-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RL+zISccqFCMRZfS+qu8bodNXEKPxxF1mFccQJt+Ze7x90j605wQAFiB4kPmGkVV KvWZohVbxCO3enV5RuXrGA== 0001125282-02-002893.txt : 20021015 0001125282-02-002893.hdr.sgml : 20021014 20021015141450 ACCESSION NUMBER: 0001125282-02-002893 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020831 FILED AS OF DATE: 20021015 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: 02788934 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 b320621_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended August 31, 2002 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From To Commission File Number 1-5742 RITE AID CORPORATION (Exact name of registrant as specified in its charter) Delaware 23-1614034 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 Hunter Lane, 17011 Camp Hill, Pennsylvania (Zip Code) (Address of principal executive offices) 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 515,126,181 shares of its $1.00 par value common stock outstanding as of September 27, 2002. RITE AID CORPORATION TABLE OF CONTENTS Page Cautionary Statement Regarding Forward Looking Statements 3 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements: Condensed Consolidated Balance Sheets as of August 31, 2002 and March 2, 2002 4 Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended August 31, 2002 and September 1, 2001 5 Condensed Consolidated Statements of Operations for the Twenty-Six Week Periods Ended August 31, 2002 and September 1, 2001 6 Condensed Consolidated Statements of Cash Flows for the Twenty-Six Week Periods Ended August 31, 2002 and September 1, 2001 7 Notes to Condensed Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 24 ITEM 4, Controls and Procedures 25 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 26 ITEM 2. Changes in Securities and Use of Proceeds 26 ITEM 3. Defaults Upon Senior Securities 26 ITEM 4. Submission of Matters to a Vote of Security Holders 26 ITEM 5. Other Information 27 ITEM 6. Exhibits and Reports on Form 8-K 27
2 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 facility 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 our ability to hire and retain pharmacists and other store personnel; o the outcomes of pending lawsuits and governmental investigations, both civil and criminal, involving our financial reporting and other matters; o competitive pricing pressures and continued consolidation of the drugstore industry; and o the efforts of third party payers to reduce prescription drug costs, changes in state or federal legislation or regulations, the success of planned advertising and merchandising strategies, general economic conditions and inflation, interest rate movements, access to capital and our relationship with our suppliers. We undertake no obligation to revise the forward-looking statements included in this report to reflect any future events or circumstances. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations---Overview and Factors Affecting Our Future Prospects" included in our Annual Report on Form 10-K for the fiscal year ended March 2, 2002 ("the Fiscal 2002 10-K"), which we filed with the Securities and Exchange Commission ("SEC") on May 7, 2002 and is available on the SEC's website at "www.sec.gov". 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) (unaudited)
August 31, 2002 March 2, 2002 --------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $270,880 $344,055 Accounts receivable, net 616,371 594,249 Inventories, net 2,253,343 2,262,111 Prepaid expenses and other current assets 101,332 101,681 --------- --------- Total current assets 3,241,926 3,302,096 PROPERTY, PLANT AND EQUIPMENT, NET 2,004,298 2,096,030 GOODWILL 684,535 684,535 OTHER INTANGIBLES, NET 219,900 240,725 OTHER ASSETS 185,570 168,373 --------- --------- Total assets $6,336,229 $6,491,759 ========= ========= LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Short-term debt and current maturities of convertible notes, long-term debt and lease financing obligations $213,026 $209,457 Accounts payable 812,163 830,535 Sales and other taxes payable 45,486 49,407 Accrued salaries, wages and other current liabilities 733,328 688,435 --------- --------- Total current liabilities 1,804,003 1,777,834 CONVERTIBLE NOTES 243,750 243,000 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,387,062 3,427,930 LEASE FINANCING OBLIGATIONS, LESS CURRENT MATURITIES 172,689 176,081 OTHER NONCURRENT LIABILITIES 800,749 837,737 --------- --------- Total liabilities 6,408,253 6,462,582 COMMITMENTS AND CONTINGENCIES --- --- REDEEMABLE PREFERRED STOCK 19,612 19,561 STOCKHOLDERS' (DEFICIT) EQUITY: Preferred stock, par value $1 per share, liquidation value $100 per share 370,997 361,504 Common stock, par value $1 per share 515,125 515,136 Additional paid-in capital 3,142,337 3,151,811 Accumulated deficit (4,108,750) (4,006,043) Stock-based and deferred compensation 1,910 463 Accumulated other comprehensive loss (13,255) (13,255) --------- --------- Total stockholders' (deficit) equity (91,636) 9,616 --------- --------- Total liabilities and stockholders' (deficit) equity $6,336,229 $6,491,759 ========= =========
See accompanying notes to condensed consolidated financial statements. 4 RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited)
Thirteen Week Period Ended -------------------------- August 31, 2002 September 1, 2001 --------------- ----------------- REVENUES $3,856,320 $3,691,074 COSTS AND EXPENSES: Costs of goods sold, including occupancy costs 2,973,199 2,856,756 Selling, general and administrative expenses 851,232 826,428 Stock-based compensation benefit (6,746) (845) Goodwill amortization --- 5,280 Store closing and impairment charges 58,223 22,105 Interest expense 84,955 102,377 Interest rate swap contracts 14 31,047 Loss on debt and lease conversions and modifications --- 21,882 Share of loss from equity investment --- 4,512 Loss (gain) on sale of assets and investments, net 1,477 (1,636) --------- --------- 3,962,354 3,867,906 --------- --------- Loss before income taxes and extraordinary item (106,034) (176,832) INCOME TAX EXPENSE 649 2,500 --------- --------- Loss before extraordinary item (106,683) (179,332) EXTRAORDINARY ITEM, gain (loss) on early extinguishment of debt, net of income taxes of $0 1,392 (66,589) --------- --------- Net loss $ (105,291) $(245,921) ========= ========= COMPUTATION OF LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss $ (105,291) $(245,921) Accretion of redeemable preferred stock (26) --- Preferred stock beneficial conversion --- (5,181) Cumulative preferred stock dividends (2,263) (6,688) --------- --------- Net loss attributable to common stockholders $ (107,580) $(257,790) ========= ========= BASIC AND DILUTED LOSS PER SHARE: Loss before extraordinary item $ (0.21) $(0.40) Loss from extraordinary item --- (0.14) --------- --------- Net loss per share $ (0.21) $(0.54) ========= =========
See accompanying notes to condensed consolidated financial statements. 5 RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited)
Twenty-Six Week Period Ended ---------------------------- August 31, 2002 September 1, 2001 --------------- ----------------- REVENUES $7,781,436 $7,401,207 COSTS AND EXPENSES: Costs of goods sold, including occupancy costs 5,983,918 5,692,211 Selling, general and administrative expenses 1,734,819 1,646,671 Stock-based compensation expense 1,348 42,247 Goodwill amortization --- 10,623 Store closing and impairment charges 54,106 21,741 Interest expense 169,586 231,066 Interest rate swap contracts 278 31,047 Loss on debt and lease conversions and modifications --- 154,595 Share of loss from equity investment --- 10,395 Gain on sale of assets and investments, net (15,388) (51,455) ---------- ---------- 7,928,667 7,789,141 ---------- ---------- Loss before income taxes and extraordinary item (147,231) (387,934) INCOME TAX (BENEFIT) EXPENSE (42,862) 2,500 ---------- ---------- Loss before extraordinary item (104,369) (390,434) EXTRAORDINARY ITEM, gain (loss) on early extinguishment of debt, net of income taxes of $0 1,662 (66,589) ---------- ---------- Net loss $ (102,707) $(457,023) ========== ========== COMPUTATION OF LOSS APPLICABLE TO COMMON STOCKHOLDERS: Net loss $ (102,707) $(457,023) Accretion of redeemable preferred stock (51) --- Preferred stock beneficial conversion --- (5,181) Cumulative preferred stock dividends (9,493) (13,368) ---------- ---------- Net loss attributable to common stockholders $ (112,251) $(475,572) ========== ========== BASIC AND DILUTED LOSS PER SHARE: Loss before extraordinary item $ (0.22) $(0.95) Loss from extraordinary item --- (0.15) ---------- ---------- Net loss per share $ (0.22) $(1.10) ========== ==========
See accompanying notes to condensed consolidated financial statements. 6 RITE AID CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Twenty-Six Week Period Ended ---------------------------- August 31, 2002 September 1, 2001 --------------- ---------------- OPERATING ACTIVITIES: Net loss $(102,707) $(457,023) Extraordinary (gain) loss (1,662) 66,589 --------- --------- Loss from operations (104,369) (390,434) Adjustments to reconcile to net cash used in operating activities: Depreciation and amortization 147,326 180,176 Stock-based compensation expense 1,348 42,247 Store closing and impairment charges 54,106 21,741 Loss on debt and lease conversions and modifications --- 154,595 Interest rate swap contracts market value adjustment 278 31,047 Gain on sale of assets and investments, net (15,388) (51,455) Changes in income tax receivables and payables (44,002) (9,702) Changes in operating assets and liabilities (44,432) (26,536) --------- --------- NET CASH USED IN OPERATING ACTIVITIES (5,133) (48,321) --------- --------- INVESTING ACTIVITIES: Expenditures for property, plant and equipment (48,063) (127,300) Proceeds from the repayment/sale of AdvancePCS securities --- 484,214 Intangible assets acquired (5,556) (4,900) Proceeds from dispositions 25,582 12,684 --------- --------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (28,037) 364,698 --------- --------- FINANCING ACTIVITIES: Principal payments on long-term debt (26,528) (2,114,360) Proceeds from the issuance of the senior credit facility --- 1,378,462 Net change in bank credit facilities (12,500) --- Change in zero balance cash accounts (766) (20,075) Proceeds from issuance of stock 280 530,418 Deferred financing costs paid (491) (73,972) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (40,005) (299,527) --------- --------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (73,175) 16,850 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 344,055 92,290 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $270,880 $109,140 ========= ========= SUPPLEMENTARY CASH FLOW DATA: Cash paid for interest (net of capitalized amounts of $176 and $0, respectively) $170,864 $250,070 ===================================== Cash payments (refunds)of income taxes $1,392 $ (7,675) ===================================== Non-cash investing and financing activities: Conversion of debt to common stock $--- $588,711 ===================================== Conversion of debt to debt $--- $152,025 ===================================== 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 August 31, 2002 and September 1, 2001 (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 August 31, 2002 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 2002 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. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective March 3, 2002. SFAS No. 142 specifies that all goodwill and indefinite life intangibles shall no longer be amortized. Goodwill must be allocated to reporting units and evaluated for impairment on an annual basis with an initial impairment assessment to be performed upon adoption of SFAS No. 142. The Company has completed the transitional goodwill impairment test as of March 3, 2002 and determined that there was no impairment loss to be recognized upon adoption of SFAS No. 142. At August 31, 2002, the Company had unamortized goodwill of $684,535 and no indefinite life intangibles. The impact of the adoption of SFAS No. 142 on the thirteen and twenty-six weeks ended September 1, 2001 is as follows:
Thirteen week Twenty-Six week period ended period ended September 1, 2001 September 1, 2001 ----------------- ----------------- Reported net loss $ (245,921) $ (457,023) Add back goodwill amortization 5,280 10,623 --------------------- --------------------- Adjusted net loss $ (240,641) $ (446,400) ===================== ===================== Basic and diluted loss per share: Reported net loss $ (0.54) $ (1.10) Goodwill amortization 0.01 0.02 --------------------- --------------------- Adjusted net loss $ (0.53) $ (1.08) ===================== =====================
8 The Company's intangible assets other than goodwill are finite-lived and amortized over their useful lives. Following is a summary of the Company's intangible assets as of August 31, 2002 and March 2, 2002.
