FILED PURSUANT TO RULE 424(B)(3)
FILE NO. 333-64950
PROSPECTUS
RITE AID CORPORATION
130,516,017 Shares of Common Stock
This prospectus relates to the sale by selling stockholders, including their
respective transferors, donees, pledgees, or successors of up to 130,516,017
shares of our common stock that the selling shareholders acquired from us in
various private placements and debt-for-equity exchanges. We will not receive
any proceeds from the sale of any of the shares.
The shares are being registered to permit the selling stockholders to sell
the shares from time to time in the public market. The selling stockholders
may sell the shares through ordinary brokerage transactions or through any
other means described in the section "Plan of Distribution". We do not know
when or in what amounts a selling stockholder may offer shares for sale. The
selling stockholders may sell any, all or none of the shares offered by this
prospectus.
Our common stock is listed on the NYSE and the Pacific Stock Exchange under
the symbol "RAD". The last reported sale price of our common stock on the NYSE
on July 19, 2001, was $8.65.
See "Risk Factors" beginning on page 9 for a discussion of risks you should
consider before investing in our securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is July 25, 2001
TABLE OF CONTENTS
Page
--------
Cautionary Note Regarding Forward Looking Statements ............... 3
Where You Can Find More Information ................................ 4
Prospectus Summary ................................................. 5
Risk Factors ....................................................... 9
Use of Proceeds .................................................... 14
Price Range of Common Stock and Dividend Policy .................... 14
Dilution ........................................................... 14
Selected Consolidated Financial Information ........................ 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 17
Business ........................................................... 34
Management ......................................................... 43
Security Ownership of Certain Beneficial Owners and Management ..... 55
Certain Relationships and Related Transactions ..................... 57
Description of Capital Stock ....................................... 59
Selling Stockholders ............................................... 63
Plan of Distribution ............................................... 71
Legal Matters ...................................................... 73
Experts ............................................................ 73
Index to Consolidated Financial Statements ......................... F-1
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus 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 our 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;
o access to capital; and
o our ability to further develop, implement and maintain reliable and
adequate internal accounting systems and controls.
We undertake no obligation to revise the forward-looking statements included
in this prospectus to reflect any future events or circumstances. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences are discussed in this prospectus
in the sections titled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
3
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Accordingly, we file annual, quarterly and current reports, proxy
statements and other information with the SEC. We also furnish to our
stockholders annual reports, which include financial statements audited by our
independent certified public accountants and other reports which the law
requires us to send to our stockholders. The public may read and copy any
reports, proxy statements or other information that we file at the SEC's
public reference room at Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549 and at the SEC's regional offices at 505 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. The public may obtain information on the public
reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http://www.sec.gov."
Our common stock is listed on the New York Stock Exchange and the Pacific
Stock Exchange under the symbol "RAD". You can inspect and copy reports, proxy
statements and other information about us at the NYSE's offices at 20 Broad
Street, New York, New York 10005 and at the offices of the Pacific Stock
Exchange, 301 Pine Street, San Francisco, California 94104 and 618 South
Spring Street, Los Angeles, California 90014.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of our common stock offered by this
prospectus. This prospectus does not contain all of the information in the
registration statement. You will find more information about us and our common
stock in the registration statement. Any statements made in this prospectus
concerning the provisions of legal documents are not necessarily complete and
you should read the documents which are filed as exhibits to the registration
statement or otherwise filed with the SEC.
4
PROSPECTUS SUMMARY
The following information summarizes the detailed information and financial
statements included elsewhere in this prospectus. We encourage you to read
this entire prospectus carefully. Unless otherwise indicated or the context
otherwise requires, dates in this prospectus that refer to a particular fiscal
year (e.g. fiscal 2001) refer to the fiscal year ended on the Saturday closest
to February 28 of that year. The fiscal year ended March 3, 2001 included 53
weeks. The fiscal years ended February 26, 2000, February 27, 1999 and
February 28, 1998 included 52 weeks.
Rite Aid Corporation
Our Business
We are the second largest retail drugstore chain in the United States,
based on number of stores, and the third largest based on revenues. As of June
2, 2001, we operated 3,631 drugstores in 30 states across the country and in
the District of Columbia. We have a first or second place market position,
based on revenues, in 34 of the 65 major U.S. metropolitan markets in which we
operate. During fiscal 2001, we generated $14.5 billion in revenues and we
generated $3.7 billion in revenues in our first quarter of fiscal 2002. Since
the beginning of fiscal 1997, we have purchased 1,554 stores, relocated 949
stores, opened 469 new stores and remodeled 410 stores. As a result, we
believe we have one of the most modern store bases in the industry.
In our stores, we sell prescription drugs and a wide assortment of other
merchandise, which we call "front-end" products. In fiscal 2001, our
pharmacists filled more than 204 million prescriptions, which accounted for
59.5% of our total revenues. In the first quarter of fiscal 2002, pharmacy
sales accounted for 61.6% of our total revenues. We believe that our pharmacy
operations will continue to represent a significant part of our business due
to favorable industry trends, including an aging population, increased life
expectancy and the discovery of new and better drug therapies. We offer
approximately 24,600 front-end products, including over-the-counter
medications, health and beauty aids, personal care items, cosmetics, household
items, beverages, convenience foods, greeting cards, photo processing,
seasonal merchandise and numerous other everyday and convenience products,
which accounted for the remaining 40.5% of our total revenues in fiscal 2001.
We distinguish our stores from other national chain drugstores, in part,
through our private label brands and our strategic alliance with General
Nutrition Companies, Inc. ("GNC"), a leading retailer of vitamin and mineral
supplements. We offer over 1,500 products under the Rite Aid private label
brand, which contributed approximately 10% of our front-end sales in fiscal
2001.
Background
Under prior management, we were engaged in an aggressive expansion program
from 1997 until 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. 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, which
contributed to our inability to access the financial markets. A resulting
decrease in revenue due to inventory shortages, reduction in advertising and
uncompetitive prices on front-end products led to a decline in customer
traffic, which had a negative impact on our store operations. 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 fiscal 1998 and fiscal 1999. We needed to restate our
financial statements and develop accounting systems and controls that would
allow us to manage our business and accurately report the results of our
operations.
In December 1999, a new management team was hired, and since that time we
have been addressing our business, operational and financial challenges. In
response to our situation, new management has:
5
o Reduced our indebtedness from $6.6 billion as of February 26, 2000 to
$3.7 billion as of June 30, 2001, after giving effect to the Refinancing
(described below);
o Improved front-end same store sales growth from a negative 2.2% in fiscal
2000 to a positive 6.5% in fiscal 2001 by improving store conditions and
product pricing and launching a competitive marketing program;
o Improved same store sales growth from 6.2% in the first quarter of fiscal
2001 to 10.0% in the first quarter of fiscal 2002 and front-end same
store sales growth from 1.4% in the first quarter of 2001 to 5.9% in the
first quarter of 2002;
o Restated our financial statements for fiscal 1998 and fiscal 1999, as
well as engaged Deloitte & Touche LLP as our new auditors to audit our
fiscal years beginning with fiscal 1998;
o Continued developing and implementing a comprehensive plan, which is
ongoing, to address problems with our accounting systems and controls,
and also resumed normal financial reporting;
o Significantly reduced the amount of our indebtedness maturing prior to
March 2005; and
o Addressed out-of-stock inventory levels and strengthened our vendor
relationships.
Refinancing Transactions
On June 27, 2001, we completed a comprehensive $3.2 billion refinancing
package (the "Refinancing") that includes a new $1.9 billion senior secured
credit facility underwritten by Citicorp North America, Inc., The Chase
Manhattan Bank, Credit Suisse First Boston and Fleet Retail Finance, Inc. As a
result of the Refinancing, we have significantly reduced our debt and the
amount of our debt maturing prior to March 2005.
Simultaneously with or prior to the closing of the new credit facility, we
completed the following transactions, which also form part of the Refinancing:
o $552.0 million in private placements of our common stock.
o An exchange with a financial institution of $152.025 million of our 10.5%
senior secured notes due 2002 for $152.025 million of new 12.5% senior
secured notes due 2006. The 12.5% senior secured notes due 2006 are
secured by a second lien on the collateral securing the new credit
facility.
o Private exchanges of common stock for $303.5 million of our bank debt and
10.5% senior secured notes due 2002.
o A synthetic lease transaction with respect to two of our distribution
centers in the amount of approximately $106.9 million.
o $150 million in a private placement of new 11.25% senior notes due 2008.
o The reclassification of $848.8 million of capital leases as operating
leases.
o An operating lease that we entered into with respect to our aircraft for
approximately $25.6 million.
o A tender offer whereby we accepted for payment $174.5 million of our
10.5% senior secured notes due 2002 at 103.25% of their principal amount.
With the proceeds of the Refinancing, we repaid our previous senior secured
credit facility, our PCS and RCF credit facilities and our secured exchange
debt. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Credit Facilities and Refinancing". As a result of the
Refinancing, our remaining debt due before March 2005 consists of $152.0
million of our 5.25% convertible subordinated notes due 2002, $107.8 million
of our 6.00% dealer remarketable securities due 2003, $21.9 million of our
10.5% senior secured notes due 2002 and amortization of the new credit
facility. We expect to
6
use internally generated funds to retire both the 5.25% notes and the dealer
remarketable securities at maturity and to meet the amortization payments
under the new credit facility.
Risk Factors
Prospective purchasers of our common stock should carefully consider the
information set forth under the heading "Risk Factors", together with all
other information in this prospectus, before making an investment in the
common stock offered by this prospectus.
Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania
17011, and our telephone number is (717) 761-2633. The address of our Web site
is www.riteaid.com. The information on our Web site is not part of this
prospectus. Our common stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange under the trading symbol "RAD". We were incorporated in
1968 and are a Delaware corporation.
The Offering
Common stock offered by selling
stockholders ....................... 130,516,017 shares
Use of proceeds..................... We will not receive any proceeds from the
sale of shares by selling stockholders
New York Stock Exchange/
Pacific Stock Exchange Symbol ...... RAD
7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the audited consolidated financial statements and
related notes appearing on pages F-1 through F-42 and the interim condensed
consolidated financial statements and related notes appearing on pages F-43
through F-57. The summary consolidated financial data for the thirteen week
periods ended June 2, 2001 and May 27, 2000 are unaudited and not necessarily
indicative of the results to be expected for the full year. The following
summary financial data does not give pro forma effect to the Refinancing.
Year Ended Thirteen Week Period Ended
-------------------------------------------------------------------------- ---------------------------
March 3, 2001 February 26, 2000 February 27, 1999 February 28, 1998 June 2, 2001 May 27, 2000
(53 weeks) (52 weeks) (52 weeks) (52 weeks)(2)
------------- ----------------- ----------------- ----------------- ------------ ------------
(In thousands, except per share amounts and other data)
Statement of
Operations Data:
REVENUES ............. $ 14,516,865 $ 13,338,947 $ 12,438,442 $ 11,352,637 $ 3,710,133 $ 3,442,186
COSTS AND EXPENSES:
Cost of goods sold,
including
occupancy costs ... 11,151,490 10,213,428 9,406,831 8,419,021 2,840,740 2,634,453
Selling, general and
administrative
expenses .......... 3,458,307 3,607,810 3,200,563 2,773,560 858,049 851,883
Goodwill
amortization ...... 20,670 24,457 26,055 26,169 5,343 6,074
Store closing and
impairment charges
(credits) ......... 388,078 139,448 195,359 155,024 (364) 16,145
Interest expense.... 649,926 542,028 274,826 202,688 128,689 171,375
Loss on debt
conversions and
modifications ..... 100,556 -- -- -- 132,713 --
Share of loss from
equity investments 36,675 15,181 448 1,886 5,883 11,574
(Gain) loss on sale
of fixed assets ... (6,030) (80,109) -- (52,621) (49,818) 9,676
------------ ------------ ------------ ------------ ------------ ------------
Total costs and
expenses............ 15,799,672 14,462,243 13,104,082 11,525,727 3,921,235 3,701,180
------------ ------------ ------------ ------------ ------------ ------------
Loss from continuing
operations before
income taxes and
cumulative effect of
accounting change... (1,282,807) (1,123,296) (665,640) (173,090) (211,102) (258,994)
INCOME TAX EXPENSE
(BENEFIT)........... 148,957 (8,375) (216,941) (28,064) -- 144,382
------------ ------------ ------------ ------------ ------------ ------------
Loss from continuing
operations before
cumulative effect
of accounting
change. ........... (1,431,764) (1,114,921) (448,699) (145,026) (211,102) (403,376)
INCOME (LOSS) FROM
DISCONTINUED
OPERATIONS, net(1).. 11,335 9,178 (12,823) (20,214) -- 11,335
Loss on disposal of
discontinued
operations, net(1) (168,795) -- -- -- -- (303,330)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE,
net................. -- (27,300) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss ............. $ (1,589,224) $ (1,133,043) $ (461,522) $ (165,240) $ (211,102) $ (695,371)
============ ============ ============ ============ ============ ============
BASIC AND DILUTED
(LOSS) INCOME PER
SHARE:
Loss from continuing
operations ........ $ (5.15) $ (4.34) $ (1.74) $ (0.58) $ (0.56) $ (1.57)
Income (loss) from
discontinued
operations ........ (0.50) 0.04 (0.05) (0.08) -- (1.12)
Cumulative effect of
accounting change,
net ............... -- (0.11) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss per share.. $ (5.65) $ (4.41) $ (1.79) $ (0.66) $ (0.56) $ (2.69)
============ ============ ============ ============ ============ ============
Balance Sheet Data
(at end of period):
Working capital
(deficit) ......... $ 1,955,877 $ 752,657 $ (892,115) $ 1,258,580 $ 1,408,325
Property, plant and
equipment (net) ... 3,041,008 3,445,828 3,328,499 2,460,513 2,992,891
Total assets........ 7,913,911 9,845,566 9,778,451 7,392,147 7,401,512
Total debt and
capital lease
obligations(3) .... 5,894,548 6,612,868 5,922,504 3,132,894 4,971,928
Redeemable preferred
stock ............. 19,457 19,457 23,559 -- 19,457
Stockholders' equity
(deficit) ......... (354,435) 432,509 1,339,617 1,898,203 (101,741)
Other Data:
Cash dividends
declared per
common share ...... $ 0 $ .3450 $ .4375 $ .4075 $ 0 0
Basic weighted
average shares 314,189,000 259,139,000 258,516,000 250,659,000 386,996,000 260,076,000
Number of retail
drugstores ........ 3,648 3,802 3,870 3,975 3,631 3,779
(1) PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS. See
"Business--PBM Segment." Accordingly, our PBM segment is reported as a
discontinued operation for all periods presented. See note 24 of the notes
to the audited consolidated financial statements.
(2) K&B, Incorporated and Harco, Inc. were acquired in August 1997.
(3) Total debt includes capital lease obligations of $1.1 billion, as of March
3, 2001, February 26, 2000, February 27, 1999 and June 2, 2001 and $622
million as of February 28, 1998.
8
RISK FACTORS
You should carefully consider the following factors, in addition to the
other information in this prospectus, before investing in our common stock.
Risks Related to an Investment in our Common Stock
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.
After giving effect to the Refinancing, we had, as of June 30, 2001 $3.7
billion of outstanding indebtedness (including current maturities but
excluding letters of credit) and stockholders' equity of $567.6 million. We
also have additional borrowing capacity under our new revolving credit
facility of $500.0 million. Our debt obligations will continue to adversely
affect our operations in a number of ways and our cash flow 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 2001 by $1.2 billion. After
giving effect to the Refinancing on a pro forma basis, we estimate that our
earnings would have been insufficient to cover our fixed charges for fiscal
2001.
Our high level of indebtedness will continue to restrict our operations.
Among other things, our indebtedness will:
o limit our ability to obtain additional financing;
o limit our flexibility in planning for, or reacting to, changes in the
markets in which we compete;
o place us at a competitive disadvantage relative to our competitors with
less indebtedness;
o render us more vulnerable to general adverse economic and industry
conditions; and
o require us to dedicate substantially all of our cash flow to service our
debt.
In fiscal 2000 we experienced operational and financial difficulties,
resulting in disputes with suppliers and vendors. These disputes were based
primarily on our level of indebtedness and led to more restrictive vendor
contract terms. 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.
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 $378.0 million of our outstanding indebtedness as of June 30,
2001, following the Refinancing, bears an interest rate that varies depending
upon LIBOR and is not covered by interest rate swap contracts that expire in
2002. 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.
We are a holding company with no direct operations.
We are a holding company with no direct operations. Our principal assets are
the equity interests that we hold in our operating subsidiaries. As a result,
we are dependent upon dividends and other payments from our
9
subsidiaries to generate the funds necessary to meet our financial
obligations, including the payment of principal of and interest on our
outstanding debt. Our subsidiaries are legally distinct from us and have no
obligation to pay amounts due with respect to our debt or to make funds
available to us for such payment or for any other reason. As of June 30, 2001,
after giving effect to the Refinancing, our subsidiaries had approximately
$3.7 billion of indebtedness and liabilities.
The covenants in our outstanding indebtedness impose restrictions that may
limit our operating and financial flexibility.
The covenants in the instruments governing our outstanding indebtedness,
including our new credit facility and the instruments governing our new 11.25%
notes and 12.5% notes, restrict our ability to incur liens and debt, pay
dividends, make redemptions and repurchases of capital stock, make loans,
investments and capital expenditures, prepay, redeem or repurchase debt,
engage in mergers, consolidations, asset dispositions, sale-leaseback
transactions and affiliate transactions, change our business, amend certain
debt and other material agreements, issue and sell capital stock of
subsidiaries, restrict distributions from subsidiaries and grant negative
pledges to other creditors.
Moreover, if we are unable to meet the terms of the financial covenants or
if we breach 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 were required to obtain waivers of defaults, we may incur significant
fees and transaction costs. In fiscal 2000, we were required to obtain waivers
of compliance with, and modifications to, certain of the covenants contained
in our senior credit and loan agreements and public indentures. In connection
with obtaining certain of such waivers and modifications, 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, 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 is settled on unfavorable terms, our results of
operations, financial condition and 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 employee benefit
plans, including our principal 401(k) plan, which permitted employees to
purchase our common stock. Purchases of our common stock under the plan were
suspended in October 1999. In January 2001, we appointed an independent
trustee to represent the interests of these plans in relation to the company
and to investigate possible claims the plans may have against us. Both the
independent trustee and the Department of Labor have asserted that the plans
may have claims against us. These investigations are ongoing and we cannot
predict their outcomes. If we were convicted of any crime, certain 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 and cash flows.
10
Given the size and nature of our business, we are subject from time to time
to various lawsuits which, depending on their outcome, may have a negative
impact on our results of operations, financial condition and cash flows.
We are substantially dependent on a single supplier of pharmaceutical products
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 flows.
We obtain approximately 93% of our pharmaceutical supplies from a single
supplier, McKesson HBOC, Inc., pursuant to a long-term contract. Pharmacy
sales represented approximately 59.5% of our total revenues during fiscal
2001, and, therefore, our relationship with McKesson HBOC is important to us.
Any significant 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 and
cash flows.
Our auditors have identified numerous "reportable conditions", which relate to
our internal accounting systems and controls, which systems and controls may
be insufficient. Improvements to our internal accounting systems and controls
could require substantial resources.
An audit of our financial statements for fiscal 1998 and fiscal 1999,
following a previous restatement, concluded in July 2000 and resulted in an
additional restatement of fiscal 1998 and fiscal 1999. Following its review of
our books and records, our management concluded that further steps were needed
to establish and maintain the adequacy of our internal accounting systems and
controls. In connection with the above audits of our financial statements,
Deloitte & Touche LLP advised us that it believed there were numerous
"reportable conditions" under the standards established by the American
Institute of Certified Public Accountants which relate to our accounting
systems and controls that could adversely affect our ability to record,
process, summarize and report financial data consistent with the assertions of
management in the financial statements. In order to address the reportable
conditions identified by Deloitte & Touche LLP, we are developing and
implementing comprehensive, adequate and reliable accounting systems and
controls. If, however, we determine that our internal accounting systems and
controls require additional improvements beyond those identified, or if the
changes we are implementing are inadequate, we may need to commit additional
substantial resources, including time from our management team, to implement
new systems and controls, which could affect the timeliness of our financial
or management reporting.
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 out-dated
inventory, resolving issues and disputes with our vendors, and 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 and cash flows and our ability to make principal or
interest payments on our debt.
11
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.
In December 1999, we hired a new management team to address our business,
operational financial and accounting challenges. Our management team has
considerable experience in the retail industry. Nonetheless, we cannot assure
you that our management will be able successfully to manage our business or
successfully implement our strategic business plan. 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 chairman and chief executive officer, Robert G. Miller, and
the other members of our management team. The loss of Mr. Miller or other key
personnel could have a material adverse effect on the results of our
operations, financial condition and cash flows. Additionally, we cannot assure
you that we will be able to attract or retain other skilled personnel in the
future.
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 revenues, and the percentage
of prescription sales reimbursed by third parties, have been increasing and we
expect them to continue to increase. In fiscal 2001, sales of prescription
drugs represented 59.5% of our revenues and we were reimbursed by third-party
payors for approximately 90.3% of all of the prescription drugs that we sold.
In the first quarter of fiscal 2002, sales of prescription drugs represented
61.6% of our revenues and we were reimbursed by third-party payors for
approximately 91.7% of all of the prescription drugs that we sold. During
fiscal 2001, the top five third-party payors accounted for approximately 26.4%
of our total revenues. 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 and cash flows could be adversely affected.
12
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 and cash flows.
Certain risks are inherent in the provision of pharmacy services; our
insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution
of pharmaceuticals and other healthcare products, such as with respect to
improper filling of prescriptions, labeling of prescriptions and 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
You may not be able to sell the common stock when you want to and, if you do,
you may not be able to receive the price that you want.
Although our common stock has been actively traded on the New York Stock
Exchange and the Pacific Exchange, we do not know if an active trading market
for the common stock will continue or, if it does, at what prices the common
stock may trade. The shares of our common stock offered by this prospectus
will significantly increase the number of shares of our common stock
registered for sale to the public, and could result in a decline in the market
price of our common stock. Therefore, you may not be able to sell the common
stock when you want and, if you do, you may not receive the price you want.
Additionally, in connection with the settlement of a class action suit brought
against us, we may be required to issue 20 million shares of common stock. If
the value of our shares of common stock is less than $7.75 per share in
February 2002, we may deliver a greater number of shares. We will also issue
additional shares of common stock pursuant to outstanding options granted
pursuant to our various stock option plans. In addition, as described below,
the refinancing of our indebtedness may include additional issuances of equity
securities. We cannot predict the extent to which this dilution, the
availability of a large amount of shares for sale, and the possibility of
additional issuances and sales of our common stock will negatively affect the
trading price of our common stock or the liquidity of our common stock.
Our debt restructuring efforts may be dilutive to your shares.
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, including holders who purchase shares of common stock in this
offering.
13
USE OF PROCEEDS
We will not receive any of the proceeds of sales by the selling
stockholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York and Pacific Stock Exchanges under
the symbol "RAD". On July 9, 2001, we had approximately 11,690 record
shareholders. Quarterly high and low stock prices, based on the New York Stock
Exchange composite transactions, together with dividend information are shown
below:
Fiscal Year Quarter High Low Dividend
----------- ------- ---- ---- --------
2002 (second quarter through July 19, 2001) ............ First 9.09 5.27 --
Second 9.99 7.50 --
2001 ................................................... First 8 1/2 4 3/4 --
Second 8 1/2 4 --
Third 4 3/8 2 7/16 --
Fourth 6 3/32 1 3/4 --
2000 ................................................... First 41 3/4 21 $.1150
Second 26 15/16 17 1/2 $.1150
Third 20 1/8 4 1/2 $.1150
Fourth 13 1/4 6 3/8 --
We have not declared or paid any cash dividends on our common stock since
the third quarter of fiscal 2000 and we do not anticipate paying cash
dividends in the foreseeable future. Our credit facilities and the instruments
governing our other indebtedness do not allow us to pay cash dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Credit Facilities and
Refinancing".
DILUTION
This offering is for sales of our common stock by some of our existing
stockholders on a continuous or delayed basis. Sales of common stock by
selling stockholders pursuant to this prospectus will not result in a change
to the net tangible book value per share before and after the distribution of
shares by the selling stockholders. There will be no change in net tangible
book value per share attributable to cash payments made by purchasers of the
shares being offered. Prospective investors should be aware, however, that the
market price of our shares may not bear any relationship to net tangible book
value per share.
14
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", our audited consolidated financial statements and
related notes appearing on pages F-1 through F-42 and the interim condensed
consolidated financial statements and related notes appearing on pages F-43
through F-57. The selected consolidated financial data for the thirteen week
periods ended June 2, 2001 and May 27, 2000 are unaudited and not necessarily
indicative of the results to be expected for the full year. The unaudited
interim selected consolidated financial data reflects all adjustments
(consisting primarily of normal recurring adjustments except as described in
the footnotes to the interim condensed consolidated financial statements)
which are, in the opinion of our management, necessary to present fairly the
financial data for the interim periods. Annual selected consolidated financial
information is presented for four fiscal years. As previously discussed in our
Form 10-K dated May 18, 2001 and our Form 10-K/A dated October 11, 2000,
substantial time, effort and expense was required over a six month period to
review, assess, reconcile, prepare and audit our financial statements for the
2000, 1999 and 1998 fiscal years. We believe it would require an unreasonable
effort and expense to conduct a similar process related to the 1997 fiscal
year. The following selected consolidated financial information does not give
pro forma effect to the Refinancing.
Fiscal Year Ended Thirteen Week Period Ended
-------------------------------------------------------------------------- ---------------------------
March 3, 2001 February 26, 2000 February 27, 1999 February 28, 1998 June 2, 2001 May 27, 2000
(53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)(1)
------------- ----------------- ----------------- ----------------- ------------ ------------
(Dollars in thousands, except per share amounts)
Operations Data:
Revenues ............. $ 14,516,865 $ 13,338,947 $ 12,438,442 $ 11,352,637 $ 3,710,133 $ 3,442,186
Costs and expenses:
Cost of goods sold,
including
occupancy costs ... 11,151,490 10,213,428 9,406,831 8,419,021 2,840,740 2,634,453
Selling, general and
administrative
expenses .......... 3,458,307 3,607,810 3,200,563 2,773,560 858,049 851,883
Goodwill
amortization ...... 20,670 24,457 26,055 26,169 5,343 6,074
Store closing and
impairment charges
(credits) ......... 388,078 139,448 195,359 155,024 (364) 16,145
Interest expense.... 649,926 542,028 274,826 202,688 128,689 171,375
Loss on debt
conversions and
modifications ..... 100,556 -- -- -- 132,713 --
Share of loss from
equity investments 36,675 15,181 448 1,886 5,883 11,574
(Gain) loss on sale
of fixed assets ... (6,030) (80,109) -- (52,621) (49,818) 9,676
------------ ------------ ------------ ------------ ------------ ------------
Total costs and
expenses............ 15,799,672 14,462,243 13,104,082 11,525,727 3,921,235 3,701,180
------------ ------------ ------------ ------------ ------------ ------------
Loss from continuing
operations before
income taxes and
cumulative effect
of accounting
change ............ (1,282,807) (1,123,296) (665,640) (173,090) (211,102) (258,994)
Income tax expense
(benefit)........... 148,957 (8,375) (216,941) (28,064) -- 144,382
------------ ------------ ------------ ------------ ------------ ------------
Loss from continuing
operations before
cumulative effect
of accounting
change(2) ......... (1,431,764) (1,114,921) (448,699) (145,026) (211,102) (403,376)
Income (loss) from
discontinued
operations, net(2).. 11,335 9,178 (12,823) (20,214) -- 11,335
Loss on disposal of
discontinued
operations, net..... (168,795) -- -- -- -- (303,330)
Cumulative effect of
accounting change,
net................. -- (27,300) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss ............ $ (1,589,224) $ (1,133,043) $ (461,522) $ (165,240) $ (211,102) $ (695,371)
============ ============ ============ ============ ============ ============
Basic and diluted
(loss) income per
share:
Loss from continuing
operations ........ $ (5.15) $ (4.34) $ (1.74) $ (0.58) $ (0.56) $ (1.57)
Income (loss) from
discontinued
operations ........ (0.50) 0.04 (0.05) (0.08) -- (1.12)
Cumulative effect of
accounting change,
net ............... -- (0.11) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss per share. $ (5.65) $ (4.41) $ (1.79) $ (0.66) $ (0.56) $ (2.69)
============ ============ ============ ============ ============ ============
Balance Sheet Data
(at end of period):
Working capital
(deficit) ......... $ 1,955,877 $ 752,657 $ (892,115) $ 1,258,580 $ 1,408,325
Property, plant and
equipment (net) ... 3,041,008 3,445,828 3,328,499 2,460,513 2,992,891
Total assets........ 7,913,911 9,845,566 9,778,451 7,392,147 7,401,512
Total debt and
capital lease
obligations(3) .... 5,894,548 6,612,868 5,922,504 3,132,894 4,971,928
Redeemable preferred
stock ............. 19,457 19,457 23,559 -- 19,457
Stockholders' equity
(deficit) ......... (354,435) 432,509 1,339,617 1,898,203 (101,741)
Other Data:
Cash flows from
continuing
operations
provided by (used
in):
Operating
activities ....... $ (704,554) $ (623,098) $ 276,855 $ 622,865 $ 45,742 $ (9,457)
Investing
activities ....... 677,653 (504,112) (2,705,043) (1,050,322) 463,714 (19,993)
Financing
activities ....... (64,324) 905,091 2,660,341 535,066 (521,668) (72,539)
Capital
expenditures(4) ... 132,504 573,287 1,222,674 716,052 23,100 18,862
Cash dividends
declared per
common share ...... 0 .3450 .4375 .4075 0 0
Basic weighted
average shares .... 314,189,000 259,139,000 258,516,000 250,659,000 386,996,000 260,076,000
Ratio of earnings to
fixed charges(5) .. -- -- -- -- -- --
Number of retail
drugstores ........ 3,648 3,802 3,870 3,975 3,631 3,779
Number of employees. 75,500 77,300 89,900 83,000 -- --
Pharmacy sales as a
percentage of
revenues .......... 59.5% 58.4% 54.2% 50.2% 61.6% 60.1%
(Footnotes on next page)
15
---------------
(1) Includes the operations of K&B, Incorporated and Harco, Inc. from their
acquisition in August 1997.
(2) PCS was acquired on January 22, 1999 and sold on October 2, 2000 and
accordingly, reported as a discontinued operation for all periods presented.
See note 24 of the notes to the consolidated financial statements.
(3) Total debt includes capital lease obligations of $1.1 billion as of March 3,
2001, February 26, 2000, February 27, 1999 and June 2, 2001 and $0.6 billion
as of February 28, 1998.
(4) Capital expenditures represent expenditures for property and equipment.
(5) Calculated by dividing earnings by fixed charges. For this purpose, earnings
include loss from continuing operations before income taxes and cumulative
effect of accounting change plus fixed charges. Fixed charges include
interest, whether expensed or capitalized, amortization of debt incurrence
cost, preferred stock dividends and that portion of rental expense which is
representative of the interest factor in those rentals. For fiscal 2001,
fiscal 2000, fiscal 1999 and fiscal 1998, earnings were insufficient to
cover fixed charges by approximately $1,248.0 million, $1,113.4 million,
$671.6 million and $175.3 million respectively.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We operate 3,631 retail drugstores in 30 states and in the District of
Columbia. We sell prescription drugs, which accounted for approximately 59.5%
of our total revenues during fiscal 2001 and 61.6% of our total revenues
during our first quarter of fiscal 2002, and other products, which we refer to
as front-end products, including non-prescription medications, health and
beauty aids and personal care items, cosmetics, photo processing and
convenience items. Until October 2, 2000, we operated a pharmacy benefit
management services business.
From the beginning of fiscal 1997 until December 1999, we were engaged in an
aggressive expansion program. During that period, we purchased 1,554 stores,
relocated 866 stores, opened 445 new stores, remodeled 308 stores and acquired
PCS. These activities had a significant negative impact on our operating
results, severely strained our liquidity and increased our indebtedness to
$6.6 billion as of February 26, 2000.
In October 1999, we announced that we had identified accounting
irregularities and our former chairman and chief executive officer resigned.
In November 1999, our former auditors resigned and withdrew their previously
issued opinions on our financial statements for the fiscal years 1998 and
1999. Thereafter, 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.
Following these events, we lost access to the commercial paper market.
In response to the situation we faced, we completed the following:
o Reduced our indebtedness from $6.6 billion on February 26, 2000 to $3.7
billion on June 30, 2001 after giving effect to the Refinancing;
o Improved our front-end same store sales growth from a negative 2.2% in
fiscal 2000 to a positive 6.5% in fiscal 2001 by improving store
conditions and product pricing and launching a competitive marketing
program;
17
o Restated our financial statements for fiscal 1998 and fiscal 1999,
engaged new auditors to audit our financial statements for fiscal 1998,
fiscal 1999 and fiscal 2000, and resumed normal financial reporting;
o Significantly reduced the amount of our indebtedness maturing prior to
March 2005, including as a result of the Refinancing;
o Pending court approval, settled the securities class action and related
lawsuits for $45.0 million to be funded with insurance proceeds and
$155.0 million of common stock, cash and/or notes to be issued and paid
in January 2002;
o Began implementing an initiative to improve all aspects of our supply
chain, including buying practices, category management systems and other
inventory issues; and
o Continued developing and implementing a comprehensive plan, which is
ongoing, to address problems with our accounting systems and controls,
and also resumed normal financial reporting.
Recent Actions Affecting Operating Results. During fiscal 2001 and fiscal
2002, we took a number of actions which had the short term effect of
significantly reducing our operating results but which management believes
were nevertheless necessary. Among the actions taken during 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 which resulted in an approximate $149.2 million charge
included in the $388.1 million recorded charges for store closures and
impairment; and (iv) the restatement and audit of our fiscal 1998 and fiscal
1999 financial statements and the related investigation conducted by our audit
committee of prior accounting irregularities, which resulted in our incurring
and recording of $82.1 million of accounting and legal expense. Among the
actions taken during the first quarter of fiscal 2002 were additional debt
conversions resulting in a loss of $132.7 million and during the second
quarter of fiscal 2002 we completed the Refinancing that will result in
additional losses of approximately $88 million. We anticipate taking actions
in the future similar to those described above 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 opened 469 new
stores, relocated 949 stores, remodeled 410 stores and closed 1,159 stores.
These new, relocated and remodeled stores represented approximately 50% of our
total stores at June 2, 2001 and are generally larger, free standing stores
and have higher operating expenses than our older stores. New stores generally
do not become profitable until a critical mass of customers is developed.
Relocated stores also must attract additional customers to achieve comparable
profitability to the store that was replaced. We believe that the period of
time required for a new store to achieve profitable operations is generally
between two and four years. This period can vary significantly based on the
location of a particular store and on other factors, including the investments
made in purchasing prescription files for the location and advertising. Our
recent liquidity constraints have limited our ability to purchase prescription
files and make other investments to promote the development of our new and
relocated stores. We believe that our relatively high percentage of new and
relocated stores is a significant factor in our recent operating results.
Management believes that as these newer stores mature they should gain the
critical mass of customers needed for profitable operations. We believe this
continuing maturation should positively affect our operating performance in
future periods. If we are not able to improve the performance of these new and
relocated stores, it will have a material adverse effect on our ability to
restore the profitability of our operations.
Substantial Accounting, Legal and Investigation Expenses. We have incurred
substantial expenses in connection with the process of reviewing and
reconciling our books and records, restating our fiscal 1998 and fiscal 1999
financial statements, investigating our prior accounting practices and
preparing our financial statements. Included in these expenses are the costs
of the Deloitte & Touche LLP audits, the investigation by the law firm of
Swidler, Berlin, Shereff, Friedman LLP, assisted by Deloitte & Touche LLP,
conducted for our audit committee concerning the accounting irregularities
which led to the restatement of our financial statements for fiscal 1998 and
fiscal 1999 and the costs of retaining Arthur Andersen LLP to assist
management in reviewing and reconciling our books and records. We incurred
$82.1 million in fiscal 2001 and $3.4 million in the first quarter of fiscal
2002 and we expect to incur a total of $10.0 million to $15.0
18
million in fiscal 2002 for these types of investigations. 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. In June 2000, we completed a series of debt
restructuring transactions as described in "Liquidity and Capital Resources".
In connection with these transactions, an aggregate total of 69,564,434 shares
of our common stock were issued in exchange for $462.6 million principal
amount of our outstanding indebtedness. In addition, in November 2000, January
2001 and April 2001, we completed numerous privately negotiated transactions,
whereby an aggregate total of 18,125,700 shares of our common stock were
issued in exchange for approximately $156.6 million principal amount of our
outstanding indebtedness. In March 2001, we also exchanged approximately
$279.3 million principal amount of outstanding indebtedness for an aggregate
of 41,276,335 shares of our common stock upon completion of a public tender
offer. As a result of these exchanges, we recorded an aggregate loss on
conversion of approximately $100.6 million in fiscal 2001 and will record
additional losses in fiscal 2002. In addition, pursuant to the conversion
price adjustment and pay-in-kind dividend provisions of the series B
convertible preferred stock issued to Green Equity Investors III, L.P. in
October 1999, 62,317,123 shares of our common stock were issuable upon the
conversion of such preferred stock at July 1, 2001. As a result of the
Refinancing, and including the shares issuable upon the conversion of our
Series B and our new Series C preferred stock, shares issuable under
outstanding stock options and warrants and shares contingently issuable under
the shareholder litigation settlement, common shares outstanding increased
from 348.1 million on March 3, 2001 to 493.3 million on June 30, 2001.
Accounting Systems. Following a review of our books and records, management
concluded that further steps were needed to establish and maintain the
adequacy of our internal accounting systems and controls. In connection with
the audit of our financial statements, Deloitte & Touche LLP advised us that
it believed there were numerous "reportable conditions" under the standards
established by the American Institute of Certified Public Accountants which
relate to our accounting systems and controls that could adversely affect our
ability to record, process, summarize and report financial data consistent
with the assertions of management in the financial statements. We are
developing and implementing comprehensive, adequate and reliable accounting
systems and controls which are intended to address the reportable conditions
identified by Deloitte & Touche LLP.
Sale of PCS. On October 2, 2000, we sold PCS, our PBM segment, to Advance
Paradigm (now AdvancePCS). The selling price of PCS consisted of $710.5
million in cash, $200.0 million in principal amount of AdvancePCS's 11%
promissory notes and AdvancePCS equity securities. Accordingly, the PBM
segment is reported as a discontinued operation for all periods presented in
the accompanying financial statements, and the operating income of the PBM
segment through October 2, 2000, the date of sale, is reflected separately
from the income from continuing operations. The loss on disposal of the PBM
segment was $168.8 million. Additionally, we recorded an increase to the tax
valuation allowance and income tax expense of $146.9 million in the first
quarter of fiscal 2001 in continuing operations.
Working Capital. We generally finance our inventory and capital expenditure
requirements with internally generated funds and borrowings. We expect to use
borrowings to finance inventories and to support our continued growth. Over
75% of our front-end sales are in cash. Third-party insurance programs, which
typically settle in fewer than 30 days, accounted for 90.3% of our pharmacy
revenues and 53.7% of our revenues in fiscal 2001.
Seasonality. We experience seasonal fluctuations in our results of
operations in the fourth fiscal quarter as the result of Christmas and the flu
season. We also tailor certain front-end merchandise to capitalize on holidays
and seasons. This leads to an increase in revenues during our fourth fiscal
quarter.
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 and 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 greater
portion of our
19
business due to the general aging of the population, the use of
pharmaceuticals to treat a growing number of healthcare problems, and the
introduction of a number of successful new prescription drugs. In fiscal 2001,
we were reimbursed by third-party payors for approximately 90.3% of all of the
prescription drugs that we sold and for approximately 91.7% in the first
quarter of fiscal 2002. 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
Revenues and Other Operating Data
Thirteen Week Period
Year Ended Ended
------------------------------------------ -----------------------
March 3, February 26, February 27, June 2, May 27,
2001 2000 1999 2001 2000
----------- ------------ ------------ ---------- ----------
Revenues (dollars in thousands)........................... $14,516,865 $13,338,947 $12,438,442 $3,710,133 $3,442,186
Revenue growth............................................ 8.8% 7.2% 9.6% 7.8% 2.6%
Same store sales growth................................... 9.1% 7.9% 15.5% 10.0% 6.2%
Pharmacy sales growth..................................... 8.7% 15.6% 18.2% 12.6% 7.2%
Same store pharmacy sales growth.......................... 10.9% 16.2% 21.9% 12.7% 9.6%
Pharmacy as a % of total revenues......................... 59.5% 58.4% 54.2% 61.6% 60.1%
Third-party sales as a % of total pharmacy revenues....... 90.3% 87.8% 85.4% 91.7% 89.6%
Front-end sales growth.................................... 3.8% (2.6)% 0.8% 5.7% (1.4)
Same store front-end sales growth. ....................... 6.5% (2.2)% 6.6% 5.9% 1.4%
Front-end as a % of total revenues........................ 40.5% 41.6% 45.8% 38.4% 39.9%
Store data:
Total stores (beginning of period)........................ 3,802 3,870 3,975 3,648 3,802
New stores................................................ 9 77 163 3 4
Closed stores............................................. (163) (181) (330) (20) (27)
Store acquisitions, net................................... -- 36 62 0 0
Total stores (end of period) ............................. 3,648 3,802 3,870 3,631 3,779
Remodeled stores.......................................... 98 14 155
Relocated stores.......................................... 63 180 331 4 24
Revenues
Thirteen Week Period Comparisons
The 7.8% growth in revenues for the thirteen week period ended June 2, 2001
was driven by front end sales growth of 5.7% and pharmacy sales growth of
12.6%. The 2.6% growth in revenues for the thirteen week period ended May 27,
2000 was due to the 7.2% growth in pharmacy sales, which more than offset a
decline in our front end store sales. Same store sales growth for the thirteen
weeks ended June 2, 2001 was 10.0%. As the prior fiscal year was a 53 week
year, same store sales for the thirteen weeks ended June 2, 2001 are
calculated by comparing that period with the thirteen weeks ended June 3,
2000.
