10-Q 1 a18-15812_110q.htm 10-Q

Table of Contents

 

 

 

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 2, 2018

 

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 1,066,805,893 shares of its $1.00 par value common stock outstanding as of June 27, 2018.

 

 

 



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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 2, 2018 and March 3, 2018

5

 

Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

6

 

Condensed Consolidated Statements of Comprehensive Loss for the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

7

 

Condensed Consolidated Statements of Cash Flows for the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

8

 

Notes to Condensed Consolidated Financial Statements

20

ITEM 2.

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

32

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

45

ITEM 4.

Controls and Procedures

46

 

PART II
OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

46

ITEM 1A.

Risk Factors

46

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

ITEM 3.

Defaults Upon Senior Securities

47

ITEM 4.

Mine Safety Disclosures

47

ITEM 5.

Other Information

47

ITEM 6.

Exhibits

47

 

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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 facility 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 payor contracts;

 

·                  risks related to the expected timing and likelihood of completion of the pending Merger (as defined in Part I Item 1 below) with Albertsons Companies, Inc. (“Albertsons”), including the risk that the transaction may not close due to one or more closing conditions to the transaction not being satisfied or waived, including that the required approval of the Merger by our stockholders was not obtained;

 

·                  the inability to complete the sale of distribution centers to WBA (as defined in Part I, Item 1 below), receive the related proceeds and recognize the corresponding expected gain due to the failure to satisfy the minimal remaining conditions applicable only to the distribution centers being transferred at such distribution center closing and other risks related to obtaining the requisite consents to the remaining distribution center closing of the Sale;

 

·                  risks related to our ability to successfully integrate with Albertsons’ business, which may result in the combined company not operating as effectively and efficiently as expected and the risk that the combined company may be unable to achieve cost savings or revenue synergies or it may take longer than expected to achieve those synergies;

 

·                  the risk of the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement (as defined in Part I, Item 1 below) with Albertsons, including circumstances requiring us to pay Albertsons a termination fee pursuant to the Merger Agreement;

 

·                  the risk that the proposed Merger and its announcement could have an adverse effect on our ability to retain customers and retain and hire key personnel and maintain relationships with our suppliers and customers and on our operating results and businesses generally;

 

·                  the impact on our business, operating results and relationships with customers, suppliers, third party payors, and employees, resulting from our efforts over the past two years to consummate a significant transaction with Walgreens Boots Alliance, Inc. (“WBA”);

 

·                  the risk that we will not be able to meet our obligations under our Transition Services Agreement (“TSA”) with WBA, which could expose us to significant financial penalties;

 

·                  the risk that we cannot reduce our selling, general and administrative expenses enough to offset lost revenue from the TSA agreement as the amount of stores serviced under the agreement decreases;

 

·                  the risk that there may be a significant decline in our stock price or that there may be changes to our strategy in the event that the Merger and/ or the remaining distribution center closing of the Sale do 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;

 

·                  our ability to refinance our indebtedness on terms favorable to us;

 

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

 

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·                  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, 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;

 

·                  the continued impact of gross margin pressure 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;

 

·                  risks related to other business effects, including the effects of industry, market, economic, political 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 or Sale and instituted against us and others;

 

·                  the potential reputational risk to our business during the period in which WBA is operating the Acquired Stores (as defined below) under the Rite Aid banner;

 

·                  the risk that the Tax Cuts and Jobs Act that was enacted on December 22, 2017 may have a negative impact on our financial results;

 

·                  the inability to fully realize the benefits of our tax attributes;

 

·                  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

 

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Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended March 3, 2018 (the “Fiscal 2018 10-K”), as well as in the “Risk Factors” section of the Fiscal 2018 10-K, which we filed with the SEC on April 26, 2018 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 2, 2018

 

March 3,
2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

147,092

 

$

447,334

 

Accounts receivable, net

 

1,908,955

 

1,869,100

 

Inventories, net of LIFO reserve of $591,056 and $581,090

 

1,809,595

 

1,799,539

 

Prepaid expenses and other current assets

 

151,059

 

181,181

 

Current assets held for sale

 

179,442

 

438,137

 

Total current assets

 

4,196,143

 

4,735,291

 

Property, plant and equipment, net

 

1,401,924

 

1,431,246

 

Goodwill

 

1,421,120

 

1,421,120

 

Other intangibles, net

 

568,920

 

590,443

 

Deferred tax assets

 

522,674

 

594,019

 

Other assets

 

218,672

 

217,208

 

Total assets

 

$

8,329,453

 

$

8,989,327

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

19,025

 

$

20,761

 

Accounts payable

 

1,767,777

 

1,651,363

 

Accrued salaries, wages and other current liabilities

 

1,030,292

 

1,231,736

 

Current liabilities held for sale

 

 

560,205

 

Total current liabilities

 

2,817,094

 

3,464,065

 

Long-term debt, less current maturities

 

3,134,704

 

3,340,099

 

Lease financing obligations, less current maturities

 

28,874

 

30,775

 

Other noncurrent liabilities

 

536,470

 

553,378

 

Total liabilities

 

6,517,142

 

7,388,317

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 1,067,197 and 1,067,318

 

1,067,197

 

1,067,318

 

Additional paid-in capital

 

4,855,901

 

4,850,712

 

Accumulated deficit

 

(4,076,602

)

(4,282,471

)

Accumulated other comprehensive loss

 

(34,185

)

(34,549

)

Total stockholders’ equity

 

1,812,311

 

1,601,010

 

Total liabilities and stockholders’ equity

 

$

8,329,453

 

$

8,989,327

 

 

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  2, 2018

 

June 3, 2017

 

Revenues

 

$

5,388,490

 

$

5,436,523

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

4,219,741

 

4,274,580

 

Selling, general and administrative expenses

 

1,152,627

 

1,160,940

 

Lease termination and impairment charges

 

9,859

 

4,038

 

Interest expense

 

62,792

 

51,000

 

Loss on debt retirements, net

 

554

 

 

Gain on sale of assets, net

 

(5,859

)

(5,877

)

 

 

5,439,714

 

5,484,681

 

Loss from continuing operations before income taxes

 

(51,224

)

(48,158

)

Income tax benefit

 

(9,497

)

(12,121

)

Net loss from continuing operations

 

(41,727

)

(36,037

)

Net income (loss) from discontinued operations, net of tax

 

256,143

 

(39,312

)

Net income (loss)

 

$

214,416

 

$

(75,349

)

Computation of (loss) income attributable to common stockholders:

 

 

 

 

 

Loss from continuing operations attributable to common stockholders—basic and diluted

 

$

(41,727

)

$

(36,037

)

Income (loss) from discontinued operations attributable to common stockholders—basic and diluted

 

256,143

 

(39,312

)

Income (loss) attributable to common stockholders—basic and diluted

 

$

214,416

 

$

(75,349

)

 

 

 

 

 

 

Basic and diluted income (loss) per share:

 

 

 

 

 

Continuing operations

 

$

(0.04

)

$

(0.03

)

Discontinued operations

 

$

0.24

 

$

(0.04

)

Net basic and diluted income (loss) per share

 

$

0.20

 

$

(0.07

)

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

June 2, 2018

 

June 3, 2017

 

Net income (loss)

 

$

214,416

 

$

(75,349

)

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 $144 and $342 tax expense

 

364

 

514

 

Total other comprehensive income

 

364

 

514

 

Comprehensive income (loss)

 

$

214,780

 

$

(74,835

)

 

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 2, 2018

 

June 3, 2017

 

Operating activities:

 

 

 

 

 

Net income (loss)

 

$

214,416

 

$

(75,349

)

Net income (loss) from discontinued operations, net of tax

 

256,143

 

(39,312

)

Net loss from continuing operations

 

$

(41,727

)

$

(36,037

)

Adjustments to reconcile to net cash (used in) provided by operating activities of continuing operations:

 

 

 

 

 

Depreciation and amortization

 

94,529

 

101,029

 

Lease termination and impairment charges

 

9,859

 

4,038

 

LIFO charge

 

9,966

 

10,173

 

Gain on sale of assets, net

 

(5,859

)

(5,877

)

Stock-based compensation expense

 

5,031

 

9,038

 

Loss on debt retirements, net

 

554

 

 

Changes in deferred taxes

 

(12,355

)

(38,160

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(194,159

)

(34,611

)

Inventories

 

31,101

 

28,068

 

Accounts payable

 

207,960

 

(34,313

)

Other assets and liabilities, net

 

(121,214

)

44,421

 

Net cash (used in) provided by operating activities of continuing operations

 

(16,314

)

47,769

 

Investing activities:

 

 

 

 

 

Payments for property, plant and equipment

 

(47,971

)

(38,325

)

Intangible assets acquired

 

(13,655

)

(5,521

)

Proceeds from insured loss

 

 

8,639

 

Proceeds from dispositions of assets and investments

 

9,916

 

2,137

 

Proceeds from sale-leaseback transactions

 

2,587

 

 

Net cash used in investing activities of continuing operations

 

(49,123

)

(33,070

)

Financing activities:

 

 

 

 

 

Net proceeds from (payments to) revolver

 

190,000

 

(90,000

)

Principal payments on long-term debt

 

(431,106

)

(3,503

)

Change in zero balance cash accounts

 

1,083

 

28,768

 

Net proceeds from issuance of common stock

 

910

 

147

 

Payments for taxes related to net share settlement of equity awards

 

 

(147

)

Financing fees paid for early redemption

 

(13

)

 

Net cash used in financing activities of continuing operations

 

(239,126

)

(64,735

)

Cash flows from discontinued operations:

 

 

 

 

 

Operating activities of discontinued operations

 

(74,050

)

44,965

 

Investing activities of discontinued operations

 

603,402

 

(25,126

)

Financing activities of discontinued operations

 

(525,031

)

(764

)

Net cash provided by discontinued operations

 

4,321

 

19,075

 

Decrease in cash and cash equivalents

 

(300,242

)

(30,961

)

Cash and cash equivalents, beginning of period

 

447,334

 

245,410

 

Cash and cash equivalents, end of period

 

$

147,092

 

$

214,449

 

 

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 2, 2018 and June 3, 2017

 

(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 2, 2018 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 2018 10-K.