August 31, 2002 March 2, 2002 --------------- ------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ Favorable leases and other $313,429 $(165,932) $312,677 $(158,290) Prescription files 343,664 (271,261) 341,422 (255,084) --------------- ---------------- ------------ --------------- Total $657,093 $(437,193) $654,099 $(413,374) =============== ================ ============ ===============
Amortization expense for these intangible assets was $11,876 and $24,626 for the thirteen and twenty-six weeks ended August 31, 2002, respectively. The anticipated annual amortization expense for these intangible assets is $43,690, $30,559, $15,088, $11,170 and $10,213 in fiscal 2003, 2004, 2005, 2006 and 2007, respectively. The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective March 3, 2002. SFAS No. 144 addressed the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company has determined that there was no impact on the consolidated financial position or results of operations as a result of the adoption of SFAS No. 144. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," Amendment of SFAS No. 13, "Accounting for Leases," and Technical Corrections." The provisions of SFAS No. 145 that relate to the rescission of SFAS No. 4 are required to be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for classification as an extraordinary item shall be reclassified. Beginning with fiscal 2004, the Company's financial statements for prior years with extraordinary items for the early extinguishment of debt will show such items as reclassified to operations. The provisions related to SFAS No. 13 are effective for transactions occurring after May 15, 2002 and have been adopted without material impact. All other provisions of SFAS No. 145, which are effective for financial statements issued on or after May 15, 2002, have been adopted without material impact. In June of 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This differs from the guidance in EITF 94-3, which requires that a liability for costs associated with an exit plan or disposal activity be recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also requires all charges related to an exit activity, including accretion of interest related to the discounting of the future liability related to that activity, to be classified in the same line item on the statement of operations. The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not adopted SFAS No. 146, and has not determined whether it will elect to adopt SFAS No. 146 before the required date. The adoption of SFAS No. 146 will impact the timing of recognition of liabilities on stores closed or severance arrangements entered into after the adoption date, but will have no impact on the liabilities recorded by the Company for stores already closed and severance arrangements already entered into. The adoption will also impact the classification of the accretion of interest on closed stores in the statement of operations. 9 3. Loss Per Share Following is a summary of the components of the numerator and denominator of the basic and diluted loss per share computation:
Thirteen Week Period Ended Twenty-Six Week Period Ended -------------------------- ---------------------------- August 31, September 1, August 31, September1, 2002 2001 2002 2001 ---------- ------------ ---------- ----------- Numerator for earnings per share: Loss before extraordinary item $(106,683) $(179,332) $(104,369) $(390,434) Accretion of redeemable preferred stock (26) --- (51) --- Preferred stock beneficial conversion and reset provision --- (5,181) --- (5,181) Cumulative preferred stock dividends (2,263) (6,688) (9,493) (13,368) --------- --------- --------- --------- Net loss before extraordinary item attributable to common stockholders (108,972) (191,201) (113,913) (408,983) Extraordinary item, gain (loss) on early extinguishment of debt 1,392 (66,589) 1,662 (66,589) --------- --------- --------- --------- Net loss attributable to common stockholders $(107,580) $(257,790) $(112,251) $(475,572) ========= ========= ========= ========= Denominator: Basic weighted average shares 515,158 477,464 515,139 432,390 Diluted weighted average share 515,158 477,464 515,139 432,390 Basic and diluted loss per share: Loss from operations $(0.21) $(0.40) $(0.22) $(0.95) Loss from extraordinary item --- (0.14) --- (0.15) --------- --------- --------- --------- Net loss per share $(0.21) $(0.54) $(0.22) $(1.10) ========= ========= ========= =========
No potential shares of common stock have been included in the computation of diluted earnings per share as the Company incurred losses attributable to common shareholders for the thirteen and twenty-six week periods ended August 31, 2002 and September 1, 2001, and the amount would be antidilutive. At August 31, 2002, an aggregate of 172,058 potential common shares related to stock options, convertible notes and preferred stock and warrants, have been excluded from the computation of diluted earnings per share. 4. Store Closing and Impairment Charges Store closing and impairment charges consist of:
Thirteen Week Period Ended Twenty-Six Week Period Ended -------------------------- ---------------------------- August 31, September 1, August 31, September 1, 2002 2001 2002 2001 ---------- ------------ ---------- ------------ Impairment charges $5,548 $8,690 $6,408 $16,583 Store and equipment lease exit charges 52,675 13,415 47,698 4,847 Impairment of other assets --- --- --- 311 --------- --------- --------- --------- $58,223 $22,105 $54,106 $21,741 ========= ========= ========= =========
Impairment charges Impairment charges include non-cash charges of $5,548 and $4,490 for the thirteen week periods ended August 31, 2002 and September 1, 2001, respectively, for the impairment of long-lived assets (including allocable goodwill for the thirteen week period ended September 1, 2001) at 41 and 13 stores, respectively. Impairment charges include non-cash charges of $6,408 and $12,383 for the twenty-six week periods ended August 31, 2002 and September 1, 2001, respectively, for the impairment of long-lived assets (including allocable goodwill for the twenty-six week period ended September 1, 2001) at 54 and 30 stores, respectively. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store or because of changes in circumstances that indicated the carrying value of the asset may not be recoverable. Also included in impairment charges for the thirteen and twenty-six week periods ended September 1, 2001 are approximately $4,200 of costs related to software. 10 Store and equipment lease exit charges During the thirteen week periods ended August 31, 2002 and September 1, 2001, the Company recorded charges for 32 and 26 stores, respectively, to be closed or relocated under long-term leases. During the twenty-six week periods ended August 31, 2002 and September 1, 2001, the Company recorded charges for 32 and 33 stores, respectively, to be closed or relocated under long-term leases. Costs incurred to close a store, which principally include lease termination costs, are recorded at the time management commits to closing the store, which is the date 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 each quarter and adjusts the liability accordingly. The reserve for store and equipment lease exit costs includes the following activity:
Thirteen Week Period Ended Twenty-Six Week Period Ended -------------------------- ---------------------------- August 31, September 1, August 31, September 1, 2002 2001 2002 2001 ---------- ------------ ---------- ------------ Balance --- beginning of period $272,195 $216,961 $287,464 $233,008 Provision for present value of noncancellable lease payments of stores designated to be closed 36,198 18,474 37,291 21,565 Changes in assumptions about future sublease income, terminations and changes in interest rates 16,572 (1,949) 11,142 (10,093) Reversals of reserves for stores that management has determined will remain open (95) (3,110) (735) (6,625) Interest accretion 2,645 2,350 5,102 4,683 Cash payments, net of sublease income (13,999) (12,901) (26,748) (22,713) -------- --------- --------- --------- Balance --- end of period $313,516 $219,825 $313,516 $219,825 ========= ========= ========= =========
5. Sale of Investments On April 29, 2002 and May 6, 2002, the Company sold shares of drugstore.com. As a result of these transactions, the Company no longer has an equity investment in drugstore.com. These sales resulted in a gain of $15,777, which is included in gain on sale of assets and investments, net, for the twenty-six week period ended August 31, 2002. These sales do not affect the business arrangement entered into in July 1999 between the Company and drugstore.com. Following these sales, the Company does not have any equity method investments. 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 twenty-six week period ended September 1, 2001. Additionally, AdvancePCS repurchased the unsecured 11% senior subordinated notes for $200,000 plus accrued interest. 6. Income Taxes The tax benefit of $42,862 for the twenty-six week period ended August 31, 2002 is comprised of two components. The first reflects an income tax benefit of $44,011 based on the tax law change, enacted on March 9, 2002, which increased the carryback period of net operating losses incurred in fiscal 2001 and 2002 from two years to five. The second component is the provision from operations for state income taxes of $1,149. 11 The income tax benefit of the NOL's generated in the twenty-six week periods ended August 31, 2002 and September 1, 2001 have been fully offset by a valuation allowance as a result of the Company's determination that, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. The Company has undergone an ownership change for statutory purposes during fiscal 2002, which resulted in a limitation on the future use of net operating loss carryforwards. The Company believes that this limitation does not further impair the net operating loss carryforwards because they are fully reserved. 7. Indebtedness and Credit Agreements General: Following is a summary of indebtedness and lease financing obligations at August 31, 2002 and March 2, 2002:
August 31, 2002 March 2, 2002 --------------------------------------------------- Secured Debt: Senior secured credit facility $ 1,365,962 $ 1,378,462 10.5% senior secured notes due 2002 20,879 20,879 12.5% senior secured notes due 2006 ($152,025 face value less unamortized discount of $7,000 and $7,857) 145,025 144,168 Senior secured (shareholder) notes due 2006 149,500 149,500 Other 10,568 11,284 --------------------- ------------------------ 1,691,934 1,704,293 Lease Financing Obligations 179,718 182,625 Unsecured Debt: 5.25% convertible subordinated notes due 2002 150,500 150,500 6.0% dealer remarketable securities due 2003 58,125 83,550 6.0% fixed-rate senior notes due 2005 194,500 194,500 7.625% senior notes due 2005 198,000 198,000 4.75% convertible notes due 2006 ($250,000 face value less unamortized discount of $6,250 and $7,000) 243,750 243,000 7.125% notes due 2007 350,000 350,000 6.125% fixed-rate senior notes due 2008 150,000 150,000 11.25% senior notes due 2008 150,000 150,000 6.875% senior debentures due 2013 200,000 200,000 7.7% notes due 2027 300,000 300,000 6.875% fixed-rate senior notes due 2028 150,000 150,000 --------------------- ------------------------ 2,144,875 2,169,550 --------------------- ------------------------ Total debt 4,016,527 4,056,468 Short-term debt and current maturities of convertible notes, long-term debt and lease financing obligations (213,026) (209,457) --------------------- ------------------------ Long-term debt and lease financing obligations, less current maturities $ 3,803,501 $ 3,847,011 ===================== ========================
Debt Redemptions: During the thirteen and twenty-six week periods ended August 31, 2002, the Company redeemed $20,925 and $25,425 of its 6.0% dealer remarketable securities due 2003 for $19,533 and $23,763, respectively. The early redemption resulted in an extraordinary gain of $1,392 and $1,662, net of tax of $0, for the thirteen and twenty-six week periods ended August 31, 2002, respectively. 12 On September 16, 2002, the Company redeemed $150,500 of its 5.25% convertible subordinated notes due 2002 using its available cash and cash equivalents. The redemption was made in accordance with the scheduled maturity of the 5.25% convertible subordinated notes due 2002 and did not result in any gain or loss. On September 16, 2002, the Company redeemed $20,879 of its 10.5% senior secured notes due 2002 using proceeds from the senior secured credit facility. The redemption was made in accordance with the scheduled maturity of the 10.5% senior secured notes due 2002 and did not result in any gain or loss. Debt for Equity Exchanges: The Company completed the following debt for equity exchanges during the twenty-six weeks ended September 1, 2001.