For the thirteen week period ended June 2, 2001, and for the thirteen week
period ended May 27, 2000, pharmacy sales led revenue growth with same-store
sales increases of 12.7% and 9.6%, respectively. Contributing to the increases
in pharmacy same store sales was our ability to attract and retain managed
care customers, our successful pilot markets for reduced cash pricing, our
increased focus on pharmacy initiatives such as will call and predictive
refill, and favorable industry trends. These trends included an aging American
population with many "baby boomers" now in their fifties and consuming a
greater number of prescription drugs. The use of pharmaceuticals as the
treatment of choice for a growing number of healthcare problems and the
introduction of a number of successful new prescription drugs also contributes
to the growing demand for pharmaceutical products.
Front end sales, which include all non-prescription sales such as seasonal
merchandise, convenience items and food, also had same store sales growth in
the thirteen week period ended June 2, 2001, increasing 5.9%. The same store
sales increase was primarily a result of increased sales volume due to
lowering prices
20
on key items, distributing a nationwide weekly advertising circular, expanding
certain product categories and improving general store conditions.
Fiscal Year Comparisons
The 8.8% growth in revenues in fiscal 2001 was driven by an increase of 3.8%
in front-end sales, an increase of 8.7% in pharmacy sales and the additional
week in fiscal 2001. Our total revenue growth in fiscal 2000 of 7.2 % was
fueled by strong growth in pharmacy sales, offset by a slight decline in front
end sales. Same store sales growth for fiscal 2001 was 9.1%. As fiscal 2001
was a 53 week year, same store sales are calculated by comparing the 53 week
period ended March 3, 2001 with the 53 week period ended March 4, 2000. The
decrease from 15.5% sales growth in fiscal 1999 was due to the deterioration
in store operations described above.
For fiscal 2001 and fiscal 2000, pharmacy revenues led sales growth with
same store sales increases of 10.9% and 16.2%, respectively. Fiscal 2001
increases were generated by our ability to attract and retain managed care
customers, our successful pilot markets for reduced cash pricing, our
increased focus on pharmacy initiatives such as will call and predictive
refill, and favorable industry trends. These favorable trends include an aging
population, the use of pharmaceuticals to treat a growing number of healthcare
problems, and the introduction of a number of successful new prescription
drugs. Fiscal 2000 pharmacy increases were driven by similar favorable
industry trends, as well as the purchase of prescription files from
independent pharmacies.
The lower growth in same store pharmacy sales in fiscal 2001 was due
primarily to a significant reduction in the number of prescription files we
purchased and store relocations we effected. The lower growth in fiscal 2000
was due primarily to a reduction as compared to fiscal 1999 in the number of
relocations effected.
Same store front-end sales in fiscal 2001, which includes all non-
prescription sales, such as seasonal merchandise, convenience items, and food
and other non- prescription sales, increased 6.5% from fiscal 2000. This
increase was fueled by the reinstatement of our weekly circular advertising
program, and was also driven by strong performance in seasonal businesses,
consumables, vitamins, general merchandise and private label brands. Same
store front-end sales in fiscal 2000 decreased 2.2% from fiscal 1999 levels.
This decrease was due to elevated levels of out-of-stock merchandise in the
third and fourth quarters of fiscal 2000, and the decision of former
management to suspend the weekly advertising program in fiscal 2000 and to
raise front-end prices to levels that were not competitive.
Costs and Expenses
Thirteen Week Period
Year Ended Ended
------------------------------------------ -----------------------
March 3, February 26, February 27, June 2, May 27,
2001 2000 1999 2001 2000
----------- ------------ ------------ ---------- ----------
(dollars in thousands)
Costs of goods sold....................................... $11,151,490 $10,213,428 $9,406,831 $2,840,740 $2,634,453
Gross margin.............................................. 23.2% 23.4% 24.4% 23.4% 23.5%
Selling, general and administrative expenses.............. $ 3,458,307 $ 3,607,810 $3,200,563 $ 858,049 $ 851,883
Selling, general and administrative expenses as a
percentage of revenues.................................. 23.8% 27.0% 25.7% 23.1% 24.7%
Goodwill amortization..................................... $ 20,670 $ 24,457 $ 26,055 $ 5,343 $ 6,074
Store closing and impairment charges (credits)............ 388,078 139,448 195,359 (364) 16,145
Interest expense.......................................... 649,926 542,028 274,826 128,689 171,375
Loss on debt conversions and modifications................ 100,556 -- -- 132,713 --
Share of loss from equity investments..................... 36,675 15,181 448 5,883 11,574
(Gain) loss on sale of fixed assets....................... (6,030) (80,109) -- (49,818) 9,676
21
Cost of Goods Sold
Thirteen Week Period Comparisons
Gross margin was 23.4% for the thirteen week period ended June 2, 2001
compared to 23.5% for the thirteen week period ended May 27, 2000. Although
gross margin was relatively flat, it was negatively impacted by the continuing
trend of increased third party reimbursed prescription sales as a percent of
total prescription sales. The increase in third party prescription sales had a
negative impact on gross margin rates because they are paid by a person or
entity other than the recipient of the prescribed pharmaceutical, and are
generally subject to lower negotiated reimbursement rates in conjunction with
a pharmacy benefit plan. Third party sales as a percentage of total pharmacy
sales were 91.7% and 89.6% for the thirteen week period ended June 2, 2001 and
May 27, 2000, respectively. Offsetting this trend was an improvement in
cigarette and liquor margin, a reduction in losses from product returns, and
better leveraging of our fixed costs resulting from our higher sales volume.
We use the last-in, first-out (LIFO) method of inventory valuation, which is
determined annually when inflation rates and inventory levels are finalized.
Therefore, LIFO costs for interim period financial statements are estimated.
Cost of sales includes a LIFO provision of $15.0 million for the thirteen week
period ended June 2, 2001 versus $5.3 million for the thirteen week period
ended May 27, 2000.
Fiscal Year Comparisons
Gross margin was 23.2% for fiscal 2001 compared to 23.4% in fiscal 2000. The
slight decline in margin was attributable to a shifting in sales mix to
pharmacy from front-end. In fiscal 2001, the percentage of front-end sales to
total revenues 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
(typically lower margin products) as a percentage of front-end sales.
Additionally, we incurred $17.5 million in inventory liquidation losses
related to our closed stores. Partially offsetting the items listed above was
an improvement in the margin of front-end goods (exclusive of cigarettes and
liquor). These increases resulted from a more profitable product mix, and from
increases in the levels of one-hour photo and phone card sales.
Gross margin declined to 23.4% in fiscal 2000 from 24.4% in fiscal 1999. The
decline in gross margin in fiscal 2000 from fiscal 1999 was a result of a
substantial decline in our pharmacy margins. A decline in occupancy costs in
fiscal 1999 was largely offset by increased costs related to our distribution
facilities. We incurred costs in fiscal 2000 in connection with the shift in
certain operations from our distribution facility in Harrisburg, Pennsylvania
to a new distribution facility located in Perryman, Maryland, resulting in
certain duplicate costs and also in connection with the processing of
merchandise received from our stores for shipment back to our vendors. These
costs are not expected to be recurring costs. These increased costs were
partially offset by a substantial credit to cost of goods sold resulting from
the receipt of vendor allowances following a restructuring of the terms of
certain vendor contracts. In fiscal 1999, prior to the restructuring of the
contracts, these vendor allowances were credited to selling, general and
administrative expense. Also partially offsetting the increases in cost of
goods sold in fiscal 2000 were improved store level margins for front-end and
pharmacy sales.
Also negatively impacting gross margins in the periods presented was the
continuing industry trend of rising third-party sales coupled with decreasing
margins on third-party reimbursed prescription sales. Third-party prescription
sales typically have lower gross margins than other prescription sales because
they are paid by a person or entity other than the recipient of the prescribed
pharmaceutical and are generally subject to lower negotiated reimbursement
rates in conjunction with a pharmacy benefit plan. Pharmacy sales as a
percentage of total revenues were 59.5%, 58.4% and 54.2% in fiscal 2001,
fiscal 2000 and fiscal 1999, respectively and third-party sales as a
percentage of pharmacy sales were 90.3%, 87.8%, and 85.4% in fiscal 2001,
fiscal 2000 and fiscal 1999, respectively.
We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO
charge was $40.7 million in fiscal 2001, $34.6 million in fiscal 2000 and
$36.5 million in fiscal 1999. We have changed our method of accounting for
LIFO as of February 26, 2000. See "Accounting Change".
22
Selling, General and Administrative Expenses
Thirteen Week Period Comparisons
The selling, general and administrative expense ("SG&A") was 23.1% of
revenue in the thirteen week period ended June 2, 2001 and 24.7% in the
thirteen week period ended May 27, 2000. SG&A for the thirteen week period
ended June 2, 2001 includes $43.1 million of non-cash expense related to
variable plan accounting on certain management stock options, restricted stock
grants and stock appreciation rights, offset by $15.0 million received related
to the partial settlement of litigation with certain drug manufactures and a
net benefit of $4.2 million in legal expense related to a favorable legal
settlement. Excluding these items, our SG&A as a percentage of revenues would
have been 22.5% in the thirteen week period ended June 2, 2001. SG&A for the
thirteen week period ended May 27, 2000 includes $25.5 million of costs
incurred with the restatement of our historical statements. Excluding this
item results in an adjusted SG&A as a percentage of revenue of 24.0% in the
thirteen week period ended May 27, 2000. SG&A exclusive of these items in the
thirteen week period of the current fiscal year of 22.5% compares favorably to
the adjusted 24.0% of the prior year's comparable period because of decreased
labor charges, and better leveraging of our fixed costs resulting from our
higher sales volume.
Fiscal Year Comparisons
SG&A was 23.8% of revenues in fiscal 2001, 27.0% in fiscal 2000 and 25.7% in
fiscal 1999. 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 shareholders' class action lawsuit, and by $20.0 million received related
to the partial settlement of litigation with certain drug manufacturers.
Offsetting these items was $82.1 million incurred in connection with the
restatement of our historical financial statements, and the incurrence of
$45.9 million in non-cash expense related to variable plan accounting on
certain management stock options, and restricted stock grants. If these non-
operating and non cash items are excluded, our SG&A as a percentage of
revenues would have been 23.2%. SG&A expense for fiscal 2000 was unfavorably
impacted by a charge of $232.8 million related to litigation issues, offset by
a reversal of stock appreciation rights accruals of $45.5 million. Excluding
these non-operating and non cash items results in an adjusted SG&A as a
percentage of revenues of 25.6% in fiscal 2000. SG&A on an adjusted basis of
23.2% for fiscal 2001 compares favorably with SG&A on an adjusted basis of
25.6% for fiscal 2000 due to lower depreciation expense resulting from a net
reduction in our store count, decreased repair and maintenance and terminated
project costs, and the better leveraging of fixed SG&A costs resulting from
our higher sales volume.
The increase in SG&A expense as a percent of revenues in fiscal 2000 over
fiscal 1999 is predominately attributable to increased accruals for litigation
and other contingencies, as described above.
Store Closing and Impairment Charges
Store closing and impairment charges (credits) consist of:
Thirteen Week
Year Ended Period Ended
--------------------------------------- -----------------
March 3, February 26, February 27, June 2, May 27,
2001 2000 1999 2001 2000
-------- ------------ ------------ ------- -------
(dollars in thousands)
Impairment charges................................................. $214,224 $120,593 $ 87,666 $ 7,893 $ 8,169
Store lease exit charges (credits)................................. 57,668 18,855 107,693 (8,568) 7,976
Impairment of investments.......................................... 116,186 -- -- 311 --
-------- -------- -------- ------- -------
$388,078 $139,448 $195,359 $ (364) $16,145
======== ======== ======== ======= =======
Impairment Charges -- Thirteen Week Period and Fiscal Comparisons
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. Impairment charges include non-cash charges of $7.9
million and $8.2 million for the thirteen week periods ended June 2, 2001 and
May 27, 2000, respectively, for the impairment of long-lived assets (including
allocable goodwill) at 17 and 42 stores, respectively. In fiscal 2001, fiscal
2000
23
and fiscal 1999, store closing and impairment charges include non-cash charges
of $214.2 million, $120.6 million and $87.7 million, respectively, for the
impairment of long-lived assets (including allocable goodwill) of 495 stores,
249 stores and 270 stores, respectively.
Store Lease Exit Costs -- Thirteen Week Period and Fiscal Year Comparisons
Costs incurred to close a store, which principally consist of lease
termination costs, are recorded at the time management commits to closing the
store, which is the date that the closure is formally approved by senior
management, or in the case of a store to be relocated, the date the new
property is leased or purchased. We calculate our liability for closed stores
on a store-by-store basis. The calculation includes the future minimum lease
payments and related ancillary costs, from the date of closure to the end of
the remaining lease term, net of estimated cost recoveries that may be
achieved through subletting properties or through favorable lease
terminations. This liability is discounted using a risk-free rate of interest.
We evaluate these assumptions each quarter and adjust the liability
accordingly. During the thirteen week periods ended June 2, 2001 and May 27,
2000, we recorded a provision for 7 and 18 stores, respectively, that were
designated for closure. The effect of lease terminations and changes in
assumptions in interest rates during the thirteen week period ended June 2,
2001, had a positive impact that exceeded the additional provision due to low
closure levels and resulted in an expense credit from closed store activity.
As a result of focused efforts on cost recoveries for closed stores during
fiscal 2001 and 2000, we experienced improved results, which has been
reflected in the assumptions about future sublease income.
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
Thirteen Week Period Comparisons
Interest expense was $128.7 million for the thirteen week period ended June
2, 2001, compared to $171.4 million in the thirteen week period ended May 27,
2000. The decrease was primarily due to the reduction of debt resulting from
the sale of PCS and debt for equity exchanges. The weighted average interest
rates, excluding capital leases, on our indebtedness for the thirteen week
period ended June 2, 2001 and May 27, 2000 were 8.01% and 8.10%, respectively.
Fiscal Year Comparisons
Interest expense was $649.9 million in fiscal 2001 compared to $542.0
million in fiscal 2000 and $274.8 million in fiscal 1999. The substantial
increase in fiscal 2001 and fiscal 2000 were due to higher average levels of
indebtedness and higher interest rates on debt. In fiscal 2001, we increased
our average outstanding debt with the addition of the $1.1 billion senior
secured credit facility, which includes a $600.0 million term loan and a
$500.0 million revolving credit facility. We used the term loan to terminate
our accounts receivable securitization facility and repurchased $300.0 million
of unpaid receivables thereunder and funded $66.4 million of transaction costs
related to our debt restructuring. The remainder of the term loan together
with the revolving credit facility were used for general corporate purposes,
including the costs of reviewing, reconciling and restating our fiscal 1998
and fiscal 1999 financial statements, the cost of the audit of our restated
financial statements and investigation costs. These items were partially
offset by reductions of indebtedness in the second half of fiscal 2001
resulting from the sale of PCS and debt for equity exchanges. In fiscal 2000,
our debt increased as a result of the $1.3 billion borrowed in January 1999
under the PCS credit facility and the $300.0 million of demand note borrowings
to supplement cash flows from operating activities. The annual weighted
average interest rates on our indebtedness in fiscal 2001, fiscal 2000 and
fiscal 1999 were 8.2%, 7.4% and 6.8% respectively.
24
Income Taxes
Thirteen Week Period Comparisons
We had net losses in the thirteen week periods ended June 2, 2001 and May
27, 2000. The tax benefit for the thirteen week period ended June 2, 2002 is
fully offset by a valuation allowance based on management's determination
that, based on available evidence, it is more likely than not that certain of
the deferred tax assets will not be realized. The income tax provision for the
thirteen week period ended May 27, 2000 reflects the effect of the decision to
sell PCS and to discontinue the operations of our PBM segment. It is
foreseeable that an "ownership change" for statutory purposes will occur
during fiscal 2002 as a result of our refinancing efforts, including issuances
of equity and exchanges of debt for equity. An "ownership change" would result
in a limitation imposed on the future use of net operating losses and any net
unrealized built-in losses incurred or existing prior to the "ownership
change".
Fiscal Year Comparisons
We had net losses in fiscal 2001, fiscal 2000 and fiscal 1999. Tax expense
of $149.0 million and tax benefits of $26.6 million (including the benefit
related to cumulative effect of accounting change) and $216.9 million have
been reflected for fiscal 2001, fiscal 2000 and fiscal 1999, respectively. The
full benefit of the net operating loss carryforwards ("NOLs") generated in
each period has been fully offset by a valuation allowance based on
management's determination that, based on available evidence, it is more
likely than not that some of the deferred tax assets will not be realized. We
expect to file amended tax returns and utilize the NOLs against taxable income
in prior years to the maximum extent possible. Of the $147.6 million
recoverable taxes recorded as of February 26, 2000, we have collected or have
offsets of $122.7 million. The remaining $24.9 million has been reclassified
to other non current assets since we anticipate collection beyond fiscal 2002.
Other Significant Charges
Thirteen Week Period Comparisons
The net loss from continuing operations for the thirteen week periods ended
June 2, 2001 and May 27, 2000 was $211.1 million and $403.4 million,
respectively. In addition to the matters discussed above, our results in the
thirteen week periods ended June 2, 2001 and May 27, 2000 have been affected
by other charges. In the thirteen week period ended June 2, 2001, we recorded
a pre-tax loss of $132.7 million on debt conversions and a loss of $5.9
million representing our share of the drugstore.com losses partially offset by
a gain of $53.2 million resulting from the sale of AdvancePCS securities. In
the thirteen week period ended May 27, 2000, we recorded income tax expense of
$144.4 million due primarily to valuation allowances related to the decision
to dispose of the PBM segment and a $11.6 million loss from our share of
drugstore.com losses.
Fiscal Year Comparisons
In addition to the operational matters discussed above, our results in
fiscal 2001 were adversely affected by other significant charges. We recorded
a net loss of $168.8 million on the disposal of the PBM segment. As a result
of the decision to dispose of the PBM segment, we recognized an increase in
the income tax valuation allowance of $146.9 million for fiscal 2001. We also
recorded a pre-tax loss of $100.6 million on debt conversions and
modifications, and recorded a loss of $36.7 million representing our share of
drugstore.com losses.
Discontinued Operations
On July 12, 2000, we announced the sale of the PBM segment, at which time
the PBM segment was subjected to discontinued operations accounting. Prior to
becoming a discontinued operation on July 12, 2000, the PBM segment generated
net income of $11.3 million from February 27, 2000 through July 11, 2000,
compared to net income of $9.2 million in fiscal 2000 and a net loss of $12.8
million in fiscal 1999.
25
Liquidity and Capital Resources
We have two primary sources of liquidity: (i) cash provided by operations
and (ii) the revolving credit facility under our senior secured credit
facility. We may also generate liquidity from the sale of assets, including
sale-leaseback transactions. During fiscal 2000 and fiscal 2001, cash provided
by operations was not sufficient to fund our working capital requirements. As
a result, we have supplemented our cash from operations with borrowings under
our credit facilities. Our principal uses of cash are to provide working
capital for operations, service our obligations to pay interest and principal
on our debt, and to provide funds for capital expenditures. On June 27, 2001,
we completed a comprehensive $3.2 billion refinancing package to refinance a
significant proportion of our indebtedness. See "Prospectus
Summary--Refinancing Transactions".
Credit Facilities and Refinancing
New Senior Secured Credit Facility. As part of the Refinancing, we entered
into a new senior secured credit facility in the aggregate principal amount of
$1.9 billion, consisting of term loan facilities in the amount of $1.4
billion, which includes funds sufficient to repay the remaining $22 million
aggregate principal amount of outstanding 10.5% senior secured notes due 2002,
and a revolving credit facility in the amount of $500.0 million.
Borrowings under the facilities generally bear interest at LIBOR plus a
spread of 3.50%, if we choose to make LIBOR borrowings, or the highest of (a)
the current base rate of Citibank, N.A., (2) the Federal Funds Effective Rate
plus 0.5% and (c) the Base CD Rate plus 0.5%, plus a spread of 2.50%. The
facilities will mature on June 27, 2005, provided that to the extent that more
than $20 million of our 7.625% senior notes due 2005 remain outstanding on
December 31, 2004, the facilities will mature and all lending commitments
under the revolving facility will terminate on March 15, 2005.
The senior secured credit facility contains covenants that are customary for
facilities of this type, which place restrictions on, among other things, the
increase of debt, the payment of distributions in respect of capital stock,
the prepayment of debt, investments, capital expenditures, mergers, liens,
sale-leaseback transactions and the granting of negative pledges to other
creditors, and require us to meet various financial ratios.
The senior secured credit facility is subject to mandatory prepayment with
the net cash proceeds of sales of specified assets and sales of capital stock
of any of our subsidiaries owning any specified assets (other than sales in
the ordinary course of business and other limited exceptions) and the net cash
proceeds of certain permitted capital markets transactions. However, provided
that we are in compliance with certain requirements under the facility, we may
use up to $300 million of proceeds of a permitted capital markets transaction
to repay certain outstanding debt and use the balance of the $300 million for
general corporate purposes. Any proceeds from a permitted capital markets
transaction in excess of $200 million will be split 75% for prepayment of the
term loan facilities and 25% for general corporate purposes. The facility also
permits the issuance of certain additional debt, the proceeds of which will
not be required to be applied to mandatory prepayment, as follows: (a) up to
$200 million aggregate principal amount of secured debt, subordinated only to
the senior secured credit facility and any remaining 10.5% notes, with terms
and conditions satisfactory to lenders under the facility holding more than 66
2/3% of the aggregate amount of the loans and commitments under the senior
secured credit facility (of which $107 million has been issued as part of a
synthetic lease facility), and (b) an aggregate principal amount of debt
(which, among other things, has a maturity date after January 1, 2006 and is
limited to a passive second priority lien on the senior secured credit
facility or to liens on certain real estate) in an amount not in excess of
$450 million.
The senior secured credit facility contains customary event of default
provisions including nonpayment, misrepresentation, breach of covenants,
bankruptcy and default under other indebtedness.
Substantially all of our wholly-owned subsidiaries guarantee our obligations
under the new credit facility. These subsidiary guarantees are secured
primarily by a first priority lien on the inventory, accounts receivable,
intellectual property and prescription files of the subsidiary guarantors. Our
direct obligations under the new credit facility will be unsecured. The $21.9
million aggregate principal amount of outstanding
26
10.5% senior secured notes are secured on a shared first priority basis with
the new credit facility. Our 12.5% senior secured notes due 2006 are secured
on a second priority basis. The new senior secured credit facility and our
outstanding indebtedness include borrowings that were used to purchase $174.5
million aggregate principal amount of 10.5% senior secured notes due 2002 in
the tender offer, which is a part of the Refinancing.
Previous Senior Secured Credit Facility. In June 2000, we entered into a
$1.0 billion (which was increased to $1.1 billion in November 2000) senior
secured credit facility with a syndicate of banks led by Citibank N.A., as
agent. The facility was to mature on August 1, 2002, and consisted of a $600.0
million term loan facility and a $500.0 million revolving credit facility. We
used the term facility to terminate our accounts receivable securitization
facility and repurchase $300.0 million of unpaid receivables thereunder, to
fund $66.4 million of transaction costs relating to our financial
restructuring and to provide $133.6 million of cash available for general
corporate purposes. The revolving facility provided us with borrowings for
working capital requirements, capital expenditures and general corporate
purposes. Borrowings under the facilities generally bore interest either at
LIBOR plus 3.0%, if we chose to make LIBOR borrowings, or at Citibank's base
rate plus 2%.
Substantially all of our wholly-owned subsidiaries guaranteed our
obligations under the previous senior secured credit facility. These
subsidiary guarantees were secured by a first priority lien on the inventory,
accounts receivable, intellectual property and some of the real estate assets
of the subsidiary guarantors. Our direct obligations under the senior credit
facility were unsecured.
The previous senior secured credit facility contained customary covenants,
which placed restrictions on the assumption of debt, the payment of dividends,
mergers, liens and sale-leaseback transactions. The facility required us to
meet various financial ratios and limited our capital expenditures.
The previous senior secured credit facility was repaid with the proceeds of
the Refinancing.
Other Credit Facilities. In June 2000, we extended to August 2002 the
maturity date of our RCF credit facility and our PCS credit facility.
Borrowings under the PCS credit facility bore interest at LIBOR plus 3.25% and
borrowings under the RCF credit facility bore interest at LIBOR plus 3.75%.
These credit facilities contained restrictive covenants which placed
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale-leaseback transactions. They also required us to satisfy
financial covenants which were generally slightly less restrictive than the
covenants in our previous senior secured credit facility. The facilities also
limited the amount of our capital expenditures to $186.0 million for the three
quarters ended March 3, 2001, increasing to $243.0 million for the four
quarters ending June 1, 2002.
As part of the restructuring of our debt in June 2000, certain affiliates of
J.P. Morgan, which had lent us $300.0 million under a demand note in June 1999
and was also a lender under the RCF and PCS credit facilities, together with
certain other lenders under the two credit facilities, agreed to exchange a
portion of their loans for a new secured exchange debt obligation and shares
of our common stock. This resulted in a total of $284.8 million of debt under
these facilities, including $200.0 million of the outstanding principal of the
demand note, being exchanged for an aggregate of 51,785,434 shares of our
common stock at an exchange rate of $5.50 per share. We recorded a gain on
this exchange of debt of $5.2 million in the second quarter of fiscal 2001. An
additional $274.8 million of borrowings under the facilities were exchanged
for the exchange debt, including the entire remaining principal amount of the
demand note. The terms of the exchange debt were substantially the same as the
terms of our RCF and PCS credit facilities and the interest rate was LIBOR
plus 3.25%.
The PCS and RCF credit facilities and the exchange debt were repaid with the
proceeds of the Refinancing.
Debt Covenants. We were in compliance with the covenants of the previous
senior secured credit facility and our other credit facilities and debt
instruments as of March 3, 2001. With continuing improvements in operating
performance, we anticipate that we will maintain our compliance with our debt
covenants in the new senior secured credit facility. However, variations in
our operating performance and unanticipated developments may adversely affect
our ability to remain in compliance with the applicable debt covenants.
27
Commercial Paper. Until September 24, 1999, we issued commercial paper
supported by unused credit commitments to supplement cash generated by
operations. Since the loss of our investment grade rating in fiscal 2000, we
are no longer able to issue commercial paper. Our outstanding commercial paper
amounted to $192.0 million at February 26, 2000 and $1,783.1 million at
February 27, 1999. All remaining commercial paper obligations were repaid in
March 2000.
Exchange Offers. During the period between June 2000 and March 3, 2001 we
completed numerous debt for debt and debt for equity exchange offers. In the
aggregate, we issued:
o $467.5 million of our 10.5% senior secured notes due 2002; and
o 32.3 million shares of our common stock,
in exchange for an aggregate of:
o $123.0 million of our 5.5% notes due December 2000;
o $342.7 million of our 6.7% notes due December 2001;
o $292.7 million of our 5.25% convertible subordinated notes due 2002;
o $17.8 million of our 6.00% dealer remarketable securities due 2003;
and
o $2.0 million of our 7.625% senior notes due 2005.
In connection with these exchanges we recorded an aggregate loss of $100.6
million during fiscal 2001.
Subsequent to March 3, 2001, the holders of approximately $205.3 million
principal amount of our 5.25% convertible subordinated notes due 2002
exchanged these notes for an aggregate of 29.7 million shares of our common
stock and the holders of approximately $79.9 million principal amount of our
6.0% dealer remarketable securities due 2003 exchanged these notes for an
aggregate of 12.4 million shares of our common stock. We also exchanged an
aggregate of $303.5 million in our RCF credit facility, PCS credit facility,
10.5% senior secured notes due 2002 and other debt for 44.3 million shares of
common stock. In addition, as part of the Refinancing, we consummated a
tender offer for $174.5 million of our 10.5% senior secured notes due 2002.
See "Summary--Refinancing Transactions".
In connection with the Refinancing, we will incur nonrecurring expense in
the first and second quarters of fiscal 2002 of approximately $221.0 million.
On a prospective annual basis, the Refinancing reduces depreciation and
amortization expense approximately $4.0 million, but increases rent expense
approximately $57.0 million. Interest expense is also expected to decrease due
to the Refinancing, earlier debt for equity exchanges and the repayment of
debt related to the sale of AdvancePCS investments. Prospective annual
interest expense is estimated to be $370 million to $390 million, of which
$320 million to $340 million is cash interest expense.
28
Capitalization. The following table sets forth our capitalization at June
30, 2001, following the completion of the refinancing transactions described
in "Prospectus Summary--Refinancing Transactions".
As of
June 30, 2001
---------------
($ in millions)
Secured Debt:
Senior secured credit facility ............................... $1,378
10.50% senior secured notes due 2002 ......................... 22
12.5% senior secured notes due 2006 .......................... 143
Other ........................................................ 12
Lease Financing Obligations .................................. 227
Unsecured Debt:
6.7% notes due 2001 .......................................... 7
6.0% dealer remarketable securities due 2003 ................. 108
6.0% notes due 2005 .......................................... 195
7.625% notes due 2005 ........................................ 198
7.125% notes due 2007 ........................................ 350
6.125% notes due 2008 ........................................ 150
11.25% senior notes due 2008 ................................. 150
6.875% senior debentures due 2013 ............................ 200
7.7% notes due 2027 .......................................... 300
6.875% debentures due 2028 ................................... 150
Subordinated Debt:
5.25% convertible subordinated notes due 2002 ................ 152
------
Total debt .................................................. 3,742
Redeemable preferred stock ................................... 19
Stockholders' equity ......................................... 568
------
Total capitalization ........................................ $4,329
======
On a prospective annual basis, the refinancing will reduce depreciation and
amortization expense approximately $4.0 million but increase rent expense
approximately $57.0 million. Interest expense is also expected to decrease due
to the refinancing, debt for equity exchanges effected prior to June 3, 2001,
and the repayment of debt related to the sale of the AdvancePCS investments.
Prospective annual interest expense is estimated to be $370.0 million to
$390.0 million of which $320.0 million to $340.0 million is cash interest.
Net Cash Provided By (Used In) Operating, Investing and Financing Activities
Thirteen Week Period Comparisons
Our operating activities provided $45.7 million of cash in the thirteen week
period ended June 2, 2001 and used $9.4 million of cash in the thirteen week
period ended May 27, 2000. Operating cash flow was negatively impacted by
$127.3 million in interest payments and increases in operating assets. This
was offset by increased current liabilities.
Cash provided by investing activities was $463.7 million for the thirteen
week period ended June 2, 2001, due primarily to the sale of the securities we
received in our sale of AdvancePCS. Cash used in investing activities was
$20.0 million for the thirteen week period ended May 27, 2000. Cash used for
store construction and relocations amounted to $7.1 million and $18.9 million
for the thirteen week period ended June 2, 2001 and May 27, 2000,
respectively.
Cash used in financing activities was $521.7 million and $72.5 million for
the thirteen week periods ended June 2, 2001 and May 27, 2000, respectively.
Proceeds from the sale of the securities we received from our sale of
AdvancePCS were used to pay down outstanding debt balances, which
significantly impacted cash used in financing activities in the thirteen week
period ended June 2, 2001.
29
Fiscal Year Comparisons
We used $704.6 million of cash to fund continuing operations in fiscal 2001.
Operating cash flow was negatively impacted by $543.3 million of interest
payments. Operating cash flow was also negatively impacted from an increase in
current assets, primarily resulting from repurchasing $300.0 million of
accounts receivable when we refinanced the accounts receivable securitization
facility, and a decrease in accounts payable and other liabilities.
In fiscal 2000, we used $623.1 million of cash to fund continuing
operations. Operating cash flow was negatively impacted by $501.8 million of
interest payments. Operating cash flow was also negatively impacted from an
increase in current assets and a decrease in accounts payable partially offset
by an increase in other liabilities.
Cash provided by investing activities was $677.7 million for fiscal 2001.
Cash was provided from the sale of our discontinued operations and various
other assets, less expenditures for fixed and intangible assets.
Cash used for investing activities was $552.1 million and $2.7 billion for
fiscal 2000 and fiscal 1999, respectively. Cash used for store construction
and relocations amounted to $573.3 million for fiscal 2000 and $1.2 billion
for fiscal 1999. In addition, cash of $1.4 billion was used to acquire PCS in
fiscal 1999.
Cash used in financing activities was $64.3 million for fiscal 2001. The
cash used consisted of payments of $78.1 million of deferred financing costs
partially offset by net debt borrowings of $6.8 million and proceeds from
sale-leaseback transactions of $7.0 million. During fiscal 2001, we used the
proceeds from the sale of our PBM segment to reduce our borrowings.
Cash provided by financing activities was $905.1 million for fiscal 2000 and
$2,660.3 million for fiscal 1999. Increased borrowings under our RCF and PCS
credit facilities which replaced our commercial paper program and the sale of
$300.0 million of preferred stock were the main financing activities during
fiscal 2000. In fiscal 1999, we issued commercial paper to finance the
acquisition of PCS. Also during fiscal 1999, net proceeds were received from
the issuance of $700.0 million in long-term debt and $200.0 million of dealer
remarketable securities. Cash provided by financing activities included
proceeds received from store sale-leaseback transactions of $74.9 million and
$505.0 million for fiscal 2000 and 1999, respectively.
Capital Expenditures
Thirteen Week Period Comparisons
We plan capital expenditures of approximately $230.0 million to $240.0
million during fiscal 2002, consisting of approximately $82.6 million related
to the termination of an operating lease and the corresponding purchase of
equipment, $34.7 million related to new store construction, store relocation
and other store construction projects. An additional $89.2 million will be
dedicated to other store improvement activities and the purchase of
prescription files from independent pharmacists. We expect that these capital
expenditures will be financed primarily with cash flow from operations and
borrowings under the revolving credit facility available under our senior
secured facility. During the thirteen week period ended June 2, 2001, the
company spent $26.8 million on capital expenditures, consisting of $7.1
million related to new store construction, store relocation and other store
construction projects. As additional $19.7 million was related to other store
improvement activities and the purchase of prescription files from independent
pharmacists.
Fiscal Year Comparisons
We spent approximately $132.5 million, $573.3 million and $1.2 billion in
capital expenditures in each of fiscal 2001, fiscal 2000, and fiscal 1999,
respectively. In fiscal 2001 our capital expenditures were primarily related
to new store construction, store relocation and other store construction
projects.
Future Liquidity
We are highly leveraged. Based upon our current levels of operations and
expected improvements in our operating performance, management believes that
cash flow from operations, together with available borrowings under our new
senior secured credit facility and our other sources of liquidity (including
asset
30
sales) will be adequate to meet anticipated requirements for working capital,
debt service and capital expenditures for the foreseeable future. However, our
ability to meet our obligations will depend in part on our ability to
successfully execute our long-term strategy and improve the operating
performance of our stores. On June 27, 2001, we closed a series of
transactions to refinance a significant portion of our indebtedness, see
"Prospectus Summary--Refinancing Transactions". These transactions provide us
with additional liquidity and reduce the amount of our indebtedness maturing
before 2005. Our indebtedness maturing before 2005 now consists of $152.0
million of our 5.25% convertible subordinated notes due 2002, $107.8 million
of 6.00% dealer remarketable securities due 2003 and $21.9 million of our
10.5% senior secured notes due 2002. Funds sufficient to repay the $21.9
million of notes outstanding at maturity are included in our new credit
facility.
Accounting Change
In fiscal 2000, we changed our application of the LIFO method of accounting
by restructuring our LIFO pool structure through a combination of certain
geographic pools. The reduction in the number of LIFO pools was made to more
closely align the LIFO pool structure to store merchandise categories. The
effect of this change in fiscal 2000 was to decrease our earnings by $6.8
million (net of income tax benefit of $4.6 million) or $.03 per diluted common
share. The cumulative effect of the accounting change was a charge of $27.3
million (net of income tax benefit of $18.2 million) or $.11 per diluted
common share. The pro forma effect of this accounting change would have been a
reduction in net income of $6.4 million, (net of income tax benefit of $4.2
million) or $.02 per diluted common share for fiscal 1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 138,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, will be required to be recorded on the balance sheet at
fair value. If the derivative is designated and effective as a fair value
hedge, the changes in the fair value of the derivative and the changes in the
hedged item attributable to the hedged risk will be recognized in earnings. If
the derivative is designated and effective as a cash-flow hedge, changes in
the fair value of the effective portion of the derivative will be recorded in
other comprehensive income ("OCI") and will be recognized in the income
statement when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as
well as ongoing effectiveness assessments in order to use hedge accounting.
For a derivative that does not qualify as a hedge, changes in fair value will
be recognized in earnings. On March 4, 2001, in connection with the adoption
of the new Statement, we will record a reduction of approximately $29.0
million in OCI as a cumulative transition adjustment for derivatives
designated as cash flow-type hedges prior to adopting SFAS 133.
Certain issues currently under consideration by the Derivatives
Implementation Group ("DIG") may make it more difficult to qualify for cash
flow hedge accounting in the future. Pending the results of the DIG
deliberations, changes in the fair value of our interest rate swaps may be
recorded as a component of net income.
In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initiated after June 30, 2001;
and b) the provisions of SFAS 141 also apply to all business combinations
accounted for by the purchase method that are completed after June 30 2001
(that is, the date of the acquisition is July 2001 or later). There are also
transition provisions that apply to business combinations completed before
July 1, 2001, that were accounted for by the purchase method. SFAS 142
effective for fiscal years beginning after December 15, 2001 to all goodwill
and other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized. The Company is currently evaluating the provisions of SFAS 141 and
31
SFAS 142 and has not adopted such provisions in its June 2, 2001 condensed
consolidated financial statements.
Change in Accountants
On November 19, 1999, we filed a Current Report on Form 8-K disclosing the
resignation of our former auditors, KPMG LLP and the withdrawal of their
report on our financial statements. On December 6, 1999, we amended the Form
8-K dated November 19, 1999 to file a letter by KPMG LLP concerning the
disclosure in the Form 8-K. On December 10, 1999, we filed a Current Report on
Form 8-K to announce that we had retained Deloitte & Touche LLP as our
independent auditors.
Market Risk
Our future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. Our major
market risk exposure is changing interest rates. Increases in interest rates
would increase our interest expense. Since the end of fiscal 2000, our primary
risk exposure has not changed. We enter into debt obligations to support
capital expenditures, acquisitions, working capital needs and general
corporate purposes. Our policy is to manage interest rates through the use of
a combination of variable-rate credit facilities, fixed-rate long-term
obligations and derivative transactions.
The table below provides information about our financial instruments that
are sensitive to changes in interest rates. The table presents principal
payments and the related weighted average interest rates by expected maturity
dates as of March 3, 2001.
Fair Value
At March 3,
2002 2003 2004 2005 2006 Thereafter Total 2001
------ ---------- -------- -------- -------- ---------- ---------- -----------
(dollars in thousands)
Long-term debt,
including current portion
Fixed rate ..................... $8,353 $1,828,874 $188,533 $197,014 $198,439 $1,153,550 $3,574,763 $ 2,824,904
Average Interest Rate .......... 5.91% 9.41% 6.00% 6.06% 7.62% 7.05%
Interest Rate Swap ............. -- -- -- -- -- -- -- ($ 29,000)
Variable Rate .................. -- $1,219,785 -- -- -- -- $1,219,785 $ 1,219,785
Average Interest Rate .......... -- 9.16% -- -- -- --
In June 2000, we entered into an interest rate swap that fixes the LIBOR
component of $500.0 million of our variable-rate debt at 7.083% for a two year
period. In July 2000, we entered into an additional interest rate swap that
fixes the LIBOR component of an additional $500.0 million of variable rate
debt at 6.946% for a two year period.
Our ability to satisfy our interest payment obligations on our outstanding
debt will depend largely on our future performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service our
interest payment obligations on our outstanding indebtedness and if we cannot
borrow or obtain equity financing to satisfy those obligations, our business
and results of operations will be materially adversely affected. We cannot
assure you that any replacement borrowing or equity financing could be
successfully completed.
The ratings on the senior secured credit facility, the RCF credit facility,
the PCS credit facility and the fixed-rate obligations as of March 31, 2001
were B- by Standard & Poor's and by Caa1 by Moody's. The exchange debt
facility was not rated. Immediately prior to the Refinancing, the interest
rates on the variable-rate borrowings were as follows: $1.1 billion previous
senior credit facility: LIBOR plus 3.00%, the RCF facility: LIBOR plus 3.75%,
the PCS and the exchange debt facilities: LIBOR plus 3.25%. The interest rate
on the new $1.9 billion senior credit facility is LIBOR plus 3.50%.
Downgrades of our credit ratings will not have an impact upon the rate on
the borrowings under these credit facilities.
32
Changes in one month LIBOR affect our cost of borrowings because the
interest rate on our variable-rate obligations is based on LIBOR. If the
market rates of interest for one month LIBOR change by 10% (approximately 50
basis points), our annual interest expense would change by approximately $1.9
million based upon our variable-rate debt outstanding of approximately $378.0
million as of June 30, 2001.
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.
33
BUSINESS
Overview
We are the second largest retail drugstore chain in the United States based
on number of stores and the third largest based on revenues. We operate our
drugstores in 30 states across the country and in the District of Columbia. We
have a first or second place market position, based on revenues, in 34 of the
65 major U.S. metropolitan markets in which we operate. As of June 2, 2001, we
operated 3,631 stores, which generated $14.5 billion in revenues during fiscal
2001. Since the beginning of fiscal 1997, we have purchased 1,554 stores,
relocated 949 stores, opened 469 new stores and remodeled 410 stores. As a
result, we believe we have one of the most modern store bases in the industry.
