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RITE AID CORPORATION TABLE OF CONTENTS
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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|
ý |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 30, 2014 |
OR |
o |
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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)
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Delaware
(State or other jurisdiction of
incorporation or organization) |
|
23-1614034
(I.R.S. Employer Identification No.) |
30 Hunter Lane,
Camp Hill, Pennsylvania
(Address of principal executive offices) |
|
17011
(Zip Code) |
Registrant's
telephone number, including area code: (717) 761-2633.
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last Report):
Not Applicable
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for the past
90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files) Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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|
Large accelerated filer ý |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a
smaller reporting company) |
|
Smaller reporting company o |
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange
act). Yes o No ý
The registrant had 981,430,837 shares of its $1.00 par value common stock outstanding as of September 18, 2014.
Table of Contents
RITE AID CORPORATION
TABLE OF CONTENTS
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Cautionary Statement Regarding Forward-Looking Statements |
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2 |
PART I
FINANCIAL INFORMATION
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ITEM 1. |
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Financial Statements (unaudited): |
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Condensed Consolidated Balance Sheets as of August 30, 2014 and March 1, 2014 |
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3 |
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Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended August 30, 2014 and August 31,
2013 |
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4 |
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Condensed Consolidated Statements of Comprehensive Income for the Thirteen Week Periods Ended August 30, 2014 and August 31,
2013 |
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5 |
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Condensed Consolidated Statements of Operations for the Twenty-Six Week Periods Ended August 30, 2014 and August 31,
2013 |
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6 |
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Condensed Consolidated Statements of Comprehensive Income for the Twenty-Six Week Periods Ended August 30, 2014 and August 31,
2013 |
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7 |
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Condensed Consolidated Statements of Cash Flows for the Twenty-Six Week Periods Ended August 30, 2014 and August 31,
2013 |
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8 |
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Notes to Condensed Consolidated Financial Statements |
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9 |
ITEM 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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27 |
ITEM 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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36 |
ITEM 4. |
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Controls and Procedures |
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37 |
PART II
OTHER INFORMATION
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ITEM 1. |
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Legal Proceedings |
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38 |
ITEM 1A. |
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Risk Factors |
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38 |
ITEM 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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39 |
ITEM 3. |
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Defaults Upon Senior Securities |
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39 |
ITEM 4. |
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Mine Safety Disclosures |
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39 |
ITEM 5. |
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Other Information |
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39 |
ITEM 6. |
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Exhibits |
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40 |
1
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report, as well as our other public filings or public statements, include forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by terms and phrases such as "anticipate," "believe," "intend," "estimate," "expect,"
"continue," "should," "could," "may," "plan," "project," "predict," "will" and similar expressions and include references to assumptions and relate to our future prospects, developments and business
strategies.
Factors
that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited
to:
-
- our high level of indebtedness;
-
- our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our credit
facilities and other debt agreements;
-
- general economic conditions (including the impact of continued high unemployment and changing consumer behavior),
inflation and interest rate movements;
-
- the continued impact of private and public third party payors reduction in prescription drug reimbursement and efforts to
encourage mail order and limit access to payor networks;
-
- our ability to achieve the benefits of our efforts to reduce the costs of our generic and other drugs;
-
- our ability to continue to improve the operating performance of our stores in accordance with our long term strategy;
-
- our ability to maintain or grow prescription count and realize front-end sales growth;
-
- our ability to hire and retain qualified personnel;
-
- competitive pricing pressures, including aggressive promotional activity from our competitors;
-
- decisions to close additional stores and distribution centers or undertake additional refinancing activities, which could
result in further charges to our operating statement;
-
- our ability to manage expenses and working capital;
-
- continued consolidation of the drugstore and the pharmacy benefit management industries;
-
- changes in state or federal legislation or regulations, and the continued impact from the ongoing implementation of the
Patient Protection and Affordable Care Act as well as other healthcare reform;
-
- the outcome of lawsuits and governmental investigations; and
-
- other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the
"SEC").
We
undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date
of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences are discussed in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" either included herein
or in our Annual Report on Form 10-K for the fiscal year ended March 1, 2014 (the "Fiscal 2014 10-K") which we filed with the SEC on April 23, 2014, and our Quarterly Report on
Form 10-Q for the thirteen weeks ended May 31, 2014 (the "First Quarter 2015 10-Q") which we filed on July 3, 2014. These documents are available on the SEC's website at www.sec.gov.
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
|
|
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|
|
|
|
|
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August 30, 2014 |
|
March 1, 2014 |
|
ASSETS |
|
|
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|
|
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Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
185,758 |
|
$ |
146,406 |
|
Accounts receivable, net |
|
|
954,785 |
|
|
949,062 |
|
Inventories, net of LIFO reserve of $1,021,670 and $1,018,581 |
|
|
2,922,203 |
|
|
2,993,948 |
|
Prepaid expenses and other current assets |
|
|
131,281 |
|
|
195,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,194,027 |
|
|
4,285,125 |
|
Property, plant and equipment, net |
|
|
2,006,872 |
|
|
1,957,329 |
|
Goodwill |
|
|
73,103 |
|
|
|
|
Other intangibles, net |
|
|
411,295 |
|
|
431,227 |
|
Other assets |
|
|
274,047 |
|
|
271,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,959,344 |
|
$ |
6,944,871 |
|
|
|
|
|
|
|
|
|
|
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|
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LIABILITIES AND STOCKHOLDERS' DEFICIT |
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|
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Current liabilities: |
|
|
|
|
|
|
|
Current maturities of long-term debt and lease financing obligations |
|
$ |
113,070 |
|
$ |
49,174 |
|
Accounts payable |
|
|
1,205,834 |
|
|
1,292,419 |
|
Accrued salaries, wages and other current liabilities |
|
|
1,092,072 |
|
|
1,165,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,410,976 |
|
|
2,507,452 |
|
Long-term debt, less current maturities |
|
|
5,570,583 |
|
|
5,632,798 |
|
Lease financing obligations, less current maturities |
|
|
68,633 |
|
|
75,171 |
|
Other noncurrent liabilities |
|
|
815,677 |
|
|
843,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities |
|
|
8,865,869 |
|
|
9,058,573 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
Stockholders' deficit: |
|
|
|
|
|
|
|
Common stock, par value $1 per share; 1,500,000 authorized; shares issued and outstanding 981,339 and 971,331 |
|
|
981,339 |
|
|
971,331 |
|
Additional paid-in capital |
|
|
4,494,704 |
|
|
4,468,149 |
|
Accumulated deficit |
|
|
(7,346,553 |
) |
|
(7,515,848 |
) |
Accumulated other comprehensive loss |
|
|
(36,015 |
) |
|
(37,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' deficit |
|
|
(1,906,525 |
) |
|
(2,113,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit |
|
$ |
6,959,344 |
|
$ |
6,944,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended |
|
|
|
August 30, 2014 |
|
August 31, 2013 |
|
Revenues |
|
$ |
6,522,584 |
|
$ |
6,278,165 |
|
Costs and expenses: |
|
|
|
|
|
|
|
Cost of goods sold |
|
|
4,628,005 |
|
|
4,461,804 |
|
Selling, general and administrative expenses |
|
|
1,640,524 |
|
|
1,602,931 |
|
Lease termination and impairment charges |
|
|
7,111 |
|
|
11,390 |
|
Interest expense |
|
|
100,950 |
|
|
106,716 |
|
Loss on debt retirements, net |
|
|
|
|
|
62,172 |
|
Gain on sale of assets, net |
|
|
(1,715 |
) |
|
(1,885 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,374,875 |
|
|
6,243,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
147,709 |
|
|
35,037 |
|
Income tax expense |
|
|
19,860 |
|
|
2,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
127,849 |
|
$ |
32,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of income attributable to common stockholders: |
|
|
|
|
|
|
|
Net income |
|
$ |
127,849 |
|
$ |
32,827 |
|
Accretion of redeemable preferred stock |
|
|
|
|
|
(26 |
) |
Cumulative preferred stock dividends |
|
|
|
|
|
(2,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersbasic |
|
|
127,849 |
|
|
30,029 |
|
Add backinterest on convertible notes |
|
|
1,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersdiluted |
|
$ |
129,213 |
|
$ |
30,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.13 |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.13 |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended |
|
|
|
August 30, 2014 |
|
August 31, 2013 |
|
Net income |
|
$ |
127,849 |
|
$ |
32,827 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
Defined benefit pension plans: |
|
|
|
|
|
|
|
Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost |
|
|
660 |
|
|
1,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
660 |
|
|
1,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
128,509 |
|
$ |
34,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
Revenues |
|
$ |
12,988,115 |
|
$ |
12,571,222 |
|
Costs and expenses: |
|
|
|
|
|
|
|
Cost of goods sold |
|
|
9,290,557 |
|
|
8,933,870 |
|
Selling, general and administrative expenses |
|
|
3,284,878 |
|
|
3,212,192 |
|
Lease termination and impairment charges |
|
|
11,959 |
|
|
22,362 |
|
Interest expense |
|
|
201,770 |
|
|
219,780 |
|
Loss on debt retirements, net |
|
|
|
|
|
62,172 |
|
Gain on sale of assets, net |
|
|
(2,085 |
) |
|
(7,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,787,079 |
|
|
12,443,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
201,036 |
|
|
127,911 |
|
Income tax expense |
|
|
31,741 |
|
|
5,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
169,295 |
|
$ |
122,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of income attributable to common stockholders: |
|
|
|
|
|
|
|
Net income |
|
$ |
169,295 |
|
$ |
122,489 |
|
Accretion of redeemable preferred stock |
|
|
|
|
|
(51 |
) |
Cumulative preferred stock dividends |
|
|
|
|
|
(5,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersbasic |
|
$ |
169,295 |
|
$ |
116,934 |
|
Add backinterest on convertible notes |
|
|
2,728 |
|
|
2,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersdiluted |
|
$ |
172,023 |
|
$ |
119,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.18 |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.17 |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week
Period Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
Net income |
|
$ |
169,295 |
|
$ |
122,489 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
Defined benefit pension plans: |
|
|
|
|
|
|
|
Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost |
|
|
1,319 |
|
|
2,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
$ |
1,319 |
|
$ |
2,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
170,614 |
|
$ |
125,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
7
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
Operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
169,295 |
|
$ |
122,489 |
|
Adjustments to reconcile to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
204,589 |
|
|
200,493 |
|
Lease termination and impairment charges |
|
|
11,959 |
|
|
22,362 |
|
LIFO charges |
|
|
3,089 |
|
|
35,000 |
|
Gain on sale of assets, net |
|
|
(2,085 |
) |
|
(7,065 |
) |
Stock-based compensation expense |
|
|
9,892 |
|
|
8,077 |
|
Loss on debt retirements, net |
|
|
|
|
|
62,172 |
|
Excess tax benefit on stock options and restricted stock |
|
|
(27,058 |
) |
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
441 |
|
|
6,743 |
|
Inventories |
|
|
68,917 |
|
|
(95,926 |
) |
Accounts payable |
|
|
(26,750 |
) |
|
36,200 |
|
Other assets and liabilities, net |
|
|
(50,058 |
) |
|
(126,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
362,231 |
|
|
263,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
Payments for property, plant and equipment |
|
|
(193,633 |
) |
|
(170,850 |
) |
Intangible assets acquired |
|
|
(40,023 |
) |
|
(35,651 |
) |
Acquisition of Health Dialog and RediClinic, net of cash acquired |
|
|
(69,793 |
) |
|
|
|
Proceeds from sale-leaseback transactions |
|
|
|
|
|
3,989 |
|
Proceeds from dispositions of assets and investments |
|
|
6,102 |
|
|
9,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(297,347 |
) |
|
(192,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
1,152,293 |
|
|
1,310,000 |
|
Net proceeds from revolver |
|
|
5,000 |
|
|
12,000 |
|
Principal payments on long-term debt |
|
|
(1,165,623 |
) |
|
(1,321,971 |
) |
Change in zero balance cash accounts |
|
|
(57,545 |
) |
|
(5,319 |
) |
Net proceeds from issuance of common stock |
|
|
14,791 |
|
|
12,263 |
|
Financing fees paid for early debt redemption |
|
|
|
|
|
(45,636 |
) |
Excess tax benefit on stock options and restricted stock |
|
|
27,058 |
|
|
|
|
Deferred financing costs paid |
|
|
(1,506 |
) |
|
(17,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(25,532 |
) |
|
(56,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
39,352 |
|
|
14,715 |
|
Cash and cash equivalents, beginning of period |
|
|
146,406 |
|
|
129,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
185,758 |
|
$ |
144,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow data: |
|
|
|
|
|
|
|
Cash paid for interest (net of capitalized amounts of $90 and $106, respectively) |
|
$ |
192,319 |
|
$ |
219,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments of income taxes, net of refunds |
|
$ |
4,118 |
|
$ |
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment financed under capital leases |
|
$ |
3,925 |
|
$ |
13,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment received for non-cash consideration |
|
$ |
1,337 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends paid in additional shares |
|
$ |
|
|
$ |
5,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross borrowings from revolver |
|
$ |
1,556,000 |
|
$ |
1,542,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross repayments to revolver |
|
$ |
1,551,000 |
|
$ |
1,530,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
8
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 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 and twenty-six week periods
ended August 30, 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.
In
June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and
Disclosures. The standard requires the accounting for repurchase-to-maturity transactions to be treated in the same manner as secured
9
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation (Continued)
borrowing
accounting, making the accounting consistent with other repurchase agreements. In addition, the standard requires separate accounting for a transfer of a financial asset executed
contemporaneously with a repurchase agreement with the same counterparty, resulting in the accounting remaining consistent with other repurchase agreements. This ASU is effective for fiscal years
beginning after December 15, 2014, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2014-11 on its financial
position, results of operations and cash flows.
In
June 2014, the FASB issued ASU No. 2014-12, CompensationStock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms
of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The standard requires that a performance target that affects vesting and
that could be achieved after the requisite service period be treated as a performance condition, and compensation cost should be recognized in the period in which it becomes probable that the
performance target will be achieved. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company is in the process
of assessing the impact of the adoption of ASU 2014-12 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 London based international healthcare services group. Health Dialog operates 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 retail clinics in the greater Houston and San Antonio areas. RediClinic
operates as a 100 percent owned subsidiary of the Company. As part of the acquisition of RediClinic, the Company acquired an immaterial equity investment in RediClinic Austin, LLC, which
operates as a joint venture in the greater Austin area.
The
Company paid a combined amount of $69,793, net of cash acquired of $19,945, related to the acquisitions of Health Dialog and RediClinic (collectively "acquisitions"). The preliminary
purchase accounting for these acquisitions resulted in goodwill of $73,103, 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.
