ........ -- (0.11) -- --
------------ ------------ ------------ ------------
Net loss per share................................. $ (5.65) $ (4.41) $ (1.79) $ (0.66)
============ ============ ============ ============
Year-End Financial Position:
Working capital (deficit)......................... $ 1,955,877 $ 752,657 $ (892,115) $ 1,258,580
Property, plant and equipment (net)............... 3,041,008 3,445,828 3,328,499 2,460,513
Total assets...................................... 7,913,911 9,845,566 9,778,451 7,392,147
Total debt ....................................... 5,894,548 6,612,868 5,922,504 3,132,894
Redeemable preferred stock........................ 19,457 19,457 23,559 --
Stockholders' equity.............................. (354,435) 432,509 1,339,617 1,898,203
Other Data:
Cash dividends declared per common share.......... $ 0 $ .3450 $ .4375 $ .4075
Basic weighted average shares..................... 314,189,000 259,139,000 258,516,000 250,659,000
Diluted weighted average shares................... 314,189,000 259,139,000 258,516,000 250,659,000
Number of retail drugstores....................... 3,648 3,802 3,870 3,975
Number of employees............................... 75,500 77,300 89,900 83,000
(Footnotes on next page)
15
- ---------------
(1) PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS. See
"Business--PBM Segment." Accordingly, our PBM segment is reported as a
discontinued operation for all periods presented. See note 24 of the notes
to the consolidated financial statements.
(2) K&B, Incorporated and Harco, Inc. were acquired in August 1997.
(3) Total debt includes capital lease obligations of $1.1 billion, $1.1
billion, $1.1 billion and $622 million as of March 3, 2001, February 26,
2000, February 27, 1999 and February 28, 1998, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Management believes that the following matters should be considered in
connection with the discussion of results of operations and financial
condition:
Recent Actions Affecting Operating Results. During fiscal 2001, we took a
number of actions which had the short term effect of significantly reducing
our operating results but which management believes were nevertheless
necessary. Among the actions taken were: (i) the sale of PCS which resulted in
our recognizing a loss of $168.8 million and an increase in income tax expense
of $146.9 million; (ii) the exchange of approximately $597.3 million of our
debt for shares of our common stock which resulted in a net loss of $100.6
million; (iii) our decision to close or relocate certain stores that resulted
in an approximate $149.2 million charge included in the $388.1 million
recorded charges for store closures and impairment; and (iv) the restatement
and audit of our fiscal 1999 and 1998 financial statements and the related
investigation conducted by our audit committee of prior accounting
irregularities resulted in our incurring and recording of $82.1 million of
accounting and legal expense. We anticipate taking similar actions in the
future that may have a material negative impact upon our operating results for
the period in which we take those actions or subsequent periods. We also
expect to incur significant costs and fees in connection with the refinancing
described under "Recent Event".
Maturing Store Base. Since the beginning of fiscal 1997, we built 466 new
stores, relocated 945 stores, remodeled 406 and closed 1,139 stores. These
new, relocated and remodeled stores represented approximately 49.8% of our
total stores at March 3, 2001 and are generally larger, free standing stores
and have 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 and four years. This period can vary significantly based on the
location of a particular store and on other factors, including the investments
made in purchasing prescription files for the location and advertising. Our
recent liquidity constraints have limited our ability to purchase prescription
files and make other investments to promote the development of our new and
relocated stores. We believe that our relatively high percentage of new and
relocated stores is a significant factor in our recent operating results.
Management believes that as these newer stores mature they should gain the
critical mass of customers needed for profitable operations. We believe this
continuing maturation should positively affect our operating performance in
future periods. If we are not able to improve the performance of these new and
relocated stores, it will have a material adverse effect on our ability to
restore the profitability of our operations.
Substantial Investigation Expenses. We have incurred substantial expenses
in connection with the process of reviewing and reconciling our books and
records, restating our 1998 and 1999 financial statements, investigating our
prior accounting practices and preparing our financial statements. Included in
these expenses are the costs of the Deloitte & Touche LLP audits, the
investigation by the law firm of Swidler, Berlin, Shereff, Friedman, assisted
by Deloitte & Touche LLP, conducted for our audit committee concerning the
accounting irregularities which led to the restatement of our financial
statements for our 1999 and 1998 fiscal years and the costs of retaining
Arthur Andersen LLP to assist management in reviewing and reconciling our
books and records. We incurred $82.1 million in fiscal 2001 and we expect to
incur $10.0 million to $15.0 million in fiscal 2002. We anticipate that we
will continue to incur significant legal and other expenses in connection with
the ongoing litigation and investigations to which we are subject.
16
Dilutive Equity Issuances. In June 2000, we 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 our common stock were issued in exchange for $462.6
million principal amount of our outstanding indebtedness. In addition, in
November 2000, January 2001 and April 2001, we completed numerous privately
negotiated transactions, and in connection with these transactions, an
aggregate total of 18,125,700 shares of our common stock were issued in
exchange for approximately $156.6 million principal amount of our outstanding
indebtedness. In March 2001, we also exchanged approximately $279.3 million
principal amount of outstanding indebtedness for an aggregate of 41,276,335
shares of our common stock upon completion of a public tender offer. As a
result of these exchanges, we recorded an aggregate loss on conversion of
approximately $100.6 million in fiscal 2001 and will record additional losses
in fiscal 2002. In addition, pursuant to the conversion price adjustment and
pay-in-kind dividend provisions of the series B convertible preferred stock
issued to Green Equity Investors III, L.P. in October 1999, 61,095,219 shares
of our common stock were issuable upon the conversion of such preferred stock
at March 31, 2001. Assuming the transactions which occurred subsequent to
March 3, 2001 and prior to May 4, 2001 had occurred on March 3, 2001, the
common shares outstanding would have increased from 348,055,000 to
392,868,382. In light of our substantial leverage and liquidity constraints,
we will continue to consider opportunities to use our equity securities to
discharge debt or other obligations that may arise. Such issuances will have a
dilutive effect on the outstanding shares of our common stock.
Accounting Systems. Following its review of our books and records,
management concluded that further steps were needed to establish and maintain
the adequacy of our internal accounting systems and controls. In connection
with the audit of our financial statements, Deloitte & Touche LLP advised us
that it believed there were numerous "reportable conditions" under the
standards established by the American Institute of Certified Public
Accountants which relate to our accounting systems and controls and could
adversely affect our ability to record, process, summarize and report
financial data consistent with the assertions of management in the financial
statements. We are developing and implementing comprehensive, adequate and
reliable accounting systems and controls which address the reportable
conditions identified by Deloitte & Touche LLP.
Sale of PCS. On October 2, 2000, we sold PCS, our PBM segment, to Advance
Paradigm (now AdvancePCS). The selling price of PCS consisted of $710.5
million in cash, $200.0 million in principal amount of AdvancePCS's 11%
promissory notes and AdvancePCS equity securities. Accordingly, the PBM
segment is reported as a discontinued operation for all periods presented in
the accompanying financial statements, and the operating income of the PBM
segment through October 2, 2000, the date of sale, is reflected separately
from the income from continuing operations. The loss on disposal of the PBM
segment was $168.8 million. Additionally, we recorded an increase to the tax
valuation allowance and income tax expense of $146.9 million in the first
quarter of fiscal 2001 in continuing operations.
Working Capital. We generally finance our inventory and capital expenditure
requirements with internally generated funds and borrowings. We expect to use
borrowings to finance inventories and to support our continued growth. Over
75% of our front-end sales are in cash. Third-party insurance programs, which
typically settle in fewer than 30 days, accounted for 90.3% of our pharmacy
sales and 53.7% of our revenues in fiscal 2001.
Seasonality. We experience seasonal fluctuations in our results of operations
in the fourth quarter as the result of the seasonal nature of Christmas and the
flu season. We tailor certain front-end merchandise to capitalize on holidays
and seasons.
17
Results of Operations
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
(dollars in thousands)
Sales..................................................... $14,516,865 $13,338,947 $12,438,442
Sales growth.............................................. 8.8% 7.2% 9.6%
Same store sales growth................................... 9.1% 7.9% 15.5%
Pharmacy sales growth..................................... 8.7% 15.6% 18.2%
Same store pharmacy sales growth.......................... 10.9% 16.2% 21.9%
Pharmacy as a % of total sales............................ 59.5% 58.4% 54.2%
Third-party sales as a % of total pharmacy sales.......... 90.3% 87.8% 85.4%
Front-end sales growth.................................... 3.8% (2.6)% 0.8%
Same store front-end sales growth......................... 6.5% (2.2)% 6.6%
Front-end as a % of total sales........................... 40.5% 41.6% 45.8%
Store data:
Total stores (beginning of period) ...................... 3,802 3,870 3,975
New stores .............................................. 9 77 163
Closed stores ........................................... (163) (181) (330)
Store acquisitions, net ................................. -- 36 62
Total stores (end of period) ............................ 3,648 3,802 3,870
Remodeled stores ........................................ 98 14 155
Relocated stores ....................................... 63 180 331
Sales
The 8.8% growth in revenues in fiscal 2001 is driven by an increase of 3.8%
in front-end sales, an increase of 8.7% in pharmacy sales and the additional
week in fiscal 2001. Our total revenues growth in fiscal 2000 of 7.2 % was
fueled by strong growth in pharmacy sales, offset by a slight decline in front
end sales. Same store sales growth for fiscal 2001 was 9.1%. As fiscal 2001
was a 53 week year, same store sales are calculated by comparing the 53 week
period ending March 3, 2001 with the 53 week period ending March 4, 2000.
For fiscal 2001 and 2000, pharmacy revenues led sales growth with same store
sales increases of 10.9% and 16.2%, respectively. Fiscal 2001 increases were
generated by our ability to attract and retain managed care customers, our
successful pilot markets for reduced cash pricing, our increased focus on
pharmacy initiatives such as will call and predictive refill, and favorable
industry trends. These favorable trends include an aging population, the use
of pharmaceuticals to treat a growing number of healthcare problems, and the
introduction of a number of successful new prescription drugs. Fiscal 2000
pharmacy increases were driven by favorable industry trends, as well as the
purchase of prescription files from independent pharmacies.
The lower growth in same store pharmacy sales in fiscal 2001 was due
primarily to a significant reduction in the number of prescription files we
purchased and store relocations we effected. The lower growth in fiscal 2000
was due primarily to a reduction as compared to fiscal 1999 in the number of
relocations effected.
Same store front-end sales, which includes all non-prescription sales, such
as seasonal merchandise, convenience items, and food and other non-
prescription sales, increased 6.5% from fiscal 2000. This increase was fueled
by the reinstatement of our weekly circular advertising program, and was also
driven by strong performance in seasonal businesses, consumables, vitamins,
general merchandise and private brands. Same store front-end sales in fiscal
2000 decreased 2.2% from fiscal 1999 levels. This decrease was due to elevated
levels of out-of-stock merchandise in the 3rd and 4th quarters of fiscal 2000,
and the decision of former management to suspend the weekly advertising
program in fiscal 2000 and to raise front-end prices to levels that were not
competitive.
18
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
(dollars in thousands)
Costs of goods sold ............................................................ $11,151,490 $10,213,428 $9,406,831
Gross margin ................................................................... 23.2% 23.4% 24.4%
Selling, general and administrative expenses ................................... $ 3,458,307 $ 3,607,810 $3,200,563
Selling, general and administrative expenses as a percentage of revenues ....... 23.8% 27.0% 25.7%
Goodwill amortization .......................................................... $ 20,670 $ 24,457 $ 26,055
Store closing and impairment charges ........................................... 388,078 139,448 195,359
Interest expense ............................................................... 649,926 542,028 274,826
Loss on debt conversions and modifications ..................................... 100,556 -- --
Share of loss from equity investments .......................................... 36,675 15,181 448
Gain on sale of fixed assets ................................................... (6,030) (80,109) --
Cost of Goods Sold
Gross margin was 23.2% for fiscal 2001 compared to 23.4% in fiscal 2000. The
slight decline in margin is attributable to a shifting in sales mix to
pharmacy from front-end. In fiscal 2001, the percentage of front-end sales to
total sales decreased to 40.5% from 41.6% in 2000. Also contributing to the
lower margin in 2001 was an increase in sales of cigarettes and liquor as a
percentage of front-end sales. Additionally, we incurred $17.5 million in
inventory liquidation losses related to our closed stores. Partially
offsetting the items above was an improvement in the margin of front-end goods
(exclusive of cigarettes and liquor). These increases resulted from a more
profitable product mix, and from increases in the levels of one-hour photo and
phone card sales.
Gross margin declined to 23.4% in fiscal 2000 from 24.4% in fiscal 1999. The
decline in gross margin in fiscal 2000 from fiscal 1999 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. We incurred significant costs in fiscal 2000 in connection with
the 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 2000 were improved
store level margins for front-end and pharmacy sales.
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 sales were 59.5%, 58.4% and 54.2% in fiscal 2001, 2000 and
1999, respectively and third-party sales as a percentage of pharmacy sales
were 90.3%, 87.8%, and 85.4% in fiscal 2001, 2000 and 1999, respectively.
We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO
charge was $40.7 million in fiscal 2001, $34.6 million in fiscal 2000 and
$36.5 million in fiscal 1999. We have changed our 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 23.8% of sales in
fiscal 2001, 27.0% in fiscal 2000 and 25.7% in fiscal 1999. SG&A expenses for
2001 were favorably impacted by a $20.0 million increase in estimated
insurance recovery related to the settlement of the shareholder's class action
lawsuit, and by $20.0 million received related to the partial settlement of
litigation with certain drug manufacturers. Offsetting these items was $82.1
million incurred in connection with the restatement of our
19
historical financial statements, and the incurrence of $45.9 million in non-
cash expense related to variable plan accounting on certain management stock
options, and restricted stock grants. If these non-operating and non cash
items are excluded, our SG&A as a percentage of revenues would have been
23.2%. SG&A expense for 2000 was unfavorably impacted by a charge of $232.8
million related to litigation issues, offset by a reversal of stock
appreciation rights accruals of $45.5 million. Excluding these non-operating
and non cash items results in an adjusted SG&A as a percentage of sales of
25.6% in fiscal 2000. SG&A on an adjusted basis of 23.2% for fiscal 2001
compares favorably with SG&A on an adjusted basis of 25.6% for fiscal 2000 due
to lower depreciation expense resulting from a net reduction in our store
count, decreased repair and maintenance and terminated project costs, and the
better leveraging of fixed SG&A costs resulting from our higher sales volume.
The increase in SG&A expense as a percent of sales in fiscal 2000 over
fiscal 1999 is predominately attributable to increased accruals for litigation
and other contingencies, as described above.
Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
(dollars in thousands)
Impairment charges ....................... $214,224 $120,593 $ 87,666
Store lease exit costs ................... 57,668 18,855 107,693
Impairment of investments ................ 116,186 -- --
-------- -------- --------
$388,078 $139,448 $195,359
======== ======== ========
Impairment Charges
In fiscal 2001, 2000 and 1999, store closing and impairment charges include
non-cash charges of $214.2 million, $120.6 million and $87.7 million,
respectively, for the impairment of long-lived assets (including allocable
goodwill) of 495, 249 and 270 stores, respectively. These amounts include the
write-down of long-lived assets to estimated fair value at stores that were
assessed for impairment as part of our on-going review of the performance of
our stores or management's intention to relocate or close the store.
Store Lease Exit Cost
Costs incurred to close a store, which principally consist of lease
termination costs, are recorded at the time management commits to closing the
store, which is the date that the closure is formally approved by senior
management, or in the case of a store to be relocated, the date the new
property is leased or purchased. We calculate our liability for closed stores
on a store-by-store basis. The calculation includes the future minimum lease
payments and related ancillary costs, from the date of closure to the end of
the remaining lease term, net of estimated cost recoveries that may be
achieved through subletting properties or through favorable lease
terminations. As a result of focused efforts on cost recoveries for closed
stores during fiscal 2001, we experienced improved results, which has been
reflected in the assumptions about future sublease income. This liability is
discounted using a risk-free rate of interest. We evaluate these assumptions
each quarter and adjust the liability accordingly.
Impairment of Investments
We have an investment in the common stock of drugstore.com, which is
accounted for under the equity method. The initial investment was valued based
upon the initial public offering price for drugstore.com. During fiscal 2001,
we recorded an impairment of our investment in drugstore.com of $112.1
million. This write-down was based upon a decline in the market value of
drugstore.com's stock that we believe to be other than temporary.
Additionally, we recorded impairment charges of $4.1 million for other
investments.
20
Interest Expense
Interest expense was $649.9 million in fiscal 2001 compared to $542.0
million in fiscal 2000 and $274.8 million in fiscal 1999. The substantial
increase in fiscal 2001 and fiscal 2000 is due to higher average levels of
indebtedness and higher interest rates on debt. In fiscal 2001, we increased
our average outstanding debt with the addition of the $1.1 billion senior
secured credit facility, which includes a $600.0 million term loan and a
$500.0 million revolving credit facility. We used the term loan to terminate
our accounts receivable securitization facility and repurchased $300.0 million
of unpaid receivables thereunder and funded $66.4 million of transaction costs
related to our debt restructuring. The remainder of the term loan together
with the revolving credit facility were used for general corporate purposes,
including reviewing, reconciling and restating our 1998 and 1999 financial
statements, the cost of the audit of our restated financial statements and
investigation costs. These items were partially offset by reductions of
indebtedness in the second half of the fiscal year resulting from the sale of
PCS and debt for equity exchanges. In fiscal 2000, our debt increased as a
result of the $1.3 billion borrowed in January 1999 under the PCS credit
facility and the $300.0 million of demand note borrowings to supplement cash
flows from operating activities. The annual weighted average interest rates on
our indebtedness in fiscal 2001, fiscal 2000 and fiscal 1999 were 8.2%, 7.4%
and 6.8% respectively.
Income Taxes
We had net losses in fiscal 2001, fiscal 2000 and fiscal 1999. Tax expense
of $149.0 and tax benefits of $26.6 million (including the benefit related to
cumulative effect of accounting change) and $216.9 million have been reflected
for fiscal 2001, fiscal 2000 and fiscal 1999, respectively. The full benefit
of the net operating loss carryforwards ("NOLs") generated in each period has
been fully 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. We expect to file amended tax
returns and utilize the NOL's against taxable income in prior years to the
maximum extent possible. It is likely that an "ownership change" for statutory
purposes may occur as a result of our refinancing efforts, including issuances
of equity and exchanges of debt for equity. If an ownership change occurs, the
use of our existing NOLs and possibly our net unrealized built-in losses would
be subject to limitations. Of the $147.6 million recoverable taxes recorded as
of February 26, 2000, we have collected or have offsets of $122.7 million. The
remaining $24.9 million has been reclassified to other non current assets since
we anticipate collection beyond fiscal 2002.
Other Significant Charges
In addition to the operational matters discussed above, our results in the
current fiscal year have been adversely affected by other significant charges.
We recorded a net loss of $168.8 million on the disposal of the PBM segment.
As a result of the decision to dispose of the PBM segment, we recognized an
increase in the income tax valuation allowance of $146.9 million for fiscal
2001. We also recorded a pre-tax loss of $100.6 million on debt conversions
and modifications, and recorded a loss of $36.7 million representing our share
of the drugstore.com losses.
Discontinued Operations
On July 12, 2000, we announced the sale of the PBM segment, at which time
the PBM segment was subjected to discontinued operations accounting. Prior to
becoming a discontinued operation on July 12, 2000, the PBM segment generated
net income of $11.3 million from February 27, 2000 through July 11, 2000,
compared to net income of $9.2 million in fiscal 2000 and a net loss of $12.8
million in fiscal 1999.
Liquidity and Capital Resources
We have two primary sources of liquidity: (i) cash provided by operations
and (ii) the revolving credit facility under our senior secured credit
facility. We may also generate liquidity from the sale of assets, including
sale-leaseback transactions. During fiscal 2001 and fiscal 2000, cash provided
by operations was not sufficient to fund our working capital requirements. As
a result, we have supplemented our cash from operations with borrowings under
our credit facilities. Our principal uses of cash are to provide working
capital for operations, service our obligations to pay interest and principal on
our debt, and to provide funds for capital expenditures. On May 15, 2001, we
entered into a commitment letter to refinance a significant portion of our
indebtedness. See "Recent Event".
