NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a
recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen week period ended
May 31, 2014 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Rite Aid Corporation and Subsidiaries (the "Company") Fiscal 2014 10-K.
New Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11,
Presentation of an Unrecognized Tax Benefit when a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
. ASU No. 2013-11 requires an entity to present unrecognized tax benefits as a
reduction to deferred tax assets when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. ASU No. 2013-11 is effective for fiscal
years beginning on or after December 15, 2013, and for interim periods within those fiscal years. This pronouncement had no effect on the financial statements as the Company has historically
presented uncertain tax positions in accordance with ASU No. 2013-11.
In
May 2013, the FASB issued a proposed Accounting Standards Update,
Leases
(Topic 842): a revision of the 2010 proposed Accounting
Standards Update, Leases (Topic 840), that would require an entity to recognize assets and liabilities arising under lease contracts on the balance sheet. The proposed standard, as currently drafted,
will have a material impact on the Company's reported results of operations and financial position.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
This ASU supersedes the revenue recognition
requirements in Accounting Standards Codification 605Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of
the adoption of ASU 2014-09 on its financial position, results of operations and cash flows.
2. Acquisitions
On April 1, 2014, the Company acquired Boston based Health Dialog Services Corporation, which is engaged in providing health coaching, shared decision making and healthcare
analytics from Bupa, a
7
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
2. Acquisitions (Continued)
London
based international healthcare services group. Health Dialog will operate as a 100 percent owned subsidiary of the Company.
On
April 10, 2014, the Company acquired Houston based RediClinic, which is engaged in the operation of 30 retail clinics in the greater Houston, Austin and San Antonio areas.
RediClinic will operate as a 100 percent owned subsidiary of the Company.
The
Company paid a combined amount of $65,306, net of cash acquired of $19,865, related to the acquisitions of Health Dialog and RediClinic (collectively "acquisitions"). The preliminary
purchase accounting for the acquisitions resulted in goodwill of $83,971, relating to expected future synergies and operating efficiencies, with the remaining amount allocated to tangible assets, less
liabilities assumed. Such amounts are not significant. This allocation is subject to change as the Company finalizes purchase accounting.
Operating
results of the acquisitions have been included in the Condensed Consolidated Statements of Operations from their respective acquisition dates forward in the Company's sole
retail drug segment. Pro forma information for the acquisitions is not presented as their results are immaterial to the Company's condensed consolidated financial statements.
3. Income Per Share
Basic income per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted income
per share reflects the potential dilution that could occur if securities or other contracts to issue common
8
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
3. Income Per Share (Continued)
stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company subject to anti-dilution limitations.
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
May 31,
2014
|
|
June 1,
2013
|
|
Numerator for income per share:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,446
|
|
$
|
89,662
|
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
(25
|
)
|
Cumulative preferred stock dividends
|
|
|
|
|
|
(2,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersbasic
|
|
$
|
41,446
|
|
$
|
86,905
|
|
Add backinterest on convertible notes
|
|
|
|
|
|
1,364
|
|
Add backcumulative preferred stock dividends
|
|
|
|
|
|
2,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersdiluted
|
|
$
|
41,446
|
|
$
|
91,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
963,332
|
|
|
893,871
|
|
Outstanding options and restricted shares, net
|
|
|
33,222
|
|
|
38,812
|
|
Convertible notes
|
|
|
|
|
|
24,800
|
|
Convertible preferred stock
|
|
|
|
|
|
33,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
996,554
|
|
|
991,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.04
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.04
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
to their antidilutive effect, the following potential common shares have been excluded from the computation of diluted income per share as of May 31, 2014 and June 1,
2013:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
May 31,
2014
|
|
June 1,
2013
|
|
Stock options
|
|
|
|
|
|
49,324
|
|
Convertible notes
|
|
|
24,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,800
|
|
|
49,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
4. Lease Termination and Impairment Charges
Lease termination and impairment charges consist of amounts as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
May 31,
2014
|
|
June 1,
2013
|
|
Impairment charges
|
|
$
|
151
|
|
$
|
4,601
|
|
Lease termination charges
|
|
|
4,697
|
|
|
6,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,848
|
|
$
|
10,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Charges
These amounts include the write-down of long-lived assets at locations that were assessed for impairment because of management's
intention to relocate or close the location or because of changes in circumstances that indicated the carrying value of an asset may not be recoverable.