 

The discussion and presentation of the operating and financial results of our business segments have been impacted by the following event.

 

Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement (the “Amended and Restated Asset Purchase Agreement”), dated as of September 18, 2017, by and among Rite Aid, WBA and Walgreen Co., an Illinois corporation and wholly owned direct subsidiary of WBA (“Buyer”), Buyer agreed to purchase from Rite Aid 1,932 stores (the “Acquired Stores”), three distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4.375 billion, on a cash free, debt free basis (the “Asset Sale” or the “Sale”). As of March 27, 2018, the Company has sold all 1,932 Acquired Stores and related assets to WBA in exchange for proceeds of $4,156.7 million, which were used to repay outstanding debt. Based on its magnitude and because the Company is exiting certain markets, the Sale represents a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for the Asset Sale as required by Accounting Standards Codification 210-05—Discontinued Operations (ASC 205-20). In accordance with ASC 205-20, the Company reclassified the assets and liabilities to be sold, including the 1,932 Acquired Stores, three (3) distribution centers, related inventory and other specified assets and liabilities related thereto (collectively the “Assets to be Sold” or “Disposal Group”) to assets and liabilities held for sale on its consolidated balance sheets as of the periods ended June 2, 2018 and March 3, 2018, and reclassified the financial results of the Disposal Group in its consolidated statements of operations and consolidated statements of cash flows for all periods presented. Additionally, corporate support activities related to the Disposal Group were not reclassified to discontinued operations. Please see additional information as provided in Note 3 Asset Sale to WBA.

 

Recently adopted accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU No. 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),” which amends the principal-versus-agent implementation guidance and in April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” which amends the guidance in those areas in the new revenue recognition standard. These ASUs, collectively the “new revenue standard”, are effective for annual reporting periods (including interim reporting periods within those periods) beginning January 1, 2018.

 

The Company adopted the new revenue standard as of March 4, 2018 using the modified retrospective method and applying the new standard to all contracts with customers.  Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.  In connection with the adoption of the new revenue standard, the Company identified one difference in its Retail Pharmacy segment related to the timing of revenue recognition for third party prescription revenues, which was historically recognized at the time the prescription was filled.  Upon adoption of ASU No. 2014-09, this revenue is recognized at the time the customer takes possession of the merchandise. In connection with its March 4, 2018

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

adoption of the new revenue standard on a modified retrospective basis, the Company recorded a reduction to accounts receivable of $57,897, a reduction to deferred tax assets of $1,772, an increase to inventory of $51,121, and a corresponding increase to accumulated deficit of $8,548 within its Retail Pharmacy segment.

 

In addition, the Company identified revenues under one specific rebate administration program under which the Company’s Pharmacy Services segment was determined to be the principal and historically recognized revenues and cost of revenues on a gross basis of approximately $123,500 during fiscal 2018. Upon adoption of the new revenue standard, the Company is required to record revenue from this program on a net basis.   The Company expects the impact of the adoption of the new revenue standard to be immaterial to its revenues, net income, and cash flows on an ongoing basis.

 

The following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting standard:

 

Revenue Recognition

 

Retail Pharmacy Segment

 

For front end sales, the Retail Pharmacy segment recognizes revenues upon the transfer of control of the goods to the customer. The Company satisfies its performance obligation at the point of sale for front end transactions. The Retail Pharmacy segment front end revenue is measured based on the amount of fixed consideration that we expect to receive, net of an allowance for estimated future returns. Return activity is immaterial to revenues and results of operations in all periods presented.

 

For pharmacy sales, the Retail Pharmacy segment recognizes revenue upon the transfer of control of the goods to the customer. The Company satisfies its performance obligation, upon pickup by the customer, which is when the customer takes title to the product.  Each prescription claim is its own arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims.  The Company’s revenue is measured based on the amount of fixed consideration that we expect to receive, reduced by refunds owed to the third party payor for pricing guarantees and performance against defined value-based service and performance metrics. The inputs to these estimates are not highly subjective or volatile.  The effect of adjustments between estimated and actual amounts have not been material to the Company’s results of operations or financial position. Prescriptions are generally not returnable.

 

The Retail Pharmacy segment offers a chain-wide loyalty card program titled wellness +. Individual customers are able to become members of the wellness + program.  Members participating in the wellness + loyalty card program earn points on a calendar year basis for eligible front end merchandise purchases and qualifying prescription purchases which may be redeemed to pay for future purchases. One point is awarded for each dollar spent towards front end merchandise and 25 points are awarded for each qualifying prescription.

 

Members reach specific wellness + tiers based on the points accumulated during the calendar year, which entitles such customers to certain future discounts and other benefits upon reaching that tier. For example, any customer that reaches 1,000 points in a calendar year achieves the “Gold” tier, enabling him or her to receive a 20% discount on qualifying purchases of front end merchandise for the remaining portion of the calendar year and also the next calendar year. There is also a similar “Silver” level with a lower threshold and benefit level.

 

Points earned pursuant to the wellness+ program represent a performance obligations and the Company allocates revenue between the merchandise purchased and the wellness + points based on the relative stand-alone selling price of each performance obligation. The relative value of the wellness + points is initially deferred as a contract liability (included in other current and noncurrent liabilities). As customers redeem the points to receive discounted front end merchandise or when the points expire, the Retail Pharmacy segment recognizes an allocable portion of the deferred contract liability into revenue. The Retail Pharmacy segment had accrued contract liabilities of $73,191 as of June 2, 2018, of which $49,793 is included in other current liabilities and $23,398 is included in noncurrent liabilities. The Retail Pharmacy segment had accrued contract liabilities of $63,851 as of March 3, 2018, of which $50,036 is included in other current liabilities and $13,815 is included in noncurrent liabilities.

 

The wellness + program also allows a customer to earn Bonus Cash based on qualifying purchases. Wellness + Rewards members have the opportunity to redeem his or her accumulated Bonus Cash on a future purchase with a 60 day expiration window. All Bonus Cash is redeemed using a FIFO methodology (i e., first Bonus Cash earned are the first to be redeemed).

 

For a majority of the Bonus Cash issuances, funding is provided by our vendors through contractual arrangements. This funding is treated as a contract liability and remains a contract liability until i) a wellness + Rewards members redeem their Bonus Cash, or ii) wellness + Rewards members allow the Bonus Cash to expire. Upon redemption or expiration, the Retail Pharmacy segment recognizes an allocable portion of the accrued contract liability into revenue. For Bonus Cash issuances that are not vendor

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

funded, the contract liability is recorded at the time of issuance through a reduction to revenues, and not recognized until the Bonus Cash is redeemed or expires.

 

Pharmacy Services Segment

 

The Pharmacy Services segment sells prescription drugs indirectly through its retail pharmacy network and directly through its mail service dispensing pharmacy. The Pharmacy Services segment recognizes revenue from prescription drugs sold by (i) its mail service dispensing pharmacy and (ii) under retail pharmacy network contracts where it is the principal at the contract prices negotiated with its clients, primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout the United States. Revenues include: (i) the portion of the price the client pays directly to the Pharmacy Services segment, net of any volume-related or other discounts paid back to the client (see “Drug Discounts” below), (ii) the price paid to the Pharmacy Services segment by client plan members for mail order prescriptions (“Mail Co-Payments”) (iii) client plan member copayments made directly to the retail pharmacy network, and (iv) administrative fees. Revenue is recognized when the Pharmacy Services segment meets its performance obligations relative to each transaction type, The following revenue recognition policies have been established for the Pharmacy Services segment:

 

·                  Revenues generated from prescription drugs sold by third party pharmacies in the Pharmacy Services segment’s retail pharmacy network and associated administrative fees are recognized at the Pharmacy Services segment’s point-of-sale, which is when the claim is adjudicated by the Pharmacy Services segment’s online claims processing system.  At this point the Company has performed all of its performance obligations.

 

·                  Revenues generated from prescription drugs sold by the Pharmacy Services segment’s mail service dispensing pharmacy are recognized when the prescription is shipped. At the time of shipment, the Pharmacy Services segment has performed all of its performance obligations under its client contracts, as control of and title to the product has passed to the clients plan member.  The Pharmacy Services segment does not experience a significant level of returns or reshipments.

 

·                  Revenues generated from administrative fees based on membership or claims volume are recognized monthly based on the terms within the individual contracts, either a monthly member based fee, or a claims volume based fee.

