10-Q 1 a17-15030_110q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 3, 2017

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission File Number: 1-5742

 

RITE AID CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

23-1614034
(I.R.S. Employer
Identification No.)

 

 

 

30 Hunter Lane,
Camp Hill, Pennsylvania

 

17011

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (717) 761-2633.

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report):

Not Applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “Large Accelerated Filer,” “Accelerated Filer,” “Smaller Reporting Company” and “Emerging Growth Company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o
(Do not check if a
smaller reporting company)

Smaller reporting company o

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange act).  Yes o  No x

 

The registrant had 1,053,291,998 shares of its $1.00 par value common stock outstanding as of June 22, 2017.

 

 

 



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RITE AID CORPORATION

 

TABLE OF CONTENTS

 

 

Cautionary Statement Regarding Forward-Looking Statements

2

 

PART I
FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements (unaudited):

 

 

Condensed Consolidated Balance Sheets as of June 3, 2017 and March 4, 2017

4

 

Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended June 3, 2017 and May 28, 2016

5

 

Condensed Consolidated Statements of Comprehensive Loss for the Thirteen Week Periods Ended June 3, 2017 and May 28, 2016

6

 

Condensed Consolidated Statements of Cash Flows for the Thirteen Week Periods Ended June 3, 2017 and May 28, 2016

7

 

Notes to Condensed Consolidated Financial Statements

8

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

37

ITEM 4.

Controls and Procedures

37

 

PART II
OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

38

ITEM 1A.

Risk Factors

38

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

ITEM 3.

Defaults Upon Senior Securities

38

ITEM 4.

Mine Safety Disclosures

38

ITEM 5.

Other Information

38

ITEM 6.

Exhibits

39

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report, as well as our other public filings or public statements, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.

 

Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

 

·                  our high level of indebtedness;

 

·                  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;

 

·                  the continued impact of private and public third party payors reduction in prescription drug reimbursement rates and their ongoing efforts to limit access to payor networks, including through mail order;

 

·                  our ability to achieve the benefits of our efforts to reduce the costs of our generic and other drugs, and our ability to achieve drug pricing efficiencies;

 

·                  the impact of the loss of one or more major third party payors;

 

·                  the inability to complete the proposed Sale (as defined in Note 3 below) due to the failure to satisfy the conditions to the completion of the Sale, including receipt of required regulatory approvals, and other risks related to obtaining the requisite consents to the Sale;

 

·                  the continuing effect of the prior Merger Agreement and the proposed Sale, including the effect of the announcement of the  Terminations (as defined in Note 3 below), on our business relationships (including, without limitation, customers and suppliers), operating results and business generally;

 

·                  our ability to improve the operating performance of our stores in accordance with our long term strategy;

 

·                  our ability to grow prescription count and realize front-end sales growth;

 

·                  our ability to hire and retain qualified personnel;

 

·                  decisions to close additional stores and distribution centers or undertake additional refinancing activities (subject to the limitations in the  Asset Purchase Agreement (as defined in Note 3 below)), which could result in charges to our operating statement;

 

·                  our ability to manage expenses and working capital;

 

·                  continued consolidation of the drugstore and the pharmacy benefit management (“PBM”) industries;

 

·                  the risk that changes in federal or state laws or regulations, including the Health Care Education Affordability Reconciliation Act, the repeal of all or part of the Patient Protection and the Affordable Care Act (or “Patient Care Act”) and any regulations enacted thereunder may occur;

 

·                  the risk that provider and state contract changes may occur;

 

·                  risks related to compromises of our information or payment systems or unauthorized access to confidential or personal information of our associates or customers;

 

·                  our ability to maintain our current pharmacy services business and obtain new pharmacy services business, including maintaining renewals of expiring contracts, avoiding contract termination rights that may permit certain of our clients to terminate their contracts prior to their expiration and early price renegotiations prior to contract expirations;

 

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·                  the continued impact of declining gross margins in the PBM industry due to increased market competition and client demand for lower prices while providing enhanced service offerings;

 

·                  our ability to maintain our current Medicare Part D business and obtain new Medicare Part D business, as a result of the annual Medicare Part D competitive bidding process;

 

·                  the expiration or termination of our Medicare or Medicaid managed care contracts by federal or state governments;

 

·                  the amount of the costs, fees, expenses and charges related to the terminated Merger Agreement (as defined in Note 3 below), the terminated Divestiture Asset Purchase Agreement (as defined in Note 3 below) or the Sale;

 

·                  the risk that our stock price may decline significantly if the Sale is not completed;

 

·      our ability to refinance our indebtedness on terms favorable to us in the event that the sale is not completed;

 

·                  the risk that a governmental entity may prohibit, delay or refuse to grant approval, including antitrust approval, for the completion of the Sale or may require conditions, limitations or restrictions in connection with such approvals, including the risk that the FTC may not approve the transaction;

 

·                  risks related to other business effects, including the effects of industry, market, economic, political (including as a result of the recent U.S. Presidential election) or regulatory conditions, future exchange or interest rates or credit ratings, changes in tax laws, regulations, rates and policies or competitive development including aggressive promotional activity from our competitors;

 

·                  the risk that we could experience deterioration in our current Star rating with the Centers of Medicare and Medicaid Services (“CMS”) or incur CMS penalties and/or sanctions;

 

·                  the nature, cost and outcome of pending and future litigation and other legal proceedings or governmental investigations, including any such proceedings related to the Merger (as defined in Note 3 below) or Sale and instituted against us and others;

 

·                  the risk that there may be a material adverse change of the Company or the Acquired Stores (as defined in Note 3 below);

 

·                  there may be changes to our strategy in the event that the Sale does not close, which may include delaying or reducing capital or other expenditures, selling assets or other operations, closing underperforming stores, attempting to restructure or refinance our debt, seeking additional capital or incurring other costs associated with restructuring our business;

 

·                  other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

 

We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended March 4, 2017 (the “Fiscal 2017 10-K”), as well as in the “Risk Factors” section of the Fiscal 2017 10-K, which we filed with the SEC on May 3, 2017 and is available on the SEC’s website at www.sec.gov.

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

June 3, 2017

 

March 4,
2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

214,449

 

$

245,410

 

Accounts receivable, net

 

1,781,175

 

1,771,126

 

Inventories, net of LIFO reserve of $1,016,650 and $999,776

 

2,789,176

 

2,837,211

 

Prepaid expenses and other current assets

 

192,767

 

211,541

 

Total current assets

 

4,977,567

 

5,065,288

 

Property, plant and equipment, net

 

2,218,333

 

2,251,692

 

Goodwill

 

1,715,479

 

1,715,479

 

Other intangibles, net

 

787,969

 

835,795

 

Deferred tax assets

 

1,556,301

 

1,505,564

 

Other assets

 

204,489

 

219,934

 

Total assets

 

$

11,460,138

 

$

11,593,752

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

22,460

 

$

21,335

 

Accounts payable

 

1,646,457

 

1,613,909

 

Accrued salaries, wages and other current liabilities

 

1,339,778

 

1,370,004

 

Total current liabilities

 

3,008,695

 

3,005,248

 

Long-term debt, less current maturities

 

7,177,918

 

7,263,288

 

Lease financing obligations, less current maturities

 

39,889

 

44,070

 

Other noncurrent liabilities

 

673,008

 

667,076

 

Total liabilities

 

10,899,510

 

10,979,682

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 1,053,685 and 1,053,690

 

1,053,685

 

1,053,690

 

Additional paid-in capital

 

4,848,675

 

4,839,854

 

Accumulated deficit

 

(5,299,929

)

(5,237,157

)

Accumulated other comprehensive loss

 

(41,803

)

(42,317

)

Total stockholders’ equity

 

560,628

 

614,070

 

Total liabilities and stockholders’ equity

 

$

11,460,138

 

$

11,593,752

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

June 3, 2017

 

May 28, 2016

 

Revenues

 

$

7,781,453

 

$

8,184,181

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

6,022,419

 

6,289,881

 

Selling, general and administrative expenses

 

1,761,290

 

1,793,247

 

Lease termination and impairment charges

 

4,086

 

5,781

 

Interest expense

 

109,937

 

105,113

 

(Gain) loss on sale of assets, net

 

(5,721

)

1,056

 

 

 

7,892,011

 

8,195,078

 

Loss before income taxes

 

(110,558

)

(10,897

)

Income tax benefit

 

(35,209

)

(6,309

)

Net loss

 

$

(75,349

)

$

(4,588

)

Computation of loss attributable to common stockholders:

 

 

 

 

 

Loss attributable to common stockholders—basic and diluted

 

$

(75,349

)

$

(4,588

)

Basic and diluted loss per share

 

$

(0.07

)

$

(0.00

)

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

June 3, 2017

 

May 28, 2016

 

Net loss

 

$

(75,349

)

$

(4,588

)

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $342 and $451 tax expense

 

514

 

681

 

Total other comprehensive income

 

514

 

681

 

Comprehensive loss

 

$

(74,835

)

$

(3,907

)

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

June 3, 2017

 

May 28, 2016

 

Operating activities:

 

 

 

 

 

Net loss

 

$

(75,349

)

$

(4,588

)

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

142,092

 

138,788

 

Lease termination and impairment charges

 

4,086

 

5,781

 

LIFO charge

 

16,874

 

13,751

 