Carrying Additional Amount Common Paid-In Debt Exchanged Exchanged Stock Capital - -------------- --------- ------ ------- PCS facility $14,478 $1,769 $13,867 RCF facility 169,906 26,370 158,388 5.25% convertible subordinated notes due 2002 205,308 29,750 307,686 6.00% dealer remarketable securities due 2002 79,885 12,382 55,633 10.50% senior secured notes due 2002 119,134 16,115 114,223 -------------- -------------- ------------- Total $588,711 $86,386 $649,797 ============== ============== =============
Refinancing: On June 27, 2001, the Company completed a major financial restructuring that extended the maturity dates of the majority of its debt to 2005 or beyond, provided additional equity and converted a portion of its debt to equity. In connection with the June 27, 2001 refinancing, the Company 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 connection with the June 27, 2001 refinancing, the Company exchanged $152,025 of its existing 10.5% senior secured notes due 2002 for an equal amount of 12.5% notes due September 2006 (the "12.5% senior secured notes"). In addition, the 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. The fair value of the warrants issued in connection with the 12.5% senior secured notes were recorded as a component of additional paid-in capital of $9,000. This resulted in a discount on the 12.5% senior secured notes of $9,000 which is being amortized over the life of the 12.5% senior secured notes as a component of interest expense. Interest Rate Swap Contracts: In June 2000, the Company entered into an interest rate swap contract that fixed the LIBOR component of $500,000 of the Company's variable rate debt at 7.083% for a two-year period, ended on June 26, 2002. In July 2000, the Company entered into an additional interest rate swap that fixed the LIBOR component of an additional $500,000 of variable rate debt at 6.946% for a two-year period, ended July 10, 2002. As a result of the June 27, 2001 refinancing, the Company's interest rate swaps no longer qualified for hedge accounting treatment and therefore, the changes in fair value of these interest rate swap contracts was recorded as a component of net loss. Accordingly, the Company recognized a charge of $31,047 during the thirteen week period ended September 1, 2001, representing the amount that the Company would have to pay the counter party at September 1, 2001 to terminate these contracts. Changes in the market value of the interest rate swaps of $14 and $278, inclusive of cash payments, have been recorded on the income statement for the thirteen and twenty-six week periods ended August 31, 2002. These amounts represent adjustments to the aggregate expense recognized by the Company relating to these swaps. These contracts expired and were fully funded during the thirteen week period ended August 31, 2002 and have not been renewed. Correspondingly, there is no termination liability as of August 31, 2002. 13 8. Stockholders' Equity The Company previously issued 3,000 shares of Series B cumulative pay-in-kind preferred stock at $100 per share, which is the liquidation preference. The Series B Preferred Stock was convertible into shares of the Company's common stock at a conversion price of $5.50 per share. On October 5, 2001, the Company exchanged all outstanding shares of Series B cumulative pay-in-kind 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 the liquidation, distribution or winding up of the Company. 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 represented fair market value of a share of common stock on the date of the repricing. In connection with the repricing, the Company recognizes compensation expense for these options using variable plan accounting. Under variable plan accounting, the Company recognizes compensation expense over the option vesting period. In addition, subsequent changes in the market value of the Company's common stock during the option period, or until exercised, will generate changes in the compensation expense recognized on the repriced options. The Company recognized expense (reduction of expense) of $(8,923)and $(2,750) for the thirteen week periods ended August 31, 2002 and September 1, 2001, and $(2,992) and $37,129 for the twenty-six week periods ended August 31, 2002 and September 1, 2001, respectively, related to the repriced options. The stock-based and deferred compensation component of stockholders' equity is comprised of $5,459 and $8,453 related to the repriced options offset by $3,549 and $7,990 of deferred compensation, as of August 31, 2002 and March 2, 2002, respectively. 9. Commitments and Contingencies The Company is party to numerous legal proceedings, as discussed below. Federal investigations In June of 2002, the SEC issued a cease-and-desist order that completes their investigation into the Company relating to certain financial reporting and accounting practices under former management. The cease-and-desist order, in which Rite Aid neither admits or denies the findings, was pursuant to Rite Aid's offer of settlement. The Company will pay no fine under the SEC settlement. There are currently pending federal governmental investigations, both civil and criminal, by the United States Attorney, involving the Company's financial reporting and other matters. Management is cooperating fully with the United States Attorney. Settlement discussions have begun with the United States Attorney for the Middle District of Pennsylvania, who has proposed that the government would not institute any criminal proceeding against the Company if the Company enters into a consent judgement providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on the Company's financial condition and results of operations. The Company has accrued $20,000 during the thirteen week period ended June 1, 2002 in connection with the resolution of these matters; however, the Company may incur charges in excess of that amount and the Company is unable to estimate the possible range of loss. The Company will continue to evaluate its estimate and to the extent that additional information arises or its strategy changes, the Company will adjust its accrual accordingly. The U.S. Department of Labor has commenced an investigation of matters relating to the Company's associate benefit plans, including the principal 401(k) plan, which permitted associates to purchase 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 putative class action lawsuit on behalf of the plans and their participants has been filed by a participant in the plans in the United States District Court for the Eastern District of Pennsylvania. As a result of discussions with the independent trustee and the attorneys for the putative class action plaintiff, the Company has arrived at a preliminary understanding which would resolve all claims arising out of our associate benefit plans by an agreement to maintain the current level of benefits and requires the Company to pay $4,010 and its insurance companies to pay $5,500 into a settlement fund. The Company has accrued its portion of the cash settlement. Various non-monetary terms and conditions remain to be negotiated and agreed upon and any agreement reached will be subject to the approval of the Department of Labor and the District Court. There can be no assurance that a settlement of the matter will be agreed upon or, if agreed upon, approved by the Department of Labor and the District Court. 14 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 and financial condition. In addition, substantial penalties, damages or other monetary remedies assessed against the Company, including a settlement, could also have a material adverse effect on the Company's results of 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 there and in the Delaware Court of Chancery. Under the agreement, the Company issued $149,500 of senior secured notes due March 2006 and paid $45,000 in cash, which was fully funded by the Company's officers' and directors' liability insurance. As additional consideration for the settlement, the Company has assigned to the plaintiffs all of the Company's claims against the above named executives and KPMG LLP. On August 16, 2001, the district court approved the settlement. Certain of the nonsettling defendants appealed the order. On September 19, 2002, counsel for the plaintiffs advised the Company that an agreement in principle had been reached to settle the stockholder's claims against KPMG, Martin Grass, Frank Bergonzi and Timothy Noonan. Such settlement remains subject to documentation and approval by the U.S. District Court. If and when such settlement is approved by the U.S. District Court, the pending appeal by such defendants will be dismissed, whereupon the Company's settlement of the consolidated securities class action lawsuits will become final. 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, they will be free to individually pursue their claims. Management believes that their claims, individually and in the aggregate, are not material. A purported class action has been instituted by a stockholder against the Company in Delaware state court on behalf of stockholders who purchased shares of the Company's common stock prior to May 2, 1997, and who continued to hold them after November 10, 1999, alleging claims similar to the claims alleged in the consolidated securities class action lawsuits described above. The amount of damages sought was not specified and may be material. The Company has filed a motion to dismiss this claim which is pending before the court. These claims are ongoing and the Company cannot predict their outcome. An unfavorable outcome could result in a material adverse effect on the Company's results of operations, financial condition or cash flows. Drug reimbursement matters The Company is being investigated by multiple state attorneys general for its reimbursement practices relating to partially-filled prescriptions and fully-filled prescriptions that are not picked up by ordering customers. The Company is supplying similar information with respect to these matters to the United States Department of Justice. The Company believes that these investigations are similar to investigations which were, and are being, undertaken with respect to the practices of others in the retail drug industry. The Company also believes that its existing policies and procedures fully comply with the requirements of applicable law and intend to fully cooperate with these investigations. The Company cannot, however, predict their outcomes at this time. An individual acting on behalf of the United States of America, has filed a lawsuit in the United 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 United States Department of Justice has intervened in this lawsuit, as is its right under the law. The Company has reached an agreement to settle these investigations and the lawsuit filed by the private individual for $7,225, which is subject to court approval. The Company has reserved $7,225 related to this potential liability in fiscal 2002. These claims are ongoing and the Company cannot predict their outcome. If any of these cases result in a substantial monetary judgement against the Company or is settled on unfavorable terms, the Company's results of operations, financial position and cash flows could be materially adversely affected. 15 Other In June of 2002, several former executive officers were indicted by the United States Attorney on various criminal charges, including securities fraud, and one former executive officer plead guilty to charges of obstruction of an internal investigation. The Company currently has separation and other arrangements with certain of these executives. As a result of these indictments, the Company has ceased payments under these obligations. The Company maintains liabilities of $26,400 as of August 31, 2002, related to future obligations under these arrangements. The Company is conducting an investigation of these arrangements and based upon the outcome, the Company may adjust these liabilities and record this adjustment as a reduction to selling, general and administrative expenses. The Company, together with a significant number of major U.S. retailers, have been sued by the Lemelson Foundation in a complaint which alleges that portions of the technology included in the Company's point-of-sale system infringe upon a patent held by the plaintiffs. The amount of damages sought is unspecified and may be material. The Company cannot predict the outcome of this litigation or whether it could result in a material adverse effect on the Company's results of operations, financial conditions or cash flows. The Company is subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of the Company's management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on the Company's results of operations, financial condition and cash flows if decided adversely. 10. Subsequent Event In September and October of 2002, the Company received cash receipts of $12,300 for settlement of litigation with certain drug manufacturers. This receipt will be recorded as a reduction to selling, general and administrative expenses in the third quarter of fiscal 2003. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Loss before extraordinary item for the thirteen and twenty-six week periods ended August 31, 2002 was $106.7 million and $104.4 million, respectively. Loss before extraordinary item for the thirteen and twenty-six week periods ended September 1, 2001 was $179.3 million and $390.4 million, respectively. The substantial improvement is the net result of several factors, the most important we believe to be increased sales and reduced interest expense. These elements are described in further detail in the Results of Operations and Liquidity and Capital Resources sections below. However, there are other items that must be noted in order to understand the results of operations. Those items are: Litigation Related Charges and Credits. In the thirteen and twenty-six week period ended August 31, 2002, we recorded charges of $0.3 million and $20.3 million, respectively, related to governmental investigations. In the thirteen and twenty-six week periods ended September 1, 2001, we recorded $24.1 million and $39.1 million, respectively, related to proceeds received from litigation settlements with certain drug manufacturers and increased litigation related accruals by $7.1 million and $2.9 million, respectively. Substantial Investigation Expenses. We continue to incur substantial expenses in connection with the process of defending ourselves and former management against various shareholder actions and cooperation with the U.S. Attorney's Office in their investigations of former management. We incurred $3.2 million and $5.6 million in the thirteen week periods ended August 31, 2002 and September 1, 2001, respectively, and $9.9 million and $9.0 million in the twenty-six week periods ended August 31, 2002 and September 1, 2001, respectively. We expect to incur an additional $5.0 million to $10.0 million over the remainder of fiscal 2003, and expect to continue to incur significant legal and other expenses in connection with the ongoing litigation and investigations to which we are subject. Stock-Based Compensation Expense. We recorded stock-based compensation (benefit) expense of $(6.7) million and $(0.8) million in the thirteen week periods ended August 31, 2002 and September 1, 2001, respectively and $1.3 million and $42.2 million in the twenty-six week periods ended August 31, 2002 and September 1, 2001, respectively resulting primarily from the impact of applying variable plan accounting to our stock-based compensation plans. Gain on Sale of Assets and Investments. In the twenty-six week period ended August 31, 2002, we recorded a gain of $15.8 million resulting from the sale of our investment in drugstore.com. In the twenty-six week period ended September 1, 2001, we recorded a gain of $53.2 million resulting from the sale of AdvancePCS securities. Loss on Debt and Lease Conversions and Modifications. In the twenty-six week period ended September 1, 2001, we recorded a pre-tax loss of $154.6 million on debt conversions and lease modifications that were performed in connection with the June 27, 2001 refinancing. Income Tax Benefit. In the twenty-six week period ended August 31, 2002, we recorded a $44.0 million income tax benefit related to carryback of net operating losses made possible by a tax law change. Other. In the twenty-six week period ended September 1, 2001, we recorded a $10.4 million charge related to our share of loss in our investment in drugstore.com. The investment had no carrying value as of March 3, 2002, and therefore we recorded no losses in equity investments in subsidiaries in the twenty-six week period ended August 31, 2002. In the twenty-six week period ended September 1, 2001, we recorded a $10.6 million charge for goodwill amortization. We recorded no charges for goodwill amortization in the twenty-six week period ended August 31, 2002, pursuant to the adoption of SFAS No. 142. Recent Actions Affecting Operating Results During fiscal 2002 and the first two quarters of fiscal 2003 we took a number of actions which had the short-term effect of significantly reducing our operating results but which management believes were nevertheless necessary. These actions include, but are not limited to, the sale of assets, the exchange of our debt for shares of our common stock, the closure, relocation or impairment of stores and the refinancing of the company. We anticipate taking actions in the future similar to some of those described above that may have a material negative impact upon our operating results for the period in which we take those actions or subsequent periods. 17 Results of Operations Revenues and Other Operating Data