 

In the majority of its contracts, the Pharmacy Services segment is the principal because its client contracts give clients the right to obtain access to its pharmacy contracts under which the Pharmacy Services segment directs its pharmacy network to provide the services (drug dispensing, consultation, etc.) and goods (prescription drugs) to the clients’ members at its  negotiated pricing. The Pharmacy Services segment’s obligations under its client contracts are separate and distinct from its obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these contracts, the Pharmacy Services segment is contractually required to pay the third party pharmacies in its retail pharmacy network for products sold after payment is received from its clients. The Pharmacy Services segment has control over these transactions until the prescription is transferred to the member and, thus, that it is acting as a principal. As such, the Pharmacy Services segment records the total prescription price contracted with clients in revenues.

 

Amounts paid to pharmacies and amounts charged to clients are exclusive of the applicable co-payment under Pharmacy Services segment contracts. Retail pharmacy co-payments, which we instruct retail pharmacies to collect from members, are included in our revenues and our cost of revenues.

 

For contracts under which the Pharmacy Services segment acts as an agent or does not control the prescription drugs prior to transfer to the client, no revenue is recognized.

 

Drug Discounts—The Pharmacy Services segment deducts from its revenues that are generated from prescription drugs sold by third party pharmacies any rebates, inclusive of discounts and fees, earned by its clients based on utilization levels and other factors as negotiated with the prescription drug manufacturers or suppliers. Rebates are paid to clients in accordance with the terms of client contracts.

 

Medicare Part D—The Pharmacy Services segment, through its EIC subsidiary, participates in the federal government’s Medicare Part D program as a Prescription Drug Plan (“PDP”). Please refer to Note 8, Medicare Part D.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

Disaggregation of Revenue

 

The following table disaggregates the Company’s revenue by major source in each segment for the thirteen week period ended June 2, 2018:

 

In millions

 

For the thirteen week period ended June 2,
2018

 

Retail Pharmacy segment:

 

 

 

Pharmacy sales

 

$

2,565,286

 

Front end sales

 

1,296,147

 

Other revenue

 

36,332

 

Total Retail Pharmacy segment

 

$

3,897,765

 

 

 

 

 

Pharmacy Services segment

 

1,542,762 

 

Intersegment elimination

 

(52,037

)

Total revenue

 

$

5,388,490

 

 

Impact of New Revenue Recognition Standard on Financial Statement Line Items

 

The Company adopted the new revenue standard using the modified retrospective method. The cumulative effect of applying the new standard to all contracts was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue standard, the following adjustments were made to accounts on the condensed consolidated balance sheet as of March 4, 2018:

 

 

 

Impact of Change in Accounting Policy

 

 

 

As Reported

 

 

 

Adjusted

 

In millions

 

March 3, 2018

 

Adjustments

 

March 4, 2018

 

Condensed Consolidated Balance Sheet:

 

 

 

 

 

 

 

Accounts receivable, net

 

$

1,869,100

 

$

(57,897

)

$

1,811,203

 

Inventories, net

 

1,799,539

 

51,121

 

1,850,660

 

Deferred tax assets

 

594,019

 

(1,772

)

592,247

 

Total assets

 

8,989,327

 

(8,548

)

8,980,779

 

Accumulated deficit

 

(4,282,471

)

(8,548

)

(4,291,019

)

Total shareholders’ equity

 

1,601,010

 

(8,548

)

1,592,462

 

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

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). On January 5, 2018 the FASB issued an exposure draft amending certain aspects of the new leasing standard. The proposed amendments include a provision to allow entities to elect not to restate comparative periods in the period of adoption when transitioning to the new standard and instead allow a modified retrospective approach. 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.

 

2. Merger Agreement

 

On February 18, 2018, Rite Aid entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Albertsons, Ranch Acquisition II LLC, a Delaware limited liability company and a wholly-owned direct subsidiary of Albertsons (“Merger Sub II”) and Ranch Acquisition Corp., a Delaware corporation and a wholly-owned direct subsidiary of Merger Sub II (“Merger Sub” and, together with Merger Sub II, the “Merger Subs”). Pursuant to the Merger Agreement, (i) Merger Sub will merge with and into Rite Aid (the “Merger”), with Rite Aid surviving the Merger as a wholly-owned direct subsidiary of Merger Sub II (the “Surviving Corporation”), and (ii) immediately following the Merger, the Surviving Corporation will merge with and into Merger Sub II (the “Subsequent Merger” and, together with the Merger, the “Mergers”) with Merger Sub II surviving the Subsequent Merger as a wholly-owned direct subsidiary of Albertsons (the “Surviving Company”).

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

At the effective time of the Merger (the “Effective Time”), each share of Rite Aid’s common stock, par value $1.00 per share, issued and outstanding immediately prior to the Effective Time (other than shares of Rite Aid common stock owned by Albertsons, Merger Sub or Rite Aid (including treasury stock held by Rite Aid), which will be cancelled) will be converted into the right to receive and become exchangeable for 0.1000 (the “Base Exchange Ratio”) of a fully paid and nonassessable share of Albertsons common stock, par value $0.01 per share (“Albertsons Common Stock”) (the “Base Consideration”), without interest, plus, at the election of the holder of Rite Aid common stock, either (i) an amount in cash equal to $0.1832 per share (the “Additional Cash Consideration” and, together with the Base Consideration, the “Cash Election Consideration”), without interest, or (ii) 0.0079 (the “Additional Stock Election Exchange Ratio” and, together with the Base Exchange Ratio, the “Stock Election Exchange Ratio”) of a fully paid and nonassessable share of Albertsons Common Stock (the “Additional Stock Consideration” and, together with the Base Consideration, the “Stock Election Consideration”).

 

Consummation of the Merger is subject to various closing conditions, including but not limited to (i) approval of the Merger Agreement by holders of a majority of the outstanding shares of our common stock entitled to vote on the Merger, (ii) the expiration or earlier termination of the waiting period under the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) (which condition was satisfied on March 28, 2018), (iii) the absence of any law or order prohibiting the Merger, (iv) the absence of a material adverse effect on the Company and Albertsons, in each case, as defined in the Merger Agreement, (v) approval for listing, on the NYSE, of the shares of Albertsons Common Stock to be issued in the Merger and to be reserved for issuance in connection with the Merger (which approval was obtained on June 21, 2018), (vi) Albertsons’s registration statement on Form S 4 shall have become effective under the Securities Act (which Form S-4 was declared effective on June 25, 2018), and shall not be the subject of any stop order or proceedings seeking a stop order, (vii) approval of the Ohio Department of Insurance for the change of control of EIC, and (viii) Albertsons shall have delivered the Company a Lock Up Agreement, No Action Agreement and Standstill Agreement, in each case, in the form agreed to by the parties to the Merger Agreement.  The special meeting of Rite Aid’s stockholders to, among other things, consider and vote on a proposal to approve the Merger Agreement has been scheduled for August 9, 2018.

 

On February 18, 2018, in connection with the Merger Agreement, the Company entered into a standstill agreement (the “Standstill Agreement”) with Albertsons and Cerberus Capital Management, L.P. (“Cerberus”), pursuant to which Cerberus has agreed not to: (i) purchase shares of Albertsons Common Stock or other securities issued by Albertsons, except Cerberus may acquire beneficial ownership of Albertsons Common Stock provided that such beneficial ownership does not result in ownership of 30% or more of the issued and outstanding shares of Albertsons Common Stock in the aggregate following such transaction, (ii) make any public statement or public disclosure regarding any intent, purpose, plan or proposal by Cerberus or any of its controlled affiliates to the composition of the Albertsons board of directors, any merger, consolidation or acquisition of Albertsons or its subsidiaries, (iii) engage in any solicitation of proxies or otherwise solicit the stockholders of Albertsons or (iv) enter into any agreements to make any investment with any person that engages or offers or proposes to engage in any of (i) through (iii) during the standstill period. The standstill period commences at the Effective Time and terminates upon the earliest to occur of (a) thirty days following the date that Cerberus does not have any of its designees on the Albertsons board of directors, (b) the date on which Cerberus no longer has the right to appoint (and has not appointed) at least one director to the Albertsons board of directors and (c) the date on which Albertsons materially breaches or takes any action challenging the validity or enforceability of the provisions of the Merger Agreement that grant Cerberus certain rights to appoint directors to the Albertsons board of directors. In addition, pursuant to the Standstill Agreement, from February 18, 2018 until the Effective Time, Cerberus has agreed not to acquire or agree to acquire beneficial ownership of any shares of Albertsons Common Stock, Rite Aid common stock or other securities or debt issued by Albertsons or Rite Aid that would result in beneficial ownership of 30% or more of the issued and outstanding shares of Albertsons Common Stock at the Effective Time (assuming for the purposes of such calculation that the Effective Time occurred immediately after such acquisition).

 

3. Asset Sale to WBA

 

On September 18, 2017, the Company entered into the Amended and Restated Asset Purchase Agreement with WBA and Buyer, which amended and restated in its entirety the previously disclosed Asset Purchase Agreement (the “Original APA”), dated as of June 28, 2017, by and among the Company, WBA and Buyer. Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer agreed to purchase from the Company 1,932 Acquired Stores, three (3) distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4,375,000, on a cash-free, debt-free basis in the Sale.