(Gain) loss on sale of assets, net

 

(5,721

)

1,056

 

Stock-based compensation expense

 

9,038

 

11,144

 

Changes in deferred taxes

 

(38,160

)

(5,749

)

Excess tax benefit on stock options and restricted stock

 

 

(883

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(13,757

)

(74,530

)

Inventories

 

31,172

 

59,440

 

Accounts payable

 

4,372

 

115,646

 

Other assets and liabilities, net

 

18,087

 

(99, 856

)

Net cash provided by operating activities

 

92,734

 

160,000

 

Investing activities:

 

 

 

 

 

Payments for property, plant and equipment

 

(60,738

)

(106,077

)

Intangible assets acquired

 

(8,234

)

(16,381

)

Proceeds from dispositions of assets and investments

 

8,639

 

3,088

 

Proceeds from insured loss

 

2,137

 

 

Net cash used in investing activities

 

(58,196

)

(119,370

)

Financing activities:

 

 

 

 

 

Net payments to revolver

 

(90,000

)

(20,000

)

Principal payments on long-term debt

 

(4,267

)

(5,721

)

Change in zero balance cash accounts

 

28,768

 

2,262

 

Net proceeds from issuance of common stock

 

147

 

2,371

 

Excess tax benefit on stock options and restricted stock

 

 

883

 

Payments for taxes related to net share settlement of equity awards

 

(147

)

(56

)

Net cash used in financing activities

 

(65,499

)

(20,261

)

(Decrease) increase in cash and cash equivalents

 

(30,961

)

20,369

 

Cash and cash equivalents, beginning of period

 

245,410

 

124,471

 

Cash and cash equivalents, end of period

 

$

214,449

 

$

144,840

 

Supplementary cash flow data:

 

 

 

 

 

Cash paid for interest (net of capitalized amounts of $71 and $56, respectively)

 

$

75,535

 

$

71,434

 

Cash payments of income taxes, net of refunds

 

$

1,461

 

$

3,869

 

Equipment financed under capital leases

 

$

3,857

 

$

1,553

 

Equipment received for noncash consideration

 

$

1,295

 

$

632

 

Reduction in lease financing obligation

 

$

2,416

 

$

 

Gross borrowings from revolver

 

$

579,000

 

$

867,000

 

Gross payments to revolver

 

$

669,000

 

$

887,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 3, 2017 and May 28, 2016

 

(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 in the United States of America 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 accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen week period ended June 3, 2017 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 audited consolidated financial statements and notes thereto included in the Rite Aid Corporation (“Rite Aid”) and Subsidiaries (together with Rite Aid, the “Company”) Fiscal 2017 10-K.

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends the accounting for certain aspects of share-based payments to employees in ASC Topic 718, Compensation — Stock Compensation. The new guidance eliminates the accounting for any excess tax benefits and deficiencies through equity and requires all excess tax benefits and deficiencies related to employee share-based compensation arrangements to be recorded in the income statement. This aspect of the new guidance is required to be applied prospectively. The new guidance also requires (i.) the presentation of excess tax benefits on the statement of cash flows as an operating activity rather than a financing activity, a change which may be applied prospectively or retrospectively and (ii.) the presentation of employee taxes paid when an employer withholds shares for tax withholding purposes on the statement of cash flows as a financing activity, a change which must be applied retrospectively. The new guidance further provides an accounting policy election to account for forfeitures as they occur rather than utilizing the estimated amount of forfeitures at the time of issuance. The Company adopted this new guidance effective March 5, 2017. The primary impact of adoption was (i.) the modified retrospective recognition of the cumulative amount of previously unrecognized excess tax benefits as an opening balance sheet adjustment and (ii.) the recognition of excess tax benefits in the income statement on a prospective basis, rather than equity. As a result, the Company (i.) increased the deferred tax asset and reduced accumulated deficit by $12,577 as of the beginning of the thirteen weeks ended June 3, 2017, and (ii.) the Company recognized a discrete income tax expense of $52 in income tax expense for the thirteen weeks ended June 3, 2017. The Company also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of fiscal 2018. The retrospective application of cash paid on employees’ behalf related to shares withheld for tax purposes resulted in increases to both “Net cash provided by operating activities” and “Net cash used in financing activities” of $56 for the thirteen weeks ended May 28, 2016. The Company’s stock-based compensation expense continues to reflect estimated forfeitures. None of the other provisions in this new guidance had a material impact on the Company’s condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), an update to ASU 2014-09. This ASU amends ASU 2014-09 to defer the effective date by one year for annual reporting periods beginning after December 15, 2017 (fiscal 2019). Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. This ASU removes inconsistencies, complexities and allows transparency and comparability of revenue transactions across entities, industries, jurisdictions and capital markets by providing a single comprehensive principles-based model with additional disclosures regarding uncertainties. The principles-based revenue recognition model has a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Early adoption is permitted for annual reporting periods beginning after December 15, 2016 (fiscal 2018). In transition, the ASU may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company does not intend to early adopt the new standard. During the thirteen weeks ended June 3, 2017, the Company assembled a cross functional team to identify the population of contracts with customers, for both its Retail Pharmacy and Pharmacy Services segments, and evaluate them under the provisions of ASU 2014-09. The Company intends to

 

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adopt the new standard on a modified retrospective basis. Under this implementation method, the Company will recognize the cumulative effect of initially applying the new guidance as an adjustment to the opening retained earnings balance for the annual reporting period of initial application. While the Company is continuing its assessment of all of the potential impacts of the new standard, it does not expect the implementation of the standard to have a material impact on the Company’s consolidated financial position, results of operations or cash flow.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, (Topic 842), which is intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that engage in lease transactions (both lessee and lessor) that lease assets such as real estate and manufacturing equipment. This ASU will require organizations that lease assets—referred to as “leases”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU No. 2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019 (fiscal 2020). The Company believes that the new standard will have a material impact on its financial position. The Company is currently evaluating the impact this standard implementation will have on its results of operations and cash flows.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, (Topic 350): Simplifying the Test for Goodwill Impairment, which is intended to simplify the subsequent measurement and impairment of goodwill. The ASU simplifies the complexity of evaluating goodwill for impairment by eliminating the second step of the impairment test, which compares the implied fair value of a reporting unit’s goodwill to the carrying amount of that goodwill. Instead, the ASU requires entities to compare the fair value of a reporting unit to its carrying amount in order to determine the amount of goodwill impairment recognized. ASU No. 2017-04 is effective for fiscal years and interim periods within those years beginning after December 15, 2019 (fiscal 2020). Early adoption of all the amendments for ASU 2017-04 is permitted. Amendments must be applied prospectively. The Company is in process of assessing the impact of the adoption of ASU No. 2017-04 on its financial position, results of operations and cash flows.

 

2. Acquisition

 

On June 24, 2015, the Company completed its acquisition of TPG VI Envision BL, LLC and Envision Topco Holdings, LLC (“EnvisionRx”), pursuant to the terms of an agreement (“Agreement”) dated February 10, 2015 (the “Acquisition”). EnvisionRx, which was a portfolio company of TPG Capital L.P. prior to its acquisition by the Company, is a full-service pharmacy services provider. EnvisionRx provides both transparent and traditional pharmacy benefit manager (“PBM”) service options through its EnvisionRx and MedTrak PBMs, respectively. EnvisionRx also offers fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies; access to the nation’s largest cash pay infertility discount drug program via Design Rx; an innovative claims adjudication software platform in Laker Software; and a national Medicare Part D prescription drug plan through Envision Insurance Company’s (“EIC”) EnvisionRx Plus Silver product for the low income auto-assign market and its Clear Choice product for the chooser market. EnvisionRx is headquartered in Twinsburg, Ohio and operates as a 100 percent owned subsidiary of the Company.

 

Pursuant to the terms of the Agreement, as consideration for the Acquisition, the Company paid $1,882,211 in cash and issued 27,754 shares of Rite Aid common stock. The Company financed the cash portion of the Acquisition with borrowings under its Amended and Restated Senior Secured Revolving Credit Facility, and the net proceeds from the April 2, 2015 issuance of $1,800,000 aggregate principal amount of 6.125% senior notes due 2023 (the “6.125% Notes”). The consideration associated with the common stock was $240,907 based on a stock price of $8.68 per share, representing the closing price of the Company’s common stock on the closing date of the Acquisition.

 

The Company’s condensed consolidated financial statements for the thirteen week periods ended June 3, 2017 and May 28, 2016 include EnvisionRx results of operations (please see Note 12 Segment Reporting for the Pharmacy Services segment results included within the condensed consolidated financial statements for the thirteen week periods ended June 3, 2017 and May 28, 2016, which reflects the results of EnvisionRx). The Company’s condensed consolidated financial statements reflect the purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the Acquisition date.

