Back to GetFilings.com
===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
----------------
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended March 2, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 1-5742
----------------
RITE AID CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1614034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Hunter Lane,
Camp Hill, Pennsylvania 17011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 761-2633
----------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $1.00 par value New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting 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 1, 2002 was approximately
$1,086,492,393. For purposes of this calculation, executive officers,
directors and 5% shareholders are deemed to be affiliates of the registrant.
As of May 1, 2002 the registrant had outstanding 515,113,894 shares of
common stock, par value $1.00 per share.
===============================================================================
TABLE OF CONTENTS
Page
----
PART I..................................................................................................................... 2
ITEM 1. Business..................................................................................................... 2
ITEM 2. Properties................................................................................................... 6
ITEM 3. Legal Proceedings............................................................................................ 8
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................... 10
PART II.................................................................................................................... 11
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 11
ITEM 6. Selected Financial Data...................................................................................... 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks.................................................. 30
ITEM 8. Financial Statements and Supplementary Data.................................................................. 31
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 31
PART III................................................................................................................... 32
PART IV.................................................................................................................... 33
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................. 33
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 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 and continued consolidation of the
drugstore industry;
o third-party prescription reimbursement levels and regulatory changes
governing pharmacy practices;
o general economic conditions, inflation and interest rate movements;
o merchandise supply constraints or disruptions; and
o access to capital.
We undertake no obligation to revise the forward-looking statements included
in this report to reflect any future events or circumstances. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences are discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview and Factors Affecting Our Future Prospects"
included in this annual report on Form 10-K.
1
PART I
Item 1. Business
Overview
We are the third largest retail drugstore chain in the United States. We
operate 3,497 retail drugstores in 28 states and in the District of Columbia.
We have a first or second market position in 55 of the 117 major U.S.
metropolitan markets in which we operate. We sell prescription drugs, which
accounted for approximately 61.3% of our total sales during fiscal 2002. Our
drugstores filled over 202 million prescriptions during fiscal 2002. Our
drugstores also offer other products, which we refer to as front-end products,
including nonprescription medications, health and beauty aids and personal
care items, cosmetics, photo processing and convenience items.
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 and such
stores typically include a drive-thru pharmacy.
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 Exchange under the trading
symbol of "RAD".
Strategy
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 achieving our future profitability and
improving cash flow. We also believe that the substantial investment made in
our store base over the last six 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, we estimate 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 fifties, the increasing life expectancy of the American
population, the introduction of several new successful drugs and inflation. We
believe that this growth will help increase the sales productivity of our
existing store base.
Since the beginning of fiscal 1997, we built 473 new stores, relocated 967
stores, generally to larger or freestanding sites, remodeled 470 stores and
closed 1,307 stores. We also acquired 1,564 stores during the same period. All
of our stores are integrated into a common information system. At March 2,
2002, approximately 55% 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 three to five 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 implemented 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,
seasonal merchandising and direct marketing efforts. We have also implemented
programs that are specifically directed to our pharmacy business. These
include reduced cash prices, an increased focus on attracting and retaining
managed care customers and the establishment of several partnering
relationships with major drug suppliers to provide discount cards to senior
citizens. 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 associate
training programs to improve customer service and educate our associates about
the products we offer. We have implemented associate programs that create
compensatory and other incentives for associates to provide customers with
quality service and to improve our corporate culture.
2
We continue to add popular product departments, such as our General
Nutrition Companies, Inc. ("GNC") stores-within-Rite Aid-stores and one-hour
photo development departments. We continue to implement plans to expand the
categories of our front-end products and increase the emphasis on our Rite Aid
brand products and generic prescription drugs. As private brand and generic
prescription drugs generate higher margins than national brand label, we
expect that increases in the sales of these products would enhance our
profitability. We believe that increases in offerings of products and services
are integral components of our strategy to distinguish us from other national
drugstore chains.
Recovery
Under prior management, we were engaged in an aggressive expansion program
from the beginning of fiscal 1997 until December 1999. During that period, we
purchased 1,554 stores, relocated 866 stores, opened 445 new stores, remodeled
308 stores and acquired PCS Health Systems, Inc. ("PCS"). These activities had
a significant negative impact on our operating results and financial
condition, 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, the SEC and the U.S. Attorney for the Middle District of
Pennsylvania began investigations 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, a new senior management team was hired.
At the time of their arrival, the new management team faced a series of
immediate challenges. These included:
o Deteriorating Store Operations. We experienced substantial operational
difficulties during fiscal 2000. The principal problem was a decline in
customer traffic and revenues due to inventory shortages, reduced
advertising and uncompetitive prices on front-end products. By November
1999, our out-of-stock level had reached 29% and many popular products
were not available in our stores. This situation resulted from liquidity
constraints and concerns, tighter vendor credit terms and a delay in the
opening of our distribution center in Perryman, MD, which caused delays
in the shipment of seasonal merchandise. During fiscal 2000, we also
suspended our practice of circulating regular newspaper advertising
supplements. This disrupted customer traffic and adversely affected
revenues. In order to offset the effects of these actions, former
management raised the prices of front-end products above competitive
levels. Customers rejected the higher prices and revenues continued to
decline.
o Inability to Access Capital Markets. From March 1995 through February
2000, we substantially increased our level of debt and placed a
significant strain on our short-term liquidity. The problems were
exacerbated by our inability to complete a planned public offering of
equity securities to repay the $1.3 billion short-term credit facility
due in October 1999, which had been established to support the commercial
paper issuances used to acquire PCS. By June 1999, we had issued the
maximum amount of commercial paper that was permitted under our credit
facilities. In September 1999, we informed our banks that we anticipated
being in default on various covenants under both our $1.3 billion PCS
credit facility and our $1.0 billion general credit facility and in
October 1999, Standard & Poor's and Moody's downgraded our credit rating.
As a result of these events, we lost access to the commercial paper
market.
In response to these challenges, we:
o Reduced our indebtedness, including lease financing obligations, from
$6.6 billion on February 26, 2000 to $4.1 billion on March 2, 2002;
o Improved our front-end same store sales growth from a negative 2.2% in
fiscal 2000 to a positive 3.6% during fiscal 2002 by improving store
conditions and product pricing and launching a competitive marketing
program;
3
o Restated our financial statements for fiscal 1998 and fiscal 1999 and
engaged new auditors to audit our financial statements for fiscal 1998,
fiscal 1999 and fiscal 2000;
o Settled the securities class action and related lawsuits in February 2002
for $45.0 million funded with insurance proceeds and $149.5 million of
senior secured notes, issued in April 2002 and due March 15, 2006;
o Addressed our out of stock inventory level and strengthened our vendor
relationships;
o Implemented initiatives to improve all aspects of our supply chain,
including buying practices, category management systems and other
inventory issues;
o Addressed and corrected problems with our accounting systems and
controls, and resumed normal financial reporting; and
o Completed the refinancing of our indebtedness.
Products and Services
During fiscal 2002, sales of prescription drugs represented approximately
61.3% of our total sales. In fiscal years 2002, 2001 and 2000, prescription
drug sales were $9.3 billion, $8.6 billion, and $7.8 billion, respectively, of
our revenues. We sell approximately 24,700 different types of non-
prescription, or front-end, products. The types and number of front-end
products vary based on available space and customer needs and preferences. No
single front-end product category contributed significantly to our sales
during fiscal 2002 although certain front-end product classes contributed
notably to our sales. Our principal classes of products are the following:
Fiscal Year 2002
Percentage of
Product Class Revenues
------------- ----------------
Prescription drugs.......................................... 61.3%
Over-the-counter and personal care.......................... 10.2
Health and beauty aids...................................... 5.3
General merchandise and other............................... 23.2
We offer approximately 1,700 products under the Rite Aid private brand,
which contributed approximately 10.6% of our front-end sales in fiscal 2002.
During fiscal 2002, we added approximately 300 products under our private
brand. We intend to increase the number and the sales of our private 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 2, 2002, we operated 785 GNC stores-within-Rite Aid-
stores. We plan to open 209 GNC stores-within-our-stores during fiscal 2003.
Part of our strategy is to locate our stores at convenient locations in
fast-growing metropolitan areas. 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, although we routinely evaluate
expansion opportunities, including acquisitions. Consistent with our operating
strategy, during fiscal 2002, we opened 7 new stores, acquired 10 stores,
relocated 22 stores, remodeled 64 stores and closed 168 stores. Our current
plan for fiscal 2003 is to open approximately 3 new stores, relocate 18 stores
and remodel 140 stores. Our fiscal 2003 planned store openings and relocations
are not concentrated in any specific geographic region.
Technology
All of our stores are integrated into a common information system, which
enables our pharmacists to fill prescriptions more accurately and efficiently
with reduced chances of adverse drug interaction and which can be expanded to
accommodate new stores. Additionally, each of our stores employs point-of-sale
technology
4
that facilitates inventory replenishment, sales analysis and recognition of
customer trends. As of March 2, 2002, we had installed ScriptPro automated
pharmacy dispensing units which are linked to our pharmacists' computers and
fill and label prescription drug orders, in 850 stores. The efficiency of
ScriptPro units allows our pharmacists to spend an increased amount of time
consulting with our customers. In fiscal 2002, 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 riteaid.com powered by drugstore.com or over
the phone through our telephonic rapid automated refill systems.
Suppliers
During fiscal 2002, 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. If our relationship with
McKesson HBOC was disrupted, we could have difficulty filling prescriptions,
which would negatively affect our business. We purchase generic (non-brand
name) pharmaceuticals from a variety of sources. 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.
We sell private brand and co-branded products that generally are supplied by
numerous competitive sources. The Rite Aid and GNC co-branded PharmAssure
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 and Third-Party Payors
During fiscal 2002, our stores served an average of 1.9 million customers
per day. 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 revenues.
In fiscal 2002, 92.0% of our pharmacy sales were to customers covered by
third-party plans. In a typical third-party plan, we contract with a third-
party payor (such as an insurance company, a prescription benefit management
company, a governmental agency, a private employer, a health maintenance
organization or other managed care provider) that agrees to pay for all or a
portion of a customer's eligible prescription purchases. During fiscal 2002,
the top five third-party payors accounted for approximately 20.0% of our total
revenues, the largest of which represented approximately 9.0% of our total
revenues. Any significant loss of third-party payor business could have a
material adverse effect on our business and results of operations.
Competition
The retail drugstore industry is highly competitive. 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. We believe continued consolidation of
the drugstore industry will further increase competitive pressures in the
industry.
Associates
As of March 2, 2002, we had approximately 75,000 associates of whom 12% are
pharmacists. Approximately 49% of our associates were part-time and
approximately 26,000 were unionized. There is a national shortage of
pharmacists. Our management has implemented various associate incentive plans,
5
including the implementation of a stock option plan for field associates, in
order to attract and retain qualified pharmacists. We believe that our
relationships with our associates 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 brand 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 that allow us to
place slot machines in our Nevada stores. We also hold licenses to operate our
pharmacies and our distribution facilities. Together, these licenses are
material to our operations.
Regulation
Our business is subject to various federal and state regulations. For
example, pursuant to the Omnibus Budget Reconciliation Act of 1990 ("OBRA")
and comparable state regulations, our pharmacists are required to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects and other information deemed
significant by the pharmacists and may have a duty to warn customers regarding
any potential adverse effects of a prescription drug if the warning could
reduce or negate such affect.
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 and are subject to
federal Drug Enforcement Agency regulations relative to our pharmacy
operations, including purchasing, storing and dispensing of controlled
substances. 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.
We are also subject to laws governing our relationship with associates,
including minimum wage requirements, overtime and working conditions.
Increases in the federal minimum wage rate, associate benefit costs or other
costs related to associates could adversely affect our results of operations.
In addition, in connection with the ownership and operations of our stores,
distribution centers and other sites, we are subject to laws and regulations
relating to the protection of the environment and health and safety matters,
including those governing the management and disposal of hazardous substances
and the cleanup of contaminated sites. Violations of or liabilities under
these laws and regulations as a result of our current or former operations or
historical activities at our sites, such as gasoline service stations and dry
cleaners, could result in significant costs.
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.
Item 2. Properties
We own our corporate headquarters, which is located in a 205,000 square foot
building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a 99,000
square foot building near Harrisburg, Pennsylvania for use by additional
administrative personnel. We lease 3,214 of our operating 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
6
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 2, 2002, we operated 3,497 retail drugstores. 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 and such stores typically
include a drive-thru pharmacy. The overall average selling square feet of each
store in our chain is 11,100 square feet. The overall average total square
feet of each store in our chain is 12,800. The stores on the east coast
average 8,600 selling square feet per store (9,500 average total square feet
per store). The west coast stores average 17,020 selling square feet per store
(21,100 average total square feet per store). The central stores average 9,500
selling square feet per store (10,200 average total square feet per store).
The table below identifies the number of stores by state as of March 2,
2002:
State Store Count
----- -----------
Alabama.......................................................... 123
Arizona.......................................................... 3
California....................................................... 594
Colorado......................................................... 30
Connecticut...................................................... 38
Delaware......................................................... 26
District of Columbia............................................. 8
Georgia.......................................................... 50
Idaho............................................................ 22
Indiana.......................................................... 9
Kentucky......................................................... 119
Louisiana........................................................ 91
Maine............................................................ 81
Maryland......................................................... 144
Michigan......................................................... 335
Mississippi...................................................... 32
Nevada........................................................... 37
New Hampshire.................................................... 39
New Jersey....................................................... 171
New York......................................................... 397
Ohio............................................................. 246
Oregon........................................................... 71
Pennsylvania..................................................... 359
Tennessee........................................................ 48
Utah............................................................. 30
Vermont.......................................................... 12
Virginia......................................................... 142
Washington....................................................... 137
West Virginia.................................................... 103
-----
Total........................................................... 3,497
=====
7
Our stores have the following attributes at March 2, 2002:
Attribute Number Percentage
--------- ------ ----------
Freestanding ............................................ 1,857 53.1%
Drive through pharmacy .................................. 1,277 36.5
One-hour photo development department ................... 2,287 65.4
GNC stores-within a Rite Aid-store ...................... 785 22.4
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
Utica, New York(1) ................................... Leased 115,000
Poca, West Virginia .................................. Owned 264,000
Dunbar, West Virginia(1) ............................. Leased 61,000
Perryman, Maryland ................................... Leased 885,000
Tuscaloosa, Alabama .................................. Owned 238,000
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 believe that
the capacity of our distribution facilities is adequate.
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 in 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 2,
2002, we subleased 5,246,700 square feet of space and an additional 4,863,100
square feet of space in closed or relocated stores was not subleased.
Item 3. Legal Proceedings
We are party to numerous legal proceedings, as described below.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving our
financial reporting and other matters. We are cooperating fully with the SEC
and the United States Attorney. Settlement discussions have begun with the
United States Attorney for the Middle District of Pennsylvania. The United
States Attorney has proposed that the government would not institute any
criminal proceeding against us if we enter into a consent judgement providing
for a civil penalty payable over a period of years. The amount of the civil
penalty has not been agreed to and there can be no assurance that a settlement
will be reached or that the amount of such penalty will not have a material
adverse effect on our result of operations, financial condition or cash flows.
8
The U.S. Department of Labor has commenced an investigation of matters
relating to our associate benefit plans, including the principal 401(k) plan,
which permitted associates 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 Rite Aid Corporation 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 putative 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. As a result of discussions we have had with the independent
trustee and the attorneys for the putative class action plaintiff, we have
arrived at a preliminary understanding which would resolve all claims arising
out of our associate benefit plans by an agreement to maintain the current
level of benefits and a current payment that will cost us, net of insurance,
approximately $3.3 million, which we have accrued. Various non-monetary terms
and conditions remain to be negotiated and agreed upon and any agreement
reached will be subject to the approval of the Department of Labor and the
District Court. There can be no assurance that a settlement of the matter will
be agreed upon or, if agreed upon, approved by the Department of Labor and the
District Court.
These investigations and settlement discussions are ongoing and we cannot
predict their outcomes. If we were convicted of any crime, certain licenses
and government contracts such as Medicaid plan reimbursement agreements that
are material to our operations may be revoked, which would have a material
adverse effect on our results of operations, financial condition or cash
flows. In addition, substantial penalties, damages or other monetary remedies
assessed against us, including a settlement, could also have a material
adverse effect on our results of operation's, financial condition or cash
flows.
Stockholder litigation
We, certain 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. Most of the complaints asserted claims under
Sections 10 and 20 of the Securities Exchange Act of 1934, based upon the
allegation that our financial statements for fiscal 1997, fiscal 1998 and
fiscal 1999 fraudulently misrepresented our financial position and results of
operation for those periods. All of these cases have been consolidated in the
U.S. District Court for the Eastern District of Pennsylvania. On November 9,
2000, we announced that we had reached an agreement to settle the consolidated
securities class action lawsuits pending there and in the Delaware Court of
Chancery. Under the agreement, we issued $149.5 million of senior secured
notes due March 2006 and paid $45.0 million in cash, which was fully funded by
our officers' and directors' liability insurance. As additional consideration
for the settlement, we assigned to the plaintiffs all of our claims against
the above named executives and KPMG LLP. On August 16, 2001, the district
court approved the settlement. Certain of the nonsettling defendants have
appealed the order. We cannot predict the outcome of that appeal. If the
settlement does not become final, this litigation could result in a material
adverse effect on our results of operations, financial condition or cash
flows. Several members of the class have elected to "opt-out" of the class
and, as a result, approval of the settlement becomes final and they will be
free to individually pursue their claims. We believe that their claims,
individually and in the aggregate, are not material.
A purported class action has been instituted by a stockholder against us in
Delaware state court on behalf of stockholders who purchased shares of our
common stock prior to May 2, 1997, and who continued to hold them after
November 10, 1999, alleging claims similar to the claims alleged in the
consolidated securities class action lawsuits described above. The amount of
damages sought was not specified and may be material. We have filed a motion
to dismiss this claim which is pending before the court. These claims are
ongoing and we cannot predict their outcome. An unfavorable outcome could
result in a material adverse effect on our results of operations, financial
condition or cash flows.
9
Drug reimbursement matters
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 United
States 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 healthcare plans
by failing to appropriately issue refunds for partially filled prescriptions
and prescriptions which were not picked up by customers. The United States
Department of Justice has intervened in this lawsuit, as is its right under
the law. We have reached an agreement to settle these investigations and the
lawsuit filed by the private individual for $7.2 million, which is subject to
court approval. We have reserved $7.2 million against this potential
liability.
These claims are ongoing and we cannot predict their outcome. If any of
these cases result in a substantial monetary judgement against us or are
settled on unfavorable terms, our results of operations, financial condition
or cash flows could be materially adversely affected.
Other
We, together with a significant number of major U.S. retailers, have been
sued by the Lemelson Foundation in a complaint which alleges that portions of
the technology included in our point-of-sale system infringe upon a patent
held by the plaintiffs. The amount of damages sought is unspecified and may be
material. We cannot predict the outcome of this litigation or whether it could
result in a material adverse effect on our results of operations, financial
conditions or cash flows.
We are subject from time to time to lawsuits arising in the ordinary course
of business. In our opinion, these matters are adequately covered by insurance
or, if not so covered, are without merit or are of such nature or involve
amounts that would not have a material adverse effect on our results of
operations, financial condition or cash flows if decided adversely.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth
quarter of our fiscal year covered by this report.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York Stock Exchange and the Pacific
Exchange under the symbol "RAD." On May 1, 2002, we had approximately 11,982
record shareholders. Quarterly high and low stock prices, based on the New
York Stock Exchange composite transactions, are shown below.
Fiscal Year Quarter High Low
----------- ------- ---- ----
2003 (through May 1, 2002) ............................................................. First 4.22 3.08
2002 ................................................................................... First 9.06 5.35
Second 9.74 7.37
Third 8.39 4.69
Fourth 5.06 2.06
2001 ................................................................................... First 8.50 4.75
Second 8.50 4.00
Third 4.38 2.44
Fourth 6.09 1.75
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 facility does not allow us to
pay cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We have not sold any unregistered securities during the period covered by
this report that was not previously disclosed in one of our Quarterly Reports
on Form 10-Q.
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-43.