 

The Company announced on September 19, 2017 that the waiting period under the HSR Act, expired with respect to the Sale. As of March 27, 2018, the Company has completed the store transfer process, and all 1,932 stores and related assets have been transferred to WBA and the Company has received cash proceeds of $4,156,686. The transfer of the three (3) distribution centers and related assets is expected to begin after September 1, 2018. The majority of the closing conditions have been satisfied, and the transfer of the three distribution centers and related assets remains subject to minimal customary closing conditions applicable only to the distribution centers being transferred at such distribution center closings, as specified in the Amended and Restated Asset Purchase Agreement.  The Company has recorded a pre-tax gain on the Sale of the stores of $2,489,389.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

The parties to the Amended and Restated Asset Purchase Agreement have each made customary representations and warranties. The Company has agreed to various covenants and agreements, including, among others, the Company’s agreement to conduct its business at the distribution centers being sold to WBA in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the distribution center closing. The Company has also agreed to provide transition services to Buyer for up to three (3) years after the initial closing of the Sale. Under the terms of the TSA, the Company provides various services on behalf of WBA, including but not limited to the purchase and distribution of inventory and virtually all selling, general and administrative activities. In connection with these services, the Company purchases the related inventory and incurs cash payments for the selling, general and administrative activities, which, the Company bills on a cash neutral basis to WBA in accordance with terms as outlined in the TSA. Total billings for these items during the thirteen week period ended June 2, 2018 were $2,041,075, of which $447,305 is included in Accounts receivable, net. The Company charged WBA TSA fees of $23,735 during the thirteen week period ended June 2, 2018 which are reflected as a reduction to selling, general and administrative expenses. Albertsons is obligated to assume the Company’s remaining obligations under the TSA.

 

Under the terms of the Amended and Restated Asset Purchase Agreement, the Company 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, subject to certain terms and conditions.

 

Based on its magnitude and because the Company is exiting certain markets, the Sale represents a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for the Sale as required by Accounting Standards Codification 210-05—Discontinued Operations (ASC 205-20). In accordance with ASC 205-20, the Company reclassified the Disposal Group to assets and liabilities held for sale on its consolidated balance sheets as of the periods ended June 2, 2018 and March 3, 2018, and reclassified the financial results of the Disposal Group in its consolidated statements of operations and consolidated statements of cash flows for all periods presented. The Company also revised its discussion and presentation of operating and financial results to be reflective of its continuing operations as required by ASC 205-20.

 

The carrying amount of the Assets to be Sold, which were included in the Retail Pharmacy segment, have been reclassified from their historical balance sheet presentation to current assets and liabilities held for sale as follows:

 

 

 

June 2,
2018

 

March 3,
2018

 

Inventories

 

$

111,001

 

$

264,286

 

Property and equipment

 

68,441

 

158,433

 

Goodwill(a)

 

 

4,629

 

Intangible assets

 

 

10,789

 

Current assets held for sale

 

$

179,442

 

$

438,137

 

Current maturities of long-term lease financing obligations

 

$

 

$

270

 

Accrued salaries, wages and other current liabilities

 

 

6,146

 

Long-term debt, less current maturities(b)

 

 

549,549

 

Lease financing obligations, less current maturities

 

 

838

 

Other noncurrent liabilities

 

 

3,402

 

Current liabilities held for sale

 

$

 

$

560,205

 

 


(a)                                 The Company had $76,124 of goodwill in its Retail Pharmacy segment resulting from the acquisition of Health Dialog and RediClinic, which is accounted for as Retail Pharmacy segment enterprise goodwill. The Company has allocated a portion of its Retail Pharmacy segment enterprise goodwill to the discontinued operation.

 

(b)                                 In connection with the Sale, the Company had estimated that the Sale would generate excess cash proceeds of approximately $4,027,400 which would be used to repay outstanding indebtedness. During the thirteen week period ended June 2, 2018, the Company has a use of cash for financing purposes of $525,031 in its discontinued operations and, based on refinements to its calculations, reduced its estimate of excess cash proceeds by approximately $24,500 and reclassified that amount to assets held and used. Consequently, the Company has classified $0 and $549,549 of estimated cash proceeds to be used for debt repayment to liabilities held for sale as of June 2, 2018 and March 3, 2018, respectively. As of June 2, 2018 and March 3, 2018, the Company repaid outstanding indebtedness of $525,031 and $3,135,000 with Sale proceeds.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

The operating results of the discontinued operations that are reflected on the consolidated statements of operations within net income (loss) from discontinued operations are as follows:

 

 

 

June 2,
2018
(13 weeks)

 

June 3,
2017
(13 weeks)

 

Revenues

 

$

23,400

 

$

2,377,857

 

Costs and expenses:

 

 

 

 

 

Cost of revenues(a)

 

17,081

 

1,780,765

 

Selling, general and administrative expenses(a)

 

13,875

 

600,640

 

Lease termination and impairment charges

 

 

48

 

Loss on debt retirements, net

 

4,570

 

 

Interest expense(b)

 

4,615

 

58,937

 

Gain on stores sold to Walgreens Boots Alliance

 

(360,557

)

 

(Gain) loss on sale of assets, net

 

 

(156

)

 

 

(320,416

)

2,440,234

 

Income (loss) from discontinued operations before income taxes

 

343,816

 

(62,377

)

Income tax expense (benefit)

 

87,673

 

(23,065

)

Net income (loss) from discontinued operations, net of tax

 

$

256,143

 

$

(39,312

)

 


(a)                                 Cost of revenues and selling, general and administrative expenses for the discontinued operations excludes corporate overhead. These charges are reflected in continuing operations.

 

(b)                                 In accordance with ASC 205-20, the operating results for the thirteen week periods ended June 2, 2018 and June 3, 2017, respectively, for the discontinued operations include interest expense relating to the outstanding indebtedness repaid with the estimated excess proceeds from the Sale.

 

The operating results reflected above do not fully represent the Disposal Group’s historical operating results, as the results reported within net income from discontinued operations only include expenses that are directly attributable to the Disposal Group.

 

4. Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted income (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 2,
2018

 

June 3,
2017

 

Basic and diluted income (loss) per share:

 

 

 

 

 

Numerator:

 

 

 

 

 

Net loss from continuing operations

 

$

(41,727

)

$

(36,037

)

Net income (loss) from discontinued operations

 

256,143

 

(39,312

)

Income (loss) attributable to common stockholders— basic and diluted

 

$

214,416

 

$

(75,349

)

Denominator:

 

 

 

 

 

Basic weighted average shares

 

1,054,381

 

1,046,826

 

Outstanding options and restricted shares, net

 

 

 

Diluted weighted-average shares

 

1,054,381

 

1,046,826

 

 

 

 

 

 

 

Basic and diluted income (loss) per share:

 

 

 

 

 

Continuing operations

 

$

(0.04

)

$

(0.03

)

Discontinued operations

 

0.24

 

(0.04

)

Net basic and diluted income (loss) per share

 

$

0.20

 

$

(0.07

)

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

Due to their antidilutive effect, 25,768 and 33,747 potential common shares related to stock options have been excluded from the computation of diluted income (loss) per share for the thirteen week period ended June 2, 2018 and June 3, 2017, respectively. Also, excluded from the computation of diluted income (loss) per share as of June 2, 2018 and June 3, 2017 are restricted shares of 11,339 and 5,623, 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 2,
2018

 

June 3,
2017

 

Impairment charges

 

$

283

 

$

659

 

Lease termination charges

 

9,576

 

3,379

 

 

 

$

9,859

 

$

4,038

 

 

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 2,
2018

 

June 3,
2017

 

Balance—beginning of period

 

$

133,290

 

$

165,138

 

Provision for present value of noncancellable lease payments of closed stores

 

8,130

 

913

 

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

 

(1,038

)

(549

)

Interest accretion

 

2,685

 

3,095

 

Cash payments, net of sublease income

 

(11,885

)

(12,931

)

Balance—end of period

 

$

131,182

 

$

155,666

 

 

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.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

·                  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 2, 2018, long-lived assets from continuing operations with a carrying value of $1,575, primarily store assets, were written down to their fair value of $1,292, resulting in an impairment charge of $283. 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.   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 2, 2018 and June 3, 2017:

 

Fair Value Measurement Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
June 2,
2018

 

Long-lived assets held for use

 

$

 

$

 

$

 

$

 

Long-lived assets held for sale

 

$

 

$

1,292

 

$

 

$

1,292

 

Total

 

$

 

$

1,292

 

$

 

$

1,292

 

 

 

 

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

 

 

The above assets reflected in the caption Long-lived assets held for sale are separate and apart from the Assets to be Sold and do to their immateriality have not been reclassified to assets held for sale.

 

As of June 2, 2018 and June 3, 2017, 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 we believe approximate their fair values due to their short term nature.  In addition, as of June 2, 2018 and March 3, 2018 the Company has $7,257 and $7,282, respectively, of investments, carried at amortized cost as these investments are being held to maturity, which are included as a component of other assets.  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 $3,134,794 and $3,162,700, respectively, as of June 2, 2018. There were no outstanding derivative financial instruments as of June 2, 2018 and March 3, 2018.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

7. Income Taxes

 

The new federal tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”) enacted on December 22, 2017 (the “Enactment Date”) introduced significant changes to U.S. income tax law. Effective for tax years beginning on or after January 1, 2018, the Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%.