Thirteen Week Period Ended Twenty-Six Week Period Ended -------------------------- ---------------------------- August 31, September 1, August 31, September 1, 2002 2001 2002 2001 ---------- ------------ ---------- ------------ Revenues $3,856,320 $3,691,074 $7,781,436 $7,401,207 Revenue growth 4.5% 7.3% 5.1% 7.5% Same store sales growth 7.1% 8.9% 7.7% 9.1% Pharmacy sales growth 8.2% 9.8% 8.7% 10.2% Same store pharmacy sales growth 10.8% 11.7% 11.3% 11.8% Pharmacy as a % of total sales 63.1% 61.0% 63.3% 61.3% Third party sales as a % of total pharmacy sales 92.6% 92.0% 92.6% 91.9% Front-end sales (decline) growth (1.1)% 3.0% (0.4)% 3.2% Same store front end sales growth 1.3% 4.8% 2.0% 5.0% Front end sales as a % of total sales 36.9% 39.0% 36.7% 38.7% Store data: Total stores (beginning of period) 3,454 3,631 3,497 3,648 New stores --- --- 1 3 Closed stores (10) (37) (55) (57) Store acquisitions, net --- --- 1 --- Total stores (end of period) 3,444 3,594 3,444 3,594 Relocated stores 3 4 7 8
Revenues The 4.5% and 5.1% growth in revenues for the thirteen and twenty-six week periods ended August 31, 2002 were driven by pharmacy sales growth of 8.2% and 8.7%, respectively, offset slightly by front end sales declines of 1.1% and 0.4%, respectively. The 7.3% and 7.5% growth in revenues for the thirteen and twenty-six week periods ended September 1, 2001 were driven by pharmacy sales growth of 9.8% and 10.2%, respectively, and front end sales growth of 3.0% and 3.2%, respectively. Same store sales growth for the thirteen and twenty-six week periods ended August 31, 2002 was 7.1% and 7.7%, respectively. For the thirteen and twenty-six week periods ended August 31, 2002, pharmacy sales led revenue growth with same store sales increases of 10.8% and 11.3%, respectively. Factors contributing to pharmacy same store sales increases include inflation, improved attraction and retention of managed care customers, our reduced cash pricing, our increased focus on pharmacy initiatives such as predictive refill, and favorable industry trends. These trends include an aging population, the use of pharmaceuticals to treat a growing number of healthcare problems and the introduction of a number of successful new prescription drugs. These favorable factors were partially offset by the increase in generic sales mix. For the thirteen week periods ended August 31, 2002 and September 1, 2001, front end same stores sales increased 1.3% and 4.8%, respectively. For the twenty-six week periods ended August 31, 2002 and September 1, 2001, front end same store sales increased 2.0% and 5.0%, respectively. The same store sales increases were primarily a result of improved assortments, lower prices on key items, and distributing a nationwide weekly advertising circular. 18 Costs and Expenses
Thirteen Week Period Ended Twenty-Six Week Period Ended -------------------------- ---------------------------- August 31, September 1, August 31, September 1, 2002 2001 2002 2001 ---------- ------------ ---------- ------------ Cost of goods sold $2,973,199 $2,856,756 $5,983,918 $5,692,211 Gross profit 883,121 834,318 1,797,518 1,708,996 Gross margin 22.9% 22.6% 23.1% 23.1% Selling, general and administrative expenses 851,232 826,428 1,734,819 1,646,671 Selling, general and administrative expenses as a percentage of revenues 22.1% 22.4% 22.3% 22.2% Stock-based compensation (benefit) expense (6,746) (845) 1,348 42,247 Goodwill amortization --- 5,280 --- 10,623 Store closing and impairment charges 58,223 22,105 54,106 21,741 Interest expense 84,955 102,377 169,586 231,066 Interest rate swap contracts 14 31,047 278 31,047 Loss on debt and lease conversions and modifications --- 21,882 --- 154,595 Share of loss from equity investment --- 4,512 --- 10,395 Loss (gain) on sale of assets and investments, net 1,477 (1,636) (15,388) (51,455)
Cost of Goods Sold Gross margin was 22.9% for the thirteen week period ended August 31, 2002 compared to 22.6% for the thirteen week period ended September 1, 2001. Gross margin was positively impacted by improvements in pharmacy margin, driven by increased generic mix and improved third party reimbursements. Gross margin rate was positively impacted by flat occupancy expense on a higher sales base and by lower inventory liquidation costs related to closed stores. Offsetting the positive pharmacy margin trends was a decline in front end margin contribution caused by a lower mix of front end sales and lower vendor promotion allowances and rebates. Gross margin was 23.1% for the twenty-six week period ended August 31, 2002 compared to 23.1% for the twenty-six week period ended September 1, 2001. Gross margin was positively impacted by improvements in pharmacy margin, driven by increased generic mix and improved third party reimbursements. Gross margin rate was positively impacted by flat occupancy expense on a higher sales base and by lower inventory liquidation costs related to closed stores. Offsetting the positive pharmacy margin trends was a decline in front end margin contribution caused by a lower mix of front end sales. 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 $17.3 million and $34.5 million for the thirteen and twenty-six week period ended August 31, 2002, versus $15.0 million and $30.0 million for the thirteen and twenty-six week period ended September 1, 2001. Selling, General and Administrative Expenses The selling, general and administrative expenses ("SG&A") for the thirteen week period ended August 31, 2002 includes $3.5 million incurred primarily in connection with our defense of shareholder litigation and cooperating with various governmental investigations. Excluding these items, SG&A as a percentage of revenues was 22.0% for the thirteen week period ended August 31, 2002. SG&A expense for the thirteen week period ended September 1, 2001, includes $7.1 million to accrue for non-recurring litigation and $5.6 million incurred primarily in connection with our defense of shareholder litigation and cooperating with various governmental investigations, offset by receipts of $24.1 million for the settlement of litigation with certain drug manufacturers. Excluding these items, SG&A as a percentage of revenues was 22.7% for the thirteen week period ended September 1, 2001. SG&A on an adjusted basis of 22.0% for the thirteen week period ended August 31, 2002 compares favorably with SG&A on an adjusted basis of 22.7% for the thirteen week period ended September 1, 2001 due to decreased depreciation and amortization charges resulting from a reduced store count, reductions in professional fees, and better leveraging of our fixed costs resulting from higher sales volume, partially offset by higher associate benefit costs. 19 The selling, general and administrative expenses ("SG&A") for the twenty-six week period ended August 31, 2002, includes charges of $20.3 million to accrue for non-recurring litigation and $9.9 million incurred primarily in connection with our defense of shareholder litigation and cooperating with various governmental investigations. Excluding these items, SG&A as a percentage of revenues was 21.9% for the twenty-six week period ended August 31, 2002. SG&A expense for the twenty-six week period ended September 1, 2001, includes $2.9 million to accrue for non-recurring litigation and $9.0 million incurred primarily in connection with our defense of shareholder litigation and cooperating with various governmental investigations, offset by 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 22.6% for the twenty-six week period ended September 1, 2001. SG&A on an adjusted basis of 21.9% for the twenty-six week period ended August 31, 2002 compares favorably with SG&A on an adjusted basis of 22.6% for the twenty-six week period ended September 1, 2001 due to decreased depreciation and amortization charges resulting from a reduced store count, reductions in professional fees, and better leveraging of our fixed costs resulting from higher sales volume, partially offset by higher associate benefit costs. Store Closing and Impairment Charges Store closing and impairment charges consist of:
Thirteen Week Period Twenty-Six Week Period Ended Ended ------- ------- August 31, September 1, August 31, September 1, 2002 2001 2002 2001 ------- ------- ------- ------- Impairment charges $ 5,548 $ 8,690 $ 6,408 $16,583 Store and equipment lease exit charges 52,675 13,415 47,698 4,847 Impairment of other assets -- -- -- 311 ------- ------- ------- ------- $58,223 $22,105 $54,106 $21,741 ======= ======= ======= =======
Impairment Charges. Impairment charges include non-cash charges of $5.5 million and $4.5 million for the thirteen week periods ended August 31, 2002 and September 1, 2001, respectively, for the impairment of long-lived assets (including allocable goodwill for the thirteen week period ended September 1, 2001) at 41 and 13 stores, respectively. Impairment charges include non-cash charges of $6.4 million and $12.4 million for the twenty-six week periods ended August 31, 2002 and September 1, 2001, respectively, for the impairment of long-lived assets (including allocable goodwill for the twenty-six week period ended September 1, 2001) at 54 and 30 stores, respectively. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store or because of changes in circumstances that indicated the carrying value of the asset may not be recoverable. Also included in impairment charges for the thirteen and twenty-six weeks ended September 1, 2001 are approximately $4.2 million of costs related to software. Store and Equipment Lease Exit Costs. During the thirteen week periods ended August 31, 2002 and September 1, 2001, the Company recorded charges for 32 and 26 stores, respectively, to be closed or relocated under long-term leases. During the twenty-six week periods ended August 31, 2002 and September 1, 2001, the Company recorded charges for 32 and 33 stores, respectively, to be closed or relocated under long-term leases. Costs incurred to close a store, which principally include lease termination costs, are recorded at the time management commits to closing the store, which is the date that 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 leases terminations. This liability is discounted using a risk-free rate of interest. We evaluate these assumptions each quarter and adjust the liability accordingly. As part of our ongoing business activities, we assess stores for potential closure. Decisions to close stores in future periods would result in charges for store lease exit costs and liquidation of inventory, as well as impairment of assets at these stores. Interest Expense Interest expense was $85.0 and $169.6 million for the thirteen and twenty-six week periods ended August 31, 2002, compared to $102.4 million and $231.1 million for the thirteen and twenty-six week periods ended September 1, 2001. The decrease was primarily due to the reduction of debt resulting from the sale of PCS and the June 2001 refinancing. The weighted average interest rates, excluding capital leases, on our indebtedness for the twenty-six week period ended August 31, 2002 and September 1, 2001 were 7.4% and 8.1%, respectively. 