11
Fiscal Year Ended
-------------------------------------------------------------------------------------------
March 2, 2002 March 3, 2001 February 26, 2000 February 27, 1999 February 28, 1998
(52 weeks) (53 weeks) (52 weeks) (52 weeks)(1) (52 weeks)(2)
------------- ------------- ----------------- ----------------- -----------------
(Dollars in thousands, except per share amounts)
Summary of Operations:
REVENUES............................ $ 15,171,146 $ 14,516,865 $ 13,338,947 $ 12,438,442 $ 11,352,637
COSTS AND EXPENSES:
Cost of goods sold, including
occupancy costs.................. 11,742,309 11,151,490 10,213,428 9,406,831 8,419,021
Selling, general and administrative
expenses......................... 3,382,962 3,412,442 3,651,248 3,168,363 2,751,360
Stock-based compensation (benefit)
expense.......................... (15,891) 45,865 (43,438) 32,200 22,200
Goodwill amortization.............. 21,007 20,670 24,457 26,055 26,169
Store closing and impairment
charges.......................... 251,617 388,078 139,448 195,359 155,024
Interest expense................... 396,064 649,926 542,028 274,826 202,688
Interest rate swap contracts....... 41,894 -- -- -- --
Loss on debt and lease conversions
and modifications................ 154,465 100,556 -- -- --
Share of loss from equity
investments...................... 12,092 36,675 15,181 448 1,886
Gain on sale of assets and
investments, net................. (42,536) (6,030) (80,109) -- (52,621)
------------ ------------ ------------ ------------ ------------
15,943,983 15,799,672 14,462,243 13,104,082 11,525,727
------------ ------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes,
extraordinary item and cumulative
effect of accounting change...... (772,837) (1,282,807) (1,123,296) (665,640) (173,090)
INCOME TAX EXPENSE (BENEFIT)........ (11,745) 148,957 (8,375) (216,941) (28,064)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations
before extraordinary item and
cumulative effect of accounting
change........................... (761,092) (1,431,764) (1,114,921) (448,699) (145,026)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, net of 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 income tax
benefit of $734................... -- (168,795) -- -- --
EXTRAORDINARY ITEM, loss on early
extinguishment of debt, net of
income taxes of $0................ (66,589) -- -- -- --
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE, net of income tax benefit
of $18,200........................ -- -- (27,300) -- --
------------ ------------ ------------ ------------ ------------
NET LOSS......................... $ (827,681) $ (1,589,224) $ (1,133,043) $ (461,522) $ (165,240)
============ ============ ============ ============ ============
BASIC AND DILUTED (LOSS) INCOME PER
SHARE:
Loss from continuing operations.... $ (1.68) $ (5.15) $ (4.34) $ (1.74) $ (0.58)
Income (loss) from discontinued
operations....................... -- (0.50) 0.04 (0.05) (0.08)
Loss from extraordinary item....... (0.14) -- -- -- --
Cumulative effect of accounting
change........................... -- -- (0.11) -- --
------------ ------------ ------------ ------------ ------------
Net loss per share............... $ (1.82) $ (5.65) $ (4.41) $ (1.79) $ (0.66)
============ ============ ============ ============ ============
Year-End Financial Position:
Working capital (deficit)........... $ 1,524,262 $ 1,955,877 $ 752,657 $ (892,115) $ 1,258,580
Property, plant and equipment (net). 2,096,030 3,041,008 3,445,828 3,328,499 2,460,513
Total assets........................ 6,479,208 7,913,911 9,845,566 9,778,451 7,392,147
Total debt (3)...................... 4,056,468 5,894,548 6,612,868 5,922,504 3,132,894
Redeemable preferred stock.......... 19,561 19,457 19,457 23,559 --
Stockholders' equity (deficit)...... 9,616 (354,435) 432,509 1,339,617 1,898,203
Other Data:
Cash flows from continuing
operations provided by (used in):
Operating activities............... 16,343 (704,554) (623,098) 278,947 622,865
Investing activities............... 342,531 677,653 (504,112) (2,705,043) (1,050,322)
Financing activities............... (107,109) (64,324) 905,091 2,660,341 535,066
Capital expenditures (4)............ 175,183 132,504 573,287 1,222,674 716,052
Cash dividends declared per common
share............................. $ 0 $ 0 $ .3450 $ .4375 $ .4075
Basic weighted average shares....... 474,028,000 314,189,000 259,139,000 258,516,000 250,659,000
Diluted weighted average shares..... 474,028,000 314,189,000 259,139,000 258,516,000 250,659,000
Number of retail drugstores......... 3,497 3,648 3,802 3,870 3,975
Number of associates................ 75,000 75,500 77,300 89,900 83,000
(Footnotes on next page)
12
- ---------------
(1) PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS.
Accordingly, our Pharmacy Benefit Management ("PBM") segment is reported as
a discontinued operation for all periods presented. See note 23 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 $183 million, $1.1
billion, $1.1 billion, $1.1 billion and $622 million as of March 2, 2002,
March 3, 2001, February 26, 2000, February 27, 1999 and February 28, 1998,
respectively.
(4) Capital expenditures represent expenditures for property and equipment.
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 2002 and 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. In fiscal 2002, the actions taken were: (i) completion of the
refinancing, which extended the maturity of the majority of our debt,
converted a portion of our debt to equity, and reclassified capital leases to
operating leases, resulting in a aggregate loss of $221.1 million and (ii) our
decision to close or relocate certain stores, which resulted in a
$161.3 million charge which is included in the $251.6 million charge for store
closing and impairment. Among the actions taken in fiscal 2001 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 a $149.2 million charge which is
included in the $388.1 million charge for store closing 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.
Maturing Store Base. Since the beginning of fiscal 1997, we built 473 new
stores, relocated 967 stores, remodeled 470 stores and closed 1,307 stores.
These new, relocated and remodeled stores represented approximately 55% of our
total stores at March 2, 2002 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 three to five 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, preparing our financial statements and defending
our company in pending investigations. Included in these expenses in fiscal
2001 are the costs of the Deloitte & Touche LLP audits, the investigation by
the law firm of Swidler, Berlin, Shereff, Friedman, assisted by Deloitte &
Touche
13
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 Andersen LLP to
assist management in reviewing and reconciling our books and records. We
incurred $17.5 million in fiscal 2002, $82.1 million in fiscal 2001 and we
expect to incur $10.0 million to $15.0 million in fiscal 2003. 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.
Dilutive Equity Issuances. At March 2, 2002, 515.1 million shares of common
stock were outstanding and an additional 174.7 million shares of common stock
were issuable related to outstanding stock options, convertible notes,
preferred stock and warrants. During fiscal 2002, we issued 86.4 million
shares of common stock in exchange for $588.7 million of indebtedness. We also
issued 80.1 million shares of common stock for $528.4 million. See
"--Liquidity and Capital Resources--Refinancing" for further details.
At March 2, 2002, our 174.7 million shares of common stock potentially
issuable consist of the following:
Outstanding Convertible Preferred Warrants and
Strike Price Stock Options(a) Notes(b) Stock Other Total
- ------------ ---------------- ----------- --------- ------------ -------
(Shares in thousands)
$5.50 and under........................................... 46,897 -- 65,728 30 112,655
$5.51 to $7.50............................................ 1,440 38,462 -- -- 39,902
$7.51 and over............................................ 12,422 4,206 -- 5,500 22,128
------ ------ ------ ----- -------
Total issuable shares..................................... 60,759 42,668 65,728 5,530 174,685
====== ====== ====== ===== =======
(a) The exercise of these options would provide cash of $375.4 million
(b) The conversion of these notes to equity would reduce the principal amount
of debt by $400.5 million
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.
In March 2001, the Company sold its investment in AdvancePCS equity
securities for $284.2 million, resulting in a gain of $53.2 million.
Additionally, AdvancePCS repurchased the 11% promissory notes for
$200.0 million, plus accrued interest.
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
82% of our front-end sales are in cash. Third-party payors, which typically
settle in fewer than 30 days, accounted for 92.0% of our pharmacy sales and
56.4% of our revenues in fiscal 2002.
Seasonality. We experience seasonal fluctuations in our results of
operations in the first and fourth quarters as the result of the concentration
of holidays and the flu season. We tailor certain front-end merchandise to
capitalize on holidays and seasons.
Industry Trends. It is anticipated that pharmacy sales in the United States
will increase 75% over the next five years. This anticipated growth is
expected to be driven by the "baby boom" generation entering their fifties,
the increasing life expectancy of the American population, the introduction of
several new drugs and inflation. The retail drugstore industry is highly
fragmented and has been experiencing consolidation. We believe that the
continued consolidation of the drugstore industry will further increase
competitive pressures in the industry. We expect to continue to compete on the
basis of price and convenience, particularly in front-end products, and
therefore will continue to focus on programs designed to improve our image
with customers. Prescription drug sales continue to represent a great portion
of our new business due to the general aging of the population, the use of
pharmaceuticals to treat a growing number of healthcare problems, and the
14
introduction of a number of successful new prescription drugs. In fiscal 2002,
we were reimbursed by third party payors for approximately 92.0% of all of the
prescription drugs that we sold. If third-party payors reduce their
reimbursement levels or if Medicare covers prescription drugs at reimbursement
levels lower than our current retail prices, our margins on these sales would
be reduced and the profitability of our business could be adversely affected.
Results of Operations
Revenue and Other Operating Data
Year Ended
--------------------------------------------------
March 2, 2002 March 3, 2001 February 26, 2000
(52 Weeks) (53 Weeks) (52 Weeks)
------------- ------------- -----------------
(Dollars in thousands)
Revenue ................................................................ $15,171,146 $14,516,865 $13,338,947
Revenue growth ......................................................... 4.5% 8.8% 7.2%
Same store sales growth ................................................ 8.3% 9.1% 7.9%
Pharmacy sales growth .................................................. 9.6% 8.7% 15.6%
Same store pharmacy sales growth ....................................... 11.4% 10.9% 16.2%
Pharmacy as a % of total sales ......................................... 61.3% 59.5% 58.4%
Third-party sales as a % of total pharmacy sales ....................... 92.0% 90.3% 87.8%
Front-end sales growth ................................................. 1.9% 3.8% (2.6)%
Same store front-end sales growth ...................................... 3.6% 6.5% (2.2)%
Front-end as a % of total sales ........................................ 38.7% 40.5% 41.6%
Store data:
Total stores (beginning of period) .................................... 3,648 3,802 3,870
New stores ............................................................ 7 9 77
Closed stores ......................................................... (168) (163) (181)
Store acquisitions, net ............................................... 10 -- 36
Total stores (end of period) .......................................... 3,497 3,648 3,802
Remodeled stores ...................................................... 64 98 14
Relocated stores ...................................................... 22 63 180
Note: Except for revenue growth, all percentages in the above table are
based on a comparable 52 week period.
Revenues
Fiscal 2002 (52 weeks) revenues increased 4.5% over fiscal 2001 (53 weeks).
Excluding the extra week, revenues would have increased 6.5%, driven by
increases of 1.9% in front-end sales and 9.6% in pharmacy. Same store sales
growth for fiscal 2002 was 8.3% (pharmacy of 11.4% and front-end of 3.6%). As
fiscal 2001 was a 53 week year, same store sales are calculated by comparing the
52 week period ended March 2, 2002 with the 52 week period ended March 3, 2001.
Fiscal 2002 pharmacy sales led sales growth due to an increase in both
prescriptions filled (on a comparable 52 week basis) and sales price per
prescription. Factors contributing to our pharmacy same store sales increases
include inflation, improved attraction and retention of managed care
customers, our reduced cash pricing, our increased focus on pharmacy
initiatives such as predictive refill, and favorable industry trends. These
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.
Front-end fiscal 2002 sales, which includes all non-prescription sales, such
as seasonal merchandise, convenience items, and food and other non-
prescription sales, also increased. The increase was primarily a result of
increased sales volume due to improved assortments, lower prices on key items
and distributing a nationwide weekly advertising circular.
Our total revenue growth in fiscal 2001 of 8.8% was also fueled by strong
growth in pharmacy sales of 8.7%, an increase in front end sales of 3.8% and
the additional week in fiscal 2001. Pharmacy sales led
15
revenue growth with same store sales increases of 10.9% accompanied by very
strong front-end same store sales growth of 6.5%. The pharmacy and front-end
increases were due to the same factors as described above for fiscal 2002.
For fiscal 2000, total revenue increased 7.2% based on pharmacy sales growth
of 15.6% with front-end sales declining 2.6%. Pharmacy sales had same store
increases of 16.2% due to the same factors as described above for fiscal 2002
and 2001 as well as the purchase of prescription files from independent
pharmacies. The front-end decrease was consistent with front-end same store
sales decreases of 2.2% due to elevated levels of out-of-stock merchandise in
the third and fourth quarters of fiscal 2000, and the decisions of former
management to suspend the weekly advertising program in fiscal 2000 and to
raise front-end prices to levels that were not competitive.
The growth rates in pharmacy sales for fiscal 2002 and 2001 were lower than
fiscal 2000 due primarily to a significant reduction in the number of
prescription files we purchased and store relocations we effected.
Costs and Expenses
Year Ended
--------------------------------------------------
March 2, 2002 March 3, 2001 February 26, 2000
(52 Weeks) (53 Weeks) (52 Weeks)
------------- ------------- -----------------
(Dollars in thousands)
Costs of goods sold .................................................... $11,742,309 $11,151,490 $10,213,428
Gross margin ........................................................... 22.6% 23.2% 23.4%
Selling, general and administrative expenses ........................... $ 3,382,962 $ 3,412,442 $ 3,651,248
Selling, general and administrative expenses as a percentage of
revenues .............................................................. 22.3% 23.5% 27.4%
Stock-based compensation (benefit) expense ............................. $ (15,891) $ 45,865 $ (43,438)
Goodwill amortization .................................................. 21,007 20,670 24,457
Store closing and impairment charges ................................... 251,617 388,078 139,448
Interest expense ....................................................... 396,064 649,926 542,028
Interest rate swap contracts ........................................... 41,894 -- --
Loss on debt and lease conversions and modifications ................... 154,465 100,556 --
Share of loss from equity investments .................................. 12,092 36,675 15,181
Gain on sale of assets and investments, net ............................ (42,536) (6,030) (80,109)
Cost of Goods Sold
Gross margin was 22.6% for fiscal 2002 compared to 23.2% in fiscal 2001.
Gross margin was negatively impacted by the continuing trend of a shifting in
sales mix from front-end to pharmacy, inflation, increased third party
reimbursed prescription sales as a percent of total prescription sales, and
lower cash prices on pharmacy sales. The increase in third party prescription
sales had a negative impact on gross profit because they are paid by a person
or entity other than the recipient of the prescribed pharmaceutical, and are
generally subject to lower negotiated reimbursement rates in conjunction with
a pharmacy benefit plan. Third party sales as a percentage of total pharmacy
sales were 92.0% and 90.3% in fiscal 2002 and 2001, respectively.
Additionally, we incurred $31.4 million primarily in inventory liquidation
losses related to our closed stores compared to the $17.5 million incurred in
fiscal 2001. Also negatively impacting gross margin were higher LIFO costs,
higher shrink costs and the reclassification of certain leases from capital to
operating in connection with the June 2001 refinancing, which caused an
increase in fiscal 2002 occupancy costs. Partially offsetting these items was
an increase in gross margin on front end merchandise driven by increased
markdown support from vendors, improvements in returns losses and lower
depreciation expense.
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
16
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.
We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO
charge was $69.3 million in fiscal 2002, $40.7 million in fiscal 2001 and
$34.6 million in fiscal 2000.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for 2002 includes
$17.5 million incurred in connection with our defense of shareholder
litigation and cooperating with various governmental investigations. Also
included in SG&A expense for fiscal 2002 is a charge of $7.1 million for the
accrual of anticipated loss on non-recurring litigation, and $8.8 million to
terminate an exclusivity contract with a certain vendor. Offsetting these
items are receipts of $39.1 million for the settlement of litigation with
certain drug manufacturers and $7.1 million of expense reduction resulting
primarily from senior executives releasing their rights to their non-qualified
defined benefit arrangements. Excluding these items, SG&A as a percentage of
revenues was 22.4% in fiscal 2002.
SG&A expenses for fiscal 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 $20.1 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 historical financial statements and various governmental
investigations. Excluding these items, SG&A as a percentage of revenue was
23.2%.
After considering the items described in the previous paragraphs, SG&A on an
adjusted basis of 22.4% for fiscal 2002 compares favorably with SG&A on an
adjusted basis of 23.2% for fiscal 2001 due to decreased depreciation and
amortization charges resulting from a reduced store count and better
leveraging of our fixed costs resulting from higher sales volume, partially
offset by higher associate benefit costs and higher advertising costs.
SG&A expense for 2000 was unfavorably impacted by a charge of $232.8 million
related to litigation issues. Excluding this item 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.
Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Year Ended
--------------------------------------------------
March 2, 2002 March 3, 2001 February 26, 2000
------------- ------------- -----------------
(Dollars in thousands)
Impairment charges ..................................................... $157,962 $214,224 $120,593
Store and equipment lease exit charges ................................. 93,303 57,668 18,855
Impairment of investments .............................................. 352 116,186 --
======== ======== ========
$251,617 $388,078 $139,448
======== ======== ========
Impairment Charges. In fiscal 2002, 2001 and 2000, store closing and
impairment charges include non-cash charges of $158.0 million, $214.2 million
and $120.6 million, respectively, for the impairment of long-lived assets
(including allocable goodwill) of 365, 495 and 249 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.
17
Store and Equipment Lease Exit Charges. Charges 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. This liability is discounted using a risk-free
rate of interest. We evaluate these assumptions each quarter and adjust the
liability accordingly. Also included in store and equipment lease exit costs
are charges of $1.3 million incurred in fiscal 2002 related to the early
termination of an equipment lease.
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.
Interest Expense
Interest expense was $396.1 million infiscal 2002 compared to $649.9 million
in fiscal 2001. Interest expense for fiscal 2002 decreased from 2001 due to
the reduction of debt resulting from the sale of PCS, debt for equity
exchanges and the June 2001 refinancing, which included the relinquishment of
certain renewal options on real estate leases that resulted in a
reclassification from capital leases to operating leases.
Interest expense was $649.9 million infiscal 2001 compared to $542.0 million
in fiscal 2001. In fiscal 2001, we increased our average outstanding debt with
the addition of the $1.1 billion senior secured credit facility, which
included 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.
The annual weighted average interest rates on our indebtedness in fiscal
2002, fiscal 2001 and fiscal 2000 were 8.2%, 8.2% and 7.4% respectively.
For fiscal 2003, annual interest expense is expected to be $350.0 million to
$370.0 million.
Interest Rate Swap Contracts
We entered into interest rate swap contracts to hedge the exposure to
increasing rates with respect to our variable rate debt. As a result of the
June 2001 refinancing, the interest rate swap contracts no longer qualify for
hedge accounting treatment, and therefore the changes in fair value of these
interest rate swap contracts is required to be recorded as a component of net
loss. Accordingly, we recognized a charge of $31.0 million representing the
amount that we would have to pay the counter party to terminate the contracts
as of that date. Subsequent changes in the market value of the interest rate
swaps, inclusive of cash payments, have been recorded in this caption on the
statement of operations. The total expense recorded in this caption for fiscal
2002 is $41.9 million. This amount exceeds the initial charge resulting from
the June 27, 2001 refinancing because of a further reduction of interest rates
from the June 27, 2001 refinancing through March 2, 2002. Our termination
liability is $19.0 million as of March 2, 2002. These contracts expire in the
second quarter of fiscal 2003.
Income Taxes
We had net losses in fiscal 2002, fiscal 2001 and fiscal 2000. A tax benefit
of $11.7 million, expense of $149.0 million and benefit of $26.6 million
(including the benefit related to cumulative effect of accounting
18
change) have been recorded for fiscal 2002, fiscal 2001 and fiscal 2000,
respectively. The fiscal 2002 benefit is primarily due to the favorable
outcome of federal income tax litigation. The fiscal 2001 expense is primarily
due to the increase in the income tax valuation allowance caused by the sale
of PCS. The benefit of the net operating loss carryforwards ("NOLs") generated
in each period has been fully offset by a valuation allowance as a result of
management's determination that, based on available evidence, it is more
likely than not that the deferred tax assets will not be realized.
We have undergone an ownership change for statutory purposes during fiscal
2002, which resulted in a limitation on the future use of net operating loss
carryforwards. We believe that this limitation does not further impair the net
operating loss carryforwards because they are fully reserved.
Based on the tax law changes enacted on March 9, 2002, we expect to record a
tax benefit of approximately $44.0 million from the five-year net operating
loss carry-back provision. This benefit will be recorded in the first quarter
of fiscal 2003.
Other Significant Charges
In addition to the operational matters discussed above, our results in
fiscal 2002 and 2001 have been adversely affected by other significant
charges. We recorded losses of $12.1 million and $36.7 million in fiscal 2002
and 2001, respectively, representing our share of drugstore.com losses. We
recorded $154.5 million and $100.6 million in fiscal 2002 and 2001,
respectively for losses on debt and lease conversions and modifications and an
extraordinary loss of $66.6 million in fiscal 2002 relating to early
extinguishment of debt resulting from the June 27, 2001 refinancing. We
recorded stock-based compensation benefit of $15.9 million and expense of
$45.9 million in fiscal 2002 and 2001, respectively, resulting primarily from
the impact of applying variable plan accounting to several of our stock-based
compensation plans. We also recorded a gain of $53.2 million in fiscal 2002
resulting from the sale of AdvancePCS securities. In fiscal 2001, we recorded
a net loss of $168.8 million on the disposal of the PBM segment.
Liquidity and Capital Resources
General
We have two primary sources of liquidity: (i) cash provided by operations
and (ii) the revolving credit facility under our new senior secured credit
facility. Our principal uses of cash are to provide working capital for
operations, service our obligations to pay interest and principal on debt, and
to provide funds for capital expenditures.
Our ability to borrow under the senior secured credit facility is based on a
specified borrowing base consisting of eligible accounts receivable and
inventory. On March 2, 2002, the term loan was fully drawn except for
$21.5 million, which is available and may be drawn to pay for the remaining
outstanding 10.5% senior secured notes when they mature on September 15, 2002.
In addition, we had $438.7 million in additional available borrowing capacity
under the revolving credit facility net of outstanding letters of credit of
$61.3 million.