 

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During fiscal 2017, the Company finalized the valuation of the identifiable assets acquired and the liabilities assumed. The following is the allocation of the purchase price:

 

Final purchase price

 

 

 

Cash consideration

 

$

1,882,211

 

Stock consideration

 

240,907

 

Total

 

$

2,123,118

 

Final purchase price allocation

 

 

 

Cash and cash equivalents

 

$

103,834

 

Accounts receivable

 

892,678

 

Inventories

 

7,276

 

Prepaid expenses and other current assets

 

13,386

 

Total current assets

 

1,017,174

 

Property and equipment

 

13,196

 

Intangible assets(1)

 

646,600

 

Goodwill

 

1,639,355

 

Other assets

 

7,219

 

Total assets acquired

 

3,323,544

 

Accounts payable

 

491,672

 

Reinsurance funds held

 

381,225

 

Other current liabilities(2)

 

215,770

 

Total current liabilities

 

1,088,667

 

Other long term liabilities(3)

 

111,759

 

Total liabilities assumed

 

1,200,426

 

Net assets acquired

 

$

2,123,118

 

 


(1)                                 Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a final valuation prepared by an independent third party. The fair values assigned to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earnings methods. The major assumptions used in arriving at the estimated identifiable intangible asset values included management’s estimates of future cash flows, discounted at an appropriate rate of return which are based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. The estimated fair value of intangible assets and related useful lives as included in the final purchase price allocation include:

 

 

 

Estimated
Fair Value

 

Estimated
Useful Life
(In Years)

 

Customer relationships

 

$

465,000

 

17

 

CMS license

 

57,500

 

25

 

Claims adjudication and other developed software

 

59,000

 

7

 

Trademarks

 

20,100

 

10

 

Backlog

 

11,500

 

3

 

Trademarks

 

33,500

 

Indefinite

 

Total

 

$

646,600

 

 

 

 

(2)                                 Other current liabilities includes $116,057 due to TPG under the terms of the Agreement, representing the amounts due to EnvisionRx from CMS, less corresponding amounts due to various reinsurance providers under certain reinsurance programs, for CMS activities that relate to the year ended December 31, 2014. This liability was satisfied with a payment to TPG on November 5, 2015.

 

(3)                                 Primarily relates to deferred tax liabilities.

 

The above goodwill represents future economic benefits expected to be recognized from the Company’s expansion into the pharmacy services market, as well as expected future synergies and operating efficiencies from combining operations with

 

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EnvisionRx. Goodwill resulting from the Acquisition of $1,639,355 has been allocated to the Pharmacy Services segment of which $1,368,657 is deductible for tax purposes.

 

3. Termination of the Merger Agreement with WBA and the Pending Asset Sale to WBA

 

Termination of Merger Agreement with Walgreens Boots Alliance, Inc.

 

On October 27, 2015, Rite Aid, Walgreens Boots Alliance, Inc. (NASDAQ: WBA) (“WBA”)  and Victoria Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and a wholly owned subsidiary of WBA, entered into an Agreement and Plan of Merger (as amended by Amendment No. 1, dated as of January 29, 2017 (the “Amendment”)) (the “Merger Agreement”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub was to merge with and into Rite Aid (the “Merger”), with Rite Aid surviving the Merger as a 100 percent owned direct subsidiary of WBA.  On June 28, 2017, Rite Aid, WBA and Merger Sub entered into a Termination Agreement (the “Merger Termination Agreement”) under which the parties agreed to terminate the Merger Agreement.  The Merger Termination Agreement provides that WBA would pay to Rite Aid a termination fee in the amount of $325,000. Rite Aid received the termination fee payment on June 30, 2017.  Subject to limited customary exceptions, the Merger Termination Agreement also mutually releases the parties from any claims of liability to one another relating to the contemplated merger transaction.

 

Termination of the Divestiture Asset Purchase Agreement with Fred’s

 

As previously disclosed, on December 19, 2016, Rite Aid entered into an Asset Purchase Agreement (the “Divestiture Asset Purchase Agreement”) with AFAE, LLC, a Tennessee limited liability company (“AFAE”), Fred’s, Inc., a Tennessee corporation (“Fred’s”) (solely for the purposes set forth in the Divestiture Asset Purchase Agreement) and WBA (solely for the purposes set forth in the Divestiture Asset Purchase Agreement).  Pursuant to the terms and subject to the conditions set forth in the Divestiture Asset Purchase Agreement, Rite Aid agreed to sell 865 Rite Aid stores and certain specified assets to Fred’s (the “Divestiture Sale”). In connection with the Merger and pursuant to the terms and subject to the conditions set forth in the Divestiture Asset Purchase Agreement, AFAE was to purchase from Rite Aid 865 stores and certain specified assets related thereto.  On June 28, 2017, Rite Aid, AFAE, Fred’s and WBA entered into a letter agreement (the “APA Termination Agreement” and together with the Merger Termination Agreement, the “Terminations”) under which the parties agreed to terminate the Divestiture Asset Purchase Agreement.  Subject to limited customary exceptions, the APA Termination Agreement also mutually releases the parties from any claims of liability to one another relating to the contemplated sale transaction.

 

Entry Into Asset Purchase Agreement with WBA

 

On June 28, 2017, Rite Aid entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with WBA and Walgreen Co., an Illinois corporation (“Walgreen’s”) and wholly owned direct subsidiary of WBA (“Buyer”).  Pursuant to the terms and subject to the conditions set forth in the Asset Purchase Agreement, Buyer will purchase from Rite Aid 2,186 stores (the “Acquired Stores”), three (3) distribution centers, related inventory and other specified assets related thereto for a purchase price of approximately $5.175 billion, on a cash-free, debt-free basis (the “Sale”).

 

Completion of the Sale is subject to various closing conditions, including but not limited to (i) the waiting period (and any extension thereof) applicable to the Sale and the other transactions contemplated by the Asset Purchase Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or been earlier terminated, (ii) the absence of a material adverse effect on the stores and distribution centers being acquired in the Sale, (iii) a duplicate copy of Rite Aid’s prescription dispensing system being operational and (iv) receipt of required licenses and lease consents.

 

The parties to the Asset Purchase Agreement have each made customary representations and warranties. Rite Aid has agreed to various covenants and agreements, including, among others, Rite Aid’s agreement to conduct its business at the Acquired Stores in the ordinary course during the period between the execution of the Asset Purchase Agreement and the closing of the Sale, subject to certain exceptions, Rite Aid’s agreement not to solicit proposals from third parties for the purchase of the remainder of Rite Aid or over 50% of its stock or assets for sixty (60) days after the date of the Asset Purchase Agreement subject to certain exceptions and the parties’ agreement to use their reasonable best efforts to obtain all authorizations and approvals from governmental authorities.  Rite Aid has agreed to provide transition services to Buyer for up to (3) three years after closing of the Sale.

 

The Asset Purchase Agreement contains specified termination rights for Rite Aid and WBA, including a mutual termination right in the event any court of competent jurisdiction or other governmental entity shall have issued a final and nonappealable legal restraint that prevents, makes illegal, prohibits, restrains or enjoins the completion of the Sale, and a termination right for WBA in the event Rite Aid enters into an agreement to sell all of the remainder of Rite Aid or over 50% of its stock or assets to a third party. 

 

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Under the terms of the Asset Purchase Agreement, Rite Aid has the option to purchase pharmaceutical drugs through an affiliate of WBA under terms, including cost, that are substantially equivalent to Walgreen’s for a period of ten (10) years.

 

4. Loss Per Share

 

Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss 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 income of the Company subject to anti-dilution limitations.

 

 

 

Thirteen Week
Period Ended

 

 

 

June 3,
2017

 

May 28,
2016

 

Numerator for loss per share:

 

 

 

 

 

Loss attributable to common stockholders—basic and diluted

 

$

(75,349

)

$

(4,588

)

Denominator:

 

 

 

 

 

Basic weighted average shares

 

1,046,826

 

1,042,437

 

Outstanding options and restricted shares, net

 

 

 

Diluted weighted average shares

 

1,046,826

 

1,042,437

 

Basic and diluted loss per share

 

$

(0.07

)

$

(0.00

)

 

Due to their antidilutive effect, 33,747 and 36,860 potential common shares related to stock options have been excluded from the computation of diluted loss per share as of June 3, 2017 and May 28, 2016, respectively. Also, excluded from the computation of diluted loss per share as of June 3, 2017 and May 28, 2016 are restricted shares of 5,623 and 4,742, respectively, which are included in shares outstanding.

 

5. Lease Termination and Impairment Charges

 

Lease termination and impairment charges consist of amounts as follows:

 

 

 

Thirteen Week
Period Ended

 

 

 

June 3,
2017

 

May 28,
2016

 

Impairment charges

 

$

659

 

$

619

 

Lease termination charges

 

3,427

 

5,162

 

 

 

$

4,086

 

$

5,781

 

 

Impairment Charges

 

These amounts include the write-down of long-lived assets at locations that were assessed for impairment because of management’s intention to relocate or close the location or because of changes in circumstances that indicated the carrying value of an asset may not be recoverable.

 

Lease Termination Charges

 

As part of the Company’s ongoing business activities, the Company assesses stores and distribution centers for potential closure or relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease termination charges, lease exit costs and inventory liquidation charges, as well as impairment of assets at these locations. The following table reflects the closed store and distribution center charges that relate to new closures, changes in assumptions and interest accretion:

 

 

 

Thirteen Week
Period Ended

 

 

 

June 3,
2017

 

May 28,
2016

 

Balance—beginning of period

 

$

165,138

 

$

208,421

 

Provision for present value of noncancellable lease payments of closed stores

 

913

 

622

 

Changes in assumptions about future sublease income, terminations and changes in interest rates

 

(549

)

811

 

Interest accretion

 

3,095

 

3,778

 

Cash payments, net of sublease income

 

(12,931

)

(14,642

)

Balance—end of period

 

$

155,666

 

$

198,990

 

 

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6. Fair Value Measurements

 

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

 

·                  Level 1—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·                  Level 2—Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

 

·                  Level 3—Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

 

Non-Financial Assets Measured on a Non-Recurring Basis

 

Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the thirteen week period ended June 3, 2017, long-lived assets from continuing operations with a carrying value of $964, primarily store assets, were written down to their fair value of $305, resulting in an impairment charge of $659. During the thirteen week period ended May 28, 2016, long-lived assets from continuing operations with a carrying value of $1,051, primarily store assets, were written down to their fair value of $432, resulting in an impairment charge of $619. If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired in the current period may be further impaired in future periods.