10
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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 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 |
|
Twenty-Six Week Period
Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
Numerator for income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
127,849 |
|
$ |
32,827 |
|
$ |
169,295 |
|
$ |
122,489 |
|
Accretion of redeemable preferred stock |
|
|
|
|
|
(26 |
) |
|
|
|
|
(51 |
) |
Cumulative preferred stock dividends |
|
|
|
|
|
(2,772 |
) |
|
|
|
|
(5,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersbasic |
|
$ |
127,849 |
|
$ |
30,029 |
|
$ |
169,295 |
|
$ |
116,934 |
|
Add backinterest on convertible notes |
|
|
1,364 |
|
|
|
|
|
2,728 |
|
|
2,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersdiluted |
|
$ |
129,213 |
|
$ |
30,029 |
|
$ |
172,023 |
|
$ |
119,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares |
|
|
970,664 |
|
|
901,992 |
|
|
966,997 |
|
|
897,993 |
|
Outstanding options and restricted shares, net |
|
|
26,132 |
|
|
44,726 |
|
|
26,141 |
|
|
40,143 |
|
Convertible notes |
|
|
24,796 |
|
|
|
|
|
24,796 |
|
|
24,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares |
|
|
1,021,592 |
|
|
946,718 |
|
|
1,017,934 |
|
|
962,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.13 |
|
$ |
0.03 |
|
$ |
0.18 |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.13 |
|
$ |
0.03 |
|
$ |
0.17 |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
to their antidilutive effect, the following potential common shares have been excluded from the computation of diluted income per share as of August 30, 2014 and
August 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period
Ended |
|
Twenty-Six Week Period
Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
Stock options |
|
|
2,836 |
|
|
39,014 |
|
|
2,836 |
|
|
43,668 |
|
Convertible notes |
|
|
|
|
|
24,800 |
|
|
|
|
|
|
|
Convertible preferred stock |
|
|
|
|
|
34,109 |
|
|
|
|
|
34,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,836 |
|
|
97,923 |
|
|
2,836 |
|
|
77,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 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 |
|
Twenty-Six Week Period
Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
Impairment charges |
|
$ |
132 |
|
$ |
265 |
|
$ |
283 |
|
$ |
4,866 |
|
Lease termination charges |
|
|
6,979 |
|
|
11,125 |
|
|
11,676 |
|
|
17,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,111 |
|
$ |
11,390 |
|
$ |
11,959 |
|
$ |
22,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Twenty-Six Week Period
Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
Balancebeginning of period |
|
$ |
270,322 |
|
$ |
312,011 |
|
$ |
284,270 |
|
$ |
323,758 |
|
Provision for present value of noncancellable lease payments of closed stores |
|
|
294 |
|
|
5,981 |
|
|
436 |
|
|
6,374 |
|
Changes in assumptions about future sublease income, terminations and changes in interest rates |
|
|
1,844 |
|
|
(308 |
) |
|
1,417 |
|
|
213 |
|
Interest accretion |
|
|
4,845 |
|
|
5,452 |
|
|
9,827 |
|
|
10,909 |
|
Cash payments, net of sublease income |
|
|
(16,175 |
) |
|
(19,499 |
) |
|
(34,820 |
) |
|
(37,617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period |
|
$ |
261,130 |
|
$ |
303,637 |
|
$ |
261,130 |
|
$ |
303,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
12
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 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 twenty-six week period ended August 30, 2014,
long-lived assets from continuing operations with a carrying value of $1,849, primarily store assets, were written down to their fair value of $1,566, resulting in an impairment charge of $283 of
which $132 relates to the thirteen-week period ended August 30, 2014. During the twenty-six week period ended August 31, 2013, long-lived assets from continuing operations with a
carrying value of $18,162, primarily store assets, were written down to their fair value of $13,296, resulting in an impairment charge of
$4,866 of which $265 relates to the thirteen-week period ended August 31, 2013. 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.
13
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
5. Fair Value Measurements (Continued)
The
following table presents fair values for those assets measured at fair value on a non-recurring basis at August 30, 2014 and August 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total as of
August 30,
2014 |
|
Long-lived assets held for use |
|
$ |
|
|
$ |
|
|
$ |
1,566 |
|
$ |
1,566 |
|
Long-lived assets held for sale |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
1,566 |
|
$ |
1,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total as of
August 31,
2013 |
|
Long-lived assets held for use |
|
$ |
|
|
$ |
|
|
$ |
865 |
|
$ |
865 |
|
Long-lived assets held for sale |
|
$ |
|
|
$ |
12,431 |
|
$ |
|
|
$ |
12,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
12,431 |
|
$ |
865 |
|
$ |
13,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of August 30, 2014 and August 31, 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 $5,651,608 and $5,989,414, respectively, as of August 30, 2014. There were no outstanding derivative financial instruments as of August 30, 2014 and March 1, 2014.
6. Income Taxes
The Company recorded an income tax expense of $19,860 and $2,210 for the thirteen week periods ended August 30, 2014 and August 31, 2013, respectively, and an income tax
expense of $31,741 and
$5,422 for the twenty-six week periods ended August 30, 2014 and August 31, 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.
14
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
6. Income Taxes (Continued)
The income tax expense for the thirteen and twenty-six week periods ended August 30, 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 and twenty-six week periods ended August 31, 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 $2,197 and $(34,692), respectively.
The
Company recognizes tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the
evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the
current estimate of the tax liabilities.
While
it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect the change to have a significant impact on the
results of operations or the financial position of the Company.
The
valuation allowances as of August 30, 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 $2,016,475 and $2,060,811 against net deferred tax assets at August 30, 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 twenty-six weeks ended August 30, 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 twenty-six week period ended August 30, 2014:
|
|
|
|
|
|
|
August 30, 2014 |
|
Balance, March 1, 2014 |
|
$ |
|
|
Acquisitions: |
|
|
|
|
Initial goodwill acquired |
|
|
83,971 |
|
Change in purchase price allocation |
|
|
(10,868 |
) |
|
|
|
|
|
|
|
|
|
Balance, August 30, 2014 |
|
$ |
73,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
7. Goodwill and Other Intangible Assets (Continued)
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
August 30, 2014 and March 1, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 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 |
|
$ |
643,747 |
|
$ |
(466,290 |
) |
9 years |
|
$ |
634,320 |
|
$ |
(447,608 |
) |
9 years |
Prescription files |
|
|
1,381,923 |
|
|
(1,148,085 |
) |
3 years |
|
|
1,353,057 |
|
|
(1,108,542 |
) |
4 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,025,670 |
|
$ |
(1,614,375 |
) |
|
|
$ |
1,987,377 |
|
$ |
(1,556,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Also
included in other non-current liabilities as of August 30, 2014 and March 1, 2014 are unfavorable lease intangibles with a net carrying amount of $59,278 and $62,687,
respectively. These intangible liabilities are amortized over their remaining lease terms at time of acquisition.
Amortization
expense for these intangible assets and liabilities was $28,532 and $57,769 for the thirteen and twenty-six week periods ended August 30, 2014, respectively.
Amortization expense for these intangible assets and liabilities was $29,121 and $60,806 for the thirteen and twenty-six week periods ended August 31, 2013, respectively. The anticipated annual
amortization expense for these intangible assets and liabilities is 2015$111,742; 2016$101,315; 2017$88,024; 2018$50,059 and
2019$24,105.
16
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at August 30, 2014 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
August 30,
2014 |
|
March 1,
2014 |
|
Secured Debt: |
|
|
|
|
|
|
|
Senior secured revolving credit facility due February 2018 |
|
$ |
405,000 |
|
$ |
400,000 |
|
Tranche 6 Term Loan due February 2020 |
|
|
|
|
|
1,152,293 |
|
Tranche 7 Term Loan due February 2020 |
|
|
1,149,412 |
|
|
|
|
10.25% senior secured notes (second lien) due October 2019 ($270,000 face value less unamortized discount of $1,057 and $1,160) |
|
|
268,943 |
|
|
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 |
|
|
5,324 |
|
|
5,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,448,679 |
|
|
3,446,457 |
|
Guaranteed Unsecured Debt: |
|
|
|
|
|
|
|
9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $3,751 and $4,087) |
|
|
905,751 |
|
|
906,087 |
|
6.75% senior notes due June 2021 |
|
|
810,000 |
|
|
810,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,715,751 |
|
|
1,716,087 |
|
Unguaranteed Unsecured Debt: |
|
|
|
|
|
|
|
8.5% convertible notes due May 2015 |
|
|
64,178 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,178 |
|
|
487,188 |
|
Lease financing obligations |
|
|
100,678 |
|
|
107,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
5,752,286 |
|
|
5,757,143 |
|
Current maturities of long-term debt and lease financing obligations |
|
|
(113,070 |
) |
|
(49,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and lease financing obligations, less current maturities |
|
$ |
5,639,216 |
|
|
5,707,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
The Company has a senior secured credit facility that consists of a $1,795,000 revolving credit facility and a $1,149,412 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
17
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Indebtedness and Credit Agreements (Continued)
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, 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 August 30,
2014, the Company had $405,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $71,789, which resulted in additional borrowing capacity of
$1,318,211.
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 August 30, 2014, the Company had the ability to issue additional
unsecured debt under the second lien credit facilities and other indentures.
The
credit facility has a financial covenant that, if availability on the revolving credit facility is less than $150,000, the Company maintain a minimum fixed charge coverage ratio of
1.00 to 1.00. As of August 30, 2014, the availability was in excess of $150,000, and as such, this covenant does not apply. 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 senior secured credit facility also provides for
customary events of default.
The
Company also has two second priority secured term loan facilities. The first 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%. The second 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
18
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Indebtedness and Credit Agreements (Continued)
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. The Company has no independent assets or operations.
Additionally, the subsidiaries, including joint ventures, that do not guaranty 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.
On September 15, 2014, the Company called for the early redemption of all of its outstanding $270,000 aggregate principal amount
of its 10.25% senior notes due October 2019. The Company intends to use borrowings under its revolving credit facility to fund the October 2014 redemption. See Note 13.
The aggregate annual principal payments of long-term debt for the remainder of fiscal 2015 and thereafter are as follows:
2015$11,085; 2016$75,701; 2017$11,523; 2018$416,523; 2019$11,523 and $5,122,559 thereafter.
9. Stock Options and Stock Awards
The Company recognizes share-based compensation expense over the requisite service period of the award, net of an estimate for the impact of forfeitures. Operating results for the
twenty-six week periods ended August 30, 2014 and August 31, 2013 include $9,892 and $8,077, respectively, of compensation costs related to the Company's stock-based compensation
arrangements.
19
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
9. Stock Options and Stock Awards (Continued)
The
total number and type of newly awarded grants and the related weighted average fair value for the twenty-six week periods ended August 30, 2014 and August 31, 2013 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2014 |
|
August 31, 2013 |
|
|
|
Shares |
|
Weighted
Average
Fair Value |
|
Shares |
|
Weighted
Average
Fair Value |
|
Stock options granted |
|
|
3,113 |
|
$ |
4.43 |
|
|
4,828 |
|
$ |
1.91 |
|
Stock awards granted |
|
|
3,304 |
|
$ |
7.01 |
|
|
2,721 |
|
$ |
2.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total awards |
|
|
6,417 |
|
|
|
|
|
7,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Typically,
stock options granted vest, and are subsequently exercisable in equal annual installments over a four-year period for employees. Stock awards typically vest in equal annual
installments over a three-year period.
The
Company calculates the fair value of stock options using the Black- Scholes-Merton option pricing model. The following assumptions were used in the Black-Scholes-Merton option
pricing model:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period
Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
Expected stock price volatility |
|
|
74 |
% |
|
85 |
% |
Expected dividend yield |
|
|
0 |
% |
|
0 |
% |
Risk-free interest rate |
|
|
1.7 |
% |
|
1.4 |
% |
Expected option life |
|
|
5.5 years |
|
|
5.5 years |
|
As
of August 30, 2014, the total unrecognized pre-tax compensation costs related to unvested stock options and restricted stock grants, net of estimated forfeitures and the
weighted average period of cost amortization are as follows:
|
|
|
|
|
|
|
August 30, 2014 |
|
|
Unvested
stock
options |
|
Unvested
restricted
stock |
Unrecognized pre-tax costs |
|
$23,018 |
|
$33,348 |
Weighted average amortization period |
|
2.9 years |
|
2.6 years |
20
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
10. 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 and twenty-six week periods ended August 30, 2014 and August 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period
Ended
August 30, 2014 |
|
Thirteen Week Period
Ended
August 31, 2013 |
|
Twenty-Six Week Period
Ended August 30, 2014 |
|
Twenty-Six Week Period
Ended August 31, 2013 |
|
|
|
Defined
benefit
pension
plans |
|
Accumulated
other
comprehensive
loss |
|
Defined
benefit
pension
plans |
|
Accumulated
other
comprehensive
loss |
|
Defined
benefit
pension
plans |
|
Accumulated
other
comprehensive
loss |
|
Defined
benefit
pension
plans |
|
Accumulated
other
comprehensive
loss |
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-beginning of period |
|
$ |
(36,675 |
) |
$ |
(36,675 |
) |
$ |
(60,106 |
) |
$ |
(60,106 |
) |
$ |
(37,334 |
) |
$ |
(37,334 |
) |
$ |
(61,369 |
) |
$ |
(61,369 |
) |
Amounts reclassified from accumulated other comprehensive loss to net income |
|
|
660 |
|
|
660 |
|
|
1,262 |
|
|
1,262 |
|
|
1,319 |
|
|
1,319 |
|
|
2,525 |
|
|
2,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-end of period |
|
$ |
(36,015 |
) |
$ |
(36,015 |
) |
$ |
(58,844 |
) |
$ |
(58,844 |
) |
$ |
(36,015 |
) |
$ |
(36,015 |
) |
$ |
(58,844 |
) |
$ |
(58,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and twenty-six
week periods ended August 30, 2014 and August 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended August 30, 2014 and August 31, 2013 |
|
|
Amount reclassified
from accumulated other
comprehensive loss |
|
|
Details about accumulated other
comprehensive loss components
|
|
August 30,
2014 |
|
August 31,
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) |
|
|
(600 |
) |
|
(1,202 |
) |
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(660 |
) |
|
(1,262 |
) |
Total before income tax expense |
|
|
|
|
|
|
|
|
Income tax expense(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(660 |
) |
$ |
(1,262 |
) |
Net of income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
10. Reclassifications from Accumulated Other Comprehensive Loss (Continued)
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013 |
|
|
Amount reclassified
from accumulated other
comprehensive loss |
|
|
Details about accumulated other
comprehensive loss components
|
|
August 30,
2014 |
|
August 31,
2013 |
|
Affected line item in the condensed
consolidated statements of operations |
Defined benefit pension plans |
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost(a) |
|
$ |
(120 |
) |
$ |
(120 |
) |
Selling, general and administrative expenses |
Amortization of unrecognized net loss(a) |
|
|
(1,199 |
) |
|
(2,405 |
) |
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,319 |
) |
|
(2,525 |
) |
Total before income tax expense |
|
|
|
|
|
|
|
|
Income tax expense(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,319 |
) |
$ |
(2,525 |
) |
Net of income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (a)
- See
Note 11, Retirement Plans for additional details.
- (b)
- Income
tax expense is $0 due to the valuation allowance. See Note 6, Income Taxes for additional details.
11. Retirement Plans
Net periodic pension expense recorded in the thirteen and twenty-six week periods ended August 30, 2014 and August 31, 2013, for the Company's defined benefit plans
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan |
|
Nonqualified
Executive Retirement
Plans |
|
Defined Benefit
Pension Plan |
|
Nonqualified
Executive Retirement
Plans |
|
|
|
Thirteen Week Period Ended |
|
Twenty-Six Week Period Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
Service cost |
|
$ |
792 |
|
$ |
830 |
|
$ |
|
|
$ |
|
|
$ |
1,585 |
|
$ |
1,660 |
|
$ |
|
|
$ |
|
|
Interest cost |
|
|
1,631 |
|
|
1,551 |
|
|
135 |
|
|
135 |
|
|
3,262 |
|
|
3,102 |
|
|
270 |
|
|
271 |
|
Expected return on plan assets |
|
|
(1,929 |
) |
|
(1,779 |
) |
|
|
|
|
|
|
|
(3,858 |
) |
|
(3,558 |
) |
|
|
|
|
|
|
Amortization of unrecognized prior service cost |
|
|
60 |
|
|
60 |
|
|
|
|
|
|
|
|
120 |
|
|
120 |
|
|
|
|
|
|
|
Amortization of unrecognized net loss |
|
|
600 |
|
|
1,202 |
|
|
|
|
|
|
|
|
1,199 |
|
|
2,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense |
|
$ |
1,154 |
|
$ |
1,864 |
|
$ |
135 |
|
$ |
135 |
|
$ |
2,308 |
|
$ |
3,729 |
|
$ |
270 |
|
$ |
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
11. Retirement Plans (Continued)
During
the thirteen and twenty-six week periods ended August 30, 2014 the Company contributed $420 and $806, respectively, to the Nonqualified Executive Retirement Plans and
$1,159 to the Defined Benefit Pension Plan. During the remainder of fiscal 2015, the Company expects to contribute $834 to the Nonqualified Executive Retirement Plans and $0 to the Defined Benefit
Pension Plan.