 

The Company recorded an income tax benefit from continuing operations of $9,497 and $12,121 for the thirteen week periods ended June 2, 2018 and June 3, 2017. The effective tax rate for the thirteen week periods ended June 2, 2018 and June 3, 2017 was 18.5% and 25.2%, respectively. The effective tax rate for the thirteen week period ended June 2, 2018 includes an adjustment of (2.3)% to increase the valuation allowance related to certain state deferred taxes. The tax benefit for the thirteen week period ended June 3, 2017 is higher in comparison to 2018, as it is based on a federal statutory rate of 35%, offset by increases to the valuation allowance primarily related to state deferred taxes.

 

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.

 

The Company believes that it is reasonably possible that a decrease of up to $13,498 in unrecognized tax benefits related to state exposures may be necessary in the next twelve months however management 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 $903,342 and $896,800, which relates primarily to state deferred tax assets at June 2, 2018 and March 3, 2018, respectively.

 

8. Medicare Part D

 

The Company offers Medicare Part D benefits through EIC, which has contracted with CMS to be a 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 $29,464 as of March 31, 2018. EIC was in excess of the minimum required amounts in these states as of June 2, 2018.

 

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 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.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

As of June 2, 2018, accounts receivable, net included $442,690 due from CMS and accrued salaries, wages and other current liabilities included $163,134 of EIC liabilities under certain reinsurance contracts. As of March 3, 2018, accounts receivable, net included $350,563 due from CMS and accrued salaries, wages and other current liabilities included $183,318 of EIC liabilities under certain reinsurance contracts. During calendar 2017, EIC limited its exposure to loss and recovered a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company. Beginning calendar 2018, EIC does not have a reinsurance agreement in place related to its individual and certain group Medicare Part D Plans.

 

9. Goodwill and Other Intangible Assets

 

There was no impairment charge for the thirteen week period ended June 2, 2018. At June 2, 2018 and March 3, 2018, accumulated impairment losses for the Pharmacy Services segment was $261,727.

 

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 2, 2018 and March 3, 2018.

 

 

 

June 2, 2018

 

March 3, 2018

 

 

 

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(a)

 

$

379,809

 

$

(318,930

)

$

60,879

 

7 years

 

$

379,355

 

$

(316,798

)

$

62,557

 

7 years

 

Prescription files

 

906,181

 

(808,498

)

97,683

 

3 years

 

900,111

 

(801,706

)

98,405

 

3 years

 

Customer relationships(a)

 

465,000

 

(187,616

)

277,384

 

14 years

 

465,000

 

(172,635

)

292,365

 

15 years

 

CMS license

 

57,500

 

(6,747

)

50,753

 

22 years

 

57,500

 

(6,172

)

51,328

 

23 years

 

Claims adjudication and other developed software

 

58,985

 

(24,724

)

34,261

 

4 years

 

58,985

 

(22,617

)

36,368

 

5 years

 

Trademarks

 

20,100

 

(5,896

)

14,204

 

7 years

 

20,100

 

(5,394

)

14,706

 

8 years

 

Backlog

 

11,500

 

(11,244

)

256

 

1 year

 

11,500

 

(10,286

)

1,214

 

1 year

 

Total finite

 

$

1,899,075

 

$

(1,363,655

)

535,420

 

 

 

$

1,892,551

 

$

(1,335,608

)

$

556,943

 

 

 

Trademarks

 

33,500

 

 

33,500

 

Indefinite

 

33,500

 

 

33,500

 

Indefinite

 

Total

 

$

1,932,575

 

$

(1,363,655

)

$

568,920

 

 

 

$

1,926,051

 

$

(1,335,608

)

$

590,443

 

 

 

 


(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 2, 2018 and March 3, 2018 are unfavorable lease intangibles with a net carrying amount of $17,857 and $18,888, respectively. These intangible liabilities are amortized over their remaining lease terms at time of acquisition.

 

Amortization expense for these intangible assets and liabilities was $35,400 and $40,962 for the thirteen week periods ended June 2, 2018 and June 3, 2017, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2019—$124,583; 2020—$100,875; 2021—$76,995; 2022—$55,206 and 2023—$38,953.

 

10. Indebtedness and Credit Agreements

 

Following is a summary of indebtedness and lease financing obligations at June 2, 2018 and March 3, 2018:

 

 

 

June 2, 2018

 

March 3,
2018

 

Secured Debt:

 

 

 

 

 

Senior secured revolving credit facility due January 2020 ($190,000 and $0 face value less unamortized debt issuance costs of $10,258 and $13,076)

 

$

179,742

 

$

(13,076

)

Other secured

 

90

 

90

 

 

 

179,832

 

(12,986

)

Guaranteed Unsecured Debt:

 

 

 

 

 

9.25% senior notes due March 2020 ($0 and $902,000 face value plus unamortized premium of $0 and $1,400 and less unamortized debt issuance costs of $0 and $4,924 as of June 2, 2018 and March 3, 2018, respectively)

 

 

898,476

 

6.75% senior notes due June 2021 ($805,169 and $810,000 face value less unamortized debt issuance costs of $4,482 and $4,877)

 

800,687

 

805,123

 

6.125% senior notes due April 2023 ($1,753,490 and $1,800,000 face value less unamortized debt issuance costs of $20,106 and $21,708)

 

1,733,384

 

1,778,292

 

 

 

2,534,071

 

3,481,891

 

Unguaranteed Unsecured Debt:

 

 

 

 

 

7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,418 and $1,460)

 

293,582

 

293,540

 

6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $691 and $707)

 

127,309

 

127,293

 

 

 

420,891

 

420,833

 

Lease financing obligations

 

47,809

 

52,554

 

Total debt

 

3,182,603

 

3,942,292

 

Current maturities of long-term debt and lease financing obligations

 

(19,025

)

(21,031

)

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

 

$

3,163,578

 

$

3,921,261

 

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

Reconciliation of indebtedness included in continuing operations and discontinued operations:

 

 

 

March 3, 2018

 

 

 

Debt

 

Lease Financing
Obligations

 

Total Debt and
Lease Financing
Obligations

 

Balance, March 3, 2018—per above table

 

$

3,889,738

 

$

52,554

 

$

3,942,292

 

Amounts reclassified as current liabilities held for sale in connection with the Sale(a)

 

(549,549

)

(1,108

)

(550,657

)

Total debt and lease financing obligations

 

3,340,189

 

51,446

 

3,391,635

 

Current maturities of long-term debt and lease financing obligations—continuing operations

 

(90

)

(20,671

)

(20,761

)

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

 

$

3,340,099

 

$

30,775

 

$

3,370,874

 

 


(a)                                 In connection with the Sale, the Company had estimated that the Sale would generate excess cash proceeds of approximately $4,027,400 which would be used to repay outstanding indebtedness. During the thirteen week period ended June 2, 2018, the Company has a use of cash for financing purposes of $525,031 in its discontinued operations and, based on refinements to its calculations, reduced its estimate of excess cash proceeds by approximately $24,500 and reclassified that amount to assets held and used. Consequently, the Company has classified $0 and $549,549 of estimated cash proceeds to be used for debt repayment to liabilities held for sale as of June 2, 2018 and March 3, 2018, respectively. Additionally, as part of the Sale, the Company will be relieved of approximately $0 and $1,108, respectively, of capital lease obligations as of June 2, 2018 and March 3, 2018. These amounts are also reflected as liabilities held for sale. Please see Note 3 for additional details.

 

Credit Facility

 

The Company’s Amended and Restated Senior Secured Credit Facility has a borrowing capacity of $2,700,000 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 2, 2018, the Company had $190,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $55,790 which resulted in additional borrowing capacity of $2,454,210.

 

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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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

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 2, 2018, the Company had availability under its revolver of $2,454,210, 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.

 

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 and unsecured guaranteed notes. The Amended and Restated Senior Secured Credit Facility is secured, on a senior priority basis, 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, 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 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 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.

 

Fiscal 2018 and 2019 Transactions

 

During January 2018, the Company used proceeds from the Asset Sale to repay and retire all of its outstanding second lien $470,000 tranche 1 term loan and $500,000 tranche 2 term loan principal (the “Second Lien Term Loan Prepayment”). During February 2018, the Company reduced the borrowing capacity on its Amended and Restated Senior Secured Credit Facility from $3,700,000 to $3,000,000. In connection with the transactions, the Company recorded a loss on debt retirement of $8,180, which included interest and unamortized debt issuance costs. The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On February 27, 2018, the Company announced that it had commenced an offer to purchase up to $900,000 of the outstanding 9.25% senior notes due 2020 (the “9.25% Notes”), the 6.75% senior notes due 2021 (the “6.75% Notes”) and the 6.125% Senior Notes due 2023 (the “6.125% Notes”), pursuant to the asset sale provisions of the indentures of such notes. On March 29, 2018, the Company accepted for payment, pursuant to its offer to purchase, $3,454 principal amount of the 9.25% Notes, representing 0.38% of the outstanding principal amount of the 9.25% Notes, $3,471 principal amount of the 6.75% Notes, representing 0.43% of the outstanding principal amount of the 6.75% Notes, and $41,751 principal amount of the 6.125% Notes, representing 2.32% of the outstanding principal amount of the 6.125% Notes.  In connection therewith, the Company recorded a loss on debt retirement of $49

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

which included unamortized debt issuance costs, partially offset by unamortized discount.  The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations. The debt repayment and related loss on debt retirement of $498 for the 6.125% Notes is included in the results of operations and cash flows of continuing operations.