21
Credit Facilities and June 2000 Debt Restructuring
In June 2000, we completed a major financial restructuring that provided us
with additional liquidity, 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.
Senior Secured Credit Facility. In June 2000, we entered into a $1.0
billion (which was increased to $1.1 billion in November 2000) senior secured
credit facility with a syndicate of banks led by Citibank N.A., as agent. The
facility matures on August 1, 2002, and consists of a $600.0 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 available for general corporate purposes. The
revolving facility provides us with borrowings for working capital
requirements, capital expenditures and general corporate purposes. Borrowings
under the facilities generally bear interest either at LIBOR plus 3.0%, if we
choose to make LIBOR borrowings, or at Citibank's base rate plus 2%. 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 guarantee
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-leaseback transactions. The facility requires us to meet
various financial ratios and limits our capital expenditures. In connection
with the additional term loan borrowings in November 2000, we also amended
certain of the financial covenants in this facility to conform to the less
restrictive covenants in our other debt agreements for a limited period of
time. For the three quarters ended March 3, 2001, our covenants required us to
maintain a minimum interest coverage ratio and a minimum fixed charge coverage
ratio of .95:1, increasing to a minimum interest coverage ratio of 1.40:1 and
a minimum fixed charge ratio of 1.19:1 for the four quarters ending June 1,
2002. For the three fiscal quarters ended March 3, 2001, our consolidated
EBITDA (as defined in the senior secured credit facility) was required to be
no less than $364.0 million, increasing to $720.0 million for the four
quarters ending June 1, 2002. In addition, our capital expenditures were
limited to $186.0 million for the three fiscal quarters ended March 3, 2001,
increasing to $243.0 million for the four quarters ending June 1, 2002.
For the three quarters ended March 3, 2001, our EBITDA (as so defined) was
$410.1 million, our interest coverage ratio was 1.07:1, our fixed charge
coverage ratio was 1.03:1 and our capital expenditures were $113.6 million.
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 our 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 March 3, 2001, the $600.0 million term loan was fully drawn and
we had $394.6 million in additional available borrowing capacity under the
revolving facility.
Other Credit Facilities. In June 2000, we extended to August 2002 the
maturity date of our RCF credit facility and our PCS credit facility.
Borrowings under the PCS credit facility bear interest at LIBOR plus 3.25% and
borrowings under the RCF credit facility bear interest at LIBOR plus 3.75%.
These credit facilities contain restrictive covenants which place restrictions
on the assumption of debt, the payment of dividends, mergers, liens and sale-
leaseback transactions. They also require us to satisfy financial covenants
which are generally slightly less restrictive than the covenants in our senior
secured credit facility. The
22
facilities also limit the amount of our capital expenditures to $186.0 million
for the three quarters ended March 3, 2001, increasing to $243.0 million for the
four quarters ending June 1, 2002. We applied $1.1 billion (all of the net
proceeds from the sale of PCS minus certain expenses) to reduce the outstanding
balances of the PCS credit facility and the PCS exchange debt described below.
Under the terms of these facilities, after giving effect to the $100.0 million
increase in the term loan, we are permitted to incur up to an additional $35.0
million of indebtedness under the senior secured credit facility without the
further consent of the lenders. At April 28, 2001, we had $1.1 billion of
borrowings outstanding under these credit facilities and exchange debt. These
facilities are also guaranteed and secured as described below. The RCF credit
facility is secured by a first lien on the stock of drugstore.com.
As part of the restructuring of our debt in June 2000, 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 shares
of our common stock. This resulted in a total of $284.8 million of debt under
these facilities, including $200.0 million of the outstanding principal of the
demand note, being exchanged for an aggregate of 51,785,434 shares of our
common stock at an exchange rate of $5.50 per share. We recorded a gain on
this exchange of debt of $5.2 million in the second quarter of fiscal 2001. An
additional $274.8 million of borrowings under the facilities were exchanged
for the exchange debt, including the entire remaining principal amount of the
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 PCS and RCF credit facilities.
Also, as part of the restructuring of our debt in June 2000, 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.
In connection with modifications to the PCS and RCF credit facilities, the
exchange of debt for exchange debt and the amendment of 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. The holders of exchange debt also
received a first lien on our prescription files. Except to the extent
previously secured, our direct obligations under those facilities and
guarantees remain unsecured.
Debt Covenants. We were in compliance with the covenants of the senior
secured credit facility and our other credit facilities and debt instruments
as of March 3, 2001. With continuing improvements in operating performance, we
anticipate that we will remain in compliance with our debt covenants. However,
variations in our operating performance and unanticipated developments may
adversely affect our ability to remain in compliance with the applicable debt
covenants.
Commercial Paper. Until September 24, 1999, we issued commercial paper
supported by unused credit commitments to supplement cash generated by
operations. Since the loss of our investment grade rating in fiscal 2000, we
are no longer able to issue commercial paper. Our outstanding commercial paper
amounted to $192.0 million at February 26, 2000 and $1,783.1 million at
February 27, 1999. All remaining commercial paper obligations were repaid in
March 2000.
Exchange Offers. In June 2000, we completed the exchange of $52.5 million
of our 5.5% notes due December 2000 and $321.8 million of our 6.7% notes due
December 2001 for an aggregate of $374.3 million of our 10.5% senior secured
notes due September 2002. After the exchange, $147.5 million of the 5.5% notes
due December 2000 and $28.2 million of the 6.7% notes due December 2001
remained outstanding. In connection with the exchange, we entered into a
forward purchase agreement with J.P. Morgan and another financial institution
under which they agreed to purchase $93.2 million of the 10.5% senior secured
notes due 2002. These financial institutions purchased $16.7 million of the
5.5% notes and $20.4 million of the 6.7% notes on July 27, 2000; $53.8 million
of the 5.5% notes on September 13, 2000; and $.5 million of the 6.7% notes on
December 14, 2000; and exchanged the purchased notes with us for the 10.5%
senior secured notes due 2002. The remaining $76.9 million of 5.5% notes due
in December 2000 were retired at maturity with general corporate funds and the
$1.8 million that remained under the forward purchase agreement.
23
On June 26, 2000, we issued 17,779,000 shares of our common stock in
exchange for approximately $177.8 million principal amount of our 5.25%
convertible subordinated notes due 2002. As a result of this exchange, we
recorded a loss of approximately $89.0 million in the second quarter of fiscal
2001.
On November 10, 2000, we issued 9,222,200 shares of our common stock in
exchange for approximately $79.9 million principal amount of our 5.25%
convertible notes due 2002 and $12.3 million principal amount of our 6.0%
dealer remarketable securities due 2003. As a result of this exchange, we
recorded a loss of approximately $8.3 million in the third quarter of fiscal
2001.
On January 23, 2001, we issued 862,500 shares of our common stock in
exchange for approximately $5.5 million principal amount of our 6.0% senior
notes due 2005 and $2.0 million principal amount of our 7.625% senior notes
due 2005. As a result of this exchange, we recorded a gain of approximately
$4.3 million in the fourth quarter of fiscal 2001.
On January 26 and January 30, 2001, we issued an aggregate of 4,475,000
shares of our common stock in exchange for approximately $35.0 million
principal amount of our 5.25% convertible subordinated notes due 2002. As a
result of this exchange, we recorded a loss of approximately $12.8 million in
the fourth quarter of fiscal 2001.
Debt Capitalization. Subsequent to March 3, 2001, the following debt for
equity exchanges were completed:
o On March 14, 2001, the holders of approximately $201.4 million principal
amount of our 5.25% convertible subordinated notes due 2002 exchanged
these notes for an aggregate of 29,204,160 shares of our common stock and
the holders of approximately $77.9 million principal amount of our 6.0%
dealer remarketable securities due 2003 exchanged these notes for an
aggregate of 12,072,175 shares of our common stock. As a result of these
exchanges, we recorded a loss of approximately $119.2 million in the
first quarter of fiscal 2002.
o On April 6, 2001, the holders of approximately $3.9 million principal
amount of our 5.25% convertible subordinated notes due 2002 and
$2.0 million principal amount of our 6.0% dealer remarketable securities
due 2003 exchanged these notes for an aggregate of 856,000 shares of our
common stock. As a result of these exchanges, we recorded a loss of
approximately $2.5 million in the first quarter of fiscal 2002.
o On April 25, 2001, the holders of approximately $11.0 million principal
amount of our 10.5% senior secured notes due 2002 exchanged these notes
for an aggregate of 1,925,000 shares of our common stock. As a result of
this exchange, we recorded a loss of approximately $1.2 million in the
first quarter of fiscal 2002.
o On April 25, 2001, the holders of approximately $5.0 million principal
amount of our 10.5% senior secured notes due 2002 exchanged these notes
for an aggregate of 785,000 shares of our common stock. As a result of
this exchange, we recorded a loss of approximately $0.6 million in the
first quarter of fiscal 2002.
24
The following table sets forth our debt capitalization at April 28, 2001,
following the completion of the refinancing transactions described above and
the repayment of the PCS credit facility by $437.5 million and the exchange
debt facility by $46.6 millon utilizing proceeds from AdvancePCS's retirement
of its $200.0 million obligation to us and the sale of AdvancePCS shares.
As of
April 28, 2001 (1)
-----------------
($ in millions)
Secured Debt:
Senior secured credit facility ........................... $ 800
PCS credit facility ...................................... 154
RCF credit facility ...................................... 730
10.5% senior secured notes due 2002 ...................... 452
Exchange debt ............................................ 170
Capital lease obligations ................................ 20
Other .................................................... 12
Lease Financing Obligations ............................... 1,076
Other Senior Debt:
6.7% notes due 2001 ...................................... 7
6.0% dealer remarketable securities due 2003 ............. 108
6.0% notes due 2005 ...................................... 195
7.625% notes due 2005 .................................... 198
7.125% notes due 2007 .................................... 350
6.125% notes due 2008 .................................... 150
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 ............ 152
------
Total Debt ............................................... $5,224
======
- ---------------
(1) We have entered into commitments for additional debt for equity exchanges
that have not yet been consumated and are not reflected in the table set
forth above, and on May 15, 2001, we entered into a commitment letter to
refinance a significant portion of our indebtedness--see "Recent Event".
Net Cash Provided By (Used In) Operating, Investing and Financing Activities
We used $704.6 million of cash to fund continuing operations in fiscal 2001.
Operating cash flow was negatively impacted by $543.3 million of interest
payments. Operating cash flow was also negatively impacted from an increase in
current assets, primarily resulting from repurchasing $300.0 million of
accounts receivable when we refinanced the accounts receivable securitization
facility, and a decrease in accounts payable and other liabilities.
In fiscal 2000, we used $623.1 million of cash to fund continuing
operations. Operating cash flow was negatively impacted by $501.8 million of
interest payments. Operating cash flow was also negatively impacted from an
increase in current assets and a decrease in accounts payable partially offset
by an increase in other liabilities.
Cash provided by investing activities was $677.7 million for fiscal 2001.
Cash was provided from the sale of our discontinued operations, various other
assets, less expenditures for fixed and intangible assets.
25
Cash used for investing activities was $552.1 million and $2.7 billion for
fiscal years 2000 and 1999, respectively. Cash used for store construction and
relocations amounted to $573.3 million for fiscal 2000 and $1.2 billion for
fiscal 1999. In addition, cash of $1.4 billion was used to acquire PCS in
fiscal 1999.
Cash used in financing activities was $64.3 million for fiscal 2001. The
cash used consisted of payments of $78.1 million of deferred financing costs
partially offset by net debt borrowings of $6.8 million and proceeds from
sale-leaseback transactions of $7.0 million. During fiscal 2001, we used the
proceeds from the sale of our PBM segment to reduce our borrowings.
Cash provided by financing activities was $905.1 million for fiscal 2000 and
$2,660.3 million for fiscal 1999. Increased borrowings under our RCF and PCS
credit facilities which replaced our commercial paper program and the sale of
$300.0 million of preferred stock were the main financing activities during
fiscal 2000. In fiscal 1999, we issued 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
remarketable securities. Cash provided by financing activities included
proceeds received from store sale-leaseback transactions of $74.9 million and
$505.0 million for fiscal 2000 and 1999, respectively.
Capital Expenditures
We plan to make total capital expenditures of approximately $140.0 million
during fiscal 2002, consisting of approximately $34.7 million related to new
store construction, store relocation and other store construction projects. An
additional $89.2 million will be dedicated to other store improvement
activities and the purchase of prescription files from independent
pharmacists. Management expects that these capital expenditures will be
financed primarily with cash flow from operations and borrowings under the
revolving credit facility available under our senior secured facility.
Future Liquidity
We are highly leveraged. Based upon our current levels of operations and
expected improvements in our operating performance, management believes that
cash flow from operations, together with available borrowings under our senior
secured credit facility and our other sources of liquidity (including asset
sales) will be adequate to meet anticipated requirements for working capital,
debt service and capital expenditures until August and September 2002, when
$2.5 billion of our indebtedness (as of April 28, 2001), including the
revolving credit facility under the senior secured credit facility, matures.
For a discussion of factors that could affect our current assessment, see "--
Factors Affecting Our Future Prospects" below. 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. On May 15, 2001, we entered into a
commitment letter to refinance a significant portion of our indebtedness, see
"Recent Event".
Accounting Change
In fiscal 2000, we changed our application of the LIFO method of accounting
by restructuring our LIFO pool structure through a combination of certain
geographic pools. The reduction in the number of LIFO pools was made to more
closely align the LIFO pool structure to store merchandise categories. The
effect of this change in fiscal 2000 was to decrease our earnings by $6.8
million (net of income tax benefit of $4.6 million) or $.03 per diluted common
share. The cumulative effect of the accounting change was a charge of $27.3
million (net of income tax benefit 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 $4.2
million) or $.02 per diluted common share for fiscal 1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 138,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, will be required to be recorded on the balance sheet at
fair value. If the derivative is designated and effective as a fair value
hedge, the changes in the fair value of the derivative and
26
the changes in the hedged item attributable to the hedged risk will be
recognized in earnings. If the derivative is designated and effective as a
cash-flow hedge, changes in the fair value of the effective portion of the
derivative will be recorded in other comprehensive income ("OCI") and will be
recognized in the income statement when the hedged item affects earnings. SFAS
133 defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use
hedge accounting. For a derivative that does not qualify as a hedge, changes
in fair value will be recognized in earnings. On March 4, 2001, in connection
with the adoption of the new Statement, we will record a reduction of
approximately $29.0 million in OCI as a cumulative transition adjustment for
derivatives designated as cash flow-type hedges prior to adopting SFAS 133.
Certain issues currently under consideration by the Derivatives
Implementation Group ("DIG") may make it more difficult to qualify for cash
flow hedge accounting in the future. Pending the results of the DIG
deliberations, changes in the fair value of our interest rate swaps may be
recorded as a component of net income.
Factors Affecting our Future Prospects
Risks Related to Our Financial Condition
We are highly leveraged. Our substantial indebtedness severely limits cash
flow available for our operations and could adversely affect our ability to
service debt or obtain additional financing if necessary.
As of April 28, 2001, we had $4.1 billion of outstanding indebtedness for
borrowed money (including current maturities but excluding letters of credit)
and $1.1 billion of capital leases and a negative stockholders' equity. As of
the same date, we had additional borrowing capacity under our revolving credit
facility of $264.0 million. Based on the indebtedness outstanding at April 28,
2001 and the then current interest rates, our annualized cash interest expense
would be approximately $433.6 million.
Our high level of indebtedness will continue to restrict our operations.
Among other things, our indebtedness will:
o limit our ability to obtain additional financing;
o limit our flexibility in planning for, or reacting to, changes in the
markets in which we compete;
o place us at a competitive disadvantage relative to our competitors with
less indebtedness;
o render us more vulnerable to general adverse economic and industry
conditions; and
o require us to dedicate substantially all of our cash flow to service our
debt.
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.
If we do not consummate the refinancing transaction described under "Recent
Event", approximately $2.5 billion of our indebtedness at April 28, 2001 will
mature in August and September 2002. In order to satisfy these obligations, we
will need to refinance them, sell assets to satisfy them or seek postponement
of their maturity dates from our existing lenders. Our ability successfully to
accomplish any of these 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 $853.7 million of our outstanding indebtedness as of April 28,
2001 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 will also increase. Therefore an increase in
LIBOR would increase our interest payment
27
obligations under these outstanding loans and have a negative effect on our
cash flow and financial condition. We anticipate that any replacement
financing we obtain will also have the interest rate on a floating rate.
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. We anticipate
that any replacement financing we obtain, including those proposed by our May
15, 2001 bank commitment letter, will impose similar restrictions.
Moreover, if we are unable to meet the terms of the financial covenants or
if we breach of any of these covenants, 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 indebtedness and cause our debt
to become immediately due and payable. If 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. Any
criminal conviction against us 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, results of operations and cash flows.
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. In addition, an investigation has also
been commenced by the U.S. Department of Labor concerning our employee benefit
plans, including our principal 401(k) plan, which permitted employees to
purchase our common stock. Purchases of our common stock under the plan were
suspended in October 1999. In January 2001, we appointed an independent
trustee to represent the interests of these plans in relation to the company
and to investigate possible claims the plans may have against us. Both the
independent trustee and the Department of Labor have asserted that the plans
may have claims against us. These investigations are ongoing and we cannot
predict their outcomes. If we were convicted of any crime, certain contracts
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 us could also have a material adverse effect on our results
of operations, financial condition and cash flows.
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, financial condition and cash flows.
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 93% of our pharmaceutical supplies from a single
supplier, McKesson HBOC, Inc., pursuant to a long-term contract. Pharmacy
sales represented approximately 59.5% of our total sales during fiscal 2001,
and, therefore, our relationship with McKesson HBOC is important to us. Any
significant disruptions in our relationships with our suppliers, particularly
our relationship with McKesson HBOC 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.
28
Our internal accounting systems and controls may be insufficient.
An audit of our financial statements for fiscal years 1999 and 1998,
following a previous restatement, concluded in July 2000 and resulted in an
additional restatement of fiscal years 1999 and 1998. Following its review of
our books and records, our management concluded that further steps were needed
to establish and maintain the adequacy of our internal accounting systems and
controls. In connection with the above audits of our financial statements,
Deloitte & Touche LLP advised us that it believed there were numerous
"reportable conditions" under the standards established by the American
Institute of Certified Public Accountants which relate to our accounting systems
and controls and could adversely affect our ability to record, process,
summarize and report financial data consistent with the assertions of management
in the financial statements. In order to address the reportable conditions
identified, we are developing and implementing comprehensive, adequate and
reliable accounting systems and controls which address the reportable conditions
identified by Deloitte & Touche LLP. If, however, we determine that our internal
accounting systems and controls require additional improvements beyond those
identified, we may need to commit substantial resources, including time from our
management team, to implement new systems and controls.
We cannot assure you that management will be able to successfully manage our
business or successfully implement our strategic plan.
In December 1999, we hired a new management team. Our management team has
considerable experience in the retail industry. Nonetheless, we cannot assure
you that our management will be able successfully to manage our business or
successfully implement our strategic business plan.
We are dependent on our 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, Robert G. Miller, and
the other members of our 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 need to continue to improve our operations in order to improve our
financial condition, but our operations will not improve if we cannot continue
to effectively implement our business strategy.
Our operations during fiscal 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 our ability to produce audited
financial statements. To improve operations, new management developed and in
fiscal 2001 had been implementing and continues to implement, a business
strategy to improve the pricing of products, provide more consistent
advertising through weekly, national circulars, eliminated inventory shortages
and out-dated inventory, shortages, resolved issues and disputes with our
vendors, developed 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 implementing our
business strategy, or if our business strategy is not effective, we may not be
able to continue to improve our operations. Failure to continue to improve
operations would adversely affect our ability to make principal or interest
payments on our debt.
