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TABLE OF CONTENTS
Item 9B. Other Information

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-K


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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended February 27, 2010

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From            To          

Commission File Number 1-5742

RITE AID CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  23-1614034
(I.R.S. Employer Identification No.)

30 Hunter Lane, Camp Hill, Pennsylvania
(Address of principal executive offices)

 

17011
(Zip Code)

Registrant's telephone number, including area code: (717) 761-2633

         Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Common Stock, $1.00 par value   New York Stock Exchange

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý     No  o

         Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or section 15(d) of the Exchange Act. Yes  o     No  ý

         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 (or for such shorter period that the registrant was required to file such reports), 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  o     No  o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes  ý     No  o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "Accelerated Filer" and "Large Accelerated Filer" in Rule 12b-2 of the Exchange Act.

Large Accelerated  ý   Accelerated Filer  o   Non-Accelerated Filer  o
(Do not check if a
smaller reporting company)
  Smaller reporting company  o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  ý

         The aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates of the registrant based on the closing price at which such stock was sold on the New York Stock Exchange on August 29, 2009 was approximately $996,928,866. For purposes of this calculation, executive officers, directors and 5% shareholders are deemed to be affiliates of the registrant.

         As of April 20, 2010 the registrant had outstanding 887,670,198 shares of common stock, par value $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the proxy statement for the registrant's annual meeting of stockholders to be held on June 23, 2010 are incorporated by reference into Part III.


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

Cautionary Statement Regarding Forward-Looking Statements

    3  

PART I

           
 

ITEM 1.

 

Business

    4  
 

ITEM 1A.

 

Risk Factors

    11  
 

ITEM 1B.

 

Unresolved Staff Comments

    19  
 

ITEM 2.

 

Properties

    19  
 

ITEM 3.

 

Legal Proceedings

    22  
 

ITEM 4.

 

[Reserved]

    23  

PART II

           
 

ITEM 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    23  
 

ITEM 6.

 

Selected Financial Data

    24  
 

ITEM 7.

 

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

    26  
 

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    43  
 

ITEM 8.

 

Financial Statements and Supplementary Data

    43  
 

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    43  
 

ITEM 9A.

 

Controls and Procedures

    44  
 

ITEM 9B.

 

Other Information

    46  

PART III

           
 

ITEM 10.

 

Directors and Executive Officers and Corporate Governance

       
 

ITEM 11.

 

Executive Compensation

       
 

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

       
 

ITEM 13.

 

Certain Relationships and Related Transactions and Director Independence

       
 

ITEM 14.

 

Principal Accountant Fees and Services

       

PART IV

           
 

ITEM 15.

 

Exhibits and Financial Statement Schedule

    46  


SIGNATURES


 

 

107

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        This report, as well as our other public filings or public statements, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by terms and phrases such as "anticipate," "believe," "intend," "estimate," "expect," "continue," "should," "could," "may," "plan," "project," "predict," "will" and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.

        Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

        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—Overview and Factors Affecting Our Future Prospects" included in this annual report on Form 10-K.

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PART I

Item 1.    Business

Overview

        We are the third largest retail drugstore chain in the United States based on revenues and number of stores. We operate our drugstores in 31 states across the country and in the District of Columbia. As of February 27, 2010, we operated 4,780 stores.

        In our stores, we sell prescription drugs and a wide assortment of other merchandise, which we call "front end" products. In fiscal 2010, prescription drug sales accounted for 67.9% of our total sales. We believe that our pharmacy operations will continue to represent a significant part of our business due to favorable industry trends, including an aging population, increased life expectancy, anticipated growth in the federally funded Medicare Part D prescription program as "baby boomers" begin to enroll in 2011, expanded coverage for uninsured Americans as the result of the Patient Protection and Affordable Care Act and the discovery of new and better drug therapies. We offer approximately 25,000 front end products, which accounted for the remaining 32.1% of our total sales in fiscal 2010. Front end products include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and numerous other everyday and convenience products, as well as photo processing. We attempt to distinguish our stores from other national chain drugstores, in part, through our private brands and our strategic alliance with GNC, a leading retailer of vitamin and mineral supplements. We offer approximately 3,300 products under the Rite Aid private brand, which contributed approximately 15.0% of our front end sales in the categories where private brand products were offered in fiscal 2010.

        The overall average size of each store in our chain is approximately 12,500 square feet. The average size of our stores is larger in the western United States. As of February 27, 2010, approximately 59% of our stores are freestanding; approximately 50% of our stores include a drive-thru pharmacy; approximately 40% include one-hour photo shops; and approximately 40% include a GNC store-within-Rite Aid-store.

        Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, and our telephone number is (717) 761-2633. Our common stock is listed on the New York Stock Exchange under the trading symbol of "RAD." We were incorporated in 1968 and are a Delaware corporation.

Industry Trends

        The rate of pharmacy sales growth in the United States in recent years has slowed driven by the decline in new blockbuster drugs, a longer FDA approval process, drug safety concerns, higher copays, the loss of individual health insurance as unemployment rises and an increase in the use of generic (non-brand name) drugs, which are less expensive but generate higher gross margins. However, we expect prescription sales to grow in the coming years due to the aging population, increased life expectancy, "baby boomers" becoming eligible for the federally funded Medicare prescription program and new drug therapies. We expect that recently passed health care legislation could afford access for more patients to prescriptions. Furthermore, we expect the estimated additional 32 million people who will be covered by health insurance in 2014, and the closing of the "donut hole" in Medicare Part D to be good for our business.

        Generic prescription drugs help lower overall costs for customers and third party payors. We believe the utilization of existing generic pharmaceuticals will continue to increase. Further, a significant number of new generics are expected to be introduced in the next few years as many popular branded drugs are scheduled to lose patent protection. The gross profit from a generic drug prescription in the retail drugstore industry is greater than the gross profit from a brand drug prescription.

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        The retail drugstore industry is highly competitive and has been experiencing consolidation. We believe that the continued consolidation of the drugstore industry, continued new store openings, increased competition from internet based providers and aggressive generic pricing programs at competitors such as Wal-Mart and various supermarket chains will further increase competitive pressures in the industry. The pharmacy business has become increasingly promotional, which contributes to additional competitive pressures.

        The retail drugstore industry relies significantly on third party payors. Third party payors, including the Medicare Part D plans and the state sponsored Medicaid agencies, at times change the eligibility requirements of participants or reduce certain reimbursement rates. These evaluations and resulting changes and reductions are expected to continue. When third party payors, including the Medicare Part D program and state sponsored Medicaid agencies, reduce the number of participants or reduce their reimbursement rates, sales and margins in the industry could be reduced, and profitability of the industry could be adversely affected. These possible adverse effects can be partially or entirely offset by controlling expenses, dispensing more higher margin generics and dispensing more prescriptions overall. The impact of AMP and the recently passed Patient Protection and Affordable Care Act is still being determined.

Strategy

        Our objectives and goals are to grow profitable sales by unlocking the value of our diverse store base, improve customer loyalty by improving customer and associate satisfaction, generate positive cash flow by taking unnecessary costs out of the business and improving operating efficiencies and reduce debt via the generation of operating cash flow and improvements in working capital management. We believe that by executing on these goals we can improve stockholder value. The following paragraphs describe in more detail some of the components of our strategies that we believe will result in the achievement of these goals and objectives:

        Grow profitable sales by unlocking the value of our diverse store base.     As of February 27, 2010 we have 4,780 stores in 31 states and the District of Columbia. These stores are in diverse markets, with many being in urban, high traffic areas and many being in lower traffic suburban or rural areas. In the past we have operated our stores with consistent standards for store staffing, field management staffing, distribution center deliveries, advertising, product assortment and pricing. We are continuing the process of stratifying these stores into specific groups and further refining the business plans for each group. The plans will ultimately result in different subsets of stores having standards for labor, product assortment, pricing and distribution center deliveries that are best suited for that group of stores. Our focus will be on merchandising and sales growth opportunities, particularly in low volume and urban stores. We believe that these changes will improve profitability, particularly at our lower volume stores.

        Improve sales by improving customer loyalty.     We believe that our greatest opportunity to improve sales is by ensuring that we have a base of loyal, repeat customers, particularly in the pharmacy business. We believe that the best way to obtain loyal customers is to show that Rite Aid will help them lead happier, healthier lives. We believe that excellent customer service helps us achieve that goal and we believe that improving the associate work experience will translate into better customer service. We have several programs that are also designed to improve customer loyalty, including the following:

    We launched our wellness+ loyalty card program in four pilot markets in the third quarter of fiscal 2010. wellness+ provides many benefits for cardholders based on accumulating points for front end and prescription purchases. We rolled out the program to the rest of the chain on April 18, 2010. Based on the pilot markets, we are expecting enrollment of 15 to 20 million members at maturity.

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    We have several initiatives underway to simplify work processes in our stores to enable better customer service.

    We continue to offer our free Rx Savings Card, which provides cost savings on all prescription drugs to patients with limited or no insurance.

    We offer an automated refill option for customers with maintenance prescriptions, and also make courtesy refill reminder phone calls.

        In the front end business, we plan to aggressively grow our private brand offerings, as we believe that our private brand products offer cost effective alternatives to national brand products that are very attractive during difficult economic times. We are rolling out our new private brand architecture with strong promotional support, good price positioning and continued development of new items, which will help us grow private brand sales and meet the needs of today's customers. We expect this will increase our private brand penetration in categories such as health and beauty products, food and other consumables, household goods and baby products by approximately 75 basis points from approximately 15.00% to approximately 15.75% by the end of fiscal 2011. Additionally, we also have several other front end initiatives planned, including merchandising and sales growth, and shrink reduction. We also plan to add 105 new GNC stores-within-Rite Aid-stores.

        In the pharmacy business, we plan to increase the number of immunizing pharmacists from 2,000 in fiscal 2010 to 6,000 in fiscal 2011, which will increase our immunizing presence in many of our top markets. Additionally, we plan to grow script count by continuing to improve customer service, growing our Rx savings program, purchasing prescription files and attracting and retaining high value pharmacy customers through our wellness+ loyalty program.

        Generate positive cash flow by continuing to take unnecessary costs out of the business.     We believe we have an opportunity to better leverage our sales by making changes to our cost structure. We have numerous cost reduction initiatives in place or planned for fiscal 2011, including the following:

    We plan to make additional changes to staffing, marketing and merchandising, and distribution for some of our lower volume stores, which we believe will improve store profitability without sacrificing sales or customer service.

    We have centralized all non-merchandise purchasing into a centralized Indirect Procurement function. This group is responsible for reviewing all purchase contracts and arrangements and utilizes several tools, including on-line auctions, to control the cost of these services.

    We are continuing to examine our administrative headcount requirements.

    We expect to reduce supply chain costs by further reducing inventory, improving work processes in the distribution center network, and re-assigning which distribution centers service particular stores.

        We believe that these changes, as well as others, will enable us to improve our operating profitability without sacrificing sales and customer service.

        Reduce debt.     We are highly leveraged and believe that our leverage puts us at a competitive disadvantage. We plan to continue to reduce debt in fiscal 2011 by executing on the operating initiatives discussed above, as well as by doing the following:

    We have taken measures to reduce our investment in inventory, including steps to reduce the number of SKU's, reduce our backroom inventories and reduce store safety stock in certain categories. The continuation of these programs, along with planned improvements in our ad ordering system and sales forecasting techniques, should further reduce our inventory levels, which should increase available working capital and improve operating efficiencies.

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    We plan to closely manage our capital expenditures in fiscal 2011, as we did in fiscal 2010, when we significantly reduced capital expenditures after investing a significant amount of capital dollars into the Brooks Eckerd stores during fiscal 2008 and fiscal 2009. Our targeted capital expenditures for fiscal 2011 are $250 million, with a $50 million allocation for prescription file buys.

        We believe that these initiatives, along with other improvements in cash flow from operations, will enable us to continue to reduce debt in fiscal 2011.

Products and Services

        Sales of prescription drugs represented approximately 67.9%, 67.2%, and 66.7% of our total sales in fiscal years 2010, 2009 and 2008, respectively. In fiscal years 2010, 2009 and 2008, prescription drug sales were $17.4 billion, $17.6 billion, and $16.2 billion, respectively. See "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements.

        We sell approximately 25,000 different types of non-prescription, or front end products. The types and number of front end products in each store vary, and selections are based on customer needs and preferences and available space. No single front end product category contributed significantly to our sales during fiscal 2010. Our principal classes of products in fiscal 2010 were the following:

Product Class
  Percentage of
Sales
 

Prescription drugs

    67.9 %

Over-the-counter medications and personal care

    9.4 %

Health and beauty aids

    5.0 %

General merchandise and other

    17.7 %

        We offer approximately 3,300 products under the Rite Aid private brand, which contributed approximately 15.0% of our front end sales in the categories where private brand products were offered in fiscal 2010. We intend to increase the number of private brand products, revamp and expand our private brand architecture.

        We have a strategic alliance with GNC under which we have opened 1,908 GNC "stores-within-Rite Aid-stores" as of February 27, 2010 and a contractual commitment to open an additional 444 stores by December 2014. We incorporate the GNC store-within-Rite Aid-store concept into our new and relocated stores. GNC is a leading nationwide retailer of vitamin and mineral supplements, personal care, fitness and other health related products.

Technology

        All of our stores are integrated into a common information system, which enables our customers to fill or refill prescriptions in any of our stores throughout the country, reduces chances of adverse drug interactions, and enables our pharmacists to fill prescriptions more accurately and efficiently. This system can be expanded to accommodate new stores. Our customers may also order prescription refills over the Internet through www.riteaid.com , or over the phone through our telephonic automated refill systems for pick up at a Rite Aid store. As of February 27, 2010, we had a total of 997 automated pharmacy dispensing units, which are linked to our pharmacists' computers that fill and label prescription drug orders, in high volume stores. The efficiency of these units allows our pharmacists to spend more time consulting with our customers. Additionally, each of our stores employs point-of-sale technology that supports sales analysis and recognition of customer trends. This same point-of-sale technology facilitates the maintenance of perpetual inventory records which, together with our sales analysis, drives our automated inventory replenishment process.

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Suppliers

        During fiscal 2010, we purchased brand pharmaceuticals and some generic pharmaceuticals, which amounted to approximately 93.5% of the dollar volume of our prescription drugs, from a single wholesaler, McKesson Corp ("McKesson"), under a contract, which runs through April 1, 2013. Under the contract, with limited exceptions, we are required to purchase all of our branded pharmaceutical products from McKesson. If our relationship with McKesson was disrupted, we could temporarily have difficulty filling prescriptions until we executed a replacement wholesaler agreement or developed and implemented self-distribution processes, which could negatively affect our business.

        We purchase almost all of our generic (non-brand name) pharmaceuticals directly from manufacturers. We believe the losses of any one generic supplier would not have a material impact on our business.

        We purchase our non-pharmaceutical merchandise from numerous manufacturers and wholesalers. We believe that competitive sources are readily available for substantially all of the non-pharmaceutical merchandise we carry and that the loss of any one supplier would not have a material effect on our business.

        We sell private brand and co-branded products that generally are supplied by numerous competitive sources. The Rite Aid and GNC co-branded PharmAssure vitamin and mineral supplement products and the GNC branded vitamin and mineral supplement products that we sell in our stores are developed by GNC, and along with our Rite Aid brand vitamin and mineral supplements, are manufactured by GNC.

Customers and Third Party Payors

        During fiscal 2010, our stores filled approximately 300 million prescriptions and served an average of 2.2 million customers per day. The loss of any one customer would not have a material adverse impact on our results of operations.

        In fiscal 2010, 96.2% of our pharmacy sales were to customers covered by third party payors (such as insurance companies, prescription benefit management companies, government agencies, private employers or other managed care providers) that agree to pay for all or a portion of a customer's eligible prescription purchases based on negotiated and contracted reimbursement rates. During fiscal 2010, the top five third party payors accounted for approximately 41.4% of our total sales, the largest of which represented 14.4% of our total sales. During fiscal 2010, Medicaid related sales were approximately 6.9% of our total sales, of which the largest single Medicaid payor was approximately 2.0% of our total sales. During fiscal 2010, approximately 16.7% of our pharmacy sales were to customers covered by Medicare Part D.

Competition

        The retail drugstore industry is highly competitive. We compete with, among others, retail drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, dollar stores and mail order pharmacies. We compete on the basis of store location and convenient access, customer service, product selection and price. We believe continued consolidation of the drugstore industry, the aggressive discounting of generic drugs by supermarkets and mass merchandisers and the increase of promotional incentives to drive prescription sales will further increase competitive pressures in the industry.

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Marketing and Advertising

        In fiscal 2010, marketing and advertising expense was approximately $375 million, which was spent primarily on weekly circular advertising. Our marketing and advertising activities centered primarily on the following:

    Product price promotions to draw customers to our stores;

    Our wellness+ loyalty program, which rolled out to the rest of the chain April 18, 2010 will be the largest marketing expenditure that we have made in several years;

    Initiatives to grow pharmacy sales, including a free Rx Savings Card, which provides significant cost savings on generic and brand prescriptions and over-the-counter medications to patients with limited or no insurance;

    Emphasis on the value of Rite Aid brand products;

    Support of specific initiatives and stores, including competitor market intrusion and prescription file buys; and

    Our vision to be the customer's first choice for health and wellness products, services and information.

        Under the umbrella of our "With Us It's Personal" brand positioning, we promoted educational programs focusing on specific health conditions and incentives for patients to transfer their prescriptions to Rite Aid. We are also emphasizing our automated courtesy refill service. We believe all of these programs will help us improve customer satisfaction and grow profitable sales.

Associates

        We believe that our relationships with our associates are good. As of February 27, 2010, we had approximately 97,500 associates; 13% were pharmacists, 44% were part-time and 26% were unionized. Associate satisfaction is critical to the success of our strategy. We have surveyed our associates to obtain feedback on various employment-related topics, including job satisfaction and their understanding of our core values and mission. We have also instituted an internal group, consisting of managers and staff from all components of our business that is responsible for using feedback from associates throughout the Company to create a better work environment.

        The national shortage of pharmacists has eased over the past 12 months, resulting in more licensed pharmacists and new graduates seeking positions in many markets. Although this is occurring nationally, there is still an unmet demand for pharmacists in certain regions of the country that are challenging to staff. We continue to offer competitive compensation plans to retain and attract current and future pharmacists, work with Colleges of Pharmacy across the U.S. to recruit both pharmacy interns and pharmacy graduates and conduct a recruiting program for international pharmacists.

Research and Development

        We do not make significant expenditures for research and development.

Licenses, Trademarks and Patents

        The Rite Aid name is our most significant trademark and the most important factor in marketing our stores and private brand products. We hold licenses to sell beer, wine and liquor, cigarettes and lottery tickets. As part of our strategic alliance with GNC, we have a license to operate GNC "stores-within-Rite Aid-stores." We also hold licenses to operate our pharmacies and our distribution facilities. Collectively, these licenses are material to our operations.

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Seasonality

        We experience moderate seasonal fluctuations in our results of operations concentrated in the first and fourth fiscal quarters as the result of the concentration of the cough, cold and flu season and the holidays. We tailor certain front end merchandise to capitalize on holidays and seasons. We increase our inventory levels during our third fiscal quarter in anticipation of the seasonal fluctuations described above. Our results of operations in the fourth and first fiscal quarters may fluctuate based upon the timing and severity of the cough, cold and flu season, both of which are unpredictable.

Regulation

        Our business is subject to federal, state, and local government laws, regulations and administrative practices. We must comply with numerous provisions regulating health and safety, equal employment opportunity, minimum wage and licensing for the sale of drugs, alcoholic beverages, tobacco and other products. In addition we must comply with regulations pertaining to product content, labeling, dating and pricing.

        Pursuant to the Omnibus Budget Reconciliation Act of 1990 ("OBRA") and comparable state regulations, our pharmacists are required to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists and may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effect.

        The appropriate state boards of pharmacy must license our pharmacies and pharmacists. Our pharmacies and distribution centers are also registered with the Federal Drug Enforcement Administration and are subject to Federal Drug Enforcement Agency regulations relative to our pharmacy operations, including regulations governing purchasing, storing and dispensing of controlled substances. Applicable licensing and registration requirements require our compliance with various state statutes, rules and/or regulations. If we were to violate any applicable statute, rule or regulation, our licenses and registrations could be suspended or revoked or we could be subject to fines or penalties. Any such violation could also damage our reputation and brand.

        In recent years, an increasing number of legislative proposals have been enacted (the Patient Protection and Affordable Care Act), introduced or proposed in Congress and in some state legislatures that affect or would affect major changes in the healthcare system, either nationally or at the state level. The legislative initiatives include changes in reimbursement levels, changes in qualified participants, changes in drug safety regulations and e-prescribing. We cannot predict the timing of enactment of any such proposals to the extent not yet approved or the long-term outcome or effect of legislation from these efforts on our business.

        Our pharmacy business is subject to patient privacy and other obligations, including corporate, pharmacy and associate responsibility imposed by the Health Insurance Portability and Accountability Act. As a covered entity, we are required to implement privacy standards, train our associates on the permitted uses and disclosures of protected health information, provide a notice of privacy practice to our pharmacy customers and permit pharmacy customers to access and amend their records and receive an accounting of disclosures of protected health information. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties.

        We are also subject to laws governing our relationship with our associates, including minimum wage requirements, overtime, working conditions and unionizing efforts. Increases in the federal minimum wage rate, associate benefit costs or other costs related to associates could adversely affect our results of operations. Additionally, there are currently a number of legislative proposals being considered that could impact the ability of workers to unionize. We cannot assure you if or when any such proposal may be enacted or the impact any such legislation could have on our operations or cost structure.

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        In addition, in connection with the ownership and operations of our stores, distribution centers and other sites, we are subject to laws and regulations relating to the protection of the environment and health and safety matters, including those governing the management and disposal of hazardous substances and the cleanup of contaminated sites. Violations or liabilities under these laws and regulations as a result of our current or former operations or historical activities at our sites, such as gasoline service stations and dry cleaners, could result in significant costs.

Corporate Governance and Internet Address

        We recognize that good corporate governance is an important means of protecting the interests of our stockholders, associates, customers, and the community. We have closely monitored and implemented relevant legislative and regulatory corporate governance reforms, including provisions of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), the rules of the SEC interpreting and implementing Sarbanes-Oxley, and the corporate governance listing standards of the New York Stock Exchange.

        Our corporate governance information and materials, including our Certificate of Incorporation, Bylaws, Corporate Governance Guidelines, the charters of our Audit Committee, Compensation Committee and Nominating and Governance Committee, our Code of Ethics for the Chief Executive Officer and Senior Financial Officers, our Code of Ethics and Business Conduct and our Related Person Transaction Policy are posted on the corporate governance section of our website at www.riteaid.com and are available in print upon request to Rite Aid Corporation, 30 Hunter Lane, Camp Hill, Pennsylvania 17011, Attention: Corporate Secretary. Our Board will regularly review corporate governance developments and modify these materials and practices as warranted.

        Our website also provides information on how to contact us and other items of interest to investors. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, as soon as reasonably practicable after we file these reports with, or furnish them to, the SEC.

Item 1A.    Risk Factors

Factors Affecting our Future Prospects

        Set forth below is a description of certain risk factors which we believe may be relevant to an understanding of us and our business. Security holders are cautioned that these and other factors may affect future performance and cause actual results to differ from those which may be anticipated. See "Cautionary Statement Regarding Forward-Looking Statements."


Risks Related to Our Financial Condition

Current economic conditions may adversely affect our industry, business and results of operations.

        The United States economy is continuing to feel the impact of the economic downturn that began in late 2007, and the future economic environment may continue to be less favorable than that of previous years. This economic uncertainty has and could further lead to reduced consumer spending for the foreseeable future. If consumer spending continues to decrease, we will likely not be able to improve our same store sales. In addition, reduced or flat consumer spending may drive us and our competitors to offer additional products at promotional prices, which would have a negative impact on our gross profit. A continued softening or slow recovery in consumer spending may adversely affect our industry, business and results of operations. Reduced revenues as a result of decreased consumer spending may also reduce our liquidity and otherwise hinder our ability to implement our long term strategy.

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We are highly leveraged. Our substantial indebtedness could limit cash flow available for our operations and could adversely affect our ability to service debt or obtain additional financing if necessary.

        We had, as of February 27, 2010, $6.4 billion of outstanding indebtedness and stockholders' deficit of $1.7 billion. We also had additional borrowing capacity under our existing $1.175 billion senior secured revolving credit facility of approximately $936.0 million, net of outstanding letters of credit of $159.0 million. Our earnings were insufficient to cover fixed charges and preferred stock dividends for fiscal 2010, 2009, 2008, 2007 and 2006 by $498.4 million, $2.6 billion, $340.6 million, $50.8 million and $23.1 million, respectively.

        Our high level of indebtedness will continue to restrict our operations. Among other things, our indebtedness will:

    limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;

    place us at a competitive disadvantage relative to our competitors with less indebtedness;

    render us more vulnerable to general adverse economic, regulatory and industry conditions; and

    require us to dedicate a substantial portion of our cash flow to service our debt.

        Our ability to meet our cash requirements, including our debt service obligations, is dependent upon our ability to substantially improve our operating performance, which will be subject to general economic and competitive conditions and to financial, business and other factors, many of which are beyond our control. We cannot provide assurance that our business will generate sufficient cash flow from operations to fund our cash requirements and debt service obligations.

        We believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures through fiscal 2011 and have no material maturities prior to September 2012. However, if our operating results, cash flow or capital resources prove inadequate, or if interest rates rise significantly, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt and other obligations or otherwise be required to delay our planned activities. If we are unable to service our debt or experience a significant reduction in our liquidity, we could be forced to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek additional equity capital, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our existing debt agreements limit our ability to take certain of these actions. Our failure to generate sufficient operating cash flow to pay our debts or refinance our indebtedness could have a material adverse effect on us.

Borrowings under our senior secured credit facility are based upon variable rates of interest, which could result in higher expense in the event of increases in interest rates.

        As of February 27, 2010, approximately $2.1 billion of our outstanding indebtedness bore interest at a rate that varies depending upon the London Interbank Offered Rate ("LIBOR"), subject, in the case of the Tranche 3 Term Loan, senior secured loan due June 2014; the Tranche 4 Term Loan, senior secured loan due June 2015; and the senior secured revolving credit facility, to a minimum LIBOR floor of 300 basis points. Our Tranche 2 Term Loan, senior secured loan due June 2014, is most subject to LIBOR fluctuations because there is no floor. If we borrow additional amounts under our senior secured revolving credit facility, the interest rate on those borrowings will also vary depending upon LIBOR. If LIBOR rises, the interest rates on outstanding debt will increase. Therefore an increase in LIBOR would increase our interest payment obligations under those loans and have a negative effect on our cash flow and financial condition. We currently do not maintain hedging contracts that would limit our exposure to variable rates of interest.

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The covenants in the instruments that govern our current indebtedness may limit our operating and financial flexibility.

        The covenants in the instruments that govern our current indebtedness limit our ability to:

    incur debt and liens;

    pay dividends;

    make redemptions and repurchases of capital stock;

    make loans and investments;

    prepay, redeem or repurchase debt;

    engage in acquisitions, consolidations, asset dispositions, sale-leaseback transactions and affiliate transactions;

    change our business;

    amend some of our debt and other material agreements;

    issue and sell capital stock of subsidiaries;

    restrict distributions from subsidiaries; and

    grant negative pledges to other creditors.

        In addition, our credit facility has a fixed charge coverage ratio test which increases from 1.05 to 1.10 beginning in the first quarter of fiscal 2011. The senior secured credit facility only requires us to maintain the minimum fixed charge coverage ratio once availability on the revolving credit facility is less than $150 million. If we are unable to meet the terms of the financial covenants or if we breach any of these covenants, a default could result under one or more of these agreements. A default, if not waived by our lenders, could result in the acceleration of our outstanding indebtedness and cause our debt to become immediately due and payable. If acceleration occurs, we would not be able to repay our debt and it is unlikely that we would be able to borrow sufficient additional funds to refinance such debt. Even if new financing is made available to us, it may not be available on terms acceptable to us. If we obtain modifications of our agreements, or are required to obtain waivers of defaults, we may incur significant fees and transaction costs or become subject to more stringent covenants and restrictions on our operations.

Our stockholders will experience dilution if we issue additional common stock.

        Subject to any required approval under the Stockholder Agreement (as defined below), we are generally not restricted from issuing additional shares of our common shares or preferred stock, including, subject to the terms of our outstanding debt instruments, any securities that are convertible into or exchangeable for, or that represent the right to receive, common shares or preferred stock or any substantially similar securities, whether for cash, as part of incentive compensation or in refinancing transactions. Any additional future issuances of common stock will reduce the percentage of our common stock owned by investors who do not participate in such issuances. In most circumstances, stockholders will not be entitled to vote on whether or not we issue additional shares of common stock. The market price of our common stock could decline as a result of issuances of a large number of shares of our common stock or the perception that such issuances could occur.

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Subject to certain limitations, Jean Coutu Group may sell Rite Aid common stock at any time, which could cause our stock price to decrease.

        The shares of Rite Aid common stock that the Jean Coutu Group currently holds are generally restricted, but Jean Coutu Group may sell these shares under certain circumstances, including pursuant to a registered underwritten public offering under the Securities Act or in accordance with Rule 144 under the Securities Act. We have entered into a registration rights agreement with Jean Coutu Group, which will give Jean Coutu Group the right to require us to register all or a portion of its shares at any time (subject to certain exceptions). The sale of a substantial number of our shares by Jean Coutu Group or our other stockholders within a short period of time could cause our stock price to decrease, make it more difficult for us to raise funds through future offerings of Rite Aid common stock or acquire other businesses using Rite Aid common stock as consideration.

We are in compliance with all New York Stock Exchange continued listing requirements. However, if we do not continue to maintain compliance with such requirements, our common stock may be delisted.

        On July 1, 2009, we were notified by the New York Stock Exchange (the "NYSE") that, as of July 1, 2009, we regained compliance with the NYSE share price listing requirement. We are in compliance with all NYSE listing rules, have actively been taking steps to maintain our listing and expect our efforts to maintain our NYSE listing will be successful. However, there can be no assurance that we will maintain compliance with the NYSE minimum share price rule or other continued listing requirements. In the event of a delisting, holders of our 8.5% convertible notes due 2015 (the "8.5% Convertible Notes") could require us to repurchase their 8.5% Convertible Notes, which would result in a default under our senior credit facility. Although there can be no assurance that we would be able to do so, we may seek to refinance or otherwise acquire the 8.5% Convertible Notes to avoid such a scenario, as the amendment to our Credit Agreement permits us to do under certain circumstances.


Risks Related to Our Operations

We need to continue to improve our operations in order to improve our financial condition, but our operations will not improve if we cannot continue to effectively implement our business strategy or if our strategy is negatively affected by worsening economic conditions.

        We have not yet achieved the sales productivity level of our major competitors. We believe that improving the sales of existing stores is important to improving profitability and operating cash flow. If we are not successful in implementing our strategies, including our efforts to further reduce costs, or if our strategies are not effective, we may not be able to improve our operations. In addition, any further adverse change or continued downturn in general economic conditions or major industries can adversely affect drug benefit plans and reduce our pharmacy sales. Adverse changes in general economic conditions affect consumer buying practices and consequently reduce our sales of front end products, and cause a decrease in our profitability. Failure to continue to improve operations or a continued decline in major industries or general economic conditions would adversely affect our results of operations, financial condition and cash flows and our ability to make principal or interest payments on our debt.

For so long as Jean Coutu Group (and, subject to certain conditions, certain members of the Coutu family) maintain certain levels of Rite Aid stock ownership, Jean Coutu Group (and, subject to certain conditions, certain members of the Coutu family) could exercise significant influence over us.

        At February 27, 2010 Jean Coutu Group owns approximately 27.5% of the voting power of Rite Aid. As a result, Jean Coutu Group (and, subject to certain conditions, certain members of the Coutu family) generally has the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders. The stockholder agreement (the "Stockholder Agreement") that we entered into at the time of the Brooks Eckerd acquisition provides that Jean Coutu Group (and, subject to

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certain conditions, certain members of the Coutu family) designate four of the fourteen members of our board of directors, subject to adjustment based on its ownership position in us. Accordingly, Jean Coutu Group generally is able to significantly influence the outcome of all matters that come before our board of directors. As a result of its significant interest in us, Jean Coutu Group may have the power, subject to applicable law (including the fiduciary duties of the directors designated by Jean Coutu Group), to significantly influence actions that might be favorable to Jean Coutu Group, but not necessarily favorable to our financial condition and results of operations. In addition, the ownership position and governance rights of Jean Coutu Group could discourage a third party from proposing a change of control or other strategic transaction concerning us. Additionally, the Stockholder Agreement provides Jean Coutu Group with certain preemptive rights, the ability to maintain their ownership percentage in Rite Aid and in certain circumstances, requires two-thirds of our Board to approve certain transactions.

Conflicts of interest may arise between us and Jean Coutu Group, which may be resolved in a manner that adversely affects our business, financial condition or results of operations.

        Following the Brooks Eckerd acquisition, Jean Coutu Group has continued its Canadian operations but no longer has any operations in the United States, and we currently have no operations in Canada. Despite the lack of geographic overlap, conflicts of interest may arise between us and Jean Coutu Group in areas relating to past, ongoing and future relationships, including corporate opportunities, potential acquisitions or financing transactions, sales or other dispositions by Jean Coutu Group of its interests in us and the exercise by Jean Coutu Group of its influence over our management and affairs.

        As a result of the Brooks Eckerd acquisition, a number of the directors on our board of directors are persons who are also officers or directors of Jean Coutu Group or its subsidiaries. Service as a director or officer of both Rite Aid and Jean Coutu Group or its other subsidiaries could create conflicts of interest if such directors or officers are faced with decisions that could have materially different implications for Rite Aid and for Jean Coutu Group. Apart from the conflicts of interest policy contained in our Code of Ethics and Business Conduct and applicable to our directors, we and Jean Coutu Group have not established any formal procedures for us and Jean Coutu Group to resolve potential or actual conflicts of interest between us. There can be no assurance that any of the foregoing conflicts will be resolved in a manner that does not adversely affect our business, financial condition or results of operations.

We are dependent on our management team, and the loss of their services could have a material adverse effect on our business and the results of our operations or financial condition.

        The success of our business is materially dependent upon the continued services of our executive management team. The loss of key personnel could have a material adverse effect on the results of our operations, financial condition or cash flows. Additionally, we cannot assure you that we will be able to attract or retain other skilled personnel in the future.

We are substantially dependent on a single wholesaler of branded pharmaceutical products to sell products to us on satisfactory terms. A disruption in this relationship may have a negative effect on our results of operations, financial condition and cash flow.

        We purchase all of our brand prescription drugs from a single wholesaler, McKesson, pursuant to a contract that runs through April 1, 2013. Pharmacy sales represented approximately 67.9% of our total sales during fiscal 2010, and, therefore, our relationship with McKesson is important to us. Any significant disruptions in our relationship with McKesson would make it difficult for us to continue to operate our business until we executed a replacement wholesaler agreement or developed and implemented self-distribution processes. There can be no assurance that we would be able to find a replacement wholesaler on a timely basis or that such a wholesaler would be able to fulfill our demands

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on similar terms, which would have a material adverse effect on our results of operations, financial condition and cash flows.


Risks Related to Our Industry

The markets in which we operate are very competitive and further increases in competition could adversely affect us.

        We face intense competition with local, regional and national companies, including other drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, dollar stores, mail order and internet pharmacies. Our industry also faces growing competition from companies who import drugs directly from other countries, such as Canada, as well as from large-scale retailers that offer generic drugs at a substantial discount. Some of our competitors have or may merge with or acquire pharmaceutical services companies or pharmacy benefit managers, which may further increase competition. We may not be able to effectively compete against them because our existing or potential competitors may have financial and other resources that are superior to ours. In addition, we may be at a competitive disadvantage because we are more highly leveraged than our competitors. The ability of our stores to achieve profitability depends on their ability to achieve a critical mass of loyal, repeat customers. We believe that the continued consolidation of the drugstore industry will further increase competitive pressures in the industry. We cannot assure you that we will be able to continue to effectively compete in our markets or increase our sales volume in response to further increased competition.

Drug benefit plan sponsors and third party payors could change their plan eligibility criteria and further encourage or require the use of mail-order prescriptions which could decrease our sales and reduce our margins and have a material adverse effect on our business.

        An adverse trend for drugstore retailing has been initiatives to contain rising healthcare costs leading to the rapid growth in mail-order prescription processors. These prescription distribution methods have grown in market share relative to drugstores as a result of the rapid rise in drug costs experienced in recent years and are predicted to continue to rise. Mail-order prescription distribution methods are perceived by employers and insurers as being less costly than traditional distribution methods and are being encouraged, and, in some cases, required, by third party pharmacy benefit managers, employers and unions that administer benefits. As a result, some labor unions and employers are requiring, and others may encourage or require, that their members or employees obtain medications from mail-order pharmacies which offer drug prescriptions at prices lower than we are able to offer.

        Another adverse trend for drugstore retailing has been for drug benefit plan sponsors and third party payors to change their plan eligibility requirements resulting in fewer beneficiaries covered and a reduction in the number of prescriptions allowed.

        Mail-order prescription distribution and drug benefit plan eligibility changes have negatively affected sales for traditional chain drug retailers, including us, and we expect such negative effect to continue in the future. There can be no assurance that our efforts to offset the effects of mail order and eligibility changes will be successful nor can we predict whether the recently adopted health care reform legislation will exacerbate this risk.

The availability of pharmacy drugs is subject to governmental regulations.

        The continued conversion of various prescription drugs, including the planned conversion of a number of popular medications, to over-the-counter medications may reduce our pharmacy sales and customers may seek to purchase such medications at non-pharmacy stores. Also, if the rate at which new prescription drugs become available slows or if new prescription drugs that are introduced into the market fail to achieve popularity, our pharmacy sales may be adversely affected. The withdrawal of

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certain drugs from the market or concerns about the safety or effectiveness of certain drugs or negative publicity surrounding certain categories of drugs may also have a negative effect on our pharmacy sales or may cause shifts in our pharmacy or front end product mix.

Changes in third party reimbursement levels for prescription drugs and changes in industry pricing benchmarks could reduce our margins and have a material adverse effect on our business.

        Sales of prescription drugs reimbursed by third party payors, including the Medicare Part D plans and state sponsored Medicaid agencies, are 96.2% of our business. We expect our pharmacy gross margin to be lower in fiscal 2011 than previously experienced due to continued reimbursement rate pressures, fewer new generics, fewer price reductions on existing generics and the impact of the recently implemented Average Wholesale Price ("AWP") adjustments on our Medicaid business.

        In conjunction with a class action settlement with two entities that publish the average wholesale price (AWP) of pharmaceuticals, the methodology used to calculate the AWP, a pricing reference widely used in the pharmacy industry, reduced the AWP for many prescription drugs effective September 26, 2009. We have reached understandings with most of our third party payors to adjust reimbursements to correct for this change in methodology, but many state Medicaid programs that utilize AWP as a pricing reference have not taken action to make similar adjustments, which is expected to result in reduced Medicaid reimbursement levels in fiscal 2011 as we have experienced in the latter part of fiscal 2010. In fiscal 2010, approximately 6.9% of our revenues were from state sponsored Medicaid agencies, the largest of which was approximately 2.0% of our total sales.

        Additionally, certain provisions of the Deficit Reduction Act of 2005 (DRA) sought to reduce federal spending by altering the Medicaid reimbursement formula for multi-source (i.e., generic) drugs (AMP). Those reductions did not go into effect; however, the Patient Protection and Affordable Care Act, signed into law on March 23, 2010 (the Patient Care Act) enacted a modified reimbursement formula for multi-source drugs. The modified formula, when implemented, may reduce Medicaid reimbursements. There have also been a number of other recent proposals and enactments by the Federal government and various states to reduce Medicare Part D and Medicaid reimbursement levels in response to budget problems. We expect other similar proposals in the future.

        The continued efforts of the Federal government, health maintenance organizations, managed care organizations, pharmacy benefit management companies, other State and local government entities, and other third-party payors to reduce prescription drug costs and pharmacy reimbursement rates, as well as litigation relating to how drugs are priced, may impact our profitability. In addition, some of these entities may offer pricing terms that we may not be willing to accept or otherwise restrict our participation in their networks of pharmacy providers.

        Although we expect continued improvements in selling, general and administrative expenses as a percentage of revenues to somewhat mitigate all of these factors above, if our pharmacy gross margin continues to decrease, it would adversely affect our results of operations, financial condition and cash flows.

We are subject to governmental regulations, procedures and requirements; our noncompliance or a significant regulatory change could adversely affect our business, the results of our operations or our financial condition.