The senior secured credit facility, as amended, also allows us, at our
option, to issue up to $893.0 million of unsecured debt that is not guaranteed
by any of our subsidiaries, reduced by the following debt to the extent
incurred: (i) $150.0 million of financing transactions of existing owned real
estate; (ii) $643.0 million of additional debt secured by the facility's
collateral on a second priority basis; and (iii) $100.0 million of financing
transactions for property or assets acquired after June 27, 2001. The
$893.0 million of permitted debt, whether secured or unsecured, is reduced by
the aggregate outstanding, undefeased balances of the 5.25% convertible
subordinated notes, the 6.0% dealer remarketable securities and the 4.75%
convertible notes and the senior secured notes (see "Other Transactions"
below). As of March 2, 2002, we had outstanding principal balances of
$150.5 million, $83.6 million, $250.0 million and $149.5 million of the 5.25%
convertible subordinated notes, 6.0% dealer remarketable securities, 4.75%
convertible notes and the senior secured notes, respectively. As of March 2,
2002, our remaining permitted debt under the senior secured credit facility is
$259.4 million. Our 11.25% senior notes due July 2008 also permit
$150.0 million of real estate financing, $400.0 million of additional other
debt and $600.0 million of additional permitted debt,
19
which includes allowing us to increase our senior secured credit facility. As
of March 2, 2002 our remaining permitted debt under the 11.25% senior notes
due 2008 is $600.5 million.
The senior secured credit facility, as amended, requires us to meet various
financial ratios and limits capital expenditures. Beginning with the 12 months
ended March 2, 2002, the covenants require us to maintain a maximum leverage
ratio of 8.40:1, increasing to 9.50:1 for the twelve months ending June 1,
2002, and increasing again to 10.00:1 for the twelve months ending August 31,
2002, before gradually decreasing to 6.00:1 for the twelve months ending
May 31, 2005. We must also maintain a minimum interest coverage ratio of
1.20:1 for the twelve months ending March 2, 2002, decreasing to 1.15:1 for
the twelve months ending June 1, 2002 and decreasing again to 1.10:1 for the
twelve months ending August 31, 2002 before gradually increasing to 2.00:1 for
the twelve months ending November 30, 2004. In addition, we must maintain a
minimum fixed charge ratio of 0.9:1 for the twelve months ending March 2,
2002, gradually increasing to 1.10:1 for the twelve months ending August 31,
2004. Capital expenditures not relating to the June 27, 2001 refinancing are
limited to $150.0 million annually beginning with the twelve months ending
March 2, 2002. These capital expenditure limits are subject to upward
adjustment based upon availability of excess liquidity as defined in our
senior secured credit facility.
We were in compliance with the covenants of the senior secured credit
facility, as amended, and our other credit facilities and debt instruments as
of March 2, 2002. 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.
The senior secured credit facility provides for customary events of default,
including nonpayment, misrepresentation, breach of covenants and bankruptcy.
It is also an event of default if any event occurs that enables, or which with
the giving of notice or the lapse of time would enable, the holder of our debt
to accelerate the maturity of debt having a principal amount of $25.0 million
or more.
Refinancing
On June 27, 2001, we completed a major refinancing that extended the
maturity dates of the majority of our debt to 2005 or beyond, provided
additional equity, converted a portion of our debt to equity and reclassified
capital leases to operating leases. The components of the refinancing are
described in detail in the footnotes to the consolidated financial statements.
Major components of the refinancing are summarized below:
New Secured Credit Facility. We entered into a new $1.9 billion syndicated
senior secured credit facility with a syndicate of banks led by Citicorp USA,
Inc. as senior agent. The new facility matures on June 27, 2005 unless more
than $20.0 million of our 7.625% senior notes due April 15, 2005 are
outstanding on December 31, 2004, in which event the maturity date is March 15,
2005. The new facility consists of a $1.4 billion term loan facility and a
$500.0 million revolving credit facility. The term loan was used to prepay
various outstanding debt balances.
High Yield Notes. We issued $150.0 million of 11.25% senior notes due July
2008 in a private placement offering. These notes are unsecured and are
effectively subordinate to our secured debt.
Debt for Debt Exchange. We exchanged $152.0 million of our existing 10.50%
senior secured notes for an equal principal amount of 12.50% senior secured
notes due September 15, 2006. The 12.50% notes are secured by a second
priority lien on the collateral of the senior secured credit facility. In
addition, holders of these notes received warrants to purchase 3.0 million
shares of our common stock at $6.00 per share. On June 29, 2001, the warrant
holders elected to exercise these warrants, on a cashless basis, and as a
result 1.0 million shares of common stock were issued.
Tender Offer. On May 24, 2001, we commenced a tender offer for the 10.50%
senior secured notes due 2002 at a price of 103.25% of the principal amount.
The tender offer was closed on June 27, 2001, at which time $174.5 million
principal was tendered. We incurred a tender offer premium of $5.7 million as
a result of the transaction. We used proceeds from the new senior secured
credit facility to pay for the tender offer.
20
Debt for Equity Exchanges. We completed exchanges of $588.7 million of debt
for 86.4 million shares of common stock.
Sales of Common Stock. We issued 80.1 million shares of our common stock
for net proceeds of $528.4 million.
Lease Obligations. We relinquished certain renewal options which had been
available under the terms of certain real estate leases on property previously
sold and leased back and accordingly, we reclassified the related leases as
operating leases thereby reducing outstanding capital lease obligations by
$850.8 million.
Impact on Results of Operations for Fiscal 2002. As a result of the
refinancing, we: i) recorded an extraordinary loss on early extinguishment of
debt of $66.6 million; ii) recognized a loss of $21.9 million related to debt
and lease conversions and modifications; and iii) recognized a charge of
$31.0 million related to our interest rate swap agreements.
Other Transactions
Convertible Notes. We issued $250.0 million of our 4.75% convertible notes
due December 2006 in November 2001. These notes were issued at a 3% discount
resulting in cash proceeds of $242.5 million. These notes are unsecured and
are effectively subordinate to our secured debt. The notes are convertible, at
the option of the holder, into shares of our common stock at a conversion
price of $6.50 per share, subject to adjustments to prevent dilution, at any
time.
Repurchase of Debt. We repurchased $24.2 million of our 6.0% dealer
remarketable securities due 2003, $1.0 million of our 10.50% notes due 2002
and $1.5 million of our 5.25% convertible subordinated notes due 2002 during
fiscal 2002.
Senior Secured Notes. We issued $149.5 million of our senior secured notes
due 2006 as part of our settlement of a lawsuit with shareholders. When
issued, we paid interest for the period from October 15, 2001 to January 25,
2002 of $2.1 million. From January 26, 2002, the notes accrue interest at a
variable rate equal to our average bank borrowing rate plus 3.75% until the
final settlement is approved. At that time, the notes will be given an
interest rate, enabling the notes to be traded at face value upon
determination of such rate.
Other
Debt Maturities and Other Obligations. The following table details the
maturities of our indebtedness and lease financing obligations as of March 2,
2002, as well as other contractual cash obligations and commitments.
21
Contractual Obligations and Commitment
Less Than
Total 1 Year 1 to 3 Years 4 to 5 Years After 5 Years
----------- --------- ------------ ------------ -------------
(Dollars in thousands)
Contractual Cash Obligations
Long Term Debt.......................................... $ 3,873,843 $202,913 $ 184,540 $2,389,404 $1,096,986
Capital lease obligations............................... 182,625 6,544 13,765 14,954 147,362
Operating leases........................................ 6,680,051 585,128 1,087,263 921,951 4,085,709
----------- -------- ---------- ---------- ----------
Total Contractual Cash Obligations..................... $10,736,519 $794,585 $1,285,568 $3,326,309 $5,330,057
=========== ======== ========== ========== ==========
Commitments
Lease guarantees........................................ 360,500 -- -- -- --
Outstanding letters of credit........................... 61,324 61,324 -- -- --
----------- -------- ---------- ---------- ----------
Total commitments...................................... $ 421,824 $ 61,324 -- -- --
=========== ======== ========== ========== ==========
We lease certain distribution facilities under a synthetic lease agreement.
The agreement is accounted for as an operating lease. The lease agreement
terminates on June 27, 2005 at which time we intend to either extend the term
of the agreement or make a payment of $106.9 million to purchase the
facilities. Renewal is subject to our meeting certain financial conditions, as
defined in the synthetic lease agreement. Our guaranteed residual obligation
of $85.5 million under the agreement is included in the table above in lease
guarantees.
Net Cash Provided By (Used In) Operating, Investing and Financing Activities
Cash provided by operations was $16.3 million in fiscal 2002. Cash was
provided primarily through improved operating results, a significant reduction
in interest payments and a reduction in inventory levels net of a decrease in
accounts payable.
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 $342.5 million for fiscal 2002.
Cash was provided from the sale of our investment in AdvancePCS, less
expenditures for fixed assets and script file purchases.
Cash provided by investing activities was $677.7 million for fiscal 2001.
Cash was provided from the sale of our discontinued operations, less
expenditures for fixed assets and script file purchases.
Cash used for investing activities was $552.1 million for fiscal 2000. Cash
used for store construction and relocations amounted to $573.3 million, with
an additional $67.8 million used for the acquisition of intangible assets.
These amounts were offset by $169.5 million provided by the sale of assets.
Cash used in financing activities was $107.1 million for fiscal 2002. The
cash used consisted of repayments of long-term debt of $2.3 billion and
payments of deferred financing costs of $83.1 million, offset with new
borrowing of $1.4 billion, bond proceeds of $392.5 million and $530.6 million
of proceeds from the issuance of common stock.
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.
22
Cash provided by financing activities was $905.1 million for fiscal 2000.
Increased borrowings under then existing 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. Cash provided by
financing activities included proceeds received from store sale-leaseback
transactions of $74.9 million.
Capital Expenditures
We plan to make total capital expenditures of approximately $130.0 million
during fiscal 2003, consisting of approximately $61.0 million related to new
store construction, store relocation and store remodel projects. An additional
$69.0 million will be dedicated to the purchase of prescription files from
independent pharmacists, improvements to distribution centers, technology
enhancements and other corporate requirements. 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. Our high level of indebtedness: (a) limits our
ability to obtain additional financing; (b) limits our flexibility in planning
for, or reacting to, changes in our business and the industry; (c) places us
at a competitive disadvantage relative to our competitors with less debt; (d)
renders us more vulnerable to general adverse economic and industry
conditions; and (e) requires us to dedicate a substantial portion of our cash
flow to service our debt. Based upon current levels of operations and planned
improvements in our operating performance, management believes that cash flow
from operations together with available borrowing under the senior secured
credit facility and other sources of liquidity will be adequate to meet our
anticipated annual requirements for working capital, debt service and capital
expenditures for the next twelve months. We will continue to assess our
liquidity position and potential sources of supplemental liquidity in light of
our operating performance and other relevant circumstances. Should we
determine, at any time, that it is necessary to obtain additional short-term
liquidity, we will evaluate our alternatives and take appropriate steps to
obtain sufficient additional funds. Obtaining any such supplemental liquidity
through the increase of indebtedness or asset sales may require the consent of
the lenders under one or more of our debt agreements. There can be no
assurance that any such supplemental funding, if sought, could be obtained or
that our lenders would provide the necessary consents, if required.
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.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 is effective as follows: a) use of the pooling-of-
interest method is prohibited for business combinations initiated after
June 30, 2001; and b) the provisions of SFAS No. 141 also apply to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001 (that is, the date of the acquisition is July 2001 or
later). The adoption of SFAS No. 141 had no impact on our consolidated
financial position or results of operations. SFAS No. 142 is effective for the
fiscal years beginning after December 15, 2001 with respect to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized. SFAS No. 142 specifies that all goodwill and intangibles with
indefinite lives shall not be amortized. Goodwill must be allocated to
reporting units and evaluated for impairment on an annual basis with an
initial impairment assessment to be performed upon adoption of the Statement.
We have evaluated the provisions of SFAS No. 142 and will not have to record
any impairment of goodwill upon
23
our adoption of SFAS No. 142, which is effective March 3, 2002. At March 2,
2002, we had unamortized goodwill of $684.5 million and recorded $21.0 million
of goodwill amortization expense in fiscal 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 retains the requirements of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," to recognize an impairment loss if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and to measure an impairment loss as the difference between the
carrying amount and fair value of the asset. SFAS No. 144 modifies SFAS No.
121 in that it eliminates the requirement to allocate goodwill to long-lived
assets to be tested for impairment. SFAS No. 144 also modifies APB Opinion No.
30, "Reporting the Results of Operations " Reporting the Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," to require discontinued operations
presentation in the income statement for a component of an entity that is to
be disposed. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, and early adoption is encouraged. We plan to adopt SFAS No.
144 effective March 3, 2002 and the impact is not believed to be material.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to allowance for uncollectible receivables and vendor
debits, pension benefits, self insured liabilities, lease exit liabilities,
impairment, litigation and income taxes. We base our estimates on historical
experience, current and anticipated business conditions, the condition of the
financial markets, and various other assumptions that are believed to be
reasonable under existing conditions. Actual results may differ from these
estimates.
We believe that the following critical accounting policies affect our more
significant judgements and estimates used in the preparation of our
consolidated financial statements:
Allowance for uncollectible receivables. The majority of our prescription
sales are made to customers that are covered by third party payors, such as
insurance companies, government agencies and employers. We carry receivables
that represent the amount owed to us for sales made to customers or employees
of those payors that have not yet been paid. We maintain a reserve for the
amount of these receivables deemed to be uncollectible. This reserve is
calculated based upon historical collection activity adjusted for current
conditions. If the financial condition of the payors were to deteriorate,
resulting in an inability to make payments, then an additional reserve would
be required.
Impairment. We evaluate long-lived assets, including stores, for impairment
annually, or whenever events or changes in circumstances indicate that the
assets may not be recoverable. The impairment is measured by calculating the
estimated future cash flows expected to be generated by the store, and
comparing this amount to the carrying value of the store's assets. Cash flows
are calculated utilizing individual store forecasts and total company
projections for the remaining estimated lease lives of the stores being
analyzed. Should actual results differ from those forecasted and projected, we
are subject to future impairment charges related to these facilities.
Goodwill Impairment. As disclosed in the consolidated financial statements,
we have unamortized goodwill in the amount of $684.5 million. In connection
with the adoption of SFAS No. 142, we have performed an impairment test of
goodwill as of March 3, 2002, which resulted in no impairment being
identified. However, the process of evaluating goodwill for impairment
involves the determination of the fair value of our company. Inherent in such
fair value determinations are certain judgements and estimates, including the
interpretation of economic indicators and market valuations and assumptions
about our strategic plans. To the extent that our strategic plans change, or
that economic and market conditions worsen, it is possible that our conclusion
regarding goodwill impairment could change and result in a material effect on
our financial position or results of operations.
24
Vendor debit reserve. We maintain a contra-payable for returns and vendor
allowances that have been earned under the terms of the corresponding
agreements, but have not been charged against a payment to the vendor or
received in cash. We record a reserve against this contra-payable based upon
historical realization of these items and known issues with the vendors.
Differences in actual results from historical experience, or a deterioration
in a vendor relationship could cause write-offs of vendor debits that are
currently not reserved.
Self insurance liabilities. We record estimates for self insured medical,
dental, worker's compensation and general liability insurance coverage. Should
a greater amount of claims occur compared to what was estimated, or medical
costs increase beyond what was anticipated, reserves recorded may not be
sufficient, and additional expense may be recorded.
Benefit plan accruals. We have several defined benefit plans, under which
participants earn a retirement benefit based upon a formula set forth in the
plan. We record expense related to these plans using actuarially determined
amounts that are calculated under the provisions of SFAS No. 87, "Employer's
Accounting for Pensions". Key assumptions used in the actuarial valuations
include the discount rate and the anticipated rate of return on plan assets.
These rates are based on market interest rates, and therefore fluctuations in
market interest rates could impact the amount of pension expense recorded for
these plans.
Litigation reserves. We are involved in litigation on an ongoing basis. We
accrue our best estimate of the probable loss related to legal claims. Such
estimates are developed in consultation with in-house and outside counsel, and
are based upon a combination of litigation and settlement strategies. To the
extent additional information arises or our strategies change, it is possible
that our best estimate of the probable liability may also change.
Lease exit liabilities. We record reserves for closed stores based on
future lease commitments, anticipated ancillary occupancy costs, anticipated
future subleases of properties and current risk free interest rates. If
interest rates or the real estate leasing markets change, additional reserves
may be required.
Stock-based compensation. We maintain various stock-based incentive
compensation programs for executives and key associates. We account for
several of the awards under these plans using variable plan accounting. Under
variable plan accounting, we record expense on the awards over the option
period period based on the difference between the actual market value of the
stock, and the strike price of the award. Therefore, fluctuations in the
market value of the stock will cause fluctuations in the amount of expense
recorded on these awards.
Income taxes. We currently have net operating loss ("NOL") carryforwards
that can be utilized to offset future income for federal and state tax
purposes. These NOLs generate a significant deferred tax asset. However, we
have recorded a valuation allowance against this deferred tax asset as we have
determined that it is more likely than not that we will not be able to fully
utilize the NOLs. Should our assumptions regarding the utilization of these
NOLs change, we may reduce some or all of this valuation allowance, which
would result in the recording of an income tax benefit.
Factors Affecting our Future Prospects
Risks Related to Our Financial Condition
We are highly leveraged. Our substantial indebtedness will severely limit cash
flow available for our operations and could adversely affect our ability to
service debt or obtain additional financing if necessary.
We had, as of March 2, 2002, $4.1 billion of outstanding indebtedness and
stockholders' equity of $9.6 million. We also had additional borrowing
capacity under our new revolving credit facility of $438.7 million at that
time, net of outstanding letters of credit of $61.3 million. Our debt
obligations adversely affect our operations in a number of ways and our cash
flow from operations is insufficient to service our debt, which may require us
to borrow additional funds for that purpose, restructure or otherwise
refinance that debt. Our earnings were insufficient to cover our fixed charges
for fiscal 2002 by $761.6 million.
25
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 our cash flow to service our
debt.
In fiscal 2000, we experienced operational and financial difficulties,
resulting in disputes with suppliers and vendors. Although we believe that our
prior disputes with suppliers and vendors have been largely resolved, any
future material deterioration in our operational or our financial situation
could again impact vendors' and suppliers' willingness to do business with us.
Our ability to make payments on our debt depends upon our ability to
substantially improve our future operating performance, which is subject to
general economic and competitive conditions and to financial, business and
other factors, many of which we cannot control. If our cash flow from our
operating activities is insufficient, we may take certain actions, including
delaying or reducing capital or other expenditures, attempting to restructure
or refinance our debt, selling assets or operations or seeking additional
equity capital. We may be unable to take any of these actions on satisfactory
terms or in a timely manner. Further, any of these actions may not be
sufficient to allow us to service our debt obligations or may have an adverse
impact on our business. Our existing debt agreements limit our ability to take
certain of these actions. Our failure to earn enough to pay our debts or to
successfully undertake any of these actions could have a material adverse
effect on us.
In 2005, a substantial amount of our indebtedness will mature, including the
debt outstanding under our senior secured credit facility.
Some of our debt, including borrowings under our new credit facility, is based
upon variable rates of interest, which could result in higher interest expense
in the event of increases in interest rates.
Approximately $528.0 million of our outstanding indebtedness as of March 2,
2002 bears an interest rate that varies depending upon LIBOR and is not
covered by interest rate swap contracts. 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 obligations under these outstanding loans and have a negative
effect on our cash flow and financial condition.
The covenants in our outstanding indebtedness impose restrictions that may
limit our operating and financial flexibility.
The covenants in the instruments that govern our outstanding indebtedness
restrict our ability to:
o incur liens and debt;
o pay dividends;
o make redemptions and repurchases of capital stock;
o make loans, investments and capital expenditures;
o prepay, redeem or repurchase debt;
o engage in mergers, consolidations, assets dispositions, saleleaseback
transactions and affiliate transactions;
o change our business;
o amend certain debt and other material agreements;
o issue and sell capital stock of subsidiaries;
26
o restrict distributions from subsidiaries; and
o grant negative pledges to other creditors.
Moreover, if we are unable to meet the terms of the financial covenants or
if we breach 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.
If we obtain modifications of our agreements, or are required to obtain
waivers of defaults, we may incur significant fees and transaction costs. In
fiscal 2002 and 2001, we modified certain covenants contained in our senior
credit and loan agreements. In fiscal 2000, we obtained waivers of compliance
contained in our credit facilities and public indentures. In connection with
obtaining these modifications and waivers, we paid significant fees and
transaction costs.
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, the United States Attorney and an
investigation by the United States Department of Labor. In addition to any
fines or damages that we might have to pay, any criminal conviction against us
may result in the loss of licenses and contracts that are material to the
conduct of our business, which would have a negative effect on our results of
operations, financial condition and cash flows.
There are several major ongoing lawsuits and investigations in which we are
involved. These include, in addition to the investigations described below,
several class action lawsuits. While some of these lawsuits have been settled,
pending court approval or appeal, we are unable to predict the outcome of any
of these matters at this time. If any of these cases result in a substantial
monetary judgment against us or are settled on unfavorable terms, our results
of operations, financial condition or cash flows could be materially adversely
affected.
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 associate
benefit plans, including our principal 401(k) plan, which permitted associates
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 licenses
and government contracts, such as Medicaid plan reimbursement agreements, 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 or 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 or cash flows.