20 Interest Rate Swap Contracts We entered into interest rate swap contracts to hedge the exposure to increasing rates with respect to our variable rate debt. As a result of the June 2001 refinancing, the interest rate swap contracts no longer qualified for hedge accounting treatment, and therefore the changes in fair value of these interest rate swap contracts is required to be recorded as a component of net loss. Accordingly, we recognized a charge of $31.0 million during the thirteen week period ended September 1, 2001, representing the amount that we would have to pay the counter party to terminate these contracts. Additionally, changes in the market value of the interest rate swaps of $0.1and $0.3 million, inclusive of cash payments, have been recorded on the income statement for the thirteen and twenty-six week periods ended August 31, 2002. These contracts expired and were fully funded during the thirteen week period ended August 31, 2002 and have not been renewed. Correspondingly, there is no termination liability as of August 31, 2002. Income Taxes The tax benefit of $42.9 million for the twenty-six week period ended August 31, 2002 is comprised of two components. The first reflects an income tax benefit of $44.0 million based on a tax law change, enacted on March 9, 2002, which increased the carryback period of net operating losses incurred in fiscal 2001 and 2002 from two years to five. The second component is the provision for state income taxes of $1.1 million. The income tax benefits of the NOL's generated in the twenty-six week periods ended August 31, 2002 and September 1, 2001 have been fully offset by a valuation allowance as a result of management's determination that, based on available evidence, it is more likely than not that the deferred tax assets will not be realized. We have undergone an ownership change for statutory purposes during fiscal 2002, which resulted in a limitation on the future use of net operating loss carryforwards. We believe that this limitation does not further impair the net operating loss carryforwards because they are fully reserved. Liquidity and Capital Resources General We have two primary sources of liquidity: (i) cash provided by operations and (ii) the revolving credit facility under our senior secured credit facility. Our principal uses of cash are to provide working capital for operations, service our obligations to pay interest and principal on debt and to provide funds for capital expenditures. Our ability to borrow under the senior secured credit facility is based on a specified borrowing base consisting of eligible accounts receivable and inventory. On August 31, 2002, we had $378.5 million in additional available borrowing capacity under the revolving credit facility net of outstanding letters of credit of $113.2 million. In addition, the term loan was fully drawn except for $21.5 million, which is available and was used to pay for the remaining outstanding 10.5% senior secured notes when they matured on September 15, 2002. The senior secured credit facility, as amended, also allows us, at our option, to issue up to $893.0 million of unsecured debt that is not guaranteed by any of our subsidiaries, reduced by the following debt to the extent incurred: (i) $150.0 million of financing transactions of existing owned real estate; (ii) $643.0 million of additional debt secured by the facility's collateral on a second priority basis; and (iii) $100.0 million of financing transactions for property or assets acquired after June 27, 2001. The $893.0 million of permitted debt, whether secured or unsecured, is reduced by the aggregate outstanding, undefeased balances of the 5.25% convertible subordinated notes, the 6.0% dealer remarketable securities and the 4.75% convertible notes and the 12.5% senior secured notes. As of August 31, 2002, we had outstanding principal balances of $150.5 million, $58.1 million, $250.0 million and $149.5 million of the 5.25% convertible subordinated notes, 6.0% dealer remarketable securities, 4.75% convertible notes and the senior secured notes, respectively. As of August 31, 2002, our remaining permitted debt under the senior secured credit facility is $284.9 million. The permitted debt amount increased to $435.4 million following the redemption of the 5.25% convertible subordinated notes on September 16, 2002. Our 11.25% senior notes due July 2008 also permit $150.0 million of real estate financing, $400.0 million of additional other debt and $600.0 million of additional permitted debt, which includes allowing us to increase our senior secured credit facility. As of August 31, 2002 our remaining permitted debt under the 11.25% senior notes due 2008, excluding real estate financing, is $600.5 million. 21 The senior secured credit facility, as amended, requires us to meet various financial ratios and limits capital expenditures. Beginning with the 12 months ended March 2, 2002, the covenants require us to maintain a maximum leverage ratio of 8.40:1, increasing to 9.50:1 for the twelve months ended June 1, 2002, and increasing again to 10.00:1 for the twelve months ended August 31, 2002, before gradually decreasing to 6.00:1 for the twelve months ended May 31, 2005. We must also maintain a minimum interest coverage ratio of 1.20:1 for the twelve months ended March 2, 2002, decreasing to 1.15:1 for the twelve months ended June 1, 2002 and decreasing again to 1.10:1 for the twelve months ended August 31, 2002 before gradually increasing to 2.00:1 for the twelve months ended November 30, 2004. In addition, we must maintain a minimum fixed charge ratio of 0.9:1 for the twelve months ended March 2, 2002, gradually increasing to 1.10:1 for the twelve months ended August 31, 2004. Capital expenditures are limited to $150.0 million annually beginning with the twelve months ended March 2, 2002. These capital expenditure limits are subject to upward adjustment based upon availability of excess liquidity as defined in our senior secured credit facility. We were in compliance with the covenants of the senior secured credit facility, as amended, and our other credit facilities and debt instruments as of August 31, 2002. With continuing improvements in operating performance, we anticipate that we will remain in compliance with our debt covenants. However, variations in our operating performance and unanticipated developments may adversely affect our ability to remain in compliance with the applicable debt covenants. The senior secured credit facility provides for customary events of default, including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holders of our debt to accelerate the maturity of debt having a principal amount of $25.0 million or more. On September 16, 2002, we redeemed $150,500 of our 5.25% convertible subordinated notes due 2002 using available cash and cash equivalents. The redemption was made in accordance with the scheduled maturity of the 5.25% convertible subordinated notes due 2002 and did not result in any gain or loss. On September 16, 2002, we redeemed $20,879 of our 10.5% senior secured notes due 2002 using proceeds from the senior secured credit facility. The redemption was made in accordance with the scheduled maturity of the 10.5% senior secured notes due 2002 and did not result in any gain or loss. Net Cash Provided by/Used in Operating, Investing and Financing Activities We used $5.1 million and $48.3 million to fund continuing operations in the twenty-six week periods ended August 31, 2002 and September 1, 2001, respectively. Operating cash flow for the twenty-six week period ended August 31, 2002 was negatively impacted by $170.9 million of interest payments, increases in accounts receivable, inventory and decreases in accounts payable. Operating cash flow for the twenty-six week period ended September 1, 2001 was negatively impacted by $250.1 million in interest payments and increases in accounts receivable and inventory. Cash used in investing activities was $28.0 million for the twenty-six week period ended August 31, 2002, due primarily to expenditures for property, plant and equipment as well as intangible assets, offset by proceeds from asset dispositions. 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 financing activities was $40.0 million and $299.5 million for the twenty-six week periods ended August 31, 2002 and September 1, 2001, respectively. Proceeds from 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 was $1,437.9 million at August 31, 2002, compared to $1,524.3 million at March 2, 2002. Capital Expenditures We plan capital expenditures of approximately $130.0 million during fiscal 2003, consisting of approximately $61.0 million related to new store construction, store relocation and store remodel projects. An additional $69.0 million will be dedicated to the purchase of prescription files from independent pharmacists, improvements to distribution centers, technology enhancements and other corporate requirements. Management expects that these capital expenditures will be financed primarily with cash flow from operations and borrowings under the revolving credit facility available under our senior secured facility. During the twenty-six week period ended August 31, 2002, we spent $53.6 million on capital expenditures, consisting of $26.0 million related to new store construction, store relocation and other store construction projects. An additional $27.6 million was related to other store improvement activities and the purchase of prescription files from independent pharmacists. 22 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 borrowings under the senior secured credit facility and its other sources of liquidity will be adequate to meet our anticipated annual requirements for working capital, debt service and capital expenditures through the end of fiscal 2003. 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 would 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. Recent Accounting Pronouncements We adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective March 3, 2002. SFAS No. 142 specifies that all goodwill and indefinite life intangibles shall no longer be amortized. Goodwill must be allocated to reporting units and evaluated for impairment on an annual basis with an initial impairment assessment to be performed upon adoption of SFAS No. 142. We have completed the transitional goodwill impairment test as of March 3, 2002 and determined that there was no impairment loss to be recognized upon adoption of SFAS No. 142. At August 31, 2002, we have unamortized goodwill of $684.5 million and no indefinite life intangibles. The impact of the adoption of SFAS No. 142 on the thirteen and twenty-six week periods ended September 1, 2001 is as follows (in millions except per share amounts):
Thirteen week Twenty-Six week period ended period ended September 1, 2001 September 1, 2001 ----------------- ----------------- Reported net loss $ (245.9) $ (457.0) Add back goodwill amortization 5.3 10.6 --------- --------- Adjusted net loss $ (240.6) $ (446.4) ========= ========= Basic and diluted loss per share: Reported net loss $ (0.54) $ (1.10) Goodwill amortization 0.01 0.02 --------- --------- Adjusted net loss $ (0.53) $ (1.08) ========= =========
We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective March 3, 2002. SFAS No. 144 addressed the financial accounting and reporting for the impairment or disposal of long-lived assets. We have determined that there was no impact on the consolidated financial position or results of operations as a result of the adoption of SFAS No. 144. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," Amendment of SFAS No. 13, "Accounting for Leases," and Technical Corrections." The provisions of SFAS No. 145 that relate to the rescission of SFAS No. 4 are required to be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for classification as an extraordinary item shall be reclassified. Beginning with fiscal 2004, our financial statements for prior years with extraordinary items for the early extinguishment of debt will show such items as reclassified to operations. The provisions related to SFAS No. 13 are effective for transactions occurring after May 15, 2002 and have been adopted without material impact All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. 23 In June of 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This differs from the guidance in EITF 94-3, which requires that a liability for costs associated with an exit plan or disposal activity be recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also requires all charges related to an exit activity, including accretion of interest related to the discounting of the future liability related to that activity, to be classified in the same line item on the statement of operations. The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not adopted SFAS No.146, and has not determined whether it will elect to adopt SFAS No. 146 before the required date. The adoption of this Statement will impact the timing of recognition of liabilities on stores closed or severance arrangements entered into after the adoption date, but will have not impact on the current liabilities recorded by the client for store already closed and severance arrangements already entered into. The adoption will also impact the classification of the accretion of interest on closed stores in the statement of operations. 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---Overview" and "Factors Affecting our Future Prospects" included in our Annual Report on Form 10-K for the fiscal year ended March 2, 2002, which we filed with the SEC on May 7, 2002. 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 2002, our primary risk exposure has not changed. We enter into debt obligations to support capital expenditures, acquisitions, working capital needs and general corporate purposes. Our policy is to manage interest rates through the use of a combination of variable-rate credit facilities, fixed-rate long-term obligations and derivative transactions. The table below provides information about the company's 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 August 31, 2002.
Fair Value at August 31, 2003 2004 2005 2006 2007 Thereafter Total 2002 --------- -------- --------- ----------- --------- --------- ----------- ---------- (dollars in millions) Long-term debt, Including current portion Fixed rate $175.4 $59.1 $2.5 $392.9 $739.3 $952.1 $2,321.3 $1,610.2 Average Interest Rate 6.00% 6.06% 11.66% 6.82% 7.56% 7.71% 7.34% Variable Rate $15.0 $37.5 $60.0 $1,253.5 $149.5 $1,515.5 $1,515.5 Average Interest Rate 5.56% 5.56% 5.56% 5.56% 9.31% 5.93%
24 As of August 31, 2002, 39.5% of our total debt is exposed to fluctuations in variable interest rates. During the thirteen week period ended August 31, 2002, the two interest rate swap contracts that fixed an aggregate of $1.0 billion of our LIBOR based variable rate debt terminated and were not renewed. This increases our exposure to fluctuations in market 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 August 31, 2002, 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 B2 by Moody's. The interest rate on the variable rate borrowings on this facility are LIBOR plus 3.75%. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of this report, have concluded that, as of such date our disclosure controls and procedures were adequate and effective to ensure that material information relating to Rite Aid would be made known to them by others within the company. (b) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect Rite Aid's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in Rite Aid's internal controls. As a result, no corrective actions were required or undertaken. 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings The U.S. Federal Trade Commission commenced an investigation of us on September 11, 2002 of matters relating to consumer privacy and advertising practices. We have not been accused of any wrongdoing and we are fully cooperating with the Federal Trade Commission. The investigation is in its preliminary stages and we cannot predict its outcome at this time. On September 19, 2002 counsel for the plaintiffs in the stockholder litigation advised us that an agreement in principle had been reached to settle the stockholder's claims against KPMG, Martin Grass, Frank Bergonzi and Timothy Noonan. Such settlement remains subject to documentation and approval by the U.S. District Court. If and when such settlement is approved by the U.S. District Court, the pending appeal by such defendants will be dismissed, whereupon our settlement of the consolidated securities class action lawsuits will become final. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders On June 26, 2002, we held our 2002 Annual Meeting of Stockholders. At the 2002 Annual Meeting, our stockholders: 1. Elected two directors to hold office until the 2005 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified, by the following votes: Common and Series D Preferred stockholders: Robert G. Miller For: 428,794,242 Against: 0 Withheld: 8,473,659 Alfred M. Gleason For: 428,517,277 Against: 0 Withheld: 8,750,625 Series D Preferred stockholders: For: 66,124,816 Against: 0 Withheld: 0 Following the 2002 Annual Meeting of Stockholders, the following persons continued to serve as our Directors: William J. Bratton, Alfred M. Gleason, George G. Golleher, Leonard I. Green, Mary F. Sammons, Robert G. Miller, Stuart M. Sloan and Jonathan D. Sokoloff. 2. Defeated a stockholder proposal that requested our Board of Directors to establish a policy that it will make its best efforts to appoint only independent directors to serve on the Board's Audit, Compensation and Nominating Committees: Common stockholders: For: 60,425,336 Against: 115,002,173 Abstain: 5,187,466 Series D Preferred stockholders: For: 0 Against: 66,124,816 Abstain: 0 26 Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report.