Lease Termination Charges
As part of the Company's ongoing business activities, the Company assesses stores and distribution centers for potential closure or
relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease termination charges, lease exit costs and inventory liquidation charges, as well as
impairment of assets at these locations. The following table reflects the closed store and distribution center charges that relate to new closures, changes in assumptions and interest accretion:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
May 31,
2014
|
|
June 1,
2013
|
|
Balancebeginning of period
|
|
$
|
284,270
|
|
$
|
323,758
|
|
Provision for present value of noncancellable lease payments of closed stores
|
|
|
142
|
|
|
393
|
|
Changes in assumptions about future sublease income, terminations and changes in interest rates
|
|
|
(427
|
)
|
|
520
|
|
Interest accretion
|
|
|
4,982
|
|
|
5,458
|
|
Cash payments, net of sublease income
|
|
|
(18,645
|
)
|
|
(18,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
270,322
|
|
$
|
312,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Fair Value Measurements
The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy
is based upon the
10
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
5. Fair Value Measurements (Continued)
lowest
level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:
-
-
Level 1Inputs to the valuation methodology are unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access at the measurement date.
-
-
Level 2Inputs to the valuation methodology are quoted prices for similar assets and liabilities in
active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
-
-
Level 3Inputs to the valuation methodology are unobservable inputs based upon management's best
estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.
Non-Financial Assets Measured on a Non-Recurring Basis
Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using
Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic
conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows
(which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of
the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the thirteen week period ended May 31, 2014, long-lived
assets from continuing operations with a carrying value of $358, primarily store assets, were written down to their fair value of $207, resulting in an impairment charge of $151. During the thirteen
week period ended June 1, 2013, long-lived assets from continuing operations with a carrying value of $17,508, primarily store assets, were written down to their fair value of $12,907,
resulting in an impairment charge of $4,601. If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired in the current
period may be further impaired in future periods.
The
following table presents fair values for those assets measured at fair value on a non-recurring basis at May 31, 2014 and June 1, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total as of
May 31,
2014
|
|
Long-lived assets held for use
|
|
$
|
|
|
$
|
|
|
$
|
207
|
|
$
|
207
|
|
Long-lived assets held for sale
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
207
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
5. Fair Value Measurements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total as of
June 1,
2013
|
|
Long-lived assets held for use
|
|
$
|
|
|
$
|
|
|
$
|
592
|
|
$
|
592
|
|
Long-lived assets held for sale
|
|
$
|
|
|
$
|
12,315
|
|
$
|
|
|
$
|
12,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
12,315
|
|
$
|
592
|
|
$
|
12,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31, 2014 and June 1, 2013, the Company did not have any financial assets measured on a recurring basis.
Other Financial Instruments
Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable.
These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature.
The
fair value for LIBOR-based borrowings under the Company's senior secured credit facility and first and second lien term loans are estimated based on the quoted market price of the
financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company's other long-term indebtedness are estimated based on quoted
market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company's total long-term indebtedness
was $5,600,616 and $6,066,108, respectively, as of May 31, 2014. There were no outstanding derivative financial instruments as of May 31, 2014 and March 1, 2014.
6. Income Taxes
The Company recorded an income tax expense of $11,881 and $3,212 for the thirteen week periods ended May 31, 2014 and June 1, 2013, respectively. The income tax expense is
recorded net of adjustments to maintain a full valuation allowance against the Company's net deferred tax assets.
The
income tax expense for the thirteen week period ended May 31, 2014 is primarily attributable to an increase in the deferred tax valuation allowance to offset the windfall tax
benefits recorded in Additional Paid in Capital ("APIC") pursuant to the tax law ordering approach.
The
income tax expense for the thirteen week period ended June 1, 2013 is primarily attributable to the accrual of federal, state and local taxes and adjustments to unrecognized
tax benefits offset by adjustments to the valuation allowance of $36,889.
The
Company recognizes tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the
evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the
current estimate of the tax liabilities.