In our stores, we sell prescription drugs and a wide assortment of other
merchandise which we call "front-end" products. In fiscal 2001, our
pharmacists filled more than 204 million prescriptions which accounted for
59.5% of our total revenues. In the first quarter of fiscal 2002, pharmacy
sales accounted for 61.6% of our total revenues. We believe that our pharmacy
operations will continue to represent a significant part of our business due
to favorable industry trends, including an aging population, increased life
expectancy and the discovery of new and better drug therapies. We offer
approximately 24,600 front-end products, including over-the-counter
medications, health and beauty aids, personal care items, cosmetics, household
items, beverages, convenience foods, greeting cards, photo processing,
seasonal merchandise and numerous other everyday and convenience products,
which accounted for the remaining 40.5% of our total revenues in fiscal 2001
and the remaining 38.4% of our total revenues in the first quarter of fiscal
2002. We distinguish our stores from other national chain drugstores, in part,
through our private label brands and our strategic alliance with GNC, a
leading retailer of vitamin and mineral supplements. We offer over 1,500
products under the Rite Aid private label brand, which contributed
approximately 10% of our front-end sales in fiscal 2001.
Our stores range in size from approximately 5,000 to 40,000 square feet. The
larger stores are concentrated in the western United States. Substantially all
of the stores we have opened since 1995 are based on our prototype 12,500
square foot freestanding building and such stores typically include a drive-
thru pharmacy and one-hour photo shop and many include a GNC store-within-Rite
Aid-store.
Until October 2, 2000, when we sold it to Advance Paradigm, Inc. (now
AdvancePCS), we owned PCS Health Systems, Inc., a provider of pharmacy benefit
management services to employers, insurance carriers and managed care
companies. As a result of the sale, the PBM segment is reported as a
discontinued operation for all relevant periods in the financial statements
included in this offering memorandum.
Strategy
Our primary long-term operating strategy is to focus on improving the
productivity of our existing store base. We believe that improving the sales
of existing stores is important to achieving profitability and positive cash
flow. We also believe that the substantial investment made in our store base
over the last five years has given us one of the most modern stores bases in
the industry. However, our store base has not yet achieved a level of sales
productivity comparable to our major competitors. We intend to improve the
performance of existing stores by continuing to (i) capitalize on the
substantial investment in our stores and distribution facilities; (ii) improve
the product offerings in our stores; and (iii) enhance our customer and
employee relationships. Moreover, it is estimated 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 successful drugs and inflation. We believe this
growth will help increase the sales productivity of our existing store base.
To achieve this objective, we are implementing the following strategies:
Capitalize on Investments in Stores and Distribution Facilities.
Approximately 50% of our stores have been constructed, relocated or remodeled
since the beginning of fiscal 1997. Our new and relocated stores are generally
larger and need to develop a critical mass of customers to achieve
profitability, which generally takes two to four years. Therefore, attracting
more customers is a key component of our long-term operating strategy. We
continue to attract new customers to our modern stores through various
marketing strategies
34
including weekly circulars, seasonal merchandising programs and direct
marketing efforts. To support our new store base, we improved our distribution
network by, among other things, opening two high capacity distribution centers
in Perryman, MD and Lancaster, CA.
During fiscal 2001, we undertook several initiatives to increase sales of
our Rite Aid brand products and generic prescription drugs. In fiscal 2001, we
piloted a program in four markets whereby we reduced pricing of our Rite Aid
brand and reduced cash prices of generic pharmacy products which resulted in
higher amounts of cash prescriptions being filled.
Improve Product Offerings in Our Stores. We continue to develop ideas for
new product departments and have begun to implement plans to expand the
categories of our front-end products. We continue to add popular and
profitable product departments, such as our GNC stores-within-Rite Aid-stores
and one-hour photo development departments. Although we are already an
industry leader in dispensing generic drugs, which are generally more
profitable than brand name drugs, in fiscal 2001 we took additional steps to
further improve our generic efficiency, including adding functionality to our
proprietary Rite Aid Dispensing System to aid our pharmacists in dispensing
generic prescriptions whenever possible. As private label and generic
prescription drugs generate higher margins than branded label, we expect that
increases in the sales of these products should enhance our profitability. We
continue to improve inventory and product categories to offer more
personalized products and services to our customers, including better
management of seasonal items. We also continue to strengthen our relationships
with our suppliers in order to offer customers a wider selection of products.
Enhance Customer and Employee Relationships. We have implemented programs
designed to improve relationships with customers and improve employee morale.
Through attention to customers' needs and preferences, we are increasing our
efforts to offer more personalized products and services to our customers. We
are continuing programs that are designed to build awareness and enhance
positive perceptions among customers, including distribution of a weekly
circular, weekly sales items, seasonally relevant merchandising and our
customer reward program, "Rite Rewards." We are increasing customer loyalty by
establishing a strong community presence, increasing promotional themes and
exclusive offers and focusing on the attraction and retention of managed care
customers. We continue to develop and implement employee training programs to
improve customer service and educate our employees about the products we
offer. We are also developing employee programs that create compensatory and
other incentives for employees to provide customers with quality service, to
promote our private label brands and to improve our corporate culture.
Description of our Business
Products and Services. During fiscal 2001, sales of prescription drugs
represented approximately 59.5% of our total revenues up from 54.2% in fiscal
1999. Sales of prescription drugs represented approximately 61.6% of our total
revenues for our first quarter in fiscal 2002. In fiscal 2001, fiscal 2000 and
fiscal 1999, prescription drug revenues were $8.6 billion, $7.8 billion and
$6.7 billion, respectively, of our revenues. Prescription drug revenues were
$2.27 billion for our first quarter in fiscal 2002. We sell approximately
24,600 different types of non-prescription, or front-end, products. The types
and numbers of front-end products in each store vary, and selections are based
on available space and customers' needs and preferences. No single front-end
product category contributed significantly to our revenues during fiscal 2001
although certain front-end product classes contributed notably to our
revenues. Our principal classes of products in fiscal 2001 were the following:
Percentage of
Product Class Revenues
------------- -------------
Prescription drugs ............................................. 59.5%
Over-the-counter and personal care ............................. 10.9
Health and beauty aids ......................................... 5.8
General merchandise and other .................................. 23.8
35
We offer over 1,500 products under the Rite Aid private label brand, which
contributed approximately 10.0% of our front-end sales in fiscal 2001. During
fiscal 2001, we added 159 products under our private label. We intend to
increase the number and the sales of our private label brand products.
We have a strategic alliance with GNC under which we have agreed to open 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 June 2, 2001, we operated 670 GNC stores-within-Rite Aid-stores. We plan to
open 220 GNC stores-within-Rite Aid-stores during fiscal 2002.
Store Locations. Part of our strategy is to locate our stores at convenient
locations in fast-growing metropolitan areas. As of June 2, 2001, we had a
first or second place market position in 34 of the 65 major U.S. metropolitan
markets in which we operate. We have significantly reduced our store
development program in order to focus our efforts and resources on improving
the operations of our existing store base. Consistent with our operating
strategy, during fiscal 2001, we opened 9 new stores, relocated 63 stores,
remodeled 98 stores and closed 163 stores. Our current plan for fiscal 2002 is
to open approximately 6 new stores, relocate 25 stores and remodel 76 stores.
Our fiscal 2002 planned store openings and relocations are not concentrated in
any specific geographic region.
The table below identifies the number of stores by state as of June 2, 2001:
State Store Count
----- -----------
Alabama .......................................................... 129
Arizona .......................................................... 3
California ....................................................... 599
Colorado ......................................................... 31
Connecticut ...................................................... 44
Delaware ......................................................... 26
District of Columbia ............................................. 8
Georgia .......................................................... 52
Idaho ............................................................ 22
Indiana .......................................................... 8
Kentucky ......................................................... 123
Louisiana ........................................................ 96
Maine ............................................................ 82
Maryland ......................................................... 154
Michigan ......................................................... 344
Mississippi ...................................................... 32
Nevada ........................................................... 37
New Hampshire .................................................... 39
New Jersey ....................................................... 174
New York ......................................................... 404
Ohio ............................................................. 278
Oregon ........................................................... 72
Pennsylvania ..................................................... 368
Tennessee ........................................................ 51
Texas ............................................................ 5
Utah ............................................................. 30
Vermont .......................................................... 13
Virginia ......................................................... 159
Washington ....................................................... 138
West Virginia .................................................... 109
Wyoming .......................................................... 1
-----
Total ........................................................... 3,631
=====
36
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. As of June 2, 2001, we had installed
ScriptPro automated pharmacy dispensing units which are linked to our
pharmacists' computers and fill and label prescription drug orders in 871
stores. The efficiency of the ScriptPro units allows our pharmacists to spend
an increased amount of time consulting with customers. In fiscal 2001, we
developed and implemented several new technologies and applications, including
productivity improvements related to our piece picking and inventory movement
management. We also made modifications to our proprietary pharmacy information
system in order to improve its user interface and information output.
Additionally, each of our stores employs point-of-sale technology that
facilitates inventory replenishment, sales analysis and recognition of
customer trends. Our customers may also order prescription refills over the
Internet through drugstore.com or over the phone through our telephonic rapid
automated refill systems.
Suppliers. During fiscal 2001, we purchased approximately 93% of the dollar
volume of our prescription drugs from a single supplier, McKesson HBOC, Inc.,
under a contract which runs until April 2004. Under the contract, McKesson
HBOC has agreed to sell to us all of our requirements of branded
pharmaceutical products. With limited exceptions, we are required to purchase
all of our branded pharmaceutical products from McKesson HBOC. 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. In
fiscal 1999 and fiscal 2000 disputes arose between us and some of our major
vendors which weakened our relationships. During fiscal 2001, we made
significant efforts to resolve prior issues and disputes and to improve our
relationships with our suppliers and vendors and we believe these efforts have
been successful.
We sell private label and co-branded products that generally are supplied by
numerous competitive sources. The Rite Aid and GNC co-branded PharmAssure
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 2001, our stores served an
average of 1.9 million customers per day as compared to an average of 1.8
million customers per day in fiscal 2000. The loss of any one customer would
not have a material adverse impact on our results of operations. No single
customer or health plan contract accounted for more than 10% of our total
revenues.
In a typical third-party payment 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 in exchange for reduced
prescription rates. During fiscal 2001, the top five third-party payors
accounted for approximately 26.4% of our total revenues, the largest of which
represented 10.8% of our total revenues. Third party prescription sales
represented 91.7% of our pharmacy revenue during our first quarter in fiscal
2002. 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, discount stores and mail order pharmacies. We compete on the
basis of location and convenient access, customer service, product selection
and price. Our store base has not achieved the level of sales productivity our
major competitors achieve. Our new and relocated stores are generally larger
and need to develop a critical mass of customers to achieve profitability,
which generally takes two to four years. Although in the recent past we have
had problems with inventory shortages, uncompetitive pricing and customer
service, we have taken and are taking steps to address these
37
issues. Our major competitors among retail drugstore chains are CVS and
Walgreens. We believe continued consolidation of the drugstore industry will
further increase competitive pressures in the industry.
Marketing and Advertising
In fiscal 2001, marketing and advertising expenditures were $214.9 million,
which was spent primarily on newpaper advertising circulars. We have initiated
various programs that are designed to improve our image with customers. These
include our distribution of weekly circulars to announce vendor promotions,
weekly sales items and, in our expanded test market, our customer reward
program, "Rite Rewards." We continue to develop and test direct marketing
initiatives with a goal of expanding such initiatives to all of our stores. In
addition, in fiscal 2001, in order to improve our image, we implemented
several consumer events, including our Rite Aid Health and Beauty Expos held
in New Orleans, Louisiana and in Seattle, Washington. Our front-end and
prescription suppliers were invited to participate in both of these events by
displaying, demonstrating and sampling their products and services in exhibit
booths. We have also initiated programs that are specifically directed to our
pharmacy business. These include reduced cash prices and an increased focus on
attracting and retaining managed care customers.
Employees
We believe that our relationships with our employees are good. As of March
3, 2001, we had 75,500 employees, approximately 9,000 of which were
pharmacists. Approximately 47% of our employees were part-time and
approximately 26,400 were unionized. There is a national shortage of
pharmacists. Our management is implementing various employee incentive plans
in order to attract and retain qualified pharmacists.
Research and Development
We do not make significant expenditures for research and development.
Licenses, Trademarks and Patents
The Rite Aid name is our most significant trademark and the most important
factor in marketing our stores and private label products. We hold licenses to
sell beer, wine and liquor, cigarettes and lottery tickets. Additionally, we
hold licenses granted to us by the Nevada Gaming Commission 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 effect.
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 its pharmacy
operations, including purchasing, storing and dispensing of controlled
substances. Applicable licensing and registration regulations require our
compliance with various state statutes, rules and/or regulations. Violations
of applicable statutes, rules or regulations could result in the suspension or
revocation of our licenses and registrations.
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,
38
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.
We are also subject to laws governing our relationship with employees,
including minimum wage requirements, overtime and working conditions.
Increases in the federal minimum wage rate, employee benefit costs or other
costs associated with employees could adversely affect our results of
operations.
In addition, in connection with the ownership and operation 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.
PBM Segment
On October 2, 2000, we consummated the sale of PCS to Advance Paradigm (now
known as AdvancePCS) for $710.5 million in cash, equity securities of
AdvancePCS and AdvancePCS's $200.0 million 11% promissory notes. In March
2001, we sold the AdvancePCS equity securities in an underwritten public
offering for a total of $284.1 million (net of selling commissions) and
AdvancePCS paid the promissory note in full plus accrued and unpaid interest.
We applied $1,093.5 million of the proceeds from the sale of PCS to reduce our
debt. We recorded a loss on disposal of $168.8 million in fiscal 2001 as a
result of the sale.
Properties
We own our corporate headquarters, which are located in a 205,000 square-
foot building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a
99,000 square-foot building near Harrisburg, Pennsylvania for use by
additional administrative personnel. We lease 3,358 of our drugstore
facilities under non-cancelable leases, many of which have original terms of
10 to 22 years. In addition to minimum rental payments, which are set at
competitive market rates, certain leases require additional payments based on
sales volume, as well as reimbursement for taxes, maintenance and insurance.
Most of our leases contain renewal options, some of which involve rent
increases.
As of June 2, 2001, we operated 3,631 retail drugstores. The overall average
size of each store in our chain is 12,663 square feet. The stores on the east
coast average 9,502 square feet per store. The west coast stores average
20,802 square feet per store. The central stores average 10,323 square feet
per store.
We operate the following distribution centers and overflow storage
locations, which we own or lease as indicated:
Approximate
Owned or Square
Location Leased Footage
-------- -------- -----------
Rome, New York ....................................... Owned 291,000
Rome, New York (1) ................................... Leased 71,400
Utica, New York (1) .................................. Leased 115,000
Poca, West Virginia .................................. Owned 264,000
Dunbar, West Virginia (1) ............................ Leased 61,000
South Nitro, West Virginia (1) ....................... Leased 50,000
Perryman, Maryland ................................... Leased 885,000
Tuscaloosa, Alabama .................................. Owned 238,000
Tuscaloosa, Alabama (1) .............................. Leased 27,000
Cottondale, Alabama (1) .............................. Leased 125,000
Pontiac, Michigan .................................... Owned 362,000
Woodland, California ................................. Owned 521,300
Woodland, California (1) ............................. Leased 200,000
Wilsonville, Oregon .................................. Leased 518,000
Lancaster, California ................................ Leased 917,000
---------------
(1) Overflow storage locations.
39
The original terms of the leases for our distribution centers range from 5
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. Although, from
time to time, we may be near capacity at some of our distribution facilities,
particularly our older facilities, we believe that the capacity of our
facilities is adequate. As part of our ongoing efforts to improve our supply
chain, we are studying ways to optimize capacity utilization and management of
our facilities.
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 3,
2001, we subleased 5,558,000 square feet of space and an additional 4,019,000
square feet of space in closed or relocated stores was not subleased.
Legal Proceedings
Federal Investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving our
financial reporting and other matters. We are cooperating fully with the SEC
and the United States Attorney. We have begun settlement discussions 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 we enter into a consent judgment
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 financial condition and result of operations.
The U.S. Department of Labor has commenced an investigation of matters
relating to our employee benefit plans, including our principal 401(k) plan,
which permitted employees to purchase our common stock. Purchases of our
common stock under the plan were suspended in October 1999. In January 2001,
we appointed an independent trustee to represent the interests of these plans
in relation to us and to investigate possible claims the plans may have
against us. Both the independent trustee and the Department of Labor have
asserted that the plans may have claims against us. The investigations, with
which we are cooperating fully, are ongoing and we cannot predict their
outcomes. In addition, a purported class action lawsuit on behalf of the plans
and their participants has been filed by a participant in the plans in the
United States District Court for the Eastern District of Pennsylvania.
These investigations 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 and financial condition. 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 operations, financial condition and cash flows.
Stockholder Litigation
We, certain of our directors, our former chief executive officer Martin
Grass, our former president Timothy Noonan, our former chief financial officer
Frank Bergonzi, and our former auditor KPMG LLP, have been sued in a number of
actions, most of which purport to be class actions, brought on behalf of
stockholders who purchased our securities on the open market between May 2,
1997 and November 10, 1999. Most of the complainus 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 against us in the U.S. District Court
for the Eastern District of Pennsylvania and the derivative lawsuits pending
there and in the Delaware Court of Chancery. Under the agreement, which has
been
40
submitted to the U.S. District Court for the Eastern District of Pennsylvania
for approval, we will pay $45.0 million in cash, which will be fully funded by
our officers' and directors' liability insurance, and issue shares of common
stock in 2002. The shares will be valued over a 10 day trading period in
January 2002. If the value determined is at least $7.75 per share, we will
issue 20 million shares. If the value determined is less than $7.75 per share,
we have the option to deliver any combination of common stock, cash and short-
term notes, with a total value of $155.0 million. As additional consideration
for the settlement, we have assigned to the plaintiffs all of our claims
against the above named executives and KPMG LLP. Several members of the class
have elected to "opt-out" of the class and, as a result, if the settlement is
approved by the court, they will be free to individually pursue their claims.
Management believes that their claims, individually and in the aggregate, are
not material. On June 8, 2001, the court issued a ruling indicating that it
was prepared to approve the settlement if certain technical changes were made
in the order that the plaintiffs and settling defendants requested be issued
by the court. We have worked with the plaintiffs to modify the requested order
and resubmitted it for court approval. We anticipate that the nonsettling
defendants will appeal any approved order. We cannot predict the outcome of
any such appeal or whether, if the settlement does not become final, this
litigation would result in a material adverse effect on our results of
operations, financial condition or cash flows.
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.
Drug Pricing and Reimbursement Matters
On October 5, 2000, we settled, for an immaterial amount, and without
admitting any violation of the law, the lawsuit filed by the Florida Attorney
General alleging that our non-uniform pricing policy for cash prescription
purchases was unlawful under Florida law. The filing of the complaint by the
Florida Attorney General, and our press release issued in conjunction
therewith, precipitated an investigation by the New Jersey Attorney General
which is ongoing and the filing of a purported federal class action in
California and several purported state class actions, all of which (other than
those pending in New York that were filed on October 5, 1999 and those pending
in California that were filed on January 3, 2000) have been dismissed. A
motion to dismiss the action in New York is currently pending and the
plaintiffs in the California action have agreed to a voluntary dismissal of
their complaint. On May 30, 2001, a complaint filed in New Jersey in which the
plaintiff made similar allegation and which the trial court dismissed for
failing to state a claim upon which relief could be based was reinstated by
the appellate court. We believe that the remaining lawsuits are without merit
under applicable state consumer protection laws. As a result, we intend to
continue to vigorously defend against them and we do not anticipate that if
fully adjudicated, they will result in an award of damages. However, such
outcomes cannot be assured and a ruling against us could have a material
adverse effect on the financial position and results of operations of the
company as well as necessitate substantial additional expenditures to cover
legal costs as we pursue all available defenses.
We are being investigated by multiple state attorneys general for our
reimbursement practices relating to partially-filled prescriptions and fully-
filled prescriptions that are not picked up by ordering customers. We are
supplying similar information with respect to these matters to the Department
of Justice. We believe that these investigations are similar to investigations
which were, and are being, undertaken with respect to the practices of others
in the retail drug industry. We also believe that our existing policies and
procedures fully comply with the requirements of applicable law and intend to
fully cooperate with these investigations. We cannot, however, predict their
outcomes at this time.
An individual acting on behalf of the United States of America, has filed a
lawsuit in the United States District Court for the Eastern District of
Pennsylvania under the Federal False Claims Act alleging that we defrauded
federal healthcare plans by failing to appropriately issue refunds for
partially filled prescriptions and prescriptions which were not picked up by
customers. The Department of Justice has advised the court
41
that it intends to join this lawsuit, as is its right under the law; its
investigation is continuing. We have filed a motion to dismiss the complaint
for failure to state a claim.
These claims are ongoing and we cannot predict their outcome. If any of
these cases result in a substantial monetary judgment against us or is settled
on unfavorable terms, our results of operations, financial position and cash
flows could be materially adversely affected.
Store Management Overtime Litigation
We are a defendant in a class action pending in the California Superior
Court in San Diego with three subclasses, comprised of our California store
managers, assistant managers and managers-in-training. The plaintiffs seek
back pay for overtime not paid to them and injunctive relief to require us to
treat our store management as non-exempt. They allege that we decided to
minimize labor costs by causing managers, assistant managers and managers-in-
training to perform the duties and functions of associates for in excess of
forty hours per week without paying them overtime. We believe that in-store
management were and are properly classified as exempt from the overtime
provisions of California law. On May 21, 2001, we entered into a Memorandum of
Agreement with the plaintiffs under which, subject to approval of the court,
we will settle this lawsuit for a maximum of $25.0 million, a charge for which
was taken in fiscal 2000. The settlement amount is payable in four equal
installments of 25%, the first of which is payable upon final court approval
of the settlement and the balance is payable 6, 12 and 18 months thereafter.
On June 1, 2001, the court entered an order granting preliminary approval of
the settlement and authorizing notice to the class.
Other
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 the opinion of our management, these matters are adequately
covered by insurance or, if not so covered, are without merit or are of such
nature or involve amounts that would not have a material adverse effect on our
financial condition, results of operations or cash flows if decided adversely.
42
MANAGEMENT
The following table sets forth certain information regarding our directors,
executive officers and key employees as of June 30, 2001.
Name Age Office and Position
---- --- -------------------
Robert G. Miller.................................... 57 Chairman and Chief Executive Officer
Mary F. Sammons..................................... 54 Director, President and Chief Operating Officer
David R. Jessick.................................... 47 Senior Executive Vice President and Chief Administrative
Officer
Elliot S. Gerson.................................... 59 Senior Executive Vice President and General Counsel
John T. Standley.................................... 38 Senior Executive Vice President and Chief Financial
Officer
James P. Mastrian................................... 58 Senior Executive Vice President -- Marketing and Logistics
Christopher Hall.................................... 36 Executive Vice President Finance and Accounting
Mark Panzer......................................... 44 Executive Vice President, Store Operations
Eric Sorkin......................................... 52 Executive Vice President Pharmacy Services
Kevin Twomey........................................ 51 Senior Vice President and Chief Accounting Officer
Robert B. Sari...................................... 45 Senior Vice President, Deputy General Counsel and
Secretary
William J. Bratton.................................. 53 Director
Alfred M. Gleason................................... 71 Director
Leonard I. Green.................................... 67 Director
Nancy A. Lieberman.................................. 44 Director
Stuart M. Sloan..................................... 57 Director
Jonathan D. Sokoloff................................ 43 Director
Leonard N. Stern.................................... 63 Director
Robert G. Miller. Mr. Miller has been our Chairman and Chief Executive
Officer since December 5, 1999. Previously, Mr. Miller served as Vice Chairman
and Chief Operating Officer of The Kroger Company, a retail food company. Mr.
Miller joined Kroger in May 1999, when The Kroger Company acquired Fred Meyer,
Inc., a food, drug and general merchandise chain. From 1991 until the
acquisition, he served as Chief Executive Officer of Fred Meyer, Inc. Mr.
Miller also serves as a director of Harrah Entertainment, Inc., PathMark
Stores, Inc. and AdvancePCS.
Mary F. Sammons. Ms. Sammons has been our President and Chief Operating
Officer and a member of our Board of Directors since December 5, 1999. From
April 1999 to December 1999, Ms. Sammons served as President and Chief
Executive Officer of Fred Meyer Stores, Inc., a subsidiary of The Kroger
Company. From January 1998 to April 1999, Ms. Sammons served as President and
Chief Executive Officer of Fred Meyer Stores, Inc., a subsidiary of Fred
Meyer, Inc. From 1985 through 1997, Ms. Sammons held several senior level
positions with Fred Meyer Inc., the last being that of Executive Vice
President. Ms. Sammons is also a director of drugstore.com and of the National
Association of Chain Drugstores.
David R. Jessick. Mr. Jessick has been our Senior Executive Vice President
and our Chief Administrative Officer since December 5, 1999. From 1997 to July
1999, Mr. Jessick served as Executive Vice President of Finance and Investor
Relations of Fred Meyer, Inc. From 1979 to 1997, Mr. Jessick held several
senior management positions at Thrifty PayLess Holdings, Inc., a west coast-
based drugstore chain that had annual sales of $5.0 billion before being
acquired by Rite Aid in 1996. Mr. Jessick was Executive Vice President and
Chief Financial Officer of Thrifty PayLess Holdings, Inc. before Thrifty
PayLess was acquired by Rite Aid. Mr. Jessick serves as a Director of
AdvancePCS.
Elliot S. Gerson. Mr. Gerson is a Senior Executive Vice President and our
General Counsel. He has held those positions since October 1999 and July 1997,
respectively. Mr. Gerson also served as our Secretary from July 1997 to May
2000. Mr. Gerson joined Rite Aid in November 1995 as Senior Vice President and
43
Assistant Chief Legal Counsel. Prior to joining Rite Aid, Mr. Gerson was a
partner in the law firm of Bolger, Picker, Hankin & Tannenbaum from May 1993
to November 1995.
John T. Standley. Mr. Standley was appointed as a Senior Executive Vice
President and our Chief Financial Officer in September 2000. He had been an
Executive Vice President and our Chief Financial Officer since December 5,
1999. Previously, he was Executive Vice President and Chief Financial Officer
of Fleming Companies, Inc., a food marketing and distribution company from May
1999 to December 1999. Between July 1998 and May 1999, Mr. Standley was Senior
Vice President and Chief Financial Officer of Fred Meyer, Inc. Mr. Standley
served as Chief Financial Officer of Ralphs Grocery Company between January
1997 and July 1998 and of Food 4 Less between January 1997 to July 1998. Mr.
Standley also served in an executive position at Smith's Food & Drug from May
1996 to February of 1997 and as Chief Financial Officer of Smitty's
Supervalue, Inc. from December 1994 to May 1996.
James P. Mastrian. Mr. Mastrian was appointed as our Senior Executive Vice
President, Marketing and Logistics in October 2000. He had been our Executive
Vice President, Marketing since November 15, 1999. Mr. Mastrian was also our
Executive Vice President, Category Management from July 1998 to November 1999.
Mr. Mastrian was Senior Executive Vice President, Merchandising and Marketing
of OfficeMax from June 1997 to July 1998 and Executive Vice President,
Marketing of Revco D.S., Inc. from September 1990 to June 1997.
Christopher Hall. Mr. Hall has been our Executive Vice President Finance
and Accounting since January 10, 2001. Prior to that, he served as our Senior
Vice President and Chief Accounting Officer from January 25, 2000. From April
1999 to January 2000, Mr. Hall was Executive Vice President and Chief
Financial Officer at Golden State Foods. Between July 1998 and March 1999, Mr.
Hall served as Senior Vice President of Finance at Ralphs Grocery Company. Mr.
Hall joined Ralphs Grocery as Vice President of Accounting in June 1995.
Mark Panzer. Mr. Panzer joined us on June 28, 2001 as Executive Vice
President, Store Operations. From 1989 until joining us, Mr. Panzer held
several operations and marketing positions of increasing responsibility at
Albertson's and predecessor companies acquired by Albertson's. Mr. Panzer was
Corporate Vice President of Marketing and Sales, General Merchandise at
Albertson's at the time of his departure.
Eric Sorkin. Mr. Sorkin has been our Executive Vice President, Pharmacy
Services since February 2001. From February 2000 to February 2001 he served as
our Senior Vice President, Pharmacy, and from May 1997 to February 2000 he
served as our Vice President, Pharmacy Purchasing. Prior to rejoining Rite Aid
in 1997, Mr. Sorkin served in senior positions at Express Scripts, Pathmark,
Thrifty Drugs and Pharmacy Direct Network, and as President of Sorkin
Consulting. In his first 19 years with Rite Aid, he held executive positions
in operations, personnel, third party, information systems and pharmacy
services. Mr. Sorkin has served on pharmacy benefit management, H.M.O. and
pharmaceutical manufacturer advisory panels, and on national and state
healthcare and government affairs committees.
Kevin Twomey. Mr. Twomey has been our Senior Vice President and Chief
Accounting Officer since December 2000. From September 1989 to November 2000,
Mr. Twomey held several accounting and finance management positions at Fleming
Companies, Inc., a food wholesaler and grocery store chain. He was Senior Vice
President and Chief Accounting Officer at Fleming when he left. Prior to
joining Fleming, he was an audit partner at Deloitte & Touche.
Robert B. Sari. Mr. Sari has been our Senior Vice President, Deputy General
Counsel and Secretary since October 2000. From May 2000 to October 2000, he
served as our Deputy General Counsel and Secretary. Mr. Sari also served as
Vice President, Law from May 2000 to October 2000 and as Associate General
Counsel from May 1997 to May 2000. Prior to May 1997, Mr. Sari was Vice
President, Legal Affairs for Thrifty PayLess, Inc.
William J. Bratton. Mr. Bratton has served as a director since 1997. Prior
to August 2000, when Mr. Bratton became President of Bratton Group LLC, which
provides criminal justice consulting services, he was a self-employed criminal
justice consultant. From January 1998 to March 2000, Mr. Bratton was President
and Chief Operating Officer of Carco Group, Inc., a provider of employment
background screening services. From April 1996 through 1997, he was Vice
Chairman of First Security Services Corporation and President
44
of its subsidiary, First Security Consulting, Inc. Mr. Bratton was Police
Commissioner of the City of New York from 1994 through April 1996.
Alfred M. Gleason. Mr. Gleason has served as a director since January 2000.
Mr. Gleason is currently a self-employed consultant. Mr. Gleason served as the
President of the Port of Portland Commission in Portland, Oregon, from October
1995 until June 1999. From 1985 until 1995, Mr. Gleason held several positions
with PacifiCorp, including Chief Executive Officer, President and Director.
Mr. Gleason served as a Director of Fred Meyer, Inc. until June 1999.
Leonard I. Green. Mr. Green has served as a director since 1999. Mr. Green
has been an executive officer of Leonard Green & Partners, L.P., an affiliate
of Green Equity Investors III, L.P., since its formation in 1994. Mr. Green
has also been, individually or through a corporation, a partner in a merchant
banking firm affiliated with Leonard Green & Partners, L.P., since its
inception in 1989. Mr. Green is also a director of Communications & Power
Industries, Inc., Liberty Group Publishing, Inc. and Dollar Financial Group,
Inc. Mr. Green was elected as a director pursuant to the October 1999
agreement of Green Equity Investors III, L.P. to purchase 3,000,000 shares of
preferred stock of Rite Aid.
Nancy A. Lieberman. Ms. Lieberman has served as a director since 1996. Ms.
Lieberman has been a partner in the law firm of Skadden, Arps, Slate, Meagher
& Flom LLP since 1987. Skadden, Arps, Slate, Meagher & Flom LLP provides legal
services to Rite Aid.
Stuart M. Sloan. Mr. Sloan has served as a director since June 2000. Mr.
Sloan has been a principal of Sloan Capital Companies, a private investment
company since 1984. Mr. Sloan was also the Chairman of the Board from 1986 to
1998 and the Chief Executive Officer from 1991 to 1996 of Quality Food
Centers, Inc., a supermarket chain. He currently serves on the board of
directors of Anixter International Inc.
Jonathan D. Sokoloff. Mr. Sokoloff has served as a director since 1999. Mr.
Sokoloff has been an executive officer of Leonard Green & Partners, L.P., an
affiliate of Green Equity Investors III, L.P. since its formation in 1994.
Since 1990, Mr. Sokoloff has also been a partner in a merchant banking firm
affiliated with Leonard Green & Partners, L.P. Mr. Sokoloff is also a director
of Twinlab Corporation, Diamond Triumph Auto Glass, Inc., Dollar Financial
Group, Inc. and Gart Sports Company. Mr. Sokoloff was elected as a director
pursuant to the October 1999 agreement of Green Equity Investors III, L.P. to
purchase 3,000,000 shares of preferred stock of Rite Aid.
Leonard N. Stern. Mr. Stern has served as a director since 1986. Mr. Stern
is Chairman of the Board and Chief Executive Officer of The Hartz Group, Inc.
and affiliated companies, a position he has held since 1970. These companies
are engaged in the businesses of the manufacture and sale of pet supplies,
ownership and operation of hotels, real estate development and investing. Rite
Aid purchases pet supplies from The Hartz Mountain Corporation, Inc., which
was owned by the Hartz Group, Inc. until December 31, 2000. Mr. Stern is also
a director of Homes for the Homeless, a nonprofit organization.
45
Executive Officer Compensation
The following table provides a summary of compensation paid during the last
three fiscal years to our current chief executive officer and the four most
highly compensated executive officers who were serving as executive officers
at the end of fiscal 2001.
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------------------------- ----------------------------------
Securities
Underlying
Restricted Option All Other
Name and Principal Other Annual Stock Grants/ LTIP Compensation
Position Fiscal Year Salary (1) Bonus Compensation Awards (2) SARs Payouts (3)
--------- ----------- ---------- ---------- ------------ ---------- ---------- ------- ------------
Robert G. Miller .... 2001 $1,398,654 $1,268,991 $111,100(4) $6,248,438(5) 8,700,000(14) $-- $ --
Chairman & Chief
Executive Officer 2000 328,462 -- -- 4,950,000(6) 3,000,000(15) -- 600,000(21)
Mary F. Sammons ..... 2001 1,013,654 768,930 -- 5,092,186(7) 6,550,000(16) -- 1,447
Director, President
& Chief Operating
Officer 2000 203,076 -- -- 1,650,000(8) 2,000,000(15) -- 200,000(22)
David R. Jessick .... 2001 731,538 575,192 -- 2,734,946(9) 4,025,000(17) -- 609
Senior Executive Vice
President & Chief 2000 158,461 -- -- 825,000(10) 1,000,000(15) -- 150,000(23)
Administrative Office
Elliot S. Gerson .... 2001 511,982 341,106 -- 128,125(11) 491,278(18) -- 2,245
Senior Executive Vice
President & General 2000 408,393 100,000 -- -- 535,000(19) -- --
Counsel
1999 375,000 -- -- -- 75,000 -- --
John T. Standley .... 2001 675,769 528,317 -- 2,734,946(12) 4,025,000(20) -- 85,708
Senior Executive Vice
President and Chief 2000 135,385 -- -- 825,000(13) 1,000,000(15) -- 150,000(24)
Financial Officer
---------------
(1) Mr. Miller, Ms. Sammons, Mr. Jessick and Mr. Standley commenced employment
with us on December 5, 1999. Salary amounts for Mr. Miller, Ms. Sammons,
Mr. Jessick and Mr. Standley include amounts contributed by us to each
such executive officer's account under our special deferred compensation
plan.
(2) Each named executive officer has the right to vote the shares of
restricted stock and to receive any dividends paid on such shares.
(3) "All Other Compensation" includes the following for 2001: For Ms. Sammons,
$1,447 in supplemental life insurance premiums paid by us. For Mr.
Jessick, $609 in supplemental life insurance premiums paid by us. For Mr.
Gerson, $2,245 in supplemental life insurance premiums paid by us. For Mr.
Standley, $85,617 in moving expenses and $91 in supplemental life
insurance premiums paid by us.
(4) Includes $100,424 Mr. Miller received as gross up to cover taxes on
restricted stock granted to him in December 1999 when he commenced
employment.
(5) On June 15, 2000, Mr. Miller was awarded 600,000 shares of restricted
common stock; restrictions on 240,000 shares lapse on June 15, 2001, and
restrictions on 120,000 shares lapse on each of December 15, 2001, June
15, 2002 and December 15, 2002. On November 29, 2000, Mr. Miller was
awarded 75,000 shares of restricted common stock; restrictions on 9,375
shares lapse ratably on a quarterly basis from March 3, 2001 through June
1, 2002, and restrictions on 9,375 shares lapse on each of August 31, 2002
and November 30, 2002. On January 10, 2001, Mr. Miller was awarded 409,091
shares of restricted common stock; restrictions on 163,637 shares will
lapse on June 15, 2001, and restrictions on 81,818 shares will lapse on
each of December 15, 2001, June 15, 2002 and December 15, 2002. At the end
of fiscal year 2001, Mr. Miller held 1,441,383 restricted shares with an
aggregate market value of $8,778,022.
46
(Footnotes continued from previous page)
(6) On December 5, 1999, pursuant to his employment agreement with us, Mr.
Miller was awarded 600,000 shares of restricted common stock. The
restrictions on those shares lapse in thirty-six equal monthly installments
commencing January 7, 2000, unless accelerated upon a change of control of
us.
(7) On June 15, 2000, Ms. Sammons was awarded 600,000 shares of restricted
common stock; restrictions on 240,000 shares lapse on June 15, 2001, and
restrictions on 120,000 shares lapse on each of December 15, 2001, June 15,
2002 and December 15, 2002. On November 29, 2000, Ms. Sammons was awarded
75,000 shares of restricted common stock; restrictions on 9,375 shares of
common stock lapse ratably on a quarterly basis from March 3, 2001 through
June 1, 2002 and restrictions on 9,375 shares lapse on each of August 31,
2002 and November 30, 2002. On January 10, 2001, Ms. Sammons was awarded
72,727 shares of restricted common stock; restrictions on 29,091 shares
lapse on June 15, 2001, restrictions on 14,546 shares lapse on December 15,
2001 and restrictions on 14,545 shares lapse on each of June 15, 2002 and
December 15, 2002. At the end of fiscal 2001, Ms. Sammons held 860,574
restricted shares with an aggregate market value of $5,240,896.
(8) On December 5, 1999, pursuant to her employment agreement with us, Ms.
Sammons was awarded 200,000 shares of restricted common stock. The
restrictions on those shares lapse in thirty-six equal monthly installments
commencing January 7, 2000, unless accelerated upon a change of control of
us.
(9) On June 15, 2000, Mr. Jessick was awarded 336,364 shares of restricted
common stock; restrictions on 134,546 shares lapse on June 15, 2001, and
restrictions on 67,273 shares lapse on each of December 15, 2001, June 15,
2002 and December 15, 2002. On November 29, 2000, Mr. Jessick was awarded
50,000 shares of restricted common stock; restrictions on 6,250 shares of
common stock lapse ratably on a quarterly basis from March 3, 2001 through
June 1, 2002 and restrictions on 6,250 shares lapse on each of August 31,
2002 and November 30, 2002. At the end of fiscal 2001, Mr. Jessick held
441,225 restricted shares with an aggregate market value of $2,687,060.
(10) On December 5, 1999, pursuant to his employment agreement with us, Mr.
Jessick was awarded 100,000 shares of restricted common stock. The
restrictions on those shares lapse in thirty-six equal monthly
installments January 7, 2000, unless accelerated upon a change of control
of us.
(11) On November 29, 2000, Mr. Gerson was awarded 50,000 shares of restricted
common stock; restrictions on 6,250 shares of common stock lapse ratably
on a quarterly basis from March 3, 2001 through June 1, 2002 and
restrictions on 6,250 shares lapse on each of August 31, 2002 and November
30, 2002. At the end of fiscal year 2001, Mr. Gerson held 43,750
restricted shares with an aggregate market value of $266,437.
(12) On June 15, 2000, Mr. Standley was awarded 336,364 shares of restricted
common stock; restrictions on 134,546 shares lapse on June 15, 2001, and
restrictions on 67,273 shares lapse on each of December 15, 2001, June 15,
2002 and December 15, 2002. On November 29, 2000, Mr. Standley was awarded
50,000 shares of restricted common stock; restrictions on 6,250 shares of
common stock lapse ratably on a quarterly basis from March 3, 2001 through
June 1, 2002 and restrictions on 6,250 shares lapse on each of August 31,
2002 and November 30, 2002. At the end of fiscal 2001, Mr. Standley held
441,225 restricted shares with an aggregate market value of $2,687,060.
(13) On December 5, 1999, pursuant to his employment agreement with us, Mr.
Standley was awarded 100,000 shares of restricted common stock. The
restrictions on those shares lapse in thirty-six equal monthly
installments commencing January 7, 2000, unless accelerated upon a change
of control of us.
(14) 4,200,000 of these options replace options that were cancelled on November
20, 2000. For more information, refer to the Option Grants in the 2001
Fiscal Year and the 10 Year Option/SAR Repricing tables herein.
(15) These options were cancelled on November 20, 2000.
(16) 3,050,000 of these options replace options that were cancelled on November
20, 2000. For more information, refer to the Option Grants in the 2001
Fiscal Year and the 10 Year Option/SAR Repricing tables herein.
47
(17) 1,525,000 of these options replace options that were cancelled on November
20, 2000. For more information, refer to the Option Grants in the 2001
Fiscal Year and the 10 Year Option/SAR Repricing tables herein.
(18) 241,278 of these options replace options that were cancelled on November
20, 2000. For more information, refer to the Option Grants in the 2001
Fiscal Year and the 10 Year Option/SAR Repricing tables herein.
(19) 241,278 of these options were cancelled on November 20, 2000.
(20) 1,525,000 of these options replace options that were cancelled on November
20, 2000. For more information, refer to the Option Grants in the 2001
Fiscal Year and the 10 Year Option/SAR Repricing tables herein.
(21) Represents a guaranteed bonus in the amount of $600,000 paid in April 2000
in respect of calendar year 1999 to compensate Mr. Miller for lost bonus
opportunities with his prior employer.
(22) Represents a guaranteed bonus in the amount of $200,000 paid in April 2000
in respect of calendar year 1999 to compensate Ms. Sammons for lost bonus
opportunities with her prior employer.