        Our business is subject to federal, state and local government laws, regulations and administrative practices. We must comply with numerous provisions regulating health and safety, equal employment opportunity, minimum wage and licensing for the sale of drugs, alcoholic beverages, tobacco and other products. In addition, we must comply with regulations pertaining to product labeling, dating and pricing. Our pharmacy business is subject to local registrations in the states where our pharmacies are located, applicable Medicare and Medicaid regulations and prohibitions against paid referrals of patients. Failure to properly adhere to these and other applicable regulations could result in the imposition of civil and criminal penalties including suspension of payments from government programs;

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loss of required government certifications; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; loss of licenses; significant fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements and could adversely affect the continued operation of our business. Additionally, any such failure could damage our reputation or brand.

        Our pharmacy business is subject to the patient privacy and other obligations including corporate, pharmacy and associate responsibility, imposed by the Health Insurance Portability and Accountability Act. As a covered entity, we are required to implement privacy standards, train our associates on the permitted use and disclosures of protected health information, properly dispose of related records, provide a notice of privacy practice to our pharmacy customers and permit pharmacy health customers to access and amend their records and receive an accounting of disclosures of protected health information. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties.

        Federal and state reform programs, such as healthcare reform and enforcement initiatives of federal and state governments may also affect our pharmacy business. These initiatives include:

    proposals designed to significantly reduce spending on Medicare, Medicaid and other government programs;

    changes in programs providing for reimbursement for the cost of prescription drugs by third party plans;

    increased scrutiny of, and litigation relating to, prescription drug manufacturers' pricing and marketing practices; and

    regulatory changes relating to the approval process for prescription drugs.

        These initiatives could lead to the implementation or enactment of, or changes to, federal regulations and state regulations that could adversely impact our prescription drug sales and, accordingly, our results of operations, financial condition or cash flows. It is uncertain at this time what additional healthcare reform initiatives, if any, will be implemented, or whether there will be other changes in the administration of governmental healthcare programs or interpretations of governmental policies or other changes affecting the healthcare system. The recently adopted healthcare reform legislation as well as future healthcare or budget legislation or other changes, including those referenced above, may materially adversely impact our pharmacy sales.

Certain risks are inherent in providing pharmacy services; our insurance may not be adequate to cover any claims against us.

        Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. In addition, federal and state laws that require our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. Although we maintain professional liability and errors and omissions liability insurance, from time to time, claims result in the payment of significant amounts, some portions of which are not funded by insurance. We cannot assure you that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future. Our results of operations, financial condition or cash flows may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liability for which we self-insure or we suffer reputational harm as a result of an error or omission.

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We will not be able to compete effectively if we are unable to attract, hire and retain qualified pharmacists.

        The national shortage of pharmacists has eased over the past 12 months, resulting in more licensed pharmacists and new graduates seeking positions in many markets. Although this is occurring nationally, there is still an unmet demand for pharmacists in certain regions of the country that are challenging to staff. We continue to offer competitive compensation plans to retain and attract current and future pharmacists, work with Colleges of Pharmacy across the U.S. to recruit both pharmacy interns and pharmacy graduates and conduct a recruiting program for international pharmacists, but if the shortage recurs in one or more markets, our ability to compete effectively in that market could be adversely impacted.

We may be subject to significant liability should the consumption of any of our products cause injury, illness or death.

        Products that we sell could become subject to contamination, product tampering, mislabeling or other damage requiring us to recall our private brand products. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. Product liability claims may be asserted against us with respect to any of the products or pharmaceuticals we sell and we may be obligated to recall our private brand products. A product liability judgment against us or a product recall could have a material, adverse effect on our business, financial condition or results of operations.

If we fail to protect the security of personal information about our customers and associates, we could be subject to costly government enforcement actions or private litigation.

        Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our web site, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, security could be compromised and confidential customer or business information misappropriated. Loss of customer or business information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, payment card associations and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, compliance with tougher privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.

Item 1B.    Unresolved SEC Staff Comments

        None

Item 2.    Properties

        As of February 27, 2010, we operated 4,780 retail drugstores. The overall average selling square feet of each store in our chain is 10,000 square feet. The overall average total square feet of each store in our chain is 12,500. The stores in the eastern part of the U.S. average 8,800 selling square feet per store (10,900 average total square feet per store). The stores in the western part of the U.S. average 15,400 selling square feet per store (19,800 average total square feet per store).

        Our Customer World store prototype has an overall average selling square footage of 11,500 and an overall average total square feet of 14,500. The new Customer World store prototype in the eastern parts of the U.S. averages 11,000 selling square feet (14,000 average total square feet per store). The Customer World store prototype in the western part of the U.S. averages 14,000 selling square feet (17,400 average total square feet per store).

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        The table below identifies the number of stores by state as of February 27, 2010:

State
  Store Count  

Alabama

    95  

California

    600  

Colorado

    20  

Connecticut

    78  

Delaware

    43  

District of Columbia

    7  

Georgia

    195  

Idaho

    13  

Indiana

    10  

Kentucky

    117  

Louisiana

    66  

Massachusetts

    159  

Maine

    81  

Maryland

    145  

Michigan

    286  

Mississippi

    27  

North Carolina

    242  

Nevada

    1  

New Hampshire

    68  

New Jersey

    270  

New York

    656  

Ohio

    229  

Oregon

    71  

Pennsylvania

    570  

Rhode Island

    47  

South Carolina

    98  

Tennessee

    88  

Utah

    22  

Vermont

    38  

Virginia

    195  

Washington

    139  

West Virginia

    104  
       

Total

    4,780  
       

        Our stores have the following attributes at February 27, 2010:

Attribute
  Number   Percentage  

Freestanding

    2,799     58.6 %

Drive through pharmacy

    2,393     50.1 %

One-hour photo development department

    1,911     40.0 %

GNC stores-within a Rite Aid-store

    1,908     39.9 %

        We lease 4,522 of our operating drugstore facilities under non-cancelable leases, many of which have original terms of 10 to 22 years. In addition to minimum rental payments, which are set at competitive market rates, certain leases require additional payments based on sales volume, as well as reimbursement for taxes, maintenance and insurance. Most of our leases contain renewal options, some of which involve rent increases. The remaining 258 drugstore facilities are owned.

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        We own our corporate headquarters, which is located in a 205,000 square foot building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease 366,400 square feet of space in various buildings near Harrisburg, Pennsylvania for document warehousing use and additional administrative personnel. We own additional buildings near Harrisburg, Pennsylvania which total 105,800 square feet and house our model store and additional administrative personnel.

        We operate the following distribution centers and satellite distribution locations, which we own or lease as indicated:

Location
  Owned or
Leased
  Approximate
Square
Footage
 

Rome, New York

  Owned     283,000  

Utica, New York(1)

  Leased     172,000  

Geddes, New York(1)

  Leased     300,000  

Poca, West Virginia

  Owned     255,000  

Dunbar, West Virginia(1)

  Leased     110,000  

Perryman, Maryland

  Owned     885,000  

Perryman, Maryland(1)

  Leased     262,000  

Tuscaloosa, Alabama

  Owned     230,000  

Cottondale, Alabama(1)

  Leased     224,000  

Pontiac, Michigan

  Owned     325,000  

Woodland, California

  Owned     513,000  

Woodland, California(1)

  Leased     200,000  

Wilsonville, Oregon

  Leased     643,000  

Lancaster, California

  Owned     914,000  

Charlotte, North Carolina

  Owned     585,500  

Charlotte, North Carolina(1)

  Leased     291,000  

Dayville, Connecticut

  Owned     460,000  

Liverpool, New York

  Owned     828,000  

Philadelphia, Pennsylvania

  Owned     245,000  

Philadelphia, Pennsylvania(1)

  Leased     415,000  

(1)
Satellite distribution locations.

        The original terms of the leases for our distribution centers and satellite distribution locations range from 5 to 22 years. In addition to minimum rental payments, certain distribution centers require tax reimbursement, maintenance and insurance. Most leases contain renewal options, some of which involve rent increases. Although from time to time, we may be near capacity at some of our distribution facilities, particularly at our older facilities, we believe that the capacity of our facilities is adequate.

        We also own a 55,800 square foot ice cream manufacturing facility located in El Monte, California. On February 17, 2010 we sold the 68,000 square foot office building in Warwick, Rhode Island which was acquired as part of the Brooks Eckerd acquisition.

        On a regular basis and as part of our normal business, we evaluate store performance and may reduce in size, close or relocate a store if the store is redundant, underperforming or otherwise deemed unsuitable. We also evaluate strategic dispositions and acquisitions of facilities and prescription files. When we reduce in size, close or relocate a store or close distribution center facilities, we often continue to have leasing obligations or own the property. We attempt to sublease this space. As of February 27, 2010, we had 10,092,337 square feet of excess space, 4,832,854 square feet of which was subleased.

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Item 3.    Legal Proceedings

        We are currently a defendant in several putative collective or class action lawsuits filed in federal or state courts in Pennsylvania, New Jersey, New York, Maryland, Ohio and Oregon, purportedly on behalf of, in some cases (i) current and former assistant store managers, or (ii) current and former store managers and assistant store managers, respectively, working in our stores at various locations. The lawsuits allege violations of the Fair Labor Standards Act and of certain state wage and hour statutes. The lawsuits seek various combinations of unpaid compensation (including overtime compensation), liquidated damages, exemplary damages, pre- and post-judgment interest as well as attorneys' fees and costs. In one of the cases, Craig et al v. Rite Aid Corporation et al, pending in the United States District Court for the Middle District of Pennsylvania, brought on behalf of current and former assistant store managers, the Court, on December 9, 2009, conditionally certified a nationwide collective group of individuals who worked for us as assistant store managers since December 9, 2006. Notice of the Craig action has been sent to the purported members of the collective group. The number of persons who will opt into the Craig action has not been determined. In another of the cases, Indergit v. Rite Aid Corporation et al, pending in the United States District Court for the Southern District of New York, brought on behalf of current and former store managers and assistant store managers, the Court, on April 2, 2010, conditionally certified a nationwide collective group of individuals who worked for us 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. Neither the actual date on which the Notice will be sent nor the number of persons who will opt into the Indergit action has been determined. At this time, we are not able to predict the outcome of these lawsuits, or any possible monetary exposure associated with the lawsuits. We believe, however, that the lawsuits are without merit and not appropriate for collective or class action treatment. We are vigorously defending all of these claims.

        We are currently a defendant in several putative class action lawsuits filed in state courts in California alleging violations by us of California wage and hour laws pertaining primarily to pay for missed meals and rest periods. These suits purport to be class actions and seek substantial damages. At this time, we are not able to predict the outcome of these lawsuits, or any possible monetary exposure associated with the lawsuits. We believe, however, that the plaintiffs' allegations are without merit and that their claims are not appropriate for class action treatment. We are vigorously defending all of these claims.

        We do not believe that any of these matters will have a material adverse effect on our business or financial condition. We cannot give assurance, however, that an unfavorable outcome in one or more of these matters will not have a material adverse effect on our results of operations for the period in which they are resolved.

        We are subject from time to time to various claims and lawsuits and governmental investigations, inspections, audits, inquiries and similar actions arising in, and incidental to, the ordinary course of our business. While we cannot predict the outcome of these claims with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated results of operations, financial position or cash flows.

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Item 4.    [Reserved]


PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities.

        Our common stock is listed on the New York Stock Exchange under the symbol "RAD." On April 20, 2010, we had approximately 28,771 stockholders of record. Quarterly high and low stock prices, based on the New York Stock Exchange ("NYSE") composite transactions, are shown below.

Fiscal Year
  Quarter   High   Low  

2011 (through April 20, 2010)

  First   $ 1.74   $ 1.34  

2010

  First     1.22     0.21  

  Second     1.74     1.22  

  Third     2.24     1.26  

  Fourth     1.66     1.26  

2009

  First     2.99     2.03  

  Second     2.32     1.01  

  Third     1.21     0.30  

  Fourth     0.51     0.20  

        We have not declared or paid any cash dividends on our common stock since the third quarter of fiscal 2000 and we do not anticipate paying cash dividends on our common stock in the foreseeable future. Our senior secured credit facility and some of the indentures that govern our other outstanding indebtedness restrict our ability to pay dividends.

        We have not sold any unregistered equity securities during the period covered by this report, nor have we repurchased any equity securities, during the period covered by this report.

        The Chief Executive Officer of the Company certified to the NYSE on July 1, 2009 that she was not aware of any violation by the Company of the NYSE's corporate governance listing standards.


STOCK PERFORMANCE GRAPH

        The graph below compares the yearly percentage change in the cumulative total stockholder return on our common stock for the last five fiscal years with the cumulative total return on (i) the Russell 1000 Consumer Staples Index, and (ii) the Russell 1000 Index, over the same period (assuming the investment of $100.00 in our common stock and such indexes on February 26, 2005 and reinvestment of dividends).

        For comparison of cumulative total return, we have elected to use the Russell 1000 Consumer Staples Index, consisting of 52 companies including the three largest drugstore chains, and the Russell 1000 Index. This allows comparison of the company to a peer group of similar sized companies. We are one of the companies included in the Russell 1000 Consumer Staples Index and the Russell 1000 Index. The Russell 1000 Consumer Staples Index is a capitalization-weighted index of companies that provide products directly to consumers that are typically considered nondiscretionary items based on consumer purchasing habits. The Russell 1000 Index consists of the largest 1000 companies in the Russell 3000 Index and represents the universe of large capitalization stocks from which many active money managers typically select.

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Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
February 2010

GRAPHIC

 
  2006   2007   2008   2009   2010  

RITE AID CORP

    118.90     168.90     77.63     8.14     44.20  

Russell 1000 Index

    109.74     120.76     117.90     66.48     103.26  

Russell 1000 Consumer Staples Index

    104.33     115.18     125.80     91.62     127.51  

Item 6.    Selected Financial Data

        The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and related notes.

        Selected financial data for the fiscal years 2009, 2008, 2007 and 2006 have been adjusted to reflect the operations of our 28 stores in the Las Vegas market area as a discontinued operations as the Company entered into an agreement to sell the prescription files and terminate the operations of these stores during the fourth quarter of fiscal 2008.

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        Selected financial data for March 1, 2008 includes Brooks Eckerd results of operations for the thirty-nine week period ended March 1, 2008.

 
  Fiscal Year Ended  
 
  February 27,
2010
(52 weeks)
  February 28,
2009
(52 weeks)
  March 1,
2008
(52 weeks)
  March 3,
2007
(52 weeks)
  March 4,
2006
(53 weeks)
 
 
  (Dollars in thousands, except per share amounts)
 

Summary of Operations:

                               

Revenues(1)

  $ 25,669,117   $ 26,289,268   $ 24,326,846   $ 17,399,383   $ 17,163,044  

Costs and expense:

                               
 

Cost of goods sold(2)

    18,845,027     19,253,616     17,689,272     12,710,609     12,491,642  
 

Selling, general and administrative expenses(3)(4)

    6,603,372     6,985,367     6,366,137     4,338,462     4,275,098  
 

Goodwill impairment charge

        1,810,223              
 

Lease termination and impairment charges

    208,017     293,743     86,166     49,317     68,692  
 

Interest expense

    515,763     477,627     449,596     275,219     277,017  
 

Loss on debt modifications and retirements, net

    993     39,905     12,900     18,662     9,186  
 

(Gain) loss on sale of assets and investments, net

    (24,137 )   11,581     (3,726 )   (11,139 )   (6,463 )
                       

Total costs and expenses

    26,149,035     28,872,062     24,600,345     17,381,130     17,115,172  
                       

(Loss) income before income taxes

    (479,918 )   (2,582,794 )   (273,499 )   18,253     47,872  

Income tax expense (benefit)(5)

    26,758     329,257     802,701     (11,609 )   (1,228,136 )
                       

Net (loss) income from continuing operations

    (506,676 )   (2,912,051 )   (1,076,200 )   29,862     1,276,008  

Loss from discontinued operations, net of gain on disposal and income tax benefit

        (3,369 )   (2,790 )   (3,036 )   (3,002 )
                       

Net (loss) income

  $ (506,676 ) $ (2,915,420 ) $ (1,078,990 ) $ 26,826   $ 1,273,006  
                       

Basic and diluted (loss) income per share:

                               

Basic (loss) income per share

  $ (0.59 ) $ (3.49 ) $ (1.54 ) $ (0.01 ) $ 2.36  
                       

Diluted (loss) income per share

  $ (0.59 ) $ (3.49 ) $ (1.54 ) $ (0.01 ) $ 1.89  
                       

Year-End Financial Position:

                               

Working capital

  $ 2,332,976   $ 2,062,505   $ 2,123,855   $ 1,363,063   $ 741,488  

Property, plant and equipment, net

    2,293,153     2,587,356     2,873,009     1,743,104     1,717,022  

Total assets

    8,049,911     8,326,540     11,488,023     7,091,024     6,988,371  

Total debt(6)

    6,370,899     6,011,709     5,985,524     3,100,288     3,051,446  

Stockholders' (deficit) equity

    (1,673,551 )   (1,199,652 )   1,711,185     1,662,846     1,606,921  

Other Data:

                               

Cash flows (used in) provided by:

                               
 

Operating activities

    (325,063 )   359,910     79,368     309,145     417,165  
 

Investing activities

    (120,486 )   (346,358 )   (2,933,744 )   (312,780 )   (231,084 )
 

Financing activities

    397,108     (17,279 )   2,903,990     33,716     (272,835 )

Capital expenditures

    193,630     541,346     740,375     363,728     341,349  

Basic weighted average shares

    880,843,000     840,812,000     723,923,000     524,460,000     523,938,000  

Diluted weighted average shares(7)

    880,843,000     840,812,000     723,923,000     524,460,000     676,666,000  

Number of retail drugstores

    4,780     4,901     5,059     3,333     3,323  

Number of associates

    97,500     103,000     112,800     69,700     70,200  

(1)
Revenues for the fiscal years 2007 and 2006 have been adjusted by $108,336 and $107,924 respectively for the effect of discontinued operations.

(2)
Cost of goods sold for the fiscal years 2007 and 2006 have been adjusted by $80,988 and $80,218 respectively for the effect of discontinued operations.

(3)
Selling, general and administrative expenses for the fiscal years 2007 and 2006 have been adjusted by $32,019 and $32,323 respectively for the effect of discontinued operations.

(4)
Includes stock-based compensation expense. Stock based compensation expense for the fiscal years 2010, 2009, 2008 and 2007 was determined using the fair value method set forth in ASC 718, "Compensation—Stock Compensation." Stock-based compensation expense for the fiscal year ended March 4, 2006 was determined using the fair value method set forth in the former SFAS No. 123 "Accounting for Stock-Based Compensation".

(5)
Income tax benefit for the fiscal years 2007 and 2006 has been adjusted by $1,635 and $1,616 respectively for the effect of discontinued operations.

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(6)
Total debt included capital lease obligations of $152.7 million, $193.8 million, $216.3 million, $189.7 million, and $178.2 million, as of February 27, 2010, February 28, 2009, March 1, 2008, March 3, 2007 and March 4, 2006, respectively.

(7)
Diluted weighted average shares for the year ended March 4, 2006 included the impact of stock options, as calculated under the treasury stock method and convertible debt and preferred stock, as calculated under the if-converted method.

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Net loss for fiscal 2010 was $506.7 million or $0.59 per basic and diluted share, compared to net loss for fiscal 2009 of $2,915.4 million or $3.49 per basic and diluted share and net loss of $1,079.0 million or $1.54 per basic and diluted share in fiscal 2008. Fiscal 2009 included significant non-cash charges related to goodwill impairment, store impairment and an additional tax valuation allowance against deferred tax assets that accounted for $2.2 billion or $2.70 per diluted share. Excluding these significant non-cash charges, fiscal 2009's net loss would have been $640 million or $0.79 per diluted share. Our operating results are described in detail in the Results of Operations section of this Item 7. Some of the key factors that impacted our results in fiscal 2010, 2009, and 2008 are summarized as follows:

        Write-Off of Goodwill:     During fiscal 2009, we impaired all of our existing goodwill, which resulted in a non-cash charge of $1.81 billion. This entry was required due to the fact that the market value of Rite Aid Corporation, as indicated by the trading price of our common stock, was less than the carrying value of our net assets as of February 28, 2009.

        Income Tax:     Net loss for fiscal 2010 included income tax expense of $26.8 million and was primarily comprised of an accrual for state and local taxes net of federal tax recoveries and adjustments to unrecognized tax benefits. The Company maintains a full valuation allowance against the net deferred tax assets. ASC 740, "Income Taxes" requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, ASC 740 precludes relying on projections of future taxable income to support the recognition of deferred tax assets.

        Net loss for fiscal 2009 included income tax expense of $329.3 million. The income tax expense was primarily due to a non-cash write-down of our remaining net Federal and State deferred tax assets through an adjustment to our valuation allowance. This change was primarily due to a decline in actual results from our previous forecast as a result of the impact of difficult economic conditions on fiscal 2009 results. Net loss for fiscal 2008 included income tax expense of $920.4 million related to a non-cash increase of the valuation allowance on federal and state net deferred tax assets.

        Store Closing and Impairment Charges:     We recorded store closing and impairment charges of $208.0 million in fiscal 2010, versus $293.7 million in store closing and impairment charges in fiscal 2009 and $86.2 million in fiscal 2008. The decrease in charges for fiscal 2010 was largely due to the store closure activity and higher store impairment charges in fiscal 2009 driven by the decision to close stores that, due to the acquisition of Brooks Eckerd, were in overlapping market areas and the assessment that future cash flows from these stores would not be sufficient to cover their asset value.

        LIFO Charges:     We record the value of our inventory on the Last-In, First-Out (LIFO) method. We recorded non-cash LIFO charges of $88.5 million, $184.6 million and $16.1 million in fiscal 2010, 2009 and 2008, respectively. The higher LIFO charge in fiscal 2009 was due to higher inflation on front end products in that year.

        Acquisition of Brooks Eckerd.     On June 4, 2007, we acquired all of the membership interests of Jean Coutu USA, the holding company for Brooks Eckerd, from Jean Coutu Group, pursuant to the terms of the agreement dated August 23, 2006. As consideration for the acquisition, we paid

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$2.31 billion in cash and issued 250 million shares of Rite Aid common stock. We financed our cash payment via the establishment of a new term loan facility, issuance of senior notes and borrowings under our existing revolving credit facility. As part of the arrangement of the financing necessary to complete the acquisition, we incurred a $12.9 million fee for bridge financing that ultimately was not needed. This fee was recorded as a loss on debt modification in our statement of operations for fiscal 2008.

        As of February 27, 2010, Jean Coutu Group owned 252.0 million shares of Rite Aid common stock, which represents approximately 27.5% of the total Rite Aid voting power. We expanded our Board of Directors to 14 members, with four of the seats being held by members designated by the Jean Coutu Group. In connection with the Acquisition, we entered into a Stockholder Agreement (the "Stockholder Agreement") with Jean Coutu Group and certain family members. The Stockholder Agreement contains provisions relating to Jean Coutu Group's ownership interest in the Company, board and board committee composition, corporate governance, stock ownership, stock purchase rights, transfer restrictions, voting arrangements and other matters. We also entered into a registration rights agreement with Jean Coutu Group giving Jean Coutu Group certain rights with respect to the registration under the Securities Act of 1933, as amended, of the shares of our common stock issued to Jean Coutu Group or acquired by Jean Coutu Group pursuant to certain stock purchase rights or open market rights under the Stockholder Agreement.

        Debt Refinancing.     In fiscal years 2010 and 2009, we took several steps to extend the terms of our debt and obtain more flexibility. In fiscal 2010, we refinanced our first and second lien securitization facilities. The refinancing consisted of the issuance of $270.0 million of new 10.25% Senior Secured Notes due October 2019, commitments to increase the maximum borrowing capacity under our existing senior secured revolving credit facility from $1.0 billion to $1.175 billion, and an increase in the borrowings under our existing $525.0 million Tranche 4 term loan due June 2015 by $125.0 million to $650.0 million. Additionally, we issued $410.0 million of 9.75% senior secured notes due June 2016 proceeds of which repaid all borrowings outstanding under the revolving credit facility due September 2010 and all of the commitments thereunder. We also repaid all borrowings due under the $145.0 million Tranche 1 Term Loan. We incurred fees of $60.2 million to consummate the fiscal 2010 refinancings. In fiscal 2009, we issued our 8.5% convertible notes due May 2015, the proceeds of which were used to redeem our 6.125% notes due December 2008. Additionally, we consummated a tender offer and consent solicitation and repaid $348.9 million of our 8.125% notes due May 2010, $144.0 million of our 9.25% notes due June 2013 and the full balance of our 7.5% notes due January 2015. Proceeds from the issuance of our 10.375% notes due July 2016 and our Tranche 3 term loan were used to fund the tender offer and consent solicitation. We incurred charges of $39.9 million to call these notes prior to maturity and write-off unamortized debt issue costs.

        Dilutive Equity Issuances.     At February 27, 2010, 887.6 million shares of common stock were outstanding and an additional 164.9 million shares of common stock were issuable related to outstanding stock options, convertible preferred stock and convertible notes.

        Our 164.9 million shares of potentially issuable common stock consist of the following (shares in thousands):

Strike price
  Outstanding
Stock Options(a)
  Preferred
Stock
  Convertible
Notes
  Total  

$0.99 and under

    14,173             14,173  

$1.00 to $1.99

    16,744             16,744  

$2.00 to $2.99

    8,895         61,045     69,940  

$3.00 to $3.99

    1,685             1,685  

$4.00 to $4.99

    21,131             21,131  

$5.00 to $5.99

    3,816     27,692         31,508  

$6.00 and over

    9,670             9,670  
                   

Total issuable shares

    76,114     27,692     61,045     164,851  
                   

(a)
The exercise of these options would provide cash of $234.3 million.

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Results of Operations

        The results of operations for the fiscal year ended March 1, 2008 have been adjusted to reflect the operations of our 28 stores in the Las Vegas market area as a discontinued operation, as the Company has sold the prescription files and terminated the operations of these stores.

    Revenue and Other Operating Data

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 
 
  (Dollars in thousands)
 

Revenues

  $ 25,669,117   $ 26,289,268   $ 24,326,846  

Revenue (decline) growth

    (2.4 )%   8.1 %   39.8 %

Same store sales (decline) growth

    (0.9 )%   0.8 %   1.3 %

Pharmacy sales (decline) growth

    (1.4 )%   8.5 %   46.2 %

Same store pharmacy sales growth

    0.1 %   0.7 %   1.7 %

Pharmacy sales as a % of total sales

    67.9 %   67.2 %   66.7 %

Third party sales as a % of total pharmacy sales

    96.2 %   96.3 %   95.9 %

Front end sales (decline) growth

    (4.3 )%   6.1 %   28.0 %

Same store front end sales (decline) growth

    (2.9 )%   0.9 %   0.7 %

Front end sales as a % of total sales

    32.1 %   32.8 %   33.3 %

Store data:

                   
 

Total stores (beginning of period)

    4,901     5,059     3,333  
 

New stores

    17     33     47  
 

Closed stores

    (138 )   (200 )   (183 )
 

Store acquisitions, net

        9     1,862  
 

Total stores (end of period)

    4,780     4,901     5,059  
 

Remodeled stores

    8     70     145  
 

Relocated stores

    41     56     65  

    Revenues

        Fiscal 2010 compared to Fiscal 2009:     The 2.4% decline in revenue was primarily driven by a reduction in our store base and a decline in same store sales, which decreased 0.9% compared to prior year. This decline consisted of 0.1% pharmacy same store sales increase offset by a 2.9% decrease in front end same store sales. Same store sales trends for fiscal 2010 and fiscal 2009 are described in the following paragraphs. We include in same store sales all stores that have been open at least one year. Stores in liquidation are considered closed. Relocation stores are not included in same store sales until one year has lapsed.

        Pharmacy same store sales increased 0.1%. Same store prescription growth was 0.8% for fiscal 2010, which was positively impacted by the growth of our Rx Savings Card program, the benefit of grassroots marketing initiatives in our high-volume front end/low volume pharmacy stores and growth in our automated refill reminder program and other prescription compliance programs. The impact on sales of the increase in our prescription count was partially offset by an increase in generic sales and reductions in pharmacy reimbursement rates.

        Front end same store sales decreased 2.9% from the prior year, due to weakness in the overall economic environment and its impact on consumer shopping behavior and the impact of some of our initiatives, including our efforts to reduce costs, to reduce inventory, and to make changes to operating procedures for low volume stores.

        Fiscal 2009 compared to Fiscal 2008:     The 8.1% growth in revenue for fiscal 2009 was driven primarily by the acquisition of Brooks Eckerd. In addition, same store sales increased 0.8% and

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consisted of 0.7% pharmacy same store sales increase and a 0.9% increase in front end same store sales. Same store sales include the results of the Brooks Eckerd stores for the last thirty-nine weeks of fiscal 2009 and fiscal 2008.

        Pharmacy same store sales increased 0.7%. Increases in price per prescription were partially offset by increased generic penetration and a 1.0% same store prescription decline. The decline in same store prescriptions was driven by script count declines in the Brooks Eckerd stores, switches of prescriptions to over-the-counter medications and the overall economic environment. Same store script growth at the core Rite Aid stores was 0.7% for fiscal 2009 and same store scripts declined 5.0% for the Brooks Eckerd stores.

        Front end same store sales increased 0.9% in fiscal 2009, due to strong performance in our consumable and over-the-counter categories and improvement in our private brand penetration. These items were somewhat offset by weakness in the overall economic environment, which had a negative impact on seasonal sales in the second half of the fiscal year and decreases in photo sales, which were due to the continuing trend of consumers printing fewer images as well as the disruption of services due to the conversion of our photo technology to FUJI digital equipment. Front end same store sales for the core Rite Aid stores increased 1.2% for the year, while front end same store sales for the Brooks Eckerd stores declined by 0.5%.

Costs and Expenses

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 
 
  (Dollars in thousands)
 

Costs of goods sold

  $ 18,845,027   $ 19,253,616   $ 17,689,272  

Gross profit

    6,824,090     7,035,652     6,637,574  

Gross margin

    26.6 %   26.8 %   27.3 %

Selling, general and administrative expenses

  $ 6,603,372   $ 6,985,367   $ 6,366,137  

Selling, general and administrative expenses as a percentage of revenues

    25.7 %   26.6 %   26.2 %

Goodwill impairment charge

        1,810,223      

Lease termination and impairment charges

    208,017     293,743     86,166  

Interest expense

    515,763     477,627     449,596  

Loss on debt modifications and retirements, net

    993     39,905     12,900  

(Gain) loss on sale of assets, net

    (24,137 )   11,581     (3,726 )

    Cost of Goods Sold

        Gross margin rate was 26.6% for fiscal 2010 compared to 26.8% in fiscal 2009. The decline in gross margin rate for fiscal 2010 was driven primarily by pharmacy margin decline due to reductions in reimbursement rates including reductions in Medicaid reimbursements resulting from the AWP rollback, fewer new generics and fewer price reductions on existing generics. We expect the impact from these items to continue in fiscal 2011, which could result in lower pharmacy margins. Front end gross margin was lower, as improvements in shrink and distribution costs were more than offset by a higher mix of promotional sales and lower inventory capitalization costs. Partially offsetting the decline in front end and pharmacy margins was a reduction in LIFO expense.

        Gross margin rate was 26.8% for fiscal 2009 compared to 27.3% in fiscal 2008. The decline in gross margin rate for fiscal 2009 was driven primarily by a significant increase in our LIFO charge, which is due to higher front end and pharmacy product inflation than in prior years. Pharmacy gross margin rate on a FIFO basis improved due to an increase in the percentage of generic drugs dispensed and a lower cost of generics, partially offset by lower reimbursement rates. Front end gross margin on a FIFO basis was flat, as improvements in shrink were offset by a reduction in photo sales.

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        We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO charge was $88.5 million in fiscal 2010, $184.6 million in fiscal 2009 and $16.1 million in fiscal 2008.

    Selling, General and Administrative Expenses

        SG&A for fiscal 2010 was 25.7% as a percentage of revenue, compared to 26.6% in fiscal 2009. The decrease in SG&A as a percentage of revenues is mostly due to a decrease in salaries and benefit costs due to better labor control and reductions in store operating expenses and corporate administrative expenses resulting from our various cost reduction initiatives.

        SG&A for fiscal 2009 was 26.6% as a percentage of revenue, compared to 26.2% in fiscal 2008. The increase in SG&A as a percentage of revenue was primarily due to an increase in depreciation and amortization expense related primarily to increased intangible assets resulting from the allocation of the purchase price of Brooks Eckerd, an increase in rent and occupancy expenses due to new and relocated stores and the sale-leaseback of owned stores. These items were somewhat offset by a decrease in integration expense and advertising costs.

    Goodwill Impairment

        In fiscal 2009, we impaired all of our existing goodwill, which resulted in a non-cash charge of $1.81 billion. This entry was required due to the fact that our market value, as indicated by the trading price of our common stock, was less than the carrying value of our net assets as of February 28, 2009.

    Lease Termination and Impairment Charges

        Lease termination and impairment charges consist of amounts and number of locations as follows:

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 
 
  (Dollars in thousands)
 

Impairment charges

  $ 75,475   $ 157,334   $ 30,823  

Facility and equipment lease exit charges

    132,542     136,409     55,343  
               

  $ 208,017   $ 293,743   $ 86,166  
               

Impairment charges

                   

Number of Stores

    670     815     420  

Number of Distribution Centers

    1          
               

    671     815     420  

Lease exit charges

                   

Number of Stores

    108     162     66  

Number of Distribution Centers

    1          
               

    109     162     66  

        Impairment Charges.     These amounts include the write-down of long-lived assets to estimated fair value at stores that were identified for impairment as part of our on-going store performance review at all of our stores or management's intention to relocate or close a specific store. The increase in impairment charges in fiscal 2009 was primarily due to current and projected operating results at these stores not being sufficient to cover the asset values.

        Facility and Equipment Lease Exit Charges.     Charges to close a store, which principally consist of lease termination costs, 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 favorable lease terminations. We evaluate these assumptions each quarter and adjust the liability accordingly. The increase in facility and equipment lease exit charges over fiscal 2008 is due to

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a higher level of stores closed in fiscal 2009 and 2010 and a decrease in the amount of assumed sublease income over the remaining minimum lease term.

        As part of our ongoing business activities, we assess stores and distribution centers for potential closure. Decisions to close stores in future periods would result in charges for store lease exit costs and liquidation of inventory, as well as impairment of assets at these stores.

    Interest Expense

        In fiscal 2010, 2009, and 2008, interest expense was $515.8 million, $477.6 million and $449.6 million, respectively. The increase in interest expense in fiscal 2010 compared to fiscal 2009 is due to higher cost debt incurred as part of our fiscal 2010 refinancings offset somewhat by lower LIBOR rates and decreased borrowings under the revolving credit facility.

        The annual weighted average interest rates on our indebtedness in fiscal 2010, 2009 and 2008 were 6.8%, 6.6% and 7.5%, respectively.

    Income Taxes

        Income tax expense of $26.8 million, $329.3 million and $802.7 million, has been recorded for fiscal 2010, 2009 and 2008, respectively. Net loss for fiscal 2010 included income tax expense of $26.8 million and was primarily comprised of an accrual for state and local taxes net of federal tax recoveries and adjustments to unrecognized tax benefits. The Company maintains a full valuation allowance against the net deferred tax assets. ASC 740, "Income Taxes" requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. In determining whether a valuation allowance is required, we take into account all available positive and negative evidence with regard to the recognition of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect recognition of a deferred tax asset, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, ASC 740 precludes relying on projections of future taxable income to support the recognition of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.

        The fiscal 2009 income tax expense included non-cash income tax expense of $673.1 million related to the write-down of our remaining net Federal and State deferred tax assets through an adjustment to our valuation allowance. This change was primarily due to a decline in actual results from our previous forecast as a result of the impact of current economic conditions on fiscal 2009 results. The fiscal 2008 income tax expense included a non-cash tax expense of $920.4 million related to an increase of the valuation allowance on federal and state net deferred tax assets. The existence of negative evidence at March 1, 2008, was primarily the result of recently completed acquisition of Brooks Eckerd and the impact on current year earnings due to planned integration and acquisition activities, compounded by the weakening economy during the second half of the year.

        We monitor all available evidence related to our ability to utilize our remaining net deferred tax assets. We maintained a full valuation allowance of $1,984.5 million and $1,787.8 million against remaining net deferred tax assets at fiscal year end 2010 and 2009, respectively.

Liquidity and Capital Resources

General

        We have three primary sources of liquidity: (i) cash and cash equivalents, (ii) cash provided by operating activities, and (iii) borrowings under the revolving credit facility under our senior secured 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, to fund capital expenditures and to provide funds for payment of our debt.

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Credit Facility

        Our senior secured credit facility includes a $1.175 billion revolving credit facility. Borrowings under this revolving credit facility bear interest at LIBOR plus 4.25% (with a minimum LIBOR of 3.00%), if we choose to make LIBOR borrowings, or at Citibank's base rate plus 3.25% (with a minimum base rate of 4.00%). The interest rate can fluctuate between LIBOR plus 4.25% and LIBOR plus 4.75%, based upon the amount of revolver availability, as defined in the senior credit facility. We are required to pay fees between 0.75% and 1.00% per annum on the daily unused amount of the revolving credit facility, depending on the amount of revolver availability. Amounts drawn under this credit facility become due and payable in September 2012.

        Our ability to borrow under the revolving credit facility is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At February 27, 2010, we had $80.0 million outstanding under the revolving credit facility. At February 27, 2010, we also had letters of credit outstanding against the revolving credit facility of $159.0 million, which resulted in additional borrowing capacity of $936.0 million.

        On June 4, 2007, we amended our senior secured credit facility to establish a new senior secured term loan in the aggregate principal amount of $1.105 billion and borrowed the full amount thereunder. A portion of the proceeds from the borrowings under this senior secured term loan (the "Tranche 2 Term Loan") were used to fund the acquisition of Brooks Eckerd. The Tranche 2 Term Loan will mature on June 4, 2014 and currently bears interest at LIBOR plus 1.75%, if we choose to make LIBOR borrowings, or at Citibank's base rate plus 0.75%. We must make mandatory prepayments of the Tranche 2 Term Loan with the proceeds of asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by us (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and 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 2 Term Loan may also be required.

        In July 2008, we issued a new senior secured term loan (Tranche 3 Term Loan) of $350.0 million under our existing senior secured credit facility. The Tranche 3 Term Loan was issued at a discount of 90% of par. The Tranche 3 Term Loan matures on June 4, 2014 and bears interest at LIBOR (with a minimum LIBOR rate of 3.00%) plus 3.00%, if we choose to make LIBOR borrowings, or at Citibank's base rate (with a minimum base rate of 4.00%) plus 2.00%. We must make mandatory prepayments of the Tranche 3 Term Loan with the proceeds of asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by us (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and 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 3 Term Loan may also be required.

        In June 2009, we issued a new senior secured term loan (the "Tranche 4 Term Loan") of $525.0 million under our existing secured credit facility. In October 2009, we issued an additional $125.0 million under the Tranche 4 Term Loan as part of the Refinancing. The Tranche 4 Term Loan matures on June 10, 2015 and bears interest at a rate per annum equal to, at our option, either (a) an adjusted LIBOR rate (with a LIBOR floor of 3.00% per annum) plus 6.50% or (b) Citibank's base rate (with a floor of 4.00% per annum) plus 5.50%. We must make mandatory prepayments of the Tranche 4 Term Loan with the proceeds of certain asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by us (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and debt (subject to certain exceptions). If at any time there is a shortfall in our borrowing base under the senior secured credit facility, prepayment of the Tranche 4 Term Loan may also be required. All prepayments of the Tranche 4 Term Loan occurring on or prior to the third anniversary of the initial borrowing of the Tranche 4 Term Loan are subject to a prepayment premium in an amount equal to (i) 5.0% of the principal amount prepaid if such prepayment occurs on or prior to the first anniversary of such borrowing, (ii) 3.0% of the principal amount prepaid if such prepayment occurs on or prior to the second anniversary of such borrowing and

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(iii) 1.0% of the principal amount prepaid if such prepayment occurs on or prior to the third anniversary of such borrowing.

        The senior secured credit facility also 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.

        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 three months after June 4, 2014. The senior secured credit facility allows us to incur an unlimited amount of unsecured debt with a maturity beyond three months after June 4, 2014; however 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 of said debt. The senior secured facility also allows, so long as the senior secured credit facility is not in default, for the repurchase of any debt with a maturity on or before June 4, 2014 and for the voluntary repurchase of debt with a maturity after June 4, 2014 if we maintain availability on the revolving credit facility of at least $100.0 million

        Our credit facility has a fixed charge coverage ratio test which increases from 1.05 to 1.10 beginning in the first quarter of fiscal 2011. The senior secured credit facility only requires us to maintain the minimum fixed charge coverage ratio once availability on the revolving credit facility is less than $150 million.

        The senior secured credit facility provides for 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.