We are substantially dependent on a single supplier of pharmaceutical products
to sell products to us on satisfactory terms. A disruption in this
relationship would have a negative effect on our results of operations,
financial condition and cash flow.
We obtain approximately 93% of our pharmaceutical products from a single
supplier, McKesson HBOC, Inc., pursuant to a longterm contract. Pharmacy sales
represented approximately 61.3% of our total sales during fiscal 2002, and,
therefore, our relationship with McKesson HBOC is important to us. Any
significant
27
disruptions in 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, financial condition or cash flows.
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 or if they are negatively
affected by general economic conditions.
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, disputes
with suppliers and uncertainties regarding our ability to produce audited
financial statements. To improve operations, new management developed, and in
fiscal 2001 began implementing and continues to implement, a business strategy
to improve our stores and enhance our relationships with our customers by
improving the pricing of products, providing more consistent advertising
through weekly circulars, eliminating inventory shortages and outdated
inventory, resolving issues and disputes with our vendors, developing programs
intended to provide better customer service and purchasing prescription files
and other means. 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. In addition, 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, and
cause a proportionately greater decrease in our profitability. Failure to
continue to improve operations or a decline in general economic conditions
would adversely affect our results of operations, financial condition or cash
flows and our ability to make principal or interest payments on our debt.
We cannot assure you that management will be able to successfully manage our
business or successfully implement our strategic plan. This could have a
material adverse effect on our business and the results of our operations,
financial condition and cash flows.
We cannot assure you that our management will be able successfully to manage
our business or successfully implement our strategic business plan. This could
have a material adverse effect on our results of operations, financial
condition and cash flows.
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 executive management team. The loss of key personnel could
have a material adverse effect on the results of our operations, financial
condition or cash flows. Additionally, we cannot assure you that we will be
able to attract or retain other skilled personnel in the future.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001, and other attacks or acts of war may
adversely affect the markets in which we operate, our operations and our
profitability.
On September 11, 2001, the United States was the target of terrorist attacks
of unprecedented scope. The attacks caused major instability in the U.S. and
other financial markets and reduced consumer confidence. The threat of
terrorist attacks, any military response and other related developments may
adversely affect prevailing economic conditions, resulting in reduced consumer
spending and reduced sales in our stores. These developments will subject us
to increased risks and, depending on their magnitude, could have a material
adverse effect on our business.
28
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 drugstore chains, independently owned drugstores,
supermarkets, mass merchandisers, discount stores and mail order pharmacies.
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. Because many of our stores are
new, their ability to achieve profitability depends on their ability to
achieve a critical mass of customers. While customer growth is often achieved
through purchases of prescription files from existing pharmacies, our ability
to achieve this critical mass through purchases of prescription files could be
confined by liquidity constraints. Although in the recent past, our
competitiveness has been adversely affected by problems with inventory
shortages, uncompetitive pricing and customer service, we have taken steps to
address these issues. 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, and the percentage of
prescription sales reimbursed by third parties, have been increasing and we
expect them to continue to increase. In fiscal 2002, sales of prescription
drugs represented 61.3% of our sales and we were reimbursed by third-party
payors for approximately 92.0% of all of the prescription drugs that we sold.
During fiscal 2002, the top five third-party payors accounted for
approximately 20.0% of our total sales. Any significant loss of third-party
provider business could have a material adverse effect on our business and
results of operations. Also, 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, we may be reimbursed for some prescription drugs 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, financial condition or cash flows could be adversely affected.
We are subject to governmental regulations, procedures and requirements; our
noncompliance or a significant regulatory change could adversely affect 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 healthcare 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 results of
operations, financial condition or cash flows.
Certain risks are inherent in providing 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 healthcare products, such as with respect to
improper filling of prescriptions, labeling of prescriptions and
29
adequacy of warnings. Although we maintain professional liability and errors
and omissions liability insurance, from time to time, claims result in the
payment of significant amounts, some portions of which are not funded by
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. Our results of
operations, financial condition or cash flows may be adversely affected if in
the future our insurance coverage proves to be inadequate or unavailable or
there is an increase in liability for which we self insure or we suffer
reputational harm as a result of an error or omission.
We will not be able to compete effectively if we are unable to attract, hire
and retain qualified pharmacists.
There is a nationwide shortage of qualified pharmacists. In response, we
have implemented improved benefits and training programs in order to attract,
hire and retain qualified pharmacists. However, we may not be able to attract,
hire and retain enough qualified pharmacists. This could adversely affect our
operations.
Risks Related to Our Common Stock
Various planned issuances of stock will be, and our continuing debt
restructuring efforts may be, dilutive to shareholders.
At March 2, 2002, 515.1 million shares of our common stock were outstanding
and an additional 174.7 million shares of our common stock were issuable
related to outstanding stock options, convertible notes, preferred stock and
warrants. In addition, we may undertake additional transactions to simplify
and restructure our capital structure, which may include, as part of these
efforts, additional issuances of equity securities in exchange for our
indebtedness. The issuance of additional shares of common stock may be
dilutive to the holders of our common stock. We cannot predict the extent to
which the dilution will negatively affect the trading price of our common
stock or the liquidity of our common stock.
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. 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 2, 2002.
Fair Value
at March 2,
2003 2004 2005 2006 2007 Thereafter Total 2002
-------- -------- ------- ---------- -------- ---------- ---------- -----------
(Dollars in thousands)
Long-term debt, including
current portion
Fixed rate .................... $202,913 $122,012 $62,528 $1,267,937 $593,505 $1,096,986 $3,345,881 $2,609,314
Average Interest Rate ......... 6.64% 7.52% 10.80% 9.54% 6.21% 8.43% 8.36%
Variable Rate ................. 378,462 149,500 -- $ 527,962 $ 527,962
Average Interest Rate ......... 5.63% 9.38% 6.69%
Interest Rate Swap ............ -- -- -- -- -- -- -- ($18,968)
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
30
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 credit facility as of May 1, 2002 were BB- by
Standard & Poor's and by B2 by Moody's. The interest rate on the variable-rate
borrowings under the senior credit facility is LIBOR plus 3.75%.
Downgrades of our credit ratings will not have an impact upon the rate on
the borrowings under these credit facilities. However, an upgrade by Moody's
to B1 or better would result in a reduction in our variable rate of .25% to
LIBOR plus 3.50%.
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 20
basis points) as compared to the LIBOR rate of 1.88% as of March 2, 2002 our
annual interest expense would change by approximately $1.0 million based upon
our variable-rate debt outstanding of approximately $528.0 million on March 2,
2002.
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 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
Not applicable
31
PART III
We intend to file with the Securities and Exchange Commission a definitive
proxy statement for our 2002 Annual Meeting of Stockholders pursuant to
Regulation 14A not later than 120 days after March 2, 2002. The information
called for by this Part III is incorporated by reference to that proxy
statement.
32
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 2, 2002 and March 3, 2001........ F-3
Consolidated Statements of Operations for the fiscal years ended March 2,
2002, March 3, 2001 and February 26, 2000............................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal
years ended March 2, 2002, March 3, 2001 and February 26, 2000.......... F-5
Consolidated Statements of Cash Flows for the fiscal years ended March 2,
2002, March 3, 2001 and February 26, 2000............................... 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 Plan of acquisition, reorganization, arrangement, liquidation or succession 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 Exhibit 3(ii) to Form 8-K filed
October 25, 1999 on November 2, 1999
3.3 Series C Preferred Stock Certificate of Designation dated June 26, 2001 Exhibit 3.3 to Form S-1, File No.
333-64960, filed on July 12, 2001
3.4 Certificate of Amendment to Restated Certificate of Incorporation dated June 27, Exhibit 3.4 to Form S-1, File No.
2001 333-64960, filed on July 12, 2001
3.5 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Exhibit 3.5 to Form S-1, File No.
Designation dated October 3, 2001 333-64960, filed on July 12, 2001
3.6 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
3.7 Amendment to By-laws, adopted January 30, 2002 Exhibit T3B2 to Form T-3 filed on
March 4, 2002
4.1 Indenture dated as of September 10, 1997 by and between Rite Aid Corporation, as Exhibit 4.1 to Registration
issuer, and Harris Trust and Savings Bank, as trustee, related to the Company's Statement on Form S-3, File No.
5.25% Convertible Subordinated Notes 333-39699, filed on November 6,
1997
33
Exhibit
Numbers Description Incorporation by Reference to
- -------- ----------- -----------------------------
4.2 Indenture dated as of September 22, 1998 by and between Rite Aid Corporation, as Exhibit 4.1 to Registration
issuer, and Harris Trust and Savings Bank, as trustee, related to the Company's 6% Statement on Form S-4, File No.
Dealer Remarketable Securities 333-66901, filed on November 6,
1998
4.3 Indenture dated as of December 21, 1998, between Rite Aid Corporation, as issuer, Exhibit 4.1 to Registration
and Harris Trust and Savings Bank, as trustee, related to the Company's 5 1/2% Statement on Form S-4, File No.
Notes due 2000, 6% Notes due 2005, 6 7/8% Notes due 2008 and 6 7/8 Notes due 2028 333-74751, filed on March 19,
1999
4.4 Supplemental Indenture dated as of February 3, 2000, between Rite Aid Corporation, Exhibit 4.1 to Form 8-K, filed on
as issuer, and U.S. Bank Trust National Association, to the Indenture dated as of February 7, 2002
August, 1993 and Morgan Guaranty Trust Company of New York, relating to the
Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625%
Notes due 2005 and 6.875% Notes due 2013
4.5 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, related to the
Company's 5.25% Convertible Subordinated Notes
4.6 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, related to the
Company's 6% Dealer Remarketable Securities
4.7 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, related to the
Company's 10.5% Senior Secured Notes due 2002
4.8 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, related to the Company's 10.5% Senior Secured Notes due 2002
4.9 Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, and Exhibit 4.7 to Registration
State Street Bank and Trust Company, as trustee, related to the Company's 12.5% Statement on Form S-1, File No.
Senior Secured Notes due 2006 333-64950, filed on July 12, 2002
4.10 Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, and Exhibit 4.8 to Registration
BNY Midwest Trust Company, as trustee, related to the Company's 11 3/4 Notes due Statement on Form S-1, File No.
December 2008 333-64950, filed on July 12, 2002
4.11 Indenture dated as of November 19, 2001, between Rite Aid Corporation, as issuer, Exhibit 4.3 to Form 10-Q, filed
and BNY Midwest Trust Company, as trustee, related to the Company's 4.75% on January 15, 2002
Convertible Notes due December 1, 2006
4.12 Indenture dated as of April 4, 2002, between Rite Aid Corporation, as issuer, and Exhibit T3C to Form T-3, Filed on
BNY Midwest Trust Company, as trustee, related to the Company's Senior Secured March 4, 2000
Notes due March 15, 2006
10.1 1999 Stock Option Plan* Exhibit 10.1 to Form 10-K, filed
on May 21, 2001
10.2 2000 Omnibus Equity Plan* Included in Proxy Statement dated
October 24, 2000
10.3 2001 Stock Option Plan* Exhibit 10.3 to Form 10-K, filed
on May 21, 2001
10.4 Employment Agreement by and between Rite Aid Corporation and Robert G. Miller dated Exhibit 10.1 to Form 8-K filed on
as of December 5, 1999* January 18, 2000.
10.5 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Exhibit 10.9 to Form 10-K, filed
Robert G. Miller, dated as of May 7, 2001* on May 21, 2001
34
Exhibit
Numbers Description Incorporation by Reference to
- -------- ----------- -----------------------------
10.6 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.31 to Form 8-K, filed
December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller* on January 18, 2000
10.7 Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated Exhibit 10.2 to Form 8-K, filed
as of December 5, 1999* on January 18, 2000
10.8 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Exhibit 10.12 to Form 10-K, filed
Mary F. Sammons, dated as of May 7, 2001* on May 21, 2001
10.9 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.32 to Form 8-K, filed
December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons* on January 18, 2000
10.10 Employment Agreement by and between Rite Aid Corporation and David R. Jessick, Exhibit 10.3 to Form 8-K, filed
dated as of December 5, 1999* on January 18, 2000
10.11 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.33 to Form 8-K, filed
December 5, 1999, by and between Rite Aid Corporation and David R. Jessick* on January 18, 2000
10.12 Employment Agreement by and between Rite Aid Corporation and John T. Standley, Exhibit 10.4 to Form 8-K, filed
dated as of December 5, 1999* on January 18, 2000
10.13 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.34 to Form 8-K, filed
December 5, 1999, by and between Rite Aid Corporation and John T. Standley* on January 18, 2000
10.14 Employment Agreement by and between Rite Aid Corporation and Elliot S. Gerson, Exhibit 10.18 to Form 10-K, filed
dated as of November 16, 2000* on May 21, 2001
10.15 Employment Agreement by and between Rite Aid Corporation and Eric Sorkin, dated as Exhibit 10.19 to Form 10-K filed
of April 2, 1999* on May 21, 2001
10.16 Employment Agreement by and between Rite Aid Corporation and James Mastrain, dated Exhibit 10.20 to Form 10-K, filed
as of September 27, 2000* on May 21, 2001
10.17 Rite Aid Corporation Special Deferred Compensation Plan* Exhibit 10. 20 to Form 10-K filed
on July 11, 2000
10.18 Employment Agreement by and between Rite Aid Corporation and Christopher Hall, Exhibit 10.48 to Form 10-K, filed
dated as of January 26, 2000* on May 21, 2001
10.19 Employment Agreement by and between Rite Aid Corporation and Robert B. Sari, dated Exhibit 10.49 to Form 10-K filed
as of February 28, 2001* on May 21, 2001
11 Statement regarding computation of earnings per share (see note 4 to the Filed herewith
consolidated financial statements)
12 Statement regarding computation of ratio of earnings to fixed charges Filed herewith
13 Annual report to security holders Not applicable
16 Letter regarding change in certifying accountant Not applicable
18 Letter regarding change in accounting principles Exhibit 18 to the Form 10-K filed
on July 11, 2000
21 Subsidiaries of the registrant Filed herewith
22 Published report regarding matters submitted to vote of security holders Not applicable
23.1 Consent of Deloitte & Touche LLP Filed herewith
23.2 Consent of Ernst & Young LLP Filed herewith
24 Power of Attorney Not applicable
- ---------------
* Constitutes a compensatory plan or arrangement required to be filed with
this Form.
(b) Reports on Form 8-K
On February 27, 2002, we filed a current report on Form 8-K disclosing that
we amended our $1.9 billion senior secured credit facility, which amendment
allowed us to issue senior secured notes, as we previously agreed with the
plaintiff's as the final payment of our previously announced settlement of the
consolidated securities class action and derivative lawsuits against us.
35
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 2, 2002 and March 3, 2001, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended March 2, 2002.
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 revenues of $1,264.7 million for the year ended February 26,
2000. 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 2, 2002, and March 3, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended March 2,
2002, 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 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended, effective March 4,
2001. As discussed in Note 2 to the consolidated financial statements, the
Company changed its application of the last-in, first-out ("LIFO") method of
accounting for inventory in the year ended February 26, 2000.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 30, 2002, except for Note 24,
as to which the date is May 6, 2002
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
PCS Holding Corporation
We have audited the consolidated balance sheet of PCS Holding Corporation
and Subsidiaries (the Company) as February 26, 2000, and the related
consolidated statements of operations, shareholder's equity, and cash flows
for the year then ended (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 audit 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 audit 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 26, 2000, and the
consolidated results of their operations and their cash flows for the year
then ended, 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, except per share amounts)
March 2, 2002 March 3, 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 344,055 $ 92,290
Accounts receivable, net ..................... 581,698 503,527
Inventories, net ............................. 2,262,111 2,444,525
Investment in AdvancePCS ..................... -- 491,198
Prepaid expenses and other current assets .... 101,681 85,292
----------- -----------
Total current assets........................ 3,289,545 3,616,832
PROPERTY, PLANT AND EQUIPMENT, NET ............ 2,096,030 3,041,008
GOODWILL AND OTHER INTANGIBLES ................ 925,260 1,067,339
OTHER ASSETS .................................. 168,373 188,732
----------- -----------
Total assets................................ $ 6,479,208 $ 7,913,911
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt and current maturities of
convertible notes, long-term debt and lease
financing obligations....................... $ 209,457 $ 36,956
Accounts payable ............................. 842,855 896,390
Sales and other taxes payable ................ 49,407 31,562
Accrued salaries, wages and other current
liabilities................................. 663,564 696,047
----------- -----------
Total current liabilities................... 1,765,283 1,660,955
CONVERTIBLE NOTES ............................. 243,000 357,324
LONG-TERM DEBT, LESS CURRENT MATURITIES ....... 3,427,930 4,428,871
LEASE FINANCING OBLIGATIONS, LESS CURRENT
MATURITIES................................... 176,081 1,071,397
OTHER NONCURRENT LIABILITIES .................. 837,737 730,342
----------- -----------
Total liabilities........................... 6,450,031 8,248,889
COMMITMENTS AND CONTINGENCIES ................. -- --
REDEEMABLE PREFERRED STOCK .................... 19,561 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $1 per share;
liquidation value $100 per share; 20,000
shares authorized: shares issued -- 3,615
and 3,340................................... 361,504 333,974
Common stock, par value $1 per share;
1,000,000 shares authorized: shares issued
and outstanding -- 515,136 and 348,055...... 515,136 348,055
Additional paid-in capital ................... 3,151,811 2,065,301
Accumulated deficit .......................... (4,006,043) (3,171,956)
Stock based and deferred compensation ........ 463 19,782
Accumulated other comprehensive (loss) income (13,255) 50,409
----------- -----------
Total stockholders' equity (deficit)........ 9,616 (354,435)
----------- -----------
Total liabilities and stockholders' equity
(deficit) ................................. $ 6,479,208 $ 7,913,911
=========== ===========
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, except per share amounts)
Year Ended
-----------------------------------------
March 2, March 3, February 26,
2002 2001 2000
(52 weeks) (53 weeks) (52 weeks)
----------- ----------- ------------
REVENUES $15,171,146 $14,516,865 $13,338,947
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs........................................ 11,742,309 11,151,490 10,213,428
Selling, general and administrative expenses......................................... 3,382,962 3,412,442 3,651,248
Stock-based compensation (benefit) expense........................................... (15,891) 45,865 (43,438)
Goodwill amortization................................................................ 21,007 20,670 24,457
Store closing and impairment charges................................................. 251,617 388,078 139,448
Interest expense..................................................................... 396,064 649,926 542,028
Interest rate swap contracts......................................................... 41,894 -- --
Loss on debt and lease conversions and modifications................................. 154,465 100,556 --
Share of loss from equity investments................................................ 12,092 36,675 15,181
Gain on sale of assets and investments, net.......................................... (42,536) (6,030) (80,109)
----------- ----------- -----------
15,943,983 15,799,672 14,462,243
----------- ----------- -----------
Loss from continuing operations before income taxes, extraordinary item and
cumulative effect of accounting change............................................. (772,837) (1,282,807) (1,123,296)
INCOME TAX EXPENSE (BENEFIT).......................................................... (11,745) 148,957 (8,375)
----------- ----------- -----------
Loss from continuing operations before extraordinary item and cumulative effect of
accounting change.................................................................. (761,092) (1,431,764) (1,114,921)
INCOME FROM DISCONTINUED OPERATIONS, net of income tax expense of $0, $13,846 and
$30,903............................................................................. -- 11,335 9,178
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, net of income tax benefit of $734........ -- (168,795) --
EXTRAORDINARY ITEM, loss on early extinguishment of debt, net of income taxes of $0... (66,589) -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net of income tax benefit of $18,200.......... -- -- (27,300)
----------- ----------- -----------
NET LOSS $ (827,681) $(1,589,224) $(1,133,043)
=========== =========== ===========
COMPUTATION OF LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss............................................................................. $ (827,681) $(1,589,224) $(1,133,043)
Accretion of redeemable preferred stock.............................................. (104) -- (97)
Preferred stock conversion reset..................................................... (6,406) (160,915) --
Cumulative preferred stock dividends................................................. (27,530) (25,724) (10,110)
----------- ----------- -----------
Loss applicable to common stockholders $ (861,721) $(1,775,863) $(1,143,250)
=========== =========== ===========
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations...................................................... $ (1.68) $ (5.15) $ (4.34)
Income (loss) from discontinued operations........................................... -- (0.50) 0.04
Loss from extraordinary item......................................................... (0.14) -- --
Cumulative effect of accounting change............................................... -- -- (0.11)
----------- ----------- -----------
Net loss per share................................................................. $ (1.82) $ (5.65) $ (4.41)
=========== =========== ===========
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 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
Preferred Stock Common Stock Additional Retained Stock Based
------------------ ------------------ Paid-in Earnings and Deferred
Shares Amount Shares Amount Capital (Deficit) Compensation
------ --------- ------- -------- ---------- ----------- ------------
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 (Series B
for Series A)........................... -- --
Stock options exercised .................. 66 66 814
Stock option income tax benefit .......... 243
Stock grants ............................. 1,000 1,000 7,250 $ (6,188)
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) (6,188)
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 (10,410)
Bond conversion .......................... 84,124 84,124 604,574
Deferred compensation plans .............. 36,380
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) $ 19,782
Net loss ................................. (827,681)
Other comprehensive loss:
Sale of investment in AdvancePCS .........
Cash flow hedge transition liability
adjustment..............................
Cash flow hedge market value adjustment ..