Exhibit Incorporation Numbers Description by Reference to - ------- ----------- --------------- 3.1 Restated Certificate of Incorporation dated December 12, Exhibit 3 (i) to Form 8-K, 1996 filed on November 2, 1999 3.2 Certificate of Amendment to the Restated Certificate of Exhibit 3 (ii) to Form 8-K, Incorporation dated October 25, 1999 filed on November 2, 1999 3.3 Certificate of Amendment to Restated Certificate of Exhibit 3.4 to Form S-1, File Incorporation dated June 27, 2001 No. 333-64960, filed on July 12, 2001 3.4 8% Series D Cumulative Convertible Pay-in-Kind Preferred Exhibit 3.5 to Form 10-Q, Stock Certificate of Designation, dated October 3, 2001 filed on October 12, 2001 3.5 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K, filed on November 13, 2000 3.6 Amendment to By-laws, adopted January 30, 2002 Exhibit T3B2 to Form T-3, filed on March 4, 2002 4.1 Indenture dated as of September 10, 1997 by and between Exhibit 4.1 to Registration Rite Aid Corporation, as issuer, and Harris Trust and Statement on Form S-3, File No. Savings Bank, as trustee, related to the Company's 5.25% 333-39699, filed on November 6, Convertible Subordinated Notes 1997 4.2 Indenture dated as of September 22, 1998 by and between Exhibit 4.1 to Registration Rite Aid Corporation, as issuer, and Harris Trust and Statement on Form S-4, File No. Savings Bank, as trustee, related to the Company's 6% 333-66901, filed on November 6, Dealer Remarketable Securities 1998 4.3 Indenture dated as of December 21, 1998, between Rite Exhibit 4.1 to Registration Aid Corporation, as issuer, and Harris Trust and Savings Statement on Form S-4, File No. Bank, as trustee, related to the Company's 51/2% Notes 333-74751, filed on March 19, due 2000, 6% Notes due 2005, 6 1/8% Notes due 2008 and 6 1999 7/8 Notes due 2028 4.4 Supplemental Indenture dated as of February 3, 2000, Exhibit 4.1 to Form 8-K, filed between Rite Aid Corporation, as issuer, and U.S. Bank on February 7, 2002 Trust National Association, to the Indenture dated as of August, 1993 and Morgan Guaranty Trust Company of New York, relating to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013 4.5 Supplemental Indenture, dated as of February 3, 2000, Exhibit 4.2 to Form 8-K, filed between Rite Aid Corporation and Harris Trust and on February 7, 2000 Savings Bank, to the Indenture dated September 10, 1997, between Rite Aid Corporation and Harris Trust and Savings Bank, related to the Company's 5.25% Convertible Subordinated Notes 4.6 Supplemental Indenture, dated as of February 3, 2000, Exhibit 4.3 to Form 8-K, filed between Rite Aid Corporation and Harris Trust and on February 7, 2000 Savings Bank, to the Indenture dated September 22, 1998, between Rite Aid Corporation and Harris Trust and Savings Bank, related to the Company's 6% Dealer Remarketable Securities
27
4.7 Supplemental Indenture, dated as of February 3, 2000, Exhibit 4.4 to Form 8-K, filed between Rite Aid Corporation and Harris Trust and on February 7, 2000 Savings Bank, to the Indenture dated December 21, 1998, between Rite Aid Corporation and Harris Trust and Savings Bank, related to the Company's 10.5% Senior Secured Notes due 2002 4.8 Indenture, dated as of June 14, 2000, among Rite Aid Exhibit 4.1 to Form 8-K, filed Corporation, as issuer, each of the Subsidiary on June 21, 2000 Guarantors named therein and State Street Bank and Trust Company, as Trustee, related to the Company's 10.5% Senior Secured Notes due 2002 4.9 Indenture, dated as of June 27, 2001, between Rite Aid Exhibit 4.7 to Registration Corporation, as issuer, and State Street Bank and Trust Statement on Form S-1, File No. Company, as trustee, related to the Company's 12.5% 333-64950, filed on July 12, Senior Secured Notes due 2006 2001 4.10 Indenture, dated as of June 27, 2001, between Rite Aid Exhibit 4.8 to Registration Corporation, as issuer, and BNY Midwest Trust Company, Statement on Form S-1, File No. as trustee, related to the Company's 113/4Notes due 333-64950, filed on July 12, December 2008 2001 4.11 Indenture, dated as of November 19, 2001, between Rite Exhibit 4.3 to Form 10-Q, filed Aid Corporation, as issuer, and BNY Midwest Trust on January 15, 2002 Company, as trustee, related to the Company's 4.75% Convertible Notes due December 1, 2006 4.12 Indenture, dated as of April 4, 2002, between Rite Aid Exhibit T3C to Form T-3, filed Corporation, as issuer, and BNY Midwest Trust Company, on March 4, 2000 as trustee, related to the Company's Senior Secured Notes due March 15, 2006 10.1 Amended and Restated Employment Agreement, dated as of Filed herewith June 27, 2002, between Rite Aid Corporation and David R. Jessick 11 Statement regarding computation of earnings per share (See note 3 to the condensed consolidated financial statements) 99.1 Certification of CEO and CFO Pursuant to 18 United Filed herewith States Code, Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002
Rite Aid Corporation filed a Current Report on Form 8-K on June 24, 2002 disclosing under Item 5 a press release dated June 21, 2002 announcing that the Securities and Exchange Commission has issued a cease-and-desist order that completes an investigation of the Company relating to certain financial reporting and accounting practices under prior management. The cease-and-desist order, in which Rite Aid neither admits or denies the findings, was issued pursuant to Rite Aid's offer of Settlement. 28 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 15, 2002 RITE AID CORPORATION By: /s/ ROBERT B. SARI ---------------------------- Robert B. Sari Senior Vice President and General Counsel Date: October 15, 2002 By: /s/ CHRISTOPHER HALL ---------------------------- Christopher Hall Executive Vice President and Chief Financial Officer 29 CERTIFICATIONS I, Robert G. Miller, Chairman and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rite Aid Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 15, 2002 By: /s/ ROBERT G. MILLER ---------------------------- Robert G. Miller Chairman and Chief Executive Officer 30 CERTIFICATIONS I, Christopher Hall, Executive Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Rite Aid Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 15, 2002 By: /s/ CHRISTOPHER HALL ---------------------------- Christopher Hall Executive Vice President and Chief Financial Officer 31 EX-10.1 3 b320621_ex10-1.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT Exhibit 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED AGREEMENT (this "Agreement") by and between Rite Aid Corporation, a Delaware corporation (the "Company "), and David R. Jessick (the "Employee"), is entered into as of this 27th day of June, 2002 and shall become effective at the close of business on June 27, 2002 (the "Effective Date"). WITNESSETH WHEREAS, the Company and the Employee are parties to the Employment Agreement dated as of December 5, 1999 (the "Original Employment Agreement"); and WHEREAS, the Company wishes to provide for the continued services of Employee, and the Employee wishes to continue to serve the Company on the terms and conditions set forth in this Agreement; and WHEREAS, Employee and the Company deserve to settle fully all employment related matters between them arising prior to the Effective Date including, but not limited to, any differences that might have arisen under the Original Employment Agreement based on Employee's change of position with the Company; NOW, THEREFORE, as of the Effective Date, and except as otherwise expressly set forth herein, the Original Employment Agreement is hereby amended and restated as follows (with this Agreement superseding the Original Employment Agreement from and after the Effective Date in its entirety): 1. TERM. Subject to earlier termination in accordance with the provisions of Section 4, the term of Employee's employment under this Agreement (such period, commencing as of the Effective Date, being referred to herein as the "Employment Period") shall end on February 26, 2005. 2. POSITION AND DUTIES. As of the Effective Date, Employee hereby resigns as Senior Executive Vice President and Chief Administrative Officer of the Company and from all other offices and positions he holds with the Company and its subsidiaries. During the Employment Period, the Employee shall continue to be an employee of the Company, with such duties and responsibilities as may from time to time be assigned to him by the Company's Chief Executive Officer (or his or her designee) or the Board of Directors of the Company (the "Board"). As an employee, Employee shall make himself available to provide services to the Company and its subsidiaries from time to time on such project(s) relating to the business, affairs and management of the Company as may be assigned to him. The Company acknowledges that Employee will have other activities, obligations and engagements that will command his time and attention, subject to the provisions of Section 8 and the other provisions hereof. In no event shall the period of services (which shall include travel time) required hereunder exceed an average of six (6) hours per week calculated on a weekly basis. The duties of Employee may be performed in Portland, Oregon (or such other place where Employee principally resides) and Employee shall be provided with office space in the Company's Portland, Oregon office, which shall include secretarial and other support services. 3. COMPENSATION. (a) BASE SALARY. During the Employment Period, the Company shall pay Employee an annual base salary ("Annual Base Salary") of $150,000. The Annual Base Salary shall be payable in accordance with the Company's regular payroll practice, as in effect from time to time (but in no event less frequently than monthly). (b) INCENTIVE COMPENSATION. With respect to the 2003 fiscal year only, Employee shall be entitled to participate on the same basis as other executives in the bonus plan authorized by the Company's Board of Directors (the "Board") on April 3, 2002. Employee's bonus level shall be based upon sixty percent (60%) of Employee's current annualized Base Salary ($600,000 per year) in effect on the day preceding the Effective Date even though the entire $600,000 Base Salary for fiscal year 2003 will not be paid to Employee as a result of this Agreement, and (ii) if bonuses under that plan are not earned, the bonus payment, if any, to Employee shall be approved by the Board. Any salary paid pursuant to section 3(a) of this Agreement shall not be taken into account for purposes of determining the payment, if any, pursuant to this subsection (b). Employee shall not be entitled to participate in such plan or any successor thereto for any fiscal year after fiscal year 2003. In the event the Company pays a performance or other bonus with respect to fiscal year 2003 in lieu of or in addition to the bonus under the plan, Employee shall not be entitled to participate therein. Employee's death or disability shall not affect or diminish any payment of the bonus which would otherwise be due and payable. (c ) CERTAIN OTHER BENEFITS During the Employment Period, except as and to the extent otherwise provided herein, (i) the Company shall, subject to the immediately succeeding sentence, continue to maintain Employee's term life insurance on the Employee's life, in the face amount of $1,500,000 (in the form currently provided) and (ii) Employee shall be entitled to participate in employee discounts, Internet access arrangements and Company- sponsored health benefits and health plans which will provide the same coverage and benefits (which shall be continuous and uninterrupted) as those plans in which Executive employees of the Company are generally able to participate, subject in the case of health benefits and health plans to any generally applicable eligibility requirements and the other generally applicable terms (including, but not limited to contribution requirements) thereof, other than any requirements relating to minimum hours worked or scheduled to work. The Employee agrees to cooperate with the Company in maintaining such term life insurance, including submitting to a physical examination if required to do so by the insurance carrier. The beneficiary of each of the aforementioned policies shall be designated by the Employee and if not so designated shall be his estate. In addition, during the Employment Period, the Company shall promptly reimburse Employee against receipts for (x) all necessary and reasonable business expenses incurred by the Employee in connection with the discharge of his duties hereunder, and (y) all reasonable costs and expenses incurred by Employee in the course of meeting with Company directors and officers. (d) DEFERRED COMPENSATION. As of the first day of each month through and including February 1, 2003, the Company shall continue to credit Employee's account under the New Deferred Compensation Plan established under the Original Employment Agreement with an amount equal to $10,000. The Employee shall be fully vested at all times in his account balance under the New Deferred Compensation Plan. In addition, Employee shall have the right to defer all or any portion of the Annual Base Salary receivable after the Effective Date hereunder pursuant to deferred compensation arrangements to be established in good faith after the Effective Date. 2 (e) EQUITY AWARDS. As of the Effective Date, Employee holds the options ("Options") to purchase Company common stock and the shares of restricted Company common stock ("Restricted Stock") set forth on Schedule I hereto (collectively, the "Company Securities"). Except as otherwise provided herein, the time vesting provisions applicable to the Options and the Restricted Stock shall continue to apply after the Effective Date based solely upon the lapse of time until such Options have vested and restrictions had lapsed in full; provided, however, that upon a Change in Control (as defined in Appendix A) all Options shall vest in full and all restrictions on the Restricted Stock shall lapse in full. The exercise period of the Options shall not be shortened by virtue of any provision of this Agreement or any termination of Employee's status as an employee of the Company, and in all events, each Option shall remain exercisable by Employee, his estate or successors for ten (10) years from the date of its grant. To the extent Company has a withholding obligation with respect to any vesting of Restricted Stock, Employee shall either pay such amount to Company or make an election (if made within 5 business days of such vesting or such longer period as is provided to all executive officers of the Company)to receive a net amount of vested shares of Restricted Stock based on cancellation of the number of shares equal to such withholding obligation calculated at the fair market value of such shares as determined under the relevant plan or, if not so determined, by the Board of Directors or compensation committee in good faith. Except as expressly provided herein, the terms and conditions of the Company Securities in effect immediately prior to the Effective Date shall remain in full force and effect from and after the Effective Date. (f) INDEMNIFICATION. The Company shall (a) indemnify and hold Employee harmless, to the full extent permitted under applicable law, for, from and against any and all losses, claims, costs, expenses, damages, liabilities or actions (including security holder actions, in respect thereof) related to or arising out of the Employee's employment with or his service to the Company prior to and after the Effective Date as an officer or employee of the Company and (b) advance and pay all reasonable costs, expenses and attorney's fees incurred by Employee in connection with or relating to the defense of any such loss, claim, cost, expense, damage, liability or action. The Company shall cause any director and officer liability insurance policies applicable to the Employee to remain in effect for six (6) years following the termination of employment for any reason. The provisions of this Section 3(f) shall survive termination of this Agreement for any reason. 4. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. The Company shall be entitled to terminate the Employee's employment because of the Employee's Disability during the Employment Period. "Disability" means that Employee has been unable, for six consecutive months, to perform the Employee's duties under this Agreement, as a result of physical or mental illness or injury. The effective date of any termination of Employee's employment for Disability is referred to herein as the "Disability Effective Date." A termination of the Employee's employment by the Company for Disability shall be communicated to the Employee by written notice, and shall be effective on the 30th day after receipt of such notice by the Employee, unless the Employee is able to return to the performance of the Employee's duties before the Disability Effective Date. During any period prior to the Disability Effective Date during which Employee is unable to fully perform his duties with the Company due to such physical or mental illness or injury, there shall be no diminution in the amounts payable or benefits available to Employee hereunder. 3 (b) TERMINATION BY THE COMPANY. The Company may terminate the Employee's employment at any time during the Employment Period for Cause. "Cause" shall mean only an act of fraud, embezzlement or misappropriation by the Employee, in any such case intended by the Employee to result in substantial personal enrichment at the expense of the Company. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the non-employee members of the Board at a meeting of the Board called and held for such purpose (after reasonable written notice to Employee setting forth in reasonable detail the specific conduct of the Employee upon which the Board relied in reaching its determination, and an opportunity for Employee, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Employee was guilty of conduct constituting Cause as defined above, Employee shall be entitled to receive all compensation and benefits hereunder pending the delivery of such resolution. The effective date of any termination for Cause shall be the date such resolution is delivered to Employee. (c) GOOD REASON. (i) The Employee may terminate employment for Good Reason or without Good Reason. "Good Reason" shall mean the occurrence of any one of the following: A. any failure by the Company to comply with any provision of Section 3 of this Agreement; B. any other material breach of this Agreement by the Company; provided, however, that the Company shall have the right, within ten (10) days after receipt of notice from Employee of the Company's violation of subparagraphs A or B (or such longer period provided below) to cure in full the event or circumstances giving rise to such Good Reason, in the event of which cure such event or circumstances shall be deemed not to constitute Good Reason hereunder. A termination of employment by the Employee for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Employee relies, provided, that Employee's continued employment shall not be deemed to constitute consent to, or a waiver of rights with respect to, any act, omission or other grounds constituting Good Reason hereunder. For clarity, it is understood that the requirement of setting forth such specific conduct and specific provisions(s) is intended (i) to permit the Company to make a reasonable evaluation of Employee's claim of termination for Good Reason and (ii) to permit the Company, where applicable, to cure such conduct, but not to require Employee to specify each act, omission or other grounds constituting Good Reason, there being no intention of the parties that failure to so specify will function as an estoppel with respect to any claim by Employee. A termination of employment by the Employee for Good Reason shall be effective on the latest of (i) the fifth business day following the expiration of the Company's cure period described above, if applicable, (ii) the date specified by Employee in the Notice of Termination for Good Reason or (iii) 45 days following the date the Notice of Termination for Good Reason is delivered to the Company. 4 In addition, a Change of Control of the Company (as defined in Appendix A) during the Employment Period shall be deemed to constitute a termination of employment by the Employee for Good Reason (provided that the Employee need not actually terminate his employment before or after such Change in Control). In such event, in addition to the provisions of Section 5(a), the Company shall pay to the Employee, not later than ten (10) days following the Date of Termination, an amount equal to the following (but not less than zero): (x) $2,880,000; less ---- (y) the gross amount, if any that Employee realizes (which amount Employee agrees to promptly report to the Company) with respect to the Options (other than with respect to the Options granted in January 2002 set forth in Schedule I which shall not be included as an offset) at any time prior to or as a result of the Change in Control (with any Options converted into immediately freely tradeable securities as of the date of the Change of Control being deemed to be realized and valued by the Board of Directors of the Company in good faith at such date of closing). (ii) A termination of the Employee's employment by the Employee without Good Reason shall be effected by giving the Company at least 90 days' written notice of such termination, and shall be effective on the date specified by Employee in such notice, provided, however, that no such notice period shall be required with respect to any such termination as to which such written notice of termination is delivered to the Company following a Change in Control of the Company. (d) DATE OF TERMINATION. The "Date of Termination" means the date of the Employee's death, the Disability Effective Date, or the date on which the termination of the Employee's employment by the Company for Cause or by the Employee for Good Reason or without Good Reason becomes effective, as the case may be. On the Date of Termination, the Employment Period shall terminate. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) FOR GOOD REASON OR FOR OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company terminates the Employee's employment for any reason other than Cause, Death or Disability, or the Employee terminates his employment for Good Reason; (1) the Company shall continue to pay (as and when due under this Agreement) to the Employee: (A) his Annual Base Salary through the end of the Employment Period, (B) the incentive compensation as provided in Section 3(b) above, payable when generally paid under such Plan, (C) any other compensation and benefits accrued (and, where applicable, vested) through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements applicable to Employee hereunder as in effect immediately prior to the Date of Termination (or, if in any case providing a greater benefit to Employee, as in effect immediately prior to an event constituting Good Reason), and (D) any amounts of reimbursable business expenses incurred through the Date of Termination. 5 (2) health benefits provided to the Employee immediately prior to the Date of Termination (or, at Employee's sole discretion, medical coverage provided to the Employee immediately prior to the occurrence of any event constituting Good Reason) and the life insurance set forth in Section 3(c) shall continue to be provided by the Company to the Employee (and, if applicable, his spouse and dependents) through February 26, 2005; (3) all of the Employee's then outstanding Options shall vest and become fully exercisable as of the Date of Termination and the Options shall remain fully vested and exercisable by Employee, his estate or successor for ten (10) years from the date of its grant; (4) all remaining restrictions applicable to the Restricted Stock shall immediately lapse; and (5) if the date of termination is prior to February 1, 2003, the Company shall continue to credit Employee's account under the New Deferred Compensation Plan as provided in Section 3(d) above through and including February 1, 2003. (b) DEATH AND DISABILITY. If the Employee's employment is terminated by reason of the Employee's death or Disability during the Employment Period; (1) the Company shall pay to the Employee or, in the case of the Employee's death, to the Employee's designated beneficiaries (or, if there is no such beneficiary, to the Employee's estate or legal representative), in a lump sum in cash within ten (10) days after the Date of Termination (or, if later, when payable in accordance with the relevant Plans), (a) any earned but unpaid Annual Base Salary through the Date of Termination, (b) the incentive compensation, as provided in Section 3(b) above, payable when generally paid under such Plan, and (c) any unreimbursed business expenses (collectively, the "Accrued Benefits"). (2) health benefits provided to the Employee immediately prior to the Date of Termination shall continue to be provided by the Company (i) in the event of Disability, to the Employee (and, if applicable, his spouse and dependents) or (ii) in the event of Employee's death, to his surviving spouse (and, if applicable, his dependents), through February 26, 2005; (3) all of the Employee's then outstanding Options shall vest and become fully exercisable as of the Date of Termination and (i) the Options shall remain fully vested and exercisable by Employee, his estate or successor for ten (10) years from the date of its grant; (4) all remaining restrictions applicable to the Restricted Stock shall immediately lapse; and 6 (5) if the termination date is prior to February 1, 2003, the Company shall continue to credit Employee's account under the New Deferred Compensation Plan as provided in Section 3(d) above through and including February 1,2003. (c) BY THE COMPANY FOR CAUSE. If the Employee's employment is terminated by the Company for Cause during the Employment Period, (1) the Company shall pay to the Employee the Accrued Benefits within ten (10) days after the Date of Termination , (2) Employee's outstanding vested Options shall remain exercisable for the remainder of their term and Employee's unvested Options shall terminate and be immediately canceled, and (3) any portion of the Restricted Stock as to which time vesting restrictions have not lapsed prior to the Date of Termination shall terminate and be immediately canceled. (d) BY THE EMPLOYEE OTHER THAN FOR GOOD REASON. If the Employee's employment is terminated by Employee (other than for Good Reason) during the Employment Period, (1) the Company shall pay to the Employee the Accrued Benefits, within ten (10) days after the Date of Termination; (2) Employee's outstanding vested Options shall remain exercisable for the remainder of their term and Employee's unvested Options shall continue to vest based on the lapse of time as if Employee's employment with the Company had continued uninterrupted in full and thereafter remain exercisable for the remainder of their term, in each case without any regard to any early termination provision, and (3) the restrictions on the Restricted Stock shall continue to lapse as if Employee's employment with the Company had continued uninterrupted until such restrictions had lapsed in full. (e) GOLDEN PARACHUTE PAYMENTS. (i) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this agreement or of any other plan, arrangement or agreement of the Company (or any affiliate) (collectively, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), as determined as provided below, the Company shall pay to the Employee, at the time specified in Section 5(e)(ii) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Employee, after deduction of the Excise Tax on Payments and any federal, state and local income and employment or other tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by the Employee with respect thereto, shall be equal to the total Payments. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Employee and selected by the accounting firm which was, immediately prior to the event giving rise to the Payment, the Company's independent auditor (the "Auditor"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(l) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to the individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Employee's residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. 7 (ii) The Gross-Up Payments provided for in Section 5(e)(i) hereof shall be made upon the earlier of (i) ten days following the Date of Termination or (ii) the imposition upon the Employee or payment by the Employee of any Excise Tax. (iii) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that the Excise Tax is less than the amount taken into account under Section 5(e)(i) hereof, the Employee shall repay to the Company within thirty (30) days of the Employee's receipt of notice of such final determination the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-Up Payment being repaid by the Employee if and to the extent that such repayment results in a reduction in Excise Tax and a dollar-for-dollar reduction in the Employee's taxable income and wages for the purpose of federal, state and local income taxes) plus any interest received by the Employee on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that the Excise Tax exceeds the amount taken into account hereunder (including without limitation by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment pursuant to Section 5(e)(i) in respect of such excess within thirty (30) days of the Company's receipt of notice of such final determination or opinion. The Employee and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Payments. (iv) In the event of any change in, or further interpretation of, sections 280G or 4999 of the Code and the regulations promulgated thereunder, the Employee shall be entitled, by written notice to the Company, to request an opinion of Tax Counsel regarding the application of such change to any of the foregoing, and the Company shall use its best efforts to cause such opinion to be rendered as promptly as practicable. All fees and expenses of the Auditor and Tax Counsel incurred in connection with this Agreement shall be borne by the Company. 6. [INTENTIONALLY OMITTED.] 7. FULL SETTLEMENT. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Employee or others whether in respect of claims made under this Agreement or otherwise. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts, benefits and other compensation payable or otherwise provided to the Employee under any of the provisions of this Agreement, and such amounts shall not be reduced, regardless of whether the Employee obtains other employment. In no event shall any amounts, benefits or other compensation payable or otherwise provided to Employee hereunder be reduced in respect of, or the Company's obligations to Employee hereunder be affected by, or any other form of "clawback" provision apply to, the payment to Employee at any time of any amounts, benefits or other compensation in respect of his employment with any prior employer. 