Other 2010 Transactions

        In October 2009, we issued $270.0 million of 10.25% senior secured notes due October 15, 2019. The notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsubordinated indebtedness. Our obligations under these notes are guaranteed, subject to certain limitations, by the same subsidiaries that guarantee the obligations under the senior secured credit facility. The guarantees are secured by shared second priority liens with holders of the 10.375% senior secured notes due 2016 and 7.5% senior secured notes due 2017. The indenture that governs the 10.25% notes contains covenant provisions that, among other things, include limitations on our ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale-leaseback transactions. The 10.25% senior secured notes due October 2019 were issued at 99.2% of par.

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        In June 2009, we issued $410.0 million of 9.75% senior secured notes due June 12, 2016. These notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsubordinated indebtedness. Our obligations under these notes are guaranteed, subject to certain limitations, by the same subsidiaries that guarantee the obligations under the senior secured credit facility. These guarantees are shared, on a senior basis, with debt outstanding under the senior secured credit facility. The indenture that governs the 9.75% notes contains covenant provisions that, among other things, allow the holders of the notes to participate along with the term loan holders in mandatory prepayments resulting from the proceeds of certain asset dispositions (at the option of the noteholder) and include limitations on our ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale-leaseback transactions. The 9.75% senior secured notes due June 2016 were issued at 98.2% of par.

        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 February 27, 2010, the amount of additional secured debt that could be incurred under these indentures was approximately $997.6 million (which amount does not include the ability to enter into certain sale and leaseback transactions). However, we could not incur any additional secured debt as of February 27, 2010 assuming a fully drawn revolver and the outstanding letters of credit. The ability to issue additional unsecured debt under these indentures is governed by an interest coverage ratio test.

    Sale Leaseback Transactions

        During fiscal 2010 we sold a total of 3 owned stores to independent third parties. Net proceeds from these sales were $8.0 million. Concurrent with these sales, we entered into agreements to lease the stores back from the purchasers over minimum lease terms of 10 to 20 years. We accounted for all of these leases as operating leases. A gain on the sale of these stores of $5.3 million was deferred and is being recorded over the minimum term of these leases.

2009 Transactions

        On June 4, 2008, we commenced a tender offer and consent solicitation under which we offered to repurchase all outstanding amounts of our 8.125% senior secured notes due May 2010, our 7.5% senior secured notes due January 2015 and our 9.25% senior notes due June 2013. On July 8, 2008, the tender offer expired and on July 9, we repaid $348.9 million of the outstanding balance of our 8.125% notes due May 2010, $199.6 million of our 7.5% notes due January 2015 and $144.0 million of the outstanding balance of our 9.25% notes due June 2013. In addition, on July 9, 2008, we sent a notice of redemption for the remaining outstanding 7.5% notes due 2015 and satisfied and discharged the indenture governing such notes. As a result of this tender and consent solicitation, the indentures governing these notes were amended to eliminate substantially all of the restrictive covenants therein including limitations on our ability to incur additional debt and grant liens against assets. In addition, the guarantees on each series were eliminated and the 8.125% notes are no longer secured. We did the transaction because these notes had restrictions on secured debt that prohibited us from fully drawing on our revolving credit facility under certain circumstances. We incurred a loss on debt modification related to this transaction of $36.6 million.

        These transactions were financed via the issuance of a new senior secured term loan (the Tranche 3 Term Loan) described above and the issuance of a $470.0 million aggregate principal amount of 10.375% senior secured notes due July 2016. These notes are unsecured unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsubordinated indebtedness. Our obligations under the notes are guaranteed, subject to certain limitations, by subsidiaries that guarantee the obligations under our senior secured credit facility. The guarantees are secured by shared second priority liens with holders of our 7.5% senior secured notes due 2017 and our 10.25% senior secured notes due 2019. The indenture that governs the 10.375% senior secured notes due 2016 contains covenant provisions that, among other things, include limitations on our ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and

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enter into sale-leaseback transactions. The 10.375% senior secured notes due July 2016 were issued at 90.588% of par.

        In May 2008 we issued $158.0 million of 8.5% convertible notes due May 2015. These notes are unsecured and are effectively junior to our secured debt. The notes are convertible, at the option of the holder, into shares of our common stock at a conversion price of $2.59 per share, subject to adjustments to prevent dilution, at any time. Proceeds from the issuance of these notes were used to fund the redemption of our 6.125% notes due December 2008. We recorded a loss on debt modification of $3.3 million related to the early redemption of the 6.125% notes due 2008, which included payment of a make whole premium to the noteholders and unamortized debt issue costs on the notes.

    Preferred Stock Transactions

        In the fourth quarter of fiscal 2009 the holder of substantially all of the outstanding shares of our Series G preferred stock converted its shares into 27.1 million shares of our common stock at a conversion rate of $5.50 per share.

        During fiscal 2006, we issued 4.8 million shares of our Series I Mandatory Convertible preferred stock ("Series I preferred stock"). In the first quarter of fiscal 2009, we entered into agreements with several of the holders of the Series I preferred stock to convert 2.4 million shares into common stock, at a rate of 5.6561 common shares per preferred share, earlier than the mandatory conversion date, which resulted in the issuance of 14.6 million shares of our common stock. In the third quarter of fiscal 2009, the remaining outstanding 2.4 million shares of Series I preferred stock automatically converted into common stock, at a rate of 5.6561 common shares per preferred share, which resulted in the issuance of 13.7 million shares of our common stock.

    Sale Leaseback Transactions

        During fiscal 2009 we sold a total of 72 owned stores to independent third parties. Net proceeds from these sales were $193.0 million. Concurrent with these sales, we entered into agreements to lease the stores back from the purchasers over minimum lease terms of 20 years. We accounted for 67 of these leases as operating leases and the remaining five were initially accounted for using the financing method as these lease agreements contain a clause that allow the buyer to force us to repurchase the properties under certain conditions. A gain on the sale of these stores of $5.2 million was deferred and is being recorded over the minimum term of these leases. Subsequent to February 28, 2009, the clause that allowed the buyer to force us to repurchase the property lapsed on three of these leases. Therefore, these leases are now accounted for as operating leases.

2008 Transactions

    Debt Transactions

        On June 4, 2007 we incurred $1.22 billion aggregate principal amount of senior notes. The issue consisted of $410.0 million of 9.375% senior notes due 2015 and $810.0 million of 9.5% senior notes due 2017. Our obligations under each series of notes are guaranteed fully and unconditionally, jointly and severally, by all of our subsidiaries that guarantee our obligations under our existing senior secured credit facility and our outstanding senior secured notes. The notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all of our other unsecured, unsubordinated debt. The indentures governing the notes contain covenants that limit our ability and the ability of our restricted subsidiaries to, among other things; incur additional debt, pay dividends or make other restricted payments, purchase, redeem or retire capital stock or subordinated debt, make asset sales, enter into transactions with affiliates, incur liens, enter into sale-leaseback transactions, provide subsidiary guarantees, make investments and merge or consolidate with any other persons.

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    Preferred Stock Transactions

        During the fourth quarter of fiscal 2005, we issued 2.5 million shares of our Series E Mandatory Convertible preferred stock ("Series E preferred stock"). The Series E preferred stock automatically converted into common stock on February 1, 2008 at a rate of 14.0056 common shares per preferred share, as determined by the adjusted applicable market value of our common stock (as defined in the Series E preferred stock agreement) on the date of conversion. The Series E preferred stock conversion resulted in the issuance of 35.0 million shares of our common stock to the holders of the Series E preferred stock.

    Sale Leaseback Transactions

        During fiscal 2008 we sold a total of 22 owned stores to independent third parties. Net proceeds from these sales were $93.3 million. Concurrent with these sales, we entered into agreements to lease the stores back from the purchasers over minimum lease terms of 20 years. We accounted for 14 of these leases as operating leases and the remaining eight were accounted for using the financing method as these lease agreements contain a clause that allow the buyer to force us to repurchase the properties under certain conditions. Subsequent to March 1, 2008, the clause that allowed the buyer to force us to repurchase the property lapsed on all of these leases. Therefore, these leases are now accounted for as operating leases.

Off Balance Sheet Obligations

        Until October 26, 2009, we maintained securitization agreements (the "First Lien Facility") with several multi-seller asset-backed commercial paper vehicles ("CPVs"). Under the terms of the First Lien Facility, we sold substantially all of our eligible third party pharmaceutical receivables to a bankruptcy remote Special Purpose Entity ("SPE") and retained servicing responsibility. The SPE then transferred an interest in these receivables to various CPVs. We also maintained a $225.0 million second priority accounts receivable securitization term loan ("Second Lien Facility").

        On October 26, 2009, we terminated both accounts receivable securitization facilities and replaced them with senior secured notes, increased borrowing capacity under our existing senior secured revolving credit facility and an increase in borrowings under our Tranche 4 Term Loan. As part of this refinancing, we incurred a prepayment penalty of $2.3 million in relation to the Second Lien Facility and recognized $3.8 million of unamortized discount related to the Second Lien Facility. These charges are recorded as a component of selling, general, and administrative expenses.

        The table below details receivable transfer activity for the years presented (in thousands). Note that for the period ended February 27, 2010, receivables securitization activity is reflected through October 26, 2009, the date of the termination of the securitization facilities.

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Average amount of outstanding receivables transferred

  $ 226,521   $ 471,319   $ 332,115  

Total receivable transfers

  $ 2,240,000   $ 6,940,000   $ 4,992,000  

Collections made by the Company as part of the servicing arrangement on behalf of the CPVs

  $ 2,320,000   $ 7,045,000   $ 4,907,000  

        The program fee under the First Lien Facility was LIBOR plus 2.0% of the total amount advanced under the facility. The liquidity fee was 3.5% of the total facility commitment of $345.0 million. The program and the liquidity fees are recorded as a component of selling, general and administrative expenses. Program and liquidity fees for fiscal 2010, 2009 and 2008 were $12.0 million, $24.9 million and $22.3 million, respectively.

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        Financing fees related to the Second Lien Facility for fiscal 2010 were $24.9 million and are recorded as a component of selling, general, and administrative expenses. At February 28, 2009, our interest in the third party pharmaceutical receivables is as follows (in thousands):

 
  February 28,
2009
 

Third party pharmaceutical receivables

  $ 955,827  

Allowance for uncollectible accounts

    (31,421 )
       

Net third party receivables

    924,406  

First lien facility

    (330,000 )

Second lien facility (net of discount of $6,621)

    (218,379 )
       

Net retained interest

  $ 376,027  
       

        As of February 27, 2010, we had no material off balance sheet arrangements, other than operating leases included in the table below.

Contractual Obligations and Commitments

        The following table details the maturities of our indebtedness and lease financing obligations as of February 27, 2010, as well as other contractual cash obligations and commitments.

 
  Payment due by period  
 
  Less Than
1 Year
  1 to 3 Years   3 to 5 Years   After 5 Years   Total  
 
  (Dollars in thousands)
 

Contractual Cash Obligations

                               

Long term debt(1)

  $ 512,384   $ 1,075,843   $ 2,477,651   $ 5,478,073   $ 9,543,951  

Capital lease obligations(2)

    31,652     44,820     44,250     102,189     222,911  

Operating leases(3)

    1,007,159     1,891,244     1,688,143     5,417,157     10,003,703  

Open purchase orders

    396,923                 396,923  

Redeemable preferred stock(4)

                21,300     21,300  

Other, primarily self insurance and retirement plan obligations(5)

    110,175     127,394     30,635     75,118     343,322  

Minimum purchase commitments(6)

    146,632     291,026     295,316     702,443     1,435,417  
                       
 

Total contractual cash obligations

  $ 2,204,925   $ 3,430,327   $ 4,535,995   $ 11,796,280   $ 21,967,527  
                       

Commitments

                               

Lease guarantees(7)

  $ 28,425   $ 54,424   $ 52,859   $ 101,591   $ 237,299  

Outstanding letters of credit

    159,040                 159,040  
                       
 

Total commitments

    2,392,390     3,484,751     4,588,854     11,897,871     22,363,866  
                       

(1)
Includes principal and interest payments for all outstanding debt instruments. Interest was calculated on variable rate instruments using rates as of February 27, 2010.

(2)
Represents the minimum lease payments on non-cancelable leases, including interest, but net of sublease income.

(3)
Represents the minimum lease payments on non-cancelable leases.

(4)
Represents value of redeemable preferred stock at its redemption date.

(5)
Includes the undiscounted payments for self-insured medical coverage, actuarially determined undiscounted payments for self-insured workers' compensation and general liability, and actuarially determined obligations for defined benefit pension and nonqualified executive retirement plans.

(6)
Represents commitments to purchase products from certain vendors.

(7)
Represents lease guarantee obligations for 134 former stores related to certain business dispositions. The respective purchasers assume the obligations and are, therefore, primarily liable for these obligations.

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        Obligations for income tax uncertainties pursuant to ASC 740, "Income Taxes" of approximately $117.0 million are not included in the table above as we are uncertain as to if or when such amounts may be settled.

Net Cash Provided By (Used In) Operating, Investing and Financing Activities

        Cash flow used in operating activities was $325.1 million in fiscal 2010. Cash flow was negatively impacted by the repayments of the accounts receivable securitization facilities totaling $555.0 million and a decrease in accounts payable offset by a reduction in inventory and accounts receivable. The decreases in accounts receivables, inventory and accounts payable were due to operating fewer stores and various working capital initiatives.

        Cash flow provided by operating activities was $359.9 million in fiscal 2009. Cash flow was positively impacted by net proceeds from our accounts receivable securitization, reductions in accounts receivable and inventory, partially offset by a decrease in accounts payable. The decrease in inventory is primarily due to the efforts made by management to reduce excess inventory and a decrease in purchasing volume, which also impacted accounts payable.

        Cash flow provided by operating activities was $79.4 million in fiscal 2008. Cash flow was positively impacted by net proceeds from our accounts receivable securitization and a reduction in accounts receivable partially offset by an increase in inventory and a decrease in accounts payable. The increase in inventory was primarily caused by Brooks Eckerd integration activities. Integration activities that require a temporary investment in inventory include replacing discontinued inventory, increasing the number of SKU's at the Brooks Eckerd distribution centers and retrofitting the planograms in the Brooks Eckerd stores. The decrease in accounts payable was primarily due to conforming vendor terms as part of the integration efforts.

        Cash used in investing activities was $120.5 million in fiscal 2010. Cash was used for the purchase of property, plant and equipment and prescription files which was offset in part by proceeds from asset dispositions.

        Cash used in investing activities was $346.4 million in fiscal 2009. Cash was used for the purchase of property, plant and equipment and prescription files which was offset in part by proceeds from our sale leaseback transactions and proceeds from asset dispositions.

        Cash used in investing activities was $2,933.7 million in fiscal 2008. Cash used was primarily for the acquisition of Brooks Eckerd and purchase of property, plant and equipment and intangible assets offset by proceeds from sale-leaseback transactions and asset dispositions.

        Cash provided by financing activities was $397.1 million in fiscal 2010 due to proceeds from refinancings offset by a reduction in borrowings on our revolving credit facility and the payment of financing fees related to the refinancings.

        Cash used in financing activities was $17.3 million in fiscal 2009 due to the net impact of proceeds from the issuance of convertible notes and redemption of various notes, amending of our credit facility and principal payments on long term debt.

        Cash provided by financing activities was $2,904.0 million in fiscal 2008. Cash provided by financing was primarily provided by proceeds from issuance of long-term debt utilized to fund the Brooks Eckerd acquisition, net proceeds from our revolving credit facility, the change in the zero balance cash accounts and net proceeds from the issuance of common stock, offset by financing costs paid, scheduled debt payments and preferred stock dividends.

Capital Expenditures

        We plan to make total capital expenditures of approximately $250 million during fiscal 2011, consisting of approximately 21% related to the new store construction and store relocation, 12%

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related to store remodels and 67% related to prescription file purchases, infrastructure and maintenance requirements. Management expects that these capital expenditures will be financed primarily with cash flow from operating activities and use of the revolving credit facility.

Future Liquidity

        We are highly leveraged. Our high level of indebtedness: (i) limits our ability to obtain additional financing; (ii) limits our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) places us at a competitive disadvantage relative to our competitors with less debt; (iv) renders us more vulnerable to general adverse economic and industry conditions; and (v) requires us to dedicate a substantial portion of our cash flow to service our debt. Based upon our current levels of operations, we believe that cash flow from operations together with available borrowings under the senior secured credit facility and other sources of liquidity will be adequate to meet our requirements for working capital, debt service and capital expenditures for the next twelve months. Based on our liquidity position, which we expect to remain strong throughout the year, we do not expect the restriction on our credit facility, that could result if we fail to meet the fixed charge covenant in our senior secured credit facility, to have any impact on our business 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. Should we determine, at any time, that it is necessary to obtain additional short-term liquidity, we will evaluate our alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurance that any such supplemental funding, if sought, could be obtained or if obtained, would be on terms acceptable to us. From time to time, we may enter into transactions to exchange debt for shares of common stock in order to reduce our outstanding debt.

Critical Accounting Policies and Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to allowance for uncollectible receivables, inventory shrink, impairment, self insurance liabilities, pension benefits, lease exit liabilities, income taxes and litigation. We base our estimates on historical experience, current and anticipated business conditions, the condition of the financial markets and various other assumptions that are believed to be reasonable under existing conditions. Variability reflected in the sensitivity analyses presented below is based on our recent historical experience. Actual results may differ materially from these estimates and sensitivity analyses.

        The following critical accounting policies require the use of significant judgments and estimates by management:

        Allowance for uncollectible receivables:     Almost all of our prescription sales are made to customers that are covered by third party payors, such as insurance companies, prescription benefit management companies, government agencies, private employers, health maintenance organizations or other managed care providers. We recognize and report receivables that represent the amount owed to us for sales made to customers, who are employees or members of those payors, which have not yet been paid. We maintain an allowance for the amount of these receivables deemed to be uncollectible. This allowance is calculated based upon historical collection and write-off activity adjusted for current conditions. The estimated bad debt write-off rate is calculated by dividing historical write-offs for the most recent twelve months, for which collection activities have been completed, by third party payor sales for the same period. A bad debt expense is recognized by applying the estimated write-off rate to

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third party payor sales for the period. There have been no significant changes in the assumptions used to calculate our estimated write-off rate over the past three years. If the financial condition of the payors were to deteriorate, resulting in an inability to make payments, an additional reserve would be recorded in the period in which the change in financial condition first became known. Based on current conditions, we do not expect a significant change to our write-off rate in future periods. A one basis point difference in our estimated write-off rate for the year ended February 27, 2010, would have affected pretax income by approximately $1.4 million.

        Inventory:     The carrying value of our inventory is reduced by a reserve for estimated shrink losses that occur between physical inventory dates. When estimating these losses, we consider historical loss results at specific locations (including stores and distribution centers), as well as overall loss trends as determined during physical inventory procedures. The estimated shrink rate is calculated by dividing historical shrink results for stores inventoried in the most recent six months by the sales for the same period. Shrink expense is recognized by applying the estimated shrink rate to sales since the last physical inventory. There have been no significant changes in the assumptions used to calculate our shrink rate over the last three years. Although possible, we do not expect a significant change to our shrink rate in future periods. A 10 basis point difference in our estimated shrink rate for the year ended February 27, 2010, would have affected pre-tax income by approximately $9.5 million.

        Impairment of Long-Lived Assets:     We evaluate long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the assets may not be recoverable. We have identified each store as an asset group for purposes of performing this evaluation. Our evaluation of whether possible impairment indicators exist includes comparing future cash flows expected to be generated by the store to the carrying value of the store's assets. If the estimated future cash flows of the asset group (store level) are less than the carrying amount of the store's assets, we calculate an impairment loss by comparing the carrying value of the store's assets to the fair value of such assets. We determine fair value by discounting the estimated future cash flows of the store discussed above.

        Cash flows are calculated utilizing the detailed store financial plan for the year immediately following the current year end. To arrive at cash flow estimates for additional future years, we project sales growth by store (consistent with our overall business planning objectives and results), and determine the incremental cash flow that such sales growth will contribute to that store's operations. The discount rate used is our credit adjusted risk-free interest rate.

        The assumptions utilized in calculating impairment are updated annually. Should actual sales growth rates and related incremental cash flow differ from those forecasted and projected, we may incur future impairment charges related to the stores being evaluated. Changes in our discount rate of 50 basis points would not have a material impact on the total impairment recorded in fiscal 2010.

        Self-insurance liabilities:     We expense claims for self-insured medical, dental, workers' compensation and general liability insurance coverage as incurred including an estimate for claims incurred but not paid. The expense for self-insured medical and dental claims incurred but not paid is determined by multiplying the average claim value paid over the most recent twelve months by the average number of days from the same period between when the claims were incurred and paid. There have been no significant changes in assumptions used to determine days lag over the last three years. Should a greater amount of claims occur compared to what was previously estimated or medical costs increase beyond what was anticipated, expense recorded may not be sufficient, and additional expense may be recorded. A one day change in days lag for the year ended February 27, 2010, would have affected pretax income by approximately $0.6 million.

        The expense for self-insured workers' compensation and general liability claims incurred but not paid is determined using several factors, including historical claims experience and development, severity of claims, medical costs and the time needed to settle claims. We discount the estimated expense for workers' compensation to present value as the time period from incurrence of the claim to

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final settlement can be several years. We base our estimates for such timing on previous settlement activity. The discount rate is based on the current market rates for Treasury bills that approximate the average time to settle the workers' compensation claims. These assumptions are updated on an annual basis. A 25 basis point difference in the discount rate for the year ended February 27, 2010, would have affected pretax income by approximately $1.9 million.

        Benefit plan accrual:     We have several defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in the plan. We record expense related to these plans using actuarially determined amounts that utilize various assumptions. Key assumptions used in the actuarial valuations include the mortality rate, the discount rate, the expected rate of return on plan assets and the rate of increase in future compensation levels. These rates are updated annually and are based on available public information, market interest rates and internal plans regarding compensation and any other changes impacting benefits.

        These assumptions have not significantly changed over the last three years, except that the discount rate has been adjusted due to changes in rates derived from published high-quality long-term bond indices, the terms of which approximate the term of the cash flows to pay the accumulated benefit obligations when due. A decrease of 25 basis points in the discount rate, assuming no other changes in the estimates, increases the amount of the projected benefit obligation and the related required expense by $3.4 million and $0.2 million, respectively.

        Lease exit liabilities:     We record reserves for closed stores based on future lease commitments, anticipated ancillary occupancy costs and anticipated future subleases of properties. The reserves are calculated at the individual location level and the assumptions are assessed at that level. The reserve for lease exit liabilities is discounted using a credit adjusted risk free interest rate. Reserve estimates and related assumptions are updated on a quarterly basis.

        A substantial amount of our closed stores were closed prior to our adoption of ASC 420, "Exit or Disposal Cost Obligations." Therefore, if interest rates change, reserves may be increased or decreased. In addition, changes in the real estate leasing markets can have an impact on the reserve. As of February 27, 2010, a 50 basis point variance in the credit adjusted risk free interest rate would have affected pretax income by approximately $3.3 million for fiscal 2010.

        Income taxes:     We currently have net operating loss ("NOL") carryforwards that can be utilized to offset future income for federal and state tax purposes. These NOLs generate significant deferred tax assets which are currently offset by a valuation allowance. We regularly review the deferred tax assets for recoverability considering the relative impact of negative and positive evidence including our historical profitability, projected taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The weight given to the potential effect of the negative and positive evidence is commensurate with the extent to which it can be objectively verified. We establish a valuation allowance against deferred tax assets when we determine that it is more likely than not that some portion of our deferred tax assets will not be realized. There have been no significant changes in the assumptions used to calculate our valuation allowance over the last three years. However, changes in market conditions and the impact of the acquisition of Brooks Eckerd on operations have caused changes in the valuation allowance from period to period which were included in the tax provision in the period of change.

        We recognize tax liabilities in accordance with ASC 740, "Income Taxes" and we adjust these liabilities when our judgment changes 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 our current estimate of the tax liabilities.

        Litigation reserves:     We are involved in litigation on an on-going basis. We accrue our best estimate of the probable loss related to legal claims. Such estimates are based upon a combination of litigation

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and settlement strategies. These estimates are updated as the facts and circumstances of the cases develop and/or change. To the extent additional information arises or our strategies change, it is possible that our best estimate of the probable liability may also change. Changes to these reserves during the last three fiscal years were not material.

Adjusted EBITDA

        In addition to net income determined in accordance with GAAP, we use certain non-GAAP measures in assessing our operating performance. We believe the adjusted non-GAAP measure serves as an appropriate measure to be used in evaluating the performance of our business. We define adjusted EBITDA as net loss excluding the impact of income taxes, interest expense and securitization costs, depreciation and amortization, LIFO adjustments, charges or credits for facility closing and impairment, inventory write-down liquidation expenses, stock-based compensation expense, debt modifications and retirements, sale of assets and investments and other items. We reference this 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 and gives a better indication of our core operating performance. In addition, we base incentive compensation and our forward-looking estimates on adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up. We include this non-GAAP financial measure in our earnings announcement 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. Management believes that adjusted EBITDA also facilitates comparisons of our results of operations with those of companies having different capital structures. However, we do not, and do not recommend that adjusted non-GAAP measures are solely used to assess our financial performance or to formulate investment decisions. Additionally, our definition of adjusted EBITDA may not be calculated in the same manner as other companies.

        The following is a reconciliation of adjusted EBITDA to our net loss for fiscal 2010, 2009 and 2008:

 
  February 27,
2010
(52 weeks)
  February 28,
2009
(52 weeks)
  March 1,
2008
(52 weeks)
 

Net loss

  $ (506,676 ) $ (2,915,420 ) $ (1,078,990 )
 

Interest expense and securitization costs

    552,625     503,691     449,596  
 

Income tax expense

    26,758     329,257     801,198  
 

Depreciation and amortization expense

    534,238     586,208     472,473  
 

LIFO charges

    88,450     184,569     16,114  
 

Goodwill impairment charge

        1,810,223      
 

Lease termination and impairment charges

    208,017     293,743     86,166  
 

Stock-based compensation expense

    23,794     31,448     40,439  
 

(Gain) loss on sale of assets, net

    (24,137 )   11,629     (11,826 )
 

Loss on debt modifications and retirements, net

    993     39,905     12,900  
 

Incremental acquisition costs

        85,633     154,222  
 

Closed facility liquidation expense

    14,801     19,353     14,396  
 

Severance costs

    6,184     15,754      
 

Other

    (73 )   (4,846 )   6,141  
               

Adjusted EBITDA

  $ 924,974   $ 991,147   $ 962,829  
               

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Item 7A.    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.

        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 February 27, 2010.

 
  2011   2012   2013   2014   2015   Thereafter   Total   Fair Value at
February 27,
2010
 
 
  (Dollars in thousands)
 

Long-term debt, including current portion, excluding capital lease obligations

                                                 

Fixed rate

  $ 13,150   $ 115   $ 115   $ 190,842   $   $ 3,951,000   $ 4,155,222   $ 3,690,742  

Average Interest Rate

    7.60 %   7.00 %   7.00 %   6.95 %   0.00 %   9.05 %   8.94 %      

Variable Rate

  $ 19,425   $ 21,050   $ 101,050   $ 21,050   $ 1,379,588   $ 619,125   $ 2,161,288   $ 2,030,941  

Average Interest Rate

    4.59 %   4.97 %   6.97 %   4.97 %   2.98 %   9.50 %   5.09 %      

        Our ability to satisfy our interest payment obligations on our outstanding debt will depend largely on our future performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service our interest payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations will be materially adversely affected. We cannot 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 and our Tranche 2 Term loans, Tranche 3 Term loans and Tranche 4 Term loans, are all based on LIBOR. However, the interest rate on our revolving credit facility, Tranche 3 Term loans and Tranche 4 Term loans all have a LIBOR floor of 300 basis points. Therefore, at year end, given the current interest rate environment, the only instrument that was subject to LIBOR fluctuations was our Tranche 2 Term loans. If the market rates of interest for LIBOR changed by 100 basis points as of February 27, 2010, our annual interest expense would change by approximately $11.1 million.

        A change in interest rates generally 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.

Item 8.    Financial Statements and Supplementary Data

        Our consolidated financial statements and notes thereto are included elsewhere in this report and are incorporated by reference herein. See Item 15 of Part IV.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        Not applicable

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Item 9A.    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)   Internal Control Over Financial Reporting

    Management's Annual Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that, as of February 27, 2010, we did not have any material weaknesses in our internal control over financial reporting and our internal control over financial reporting was effective.

    Attestation Report of the Independent Registered Public Accounting Firm

        The attestation report of our independent registered public accounting firm, Deloitte & Touche LLP, on our internal control over financial reporting is included after the next paragraph.

(c)   Changes in Internal Control Over Financial Reporting

        There has not been any change 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 our fourth fiscal quarter ended February 27, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Rite Aid Corporation
Camp Hill, Pennsylvania

        We have audited the internal control over financial reporting of Rite Aid Corporation and subsidiaries (the "Company") as of February 27, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 27, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended February 27, 2010 of the Company and our report dated April 28, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule.

Deloitte & Touche LLP
Philadelphia, Pennsylvania
April 28, 2010

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Item 9B.    Other Information

        None


PART III

        We intend to file with the SEC a definitive proxy statement for our 2010 Annual Meeting of Stockholders, to be held on June 23, 2010, pursuant to Regulation 14A not later than 120 days after February 27, 2010. The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference from that proxy statement.


PART IV

Item 15.    Exhibits and Financial Statement Schedule

        (a)   The consolidated financial statements of the Company and report of the independent registered public accounting firm identified in the following index are included in this report from the individual pages filed as a part of this report:

1.     Financial Statements

        The following financial statements, report of the independent registered public accounting firm and supplementary data are included herein:

2.     Financial Statement Schedule

    Schedule II—Valuation and Qualifying Accounts

        All other schedules are omitted because they are not applicable, not required or the required information is included in the consolidated financial statements or notes thereto.

3.     Exhibits

Exhibit
Numbers
  Description   Incorporation By Reference To
  2.1   Amended and Restated Stockholder Agreement, dated August 23, 2006, amended and restated as of June 4, 2007, by and between Rite Aid Corporation, The Jean Coutu Group (PJC) Inc., Jean Coutu, Marcelle Coutu, Francois J. Coutu, Michel Coutu, Louis Coutu, Sylvie Coutu and Marie-Josee Coutu   Exhibit 2.2 to Form 10-Q, filed on July 12, 2007

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Exhibit
Numbers
  Description   Incorporation By Reference To
  2.2   Registration Rights Agreement, dated August 23, 2006, by and between Rite Aid Corporation and The Jean Coutu Group (PJC) Inc.   Exhibit 10.2 to Form 8-K, filed on August 24, 2006

 

3.1

 

Restated Certificate of Incorporation dated December 12, 1996

 

Exhibit 3(i) to Form 8-K, filed on November 2, 1999

 

3.2

 

Certificate of Amendment to the Restated Certificate of Incorporation dated February 22, 1999

 

Exhibit 3(ii) to Form 8-K, filed on November 2, 1999

 

3.3

 

Certificate of Amendment to the Restated Certificate of Incorporation dated June 27, 2001

 

Exhibit 3.4 to Registration Statement on Form S-1, File No. 333-64950, filed on July 12, 2001

 

3.4

 

Certificate of Amendment to the Restated Certificate of Incorporation dated June 4, 2007

 

Exhibit 4.4 to Registration Statement on Form S-8, File No. 333-146531, filed on October 5, 2007

 

3.5

 

Certificate of Amendment to the Restated Certificate of Incorporation dated June 25, 2009

 

Exhibit 3.1 to Form 10-Q filed on July 8, 2009

 

3.6

 

7% Series G Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Designation dated January 28, 2005

 

Exhibit 3.2 to Form 8-K, filed on February 2, 2005

 

3.7

 

6% Series H Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Designation dated January 28, 2005

 

Exhibit 3.3 to Form 8-K, filed on February 2, 2005

 

3.8

 

Amended and Restated By-Laws

 

Exhibit 3.1 to Form 8-K, filed on January 27, 2010

 

4.1

 

Indenture, dated August 1, 1993, by and between Rite Aid Corporation, as issuer, and Morgan Guaranty Trust Company of New York, as trustee, related to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013

 

Exhibit 4A to Registration Statement on Form S-3, File No. 033-63794, filed on June 3, 1993

 

4.2

 

Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation, as issuer, and U.S. Bank Trust National Association as successor to Morgan Guaranty Trust Company of New York, to the Indenture dated as of August 1, 1993, relating to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013

 

Exhibit 4.1 to Form 8-K filed on February 7, 2000

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Exhibit
Numbers
  Description   Incorporation By Reference To
  4.3   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 5.50% Notes due 2000, 6% Notes due 2005, 6.125% Notes due 2008 and 6.875% Notes due 2028   Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-74751, filed on March 19, 1999

 

4.4

 

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 5.50% Notes due 2000, 6% Notes due 2005, 6.125% Notes due 2008 and 6.875% Notes due 2028

 

Exhibit 4.4 to Form 8-K, filed on February 7, 2000

 

4.5

 

Indenture, dated as of April 22, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 8.125% Senior Secured Notes due 2010

 

Exhibit 4.11 to Form 10-K, filed on May 2, 2003

 

4.6

 

Supplemental Indenture, dated as of June 4, 2007, between Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Trust Company, N.A. to the Indenture dated as of April 22, 2003 between Rite Aid Corporation and BNY Midwest Trust Company, related to the Company's 8.125% Senior Secured Notes due 2010

 

Exhibit 4.6 to Form 10-Q, filed on January 9, 2008

 

4.7

 

Second Supplemental Indenture, dated as of June 17, 2008, between Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Trust Company, N.A., to the Indenture dated as of April 22, 2003 between Rite Aid Corporation and BNY Midwest Trust Company, related to the Company's 8.125% Senior Secured Notes due 2010

 

Exhibit 4.7 to Form 10-Q, filed on July 10, 2008

 

4.8

 

Indenture, dated as of May 20, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 9.25% Senior Notes due 2013

 

Exhibit 4.12 to Form 10-Q, filed on July 3, 2003

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Exhibit
Numbers
  Description   Incorporation By Reference To
  4.9   Supplemental Indenture, dated as of June 4, 2007, between Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Trust Company, N.A. to the Indenture dated as of May 20, 2003 between Rite Aid Corporation and BNY Midwest Trust Company, related to the Company's 9.25% Senior Secured Notes due 2013   Exhibit 4.8 to Form 10-Q, filed on January 9, 2008

 

4.10

 

Second Supplemental Indenture, dated as of June 17, 2008, between Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Trust Company, N.A., as successor trustee, to the Indenture dated as of May 20, 2003 between Rite Aid Corporation and BNY Midwest Trust Company, related to the Company's 9.25% Senior Secured Notes due 2013

 

Exhibit 4.10 to Form 10-Q, filed on July 10, 2008

 

4.11

 

Indenture, dated as of February 21, 2007, between Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., as trustee, related to the Company's 7.5% Senior Secured Notes due 2017

 

Exhibit 99.1 to Form 8-K, filed on February 26, 2007

 

4.12

 

Supplemental Indenture, dated as of June 4, 2007, between Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Trust Company, N.A. to the Indenture dated as of February 21, 2007 between Rite Aid Corporation and The Bank of New York Trust Company, N.A., related to the Company's 7.5% Senior Secured Notes due 2017

 

Exhibit 4.12 to Form 10-Q, filed on January 9, 2008

 

4.13

 

Second Supplemental Indenture, dated as of July 9, 2008, among Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Mellon Trust Company, N. A., as successor trustee, to the Indenture, dated as of February 15, 2007, between Rite Aid Corporation and The Bank of New York Trust Company, N.A., related to the Company's 7.5% Senior Secured Notes due 2017

 

Exhibit 4.13 to Form 10-Q, filed on July 10, 2008

 

4.14

 

Indenture, dated as of February 21, 2007, between Rite Aid Corporation, as issuer, and The Bank of New York Trust Company, N.A., as trustee, related to the Company's 8.625% Senior Notes due 2015

 

Exhibit 99.2 to Form 8-K, filed on February 26, 2007

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Exhibit
Numbers
  Description   Incorporation By Reference To
  4.15   Supplemental Indenture, dated as of June 4, 2007, between Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Trust Company, N.A. to the Indenture dated as of February 21, 2007 between Rite Aid Corporation and The Bank of New York Trust Company, N.A., related to the Company's 8.625% Senior Secured Notes due 2015   Exhibit 4.14 to Form 10-Q, filed on January 9, 2008

 

4.16

 

Second Supplemental Indenture, dated as of July 9, 2008, among Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Mellon Trust Company, N. A., as successor trustee, to the Indenture, dated as of February 15, 2007, between Rite Aid Corporation and The Bank of New York Trust Company, N. A., related to the Company's 8.625% Senior Notes due 2015

 

Exhibit 4.16 to Form 10-Q, filed on July 10, 2008

 

4.17

 

Amended and Restated Indenture, dated as of June 4, 2007 among Rite Aid Corporation (as successor to Rite Aid Escrow Corp.), the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., as Trustee, related to the Company's 9.375% Senior Notes due 2015

 

Exhibit 4.1 to Form 8-K, filed on June 6, 2007

 

4.18

 

First Supplemental Indenture, dated as of July 9, 2008, among Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Mellon Trust Company, N. A. to the Amended and Restated Indenture, dated as of June 4, 2007, among Rite Aid Corporation (as successor to Rite Aid Escrow Corp.), the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., related to the Company's 9.375% Senior Notes due 2015

 

Exhibit 4.18 to Form 10-Q, filed on July 10, 2008

 

4.19

 

Amended and Restated Indenture, dated as of June 4, 2007 among Rite Aid Corporation (as successor to Rite Aid Escrow Corp.), the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., as Trustee, related to the Company's 9.5% Senior Notes due 2017

 

Exhibit 4.2 to Form 8-K, filed on June 6, 2007

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Exhibit
Numbers
  Description   Incorporation By Reference To
  4.20   First Supplemental Indenture, dated as of July 9, 2008, among Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Mellon Trust Company, N. A., as successor trustee, to the Amended and Restated Indenture, dated as of June 4, 2007, among Rite Aid Corporation (as successor to Rite Aid Escrow Corp.), the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., related to the Company's 9.5% Senior Notes due 2017   Exhibit 4.20 to Form 10-Q, filed on July 10, 2008

 

4.21

 

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

 

4.22

 

First Supplemental Indenture, dated as of May 29, 2008, between Rite Aid Corporation, the subsidiaries named therein 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 2016 Securities

 

Exhibit 4.2 to Form 8-K, filed on June 2, 2008

 

4.23

 

Indenture, dated as of July 9, 2008, between Rite Aid Corporation, as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, related to the Company's 10.375% Senior Secured Notes due 2016

 

Exhibit 4.23 to Form 10-Q, filed on July 10, 2008

 

4.24

 

Indenture, dated as of June 12, 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 9.750% Senior Secured Notes due 2016

 

Exhibit 4.1 to Form 8-K, filed on June 16, 2009

 

4.25

 

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

 

Exhibit 4.1 to Form 8-K, filed on October 29, 2009

 

10.1

 

1999 Stock Option Plan*

 

Exhibit 10.1 to Form 10-K, filed on May 21, 2001

 

10.2

 

2000 Omnibus Equity Plan*

 

Included in Proxy Statement dated October 24, 2000

 

10.3

 

2001 Stock Option Plan*

 

Exhibit 10.3 to Form 10-K, filed on May 21, 2001

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Exhibit
Numbers
  Description   Incorporation By Reference To
  10.4   2004 Omnibus Equity Plan*   Exhibit 10.4 to Form 10-K, filed on April 28, 2005

 

10.5

 

2006 Omnibus Equity Plan*

 

Exhibit 10 to Form 8-K, filed on January 22, 2007

 

10.6

 

Supplemental Executive Retirement Plan*

 

Filed herewith

 

10.7

 

Amended and Restated Employment Agreement by and between Rite Aid Corporation and John T. Standley, dated as of January 21, 2010*

 

Filed herewith

 

10.8

 

Employment Agreement by and between Rite Aid Corporation and Frank G. Vitrano, dated as of September 24, 2008*

 

Exhibit 10.3 to Form 10-Q, filed on October 8, 2008

 

10.9

 

Employment Agreement by and between Rite Aid Corporation and Marc A. Strassler, dated as of March 9, 2009*

 

Exhibit 10.8 to Form 10-K, filed on April 17, 2009

 

10.10

 

Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller*

 

Exhibit 4.31 to Form 8-K, filed on January 18, 2000

 

10.11

 

Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of December 5, 1999*

 

Exhibit 10.2 to Form 8-K, filed on January 18, 2000

 

10.12

 

Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of May 7, 2001*

 

Exhibit 10.12 to Form 10-Q, filed on May 21, 2001

 

10.13

 

Amendment No. 2 to Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of September 30, 2003*

 

Exhibit 10.3 to Form 10-Q, filed on October 7, 2003

 

10.14

 

Amendment No. 3 to Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of December 30, 2008*

 

Exhibit 10.6 to Form 10-Q, filed on January 7, 2009

 

10.15

 

