0001125282-01-502199.txt : 20011019 0001125282-01-502199.hdr.sgml : 20011019 ACCESSION NUMBER: 0001125282-01-502199 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010901 FILED AS OF DATE: 20011012 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RITE AID CORP CENTRAL INDEX KEY: 0000084129 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 231614034 STATE OF INCORPORATION: DE FISCAL YEAR END: 0302 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05742 FILM NUMBER: 1757883 BUSINESS ADDRESS: STREET 1: 30 HUNTER LANE CITY: CAMP HILL OWN STATE: PA ZIP: 17011 BUSINESS PHONE: 7177612633 MAIL ADDRESS: STREET 1: PO BOX 3165 CITY: HARRISBURG STATE: PA ZIP: 17105 FORMER COMPANY: FORMER CONFORMED NAME: LEHRMAN LOUIS & CO DATE OF NAME CHANGE: 19680510 FORMER COMPANY: FORMER CONFORMED NAME: RACK RITE DISTRIBUTORS DATE OF NAME CHANGE: 19680510 10-Q 1 b314119_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 1, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _____ To _____ Commission File Number 1-5742 RITE AID CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of 23-1614034 incorporation or organization) (I.R.S. Employer 30 Hunter Lane, Identification No.) 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. _X_ Yes ___ No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The registrant had 515,957,766 shares of its $1.00 par value common stock outstanding as of September 29, 2001. RITE AID CORPORATION TABLE OF CONTENTS Page Cautionary Statement Regarding Forward Looking Statements 1 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements: Condensed Consolidated Balance Sheets as of September 1, 2001 and March 3, 2001 2 Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended September 1, 2001 and August 26, 2000 3 Condensed Consolidated Statements of Operations for the Twenty-Six Week Periods Ended September 1, 2001 and August 26, 2000 4 Condensed Consolidated Statement of Stockholders' Equity (Deficit) for the Twenty-Six Week Period Ended September 1, 2001 5 Condensed Consolidated Statements of Cash Flows for the Twenty-Six Week Periods Ended September 1, 2001 and August 26, 2000 6 Notes to Condensed Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 28 ITEM 2. Changes in Securities and Use of Proceeds 28 ITEM 3. Defaults Upon Senior Securities 30 ITEM 4. Submission of Matters to a Vote of Security Holders 30 ITEM 5. Other Information 31 ITEM 6. Exhibits and Reports on Form 8-K 31 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as "anticipate," "believe," "intend," "estimate," "expect," "continue," "should," "could," "may," "plan," "project," "predict," "will" and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies. Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to: o our high level of indebtedness; o our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our credit facilities and other debt agreements; o our ability to improve the operating performance of our existing stores, and, in particular, our new and relocated stores in accordance with our management's long term strategy; o the outcomes of pending lawsuits and governmental investigations, both civil and criminal, involving our financial reporting and other matters; o competitive pricing pressures, continued consolidation of the drugstore industry; o third-party prescription reimbursement levels and regulatory changes governing pharmacy practices; o general economic conditions, inflation and interest rate movements; o merchandise supply constraints or disruptions; o access to capital; and o our ability to further develop, implement and maintain reliable and adequate internal accounting systems and controls. We undertake no obligation to revise the forward-looking statements included in this report to reflect any future events or circumstances. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations---Factors Affecting Our Future Prospects" included in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 3, 2001 ("the Fiscal 2001 10-K"), which was filed with the Securities and Exchange Commission ("SEC") on May 21, 2001 and is available on the SEC's website at www.sec.gov. 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (unaudited)
September 1, 2001 March 3, 2001 ----------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 109,140 $ 92,290 Accounts receivable, net 559,275 503,527 Inventories, net 2,562,561 2,444,525 Investment in AdvancePCS -- 491,198 Prepaid expenses and other current assets 86,542 85,292 ----------- ----------- Total current assets 3,317,518 3,616,832 PROPERTY, PLANT AND EQUIPMENT, NET 2,313,772 3,041,008 GOODWILL AND OTHER INTANGIBLES, NET 1,009,842 1,067,339 OTHER ASSETS 193,152 188,732 ----------- ----------- Total assets $ 6,834,284 $ 7,913,911 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Short-term debt and current maturities of long-term debt and lease financing obligations $ 32,706 $ 36,956 Accounts payable 1,022,456 896,390 Sales and other taxes payable 47,961 31,562 Accrued salaries, wages and other current liabilities 809,175 696,047 ----------- ----------- Total current liabilities 1,912,298 1,660,955 CONVERTIBLE SUBORDINATED NOTES 152,010 357,324 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,342,227 4,428,871 LEASE FINANCING OBLIGATIONS, LESS CURRENT MATURITIES 212,483 1,071,397 OTHER NONCURRENT LIABILITIES 742,600 730,342 ----------- ----------- Total liabilities 6,361,618 8,248,889 COMMITMENTS AND CONTINGENCIES -- -- REDEEMABLE PREFERRED STOCK 19,510 19,457 STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, par value $1 per share 347,342 333,974 Common stock, par value $1 per share 515,939 348,055 Additional paid-in capital 3,166,207 2,065,301 Accumulated deficit (3,634,160) (3,171,956) Stock-based and deferred compensation 58,450 19,782 Accumulated other comprehensive (loss) income (622) 50,409 ----------- ----------- Total stockholders' equity (deficit) 453,156 (354,435) ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 6,834,284 $ 7,913,911 =========== ===========
See accompanying notes to condensed consolidated financial statements. 2 RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (unaudited)
Thirteen Week Period Ended ---------------------------- September 1, August 26, 2001 2000 ----------- ----------- REVENUES $ 3,691,074 $ 3,439,469 COSTS AND EXPENSES: Costs of goods sold, including occupancy costs 2,872,390 2,630,258 Selling, general and administrative expenses 809,949 855,082 Goodwill amortization 5,280 5,627 Store closing and impairment charges 22,105 88,292 Interest expense 102,377 182,108 Interest rate swap contracts market value adjustment 31,047 -- Loss on debt and lease conversions and modifications, net 21,882 83,789 Share of loss from equity investment 4,512 12,496 (Gain) loss on sale of assets and investments, net (1,636) 6,850 ----------- ----------- 3,867,906 3,864,502 ----------- ----------- Loss from continuing operations before income taxes (176,832) (425,033) INCOME TAX EXPENSE 2,500 -- ----------- ----------- Loss from continuing operations before extraordinary item (179,332) (425,033) DISCONTINUED OPERATIONS, estimated loss on disposal of the PBM segment (net of income tax benefit of $23,484) -- (31,433) ----------- ----------- Net loss before extraordinary item (179,332) (456,466) EXTRAORDINARY ITEM, loss on early extinguishment of debt (net of income taxes of $0) (66,589) -- ----------- ----------- NET LOSS $ (245,921) $ (456,466) =========== =========== BASIC AND DILUTED (LOSS) PER SHARE: Loss from continuing operations $ (0.40) $ (1.87) Loss from discontinued operations -- (0.10) Loss from extraordinary item (0.14) -- ----------- ----------- Net loss per share $ (0.54) $ (1.97) =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (unaudited)
Twenty-Six Week Period Ended ----------------------------- September 1, August 26, 2001 2000 ----------- ----------- REVENUES $ 7,401,207 $ 6,881,655 COSTS AND EXPENSES: Costs of goods sold, including occupancy costs 5,713,130 5,264,711 Selling, general and administrative expenses 1,667,999 1,706,965 Goodwill amortization 10,623 11,701 Store closing and impairment charges 21,741 104,437 Interest expense 231,066 353,483 Interest rate swap contracts market value adjustment 31,047 -- Loss on debt and lease conversions and modifications, net 154,595 83,789 Share of loss from equity investment 10,395 24,070 (Gain) loss on sale of assets and investments, net (51,455) 16,526 ----------- ----------- 7,789,141 7,565,682 ----------- ----------- Loss from continuing operations before income taxes (387,934) (684,027) INCOME TAX EXPENSE 2,500 144,382 ----------- ----------- Loss from continuing operations before extraordinary item (390,434) (828,409) DISCONTINUED OPERATIONS: Income from discontinued operations (net of income tax expense of $13,846) -- 11,335 Estimated loss on disposal of the PBM segment (net of income tax benefit of $734) -- (334,763) ----------- ----------- Net loss before extraordinary item (390,434) (1,151,837) EXTRAORDINARY ITEM, loss on early extinguishment of debt (net of income taxes of $0) (66,589) -- ----------- ----------- NET LOSS $ (457,023) $(1,151,837) =========== =========== BASIC AND DILUTED (LOSS) PER SHARE: Loss from continuing operations $ (0.95) $ (3.48) Loss from discontinued operations -- (1.12) Loss from extraordinary item (0.15) -- ----------- ----------- Net loss per share $ (1.10) $ (4.60) =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) For the Twenty-Six Week Period Ended September 1, 2001 (Dollars and share information in thousands) (unaudited)
Stock-Based Accumulated Preferred Stock Common Stock Additional and Other ------------------- -------------------- Paid-in Accumulated Deferred Comprehensive Shares Class B Shares Issued Capital Deficit Compensation Income/(Loss) Total --------- -------- --------- --------- ----------- ----------- ----------- ------------- ----------- BALANCE MARCH 3, 2001 3,340 $333,974 348,055 $348,055 $2,065,301 $(3,171,956) $19,782 $50,409 $(354,435) Net loss (457,023) (457,023) Other comprehensive loss: Sale of investment in AdvancePCS (51,031) (51,031) Cash flow hedge transition liability adjustment (29,010) (29,010) Cash flow hedge market value adjustment (2,037) (2,037) Elimination of cash flow hedge accounting 31,047 31,047 ----------- Comprehensive loss (508,054) Bond conversions 86,386 86,386 649,797 736,183 Issuance of common stock 80,083 80,083 448,321 528,404 Issuance of common stock warrants 982 982 8,018 9,000 Preferred stock conversion reset (5,181) 5,181 --- Accretion of convertible preferred stock 5,181 (5,181) --- Deferred compensation plans 88 88 659 38,604 39,351 Stock options exercised 374 374 1,640 2,014 Stock forfeitures (29) (29) (53) 64 (18) Dividends on preferred stock 133 13,368 (13,368) --- Increase resulting from sale of stock by equity method investee 711 711 --------- -------- --------- --------- ----------- ----------- ----------- ----------- ----------- BALANCE SEPTEMBER 1, 2001 3,473 $347,342 515,939 $515,939 $3,166,207 $(3,634,160) $58,450 $(622) $453,156 ========= ======== ========= ========= =========== =========== =========== =========== =========== -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. 5 RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited)
Twenty-Six Week Period Ended ---------------------------- September 1, August 26, 2001 2000 ----------- ----------- OPERATING ACTIVITIES: Net loss $ (457,023) $(1,151,837) Extraordinary loss 66,589 -- Income from discontinued operations -- (11,335) Loss on disposal of discontinued operations -- 334,763 ----------- ----------- Loss from continuing operations (390,434) (828,409) Adjustments to reconcile to net cash used in operations: Depreciation and amortization 180,176 188,601 Store closing and impairment charges 21,741 104,437 Non cash stock-charge 42,247 4,481 Interest rate swap contracts market value adjustment 31,047 -- Loss on debt and lease conversions and modifications, net 154,595 83,789 (Gain) loss on sale of assets and investments, net (51,455) 16,526 Changes in operating assets and liabilities (36,238) (131,460) ----------- ----------- NET CASH USED IN CONTINUING OPERATIONS (48,321) (562,035) ----------- ----------- NET CASH USED IN DISCONTINUED OPERATIONS -- (9,799) ----------- ----------- INVESTING ACTIVITIES: Expenditures for property, plant and equipment (127,300) (59,930) Proceeds from the repayment/sale of AdvancePCS securities 484,214 -- Intangible assets acquired (4,900) (3,300) Proceeds from dispositions 12,684 43,000 ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 364,698 (20,230) ----------- ----------- FINANCING ACTIVITIES: Principal payments on long-term debt (2,134,435) (1,440,793) Proceeds from the issuance of the senior credit facility 1,378,462 -- Net (payments) of commercial paper borrowings -- (192,000) Deferred financing costs paid (73,972) (64,544) Net proceeds from bank loans -- 2,181,724 Proceeds from issuance of stock 530,418 -- Other financing activities, net -- 215 ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (299,527) 484,602 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,850 (107,462) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,290 179,757 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 109,140 $ 72,295 =========== ===========
6 SUPPLEMENTARY CASH FLOW DATA: Cash paid: Interest (net of capitalized amounts of $0 and $671) $ 250,070 $ 280,293 =========== =========== Income tax refunds (payments) $ (7,675) $ 86,767 =========== =========== Non-cash investing and financing activities: Conversion of debt to common stock $ 588,711 $ 462,610 =========== =========== Conversion of debt to debt $ 152,025 $ 411,442 =========== =========== Components of conversion of leases from capital to operating: Reduction in leased assets, net $ 704,191 -- =========== =========== Reduction in lease financing obligations $ 850,792 -- =========== =========== Increase in deferred gain $ 168,483 -- =========== ===========
See accompanying notes to condensed consolidated financial statements. 7 RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Thirteen and Twenty-Six Week Periods Ended September 1, 2001, and August 26, 2000 (Dollars and share information in thousands, except per share amounts) (unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. The accompanying financial information reflects all adjustments (consisting primarily of normal recurring adjustments except as described in these notes), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen and twenty-six week periods ended September 1, 2001 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's fiscal 2001 Annual Report on Form 10-K filed with the SEC. Certain reclassifications have been made to prior years' amounts to conform to current year classifications. 2. Loss Per Share Following is a summary of the components of the numerator and denominator of the basic loss per share computation:
Thirteen Week Period Ended Twenty-Six Week Period Ended -------------------------------- ----------------------------- September 1, August 26, September 1, August 26, 2001 2000 2001 2000 -------------- ------------- ------------- -------------- Numerator for earnings per share: Loss from continuing operations $ (179,332) $ (425,033) $ (390,434) $ (828,409) Preferred stock beneficial conversion and reset (5,181) (160,915) (5,181) (160,915) Cumulative preferred stock dividends (6,688) (6,442) (13,368) (12,403) ----------- ----------- ----------- ----------- Net loss from continuing operations attributable to common stockholders (191,201) (592,390) (408,983) (1,001,727) Total loss from discontinued operations --- (31,433) --- (323,428) Extraordinary item, loss on early extinguishment of debt (66,589) --- (66,589) --- ----------- ----------- ----------- ----------- Net loss attributable to common stockholders $ (257,790) $ (623,823) $ (475,572) $(1,325,155) =========== =========== =========== =========== Denominator: Basic weighted average shares 477,464 316,111 432,390 288,093 =========== =========== =========== ===========
Fully diluted loss per share is not presented as the Company incurred losses for the thirteen and twenty-six week periods ended September 1, 2001 and August 26, 2000 and the amount would be antidilutive. At September 1, 2001, an aggregate of 147,268 potential common shares related to stock options, convertible notes, preferred stock, 8 warrants and shares committed to be issued in connection with the settlement of certain litigation, have been excluded from the computation of diluted earnings per share. 3. Business Segments The Company operated in a single business segment during the twenty-six week period ended September 1, 2001, the Retail Drug segment. This segment consists of the operation of retail drugstores across the United States. The drugstores' primary business is pharmacy services, with prescription drugs accounting for approximately 61.3% percent and 59.6% percent of total segment sales for the twenty-six week periods ended September 1, 2001 and August 26, 2000, respectively. In addition, the Company's drugstores offer a full selection of health and personal care products, seasonal merchandise and a large private label product line. The Company operated in two business segments in the twenty-six week period ended August 26, 2000, the Retail Drug segment and the PBM segment. Through its PBM segment, which consisted primarily of PCS Health Systems, Inc. ("PCS"), the Company offered pharmacy benefit management, mail-order pharmacy services, marketing prescription plans and other managed health care services to employers, health plans and their members and government-sponsored employee benefit programs. The Company has sold its PBM segment to Advance Paradigm Inc. (now known as "AdvancePCS"). As a result, the PBM segment has been reclassified and is accounted for as a discontinued operation in the accompanying financial statements. The Company's continuing operations consist solely of the Retail Drug segment. 4. Discontinued Operations On October 2, 2000, the Company sold its wholly owned subsidiary, PCS, to AdvancePCS. The proceeds from the sale of PCS consisted of $710,557 in cash, $200,000 in principal amount of AdvancePCS's unsecured 11% senior subordinated notes and equity securities of AdvancePCS. During March 2001, the Company sold the AdvancePCS equity securities for $284,214 resulting in a gain of $53,214, which was recognized during the thirteen week period ended June 2, 2001. The recognition resulted in a reduction of other comprehensive income of $51,031, which represented the appreciation in the market value of the equity securities from date of acquisition of the securities through March 3, 2001. Additionally, AdvancePCS repurchased the unsecured 11% senior subordinated notes for $200,000 plus accrued interest. PCS is reported as a discontinued operation for the thirteen and twenty-six week periods ended August 26, 2000, and the operating results of PCS are reflected separately from the results of continuing operations. As a result of the sale, the Company recorded an increase to the tax valuation allowance and income tax expense of $146,917 in the twenty-six week period ended August 26, 2000. 5. Store Closing and Impairment Charges Store closing and impairment charges (credits) consist of:
Thirteen Week Period Ended Twenty-six Week Period Ended ---------------------------------- ----------------------------------- September 1, August 26, September 1, August 26, 2001 2000 2001 2000 --------------- ------------- ---------------- -------------- Impairment charges $ 8,690 $ 17,922 $ 16,583 $ 25,824 Store and equipment lease exit charges (credits) 13,415 (6,875) 4,847 1,368 Impairment of other assets --- 77,245 311 77,245 --------------- ------------- ---------------- -------------- $ 22,105 $ 88,292 $ 21,741 $ 104,437 =============== ============= ================ ==============
Impairment Charges 9 Impairment charges include non-cash charges of $4,490 and $17,922 for the thirteen week periods ended September 1, 2001 and August 26, 2000, respectively, for the impairment of long-lived assets (including allocable goodwill) at 13 and 60 stores, respectively. Impairment charges include non-cash charges of $12,383 and $25,824 for the twenty-six week periods ended September 1, 2001 and August 26, 2000, respectively, for the impairment of long-lived assets (including allocable goodwill) at 30 and 102 stores, respectively. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store. Also included in impairment charges for the thirteen and twenty-six weeks ended September 1, 2001 are approximately $4,200 of costs related to software. The Company has an investment in the common stock of drugstore.com, which is accounted for under the equity method. The initial investment was valued based upon the initial public offering price of drugstore.com. During the thirteen week period ended August 26, 2000, the Company recorded an impairment of its investment in drugstore.com's stock of $77,245 that the Company believes to be other-than-temporary. Store and Equipment Lease Exit Costs. Costs incurred to close a store, which principally consist of lease termination costs, are recorded at the time management commits to closing the store, which is the date that the closure is formally approved by senior management, or in the case of a store to be relocated, the date the new property is leased or purchased. The Company calculates its liability for closed stores on a store-by-store basis. The calculation includes the future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations. This liability is discounted using a risk-free rate of interest. The Company evaluates these assumptions at each interim period and adjusts the liability accordingly. During the thirteen week periods ended September 1, 2001 and August 26, 2000 the Company recorded a provision for 26 and 16 stores, respectively, that were designated for closure. During the twenty-six week periods ended September 1, 2001 and August 26, 2000, the Company recorded a provision for 33 and 34 stores, respectively, that were designated for closure. Also included in this line are charges of approximately $1,300 incurred in the thirteen weeks ended September 1, 2001, related to the early termination of an equipment lease. The reserve for store and equipment lease exit costs includes the following activity:
Thirteen Week Period Ended Twenty-six Week Period Ended -------------------------------- ---------------------------------- September 1, August 26, September 1, August 26, 2001 2000 2001 2000 -------------- ------------- ---------------- -------------- Balance --- beginning of period $ 216,961 $ 213,706 $ 233,008 $ 212,812 Provision for present value of noncancellable lease payments of stores designated to be closed 18,474 8,952 21,565 28,309 Changes in assumptions about future sublease income, terminations, and changes in interest rates (1,949) (12,843) (10,093) (19,609) Reversals of reserves for stores that management has determined will remain open (3,110) (2,984) (6,625) (7,332) Interest accretion 2,350 3,021 4,683 5,724 Cash payments, net of sublease income (12,901) (9,795) (22,713) (19,847) -------------- ------------- ---------------- -------------- Balance --- end of period $ 219,825 $ 200,057 $ 219,825 $ 200,057 ============== ============= ================ ==============
6. Indebtedness, Credit Agreements and Lease Financing Obligations 10 Following is a summary of indebtedness and lease financing obligations at September 1, 2001 and March 3, 2001:
September 1, 2001 March 3, 2001 --------------------------------------------------- Secured Debt: Senior secured credit facility ("SCF") $ 1,378,462 $ --- Senior facility --- 682,000 Revolving Credit Facility due 2002 ("RCF") --- 730,268 Term loan due 2002 ("PCS") --- 591,391 Exchange debt --- 216,126 10.5% senior secured notes due 2002 21,879 467,500 12.5% senior secured notes due 2006 143,311 --- Other 11,977 12,447 --------------------- ------------------------ 1,555,629 2,699,732 Lease Financing Obligations 224,180 1,100,000 Unsecured Debt: 6.7% notes due 2001 7,342 7,342 5.25% convertible subordinated notes due 2002 152,010 357,324 6.0% dealer remarketable securities due 2003 107,765 187,650 6.0% fixed-rate senior notes due 2005 194,500 194,500 7.625% senior notes due 2005 198,000 198,000 7.125% notes due 2007 350,000 350,000 6.125% fixed-rate senior notes due 2008 150,000 150,000 11.25% notes due 2008 150,000 --- 6.875% senior debentures due 2013 200,000 200,000 7.7% notes due 2027 300,000 300,000 6.875% fixed-rate senior notes due 2028 150,000 150,000 --------------------- ------------------------ 1,959,617 2,094,816 --------------------- ------------------------ Total debt 3,739,426 5,894,548 Short-term debt, current maturities of long-term debt and lease financing obligations (32,706) (36,956) --------------------- ------------------------ Long-term debt and lease financing obligations, less current maturities $ 3,706,720 $ 5,857,592 ===================== ========================
On June 27, 2001, the Company completed a major financial restructuring that extended the maturity dates of the majority of its debt to 2005 or beyond, provided additional equity and converted a portion of its debt to equity. These transactions are described below: New Senior Secured Credit Facility: The Company entered into a new $1,900,000 senior secured credit facility with a syndicate of banks led by Citicorp USA, Inc. as senior agent. The new facility matures on June 27, 2005 unless more than $20,000 of the 7.625% senior notes due April 15, 2005 are outstanding on December 31, 2004, in which event the maturity date is March 15, 2005. The new facility consists of a $1,400,000 term loan facility and a $500,000 revolving credit facility. The term loan was used to repay the outstanding balances of the old senior facility, PCS facility, RCF facility, the Exchange Debt and all but $21,879 of the 10.5% senior secured notes due September 2002. The revolving facility is available for working capital requirements, capital expenditures and general corporate purposes. Borrowings under the facilities generally bear interest either at LIBOR plus 3.5%, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 2.5%. The Company is required to 11 pay fees of 0.50% per annum on the daily unused amount of the revolving facility. Amortization payments of $5,000 related to the term loan begin March 2, 2002, increasing to $7,500 for the quarters ending May 31, 2002 through August 31, 2003 and $15,000 for the quarters ending November 30, 2003 through February 26, 2005. Substantially all of Rite Aid Corporation's wholly owned subsidiaries guarantee the obligations under the senior secured credit facility. The subsidiary guarantees are secured by a first priority lien on the inventory, accounts receivable, prescription files, intellectual property and some real estate assets of the subsidiary guarantors. Rite Aid Corporation is a holding company with no direct operations and is dependent upon dividends and other payments from its subsidiaries to service payments due under the senior secured credit facility. Rite Aid Corporation's obligations under the senior secured credit facility are unsecured. The senior secured credit facility contains customary covenants, which place restrictions on the assumption of debt, the payment of dividends, mergers, liens and sale and leaseback transactions. The senior secured credit facility has been amended to allow the Company, at its option, to issue up to $643,000 of unsecured debt that is not guaranteed by any subsidiaries of the Company, reduced by the following debt to the extent incurred: (i) $150,000 of financing transactions of existing owned real estate; (ii) $393,000 of additional debt secured by the facility's collateral on a second priority basis; and (iii) $100,000 of financing transactions for property or assets acquired after June 27, 2001. The $643,000 of permitted debt, whether secured or unsecured, is reduced by the aggregate outstanding, undefeased balances of the 5.25% convertible subordinated notes and the 6.0% dealer remarketable securities. The senior secured credit facility requires the Company to meet various financial ratios and limits capital expenditures. Beginning with the nine months ending December 1, 2001, the covenants require the Company to maintain a maximum leverage ratio of 8.25:1 decreasing to 3.5:1 for the twelve months ending May 31, 2005. The Company must also maintain a minimum interest coverage ratio of 1.25:1 for the nine months ending December 1, 2001, increasing to 2.8:1 for the twelve months ending May 31, 2005 and a minimum fixed charge coverage ratio of 0.9:1 for the nine months ending December 1, 2001 increasing to 1.25:1 for the twelve months ending May 31, 2005. Capital expenditures are limited to $200,000 annually beginning with the twelve months ending March 2, 2002. These expenditure limits are subject to upward adjustment based upon availability of excess liquidity as defined in the Company's senior secured credit facility. The senior secured credit facility provides for customary events of default, including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of the Company's debt to accelerate the maturity of debt having a principal amount of $25,000 or more. The Company's ability to borrow under the senior secured credit facility is based on a specified borrowing base consisting of eligible accounts receivable and inventory. At September 1, 2001, the term loan was fully drawn except for $21,538, which is available and may be drawn to pay the remaining outstanding 10.5% senior secured notes when they mature on September 15, 2002. At September 1, 2001, the Company had no outstanding draws on the revolving credit facility and the Company had additional available borrowing capacity of $423,898, net of outstanding letters of credit of $76,102. High Yield Notes: The Company issued $150,000 of 11.25% senior notes due July 2008 in a private placement offering. These notes are unsecured and subordinate to the secured debt of the Company. Among the transactions permitted by the 11.25% senior notes to increase debt are transactions to finance existing owned real estate not to exceed an aggregate $150,000 and $400,000 of other debt. The 11.25% senior notes also allow for the senior secured credit facility to be increased up to $2,500,000. Debt for Debt Exchange: The Company exchanged $152,025 of its existing 10.5% senior secured notes due 2002 for an equal amount of 12.5% senior notes due September 2006. In addition, holders of these notes received warrants to purchase 3,000 shares of Company common stock at $6.00 per share. On June 29, 2001, the warrant holders exercised these warrants, on a cashless basis, and as a result approximately 982 shares of common stock were issued. Tender Offer: On May 24, 2001, the Company commenced a tender offer for the 10.50% senior secured notes due 2002 at a price of 103.25% of the principal amount of the notes. The tender offer was closed on June 27, 12 2001, at which time $174,462 principal amount of the notes was tendered. The Company incurred a tender offer premium of $5,670 as a result of the transaction, which is included as a component of the extraordinary loss. The Company used proceeds from the new senior secured credit facility to pay for the notes tendered. Debt for Equity Exchanges and Sales of Capital Stock: The Company has completed the following debt for equity exchanges during the twenty-six weeks ended September 1, 2001.
Debt Exchanged Carrying Common Additional Amount Stock Paid-In Exchanged Capital ------------------------------------------------ PCS facility $ 14,478 $ 1,769 $ 13,867 RCF facility 169,906 26,370 158,388 5.25% convertible subordinated notes 205,308 29,750 307,686 6.00% dealer remarketable securities 79,885 12,382 55,633 10.50% notes due 2002 119,134 16,115 114,223 -------------- ------------ ------------ $ 588,711 $ 86,386 $ 649,797 ============== ============ ============
In addition to the debt for equity exchange transactions listed above, the Company sold approximately 80,083 shares of its common stock for net proceeds of $528,404, which resulted in an increase to common stock of $80,083, and additional paid in capital of $448,321. The Company issued approximately 2,122 shares of its Series C Convertible Preferred Stock in connection with the debt for equity exchanges. The Series C Convertible Preferred Stock was converted into 21,217 shares of common stock on July 30, 2001, at which time the Series C Convertible Preferred Stock was retired. As a result of the above exchanges, the Company recognized an aggregate loss of $151,907 for the twenty-six week period ended September 1, 2001. The amount of this loss related to the exchange of debt convertible into the Company's common stock is $132,713, and is classified as a component of operations. The remaining loss of $19,194 is classified as a component of the extraordinary loss. Lease Obligations: The Company surrendered certain renewal options contained in certain real estate leases on property previously sold and leased back to the Company and as a result these leases were afforded sale and leaseback accounting treatment and, accordingly have been reclassified as operating leases. This action resulted in a reduction of outstanding capital lease obligations of $850,792. Accordingly, the Company recognized a loss of $21,882 in the thirteen weeks ended September 1, 2001, and recorded a net deferred gain of $168,483, which will be amortized over the remaining noncancellable lease terms. In addition, the Company repaid certain obligations totaling $16,467 related to leasehold improvements. Synthetic Leases: The Company terminated existing synthetic lease agreements for certain land, buildings, equipment and aircraft, which were accounted for as operating leases. A wholly owned subsidiary of the Company purchased the equipment for $82,604, and is leasing the land, buildings and aircraft from different parties. The obligations under the new synthetic lease for the land and buildings are secured by a first priority lien on the equipment at the leased buildings owned by the Company's subsidiary. The Company has guaranteed certain of the obligations of the subsidiary. The Company accounted for these new leases as operating leases. Guarantees: Substantially all of Rite Aid Corporation's wholly-owned subsidiaries guarantee the obligations under the senior secured credit facility. The subsidiary guarantees are secured primarily by a first priority lien on the inventory, accounts receivable, prescription files, intellectual property and some real estate assets of the subsidiary guarantors. Rite Aid Corporation is a holding company with no direct operations and is dependent upon dividends and other payments from its subsidiaries to service payments due under the senior secured credit facility. Rite Aid Corporation's obligations under the senior secured credit facility are unsecured. The $21,879 aggregate principal amount of outstanding 10.5% senior secured notes are guaranteed by substantially all of the Company's wholly-owned subsidiaries, which are secured on a shared first priority basis with the new credit facility. The 12.5% 13 senior secured notes due 2006 are guaranteed by substantially all of the Company's wholly-owned subsidiaries, and are secured on a second priority basis by the same collateral as the new senior secured credit facility. Interest Rate Swap Contracts: In June 2000, the Company entered into an interest rate swap contract that fixes the LIBOR component of $500,000 of the Company's variable rate debt at 7.083% for a two-year period. In July 2000, the Company entered into an additional interest rate swap that fixes the LIBOR component of an additional $500,000 of variable rate debt at 6.946% for a two-year period. On March 4, 2001, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138. In connection with the adoption of the new statement, the Company recorded $29,010 in Other Comprehensive Income ("OCI") as a cumulative change in accounting for derivatives designated as cash flow type hedges prior to adopting SFAS 133. The Company enters into interest rate swap agreements to hedge the exposure to increasing rates with respect to its variable rate debt. These interest rate swap agreements were accounted for as cash flow hedges upon the initial adoption of SFAS 133. As a result of the June 27, 2001 refinancing, the Company's interest rate swaps no longer qualify for hedge accounting treatment and therefore, the changes in fair value of these interest rate swap contracts is required to be recorded as a component of net loss. For the thirteen week period ended September 1, 2001, the Company has recognized a charge of $31,047 representing the amount that the Company would have to pay the counter party to terminate these contracts. Other: As a result of the above transactions, the Company has recorded in the thirteen week period ended September 1, 2001 an extraordinary loss on early extinguishment of debt of $66,589 (including $40,735 of deferred debt issue costs written-off), loss on debt and lease conversions and modifications of $21,882, a charge of $31,047 related to interest rate swap contracts and deferred debt issue costs of $73,972. In March 2001, the Company sold its investment in AdvancePCS. Proceeds received from the sale were used to pay down $437,508 of borrowings under the PCS loan, and $46,596 of borrowings under the Exchange Debt. The aggregate annual principal payments of long-term debt and capital lease obligations for the five succeeding fiscal years are as follows: 2002, $11,838; 2003, $223,847; 2004, $166,248; 2005, $84,903; 2006, $1,653,557 and $1,599,033 in 2007 and thereafter. 7. Stockholders' Equity (Deficit) On June 27, 2001, the stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock, $1.00 par value, from 600,000 to 1,000,000. During the twenty-six week period ended September 1, 2001, the Company issued, as a dividend, 133 shares of 8% Series B cumulative pay-in-kind preferred ("Series B preferred stock") at $100 per share, which is the liquidation preference. The Series B Preferred Stock is convertible into shares of the Company's common stock at a conversion price of $5.50 per share. On October 3, 2001, the Company agreed to exchange all outstanding shares of Series B preferred stock for an equal number of shares of 8% Series D cumulative pay-in-kind preferred stock ("Series D preferred stock"). The Series D preferred stock differs from the Series B preferred stock only in that the consent of holders of the Series D preferred stock is not required in order for the Company to issue shares of the Company's capital stock that are on parity with the Series D preferred stock with respect to dividends and distributions upon liquidation, distribution or winding up. In November 2000, the Company reduced the exercise price of approximately 16,684 stock options issued after December 4, 1999 to $2.75 per share, which represents the fair market value of a share of common stock on the date of the repricing. In connection with the repricing, the Company recognizes compensation expense for these 14 options using variable plan accounting. Under variable plan accounting, the Company recognizes compensation expense over the option vesting period. In addition, subsequent changes in the market value of the Company's common stock during the option period, or until exercised, will generate changes in the compensation expense recognized on the repriced options. The Company recognized expense (reduction of expense) of $(2,750) and 37,129 during the thirteen and twenty-six week periods ended September 1, 2001, respectively, related to the repriced options. As of September 1, 2001, the stock-based and deferred compensation component of stockholders' equity is comprised of $70,873 related to the repriced options offset by $12,423 of deferred compensation. On June 15, 2001, in connection with the granting of certain restricted shares of common stock, the Company issued approximately $5,500 of loans to plan participants, including officers, in order to cover the participants' federal and state withholding taxes. The loans bear interest at 4.25% per annum and are due and payable upon the earlier of June 15, 2002 or the date the participant sells the underlying shares of common stock. 8. Commitments and Contingencies The Company is party to numerous legal proceedings, as described below. Federal investigations There are currently pending federal governmental investigations, both civil and criminal, by the SEC and the United States Attorney, involving the Company's financial reporting and other matters. Management is cooperating fully with the SEC and the United States Attorney. Settlement discussions have begun with the United States Attorney for the Middle District of Pennsylvania. The United States Attorney has proposed that the government would not institute any criminal proceeding against the Company if the Company enters into a consent judgement providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on the Company's results of operations, financial condition or cash flows. The U.S. Department of Labor has commenced an investigation of matters relating to the Company's employee benefit plans, including the Company's principal 401(k) plan, which permitted employees to purchase the Company's common stock. Purchases of the Company's common stock under the plan were suspended in October 1999. In January 2001, the Company appointed an independent trustee to represent the interests of these plans in relation to the Company and to investigate possible claims the plans may have against the Company. Both the independent trustee and the Department of Labor have asserted that the plans may have claims against the Company. The investigations, with which the Company is cooperating fully, are ongoing and the Company cannot predict their outcomes. In addition, a purported class action lawsuit on behalf of the plans and their participants has been filed by a participant in the plans in the United States District Court for the Eastern District of Pennsylvania. These investigations and settlement discussions are ongoing and the Company cannot predict their outcomes. If the Company were convicted of any crime, certain licenses and government contracts such as Medicaid plan reimbursement agreements that are material to operations may be revoked, which would have a material adverse effect on the Company's results of operations, financial condition or cash flows. In addition, substantial penalties, damages or other monetary remedies assessed against the Company, including a settlement, could also have a material adverse effect on the Company's results of operations, financial condition or cash flows. Stockholder litigation The Company, certain directors, its former chief executive officer Martin Grass, its former president Timothy Noonan, its former chief financial officer Frank Bergonzi, and its former auditor KPMG LLP, have been sued in a number of actions, most of which purport to be class actions, brought on behalf of stockholders who purchased the Company's securities on the open market between May 2, 1997 and November 10, 1999. Most of the complaints asserted claims under Sections 10 and 20 of the Securities Exchange Act of 1934, based upon the allegation that the Company's financial statements for fiscal 1997, fiscal 1998 and fiscal 1999 fraudulently misrepresented the Company's financial position and results of operation for those periods. All of these cases have been consolidated in the U.S. District Court for the Eastern District of Pennsylvania. On November 9, 2000, the Company announced that it had reached an agreement to settle the consolidated securities class action lawsuits pending 15 there and in the Delaware Court of Chancery. Under the agreement, the Company will pay $45,000 in cash, which will be fully funded by the Company's officers' and directors' liability insurance, and issue shares of common stock in 2002. The shares will be valued over a 10 day trading period in January 2002. If the value determined is at least $7.75 per share, the Company will issue 20,000 shares. If the value determined is less than $7.75 per share, the Company has the option to deliver any combination of common stock, cash and short-term notes, with a total value of $155,000. As additional consideration for the settlement, the Company has assigned to the plaintiffs all of the Company's claims against the above named executives and KPMG LLP. On August 16, 2001, the district court approved the settlement. Certain of the nonsettling defendants have appealed the order. The Company cannot predict the outcome of that appeal. If the settlement does not become final, this litigation could result in a material adverse effect on the Company's results of operations, financial condition or cash flows. Several members of the class have elected to "opt-out" of the class and, as a result, approval of the settlement becomes final and they will be free to individually pursue their claims. Management believes that their claims, individually and in the aggregate, are not material. A purported class action has been instituted by a stockholder against the Company in Delaware state court on behalf of stockholders who purchased shares of the Company's common stock prior to May 2, 1997, and who continued to hold them after November 10, 1999, alleging claims similar to the claims alleged in the consolidated securities class action lawsuits described above. The amount of damages sought was not specified and may be material. The Company has filed a motion to dismiss this claim which is pending before the court. These claims are ongoing and the Company cannot predict their outcome. An unfavorable outcome could result in a material adverse effect on the Company's results of operations, financial condition or cash flows. Drug pricing and reimbursement matters On October 5, 2000, the Company settled, for an immaterial amount, and without admitting any violation of the law, the lawsuit filed by the Florida Attorney General alleging that the Company's non-uniform pricing policy for cash prescription purchases was unlawful under Florida law. The filing of the complaint by the Florida Attorney General, and the Company's press release issued in conjunction therewith, precipitated an investigation by the New Jersey Attorney General which is ongoing and the filing of a purported federal class action in California and several purported state class actions, all of which (other than one pending in New York that was filed on October 5, 1999) have been dismissed. A motion to dismiss the action in New York is currently pending. On May 30, 2001, a complaint filed in New Jersey in which the plaintiff made a similar allegation and which the trial court dismissed for failing to state a claim upon which relief could be based was reinstated by the appellate court. Management believes that the remaining lawsuits are without merit under applicable state consumer protection laws. As a result, the Company intends to continue to vigorously defend against them and does not anticipate that if fully adjudicated, they will result in an award of damages. However, such outcomes cannot be assured and a ruling against the Company could have a material adverse effect on the results of operations, financial position or cash flows of the Company. The Company is being investigated by multiple state attorneys general for its reimbursement practices relating to partially-filled prescriptions and fully-filled prescriptions that are not picked up by ordering customers. The Company is supplying similar information with respect to these matters to the Department of Justice. Management believes that these investigations are similar to investigations, which were, and are being, undertaken with respect to the practices of others in the retail drug industry. Management also believes that the Company's existing policies and procedures fully comply with the requirements of applicable law. An individual acting on behalf of the United States of America has filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania under the Federal False Claims Act alleging that the Company defrauded federal healthcare plans by failing to appropriately issue refunds for partially filled prescriptions and prescriptions which were not picked up by customers. The Department of Justice has advised the court that it intends to join this lawsuit, as is its right under the law; its investigation is continuing. The Company has filed a motion to dismiss the complaint for failure to state a claim. The Company has reached a preliminary agreement to settle these investigations and the lawsuit by the private individual and recorded a charge in the thirteen weeks ended September 1, 2001 for $7,100. These claims are ongoing and if the preliminary settlement is not finalized, the Company cannot predict their outcome. If any of these cases result in a substantial monetary judgement against the Company, the Company's results of operations, financial position or cash flows could be materially adversely affected. 