Elimination of cash flow hedge accounting
Minimum pension liability adjustment .....
Comprehensive loss .......................
Bond conversions ......................... 86,386 86,386 649,797
Issuance of common stock ................. 80,083 80,083 448,321
Issuance of common stock warrants ........ 982 982 8,018
Preferred stock conversion reset ......... (6,406) 6,406
Accretion of convertible preferred stock . 6,406 (6,406)
Exchange of preferred shares (Series D
for Series B)........................... -- --
Stock grants ............................. 88 88 659 8,388
Deferred compensation plans .............. (27,771)
Stock options exercised .................. 421 421 1,764
Issuance of common stock for services .... 331 331 1,787
Stock forfeitures ........................ (1,210) (1,210) (3,423) 64
Dividends on preferred stock ............. 275 27,530 (27,530)
Increase resulting from sale of stock by
equity method investee.................. 711
----- --------- ------- -------- ---------- ----------- --------
BALANCE MARCH 2, 2002 .................... 3,615 $ 361,504 515,136 $515,136 $3,151,811 $(4,006,043) $ 463
===== ========= ======= ======== ========== =========== ========
Accumulated
Other
Comprehensive
Income Total
------------- -----------
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 (Series B
for Series A)........................... --
Stock options exercised .................. 880
Stock option income tax benefit .......... 243
Stock grants ............................. 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 ................ -- 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 ............................. 12,387
Bond conversion .......................... 688,698
Deferred compensation plans .............. 36,380
Dividends on preferred stock ............. --
Increase resulting from sale of stock by
equity method investee.................. 14,406
-------- -----------
BALANCE MARCH 3, 2001 .................... $ 50,409 $ (354,435)
Net loss ................................. (827,681)
Other comprehensive loss:
Sale of investment in AdvancePCS ......... (51,031) (51,031)
Cash flow hedge transition liability
adjustment.............................. (29,010) (29,010)
Cash flow hedge market value adjustment .. (2,037) (2,037)
Elimination of cash flow hedge accounting 31,047 31,047
Minimum pension liability adjustment ..... (12,633) (12,633)
-----------
Comprehensive loss ....................... (891,345)
Bond conversions ......................... 736,183
Issuance of common stock ................. 528,404
Issuance of common stock warrants ........ 9,000
Preferred stock conversion reset ......... --
Accretion of convertible preferred stock . --
Exchange of preferred shares (Series D
for Series B)........................... --
Stock grants ............................. 9,135
Deferred compensation plans .............. (27,771)
Stock options exercised .................. 2,185
Issuance of common stock for services .... 2,118
Stock forfeitures ........................ (4,569)
Dividends on preferred stock ............. --
Increase resulting from sale of stock by
equity method investee.................. 711
-------- -----------
BALANCE MARCH 2, 2002 .................... $(13,255) $ 9,616
======== ===========
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)
Year Ended
-----------------------------------------
March 2, March 3, February 26,
2002 2001 2000
(52 Weeks) (53 Weeks) (52 Weeks)
----------- ----------- ------------
OPERATING ACTIVITIES:
Net loss............................................................................. $ (827,681) $(1,589,224) $(1,133,043)
Income from discontinued operations.................................................. -- 11,335 9,178
Loss on disposal of discontinued operations.......................................... -- (168,795) --
Extraordinary loss................................................................... (66,589) -- --
----------- ----------- -----------
Loss from continuing operations...................................................... (761,092) (1,431,764) (1,142,221)
----------- ----------- -----------
Adjustments to reconcile to net cash provided by (used in) operations:
Cumulative effect of change in accounting method................................... -- -- 27,300
Depreciation and amortization...................................................... 349,840 384,066 443,974
Store closings and impairment loss................................................. 251,617 388,078 139,448
Interest rate swap contracts....................................................... 41,894 -- --
Gain on sale of assets and investments, net........................................ (42,536) (6,030) (80,109)
Stock-based compensation (benefit) expense......................................... (15,891) 45,865 (43,438)
Write-off of deferred tax asset.................................................... -- 146,917 --
Loss on debt and lease conversions and modifications............................... 154,465 100,556 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable............................................................... (69,004) (351,492) (79,156)
Inventories....................................................................... 112,649 27,912 77,963
Income taxes receivable/payable................................................... (14,635) 147,599 25,390
Accounts payable.................................................................. (5,004) (66,462) (278,073)
Other liabilities................................................................. (62,564) (148,880) 196,938
Other............................................................................. 76,604 59,081 88,886
----------- ----------- -----------
Net cash provided by (used in) continuing operations 16,343 (704,554) (623,098)
Net cash provided by discontinued operations...................................... -- 3,758 365,375
----------- ----------- -----------
Net cash provided by (used in) operating activities............................... 16,343 (700,796) (257,723)
----------- ----------- -----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment....................................... (175,183) (132,504) (573,287)
Purchases of businesses, net of cash acquired........................................ -- -- (24,454)
Net investment in equity method investee............................................. -- -- (8,125)
Intangible assets acquired........................................................... (12,200) (9,000) (67,783)
Proceeds from the repayment / sale of AdvancePCS securities.......................... 484,214 -- --
Proceeds from sale of discontinued operations........................................ -- 710,557 --
Proceeds from dispositions........................................................... 45,700 108,600 169,537
----------- ----------- -----------
Net cash provided by (used in) continuing operations 342,531 677,653 (504,112)
Net cash used in discontinued operations.......................................... -- -- (48,021)
----------- ----------- -----------
Net cash provided by (used in) investing activities............................... 342,531 677,653 (552,133)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from the issuance of long-term debt..................................... 1,378,462 -- 1,600,000
Net change in bank credit facilities................................................. -- 324,899 716,073
Net payments of commercial paper borrowings.......................................... -- (192,000) (1,591,125)
Net proceeds from the issuance of preferred stock.................................... -- -- 300,000
Repurchase of redeemable preferred stock............................................. -- -- (10,000)
Proceeds from the issuance of bonds.................................................. 392,500 -- --
Proceeds from leasing obligations.................................................... -- 6,992 74,898
Principal payments on long-term debt................................................. (2,325,562) (126,122) (68,113)
Cash dividends paid.................................................................. -- -- (89,159)
Net proceeds from the issuance of common stock....................................... 530,589 -- 880
Deferred financing costs paid........................................................ (83,098) (78,093) (34,984)
Other................................................................................ -- -- 6,621
----------- ----------- -----------
Net cash (used in) provided by financing activities............................... (107,109) (64,324) 905,091
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 251,765 (87,467) 95,235
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......................................... 92,290 179,757 84,522
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 344,055 $ 92,290 $ 179,757
=========== =========== ===========
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 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
1. 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 of America. It
is one of the largest retail drugstore chains in the United States, with 3,497
stores in operation as of March 2, 2002. 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 brand 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 2, 2002 March 3, 2001 February 26, 2000
(52 Weeks) (53 Weeks) (52 Weeks)
------------- ------------- -----------------
Pharmacy ............................................................... $ 9,292,604 $ 8,639,288 $ 7,788,404
Front-end .............................................................. 5,878,542 5,877,577 5,550,543
----------- ----------- -----------
$15,171,146 $14,516,865 $13,338,947
=========== =========== ===========
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 23).
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 29 or
March 1. The fiscal years ended March 2, 2002 and February 26, 2000 included
52 weeks. The fiscal year ended March 3, 2001 included 53 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.
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.
Allowance for Uncollectible Receivables
The majority of prescription sales are made to customers that are covered by
third-party payors, such as insurance companies, government agencies and
employers. The Company carries receivables that represent
F-7
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies -- (Continued)
the amount owed to the Company for sales made to customers or employees of
those payors that have not yet been paid. The Company maintains a reserve for
the amount of these receivables deemed to be uncollectible. This reserve is
calculated based upon historical collection activity adjusted for current
conditions.
Inventories
Inventories are stated at the lower of cost or market. Inventory balances
include the 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 2). At March 2,
2002 and March 3, 2001, inventories were $450,726 and $381,466, 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 $69,260, $40,726 and $34,614 for
fiscal years 2002, 2001 and 2000, 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
annually or 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 2002, 2001 and
2000, the Company capitalized costs of approximately $2,198, $1,227 and
$4,595, respectively.
F-8
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
1. 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 in
which the Company holds 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.
The ability to exercise significant influence is reviewed on a periodic
basis. In instances where the Company loses its ability to exercise
significant influence due to decreases in its ownership percentage or board
participation, the Company will cease the use of the equity method of
accounting, and in turn use the cost method of accounting. Under the cost
method of accounting, the Company records its investment in the affiliated
entity at cost, as a component of other assets. Income is recognized to the
extent that the affiliate pays dividends to the Company.
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 dependent on 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 when earned.
Vendor Debit Reserve
The Company maintains a contra-payable for returns and vendor allowances
that have been earned under the terms of the corresponding agreements, but
have not been charged against a payment to the vendor or received in cash. The
Company records a reserve against this contra-payable based upon historical
realization of these items and known issues with the vendors.
Stock-Based Compensation
The Company accounts for its associate and director stock-based compensation
plans under APB Opinion No. 25.
F-9
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies -- (Continued)
The Company maintains various stock based incentive compensation programs
for executives and key associates. The Company accounts for several of the
awards under these plans using variable plan accounting. Under variable plan
accounting, the Company records expense on the awards over the option period
based on the difference between the actual market value of the stock, and the
strike price of the award.
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.
Lease Exit Charges
The Company records reserves for closed stores based on future lease
commitments, anticipated ancillary occupancy costs, anticipated future
subleases of properties and current risk-free interest rates.
Litigation Reserves
The Company is involved in litigation on an ongoing basis. The Company
accrues its best estimate of the probable loss related to legal claims. Such
estimates are developed in consultation with in-house and outside counsel, and
are based upon a combination of litigation and settlement strategies.
Advertising
Advertising costs are expensed as incurred. Advertising expenses, net of
reimbursements, for fiscal 2002, 2001 and 2000 were $219,532, $214,891 and
$194,880, 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 $500
and general liability occurrences exceeding $2,000. 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.
A majority of the Company-sponsored associate medical plans are self-
insured. The remaining Company-sponsored associate medical plans are covered
through guaranteed cost contracts.
Benefit Plan Accruals
The Company has several defined benefit plans, under which participants earn
a retirement benefit based upon a formula set forth in the plan. The Company
records expense related to these plans using actuarially determined amounts
that are calculated under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employer's Accounting for Pensions". Key
assumptions used in the actuarial valuations include the discount rate and the
anticipated rate of return on plan assets.
F-10
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies -- (Continued)
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.
The Company currently has net operating loss ("NOL") carryforwards that can
be utilized to offset future income for federal and state tax purposes. These
NOL's generate a significant deferred tax asset. However, the Company has
recorded a valuation allowance against this deferred tax asset as it has been
determined that it is more likely than not that the Company will not generate
future income that the NOL's could offset.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America 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 2002, 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. Upon inception of
interest rate swap agreements, or modifications thereto, the Company performs
a comprehensive review of the interest rate swap agreements based on the
criteria as provided by SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Company will use hedge accounting treatment on
derivative instruments to the extent that the respective instrument qualifies
for such treatment under SFAS No. 133.
On March 4, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. In
connection with the adoption of the new statement, the Company recorded
$29,010 in Other Comprehensive Income ("OCI") as a cumulative change in
accounting for derivatives designated as cash flow type hedges prior to
adopting SFAS No. 133. The Company enters into interest rate swap agreements
to hedge the exposure to increasing rates with respect to its variable rate
debt. These interest rate swap agreements were accounted for as cash flow
hedges upon the initial adoption of SFAS No. 133.
F-11
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies -- (Continued)
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 is effective as follows:
a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS No.
141 also apply to all business combinations accounted for by the purchase
method that are completed after June 30, 2001 (that is, the date of the
acquisition is July 2001 or later). The adoption of SFAS No. 141 had no impact
on the consolidated financial position or results of operations. SFAS No. 142
is effective for the fiscal years beginning after December 15, 2001 with
respect to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those assets
were initially recognized. SFAS No. 142 specifies that all goodwill and
intangibles with indefinite lives shall not be amortized. Goodwill must be
allocated to reporting units and evaluated for impairment on an annual basis
with an initial impairment assessment to be performed upon adoption of the
Statement. The Company has evaluated the provisions of SFAS No. 142 and will
not have to record any impairment of goodwill upon the adoption of SFAS No.
142, which is effective March 3, 2002. At March 2, 2002, the Company had
unamortized goodwill of $684,535 and recorded $21,007 of goodwill amortization
expense in fiscal 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 retains the requirements of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," to recognize an impairment loss if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and to measure an impairment loss as the difference between the
carrying amount and fair value of the asset. SFAS No. 144 modifies SFAS No.
121 in that it eliminates the requirement to allocate goodwill to long-lived
assets to be tested for impairment. SFAS No. 144 also modifies APB Opinion No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," to require discontinued operations
presentation in the income statement for a component of an entity that is to
be disposed. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, and early adoption is encouraged. The Company plans to
adopt SFAS No. 144 effective March 3, 2002 and the impact is not believed to
be material.
2. 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.
3. 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.
F-12
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
3. Acquisitions and Dispositions -- (Continued)
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.
4. 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.
Year Ended
---------------------------------------
March 2, March 3, February 26,
2002 2001 2000
--------- ----------- ------------
Numerator for earnings per share:
Loss from continuing operations before extraordinary item and cumulative effect of
accounting change, net of tax....................................................... $(761,092) $(1,431,764) $(1,114,921)
Accretion of redeemable preferred stock.............................................. (104) -- (97)
Preferred stock conversion reset..................................................... (6,406) (160,915) --
Cumulative preferred stock dividends................................................. (27,530) (25,724) (10,110)
--------- ----------- -----------
Loss before extraordinary item and cumulative effect of accounting change
attributable to common stockholders................................................. (795,132) (1,618,403) (1,125,128)
Income from discontinued operations, net of tax...................................... -- 11,335 9,178
Loss on disposal of discontinued operations, net of tax.............................. -- (168,795) --
--------- ----------- -----------
Total income (loss) from discontinued operations..................................... -- (157,460) 9,178
Extraordinary item, loss on early extinguishment of debt............................. (66,589) -- --
Cumulative effect of accounting change............................................... -- -- (27,300)
--------- ----------- -----------
Net loss attributable to common stockholders............................................ $(861,721) $(1,775,863) $(1,143,250)
========= =========== ===========
Denominator:
Basic weighted average shares........................................................ 474,028 314,189 259,139
Diluted weighted average shares...................................................... 474,028 314,189 259,139
Basic and diluted loss per share:
Loss from continuing operations...................................................... $ (1.68) $ (5.15) $ (4.34)
Income (loss) from discontinued operations........................................... -- (0.50) 0.04
Extraordinary item, loss on early extinguishment of debt, net........................ (0.14) -- --
Cumulative effect of accounting change, net.......................................... -- -- (0.11)
--------- ----------- -----------
Net loss per share................................................................... $ (1.82) $ (5.65) $ (4.41)
========= =========== ===========
In fiscal 2002, 2001 and 2000, no potential shares of common stock have been
included in the calculation of diluted earnings per share because of the
losses reported. At March 2, 2002, an aggregate of 174,685 potential common
shares related to stock options, convertible preferred stock, convertible
notes,
F-13
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
4. Earnings Per Share -- (Continued)
warrants, stock appreciation rights and other have been excluded from the
computation of diluted earnings per share.
5. Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Year Ended
-----------------------------------
March 2, March 3, February 26,
2002 2001 2000
-------- -------- ------------
Impairment charges.......................................................................... $157,962 $214,224 $120,593
Store and equipment lease exit charges...................................................... 93,303 57,668 18,855
Impairment of other assets.................................................................. 352 116,186 --
-------- -------- --------
$251,617 $388,078 $139,448
======== ======== ========
Impairment charges
In fiscal 2002, 2001 and 2000 store closing and impairment charges include
non-cash charges of $157,962, $214,224 and $120,593, respectively, for the
impairment of long-lived assets (including allocable goodwill) at 365, 495 and
249 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 and equipment lease exit charges
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. 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 4.22%, 4.71% and 6.60% at March 2,
2002, March 3, 2001 and February 26, 2000, respectively. Also included in this
line are charges of approximately $1,300 incurred during fiscal 2002 related
to the early termination of an equipment lease.
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 $6,678, $13,232 and $10,490 in fiscal 2002, 2001
and 2000, respectively, for lease accruals previously established for those
stores.
F-14
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
5. Store Closing and Impairment Charges -- (Continued)
The reserve for store lease exit costs includes the following activity:
Year Ended
-----------------------------------
March 2, March 3, February 26,
2002 2001 2000
-------- -------- ------------
Balance--beginning of year................................................................. $233,008 $212,812 $ 246,805
Provision for present value of noncancellable lease payments of stores designated to be
closed.................................................................................. 104,724 102,495 58,324
Changes in assumptions about future sublease income, terminations, etc. and change of
interest rate........................................................................... (6,071) (31,595) (28,979)
Reversals of reserves for stores that management has determined will remain open......... (6,678) (13,232) (10,490)
Interest accretion....................................................................... 9,017 11,552 13,251
Cash payments, net of sublease income.................................................... (46,536) (49,024) (66,099)
-------- -------- ---------
Balance--end of year....................................................................... $287,464 $233,008 $ 212,812
======== ======== =========
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 associates
at the facility 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.
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 associates 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 associates. 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 associates 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.
As of March 2, 2002, the Company has no remaining recorded value for its
investment in drugstore.com's common stock.
F-15
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
5. Store Closing and Impairment Charges -- (Continued)
Additionally, the Company recorded impairment charges of $352 and $4,063 for
other investments for the years ended March 2, 2002 and March 3, 2001.
6. Accounts Receivable
During November 1997, the Company and certain of its subsidiaries entered
into an agreement to sell, on an ongoing basis, a pool of 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 2, 2002 and March 3, 2001 was $28,084 and
$37,050, respectively. The Company's accounts receivable are due primarily
from third-party payors (e.g., insurance companies and governmental agencies)
under third-party plans and are booked net of any allowances provided for
under the respective plans. Since payments due from third-party payors are
sensitive to payment criteria changes and legislative actions, the allowance
is reviewed continually and adjusted for accounts deemed uncollectible by
management.
7. Property, Plant and Equipment
Following is a summary of property, plant and equipment, including capital
lease assets, at March 2, 2002 and March 3, 2001:
2002 2001
----------- -----------
Land ............................................. $ 290,104 $ 668,561
Buildings ........................................ 555,164 932,083
Leasehold improvements ........................... 1,096,214 1,192,815
Equipment ........................................ 1,469,722 1,413,890
Construction in progress ......................... 28,533 49,182
----------- -----------
3,439,737 4,256,531
Accumulated depreciation ......................... (1,343,707) (1,215,523)
----------- -----------
Property, plant and equipment, net.............. $ 2,096,030 $ 3,041,008
=========== ===========
Depreciation expense, which includes the depreciation of assets recorded
under capital leases, was $260,040 in fiscal 2002, $285,886 in fiscal 2001 and
$326,873 in fiscal 2000.
F-16
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
7. Property, Plant and Equipment -- (Continued)
Substantially all of the Company's owned properties on which it operates
stores are pledged as collateral under the Company's debt agreements. Included
in property, plant and equipment is the carrying amount of assets to be
disposed of totaling $52,890 and $64,131 at March 2, 2002 and March 3, 2001,
respectively.
8. Investments in Fifty Percent or Less Owned Subsidiaries
In July 1999, the Company purchased 9,335 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 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 initially accounted for
the investment on the equity method because the Company had 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 $117,930 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 $711, $14,406 and $2,929 and corresponding
increases to equity in connection with the sale of stock by drugstore.com
during fiscal 2002, 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. As
of March 2, 2002, the Company has no remaining recorded value for its
investment in drugstore.com's common stock.
In January 2002, the Company sold 1,400 shares of drugstore.com common
stock, resulting in a gain on sale of assets of $4,376.
9. Goodwill and Other Intangibles
Following is a summary of intangible assets at March 2, 2002 and March 3,
2001:
2002 2001
---------- ----------
Goodwill ............................................ $ 793,770 $ 848,121
Lease acquisition costs and favorable leases ........ 312,811 343,006
Prescription files .................................. 341,284 334,089
Assembled workforce ................................. 41,525 47,133
---------- ----------
1,489,390 1,572,349
Accumulated amortization ............................ (564,130) (505,010)
---------- ----------
$ 925,260 $1,067,339
========== ==========
F-17
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
10. Accrued Salaries, Wages and Other Current Liabilities
Accrued salaries, wages and other current liabilities consist of the
following at March 2, 2002 and March 3, 2001:
2002 2001
-------- --------
Accrued wages, benefits and other personnel costs ....... $259,915 $249,456
Accrued legal and other professional fees ............... 46,120 64,482
Accrued personal property taxes payable ................. 2,661 2,887
Accrued interest ........................................ 64,781 85,308
Accrued lease exit costs ................................ 39,378 37,043
Accrued rent and other occupancy costs .................. 81,314 68,716
Deferred income ......................................... 36,996 24,543
Accrued store expense ................................... 20,014 31,934
Accrued real estate and property taxes .................. 36,926 44,866
Accrued self insurance liability ........................ 34,427 30,668
Accrued advertising ..................................... 13,393 15,869
Other ................................................... 27,639 40,275
-------- --------
$663,564 $696,047
======== ========
11. Income Taxes
The provision for income taxes from continuing operations was as follows:
Year Ended
-----------------------------------
March 2, March 3, February 26,
2002 2001 2000
-------- -------- --------
Current tax expense (benefit):
Federal.................................................................................. $(13,127) $ -- $(19,017)
State.................................................................................... 1,382 3,078 --
-------- -------- --------
(11,745) 3,078 (19,017)
Deferred tax (benefit):
Federal.................................................................................. -- 146,773 20,677
State.................................................................................... -- (894) (10,035)
-------- -------- --------
-- 145,879 10,642
-------- -------- --------
Total income expense (benefit)........................................................... $(11,745) $148,957 $ (8,375)
======== ======== ========
A reconciliation of the provision for income taxes as presented on the
consolidated statements of operations is as follows:
Year Ended
-----------------------------------
March 2, March 3, February 26,
2002 2001 2000
-------- -------- ------------
Income tax expense (benefit) from continuing operations..................................... $(11,745) $148,957 $ (8,375)
Income tax expense from discontinued operations............................................. -- 13,846 30,903
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)....................................................... $(11,745) $162,069 $ 4,328
======== ======== ========
F-18
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
11. Income Taxes -- (Continued)
A reconciliation of the statutory federal rate and the effective rate, for
continuing operations, is as follows:
Year Ended
-----------------------------------
Percentage March 2, March 3, February 26,
---------- 2002 2001 2000
-------- -------- ------------
Federal statutory rate...................................................................... (35.0)% (35.0)% (35.0)%
Nondeductible expenses...................................................................... 7.9 6.0 3.4
State income taxes, net..................................................................... (2.7) (6.8) (4.1)
Tax credits................................................................................. - - (.8)
Valuation allowance......................................................................... 30.0 47.4 34.9
Other....................................................................................... (1.6) -- .9
----- ----- -----
Effective tax rate.......................................................................... (1.4)% 11.6% (0.7)%
===== ===== =====
The income tax benefit for fiscal 2002 reflects a one-time benefit of
$13,127 related to the favorable outcome of federal income tax litigation.
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.
The tax effect of temporary differences that give rise to significant
components of deferred tax assets and liabilities consist of the following at
March 2, 2002 and March 3, 2001:
2002 2001
----------- -----------
Deferred tax assets:
Accounts receivable............................. $ 25,032 $ 31,113
Accrued expenses................................ 67,096 147,427
Liability for lease exit costs.................. 133,562 125,284
Pension, retirement and other benefits.......... 86,448 96,338
Investment impairment........................... 79,699 108,733
Other........................................... 107 370
Credits......................................... 58,532 58,533
Net operating losses............................ 1,007,218 724,177
----------- -----------
Total gross deferred tax assets................. 1,457,694 1,291,975
Valuation allowance ............................... (1,234,761) (1,031,287)
----------- -----------
Net deferred tax assets......................... 222,933 260,688
Deferred tax liabilities:
Inventory....................................... 115,196 123,584
Long-lived assets............................... 107,737 137,104
----------- -----------
Total gross deferred tax liabilities............ 222,933 260,688
----------- -----------
Net deferred tax assets, all noncurrent ........... $ -- $ --
=========== ===========
Net Operating Losses, Capital Losses and Tax Credits
At March 2, 2002 and March 3, 2001, the Company had federal net operating
loss (NOL) carryforwards of $2,309,115 and $1,572,818, respectively, the
majority of which expire between fiscal 2017 and 2022. The Company has
determined that it has undergone an ownership change for statutory purposes
during fiscal
F-19
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
11. Income Taxes -- (Continued)
2002, which will result in a limitation imposed on the future use of net
operating loss carryforwards. The Company believes that this limitation does
not further impair the net operating loss carryforwards as the Company
believes that it is more likely than not that those carryforwards will not be
realized.
At March 2, 2002 and March 3, 2001, the Company had state NOL carryforwards
of $2,442,917 and $1,718,513, respectively, the majority of which expire by
fiscal 2004 and the remaining balance by fiscal 2022.
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 2, 2002 and March 3, 2001, the Company had federal business tax
credit carryforwards of $51,137 and $49,597, 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 at fiscal 2002 and
2001.
Valuation Allowances
The valuation allowances as of March 2, 2002 and March 3, 2001 were
$1,234,761 and $1,031,287 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.
Subsequent Event
Based on tax law changes enacted on March 9, 2002, the Company expects to
receive a tax benefit of approximately $44,000 from the five-year net
operating loss carry-back provision. This benefit will be recorded to income
in the first quarter of fiscal 2003.
F-20
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
12. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at
March 2, 2002 and March 3, 2001:
March 2, March 3,
2002 2001
---------- ----------
Secured Debt:
Senior secured credit facility ("SCF") ............. $1,378,462 $ --
Senior facility .................................... -- 682,000
Revolving Credit Facility due 2002 ("RCF") ......... -- 730,268
Term loan due 2002 ("PCS") ......................... -- 591,391
Exchange debt ...................................... -- 216,126
10.5% senior secured notes due 2002 ................ 20,879 467,500
12.5% senior secured notes due 2006 ($152,025 face
value less unamortized discount of $7,857)........ 144,168 --
Senior secured (shareholder) notes due 2006 ........ 149,500 --
Other .............................................. 11,284 12,447
---------- ----------
1,704,293 2,699,732
Lease Financing Obligations ......................... 182,625 1,100,000
Unsecured Debt:
6.70% notes due on 2001 ............................ -- 7,342
5.25% convertible subordinated notes due 2002 ...... 150,500 357,324
6.0% dealer remarketable securities due 2003 ....... 83,550 187,650
6.0% fixed-rate senior notes due 2005 .............. 194,500 194,500
7.625% senior notes due 2005 ....................... 198,000 198,000
4.75% convertible notes due 2006 ($250,000 face
value less unamortized discount of $7,000)........ 243,000 --
7.125% notes due 2007 .............................. 350,000 350,000
6.125% fixed-rate senior notes due 2008 ............ 150,000 150,000
11.25% notes due 2008 .............................. 150,000 --
6.875% senior debentures due 2013 .................. 200,000 200,000
7.7% notes due 2027 ................................ 300,000 300,000
6.875% fixed-rate senior notes due 2028 ............ 150,000 150,000
---------- ----------
2,169,550 2,094,816
---------- ----------
Total debt .......................................... 4,056,468 5,894,548
Short-term debt and current maturities of
convertible notes long-term debt and lease
financing obligations.............................. (209,457) (36,956)
---------- ----------
Long-term debt and lease financing obligations, less
current maturities................................. $3,847,011 $5,857,592
========== ==========
Refinancing:
On June 27, 2001, the Company completed a major financial restructuring that
extended the maturity dates of the majority of its debt to 2005 or beyond,
provided additional equity and converted a portion of its debt to equity.
These transactions are described below:
New Senior Secured Credit Facility. The Company entered into a new
$1,900,000 senior secured credit facility with a syndicate of banks led by
Citicorp USA, Inc. as senior agent. The new facility matures on June 27, 2005
unless more than $20,000 of the 7.625% senior notes due April 15, 2005 are
outstanding on
F-21
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
12. Indebtedness and Credit Agreements -- (Continued)
December 31, 2004, in which event the maturity date is March 15, 2005. The new
facility consists of a $1,400,000 term loan facility and a $500,000 revolving
credit facility. The term loan was used to repay the outstanding balances of
the old senior facility, PCS facility, RCF facility, the Exchange Debt and all
but $21,879 of the 10.5% senior secured notes due September 2002. The
revolving facility is available for working capital requirements, capital
expenditures and general corporate purposes. Borrowings under the facilities
currently bear interest either at LIBOR plus 3.75%, if the Company chooses to
make LIBOR borrowings, or at Citibank's base rate plus 2.75%. The Company is
required to pay fees of 0.50% per annum on the daily unused amount of the
revolving facility. Amortization payments of $5,000 related to the term loan
begin March 4, 2002, increasing to $7,500 for the quarters ending May 31, 2002
through August 31, 2003 and $15,000 for the quarters ending November 30, 2003
through February 26, 2005.
Substantially all of Rite Aid Corporation's wholly owned subsidiaries
guarantee the obligations under the senior secured credit facility. The
subsidiary guarantees are secured by a first priority lien on the inventory,
accounts receivable, prescription files, intellectual property and certain
real estate assets of the subsidiary guarantors. Rite Aid Corporation is a
holding company with no direct operations and is dependent upon dividends and
other payments from its subsidiaries to service payments due under the senior
credit facility. Rite Aid Corporation's direct obligations under the senior
credit facility are unsecured.
The senior secured credit facility has been amended to allow the Company, at
its option, to issue up to $893,000 of unsecured debt that is not guaranteed
by any subsidiaries of the Company, reduced by the following debt to the
extent incurred: (i) $150,000 of financing transactions of existing owned real
estate; (ii) $643,000 of additional debt secured by the facility's collateral
on a second priority basis; and (iii) $100,000 of financing transactions for
property or assets acquired after June 27, 2001. The $893,000 of permitted
debt, whether secured or unsecured, is reduced by the aggregate outstanding,
undefeased balances of the 5.25% convertible subordinated notes, the 6.0%
dealer remarketable securities, the 4.75% convertible notes and the
shareholder secured notes. As of March 2, 2002, the Company had outstanding
principal balances of $150,500, $83,550, $250,000 and $149,500 of the 5.25%
convertible subordinated notes, 6.0% dealer remarketable securities, 4.75%
convertible notes and agreement to issue shareholder secured notes,
respectively. As of March 2, 2002, the remaining permitted debt under the
senior secured credit facility is $259,450.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. The senior secured credit facility,
as amended, requires the Company to meet various financial ratios and limits
capital expenditures. Beginning with the 12 months ended March 2, 2002, the
covenants require the Company to maintain a maximum leverage ratio of 8.40:1,
increasing to 9.50:1 for the twelve months ending June 1, 2002, and increasing
again to 10.00:1 for the twelve months ending August 31, 2002, before
gradually decreasing to 6.00:1 for the twelve months ending May 31, 2005. The
Company must also maintain a minimum interest coverage ratio of 1.20:1 for the
twelve months ending March 2, 2002, decreasing to 1.15:1 for the twelve months
ending June 1, 2002 and decreasing again to 1.10:1 for the twelve months
ending August 31, 2002 before gradually increasing to 2.00:1 for the twelve
months ending November 30, 2004. In addition, the Company must maintain a
minimum fixed charge ratio of 0.9:1 for the twelve months ending March 2,
2002, gradually increasing to 1.10:1 for the twelve months ending August 31,
2004. Capital expenditures not relating to the June 27, 2001 refinancing are
limited to $150,000 annually beginning with the twelve months ending March 2,
2002. These capital expenditure limits are subject to upward adjustment based
upon availability of excess liquidity as defined in the Company's senior
secured credit facility. As of March 2, 2002, the Company is in compliance
with these covenants.
F-22
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
12. Indebtedness and Credit Agreements -- (Continued)
The senior secured credit facility provides for customary events of default,
including nonpayment, misrepresentation, breach of covenants and bankruptcy.
It is also an event of default if any event occurs that enables, or which with
the giving of notice or the lapse of time would enable, the holder of the
Company's debt to accelerate the maturity of debt having a principal amount of
$25,000 or more.
The Company's ability to borrow under the senior secured credit facility is
based on a specified borrowing base consisting of eligible accounts receivable
and inventory. At March 2, 2002, the term loan was fully drawn except for
$21,538, which is available and may be drawn to pay the remaining outstanding
10.5% senior secured notes when they mature on September 15, 2002. At March 2,
2002, the Company had no outstanding draws on the revolving credit facility
and the Company had additional available borrowing capacity of $438,676, net
of outstanding letters of credit of $61,324.
High Yield Notes. The Company issued $150,000 of 11.25% senior notes due
July 2008 in a private placement offering. These notes are unsecured and are
effectively subordinate to the secured debt of the Company. Among the
transactions permitted by the 11.25% senior notes to increase debt are
transactions to finance existing owned real estate not to exceed an aggregate
$150,000 and $400,000 of other debt. The 11.25% senior notes also allow
$600,000 of additional permitted debt, which includes increasing the senior
secured facility. With the issuance by the Company of $250,000 of 4.75%
convertible notes in November 2001 and the $149,500 of senior secured notes
for the February 2002 settlement of a lawsuit with shareholders which were
issued in April 2002, the Company has remaining permitted debt of $600,500
under the 11.25% senior notes of March 2, 2002.
Debt for Debt Exchange. The Company exchanged $152,025 of its existing
10.5% senior secured notes due 2002 for an equal amount of 12.5% senior notes
due September 2006. In addition, holders of these notes received warrants to
purchase 3,000 shares of Company common stock at $6.00 per share. On June 29,
2001, the warrant holders exercised these warrants, on a cashless basis, and
as a result approximately 982 shares of common stock were issued.
Tender Offer. On May 24, 2001, the Company commenced a tender offer for the
10.50% senior secured notes due 2002 at a price of 103.25% of the principal
amount of the notes. The tender offer was closed on June 27, 2001, at which
time $174,462 principal amount of the notes was tendered. The Company incurred
a tender offer premium of $5,670 as a result of the transaction, which is
included as a component of the extraordinary loss. The Company used proceeds
from the new senior secured credit facility to pay for the notes tendered.
Debt for Equity Exchanges and Sales of Capital Stock. The Company completed
the following debt for equity exchanges during fiscal 2002.
Carrying Additional
Amount Common Paid-In
Debt Exchanged Exchanged Stock Capital
- -------------- --------- ------- ----------
PCS facility.................................................................................. $ 14,478 $ 1,769 $ 13,867
RCF facility.................................................................................. 169,906 26,370 158,388
5.25% convertible subordinated notes.......................................................... 205,308 29,750 307,686
6.00% dealer remarketable securities.......................................................... 79,885 12,382 55,633
10.50% notes due 2002......................................................................... 119,134 16,115 114,223
-------- ------- --------
$588,711 $86,386 $649,797
======== ======= ========
In addition to the debt for equity exchange transactions listed above, the
Company sold approximately 80,083 shares of its common stock for net proceeds
of $528,404, which resulted in an increase to common stock of $80,083, and
additional paid in capital of $448,321.
F-23
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
12. Indebtedness and Credit Agreements -- (Continued)
The Company issued approximately 2,122 shares of its Series C Convertible
Preferred Stock in connection with the debt for equity exchanges. The Series C
Convertible Preferred Stock was converted into 21,217 shares of common stock
on July 30, 2001, at which time the Series C Convertible Preferred Stock was
retired.
As a result of the above exchanges, the Company recognized an aggregate loss
of $151,907. The amount of this loss related to the exchange of debt
convertible into the Company's common stock is $132,713, and is classified as
a component of operations. The remaining loss of $19,194 is classified as a
component of the extraordinary loss.
Lease Obligations. The Company surrendered certain renewal options
contained in certain real estate leases on property previously sold and leased
back to the Company and as a result these leases were afforded sale and
leaseback accounting treatment and, accordingly have been reclassified as
operating leases. This action resulted in a reduction of outstanding capital
lease obligations of $850,792. Accordingly, the Company recognized a loss on
lease modifications of $21,882 in fiscal 2002, and recorded a net deferred
gain of $168,483, which will be amortized over the remaining noncancellable
lease terms. In addition, the Company repaid certain obligations totaling
$16,467 related to leasehold improvements.
Synthetic Leases. The Company terminated existing synthetic lease
agreements for certain land, buildings, equipment and aircraft, which were
accounted for as operating leases. A wholly owned subsidiary of the Company
purchased the equipment for $82,604, and is leasing the land, buildings and
aircraft from different parties. The obligations under the new synthetic lease
for the land and buildings are secured by a first priority lien on the
equipment at the leased buildings owned by the Company's subsidiary. The
Company has guaranteed certain of the obligations of the consolidated
subsidiary. The Company accounted for these new leases as operating leases.
Interest Rate Swap Contracts. 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.
As a result of the June 27, 2001 refinancing, the Company's interest rate
swaps no longer qualify for hedge accounting treatment and therefore, the
changes in fair value of these interest rate swap contracts is required to be
recorded as a component of net loss. Accordingly, the Company recognized a
charge of $31,047 representing the amount that the Company would have to pay
the counter party to terminate these contracts as of that date. Subsequent
changes in the market value of the interest rate swaps of $10,847, inclusive
of cash payments, have been recorded on the income statement for the year
ended March 2, 2002. This amount represents an adjustment to the aggregate
expense recognized by the Company relating to the swaps. This adjustment is
due to a reduction in market interest rates coupled with the passage of time.
The termination liability was $18,968 as of March 2, 2002.
Other. As a result of the above transactions, the Company has recorded an
extraordinary loss on early extinguishment of debt of $66,589 (including
$40,735 of deferred debt issue costs written-off), loss on debt and lease
conversions and modifications of $21,882 and deferred debt issue costs of
$73,972.
Other Transactions
Convertible Notes. The Company issued $250,000 of 4.75% convertible notes
due December 2006 in November 2001. These notes were issued at a 3% discount
resulting in cash proceeds of $242,500. These notes are unsecured and are
effectively subordinate to the secured debt of the Company. The notes are
F-24
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
12. Indebtedness and Credit Agreements -- (Continued)
convertible, at the option of the holder, into shares of the Company's common
stock at a conversion price of $6.50 per share, subject to adjustments to
prevent dilution, at any time.
Repurchase of Debt. The Company repurchased $24,215 of its 6.0% dealer
remarketable securities due 2003, $1,000 of its 10.50% notes due 2002 and
$1,510 of its 5.25% convertible subordinated notes due 2002 during fiscal
2002.
Senior Secured Notes. The Company, in April 2002, issued $149,500 of its
secured notes due 2006 as part of its February 2002 settlement of a lawsuit
with shareholders. Upon issuance, the Company paid interest for the period
from October 15, 2001 to January 25, 2002 of $2,100. From January 26, 2002,
the notes accrue interest at a variable rate equal to the Company's average
bank borrowing rate plus 3.75% until the final settlement is approved. At that
time, the notes will be given an interest rate, enabling the notes to be
traded at face value upon determination of such rate.
Other. In March 2001, the Company sold its investment in AdvancePCS.
Proceeds received from the sale were used to pay down $437,508 of borrowings
under the PCS facility, and $46,596 of borrowings under the Exchange Debt.
Debt for Equity Exchanges. Throughout fiscal 2001, the Company exchanged
debt for equity as outlined in the table below:
Carrying Additional
Amount Common Paid-In
Debt Exchanged Exchanged Stock Capital
- -------------- --------- ------- ----------
PCS and RCF facilities and J.P. Morgan demand note............................................ $284,820 $51,785 $220,088
5.25% convertible subordinated notes.......................................................... 292,662 30,241 379,829
6.00% dealer remarketable securities.......................................................... 17,850 1,868 4,053
7.625% senior notes........................................................................... 2,000 230 604
-------- ------- --------
For the year ended March 3, 2001.............................................................. $597,332 $84,124 $604,574
======== ======= ========
The Company had outstanding letters of credit of $61,324 at March 2, 2002
and $46,952 at March 3, 2001. 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 2, 2002 or March 3, 2001.
The annual weighted average interest rate on the Company's indebtedness was
8.2%, 8.2% and 7.4% for fiscal 2002, fiscal 2001 and fiscal 2000,
respectively.
The aggregate annual principal payments of long-term debt for the five
succeeding fiscal years are as follows: 2003, $202,913; 2004, $122,012; 2005,
$62,528; 2006, $1,646,399; 2007, $743,005 and $1,096,986 in 2008 and
thereafter. The Company is in compliance with restrictions and limitations
included in the provisions of various loan and credit agreements.
Substantially all of Rite Aid Corporation's wholly-owned subsidiaries
guarantee the obligations under the new senior secured credit facility. These
subsidiary guarantees are secured primarily by a first priority lien on the
inventory, accounts receivable, prescription files, intellectual property and
some real estate assets of the subsidiary guarantors. Rite Aid Corporation is
a holding company with no direct operations and is dependent upon dividends
and other payments from its subsidiaries to service payments due under the
senior credit facility. Rite Aid Corporation's direct obligations under the
senior credit facility are unsecured. The $20,879 aggregate principal amount
of outstanding 10.5% senior secured notes are guaranteed by substantially all
of
F-25
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
12. Indebtedness and Credit Agreements -- (Continued)
the Company's wholly-owned subsidiaries, which are secured on a shared first
priority basis with the new credit facility. The 12.5% senior secured notes
due 2006 are guaranteed by substantially all of the Company's wholly-owned
subsidiaries, and are secured on a second priority basis by the same
collateral as the new senior secured credit facility.
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.
13. 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 $10,175, $10,930 and $10,443,
was $573,675, $537,423 and $500,782 in 2002, 2001 and 2000, respectively.
These amounts include contingent rentals of $26,893, $26,644 and $28,625, in
fiscal 2002, 2001 and 2000, respectively.
The Company leases certain facilities through sale-leaseback arrangements
accounted for using the financing method. Proceeds from sale-leaseback
programs were approximately $1,620 in 2002, $6,992 in 2001 and $74,898 in
2000.