Amendment No. 4 to Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of January 21, 2010*

 

Filed herewith

 

10.16

 

Side Agreement to Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of October 11, 2006*

 

Exhibit 10.14 to Form 10-K, filed on April 29, 2008

 

10.17

 

Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons*

 

Exhibit 4.32 to Form 8-K, filed on January 18, 2000

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Exhibit
Numbers
  Description   Incorporation By Reference To
  10.18   Employment Agreement by and between Rite Aid Corporation and Douglas E. Donley, dated as of August 1, 2000*   Exhibit 10.1 to Form 10-Q, filed on December 22, 2005

 

10.19

 

Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Douglas E. Donley, dated as of December 18, 2008*

 

Exhibit 10.4 to Form 10-Q, filed on January 7, 2009

 

10.20

 

Rite Aid Corporation Special Executive Retirement Plan*

 

Exhibit 10.15 to Form 10-K, filed on April 26, 2004

 

10.21

 

Employment Agreement by and between Rite Aid Corporation and Brian Fiala, dated as of June 26, 2007*

 

Exhibit 10.1 to Form 10-Q, filed on July 12, 2007

 

10.22

 

Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Brian Fiala, dated as of December 18, 2008*

 

Exhibit 10.3 to Form 10-Q, filed on January 7, 2009

 

10.23

 

Employment Agreement by and between Rite Aid Corporation and Ken Martindale, dated as of December 3, 2008*

 

Exhibit 10.7 to Form 10-Q, filed on January 7, 2009

 

10.24

 

Employment Agreement by and between Rite Aid Corporation and Robert I. Thompson, dated as of February 3, 2008*

 

Exhibit 10.5 to Form 10-Q, filed on January 6, 2010

 

10.25

 

Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Robert I. Thompson, dated as of September 23, 2009*

 

Exhibit 10.6 to Form 10-Q, filed on January 6, 2010

 

10.26

 

Supply Agreement by and between Rite Aid Corporation and McKesson Corporation, dated as of December 22, 2003**

 

Exhibit 10.25 to Form 10-K, filed on April 29, 2008

 

10.27

 

First Amendment to Supply Agreement by and between Rite Aid Corporation and McKesson Corporation, dated as of December 8, 2007**

 

Exhibit 10.26 to Form 10-K, filed on April 29, 2008

 

10.28

 

Second Amendment to Supply Agreement by and between Rite Aid Corporation and McKesson Corporation, dated as of November 7, 2008**

 

Exhibit 10.1 to Form 10-Q, filed on January 7, 2009

 

10.29

 

Third Amendment to Supply Agreement by and between Rite Aid Corporation and McKesson Corporation, dated as of February 1, 2009**

 

Exhibit 10.30 to Form 10-K, filed on April 17, 2009

 

10.30

 

Fourth Amendment to Supply Agreement by and between Rite Aid Corporation and McKesson Corporation, dated as of December 10, 2009**

 

Exhibit 10.4 to Form 10-Q, filed on January 6, 2010

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Exhibit
Numbers
  Description   Incorporation By Reference To
  10.31   Management Services Agreement by and between Rite Aid Corporation and Leonard Green & Partners, L.P., dated as of January 1, 2003   Exhibit 10.27 to Form 10-K, filed on April 29, 2008

 

10.32

 

Fourth Amendment to Management Services Agreement by and between Rite Aid Corporation and Leonard Green & Partners, L.P., dated as of February 12, 2007

 

Exhibit 10.28 to Form 10-K, filed on April 29, 2008

 

10.33

 

Amended and Restated Credit Agreement, dated as of June 5, 2009, 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 June 11, 2009

 

10.34

 

Refinancing Amendment No. 1, dated as of June 10, 2009, relating to the Credit Agreement, dated as of June 5, 2009, among Rite Aid Corporation, the subsidiary guarantors party thereto, the lender party thereto and Citicorp North America, Inc., as Administrative Agent

 

Exhibit 10.2 to Form 8-K, filed on June 11, 2009

 

10.35

 

Refinancing Amendment No. 2, dated as of June 26, 2009, relating to the Amended and Restated Credit Agreement, dated as of June 5, 2009, among Rite Aid Corporation, the subsidiary guarantors party thereto, the lenders party thereto and Citicorp North America, Inc., as Administrative Agent and Collateral Processing Agent

 

Exhibit 10.1 to Form 8-K, filed on July 1, 2009

 

10.36

 

Amended and Restated Collateral Trust and Intercreditor Agreement, including the related definitions annex, dated as of June 5, 2009, among Rite Aid Corporation, each subsidiary named therein or which becomes a party thereto, Wilmington Trust Company, as collateral trustee, Citicorp North America, Inc., as senior collateral processing agent, The Bank of New York Trust Company, N.A., as trustee under the 2017 7.5% Note Indenture (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as trustee under the 2016 10.375% Note Indenture (as defined therein), and each other Second Priority Representative and Senior Representative which becomes a party thereto

 

Exhibit 10.3 to Form 8-K, filed on June 11, 2009

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Exhibit
Numbers
  Description   Incorporation By Reference To
  10.37   Amended and Restated Senior Subsidiary Guarantee Agreement, dated as of June 5, 2009 among the subsidiary guarantors party thereto and Citicorp North America, Inc., as senior collateral agent   Exhibit 10.4 to Form 8-K, filed on June 11, 2009

 

10.38

 

Amended and Restated Senior Subsidiary Security Agreement, dated as of June 5, 2009, by the subsidiary guarantors party thereto in favor of the Citicorp North America, Inc., as senior collateral agent

 

Exhibit 10.5 to Form 8-K, filed on June 11, 2009

 

10.39

 

Amended and Restated Senior Indemnity, Subrogation and Contribution Agreement, dated as of May 28, 2003, and supplemented as of September 27, 2004, among Rite Aid Corporation, the Subsidiary Guarantors, and Citicorp North America, Inc. and JPMorgan Chase Bank, N.A., as collateral processing co-agents

 

Exhibit 4.27 to Form 10-K, filed on April 29, 2008

 

10.40

 

Second Priority Subsidiary Guarantee Agreement, dated as of June 27, 2001, as amended and restated as of May 28, 2003, and as supplemented as of January 5, 2005, among the Subsidiary Guarantors and Wilmington Trust Company, as collateral agent

 

Exhibit 4.36 to Form 10-K, filed on April 17, 2009

 

10.41

 

Second Priority Subsidiary Security Agreement, dated as of June 27, 2001, as amended and restated as of May 28, 2003, as supplemented as of January 5, 2005, and as amended in the Reaffirmation Agreement and Amendment dates as of January 11, 2005, by the Subsidiary Guarantors in favor of Wilmington Trust Company, as collateral trustee.

 

Exhibit 4.37 to Form 10-K, filed on April 17, 2009

 

10.42

 

Amended and Restated Second Priority Indemnity, Subrogation and Contribution Agreement, dated as of May 28, 2003, and as supplemented as of January 5, 2005, among the Subsidiary Guarantors and Wilmington Trust Company, as collateral agent

 

Exhibit 4.33 to Form 10-K, filed on April 29, 2008.

 

10.43

 

Intercreditor Agreement, dated as of February 18, 2009, by and among Citicorp North America, Inc. and Citicorp North America, Inc., and acknowledged and agreed to by Rite Aid Funding II

 

Exhibit 10.2 to Form 8-K, filed on February 20, 2009

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Table of Contents

Exhibit
Numbers
  Description   Incorporation By Reference To
  10.44   Senior Lien Intercreditor Agreement dated as of June 12, 2009, among Rite Aid Corporation, the subsidiary guarantors named therein, Citicorp North America, Inc., as senior collateral agent for the Senior Secured Parties (as defined therein), Citicorp North America, Inc., as senior representative for the Senior Loan Secured Parties (as defined therein), The Bank of New York Mellon Trust Company, N.A., as Senior Representative (as defined therein) for the Initial Additional Senior Debt Parties (as defined therein), and each additional Senior Representative from time to time party thereto   Exhibit 10.2 to Form 8-K, filed on June 16, 2009

 

10.45

 

Incremental Facility Amendment No. 1, dated as of October 26, 2009, among Rite Aid Corporation, the lenders party thereto, Citicorp North America, Inc., as administrative agent and collateral agent and the other agents party thereto.

 

Exhibit 10.1 to Form 8-K, filed on October 29, 2009

 

10.46

 

Incremental Facility Amendment No. 2, dated as of October 19, 2009 and effective as of October 26, 2009, among Rite Aid Corporation, the lenders party thereto, Citicorp North America, Inc., as administrative agent and collateral agent and the other agents party thereto.

 

Exhibit 10.2 to Form 8-K, filed on October 29, 2009

 

11

 

Statement regarding computation of earnings per share

 

Filed herewith (see note 3 to the consolidated financial statements)

 

12

 

Statement regarding computation of ratio of earnings to fixed charges

 

Filed herewith

 

21

 

Subsidiaries of the Registrant

 

Filed herewith

 

23

 

Consent of Independent Registered Public Accounting Firm

 

Filed herewith

 

31.1

 

Certification of CEO pursuant to Rule 13a-14(a)/15d-14 (a) under the Securities Exchange Act of 1934

 

Filed herewith

 

31.2

 

Certification of CFO pursuant to Rule 13a-14 (a)/15d-14 (a) under Securities Exchange Act of 1934

 

Filed herewith

 

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

 

Filed herewith

*
Constitutes a compensatory plan or arrangement required to be filed with this Form 10-K.

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Table of Contents

**
Confidential portions of these Exhibits were redacted and filed separately with the Securities and Exchange Commission pursuant to requests for confidential treatment.

         In reviewing the agreements included as exhibits to this Annual Report on Form 10-K please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Rite Aid Corporation, its subsidiaries or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

    should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

    have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

    may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

    were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

         Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Rite Aid Corporation may be found elsewhere in this report and the Company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Rite Aid Corporation
Camp Hill, Pennsylvania

        We have audited the accompanying consolidated balance sheets of Rite Aid Corporation and subsidiaries (the "Company") as of February 27, 2010 and February 28, 2009, and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for each of the three years in the period ended February 27, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Rite Aid Corporation and subsidiaries as of February 27, 2010 and February 28, 2009, and the results of their operations and their cash flows for each of the three years in the period ended February 27, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of February 27, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 28, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.

Deloitte & Touche LLP
Philadelphia, Pennsylvania
April 28, 2010

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RITE AID CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 
  February 27,
2010
  February 28,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 103,594   $ 152,035  
 

Accounts receivable, net

    955,502     526,742  
 

Inventories, net

    3,238,644     3,509,494  
 

Prepaid expenses and other current assets

    210,928     176,661  
           
   

Total current assets

    4,508,668     4,364,932  

Property, plant and equipment, net

    2,293,153     2,587,356  

Other intangibles, net

    823,088     1,017,011  

Other assets

    425,002     357,241  
           
   

Total assets

  $ 8,049,911   $ 8,326,540  
           

LIABILITIES AND STOCKHOLDERS' DEFICIT

             

Current liabilities:

             
 

Current maturities of long-term debt and lease financing obligations

  $ 51,502   $ 40,683  
 

Accounts payable

    1,159,069     1,256,982  
 

Accrued salaries, wages and other current liabilities

    965,121     1,004,762  
           
   

Total current liabilities

    2,175,692     2,302,427  

Long-term debt, less current maturities

    6,185,633     5,801,230  

Lease financing obligations, less current maturities

    133,764     169,796  

Other noncurrent liabilities

    1,228,373     1,252,739  
           
   

Total liabilities

    9,723,462     9,526,192  

Commitments and contingencies

         

Stockholders' deficit:

             
 

Preferred stock—series G, par value $1 per share; liquidation value $100 per share; 2,000 shares authorized; shares issued .006 and .006

    1     1  
 

Preferred stock—series H, par value $1 per share; liquidation value $100 per share; 2,000 shares authorized; shares issued 1,523 and 1,435

    152,304     143,498  
 

Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 887,636 and 886,113

    887,636     886,113  

Additional paid-in capital

    4,277,200     4,265,211  

Accumulated deficit

    (6,959,372 )   (6,452,696 )

Accumulated other comprehensive loss

    (31,320 )   (41,779 )
           
   

Total stockholders' deficit

    (1,673,551 )   (1,199,652 )
           
   

Total liabilities and stockholders' deficit

  $ 8,049,911   $ 8,326,540  
           

The accompanying notes are an integral part of these consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Revenues

  $ 25,669,117   $ 26,289,268   $ 24,326,846  

Costs and expenses:

                   
 

Cost of goods sold

    18,845,027     19,253,616     17,689,272  
 

Selling, general and administrative expenses

    6,603,372     6,985,367     6,366,137  
 

Goodwill impairment charge

        1,810,223      
 

Lease termination and impairment charges

    208,017     293,743     86,166  
 

Interest expense

    515,763     477,627     449,596  
 

Loss on debt modifications and retirements, net

    993     39,905     12,900  
 

(Gain) loss on sale of assets, net

    (24,137 )   11,581     (3,726 )
               

    26,149,035     28,872,062     24,600,345  
               

Loss before income taxes

    (479,918 )   (2,582,794 )   (273,499 )

Income tax expense

    26,758     329,257     802,701  
               
 

Net loss from continuing operations

  $ (506,676 ) $ (2,912,051 ) $ (1,076,200 )

Loss from discontinued operations, net of gain on disposal and income tax benefit

        (3,369 )   (2,790 )
               
 

Net loss

  $ (506,676 ) $ (2,915,420 ) $ (1,078,990 )
               

Computation of loss applicable to common stockholders:

                   
 

Net loss

  $ (506,676 ) $ (2,915,420 ) $ (1,078,990 )
 

Accretion of redeemable preferred stock

    (102 )   (102 )   (102 )
 

Cumulative preferred stock dividends

    (8,807 )   (21,768 )   (32,533 )
 

Preferred stock beneficial conversion

            (556 )
               
 

Loss applicable to common stockholders

  $ (515,585 ) $ (2,937,290 ) $ (1,112,181 )
               

Basic and diluted loss per share:

                   
 

Basic loss per share

  $ (0.59 ) $ (3.49 ) $ (1.54 )
               
 

Diluted loss per share

  $ (0.59 ) $ (3.49 ) $ (1.54 )
               

The accompanying notes are an integral part of these consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)/EQUITY
For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008
(In thousands)

 
  Preferred Stock
Series E
  Preferred
Stock-Series G
  Preferred
Stock-Series H
  Preferred
Stock-Series I
   
   
   
   
   
   
 
 
  Common Stock    
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Additional
Paid-In
Capital
  Accumulated
Deficit
   
 
 
  Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Total  

BALANCE MARCH 3, 2007

    2,500   $ 120,000     1,299   $ 129,917     1,274   $ 127,385     4,820   $ 116,415     536,686     536,686     3,118,299   $ (2,462,197 ) $ (23,659 ) $ 1,662,846  

Net loss

                                                                      (1,078,990 )         (1,078,990 )

Other comprehensive income:

                                                                                     

Changes in Defined Benefit Plans

                                                                            6,285     6,285  

Tax provision from minimum pension liability adjustment

                                                                            (2,743 )   (2,743 )
                                                                                     

Comprehensive loss

                                                                                  (1,075,448 )

Adjustment to initially apply ASC 740

                                                                      4,467           4,467  

Issuance of shares to Jean Coutu Group

                                                    250,000     250,000     840,000                 1,090,000  

Exchange of restricted shares for taxes

                                                    (1,423 )   (1,423 )   (7,080 )               (8,503 )

Issuance of restricted stock

                                                    7,179     7,179     (7,179 )                

Cancellation of restricted stock

                                                    (1,382 )   (1,382 )   1,382                  

Amortization of restricted stock balance

                                                                21,224                 21,224  

Stock-based compensation expense

                                                                19,215                 19,215  

Stock options exercised

                                                    4,135     4,135     8,629                 12,764  

Dividends on preferred stock

                94     9,336     78     7,817                             (17,153 )                

Preferred stock beneficial conversion

                                                                556     (556 )          

Conversion of Series E preferred stock

    (2,500 )   (120,000 )                                       35,014     35,014     84,986                  

Cash dividends paid on preferred shares

                                                                (15,380 )               (15,380 )
                                                           

BALANCE MARCH 1, 2008

      $     1,393   $ 139,253     1,352   $ 135,202     4,820   $ 116,415     830,209   $ 830,209   $ 4,047,499   $ (3,537,276 ) $ (20,117 ) $ 1,711,185  
                                                           

Net loss

                                                                      (2,915,420 )         (2,915,420 )

Other comprehensive income:

                                                                                     

Changes in Defined Benefit Plans

                                                                            (21,662 )   (21,662 )
                                                                                     

Comprehensive loss

                                                                                  (2,937,082 )

Exchange of restricted shares for taxes

                                                    (1,741 )   (1,741 )   (1,113 )               (2,854 )

Issuance of restricted stock

                                                    2,646     2,646     (2,646 )                

Cancellation of restricted stock

                                                    (967 )   (967 )   967                  

Amortization of restricted stock balance

                                                                17,913                 17,913  

Stock-based compensation expense

                                                                13,535                 13,535  

Stock options exercised

                                                    516     516     601                 1,117  

Dividends on preferred stock

                100     10,006     83     8,296                             (18,302 )                

Conversion of Series G and I preferred stock

                (1,493 )   (149,258 )               (4,820 )   (116,415 )   55,450     55,450     210,223                  

Cash dividends paid on preferred shares

                                                                (3,466 )               (3,466 )
                                                           

BALANCE FEBRUARY 28, 2009

      $       $ 1     1,435   $ 143,498       $     886,113   $ 886,113   $ 4,265,211   $ (6,452,696 ) $ (41,779 ) $ (1,199,652 )
                                                           

Net loss

                                                                      (506,676 )         (506,676 )

Other comprehensive income:

                                                                                     

Changes in Defined Benefit Plans

                                                                            10,459     10,459  
                                                                                     

Comprehensive loss

                                                                                  (496,217 )

Exchange of restricted shares for taxes

                                                    (1,198 )   (1,198 )   (343 )               (1,541 )

Issuance of restricted stock

                                                    3,289     3,289     (3,289 )                

Cancellation of restricted stock

                                                    (642 )   (642 )   642                  

Amortization of restricted stock balance

                                                                11,772                 11,772  

Stock-based compensation expense

                                                                12,022                 12,022  

Stock options exercised

                                                    74     74     (8 )               66  

Dividends on preferred stock

                            88     8,806                             (8,807 )               (1 )
                                                           

BALANCE FEBRUARY 27, 2010

      $       $ 1     1,523   $ 152,304       $     887,636   $ 887,636   $ 4,277,200   $ (6,959,372 ) $ (31,320 ) $ (1,673,551 )
                                                           

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

OPERATING ACTIVITIES:

                   
 

Net loss

  $ (506,676 ) $ (2,915,420 ) $ (1,078,990 )
 

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

                   
   

Depreciation and amortization

    534,238     586,208     472,473  
   

Goodwill impairment charge

        1,810,223      
   

Lease termination and impairment charges

    208,017     293,743     86,166  
   

LIFO charges

    88,450     184,569     16,114  
   

(Gain) loss on sale of assets, net

    (24,137 )   11,629     (11,826 )
   

Stock-based compensation expense

    23,794     31,448     40,439  
   

Loss on debt modifications and retirements, net

    993     39,905     12,900  
   

Changes in deferred taxes

        307,789     805,204  
   

Proceeds from sale of inventory

            16,811  
   

Proceeds from insured loss

    1,380         8,550  
   

Changes in operating assets and liabilities:

                   
     

Net (repayments to) proceeds from accounts receivable securitization

    (555,000 )   104,881     85,000  
     

Accounts receivable

    118,240     33,784     36,820  
     

Inventories

    181,542     196,517     (306,360 )
     

Accounts payable

    (194,655 )   (140,258 )   (115,624 )
     

Other assets and liabilities, net

    (201,249 )   (185,108 )   11,691  
               
       

Net cash (used in) provided by operating activities

    (325,063 )   359,910     79,368  
               

INVESTING ACTIVITIES:

                   
   

Payments for property, plant and equipment

    (183,858 )   (460,857 )   (687,529 )
   

Intangible assets acquired

    (9,772 )   (80,489 )   (52,846 )
   

Acquisition of Jean Coutu, USA, net of cash acquired

        (112 )   (2,306,774 )
   

Proceeds from sale-leaseback transactions

    7,967     161,553     48,985  
   

Proceeds from dispositions of assets and investments

    65,177     33,547     58,470  
   

Proceeds from insured loss

            5,950  
               
       

Net cash used in investing activities

    (120,486 )   (346,358 )   (2,933,744 )
               

FINANCING ACTIVITIES:

                   
   

Proceeds from issuance of long-term debt

    1,303,307     900,629     2,307,867  
   

Net (payments to) proceeds from revolver

    (758,000 )   (11,000 )   549,000  
   

Proceeds from financing secured by owned property

        31,266     44,267  
   

Principal payments on long-term debt

    (174,706 )   (870,054 )   (15,939 )
   

Change in zero balance cash accounts

    86,650     (16,298 )   79,606  
   

Net proceeds from the issuance of common stock

    66     1,117     12,764  
   

Payments for preferred stock dividends

        (3,466 )   (15,380 )
   

Deferred financing costs paid

    (60,209 )   (49,473 )   (58,195 )
               
       

Net cash provided by (used in) financing activities

    397,108     (17,279 )   2,903,990  
               

(Decrease) increase in cash and cash equivalents

    (48,441 )   (3,727 )   49,614  

Cash and cash equivalents, beginning of year

    152,035     155,762     106,148  
               

Cash and cash equivalents, end of year

  $ 103,594   $ 152,035   $ 155,762  
               

The accompanying notes are an integral part of these consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies

    Description of Business

        The Company is a Delaware corporation and through its wholly-owned subsidiaries, operates retail drugstores in the United States of America. It is one of the largest retail drugstore chains in the United States, with 4,780 stores in operation as of February 27, 2010. The Company's drugstores' primary business is pharmacy services. The Company also sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line.

        The Company's operations consist solely of the retail drug segment. Revenues are as follows:

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Pharmacy sales

  $ 17,355,964   $ 17,604,284   $ 16,179,170  

Front end sales

    8,213,388     8,581,115     8,049,446  

Other revenue

    99,765     103,869     98,230  
               

  $ 25,669,117   $ 26,289,268   $ 24,326,846  
               

        Sales of prescription drugs represented approximately 67.9%, 67.2%, and 66.7% of the Company's total sales in fiscal years 2010, 2009 and 2008, respectively. The Company's principal classes of products in fiscal 2010 were the following:

Product Class
  Percentage
of Sales
 

Prescription drugs

    67.9 %

Over-the-counter medications and personal care

    9.4 %

Health and beauty aids

    5.0 %

General merchandise and other

    17.7 %

    Fiscal Year

        The Company's fiscal year ends on the Saturday closest to February 29 or March 1. The fiscal years ended February 27, 2010, February 28, 2009 and March 1, 2008 included 52 weeks.

    Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

    Cash and Cash Equivalents

        Cash and cash equivalents consist of cash on hand and highly liquid investments, which are readily convertible to known amounts of cash and which have original maturities of three months or less when purchased.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies (Continued)

    Allowance for Uncollectible Receivables

        Approximately 96% of prescription sales are made to customers that are covered by third-party payors, such as insurance companies, government agencies and employers. The Company recognizes receivables that represent the amount owed to the Company for sales made to customers or employees of those payors that have not yet been paid. The Company maintains a reserve for the amount of these receivables deemed to be uncollectible. This reserve is calculated based upon historical collection activity adjusted for current conditions.

    Inventories

        Inventories are stated at the lower of cost or market. Inventory balances include the capitalization of certain costs related to purchasing, freight and handling costs associated with placing inventory in its location and condition for sale. The Company uses the last-in, first-out ("LIFO") method of accounting for substantially all of its inventories. At February 27, 2010 and February 28, 2009, inventories were $831,113 and $746,467, respectively, lower than the amounts that would have been reported using the first-in, first-out ("FIFO") method. The Company calculates its FIFO inventory valuation using the retail method for store inventories and the cost method for distribution facility inventories. The LIFO charge was $88,450, $184,569 and $16,114 for fiscal years 2010, 2009, and 2008, respectively. During fiscal 2010 and 2009, a reduction in inventories related to working capital initiatives resulted in the liquidation of applicable LIFO inventory quantities carried at lower costs in prior years. This LIFO liquidation resulted in a $33,085 and $13,777 cost of sales decrease, with a corresponding reduction to the adjustment to LIFO for fiscal 2010 and fiscal 2009, respectively.

    Impairment of Long-Lived Assets

        Asset impairments are recorded when the carrying value of assets are not recoverable. For purposes of recognizing and measuring impairment of long-lived assets, the Company categorizes assets of operating stores as "Assets to Be Held and Used" and "Assets to Be Disposed Of". The Company evaluates assets at the store level because this is the lowest level of identifiable cash flows ascertainable to evaluate impairment. Assets being tested for recoverability at the store level include tangible long-lived assets and identifiable, finite-lived intangibles that arose in purchase business combinations. Corporate assets to be held and used are evaluated for impairment based on excess cash flows from the stores that support those assets.

        The Company reviews long-lived assets to be held and used for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies (Continued)

    Property, Plant and Equipment

        Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. The Company provides for depreciation using the straight-line method over the following useful lives: buildings—30 to 45 years; equipment—3 to 15 years.

        Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease. When determining the amortization period of a leasehold improvement, the Company considers whether discretionary exercise of a lease renewal option is reasonably assured. If it is determined that the exercise of such option is reasonably assured, the Company will amortize the leasehold improvement asset over the minimum lease term, plus the option period. This determination depends on the remaining life of the minimum lease term and any economic penalties that would be incurred if the lease option is not exercised.

        Capitalized lease assets are recorded at the lesser of the present value of minimum lease payments or fair market value and amortized over the estimated useful life of the related property or term of the lease.

        The Company capitalizes direct internal and external development costs and direct external application development costs associated with internal-use software. Neither preliminary evaluation costs nor costs associated with the software after implementation are capitalized. For fiscal years 2010, 2009 and 2008, the Company capitalized costs of approximately $4,256, $4,990 and $3,399, respectively.

    Intangible Assets

        The Company has certain finite-lived intangible assets that are amortized over their useful lives. The value of favorable and unfavorable leases on stores acquired in business combinations are amortized over the terms of the leases on a straight-line basis. Prescription files acquired in business combinations are amortized over an estimated useful life of ten years on an accelerated basis, which approximates the anticipated prescription file retention and related cash flows. Purchased prescription files acquired in other than business combinations are amortized over their estimated useful lives of five years on a straight-line basis.

    Deferred Financing Costs

        Costs incurred to issue debt are deferred and amortized as a component of interest expense over the terms of the related debt agreements. Amortization expense of deferred financing costs was $20,789, $13,410, and $15,773 for fiscal 2010, 2009, and 2008, respectively.

    Revenue Recognition

        For all sales other than third party pharmacy sales, the Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. For third party pharmacy sales, revenue is recognized at the time the prescription is filled, which is or approximates when the customer picks up the prescription. The Company records revenue net of an allowance for estimated future returns. Return activity is immaterial to revenues and results of operations in all periods presented.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies (Continued)

    Cost of Goods Sold

        Cost of goods sold includes the following: the cost of inventory sold during the period, including related vendor rebates and allowances, LIFO charges, costs incurred to return merchandise to vendors, inventory shrink costs, purchasing costs and warehousing costs which include inbound freight costs from the vendor, distribution payroll and benefit costs, distribution center occupancy costs and depreciation expense and delivery expenses to the stores.

    Vendor Rebates and Allowances

        Rebates and allowances received from vendors relate to either buying and merchandising or promoting the product. Buying and merchandising related rebates and allowances are recorded as a reduction of cost of goods sold as product is sold. Buying and merchandising rebates and allowances include all types of vendor programs such as cash discounts from timely payment of invoices, purchase discounts or rebates, volume purchase allowances, price reduction allowances and slotting allowances. Certain product promotion related rebates and allowances, primarily related to advertising, are recorded as a reduction in selling, general and administrative expenses when the advertising commitment has been satisfied.

    Rent

        The Company records rent expense on operating leases on a straight-line basis over the minimum lease term. The Company begins to record rent expense at the time that the Company has the right to use the property. From time to time, the Company receives incentive payments from landlords that subsidize lease improvement construction. These leasehold incentives are deferred and recognized on a straight-line basis over the minimum lease term.

    Selling, General and Administrative Expenses

        Selling, general and administrative expenses include store and corporate administrative payroll and benefit costs, occupancy costs which include retail store and corporate rent costs, facility and leasehold improvement depreciation and utility costs, advertising, repair and maintenance, insurance, equipment depreciation and professional fees.

    Repairs and Maintenance

        Routine repairs and maintenance are charged to operations as incurred. Improvements and major repairs, which extend the useful life of an asset, are capitalized and depreciated.

    Advertising

        Advertising costs, net of specific vendor advertising allowances, are expensed in the period the advertisement first takes place. Advertising expenses, net of vendor advertising allowances, for fiscal 2010, 2009 and 2008 were $375,118, $375,790 and $375,025, respectively.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies (Continued)

    Insurance

        The Company is self-insured for certain general liability and workers' compensation claims. For claims that are self-insured, stop-loss insurance coverage is maintained for workers' compensation occurrences exceeding $750 and general liability occurrences exceeding $2,000. The Company utilizes actuarial studies as the basis for developing reported claims and estimating claims incurred but not reported relating to the Company's self-insurance. Workers' compensation claims are discounted to present value using a risk-free interest rate.

        A majority of the Company-sponsored associate medical plans are self-insured. The remaining Company-sponsored associate medical plans are covered through guaranteed cost contracts.

    Benefit Plan Accruals

        The Company has several defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in the plan. The Company records expense related to these plans using actuarially determined amounts that are calculated under the provisions of ASC 715, "Compensation—Retirement Benefits." Key assumptions used in the actuarial valuations include the discount rate, the expected rate of return on plan assets and the rate of increase in future compensation levels.

    Stock-Based Compensation

        The Company has several stock option plans, which are described in detail in Note 15. The Company accounts for stock-based compensation under ASC 718, "Compensation—Stock Compensation," which requires companies to account for share-based payments to associates using the fair value method of expense recognition. Fair value for stock options can be calculated using either a closed form or open form calculation method. ASC 718 requires companies to recognize option expense over the requisite service period of the award, net of an estimate for the impact of award forfeitures.

    Store Pre-opening Expenses

        Costs incurred prior to the opening of a new or relocated store, associated with a remodeled store or related to the opening of a distribution facility are charged against earnings when incurred.

    Litigation Reserves

        The Company is involved in litigation on an ongoing basis. The Company accrues its best estimate of the probable loss related to legal claims. Such estimates are developed in consultation with in-house counsel, and are based upon a combination of litigation and settlement strategies.

    Facility Closing Costs and Lease Exit Charges

        When a store is closed, the Company records an expense for unrecoverable costs and accrues a liability equal to the present value at current credit adjusted risk-free interest rates of the remaining lease obligations and anticipated ancillary occupancy costs, net of estimated sublease income. Other store closing and liquidation costs are expensed when incurred.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies (Continued)

    Income Taxes

        Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities. Deferred income tax expense (benefit) represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change.

        The Company has net operating loss ("NOL") carryforwards that can be utilized to offset future income for federal and state tax purposes. These NOLs generate a significant deferred tax asset. The Company regularly reviews the deferred tax assets for recoverability considering historical profitability, projected taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.

        The Company recognizes tax liabilities in accordance with ASC 740, "Income Taxes" 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.

    Sales Tax Collected

        Sales taxes collected from customers and remitted to various governmental agencies are presented on a net basis (excluded from revenues) in the Company's statement of operations.

    Use of Estimates

        The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

    Significant Concentrations

        The Company's pharmacy sales were primarily to customers covered by health plan contracts, which typically contract with a third party payor that agrees to pay for all or a portion of a customer's eligible prescription purchases. During fiscal 2010, the top five third party payors accounted for approximately 41.4% of the Company's total sales. The largest third party payor represented 14.4%, 12.6%, and 11.3% of total sales during fiscal 2010, 2009, and 2008, respectively. Third party payors are entities such as an insurance company, governmental agency, health maintenance organization or other managed care provider, and typically represent several health care contracts and customers. During fiscal 2010, state sponsored Medicaid agencies accounted for approximately 6.9% of the Company's total sales, the largest of which was approximately 2.0% of the Company's total sales. Any significant

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies (Continued)

loss of third-party payor business could have a material adverse effect on the Company's business and results of operations.

        During fiscal 2010, the Company purchased brand pharmaceuticals and some generic pharmaceuticals which amounted to approximately 93.5% of the dollar volume of its prescription drugs from a single wholesaler, McKesson Corp. ("McKesson"), under a contract expiring April 1, 2013. With limited exceptions, the Company is required to purchase all of its branded pharmaceutical products from McKesson. If the Company's relationship with McKesson was disrupted, the Company could have temporary difficulty filling prescriptions until a replacement wholesaler agreement was executed, which would negatively impact the business.

    Certain Business Risks and Management's Plans

        The U.S. economy is currently in a recession and the future economic environment may continue to be less favorable than that of recent years. The Company is highly leveraged and its substantial indebtedness could limit cash flow available for operations and could adversely affect its ability to service debt or obtain additional financing. As a result of the current condition of the credit markets, the Company may not be able to obtain additional financing on favorable terms, or at all. If the Company's operating results, cash flow or capital resources prove inadequate, or if interest rates rise significantly, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt and other obligations or otherwise be required to delay its planned activities.

        Management believes that the Company has adequate sources of liquidity to meet its anticipated requirements for working capital, debt service and capital expenditures through fiscal 2011. The Company has a $1,175,000 senior secured revolving credit facility of which $80,000 was outstanding at February 27, 2010.

    Derivatives

        The Company may enter into interest rate swap agreements to hedge the exposure to increasing rates with respect to its variable rate debt, when the Company deems it prudent to do so. Upon inception of interest rate swap agreements, or modifications thereto, the Company performs a comprehensive review of the interest rate swap agreements based on the criteria as provided by ASC 815, "Derivatives and Hedging." As of February 27, 2010 and February 28, 2009, the Company had no interest rate swap arrangements or other derivatives.

    Discontinued Operations

        For purposes of determining discontinued operations, the Company has determined that the store level is a component of the entity within the context of ASC 360, "Property, Plant and Equipment." A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company. The Company routinely evaluates its store base and closes non-performing stores. The Company evaluates the results of operations of these closed stores both quantitatively and qualitatively to determine if it is appropriate for reporting as discontinued operations. Stores sold where the Company retains the

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

1. Summary of Significant Accounting Policies (Continued)

prescription files are excluded from the analysis as the Company retains direct cash flows resulting from the migration of revenue to existing stores.

2. Acquisition

        On June 4, 2007, the Company acquired of all of the membership interests of JCG (PJC) USA, LLC ("Jean Coutu USA"), the holding company for the Brooks Eckerd drugstore chain ("Brooks Eckerd"), from Jean Coutu Group (PJC) Inc. ("Jean Coutu Group"), pursuant to the terms of the Stock Purchase Agreement (the "Agreement") dated August 23, 2006. As consideration for the acquisition of Jean Coutu USA (the "Acquisition"), the Company paid $2,307,747 and issued 250,000 shares of Rite Aid common stock. The Company financed the cash payment via the establishment of a new term loan facility, issuance of senior notes and borrowings under its existing revolving credit facility. The consideration associated with the common stock was $1,090,000 based on a stock price of $4.36 per share, representing the average closing price of Rite Aid common stock beginning two days prior to the announcement of the Acquisition on August 24, 2006 and ending two days after the announcement. At February 27, 2010 the Jean Coutu Group owned approximately 27.5% of total Rite Aid voting power.

        The Company's consolidated financial statements for the fiscal year ended March 1, 2008 include Brooks Eckerd results of operations for the thirty-nine week period ended March 1, 2008.

        The following unaudited pro forma consolidated financial data gives effect to the Acquisition as if it had occurred as of the beginning of the period presented.

 
  March 1,
2008
(52 Weeks)
 

Net revenues

  $ 26,747,000  

Net loss

    (1,133,300 )

Basic loss per share

  $ (1.57 )

Diluted loss per share

  $ (1.57 )

        The pro forma combined information assumes the acquisition of Brooks Eckerd occurred at the beginning of the period presented. These results have been prepared by combining the historical results of the Company and historical results of Brooks Eckerd. The pro forma financial data for the period presented includes adjustments to reflect the incremental interest expense that results from the incurrence of the additional debt to finance the acquisition and additional depreciation and amortization expense resulting from the purchase price allocation. The pro forma information for the fiscal year ended March 1, 2008 includes charges of $154,222 resulting from the integration of the Brooks Eckerd stores.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

2. Acquisition (Continued)

        The pro forma information does not purport to be indicative of the results that actually would have been achieved if the operations were combined during the period presented and is not intended to be a projection of future results or trends.

        In connection with the Acquisition, the Company entered into a transition services agreement with the Jean Coutu Group. Under the terms of this agreement, Jean Coutu Group provided certain information technology, network and support services to the Company. This agreement expired in September 2008. The Company recorded an expense of $894 and $4,085 for services provided under this agreement for the years ended February 28, 2009 and March 1, 2008, respectively.

3. Loss Per Share

        Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company subject to anti-dilution limitations.

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Numerator for loss per share:

                   
 

Net loss

  $ (506,676 ) $ (2,915,420 ) $ (1,078,990 )
 

Accretion of redeemable preferred stock

    (102 )   (102 )   (102 )
 

Cumulative preferred stock dividends

    (8,807 )   (21,768 )   (32,533 )
 

Preferred stock beneficial conversion

            (556 )
               

Loss applicable to common stockholders—basic and diluted

  $ (515,585 ) $ (2,937,290 ) $ (1,112,181 )
               

Denominator:

                   
 

Basic and diluted weighted average shares

    880,843     840,812     723,923  

Basic and diluted loss per share:

                   
 

Basic and diluted loss per share

  $ (0.59 ) $ (3.49 ) $ (1.54 )
               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

3. Loss Per Share (Continued)

        Due to their antidilutive effect, the following potential common shares have been excluded from the computation of diluted loss per share as of February 27, 2010, February 28, 2009 and March 1, 2008:

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Stock options

    76,114     70,162     64,662  

Convertible preferred stock

    27,692     26,091     77,163  

Convertible debt

    61,045     61,045      
               

    164,851     157,298     141,825  
               

        Also excluded from the computation of diluted loss per share as of February 27, 2010, February 28, 2009 and March 1, 2008 are restricted shares of 5,944, 6,515, and 9,395 which are included in shares outstanding.

4. Lease Termination and Impairment Charges

        Lease termination and impairment charges consisted of amounts and number of locations as follows:

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Impairment charges

  $ 75,475   $ 157,334   $ 30,823  

Facility and equipment lease exit charges

    132,542     136,409     55,343  
               

  $ 208,017   $ 293,743   $ 86,166  
               

Impairment charges

                   

Number of Stores

    670     815     420  

Number of Distribution Centers

    1          
               

    671     815     420  

Lease exit charges

                   

Number of Stores

    108     162     66  

Number of Distribution Centers

    1          
               

    109     162     66  

    Impairment Charges

        These amounts included the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store, or because of changes in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

4. Lease Termination and Impairment Charges (Continued)

circumstances that indicated the carrying value of an asset may not be recoverable. The increase in impairment charges in fiscal 2009 was triggered by projected operating results at certain stores not being sufficient to cover the asset values at these stores.

    Facility and Equipment Lease Exit Charges

        Charges to close a store, which principally consist of lease termination costs, 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." The Company calculates its 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. The Company evaluates these assumptions each quarter and adjusts the liability accordingly. The increase in facility and equipment lease exit charges over fiscal 2008 is due to a higher level of stores closed in fiscal 2009 and 2010 and a decrease in the amount of assumed sublease income over the remaining minimum lease term.

        The following table reflects the closed store charges that relate to new closures, changes in assumptions and interest accretion.

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Balance—beginning of year

  $ 381,411   $ 329,682   $ 195,205  
 

Provision for present value of noncancellable lease payments of closed stores

    80,331     97,667     27,464  
 

Changes in assumptions about future sublease income, terminations and change of interest rate

    31,014     20,947     16,482  
 

Reversals of reserves for stores that management has determined will remain open

            (1,465 )
 

Interest accretion

    26,693     19,837     13,874  
 

Leased properties of Jean Coutu USA closed or designated to be closed

            133,864  
 

Cash payments, net of sublease income

    (106,795 )   (86,722 )   (55,742 )
               

Balance—end of year

  $ 412,654   $ 381,411   $ 329,682  
               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

4. Lease Termination and Impairment Charges (Continued)

        The Company's revenues and income before income taxes for fiscal 2010, 2009, and 2008 included results from stores that have been closed or are approved for closure as of February 27, 2010. The revenue and operating losses of these stores for the periods are presented as follows:

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Revenues

  $ 248,572   $ 786,883   $ 1,286,798  

Income (loss) from operations

    4,350     (69,148 )   (31,680 )

        Included in income or loss from operations for fiscal 2010, 2009, and 2008 are depreciation and amortization charges of $4,554, $13,090 and $18,413, respectively, and closed store inventory liquidation charges of $5,236, $9,881 and $6,193, respectively. Also included in loss from operations for fiscal 2010 are gains on the sale of assets of $33,042 and for fiscal 2009 and 2008 are losses on the sale of assets of $13,694 and $2,853, respectively. Income or loss from operations does not include any allocation of corporate level overhead costs. The above results are not necessarily indicative of the impact that these closures will have on revenues and operating results of the Company in the future, as the Company often transfers the business of a closed store to another Company store, thereby retaining a portion of these revenues. The amounts indicated above do not include the results of operations for stores closed related to discontinued operations.