12
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
6. Income Taxes (Continued)
While
it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect the change to have a significant impact on the
results of operations or the financial position of the Company.
The
valuation allowances as of May 31, 2014 and March 1, 2014 apply to the net deferred tax assets of the Company. The Company continues to maintain a full valuation
allowance of $2,059,449 and $2,060,811 against net deferred tax assets at May 31, 2014 and March 1, 2014, respectively.
7. Goodwill and Other Intangible Assets
Goodwill is not amortized, but is instead evaluated for impairment on an annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that
impairment may be more likely. During the thirteen weeks ended May 31, 2014, no impairment charges have been taken against the Company's goodwill. Below is a summary of the changes in the
carrying amount of goodwill for the thirteen week period ended May 31, 2014:
|
|
|
|
|
|
|
May 31, 2014
|
|
Balance, March 1, 2014
|
|
$
|
|
|
Acquisitions
|
|
|
83,971
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2014
|
|
$
|
83,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's other intangible assets are finite-lived and amortized over their useful lives. Following is a summary of the Company's amortizable intangible assets as of May 31,
2014 and March 1, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2014
|
|
March 1, 2014
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Remaining
Weighted
Average
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Remaining
Weighted
Average
Amortization
Period
|
Favorable leases and other
|
|
$
|
641,236
|
|
$
|
(458,877
|
)
|
9 years
|
|
$
|
634,320
|
|
$
|
(447,608
|
)
|
9 years
|
Prescription files
|
|
|
1,366,798
|
|
|
(1,128,650
|
)
|
3 years
|
|
|
1,353,057
|
|
|
(1,108,542
|
)
|
4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,008,034
|
|
$
|
(1,587,527
|
)
|
|
|
$
|
1,987,377
|
|
$
|
(1,556,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Also
included in other non-current liabilities as of May 31, 2014 and March 1, 2014 are unfavorable lease intangibles with a net carrying amount of $60,920 and $62,687,
respectively. These intangible liabilities are amortized over their remaining lease terms.
Amortization
expense for these intangible assets and liabilities was $29,237 and $31,685 for the thirteen week periods ended May 31, 2014 and June 1, 2013, respectively.
The anticipated annual
13
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
7. Goodwill and Other Intangible Assets (Continued)
amortization
expense for these intangible assets and liabilities is 2015$108,903; 2016$97,359; 2017$83,950; 2018$46,031 and
2019$20,101.
8. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at May 31, 2014 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
May 31,
2014
|
|
March 1,
2014
|
|
Secured Debt:
|
|
|
|
|
|
|
|
Senior secured revolving credit facility due February 2018
|
|
$
|
351,000
|
|
$
|
400,000
|
|
Tranche 6 Term Loan due February 2020
|
|
|
|
|
|
1,152,293
|
|
Tranche 7 Term Loan due February 2020
|
|
|
1,152,293
|
|
|
|
|
10.25% senior secured notes (second lien) due October 2019 ($270,000 face value less unamortized discount of $1,109 and $1,160)
|
|
|
268,891
|
|
|
268,840
|
|
8.00% senior secured notes (senior lien) due August 2020
|
|
|
650,000
|
|
|
650,000
|
|
Tranche 1 Term Loan (second lien) due August 2020
|
|
|
470,000
|
|
|
470,000
|
|
Tranche 2 Term Loan (second lien) due June 2021
|
|
|
500,000
|
|
|
500,000
|
|
Other secured
|
|
|
5,325
|
|
|
5,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,397,509
|
|
|
3,446,457
|
|
Guaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $3,919 and $4,087)
|
|
|
905,919
|
|
|
906,087
|
|
6.75% senior notes due June 2021
|
|
|
810,000
|
|
|
810,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,715,919
|
|
|
1,716,087
|
|
Unguaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
8.5% convertible notes due May 2015
|
|
|
64,188
|
|
|
64,188
|
|
7.7% notes due February 2027
|
|
|
295,000
|
|
|
295,000
|
|
6.875% fixed-rate senior notes due December 2028
|
|
|
128,000
|
|
|
128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,188
|
|
|
487,188
|
|
Lease financing obligations
|
|
|
103,770
|
|
|
107,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
5,704,386
|
|
|
5,757,143
|
|
Current maturities of long-term debt and lease financing obligations
|
|
|
(112,818
|
)
|
|
(49,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and lease financing obligations, less current maturities
|
|
$
|
5,591,568
|
|