12. 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, 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 filed a motion seeking reconsideration of the Court's September 26, 2013 decision which motion
was denied in June 2014. The Company subsequently filed a petition for an interlocutory appeal of the Court's September 26, 2013 ruling with the U. S. Court of Appeals for the Second Circuit
which petition was
23
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
12. Commitments and Contingencies (Continued)
denied
in September 2014. 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 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, failure to reimburse business expenses and failure to provide employee seating (the "California
Cases"). 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 pharmacist 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), during the period ended March 1, 2014, the Company recorded a legal accrual with respect to these matters. The Company and the attorneys representing the putative class of pharmacists
have agreed to a class wide settlement of the case of $9.7 million subject to final Court approval. The parties are in the process of documenting the settlement and obtaining Court approval.
In
the employee seating case (Hall v. Rite Aid Corporation, San Diego County Superior Court), the Court, in October 2011, granted the
plaintiff's motion for class certification. The Company filed its motion for decertification, which motion was granted in November 2012. Plaintiff subsequently appealed the Court's order which appeal
was granted in May 2014. The Company filed a petition for review of the appellate court's decision with the California Supreme Court, which petition was denied in August 2014. Proceedings in the Hall
case are stayed pending a decision by the California Supreme
Court in two similar cases. With respect to the California Cases (other than Chase and Scherwin and
Kyle), 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 has been involved in discussions with the government regarding the matter. The Company recorded a legal accrual with respect to this matter during the period ended August 30, 2014.
Subsequent to the
24
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
12. Commitments and Contingencies (Continued)
end
of the second quarter, the Company has agreed to pay $2.99 million to settle the matter. The parties are in the process of documenting the settlement.
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 ("CID") dated June 21, 2013 by the USAO for the Eastern District of California and the Attorney General's Office of the
State of
25
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen and Twenty-Six Week Periods Ended August 30, 2014 and August 31, 2013
(Dollars and share information in thousands, except per share amounts)
(unaudited)
12. Commitments and Contingencies (Continued)
California
(the "AG"). The CID requests records and responses to interrogatories regarding Rite Aid's Drug Utilization Review and prescription dispensing protocol and the dispensing of drugs
designated "Code 1" by the State of California. The USAO has indicated that it was dropping its inquiry. The Company is in the process of producing responsive documents and interrogatory responses to
the AG 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.
13. Subsequent Events
On September 15, 2014, the Company called for the early redemption of all of its outstanding $270,000 aggregate principal amount of 10.25% senior notes due October 2019. The
10.25% senior notes will be redeemed on October 15, 2014 at their contractually determined early redemption price of 105.125% of the principal amount, plus accrued interest to, but not
including, the date of redemption. To fund this redemption, the Company plans to use borrowings under its revolving credit facility. The Company expects to recognize a loss on debt retirement of
approximately $18,000 in the third quarter of fiscal 2015 related to this transaction.
26
Table of Contents
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net income for the thirteen and twenty-six week periods ended August 30, 2014 was $127.8 million and
$169.3 million, respectively, compared to net income of $32.8 million and $122.5 million, respectively, for the thirteen and twenty-six week periods ended August 31, 2013.
The increase in the thirteen and twenty-six week operating results was driven primarily by an increase in Adjusted EBITDA, no loss on debt retirements compared to $62.2 million during the
thirteen and twenty-six week periods ended August 31, 2013, and lower LIFO charges, partially offset by higher income tax expense.
Adjusted
EBITDA for the thirteen and twenty-six week periods ended August 30, 2014 was $364.2 million or 5.6 percent of revenues and $646.8 million or
5.0 percent of revenues, respectively, compared to $341.6 million or 5.4 percent of revenues and $686.4 million or 5.5 percent of revenues for the thirteen and
twenty-six week periods ended August 31, 2013, respectively. The increase in Adjusted EBITDA for the thirteen week period was driven by an increase in front end and pharmacy gross profit
partially offset by an increase in selling, general and administrative expenses related to our higher level of sales.
On
February 17, 2014, we executed an expanded five-year agreement with McKesson for pharmaceutical purchasing and distribution (our "Purchasing and Delivery Arrangement"). As part
of our Purchasing and Delivery Arrangement, McKesson assumed responsibility for purchasing essentially all of the brand and generic medications we dispense as well as providing a new direct store
delivery model to all of our stores. We expect that this arrangement will leverage the scale of both companies to deliver greater purchasing and distribution efficiencies, ensure the highest levels of
service for our customers and improve working capital through the reduction of pharmacy inventory.
27
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended |
|
Twenty-Six Week Period Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
|
|
(dollars in thousands)
|
|
Revenues |
|
$ |
6,522,584 |
|
$ |
6,278,165 |
|
$ |
12,988,115 |
|
$ |
12,571,222 |
|
Revenue growth (decline) |
|
|
3.9 |
% |
|
0.8 |
% |
|
3.3 |
% |
|
(1.0 |
)% |
Same store sales growth (decline) |
|
|
4.1 |
% |
|
1.0 |
% |
|
3.6 |
% |
|
(0.8 |
)% |
Pharmacy sales growth (decline) |
|
|
5.2 |
% |
|
1.4 |
% |
|
4.6 |
% |
|
(1.5 |
)% |
Same store prescription count increase (decrease) |
|
|
3.7 |
% |
|
0.0 |
% |
|
3.0 |
% |
|
(0.1 |
)% |
Same store pharmacy sales growth (decline) |
|
|
5.6 |
% |
|
1.7 |
% |
|
5.1 |
% |
|
(1.1 |
)% |
Pharmacy sales as a % of total sales |
|
|
68.8 |
% |
|
67.9 |
% |
|
68.6 |
% |
|
67.7 |
% |
Third party sales as a % of total pharmacy sales |
|
|
97.5 |
% |
|
97.0 |
% |
|
97.5 |
% |
|
97.0 |
% |
Front-end sales growth (decline) |
|
|
0.7 |
% |
|
(0.6 |
)% |
|
0.1 |
% |
|
(0.1 |
)% |
Same store front-end sales growth (decline) |
|
|
1.1 |
% |
|
(0.3 |
)% |
|
0.6 |
% |
|
0.0 |
% |
Front-end sales as a % of total sales |
|
|
31.2 |
% |
|
32.1 |
% |
|
31.4 |
% |
|
32.3 |
% |
Adjusted EBITDA(*) |
|
$ |
364,166 |
|
$ |
341,589 |
|
$ |
646,779 |
|
$ |
686,367 |
|
Store data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores (beginning of period) |
|
|
4,581 |
|
|
4,615 |
|
|
4,587 |
|
|
4,623 |
|
New stores |
|
|
1 |
|
|
|
|
|
1 |
|
|
|
|
Store acquisitions |
|
|
|
|
|
1 |
|
|
1 |
|
|
1 |
|
Closed stores |
|
|
(10 |
) |
|
(12 |
) |
|
(17 |
) |
|
(20 |
) |
Total stores (end of period) |
|
|
4,572 |
|
|
4,604 |
|
|
4,572 |
|
|
4,604 |
|
Relocated stores |
|
|
5 |
|
|
5 |
|
|
8 |
|
|
5 |
|
Remodeled and expanded stores |
|
|
118 |
|
|
109 |
|
|
224 |
|
|
217 |
|
- (*)
- See
Adjusted EBITDA and Other Non-GAAP Measures for additional details
Revenues increased 3.9% for the thirteen weeks ended August 30, 2014 compared to an increase of 0.8% for the thirteen weeks
ended August 31, 2013. The increase in revenues for the thirteen week period ended August 30, 2014 was primarily a result of an increase in pharmacy same store sales.
Pharmacy
same store sales increased by 5.6% for the thirteen week period ended August 30, 2014 compared to the 1.7% increase in the thirteen week period ended August 31,
2013. The increase in the current period is due primarily to the 3.7% increase in same store prescription count, partially offset by an approximate 2.0% negative impact from generic introductions and
lower reimbursement rates. We expect lower reimbursement rates to continue to have a negative impact on our pharmacy sales.
Front-end
same store sales increased 1.1% for the thirteen week period ended August 30, 2014 compared to the 0.3% decrease in the thirteen week period ended August 31,
2013. The increase in the current period is due primarily to the positive impact of our wellness + loyalty program, incremental sales from our Wellness format stores, and other
management initiatives to increase front-end sales.
Revenues
increased 3.3% for the twenty-six weeks ended August 30, 2014 compared to a decrease of 1.0% for the twenty-six weeks ended August 31, 2013. The increase in
revenues for the twenty-six week period ended August 30, 2014 was primarily a result of an increase in pharmacy same store sales.
28
Table of Contents
Pharmacy
same store sales increased by 5.1% for the twenty-six week period ended August 30, 2014 compared to the 1.1% decrease in the twenty-six week period ended
August 31, 2013. The increase in the current period is due primarily to the 3.0% increase in same store prescription count, partially offset by an approximate 1.7% negative impact from generic
introductions and continued lower reimbursement rates.
Front-end
same store sales increased by 0.6% during the twenty-six week period ended August 30, 2014 compared to remaining flat during the twenty-six week period ended
August 31, 2013. The same store front-end sales were positively impacted by our wellness + loyalty program, and incremental sales from our Wellness format stores.
We
include in same store sales all stores that have been open at least one year. Relocation stores are not included in same store sales until one year has lapsed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period
Ended |
|
Twenty-Six Week Period
Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
|
|
(dollars in thousands)
|
|
Cost of goods sold |
|
$ |
4,628,005 |
|
$ |
4,461,804 |
|
$ |
9,290,557 |
|
$ |
8,933,870 |
|
Gross profit |
|
|
1,894,579 |
|
|
1,816,361 |
|
|
3,697,558 |
|
|
3,637,352 |
|
Gross margin |
|
|
29.1 |
% |
|
28.9 |
% |
|
28.5 |
% |
|
28.9 |
% |
FIFO gross profit |
|
|
1,896,123 |
|
|
1,839,361 |
|
|
3,700,647 |
|
|
3,672,352 |
|
FIFO gross margin |
|
|
29.1 |
% |
|
29.3 |
% |
|
28.5 |
% |
|
29.2 |
% |
Selling, general and administrative expenses |
|
|
1,640,524 |
|
|
1,602,931 |
|
|
3,284,878 |
|
|
3,212,192 |
|
Selling, general and administrative expenses as a percentage of revenues |
|
|
25.2 |
% |
|
25.5 |
% |
|
25.3 |
% |
|
25.6 |
% |
Lease termination and impairment charges |
|
|
7,111 |
|
|
11,390 |
|
|
11,959 |
|
|
22,362 |
|
Interest expense |
|
|
100,950 |
|
|
106,716 |
|
|
201,770 |
|
|
219,780 |
|
Gain on sale of assets, net |
|
|
(1,715 |
) |
|
(1,885 |
) |
|
(2,085 |
) |
|
(7,065 |
) |
Gross profit increased $78.2 million and $60.2 million for the thirteen and twenty-six week periods ended
August 30, 2014, respectively, as compared to the thirteen and twenty-six week periods ended August 31, 2013. Pharmacy gross profit was higher due to the increase in pharmacy revenues
and an impact on inventory valuation related to the transition to our new Purchasing and Delivery Arrangement, partially offset by lower reimbursement rates. The net effect on inventory valuation
resulting from the transition to the Purchasing and Delivery Arrangement is not expected to be material to full year fiscal 2015 results, but did increase gross profit by approximately
$40.0 million during the thirteen week period ended August 30, 2014. Front-end gross profit was also higher and our estimated LIFO charge was lower due to expected pharmacy inventory
reductions in connection with our Purchasing and Delivery Arrangement.
Gross
margin was 29.1% and 28.5% of sales for the thirteen and twenty-six week periods ended August 30, 2014, respectively, compared to 28.9% of sales for the thirteen and
twenty-six week periods ended August 31, 2013. The increase in gross margin for the thirteen week period was due to higher front-end gross margin and a lower estimated LIFO charge resulting
from reductions in pharmacy inventory levels, partially offset by a reduction in pharmacy reimbursement rates. The reduction in gross margin for the twenty-six week period was due primarily to
continued pharmacy reimbursement rate pressures, partially offset by savings associated with our Purchasing and Delivery Arrangement and
29
Table of Contents
a
lower LIFO charge. We expect to see continued gross margin pressure from reimbursement rate reductions throughout the remainder of the fiscal year.
We
use the last-in, first-out ("LIFO") method of inventory valuation, which is estimated on a quarterly basis and is finalized at year end when inflation rates and inventory levels are
final. Therefore, LIFO costs for interim period financial statements are estimated. LIFO charges were $1.5 million and $3.1 million for the thirteen and twenty-six week periods ended
August 30, 2014, respectively, compared to a $23.0 million and $35.0 million charge for the thirteen and twenty-six week periods ended August 31, 2013, respectively. The
lower estimated LIFO charge for this year relates to lower expected pharmacy inventory in both our stores and distribution centers in connection with our Purchasing and Delivery Arrangement.
Selling, General and Administrative Expenses
SG&A as a percentage of revenues was 25.2% in the thirteen week period ended August 30, 2014 compared to 25.5% in the thirteen
week period ended August 31, 2013. The decrease in SG&A as a percentage of revenues was due primarily to salary and payroll related expenses, which were higher on a dollar basis but lower as a
percentage of revenues.
SG&A
as a percentage of revenues was 25.3% in the twenty-six week period ended August 30, 2014 compared to 25.6% in the twenty-six week period ended August 31, 2013. The
decrease in SG&A as a percentage of revenues was due primarily to salary and payroll related expenses, which were higher on a dollar basis but lower as a percentage of revenues.
Lease termination and impairment charges consist of amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period
Ended |
|
Twenty-Six Week Period
Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
Impairment charges |
|
$ |
132 |
|
$ |
265 |
|
$ |
283 |
|
$ |
4,866 |
|
Lease termination charges |
|
|
6,979 |
|
|
11,125 |
|
|
11,676 |
|
|
17,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,111 |
|
$ |
11,390 |
|
$ |
11,959 |
|
$ |
22,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Please
refer to "Management's Discussion and Analysis of Financial Condition and Results of OperationsImpairment Charges" included in our Fiscal 2014 10-K for a detailed
description of our impairment methodology.
Lease Termination Charges: Charges to close a store, which principally consist of continuing lease obligations, are recorded at the
time the store is
closed and all inventory is liquidated, pursuant to the guidance set forth in ASC 420, "Exit or Disposal Cost Obligations." We calculate our liability for closed stores on a store-by-store basis. The
calculation includes the discounted effect of 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. We evaluate these assumptions each quarter and adjust the liability accordingly. As part of our
ongoing business activities, we assess stores and distribution centers for potential closure and relocation. Decisions to close or relocate stores or
30
Table of Contents
distribution
centers in future periods would result in lease termination charges for lease exit costs and liquidation of inventory, as well as impairment of assets at these locations.
Interest expense was $101.0 million and $201.8 million for the thirteen and twenty-six week periods ended
August 30, 2014, respectively, compared to $106.7 million and $219.8 million for the thirteen and twenty-six week periods ended August 31, 2013, respectively. The decrease
in interest expense was a result of the recent refinancing activities during the first quarter of fiscal 2015 and the first and second quarters of fiscal 2014. The weighted average interest rates on
our indebtedness for the twenty-six week periods ended August 30, 2014 and August 31, 2013 were 6.4% and 6.6%, respectively.
We recorded an income tax expense of $19.9 million and $2.2 million for the thirteen week periods ended August 30,
2014 and August 31, 2013, respectively, and an income tax expense of $31.7 million and $5.4 million for the twenty-six week periods ended August 30, 2014 and
August 31, 2013, respectively. The income tax expense is recorded net of adjustments to maintain a full valuation allowance against our net deferred tax assets.