        The Company is following the guidance in ASC 820, "Fair Value Measurements and Disclosures" as it relates to nonfinancial assets and liabilities. ASC 820 prioritizes inputs used in measuring fair value into a hierarchy of three levels: Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2—inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and Level 3—unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

        Long-lived assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets is determined by estimating the amount and timing of net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

4. Lease Termination and Impairment Charges (Continued)

        The table below sets forth by level within the fair value hierarchy the long-lived assets as of the impairment measurement date for which an impairment assessment was performed.

 
  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  Significant
Other
Observable
Inputs (Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Fair Values
as of
Impairment
Date
  Total Charges
February 27,
2010
 

Long-lived assets held and used

  $   $ 20,274   $ 4,262   $ 24,536   $ (64,469 )

Long-lived assets held for sale

        14,927         14,927     (11,006 )
                       

Total

  $   $ 35,201   $ 4,262   $ 39,463   $ (75,475 )
                       

5. Discontinued Operations

        During the fourth quarter of fiscal 2008, the Company entered into agreements to sell the prescription files of 28 of its stores in the Las Vegas, Nevada area. The Company owned four of these stores and the remaining stores were leased. The Company assigned the lease rights of 17 of those stores to other entities and closed the remaining leased stores. The Company has sold three of the owned stores and plans to sell the remaining one owned store. The sale and transfer of the prescription files has been completed and the inventory at the stores has been liquidated.

        The Company has presented the operating results of and the gain on the sale of Las Vegas as a discontinued operation in the statement of operations for fiscal 2009 and 2008. The following amounts have been segregated from continuing operations and included in discontinued operations:

 
  Year Ended  
 
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 
 
  (Dollars in thousands)
 

Revenues

  $ 267   $ 90,815  

Costs and expenses:

             
 

Cost of goods sold

    1,652     70,171  
 

Selling, general and administrative expenses

    1,936     33,039  
 

Loss (gain) on sale of assets

    48     (8,100 )
           

Total costs and expenses

    3,636     95,110  
           

Loss from discontinued operations before income taxes

    (3,369 )   (4,295 )

Income tax benefit

        (1,505 )
           
 

Net loss from discontinued operations

  $ (3,369 ) $ (2,790 )
           

        The assets and liabilities of the divested stores for the year ended February 28, 2009 are not significant and have not been segregated in the consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

6. Income Taxes

        The provision for income taxes was as follows:

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Current tax expense (benefit):

                   
 

Federal

  $ (4,819 ) $ 165   $ (355 )
 

State

    3,330     6,327     1,183  
               

    (1,489 )   6,492     828  

Deferred tax expense (benefit):

                   
 

Federal

    1,849     260,592     726,167  
 

State

    26,398     62,173     75,706  
               

    28,247     322,765     801,873  
               

Total income tax expense

  $ 26,758   $ 329,257   $ 802,701  
               

        A reconciliation of the expected statutory federal tax and the total income tax benefit was as follows:

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Expected federal statutory expense at 35%

  $ (167,972 ) $ (903,974 ) $ (95,725 )

Nondeductible expenses

    2,941     9,445     6,476  

State income taxes, net

    (24,662 )   (54,921 )   (25,789 )

Increase (reduction) of previously recorded liabilities

    18,359     9,737     (999 )

Recoverable AMT tax due to special 5-year NOL carryback

    (4,790 )        

Credits generated

            (1,699 )

Goodwill Impairment

        595,856      

Valuation allowance

    202,882     673,114     920,437  
               

Total income tax expense (benefit)

  $ 26,758   $ 329,257   $ 802,701  
               

        Net loss for fiscal 2010 included income tax expense of $26,758 and was primarily comprised of an accrual for state and local taxes net of federal tax recoveries and adjustments to unrecognized tax benefits. The Company maintains a full valuation allowance against the net deferred tax assets. ASC 740, "Income Taxes" requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. According to ASC 740, a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, ASC 740 precludes relying on projections of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

6. Income Taxes (Continued)


future taxable income to support the recognition of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.

        The fiscal 2009 income tax expense included non-cash income tax expense of $673,114 related to the write-down of our remaining net Federal and State deferred tax assets through an adjustment to our valuation allowance. The increase to the valuation allowance for fiscal 2009 was primarily related to the impact of the current economic conditions on fiscal 2009 operating results. The income tax expense for fiscal 2008 included $920,437 related to the increase of the valuation allowance on federal and state net deferred tax assets. The existence of negative evidence at March 1, 2008 was primarily the result of recently completed acquisition of Brooks Eckerd and the impact on current year earnings due to planned integration and acquisition activities, compounded by the weakening economy during the latter half of the year.

        The tax effect of temporary differences that gave rise to significant components of deferred tax assets and liabilities consisted of the following at February 27, 2010 and February 28, 2009:

 
  2010   2009  

Deferred tax assets:

             
 

Accounts receivable

  $ 21,934   $ 25,634  
 

Accrued expenses

    284,383     303,782  
 

Liability for lease exit costs

    193,073     177,837  
 

Pension, retirement and other benefits

    187,240     157,867  
 

Long-lived assets

    148,404     75,983  
 

Other

    3,842     5,864  
 

Credits

    71,070     74,050  
 

Net operating losses

    1,411,692     1,289,275  
           
   

Total gross deferred tax assets

    2,321,638     2,110,292  
 

Valuation allowance

    (1,984,468 )   (1,787,798 )
           
   

Total deferred tax assets

    337,170     322,494  

Deferred tax liabilities:

             
 

Inventory

    337,170     322,494  
           
   

Total gross deferred tax liabilities

    337,170     322,494  
           

Net deferred tax assets

  $   $  
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

6. Income Taxes (Continued)

        A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

 
  2010   2009   2008  

Unrecognized tax benefits

  $ 280,394   $ 233,014   $ 23,004  
 

Increases to prior year tax positions

    8,661     5,395     31,122  
 

Increases to prior year tax positions for Brooks Eckerd Acquisition

        40,670     178,759  
 

Decreases to tax positions in prior periods

    (306 )   (2,532 )    
 

Increases to current year tax positions

    12,669     5,189     3,459  
 

Settlements

        (811 )    
 

Lapse of statute of limitations

    (711 )   (531 )   (3,330 )
               

Unrecognized tax benefits balance

  $ 300,707   $ 280,394     233,014  
               

        The amount of the above unrecognized tax benefits at February 27, 2010, February 28, 2009 and March 1, 2008 which would impact the Company's effective tax rate, if recognized, was $116,972, $100,995 and $82,652, respectively. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is maintained against the Company's net deferred tax assets.

        The Company is indemnified by Jean Coutu Group for certain tax liabilities incurred for all years ended up to and including June 4, 2007. Although the Company is indemnified by Jean Coutu Group, the Company remains the primary obligor to the tax authorities with respect to any tax liability arising for the years prior to the acquisition. Accordingly, as of February 27, 2010, February 28, 2009 and March 1, 2008, the Company had a corresponding recoverable indemnification asset of $146,053, $131,681 and $107,148, respectively from Jean Coutu Group, included in the "Other Assets" line of the Consolidated Balance Sheets, to reflect the indemnification for such 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.

        The Company recognizes interest and penalties related to tax contingencies as income tax expense. The Company recognized expense for net interest and penalties in connection with tax matters of $12,267, $9,527 and $238 for fiscal years 2010, 2009 and 2008, respectively. As of February 27, 2010 and February 28, 2009, the total amount of accrued income tax-related interest and penalties was $58,443 and $46,175, respectively.

        The Company files U.S. federal income tax returns as well as income tax returns in those states where it does business. The federal income tax returns are closed to examination by the Internal Revenue Service (IRS) through fiscal 2005. However, any net operating losses that were generated in these prior closed years may be subject to examination by the IRS upon utilization. The IRS is currently examining the consolidated U.S. income tax return for Brooks Eckerd for fiscal years 2006 thru 2007. In fiscal 2010, the IRS completed the examination of the consolidated U.S. income tax return for Rite Aid Corporation and subsidiaries for fiscal year 2008 and issued a no change report. Additionally the IRS completed the examination of the consolidated U.S. income tax return for Brooks

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

6. Income Taxes (Continued)


Eckerd for the fiscal years 2004 and 2005. A revenue agent report (RAR) was received in the fourth quarter of fiscal 2010. The company is appealing these audit results. Management believes that the Company has adequately provided for any potential adverse results. Furthermore, the tax indemnification referenced above would reimburse the company for any assessment that may arise. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. However, as a result of reporting IRS audit adjustments, the Company has statutes open in some states from fiscal 2003.

    Net Operating Losses, Capital Losses and Tax Credits

        At February 27, 2010, the Company had federal net operating loss (NOL) carryforwards of approximately $3,423,999, the majority of which will expire, if not utilized, between fiscal 2019 and fiscal 2022.

        At February 27, 2010, the Company had state NOL carryforwards of approximately $5,736,643, the majority of which will expire between fiscal 2019 and fiscal 2027.

        At February 27, 2010, the Company had federal business tax credit carryforwards of $58,152, the majority of which will expire between fiscal 2012 and fiscal 2020. In addition to these credits, the Company has alternative minimum tax credit carryforwards of $3,221.

    Valuation Allowances

        The valuation allowances as of February 27, 2010 and February 28, 2009 apply to the net deferred tax assets of the Company. The valuation allowance was increased in the third and fourth quarters of fiscal 2009 to fully offset the net deferred tax assets. The increase for fiscal 2009 was primarily related to the impact of the current economic conditions on fiscal 2009 operating results. The Company maintained a full valuation allowance of $1,984,468 and $1,787,798 against net deferred tax assets at February 27, 2010 and February 28, 2009, respectively.

7. Accounts Receivable

        The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. The allowance for uncollectible accounts at February 27, 2010 and February 28, 2009 was $31,549 and $37,490, respectively. The Company's accounts receivable are due primarily from third-party payors (e.g., pharmacy benefit management companies, insurance companies or governmental agencies) and are recorded net of any allowances provided for under the respective plans. Since payments due from third-party payors are sensitive to payment criteria changes and legislative actions, the allowance is reviewed continually and adjusted for accounts deemed uncollectible by management.

        Until October 26, 2009, the Company maintained securitization agreements (the "First Lien Facility") with several multi-seller asset-backed commercial paper vehicles ("CPVs"). Under the terms of the First Lien Facility, the Company sold substantially all of its eligible third party pharmaceutical receivables to a bankruptcy remote Special Purpose Entity ("SPE") and retained servicing

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

7. Accounts Receivable (Continued)


responsibility. The SPE then transferred an interest in these receivables to various CPVs. The Company also maintained a $225,000 second priority accounts receivable securitization term loan (the "Second Lien Facility").

        On October 26, 2009, the Company terminated both accounts receivable securitization facilities and replaced them with senior secured notes, increased borrowing capacity under the Company's existing senior secured revolving credit facility and an increase in borrowings the Company's Tranche 4 Term Loan. The new borrowings are discussed in more detail in Note 11. As part of this refinancing, the Company incurred a prepayment penalty of $2,250 in relation to the Second Lien Facility and recognized $3,822 of unamortized discount related to the Second Lien Facility. These charges are recorded as a component of selling, general, and administrative expenses.

        At October 26, 2009, prior to the termination of the First Lien Facility, the total outstanding receivables that had been transferred to CPV's were $250,000. At February 28, 2009, the total outstanding receivables that had been transferred to CPVs were $330,000.

        The table below details receivable transfer activity for the years ended February 27, 2010, February 28, 2009 and March 1, 2008. Note that for the fifty-two period ended February 27, 2010, receivables securitization activity is reflected through October 26, 2009, the date of the termination of the securitization facilities.

 
  Year Ended  
 
  February 27,
2010
(52 Weeks)
  February 28,
2009
(52 Weeks)
  March 1,
2008
(52 Weeks)
 

Average amount of outstanding receivables transferred

  $ 226,521   $ 471,319   $ 332,115  

Total receivable transfers

  $ 2,240,000   $ 6,940,000   $ 4,992,000  

Collections made by the Company as part of the servicing arrangement on behalf of the CPVs

  $ 2,320,000   $ 7,045,000   $ 4,907,000  

        The program fee under the First Lien Facility was LIBOR plus 2.0% of the total amount advanced under the facility. The liquidity fee was 3.5% of the total facility commitment of $345,000. The program and the liquidity fees are recorded as a component of selling, general and administrative expenses. Program and liquidity fees for fiscal 2010, 2009 and 2008 were $11,980, $24,903 and $22,314, respectively.

        Financing fees related to the Second Lien Facility for fiscal 2010 and 2009 were $24,882 and $1,161, respectively and are recorded as a component of selling, general, and administrative expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

7. Accounts Receivable (Continued)

        At February 28, 2009, the Company's interest in the third party pharmaceutical receivables was as follows:

 
  February 28,
2009
 

Third party pharmaceutical receivables

  $ 955,827  

Allowance for uncollectible accounts

    (31,421 )
       

Net third party receivables

    924,406  

First lien facility

    (330,000 )

Second lien facility (net of discount of $6,621)

    (218,379 )
       

Net retained interest

  $ 376,027  
       

8. Property, Plant and Equipment

        Following is a summary of property, plant and equipment, including capital lease assets, at February 27, 2010 and February 28, 2009:

 
  2010   2009  

Land

  $ 267,938   $ 280,391  

Buildings

    749,741     798,048  

Leasehold improvements

    1,617,713     1,623,136  

Equipment

    2,100,050     2,239,935  

Construction in progress

    73,901     89,552  
           

    4,809,343     5,031,062  

Accumulated depreciation

    (2,516,190 )   (2,443,706 )
           

Property, plant and equipment, net

  $ 2,293,153   $ 2,587,356  
           

        Depreciation expense, which included the depreciation of assets recorded under capital leases, was $349,282, $383,671 and $309,270 in fiscal 2010, 2009 and 2008, respectively.

        Included in property, plant and equipment was the carrying amount of assets to be disposed of totaling $26,003 and $33,386 at February 27, 2010 and February 28, 2009, respectively.

9. Goodwill and Other Intangibles Assets

        At February 28, 2009, the Company impaired all of its existing goodwill, which resulted in a non-cash charge of $1,810,223. This entry was required due to the fact that the Company's market value, as indicated by the trading price of its common stock, was less than the carrying value of its net assets as of February 28, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

9. Goodwill and Other Intangibles Assets (Continued)

        The Company's intangible assets are finite-lived and amortized over their useful lives. Following is a summary of the Company's intangible assets as of February 27, 2010 and February 28, 2009.

 
  2010   2009
 
  Gross
Carrying
Amount
  Accumulated
Amortization
  Remaining
Weighted
Average
Amortization
Period
  Gross
Carrying
Amount
  Accumulated
Amortization
  Remaining
Weighted
Average
Amortization
Period

Favorable leases and other

  $ 658,590   $ (305,791 ) 11 years   $ 693,455   $ (279,806 ) 11 years

Prescription files

    1,204,348     (734,059 ) 6 years     1,209,268     (605,906 ) 7 years

Goodwill

                       
                         

Total

  $ 1,862,938   $ (1,039,850 )     $ 1,902,723   $ (885,712 )  
                         

        Also included in other non-current liabilities as of February 27, 2010 and February 28, 2009 are unfavorable lease intangibles with a net carrying amount of $106,910 and $124,053, respectively.

        Amortization expense for these intangible assets and liabilities was $184,956, $202,537 and $163,201 for fiscal 2010, 2009 and 2008, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2011—$165,998; 2012—$132,504; 2013—$107,477; 2014—$82,189 and 2015—$64,302.

10. Accrued Salaries, Wages and Other Current Liabilities

        Accrued salaries, wages and other current liabilities consisted of the following at February 27, 2010 and February 28, 2009:

 
  2010   2009  

Accrued wages, benefits and other personnel costs

  $ 372,434   $ 393,306  

Accrued sales and other taxes payable

    97,512     101,083  

Accrued store expense

    171,403     157,047  

Other

    323,772     353,326  
           

  $ 965,121   $ 1,004,762  
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

11. Indebtedness and Credit Agreement

        Following is a summary of indebtedness and lease financing obligations at February 27, 2010 and February 28, 2009:

 
  2010   2009  

Secured Debt:

             
 

Senior secured revolving credit facility due September 2010

  $   $ 838,000  
 

Senior secured credit facility term loan due September 2010

        145,000  
 

Senior secured revolving credit facility due September 2012

    80,000      
 

Senior secured credit facility term loan due June 2014

    1,085,663     1,096,713  
 

Senior secured credit facility term loan due June 2014 ($345,625 and $349,125 face value less unamortized discount of $25,634 and $31,549)

    319,991     317,576  
 

Senior secured credit facility term loan due June 2015 ($650,000 face value less unamortized net discount of $15,036)

    634,964      
 

9.75% senior secured notes (first lien) due June 2016 ($410,000 face value less unamortized discount of $6,692)

    403,308      
 

10.375% senior secured notes (second lien) due July 2016 ($470,000 face value less unamortized discount of $35,481 and $41,011)

    434,519     428,989  
 

7.5% senior secured notes (second lien) due March 2017

    500,000     500,000  
 

10.25% senior secured notes (second lien) due October 2019 ($270,000 face value less unamortized discount of $1,978)

    268,022      
 

Other secured

    2,316     4,194  
           

    3,728,783     3,330,472  

Guaranteed Unsecured Debt:

             
 

8.625% senior notes due March 2015

    500,000     500,000  
 

9.375% senior notes due December 2015 ($410,000 face value less unamortized discount of $4,049 and $4,754)

    405,951     405,246  
 

9.5% senior notes due June 2017 ($810,000 face value less unamortized discount of $9,431 and $10,732)

    800,569     799,268  
           

    1,706,520     1,704,514  

Unsecured Unguaranteed Debt:

             
 

8.125% notes due May 2010

    11,117     11,117  
 

9.25% senior notes due June 2013

    6,015     6,015  
 

6.875% senior debentures due August 2013

    184,773     184,773  
 

8.5% convertible notes due May 2015

    158,000     158,000  
 

7.7% notes due February 2027

    295,000     295,000  
 

6.875% fixed-rate senior notes due December 2028

    128,000     128,000  
           

    782,905     782,905  

Lease financing obligations

    152,691     193,818  
           

Total debt

    6,370,899     6,011,709  

Current maturities of long-term debt and lease financing obligations

    (51,502 )   (40,683 )
           

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

  $ 6,319,397   $ 5,971,026  
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

11. Indebtedness and Credit Agreement (Continued)

    Credit Facility

        The Company has a senior secured credit facility that includes a $1,175,000 revolving credit facility. Borrowings under the revolving credit facility bear interest at LIBOR plus 4.25% (with a minimum LIBOR of 3.00%), if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 3.25% (with a minimum base rate of 4.00%). The interest rate can fluctuate between LIBOR plus 4.25% and LIBOR plus 4.75%, based upon the amount of revolver availability, as defined in the senior secured credit facility. The Company is required to pay fees between 0.75% and 1.00% per annum on the daily unused amount of the revolving credit facility, depending on the amount of revolver availability. Amounts drawn under the revolving credit facility become due and payable in September 2012.

        The Company's ability to borrow under the revolving credit facility is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At February 27, 2010, the Company had $80,000 of borrowings outstanding under the revolving credit facility. At February 27, 2010, the Company also had letters of credit outstanding against the revolving credit facility of $159,040, which gave the Company additional borrowing capacity of $935,960.

        On June 4, 2007, the Company amended its senior secured credit facility to establish a new senior secured term loan in the aggregate principal amount of $1,105,000 and borrowed the full amount thereunder. A portion of the proceeds from the borrowings under this senior secured term loan (the "Tranche 2 Term Loan") were used to fund the acquisition of Brooks Eckerd. The Tranche 2 Term Loan will mature on June 4, 2014 and currently bears interest at LIBOR plus 1.75%, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 0.75%. The Company must make mandatory prepayments of the Tranche 2 Term Loan with the proceeds of asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by the Company (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and debt (subject to certain exceptions). If at any time total debt outstanding under the senior secured credit facility exceeds the borrowing base, prepayment of the Tranche 2 Term Loan may also be required.

        In July 2008, the Company issued a new senior secured term loan (the "Tranche 3 Term Loan") of $350,000 under the Company's existing senior secured credit facility. The Tranche 3 Term Loan was issued at a discount of 90% of par. The Tranche 3 Term Loan matures on June 4, 2014 and bears interest at LIBOR (with a minimum LIBOR rate of 3.00%) plus 3.00%, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate (with a minimum base rate of 4.00%) plus 2.00%. The Company must make mandatory prepayments of the Tranche 3 Term Loan with the proceeds of asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by the Company (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and debt (subject to certain exceptions). If at any time total debt outstanding under the senior secured credit facility exceeds the borrowing base, prepayment of the Tranche 3 Term Loan may also be required.

        In June 2009, the Company issued a new senior secured term loan (the "Tranche 4 Term Loan") of $525,000 under our existing secured credit facility. In October 2009, the Company issued an additional $125,000 under the Tranche 4 Term Loan. The Tranche 4 Term Loan matures on June 10,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

11. Indebtedness and Credit Agreement (Continued)


2015 and bears interest at a rate per annum equal to, at the Company's option, either (a) an adjusted LIBOR rate (with a LIBOR floor of 3.00% per annum) plus 6.50% or (b) Citibank's base rate (with a floor of 4.00% per annum) plus 5.50%. The Company must make mandatory prepayments of the Tranche 4 Term Loan with the proceeds of certain asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by the Company (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and debt (subject to certain exceptions). If at any time there is a shortfall in the Company's borrowing base under the senior secured credit facility, prepayment of the Tranche 4 Term Loan may also be required. All prepayments of the Tranche 4 Term Loan occurring on or prior to the third anniversary of the initial borrowing of the Tranche 4 Term Loan are subject to a prepayment premium in an amount equal to (i) 5.0% of the principal amount prepaid if such prepayment occurs on or prior to the first anniversary of such borrowing, (ii) 3.0% of the principal amount prepaid if such prepayment occurs on or prior to the second anniversary of such borrowing and (iii) 1.0% of the principal amount prepaid if such prepayment occurs on or prior to the third anniversary of such borrowing.

        The senior secured credit facility also restricts the Company and the subsidiary guarantors from accumulating cash on hand in excess of $200,000 at any time when revolving loans are outstanding (not including cash located in the Company's store deposit accounts, cash necessary to cover the Company's current liabilities and certain other exceptions) and from accumulating cash on hand with revolver borrowings in excess of $100,000 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 the Company's senior secured credit facility or (b) the sum of revolver availability under the Company's senior secured credit facility and certain amounts held on deposit with the senior collateral agent in a concentration account is less than $100,000 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 the Company's senior secured credit facility.

        The senior secured credit facility allows the Company to have outstanding, at any time, up to $1,500,000 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 $750,000 of such secured second priority debt and unsecured debt shall mature or require scheduled payments of principal prior to three months after June 4, 2014. The senior secured credit facility allows the Company to incur an unlimited amount of unsecured debt with a maturity beyond three months after June 4, 2014; however other debentures limit the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence of said debt. The senior secured facility also allows, so long as the senior secured credit facility is not in default, for the repurchase of any debt with a maturity on or before June 4, 2014, and for the voluntary repurchase of debt with a maturity after June 4, 2014, if the Company maintains availability on the revolving credit facility of at least $100,000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

11. Indebtedness and Credit Agreement (Continued)

        The senior secured credit facility contains covenants, which place restrictions on the incurrence of debt beyond the restrictions described above, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens. The Company's credit facility has a fixed charge coverage ratio test which increases from 1.05 to 1.10 beginning in the first quarter of fiscal 2011. The senior secured credit facility only requires the Company to maintain the minimum fixed charge coverage ratio once availability on the revolving credit facility is less than $150,000.

        The senior secured credit facility provides for events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if the Company fails to make any required payment on debt having a principal amount in excess of $50,000 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.

        Substantially all of Rite Aid Corporation's wholly-owned subsidiaries guarantee the obligations under the senior secured credit facility. The subsidiary guarantees of the senior secured credit facility and the 9.75% senior secured notes due 2016 are secured by a senior lien on, among other things the inventory, accounts receivable and prescription files of the subsidiary guarantors. Rite Aid Corporation is a holding company with no direct operations and is dependent upon dividends, distributions and other payments from its subsidiaries to service payments due under the senior secured credit facility. The 7.5% senior secured notes due 2017, the 10.375% senior secured notes due 2016, and the 10.25% senior secured notes due 2019 are guaranteed by substantially all of the Company's wholly-owned subsidiaries, which are the same subsidiaries that guarantee the senior secured credit facility and the 9.75% senior secured notes, and are secured on a second priority basis by the same collateral as the senior secured credit facility and the 9.75% senior secured notes due 2016. The 8.625% senior notes due 2015, the 9.375% senior notes due 2015 and the 9.5% senior notes due 2017 are also guaranteed by all of the same subsidiaries on an unsecured basis.

        The subsidiary guarantees related to the Company's senior secured credit facility and secured notes and on an unsecured basis the guaranteed indentures are full and unconditional and joint and several, and there are no restrictions on the ability of the parent to obtain funds from its subsidiaries. Also, the parent company has no independent assets or operations, and subsidiaries not guaranteeing the credit facility and applicable indentures are minor. Accordingly, condensed consolidating financial information for the parent and subsidiaries is not presented.

        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. As of February 27, 2010, the amount of additional secured and unsecured debt that could be incurred under these indentures was $997,595 (which does not include the ability to enter into certain sale and leaseback transactions.) However, 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 these indentures is governed by an interest coverage ratio test.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

11. Indebtedness and Credit Agreement (Continued)

    Other 2010 Transactions

        In October 2009, the Company issued $270,000 of 10.25% senior secured notes due October 15, 2019. These notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsubordinated indebtedness. The Company's obligations under these notes are guaranteed, subject to certain limitations, by the same subsidiaries that guarantee the obligations under the senior secured credit facility and the 9.75% senior secured notes due 2016. The guarantees are secured by shared second priority liens with holders of the 10.375% senior secured notes due 2016 and 7.5% senior secured notes due 2017. The indenture that governs the 10.25% notes contains covenant provisions that, among other things, include limitations on the Company's ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale-leaseback transactions. The 10.25% senior secured notes due October 2019 were issued at 99.2% of par.

        In June 2009, the Company issued $410,000 of 9.75% senior secured notes due June 12, 2016. These notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsubordinated indebtedness. The Company's obligations under these notes are guaranteed, subject to certain limitations, by the same subsidiaries that guarantee the obligations under the senior secured credit facility and the second lien notes. These guarantees are shared, on a senior basis, with debt outstanding under the senior secured credit facility. The indenture that governs the 9.75% notes contains covenant provisions that, among other things, allow the holders of the notes to participate along with the term loan holders in the mandatory prepayments resulting from the proceeds of certain asset dispositions (at the option of the noteholder) and include limitations on the Company's ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale-leaseback transactions. The 9.75% senior secured notes due June 2016 were issued at 98.2% of par.

    2009 Transactions

        In July 2008, pursuant to a tender offer and consent solicitation, the Company repurchased substantially all of the outstanding amounts of its 8.125% senior secured notes due May 2010, its 7.5% senior secured notes due January 2015 and its 9.25% senior notes due June 2013. This transaction was done because these notes had restrictions on the incurrence of liens securing the secured debt that prohibited the Company from fully drawing on its revolving credit facility under certain circumstances. The remaining outstanding amounts of such series no longer contain such restrictions and are no longer secured or guaranteed. The Company recorded a loss on debt modification related to these transactions of $36,558 in fiscal 2009.

        These transactions were financed via the issuance of a new senior secured term loan (the Tranche 3 Term Loan described above) and the issuance of a $470,000 aggregate principal amount of 10.375% senior secured notes due July 2016. These notes are unsecured unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsubordinated indebtedness. The Company's obligations under the notes are guaranteed, subject to certain limitations, by subsidiaries that guarantee the obligations under its senior secured credit facility and the 9.75% senior secured notes. The guarantees are secured by shared second priority liens with holders of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

11. Indebtedness and Credit Agreement (Continued)


Company's 7.5% senior secured notes due 2017 and 10.25% senior secured notes due 2019. The indenture that governs the 10.375% senior secured notes due 2016 contains covenant provisions that, among other things, include limitations on the Company's ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale-leaseback transactions. The senior 10.375% secured notes due July 2016 were issued at 90.588% of par.

        In May 2008, the Company issued $158,000 of 8.5% convertible notes due May 2015. These notes are unsecured and are effectively junior to the secured debt of the Company. The notes are convertible, at the option of the holder, into shares of the Company's common stock at a conversion price of $2.59 per share, subject to adjustments to prevent dilution, at any time. Proceeds from the issuance of these notes were used to fund the redemption of the Company's 6.125% notes due December 2008. The Company recorded a loss on debt modification of $3,347 related to the early redemption of the 6.125% notes, which included payment of a make whole premium to the noteholders and unamortized debt issue costs on the notes. These notes also require that the Company maintains compliance with all NYSE listing rules. In the event of a NYSE delisting, holders of these notes could require the Company to repurchase them, which would result in a default under the senior secured credit facility. Although there is no assurance the Company would be able to do so, the Company could seek to refinance or otherwise acquire these notes to avoid such a scenario, as the senior secured credit facility permits in certain circumstances. Currently, the Company is in compliance with all NYSE listing rules.

    2008 Transactions

        On June 4, 2007 the Company incurred $1,220,000 aggregate principal amount of senior notes. The issue consisted of $410,000 of 9.375% senior notes due 2015 and $810,000 of 9.5% senior notes due 2017. The Company's obligations under each series of notes are fully and unconditionally guaranteed, jointly and severally, by all of the Company's subsidiaries that guarantee its obligations under the existing senior secured credit facility and other outstanding senior secured notes. The notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all of the Company's other unsecured, unsubordinated debt. The indentures governing the notes contain covenants that limit the Company's ability and the ability of its restricted subsidiaries to, among other things, incur additional debt, pay dividends or make other restricted payments, purchase, redeem or retire capital stock or subordinated debt, make asset sales, enter into transactions with affiliates, incur liens, enter into sale-leaseback transactions, provide subsidiary guarantees, make investments and merge or consolidate with any other persons.

    Interest Rates and Maturities

        The annual weighted average interest rate on the Company's indebtedness was 6.8%, 6.6%, and 7.5% for fiscal 2010, 2009, and 2008, respectively.

        The aggregate annual principal payments of long-term debt for the five succeeding fiscal years are as follows: 2011—$32,575; 2012—$21,165; 2013—$101,165; 2014—$211,892 and $5,949,713 in 2015 and thereafter. The Company is in compliance with restrictions and limitations included in the provisions of various loan and credit agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

12. Leases

        The Company leases most of its retail stores and certain distribution facilities under noncancellable operating and capital leases, most of which have initial lease terms ranging from five to 22 years. The Company also leases certain of its equipment and other assets under noncancellable operating leases with initial terms ranging from 3 to 10 years. In addition to minimum rental payments, certain store leases require additional payments based on sales volume, as well as reimbursements for taxes, maintenance and insurance. Most leases contain renewal options, certain of which involve rent increases. Total rental expense, net of sublease income of $11,027, $11,141, and $10,331, was $961,519, $962,840 and $863,801 in fiscal 2010, 2009, and 2008, respectively. These amounts include contingent rentals of $27,260, $31,605 and $35,932 in fiscal 2010, 2009, and 2008, respectively.

        During fiscal 2010, the Company sold a total of 3 owned properties to independent third parties. Net proceeds from these sales were $7,967. Concurrent with these sales, the Company entered into agreements to lease the stores back from the purchasers over minimum lease terms of 10 to 20 years. The Company accounted for all of these leases as operating leases. A gain on the sale of these stores of $5,301 was deferred and is being recorded over the minimum term of these leases.

        During fiscal 2009, the Company sold 72 owned stores to several independent third parties. Proceeds from these sales totaled $192,819. The Company entered into agreements to lease these stores back from the purchasers over minimum lease terms of 20 years. Sixty-seven leases were accounted for as operating leases and five were accounted for under the financing method as of February 28, 2009, as these lease agreements contain a clause that allows the buyer to force the Company to repurchase the property under certain conditions. Gains on these transactions of $5,157 have been deferred and are being recorded over the related minimum lease terms. Losses of $501, which relate to certain stores in these transactions, were recorded as losses on the sale of assets for the year ended February 28, 2009. Subsequent to February 28, 2009, the clause that allowed the buyer to force the Company to repurchase the properties lapsed on three of the five leases. Therefore, these leases are now accounted for as operating leases. The Company recorded a financing lease obligation of $6,564 related to the remaining leases.

        During fiscal 2008, the Company sold 22 owned stores to several independent third parties. Proceeds from these sales totaled $93,252. The Company entered into agreements to lease these stores back from the purchasers over minimum lease terms of 20 years. Fourteen leases were accounted for as operating leases and eight were accounted for under the financing method as of March 1, 2008, as these lease agreements contain a clause that allows the buyer to force the Company to repurchase the property under certain conditions. Subsequent to March 1, 2008, the clause that allowed the buyer to force the Company to repurchase the properties lapsed on all of the eight leases and these are now accounted for as operating leases.

        The net book values of assets under capital leases and sale-leasebacks accounted for under the financing method at February 27, 2010 and February 28, 2009 are summarized as follows:

 
  2010   2009  

Land

  $ 7,528   $ 12,793  

Buildings

    152,973     166,460  

Leasehold improvements

    1,652     6,491  

Equipment

    23,120     34,712  

Accumulated depreciation

    (95,941 )   (97,649 )
           

  $ 89,332   $ 122,807  
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

12. Leases (Continued)

        Following is a summary of lease finance obligations at February 27, 2010 and February 28, 2009:

 
  2010   2009  

Obligations under financing leases

  $ 141,387   $ 156,625  

Sale-leaseback obligations

    11,304     37,193  

Less current obligation

    (19,131 )   (24,127 )
           

Long-term lease finance obligations

  $ 133,560   $ 169,691  
           

        Following are the minimum lease payments for all properties under a lease agreement that will have to be made in each of the years indicated based on non-cancelable leases in effect as of February 27, 2010:

Fiscal year
  Lease Financing
Obligations
  Operating Leases  

2011

    31,652     1,007,159  

2012

    22,453     971,502  

2013

    22,367     919,742  

2014

    22,322     871,458  

2015

    21,928     816,685  

Later years

    102,189     5,417,157  
           

Total minimum lease payments

    222,911     10,003,703  
             

Amount representing interest

    (70,220 )      
             

Present value of minimum lease payments

    152,691        
             

13. Redeemable Preferred Stock

        In March 1999 and February 1999, Rite Aid Lease Management Company, a wholly owned subsidiary of the Company, issued 63,000 and 150,000 shares of Cumulative Preferred Stock, Class A, par value $100 per share, respectively. The Class A Cumulative Preferred Stock is mandatorily redeemable on April 1, 2019 at a redemption price of $100 per share plus accumulated and unpaid dividends. The Class A Cumulative Preferred Stock pays dividends quarterly at a rate of 7.0% per annum of the par value of $100 per share when, as and if declared by the Board of Directors of Rite Aid Lease Management Company in its sole discretion. The amount of dividends payable in respect of the Class A Cumulative Preferred Stock may be adjusted under certain events. The outstanding shares of the Class A Preferred Stock were recorded at their estimated fair value of $19,253 for the fiscal 2000 issuances, which equaled the sale price on the date of issuance. Because the fair value of the Class A Preferred Stock was less than the mandatory redemption amount at issuance, periodic accretions to expense using the interest method are made so that the carrying amount equals the redemption amount on the mandatory redemption date. Accretion was $102 in fiscal 2010, 2009 and 2008. The amount of this instrument is $20,379 and $20,277 and is recorded in Other Non-Current Liabilities as of February 27, 2010 and February 28, 2009, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

14. Capital Stock

        As of February 27, 2010, the authorized capital stock of the Company consists of 1,500,000 shares of common stock and 20,000 shares of preferred stock, each having a par value of $1.00 per share. Preferred stock is issued in series, subject to terms established by the Board of Directors.

        In fiscal 2006, the Company issued 4,820 shares of Series I Mandatory Convertible Preferred Stock ("Series I preferred stock") at an offering price of $25 per share. Dividends on the Series I preferred stock were $1.38 per share per year, and were due and payable on a quarterly basis in either cash or common stock or a combination of both at the Company's election. In the first quarter of fiscal 2009 the Company entered into agreements with several of the holders of the Series I preferred stock to convert 2,404 shares into Rite Aid common stock earlier than the mandatory conversion date, November 17, 2008, at a rate of 5.6561 which resulted in the issuance of 14,648 shares of Rite Aid common stock. On the mandatory conversion date, the remaining outstanding 2,416 shares of Series I preferred stock automatically converted at a rate of 5.6561 which resulted in the issuance of 13,665 shares of Rite Aid common stock.

        The Company also has outstanding Series G and Series H preferred stock. The Series G preferred stock has a liquidation preference of $100 per share and pays quarterly dividends at 7% of liquidation preference. In the fourth quarter of 2009, at the election of the holder, substantially all of the Series G preferred stock was converted into 27,137 common shares, at a conversion rate of $5.50 per share. The remaining Series G preferred stock can be redeemed at the Company's election after January 2009. The Company has not elected to redeem the remaining Series G preferred stock as of February 27, 2010.

        The Series H preferred stock pays dividends of 6% of liquidation preference and can be redeemed at the Company's election after January 2010. All dividends can be paid in either cash or in additional shares of preferred stock, at the election of the Company. Any redemptions are at 105% of the liquidation preference of $100 per share, plus accrued and unpaid dividends. The Series H shares are convertible into common stock of the Company, at the holder's option, at a conversion rate of $5.50 per share. The Company has not elected to redeem the Series H preferred stock as of February 27, 2010.

15. Stock Option and Stock Award Plans

        The Company recognizes share-based compensation expense in accordance with ASC 718, "Compensation—Stock Compensation." Expense is recognized over the requisite service period of the award, net of an estimate for the impact of forfeitures. Operating results for fiscal 2010, 2009 and 2008 include $23,794, $31,448 and $40,439 of compensation costs related to the Company's stock-based compensation arrangements.

        The Company reserved 22,000 shares of its common stock for the granting of stock options and other incentive awards to officers and key associates under the 1990 Omnibus Stock Incentive Plan (the 1990 Plan), which was approved by the shareholders. Options may be granted, with or without stock appreciation rights ("SAR"), at prices that are not less than the fair market value of a share of common stock on the date of grant. The exercise of either a SAR or option automatically will cancel

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

15. Stock Option and Stock Award Plans (Continued)


any related option or SAR. Under the 1990 Plan, the payment for SARs will be made in shares, cash or a combination of cash and shares at the discretion of the Compensation Committee.

        In November 1999, the Company adopted the 1999 Stock Option Plan (the 1999 Plan), under which 10,000 shares of common stock are authorized for the granting of stock options at the discretion of the Board of Directors.

        In December 2000, the Company adopted the 2000 Omnibus Equity Plan (the 2000 Plan) under which 22,000 shares of common stock are reserved for granting of restricted stock, stock options, phantom stock, stock bonus awards and other stock awards at the discretion of the Board of Directors.

        In February 2001, the Company adopted the 2001 Stock Option Plan (the 2001 Plan) which was approved by the shareholders under which 20,000 shares of common stock are authorized for granting of stock options at the discretion of the Board of Directors.

        In April 2004, the Board of Directors adopted the 2004 Omnibus Equity Plan, which was approved by the shareholders. Under the plan, 20,000 shares of common stock are authorized for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors.

        In January 2007, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2006 Omnibus Equity Plan. Under the plan, 50,000 shares of Rite Aid common stock are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors. The adoption of the 2006 Omnibus Equity Plan became effective upon the closing of the Acquisition.

        All of the plans provide for the Board of Directors (or at its election, the Compensation Committee) to determine both when and in what manner options may be exercised; however, it may not be more than 10 years from the date of grant. All of the plans provide that stock options may be granted at prices that are not less than the fair market value of a share of common stock on the date of grant. The aggregate number of shares authorized for issuance for all plans is 91,694 as of February 27, 2010.