|
5,707,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Indebtedness and Credit Agreements (Continued)
Credit Facility
The Company has a senior secured credit facility that consists of a $1,795,000 revolving credit facility and a $1,152,293 senior
secured term loan (the "Tranche 7 Term Loan"). Borrowings under the revolving credit facility bear interest at a rate per annum between LIBOR plus 2.25% and LIBOR plus 2.75%, if the Company
chooses to make LIBOR borrowings, or between Citibank's base rate plus 1.25% and Citibank's base rate plus 1.75% in each case based upon the amount of revolver availability as defined in the senior
secured credit facility. The Company is required to pay fees between 0.375% and 0.50% per annum on the daily unused amount of the revolver, depending on the amount of revolver availability. Amounts
drawn under the revolver become due and payable on February 21, 2018. On March 14, 2014, the Company amended and restated its credit agreement governing its senior secured credit
facility, pursuant to which it prepaid its outstanding Tranche 6 Term Loan with the proceeds of a new $1,152,293 Tranche 7 Term Loan. The Tranche 7 Term Loan matures on
February 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 2.75%, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 1.75%. The
Tranche 7 Term Loan is subject to a 0.75% LIBOR floor per annum.
The
Company's ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At May 31, 2014,
the Company had $351,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $77,826, which resulted in additional borrowing capacity of
$1,366,174.
The
senior secured credit facility contains certain restrictions on the ability of the Company and the subsidiary guarantors to accumulate cash on hand, and under certain circumstances,
requires the funds in the Company's deposit accounts to be applied first to the repayment of outstanding revolving loans under the senior secured credit facility and then to be held as collateral for
the senior obligations.
The
senior credit facility restricts the amount of secured and unsecured debt the Company may have outstanding. The senior secured credit facility allows the Company to incur an
unlimited amount of unsecured debt with a maturity beyond May 21, 2020. However, the Company's second priority secured term loan facilities and the indentures that govern the Company's secured
and guaranteed unsecured notes contain restrictions on the amount of additional secured and unsecured debt that can be incurred by the Company. Pursuant to certain of the Company's existing
indentures, the Company could not incur any additional secured debt assuming a fully drawn revolver and the outstanding letters of credit. The ability to issue additional unsecured debt under the
second priority secured term loan facilities and the indentures is generally governed by an interest coverage ratio test. As of May 31, 2014, the Company had the ability to issue additional
unsecured debt under the second lien credit facilities and other indentures.
The
senior secured credit facility contains additional covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions
and the granting of liens. The credit facility has a financial covenant, which is the maintenance of a fixed charge coverage ratio. The covenant requires that, if availability on the revolving credit
facility is less than
15
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Indebtedness and Credit Agreements (Continued)
$150,000,
the Company must maintain a minimum fixed charge coverage ratio of 1.00 to 1.00. As of May 31, 2014, availability under the revolving credit facility was in excess of $150,000 and our
fixed charge coverage ratio was greater than 1.00 to 1.00. The senior secured credit facility also provides for customary events of default.
The
Company also has a second priority secured term loan facility, which includes a $470,000 second priority secured term loan (the "Tranche 1 Term Loan"). The Tranche 1
Term Loan matures on August 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 4.75% with a LIBOR floor of 1.00%, if the Company chooses to make LIBOR borrowings, or
at Citibank's base rate plus 3.75%.
On
June 21, 2013, the Company entered into a new second priority secured term loan facility, which includes a $500,000 second priority secured term loan (the "Tranche 2
Term Loan"). The Tranche 2 Term Loan matures on June 21, 2021 and currently bears interest at a rate per annum equal to LIBOR plus 3.875% with a LIBOR floor of 1.00%, if the Company
chooses to make LIBOR borrowings, or at Citibank's base rate plus 2.875%.