 

The following table presents fair values for those assets measured at fair value on a non-recurring basis at June 3, 2017 and May 28, 2016:

 

Fair Value Measurement Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
June 3,
2017

 

Long-lived assets held for use

 

$

 

$

 

$

201

 

$

201

 

Long-lived assets held for sale

 

$

 

$

104

 

$

 

$

104

 

Total

 

$

 

$

104

 

$

201

 

$

305

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
May 28,
2016

 

Long-lived assets held for use

 

$

 

$

 

$

432

 

$

432

 

Long-lived assets held for sale

 

$

 

$

 

$

 

$

 

Total

 

$

 

$

 

$

432

 

$

432

 

 

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As of June 3, 2017 and May 28, 2016, the Company did not have any financial assets measured on a recurring basis.

 

Other Financial Instruments

 

Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable. These instruments are recorded at book value, which the Company believes approximate their fair values due to their short term nature. In addition, as of June 3, 2017 and May 28, 2016 the Company has $7,018 and $6,567, respectively, of investments carried at amortized cost as these investments are being held to maturity. These investments are included as a component of prepaid expenses and other current assets as of June 3, 2017 and are included as a component of other assets as of May 28, 2016. The Company believes the carrying value of these investments approximates their fair value.

 

The fair value for LIBOR-based borrowings under the Company’s senior secured credit facility and first and second lien term loans are estimated based on the quoted market price of the financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company’s other long-term indebtedness are estimated based on quoted market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company’s total long-term indebtedness was $7,178,008 and $7,273,272, respectively, as of June 3, 2017. There were no outstanding derivative financial instruments as of June 3, 2017 and March 4, 2017.

 

7. Income Taxes

 

The Company recorded an income tax benefit of $35,209 and $6,309 for the thirteen week periods ended June 3, 2017 and May 28, 2016, respectively. The effective tax rate for the thirteen week periods ended June 3, 2017 and May 28, 2016 was 31.8% and 57.9%, respectively.  The effective tax rate for the period ended June 3, 2017 is net of an adjustment of (8.4%) to increase the valuation allowance to offset the current year deferred state tax benefits.  The higher effective income tax benefit rate for the period ended May 28, 2016 was the result of a discrete income tax benefit recorded for the lapse of a statute of limitations on an uncertain tax position which raised the Company’s effective income tax benefit rate by 13.3%.

 

The Company recognizes tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

 

While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

 

The Company regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain.  Management will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. The Company continues to maintain a valuation allowance against net deferred tax assets of $235,983 and $226,726, which relates primarily to state deferred tax assets at June 3, 2017 and March 4, 2017, respectively.

 

8. Medicare Part D

 

The Company offers Medicare Part D benefits through EIC, which has contracted with Centers of Medicare and Medicaid Services (“CMS”) to be a Prescription Drug Plan (“PDP”) and, pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, must be a risk-bearing entity regulated under state insurance laws or similar statutes.

 

EIC is a licensed domestic insurance company under the applicable laws and regulations. Pursuant to these laws and regulations, EIC must file quarterly and annual reports with the National Association of Insurance Commissioners (“NAIC”) and certain state regulators, must maintain certain minimum amounts of capital and surplus under formulas established by certain states and must, in certain circumstances, request and receive the approval of certain state regulators before making dividend payments or other capital distributions to the Company. The Company does not believe these limitations on dividends and distributions materially impact its financial position. EIC is subject to minimum capital and surplus requirements in certain states. The minimum amount of capital and surplus required to satisfy regulatory requirements in these states is $31,650 as of March 31, 2017. EIC was in excess of the minimum required amounts in these states as of June 3, 2017.

 

The Company has recorded estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims management and enrollment systems. Significant estimates arising from its participation in

 

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Table of Contents

 

this program include: (i) estimates of low-income cost subsidies, reinsurance amounts, and coverage gap discount amounts ultimately payable to CMS based on a detailed claims reconciliation that will occur in the following year; (ii) an estimate of amounts receivable from CMS under a risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been incurred but have not yet been reported.

 

As of June 3, 2017, accounts receivable, net included $311,905 due from CMS and accrued salaries, wages and other current liabilities included $166,665 of EIC liabilities under certain reinsurance contracts. As of May 28, 2016, accounts receivable, net included $319,976 due from CMS and accrued salaries, wages and other current liabilities included $152,970 of EIC liabilities under certain reinsurance contracts. EIC limits its exposure to loss and recovers a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company.

 

9. Goodwill and Other Intangible Assets

 

Goodwill and indefinitely-lived assets, such as certain trademarks acquired in connection with acquisition transactions, are not amortized, but are instead evaluated for impairment on an annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that impairment may be more likely. During the thirteen weeks ended June 3, 2017 and the fifty-three weeks ended March 4, 2017, no impairment charges have been taken against the Company’s goodwill or indefinitely-lived intangible assets. No changes were made to the carrying amount of goodwill for the thirteen week period ended June 3, 2017.

 

The Company’s intangible assets are primarily finite-lived and amortized over their useful lives. Following is a summary of the Company’s finite-lived and indefinite-lived intangible assets as of June 3, 2017 and March 4, 2017.

 

 

 

June 3, 2017

 

March 4, 2017

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Remaining
Weighted
Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Remaining
Weighted
Average
Amortization
Period

 

Favorable leases and other

 

$

663,949

 

$

(537,884

)

$

126,065

 

7 years

 

$

664,670

 

$

(531,022

)

$

133,648

 

7 years

 

Prescription files

 

1,586,981

 

(1,412,404

)

174,577

 

3 years

 

1,584,240

 

(1,390,139

)

194,101

 

3 years

 

Customer relationships(a)

 

465,000

 

(127,226

)

337,774

 

15 years

 

465,000

 

(110,653

)

354,347

 

16 years

 

CMS license

 

57,500

 

(4,447

)

53,053

 

23 years

 

57,500

 

(3,872

)

53,628

 

24 years

 

Claims adjudication and other developed software

 

58,992

 

(16,295

)

42,697

 

5 years

 

58,995

 

(14,188

)

44,807

 

6 years

 

Trademarks

 

20,100

 

(3,886

)

16,214

 

8 years

 

20,100

 

(3,383

)

16,717

 

9 years

 

Backlog

 

11,500

 

(7,411

)

4,089

 

1 year

 

11,500

 

(6,453

)

5,047

 

2 years

 

Total finite

 

$

2,864,022

 

$

(2,109,553

)

$

754,469

 

 

 

$

2,862,005

 

$

(2,059,710

)

$

802,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

33,500

 

 

33,500

 

Indefinite

 

33,500

 

 

33,500

 

Indefinite

 

Total

 

$

2,897,522

 

$

(2,109,553

)

$

787,969

 

 

 

$

2,895,505

 

$

(2,059,710

)

$

835,795

 

 

 

 


(a)                                 Amortized on an accelerated basis which is determined based on the remaining useful economic lives of the customer relationships that are expected to contribute directly or indirectly to future cash flows.

 

Also included in other non-current liabilities as of June 3, 2017 and March 4, 2017 are unfavorable lease intangibles with a net carrying amount of $37,053 and $38,242, respectively. These intangible liabilities are amortized over their remaining lease terms at the time of acquisition.

 

Amortization expense for these intangible assets and liabilities was $54,932 and $55,503 for the thirteen week periods ended June 3, 2017 and May 28, 2016, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2018—$181,675; 2019—$144,555; 2020—$115,010; 2021—$82,456 and 2022—$53,534.