8 8. CONFIDENTIAL INFORMATION; SOLICITATION. During the Employment Period and for a period of three years following the applicable Date of Termination, the Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Employee obtains during the Employee's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Employee's violation of this Section 8) ("Confidential Information") and the Employee shall not communicate, divulge or disseminate Confidential Information at any time during such period to anyone other than the Company, appropriate Company personnel and those other persons designated by the Company, except (i) with the prior written consent of the Company, (ii) as otherwise required by law or legal process, (iii) on behalf of the Company in the furtherance of its business or in the course of performing Employee's duties to the Company or (iv) in the course of any adversarial proceeding against the Company. During the Employment Period (and if during the Employment Period (A) the Employee terminates his employment with the Company without Good Reason or (B) the Employee is terminated by the Company for Cause, then for one year after the Date of Termination), (i) the Employee shall not, without the written consent of the Board, directly or indirectly solicit or recruit any person (other than persons employed in a clerical or other non-professional position) who is then employed by the Company or who was employed by the Company or any of its subsidiaries or affiliates at any time during the six-month period preceding the Date of Termination for the purpose of being employed by the Employee, by any entity or person on whose behalf the Employee is acting as an agent, representative or employee or by any Competitor of the Company and (ii) the Employee shall not, without the written consent of the Board, directly or indirectly, solicit, entice, persuade or induce any person or entity doing business with the Company and its subsidiaries and affiliates, to terminate such relationship or to refrain from extending or renewing the same. In the event of a breach or any threatened breach of the Section 8, Employee agrees that, in addition to any other remedy available to the Company at law or in equity, the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any breach or prevent any threatened breach. Employee further acknowledges that damages would be inadequate and insufficient to compensate the Company for any breach of this Section 8. 9. NON-DISPARAGEMENT. Employee agrees that he will not in any public forum (i.e., lectures, to the media, in published articles, to analysts, or in comparable public forums) or in private conversations (i.e., social settings, etc.) criticize, disparage, denigrate, or speak adversely of, or disclose negative information about, the operations, management or performance of the Company or about any director, officer, employee or agent of the Company. The intent of this Section 9 is to ensure that Employee does not say or do anything that damages or impairs, or might damage or impair, in any way the business organization, goodwill, or reputation of the Company or any of its directors, officers, employees or agents. 9 10. DISPUTE RESOLUTION; ATTORNEYS' FEES. All disputes arising under or related to the employment of the Employee by the Company or the provisions of this agreement shall be settled by arbitration under the rules of the American Arbitration Association then in effect, such arbitration to be held in Portland, Oregon, as the sole and exclusive remedy of either party and judgment on any arbitration award may be entered in any court of competent jurisdiction. The Company agrees to reimburse all reasonable legal fees and other expenses incurred by the Employee in any such dispute if the Employee prevails as to one or more of the material issues in the dispute. 11. SUCCESSORS. (a) No rights or obligations of Employee under this Agreement may be assigned or transferred by Employee other than his rights to payments, benefits or other compensation hereunder, which (without the prior written consent of the Company) may be transferred only by will or the laws of descent and distribution or as otherwise provided in the applicable agreements covering the Company's securities. Upon Employee's death, this Agreement and all rights of Employee hereunder, including with regard to the Company's Securities shall inure to the benefit of and be enforceable by Employee's spouse, beneficiary or beneficiaries, personal or legal representatives, or estate, to the extent any such person succeeds to Employee's right to benefits under this Agreement. Employee shall be entitled to select and change a beneficiary or beneficiaries to receive any payment, benefit or other compensation payable hereunder following Employee's death by giving the Company written notice thereof. In the event of Employee's death or a judicial determination of his incompetence, reference in this Agreement to Employee shall be deemed, where appropriate, to refer to his beneficiary or beneficiaries, estate or other legal representative(s). (b) No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, the "Company" shall mean both the Company as defined above and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 1l(b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise. 12. COMPANY REPRESENTATION. The Company represents and warrants to the Employee that (i) it has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder in full, (ii) the execution and delivery of this Agreement by the Company and the performance of its obligations hereunder have been duly and validly authorized by all necessary corporate action and (iii) no other corporate proceedings on the part of the Company (including on the part of the shareholders of the Company) are necessary to authorize this Agreement or perform such obligations. This Agreement has been duly and validly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 10 13. WAIVER AND RELEASE. (a) Employee acknowledges that there are various state, local and federal laws that prohibit, among other things, employment discrimination on the basis of age, sex, race, color, national origin, religion, disability, sexual orientation or veteran status and that these laws are enforced through the Equal Employment Opportunity Commission, Department of Labor and State or Local Human Rights agencies. Such laws include, without limitation, Title VII of the Civil Rights Act of 1964; the Age Discrimination in Employment Act ("ADEA"); the Americans with Disabilities Act ("ADA"); the Employee Retirement Income Security Act ("ERISA"); 42 U.S.C. Section 1981; the California Fair Employment and Housing Act, etc., as each may have been amended, and other state and local human or civil rights laws as well as other statutes which regulate employment; and the common law of contracts and torts. Employee hereby waives and releases any rights he may have under these or any other laws with respect to his employment under the Original Employment Agreement (and the termination thereof) and acknowledges that the Company has not (a) discriminated against him, including on the basis of age, (b) breached any contract with him, (c) committed any civil wrong (tort) against him, or (d) otherwise acted unlawfully toward him. Employee also waives any right to become, and promises not to consent to become, a member of any class in a case in which claims are asserted against any Releasee (as defined in Section 13(b) hereof) that are related in any way to his employment under the Original Employment Agreement (and the termination thereof), and that involve events which have occurred as of the date of this Agreement (defined to mean the date on which Employee signs this Agreement). If Employee, without his prior knowledge and consent, is made a member of a class in any proceeding, he will opt out of the class at the first opportunity afforded to him after learning of his inclusion. In this regard, Employee agrees that he will execute, without objection or delay, an "opt-out" form presented to him either by the court in which such proceeding is pending or by counsel for any Releasee who is made a defendant in any such proceeding. (b) Employee, on behalf of himself and his heirs, executors, administrators, successors and assigns, hereby unconditionally releases and discharges the Company, and its subsidiaries, successors, assigns, affiliates, shareholders, directors, officers, representatives, agents and employees as well as any benefit plan and its fiduciaries and insurors (collectively "Releasees" and individually "Releasee") from all known and unknown claims (including claims for attorneys' fees and costs), charges, actions and causes of action, demands, damages, and liabilities of any kind or character, in law or equity, suspected or unsuspected, past or present, that he ever had, may now have, or may later assert against any Releasee, arising out of or related to his employment with the Company prior to the Effective Date, including but not limited to severance or other claims arising under the Original Employment Agreement or as a result of Employee's change in position with the Company pursuant to this Agreement and any other claims against the Company other than claims arising pursuant to the terms of this Agreement after the Effective Date. To the fullest extent permitted by law, this release includes, but is not limited to: (a) claims arising under the ADEA, the Older Workers Benefit Protection Act, the Workers' Adjustment and Retraining Notification Act, the ERISA, the Family and Medical Leave Act of 1993, the ADA, the California Fair Employment and Housing Act, and any other federal, state, or local law prohibiting age, race, color, gender, creed, religion, sexual preference/orientation, marital status, national origin, mental or physical disability, veteran status, or any other form of unlawful discrimination or claim with respect to or arising out of Employee's employment with the Company or this Agreement; (b) claims (whether based on common law or otherwise) arising out of or related to any contract (whether express or implied); (c) claims under any federal, state or local constitutions, statutes, rules or regulations; (d) claims (whether based on common law or otherwise) arising out of any kind of tortious conduct (whether intentional or otherwise) including but not limited to, wrongful termination, defamation, violation of public policy; and (e) claims included in, related to, or which could have been included in any presently pending federal, state or local lawsuit filed by Employee or on his behalf against any Releasee, which Employee agrees to immediately dismiss with prejudice. Section 1542 of the Civil Code of the State of California states: 11 "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge of all Releasees with respect to claims in California as well as all other jurisdictions, Employee expressly acknowledges that this Release is intended to include not only claims that are known, anticipated or disclosed, but also claims that are unknown, unanticipated and undisclosed. 14. MISCELLANEOUS. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Oregon, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, or by a nationally recognized overnight courier addressed as follows: If to the Employee: David R. Jessick 16025 N. E. Eilers Road Aurora, OR 97002 If to the Company: Rite Aid Corporation 30 Hunter Lane Camp Hill, Pennsylvania 17011 Attention: General Counsel or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 14. Notices and communications shall be effective when actually received by the addressee. 12 (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provision of this Agreement, (and, except as specifically provided in Section 3(e) above), the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Employee's or the Company's failure to insist upon strict compliance with any provisions of, or to assert, any right under, this Agreement (including, without limitation, the right of the Employee to terminate employment for Good Reason pursuant to paragraph (c) of Section 4 of this Agreement) shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) The rights and benefits of the Employee under this Agreement may not be anticipated, assigned, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Employee to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Employee in the event of insolvency or bankruptcy. (g) This Agreement (together with the exhibits hereto) sets forth the entire agreement of the parties hereto in respect of the subject matter construed herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written by any party or any officer or other representative of such party in respect of such subject matter. (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. (i) This Agreement shall survive the termination of the Employment Period and the termination of Employee's employment hereunder under any circumstances to the extent necessary to give effect to its provisions. 13 IN WITNESS WHEREOF, Employee and the Company have executed this Agreement as of the date first written above. RITE AID CORPORATION By: /s/ Robert G. Miller --------------------------- Robert G. Miller, CEO EMPLOYEE /s/ David R. Jessick ------------------------- David R. Jessick 14 APPENDIX A A "Change in Control of the Company" shall be deemed to have occurred if, as the result of a single transaction or a series of transactions, the event set forth in any one of the following paragraphs shall have occurred: (1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (2) Incumbent Directors cease at any time and for any reason to constitute a majority of the number of directors then serving on the Board. "Incumbent Directors" shall mean directors who either (A)are directors of the Company as of the Effective Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors to the Board); or (3) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (4) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. "Affiliate" shall have the meaning set forth in Rule 12b-2 under Section 12 of the Exchange Act. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act, except that a Person shall not be deemed to be the Beneficial Owner of any securities which are properly filed on a Form 13G. 15 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Person" shall have the meaning given in Section 3(a)(9)of the Exchange Act, as modified and used in Sections 13(d)and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. EX-99.1 4 b320621_ex99-1.txt CERTIFICATION OF CEO AND CFO Exhibit 99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of Rite Aid Corporation, a Delaware Corporation (the "Company") for the quarterly period ended August 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Robert G. Miller, as Chief Executive Officer of the Company, and Christopher Hall, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert G. Miller - ------------------------------ Name: Robert G. Miller Title: Chairman and Chief Executive Officer Date: October 15, 2002 /s/ Christopher Hall - ------------------------------ Name: Christopher Hall Title: Executive Vice President and Chief Financial Officer Date: October 15, 2002 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----