Substantially
all of Rite Aid Corporation's 100 percent owned subsidiaries guarantee the obligations under the senior secured credit facility, second priority secured term loan
facilities, secured guaranteed notes and unsecured guaranteed notes. The senior secured credit facility, second priority secured term loan facilities and secured guaranteed notes are secured, on a
senior or second priority basis, as
applicable, by a lien on, among other things, accounts receivable, inventory and prescription files of the subsidiary guarantors. The subsidiary guarantees related to the Company's senior secured
credit facility, second priority secured term loan facilities and secured guaranteed notes and, on an unsecured basis, the unsecured guaranteed notes are full and unconditional and joint and several,
and there are no restrictions on the ability of the Company to obtain funds from its subsidiaries. Also, the Company has no independent assets or operations, and subsidiaries not guaranteeing the
credit facility, second priority secured term loan facilities and applicable notes are minor. Accordingly, condensed consolidating financial information for the Company and subsidiaries is not
presented.
The aggregate annual principal payments of long-term debt for the remainder of fiscal 2015 and thereafter are as follows:
2015$13,966; 2016$75,711; 2017$11,523; 2018$362,523; 2019$11,523 and $5,122,560 thereafter.
16
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Reclassifications from Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss and the changes in balances of each component of accumulated other comprehensive loss, net of tax as
applicable, for the thirteen week periods ended May 31, 2014 and June 1, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen week period
ended May 31, 2014
|
|
Thirteen week period
ended June 1, 2013
|
|
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balancebeginning of period
|
|
$
|
(37,334
|
)
|
$
|
(37,334
|
)
|
$
|
(61,369
|
)
|
$
|
(61,369
|
)
|
Amounts reclassified from accumulated other comprehensive loss to net
income
|
|
|
659
|
|
|
659
|
|
|
1,263
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
(36,675
|
)
|
$
|
(36,675
|
)
|
$
|
(60,106
|
)
|
$
|
(60,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the effects on net income of significant amounts classified out of each component of accumulated other comprehensive loss for the thirteen week periods
ended May 31, 2014 and June 1, 2013:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
|
|
|
Amount
reclassified from
accumulated other
comprehensive loss
|
|
|
Details about accumulated other
comprehensive loss components
|
|
May 31,
2014
|
|
June 1,
2013
|
|
Affected line item in the condensed
consolidated statements of operations
|
Defined benefit pension plans
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost(a)
|
|
$
|
(60
|
)
|
$
|
(60
|
)
|
Selling, general and administrative expenses
|
Amortization of unrecognized net loss(a)
|
|
|
(599
|
)
|
|
(1,203
|
)
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(659
|
)
|
|
(1,263
|
)
|
Total before income tax expense
|
|
|
|
|
|
|
|
|
Income tax expense(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(659
|
)
|
$
|
(1,263
|
)
|
Net of income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
See
Note 10, Retirement Plans for additional details.
-
(b)
-
Income
tax expense is $0 due to the valuation allowance. See Note 6, Income Taxes for additional details.
17
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
10. Retirement Plans
Net periodic pension expense recorded in the thirteen week periods ended May 31, 2014 and June 1, 2013, for the Company's defined benefit plans includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified
Executive
Retirement Plans
|
|
|
|
Thirteen Week Period Ended
|
|
|
|
May 31,
2014
|
|
June 1,
2013
|
|
May 31,
2014
|
|
June 1,
2013
|
|
Service cost
|
|
$
|
793
|
|
$
|
829
|
|
$
|
|
|
$
|
|
|
Interest cost
|
|
|
1,631
|
|
|
1,551
|
|
|
135
|
|
|
136
|
|
Expected return on plan assets
|
|
|
(1,929
|
)
|
|
(1,779
|
)
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
60
|
|
|
60
|
|
|
|
|
|
|
|
Amortization of unrecognized net loss
|
|
|
599
|
|
|
1,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
1,154
|
|
$
|
1,864
|
|
$
|
135
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the thirteen week period ended May 31, 2014 the Company contributed $386 to the Nonqualified Executive Retirement Plans. During the remainder of fiscal 2015, the Company
expects to contribute $1,256 to the Nonqualified Executive Retirement Plans and $0 to the Defined Benefit Pension Plan.
11. Commitments and Contingencies
The Company is a party to legal proceedings, investigations and claims in the ordinary course of its business, including the matters
described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company
evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable.