 

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Table of Contents

 

10. Indebtedness and Credit Agreements

 

Following is a summary of indebtedness and lease financing obligations at June 3, 2017 and March 4, 2017:

 

 

 

June 3,
2017

 

March 4,
2017

 

Secured Debt:

 

 

 

 

 

Senior secured revolving credit facility due January 2020 ($2,340,000 and $2,430,000 face value less unamortized debt issuance costs of $22,715 and $24,918)

 

$

2,317,285

 

$

2,405,082

 

Tranche 1 Term Loan (second lien) due August 2020 ($470,000 face value less unamortized debt issuance costs of $3,861 and $4,167)

 

466,139

 

465,833

 

Tranche 2 Term Loan (second lien) due June 2021 ($500,000 face value less unamortized debt issuance costs of $2,290 and $2,431)

 

497,710

 

497,569

 

Other secured

 

90

 

90

 

 

 

3,281,224

 

3,368,574

 

Guaranteed Unsecured Debt:

 

 

 

 

 

9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $1,903 and $2,071 and less unamortized debt issuance costs of $6,876 and $7,527)

 

897,027

 

896,544

 

6.75% senior notes due June 2021 ($810,000 face value less unamortized debt issuance costs of $5,989 and $6,360)

 

804,011

 

803,640

 

6.125% senior notes due April 2023 ($1,800,000 face value less unamortized debt issuance costs of $24,915 and $25,984)

 

1,775,085

 

1,774,016

 

 

 

3,476,123

 

3,474,200

 

Unguaranteed Unsecured Debt:

 

 

 

 

 

7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,584 and $1,625)

 

293,416

 

293,375

 

6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $755 and $771)

 

127,245

 

127,229

 

 

 

420,661

 

420,604

 

Lease financing obligations

 

62,259

 

65,315

 

Total debt

 

7,240,267

 

7,328,693

 

Current maturities of long-term debt and lease financing obligations

 

(22,460

)

(21,335

)

Long-term debt and lease financing obligations, less current maturities

 

$

7,217,807

 

$

7,307,358

 

 

Credit Facility

 

The Company’s Amended and Restated Senior Secured Credit Facility has a borrowing capacity of $3,700,000 and matures in January 2020. Borrowings under the revolver bear interest at a rate per annum between (i) LIBOR plus 1.50% and LIBOR plus 2.00% with respect to Eurodollar borrowings and (ii) the alternate base rate plus 0.50% and the alternate base rate plus 1.00% with respect to ABR borrowings, in each case, based upon the average revolver availability (as defined in the Amended and Restated Senior Secured Credit Facility). The Company is required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the revolver, depending on the Average Revolver Availability (as defined in the Amended and Restated Senior Secured Credit Facility). Amounts drawn under the revolver become due and payable on January 13, 2020.

 

The Company’s ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At June 3, 2017, the Company had $2,340,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $59,388 which resulted in additional borrowing capacity of $1,300,612.

 

The Amended and Restated Senior Secured Credit Facility restricts the Company and the Subsidiary Guarantors (as defined herein) from accumulating cash on hand, and under certain circumstances, requires the funds in the Company’s deposit accounts to be applied first to the repayment of outstanding revolving loans under the Amended and Restated Senior Secured Credit Facility and then to be held as collateral for the senior obligations.

 

The Amended and Restated Senior Secured Credit Facility allows the Company to have outstanding, at any time, up to $1,500,000 in secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock in addition to

 

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borrowings under the Amended and Restated Senior Secured Credit Facility and existing indebtedness, provided that not in excess of $750,000 of such secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest of (a) the fifth anniversary of the effectiveness of the Amended and Restated Senior Secured Credit Facility and (b) the latest maturity date of any Term Loan or Other Revolving Loan (each as defined in the Amended and Restated Senior Secured Credit Facility) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date and, with respect to any escrow notes issued by Rite Aid, excluding any special mandatory redemption of the type described in clause (iii) of the definition of “Escrow Notes” in the Amended and Restated Senior Secured Credit Facility). Subject to the limitations described in clauses (a) and (b) of the immediately preceding sentence, the Amended and Restated Senior Secured Credit Facility additionally allows the Company to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the Amended and Restated Senior Secured Credit Facility) is not in effect; provided, however, that certain of the Company’s other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The Amended and Restated Senior Secured Credit Facility also contains certain restrictions on the amount of secured first priority debt the Company is able to incur. The Amended and Restated Senior Secured Credit Facility also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended and Restated Senior Secured Credit Facility is not in default and the Company maintains availability under its revolver of more than $365,000.

 

The Amended and Restated Senior Secured Credit Facility has a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (a) on any date on which availability under the revolver is less than $200,000 or (b) on the third consecutive business day on which availability under the revolver is less than $250,000 and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the revolver is equal to or greater than $250,000. As of June 3, 2017, the Company had availability under its revolver of $1,300,612, its fixed charge coverage ratio was greater than 1.00 to 1.00, and the Company was in compliance with the senior secured credit facility’s financial covenant. The Amended and Restated Senior Secured Credit Facility also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens.

 

The Amended and Restated Senior Secured Credit Facility also provides for customary events of default.

 

The Company also has two second priority secured term loan facilities, the Tranche 1 Term Loan and the Tranche 2 Term Loan. The Tranche 1 Term Loan matures on August 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 4.75% with a LIBOR floor of 1.00%, if the Company chooses to make LIBOR borrowings, or at Citibank’s base rate plus 3.75%. The Tranche 2 Term Loan matures on June 21, 2021 and currently bears interest at a rate per annum equal to LIBOR plus 3.875% with a LIBOR floor of 1.00%, if the Company chooses to make LIBOR borrowings, or at Citibank’s base rate plus 2.875%.

 

With the exception of EIC, substantially all of Rite Aid Corporation’s 100 percent owned subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, and unsecured guaranteed notes. The Amended and Restated Senior Secured Credit Facility and second priority secured term loan facilities are secured, on a senior or second priority basis, as applicable, by a lien on, among other things, accounts receivable, inventory and prescription files of the Subsidiary Guarantors. The subsidiary guarantees related to the Company’s Amended and Restated Senior Secured Credit Facility and second priority secured term loan facilities and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several, and there are no restrictions on the ability of the Company to obtain funds from its subsidiaries. The Company has no independent assets or operations. Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended and Restated Senior Secured Credit Facility, the credit facility, second priority secured term loan facilities and applicable notes, were minor. Accordingly, condensed consolidating financial information for the Company and subsidiaries is not presented for those periods. Subsequent to the Acquisition, other than EIC, the subsidiaries, including joint ventures, that do not guarantee the credit facility, second priority secured term loan facilities and applicable notes, are minor. As such, condensed consolidating financial information for the Company, its guaranteeing subsidiaries and non-guaranteeing subsidiaries is presented for those periods subsequent to the Acquisition. See Note 14 “Guarantor and Non-Guarantor Condensed Consolidating Financial Information” for additional disclosure.

 

Maturities

 

The aggregate annual principal payments of long-term debt for the remainder of fiscal 2018 and thereafter are as follows: 2018—$90; 2019—$0; 2020—$2,340,000; 2021—$1,372,000; 2022—$1,310,000 and $2,223,000 thereafter.

 

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11. Retirement Plans

 

Net periodic pension expense recorded in the thirteen week periods ended June 3, 2017 and May 28, 2016, for the Company’s defined benefit plan includes the following components:

 

 

 

Defined Benefit
Pension Plan

 

 

 

Thirteen Week Period Ended

 

 

 

June 3,
2017

 

May 28,
2016

 

Service cost

 

$

346

 

$

292

 

Interest cost

 

1,603

 

1,621

 

Expected return on plan assets

 

(1,147

)

(1,142

)

Amortization of unrecognized prior service cost

 

 

 

Amortization of unrecognized net loss

 

856

 

1,132

 

Net periodic pension expense

 

$

1,658

 

$

1,903

 

 

During the thirteen week period ended June 3, 2017 the Company contributed $0 to the Defined Benefit Pension Plan. During the remainder of fiscal 2018, the Company expects to contribute $4,900 to the Defined Benefit Pension Plan.

 

12. Segment Reporting

 

Prior to June 24, 2015, the Company’s operations were within one reportable segment. As a result of the completion of the Acquisition, the Company has realigned its internal management reporting to reflect two reportable segments, its retail drug stores (“Retail Pharmacy”), and its pharmacy services (“Pharmacy Services”) segments, collectively the “Parent Company”.

 

The Retail Pharmacy segment’s primary business is the sale of prescription drugs and related consultation to its customers. Additionally, the Retail Pharmacy segment sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line. The Pharmacy Services segment offers a full range of pharmacy benefit management services including plan design and administration, on both a transparent pass-through model and traditional model, formulary management and claims processing. Additionally, the Pharmacy Services segment offers specialty and mail order services, infertility treatment, and drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.

 

The Parent Company’s chief operating decision makers are its Parent Company Chief Executive Officer, Parent Company President and CEO—Retail Pharmacy, CEO—Pharmacy Services, Chief Financial Officer and its Senior Executive Vice Presidents (collectively the “CODM”). The CODM has ultimate responsibility for enterprise decisions. The CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy and Pharmacy Services segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. The CODM relies on internal management reporting that analyzes enterprise results on certain key performance indicators, namely, revenues, gross profit, and Adjusted EBITDA.

 

The following table is a reconciliation of the Company’s business segments to the condensed consolidated financial statements for the thirteen week periods ended June 3, 2017 and May 28, 2016:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Intersegment
Eliminations(1)

 

Consolidated

 

June 3, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

6,350,208

 

$

1,513,241

 

$

(81,996

)

$

7,781,453

 

Gross Profit

 

1,654,062

 

104,972

 

 

1,759,034

 

Adjusted EBITDA(2)

 

143,965

 

48,599

 

 

192,564

 

May 28, 2016:

 

 

 

 

 

 

 

 

 

Revenues

 

$

6,675,548

 

$

1,602,359

 

$

(93,726

)

$

8,184,181

 

Gross Profit

 

1,805,367

 

88,933

 

 

1,894,300

 

Adjusted EBITDA(2)

 

244,827

 

41,175

 

 

286,002

 

 

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(1)                                 Intersegment eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services segments record the revenue on a stand-alone basis.

 

(2)                                 See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” in MD&A for additional details.