        The Company has issued options to certain senior executives pursuant to their individual employment contracts. These options were not issued out of the plans listed above, but are included in the option tables herein. As of February 27, 2010, all of these options expired.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

15. Stock Option and Stock Award Plans (Continued)

    Stock Options

        The Company determines the fair value of stock options issued on the date of grant using the Black-Scholes-Merton option-pricing model. The following assumptions were used for options granted in fiscal 2010, 2009 and 2008:

 
  2010   2009   2008  

Expected stock price volatility

    76 %   50 %   52 %

Expected dividend yield

    0.00 %   0.00 %   0.00 %

Risk-free interest rate

    2.50 %   2.76 %   4.96 %

Expected option life

    5.5 years     5.25 years     5.5 years  

        The weighted average fair value of options granted during fiscal 2010, 2009, and 2008 was $0.83, $0.42, and $3.20, respectively.

        Following is a summary of stock option transactions for the fiscal years ended February 27, 2010, February 28, 2009, and March 1, 2008:

 
  Shares   Weighted Average
Exercise
Price Per Share
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 

Outstanding at March 3, 2007

    60,596     4.60              
 

Granted

    10,744     6.01              
 

Exercised

    (4,135 )   3.09              
 

Cancelled

    (2,543 )   6.66              
                       

Outstanding at March 1, 2008

    64,662     4.85              
 

Granted

    14,632     .90              
 

Exercised

    (516 )   2.16              
 

Cancelled

    (8,616 )   6.84              
                       

Outstanding at February 28, 2009

    70,162     3.80              
 

Granted

    18,367     1.26              
 

Exercised

    (75 )   0.89              
 

Cancelled

    (12,340 )   4.48              
                       

Outstanding at February 27, 2010

    76,114     3.08     5.77   $ 13,181  
                   

Vested or expected to vest at February 27, 2010

    68,890     3.09     5.52   $ 13,181  
                   

Exercisable at February 27, 2010

    44,086     4.04     3.55   $ 2,148  
                   

        As of February 27, 2010, there was $21,871 of total unrecognized pre-tax compensation costs related to unvested stock options, net of forfeitures. These costs are expected to be recognized over a weighted average period of 2.49 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

15. Stock Option and Stock Award Plans (Continued)

        Cash received from stock option exercises for fiscal 2010, 2009, and 2008 was $66, $1,117, and $12,764 respectively. There was no income tax benefit from stock options for fiscal 2010, 2009 and fiscal 2008. The total intrinsic value of stock options exercised for fiscal 2010, 2009, and 2008 was $44, $239, and $12,705, respectively.

Restricted Stock

        The Company provides restricted stock grants to associates under plans approved by the stockholders. Shares awarded under the plans vest in installments up to three years and unvested shares are forfeited upon termination of employment. Additionally, vesting of 170 shares awarded to certain senior executives was conditional upon the Company meeting specified performance targets. Following is a summary of restricted stock transactions for the fiscal years ended February 27, 2010, February 28, 2009, and March 1, 2008:

 
  Shares   Weighted
Average
Grant Date
Fair Value
 

Balance at March 3, 2007

    8,002     4.21  
 

Granted

    7,542     5.94  
 

Vested

    (4,004 )   4.12  
 

Cancelled

    (1,568 )   5.25  
           

Balance at March 1, 2008

    9,972     5.39  
 

Granted

    2,647     0.94  
 

Vested

    (4,760 )   5.19  
 

Cancelled

    (1,160 )   4.86  
           

Balance at February 28, 2009

    6,699     3.87  
 

Granted

    3,289     1.28  
 

Vested

    (3,387 )   4.35  
 

Cancelled

    (657 )   3.03  
           

Balance at February 27, 2010

    5,944     2.26  
           

        Compensation expense related to all restricted stock grants is being recorded over a three year vesting period of these grants. At February 27, 2010, there was $6,864 of total unrecognized pre-tax compensation costs related to unvested restricted stock grants, net of forfeitures. These costs are expected to be recognized over a weighted average period of 1.34 years.

        The total fair value of restricted stock vested during fiscal years 2010, 2009, and 2008 was $14,726, $24,707, and $16,488, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

16. Retirement Plans

    Defined Contribution Plans

        The Company and its subsidiaries sponsor several retirement plans that are primarily 401(k) defined contribution plans covering nonunion associates and certain union associates. The Company does not contribute to all of the plans. Per those plan provisions, the Company matches 100% of a participant's pretax payroll contributions, up to a maximum of 3% of such participant's pretax annual compensation. Thereafter, the Company will match 50% of the participant's additional pretax payroll contributions, up to a maximum of 2% of such participant's additional pretax annual compensation. Total expense recognized for the above plans was $59,531 in fiscal 2010, $64,111 in fiscal 2009 and $56,318 in fiscal 2008.

        The Chairman of the Board and Chief Executive Officer and a member of the Board of Directors are entitled to supplemental retirement defined contribution arrangements in accordance with their employment agreements, which vest immediately. The Company makes investments to fund these obligations. Other officers, who are not participating in the defined benefit nonqualified executive retirement plan, are included in a supplemental retirement plan, which is a defined contribution plan that is subject to a five year graduated vesting schedule. The expense (income) recognized for these plans was $10,989 in fiscal 2010, $(6,287) in fiscal 2009, and $3,180 in fiscal 2008. The income recognized in fiscal 2009 is due to the impact of market conditions on the plan liabilities.

    Defined Benefit Plans

        The Company and its subsidiaries also sponsor a qualified defined benefit pension plan that requires benefits to be paid to eligible associates based upon years of service and, in some cases, eligible compensation. The Company's funding policy for The Rite Aid Pension Plan (The "Defined Benefit Pension Plan") is to contribute the minimum amount required by the Employee Retirement Income Security Act of 1974. However, the Company may, at its sole discretion, contribute additional funds to the plan. The Company made discretionary contributions of $2,681 in fiscal 2010, $1,174 in fiscal 2009, and $10,100 in fiscal 2008.

        The Company has established the nonqualified executive retirement plan for certain officers who, pursuant to their employment agreements, are not participating in the defined contribution supplemental retirement plan. Generally, eligible participants receive an annual benefit, payable monthly over fifteen years, equal to a percentage of the average of the three highest annual base salaries paid or accrued for each participant within the ten fiscal years prior to the date of the event giving rise to payment of the benefit. This defined benefit plan is unfunded.

        On March 3, 2007, the last day of the 2007 fiscal year, the Company adopted the provisions of ASC 715 "Compensation—Retirement Benefits". This standard requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability on the balance sheet and to recognize changes in the funded status in the year in which the changes occur through other comprehensive income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

16. Retirement Plans (Continued)

        Net periodic pension expense and other changes recognized in other comprehensive income for the defined benefit plans included the following components:

 
  Defined Benefit
Pension Plan
  Nonqualified Executive
Retirement Plan
 
 
  2010   2009   2008   2010   2009   2008  

Service cost

  $ 2,603   $ 2,819   $ 3,254   $ 54   $ 51   $ 49  

Interest cost

    6,032     5,741     5,476     1,130     1,199     1,146  

Expected return on plan assets

    (2,637 )   (5,305 )   (5,054 )            

Amortization of unrecognized net transition obligation

                        87  

Amortization of unrecognized prior service cost

    861     997     997              

Amortization of unrecognized net loss (gain)

    3,037     328     845     651     (422 )   (445 )
                           
 

Net pension expense

  $ 9,896   $ 4,580   $ 5,518   $ 1,835   $ 828   $ 837  

Other changes recognized in other comprehensive loss:

                                     
 

Unrecognized net (gain) loss arising during period

  $ (4,339 ) $ 24,694   $ (3,928 ) $ (1,572 ) $ (2,130 ) $ (874 )
 

Prior service cost arising during period

        2                  
 

Amortization of unrecognized net transition obligation

                        (87 )
 

Amortization of unrecognized prior service costs

    (860 )   (997 )   (997 )            
 

Amortization of unrecognized net (loss) gain

    (3,037 )   (328 )   (845 )   (651 )   422     445  
                           

Net amount recognized in other comprehensive loss

    (8,236 )   23,371     (5,770 )   (2,223 )   (1,708 )   (516 )
                           

Net amount recognized in pension expense and other comprehensive loss

  $ 1,660   $ 27,951   $ (252 ) $ (388 ) $ (880 ) $ 321  
                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

16. Retirement Plans (Continued)

        The table below sets forth reconciliation from the beginning of the year for both the benefit obligation and plan assets of the Company's defined benefit plans, as well as the funded status and amounts recognized in the Company's balance sheet as of February 27, 2010 and February 28, 2009:

 
  Defined Benefit
Pension Plan
  Nonqualified
Executive
Retirement Plan
 
 
  2010   2009   2010   2009  

Change in benefit obligations:

                         
 

Benefit obligation at end of prior year

  $ 88,409   $ 92,301   $ 17,090   $ 19,678  
 

Service cost

    2,603     2,819     54     51  
 

Interest cost

    6,032     5,741     1,130     1,199  
 

Distributions

    (5,965 )   (6,017 )   (1,824 )   (1,708 )
 

Change due to change in assumptions

    12,027     (6,474 )   865     (439 )
 

Change due to plan amendment

        2          
 

Actuarial (gain) loss

    770     37     (2,437 )   (1,691 )
                   

Benefit obligation at end of year

  $ 103,876   $ 88,409   $ 14,878   $ 17,090  
                   

Change in plan assets:

                         
 

Fair value of plan assets at beginning of year

  $ 57,187   $ 87,856   $   $  
 

Employer contributions

    2,681     1,174     1,824     1,708  
 

Actual return on plan assets

    21,203     (24,490 )        
 

Distributions (including expenses paid by the plan)

    (7,395 )   (7,353 )   (1,824 )   (1,708 )
                   

Fair value of plan assets at end of year

  $ 73,676   $ 57,187   $   $  
                   

Funded status

  $ (30,200 ) $ (31,222 ) $ (14,878 ) $ (17,090 )

Unrecognized net actuarial loss

                 

Unrecognized prior service cost

                 

Unrecognized net transition obligation

                 
                   

Net amount recognized

  $ (30,200 ) $ (31,222 ) $ (14,878 ) $ (17,090 )
                   

Amounts recognized in consolidated balance sheets consisted of:

                         
 

Prepaid pension cost

  $   $   $   $  
 

Accrued pension liability

    (30,200 )   (31,222 )   (14,878 )   (17,090 )
 

Pension intangible asset

                 
 

Minimum pension liability included in accumulated other comprehensive loss

                 
                   

Net amount recognized

  $ (30,200 ) $ (31,222 ) $ (14,878 ) $ (17,090 )

Amounts recognized in accumulated other comprehensive loss consist of:

                         
 

Net actuarial (loss) gain

  $ (29,865 ) $ (37,240 ) $ 2,696   $ 473  
 

Prior service cost

    (2,562 )   (3,423 )        
 

Net transition obligation

                 
                   

Amount recognized

  $ (32,427 ) $ (40,663 ) $ 2,696   $ 473  
                   

        The estimated net actuarial loss and prior service cost amounts that will be amortized from accumulated other comprehensive loss into net periodic pension expense in fiscal 2011 are $2,029 and $861, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

16. Retirement Plans (Continued)

        The accumulated benefit obligation for the defined benefit pension plan was $103,247 and $87,932 as of February 27, 2010 and February 28, 2009, respectively. The accumulated benefit obligation for the nonqualified executive retirement plan was $14,780 and $16,931 as of February 27, 2010 and February 28, 2009, respectively.

        The significant actuarial assumptions used for all defined benefit plans to determine the benefit obligation as of February 27, 2010, February 28, 2009, and March 1, 2008 were as follows:

 
  Defined Benefit
Pension Plan
  Nonqualified
Executive
Retirement Plan
 
 
  2010   2009   2008   2010   2009   2008  

Discount rate

    6.00 %   7.00 %   6.50 %   6.00 %   7.00 %   6.50 %

Rate of increase in future compensation levels

    5.00     5.00     5.00     3.00     3.00     3.00  

        Weighted average assumptions used to determine net cost for the fiscal years ended February 27, 2010, February 28, 2009 and March 1, 2008 were:

 
  Defined Benefit
Pension Plan
  Nonqualified
Executive
Retirement Plan
 
 
  2010   2009   2008   2010   2009   2008  

Discount rate

    7.00 %   6.50 %   5.75 %   7.00 %   6.50 %   5.75 %

Rate of increase in future compensation levels

    5.00     5.00     5.00     3.00     3.00     3.00  

Expected long-term rate of return on plan assets

    7.75     7.75     7.75     N/A     N/A     N/A  

        To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 7.75% long-term rate of return on plan assets assumption for fiscal 2010, 2009 and 2008.

        The Company's pension plan asset allocations at February 27, 2010 and February 28, 2009 by asset category were as follows:

 
  February 27,
2010
  February 28,
2009
 

Equity securities

    60 %   56 %

Fixed income securities

    40 %   44 %
           
 

Total

    100 %   100 %
           

        The investment objectives of the Defined Benefit Pension Plan, the only defined benefit plan with assets, are to:

    Achieve a rate of return on investments that exceeds inflation over a full market cycle and is consistent with actuarial assumptions;

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

16. Retirement Plans (Continued)

    Balance the correlation between assets and liabilities by diversifying the portfolio among various asset classes to address return risk and interest rate risk;

    Balance the allocation of assets between the investment managers to minimize concentration risk;

    Maintain liquidity in the portfolio sufficient to meet plan obligations as they come due; and

    Control administrative and management costs.

        The asset allocation established for the pension investment program reflects the risk tolerance of the Company, as determined by:

    The current and anticipated financial strength of the Company;

    the funded status of the plan; and

    plan liabilities.

        Investments in both the equity and fixed income markets will be maintained, recognizing that historical results indicate that equities (primarily common stocks) have higher expected returns than fixed income investments. It is also recognized that the correlation between assets and liabilities must be balanced to address higher volatility of equity investments (return risk) and interest rate risk.

        The following targets are to be applied to the allocation of plan assets.

Category
  Target Allocation  

U.S. equities

    45 %

International equities

    15 %

U.S. fixed income

    40 %
       
 

Total

    100 %
       

        The Company expects to contribute $1,520 to the nonqualified executive retirement plan during fiscal 2011. Included in prepaid expenses and other current assets is a prepayment of the fiscal 2011 Deferred Benefit Plan contribution of $13,451.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

16. Retirement Plans (Continued)

        The following table sets forth by level within the fair value hierarchy a summary of the plan's investments measured at fair value on a recurring basis as February 27, 2010:

 
  Fair Value Measurements at February 27, 2010  
 
  Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  Significant
Observable
Inputs (Level 2)
  Significant
Unobservable
Inputs (Level 3)
  Total  

Equity Securities

                         
 

International equity

        $ 10,829         $ 10,829  
 

Large Cap

          23,163           23,163  
 

Mid Cap

          8,046           8,046  
 

Small Cap

          2,343           2,343  

Fixed Income

                         
 

Long Term Credit Bond Index

          29,223           29,223  

Other types of investments

                         
 

Short Term Investments

          72           72  
 

Total

 
$

 
$

73,676
 
$

 
$

73,676
 
                   

        The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Common and Collective Trusts

        Common collective trust funds are stated at fair value as determined by the issuer of the common collective trust funds based on the fair market value of the underlying investments.

        Following are the future benefit payments expected to be paid for the Defined Benefit Pension Plan and the nonqualified executive retirement plan during the years indicated:

Fiscal Year
  Defined Benefit
Pension Plan
  Nonqualified
Executive
Retirement Plan
 

2011

  $ 5,669   $ 1,520  

2012

    5,733     1,553  

2013

    6,068     1,659  

2014

    6,252     1,641  

2015

    6,555     1,581  

2016 - 2020

    36,191     5,985  
           
 

Total

  $ 66,468   $ 13,939  
           

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

16. Retirement Plans (Continued)

    Other Plans

        The Company participates in various multi-employer union pension plans that are not sponsored by the Company. Total expenses recognized for the multi-employer plans were $19,328 in fiscal 2010, $10,924 in fiscal 2009 and $13,341 in fiscal 2008.

17. Commitments, Contingencies and Guarantees

    Legal Proceedings

        The Company is currently a defendant in several putative collective or class action lawsuits filed in federal or state courts in Pennsylvania, New Jersey, New York, Maryland, Ohio and Oregon, purportedly on behalf of, in some cases (i) current and former assistant store managers, or (ii) current and former store managers and assistant store managers, respectively, working in the Company's stores at various locations. The lawsuits allege violations of the Fair Labor Standards Act and of certain state wage and hour statutes. The lawsuits seek various combinations of unpaid compensation (including overtime compensation), liquidated damages, exemplary damages, pre- and post-judgment interest as well as attorneys' fees and costs. In one of the cases, Craig et al v. Rite Aid Corporation et al , pending in the United States District Court for the Middle District of Pennsylvania, brought on behalf of current and former assistant store managers, the Court, on December 9, 2009, conditionally certified a nationwide collective group of individuals who worked for the Company as assistant store managers since December 9, 2006. Notice of the Craig action has been sent to the purported members of the collective group. The number of persons who will opt into the Craig action has not been determined. In another of the cases, Indergit v. Rite Aid Corporation et al , pending in the United States District Court for the Southern District of New York, brought on behalf of current and former store managers and assistant store managers, the Court, on April 2, 2010, 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. Neither the actual date on which the Notice will be sent nor the number of persons who will opt into the Indergit action has been determined. At this time, the Company is not able to predict the outcome of these lawsuits, or any possible monetary exposure associated with the lawsuits. The Company's management believes, however, that the lawsuits are without merit and not appropriate for collective or class action treatment. The Company is vigorously defending all of these claims.

        The Company is currently a defendant in several putative class action lawsuits filed in state courts in California alleging violations by us of California wage and hour laws pertaining primarily to pay for missed meals and rest periods. These suits purport to be class actions and seek substantial damages. At this time, the Company's not able to predict the outcome of these lawsuits, or any possible monetary exposure associated with the lawsuits. The Company's management believes, however, that the plaintiffs' allegations are without merit and that their claims are not appropriate for class action treatment. The Company is vigorously defending all of these claims.

        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 these claims with certainty, the Company's management does not believe that

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

17. Commitments, Contingencies and Guarantees (Continued)


the outcome of any of these legal matters will have a material adverse effect on its consolidated results of operations, financial position or cash flows.

    Guaranteed Lease Obligations

        In connection with certain business dispositions, the Company continues to guarantee lease obligations for 134 former stores. The respective purchasers assume the Company's obligations and are, therefore, primarily liable for these obligations. Assuming that each respective purchaser became insolvent, an event which the Company believes to be highly unlikely, management estimates that it could settle these obligations for amounts substantially less than the aggregate obligation of $237,299 as of February 27, 2010. The obligations are for varying terms dependent upon the respective lease, the longest of which lasts through February 17, 2024.

        In the opinion of management, the ultimate disposition of these guarantees will not have a material effect on the Company's results of operations, financial position or cash flows.

18. Supplementary Cash Flow Data

 
  Year Ended  
 
  February 27,
2010
  February 28,
2009
  March 1,
2008
 

Cash paid for interest (net of capitalized amounts of $859, $1,434 and $2,069)

  $ 484,873   $ 462,847   $ 353,711  
               

Cash payments for income taxes, net

  $ 2,987   $ 5,793   $ 2,404  
               

Equipment financed under capital leases

  $ 185   $ 8,117   $ 11,667  
               

Equipment received for noncash consideration

  $ 15,603   $ 23,878   $ 3,411  
               

Preferred stock dividends paid in additional shares

  $ 8,807   $ 18,302   $ 17,153  
               

Reduction in lease financing obligation

  $ 25,889   $ 40,221   $ 18,406  
               

Accrued capital expenditures

  $ 16,846   $ 16,529   $ 37,344  
               

Gross borrowings from revolver

  $ 2,746,574   $ 5,522,000   $ 5,006,000  
               

Gross repayments to revolver

  $ 3,504,574   $ 5,533,000   $ 4,457,000  
               

19. Related Party Transactions

        There were receivables from related parties of $84 and $314 at February 27, 2010 and February 28, 2009, respectively.

        In connection with the acquisition of Jean Coutu, USA, the Company entered into a transition services agreement with the Jean Coutu Group. Under the terms of this agreement, Jean Coutu Group

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

19. Related Party Transactions (Continued)


provided certain information technology, network and support services to the Company. The agreement expired in September 2008. The Company recorded an expense of $894 for services provided under this agreement for the year ended February 28, 2009.

        During fiscal 2010, 2009 and 2008, the Company paid Leonard Green & Partners, L.P., fees of $222, $227 and $276, for financial advisory services, respectively. These amounts include expense reimbursements of $72, $90 and $89 for the fiscal years 2010, 2009 and 2008, respectively. Jonathan D. Sokoloff, director, is an equity owner of Leonard Green & Partners, L.P. The Company has entered into a month-to-month agreement with Leonard Green & Partners, L.P., as amended whereby the Company has agreed to pay Leonard Green & Partners, L.P., a monthly fee of $12.5, paid in arrears, for its consulting services. The consulting agreement also provides for the reimbursement of out-of-pocket expenses incurred by Leonard Green & Partners, L.P.

        Prior to being employed by the Company, the Company paid Mr. John Standley a fee of $32.5 per week for consulting services rendered in July, August and September 2008. The consulting agreement was on a week-to-week basis, which also provided for the reimbursement of out-of-pocket expenses incurred by Mr. Standley. During fiscal year 2009 and prior to his employment as President and Chief Operating Officer, Rite Aid paid Mr. Standley a consulting fee of $294.

20. Interim Financial Results (Unaudited)

 
  Fiscal Year 2010  
 
  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  Year  

Revenues

  $ 6,531,178   $ 6,321,870   $ 6,352,283   $ 6,463,786   $ 25,669,117  

Cost of goods sold

    4,757,112     4,633,595     4,665,871     4,788,449     18,845,027  

Selling, general and administrative expenses

    1,710,672     1,645,913     1,605,213     1,641,574     6,603,372  

Lease termination and impairment charges

    66,986     28,752     35,072     77,207     208,017  

Interest expense

    109,478     128,828     135,770     141,687     515,763  

Loss on debt modifications and retirements, net

        993             993  

(Gain) loss on sale of assets and investments, net

    (19,951 )   (4,188 )   (1,459 )   1,461     (24,137 )
                       

    6,624,297     6,433,893     6,440,467     6,650,378     26,149,035  
                       

Loss before income taxes

    (93,119 )   (112,023 )   (88,184 )   (186,592 )   (479,918 )

Income tax expense (benefit)

    5,327     3,989     (4,322 )   21,764     26,758  
                       

Net loss

  $ (98,446 ) $ (116,012 ) $ (83,862 ) $ (208,356 ) $ (506,676 )
                       

Basic loss per share(1)

  $ (0.11 ) $ (0.14 ) $ (0.10 ) $ (0.24 ) $ (0.59 )
                       

Diluted loss per share(1)

  $ (0.11 ) $ (0.14 ) $ (0.10 ) $ (0.24 ) $ (0.59 )
                       

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

20. Interim Financial Results (Unaudited) (Continued)

 
  Fiscal Year 2009  
 
  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  Year  

Revenues

  $ 6,612,856   $ 6,500,244   $ 6,468,601   $ 6,707,567   $ 26,289,268  

Cost of goods sold

    4,804,610     4,722,070     4,743,089     4,983,847     19,253,616  

Selling, general and administrative expenses

    1,792,974     1,780,631     1,711,873     1,699,889     6,985,367  

Goodwill impairment charge

                1,810,223     1,810,223  

Lease termination and impairment charges

    36,262     51,825     101,635     104,021     293,743  

Interest expense

    118,240     118,565     126,615     114,207     477,627  

Loss on debt modifications and retirements, net

    3,708     36,197             39,905  

Loss (gain) on sale of assets and investments, net

    5,340     7,607     (1,008 )   (358 )   11,581  
                       

    6,761,134     6,716,895     6,682,204     8,711,829     28,872,062  
                       

Loss before income taxes

    (148,278 )   (216,651 )   (213,603 )   (2,004,262 )   (2,582,794 )

Income tax expense

    4,993     5,346     29,522     289,396     329,257  
                       

Net loss from continuing operations

    (153,271 )   (221,997 )   (243,125 )   (2,293,658 )   (2,912,051 )

Loss from discontinued operations, net of gain on disposal and income tax benefit

    (3,369 )               (3,369 )
                       

Net loss

  $ (156,640 ) $ (221,997 ) $ (243,125 ) $ (2,293,658 ) $ (2,915,420 )
                       

Basic loss per share(1)

  $ (0.20 ) $ (0.27 ) $ (0.30 ) $ (2.67 ) $ (3.49 )
                       

Diluted loss per share(1)

  $ (0.20 ) $ (0.27 ) $ (0.30 ) $ (2.67 ) $ (3.49 )
                       

(1)
Loss per share amounts for each quarter may not necessarily total to the yearly loss per share due to the weighting of shares outstanding on a quarterly and year-to-date basis.

        During the second quarter of 2010, the Company recorded a loss on debt modification related to the repayment of its Tranche 1 Term Loan as discussed in Note 11. During the fourth quarter of fiscal 2010, the Company recorded facilities impairment charges of $58,134 and LIFO expense of $44,140 as inflation was lower than at prior year end.

        During the second quarter of 2009, the Company recorded a loss on debt modification related to the repurchase of several notes. During the fourth quarter of fiscal 2009, the Company recorded a charge for goodwill impairment of $1,810,223 and facilities impairment charges of $85,839. The Company recorded income tax expense of $280,700 related to the establishment of additional valuation allowance against deferred tax assets. The Company recorded LIFO expense of $94,569 as inflation was higher than anticipated.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008

(In thousands, except per share amounts)

21. Financial Instruments

        The carrying amounts and fair values of financial instruments at February 27, 2010 and February 28, 2009 are listed as follows:

 
  2010   2009  
 
  Carrying
Amount
  Fair
Value
  Carrying
Amount
  Fair
Value
 

Variable rate indebtedness

  $ 2,120,618   $ 1,990,963   $ 2,397,288   $ 1,674,069  

Fixed rate indebtedness

  $ 4,097,590   $ 3,632,738   $ 3,420,603   $ 1,076,476  

        Cash, trade receivables and trade payables are carried at market value, which approximates their fair values due to the short-term maturity of these instruments.

        The following methods and assumptions were used in estimating fair value disclosures for financial instruments:

    LIBOR-based borrowings under credit facilities:

        The carrying amounts for LIBOR-based borrowings under the credit facilities, term loans and term notes are estimated based on the quoted market price of the financial instruments.

    Long-term indebtedness:

        The fair values of long-term indebtedness are estimated based on the quoted market prices of the financial instruments. If quoted market prices were not available, the Company estimated the fair value based on the quoted market price of a financial instrument with similar characteristics.

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RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended February 27, 2010, February 28, 2009 and March 1, 2008
(dollars in thousands)

Allowances deducted from accounts receivable
for estimated uncollectible amounts:
  Balance at
Beginning
of Period
  Additions
Charged to
Costs and
Expenses
  Deductions   Allowances
Related to
the Purchase of
Jean Coutu, USA
  Balance at
End of
Period
 

Year ended February 27, 2010

  $ 37,490   $ 21,348   $ 27,289       $ 31,549  

Year ended February 28, 2009

  $ 41,221   $ 31,269   $ 35,000       $ 37,490  

Year ended March 1, 2008

  $ 30,246   $ 34,598   $ 34,015     10,392   $ 41,221  

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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.

  RITE AID CORPORATION

 

By:

 

/s/ MARY F. SAMMONS


Mary F. Sammons
Chairman of the Board and
Chief Executive Officer

 

Dated: April 28, 2010

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their respective capacities on April 28, 2010.

Signature
 
Title

 

 

 
/s/ MARY F. SAMMONS

Mary F. Sammons
  Chairman of the Board and Chief Executive
Officer

/s/ MICHEL COUTU

Michel Coutu

 

Non-Executive Co-Chairman of the Board

/s/ JOHN T. STANDLEY

John T. Standley

 

President and Chief Operating Officer

/s/ FRANK G. VITRANO

Frank G. Vitrano

 

Chief Financial Officer, Chief Administration
Officer and Senior Executive Vice President

/s/ DOUGLAS E. DONLEY

Douglas E. Donley

 

Chief Accounting Officer and Senior Vice President

/s/ JOSEPH B. ANDERSON, JR

Joseph B. Anderson, Jr

 

Director

/s/ ANDRE BELZILE

Andre Belzile

 

Director

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Table of Contents

Signature
 
Title

 

 

 
/s/ FRANCOIS J. COUTU

Francois J. Coutu
  Director

/s/ JAMES L. DONALD

James L. Donald

 

Director

/s/ DAVID R. JESSICK

David R. Jessick

 

Director

/s/ ROBERT G. MILLER

Robert G. Miller

 

Director

/s/ MICHAEL N. REGAN

Michael N. Regan

 

Director

/s/ PHILIP G. SATRE

Philip G. Satre

 

Director

/s/ JONATHAN D. SOKOLOFF

Jonathan D. Sokoloff

 

Director

/s/ MARCY SYMS

Marcy Syms

 

Director

/s/ DENNIS WOOD

Dennis Wood

 

Director

108




Exhibit 10.6

 

RITE AID CORPORATION

 

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

 

Effective April 13, 2010

 



 

Table of Contents

 

Purpose

 

1

ARTICLE 1 Definitions

 

1

 

 

 

 

ARTICLE 2 Eligibility and Participation

 

3

2.1

Eligibility for Participation

 

3

2.2

Selection for Participation in the Plan

 

3

2.3

Enrollment Requirements

 

3

2.4

Termination of Participation

 

3

2.5

Waiver of Other Nonqualified Deferred Compensation Benefits

 

3

 

 

 

 

ARTICLE 3 Crediting

 

3

3.1

Crediting of Account Balances

 

3

3.2

FICA and Other Taxes

 

5

3.3

Establishment of Trust

 

5

 

 

 

 

ARTICLE 4 Unforeseeable Financial Emergencies; Withdrawal Election

 

5

4.1

Withdrawal Payout/Suspensions for Unforeseeable Financial Emergency

 

5

4.2

Withdrawal Election

 

5

 

 

 

 

ARTICLE 5 Plan Benefit

 

5

5.1

Payment of Plan Benefit

 

5

5.2

Installment Payments

 

6

5.3

Vesting

 

8

 

 

 

 

ARTICLE 6 Beneficiary Designation

 

6

6.1

Beneficiary

 

6

6.2

Beneficiary Designation; Change

 

6

6.3

Acknowledgment

 

7

6.4

No Beneficiary Designation

 

7

6.5

Doubt as to Beneficiary

 

10

 

 

 

 

ARTICLE 7 Termination, Amendment or Modification

 

11

7.1

Termination

 

11

7.2

Amendment

 

7

7.3

Effect of Payment

 

7

 

 

 

 

ARTICLE 8 Administration

 

7

8.1

Committee Duties

 

7

8.2

Agents

 

7

8.3

Indemnification of Committee

 

8

 

 

 

 

ARTICLE 9 Other Benefits and Agreements

 

12

9.1

Coordination with Other Benefits

 

12

 



 

ARTICLE 10 Claims Procedures

 

8

10.1

Presentation of Claim

 

8

10.2

Notification of Decision

 

8

10.3

Review of a Denied Claim

 

8

10.4

Decision on Review

 

9

10.5

Legal Action

 

9

 

 

 

 

ARTICLE 11 Miscellaneous

 

9

11.1

Unsecured General Creditor

 

9

11.2

Company’s Liability

 

9

11.3

Nonassignability

 

9

11.4

Furnishing Information

 

10

11.5

Terms

 

10

11.6

Captions

 

10

11.7

Governing Law

 

10

11.8

Notice

 

10

11.9

Successors

 

10

11.10

Spouse’s Interest

 

11

11.11

Validity; No Waiver

 

11

11.12

Incompetent

 

11

11.13

Court Order

 

11

11.14

Distribution in the Event of Taxation

 

11

11.15

Taxes and Withholding

 

11

ARTICLE 12 Compliance with Code Section 409A

 

14

 

 

 

 

APPENDIX A

 

 

 



 

RITE AID CORPORATION

 

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

 

Amended and Restated Effective April 13, 2010

 

Purpose

 

The purpose of this Plan is to provide specified benefits to a select group of management employees of Rite Aid Corporation, a Delaware corporation (the “Company”). This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.

 

ARTICLE 1

Definitions

 

For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

 

1.1            “Account Balance” shall mean the credit balance at the time of determination of a Participant’s Deferral Account.  This balance shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant and his or her Beneficiaries pursuant to this Plan.

 

1.2            “Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 6, that are entitled to receive benefits under this Plan upon the death of a Participant.

 

1.3            “Beneficiary Designation Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.

 

1.4            “Board” shall mean the board of directors of the Company, and “Chairman” shall mean the Chairman of the Board.

 

1.5            “Claimant” shall have the meaning set forth in Section 10.1.

 

1.6            “Code” shall mean the Internal Revenue Code of 1986, as amended.

 

1.7            “Committee” shall mean the committee described in Article 8.

 

1.8            “Company” shall mean Rite Aid Corporation, a Delaware corporation.

 

1.9            “Deferral Account” shall mean (i) the sum of all of a Participant’s Monthly Deferral Amounts, plus (ii) additional amounts debited or credited in accordance with Section 3.1, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan.  A separate Deferral Account shall be maintained for each Participant.  This account

 



 

shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan.

 

1.10          “Deferral Account Relating to a Plan Year” shall mean (i) a Participant’s aggregate Monthly Deferral Amounts relating to a calendar year (or portion thereof) during which this Plan is in effect, plus (ii) additional amounts debited or credited with respect such amounts in accordance with Section 3.1, less (iii) any distributions relating thereto.

 

1.11          “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

 

1.12          “Measurement Funds” shall mean that group of mutual funds or other investment categories, which the Company shall prescribe in writing by notice given to the Participants.

 

1.13          “Monthly Deferral Amount” shall mean the amount to be credited to the Deferral Account of a Participant, as provided in Article 3 hereof.

 

1.14          “Normal Retirement Date” shall mean the later of a Participant’s attainment of age sixty (60) or completion of five (5) full calendar years of service with the Company, commencing with the year beginning January 1, 2001.

 

1.15          “Participant” shall mean an eligible executive employee of the Company who is selected to participate in this Plan, as provided in Article 2 hereof.

 

1.16          “Plan” shall mean this Supplemental Executive Retirement Plan, which shall be evidenced by this instrument, as the same may be amended from time to time.

 

1.17          “Termination of Employment” shall mean the ceasing of a Participant’s employment with the Company, voluntarily or involuntarily, for any reason.

 

1.18          “Unforeseeable Financial Emergency” shall, for any benefit which accrued and was fully vested prior to January 1, 2005, mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant’s property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, as determined in good faith by the Committee.

 

Effective January 1, 2005, solely for benefits which accrue or vest on or after such date, “Unforeseeable Financial Emergency” shall mean severe financial hardship to the Participant resulting from an illness or accident of the participant, the Participant’s spouse, or dependent of the Participant (as specified in Section 409A), loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

 

1.19 “Specified Employee” means, for any year in which the stock of the Company is tradeable on an established securities market, any employee who meets the requirements of Internal Revenue Code Section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the

 



 

Regulations thereunder, but without regard to Internal Revenue Code Section 416(i)(5)) at any time during the 12 month period ending on the last occurring December 31 st .

 

ARTICLE 2

Eligibility and Participation

 

2.1            Eligibility for Participation .  Executive employees of the Company (which, for this purpose, shall include subsidiaries of the Company) who have attained the position of vice president or who have attained an executive position more senior than that of vice president shall be eligible to participate in the Plan.

 

2.2            Selection for Participation in the Plan .  From time-to-time, the Chairman, or such senior management employee(s) designated by the Chairman, may select those individuals who are to participate in the Plan from among those employees eligible for participation as provided in Section 2.1.  The initial Participants in the Plan shall be so selected prior to, and shall commence participation in the Plan as of, the effective date hereof.  Employees subsequently selected shall commence participation as of the first day of the calendar year following the year of their selection or at such earlier date as the Chairman or his designee may determine.

 

2.3            Enrollment Requirements .  Each Participant shall complete, execute and return to the Committee a Beneficiary Designation Form.  In addition, the Committee shall establish from time to time such other enrollment requirements as it reasonably determines are necessary for purposes of the Plan.

 

2.4            Termination of Participation .  A Participant shall cease to be a Participant in the Plan upon the later of:  (a)  the earliest of (i) his ceasing to be employed by the Company in an eligible position, whether voluntarily or involuntarily, for any reason whatsoever including, without limiting the generality of the foregoing, death or disability; (ii) a determination by the Chairman that the Participant shall no longer be eligible to participate in the Plan; or (iii) the termination of the Plan, or (b) upon receipt of the full distribution of his vested Account Balance.

 

2.5            Waiver of other Nonqualified Deferred Compensation Benefits .  It shall be a pre-condition to participation in this Plan that a Participant waive any rights he may have or to which he might otherwise become entitled to receive any other nonqualified retirement or deferred compensation benefit from the Company, whether by way of or pursuant to any other plan, program, employment agreement or other arrangement.  Such waiver shall be effectuated in such manner and with such forms as the Committee shall prescribe for this purpose.  Notwithstanding the foregoing, the waiver requirement shall not apply with respect to the Key Employees’ Deferred Compensation Plan.

 

ARTICLE 3

Crediting

 

3.1            Crediting of Account Balances .  In accordance with and subject to such reasonable rules and procedures as may from time to time be established by the Committee, amounts shall be credited to or debited from a Participant’s Account Balance in accordance with the following rules:

 



 

(a)                                   Crediting of Monthly Deferral Amount .  For each month during which he remains a Participant hereunder, a Participant’s Deferral Account shall be credited as of the first day of said month with the Participant’s Monthly Deferral Amount.  Except as provided hereinafter, the Monthly Deferral Amount shall equal two percent (2%) of the Participant’s annual base compensation from the Company (excluding bonuses) as determined by the Committee.  Notwithstanding the foregoing, the Monthly Deferral Amount of a Participant for any month prior to May 1, 2004 shall not exceed seven thousand dollars ($7,000).  The Monthly Deferral Amount of a Participant For any month beginning on or after May 1, 2004, but prior to April 13, 2010 shall not exceed fifteen thousand dollars ($15,000).  The Monthly Deferral Amount of a Participant beginning on or after April 14, 2010 shall not be subject to a maximum amount.

 

(b)                                  Measurement Funds .  Each Participant shall have the right, from time to time, to select those Measurement Funds in which his or her Account Balance shall be deemed to be invested, upon which to base a crediting rate for the purpose of crediting or debiting amounts to the Participant’s Account Balance.  The Participant shall provide at least five (5) business days’ notice to the Company prior to making any change in the deemed investment of his or her Account Balance, but shall not in any event be permitted to make such changes to the extent the Company would not be able to make corresponding changes to its actual investment of funds, if any, it being understood that the Company shall be under no obligation to invest any of its funds in the same manner as any Participant’s deemed investment of his or her Account Balance.

 

(c)                                   Crediting or Debiting Method .  A Participant’s Account Balance shall be credited or debited on a daily basis, based on the performance of the selected Measurement Funds.  To the extent necessary to comply with applicable insurance laws, a monthly Deferral Amount shall be deemed invested at a money market rate of return prior to the expiration of any applicable waiting period, and shall be deemed invested in the applicable Measurement Funds from and after the expiration of such waiting period.

 

(d)                                  No Actual Investment .  Notwithstanding any other provision of this Plan, the Measurement Funds are to be used for measurement purposes only, and the crediting or debiting of amounts to a Participant’s Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any Measurement Fund.  In the event that the Company, in its own discretion, decides to invest funds in any Measurement Fund and/or through investments held under the Trust described in Section 3.3 hereof, no Participant shall have any rights in or to any such Fund or such investments.  Without limiting the foregoing, a Participant’s Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by

 



 

the Company; the Participant shall at all times remain an unsecured creditor of the Company.

 

3.2            FICA and Other Taxes .  The Company shall withhold the Participant’s share of FICA and other employment taxes relating to Monthly Deferral Amounts in such reasonable manner as the Company deems appropriate.

 

3.3            Establishment of Trust .  In connection with the adoption of this Plan, Company has established a Trust pursuant to a Trust Agreement of even date herewith (the “Trust”).  The Company intends to make contributions to said Trust to assist the Company in discharging its obligations hereunder to the Participants or their beneficiaries and, in the event of a “Change in Control of the Company”, as that term is defined in Appendix A hereto, the Company shall, on the Change in Control date, contribute to the Trust the amount needed to cause the Trust to have assets equal to the “Plan Benefits” (as defined in Article 5) of all of the Participants.  Notwithstanding the foregoing, the funding described in the preceding sentence shall not occur as a result of a substantial downturn in the Company’s financial status

 

ARTICLE 4

 Unforeseeable Financial Emergencies;

Withdrawal Election

 

4.1            Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies .  If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to receive a partial or full payout of the vested portion of his or her Deferral Account.  The amount of the payout shall not exceed the lesser of the Participant’s vested Deferral Account or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency.  The Committee shall consider each such request in good faith.  If the petition for a payout is approved, such payout shall be made as promptly as reasonably practicable.