If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
The
Company's contingencies are subject to significant uncertainties, including, among other factors: (i) proceedings are in early stages; (ii) whether class or collective
action status is sought and the likelihood of a class being certified; (iii) the outcome of pending appeals or motions; (iv) the extent of potential damages, fines or penalties, which
are often unspecified or indeterminate; (v) the impact of discovery on the matter; (vi) whether novel or unsettled legal theories are at issue; (vii) there are significant factual
issues to be resolved; and/or (viii) in the case of certain government agency investigations, whether a sealed qui tam lawsuit ("whistleblower" action) has been filed and whether the government
agency makes a decision to intervene in the lawsuit following investigation.
The
Company has been named in a collective and class action lawsuit,
Indergit v. Rite Aid Corporation et al
pending in the United States
District Court for the Southern District of New York,
18
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
11. Commitments and Contingencies (Continued)
filed
purportedly on behalf of current and former store managers working in the Company's stores at various locations around the country. The lawsuit alleges that the Company failed to pay overtime to
store managers as required under the FLSA and under certain New York state statutes. The lawsuit also seeks other relief, including liquidated damages, punitive damages, attorneys' fees, costs and
injunctive relief arising out of state and federal claims for overtime pay. On April 2, 2010, the Court conditionally certified a nationwide collective group of individuals who worked for the
Company as store managers since March 31, 2007. The Court ordered that Notice of the
Indergit
action be sent to the purported members of the
collective group (approximately 7,000 current and former store managers) and approximately 1,550 joined the
Indergit
action. Discovery as to
certification issues has been completed. On September 26, 2013, the Court granted Rule 23 class certification of the New York store manager claims as to liability only, but denied it as
to damages, and denied the Company's motion for decertification of the nationwide collective action claims. The Company has filed a motion seeking reconsideration of the Court's September 26,
2013 decision and briefing on that motion is complete and awaiting a ruling. Once approved by the Court, notice of the Rule 23 class certification as to liability only will be sent to
approximately 1,750 current and former store managers in the state of New York. At this time, the Company is not able to either predict the outcome of this lawsuit or estimate a potential range of
loss with respect to the lawsuit. The Company's management believes, however, that this lawsuit is without merit and not appropriate for collective or class action treatment and is vigorously
defending this lawsuit.
The
Company is currently a defendant in several putative class action lawsuits filed in state courts in California alleging violations of California wage and hour laws, rules and
regulations pertaining primarily to failure to pay overtime, pay for missed meals and rest periods and failure to provide employee seating. These suits purport to be class actions and seek substantial
damages. The Company has aggressively challenged both the merits of the lawsuits and the allegations that the cases should be certified as class or representative actions. With respect to cases
involving meal and rest periods (
Chase
and
Scherwin v. Rite Aid Corporation
pending in Los Angeles
County Superior Court and
Kyle v. Rite Aid Corporation
pending in Sacramento County Superior Court), in light of the cost and uncertainty involved in
these lawsuits, the Company is involved in ongoing discussions with counsel for the Plaintiffs concerning a possible resolution of these matters. During the period ended March 1, 2014, the
Company recorded a legal accrual with respect to these matters. With respect to the other lawsuits described in this paragraph, the Company, at this time, is not able to predict either the outcome of
these lawsuits or estimate a potential range of loss with respect to said lawsuits.
The
Company was served with a United States Department of Health and Human Services Office of the Inspector General ("OIG") subpoena dated March 5, 2010 in connection with an
investigation being conducted by the OIG and the United States Attorney's Office for the Central District of California. The subpoena requests records related to any gift card inducement programs for
customers who transferred prescriptions for drugs or medicines to the Company's pharmacies, and whether any customers who receive federally funded prescription benefits (e.g. Medicare and
Medicaid) may have benefited from those programs. The Company has substantially completed its production of records in response to the subpoena. In June 2013, the government contacted the Company, and
the Company is
19
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
11. Commitments and Contingencies (Continued)
involved
in ongoing discussions with the government regarding the matter. The Company is unable to predict the timing or outcome of any review by the government of such information.