The
income tax expense for the thirteen and twenty-six week periods ended August 30, 2014 is primarily attributable to an increase in the deferred tax valuation allowance to
offset the windfall tax benefits related to stock awards recorded in Additional Paid In Capital ("APIC") pursuant to the tax law ordering approach.
The
income tax expense for the thirteen and twenty-six week periods ended August 31, 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 $2.2 million and $(34.7) million, respectively.
We
recognize tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation
of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current
estimate of the tax liabilities.
While
it is expected that the amount of unrecognized tax benefits will change in the next twelve months, management does not expect the change to have a significant impact on the results
of operations or the financial position of the Company.
We
evaluate whether a valuation allowance is required based on a review of all available evidence to determine if we would be able to realize our deferred tax assets in the future in
excess of their net recorded amount. Realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. As of August 30, 2014, we achieved our
second consecutive quarter of cumulative pre-tax earnings based on a rolling three year window; however, we did not use projections of future taxable income as a factor in evaluating the ultimate
realization of the deferred tax assets. At this time, we do not believe that we have achieved a level of sustained profitability that would, in our judgment, support a release of the valuation
allowance. On a quarterly basis, we will continue to evaluate and weigh the significant factors that affect our future profitability. Although realization is not assured, we believe that in the near
term the amount of the net deferred tax asset considered realizable could be increased if we conclude, based on all available evidence, including the
development and finalization of our future operating plans, that the future use of these assets is more likely than not.
31
Table of Contents
Liquidity and Capital Resources
We have two primary sources of liquidity: (i) cash provided by operating activities and (ii) borrowings under our
revolving credit facility. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt and to fund capital expenditures.
Total liquidity as of August 30, 2014 was $1,368.8 million, which consisted of revolver borrowing capacity of $1,318.2 million and invested cash of $50.6 million.
Our senior secured credit facility consists of a $1.795 billion revolving credit facility and a $1.149 billion
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 we choose 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. We are
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.
Our
ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At August 30, 2014, we had
$405.0 million of
borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $71.8 million, which resulted in additional borrowing capacity of
$1,318.2 million.
On
March 14, 2014, we amended and restated our credit agreement, pursuant to which we prepaid our outstanding Tranche 6 Term Loan with the proceeds of a new
$1.152 billion Tranche 7 Term Loan. The $1.152 billion Tranche 7 Term Loan matures on February 21, 2020 and currently bears interest at a rate per annum equal to
LIBOR plus 2.75% with a LIBOR floor of 0.75%, if we choose to make LIBOR borrowings, or at Citibank's base rate plus 1.75%. We must make mandatory prepayments of the Tranche 7 Term Loan with
the proceeds of certain asset dispositions and casualty events (subject to certain limitations), and with the proceeds of certain issuances of debt (subject to certain exceptions). If at any time
there is a shortfall in our borrowing base under our senior secured credit facility, prepayment of the Tranche 7 Term Loan may also be required.
The
senior secured credit facility restricts us and the subsidiary guarantors from accumulating cash on hand in excess of $200.0 million at any time when revolving loans are
outstanding (not including cash located in our store deposit accounts, cash necessary to cover our current liabilities and certain other exceptions) and from accumulating cash on hand with revolver
borrowings in excess of $100.0 million over three consecutive business days. The senior secured credit facility also states that if at any time (other than following the exercise of remedies or
acceleration of any senior obligations or second priority debt and receipt of a triggering notice by the senior collateral agent from a representative of the senior obligations or the second priority
debt) either (a) an event of default exists under our senior secured credit facility or (b) the sum of revolver availability under our senior secured credit facility and certain amounts
held on deposit with the senior collateral agent in a concentration account is less than $100.0 million for three consecutive business days (a "cash sweep period"), the funds in our deposit
accounts will be swept to a concentration account with the senior collateral agent and will be applied first to repay outstanding revolving loans under the senior secured credit facility, and then
held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of our senior secured credit facility.
32
Table of Contents
The senior secured credit facility allows us to have outstanding, at any time, up to $1.5 billion in secured second priority debt and unsecured debt in
addition to borrowings under the senior secured credit facility and existing indebtedness, provided that not in excess of $750.0 million of such secured second priority debt and unsecured debt
shall mature or require scheduled payments of principal prior to May 21, 2020. The senior secured credit facility allows us to incur an unlimited amount of unsecured debt with a maturity beyond
May 21, 2020; however, certain of our other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of
incurrence or other exemptions are not available. The senior secured credit facility also contains certain restrictions on the amount of secured first priority debt we are able to incur. The senior
secured facility also allows, so long as the senior secured credit facility is not in default and we maintain availability on the revolving credit facility of more than $100.0 million, for the
voluntary repurchase of any debt and the mandatory repurchase of our 8.5% convertible notes due 2015 or other convertible debt.
Our
credit facility has a financial covenant that, if availability on the revolving credit facility is less than $150.0 million, we maintain a minimum fixed charge coverage ratio
of 1.00 to 1.00. As of August 30, 2014, the availability was in excess of $150.0 million, and as such, this covenant does not apply. The senior secured credit facility also contains
covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens. The senior secured credit facility also
provides for customary events of default.
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
we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would
enable, the holder of such debt to accelerate the maturity or require the repurchase of such debt. The mandatory repurchase of the 8.5% convertible notes due 2015 or any other convertible debt is
excluded from this event of default.
On
February 21, 2013, we entered into a second priority secured term loan facility, which includes a $470.0 million 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 we choose to
make LIBOR borrowings, or at Citibank's base rate plus 3.75%.
On
June 21, 2013, we entered into a new second priority secured term loan facility, which includes a $500.0 million 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 we choose to
make LIBOR borrowings, or at Citibank's base rate plus 2.875%.
The
second priority secured term loan facilities and the indentures that govern our secured and guaranteed unsecured notes contain restrictions on the amount of additional secured and
unsecured debt that can be incurred by us. As of August 30, 2014, the amount of additional secured debt that could be incurred under the most restrictive covenant of the second priority secured
term loan facilities and these indentures was approximately $1.4 billion (which amount does not include the ability to enter into certain sale and leaseback transactions). However, we currently
cannot incur any additional secured debt assuming a fully drawn revolver and the outstanding letters of credit. The ability to issue additional unsecured debt under these indentures is generally
governed by an interest coverage ratio test. As of August 30, 2014, we had the ability to issue additional unsecured debt under the second lien credit facilities and other indentures.
33
Table of Contents
On September 15, 2014, we called for the early redemption of all of the outstanding $270.0 million aggregate principal
amount of 10.25% senior notes due October 2019. The
10.25% senior notes will be redeemed on October 15th at their contractually determined early redemption price of 105.125% of the principal amount, plus accrued interest. To
fund this redemption, we plan to use borrowings under our revolving credit facility.
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash flow provided by operating activities was $362.2 million and $263.9 million in the twenty-six week periods ended
August 30, 2014 and August 31, 2013, respectively. Operating cash flow was positively impacted by net income and a reduction in inventory relating to our Purchasing and Delivery
Arrangement and management initiatives to reduce inventory, partially offset by a use of cash in connection with other assets and liabilities, net, primarily due to reductions of payroll and occupancy
related accruals, as well as reduced accounts payable related to the inventory reduction noted above.
Cash
used in investing activities was $297.3 million and $192.8 million for the twenty-six week periods ended August 30, 2014 and August 31, 2013,
respectively. Cash used for the purchase of property, plant, equipment and prescription files was higher than in the prior year due to a higher investment in Wellness store remodels and prescription
file buys. Proceeds from the sale of assets were lower as compared to the prior year. Also reflected in investing activities are expenditures of $69.8 million, net of cash acquired, related to
the acquisitions of Health Dialog and RediClinic.
Cash
used in financing activities was $25.5 million and $56.4 million for the twenty-six week periods ended August 30, 2014 and August 31, 2013, respectively.
Cash used in financing activities for the twenty-six weeks ended August 30, 2014 reflects principal payments on long-term debt, a reduction in our zero balance bank accounts, proceeds from the
issuance of common stock, and proceeds from excess tax benefit on stock options.
During the thirteen and twenty-six week periods ended August 30, 2014 and August 31, 2013 capital expenditures were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended |
|
Twenty-Six Week
Period Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
New store construction, store relocation and store remodel projects |
|
$ |
65,763 |
|
$ |
59,235 |
|
$ |
126,625 |
|
$ |
109,811 |
|
Technology enhancements, improvements to distribution centers and other corporate requirements |
|
|
33,528 |
|
|
30,717 |
|
|
67,008 |
|
|
61,056 |
|
Purchase of prescription files from other retail pharmacies |
|
|
20,437 |
|
|
23,857 |
|
|
40,023 |
|
|
35,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
119,728 |
|
$ |
113,809 |
|
$ |
233,656 |
|
$ |
206,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
have completed 1,433 Wellness store remodels as of August 30, 2014. We plan on making total capital expenditures of approximately $525.0 million during fiscal 2015,
consisting of approximately $280.0 million related to store relocations and remodels and new store construction, $155.0 million related to infrastructure and maintenance requirements and
$90.0 million related to prescription file purchases. Management expects that these capital expenditures will be financed primarily with cash flow from operating activities.
34
Table of Contents
We are highly leveraged. Our high level of indebtedness could: (i) limit our ability to obtain additional financing;
(ii) limit our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) place us at a competitive disadvantage relative to our competitors with less
debt; (iv) render us more vulnerable to general adverse economic and industry conditions; and (v) require us to dedicate a substantial portion of our cash flow to service our debt. Based
upon our current levels of operations and the anticipated estimated working capital benefit of $250.0 million resulting from our Purchasing and Delivery Arrangement, we believe that cash flow
from operations together with available borrowings under the revolving credit facility and other sources of liquidity will be adequate to meet our requirements for working capital, debt service and
capital expenditures at least for the next twelve months. Based on our liquidity position, which we expect to remain strong throughout the year, we do not expect to be subject to the fixed charge
covenant in our senior secured credit facility in the next twelve months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in light of our operating
performance, and other relevant circumstances. From time to time, we may seek deleveraging transactions, including entering into transactions to exchange debt for shares of common stock, issuance of
equity (including preferred stock and convertible securities), repurchase outstanding indebtedness, or seek to refinance our outstanding debt or may otherwise seek transactions to reduce interest
expense and extend debt maturities. Any of these transactions could impact our financial results.
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that require the use of significant judgments and estimates by management, refer
to "Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Estimates" included in our Fiscal 2014 10-K.
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and industry, refer to "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" included in our Fiscal 2014 10-K which we filed with the SEC on April 23, 2014.
Adjusted EBITDA and Other Non-GAAP Measures
In addition to net income determined in accordance with GAAP, we use certain non-GAAP measures, such as "Adjusted EBITDA", in assessing
our operating performance. We believe the non-GAAP metrics serve as an appropriate measure to be used in evaluating the performance of our business. We define Adjusted EBITDA as net income excluding
the impact of income taxes (and any corresponding adjustments to tax indemnification asset), interest expense, depreciation and amortization, LIFO adjustments, charges or credits for facility closing
and impairment, inventory write-downs related to store closings, debt retirements, and other items (including stock-based compensation expense, sale of assets and investments, and revenue deferrals
related to our customer loyalty program). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates
internal comparisons to the historical operating performance of prior periods and external comparisons to competitors' historical operating performance. In addition, incentive compensation is based on
Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of
actual to planned Adjusted EBITDA.
35
Table of Contents
The
following is a reconciliation of Adjusted EBITDA to our net income for the thirteen and twenty-six week periods ended August 30, 2014 and August 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended |
|
Twenty-Six Week
Period Ended |
|
|
|
August 30,
2014 |
|
August 31,
2013 |
|
August 30,
2014 |
|
August 31,
2013 |
|
|
|
(dollars in thousands)
|
|
Net income |
|
$ |
127,849 |
|
$ |
32,827 |
|
$ |
169,295 |
|
$ |
122,489 |
|
Interest expense |
|
|
100,950 |
|
|
106,716 |
|
|
201,770 |
|
|
219,780 |
|
Income tax expense |
|
|
19,860 |
|
|
2,210 |
|
|
31,741 |
|
|
5,422 |
|
Depreciation and amortization expense |
|
|
101,484 |
|
|
99,247 |
|
|
204,589 |
|
|
200,493 |
|
LIFO charges |
|
|
1,544 |
|
|
23,000 |
|
|
3,089 |
|
|
35,000 |
|
Lease termination and impairment charges |
|
|
7,111 |
|
|
11,390 |
|
|
11,959 |
|
|
22,362 |
|
Other |
|
|
5,368 |
|
|
66,199 |
|
|
24,336 |
|
|
80,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
364,166 |
|
$ |
341,589 |
|
$ |
646,779 |
|
$ |
686,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to Adjusted EBITDA, we occasionally refer to several other Non-GAAP measures, on a less frequent basis, in order to describe certain components of our business and how we
utilize them to describe our results. These measures include but are not limited to Adjusted EBITDA Gross Margin and Gross Profit (gross margin/gross profit excluding non-Adjusted EBITDA items),
Adjusted EBITDA SG&A (SG&A expenses excluding non-Adjusted EBITDA items), FIFO Gross Margin and FIFO Gross Profit (gross margin/gross profit before LIFO charges) and Free Cash Flow (Adjusted EBITDA
less cash paid for interest, rent on closed stores, capital expenditures, acquisition costs and the change in working capital).
We
include these non-GAAP financial measures in our earnings announcements and guidance in order to provide transparency to our investors and enable investors to better compare our
operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. Adjusted EBITDA or other non-GAAP measures should
not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP.
Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies.
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. Our major market risk exposure is changing interest rates. Increases in interest rates would increase our interest
expense. 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. We currently do not have any derivative transactions outstanding.
36
Table of Contents
The
table below provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal payments and the related weighted
average interest rates by expected maturity dates as of August 30, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
Thereafter |
|
Total |
|
Fair Value at
08/30/2014 |
|
|
|
(dollars in thousands)
|
|
Long-term debt, including current portion, excluding capital lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
$ |
5,324 |
|
$ |
64,178 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
3,055,000 |
|
$ |
3,124,502 |
|
$ |
3,478,386 |
|
Average Interest Rate |
|
|
0.95 |
% |
|
8.50 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
8.16 |
% |
|
8.16 |
% |
|
|
|
Variable Rate |
|
$ |
5,761 |
|
$ |
11,523 |
|
$ |
11,523 |
|
$ |
416,523 |
|
$ |
11,523 |
|
$ |
2,067,559 |
|
$ |
2,524,412 |
|
$ |
2,511,028 |
|
Average Interest Rate |
|
|
3.50 |
% |
|
3.50 |
% |
|
3.50 |
% |
|
2.41 |
% |
|
3.50 |
% |
|
4.34 |
% |
|
4.01 |
% |
|
|
|
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 could be materially adversely affected. We cannot be assured that any replacement borrowing or
equity financing could be successfully completed.
The
interest rate on our variable rate borrowings, which include our revolving credit facility, our new Tranche 7 Term Loan and Tranche 1 Term Loan and our Tranche 2
Term Loan, are all based on LIBOR. However, the interest rate on our Tranche 7 Term Loan has a LIBOR floor of 75 basis points and our Tranche 1 Term Loan and Tranche 2 Term Loan
have a LIBOR floor of 100 basis points. If the market rates of interest for LIBOR changed by 100 basis points as of August 30, 2014, our annual interest expense would change by approximately
$10.3 million.
A
change in interest rates does not have an impact upon our future earnings and cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and if additional debt is
acquired to fund the debt repayment, future earnings and cash flow may be affected by changes in interest rates. This effect would be realized in the periods subsequent to the periods when the debt
matures. Increases in interest rates would also impact our ability to refinance existing maturities on favorable terms.