 

The following is a reconciliation of net loss to Adjusted EBITDA for the thirteen week periods ended June 3, 2017 and May 28, 2016:

 

 

 

Thirteen Week Period
Ended

 

 

 

June 3,
2017

 

May 28,
2016

 

 

 

(dollars in thousands)

 

Net loss

 

$

(75,349

)

$

(4,588

)

Interest expense

 

109,937

 

105,113

 

Income tax benefit

 

(35,209

)

(6,309

)

Depreciation and amortization expense

 

142,092

 

138,788

 

LIFO charge

 

16,874

 

13,751

 

Lease termination and impairment charges

 

4,086

 

5,781

 

Other

 

30,133

 

33,466

 

Adjusted EBITDA

 

$

192,564

 

$

286,002

 

 

The following is balance sheet information for the Company’s reportable segments:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Eliminations(2)

 

Consolidated

 

June 3, 2017:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

8,497,159

 

$

3,129,515

 

$

(166,536

)

$

11,460,138

 

Goodwill

 

76,124

 

1,639,355

 

 

1,715,479

 

Additions to property and equipment and intangible assets

 

65,771

 

3,201

 

 

68,972

 

March 4, 2017:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

8,664,216

 

$

3,087,143

 

$

(157,607

)

$

11,593,752

 

Goodwill

 

76,124

 

1,639,355

 

 

1,715,479

 

Additions to property and equipment and intangible assets(1)

 

468,386

 

12,725

 

 

481,111

 

 


(1)                                 Includes additions to property and equipment and intangible assets for the fifty-three week period ended March 4, 2017.

 

(2)                                 As of June 3, 2017 and March 4, 2017, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $145,998 and $140,865, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $20,538 and $16,742, respectively, that represents amounts owed from the Pharmacy Services segment to the Retail Pharmacy segment that are created when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products.

 

13. Commitments and Contingencies

 

Legal Matters

 

The Company is a party to legal proceedings, investigations and claims in the ordinary course of its business, including the matters described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.

 

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The Company’s contingencies are subject to significant uncertainties, including, among other factors: (i) proceedings are in early stages; (ii) whether class or collective action status is sought and the likelihood of a class being certified; (iii) the outcome of pending appeals or motions; (iv) the extent of potential damages, fines or penalties, which are often unspecified or indeterminate; (v) the impact of discovery on the matter; (vi) whether novel or unsettled legal theories are at issue; (vii) there are significant factual issues to be resolved; and/or (viii) in the case of certain government agency investigations, whether a sealed qui tam lawsuit (“whistleblower” action) has been filed and whether the government agency makes a decision to intervene in the lawsuit following investigation.

 

After the announcement of the proposed Merger between the Company and Walgreens Boots Alliance, Inc. (WBA), a putative class action lawsuit was filed in Pennsylvania in the Court of Common Pleas of Cumberland County (Wilson v. Rite Aid Corp., et al.) by purported Company stockholders against the Company, its directors (the Individual Defendants, together with the Company, the Rite Aid Defendants), WBA and Victoria Merger Sub Inc. (Victoria) challenging the transactions contemplated by the Merger agreement. The complaint alleged primarily that the Individual Defendants breached their fiduciary duties by, among other things, agreeing to an allegedly unfair and inadequate price, agreeing to deal protection devices that allegedly prevented the directors from obtaining higher offers from other interested buyers for the Company and allegedly failing to protect against certain purported conflicts of interest in connection with the Merger. The complaint further alleged that the Company, WBA and/or Victoria aided and abetted these alleged breaches of fiduciary duty. The complaint sought, among other things, to enjoin the closing of the Merger as well as money damages and attorneys’ and experts’ fees.

 

An action was filed in the United States District Court for the Middle District of Pennsylvania (the Pennsylvania District Court), asserting a claim for violations of Section 14(a) of the Exchange Act and SEC Rule 14a-9 against the Rite Aid Defendants, WBA and Victoria and a claim for violations of Section 20(a) of the Exchange Act against the Individual Defendants and WBA (Herring v. Rite Aid Corp., et al.). The complaint in the Herring action alleged, among other things, that the Rite Aid Defendants disseminated an allegedly false and materially misleading proxy and sought to enjoin the shareholder vote on the proposed Merger, a declaration that the proxy was materially false and misleading in violation of federal securities laws and an award of money damages and attorneys’ and experts’ fees. On January 14 and 16, 2016, respectively, the plaintiff in the Herring action filed a motion for preliminary injunction and a motion for expedited discovery. On January 21, 2016, the Rite Aid Defendants filed a motion to dismiss the Herring complaint. At a hearing held on January 25, 2016, the Pennsylvania District Court orally denied the plaintiff’s motion for expedited discovery and subsequently denied the plaintiff’s motion for preliminary injunction on January 28, 2016. On March 14, 2016, the Pennsylvania District Court appointed Jerry Herring, Don Michael Hussey and Joanna Pauli Hussey as lead plaintiffs for the putative class and approved their selection of Robbins Geller Rudman & Dowd LLP as lead counsel. On April 14, 2016, the Pennsylvania District Court granted the lead plaintiffs’ unopposed motion to stay the Herring action for all purposes pending consummation of the Merger.

 

On March 17, 2017, the Herring plaintiffs filed a motion to lift the stay for the purpose of filing a proposed amended complaint. Defendants opposed the motion, and briefing concluded on April 17, 2017. The motion is currently pending before the Pennsylvania District Court. The proposed amended complaint asserts state law breach of fiduciary duty claims against the Individual Defendants, a claim of aiding and abetting the alleged breaches of fiduciary duty against Rite Aid, WBA and Victoria, as well as claims for violations of Section 14(a) of the Exchange Act and SEC Rule 14a-9 against the Rite Aid Defendants, WBA and Victoria, claims for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 against the Rite Aid Defendants, WBA, Victoria and certain WBA executives, and a claim for violations of Section 20(a) of the Exchange Act against the Individual Defendants, WBA and Victoria.

 

The Company has been named in a collective and class action lawsuit, Indergit v. Rite Aid Corporation, et al., pending in the United States District Court for the Southern District of New York, filed purportedly on behalf of current and former store managers working in the Company’s stores at various locations around the country. The lawsuit alleges that the Company failed to pay overtime to store managers as required under the FLSA and under certain New York state statutes. The lawsuit also seeks other relief, including liquidated damages, attorneys’ fees, costs and injunctive relief arising out of state and federal claims for overtime pay. On April 2, 2010, the Court conditionally certified a nationwide collective group of individuals who worked for the Company as store managers since March 31, 2007. The Court ordered that Notice of the Indergit action be sent to the purported members of the collective group (approximately 7,000 current and former store managers) and approximately 1,550 joined the Indergit action. Discovery as to

 

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certification issues has been completed. On September 26, 2013, the Court granted Rule 23 class certification of the New York store manager claims as to liability only, but denied it as to damages, and denied the Company’s motion for decertification of the nationwide collective action claims. The Company filed a motion seeking reconsideration of the Court’s September 26, 2013 decision which motion was denied in June 2014. The Company subsequently filed a petition for an interlocutory appeal of the Court’s September 26, 2013 ruling with the U. S. Court of Appeals for the Second Circuit which petition was denied in September 2014. Notice of the Rule 23 class certification as to liability only has been sent to approximately 1,750 current and former store managers in the state of New York. Discovery related to the merits of the claims is ongoing. On January 12, 2017, the parties reached a settlement in principle of this matter, for an immaterial amount of money, which is subject to preliminary and final approval by the court. On January 19, 2017, the court entered an order staying the case indefinitely pending preliminary and final court approval. In the event the settlement does not receive preliminary and/or final approval by the court, the litigation will resume. If such occurs, the Company presently is not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit. The Company’s management believes, however, that this lawsuit is without merit and is vigorously defending this lawsuit.

 

The Company is currently a defendant in several lawsuits filed in state courts in California alleging violations of California wage-and-hour laws, rules and regulations pertaining primarily to failure to pay overtime, failure to pay for missed meals and rest periods, failure to reimburse business expenses and failure to provide employee seating (the “California Cases”). The class actions pertaining to failure to reimburse business expenses and provide employee seating purport to be class actions and seek substantial damages. The single-plaintiff and multi-plaintiff lawsuits regarding failure to pay overtime and failure to pay for missed meals and rest periods, in the aggregate, seek substantial damages. The Company has aggressively challenged the merits of the lawsuits and, where applicable, the allegations that the cases should be certified as class or representative actions.

 

In the business expense class action (Fenley v. Rite Aid Corporation, Santa Clara Superior Court), the parties reached a settlement pursuant to which the Company will pay an immaterial amount to settle the class claims. The court granted final approval of the settlement on February 3, 2017.

 

In the employee seating case (Hall v. Rite Aid Corporation, San Diego County Superior Court), the Court, in October 2011, granted the plaintiff’s motion for class certification. The Company filed its motion for decertification, which motion was granted in November 2012. Plaintiff subsequently appealed the Court’s order which appeal was granted in May 2014. The Company filed a petition for review of the appellate court’s decision with the California Supreme Court, which petition was denied in August 2014. Proceedings in the Hall case were stayed pending a decision by the California Supreme Court in two similar cases. That decision was rendered on April 4, 2016. A status conference in the case was held on November 18, 2016, at which time the court lifted the stay and scheduled the case for trial on January 26, 2018.

 

With respect to the California Cases, the Company, at this time, is not able to predict either the outcome of these lawsuits or estimate a potential range of loss with respect to said lawsuits and is vigorously defending them.