The additional unregistered shares of common stock that we issued may depress
the market price of our common stock because we have agreed to register those
shares under the Securities Act to enable the holders of the shares to sell
them.
We are obligated to register the shares of our common stock that we issued
in various transactions. In addition, we are obligated to register the
61,095,219 shares of our common stock underlying (as of March 31, 2001) the
series B convertible preferred stock that we issued in October 1999 and the
2,500,000 shares of our common stock underlying the warrant issued to J.P.
Morgan Ventures Corporation on October 1999. As of May 17, 2001, we have also
agreed to register an aggregate of approximately 111,000,000 shares of our
common stock that we issued or agreed to issue in various debt for equity
exchanges. In addition, we expect to agree to register a significant number of
additional shares of our common stock pursuant to the
29
refinancings of our debt described under "Recent Event," and we may agree to
register additional shares in the future pursuant to additional refinancings.
The possible public sale of such large numbers of shares may have an adverse
effect on the market price of our common stock.
Risks Related to Our Industry
The markets in which we operate are very competitive and further increases in
competition could adversely affect us.
We face intense competition with local, regional and national companies,
including other drug store chains, independent drug stores, supermarkets 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, 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 effectively to 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.
Sales of prescription drugs, as a percentage of sales, have been increasing
and we expect them to continue to increase. In fiscal 2001, we were reimbursed
by third-party payors for approximately 90.3% of all of the prescription drugs
that we sold. 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 and our results of operations and financial
condition could be adversely affected.
We are subject to governmental regulations, procedures and requirements; our
noncompliance or a significant regulatory change could hurt our business, the
results of our operations or our financial condition.
Our pharmacy business is subject to federal, state, and local regulation.
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 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 our
results of operations and financial condition.
Certain risks are inherent in the provision of pharmacy services; 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, our consumers may decrease their purchases,
particularly of products other than pharmaceutical products that they
30
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
Our future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. Our major
market risk exposure is changing interest rates. Increases in interest rates
would increase our interest expense. Since the end of fiscal 2000, our primary
risk exposure has not changed. We enter into debt obligations to support
capital expenditures, acquisitions, working capital needs and general
corporate purposes. Our policy is to manage interest rates through the use of
a combination of variable-rate credit facilities, fixed-rate long-term
obligations and derivative transactions.
The table below provides information about our financial instruments that
are sensitive to changes in interest rates. The table presents principal
payments and the related weighted average interest rates by expected maturity
dates as of March 3, 2001.
Fair Value
at March 3,
2002 2003 2004 2005 2006 Thereafter Total 2001
------ ---------- -------- -------- -------- ---------- ---------- -----------
(dollars in thousands)
Long-term debt,
including current portion
Fixed rate ..................... $8,353 $1,828,874 $188,533 $197,014 $198,439 $1,153,550 $3,574,763 $2,824,904
Average Interest Rate .......... 5.91% 9.41% 6.00% 6.06% 7.62% 7.05%
Interest Rate Swap ............. -- -- -- -- -- -- -- ($29,000)
Variable Rate .................. -- $1,219,785 -- -- -- $1,219,785 $1,219,785
Average Interest Rate .......... -- 9.16% -- -- --
In June 2000, we entered into an interest rate swap that fixes the LIBOR
component of $500.0 million of our variable-rate debt at 7.083% for a two year
period. In July 2000, we entered into an additional interest rate swap that
fixes the LIBOR component of an additional $500.0 million of variable rate
debt at 6.946% for a two year period.
Our ability to satisfy our interest payment obligations on our outstanding
debt will depend largely on our future performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service our
interest payment obligations on our outstanding indebtedness and if we cannot
borrow or obtain equity financing to satisfy those obligations, our business
and results of operations will be materially adversely affected. We cannot
assure you that any replacement borrowing or equity financing could be
successfully completed.
The ratings on the senior secured credit facility, the RCF credit facility,
the PCS credit facility and the fixed-rate obligations as of March 31, 2001
were B- by Standard & Poor's and by Caa1 by Moody's. The exchange debt
facility has not been rated. The interest rates on the variable-rate
borrowings are as follows: $1.1 billion senior credit facility: LIBOR plus
3.00%, the RCF facility: LIBOR plus 3.75%, the PCS and the exchange debt
facilities: LIBOR plus 3.25%.
Further downgrades of our credit ratings will not have an impact upon the
rate on the borrowings under these credit facilities.
Changes in one month LIBOR affect our cost of borrowings because the
interest rate on our variable-rate obligations is based on LIBOR. If the
market rates of interest for one month LIBOR change by 10% (approximately 50
basis points) as compared to the LIBOR rate of 5.29% and 4.43% as of March 3,
2001 and April 28, 2001, respectively, our annual interest expense would
change by approximately $6.0 million and $4.3 million, respectively, based
upon our variable-rate debt outstanding of approximately $1.2 billion and
$853.7 million as of March 3, 2001 and April 28, 2001, respectively.
A change in interest rates generally does not have an impact upon our 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
31
debt repayment, future earnings and cash flow may be affected by changes in
interest rates. This effect would be realized in the periods subsequent to the
periods when the debt matures.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and notes thereto are included
elsewhere in this Annual Report on Form 10-K and are incorporated by reference
herein. See Item 14 of Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 19, 1999, we filed a Current Report on Form 8-K disclosing the
resignation of our former auditors, KPMG LLP and the withdrawal of their
report on our financial statements. On December 6, 1999, we 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, we filed a Current Report on
Form 8-K to announce that we had retained Deloitte & Touche LLP as our
independent auditors.
32
PART III
We intend to file with the Securities and Exchange Commission a definitive
proxy statement for our 2001 Annual Meeting of Stockholders pursuant to
Regulation 14A not later than 120 days after March 3, 2001. The information
called for by this Part III is incorporated by reference to that proxy
statement.
33
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 March 3, 2001 and February 26, 2000 .... F-3
Consolidated Statements of Operations for the fiscal years ended
March 3, 2001, February 26, 2000 and February 27, 1999.................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal
years ended March 3, 2001, February 26, 2000 and February 27, 1999...... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
March 3, 2001, February 26, 2000 and February 27, 1999.................. 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 or notes thereto.
Financial statements of 50% or less owned companies have been omitted since
they do not constitute significant subsidiaries.
3. Exhibits
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
2 Not Applicable
3.1 Restated Certificate of Incorporation dated December 12, 1996 Exhibit 3(i) to Form 8-K filed on
November 2, 1999
3.2 Certificate of Amendment to the Restated Certificate of Incorporation dated October Exhibit 3(ii) to Form 8-K filed
25, 1999 on November 2, 1999
3.3 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
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.
4.2 Waiver dated as of January 11, 2000 to Guaranty dated as of March 19, 1998, as Exhibit 4.7 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998, and as further amended by January 18, 2000
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
34
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
4.3 Amendment No. 3, dated as of December 23, 1999 to Master Lease and Security Exhibit 4.8 to Form 8-K filed on
Agreement, dated as of March 19, 1998, (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998, and Amendment No. 2 dated as of October 25, 1999) between RAC
Leasing LLC and Rite Aid Realty Corp.
4.4 Amendment No. 3 dated as of December 2, 1999 to Guaranty Dated as of March 19, Exhibit 4.9 to Form 8-K filed on
1998, as amended by Amendment No. 1, Dated as of June 22, 1998, and as further January 18, 2000
amended by Amendment No. 2, dated as of October 25, 1999, from Rite Aid Corporation
to RAC Leasing LLC
4.5 Amendment No. 2 dated as of October 25, 1999 to Guaranty dated March 19, 1998 (as Exhibit 4.10 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998) from Rite Aid Corporation to January 18, 2000
RAC Leasing LLC
4.6 Amendment No. 1 dated as of June 22, 1998, to Guaranty dated March 19, 1998, from Exhibit 4.11 to Form 8-K filed on
Rite Aid Corporation to RAC Leasing LLC January 18, 2000
4.7 Amendment No. 2 dated as of October 25, 1999 to Master Lease and Security Exhibit 4.12 to Form 8-K filed on
Agreement, dated as of March 19, 1998 (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998) between RAC Leasing LLC and Rite Aid Realty Corp.
4.8 Amendment No. 1 dated as of June 22, 1998 to Master Lease and Security Agreement, Exhibit 4.13 to Form 8-K filed on
dated as of March 19, 1998 between RAC Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.9 Guaranty, dated as of March 19, 1998, from Rite Aid Corporation to RAC Leasing LLC Exhibit 4.4 to Form 8-K filed on
January 18, 2000
4.10 Master Lease and Security Agreement, dated as of March 19, 1998, between RAC Exhibit 4.15 to Form 8-K filed on
Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.11 Waiver dated as of January 11, 2000 to Guaranty dated as of May 30, 1997, as Exhibit 4.16 to Form 8-K filed on
amended by Amendment No. 1, dated as of October 25, 1999, and as further amended by January 18, 2000
Amendment No. 2, dated as of December 2, 1999 between Rite Aid Corporation and
Sumitomo Bank Leasing and Finance, Inc.
4.12 Amendment No. 2 dated as of December 2, 1999 to Guaranty dated as of May 30, 1997, Exhibit 4.17 to Form 8-K filed on
as amended by Amendment No. 1, dated as of October 25, 1999, from Rite Aid January 18, 2000
Corporation to Sumitomo Bank Leasing and Finance, Inc.
4.13 Amendment No. 1 dated as of October 25, 1999 to Guaranty dated as of May 30, 1997 Exhibit 4.18 to Form 8-K filed on
from Rite Aid Corporation to Sumitomo Bank Leasing and Finance, Inc. January 18, 2000
4.14 Amendment No. 4, dated as of October 25, 1999 to Master Lease and Security Exhibit 4.19 to Form 8-K filed on
Agreement, dated as of May 30, 1997, as amended by Amendment No. 1, dated as of January 18, 2000
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.
4.15 Amendment No. 3, dated as of May 26, 1999, to Master Lease and Security Agreement, Exhibit 4.20 to Form 8-K filed on
dated as of May 30, 1997, (as amended by Amendment No. 1, dated as of March 11, January 18, 2000
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.
35
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
4.16 Amendment No. 2, dated as of June 22, 1998 to Master Lease Security Agreement, Exhibit 4.21 to Form 8-K filed on
dated as of May 30, 1997, as amended by Amendment No. 1 to Master Lease and January 18, 2000
Security Agreement, dated as of March 11, 1998 between Sumitomo Bank Leasing and
Finance, Inc. and Rite Aid Realty Corp.
4.17 Amendment No. 1, dated as of March 11, 1998 to Master Lease and Security Agreement, Exhibit 4.22 to Form 8-K filed on
dated as of May 30, 1997 between Sumitomo Bank Leasing and Finance, Inc. and Rite January 18, 2000
Aid Realty Corp.
4.18 Guaranty, dated as of May 30, 1997 from Rite Aid Corporation to Sumitomo Bank Exhibit 4.23 to Form 8-K filed on
Leasing and Finance, Inc. January 18, 2000
4.19 Master Lease and Security Agreement, dated as of May 30, 1997, between Sumitomo Exhibit 4.24 to Form 8-K filed on
Bank Leasing and Finance, Inc. and Rite Aid Realty Corp. January 18, 2000
4.20 Waiver No. 1 dated as of January 10, 2000 to Note Agreement dated as of September Exhibit 4.25 to Form 8-K filed on
30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of October 25, January 18, 2000
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
4.21 Amendment No. 2 dated as of December 2, 1999 to Note Agreement dated as of Exhibit 4.26 to Form 8-K filed on
September 30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of January 18, 2000
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
4.22 Amendment No. 1 dated as of October 25, 1999 to Note Agreement dated as of Exhibit 4.27 to Form 8-K filed on
September 30, 1996 among Finco, Inc., Rite Aid Corporation, The Prudential January 18, 2000
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
4.23 Guaranty Agreement dated as of September 30, 1996 from Rite Aid Corporation to the Exhibit 4.28 to Form 8-K filed on
Prudential Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.24 Note Agreement dated as of September 30, 1996 among Finco, Inc., The Prudential Exhibit 4.29 to Form 8-K filed on
Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.25 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.2 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 10, 1997, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
36
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
4.26 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.3 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 22, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.27 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.4 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated December 21, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.28 Commitment Letter dated April 10, 2000 Exhibit 4.1 to Form 8-K filed on
April 11, 2000
4.29 Indenture, dated as of June 14, 2000, among Rite Aid Corporation, as Issuer, each Exhibit 4.1 to Form 8-K filed on
of the Subsidiary Guarantors named therein and State Street Bank and Trust Company, June 21, 2000
as Trustee.
4.30 Exchange and Registration Rights Agreement, dated as of June 14, 2000, by and among Exhibit 4.2 to Form 8-K filed on
Rite Aid Corporation, State Street Bank and Trust Company and the Holders of the June 21, 2000
10.50% Senior Secured Notes due 2002.
4.31 Registration Rights Agreement, dated as of June 14, 2000, by and among Rite Aid Exhibit 4.3 to Form 8-K filed on
Corporation and the Lenders listed therein. June 21, 2000
10.1 1999 Stock Option Plan* Filed Herewith
10.2 2000 Omnibus Equity Plan* Included in Proxy Statement dated
October 24, 2000
10.3 2001 Stock Option Plan* Filed Herewith
10.4 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.1 to Form 8-K filed on
Aid Corporation and Green Equity Investors III, L.P. November 2, 1999
10.5 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.2 to Form 8-K filed on
Aid Corporation and J.P. Morgan Ventures Corporation November 2, 1999
10.6 Warrant to purchase Common Stock, par value $1.00 per share, of Rite aid Exhibit 4.3 to Form 8-K filed on
Corporation, dated October 27, 1999, issued to J.P. Morgan Ventures Corporation November 2, 1999.
10.7 Commitment Letter, dated October 18, 1999, by and between Rite Aid Corporation and Exhibit 10.1 to Form 8-K filed on
Green Equity Investors III, L.P. November 2, 1999
10.8 Employment Agreement by and between Rite Aid Corporation and Robert G. Miller, Exhibit 10.1 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.9 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Robert G. Miller, dated as of May 7, 2001*
10.10 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.31 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller* January 18, 2000
10.11 Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated Exhibit 10.2 to Form 8-K filed on
as of December 5, 1999* January 18, 2000
10.12 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Mary F. Sammons, dated as of May 7, 2001*
10.13 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.32 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons* January 18, 2000
10.14 Employment Agreement by and between Rite Aid Corporation and David R. Jessick, Exhibit 10.3 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.15 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.33 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and David R. Jessick* January 18, 2000
37
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
10.16 Employment Agreement by and between Rite Aid Corporation and John T. Standley, Exhibit 10.4 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.17 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.34 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and John T. Standley* January 18, 2000
10.18 Employment Agreement by and between Rite Aid Corporation and Elliot S. Gerson, Filed Herewith
dated as of November 16, 2000*
10.19 Employment Agreement by and between Rite Aid Corporation and Eric Sorkin, dated as Filed Herewith
of April 2, 1999*
10.20 Employment Agreement by and between Rite Aid Corporation and James Mastrain, dated Filed Herewith
as of September 27, 2000*
10.21 Rite Aid Corporation Special Deferred Compensation Plan* Exhibit 10. 20 to Form 10-K filed
on July 11, 2000
10.22 Senior Credit Agreement, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.1 to Form 8-K filed on
Banks party thereto, Citicorp USA, Inc., as Senior Administrative Agent, Citicorp June 21, 2000
USA, Inc., as Senior Collateral Agent, and Heller Financial, Inc. and Fleet Retail
Finance Inc., as Syndication Agents.
10.23 Collateral Trust and Intercreditor Agreement, dated as of June 12, 2000, among Rite Exhibit 10.2 to Form 8-K filed on
Aid Corporation, each Subsidiary Guarantor of Rite Aid Corporation listed therein, June 21, 2000
Wilmington Trust Company, Citicorp 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 as of June 12, 2000, made by the Exhibit 10.3 to Form 8-K filed
Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
Subsidiary Guarantor pursuant to the Senior Credit Facility, in favor of Citicorp
USA, Inc., as Senior Collateral Agent.
10.25 Senior Subsidiary Guarantee Agreement, dated as of June 12, 2000, among each of the Exhibit 10.4 to Form 8-K filed
Subsidiary Guarantors of Rite Aid Corporation listed therein and Citicorp USA, June 21, 2000
Inc., as Senior Collateral Agent.
10.26 Senior Indemnity, Subrogation and Contribution Agreement, dated as of June 12, Exhibit 10.5 to Form 8-K filed
2000, among Rite Aid Corporation, each of the Subsidiary Guarantors listed therein June 21, 2000
and Citicorp USA, Inc., as Senior Collateral Agent.
10.27 RCF Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.6 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.28 PCS Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.7 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.29 Exchange Debt Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.8 to Form 8-K filed
Banks from time to time parties thereto and Morgan Guaranty Trust Company of New June 21, 2000
York, as Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and
Book Runner.
38
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
10.30 Second Priority Subsidiary Guarantee Agreement, dated as of June 12, 2000, among Exhibit 10.9 to Form 8-K filed
each of the Subsidiary Guarantors of Rite Aid Corporation listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.31 Second Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.10 to Form 8-K filed
the Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
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 Contribution Agreement, dated as of June Exhibit 10.11 to Form 8-K filed
12, 2000, among Rite Aid Corporation, each Subsidiary Guarantor listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.33 First Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.12 to Form 8-K filed
the Domestic Subsidiaries identified therein and any other person that becomes a June 21, 2000
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 Agreement, dated as of June 12, 2000, Exhibit 10.13 to Form 8-K filed
between Rite Aid Corporation and Morgan Guaranty Trust Company of New York, as June 21, 2000
Agent.
10.35 Amended and Restated PCS Pledge Agreement, dated as of June 12, 2000, between Rite Exhibit 10.14 to Form 8-K filed
Aid Corporation and Morgan Guaranty Trust Company of New York, as Agent. June 21, 2000
10.36 Form of Second Priority Mortgage, Assignment of Leases and Rents, Security Exhibit 10.15 to Form 8-K filed
Agreement and Financing Statement, by the Subsidiary Guarantor listed therein, to June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.37 Amendment No. 3 to Note Agreement, Amendment No. 4 to Guaranty Agreement, and Exhibit 10.16 to Form 8-K filed
Amendment No. 1 to Put Agreement, for Adjustable Rate Senior Secured Notes due June 21, 2000
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 June 12, 2000, from Rite Aid Corporation, Exhibit 10.17 to Form 8-K filed
as Guarantor, to RAC Leasing LLC, as Lessor. June 21, 2000
10.39 Amendment No. 4 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.18 to Form 8-K filed
between RAC Leasing LLC, as Lessor, and Rite Aid Realty Corp., as Lessee. June 21, 2000
10.40 Amendment No. 4 to Guaranty, dated as of June 12, 2000, from Rite Aid Corporation, Exhibit 10.19 to Form 8-K filed
as Guarantor, to Sumitomo Bank Leasing and Finance, Inc., as Lessor. June 21, 2000
10.41 Amendment No. 5 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.20 to Form 8-K filed
between Sumitomo Bank Leasing and Finance, Inc., as Lessor, and Rite Aid Realty June 21, 2000
Corp., as Lessee.
10.42 Executive Separation Agreement and General Release, dated February 28, 2000, Exhibit 10.46 to Form
between Rite Aid Corporation and Timothy Noonan. 10-K filed on July 11, 2000
10.43 Letter Agreement, dated February 28, 2000, between Rite Aid Corporation and Timothy Exhibit 10.47 to Form
Noonan, amending Executive Separation Agreement and General Release, dated February 10-K filed on July 11, 2000
28, 2000, between Rite Aid Corporation and Timothy Noonan.
39
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
10.44 Commitment letter dated May 15, 2001 by and between Rite Aid Corporation, Solomon Filed herewith
Smith Barney Inc., Citicorp North America, Inc., The Chase Manhattan Bank, J.P.