16 Store Management Overtime Litigation The Company is a defendant in a class action pending in the California Superior Court in San Diego with three subclasses, comprised of its California store managers, assistant managers and managers-in-training. The plaintiffs seek back pay for overtime not paid to them and injunctive relief to require the Company to treat its store management as non-exempt. They allege that the Company decided to minimize labor costs by causing managers, assistant managers and managers-in-training to perform the duties and functions of associates for in excess of forty hours per week without paying them overtime. Management believes that in-store management were and are properly classified as exempt from the overtime provisions of California law. On May 21, 2001, the Company entered into a Memorandum of Agreement with the plaintiffs under which, subject to approval of the court, the Company will settle this lawsuit for a maximum of $25,000, for which a charge was recorded in fiscal 2000. The settlement amount is payable in four equal installments of 25%, the first of which is payable upon final court approval of the settlement and the balance is payable 6, 12 and 18 months thereafter. On June 1, 2001 the court entered an order granting preliminary approval of the settlement and authorizing notice to the class. Other The Company, together with a significant number of major U.S. retailers, have been sued by the Lemelson Foundation in a complaint which alleges that portions of the technology included in the Company's point-of-sale system infringe upon a patent held by the plaintiffs. The amount of damages sought is unspecified and may be material. The Company cannot predict the outcome of this litigation or whether it could result in a material adverse effect on the Company's results of operations, financial condition or cash flows. The Company is subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of the Company's management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on the Company's results of operations, financial condition or cash flows if decided adversely. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Our long term operating strategy is to focus on improving the productivity of our existing store base. We believe that improving the sales of our existing stores is important to improving our future profitability and cash flow. We also believe that the substantial investment made in our store base has given us one of the most modern store bases in the industry. However, our store base has not yet achieved the level of sales productivity that our major competitors achieve. We intend to improve the performance of our existing stores by continuing to (i) capitalize on the substantial investment in our stores and distribution facilities; (ii) enhance our customer and employee relationships; and (iii) improve the product offerings in our stores. Moreover, it is estimated that pharmacy sales in the United States will increase more than 75% over the next five years. This anticipated growth is expected to be fueled by the "baby boom" generation entering their 50's, the increasing life expectancy of the American population, the introduction of several new successful drugs and inflation. We believe that this growth will help increase the sales productivity of our existing store base. We have initiated various programs that are designed to improve our image with customers. These include our weekly distribution of a nationwide advertising circular to announce vendor promotions, weekly sales items and, in our expanded test markets, our customer reward program, "Rite Rewards." We have also initiated programs that are specifically directed to our pharmacy business. These include reduced cash prices and an increased focus on attracting and retaining managed care customers. Through the use of technology and attention to customers' needs and preferences, we are increasing our efforts to identify inventory and product categories that will enable us to offer more personalized products and services to our customers. We continue to develop and implement employee training programs to improve customer service and educate our employees about the products we offer. We are also developing employee programs that create compensatory and other incentives for employees to provide customers with quality service, to promote our private label brands and to improve our corporate culture. We have also initiated a television advertising campaign. We continue to add popular and profitable product departments, such as our General Nutrition Companies, Inc. ("GNC") stores-within-Rite Aid-stores and one-hour photo development departments. We continue to develop ideas for new product departments and have begun to implement plans to expand the categories of our front-end products. During fiscal 2001, we undertook several initiatives to increase sales of our Rite Aid brand products and generic prescription drugs. As private label and generic prescription drugs generate higher margins than branded label, we expect that increases in the sales of these products would enhance our profitability. We believe that the addition of new departments and increases in offerings of products and services are integral components of our strategy to distinguish us from other national drugstore chains. Management believes that the following matters should be considered in connection with the discussion of results of operations and financial condition: Recent Actions. On June 27, 2001 we completed a major refinancing that extended the maturity dates of the majority of our debt to 2005 or beyond, provided additional equity, converted a portion of our debt for equity and reclassified capital leases to operating leases. See "Liquidity and Capital Resources - Refinancing" for further details. Maturing Store Base. Since the beginning of fiscal 1997, we built 469 new stores, relocated 952 stores, remodeled 435 stores and closed 1,196 stores. These new, relocated and remodeled stores represent approximately 50% of our total stores at September 1, 2001. The new and relocated stores opened in recent years are generally larger, free standing stores with higher operating expenses than our older stores. New stores generally do not become profitable until a critical mass of customers is developed. Relocated stores also must attract additional customers to achieve comparable profitability to the store that was replaced. We believe that the period of time required for a new store to achieve profitable operations is generally two to four years. This period can vary significantly based on the location of a particular store and on other factors, including the investments made in purchasing prescription files for the location and advertising. Our recent liquidity constraints have limited our ability to purchase prescription files and make other investments to promote the development of our new and relocated stores. We believe that our relatively high percentage of new and relocated stores is a significant factor in recent 18 operating results. However, we believe that as these newer stores mature they should gain the critical mass of customers needed for profitable operations. This continuing maturation should positively affect the Company's operating performance in future periods. If we are not able to improve the performance of these new and relocated stores it will adversely affect our ability to restore the profitability of our operations. Substantial Investigation Expenses. We continue to incur substantial expenses in connection with the process of defending us against various shareholder actions and cooperation with the U.S. Attorney's Office in its investigations. We incurred $9.0 million in the twenty-six week period ended September 1, 2001 and we expect to incur an additional $3.0 million to $8.0 million over the remainder of fiscal 2002. We expect to continue to incur significant legal and other expenses in connection with the ongoing litigation and investigations to which we are subject. Dilutive Equity Issuances. At September 1, 2001, 515.9 million shares of common stock were outstanding and additional 147.3 million shares of common stock were issuable related to outstanding stock options, convertible notes, preferred stock, warrants and shares committed to be issued in connection with the settlement of certain litigation. During the first and second quarters, we issued 86.4 million shares of common stock in exchange for $588.7 million of indebtedness. Certain transactions completed as part of our June 27, 2001 refinancing have further diluted the existing share base. See "Liquidity and Capital Resources - Refinancing" for further details. In light of our substantial leverage and liquidity constraints, we will continue to consider opportunities to use our equity securities to discharge debt or other obligations that may arise. Such issuances may have a dilutive effect on the outstanding shares of common stock. Accounting Systems. Following its review of our books and records in connection with our fiscal 2000 audit, management concluded that further steps were needed to establish and maintain the adequacy of our internal accounting systems and controls. In connection with the audit of our financial statements, Deloitte & Touche LLP advised us that it believed there were numerous "reportable conditions" under the standards established by the American Institute of Certified Public Accountants which relate to our accounting systems and controls and could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. We are further developing and implementing comprehensive, adequate and reliable accounting systems and controls which address the reportable conditions identified by Deloitte & Touche LLP. Working Capital. We generally finance our inventory and capital expenditure requirements with internally generated funds and borrowings. We expect to use borrowings to finance inventories and to support our continued growth. Over 75% of our front-end sales are in cash. Third-party insurance programs, which typically settle in fewer than 30 days, accounted for 91.9% of our pharmacy sales in the twenty-six week period ended September 1, 2001. Seasonality. We experience seasonal fluctuations in our results of operations in the fourth quarter as the result of the seasonal nature of Christmas and the flu season. We tailor certain front-end merchandise to capitalize on holidays and seasons. 19 Results of Operations Revenues and Other Operating Data
Thirteen Week Period Ended Twenty-six Week Period Ended -------------------------------- ---------------------------------- September 1, August 26, September 1, August 26, 2001 2000 2001 2000 -------------- ------------- ---------------- -------------- Revenues $ 3,691,074 $ 3,439,469 $ 7,401,207 $ 6,881,655 Revenues growth 7.3% 7.4% 7.5% 4.9% Same store sales growth 8.9% 9.9% 9.1% 8.0% Pharmacy sales growth 9.8% 8.5% 10.2% 7.8% Same store pharmacy sales growth 11.7% 10.9% 11.8% 10.3% Pharmacy as a % of total sales 61.0% 59.0% 61.3% 59.6% Third party sales as a % of total pharmacy sales 92.0% 90.0% 91.9% 89.8% Front-end sales growth 3.0% 5.5% 3.2% 2.0% Same store front end sales growth 4.8% 8.5% 5.0% 4.8% Front end sales as a % of total sales 39.0% 41.0% 38.7% 40.4% Store data: Total stores (beginning of period) 3,631 3,779 3,648 3,802 New stores --- 1 3 5 Closed stores (37) (13) (57) (40) Store acquisitions, net --- -- --- -- Total stores (end of period) 3,594 3,767 3,594 3,767 Relocated stores 4 19 8 43
Revenues The 7.3% and 7.5% growth in revenues for the thirteen and twenty-six week periods ended September 1, 2001 were driven by front end sales growth of 3.0% and 3.2%, respectively and pharmacy sales growth of 9.8% and 10.2%, respectively. Same store sales growth for the thirteen and twenty-six week periods ended September 1, 2001 was 8.9% and 9.1%, respectively. As the prior fiscal year was a 53 week year, same store sales for the thirteen and twenty-six week periods ended September 1, 2001 are calculated by comparing that period with the thirteen and twenty-six week periods ended September 2, 2000. For the thirteen and twenty-six week periods ended September 1, 2001, pharmacy sales led revenues growth with same-store sales increases of 11.7% and 11.8%, respectively. Pharmacy same store sales increases are due to both an increase in prescriptions filled and sales price per prescription. Also contributing to pharmacy same store sales increases is our ability to attract and retain managed care customers, our successful pilot markets for reduced cash pricing, our increased focus on pharmacy initiatives such as will call and predictive refill, and favorable industry trends. These trends include an aging American population with many "baby boomers" now in their fifties and consuming a greater number of prescription drugs. The use of pharmaceuticals as the treatment of choice for a growing number of healthcare problems and the introduction of a number of successful new prescription drugs also contributes to the growing demand for pharmaceutical products. Front end sales, which includes all non-prescription sales such as seasonal merchandise, convenience items and food, also had same store sales growth in the thirteen and twenty-six week periods ended September 1, 2001, increased 4.8% and 5.0%, respectively. The same store sales increase was primarily a result of increased sales volume due to lowering prices on key items, distributing a nationwide weekly advertising circular, expanding certain product categories and improving general store conditions. 20 Costs and Expenses
Thirteen Week Period Ended Twenty-six Week Period Ended -------------------------------- ---------------------------------- September 1, August 26, September 1, August 26, 2001 2000 2001 2000 -------------- ------------- ---------------- -------------- Cost of goods sold $ 2,872,390 $ 2,630,258 $ 5,713,130 $ 5,264,711 Gross profit 818,684 809,211 1,688,077 1,616,944 Gross margin 22.2% 23.5% 22.8% 23.5% Selling, general and administrative expenses 809,949 855,082 1,667,999 1,706,965 Selling, general and administrative expenses as a percentage of revenues 21.9% 24.9% 22.5% 24.8% Goodwill amortization 5,280 5,627 10,623 11,701 Store closing and impairment charges (credits) 22,105 88,292 21,741 104,437 Interest expense 102,377 182,108 231,066 353,483 Interest rate swap contracts market value adjustment 31,047 --- 31,047 --- Loss on debt and lease conversions and modifications, net 21,882 83,789 154,595 83,789 Share of loss from equity investment 4,512 12,496 10,395 24,070 (Gain) loss on sale of assets and investments, net (1,636) 6,850 (51,455) 16,526
Cost of Goods Sold Gross margin was 22.2% for the thirteen week period ended September 1, 2001 compared to 23.5% for the thirteen week period ended August 26, 2000. Gross margin was negatively impacted by the continuing trend of increased third party reimbursed prescription sales as a percent of total prescription sales, higher shrink costs, and lower cash prices on pharmacy sales. The increase in third party prescription sales had a negative impact on gross margin rates because they are paid by a person or entity other than the recipient of the prescribed pharmaceutical, and are generally subject to lower negotiated reimbursement rates in conjunction with a pharmacy benefit plan. Third party sales as a percentage of total pharmacy sales were 92.0% for the thirteen week period ended September 1, 2001 compared to 90.0% for the thirteen week period ended August 26, 2000, respectively. Partially offsetting this trend was a reduction in losses from product returns, and better leveraging of our fixed costs resulting from our higher sales volume. Gross margin was 22.8% for the twenty-six week period ended September 1, 2001, compared to 23.5% for the twenty-six week period ended August 26, 2000. Gross margin was negatively impacted by the continuing trend of increased third party reimbursed prescription sales as a percent of total prescription sales, higher shrink costs, and lower cash prices on pharmacy sales. Partially offsetting this trend was a reduction in loss for product returns, an improvement in liquor margin and better leveraging of our fixed costs resulting from our higher sales volume. We use the last-in, first-out (LIFO) method of inventory valuation, which is determined annually when inflation rates and inventory levels are finalized. Therefore, LIFO costs for interim period financial statements are estimated. Cost of sales includes a LIFO provision of $15.0 and $30.0 million for the thirteen and twenty-six week periods ended September 1, 2001 versus $6.4 million and $11.6 million for the thirteen and twenty-six week periods ended August 26, 2000. 21 Selling, General and Administrative Expenses The selling, general and administrative expense (SG&A) for the thirteen week period ended September 1, 2001 includes $5.6 million of expenses incurred in connection with our defense against shareholder actions and assisting the U.S. attorney's office in its investigation. Also included in SG&A expense for the thirteen week period ended September 1, 2001, is an expense of $7.1 million for the accrual of anticipated loss on certain legal matters. Offsetting these amounts is $.8 million of non-cash income related to variable plan accounting on certain management stock options, restricted stock grants, and stock appreciation rights, and receipt of $24.1 million for the settlement of litigation with certain drug manufacturers. Excluding these items results in an adjusted SG&A as a percentage of revenues of 22.3% for the thirteen week period ended September 1, 2001. SG&A for the thirteen week period ended August 26, 2000, includes $26.1 million of costs incurred with the restatement of our historical financial statements, offset by the receipt of $12.3 million related to the partial settlement of litigation with certain drug manufacturers. Excluding these items results in an adjusted SG&A as a percentage of revenue of 24.5% for the thirteen week period ended August 26, 2000. SG&A exclusive of these items in the thirteen week period of the current fiscal year of 22.3% compares favorably to the adjusted 24.5% of the prior year's comparable period because of decreased labor charges, decreased depreciation and amortization and store expenses resulting from a reduced store count, and better leveraging of our fixed costs resulting from our higher sales volume. SG&A for the twenty-six week period ended September 1, 2001 includes $9.0 million of expenses incurred in connection with our defense against shareholder actions and assisting the U.S. attorney's office in their investigation of former management. Also included in the SG&A expense for the twenty-six week period ended September 1, 2001, is a net expense of $2.9 million for the accrual of anticipated loss on certain legal matters and $42.2 million of non-cash expense related to variable plan accounting on certain management stock options, restricted stock grants and stock appreciation rights. Offsetting these amounts are receipts of $39.1 million for the settlement of litigation with certain drug manufacturers. Excluding these items, SG&A as a percentage of revenues was 22.3% for the twenty-six week period ended September 1, 2001. SG&A for the twenty-six week period ended August 26, 2000 includes $51.5 million of costs incurred with the restatement our historical financial statements, offset by a receipt of $12.3 million related to the partial settlement of litigation with certain drug manufacturers. Excluding these items results in an adjusted SG&A as a percentage of revenue of 24.2% in the twenty-six week period ended August 26, 2000. SG&A exclusive of these items in the period of the current fiscal year of 22.3% compares favorably to the adjusted 24.2% of the prior year's comparable period because of decreased labor charges, decreased depreciation and amortization and store expenses resulting from a reduced store count, and better leveraging of our fixed costs resulting from our higher sales volume. 22 Store Closing and Impairment Charges Store closing and impairment charges (credits) consist of:
Thirteen Week Period Ended Twenty-six Week Period Ended -------------------------------- ---------------------------------- September 1, August 26, September 1, August 26, 2001 2000 2001 2000 -------------- ------------- ---------------- -------------- Impairment charges $ 8,690 $ 17,922 $ 16,583 $ 25,824 Store and equipment lease exit charges (credits) 13,415 (6,875) 4,847 1,368 Impairment of other assets --- 77,245 311 77,245 -------------- ------------- ---------------- -------------- $ 22,105 $ 88,292 $ 21,741 $ 104,437 ============== ============= ================ ==============