(23) Represents a guaranteed bonus in the amount of $150,000 paid in April 2000
in respect of calendar year 1999.
(24) Represents a guaranteed bonus in the amount of $150,000 paid in April 2000
in respect of calendar year 1999.
Option Grants in the 2001 Fiscal Year
The following table sets forth certain information regarding options granted
during fiscal year 2001 to the named executive officers, including options
that were granted and cancelled during the fiscal year in connection with the
repricing of such options on November 20, 2000.
Number of % of Total
Securities Options
Underlying Granted to Total
Options Employees in Exercise Expiration Grant Date
Name Granted Fiscal Year Price (1) Date Present Value (2)
---- ---------- ------------ --------- ---------- -----------------
Robert G. Miller....................................... 1,200,000(3) 2.5% $6.50 6/29/10 $3,568,948
1,200,000 2.5% $2.75 6/29/10 775,672
3,000,000(4) 6.3% $2.75 12/05/09 1,406,500
4,500,000 9.4% $4.05 2/13/11 8,825,100
Mary F. Sammons........................................ 2,000,000(4) 4.2% $2.75 12/05/09 937,666
1,050,000(3) 2.2% $6.50 6/29/10 3,122,831
1,050,000 2.2% $2.75 6/29/10 678,712
3,500,000 7.3% $4.05 2/13/11 6,863,966
David R. Jessick....................................... 525,000(3) 1.1% $6.50 6/29/10 1,561,416
525,000 1.1% $2.75 6/29/10 339,356
1,000,000(4) 2.1% $2.75 12/05/09 468,833
2,500,000 5.2% $4.05 2/13/11 4,902,833
Elliot S. Gerson....................................... 26,278(3) 0.1% $8.00 1/17/10 111,899
26,278 0.1% $2.75 1/17/10 14,420
215,000(3) 0.4% $6.50 6/29/10 133,542
215,000 0.4% $2.75 6/29/10 722,195
250,000 0.5% $4.05 2/13/11 490,283
John T. Standley....................................... 525,000(3) 1.1% $6.50 6/29/10 1,561,415
525,000 1.1% $2.75 6/29/10 339,356
1,000,000(4) 2.1% $2.75 12/05/09 468,833
2,500,000 5.2% $4.05 2/13/11 4,902,833
48
---------------
(1) All options have an exercise price equal to the fair market value on the
date of grant. Mr. Miller's option for 3,000,000 shares, Ms. Sammons'
option for 2,000,000 shares, Mr. Jessick's option for 1,000,000 shares and
Mr. Standley's option for 1,000,000 shares vest in monthly installments
over a 36-month period beginning on January 5, 2000. Mr. Miller's option
for 1,200,000 shares, Ms. Sammons' option for 1,050,000 shares, Mr.
Jessick's option for 525,000 shares and Mr. Standley's option for 525,000
shares vest in monthly installments over a 29-month period beginning on
June 29, 2000. Mr. Miller's option for 4,500,000 shares, Ms. Sammons'
option for 3,500,000 shares, Mr. Jessick's option for 2,500,000 shares,
Mr. Gerson's option for 250,000 shares and Mr. Standley's option for
2,500,000 shares vest ratably over a three-year period beginning on the
first anniversary of the date the option was granted. Mr. Gerson's options
for 215,000 shares and 26,278 shares vest ratably over a four-year period
beginning on the first anniversary of the date such options were granted.
(2) The hypothetical present values on the grant date were calculated under
the Black-Scholes option pricing model, which is a mathematical formula
used to value options traded on stock exchanges. The formula considers a
number of assumptions in hypothesizing an option's present value.
Assumptions used to value the options include the stock's expected
volatility rate of 67.17%, projected dividend yield of 0%, a risk-free
rate of return of 6.25% and projected time of exercise being one year
after vesting. The ultimate realizable value of an option will depend on
the actual market value of the common stock on the date of exercise as
compared to the exercise price of the option. Consequently, there is no
assurance that the hypothetical present value of the stock options
reflected in this table will be realized.
(3) These options were cancelled in connection with the repricing of such
options on November 20, 2000 and were replaced with a grant for the same
number of shares as set forth in the next entry on the table.
(4) These options replace options that were granted on December 5, 1999 with
an exercise price of $7.35 that were cancelled in connection with the
repricing of such options on November 20, 2000.
Option Exercises and Year-end Value Table
The following table summarizes the value at March 3, 2001 of all shares
subject to options granted to the named executive officers. No options were
exercised during fiscal year 2001.
Number of Securities Value of
Underlying Unexercised In-the-Money Options
Shares Options at March 3, 2001 at March 3, 2001
Acquired on Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Robert G. Miller ............................... 0 $0 1,497,701 7,202,299 $5,002,321 $18,205,678
Mary F. Sammons ................................ 0 0 1,067,433 5,482,567 3,565,226 13,761,773
David R. Jessick ............................... 0 0 533,716 3,491,284 1,782,615 8,410,885
Elliot S. Gerson ............................... 0 0 556,252 678,748 273,754 1,405,851
John T. Standley ............................... 0 0 533,716 3,491,284 1,782,615 8,410,885
---------------
(1) "In-the-Money" options are options with a base (or exercise) price less
than the market price of the common stock on March 3, 2001. The value of
such options is calculated using a stock price of $6.09, which was the
closing price of our common stock on the NYSE on March 2, 2001.
49
10-year Option/SAR Repricings
The following table sets forth, for all of our executive officers, all
option repricings during the period March 3, 1991 through March 3, 2001.
During such period, there was one repricing of options with respect to the
options set forth below.
Number of Market Price Exercise
Securities of Stock At Price At
Underlying Time of Time of New
Options/SARs Repricing Or Repricing or Exercise
Repriced or Amendment Amendment Price
Name(1) Date Amended (#) ($) ($) ($)
------- -------- ------------ ------ ------ ------
Robert G. Miller.. 11/20/00 3,000,000 $ 2.75 $ 7.35 $ 2.75
11/20/00 1,200,000 $ 2.75 $ 6.50 $ 2.75
Mary F. Sammons... 11/20/00 2,000,000 $ 2.75 $ 7.35 $ 2.75
11/20/00 1,050,000 $ 2.75 $ 6.50 $ 2.75
David R. Jessick.. 11/20/00 1,000,000 $ 2.75 $ 7.35 $ 2.75
11/20/00 525,000 $ 2.75 $ 6.50 $ 2.75
Elliot S. Gerson.. 11/20/00 215,000 $ 2.75 $ 6.50 $ 2.75
11/20/00 26,278 $ 2.75 $ 8.00 $ 2.75
John T. Standley.. 11/20/00 1,000,000 $ 2.75 $ 7.35 $ 2.75
11/20/00 525,000 $ 2.75 $ 6.50 $ 2.75
James P. Mastrain. 11/20/00 33,546 $ 2.75 $7.935 $ 2.75
11/20/00 300,000 $ 2.75 $ 6.50 $ 2.75
Christopher Hall.. 11/20/00 350,000 $ 2.75 $ 7.00 $ 2.75
11/20/00 250,000 $ 2.75 $ 6.50 $ 2.75
Eric Sorkin....... 11/20/00 75,000 $ 2.75 $5.625 $ 2.75
11/20/00 235,000 $ 2.75 $ 6.50 $ 2.75
Robert B. Sari.... 11/20/00 100,000 $ 2.75 $ 7.00 $ 2.75
11/20/00 50,000 $ 2.75 $ 6.50 $ 2.75
Alex Grass(2)..... 2/7/94 400,000 $18.50 $20.50 $18.50
Martin Grass(2)... 2/7/94 500,000 $18.50 $20.50 $18.50
Franklin Brown(2). 2/7/94 137,500 $18.50 $20.50 $18.50
Timothy Noonan(2). 2/7/94 137,500 $18.50 $20.50 $18.50
Alex Schamroth(2). 2/7/94 137,500 $18.50 $20.50 $18.50
Length of
Original
Option Term
Remaining At
Date of
Repricing Or
Name(1) Amendment
------- -----------------
Robert G. Miller ........................................... 9 years
9 years, 7 months
Mary F. Sammons ............................................ 9 years
9 years, 7 months
David R. Jessick ........................................... 9 years
9 years, 7 months
Elliot S. Gerson ........................................... 9 years, 7 months
9 years, 2 months
John T. Standley ........................................... 9 years
9 years, 7 months
James P. Mastrain .......................................... 9 years, 2 months
9 years, 7 months
Christopher Hall ........................................... 9 years, 2 months
9 years, 7 months
Eric Sorkin ................................................ 9 years, 4 months
9 years, 7 months
Robert B. Sari ............................................. 9 years, 6 months
9 years, 7 months
Alex Grass(2) .............................................. 9 years
Martin Grass(2) ............................................ 9 years
Franklin Brown(2) .......................................... 9 years
Timothy Noonan(2) .......................................... 9 years
Alex Schamroth(2) .......................................... 9 years
---------------
(1) See the table of directors, executive officers and key employees for titles
of the current executive officers.
(2) In connection with our consummation of a "dutch auction" self tender offer,
in which we repurchased from our stockholders an aggregate of 2,077,271
shares of our common stock at a purchase price of $18.50 per share, on
February 7, 1994, we repriced outstanding stock options to purchase an
aggregate of 2,157,250 shares of our common stock. On the date of such
repricing, the closing sale price of our common stock as reported on the
NYSE was $18.50. At such time, Alex Grass was the Chairman and Chief
Executive Officer; Martin Grass was President and Chief Operating Officer;
Franklin Brown was Executive Vice President; Timothy Noonan was Executive
Vice President and Alex Schamroth was Executive Vice President. The market
and exercise prices in the table have been adjusted to reflect the two-for-
one stock split on the Common Stock that occurred on February 3, 1998.
The Executive Retirement Plan
We have established the Non-Qualified Executive Retirement Plan (the "Plan")
to provide retirement benefits to long-term employees 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 employees.
Participants generally are entitled to receive benefits upon retirement after
age 65 or upon death, in which case any length of service requirement is
disregarded.
50
Generally, eligible participants receive an annual benefit, payable monthly
over 15 years, equal to a percentage, ranging from 40% to 60%, of the highest
base salaries and highest bonus paid or accrued for each participant within
the 10 fiscal years prior to the date of the event giving rise to payment of
the benefit.
The Plan provides that benefits will not be paid to employees whose
employment is terminated for any reason other than retirement, disability or
death. Additionally, if, during the time a benefit is being paid to a former
employee, it is determined that the former employee committed an act that
could have resulted in a good cause discharge, we will cease paying benefits
to the former employee.
Mr. Miller, Ms. Sammons, Mr. Jessick and Mr. Standley were credited with 15
years of service under the Plan effective in December 1999 pursuant to their
employment agreements.
Because it is not possible to determine what the individual annual base
salary and annual bonus of the named executive officers will be assuming
retirement at normal retirement age, we cannot estimate the annual benefits
payable at normal retirement age for each of the named executive officers.
However, by way of example, if each were to have attained normal retirement
age and 20 or more years of credited service under the Plan, based upon last
year's annual salary and annual bonus, it is estimated that Mr. Miller would
be entitled to receive $1,361,395, Ms. Sammons would be entitled to receive
$1,001,358, Mr. Jessick would be entitled to receive $705,115, Mr. Standley
would be entitled to receive $676,990 and Mr. Gerson would be entitled to
receive $504,664 as annual benefits payable upon retirement.
Executive Employment Agreements
On December 5, 1999, we entered into employment agreements with Robert G.
Miller, Mary F. Sammons, David R. Jessick and John T. Standley, and, on
November 16, 2000, we entered into an employment agreement with Elliot S.
Gerson. Pursuant to their individual employment agreements:
o Mr. Miller was appointed as our Chief Executive Officer and elected as
Chairman of our Board of Directors;
o Ms. Sammons was appointed as our President and Chief Operating Officer and
was appointed to our Board of Directors;
o Mr. Jessick was appointed as our Senior Executive Vice President and Chief
Administrative Officer;
o Mr. Gerson was appointed as our Senior Executive Vice President and
General Counsel; and
o Mr. Standley was appointed as our Executive Vice President and Chief
Financial Officer and is now our Senior Executive Vice President and Chief
Financial Officer.
Term. The term of each executive's employment agreement commenced on the
date of his or her employment agreement and, unless terminated earlier, will
terminate on the third anniversary (second anniversary in the case of Mr.
Gerson), but will automatically renew for an additional year on each
anniversary of the effective date of the agreement unless either we or the
executive provides the other with notice of non-renewal at least 180 days
prior to such an anniversary.
Salary and Incentive Bonus. The respective agreements provide each
executive with a base salary and incentive compensation, including, with
respect to the 2001 fiscal year:
o Mr. Miller was entitled to receive an annual base salary of not less than
$1,250,000, however, Mr. Miller volunteered to receive a base salary of
not less than $1,000,000. Mr. Miller received a bonus of $868,991 and a
special bonus of $400,000 in recognition of his efforts in connection with
our refinancing efforts in the 2001 fiscal year, and he has the
opportunity to receive future annual bonuses that shall equal or exceed
his annual base salary then in effect if our performance meets certain
annual target goals based on the business plan developed by Management and
the Board of Directors.
o Ms. Sammons was entitled to receive an annual base salary of not less than
$900,000. She received a bonus of $468,930 pursuant to her employment
agreement and a special bonus of $300,000 in connection with the
refinancing and in the future may, if our performance meets the targets,
receive an annual bonus that, if paid, will equal or exceed 75% of her
annual base salary then in effect.
51
o Mr. Jessick was entitled to receive an annual base salary of not less than
$600,000. He was awarded a bonus of $275,192 pursuant to his employment
agreement and a special bonus of $300,000 in connection with the
refinancing. If our performance meets the targets, Mr. Jessick will be
paid an annual bonus that will equal or exceed 60% of his annual base
salary then in effect.
o Mr. Gerson was entitled to receive an annual base salary of not less than
$500,000. He was awarded a bonus of $191,106 pursuant to his employment
agreement and a special bonus of $150,000 in connection with the
refinancing. If our performance meets the targets, Mr. Gerson will be paid
an annual bonus that will equal or exceed 50% of his annual base salary
then in effect.
o Mr. Standley was entitled to receive an annual base salary of not less
than $600,000. He was awarded a bonus of $228,317 pursuant to his
employment agreement and a special bonus of $300,000 in connection with
the refinancing. If our performance meets the targets, Mr. Standley will
be paid an annual bonus that will equal or exceed 50% of his annual base
salary then in effect.
Other Benefits. Pursuant to their employment agreements, each of the
executives is also entitled to participate in our fringe benefit and
perquisite programs and savings plans.
Restricted Stock and Options. Pursuant to their employment agreements and
individual stock option agreements, in December 1999, Mr. Miller, Ms. Sammons,
Mr. Jessick and Mr. Standley also received awards of restricted common stock
and were granted options to purchase additional shares of our common stock as
follows:
o Mr. Miller was granted an option to purchase 3,000,000 shares of common
stock and was awarded 600,000 shares of restricted common stock.
o Ms. Sammons was granted an option to purchase 2,000,000 shares of common
stock and was awarded 200,000 shares of restricted common stock.
o Mr. Jessick was granted an option to purchase 1,000,000 shares of common
stock and was awarded 100,000 shares of restricted common stock.
o Mr. Standley was granted an option to purchase 1,000,000 shares of common
stock and was awarded 100,000 shares of restricted common stock.
All of the options granted and restricted common stock awarded to each of
such executives listed above vest in thirty-six equal monthly installments
commencing January 5, 2000.
Other Provisions. Each of Mr. Miller's and Mr. Jessick's employment
agreement provides for him to be based in Portland, Oregon and that he be
provided, for our convenience, with an apartment in the vicinity of our
corporate headquarters in the Harrisburg, Pennsylvania area.
Pursuant to his employment agreement, Mr. Miller is entitled to recommend
two persons to serve on our Board of Directors. Mr. Miller has made two Board
of Directors recommendations to date and as a result, Alfred Gleason and
Stuart Sloan were appointed to the Board of Directors in January 2000 and June
2000, respectively.
Termination of Employment. Upon written notice, the employment agreement of
each of the executives is terminable by either us or the individual executive
seeking termination.
If Mr. Miller, Ms. Sammons, Mr. Jessick or Mr. Standley is terminated by us
"without cause" or by an executive for "good reason" (in each case, as defined
in their employment agreement), then the terminated executive will be entitled
to receive:
o an amount equal to three times the sum of the individual executive's
annual base salary and target bonus plus any accrued but unpaid salary and
bonus, with the maximum bonus that the executive is eligible to earn being
pro-rated through the date of termination;
o the deferred compensation amounts that would otherwise have been credited
to the executive pursuant to the Special Deferred Compensation Plan
referred to below had the executive continued employment
52
with us through the end of the then-remaining term of the employment
agreement and certain medical benefits; and
o all of the executive's stock options will immediately vest and be
exercisable for the remainder of their stated terms, the restrictions on
the restricted common stock will immediately lapse and any performance or
other conditions applicable to any other equity incentive awards will be
considered to have been satisfied.
If Mr. Gerson is terminated by us "without cause" or by him for "good
reason" (as such terms are defined in his employment agreement), then he will
be entitled to receive:
o an amount equal to two times the sum of his annual base salary and target
bonus plus any accrued but unpaid salary and bonus, with the maximum bonus
that the executive is eligible to earn being pro-rated through the date of
termination; and
o all of his stock options will immediately vest and be exercisable,
generally, for a period of 90 days following the termination of employment
and the restrictions on the restricted common stock will immediately lapse
to the extent his options would have vested and restrictions would have
lapsed had he remained employed by us for two years following the
termination.
If we terminate any of the executives "for cause" (as defined in the
employment agreements),
o we will pay him or her all accrued benefits,
o any portion of any then-outstanding stock option grant that was not
exercised prior to the date of termination will immediately terminate, and
o any portion of any restricted stock award, or other equity incentive
award, as to which the restrictions have not lapsed or as to which any
other conditions were not satisfied prior to the date of termination will
be forfeited.
Under Mr. Miller's, Ms. Sammons's, Mr. Jessick's and Mr. Standley's
employment agreements, any termination of employment by the executive within
the six month period commencing on the date of a "change in control" of us
will be treated as a termination of employment by the executive for "good
reason." Under Mr. Gerson's employment agreement, upon a "change in control"
of us, all of his stock options will immediately vest and be exercisable and
any restrictions on the restricted stock will immediately lapse. Each
employment agreement provides that the executive will receive an additional
payment to reimburse the executive for any excise taxes imposed pursuant to
Section 4999 of the Internal Revenue Code. Each employment agreement also
provides for certain benefits upon termination of the executive by reason of
death or disability, by us "for cause" or by the executive other than for
"good reason." The employment agreement of each executive prohibits the
executive from competing with us during his or her employment and for a period
of one year, or with respect to Mr. Gerson, two years, thereafter.
Pursuant to amendments to the employment agreements with Mr. Miller and Ms.
Sammons dated May 7, 2001, we have agreed to pay them, as an additional
incentive bonus, the difference between the amount called for under their
severance agreements with their prior employer and the amount they actually
receive from that employer, plus interest at the rate of 9% per annum from
December 5, 1999. Mr. Miller and Ms. Sammons were to receive $5,022,685 and
$1,624,000, respectively, under those severance agreements, and they each
retain control over their claims against their former employer. The amendments
to the employment agreements provide generally that we will pay such bonuses
within five days after January 1, 2002 if the executive is still employed (or,
in Mr. Miller's case, a member of the Board of Directors) on that date.
However, the bonuses will be paid within five days after an earlier
termination of employment (i) by reason of death or disability, by us without
"cause" or by the executive for "good reason," or (ii) for any reason upon or
following a "change in control" (all as defined in the executive's employment
agreement). Finally, in the case of Mr. Miller, the payment will be made
before January 1, 2002 within five days after the date he ceases to be both an
employee and a Director (provided he does not cease to be a Director by reason
of either a voluntary resignation or simultaneously with or following his
termination of employment for cause). No bonus payment will be made if the
executive's employment is terminated for cause before January 1, 2002 and
before a change in control.
53
If either executive is paid any of the bonus prior to the final
determination of his or her claim against the prior employer, the executive
must repay to us any amount that is paid to him or her by the former employer,
net of any excess taxes payable by the executive on account of the repayment
and any legal expenses not reimbursed by us under the employment agreement.
Neither executive is obligated to reimburse us more than the amount of the
bonus paid to him or her. If Mr. Miller's employment is terminated by him
without good reason or by us for cause between January 1, 2002 and December 5,
2002, there has not been a change in control of us, and Mr. Miller no longer
serves as a Director (by reason of a voluntary resignation or a removal
simultaneous with an employment termination for cause), Mr. Miller will be
entitled to retain only a portion of the bonus that is prorated for the number
of days between December 5, 1999 and the date of termination.
Special Deferred Compensation Plan
In addition to the base salary and bonus provisions of the executives'
employment agreements, we established the Special Deferred Compensation Plan
for the benefit of select members of its management team, including Mr.
Miller, Ms. Sammons, Mr. Jessick and Mr. Standley. Under this plan, we credit
a specific sum to individual accounts established for each of Mr. Miller, Ms.
Sammons, Mr. Jessick and Mr. Standley. The sums are credited on the first day
of each month during the term of their employment with us. Each of Mr. Miller,
Ms. Sammons, Mr. Jessick and Mr. Standley is fully vested, at all times, in
his or her account balance; although, generally they may not receive payments
from their accounts until three years after an election to receive a payment.
Each month, $20,000 is credited to Mr. Miller's account, $15,000 is credited
to Ms. Sammons' account and $10,000 is credited to each of Mr. Jessick's and
Mr. Standley's account.
Under this plan, the Executives are able to direct the investment of the
amounts credited to their individual accounts by selecting one or more
investment vehicles from a group of deemed investments offered pursuant to the
plan.
Compensation Committee Interlocks and Insider Participation
None of our executive officers, directors or Compensation Committee members
currently serve, or have in the past served, on the compensation committee of
any other company whose directors and executive officers have served on our
Compensation Committee.
54
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2001, certain information
concerning the beneficial shareholdings of (a) each director, (b) each nominee
for director, (c) each executive officer named in our summary compensation
table appearing elsewhere herein, (d) each holder of more than five percent of
our common stock and (e) all directors and executive officers as a group
(based on 493,346,010 shares of common stock outstanding as of such date).
Each of the persons named below has sole voting power and sole investment
power with respect to the shares set forth opposite his or her name, except as
otherwise noted.
Number of Common Shares
Beneficial Owners Beneficially Owned (1) Percentage of Class
----------------- ----------------------- --------------------
Executive Officers and
Directors:
William J. Bratton ........... 14,889(2) *
Elliot S. Gerson ............. 665,004(3) *
Alfred M. Gleason ............ 106,189(4) *
Leonard I. Green ............. 65,429,905(5) 11.7%
David R. Jessick ............. 1,307,498(6) *
Nancy A. Lieberman ........... 7,000 *
Robert G. Miller ............. 3,940,068(7) *
Mary F. Sammons .............. 2,565,735(8) *
Stuart M. Sloan .............. 10,989 *
Jonathan D. Sokoloff ......... 64,941,341(9) 11.6%
John T. Standley ............. 1,295,368(10) *
Leonard N. Stern ............. 50,989 *
All executive officers and
directors (18 persons) ....... 77,133,093 13.8%
5% Stockholders:
FMR Corporation .............. 45,627,250(11) 9.2%
Green Equity Investors III,
L.P. ......................... 64,435,905(12) 11.5%(13)
J.P. Morgan Chase & Co. ...... 38,923,836(14) 7.9%
---------------
* Percentage less than 1% of class.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under Exchange Act, thereby including options exercisable within 60
days of June 30, 2001.
(2) This amount includes 400 shares owned by Mr. Bratton's wife.
(3) This amount includes 610,002 shares which may be acquired within 60
days by exercising stock options, 1,002 shares in Mr. Gerson's 401(k)
account and 43,750 restricted shares.
(4) This amount includes 16,000 shares owned by Mr. Gleason's wife.
(5) This amount includes 64,435,905 shares beneficially owned by Green
Equity Investors III, L.P., which is affiliated with Leonard Green &
Partners, L.P., of which Mr. Green is an executive officer and equity
owner, 990,000 shares owned by Verdi Group, Inc., over which Mr. Green
has beneficial ownership.
(6) This amount includes 809,004 shares which may be acquired within 60
days by exercising stock options and 486,364 restricted shares.
(7) This amount includes 2,245,977 shares which may be acquired within 60
days by exercising stock options and 1,684,091 restricted shares.
(8) This amount includes 1,618,008 shares which may be acquired within 60
days by exercising stock options and 947,727 restricted shares.
(9) This amount includes 64,435,905 shares beneficially owned by Green
Equity Investors III, L.P., which is affiliated with Leonard Green &
Partners, L.P., of which Mr. Sokoloff is an executive officer and
equity owner.
(10) This amount includes 809,004 shares which may be acquired within 60
days by exercising stock options and 486,364 restricted shares.
55
(11) This amount, which is disclosed in a report on Schedule 13G dated June
12, 2001 by FMR Corporation, includes 38,957,260 shares in respect of
which Fidelity Management & Research Company holds sole dispositive
power and 4,316,090 shares over which Fidelity Management Trust Company
holds sole dispositive power (including 1,691,890 shares over which it
also holds voting power). Both Fidelity Management Research Company and
Fidelity Management Trust Company are wholly-owned subsidiaries of FMR
Corporation. This amount also includes 2,353,900 shares over which
Fidelity International Limited holds sole voting and dispositive power.
A partnership controlled by Edward C. Johnson 3d, who also controls FMR
Corporation, has the right to cast 39.89% of the votes cast by holders
of Fidelity International Limited voting stock. FMR Corporation and
Fidelity International Limited state that the shares held by Fidelity
International Limited need not be aggregated for the purposes of
Section 13(d) of the Securities Act of 1934, as amended, however, FMR
Corporation has voluntarily filed its report as if all the shares were
beneficially owned by FMR Corporation. Abigail P. Johnson and Edward C.
Johnson 3d, together with members of their family, are the predominant
owners of the Class B shares of common stock of FMR Corporation,
representing approximately 49% of the voting power of FMR Corporation.
Ms. Johnson owns 24.5% of the voting stock and is a director of FMR
Corporation. Mr. Johnson owns 12.0% of the voting stock and is Chairman
of FMR Corporation. Members of the Johnson family and other Class B
Stockholders are parties to a voting agreement under which each party
agrees to vote its Class B Shares in accordance with the vote of the
majority vote of shares of the parties.
(12) Green Equity Investors III, L.P. beneficially owns 64,435,905 shares of
common stock. This number represents the number of shares issuable
within 60 days of June 30, 2001 upon the conversion of convertible
preferred stock.
(13) Based upon the number of shares outstanding as of June 30, 2001 and
assuming conversion of all Class B preferred stock by Green Equity
Investors III, L.P.
(14) This amount, as reflected in a report on Schedule 13G/A dated February
14, 2001 and Forms 4 filed on March 12, March 13 and April 10, 2001
filed by J.P. Morgan Chase & Co., consists of 38,923,836 shares of
common stock, including 2,500,000 shares where there is a right to
acquire, of which the reporting person claims sole voting and
dispositive power over 38,923,836 shares.
56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 2001, we paid to J.P. Morgan Chase & Co., ("JPMorganChase") and
its affiliates fees and other amounts in connection with our financing
activities, including the refinancing in June 2000, of $20.5 million.
JPMorganChase is a beneficial owner of more than 5% of our common stock and is
the parent company of the Chase Manhattan Bank, one of our lenders. We
anticipate paying JPMorganChase and its affiliates additional fees and other
amounts for services in connection with the financing activities described
under "Prospectus Summary--Refinancing Transactions" and related transactions
in the aggregate of approximately $13.7 million and may pay it additional
compensation for services in connection therewith in amounts to be determined.
In June 2001, an affiliate of JPMorganChase exchanged $9,825,000 aggregate
principal amounts of our 10.5% Notes due 2002 for 1,136,108 shares of our
common stock. These shares of common stock are included in this prospectus.
In June 2000, an affiliate of JPMorganChase and another financial
institution participated in the refinancing of certain of our debt by agreeing
to purchase $93.2 million of 10.50% 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 JPMorganChase, exchanged an aggregate of $284.8 million of
their loans outstanding under the PCS credit facility, the RCF credit facility
and a $300.0 million demand note into an aggregate of 51,785,434 shares of our
common stock at an exchange rate of $5.50 per share.
Leonard Green and Jonathan D. Sokoloff, members of our Board of Directors,
are equity owners of Leonard Green & Partners, L.P. During fiscal year 2001,
we paid Leonard Green & Partners, L.P. a $3,000,000 fee for services provided
in connection with the financial restructuring transactions which we completed
in June 2000 and reimbursed its out-of-pocket expenses. We also paid Leonard
Green & Partners, L.P. a $2,500,000 fee for services provided in connection
with the sale of PCS Health Services, Inc. In October 1999, we agreed to pay
Leonard Green & Partners, L.P. an annual fee of $1 million for its consulting
services. This fee was increased to $1.5 million at the time of the June 2000
restructuring transactions. The consulting agreement also provides for the
reimbursement of out-of-pocket expenses incurred by Leonard Green & Partners,
L.P. We have agreed to register the common stock issuable upon conversion of
the Series B preferred stock and to pay all expenses and fees (other than
underwriting discounts and commission) related to any registration. In
addition, we paid Leonard Green & Partners, L.P. a fee of $2.5 million for
financial advisory services in connection with the refinancing.
The Hartz Mountain Corporation, which was owned and controlled by Leonard N.
Stern, sold merchandise in the ordinary course of business to us and our
subsidiaries in the approximate amount of $5,000,000 during the year ended
December 31 2000. Mr. Stern sold his interest in The Hartz Mountain
Corporation on December 29, 2000.
On June 27, 2001 we sold an aggregate of 28,948,300 shares of our common
stock to certain affiliates of FMR Corporation at a purchase price of $7.50
per share. FMR Corporation voluntarily filed a report on Schedule 13d dated
June 12, 2001 disclosing that it may be deemed to beneficially own more than
5% of our common stock.
On June 27, 2001, we exchanged an aggregate of $152.025 million principal
amount of our 10.5% senior secured notes due 2002 for $152.025 million of new
12.5% notes due 2006 to affiliates of FMR Corporation. In connection with such
exchange, we also issued to the exchanging holders common stock purchase
warrants to purchase an aggregate of 3.0 million shares of our common stock at
an exercise price of $6.00 per share.
The law firm of Skadden, Arps, Slate, Meagher & Flom LLP provides legal
services to us. Nancy Lieberman, one of our directors, is a partner of that
law firm. Fees paid by us to Skadden, Arps, Slate, Meagher & Flom LLP did not
exceed five percent of the law firm's gross revenues for its last fiscal year.
On June 15, 2001, in connection with our grant of certain restricted shares
of our common stock to our executive officers and each such officer's
agreement not to sell these shares earlier than the expiration of the
57
third trading day following the date we announce our earnings for our fiscal
year 2002, we have made loans to each of these officers in order to cover the
officer's federal and state withholding taxes. Each loan is non-recourse and
is secured solely by the shares of common stock to which the loan relates.
Each loan bears interest at the rate of 4.25% per annum and is due and payable
upon the earlier of June 15, 2002 or the date the officer sells the awarded
shares of common stock. As of June 30, 2001, we had outstanding $5.5 million
of these loans, including accrued and unpaid interest. The following are loans
in excess of $60,000 as of June 30, 2001.
Executive Officer Loan Amount
----------------- -----------
Robert G. Miller $2,092,180
Mary F. Sammons $1,250,336
David R. Jessick $ 637,645
John T. Standley $ 637,645
Christopher Hall $ 156,547
58
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 1,000,000,000 shares of common
stock and 20,000,000 shares of preferred stock.
Common Stock
As of June 30, 2001, there were 493,346,010 shares of common stock issued
and outstanding.
The holders of common stock are entitled to receive ratably, from funds
legally available for the payment thereof, dividends when and as declared by
resolution of our Board of Directors, subject to any preferential dividend
rights granted to the holders of any outstanding preferred stock.
Each holder of common stock is entitled to one vote for such share
registered in his name on our books on all matters submitted to a vote of
stockholders. Except as otherwise provided by law, the holders of common stock
vote as one class. The shares of common stock do not have cumulative voting
rights. As a result, subject to the voting rights of the holders of any shares
of our preferred stock, including the voting rights of the Series B preferred
stock, which may at the time be outstanding, the holders of common stock
entitled to exercise more than 50% of the voting rights in an election of
directors can elect 100% of the directors to be elected in a particular year
if they choose to do so. In such event, the holders of the remaining common
stock voting for the election of directors will not be able to elect any
persons to our Board of Directors.
Holders of our common stock do not have preemptive, subscription, redemption
or conversion rights. The outstanding shares of common stock are duly
authorized, validly issued, fully paid and nonassessable.
Preferred Stock
Under the Rite Aid Charter, our Board has the authority, without further
stockholder action, to issue from time to time up to a maximum of 20,000,000
shares of preferred stock, in one or more series and for such consideration as
may be fixed from time to time by the Board, and to fix before the issuance of
any shares of preferred stock of a particular series, the designation of such
series, the number of shares to comprise such series, the dividend rate or
rates payable with respect to the shares of such series, the redemption price
or prices, if any, and the terms and conditions of any redemption, the voting
rights, any sinking fund provisions for the redemption or purchase of the
shares of such series, the terms and conditions upon which the shares are
convertible or exchangeable, if they are convertible or exchangeable, and any
other relative rights, preferences and limitations pertaining to such series.
Series B Cumulative Pay-In-Kind Preferred Stock
As of June 30, 2001, there were 3,427,441.7884 shares of Series B cumulative
pay-in-kind preferred stock outstanding. As of such date, the outstanding
shares of Series B preferred stock were convertible into 62,317,123 shares of
our common stock. The outstanding shares of Series B preferred stock are duly
authorized, validly issued, fully paid and nonassessable.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of us, holders of Series B preferred stock shall be entitled to
receive out of our assets legally available for distribution to stockholders,
before any distribution of assets is made to holders of common stock or any
other class or series of capital stock ranking junior to the Series B
preferred stock, a liquidation preference of $100, subject to certain
adjustments, plus all accrued and unpaid dividends thereon. If, upon any
voluntary or involuntary liquidation, dissolution or winding up of us, the
amounts payable to holders of Series B preferred stock and any other shares of
preferred stock ranking as to such distribution on a parity with the Series B
preferred stock are not paid in full, the holders of Series B preferred stock
and of such other shares of preferred stock will share ratably in any such
distribution of our assets in proportion to the full respective preferential
amounts to which they are entitled.
Each holder of Series B preferred stock is entitled to vote with holders of
common stock and each holder of Series B preferred stock is entitled to one
vote for each share of common stock issuable upon conversion of such holder's
Series B preferred stock. The holders of Series B preferred stock are entitled
to
59
vote separately as a class to elect two directors to our Board of Directors.
Leonard T. Green and Jonathan D. Sokoloff are the directors elected by the
holders of Series B preferred stock.
Each share of Series B preferred stock is convertible into the number of
shares of our common stock equal to the liquidation preference divided by the
conversion price, which is $5.50 per share, subject to certain anti-dilution
adjustments. Without the prior consent of the holders of a majority of the
Series B preferred stock, we may not authorize, create or issue any securities
that are senior or pari passu to the Series B preferred stock, or take certain
other actions that would adversely affect the rights, privileges and
preferences of the Series B preferred stock.
Each holder of Series B preferred stock is entitled to receive cumulative
preferential dividends at the rate of 8.0% on the liquidation preference,
payable quarterly in arrears. Dividends shall be paid, at our option, either
in cash, additional shares of Series B preferred stock, or a combination
thereof. From time to time, on or after October 25, 2004, we may redeem shares
of Series B preferred stock at 105% of the liquidation preference plus any
unpaid partial dividends to the applicable redemption date. Holders of Series
B preferred stock have no preemptive rights to subscribe for any additional
securities which we may issue. We have granted the holders of Series B
preferred stock certain registration rights with respect to the Series B
preferred stock and the common stock into which the Series B preferred stock
may be converted.
Series C Convertible Preferred Stock
On June 27, 2001, we issued 2,121,677 shares of Series C convertible
preferred stock. The Series C preferred stock is convertible into common stock
immediately upon the earlier of (i) the effectiveness of a registration
statement registering the shares of common stock into which the Series C
preferred stock are convertible for resale under the Securities Act, and (ii)
a merger or consolidation of us with or into any other corporation in which we
are not the surviving corporation or the sale, lease or conveyance of all or
substantially all of our property, assets or business. Each share of Series C
preferred stock is convertible into 10 shares of common stock, subject to
anti-dilution adjustments to the conversion rate. Accordingly, upon
effectiveness of the registration statement of which this prospectus forms a
part, the Series C preferred stock will convert into 21,216,770 shares of our
common stock.
With respect to dividends and any distributions upon liquidation, the Series
C preferred stock ranks senior to our common stock but junior to the Series B
preferred stock.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of us, holders of the Series C preferred stock will be entitled to
receive, in preference to any payments on our common stock but after payments
on the Series B preferred stock, a liquidation preference of $62.52 per share,
plus any accrued and unpaid dividends.
Each holder of Series C preferred stock is entitled to receive cumulative
dividends at the rate of 8.7455% per annum of the liquidation preference,
payable quarterly in arrears. If we declare a distribution in securities of
other persons, debt instruments issued by us or any other person or any other
assets, holders of the Series C preferred stock will be entitled to
participate in the distribution proportionately as though those holders were
holders of the common stock into which the Series C preferred stock is
convertible as of the record date for the distribution.
Each holder of Series C preferred stock is entitled to vote with the holders
of common stock and each holder is entitled to one vote for each whole share
of common stock issuable upon conversion of the holder's Series C preferred
stock.
Charter and By-Law Provisions
The Rite Aid Charter specifies that our Board of Directors shall be divided
into three classes, as nearly equal in number as possible, and shall consist
of not less than three nor more than 15 directors elected for three-year
staggered terms. The term of one class of directors expires at each annual
meeting of stockholders. Our By-laws provide that the number of directors on
the Board may be fixed by the Board only, or if the number is not fixed, the
number will be seven. The number of directors may be increased or decreased by
the Board only. In the interim period between annual meetings of stockholders
or of special meetings of
60
stockholders, vacancies and newly created directorships may be filled by the
Board. Any directors so elected will hold office until the next election of
the class to which such directors have been elected. The Board has been fixed
at and currently consists of 9 directors.
The Rite Aid Charter requires that any mergers, consolidations asset
dispositions and other transactions involving a beneficial owner of 10% or
more of the voting power of the then outstanding classes of stock entitled to
vote in the election of directors be approved, unless certain conditions are
satisfied, by the affirmative vote of the holders of shares representing not
less than 75% of the voting stock. These special voting requriements do not
apply if the transaction is approved by a majority of the Continuing Directors
(as defined below) or the consideration offered to our stockholders meets
specified fair price standards (including related procedural requirements as
to the form of consideration and continued payment of dividends). "Continuing
Director" as defined in the Rite Aid Charter means a member of our Board who
was not affiliated with a Related Person (as defined below) and was a member
of the Board prior to the time that the Related Person acquired the last
shares of common stock entitling such Related Person to exercise, in the
aggregate, in excess of 10% of the total voting power of all classes of voting
stock, or any individual, corporation, partnership, person or other entity
("Person") recommended to succeed a Continuing Director by a majority of
Continuing Directors. "Related Person," as defined in the Rite Aid Charter,
means any Person or affiliate or associate of such Person, which has
beneficial ownership directly or indirectly of shares of stock of Rite Aid
entitling such Person to exercise more than 10% of the total voting power of
all classes of voting stock.
The Rite Aid Charter also provides that any corporate action either (i)
taken at a special meeting of stockholders called by the Board, a majority of
whose members are not Continuing Directors, or (ii) approved by written
consent of stockholders, shall require the approval of not less than 75% of
the then outstanding voting stock.
Change of Control
Section 203 of the DGCL prohibits generally a public Delaware corporation,
including Rite Aid, from engaging in a business combination (as defined below)
with an interested stockholder (as defined below) for a period of three years
after the date of the transaction in which an interested stockholder became
such, unless: (i) the board of directors of such corporation approved, prior
to the date such interested stockholder became such, either such business
combination or such transaction; (ii) upon consummation of such transaction,
such interested stockholder owns at least 85% of the voting shares of such
corporation (excluding specified shares) outstanding at the time the
transaction commenced; or (iii) such business combination is approved by the
board of directors of such corporation and authorized by the affirmative vote
(at an annual or special meeting and not by written consent) of at least 66 2/
3% of the outstanding voting shares of such corporation (excluding shares held
by such interested stockholder). A "business combination" includes (i)
mergers, consolidations and sales or other dispositions of 10% or more of the
assets of a corporation to or with an interested stockholder, (ii) certain
transactions resulting in the issuance or transfer to an interested
stockholder of any stock of such corporation or its subsidiaries, and (iii)
certain other transactions resulting in a financial benefit to an interested
stockholder. An "interested stockholder" is a person who owns (or, if such
person is an affiliate or associate of the corporation, within a three-year
period did own) 15% or more of a corporation's stock entitled to vote
generally in the election of directors and, the affiliates and associates of
such person.
Indemnification of Officers and Directors
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding (i) if such person acted in good faith and in a manner that person
reasonably believed to be in or not opposed to the best interests of the
corporation and
61
(ii) with respect to any criminal action or proceeding, if he or she had no
reasonable cause to believe such conduct was unlawful. In actions brought by
or in the right of the corporation, a corporation may indemnify such person
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit if such person acted in good faith and in a manner that person reasonable
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification may be made in respect of any claim, issue or
matter as to which that person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person in fairly and reasonable
entitled to indemnification for such expenses which the Court of Chancery or
other such court shall deem proper. To the extent that such person has been
successful on the merits or otherwise in defending any such action, suit or
proceeding referred to above or any claim, issue or matter therein, he or she
is entitled to indemnification for expenses (including attorneys' fees)
actually and reasonable incurred by such person in connection therewith. The
indemnification and advancement of expenses provided for or granted pursuant
to Section 145 is not exclusive of any other rights of indemnification or
advancement of expenses to which those seeking indemnification or advancement
of expenses may be entitled, and a corporation may purchase and maintain
insurance against liabilities asserted against any former or current,
director, officer, employee or agent of the corporation, or a person who is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, whether or not the power to indemnify is provided by the statute.
Article Tenth of our Certificate of Incorporated and Article VII of our By-
laws provide for the indemnification of its directors and officers as
authorized by Section 145 of the DGCL.
The directors and officers of us and our subsidiaries are insured (subject
to certain exceptions and deductions) against liabilities which they may incur
in their capacity as such including liabilities under the Securities Act,
under liability insurance policies carried by us.
62
SELLING STOCKHOLDERS
The following table sets forth information regarding each selling
stockholder and the amount of our common stock that it may offer under this
prospectus. When we refer to the "selling stockholders" in this prospectus, we
mean those persons listed in the table below, as well as the pledgees, donees,
assignees, transferees, successors and others who hold any of the selling
securityholders' interest. The shares of our common stock offered by this
prospectus were originally sold by us in a number of private placements and
privately negotiated debt for equity exchanges.
Since the date that we received the information from the selling
stockholders, one or more selling stockholders identified below may have sold,
transferred or otherwise disposed of all or a substantial portion of the
shares of our common stock held by it in one or a series of transactions
exempt from the Securities Act. Information regarding the selling stockholders
may change from time to time and any changed information will be set forth in
a prospectus supplement to the extent required. Unless set forth below, to the
best of our knowledge, none of the selling stockholders has, or within the
past three years has had, any material relationship with us, any of our
predecessors or affiliates, or beneficially owns in excess of 1% of our
outstanding common stock.
J.P. Morgan Securities Inc. is an affiliate of JPMorganChase, a beneficial
owner of more than 5% of our common stock and the parent of the Chase
Manhattan Bank, one of our lenders.
A selling stockholder may from time to time offer and sell any or all of its
securities under this prospectus. Because a selling stockholder is not
obligated to sell the shares of our common stock held by it, we cannot
estimate the number of shares of our common stock that a selling stockholder
will beneficially own after this offering. Beneficial ownership is based upon
493,346,010 shares of common stock outstanding as of June 30, 2001.
*Represents less than one per cent of our outstanding common stock.
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
Allmerica Investment Trust Select Growth Fund.................. 149,200 * 149,200
American Century Mutual Funds, Inc............................ 5,025,000 1.0 3,000,000
American Century World Mutual Funds, Inc....................... 947,500 * 400,000
Asset Allocation............................................... 269,900 * 269,900
AUSA Life Insurance Co.-TIM.................................... 1,256,209 * 1,256,209
Balanced Investment Growth Fund................................ 85,000 * 85,000
Bank of America N.A............................................ 1,766,877 * 1,766,877
Bessent Global Equity Master Fund.............................. 2,563,821 * 2,310,000
Broadsword Limited............................................. 16,100 * 16,100
Canadian Balanced Fund......................................... 706,625 * 706,625
Canadian Balanced GIF.......................................... 11,400 * 11,400
Canadian Equity Fund........................................... 549,800 * 549,800
Canadian Equity GIF............................................ 6,500 * 6,500
Chesapeake Partners International Ltd.......................... 1,925,000(1) * 704,515
Chesapeake Partners Institutional Fund Limited Partnership..... 1,925,000(2) * 31,762
Chesapeake Partners Limited Partnership........................ 1,925,000(3) * 1,188,723
Cisalpina/Putnam Global Balanced Fund.......................... 14,300 * 14,300
Cisalpina/Putnam Global Value.................................. 389,400 * 389,400
Cisalpina/Putnam USA Equity Fund............................... 89,400 * 89,400
63
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
Cisalpina/Putnam USA Value Fund................................ 63,000 * 63,000
Commonwealth of Massachusetts Pension Reserve Investment
Management Board(4).......................................... 35,821 * 35,821
Commonwealth of Puerto Rico State Ins. Corp.................... 7,600 * 7,600
Connecticut General Life Insurance Co.......................... 203,000 * 203,000
Curators Of The University Of Missouri(4)...................... 6,000 * 6,000
Diversified Investment Advisors, Inc........................... 185,100 * 185,100
EQ Advisors Trust-EQ/Putnam Investors Growth Fund.............. 62,500 * 62,500
Equitable Advisors Trust-FI Mid Cap(4)......................... 9,000 * 9,000
Evergreen Masters Fund......................................... 10,100 * 10,100
Fidelity Advisor Series I: Fidelity Advisor Asset Allocation
Fund(5)...................................................... 10,268 * 10,268
Fidelity Advisor Series I: Fidelity Advisor Balanced Fund(5)... 212,000 * 212,000
Fidelity Advisor Series I: Fidelity Advisor Dividend Growth
Fund(5)...................................................... 193,000 * 193,000
Fidelity Advisor Series I: Fidelity Advisor Dynamic Capital
Appreciation Fund(5)......................................... 47,000 * 47,000
Fidelity Advisor Series I: Fidelity Advisor Equity Growth
Fund(5)...................................................... 1,300,000 * 1,300,000
Fidelity Advisor Series I: Fidelity Advisor Growth & Income
Fund(5)...................................................... 240,000 * 240,000
Fidelity Advisor Series I: Fidelity Advisor Growth
Opportunities Fund(5)........................................ 1,143,000 * 1,143,000
Fidelity Advisor Series I: Fidelity Advisor Mid Cap Fund(5).... 249,000 * 249,000
Fidelity Advisor Series II: Fidelity Advisor High Income
Fund(5)...................................................... 3,012 * 3,012
Fidelity Advisor Series II: Fidelity Advisor High Yield Fund(5) 616,472 * 616,472
Fidelity Advisor Series VIII: Fidelity Advisor Global Equity
Fund(5)...................................................... 2,000 * 2,000
Fidelity American Opportunities Fund(5)........................ 5,000 * 5,000
Fidelity Beacon Street Trust: Fidelity Tax Managed Stock
Fund(5)...................................................... 10,000 * 10,000
Fidelity Canadian Asset Allocation Fund(5)..................... 428,000 * 428,000
Fidelity Canadian Balanced Fund(5)............................. 1,109 * 1,109
Fidelity Capital Trust: Fidelity Value Fund(5)................. 452,000 * 452,000
64
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
Fidelity Charles Street Trust: Fidelity Asset Manager(5)....... 1,249,574 * 1,249,574
Fidelity Charles Street Trust: Fidelity Asset Manager:
Aggressive(5)................................................ 41,558 * 41,558
Fidelity Charles Street Trust: Fidelity Asset Manager:
Growth(5).................................................... 477,959 * 477,959
Fidelity Charles Street Trust: Fidelity Asset Manager:
Income(5).................................................... 3,821 * 3,821
Fidelity Commonwealth Trust: Fidelity Mid-Cap Stock Fund(5).... 688,000 * 688,000
Fidelity Contrafund(5)......................................... 3,366,000 * 3,366,000
Fidelity Devonshire Trust: Fidelity Equity-Income Fund(5)...... 16,226 * 16,226
Fidelity Financial Trust: Fidelity Independence Fund(5)........ 670,000 * 670,000
Fidelity Fixed-Income Trust: Fidelity High Income Fund(5)...... 68,436 * 68,436
Fidelity Global Asset Allocation Fund(5)....................... 8,019 * 8,019
Fidelity Hastings Street Trust: Fidelity Fund(5)............... 1,339,000 * 1,339,000
Fidelity High Yield Collective Trust(5)........................ 17,619 * 17,619
Fidelity International Portfolio Fund(5)....................... 508,000 * 508,000
Fidelity Investment Trust: Fidelity Worldwide Fund(5).......... 85,000 * 85,000
Fidelity Magellan Fund(5)...................................... 8,621,300 1.7 8,621,300
Fidelity Puritan Trust: Fidelity Balanced Fund(5).............. 6,477 * 6,477
Fidelity Securities Fund: Fidelity Blue Chip Growth Fund(5).... 2,254,000 * 2,254,000
Fidelity Securities Fund: Fidelity Dividend Growth Fund(5)..... 1,404,000 * 1,404,000
Fidelity Summer Street Trust: Fidelity Capital & Income Fund(5) 590,630 * 590,630
Fidelity Trend Fund(5)......................................... 435,000 * 435,000
Fidelity Union Street Trust: Fidelity Export and Multinational
Fund(5)...................................................... 52,000 * 52,000
Fir Tree Institutional Value Fund, L.P......................... 9,459,417 1.8 6,300,260(6)
Fir Tree Recovery Master Fund, L.P............................. 2,021,860 * 1,295,470(6)
Fir Tree Value Fund, L.P....................................... 18,710,291 3.6 12,385,440(6)
Fir Tree Value Partners LDC.................................... 1,825,550 * 1,235,600(6)
Ford Motor Company Master Trust Fund(4)........................ 208,000 * 208,000
Idex Equity Fund............................................... 55,000 * 55,000
I.G. Global Equity Fund-U.S.(4)................................ 2,000 * 2,000
Illinois Wesleyan University................................... 5,700 * 5,700
65
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
ING Select Large Cap(4)........................................ 1,000 * 1,000
International Balanced Fund.................................... 100,000 * 100,000
International Investment Fund: Putnam Global Core Equity Fund.. 1,458,667 * 1,113,667
International Investment Funds: Putnam Global Core Equity A
Fund......................................................... 223,100 * 223,100
International Investment Fund-Putnam Global Growth Equity A
Fund......................................................... 63,000 * 6,800
International Investment Funds: Putnam Global Asset Allocation
Fund B-2..................................................... 32,900 * 32,900
International Investment Fund-Putnam US Core Growth Equity Fund 14,200 * 14,200
John Hancock Variable Series I-Health Sciences Fund............ 5,530 * 3,900
JNL Series Trust-JNL/Putnam Growth Series...................... 65,000 * 65,000
J.P. Morgan Securities Inc..................................... 1,148,808 * 1,136,108
LibertyView Funds, L.P......................................... 4,016,211 * 4,016,211
LibertyView Fund, LLC.......................................... 721,606 * 721,606
LibertyView Global Volatility Fund, L.P........................ 1,020,453 * 1,020,453
Lincoln National Global Asset Allocation Funds Inc............. 42,600 * 3,100
Manufacturers Investment Trust - Equity Trust Mid Cap Growth
Sub Portfolio(4)............................................. 59,000 * 59,000
Manufacturers Investment Trust - Equity Trust Mid Cap Value Sub
Portfolio(4)................................................. 71,000 * 71,000
Manufacturers Investment Trust................................. 542,100 * 542,100
Marathon Master Fund Ltd....................................... 1,473,405 * 1,473,405
Marathon Special Opportunity Fund Ltd.......................... 785,000 * 785,000
Marsh & McLennan Companies, Inc. U.S. Retirement Plan.......... 43,500 * 43,500
Mass Mutual Blue Chip Growth Fund(4)........................... 46,000 * 46,000
MCN Energy Group Employee Benefit Plans Master Trust........... 7,800 * 7,800
Michigan BAC Pension Fund...................................... 3,000 * 3,000
Nissay/Putnam Global Equity Fund............................... 20,800 * 20,300
66
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
Oddo Putnam U.S. Core Growth Fund.............................. 15,100 * 15,100
Oregon Community Foundation.................................... 3,400 * 3,400
OZF Credit Opportunities Master Fund, Ltd...................... 1,479,537 * 1,171,353
OZ Master Fund, Ltd............................................ 6,715,716 1.4 6,033,090
Parker-Hannifin Corporation.................................... 14,300 * 14,300
Penn Series Funds Inc Large Cap Value Fund..................... 46,700 * 46,700
Pension Investment Committee of General Motors for General
Motors Employees Domestic Group Pension Trust(4)............. 105,525 * 105,525
Pirelli Tire Corp Master Pension & Retirement Trust............ 4,200 * 4,200
Putnam Advisory Acct #13480.................................... 3,500 * 3,500
Putnam Asset Allocation Funds-Balanced Portfolio............... 415,322 * 88,300
Putnam Asset Allocation Funds-Conservative Portfolio........... 148,482 * 27,100
Putnam Asset Allocation Funds-Growth Portfolio................. 144,600 * 34,100
Putnam Balanced Retirement Fund................................ 58,900 * 58,900
Putnam Canadian Global Trust U.S. Equity Fund.................. 29,400 * 29,400
Putnam Canadian Global Trust Global Core Equity Fund........... 227,600 * 212,400
Putnam Capital Appreciation Fund............................... 1,923,200 * 518,700
Putnam Convertible Income-Growth Trust......................... 1,172,900 * 167,700
Putnam Convertible Opportunities & Income Trust................ 17,128 * 6,500
Putnam Core Growth Equity Fund, LLC............................ 60,400 * 60,400
Putnam Core Growth Trust....................................... 119,800 * 119,800
Putnam Equity Income Fund...................................... 315,100 * 315,100
Putnam Funds Trust-U.S. Core Fund.............................. 20,600 * 18,200
Putnam Global Core Equity Fund, LLC............................ 17,100 * 17,100
Putnam Global Equity Fund...................................... 1,033,800 * 1,033,300
Putnam Health Sciences Trust................................... 1,575,150 * 1,151,400
Putnam Investment Funds-Putnam Capital Opportunities Fund...... 1,649,800 * 455,500
Putnam Investment Funds-Putnam Global Growth And Income Fund... 117,000 * 117,000
67
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
Putnam Investors Fund.......................................... 1,956,867 * 1,956,867
Putnam Large Cap Value Trust................................... 7,700 * 7,700
Putnam Tax Smart Funds Trust-Putnam Tax Smart Equity Fund...... 227,000 * 227,000
Putnam Tobacco-Free Core Growth Equity Fund, LLC............... 9,700 * 9,700
Putnam Variable Trust-Putnam VT Capital Appreciation Fund...... 12,361 * 3,400
Putnam Variable Trust-Putnam VT The George Putnam Fund of
Boston....................................................... 25,500 * 25,500
Putnam Variable Trust-Putnam VT Global Asset Allocation Fund... 79,100 * 6,600
Putnam Variable Trust-Putnam VT Investors Fund................. 182,400 * 182,400
Putnam Voyager Fund............................................ 5,678,533 1.1 5,678,533
Putnam Variable Trust-Putnam VT Health Sciences Fund........... 121,750 * 88,700
Putnam Variable Trust-Putnam VT Voyager Fund................... 1,204,900 * 1,204,900
Putnam World Trust-Putnam Global Core Equity Fund.............. 17,600 * 17,600
Putnam World Trust-Putnam Growth Equity Fund................... 19,200 * 19,200
Putnam World Trust II-Putnam Global Small-Cap Core Equity Fund
(Dublin)..................................................... 10,883 * 2,533
Putnam World Trust II-Putnam Global Value Equity Fund (Dublin). 1,900 * 1,900
Putnam World Trust II-Putnam Health Sciences Equity Fund
(Dublin)..................................................... 585 * 400
Putnam World Trust II-Putnam Investors (U.S. Growth Equity)
Fund (Dublin)................................................ 17,400 * 17,400
Putnam World Trust II-The George Putnam (U.S. Equity and Bond)
Fund......................................................... 2,300 * 2,300
Quantum Partners Bessent Global................................ 398,979 * 358,000
Roman Catholic Archbishop of Boston............................ 15,600 * 15,600
Salomon Smith Barney Inc....................................... 4,681,221 * 4,681,221
Satellite Fund I, L.P.......................................... 76,901 * 51,267
Satellite Fund II, L.P......................................... 1,710,826 * 1,140,551
Satellite Overseas Fund, Ltd................................... 2,760,192 * 1,840,128
Satellite Overseas Fund III, Ltd............................... 708,013 * 472,009
Sceptre Investment Counsel Limited-Sceptre Global Equity Fund.. 39,200 * 39,200
Sceptre Investment Counsel Limited-Sceptre Foreign Pool Fund... 687,100 * 687,100
Season Series Trust-Asset Allocation: Diversified Growth
Portfolio.................................................... 10,500 * 10,500
Segregated Fund "1"............................................ 1,400 * 1,400
68
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
Segregated Fund "A"............................................ 6,200 * 6,200
Society For The Preservation Of New England Antiquities........ 4,900 * 4,900
Stichting Pensioenfonds Voor De Woningcorporaties.............. 23,600 * 23,600
Strategic Global Fund: Global Asset Allocation (Putnam) Fund... 9,600 * 9,600
SunAmerica Series Trust-Putnam Growth Portfolio................ 111,300 * 111,300
TALIAC-Corporate............................................... 625,668 * 625,668
TALIAC-Separate Account TBAL................................... 1,225,400 * 1,225,400
TALIAC-Separate Account TEF.................................... 7,000,000 1.4 7,000,000
The George Putnam Fund of Boston............................... 295,900 * 295,900
The Robert Wood Foundation..................................... 15,100 * 15,100
TOLIC-Corporate................................................ 3,539,433 * 3,539,433
TOLIC-Separate Account A....................................... 5,500,000 1.1 5,500,000
TOLIC-Separate Account B....................................... 540,000 * 540,000
Transamerica Aggressive Growth Fund............................ 426,000 * 426,000
Transamerica Growsafe US Bal USD............................... 86,800 * 86,800
Transamerica Growsafe US Eq Fd 2............................... 9,354 * 9,354
Transamerica Growsafe US Eq USD................................ 320,000 * 320,000
Transamerica Premier Agg. Growth............................... 720,838 * 720,838
Transamerica Premier Balanced.................................. 494,000 * 494,000
Transamerica Premier Equity.................................... 950,000 * 950,000
Transamerica Premier Value..................................... 112,400 * 112,400
Transamerica Value Fund........................................ 675,500 * 675,500
TVIF-Growth Portfolio.......................................... 1,300,000 * 1,300,000
University of Missouri Retirement, Disability and Death Benefit
Trust Fund(4)................................................ 28,000 * 28,000
US Chamber of Commerce Retirement Income Plan.................. 4,700 * 4,700
Variable Insurance Products Fund: Equity-Income Portfolio(5)... 8,323 * 8,323
Variable Insurance Products Fund: Growth Portfolio(5).......... 1,450,000 * 1,450,000
Variable Insurance Products Fund III: Balanced Portfolio(5).... 30,392 * 30,392
Variable Insurance Products Fund II: Contrafund Portfolio(5)... 849,000 * 849,000
69
Numbers of shares
Number of shares of of common stock
common stock owned Percentage of covered by this
Name prior to this offering outstanding shares prospectus
---- ---------------------- ------------------ -----------------
Variable Insurance Products Fund III: Dynamic Capital
Appreciation Portfolio(5).................................... 1,000 * 1,000
Variable Insurance Products Fund III: Growth Opportunities
Portfolio(5)................................................. 108,000 * 108,000
Variable Insurance Products Fund III: Mid Cap Portfolio(5)..... 98,000 * 98,000
Wisconsin Physicians Service Ins Corp.......................... 3,300 * 3,300
Woolworths Group Superannuation Scheme Pty Limited............. 30,300 * 26,700
---------------
(1) Beneficial ownership includes shares held by Chesapeake Partners Limited
Partnership and Chesapeake Partners Institutional Fund Limited Partnership.
(2) Beneficial ownership includes shares held by Chesapeake Partners Limited
Partnership and Chesapeake Partners International Ltd.
(3) Beneficial ownership includes shares held by Cheaspeake Partners
International Limited and Chesapeake Partners Institutional Fund Limited
Partnership.
(4) Shares indicated as owned by such entity are owned directly by various
private investment accounts, primarily employee benefit plans for which
Fidelity Management Trust Company ("FMTC") serves as trustee or managing
agent. FMTC is a wholly-owned subsidiary of FMR (as defined in footnote 5)
and a bank as defined in Section 3(a)(6) of the Securities Exchange Act of
1934, as amended. These holdings are as of July 9, 2001.
(5) The entity is either an investment company or a portfolio of an investment
company registered under Section 8 of the Investment Company Act of 1940,
as amended, or a private investment account advised by Fidelity Management
& Research Company ("FMR Co."). FMR Co. is a Massachusetts corporation and
an investment advisor registered under Section 203 of the Investment
Advisers Act of 1940, as amended, and provides investment advisory services
to each of such Fidelity entities identified above, and to other registered
investment companes and to certain other funds which are generally offered
to a limited group of investors. FMR Co. is a wholly-owned subsidiry of FMR
Corp. ("FMR"), a Massachusetts corporation. These holdings are as of July
9, 2001.
(6) Represents shares of our common stock issuable on conversion of shares of
Series C preferred stock. Each share of Series C preferred stock shall
automatically convert into ten shares of common stock upon the
effectiveness of the registration statement of which this prospectus forms
a part.
70
PLAN OF DISTRIBUTION
The selling stockholders, or their pledgees, donees, transferees, or any of
their successors in interest selling shares received from a named selling
stockholder as a gift, partnership distribution or other
non-sale-related transfer after the date of this prospectus (all of whom may
be selling stockholders), may sell the shares of common stock from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed, in the over-the-counter market, in privately
negotiated transactions or otherwise, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at prices otherwise negotiated. The selling stockholders may
sell the shares of common stock by one or more of the following methods,
without limitation:
(a) block trades in which the broker or dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by the
broker or dealer for its own account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchases;
(e) privately negotiated transactions;
(f) short sales;
(g) through the writing of options on the shares, whether or not the
options are listed on an options exchange;
(h) through the distribution of the shares by any selling stockholder to
its partners, members or stockholders;
(i) one or more underwritten offerings on a firm commitment or best
efforts basis; and
(j) any combination of any of these methods of sale.
The selling stockholder may also transfer the shares by gift.
We do not know of any arrangements by the selling stockholders for the sale
of any of the shares.
The selling stockholders may engage brokers and dealers, and any brokers or
dealers may arrange for other brokers or dealers to participate in effecting
sales of the shares. These brokers, dealers or underwriters may act as
principals, or as an agent of a selling stockholder. Broker-dealers may agree
with a selling stockholder to sell a specified number of the shares at a
stipulated price per share. If a broker-dealer is unable to sell shares acting
as agent for a selling stockholder, it may purchase as principal any unsold
shares at the stipulated price. Broker-dealers that acquire shares as
principals may thereafter resell the shares from time to time in transactions
on any stock exchange or automated interdealer quotation system on which the
shares are then listed, at prices and on terms then prevailing at the time of
sale, at prices related to the then-current market price or in negotiated
transactions. Broker-dealers may use block transactions and sales to and
through broker-dealers, including transactions of the nature described above.
The selling stockholders may also sell the shares in accordance with Rule 144
under the Securities Act, rather than pursuant to this prospectus, regardless
of whether the shares are covered by this prospectus.
From time to time, one or more of the selling stockholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or persons to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling stockholders. The number of a selling stockholder's shares offered
under this prospectus will decrease as and when it takes such actions. The
plan of distribution for the selling stockholder's shares will otherwise
remain unchanged. In addition, a selling stockholder may, from time to time,
sell the shares short, and, in those instances, this prospectus may be
delivered in connection with the short sales and the shares offered under this
prospectus may be used to cover short sales.
71
To the extent required under the Securities Act, the aggregate amount of
selling stockholders' shares being offered and the terms of the offering, the
names of any agents, brokers, dealers or underwriters and any applicable
commission with respect to a particular offer will be set forth in an
accompanying prospectus supplement. Any underwriters, dealers, brokers or
agents participating in the distribution of the shares may receive
compensation in the form of underwriting discounts, concessions, commissions
or fees from a selling stockholder and/or purchasers of selling stockholders'
shares of common stock, for whom they may act, which compensation as to a
particular broker-dealer might be in excess of customary commissions.
The selling stockholders and any underwriters, broker, dealers or agents
that participate in the distribution of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the shares sold by them may be deemed to be underwriting discounts and
commissions.
A selling stockholder may enter into hedging transactions with broker-
dealers and the broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with the selling stockholder,
including, without limitation, in connection with distributions of the shares
by those broker-dealers. A selling stockholder may enter into option or other
transactions with one or more broker-dealers that involve the delivery of the
shares offered hereby to the broker-dealers, who may then resell or otherwise
transfer those shares. A selling stockholder may also loan or pledge the
shares offered hereby to a broker-dealer and the broker-dealer may sell the
shares offered hereby so loaned or upon a default may sell or otherwise
transfer the pledged shares offered hereby.
The selling stockholder and other persons participating in the sale or
distribution of the shares will be subject to applicable provisions on the
Securities Exchange Act, as amended, and the rules and regulations thereunder,
including Regulation M. This regulation may limit the timing of purchases and
sales of any of the shares by the selling stockholders and any other person.
The anti-manipulation rules under the Securities Exchange Act may apply to
sales of shares in the market and to the activities of the selling
stockholders and their affiliates. Furthermore, Regulation M may restrict the
ability of any person engaged in the distribution of the shares to engage in
market-making activities with respect to the particular shares being
distributed for a period of up to five business days before the distribution.
These restrictions may affect the marketability of the shares and the ability
of any person or entity to engage in market-making activities with respect to
the shares.
In order to comply with the securities laws of certain states, if
applicable, the shares must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless thay have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
We have agreed to indemnify in certain circumstances the selling
stockholders and any brokers, dealers and agents who may be deemed to be
underwriters, if any, of the shares covered by the registration statement,
against certain liabilities, including liabilities under the Securities Act.
The selling stockholders have agreed to indemnify us in certain circumstances
against certain liabilities, including liabilities under the Securities Act.
The shares of common stock offered hereby originally issued to the selling
stockholders pursuant to an exemption from the registration requirements of
the Securities Act. We agreed to register the shares under the Securities Act
and to keep the registration statement of which this prospectus is a part
effective until the earlier of the date on which the selling stockholders have
sold all of the shares, the shares covered hereby are no longer outstanding or
the holders are entitled to sell their shares under Rule 144 under the
Securities Act. We have agreed to pay certain expenses in connection with this
offering, including, in certain circumstances, the fees and expenses of
counsel to the selling stockholders, but not including underwriting discounts,
concessions, commissions or fees of the selling stockholders.
We will not receive any proceeds from sales of any shares by the selling
stockholders.
We can not assure you that the selling stockholders will sell all or any
portion of the shares offered hereby.
We may suspend the use of this prospectus by the selling stockholder under
certain circumstances.
Any common stock sold by a selling stockholder pursuant to a prospectus
supplement will be listed on the NYSE, subject to official notice of issuance.
72
LEGAL MATTERS
Certain legal matters as to the validity of the shares offered by this
prospectus will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York. Nancy A. Lieberman, a partner of Skadden, Arps,
Slate, Meagher & Flom LLP, is a director and stockholder of Rite Aid.
EXPERTS
The consolidated financial statements of the Company and its consolidated
subsidiaries, except PCS Holding Corporation and subsidiaries which has been
included in discontinued operations in such consolidated financial statements,
as of March 3, 2001 and February 26, 2000, and for each of the three years in
the period ended March 3, 2001 included in this prospectus and related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP as stated in their reports
appearing herein and elsewhere in the registration statement. The financial
statements of PCS Holding Corporation and subsidiaries for the year ended
February 26, 2000 and the thirty-six days ended February 27, 1999, not
separately included herein or elsewhere in the registration statement have
been audited by Ernst & Young LLP, as stated in their report, which is
included herein. Such financial statements and related financial statement
schedule of the Company and its consolidated subsidiaries are included herein
and elsewhere in the registration statement in reliance upon the respective
reports of such firms given upon their authority as experts in accounting and
auditing. All of the foregoing firms are independent auditors.
73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Annual Consolidated Financial Statements
Independent Auditors' Reports .......................................... F-2
Consolidated Balance Sheets as of March 3, 2001 and February 26, 2000 .. F-4
Consolidated Statements of Operations for the fiscal years ended March
3, 2001, February 26, 2000 and February 27, 1999 ..................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended March 3, 2001, February 26, 2000 and February 27,
1999 ................................................................. F-6
Consolidated Statements of Cash Flows for the fiscal years ended March
3, 2001, February 26, 2000 and February 27, 1999 ..................... F-7
Notes to Consolidated Financial Statements ............................. F-8
Interim Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 2, 2001 and March 3,
2001 ................................................................. F-43
Condensed Consolidated Statements of Operations for the Thirteen Week
Periods Ended June 2, 2001 and May 27, 2000 .......................... F-44
Condensed Consolidated Statement of Stockholders' Deficit for the
Thirteen Week Period Ended June 2, 2001 .............................. F-45
Condensed Consolidated Statements of Cash Flows for the Thirteen Week
Periods Ended June 2, 2001 and May 27, 2000 .......................... F-46
Notes to Condensed Consolidated Financial Statements ................... F-47
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Rite Aid Corporation
Camp Hill, Pennsylvania
We have audited the accompanying consolidated balance sheets of Rite Aid
Corporation and subsidiaries as of March 3, 2001 and February 26, 2000, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
March 3, 2001. 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 did not audit the consolidated
financial statements of PCS Holding Corporation (a consolidated subsidiary of
Rite Aid Corporation), which has been included in discontinued operations in
the accompanying consolidated financial statements, which statements reflect
total assets constituting 17% of consolidated total assets as of February 26,
2000, and revenues of $1,264.7 million and $104.3 million for the years ended
February 26, 2000 and February 27, 1999, respectively. Those financial
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for PCS
Holding Corporation, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of Rite Aid Corporation and subsidiaries at
March 3, 2001, and February 26, 2000, and the results of their operations and
their cash flows for each of the three years in the period ended March 3,
2001, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its application of the last-in, first-out ("LIFO") method of
accounting for inventory in 2000.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
May 8, 2001, except for Note 25,
as to which the date is May 16, 2001
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
PCS Holding Corporation
We have audited the consolidated balance sheets of PCS Holding Corporation
and Subsidiaries (the Company) as of February 27, 1999 and February 26, 2000,
and the related consolidated statements of operations, shareholder's equity,
and cash flows for the thirty-six days ended February 27, 1999 and the year
ended February 26, 2000 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PCS Holding Corporation and Subsidiaries at February 27, 1999 and February
26, 2000, and the consolidated results of their operations and their cash
flows for the thirty-six days ended February 27, 1999 and the year ended
February 26, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
April 21, 2000
F-3
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share amounts)
March 3, 2001 February 26, 2000
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 92,290 $ 179,757
Accounts receivable, net ................ 503,527 152,035
Inventories, net ........................ 2,444,525 2,472,437
Investment in AdvancePCS ................ 491,198 --
Refundable income taxes .................. -- 147,599
Prepaid expenses and other current assets 85,292 63,659
----------- -----------
Total current assets.................... 3,616,832 3,015,487
PROPERTY, PLANT AND EQUIPMENT, NET ........ 3,041,008 3,445,828
GOODWILL AND OTHER INTANGIBLES ............ 1,067,339 1,258,108
OTHER ASSETS .............................. 188,732 235,398
DEFERRED TAX ASSET ........................ -- 146,917
NET NON-CURRENT ASSETS OF DISCONTINUED
OPERATIONS............................... -- 1,743,828
----------- -----------
Total assets............................ $ 7,913,911 $ 9,845,566
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current lease financing obligations ...... $ 28,603 $ 25,964
Short-term debt and current maturities of
long-term debt .......................... 8,353 76,086
Accounts payable ........................ 896,390 854,062
Sales and other taxes payable ............ 31,562 33,662
Accrued salaries, wages and other current
liabilities ............................. 696,047 883,003
Net current liabilities of discontinued
operations............................... -- 390,053
----------- -----------
Total current liabilities............... 1,660,955 2,262,830
CONVERTIBLE SUBORDINATED NOTES ........... 357,324 649,986
LONG-TERM DEBT LESS CURRENT MATURITIES ... 4,428,871 4,738,661
LEASE FINANCING OBLIGATIONS LESS CURRENT
MATURITIES............................... 1,071,397 1,122,171
OTHER NONCURRENT LIABILITIES .............. 730,342 619,952
----------- -----------
Total liabilities....................... 8,248,889 9,393,600
COMMITMENTS AND CONTINGENCIES ............ -- --
REDEEMABLE PREFERRED STOCK ................ 19,457 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $1 per share;
liquidation value $100 per
share; 20,000,000 shares authorized:
shares issued -- 3,340,000
and 3,083,000........................... 333,974 308,250
Common stock, par value $1 per share;
600,000,000 shares authorized: shares
issued and outstanding -- 348,055,000
and 259,927,000......................... 348,055 259,927
Additional paid-in capital ............... 2,065,301 1,292,337
Accumulated deficit ...................... (3,171,956) (1,421,817)
Deferred compensation .................... 19,782 (6,188)
Accumulated other comprehensive income ... 50,409 --
----------- -----------
Total stockholders' equity (deficit).... (354,435) 432,509
----------- -----------
Total liabilities and stockholders'
equity (deficit)...................... $ 7,913,911 $ 9,845,566
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
(53 weeks) (52 weeks) (52 weeks)
----------- ------------ ------------
REVENUES............................................................................. $14,516,865 $13,338,947 $12,438,442
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs....................................... 11,151,490 10,213,428 9,406,831
Selling, general and administrative expenses........................................ 3,458,307 3,607,810 3,200,563
Goodwill amortization............................................................... 20,670 24,457 26,055
Store closing and impairment charges................................................ 388,078 139,448 195,359
Interest expense.................................................................... 649,926 542,028 274,826
Loss on debt conversions and modifications.......................................... 100,556 -- --
Share of loss from equity investments............................................... 36,675 15,181 448
Gain on sale of fixed assets........................................................ (6,030) (80,109) --
----------- ------------ ------------
15,799,672 14,462,243 13,104,082
----------- ------------ ------------
Loss from continuing operations before income taxes and
cumulative effect of accounting change............................................ (1,282,807) (1,123,296) (665,640)
INCOME TAX EXPENSE (BENEFIT)......................................................... 148,957 (8,375) (216,941)
----------- ----------- -----------
Loss from continuing operations before cumulative effect
of accounting change.............................................................. (1,431,764) (1,114,921) (448,699)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
including income tax expense (benefit) of $13,846, $30,903, and $(5,925)........... 11,335 9,178 (12,823)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
net of income tax benefit of $734.................................................. (168,795) -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax benefit of $18,200............................................... -- (27,300) --
----------- ------------ ------------
NET LOSS......................................................................... $(1,589,224) $(1,133,043) $ (461,522)
=========== ============ ============
COMPUTATION OF LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss............................................................................ $(1,589,224) $(1,133,043) $ (461,522)
Accretion of redeemable preferred stock............................................. -- (97) --
Preferred stock conversion reset.................................................... (160,915) -- --
Cumulative preferred stock dividends................................................ (25,724) (10,110) (627)
----------- ------------ ------------
Loss applicable to common stockholders........................................... $(1,775,863) $(1,143,250) $ (462,149)
=========== ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations..................................................... $ (5.15) $ (4.34) $ (1.74)
Income (loss) from discontinued operations.......................................... (0.50) 0.04 (0.05)
Cumulative effect of accounting change, net......................................... -- (0.11) --
----------- ------------ ------------
Net loss per share............................................................... $ (5.65) $ (4.41) $ (1.79)
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands, except per share amounts)
Preferred Stock Common Stock Additional Retained
------------------------------- ------------------ Paid-in Earnings
Shares Class A Class B Shares Issued Capital (Deficit)
------ --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 28, 1998...... -- -- -- 258,214 $258,214 $1,354,917 $ 285,859
Net loss....................... (461,522)
Other comprehensive income --
Minimum pension liability
adjustment...................
Comprehensive loss ...........
Stock options exercised........ 633 633 8,603
Stock option income tax benefit 5,807
Stock grants................... 14 14 669
Bond conversion................ 9
Cash dividends paid on common
stock ($.4375 per share)..... (113,111)
----- --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 27, 1999...... -- -- -- 258,861 258,861 1,370,005 (288,774)
Net loss....................... (1,133,043)
Other comprehensive income --
Minimum pension liability
adjustment...................
Comprehensive loss ...........
Issuance of preferred shares... 3,000 300,000
Exchange of preferred shares... (300,000) 300,000
Stock options exercised........ 66 66 814
Stock option income tax benefit 243
Stock grants................... 1,000 1,000 7,250
Issuance of common stock
warrants..................... 8,500
Bond conversion................ 5
Dividends on preferred stock... 83 8,250 (8,250)
Increase resulting from sale of
stock by equity method
investee..................... 2,929
Cash dividends paid on common
stock ($.3450 per share)..... (89,159)
----- --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 26, 2000...... 3,083 -- 308,250 259,927 259,927 1,292,337 (1,421,817)
Net loss....................... (1,589,224)
Other comprehensive (loss) --
Minimum pension liability
adjustment...................
Appreciation of investment in
AdvancePCS...................
Comprehensive loss ...........
Preferred stock conversion
reset........................ (160,915) 160,915
Accretion of convertible
preferred stock.............. 160,915 (160,915)
Stock grants................... 4,004 4,004 18,793
Bond conversion................ 84,124 84,124 604,574
Deferred compensation plans....
Dividends on preferred stock... 257 25,724 (25,724)
Increase resulting from sale of
stock by equity method
investee..................... 14,406
----- --------- --------- ------- -------- ---------- -----------
BALANCE MARCH 3, 2001.......... 3,340 $ -- $ 333,974 348,055 $348,055 $2,065,301 $(3,171,956)
===== ========= ========= ======= ======== ========== ===========
Accumulated
Other
Deferred Comprehensive
Compensation Income Total
------------ ------------- -----------
BALANCE FEBRUARY 28, 1998...... -- $ (787) $ 1,898,203
Net loss....................... (461,522)
Other comprehensive income --
Minimum pension liability
adjustment................... 312 312
-----------
Comprehensive loss ........... (461,210)
Stock options exercised........ 9,236
Stock option income tax benefit 5,807
Stock grants................... 683
Bond conversion................ 9
Cash dividends paid on common
stock ($.4375 per share)..... (113,111)
-------- ------- -----------
BALANCE FEBRUARY 27, 1999...... -- (475) 1,339,617
Net loss....................... (1,133,043)
Other comprehensive income --
Minimum pension liability
adjustment................... 475 475
-----------
Comprehensive loss ........... (1,132,568)
Issuance of preferred shares... 300,000
Exchange of preferred shares... --
Stock options exercised........ 880
Stock option income tax benefit 243
Stock grants................... (6,188) 2,062
Issuance of common stock
warrants..................... 8,500
Bond conversion................ 5
Dividends on preferred stock... --
Increase resulting from sale of
stock by equity method
investee..................... 2,929
Cash dividends paid on common
stock ($.3450 per share)..... (89,159)
-------- ------- -----------
BALANCE FEBRUARY 26, 2000...... (6,188) -- 432,509
Net loss....................... (1,589,224)
Other comprehensive (loss) --
Minimum pension liability
adjustment................... (622) (622)
Appreciation of investment in
AdvancePCS................... 51,031 51,031
-----------
Comprehensive loss ........... (1,538,815)
Preferred stock conversion
reset........................ --
Accretion of convertible
preferred stock.............. --
Stock grants................... (10,410) 12,387
Bond conversion................ 688,698
Deferred compensation plans.... 36,380 36,380
Dividends on preferred stock... --
Increase resulting from sale of
stock by equity method
investee..................... 14,406
-------- ------- -----------
BALANCE MARCH 3, 2001.......... $ 19,782 $50,409 $ (354,435)
======== ======= ===========
The accompanying notes are an integral part of these consolidated financial
statements
F-6
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
OPERATING ACTIVITIES:
Net loss............................................................................ $(1,589,224) $(1,133,043) $ (461,522)
Income (loss) from discontinued operations.......................................... 11,335 9,178 (12,823)
Loss on disposal of discontinued operations......................................... (168,795) -- --
----------- ----------- -----------
Loss from continuing operations..................................................... (1,431,764) (1,142,221) (448,699)
Adjustments to reconcile to net cash (used in) provided by operations:
Cumulative effect of change in accounting method.................................. -- 27,300 --
Depreciation and amortization..................................................... 384,066 443,974 379,793
Store closings and impairment loss................................................ 388,078 139,448 195,359
Gain on sale of fixed assets...................................................... (6,030) (80,109) --
Stock based compensation.......................................................... 45,865 -- --
Write-off of deferred tax asset................................................... 146,917 -- --
Loss on debt conversions and modifications........................................ 100,556 -- --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.............................................................. (351,492) (79,156) (3,833)
Inventories...................................................................... 27,912 77,963 415,459
Income taxes receivable/payable.................................................. 147,599 25,390 (278,652)
Accounts payable................................................................. (66,462) (278,073) (129,500)
Other liabilities................................................................ (148,880) 196,938 103,836
Other............................................................................ 59,081 45,448 43,092
----------- ----------- -----------
Net cash (used in) provided by continuing operations............................. (704,554) (623,098) 276,855
Net cash provided by (used in) discontinued operations........................... 3,758 365,375 (227,925)
----------- ----------- -----------
Net cash (used in) provided by operating activities.............................. (700,796) (257,723) 48,930
----------- ----------- -----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment...................................... (132,504) (573,287) (1,222,674)
Purchases of businesses, net of cash acquired....................................... -- (24,454) (1,390,620)
Net investment in equity method investee............................................ -- (8,125) --
Intangible assets acquired.......................................................... (9,000) (67,783) (91,749)
Proceeds from sale of discontinued operations....................................... 710,557 -- --
Proceeds from dispositions.......................................................... 108,600 169,537 --
----------- ----------- -----------
Net cash provided by (used in) continuing operations............................. 677,653 (504,112) (2,705,043)
Net cash used in discontinued operations......................................... -- (48,021) (4,205)
----------- ----------- -----------
Net cash provided by (used in) investing activities.............................. 677,653 (552,133) (2,709,248)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from the issuance of long-term debt.................................... -- 1,600,000 895,878
Net change in bank credit facilities................................................ 324,899 716,073 --
Net (payments) proceeds of commercial paper borrowings.............................. (192,000) (1,591,125) 1,383,125
Net proceeds from the issuance of preferred stock................................... -- 300,000 --
Net proceeds from the issuance of redeemable preferred stock........................ -- -- 23,559
Repurchase of redeemable preferred stock............................................ -- (10,000) --
Proceeds from leasing obligations................................................... 6,992 74,898 504,990
Principal payments on long-term debt................................................ (126,122) (68,113) (39,557)
Cash dividends paid................................................................. -- (89,159) (113,111)
Net proceeds from the issuance of common stock...................................... -- 880 683
Deferred financing costs paid....................................................... (78,093) (34,984) (5,928)
Other............................................................................... -- 6,621 10,702
----------- ----------- -----------
Net cash provided by (used in) financing activities.............................. (64,324) 905,091 2,660,341
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (87,467) 95,235 23
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... 179,757 84,522 84,499
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................... $ 92,290 $ 179,757 $ 84,522
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
1. Results of Operations and Financing
During fiscal 2001, 2000 and 1999, the Company incurred net losses of
$1,589,224, $1,133,043 and $461,522, respectively, and during fiscal 2001 net
cash used in operating activities from continuing operations was $704,554.