ITEM 4. Controls and Procedures
- (a)
- Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
- (b)
- Changes in Internal Control over Financial Reporting
There
have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Certain legal proceedings in which we are involved are discussed in Part I, Item 3 of our Annual Report on
Form 10-K (the "10-K") for the year ended March 1, 2014. The following discussion is limited to certain recent developments concerning our legal proceedings and should be read in
conjunction with the 10-K.
With
respect to the Indergit litigation, in September 2014, the U. S. Court of Appeals for the Second Circuit denied our petition for an
interlocutory appeal of the district court's order denying our motion for decertification of the nationwide collective action claims.
We
are 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, failure to reimburse business expenses and failure to provide employee seating (collectively, the "California
Cases"). These suits purport to be class actions and seek substantial damages. We have 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 pharmacist 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), we and the attorneys representing the putative class of pharmacists have agreed to a class wide settlement of the case of $9.7 million, subject to final Court approval. The parties are
in the process of documenting the settlement and obtaining Court approval.
In
the employee seating case (Hall v. Rite Aid Corporation, San Diego County Superior Court), the Court, in October 2011, granted the
plaintiff's motion for class certification. We filed a motion for decertification, which motion was granted in November 2012. Plaintiff subsequently appealed the Court's order which appeal was granted
in May 2014. We filed a petition for review of the appellate court's decision with the California Supreme Court, which petition was denied in August 2014. Proceedings in the Hall case are stayed pending
a decision by the California Supreme Court in two similar cases. With respect to the California Cases (other than
Chase and Scherwin and Kyle), we, at this time, are not able to predict either the outcome of these
lawsuits or estimate a potential range of loss with respect to said lawsuits.
With
respect to the investigation being conducted by the United States Department of Health and Human Services, Office of the Inspector General and the United States Attorney's Office
for the Central District of California pursuant to a subpoena dated March 5, 2010 seeking information related to any gift card inducement programs for customers who transferred prescriptions
for drugs or medicines to our pharmacies, and whether any customers who receive federally funded prescription benefits may have benefited from those programs (the "Gift Card Investigation"),
subsequent to the end of the second quarter of fiscal year 2015, we have agreed to pay $2.99 million to settle the matter. The parties are in the process of documenting the settlement.
ITEM 1A. Risk Factors
In addition to the information set forth in this Quarterly Report, you should carefully consider the factors discussed in
Part I, Item 1A, "Risk Factors" in our Fiscal 2014 10-K, filed with the SEC on April 23, 2014, which could materially affect our business, financial condition or future results.
38
Table of Contents
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Repurchases of Equity Securities. The table below is a listing of repurchases of Common Stock during the second quarter of fiscal
2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal period:
|
|
Total
Number of
Shares
Repurchased |
|
Average
Price Paid
Per Share |
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs |
|
Maximum Number of
Shares that may yet be
Purchased under the
Plans or Programs |
|
June 1 to June 28, 2014(1) |
|
|
2,070,743 |
|
$ |
7.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29 to July 26, 2014 |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 27 to August 30, 2014 |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Represents
shares withheld by the Company, at the election of certain holders of vested restricted stock, with a market value approximating the amount of
withholding taxes due.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
Not applicable.
39
Table of Contents
ITEM 6. Exhibits
- (a)
- The
following exhibits are filed as part of this report.
|
|
|
|
|
|
Exhibit Numbers |
|
Description |
|
Incorporation By Reference To |
|
3.1 |
|
Amended and Restated Certificate of Incorporation, dated January 22, 2014 |
|
Exhibit 3.1 to Form 10-K, filed on April 23, 2014 |
|
3.2 |
|
Amended and Restated By-Laws |
|
Exhibit 3.1 to Form 8-K, filed on January 27, 2010 |
|
4.1 |
|
Indenture, dated as of October 26, 2009, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, related to the Company's
10.25% Senior Secured Notes due 2019 |
|
Exhibit 4.1 to Form 8-K, filed on October 29, 2009 |
|
4.2 |
|
Indenture, dated as of August 16, 2010, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, related to the Company's
8.00% Senior Secured Notes due 2020 |
|
Exhibit 4.1 to Form 8-K, filed on August 19, 2010 |
|
4.3 |
|
Indenture, dated as of February 27, 2012, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, related to the Company's
9.25% Senior Notes due 2020 |
|
Exhibit 4.1 to Form 8-K, filed on February 27, 2012 |
|
4.4 |
|
First Supplemental Indenture, dated as of May 15, 2012, among Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Mellon Trust Company, N.A. to the Indenture, dated as of
February 27, 2012, among Rite Aid Corporation, the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., related to the Company's 9.25% Senior Notes due 2020 |
|
Exhibit 4.23 to the Registration Statement on Form S-4, File No. 181651, filed on May 24, 2012 |
|
4.5 |
|
Indenture, dated as of August 1, 1993, between Rite Aid Corporation, as issuer, and Morgan Guaranty Trust Company of New York, as trustee, related to the Company's 7.70% Notes due 2027 |
|
Exhibit 4A to Registration Statement on Form S-3, File No. 033-63794, filed on June 3, 1993 |
|
4.6 |
|
Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and U.S. Bank Trust National Association (as successor trustee to Morgan Guaranty Trust Company of New York) to the Indenture
dated as of August 1, 1993, between Rite Aid Corporation and Morgan Guaranty Trust Company of New York, relating to the Company's 7.70% Notes due 2027 |
|
Exhibit 4.1 to Form 8-K filed on February 7, 2000 |
40
Table of Contents
|
|
|
|
|
|
Exhibit Numbers |
|
Description |
|
Incorporation By Reference To |
|
4.7 |
|
Second Supplemental Indenture, dated as of February 21, 2013, between Rite Aid Corporation and U.S. Bank Trust National Association to the Indenture dated as of August 1, 1993, between Rite Aid Corporation and
Morgan Guaranty Trust Company of New York, relating to the Company's 6.875% Senior Debentures due 2013 |
|
Exhibit 4.3 to Form 8-K, filed on February 21, 2013 |
|
4.8 |
|
Indenture, dated as of December 21, 1998, between Rite Aid Corporation, as issuer, and Harris Trust and Savings Bank, as trustee, related to the Company's 6.875% Notes due 2028 |
|
Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-74751, filed on March 19, 1999 |
|
4.9 |
|
Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and Harris Trust and Savings Bank to the Indenture, dated December 21, 1998, between Rite Aid Corporation and Harris Trust
and Savings Bank, related to the Company's 6.875% Notes due 2028 |
|
Exhibit 4.4 to Form 8-K, filed on February 7, 2000 |
|
4.10 |
|
Indenture, dated as of May 29, 2008, between Rite Aid Corporation, as issuer, and The Bank of New York Trust Company, N.A., as trustee, related to the Company's Senior Debt Securities |
|
Exhibit 4.1 to Form 8-K, filed on June 2, 2008 |
|
4.11 |
|
First Supplemental Indenture, dated as of May 29, 2008, among Rite Aid Corporation and The Bank of New York Trust Company, N.A. to the Indenture, dated as of May 29, 2008, between Rite Aid Corporation and
The Bank of New York Trust Company, N.A., related to the Company's 8.5% Convertible Notes due 2015 |
|
Exhibit 4.2 to Form 8-K, filed on June 2, 2008 |
|
4.12 |
|
Indenture, dated as of July 2, 2013, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., related to the Company's 6.75% Senior Notes
due 2021 |
|
Exhibit 4.1 to Form 8-K, filed on July 2, 2013 |
|
10.1 |
|
Amended and Restated Credit Agreement, dated as of June 27, 2001, as amended and restated as of March 14, 2014, among Rite Aid Corporation, the lenders from time to time party thereto and Citicorp North
America, Inc., as administrative agent and collateral agent. |
|
Exhibit 10.1 to Form 8-K, filed on March 19, 2014 |
|
10.2 |
|
Employment Agreement by and between Rite Aid Corporation and Darren W. Karst dated as of July 24, 2014 |
|
Filed herewith |
|
11 |
|
Statement regarding computation of earnings per share (See Note 3 to the condensed consolidated financial statements) |
|
Filed herewith |
|
31.1 |
|
Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended |
|
Filed herewith |
41
Table of Contents
|
|
|
|
|
|
Exhibit Numbers |
|
Description |
|
Incorporation By Reference To |
|
31.2 |
|
Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended |
|
Filed herewith |
|
32 |
|
Certification of CEO and CFO pursuant to 18 United States Code, Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002 |
|
Filed herewith |
|
101. |
|
The following materials are formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at August 30, 2014 and March 1, 2014, (ii) Condensed Consolidated
Statements of Operations for the thirteen and twenty-six week periods ended August 30, 2014 and August 31, 2013, (iii) Condensed Consolidated Statements of Comprehensive Income for the thirteen and twenty-six week periods ended
August 30, 2014 and August 31, 2013, (iv) Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended August 30, 2014 and August 31, 2013 and (v) Notes to Condensed Consolidated Financial
Statements, tagged in detail. |
|
|
42
Table of Contents
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 2, 2014 |
|
RITE AID CORPORATION |
|
|
By: |
|
/s/ DARREN W. KARST
Darren W. Karst Executive Vice President and
Chief Financial Officer |
Date: October 2, 2014 |
|
By: |
|
/s/ DOUGLAS E. DONLEY
Douglas E. Donley Senior Vice President and
Chief Accounting Officer |
43
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this Agreement) is entered into as of the 24th day of July 2014 (the Effective Date) by and between Rite Aid Corporation, a Delaware corporation (the Company) and Darren W. Karst (Executive).
WHEREAS, Executive desires to provide the Company with his services and the Company desires to hire and employ Executive on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive (individually a Party and together the Parties), intending to be legally bound, agree as follows:
1. Term of Employment.
The term of Executives employment under this Agreement shall commence on August 25, 2014 or such earlier date as Executive and the Company shall agree (the Commencement Date) and, unless earlier terminated pursuant to Section 5 below, shall continue for a period ending on the date that is two (2) years following the Commencement Date (the Original Term of Employment). The Original Term of Employment shall be automatically renewed for successive one (1) year terms (the Renewal Terms) unless at least one hundred eighty (180) days prior to the expiration of the Original Term of Employment or any Renewal Term, either Party notifies the other Party in writing that he or it is electing to terminate this Agreement at the expiration of the then current Term of Employment. Term shall mean the Original Term of Employment and all Renewal Terms. For purposes of this Agreement, except as otherwise provided herein, the phrases year during the Term or similar language shall refer to each twelve (12) month period commencing on the Commencement Date or applicable anniversaries thereof.
2. Position and Duties.
2.1 Generally. During the Term, Executive shall serve as an Executive Vice President and Chief Financial Officer of the Company and shall have such officer level duties, responsibilities and authority as are customary for such position and such other titles, duties, responsibilities and authorities as shall be assigned by the Company from time to time consistent with such position. Executive shall devote his full working time, attention, knowledge and skills faithfully and to the best of his ability, to the duties and responsibilities assigned by the Company in furtherance of the business affairs and activities of the Company and its subsidiaries, affiliates and strategic partners. Executive shall report solely to the Companys Chief Executive Officer. Contemporaneously with termination of Executives employment for any reason, Executive shall automatically resign from all offices and positions he holds with the Company or any subsidiary without any further action on the part of Executive or the Company.
2.2 Other Activities. Anything herein to the contrary notwithstanding, nothing in this Agreement shall preclude the Executive from engaging in the following activities: (i) serving on the board of directors of a reasonable number of other corporations or the boards of a reasonable
number of trade associations and/or charitable organizations, subject to the Companys approval, which shall not be unreasonably withheld, (ii) engaging in charitable activities and community affairs, and (iii) managing his personal investments and affairs, provided that Executives activities pursuant to clauses (i), (ii) or (iii) do not violate Sections 6 or 7 below or materially interfere with the proper performance of his duties and responsibilities under this Agreement. Executive shall at all times be subject to, observe and carry out such rules, regulations, policies, directions, and restrictions as the Company may from time to time establish for officers of the Company or employees generally.
3. Compensation.
3.1 Base Salary. During the Term, as compensation for his services hereunder, Executive shall receive a salary at the annualized rate of Seven Hundred Ninety Thousand Dollars ($790,000) per year (Base Salary as may be adjusted from time to time, subject to Section 5.4), which shall be paid in accordance with the Companys normal payroll practices and procedures, less such deductions or offsets required by applicable law or otherwise authorized by Executive.
3.2 Annual Performance Bonus. The Executive shall participate each fiscal year during the Term in the Companys annual bonus plan as adopted and approved by the Companys Board of Directors (the Board) or the Compensation Committee of the Board (the Compensation Committee) from time to time. For the current fiscal year (FY 2015), Executives annual bonus opportunity pursuant to such plan shall equal seventy-five percent (75%) (the Annual Target Bonus) of the Base Salary, subject to proration from the Effective Date. For subsequent fiscal years, the Annual Target Bonus may be adjusted by the Compensation Committee (however, in no event shall it be less than 75%). Payment of any bonus earned shall be made in accordance with the terms of the Companys annual bonus plan as in effect for the year for which the bonus is earned.
3.3 Equity Awards.
(a) On the Commencement Date, the Executive will be granted shares of restricted Company Common Stock, par value $1.00 per share (Company Stock) as an inducement valued at $2 million (the Restricted Stock). The number of shares of Restricted Stock shall be determined by dividing $2 million by the closing price of the Company Stock on the Commencement Date. The Restricted Stock shall vest and become exercisable as to one-third (1/3) of the shares of the Restricted Stock on each of the first three (3) anniversaries from the date of grant; be subject to the acceleration, exercise and termination provisions set forth in the Companys 2014 Omnibus Equity Plan (the Equity Plan), a copy of which Equity Plan has been filed as Exhibit 10.1 to the Companys current report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2014 and Article 5 hereof; and otherwise be evidenced by and subject to the terms of the Equity Plan.
(b) Executive will be eligible to participate during the Term in the Companys Long Term Incentive Plan (LTIP). Executives long term incentive factor will be based upon two hundred percent (200%) of Executives Base Salary. In addition, on the Commencement Date, Executive will be granted awards under the Equity Plan pursuant to the LTIP with respect to fiscal year 2015 valued at two hundred percent (200%) of Base Salary calculated in a manner consistent
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with and containing the same terms and conditions as other senior executives. The number of awards shall be comprised of forty percent (40%) stock options (vesting ratably over four (4) years), twenty-five percent (25%) restricted stock (vesting ratably over three (3) years) and thirty-five percent (35%) performance units settleable in shares of Company stock at the end of the three (3) year performance period.
4. Additional Benefits.
4.1 Employee Benefits. During the Term, Executive shall be eligible to participate in the employee benefit plans (including, but not limited to medical, dental and life insurance plans, short-term and long-term disability coverage, the Supplemental Executive Retirement Plan and 401(k) plans) in which management employees of the Company are generally eligible to participate, subject to satisfaction of any eligibility requirements and the other generally applicable terms of such plans. Nothing in this Agreement shall prevent the Company from amending or terminating any employee benefit plans of the Company from time to time as the Company deems appropriate. The Company agrees to waive the eligibility waiting period with respect to short-term disability coverage.
4.2 Expenses. The Company shall reimburse Executive for any expenses reasonably incurred by him during the Term (and at any time during his employment thereafter), in furtherance of his duties hereunder, including without limitation the premium for a personal long-term disability policy covering Executive from the Commencement Date until he becomes eligible for the Companys long-term disability coverage, travel, meals and accommodations, upon submission of vouchers or receipts and in compliance with such rules and policies relating thereto as the Company may from time to time adopt or as may be required in order to permit such payments to be taken as proper deductions by the Company or any subsidiary under the Internal Revenue Code of 1986, as amended, and the rules and regulations adopted pursuant thereto now or hereafter in effect (the Code). The Company will pay Executives reasonable professional fees incurred to negotiate and prepare this Agreement and all related agreements. The provisions of Section 14(b) shall apply to all reimbursements made under this Section 4.2.
4.3 Vacation. Executive shall be entitled to twenty (20) days of paid vacation during each year of the Term. Vacation will replenish on Executives anniversaries and future increments will follow Company policy.
4.4 Automobile Allowance. During the Term, the Company shall provide Executive with an automobile allowance of $1,000.00 per month.
4.5 Annual Financial Planning Allowance. During each year of the Term, the Company shall provide Executive with an executive planning allowance in the amount of $5,000.00. The provisions of Section 14(b) shall apply to any payments or reimbursements made under this Section 4.5.
4.6 Relocation and Commuting Expenses. Subject to Executive providing reasonable documentation to the Company, the Company shall reimburse Executive up to a total of Sixty-Seven Thousand Dollars ($67,000) annually for transportation, commuting, lodging and other
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relocation expenses (including moving and house hunting expenses and other direct costs incurred in connection with any relocation) incurred by Executive during the Term.
4.7 Indemnification. The Company shall (a) indemnify and hold Executive 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) relating to or arising out of the Executives employment with and service as an officer of the Company during the Term and at all times thereafter; and (b) pay all reasonable costs, expenses and attorneys fees incurred by Executive in connection with or relating to the defense of any such loss, claim, cost, expense, damage, liability or action, subject to Executives undertaking to repay in the event it is ultimately determined that Executive is not entitled to be indemnified by the Company. Executive shall at all relevant times be covered as an insured under any director and officer liability insurance that covers members of the Board. Following termination of the Executives employment or service with the Company, the Company shall cause any director and officer liability insurance policies applicable to the Executive prior to such termination to remain in effect for six (6) years following the date of termination of employment. The provisions of Section 14(b) shall apply to any payments or reimbursements made under this Section 4.7.
5. Termination.
5.1 Termination of Executives Employment by the Company for Cause. The Company may terminate Executives employment hereunder for Cause (as defined below). Such termination shall be effected by written notice thereof delivered by the Company to Executive, indicating in reasonable detail the facts and circumstances alleged to provide a basis for such termination, and shall be effective as of the date of such notice in accordance with Section 12 hereof. Cause, as determined in reasonable good faith by a resolution adopted by the affirmative vote of a majority of the Companys Board of Directors (after reasonable written notice to Executive setting forth in reasonable detail the specific conduct of Executive upon which the Board relies in reaching its determination, and a reasonable opportunity for Executive, together with his counsel, to be heard before the Board prior to making such determination), shall mean: (i) Executives gross negligence or willful misconduct in the performance of the duties or responsibilities of his position with the Company or any subsidiary, or failure to timely carry out any lawful and reasonable directive of the Company; (ii) Executives misappropriation of any funds or property of the Company or any subsidiary; (iii) the conduct by Executive which is a material violation of this Agreement or written Company Policy or which materially interferes with the Executives ability to perform his duties; provided, however, that Executive shall have the right, within thirty (30) days after receipt of written notice (which shall set forth in reasonable detail the specific conduct of Executive that constitutes Cause and the specific provision(s) of this Agreement on which Company relies) from Company of the Executives violation of this subsection, to cure the event or circumstances giving rise to such Cause and in the event of which cure, such event or circumstances shall not constitute Cause hereunder; (iv) the commission by Executive of an act of fraud or dishonesty toward the Company or any subsidiary; (v) Executives willful misconduct or gross negligence which damages or injures the Company or the Companys reputation; (vi) Executive is convicted of or pleads guilty to a felony involving moral turpitude; or (vii) the use or imparting by Executive of any confidential or proprietary information of the Company or any subsidiary in material violation of Section 6 below.
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5.2 Compensation upon Termination by the Company for Cause or by Executive without Good Reason. In the event of Executives termination of employment (i) by the Company for Cause or (ii) by Executive voluntarily without Good Reason:
(a) Executive shall be entitled to receive (i) all amounts of accrued but unpaid Base Salary through the effective date of such termination, (ii) reimbursement for reasonable and necessary expenses incurred by Executive through the date of notice of such termination, to the extent otherwise provided under Section 4.2 above, (iii) all other vested payments and benefits to which Executive may otherwise be entitled pursuant to the terms of the applicable benefit plan or arrangement through the effective date of such termination, and (iv) reimbursement of relocation and commuting expense payments incurred pursuant to Section 4.6 on or prior to the date of termination ((i), (ii), (iii) and (iv), the (Accrued Benefits). All other rights of Executive (and, except as provided in Section 5.6 below, all obligations of the Company) hereunder or otherwise in connection with Executives employment with the Company shall terminate effective as of the date of such termination of employment and Executive shall not be entitled to any payments or benefits not specifically described in this subsection (a) or (b) below.
(b) Any portion of any restricted stock or any other equity incentive awards as to which the restrictions have not lapsed or as to which any other conditions shall not have been satisfied prior to the date of termination shall be forfeited as of such date and any portion of Executives stock options that have vested and become exercisable prior to the date of termination shall remain exercisable for a period of ninety (90) days following the date of termination of employment (or, such later date as may be permitted by the relevant stock option or equity plan, or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate; provided, however, in the event of termination of Executive by the Company for Cause, any stock options that have not been exercised prior to the date of termination shall immediately terminate as of such date.
Any termination of Executives employment by Executive voluntarily without Good Reason shall be effective upon a thirty (30) day notice to the Company or such earlier date as the Company determines in its discretion and designates in writing. A termination of Executives employment by the Company for Cause or by the Executive other than for Good Reason shall not constitute a breach of this Agreement.
5.3 Compensation upon Termination of Executives Employment by the Company Other Than for Cause or by Executive for Good Reason. Executives employment hereunder may be terminated during the Term by the Company other than for Cause or by Executive for Good Reason. In the event that Executives employment hereunder is terminated by the Company other than for Cause or by Executive for Good Reason:
(a) Executive shall be entitled to receive (i) the Accrued Benefits, (ii) an amount equal to two (2) times the sum of Executives then Base Salary plus Annual Target Bonus as of the date of termination of employment, such amount payable in equal installments pursuant to the Companys standard payroll procedures for management employees over a period of two (2) years commencing on the payroll payment date for the first full payroll period following the date that the release of claims (referred to below) becomes irrevocable (provided, if as of the date of termination the release of claims could become irrevocable in either of two taxable years of
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Executive, payments will not commence before the first day of the later such taxable year), and (iii) with respect to health insurance coverage, the cost of COBRA benefits (and equivalent benefits which shall be provided by the Company following expiration of any COBRA continuation period) to Executive and his immediate family for a period of two (2) years following the date of termination of employment.
(b) Executives stock option awards held by Executive shall, on the date that the release referred to below becomes irrevocable, vest and become immediately exercisable and the restrictions with respect to any awards of restricted stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two (2) years following the date of termination. Such portion of Executives stock options (together with any portion of Executives stock options that have vested and become exercisable prior to the date of termination) shall remain exercisable for a period of ninety (90) days following the date of termination of employment (or, such later date as may be permitted by the relevant stock option or equity plan, or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate. Any remaining portion of Executives stock options that have not vested (or deemed to have vested) as of the date of termination shall terminate as of such date; and all shares of restricted stock as to which the restrictions shall not have lapsed as of the date of termination shall be forfeited as of such date.
(c) If a termination pursuant to Section 5.3 of the Agreement occurs following the start of the Companys fiscal year, Executive shall also be entitled to receive, at the same time as is paid to other eligible participants in the bonus plan, following determination by the Compensation Committee (or the Board) of the Companys performance under the applicable annual performance goals for the fiscal year, a pro rata annual bonus determined by multiplying the performance level achieved (relative to Executives Annual Target Bonus amount) by the fraction (x) the numerator of which is the number of days between the beginning of the then current fiscal year of the Company and the date of termination of employment and (y) the denominator of which is 365. Executive shall also receive any unpaid annual bonus earned for any completed fiscal year preceding the date of termination.
(d) All other rights of Executive (and, except as provided in Section 5.6 below, all obligations of the Company) hereunder or otherwise in connection with Executives employment with the Company shall terminate effective as of the date of such termination of employment and Executive shall not be entitled to any payments or benefits not specifically described in 5.3(a) through (c).
Any termination of employment pursuant to this Section 5.3 shall be effective upon a thirty (30) day notice thereof or the Company may elect in its sole discretion to reduce or eliminate the notice period and pay the Executive his Base Salary for some or all of the notice period in lieu of notice. A termination of Executives employment by the Company other than for Cause or by the Executive for Good Reason shall not constitute a breach of this Agreement. To be eligible for the payment, benefits and stock rights described in Section 5.3(a)(ii)-(iii), (b) and (c) above, Executive must execute, within thirty (30) days after the date of termination, not revoke, and abide by a release (which shall be substantially in the form attached hereto as Appendix A) of all
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other claims, cooperate with the Company in the event of litigation and fully comply with Executives obligations under Sections 6 and 7 below.
5.4 Definition of Good Reason. For purposes of this Agreement, Good Reason shall mean the occurrence of any one of the following:
(a) the assignment to Executive of any duties or responsibilities materially inconsistent with Executives status and positions as Chief Financial Officer and an Executive Vice President of the Company, or any material adverse change in Executives title or reporting relationships; or
(b) any decrease in Executives then Base Salary to which Executive has not agreed to in writing; or
(c) a material breach by the Company of this Agreement;
(d) notification to Executive by the Company that it has elected to terminate the Agreement at the expiration of the then current Term;
provided, however, that Executive has provided written notice (which shall set forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provisions of this Agreement on which Executive relies) to the Company of the existence of any condition described in any one of the subparagraphs (a), (b), (c) or (d) within thirty (30) days of Executives knowledge of the initial existence of such condition, and the Company has not cured the condition within thirty (30) days of the receipt of such notice. Any termination of employment by the Executive for Good Reason pursuant to Section 5.3 must occur no later than the date that is the three (3) month anniversary of Executives knowledge of the initial existence of the condition giving rise to the termination right.
5.5 Compensation upon Termination of Executives Employment by Reason of Executives Death or Total Disability. In the event that Executives employment with the Company is terminated by reason of Executives death or due to involuntary termination of Executive by the Company on account of Executives Total Disability (as defined below), subject to the requirements of applicable law:
(a) Executive or Executives estate, as the case may be, shall be entitled to receive (i) the Accrued Benefits, (ii) any other benefits payable under the then current disability and/or death benefit plans, as applicable, in which Executive is a participant and (iii) with respect to health insurance coverage, the cost of COBRA benefits (and equivalent benefits which shall be provided by the Company following expiration of any COBRA continuation period) to Executive and/or his immediate family, as applicable, for a period of two (2) years following the date of termination of employment. Executive or Executives estate shall also be entitled to receive, at the same time as is paid to other eligible participants in the bonus plan, following determination by the Compensation Committee (or the Board) of the Companys performance under the applicable annual performance goals for the fiscal year, a pro rata annual bonus determined by multiplying the performance level achieved (relative to Executives Annual Target Bonus amount) by the fraction (x) the numerator of which is the number of days between the beginning of the then current fiscal year of the Company and the date of termination of employment and (y)
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the denominator of which is 365. Executive or Executive estate shall also be entitled to any unpaid annual bonus earned for any completed fiscal year preceding the date of termination.
(b) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of Restricted Stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two (2) years following the date of termination. Such portion of Executives stock options (together with any portion of Executives stock options that have vested and become exercisable prior to the date of termination) shall remain exercisable for a period of ninety (90) days following the date of termination of employment (or, such later date as may be permitted by the relevant stock option or equity plan, or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate. Any remaining portion of Executives stock options that have not vested (or deemed to have vested) as of the date of termination shall terminate as of such date; and all shares of restricted stock as to which the restrictions shall not have lapsed as of the date of termination shall be forfeited as of such date.
(c) All other rights of Executive (and, except as provided in Section 5.6 below, all obligations of the Company) hereunder or otherwise in connection with Executives employment with the Company shall terminate effective as of the date of such termination of employment and Executive shall not be entitled to any payments or benefits not specifically described in Section 5.5(a) through (c).
Total Disability shall mean any physical or mental disability that prevents Executive from (a)(i) performing one or more of the essential functions of his position for a period of not less than ninety (90) days in any twelve (12) month period and (ii) which is expected to be of permanent or indeterminate duration but expected to last at least twelve (12) continuous months or result in death of the Executive as determined (y) by a physician selected by the Company or its insurer or (z) pursuant to the Companys benefit programs; or (b) reporting to work for ninety (90) or more consecutive business days or unable to engage in any substantial activity.
5.6 Survival. In the event of any termination of Executives employment during the Term, or upon or after expiration of the Term, Executive and the Company nevertheless shall continue to be bound by the terms and conditions set forth in Section 4.7 and Section 5.3 above and Sections 6 through 10 below, which shall survive the expiration of the Term.
5.7 Change in Control Best Payments Determination. Any other provision of this Agreement to the contrary notwithstanding, if any portion of any payment or benefit under this Agreement either individually or in conjunction with any payment or benefit under any other plan, agreement or arrangement (all such payments and benefits, the Total Payments) would constitute an excess parachute payment within the meaning of Internal Revenue Code Section 280G, that is subject to the tax imposed by Section 4999 of such Code, then the Total Payments to be made to Executive shall be reduced, but only to the extent that Executive would retain a greater amount on an after-tax basis than he would retain absent such reduction, such that the value of the Total Payments that Executive is entitled to receive shall be $1 less than the maximum amount which the Employee may receive without becoming subject to the excise tax under Section 4999. For purposes of this Section 5.7, the determination of whichever amount is
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greater on an after-tax basis shall be (i) based on maximum federal, state and local income and employment tax rates and the tax that would be imposed on Executive pursuant to Section 4999 and (ii) made at Company expense by independent accountants selected by the Company and Executive (which may be the Companys income tax return preparers if Executive so agrees) which determination shall be binding on both Executive and the Company. Any such reduction as may apply under this Section 5 7 shall be applied (i) first, to any payments due to Executive under Section 5.3(a)(ii), (ii) then, any other cash payments not covered by this Agreement that are included in the Total Payments, (iii) then, under Section 5.3(c), (iv) then, Section 5.3(a)(iii), and (v) then under Section 5.3(b).
5.8 No Other Severance or Termination Benefits. Except as expressly set forth herein, Executive shall not be entitled to damages or to any severance or other benefits upon termination of employment with the Company under any circumstances and for any or no reason, including, but not limited to any severance pay under any Company severance plan, policy or practice.
6. Protection of Confidential Information.
Executive acknowledges that during the course of his employment with the Company, its subsidiaries, affiliates and strategic partners, he will be exposed to documents and other information regarding the confidential affairs of the Company, its subsidiaries, affiliates and strategic partners, including without limitation, information about their past, present and future financial condition, pricing strategy, prices, suppliers, cost information, business and marketing plans, the markets for their products, key personnel, past, present or future actual or threatened litigation, trade secrets, and other intellectual property, current and prospective customer lists, operational methods, acquisition plans, prospects, plans for future development and other business affairs and information about the Company and its subsidiaries, affiliates and strategic partners not readily available to the public (the Confidential Information). Executive further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual character. In recognition of the foregoing, the Executive covenants and agrees as follows:
6.1 No Disclosure or Use of Confidential Information. At no time shall Executive ever divulge, disclose, or otherwise use any Confidential Information (other than as necessary to perform his duties under this Agreement and in furtherance of the Companys best interests), unless and until such information is readily available in the public domain by reason other than Executives disclosure or use thereof in violation of the first clause of this Section 6.1. Executive acknowledges that Company is the owner of, and that Executive has not rights to, any trade secrets, patents, copyrights, trademarks, know-how or similar rights of any type, including any modifications or improvements to any work or other property developed, created or worked on by Executive during the Term of this Agreement.
6.2 Return of Company Property, Records and Files. Upon the termination of Executives employment at any time and for any reason, or at any other time the Board may so direct, Executive shall promptly deliver to the Companys offices in Harrisburg, Pennsylvania all of the property and equipment of the Company, it subsidiaries, affiliates and strategic partners (including any cell phones, pagers, credit cards, personal computers, etc.) and any and all documents, records, and files, including any notes, memoranda, customer lists, reports or any
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and all other documents, including any copies thereof, whether in hard copy form or on a computer disk or hard drive, which relate to the Company, its subsidiaries, affiliates, strategic partners, successors or assigns, and/or their respective past and present officers, directors, employees or consultants (collectively, the Company Property, Records and Files); it being expressly understood that, upon termination of Executives employment at any time and for any reason, Executive shall not be authorized to retain any of the Company Property, Records and Files, any copies thereof or excerpts therefrom.
7. Noncompetition and Other Matters.
7.1 Noncompetition. During the Executives employment with the Company or one of its subsidiaries and during the twelve (12) month period following the termination of Executives employment (the Restricted Period), Executive will not directly, or indirectly knowingly cause any other person to, engage in Competition with the Company. Competition shall mean engaging in any activity for a Competitor of the Company, whether as a principal, agent, partner, officer, director, employee, independent contractor, investor, consultant or stockholder (except as a less than one percent (1%) shareholder of a publicly traded company) or otherwise. A Competitor shall mean any person, corporation or other entity and its parents, subsidiaries, affiliates and assigns, (collectively, a Person) doing business in any geographical area in which the Company or any of its subsidiaries or affiliates are doing or have imminent plans to do business, and which is engaged in the operation of a retail or internet business which includes or has imminent plans to include a pharmacy (i.e., the sale of prescription drugs) as an offering or component of its business, including but not limited to, chain drug store companies such as Walgreen Company and CVS Caremark, mass merchants such as Walmart Stores, Inc. and Target Corporation and food/drug combinations such as The Kroger Co., Safeway Inc., Ahold USA and AB Acquisition LLC; provided, however, that a Competitor shall not include a Person that operates seventy-five (75) or fewer pharmacies. During Executives employment by the Company or one of its subsidiaries and during the Restricted Period, Executive will not directly, or indirectly knowingly cause any other person to, engage in any activity that involves providing audit review or other consulting or advisory services with respect to any relationship between the Company and any third party.
7.2 Noninterference. During the Restricted Period, Executive shall not, directly, or indirectly knowingly cause any other person to, solicit, induce, or attempt to solicit or induce any officer, director, employee, agent or consultant of the Company or any of its subsidiaries, affiliates, strategic partners, successors or assigns to terminate his, her or its employment or other relationship with the Company or its subsidiaries, affiliates, strategic partners, successors or assigns for the purpose of associating with any Competitor of the Company or its subsidiaries, affiliates, strategic partners, successors or assigns, or otherwise encourage any such person or entity to leave or sever his, her or its employment or other relationship with the Company or its subsidiaries, affiliates, strategic partners, successors or assigns for any other reason.
7.3 Nonsolicitation. During the Restricted Period, Executive shall not directly, or indirectly knowingly cause any other person to, solicit, induce, or attempt to solicit or induce any customers, clients, vendors, suppliers or consultants then under contract to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns, to terminate, limit or otherwise modify his, her or its relationship with the Company or its subsidiaries, affiliates, strategic
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partners, successors or assigns, for the purpose of associating with any Competitor of the Company or its subsidiaries, affiliates, strategic partners, successors or assigns, or otherwise encourage such customers, clients, vendors, suppliers or consultants then under contract to terminate his, her or its relationship with the Company or its subsidiaries, affiliates, strategic partners, successors or assigns for any reason. During the Restricted Period, Executive shall not hire, either directly or through any employee, agent or representative, any person known by Executive to be (or to have been) a field and corporate management employee of the Company or any subsidiary or any such person who was employed by the Company or any subsidiary within 180 days of such hiring.
8. Rights and Remedies Upon Breach.
If Executive breaches, or threatens to commit a breach of, any of the provisions of Sections 6 or 7 above (the Restrictive Covenants), the Company and its subsidiaries, affiliates, strategic partners, successors or assigns shall have the following rights and remedies, each of which shall be independent of the others and severally enforceable, and each of which shall be in addition to, and not in lieu of, any other rights or remedies available to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns at law or in equity.
8.1 Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction by injunctive decree or otherwise, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns and that money damages would not provide an adequate remedy to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns.
8.2 Accounting. The right and remedy to require Executive to account for and pay over to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns, as the case may be, all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as a result of any transaction or activity constituting a breach of any of the Restrictive Covenants.
8.3 Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographic and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect without regard to the invalid portions.
8.4 Modification by the Court. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or scope of such provision, such court shall have the power (and is hereby instructed by the parties) to modify or reduce the duration or scope of such provision, as the case may be (it being the intent of the parties that any such modification or reduction be limited to the minimum extent necessary to render such provision enforceable), and, in its modified or reduced form, such provision shall then be enforceable.
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8.5 Enforceability in Jurisdictions. Executive intends to and hereby confers jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographic scope of such covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of Executive that such determination not bar or in any way affect the right of the Company or its subsidiaries, affiliates, strategic partners, successors or assigns to the relief provided herein in the courts of any other jurisdiction within the geographic scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.
8.6 Extension of Restriction in the Event of Breach. In the event that Executive breaches any of the provisions set forth in this Section 8, the length of time of the Restricted Period shall be extended for a period of time equal to the period of time during which Executive is in breach of such provision.
9. No Violation of Third-Party Rights.
(a) Executive represents, warrants and covenants that he:
(i) will not, in the course of employment, infringe upon or violate any proprietary rights of any third party (including, without limitation, any third party confidential relationships, patents, copyrights, mask works, trade secrets, or other proprietary rights);
(ii) is not a party to any conflicting agreements with third parties, which will prevent him from fulfilling the terms of employment and the obligations of this Agreement;
(iii) does not have in his possession any confidential or proprietary information or documents belonging to others and will not disclose to the Company, use, or induce the Company to use, any confidential or proprietary information or documents of others; and
(iv) agrees to respect any and all valid obligations which he may now have to prior employers or to others relating to confidential information, inventions, discoveries or other intellectual property which are the property of those prior employers or others, as the case may be.
Executive has supplied to the Company a copy of each written agreement with any of Executives prior employers, as well as any other agreements to which Executive is subject, which includes any obligation of confidentiality, assignment of intellectual property, nonsolicitation or noncompetition. Executive has listed each of such agreements in Appendix B.
Executive agrees to indemnify and save harmless the Company from any loss, claim, damage, cost or expense of any kind (including without limitation, reasonable attorney fees) to which the Company may be subjected by virtue of a breach by Executive of the foregoing representations, warranties, and covenants.
(b) The Company represents and warrants to Executive that as of the Commencement Date none of the Company or any of its subsidiaries or affiliates conducts business, or has any imminent plans to conduct business, in the states of Minnesota, Wisconsin and Illinois. The
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Company agrees to indemnify and save harmless Executive from any loss, claim, damage, cost or expense of any kind (including without limitation, reasonable attorney fees) to which Executive may be subjected by virtue of a breach by the Company of the foregoing representation and warranty.
10. Arbitration.
Except as necessary for the Company and its subsidiaries, affiliates, strategic partners, successors or assigns or Executive to specifically enforce or enjoin a breach of this Agreement (to the extent such remedies are otherwise available), the parties agree that any and all disputes that may arise in connection with, arising out of or relating to this Agreement, or any dispute that relates in any way, in whole or in part, to Executives employment with the Company or any subsidiary, affiliate or strategic partner, the termination of that employment or any other dispute by and between the parties or their subsidiaries, affiliates, strategic partners, successors or assigns, shall be submitted to final and binding arbitration in Harrisburg, Pennsylvania according to the National Employment Dispute Resolution Rules and procedures of the American Arbitration Association at the time in effect. This arbitration obligation extends to any and all claims that may arise by and between the parties or their subsidiaries, affiliates, strategic partners, successors or assigns, and expressly extends to, without limitation, claims or causes of action for wrongful termination, impairment of ability to compete in the open labor market, breach of an express or implied contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, fraud, misrepresentation, defamation, slander, infliction of emotional distress, disability, loss of future earnings, and claims under the Pennsylvania Constitution, the United States Constitution, and applicable state and federal fair employment laws, federal and state equal employment opportunity laws, and federal and state labor statutes and regulations, including, but not limited to, the Civil Rights Act of 1964, as amended, the Fair Labor Standards Act, as amended, the Americans With Disabilities Act of 1990, as amended, the Rehabilitation Act of 1973, as amended, the Employee Retirement Income Security Act of 1974, as amended, the Age Discrimination in Employment Act of 1967, as amended, and any other state or federal law. The Company shall pay all fees and expenses of the arbitrator (other than a filing fee that Executive would have paid to commence litigation in a state court located in Harrisburg, Pennsylvania, in the event that Executive commences such arbitration hereunder) Executive understands that by entering into this Agreement, Executive is waiving Executives rights to have a court determine Executives rights, including under federal, state or local statutes prohibiting employment discrimination, including sexual harassment and discrimination on the basis of age, race, color, religion, national origin, disability, veteran status or any other factor prohibited by governing law. Executive further understands that there is no intent herein to interfere with the Equal Employment Opportunity Commissions right to enforce the laws it oversees or your right to file an administrative charge of employment discrimination or a similar state or local administrative agency.
11. Assignment.
Neither this Agreement, nor any of Executives rights or obligations hereunder, may be assigned or otherwise subject to hypothecation by Executive. The Company may assign its rights and obligations hereunder, and hereby consents to any such assignment, in whole or in part, to any of the Companys subsidiaries, affiliates, or parent corporations. The Company shall assign this
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Agreement to any successor or assign in connection with the sale of all or substantially all of the Companys assets or stock, or in connection with any merger in which the Company is not the survivor, or any acquisition and/or reorganization involving the Company.
12. Notices.
All notices and other communications under this Agreement shall be in writing and shall be given by fax or first class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective persons named below:
If to the Company: Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: General Counsel
Fax: (717) 760-7867
If to Executive: Darren W. Karst, at his last address shown on the payroll records of the Company.
Any party may change such partys address for notices by notice duly given pursuant hereto.
13. General.
13.1 No Offset or Mitigation. The Companys 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 Executive or others whether in respect of claims made under this Agreement or otherwise. In no event shall the Executive 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 Executive under any of the provisions of this Agreement, and such amounts shall not be reduced, regardless of whether the Executive obtains other employment.
13.2 Governing Law. This Agreement is executed in Pennsylvania and shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflicts of laws principles thereof which might refer such interpretations to the laws of a different state or jurisdiction. Any court action instituted by Executive relating in any way to this Agreement shall be filed exclusively in state court in Cumberland County, Pennsylvania or federal court in Harrisburg, Pennsylvania and Executive consents to the jurisdiction and venue of said courts in any action instituted by or on behalf of the Company against him.
13.3 Entire Agreement. This Agreement sets forth the entire understanding of the parties relating to Executives employment with the Company and cancels and supersedes all agreements, arrangements and understandings relating thereto made prior to the date hereof, written or oral, between the Executive and the Company and/or any subsidiary or affiliate.
14
13.4 Amendments; Waivers. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, only by a written instrument executed by the parties, or in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. No waiver by any party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement.
13.5 Conflict with Other Agreements. Executive represents and warrants that neither his execution of this Agreement nor the full and complete performance of his obligations hereunder will violate or conflict in any respect with any written or oral agreement or understanding with any person or entity.
13.6 Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding upon the Company (and its successors and assigns) and Executive and his heirs, executors and personal representatives.
13.7 Withholding. Notwithstanding any other provision of this Agreement, 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.
13.8 Severability. 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.
13.9 No Assignment. The rights and benefits of the Executive 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 Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. In the event of Executives death, the Company shall pay to Executives estate all unpaid amounts that were payable to Executive immediately prior to his death.
13.10 Survival. This Agreement shall survive the termination of Executives employment and the expiration of the Term to the extent necessary to give effect to its provisions.
13.11 Captions. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.
13.12 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts; each of which when so executed and delivered shall be an original but all such counterparts together shall constitute one and the same instrument.
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14. Compliance with Code Section 409A.
(a) Payment of Benefits: To the extent necessary to avoid adverse tax consequences, and except as described below, any payment to which Executive becomes entitled under the Agreement, or any arrangement or plan referenced in this Agreement, that constitutes deferred compensation under section 409A of the Code (409A), and is (a) payable upon Executives termination; (b) at a time when the Executive is a specified employee as defined by 409A shall not be made until the first payroll date after the earliest of: (1) the expiration of the six (6) month period (the Deferral Period) measured from the date of Executives separation from service within the meaning of such term under 409A; or (2) the date of Executives death.
On the first payroll date after the expiration of the Deferral Period, all payments that would have been made during the Deferral Period (whether in a single lump sum or in installments) shall be paid as a single lump sum to Executive or, if applicable, his beneficiary. This section shall not apply to any payment which meets the short term deferral exception to 409A or constitutes separation pay as described in Treasury Regulation Section 409A-1(b)(9) (in general, payments (i) that are made on an involuntary separation from service which (ii) do not exceed the lesser of two (2) times (x) the Executives annualized compensation for the taxable year preceding the year in which the separation from service occurs or (y) the Code Section 401(a)(17) limit on compensation for the year in which separation from service occurs and (iii) are paid in total by the end of the second calendar year following the calendar year in which the separation from service occurs).
The Company shall pay to Executive the Accrued Benefits, within ten (10) days after the Date of Termination. Notwithstanding the foregoing, if the Executive is a specified employee, as defined by 409A, and payment of the Accrued Benefits is required to be delayed under 409A, the Company shall pay to Executive the Accrued Benefits on the first payroll date after the six (6) month anniversary of the Date of Termination.
For purposes of 409A, each payment and each installment described in this Agreement shall be considered a separate payment from each other payment or installment and to the extent required by 409A, a payment due upon termination of employment will only be paid upon Executives separation from service within the meaning of such term under 409A.
(b) Reimbursements: To the extent required by 409A, with regard to any provision that provides for the reimbursement of costs and expenses, or for the provision of in-kind benefits: (i) the right to such reimbursement or in-kind benefit shall not be subject to liquidation or exchange for another benefit; (ii) the amount of expenses or in-kind benefits available or paid in one (1) year shall not affect the amount available or paid in any subsequent year; and (iii) such payments shall be made on or before the last day of the Executives taxable year in which the expense occurred.
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IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date first written above.
RITE AID CORPORATION |
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/s/ Marc A. Strassler |
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By: Marc A. Strassler |
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Its: Executive Vice President, General Counsel and Secretary |
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EXECUTIVE |
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/s/ Darren W. Karst |
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Appendix A to Employment Agreement
Date
Name
Address
City, State Zip
Re: Severance Agreement and General Release
Dear Name:
We are interested in resolving cooperatively your separation of employment with Rite Aid Corporation (the Company), which will take place on (date), your Separation Date. Toward this end, we propose the following Severance Agreement, which includes a General Release.
Whereas, the Company has previously entered into an employment agreement with you, dated (Date) (the Employment Agreement), which contains among other things, certain provisions regarding severance compensation payable upon termination of your employment with the Company under certain circumstances. Other than what is expressly set forth herein, the terms and conditions of the Employment Agreement shall remain in full force and effect.
The terms and conditions set forth in Paragraph 1 below will apply regardless of whether you decide to sign this Severance Agreement and General Release. However, you will not be eligible to receive the payments and benefits set forth in Paragraph 2 below unless you sign and do not revoke this Severance Agreement and General Release, within the time period specified below. (Please see Paragraph 3 below for what it means to revoke this Severance Agreement and General Release.)
You may consider for twenty-one (21) days whether you wish to sign this Severance Agreement and General Release. Since this Severance Agreement and General Release (Agreement) is a legal document, you are encouraged to review it with your attorney.