Impairment Charges. Impairment charges include non-cash charges of $4.5 million and $17.9 million for the thirteen week periods ended September 1, 2001 and August 26, 2000, respectively, for the impairment of long-lived assets (including allocable goodwill) at 13 and 60 stores, respectively. Impairment charges include non-cash charges of $12.4 million and $25.8 million for the twenty-six week periods ended September 1, 2001 and August 26, 2000, respectively, for the impairment of long-lived assets (including allocable goodwill) at 30 and 102 stores, respectively. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store. Included in impairment charges for the thirteen week period ended September 1, 2001 are $4.2 million of costs related to software. We have an investment in the common stock of drugstore.com, which is accounted for under the equity method. The initial investment was valued based upon the initial public offering price of drugstore.com. During the thirteen week period ended August 26, 2000, we recorded a write-down of $77.2 million of our investment in drugstore.com. This write-down was based on a decline in the market price of drugstore.com's stock that we believe is other than temporary. Store and Equipment Lease Exit Costs. Charges incurred to close a store, which principally consist of lease termination costs, are recorded at the time management commits to closing the store, which is the date that the closure is formally approved by senior management, or in the case of a store to be relocated, the date the new property is leased or purchased. We calculate our liability for closed stores on a store-by-store basis. The calculation includes the future minimum lease payments and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations. This liability is discounted using a risk-free rate of interest. We evaluate these assumptions each quarter and adjust the liability accordingly. During the thirteen week periods ended September 1, 2001 and August 26, 2000 we recorded a provision for 26 and 16 stores, respectively, that were designated for closure. During the twenty-six week periods ended September 1, 2001 and August 26, 2000, we recorded a provision for 33 and 34 stores, respectively, that were designated for closure. Also included in this line are charges of $1.3 million incurred in the thirteen weeks ended September 1, 2001, related to the early termination of an equipment lease. Interest Expense Interest expense was $102.4 and $231.1 million for the thirteen and twenty-six week periods ended September 1, 2001, compared to $182.1 and $353.5 million in the thirteen and twenty-six week periods ended August 26, 2000. The decrease was primarily due to the reduction of debt resulting from the sale of PCS, debt for equity exchanges and the refinancing. The weighted average interest rates, excluding capital leases, on the company's indebtedness for the thirteen week periods ended September 1, 2001 and August 26, 2000 were 8.1% and 8.5%, respectively. 23 Interest Rate Swap Contracts Market Value Adjustment We enter into interest rate swap contracts to hedge the exposure to increasing rates with respect to our variable rate debt. As a result of the June 27, 2001 refinancing, the interest rate swap contracts no longer qualify for hedge accounting treatment and therefore, the changes in fair value of these interest rate swap contracts is required to be recorded as a component of net loss. For the thirteen and twenty-six weeks ended September 1, 2001, we recognized a charge of approximately $31.0 million representing the amount we would have to pay the counter party to terminate these contracts. Income Taxes The Federal tax benefit for the thirteen and twenty-six week periods ended September 1, 2001 and August 26, 2000 is fully offset by a valuation allowance based on management's determination that, based on available evidence, it is more likely than not that certain of the deferred tax assets will not be realized. The state tax provision reflects taxable income in certain states which do not allow combined or consolidated returns which would have benefited from the groups' loss. The income tax provision for the thirteen and twenty-six week periods ended August 26, 2000 reflects the effect of the decision to sell PCS and to discontinue the operations of our PBM segment. It is foreseeable that an "ownership change" for statutory purposes will occur during fiscal 2002 as a result of our refinancing efforts, including issuances of equity and exchanges of debt for equity. An "ownership change" would result in a limitation imposed on the future use of net operating losses and any net unrealized built-in losses incurred or existing prior to the "ownership change". Other Significant Charges The net loss from continuing operations for the thirteen week periods ended September 1, 2001 and August 26, 2000 was $179.3 million and $425.0 million, respectively. The net loss from continuing operations for the twenty-six week periods ended September 1, 2001 and August 26, 2000 was $390.4 million and $828.4 million, respectively. In addition to the matters discussed above, our results in the thirteen and twenty-six week periods ended September 1, 2001 and August 26, 2000 have been affected by other charges. In the thirteen week periods ended September 1, 2001 and August 26, 2000, we recorded pre-tax losses of $21.9 million and $83.8 million on debt and lease conversions and modifications and $4.5 million and $12.5 million representing our share of drugstore.com losses. In addition, we recorded an extraordinary loss of $66.6 million in the thirteen week period ended September 1, 2001, related to extinguishment of debt in the June 27, 2001 refinancing. In the twenty-six week periods ended September 1, 2001 and August 26, 2000, we recorded pre-tax losses of $154.6 million and $83.8 million on debt and lease conversions and modifications and losses of $10.4 million and $24.1 million representing our share of drugstore.com losses. In addition, we recorded a gain of $53.2 million in the twenty-six week period ending September 1, 2001 resulting from the sale of AdvancePCS securities. Liquidity and Capital Resources We have two primary sources of liquidity: (i) cash provided by operations and (ii) the revolving credit facility under our new senior secured credit facility. We may also generate liquidity from the sale of assets, including sale-leaseback transactions, the issuance of debt and equity securities and potential additional borrowings. Among the transactions permitted by our senior secured credit facility that will allow us to generate additional liquidity are (with some limitations related to other outstanding debt): transactions to finance existing owned real estate not to exceed an aggregate $150.0 million, the issuance of $393.0 million of additional debt secured by the facility's collateral on a second priority basis and $100.0 million of financing transactions with respect to property acquired after June 27, 2001, or at our option, we are permitted to issue unsecured debt, in lieu of any of the foregoing permitted debt. Our 11.25% senior notes due July 2008 also permit $150.0 million of real estate financing plus $400.0 million of additional other debt and provides for the senior secured credit facility to be increased up to $2.5 billion. Our principal uses of cash are to provide working capital for operations, service our obligations to pay interest and principal on debt, and to provide funds for capital expenditures. Refinancing On June 27, 2001, we completed a major refinancing that extended the maturity dates of the majority of our debt to 2005 or beyond, provided additional equity, converted a portion of our debt to equity and reclassified capital 24 leases to operating leases. The components of the refinancing are described in detail in the footnotes to the consolidated financial statements. Major components of the refinancing are summarized below: New Secured Credit Facility: We entered into a new $1.9 billion syndicated senior secured credit facility with a syndicate of banks led by Citicorp USA, Inc. as senior agent. The new facility matures on June 27, 2005 unless more than $20.0 million of our 7.625% senior notes due April 15, 2005 are outstanding on December 31, 2004, in which event the maturity date is March 15, 2005. The new facility consists of a $1.4 billion term loan facility and a $500.0 million revolving credit facility. The term loan was used to prepay various outstanding debt balances. Our ability to borrow under the senior secured credit facility is based on a specified borrowing base consisting of eligible accounts receivable and inventory. At June 30, 2001, the term loan was fully drawn except for $21.9 million, which is available and may be drawn to pay for the remaining outstanding 10.5% senior secured notes when they mature on September 15, 2002. At September 1, 2001, we had $423.9 million in additional available borrowing capacity under the revolving credit facility net of outstanding letters of credit of $76.1 million. High Yield Notes: We issued $150.0 million of 11.25% senior notes due July 2008 in a private placement offering. These notes are unsecured and subordinate to our secured debt. Debt for Debt Exchange: We exchanged $152.0 million of our existing 10.50% senior secured notes for an equal principal amount of 12.50% senior secured notes due September 15, 2006. The 12.50% notes are secured by a second priority lien on the collateral of the senior secured credit facility. In addition, holders of these notes received warrants to purchase 3.0 million shares of our common stock at $6.00 per share. On June 29, 2001, the warrant holders elected to exercise these warrants, on a cashless basis, and as a result 1.0 million shares of common stock were issued. Tender Offer: On May 24, 2001, we commenced a tender offer for the 10.50% senior secured notes due 2002 at a price of 103.25% of the principal amount. The tender offer was closed on June 27, 2001, at which time $174.5 million principal was tendered. We incurred a tender offer premium of $5.7 million as a result of the transaction. We used proceeds from the new senior secured credit facility to pay for the tender offer. Debt for Equity Exchanges: We completed exchanges of $588.7 million of debt for 86.4 million shares of common stock. Sales of Common Stock: We issued 80.1 million shares of our common stock for net proceeds of $528.4 million. Lease Obligations: We relinquished certain renewal options which had been available under the terms of certain real estate leases on property previously sold and leased back and reclassified the related leases as operating leases thereby reducing outstanding capital lease obligations by $850.8 million. Impact on Results of Operations in the Second Quarter of Fiscal 2002: As a result of the refinancing, we: i) recorded an extraordinary loss on early extinguishment of debt of $66.6 million; ii) recognized a loss of $21.9 million related to debt and lease conversions and modifications; and iii) recognized a charge of $31.0 million related to our interest rate swap agreements. On a prospective annual basis, the refinancing will reduce depreciation and amortization expense by approximately $4.0 million but increase rent expense by approximately $57.0 million. Interest expense is also expected to decrease due to the refinancing, the debt for equity exchanges affected prior to June 3, 2001, and the repayment of debt related to the sale of the AdvancePCS investments. Prospective annual interest expense is estimated to be $350.0 million to $370.0 million of which $300.0 million to $320.0 million is cash interest. Net Cash Provided by/Used in Operating, Investing and Financing Activities Cash Flows Our operating activities used $48.3 million of cash in the twenty-six week period ended September 1, 2001 and $562.0 million of cash in the twenty-six week period ended August 26, 2000. Operating cash flow was negatively impacted by $250.1 million in interest payments and increases in operating assets. 25 Cash provided by investing activities was $364.7 million for the twenty-six week period ended September 1, 2001, due primarily to the sale of the securities we received in our sale of AdvancePCS. Cash used in investing activities was $20.2 million for the twenty-six week period ended August 26, 2000. Cash used for store construction and relocations amounted to $23.8 million and $31.2 million for the twenty-six week periods ended September 1, 2001 and August 26, 2000, respectively. Cash (used in) provided by financing activities was $(299.5) million and $484.6 million for the twenty-six week periods ended September 1, 2001 and August 26, 2000, respectively. Proceeds form the issuance of the new senior secured credit facility, issuance of common stock, and the sale of our AdvancePCS securities were all used to pay down a significant portion of our debt, which significantly impacted cash used in financing activities in the twenty-six week period ended September 1, 2001. Working Capital Working capital was $1,405.2 million at September 1, 2001, compared to $1,955.9 million at March 3, 2001. The decrease in working capital is primarily due to the sale of the securities we received in our sale of AdvancePCS, proceeds of which were used to pay down long-term debt. Net working capital was also impacted by the reclassification of the previously classified non-current portion of the liability relating to the stockholder litigation settlement as a current liability. Capital Expenditures We plan capital expenditures of approximately $120.0 million during fiscal 2002, consisting of $62.9 million related to new store construction, store relocation and other store construction projects, and an additional $57.1 million which will be dedicated to other store improvement activities and the purchase of prescription files from independent pharmacists. In addition, as part of the June 27, 2001 refinancing, we expended $82.6 million related to the termination of an operating lease and the corresponding purchase of equipment bringing our total planned capital expenditures for the year to approximately $202.6 million. We expect that these capital expenditures will be financed primarily with cash flow from operations and borrowings under the revolving credit facility available under our senior secured facility. During the twenty-six week period ended September 1, 2001, we spent $132.2 million on capital expenditures, consisting of $23.8 million related to new store construction and relocation, $25.8 million related to other store improvement activities and the purchase of prescription files from independent pharmacists, and $82.6 million in conjunction with the refinancing. Future Liquidity We are highly leveraged. Our high level of indebtedness: (a) limits our ability to obtain additional financing; (b) limits our flexibility in planning for, or reacting to, changes in our business and the industry; (c) places us at a competitive disadvantage relative to our competitors with less debt; (d) renders us more vulnerable to general adverse economic and industry conditions; and (e) requires us to dedicate a substantial portion of our cash flow to service our debt. Based upon current levels of operations and planned improvements in our operating performance, management believes that cash flow from operations together with available borrowing under the senior secured credit facility and our other sources of liquidity will be adequate to meet our anticipated annual requirements for working capital, debt service and capital expenditures for the next twelve months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in light of our operating performance and other relevant circumstances. Should we determine, at any time, that it is necessary to seek additional short-term liquidity, we will evaluate our alternatives and take appropriate steps to obtain sufficient additional funds. Obtaining any such supplemental liquidity through the increase of indebtedness or asset sales may require the consent of the lenders under one or more of our debt agreements. There can be no assurance that any such supplemental funding, if sought, could be obtained or that our lenders would provide the necessary consents, if required. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS 141 also apply to 26 all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. We are currently evaluating the provisions of SFAS 142 and have not adopted such provisions in our September 1, 2001 condensed consolidated financial statements. Factors Affecting Our Future Prospects For a discussion of risks related to our financial condition, operations and industry, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Our Future Prospects" in our Form 10-K for the 2001 fiscal year, filed with the SEC on May 21, 2001. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. The major market risk exposure is changing interest rates. Increases in interest rates would increase our interest expense. Since the end of fiscal 2001, our primary risk exposure has not changed. Our company enters into debt obligations to support capital expenditures, acquisitions, working capital needs and general corporate purposes. Our policy is to manage interest rates through the use of a combination of variable-rate credit facilities, fixed-rate long-term obligations and derivative transactions. The table below provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal payments and the related weighted average interest rates by expected maturity dates as of September 1, 2001.
Fiscal Year ----------- Fair Value at 2002 2003 2004 2005 2006 Thereafter Total September 1, 2001 --------------------------------------------------------------------------------------- (dollars in thousands) Long-term debt, including current portion Fixed rate $8,245 $205,439 $146,104 $62,464 $1,267,873 $1,446,659 $3,136,784 $2,830,360 Average Interest Rate 6.84% 6.60% 10.49% 10.56% 9.37% 7.90% Interest Rate Swap --- --- --- --- --- --- --- $(31,047) Variable Rate --- --- --- 378,462 --- $378,462 $378,462 Average Interest Rates --- --- --- --- 7.19% ---
In June 2000, we refinanced certain variable and fixed-rate obligations maturing in fiscal years 2001 and 2002 and entered into an interest rate swap that fixes the LIBOR component of $500.0 million of our variable-rate debt at 7.083% for a two-year period. In July 2000, we entered into an additional interest rate swap that fixes the LIBOR component of an additional $500.0 million of variable rate debt at 6.946% for a two year period. The variable rate debt that had interest rates fixed by the two interest rate swaps were included with fixed rate debt in the above table. As of September 1, 2001, 10.8% of our total debt is exposed to fluctuations in variable interest rates. Our ability to satisfy interest payment obligations on our outstanding debt will depend largely on our future performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service our interest payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot assure you that any such borrowing or equity financing could be successfully completed. As of September 28, 2001, we had one credit facility: the $1.9 billion syndicated senior secured credit facility. The ratings on this facility were BB- by Standard & Poor's and B1 by Moody's. The interest rates on the variable rate borrowings on this facility are LIBOR plus 3.50%. 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings On November 9, 2000, we announced that we had reached an agreement to settle the consolidated securities class action lawsuits pending against us in the U.S. District Court for the Eastern District of Pennsylvania and the derivative lawsuits pending there and in the Delaware Court of Chancery. On August 16, 2001, the court approved the settlement. Certain of the defendants in those actions who were not included in the settlement have appealed the approval. Item 2. Changes in Securities and Use of Proceeds (a) none (b) none (c) We sold the following equity securities during the period covered by this report that were not registered under the Securities Act: 28 o On June 22, 2001, holders of approximately $41.3 million principal amount of our 10.50% senior secured notes due 2002 exchanged these notes for an aggregate of 4,681,221 shares of our common stock. The common stock was issued in privately negotiated transactions exempt from registration in reliance on Section 3(a)(9) of the Securities Act. o On June 25, 2001, a holder of approximately $9.8 million principal amount of our 10.50% senior secured notes due 2002 exchanged these notes for an aggregate of 1,136,108 shares of our common stock. The common stock was issued in privately negotiated transactions exempt from registration in reliance on Section 3(a)(9) of the Securities Act. o On June 26, 2001, holders of approximately $9.5 million principal amount of our PCS credit facility, approximately $7.2 million principal amount of indebtedness under our RCF credit facility and approximately $15.3 million principal amount of our 10.50% senior secured notes due 2002 exchanged this indebtedness for an aggregate of 3,615,693 shares of our common stock. The common stock was issued in privately negotiated transactions exempt from registration in reliance on Section 3(a)(9) of the Securities Act. o On June 27, 2001, holders of approximately $132.7 million principal amount of indebtedness under our RCF credit facility exchanged this indebtedness for an aggregate of 2,121,677 shares of our Series C preferred stock. The preferred stock was issued in privately negotiated transactions exempt from registration in reliance on Section 3(a)(9) of the Securities Act. o On June 27, 2001, we issued and sold to a group of institutional investors an aggregate of 80,082,727 shares of our common stock for aggregate consideration of approximately $551.3 million. The common stock was issued in privately negotiated transactions exempt from registration in reliance on Section 4(2) of the Securities Act. o On June 27, 2001, holders of approximately $152.0 million principal amount of our 10.50% senior secured notes due 2002 exchanged these notes for approximately $152.0 million principal amount of new 12.50% senior secured notes due 2006 and the issuance to such holders of common stock purchase warrants exercisable to purchase 3,000,000 shares of common stock at an exercise price of $6.00 per share. The 12.50% senior secured notes due 2006 and the common stock purchase warrants were issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act. o On June 27, 2001, we issued and sold to a group of institutional investors $150.0 million aggregate principal amount of new 11.25% senior secured notes due 2008. The 11.25% senior secured notes due 2008 were issued in a transaction exempt from registration in reliance on Rule 144A of the Securities Act. o On July 5, 2001, we issued 866,320 shares of our common stock in connection with the cashless exercise of stock warrants issued in connection with the June 27, 2001 exchange of 10.50% senior secured notes due 2002 for 12.50% senior secured notes due 2006 in reliance on the exemption contained in Section 3(a)(9) of the Securities Act. o On July 6, 2001, we issued 115,921 shares of our common stock in connection with the cashless exercise of stock warrants issued in connection with the June 27, 2001 exchange of 10.50% senior 29 secured notes due 2002 for 12.50% senior secured notes due 2006 in reliance on the exemption contained in Section 3(a)(9) of the Securities Act. o On August 1, 2001, we issued 21,216,770 shares of our common stock in connection with the conversion of Series C Convertible Preferred Stock issued in connection with the June 27, 2001 exchange of 10.50% senior secured notes due 2002 for 12.50% senior secured notes due 2006 in reliance on the exemption contained in Section 3(a)(9) of the Securities Act. o On October 5, 2001, the holder of all 3,495,990 outstanding shares of Series B preferred stock exchanged those shares for 3,495,990 shares of our Series D preferred stock. The Series D preferred stock was issued in a privately negotiated transaction exempt from registration under Section 3(a)(9) under the Securities Act. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders On June 27, 2001, we held our 2001 Annual Meeting of Stockholders. At the 2001 Annual Meeting, our stockholders: 1. Elected two directors to hold office until the 2004 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified, by the following votes: Common and Series B Preferred stockholders: Mary F. Sammons: For: 361,147,052* Against: 0 Abstain: 22,768,128 Leonard N. Stern: For: 358,650,223* Against: 0 Abstain: 25,264,956 Series B Preferred stockholders: Leonard I. Green For: 61,095,218 Against: 0 Abstain: 0 Following the 2001 Annual Meeting of Stockholders, the following persons continued to serve as our Directors: Robert G. Miller, William J. Bratton, Alfred M. Gleason, Nancy A. Lieberman, Stuart M. Sloan, and Jonathan D. Sokoloff, 2. Approved the Amendment to our Amended Certificate of Incorporation to increase our authorized number of shares of common stock from 600,000,000 to 1,000,000,000: Common stockholders: For: 317,229,535 Against: 4,753,678 Abstain: 836,748 Series B Preferred stockholders: For: 61,095218 Against: 0 Abstain: 0 3. Approved the proposal to ratify the appointment of Deloitte & Touche LLP as our independent auditors: Common and Series B Preferred stockholders: For: 382,584,371* Against: 796,497 Abstain: 534,311 30 An asterisk "*" indicates that the results include 61,095,218 votes cast in respect of all of the outstanding shares at the time of the 2001 Annual Meeting of Stockholders of our Series B preferred stock. Item 5. Other Information On October 3, 2001, we entered into an exchange agreement with Green Equity Investors III, L.P. pursuant to which Green Equity Investors agreed to exchange all 3,495,990 shares of our 8% Series B preferred stock that it owns for a like number of shares of a new series of 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock; the exchange was completed on October 5, 2001. Following the exchange, we have no shares of Series B preferred stock outstanding. The Series D preferred stock has the identical rights, privileges and preferences as the Series B preferred stock except that the prior consent of its holders is not required in order for the Company to issue shares of its capital stock that are on parity with the Series D preferred stock with respect to dividends and distributions upon our liquidation, distribution or winding up. In connection with the exchange, on October 3, 2001, we also entered into an amendment to our October 27, 1999 Registration Rights Agreement with Green Equity Investors under which we made the terms of that agreement applicable to the Series D preferred stock. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report.