 

On March 13, 2018, the Company issued a notice of redemption for all of the 9.25%. Notes that were outstanding on April 12, 2018, pursuant to the terms of the indenture of the 9.25% Notes. On April 12, 2018, the Company redeemed 100% of the remaining outstanding 9.25% Notes.  In connection therewith, the Company recorded a loss on debt retirement of $3,422 which included unamortized debt issuance costs, partially offset by unamortized discount.  The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On April 19, 2018, the Company announced that it had commenced an offer to purchase up to $700,000 of its outstanding 6.75% Notes and its 6.125% Notes pursuant to the terms of such indentures. On May 21, 2018, the Company redeemed $1,360 aggregate principal amount of the 6.75% Notes and $4,759 aggregate principal amount of the 6.125% Notes.  The debt repayment and related loss on debt retirement of $8 for the 6.75% Notes is included in the results of operations and cash flows of discontinued operations.  The debt repayment and related loss on debt retirement of $56 for the 6.125% Notes is included in the results of operations and cash flows of continuing operations.

 

On April 29, 2018, the Company further reduced the borrowing capacity on its Amended and Restated Senior Secured Credit Facility from $3,000,000 to $2,700,000. In connection therewith, the Company recorded a loss on debt retirement of $1,091, which included unamortized debt issuance costs. The loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On May 25, 2018, the Company issued a notice of redemption for all of the 6.75% Notes that were outstanding on June 25 2018, pursuant to the terms of the indenture of the 6.75% Notes. On June 25, 2018, the Company redeemed 100% of the remaining outstanding 6.75% Notes, which resulted in a loss on debt retirement of $18,075. The debt repayment and related loss on debt retirement will be included in the results of operations and cash flows of discontinued operations during the second quarter ending September 1, 2018.

 

Maturities

 

The aggregate annual principal payments of long-term debt for the remainder of fiscal 2019 and thereafter are as follows: 2019—$90; 2020—$190,000; 2021—$0; 2022—$805,169; 2023—$0 and $2,176,490 thereafter.

 

11. Retirement Plans

 

Net periodic pension expense recorded in the thirteen week periods ended June 2, 2018 and June 3, 2017, for the Company’s defined benefit plan includes the following components:

 

 

 

Defined Benefit
Pension Plan

 

 

 

Thirteen Week Period Ended

 

 

 

June 2,
2018

 

June 3,
2017

 

Service cost

 

$

312

 

$

346

 

Interest cost

 

1,578

 

1,603

 

Expected return on plan assets

 

(1,434

)

(1,147

)

Amortization of unrecognized prior service cost

 

 

 

Amortization of unrecognized net loss

 

507

 

856

 

Net periodic pension expense

 

$

963

 

$

1,658

 

 

During the thirteen week period ended June 2, 2018 the Company contributed $813 to the Defined Benefit Pension Plan. During the remainder of fiscal 2018, the Company expects to contribute $3,800 to the Defined Benefit Pension Plan.

 

12. Segment Reporting

 

The Company has two reportable segments, its retail drug stores (“Retail Pharmacy”), and its pharmacy services (“Pharmacy Services”) segments, collectively the “Parent Company”.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

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, Chief Operating Officer, Chief Financial Officer, Chief Operating Officer—Retail Pharmacy, and the Chief Executive Officer—Pharmacy Services, (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 is balance sheet information for the Company’s reportable segments:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Eliminations(2)

 

Consolidated

 

June 2, 2018:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,434,447

 

$

2,950,099

 

$

(55,093

)

$

8,329,453

 

Goodwill

 

43,493

 

1,377,627

 

 

1,421,120

 

Additions to property and equipment and intangible assets

 

58,067

 

3,559

 

 

61,626

 

March 3, 2018:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

6,089,343

 

$

2,954,953

 

$

(54,969

)

$

8,989,327

 

Goodwill

 

43,492

 

1,377,628

 

 

1,421,120

 

Additions to property and equipment and intangible assets

 

199,437

 

15,327

 

 

214,764

 

 


(2)                                 As of June 2, 2018 and March 3, 2018, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $40,319 and $38,713, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $14,774 and $16,256, 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.

 

The following table is a reconciliation of the Company’s business segments to the consolidated financial statements for the thirteen week periods ended June 2, 2018 and June 3, 2017:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Intersegment
Eliminations(1)

 

Consolidated

 

June 2, 2018:

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,897,765

 

$

1,542,762

 

$

(52,037

)

$

5,388,490

 

Gross Profit

 

1,069,457

 

99,292

 

 

1,168,749

 

Adjusted EBITDA(2)

 

113,469

 

33,863

 

 

147,332

 

June 3, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,972,351

 

$

1,513,241

 

$

(49,069

)

$

5,436,523

 

Gross Profit

 

1,056,971

 

104,972

 

 

1,161,943

 

Adjusted EBITDA(2)

 

87,365

 

48,599

 

 

135,964

 

 


(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) income to Adjusted EBITDA for the thirteen week periods ended June 2, 2018 and June 3, 2017:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

 

 

June 2,
2018
(13 weeks)

 

June 3,
2017
(13 weeks)

 

Net loss from continuing operations

 

$

(41,727

)

$

(36,037

)

Interest expense

 

62,792

 

51,000

 

Income tax benefit

 

(9,497

)

(12,121

)

Depreciation and amortization expense

 

94,529

 

101,029

 

LIFO charge

 

9,966

 

10,173

 

Lease termination and impairment charges

 

9,859

 

4,038

 

Loss on debt retirements, net

 

554

 

 

Other

 

20,856

 

17,882

 

Adjusted EBITDA from continuing operations

 

$

147,332

 

$

135,964

 

 

13. Commitments, Contingencies and Guarantees

 

Legal Matters and Regulatory Proceedings

 

The Company is involved in legal proceedings and is subject to investigations, inspections, claims, audits, inquiries, and similar actions by governmental authorities arising in the ordinary course of its business, including, without limitation, the matters described below. The Company records accruals for outstanding legal matters and applicable regulatory proceedings 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 and regulatory proceedings that could affect the amount of any existing accrual and developments that would make a loss contingency both probable and reasonably estimable, and as a result, warrant an account. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.  None of the Company’s accruals for outstanding legal matters or regulatory proceedings are material individually or in the aggregate to the Company’s consolidated financial position.

 

The Company’s contingencies are subject to significant uncertainties, many of which are beyond the Company’s control, 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 qui tam lawsuit (“whistleblower” action) has been filed and whether the government agency makes a decision to intervene in the lawsuit following investigation.  While the Company cannot predict the outcome of any of the contingencies, the Company’s management does not believe that the outcome of any of these legal matters or regulatory proceedings will be material to the Company’s consolidated financial position.  It is possible, however, the Company’s results of operations or cash flows could be materially affected by unfavorable outcomes in outstanding legal matters or regulatory proceedings.

 

After the announcement of the then 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 a purported Company stockholder 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. The matter remains pending, but inactive.

 

Also in connection with that proposed merger, a lawsuit 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 (Hering v. Rite Aid Corp., et al.). The complaint in the Hering 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 Hering 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 Hering 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 Hering, Don Michael Hussey and

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

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 Hering action for all purposes pending consummation of the merger.

 

On March 17, 2017, the Hering 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 proposed amended complaint asserted 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. On August 4, 2017, the Pennsylvania District Court entered an order lifting the stay, noting that the original claims in this matter are now moot, and directed the plaintiffs to file a motion for leave to amend the complaint, with brief in support thereof, on or before September 15, 2017 which deadline was subsequently extended to September 22, 2017. On September 22, 2017, the lead plaintiffs gave notice that plaintiffs Don Michael Hussey and Joanna Pauli Hussey were withdrawing as lead plaintiffs, and that plaintiff Jerry Hering (the Lead Plaintiff) would continue to represent the proposed class in the Hering action going forward. That same day, Lead Plaintiff filed a motion for leave to file an amended complaint, which the Pennsylvania District Court granted on November 27, 2017. On December 11, 2017, Lead Plaintiff filed the amended complaint (the Amended Complaint), which alleges a claim for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 and a claim for violations of Section 20(a) of the Exchange Act against the Rite Aid Defendants, WBA, and certain WBA executives. On February 14 and 16, 2018, the Rite Aid Defendants filed a motion to dismiss the Amended Complaint, and an opening brief in support thereof.  Briefing concluded on June 7, 2018.