 

In addition, effective for benefits that accrued and were fully vested on or after January 1, 2005, any distribution on account of an Unforeseeable Financial Emergency shall comply with the relevant provisions of Internal Revenue code Section 409A, together with the final regulations and interpretations promulgated thereunder.  Without limiting the generality of the foregoing, any such distribution shall be limited to an amount that shall not exceed the amounts necessary to satisfy the emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of the assets would not itself cause severe financial hardship).

 

4.2            Withdrawal Election .  A Participant (or Beneficiary, if applicable) may elect to withdraw the entire vested portion of his or her Account Balance or, if the payment of Plan Benefits has already commenced, the amount of his remaining unpaid Plan Benefits, in either case less a 10% withdrawal penalty (the net amount shall be referred to as the “Withdrawal Amount”).  No partial withdrawals shall be allowed.  The Participant shall make this election by giving the Committee advance written notice of the election.  The penalty shall be equal to 10% of the Participant’s Account Balance determined immediately prior to the withdrawal.  The

 



 

Participant shall be paid the Withdrawal Amount in a lump sum as promptly as reasonably practicable following receipt by the Committee of the notice of the Withdrawal Election.  A Participant who receives a Withdrawal Amount shall thereupon cease to be a Participant and shall not again be eligible to be a Participant in this Plan.  Notwithstanding the foregoing, this section shall solely be effective for benefits which accrued and were fully vested prior to January 1, 2005, and shall not be effective for any benefits which accrued or vested on or after such date.

 

ARTICLE 5

Plan Benefit

 

5.1            Payment of Plan Benefit .  Except as provided in Section 5.2, a Participant who attains his Normal Retirement Date or whose employment terminates for any reason and under any circumstances shall thereupon be entitled to receive, as a benefit hereunder (the “Plan Benefit”), his entire vested Account Balance determined as of the date the Participant terminates employment with the Company.  The Plan Benefit shall be payable to the Participant within sixty (60) days following his termination of employment.

 

5.2                                  Installment Payments (a)     For benefits which accrued and were fully vested prior to January 1, 2005, notwithstanding the provisions of Section 5.1, a Participant shall have the right to file an election with the Company providing for payment of his Account Balance in five (5), ten (10), or fifteen (15) consecutive annual installments commencing with his entitlement to begin receiving his Plan Benefit.  Each such installment shall include interest on the unpaid balance from the date on which the Participant becomes entitled to receive his Plan Benefit at the prime rate of interest, as published in the “Money Rates” Section of The Wall Street Journal.  The prime rate of interest shall be on or as of the business date closest to December 1 st  of each year and the prime rate as so determined shall be applied with respect to the calendar year following the December 1 st  date of determination.  The prime rate initially employed shall be that as of the December 1 st  preceding the commencement of the payment of installments to the participant.  The amount of each installment payment shall be redetermined on the first day of the month coincident with or next following the anniversary of the date of termination each year, based upon the prime rate of interest determined as aforesaid, the remaining Account Balance, and the remaining number of payment periods.  No such election shall be valid unless made at least one year prior to the actual date of termination, any election made during such one year period shall be ignored in favor of the most recent such election made at least one year prior to the actual date of termination and, in default of any such installment election, the Plan Benefit shall be paid in a single lump sum payment.  If the Plan Benefit of a Participant or his Beneficiary does not exceed Fifty Thousand Dollars ($50,000), it shall be paid in a single lump sum, any election by the Participant to the contrary notwithstanding.  To the extent permissible by law, each payment and each installment described in this Section 5.2 shall be considered a separate payment from each other payment or installment.

 



 

(b)                                  For benefits which accrue or vest on or after January 1, 2005, notwithstanding the provisions of Section 5.1 (or the preceding Section 5.2(a)), a Participant shall have the right to file an election with the Company providing for payment of his Account Balance in five (5), ten (10), or fifteen (15) consecutive annual installments commencing with his entitlement to begin receiving his Plan Benefit.  Each such installment shall include interest on the unpaid balance from the date on which the Participant becomes entitled to receive his Plan Benefit at the prime rate of interest, as published in the “Money Rates” Section of The Wall Street Journal.  The prime rate of interest shall be on or as of the business date closest to December 1 st  of each year and the prime rate as so determined shall be applied with respect to the calendar year following the December 1 st  date of determination.  The prime rate initially employed shall be that as of the December 1 st  preceding the commencement of the payment of installments to the participant.  The amount of each installment payment shall be redetermined on the first day of the month coincident with or next following the anniversary of the date of termination each year, based upon the prime rate of interest determined as aforesaid, the remaining Account Balance, and the remaining number of payment periods.  No such election shall be valid unless made at or prior to the end of the year prior to the year in which the deferrals are made, any election made after such date shall be ignored in favor of the most recent such election made at least one year prior to the actual date of deferral and, in default of any such installment election, the Plan Benefit shall be paid in a single lump sum payment.  If the Plan Benefit of a Participant or his Beneficiary does not exceed the limitation for the year of distribution set forth in Internal Revenue Code Section 402(g) ($15,500 for 2008), it shall be paid in a single lump sum, any election by the Participant to the contrary notwithstanding.

 

If the Plan Administrator so permits, any distribution election made pursuant to the preceding paragraph may be modified by the Participant so long as the following requirements are met:

 

(1) any such modification is made at least one year before the distribution is to be made under the existing election; and

(2) the modification defers the payment of benefits for at least five years from the date on which the payment would have begun under the original election.

 

Notwithstanding the preceding paragraph, on or prior to December 31, 2008, each Participant shall be entitled to change elections previously made for his or her annual account in years 2005, 2006, 2007 and 2008, so long as such elections do not defer receipt of any portion of his Account

 



 

Balance which would otherwise have been received in the year in which the election is made, or accelerate receipt of any portion of his Account Balance into the year in which the election is made.

 

5.3                                  Vesting (a)       A Participant’s entitlement to receive his Deferral Account Relating to any particular Plan Year as a Plan Benefit hereunder shall vest at the rate of twenty percent (20%) per year for each full or partial calendar year of participation in the Plan beginning with the effective date of the Plan.  Notwithstanding the foregoing, a Participant’s right to receive his entire Account Balance shall be fully vested upon his death, termination of employment due to total disability (as determined by the Committee), attainment of Normal Retirement Date, termination of the Plan, or a “Change in Control of the Company,” as defined in Appendix A hereto provided , effective September 20, 2006, that any amounts credited to a Participant’s Account Balance in respect of periods after the date of such Change in Control of the Company shall vest in accordance with the terms of the Plan and shall not be affected by the occurrence of such Change in Control of the Company.

 

Notwithstanding anything herein to the contrary, effective August 1, 2005, the Senior Vice President of Human Resources, (or his or her designee) may, following a reasonable good faith determination, designate one or more executives who continue to be employed by the Company but who cease to be a Participant because they cease to be employed in an eligible position as described in Section 2.4, to continue to be treated as a Participant under Section 5.3 solely for the purpose of determining their vested interest in the balance (including amounts credited or debited thereafter under Section 3.1(b)) of his or her Deferral Account on the date he or she ceased to be a Participant (“Vesting Participant”) until the earlier of (i) their termination of employment with the Company for any reason, or (ii) a determination in reasonable good faith by the Senior Vice President of Human Resources (or his or her designee) that the designated executive shall no longer be a Participant in the Plan for purposes of Section 5.3. A Vesting Participant’s Deferral Account shall not be eligible to be credited with the monthly Deferral Amount effective on the date he or she ceases to be employed in an eligible position as described in Section 2.4.

 

Effective December 19, 2007, notwithstanding anything in this Plan to the contrary, a Participant’s right to receive his entire Account Balance shall be fully vested upon his death, termination of employment due to total disability (as determined by the Committee), attainment of Normal Retirement Date, termination of the Plan, or upon involuntary termination of employment with the Company, other than for “Cause” (as defined in

 



 

subsection 5.3(b)), within twelve months following a “Change in Control of the Company,” as defined in Appendix A hereto.

 

(b)                                  Notwithstanding anything herein to the contrary, effective August 1, 2005, if a Participant’s employment is terminated for “Cause,” the Participant shall (i) not be entitled to any portion of his or her Deferral Account; (ii) forfeit the portion of his or her Deferral Account which as of the date of his or her termination of employment for Cause has not been paid; and (iii) be obligated to repay to the Company, the amount if any, of his or her Deferral Account previously paid to him or her. For purposes of this Subsection 5.3(b) “Cause” as determined in reasonable good faith by the Senior Vice President of Human Resources (or his or her designee) or the Board of Directors shall mean (i) the Participant’s gross negligence or willful misconduct in the performance of the duties or responsibilities of his or her position with the Company or any subsidiary, (ii) misappropriation of any funds or property of the Company or any subsidiary; (iii) conduct by the Participant which is a material violation of Company policy or any agreement between the Company and the Participant or which materially interferes with the Participant’s ability to perform his or her duties; (iv) the commission by Participant of an act of fraud or dishonesty toward the Company or any subsidiary; (v) Participant’s misconduct or negligence which damages or injures the Company or the Company’s reputation; (vi) the Participant is convicted of or pleads to a felony involving moral turpitude; or (vii) the use or imparting by the Participant of any confidential or proprietary information of the Company, or any subsidiary in violation of any confidentiality or proprietary agreement to which the Participant is a party.

 

ARTICLE 6

Beneficiary Designation

 

6.1            Beneficiary .  Each Participant shall have the right, at any time, to designate his or her Beneficiary (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant.  The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of the Company in which the Participant participates.

 

6.2            Beneficiary Designation; Change .  A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent.  A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled.  The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.

 


 

6.3            Acknowledgment .  No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Committee or its designated agent.

 

6.4            No Beneficiary Designation .  If a Participant fails to designate a Beneficiary as provided in Sections 6.1, 6.2 and 6.3 above, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving spouse.  If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate or otherwise as directed under any applicable living trust or similar instrument of the Participant.

 

6.5            Doubt as to Beneficiary .  If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in good faith, to cause the Company to withhold such payments until this matter is resolved to the Committee’s satisfaction.

 



 

ARTICLE 7

Termination, Amendment or Modification

 

7.1            Termination . The Company reserves the right to terminate the Plan at any time.  Upon termination of the Plan, each Participant’s balance shall be fully vested and, to the extent permissible by Internal Revenue Code Section 409A, paid to him or her according to the provisions of Article 5 of this Plan. Any such termination and the attendant payment of benefits shall comply with the provisions of Internal Revenue Code Section 409A, and the final regulations thereunder including, but not limited to, the requirement that all similar plans of the Company be terminated.

 

7.2            Amendment . The Company may amend the Plan from time-to-time, but no amendment shall adversely affect the rights which a Participant shall have accrued hereunder at the time of the amendment without the express written consent of such Participant.

 

7.3            Effect of Payment .  The full payment of the applicable Plan Benefit under Articles 4, 5 and/or 6 of the Plan, whether directly by the Company and/or through the Trust described in Section 3.3, shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan.

 

ARTICLE 8

Administration

 

8.1            Committee Duties .  This Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint.  The Committee shall also have the discretion and authority in good faith to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan.

 

8.2            Agents .  In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to the Company.

 



 

8.3            Indemnification of Committee .  The Company shall indemnify and hold harmless the members of the Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members.

 

ARTICLE 9

Other Benefits and Agreements

 

9.1            Coordination with Other Benefits .  Except as otherwise provided in Section 2.5, the benefits provided for a Participant and such Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program maintained by the Company.

 

ARTICLE 10

Claims Procedures

 

10.1          Presentation of Claim .  Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan.

 

10.2          Notification of Decision .  The Committee shall consider a Claimant’s claim within a reasonable time, and shall notify the Claimant in writing:

 

(a)                                   that the Claimant’s requested determination has been made, and that the claim has been allowed in full; or

 

(b)                                  that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant’s requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:

 

(i)                                      the specific reason(s) for the denial of the claim, or any part of it;

 

(ii)                                   specific reference(s) to pertinent provisions of the Plan upon which such denial was based;

 

(iii)                                a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and

 

(iv)                               an explanation of the claim review procedure set forth in Section 10.3 below.

 

10.3          Review of a Denied Claim .  Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant’s duly authorized representative) may file with the Committee a written request for a review of the

 



 

denial of the claim.  Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant’s duly authorized representative):

 

(a)                                   may review pertinent documents;

 

(b)                                  may submit written comments or other documents; and/or

 

(c)                                   may request a hearing, which the Committee, in its sole discretion, may grant.

 

10.4          Decision on Review .  The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee’s decision must be rendered within 120 days after such date.  Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain:

 

(a)                                   specific reasons for the decision;

 

(b)                                  specific reference(s) to the pertinent Plan provisions upon which the decision was based; and

 

(c)                                   such other matters as the Committee deems relevant.

 

10.5          Legal Action .  A Claimant’s compliance with the foregoing provisions of this Article 10 is a mandatory prerequisite to a Claimant’s right to commence any legal action with respect to any claim for benefits under this Plan.

 

ARTICLE 11

Miscellaneous

 

11.1          Unsecured General Creditor .  Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of the Company.  Any and all of the Company’s assets shall be, and remain, the general, unpledged unrestricted assets of the Company.  The Company’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

 

11.2          Company’s Liability .  The Company’s liability for the payment of benefits shall be defined only by the Plan and any elections made by the Participant pursuant to the Plan.  The Company shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and any such election.

 

11.3          Nonassignability .  Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, nonassignable and non-transferable, except that the foregoing shall not apply to any family support obligations set forth in a court order.  No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment

 



 

of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.

 

11.4          Furnishing Information .  A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may reasonably be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may reasonably deem necessary.

 

11.5          Terms .  Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

 

11.6          Captions .  The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

 

11.7          Governing Law .  Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Pennsylvania without regard to its conflicts of laws principles.

 

11.8          Notice .  Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

 

General Counsel

Rite Aid Corporation

30 Hunter Lane

Camp Hill, PA  17011

 

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

 

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

 

11.9          Successors .  This Plan and all rights of each Participant hereunder shall inure to the benefit of and be enforceable by the Participant’s Beneficiary, personal or legal representatives, or estate, to the extent any such person succeeds to the Participant’s interests under this Plan.  No rights or obligations of the Company under this Plan may be assigned or transferred except that the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform the Company’s obligations under this Plan in the same manner and to the same extent that the Company would have been

 



 

required to perform it if no such succession had taken place.  As used in this Plan, the “Company” shall mean both the Company as defined above and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 11.9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law or otherwise.

 

11.10        Spouse’s Interest .  The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse’s will, nor shall such interest pass under the laws of intestate succession,

 

11.11        Validity; No Waiver .  In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.  The failure of the Company or any Participant to insist upon strict compliance with any provisions of, or to assert any right under, this Plan shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Plan.

 

11.12        Incompetent .  If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person.  The Committee may require proof of minority, incompetency, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit.  Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

 

11.13        Court Order .  The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party.

 

11.14        Distribution in the Event of Taxation .  If; for any reason, all or any portion of a Participant’s benefit under this Plan becomes taxable to the Participant prior to receipt, the Company shall promptly distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed the Participant’s unpaid Account Balance under the Plan).

 

11.15        Taxes and Withholding .  The Company may withhold from any distribution under this Plan any and all employment and income taxes that are required to be withheld under applicable law.

 



 

ARTICLE 12

COMPLIANCE WITH CODE SECTION 409A

 

12.1          General

 

Notwithstanding anything in this Plan to the contrary, effective as of January 1, 2005, the following provisions shall govern:  The provisions listed below are intended to be compliant with Internal Revenue Code Section 409A and the final regulations promulgated thereunder (‘409A’) and shall be construed to be so compliant.  The provisions of this Article 12 shall apply only to benefits accrued after January 1, 2005 or which did not vest until after December 31, 2004.

 

12.2                            Payment of Benefits

 

No Participant shall have the opportunity to accelerate or further defer payment amounts except as permitted by 409A.  Any payment to which the Participant becomes entitled under the Agreement, or any arrangement or plan referenced in this Agreement, that constitutes “deferred compensation” under 409A, and is (i) payable upon the Participant’s termination; (ii) at a time when the Participant is a “specified employee” as defined by 409A shall not be made until the earliest of:

 

(a)                                   the expiration of the six month period (the “Deferral Period”) measured from the date of the Participant’s ‘separation from service’ under 409A;

(b)                                  the date the Participant becomes “disabled” under 409A; or

(c)                                   the date of the Participant’s death.

 

Upon 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 the Executive or, if applicable, his beneficiary.

 

IN WITNESS WHEREOF, the undersigned has executed this restated Plan document on behalf of the Company this 13 th  day of April, 2010, the restated Plan to become effective as of April 13, 2010.

 

 

RITE AID CORPORATION

 

 

 

 

 

 

 

By:

/s/ Marc A. Strassler

 

 

 

 

Title:

Executive Vice President & General Counsel

 



 

APPENDIX A

 

A “Change in Control of the Company” shall be deemed to have occurred if, as the result- of a single transaction or a series of transactions, the event set forth in any one of the following paragraphs shall have occurred:

 

(1)            any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding voting securities; or
 
(2)            Incumbent Directors cease at any time and for any reason to constitute a majority of the number of directors then serving on the Board.  “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the Effective Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors to the Board); or
 
(3)            there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding voting securities; or
 
(4)            the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
 

“Affiliate” shall have the meaning set forth in Rule l2b-2 under Section 12 of the Exchange Act.

 

“Beneficial Owner” shall have the meaning set forth in Rule l3d-3 under the Exchange Act, except that a Person shall not be deemed to be the Beneficial Owner of any securities which are properly filed on a Form 13G.

 



 

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

 

“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except, that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

 




Exhibit 10.7

 

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

 

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”) was entered into and effective as of the 24th day of September, 2008 (the “Effective Date”), and amended as of the 21 st  day of January, 2010 (the “Amendment Date”), by and between Rite Aid Corporation, a Delaware corporation (the “Company”) and John T. Standley (the “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 Executive’s employment under this Agreement shall commence on the Effective Date and, unless earlier terminated pursuant to Section 5 below, shall continue for a period  (the “Original Term of Employment”) ending on the date that is three (3) years following June 24, 2010 (the “Implementation Date”).  The Original Term of Employment shall be automatically renewed for successive one year terms (the “Renewal Terms”) unless at least 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 (a “Nonrenewal Notice”).  “Term” shall mean the Original Term of Employment and all Renewal Terms.  For purposes of this Agreement, except as otherwise provided herein, the phrase “year during the Term” or similar language shall refer to each 12 month period commencing on the Effective Date or the Implementation Date (upon the occurrence of such date) or the applicable anniversaries thereof.

 

2.              Position and Duties.

 

2.1           Generally.  During the Term, Executive shall serve as President and Chief Operating Officer of the Company and, commencing on the Implementation Date, shall also serve as Chief Executive Officer and shall have the titles, duties, responsibilities and authority as are customary for such positions and such other titles, duties, responsibilities and authorities as shall be assigned by the Company from time to time consistent with such positions.  Executive shall devote his full working time, attention, knowledge and skills faithfully and to the best of his ability, to the duties and responsibilities so 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 Company’s Board of Directors and, commencing on (i) the Amendment Date, all employees of the Company (with the exception of the Senior

 



 

Vice President of Corporate Communications) shall report directly or indirectly to Executive; and (ii) the Implementation Date, all employees of the Company shall report directly or indirectly to Executive.  Following termination of Executive’s employment for any reason, Executive shall immediately resign from all offices and positions he holds with the Company or any subsidiary.

 

Other than necessary travel in connection with the performance of his duties hereunder, the Executive shall be based at the Company’s headquarters.

 

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 Company’s approval, which shall not be unreasonably withheld, with the current activities listed on Appendix D being approved; (ii) engaging in charitable activities and community affairs; and (iii) managing his personal investments and affairs, provided that such activities 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 lawful rules, regulations, policies, directions, and restrictions as the Company may from time to time establish for officers of the Company.

 

3.              Compensation .

 

3.1           Base Salary During the Term, as compensation for his services hereunder, Executive shall receive a base salary at the annualized rate of $900,000.00 per year and, commencing on the Implementation Date, $1,000,000 per year (“Base Salary” as shall be reviewed annually for possible increase), which shall be paid in accordance with the Company’s 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 Company’s annual bonus plan as adopted and approved by the Board or the Compensation Committee from time to time.  For Fiscal Year 2009, Executive’s annual bonus opportunity pursuant to such plan shall equal 125% and, commencing on the Implementation Date, 200% (the “Annual Target Bonus”) of the annualized Base Salary ($900,000 per year for Fiscal Year 2009) even though the entire $900,000 Base Salary for Fiscal Year 2009 will not be paid to Executive as a result of this Agreement.  For subsequent fiscal years, the Annual Target Bonus may be adjusted (however, in no event shall it be less than 125% and commencing on the Implementation Date 200%) and shall be based upon the Board approved plan for that year.

 

3.3           Equity Awards .

 

(a)            On the Effective Date the Executive was granted an option (the “Original Option”) to purchase 3,500,000 shares of the Company’s Common Stock, par value $1.00 per share (“Company Stock”) and on the Amendment Date the Executive was granted an option to

 

2



 

purchase 2,555,000 shares of Company Stock (the “Amendment Option” and, collectively with the Original Option, the “Options”).  The Options are: (i) a nonqualified stock option; (ii) have an exercise price equal to(x)  $0.96 for the Original Option and (y) $1.52 for the Amendment Option, respectively; (iii) have a term of ten (10) years following the date of such grant; (iv) vest and become exercisable as to one-fourth of the shares of the Company Stock subject to the applicable Option on each of the first four (4) anniversaries from the date of such grant; (v) be subject to the acceleration exercise and termination provisions set forth in Section 3.3(c) and Article 5 hereof; and (vi) otherwise be evidenced by and subject to the terms of the Company’s stock option and equity plans.

 

(b)            Executive will participate in the Company’s Executive Equity Plan (the “EEP”).  On a going forward basis, the award will be based upon Executive’s annual Base Salary and the stock closing price on the date of grant.  For Fiscal Year 2009 only, Executive’s participation in the EEP will be on a prorated basis.  Executive’s long term incentive plan target under the EEP shall be set at 200% of Base Salary.

 

(c)            Upon the occurrence of a Change in Control of the Company and prior to the termination of Executive’s employment with the Company, the Options awarded pursuant to subsection (a) above and any stock options awarded pursuant to the EEP in subsection (b) above then held by Executive shall immediately vest and become exercisable in full.  For purposes of this Agreement “Change in Control” shall have the meaning set forth in the attached Appendix A.

 

(d)            It is understood and acknowledged by Executive that the securities underlying the stock options and/or restricted stock that may be awarded to Executive from time to time may not be subject to an effective registration statement under the federal securities laws until some time after the Effective Date.  The Company agrees that if, as of the date of termination of Executive’s employment under the circumstances described in Sections 5.2 (except termination for Cause), 5.3 and 5.5, the securities underlying the then vested and exercisable portion of any stock options are not subject to an effective registration statement, the 90 day or one year periods, as applicable, in Section 5.2 (except termination for Cause), 5.3 and 5.5, as applicable, will be deemed to run from the first date such securities become subject to an effective registration statement.

 

4.              Additional Benefits .

 

4.1       Employee Benefits During the Term, Executive and, as to welfare plans the Executive’s eligible immediate family, as the case may be, shall be entitled 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 (which shall be at the monthly contribution rate equal to 2% of Executive’s Base Salary) and 401(k) plans) in which senior management employees of the Company are generally eligible to participate, subject to any eligibility requirements and the other generally applicable terms of such plans.

 

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4.2       Expenses During the Term, the Company shall reimburse Executive for any expenses reasonably incurred by him in furtherance of his duties hereunder, including without limitation 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.

 

4.3       Vacation Executive shall be entitled to four (4) weeks paid vacation during each year of the Term.

 

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 and tax services allowance in the amount of up to $7,000.00 and, commencing on the Implementation Date, in the amount of up to $10,000.

 

4.6           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 Executive’s employment with and service as an officer of the Company or as an officer or director of an entity other than the Company at the request of the Company; and (b) pay all reasonable costs, expenses and attorney’s 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 Executive’s undertaking to repay in the event it is ultimately determined that Executive is not entitled to be indemnified by the Company, and enforcement of its rights hereunder.  Following termination of the Executive’s 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.

 

5.              Termination .

 

5.1           Termination of Executive’s Employment by the Company for Cause .   The Company may terminate Executive’s 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 Company’s 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) Executive’s gross negligence or willful misconduct in the performance of the duties or

 

4



 

responsibilities of his position with the Company or any subsidiary, or failure to timely carry out any lawful and reasonable directive of the Board of Directors; (ii) Executive’s intentional 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 which materially interferes with the Executive’s 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 Executive’s 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, misappropriation or embezzlement toward the Company or any subsidiary; (v) Executive’s gross negligence or willful misconduct which damages or injures the Company or the Company’s 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.

 

5.2           Compensation Upon Termination by the Company for Cause or by Executive Without Good Reason .   In the event of Executive’s termination of employment (i) by the Company for Cause or (ii) by Executive voluntarily without Good Reason:

 

(a)            Executive shall be entitled to receive within ten (10) business days of the date of termination:  (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 such termination, to the extent otherwise provided under Section 4.2 above, and (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 (collectively (i), (ii) and (iii), 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 Executive’s 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)            Except as provided in Section 3.3(d), 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 Executive’s 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 Executive’s employment by Executive voluntarily without Good Reason shall be effective upon thirty (30) days’ notice to the Company or such earlier date as the Company

 

5



 

determines in its discretion and designates in writing.  A termination of Executive’s 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 Executive’s Employment by the Company Other Than for Cause or By Executive for Good Reason .  Executive’s employment hereunder may be terminated by the Company other than for Cause (such termination to include if the Company provides Executive a Nonrenewal Notice, a “Company Nonrenewal”) or by Executive for Good Reason.  In the event that Executive’s employment hereunder is terminated by the Company other than for Cause (such termination to include a Company Nonrenewal) or by Executive for Good Reason:

 

(a)            Executive shall be entitled to receive: (i) within ten (10) business days of the date of termination the Accrued Benefits; (ii) an amount equal to two (2) times (one (1) times in the case of a Company Nonrenewal and two (2) times in the case of a Company Nonrenewal within six (6) months of a Change in Control) the sum of Executive’s then Base Salary plus Annual Target Bonus as of the date of termination of employment, such amount payable in equal installments pursuant to the Company’s standard payroll procedures for management employees over a period of two (2) years (one (1) year in the case of a Company Nonrenewal and two years in the case of a Nonrenewal within six (6) months of a Change in Control) following the date of termination of employment; and (iii) continued health and medical insurance coverage (or reimbursement to Executive of the cost of purchasing health and medical coverage substantially comparable in all material respects to the coverage provided by the Company to the Executive, excepting payments for such periods that the Company provides such coverage) for Executive and his immediate family for a period of two (2) years (one (1) year in the case of a Company Nonrenewal and two years in the case of a Nonrenewal within six (6) months of a Change in Control) following the date of termination of employment.  In addition, if such termination occurs following the start of the Company’s fiscal year, Executive shall also be entitled to receive (which shall be paid at the same time paid to other eligible participants in the bonus plan and following determination by the Board that the Company has achieved or exceeded its annual performance targets for the fiscal year) a pro rata annual bonus determined by multiplying Executive’s then Annual Target Bonus by a 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.

 

(b)            The Executive’s 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 three (3) years (one (1) year in the case of a Company Nonrenewal and three (3) years in the case of a Company Nonrenewal within six (6) months of a Change in Control) following the date of termination.  Except as provided in Section 3.3(d), such portion of Executive’s stock options (together with any portion of Executive’s stock options that have vested and become exercisable prior to the date of termination) shall remain exercisable for a period of one (1) year 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

 

6



 

the respective terms of the options), whereupon all such options shall terminate.  Any remaining portion of Executive’s 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 (or deemed to 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 Executive’s 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 thirty (30) days 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, prorated as applicable.  A termination of Executive’s 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, not revoke and abide by a release (which shall be substantially in the form attached hereto as Appendix C) of all other claims, reasonably cooperate (subject to reimbursement by Company of reasonable costs and expenses incurred by Executive) with the Company in the event of litigation (other than by Executive) involving the Company and fully comply in all material respects with Executive’s 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)            any adverse alteration in Executive’s titles, position, status, duties, authorities, reporting relationship or responsibilities with the Company or its subsidiaries from those specified in this Agreement;  or

 

(b)            any decrease in Executive’s then Base Salary as set forth in Section 3.1 or Annual Target Bonus in Section 3.2 to which Executive has not agreed in writing; or

 

(c)            any other material breach by the Company of this Agreement;

 

(d)            failure to promptly provide any material benefits or compensation hereunder; or

 

(e)             the failure of Executive to be promoted to Chief Executive Officer of the Company on or prior to the Implementation Date;

 

provided, however, that in each such case the Company shall have the right, within thirty (30) days (fifteen (15) days for the payment of compensation under this Agreement) after receipt of written notice (which shall set forth in reasonable detail the specific conduct of Company that

 

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constitutes Good Reason and the specific provision(s) of this Agreement on which Executive relies) from Executive of the Company’s violation of any of the foregoing, to cure the event or circumstances giving rise to such Good Reason and in the event of which cure, such event or circumstances shall not constitute Good Reason hereunder.

 

5.5           Compensation Upon Termination of Executive’s Employment By Reason of Executive’s Death or Total Disability In the event that Executive’s employment with the Company is terminated by reason of Executive’s death or Total Disability (as defined below):

 

(a)            Executive or Executive’s estate, as the case may be, shall be entitled to receive:  (i) within ten (10) business days of the date of termination the Accrued Benefits; (ii) promptly any other benefits payable under the then current disability and/or death benefit plans, as applicable, in which Executive is a participant; and (iii) continued health and medical insurance coverage (or reimbursement to Executive of the cost of purchasing health and medical coverage substantially comparable in all material respects to the coverage provided by the Company to the Executive, excepting payments for such periods that the Company provides such coverage ) for Executive and/or his immediate family, as applicable, for a period of two (2) years following the date of termination of employment.  In addition, if such termination occurs following the start of the Company’s fiscal year, Executive shall also be entitled to receive (which shall be paid at the same time paid to other eligible participants in the bonus plan and following determination by the Board that the Company has achieved or exceeded its annual performance targets for the fiscal year) a prorata annual bonus determined by multiplying Executive’s then Annual Target Bonus by a 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.

 

(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 three (3) years following the date of termination.  Except as provided in Section 3.3(d) such portion of Executive’s stock options (together with any portion of Executive’s stock options that have vested and become exercisable prior to the date of termination) shall remain exercisable for a period of one (1) year 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 Executive’s 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 Executive’s employment with the Company shall terminate effective as of the date of such termination of

 

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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 150 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 Company’s 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 Executive’s employment, Executive and the Company nevertheless shall continue to be bound by the terms and conditions set forth in Section 4.6 above, 5.7 and 5.9 below and  Sections 6 through 10 below, which shall survive the expiration of the Term.

 

5.7           Excise Tax Gross-Up .

 

(a)            In the event that any payment or benefit received or to be received by the Executive pursuant to the terms of this Agreement or any other plan, arrangement or agreement of the Company (or any affiliate) (collectively, the “Payments”) would be subject to the Excise Tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), as determined as provided below, the Company shall pay to the Executive, at the time specified in Section 5.7(b) below an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of the Excise Tax on payments and any federal, state and local income and employment or other tax and the Excise Tax upon the Gross-Up Payment, and any interest, penalties or additions to tax payable by the company, Executive with respect thereto, shall be equal to the total Payments.  For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as “parachute payments” within the meaning of section 280G(b)(2) of the Code, and all “excise parachute payments” within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive and selected by the Company, a Payment (in whole or in part) does not constitute a “parachute payment” within the meaning of section 280G(b)(2) of the Code, or such “excess parachute payments” (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of “excess parachute payments” within the meaning of section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Tax Counsel in accordance with the principles of sections 280G(d)(3) and (4) of the Code.  For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of the Executive’s residence in the calendar year in which the Gross-Up

 

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Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates.

 

(b)            The Gross-Up Payment provided for in Section 5.7(a) hereof shall be made upon the earlier of (i) thirty (30) days following the date of termination of Executive’s employment or (ii) the imposition upon the Executive or payment by the Executive of any Excise Tax.

 

(c)            If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that the Excise Tax is less than the amount taken into account under Section 5.7(a) hereof, the Executive shall repay to the Company within thirty (30) days of the Executive’s receipt of notice of such final determination the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-Up Payment being repaid by the Executive if and to the extent that such repayment results in a reduction in Excise Tax and a dollar for dollar reduction in the Executive’s taxable income and wages for the purpose of federal, state and local income taxes) plus any interest received by the Executive on the amount of such repayment.  If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that the Excise Tax exceeds the amount taken into account hereunder (including without limitation by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment pursuant to Section 5.7(a) in respect of such excess within thirty (30) days of the Company’s receipt of notice of such final determination or proceeding.  The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Payments.

 

(d)            In the event of any change in, or further interpretation of, sections 280G or 4999 of the Code and the regulations promulgated thereunder, the Executive shall be entitled, by written notice to the Company, to request an opinion of Tax Counsel regarding the application of such change to any of the foregoing, and the Company shall use its best efforts to cause such opinion to be rendered as promptly as practicable.  All fees and expenses of the Tax Counsel incurred in connection with this Agreement shall be borne by the Company.

 

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.

 

5.9            Section 409A .  Notwithstanding anything in this Agreement to the contrary, to the extent:  (a) that any payment to which the Executive becomes entitled under this Agreement (including, without limitation, any payments made pursuant to this Clause), or any agreement or plan referenced herein, in connection with the Executive’s termination of employment with the Company constitutes deferred compensation subject to Section 409A of the Code; and (b) the

 

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Executive is deemed at the time of such termination of employment to be a “specified employee” under Code Section 409A, such payment shall not be made or commence until the earliest of:  (i) the expiration of the six (6) month period measured from the date of the Executive’s “separation from service” (as such term is at the time defined in Treasury Regulations under Code Section 409A) with the Company; (ii) the date the Executive becomes “disabled” (as defined in Code Section 409A); or (iii) the date of the Executive’s death following such separation from service; provided, however, that such deferral shall only be effected if and to the extent required to avoid adverse tax treatment to the Executive, including, without limitation, those imposed under Code Section 409A(a)(1)(B) in the absence of such deferral; provided, however, that if the Company reasonably and in good faith determines, based upon and in accordance with advice from its outside counsel or tax advisors, that a deferral pursuant to this sentence is necessary, the Executive agrees that the Company will not be liable to the Executive for any damages to the Executive arising from such deferral of such payment.  Upon the expiration of the deferral period, any payments that would have otherwise been made during that period (whether in a single sum or in installments) shall be paid in a single cash lump sum payment to the Executive (or his beneficiary, as applicable).  With regard to any provision that provides for reimbursement of costs and expenses or of in-kind benefits, except as permitted by Code Section 409A, (i) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, (ii) the amount of expenses eligible for reimbursement or in-kind benefits to be provided during any taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits to be provided in any other taxable year; provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under any arrangement covered by Code Section 105(b) solely because such expenses are subject to a limit related to the period the arrangement is in effect, and (iii) such payments shall be made on or before the last day of the Executive’s taxable year following the taxable year in which the expense occurred.  Each amount to be paid or benefit to be provided to the Executive shall be construed as a “separate identified payment” for purposes of Code Section 409A to the fullest extent permitted therein.

 

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

 

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perform his duties under this Agreement and in furtherance of the Company’s best interests or as otherwise required by law, regulation or legal process or with respect to a lawsuit with the Company, its affiliates, subsidiaries or parents), unless and until such information is readily available in the public domain by reason other than Executive’s 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 no 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 Executive’s employment at any time and for any reason, or at any other time the Board may so direct, Executive shall promptly deliver to the Company’s offices in Harrisburg, Pennsylvania all of the property and equipment of the Company, its 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 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 Executive’s 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 Executive’s employment with the Company and for the one (1) year period immediately following the date of termination of Executive’s employment (the “Restricted Period”) Executive shall not, directly or indirectly, in any city, town, county, parish or other municipality in any state of the United States (the names of each such city, town, parish, or other municipality, including, without limitation, the name of each county in the Commonwealth of Pennsylvania being expressly incorporated by reference herein), or any other place in the world, where the Company, or its subsidiaries, affiliates, strategic partners, successors, or assigns, engages in the ownership, management and operation of retail drugstores (i) engage in a Competing Business for Executive’s own account; (ii) enter the employ of, or render any consulting or contracting services to, any Competing Business; or (iii) become interested in or otherwise associated or connected with any Competing Business in any capacity, including, without limitation, as an individual, partner, shareholder, officer, director, principal, agent, trustee, employee, contractor, consultant or management position with any entity providing consulting services to a Competing Business; provided , however, Executive may (i) own, directly or indirectly, solely as a passive investment, securities of any entity traded on any national securities exchange if Executive is not a controlling person of, or a member of a group which controls such entity and does not, directly or indirectly, own 3% or more of any class of securities of such entity.  For purposes of this Section 7.1, the phrase “Competing Business” shall mean any entity a majority of whose business involves the ownership and operation of retail or internet based drugstores.

 

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7.2            Noninterference .   During the Restricted Period, Executive shall not, directly or indirectly, 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, 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 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 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, provided, however, nothing herein shall prohibit any advertisement or general hiring as a result thereof that is not specifically targeted at such persons.

 

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

 

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received by Executive as a result of any transaction or activity constituting a material or intentional 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.

 

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 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

 

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(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 Executive’s 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.

 

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 Executive’s 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.  Executive understands that by entering into this Agreement, Executive is waiving Executive’s rights to have a court determine Executive’s 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.

 

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11.            Assignment .

 

Neither this Agreement, nor any of Executive’s rights or obligations hereunder, may be assigned or otherwise subject to hypothecation by Executive, other than by will or the laws of the descent and distribution.  The Company may assign its rights and obligations hereunder, and Executive hereby consents to any such assignment, in whole or in part (i) to the Company’s parent corporation; or (ii) to any other successor or assign in connection with the sale of all or substantially all of the Company’s assets or stock or in connection with any merger, acquisition and/or reorganization involving the Company; provided, however, any such assignment will not diminish or waive any of Executive’s rights hereunder, including, without limitation, rights upon any Change in Control of 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 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, PA 17011

 

 

Attention: General Counsel

 

 

Fax: (717) 760-7867

 

 

 

 

If to Executive:

John T. Standley

 

 

at the most recent address on file at the Company’s payroll office

 

 

Any party may change such party’s address for notices by notice duly given pursuant hereto.

 

13.            General .

 

13.1         No Offset or Mitigation The Company’s obligation to make the payments provided for in, and otherwise to perform its obligations under this Agreement shall not be affected by any setoff, 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

 

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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 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 Executive’s 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.

 

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.

 

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13.10      Survival.   This Agreement shall survive the termination of Executive’s 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.

 

13.13      Legal Fees and Expenses .  Promptly following the Effective Date, the Company shall reimburse the Executive for legal fees and expenses incurred by Executive in negotiation of the amendment to this Agreement up to the maximum of $7,500.

 

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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

 

 

 

 

 

/s/ Marc A. Strassler

 

 

 

By: Marc A. Strassler

 

Its: Executive Vice President, General Counsel

 

 

 

 

 

EXECUTIVE

 

 

 

 

 

/s/ John T. Standley

 

John T. Standley

 

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APPENDIX A

 

A “Change in Control of the Company” shall be deemed to have occurred if, as the result of a single transaction or a series of transactions, the event set forth in any one of the following paragraphs shall have occurred:

 

(1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding voting securities; or

 

(2) Incumbent Directors cease at any time and for any reason to constitute a majority of the number of directors then serving on the Board.  “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the Effective Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors to the Board); or

 

(3) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than:  (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding voting securities; or

 

(4) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.

 

“Affiliate” shall have the meaning set forth in Rule 12b-2 under Section 12 of the Exchange Act.

 

“Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act, except that a Person shall not be deemed to be the Beneficial Owner of any securities which are properly filed on a Form 13G.

 

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“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

 

“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include:  (i) the Company or any of its subsidiaries; (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries; (iii) an underwriter temporarily holding securities pursuant to an offering of such securities; or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

 

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APPENDIX B

 

The following is a list of all written agreements with any of  Executive’s 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.  If none, type “None”.

 

NONE

 

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APPENDIX C

 

(Form of Release)

 

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MAILING ADDRESS

P.O. Box 3165

Harrisburg, PA 17105

 

GENERAL OFFICE

30 Hunter Lane

Camp Hill, PA 17011

 

 

(717) 761-2633

 

Appendix C to Employment Agreement

 

Date

 

Name

Address

City, St 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 20 below for what it means to revoke this Severance Agreement and General Release.)

 

You may consider for forty-five (45) 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.

 

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(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.