Exhibit Numbers Description Incorporation by Reference to -------- ----------- ----------------------------- 3.1 Restated Certificate of Incorporation dated December 12, 1996 Exhibit 3(i) to Form 8-K filed on November 2, 1999 3.2 Certificate of Amendment to the Restated Certificate of Exhibit 3(ii) to Form 8-K filed on Incorporation dated October 25, 1999 November 2, 1999 3.3 Series C Preferred Stock Certificate of Designation dated June Exhibit 3.3 to Form S-1 filed on July 26, 2001 12, 2001 3.4 Certificate of Amendment to Restated Certificate of Exhibit 3.4 to Form S-1 filed on July Incorporation dated June 27, 2001 12, 2001 3.5 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock Filed herewith Certificate of Designation dated October 3, 2001. 3.6 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on November 13, 2000 4.1 Indenture, dated as of June 27, 2001, between Rite Aid Exhibit 4.7 to Form S-1 filed on July Corporation, as issuer and State Street Bank and Trust Company, 12, 2001 as trustee, related to the Company's 12.50% Senior Secured Notes due 2006. 4.2 Indenture, dated as of June 27, 2001 between Rite Aid Exhibit 4.8 to Form S-1 filed on July Corporation, as issuer and BNY Midwest Trust Company, as 12, 12, 2001 2001 trustee, related to the Company's 11 3/4% Senior Notes due 2008. 4.3 Exchange and Registration Rights Agreement, dated as of June Exhibit 4.9 to Form S-1 filed on July 27, 2001, between Rite Aid Corporation and Salomon Smith Barney 12, 2001 Inc., Credit Suisse First Boston Corporation, J.P. Morgan
31 Securities Inc. and Fleet Securities, Inc., as initial purchasers, for the benefit of the holders of the Company's 11 1/4% Senior Notes due 2008. 10.1 Amendment No. 1 to Employment Agreement by and between Rite Aid Exhibit 10.9 to Form 10-K filed on May Corporation and Robert G. Miller, dated as of May 7, 2001 21, 2001 10.2 Amendment No. 1 to Employment Agreement by and between Rite Aid Exhibit 10.11 to Form Corporation and Mary F. Sammons, dated as of May 7, 2001 10-K filed on May 21, 2001 10.3 Equity for Bank Debt Exchange Agreement between Rite Aid Exhibit 10.45 to Form Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional 10-K filed on May 21, 2001 Value Fund, L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P. 10.4 Side Letter to Equity for Bank Debt Exchange Agreement, dated Exhibit 10.46 to Form 10-K filed on May April 30, 2001, between Rite Aid Corporation, Fir Tree Value 21, 2001 Fund, L.P., Fir Tree Institutional Value Fund, L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P. 10.5 Stock Purchase Agreement dated May 17, 2001 by and between Rite Exhibit 10.51 to Form Aid Corporation and Transamerica Investment Management, LLC S-1 filed on July 12, 1001 10.6 Registration Rights Agreement dated May 31, 2001 by and between Exhibit 10.56 to Form Rite Aid Corporation; Fir Tree Value Fund, L.P; Fir Tree S-1 filed on July 12, 2001 Institutional Value Fund, L.P.; Fir Tree Value Partners LDC; and Fir Tree Recovery Master Fund, L.P. 10.27 Registration Rights Agreement dated as of June 14, 2001 by and Exhibit 10.27 to Registration Statement between Rite Aid Corporation and Marathon Special Opportunity on Form S-1, File No. 333-64950, filed Fund Ltd. and Marathon Master Fund, Ltd. on July 12, 2001 10.28 Registration Rights Agreement dated as of June 19, 2001 by and Exhibit 10.28 to Registration Statement between Rite Aid Corporation and OZ Master Fund, Ltd. and OZF on S-1, File No. 333-64950, filed on Credit Opportunities Master Fund, Ltd. July 12, 2001 10.29 Registration Rights Agreement dated as of May 24, 2001 by and Exhibit 10.29 to Form S-1 filed on July between Rite Aid Corporation and Liberty View Fund, LP, Liberty 12, 2001 View Fund, LLC and Liberty View Global Volatility Fund LP 10.30 Senior Credit Agreement, dated as of June 27, 2001 among Rite Exhibit 10.30 to Registration Statement Aid Corporation, the financial institutions party thereto, on S-1, File No. 333-64950, filed on Citicorp USA, Inc., as senior administrative agent and as July 12, 2001 senior collateral agent, and The Chase Manhattan Bank, Credit Suisse First Boston and Fleet Retail Finance Inc., as syndication agents 10.31 Senior Subsidiary Guarantee Agreement, dated as of June 27, Exhibit 10.31 to Registration Statement 2001 among the Subsidiary Guarantors (as defined therein) and on S-1, File No. 333-64950, filed on Citicorp USA, Inc., as senior collateral agent July 12, 2001 10.32 Senior Subsidiary Security Agreement, dated as of June 27, 2001 Exhibit 10.32 to Registration Statement
32 by the Subsidiary Guarantors (as defined therein) in favor of on S-1, File No. 333-64950, filed on the Citicorp USA (senior collateral agent). July 12, 2001 10.33 Collateral Trust and Intercreditor Agreement, dated as of June Exhibit 10.33 to Registration Statement 27, 2001 among Rite Aid Corporation, the Subsidiary Guarantors on S-1, File No. 333-64950, filed on (as defined therein), Wilmington Trust Company, as collateral July 12, 2001 trustee for the holders from time to time of the Second Priority Debt Obligations (as defined therein), Citicorp USA Inc., as collateral agent for the Senior Secured Parties (as defined therein) under the Senior Loan Documents (as defined therein), Citibank USA, Inc., as agent for the Synthetic Lease Parties (as defined therein), State Street Bank and Trust Company, as trustee under the Exchange Note Indenture (as defined therein) for the holders of the Exchange Notes (as defined therein) and each other Second Priority Representative (as defined therein) which from time to time becomes a party thereto. 10.34 Second Priority Subsidiary Guarantee Agreement, dated as of Exhibit 10.34 to Registration Statement June 27, 2001 among the Subsidiary Guarantors (as defined on S-1, File No. 333-64950, filed on therein) and Wilmington Trust Company, as collateral agent. July 12, 2001 10.35 Second Priority Subsidiary Security Agreement, dated as of June Exhibit 10.35 to Registration Statement 27, 2001 by the Subsidiary Guarantors (as defined therein) in on S-1, File No. 333-64950, filed on favor of Wilmington Trust Company, as collateral trustee. July 12, 2001 10.36 Each of the Mortgages, Deeds of Trust, Assignments of Leases Exhibit 10.36 to Registration Statement and Rents, Security Agreements, Financing Statements and on S-1, File No. 333-64950, filed on Fixture Filings, dated June 27, 2001 from the Subsidiary July 12, 2001 Guarantors (as defined therein) listed therein, to Citicorp USA, Inc. as Senior Collateral Agent. 10.37 Each of the Mortgages, Deeds of Trust, Assignments of Leases Exhibit 10.37 to Registration Statement and Rents, Security Agreements, Financing Statements and on S-1, File No. 333-64950, filed on Fixture Filings, dated June 27, 2001, from the Subsidiary July 12, 2001 Guarantor listed therein, to Wilmington Trust Company, as Second Priority Collateral Trustee. 10.38 Participation Agreement, dated as of June 27, 2001 among Rite Exhibit 10.38 to Registration Statement Aid Realty Corp.; Rite Aid Corporation; Wells Fargo Northwest, on S-1, File No. 333-64950, filed on National Association, not in its individual capacity except as July 12, 2001 expressly set forth therein but solely as trustee of the RAC Distribution Statutory Trust; the persons named therein as note holders and certificate holders; and Citicorp USA, Inc., in its capacity as administrative agent 10.39 Lease, dated as of June 27, 2001 between Wells Fargo Northwest, Exhibit 10.39 to Registration Statement National Association, not in its individual capacity, but on Form S-1, File No. 333-64950, filed solely as trustee of the RAC Distribution Statutory Trust, and on July 12, 2001 Rite Aid Realty Corp. 10.40 Ground Lease Agreement dated as of June 27, 2001 between Exhibit 10.40 to Registration Statement Thrifty Payless, Inc., and Wells Fargo Northwest, National on Form S-1, File No. 333-64950, filed Association, not in its individual capacity, but solely as on July 12, 2001 trustee of the RAC Distribution Statutory Trust.
33 10.41 Security Agreement, dated as of June 27, 2001, made by Rite Aid Exhibit 10.41 to Registration Statement Realty Corp., in favor of Wells Fargo Northwest, National on Form S-1, File No. 333-64950, filed Association, not in its individual capacity, but solely as on July 12, 2001 trustee of the RAC Distribution Statutory Trust. 10.42 Parent Guarantee, dated as of June 27, 2001, by Rite Aid Exhibit 10.42 to Registration Statement Corporation, to Wells Fargo Northwest, National Association, on Form S-1, File No. 333-64950, filed not in its individual capacity, but solely as trustee of the on July 12, 2001 RAC Distribution Statutory Trust. 10.43 Instrument Guarantee, dated as of June 27, 2001, by Rite Aid Exhibit 10.43 to Registration Statement Realty Corp., to each of the Note Holders and Certificate on Form S-1, File No. 333-64950, filed Holders (each as defined in Participation Agreement, dated as on July 12, 2001 of June 27, 2001 among Rite Aid Realty Corp., Rite Aid Corporation, Wells Fargo Northwest, National Association, not in its individual capacity, but solely as trustee of the RAC Distribution Statutory Trust; the Persons named therein as note holders and certificate holders; and Citicorp USA, Inc., in its capacity as administrative agent). 10.44 Loan Agreement dated as of June 27, 2001 among Wells Fargo Exhibit 10.44 to Registration Statement Northwest, National Association, not in its individual on Form S-1, File No. 333-64950, filed capacity, but solely as trustee of the RAC Distribution on July 12, 2001 Statutory Trust, the Persons named therein as note holders and/or any assignee thereof. 10.45 Assignment and Security Agreement, dated as of June 27, 2001, Exhibit 10.45 to Registration Statement by Wells Fargo Northwest, National Association, not in its on Form S-1, File No. 333-64950, filed individual capacity, but solely as trustee of the RAC on July 12, 2001 Distribution Statutory Trust, in favor of Citicorp USA, Inc., as Agent. 10.46 Amended and Restated Declaration of Trust dated as of June 27, Exhibit 10.46 to Registration Statement 2001, between Wells Fargo Northwest, National Association and on Form S-1, File No. 333-64950, filed the Certificate Holders as defined therein. on July 12, 2001 10.47 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.47 to Registration Statement Rite Aid Corporation, American Century Mutual Funds, Inc. and on Form S-1, File No. 333-64950, filed American Century World Mutual Funds, Inc. on July 12, 2001 10.48 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.48 to Registration Statement Rite Aid Corporation, Bessent Global Equity Master and Quantum on Form S-1, File No. 333-64950, filed Partners Bessent Global. on July 12, 2001 10.49 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.49 to Registration Statement Rite Aid Corporation and various funds affiliated with or on Form S-1, File No. 333-64950, filed controlled by FRM M Corp. (Fidelity holders). on July 12, 2001 10.50 Stock Purchase Agreement dated June 12, 2001 by and between Exhibit 10.50 to Registration Statement Rite Aid Corporation; Putnam Investment Management, LLC; The on Form S-1, File No. 333-64950, filed Putnam Advisory Company, LLC; and Putnam Fiduciary Trust on July 12, 2001 Company. 10.51 Stock Purchase Agreement dated May 17, 2001 by and between Rite Exhibit 10.51 to Registration Statement Aid Corporation and Transamerica Investment Management, LLC. on Form S-1, File No. 333-64950, filed on July 12, 2001
34 10.52 Exchange and Registration Rights Agreement dated as of June 27, Exhibit 10.52 to Registration Statement 2001 by and between Rite Aid Corporation and the Fidelity on Form S-1, File No. 333-64950, filed holders. on July 12, 2001 10.53 Registration Rights Agreement dated June 27, 2001 by and Exhibit 10.53 to Registration Statement between Rite Aid Corporation and the Fidelity holders. on Form S-1, File No. 333-64950, filed on July 12, 2001 10.54 Registration Rights Agreement dated June 27, 2001 by and Exhibit 10.54 to Registration Statement between Rite Aid Corporation, American Century Mutual Funds, on Form S-1, File No. 333-64950, filed Inc.; American Century World Mutual Funds, Inc.; Bessent Global on July 12, 2001 Equity Master; Quantum Partners Bessent Global; the Fidelity holders; Putnam Investment Management, LLC; The Putnam Advisory Company, LLC; and Putnam Fiduciary Trust Company. 10.55 Registration Rights Agreement dated June 27, 2001 by and Exhibit 10.55 to Registration Statement between Rite Aid Corporation and Transamerica Investment on Form S-1, File No. 333-64950, filed Management, LLC. on July 12, 2001 10.57 Note Exchange Agreement dated June 27, 2001 by and between Rite Exhibit 10.57 to Registration Statement Aid Corporation and the Fidelity holders. on Form S-1, File No. 333-64950, filed on July 12, 2001 10.58 Form of Common Stock Purchase Warrant dated June 27, 2001 Exhibit 10.58 to Registration Statement issued by Rite Aid Corporation to Fidelity and funds affiliated on Form S-1, File No. 333-64950, filed with or controlled by Fidelity. on July 12, 2001 10.59 Purchase Agreement dated June 20, 2001 between Rite Aid Exhibit 10.59 to Registration Statement Corporation and Salomon Smith Barney Inc., Credit Suisse First on Form S-1, File No. 333-64950, filed Boston Corporation, J.P. Morgan Securities Inc. and Fleet on July 12, 2001 Securities Inc. as representatives of the initial purchasers of the Company's 11 1/4% Senior Notes due 2008. 10.60 Exchange Agreement, dated as of October 3, 2001, by and among Filed herewith Rite Aid Corporation and Green Equity Investors III, L.P. 10.61 Amendment Number 1 to the Registration Rights Agreement dated Filed herewith as of October 27, 1999, dated as of October 3, 2001, by and among Rite Aid Corporation and Green Equity Investors III, L.P. 10.62 Amendment Number 1 to the Senior Credit Agreement dated June Filed herewith 27, 2001, dated as of September 19, 2001, among Rite Aid Corporation, the Banks (as defined therein), Citicorp USA, Inc., as a Swingline Bank, as an Issuing Bank and as administrative agent for the Banks, Citicorp USA, Inc., as collateral agent for the Banks and The Chase Manhattan Bank, Credit Suisse First Boston and Fleet Retail Finance Inc., as syndication agents. 11 Statements re Computation of Loss Per Share (See Note 2 to the condensed consolidation financial statements)
35 ---------- (c) Rite Aid Corporation has filed the following Current Reports on Form 8-K in the thirteen week period ended September 1, 2001: (1) Rite Aid Corporation filed a Current Report on Form 8-K on June 21, 2001 disclosing under Item 5 a press release dated June 19, 2001 announcing that institutional investors who previously agreed to invest $302.4 million in shares of Rite Aid Common stock increased their commitments to $402.4 million. The private placement was part of Rite Aid's previously announced $3.0 billion refinancing package. (2) Rite Aid Corporation filed a Current Report on Form 8-K on June 28, 2001 disclosing under Item 5 a press release announcing (i) the completion of Rite Aid's $3.0 billion refinancing package, and (ii) the results of Rite Aid's previously announced tender offer for its 10.50% senior secured notes due 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 12, 2001 RITE AID CORPORATION By: /s/ ELLIOT S. GERSON Elliot S. Gerson Senior Executive Vice President and General Counsel Date: October 12, 2001 By: /s/ JOHN T. STANDLEY John T. Standley Senior Executive Vice President and Chief Financial Officer 36 EX-3.5 3 b314119_ex3-5.txt CERTIFICATE OF DESIGNATION CERTIFICATE OF DESIGNATION OF 8% SERIES D CUMULATIVE CONVERTIBLE PAY-IN-KIND PREFERRED STOCK OF Rite Aid Corporation ------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------- Rite Aid Corporation (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, certifies that pursuant to the authority contained in Article Fourth of its Restated Certificate of Incorporation (the "Certificate of Incorporation") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company, at a meeting duly called and held via telephone conference on October 3, 2001 duly approved and adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that, pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation, the Board of Directors does hereby designate, create, authorize and provide for the issuance of 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock (the "Series D Preferred Stock"), par value $1.00 per share, with a liquidation preference of $100 per share at the time of initial issuance, initially consisting of 6,000,000 shares, which number may be increased from time to time by the Board of Directors upon any issuance of Series D Preferred Stock in accordance with Section 3 of this Certificate of Designation and upon compliance with applicable law, having the following voting powers, preferences and relative, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1. Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 1 shall have, for all purposes of this resolution, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Closing Price" means, with respect to any securities on any day, the closing sale price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the New York Stock Exchange, or, if such security is not listed or admitted to trading on such exchange, on the principal national securities exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose. "Common Stock" means the common stock, par value $1.00 per share, of the Company. "Conversion Price" means $5.50, subject to adjustment as set forth in Section 6 herein. "DGCL" means the Delaware General Corporation Law. 2 "Dividend Payment Date" has the meaning set forth in Section 3(a) below. "Dividend Rate" means 8.00% per annum. "Holder" means the record holder of one or more shares of Series D Preferred Stock, as shown on the books and records of the Company. "Issue Date" means the first date on which any shares of Series D Preferred Stock are issued. "Junior Securities" has the meaning set forth in Section 2 below. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. "Liquidation Date" has the meaning set forth in Section 4 below. "Liquidation Preference" means, as of any date and subject to adjustment based on stock splits, subdivisions or combinations with respect to the Series D Preferred, $100 plus accrued and unpaid dividends with respect to any preceding Dividend Payment Date, as if the same had been paid on such date, at the Dividend Rate. "Optional Redemption Price" has the meaning set forth in Section 5(a) below. "Parity Securities" has the meaning set forth in Section 2 below. "Partial Dividend Period Amount" means, as of any applicable date, with respect to any Series D Preferred Stock, an amount equal to the amount of dividends that would accrue at the Dividend Rate on the Liquidation Preference of such Series D Preferred Stock on a daily basis from the last Dividend Payment Date to and including such applicable date. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, other entity or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). 3 "Record Date" has the meaning set forth in Section 3(a) below. "Redemption Date" has the meaning set forth in Section 5(c) below. "Senior Security" has the meaning set forth in Section 2 below. "Series B Preferred Directors" means the individuals elected by the holders of the Company's Series B Cumulative Convertible Pay-In-Kind Preferred Stock and serving as such immediately prior to the initial issuance of the Series D Preferred Stock. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Trading Day" means (x) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange is open for business or (y) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made on the Nasdaq National Market or (z) if the applicable security is not otherwise listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. 2. Ranking. The Series D Preferred Stock shall, with respect to dividend rights and distributions upon the liquidation, winding-up or dissolution of the Company, rank (i) senior to the Company's Series C Convertible Preferred Stock, all classes of Common Stock of the Company and to each other class of Capital Stock or series of preferred stock established after the Issue Date by the Board of Directors, the terms of which do not expressly provide that it ranks senior to or on a parity with the Series D Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to with the Common Stock of the Company as "Junior Securities"); (ii) on parity with any additional shares of Series D Preferred Stock issued by the Company in the future in accordance with Section 3 hereof and any other class of Capital Stock or series 4 of preferred stock established after the Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Series D Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to as "Parity Securities") and (iii) subject to Section 7(g) hereof, junior to any other class of Capital Stock or series of preferred stock established after the Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Series D Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Securities"). 3. Dividends. a. Except as set forth in paragraph 3 (d) below, the Holders of shares of the Series D Preferred Stock shall be entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends, accruing from the date of issuance at the Dividend Rate on the Liquidation Preference and payable quarterly in arrears on each March 31, June 30, September 30 and December 31 or, if any such date is not a Business Day, on the next succeeding Business Day (each, a "Dividend Payment Date"), to the Holders of record as of the next preceding March 15, June 15, September 15 and December 15 (each, a "Record Date"). Dividends shall be payable, at the option of the Company, either (i) in cash, (ii) by issuance of additional shares of Series D Preferred Stock (including fractional shares) having an aggregate Liquidation Preference equal to the amount of the dividend to be paid, or (iii) in any combination thereof. All dividends paid with respect to shares of Series D Preferred Stock, whether in cash or shares of Series D Preferred Stock, pursuant to this Section 3 shall be made pro rata among the Holders based upon the aggregate accrued but unpaid dividends on the shares held by each such Holder. If and when any shares are issued under this Section 3(a) for the payment of accrued dividends, such shares shall be validly issued and outstanding and fully paid and nonassessable and shall initially have a Conversion Price equal to that of the Series D Preferred Stock with respect to which it is issued. Dividends payable on the Series D Preferred Stock shall be computed on the basis of a 360-day year consisting of twelve 30-day months and shall be deemed to accumulate on a daily basis. b. To the extent not paid pursuant to Section 3(a) above, dividends on the Series D Preferred Stock shall accumulate, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. For all purposes hereunder, dividends on the Series D Preferred Stock shall be treated as if the same were paid on the relevant Dividend Payment Date, whether or not the same were in fact so paid or declared. 