The net book values of assets under capital leases and sale-leasebacks
accounted for under the financing method at March 2, 2002 and March 3, 2001
are summarized as follows:
2002 2001
-------- --------
Land .................................................... $ 11,209 $326,304
Buildings ............................................... 168,500 532,635
Leasehold improvements .................................. -- 128,122
Equipment ............................................... 2,644 2,644
Accumulated depreciation ................................ (33,675) (63,097)
-------- --------
$148,678 $926,608
======== ========
Following is a summary of lease finance obligations at March 2, 2002 and
March 3, 2001:
2002 2001
-------- ----------
Sale-leaseback obligations accounted for under the
financing method..................................... $ -- $ 917,211
Obligations under capital leases ...................... 182,625 182,789
-------- ----------
Total ................................................. 182,625 1,100,000
Less current obligation ............................... (6,544) (28,603)
-------- ----------
Long-term lease finance obligations ................... $176,081 $1,071,397
======== ==========
The Company surrendered certain renewal options contained in certain real
estate leases on property previously sold and leased back to the Company and
as a result these leases were afforded sale and leaseback
F-26
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
13. Leases -- (Continued)
accounting treatment and, accordingly have been reclassified as operating
leases. This action resulted in a reduction of outstanding capital lease
obligations of $850,792.
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 2, 2002:
Lease
Financing Operating
Fiscal Year Obligations Leases
- ----------- ----------- ----------
2003 ............................................... $ 22,100 $ 585,128
2004 ............................................... 21,752 560,284
2005 ............................................... 21,666 526,979
2006 ............................................... 21,309 480,888
2007 ............................................... 21,016 441,063
Later years ........................................ 218,889 4,085,709
--------- ----------
Total minimum lease payments ....................... 326,732 $6,680,051
==========
Amount representing interest ....................... (144,107)
-----------
Present value of minimum lease payments ............ $ 182,625
=========
The Company leases certain distribution facilities under a synthetic lease
agreement. The agreement is accounted for as an operating lease. The lease
agreement terminates on June 27, 2005 at which time the Company intends to
either extend the term of the agreement or purchase the facilities. Renewal is
subject to our meeting certain financial conditions, as defined in the
synthetic lease agreement. The Company's guaranteed residual value is $85,480
under the agreement.
14. 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. Accretion was $104 in fiscal 2002.
15. Capital Stock
In October 1999, the Company issued 3,000 shares of Series B preferred stock
at $100 per share which was the liquidation preference. The Series B preferred
stock paid 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
F-27
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
15. Capital Stock -- (Continued)
adjustment the Company increased its paid in capital, its accumulated deficit,
and its loss attributable to common stockholders by $6,406 and $160,915 during
the fiscal years ended March 2, 2002 and March 3, 2001, respectively
(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). On October 5, 2001, the Company exchanged all outstanding
shares of Series B cumulative pay-in-kind preferred Series B for an equal
number of shares of 8% Series D cumulative pay-in-kind preferred stock
("Series D preferred stock"). The Series D preferred stock differs from the
Series B preferred stock only in that the consent of holders of the Series D
preferred stock is not required in order for the Company to issue shares of
the Company's capital stock that are on parity with the Series D preferred
stock with respect to dividends and distributions upon the liquidation,
distribution or winding up of the Company.
For the years ended March 2, 2002, March 3, 2001 and February 26, 2000, the
Company recognized an increase to its investment in drugstore.com of $711,
$14,406 and $2,929, respectively, and a corresponding increase to paid in
capital, in connection with equity transactions of drugstore.com.
On June 27, 2001, the stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock, $1.00 par value, from 600,000 to 1,000,000. As of
March 2, 2002, the authorized capital stock of the Company consists of
1,000,000 shares of common stock and 20,000 shares of preferred stock, having
a par value of $1.00 per share and $100.00 per share, respectively. Preferred
stock is issued in series subject to terms established by the Board of
Directors. At March 2, 2002, the Company has outstanding warrants to purchase
2,500 shares of common stock at $11.00 per share. The Company has no other
warrants outstanding.
16. Stock Option and Stock Award Plans
The Company reserved 22,000 shares of its common stock for the granting of
stock options and other incentive awards to officers and key associates 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. The 1990 Plan
was terminated during fiscal 2000 and all outstanding awards were rolled into
the 2000 Plan.
In November 1999, the Company adopted the 1999 Stock Option Plan (the 1999
Plan), under which 10,000 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 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 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 52,000 as of March 2, 2002.
F-28
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans -- (Continued)
Stock Options
Following is a summary of stock option transactions for the fiscal years
ended March 2, 2002, March 3, 2001 and February 26, 2000:
Weighted Average
Shares Price Per Shares
------- ----------------
Balance, February 27, 1999 ....................... 14,671 $19.02
Granted........................................ 18,688 7.95
Exercised...................................... (65) 13.61
Cancelled...................................... (7,489) 14.60
------- ------
Balance, February 26, 2000 ....................... 25,805 12.30
Granted........................................ 47,831 4.03
Exercised...................................... -- --
Cancelled (1).................................. (20,439) 7.57
------- ------
Balance, March 3, 2001 ........................... 53,197 $ 6.48
Granted........................................ 10,843 5.72
Exercised...................................... (422) 5.23
Cancelled...................................... (2,859) 10.01
------- ------
Balance, March 2, 2002 ........................... 60,759 $ 6.18
======= ======
- ---------------
(1) Includes 16,684 stock options which have been cancelled and reissued.
For various price ranges, weighted average characteristics of outstanding
stock options at March 2, 2002 were as follows:
Exercisable
Outstanding Options Options
---------------------------------------- -----------------
Number
Outstanding Weighted Weighted
as of Remaining Average Average
Range of Exercise Prices March 2, 2002 Life (years) Price Shares Price
- ------------------------ ------------- ------------ -------- ------ --------
$ 2.2600 to $ 2.2600 ..... 4,349 9.91 $ 2.2600 1,140 $ 2.2600
$ 2.7500 to $ 2.7500 ..... 16,500 8.04 $ 2.7500 9,562 $ 2.7500
$ 3.0000 to $ 4.0500 ..... 20,922 8.95 $ 4.0207 6,954 $ 4.0248
$ 4.0625 to $ 7.0000 ..... 6,554 7.91 $ 5.5498 2,838 $ 5.4392
$ 7.1250 to $12.3750 ..... 6,377 7.69 $ 8.7972 1,314 $ 9.7799
$12.500 to $44.6875 ..... 5,836 4.14 $22.8140 4,604 $21.2742
$45.5625 to $45.5625 ..... 3 6.77 $45.5625 2 $45.5625
$47.5000 to $47.5000 ..... 202 6.88 $47.5000 171 $47.5000
$48.5625 to $48.5625 ..... 13 6.84 $48.5625 7 $48.5625
$48.8125 to $48.8125 ..... 3 6.85 $48.8125 1 $48.8125
------ ------
$ 2.2600 to $48.8125 ..... 60,759 8.06 $ 6.1783 26,593 $ 7.2081
====== ==== ======== ====== ========
In November 2000, the Company reduced the exercise price of 16,684 stock
options issued after December 4, 1999 to $2.75 per share, which represents
fair market value of a share of common stock on the date of the repricing. In
connection with the repricing, the Company recognizes compensation expense for
these options using variable plan accounting. Under variable plan accounting,
the Company recognizes compensation expense over the option vesting period. In
addition, subsequent changes in the market value of
F-29
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans -- (Continued)
the Company's common stock during the option period, or until exercised, will
generate changes in the compensation expense recognized on the repriced
options. The Company recognized expense (reduction of expense) of
approximately $(27,771) and $33,500 during fiscal 2002 and 2001, respectively,
related to the repriced options.
The Company follows the provisions of 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 2, March 3, February 26,
2002 2001 2000
--------- ----------- ------------
Net loss................................................................................ $(827,681) $(1,589,224) $(1,133,043)
Pro forma additional compensation expense under fair value method....................... (66,126) (1,798) (22,464)
--------- ----------- -----------
Pro forma net loss...................................................................... (893,807) (1,591,022) (1,155,507)
Accretion of redeemable preferred stock................................................. (104) -- (97)
Preferred stock conversion reset........................................................ (6,406) (160,915) --
Dividends on preferred stock............................................................ (27,530) (25,724) (10,110)
--------- ----------- -----------
Pro forma net loss attributable to common stockholders.................................. $(927,847) $(1,777,661) $(1,165,714)
========= =========== ===========
Pro forma basic and diluted loss per share.............................................. $ (1.96) $ (5.66) $ (4.50)
========= =========== ===========
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:
2002 2001 2000
--------- --------- ---------
Expected stock price volatility.............................................................. 68.7% 67.2% 58.0%
Expected dividend yield...................................................................... 0.0% 0.0% 0.0%
Risk-free interest rate...................................................................... 4.25% 6.25% 6.3%
Expected life of options..................................................................... 5.0 years 2.8 years 4.2 years
The average fair value of each option granted during fiscal 2002, 2001 and
2000 was $3.46, $1.91 and $4.09, respectively.
Restricted Stock
The Company provides restricted stock grants to key associates under plans
approved by the stockholders. Shares awarded under the plans vest in
installments up to three years and unvested shares are forfeited upon
termination of employment. The Company made the following grants during fiscal
2002, 2001 and 2000:
2002 2001 2000
---- ------- ------
Shares granted......................................................................................... 88 4,004 1,000
Fair value on the date of the grant.................................................................... $747 $22,797 $8,250
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 2, 2002, March 3, 2001 and February 26, 2000, the
F-30
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans -- (Continued)
Company recognized expense of $9,135, $12,387 and $2,062, respectively,
related to restricted share awards. The unearned compensation associated with
these restricted stock shares was $7,990 and $16,598 as of March 2, 2002 and
March 3, 2001, respectively. This amount is included in stockholders equity as
a component of stock-based and deferred compensation.
During fiscal 2002, in connection with the vesting of certain restricted
shares of common stock, the Company made loans totaling approximately $5,900
to executive officers to provide them with funds to pay federal and state
income taxes due upon the vesting. The loans bore interest and were secured on
a non-recourse basis by the vested shares. On December 10, 2001, the executive
officers repaid these loans utilizing the 1,140 shares securing those loans.
This resulted in a charge of $1,400 during the fourth quarter of fiscal 2002.
During fiscal 2002, the Company entered into an agreement with a service
provider whereby the provider would receive shares of Company common stock in
exchange for certain services. In connection with this agreement, the Company
issued 331 shares of its common stock and recognized $2,118 of stock-based
compensation expense during fiscal 2002.
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 2, 2002 and March 3, 2001, there were approximately 3,700 and 5,700
stock appreciation rights units outstanding, respectively. Grant prices for
units outstanding at March 2, 2002 ranged from $5.38 to $48.56 per unit.
Amounts charged or (credited) to expense relating to the stock appreciation
rights units for fiscal 2002, 2001 and 2000 were $(773), $(22) and $(45,500),
respectively.
17. Retirement Plans
Defined Contribution Plans
The Company and its subsidiaries have numerous retirement plans covering
salaried associates and certain hourly associates. 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 associate's salary, as determined by the Board of Directors based on
the Company's performance. Effective January 1, 2002, the Company
significantly improved the Company's match for the defined contribution plan.
With this enhancement, the profit sharing plan was eliminated. Total expenses
recognized for the above plans was $12,260 in 2002, $13,693 in 2001 and
$17,589 in 2000.
Senior executive officers are entitled to deferred compensation arrangements
in accordance with their employment agreements, which are funded monthly as
they vest. Certain other key executives are included in a deferred
compensation plan, which is a defined contribution plan that is unfunded and
subject to a five year graduated vesting schedule. The expenses recognized for
all of these plans was $3,031 in 2002, $798 in 2001 and $281 in 2000.
F-31
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
17. Retirement Plans -- (Continued)
Defined Benefit Plans
The Company and its subsidiaries also sponsor a qualified defined benefit
pension plan that requires benefits to be paid to eligible associates based
upon years of service and, in some cases, eligible compensation. Prior to
February 28, 2002, the Company and its subsidiaries sponsored four separate
qualified defined benefit pension plans. However, effective February 28, 2002,
the Company merged these four plans into a single plan. The Company merged
these plans to take advantage of financial and administrative economies of
scale; the merger had no effect on the benefits provided to eligible
associates. The Company's funding policy for the newly merged plan is to
contribute the minimum amount required by the Employee Retirement Income
Security Act of 1974.
The Company has established the Nonqualified Executive Retirement Plan to
provide retirement benefits to long-term associates who hold a position of
executive vice president or higher and to select executives who may, pursuant
to their employment agreements, be deemed to be long-term associates.
Generally, eligible participants receive an annual benefit, payable monthly
over fifteen years, equal to a percentage of the highest base salary and
highest bonus paid or accrued for each participant within the ten fiscal years
prior to the date of the event giving rise to payment of the benefit. This
defined benefit plan is unfunded. The Company recognized a curtailment and
settlement benefit as of March 2, 2002, due to certain executives releasing
their rights under the plan. This reduced the benefit obligation by $4,083.
Net periodic pension expense for the defined benefit plans includes the
following components:
Defined Benefit Pension Nonqualified Executive
Plans Retirement Plan
---------------------------- ---------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ------- ------ -------
Service cost ............................. $ 4,162 $ 4,004 $ 4,441 $ 294 $ 908 $ 671
Interest cost ............................ 4,508 4,248 4,166 1,994 2,642 1,497
Expected return on plan assets ........... (5,022) (6,896) (5,723) -- -- --
Amortization of unrecognized net
transition (asset)/obligation........... (160) (160) (160) 87 1,162 1,163
Amortization of unrecognized prior
service cost............................ 513 346 376 -- -- --
Amortization of unrecognized net gain .... -- (2,202) (226) (240) (193) --
Curtailment and settlement ............... -- -- -- (4,083) -- --
Change due to plan amendment ............. -- -- -- (643) -- 18,891
------- ------- ------- ------- ------ -------
Net pension expense (credit) ............. $ 4,001 $ (660) $ 2,874 $(2,591) $4,519 $22,222
======= ======= ======= ======= ====== =======
F-32
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
17. Retirement Plans -- (Continued)
The table below sets forth a reconciliation from the beginning of the year
for both the benefit obligation and plan assets of the Company's retirement
and defined benefits plan, as well as the funded status and amounts recognized
in the Company's balance sheet as of March 2, 2002 and March 3, 2001:
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
----------------- -------------------
2002 2001 2002 2001
------- ------- -------- --------
Change in benefit obligations:
Benefit obligation at end of prior year . $64,919 $58,791 $ 31,639 $ 34,691
Service cost ............................ 4,162 4,004 294 908
Interest cost ........................... 4,508 4,248 1,994 2,642
Distributions ........................... (4,871) (5,349) (1,787) (1,429)
Curtailment and settlement .............. -- -- (4,083) --
Change due to change in assumptions ..... -- 1,431 503 1,006
Change due to plan amendment ............ 1,690 -- (643) --
Actuarial (gain) or loss ................ (944) 1,794 (118) (6,179)
------- ------- -------- --------
Benefit obligation at end of year ........ $69,464 $64,919 $ 27,799 $ 31,639
======= ======= ======== ========
Change in plan assets:
Fair value of plan assets at beginning
of year ............................... $77,510 $81,718 $ -- $ --
Employer contributions .................. 4,026 4,211 1,787 1,429
Actual return on plan assets ............ (5,688) (7,959) -- --
Adjustment for fair value from
measurement date ...................... (7,444) 5,932 -- --
Distributions (including expenses paid
by the plan) .......................... (6,131) (6,392) (1,787) (1,429)
------- ------- -------- --------
Fair value of plan assets at end of year . $62,273 $77,510 $ -- $ --
======= ======= ======== ========
Funded status ............................ $(7,191) $12,591 $(27,799) $(31,639)
Unrecognized net gain (loss) ............. 13,515 (5,101) 38 (10,952)
Unrecognized prior service cost .......... 2,056 1,463 -- --
Unrecognized net transition (asset) or
obligation.............................. (19) (179) 465 11,628
------- ------- -------- --------
Prepaid or (accrued) pension cost
recognized.............................. $ 8,361 $ 8,774 $(27,296) $(30,963)
======= ======= ======== ========
Amounts recognized in consolidated
balance sheets consisted of:
Prepaid (accrued) pension cost .......... $ -- $ 9,009 $(27,296) $(30,963)
Accrued pension liability ............... (6,950) (857) -- --
Pension intangible asset ................ 2,056 -- -- --
Accumulated other comprehensive income .. 13,255 622 -- --
------- ------- -------- --------
Net amount recognized .................... $ 8,361 $ 8,774 $(27,296) $(30,963)
======= ======= ======== ========
As of February 28, 2002, the Rite Aid Pension Plan had an accumulated
benefit obligation of $69,223 that exceeded the fair value of plan assets of
$62,273. One year ago, 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.
F-33
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
17. 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
------------------- -------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Discount rate ............................ 7.00 7.00 7.25 7.25 7.50 7.83
Rate of increase in future compensation
levels.................................. 4.50 4.50 4.50 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
18. Commitments, Contingencies and Guarantees
Legal Proceedings
The Company is party to numerous legal proceedings, as discussed below.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving the
Company's financial reporting and other matters. Management is cooperating
fully with the SEC and the United States Attorney. Settlement discussions have
begun with the United States Attorney for the Middle District of Pennsylvania.
The United States Attorney has proposed that the government would not
institute any criminal proceeding against the Company if the Company enters
into a consent judgement providing for a civil penalty payable over a period
of years. The amount of the civil penalty has not been agreed to and there can
be no assurance that a settlement will be reached or that the amount of such
penalty will not have a material adverse effect on the Company's financial
condition and result of operations.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's associate benefit plans, including the principal
401(k) plan, which permitted associates to purchase common stock. Purchases of
common stock under the plan were suspended in October 1999. In January 2001,
the Company appointed an independent trustee to represent the interests of
these plans in relation to the Company and to investigate possible claims the
plans may have against the Company. Both the independent trustee and the
Department of Labor have asserted that the plans may have claims against the
Company. The investigations, with which the Company is cooperating fully, are
ongoing and the Company cannot predict their outcomes. In addition, a putative
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. As a result of discussions with the
independent trustee and the attorneys for the putative class action plaintiff,
the Company has arrived at a preliminary understanding which would resolve all
claims arising out of our associate benefit plans by an agreement to maintain
the current level of benefits and a current payment that will cost, net of
insurance, approximately $3,300, which has been accrued. Various non-monetary
terms and conditions remain to be negotiated and agreed upon and any agreement
reached will be subject to the approval of the Department of Labor and the
District Court. There can be no assurance that a settlement of the matter will
be agreed upon or, if agreed upon, approved by the Department of Labor and the
District Court.
These investigations and settlement discussions are ongoing and the Company
cannot predict their outcomes. If the Company were convicted of any crime,
certain licenses and government contracts such as Medicaid plan reimbursement
agreements that are material to operations may be revoked, which would have
F-34
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
18. Commitments, Contingencies and Guarantees -- (Continued)
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, including a settlement, could also have
a material adverse effect on the Company's results of operation's, financial
condition or cash flows.
Stockholder litigation
The Company, certain directors, its former chief executive officer Martin
Grass, its former president Timothy Noonan, its former chief financial officer
Frank Bergonzi, and its former auditor KPMG LLP, have been sued in a number of
actions, most of which purport to be class actions, brought on behalf of
stockholders who purchased the Company's securities on the open market between
May 2, 1997 and November 10, 1999. Most of the complaints asserted claims
under Sections 10 and 20 of the Securities Exchange Act of 1934, based upon
the allegation that the Company's financial statements for fiscal 1997, fiscal
1998 and fiscal 1999 fraudulently misrepresented the Company's financial
position and results of operation for those periods. All of these cases have
been consolidated in the U.S. District Court for the Eastern District of
Pennsylvania. On November 9, 2000, the Company announced that it had reached
an agreement to settle the consolidated securities class action lawsuits
pending there and in the Delaware Court of Chancery. Under the agreement, the
Company issued $149,500 of senior secured notes due March 2006 and paid
$45,000 in cash, which was fully funded by the Company's officers' and
directors' liability insurance. 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. On August 16, 2001,
the district court approved the settlement. Certain of the nonsettling
defendants have appealed the order. The Company cannot predict the outcome of
that appeal. If the settlement does not become final, this litigation could
result in a material adverse effect on the Company's results of operations,
financial condition or cash flows. Several members of the class have elected
to "opt-out" of the class and, as a result, approval of the settlement becomes
final and they will be free to individually pursue their claims. Management
believes that their claims, individually and in the aggregate, are not
material.
A purported class action has been instituted by a stockholder against the
Company in Delaware state court on behalf of stockholders who purchased shares
of the Company's common stock prior to May 2, 1997, and who continued to hold
them after November 10, 1999, alleging claims similar to the claims alleged in
the consolidated securities class action lawsuits described above. The amount
of damages sought was not specified and may be material. The Company has filed
a motion to dismiss this claim which is pending before the court. These claims
are ongoing and the Company cannot predict their outcome. An unfavorable
outcome could result in a material adverse effect on the Company's results of
operations, financial condition or cash flows.