1. General Terms of Termination. As noted above, whether or not you sign this Agreement:
(a) Your last day of employment is (date) which is your Separation Date. You will be paid for all time worked up to and including your termination.
(b) You will be paid for earned but unused vacation days and any properly documented reasonable expenses incurred in connection with your employment through your Separation Date.
(c) Except as contemplated by the Employment Agreement, your eligibility to participate in all other group benefits except Company sponsored health insurance including medical, dental, vision and prescription as an employee of the Company will end on your Separation Date.
2. Separation Payment. Except with respect to the Accrued Benefits as defined in the Employment Agreement, if you sign this Agreement, agreeing to be bound by the General
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Release in Paragraph 3 below and the other terms and conditions of this Agreement described below, and comply with the requirements of this Paragraph 2 (other than the Accrued Benefits), you will receive the compensation and benefits set forth in Section 5.3 of the Employment Agreement. You will not be eligible for the payment and benefits described in this Paragraph 2 unless: (i) you sign this Agreement no later than twenty-one (21) days after you receive it, promptly return the Agreement to the Company after you sign it, and do not timely revoke it; and (ii) you have returned all Company property and documents in accordance with Paragraph 15 below.
3. General Release. In consideration for the agreement by the Company as set forth in Paragraphs 1 and 2, you, on behalf of yourself, your dependents, heirs, executors, administrators, assigns and successors, and each of them, hereby voluntarily agree to the general release set forth in this paragraph (the General Release). You hereby voluntarily agree to release and forever discharge the Company and its current and former subsidiaries and affiliates, and the owners, directors, officers, employees, agents, and employee benefit plans and trusts of each of them, and all of their respective successors and assigns from any and all causes of action or claims of any type, known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which you now own or hold or which you have at any time heretofore owned or held or may in the future hold as against the Company including, but not limited to, any claims arising out of or in any way connected with your employment with the Company or the termination of said employment, or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatsoever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of the Company, or any of them, committed or omitted prior to the date of this Agreement including, without limiting the generality of the foregoing, any claims arising under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e, et seq., (Title VII), the Civil Rights Act of 1866, 42 U.S.C. § 1981, the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. § 621, et seq., the National Labor Relations Act, 29 U.S.C. § 151, et seq., the Americans With Disabilities Act, 42 U.S.C. § 12101 et seq., (ADA), the ADA Amendments Act (ADAAA), Pub. L. 110-325; the Family and Medical Leave Act (FMLA), 29 U.S.C. § 2601 et seq., the Fair Labor Standards Act (FLSA), the Age Discrimination in Employment Act, as amended, 29 U.S.C. § 621 et seq. (the ADEA), the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. (ERISA), the Equal Pay Act, all wage and hour laws, the Pennsylvania Human Relations Act, 43 Pa. Stat. Ann §§ 951 et seq., the Pennsylvania Equal Pay Law, 43 Pa. Stat. Ann. §§ 336.1 et seq., the Pennsylvania Minimum Wage Law, 43 Pa. Cons. Stat. Ann. § 333.101, the Pennsylvania Worker and Community Right to Know Act, 35 Pa. Cons. Stat. Ann. § 7301, and the common law of the Commonwealth of Pennsylvania, and all other claims under any other federal, state, or local statute, law, ordinance, regulation, or order including, but not limited to, claims of discrimination, retaliation or breach of contract and whether for back pay, earned or accrued vacation pay, bonus, earned commissions, severance, damages, claims for attorneys fees and costs, and any other relief or remedy at law or at equity (the Released Claims). In addition, you further covenant and agree never to institute directly or indirectly or to participate in (unless otherwise required by law) any action or proceeding of any kind against the Company, based on or related to the Released Claims, your employment or termination of employment with the Company, including, but not limited to, an action asserting that the Company discriminated or retaliated against you or an action asserting breach of contract, it being understood that there is no intent herein to interfere with the Equal Employment Opportunity Commissions right to
19
enforce the laws it oversees or your right to file an administrative charge of employment discrimination or a similar state or local administrative agency. If you file such an administrative charge or claim, you understand and agree that you hereby waive any right to recover any personal relief, monetary or otherwise, resulting from such administrative action. You further represent and warrant that you have not filed any lawsuit, administrative charge or any other claim or complaint, of any nature, against the Company. Notwithstanding the above, this General Release does not extend to (i) claims for Accrued Benefits and other vested benefits under any applicable benefit plans or arrangements; (ii) claims for workers compensation benefits or for an occupational disease; (iii) any whistleblower claims arising under the Sarbanes-Oxley Act or Dodd-Frank Wall Street Reform and Consumer Protection Act; (iv) claims to require the Company to honor its commitments set forth in this Agreement; (v) claims to interpret or to determine the scope, meaning or effect of this Agreement; (vi) claims arising out of any conduct, matter, event or omission existing or occurring after you have signed this Agreement; (vii) claims for indemnification and officers and directors insurance coverage under Section 4.7 of the Employment Agreement, the Companys charter, by-laws or applicable law; and/or (viii) claims that cannot be waived as a matter of law pursuant to federal, state, or local law. You waive any right to bring, maintain, or participate in a class, collective, or representative action against the Company to the maximum extent permitted by law. You agree that you may not serve as a representative of a class, collective, or representative action, may not participate as a member of a class, collective, or representative action, and may not recover any relief from a class, collective, or representative action. You further agree that if you are included within a class, collective, or representative action, you will take all steps necessary to opt-out of the action or refrain from opting in, as the case may be. You retain the right to challenge the validity of the class waiver set forth in this paragraph, and you will not be subject to retaliation by the Company for asserting such right.
You expressly recognize and agree that by entering into this Agreement, you are waiving any and all rights and claims that you may have arising under the Age Discrimination In Employment Act, as amended by the Older Workers Benefits Protection Act of 1990, which have arisen on or before the date of execution of this Agreement. You agree and represent that you were advised (by this Agreement) to discuss the terms of the Agreement with an attorney of your choice, that you have had an opportunity to discuss those terms with attorneys or advisors of your choice, and that you have had enough time and opportunity to consider the terms of this Agreement. You further agree and represent that you have been given twenty-one (21) days within which to consider and sign this Agreement, and that if you sign this Agreement prior to the expiration of this twenty-one (21) day review period, you are voluntarily waiving said review period. You shall have the right to revoke this Agreement within seven (7) days after signing it. Unless revoked, this Agreement shall become effective on the eighth day following its execution. You further certify that you sign this Agreement knowingly and voluntarily and without coercion in exchange for the consideration described herein which you acknowledge as adequate and satisfactory.
4. The parties agree and acknowledge that this Agreement and the considerations exchanged herein shall not constitute and shall not be interpreted as an admission on the part of the Company of a violation of any statute, law, or ordinance or of any other wrongdoing by the Company.
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5. The parties further agree that this Agreement is in full, complete, and final settlement by you of any and all claims, actions, causes of action, damages, or costs against the Company resulting from or pertaining to the Released Claims, your employment with, treatment at, severance from, or separation of employment from the Company.
6. The parties agree that this Agreement shall supersede and replace any and all prior written or oral agreements previously entered into between them, which agreements shall be null and void and of no consequence, except that the parties agree that this paragraph does not apply to any agreements referenced in this Agreement or to any applicable confidentiality, noncompetition, noninterference, and/or nonsolicitation agreements.
7. The parties agree that the laws of the Commonwealth of Pennsylvania shall apply to the terms and conditions of this Agreement, and they consent to the exclusive jurisdiction of the Pennsylvania courts with respect to the enforcement of this Agreement.
8. You waive any and all claims or rights to reemployment or reinstatement to your former position or any position within the Company.
9. You understand and agree that in the event any claim, suit, or action whatsoever shall be commenced by you, your heirs, executors, or administrators against the Company, based upon the Released Claims, this Agreement shall constitute a complete defense to any such claim, suit, or action.
10. You further understand and agree that in the event that you or your heirs, executors, or administrators attempt to institute or do institute any claim, suit, or action against the Company, you shall be obligated, as an express condition of bringing such action, to tender back to the Company all monies paid and/or the value of any financial benefits received pursuant to this Agreement. This paragraph does not grant you an option to return the money and institute a lawsuit. Instead, this paragraph merely creates an additional term and condition precedent of bringing a suit regardless of the fact that such suit is expressly barred by Paragraphs 3 and 5 hereof, and is without merit.
11. Except as specifically set forth herein, you waive any common law and/or statutory right to recover attorneys fees and costs, if any.
12. It is intended that this Agreement, and all payments or income to you contemplated by it, comply with, or are exempt from, the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the Code) and the Treasury Regulations promulgated thereunder. This Agreement shall be construed, administered, and governed in a manner consistent with this intent. The Company hereby agrees to indemnify and hold you harmless on an after-tax basis for any federal or state taxes imposed under Code section 409A (or similar state law) and any interest, penalties, or additions to tax imposed with respect thereto (collectively, 409A Taxes) as well as related reasonable out-of-pocket expenses resulting from contesting the imposition of 409A Taxes that result from the payment of, or right to, any amount or property provided for in this Agreement. Any such indemnity payment shall be made within thirty (30) days of the date you remit the 409A Taxes to the applicable taxing authority imposing the 409A Taxes.
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13. It is agreed that the terms and provisions of this Agreement are to remain strictly confidential and that any disclosure of the terms of this Agreement by you to any employee or former employee of the Company, or to any other person, other than your legal counsel, tax advisors, or your immediate family members will violate this Agreement.
14. You agree that you will not make any disparaging statements, oral or written, regarding the Company to any person, firm or other entity. You further agree, without limiting any other applicable remedies, that in the event of any breach of this provision, the Companys obligation to provide any and all consideration provided for in Paragraph 2 above will terminate. The Company agrees that members of its senior management team will not disparage you.
15. Regardless of whether you sign this Agreement, and as a condition of receiving the consideration set forth in Paragraph 2 above, you must return to your supervisor, retaining no copies, all Company property, including computers, wireless devices, papers, files, documents, reference guides, equipment, keys, access key tag/card, identification cards, credit cards, software, computer access codes, disks, supplies and institutional manuals, and you shall not retain any copies, duplicates, reproductions or excerpts of any of the foregoing, whether in hardcopy or electronic format and are prohibited from using or disclosing confidential and/or proprietary information which you accrued in the course of your employment with the Company.
16. You agree to make yourself available at mutually agreeable times to cooperate with the Company with respect to any legal proceedings that the Company believes, in its sole discretion, may be in any way related to your employment with the Company. Such cooperation encompasses your assistance with matters preliminary to the investigation of any legal proceedings and assistance during and throughout any litigation or legal proceeding, including, but not limited to, participating in any fact-finding or investigation, speaking with the Companys attorneys, testifying in depositions, testifying at hearings or at trial, and assisting with any post-litigation matter or appeal. Upon submission of appropriate documentation, you shall be reimbursed for reasonable out-of-pocket expenses incurred in rendering such cooperation, which shall not include any attorneys fees. Nothing in this paragraph should be construed as suggesting or implying in any way that you should testify untruthfully.
17. In the event that, any one or more provisions (or portion thereof) of this Agreement is held to be invalid, unlawful or unenforceable for any reason, the invalid, unlawful or unenforceable provision (or portion thereof) shall be construed or modified so as to provide the Company with the maximum protection that is valid, lawful and enforceable, consistent with the intent of the Company and you in entering into this Agreement. If such provision (or portion thereof) cannot be construed or modified so as to be valid, lawful and enforceable, that provision (or portion thereof) shall be construed as narrowly as possible and shall be severed from the remainder of this Agreement (or provision), and the remainder shall remain in effect and be construed as broadly as possible, as if such invalid, unlawful or unenforceable provision (or portion thereof) had never been contained in this Agreement
18. No changes to this Agreement can be effective except by another written agreement signed by you and by the Companys authorized representative.
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19. You and the Company execute this Agreement voluntarily, with full knowledge of its significance, and you acknowledge that you have read and fully understand the meaning of this Agreement, intend to be legally bound by the Agreement, and that no inducement, duress, or coercion caused either party to enter into this understanding.
PLEASE READ CAREFULLY
1. THIS AGREEMENT CONSTITUTES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. IT DOES NOT WAIVE RIGHTS OR CLAIMS THAT MAY ARISE AFTER THE DATE IT IS EXECUTED;
2. YOU AGREE THAT YOU ARE WAIVING RIGHTS AND CLAIMS YOU MAY HAVE IN EXCHANGE FOR CONSIDERATION IN ADDITION TO THINGS OF VALUE TO WHICH YOU ARE ALREADY ENTITLED;
3. YOU UNDERSTAND THAT YOU HAVE BEEN ADVISED THAT YOU HAVE THE RIGHT TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT;
4. YOU UNDERSTAND THAT YOU HAVE TWENTY-ONE (21) DAYS WITHIN WHICH TO CONSIDER THIS AGREEMENT;
5. YOU UNDERSTAND THAT YOU HAVE SEVEN (7) DAYS FOLLOWING YOUR EXECUTION OF THIS AGREEMENT TO REVOKE IT AND THAT THIS AGREEMENT SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE UNTIL THE REVOCATION PERIOD HAS EXPIRED. REVOCATION MUST BE IN WRITING AND TIMELY DELIVERED TO: GENERAL COUNSEL, RITE AID CORPORATION, 30 HUNTER LANE, CAMP HILL, PENNSYLVANIA, 17011; AND
In witness whereof, the parties hereto have executed this Agreement on the day and date indicated below.
RITE AID CORPORATION |
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By: |
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Its: |
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Dated: |
Dated: |
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Appendix B to Employment Agreement
Employment Agreement between Executive and Roundys, Inc., Roundys Supermarkets, Inc. and Roundys Acquisition Corp., dated as of February 8, 2012.
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Exhibit 31.1
Certification of Chief Executive Officer
I,
John T. Standley, Chairman and Chief Executive Officer, certify that:
- 1.
- I
have reviewed this quarterly report on Form 10-Q of Rite Aid Corporation (the "Registrant");
- 2.
- Based
on my knowledge, this 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 report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this 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 report;
- 4.
- The
Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and
have:
- a.
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is
being prepared;
- b.
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- c.
- Evaluated
the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- d.
- Disclosed
in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over
financial reporting; and
- 5.
- The
Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors:
- a.
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record, process, summarize and report financial information; and
- b.
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over
financial reporting.
Date:
October 2, 2014
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By: |
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/s/ JOHN T. STANDLEY
John T. Standley Chairman and Chief Executive Officer |
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Certification of Chief Executive Officer
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Exhibit 31.2
Certification of Chief Financial Officer
I,
Darren W. Karst, Executive Vice President and Chief Financial Officer, certify that:
- 1.
- I
have reviewed this quarterly report on Form 10-Q of Rite Aid Corporation (the "Registrant");
- 2.
- Based
on my knowledge, this 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 report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this 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 report;
- 4.
- The
Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and
have:
- a.
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is
being prepared;
- b.
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- c.
- Evaluated
the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
- d.
- Disclosed
in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over
financial reporting; and
- 5.
- The
Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors:
- a.
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record, process, summarize and report financial information; and
- b.
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over
financial reporting.
Date:
October 2, 2014
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By: |
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/s/ DARREN W. KARST
Darren W. Karst Executive Vice President and
Chief Financial Officer |
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Certification of Chief Financial Officer
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Exhibit 32
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 (the "Company") for the quarterly period ended
August 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), John T. Standley, as Chief Executive Officer of the Company, and Darren W. Karst, as
Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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.
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/s/ JOHN T. STANDLEY
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Name: |
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John T. Standley |
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Title: |
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Chairman and Chief Executive Officer |
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Date: |
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October 2, 2014 |
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/s/ DARREN W. KARST
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Name: |
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Darren W. Karst |
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Title: |
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Executive Vice President and
Chief Financial Officer |
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Date: |
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October 2, 2014 |
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QuickLinks
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
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