5 c. Holders of the Series D Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of the full cumulative dividends as herein described. Unless full cumulative dividends on all outstanding shares of Series D Preferred Stock for all past dividend periods shall have been declared and paid in cash or by the issuance of additional shares of Series D Preferred Stock, or declared and a sufficient sum for the payment thereof set apart, then: (i) no dividend (other than a dividend payable solely in Junior Securities) shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities; (ii) no other distribution shall be declared or made upon, or any sum set apart for the payment of any distribution upon, any shares of Junior Securities, other than a distribution consisting solely of Junior Securities; (iii) no shares of Junior Securities shall be purchased, redeemed or otherwise acquired or retired for value (excluding an exchange or conversion for shares of other Junior Securities) by the Company or any of its Subsidiaries; and (iv) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition or retirement for value of any shares of Junior Securities by the Company or any of its Subsidiaries. d. In the case of shares of Series D Preferred Stock issued on the Issue Date, dividends shall accrue and be cumulative from October 1, 2001. In the case of shares of Series D Preferred Stock issued as a dividend on shares of Series D Preferred Stock, dividends shall accrue and be cumulative from the Dividend Payment Date in respect of which such shares were issued or were scheduled to be paid pursuant to Section 3(a) hereof as a dividend. e. Each fractional share of Series D Preferred Stock outstanding (or treated as outstanding pursuant to Section 3(b) hereof) shall be entitled to a ratably proportionate amount of all dividends accruing with respect to each outstanding or due to be issued and outstanding share of Series D Preferred Stock pursuant to paragraph (a) of this Section 3, and all such dividends with respect to such outstanding fractional shares shall be cumulative and shall accrue (whether or not declared); and shall be payable in the same manner and at such times as provided for in paragraph (a) of this Section 3 with respect to dividends on each outstanding or due to be issued and outstanding share of Series D Preferred Stock. Each fractional share of Series D Preferred Stock outstanding shall also be entitled to a ratably proportionate amount of any other distributions made with respect to each outstanding or due to be issued and outstanding share of Series D Preferred Stock, and all such distributions shall be payable in the same manner and at the same time as distributions on each outstanding or due to be issued and outstanding share of Series D Preferred Stock. 6 f. Accrued but unpaid dividends for any past dividend periods may be declared by the Board of Directors and paid on any date fixed by the Board of Directors, whether or not a regular Dividend Payment Date, to Holders of record on the books of the Corporation on such record date as may be fixed by the Board of Directors, which record date shall be no more than 60 days prior to the payment date thereof. 4. Distributions Upon Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company or reduction or decrease in its Capital Stock resulting in a distribution of assets to the holders of any class or series of the Company's Capital Stock (the date of such occurrence, the "Liquidation Date"), the Company shall, out of the assets of the Company available for distribution, make the following payments in respect of its Capital Stock: a. first, payments due in connection with the Senior Securities on the Liquidation Date, including any accumulated and unpaid dividends, if any, on such Senior Securities, to the Liquidation Date; b. second, on a pro rata basis, payments (i) on shares of the Series D Preferred Stock equal to the Liquidation Preference per share of Series D Preferred Stock held by or due to (as of such date pursuant to Section 3 hereof) such Holder, plus all Partial Dividend Period Amounts, if any, thereon to the Liquidation Date and (ii) due on Parity Securities; and c. third, payments on any Junior Securities, including, without limitation, the Common Stock. After payment in full in cash of the Liquidation Preference and all accrued and unpaid dividends, if any, to which Holders of Series D Preferred Stock are entitled, such Holders shall not be entitled to any further participation in any distribution of assets of the Company. 5. Redemption by the Company. a. From time to time, on and after October 25, 2004, the Company shall have the option to redeem (subject to the legal availability of funds therefor) all, or any part of, the outstanding (and due to be issued and outstanding as of such date pursuant to Section 3 hereof) shares of the Series D Preferred Stock at a price equal to 105% of the Liquidation Preference), plus the Partial Dividend Period Amount, if any, to the applicable Redemption Date (together, the "Optional Redemption Price"). 7 b. In case of redemption of less than all of such shares of Series D Preferred Stock, the shares to be redeemed shall be selected pro rata or by other appropriate means. c. Notice of any redemption shall be sent by or on behalf of the Company not less than 30 nor more than 60 days prior to the date specified for redemption in such notice (the "Redemption Date"), by first class mail, postage prepaid, to all Holders of record of the Series D Preferred Stock at their last addresses as they shall appear on the books of the Company; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series D Preferred Stock except as to the Holder to whom the Company has failed to give notice or except as to the Holder to whom notice was defective. In addition to any information required by law, such notice shall state: (i) the Redemption Date; (ii) the Optional Redemption Price; (iii) the number of shares of Series D Preferred Stock to be redeemed and, if less than all shares held by such Holder are to be redeemed, the number of such shares to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Optional Redemption Price; (v) the Conversion Price then in effect; (vi) that the Holder's right to convert such shares of into Common Stock shall terminate on the close of business on the fifth Business Day preceding such redemption date; and (vii) that dividends on the shares to be redeemed will cease to accumulate on the Redemption Date. Upon the mailing of any such notice of redemption, the Company shall become obligated to redeem at the time of redemption specified therein all shares called for redemption. d. If notice has been mailed in accordance with Section 5(c) above and provided that on or before the Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds in trust for the pro rata benefit of the Holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, dividends on the shares of the Series D Preferred Stock so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series D Preferred Stock, and all rights of the Holders thereof as stockholders of the Company (except the right to receive from the Company the Optional Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Company shall so require and the notice shall so state, unless such certificates have not yet been issued by the Company but are otherwise due to such Holder pursuant to Section 3 hereof), such shares shall be redeemed by the Company at the Optional Redemption Price. 8 e. Any deposit of funds with a bank or trust company for the purpose of redeeming Series D Preferred Stock shall be irrevocable except that any balance of monies so deposited by the Company and unclaimed by the Holders of the Series D Preferred Stock entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Company, and after any such repayment, the Holders of the shares entitled to the funds so repaid to the Company shall look only to the Company for payment without interest or other earnings; provided, however, that any funds deposited for the purpose of redeeming shares of Series D Preferred Stock which are subsequently converted in accordance with Section 6 hereof shall be repaid to the Company upon such conversion. 6. Conversion. a. Any Holder of shares of Series D Preferred Stock shall have the right to convert any of such shares which have not been previously redeemed into fully paid, nonassessable shares of Common Stock. For the purpose of conversion, each share of Series D Preferred Stock shall be valued at the Liquidation Preference, which shall be divided by the Conversion Price in effect on the conversion date to determine the number of shares issuable upon conversion. In case any shares of Series D Preferred Stock are to be redeemed pursuant to Section 5 hereof, such right of conversion shall cease and terminate as to the shares of Series D Preferred Stock to be redeemed at the close of business on the fifth Business Day preceding the date fixed for redemption, unless the Company shall default in the payment of the applicable redemption price. b. Any Holder of shares of Series D Preferred Stock desiring to convert such shares into Common Stock shall surrender the certificate or certificates (unless such certificates have not yet been issued by the Company but are otherwise due such Holder pursuant to Section 3 hereof) evidencing such shares of Series D Preferred Stock at the office of the transfer agent (which may be the Company) for the Series D Preferred Stock, which certificate or certificates, if the Company shall so require, shall be duly endorsed to the Company or in blank, or accompanied by proper instruments of transfer to the Company or in blank, accompanied by (i) an irrevocable written notice to the Company that the Holder elects so to convert such shares of Series D Preferred Stock and specifying the name or names (with address or addresses) in which a certificate or certificates evidencing shares of Common Stock are to be issued, (ii) in the event that the Series D Preferred Stock is converted during the period from the close of business on any Record Date next preceding any Dividend Payment Date to the opening of business on such Dividend Payment Date, payment in New York Clearing House funds or other funds acceptable to the Company of an 9 amount equal to the Partial Dividend Period Amount (other than with respect to dividends to be paid-in-kind by the Company) that would accrue from the date of conversion to such Dividend Payment Date on the Series D Preferred Stock so converted and (iii) if required pursuant to Section 6(f), an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Company demonstrating that such taxes have been paid). In the event that a holder fails to notify the Company of the number of shares of Series D Preferred Stock which such Holder wishes to convert, such Holder shall be deemed to have elected to convert all shares represented by the certificate or certificates surrendered for conversion. Holders of shares of Series D Preferred Stock at the close of business on a Record Date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion thereof following such Record Date and prior to such Dividend Payment Date. A Holder of shares of Series D Preferred Stock on a Record Date who (or whose transferee) tenders any such shares for conversion into shares of Common Stock on such Dividend Payment Date will receive the dividend payable by the Company on such shares of Series D Preferred Stock on such date. Except as provided for above, no payments or adjustments in respect of dividends on shares of Series D Preferred Stock surrendered for conversion or on account of any dividend on the Common Stock issued upon conversion shall be made upon the conversion of any shares of Series D Preferred Stock. The Company shall, as soon as practicable after such deposit of certificates (to the extent required above) evidencing shares of Series D Preferred Stock accompanied by the written notice and compliance with any other conditions herein contained, deliver at such office of such transfer agent to the person for whose account such shares of Series D Preferred Stock were so surrendered, or to the nominee or nominees of such person, certificates evidencing the number of full shares of Common Stock to which such person shall be entitled as aforesaid, together with a cash adjustment in respect of any fraction of a share of Common Stock as hereinafter provided. Subject to the following provisions of this paragraph, each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Series D Preferred Stock to be converted shall have been surrendered (to the extent required above) together with the 10 irrevocable written notice and payment of taxes (if applicable) as provided for in clauses (i) and (iii) above, and the person or persons entitled to receive the Common Stock deliverable upon conversion of such Series D Preferred Stock shall be treated for all purposes as the record holder or holders of such Common Stock at such time on such date, unless the stock transfer books of the Company shall be closed on such date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date on which such shares shall have been surrendered and such notice (and, if applicable, payment) received by the Company. Immediately following such conversion, the rights of the holders of converted Series D Preferred Stock, as such, shall cease. c. Adjustment of Conversion Price. The Conversion Price at which shares of Series D Preferred Stock are convertible into Common Stock shall be subject to adjustment from time to time, as follows: i. In case at any time after the date hereof, the Company shall pay or make a dividend or other distribution on all or any portion of its Common Stock or shall make a dividend or other distribution on any other class of Capital Stock of the Company which dividend or distribution includes Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be decreased by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such decrease to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (i), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip Common Stock. If any dividend or distribution of the type described in this Section 6(c)(i) is declared but not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. ii. In case at any time after the date hereof, the Company shall pay or make a dividend or other distribution on all of its Common Stock consisting of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options (not being available on an equivalent basis to Holders of the Series D Preferred Stock upon conversion) entitling the holders 11 of its Common Stock to subscribe for or purchase Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (viii) of this Section 6(c)) of the shares of Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, warrants or options (other than pursuant to a dividend reinvestment plan), the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be decreased by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such decrease to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (ii), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but will include shares issuable in respect of scrip certificates, if any, issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights or warrants in respect of Common Stock held in the treasury of the Company (or, if rights or warrants are issued in respect of all of the Common Stock of the Company, will not exercise any such rights or warrants in respect of Common Stock held in the treasury of the Company). In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such current market price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such rights or warrants. The value of such consideration, if other than cash, shall be determined in the reasonable good faith judgment of the Board of Directors of the Company, whose determination shall be conclusive. iii. In case at any time after the date hereof, all or any portion of the Common Stock outstanding shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely in case at any time after the date hereof, all or any portion of the shares of Common Stock outstanding shall each be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. 12 iv. In case at any time after the date hereof, the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness or assets (including securities, rights, warrants or options, but excluding any rights, warrants, or options referred to in paragraph (ii) of this Section 6(c) as entitling the holders of Common Stock to subscribe for or purchase Common Stock at a price per share less than the current market price, any dividend or distribution paid exclusively in cash, any dividend or distribution referred to in paragraph (i) of this Section 6(c) and any dividend or distribution upon a merger or consolidation referred to in paragraph (v) of this Section 6(c)), the Conversion Price shall be decreased so that the same shall equal the rate determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (viii) of this Section 6(c)) of the Common Stock on the date fixed for such determination less the then fair market value (as determined by the Board of Directors in good faith, whose determination shall be conclusive) of the portion of the assets or evidence of indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such distribution. If any dividend or distribution of the type described in this Section 6(c)(iv) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared. v. In case at any time after the date hereof, the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock consisting exclusively of cash (excluding any cash that is distributed upon a merger or consolidation or a sale or transfer of all or substantially all of the assets of the Company to which Section 6(e) applies or as part of a distribution referred to in paragraph (iv) of this Section 6(c)) in an aggregate amount that, combined together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to this paragraph (v) has been made and (ii) the aggregate of any cash plus the fair market value (as determined by the Board of Directors in good faith, whose determination shall be conclusive) of consideration payable in respect of any tender offer by the Company or any of its Subsidiaries for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no adjustment pursuant to paragraph (vi) of this Section 6(c) has been made, exceeds 12.5% of the product of the current market price per share of Common Stock on the date for the determination of holders of Common Stock entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, then, and in each such case, immediately after the close of business on such date for determination, the Conversion Price shall be 13 decreased so that the same shall equal the rate determined by multiplying the Conversion Price in effect immediately prior to the close of business in the date fixed for determination of the stockholders entitled to receive such distribution by a fraction (A) the numerator of which shall be equal to the current market price per share (determined as provided in paragraph (viii) of this Section 6(c)) of the Common Stock on the date fixed for such determination less an amount equal to the quotient of (x) the excess of such combined amount over such 12.5% and (y) the number of shares of Common Stock outstanding on such date for determination and (B) the denominator of which shall be equal to the current market price per share (determined as provided in paragraph (viii) of this section 6(c)) of the Common Stock on such date for determination. If any dividend or distribution of the type described in this Section 6(c)(v) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared. vi. In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors in good faith, whose determination shall be conclusive) that combined together with (i) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive) as of the expiration of such tender or exchange offer, of consideration payable in respect of any other tender or exchange offer, by the Company or any Subsidiary of the company for all or any portion of the Common Stock expiring within the 12 months preceding the expiration of such tender or exchange offer and in respect of which no adjustment, pursuant to this paragraph (vi) has been made and (ii) the aggregate amount of any distributions to all holders of the Company's Common Stock made exclusively in cash within 12 months preceding the expiration of such tender or exchange offer and in respect of which no adjustment pursuant to paragraph (v) of this Section 6(c) has been made, exceeds 12.5% of the product of the current market price per share of the Common Stock (determined as provided in paragraph (viii) of this Section 6(c)) as of the last time (the "Expiration Time") tenders or tenders could have been made pursuant to such tender or exchange offer (as it may be amended) times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Expiration Time, then, and in each such case, immediately prior to the opening of business on the day after the date of the Expiration Time, the Conversion Price shall be decreased so that the same shall equal the rate determined by multiplying the Conversion Price immediately prior to the close of business on the date of the Expiration Time by a fraction (A) the numerator of which shall be equal to (1) the product of (x) the current market price per share of the Common Stock (determined as provided in paragraph (viii) of this Section 6(c)) on the date of the Expiration Time and (y) the 14 number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the date of the Expiration Time less (2) the amount of cash plus the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares, and (B) the denominator of which shall be equal to the product of (x) the current market price per share of the Common Stock (determined as provided in paragraph (viii) of this Section 6(c), as of the Expiration Time and (y) the number of shares of Common Stock outstanding (including any tendered or exchanged shares) as of the Expiration Time less the number of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum, being referred to as the "Purchased Shares"). In the event that the Company is obligated to purchase shares pursuant to any such tender offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender offer had not been made. vii. The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 6(e) applies) shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of stockholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraph (ii) of this Section 6(c)) and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective," as the case may be, and "the day upon which such subdivision or combination becomes effective", within the meaning of the paragraph (iii) of this Section 6(c)). viii. For the purpose of any computation under paragraphs (ii), (iv), (v), or (vi) of this Section 6(c), the current market price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share for the five consecutive Trading Days immediately preceding the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. For purposes of this paragraph, the term "ex date", when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the applicable securities exchange or in the applicable securities market without the right to receive such issuance or distribution. 15 ix. The Company may make such reductions in the Conversion Price, in addition to those required by subparagraphs (i), (ii), (iii), (iv), (v) and (vi), of this Section 6(c), as it considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. The Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty days, the reduction is irrevocable during the period and the Board of Directors (or, to the extent permitted by applicable law, a duly authorized committee thereof) shall have made a good faith determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail to Holders of record of the Series D Preferred Stock a notice of the reduction at least fifteen days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period it will be in effect. x. Notwithstanding any other provision of this Section 6, no adjustment to the Conversion Price shall reduce the Conversion Price below the then par value per share of the Common Stock, and any such purported adjustment shall instead reduce the Conversion Price to such par value. Without the prior approval of the holders of a majority of interest of the Series D Preferred Stock, the Company will not take any action (1) to increase the par value per share of the Common Stock or (2) that would or does result in any adjustment in the Conversion Price that would cause the Conversion Price to be less than the then par value per share of the Common Stock. xi. Notwithstanding any other provision of this Section 6, no adjustment in the Conversion Price need be made until all cumulative adjustments amount to 1% or more of the Conversion Price as last adjusted. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. xii. Whenever the Conversion Price is adjusted as herein provided: 16 (1) the Company shall compute the adjusted conversion price and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the transfer agent for the Series D Preferred Stock; and (2) a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall as soon as practicable be mailed by the Company to all record Holders of shares of Series D Preferred Stock at their last addresses as they shall appear upon the stock transfer books of the Company. xiii. In any case in which this Section 6(c) provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (x) issuing to the Holder of any share of Series D Preferred Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (y) paying to such Holder any amount in cash in lieu of any fractional share of Common Stock pursuant to Section 6(d). d. The Company shall not issue fractional shares or scrip representing fractional shares of Common Stock upon conversion of Series D Preferred Stock. Instead the Company shall pay a cash adjustment based upon the Closing Price of the Common Stock on the Business Day immediately preceding the date of conversion. If more than one certificate evidencing shares of Series D Preferred Stock shall be surrendered for conversion at one time by the same Holder, the number of shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series D Preferred Stock so surrendered. e. In the event that the Company shall be a party to any transaction, including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), (iii) any sale or transfer of all or substantially all of the assets of the Company or (iv) any compulsory share exchange, pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, then lawful provision shall be made as part of the terms of such transaction whereby the Holder of each share of Series D Preferred Stock then outstanding shall have the right thereafter, to convert such share into the kind and amount of securities, cash and other property receivable upon such recapitalization, reclassification, consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into which such share of Series D Preferred Stock might have been converted immediately prior to such recapitalization, reclassification, consolidation, merger, sale, transfer or share exchange. The Company or the person formed by such consolidation or resulting from such merger or which acquires such assets or which acquires the Company's shares, as the case may be, shall make provisions in its certificate or articles of incorporation or other constituent document to establish such right. Such certificate or articles of incorporation or other constituent document shall provide for adjustments which, for events subsequent to the effective date of such certificate or articles of incorporation or other constituent document, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. The above provisions shall similarly apply to successive recapitalization, reclassifications, consolidations, mergers, sales, transfers or share exchanges. 17 f. The Company shall at all times reserve and keep available, out of its authorized and unissued stock, solely for the purpose of effecting the conversion of the Series D Preferred Stock, such number of shares of its Common Stock, free of preemptive rights, as shall from time to time be sufficient to effect the conversion of all shares of Series D Preferred Stock from time to time outstanding. The Company shall from time to time, in accordance with the laws of the State of Delaware, use its best efforts to increase the authorized number of shares of Common Stock if at any time the number of shares of authorized and unissued Common Stock shall not be sufficient to permit the conversion of all the then outstanding shares of Series D Preferred Stock. The Company shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of the Series D Preferred Stock. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Common Stock (or other securities or assets) in a name other than that in which the shares of Series D Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Company the amount of such tax or has established, to the satisfaction of the Company, that such tax has been paid. g. In case: i. the Company shall authorize or take an action that would, upon consummation, require a Conversion Price adjustment pursuant to subparagraphs (ii), (iii), (iv), (v) or (vi) of Section 6(c); or ii. of any reclassification of Common Stock (other than a subdivision or combination of the outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company shall be required, or of the sale or transfer of all or substantially all of the assets of the Company or of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property; or iii. of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be mailed to the Holders of record of the Series D Preferred Stock, at their last addresses as they shall appear upon the stock transfer books of the Company, at least twenty days prior to the proposed record or effective date as the case may be, notice stating (x) the date on which a record (if any) is to be taken for the purpose of such action, dividend or distribution, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend or distribution are to be determined or (y) the date on which such action, reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such action, reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up (but no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice). 18 h. Notwithstanding the foregoing provisions, the issuance of any shares of Common Stock pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Company and the investment of dividends or interest payable on securities of the Company and the investment of additional optional amounts in shares of Common Stock under any such plan and the issuance of any shares of Common Stock or options or rights to purchase such shares pursuant to any employee benefit plan or program of the Company or pursuant to any option, warrant, right or exercisable, exchangeable or convertible security outstanding as of the Issue Date, shall not be deemed to constitute an issuance of Common Stock or exercisable, exchangeable or convertible securities by the Company to which any of the adjustment provisions described above applies so long as the size or extent of the plan or plans are customary corporations similar to the Company. There shall also be no adjustment of the Conversion Price in case of the issuance of any stock (or securities convertible into or exchangeable for stock) of the Company except as specifically described in this Section 6. If any action would require adjustment of the Conversion Price pursuant to more than one of the provisions described above, only one adjustment shall be made and such adjustment shall be the amount of adjustment which has the greatest absolute value. i. For purposes of this Section 6, the number of shares of Common Stock at any time outstanding shall not include any shares of Common Stock then owned or held by or for the account of the Company. 7. Voting Rights. a. Holders of Series D Preferred Stock shall have no voting rights, except as required by law and as hereinafter provided in this Section 7. b. The Holders of Series D Preferred Stock shall be entitled to notice of all stockholders meetings in accordance with the Company's bylaws and the DGCL, and except as set forth in Section 7(c) and (d) below and as otherwise required by applicable law, the Holders of Series D Preferred Stock shall be entitled to vote on all matters submitted to the stockholders for a vote, voting together with the holders of the Common Stock as a single class, with each share of Common Stock entitled to one vote per share and each share of Series D Preferred Stock entitled to one vote for each share of Common Stock issuable upon conversion of the Series D Preferred Stock as of the record date for such vote or, if no record date is specified, as of the date of such vote. c. The Holders of the outstanding shares of Series D Preferred Stock, voting as a separate single class, shall have the right to elect two directors to serve on the Company's Board of Directors (the "Series D Preferred Directors"). The Series D Preferred Directors shall initially be the Series B Preferred Directors. 19 d. i. If at any time dividends on the Series D Preferred Stock shall be in arrears in an amount equal to at least two of the full quarterly dividends payable (either in cash or additional shares of Series D Preferred Stock) on shares of Series D Preferred Stock, then the Company shall take all steps reasonably required to increase the number of members of the Board of Directors by two and the Holders of the outstanding shares of Series D Preferred Stock, voting separately as a class, shall be entitled to elect the directors to fill the newly created directorships resulting from the increase the number of directors at any annual meeting of stockholders or special meeting held in place thereof, or at a special meeting of the Holders of such shares of Series D Preferred Stock called as hereinafter provided, or by the written consent of the Holders of Series D Preferred Stock without a meeting. ii. Whenever such voting right pursuant to this Section 7(d) shall have vested as aforesaid, such right may be exercised initially by written consent of the Holders of Series D Preferred Stock, or either at a special meeting of the Holders of Series D Preferred Stock, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such annual meeting, or by the written consent of the Holders of Series D Preferred Stock without a meeting. Such voting right shall continue until such time as dividends accrued on Series D Preferred Stock shall be in arrears in an amount less than two of the full quarterly dividends payable on shares of Series D Preferred Stock, at which time such voting right of the Holders of Series D Preferred Stock shall terminate, subject to revesting in the event of each and every subsequent failure of the Company for the requisite period of time fully to pay dividends as described above, and the number of directors shall be reduced by two with the directors elected pursuant to this Section 7(d) resigning from the Board of Directors. iii. At any time after such voting power shall have been so vested, pursuant to this Section 7(d), in shares of Series D Preferred Stock and such right shall not already have been exercised by written consent, as aforesaid, a proper officer of the Company may, and upon the written request of Holders of record of at least 10% of the shares of Series D Preferred Stock (addressed to the Secretary of the Company at the principal office of the Company) shall, call a special meeting of the Holders of shares of Series D Preferred Stock for the election of the directors of the Company to be elected by them as herein provided, such call to be made by notice given in accordance with the notice provisions provided by the by-laws of the Company for a special meeting of the stockholders or as required by law. Such meeting shall be held at the earliest practicable date upon the notice required for special meetings of stockholders at the place designated by the Secretary of the Company. If such meeting shall not be called by a proper officer of the Company within 30 days after receipt of such written request by the Secretary of the Company then the Holders of record of at least 10% of the shares of Series D Preferred Stock then outstanding may call such meeting at the expense of the Company, and such meeting may be called by such Holders upon the notice required for special meetings of stockholders and shall be held at the place designated in such notice. Any Holder of Series D Preferred Stock which would be entitled to vote at any such meeting shall have access to the stock books of the Company for the purpose of causing a meeting of Holders of Series D Preferred Stock to be called pursuant to the provisions of this paragraph. Notwithstanding the provisions of this paragraph, however, no such special meeting shall be called during a period within 90 days immediately preceding the date fixed for the next annual meeting of stockholders. 20 e. At any meeting held for the purpose of electing directors at which the Holders of Series D Preferred Stock shall have the right to elect a director as provided herein, the presence in person or by proxy of the Holders of a majority of the then outstanding shares of Series D Preferred Stock shall be required and be sufficient to constitute a quorum of such class for the election of directors by such class. At any such meeting or adjournment thereof (x) the absence of a quorum of the Holders of Series D Preferred Stock shall not prevent the election of directors other than the director to be elected by the Holders of Series D Preferred Stock voting together as a class, and the absence of a quorum or quorums of the holders of Capital Stock entitled to elect such other directors shall not prevent the election of the director to be elected by the Holders of Series D Preferred Stock voting together as a class, and (y) in the absence of a quorum of the holders of any class of stock entitled to vote for the election of directors, holders of a majority of the shares of Series D Preferred Stock present in person or by proxy of such class shall have the power to adjourn the meeting for the election of directors which the holders of such class are entitled to elect, from time to time, without notice (except as required by law) other than announcement at the meeting, until a quorum shall be present. f. In case of a vacancy occurring in the office of any director so elected pursuant to Section 7, the Holders of a majority of the Series D Preferred Stock then outstanding may, at a special meeting of the Holders or by written consent as provided above, elect a successor to hold office for the unexpired term of such director. g. The Company shall not, without the affirmative vote or consent of the Holders of a majority of the shares of Series D Preferred Stock then outstanding: i. amend or otherwise alter its Certificate of Incorporation in any manner that adversely affects the rights, privileges and preferences of the Series D Preferred Stock set forth in this Certificate of Designation; ii. take any action requiring a vote of stockholders of the Company that (x) is materially adverse to the Holders of Series D Preferred Stock or (y) adversely affects the rights, preferences and privileges of the Series D Preferred Stock set forth in this Certificate of Designation; iii. authorize, create (by way of reclassification or otherwise) or issue any Senior Securities or security convertible into or evidencing the right to purchase any Senior Securities; or iv. issue or obligate or otherwise commit itself to issue shares of Series D Preferred Stock, except as dividends in accordance with Section 3(a) hereof. h. The Company shall not, without the affirmative vote or consent of the Series D Preferred Directors, redeem or repurchase any Capital Stock of the Company or pay any cash dividend on the Common Stock unless such cash dividend would not require an adjustment to the Conversion Price pursuant to Section 6(c)(v) hereof. 8. Payment. a. All amounts payable in cash with respect to the Series D Preferred Stock shall be payable in United States dollars at the principal executive office of the Company or, at the option of the Holder, payment of dividends (if any) may be made by check mailed to such Holder of the Series D Preferred Stock at its address set forth in the register of Holders of Series D Preferred Stock maintained by the Company. 21 b. Any payment on the Series D Preferred Stock due on any day that is not a Business Day need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on such due date. c. Dividends payable on the Series D Preferred Stock on any Redemption Date that is a Dividend Payment Date shall be paid to the Holders of record as of the immediately preceding Record Date. 9. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series D Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Certificate of Designation (as such Certificate of Designation may be amended from time to time) and in the Certificate of Incorporation. The shares of Series D Preferred Stock shall have no preemptive or subscription rights. 10. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 11. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series D Preferred Stock and qualifications, limitations and restrictions thereof set forth in this Certificate of Designation (as it may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series D Preferred Stock and qualifications, limitations and restrictions thereof set forth in this Certificate of Designation (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series D Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series D Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series D Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 12. Reissuance of Series D Preferred Stock. Shares of Series D Preferred Stock that have been issued and reacquired in any manner, including shares purchased, redeemed, exchanged or converted, shall (upon compliance with any applicable provisions of the DGCL) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that any issue of such shares as Series D Preferred Stock must be in compliance with the terms hereof. [signature page follows] 22 IN WITNESS WHEREOF, the Company has caused this certificate to be duly executed this 3 day of October, 2001. RITE AID CORPORATION By: _________________________________ Name: Elliot S. Gerson Title: Senior Executive Vice President and General Counsel 23 EX-10.60 4 b314119_ex10-60.txt EXCHANGE AGREEMENT EXCHANGE AGREEMENT This EXCHANGE AGREEMENT (the "Agreement") is entered into as of October 3, 2001, by and among Rite Aid Corporation, a Delaware corporation (the "Company"), and Green Equity Investors III, L.P. (the "Exchanging Holder"). WHEREAS, the Company has issued and sold to the Exchanging Holder, shares of the Company's 8% Series A Cumulative Convertible Pay-In-Kind Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"), which was subsequently converted into shares of the Company's 8% Series B Cumulative Convertible Pay-In-Kind Preferred Stock, par value $1.00 per share (the "Series B Preferred Stock"); and WHEREAS, as of September 30, 2001, the Exchanging Holder owns 3,495,990.6242 shares of Series B Preferred Stock, including all accrued and unpaid dividends which will be paid by the Company in additional shares of Series B Preferred Stock (the "Series B Shares") and WHEREAS, pursuant to the Certificate of Designation governing the Series B Preferred Stock, the Company may not issue shares of its common stock, par value $1.00 per share (the "Common Stock") that are pari passu to the Series B Preferred Stock without the prior affirmative vote or consent of the holders of a majority in interest of the Series B Preferred Stock (the "Series B Preferred Stock Pari Passu Veto"); and WHEREAS, the Company, desires to eliminate the Series B Preferred Stock Pari Passu Veto; and WHEREAS, pursuant to an offer to exchange, the Company desires to issue to the Exchanging Holder, and the Exchanging Holder desires to acquire from the Company, in exchange for all of the Series B Shares, an equal number of shares of Series D Preferred Stock (the "Series D Shares"), on the terms and subject to the conditions set forth herein; and NOW, THEREFORE, in consideration for the Company completing a refinancing of its senior credit agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The Exchange. (a) Exchange. Subject to the terms and conditions hereof, the Company hereby agrees to issue to the Exchanging Holder one share, including fractional Shares thereof, of the Company's 8% Series D Cumulative Convertible Pay-In-Kind Preferred Stock, par value $1.00 per share (the "Series D Preferred Stock") for every share, including fractional shares, of 8% Series B Pay-In-Kind Preferred Stock tendered in exchange therefore (the "Exchange"). (b) Rights, Terms, Preferences and Designations of the Series D Preferred Stock. The Series D Preferred Stock will be governed by a certificate of designation which will be filed by the Company with the Delaware Secretary of State on or prior to the Closing Date, and the form of which is attached Exhibit A hereto (the "Series D Certificate of Designation"). (c) Registration Rights. The Company and the Exchanging Holder have previously entered into that certain registration rights agreement dated as of October 27, 2000 and simultaneous with the consummation of the Exchange, shall enter into an amendment (the "Amendment" and together with this Agreement, the "Agreements") to the Registration Rights Agreement, the form of which is attached as Exhibit B hereto, in order to replace all references in the Registration Rights Agreement to the Series B Preferred Stock and the Series A Preferred Stock with the Series D Preferred Stock. 2. Closing. The consummation of the Exchange shall take place at a closing (the "Closing") to be held at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York, at 9:00 a.m. New York City time, on October 5, 2001, or at such other time and place as the Company and the Exchanging Holder mutually agree (the "Closing Date"). At the Closing, the Company shall deliver to the Exchanging Holder certificates representing the Series D Shares issued in exchange for and cancellation of the Series B Shares. 3. Exchanging Holder Representations. The Exchanging Holder hereby represents and warrants to the Company as follows: (a) Authorization. The Exchanging Holder has full partnership power and authority to execute, deliver and perform its obligations under the Agreements. The execution and delivery of the Agreements have each been duly and validly authorized, and all necessary partnership action has been taken to make the Agreements legal, valid and binding obligations of the Exchanging Holder, enforceable in accordance with their respective terms, except that the enforcement hereof may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). 2 (b) Receipt of Information. The Exchanging Holder has received and reviewed the Agreements, and has received all such information as it deems necessary and appropriate to enable it to evaluate the financial risk inherent in making the Exchange and has received satisfactory and complete information concerning the business and financial condition of the Company in response to all inquiries in respect thereof. (c) Title to Series B Shares. Immediately prior to the Closing, the Exchanging Holder will have title to the Series B Shares, including all accrued and unpaid dividends, being exchanged by it, free and clear of all claims, liens, title defects and objections or equities of any kind and nature whatsoever. (d) Investment Representations. (i) The Exchanging Holder is the person who exercises full investment discretion with respect to the Series B Shares and the Exchanging Holder has neither purchased nor sold for its account any Series B Shares since the original issuance thereof. (ii) The Exchanging Holder is acquiring the Series D Shares hereunder for its own account, and not as a nominee or agent for any other person, firm or corporation, and not with a view to the sale or distribution of all or any part thereof in any transaction that would be in violation of the securities laws of the United States. The Exchanging Holder does not have any contract, undertaking, agreement or arrangement with any person, firm or corporation to sell or transfer to such person, firm or corporation with respect to any Series D Shares. (iii) The Exchanging Holder understands that the Series D Shares acquired hereunder and the shares of the Company's Common Stock into which the Series D Shares are convertible (such shares of Common Stock, together with the Series D Shares, the "Exchange Securities") will not be registered under the Securities Act of 1933, as amended (the "Act"), in part based upon an exemption from registration predicated on the accuracy and completeness of its representations and warranties appearing herein. The Exchanging Holder understands and acknowledges that, as a result, it will not be permitted to sell, transfer or assign any of the Series D Shares acquired hereunder until such Exchange Securities are registered or an exemption from the registration and prospectus delivery requirements of the Act is available. 