Drug reimbursement matters
The Company is being investigated by multiple state attorneys general for
its reimbursement practices relating to partially-filled prescriptions and
fully-filled prescriptions that are not picked up by ordering customers. The
Company is supplying similar information with respect to these matters to the
Department of Justice. The Company believes that these investigations are
similar to investigations which were, and are being, undertaken with respect
to the practices of others in the retail drug industry. The Company also
believes that its existing policies and procedures fully comply with the
requirements of applicable law and intend to fully cooperate with these
investigations. The Company 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 Stated District Court for the Eastern District
of Pennsylvania under the Federal False Claims Act alleging that
F-35
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
18. Commitments, Contingencies and Guarantees -- (Continued)
the Company defrauded federal healthcare plans by failing to appropriately
issue refunds for partially filled prescriptions and prescriptions which were
not picked up by customers. The Department of Justice has intervened in this
lawsuit, as is its right under the law. The Company has reached an agreement
to settle these investigations and the lawsuit filed by the private individual
for $7,225, which is subject to court approval. The Company has reserved
$7,225 related to this potential liability.
These claims are ongoing and the Company cannot predict their outcome. If
any of these cases result in a substantial monetary judgement against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position or cash flows could be materially adversely
affected.
Other
The Company, together with a significant number of major U.S. retailers,
have been sued by the Lemelson Foundation in a complaint which alleges that
portions of the technology included in the Company's point-of-sale system
infringe upon a patent held by the plaintiffs. The amount of damages sought is
unspecified and may be material. The Company cannot predict the outcome of
this litigation or whether it could result in a material adverse effect on the
Company's results of operations, financial conditions or cash flows.
The Company is subject from time to time to lawsuits arising in the ordinary
course of business. In the opinion of the Company's management, these matters
are adequately covered by insurance or, if not so covered, are without merit
or are of such nature or involve amounts that would not have a material
adverse effect on the Company's results of operations, financial condition or
cash flows if decided adversely.
The Company, along with other retail drug store chains are plaintiffs in
various lawsuits against certain manufacturers of brand name prescription
drugs. As a result of favorable judgments in these lawsuits the Company
received payments and recorded nonrecurring gains in selling, general and
administrative expenses of $39,100 and $20,100 in fiscal 2002 and 2001,
respectively.
Guaranteed Lease Obligations
In connection with certain business dispositions, the Company continues to
guarantee lease obligations for approximately 150 former stores. The
respective purchasers assume the Company's obligation and are therefore,
primarily liable for these obligations. Assuming that each respective
purchaser became insolvent, an event which the Company believes to be highly
unlikely, management estimates that it could settle these obligations for
amounts substantially less than the aggregate obligation of $275,000 as of
March 2, 2002.
In the opinion of management, the ultimate disposition of these guarantees
will not have a material effect on the Company's results of operations,
financial position or cash flows.
F-36
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
19. Supplementary Cash Flow Data
Year Ended
-----------------------------------
March 2, March 3, February 26,
2002 2001 2000
-------- -------- ------------
Cash paid for interest (net of capitalized amounts of $806, $1,836 and $5,292).............. $388,986 $543,343 $501,813
======== ======== ========
Cash paid for (refunds from) income taxes................................................... $ (3,686) $(88,078) $ 981
======== ======== ========
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.......................................................... $588,711 $597,332 $ --
======== ======== ========
Conversion of debt for debt................................................................. $152,025 $467,500 $ -
======== ======== ========
Exchange of preferred shares................................................................ $349,600 $ -- $300,000
======== ======== ========
Issuance of senior secured (shareholder) notes in lieu of accrued liability................. $149,500 -- --
======== ======== ========
Exchange of lease liability for note receivable............................................. $ 40,546 -- --
======== ======== ========
Components of conversion (lease modification) of leases from capital to operating:
Reduction in leases assets, net............................................................. $704,191 -- --
======== ======== ========
Reduction in lease financing obligation..................................................... $850,791 -- --
======== ======== ========
Increase in deferred gain................................................................... $168,483 -- --
======== ======== ========
20. Related Party Transactions
Included in accounts receivable at March 2, 2002 and March 3, 2001 were
receivables from related parties of $13,105, and $3,456, respectively.
Included in accounts payable of March 2, 2002 and March 3, 2001 were payables
to related parties of $6,457 and $421, respectively. These receivables and
payables relate primarily to transactions with drugstore.com.
During fiscal 2002, 2001 and 2000, the Company sold merchandise totaling
$75,152, $65,259 and $16,280, respectively, to drugstore.com (or drugstore.com
customers) and Diversified Prescription Delivery, LLC. 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.
On May 27, 2001, the Company amended the employment agreements of Robert
Miller, Chairman of the Board and Chief Executive Officer and Mary Sammons,
President and Chief Operating Officer, 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. In
F-37
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
20. Related Party Transactions -- (Continued)
January 2002, the Company made payments of $5,971 to Mr. Miller and $1,931 to
Ms. Sammons for these bonuses. The bonuses are repayable to the extent of each
executive's recovery of severance due from the former employer. The company
has recorded the payment to Mr. Miller as recoverable, as a summary judgement
has been filed by the courts in his favor, which has been appealed. The
payment to Ms. Sammons is being expensed over the term of her employment
contract.
In fiscal 2000, the Company purchased $8,814 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.
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.
During fiscal 2002, the Company paid Leonard Green & Partners L.P., holder
of the Series D Preferred Stock, an annual fee of $1,500 and fees of $2,500 in
connection with the June 27, 2001 refinancing. During fiscal 2001 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
D preferred stock and to pay all expenses and fees (other than underwriting
discounts and commission) related to any registration.
During fiscal 2002, the Company paid J.P. Morgan Chase & Co. ("J.P.
Morgan"), one of the Company's lenders and beneficial owner of more than 5% of
the Company's issued common stock, fees and other amounts in connection with
the June 27, 2001 refinancing of $15,500. During fiscal 2001, the Company paid
J.P. Morgan fees and other amounts in connection with refinancing activity of
$20,500. Additionally, during fiscal 2001, J.P. Morgan and another financial
institution participated in the refinancing of certain debt by purchasing
$93,200 of 10.5% senior secured notes due September 2002 when the 5.5% notes
matured in December 2000.
In June 2000, certain lenders, including J.P. Morgan Ventures Corporation,
an affiliate of J.P. Morgan, exchanged an aggregate of approximately $284,800
of their loans outstanding for 51,785 shares of common stock at an exchange
rate of $5.50 per share.
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
were $2,866, $6,853 and $3,458 during fiscal 2002, 2001, and 2000,
respectively and did not exceed five percent of the firm's gross revenues for
its fiscal years.
F-38
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
21. Interim Financial Results (Unaudited)
Fiscal Year 2002 (52 Weeks)
-------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
------------- -------------- ------------- -------------- -----------
Revenues ................................. $3,710,133 $3,691,074 $3,732,079 $4,037,860 $15,171,146
Cost of goods sold, including occupancy
costs................................... 2,835,455 2,856,756 2,916,062 3,134,036 11,742,309
Selling, general and administrative
expenses................................ 820,242 826,428 848,597 887,695 3,382,962
Stock-based compensation (benefit)
expense................................. 43,092 (845) (39,447) (18,691) (15,891)
Store closing and impairment charges ..... (364) 22,105 18,652 211,224 251,617
Interest expense ......................... 128,689 102,377 82,515 82,483 396,064
Loss on debt and lease conversions and
modifications........................... 132,713 21,882 (56) (74) 154,465
Other .................................... (38,592) 39,203 17,973 13,873 32,457
---------- ---------- ---------- ---------- -----------
Loss from continuing operations before
income taxes and extraordinary item..... (211,102) (176,832) (112,217) (272,686) (772,837)
Income tax expense (benefit) ............. -- 2,500 546 (14,791) (11,745)
---------- ---------- ---------- ---------- -----------
Loss from continuing operations .......... (211,102) (179,332) (112,763) (257,895) (761,092)
Extraordinary item, loss on early
extinguishment of debt.................. -- (66,589) -- -- (66,589)
---------- ---------- ---------- ---------- -----------
Net loss ................................. $ (211,102) $ (245,921) $ (112,763) $ (257,895) $ (827,681)
========== ========== ========== ========== ===========
Basic and diluted loss per share:
Loss from continuing operations .......... $ (0.56) $ (0.40) $ (0.23) $ (0.51) $ (1.68)
Loss from extraordinary item ............. -- (0.14) -- -- (0.14)
---------- ---------- ---------- ---------- -----------
Net loss per share ....................... $ (0.56) $ (0.54) $ (0.23) $ (0.51) $ (1.82)
========== ========== ========== ========== ===========
F-39
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
21. Interim Financial Results (Unaudited) -- (Continued)
Fiscal Year 2001 (53 Weeks)
-------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
------------- -------------- ------------- -------------- -----------
Revenues ................................. $3,442,186 $3,439,469 $3,531,691 $4,103,519 $14,516,865
Cost of goods sold, including occupancy
costs................................... 2,634,453 2,610,223 2,713,988 3,192,826 11,151,490
Selling, general and administrative
expenses................................ 854,185 870,378 805,571 882,308 3,412,442
Stock-based compensation (benefit)
expense................................. (2,302) 4,739 5,264 38,164 45,865
Store closing and impairment charges ..... 16,145 88,292 95,305 188,336 388,078
Interest expense ......................... 171,375 182,108 146,388 150,055 649,926
Loss on debt and lease conversions and
modifications........................... -- 83,789 8,306 8,461 100,556
Other .................................... 27,324 24,973 (1,884) 902 51,315
---------- ---------- ---------- ---------- -----------
Loss from continuing operations before
income taxes............................ (258,994) (425,033) (241,247) (357,533) (1,282,807)
Income tax expense ....................... 144,382 -- -- 4,575 148,957
---------- ---------- ---------- ---------- -----------
Loss from continuing operations .......... (403,376) (425,033) (241,247) (362,108) (1,431,764)
Income 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 per share ....................... $ (2.69) $ (1.97) $ (0.34) $ (0.98) $ (5.65)
========== ========== ========== ========== ===========
Certain reclassifications have been made to the previously issued quarterly
amounts to conform to fiscal 2002 year end classifications.
During the fourth quarter of fiscal 2002, the Company incurred $211,224 of
store closing and impairment charges and a reduction of expenses of $22,573
related to stock options under variable accounting plans. Also during the
fourth quarter of fiscal 2002, the Company expensed $8,800 to reflect the
termination of an exclusivity contract with a vendor and recorded a $13,127
tax benefit related to the favorable outcome of federal income tax litigation.
During the first and second quarters of fiscal 2002, the Company recorded
$15,000 and $24,100 of nonrecurring gains in selling, general and
administrative expenses related to favorable litigation payments. 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.
F-40
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
21. Interim Financial Results (Unaudited) -- (Continued)
During the third and fourth quarters of fiscal 2001, the Company recorded
$12,500 and $7,600 of nonrecurring gains in selling, general and
administrative expenses related to favorable litigation payments.
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.
22. Financial Instruments
The carrying amounts and fair values of financial instruments at March 2,
2002 and March 3, 2001 are listed as follows:
2002 2001
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Variable rate
indebtedness............ $ 527,962 $ 527,962 $1,219,785 $1,219,785
Fixed rate indebtedness .. 3,345,881 2,609,314 3,574,763 2,824,904
Note receivable .......... -- -- 37,041 37,962
AdvancePCS securities .... -- -- 491,198 491,198
Interest rate swaps ...... (18,968) (18,968) -- (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-41
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
23. 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 year ended February 26, 2000 were as follows:
Thirty-One Weeks
Ended October 2, 2000 February 26, 2000
--------------------- -----------------
Net sales ......................... $ 779,748 $1,342,495
Income (loss) from operations
before income tax expense........ 25,181 40,081
Income tax expense (benefit) ...... 13,846 30,903
--------- ----------
Income (loss) from discontinued
operations....................... 11,335 9,178
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
========= ==========
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 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
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
F-42
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(In thousands, except per share amounts)
23. Discontinued Operations -- (Continued)
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.
24. Subsequent Events
On April 29, 2002, and May 6, 2002, the Company sold shares of
drugstore.com. As a result of these transactions, the Company no longer has an
equity investment in drugstore.com. These sales resulted in a gain of
approximately $16,277 which will be recorded to income in the first quarter of
fiscal 2003. These sales do not affect the business arrangement entered into
in July 1999 between the Company and drugstore.com.
F-43
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 2, 2002, March 3, 2001 and February 26, 2000
(dollars in thousands)
Additions
Allowances deducted from accounts receivable Balance at Charged to Balance at
for estimated uncollectible amounts: Beginning Costs and End of
------------------------------------ of Period Expenses Deductions Period
---------- ---------- ---------- ----------
Year ended March 2, 2002 .................................................... $37,050 $ 7,384 $16,350 $28,084
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
F-44
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 7, 2002
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 7, 2002.
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/ 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/ LEONARD I. GREEN Director
- ------------------------------------------
Leonard I. Green
/s/ NANCY A. LIEBERMAN Director
- ------------------------------------------
Nancy A. Lieberman
/s/ STUART M. SLOAN Director
- ------------------------------------------
Stuart M. Sloan
S-1
Signature Title
--------- -----
/s/ JONATHAN D. SOKOLOFF Director
- ------------------------------------------
Jonathan D. Sokoloff
/s/ GEORGE G. GOLLEHER Director
- ------------------------------------------
George G. Golleher
S-2
EXHIBIT INDEX
Exhibit
Numbers Description Incorporation by Reference to
-------- ----------- -----------------------------
2 Plan of acquisition, reorganization, arrangement, liquidation or succession 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 Exhibit 3(ii) to Form 8-K filed
October 25, 1999 on November 2, 1999
3.3 Series C Preferred Stock Certificate of Designation dated June 26, 2001 Exhibit 3.3 to Form S-1, File No.
333-64960, filed on July 12, 2001
3.4 Certificate of Amendment to Restated Certificate of Incorporation dated June 27, Exhibit 3.4 to Form S-1, File No.
2001 333-64960, filed on July 12, 2001
3.5 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Exhibit 3.5 to Form S-1, File No.
Designation dated October 3, 2001 333-64960, filed on July 12, 2001
3.6 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
3.7 Amendment to By-laws, adopted January 30, 2002 Exhibit T3B2 to Form T-3 filed on
March 4, 2002
4.1 Indenture dated as of September 10, 1997 by and between Rite Aid Corporation, Exhibit 4.1 to Registration
as issuer, and Harris Trust and Savings Bank, as trustee, related to the Statement on Form S-3, File No.
Company's 5.25% Convertible Subordinated Notes 333-39699, filed on November 6,
1997
4.2 Indenture dated as of September 22, 1998 by and between Rite Aid Corporation, Exhibit 4.1 to Registration
as issuer, and Harris Trust and Savings Bank, as trustee, related to the Statement on Form S-4, File No.
Company's 6% Dealer Remarketable Securities 333-66901, filed on November 6,
1998
4.3 Indenture dated as of December 21, 1998, between Rite Aid Corporation, as Exhibit 4.1 to Registration
issuer, and Harris Trust and Savings Bank, as trustee, related to the Company's Statement on Form S-4, File No.
5 1/2% Notes due 2000, 6% Notes due 2005, 6 7/8% Notes due 2008 and 6 7/8 Notes 333-74751, filed on March 19,
due 2028 1999
4.4 Supplemental Indenture dated as of February 3, 2000, between Rite Aid Exhibit 4.1 to Form 8-K, filed on
Corporation, as issuer, and U.S. Bank Trust National Association, to the February 7, 2002
Indenture dated as of August, 1993 and Morgan Guaranty Trust Company of New
York, relating to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007,
7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013
4.5 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Exhibit 4.2 to Form 8-K, filed on
Corporation and Harris Trust and Savings Bank, to the Indenture dated February 7, 2000
September 10, 1997, between Rite Aid Corporation and Harris Trust and Savings
Bank, related to the Company's 5.25% Convertible Subordinated Notes
4.6 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Exhibit 4.3 to Form 8-K, filed on
Corporation and Harris Trust and Savings Bank, to the Indenture dated February 7, 2000
September 22, 1998, between Rite Aid Corporation and Harris Trust and Savings
Bank, related to the Company's 6% Dealer Remarketable Securities
Exhibit
Numbers Description Incorporation by Reference to
-------- ----------- -----------------------------
4.7 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Exhibit 4.4 to Form 8-K, filed on
Corporation and Harris Trust and Savings Bank, to the Indenture dated February 7, 2000
December 21, 1998, between Rite Aid Corporation and Harris Trust and Savings
Bank, related to the Company's 10.5% Senior Secured Notes due 2002
4.8 Indenture, dated as of June 14, 2000, among Rite Aid Corporation, as issuer, Exhibit 4.1 to Form 8-K, filed on
each of the Subsidiary Guarantors named therein and State Street Bank and Trust June 21, 2000
Company, as Trustee, related to the Company's 10.5% Senior Secured Notes due
2002
4.9 Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, Exhibit 4.7 to Registration
and State Street Bank and Trust Company, as trustee, related to the Company's Statement on Form S-1, File No.
12.5% Senior Secured Notes due 2006 333-64950, filed on July 12, 2002
4.10 Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, Exhibit 4.8 to Registration
and BNY Midwest Trust Company, as trustee, related to the Company's 11 3/4 Statement on Form S-1, File No.
Notes due December 2008 333-64950, filed on July 12, 2002
4.11 Indenture dated as of November 19, 2001, between Rite Aid Corporation, as Exhibit 4.3 to Form 10-Q, filed
issuer, and BNY Midwest Trust Company, as trustee, related to the Company's on January 15, 2002
4.75% Convertible Notes due December 1, 2006
4.12 Indenture dated as of April 4, 2002, between Rite Aid Corporation, as issuer, Exhibit T3C to Form T-3, Filed on
and BNY Midwest Trust Company, as trustee, related to the Company's Senior March 4, 2001
Secured Notes due March 15, 2006
10.1 1999 Stock Option Plan* Exhibit 10.1 to Form 10-K, filed
on May 21, 2001
10.2 2000 Omnibus Equity Plan* Included in Proxy Statement dated
October 24, 2000
10.3 2001 Stock Option Plan* Exhibit 10.3 to Form 10-K, filed
on May 21, 2001
10.4 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.
10.5 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Exhibit 10.9 to Form 10-K, filed
Robert G. Miller, dated as of May 7, 2001* on May 21, 2001
10.6 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as Exhibit 4.31 to Form 8-K, filed
of December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller* on January 18, 2000
10.7 Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, Exhibit 10.2 to Form 8-K, filed
dated as of December 5, 1999* on January 18, 2000
10.8 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Exhibit 10.12 to Form 10-K, filed
Mary F. Sammons, dated as of May 7, 2001* on May 21, 2001
10.9 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as Exhibit 4.32 to Form 8-K, filed
of December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons* on January 18, 2000
10.10 Employment Agreement by and between Rite Aid Corporation and David R. Jessick, Exhibit 10.3 to Form 8-K, filed
dated as of December 5, 1999* on January 18, 2000
10.11 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as Exhibit 4.33 to Form 8-K, filed
of December 5, 1999, by and between Rite Aid Corporation and David R. Jessick* on January 18, 2000
10.12 Employment Agreement by and between Rite Aid Corporation and John T. Standley, Exhibit 10.4 to Form 8-K, filed
dated as of December 5, 1999* on January 18, 2000
Exhibit
Numbers Description Incorporation by Reference to
-------- ----------- -----------------------------
10.13 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as Exhibit 4.34 to Form 8-K, filed
of December 5, 1999, by and between Rite Aid Corporation and John T. Standley* on January 18, 2000
10.14 Employment Agreement by and between Rite Aid Corporation and Elliot S. Gerson, Exhibit 10.18 to Form 10-K, filed
dated as of November 16, 2000* on May 21, 2001
10.15 Employment Agreement by and between Rite Aid Corporation and Eric Sorkin, dated Exhibit 10.19 to Form 10-K filed
as of April 2, 1999* on May 21, 2001
10.16 Employment Agreement by and between Rite Aid Corporation and James Mastrain, Exhibit 10.20 to Form 10-K, filed
dated as of September 27, 2000* on May 21, 2001
10.17 Rite Aid Corporation Special Deferred Compensation Plan* Exhibit 10. 20 to Form 10-K filed
on July 11, 2000
10.18 Employment Agreement by and between Rite Aid Corporation and Christopher Hall, Exhibit 10.48 to Form 10-K, filed
dated as of January 26, 2000* on May 21, 2001
10.19 Employment Agreement by and between Rite Aid Corporation and Robert B. Sari, Exhibit 10.49 to Form 10-K filed
dated as of February 28, 2001* on May 21, 2001
11 Statement regarding computation of earnings per share (see note 4 to the Filed herewith
consolidated financial statements).
12 Statement regarding computation of ratio of earnings to fixed charges Filed herewith
13 Annual report to security holders Not applicable
16 Letter regarding change in certifying accountant Not applicable
18 Letter regarding change in accounting principles Exhibit 18 to the Form 10-K filed
on July 11, 2000
21 Subsidiaries of the registrant Filed herewith
22 Published report regarding matters submitted to vote of security holders Not applicable
23.1 Consent of Deloitte & Touche LLP Filed herewith
23.2 Consent of Ernst & Young LLP Filed herewith
24 Power of Attorney Not applicable
- ---------------
* Constitutes a compensatory plan or arrangement required to be filed with
this Form.
(b) Reports on Form 8-K
On February 27, 2002, we filed a current report on Form 8-K disclosing that
we amended our $1.9 billion senior secured credit facility, which amendment
allowed us to issue senior secured notes, as we previously agreed with the
plaintiff's as the final payment of our previously announced settlement of the
consolidated securities class action and derivative lawsuits against us.