Morgan Securities Inc., Credit Suisse First Boston, Fleet Retail Finance Inc., and
Fleet Securities, Inc.
10.45 Equity for Bank Debt Exchange Agreement dated April 12, 2001 between Rite Aid Filed herewith
Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P.,
Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.46 Side Letter to Equity for Bank Debt Exchange Agreement dated April 30, 2001 between Filed herewith
Rite Aid Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund,
L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.47 Intentionally left blank
10.48 Employment Agreement by and between Rite Aid Corporation and Christopher Hall, Filed herewith
dated as of January 26, 2000*
10.49 Employment Agreement by and between Rite Aid Corporation and Robert B. Sari, dated Filed herewith
as of February 28, 2001*
11 Not Applicable
12 Statement regarding computation of ratios of earnings to fixed charges Filed herewith
13 Not Applicable
16 Not Applicable
18 Letter re change in accounting principles Exhibit 18 to the Form
10-K filed on July 11, 2000
21 Subsidiaries of the registrant Filed herewith
22 Not Applicable
23 Consent of Independent Certified Public Accountants Not applicable
24 Not Applicable
- ---------------
* Constitutes a compensatory plan or arrangement required to be filed with
this Form.
(b) Reports on Form 8-K
We did not file any current reports on Form 8-K during the fourth quarter of
fiscal 2001.
40
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 March 3, 2001 and February 26, 2000, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
March 3, 2001. 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 has been included in
discontinued operations in the accompanying consolidated financial statements,
which statements reflect total assets constituting 17% of consolidated total
assets as of February 26, 2000, and revenues of $1,264.7 million and $104.3
million for the years ended February 26, 2000 and February 27, 1999,
respectively. 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
March 3, 2001, and February 26, 2000, and the results of their operations and
their cash flows for each of the three years in the period ended March 3,
2001, 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 3 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
May 8, 2001, except for Note 25,
as to which the date is May 16, 2001
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 separately 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
F-2
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share amounts)
March 3, 2001 February 26, 2000
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 92,290 $ 179,757
Accounts receivable, net ................ 503,527 152,035
Inventories, net ........................ 2,444,525 2,472,437
Investment in AdvancePCS ................ 491,198 --
Refundable income taxes .................. -- 147,599
Prepaid expenses and other current assets 85,292 63,659
----------- -----------
Total current assets.................... 3,616,832 3,015,487
PROPERTY, PLANT AND EQUIPMENT, NET ........ 3,041,008 3,445,828
GOODWILL AND OTHER INTANGIBLES ............ 1,067,339 1,258,108
OTHER ASSETS .............................. 188,732 235,398
DEFERRED TAX ASSET ........................ -- 146,917
NET NON-CURRENT ASSETS OF DISCONTINUED
OPERATIONS............................... -- 1,743,828
----------- -----------
Total assets............................ $ 7,913,911 $ 9,845,566
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current lease financing obligations ...... $ 28,603 $ 25,964
Short-term debt and current maturities of
long-term debt .......................... 8,353 76,086
Accounts payable ........................ 896,390 854,062
Sales and other taxes payable ............ 31,562 33,662
Accrued salaries, wages and other current
liabilities ............................. 696,047 883,003
Net current liabilities of discontinued
operations............................... -- 390,053
----------- -----------
Total current liabilities............... 1,660,955 2,262,830
CONVERTIBLE SUBORDINATED NOTES ........... 357,324 649,986
LONG-TERM DEBT LESS CURRENT MATURITIES ... 4,428,871 4,738,661
LEASE FINANCING OBLIGATIONS LESS CURRENT
MATURITIES............................... 1,071,397 1,122,171
OTHER NONCURRENT LIABILITIES .............. 730,342 619,952
----------- -----------
Total liabilities....................... 8,248,889 9,393,600
COMMITMENTS AND CONTINGENCIES ............ -- --
REDEEMABLE PREFERRED STOCK ................ 19,457 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $1 per share;
liquidation value $100 per
share; 20,000,000 shares authorized:
shares issued -- 3,340,000
and 3,083,000........................... 333,974 308,250
Common stock, par value $1 per share;
600,000,000 shares authorized: shares
issued and outstanding -- 348,055,000
and 259,927,000......................... 348,055 259,927
Additional paid-in capital ............... 2,065,301 1,292,337
Accumulated deficit ...................... (3,171,956) (1,421,817)
Deferred compensation .................... 19,782 (6,188)
Accumulated other comprehensive income ... 50,409 --
----------- -----------
Total stockholders' equity (deficit).... (354,435) 432,509
----------- -----------
Total liabilities and stockholders'
equity (deficit)......................... $ 7,913,911 $ 9,845,566
=========== ===========
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)
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
(53 weeks) (52 weeks) (52 weeks)
----------- ------------ ------------
REVENUES............................................................................. $14,516,865 $13,338,947 $12,438,442
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs....................................... 11,151,490 10,213,428 9,406,831
Selling, general and administrative expenses........................................ 3,458,307 3,607,810 3,200,563
Goodwill amortization............................................................... 20,670 24,457 26,055
Store closing and impairment charges................................................ 388,078 139,448 195,359
Interest expense.................................................................... 649,926 542,028 274,826
Loss on debt conversions and modifications.......................................... 100,556 -- --
Share of loss from equity investments............................................... 36,675 15,181 448
Gain on sale of fixed assets........................................................ (6,030) (80,109) --
----------- ------------ ------------
15,799,672 14,462,243 13,104,082
----------- ------------ ------------
Loss from continuing operations before income taxes and
cumulative effect of accounting change............................................ (1,282,807) (1,123,296) (665,640)
INCOME TAX EXPENSE (BENEFIT)......................................................... 148,957 (8,375) (216,941)
----------- ----------- -----------
Loss from continuing operations before cumulative effect
of accounting change.............................................................. (1,431,764) (1,114,921) (448,699)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
including income tax expense (benefit) of $13,846, $30,903, and $(5,925)........... 11,335 9,178 (12,823)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
net of income tax benefit of $734.................................................. (168,795) -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax benefit of $18,200............................................... -- (27,300) --
----------- ------------ ------------
NET LOSS......................................................................... $(1,589,224) $(1,133,043) $ (461,522)
=========== ============ ============
COMPUTATION OF LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss............................................................................ $(1,589,224) $(1,133,043) $ (461,522)
Accretion of redeemable preferred stock............................................. -- (97) --
Preferred stock conversion reset.................................................... (160,915) -- --
Cumulative preferred stock dividends................................................ (25,724) (10,110) (627)
----------- ------------ ------------
Loss applicable to common stockholders........................................... $(1,775,863) $(1,143,250) $ (462,149)
=========== ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations..................................................... $ (5.15) $ (4.34) $ (1.74)
Income (loss) from discontinued operations.......................................... (0.50) 0.04 (0.05)
Cumulative effect of accounting change, net......................................... -- (0.11) --
----------- ------------ ------------
Net loss per share............................................................... $ (5.65) $ (4.41) $ (1.79)
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands, except per share amounts)
Preferred Stock Common Stock Additional Retained
------------------------------- ------------------ Paid-in Earnings
Shares Class A Class B Shares Issued Capital (Deficit)
------ --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 28, 1998...... -- -- -- 258,214 $258,214 $1,354,917 $ 285,859
Net loss....................... (461,522)
Other comprehensive income --
Minimum pension liability
adjustment...................
Comprehensive loss ...........
Stock options exercised........ 633 633 8,603
Stock option income tax benefit 5,807
Stock grants................... 14 14 669
Bond conversion................ 9
Cash dividends paid on common
stock ($.4375 per share)..... (113,111)
----- --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 27, 1999...... -- -- -- 258,861 258,861 1,370,005 (288,774)
Net loss....................... (1,133,043)
Other comprehensive income --
Minimum pension liability
adjustment...................
Comprehensive loss ...........
Issuance of preferred shares... 3,000 300,000
Exchange of preferred shares... (300,000) 300,000
Stock options exercised........ 66 66 814
Stock option income tax benefit 243
Stock grants................... 1,000 1,000 7,250
Issuance of common stock
warrants..................... 8,500
Bond conversion................ 5
Dividends on preferred stock... 83 8,250 (8,250)
Increase resulting from sale of
stock by equity method
investee..................... 2,929
Cash dividends paid on common
stock ($.3450 per share)..... (89,159)
----- --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 26, 2000...... 3,083 -- 308,250 259,927 259,927 1,292,337 (1,421,817)
Net loss....................... (1,589,224)
Other comprehensive (loss) --
Minimum pension liability
adjustment...................
Appreciation of investment in
AdvancePCS...................
Comprehensive loss ...........
Preferred stock conversion
reset........................ (160,915) 160,915
Accretion of convertible
preferred stock.............. 160,915 (160,915)
Stock grants................... 4,004 4,004 18,793
Bond conversion................ 84,124 84,124 604,574
Deferred compensation plans....
Dividends on preferred stock... 257 25,724 (25,724)
Increase resulting from sale of
stock by equity method
investee..................... 14,406
----- --------- --------- ------- -------- ---------- -----------
BALANCE MARCH 3, 2001.......... 3,340 $ -- $ 333,974 348,055 $348,055 $2,065,301 $(3,171,956)
===== ========= ========= ======= ======== ========== ===========
Accumulated
Other
Deferred Comprehensive
Compensation Income Total
------------ ------------- -----------
BALANCE FEBRUARY 28, 1998...... -- $ (787) $ 1,898,203
Net loss....................... (461,522)
Other comprehensive income --
Minimum pension liability
adjustment................... 312 312
-----------
Comprehensive loss ........... (461,210)
Stock options exercised........ 9,236
Stock option income tax benefit 5,807
Stock grants................... 683
Bond conversion................ 9
Cash dividends paid on common
stock ($.4375 per share)..... (113,111)
-------- ------- -----------
BALANCE FEBRUARY 27, 1999...... -- (475) 1,339,617
Net loss....................... (1,133,043)
Other comprehensive income --
Minimum pension liability
adjustment................... 475 475
-----------
Comprehensive loss ........... (1,132,568)
Issuance of preferred shares... 300,000
Exchange of preferred shares... --
Stock options exercised........ 880
Stock option income tax benefit 243
Stock grants................... (6,188) 2,062
Issuance of common stock
warrants..................... 8,500
Bond conversion................ 5
Dividends on preferred stock... --
Increase resulting from sale of
stock by equity method
investee..................... 2,929
Cash dividends paid on common
stock ($.3450 per share)..... (89,159)
-------- ------- -----------
BALANCE FEBRUARY 26, 2000...... (6,188) -- 432,509
Net loss....................... (1,589,224)
Other comprehensive (loss) --
Minimum pension liability
adjustment................... (622) (622)
Appreciation of investment in
AdvancePCS................... 51,031 51,031
-----------
Comprehensive loss ........... (1,538,815)
Preferred stock conversion
reset........................ --
Accretion of convertible
preferred stock.............. --
Stock grants................... (10,410) 12,387
Bond conversion................ 688,698
Deferred compensation plans.... 36,380 36,380
Dividends on preferred stock... --
Increase resulting from sale of
stock by equity method
investee..................... 14,406
-------- ------- -----------
BALANCE MARCH 3, 2001.......... $ 19,782 $50,409 $ (354,435)
======== ======= ===========
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)
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
OPERATING ACTIVITIES:
Net loss............................................................................ $(1,589,224) $(1,133,043) $ (461,522)
Income (loss) from discontinued operations.......................................... 11,335 9,178 (12,823)
Loss on disposal of discontinued operations......................................... (168,795) -- --
----------- ----------- -----------
Loss from continuing operations..................................................... (1,431,764) (1,142,221) (448,699)
Adjustments to reconcile to net cash (used in) provided by operations:
Cumulative effect of change in accounting method.................................. -- 27,300 --
Depreciation and amortization..................................................... 384,066 443,974 379,793
Store closings and impairment loss................................................ 388,078 139,448 195,359
Gain on sale of fixed assets...................................................... (6,030) (80,109) --
Stock based compensation.......................................................... 45,865 -- --
Write-off of deferred tax asset................................................... 146,917 -- --
Loss on debt conversions and modifications........................................ 100,556 -- --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.............................................................. (351,492) (79,156) (3,833)
Inventories...................................................................... 27,912 77,963 415,459
Income taxes receivable/payable.................................................. 147,599 25,390 (278,652)
Accounts payable................................................................. (66,462) (278,073) (129,500)
Other liabilities................................................................ (148,880) 196,938 103,836
Other............................................................................ 59,081 45,448 43,092
----------- ----------- -----------
Net cash (used in) provided by continuing operations............................. (704,554) (623,098) 276,855
Net cash provided by (used in) discontinued operations........................... 3,758 365,375 (227,925)
----------- ----------- -----------
Net cash (used in) provided by operating activities.............................. (700,796) (257,723) 48,930
----------- ----------- -----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment...................................... (132,504) (573,287) (1,222,674)
Purchases of businesses, net of cash acquired....................................... -- (24,454) (1,390,620)
Net investment in equity method investee............................................ -- (8,125) --
Intangible assets acquired.......................................................... (9,000) (67,783) (91,749)
Proceeds from sale of discontinued operations....................................... 710,557 -- --
Proceeds from dispositions.......................................................... 108,600 169,537 --
----------- ----------- -----------
Net cash provided by (used in) continuing operations............................. 677,653 (504,112) (2,705,043)
Net cash used in discontinued operations......................................... -- (48,021) (4,205)
----------- ----------- -----------
Net cash provided by (used in) investing activities.............................. 677,653 (552,133) (2,709,248)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from the issuance of long-term debt.................................... -- 1,600,000 895,878
Net change in bank credit facilities................................................ 324,899 716,073 --
Net (payments) proceeds of commercial paper borrowings.............................. (192,000) (1,591,125) 1,383,125
Net proceeds from the issuance of preferred stock................................... -- 300,000 --
Net proceeds from the issuance of redeemable preferred stock........................ -- -- 23,559
Repurchase of redeemable preferred stock............................................ -- (10,000) --
Proceeds from leasing obligations................................................... 6,992 74,898 504,990
Principal payments on long-term debt................................................ (126,122) (68,113) (39,557)
Cash dividends paid................................................................. -- (89,159) (113,111)
Net proceeds from the issuance of common stock...................................... -- 880 683
Deferred financing costs paid....................................................... (78,093) (34,984) (5,928)
Other............................................................................... -- 6,621 10,702
----------- ----------- -----------
Net cash provided by (used in) financing activities.............................. (64,324) 905,091 2,660,341
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (87,467) 95,235 23
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... 179,757 84,522 84,499
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................... $ 92,290 $ 179,757 $ 84,522
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
1. Results of Operations and Financing
During fiscal 2001, 2000 and 1999, the Company incurred net losses of
$1,589,224, $1,133,043 and $461,522, respectively, and during fiscal 2001 net
cash used in operating activities from continuing operations was $704,554.
Since December 1999, management of the Company has taken a series of steps
intended to stabilize and improve the operating results of the Company.
Management believes that available cash and cash equivalents together with
cash flow from operations, available borrowings under the 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 2002. In addition, management believes that the
Company will be in compliance with its existing debt covenant requirements
throughout fiscal 2002. However, a substantial portion of its indebtedness
which matures in August and September 2002 will require the Company to
refinance the indebtedness at or before that time.
2. Summary of Significant Accounting Policies
Description of Business
The Company is a Delaware corporation and through its wholly-owned
subsidiaries, operates retail drugstores in the United States. It is one of
the largest retail drugstore chains in the United States, with 3,648 stores in
operation as of March 3, 2001. The Company's drugstores' primary business is
pharmacy services. It also sells a full selection of health and beauty aids
and personal care products, seasonal merchandise and a large private label
product line.
The Company's continuing operations consists solely of the retail drug
segment. Revenues from its retail drug stores are derived from:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Pharmacy..................... $ 8,639,288 $ 7,788,404 $ 6,737,710
Front-end.................... 5,877,577 5,550,543 5,700,732
----------- ----------- -----------
$14,516,865 $13,338,947 $12,438,442
=========== =========== ===========
Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary PCS Health
Systems, Inc. ("PCS"), a pharmacy benefits manager ("PBM"). Accordingly, for
financial statement purposes, the assets, liabilities, results of operations
and cash flows of this business have been segregated from those of continuing
operations and are presented in the Company's financial statements as
discontinued operations (see Note 24).
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 28. The
fiscal year ended March 3, 2001 included 53 weeks. The fiscal years ended
February 26, 2000 and February 27, 1999 both included 52 weeks.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform
to current year classifications.
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.
F-7
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, and highly liquid
investments which are readily convertible 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 (see Note 3). At March 3,
2001 and February 26, 2000, inventories were $381,466 and $340,740,
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. The LIFO charge was $40,726, $34,614 and $36,469
for fiscal years 2001, 2000 and 1999, respectively.
Impairment of Long-Lived Assets
Asset impairments are recorded when the carrying value of assets are not
recoverable. For purposes of recognizing and measuring impairment of long-
lived assets, 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 identifiable 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 is evaluated based on a comparison of undiscounted
future cash flows of the enterprise compared to the related net book value of
the enterprise.
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 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 of the asset or the term of the lease.
Capitalized lease assets are recorded at the present value of minimum lease
payments and amortized over the estimated economic life of the related
property or term of the lease.
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 2001, 2000 and
1999, the Company capitalized costs of approximately $1,227, $4,595 and
$9,667, respectively.
F-8
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
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 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 those
acquired in business combinations are amortized over their estimated useful
lives of five to fifteen years. The value of assembled workforce acquired is
amortized over its useful life of five years.
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.
Revenue Recognition
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 revenues and
results of operations in all periods presented.
Vendor Rebates and Allowances
Rebates and allowances 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 and allowances 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.
Stock-Based Compensation
The Company accounts for its employee and director stock-based compensation
plans under APB Opinion No. 25.
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. Other store closing and liquidation costs are
expensed when incurred and included in cost of goods sold.
Advertising
Advertising costs are expensed as incurred. Advertising expenses, net of
reimbursements, for fiscal 2001, 2000 and 1999 were $214,891, $194,880 and
$223,000, respectively.
Insurance
The Company is self-insured for certain general liability and workers'
compensation claims. For claims that are self-insured, stop-loss insurance
coverage is maintained for workers' compensation occurrences exceeding $250
and general liability occurrences exceeding $1,000. 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.
F-9
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
The Company is self-insured for all covered employee medical claims.
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.
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 2001, the Company purchased approximately 93% of the dollar
volume of its prescription drugs from a single supplier, McKesson HBOC, Inc.
("McKesson"), under a contract expiring April 2004. With limited exceptions,
the Company is required to purchase all of its branded pharmaceutical products
from McKesson. If the Company's relationship with McKesson was disrupted, the
Company could have difficulty filling prescriptions, which would negatively
impact the business.
Derivatives
The Company enters into interest rate swap agreements to hedge the exposure
to increasing rates with respect to its variable rate debt. The differential
to be paid or received as a result of these swap agreements is accrued as
interest rates change and recognized as an adjustment to interest expense
related to the variable rate debt.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 138,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, will be required to be recorded on the balance sheet at
fair value. If the derivative is designated and effective as a fair value
hedge, the changes in the fair value of the derivative and the changes in the
hedged item attributable to the hedged risk will be recognized in earnings. If
the derivative is designated and effective as a cash-flow hedge, changes in
the fair value of the effective portion of the derivative will be recorded in
other comprehensive income ("OCI") and will be recognized in the income
statement when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as
well as ongoing effectiveness assessments in order to use hedge accounting.
For a derivative that does not qualify as a hedge, changes in fair value will
be recognized in earnings. On March 4, 2001, in connection with the adoption
of the new Statement, the Company will record a reduction of approximately
$29,000 in OCI as a cumulative transition adjustment for derivatives
designated as cash flow-type hedges prior to adopting SFAS 133.
Certain issues currently under consideration by the Derivatives
Implementation Group ("DIG") may make it more difficult to qualify for cash
flow hedge accounting in the future. Pending the results of the DIG
deliberations, changes in the fair value of the Company's interest rate swaps
may be recorded as a component of net income.
F-10
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
3. Change in Accounting Method
In 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 a charge
of $6,840 (net of income tax benefit 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 income tax benefit 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 benefit of
$4,240) or $.02 per diluted common share for fiscal 1999.
4. Acquisitions and Dispositions
On March 3, 1999, the Company purchased 25 drugstores from Edgehill Drugs,
Inc. The purchase price was $24,454, net of cash acquired of $12. This
acquisition was accounted for under the purchase method of accounting. The
results of operations have been included in these consolidated financial
statements since the date of acquisition.
In September 1999, the Company signed a contract to sell 38 drugstores in
California to Longs Drug Stores California, Inc. (Longs). During the third
quarter of fiscal 2000, 32 stores were transferred to Longs and two stores
were transferred in the first quarter of fiscal 2001. The remaining four
stores were retained by the Company. A pre-tax gain of $80,109 was recognized
in the third quarter of fiscal 2000 for the stores that were sold in that
year. The immaterial gain on the sale of the two stores was recognized by the
Company in fiscal 2001.
5. Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of shares of common stock
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 Company
subject to anti-dilution limitations.
F-11
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
5. Earnings Per Share -- (Continued)
Year Ended
-------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Numerator for earnings per share:
Loss from continuing operations before
cumulative effect of accounting
change, net of tax ................... $ (1,431,764) $ (1,114,921) $ (448,699)
Accretion of redeemable preferred
stock ................................ (97) --
Preferred stock conversion reset ...... (160,915)
Cumulative preferred stock dividends .. (25,724) (10,110) (627)
------------ ------------ ------------
Loss before cumulative effect of
accounting change attributable to
common stockholders .................. (1,618,403) (1,125,128) (449,326)
Net income (loss) from discontinued
operations, net of tax ............... 11,335 9,178 (12,823)
Loss on disposal of discontinued
operations, net of tax ............... (168,795) -- --
------------ ------------ ------------
Total income (loss) from discontinued
operations ........................... (157,460) 9,178 (12,823)
Cumulative effect of accounting change -- (27,300) --
------------ ------------ ------------
Net loss attributable to common
stockholders............................ $ (1,775,863) $ (1,143,250) $ (462,149)
============ ============ ============
Denominator:
Basic weighted average shares ......... 314,189,280 259,139,000 258,516,000
Diluted weighted average shares ....... 314,189,280 259,139,000 258,516,000
Basic and diluted loss per share:
Loss from continuing operations ....... $ (5.15) $ (4.34) $ (1.74)
Income (loss) from discontinued
operations ........................... (0.50) 0.04 (0.05)
Cumulative effect of accounting
change, net .......................... -- (0.11) --
------------ ------------ ------------
Net loss per share .................... $ (5.65) $ (4.41) $ (1.79)
============ ============ ============
In fiscal 2001, 2000 and 1999, no potential shares of common stock have been
included in the calculation of diluted earnings per share because of the
losses reported. At March 3, 2001, an aggregate of 126,526,540 potential
common shares related to stock options, convertible preferred stock,
convertible notes, warrants, stock appreciation rights and other have been
excluded from the computation of diluted earnings per share.
6. Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
Impairment charges ....................... $214,224 $120,593 $ 87,666
Store lease exit costs ................... 57,668 18,855 107,693
Impairment of investments ................ 116,186 -- --
-------- -------- --------
$388,078 $139,448 $195,359
======== ======== ========
Impairment charges
In fiscal 2001, 2000, and 1999 store closing and impairment charges include
non-cash charges of $214,224, $120,593 and $87,666 respectively, for the
impairment of long-lived assets (including allocable
F-12
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
6. Store Closing and Impairment Charges -- (Continued)
goodwill) at 495, 249 and 270 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.
Store lease exit costs
During fiscal 2001, 2000, and 1999, the Company recorded charges for 144,
224, and 422 stores, respectively, to be closed or relocated 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 the date the closure is formally approved by
senior management, or in the case of a store to be relocated, the date the new
property is leased or purchased. The Company calculates its liability for
closed stores on a store-by-store basis. The calculation includes 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. As a result of focused efforts on cost recoveries for closed
stores during fiscal 2001, the Company has experienced improved results, which
has been reflected in the assumptions about future sublease income. This
liability is discounted using a risk-free rate of interest. The Company
evaluates these assumptions each quarter and adjusts the liability
accordingly. The discount rates used to determine the liability were 4.71%,
6.60% and 5.22% at March 3, 2001, February 26, 2000 and February 27, 1999,
respectively.
Subsequent to the recording of lease accruals, management determined that
certain stores would remain open or would not relocate. Accordingly, the
Company reversed charges of $13,232 and $10,490 in fiscal 2001 and 2000,
respectively, for lease accruals previously established for those stores.
The reserve for store lease exit costs includes the following activity:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
Balance--beginning of year .............. $212,812 $ 246,805 $ 191,453
Provision for present value of
noncancellable lease payments of
stores designated to be closed ....... 102,495 58,324 94,404
Changes in assumptions about future
sublease income, terminations, etc.
and change of interest rate .......... (31,595) (28,979) 13,289
Reversals of reserves for stores that
management has determined will remain
open ................................. (13,232) (10,490) --
Interest accretion .................... 11,552 13,251 8,069
Cash payments, net of sublease income . (49,024) (66,099) (60,410)
-------- --------- ---------
Balance--end of year .................... $233,008 $212,812 $246,805
======== ========= =========
In addition to store closings, the Company also closed or relocated certain
distribution centers in its efforts to consolidate operations. 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, as a result, accrued termination benefit payments of $1,634 in the second
quarter of 2000, with the charge included in selling, general and
administrative expenses. Severance payments of $1,165 were made during fiscal
year 2000 leaving a remaining liability of $469 at February 26, 2000, with
remaining 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.
F-13
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
6. Store Closing and Impairment Charges -- (Continued)
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 $3,858
in the third quarter of fiscal 2000 for all of the 480 employees with the
charge included in selling, general and administrative expenses. 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 $1,040 in severance
costs related to 102 employees. The Company paid $540 in the fourth quarter of
fiscal 2000 and the remaining $500 was paid in fiscal 2001. The remaining
reserve of $2,818 was reversed to selling, general and administrative expenses
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 $2,256 for termination benefits for 500 employees were recorded
through selling, general and administrative expenses in the third quarter of
fiscal 2000 which were subsequently paid. Additionally, an impairment charge
of $7,600 for long-lived assets was recorded in the third quarter of fiscal
2000. The facility was sold in March 2000.
Impairment of investments
The Company has an investment in the common stock of drugstore.com, which is
accounted for under the equity method. The initial investment was valued based
upon the initial public offering price of drugstore.com. During fiscal 2001,
the Company recorded an impairment of its investment in drugstore.com of
$112,123. This impairment charge was based upon a decline in the market value
of drugstore.com's stock that the Company believes to be other than temporary.
Additionally, the company recorded impairment charges of $4,063 for other
investments.
7. 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 accounts receivable
to a wholly owned bankruptcy-remote special purpose funding subsidiary (the
funding subsidiary) of the Company. The funding subsidiary sold an undivided
fractional ownership interest in the pool of receivables to a securitization
company. The accounts receivable sold to the funding subsidiary were not
recognized on the Company's consolidated balance sheet. Under the terms of the
agreement, new receivables were added to the pool as collections reduced
previously sold accounts receivable. The Company serviced, administered and
collected the receivables on behalf of the purchaser. The Company recognized
no servicing asset or liability because the benefits of servicing were
expected to represent adequate compensation for the services performed.
In connection with the Company's refinancing in June 2000, all borrowings
under the securitization program were repaid and the program was terminated.
At the date of termination, $300,000 of receivables were recognized on the
Company's consolidated balance sheet. Expenses of $7,855 and $18,052
associated with the securitization program through the date of termination
were recognized for the years ended March 3, 2001 and February 26, 2000,
respectively.
The Company maintains an allowance for doubtful accounts receivable based
upon the expected collectibility of accounts receivable. The allowance for
uncollectible accounts at March 3, 2001 and February 26, 2000 was $37,050 and
$43,371, respectively. The Company's accounts receivable 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.
F-14
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
8. Property, Plant and Equipment
Following is a summary of property, plant and equipment, including capital
lease assets, at March 3, 2001 and February 26, 2000:
2001 2000
----------- -----------
Land ............................................. $ 668,561 $ 733,979
Buildings ........................................ 932,083 1,010,133
Leasehold improvements ........................... 1,192,815 1,262,590
Equipment ........................................ 1,413,890 1,469,881
Construction in progress ......................... 49,182 85,484
----------- -----------
4,256,531 4,562,067
Accumulated depreciation ......................... (1,215,523) (1,116,239)
----------- -----------
Property, plant and equipment, net.............. $ 3,041,008 $ 3,445,828
=========== ===========
Depreciation expense, which includes the depreciation of assets recorded
under capital leases, was $285,886 in fiscal 2001, $326,873 in fiscal 2000 and
$269,184 in fiscal 1999.
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 assets to be disposed of is $64,131 and $113,454 at March
3, 2001 and February 26, 2000, respectively.
9. 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, for cash of $8,125,
including legal costs, and the Company's agreement to provide access to the
Company's networks of pharmacies and third-party providers, advertising
commitments and exclusivity agreements. Each of the Series E Convertible
Preferred Shares were converted to one share of common stock at the time of
drugstore.com's initial public offering late in July 1999 and represented
21.6% of the voting stock immediately after the initial public offering. The
investment is recorded in other assets, was initially 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 drugstore.com resulting
from its share of the voting stock, its right to appoint one board member and
a number of significant operating agreements. Included in other noncurrent
liabilities is the unamortized portion of the fair value of the operating
agreements of $133,916 that is being amortized over 10 years, the life of the
arrangements described above. As a result of the start-up nature of the
drugstore.com, the Company recorded an increase to its investment of $14,406
and $2,929 and corresponding increases to equity in connection with the sale
of stock by drugstore.com during fiscal 2001 and 2000, respectively. During
fiscal 2001, the Company recorded an impairment of its investment in
drugstore.com of $112,123. This impairment charge was based upon a decline in
the market value of drugstore.com's stock that the Company believes to be
other than temporary.
F-15
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
9. Investments in Fifty Percent or Less Owned Subsidiaries -- (Continued)
In June 1999, the Company sold its investment in Diversified Prescription
Delivery LLC, a provider of mail order 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. 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.
10. Goodwill and Other Intangibles
Following is a summary of intangible assets at March 3, 2001 and February
26, 2000:
2001 2000
---- ----
Goodwill ............................................ $ 848,121 $ 920,241
Lease acquisition costs and favorable leases ........ 670,789 713,970
Prescription files .................................. 137,700 136,434
Assembled workforce ................................. 47,133 51,021
---------- ----------
1,703,743 1,821,666
Accumulated amortization ............................ (636,404) (563,558)
---------- ----------
$1,067,339 $1,258,108
========== ==========
11. Accrued Salaries, Wages, and Other Current Liabilities
Accrued salaries wages and other current liabilities consist of the
following at March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Accrued wages, benefits and other personnel costs ....... $280,126 $254,738
Accrued legal and other professional fees ............... 67,621 161,143
Accrued taxes payable ................................... 2,012 111,805
Accrued interest ........................................ 85,307 61,427
Accrued lease exit costs ................................ 37,042 42,413
Accrued rent and other occupancy costs .................. 79,111 62,087
Deferred income ......................................... 24,543 19,143
Accrued store expense ................................... 30,057 38,443
Accrued property taxes .................................. 43,367 44,490
Other ................................................... 46,861 87,314
-------- --------
$696,047 $883,003
======== ========
F-16
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
12. Income Taxes
The provision for income taxes from continuing operations was as follows:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Current tax expense (benefit):
Federal ............................... $ -- $(19,017) $ 22,163
State ................................. 3,078 -- --
-------- -------- ---------
3,078 (19,017) 22,163
Deferred tax (benefit):
Federal ............................... 146,773 20,677 (228,776)
State ................................. (894) (10,035) (10,328)
-------- -------- ---------
145,879 10,642 (239,104)
-------- -------- ---------
Total income expense (benefit) ........ $148,957 $ (8,375) $(216,941)
======== ======== =========
A reconciliation of the provision for income taxes as presented on the
consolidated statements of operations is as follows:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Income tax expense (benefit) from
continuing operations................... $148,957 $ (8,375) $ (216,941)
Income tax expense (benefit) from
discontinued operations................. 13,846 30,903 (5,925)
Income tax (benefit) from loss on
disposal of discontinued operations..... (734) -- --
Income tax (benefit) related to
cumulative effect of accounting change.. -- (18,200) --
-------- -------- ----------
Total income tax expense (benefit) .... $162,069 $ 4,328 $(222,866)
======== ======== ==========
A reconciliation of the statutory federal rate and the effective rate, for
continuing operations, is as follows:
Year Ended
------------------------------------------------------
Percentage
---------- March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Federal statutory rate ................... (35.0)% (35.0)% (35.0)%
Nondeductible expenses ................... 6.0 3.4 3.7
State income taxes, net .................. (6.8) (4.1) (4.5)
Tax credits .............................. -- (.8) (1.4)
Valuation allowance ...................... 47.4 34.9 3.6
Other .................................... -- .9 1.0
----- ----- -----
Effective tax rate ....................... 11.6% (0.7)% (32.6)%
===== ===== =====
The difference between the statutory federal rate and the reported amount of
income tax expense attributable to discontinued operations is primarily due to
nondeductible goodwill. The effective rate for fiscal 2001 reflects an
increase in the valuation allowance due to the elimination of PCS deferred tax
liabilities, resulting from its disposition.
F-17
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
12. Income Taxes -- (Continued)
The tax effect of temporary differences that give rise to significant
components of deferred tax assets and liabilities consist of the following at
March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Deferred tax assets:
Accounts receivable............................... $ 31,113 $ 43,762
Accrued expenses.................................. 147,427 141,332
Liability for lease exit costs.................... 125,284 113,907
Pension, retirement and other benefits............ 96,338 69,476
Investment impairment............................. 108,733 59,863
Other ............................................ 370 --
Credits .......................................... 58,533 69,840
Net operating losses.............................. 724,177 466,451
----------- ---------
Total gross deferred tax assets ................. 1,291,975 964,631
Valuation allowance ................................. (1,031,287) (475,174)
----------- ---------
Net deferred tax assets ......................... 260,688 489,457
Deferred tax liabilities:
Inventory......................................... 123,584 121,119
Long-lived assets................................. 137,104 218,793
Other............................................. -- 2,628
----------- ---------
Total gross deferred tax liabilities ............ 260,688 342,540
----------- ---------
Net deferred tax assets, all noncurrent ............. $ -- $ 146,917
=========== =========
Net Operating Losses, Capital Losses and Tax Credits
At March 3, 2001 and February 26, 2000, the Company had federal net
operating loss (NOL) carryforwards of $1,572,818 and $841,059, respectively,
the majority of which expire between fiscal 2017 and 2021.
At March 3, 2001 and February 26, 2000, the Company had state NOL
carryforwards of $1,718,513 and $1,662,602, respectively, the majority of
which expire by fiscal 2005 and the remaining balance by fiscal 2015.
At March 3, 2001, due to the disposition of PCS, the Company incurred a
$406,220 capital loss which will expire, if not offset by future capital
gains, by fiscal 2006.
At March 3, 2001 and February 26, 2000, the Company had federal business tax
credit carryforwards of $49,597 and $61,394, the majority of which expire
between fiscal 2017 and 2020. In addition to these credits, the Company has
alternative minimum tax credit carryforwards of $8,935 and $7,512 at fiscal
2001 and 2000, respectively.
Valuation Allowances
The valuation allowances as of March 3, 2001, and February 26, 2000 were
$1,031,287 and $475,174 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. As a result of the decision to
dispose of PCS, the Company recognized an increase in the valuation allowance
of $146,917 in fiscal 2001.
F-18
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at
March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Commercial paper borrowings. ........................ $ -- $ 192,000
Term loan due 2000 .................................. -- 272,422
5.50% fixed-rate senior notes due 2000 .............. -- 200,000
6.70% notes due 2001 ................................ 7,342 350,000
5.25% convertible subordinated notes due 2002 ....... 357,324 649,986
Senior Facility ..................................... 682,000 --
Revolving Credit facility due 2002 (amended and
restated) ("RCF").................................. 730,268 716,073
Term loan due 2002 (amended and restated) ("PCS") ... 591,391 1,300,000
Exchange Debt ....................................... 216,126 --
10.50% notes due 2002 ............................... 467,500 --
6.00% dealer remarketable securities due 2003 ....... 187,650 200,000
6.00% fixed-rate senior notes due 2005 .............. 194,500 200,000
7.625% senior notes due 2005 ........................ 198,000 200,000
7.125% notes due 2007 ............................... 350,000 350,000
6.125% fixed-rate senior notes due 2008 ............. 150,000 150,000
6.875% senior debentures due 2013 ................... 200,000 200,000
3.50% to 10.475% industrial development bonds due
through 2009....................................... 4,740 5,196
7.70% notes due 2027 ................................ 300,000 300,000
6.875% fixed-rate senior notes due 2028 ............. 150,000 150,000
Lease financing obligations ......................... 1,100,000 1,148,135
Other ............................................... 7,707 29,056
---------- ----------
5,894,548 6,612,868
Short-term debt, current maturities of long-term
debt and lease financing obligations............... (36,956) (102,050)
---------- ----------
Long-term debt and lease financing obligations, less
current maturities................................. $5,857,592 $6,510,818
========== ==========
In June 2000, the Company entered into an interest rate swap contract that
fixes the LIBOR component of $500,000 of the Company's variable rate debt at
7.083% for a two-year period. In July 2000, the Company entered into an
additional interest rate swap that fixes the LIBOR component of an additional
$500,000 of variable rate debt at 6.946% for a two-year period. The Company
entered into these contracts to hedge its exposure to fluctuations in market
interest rates. The differential to be paid or received as a result of these
swap agreements was recorded as an adjustment to interest expense. At March 3,
2001, the Company would have had to pay $29,000 if it had terminated these
contracts on that date.
Refinancings
On June 14, 2000, the Company obtained a $1,000,000 (increased to $1,100,000
in November 2000) 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 those subsidiaries' accounts receivable,
inventory, and intellectual property and a security interest in certain of
their real property. Of this amount, $600,000 is in the form of a term loan
and $500,000 is in the form of a revolving credit facility both due in August
2002 and both with interest at LIBOR plus 3.00%. Funds drawn under the term
loan were used to repay $300,000 of drawings under the accounts receivable
securitization program and to pay $200,000 for working capital and transaction
expenses which are
F-19
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
being amortized over the term of the Senior Facility. Funds drawn from time to
time under the revolving credit facility are used to fund current operations.
In connection with the $100,000 term loan in November 6, 2000, the Company
incurred fees of $3,528 which are being amortized over the period of the new
term loans.
The Senior 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 the Company to meet various
financial ratios and limits capital expenditures. The Company was in
compliance with its debt covenants as of March 3, 2001. For the three fiscal
quarters ended March 3, 2001, those covenants required the company to maintain
a minimum interest coverage ratio and a minimum fixed charge coverage ratio of
.95:1, increasing to a minimum interest coverage ratio of 1.40:1 and a minimum
fixed charge ratio of 1.19:1 for the four quarters ending June 1, 2002. For
the three fiscal quarters ended March 3, 2001, the Company was required to
have consolidated EBITDA (as defined in the Senior Facility) of no less than
$364,000, increasing to $720,000 for the four fiscal quarters ending on June
1, 2002. For the three fiscal quarters ended March 3, 2001, capital
expenditures were limited to $186,000, increasing to $243,000 for the four
fiscal quarters ending June 1, 2002. As of March 3, 2001, the Company had
additional borrowing capacity under the Senior Facility of $394,600.