 

In connection with the proposed merger between the Company and Albertsons Companies, Inc. (ACI), on April 24, 2018, a Rite Aid stockholder filed a putative class action lawsuit in the Court of Chancery of the State of Delaware against Rite Aid, ACI, Ranch Acquisition Corp. (Merger Sub I), Ranch Acquisition II LLC (Merger Sub II, together with ACI and Merger Sub I, the ACI defendants) and each of the Rite Aid directors (the Director defendants, together with Rite Aid, the Rite Aid defendants), Del. C.A. No. 2018-0305-AGB.  Plaintiff contends that Rite Aid stockholders have appraisal rights under Section 262 of the DGCL.  Plaintiff alleges breach of fiduciary duty claims against the Director defendants for their alleged failure to provide alleged statutory appraisal rights under Delaware law and for allegedly falsely informing Rite Aid stockholders that they will not have appraisal rights.  Plaintiff further contends that the proxy statement/prospectus related to the proposed merger, and which was filed on April 6, 2018, was deficient under Section 262(d)(1) of the DGCL for failure to inform stockholders of their alleged appraisal rights.  Plaintiff seeks declarations from the Court of Chancery that the action is a proper class action and that the Director defendants breached their fiduciary duties by failing to adequately inform class members of their appraisal rights under Delaware law, to enjoin the proposed action from closing until such time as class members are afforded the ability to seek appraisal of their shares, or otherwise permit class members to petition the Court of Chancery for appraisal, and attorneys’ fees, expenses, and costs to Plaintiff.  On May 9, 2018, the Court of Chancery denied Plaintiff’s motion to expedite and declined to schedule a preliminary injunction hearing, ruling that Plaintiff failed to state a colorable claim.  Defendants oppose Plaintiff’s claims on the ground that Rite Aid stockholders have no appraisal rights under the DGCL because they have a right to receive all stock consideration as described in the proxy statement/prospectus previously filed on April 6, 2018.  On May 16, 2018, the Rite Aid defendants and the ACI defendants each filed a Motion to Dismiss Plaintiff’s Verified Class Action Complaint (collectively, the “Motions to Dismiss”).  On June 6, 2018, the parties jointly stipulated that the briefing submitted by the parties in support of, and in opposition to, Plaintiff’s Motion for Expedited Proceedings shall constitute the briefing with respect to the Motions to Dismiss. At this stage of the proceedings, the Company is not able to either predict the outcome of this lawsuit or estimate a potential rage of loss with respect to the lawsuit and is vigorously defending this lawsuit.

 

On June 29, 2018, a purported stockholder of the Company filed a Verified Complaint to Compel Inspection of Books and Records under 8 Del. C. §220 in the Delaware Court of Chancery against the Company, seeking to inspect books and records in order to determine whether wrongdoing or mismanagement has taken place such that it would be appropriate to file claims for breach of fiduciary duty, and to investigate the independence and disinterestedness of the Company’s directors with respect to the proposed merger with ACI. The Company’s response to this complaint is due on July 23, 2018.

 

The Company is currently a defendant in several lawsuits filed in 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”). Some of the California Cases purport or may be determined to be class actions and seek substantial damages and penalties. The single-plaintiff and multi-plaintiff California Cases regarding violations of wage-and-hour laws, failure to pay overtime and failure to pay for missed meals and rest periods, in the aggregate, seek substantial damages. The Company believes that its defenses and assertions in the California Cases, as well as other lawsuits, have merit. The Company has aggressively challenged the merits of the lawsuits and, where applicable, the allegations that the lawsuits should be certified as class or representative actions. Additionally, at this time the Company is not able to predict either the outcome of or estimate a potential range of loss with respect to the California Cases and is vigorously defending them.

 

In the employee seating lawsuit (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 lawsuits. That

 

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Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

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 matter for trial on January 26, 2018. The trial scheduled to begin June 15, 2018 was adjourned by the Court.  A new trial date has not been scheduled by the Court. On February 2, 2018, the Court denied Rite Aid’s motion for summary judgment.

 

Following service of subpoenas on the Company in 2011 and 2013 by the United States Attorney’s Office for the Eastern District of Michigan (“USAO”) and the State of Indiana’s Office of the Attorney General, respectively, the Company cooperated with inquiries regarding the relationship of Rite Aid’s Rx Savings Program to the reporting of usual and customary charges to publicly funded health programs. In January 2017, the USAO, 18 states and the District of Columbia declined to intervene in a sealed False Claims Act (“FCA”) lawsuit filed by qui tam plaintiff Azam Rahimi (“Relator”) in the District Court for the Eastern District of Michigan. On January 19, 2017, the court unsealed Relator’s Second Amended Complaint against the Company; it 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 states and the District of Columbia; and that the Company is thus liable under the federal FCA and similar state statutes. In its ruling on the Company’s motion to dismiss the complaint, the Court held that Relator’s complaint was deficient, but allowed Relator the opportunity to re-plead.  Relator filed a Third Amended Complaint on May 11, 2018.  The Company filed a motion to dismiss the Third Amended Complaint on May 25, 2018, which is pending. 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 Southern District of West Virginia are currently investigating, but no lawsuits have been filed. Violations of the CMEA could result in the imposition of administrative and/or civil penalties against the Company. The Company has entered into tolling agreements with the United States, and discussions have been held to attempt to resolve these matters with those USAOs and the Department of Justice, but whether any agreements can be reached and on what terms is uncertain. At this stage of the investigation, the Company is not able to predict the outcome of the investigation.

 

In December 2017, Rite Aid executed a non-prosecution agreement with the United States Attorney’s Office for the Southern District of West Virginia (countersigned by the government in January 2018), which concluded the previous criminal investigation into Rite Aid’s PSE sales. Pursuant to that agreement, the government agreed not to bring any criminal charges against Rite Aid, and Rite Aid agreed to pay an immaterial amount of money as restitution.  The civil investigation is ongoing.

 

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”) regarding (1) the Company’s Drug Utilization Review (“DUR”) and prescription dispensing protocol; and (2) the dispensing of drugs designated as “Code 1” by the State of California. The Company cooperated with the investigation, researched the government’s allegations, and refuted the government’s position. The Company produced documents including certain prescription files related to Code 1 drugs to the USAO’s office and the State of California Department of Justice’s Bureau of Medical Fraud and Elder Abuse (“CADOJ”). In August 2014, the USAO and 8 states’ attorneys general declined to intervene in a California False Claim Act (“FCA”) action (“Action”) filed under seal in the Eastern District of California by qui tam plaintiff Loyd F. Schmuckley (“Relator”) based on DUR and Code 1 allegations. In July 2016, the Commonwealth of Massachusetts and the District of Columbia also declined to intervene in the Action. On May 15, 2017, Relator and the CADOJ stipulated to dismiss all DUR-related claims and 18 other state-based claims. On September 21, 2017, the CADOJ filed a sealed complaint-in-intervention in the Action, asserting causes under the FCA, for unjust enrichment and for payment by mistake related to the Code 1 allegations. The Action was unsealed on September 26, 2017. On September 28, 2017, Relator filed a First Amended Complaint under the FCA also concerning the Code 1 allegations. The Company filed a motion to dismiss Relator’s and CADOJ’s respective complaints in January 2018, the hearing was held on March 23, 2018, and the court’s order remains pending. At this stage of the proceedings, the Company is not able to either predict the outcome of this matter or estimate a potential range of loss with respect to this matter and is vigorously defending this lawsuit.

 

The State of Mississippi, by and through its Attorney General, filed a First Amended Complaint against the Company and various purported related entities on September 27, 2016 alleging violations of the Mississippi Medicaid Fraud Control Act, violations of the Mississippi Unfair and Deceptive Trade Practices Act, fraud and unjust enrichment. The Complaint alleges the Company failed to accurately report usual and customary prices to Mississippi’s Division of Medicaid. On November 14, 2016, the Company filed motions to dismiss based on substantive and jurisdictional grounds, as well as a motion to transfer venue. These motions are pending and the lawsuit is stayed while related litigation is on appeal. 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.

 

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Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

In December 2017, the United States Judicial Panel on multidistrict litigation ordered consolidated numerous lawsuits filed against various defendants by plaintiffs such as counties, cities, hospitals, and third-party payors, alleging claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation is In re National Prescription Opiate Litigation (MDL No. 2804), pending in the U.S. District Court for the Northern District of Ohio. This multidistrict litigation presumptively includes relevant federal court lawsuits that name the Company, including lawsuits filed by counties and municipalities in California, Indiana, Maryland, Michigan, Missouri, New Jersey, North Carolina, Ohio, West Virginia, and Wisconsin.  Similar lawsuits that name the Company in some capacity have been filed in state courts, including lawsuits filed by Shelby County, Tennessee, Shelby County (Tennessee) v. Purdue Pharma, L.P. et al.; several counties and cities in West Virginia, Brooke County (West Virginia) et al. v. Purdue Pharma L.P., et al. and City of Huntington (West Virginia) et al. v. Express Scripts Holding Company, et al,; several counties in South Carolina, County of Spartanburg (South Carolina) v. Rite Aid of South Carolina, Inc. et al., County of Greenville (South Carolina) v. Rite Aid of South Carolina, Inc., et al., and County of Anderson v. Rite Aid of South Carolina, Inc., et al; Camden County, New Jersey, Camden County, New Jersey v. Purdue Pharma L.P., et al; two counties in Oklahoma, The Board of County Commissioners of Delaware County, State of Oklahoma v. Purdue Pharma L.P., et al. and The Board of County Commissioners of Ottawa County, State of Oklahoma v. Purdue Pharma L.P., et al.; the city of Parma Heights, Ohio, The City of Parma Heights, Ohio v. Purdue Pharma L.P., et al.; and the city of Atlanta, Georgia, The City of Atlanta v. Purdue Pharma, LP, et al. At this stage of the proceedings, the Company is not able to either predict the outcome of these lawsuits or estimate a potential range of loss with respect to the lawsuits and is vigorously defending them.