 

(d)            You are required to comply with Paragraphs 6 and 7 below.

 

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 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 as contemplated by the Employment Agreement. You will not be eligible for the payment and benefits described in Paragraph 2 unless:  (i) You sign this Agreement no later than forty five (45) days after you receive it, promptly return the Agreement to the Company after you sign it, and do not timely revoke it in accordance with paragraph 20 below; (ii) you have returned all Company property and documents in accordance with Paragraph 7 below.

 

3.              General Release .

 

(a)            In exchange for the consideration described in Paragraph 2 and except as contemplated under Paragraph 4 below, you release and forever discharge, to the maximum extent permitted by law, the Company and each of the other “Releasees” as defined below, from any and all claims, causes of action, complaints, lawsuits or liabilities of any kind with respect to the Company (collectively “Claims”) as described below which you, your heirs, agents, administrators or executors have or may have against the Company, or any of the other Releasees.

 

(b)            By agreeing to this General Release, you are waiving, to the maximum extent permitted by law and other than as contemplated by Paragraph 4 below, any and all Claims which you have or may have against the Company, or any of the other Releasees arising out of or relating to any conduct, matter, event or omission with respect to the Company existing or occurring before the Separation Date, including but not limited to the following:

 

(i)             any Claims having anything to do with your Employment Agreement or your employment with the Company or any of the Releasees;

 

(ii)            any Claims having anything to do with the termination of your employment with the Company or any of the Releasees;

 

(iii)           any Claims for unpaid or withheld wages, severance or retention payments, benefits, bonuses, commissions and/or other compensation of any kind;

 

(iv)           any Claims for reimbursement of expenses of any kind;

 

(v)            any Claims for attorneys’ fees or costs;

 

(vi)           any Claims for any breach under the Employee Retirement Income Security Act (“ERISA”);

 

(vii)          any Claims of discrimination and/or harassment based on age, sex, race, religion, color, creed, disability, handicap, citizenship, national origin, ancestry, sexual orientation, or any other factor protected by Federal, State or Local law as enacted or amended (such as the Age Discrimination in Employment Act, 29 U.S.C. §621 et.   seq. ; Title VII of the Civil

 

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Rights Act of 1964; the Americans with Disabilities Act, the Equal Pay Act; Civil Rights of People with Disabilities Act and Domestic Abuse Bias in Employment Law) and any Claims for retaliation under any of the foregoing laws;

 

(viii)         any Claims regarding leaves of absence including, but not limited to, any Claims under the Family and Medical Leave Act;

 

(ix)            any Claims under the National Labor Relations Act;

 

(x)             any Claims under the Sarbanes-Oxley Act;

 

(xi)            any Claims under the Worker Adjustment and Retraining Notification Act (“WARN”);

 

(xii)           any Claims for violation of public policy;

 

(xiii)          any whistleblower or retaliation Claims;

 

(xiv)         any Claims for emotional distress or pain and suffering; and/or

 

(xv)          any other statutory, regulatory, common law or other Claims of any kind, including, but not limited to, Claims for breach of contract (other than as contemplated hereby), libel, slander, fraud, wrongful discharge, promissory estoppel, equitable estoppel and misrepresentation.

 

(c)            The term “Releasees” means: all and singularly, Rite Aid Corporation, Rite Aid HDQTRS. Corp., as well as any of their direct or indirect parent, subsidiary, related or affiliated companies, and each of their past and present employees, officers, directors, attorneys, owners, partners, insurers, benefit plan fiduciaries and agents, and all of their respective predecessors, successors and assigns.

 

(d)            It is important that you understand that this General Release includes all Claims known or unknown by you, those that you may have already asserted or raised as well as those that you have never asserted or raised.

 

4.              Non-Released Claims .  Notwithstanding anything in this Agreement to the contrary, the General Release in Paragraph 3 above does not apply to:

 

(a)            Any Claims for vested benefits under any retirement, 401(k), profit-sharing, deferred compensation or stock option plan or other plan or arrangement;

 

(b)            Any Claims to enforce the commitments set forth in this Agreement or the applicable provisions of the Employment Agreement that survive termination of your employment;

 

(c)            Any Claims to interpret or to determine the scope, meaning or effect of this Agreement or the applicable provisions of the Employment Agreement that survive termination of your employment;

 

(d)            Any Claims arising out of any conduct, matter, event or omission existing or occurring after the Separation Date;

 

(e)            Any Claim that can not be waived as a matter of law; or

 

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(f)             Any Claim arising under or otherwise having anything to do with Sections 5.3 or 5.6 of the Employment Agreement to survive termination of your employment thereunder.

 

Further, the General Release does not prevent you from contacting or filing a charge with any federal, state or local government agency or commission.  However, the General Release does prevent you, to the maximum extent permitted by law, from obtaining any monetary or other personal relief for any of the Claims you have released in Paragraph 3.

 

5.              Adequacy of Consideration .  You acknowledge and agree that the consideration under Paragraph 2 above:

 

(a)            Constitutes adequate consideration to support your General Release in Paragraph 3 above; and

 

(b)            Fully compensates you for the Claims you are releasing.

 

For purposes of this Agreement, “consideration” means something of value to which you are not already entitled.

 

6.              Prohibition on Your Using or Disclosing Certain Information . Regardless of whether you sign this Agreement, to the extent provided in Section 6 of the Employment Agreement, you are prohibited from using or disclosing confidential and/or proprietary information which you acquired in the course of your employment with the Company or its predecessors, and which is not generally known by or readily accessible to the public.

 

7.              Company Property and Documents .  Regardless of whether you sign this Agreement, and as a condition of receiving the payment set forth in Paragraph 2 above, to the extent provided in Section 6 of the Employment Agreement you must return to the Company, retaining no copies , all Company property, keys, documents (hard copy or electronic), forms, correspondence, computer programs, memos, disks, DVDs and any other Company property in your possession or control.

 

8.              Confidentiality of this Agreement .  You and the Company and its affiliates each agree that, at all times, the existence, terms and conditions of this Agreement will be kept secret and confidential and will not be disclosed voluntarily to any third party, except:  (i) to your spouse, if applicable, (ii) to the extent required by law; (iii) in connection with any Claim to enforce, interpret or determine the scope, meaning, or effect of the Agreement; or (iv) to obtain confidential legal, tax or financial advice with respect thereto.

 

9.              Cooperation .  To the extent provided in Section 5.3 of the Employment Agreement, you agree that, upon reasonable request, you will meet with representatives of the Company, Rite Aid HDQTRS. Corp., or their respective parent or subsidiary company representatives and provide any information you acquired during the course of your employment relating in any way to any disputes or other matters involving the Company or any Releasee (as defined above). You further agree that you will cooperate fully with the Company relating to any matter in which you were involved or which you have knowledge by virtue of your employment with the Company, including any existing or future litigation involving the Company, whether administrative, civil or criminal in nature in which and to the extent the Company deems your cooperation necessary.

 

10.            Non-Disparagement .  You and the Company agree that neither party will make any negative comments or disparaging remarks, in writing, orally or electronically, about the other party or any other Releasee (as defined above) and their respective products and services.  However, nothing in

 

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this Agreement is intended to or shall be interpreted to restrict either party’s right and/or obligation:  (i) to testify truthfully in any forum; or (ii) to contact, cooperate with or provide information to any government agency or commission.

 

11.            Resignation of Positions . In connection with the termination of your employment by the Company, you hereby resign from all positions you may hold as an officer or director of the Company and it subsidiaries and affiliates, and the Company hereby accepts such resignations. You agree to execute all such instruments and take all such other actions as the Company may reasonably deem necessary or desirable to evidence or accomplish the foregoing in full.

 

12.            Governing Law and Forum .  This Agreement shall be governed by and construed in accordance with the laws of Pennsylvania, where this Agreement is entered into, without giving effect to any conflict of law provisions.  Any court action instituted by you or on your behalf relating to in any way to this Agreement, or your employment or termination of employment with the Company or any Releasee, shall be filed exclusively in the Cumberland County Court of Common Pleas in the Commonwealth of Pennsylvania or in the United States District Court for the Middle District of Pennsylvania, and you consent to the jurisdiction and venue of these courts.

 

13.            Statement of Non-Admission .  Nothing in this Agreement is intended as or shall be construed as an admission or concession of liability or wrongdoing by you, the Company or any Releasee as defined above.  Rather, the proposed Agreement is being offered for the sole purpose of settling cooperatively and amicably any and all possible disputes described in Paragraph 3.

 

14.            Interpretation of Agreement .  Nothing in this Agreement is intended to violate any law or shall be interpreted to violate any law.  If any paragraph or part or subpart of any paragraph in this Agreement or the application thereof is construed to be overbroad and/or unenforceable, then the court making such determination shall have the authority to narrow the paragraph or part or subpart of the paragraph as necessary to make it enforceable and the paragraph or part or subpart of the paragraph shall then be enforceable in its/their narrowed form.  Moreover, each paragraph or part or subpart of each paragraph in this Agreement is independent of and severable (separate) from each other.  In the event that any paragraph or part or subpart of any paragraph in this Agreement is determined to be legally invalid or unenforceable by a court and is not modified by a court to be enforceable, the affected paragraph or part or subpart of such paragraph shall be stricken from the Agreement, and the remaining paragraphs or parts or subparts of such paragraphs of this Agreement shall remain in full, force and effect.

 

15.            Entire Agreement .  This Agreement and the applicable provisions of the Employment Agreement constitutes the entire agreement between the parties and supersedes any and all prior representations, agreements, written or oral, expressed or implied, by the Company or any Releasee arising out of or relating in any way to your employment or the termination of your employment with any Releasee. This Agreement may not be modified or amended other than by an agreement in writing signed by you and either the Vice President & Assistant General Counsel or the Senior Director of Corporate Human Resources of Rite Aid HDQTRS. Corp.

 

16.            Acknowledgment .  You acknowledge and agree that, subsequent to the termination of your employment, you shall not be eligible for any payments from the Company or any of the Releasees or any benefits arising out of your employment with any of the Releasees, except as expressly set forth in this Agreement or the Employment Agreement.

 

17.            Headings .  The headings contained in this Agreement are for convenience of reference only and are not intended, and shall not be construed, to modify, define, limit, or expand the intent of the

 

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parties as expressed in this Agreement, and they shall not affect the meaning or interpretation of this Agreement.

 

18.            Days .  All references to a number of days throughout this Agreement refer to calendar days.

 

19.            Representations .  You agree and represent that:

 

(a)            You have read carefully the terms of this Agreement, including the General Release;

 

(b)            You have had an opportunity to and have been encouraged to review this Agreement, including the General Release, with an attorney;

 

(c)            You understand the meaning and effect of the terms of this Agreement, including the General Release;

 

(d)            You were given forty-five (45) days to determine whether you wished to sign this Agreement, including the General Release;

 

(e)            Your decision to sign this Agreement, including the General Release, is of your own free and voluntary act without compulsion of any kind;

 

(f)             No promise or inducement not expressed in this Agreement or the Employment Agreement has been made to you; and

 

(g)            You have adequate information to make a knowing and voluntary waiver.

 

20.            Revocation Period .  If you sign this Agreement, you will retain the right to revoke it for seven (7) days.  If you revoke this Agreement, you are indicating that you have changed your mind and do not want to be legally bound by this Agreement.  The Agreement shall not be effective until after the Revocation Period has expired without your having revoked it.  To revoke this Agreement, you must send a certified letter to the following address:  Steven Chesney, Senior Director of Corporate Human Resources, Rite Aid HDQTRS. Corp., 30 Hunter Lane, Camp Hill, PA 17011.  The letter must be post-marked within seven (7) days of your execution of this Agreement.  If the seventh day is a Sunday or federal holiday, then the letter must be post-marked on the following business day.  If you revoke this Agreement on a timely basis, you shall not be eligible for the consideration set forth in Paragraph 2.

 

21.            Offer Expiration Date .  As noted above, you have forty-five (45) days to decide whether you wish to sign this Agreement.  If you do not sign this Agreement within 45 days of the date you receive it, then this offer is withdrawn and you will not be eligible for the consideration set forth in Paragraph 2 above.

 

If you agree with the all of the terms of this Agreement, please sign below, indicating that you understand, agree with and intend to be legally bound by this Agreement, including the General Release, and return the signed Agreement to Steven Chesney at the above address.

 

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We wish you the best in the future.

 

 

 

Sincerely,

 

 

 

 

 

 

 

UNDERSTOOD AND AGREED, INTENDING TO BE LEGALLY BOUND:

 

 

 

 

 

 

 

 

Name

 

 

 

 

 

 

 

 

Date

 

 

 

 

 

 

 

 

Witness

 

 

 

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APPENDIX D

 

(Listing of Permitted Activities)

 

Board of Governors of Children’s Miracle Network

 

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Exhibit 10.15

 

AMENDMENT NO. 4 TO

EMPLOYMENT AGREEMENT

 

THIS AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT by and between Rite Aid Corporation, a Delaware corporation (the “Company”) and Mary F. Sammons (the “Executive”) is dated and effective as of the close of business on January 21, 2010 (the “Effective Date”).

 

1.               Introductory Statement

 

Executive is Chairman of the Board (“Chairman”) and Chief Executive Officer of the Company under the Original Employment Agreement (as defined below).  The parties mutually desire Executive to continue as Chairman and Chief Executive Officer of the Company until the annual general meeting of stockholders in June 2010 (the close of business on such date is herein referred to as the “2010 AGM Date”) and thereafter to continue employment in the Chairman’s position from the 2010 AGM Date through the close of business on June 30, 2012 or such other earlier date in June 2012 when the Company’s annual general meeting of stockholders occurs (the “2012 AGM Date”).  As used herein, the term “Employment Period” shall mean the period commencing on the Effective Date and ending on the close of business on 2012 AGM Date (the “Expiration Date”), subject to the terms and conditions herein.

 

2.               Agreement of Employment

 

(a)          Except as otherwise expressly set forth herein, the terms of the Original Employment Agreement between the Company and Executive as Chairman and Chief Executive Officer shall continue in full force and effect in accordance with the original terms thereof until the 2010 AGM Date. As of the 2010 AGM Date, the Original Employment Agreement automatically shall be amended and restated on a prospective basis as set forth or incorporated by reference herein.  As of the 2010 AGM Date, Executive hereby agrees to resign as Chief Executive Officer, which resignation shall not constitute a breach of the Original Employment Agreement or termination of employment of the Executive under the Original Employment Agreement, as amended by this Amendment No. 4.

 

Subject to earlier termination in accordance with the Original Employment Agreement, during the period commencing on the 2010 AGM Date and ending on the Expiration Date (the “Extended Term”), the Executive shall serve as the Chairman, subject to the terms hereof.  As Chairman, during the Extended Term, Executive will have such duties as are customarily assigned to such position, including presiding at all meetings of the Company’s stockholders and of the Board of Directors, and shall continue to represent the Company on the National Association of Chain Drug Stores Board of Directors and Executive Committee and have such other duties appropriate to the office of chairman as may be from time to time assigned by the Company’s Board of Directors or requested by the Chief Executive Officer.  In her capacity as

 



 

Chairman, Executive shall report to the Board of Directors and shall have no direct reports.

 

(b)          During the Extended Term, and excluding any periods of vacation and sick leave to which Executive is entitled, the Executive shall devote such attention and time during normal business hours as she believes in good faith shall be reasonably necessary to carry out her duties as Chairman, provided in no event shall Executive’s duties (or her travel on Company business) be inconsistent with her personal and other business activities from time-to-time.  Without limiting the generality of the foregoing, the Executive may serve on corporate, industry, civic or charitable boards and committees, may engage or be interested in any other business or businesses (except as expressly restricted by Section 8 of the Original Employment Agreement as incorporated herein) and shall be permitted to make and manage her personal investments.  Nothing herein shall prohibit Executive from entering into employment with one or more third parties during the Extended Term, so long as Executive believes in good faith that such employment does not reasonably interfere with Executive’s duties and is not expressly restricted by Section 8 of the Original Employment Agreement as incorporated herein.

 

(c)           During the Extended Term, in connection with the performance of her duties, the Company shall maintain an office and administrative support for the Executive at the Company’s headquarters in the Harrisburg, Pennsylvania area (whether or not she is based at such office) and shall reimburse the Executive for reasonable expenses incurred at her home office currently located in Portland, Oregon and reasonable cost of travel between her home office and the Company’s headquarters as well as for travel otherwise on behalf of the Company.

 

3.               Compensation, etc.

 

(a)          During the portion of the Employment Period from the Effective Date through the 2010 AGM Date, the terms of the Original Employment Agreement shall continue in full force and effect in accordance with the original terms thereof except as expressly set forth herein.

 

(b)          During the portion of the Employment Period from the 2010 AGM Date through the balance of the Company’s 2011 fiscal year (i.e., through February 26, 2011) (the “Initial Extended Term”), the provisions of Section 3(a) (“Base Salary” ( i.e. providing for an annual Base Salary of not less than $1,000,000), 3(b) (“Incentive Compensation”) ( i.e. targeted at 200% of the Annual Base Salary), 3(c) (“Other Benefits”), 3(d) (“Deferred Compensation; Service Credit”) and 3(f) (“Indemnification”) under the Original Employment Agreement shall continue to apply in their entirety in accordance with the original terms thereof, notwithstanding that Executive’s position shall have changed on the 2010 AGM Date to Chairman from Chairman and Chief Executive Officer.  Such provisions are incorporated herein by reference.

 

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(c)           During the portion of the Employment Period commencing after the Initial Extended Term through the Expiration Date (the “Subsequent Extended Term”), the Company shall pay Executive an annual base salary of $350,000, in accordance with the Company’s regular payroll practice for its senior executives as in effect from time to time (but in no event less frequently than monthly).  Executive shall also be entitled in their entirety to (i) continued benefits as provided under Section 3(c) (“Other Benefits”) of the Original Employment Agreement except for the personal use of Company-owned aircraft which shall cease after the Initial Extended Term, (ii) continued compensation as provided under Section 3(d) (“Deferred Compensation; Service Credit”) and (iii) continued rights under Section 3(f) (“Indemnification”) of the Original Employment Agreement.  Such provisions are incorporated herein by reference.  Executive shall not be entitled to participate in any Incentive Compensation or bonus plans (or any successor thereto) accruing during the Subsequent Extended Term.

 

(d)          Notwithstanding anything to the contrary herein or in the Original Employment Agreement, following any termination for any reason (other than Cause) of the Executive’s employment with the Company, the Company shall make an annual payment (as previously agreed) to the Executive during her life (and thereafter to her surviving spouse for his life) equal to the cost to the Executive, on an after-tax basis, of purchasing medical coverage substantially comparable in all material respects to the coverage provided by the Company to its senior executives (and their spouses and dependents) immediately prior to such termination.  Notwithstanding the foregoing, the payment described in the preceding sentence shall not be made to the Executive with respect to any period during which the Company provides such medical coverage to the Executive and her spouse and dependents pursuant to Section 5(a) or 5(b) of the Original Employment Agreement or pursuant to such provisions as incorporated herein.

 

(e)           From the Effective Date through the end of the Initial Extended Term, Executive shall be eligible to receive stock options, restricted stock awards and performance awards pursuant to the Company’s Long Term Incentive Program in her capacity as Chairman and Chief Executive Officer.  Subsequent to the 2010 AGM Date, Executive shall be entitled to receive stock options and restricted stock awards in accordance with the Company’s policy for members of the Board of Directors as in effect from time to time.

 

(f)            For the avoidance of doubt, compensation and other rights and benefits accruing in favor of Executive during a particular portion of the Employment Period (e.g. fiscal year 2011 Incentive Compensation payable in fiscal 2012) shall apply in accordance with their terms and not be limited even though not payable until or paid in a subsequent period.

 

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4.               Termination of Employment

 

Unless a different time period is specified herein, the following provisions shall take effect as of the Effective Date superseding and modifying any conflicting or inconsistent provision in Section 4 of the Original Employment Agreement:

 

(a)          Death or Disability .  The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period.  The Company shall be entitled to terminate the Executive’s employment because of the Executive’s Disability during the Employment Period.  “Disability” means that Executive has been unable, for six (6) consecutive months, to perform the Executive’s applicable duties under the Original Employment Agreement through the 2010 AGM Date and under this Amendment No. 4 for the balance of the Employment Period as a result of physical or mental illness or injury.  The effective date of any termination of Executive’s employment for Disability is referred to herein as the “Disability Effective Date”.  A termination of the Executive’s employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30 th  day after receipt of such notice by the Executive, unless the Executive returns to required performance of the Executive’s duties before the Disability Effective Date.  During any period prior to the Disability Effective Date during which Executive is absent from the required performance of her duties with the Company due to such physical or mental illness or injury, the Company shall continue to pay in the ordinary course and the Executive will be entitled to receive her applicable compensation under the Original Employment Agreement or this Amendment No. 4.

 

(b)          Termination by the Company .  The Company may terminate the Executive’s employment at any time during the Employment Period for Cause or without Cause.  “Cause” shall mean only an act of fraud, embezzlement or misappropriation by the Executive, in any such case, intended by the Executive to result in substantial personal enrichment at the expense of the Company.  Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the non-employee members of the Board at a meeting of the Board called and held for such purpose (after reasonable written notice to Executive setting forth in reasonable detail the specific conduct of the Executive upon which the Board relies in reaching its determination and an opportunity for Executive, together with her counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of the conduct set forth in the second sentence of this Section 4(b), and Executive shall be entitled to receive all compensation and benefits hereunder pending the delivery of such resolution.  The effective date of any termination for Cause shall be the date such resolution is delivered to the Executive.

 

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(c)           Good Reason; Without Good Reason .  The Executive may terminate employment for Good Reason or without Good Reason.  “Good Reason” shall mean the occurrence of any one of the following:

 

A.             any (i) adverse alteration in Executive’s titles, positions, status, duties, authorities, reporting relationships or responsibilities with the Company or its subsidiaries from those specified in the Original Employment Agreement or this Amendment No. 4 (including, in the latter case, the failure of the Executive to be elected as a member of the Board of Directors at the 2010 AGM or the 2011 AGM), as applicable (it being understood that, if the Company is no longer a public company, the failure of Executive to hold the applicable position and duties under the Original Employment Agreement or this Amendment No. 4 with any ultimate corporate or other parent of the Company or any successor shall be deemed to constitute such Good Reason), (ii) assignment to Executive of any duties or responsibilities inconsistent with Executive’s status as Chairman or Chief Executive Officer of the Company, as applicable, or (iii) failure of Executive during the Employment Period to be nominated or re-elected to the offices of Chairman and Chief Executive Officer, as applicable, or the removal of Executive from either such office under any circumstances (other than in connection with the termination of/ Executive’s employment under circumstances not otherwise constituting “Good Reason” and other than the resignation of Executive as Chief Executive Officer as of the 2010 AGM Date); provided, however, that clauses (i), (ii) and (iii) of subparagraph A of Section 4(c) hereof are hereby amended on a prospective basis, effective as of the 2010 AGM Date, to delete all references to Executive’s former status as Chief Executive Officer of the Company;

 

B.             any failure by the Company to comply with any provision of Section 3 of the Original Employment Agreement or any provision of this Amendment No. 4, as applicable;

 

C.             any failure by the Company to comply with paragraph (b) of Section 11 of the Original Employment Agreement or the similar provisions incorporated by reference in this Amendment No. 4; or

 

D.             any other material breach of the Original Employment Agreement or this Amendment No. 4, as applicable, by the Company; provided, however, that the Company shall have the right, within ten (10) days after receipt of notice from Executive of the Company’s violation of any one of subparagraphs A, B or D, to cure in full the event or circumstances giving rise to such Good Reason, in the event of which cure such event or circumstances shall be deemed not to constitute Good Reason hereunder.

 

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In addition, any termination of employment by the Executive within the six (6) month period commencing on the date of a Change in Control of the Company (as defined in Appendix A to Exhibit A to the Original Employment Agreement inclusive of the applicable definitions in such Appendix A) shall be treated as a non-curable termination of employment by the Executive for Good Reason.  A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice (“Notice of Termination for Good Reason”) of the termination, setting forth (except in the case of written notice delivered following a Change in Control of the Company) in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies, provided, that Executive’s continued employment shall not be deemed to constitute consent to, or a waiver of rights with respect to, any act, omission or other grounds constituting Good Reason hereunder.  For clarity, it is understood that the requirement of setting forth such specific conduct and specific provision(s) is intended (i) to permit the Company to make a reasonable evaluation of Executive’s claim of termination for Good Reason and (ii) to permit the Company, where applicable, to cure such conduct, but not to require Executive to specify each act, omission or other grounds constituting Good Reason, there being no intention of the parties that failure to so specify will function as an estoppel with respect to any claim by Executive.  A termination of employment by the Executive for Good Reason shall be effective on the latest of (i) the fifth (5 th ) business day following the expiration of the Company’s cure period described above, if applicable, (ii) the date specified by Executive in the Notice of Termination for Good Reason, or (ii) forty-five (45) days following the date the Notice of Termination for Good Reason is delivered to the Company.

 

A termination of the Executive’s employment by the Executive without Good Reason shall be effected by giving the Company at least ninety (90) days written notice of such termination, and shall be effective on the date specified by Executive in such notice, provided, however, that no such notice period shall be required with respect to any such termination as to which such written notice of termination is delivered to the Company following a Change in Control of the Company; and provided, further, that such notice period shall be reduced to no less than thirty (30) days following the 2010 AGM Date.

 

(d)          Date of Termination .  The “Date of Termination” means the date of the Executive’s death, the Disability Effective Date, the Expiration Date, or the date on which the termination of the Executive’s employment by the Company for Cause or without Cause or by the Executive for Good Reason or without Good Reason becomes effective, as the case may be.  On the Date of Termination, the Employment Period shall terminate.

 

5.A.  Section 5(a)(1) of the Original Employment Agreement as incorporated herein is hereby amended by adding the following at the end of said Section 5(a)(1):

 

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“Notwithstanding anything herein to the contrary, if, during the Extended Term, the Company terminates the Executive’s employment for any reason other than Cause or Disability, or the Executive terminates her employment for Good Reason, the amount payable pursuant to Section 5(a)(1)(i) of the Original Employment Agreement shall be an amount equal to three (3) times the sum of (x) Executive’s Annual Base Salary in effect immediately prior to the 2010 AGM Date (without giving effect to any reductions thereto) plus (y) the Executive’s Annual Target Bonus (as defined in Section 3(b) of the Original Employment Agreement) in effect for fiscal 2011.

 

B.  A new subsection (f) to Section 5 of the Original Employment Agreement shall be added on the Effective Date to the Original Employment Agreement and incorporated herein (which shall be in addition to and not in lieu of the provisions of the last sentence of Section 4 of Amendment No. 2 to Employment Agreement dated September 30, 2003), as follows:

 

(f)                                    Expiration of Employment Period .  Upon the termination for any reason (other than termination by the Company for Cause or by the Executive without Good Reason) of the Executive’s employment with the Company, then, on the applicable Date of Termination;

 

(i)             all of the Executive’s then outstanding stock options shall vest and become fully exercisable as of the Date of Termination and all outstanding stock options shall remain fully vested and exercisable throughout the remainder of their ten (10) year term, without regard to any early termination provisions or other terms and conditions otherwise applicable to such options; and

 

(ii)            all remaining restrictions applicable to all restricted stock awards shall immediately lapse and any performance goals or other conditions applicable to any other equity incentive awards shall immediately be deemed to have been satisfied in full (with performance goals being deemed to have been satisfied at targeted levels).

 

6.               Incorporation by Reference

 

Except as modified by this Amendment No. 4 and without limiting the provisions of Section 2(a) hereof which provide for the continued application of the Original Employment Agreement until the 2010 AGM Date, (i) the provisions of Sections 5, 6, 7, 8, 10, 11, 12, 13 and 14 of the Original Employment Agreement, (ii) the benefits set forth in Amendment No. 2 to Employment Agreement dated September 30, 2003 (except as provided in Section 3(c) of this Amendment No. 4), (iii) the Side Agreement dated February 12, 2002, the Letter Agreement dated September 24, 2008 and the Letter Agreement dated February 25, 2009 and (iv) the provisions of amendment No. 3 to Employment Agreement dated December 30, 2008 shall remain in full force and effect

 

7



 

throughout the Employment Period and are incorporated by reference in this Amendment No. 4 as if set forth herein. References in provisions incorporated by reference to capitalized terms therein shall have the meanings set forth in the capitalized terms herein and references to this “Agreement” or “agreement” referring to the Original Employment Agreement or this Amendment No. 4, as applicable, unless the context otherwise requires.  In the event of a conflict between the provisions of the Amendment No. 4 and the Original Employment Agreement, this Amendment No. 4 shall be controlling.

 

7.               Defined Terms .

 

As used herein, the Original Employment Agreement shall mean that certain Employment Agreement, dated as of December 5, 1999 as amended by Amendment No. 1 to Employment Agreement dated as of May 7, 2001; Amendment No. 2 to Employment Agreement dated September 30, 2003; Amendment No. 3 to Employment Agreement dated December 30, 2008; Side Agreement to Employment Agreement dated as of October 11, 2006; Side Agreement dated February 12, 2002; Letter Agreement dated September 24, 2008; and Letter Agreement dated February 25, 2009.  All other capitalized terms used or incorporated by reference herein and not otherwise specifically defined herein shall have the meanings set forth in the Original Employment Agreement.

 

8.               Legal Fees and Expenses .

 

Promptly following the Effective Date, the Company shall reimburse the Executive for legal fees and expenses incurred by Executive in negotiation of the Agreement up to the maximum of $10,000.

 

IN WITNESS WHEREOF, the Executive has hereunder set the Executive’s hand and, pursuant to due authorization, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written.

 

 

RITE AID CORPORATION

 

 

 

 

 

By:

/s/ Marc A. Strassler

 

Name:

Marc A. Strassler

 

Title:

Executive Vice President

 

 

 

 

 

/s/ Mary F. Sammons

 

Mary F. Sammons

 

8




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Exhibit 12

RITE AID CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

        We have calculated the ratio of earnings to fixed charges in the following table by dividing earnings by fixed charges. For this purpose, earnings include pre-tax income from continuing operations plus fixed charges, before capitalized interest. Fixed charges include interest, whether expensed or capitalized, amortization of debt expense, preferred stock dividend requirement and that portion of rental expense which is representative of the interest factor in those rentals.

 
  Year Ended  
 
  February 27,
2010
  February 28,
2009
  March 1,
2008
  March 3,
2007
  March 4,
2006
 
 
  (52 Weeks)
  (52 Weeks)
  (52 Weeks)
  (52 Weeks)
  (53 Weeks)
 
 
  (dollars in thousands)
 

Fixed charges:

                               
 

Interest expense

    515,763     477,627     449,596     275,219     277,017  
 

Interest portion of net rental expense(1)

    320,506     320,947     287,934     195,592     189,756  
                       
 

Fixed charges before capitalized interest and preferred stock dividend requirements

    836,269     798,574     737,530     470,811     466,773  
 

Preferred stock dividend requirements(2)

    17,614     43,536     65,066     62,910     65,446  
 

Capitalized interest

    859     1,434     2,069     1,474     934  
                       
 

Total fixed charges

    854,742     843,544     804,665     535,195     533,153  

Earnings:

                               
 

(Loss) income before income taxes

    (479,918 )   (2,582,794 )   (273,499 )   13,582     43,254  
 

Preferred stock dividend requirements(2)

    (17,614 )   (43,536 )   (65,066 )   (62,910 )   (65,446 )
 

Fixed charges before capitalized interest

    853,883     842,110     802,596     533,721     532,219  
                       
 

Total adjusted (loss) earnings

    356,351     (1,784,220 )   464,031     484,393     510,027  
                       

Earnings to fixed charges (deficiency) excess

    (498,391 )   (2,627,764 )   (340,634 )   (50,802 )   (23,126 )
                       
 

Ratio of earnings to fixed charges(3)

                     

(1)
The interest portion of net rental expense is estimated to be equal to one-third of the minimum rental expense for the period

(2)
The preferred stock dividend requirement is computed as the pre-tax earnings that would be required to cover preferred stock dividends.

(3)
For the years ended March 4, 2006, March 3, 2007, March 1, 2008, February 28, 2009 and February 27, 2010 earnings were insufficient to cover fixed charges by approximately $23.1 million, $50.8 million, $340.6 million, $2.6 billion and $498.4 million, respectively.



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Exhibit 21

Company
(Name in which such subsidiary
conducts business if other than corporate name):
  State of Incorporation
or Organization
112 Burleigh Avenue Norfolk, LLC   Virginia
1515 West State Street Boise, Idaho, LLC   Delaware
1740 Associates, LLC   Michigan
3581 Carter Hill Road—Montgomery Corp.    Alabama
4042 Warrensville Center Road—Warrensville Ohio, Inc.    Ohio
5277 Associates, Inc.    Washington
537 Elm Street Corporation   Rhode Island
5600 Superior Properties, Inc.    Ohio
657-659 Broad St. Corp.    New Jersey
764 South Broadway—Geneva, Ohio, LLC   Ohio
Ann & Government Streets—Mobile, Alabama, LLC   Delaware
Apex Drug Stores, Inc.    Michigan
Broadview and Wallings—Broadview Heights Ohio, Inc.    Ohio
Brooks Pharmacy, Inc.    Delaware
Central Avenue & Main Street Petal-MS, LLC   Delaware
Eagle Managed Care Corp.    Delaware
Eckerd Corporation   Delaware
Eckerd Fleet, Inc.    Florida
EDC Drug Stores, Inc.    North Carolina
EDC Licensing, Inc.    Delaware
Eighth and Water Streets—Urichsville, Ohio, LLC   Delaware
England Street—Asheland Corporation   Virginia
Fairground, LLC   Virginia
GDF, Inc.    Maryland
Genovese Drug Stores, Inc.    Delaware
Gettysburg and Hoover—Dayton, Ohio, LLC   Ohio
Harco, Inc.    Alabama
JCG (PJC) USA, LLC   Delaware
JCG Holdings (USA), Inc.    Delaware
K&B Alabama Corporation   Alabama
K&B Louisiana Corporation   Louisiana
K&B Mississippi Corporation   Mississippi
K&B Services, Incorporated   Louisiana
K&B Tennessee Corporation   Tennessee
K&B Texas Corporation   Texas
K&B, Incorporated   Delaware
Keystone Centers, Inc.    Pennsylvania
Lakehurst and Broadway Corporation   New Jersey
Maxi Drug North, Inc.    Delaware
Maxi Drug South, L.P.    Delaware
Maxi Drug, Inc.    Delaware
Maxi Green, Inc.    Vermont
Mayfield & Chillicothe Roads—Chesterland, LLC   Ohio
MC Woonsocket, Inc.    Rhode Island
Munson & Andrews, LLC   Delaware
Name Rite, LLC   Delaware
Northline & Dix—Toledo—Southgate, LLC   Michigan
P.J.C. Distribution, Inc.    Delaware
P.J.C. of West Warwick, Inc.    Rhode Island

Company
(Name in which such subsidiary
conducts business if other than corporate name):
  State of Incorporation
or Organization
P.J.C. Realty Co., Inc.    Delaware
Patton Drive and Navy Boulevard Property Corporation   Florida
Paw Paw Lake Road & Paw Paw Avenue-Coloma, Michigan, LLC   Delaware
PDS-1 Michigan, Inc.    Michigan
Perry Distributors, Inc.    Michigan
Perry Drug Stores, Inc.    Michigan
PJC Dorchester Realty LLC   Delaware
PJC East Lyme Realty LLC   Delaware
PJC Haverhill Realty LLC   Delaware
PJC Hermitage Realty LLC   Delaware
PJC Hyde Park Realty LLC   Delaware
PJC Lease Holdings, Inc.    Delaware
PJC Manchester Realty LLC   Delaware
PJC Mansfield Realty LLC   Delaware
PJC New London Realty LLC   Delaware
PJC of Cranston, Inc.    Rhode Island
PJC of East Providence, Inc.    Rhode Island
PJC of Massachusetts, Inc.    Massachusetts
PJC of Rhode Island, Inc.    Rhode Island
PJC of Vermont, Inc.    Vermont
PJC Peterborough Realty LLC   Delaware
PJC Providence Realty LLC   Delaware
PJC Realty MA, Inc.    Massachusetts
PJC Realty N.E. LLC   Delaware
PJC Revere Realty LLC   Delaware
PJC Special Realty Holdings, Inc.    Delaware
Ram—Utica, Inc.    Michigan
RDS Detroit, Inc.    Michigan
READ's Inc.    Maryland
Rite Aid Drug Palace, Inc.    Delaware
Rite Aid Hdqtrs. Corp.    Delaware
Rite Aid Hdqtrs. Funding, Inc.    Delaware
Rite Aid of Alabama, Inc.    Alabama
Rite Aid of Connecticut, Inc.    Connecticut
Rite Aid of Delaware, Inc.    Delaware
Rite Aid of Florida, Inc.    Florida
Rite Aid of Georgia, Inc.    Georgia
Rite Aid of Illinois, Inc.    Illinois
Rite Aid of Indiana, Inc.    Indiana
Rite Aid of Kentucky, Inc.    Kentucky
Rite Aid of Maine, Inc.    Maine
Rite Aid of Maryland, Inc.    Maryland
Rite Aid of Massachusetts, Inc.    Massachusetts
Rite Aid of Michigan, Inc.    Michigan
Rite Aid of New Hampshire, Inc.    New Hampshire
Rite Aid of New Jersey, Inc.    New Jersey
Rite Aid of New York, Inc.    New York
Rite Aid of North Carolina, Inc.    North Carolina
Rite Aid of Ohio, Inc.    Ohio
Rite Aid of Pennsylvania, Inc.    Pennsylvania
Rite Aid of South Carolina, Inc.    South Carolina

Company
(Name in which such subsidiary
conducts business if other than corporate name):
  State of Incorporation
or Organization
Rite Aid of Tennessee, Inc.    Tennessee
Rite Aid of Vermont, Inc.    Vermont
Rite Aid of Virginia, Inc.    Virginia
Rite Aid of Washington, D.C., Inc.    Washington DC
Rite Aid of West Virginia, Inc.    West Virginia
Rite Aid Realty Corp.    Delaware
Rite Aid Rome Distribution Center, Inc.    New York
Rite Aid Services, LLC   Delaware
Rite Aid Transport, Inc.    Delaware
Rite Fund, Inc.    Delaware
Rite Investments Corp.    Delaware
Rx Choice, Inc.    Delaware
Seven Mile and Evergreen—Detroit, LLC   Michigan
Silver Springs Road—Baltimore, Maryland/One, LLC   Delaware
Silver Springs Road—Baltimore, Maryland/Two, LLC   Delaware
State & Fortification Streets—Jackson, Mississippi, LLC   Delaware
State Street and Hill Road—Gerard, Ohio, LLC   Delaware
The Jean Coutu Group (PJC) USA, Inc.    Delaware
The Lane Drug Company   Ohio
Thrift Drug Services, Inc.    Delaware
Thrift Drug, Inc.    Delaware
Thrifty Corporation   California
Thrifty PayLess, Inc.    California
Tyler and Sanders Roads—Birmingham, Alabama, LLC   Delaware



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Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in Registration Statement Nos. 333-617340, 333-105662, 333-107824, 333-124725 and 333-146531 on Forms S-8 and the Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No. 333-64950 on Form S-1 of our reports dated April 28, 2010, relating to the financial statements and financial statement schedule of Rite Aid Corporation and subsidiaries, and the effectiveness of Rite Aid Corporation and subsidiaries' internal control over financial reporting, appearing in this Annual Report on Form 10-K of Rite Aid Corporation and subsidiaries for the year ended February 27, 2010.

DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania
April 28, 2010




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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Mary F. Sammons, Chairman and Chief Executive Officer, certify that:

1.
I have reviewed this annual report on Form 10-K 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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act")) and internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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: April 28, 2010

    By:   /s/ MARY F. SAMMONS

Mary F. Sammons
Chairman and Chief Executive Officer



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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

        I, Frank G. Vitrano, Senior Executive Vice President, Chief Financial Officer and Chief Administration Officer, certify that:

1.
I have reviewed this annual report on Form 10-K 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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange Act")) and internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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: April 28, 2010

    By:   /s/ FRANK G. VITRANO

Frank G. Vitrano
Senior Executive Vice President, Chief Financial Officer and Chief Administration 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 Annual Report on Form 10-K of Rite Aid Corporation (the "Company") for the annual period ended February 27, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Mary F. Sammons, as Chief Executive Officer of the Company, and Frank G. Vitrano, as Senior Executive Vice President and 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 her/his knowledge:

/s/ MARY F. SAMMONS

   
Name:   Mary F. Sammons    
Title:   Chairman and Chief Executive Officer    
Date:   April 28, 2010    

/s/ FRANK G. VITRANO


 

 
Name:   Frank G. Vitrano    
Title:   Senior Executive Vice President, Chief
Financial Officer and Chief Administration
Officer
   
Date:   April 28, 2010    



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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