Also on June 14, 2000, the Company extended the maturity dates of the RCF
credit facility and the PCS credit facility to August 2002. Borrowings under
the PCS credit facility bear interest at LIBOR plus 3.25% and borrowings under
the RCF credit facility bear interest at LIBOR plus 3.75%. These credit
facilities contain restrictive covenants that place restrictions on the
assumption of debt, the payment of dividends, mergers, liens and sale-
leaseback transactions. These credit facilities also require the Company to
satisfy financial covenants that are generally slightly less restrictive than
the covenants in the Senior Facility. The facilities also limit the amount of
our capital expenditures to $186,000 for the three quarters ended March 3,
2001, increasing to $243,000 for the four quarters ending June 1, 2002. Under
the terms of these facilities, after giving effect to the $100,000 increase in
the term loan, the Company is permitted to incur up to an additional $35,000
of indebtedness under the Senior Facility without the further consent of
lenders. The PCS credit facility was originally secured by a first lien on the
stock of PCS Health Systems, Inc. and the RCF credit facility was originally
secured by a first lien on the stock of drugstore.com and a second lien on the
stock of PCS Health Systems, Inc. Any amounts repaid under these facilities
with the proceeds of asset sales may not be borrowed.
In addition, on June 14, 2000 certain affiliates of J.P. Morgan Chase, which
had lent the Company $300,000 under a demand note in June 1999 and who was
also a lender under the RCF and PCS credit facilities, together with certain
other lenders under the two credit facilities, agreed to exchange $274,782 of
their loans for a new secured exchange debt obligation. 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 RCF and PCS credit facilities or demand note, as
applicable, as well as a first lien on the Company's prescription files.
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 amortization was completed during fiscal 2001. The
Company also paid and expensed $4,000 of advisory fees over a period of one
year.
Upon consummation of the sale of PCS on October 2, 2000, $575,000 of the
cash portion of the proceeds was applied to reduce the outstanding balances of
the PCS credit facility and the PCS exchange debt. In February 2001, the
Company also applied $34,504 received from the final settlement of the PCS
sale to reduce the PCS facilities. At March 3, 2001, the Company had
$1,537,785 of borrowings outstanding under the PCS, RCF and related exchange
debt facilities. Subsequent to March 3, 2001, the Company further
F-20
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
reduced the borrowings outstanding under the PCS and related exchange debt
facilities by $484,104 utilizing the proceeds from the sale of AdvancePCS
stock and repayment of AdvancePCS senior subordinated notes which it had
received as part of the consideration for the sale.
The Company also amended its existing guarantees of two synthetic lease
transactions to provide substantially the same terms of our RCF and PCS credit
facilities.
In connection with modifications to the RCF and PCS credit facilities, the
debt exchange for the 10.5% notes due 2002, the guarantee of the Prudential
note, the exchange for exchange debt and the guarantee of the synthetic lease
transactions, substantially all wholly-owned subsidiaries guaranteed the
Company's 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, the Company's
direct obligations under those facilities and guarantees remain unsecured.
Exchange Offers
In connection with the above refinancing on June 14, 2000, the Company
exchanged $52,500 of its 5.5% fixed-rate senior notes due in December 2000 and
$321,800 of its 6.7% notes due in December 2001 for $374,300 of 10.5% senior
secured notes due 2002. The Company arranged with certain financial
institutions to refinance $93,200 of the 5.5% notes when they become due with
the 10.5% senior secured notes due 2002. These financial institutions
purchased $16,710 of the 5.5% notes and $20,390 of the 6.7% notes on July 27,
2000; $53,814 of the 5.5% notes on September 13, 2000; and $476 of the 6.7%
notes on December 14, 2000; and exchanged the purchased notes with the Company
for the 10.5% senior secured notes due 2002. The remaining 5.5% notes were
retired in December 2000 with the Company's general corporate funds and the
remaining forward purchase commitment. The Company recognized an aggregate
loss of $6,200 in connection with the exchange and refinancing.
Exchange of Debt for Equity
Throughout and subsequent to fiscal 2001, the Company exchanged debt for
equity as outlined in the table below:
Carrying Additional
Debt Exchanged Amount Common Paid-In Gain
-------------- Exchanged Stock Capital (Loss)
--------- ------- ---------- ----------
Exchanged during the year ended March 3, 2001:
PCS and RCF facilities and J.P. Morgan demand note ............................. $284,820 $51,785 $220,088 $ 5,189
5.25% convertible subordinated notes ........................................... 292,662 30,241 379,829 (118,769)
6.00% dealer remarketable securities ........................................... 17,850 1,868 4,053 11,868
7.625% senior notes ............................................................ 2,000 230 604 1,156
-------- ------- -------- ----------
For the year ended March 3, 2001 ............................................... $597,332 $84,124 $604,574 $ (100,556)
======== ======= ======== ==========
Exchanges (including commitments) subsequent to March 3, 2001 through May 15,
2001 (unaudited):
5.25% convertible subordinated notes ........................................... $205,308 $29,750 $307,686 $ (133,129)
6.00% dealer remarketable securities ........................................... 79,885 12,382 55,633 11,427
10.5% notes .................................................................... 56,300 8,467 47,461 (656)
PCS facility ................................................................... 5,000 715 4,390 (105)
RCF facility ................................................................... 164,858 25,878 150,186 (11,206)
-------- ------- -------- ----------
Subsequent to March 3, 2001 .................................................... $511,351 $77,192 $565,356 $(133,669)
======== ======= ======== ==========
F-21
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
Several of the exchanges subsequent to March 3, 2001 have not settled,
including the exchanges for the 10.5% notes, the PCS facility and the RCF
facility. Accordingly, the data presented in the above table for these
exchanges is based on the best available estimates.
Other
In fiscal 2000, the Company was required to obtain waivers of compliance
with, and modifications to certain of the covenants contained in its senior
credit and loan agreements and public indentures. In connection with obtaining
the waivers and modifications, the Company paid fees and transaction costs of
$63,332.
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.
On April 20, 1995, the Company issued $200,000 of 7.625% senior notes due
April 15, 2005. 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 Company had outstanding letters of credit of $46,952 at March 3, 2001
and $41,624, at February 26, 2000. 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. There were no guarantees
outstanding at March 3, 2001. Guarantees of $33,774 were outstanding at
February 26, 2000.
The annual weighted average interest rate on the Company's indebtedness was
8.2%, 7.4% and 6.8% for fiscal 2001, fiscal 2000 and fiscal 1999,
respectively.
The aggregate annual principal payments of long-term debt and capital lease
obligations for the five succeeding fiscal years are as follows: 2002,
$36,956; 2003, $3,082,829; 2004, $218,355; 2005, $229,038; 2006, $216,398 and
$2,110,972 in 2007 and thereafter. The Company is in compliance with
restrictions and limitations included in the provisions of various loan and
credit agreements.
The subsidiary guarantees related to the Company's credit facilities are
full and unconditional and joint and several and there are no restrictions on
the ability of the parent to obtain funds from its subsidiaries. Also, the
parent company's assets and operations are not material and subsidiaries not
guaranteeing the credit facilities are minor. Accordingly, condensed
consolidating financial information for the parent and subsidiaries is not
presented.
F-22
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
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 10 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 of $10,930, $10,443 and $10,443,
was $537,423, $500,782, and $477,537 in 2001, 2000 and 1999, respectively.
These amounts include contingent rentals of $26,644, $28,625, and $32,960, in
fiscal 2001, 2000 and 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 $6,992 in 2001, $74,898 in 2000 and $504,990 in
1999.
The net book values of assets under capital leases and sale-leasebacks
accounted for under the financing method are summarized as follows:
March 3, February 26,
2001 2000
-------- ------------
Land ................................................ $326,304 $ 343,948
Buildings ........................................... 532,635 570,604
Leasehold improvements .............................. 128,122 152,347
Equipment ........................................... 2,644 757
Accumulated depreciation ............................ (63,097) (39,809)
-------- ----------
$926,608 $1,027,847
======== ==========
Following is a summary of lease finance obligations at March 3, 2001 and
February 26, 2000:
2001 2000
---------- -------
Sale-leaseback
obligations
accounted for under
the financing
method ............. $ 917,211 $ 944,805
Obligations under
capital leases ..... 182,789 203,330
---------- ----------
Total ............... 1,100,000 1,148,135
Less current
obligation ......... (28,603) (25,964)
---------- ----------
Long-term lease
finance obligations $1,071,397 $1,122,171
========== ==========
F-23
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
14. Leases -- (Continued)
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-cancelable leases
in effect as of March 3, 2001:
Fiscal year Lease Financing Operating
----------- Obligations Leases
--------------- ----------
2002 ........................................... $ 114,081 $ 511,105
2003 ........................................... 121,463 496,071
2004 ........................................... 113,327 459,983
2005 ........................................... 113,040 417,421
2006 ........................................... 96,382 372,843
Later years .................................... 1,321,703 3,325,522
---------- ----------
Total minimum lease payments ................... 1,879,996 $5,582,945
==========
Amount representing interest ................... 779,996
----------
Present value of minimum lease payments ........ $1,100,000
==========
15. Redeemable Preferred Stock
In March 1999 and February 1999, Rite Aid Lease Management Company, a wholly
owned subsidiary of the Company, 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% 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 for the 2000 issuances, 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. There was no accretion in fiscal 2001; accretion was $97 in 2000.
16. Capital Stock
In October 1999, the Company issued 3,000,000 shares of Series B preferred
stock at $100 per share which is the liquidation preference. The Series B
preferred stock pays dividends at 8% per year which is payable in cash or
additional shares of Series B, at the Company's election. The Series B
preferred stock, when issued, was convertible into shares of the Company's
common stock at a conversion price of $11.00 per share of common stock.
Pursuant to its terms, as a result of the issuance of shares at $5.50 per
share on June 14, 2000, the per share conversion price for the Series B
preferred stock was adjusted to $5.50. As a result of this adjustment the
Company increased its paid in capital, its accumulated deficit, and its loss
attributable to common stockholders by $160.9 million in June 2000
(representing the difference between $5.50 and the market price of the
Company's common stock on the original date of issuance of the Series B
preferred stock).
For the years ended March 3, 2001 and February 26, 2000, the Company
recognized an increase to its investment in drugstore.com of $14,406 and
$2,929, respectively, and a corresponding increase to paid in capital, in
connection with equity transactions of drugstore.com.
F-24
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
16. Capital Stock -- (Continued)
In April 2001, the Board of Directors approved, subject to stockholder
approval, an amendment to the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of common stock, $1.00 par value,
from 600,000,000 to 1,000,000,000. If the stockholders approve the
recommendation, the authorized capital stock of the Company will consist of
1,000,000,000 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. At March 3,
2001, the Company has outstanding warrants to purchase 2,500,000 shares of
common stock at $11.00 per share (see Note 13). The Company has no other
warrants outstanding.
17. 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 SARs, at prices that are not less than the fair
market value of a share of common stock on the date of grant. The exercise of
either a SAR or option automatically will cancel any related option or SAR.
Under the 1990 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.
In December 2000, the Company adopted the 2000 Omnibus Equity Plan (the 2000
Plan) under which 22,000,000 shares of common stock are reserved for granting
of restricted stock, stock options, phantom stock, stock bonus awards and
other stock awards at the discretion of the Board of Directors.
In February 2001, the Company adopted the 2001 Stock Option Plan (the 2001
Plan) under which 20,000,000 shares of common stock are reserved for granting
of stock options at the discretion of the Board of Directors.
All of the plans provide for the Board of Directors (or at its election, 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. All of the plans provide that 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. The aggregate number of shares reserved for issuance for all
plans is 74,000,000 as of March 3, 2001.
F-25
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
Following is a summary of stock option transactions for the fiscal years
ended March 3, 2001, February 26, 2000 and February 27, 1999:
Weighted Average
Price Per
Shares Shares
----------- ----------------
Balance, February 28, 1998 ................... 11,491,774 $ 13.96
Granted.................................... 4,054,000 32.74
Exercised.................................. (633,575) 14.58
Cancelled.................................. (241,500) 20.18
----------- -------
Balance, February 27, 1999 ................... 14,670,699 19.02
Granted.................................... 18,687,562 7.95
Exercised.................................. (64,650) 13.61
Cancelled.................................. (7,488,707) 14.60
----------- -------
Balance, February 26, 2000 ................... 25,804,904 12.30
Granted.................................... 47,830,762 4.03
Exercised.................................. -- --
Cancelled.................................. (20,438,867)(1) 7.57
----------- -------
Balance, March 3, 2001 ....................... 53,196,799 $ 6.48
=========== =======
(1) Includes 16,683,962 stock options which have been cancelled and reissued.
For various price ranges, weighted average characteristics of outstanding
stock options at March 3, 2001 were as follows:
Outstanding Options Exercisable Options
---------------------------------------- ---------------------
Number
Outstanding Weighted Weighted
Range of exercise prices as of Remaining Average Average
------------------------ March 3, 2001 life (years) Price Shares Price
------------- ------------ -------- ---------- --------
$ 2.7500 to $ 2.7500 16,683,962 9.04 $ 2.7500 4,053,041 $ 2.7500
$ 3.0000 to $ 3.9375 1,221,500 9.79 $ 3.4217 -- --
$ 4.0500 to $ 4.0500 20,142,000 9.95 $ 4.0500 -- --
$ 4.0625 to $ 8.9125 6,280,788 8.52 $ 5.6437 1,999,813 $ 5.7054
$ 8.9150 to $ 16.9375 5,689,574 4.05 $13.5048 5,689,574 $13.5048
$18.2500 to $ 44.6875 2,940,475 7.39 $28.7612 1,518,475 $29.3870
$45.5625 to $ 45.5625 3,000 7.76 $45.5625 1,500 $45.5625
$47.5000 to $ 47.5000 220,000 7.87 $47.5000 127,500 $47.5000
$48.5625 to $ 48.5625 13,000 7.84 $48.5625 6,500 $48.5625
$48.8125 to $ 48.8125 2,500 7.85 $48.8125 1,250 $48.8125
---------- ----------
$2.7500 to $ 48.8125 53,196,799 8.70 $ 6.4824 13,397,653 $11.2346
========== ==== ======== ========== ========
In November 2000, the Company reduced the exercise price of 16,683,962 stock
options issued after December 4, 1999 to $2.75 per share, which represents
fair market value of a share of common stock on the date of the repricing. In
connection with the repricing, the Company recognizes compensation expense for
these options using variable plan accounting. Under variable plan accounting,
the Company recognizes compensation expense over the option vesting period. In
addition, subsequent changes in the market value of the Company's common stock
during the option period, or until exercised, will generate changes in the
F-26
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
compensation expense recognized on the repriced options. The Company
recognized expense of approximately $33,500 during fiscal 2001 related to the
repriced options.
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.
The pro forma impact on net loss and per share amounts are reported below as
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
is outlined below:
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
Net loss............................................ $(1,589,224) $(1,133,043) $(461,522)
Pro forma additional compensation expense under fair
value method...................................... (46,842) (22,464) (10,463)
----------- ----------- ---------
Pro forma net loss.................................. (1,636,066) (1,155,507) (471,985)
Accretion of redeemable preferred stock............. -- (97) --
Preferred stock conversion reset.................... (160,915) -- --
Dividends on preferred stock........................ (25,724) (10,110) (627)
----------- ----------- ---------
Pro forma net loss attributable to common
stockholders...................................... $(1,822,705) $(1,165,714) $(472,612)
=========== =========== =========
Pro forma basic and diluted loss per share.......... $ (5.80) $ (4.50) $ (1.83)
=========== =========== =========
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:
2001 2000 1999
--------- --------- ---------
Expected stock price volatility .......... 67.2% 58.0% 30.7%
Expected dividend yield .................. 0.0% 0.0% 1.0%
Risk-free interest rate .................. 6.25% 6.3% 5.6%
Expected life of options ................. 2.8 years 4.2 years 6.7 years
The average fair value of each option granted during fiscal 2001, 2000 and
1999 was $1.91, $4.09 and $12.36, respectively.
Restricted Stock
In December 1999, certain executive officers received restricted stock
grants of 1,000,000 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
grants to the executives. Under the restricted stock agreement, the
restrictions placed on the shares lapse in equal monthly installments 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 one year.
In fiscal 2001, restricted stock grants of 4,004,000 shares were awarded to
key employees under plans approved by the stockholders. Shares vest in
installments up to three years and unvested shares are forfeited upon
termination of employment. The Company recorded the issuances at fair value on
the date of grant of $22,797.
F-27
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
Compensation expense related to all restricted stock grants is being
recorded over a one to three year vesting period of these grants. For the
years ended March 3, 2001 and February 26, 2000, the Company recognized
expense of $12,387 and $2,062 related to restricted share awards. The unearned
compensation associated with these restricted stock shares was $16,598. This
amount is included in stockholders equity as a component of deferred
compensation.
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 March 3, 2001 and February 26, 2000, there were 5.7 million and 7.0
million stock appreciation rights units outstanding, respectively. Grant
prices for units outstanding at March 3, 2001 ranged from $5.38 to $48.56 per
unit. Amounts charged or (credited) to expense relating to the stock
appreciation rights units for fiscal 2001, 2000 and 1999 were $(407),
$(45,500), $32,200, respectively.
18. 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 $5,350 in 2001, $9,945 in 2000, and $6,091 in 1999. Employer
contributions for other defined contribution plans are generally based upon a
percentage of employee contributions or, in the case of certain executive
officers, in accordance with employment agreements. The expenses recognized
for these plans were $9,141 in 2001, $7,925 in 2000, and $7,779 in 1999. 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.
F-28
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
Net periodic pension cost for the defined benefit plans includes the
following components:
Defined Benefit Pension Nonqualified Executive
Plans Retirement Plan
---------------------------- --------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------- ------
Service cost ......................................................... $ 4,004 $ 4,441 $ 5,034 $ 908 $ 671 $ 514
Interest cost ........................................................ 4,248 4,166 3,935 2,642 1,497 1,424
Expected return on plan assets ....................................... (6,896) (5,723) (4,936) -- -- --
Amortization of unrecognized net transition (asset)/obligation ....... (160) (160) (160) 1,162 1,163 1,163
Amortization of unrecognized prior service cost ...................... 346 376 473 -- -- --
Amortization of unrecognized net gain ................................ (2,202) (226) (202) (193) -- --
Change due to plan amendment -- -- -- -- 18,891 --
------- ------- ------- ------ ------- ------
Net pension (credit) expense ......................................... $ (660) $ 2,874 $ 4,144 $4,519 $22,222 $3,101
======= ======= ======= ====== ======= ======
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 March 3, 2001 and February 26, 2000:
F-29
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
------------------ --------------------
2001 2000 2001 2000
------- -------- --------- --------
Change in benefit obligations:
Benefit obligation at end of prior year ............................................ $58,791 $ 62,885 $ 34,691 $ 21,891
Service cost ....................................................................... 4,004 4,441 908 671
Interest cost ...................................................................... 4,248 4,166 2,642 1,497
Distributions ...................................................................... (5,349) (9,728) (1,429) (1,224)
Change due to change in assumptions ................................................ 1,431 (4,580) 1,006 (1,281)
Change due to plan amendment ....................................................... -- 187 -- 18,891
Actuarial (gain) or loss ........................................................... 1,794 1,420 (6,179) (5,754)
------- -------- --------- --------
Benefit obligation at end of year ................................................... $64,919 $ 58,791 $ 31,639 $ 34,691
======= ======== ========= ========
Change in plan assets:
Fair value of plan assets at beginning of year ..................................... $81,718 $ 71,686 $ -- $ --
Employer contributions ............................................................. 4,211 4,213 1,429 1,224
Actual return on plan assets ....................................................... (7,959) 18,671 -- --
Adjustment for fair value at 3/1/2000 .............................................. 5,932 -- -- --
Distributions (including assumed expenses) ......................................... (6,392) (10,485) (1,429) (1,224)
------- -------- --------- --------
Fair value of plan assets at end of year ............................................ $77,510 $ 84,085 $ -- $ --
======= ======== ========= ========
Funded status ....................................................................... $12,591 $ 25,294 $ (31,639) $(34,691)
Unrecognized net gain ............................................................... (5,723) (22,493) (10,952) (5,972)
Unrecognized prior service cost ..................................................... 1,463 1,808 -- --
Unrecognized net transition (asset) or obligation ................................... (179) (339) 11,628 12,790
------- -------- --------- --------
Prepaid or (accrued) pension cost recognized ........................................ $ 8,152 $ 4,270 $ (30,963) $(27,873)
======= ======== ========= ========
Amounts recognized in consolidated balance sheets
consisted of:
Prepaid (accrued) pension cost ..................................................... $ 9,009 $ 4,796 $(30,963) $(27,873)
Adjustment to recognize additional minimum liability ............................... (622) -- -- --
Accrued pension liability .......................................................... (857) (526) -- --
Accumulated other comprehensive income ............................................. 622 -- -- --
------- -------- --------- --------
Net amount recognized ............................................................... $ 8,152 $ 4,270 $ (30,963) $(27,873)
======= ======== ========= ========
The amounts recognized in the accompanying consolidated balance sheets as of
March 3, 2001 and February 26, 2000 are as follows:
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
--------------- -------------------
2001 2000 2001 2000
------ ------ -------- --------
Accrued benefit liability.................................................... $ (857) $ (526) $(30,963) $(27,873)
Prepaid pension cost......................................................... 9,009 4,796 -- --
------ ------ -------- --------
Net amount recognized........................................................ $8,152 $4,270 $(30,963) $(27,873)
====== ====== ======== ========
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 $56,272 and $69,873, respectively, as of March 3,
2001, and $58,791 and $84,085, respectively, as of February 26, 2000.