Since December 1999, management of the Company has taken a series of steps
intended to stabilize and improve the operating results of the Company.
Management believes that available cash and cash equivalents together with
cash flow from operations, available borrowings under the senior credit
facility and other sources of liquidity (including asset sales) will be
sufficient to fund the Company's operating activities, investing activities
and debt maturities for fiscal 2002. In addition, management believes that the
Company will be in compliance with its existing debt covenant requirements
throughout fiscal 2002. However, a substantial portion of its indebtedness
which matures in August and September 2002 will require the Company to
refinance the indebtedness at or before that time.
2. Summary of Significant Accounting Policies
Description of Business
The Company is a Delaware corporation and through its wholly-owned
subsidiaries, operates retail drugstores in the United States. It is one of
the largest retail drugstore chains in the United States, with 3,648 stores in
operation as of March 3, 2001. The Company's drugstores' primary business is
pharmacy services. It also sells a full selection of health and beauty aids
and personal care products, seasonal merchandise and a large private label
product line.
The Company's continuing operations consists solely of the retail drug
segment. Revenues from its retail drug stores are derived from:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Pharmacy..................... $ 8,639,288 $ 7,788,404 $ 6,737,710
Front-end.................... 5,877,577 5,550,543 5,700,732
----------- ----------- -----------
$14,516,865 $13,338,947 $12,438,442
=========== =========== ===========
Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary PCS Health
Systems, Inc. ("PCS"), a pharmacy benefits manager ("PBM"). Accordingly, for
financial statement purposes, the assets, liabilities, results of operations
and cash flows of this business have been segregated from those of continuing
operations and are presented in the Company's financial statements as
discontinued operations (see Note 24).
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 28. The
fiscal year ended March 3, 2001 included 53 weeks. The fiscal years ended
February 26, 2000 and February 27, 1999 both included 52 weeks.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform
to current year classifications.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
F-8
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, and highly liquid
investments which are readily convertible to known amounts of cash and which
have original maturities of three months or less when purchased.
Inventories
Inventories are stated at the lower of cost or market. Inventory balances
include capitalization of certain costs related to purchasing, freight, and
handling costs associated with placing inventory in its location and condition
for sale. The Company uses the last-in, first-out ("LIFO") method of
accounting for substantially all of its inventories (see Note 3). At March 3,
2001 and February 26, 2000, inventories were $381,466 and $340,740,
respectively, lower than the amounts that would have been reported using the
first-in, first-out ("FIFO") method. The Company calculates its FIFO inventory
valuation using the retail method for store inventories and the cost method
for warehouse inventories. The LIFO charge was $40,726, $34,614 and $36,469
for fiscal years 2001, 2000 and 1999, respectively.
Impairment of Long-Lived Assets
Asset impairments are recorded when the carrying value of assets are not
recoverable. For purposes of recognizing and measuring impairment of long-
lived assets, the Company categorizes assets of operating stores as "Assets to
Be Held and Used" and assets of stores that have been closed as "Assets to Be
Disposed Of". The Company evaluates assets at the store level because this is
the lowest level of identifiable cash flows ascertainable to evaluate
impairment. Assets being tested for recoverability at the store level include
tangible long-lived assets, identifiable intangibles and allocable goodwill
that arose in purchase business combinations. Corporate assets to be held and
used are evaluated for impairment based on excess cash flows from the stores
that support those assets. Enterprise goodwill not associated with assets
being tested for impairment is evaluated based on a comparison of undiscounted
future cash flows of the enterprise compared to the related net book value of
the enterprise.
The Company reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If the sum of the undiscounted expected
future cash flows is less than the carrying amount of the asset, the Company
recognizes an impairment loss. Impairment losses are measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
When fair values are not available, the Company estimates fair value using the
expected future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the asset.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the following useful lives:
buildings - 30 to 45 years; equipment - 3 to 15 years.
Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful life of the asset or the term of the lease.
Capitalized lease assets are recorded at the present value of minimum lease
payments and amortized over the estimated economic life of the related
property or term of the lease.
The Company capitalizes direct internal and external development costs and
direct external application development costs associated with internal-use
software. Neither preliminary evaluation costs nor costs associated with the
software after implementation are capitalized. For fiscal years 2001, 2000 and
1999, the Company capitalized costs of approximately $1,227, $4,595 and
$9,667, respectively.
F-9
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of
the net assets of acquired entities and is being amortized on a straight-line
basis over 40 years. The value of favorable and unfavorable leases on stores
acquired in business combinations are amortized over the terms of the leases
on a straight-line basis. Patient prescription files purchased and those
acquired in business combinations are amortized over their estimated useful
lives of five to fifteen years. The value of assembled workforce acquired is
amortized over its useful life of five years.
Investments in Fifty Percent or Less Owned Subsidiaries
Investments in affiliated entities for which the Company has the ability to
exercise significant influence, but not control over the investee, and
generally an ownership interest of the common stock of between 20% and 50%,
are accounted for under the equity method of accounting and are included in
other assets. Under the equity method of accounting, the Company's share of
the investee's earnings or loss is included in the consolidated statements of
operations. The portion of the Company's investment in an equity-method
investee that exceeds its share of the underlying net equity of the investee,
if any, is amortized over 7 to 30 years.
Revenue Recognition
The Company recognizes revenue from the sale of merchandise at the time the
merchandise is sold. The Company records revenue net of an allowance for
estimated future returns. Return activity is immaterial to revenues and
results of operations in all periods presented.
Vendor Rebates and Allowances
Rebates and allowances received from vendors that are based on future
purchases are initially deferred and are recognized as a reduction of cost of
goods sold when the related inventory is sold. Rebates and allowances not tied
directly to purchases are recognized as a reduction of selling, general and
administrative expense on a straight-line basis over the related contract
term.
Stock-Based Compensation
The Company accounts for its employee and director stock-based compensation
plans under APB Opinion No. 25.
Store Preopening Expenses and Closing Costs
Costs incurred prior to the opening of a new store, associated with a
remodeled store or related to the opening of a distribution facility, are
charged against earnings as administrative and general expenses when incurred.
When a store is closed, the Company expenses unrecoverable costs and accrues a
liability equal to the present value of the remaining lease obligations, net
of expected sublease income. Other store closing and liquidation costs are
expensed when incurred and included in cost of goods sold.
Advertising
Advertising costs are expensed as incurred. Advertising expenses, net of
reimbursements, for fiscal 2001, 2000 and 1999 were $214,891, $194,880 and
$223,000, respectively.
Insurance
The Company is self-insured for certain general liability and workers'
compensation claims. For claims that are self-insured, stop-loss insurance
coverage is maintained for workers' compensation occurrences exceeding $250
and general liability occurrences exceeding $1,000. The Company utilizes
actuarial studies as the basis for developing reported claims and estimating
claims incurred but not reported relating to the Company's self-insurance.
Workers' compensation claims are discounted to present value using a risk-free
interest rate.
F-10
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
The Company is self-insured for all covered employee medical claims.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial reporting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the reporting period in the
deferred tax assets and deferred tax liabilities, net of the effect of
acquisitions and dispositions. Deferred tax assets include tax loss and credit
carryforwards and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant Concentrations
During fiscal 2001, the Company purchased approximately 93% of the dollar
volume of its prescription drugs from a single supplier, McKesson HBOC, Inc.
("McKesson"), under a contract expiring April 2004. With limited exceptions,
the Company is required to purchase all of its branded pharmaceutical products
from McKesson. If the Company's relationship with McKesson was disrupted, the
Company could have difficulty filling prescriptions, which would negatively
impact the business.
Derivatives
The Company enters into interest rate swap agreements to hedge the exposure
to increasing rates with respect to its variable rate debt. The differential
to be paid or received as a result of these swap agreements is accrued as
interest rates change and recognized as an adjustment to interest expense
related to the variable rate debt.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 138,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, will be required to be recorded on the balance sheet at
fair value. If the derivative is designated and effective as a fair value
hedge, the changes in the fair value of the derivative and the changes in the
hedged item attributable to the hedged risk will be recognized in earnings. If
the derivative is designated and effective as a cash-flow hedge, changes in
the fair value of the effective portion of the derivative will be recorded in
other comprehensive income ("OCI") and will be recognized in the income
statement when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as
well as ongoing effectiveness assessments in order to use hedge accounting.
For a derivative that does not qualify as a hedge, changes in fair value will
be recognized in earnings. On March 4, 2001, in connection with the adoption
of the new Statement, the Company will record a reduction of approximately
$29,000 in OCI as a cumulative transition adjustment for derivatives
designated as cash flow-type hedges prior to adopting SFAS 133.
Certain issues currently under consideration by the Derivatives
Implementation Group ("DIG") may make it more difficult to qualify for cash
flow hedge accounting in the future. Pending the results of the DIG
deliberations, changes in the fair value of the Company's interest rate swaps
may be recorded as a component of net income.
F-11
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
3. Change in Accounting Method
In fiscal 2000, the Company changed its application of the LIFO method of
accounting by restructuring its LIFO pool structure through a combination of
certain existing geographic pools. The reduction in the number of LIFO pools
was made to more closely align the LIFO pool structure to the Company's store
merchandise categories. The effect of this change in fiscal 2000 was a charge
of $6,840 (net of income tax benefit of $4,560), or $.03 per diluted common
share. The cumulative effect of the accounting change on periods prior to
fiscal 2000 was a charge of $27,300 (net of income tax benefit of $18,200), or
$.11 per diluted common share. The pro forma effect of this accounting change
would have been a reduction in income of $6,360 (net of income tax benefit of
$4,240) or $.02 per diluted common share for fiscal 1999.
4. Acquisitions and Dispositions
On March 3, 1999, the Company purchased 25 drugstores from Edgehill Drugs,
Inc. The purchase price was $24,454, net of cash acquired of $12. This
acquisition was accounted for under the purchase method of accounting. The
results of operations have been included in these consolidated financial
statements since the date of acquisition.
In September 1999, the Company signed a contract to sell 38 drugstores in
California to Longs Drug Stores California, Inc. (Longs). During the third
quarter of fiscal 2000, 32 stores were transferred to Longs and two stores
were transferred in the first quarter of fiscal 2001. The remaining four
stores were retained by the Company. A pre-tax gain of $80,109 was recognized
in the third quarter of fiscal 2000 for the stores that were sold in that
year. The immaterial gain on the sale of the two stores was recognized by the
Company in fiscal 2001.
5. Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of shares of common stock
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company
subject to anti-dilution limitations.
F-12
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
5. Earnings Per Share -- (Continued)
Year Ended
-------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Numerator for earnings per share:
Loss from continuing operations before
cumulative effect of accounting
change, net of tax ................... $ (1,431,764) $ (1,114,921) $ (448,699)
Accretion of redeemable preferred
stock ................................ (97) --
Preferred stock conversion reset ...... (160,915)
Cumulative preferred stock dividends .. (25,724) (10,110) (627)
------------ ------------ ------------
Loss before cumulative effect of
accounting change attributable to
common stockholders .................. (1,618,403) (1,125,128) (449,326)
Net income (loss) from discontinued
operations, net of tax ............... 11,335 9,178 (12,823)
Loss on disposal of discontinued
operations, net of tax ............... (168,795) -- --
------------ ------------ ------------
Total income (loss) from discontinued
operations ........................... (157,460) 9,178 (12,823)
Cumulative effect of accounting change -- (27,300) --
------------ ------------ ------------
Net loss attributable to common
stockholders............................ $ (1,775,863) $ (1,143,250) $ (462,149)
============ ============ ============
Denominator:
Basic weighted average shares ......... 314,189,280 259,139,000 258,516,000
Diluted weighted average shares ....... 314,189,280 259,139,000 258,516,000
Basic and diluted loss per share:
Loss from continuing operations ....... $ (5.15) $ (4.34) $ (1.74)
Income (loss) from discontinued
operations ........................... (0.50) 0.04 (0.05)
Cumulative effect of accounting
change, net .......................... -- (0.11) --
------------ ------------ ------------
Net loss per share .................... $ (5.65) $ (4.41) $ (1.79)
============ ============ ============
In fiscal 2001, 2000 and 1999, no potential shares of common stock have been
included in the calculation of diluted earnings per share because of the
losses reported. At March 3, 2001, an aggregate of 126,526,540 potential
common shares related to stock options, convertible preferred stock,
convertible notes, warrants, stock appreciation rights and other have been
excluded from the computation of diluted earnings per share.
6. Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
Impairment charges ....................... $214,224 $120,593 $ 87,666
Store lease exit costs ................... 57,668 18,855 107,693
Impairment of investments ................ 116,186 -- --
-------- -------- --------
$388,078 $139,448 $195,359
======== ======== ========
Impairment charges
In fiscal 2001, 2000, and 1999 store closing and impairment charges include
non-cash charges of $214,224, $120,593 and $87,666 respectively, for the
impairment of long-lived assets (including allocable
F-13
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
6. Store Closing and Impairment Charges -- (Continued)
goodwill) at 495, 249 and 270 stores. These amounts include the write-down of
long-lived assets at stores that were assessed for impairment because of
management's intention to relocate or close the store or because of changes in
circumstances that indicate the carrying value of an asset may not be
recoverable.
Store lease exit costs
During fiscal 2001, 2000, and 1999, the Company recorded charges for 144,
224, and 422 stores, respectively, to be closed or relocated that were under
long-term leases. Costs incurred to close a store, which principally include
lease termination costs, are recorded at the time management commits to
closing the store, which is the date the closure is formally approved by
senior management, or in the case of a store to be relocated, the date the new
property is leased or purchased. The Company calculates its liability for
closed stores on a store-by-store basis. The calculation includes future
minimum lease payments and related ancillary costs, from the date of closure
to the end of the remaining lease term, net of estimated cost recoveries that
may be achieved through subletting properties or through favorable lease
terminations. As a result of focused efforts on cost recoveries for closed
stores during fiscal 2001, the Company has experienced improved results, which
has been reflected in the assumptions about future sublease income. This
liability is discounted using a risk-free rate of interest. The Company
evaluates these assumptions each quarter and adjusts the liability
accordingly. The discount rates used to determine the liability were 4.71%,
6.60% and 5.22% at March 3, 2001, February 26, 2000 and February 27, 1999,
respectively.
Subsequent to the recording of lease accruals, management determined that
certain stores would remain open or would not relocate. Accordingly, the
Company reversed charges of $13,232 and $10,490 in fiscal 2001 and 2000,
respectively, for lease accruals previously established for those stores.
The reserve for store lease exit costs includes the following activity:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
Balance--beginning of year .............. $212,812 $ 246,805 $ 191,453
Provision for present value of
noncancellable lease payments of
stores designated to be closed ....... 102,495 58,324 94,404
Changes in assumptions about future
sublease income, terminations, etc.
and change of interest rate .......... (31,595) (28,979) 13,289
Reversals of reserves for stores that
management has determined will remain
open ................................. (13,232) (10,490) --
Interest accretion .................... 11,552 13,251 8,069
Cash payments, net of sublease income . (49,024) (66,099) (60,410)
-------- --------- ---------
Balance--end of year .................... $233,008 $212,812 $246,805
======== ========= =========
In addition to store closings, the Company also closed or relocated certain
distribution centers in its efforts to consolidate operations. During the
second quarter of fiscal 2000, management approved a plan to close its leased
distribution center in Las Vegas, Nevada and terminate all of its employees
and, as a result, accrued termination benefit payments of $1,634 in the second
quarter of 2000, with the charge included in selling, general and
administrative expenses. Severance payments of $1,165 were made during fiscal
year 2000 leaving a remaining liability of $469 at February 26, 2000, with
remaining payments made during fiscal 2001. The operating lease for the
distribution center was terminated in May 2000 at the end of the lease term
with no additional liability to the Company.
F-14
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
6. Store Closing and Impairment Charges -- (Continued)
In the third quarter of fiscal 2000, management announced plans to close its
South Nitro, West Virginia distribution center in the summer of 2000. As a
result of this exit plan, the Company accrued termination benefits of $3,858
in the third quarter of fiscal 2000 for all of the 480 employees with the
charge included in selling, general and administrative expenses. In the fourth
quarter of fiscal 2000 management decided to not close the facility. However,
prior to this decision the Company became obligated to pay $1,040 in severance
costs related to 102 employees. The Company paid $540 in the fourth quarter of
fiscal 2000 and the remaining $500 was paid in fiscal 2001. The remaining
reserve of $2,818 was reversed to selling, general and administrative expenses
in the fourth quarter of fiscal 2000.
In the third quarter of fiscal 2000, management approved a plan to close and
sell its Ogden, Utah distribution center. As a result of this exit plan, a
liability of $2,256 for termination benefits for 500 employees were recorded
through selling, general and administrative expenses in the third quarter of
fiscal 2000 which were subsequently paid. Additionally, an impairment charge
of $7,600 for long-lived assets was recorded in the third quarter of fiscal
2000. The facility was sold in March 2000.
Impairment of investments
The Company has an investment in the common stock of drugstore.com, which is
accounted for under the equity method. The initial investment was valued based
upon the initial public offering price of drugstore.com. During fiscal 2001,
the Company recorded an impairment of its investment in drugstore.com of
$112,123. This impairment charge was based upon a decline in the market value
of drugstore.com's stock that the Company believes to be other than temporary.
Additionally, the company recorded impairment charges of $4,063 for other
investments.
7. Accounts Receivable
During November 1997, the Company and certain of its subsidiaries entered
into an agreement to sell, on an ongoing basis, a pool of accounts receivable
to a wholly owned bankruptcy-remote special purpose funding subsidiary (the
funding subsidiary) of the Company. The funding subsidiary sold an undivided
fractional ownership interest in the pool of receivables to a securitization
company. The accounts receivable sold to the funding subsidiary were not
recognized on the Company's consolidated balance sheet. Under the terms of the
agreement, new receivables were added to the pool as collections reduced
previously sold accounts receivable. The Company serviced, administered and
collected the receivables on behalf of the purchaser. The Company recognized
no servicing asset or liability because the benefits of servicing were
expected to represent adequate compensation for the services performed.
In connection with the Company's refinancing in June 2000, all borrowings
under the securitization program were repaid and the program was terminated.
At the date of termination, $300,000 of receivables were recognized on the
Company's consolidated balance sheet. Expenses of $7,855 and $18,052
associated with the securitization program through the date of termination
were recognized for the years ended March 3, 2001 and February 26, 2000,
respectively.
The Company maintains an allowance for doubtful accounts receivable based
upon the expected collectibility of accounts receivable. The allowance for
uncollectible accounts at March 3, 2001 and February 26, 2000 was $37,050 and
$43,371, respectively. The Company's accounts receivable are due primarily
from third-party providers (e.g., insurance companies and governmental
agencies) under third-party payment plans and are booked net of any allowances
provided for under the respective plans. Since payments due from third-party
payers are sensitive to payment criteria changes and legislative actions, the
allowance is reviewed continually and adjusted for accounts deemed
uncollectible by management.
F-15
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
8. Property, Plant and Equipment
Following is a summary of property, plant and equipment, including capital
lease assets, at March 3, 2001 and February 26, 2000:
2001 2000
----------- -----------
Land ............................................. $ 668,561 $ 733,979
Buildings ........................................ 932,083 1,010,133
Leasehold improvements ........................... 1,192,815 1,262,590
Equipment ........................................ 1,413,890 1,469,881
Construction in progress ......................... 49,182 85,484
----------- -----------
4,256,531 4,562,067
Accumulated depreciation ......................... (1,215,523) (1,116,239)
----------- -----------
Property, plant and equipment, net.............. $ 3,041,008 $ 3,445,828
=========== ===========
Depreciation expense, which includes the depreciation of assets recorded
under capital leases, was $285,886 in fiscal 2001, $326,873 in fiscal 2000 and
$269,184 in fiscal 1999.
Substantially all of the Company's owned properties on which it operates
stores are pledged as collateral under the Company's debt agreements. The
carrying amount of assets to be disposed of is $64,131 and $113,454 at March
3, 2001 and February 26, 2000, respectively.
9. Investments in Fifty Percent or Less Owned Subsidiaries
In July 1999, the Company purchased 9,334,746 of Series E Convertible
Preferred Shares in drugstore.com, an on-line pharmacy, for cash of $8,125,
including legal costs, and the Company's agreement to provide access to the
Company's networks of pharmacies and third-party providers, advertising
commitments and exclusivity agreements. Each of the Series E Convertible
Preferred Shares were converted to one share of common stock at the time of
drugstore.com's initial public offering late in July 1999 and represented
21.6% of the voting stock immediately after the initial public offering. The
investment is recorded in other assets, was initially valued at $168,025,
equal to the initial public offering price of $18 per share multiplied by the
Company's shares. The Company accounts for the investment on the equity method
because the Company has significant influence over drugstore.com resulting
from its share of the voting stock, its right to appoint one board member and
a number of significant operating agreements. Included in other noncurrent
liabilities is the unamortized portion of the fair value of the operating
agreements of $133,916 that is being amortized over 10 years, the life of the
arrangements described above. As a result of the start-up nature of the
drugstore.com, the Company recorded an increase to its investment of $14,406
and $2,929 and corresponding increases to equity in connection with the sale
of stock by drugstore.com during fiscal 2001 and 2000, respectively. During
fiscal 2001, the Company recorded an impairment of its investment in
drugstore.com of $112,123. This impairment charge was based upon a decline in
the market value of drugstore.com's stock that the Company believes to be
other than temporary.
F-16
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
9. Investments in Fifty Percent or Less Owned Subsidiaries -- (Continued)
In June 1999, the Company sold its investment in Diversified Prescription
Delivery LLC, a provider of mail order prescription delivery services. The
sales price was $22,860 and resulted in a loss of $811. The investment was
accounted for on the equity method with a carrying amount of $23,671 at the
date of sale.
In February 2000, the Company sold its investment in Stores Automated
Systems, Inc. a manufacturer of integrated point of sale systems. The
investment was accounted for on the equity method with a carrying amount of
$8,005 at the date of sale. The $8,805 sales price included cash and
forgiveness of payables, and resulted in a gain of $800.
10. Goodwill and Other Intangibles
Following is a summary of intangible assets at March 3, 2001 and February
26, 2000:
2001 2000
---- ----
Goodwill ............................................ $ 848,121 $ 920,241
Lease acquisition costs and favorable leases ........ 670,789 713,970
Prescription files .................................. 137,700 136,434
Assembled workforce ................................. 47,133 51,021
---------- ----------
1,703,743 1,821,666
Accumulated amortization ............................ (636,404) (563,558)
---------- ----------
$1,067,339 $1,258,108
========== ==========
11. Accrued Salaries, Wages, and Other Current Liabilities
Accrued salaries wages and other current liabilities consist of the
following at March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Accrued wages, benefits and other personnel costs ....... $280,126 $254,738
Accrued legal and other professional fees ............... 67,621 161,143
Accrued taxes payable ................................... 2,012 111,805
Accrued interest ........................................ 85,307 61,427
Accrued lease exit costs ................................ 37,042 42,413
Accrued rent and other occupancy costs .................. 79,111 62,087
Deferred income ......................................... 24,543 19,143
Accrued store expense ................................... 30,057 38,443
Accrued property taxes .................................. 43,367 44,490
Other ................................................... 46,861 87,314
-------- --------
$696,047 $883,003
======== ========
F-17
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
12. Income Taxes
The provision for income taxes from continuing operations was as follows:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Current tax expense (benefit):
Federal ............................... $ -- $(19,017) $ 22,163
State ................................. 3,078 -- --
-------- -------- ---------
3,078 (19,017) 22,163
Deferred tax (benefit):
Federal ............................... 146,773 20,677 (228,776)
State ................................. (894) (10,035) (10,328)
-------- -------- ---------
145,879 10,642 (239,104)
-------- -------- ---------
Total income expense (benefit) ........ $148,957 $ (8,375) $(216,941)
======== ======== =========
A reconciliation of the provision for income taxes as presented on the
consolidated statements of operations is as follows:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Income tax expense (benefit) from
continuing operations................... $148,957 $ (8,375) $ (216,941)
Income tax expense (benefit) from
discontinued operations................. 13,846 30,903 (5,925)
Income tax (benefit) from loss on
disposal of discontinued operations..... (734) -- --
Income tax (benefit) related to
cumulative effect of accounting change.. -- (18,200) --
-------- -------- ----------
Total income tax expense (benefit) .... $162,069 $ 4,328 $(222,866)
======== ======== ==========
A reconciliation of the statutory federal rate and the effective rate, for
continuing operations, is as follows:
Year Ended
------------------------------------------------------
Percentage March 3, 2001 February 26, 2000 February 27, 1999
---------- ------------- ----------------- -----------------
Federal statutory rate ................... (35.0)% (35.0)% (35.0)%
Nondeductible expenses ................... 6.0 3.4 3.7
State income taxes, net .................. (6.8) (4.1) (4.5)
Tax credits .............................. -- (.8) (1.4)
Valuation allowance ...................... 47.4 34.9 3.6
Other .................................... -- .9 1.0
----- ----- -----
Effective tax rate ....................... 11.6% (0.7)% (32.6)%
===== ===== =====
The difference between the statutory federal rate and the reported amount of
income tax expense attributable to discontinued operations is primarily due to
nondeductible goodwill. The effective rate for fiscal 2001 reflects an
increase in the valuation allowance due to the elimination of PCS deferred tax
liabilities, resulting from its disposition.
F-18
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
12. Income Taxes -- (Continued)
The tax effect of temporary differences that give rise to significant
components of deferred tax assets and liabilities consist of the following at
March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Deferred tax assets:
Accounts receivable............................... $ 31,113 $ 43,762
Accrued expenses.................................. 147,427 141,332
Liability for lease exit costs.................... 125,284 113,907
Pension, retirement and other benefits............ 96,338 69,476
Investment impairment............................. 108,733 59,863
Other ............................................ 370 --
Credits .......................................... 58,533 69,840
Net operating losses.............................. 724,177 466,451
----------- ---------
Total gross deferred tax assets ................. 1,291,975 964,631
Valuation allowance ................................. (1,031,287) (475,174)
----------- ---------
Net deferred tax assets ......................... 260,688 489,457
Deferred tax liabilities:
Inventory......................................... 123,584 121,119
Long-lived assets................................. 137,104 218,793
Other............................................. -- 2,628
----------- ---------
Total gross deferred tax liabilities ............ 260,688 342,540
----------- ---------
Net deferred tax assets, all noncurrent ............. $ -- $ 146,917
=========== =========
Net Operating Losses, Capital Losses and Tax Credits
At March 3, 2001 and February 26, 2000, the Company had federal net
operating loss (NOL) carryforwards of $1,572,818 and $841,059, respectively,
the majority of which expire between fiscal 2017 and 2021.
At March 3, 2001 and February 26, 2000, the Company had state NOL
carryforwards of $1,718,513 and $1,662,602, respectively, the majority of
which expire by fiscal 2005 and the remaining balance by fiscal 2015.
At March 3, 2001, due to the disposition of PCS, the Company incurred a
$406,220 capital loss which will expire, if not offset by future capital
gains, by fiscal 2006.
At March 3, 2001 and February 26, 2000, the Company had federal business tax
credit carryforwards of $49,597 and $61,394, the majority of which expire
between fiscal 2017 and 2020. In addition to these credits, the Company has
alternative minimum tax credit carryforwards of $8,935 and $7,512 at fiscal
2001 and 2000, respectively.
Valuation Allowances
The valuation allowances as of March 3, 2001, and February 26, 2000 were
$1,031,287 and $475,174 respectively, and principally apply to NOL and tax
credit carryforwards. The Company believes that it is more likely than not
that those carryovers will not be realized. As a result of the decision to
dispose of PCS, the Company recognized an increase in the valuation allowance
of $146,917 in fiscal 2001.
F-19
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at
March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Commercial paper borrowings. ........................ $ -- $ 192,000
Term loan due 2000 .................................. -- 272,422
5.50% fixed-rate senior notes due 2000 .............. -- 200,000
6.70% notes due 2001 ................................ 7,342 350,000
5.25% convertible subordinated notes due 2002 ....... 357,324 649,986
Senior Facility ..................................... 682,000 --
Revolving Credit facility due 2002 (amended and
restated) ("RCF").................................. 730,268 716,073
Term loan due 2002 (amended and restated) ("PCS") ... 591,391 1,300,000
Exchange Debt ....................................... 216,126 --
10.50% notes due 2002 ............................... 467,500 --
6.00% dealer remarketable securities due 2003 ....... 187,650 200,000
6.00% fixed-rate senior notes due 2005 .............. 194,500 200,000
7.625% senior notes due 2005 ........................ 198,000 200,000
7.125% notes due 2007 ............................... 350,000 350,000
6.125% fixed-rate senior notes due 2008 ............. 150,000 150,000
6.875% senior debentures due 2013 ................... 200,000 200,000
3.50% to 10.475% industrial development bonds due
through 2009....................................... 4,740 5,196
7.70% notes due 2027 ................................ 300,000 300,000
6.875% fixed-rate senior notes due 2028 ............. 150,000 150,000
Lease financing obligations ......................... 1,100,000 1,148,135
Other ............................................... 7,707 29,056
---------- ----------
5,894,548 6,612,868
Short-term debt, current maturities of long-term
debt and lease financing obligations............... (36,956) (102,050)
---------- ----------
Long-term debt and lease financing obligations, less
current maturities................................. $5,857,592 $6,510,818
========== ==========
In June 2000, the Company entered into an interest rate swap contract that
fixes the LIBOR component of $500,000 of the Company's variable rate debt at
7.083% for a two-year period. In July 2000, the Company entered into an
additional interest rate swap that fixes the LIBOR component of an additional
$500,000 of variable rate debt at 6.946% for a two-year period. The Company
entered into these contracts to hedge its exposure to fluctuations in market
interest rates. The differential to be paid or received as a result of these
swap agreements was recorded as an adjustment to interest expense. At March 3,
2001, the Company would have had to pay $29,000 if it had terminated these
contracts on that date.
Refinancings
On June 14, 2000, the Company obtained a $1,000,000 (increased to $1,100,000
in November 2000) senior secured credit facility (the Senior Facility) from a
syndicate of banks. The Senior Facility is guaranteed by substantially all of
the Company's wholly-owned subsidiaries, and the banks have a security
interest in substantially all of those subsidiaries' accounts receivable,
inventory, and intellectual property and a security interest in certain of
their real property. Of this amount, $600,000 is in the form of a term loan
and $500,000 is in the form of a revolving credit facility both due in August
2002 and both with interest at LIBOR plus 3.00%. Funds drawn under the term
loan were used to repay $300,000 of drawings under the accounts receivable
securitization program and to pay $200,000 for working capital and transaction
expenses which are
F-20
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
being amortized over the term of the Senior Facility. Funds drawn from time to
time under the revolving credit facility are used to fund current operations.
In connection with the $100,000 term loan in November 6, 2000, the Company
incurred fees of $3,528 which are being amortized over the period of the new
term loans.
The Senior Facility contains customary covenants, which place restrictions
on the assumption of debt, the payment of dividends, mergers, liens and sale
and leaseback transactions. The facility requires the Company to meet various
financial ratios and limits capital expenditures. The Company was in
compliance with its debt covenants as of March 3, 2001. For the three fiscal
quarters ended March 3, 2001, those covenants required the company to maintain
a minimum interest coverage ratio and a minimum fixed charge coverage ratio of
.95:1, increasing to a minimum interest coverage ratio of 1.40:1 and a minimum
fixed charge ratio of 1.19:1 for the four quarters ending June 1, 2002. For
the three fiscal quarters ended March 3, 2001, the Company was required to
have consolidated EBITDA (as defined in the Senior Facility) of no less than
$364,000, increasing to $720,000 for the four fiscal quarters ending on June
1, 2002. For the three fiscal quarters ended March 3, 2001, capital
expenditures were limited to $186,000, increasing to $243,000 for the four
fiscal quarters ending June 1, 2002. As of March 3, 2001, the Company had
additional borrowing capacity under the Senior Facility of $394,600.
Also on June 14, 2000, the Company extended the maturity dates of the RCF
credit facility and the PCS credit facility to August 2002. Borrowings under
the PCS credit facility bear interest at LIBOR plus 3.25% and borrowings under
the RCF credit facility bear interest at LIBOR plus 3.75%. These credit
facilities contain restrictive covenants that place restrictions on the
assumption of debt, the payment of dividends, mergers, liens and sale-
leaseback transactions. These credit facilities also require the Company to
satisfy financial covenants that are generally slightly less restrictive than
the covenants in the Senior Facility. The facilities also limit the amount of
our capital expenditures to $186,000 for the three quarters ended March 3,
2001, increasing to $243,000 for the four quarters ending June 1, 2002. Under
the terms of these facilities, after giving effect to the $100,000 increase in
the term loan, the Company is permitted to incur up to an additional $35,000
of indebtedness under the Senior Facility without the further consent of
lenders. The PCS credit facility was originally secured by a first lien on the
stock of PCS Health Systems, Inc. and the RCF credit facility was originally
secured by a first lien on the stock of drugstore.com and a second lien on the
stock of PCS Health Systems, Inc. Any amounts repaid under these facilities
with the proceeds of asset sales may not be borrowed.
In addition, on June 14, 2000 certain affiliates of J.P. Morgan Chase, which
had lent the Company $300,000 under a demand note in June 1999 and who was
also a lender under the RCF and PCS credit facilities, together with certain
other lenders under the two credit facilities, agreed to exchange $274,782 of
their loans for a new secured exchange debt obligation. The terms of the
exchange debt are substantially the same as the terms of our RCF and PCS
credit facilities and the interest rate is currently LIBOR plus 3.25%. The
lenders of the exchange debt have the same collateral as they did with respect
to their loans under the RCF and PCS credit facilities or demand note, as
applicable, as well as a first lien on the Company's prescription files.
Additionally, the Company issued three-year warrants to purchase 2,500,000
shares of common stock at $11.00 per share. The fair value assigned to the
warrants was $8,500 and amortization was completed during fiscal 2001. The
Company also paid and expensed $4,000 of advisory fees over a period of one
year.
Upon consummation of the sale of PCS on October 2, 2000, $575,000 of the
cash portion of the proceeds was applied to reduce the outstanding balances of
the PCS credit facility and the PCS exchange debt. In February 2001, the
Company also applied $34,504 received from the final settlement of the PCS
sale to reduce the PCS facilities. At March 3, 2001, the Company had
$1,537,785 of borrowings outstanding under the PCS, RCF and related exchange
debt facilities. Subsequent to March 3, 2001, the Company further
F-21
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
reduced the borrowings outstanding under the PCS and related exchange debt
facilities by $484,104 utilizing the proceeds from the sale of AdvancePCS
stock and repayment of AdvancePCS senior subordinated notes which it had
received as part of the consideration for the sale.
The Company also amended its existing guarantees of two synthetic lease
transactions to provide substantially the same terms of our RCF and PCS credit
facilities.
In connection with modifications to the RCF and PCS credit facilities, the
debt exchange for the 10.5% notes due 2002, the guarantee of the Prudential
note, the exchange for exchange debt and the guarantee of the synthetic lease
transactions, substantially all wholly-owned subsidiaries guaranteed the
Company's obligations thereunder on a second priority basis. These subsidiary
guarantees are secured by a second priority lien on the inventory, accounts
receivable, intellectual property and some of the real estate assets of the
subsidiary guarantors. Except to the extent previously secured, the Company's
direct obligations under those facilities and guarantees remain unsecured.
Exchange Offers
In connection with the above refinancing on June 14, 2000, the Company
exchanged $52,500 of its 5.5% fixed-rate senior notes due in December 2000 and
$321,800 of its 6.7% notes due in December 2001 for $374,300 of 10.5% senior
secured notes due 2002. The Company arranged with certain financial
institutions to refinance $93,200 of the 5.5% notes when they become due with
the 10.5% senior secured notes due 2002. These financial institutions
purchased $16,710 of the 5.5% notes and $20,390 of the 6.7% notes on July 27,
2000; $53,814 of the 5.5% notes on September 13, 2000; and $476 of the 6.7%
notes on December 14, 2000; and exchanged the purchased notes with the Company
for the 10.5% senior secured notes due 2002. The remaining 5.5% notes were
retired in December 2000 with the Company's general corporate funds and the
remaining forward purchase commitment. The Company recognized an aggregate
loss of $6,200 in connection with the exchange and refinancing.
Exchange of Debt for Equity
Throughout and subsequent to fiscal 2001, the Company exchanged debt for
equity as outlined in the table below:
Carrying Additional
Amount Common Paid-In Gain
Debt Exchanged Exchanged Stock Capital (Loss)
-------------- --------- ------- ---------- ---------
Exchanged during the year ended March 3, 2001:
PCS and RCF facilities and J.P. Morgan demand note .............................. $284,820 $51,785 $220,088 $ 5,189
5.25% convertible subordinated notes ............................................ 292,662 30,241 379,829 (118,769)
6.00% dealer remarketable securities ............................................ 17,850 1,868 4,053 11,868
7.625% senior notes ............................................................. 2,000 230 604 1,156
-------- ------- -------- ---------
For the year ended March 3, 2001 ................................................ $597,332 $84,124 $604,574 $(100,556)
======== ======= ======== =========
Exchanges (including commitments) subsequent to March 3, 2001 through May 15,
2001 (unaudited):
5.25% convertible subordinated notes ............................................ $205,308 $29,750 $307,686 $(133,129)
6.00% dealer remarketable securities ............................................ 79,885 12,382 55,633 11,427
10.5% notes ..................................................................... 56,300 8,467 47,461 (656)
PCS facility .................................................................... 5,000 715 4,390 (105)
RCF facility .................................................................... 164,858 25,878 150,186 (11,206)
-------- ------- -------- ---------
Subsequent to March 3, 2001 ..................................................... $511,351 $77,192 $565,356 $(133,669)
======== ======= ======== =========
F-22
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
Several of the exchanges subsequent to March 3, 2001 have not settled,
including the exchanges for the 10.5% notes, the PCS facility and the RCF
facility. Accordingly, the data presented in the above table for these
exchanges is based on the best available estimates.
Other
In fiscal 2000, the Company was required to obtain waivers of compliance
with, and modifications to certain of the covenants contained in its senior
credit and loan agreements and public indentures. In connection with obtaining
the waivers and modifications, the Company paid fees and transaction costs of
$63,332.
On September 10, 1997, the Company completed the sale of $650,000 of 5.25%
convertible subordinated notes due September 15, 2002. The notes are
convertible into shares of the Company's common stock at any time on or after
the 90th day following the last issuance of notes and prior to the close of
business on the maturity date, unless previously redeemed or repurchased. The
conversion price is $36.14 per share (equivalent to a conversion rate of 27.67
shares per $1 principal amount of notes), subject to adjustment in certain
events. Interest on the notes is payable semiannually on March 15 and
September 15 of each year, commencing on March 15, 1998. The notes may be
redeemed at the option of the Company on or after September 15, 2000, in whole
or in part.
On April 20, 1995, the Company issued $200,000 of 7.625% senior notes due
April 15, 2005. The notes may not be redeemed prior to maturity and will not
be entitled to any sinking fund.
In August 1993, the Company issued 6.875% senior debentures having an
aggregate principal amount of $200,000. These debentures are due August 15,
2013, may not be redeemed prior to maturity and are not entitled to any
sinking fund.
The Company had outstanding letters of credit of $46,952 at March 3, 2001
and $41,624, at February 26, 2000. Also, the Company had provided permanent
financing guarantees to certain of its store construction developers to be
effective, if such developers were unable to obtain their own permanent
financing upon completion of the store construction. There were no guarantees
outstanding at March 3, 2001. Guarantees of $33,774 were outstanding at
February 26, 2000.
The annual weighted average interest rate on the Company's indebtedness was
8.2%, 7.4% and 6.8% for fiscal 2001, fiscal 2000 and fiscal 1999,
respectively.
The aggregate annual principal payments of long-term debt and capital lease
obligations for the five succeeding fiscal years are as follows: 2002,
$36,956; 2003, $3,082,829; 2004, $218,355; 2005, $229,038; 2006, $216,398 and
$2,110,972 in 2007 and thereafter. The Company is in compliance with
restrictions and limitations included in the provisions of various loan and
credit agreements.
The subsidiary guarantees related to the Company's credit facilities are
full and unconditional and joint and several and there are no restrictions on
the ability of the parent to obtain funds from its subsidiaries. Also, the
parent company's assets and operations are not material and subsidiaries not
guaranteeing the credit facilities are minor. Accordingly, condensed
consolidating financial information for the parent and subsidiaries is not
presented.
F-23
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
14. Leases
The Company leases most of its retail stores and certain distribution
facilities under noncancellable operating and capital leases, most of which
have initial lease terms ranging from 10 to 22 years. The Company also leases
certain of its equipment and other assets under noncancellable operating
leases with initial terms ranging from 3 to 10 years. In addition to minimum
rental payments, certain store leases require additional payments based on
sales volume, as well as reimbursements for taxes, maintenance, and insurance.
Most leases contain renewal options, certain of which involve rent increases.
Total rental expense, net of sublease income of $10,930, $10,443 and $10,443,
was $537,423, $500,782, and $477,537 in 2001, 2000 and 1999, respectively.
These amounts include contingent rentals of $26,644, $28,625, and $32,960, in
fiscal 2001, 2000 and 1999, respectively.
The Company is a guarantor on certain leases transferred to third parties
through sales or assignments.
The Company leases certain facilities through sale-leaseback arrangements
accounted for using the financing method. Proceeds from sale-leaseback
programs were approximately $6,992 in 2001, $74,898 in 2000 and $504,990 in
1999.
The net book values of assets under capital leases and sale-leasebacks
accounted for under the financing method are summarized as follows:
March 3, February 26,
2001 2000
-------- ------------
Land ................................................ $326,304 $ 343,948
Buildings ........................................... 532,635 570,604
Leasehold improvements .............................. 128,122 152,347
Equipment ........................................... 2,644 757
Accumulated depreciation ............................ (63,097) (39,809)
-------- ----------
$926,608 $1,027,847
======== ==========
Following is a summary of lease finance obligations at March 3, 2001 and
February 26, 2000:
2001 2000
---------- ----------
Sale-leaseback obligations accounted for under the
financing method ................................... $ 917,211 $ 944,805
Obligations under capital leases .................... 182,789 203,330
---------- ----------
Total ............................................... 1,100,000 1,148,135
Less current obligation ............................. (28,603) (25,964)
---------- ----------
Long-term lease finance obligations ................. $1,071,397 $1,122,171
========== ==========
F-24
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
14. Leases -- (Continued)
Following are the minimum lease payments net of sublease income that will
have to be made in each of the years indicated based on non-cancelable leases
in effect as of March 3, 2001:
Lease Financing Operating
Fiscal year Obligations Leases
----------- --------------- ----------
2002 ........................................... $ 114,081 $ 511,105
2003 ........................................... 121,463 496,071
2004 ........................................... 113,327 459,983
2005 ........................................... 113,040 417,421
2006 ........................................... 96,382 372,843
Later years .................................... 1,321,703 3,325,522
---------- ----------
Total minimum lease payments ................... 1,879,996 $5,582,945
==========
Amount representing interest ................... 779,996
----------
Present value of minimum lease payments ........ $1,100,000
==========
15. Redeemable Preferred Stock
In March 1999 and February 1999, Rite Aid Lease Management Company, a wholly
owned subsidiary of the Company, issued 63,000 and 150,000 shares of
Cumulative Preferred Stock, Class A, par value $100 per share, respectively.
The Class A Cumulative Preferred Stock is mandatorily redeemable on April 1,
2019 at a redemption price of $100 per share plus accumulated and unpaid
dividends. The Class A Cumulative Preferred Stock pays dividends quarterly at
a rate of 7.0% per annum of the par value of $100 per share when, as and if
declared by the Board of Directors of Rite Aid Lease Management Company in its
sole discretion. The amount of dividends payable in respect of the Class A
Cumulative Preferred Stock may be adjusted under certain events. The
outstanding shares of the Class A Preferred Stock were recorded at the
estimated fair value of $5,695 for the 2000 issuances, which equaled the sale
price on the date of issuance. Because the fair value of the Class A Preferred
Stock was less than the mandatory redemption amount at issuance, periodic
accretions to stockholders' equity using the interest method are made so that
the carrying amount equals the redemption amount on the mandatory redemption
date. There was no accretion in fiscal 2001; accretion was $97 in 2000.
16. Capital Stock
In October 1999, the Company issued 3,000,000 shares of Series B preferred
stock at $100 per share which is the liquidation preference. The Series B
preferred stock pays dividends at 8% per year which is payable in cash or
additional shares of Series B, at the Company's election. The Series B
preferred stock, when issued, was convertible into shares of the Company's
common stock at a conversion price of $11.00 per share of common stock.
Pursuant to its terms, as a result of the issuance of shares at $5.50 per
share on June 14, 2000, the per share conversion price for the Series B
preferred stock was adjusted to $5.50. As a result of this adjustment the
Company increased its paid in capital, its accumulated deficit, and its loss
attributable to common stockholders by $160.9 million in June 2000
(representing the difference between $5.50 and the market price of the
Company's common stock on the original date of issuance of the Series B
preferred stock).
For the years ended March 3, 2001 and February 26, 2000, the Company
recognized an increase to its investment in drugstore.com of $14,406 and
$2,929, respectively, and a corresponding increase to paid in capital, in
connection with equity transactions of drugstore.com.
F-25
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
16. Capital Stock -- (Continued)
In April 2001, the Board of Directors approved, subject to stockholder
approval, an amendment to the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of common stock, $1.00 par value,
from 600,000,000 to 1,000,000,000. If the stockholders approve the
recommendation, the authorized capital stock of the Company will consist of
1,000,000,000 shares of common stock and 20,000,000 shares of preferred stock,
both having a par value of $1.00 per share. Preferred stock is issued in
series subject to terms established by the Board of Directors. At March 3,
2001, the Company has outstanding warrants to purchase 2,500,000 shares of
common stock at $11.00 per share (see Note 13). The Company has no other
warrants outstanding.
17. Stock Option and Stock Award Plans
The Company reserved 22,000,000 shares of its common stock for the granting
of stock options and other incentive awards to officers and key employees
under the 1990 Omnibus Stock Incentive Plan (the 1990 Plan). Options may be
granted, with or without SARs, at prices that are not less than the fair
market value of a share of common stock on the date of grant. The exercise of
either a SAR or option automatically will cancel any related option or SAR.
Under the 1990 Plan, the payment for SARs will be made in shares, cash or a
combination of cash and shares at the discretion of the Compensation
Committee.
In November 1999, the Company adopted the 1999 Stock Option Plan (the 1999
Plan), under which 10,000,000 shares of common stock are reserved for the
granting of stock options at the discretion of the Board of Directors.
In December 2000, the Company adopted the 2000 Omnibus Equity Plan (the 2000
Plan) under which 22,000,000 shares of common stock are reserved for granting
of restricted stock, stock options, phantom stock, stock bonus awards and
other stock awards at the discretion of the Board of Directors.
In February 2001, the Company adopted the 2001 Stock Option Plan (the 2001
Plan) under which 20,000,000 shares of common stock are reserved for granting
of stock options at the discretion of the Board of Directors.
All of the plans provide for the Board of Directors (or at its election, the
Compensation Committee) to determine both when and in what manner options may
be exercised; however, it may not be more than 10 years from the date of
grant. All of the plans provide that stock options may be granted at prices
that are not less than the fair market value of a share of common stock on the
date of grant. The aggregate number of shares reserved for issuance for all
plans is 74,000,000 as of March 3, 2001.
F-26
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
Following is a summary of stock option transactions for the fiscal years
ended March 3, 2001, February 26, 2000 and February 27, 1999:
Weighted Average
Price Per
Shares Shares
----------- ----------------
Balance, February 28, 1998 ................... 11,491,774 $ 13.96
Granted.................................... 4,054,000 32.74
Exercised.................................. (633,575) 14.58
Cancelled.................................. (241,500) 20.18
----------- -------
Balance, February 27, 1999 ................... 14,670,699 19.02
Granted.................................... 18,687,562 7.95
Exercised.................................. (64,650) 13.61
Cancelled.................................. (7,488,707) 14.60
----------- -------
Balance, February 26, 2000 ................... 25,804,904 12.30
Granted.................................... 47,830,762 4.03
Exercised.................................. -- --
Cancelled.................................. (20,438,867)(1) 7.57
----------- -------
Balance, March 3, 2001 ....................... 53,196,799 $ 6.48
=========== =======
(1) Includes 16,683,962 stock options which have been cancelled and reissued.
For various price ranges, weighted average characteristics of outstanding
stock options at March 3, 2001 were as follows:
Outstanding Options Exercisable Options
---------------------------------------- ---------------------
Number
Outstanding Weighted Weighted
as of Remaining Average Average
Range of exercise prices March 3, 2001 life (years) Price Shares Price
------------------------ ------------- ------------ -------- ---------- --------
$ 2.7500 to $ 2.7500 16,683,962 9.04 $ 2.7500 4,053,041 $ 2.7500
$ 3.0000 to $ 3.9375 1,221,500 9.79 $ 3.4217 -- --
$ 4.0500 to $ 4.0500 20,142,000 9.95 $ 4.0500 -- --
$ 4.0625 to $ 8.9125 6,280,788 8.52 $ 5.6437 1,999,813 $ 5.7054
$ 8.9150 to $ 16.9375 5,689,574 4.05 $13.5048 5,689,574 $13.5048
$18.2500 to $ 44.6875 2,940,475 7.39 $28.7612 1,518,475 $29.3870
$45.5625 to $ 45.5625 3,000 7.76 $45.5625 1,500 $45.5625
$47.5000 to $ 47.5000 220,000 7.87 $47.5000 127,500 $47.5000
$48.5625 to $ 48.5625 13,000 7.84 $48.5625 6,500 $48.5625
$48.8125 to $ 48.8125 2,500 7.85 $48.8125 1,250 $48.8125
---------- ----------
$2.7500 to $ 48.8125 53,196,799 8.70 $ 6.4824 13,397,653 $11.2346
========== ==== ======== ========== ========
In November 2000, the Company reduced the exercise price of 16,683,962 stock
options issued after December 4, 1999 to $2.75 per share, which represents
fair market value of a share of common stock on the date of the repricing. In
connection with the repricing, the Company recognizes compensation expense for
these options using variable plan accounting. Under variable plan accounting,
the Company recognizes compensation expense over the option vesting period. In
addition, subsequent changes in the market value of the Company's common stock
during the option period, or until exercised, will generate changes in the
F-27
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
compensation expense recognized on the repriced options. The Company
recognized expense of approximately $33,500 during fiscal 2001 related to the
repriced options.
The Company adopted SFAS No.123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with the provisions of SFAS No. 123, the
Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans and, accordingly, does not recognize compensation cost.
The pro forma impact on net loss and per share amounts are reported below as
if the Company had elected to recognize compensation cost based upon the fair
value of the options granted at the grant date as prescribed by SFAS No. 123
is outlined below:
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
Net loss............................................ $(1,589,224) $(1,133,043) $(461,522)
Pro forma additional compensation expense under fair
value method...................................... (46,842) (22,464) (10,463)
----------- ----------- ---------
Pro forma net loss.................................. (1,636,066) (1,155,507) (471,985)
Accretion of redeemable preferred stock............. -- (97) --
Preferred stock conversion reset.................... (160,915) -- --
Dividends on preferred stock........................ (25,724) (10,110) (627)
----------- ----------- ---------
Pro forma net loss attributable to common
stockholders...................................... $(1,822,705) $(1,165,714) $(472,612)
=========== =========== =========
Pro forma basic and diluted loss per share.......... $ (5.80) $ (4.50) $ (1.83)
=========== =========== =========
The pro forma amounts only take into account the options issued since March
5, 1995. The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
2001 2000 1999
--------- --------- ---------
Expected stock price volatility .......... 67.2% 58.0% 30.7%
Expected dividend yield .................. 0.0% 0.0% 1.0%
Risk-free interest rate .................. 6.25% 6.3% 5.6%
Expected life of options ................. 2.8 years 4.2 years 6.7 years
The average fair value of each option granted during fiscal 2001, 2000 and
1999 was $1.91, $4.09 and $12.36, respectively.
Restricted Stock
In December 1999, certain executive officers received restricted stock
grants of 1,000,000 shares. The Company recorded these grants at a fair value
on the date of the grant of $8,250. During fiscal 2000, the Company also made
tax payments on behalf of the executives to help defray the tax effects of the
grants to the executives. Under the restricted stock agreement, the
restrictions placed on the shares lapse in equal monthly installments over the
period from December 1999 to November 2002. However, in most circumstances the
executive would only have to provide one year of service to the Company to
earn the total number of shares. Accordingly, the Company is amortizing the
cost of the stock grant over one year.
In fiscal 2001, restricted stock grants of 4,004,000 shares were awarded to
key employees under plans approved by the stockholders. Shares vest in
installments up to three years and unvested shares are forfeited upon
termination of employment. The Company recorded the issuances at fair value on
the date of grant of $22,797.
F-28
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
Compensation expense related to all restricted stock grants is being
recorded over a one to three year vesting period of these grants. For the
years ended March 3, 2001 and February 26, 2000, the Company recognized
expense of $12,387 and $2,062 related to restricted share awards. The unearned
compensation associated with these restricted stock shares was $16,598. This
amount is included in stockholders equity as a component of deferred
compensation.
Stock Appreciation Units
The Company has issued stock appreciation units to various members of field
management. The grant price for each unit is the closing price of the
Company's common stock on the date of grant. The units vest four years from
the date of grant. For each outstanding unit, the Company is obligated to pay
out the difference between the grant price and the average market price of one
share of the Company's common stock for the last twenty trading days before
the vesting date. The payment may be in cash or shares, at the discretion of
the Company; however, the Company has historically made cash payments. The
Company's obligations under the stock appreciation units are remeasured at
each balance sheet date and amortized to compensation expense over the vesting
period.
At March 3, 2001 and February 26, 2000, there were 5.7 million and 7.0
million stock appreciation rights units outstanding, respectively. Grant
prices for units outstanding at March 3, 2001 ranged from $5.38 to $48.56 per
unit. Amounts charged or (credited) to expense relating to the stock
appreciation rights units for fiscal 2001, 2000 and 1999 were $(407),
$(45,500), $32,200, respectively.
18. Retirement Plans
The Company and its subsidiaries have numerous retirement plans covering
salaried employees and certain hourly employees. The retirement plans include
a profit sharing retirement plan and other defined contribution plans.
Contributions for the profit sharing plan are a discretionary percent of each
covered employee's salary, as determined by the Board of Directors based on
the Company's profitability. Total expenses recognized for the profit sharing
plan were $5,350 in 2001, $9,945 in 2000, and $6,091 in 1999. Employer
contributions for other defined contribution plans are generally based upon a
percentage of employee contributions or, in the case of certain executive
officers, in accordance with employment agreements. The expenses recognized
for these plans were $9,141 in 2001, $7,925 in 2000, and $7,779 in 1999. There
are also several defined benefit plans that require benefits to be paid to
eligible employees based upon years of service with the Company or formulas
applied to their compensation. The Company's funding policy is to contribute
the minimum required by the Employee Retirement Income Security Act of 1974.
F-29
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
Net periodic pension cost for the defined benefit plans includes the
following components:
Defined Benefit Pension Nonqualified Executive
Plans Retirement Plan
---------------------------- --------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------- ------
Service cost ............................. $ 4,004 $ 4,441 $ 5,034 $ 908 $ 671 $ 514
Interest cost ............................ 4,248 4,166 3,935 2,642 1,497 1,424
Expected return on plan assets ........... (6,896) (5,723) (4,936) -- -- --
Amortization of unrecognized net
transition (asset)/obligation........... (160) (160) (160) 1,162 1,163 1,163
Amortization of unrecognized prior
service cost............................ 346 376 473 -- -- --
Amortization of unrecognized net gain .... (2,202) (226) (202) (193) -- --
Change due to plan amendment ............. -- -- -- -- 18,891 --
------- ------- ------- ------ ------- ------
Net pension (credit) expense ............. $ (660) $ 2,874 $ 4,144 $4,519 $22,222 $3,101
======= ======= ======= ====== ======= ======
The table below sets forth a reconciliation from the beginning of the year
for both the benefit obligation and plan assets of the Company's retirement
and health benefits plans, as well as the funded status and amounts recognized
in the Company's balance sheet as of March 3, 2001 and February 26, 2000:
F-30
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
------------------ --------------------
2001 2000 2001 2000
------- -------- --------- --------
Change in benefit obligations:
Benefit obligation at end of prior year ......... $58,791 $ 62,885 $ 34,691 $ 21,891
Service cost .................................... 4,004 4,441 908 671
Interest cost ................................... 4,248 4,166 2,642 1,497
Distributions ................................... (5,349) (9,728) (1,429) (1,224)
Change due to change in assumptions ............. 1,431 (4,580) 1,006 (1,281)
Change due to plan amendment .................... -- 187 -- 18,891
Actuarial (gain) or loss ........................ 1,794 1,420 (6,179) (5,754)
------- -------- --------- --------
Benefit obligation at end of year................. $64,919 $ 58,791 $ 31,639 $ 34,691
======= ======== ========= ========
Change in plan assets:
Fair value of plan assets at beginning of year .. $81,718 $ 71,686 $ -- $ --
Employer contributions .......................... 4,211 4,213 1,429 1,224
Actual return on plan assets .................... (7,959) 18,671 -- --
Adjustment for fair value at 3/1/2000 ........... 5,932 -- -- --
Distributions (including assumed expenses) ...... (6,392) (10,485) (1,429) (1,224)
------- -------- --------- --------
Fair value of plan assets at end of year.......... $77,510 $ 84,085 $ -- $ --
======= ======== ========= ========
Funded status..................................... $12,591 $ 25,294 $ (31,639) $(34,691)
Unrecognized net gain............................. (5,723) (22,493) (10,952) (5,972)
Unrecognized prior service cost................... 1,463 1,808 -- --
Unrecognized net transition (asset) or obligation. (179) (339) 11,628 12,790
------- -------- --------- --------
Prepaid or (accrued) pension cost recognized...... $ 8,152 $ 4,270 $ (30,963) $(27,873)
======= ======== ========= ========
Amounts recognized in consolidated balance sheets
consisted of:
Prepaid (accrued) pension cost .................. $ 9,009 $ 4,796 $(30,963) $(27,873)
Adjustment to recognize additional minimum
liability...................................... (622) -- -- --
Accrued pension liability ....................... (857) (526) -- --
Accumulated other comprehensive income .......... 622 -- -- --
------- -------- --------- --------
Net amount recognized............................. $ 8,152 $ 4,270 $ (30,963) $(27,873)
======= ======== ========= ========
The amounts recognized in the accompanying consolidated balance sheets as of
March 3, 2001 and February 26, 2000 are as follows:
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
--------------- -------------------
2001 2000 2001 2000
------ ------ -------- --------
Accrued benefit liability......................... $ (857) $ (526) $(30,963) $(27,873)
Prepaid pension cost.............................. 9,009 4,796 -- --
------ ------ -------- --------
Net amount recognized............................. $8,152 $4,270 $(30,963) $(27,873)
====== ====== ======== ========
The accumulated benefit obligation and fair value of plan assets for the
defined benefit pension plans with plan assets in excess of accumulated
benefit obligations were $56,272 and $69,873, respectively, as of March 3,
2001, and $58,791 and $84,085, respectively, as of February 26, 2000.
F-31
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
The significant actuarial assumptions used for all defined benefit pension
plans were as follows:
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
------------------- -------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Discount rate ............................ 7.00 7.25 6.75 7.50 7.83 6.95
Rate of increase in future compensation
levels.................................. 4.50 4.50 4.75 3.00 3.00 3.00
Expected long-term rate of return on plan
assets.................................. 9.00 9.00 9.00 9.00 9.00 9.00
19. Commitments, Contingencies and Guarantees
This Company is party to numerous legal proceedings, as discussed below. The
Company has charged $232,778 and $7,916 to expense for the years ended
February 26, 2000, and February 27, 1999, respectively, for various pending
and actual claims, litigation, and assessments based upon its determination of
its material, estimable and probable liabilities in regard to the portion of
these claims, lawsuits, and assessments not covered by insurance. Based upon
changes in estimates in fiscal 2001 relating primarily to resolution of
insurance coverage disputes, the Company credited selling, general and
administrative expenses by $19,625.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving the
Company's financial reporting and other matters. Management is cooperating
fully with the SEC and the United States Attorney.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including the Company's
principal 401(k) plan, which permitted employees to purchase the Company's
common stock. Purchases of the Company's common stock under the plan were
suspended in October 1999. In January 2001, the Company appointed an
independent trustee to represent the interests of these plans in relation to
the Company and to investigate possible claims the plans may have against the
Company. Both the independent trustee and the Department of Labor have
asserted that the plans may have claims against the Company. The
investigations, with which management is cooperating fully, are ongoing and
the Company cannot predict their outcomes. In addition, a purported class
action lawsuit on behalf of the plans and their participants has been filed by
a participant in the plans in the United States District in the Eastern
District of Pennsylvania.
These investigations are ongoing, and the Company cannot predict their
outcomes. If the Company were convicted of any crime, certain contracts and
licenses that are material to the Company's operations may be revoked, which
would have a material adverse effect on the Company's results of operations
and financial condition. In addition, substantial penalties, damages or other
monetary remedies assessed against the Company could also have a material
adverse effect on the Company's results of operations, financial condition and
cash flows.
Stockholder litigation
The Company, its former chief executive officer Martin Grass, its former
president Timothy Noonan, its former chief financial officer Frank Bergonzi,
and its former auditor KPMG LLP, have been sued in a number of actions, most
of which purport to be class actions, brought on behalf of stockholders who
purchased the Company's securities on the open market between May 2, 1997 and
November 10, 1999. All of these cases have been consolidated in the U.S.
District Court for the Eastern District of Pennsylvania. On November 9, 2000,
the Company announced that it had reached an agreement to settle the
consolidated securities class action lawsuits pending against the Company in
the U.S. District Court for the Eastern District of Pennsylvania and the
derivative lawsuits pending there and in the U.S. District Court of Delaware.
Under the agreement, which has been submitted to the U.S. District Court for
the Eastern District of Pennsylvania
F-32
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
19. Commitments, Contingencies and Guarantees -- (Continued)
for approval, the Company will pay $45 million in cash, which will be fully
funded by the Company's officers' and directors' liability insurance, and
issue shares of common stock in 2002. The shares will be valued over a 10 day
trading period in January 2002. If the value determined is at least $7.75 per
share, the Company will issue 20 million shares. If the value determined is
less than $7.75 per share, the Company has the option to deliver any
combination of common stock, cash and short-term notes, with a total value of
$155 million. As additional consideration for the settlement, the Company has
assigned to the plaintiffs all of the Company's claims against the above named
executives and KPMG LLP. Several members of the class have elected to "opt-
out" of the class and, as a result, if the settlement is approved by the
court, they will be free to individually pursue their claims. Management
believes that their claims, individually and in the aggregate, are not
material.
In fiscal year 2000, the Company recorded a charge of $175,000 for this
case. As a result of the agreement to settle reached in fiscal 2001 and
resolution of insurance coverage disputes, the Company recorded $20,000 as a
credit to selling, general and administrative expense.
Drug pricing and reimbursement matters
On October 5, 2000, the Company settled, for an immaterial amount, and
without admitting any violation of the law, the lawsuit filed by the Florida
Attorney General alleging that the Company's non-uniform pricing policy for
cash prescription purchases was unlawful under Florida law.
The filing of the complaint by the Florida Attorney General, and the
Company's press release issued in conjunction therewith, precipitated the
filing of a purported federal class action in California and several purported
state class actions, all of which (other than those pending in New York that
were filed on October 5, 1999 and those pending in California that were filed
on January 3, 2000) have been dismissed. A motion to dismiss the action in New
York is currently pending. Management believes that the remaining lawsuits are
without merit under applicable state consumer protection laws. As a result,
the Company intends to continue to vigorously defend them and the Company does
not anticipate, that if fully adjudicated, they will result in an award of
damages. However, such outcomes cannot be assured and a ruling against the
Company could have a material adverse effect on the financial position and
results of operations of the Company, as well as necessitate substantial
additional expenditures to cover legal costs as the Company pursues all
available defenses.
The Company is being investigated by multiple state attorneys general for
reimbursement practices relating to partially-filled prescriptions and fully-
filled prescriptions that are not picked up by ordering customers. The Company
is supplying similar information with respect to these matters to the
Department of Justice. Management believes that these investigations are
similar to investigations which were, and are being, undertaken with respect
to the practices of others in the retail drug industry. Management also
believes that existing policies and procedures fully comply with the
requirements of applicable law and intend to fully cooperate with these
investigations. Management cannot, however, predict their outcomes at this
time. An individual, acting on behalf of the United States of America, has
filed a lawsuit in the United States District Court for the Eastern District
of Pennsylvania under the Federal False Claims Act alleging that the Company
defrauded federal health care plans by failing to appropriately issue refunds
for partially filled prescriptions and prescriptions which were not picked up
by customers. The Department of Justice has not decided whether to join this
lawsuit, as is its right under the law; its investigation is continuing. The
Company has filed a motion to dismiss the complaint for failure to state a
claim.
If any of these cases result in a substantial monetary judgment against the
Company or is settled on unfavorable terms, the Company's results of
operations, financial position, and cash flows could be materially adversely
affected.
F-33
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
19. Commitments, Contingencies and Guarantees -- (Continued)
Store Management Overtime Litigation
The Company is a defendant in a class action pending in the California
Superior Court in San Diego with three subclasses, comprised of California
store managers, assistant managers and managers-in-training. The plaintiffs
seek back pay for overtime not paid to them and injunctive relief to require
the Company to treat store management as non-exempt. They allege that the
Company decided to minimize labor costs by causing managers, assistant
managers and managers-in-training to perform the duties and functions of
associates for in excess of forty hours per week without paying them overtime.
Management believes that in-store management were and are properly classified
as exempt from the overtime provisions of California law. The Company has
filed a motion to decertify the class, which is currently pending. The
Company's results of operations and financial position could be materially
adversely affected by an adverse judgment in this matter.
Other
The Company is subject from time to time to lawsuits arising in the ordinary
course of business. In the opinion of management, these matters are adequately
covered by insurance or, if not so covered, are without merit or are of such
nature or involve amounts that would not have a material adverse effect on the
Company's financial condition, results of operations, or cash flows if decided
adversely.
Vendor Arrangements
As of March 3, 2001, the Company had outstanding commitments to purchase
$7,500 of merchandise inventory per year from a vendor for use in the normal
course of business through fiscal 2005.
Employment Agreements
Employment agreements with executive officers and others contain change in
control provisions that entitle them to receive two or three times the sum of
their annual base salary and annual target bonus amount and provide for full
vesting in all outstanding stock options and immediate renewal of restrictions
on stock awards. In the event of change in control, certain executive officers
also receive the total amount of contributions that would have been made to
the special deferred compensation plan if they had been employed through the
end of their employment contract.
On May 7, 2001, the Company amended the employment agreements of two
executive officers to provide for the payment, subject to certain conditions,
of bonuses representing the difference between the amount called for under
their severance agreements from a former employer and the amount they actually
receive up to $6,647. The bonuses are payable on January 5, 2002 and will be
reduced, and if fully paid are repayable, to the extent of each executives's
recovery of severance due from a former employer.
F-34
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
20. Supplementary Cash Flow Data
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Cash paid for interest (net of capitalized
amounts of $1,836, $5,292 and $7,069)........... $543,343 $501,813 $259,100
======== ======== ========
Cash paid for (refunds from) income taxes......... $(88,078) $ 981 $ 47,667
======== ======== ========
Notes received in connection with the disposition
of discontinued operations...................... $200,000 $ -- $ --
======== ======== ========
Stock received in connection with the disposition
of discontinued operations...................... $231,000 $ -- $ --
======== ======== ========
Change in market value of the stock received in
connection with the disposition of discontinued
operations...................................... $ 51,031 $ -- $ --
======== ======== ========
Conversion of debt to common stock................ $597,332 $ -- $ --
======== ======== ========
10.50% notes due 2002 issued in exchange for
5.50% fixed rate senior notes due 2000 and 6.70%
notes due 2001.................................. $467,500 $ -- $ --
======== ======== ========
Exchange of preferred shares...................... $ -- $300,000 $ --
======== ======== ========
21. Related Party Transactions
Included in accounts receivable at March 3, 2001 and February 26, 2000 were
receivables from related parties of $3,456, and $2,982, respectively,
including employee loans. Included in accounts payable of March 3, 2001 and
February 26, 2000 were payables from related parties of $421 and $3,475,
respectively.
During fiscal 2001, 2000 and 1999, the Company sold merchandise totaling
$65,259, $16,280 and $6,225, respectively, to drugstore.com (or drugstore.com
customers) and Diversified Prescription Delivery, LLC, equity-method
investees. During fiscal 2000 and 1999, the Company purchased equipment
totaling $26,115 and $27,119, respectively, from Stores Automated Systems,
Inc., an equity-method investee. As of February 26, 2001, the Company had
divested of its interest in Store Automated Systems, Inc. Therefore, purchases
from Store Automated Systems, Inc. in fiscal 2001 are not considered related
party purchases.
In fiscal 2000 and 1999, the Company purchased $8,814 and $9,430,
respectively, of product from a manufacturer of private label over the counter
medications in which a director held an ownership interest until May 31, 1999.
The Company leases for $154 per year a 43,920 square foot storage space in a
warehouse in Camp Hill, Pennsylvania, from a partnership in which a former
director has a 50% interest.
The Company formerly operated an 8,000 square-foot store in a shopping
center in which the former Chairman of the Board and Chief Executive Officer,
has a 50% ownership interest. The rent paid by the Company was $96 per year.
In February 1999, the lease was cancelled and the Company was released from
its obligation to pay over $300 in remaining lease commitments.
Beginning in January 1999, the Company leased for $188 per year a 10,750
square-foot store in Sinking Springs, Pennsylvania, which it leases from a
relative of the former Chairman of the Board and Chief Executive Officer. The
Company leases a 5,000 square-foot store in Mt. Carmel, Pennsylvania, from a
partnership in which the former Chairman of the Board and Chief Executive
Officer is or was a partner. The rent is $39 per year.
F-35
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
21. Related Party Transactions -- (Continued)
The Company paid Leonard Green & Partners L.P. (a) a $3,000 fee for service
provided in connection with its preferred stock investment in October 1999 and
reimbursed $240 of its out-of-pocket expenses; (b) a $3,000 fee for services
provided in connection with the financial restructuring transactions which the
Company completed in June 2000 and reimbursed its out-of-pocket expenses, and
(c) a $2,500 fee for services provided in connection with the sale of PCS
Health Services, Inc. In October 1999, the Company agreed to pay Leonard Green
& Partners L.P. an annual fee of $1,000 for its consulting services. This fee
was increased to $1,500 at the time of the June 2000 restructuring
transactions. The consulting agreement also provides for the reimbursement of
out-of-pocket expenses incurred by Leonard Green & Partners L.P. The Company
has agreed to register the common stock issuable upon conversion of the series
B preferred stock and to pay all expenses and fees (other than underwriting
discounts and commission) related to any registration.
The law firm of Skadden, Arps, Slate, Meagher & Flom LLP provides legal
services to the Company. A director of the Company is a partner of that law
firm. Fees paid by the Company to Skadden, Arps, Slate, Meagher & Flom LLP did
not exceed five percent of the firm's gross revenues for its fiscal year.
22. Interim Financial Results (Unaudited)
Fiscal Year 2001 (53 Weeks)
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
Revenues......................... $3,442,186 $3,439,469 $3,531,691 $4,103,519 $14,516,865
Costs and expenses excluding
store closing and impairment
charges........................ 3,685,301 3,776,210 3,677,367 4,272,716 15,411,594
Store closing and impairment
charges........................ 15,879 88,292 95,571 188,336 388,078
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing
operations before taxes........ (258,994) (425,033) (241,247) (357,533) (1,282,807)
Income tax expense............... 144,382 -- -- 4,575 148,957
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing
operations..................... (403,376) (425,033) (241,247) (362,108) (1,431,764)
Income (loss) from discontinued
operations, net of tax......... 11,335 -- -- -- 11,335
Loss on disposal of discontinued
operations, net of tax......... (303,330) (31,433) 135,534 30,434 (168,795)
---------- ---------- ---------- ---------- -----------
Net loss......................... $ (695,371) $ (456,466) $ (105,713) $ (331,674) $(1,589,224)
========== ========== ========== ========== ===========
Basic and diluted earnings (loss)
per share:
Loss from continuing operations.. $ (1.57) $ (1.87) $ (0.74) $ (1.07) $ (5.15)
Income (loss) from discontinued
operations..................... (1.12) (0.10) 0.40 0.09 (0.50)
---------- ---------- ---------- ---------- -----------
Net loss......................... $ (2.69) $ (1.97) $ (0.34) $ (0.98) $ (5.65)
========== ========== ========== ========== ===========
F-36
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
22. Interim Financial Results (Unaudited) -- (Continued)
Fiscal Year 2000 (52 Weeks)
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
Revenues ............................. $3,354,621 $3,203,964 $3,279,138 $3,501,224 $13,338,947
Costs and expenses excluding store
closing and impairment charges ...... 3,339,205 3,313,458 3,480,935 4,189,197 14,322,795
Store closing and impairment charges . 24,490 53,188 30,601 31,169 139,448
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing
operations before taxes and
cumulative effect of change in
accounting method................... (9,074) (162,682) (232,398) (719,142) (1,123,296)
Income tax expense (benefit) ......... (28,959) (8,280) 17,403 11,461 (8,375)
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing
operations before cumulative effect
of change in accounting method, net. 19,885 (154,402) (249,801) (730,603) (1,114,921)
Income (loss) from discontinued
operations, net of tax.............. 3,345 4,247 (4) 1,590 9,178
Cumulative effect of change in
accounting method, net of tax....... (27,300) -- -- -- (27,300)
---------- ---------- ---------- ---------- -----------
Net loss ............................. $ (4,070) $ (150,155) $ (249,805) $ (729,013) $(1,133,043)
========== ========== ========== ========== ===========
Basic and diluted earnings (loss) per
share:
Loss from continuing operations ...... $ 0.08 $ (0.60) $ (1.00) $ (2.82) $ (4.34)
Income (loss) from discontinued
operations.......................... 0.01 0.02 -- 0.01 0.04
Cumulative effect of change in
accounting method................... (0.11) -- -- -- (0.11)
---------- ---------- ---------- ---------- -----------
Net loss ............................. $ (0.02) $ (0.58) $ (1.00) $ (2.81) $ (4.41)
========== ========== ========== ========== ===========
Certain reclassifications have been made to the previously issued quarterly
amounts to conform to fiscal 2001 year end classifications.
During the third and fourth quarters of fiscal 2000, the Company incurred
significant non-recurring charges. These included charges of $232,800 for
litigation expenses, $63,300 for debt restructuring, $67,600 for sale of
discontinued merchandise, and $49,800 for markdowns at retail stores.
During the third quarter of fiscal 2001, the Company recorded a $20,000
credit for resolution of insurance coverage disputes and $20,000 credit for
the reversal of previously amortized cost of issuance related to financings
resulting from a contract settlement.
During the fourth quarter of fiscal 2001 (the 14 week quarter), the Company
incurred $188,336 of store closing and impairment charges and $33,500 of
expense related to stock options under variable accounting plans.
F-37
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
23. Financial Instruments
The carrying amounts and fair values of financial instruments at March 3,
2001 and February 26, 2000 are listed as follows:
2001 2000
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Variable rate indebtedness........................ $1,219,785 $1,219,785 $2,480,495 $2,480,495
Fixed rate indebtedness........................... 3,574,763 2,824,904 2,984,238 1,959,252
Note receivable................................... 37,041 37,962 32,889 36,102
AdvancePCS securities............................. 491,198 491,198 -- --
Interest rate swaps............................... -- (29,000) -- --
Cash, trade receivables and trade payables are carried at market value,
which approximates their fair values due to the short-term maturity of these
instruments.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Commercial paper and LIBOR-based borrowings under credit facilities:
The carrying amounts for commercial paper indebtedness and interest rate
swaps and LIBOR-based borrowings under the credit facilities, term loans and
term notes approximate their fair values due to the short-term nature of the
obligations and the variable interest rates.
Long-term indebtedness and interest rate swaps:
The fair values of long-term indebtedness and interest rate swaps are
estimated based on the quoted market prices of the financial instruments. If
quoted market prices were not available, the Company estimated the fair value
based on the quoted market price of a financial instrument with similar
characteristics or based on the present value of estimated future cash flows
using a discount rate on similar long-term indebtedness issued by the Company.
Note receivable:
The fair value of the fixed-rate note receivable was determined using the
present value of projected cash flows, discounted at a market rate of interest
for similar instruments.
AdvancePCS Securities:
The fair value of AdvancePCS securities are estimated based on the quoted
market prices of the financial instruments.
F-38
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
24. Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary, PCS Health
Systems Inc., to Advance Paradigm, Inc. (now known as AdvancePCS). The
proceeds from the sale of PCS consisted of $710,557 in cash, $200,000 in
principal amount of AdvancePCS's unsecured 11% senior subordinated notes and
equity securities of AdvancePCS.
PCS is reported as a discontinued operation for all periods presented in the
accompanying financial statements and the operating results of PCS through
October 2, 2000, the date of sale, are reflected separately from the results
of continuing operations. The loss on the disposal of PCS is $168,795. This
loss includes net operating results of PCS from July 12, 2000 to October 2,
2000, transaction expenses, the final settlement of the purchase price between
the Company and AdvancePCS and the fair value of the non-cash consideration
received.
As a result of the sale, the Company recorded an increase to the tax
valuation allowance and income tax expense of $146,917 for the year ended
March 3, 2001.
Summarized operating results and net loss of PCS for thirty-one weeks ended
October 2, 2000 and the years ended February 26, 2000, and February 27, 1999
were as follows:
Year Ended
---------------------------
Thirty-One Weeks February 26, February 27,
Ended October 2, 2000 2000 1999
--------------------- ------------ ------------
Net sales......................................... $ 779,748 $1,342,495 $ 344,448
Income (loss) from operations before income tax
expense......................................... 25,181 40,081 (18,748)
Income tax expense (benefit)...................... 13,846 30,903 (5,925)
--------- ---------- ---------
Income (loss) from discontinued operations........ 11,335 9,178 (12,823)
Loss on disposal before income tax benefit........ (169,529) -- --
Income tax benefit................................ 734 -- --
--------- ---------- ---------
Loss on disposal.................................. (168,795) -- --
--------- ---------- ---------
Total income (loss) from discontinued operations.. $(157,460) $ 9,178 $(12,823)
========= ========== =========
February 26, 2000
-----------------
Net current liabilities:
Cash and cash equivalents................................. $ 4,843
Accounts and other receivables, net....................... 614,432
Other currents assets..................................... 42,707
Claims and rebates payable................................ (924,951)
Other current liabilities................................. (127,084)
----------
$ (390,053)
----------
Net non-current assets:
Property and equipment, net............................... $ 147,733
Goodwill and intangibles, net............................. 1,816,221
Noncurrent liabilities.................................... (220,126)
----------
$1,743,828
==========
Acquisition of Discontinued Operations
On January 22, 1999, the Company purchased PCS for $1.5 billion, of which
$1.3 billion was financed using commercial paper and $200 million was paid in
cash. The PCS acquisition was accounted for using the
F-39
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
24. Discontinued Operations -- (Coontinued)
purchase method. In accordance with APB Opinion No. 16, the Company recorded
the assets and liabilities of PCS at the date of acquisition at their fair
values. The excess of the cost of PCS over the fair value of the acquired
assets and liabilities of $1,286,089 was recorded as goodwill.
Intangible Assets of Discontinued Operations
February 26, 2000
-----------------
Goodwill................................................... $1,298,520
Prescription files and customer lists...................... 434,100
Trade name................................................. 113,100
Internally developed software.............................. 21,900
Assembled workforce........................................ 13,400
----------
1,881,020
Accumulated amortization................................... (64,799)
----------
$1,816,221
==========
At acquisition, the Company determined that the estimated useful life of the
goodwill recorded with the PCS acquisition was primarily indeterminate and
likely exceeded 40 years. This estimate was based upon a review of the
anticipated future cash flows and other factors the Company considered in
determining the amount that it was willing to incur for the purchase of PCS.
Additionally, management found no persuasive evidence that any material
portion of these intangible assets would be depleted in less than 40 years.
Accordingly, the Company amortized goodwill over the maximum allowable period
of 40 years on a straight-line basis.
The value of the PCS trade name was amortized over its estimated useful life
of 40 years. The value of the customer base and pharmacy network acquired in
the purchase of PCS was amortized over their estimated lives of 30 years. The
value of assembled workforce and internally developed software acquired was
amortized over their useful lives of six and five years, respectively.
Impairment of Long-Lived Assets
Long-lived assets of PCS consist principally of intangibles. The Company
compared the estimates of future undiscounted cash flows of its service lines
to which the intangibles relate to the carrying amount of those intangibles to
determine if impairment occurred. Long-lived assets and certain identifiable
intangibles to be disposed of, whether by sale or abandonment, were reported
at the lower of carrying amount or fair value less cost to sell.
Revenue Recognition of Discontinued Operations
Revenues were recognized from claims processing fees when the related claims
were adjudicated and approved for payment. Certain of the agreements required
the customers to pay a fee per covered member rather than a fee per claim.
These fees were recognized monthly based upon member counts provided by the
customers. Revenue from manufacturer programs were recognized when claims
eligible for rebate were adjudicated by the Company. The customer portion of
rebates collected was not included in revenue, and correspondingly payments of
rebates to customers were not included in expenses. Mail order program revenue
was recognized when prescriptions were shipped.
25. Subsequent Events
In March 2001, the Company reduced the outstanding balances of the PCS
credit facility and the PCS exchange debt by $484,104 with the net proceeds
from the sale of equity securities of AdvancePCS and the repayment of
AdvancePCS senior subordinated notes.
F-40
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
25. Subsequent Events -- (Continued)
Subsequent to March 3, 2001, the Company committed to issue 77,192,000
shares of its common stock in exchange for $511,351 of debt (see Note 13).
Subsequent to March 3, 2001, the Company committed to $149,600 private
placements comprised of 26,500,000 shares of common stock.
On May 15, 2001, the Company entered into a $1,900,000 commitment agreement
with a group of banks whereby the Company and the banks would enter into a new
senior secured credit facility to replace the existing Senior Credit facility.
The closing of the new credit facility is subject to the satisfaction of
customary closing conditions and the issuance by the Company of approximately
$1,050,000 in new debt or equity securities, of which $527,000 has already
been committed or arranged. The Company plans to raise the additional $523,000
by issuing equity and fixed income securities and through real estate mortgage
financings. The new credit facility will be secured by inventory, accounts
receivable and certain other assets of the Company. While management believes
that it will be successful in completing the refinancing, there is no
assurance that the refinancing transaction will be consummated.