 

The Company was served with a Civil Investigative Demand Subpoena Duces Tecum dated August 26, 2011 by the United States Attorney’s Office for the Eastern District of Michigan. The subpoena requests records regarding the relationship of Rite Aid’s Rx Savings Program to the reporting of usual and customary charges to publicly funded health programs. In connection with the same investigation, the Company was served with a Civil Subpoena Duces Tecum dated February 22, 2013 by the State of Indiana Office of the Attorney General requesting additional information regarding both Rite Aid’s Rx Savings Program and usual and customary charges. The Company responded to both of the subpoenas. To enable the parties to discuss a possible resolution, the Medicaid Fraud Control Units of the several states, commonwealths, and the District of Columbia and the Company entered into an agreement tolling the statute of limitations until October 7, 2015. The parties agreed to extend the tolling agreement and continue to exchange pertinent claims data in the near future. On January 19, 2017, the District Court for the Eastern District of Michigan unsealed Relator’s Second Amended Complaint against the Company. In its Complaint, Relator alleges that the Company failed to report Rx Savings prices as its usual and customary charges under the Medicare Part D program and to federal and state Medicaid programs in 18 (eighteen) states and the District of Columbia; and that the Company is thus liable under the federal False Claims Act and similar False Claims Act statutes operative in the states named in the Complaint. The federal government and the 18 (eighteen) states and the District of Columbia named in the lawsuit have elected not to intervene in this action. At this stage of the proceedings, the Company is not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit and is vigorously defending this lawsuit.

 

On April 26, 2012, the Company received an administrative subpoena from the U.S. Drug Enforcement Administration (“DEA”), Albany, New York District Office, requesting information regarding the Company’s sale of products containing pseudoephedrine (“PSE”). In April 2012, it also received a communication from the U.S. Attorney’s Office (“USAO”) for the Northern District of New York concerning an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 (“CMEA”). Additional subpoenas were issued in 2013, 2014, and 2015 seeking broader documentation regarding PSE sales and recordkeeping requirements. Assistant U.S. Attorneys from the Northern and Eastern Districts of New York and the

 

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Southern District of West Virginia are currently investigating, but no lawsuits or charges have been filed. Between September 2015 and January 2017, the Company received several grand jury subpoenas from the U.S. District Court for the Southern District of West Virginia seeking additional information in connection with the investigation of violations of the CMEA and/or the Controlled Substances Act (“CSA”). Violations of the CMEA or the CSA could result in the imposition of administrative, civil and/or criminal penalties against the Company. The Company is cooperating with the government and continues to provide information responsive to the subpoenas. The Company has entered into a tolling agreement with the USAOs in the Northern and Eastern Districts of New York and entered into a separate tolling agreement with the USAO in the Southern District of West Virginia. Discussions are underway to attempt to resolve these matters with those USAOs and the Department of Justice, but whether an agreement can be reached and on what terms is uncertain. While the Company’s management cannot predict the outcome of these matters, it is possible that the Company’s results of operations or cash flows could be materially affected by an unfavorable resolution. At this stage of the investigation, Rite Aid is not able to predict the outcome of the investigation.

 

In January 2013, the DEA, Los Angeles District Office, served an administrative subpoena on the Company seeking documents related to prescriptions by a certain prescriber. The USAO, Central District of California, also contacted the Company about a related investigation into allegations that Rite Aid pharmacies filled certain controlled substance prescriptions for a number of prescribers after their DEA registrations had expired or otherwise become invalid in violation of the federal Controlled Substances Act and DEA regulations. The Company responded to the administrative subpoena and subsequent informal requests for information from the USAO. The Company met with the USAO and DEA in January 2014 regarding this matter. The Company entered into a tolling agreement with the USAO. The Company recorded a legal accrual during the period ended March 1, 2014, which was revised during the period ending August 29, 2015. On February 28, 2017, the USAO, Central District of California, and the Company entered into a settlement agreement resolving this matter for an immaterial amount. The settlement agreement is not an admission of liability by the Company.

 

In June 2013, the Company was served with a Civil Investigative Demand (“CID”) by the United States Attorney’s Office for the Eastern District of California (the “USAO”). The CID requested records and responses to interrogatories regarding the Company’s Drug Utilization Review and prescription dispensing protocol and the dispensing of drugs designated as “Code 1” by the State of California. The Company researched the government’s allegations and refuted the government’s position in writing and on conference calls. Subsequently, the USAO’s office, along with the State of California, Department of Justice, Bureau of Medical Fraud and Elder Abuse (the “Bureau”), requested the Company to produce certain prescription files related to Code 1 drugs. There has been a series of four document productions in which the Company has produced prescription and associated documentation concerning Code 1 drugs: (i) on May 15, 2014, the government requested that the Company produce 60 prescriptions; (ii) on July 30, 2014, the government requested that the Company produce 30 prescriptions; (iii) on June 15, 2015, the government requested that the Company produce 80 prescriptions; and (iv) on September 30, 2016, the Company agreed to produce an additional 242 prescriptions. The Company is continuing discussions with the government.

 

Relator, Matthew Omlansky, filed a qui tam action, State of California ex rel. Matthew Omlansky v. Rite Aid Corporation, on behalf of the State of California against Rite Aid in the Superior Court of the State of California. In his Complaint, Relator alleges that Rite Aid violated the California False Claims Act by (i) failing to comply with California rules governing the Company’s reporting of its usual and customary prices; (ii) failing to dispense the least expensive equivalent generic drug in certain circumstances, in violation of applicable regulations; and (iii) dispensing, and seeking reimbursement for, restricted brand name drugs without prior approval. Relator filed his Second Amended Complaint on April 19, 2016 and Rite Aid filed its demurrer on July 29, 2016. On October 5, 2016, Rite Aid’s demurrer was granted and plaintiff’s complaint was dismissed with leave for plaintiff to file an amended complaint. Plaintiff filed a Third Amended Complaint to which Rite Aid filed a second demurrer, which is pending. At this stage of the proceedings, Rite Aid is unable to predict the outcome of its demurrer and Relator’s suit.

 

In addition to the above described matters, the Company is subject from time to time to various claims and lawsuits and governmental investigations arising in the ordinary course of business. While the Company’s management cannot predict the outcome of any of the claims, the Company’s management does not believe that the outcome of any of these legal matters will be material to the Company’s consolidated financial position. It is possible, however, that the Company’s results of operations or cash flows could be materially affected by an unfavorable resolution of pending litigation or contingencies.

 

14. Guarantor and Non-Guarantor Condensed Consolidating Financial Information

 

Rite Aid Corporation conducts the majority of its business through its subsidiaries. With the exception of EIC, substantially all of Rite Aid Corporation’s 100 percent owned subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes (the “Subsidiary Guarantors”). Additionally, with the exception of EIC, the subsidiaries, including joint ventures, that do not guarantee the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes, are minor.

 

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For the purposes of preparing the information below, Rite Aid Corporation uses the equity method to account for its investment in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in the non-guarantor subsidiaries. The subsidiary guarantees related to the Company’s Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities and secured guaranteed notes and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. Presented below is condensed consolidating financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the non-guarantor subsidiaries at June 3, 2017, March 4, 2017, and for the thirteen week periods ended June 3, 2017 and May 28, 2016. Separate financial statements for Subsidiary Guarantors are not presented.

 

 

 

Rite Aid Corporation
Condensed Consolidating Balance Sheet
June 3, 2017
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

181,648

 

$

32,801

 

$

 

$

214,449

 

Accounts receivable, net

 

 

1,459,122

 

322,053

 

 

1,781,175

 

Intercompany receivable

 

 

225,223

 

 

(225,223

)(a)

 

Inventories, net of LIFO reserve of $0, $1,016,650, $0, $0, and $1,016,650

 

 

2,789,176

 

 

 

2,789,176

 

Prepaid expenses and other current assets

 

 

184,090

 

8,677

 

 

192,767

 

Total current assets

 

 

4,839,259

 

363,531

 

(225,223

)

4,977,567

 

Property, plant and equipment, net

 

 

2,218,333

 

 

 

2,218,333

 

Goodwill

 

 

1,715,479

 

 

 

1,715,479

 

Other intangibles, net

 

 

734,916

 

53,053

 

 

787,969

 

Deferred tax assets

 

 

1,556,301

 

 

 

1,556,301

 

Investment in subsidiaries

 

15,327,513

 

48,692

 

 

(15,376,205

)(b)

 

Intercompany receivable

 

 

7,493,715

 

 

(7,493,715

)(a)

 

Other assets

 

 

204,489

 

 

 

204,489

 

Total assets

 

$

15,327,513

 

$

18,811,184

 

$

416,584

 

$

(23,095,143

)

$

11,460,138

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

90

 

$

22,370

 

$

 

$

 

$

22,460

 

Accounts payable

 

 

1,642,397

 

4,060

 

 

1,646,457

 

Intercompany payable

 

 

 

225,223

 

(225,223

)(a)

 

Accrued salaries, wages and other current liabilities

 

95,162

 

1,126,776

 

117,840

 

 

1,339,778

 

Total current liabilities

 

95,252

 

2,791,543

 

347,123

 

(225,223

)

3,008,695

 

Long-term debt, less current maturities

 

7,177,918

 

 

 

 

7,177,918

 

Lease financing obligations, less current maturities

 

 

39,889

 

 

 

39,889

 

Intercompany payable

 

7,493,715

 

 

 

(7,493,715

)(a)

 

Other noncurrent liabilities

 

 

652,239

 

20,769

 

 

673,008

 

Total liabilities

 

14,766,885

 

3,483,671

 

367,892

 

(7,718,938

)

10,899,510

 

Commitments and contingencies

 

 

 

 

 

 

Total stockholders’ equity

 

560,628

 

15,327,513

 

48,692

 

(15,376,205

)(b)

560,628

 

Total liabilities and stockholders’ equity

 

$

15,327,513

 

$

18,811,184

 

$

416,584

 

$

(23,095,143

)

$

11,460,138

 

 


(a)                                 Elimination of intercompany accounts receivable and accounts payable amounts.