F-30
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
The significant actuarial assumptions used for all defined benefit pension
plans were as follows:
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
------------------- -------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Discount rate ............................ 7.00 7.25 6.75 7.50 7.83 6.95
Rate of increase in future compensation
levels.................................. 4.50 4.50 4.75 3.00 3.00 3.00
Expected long-term rate of return on plan
assets.................................. 9.00 9.00 9.00 9.00 9.00 9.00
19. Commitments, Contingencies and Guarantees
Legal Proceedings
This Company is party to numerous legal proceedings, as discussed below. The
Company has charged $232,778 and $7,916 to expense for the years ended
February 26, 2000, and February 27, 1999, 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. Based upon
changes in estimates in fiscal 2001 relating primarily to resolution of
insurance coverage disputes, the Company credited selling, general and
administrative expenses by $19,625.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving the
Company's financial reporting and other matters. Management is cooperating
fully with the SEC and the United States Attorney.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including the Company's
principal 401(k) plan, which permitted employees to purchase the Company's
common stock. Purchases of the Company's common stock under the plan were
suspended in October 1999. In January 2001, the Company appointed an
independent trustee to represent the interests of these plans in relation to
the Company and to investigate possible claims the plans may have against the
Company. Both the independent trustee and the Department of Labor have
asserted that the plans may have claims against the Company. The
investigations, with which management is cooperating fully, are ongoing and
the Company cannot predict their outcomes. In addition, a purported class
action lawsuit on behalf of the plans and their participants has been filed by
a participant in the plans in the United States District in the Eastern
District of Pennsylvania.
These investigations are ongoing, and the Company cannot predict their
outcomes. If the Company were convicted of any crime, certain contracts and
licenses that are material to the Company's operations may be revoked, which
would have a material adverse effect on the Company's results of operations
and financial condition. In addition, substantial penalties, damages or other
monetary remedies assessed against the Company could also have a material
adverse effect on the Company's results of operations, financial condition and
cash flows.
Stockholder litigation
The Company, its former chief executive officer Martin Grass, its former
president Timothy Noonan, its former chief financial officer Frank Bergonzi,
and its former auditor KPMG LLP, have been sued in a number of actions, most
of which purport to be class actions, brought on behalf of stockholders who
purchased the Company's securities on the open market between May 2, 1997 and
November 10, 1999. All of these cases have been consolidated in the U.S.
District Court for the Eastern District of Pennsylvania. On November 9, 2000,
the Company announced that it had reached an agreement to settle the
consolidated securities class action lawsuits pending against the Company in
the U.S. District Court for the Eastern District of Pennsylvania and the
derivative lawsuits pending there and in the U.S. District Court of Delaware.
Under
F-31
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
19. Commitments, Contingencies and Guarantees -- (Continued)
the agreement, which has been submitted to the U.S. District Court for the
Eastern District of Pennsylvania for approval, the Company will pay $45
million in cash, which will be fully funded by the Company's officers' and
directors' liability insurance, and issue shares of common stock in 2002. The
shares will be valued over a 10 day trading period in January 2002. If the
value determined is at least $7.75 per share, the Company will issue 20
million shares. If the value determined is less than $7.75 per share, the
Company has the option to deliver any combination of common stock, cash and
short-term notes, with a total value of $155 million. As additional
consideration for the settlement, the Company has assigned to the plaintiffs
all of the Company's claims against the above named executives and KPMG LLP.
Several members of the class have elected to "opt-out" of the class and, as a
result, if the settlement is approved by the court, they will be free to
individually pursue their claims. Management believes that their claims,
individually and in the aggregate, are not material.
In fiscal year 2000, the Company recorded a charge of $175,000 for this
case. As a result of the agreement to settle reached in fiscal 2001 and
resolution of insurance coverage disputes, the Company recorded $20,000 as a
credit to selling, general and administrative expense.
Drug pricing and reimbursement matters
On October 5, 2000, the Company settled, for an immaterial amount, and
without admitting any violation of the law, the lawsuit filed by the Florida
Attorney General alleging that the Company's non-uniform pricing policy for
cash prescription purchases was unlawful under Florida law.
The filing of the complaint by the Florida Attorney General, and the
Company's press release issued in conjunction therewith, precipitated the
filing of a purported federal class action in California and several purported
state class actions, all of which (other than those pending in New York that
were filed on October 5, 1999 and those pending in California that were filed
on January 3, 2000) have been dismissed. A motion to dismiss the action in New
York is currently pending. Management believes that the remaining lawsuits are
without merit under applicable state consumer protection laws. As a result,
the Company intends to continue to vigorously defend them and the Company does
not anticipate, that if fully adjudicated, they will result in an award of
damages. However, such outcomes cannot be assured and a ruling against the
Company could have a material adverse effect on the financial position and
results of operations of the Company, as well as necessitate substantial
additional expenditures to cover legal costs as the Company pursues all
available defenses.
The Company is being investigated by multiple state attorneys general for
reimbursement practices relating to partially-filled prescriptions and fully-
filled prescriptions that are not picked up by ordering customers. The Company
is supplying similar information with respect to these matters to the
Department of Justice. Management believes that these investigations are
similar to investigations which were, and are being, undertaken with respect
to the practices of others in the retail drug industry. Management also
believes that existing policies and procedures fully comply with the
requirements of applicable law and intend to fully cooperate with these
investigations. Management cannot, however, predict their outcomes at this
time. An individual, acting on behalf of the United States of America, has
filed a lawsuit in the United States District Court for the Eastern District
of Pennsylvania under the Federal False Claims Act alleging that the Company
defrauded federal health care plans by failing to appropriately issue refunds
for partially filled prescriptions and prescriptions which were not picked up
by customers. The Department of Justice has not decided whether to join this
lawsuit, as is its right under the law; its investigation is continuing. The
Company has filed a motion to dismiss the complaint for failure to state a
claim.
F-32
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
19. Commitments, Contingencies and Guarantees -- (Continued)
If any of these cases result in a substantial monetary judgment against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position, and cash flows could be materially adversely
affected.
Store Management Overtime Litigation
The Company is a defendant in a class action pending in the California
Superior Court in San Diego with three subclasses, comprised of California
store managers, assistant managers and managers-in-training. The plaintiffs
seek back pay for overtime not paid to them and injunctive relief to require
the Company to treat store management as non-exempt. They allege that the
Company decided to minimize labor costs by causing managers, assistant
managers and managers-in-training to perform the duties and functions of
associates for in excess of forty hours per week without paying them overtime.
Management believes that in-store management were and are properly classified
as exempt from the overtime provisions of California law. The Company has
filed a motion to decertify the class, which is currently pending. The
Company's results of operations and financial position could be materially
adversely affected by an adverse judgment in this matter.
Other
The Company is subject from time to time to lawsuits arising in the ordinary
course of business. In the opinion of management, these matters are adequately
covered by insurance or, if not so covered, are without merit or are of such
nature or involve amounts that would not have a material adverse effect on the
Company's financial condition, results of operations, or cash flows if decided
adversely.
Vendor Arrangements
As of March 3, 2001, the Company had outstanding commitments to purchase
$7,500 of merchandise inventory per year from a vendor for use in the normal
course of business through fiscal 2005.
Employment Agreements
Employment agreements with executive officers and others contain change in
control provisions that entitle them to receive two or three times the sum of
their annual base salary and annual target bonus amount and provide for full
vesting in all outstanding stock options and immediate renewal of restrictions
on stock awards. In the event of change in control, certain executive officers
also receive the total amount of contributions that would have been made to
the special deferred compensation plan if they had been employed through the
end of their employment contract.
On May 7, 2001, the Company amended the employment agreements of two
executive officers to provide for the payment, subject to certain conditions,
of bonuses representing the difference between the amount called for under
their severance agreements from a former employer and the amount they actually
receive up to $6,647. The bonuses are payable on January 5, 2002 and will be
reduced, and if fully paid are repayable, to the extent of each executives's
recovery of severance due from a former employer.
F-33
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
20. Supplementary Cash Flow Data
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Cash paid for interest (net of capitalized amounts of $1,836, $5,292 and
$7,069)................................................................ $543,343 $501,813 $259,100
======== ======== ========
Cash paid for (refunds from) income taxes................................ $(88,078) $ 981 $ 47,667
======== ======== ========
Notes received in connection with the disposition of discontinued
operations............................................................. $200,000 $ -- $ --
======== ======== ========
Stock received in connection with the disposition of discontinued
operations............................................................. $231,000 $ -- $ --
======== ======== ========
Change in market value of the stock received in connection with the
disposition of discontinued operations................................. $ 51,031 $ -- $ --
======== ======== ========
Conversion of debt to common stock....................................... $597,332 $ -- $ --
======== ======== ========
10.50% notes due 2002 issued in exchange for 5.50% fixed rate senior
notes due 2000 and 6.70% notes due 2001................................ $467,500 $ -- $ --
======== ======== ========
Exchange of preferred shares............................................. $ -- $300,000 $ --
======== ======== ========
21. Related Party Transactions
Included in accounts receivable at March 3, 2001 and February 26, 2000 were
receivables from related parties of $3,456, and $2,982, respectively,
including employee loans. Included in accounts payable of March 3, 2001 and
February 26, 2000 were payables from related parties of $421 and $3,475,
respectively.
During fiscal 2001, 2000 and 1999, the Company sold merchandise totaling
$65,259, $16,280 and $6,225, respectively, to drugstore.com (or drugstore.com
customers) and Diversified Prescription Delivery, LLC, equity-method
investees. During fiscal 2000 and 1999, the Company purchased equipment
totaling $26,115 and $27,119, respectively, from Stores Automated Systems,
Inc., an equity-method investee. As of February 26, 2001, the Company had
divested of its interest in Store Automated Systems, Inc. Therefore, purchases
from Store Automated Systems, Inc. in fiscal 2001 are not considered related
party purchases.
In fiscal 2000 and 1999, the Company purchased $8,814 and $9,430,
respectively, 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 $154 per year a 43,920 square foot storage space in a
warehouse in Camp Hill, Pennsylvania, from a partnership in which a former
director has a 50% interest.
The Company formerly operated an 8,000 square-foot store in a shopping
center in which 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 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 the former Chairman of the Board and Chief Executive
Officer is or was a partner. The rent is $39 per year.
F-34
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
21. Related Party Transactions -- (Continued)
The Company paid Leonard Green & Partners L.P. (a) a $3,000 fee for service
provided in connection with its preferred stock investment in October 1999 and
reimbursed $240 of its out-of-pocket expenses; (b) a $3,000 fee for services
provided in connection with the financial restructuring transactions which the
Company completed in June 2000 and reimbursed its out-of-pocket expenses, and
(c) a $2,500 fee for services provided in connection with the sale of PCS
Health Services, Inc. In October 1999, the Company agreed to pay Leonard Green
& Partners L.P. an annual fee of $1,000 for its consulting services. This fee
was increased to $1,500 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 L.P. The Company
has agreed to register the common stock issuable upon conversion of the series
B preferred stock and to pay all expenses and fees (other than underwriting
discounts and commission) related to any registration.
The law firm of Skadden, Arps, Slate, Meagher & Flom LLP provides legal
services to the Company. A director of the Company is a partner of that law
firm. Fees paid by the Company to Skadden, Arps, Slate, Meagher & Flom LLP did
not exceed five percent of the firm's gross revenues for its fiscal year.
22. Interim Financial Results (Unaudited)
Fiscal Year 2001 (53 Weeks)
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
Revenues...................................................... $3,442,186 $3,439,469 $3,531,691 $4,103,519 $14,516,865
Costs and expenses excluding store closing and impairment
charges..................................................... 3,685,301 3,776,210 3,677,367 4,272,716 15,411,594
Store closing and impairment charges.......................... 15,879 88,292 95,571 188,336 388,078
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations before taxes......... (258,994) (425,033) (241,247) (357,533) (1,282,807)
Income tax expense............................................ 144,382 -- -- 4,575 148,957
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations...................... (403,376) (425,033) (241,247) (362,108) (1,431,764)
Income (loss) from discontinued operations, net of tax........ 11,335 -- -- -- 11,335
Loss on disposal of discontinued operations, net of tax....... (303,330) (31,433) 135,534 30,434 (168,795)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (695,371) $ (456,466) $ (105,713) $ (331,674) $(1,589,224)
========== ========== ========== ========== ===========
Basic and diluted earnings (loss) per share:
Loss from continuing operations............................... $ (1.57) $ (1.87) $ (0.74) $ (1.07) $ (5.15)
Income (loss) from discontinued operations.................... (1.12) (0.10) 0.40 0.09 (0.50)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (2.69) $ (1.97) $ (0.34) $ (0.98) $ (5.65)
========== ========== ========== ========== ===========
F-35
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
22. Interim Financial Results (Unaudited) -- (Continued)
Fiscal Year 2000 (52 Weeks)
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
Revenues...................................................... $3,354,621 $3,203,964 $3,279,138 $3,501,224 $13,338,947
Costs and expenses excluding store
closing and impairment charges............................... 3,339,205 3,313,458 3,480,935 4,189,197 14,322,795
Store closing and impairment charges.......................... 24,490 53,188 30,601 31,169 139,448
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting method............ (9,074) (162,682) (232,398) (719,142) (1,123,296)
Income tax expense (benefit).................................. (28,959) (8,280) 17,403 11,461 (8,375)
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations before cumulative
effect of change in accounting method, net.................. 19,885 (154,402) (249,801) (730,603) (1,114,921)
Income (loss) from discontinued operations, net of tax........ 3,345 4,247 (4) 1,590 9,178
Cumulative effect of change in accounting method, net of tax.. (27,300) -- -- -- (27,300)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (4,070) $ (150,155) $ (249,805) $ (729,013) $(1,133,043)
========== ========== ========== ========== ===========
Basic and diluted earnings (loss) per share:
Loss from continuing operations............................... $ 0.08 $ (0.60) $ (1.00) $ (2.82) $ (4.34)
Income (loss) from discontinued operations.................... 0.01 0.02 -- 0.01 0.04
Cumulative effect of change in accounting method.............. (0.11) -- -- -- (0.11)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (0.02) $ (0.58) $ (1.00) $ (2.81) $ (4.41)
========== ========== ========== ========== ===========
Certain reclassifications have been made to the previously issued quarterly
amounts to conform to fiscal 2001 year end classifications.
During the third and fourth quarters of fiscal 2000, the Company incurred
significant non-recurring charges. These included charges of $232,800 for
litigation expenses, $63,300 for debt restructuring, $67,600 for sale of
discontinued merchandise, and $49,800 for markdowns at retail stores.
During the third quarter of fiscal 2001, the Company recorded a $20,000
credit for resolution of insurance coverage disputes and $20,000 credit for
the reversal of previously amortized cost of issuance related to financings
resulting from a contract settlement.
During the fourth quarter of fiscal 2001 (the 14 week quarter), the Company
incurred $188,336 of store closing and impairment charges and $33,500 of
expense related to stock options under variable accounting plans.
F-36
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
23. Financial Instruments
The carrying amounts and fair values of financial instruments at March 3,
2001 and February 26, 2000 are listed as follows:
2001 2000
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Variable rate indebtedness .................................................. $1,219,785 $1,219,785 $2,480,495 $2,480,495
Fixed rate indebtedness ..................................................... 3,574,763 2,824,904 2,984,238 1,959,252
Note receivable ............................................................. 37,041 37,962 32,889 36,102
AdvancePCS securities ....................................................... 491,198 491,198 -- --
Interest rate swaps ......................................................... -- (29,000) -- --
Cash, trade receivables and trade payables are carried at market value,
which approximates 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 interest rate
swaps and LIBOR-based borrowings under the credit facilities, term loans and
term notes approximate their fair values due to the short-term nature of the
obligations and the variable interest rates.
Long-term indebtedness and interest rate swaps:
The fair values of long-term indebtedness and interest rate swaps 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.
AdvancePCS Securities:
The fair value of AdvancePCS securities are estimated based on the quoted
market prices of the financial instruments.
F-37
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
24. Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary, PCS Health
Systems Inc., to Advance Paradigm, Inc. (now known as AdvancePCS). The
proceeds from the sale of PCS consisted of $710,557 in cash, $200,000 in
principal amount of AdvancePCS's unsecured 11% senior subordinated notes and
equity securities of AdvancePCS.
PCS is reported as a discontinued operation for all periods presented in the
accompanying financial statements and the operating results of PCS through
October 2, 2000, the date of sale, are reflected separately from the results
of continuing operations. The loss on the disposal of PCS is $168,795. This
loss includes net operating results of PCS from July 12, 2000 to October 2,
2000, transaction expenses, the final settlement of the purchase price between
the Company and AdvancePCS and the fair value of the non-cash consideration
received.
As a result of the sale, the Company recorded an increase to the tax
valuation allowance and income tax expense of $146,917 for the year ended
March 3, 2001.
Summarized operating results and net loss of PCS for thirty-one weeks ended
October 2, 2000 and the years ended February 26, 2000, and February 27, 1999
were as follows:
Year Ended
---------------------------
Thirty-One Weeks February 26, February 27,
Ended October 2, 2000 2000 1999
--------------------- ------------ ------------
Net sales.................................................................. $ 779,748 $1,342,495 $ 344,448
Income (loss) from operations before income tax expense.................... 25,181 40,081 (18,748)
Income tax expense (benefit)............................................... 13,846 30,903 (5,925)
--------- ---------- ---------
Income (loss) from discontinued operations................................. 11,335 9,178 (12,823)
Loss on disposal before income tax benefit................................. (169,529) -- --
Income tax benefit......................................................... 734 -- --
--------- ---------- ---------
Loss on disposal........................................................... (168,795) -- --
--------- ---------- ---------
Total income (loss) from discontinued operations........................... $(157,460) $ 9,178 $(12,823)
========= ========== =========
February 26, 2000
-----------------
Net current liabilities:
Cash and cash equivalents................................. $ 4,843
Accounts and other receivables, net....................... 614,432
Other currents assets..................................... 42,707
Claims and rebates payable................................ (924,951)
Other current liabilities................................. (127,084)
----------
$ (390,053)
----------
Net non-current assets:
Property and equipment, net............................... $ 147,733
Goodwill and intangibles, net............................. 1,816,221
Noncurrent liabilities.................................... (220,126)
----------
$1,743,828
==========
Acquisition of Discontinued Operations
On January 22, 1999, the Company purchased PCS for $1.5 billion, of which
$1.3 billion was financed using commercial paper and $200 million was paid in
cash. The PCS acquisition was accounted for using the
F-38
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
24. Discontinued Operations -- (Continued)
purchase method. In accordance with APB Opinion No. 16, the Company 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 was recorded as goodwill.