On May 16, 2001, the Company agreed to issue five year warrants to purchase
3,040,000 shares of common stock at $6.00 per share in connection with the
exchange by a holder of $152,000 of 10.5% notes due 2002 for a like principal
amount of new 12.5% notes due 2006.
26. Consummation of Refinancing (Unaudited) Subsequent to the Date of the
Independent Auditors' Report
On June 27, 2001, the Company completed a major refinancing that extended
the maturity dates of the majority of debt to 2005 or beyond, provided
additional equity, converted a portion of debt for equity and reclassified
capital leases to operating leases. Major components of the refinancing are
summarized below:
New Secured Credit Facility: A new $1.9 billion syndicated senior secured
credit facility was entered into 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, then the maturity date becomes 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.
The Company's ability to borrow under the senior secured credit facility is
based on a specified borrowing base consisting of eligible accounts receivable
and inventory. At June 30, 2001, the term loan was fully drawn except for
$21.9 million available on a delayed draw basis to pay for the remaining
outstanding 10.5% senior notes when they mature on September 15, 2002. The
Company had no outstanding draws on the revolving credit facility at June 30,
2001 and had $403.6 million in additional available borrowing capacity under
the revolving credit facility at June 30, 2001, net of outstanding letters of
credit of $96.4 million.
High Yield Notes: $150.0 million of 11.25% notes due July 1, 2008 were
issued in a private placement offering. These notes are unsecured, and
subordinate to secured debt.
Debt for Debt Exchange: $152.0 million of existing 10.5% notes were
exchanged for an equal amount of 12.5% notes due September 15, 2006. These
notes are secured by a second priority lien on the collateral of the senior
secured credit facility. In addition, holders of these notes received 3.0
million warrants to purchase shares of common stock at $6.00 per share. On
June 29, 2001, the warrant holders elected to exercise these warrants.
F-41
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
26. Consummation of Refinancing (Unaudited) Subsequent to the Date of the
Independent Auditors' Report -- (Continued)
Tender Offer: In connection with the refinancing, the Company announced a
tender offer for the 10.50% Senior Secured Notes due 2002 at a price of 103%
of face value on May 24, 2001. The tender offer was closed on June 27, 2001,
at which time $174,462 principal was tendered. A tender offer premium of
$5,670 was incurred as a result of the transaction. Proceeds from the new
senior secured credit facility were used to fund the tender offer.
Debt for Equity Exchanges: $212.5 million of debt was exchanged for 8.9
million shares of common stock and 2.1 million shares of Series C Convertible
Preferred Stock.
Sales of Common Stock: The Company sold 80.1 million shares of common stock
for net proceeds of $528.2 million
Lease Obligations: The terms of certain real estate leases on property
previously sold and leased back were restructured, thereby reducing the
outstanding capital lease obligations by $848.8 million.
Impact on Results of Operations in Fiscal 2002: As a result of the
refinancing activities in fiscal 2002, the Company will: i) record an
extraordinary loss on early extinguishment of debt of approximately $66,000
subject to certain valuations; ii) record an approximate loss of $133,000 on
debt for equity exchanges; iii) recognize a loss of $22,000 related to the
reclassification of leases; and iv) defer debt issue costs of approximately
$74,000.
F-42
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(unaudited)
June 2, 2001 March 3, 2001
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 80,078 $ 92,290
Accounts receivable, net ...................... 544,100 503,527
Inventories, net .............................. 2,497,829 2,444,525
Investment in AdvancePCS ...................... -- 491,198
Prepaid expenses and other current assets ..... 82,437 85,292
----------- -----------
Total current assets......................... 3,204,444 3,616,832
PROPERTY, PLANT AND EQUIPMENT, NET ............. 2,992,891 3,041,008
GOODWILL AND OTHER INTANGIBLES, NET ............ 1,042,969 1,067,339
OTHER ASSETS ................................... 161,208 188,732
----------- -----------
Total assets................................. $ 7,401,512 $ 7,913,911
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Short-term debt and current maturities of
long-term debt and lease financing obligations $ 40,521 $ 36,956
Accounts payable .............................. 1,034,330 896,390
Sales and other taxes payable ................. 55,813 31,562
Accrued salaries, wages and other current
liabilities................................... 665,455 696,047
----------- -----------
Total current liabilities.................... 1,796,119 1,660,955
CONVERTIBLE SUBORDINATED NOTES ................. 152,016 357,324
LONG-TERM DEBT, LESS CURRENT MATURITIES ........ 3,717,511 4,428,871
LEASE FINANCING OBLIGATIONS, LESS CURRENT
MATURITIES.................................... 1,061,880 1,071,397
OTHER NONCURRENT LIABILITIES ................... 756,270 730,342
----------- -----------
Total liabilities............................ 7,483,796 8,248,889
COMMITMENTS AND CONTINGENCIES .................. -- --
REDEEMABLE PREFERRED STOCK ..................... 19,457 19,457
STOCKHOLDERS' (DEFICIT):
Preferred stock, par value $1 per share ....... 340,654 333,974
Common stock, par value $1 per share .......... 403,762 348,055
Additional paid-in capital .................... 2,509,178 2,065,301
Accumulated deficit ........................... (3,383,058) (3,171,956)
Stock-based and deferred compensation ......... 59,674 19,782
Accumulated other comprehensive (loss) income . (31,951) 50,409
----------- -----------
Total stockholders' (deficit)................ (101,741) (354,435)
----------- -----------
Total liabilities and stockholders' (deficit) $ 7,401,512 $ 7,913,911
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-43
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Thirteen Week Period Ended
---------------------------
June 2, 2001 May 27, 2000
------------ ------------
REVENUES ........................................ $3,710,133 $3,442,186
COSTS AND EXPENSES:
Costs of goods sold, including occupancy costs . 2,840,740 2,634,453
Selling, general and administrative expenses ... 858,049 851,883
Goodwill amortization .......................... 5,343 6,074
Store closing and impairment charges (credits) . (364) 16,145
Interest expense ............................... 128,689 171,375
Loss on debt conversions and modifications, net 132,713 --
Share of loss from equity investment ........... 5,883 11,574
(Gain) loss on sale of assets and investments,
net............................................ (49,818) 9,676
---------- ----------
3,921,235 3,701,180
---------- ----------
Loss from continuing operations before income
taxes.......................................... (211,102) (258,994)
INCOME TAX EXPENSE .............................. -- 144,382
---------- ----------
Loss from continuing operations ................ (211,102) (403,376)
DISCONTINUED OPERATIONS:
Income from discontinued operations (including
income tax expense of $0 and $13,846) -- 11,335
Estimated loss on disposal of the PBM segment
(including income tax expense of $0 and
$22,750)....................................... -- (303,330)
---------- ----------
Net loss ....................................... $ (211,102) $ (695,371)
========== ==========
BASIC AND DILUTED (LOSS) PER SHARE:
Loss from continuing operations ................ $ (0.56) $ (1.57)
Loss from discontinued operations .............. -- (1.12)
---------- ----------
Net loss per share ............................. $ (0.56) $ (2.69)
========== ==========
See accompanying notes to condensed consolidated financial statements.
F-44
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)
For the Thirteen Week Period Ended June 2, 2001
(Dollars and share information in thousands)
(unaudited)
Stock-Based
Preferred Stock Common Stock Additional and
----------------- ------------------ Paid-in Accumulated Deferred
Shares Class B Shares Issued Capital Deficit Compensation
------ -------- ------- -------- ---------- ----------- ------------
BALANCE MARCH 3, 2001 3,340 $333,974 348,055 $348,055 $2,065,301 $(3,171,956) $19,782
Net loss....................... (211,102)
Other comprehensive loss:
Sale of investment in
AdvancePCS...................
Cash flow hedge transition
liability adjustment.........
Cash flow hedge market value
adjustment...................
Comprehensive loss ...........
Bond conversions............... 55,736 55,736 450,393
Stock-based and deferred
compensation................. 39,828
Stock forfeitures.............. (29) (29) (53) 64
Dividends on preferred stock... 67 6,680 (6,680)
Increase resulting from sale of
stock by equity method
investee..................... 217
----- -------- ------- -------- ---------- ----------- -------
BALANCE JUNE 2, 2001........... 3,407 $340,654 403,762 $403,762 $2,509,178 $(3,383,058) $59,674
===== ======== ======= ======== ========== =========== =======
Accumulated
Other
Comprehensive
Income/(Loss) Total
------------- ---------
BALANCE MARCH 3, 2001 $ 50,409 $(354,435)
Net loss....................... (211,102)
Other comprehensive loss:
Sale of investment in
AdvancePCS................... (51,031) (51,031)
Cash flow hedge transition
liability adjustment......... (29,010) (29,010)
Cash flow hedge market value
adjustment................... (2,319) (2,319)
---------
Comprehensive loss ........... (293,462)
Bond conversions............... 506,129
Stock-based and deferred
compensation................. 39,828
Stock forfeitures.............. (18)
Dividends on preferred stock... --
Increase resulting from sale of
stock by equity method
investee..................... 217
-------- ---------
BALANCE JUNE 2, 2001........... $(31,951) $(101,741)
======== =========
See accompanying notes to condensed consolidated financial statements.
F-45
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Thirteen Week Period Ended
---------------------------
June 2, 2001 May 27, 2000
------------ ------------
OPERATING ACTIVITIES:
Net loss ....................................... $(211,102) $(695,371)
Income from discontinued operations ............ -- (11,335)
Loss on disposal of discontinued operations .... -- 303,330
--------- ---------
Loss from continuing operations ................ (211,102) (403,376)
Depreciation and amortization .................. 90,841 91,684
Stock-based compensation ....................... 39,828 2,000
Store closing and impairment charges (credits) . (364) 16,145
Loss on debt conversions and modifications, net 132,713 --
(Gain) loss on sale of assets and investments,
net............................................ (49,818) 9,676
Changes in operating assets and liabilities .... 43,644 274,414
--------- ---------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATIONS..................................... 45,742 (9,457)
--------- ---------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS .... -- 37,149
--------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment . (23,100) (18,862)
Proceeds from the repayment/sale of AdvancePCS
securities..................................... 484,214 --
Intangible assets acquired ..................... (3,700) (1,131)
Proceeds from dispositions ..................... 6,300 --
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES..................................... 463,714 (19,993)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt ........... (490,180) (70,407)
Net (payments) of commercial paper borrowings .. -- (192,000)
Net change in bank credit facilities ........... (31,488) 192,000
Proceeds from issuance of stock ................ -- 180
Other financing activities, net ................ -- (2,312)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ........... (521,668) (72,539)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ........... (12,212) (64,840)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,290 179,757
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...... $ 80,078 $ 114,917
========= =========
SUPPLEMENTARY CASH FLOW DATA:
Cash paid for interest (net of capitalized
amounts of $205 and $719)...................... $ 127,305 $ 115,300
========= =========
Cash refunds of income taxes ................... $ (5,834) $ (86,767)
========= =========
Conversion of debt to common stock ............. $ 376,193 $ --
========= =========
See accompanying notes to condensed consolidated financial statements
F-46
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X and therefore do not include all of the
information and footnotes required by generally accepted accounting principles
for complete annual financial statements. The accompanying financial
information reflects all adjustments (consisting primarily of normal recurring
adjustments except as described in these notes) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. The results of operations for the thirteen week period ended June 2,
2001 are not necessarily indicative of the results to be expected for the full
year. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's fiscal 2001 Annual Report on Form 10-K filed with
the SEC.
Certain reclassifications have been made to prior years' amounts to conform
to current year classifications.
2. Loss Per Share
Following is a summary of the components of the numerator and denominator of
the basic loss per share computation:
Thirteen Week Period Ended
---------------------------
June 2, 2001 May 27, 2000
------------ ------------
Numerator for earnings per share:
Loss from continuing operations ................ $(211,102) $(403,376)
Cumulative preferred stock dividends ........... (6,680) (5,961)
--------- ---------
Net loss from continuing operations
attributable to common stockholders............ (217,782) (409,337)
Net income from discontinued operations, net of
tax............................................ -- 11,335
Loss on disposal, net of tax ................... -- (303,330)
--------- ---------
Net loss attributable to common stockholders ... $(217,782) $(701,332)
========= =========
Denominator:
Basic weighted average shares .................. 386,996 260,076
========= =========
Fully diluted loss per share is not presented as the Company incurred losses
for the thirteen week periods ended June 2, 2001 and May 27, 2000, as the
amount would be antidilutive. At June 2, 2001, an aggregate of 120,990
potential common shares related to stock options, convertible notes and
preferred stock and warrants, have been excluded from the computation of
diluted earnings per share.
3. Business Segments
The Company operated in a single business segment during the thirteen week
period ended June 2, 2001, the Retail Drug segment. This segment consists of
the operation of retail drugstores across the United States. The drugstores'
primary business is pharmacy services, with prescription drugs accounting for
approximately 61.6% percent and 60.1% percent of total segment sales for the
thirteen week periods ended June 2, 2001 and May 27, 2000, respectively. In
addition, the Company's drugstores offer a full selection of health and
personal care products, seasonal merchandise and a large private label product
line.
The Company operated in two business segments in the thirteen week period
ended May 27, 2000, the Retail Drug segment and the PBM segment. Through its
PBM segment, which consisted primarily of PCS Health Systems, Inc. ("PCS"),
the Company offered pharmacy benefit management, mail-order pharmacy
F-47
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
3. Business Segments -- (Continued)
services, marketing prescription plans and other managed health care services
to employers, health plans and their members and government-sponsored employee
benefit programs. The Company has sold its PBM segment to Advance Paradigm
Inc. (now known as "AdvancePCS"). As a result, the PBM segment has been
reclassified and is accounted for as a discontinued operation in the
accompanying financial statements. The Company's continuing operations consist
solely of the Retail Drug segment.
4. Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary, PCS, to
AdvancePCS. The proceeds from the sale of PCS consisted of $710,557 in cash,
$200,000 in principal amount of AdvancePCS's unsecured 11% senior subordinated
notes and equity securities of AdvancePCS.
During March 2001, the Company sold the AdvancePCS equity securities for
$284,214 resulting in a gain of $53,214, which was recognized during the
thirteen week period ended June 2, 2001. The recognition resulted in a
reduction of other comprehensive income of $51,031, which represented the
appreciation in the market value of the equity securities from date of
acquisition of the securities through March 3, 2001. Additionally, AdvancePCS
repurchased the unsecured 11% senior subordinated notes for $200,000 plus
accrued interest.
PCS is reported as a discontinued operation for the thirteen week period
ended May 27, 2000, and the operating results of PCS are reflected separately
from the results of continuing operations.
As a result of the sale, the Company recorded an increase to the tax
valuation allowance and income tax expense of $146,917 in the thirteen week
period ended May 27, 2000.
5. Store Closing and Impairment Charges
Store closing and impairment charges (credits) consist of:
Thirteen Week Period Ended
---------------------------
June 2, 2001 May 27, 2000
------------ ------------
Impairment charges .............................. $ 7,893 $ 8,169
Store lease exit charges (credits) .............. (8,568) 7,976
Impairment of other assets ...................... 311 --
------- -------
$ (364) $16,145
======= =======
Impairment Charges
Impairment charges include non-cash charges of $7,893 and $8,169 for the
thirteen week periods ended June 2, 2001 and May 27, 2000, respectively, for
the impairment of long-lived assets (including allocable goodwill) at 17 and
42 stores, respectively. These amounts include the write-down of long-lived
assets at stores that were assessed for impairment because of management's
intention to relocate or close the store or because of changes in
circumstances that indicate the carrying value of the asset may not be
recoverable.
Store Lease Exit Charges (Credits)
Costs incurred to close a store, which principally consist of lease
termination costs, are recorded at the time management commits to closing the
store, which is the date that the closure is formally approved by senior
management, or in the case of a store to be relocated, the date the new
property is leased or purchased. The Company calculates its liability for
closed stores on a store-by-store basis. The calculation includes the future
minimum lease payments and related ancillary costs from the date of closure to
the end of the remaining lease term, net of estimated cost recoveries that may
be achieved through subletting properties or
F-48
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
5. Store Closing and Impairment Charges -- (Continued)
through favorable lease terminations. This liability is discounted using a
risk-free rate of interest. The Company evaluates these assumptions each
quarter and adjusts the liability accordingly. During the thirteen week
periods ended June 2, 2001 and May 27, 2000, the Company recorded a provision
for 7 and 18 stores, respectively, that were designated for closure. The
effect of lease terminations and changes in assumptions in interest rates
during the thirteen week period ended June 2, 2001, had a positive impact that
exceeded the additional provision due to low closure levels and resulted in an
expense credit from closed store activity.
The reserve for store lease exit costs includes the following activity:
Thirteen Week Period Ended
---------------------------
June 2, 2001 May 27, 2000
------------ ------------
Balance -- Beginning of Period .................. $233,008 $212,812
Provision for present value of noncancellable
lease payments of stores designated to be
closed........................................ 3,091 19,357
Changes in assumptions about future sublease
income, terminations, and changes in interest
rates......................................... (8,144) (7,035)
Reversals of reserves for stores that
management has determined
will remain open.............................. (3,515) (4,346)
Interest accretion ............................. 2,333 2,969
Cash payments, net of sublease income .......... (9,812) (10,051)
-------- --------
Balance -- End of Period ........................ $216,961 $213,706
======== ========
6. Indebtedness, Credit Agreements and Lease Financing Obligations
Following is a summary of indebtedness and lease financing obligations at
June 2, 2001 and March 3, 2001:
June 2, 2001 March 3, 2001
------------ -------------
6.70% notes due 2001 ........................... $ 7,342 $ 7,342
5.25% convertible subordinated notes due 2002 .. 152,016 357,324
Senior Facility ................................ 626,000 682,000
Revolving Credit facility due 2002 (amended and
restated) ("RCF")............................. 700,268 730,268
Term loan due 2002 (amended and restated)
("PCS")....................................... 148,883 591,391
Exchange Debt .................................. 169,530 216,126
10.50% notes due 2002 .......................... 411,500 467,500
6.00% dealer remarketable securities due 2003 .. 107,765 187,650
6.00% fixed-rate senior notes due 2005 ......... 194,500 194,500
7.625% senior notes due 2005 ................... 198,000 198,000
7.125% notes due 2007 .......................... 350,000 350,000
6.125% fixed-rate senior notes due 2008 ........ 150,000 150,000
6.875% senior debentures due 2013 .............. 200,000 200,000
8.00% to 10.375% industrial development bonds
due through 2009.............................. 4,740 4,740
7.70% notes due 2027 ........................... 300,000 300,000
6.875% fixed-rate senior notes due 2028 ........ 150,000 150,000
Lease financing obligations .................... 1,093,884 1,100,000
Other .......................................... 7,500 7,707
---------- ----------
4,971,928 5,894,548
Short-term debt, current maturities of long-
term debt and lease financing obligations..... (40,521) (36,956)
---------- ----------
Long-term debt and lease financing obligations,
less current maturities....................... $4,931,407 $5,857,592
========== ==========
F-49
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
6. Indebtedness, Credit Agreements and Lease Financing Obligations --
(Continued)
On June 27, 2001, the Company completed a refinancing which significantly
altered the capital structure. See Note 9 for details.
The Company completed the following debt for equity exchanges during the
thirteen week period ended June 2, 2001:
Carrying Additional
Amount Common Paid-In Gain
Debt Exchanged Exchanged Stock Capital (Loss)
-------------- --------- ------- ---------- ---------
PCS facility .................. $ 5,000 $ 715 $ 5,076 $ (791)
RCF facility .................. 30,000 4,347 30,115 (4,462)
5.25% convertible subordinated
notes........................ 205,308 29,750 307,686 (133,437)
6.00% dealer remarketable
securities................... 79,885 12,382 55,633 11,427
10.50% notes due 2002 ......... 56,000 8,542 51,883 (5,450)
-------- ------- -------- ---------
$376,193 $55,736 $450,393 $(132,713)
======== ======= ======== =========
In March 2001, the Company sold its investment in AdvancePCS. Proceeds
received from the sale were used to pay down $437,508 of borrowings under the
PCS loan, and $46,596 of borrowings under the Exchange Debt.
In June 2000, the Company entered into an interest rate swap contract that
fixes the LIBOR component of $500,000 of the Company's variable rate debt at
7.083% for a two-year period. In July 2000, the Company entered into an
additional interest rate swap that fixes the LIBOR component of an additional
$500,000 of variable rate debt at 6.946% for a two-year period.
On March 4, 2001, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138. In connection with the adoption of
the new statement, the Company recorded $29,010 in Other Comprehensive Income
("OCI") as a cumulative change in accounting for derivatives designated as
cash flow type hedges prior to adopting SFAS 133. The Company enters into
interest rate swap agreements to hedge the exposure to increasing rates with
respect to its variable rate debt. The differential to be paid or received as
a result of these swap agreements is accrued as interest rates change and
recognized as an adjustment to interest expense. These interest rate swaps are
accounted for as cash flow hedges. Therefore, the effective portion of the
change in fair value of the interest rate swaps is recorded within OCI. Hedge
ineffectiveness is recorded as a component of net income. As of June 2, 2001,
the market value of these swaps is $31,945, which represents the amount that
the Company would have to pay the counter party to terminate these contracts
as of that date. This balance is included in other non-current liabilities on
the accompanying balance sheet. The Company has recorded a charge to interest
expense of $616, which represents the amount of the swaps' ineffectiveness.
The remaining offset to the hedge liability is included in other comprehensive
income. Treatment of these interest rate swaps as cash flow hedges is based on
management's best interpretation of SFAS No. 133. Certain issues currently
under consideration by the Derivatives Implementation Group ("DIG") may make
it more difficult for the Company's interest rate swaps to qualify for hedge
accounting. If the Company's swaps do not qualify for hedge accounting,
changes in the fair value of these interest rate swaps will be recorded as a
component of net income.
F-50
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
7. Stockholders' Equity
The Company issued 3,000 shares of Series B cumulative pay-in-kind preferred
at $100 per share, which is the liquidation preference The Series B Preferred
Stock is convertible into shares of the Company's common stock at a conversion
price of $5.50 per share.
In November 2000, the Company reduced the exercise price of approximately
16,684 stock options issued after December 4, 1999 to $2.75 per share, which
represents fair market value of a share of common stock on the date of the
repricing. In connection with the repricing, the Company recognizes
compensation expense for these options using variable plan accounting. Under
variable plan accounting, the Company recognizes compensation expense over the
option vesting period. In addition, subsequent changes in the market value of
the Company's common stock during the option period, or until exercised, will
generate changes in the compensation expense recognized on the repriced
options. The Company recognized expense of $36,903 during the thirteen week
period ended June 2, 2001 related to the repriced options.
The stock-based and deferred compensation component of stockholders' equity
is comprised of $73,623 related to the repriced options offset by $13,949 of
deferred compensation.
On June 15 2001, in connection with the granting of certain restricted
shares of common stock, the Company issued approximately $5,500 of loans to
plan participants, including officers, in order to cover the participants'
federal and state withholding taxes. The loans bear interest at 4.25% per
annum and are due and payable upon the earlier of June 15, 2002 or the date
the participant sells the underlying shares of common stock.
8. Commitments and Contingencies
The Company is party to numerous legal proceedings, as described below.
Federal investigations
There are currently pending federal governmental investigations, both civil
and criminal, by the SEC and the United States Attorney, involving the
Company's financial reporting and other matters. Management is cooperating
fully with the SEC and the United States Attorney. Settlement discussions have
begun with the United States Attorney for the Middle District of Pennsylvania.
The United States Attorney has proposed that the government would not
institute any criminal proceeding against the Company if the Company enters
into a consent judgement providing for a civil penalty payable over a period
of years. The amount of the civil penalty has not been agreed to and there can
be no assurance that a settlement will be reached or that the amount of such
penalty will not have a material adverse effect on the Company's result of
operations, financial condition or cash flows.
The U.S. Department of Labor has commenced an investigation of matters
relating to the Company's employee benefit plans, including the Company's
principal 401(k) plan, which permitted employees to purchase the Company's
common stock. Purchases of the Company's common stock under the plan were
suspended in October 1999. In January 2001, the Company appointed an
independent trustee to represent the interests of these plans in relation to
the Company and to investigate possible claims the plans may have against the
Company. Both the independent trustee and the Department of Labor have
asserted that the plans may have claims against the Company. The
investigations, with which the Company is cooperating fully, are ongoing and
their outcomes cannot be predicted. In addition, a purported class action
lawsuit on behalf of the plans and their participants has been filed by a
participant in the plans in the United States District Court for the Eastern
District of Pennsylvania.
These investigations and settlement discussions are ongoing and their
outcome cannot be predicted. If the Company were convicted of any crime,
certain licenses and government contracts such as Medicaid plan
F-51
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Commitments and Contingencies -- (Continued)
reimbursement agreements that are material to operations may be revoked, which
would have a material adverse effect on the Company's results of operations,
financial condition or cash flow. In addition, substantial penalties, damages
or other monetary remedies assessed against the Company, including a
settlement, could also have a material adverse effect on the Company's results
of operation's, financial condition or cash flows.
Stockholder litigation
The Company, certain directors, its former chief executive officer Martin
Grass, its former president Timothy Noonan, its former chief financial officer
Frank Bergonzi, and its former auditor KPMG LLP, have been sued in a number of
actions, most of which purport to be class actions, brought on behalf of
stockholders who purchased the Company's securities on the open market between
May 2, 1997 and November 10, 1999. Most of the complaints asserted claims
under Sections 10 and 20 of the Securities Exchange Act of 1934, based upon
the allegation that the Company's financial statements for fiscal 1997, fiscal
1998 and fiscal 1999 fraudulently misrepresented the Company's financial
position and results of operation for those periods. All of these cases have
been consolidated in the U.S. District Court for the Eastern District of
Pennsylvania. On November 9, 2000, the Company announced that it had reached
an agreement to settle the consolidated securities class action lawsuits
pending against us in the U.S. District Court for the Eastern District of
Pennsylvania and the derivative lawsuits pending there and in the Delaware
Court of Chancery. Under the agreement, which has been submitted to the U.S.
District Court for the Eastern District of Pennsylvania for approval, the
Company will pay $45,000 in cash, which will be fully funded by the Company's
officers' and directors' liability insurance, and issue shares of common stock
in 2002. The shares will be valued over a 10 day trading period in January
2002. If the value determined is at least $7.75 per share, the Company will
issue 20,000 shares. If the value determined is less than $7.75 per share, the
Company has the option to deliver any combination of common stock, cash and
short-term notes, with a total value of $155,000. As additional consideration
for the settlement, the Company has assigned to the plaintiffs all of the
Company's claims against the above named executives and KPMG LLP. Several
members of the class have elected to "opt-out" of the class and, as a result,
if the settlement is approved by the court, they will be free to individually
pursue their claims. Management believes that their claims, individually and
in the aggregate, are not material. On June 8, 2001, the court issued a ruling
indicating that it was prepared to approve the settlement if certain technical
changes were made in the order that the plaintiffs and settling defendants
requested be issued by the court. The Company and the plaintiffs have modified
the requested order and resubmitted it for court approval. Management
anticipates that the nonsettling defendants will appeal any approved order.
The outcome of any such appeal cannot be predicted. If the settlement does not
become final, this litigation could result in a material adverse effect on the
Company's results of operations, financial condition or cash flows.
A purported class action has been instituted by a stockholder against the
Company in Delaware state court on behalf of stockholders who purchased shares
of our common stock prior to May 2, 1997, and who continued to hold them after
November 10, 1999, alleging claims similar to the claims alleged in the
consolidated securities class action lawsuits described above. The amount of
damages sought was not specified and may be material. The Company has filed a
motion to dismiss this claim which is pending before the court. These claims
are ongoing and their outcome cannot be predicted. An unfavorable outcome in
this litigation could result in a material adverse effect on the Company's
results of operations, financial condition or cash flows.
F-52
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Commitments and Contingencies -- (Continued)
Drug pricing and reimbursement matters
On October 5, 2000, the Company settled, for an immaterial amount, and
without admitting any violation of the law, the lawsuit filed by the Florida
Attorney General alleging that the Company's non-uniform pricing policy for
cash prescription purchases was unlawful under Florida law. The filing of the
complaint by the Florida Attorney General, and the Company's press release
issued in conjunction therewith, precipitated an investigation by the New
Jersey Attorney General which is ongoing and the filing of a purported federal
class action in California and several purported state class actions, all of
which (other than those pending in New York that were filed on October 5, 1999
and those pending in California that were filed on January 3, 2000) have been
dismissed. A motion to dismiss the action in New York is currently pending and
the plaintiffs in the California action have agreed to a voluntary dismissal
of their complaint. On May 30, 2001, a complaint filed in New Jersey in which
the plaintiff made a similar allegation and which the trial court dismissed
for failing to state a claim upon which relief could be based was reinstated
by the appellate court. Management believes that the remaining lawsuits are
without merit under applicable state consumer protection laws. As a result,
the Company intends to continue to vigorously defend against them and does not
anticipate that if fully adjudicated, they will result in an award of damages.
However, such outcomes cannot be assured and a ruling against the Company
could have a material adverse effect on the Company's results of operations,
financial condition, or cash flows.
The Company is being investigated by multiple state attorneys general for
its reimbursement practices relating to partially-filled prescriptions and
fully-filled prescriptions that are not picked up by ordering customers. The
Company is supplying similar information with respect to these matters to the
Department of Justice. Management believes that these investigations are
similar to investigations which were, and are being, undertaken with respect
to the practices of others in the retail drug industry. Management also
believes that the Company's existing policies and procedures fully comply with
the requirements of applicable law and intend to fully cooperate with these
investigations. The outcome of these investigations cannot be predicted.
An individual acting on behalf of the United States of America has filed a
lawsuit in the United States District Court for the Eastern District of
Pennsylvania under the Federal False Claims Act alleging that the Company
defrauded federal healthcare plans by failing to appropriately issue refunds
for partially filled prescriptions and prescriptions which were not picked up
by customers. The Department of Justice has advised the court that it intends
to join this lawsuit, as is its right under the law; its investigation is
continuing. The Company has filed a motion to dismiss the complaint for
failure to state a claim.
These claims are ongoing and their outcome cannot be predicted. If any of
these cases result in a substantial monetary judgement against the Company or
is settled on unfavorable terms, the Company's results of operations,
financial condition or cash flows could be materially adversely affected.
Store Management Overtime Litigation
The Company is a defendant in a class action pending in the California
Superior Court in San Diego with three subclasses, comprised of its California
store managers, assistant managers and managers-in-training. The plaintiffs
seek back pay for overtime not paid to them and injunctive relief to require
the Company to treat its store management as non-exempt. They allege that the
Company decided to minimize labor costs by causing managers, assistant
managers and managers-in-training to perform the duties and functions of
associates for in excess of forty hours per week without paying them overtime.
Management believes that in-store management were and are properly classified
as exempt from the overtime provisions of California law. On May 21, 2001, the
Company entered into a Memorandum of Agreement with the plaintiffs under
which, subject to approval of the court, the Company will settle this lawsuit
for a maximum of $25,000, a charge for which was recorded in fiscal 2000. The
settlement amount is payable in four equal
F-53
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Commitments and Contingencies -- (Continued)
installments of 25%, the first of which is payable upon final court approval
of the settlement and the balance is payable 6, 12 and 18 months thereafter.
On June 1, 2001 the court entered an order granting preliminary approval of
the settlement and authorizing notice to the class.
Other
The Company, together with a significant number of major U.S. retailers, has
been sued by the Lemelson Foundation in a complaint which alleges that
portions of the technology included in the Company's point-of-sale system
infringe upon a patent held by the plaintiffs. The amount of damages sought is
unspecified and may be material. The outcome of this litigation cannot be
predicted. An unfavorable outcome could have a material adverse effect on the
Company's results of operations, financial condition or cash flows.
The Company is subject from time to time to lawsuits arising in the ordinary
course of business. In the opinion of management, these matters are adequately
covered by insurance or, if not so covered, are without merit or are of such
nature or involve amounts that would not have a material adverse effect on our
results of operations, financial condition, or cash flows if decided
adversely.
9. Subsequent Events
Refinancing
On June 27, 2001, the Company completed a major financial restructuring that
extended the maturity dates of the majority of its debt to 2005 or beyond,
provided additional equity and converted a portion of its debt to equity.
These transactions are described below:
New Senior Secured Credit Facility: The Company entered into a new
$1,900,000 senior secured credit facility with a syndicate of banks led by
Citicorp USA, Inc. as senior agent. The new facility matures on June 27, 2005
unless more than $20,000 of the 7.625% senior notes due April 15, 2005 are
outstanding on December 31, 2004, in which event the maturity date is March
15, 2005. The new facility consists of a $1,400,000 term loan facility and a
$500,000 revolving credit facility. The term loan was used to repay the
outstanding balances of the old senior facility, PCS facility, RCF facility,
the Exchange Debt and all but $21,900 of the 10.5% senior secured notes due
September 2002. The revolving facility is available for working capital
requirements, capital expenditures and general corporate purposes. Borrowings
under the facilities generally bear interest either at LIBOR plus 3.5%, if the
Company chooses to make LIBOR borrowings, or at Citibank's base rate plus
2.5%. Amortization payments of the term loan begin March 2, 2002 of $5,000,
increasing to $7,500 for the quarters ending May 31, 2002 through August 31,
2003 and $15,000 for the quarters ending November 30, 2003 through February
26, 2005.
The Company is required to pay fees of 0.50% per annum on the daily unused
amount of the revolving facility. Substantially all of the Company's wholly
owned subsidiaries guarantee the obligations under the senior secured credit
facility and the 10.50% senior secured notes due 2002. The subsidiary
guarantees are secured by a first priority lien on the inventory, accounts
receivable, prescription files, intellectual property and some real estate
assets of the subsidiary guarantors. The Company's direct obligations under
the senior credit facility are unsecured.
The senior secured credit facility contains customary covenants, which place
restrictions on the assumption of debt, the payment of dividends, mergers,
liens and sale and leaseback transactions. Among the transactions permitted by
the facility to increase debt are transactions to finance existing owned real
estate not to exceed an aggregate $150,000 and $393,000 of additional debt
secured by the facility's collateral on a second priority basis.
F-54
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Subsequent Events -- (Continued)
The senior secured credit facility requires the Company to meet various
financial ratios and limits capital expenditures. Beginning with the nine
months ending December 1, 2001, the covenants require the Company to maintain
a maximum leverage ratio of 8.25:1 decreasing to 3.5:1 for the twelve months
ending May 31, 2005. The Company must also maintain a minimum interest
coverage ratio of 1.25:1 for the nine months ending December 1, 2001,
increasing to 2.8:1 for the twelve months ending May 31, 2005 and a minimum
fixed charge coverage ratio of 0.9:1 for the nine months ending December 1,
2001 increasing to 1.25:1 for the twelve months ending May 31, 2005. Capital
expenditures are limited to $200,000 annually beginning with the twelve months
ending March 2, 2002. These expenditure limits are subject to upward
adjustment based upon availability of excess liquidity as defined in the
Company's senior secured credit facility.
The senior secured credit facility provides for customary events of default,
including nonpayment, misrepresentation, breach of covenants and bankruptcy.
It is also an event of default if any event occurs that enables, or which with
the giving of notice or the lapse of time would enable, the holder of the
Company's debt to accelerate the maturity of debt having a principal amount of
$25,000 or more.
The Company's ability to borrow under the senior secured credit facility is
based on a specified borrowing base consisting of eligible accounts receivable
and inventory. At June 30, 2001, the term loan was fully drawn except for
$21,900 which is available and may be drawn to pay the remaining outstanding
10.5% senior secured notes when they mature on September 15, 2002. At June 30,
2001, the Company had no outstanding draws on the revolving credit facility
and the Company had additional available borrowing capacity of $403,600, net
of outstanding letters of credit of $96,400.
High Yield Notes: The Company issued $150,000 of 11.25% senior notes due
July 2008 in a private placement offering. These notes are unsecured and
subordinate to the secured debt of the Company. Among the transactions
permitted by the 11.25% senior notes to increase debt are transactions to
finance existing owned real estate not to exceed an aggregate $150,000 and
$400,000 of other debt. The 11.25% senior notes also allow for the senior
secured credit facility to be increased up to $2.5 billion.
Debt for Debt Exchange: The Company exchanged $152,025 of its existing 10.5%
senior secured notes due 2002 for an equal amount of 12.5% senior notes due
September 2006. In addition, holders of these notes received warrants to
purchase 3,000 shares of Company common stock at $6.00 per share. On June 29,
2001, the warrant holders exercised these warrants, on a cashless basis, and
as a result 1,000 shares of common stock were issued.
Tender Offer: On May 24, 2001, the Company commenced a tender offer for the
10.50% senior secured notes due 2002 at a price of 103.25% of the principal
amount of the notes. The tender offer was closed on June 27, 2001, at which
time $174,462 principal amount of the notes was tendered. The Company incurred
a tender offer premium of $5,670 as a result of the transaction. The Company
used proceeds from the new senior secured credit facility to pay for the notes
tendered.
Debt for Equity Exchanges and Sales of Capital Stock: On June 27, 2001, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock,
$1.00 par value, from 600,000 to 1,000,000.
F-55
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Subsequent Events -- (Continued)
The Company completed the following debt for equity exchanges in the period
beginning June 3, 2001 and ended June 30, 2001.
Series C
Carrying Convertible Additional
Amount Common Preferred Paid-In
Debt Exchanged Exchanged Stock Stock Capital (Loss)
-------------- ---------- -------- ----------- ---------- --------
PCS facility..... $ 9,478 $1,054 -- $ 8,791 $ (367)
RCF facility..... 139,905 806 $2,122 147,368 (10,391)
10.50% notes due
2002........... 63,134 7,573 -- 62,340 (8,436)
-------- ------ ------ -------- --------
$212,517 $9,433 $2,122 $218,499 $(19,194)
======== ====== ====== ======== ========
In addition to the debt for equity exchange transactions listed above, the
Company sold approximately 80,083 shares of its common stock for net proceeds
of $528,544 which resulted in an increase to common stock of $80,083 and
additional paid in capital of $448,461.
The Company issued approximately 2,122 shares of its Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock has a par value of
$1.00 per share and earns dividends at a rate of 8.7455% per annum, payable
quarterly in arrears. The Series C Convertible Preferred Stock converts, on a
ratio of ten shares of common stock for one share of Series C Convertible
Preferred Stock, immediately upon the earlier of (i) the effectiveness of a
registration statement pursuant to the Securities Act of 1933, as amended,
registering for resale the shares of common stock into which the Series C
Convertible Preferred Stock are convertible, or (ii) the Company's merger or
consolidation with or into any other corporation whereby the Company is not
the surviving corporation. The Series C Convertible Preferred Stock holders
vote together with the common stockholders, as a single class, with each share
of the Series C Convertible Preferred Stock having 10 votes.
Lease Obligations: The Company rescinded certain renewal options contained
in certain real estate leases on property previously sold and leased back to
the Company and as a result these leases were afforded sale and leaseback
accounting treatment and, accordingly have been reclassified as operating
leases. This restructuring resulted in a reduction of outstanding capital
lease obligations of $848,847. Accordingly, the Company will recognize a loss
of $21,888 in the second quarter of fiscal 2002, and will record a net
deferred gain of $171,862, which will be amortized over the remaining
noncancellable lease terms. In addition the Company terminated certain capital
leases and purchased the related leasehold improvements for $16,467.
Synthetic Leases: The Company terminated existing synthetic lease agreements
for certain land, buildings, equipment and aircraft, which were accounted for
as operating leases. A wholly owned subsidiary of the Company purchased the
equipment for $82,604, and is leasing the land, buildings and aircraft from
different parties. The obligations under the new synthetic lease for the land
and buildings are secured by a first priority lien on the equipment at the
leased buildings owned by the Company's subsidiary. The Company has guaranteed
certain of the obligations of the subsidiary. The Company will account for
these new leases as operating leases.
Substantially all of the Company's wholly-owned subsidiaries guarantee the
Company's obligations under the new credit facility. These subsidiary
guarantees are secured primarily by a first priority lien on the inventory,
accounts receivable, intellectual property and prescription files of the
subsidiary guarantors. The Company's direct obligations under the new credit
facility will be unsecured. The $21,879 aggregate principal amount of
outstanding 10.5% senior secured notes are secured on a shared first priority
basis with the new credit facility. The 12.5% senior secured notes due 2006
are secured on a second priority basis.
F-56
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Thirteen Week Periods Ended June 2, 2001, and May 27, 2000
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Subsequent Events -- (Continued)
As a result of the above transactions, the Company will record an
extraordinary loss on early extinguishment of debt of approximately $66,000
subject to certain valuations and will defer debt issue costs of approximately
$74,000 in the second quarter of 2002.
Capitalization
The following table summarizes the Company's capitalization at June 30,
2001, following the completion of the refinancing transactions described
above:
As of June 30, 2001
-------------------
Secured Debt:
Senior secured credit facility ................... $1,378,462
10.5% senior secured notes due 2002 .............. 21,879
12.5% senior secured notes due 2006 .............. 143,025
Other ............................................ 12,320
----------
1,555,686
Lease Financing Obligations ....................... 226,594
Unsecured Debt:
6.7% notes due 2001 .............................. 7,342
6.0% dealer remarketable securities due 2003 ..... 107,765
6.0% notes due 2005 .............................. 194,500
7.625% notes due 2005 ............................ 198,000
7.125% notes due 2007 ............................ 350,000
6.125% notes due 2008 ............................ 150,000
11.25% notes due 2008 ............................ 150,000
6.875% notes due 2013 ............................ 200,000
7.7% notes due 2027 .............................. 300,000
6.875% debentures due 2028 ....................... 150,000
----------
1,807,607
Subordinated Debt:
5.25% convertible subordinated notes due 2002 .... 152,016
----------
Total debt ........................................ 3,741,903
Redeemable preferred stock ........................ 19,457
Stockholders' equity .............................. 567,518
----------
Total capitalization ............................. $4,328,878
==========
F-57
RITE AID CORPORATION
130,516,017 Shares
of
Common Stock