 

(b)                                 Elimination of investments in consolidated subsidiaries.

 

23



Table of Contents

 

 

 

Rite Aid Corporation
Condensed Consolidating Balance Sheet
March 4, 2017

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

213,104

 

$

32,306

 

$

 

$

245,410

 

Accounts receivable, net

 

 

1,506,288

 

264,838

 

 

1,771,126

 

Intercompany receivable

 

 

215,862

 

 

(215,862

)(a)

 

Inventories, net of LIFO reserve of $0, $999,776, $0, $0, and $999,776

 

 

2,837,211

 

 

 

2,837,211

 

Prepaid expenses and other current assets

 

 

203,033

 

8,508

 

 

211,541

 

Total current assets

 

 

4,975,498

 

305,652

 

(215,862

)

5,065,288

 

Property, plant and equipment, net

 

 

2,251,692

 

 

 

2,251,692

 

Goodwill

 

 

1,715,479

 

 

 

1,715,479

 

Other intangibles, net

 

 

782,167

 

53,628

 

 

835,795

 

Deferred tax assets

 

 

1,505,564

 

 

 

1,505,564

 

Investment in subsidiaries

 

15,275,488

 

50,004

 

 

(15,325,492

)(b)

 

Intercompany receivable

 

 

7,331,675

 

 

(7,331,675

)(a)

 

Other assets

 

 

219,934

 

 

 

219,934

 

Total assets

 

$

15,275,488

 

$

18,832,013

 

$

359,280

 

$

(22,873,029

)

$

11,593,752

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

90

 

$

21,245

 

$

 

$

 

$

21,335

 

Accounts payable

 

 

1,609,025

 

4,884

 

 

1,613,909

 

Intercompany payable

 

 

 

215,862

 

(215,862

)(a)

 

Accrued salaries, wages and other current liabilities

 

66,365

 

1,236,297

 

67,342

 

 

1,370,004

 

Total current liabilities

 

66,455

 

2,866,567

 

288,088

 

(215,862

)

3,005,248

 

Long-term debt, less current maturities

 

7,263,288

 

 

 

 

7,263,288

 

Lease financing obligations, less current maturities

 

 

44,070

 

 

 

44,070

 

Intercompany payable

 

7,331,675

 

 

 

(7,331,675

)(a)

 

Other noncurrent liabilities

 

 

645,888

 

21,188

 

 

667,076

 

Total liabilities

 

14,661,418

 

3,556,525

 

309,276

 

(7,547,537

)

10,979,682

 

Commitments and contingencies

 

 

 

 

 

 

Total stockholders’ equity

 

614,070

 

15,275,488

 

50,004

 

(15,325,492

)(b)

614,070

 

Total liabilities and stockholders’ equity

 

$

15,275,488

 

$

18,832,013

 

$

359,280

 

$

(22,873,029

)

$

11,593,752

 

 


(a)                                 Elimination of intercompany accounts receivable and accounts payable amounts.

 

(b)                                 Elimination of investments in consolidated subsidiaries.

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirteen Weeks Ended June 3, 2017
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Revenues

 

$

 

$

7,760,058

 

$

39,450

 

$

(18,055

)(a)

$

7,781,453

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

6,003,041

 

37,902

 

(18,524

)(a)

6,022,419

 

Selling, general and administrative expenses

 

 

1,757,620

 

3,201

 

469

(a)

1,761,290

 

Lease termination and impairment charges

 

 

4,086

 

 

 

4,086

 

Interest expense

 

105,384

 

4,515

 

38

 

 

109,937

 

Gain on sale of assets, net

 

 

(5,721

)

 

 

(5,721

)

Equity in earnings of subsidiaries, net of tax

 

(30,035

)

1,312

 

 

28,723

(b)

 

 

 

75,349

 

7,764,853

 

41,141

 

10,668

 

7,892,011

 

Loss before income taxes

 

(75,349

)

(4,795

)

(1,691

)

(28,723

)

(110,558

)

Income tax benefit

 

 

(34,830

)

(379

)

 

(35,209

)

Net (loss) income

 

$

(75,349

)

$

30,035

 

$

(1,312

)

$

(28,723

)(b)

$

(75,349

)

Total other comprehensive income (loss)

 

514

 

514

 

 

(514

)

514

 

Comprehensive (loss) income

 

$

(74,835

)

$

30,549

 

$

(1,312

)

$

(29,237

)

$

(74,835

)

 


(a)                                 Elimination of intercompany revenues and expenses.

(b)                                 Elimination of equity in earnings of subsidiaries.

 

24



Table of Contents

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirteen Weeks Ended May 28, 2016
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Revenues

 

$

 

$

8,168,192

 

$

58,528

 

$

(42,539

)(a)

$

8,184,181

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

6,275,447

 

55,846

 

(41,412

)(a)

6,289,881

 

Selling, general and administrative expenses

 

 

1,791,637

 

2,737

 

(1,127

)(a)

1,793,247

 

Lease termination and impairment charges

 

 

5,781

 

 

 

5,781

 

Interest expense (income)

 

100,448

 

4,666

 

(1

)

 

105,113

 

Loss on sale of assets, net

 

 

1,056

 

 

 

1,056

 

Equity in earnings of subsidiaries, net of tax

 

(95,860

)

52

 

 

95,808

(b)

 

 

 

4,588

 

8,078,639

 

58,582

 

53,269

 

8,195,078

 

(Loss) income before income taxes

 

(4,588

)

89,553

 

(54

)

(95,808

)

(10,897

)

Income tax benefit

 

 

(6,307

)

(2

)

 

(6,309

)

Net (loss) income

 

$

(4,588

)

$

95,860

 

$

(52

)

$

(95,808

)(b)

$

(4,588

)

Total other comprehensive income (loss)

 

681

 

681

 

 

(681

)

681

 

Comprehensive (loss) income

 

$

(3,907

)

$

96,541

 

$

(52

)

$

(96,489

)

$

(3,907

)

 


(a)                                 Elimination of intercompany revenues and expenses.

(b)                                 Elimination of equity in earnings of subsidiaries.

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended June 3, 2017
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(71,957

)

$

164,196

 

$

495

 

$

 

$

92,734

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

(60,738

)

 

 

(60,738

)

Intangible assets acquired

 

 

(8,234

)

 

 

(8,234

)

Intercompany activity

 

 

(161,810

)

 

161,810

 

 

Proceeds from dispositions of assets and investments

 

 

8,639

 

 

 

 

 

8,639

 

Proceeds from insured loss

 

 

2,137

 

 

 

2,137

 

Net cash (used in) provided by investing activities

 

 

(220,006

)

 

161,810

 

(58,196

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net payments on revolver

 

(90,000

)

 

 

 

(90,000

)

Principal payments on long-term debt

 

 

(4,267

)

 

 

(4,267

)

Change in zero balance cash accounts

 

 

28,768

 

 

 

28,768

 

Net proceeds from issuance of common stock

 

147

 

 

 

 

147

 

Payments for taxes related to net share settlement of equity awards

 

 

(147

)

 

 

(147

)

Intercompany activity

 

161,810

 

 

 

(161,810

)

 

Net cash provided by (used in) financing activities

 

71,957

 

24,354

 

 

(161,810

)

(65,499

)

(Decrease) increase in cash and cash equivalents

 

 

(31,456

)

495

 

 

(30,961

)

Cash and cash equivalents, beginning of period

 

 

213,104

 

32,306

 

 

245,410

 

Cash and cash equivalents, end of period

 

$

 

$

181,648

 

$

32,801

 

$

 

$

214,449

 

 

25



Table of Contents

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended May 28, 2016
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(67,457

)

$

222,490

 

$

4,967

 

$

 

$

160,000

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

(106,077

)

 

 

(106,077

)

Intangible assets acquired

 

 

(16,381

)

 

 

(16,381

)

Intercompany activity

 

 

(85,086

)

 

85,086

 

 

Proceeds from dispositions of assets and investments

 

 

3,088

 

 

 

3,088

 

Net cash (used in) provided by investing activities

 

 

(204,456

)

 

85,086

 

(119,370

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net payments on revolver

 

(20,000

)

 

 

 

(20,000

)

Principal payments on long-term debt

 

 

(5,721

)

 

 

(5,721

)

Change in zero balance cash accounts

 

 

2,262

 

 

 

2,262

 

Net proceeds from issuance of common stock

 

2,371

 

 

 

 

2,371

 

Excess tax benefit on stock options and restricted stock

 

 

883

 

 

 

883

 

Payments for taxes related to net share settlement of equity awards

 

 

(56

)

 

 

(56

)

Intercompany activity

 

85,086