 

The Company is involved in two putative consumer class action lawsuits in the United States District Court for the Southern District of California, alleging that it has overcharged customers’ insurance companies for prescription drug purchases, resulting in overpayment of co-pays.  The first lawsuit, Byron Stafford v. Rite Aid Corp., Case No. 17-CV-01340-AJB-JLB, was filed on June 30, 2017, and the second case, Robert Josten v. Rite Aid Corp., Case No. 18-CV-00152-AJB-JLB, was filed on January 23, 2018.  Each lawsuit alleges that (1) the Company was obligated to charge the plaintiffs’ insurance companies a “usual and customary” price for their prescription drugs; and (2) the Company failed to do so properly because the prices it reported were not equal to or adjusted to account for the discount prices that Rite Aid offers to uninsured and underinsured customers through its Rx Savings Program.  On December 19, 2017, the court granted the Company’s motion to dismiss Stafford’s complaints with leave to amend for failure to plead compliance with the applicable statutes of limitations.  After Stafford amended the complaint on January 9, 2018, the Company filed another motion to dismiss on January 23, 2018, and a similar motion to dismiss Josten’s complaint on March 16, 2018.  Both motions are fully briefed and are awaiting a decision from the court.  At this stage of the proceedings, the Company is not able to either predict the outcome of these lawsuits or estimate a potential range of loss with respect to the lawsuit and is vigorously defending these lawsuits.

 

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 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.

 

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 2, 2018, March 3, 2018, and for the thirteen week periods ended June 2, 2018 and June 3, 2017. Separate financial statements for Subsidiary Guarantors are not presented.

 

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Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

 

 

Rite Aid Corporation
Condensed Consolidating Balance Sheet
June 2, 2018
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

138,400

 

$

8,692

 

$

 

$

147,092

 

Accounts receivable, net

 

 

1,390,296

 

518,659

 

 

1,908,955

 

Intercompany receivable

 

 

337,627

 

 

(337,627

)(a)

 

Inventories, net of LIFO reserve of $0, $591,056, $0, $0, and $591,056

 

 

1,809,595

 

 

 

1,809,595

 

Prepaid expenses and other current assets

 

 

147,760

 

3,299

 

 

151,059

 

Current assets held for sale

 

 

179,442

 

 

 

179,442

 

Total current assets

 

 

4,003,120

 

530,650

 

(337,627

)

4,196,143

 

Property, plant and equipment, net

 

 

1,401,924

 

 

 

1,401,924

 

Goodwill

 

 

1,421,120

 

 

 

1,421,120

 

Other intangibles, net

 

 

518,167

 

50,753

 

 

568,920

 

Deferred tax assets

 

 

522,674

 

 

 

522,674

 

Investment in subsidiaries

 

8,971,553

 

52,591

 

 

(9,024,144

)(b)

 

Intercompany receivable

 

 

3,949,896

 

 

(3,949,896

)(a)

 

Other assets

 

 

211,415

 

7,257

 

 

218,672

 

Total assets

 

$

8,971,553

 

$

12,080,907

 

$

588,660

 

$

(13,311,667

)

$

8,329,453

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

90

 

$

18,935

 

$

 

$

 

$

19,025

 

Accounts payable

 

 

1,762,078

 

5,699

 

 

1,767,777

 

Intercompany payable

 

 

 

337,627

 

(337,627

)(a)

 

Accrued salaries, wages and other current liabilities

 

74,552

 

781,315

 

174,425

 

 

1,030,292

 

Total current liabilities

 

74,642

 

2,562,328

 

517,751

 

(337,627

)

2,817,094

 

Long-term debt, less current maturities

 

3,134,704

 

 

 

 

3,134,704

 

Lease financing obligations, less current maturities

 

 

28,874

 

 

 

28,874

 

Intercompany payable

 

3,949,896

 

 

 

(3,949,896

)(a)

 

Other noncurrent liabilities

 

 

518,152

 

18,318

 

 

536,470

 

Total liabilities

 

7,159,242

 

3,109,354

 

536,069

 

(4,287,523

)

6,517,142

 

Commitments and contingencies

 

 

 

 

 

 

Total stockholders’ equity

 

1,812,311

 

8,971,553

 

52,591

 

(9,024,144

)(b)

1,812,311

 

Total liabilities and stockholders’ equity

 

$

8,971,553

 

$

12,080,907

 

$

588,660

 

$

(13,311,667

)

$

8,329,453

 

 


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

 

(b)                                 Elimination of investments in consolidated subsidiaries.

 

28



Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

 

 

Rite Aid Corporation
Condensed Consolidating Balance Sheet
March 3, 2018

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

441,244

 

$

6,090

 

$

 

$

447,334

 

Accounts receivable, net

 

 

1,502,507

 

366,593

 

 

1,869,100

 

Intercompany receivable

 

 

 

223,413

 

 

(223,413

)(a)

 

Inventories, net of LIFO reserve of $0, $581,090, $0, $0, and $581,090

 

 

1,799,539

 

 

 

1,799,539

 

Prepaid expenses and other current assets

 

 

176,678

 

4,503

 

 

181,181

 

Current assets held for sale

 

 

438,137

 

 

 

438,137

 

Total current assets

 

 

4,581,518

 

377,186

 

(223,413

)

4,735,291

 

Property, plant and equipment, net

 

 

1,431,246

 

 

 

1,431,246

 

Goodwill

 

 

1,421,120

 

 

 

1,421,120

 

Other intangibles, net

 

 

539,115

 

51,328

 

 

590,443

 

Deferred tax assets

 

 

594,019

 

 

 

594,019

 

Investment in subsidiaries

 

8,745,390

 

54,076

 

 

(8,799,466

)(b)

 

Intercompany receivable

 

 

3,189,419

 

 

(3,189,419

)(a)

 

Other assets

 

 

209,926

 

7,282

 

 

217,208

 

Noncurrent assets held for sale

 

 

 

 

 

 

Total assets

 

$

8,745,390

 

$

12,020,439

 

$

435,796

 

$

(12,212,298

)

$

8,989,327

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

90

 

$

20,671

 

$

 

$

 

$

20,761

 

Accounts payable

 

 

1,641,676

 

9,687

 

 

1,651,363

 

Intercompany payable

 

 

 

223,413

 

(223,413

)(a)

 

Accrued salaries, wages and other current liabilities

 

65,223

 

1,031,379

 

135,134

 

 

1,231,736

 

Current liabilities held for sales

 

549,549

 

10,656

 

 

 

560,205

 

Total current liabilities

 

614,862

 

2,704,382

 

368,234

 

(223,413

)

3,464,065

 

Long-term debt, less current maturities

 

3,340,099

 

 

 

 

3,340,099

 

Lease financing obligations, less current maturities

 

 

30,775

 

 

 

30,775

 

Intercompany payable

 

3,189,419

 

 

 

(3,189,419

)(a)

 

Other noncurrent liabilities

 

 

539,892

 

13,486

 

 

553,378

 

Noncurrent liabilities held for sale

 

 

 

 

 

 

Total liabilities

 

7,144,380

 

3,275,049

 

381,720

 

(3,412,832

)

7,388,317

 

Commitments and contingencies

 

 

 

 

 

 

Total stockholders’ equity

 

1,601,010

 

8,745,390

 

54,076

 

(8,799,466

)(b)

1,601,010

 

Total liabilities and stockholders’ equity

 

$

8,745,390

 

$

12,020,439

 

$

435,796

 

$

(12,212,298

)

$

8,989,327

 

 


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

 

(b)                                 Elimination of investments in consolidated subsidiaries.

 

29



Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 2, 2018 and June 3, 2017

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirteen Weeks Ended June 2, 2018
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Revenues

 

$

 

$

5,321,025

 

$

95,584

 

$

(28,119

)(a)

$

5,388,490

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

4,158,627

 

89,032

 

(27,918

)(a)

4,219,741

 

Selling, general and administrative expenses

 

 

1,144,832

 

7,996

 

(201

)(a)

1,152,627

 

Lease termination and impairment charges

 

 

9,859

 

 

 

9,859

 

Interest expense

 

59,939

 

2,946

 

(93

)

 

62,792

 

Loss on debt retirements

 

 

554

 

 

 

554

 

Gain on sale of assets, net

 

 

(5,859

)

 

 

(5,859

)

Equity in earnings of subsidiaries, net of tax

 

(278,970

)

1,485

 

 

277,485

(b)

 

 

 

(219,031

)

5,312,444

 

96,935

 

249,366

 

5,439,714

 

Income (loss) from continuing operations before income taxes

 

219,031

 

8,581

 

(1,351

)

(277,485

)

(51,224

)

Income tax expense (benefit)

 

 

(9,631

)

134

 

 

(9,497

)

Net income (loss) from continuing operations

 

$

219,031

 

$

18,212

 

$

(1,485

)

$

(277,485

)(b)

$

(41,727

)

Net income (loss) from discontinued operations

 

(4,615

)

260,758

 

 

 

256,143

 

Net income (loss)

 

214,416

 

278,970

 

(1,485

)

(277,485

)

214,416

 

Total other comprehensive income (loss)

 

364

 

364

 

 

(364

)

364

 

Comprehensive (loss) income

 

$

214,780

 

$

279,334

 

$

(1,485

)

$

(277,849

)

$

214,780

 

 


(a)                                 Elimination of intercompany revenues and expenses.

 

(b)                                 Elimination of equity in earnings of 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