The
Company was served with a Civil Investigative Demand Subpoena Duces Tecum dated August 26, 2011 by the United States Attorney's Office for the Eastern District of Michigan.
The subpoena requests records regarding Rite Aid's Rx Savings Program and the reporting of usual and customary charges to publicly funded health programs. In connection with the same investigation,
the Company was served with a Civil Subpoena Duces Tecum dated February 22, 2013 by the State of Indiana Office of the Attorney General. The Company has substantially completed its response to
both of the subpoenas and is unable to predict the timing or outcome of any review by the government of such information.
In
April 2012, the Company received an administrative subpoena from the Drug Enforcement Administration ("DEA"), Albany, New York District Office, requesting information regarding the
Company's sale of products containing pseudoephedrine ("PSE"). In April 2012, it also received a communication from the United States Attorneys Office ("USAO") for the Northern District of New York
concerning an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 ("CMEA"). In April 2013, the Company received additional administrative subpoenas from DEA
concerning certain retail PSE transactions at New York stores and the USAO commenced discussions with the Company regarding whether, from 2009 (upon implementation of an electronic PSE transaction
logbook system) through the present, the Company sold products containing PSE in violation of the CMEA. Violations of the CMEA could result in the imposition of administrative, civil and/or criminal
penalties against the Company. The Company is cooperating with the government and continues to provide information responsive to the subpoenas. The Company has entered into a tolling agreement with
the USAO. The Company is unable to predict the timing or outcome of any review by the government of such information.
The
Company received an additional administrative subpoena from the DEA in December 2013 requesting information in connection with an investigation of violations of the CMEA in West
Virginia. The Company is unable to predict the timing or outcome of any review by the government of such information.
In
January 2013, the DEA, Los Angeles District Office, served an administrative subpoena on the Company seeking documents related to prescriptions by a certain prescriber. The USAO,
Central District of California, also contacted the Company about a related investigation into allegations that Rite Aid pharmacies filled certain controlled substance prescriptions for a number of
practitioners after their DEA registrations had expired or otherwise become invalid in violation of the federal Controlled Substances Act and DEA regulations. The Company responded to the
administrative subpoena and subsequent informal requests for information from the USAO. The Company met with the USAO and DEA in January 2014 and is involved in ongoing discussions with the government
regarding this matter. The Company recorded a legal accrual during the period ended March 1, 2014.
The
Company was served with a Civil Investigative Demand dated June 21, 2013 by the USAO for the Eastern District of California. The CID requests records and responses to
interrogatories regarding
20
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended May 31, 2014 and June 1, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
11. Commitments and Contingencies (Continued)
Rite
Aid's Drug Utilization Review and prescription dispensing protocol and the dispensing of drugs designated "Code 1" by the State of California. The Company is in the process of producing
responsive documents and interrogatory responses and is unable to predict the timing or outcome of any review by the government of such information.
In
addition to the above described matters, the Company is subject from time to time to various claims and lawsuits and governmental investigations arising in the ordinary course of
business. While the Company's management cannot predict the outcome of any of the claims, the Company's management does not believe that the outcome of any of these legal matters will be material to
the Company's consolidated financial position. It is possible, however, that the Company's results of operations or cash flows in a particular fiscal period could be materially affected by an
unfavorable resolution of pending litigation or contingencies.
The California Department of Health Care Services ("DHCS"), the agency responsible for administering the State of California Medicaid
program, implemented retroactive reimbursement rate reductions effective June 1, 2011, impacting the medical provider community in California, including pharmacies. Numerous medical providers,
including representatives of both chain and independent pharmacies, filed suits against DHCS in federal district court in California and obtained preliminary injunctions against the rate cuts, subject
to a trial on the merits. DHCS appealed the preliminary injunctions to the Ninth Circuit Court of Appeals, which Court vacated the injunctions. Based upon the actions of DHCS and the decision of the
appeals court, the Company recorded an appropriate accrual. In January 2014, the Center for Medicare and Medicaid Services approved a state plan amendment that excluded certain drugs from the
retroactive reimbursement rate reductions effective March 31, 2012. Accordingly, the Company adjusted its accrual to take into account this exclusion at year end. As pertinent facts and
circumstances develop, this accrual may be adjusted further.
21
Table of Contents