Intangible Assets of Discontinued Operations
February 26, 2000
-----------------
Goodwill................................................... $1,298,520
Prescription files and customer lists...................... 434,100
Trade name................................................. 113,100
Internally developed software.............................. 21,900
Assembled workforce........................................ 13,400
----------
1,881,020
Accumulated amortization................................... (64,799)
----------
$1,816,221
==========
At acquisition, the Company determined that the estimated useful life of the
goodwill recorded with the PCS acquisition was primarily indeterminate and
likely exceeded 40 years. This estimate was 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 found no persuasive evidence that any material
portion of these intangible assets would be depleted in less than 40 years.
Accordingly, the Company amortized goodwill over the maximum allowable period
of 40 years on a straight-line basis.
The value of the PCS trade name was amortized over its estimated useful life
of 40 years. The value of the customer base and pharmacy network acquired in
the purchase of PCS was amortized over their estimated lives of 30 years. The
value of assembled workforce and internally developed software acquired was
amortized over their useful lives of six and five years, respectively.
Impairment of Long-Lived Assets
Long-lived assets of PCS consist principally of intangibles. The Company
compared 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 impairment occurred. Long-lived assets and certain identifiable
intangibles to be disposed of, whether by sale or abandonment, were reported
at the lower of carrying amount or fair value less cost to sell.
Revenue Recognition of Discontinued Operations
Revenues were recognized from claims processing fees when the related claims
were adjudicated and approved for payment. Certain of the agreements required
the customers to pay a fee per covered member rather than a fee per claim.
These fees were recognized monthly based upon member counts provided by the
customers. Revenue from manufacturer programs were recognized when claims
eligible for rebate were adjudicated by the Company. The customer portion of
rebates collected was not included in revenue, and correspondingly payments of
rebates to customers were not included in expenses. Mail order program revenue
was recognized when prescriptions were shipped.
25. Subsequent Events
In March 2001, the Company reduced the outstanding balances of the PCS
credit facility and the PCS exchange debt by $484,104 with the net proceeds
from the sale of equity securities of AdvancePCS and by $200,000 when
AdvancePCS repaid the senior subordinated notes.
F-39
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
25. Subsequent Events -- (Continued)
Subsequent to March 3, 2001, the Company committed to issue 77,192,000
shares of its common stock in exchange for $511,351 of debt (see Note 13).
Subsequent to March 3, 2001, the Company committed to $149,600 private
placements comprised of 26,500,000 shares of common stock.
On May 15, 2001, the Company entered into a $1,900,000 commitment agreement
with a group of banks whereby the Company and the banks would enter into a new
senior secured credit facility to replace the existing Senior Credit facility.
The closing of the new credit facility is subject to the satisfaction of
customary closing conditions and the issuance by the Company of approximately
$1,050,000 in new debt or equity securities, of which $527,000 has already
been committed or arranged. The Company plans to raise the additional $523,000
by issuing equity and fixed income securities and through real estate mortgage
financings. The new credit facility will be secured by inventory, accounts
receivable and certain other assets of the Company. While management believes
that it will be successful in completing the refinancing, there is no
assurance that the refinancing transaction will be consummated.
On May 16, 2001, the Company agreed to issue five year warrants to purchase
3,040,000 shares of common stock at $6.00 per share in connection with the
exchange by a holder of $152,000 of 10.5% notes due 2002 for a like principal
amount of new 12.5% notes due 2006.
F-40
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 3, 2001, February 26, 2000, and February 27, 1999
(dollars in thousands)
Additions
Balance at Charged to Balance at
Allowances deducted from accounts receivable Beginning Costs and End of
for estimated uncollectible amounts: Of Period Expenses Deductions Period
- ------------------------------------ ---------- --------- ---------- ----------
Year ended March 3, 2001 ..................... $ 43,371 $ 21,147 $ 27,468 $ 37,050
Year ended February 26, 2000 ................. 30,296 29,268 16,193 43,371
Year ended February 27, 1999 ................. 47,268 15,916 32,888 30,296
F-41
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: May 18, 2001
RITE AID CORPORATION
By: /s/ ROBERT G. MILLER
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 May 18, 2001.
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
- ------------------------------------- Senior Executive Vice President
John T. Standley
/s/ CHRISTOPHER HALL Executive Vice President, Finance and Accounting
- -------------------------------------
Christopher Hall
/s/ KEVIN TWOMEY Chief Accounting Officer and Senior Vice President
- -------------------------------------
Kevin Twomey
/s/ WILLIAM J. BRATTON Director
- -------------------------------------
William J. Bratton
/s/ ALFRED M. GLEASON Director
- -------------------------------------
Alfred M. Gleason
S-1
Signature Title
--------- -----
/s/ LEONARD I. GREEN Director
- -------------------------------------
Leonard I. Green
/s/ NANCY A. LIEBERMAN Director
- -------------------------------------
Nancy A. Lieberman
/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/ GERALD TSAI, JR. Director
- -------------------------------------
Gerald Tsai, Jr.
S-2
EXHIBIT INDEX
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
2 Not Applicable
3.1 Restated Certificate of Incorporation dated December 12, 1996 Exhibit 3(i) to Form 8-K filed on
November 2, 1999
3.2 Certificate of Amendment to the Restated Certificate of Incorporation dated October Exhibit 3(ii) to Form 8-K filed
25, 1999 on November 2, 1999
3.3 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
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.
4.2 Waiver dated as of January 11, 2000 to Guaranty dated as of March 19, 1998, as Exhibit 4.7 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998, and as further amended by January 18, 2000
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
4.3 Amendment No. 3, dated as of December 23, 1999 to Master Lease and Security Exhibit 4.8 to Form 8-K filed on
Agreement, dated as of March 19, 1998, (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998, and Amendment No. 2 dated as of October 25, 1999) between RAC
Leasing LLC and Rite Aid Realty Corp.
4.4 Amendment No. 3 dated as of December 2, 1999 to Guaranty Dated as of March 19, Exhibit 4.9 to Form 8-K filed on
1998, as amended by Amendment No. 1, Dated as of June 22, 1998, and as further January 18, 2000
amended by Amendment No. 2, dated as of October 25, 1999, from Rite Aid Corporation
to RAC Leasing LLC
4.5 Amendment No. 2 dated as of October 25, 1999 to Guaranty dated March 19, 1998 (as Exhibit 4.10 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998) from Rite Aid Corporation to January 18, 2000
RAC Leasing LLC
4.6 Amendment No. 1 dated as of June 22, 1998, to Guaranty dated March 19, 1998, from Exhibit 4.11 to Form 8-K filed on
Rite Aid Corporation to RAC Leasing LLC January 18, 2000
4.7 Amendment No. 2 dated as of October 25, 1999 to Master Lease and Security Exhibit 4.12 to Form 8-K filed on
Agreement, dated as of March 19, 1998 (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998) between RAC Leasing LLC and Rite Aid Realty Corp.
4.8 Amendment No. 1 dated as of June 22, 1998 to Master Lease and Security Agreement, Exhibit 4.13 to Form 8-K filed on
dated as of March 19, 1998 between RAC Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.9 Guaranty, dated as of March 19, 1998, from Rite Aid Corporation to RAC Leasing LLC Exhibit 4.4 to Form 8-K filed on
January 18, 2000
4.10 Master Lease and Security Agreement, dated as of March 19, 1998, between RAC Exhibit 4.15 to Form 8-K filed on
Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.11 Waiver dated as of January 11, 2000 to Guaranty dated as of May 30, 1997, as Exhibit 4.16 to Form 8-K filed on
amended by Amendment No. 1, dated as of October 25, 1999, and as further amended by January 18, 2000
Amendment No. 2, dated as of December 2, 1999 between Rite Aid Corporation and
Sumitomo Bank Leasing and Finance, Inc.
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
4.13 Amendment No. 1 dated as of October 25, 1999 to Guaranty dated as of May 30, 1997 Exhibit 4.18 to Form 8-K filed on
from Rite Aid Corporation to Sumitomo Bank Leasing and Finance, Inc. January 18, 2000
4.14 Amendment No. 4, dated as of October 25, 1999 to Master Lease and Security Exhibit 4.19 to Form 8-K filed on
Agreement, dated as of May 30, 1997, as amended by Amendment No. 1, dated as of January 18, 2000
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.
4.15 Amendment No. 3, dated as of May 26, 1999, to Master Lease and Security Agreement, Exhibit 4.20 to Form 8-K filed on
dated as of May 30, 1997, (as amended by Amendment No. 1, dated as of March 11, January 18, 2000
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.
4.16 Amendment No. 2, dated as of June 22, 1998 to Master Lease Security Agreement, Exhibit 4.21 to Form 8-K filed on
dated as of May 30, 1997, as amended by Amendment No. 1 to Master Lease and January 18, 2000
Security Agreement, dated as of March 11, 1998 between Sumitomo Bank Leasing and
Finance, Inc. and Rite Aid Realty Corp.
4.17 Amendment No. 1, dated as of March 11, 1998 to Master Lease and Security Agreement, Exhibit 4.22 to Form 8-K filed on
dated as of May 30, 1997 between Sumitomo Bank Leasing and Finance, Inc. and Rite January 18, 2000
Aid Realty Corp.
4.18 Guaranty, dated as of May 30, 1997 from Rite Aid Corporation to Sumitomo Bank Exhibit 4.23 to Form 8-K filed on
Leasing and Finance, Inc. January 18, 2000
4.19 Master Lease and Security Agreement, dated as of May 30, 1997, between Sumitomo Exhibit 4.24 to Form 8-K filed on
Bank Leasing and Finance, Inc. and Rite Aid Realty Corp. January 18, 2000
4.20 Waiver No. 1 dated as of January 10, 2000 to Note Agreement dated as of September Exhibit 4.25 to Form 8-K filed on
30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of October 25, January 18, 2000
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
4.21 Amendment No. 2 dated as of December 2, 1999 to Note Agreement dated as of Exhibit 4.26 to Form 8-K filed on
September 30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of January 18, 2000
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
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
4.22 Amendment No. 1 dated as of October 25, 1999 to Note Agreement dated as of Exhibit 4.27 to Form 8-K filed on
September 30, 1996 among Finco, Inc., Rite Aid Corporation, The Prudential January 18, 2000
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
4.23 Guaranty Agreement dated as of September 30, 1996 from Rite Aid Corporation to the Exhibit 4.28 to Form 8-K filed on
Prudential Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.24 Note Agreement dated as of September 30, 1996 among Finco, Inc., The Prudential Exhibit 4.29 to Form 8-K filed on
Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.25 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.2 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 10, 1997, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.26 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.3 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 22, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.27 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.4 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated December 21, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.28 Commitment Letter dated April 10, 2000 Exhibit 4.1 to Form 8-K filed on
April 11, 2000
4.29 Indenture, dated as of June 14, 2000, among Rite Aid Corporation, as Issuer, each Exhibit 4.1 to Form 8-K filed on
of the Subsidiary Guarantors named therein and State Street Bank and Trust Company, June 21, 2000
as Trustee.
4.30 Exchange and Registration Rights Agreement, dated as of June 14, 2000, by and among Exhibit 4.2 to Form 8-K filed on
Rite Aid Corporation, State Street Bank and Trust Company and the Holders of the June 21, 2000
10.50% Senior Secured Notes due 2002.
4.31 Registration Rights Agreement, dated as of June 14, 2000, by and among Rite Aid Exhibit 4.3 to Form 8-K filed on
Corporation and the Lenders listed therein. June 21, 2000
10.1 1999 Stock Option Plan* Filed Herewith
10.2 2000 Omnibus Equity Plan* Included in Proxy Statement dated
October 24, 2000
10.3 2001 Stock Option Plan* Filed Herewith
10.4 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.1 to Form 8-K filed on
Aid Corporation and Green Equity Investors III, L.P. November 2, 1999
10.5 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.2 to Form 8-K filed on
Aid Corporation and J.P. Morgan Ventures Corporation November 2, 1999
10.6 Warrant to purchase Common Stock, par value $1.00 per share, of Rite aid Exhibit 4.3 to Form 8-K filed on
Corporation, dated October 27, 1999, issued to J.P. Morgan Ventures Corporation November 2, 1999.
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
10.7 Commitment Letter, dated October 18, 1999, by and between Rite Aid Corporation and Exhibit 10.1 to Form 8-K filed on
Green Equity Investors III, L.P. November 2, 1999
10.8 Employment Agreement by and between Rite Aid Corporation and Robert G. Miller, Exhibit 10.1 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.9 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Robert G. Miller, dated as of May 7, 2001*
10.10 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.31 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller* January 18, 2000
10.11 Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated Exhibit 10.2 to Form 8-K filed on
as of December 5, 1999* January 18, 2000
10.12 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Mary F. Sammons, dated as of May 7, 2001*
10.13 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.32 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons* January 18, 2000
10.14 Employment Agreement by and between Rite Aid Corporation and David R. Jessick, Exhibit 10.3 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.15 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.33 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and David R. Jessick* January 18, 2000
10.16 Employment Agreement by and between Rite Aid Corporation and John T. Standley, Exhibit 10.4 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.17 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.34 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and John T. Standley* January 18, 2000
10.18 Employment Agreement by and between Rite Aid Corporation and Elliot S. Gerson, Filed Herewith
dated as of November 16, 2000*
10.19 Employment Agreement by and between Rite Aid Corporation and Eric Sorkin, dated as Filed Herewith
of April 2, 1999*
10.20 Employment Agreement by and between Rite Aid Corporation and James Mastrain, dated Filed Herewith
as of September 27, 2000*
10.21 Rite Aid Corporation Special Deferred Compensation Plan* Exhibit 10. 20 to Form 10-K filed
on July 11, 2000
10.22 Senior Credit Agreement, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.1 to Form 8-K filed on
Banks party thereto, Citicorp USA, Inc., as Senior Administrative Agent, Citicorp June 21, 2000
USA, Inc., as Senior Collateral Agent, and Heller Financial, Inc. and Fleet Retail
Finance Inc., as Syndication Agents.
10.23 Collateral Trust and Intercreditor Agreement, dated as of June 12, 2000, among Rite Exhibit 10.2 to Form 8-K filed on
Aid Corporation, each Subsidiary Guarantor of Rite Aid Corporation listed therein, June 21, 2000
Wilmington Trust Company, Citicorp 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 as of June 12, 2000, made by the Exhibit 10.3 to Form 8-K filed
Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
Subsidiary Guarantor pursuant to the Senior Credit Facility, in favor of Citicorp
USA, Inc., as Senior Collateral Agent.
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
10.25 Senior Subsidiary Guarantee Agreement, dated as of June 12, 2000, among each of the Exhibit 10.4 to Form 8-K filed
Subsidiary Guarantors of Rite Aid Corporation listed therein and Citicorp USA, June 21, 2000
Inc., as Senior Collateral Agent.
10.26 Senior Indemnity, Subrogation and Contribution Agreement, dated as of June 12, Exhibit 10.5 to Form 8-K filed
2000, among Rite Aid Corporation, each of the Subsidiary Guarantors listed therein June 21, 2000
and Citicorp USA, Inc., as Senior Collateral Agent.
10.27 RCF Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.6 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.28 PCS Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.7 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.29 Exchange Debt Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.8 to Form 8-K filed
Banks from time to time parties thereto and Morgan Guaranty Trust Company of New June 21, 2000
York, as Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and
Book Runner.
10.30 Second Priority Subsidiary Guarantee Agreement, dated as of June 12, 2000, among Exhibit 10.9 to Form 8-K filed
each of the Subsidiary Guarantors of Rite Aid Corporation listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.31 Second Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.10 to Form 8-K filed
the Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
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 Contribution Agreement, dated as of June Exhibit 10.11 to Form 8-K filed
12, 2000, among Rite Aid Corporation, each Subsidiary Guarantor listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.33 First Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.12 to Form 8-K filed
the Domestic Subsidiaries identified therein and any other person that becomes a June 21, 2000
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 Agreement, dated as of June 12, 2000, Exhibit 10.13 to Form 8-K filed
between Rite Aid Corporation and Morgan Guaranty Trust Company of New York, as June 21, 2000
Agent.
10.35 Amended and Restated PCS Pledge Agreement, dated as of June 12, 2000, between Rite Exhibit 10.14 to Form 8-K filed
Aid Corporation and Morgan Guaranty Trust Company of New York, as Agent. June 21, 2000
10.36 Form of Second Priority Mortgage, Assignment of Leases and Rents, Security Exhibit 10.15 to Form 8-K filed
Agreement and Financing Statement, by the Subsidiary Guarantor listed therein, to June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
10.37 Amendment No. 3 to Note Agreement, Amendment No. 4 to Guaranty Agreement, and Exhibit 10.16 to Form 8-K filed
Amendment No. 1 to Put Agreement, for Adjustable Rate Senior Secured Notes due June 21, 2000
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 June 12, 2000, from Rite Aid Corporation, Exhibit 10.17 to Form 8-K filed
as Guarantor, to RAC Leasing LLC, as Lessor. June 21, 2000
10.39 Amendment No. 4 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.18 to Form 8-K filed
between RAC Leasing LLC, as Lessor, and Rite Aid Realty Corp., as Lessee. June 21, 2000
10.40 Amendment No. 4 to Guaranty, dated as of June 12, 2000, from Rite Aid Corporation, Exhibit 10.19 to Form 8-K filed
as Guarantor, to Sumitomo Bank Leasing and Finance, Inc., as Lessor. June 21, 2000
10.41 Amendment No. 5 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.20 to Form 8-K filed
between Sumitomo Bank Leasing and Finance, Inc., as Lessor, and Rite Aid Realty June 21, 2000
Corp., as Lessee.
10.42 Executive Separation Agreement and General Release, dated February 28, 2000, Exhibit 10.46 to Form
between Rite Aid Corporation and Timothy Noonan. 10-K filed on July 11, 2000
10.43 Letter Agreement, dated February 28, 2000, between Rite Aid Corporation and Timothy Exhibit 10.47 to Form
Noonan, amending Executive Separation Agreement and General Release, dated February 10-K filed on July 11, 2000
28, 2000, between Rite Aid Corporation and Timothy Noonan.
10.44 Commitment letter dated May 15, 2001 by and between Rite Aid Corporation, Solomon Filed herewith
Smith Barney Inc., Citicorp North America, Inc., The Chase Manhattan Bank, J.P.
Morgan Securities Inc., Credit Suisse First Boston, Fleet Retail Finance Inc., and
Fleet Securities, Inc.
10.45 Equity for Bank Debt Exchange Agreement dated April 12, 2001 between Rite Aid Filed herewith
Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P.,
Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.46 Side Letter to Equity for Bank Debt Exchange Agreement dated April 30, 2001 between Filed herewith
Rite Aid Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund,
L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.47 Intentionally left blank
10.48 Employment Agreement by and between Rite Aid Corporation and Christopher Hall, Filed herewith
dated as of January 26, 2000*
10.49 Employment Agreement by and between Rite Aid Corporation and Robert B. Sari, dated Filed herewith
as of February 28, 2001*
11 Not Applicable
12 Statement regarding computation of ratios of earnings to fixed charges Filed herewith
13 Not Applicable
16 Not Applicable
Exhibit
Numbers Description Incorporation by reference to
- ------- ----------- -----------------------------
18 Letter re change in accounting principles Exhibit 18 to the Form
10-K filed on July 11, 2000
21 Subsidiaries of the registrant Filed herewith
22 Not Applicable
23 Consent of Independent Certified Public Accountants Not applicable
24 Not Applicable
- ---------------
* Constitutes a compensatory plan or arrangement required to be filed with
this Form.
(b)
Reports on Form 8-K
We did not file any current reports on Form 8-K during the fourth quarter of
fiscal 2001.