3 (iv) The Exchanging Holder agrees that in no event will it make a disposition of any Exchange Securities or any interest therein, unless such Exchange Securities are registered under the Act or unless and until (A) it shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, or (B) it shall have furnished the Company with an opinion of counsel, reasonably satisfactory in form and content to the Company, to the effect that (x) such disposition will not require registration of such Exchange Securities under the Act or compliance with applicable state securities laws or (y) an exemption from the registration requirements of the Act is available and that all appropriate action necessary for compliance thereunder and under the applicable state securities laws has been taken. (v) The Exchanging Holder is an "Accredited Investor" as such term is defined in Rule 501 of Regulation D promulgated under the Act; does not require the assistance of an investment advisor or other purchaser representative to participate in the transactions contemplated by the Agreements; has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Series D Shares, has the ability to bear the economic risks of its investment for an indefinite period of time. (e) Section 3(a)(9) Exemption. The Exchanging Holder acknowledges that the transaction contemplated hereby is intended to be exempt from registration by virtue of Section 3(a)(9) of the Securities Act of 1933, as amended. The Exchanging Holder knows of no reason why such exemption would not be available for the transaction contemplated hereby. 4. Representations and Warranties of the Company. The Company represents and warrants to the Exchanging Holder as follows: (a) Organization, Authority, etc. The Company is a corporation duly incorporated and validly existing under and by virtue of the laws of the State of Delaware and has all requisite corporate power to own or lease and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted; is duly qualified or licensed to do business and is in good standing as a foreign corporation in all jurisdictions in which it owns or leases property or in which the conduct of its business requires it so to qualify or be licensed, except where the failure to be so licensed or qualified could not, individually or in the aggregate, reasonably be expected to have a material adverse effect with respect to the Company; and has all requisite corporate power to enter into the Agreements, to issue the Series D Preferred Stock and to perform its obligations hereunder and thereunder. 4 (b) Corporate Acts and Proceedings. The execution and delivery of the Agreements and the transactions contemplated hereby and thereby have been duly and validly authorized, and all necessary corporate action has been taken to make the Agreements legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except that the enforcement thereof may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). (c) Valid Issuance. When issued in exchange for the Series B Shares as provided herein, the Series D Shares acquired hereunder will be duly and validly issued, fully paid and nonassessable. 5. Expenses. Each of the Company and the Exchanging Holder will pay its own expenses incurred in connection with the transactions contemplated hereby. 6. Legends. All certificates representing the Exchange Securities shall bear the following legends: 5 (a) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE DISPOSED OF OR TRANSFERRED UNLESS REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. (b) Any legend required to be placed thereon by any applicable state corporation, commercial or securities law. 7. Removal of Restrictions on Transfer. Any legend endorsed on a certificate representing the Exchange Securities and the stop transfer instructions and record notations with respect to such Exchange Securities shall be removed in accordance with the terms and conditions of the Registration Rights Agreement, as amended. 8. Series D Preferred Stock Directors. The Company and the Exchanging Holders agree that upon consummation of the Exchange, Leonard I. Green and Jonathan D. Sokoloff will no longer serve as the Series B Directors, as such term is defined in the Series D Certificate of Designation, but will serve, in the same class and without interruption, as the Series D Directors, as such term is defined in the Series D Certificate of Designation. 9. Miscellaneous. (a) Amendment. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally or by course of dealing, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. (b) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, next-day air courier, telex, facsimile, telecopier, or similar writing: (i) If to the Exchanging Holder to GEI, c/o Leonard Green & Partners, L.P., 1111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025, attention: Jonathan D. Sokoloff, with a copy to Gibson, Dunn and Crutcher LLP, 333 South Grand Avenue, Los Angeles, California 90071-3197, attention: Jennifer Bellah Maguire Esq.; and 6 (ii) If to the Company, to Rite Aid Corporation at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, attention: Elliot S. Gerson, Esq., Senior Executive Vice President and General Counsel, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036-6522, attention: Stacy J. Kanter, Esq. All such notices and communications shall be deemed to have been duly given: (i) when delivered by hand, if personally delivered; (ii) five (5) business days after being deposited in the mail, postage prepaid, if mailed; (iii) one (1) business day after being timely dispatched postage prepaid, if by same-day or next-day courier; (iv) when answered back, if telexed; (v) when receipt acknowledged, if sent by facsimile transmission and (vi) if given by any other means, when delivered at the addresses referred to in this Section. Any of the above addresses may be changed by notice made in accordance with this Section 11(b). (c) Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not. (d) Headings. The headings of the sections and paragraphs of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. (e) Choice of Law. It is the intention of the parties that the internal laws of the State of New York should govern the enforceability and validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereto, regardless of the laws that might otherwise govern under the applicable provisions of conflict of laws. (f) Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. BEFORE EXECUTING THIS AGREEMENT, THE EXCHANGING HOLDER SHOULD CONSULT WITH ITS TAX ADVISORS REGARDING THE CONSEQUENCES OF THE EXCHANGE AND OWNERSHIP OF THE SERIES D SHARES. 7 IN WITNESS WHEREOF, the parties hereto have caused this Exchange Agreement to be executed as of the date first above written. RITE AID CORPORATION By: ------------------------------- Name: Title: GREEN EQUITY INVESTORS III, L.P. By: Leonard Green & Partners, L.P. By: LGP Management, Inc. By: -------------------------- Name: Title: 8 EX-10.61 5 b314119_ex10-61.txt AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT AMENDMENT NUMBER 1 TO REGISTRATION RIGHTS AGREEMENT This Amendment Number 1 (the "Agreement") to the Registration Rights Agreement dated as of October 27, 1999 (the "Registration Rights Agreement") is made and entered into as of October 3, 2001, by and among RITE AID CORPORATION, a Delaware Corporation (the "Company") and GREEN EQUITY INVESTORS III, L.P. ("GEI"). W I T N E S S E T H WHEREAS, pursuant to a Letter Agreement, dated as of October 18, 1999, GEI purchased 3,000,000 shares of the Company's Series A 8% Cumulative Convertible Pay-in-Kind Preferred Stock, par valve $1.00 per share (the "Series A Preferred Stock"); and WHEREAS, in connection with the purchase and sale of the Series A Preferred Stock, the Company and GEI entered into the Registration Rights Agreement; and WHEREAS, pursuant to the rights and terms of the Series A Preferred Stock, GEI converted its shares of Series A Preferred Stock into a like number of shares of the Company's 8% Series B Cumulative Convertible Pay-in-Kind Preferred Stock, par value $1.00 per share (the "Series B Preferred Stock"); and WHEREAS, the Company and GEI have entered into an exchange agreement dated the date hereof (the "Exchange Agreement") whereby GEI will exchange all of the shares of Series B Preferred Stock it owns for a like amount of a new 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock (the "Series D Preferred Stock"); and WHEREAS, the Company and GEI desire to amend the Registration Rights Agreement so that all references to the Series A Preferred Stock and Series B Preferred Stock shall be amended and replaced with Series D Preferred Stock; NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency which is hereby acknowledged and subject to the terms and conditions herein set forth, the parties do hereby agree as follows: 1. Deletion of "WHEREAS" Clauses. The two "WHEREAS" clauses on the first page of the Registration Rights Agreement are hereby deleted in their entirety. 2. Definition of Registrable Securities. The first paragraph of the definition of "Registrable Securities," Section 1.6 of the Registration Rights Agreement, is hereby deleted and replaced in its entirety as follows: ""Registrable Securities" shall mean the Company's 8% Series D Cumulative Convertible Pay-in-Kind Preferred Stock (the "Series D Preferred Stock") issued upon exchange of the Company's 8% Series B Cumulative Convertible Pay-in-Kind Preferred Stock, and/or the Common Stock issued or issuable upon conversion of the Series D Preferred Stock." 3. Definition of Securities. The definition of Securities, Section 1.9 of the Registration Rights Agreement, is hereby deleted and replaced in its entirety as follows: ""Securities" shall mean the Series D Preferred Stock or the Common Stock." 4. Article II and Article V. All references to "Preferred Stock" and "Series B Preferred Stock" in Article II and Article V of the Registration Rights Agreement are hereby deleted and replaced with "Series D Preferred Stock." 5. Miscellaneous. a. Entire Agreement. This Agreement constitutes the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. This Agreement amends the Registration Rights Agreement only as specifically set forth herein. b. Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. c. Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York without giving effect to conflict of laws, rules or principles. d. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2 e. Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. f. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. * * * Signature Page Follows 3 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. RITE AID CORPORATION By: ______________________________________ Name: Elliot S. Gerson Title: Senior Executive Vice President and General Counsel GREEN EQUITY INVESTORS III, L.P. By: Leonard Green & Partners, L.P. By: LGP Management, Inc. By: ____________________________ Name Title: 4 EX-10.62 6 b314119_ex10-62.txt AMENDMENT NO. 1 TO SENIOR CREDIT AGREEMENT AMENDMENT NO. 1 TO SENIOR CREDIT AGREEMENT This AMENDMENT NO. 1, dated as of September 19, 2001, to the SENIOR CREDIT AGREEMENT dated as of June 27, 2001 (as amended and modified from time to time, the "Senior Credit Facility"), among RITE AID CORPORATION, a Delaware corporation ("Rite Aid" or the "Borrower"), the Banks (as defined in Article 1 thereof), CITICORP USA, INC. ("Citicorp USA"), as a Swingline Bank, as an Issuing Bank, and as administrative agent for the Banks (in such capacity, the "Senior Administrative Agent"), CITICORP USA, INC., as collateral agent for the Banks (in such capacity, the "Senior Collateral Agent") and THE CHASE MANHATTAN BANK, CREDIT SUISSE FIRST BOSTON and FLEET RETAIL FINANCE INC., as syndication agents (in such capacity, the "Syndication Agents"). RECITALS A. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Senior Credit Facility. B. The Borrower has requested that certain amendments be made to the Senior Credit Facility. C. The Borrower and the Banks are entering this Amendment pursuant to Section 9.05(a) of the Senior Credit Facility. AGREEMENTS In consideration of the foregoing Recitals, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Banks agree as follows: SECTION 1. Amendments to the Senior Credit Facility. (a) The definition of Specified Debt Financings is hereby amended and restated in its entirety as follows: "'Specified Debt Financings' means (i) the Additional Senior Second Priority Debt; (ii) the Additional Second Priority Debt; (iii) any unsecured Debt permitted by Sections 5.20(g) and (h); (iv) any Debt or Attributable Debt permitted by Section 5.20(i) of the Senior Credit Facility; (v) any Debt or Attributable Debt permitted by Section 5.20(o) of the Senior Credit Facility; and (vi) at the discretion of the Borrower, any portion of equity securities or equity-linked (e.g., trust preferred) securities issued by the Borrower the Net Cash Proceeds of which do not exceed the sum of the amount of Debt and Attributable Debt then currently permitted by Sections 5.20(g), (h), (i) and (o), provided that the amount of Debt and/or Attributable Debt permitted by Sections 5.20(g), (h), (i) and/or (o) shall be reduced by the amount of the Net Cash Proceeds of such issuance of equity or equity-linked securities and provided further that prior to issuing any such equity or equity-linked securities, the Borrower shall deliver to the Senior Administrative Agent a certificate of a Financial Officer of the Borrower setting forth the Section or Sections to be reduced, if any, and the remaining capacity, if any, available to the Borrower to incur additional Debt (or issue equity) under such Sections." (b) Section 2.13(d)(ii)(B) is hereby amended and restated in its entirety as follows: "(B) to general corporate purposes of the Borrower in an amount not to exceed $300,000,000 less the amount, as set forth in a certificate of a Financial Officer of the Borrower delivered to the Senior Administrative Agent, determined in good faith by the Borrower to be necessary to repay at par the Borrower's 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003;" (c) Section 5.20(g) of the Senior Credit Facility is hereby amended and restated in its entirety as follows: "(g) (x) Additional Senior Second Priority Debt of the Borrower (including any Replacement Senior Second Priority Debt in respect thereof and any unsecured Debt extending, or having the effect of extending, the maturity of, or refunding, refinancing or exchanging, in whole or in part such Additional Senior Second Priority Debt, which unsecured Debt meets the requirements set forth in clauses (i) through (iv) of Section 5.20(f)), in an aggregate principal amount at any time outstanding, together with the aggregate principal amount at any time outstanding of Debt incurred pursuant to clause (y), not to exceed $200,000,000 less the aggregate amount of Attributable Debt outstanding at any time in respect of the Synthetic Lease Obligations and Debt extending, refunding, refinancing or exchanging such Synthetic Lease Obligations incurred pursuant to clause (e) above (without regard to any amounts incurred thereunder and permitted by Section 5.29); provided that (i) the terms and conditions of such Debt shall be satisfactory to the Supermajority Banks and (ii) such Debt shall by its terms provide that it is subordinated only to the Senior Obligations and (y) unsecured Debt of the Borrower (including any unsecured Debt extending, or having the effect of extending, the maturity of, or refunding, refinancing or exchanging, in whole or in part such Debt, which unsecured Debt meets the requirements set forth in clauses (i) through (iv) of Section 5.20(f)) that is not Guaranteed by any Subsidiary of the Borrower, matures after April 1, 2006 and otherwise has terms no more restrictive than those of the 11.25% Senior Notes due 2008, in an aggregate principal amount not to exceed $200,000,000 less the aggregate amount of Attributable Debt outstanding at any time in respect of the Synthetic Lease Obligations and Debt extending, refunding, refinancing or exchanging such Synthetic Lease Obligations incurred pursuant to clause (e) above (without regard to any amounts incurred thereunder and permitted by Section 5.29); provided that the aggregate principal amount of Debt and Attributable Debt permitted by this Section 5.20(g) and by Sections 5.20(h), (i) and (o) (or any combination thereof) shall at all times be reduced by the aggregate outstanding undefeased principal amount of the Borrower's 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003 and the aggregate outstanding principal amount of any Debt or Attributable Debt (other than Debt under the Senior Loan Documents) that extends, or has the effect of extending, the maturity of, or refunds, refinances or is issued in exchange for, such 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003;" 2 (d) Section 5.20(h) of the Senior Credit Facility is hereby amended and restated in its entirety as follows: "(h) (x) Additional Second Priority Debt (including any Replacement Second Priority Debt in respect thereof and any unsecured Debt extending, or having the effect of extending, the maturity of, or refunding, refinancing or exchanging, in whole or in part such Additional Second Priority Debt, which unsecured Debt meets the requirements set forth in clauses (i) through (iv) of Section 5.20(f)) in an aggregate principal amount, together with the aggregate principal amount of Debt incurred pursuant to clause (y), not exceeding $300,000,000 and having a final maturity date after January 1, 2006 and (y) unsecured Debt of the Borrower (including any unsecured Debt extending, or having the effect of extending, the maturity of, or refunding, refinancing or exchanging, in whole or in part such Debt, which unsecured Debt meets the requirements set forth in clauses (i) through (iv) of Section 5.20(f)) that is not Guaranteed by any Subsidiary of the Borrower, matures after April 1, 2006 and otherwise has terms no more restrictive than those of the 11.25% Senior Notes due 2008, in an aggregate principal amount not to exceed $300,000,000; provided that the aggregate principal amount of Debt and Attributable Debt permitted by this Section 5.20(h) and by Sections 5.20(g), (i) and (o) (or any combination thereof) shall at all times be reduced by the aggregate outstanding undefeased principal amount of the Borrower's 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003 and the aggregate outstanding principal amount of any Debt or Attributable Debt (other than Debt under the Senior Loan Documents) that extends, or has the effect of extending, the maturity of, or refunds, refinances or is issued in exchange for, such 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003;" (e) Section 5.20(i) of the Senior Credit Facility is hereby amended and restated in its entirety as follows: "(i) (x) Debt or Attributable Debt, including any Debt or Attributable Debt extending, or having the effect of extending, the maturity of, or refunding, refinancing or exchanging, in whole or in part such Debt or Attributable Debt, in an aggregate principal amount at any time outstanding, together with the aggregate principal amount at any time outstanding of Debt incurred pursuant to clause (y), not to exceed $150,000,000 secured by Liens on real property or in the form of Sale and Leaseback Transactions in respect of such real property and having a final maturity date after January 1, 2006; provided that such Liens do not attach to, and such Sale and Leaseback Transactions shall not be in respect of, any property or assets other than such real property and shall not, in any event, attach to, or be in respect of, any of the Mortgaged Properties and (y) unsecured Debt of the Borrower (including any unsecured Debt extending, or having the effect of extending, the maturity of, or refunding, refinancing or exchanging, in whole or in part such Debt, which unsecured Debt meets the requirements set forth in clauses (i) through (iv) of Section 5.20(f)) that is not Guaranteed by any Subsidiary of the Borrower, matures after April 1, 2006 and otherwise has terms no more restrictive than those of the 11.25% Senior Notes due 2008, in an aggregate principal amount not to exceed $150,000,000; provided that the aggregate principal amount of Debt and Attributable Debt permitted by this Section 5.20(i) and by Sections 5.20(g), (h) and (o) (or any combination thereof) shall at all times be reduced by the aggregate outstanding undefeased principal amount of the Borrower's 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003 and the aggregate outstanding principal amount of any Debt or Attributable Debt (other than Debt under the Senior Loan Documents) that extends, or has the effect of extending, the maturity of, or refunds, refinances or is issued in exchange for, such 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003;" 3 (f) Section 5.20(o) of the Senior Credit Facility is hereby amended and restated in its entirety as follows: "(o) (x) Debt (including Capital Leases) and Attributable Debt in respect of Synthetic Leases and Sale and Leaseback Transactions incurred to finance the acquisition after the Initial Borrowing Date of property or assets provided that (i) such Debt or Attributable Debt is incurred within 24 months of the acquisition of such property or assets, (ii) any Lien securing such Debt or Attributable Debt is limited to the property or assets financed with the proceeds thereof and (iii) the aggregate principal amount of Debt and Attributable Debt incurred pursuant to this clause (x), together with the aggregate principal amount at any time outstanding of Debt incurred pursuant to clause (y), shall not exceed $100,000,000 at any time outstanding and (y) unsecured Debt of the Borrower (including any unsecured Debt extending, or having the effect of extending, the maturity of, or refunding, refinancing or exchanging, in whole or in part such Debt, which unsecured Debt meets the requirements set forth in clauses (i) through (iv) of Section 5.20(f)) that is not Guaranteed by any Subsidiary of the Borrower, matures after April 1, 2006 and otherwise has terms no more restrictive than those of the 11.25% Senior Notes due 2008, in an aggregate principal amount not to exceed $100,000,000; provided that the aggregate principal amount of Debt and Attributable Debt permitted by this Section 5.20(o) and by Sections 5.20(g), (h) and (i) (or any combination thereof) shall at all times be reduced by the aggregate outstanding undefeased principal amount of the Borrower's 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003 and the aggregate outstanding principal amount of any Debt or Attributable Debt (other than Debt under the Senior Loan Documents) that extends, or has the effect of extending, the maturity of, or refunds, refinances or is issued in exchange for, such 5.25% Convertible Subordinated Notes due 2002 and 6.00% Dealer Remarketable Securities due 2003; and" SECTION 2. Agreement of the Borrower. The Borrower agrees that, prior to incurring any Debt pursuant to Section 5.20(g)(y), 5.20(h)(y), 5.20(i)(y) or 5.20(o)(y), it shall deliver to the Senior Administrative Agent a certificate of a Financial Officer of the Borrower setting forth the applicable Section pursuant to which the Debt shall be incurred and the remaining capacity, if any, available to the Borrower to incur additional Debt under such Sections. SECTION 3. Binding Effect and Effectiveness. This Amendment may be executed in as many counterparts as may be convenient and shall become binding when each of the Borrower, the Senior Administrative Agent and each of the required Banks has executed and delivered at least one counterpart hereof. SECTION 4. Governing Law. This Amendment shall be a contract made under and governed by the laws of the State of New York, without regard to the conflicts of law provisions thereof. SECTION 5. Reference to Senior Credit Facility. Except as amended hereby, the Senior Credit Facility shall remain in full force and effect and is hereby ratified and confirmed in all respects. On and after the effectiveness of the amendment to the Senior Credit Facility accomplished hereby, each reference in the Senior Credit Facility, to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference to the Senior Credit Facility shall be deemed a reference to the Senior Credit Facility, as amended hereby, as the case may be. This Amendment shall constitute a "Senior Loan Document" for all purposes of the Senior Credit Facility and the other Senior Loan Documents. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers as of the date first above written. RITE AID CORPORATION By:______________________________________________ Name: Title: CITICORP USA, INC., Individually and as Senior Administrative Agent and Senior Collateral Agent, By:______________________________________________ Name: Title: AMENDMENT NO. 1 DATED AS OF SEPTEMBER 19, 2001 TO THE RITE AID SENIOR CREDIT FACILITY To approve Amendment No. 1: Name of Institution: ____________________________________ by__________________________________ Name: Title: