UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended March 3, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 1-5742
RITE AID CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1614034
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Hunter Lane,
Camp Hill, Pennsylvania 17011
(Address of principal executive offices) (Zip Code)
Delaware
(State or other jurisdiction of
incorporation or organization)
30 Hunter Lane,
Camp Hill, Pennsylvania
(Address of principal executive offices)
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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
Pacific Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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. |X| Yes |_| No
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. |X|
The aggregate market value of the 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 May 14, 2001 was approximately $2,888,464,506. For purposes of this calculation, executive officers, directors and 5% shareholders are deemed to be affiliates of the registrant.
As of May 14, 2001 the registrant had outstanding 394,341,787 shares of common stock, par value $1.00 per share.
TABLE OF CONTENTS
Page
----
PART I................................................................... 2
ITEM 1. Business............................................... 2
ITEM 2. Properties............................................. 8
ITEM 3. Legal Proceedings...................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders.... 11
PART II.................................................................. 12
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 12
ITEM 6. Selected Financial Data................................ 14
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risks.................................................. 31
ITEM 8. Financial Statements and Supplementary Data............ 32
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 32
PART III................................................................. 33
PART IV.................................................................. 34
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................... 34
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as "anticipate," "believe," "intend," "estimate," "expect," "continue," "should," "could," "may," "plan," "project," "predict," "will" and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.
Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
o our high level of indebtedness;
o our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our credit facilities and other debt agreements;
o our ability to complete the financial restructuring contemplated by our May 15, 2001 bank commitment letter;
o our ability to improve the operating performance of our existing stores, and, in particular, our new and relocated stores in accordance with our management's long term strategy;
o the outcomes of pending lawsuits and governmental investigations, both civil and criminal, involving our financial reporting and other matters;
o competitive pricing pressures, continued consolidation of the drugstore industry, third-party prescription reimbursement levels, regulatory changes governing pharmacy practices, general economic conditions and inflation, interest rate movements, access to capital and merchandise supply constraints; and
o our ability to further develop, implement and maintain reliable and adequate internal accounting systems and controls.
We undertake no obligation to revise the forward-looking statements included in this report to reflect any future events or circumstances. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in this report under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation--Factors Affecting our Future Prospects" herein.
PART I
Item 1. Business
Overview
We are the second largest retail drugstore chain in the United States based on store count and the third largest based on sales. We operate our drugstores in 30 states across the country and in the District of Columbia. As of March 3, 2001, we operated 3,648 stores and had a first or second place market position in 34 of the 65 major U.S. metropolitan markets in which we operated. Our stores are an average of 12,663 square feet.
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 and the Pacific Stock Exchange under the trading symbol "RAD".
During all of the fiscal year ended March 3, 2001 ("fiscal 2001"), we operated in the retail drug segment and for a portion of fiscal 2001, we also operated in the pharmacy benefit management ("PBM") segment.
Through our retail drug segment, we sell prescription drugs, sales of which represented approximately 59.5% of our total sales during fiscal 2001. Our drugstores filled over 204 million prescriptions during fiscal 2001. Our drugstores also offer non-prescription medications, health and beauty aids and personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, photo processing, seasonal merchandise and numerous other everyday and convenience products which we refer to as our "front-end products."
Until October 2, 2000, when we sold it to Advance Paradigm, Inc. (now AdvancePCS), we owned PCS Health Systems, Inc. ("PCS"), one of the nation's largest providers of pharmacy benefit management services to employers, insurance carriers and managed care companies. As a result of the sale, the PBM segment is reported as a discontinued operation for all relevant periods in the financial statements included in this Annual Report.
From the beginning of fiscal 1997 until December 1999, we were engaged in an aggressive expansion program. During that period, we purchased 1,554 stores, relocated 866 stores, opened 445 new stores, remodeled 308 stores and acquired PCS. These activities had a significant negative impact on our operating results, severely strained our liquidity and increased our indebtedness to $6.6 billion as of February 26, 2000. In October 1999, we announced that we had identified accounting irregularities and our former chairman and chief executive officer resigned. In November 1999, our former auditors resigned and withdrew their previously issued opinions on our financial statements for the fiscal years 1998 and 1999. Thereafter, investigations were begun by the Securities and Exchange Commission and the United States Attorney for the Middle District of Pennsylvania into our affairs. In addition, the complaint in a securities class action lawsuit, which had been filed in March 1999, was amended to include allegations based upon the accounting irregularities we disclosed. In December 1999, new senior management was hired. In response to the situation we faced, we completed the following:
o Restated our financial statements for fiscal years 1998 and 1999, engaged new auditors to audit our financial statements for fiscal years 1998, 1999 and 2000, and resumed normal financial reporting;
o Refinanced our near term indebtedness to defer virtually all principal amortization to no earlier than August 2002;
o Improved our front end same store sales growth from a minus 2.2% in fiscal 2000 to a positive 6.5% in fiscal 2001 by improving store conditions and launching a competitive marketing program;
o Reduced our indebtedness by $1.4 billion from $6.6 billion on February 26, 2000 to $5.2 billion on April 28, 2001 with the proceeds from the sale of PCS and as a result of debt for equity exchanges;
o Curtailed our expansion plans resulting in an approximately $441 million reduction in capital expenditures from fiscal 2000 to fiscal 2001;
o Pending court approval, settled the securities class action and related lawsuits for $45 million to be funded with insurance proceeds and $155 million of common stock, cash and/or notes to be issued and paid in January 2002; and
o Began development and implementation of a comprehensive plan to address accounting systems and controls.
o Entered into a bank committment letter to refinance a significant portion of our indebtedness, see "Recent Event".
Our long term operating strategy is to focus on improving the productivity of our existing store base. We believe that improving the sales of our existing stores is important to improving our future profitability and cash flow. We also believe that the substantial investment made in our store base over the last five years has given us one of the most modern store bases in the industry. However, our store base has not yet achieved the level of sales productivity that our major competitors achieve. We intend to improve the performance of our existing stores by continuing to (i) capitalize on the substantial investment in our stores and distribution facilities; (ii) enhance our customer and employee relationships; and (iii) improve the product offerings in our stores. Moreover, it is estimated that pharmacy sales in the United States will increase more than 75% over the next five years. This anticipated growth is expected to be fueled by the "baby boom" generation entering their 50's, the increasing life expectancy of the American population and the introduction of several new successful drugs and inflation. We believe that this growth will help increase the sales productivity of our existing store base.
Since the beginning of fiscal 1997, we have opened 466 new stores, relocated 945 stores, generally to larger or free-standing sites, remodeled 406 stores and closed 1,139 stores. We also acquired 1,554 stores during the same period. All of our stores are integrated into a common information system. At March 3, 2001, 49.8% of our stores had been constructed, relocated or remodeled since the beginning of fiscal 1997. Our new and relocated stores are generally larger and need to develop a critical mass of customers to achieve profitability, which generally takes two to four years. Therefore, attracting more customers is a key component of our long term operating strategy. We have also improved our distribution network to support these new stores by, among other things, opening two high capacity distribution centers.
We have initiated various programs that are designed to improve our image with customers. These include our weekly distribution of a nationwide advertising circular to announce vendor promotions, weekly sales items and, in our expanded test market, our customer reward program, "Rite Rewards." We have also initiated programs that are specifically directed to our pharmacy business. These include reduced cash prices and an increased focus on attracting and retaining managed care customers. Through the use of technology and attention to customers' needs and preferences, we are increasing our efforts to identify inventory and product categories that will enable us to offer more personalized products and services to our customers. We continue to develop and implement employee training programs to improve customer service and educate our employees about the products we offer. We are also developing employee programs that create compensatory and other incentives for employees to provide customers with quality service, to promote our private label brands and to improve our corporate culture.
We continue to add popular and profitable product departments, such as our General Nutrition Companies, Inc. ("GNC") stores-within-Rite Aid-stores and one-hour photo development departments. We continue to develop ideas for new product departments and have begun to implement plans to expand the categories of our front-end products. During fiscal 2001, we undertook several initiatives to increase sales of our Rite Aid brand products and generic prescription drugs. As private label and generic prescription drugs generate higher margins than branded label, we expect that increases in the sales of these products would enhance our profitability. We believe that the addition of new departments and increases in offerings of products and services are integral components of our strategy to distinguish us from other national drugstore chains.
Recent Event
On May 16, 2001, we issued a press release announcing the details of a comprehensive $3.0 billion refinancing package that includes a commitment for a new $1.9 billion senior secured credit facility fully underwritten by Citibank NA, J.P. Morgan Chase & Co., Credit Suisse First Boston and Fleet Retail Finance, Inc. We announced that upon completion of the planned transactions scheduled to close during our second
fiscal quarter, we will have significantly reduced our debt and the amount of our debt maturing prior to March 2005.
The closing of the new credit facility is subject to the satisfaction of customary closing conditions and our issuance of approximately $1.05 billion in new debt or equity securities, of which $527 million, as of May 16, 2001, has been committed or arranged, as described herein. We plan to raise, at a minimum, the additional $523 million by issuing equity and fixed income securities and through real estate mortgage financings in transactions which are intended to close simultaneously with, and which will be conditioned upon, the closing of the new credit facility. The new credit facility will be secured by inventory, accounts receivable and certain other assets owned by our subsidiaries. The facility will be used to repay our first and second lien debt, pay expenses associated with the planned refinancing and for general working capital purposes.
In the $527 million in new debt and equity securities that has already been committed is a $149 million private placement comprised of 22.7 million shares of common stock committed on March 22, 2001 at $5.50 per share and 3.8 million shares of common stock committed on May 2, 2001 at $6.50 per share. The closing of this equity investment will take place simultaneously with, and is contingent upon, the completion of the new credit facility.
One of the holders has committed to exchange $152 million of our 10.5% senior secured notes due 2002 for $152 million of new 12.5% senior secured notes maturing in 2006. The new notes will be secured by a second lien on the collateral securing the new credit facility. In connection with the exchange, the holder will receive five-year warrants to purchase approximately 3.0 million shares of our common stock at $6.00 per share. The exchange will take place simultaneously with, and is contingent upon, the closing of the new credit facility.
We also announced that included in the $527 million that has already been committed are recently completed or contracted private exchanges of common stock for $226.2 million of our bank debt and 10.5% senior secured notes due 2002, as described herein.
Once the refinancing transactions are completed, our remaining debt due before March 2005 will be $152.0 million of our 5.25% convertible subordinated notes due 2002, $107.8 million of our 6.0% dealer remarketable securities due 2003, $259.2 million of our 10.5% senior secured notes due 2002 and amortization of the new credit facility. We expect to use internally generated funds to retire both the 5.25% notes and the dealer remarketable securities at maturity and to meet the amortization payments under the new credit facility. We also announced that funds to repay the 10.5% notes at maturity are included in the new credit facility.
We are being advised on the refinancing by Salomon Smith Barney Inc., J.P. Morgan Chase & Co. and Credit Suisse First Boston.
The debt and equity securities that we will offer will not be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements.
As described in our May 16, 2001 press release, the completion of the proposed refinancing of our credit facility is subject to customary closing conditions, some of which are beyond our control, and also to our ability to successfully complete the additional financings required by the commitment letter for the refinancing. While we believe we will successfully complete the refinancing, there can be no assurance that the refinancing transactions will be consummated.
Except as set forth herein, this Annual Report does not give effect to the consummation of the refinancing.
Description of Business
Retail Drug Segment
Our stores sell prescription drugs and a wide assortment of general merchandise that we call "front-end products," including over-the-counter medications, health and beauty aids and personal care items, cosmetics,
greeting cards, household items, convenience foods, photo processing services and seasonal merchandise. We distinguish our stores from other national chain drugstores, in part, through our private label brands, our "stores-within-Rite Aid stores" program with GNC and by our Internet presence through our website, www.riteaid.com, and the drugstore.com website. Our stores range in size from approximately 5,000 to 40,000 square feet. The larger stores are concentrated in the western United States. Substantially all of the stores we have opened since 1995 are based on our prototype 12,500 square foot freestanding building and such stores typically include a drive-thru pharmacy.
Products and Services. During fiscal 2001, sales of prescription drugs represented approximately 59.5% of our total sales. In fiscal years 2001, 2000 and 1999, prescription drug sales were $8.6 billion, $7.8 billion and $6.7 billion, respectively, of our revenues. We sell approximately 24,600 different types of non-prescription, or front-end, products. No single front-end product category contributed significantly to our sales during fiscal 2001 although certain front-end product classes contributed notably to our sales. Our principal classes of products are the following:
Fiscal Year 2001
Percentage of
Product Class Sales/Revenues
------------- --------------
Prescription drugs ....................... 59.5%
Over-the-counter and personal care ....... 10.9
Health and beauty aids ................... 5.8
General merchandise and other ............ 23.8
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We offer over 1,500 products under the Rite Aid private label brand, which contributed approximately 10.0% of our front-end sales in fiscal 2001. During fiscal 2001, we added 159 products under our private label. We intend to increase the number and the sales of our private label brand products.
We have a strategic alliance with GNC under which we plan to open, own and operate a minimum of 1,000 GNC "stores-within-Rite Aid-stores" across the country by July 2003. GNC is a leading nationwide retailer of vitamin and mineral supplements and personal care, fitness and other health-related products. As of March 3, 2001, we operated 605 GNC stores-within-Rite Aid- stores. We plan to open 220 GNC stores-within-our-stores during fiscal 2002.
Our strategy is to locate our stores at convenient locations in fast-growing metropolitan areas. As of March 3, 2001, we have a first or second place market position in 34 of the 65 major U.S. metropolitan markets in which we operate. We have significantly reduced our store development program in order to focus our efforts and resources on improving the operations of our existing store base. Consistent with our operating strategy, during fiscal 2001, we opened 9 new stores, relocated 63 stores, remodeled 98 stores and closed 163 stores. Our current plan for fiscal 2002 is to open approximately 6 new stores, relocate 25 stores and remodel 76 stores. Our fiscal 2002 planned store openings and relocations are not concentrated in any specific geographic region.
The table below identifies the number of stores by state as of March 3, 2001:
State
----- Store Count
-----------
Alabama................................................... 129
Arizona................................................... 3
California................................................ 598
Colorado.................................................. 31
Connecticut............................................... 45
Delaware.................................................. 26
District of Columbia...................................... 8
Georgia................................................... 52
Idaho..................................................... 22
Indiana................................................... 8
Kentucky.................................................. 124
Louisiana................................................. 96
Maine..................................................... 82
Maryland.................................................. 154
Michigan.................................................. 345
Mississippi............................................... 32
Nevada.................................................... 37
New Hampshire............................................. 40
New Jersey................................................ 177
New York.................................................. 406
Ohio...................................................... 281
Oregon.................................................... 72
Pennsylvania.............................................. 369
Tennessee................................................. 51
Texas..................................................... 5
Utah...................................................... 30
Vermont................................................... 13
Virginia.................................................. 162
Washington................................................ 139
West Virginia............................................. 110
Wyoming................................................... 1
-----
Total.................................................. 3,648
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Technology. All of our stores are integrated into a common information system, which enables us to fill prescriptions with increased accuracy and efficiency and that can be expanded to accommodate new stores. Additionally, each of our stores employs point-of-sale technology that facilitates inventory replenishment, sales analysis and recognition of customer trends. As of March 3, 2001, we had installed ScriptPro automated pharmacy dispensing units which are linked to our pharmacists' computers and fill and label prescription drug orders, in 871 stores. In fiscal 2001, we developed and implemented several new technologies and applications, including productivity improvements related to our piece picking and inventory movement management. We also made modifications to our proprietary pharmacy information system in order to improve its user interface and information output. We also simplified our cash register or point of sale processes. Our customers may also order prescription refills over the Internet through drugstore.com or over the phone through our telephonic rapid automated refill systems.
Suppliers. During fiscal 2001, we purchased approximately 93% of the dollar volume of our prescription drugs from a single supplier, McKesson HBOC, Inc. under a contract which runs until April 2004. Under the contract, McKesson HBOC has agreed to sell to us all of our requirements of branded pharmaceutical products. With limited exceptions, we are required to purchase all of our branded pharmaceutical products from McKesson HBOC. We purchase generic (non-brand name) pharmaceuticals from a variety of sources on an exclusive basis and generic pharmaceutical products on a non-exclusive basis. If our relationship with McKesson HBOC was disrupted, we could have difficulty filling prescriptions, which would negatively affect 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. During fiscal 2001, we made significant efforts to resolve prior issues and disputes and to improve our relationships with our suppliers and vendors and we believe these efforts have been successful.
We sell private label and co-branded products that generally are supplied by numerous competitive sources. The Rite Aid and GNC co-branded PharmAssure(R) 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. During fiscal 2001, our stores served an average of 1.9 million customers per day as compared to an average of 1.8 million customers per day in fiscal 2000. The loss of any one customer would not have a material adverse impact on our results of operations. No single customer accounted for more than 10% of our total sales.
Competition. The retail drugstore industry is highly competitive. In the sale of prescription drugs, we compete with, among others, retail drugstore chains, independently owned drugstores, mass merchandisers, supermarkets, discount stores and mail order pharmacies. We compete on the basis of store location and convenient access, customer service, product selection and price.
Employees. As of March 3, 2001, we had 75,500 employees. Approximately 12% of these employees are pharmacists. There is a national shortage of pharmacists. Our management is implementing various employee incentive plans in order to attract and retain qualified pharmacists. We believe that our relationships with our employees are good.
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 label products. We hold licenses to sell beer, wine and liquor, cigarettes and lottery tickets. Additionally, we hold licenses granted to us by the Nevada Gaming Commission. We also hold licenses to operate our pharmacies and our distribution facilities. Together, these licenses are material to our operations.
Regulation
Our pharmacies and pharmacists must be licensed by the appropriate state boards of pharmacy. Our pharmacies and distribution centers are also registered with the Federal Drug Enforcement Administration. 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.
In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. The legislative initiatives include prescription drug benefit proposals for Medicare participants. Although we believe we are well positioned to respond to these developments, we cannot predict the outcome or effect of legislation resulting from these reform efforts. Also, in recent years, both federal and state authorities have proposed and have passed new legislation that imposes on healthcare providers, including pharmacies, significant additional obligations concerning the protection of confidential patient medical records and information.
PBM Segment
On October 2, 2000, we consummated the sale of PCS to Advance Paradigm (now known as AdvancePCS) for $710.5 million in cash, equity securities of AdvancePCS and AdvancePCS's $200.0 million 11% promissory notes. In March 2001, we sold the AdvancePCS equity securities in an underwritten public offering for a total of $284.1 million (net of selling commissions) and AdvancePCS paid the promissory note in full plus accrued and unpaid interest. We applied $1,093.5 million of the proceeds from the sale of PCS to reduce our debt. We recorded a loss on disposal of $168.8 million in fiscal 2001 as a result of the sale.
Item 2. Properties
We own our corporate headquarters, which are located in a 205,000 square foot building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a 99,000 square foot building near Harrisburg, Pennsylvania for use by additional administrative personnel. We lease 3,358 of our 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.
As of March 3, 2001, we operated 3,648 retail drugstores. The overall average size of each store in our chain is 12,663 square feet. The stores on the east coast average 9,502 square feet per store. The west coast stores average 20,802 square feet per store. The central stores average 10,323 square feet per store.
We operate the following distribution centers and overflow storage locations, which we own or lease as indicated:
Approximate
Owned or Square
Location Leased Footage
-------- ------ -------
Rome, New York ........................... Owned 291,000
Rome, New York(1) ........................ Leased 71,400
Utica, New York(1) ....................... Leased 115,000
Poca, West Virginia ...................... Owned 264,000
Dunbar, West Virginia(1) ................. Leased 61,000
South Nitro, West Virginia(1) ............ Leased 50,000
Perryman, Maryland ....................... Leased 885,000
Tuscaloosa, Alabama ...................... Owned 238,000
Tuscaloosa, Alabama(1) ................... Leased 27,000
Cottondale, Alabama(1) ................... Leased 125,000
Pontiac, Michigan ........................ Owned 362,000
Woodland, California ..................... Owned 521,300
Woodland, California(1) .................. Leased 200,000
Wilsonville, Oregon ...................... Leased 518,000
Lancaster, California .................... Leased 917,000
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The original terms of the leases for our distribution centers range from five 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.
We also own a 52,200 square foot ice cream manufacturing facility located in El Monte, California.
On a regular basis and as part of our normal business, we evaluate store performance and may reduce its size, close or relocate a store if the store is redundant, under performing or otherwise deemed unsuitable. When we reduce in size, close or relocate a store, we often continue to have leasing obligations or own the property, but we attempt to sublease the space. As of March 3, 2001, we subleased 5,558,000 square feet of space and an additional 4,019,000 square feet of space in closed or relocated stores was not subleased.
Item 3. Legal Proceedings
Federal Investigations
There are currently pending federal governmental investigations, both civil and criminal, by the SEC and the United States Attorney, involving our financial reporting and other matters. We are cooperating fully with the SEC and the United States Attorney.
The U.S. Department of Labor has commenced an investigation of matters relating to our employee benefit plans, including our principal 401(k) plan, which permitted employees to purchase our common stock. Purchases of our common stock under the plan were suspended in October 1999. In January 2001, we appointed an independent trustee to represent the interests of these plans in relation to us and to investigate possible claims the plans may have against us. Both the independent trustee and the Department of Labor have asserted that the plans may have claims against us. The investigations, with which we are cooperating fully, are ongoing and we cannot predict their outcomes. In addition, a purported class action lawsuit on behalf of the plans and their participants has been filed by a participant in the plans in the United States District Court for the Eastern District of Pennsylvania.
These investigations are ongoing and we cannot predict their outcomes. If we were convicted of any crime, certain contracts and licenses that are material to our operations may be revoked, which would have a material adverse effect on our results of operations and financial condition. In addition, substantial penalties, damages or other monetary remedies assessed against us could also have a material adverse effect on our results of operations, financial condition and cash flows.
Stockholder Litigation
We, certain of our directors, our former chief executive officer Martin Grass, our former president Timothy Noonan, our former chief financial officer Frank Bergonzi, and our former auditor KPMG LLP, have been sued in a number of actions, most of which purport to be class actions, brought on behalf of stockholders who purchased our securities on the open market between May 2, 1997 and November 10, 1999. All of these cases have been consolidated in the U.S. District Court for the Eastern District of Pennsylvania. On November 9, 2000, we announced that we had reached an agreement to settle the consolidated securities class action lawsuits pending against us in the U.S. District Court for the Eastern District of Pennsylvania and the derivative lawsuits pending there and in the Delaware Court of Chancery. Under the agreement, which has been submitted to the U.S. District Court for the Eastern District of Pennsylvania for approval, we will pay $45 million in cash, which will be fully funded by our officers' and directors' liability insurance, and issue shares of common stock in 2002. The shares will be valued over a 10 day trading period in January 2002. If the value determined is at least $7.75 per share, we will issue 20 million shares. If the value determined is less than $7.75 per share, we have the option to deliver any combination of common stock, cash and short-term notes, with a total value of $155 million. As additional consideration for the settlement, we have assigned to the plaintiffs all of our claims against the above named executives and KPMG LLP. Several members of the class have elected to "opt-out" of the class and, as a result, if the settlement is approved by the court, they will be free to individually pursue their claims. Management believes that their claims, individually and in the aggregate, are not material.
Drug Pricing and Reimbursement Matters
On October 5, 2000, we settled, for an immaterial amount, and without admitting any violation of the law, the lawsuit filed by the Florida Attorney General alleging that our non-uniform pricing policy for cash prescription purchases was unlawful under Florida law.
The filing of the complaint by the Florida Attorney General, and our press release issued in conjunction therewith, precipitated the filing of a purported federal class action in California and several purported state class actions, all of which (other than those pending in New York that were filed on October 5, 1999 and those pending in California that were filed on January 3, 2000) have been dismissed. A motion to dismiss the action in New York is currently pending. We believe that the remaining lawsuits are without merit under applicable state consumer protection laws. As a result, we intend to continue to vigorously defend against them and we do not anticipate that if fully adjudicated, they will result in an award of damages. However, such outcomes cannot be assured and a ruling against us could have a material adverse effect on the financial position and results of operations of the company as well as necessitate substantial additional expenditures to cover legal costs as we pursue all available defenses.
We are being investigated by multiple state attorneys general for our reimbursement practices relating to partially-filled prescriptions and fully- filled prescriptions that are not picked up by ordering customers. We are supplying similar information with respect to these matters to the Department of Justice. We believe that these investigations are similar to investigations which were, and are being, undertaken with respect to the practices of others in the retail drug industry. We also believe that our existing policies and procedures fully comply with the requirements of applicable law and intend to fully cooperate with these investigations. We cannot, however, predict their outcomes at this time.
An individual acting on behalf of the United States of America, has filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania under the Federal False Claims Act alleging that we defrauded federal health care plans by failing to appropriately issue refunds for partially filled prescriptions and prescriptions which were not picked up by customers. The Department of Justice has not decided whether to join this lawsuit, as is its right under the law, and its investigation is continuing. We have filed a motion to dismiss the complaint for failure to state a claim.
If any of these cases result in a substantial monetary judgment against us or is settled on unfavorable terms, our results of operations, financial position and cash flows could be materially adversely affected.
Store Management Overtime Litigation
We are a defendant in a class action pending in the California Superior Court in San Diego with three subclasses, comprised of our California store managers, assistant managers and managers-in-training. The plaintiffs seek back pay for overtime not paid to them and injunctive relief to require us to treat our store management as non-exempt. They allege that we decided to minimize labor costs by causing managers, assistant managers and managers-in- training to perform the duties and functions of associates for in excess of forty hours per week without paying them overtime. We believe that in-store management were and are properly classified as exempt from the overtime provisions of California law. We have filed a motion to decertify the class which is currently pending. Our results of operations and financial position could be materially adversely affected by an adverse judgment in this matter.
Other
We are subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of our management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on our financial condition, results of operations or cash flows if decided adversely.
Item 4. Submission of Matters to a Vote of Security Holders
On December 6, 2000, we held our 2000 Annual Meeting of Stockholders. At the 2000 Annual Meeting, our stockholders:
1. Elected three directors to hold office until the Annual Meeting of Stockholders in 2003 by the following votes:
(a) William J. Bratton ................... For: 313,733,384* Against: 70,375 Abstain: 7,560,123 (b) Stuart M. Sloan ...................... For: 314,415,440* Against: 65,175 Abstain: 6,883,267 (c) Jonathan D. Sokoloff ................. For: 314,366,614* Against: 70,375 Abstain: 6,926,893 |
Following the 2000 Annual Meeting of Stockholders, the following persons continued to serve as our Directors: Robert G. Miller, Alfred M. Gleason, Alex Grass (resigned January 4, 2001), Leonard I. Green, Nancy A. Lieberman, Mary F. Sammons, Leonard N. Stern and Gerald Tsai, Jr.
2. Approved, adopted and ratified our 2000 Omnibus Equity Plan by the following vote:
For: 156,023,933* Against: 22,955,892 Abstain: 2,323,130
3. Declined to adopt a stockholder proposal to sell our company to the highest bidder by the following vote:
For: 17,029,174 Against: 160,168,193* Abstain: 4,126,718
4. Declined to adopt a stockholder proposal requesting that our management prepare and make public an employment diversity report by the following vote:
For: 12,121,942 Against: 163,783,162* Abstain: 5,397,853
5. Declined to adopt a stockholder proposal to declassify our Board of Directors by the following vote:
For: 23,303,172 Against: 153,228,708* Abstain: 4,768,656
An asterisk "*" indicates that the results include 58,722,800 votes cast in respect of all of the outstanding shares at the time of the 2000 Annual Meeting of Stockholders of our 8% series B cumulative convertible pay-in-kind preferred stock.
There were 140,060,927; 140,039,797; 140,060,925; and 140,063,346 broker non-votes for each of Item 2, Item 3, Item 4 and Item 5, respectively.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is listed on the New York and Pacific Stock Exchanges under the symbol "RAD". On May 4, 2001, we had approximately 11,719 record shareholders. Quarterly high and low stock prices, based on the New York Stock Exchange composite transactions, together with dividend information are shown below:
Fiscal Year Quarter High Low Dividend
----------- ------- ---- --- --------
2002 (through May 18, 2001).............. First 9 5 1/4 --
2001..................................... First 8 1/2 4 3/4 --
Second 8 1/2 4 --
Third 4 3/8 2 7/16 --
Fourth 6 3/32 1 3/4 --
2000..................................... First 41 3/4 21 $.1150
Second 26 15/16 17 1/2 $.1150
Third 20 1/8 4 1/2 $.1150
Fourth 13 1/4 6 3/8 --
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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 in the foreseeable future. Our credit facilities do not allow us to pay cash dividends and we anticipate that any credit facility we enter into in connection with a refinancing of our indebtedness will not allow us to pay cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Credit Facilities and Debt Restructuring."
Recent sales of unregistered securities. On October 27, 1999, we sold to Green Equity Investors III, L.P. 3,000,000 shares of our series A cumulative convertible pay-in-kind preferred stock at a purchase price of $100.00 per share, for an aggregate purchase price of $300.0 million. The series A preferred stock had an 8% cumulative pay-in-kind dividend paid quarterly. On December 10, 1999, Green Equity Investors III, L.P. exchanged all of its series A preferred stock for 3,000,000 shares of our series B cumulative convertible pay-in-kind preferred stock ("series B preferred stock"). The series B preferred stock has the same terms as the series A preferred stock except that the series B preferred stock votes with the holders of our common stock and each holder of series B preferred stock has one vote for each share of the common stock issuable upon conversion of the holder's series B preferred stock. The holders of our series B preferred stock are also entitled to vote separately as a class to elect two directors to our Board of Directors. Leonard I. Green and Jonathan D. Sokoloff are the series B directors. When issued, the series B preferred stock was convertible into shares of our common stock at a conversion price of $11.00 per share subject to adjustment. As a result of the exchange of our bank debt for shares of our common stock at an exchange rate of $5.50 per share, as discussed below, the conversion price for the series B preferred stock was adjusted to $5.50 per share.
On October 27, 1999, we issued a warrant to J.P. Morgan Ventures Corporation, an affiliate of J.P. Morgan, to purchase 2,500,000 shares of our common stock. The exercise price for the common stock is $11.00 per share, subject to certain adjustments. The warrant expires on September 23, 2002. The warrant was issued in connection with the extension and restructuring of our PCS and RCF facilities in October 1999.
On June 14, 2000, certain lenders, including J.P. Morgan Ventures Corporation, exchanged an aggregate of $284.8 million of their loans outstanding under the PCS credit facility, the RCF credit facility and the $300.0 million demand note into an aggregate of 51,785,434 shares of our common stock at an exchange rate of $5.50 per share.
On June 14, 2000, we issued $374.3 million of our 10.5% senior secured notes due 2002 in exchange for $52.5 million of our outstanding 5.5% notes due December 2000 and $321.8 million of our outstanding 6.7% notes due December 2001. We also entered into an agreement with J.P. Morgan and another financial institution under which they agreed to purchase $93.2 million of the 10.5% senior secured notes due 2002 when the 5.5% notes that remain outstanding mature in December 2000.
The series A preferred stock, the series B preferred stock, the warrant, the 10.5% senior secured notes due 2002 and our common stock issued in exchange for certain of our bank debt were issued in transactions exempt from registration in reliance on Section 4(2) of the Securities Act.
On June 26, 2000, the holders of approximately $177.8 million principal amount of our 5.25% convertible subordinated notes due 2002 exchanged these notes for an aggregate of 17,779,000 shares of our common stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
On November 10, 2000, the holders of approximately $79.9 million principal amount of our 5.25% convertible subordinated notes due 2002 and $12.3 million principal amount of our 6.0% dealer remarketable securities due 2003 exchanged these notes for an aggregate of 9,222,200 shares of our common stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
On January 23, 2001, the holders of approximately $5.5 million principal amount of our 6.0% senior notes due 2005 and $2.0 million principal amount of our 7.625% senior notes due 2005 exchanged these notes for an aggregate of 862,500 shares of our common stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
On January 26, 2001, the holders of approximately $15.0 million principal amount of our 5.25% convertible subordinated notes due 2002 exchanged these notes for an aggregate of 1,875,000 shares of our common stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
On January 30, 2001, the holders of approximately $20.0 million principal amount of our 5.25% convertible subordinated notes due 2002 exchanged these notes for an aggregate of 2,600,000 shares of our common stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
On March 14, 2001, the holders of approximately $201.4 million principal amount of our 5.25% convertible subordinated notes due 2002 exchanged these notes for an aggregate of 29,204,160 shares of our common stock. The common stock was issued in an exchange offer exempt from registration in reliance on section 3(a)(9) of the Securities Act.
On March 14, 2001, the holders of approximately $77.9 principal amount of our 6.0% dealer remarketable securities due 2003 exchanged these notes for an aggregate of 12,072,175 shares of our common stock. The common stock was issued in an exchange offer exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
On April 6, 2001, the holders of approximately $3.9 million principal amount of our 5.25% convertible subordinated notes due 2002 and $2.0 million principal amount of our 6.0% dealer remarketable securities due 2003 exchanged these notes for an aggregate of 856,000 shares of our common stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
The following described transactions make up the $527 million in new equity and debt securities we have committed to issue or have issued as of May 16, 2001 in connection with the refinancing plan we announced on May 16, 2001 and which is described under the caption "Recent Event" in Item 1 of this Annual Report.
o On March 22 and May 2, 2001, respectively, we agreed to issue 22.7 million and 3.8 million shares of common stock at $5.50 and $6.50 per share, respectively (an aggregate of $149.6 million). The shares of common stock will be issued in a transaction exempt from registration in reliance on Section 4(2) of the Securities Act.
o On April 25, 2001, the holders of approximately $11.0 million principal amount of our 10.5% senior secured notes due 2002 exchanged these notes for an aggregate of 1,925,000 shares of our common
stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
o On April 25, 2001, the holders of approximately $5.0 million principal amount of our 10.5% senior secured notes due 2002 exchanged these notes for an aggregate of 785,000 shares of our common stock. The common stock was issued in a privately negotiated transaction exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
o On April 27, 2001, we agreed with (i) holders of our RCF credit facility to exchange $10.0 million principal amount of indebtedness under the RCF credit facility, and (ii) holders of our PCS credit facility to exchange $5.0 million principal amount of indebtedness under the PCS credit facility, for an aggregate of 2,144,936 shares of our common stock. The common stock will be issued in a transaction exempt from registration in reliance on Section 4(2) of the Securities Act.
o As amended on April 30, 2001, pursuant to an agreement entered into on April 12, 2001, we agreed to exchange approximately $132.7 million principal amount of indebtedness under our RCF credit facility for 21,216,772 shares of our common stock. The shares of common stock will be issued in a transaction exempt from registration in reliance on Section 4(2) of the Securities Act.
o On May 2, 2001, holders of our RCF credit facility agreed to exchange $10.0 million principal amount of indebtedness for an aggregate of 1,443,814 shares of our common stock. The shares of common stock will be issued in a transaction exempt from registration in reliance on Section 4(2) of the Securities Act.
o On May 15, 2001, a holder of our RCF credit facility exchanged $10.0 million principal amount of indebtedness under the credit facility for an aggregate of 1,473,405 shares of our common stock. The common stock was issued in a transaction exempt from registration in reliance on Section 4(2) of the Securities Act.
o On May 16, 2001, we agreed to issue five year warrants to purchase approximately 3.0 million shares of common stock at $6.00 per share. These warrants will be issued in connection with the exchange by a holder of $152.0 million of our 10.5% senior secured notes due 2002 for a like principal amount of new 12.5% senior secured notes due 2006. The warrants will be issued in a privately negotiated transaction exempt from registration in reliance on Sections 3(a)(9) of the Securities Act.
o We have also committed in three additional transactions to issue shares of our common stock in exchange for an aggregate of $40.3 million of our 10.5% senior secured notes due 2002 and $2.2 million of our RCF credit facility. The number of shares to be issued in each transaction will depend on the average price of our common stock in the pricing period contained in the agreement relating to the transaction. The shares of common stock will be issued in privately negotiated transactions exempt from registration in reliance on Section 3(a)(9) and Section 4(2), respectively, of the Securities Act.
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 appearing on pages F-1 through F-40. Selected financial data is presented for four fiscal years. As previously discussed in our 10-K/A dated October 11, 2000, substantial time, effort and expense was required over a six month period to review, assess, reconcile, prepare and audit our financial statements for fiscal 2000, fiscal 1999 and fiscal 1998. We believe it would require an unreasonable effort and expense to conduct a similar process related to fiscal year 1997. Certain reclassifications have been made to prior years' amounts to conform to current year classifications.
Fiscal Year Ended
--------------------------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999 February 28, 1998
(53 weeks) (52 weeks) (52 weeks) (52 weeks)
------------- ----------------- ----------------- -----------------
(In thousands, except per share amounts and other data)
Summary of Operations:
REVENUES ............................................ $ 14,516,865 $ 13,338,947 $ 12,438,442 $ 11,352,637
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs ...... 11,151,490 10,213,428 9,406,831 8,419,021
Selling, general and administrative expenses ....... 3,458,307 3,607,810 3,200,563 2,773,560
Goodwill amortization .............................. 20,670 24,457 26,055 26,169
Store closing and impairment charges ............... 388,078 139,448 195,359 155,024
Interest expense ................................... 649,926 542,028 274,826 202,688
Loss on debt conversions and modifications ......... 100,556 -- -- --
Share of loss from equity investments .............. 36,675 15,181 448 1,886
Gain on sale of fixed assets ....................... (6,030) (80,109) -- (52,621)
------------ ------------ ------------ ------------
15,799,672 14,462,243 13,104,082 11,525,727
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes
and cumulative effect of accounting change........ (1,282,807) (1,123,296) (665,640) (173,090)
INCOME TAX EXPENSE (BENEFIT) ........................ 148,957 (8,375) (216,941) (28,064)
Loss from continuing operations before cumulative
effect of accounting change....................... (1,431,764) (1,114,921) (448,699) (145,026)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
including income tax expense (benefit) of $13,846,
$30,903, $(5,925) and $(10,885).................... 11,335 9,178 (12,823) (20,214)
Loss on disposal of discontinued operations, net of
tax benefit of $734............................... (168,795) -- -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net of
income tax benefit of $18,200...................... -- (27,300) -- --
------------ ------------ ------------ ------------
Net loss.......................................... $ (1,589,224) $ (1,133,043) $ (461,522) $ (165,240)
============ ============ ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations................... $ (5.15) $ (4.34) $ (1.74) $ (0.58)
Income (loss) from discontinued operations ......... (0.50) 0.04 (0.05) (0.08)
Cumulative effect of accounting change, net ........ -- (0.11) -- --
------------ ------------ ------------ ------------
Net loss per share................................. $ (5.65) $ (4.41) $ (1.79) $ (0.66)
============ ============ ============ ============
Year-End Financial Position:
Working capital (deficit)......................... $ 1,955,877 $ 752,657 $ (892,115) $ 1,258,580
Property, plant and equipment (net)............... 3,041,008 3,445,828 3,328,499 2,460,513
Total assets...................................... 7,913,911 9,845,566 9,778,451 7,392,147
Total debt ....................................... 5,894,548 6,612,868 5,922,504 3,132,894
Redeemable preferred stock........................ 19,457 19,457 23,559 --
Stockholders' equity.............................. (354,435) 432,509 1,339,617 1,898,203
Other Data:
Cash dividends declared per common share.......... $ 0 $ .3450 $ .4375 $ .4075
Basic weighted average shares..................... 314,189,000 259,139,000 258,516,000 250,659,000
Diluted weighted average shares................... 314,189,000 259,139,000 258,516,000 250,659,000
Number of retail drugstores....................... 3,648 3,802 3,870 3,975
Number of employees............................... 75,500 77,300 89,900 83,000
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(Footnotes on next page)
(1) PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS. See
"Business--PBM Segment." Accordingly, our PBM segment is reported as a
discontinued operation for all periods presented. See note 24 of the notes
to the consolidated financial statements.
(2) K&B, Incorporated and Harco, Inc. were acquired in August 1997.
(3) Total debt includes capital lease obligations of $1.1 billion, $1.1
billion, $1.1 billion and $622 million as of March 3, 2001, February 26,
2000, February 27, 1999 and February 28, 1998, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Management believes that the following matters should be considered in connection with the discussion of results of operations and financial condition:
Recent Actions Affecting Operating Results. During fiscal 2001, we took a number of actions which had the short term effect of significantly reducing our operating results but which management believes were nevertheless necessary. Among the actions taken were: (i) the sale of PCS which resulted in our recognizing a loss of $168.8 million and an increase in income tax expense of $146.9 million; (ii) the exchange of approximately $597.3 million of our debt for shares of our common stock which resulted in a net loss of $100.6 million; (iii) our decision to close or relocate certain stores that resulted in an approximate $149.2 million charge included in the $388.1 million recorded charges for store closures and impairment; and (iv) the restatement and audit of our fiscal 1999 and 1998 financial statements and the related investigation conducted by our audit committee of prior accounting irregularities resulted in our incurring and recording of $82.1 million of accounting and legal expense. We anticipate taking similar actions in the future that may have a material negative impact upon our operating results for the period in which we take those actions or subsequent periods. We also expect to incur significant costs and fees in connection with the refinancing described under "Recent Event".
Maturing Store Base. Since the beginning of fiscal 1997, we built 466 new stores, relocated 945 stores, remodeled 406 and closed 1,139 stores. These new, relocated and remodeled stores represented approximately 49.8% of our total stores at March 3, 2001 and are generally larger, free standing stores and have higher operating expenses than our older stores. New stores generally do not become profitable until a critical mass of customers is developed. Relocated stores also must attract additional customers to achieve comparable profitability to the store that was replaced. We believe that the period of time required for a new store to achieve profitable operations is generally between two and four years. This period can vary significantly based on the location of a particular store and on other factors, including the investments made in purchasing prescription files for the location and advertising. Our recent liquidity constraints have limited our ability to purchase prescription files and make other investments to promote the development of our new and relocated stores. We believe that our relatively high percentage of new and relocated stores is a significant factor in our recent operating results. Management believes that as these newer stores mature they should gain the critical mass of customers needed for profitable operations. We believe this continuing maturation should positively affect our operating performance in future periods. If we are not able to improve the performance of these new and relocated stores, it will have a material adverse effect on our ability to restore the profitability of our operations.
Substantial Investigation Expenses. We have incurred substantial expenses in connection with the process of reviewing and reconciling our books and records, restating our 1998 and 1999 financial statements, investigating our prior accounting practices and preparing our financial statements. Included in these expenses are the costs of the Deloitte & Touche LLP audits, the investigation by the law firm of Swidler, Berlin, Shereff, Friedman, assisted by Deloitte & Touche LLP, conducted for our audit committee concerning the accounting irregularities which led to the restatement of our financial statements for our 1999 and 1998 fiscal years and the costs of retaining Arthur Andersen LLP to assist management in reviewing and reconciling our books and records. We incurred $82.1 million in fiscal 2001 and we expect to incur $10.0 million to $15.0 million in fiscal 2002. We anticipate that we will continue to incur significant legal and other expenses in connection with the ongoing litigation and investigations to which we are subject.
Dilutive Equity Issuances. In June 2000, we completed a series of debt restructuring transactions as described further below under "Liquidity and Capital Resources". In connection with these transactions, an aggregate total of 69,564,434 shares of our common stock were issued in exchange for $462.6 million principal amount of our outstanding indebtedness. In addition, in November 2000, January 2001 and April 2001, we completed numerous privately negotiated transactions, and in connection with these transactions, an aggregate total of 18,125,700 shares of our common stock were issued in exchange for approximately $156.6 million principal amount of our outstanding indebtedness. In March 2001, we also exchanged approximately $279.3 million principal amount of outstanding indebtedness for an aggregate of 41,276,335 shares of our common stock upon completion of a public tender offer. As a result of these exchanges, we recorded an aggregate loss on conversion of approximately $100.6 million in fiscal 2001 and will record additional losses in fiscal 2002. In addition, pursuant to the conversion price adjustment and pay-in-kind dividend provisions of the series B convertible preferred stock issued to Green Equity Investors III, L.P. in October 1999, 61,095,219 shares of our common stock were issuable upon the conversion of such preferred stock at March 31, 2001. Assuming the transactions which occurred subsequent to March 3, 2001 and prior to May 4, 2001 had occurred on March 3, 2001, the common shares outstanding would have increased from 348,055,000 to 392,868,382. In light of our substantial leverage and liquidity constraints, we will continue to consider opportunities to use our equity securities to discharge debt or other obligations that may arise. Such issuances will have a dilutive effect on the outstanding shares of our common stock.
Accounting Systems. Following its review of our books and records, management concluded that further steps were needed to establish and maintain the adequacy of our internal accounting systems and controls. In connection with the audit of our financial statements, Deloitte & Touche LLP advised us that it believed there were numerous "reportable conditions" under the standards established by the American Institute of Certified Public Accountants which relate to our accounting systems and controls and could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. We are developing and implementing comprehensive, adequate and reliable accounting systems and controls which address the reportable conditions identified by Deloitte & Touche LLP.
Sale of PCS. On October 2, 2000, we sold PCS, our PBM segment, to Advance Paradigm (now AdvancePCS). The selling price of PCS consisted of $710.5 million in cash, $200.0 million in principal amount of AdvancePCS's 11% promissory notes and AdvancePCS equity securities. Accordingly, the PBM segment is reported as a discontinued operation for all periods presented in the accompanying financial statements, and the operating income of the PBM segment through October 2, 2000, the date of sale, is reflected separately from the income from continuing operations. The loss on disposal of the PBM segment was $168.8 million. Additionally, we recorded an increase to the tax valuation allowance and income tax expense of $146.9 million in the first quarter of fiscal 2001 in continuing operations.
Working Capital. We generally finance our inventory and capital expenditure requirements with internally generated funds and borrowings. We expect to use borrowings to finance inventories and to support our continued growth. Over 75% of our front-end sales are in cash. Third-party insurance programs, which typically settle in fewer than 30 days, accounted for 90.3% of our pharmacy sales and 53.7% of our revenues in fiscal 2001.
Seasonality. We experience seasonal fluctuations in our results of operations in the fourth quarter as the result of the seasonal nature of Christmas and the flu season. We tailor certain front-end merchandise to capitalize on holidays and seasons.
Results of Operations
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
(dollars in thousands)
Sales..................................................... $14,516,865 $13,338,947 $12,438,442
Sales growth.............................................. 8.8% 7.2% 9.6%
Same store sales growth................................... 9.1% 7.9% 15.5%
Pharmacy sales growth..................................... 8.7% 15.6% 18.2%
Same store pharmacy sales growth.......................... 10.9% 16.2% 21.9%
Pharmacy as a % of total sales............................ 59.5% 58.4% 54.2%
Third-party sales as a % of total pharmacy sales.......... 90.3% 87.8% 85.4%
Front-end sales growth.................................... 3.8% (2.6)% 0.8%
Same store front-end sales growth......................... 6.5% (2.2)% 6.6%
Front-end as a % of total sales........................... 40.5% 41.6% 45.8%
Store data:
Total stores (beginning of period) ...................... 3,802 3,870 3,975
New stores .............................................. 9 77 163
Closed stores ........................................... (163) (181) (330)
Store acquisitions, net ................................. -- 36 62
Total stores (end of period) ............................ 3,648 3,802 3,870
Remodeled stores ........................................ 98 14 155
Relocated stores ....................................... 63 180 331
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Sales
The 8.8% growth in revenues in fiscal 2001 is driven by an increase of 3.8% in front-end sales, an increase of 8.7% in pharmacy sales and the additional week in fiscal 2001. Our total revenues growth in fiscal 2000 of 7.2 % was fueled by strong growth in pharmacy sales, offset by a slight decline in front end sales. Same store sales growth for fiscal 2001 was 9.1%. As fiscal 2001 was a 53 week year, same store sales are calculated by comparing the 53 week period ending March 3, 2001 with the 53 week period ending March 4, 2000.
For fiscal 2001 and 2000, pharmacy revenues led sales growth with same store sales increases of 10.9% and 16.2%, respectively. Fiscal 2001 increases were generated by our ability to attract and retain managed care customers, our successful pilot markets for reduced cash pricing, our increased focus on pharmacy initiatives such as will call and predictive refill, and favorable industry trends. These favorable trends include an aging population, the use of pharmaceuticals to treat a growing number of healthcare problems, and the introduction of a number of successful new prescription drugs. Fiscal 2000 pharmacy increases were driven by favorable industry trends, as well as the purchase of prescription files from independent pharmacies.
The lower growth in same store pharmacy sales in fiscal 2001 was due primarily to a significant reduction in the number of prescription files we purchased and store relocations we effected. The lower growth in fiscal 2000 was due primarily to a reduction as compared to fiscal 1999 in the number of relocations effected.
Same store front-end sales, which includes all non-prescription sales, such as seasonal merchandise, convenience items, and food and other non- prescription sales, increased 6.5% from fiscal 2000. This increase was fueled by the reinstatement of our weekly circular advertising program, and was also driven by strong performance in seasonal businesses, consumables, vitamins, general merchandise and private brands. Same store front-end sales in fiscal 2000 decreased 2.2% from fiscal 1999 levels. This decrease was due to elevated levels of out-of-stock merchandise in the 3rd and 4th quarters of fiscal 2000, and the decision of former management to suspend the weekly advertising program in fiscal 2000 and to raise front-end prices to levels that were not competitive.
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
(dollars in thousands)
Costs of goods sold ............................................................ $11,151,490 $10,213,428 $9,406,831
Gross margin ................................................................... 23.2% 23.4% 24.4%
Selling, general and administrative expenses ................................... $ 3,458,307 $ 3,607,810 $3,200,563
Selling, general and administrative expenses as a percentage of revenues ....... 23.8% 27.0% 25.7%
Goodwill amortization .......................................................... $ 20,670 $ 24,457 $ 26,055
Store closing and impairment charges ........................................... 388,078 139,448 195,359
Interest expense ............................................................... 649,926 542,028 274,826
Loss on debt conversions and modifications ..................................... 100,556 -- --
Share of loss from equity investments .......................................... 36,675 15,181 448
Gain on sale of fixed assets ................................................... (6,030) (80,109) --
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Cost of Goods Sold
Gross margin was 23.2% for fiscal 2001 compared to 23.4% in fiscal 2000. The slight decline in margin is attributable to a shifting in sales mix to pharmacy from front-end. In fiscal 2001, the percentage of front-end sales to total sales decreased to 40.5% from 41.6% in 2000. Also contributing to the lower margin in 2001 was an increase in sales of cigarettes and liquor as a percentage of front-end sales. Additionally, we incurred $17.5 million in inventory liquidation losses related to our closed stores. Partially offsetting the items above was an improvement in the margin of front-end goods (exclusive of cigarettes and liquor). These increases resulted from a more profitable product mix, and from increases in the levels of one-hour photo and phone card sales.
Gross margin declined to 23.4% in fiscal 2000 from 24.4% in fiscal 1999. The decline in gross margin in fiscal 2000 from fiscal 1999 was a result of a substantial decline in our pharmacy margins. A decline in occupancy costs in fiscal 1999 was largely offset by increased costs related to our distribution facilities. We incurred significant costs in fiscal 2000 in connection with the distribution facility located in Perryman, Maryland and also in connection with the processing of merchandise received from our stores for shipment back to our vendors. These increased costs were partially offset by a substantial credit to cost of goods sold resulting from the receipt of vendor allowances following a restructuring of the terms of certain vendor contracts. In fiscal 1999, prior to the restructuring of the contracts, these vendor allowances were credited to selling, general and administrative expense. Also partially offsetting the increases in cost of goods sold in fiscal 2000 were improved store level margins for front-end and pharmacy sales.
Also negatively impacting gross margins in the periods presented was the continuing industry trend of rising third-party sales coupled with decreasing margins on third-party reimbursed prescription sales. Third-party prescription sales typically have lower gross margins than other prescription sales because they are paid by a person or entity other than the recipient of the prescribed pharmaceutical and are generally subject to lower negotiated reimbursement rates in conjunction with a pharmacy benefit plan. Pharmacy sales as a percentage of total sales were 59.5%, 58.4% and 54.2% in fiscal 2001, 2000 and 1999, respectively and third-party sales as a percentage of pharmacy sales were 90.3%, 87.8%, and 85.4% in fiscal 2001, 2000 and 1999, respectively.
We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO charge was $40.7 million in fiscal 2001, $34.6 million in fiscal 2000 and $36.5 million in fiscal 1999. We have changed our method of accounting for LIFO as of February 26, 2000. See "--Accounting Change."
Selling, General and Administrative Expenses
Selling, general and administrative expense ("SG&A") was 23.8% of sales in fiscal 2001, 27.0% in fiscal 2000 and 25.7% in fiscal 1999. SG&A expenses for 2001 were favorably impacted by a $20.0 million increase in estimated insurance recovery related to the settlement of the shareholder's class action lawsuit, and by $20.0 million received related to the partial settlement of litigation with certain drug manufacturers. Offsetting these items was $82.1 million incurred in connection with the restatement of our
historical financial statements, and the incurrence of $45.9 million in non- cash expense related to variable plan accounting on certain management stock options, and restricted stock grants. If these non-operating and non cash items are excluded, our SG&A as a percentage of revenues would have been 23.2%. SG&A expense for 2000 was unfavorably impacted by a charge of $232.8 million related to litigation issues, offset by a reversal of stock appreciation rights accruals of $45.5 million. Excluding these non-operating and non cash items results in an adjusted SG&A as a percentage of sales of 25.6% in fiscal 2000. SG&A on an adjusted basis of 23.2% for fiscal 2001 compares favorably with SG&A on an adjusted basis of 25.6% for fiscal 2000 due to lower depreciation expense resulting from a net reduction in our store count, decreased repair and maintenance and terminated project costs, and the better leveraging of fixed SG&A costs resulting from our higher sales volume.
The increase in SG&A expense as a percent of sales in fiscal 2000 over fiscal 1999 is predominately attributable to increased accruals for litigation and other contingencies, as described above.
Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
(dollars in thousands)
Impairment charges ....................... $214,224 $120,593 $ 87,666
Store lease exit costs ................... 57,668 18,855 107,693
Impairment of investments ................ 116,186 -- --
-------- -------- --------
$388,078 $139,448 $195,359
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Impairment Charges
In fiscal 2001, 2000 and 1999, store closing and impairment charges include non-cash charges of $214.2 million, $120.6 million and $87.7 million, respectively, for the impairment of long-lived assets (including allocable goodwill) of 495, 249 and 270 stores, respectively. These amounts include the write-down of long-lived assets to estimated fair value at stores that were assessed for impairment as part of our on-going review of the performance of our stores or management's intention to relocate or close the store.
Store Lease Exit Cost
Costs incurred to close a store, which principally consist of lease termination costs, are recorded at the time management commits to closing the store, which is the date that the closure is formally approved by senior management, or in the case of a store to be relocated, the date the new property is leased or purchased. We calculate our liability for closed stores on a store-by-store basis. The calculation includes the future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations. As a result of focused efforts on cost recoveries for closed stores during fiscal 2001, we experienced improved results, which has been reflected in the assumptions about future sublease income. This liability is discounted using a risk-free rate of interest. We evaluate these assumptions each quarter and adjust the liability accordingly.
Impairment of Investments
We have an investment in the common stock of drugstore.com, which is accounted for under the equity method. The initial investment was valued based upon the initial public offering price for drugstore.com. During fiscal 2001, we recorded an impairment of our investment in drugstore.com of $112.1 million. This write-down was based upon a decline in the market value of drugstore.com's stock that we believe to be other than temporary. Additionally, we recorded impairment charges of $4.1 million for other investments.
Interest Expense
Interest expense was $649.9 million in fiscal 2001 compared to $542.0 million in fiscal 2000 and $274.8 million in fiscal 1999. The substantial increase in fiscal 2001 and fiscal 2000 is due to higher average levels of indebtedness and higher interest rates on debt. In fiscal 2001, we increased our average outstanding debt with the addition of the $1.1 billion senior secured credit facility, which includes a $600.0 million term loan and a $500.0 million revolving credit facility. We used the term loan to terminate our accounts receivable securitization facility and repurchased $300.0 million of unpaid receivables thereunder and funded $66.4 million of transaction costs related to our debt restructuring. The remainder of the term loan together with the revolving credit facility were used for general corporate purposes, including reviewing, reconciling and restating our 1998 and 1999 financial statements, the cost of the audit of our restated financial statements and investigation costs. These items were partially offset by reductions of indebtedness in the second half of the fiscal year resulting from the sale of PCS and debt for equity exchanges. In fiscal 2000, our debt increased as a result of the $1.3 billion borrowed in January 1999 under the PCS credit facility and the $300.0 million of demand note borrowings to supplement cash flows from operating activities. The annual weighted average interest rates on our indebtedness in fiscal 2001, fiscal 2000 and fiscal 1999 were 8.2%, 7.4% and 6.8% respectively.
Income Taxes
We had net losses in fiscal 2001, fiscal 2000 and fiscal 1999. Tax expense of $149.0 and tax benefits of $26.6 million (including the benefit related to cumulative effect of accounting change) and $216.9 million have been reflected for fiscal 2001, fiscal 2000 and fiscal 1999, respectively. The full benefit of the net operating loss carryforwards ("NOLs") generated in each period has been fully offset by a valuation allowance based on management's determination that, based on available evidence, it is more likely than not that some of the deferred tax assets will not be realized. We expect to file amended tax returns and utilize the NOL's against taxable income in prior years to the maximum extent possible. It is likely that an "ownership change" for statutory purposes may occur as a result of our refinancing efforts, including issuances of equity and exchanges of debt for equity. If an ownership change occurs, the use of our existing NOLs and possibly our net unrealized built-in losses would be subject to limitations. Of the $147.6 million recoverable taxes recorded as of February 26, 2000, we have collected or have offsets of $122.7 million. The remaining $24.9 million has been reclassified to other non current assets since we anticipate collection beyond fiscal 2002.
Other Significant Charges
In addition to the operational matters discussed above, our results in the current fiscal year have been adversely affected by other significant charges. We recorded a net loss of $168.8 million on the disposal of the PBM segment. As a result of the decision to dispose of the PBM segment, we recognized an increase in the income tax valuation allowance of $146.9 million for fiscal 2001. We also recorded a pre-tax loss of $100.6 million on debt conversions and modifications, and recorded a loss of $36.7 million representing our share of the drugstore.com losses.
Discontinued Operations
On July 12, 2000, we announced the sale of the PBM segment, at which time the PBM segment was subjected to discontinued operations accounting. Prior to becoming a discontinued operation on July 12, 2000, the PBM segment generated net income of $11.3 million from February 27, 2000 through July 11, 2000, compared to net income of $9.2 million in fiscal 2000 and a net loss of $12.8 million in fiscal 1999.
Liquidity and Capital Resources
We have two primary sources of liquidity: (i) cash provided by operations and (ii) the revolving credit facility under our senior secured credit facility. We may also generate liquidity from the sale of assets, including sale-leaseback transactions. During fiscal 2001 and fiscal 2000, cash provided by operations was not sufficient to fund our working capital requirements. As a result, we have supplemented our cash from operations with borrowings under our credit facilities. Our principal uses of cash are to provide working capital for operations, service our obligations to pay interest and principal on our debt, and to provide funds for capital expenditures. On May 15, 2001, we entered into a commitment letter to refinance a significant portion of our indebtedness. See "Recent Event".
Credit Facilities and June 2000 Debt Restructuring
In June 2000, we completed a major financial restructuring that provided us with additional liquidity, extended the maturity dates of a substantial amount of our debt until at least August 2002 and converted a portion of our debt to equity.
Senior Secured Credit Facility. In June 2000, we entered into a $1.0 billion (which was increased to $1.1 billion in November 2000) senior secured credit facility with a syndicate of banks led by Citibank N.A., as agent. The facility matures on August 1, 2002, and consists of a $600.0 million term loan facility and a $500.0 million revolving credit facility. We used the term facility to terminate our accounts receivable securitization facility and repurchase $300.0 million of unpaid receivables thereunder, to fund $66.4 million of transaction costs relating to our financial restructuring and to provide $133.6 million of cash available for general corporate purposes. The revolving facility provides us with borrowings for working capital requirements, capital expenditures and general corporate purposes. Borrowings under the facilities generally bear interest either at LIBOR plus 3.0%, if we choose to make LIBOR borrowings, or at Citibank's base rate plus 2%. For additional information about the interest rates applicable to our credit facilities, see "Quantitative and Qualitative Disclosures about Market Risks" below.
We are required to pay fees of 0.50% per annum on the daily unused amount of the commitment. Substantially all of our wholly-owned subsidiaries guarantee our obligations under the senior secured credit facility. These subsidiary guarantees are secured by a first priority lien on the inventory, accounts receivable, intellectual property and some of the real estate assets of the subsidiary guarantors. Our direct obligations under the senior credit facility are unsecured.
The senior secured credit facility contains customary covenants, which place restrictions on the assumption of debt, the payment of dividends, mergers, liens and sale-leaseback transactions. The facility requires us to meet various financial ratios and limits our capital expenditures. In connection with the additional term loan borrowings in November 2000, we also amended certain of the financial covenants in this facility to conform to the less restrictive covenants in our other debt agreements for a limited period of time. For the three quarters ended March 3, 2001, our covenants required us to maintain a minimum interest coverage ratio and a minimum fixed charge coverage ratio of .95:1, increasing to a minimum interest coverage ratio of 1.40:1 and a minimum fixed charge ratio of 1.19:1 for the four quarters ending June 1, 2002. For the three fiscal quarters ended March 3, 2001, our consolidated EBITDA (as defined in the senior secured credit facility) was required to be no less than $364.0 million, increasing to $720.0 million for the four quarters ending June 1, 2002. In addition, our capital expenditures were limited to $186.0 million for the three fiscal quarters ended March 3, 2001, increasing to $243.0 million for the four quarters ending June 1, 2002.
For the three quarters ended March 3, 2001, our EBITDA (as so defined) was $410.1 million, our interest coverage ratio was 1.07:1, our fixed charge coverage ratio was 1.03:1 and our capital expenditures were $113.6 million.
The facility provides for customary events of default, including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of our debt to accelerate the maturity of debt equaling $25.0 million or more.
Our ability to borrow under the senior secured credit facility is based on a specified borrowing base consisting of eligible accounts receivable and inventory. At March 3, 2001, the $600.0 million term loan was fully drawn and we had $394.6 million in additional available borrowing capacity under the revolving facility.
Other Credit Facilities. In June 2000, we extended to August 2002 the maturity date of our RCF credit facility and our PCS credit facility. Borrowings under the PCS credit facility bear interest at LIBOR plus 3.25% and borrowings under the RCF credit facility bear interest at LIBOR plus 3.75%. These credit facilities contain restrictive covenants which place restrictions on the assumption of debt, the payment of dividends, mergers, liens and sale- leaseback transactions. They also require us to satisfy financial covenants which are generally slightly less restrictive than the covenants in our senior secured credit facility. The
facilities also limit the amount of our capital expenditures to $186.0 million for the three quarters ended March 3, 2001, increasing to $243.0 million for the four quarters ending June 1, 2002. We applied $1.1 billion (all of the net proceeds from the sale of PCS minus certain expenses) to reduce the outstanding balances of the PCS credit facility and the PCS exchange debt described below. Under the terms of these facilities, after giving effect to the $100.0 million increase in the term loan, we are permitted to incur up to an additional $35.0 million of indebtedness under the senior secured credit facility without the further consent of the lenders. At April 28, 2001, we had $1.1 billion of borrowings outstanding under these credit facilities and exchange debt. These facilities are also guaranteed and secured as described below. The RCF credit facility is secured by a first lien on the stock of drugstore.com.
As part of the restructuring of our debt in June 2000, certain affiliates of J.P. Morgan, which had lent us $300.0 million under a demand note in June 1999 and was also a lender under the RCF and PCS credit facilities, together with certain other lenders under the two credit facilities, agreed to exchange a portion of their loans for a new secured exchange debt obligation and shares of our common stock. This resulted in a total of $284.8 million of debt under these facilities, including $200.0 million of the outstanding principal of the demand note, being exchanged for an aggregate of 51,785,434 shares of our common stock at an exchange rate of $5.50 per share. We recorded a gain on this exchange of debt of $5.2 million in the second quarter of fiscal 2001. An additional $274.8 million of borrowings under the facilities were exchanged for the exchange debt, including the entire remaining principal amount of the demand note. The terms of the exchange debt are substantially the same as the terms of our RCF and PCS credit facilities and the interest rate is currently LIBOR plus 3.25%. The lenders of the exchange debt have the same collateral as they did with respect to their loans under the PCS and RCF credit facilities. Also, as part of the restructuring of our debt in June 2000, we amended our existing guarantees of two synthetic lease transactions to provide substantially the same terms as the terms of our RCF and PCS credit facilities.
In connection with modifications to the PCS and RCF credit facilities, the exchange of debt for exchange debt and the amendment of guarantees of the synthetic lease transactions, substantially all of our wholly-owned subsidiaries guaranteed our obligations thereunder on a second priority basis. These subsidiary guarantees are secured by a second priority lien on the inventory, accounts receivable, intellectual property and some of the real estate assets of the subsidiary guarantors. The holders of exchange debt also received a first lien on our prescription files. Except to the extent previously secured, our direct obligations under those facilities and guarantees remain unsecured.
Debt Covenants. We were in compliance with the covenants of the senior secured credit facility and our other credit facilities and debt instruments as of March 3, 2001. With continuing improvements in operating performance, we anticipate that we will remain in compliance with our debt covenants. However, variations in our operating performance and unanticipated developments may adversely affect our ability to remain in compliance with the applicable debt covenants.
Commercial Paper. Until September 24, 1999, we issued commercial paper supported by unused credit commitments to supplement cash generated by operations. Since the loss of our investment grade rating in fiscal 2000, we are no longer able to issue commercial paper. Our outstanding commercial paper amounted to $192.0 million at February 26, 2000 and $1,783.1 million at February 27, 1999. All remaining commercial paper obligations were repaid in March 2000.
Exchange Offers. In June 2000, we completed the exchange of $52.5 million of our 5.5% notes due December 2000 and $321.8 million of our 6.7% notes due December 2001 for an aggregate of $374.3 million of our 10.5% senior secured notes due September 2002. After the exchange, $147.5 million of the 5.5% notes due December 2000 and $28.2 million of the 6.7% notes due December 2001 remained outstanding. In connection with the exchange, we entered into a forward purchase agreement with J.P. Morgan and another financial institution under which they agreed to purchase $93.2 million of the 10.5% senior secured notes due 2002. These financial institutions purchased $16.7 million of the 5.5% notes and $20.4 million of the 6.7% notes on July 27, 2000; $53.8 million of the 5.5% notes on September 13, 2000; and $.5 million of the 6.7% notes on December 14, 2000; and exchanged the purchased notes with us for the 10.5% senior secured notes due 2002. The remaining $76.9 million of 5.5% notes due in December 2000 were retired at maturity with general corporate funds and the $1.8 million that remained under the forward purchase agreement.
On June 26, 2000, we issued 17,779,000 shares of our common stock in exchange for approximately $177.8 million principal amount of our 5.25% convertible subordinated notes due 2002. As a result of this exchange, we recorded a loss of approximately $89.0 million in the second quarter of fiscal 2001.
On November 10, 2000, we issued 9,222,200 shares of our common stock in exchange for approximately $79.9 million principal amount of our 5.25% convertible notes due 2002 and $12.3 million principal amount of our 6.0% dealer remarketable securities due 2003. As a result of this exchange, we recorded a loss of approximately $8.3 million in the third quarter of fiscal 2001.
On January 23, 2001, we issued 862,500 shares of our common stock in exchange for approximately $5.5 million principal amount of our 6.0% senior notes due 2005 and $2.0 million principal amount of our 7.625% senior notes due 2005. As a result of this exchange, we recorded a gain of approximately $4.3 million in the fourth quarter of fiscal 2001.
On January 26 and January 30, 2001, we issued an aggregate of 4,475,000 shares of our common stock in exchange for approximately $35.0 million principal amount of our 5.25% convertible subordinated notes due 2002. As a result of this exchange, we recorded a loss of approximately $12.8 million in the fourth quarter of fiscal 2001.
Debt Capitalization. Subsequent to March 3, 2001, the following debt for equity exchanges were completed:
o On March 14, 2001, the holders of approximately $201.4 million principal amount of our 5.25% convertible subordinated notes due 2002 exchanged these notes for an aggregate of 29,204,160 shares of our common stock and the holders of approximately $77.9 million principal amount of our 6.0% dealer remarketable securities due 2003 exchanged these notes for an aggregate of 12,072,175 shares of our common stock. As a result of these exchanges, we recorded a loss of approximately $119.2 million in the first quarter of fiscal 2002.
o On April 6, 2001, the holders of approximately $3.9 million principal amount of our 5.25% convertible subordinated notes due 2002 and $2.0 million principal amount of our 6.0% dealer remarketable securities due 2003 exchanged these notes for an aggregate of 856,000 shares of our common stock. As a result of these exchanges, we recorded a loss of approximately $2.5 million in the first quarter of fiscal 2002.
o On April 25, 2001, the holders of approximately $11.0 million principal amount of our 10.5% senior secured notes due 2002 exchanged these notes for an aggregate of 1,925,000 shares of our common stock. As a result of this exchange, we recorded a loss of approximately $1.2 million in the first quarter of fiscal 2002.
o On April 25, 2001, the holders of approximately $5.0 million principal amount of our 10.5% senior secured notes due 2002 exchanged these notes for an aggregate of 785,000 shares of our common stock. As a result of this exchange, we recorded a loss of approximately $0.6 million in the first quarter of fiscal 2002.
The following table sets forth our debt capitalization at April 28, 2001, following the completion of the refinancing transactions described above and the repayment of the PCS credit facility by $437.5 million and the exchange debt facility by $46.6 millon utilizing proceeds from AdvancePCS's retirement of its $200.0 million obligation to us and the sale of AdvancePCS shares.
As of
April 28, 2001 (1)
-----------------
($ in millions)
Secured Debt:
Senior secured credit facility ........................... $ 800
PCS credit facility ...................................... 154
RCF credit facility ...................................... 730
10.5% senior secured notes due 2002 ...................... 452
Exchange debt ............................................ 170
Capital lease obligations ................................ 20
Other .................................................... 12
Lease Financing Obligations ............................... 1,076
Other Senior Debt:
6.7% notes due 2001 ...................................... 7
6.0% dealer remarketable securities due 2003 ............. 108
6.0% notes due 2005 ...................................... 195
7.625% notes due 2005 .................................... 198
7.125% notes due 2007 .................................... 350
6.125% notes due 2008 .................................... 150
6.875% senior debentures due 2013 ........................ 200
7.7% notes due 2027 ...................................... 300
6.875% debentures due 2028 ............................... 150
Subordinated Debt:
5.25% convertible subordinated notes due 2002 ............ 152
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Total Debt ............................................... $5,224
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Net Cash Provided By (Used In) Operating, Investing and Financing Activities
We used $704.6 million of cash to fund continuing operations in fiscal 2001. Operating cash flow was negatively impacted by $543.3 million of interest payments. Operating cash flow was also negatively impacted from an increase in current assets, primarily resulting from repurchasing $300.0 million of accounts receivable when we refinanced the accounts receivable securitization facility, and a decrease in accounts payable and other liabilities.
In fiscal 2000, we used $623.1 million of cash to fund continuing operations. Operating cash flow was negatively impacted by $501.8 million of interest payments. Operating cash flow was also negatively impacted from an increase in current assets and a decrease in accounts payable partially offset by an increase in other liabilities.
Cash provided by investing activities was $677.7 million for fiscal 2001. Cash was provided from the sale of our discontinued operations, various other assets, less expenditures for fixed and intangible assets.
Cash used for investing activities was $552.1 million and $2.7 billion for fiscal years 2000 and 1999, respectively. Cash used for store construction and relocations amounted to $573.3 million for fiscal 2000 and $1.2 billion for fiscal 1999. In addition, cash of $1.4 billion was used to acquire PCS in fiscal 1999.
Cash used in financing activities was $64.3 million for fiscal 2001. The cash used consisted of payments of $78.1 million of deferred financing costs partially offset by net debt borrowings of $6.8 million and proceeds from sale-leaseback transactions of $7.0 million. During fiscal 2001, we used the proceeds from the sale of our PBM segment to reduce our borrowings.
Cash provided by financing activities was $905.1 million for fiscal 2000 and $2,660.3 million for fiscal 1999. Increased borrowings under our RCF and PCS credit facilities which replaced our commercial paper program and the sale of $300.0 million of preferred stock were the main financing activities during fiscal 2000. In fiscal 1999, we issued commercial paper to finance the acquisition of PCS. Also during fiscal 1999, net proceeds were received from the issuance of $700.0 million in long-term debt and $200.0 million of dealer remarketable securities. Cash provided by financing activities included proceeds received from store sale-leaseback transactions of $74.9 million and $505.0 million for fiscal 2000 and 1999, respectively.
Capital Expenditures
We plan to make total capital expenditures of approximately $140.0 million during fiscal 2002, consisting of approximately $34.7 million related to new store construction, store relocation and other store construction projects. An additional $89.2 million will be dedicated to other store improvement activities and the purchase of prescription files from independent pharmacists. Management expects that these capital expenditures will be financed primarily with cash flow from operations and borrowings under the revolving credit facility available under our senior secured facility.
Future Liquidity
We are highly leveraged. Based upon our current levels of operations and expected improvements in our operating performance, management believes that cash flow from operations, together with available borrowings under our senior secured credit facility and our other sources of liquidity (including asset sales) will be adequate to meet anticipated requirements for working capital, debt service and capital expenditures until August and September 2002, when $2.5 billion of our indebtedness (as of April 28, 2001), including the revolving credit facility under the senior secured credit facility, matures. For a discussion of factors that could affect our current assessment, see "-- Factors Affecting Our Future Prospects" below. Our ability to replace, refinance or otherwise extend these obligations will depend in part on our ability to successfully execute our long-term strategy and improve the operating performance of our stores. On May 15, 2001, we entered into a commitment letter to refinance a significant portion of our indebtedness, see "Recent Event".
Accounting Change
In fiscal 2000, we changed our application of the LIFO method of accounting by restructuring our LIFO pool structure through a combination of certain geographic pools. The reduction in the number of LIFO pools was made to more closely align the LIFO pool structure to store merchandise categories. The effect of this change in fiscal 2000 was to decrease our earnings by $6.8 million (net of income tax benefit of $4.6 million) or $.03 per diluted common share. The cumulative effect of the accounting change was a charge of $27.3 million (net of income tax benefit of $18.2 million) or $.11 per diluted common share. The pro forma effect of this accounting change would have been a reduction in net income of $6.4 million, (net of income tax benefit of $4.2 million) or $.02 per diluted common share for fiscal 1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. If the derivative is designated and effective as a fair value hedge, the changes in the fair value of the derivative and
the changes in the hedged item attributable to the hedged risk will be recognized in earnings. If the derivative is designated and effective as a cash-flow hedge, changes in the fair value of the effective portion of the derivative will be recorded in other comprehensive income ("OCI") and will be recognized in the income statement when the hedged item affects earnings. SFAS 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value will be recognized in earnings. On March 4, 2001, in connection with the adoption of the new Statement, we will record a reduction of approximately $29.0 million in OCI as a cumulative transition adjustment for derivatives designated as cash flow-type hedges prior to adopting SFAS 133.
Certain issues currently under consideration by the Derivatives Implementation Group ("DIG") may make it more difficult to qualify for cash flow hedge accounting in the future. Pending the results of the DIG deliberations, changes in the fair value of our interest rate swaps may be recorded as a component of net income.
Factors Affecting our Future Prospects
Risks Related to Our Financial Condition
We are highly leveraged. Our substantial indebtedness severely limits cash flow available for our operations and could adversely affect our ability to service debt or obtain additional financing if necessary.
As of April 28, 2001, we had $4.1 billion of outstanding indebtedness for borrowed money (including current maturities but excluding letters of credit) and $1.1 billion of capital leases and a negative stockholders' equity. As of the same date, we had additional borrowing capacity under our revolving credit facility of $264.0 million. Based on the indebtedness outstanding at April 28, 2001 and the then current interest rates, our annualized cash interest expense would be approximately $433.6 million.
Our high level of indebtedness will continue to restrict our operations. Among other things, our indebtedness will:
o limit our ability to obtain additional financing;
o limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;
o place us at a competitive disadvantage relative to our competitors with less indebtedness;
o render us more vulnerable to general adverse economic and industry conditions; and
o require us to dedicate substantially all of our cash flow to service our debt.
A substantial portion of our indebtedness matures in August and September 2002. Our ability to refinance this indebtedness will be substantially dependent on our ability to improve our operating performance.
If we do not consummate the refinancing transaction described under "Recent Event", approximately $2.5 billion of our indebtedness at April 28, 2001 will mature in August and September 2002. In order to satisfy these obligations, we will need to refinance them, sell assets to satisfy them or seek postponement of their maturity dates from our existing lenders. Our ability successfully to accomplish any of these transactions will be substantially dependent on the successful execution of our long term strategic plan and the resulting improvements in our operating performance.
The interest rate on certain of our outstanding indebtedness is based upon floating interest rates. If interest rates increase, our interest payment obligations will increase.
Approximately $853.7 million of our outstanding indebtedness as of April 28, 2001 bears an interest rate that varies depending upon LIBOR. If we borrow additional amounts under our senior secured facility, the interest rate on those borrowings will vary depending upon LIBOR. If LIBOR rises, the interest rates on this outstanding debt will also increase. Therefore an increase in LIBOR would increase our interest payment
obligations under these outstanding loans and have a negative effect on our cash flow and financial condition. We anticipate that any replacement financing we obtain will also have the interest rate on a floating rate.
The covenants in our outstanding indebtedness impose restrictions that may limit our operating and financial flexibility.
The covenants in the instruments governing our outstanding indebtedness restrict our ability to incur liens and debt, pay dividends, make redemptions and repurchases of capital stock, make loans, investments and capital expenditures, prepay, redeem or repurchase debt, engage in mergers, consolidations, asset dispositions, sale-leaseback transactions and affiliate transactions, change our business, amend certain debt and other material agreements, issue and sell capital stock of subsidiaries, make distributions from subsidiaries and grant negative pledges to other creditors. We anticipate that any replacement financing we obtain, including those proposed by our May 15, 2001 bank commitment letter, will impose similar restrictions.
Moreover, if we are unable to meet the terms of the financial covenants or if we breach of 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.
Risks Related to Our Operations
Major lawsuits have been brought against us and certain of our subsidiaries, and there are currently pending both civil and criminal investigations by the U.S. Securities and Exchange Commission and the United States Attorney. Any criminal conviction against us may result in the loss of licenses that are material to the conduct of our business, which would have a negative effect on our financial condition, results of operations and cash flows.
There are currently pending both civil and criminal governmental investigations by the SEC and the United States Attorney concerning our financial reporting and other matters. In addition, an investigation has also been commenced by the U.S. Department of Labor concerning our employee benefit plans, including our principal 401(k) plan, which permitted employees to purchase our common stock. Purchases of our common stock under the plan were suspended in October 1999. In January 2001, we appointed an independent trustee to represent the interests of these plans in relation to the company and to investigate possible claims the plans may have against us. Both the independent trustee and the Department of Labor have asserted that the plans may have claims against us. These investigations are ongoing and we cannot predict their outcomes. If we were convicted of any crime, certain contracts that are material to our operations may be revoked, which would have a material adverse effect on our results of operations and financial condition. In addition, substantial penalties, damages, or other monetary remedies assessed against us could also have a material adverse effect on our results of operations, financial condition and cash flows.
Given the size and nature of our business, we are subject from time to time to various lawsuits which, depending on their outcome, may have a negative impact on our results of operations, financial condition and cash flows.
We are substantially dependent on a single supplier of pharmaceutical products and our other suppliers to sell products to us on satisfactory terms.
We obtain approximately 93% of our pharmaceutical supplies from a single supplier, McKesson HBOC, Inc., pursuant to a long-term contract. Pharmacy sales represented approximately 59.5% of our total sales during fiscal 2001, and, therefore, our relationship with McKesson HBOC is important to us. Any significant disruptions in our relationships with our suppliers, particularly our relationship with McKesson HBOC would make it difficult for us to continue to operate our business, and would have a material adverse effect on our results of operations and financial condition.
Our internal accounting systems and controls may be insufficient.
An audit of our financial statements for fiscal years 1999 and 1998, following a previous restatement, concluded in July 2000 and resulted in an additional restatement of fiscal years 1999 and 1998. Following its review of our books and records, our management concluded that further steps were needed to establish and maintain the adequacy of our internal accounting systems and controls. In connection with the above audits of our financial statements, Deloitte & Touche LLP advised us that it believed there were numerous "reportable conditions" under the standards established by the American Institute of Certified Public Accountants which relate to our accounting systems and controls and could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In order to address the reportable conditions identified, we are developing and implementing comprehensive, adequate and reliable accounting systems and controls which address the reportable conditions identified by Deloitte & Touche LLP. If, however, we determine that our internal accounting systems and controls require additional improvements beyond those identified, we may need to commit substantial resources, including time from our management team, to implement new systems and controls.
We cannot assure you that management will be able to successfully manage our business or successfully implement our strategic plan.
In December 1999, we hired a new management team. Our management team has considerable experience in the retail industry. Nonetheless, we cannot assure you that our management will be able successfully to manage our business or successfully implement our strategic business plan.
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 chairman and chief executive officer, Robert G. Miller, and the other members of our management team. The loss of Mr. Miller or other key personnel due to death, disability or termination of employment could have a material adverse effect on the results of our operations or financial condition, or both. Additionally, we cannot assure you that we will be able to attract or retain other skilled personnel in the future.
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.
Our operations during fiscal 2000 were adversely affected by a number of factors, including our financial difficulties, inventory shortages, allegations of violations of the law, including drug pricing issues, problems with suppliers and uncertainties regarding our ability to produce audited financial statements. To improve operations, new management developed and in fiscal 2001 had been implementing and continues to implement, a business strategy to improve the pricing of products, provide more consistent advertising through weekly, national circulars, eliminated inventory shortages and out-dated inventory, shortages, resolved issues and disputes with our vendors, developed programs intended to enhance customer relationships and provide better service and continue to improve our stores and the product offerings within our stores. If we are not successful in implementing our business strategy, or if our business strategy is not effective, we may not be able to continue to improve our operations. Failure to continue to improve operations would adversely affect our ability to make principal or interest payments on our debt.
The additional unregistered shares of common stock that we issued may depress the market price of our common stock because we have agreed to register those shares under the Securities Act to enable the holders of the shares to sell them.
We are obligated to register the shares of our common stock that we issued in various transactions. In addition, we are obligated to register the 61,095,219 shares of our common stock underlying (as of March 31, 2001) the series B convertible preferred stock that we issued in October 1999 and the 2,500,000 shares of our common stock underlying the warrant issued to J.P. Morgan Ventures Corporation on October 1999. As of May 17, 2001, we have also agreed to register an aggregate of approximately 111,000,000 shares of our common stock that we issued or agreed to issue in various debt for equity exchanges. In addition, we expect to agree to register a significant number of additional shares of our common stock pursuant to the
refinancings of our debt described under "Recent Event," and we may agree to register additional shares in the future pursuant to additional refinancings. The possible public sale of such large numbers of shares may have an adverse effect on the market price of our common stock.
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 drug store chains, independent drug stores, supermarkets and mass merchandisers. 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. We believe that the continued consolidation of the drugstore industry will further increase competitive pressures in the industry. As competition increases, a significant increase in general pricing pressures could occur which would require us to increase our sales volume and to sell higher margin products and services in order to remain competitive. We cannot assure you that we will be able to continue effectively to compete in our markets or increase our sales volume in response to further increased competition.
Changes in third-party reimbursement levels for prescription drugs could reduce our margins and have a material adverse effect on our business.
Sales of prescription drugs, as a percentage of sales, have been increasing and we expect them to continue to increase. In fiscal 2001, we were reimbursed by third-party payors for approximately 90.3% of all of the prescription drugs that we sold. These third-party payors could reduce the levels at which they will reimburse us for the prescription drugs that we provide to their members. Furthermore, if Medicare is reformed to include prescription benefits, Medicare may cover some of the prescription drugs that we now sell at retail prices, and we may be reimbursed at prices lower than our current retail prices. If third-party payors reduce their reimbursement levels or if Medicare covers prescription drugs at reimbursement levels lower than our current retail prices, our margins on these sales would be reduced, and the profitability of our business and our results of operations and financial condition could be adversely affected.
We are subject to governmental regulations, procedures and requirements; our noncompliance or a significant regulatory change could hurt our business, the results of our operations or our financial condition.
Our pharmacy business is subject to federal, state, and local regulation. These include local registrations of pharmacies 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 and could adversely affect the continued operation of our business. Furthermore, our pharmacies could be affected by federal and state reform programs, such as health care reform initiatives which could, in turn, negatively affect our business. The passing of these initiatives or any new federal or state programs could adversely affect our business and our results of operations and financial condition.
Certain risks are inherent in the provision of 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 health care products. Although we maintain professional liability and errors and omissions liability 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 maintain this insurance on acceptable terms in the future.
Any adverse change in general economic conditions can adversely affect consumer-buying practices and reduce our sales of front-end products, which are our higher margin products.
If the economy slows down and unemployment increases or inflationary conditions worry consumers, our consumers may decrease their purchases, particularly of products other than pharmaceutical products that they
need for health reasons. We make a higher profit on our sales of front-end products than we do on sales of pharmaceutical products. Therefore, any decrease in our sales of front-end products will decrease our profitability.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
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. Since the end of fiscal 2000, our primary risk exposure has not changed. We enter into debt obligations to support capital expenditures, acquisitions, working capital needs and general corporate purposes. Our policy is to manage interest rates through the use of a combination of variable-rate credit facilities, fixed-rate long-term obligations and derivative transactions.
The table below provides information about 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 March 3, 2001.
Fair Value
at March 3,
2002 2003 2004 2005 2006 Thereafter Total 2001
------ ---------- -------- -------- -------- ---------- ---------- -----------
(dollars in thousands)
Long-term debt,
including current portion
Fixed rate ..................... $8,353 $1,828,874 $188,533 $197,014 $198,439 $1,153,550 $3,574,763 $2,824,904
Average Interest Rate .......... 5.91% 9.41% 6.00% 6.06% 7.62% 7.05%
Interest Rate Swap ............. -- -- -- -- -- -- -- ($29,000)
Variable Rate .................. -- $1,219,785 -- -- -- $1,219,785 $1,219,785
Average Interest Rate .......... -- 9.16% -- -- --
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In June 2000, we entered into an interest rate swap that fixes the LIBOR component of $500.0 million of our variable-rate debt at 7.083% for a two year period. In July 2000, we entered into an additional interest rate swap that fixes the LIBOR component of an additional $500.0 million of variable rate debt at 6.946% for a two year period.
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 assure you that any replacement borrowing or equity financing could be successfully completed.
The ratings on the senior secured credit facility, the RCF credit facility, the PCS credit facility and the fixed-rate obligations as of March 31, 2001 were B- by Standard & Poor's and by Caa1 by Moody's. The exchange debt facility has not been rated. The interest rates on the variable-rate borrowings are as follows: $1.1 billion senior credit facility: LIBOR plus 3.00%, the RCF facility: LIBOR plus 3.75%, the PCS and the exchange debt facilities: LIBOR plus 3.25%.
Further downgrades of our credit ratings will not have an impact upon the rate on the borrowings under these credit facilities.
Changes in one month LIBOR affect our cost of borrowings because the interest rate on our variable-rate obligations is based on LIBOR. If the market rates of interest for one month LIBOR change by 10% (approximately 50 basis points) as compared to the LIBOR rate of 5.29% and 4.43% as of March 3, 2001 and April 28, 2001, respectively, our annual interest expense would change by approximately $6.0 million and $4.3 million, respectively, based upon our variable-rate debt outstanding of approximately $1.2 billion and $853.7 million as of March 3, 2001 and April 28, 2001, respectively.
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 Annual Report on Form 10-K and are incorporated by reference herein. See Item 14 of Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On November 19, 1999, we filed a Current Report on Form 8-K disclosing the resignation of our former auditors, KPMG LLP and the withdrawal of their report on our financial statements. On December 6, 1999, we amended the Form 8-K dated November 19, 1999 to file a letter by KPMG LLP concerning the disclosure in the Form 8-K. On December 10, 1999, we filed a Current Report on Form 8-K to announce that we had retained Deloitte & Touche LLP as our independent auditors.
PART III
We intend to file with the Securities and Exchange Commission a definitive proxy statement for our 2001 Annual Meeting of Stockholders pursuant to Regulation 14A not later than 120 days after March 3, 2001. The information called for by this Part III is incorporated by reference to that proxy statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The consolidated financial statements of the Company and reports of independent accountants identified in the following index are incorporated by reference into this report from the individual pages filed as a part of this report:
1. Financial Statements
The following financial statements and report of independent auditors are included herein:
Independent Auditors' Reports ............................................ F-1 Consolidated Balance Sheets as of March 3, 2001 and February 26, 2000 .... F-3 Consolidated Statements of Operations for the fiscal years ended March 3, 2001, February 26, 2000 and February 27, 1999.................. F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended March 3, 2001, February 26, 2000 and February 27, 1999...... F-5 Consolidated Statements of Cash Flows for the fiscal years ended March 3, 2001, February 26, 2000 and February 27, 1999.................. F-6 Notes to Consolidated Financial Statements ............................... F-7 |
2. Financial Statement Schedules
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.
Financial statements of 50% or less owned companies have been omitted since they do not constitute significant subsidiaries.
3. Exhibits
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
2 Not Applicable
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 October Exhibit 3(ii) to Form 8-K filed
25, 1999 on November 2, 1999
3.3 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
4.1 The rights of security holders of the registrant are defined by (a) the Laws of the
State of Delaware, (b) the Certificate of Incorporation of registrant and (c) the
By-laws of registrant. The Certificate of Incorporation and By-laws of the
registrant are hereby incorporated by reference in accordance with Exhibit 3 above.
4.2 Waiver dated as of January 11, 2000 to Guaranty dated as of March 19, 1998, as Exhibit 4.7 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998, and as further amended by January 18, 2000
Amendment No. 2, dated as of October 25, 1999, and as further amended by Amendment
No. 3, dated as of December 2, 1999 between Rite Aid Corporation and RAC Leasing
LLC
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Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
4.3 Amendment No. 3, dated as of December 23, 1999 to Master Lease and Security Exhibit 4.8 to Form 8-K filed on
Agreement, dated as of March 19, 1998, (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998, and Amendment No. 2 dated as of October 25, 1999) between RAC
Leasing LLC and Rite Aid Realty Corp.
4.4 Amendment No. 3 dated as of December 2, 1999 to Guaranty Dated as of March 19, Exhibit 4.9 to Form 8-K filed on
1998, as amended by Amendment No. 1, Dated as of June 22, 1998, and as further January 18, 2000
amended by Amendment No. 2, dated as of October 25, 1999, from Rite Aid Corporation
to RAC Leasing LLC
4.5 Amendment No. 2 dated as of October 25, 1999 to Guaranty dated March 19, 1998 (as Exhibit 4.10 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998) from Rite Aid Corporation to January 18, 2000
RAC Leasing LLC
4.6 Amendment No. 1 dated as of June 22, 1998, to Guaranty dated March 19, 1998, from Exhibit 4.11 to Form 8-K filed on
Rite Aid Corporation to RAC Leasing LLC January 18, 2000
4.7 Amendment No. 2 dated as of October 25, 1999 to Master Lease and Security Exhibit 4.12 to Form 8-K filed on
Agreement, dated as of March 19, 1998 (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998) between RAC Leasing LLC and Rite Aid Realty Corp.
4.8 Amendment No. 1 dated as of June 22, 1998 to Master Lease and Security Agreement, Exhibit 4.13 to Form 8-K filed on
dated as of March 19, 1998 between RAC Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.9 Guaranty, dated as of March 19, 1998, from Rite Aid Corporation to RAC Leasing LLC Exhibit 4.4 to Form 8-K filed on
January 18, 2000
4.10 Master Lease and Security Agreement, dated as of March 19, 1998, between RAC Exhibit 4.15 to Form 8-K filed on
Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.11 Waiver dated as of January 11, 2000 to Guaranty dated as of May 30, 1997, as Exhibit 4.16 to Form 8-K filed on
amended by Amendment No. 1, dated as of October 25, 1999, and as further amended by January 18, 2000
Amendment No. 2, dated as of December 2, 1999 between Rite Aid Corporation and
Sumitomo Bank Leasing and Finance, Inc.
4.12 Amendment No. 2 dated as of December 2, 1999 to Guaranty dated as of May 30, 1997, Exhibit 4.17 to Form 8-K filed on
as amended by Amendment No. 1, dated as of October 25, 1999, from Rite Aid January 18, 2000
Corporation to Sumitomo Bank Leasing and Finance, Inc.
4.13 Amendment No. 1 dated as of October 25, 1999 to Guaranty dated as of May 30, 1997 Exhibit 4.18 to Form 8-K filed on
from Rite Aid Corporation to Sumitomo Bank Leasing and Finance, Inc. January 18, 2000
4.14 Amendment No. 4, dated as of October 25, 1999 to Master Lease and Security Exhibit 4.19 to Form 8-K filed on
Agreement, dated as of May 30, 1997, as amended by Amendment No. 1, dated as of January 18, 2000
March 11, 1998, and as further amended by Amendment No. 2, dated as of June 22,
1998, and as further amended by Amendment No. 3 dated as of May 26, 1999 between
Sumitomo Bank Leasing and Finance, Inc. and Rite Aid Realty Corp.
4.15 Amendment No. 3, dated as of May 26, 1999, to Master Lease and Security Agreement, Exhibit 4.20 to Form 8-K filed on
dated as of May 30, 1997, (as amended by Amendment No. 1, dated as of March 11, January 18, 2000
1998, and as further amended by Amendment No. 2, dated as of June 22, 1998) between
Sumitomo Bank Leasing and Finance, Inc. and Rite Aid Realty Corp.
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Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
4.16 Amendment No. 2, dated as of June 22, 1998 to Master Lease Security Agreement, Exhibit 4.21 to Form 8-K filed on
dated as of May 30, 1997, as amended by Amendment No. 1 to Master Lease and January 18, 2000
Security Agreement, dated as of March 11, 1998 between Sumitomo Bank Leasing and
Finance, Inc. and Rite Aid Realty Corp.
4.17 Amendment No. 1, dated as of March 11, 1998 to Master Lease and Security Agreement, Exhibit 4.22 to Form 8-K filed on
dated as of May 30, 1997 between Sumitomo Bank Leasing and Finance, Inc. and Rite January 18, 2000
Aid Realty Corp.
4.18 Guaranty, dated as of May 30, 1997 from Rite Aid Corporation to Sumitomo Bank Exhibit 4.23 to Form 8-K filed on
Leasing and Finance, Inc. January 18, 2000
4.19 Master Lease and Security Agreement, dated as of May 30, 1997, between Sumitomo Exhibit 4.24 to Form 8-K filed on
Bank Leasing and Finance, Inc. and Rite Aid Realty Corp. January 18, 2000
4.20 Waiver No. 1 dated as of January 10, 2000 to Note Agreement dated as of September Exhibit 4.25 to Form 8-K filed on
30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of October 25, January 18, 2000
1999 and Amendment No. 2 dated as of December 2, 1999) among Finco, Inc., Rite Aid
Corporation, The Prudential Life Insurance Company of America and PruCo Life
Insurance Company and Waiver No. 1 dated as of January 10, 2000 to Guaranty
Agreement dated as of September 30, 1996 (as previously amended pursuant to
Amendment No. 1 dated as of October 25, 1999 and Amendment No. 2 dated as of
December 2, 1999) among Finco, Inc., Rite Aid Corporation, The Prudential Life
Insurance Company of America and PruCo Life Insurance
4.21 Amendment No. 2 dated as of December 2, 1999 to Note Agreement dated as of Exhibit 4.26 to Form 8-K filed on
September 30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of January 18, 2000
October 25, 1999) among Finco, Inc., Rite Aid Corporation, The Prudential Insurance
Company of America and PruCo Life Insurance Company and Amendment No. 2 dated as of
December 2, 1999 to Guaranty Agreement dated as of September 30, 1996 (as
previously amended pursuant to Amendment No. 1 dated as of October 25, 1999) among
Finco, Inc., Rite Aid Corporation, The Prudential Insurance Company of America and
PruCo Life Insurance Company
4.22 Amendment No. 1 dated as of October 25, 1999 to Note Agreement dated as of Exhibit 4.27 to Form 8-K filed on
September 30, 1996 among Finco, Inc., Rite Aid Corporation, The Prudential January 18, 2000
Insurance Company of America and PruCo Life Insurance Company and Amendment No. 1
dated as of October 25, 1999 to Guaranty Agreement dated as of September 30, 1996
among Finco, Inc., Rite Aid Corporation, The Prudential Insurance Company of
America and PruCo Life Insurance Company
4.23 Guaranty Agreement dated as of September 30, 1996 from Rite Aid Corporation to the Exhibit 4.28 to Form 8-K filed on
Prudential Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.24 Note Agreement dated as of September 30, 1996 among Finco, Inc., The Prudential Exhibit 4.29 to Form 8-K filed on
Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.25 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.2 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 10, 1997, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
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Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
4.26 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.3 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 22, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.27 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.4 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated December 21, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.28 Commitment Letter dated April 10, 2000 Exhibit 4.1 to Form 8-K filed on
April 11, 2000
4.29 Indenture, dated as of June 14, 2000, among Rite Aid Corporation, as Issuer, each Exhibit 4.1 to Form 8-K filed on
of the Subsidiary Guarantors named therein and State Street Bank and Trust Company, June 21, 2000
as Trustee.
4.30 Exchange and Registration Rights Agreement, dated as of June 14, 2000, by and among Exhibit 4.2 to Form 8-K filed on
Rite Aid Corporation, State Street Bank and Trust Company and the Holders of the June 21, 2000
10.50% Senior Secured Notes due 2002.
4.31 Registration Rights Agreement, dated as of June 14, 2000, by and among Rite Aid Exhibit 4.3 to Form 8-K filed on
Corporation and the Lenders listed therein. June 21, 2000
10.1 1999 Stock Option Plan* Filed Herewith
10.2 2000 Omnibus Equity Plan* Included in Proxy Statement dated
October 24, 2000
10.3 2001 Stock Option Plan* Filed Herewith
10.4 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.1 to Form 8-K filed on
Aid Corporation and Green Equity Investors III, L.P. November 2, 1999
10.5 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.2 to Form 8-K filed on
Aid Corporation and J.P. Morgan Ventures Corporation November 2, 1999
10.6 Warrant to purchase Common Stock, par value $1.00 per share, of Rite aid Exhibit 4.3 to Form 8-K filed on
Corporation, dated October 27, 1999, issued to J.P. Morgan Ventures Corporation November 2, 1999.
10.7 Commitment Letter, dated October 18, 1999, by and between Rite Aid Corporation and Exhibit 10.1 to Form 8-K filed on
Green Equity Investors III, L.P. November 2, 1999
10.8 Employment Agreement by and between Rite Aid Corporation and Robert G. Miller, Exhibit 10.1 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.9 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Robert G. Miller, dated as of May 7, 2001*
10.10 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.31 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller* January 18, 2000
10.11 Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated Exhibit 10.2 to Form 8-K filed on
as of December 5, 1999* January 18, 2000
10.12 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Mary F. Sammons, dated as of May 7, 2001*
10.13 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.32 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons* January 18, 2000
10.14 Employment Agreement by and between Rite Aid Corporation and David R. Jessick, Exhibit 10.3 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.15 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.33 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and David R. Jessick* January 18, 2000
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Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
10.16 Employment Agreement by and between Rite Aid Corporation and John T. Standley, Exhibit 10.4 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.17 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.34 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and John T. Standley* January 18, 2000
10.18 Employment Agreement by and between Rite Aid Corporation and Elliot S. Gerson, Filed Herewith
dated as of November 16, 2000*
10.19 Employment Agreement by and between Rite Aid Corporation and Eric Sorkin, dated as Filed Herewith
of April 2, 1999*
10.20 Employment Agreement by and between Rite Aid Corporation and James Mastrain, dated Filed Herewith
as of September 27, 2000*
10.21 Rite Aid Corporation Special Deferred Compensation Plan* Exhibit 10. 20 to Form 10-K filed
on July 11, 2000
10.22 Senior Credit Agreement, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.1 to Form 8-K filed on
Banks party thereto, Citicorp USA, Inc., as Senior Administrative Agent, Citicorp June 21, 2000
USA, Inc., as Senior Collateral Agent, and Heller Financial, Inc. and Fleet Retail
Finance Inc., as Syndication Agents.
10.23 Collateral Trust and Intercreditor Agreement, dated as of June 12, 2000, among Rite Exhibit 10.2 to Form 8-K filed on
Aid Corporation, each Subsidiary Guarantor of Rite Aid Corporation listed therein, June 21, 2000
Wilmington Trust Company, Citicorp USA, Inc., Morgan Guaranty Trust Company of New
York, The Prudential Insurance Company of America, State Street Bank and Trust
Company and The Sumitomo Bank, Limited, New York Branch.
10.24 Senior Subsidiary Security Agreement, dated as of June 12, 2000, made by the Exhibit 10.3 to Form 8-K filed
Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
Subsidiary Guarantor pursuant to the Senior Credit Facility, in favor of Citicorp
USA, Inc., as Senior Collateral Agent.
10.25 Senior Subsidiary Guarantee Agreement, dated as of June 12, 2000, among each of the Exhibit 10.4 to Form 8-K filed
Subsidiary Guarantors of Rite Aid Corporation listed therein and Citicorp USA, June 21, 2000
Inc., as Senior Collateral Agent.
10.26 Senior Indemnity, Subrogation and Contribution Agreement, dated as of June 12, Exhibit 10.5 to Form 8-K filed
2000, among Rite Aid Corporation, each of the Subsidiary Guarantors listed therein June 21, 2000
and Citicorp USA, Inc., as Senior Collateral Agent.
10.27 RCF Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.6 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.28 PCS Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.7 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.29 Exchange Debt Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.8 to Form 8-K filed
Banks from time to time parties thereto and Morgan Guaranty Trust Company of New June 21, 2000
York, as Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and
Book Runner.
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Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
10.30 Second Priority Subsidiary Guarantee Agreement, dated as of June 12, 2000, among Exhibit 10.9 to Form 8-K filed
each of the Subsidiary Guarantors of Rite Aid Corporation listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.31 Second Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.10 to Form 8-K filed
the Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
Subsidiary Guarantor pursuant to the Second Priority Debt Documents, in favor of
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.32 Second Priority Indemnity, Subrogation and Contribution Agreement, dated as of June Exhibit 10.11 to Form 8-K filed
12, 2000, among Rite Aid Corporation, each Subsidiary Guarantor listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.33 First Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.12 to Form 8-K filed
the Domestic Subsidiaries identified therein and any other person that becomes a June 21, 2000
Domestic Subsidiary pursuant to the Exchange Debt Facility Documents, in favor of
Morgan Guaranty Trust Company of New York, as Agent.
10.34 Amended and Restated Drugstore.com Pledge Agreement, dated as of June 12, 2000, Exhibit 10.13 to Form 8-K filed
between Rite Aid Corporation and Morgan Guaranty Trust Company of New York, as June 21, 2000
Agent.
10.35 Amended and Restated PCS Pledge Agreement, dated as of June 12, 2000, between Rite Exhibit 10.14 to Form 8-K filed
Aid Corporation and Morgan Guaranty Trust Company of New York, as Agent. June 21, 2000
10.36 Form of Second Priority Mortgage, Assignment of Leases and Rents, Security Exhibit 10.15 to Form 8-K filed
Agreement and Financing Statement, by the Subsidiary Guarantor listed therein, to June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.37 Amendment No. 3 to Note Agreement, Amendment No. 4 to Guaranty Agreement, and Exhibit 10.16 to Form 8-K filed
Amendment No. 1 to Put Agreement, for Adjustable Rate Senior Secured Notes due June 21, 2000
August 15, 2002, among Finco, Inc., Rite Aid Corporation, The Prudential Insurance
Company of America, and Pruco Life Insurance Company, as of June 12, 2000.
10.38 Amendment No. 5 to Guaranty, dated as of June 12, 2000, from Rite Aid Corporation, Exhibit 10.17 to Form 8-K filed
as Guarantor, to RAC Leasing LLC, as Lessor. June 21, 2000
10.39 Amendment No. 4 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.18 to Form 8-K filed
between RAC Leasing LLC, as Lessor, and Rite Aid Realty Corp., as Lessee. June 21, 2000
10.40 Amendment No. 4 to Guaranty, dated as of June 12, 2000, from Rite Aid Corporation, Exhibit 10.19 to Form 8-K filed
as Guarantor, to Sumitomo Bank Leasing and Finance, Inc., as Lessor. June 21, 2000
10.41 Amendment No. 5 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.20 to Form 8-K filed
between Sumitomo Bank Leasing and Finance, Inc., as Lessor, and Rite Aid Realty June 21, 2000
Corp., as Lessee.
10.42 Executive Separation Agreement and General Release, dated February 28, 2000, Exhibit 10.46 to Form
between Rite Aid Corporation and Timothy Noonan. 10-K filed on July 11, 2000
10.43 Letter Agreement, dated February 28, 2000, between Rite Aid Corporation and Timothy Exhibit 10.47 to Form
Noonan, amending Executive Separation Agreement and General Release, dated February 10-K filed on July 11, 2000
28, 2000, between Rite Aid Corporation and Timothy Noonan.
|
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
10.44 Commitment letter dated May 15, 2001 by and between Rite Aid Corporation, Solomon Filed herewith
Smith Barney Inc., Citicorp North America, Inc., The Chase Manhattan Bank, J.P.
Morgan Securities Inc., Credit Suisse First Boston, Fleet Retail Finance Inc., and
Fleet Securities, Inc.
10.45 Equity for Bank Debt Exchange Agreement dated April 12, 2001 between Rite Aid Filed herewith
Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P.,
Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.46 Side Letter to Equity for Bank Debt Exchange Agreement dated April 30, 2001 between Filed herewith
Rite Aid Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund,
L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.47 Intentionally left blank
10.48 Employment Agreement by and between Rite Aid Corporation and Christopher Hall, Filed herewith
dated as of January 26, 2000*
10.49 Employment Agreement by and between Rite Aid Corporation and Robert B. Sari, dated Filed herewith
as of February 28, 2001*
11 Not Applicable
12 Statement regarding computation of ratios of earnings to fixed charges Filed herewith
13 Not Applicable
16 Not Applicable
18 Letter re change in accounting principles Exhibit 18 to the Form
10-K filed on July 11, 2000
21 Subsidiaries of the registrant Filed herewith
22 Not Applicable
23 Consent of Independent Certified Public Accountants Not applicable
24 Not Applicable
|
(b) Reports on Form 8-K
We did not file any current reports on Form 8-K during the fourth quarter of fiscal 2001.
INDEPENDENT AUDITORS' REPORT
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 as of March 3, 2001 and February 26, 2000, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended March 3, 2001. Our audits also included the financial statement schedule listed in the Table of Contents at Item 14(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 these financial statements and financial statement schedule based on our audits. We did not audit the consolidated financial statements of PCS Holding Corporation (a consolidated subsidiary of Rite Aid Corporation), which has been included in discontinued operations in the accompanying consolidated financial statements, which statements reflect total assets constituting 17% of consolidated total assets as of February 26, 2000, and revenues of $1,264.7 million and $104.3 million for the years ended February 26, 2000 and February 27, 1999, respectively. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for PCS Holding Corporation, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Rite Aid Corporation and subsidiaries at March 3, 2001, and February 26, 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 3, 2001, 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.
As discussed in Note 3 to the consolidated financial statements, the Company changed its application of the last-in, first-out ("LIFO") method of accounting for inventory in 2000.
/s/ DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania |
May 8, 2001, except for Note 25,
as to which the date is May 16, 2001
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
PCS Holding Corporation
We have audited the consolidated balance sheets of PCS Holding Corporation and Subsidiaries (the Company) as of February 27, 1999 and February 26, 2000, and the related consolidated statements of operations, shareholder's equity, and cash flows for the thirty-six days ended February 27, 1999 and the year ended February 26, 2000 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PCS Holding Corporation and Subsidiaries at February 27, 1999 and February 26, 2000, and the consolidated results of their operations and their cash flows for the thirty-six days ended February 27, 1999 and the year ended February 26, 2000, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
April 21, 2000
|
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share amounts)
March 3, 2001 February 26, 2000
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 92,290 $ 179,757
Accounts receivable, net ................ 503,527 152,035
Inventories, net ........................ 2,444,525 2,472,437
Investment in AdvancePCS ................ 491,198 --
Refundable income taxes .................. -- 147,599
Prepaid expenses and other current assets 85,292 63,659
----------- -----------
Total current assets.................... 3,616,832 3,015,487
PROPERTY, PLANT AND EQUIPMENT, NET ........ 3,041,008 3,445,828
GOODWILL AND OTHER INTANGIBLES ............ 1,067,339 1,258,108
OTHER ASSETS .............................. 188,732 235,398
DEFERRED TAX ASSET ........................ -- 146,917
NET NON-CURRENT ASSETS OF DISCONTINUED
OPERATIONS............................... -- 1,743,828
----------- -----------
Total assets............................ $ 7,913,911 $ 9,845,566
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current lease financing obligations ...... $ 28,603 $ 25,964
Short-term debt and current maturities of
long-term debt .......................... 8,353 76,086
Accounts payable ........................ 896,390 854,062
Sales and other taxes payable ............ 31,562 33,662
Accrued salaries, wages and other current
liabilities ............................. 696,047 883,003
Net current liabilities of discontinued
operations............................... -- 390,053
----------- -----------
Total current liabilities............... 1,660,955 2,262,830
CONVERTIBLE SUBORDINATED NOTES ........... 357,324 649,986
LONG-TERM DEBT LESS CURRENT MATURITIES ... 4,428,871 4,738,661
LEASE FINANCING OBLIGATIONS LESS CURRENT
MATURITIES............................... 1,071,397 1,122,171
OTHER NONCURRENT LIABILITIES .............. 730,342 619,952
----------- -----------
Total liabilities....................... 8,248,889 9,393,600
COMMITMENTS AND CONTINGENCIES ............ -- --
REDEEMABLE PREFERRED STOCK ................ 19,457 19,457
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $1 per share;
liquidation value $100 per
share; 20,000,000 shares authorized:
shares issued -- 3,340,000
and 3,083,000........................... 333,974 308,250
Common stock, par value $1 per share;
600,000,000 shares authorized: shares
issued and outstanding -- 348,055,000
and 259,927,000......................... 348,055 259,927
Additional paid-in capital ............... 2,065,301 1,292,337
Accumulated deficit ...................... (3,171,956) (1,421,817)
Deferred compensation .................... 19,782 (6,188)
Accumulated other comprehensive income ... 50,409 --
----------- -----------
Total stockholders' equity (deficit).... (354,435) 432,509
----------- -----------
Total liabilities and stockholders'
equity (deficit)......................... $ 7,913,911 $ 9,845,566
=========== ===========
|
The accompanying notes are an integral part of these consolidated financial statements.
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
(53 weeks) (52 weeks) (52 weeks)
----------- ------------ ------------
REVENUES............................................................................. $14,516,865 $13,338,947 $12,438,442
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs....................................... 11,151,490 10,213,428 9,406,831
Selling, general and administrative expenses........................................ 3,458,307 3,607,810 3,200,563
Goodwill amortization............................................................... 20,670 24,457 26,055
Store closing and impairment charges................................................ 388,078 139,448 195,359
Interest expense.................................................................... 649,926 542,028 274,826
Loss on debt conversions and modifications.......................................... 100,556 -- --
Share of loss from equity investments............................................... 36,675 15,181 448
Gain on sale of fixed assets........................................................ (6,030) (80,109) --
----------- ------------ ------------
15,799,672 14,462,243 13,104,082
----------- ------------ ------------
Loss from continuing operations before income taxes and
cumulative effect of accounting change............................................ (1,282,807) (1,123,296) (665,640)
INCOME TAX EXPENSE (BENEFIT)......................................................... 148,957 (8,375) (216,941)
----------- ----------- -----------
Loss from continuing operations before cumulative effect
of accounting change.............................................................. (1,431,764) (1,114,921) (448,699)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
including income tax expense (benefit) of $13,846, $30,903, and $(5,925)........... 11,335 9,178 (12,823)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
net of income tax benefit of $734.................................................. (168,795) -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income tax benefit of $18,200............................................... -- (27,300) --
----------- ------------ ------------
NET LOSS......................................................................... $(1,589,224) $(1,133,043) $ (461,522)
=========== ============ ============
COMPUTATION OF LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss............................................................................ $(1,589,224) $(1,133,043) $ (461,522)
Accretion of redeemable preferred stock............................................. -- (97) --
Preferred stock conversion reset.................................................... (160,915) -- --
Cumulative preferred stock dividends................................................ (25,724) (10,110) (627)
----------- ------------ ------------
Loss applicable to common stockholders........................................... $(1,775,863) $(1,143,250) $ (462,149)
=========== ============ ============
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations..................................................... $ (5.15) $ (4.34) $ (1.74)
Income (loss) from discontinued operations.......................................... (0.50) 0.04 (0.05)
Cumulative effect of accounting change, net......................................... -- (0.11) --
----------- ------------ ------------
Net loss per share............................................................... $ (5.65) $ (4.41) $ (1.79)
=========== ============ ============
|
The accompanying notes are an integral part of these consolidated financial statements.
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands, except per share amounts)
Preferred Stock Common Stock Additional Retained
------------------------------- ------------------ Paid-in Earnings
Shares Class A Class B Shares Issued Capital (Deficit)
------ --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 28, 1998...... -- -- -- 258,214 $258,214 $1,354,917 $ 285,859
Net loss....................... (461,522)
Other comprehensive income --
Minimum pension liability
adjustment...................
Comprehensive loss ...........
Stock options exercised........ 633 633 8,603
Stock option income tax benefit 5,807
Stock grants................... 14 14 669
Bond conversion................ 9
Cash dividends paid on common
stock ($.4375 per share)..... (113,111)
----- --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 27, 1999...... -- -- -- 258,861 258,861 1,370,005 (288,774)
Net loss....................... (1,133,043)
Other comprehensive income --
Minimum pension liability
adjustment...................
Comprehensive loss ...........
Issuance of preferred shares... 3,000 300,000
Exchange of preferred shares... (300,000) 300,000
Stock options exercised........ 66 66 814
Stock option income tax benefit 243
Stock grants................... 1,000 1,000 7,250
Issuance of common stock
warrants..................... 8,500
Bond conversion................ 5
Dividends on preferred stock... 83 8,250 (8,250)
Increase resulting from sale of
stock by equity method
investee..................... 2,929
Cash dividends paid on common
stock ($.3450 per share)..... (89,159)
----- --------- --------- ------- -------- ---------- -----------
BALANCE FEBRUARY 26, 2000...... 3,083 -- 308,250 259,927 259,927 1,292,337 (1,421,817)
Net loss....................... (1,589,224)
Other comprehensive (loss) --
Minimum pension liability
adjustment...................
Appreciation of investment in
AdvancePCS...................
Comprehensive loss ...........
Preferred stock conversion
reset........................ (160,915) 160,915
Accretion of convertible
preferred stock.............. 160,915 (160,915)
Stock grants................... 4,004 4,004 18,793
Bond conversion................ 84,124 84,124 604,574
Deferred compensation plans....
Dividends on preferred stock... 257 25,724 (25,724)
Increase resulting from sale of
stock by equity method
investee..................... 14,406
----- --------- --------- ------- -------- ---------- -----------
BALANCE MARCH 3, 2001.......... 3,340 $ -- $ 333,974 348,055 $348,055 $2,065,301 $(3,171,956)
===== ========= ========= ======= ======== ========== ===========
Accumulated
Other
Deferred Comprehensive
Compensation Income Total
------------ ------------- -----------
BALANCE FEBRUARY 28, 1998...... -- $ (787) $ 1,898,203
Net loss....................... (461,522)
Other comprehensive income --
Minimum pension liability
adjustment................... 312 312
-----------
Comprehensive loss ........... (461,210)
Stock options exercised........ 9,236
Stock option income tax benefit 5,807
Stock grants................... 683
Bond conversion................ 9
Cash dividends paid on common
stock ($.4375 per share)..... (113,111)
-------- ------- -----------
BALANCE FEBRUARY 27, 1999...... -- (475) 1,339,617
Net loss....................... (1,133,043)
Other comprehensive income --
Minimum pension liability
adjustment................... 475 475
-----------
Comprehensive loss ........... (1,132,568)
Issuance of preferred shares... 300,000
Exchange of preferred shares... --
Stock options exercised........ 880
Stock option income tax benefit 243
Stock grants................... (6,188) 2,062
Issuance of common stock
warrants..................... 8,500
Bond conversion................ 5
Dividends on preferred stock... --
Increase resulting from sale of
stock by equity method
investee..................... 2,929
Cash dividends paid on common
stock ($.3450 per share)..... (89,159)
-------- ------- -----------
BALANCE FEBRUARY 26, 2000...... (6,188) -- 432,509
Net loss....................... (1,589,224)
Other comprehensive (loss) --
Minimum pension liability
adjustment................... (622) (622)
Appreciation of investment in
AdvancePCS................... 51,031 51,031
-----------
Comprehensive loss ........... (1,538,815)
Preferred stock conversion
reset........................ --
Accretion of convertible
preferred stock.............. --
Stock grants................... (10,410) 12,387
Bond conversion................ 688,698
Deferred compensation plans.... 36,380 36,380
Dividends on preferred stock... --
Increase resulting from sale of
stock by equity method
investee..................... 14,406
-------- ------- -----------
BALANCE MARCH 3, 2001.......... $ 19,782 $50,409 $ (354,435)
======== ======= ===========
|
The accompanying notes are an integral part of these consolidated financial statements
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Year Ended
------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
OPERATING ACTIVITIES:
Net loss............................................................................ $(1,589,224) $(1,133,043) $ (461,522)
Income (loss) from discontinued operations.......................................... 11,335 9,178 (12,823)
Loss on disposal of discontinued operations......................................... (168,795) -- --
----------- ----------- -----------
Loss from continuing operations..................................................... (1,431,764) (1,142,221) (448,699)
Adjustments to reconcile to net cash (used in) provided by operations:
Cumulative effect of change in accounting method.................................. -- 27,300 --
Depreciation and amortization..................................................... 384,066 443,974 379,793
Store closings and impairment loss................................................ 388,078 139,448 195,359
Gain on sale of fixed assets...................................................... (6,030) (80,109) --
Stock based compensation.......................................................... 45,865 -- --
Write-off of deferred tax asset................................................... 146,917 -- --
Loss on debt conversions and modifications........................................ 100,556 -- --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.............................................................. (351,492) (79,156) (3,833)
Inventories...................................................................... 27,912 77,963 415,459
Income taxes receivable/payable.................................................. 147,599 25,390 (278,652)
Accounts payable................................................................. (66,462) (278,073) (129,500)
Other liabilities................................................................ (148,880) 196,938 103,836
Other............................................................................ 59,081 45,448 43,092
----------- ----------- -----------
Net cash (used in) provided by continuing operations............................. (704,554) (623,098) 276,855
Net cash provided by (used in) discontinued operations........................... 3,758 365,375 (227,925)
----------- ----------- -----------
Net cash (used in) provided by operating activities.............................. (700,796) (257,723) 48,930
----------- ----------- -----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment...................................... (132,504) (573,287) (1,222,674)
Purchases of businesses, net of cash acquired....................................... -- (24,454) (1,390,620)
Net investment in equity method investee............................................ -- (8,125) --
Intangible assets acquired.......................................................... (9,000) (67,783) (91,749)
Proceeds from sale of discontinued operations....................................... 710,557 -- --
Proceeds from dispositions.......................................................... 108,600 169,537 --
----------- ----------- -----------
Net cash provided by (used in) continuing operations............................. 677,653 (504,112) (2,705,043)
Net cash used in discontinued operations......................................... -- (48,021) (4,205)
----------- ----------- -----------
Net cash provided by (used in) investing activities.............................. 677,653 (552,133) (2,709,248)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from the issuance of long-term debt.................................... -- 1,600,000 895,878
Net change in bank credit facilities................................................ 324,899 716,073 --
Net (payments) proceeds of commercial paper borrowings.............................. (192,000) (1,591,125) 1,383,125
Net proceeds from the issuance of preferred stock................................... -- 300,000 --
Net proceeds from the issuance of redeemable preferred stock........................ -- -- 23,559
Repurchase of redeemable preferred stock............................................ -- (10,000) --
Proceeds from leasing obligations................................................... 6,992 74,898 504,990
Principal payments on long-term debt................................................ (126,122) (68,113) (39,557)
Cash dividends paid................................................................. -- (89,159) (113,111)
Net proceeds from the issuance of common stock...................................... -- 880 683
Deferred financing costs paid....................................................... (78,093) (34,984) (5,928)
Other............................................................................... -- 6,621 10,702
----------- ----------- -----------
Net cash provided by (used in) financing activities.............................. (64,324) 905,091 2,660,341
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (87,467) 95,235 23
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... 179,757 84,522 84,499
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................... $ 92,290 $ 179,757 $ 84,522
=========== =========== ===========
|
The accompanying notes are an integral part of these consolidated financial statements.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
1. Results of Operations and Financing
During fiscal 2001, 2000 and 1999, the Company incurred net losses of $1,589,224, $1,133,043 and $461,522, respectively, and during fiscal 2001 net cash used in operating activities from continuing operations was $704,554.
Since December 1999, management of the Company has taken a series of steps intended to stabilize and improve the operating results of the Company. Management believes that available cash and cash equivalents together with cash flow from operations, available borrowings under the senior credit facility and other sources of liquidity (including asset sales) will be sufficient to fund the Company's operating activities, investing activities and debt maturities for fiscal 2002. In addition, management believes that the Company will be in compliance with its existing debt covenant requirements throughout fiscal 2002. However, a substantial portion of its indebtedness which matures in August and September 2002 will require the Company to refinance the indebtedness at or before that time.
2. 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. It is one of the largest retail drugstore chains in the United States, with 3,648 stores in operation as of March 3, 2001. The Company's drugstores' primary business is pharmacy services. It also sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a large private label product line.
The Company's continuing operations consists solely of the retail drug segment. Revenues from its retail drug stores are derived from:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Pharmacy..................... $ 8,639,288 $ 7,788,404 $ 6,737,710
Front-end.................... 5,877,577 5,550,543 5,700,732
----------- ----------- -----------
$14,516,865 $13,338,947 $12,438,442
=========== =========== ===========
|
Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary PCS Health Systems, Inc. ("PCS"), a pharmacy benefits manager ("PBM"). Accordingly, for financial statement purposes, the assets, liabilities, results of operations and cash flows of this business have been segregated from those of continuing operations and are presented in the Company's financial statements as discontinued operations (see Note 24).
Fiscal Year
The Company's fiscal year ends on the Saturday closest to February 28. The fiscal year ended March 3, 2001 included 53 weeks. The fiscal years ended February 26, 2000 and February 27, 1999 both included 52 weeks.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to current year classifications.
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.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
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.
Inventories
Inventories are stated at the lower of cost or market. Inventory balances include 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 (see Note 3). At March 3, 2001 and February 26, 2000, inventories were $381,466 and $340,740, 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 warehouse inventories. The LIFO charge was $40,726, $34,614 and $36,469 for fiscal years 2001, 2000 and 1999, 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 of stores that have been closed as "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, identifiable intangibles and allocable goodwill 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. Enterprise goodwill not associated with assets being tested for impairment is evaluated based on a comparison of undiscounted future cash flows of the enterprise compared to the related net book value of the enterprise.
The Company reviews long-lived assets to be held and used for impairment 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. 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. Capitalized lease assets are recorded at the present value of minimum lease payments and amortized over the estimated economic 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 2001, 2000 and 1999, the Company capitalized costs of approximately $1,227, $4,595 and $9,667, respectively.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
Intangible Assets
Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired entities and is being amortized on a straight-line basis over 40 years. 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. Patient prescription files purchased and those acquired in business combinations are amortized over their estimated useful lives of five to fifteen years. The value of assembled workforce acquired is amortized over its useful life of five years.
Investments in Fifty Percent or Less Owned Subsidiaries
Investments in affiliated entities for which the Company has the ability to exercise significant influence, but not control over the investee, and generally an ownership interest of the common stock of between 20% and 50%, are accounted for under the equity method of accounting and are included in other assets. Under the equity method of accounting, the Company's share of the investee's earnings or loss is included in the consolidated statements of operations. The portion of the Company's investment in an equity-method investee that exceeds its share of the underlying net equity of the investee, if any, is amortized over 7 to 30 years.
Revenue Recognition
The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. 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.
Vendor Rebates and Allowances
Rebates and allowances received from vendors that are based on future purchases are initially deferred and are recognized as a reduction of cost of goods sold when the related inventory is sold. Rebates and allowances not tied directly to purchases are recognized as a reduction of selling, general and administrative expense on a straight-line basis over the related contract term.
Stock-Based Compensation
The Company accounts for its employee and director stock-based compensation plans under APB Opinion No. 25.
Store Preopening Expenses and Closing Costs
Costs incurred prior to the opening of a new store, associated with a remodeled store or related to the opening of a distribution facility, are charged against earnings as administrative and general expenses when incurred. When a store is closed, the Company expenses unrecoverable costs and accrues a liability equal to the present value of the remaining lease obligations, net of expected sublease income. Other store closing and liquidation costs are expensed when incurred and included in cost of goods sold.
Advertising
Advertising costs are expensed as incurred. Advertising expenses, net of reimbursements, for fiscal 2001, 2000 and 1999 were $214,891, $194,880 and $223,000, respectively.
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 $250 and general liability occurrences exceeding $1,000. 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.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
2. Summary of Significant Accounting Policies -- (Continued)
The Company is self-insured for all covered employee medical claims.
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 or all of the deferred tax assets will not be realized.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles 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
During fiscal 2001, the Company purchased approximately 93% of the dollar volume of its prescription drugs from a single supplier, McKesson HBOC, Inc. ("McKesson"), under a contract expiring April 2004. 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 difficulty filling prescriptions, which would negatively impact the business.
Derivatives
The Company enters into interest rate swap agreements to hedge the exposure to increasing rates with respect to its variable rate debt. The differential to be paid or received as a result of these swap agreements is accrued as interest rates change and recognized as an adjustment to interest expense related to the variable rate debt.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended by SFAS 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. If the derivative is designated and effective as a fair value hedge, the changes in the fair value of the derivative and the changes in the hedged item attributable to the hedged risk will be recognized in earnings. If the derivative is designated and effective as a cash-flow hedge, changes in the fair value of the effective portion of the derivative will be recorded in other comprehensive income ("OCI") and will be recognized in the income statement when the hedged item affects earnings. SFAS 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that does not qualify as a hedge, changes in fair value will be recognized in earnings. On March 4, 2001, in connection with the adoption of the new Statement, the Company will record a reduction of approximately $29,000 in OCI as a cumulative transition adjustment for derivatives designated as cash flow-type hedges prior to adopting SFAS 133.
Certain issues currently under consideration by the Derivatives Implementation Group ("DIG") may make it more difficult to qualify for cash flow hedge accounting in the future. Pending the results of the DIG deliberations, changes in the fair value of the Company's interest rate swaps may be recorded as a component of net income.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
3. Change in Accounting Method
In fiscal 2000, the Company changed its application of the LIFO method of accounting by restructuring its LIFO pool structure through a combination of certain existing geographic pools. The reduction in the number of LIFO pools was made to more closely align the LIFO pool structure to the Company's store merchandise categories. The effect of this change in fiscal 2000 was a charge of $6,840 (net of income tax benefit of $4,560), or $.03 per diluted common share. The cumulative effect of the accounting change on periods prior to fiscal 2000 was a charge of $27,300 (net of income tax benefit of $18,200), or $.11 per diluted common share. The pro forma effect of this accounting change would have been a reduction in income of $6,360 (net of income tax benefit of $4,240) or $.02 per diluted common share for fiscal 1999.
4. Acquisitions and Dispositions
On March 3, 1999, the Company purchased 25 drugstores from Edgehill Drugs, Inc. The purchase price was $24,454, net of cash acquired of $12. This acquisition was accounted for under the purchase method of accounting. The results of operations have been included in these consolidated financial statements since the date of acquisition.
In September 1999, the Company signed a contract to sell 38 drugstores in California to Longs Drug Stores California, Inc. (Longs). During the third quarter of fiscal 2000, 32 stores were transferred to Longs and two stores were transferred in the first quarter of fiscal 2001. The remaining four stores were retained by the Company. A pre-tax gain of $80,109 was recognized in the third quarter of fiscal 2000 for the stores that were sold in that year. The immaterial gain on the sale of the two stores was recognized by the Company in fiscal 2001.
5. Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings 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 earnings of the Company subject to anti-dilution limitations.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
5. Earnings Per Share -- (Continued)
Year Ended
-------------------------------------------
March 3, February 26, February 27,
2001 2000 1999
------------ ------------ ------------
Numerator for earnings per share:
Loss from continuing operations before
cumulative effect of accounting
change, net of tax ................... $ (1,431,764) $ (1,114,921) $ (448,699)
Accretion of redeemable preferred
stock ................................ (97) --
Preferred stock conversion reset ...... (160,915)
Cumulative preferred stock dividends .. (25,724) (10,110) (627)
------------ ------------ ------------
Loss before cumulative effect of
accounting change attributable to
common stockholders .................. (1,618,403) (1,125,128) (449,326)
Net income (loss) from discontinued
operations, net of tax ............... 11,335 9,178 (12,823)
Loss on disposal of discontinued
operations, net of tax ............... (168,795) -- --
------------ ------------ ------------
Total income (loss) from discontinued
operations ........................... (157,460) 9,178 (12,823)
Cumulative effect of accounting change -- (27,300) --
------------ ------------ ------------
Net loss attributable to common
stockholders............................ $ (1,775,863) $ (1,143,250) $ (462,149)
============ ============ ============
Denominator:
Basic weighted average shares ......... 314,189,280 259,139,000 258,516,000
Diluted weighted average shares ....... 314,189,280 259,139,000 258,516,000
Basic and diluted loss per share:
Loss from continuing operations ....... $ (5.15) $ (4.34) $ (1.74)
Income (loss) from discontinued
operations ........................... (0.50) 0.04 (0.05)
Cumulative effect of accounting
change, net .......................... -- (0.11) --
------------ ------------ ------------
Net loss per share .................... $ (5.65) $ (4.41) $ (1.79)
============ ============ ============
|
In fiscal 2001, 2000 and 1999, no potential shares of common stock have been included in the calculation of diluted earnings per share because of the losses reported. At March 3, 2001, an aggregate of 126,526,540 potential common shares related to stock options, convertible preferred stock, convertible notes, warrants, stock appreciation rights and other have been excluded from the computation of diluted earnings per share.
6. Store Closing and Impairment Charges
Store closing and impairment charges consist of:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
Impairment charges ....................... $214,224 $120,593 $ 87,666
Store lease exit costs ................... 57,668 18,855 107,693
Impairment of investments ................ 116,186 -- --
-------- -------- --------
$388,078 $139,448 $195,359
======== ======== ========
|
Impairment charges
In fiscal 2001, 2000, and 1999 store closing and impairment charges include non-cash charges of $214,224, $120,593 and $87,666 respectively, for the impairment of long-lived assets (including allocable
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
6. Store Closing and Impairment Charges -- (Continued)
goodwill) at 495, 249 and 270 stores. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable.
Store lease exit costs
During fiscal 2001, 2000, and 1999, the Company recorded charges for 144, 224, and 422 stores, respectively, to be closed or relocated that were under long-term leases. Costs incurred to close a store, which principally include lease termination costs, are recorded at the time management commits to closing the store, which is the date the closure is formally approved by senior management, or in the case of a store to be relocated, the date the new property is leased or purchased. The Company calculates its liability for closed stores on a store-by-store basis. The calculation includes 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. As a result of focused efforts on cost recoveries for closed stores during fiscal 2001, the Company has experienced improved results, which has been reflected in the assumptions about future sublease income. This liability is discounted using a risk-free rate of interest. The Company evaluates these assumptions each quarter and adjusts the liability accordingly. The discount rates used to determine the liability were 4.71%, 6.60% and 5.22% at March 3, 2001, February 26, 2000 and February 27, 1999, respectively.
Subsequent to the recording of lease accruals, management determined that certain stores would remain open or would not relocate. Accordingly, the Company reversed charges of $13,232 and $10,490 in fiscal 2001 and 2000, respectively, for lease accruals previously established for those stores.
The reserve for store lease exit costs includes the following activity:
Year Ended
---------------------------------------
March 3, February 26, February 27,
2001 2000 1999
-------- ------------ ------------
Balance--beginning of year .............. $212,812 $ 246,805 $ 191,453
Provision for present value of
noncancellable lease payments of
stores designated to be closed ....... 102,495 58,324 94,404
Changes in assumptions about future
sublease income, terminations, etc.
and change of interest rate .......... (31,595) (28,979) 13,289
Reversals of reserves for stores that
management has determined will remain
open ................................. (13,232) (10,490) --
Interest accretion .................... 11,552 13,251 8,069
Cash payments, net of sublease income . (49,024) (66,099) (60,410)
-------- --------- ---------
Balance--end of year .................... $233,008 $212,812 $246,805
======== ========= =========
|
In addition to store closings, the Company also closed or relocated certain distribution centers in its efforts to consolidate operations. During the second quarter of fiscal 2000, management approved a plan to close its leased distribution center in Las Vegas, Nevada and terminate all of its employees and, as a result, accrued termination benefit payments of $1,634 in the second quarter of 2000, with the charge included in selling, general and administrative expenses. Severance payments of $1,165 were made during fiscal year 2000 leaving a remaining liability of $469 at February 26, 2000, with remaining payments made during fiscal 2001. The operating lease for the distribution center was terminated in May 2000 at the end of the lease term with no additional liability to the Company.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
6. Store Closing and Impairment Charges -- (Continued)
In the third quarter of fiscal 2000, management announced plans to close its South Nitro, West Virginia distribution center in the summer of 2000. As a result of this exit plan, the Company accrued termination benefits of $3,858 in the third quarter of fiscal 2000 for all of the 480 employees with the charge included in selling, general and administrative expenses. In the fourth quarter of fiscal 2000 management decided to not close the facility. However, prior to this decision the Company became obligated to pay $1,040 in severance costs related to 102 employees. The Company paid $540 in the fourth quarter of fiscal 2000 and the remaining $500 was paid in fiscal 2001. The remaining reserve of $2,818 was reversed to selling, general and administrative expenses in the fourth quarter of fiscal 2000.
In the third quarter of fiscal 2000, management approved a plan to close and sell its Ogden, Utah distribution center. As a result of this exit plan, a liability of $2,256 for termination benefits for 500 employees were recorded through selling, general and administrative expenses in the third quarter of fiscal 2000 which were subsequently paid. Additionally, an impairment charge of $7,600 for long-lived assets was recorded in the third quarter of fiscal 2000. The facility was sold in March 2000.
Impairment of investments
The Company has an investment in the common stock of drugstore.com, which is accounted for under the equity method. The initial investment was valued based upon the initial public offering price of drugstore.com. During fiscal 2001, the Company recorded an impairment of its investment in drugstore.com of $112,123. This impairment charge was based upon a decline in the market value of drugstore.com's stock that the Company believes to be other than temporary.
Additionally, the company recorded impairment charges of $4,063 for other investments.
7. Accounts Receivable
During November 1997, the Company and certain of its subsidiaries entered into an agreement to sell, on an ongoing basis, a pool of accounts receivable to a wholly owned bankruptcy-remote special purpose funding subsidiary (the funding subsidiary) of the Company. The funding subsidiary sold an undivided fractional ownership interest in the pool of receivables to a securitization company. The accounts receivable sold to the funding subsidiary were not recognized on the Company's consolidated balance sheet. Under the terms of the agreement, new receivables were added to the pool as collections reduced previously sold accounts receivable. The Company serviced, administered and collected the receivables on behalf of the purchaser. The Company recognized no servicing asset or liability because the benefits of servicing were expected to represent adequate compensation for the services performed.
In connection with the Company's refinancing in June 2000, all borrowings under the securitization program were repaid and the program was terminated. At the date of termination, $300,000 of receivables were recognized on the Company's consolidated balance sheet. Expenses of $7,855 and $18,052 associated with the securitization program through the date of termination were recognized for the years ended March 3, 2001 and February 26, 2000, respectively.
The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. The allowance for uncollectible accounts at March 3, 2001 and February 26, 2000 was $37,050 and $43,371, respectively. The Company's accounts receivable are due primarily from third-party providers (e.g., insurance companies and governmental agencies) under third-party payment plans and are booked net of any allowances provided for under the respective plans. Since payments due from third-party payers are sensitive to payment criteria changes and legislative actions, the allowance is reviewed continually and adjusted for accounts deemed uncollectible by management.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
8. Property, Plant and Equipment
Following is a summary of property, plant and equipment, including capital lease assets, at March 3, 2001 and February 26, 2000:
2001 2000
----------- -----------
Land ............................................. $ 668,561 $ 733,979
Buildings ........................................ 932,083 1,010,133
Leasehold improvements ........................... 1,192,815 1,262,590
Equipment ........................................ 1,413,890 1,469,881
Construction in progress ......................... 49,182 85,484
----------- -----------
4,256,531 4,562,067
Accumulated depreciation ......................... (1,215,523) (1,116,239)
----------- -----------
Property, plant and equipment, net.............. $ 3,041,008 $ 3,445,828
=========== ===========
|
Depreciation expense, which includes the depreciation of assets recorded under capital leases, was $285,886 in fiscal 2001, $326,873 in fiscal 2000 and $269,184 in fiscal 1999.
Substantially all of the Company's owned properties on which it operates stores are pledged as collateral under the Company's debt agreements. The carrying amount of assets to be disposed of is $64,131 and $113,454 at March 3, 2001 and February 26, 2000, respectively.
9. Investments in Fifty Percent or Less Owned Subsidiaries
In July 1999, the Company purchased 9,334,746 of Series E Convertible Preferred Shares in drugstore.com, an on-line pharmacy, for cash of $8,125, including legal costs, and the Company's agreement to provide access to the Company's networks of pharmacies and third-party providers, advertising commitments and exclusivity agreements. Each of the Series E Convertible Preferred Shares were converted to one share of common stock at the time of drugstore.com's initial public offering late in July 1999 and represented 21.6% of the voting stock immediately after the initial public offering. The investment is recorded in other assets, was initially valued at $168,025, equal to the initial public offering price of $18 per share multiplied by the Company's shares. The Company accounts for the investment on the equity method because the Company has significant influence over drugstore.com resulting from its share of the voting stock, its right to appoint one board member and a number of significant operating agreements. Included in other noncurrent liabilities is the unamortized portion of the fair value of the operating agreements of $133,916 that is being amortized over 10 years, the life of the arrangements described above. As a result of the start-up nature of the drugstore.com, the Company recorded an increase to its investment of $14,406 and $2,929 and corresponding increases to equity in connection with the sale of stock by drugstore.com during fiscal 2001 and 2000, respectively. During fiscal 2001, the Company recorded an impairment of its investment in drugstore.com of $112,123. This impairment charge was based upon a decline in the market value of drugstore.com's stock that the Company believes to be other than temporary.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
9. Investments in Fifty Percent or Less Owned Subsidiaries -- (Continued)
In June 1999, the Company sold its investment in Diversified Prescription Delivery LLC, a provider of mail order prescription delivery services. The sales price was $22,860 and resulted in a loss of $811. The investment was accounted for on the equity method with a carrying amount of $23,671 at the date of sale.
In February 2000, the Company sold its investment in Stores Automated Systems, Inc. a manufacturer of integrated point of sale systems. The investment was accounted for on the equity method with a carrying amount of $8,005 at the date of sale. The $8,805 sales price included cash and forgiveness of payables, and resulted in a gain of $800.
10. Goodwill and Other Intangibles
Following is a summary of intangible assets at March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Goodwill ............................................ $ 848,121 $ 920,241
Lease acquisition costs and favorable leases ........ 670,789 713,970
Prescription files .................................. 137,700 136,434
Assembled workforce ................................. 47,133 51,021
---------- ----------
1,703,743 1,821,666
Accumulated amortization ............................ (636,404) (563,558)
---------- ----------
$1,067,339 $1,258,108
========== ==========
|
11. Accrued Salaries, Wages, and Other Current Liabilities
Accrued salaries wages and other current liabilities consist of the following at March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Accrued wages, benefits and other personnel costs ....... $280,126 $254,738
Accrued legal and other professional fees ............... 67,621 161,143
Accrued taxes payable ................................... 2,012 111,805
Accrued interest ........................................ 85,307 61,427
Accrued lease exit costs ................................ 37,042 42,413
Accrued rent and other occupancy costs .................. 79,111 62,087
Deferred income ......................................... 24,543 19,143
Accrued store expense ................................... 30,057 38,443
Accrued property taxes .................................. 43,367 44,490
Other ................................................... 46,861 87,314
-------- --------
$696,047 $883,003
======== ========
|
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
12. Income Taxes
The provision for income taxes from continuing operations was as follows:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Current tax expense (benefit):
Federal ............................... $ -- $(19,017) $ 22,163
State ................................. 3,078 -- --
-------- -------- ---------
3,078 (19,017) 22,163
Deferred tax (benefit):
Federal ............................... 146,773 20,677 (228,776)
State ................................. (894) (10,035) (10,328)
-------- -------- ---------
145,879 10,642 (239,104)
-------- -------- ---------
Total income expense (benefit) ........ $148,957 $ (8,375) $(216,941)
======== ======== =========
|
A reconciliation of the provision for income taxes as presented on the consolidated statements of operations is as follows:
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Income tax expense (benefit) from
continuing operations................... $148,957 $ (8,375) $ (216,941)
Income tax expense (benefit) from
discontinued operations................. 13,846 30,903 (5,925)
Income tax (benefit) from loss on
disposal of discontinued operations..... (734) -- --
Income tax (benefit) related to
cumulative effect of accounting change.. -- (18,200) --
-------- -------- ----------
Total income tax expense (benefit) .... $162,069 $ 4,328 $(222,866)
======== ======== ==========
|
A reconciliation of the statutory federal rate and the effective rate, for continuing operations, is as follows:
Year Ended
------------------------------------------------------
Percentage
---------- March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Federal statutory rate ................... (35.0)% (35.0)% (35.0)%
Nondeductible expenses ................... 6.0 3.4 3.7
State income taxes, net .................. (6.8) (4.1) (4.5)
Tax credits .............................. -- (.8) (1.4)
Valuation allowance ...................... 47.4 34.9 3.6
Other .................................... -- .9 1.0
----- ----- -----
Effective tax rate ....................... 11.6% (0.7)% (32.6)%
===== ===== =====
|
The difference between the statutory federal rate and the reported amount of income tax expense attributable to discontinued operations is primarily due to nondeductible goodwill. The effective rate for fiscal 2001 reflects an increase in the valuation allowance due to the elimination of PCS deferred tax liabilities, resulting from its disposition.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
12. Income Taxes -- (Continued)
The tax effect of temporary differences that give rise to significant components of deferred tax assets and liabilities consist of the following at March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Deferred tax assets:
Accounts receivable............................... $ 31,113 $ 43,762
Accrued expenses.................................. 147,427 141,332
Liability for lease exit costs.................... 125,284 113,907
Pension, retirement and other benefits............ 96,338 69,476
Investment impairment............................. 108,733 59,863
Other ............................................ 370 --
Credits .......................................... 58,533 69,840
Net operating losses.............................. 724,177 466,451
----------- ---------
Total gross deferred tax assets ................. 1,291,975 964,631
Valuation allowance ................................. (1,031,287) (475,174)
----------- ---------
Net deferred tax assets ......................... 260,688 489,457
Deferred tax liabilities:
Inventory......................................... 123,584 121,119
Long-lived assets................................. 137,104 218,793
Other............................................. -- 2,628
----------- ---------
Total gross deferred tax liabilities ............ 260,688 342,540
----------- ---------
Net deferred tax assets, all noncurrent ............. $ -- $ 146,917
=========== =========
|
Net Operating Losses, Capital Losses and Tax Credits At March 3, 2001 and February 26, 2000, the Company had federal net operating loss (NOL) carryforwards of $1,572,818 and $841,059, respectively, the majority of which expire between fiscal 2017 and 2021.
At March 3, 2001 and February 26, 2000, the Company had state NOL carryforwards of $1,718,513 and $1,662,602, respectively, the majority of which expire by fiscal 2005 and the remaining balance by fiscal 2015.
At March 3, 2001, due to the disposition of PCS, the Company incurred a $406,220 capital loss which will expire, if not offset by future capital gains, by fiscal 2006.
At March 3, 2001 and February 26, 2000, the Company had federal business tax credit carryforwards of $49,597 and $61,394, the majority of which expire between fiscal 2017 and 2020. In addition to these credits, the Company has alternative minimum tax credit carryforwards of $8,935 and $7,512 at fiscal 2001 and 2000, respectively.
Valuation Allowances
The valuation allowances as of March 3, 2001, and February 26, 2000 were $1,031,287 and $475,174 respectively, and principally apply to NOL and tax credit carryforwards. The Company believes that it is more likely than not that those carryovers will not be realized. As a result of the decision to dispose of PCS, the Company recognized an increase in the valuation allowance of $146,917 in fiscal 2001.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at March 3, 2001 and February 26, 2000:
2001 2000
---- ----
Commercial paper borrowings. ........................ $ -- $ 192,000
Term loan due 2000 .................................. -- 272,422
5.50% fixed-rate senior notes due 2000 .............. -- 200,000
6.70% notes due 2001 ................................ 7,342 350,000
5.25% convertible subordinated notes due 2002 ....... 357,324 649,986
Senior Facility ..................................... 682,000 --
Revolving Credit facility due 2002 (amended and
restated) ("RCF").................................. 730,268 716,073
Term loan due 2002 (amended and restated) ("PCS") ... 591,391 1,300,000
Exchange Debt ....................................... 216,126 --
10.50% notes due 2002 ............................... 467,500 --
6.00% dealer remarketable securities due 2003 ....... 187,650 200,000
6.00% fixed-rate senior notes due 2005 .............. 194,500 200,000
7.625% senior notes due 2005 ........................ 198,000 200,000
7.125% notes due 2007 ............................... 350,000 350,000
6.125% fixed-rate senior notes due 2008 ............. 150,000 150,000
6.875% senior debentures due 2013 ................... 200,000 200,000
3.50% to 10.475% industrial development bonds due
through 2009....................................... 4,740 5,196
7.70% notes due 2027 ................................ 300,000 300,000
6.875% fixed-rate senior notes due 2028 ............. 150,000 150,000
Lease financing obligations ......................... 1,100,000 1,148,135
Other ............................................... 7,707 29,056
---------- ----------
5,894,548 6,612,868
Short-term debt, current maturities of long-term
debt and lease financing obligations............... (36,956) (102,050)
---------- ----------
Long-term debt and lease financing obligations, less
current maturities................................. $5,857,592 $6,510,818
========== ==========
|
In June 2000, the Company entered into an interest rate swap contract that fixes the LIBOR component of $500,000 of the Company's variable rate debt at 7.083% for a two-year period. In July 2000, the Company entered into an additional interest rate swap that fixes the LIBOR component of an additional $500,000 of variable rate debt at 6.946% for a two-year period. The Company entered into these contracts to hedge its exposure to fluctuations in market interest rates. The differential to be paid or received as a result of these swap agreements was recorded as an adjustment to interest expense. At March 3, 2001, the Company would have had to pay $29,000 if it had terminated these contracts on that date.
Refinancings
On June 14, 2000, the Company obtained a $1,000,000 (increased to $1,100,000 in November 2000) senior secured credit facility (the Senior Facility) from a syndicate of banks. The Senior Facility is guaranteed by substantially all of the Company's wholly-owned subsidiaries, and the banks have a security interest in substantially all of those subsidiaries' accounts receivable, inventory, and intellectual property and a security interest in certain of their real property. Of this amount, $600,000 is in the form of a term loan and $500,000 is in the form of a revolving credit facility both due in August 2002 and both with interest at LIBOR plus 3.00%. Funds drawn under the term loan were used to repay $300,000 of drawings under the accounts receivable securitization program and to pay $200,000 for working capital and transaction expenses which are
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
being amortized over the term of the Senior Facility. Funds drawn from time to time under the revolving credit facility are used to fund current operations. In connection with the $100,000 term loan in November 6, 2000, the Company incurred fees of $3,528 which are being amortized over the period of the new term loans.
The Senior Facility contains customary covenants, which place restrictions on the assumption of debt, the payment of dividends, mergers, liens and sale and leaseback transactions. The facility requires the Company to meet various financial ratios and limits capital expenditures. The Company was in compliance with its debt covenants as of March 3, 2001. For the three fiscal quarters ended March 3, 2001, those covenants required the company to maintain a minimum interest coverage ratio and a minimum fixed charge coverage ratio of .95:1, increasing to a minimum interest coverage ratio of 1.40:1 and a minimum fixed charge ratio of 1.19:1 for the four quarters ending June 1, 2002. For the three fiscal quarters ended March 3, 2001, the Company was required to have consolidated EBITDA (as defined in the Senior Facility) of no less than $364,000, increasing to $720,000 for the four fiscal quarters ending on June 1, 2002. For the three fiscal quarters ended March 3, 2001, capital expenditures were limited to $186,000, increasing to $243,000 for the four fiscal quarters ending June 1, 2002. As of March 3, 2001, the Company had additional borrowing capacity under the Senior Facility of $394,600.
Also on June 14, 2000, the Company extended the maturity dates of the RCF credit facility and the PCS credit facility to August 2002. Borrowings under the PCS credit facility bear interest at LIBOR plus 3.25% and borrowings under the RCF credit facility bear interest at LIBOR plus 3.75%. These credit facilities contain restrictive covenants that place restrictions on the assumption of debt, the payment of dividends, mergers, liens and sale- leaseback transactions. These credit facilities also require the Company to satisfy financial covenants that are generally slightly less restrictive than the covenants in the Senior Facility. The facilities also limit the amount of our capital expenditures to $186,000 for the three quarters ended March 3, 2001, increasing to $243,000 for the four quarters ending June 1, 2002. Under the terms of these facilities, after giving effect to the $100,000 increase in the term loan, the Company is permitted to incur up to an additional $35,000 of indebtedness under the Senior Facility without the further consent of lenders. The PCS credit facility was originally secured by a first lien on the stock of PCS Health Systems, Inc. and the RCF credit facility was originally secured by a first lien on the stock of drugstore.com and a second lien on the stock of PCS Health Systems, Inc. Any amounts repaid under these facilities with the proceeds of asset sales may not be borrowed.
In addition, on June 14, 2000 certain affiliates of J.P. Morgan Chase, which had lent the Company $300,000 under a demand note in June 1999 and who was also a lender under the RCF and PCS credit facilities, together with certain other lenders under the two credit facilities, agreed to exchange $274,782 of their loans for a new secured exchange debt obligation. The terms of the exchange debt are substantially the same as the terms of our RCF and PCS credit facilities and the interest rate is currently LIBOR plus 3.25%. The lenders of the exchange debt have the same collateral as they did with respect to their loans under the RCF and PCS credit facilities or demand note, as applicable, as well as a first lien on the Company's prescription files. Additionally, the Company issued three-year warrants to purchase 2,500,000 shares of common stock at $11.00 per share. The fair value assigned to the warrants was $8,500 and amortization was completed during fiscal 2001. The Company also paid and expensed $4,000 of advisory fees over a period of one year.
Upon consummation of the sale of PCS on October 2, 2000, $575,000 of the cash portion of the proceeds was applied to reduce the outstanding balances of the PCS credit facility and the PCS exchange debt. In February 2001, the Company also applied $34,504 received from the final settlement of the PCS sale to reduce the PCS facilities. At March 3, 2001, the Company had $1,537,785 of borrowings outstanding under the PCS, RCF and related exchange debt facilities. Subsequent to March 3, 2001, the Company further
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
reduced the borrowings outstanding under the PCS and related exchange debt facilities by $484,104 utilizing the proceeds from the sale of AdvancePCS stock and repayment of AdvancePCS senior subordinated notes which it had received as part of the consideration for the sale.
The Company also amended its existing guarantees of two synthetic lease transactions to provide substantially the same terms of our RCF and PCS credit facilities.
In connection with modifications to the RCF and PCS credit facilities, the debt exchange for the 10.5% notes due 2002, the guarantee of the Prudential note, the exchange for exchange debt and the guarantee of the synthetic lease transactions, substantially all wholly-owned subsidiaries guaranteed the Company's obligations thereunder on a second priority basis. These subsidiary guarantees are secured by a second priority lien on the inventory, accounts receivable, intellectual property and some of the real estate assets of the subsidiary guarantors. Except to the extent previously secured, the Company's direct obligations under those facilities and guarantees remain unsecured.
Exchange Offers
In connection with the above refinancing on June 14, 2000, the Company exchanged $52,500 of its 5.5% fixed-rate senior notes due in December 2000 and $321,800 of its 6.7% notes due in December 2001 for $374,300 of 10.5% senior secured notes due 2002. The Company arranged with certain financial institutions to refinance $93,200 of the 5.5% notes when they become due with the 10.5% senior secured notes due 2002. These financial institutions purchased $16,710 of the 5.5% notes and $20,390 of the 6.7% notes on July 27, 2000; $53,814 of the 5.5% notes on September 13, 2000; and $476 of the 6.7% notes on December 14, 2000; and exchanged the purchased notes with the Company for the 10.5% senior secured notes due 2002. The remaining 5.5% notes were retired in December 2000 with the Company's general corporate funds and the remaining forward purchase commitment. The Company recognized an aggregate loss of $6,200 in connection with the exchange and refinancing.
Exchange of Debt for Equity
Throughout and subsequent to fiscal 2001, the Company exchanged debt for equity as outlined in the table below:
Carrying Additional
Debt Exchanged Amount Common Paid-In Gain
-------------- Exchanged Stock Capital (Loss)
--------- ------- ---------- ----------
Exchanged during the year ended March 3, 2001:
PCS and RCF facilities and J.P. Morgan demand note ............................. $284,820 $51,785 $220,088 $ 5,189
5.25% convertible subordinated notes ........................................... 292,662 30,241 379,829 (118,769)
6.00% dealer remarketable securities ........................................... 17,850 1,868 4,053 11,868
7.625% senior notes ............................................................ 2,000 230 604 1,156
-------- ------- -------- ----------
For the year ended March 3, 2001 ............................................... $597,332 $84,124 $604,574 $ (100,556)
======== ======= ======== ==========
Exchanges (including commitments) subsequent to March 3, 2001 through May 15,
2001 (unaudited):
5.25% convertible subordinated notes ........................................... $205,308 $29,750 $307,686 $ (133,129)
6.00% dealer remarketable securities ........................................... 79,885 12,382 55,633 11,427
10.5% notes .................................................................... 56,300 8,467 47,461 (656)
PCS facility ................................................................... 5,000 715 4,390 (105)
RCF facility ................................................................... 164,858 25,878 150,186 (11,206)
-------- ------- -------- ----------
Subsequent to March 3, 2001 .................................................... $511,351 $77,192 $565,356 $(133,669)
======== ======= ======== ==========
|
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
13. Indebtedness and Credit Agreements -- (Continued)
Several of the exchanges subsequent to March 3, 2001 have not settled, including the exchanges for the 10.5% notes, the PCS facility and the RCF facility. Accordingly, the data presented in the above table for these exchanges is based on the best available estimates.
Other
In fiscal 2000, the Company was required to obtain waivers of compliance with, and modifications to certain of the covenants contained in its senior credit and loan agreements and public indentures. In connection with obtaining the waivers and modifications, the Company paid fees and transaction costs of $63,332.
On September 10, 1997, the Company completed the sale of $650,000 of 5.25% convertible subordinated notes due September 15, 2002. The notes are convertible into shares of the Company's common stock at any time on or after the 90th day following the last issuance of notes and prior to the close of business on the maturity date, unless previously redeemed or repurchased. The conversion price is $36.14 per share (equivalent to a conversion rate of 27.67 shares per $1 principal amount of notes), subject to adjustment in certain events. Interest on the notes is payable semiannually on March 15 and September 15 of each year, commencing on March 15, 1998. The notes may be redeemed at the option of the Company on or after September 15, 2000, in whole or in part.
On April 20, 1995, the Company issued $200,000 of 7.625% senior notes due April 15, 2005. The notes may not be redeemed prior to maturity and will not be entitled to any sinking fund.
In August 1993, the Company issued 6.875% senior debentures having an aggregate principal amount of $200,000. These debentures are due August 15, 2013, may not be redeemed prior to maturity and are not entitled to any sinking fund.
The Company had outstanding letters of credit of $46,952 at March 3, 2001 and $41,624, at February 26, 2000. Also, the Company had provided permanent financing guarantees to certain of its store construction developers to be effective, if such developers were unable to obtain their own permanent financing upon completion of the store construction. There were no guarantees outstanding at March 3, 2001. Guarantees of $33,774 were outstanding at February 26, 2000.
The annual weighted average interest rate on the Company's indebtedness was 8.2%, 7.4% and 6.8% for fiscal 2001, fiscal 2000 and fiscal 1999, respectively.
The aggregate annual principal payments of long-term debt and capital lease obligations for the five succeeding fiscal years are as follows: 2002, $36,956; 2003, $3,082,829; 2004, $218,355; 2005, $229,038; 2006, $216,398 and $2,110,972 in 2007 and thereafter. The Company is in compliance with restrictions and limitations included in the provisions of various loan and credit agreements.
The subsidiary guarantees related to the Company's credit facilities 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's assets and operations are not material and subsidiaries not guaranteeing the credit facilities are minor. Accordingly, condensed consolidating financial information for the parent and subsidiaries is not presented.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
14. 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 10 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 $10,930, $10,443 and $10,443, was $537,423, $500,782, and $477,537 in 2001, 2000 and 1999, respectively. These amounts include contingent rentals of $26,644, $28,625, and $32,960, in fiscal 2001, 2000 and 1999, respectively.
The Company is a guarantor on certain leases transferred to third parties through sales or assignments.
The Company leases certain facilities through sale-leaseback arrangements accounted for using the financing method. Proceeds from sale-leaseback programs were approximately $6,992 in 2001, $74,898 in 2000 and $504,990 in 1999.
The net book values of assets under capital leases and sale-leasebacks accounted for under the financing method are summarized as follows:
March 3, February 26,
2001 2000
-------- ------------
Land ................................................ $326,304 $ 343,948
Buildings ........................................... 532,635 570,604
Leasehold improvements .............................. 128,122 152,347
Equipment ........................................... 2,644 757
Accumulated depreciation ............................ (63,097) (39,809)
-------- ----------
$926,608 $1,027,847
======== ==========
|
Following is a summary of lease finance obligations at March 3, 2001 and February 26, 2000:
2001 2000
---------- -------
Sale-leaseback
obligations
accounted for under
the financing
method ............. $ 917,211 $ 944,805
Obligations under
capital leases ..... 182,789 203,330
---------- ----------
Total ............... 1,100,000 1,148,135
Less current
obligation ......... (28,603) (25,964)
---------- ----------
Long-term lease
finance obligations $1,071,397 $1,122,171
========== ==========
|
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
14. Leases -- (Continued)
Following are the minimum lease payments net of sublease income that will have to be made in each of the years indicated based on non-cancelable leases in effect as of March 3, 2001:
Fiscal year Lease Financing Operating
----------- Obligations Leases
--------------- ----------
2002 ........................................... $ 114,081 $ 511,105
2003 ........................................... 121,463 496,071
2004 ........................................... 113,327 459,983
2005 ........................................... 113,040 417,421
2006 ........................................... 96,382 372,843
Later years .................................... 1,321,703 3,325,522
---------- ----------
Total minimum lease payments ................... 1,879,996 $5,582,945
==========
Amount representing interest ................... 779,996
----------
Present value of minimum lease payments ........ $1,100,000
==========
|
15. 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 the estimated fair value of $5,695 for the 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 stockholders' equity using the interest method are made so that the carrying amount equals the redemption amount on the mandatory redemption date. There was no accretion in fiscal 2001; accretion was $97 in 2000.
16. Capital Stock
In October 1999, the Company issued 3,000,000 shares of Series B preferred stock at $100 per share which is the liquidation preference. The Series B preferred stock pays dividends at 8% per year which is payable in cash or additional shares of Series B, at the Company's election. The Series B preferred stock, when issued, was convertible into shares of the Company's common stock at a conversion price of $11.00 per share of common stock. Pursuant to its terms, as a result of the issuance of shares at $5.50 per share on June 14, 2000, the per share conversion price for the Series B preferred stock was adjusted to $5.50. As a result of this adjustment the Company increased its paid in capital, its accumulated deficit, and its loss attributable to common stockholders by $160.9 million in June 2000 (representing the difference between $5.50 and the market price of the Company's common stock on the original date of issuance of the Series B preferred stock).
For the years ended March 3, 2001 and February 26, 2000, the Company recognized an increase to its investment in drugstore.com of $14,406 and $2,929, respectively, and a corresponding increase to paid in capital, in connection with equity transactions of drugstore.com.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
16. Capital Stock -- (Continued)
In April 2001, the Board of Directors approved, subject to stockholder approval, an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock, $1.00 par value, from 600,000,000 to 1,000,000,000. If the stockholders approve the recommendation, the authorized capital stock of the Company will consist of 1,000,000,000 shares of common stock and 20,000,000 shares of preferred stock, both having a par value of $1.00 per share. Preferred stock is issued in series subject to terms established by the Board of Directors. At March 3, 2001, the Company has outstanding warrants to purchase 2,500,000 shares of common stock at $11.00 per share (see Note 13). The Company has no other warrants outstanding.
17. Stock Option and Stock Award Plans
The Company reserved 22,000,000 shares of its common stock for the granting of stock options and other incentive awards to officers and key employees under the 1990 Omnibus Stock Incentive Plan (the 1990 Plan). Options may be granted, with or without SARs, 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 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 10,000,000 shares of common stock are reserved 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 22,000,000 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) under which 20,000,000 shares of common stock are reserved for granting of stock options at the discretion of the Board of Directors.
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 reserved for issuance for all plans is 74,000,000 as of March 3, 2001.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
Following is a summary of stock option transactions for the fiscal years ended March 3, 2001, February 26, 2000 and February 27, 1999:
Weighted Average
Price Per
Shares Shares
----------- ----------------
Balance, February 28, 1998 ................... 11,491,774 $ 13.96
Granted.................................... 4,054,000 32.74
Exercised.................................. (633,575) 14.58
Cancelled.................................. (241,500) 20.18
----------- -------
Balance, February 27, 1999 ................... 14,670,699 19.02
Granted.................................... 18,687,562 7.95
Exercised.................................. (64,650) 13.61
Cancelled.................................. (7,488,707) 14.60
----------- -------
Balance, February 26, 2000 ................... 25,804,904 12.30
Granted.................................... 47,830,762 4.03
Exercised.................................. -- --
Cancelled.................................. (20,438,867)(1) 7.57
----------- -------
Balance, March 3, 2001 ....................... 53,196,799 $ 6.48
=========== =======
|
(1) Includes 16,683,962 stock options which have been cancelled and reissued.
For various price ranges, weighted average characteristics of outstanding stock options at March 3, 2001 were as follows:
Outstanding Options Exercisable Options
---------------------------------------- ---------------------
Number
Outstanding Weighted Weighted
Range of exercise prices as of Remaining Average Average
------------------------ March 3, 2001 life (years) Price Shares Price
------------- ------------ -------- ---------- --------
$ 2.7500 to $ 2.7500 16,683,962 9.04 $ 2.7500 4,053,041 $ 2.7500
$ 3.0000 to $ 3.9375 1,221,500 9.79 $ 3.4217 -- --
$ 4.0500 to $ 4.0500 20,142,000 9.95 $ 4.0500 -- --
$ 4.0625 to $ 8.9125 6,280,788 8.52 $ 5.6437 1,999,813 $ 5.7054
$ 8.9150 to $ 16.9375 5,689,574 4.05 $13.5048 5,689,574 $13.5048
$18.2500 to $ 44.6875 2,940,475 7.39 $28.7612 1,518,475 $29.3870
$45.5625 to $ 45.5625 3,000 7.76 $45.5625 1,500 $45.5625
$47.5000 to $ 47.5000 220,000 7.87 $47.5000 127,500 $47.5000
$48.5625 to $ 48.5625 13,000 7.84 $48.5625 6,500 $48.5625
$48.8125 to $ 48.8125 2,500 7.85 $48.8125 1,250 $48.8125
---------- ----------
$2.7500 to $ 48.8125 53,196,799 8.70 $ 6.4824 13,397,653 $11.2346
========== ==== ======== ========== ========
|
In November 2000, the Company reduced the exercise price of 16,683,962 stock options issued after December 4, 1999 to $2.75 per share, which represents fair market value of a share of common stock on the date of the repricing. In connection with the repricing, the Company recognizes compensation expense for these options using variable plan accounting. Under variable plan accounting, the Company recognizes compensation expense over the option vesting period. In addition, subsequent changes in the market value of the Company's common stock during the option period, or until exercised, will generate changes in the
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
compensation expense recognized on the repriced options. The Company recognized expense of approximately $33,500 during fiscal 2001 related to the repriced options.
The Company adopted SFAS No.123, "Accounting for Stock-Based Compensation," issued in October 1995. In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. The pro forma impact on net loss and per share amounts are reported below as if the Company had elected to recognize compensation cost based upon the fair value of the options granted at the grant date as prescribed by SFAS No. 123 is outlined below:
March 3, February 26, February 27,
2001 2000 1999
----------- ------------ ------------
Net loss............................................ $(1,589,224) $(1,133,043) $(461,522)
Pro forma additional compensation expense under fair
value method...................................... (46,842) (22,464) (10,463)
----------- ----------- ---------
Pro forma net loss.................................. (1,636,066) (1,155,507) (471,985)
Accretion of redeemable preferred stock............. -- (97) --
Preferred stock conversion reset.................... (160,915) -- --
Dividends on preferred stock........................ (25,724) (10,110) (627)
----------- ----------- ---------
Pro forma net loss attributable to common
stockholders...................................... $(1,822,705) $(1,165,714) $(472,612)
=========== =========== =========
Pro forma basic and diluted loss per share.......... $ (5.80) $ (4.50) $ (1.83)
=========== =========== =========
|
The pro forma amounts only take into account the options issued since March 5, 1995. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999
--------- --------- ---------
Expected stock price volatility .......... 67.2% 58.0% 30.7%
Expected dividend yield .................. 0.0% 0.0% 1.0%
Risk-free interest rate .................. 6.25% 6.3% 5.6%
Expected life of options ................. 2.8 years 4.2 years 6.7 years
|
The average fair value of each option granted during fiscal 2001, 2000 and 1999 was $1.91, $4.09 and $12.36, respectively.
Restricted Stock
In December 1999, certain executive officers received restricted stock grants of 1,000,000 shares. The Company recorded these grants at a fair value on the date of the grant of $8,250. During fiscal 2000, the Company also made tax payments on behalf of the executives to help defray the tax effects of the grants to the executives. Under the restricted stock agreement, the restrictions placed on the shares lapse in equal monthly installments over the period from December 1999 to November 2002. However, in most circumstances the executive would only have to provide one year of service to the Company to earn the total number of shares. Accordingly, the Company is amortizing the cost of the stock grant over one year.
In fiscal 2001, restricted stock grants of 4,004,000 shares were awarded to key employees under plans approved by the stockholders. Shares vest in installments up to three years and unvested shares are forfeited upon termination of employment. The Company recorded the issuances at fair value on the date of grant of $22,797.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
17. Stock Option and Stock Award Plans -- (Continued)
Compensation expense related to all restricted stock grants is being recorded over a one to three year vesting period of these grants. For the years ended March 3, 2001 and February 26, 2000, the Company recognized expense of $12,387 and $2,062 related to restricted share awards. The unearned compensation associated with these restricted stock shares was $16,598. This amount is included in stockholders equity as a component of deferred compensation.
Stock Appreciation Units
The Company has issued stock appreciation units to various members of field management. The grant price for each unit is the closing price of the Company's common stock on the date of grant. The units vest four years from the date of grant. For each outstanding unit, the Company is obligated to pay out the difference between the grant price and the average market price of one share of the Company's common stock for the last twenty trading days before the vesting date. The payment may be in cash or shares, at the discretion of the Company; however, the Company has historically made cash payments. The Company's obligations under the stock appreciation units are remeasured at each balance sheet date and amortized to compensation expense over the vesting period.
At March 3, 2001 and February 26, 2000, there were 5.7 million and 7.0 million stock appreciation rights units outstanding, respectively. Grant prices for units outstanding at March 3, 2001 ranged from $5.38 to $48.56 per unit. Amounts charged or (credited) to expense relating to the stock appreciation rights units for fiscal 2001, 2000 and 1999 were $(407), $(45,500), $32,200, respectively.
18. Retirement Plans
The Company and its subsidiaries have numerous retirement plans covering salaried employees and certain hourly employees. The retirement plans include a profit sharing retirement plan and other defined contribution plans. Contributions for the profit sharing plan are a discretionary percent of each covered employee's salary, as determined by the Board of Directors based on the Company's profitability. Total expenses recognized for the profit sharing plan were $5,350 in 2001, $9,945 in 2000, and $6,091 in 1999. Employer contributions for other defined contribution plans are generally based upon a percentage of employee contributions or, in the case of certain executive officers, in accordance with employment agreements. The expenses recognized for these plans were $9,141 in 2001, $7,925 in 2000, and $7,779 in 1999. There are also several defined benefit plans that require benefits to be paid to eligible employees based upon years of service with the Company or formulas applied to their compensation. The Company's funding policy is to contribute the minimum required by the Employee Retirement Income Security Act of 1974.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
Net periodic pension cost for the defined benefit plans includes the following components:
Defined Benefit Pension Nonqualified Executive
Plans Retirement Plan
---------------------------- --------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------- ------
Service cost ......................................................... $ 4,004 $ 4,441 $ 5,034 $ 908 $ 671 $ 514
Interest cost ........................................................ 4,248 4,166 3,935 2,642 1,497 1,424
Expected return on plan assets ....................................... (6,896) (5,723) (4,936) -- -- --
Amortization of unrecognized net transition (asset)/obligation ....... (160) (160) (160) 1,162 1,163 1,163
Amortization of unrecognized prior service cost ...................... 346 376 473 -- -- --
Amortization of unrecognized net gain ................................ (2,202) (226) (202) (193) -- --
Change due to plan amendment -- -- -- -- 18,891 --
------- ------- ------- ------ ------- ------
Net pension (credit) expense ......................................... $ (660) $ 2,874 $ 4,144 $4,519 $22,222 $3,101
======= ======= ======= ====== ======= ======
|
The table below sets forth a reconciliation from the beginning of the year for both the benefit obligation and plan assets of the Company's retirement and health benefits plans, as well as the funded status and amounts recognized in the Company's balance sheet as of March 3, 2001 and February 26, 2000:
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
------------------ --------------------
2001 2000 2001 2000
------- -------- --------- --------
Change in benefit obligations:
Benefit obligation at end of prior year ............................................ $58,791 $ 62,885 $ 34,691 $ 21,891
Service cost ....................................................................... 4,004 4,441 908 671
Interest cost ...................................................................... 4,248 4,166 2,642 1,497
Distributions ...................................................................... (5,349) (9,728) (1,429) (1,224)
Change due to change in assumptions ................................................ 1,431 (4,580) 1,006 (1,281)
Change due to plan amendment ....................................................... -- 187 -- 18,891
Actuarial (gain) or loss ........................................................... 1,794 1,420 (6,179) (5,754)
------- -------- --------- --------
Benefit obligation at end of year ................................................... $64,919 $ 58,791 $ 31,639 $ 34,691
======= ======== ========= ========
Change in plan assets:
Fair value of plan assets at beginning of year ..................................... $81,718 $ 71,686 $ -- $ --
Employer contributions ............................................................. 4,211 4,213 1,429 1,224
Actual return on plan assets ....................................................... (7,959) 18,671 -- --
Adjustment for fair value at 3/1/2000 .............................................. 5,932 -- -- --
Distributions (including assumed expenses) ......................................... (6,392) (10,485) (1,429) (1,224)
------- -------- --------- --------
Fair value of plan assets at end of year ............................................ $77,510 $ 84,085 $ -- $ --
======= ======== ========= ========
Funded status ....................................................................... $12,591 $ 25,294 $ (31,639) $(34,691)
Unrecognized net gain ............................................................... (5,723) (22,493) (10,952) (5,972)
Unrecognized prior service cost ..................................................... 1,463 1,808 -- --
Unrecognized net transition (asset) or obligation ................................... (179) (339) 11,628 12,790
------- -------- --------- --------
Prepaid or (accrued) pension cost recognized ........................................ $ 8,152 $ 4,270 $ (30,963) $(27,873)
======= ======== ========= ========
Amounts recognized in consolidated balance sheets
consisted of:
Prepaid (accrued) pension cost ..................................................... $ 9,009 $ 4,796 $(30,963) $(27,873)
Adjustment to recognize additional minimum liability ............................... (622) -- -- --
Accrued pension liability .......................................................... (857) (526) -- --
Accumulated other comprehensive income ............................................. 622 -- -- --
------- -------- --------- --------
Net amount recognized ............................................................... $ 8,152 $ 4,270 $ (30,963) $(27,873)
======= ======== ========= ========
|
The amounts recognized in the accompanying consolidated balance sheets as of March 3, 2001 and February 26, 2000 are as follows:
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
--------------- -------------------
2001 2000 2001 2000
------ ------ -------- --------
Accrued benefit liability.................................................... $ (857) $ (526) $(30,963) $(27,873)
Prepaid pension cost......................................................... 9,009 4,796 -- --
------ ------ -------- --------
Net amount recognized........................................................ $8,152 $4,270 $(30,963) $(27,873)
====== ====== ======== ========
|
The accumulated benefit obligation and fair value of plan assets for the defined benefit pension plans with plan assets in excess of accumulated benefit obligations were $56,272 and $69,873, respectively, as of March 3, 2001, and $58,791 and $84,085, respectively, as of February 26, 2000.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
18. Retirement Plans -- (Continued)
The significant actuarial assumptions used for all defined benefit pension plans were as follows:
Nonqualified
Defined Benefit Executive
Pension Plans Retirement Plan
------------------- -------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Discount rate ............................ 7.00 7.25 6.75 7.50 7.83 6.95
Rate of increase in future compensation
levels.................................. 4.50 4.50 4.75 3.00 3.00 3.00
Expected long-term rate of return on plan
assets.................................. 9.00 9.00 9.00 9.00 9.00 9.00
|
19. Commitments, Contingencies and Guarantees
Legal Proceedings
This Company is party to numerous legal proceedings, as discussed below. The Company has charged $232,778 and $7,916 to expense for the years ended February 26, 2000, and February 27, 1999, respectively, for various pending and actual claims, litigation, and assessments based upon its determination of its material, estimable and probable liabilities in regard to the portion of these claims, lawsuits, and assessments not covered by insurance. Based upon changes in estimates in fiscal 2001 relating primarily to resolution of insurance coverage disputes, the Company credited selling, general and administrative expenses by $19,625.
Federal investigations
There are currently pending federal governmental investigations, both civil and criminal, by the SEC and the United States Attorney, involving the Company's financial reporting and other matters. Management is cooperating fully with the SEC and the United States Attorney.
The U.S. Department of Labor has commenced an investigation of matters relating to the Company's employee benefit plans, including the Company's principal 401(k) plan, which permitted employees to purchase the Company's common stock. Purchases of the Company's common stock under the plan were suspended in October 1999. In January 2001, the Company appointed an independent trustee to represent the interests of these plans in relation to the Company and to investigate possible claims the plans may have against the Company. Both the independent trustee and the Department of Labor have asserted that the plans may have claims against the Company. The investigations, with which management is cooperating fully, are ongoing and the Company cannot predict their outcomes. In addition, a purported class action lawsuit on behalf of the plans and their participants has been filed by a participant in the plans in the United States District in the Eastern District of Pennsylvania.
These investigations are ongoing, and the Company cannot predict their outcomes. If the Company were convicted of any crime, certain contracts and licenses that are material to the Company's operations may be revoked, which would have a material adverse effect on the Company's results of operations and financial condition. In addition, substantial penalties, damages or other monetary remedies assessed against the Company could also have a material adverse effect on the Company's results of operations, financial condition and cash flows.
Stockholder litigation
The Company, its former chief executive officer Martin Grass, its former president Timothy Noonan, its former chief financial officer Frank Bergonzi, and its former auditor KPMG LLP, have been sued in a number of actions, most of which purport to be class actions, brought on behalf of stockholders who purchased the Company's securities on the open market between May 2, 1997 and November 10, 1999. All of these cases have been consolidated in the U.S. District Court for the Eastern District of Pennsylvania. On November 9, 2000, the Company announced that it had reached an agreement to settle the consolidated securities class action lawsuits pending against the Company in the U.S. District Court for the Eastern District of Pennsylvania and the derivative lawsuits pending there and in the U.S. District Court of Delaware. Under
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
19. Commitments, Contingencies and Guarantees -- (Continued)
the agreement, which has been submitted to the U.S. District Court for the Eastern District of Pennsylvania for approval, the Company will pay $45 million in cash, which will be fully funded by the Company's officers' and directors' liability insurance, and issue shares of common stock in 2002. The shares will be valued over a 10 day trading period in January 2002. If the value determined is at least $7.75 per share, the Company will issue 20 million shares. If the value determined is less than $7.75 per share, the Company has the option to deliver any combination of common stock, cash and short-term notes, with a total value of $155 million. As additional consideration for the settlement, the Company has assigned to the plaintiffs all of the Company's claims against the above named executives and KPMG LLP. Several members of the class have elected to "opt-out" of the class and, as a result, if the settlement is approved by the court, they will be free to individually pursue their claims. Management believes that their claims, individually and in the aggregate, are not material.
In fiscal year 2000, the Company recorded a charge of $175,000 for this case. As a result of the agreement to settle reached in fiscal 2001 and resolution of insurance coverage disputes, the Company recorded $20,000 as a credit to selling, general and administrative expense.
Drug pricing and reimbursement matters
On October 5, 2000, the Company settled, for an immaterial amount, and without admitting any violation of the law, the lawsuit filed by the Florida Attorney General alleging that the Company's non-uniform pricing policy for cash prescription purchases was unlawful under Florida law.
The filing of the complaint by the Florida Attorney General, and the Company's press release issued in conjunction therewith, precipitated the filing of a purported federal class action in California and several purported state class actions, all of which (other than those pending in New York that were filed on October 5, 1999 and those pending in California that were filed on January 3, 2000) have been dismissed. A motion to dismiss the action in New York is currently pending. Management believes that the remaining lawsuits are without merit under applicable state consumer protection laws. As a result, the Company intends to continue to vigorously defend them and the Company does not anticipate, that if fully adjudicated, they will result in an award of damages. However, such outcomes cannot be assured and a ruling against the Company could have a material adverse effect on the financial position and results of operations of the Company, as well as necessitate substantial additional expenditures to cover legal costs as the Company pursues all available defenses.
The Company is being investigated by multiple state attorneys general for reimbursement practices relating to partially-filled prescriptions and fully- filled prescriptions that are not picked up by ordering customers. The Company is supplying similar information with respect to these matters to the Department of Justice. Management believes that these investigations are similar to investigations which were, and are being, undertaken with respect to the practices of others in the retail drug industry. Management also believes that existing policies and procedures fully comply with the requirements of applicable law and intend to fully cooperate with these investigations. Management cannot, however, predict their outcomes at this time. An individual, acting on behalf of the United States of America, has filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania under the Federal False Claims Act alleging that the Company defrauded federal health care plans by failing to appropriately issue refunds for partially filled prescriptions and prescriptions which were not picked up by customers. The Department of Justice has not decided whether to join this lawsuit, as is its right under the law; its investigation is continuing. The Company has filed a motion to dismiss the complaint for failure to state a claim.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
19. Commitments, Contingencies and Guarantees -- (Continued)
If any of these cases result in a substantial monetary judgment against the Company or is settled on unfavorable terms, the Company's results of operations, financial position, and cash flows could be materially adversely affected.
Store Management Overtime Litigation
The Company is a defendant in a class action pending in the California Superior Court in San Diego with three subclasses, comprised of California store managers, assistant managers and managers-in-training. The plaintiffs seek back pay for overtime not paid to them and injunctive relief to require the Company to treat store management as non-exempt. They allege that the Company decided to minimize labor costs by causing managers, assistant managers and managers-in-training to perform the duties and functions of associates for in excess of forty hours per week without paying them overtime. Management believes that in-store management were and are properly classified as exempt from the overtime provisions of California law. The Company has filed a motion to decertify the class, which is currently pending. The Company's results of operations and financial position could be materially adversely affected by an adverse judgment in this matter.
Other
The Company is subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on the Company's financial condition, results of operations, or cash flows if decided adversely.
Vendor Arrangements
As of March 3, 2001, the Company had outstanding commitments to purchase $7,500 of merchandise inventory per year from a vendor for use in the normal course of business through fiscal 2005.
Employment Agreements
Employment agreements with executive officers and others contain change in control provisions that entitle them to receive two or three times the sum of their annual base salary and annual target bonus amount and provide for full vesting in all outstanding stock options and immediate renewal of restrictions on stock awards. In the event of change in control, certain executive officers also receive the total amount of contributions that would have been made to the special deferred compensation plan if they had been employed through the end of their employment contract.
On May 7, 2001, the Company amended the employment agreements of two executive officers to provide for the payment, subject to certain conditions, of bonuses representing the difference between the amount called for under their severance agreements from a former employer and the amount they actually receive up to $6,647. The bonuses are payable on January 5, 2002 and will be reduced, and if fully paid are repayable, to the extent of each executives's recovery of severance due from a former employer.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
20. Supplementary Cash Flow Data
Year Ended
------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999
------------- ----------------- -----------------
Cash paid for interest (net of capitalized amounts of $1,836, $5,292 and
$7,069)................................................................ $543,343 $501,813 $259,100
======== ======== ========
Cash paid for (refunds from) income taxes................................ $(88,078) $ 981 $ 47,667
======== ======== ========
Notes received in connection with the disposition of discontinued
operations............................................................. $200,000 $ -- $ --
======== ======== ========
Stock received in connection with the disposition of discontinued
operations............................................................. $231,000 $ -- $ --
======== ======== ========
Change in market value of the stock received in connection with the
disposition of discontinued operations................................. $ 51,031 $ -- $ --
======== ======== ========
Conversion of debt to common stock....................................... $597,332 $ -- $ --
======== ======== ========
10.50% notes due 2002 issued in exchange for 5.50% fixed rate senior
notes due 2000 and 6.70% notes due 2001................................ $467,500 $ -- $ --
======== ======== ========
Exchange of preferred shares............................................. $ -- $300,000 $ --
======== ======== ========
|
21. Related Party Transactions
Included in accounts receivable at March 3, 2001 and February 26, 2000 were receivables from related parties of $3,456, and $2,982, respectively, including employee loans. Included in accounts payable of March 3, 2001 and February 26, 2000 were payables from related parties of $421 and $3,475, respectively.
During fiscal 2001, 2000 and 1999, the Company sold merchandise totaling $65,259, $16,280 and $6,225, respectively, to drugstore.com (or drugstore.com customers) and Diversified Prescription Delivery, LLC, equity-method investees. During fiscal 2000 and 1999, the Company purchased equipment totaling $26,115 and $27,119, respectively, from Stores Automated Systems, Inc., an equity-method investee. As of February 26, 2001, the Company had divested of its interest in Store Automated Systems, Inc. Therefore, purchases from Store Automated Systems, Inc. in fiscal 2001 are not considered related party purchases.
In fiscal 2000 and 1999, the Company purchased $8,814 and $9,430, respectively, of product from a manufacturer of private label over the counter medications in which a director held an ownership interest until May 31, 1999. The Company leases for $154 per year a 43,920 square foot storage space in a warehouse in Camp Hill, Pennsylvania, from a partnership in which a former director has a 50% interest.
The Company formerly operated an 8,000 square-foot store in a shopping center in which the former Chairman of the Board and Chief Executive Officer, has a 50% ownership interest. The rent paid by the Company was $96 per year. In February 1999, the lease was cancelled and the Company was released from its obligation to pay over $300 in remaining lease commitments.
Beginning in January 1999, the Company leased for $188 per year a 10,750 square-foot store in Sinking Springs, Pennsylvania, which it leases from a relative of the former Chairman of the Board and Chief Executive Officer. The Company leases a 5,000 square-foot store in Mt. Carmel, Pennsylvania, from a partnership in which the former Chairman of the Board and Chief Executive Officer is or was a partner. The rent is $39 per year.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
21. Related Party Transactions -- (Continued)
The Company paid Leonard Green & Partners L.P. (a) a $3,000 fee for service
provided in connection with its preferred stock investment in October 1999 and
reimbursed $240 of its out-of-pocket expenses; (b) a $3,000 fee for services
provided in connection with the financial restructuring transactions which the
Company completed in June 2000 and reimbursed its out-of-pocket expenses, and
(c) a $2,500 fee for services provided in connection with the sale of PCS
Health Services, Inc. In October 1999, the Company agreed to pay Leonard Green
& Partners L.P. an annual fee of $1,000 for its consulting services. This fee
was increased to $1,500 at the time of the June 2000 restructuring
transactions. The consulting agreement also provides for the reimbursement of
out-of-pocket expenses incurred by Leonard Green & Partners L.P. The Company
has agreed to register the common stock issuable upon conversion of the series
B preferred stock and to pay all expenses and fees (other than underwriting
discounts and commission) related to any registration.
The law firm of Skadden, Arps, Slate, Meagher & Flom LLP provides legal services to the Company. A director of the Company is a partner of that law firm. Fees paid by the Company to Skadden, Arps, Slate, Meagher & Flom LLP did not exceed five percent of the firm's gross revenues for its fiscal year.
22. Interim Financial Results (Unaudited)
Fiscal Year 2001 (53 Weeks)
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
Revenues...................................................... $3,442,186 $3,439,469 $3,531,691 $4,103,519 $14,516,865
Costs and expenses excluding store closing and impairment
charges..................................................... 3,685,301 3,776,210 3,677,367 4,272,716 15,411,594
Store closing and impairment charges.......................... 15,879 88,292 95,571 188,336 388,078
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations before taxes......... (258,994) (425,033) (241,247) (357,533) (1,282,807)
Income tax expense............................................ 144,382 -- -- 4,575 148,957
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations...................... (403,376) (425,033) (241,247) (362,108) (1,431,764)
Income (loss) from discontinued operations, net of tax........ 11,335 -- -- -- 11,335
Loss on disposal of discontinued operations, net of tax....... (303,330) (31,433) 135,534 30,434 (168,795)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (695,371) $ (456,466) $ (105,713) $ (331,674) $(1,589,224)
========== ========== ========== ========== ===========
Basic and diluted earnings (loss) per share:
Loss from continuing operations............................... $ (1.57) $ (1.87) $ (0.74) $ (1.07) $ (5.15)
Income (loss) from discontinued operations.................... (1.12) (0.10) 0.40 0.09 (0.50)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (2.69) $ (1.97) $ (0.34) $ (0.98) $ (5.65)
========== ========== ========== ========== ===========
|
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
22. Interim Financial Results (Unaudited) -- (Continued)
Fiscal Year 2000 (52 Weeks)
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
Revenues...................................................... $3,354,621 $3,203,964 $3,279,138 $3,501,224 $13,338,947
Costs and expenses excluding store
closing and impairment charges............................... 3,339,205 3,313,458 3,480,935 4,189,197 14,322,795
Store closing and impairment charges.......................... 24,490 53,188 30,601 31,169 139,448
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting method............ (9,074) (162,682) (232,398) (719,142) (1,123,296)
Income tax expense (benefit).................................. (28,959) (8,280) 17,403 11,461 (8,375)
---------- ---------- ---------- ---------- -----------
Income (loss) from continuing operations before cumulative
effect of change in accounting method, net.................. 19,885 (154,402) (249,801) (730,603) (1,114,921)
Income (loss) from discontinued operations, net of tax........ 3,345 4,247 (4) 1,590 9,178
Cumulative effect of change in accounting method, net of tax.. (27,300) -- -- -- (27,300)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (4,070) $ (150,155) $ (249,805) $ (729,013) $(1,133,043)
========== ========== ========== ========== ===========
Basic and diluted earnings (loss) per share:
Loss from continuing operations............................... $ 0.08 $ (0.60) $ (1.00) $ (2.82) $ (4.34)
Income (loss) from discontinued operations.................... 0.01 0.02 -- 0.01 0.04
Cumulative effect of change in accounting method.............. (0.11) -- -- -- (0.11)
---------- ---------- ---------- ---------- -----------
Net loss...................................................... $ (0.02) $ (0.58) $ (1.00) $ (2.81) $ (4.41)
========== ========== ========== ========== ===========
|
Certain reclassifications have been made to the previously issued quarterly amounts to conform to fiscal 2001 year end classifications.
During the third and fourth quarters of fiscal 2000, the Company incurred significant non-recurring charges. These included charges of $232,800 for litigation expenses, $63,300 for debt restructuring, $67,600 for sale of discontinued merchandise, and $49,800 for markdowns at retail stores.
During the third quarter of fiscal 2001, the Company recorded a $20,000 credit for resolution of insurance coverage disputes and $20,000 credit for the reversal of previously amortized cost of issuance related to financings resulting from a contract settlement.
During the fourth quarter of fiscal 2001 (the 14 week quarter), the Company incurred $188,336 of store closing and impairment charges and $33,500 of expense related to stock options under variable accounting plans.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
23. Financial Instruments
The carrying amounts and fair values of financial instruments at March 3, 2001 and February 26, 2000 are listed as follows:
2001 2000
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Variable rate indebtedness .................................................. $1,219,785 $1,219,785 $2,480,495 $2,480,495
Fixed rate indebtedness ..................................................... 3,574,763 2,824,904 2,984,238 1,959,252
Note receivable ............................................................. 37,041 37,962 32,889 36,102
AdvancePCS securities ....................................................... 491,198 491,198 -- --
Interest rate swaps ......................................................... -- (29,000) -- --
|
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:
Commercial paper and LIBOR-based borrowings under credit facilities:
The carrying amounts for commercial paper indebtedness and interest rate
swaps and LIBOR-based borrowings under the credit facilities, term loans and
term notes approximate their fair values due to the short-term nature of the
obligations and the variable interest rates.
Long-term indebtedness and interest rate swaps:
The fair values of long-term indebtedness and interest rate swaps 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 or based on the present value of estimated future cash flows using a discount rate on similar long-term indebtedness issued by the Company.
Note receivable:
The fair value of the fixed-rate note receivable was determined using the present value of projected cash flows, discounted at a market rate of interest for similar instruments.
AdvancePCS Securities:
The fair value of AdvancePCS securities are estimated based on the quoted market prices of the financial instruments.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
24. Discontinued Operations
On October 2, 2000, the Company sold its wholly owned subsidiary, PCS Health Systems Inc., to Advance Paradigm, Inc. (now known as AdvancePCS). The proceeds from the sale of PCS consisted of $710,557 in cash, $200,000 in principal amount of AdvancePCS's unsecured 11% senior subordinated notes and equity securities of AdvancePCS.
PCS is reported as a discontinued operation for all periods presented in the accompanying financial statements and the operating results of PCS through October 2, 2000, the date of sale, are reflected separately from the results of continuing operations. The loss on the disposal of PCS is $168,795. This loss includes net operating results of PCS from July 12, 2000 to October 2, 2000, transaction expenses, the final settlement of the purchase price between the Company and AdvancePCS and the fair value of the non-cash consideration received.
As a result of the sale, the Company recorded an increase to the tax valuation allowance and income tax expense of $146,917 for the year ended March 3, 2001.
Summarized operating results and net loss of PCS for thirty-one weeks ended October 2, 2000 and the years ended February 26, 2000, and February 27, 1999 were as follows:
Year Ended
---------------------------
Thirty-One Weeks February 26, February 27,
Ended October 2, 2000 2000 1999
--------------------- ------------ ------------
Net sales.................................................................. $ 779,748 $1,342,495 $ 344,448
Income (loss) from operations before income tax expense.................... 25,181 40,081 (18,748)
Income tax expense (benefit)............................................... 13,846 30,903 (5,925)
--------- ---------- ---------
Income (loss) from discontinued operations................................. 11,335 9,178 (12,823)
Loss on disposal before income tax benefit................................. (169,529) -- --
Income tax benefit......................................................... 734 -- --
--------- ---------- ---------
Loss on disposal........................................................... (168,795) -- --
--------- ---------- ---------
Total income (loss) from discontinued operations........................... $(157,460) $ 9,178 $(12,823)
========= ========== =========
|
February 26, 2000
-----------------
Net current liabilities:
Cash and cash equivalents................................. $ 4,843
Accounts and other receivables, net....................... 614,432
Other currents assets..................................... 42,707
Claims and rebates payable................................ (924,951)
Other current liabilities................................. (127,084)
----------
$ (390,053)
----------
Net non-current assets:
Property and equipment, net............................... $ 147,733
Goodwill and intangibles, net............................. 1,816,221
Noncurrent liabilities.................................... (220,126)
----------
$1,743,828
==========
|
Acquisition of Discontinued Operations
On January 22, 1999, the Company purchased PCS for $1.5 billion, of which $1.3 billion was financed using commercial paper and $200 million was paid in cash. The PCS acquisition was accounted for using the
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
24. Discontinued Operations -- (Continued)
purchase method. In accordance with APB Opinion No. 16, the Company recorded the assets and liabilities of PCS at the date of acquisition at their fair values. The excess of the cost of PCS over the fair value of the acquired assets and liabilities of $1,286,089 was recorded as goodwill.
Intangible Assets of Discontinued Operations
February 26, 2000
-----------------
Goodwill................................................... $1,298,520
Prescription files and customer lists...................... 434,100
Trade name................................................. 113,100
Internally developed software.............................. 21,900
Assembled workforce........................................ 13,400
----------
1,881,020
Accumulated amortization................................... (64,799)
----------
$1,816,221
==========
|
At acquisition, the Company determined that the estimated useful life of the goodwill recorded with the PCS acquisition was primarily indeterminate and likely exceeded 40 years. This estimate was based upon a review of the anticipated future cash flows and other factors the Company considered in determining the amount that it was willing to incur for the purchase of PCS. Additionally, management found no persuasive evidence that any material portion of these intangible assets would be depleted in less than 40 years. Accordingly, the Company amortized goodwill over the maximum allowable period of 40 years on a straight-line basis.
The value of the PCS trade name was amortized over its estimated useful life of 40 years. The value of the customer base and pharmacy network acquired in the purchase of PCS was amortized over their estimated lives of 30 years. The value of assembled workforce and internally developed software acquired was amortized over their useful lives of six and five years, respectively.
Impairment of Long-Lived Assets
Long-lived assets of PCS consist principally of intangibles. The Company compared the estimates of future undiscounted cash flows of its service lines to which the intangibles relate to the carrying amount of those intangibles to determine if impairment occurred. Long-lived assets and certain identifiable intangibles to be disposed of, whether by sale or abandonment, were reported at the lower of carrying amount or fair value less cost to sell.
Revenue Recognition of Discontinued Operations
Revenues were recognized from claims processing fees when the related claims were adjudicated and approved for payment. Certain of the agreements required the customers to pay a fee per covered member rather than a fee per claim. These fees were recognized monthly based upon member counts provided by the customers. Revenue from manufacturer programs were recognized when claims eligible for rebate were adjudicated by the Company. The customer portion of rebates collected was not included in revenue, and correspondingly payments of rebates to customers were not included in expenses. Mail order program revenue was recognized when prescriptions were shipped.
25. Subsequent Events
In March 2001, the Company reduced the outstanding balances of the PCS credit facility and the PCS exchange debt by $484,104 with the net proceeds from the sale of equity securities of AdvancePCS and by $200,000 when AdvancePCS repaid the senior subordinated notes.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
For the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999
(In thousands of dollars, except per share amounts)
25. Subsequent Events -- (Continued)
Subsequent to March 3, 2001, the Company committed to issue 77,192,000 shares of its common stock in exchange for $511,351 of debt (see Note 13).
Subsequent to March 3, 2001, the Company committed to $149,600 private placements comprised of 26,500,000 shares of common stock.
On May 15, 2001, the Company entered into a $1,900,000 commitment agreement with a group of banks whereby the Company and the banks would enter into a new senior secured credit facility to replace the existing Senior Credit facility. The closing of the new credit facility is subject to the satisfaction of customary closing conditions and the issuance by the Company of approximately $1,050,000 in new debt or equity securities, of which $527,000 has already been committed or arranged. The Company plans to raise the additional $523,000 by issuing equity and fixed income securities and through real estate mortgage financings. The new credit facility will be secured by inventory, accounts receivable and certain other assets of the Company. While management believes that it will be successful in completing the refinancing, there is no assurance that the refinancing transaction will be consummated.
On May 16, 2001, the Company agreed to issue five year warrants to purchase 3,040,000 shares of common stock at $6.00 per share in connection with the exchange by a holder of $152,000 of 10.5% notes due 2002 for a like principal amount of new 12.5% notes due 2006.
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 3, 2001, February 26, 2000, and February 27, 1999
(dollars in thousands)
Additions
Balance at Charged to Balance at
Allowances deducted from accounts receivable Beginning Costs and End of
for estimated uncollectible amounts: Of Period Expenses Deductions Period
------------------------------------ ---------- --------- ---------- ----------
Year ended March 3, 2001 ..................... $ 43,371 $ 21,147 $ 27,468 $ 37,050
Year ended February 26, 2000 ................. 30,296 29,268 16,193 43,371
Year ended February 27, 1999 ................. 47,268 15,916 32,888 30,296
|
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.
Dated: May 18, 2001
RITE AID CORPORATION
By: /s/ ROBERT G. MILLER
Robert G. Miller
Chairman of the Board of Directors
and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in their respective capacities on May 18, 2001.
Signature Title
--------- -----
/s/ ROBERT G. MILLER Chairman of the Board of Directors and
------------------------------------- Chief Executive Officer
Robert G. Miller
/s/ MARY F. SAMMONS President, Chief Operating Officer and Director
-------------------------------------
Mary F. Sammons
/s/ JOHN T. STANDLEY Chief Financial Officer and
------------------------------------- Senior Executive Vice President
John T. Standley
/s/ CHRISTOPHER HALL Executive Vice President, Finance and Accounting
-------------------------------------
Christopher Hall
/s/ KEVIN TWOMEY Chief Accounting Officer and Senior Vice President
-------------------------------------
Kevin Twomey
/s/ WILLIAM J. BRATTON Director
-------------------------------------
William J. Bratton
/s/ ALFRED M. GLEASON Director
-------------------------------------
Alfred M. Gleason
|
Signature Title
--------- -----
/s/ LEONARD I. GREEN Director
-------------------------------------
Leonard I. Green
/s/ NANCY A. LIEBERMAN Director
-------------------------------------
Nancy A. Lieberman
/s/ STUART M. SLOAN Director
-------------------------------------
Stuart M. Sloan
/s/ JONATHAN D. SOKOLOFF Director
-------------------------------------
Jonathan D. Sokoloff
/s/ LEONARD N. STERN Director
-------------------------------------
Leonard N. Stern
/s/ GERALD TSAI, JR. Director
-------------------------------------
Gerald Tsai, Jr.
|
EXHIBIT INDEX
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
2 Not Applicable
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 October Exhibit 3(ii) to Form 8-K filed
25, 1999 on November 2, 1999
3.3 By-laws, as amended on November 8, 2000 Exhibit 3.1 to Form 8-K filed on
November 13, 2000
4.1 The rights of security holders of the registrant are defined by (a) the Laws of the
State of Delaware, (b) the Certificate of Incorporation of registrant and (c) the
By-laws of registrant. The Certificate of Incorporation and By-laws of the
registrant are hereby incorporated by reference in accordance with Exhibit 3 above.
4.2 Waiver dated as of January 11, 2000 to Guaranty dated as of March 19, 1998, as Exhibit 4.7 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998, and as further amended by January 18, 2000
Amendment No. 2, dated as of October 25, 1999, and as further amended by Amendment
No. 3, dated as of December 2, 1999 between Rite Aid Corporation and RAC Leasing
LLC
4.3 Amendment No. 3, dated as of December 23, 1999 to Master Lease and Security Exhibit 4.8 to Form 8-K filed on
Agreement, dated as of March 19, 1998, (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998, and Amendment No. 2 dated as of October 25, 1999) between RAC
Leasing LLC and Rite Aid Realty Corp.
4.4 Amendment No. 3 dated as of December 2, 1999 to Guaranty Dated as of March 19, Exhibit 4.9 to Form 8-K filed on
1998, as amended by Amendment No. 1, Dated as of June 22, 1998, and as further January 18, 2000
amended by Amendment No. 2, dated as of October 25, 1999, from Rite Aid Corporation
to RAC Leasing LLC
4.5 Amendment No. 2 dated as of October 25, 1999 to Guaranty dated March 19, 1998 (as Exhibit 4.10 to Form 8-K filed on
amended by Amendment No. 1, dated as of June 22, 1998) from Rite Aid Corporation to January 18, 2000
RAC Leasing LLC
4.6 Amendment No. 1 dated as of June 22, 1998, to Guaranty dated March 19, 1998, from Exhibit 4.11 to Form 8-K filed on
Rite Aid Corporation to RAC Leasing LLC January 18, 2000
4.7 Amendment No. 2 dated as of October 25, 1999 to Master Lease and Security Exhibit 4.12 to Form 8-K filed on
Agreement, dated as of March 19, 1998 (as amended by Amendment No. 1, dated as of January 18, 2000
June 22, 1998) between RAC Leasing LLC and Rite Aid Realty Corp.
4.8 Amendment No. 1 dated as of June 22, 1998 to Master Lease and Security Agreement, Exhibit 4.13 to Form 8-K filed on
dated as of March 19, 1998 between RAC Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.9 Guaranty, dated as of March 19, 1998, from Rite Aid Corporation to RAC Leasing LLC Exhibit 4.4 to Form 8-K filed on
January 18, 2000
4.10 Master Lease and Security Agreement, dated as of March 19, 1998, between RAC Exhibit 4.15 to Form 8-K filed on
Leasing LLC and Rite Aid Realty Corp. January 18, 2000
4.11 Waiver dated as of January 11, 2000 to Guaranty dated as of May 30, 1997, as Exhibit 4.16 to Form 8-K filed on
amended by Amendment No. 1, dated as of October 25, 1999, and as further amended by January 18, 2000
Amendment No. 2, dated as of December 2, 1999 between Rite Aid Corporation and
Sumitomo Bank Leasing and Finance, Inc.
|
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
4.13 Amendment No. 1 dated as of October 25, 1999 to Guaranty dated as of May 30, 1997 Exhibit 4.18 to Form 8-K filed on
from Rite Aid Corporation to Sumitomo Bank Leasing and Finance, Inc. January 18, 2000
4.14 Amendment No. 4, dated as of October 25, 1999 to Master Lease and Security Exhibit 4.19 to Form 8-K filed on
Agreement, dated as of May 30, 1997, as amended by Amendment No. 1, dated as of January 18, 2000
March 11, 1998, and as further amended by Amendment No. 2, dated as of June 22,
1998, and as further amended by Amendment No. 3 dated as of May 26, 1999 between
Sumitomo Bank Leasing and Finance, Inc. and Rite Aid Realty Corp.
4.15 Amendment No. 3, dated as of May 26, 1999, to Master Lease and Security Agreement, Exhibit 4.20 to Form 8-K filed on
dated as of May 30, 1997, (as amended by Amendment No. 1, dated as of March 11, January 18, 2000
1998, and as further amended by Amendment No. 2, dated as of June 22, 1998) between
Sumitomo Bank Leasing and Finance, Inc. and Rite Aid Realty Corp.
4.16 Amendment No. 2, dated as of June 22, 1998 to Master Lease Security Agreement, Exhibit 4.21 to Form 8-K filed on
dated as of May 30, 1997, as amended by Amendment No. 1 to Master Lease and January 18, 2000
Security Agreement, dated as of March 11, 1998 between Sumitomo Bank Leasing and
Finance, Inc. and Rite Aid Realty Corp.
4.17 Amendment No. 1, dated as of March 11, 1998 to Master Lease and Security Agreement, Exhibit 4.22 to Form 8-K filed on
dated as of May 30, 1997 between Sumitomo Bank Leasing and Finance, Inc. and Rite January 18, 2000
Aid Realty Corp.
4.18 Guaranty, dated as of May 30, 1997 from Rite Aid Corporation to Sumitomo Bank Exhibit 4.23 to Form 8-K filed on
Leasing and Finance, Inc. January 18, 2000
4.19 Master Lease and Security Agreement, dated as of May 30, 1997, between Sumitomo Exhibit 4.24 to Form 8-K filed on
Bank Leasing and Finance, Inc. and Rite Aid Realty Corp. January 18, 2000
4.20 Waiver No. 1 dated as of January 10, 2000 to Note Agreement dated as of September Exhibit 4.25 to Form 8-K filed on
30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of October 25, January 18, 2000
1999 and Amendment No. 2 dated as of December 2, 1999) among Finco, Inc., Rite Aid
Corporation, The Prudential Life Insurance Company of America and PruCo Life
Insurance Company and Waiver No. 1 dated as of January 10, 2000 to Guaranty
Agreement dated as of September 30, 1996 (as previously amended pursuant to
Amendment No. 1 dated as of October 25, 1999 and Amendment No. 2 dated as of
December 2, 1999) among Finco, Inc., Rite Aid Corporation, The Prudential Life
Insurance Company of America and PruCo Life Insurance
4.21 Amendment No. 2 dated as of December 2, 1999 to Note Agreement dated as of Exhibit 4.26 to Form 8-K filed on
September 30, 1996 (as previously amended pursuant to Amendment No. 1 dated as of January 18, 2000
October 25, 1999) among Finco, Inc., Rite Aid Corporation, The Prudential Insurance
Company of America and PruCo Life Insurance Company and Amendment No. 2 dated as of
December 2, 1999 to Guaranty Agreement dated as of September 30, 1996 (as
previously amended pursuant to Amendment No. 1 dated as of October 25, 1999) among
Finco, Inc., Rite Aid Corporation, The Prudential Insurance Company of America and
PruCo Life Insurance Company
|
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
4.22 Amendment No. 1 dated as of October 25, 1999 to Note Agreement dated as of Exhibit 4.27 to Form 8-K filed on
September 30, 1996 among Finco, Inc., Rite Aid Corporation, The Prudential January 18, 2000
Insurance Company of America and PruCo Life Insurance Company and Amendment No. 1
dated as of October 25, 1999 to Guaranty Agreement dated as of September 30, 1996
among Finco, Inc., Rite Aid Corporation, The Prudential Insurance Company of
America and PruCo Life Insurance Company
4.23 Guaranty Agreement dated as of September 30, 1996 from Rite Aid Corporation to the Exhibit 4.28 to Form 8-K filed on
Prudential Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.24 Note Agreement dated as of September 30, 1996 among Finco, Inc., The Prudential Exhibit 4.29 to Form 8-K filed on
Insurance Company of America and PruCo Life Insurance Company January 18, 2000
4.25 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.2 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 10, 1997, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.26 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.3 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated September 22, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.27 Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation Exhibit 4.4 to Form 8-K filed on
and Harris Trust and Savings Bank, to the Indenture dated December 21, 1998, February 7, 2000
between Rite Aid Corporation and Harris Trust and Savings Bank
4.28 Commitment Letter dated April 10, 2000 Exhibit 4.1 to Form 8-K filed on
April 11, 2000
4.29 Indenture, dated as of June 14, 2000, among Rite Aid Corporation, as Issuer, each Exhibit 4.1 to Form 8-K filed on
of the Subsidiary Guarantors named therein and State Street Bank and Trust Company, June 21, 2000
as Trustee.
4.30 Exchange and Registration Rights Agreement, dated as of June 14, 2000, by and among Exhibit 4.2 to Form 8-K filed on
Rite Aid Corporation, State Street Bank and Trust Company and the Holders of the June 21, 2000
10.50% Senior Secured Notes due 2002.
4.31 Registration Rights Agreement, dated as of June 14, 2000, by and among Rite Aid Exhibit 4.3 to Form 8-K filed on
Corporation and the Lenders listed therein. June 21, 2000
10.1 1999 Stock Option Plan* Filed Herewith
10.2 2000 Omnibus Equity Plan* Included in Proxy Statement dated
October 24, 2000
10.3 2001 Stock Option Plan* Filed Herewith
10.4 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.1 to Form 8-K filed on
Aid Corporation and Green Equity Investors III, L.P. November 2, 1999
10.5 Registration Rights Agreement, dated as of October 27, 1999, by and between Rite Exhibit 4.2 to Form 8-K filed on
Aid Corporation and J.P. Morgan Ventures Corporation November 2, 1999
10.6 Warrant to purchase Common Stock, par value $1.00 per share, of Rite aid Exhibit 4.3 to Form 8-K filed on
Corporation, dated October 27, 1999, issued to J.P. Morgan Ventures Corporation November 2, 1999.
|
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
10.7 Commitment Letter, dated October 18, 1999, by and between Rite Aid Corporation and Exhibit 10.1 to Form 8-K filed on
Green Equity Investors III, L.P. November 2, 1999
10.8 Employment Agreement by and between Rite Aid Corporation and Robert G. Miller, Exhibit 10.1 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.9 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Robert G. Miller, dated as of May 7, 2001*
10.10 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.31 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller* January 18, 2000
10.11 Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated Exhibit 10.2 to Form 8-K filed on
as of December 5, 1999* January 18, 2000
10.12 Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Filed Herewith
Mary F. Sammons, dated as of May 7, 2001*
10.13 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.32 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons* January 18, 2000
10.14 Employment Agreement by and between Rite Aid Corporation and David R. Jessick, Exhibit 10.3 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.15 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.33 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and David R. Jessick* January 18, 2000
10.16 Employment Agreement by and between Rite Aid Corporation and John T. Standley, Exhibit 10.4 to Form 8-K filed on
dated as of December 5, 1999* January 18, 2000
10.17 Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of Exhibit 4.34 to Form 8-K filed on
December 5, 1999, by and between Rite Aid Corporation and John T. Standley* January 18, 2000
10.18 Employment Agreement by and between Rite Aid Corporation and Elliot S. Gerson, Filed Herewith
dated as of November 16, 2000*
10.19 Employment Agreement by and between Rite Aid Corporation and Eric Sorkin, dated as Filed Herewith
of April 2, 1999*
10.20 Employment Agreement by and between Rite Aid Corporation and James Mastrain, dated Filed Herewith
as of September 27, 2000*
10.21 Rite Aid Corporation Special Deferred Compensation Plan* Exhibit 10. 20 to Form 10-K filed
on July 11, 2000
10.22 Senior Credit Agreement, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.1 to Form 8-K filed on
Banks party thereto, Citicorp USA, Inc., as Senior Administrative Agent, Citicorp June 21, 2000
USA, Inc., as Senior Collateral Agent, and Heller Financial, Inc. and Fleet Retail
Finance Inc., as Syndication Agents.
10.23 Collateral Trust and Intercreditor Agreement, dated as of June 12, 2000, among Rite Exhibit 10.2 to Form 8-K filed on
Aid Corporation, each Subsidiary Guarantor of Rite Aid Corporation listed therein, June 21, 2000
Wilmington Trust Company, Citicorp USA, Inc., Morgan Guaranty Trust Company of New
York, The Prudential Insurance Company of America, State Street Bank and Trust
Company and The Sumitomo Bank, Limited, New York Branch.
10.24 Senior Subsidiary Security Agreement, dated as of June 12, 2000, made by the Exhibit 10.3 to Form 8-K filed
Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
Subsidiary Guarantor pursuant to the Senior Credit Facility, in favor of Citicorp
USA, Inc., as Senior Collateral Agent.
|
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
10.25 Senior Subsidiary Guarantee Agreement, dated as of June 12, 2000, among each of the Exhibit 10.4 to Form 8-K filed
Subsidiary Guarantors of Rite Aid Corporation listed therein and Citicorp USA, June 21, 2000
Inc., as Senior Collateral Agent.
10.26 Senior Indemnity, Subrogation and Contribution Agreement, dated as of June 12, Exhibit 10.5 to Form 8-K filed
2000, among Rite Aid Corporation, each of the Subsidiary Guarantors listed therein June 21, 2000
and Citicorp USA, Inc., as Senior Collateral Agent.
10.27 RCF Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.6 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.28 PCS Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Banks from Exhibit 10.7 to Form 8-K filed
time to time parties thereto and Morgan Guaranty Trust Company of New York, as June 21, 2000
Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and Book
Runner.
10.29 Exchange Debt Facility, dated as of June 12, 2000, among Rite Aid Corporation, the Exhibit 10.8 to Form 8-K filed
Banks from time to time parties thereto and Morgan Guaranty Trust Company of New June 21, 2000
York, as Administrative Agent, with JP Morgan Securities Inc., as Lead Arranger and
Book Runner.
10.30 Second Priority Subsidiary Guarantee Agreement, dated as of June 12, 2000, among Exhibit 10.9 to Form 8-K filed
each of the Subsidiary Guarantors of Rite Aid Corporation listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.31 Second Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.10 to Form 8-K filed
the Subsidiary Guarantors identified therein and any other person that becomes a June 21, 2000
Subsidiary Guarantor pursuant to the Second Priority Debt Documents, in favor of
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.32 Second Priority Indemnity, Subrogation and Contribution Agreement, dated as of June Exhibit 10.11 to Form 8-K filed
12, 2000, among Rite Aid Corporation, each Subsidiary Guarantor listed therein and June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
10.33 First Priority Subsidiary Security Agreement, dated as of June 12, 2000, made by Exhibit 10.12 to Form 8-K filed
the Domestic Subsidiaries identified therein and any other person that becomes a June 21, 2000
Domestic Subsidiary pursuant to the Exchange Debt Facility Documents, in favor of
Morgan Guaranty Trust Company of New York, as Agent.
10.34 Amended and Restated Drugstore.com Pledge Agreement, dated as of June 12, 2000, Exhibit 10.13 to Form 8-K filed
between Rite Aid Corporation and Morgan Guaranty Trust Company of New York, as June 21, 2000
Agent.
10.35 Amended and Restated PCS Pledge Agreement, dated as of June 12, 2000, between Rite Exhibit 10.14 to Form 8-K filed
Aid Corporation and Morgan Guaranty Trust Company of New York, as Agent. June 21, 2000
10.36 Form of Second Priority Mortgage, Assignment of Leases and Rents, Security Exhibit 10.15 to Form 8-K filed
Agreement and Financing Statement, by the Subsidiary Guarantor listed therein, to June 21, 2000
Wilmington Trust Company, as Second Priority Collateral Trustee.
|
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
10.37 Amendment No. 3 to Note Agreement, Amendment No. 4 to Guaranty Agreement, and Exhibit 10.16 to Form 8-K filed
Amendment No. 1 to Put Agreement, for Adjustable Rate Senior Secured Notes due June 21, 2000
August 15, 2002, among Finco, Inc., Rite Aid Corporation, The Prudential Insurance
Company of America, and Pruco Life Insurance Company, as of June 12, 2000.
10.38 Amendment No. 5 to Guaranty, dated as of June 12, 2000, from Rite Aid Corporation, Exhibit 10.17 to Form 8-K filed
as Guarantor, to RAC Leasing LLC, as Lessor. June 21, 2000
10.39 Amendment No. 4 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.18 to Form 8-K filed
between RAC Leasing LLC, as Lessor, and Rite Aid Realty Corp., as Lessee. June 21, 2000
10.40 Amendment No. 4 to Guaranty, dated as of June 12, 2000, from Rite Aid Corporation, Exhibit 10.19 to Form 8-K filed
as Guarantor, to Sumitomo Bank Leasing and Finance, Inc., as Lessor. June 21, 2000
10.41 Amendment No. 5 to Master Lease and Security Agreement, dated as of June 12, 2000, Exhibit 10.20 to Form 8-K filed
between Sumitomo Bank Leasing and Finance, Inc., as Lessor, and Rite Aid Realty June 21, 2000
Corp., as Lessee.
10.42 Executive Separation Agreement and General Release, dated February 28, 2000, Exhibit 10.46 to Form
between Rite Aid Corporation and Timothy Noonan. 10-K filed on July 11, 2000
10.43 Letter Agreement, dated February 28, 2000, between Rite Aid Corporation and Timothy Exhibit 10.47 to Form
Noonan, amending Executive Separation Agreement and General Release, dated February 10-K filed on July 11, 2000
28, 2000, between Rite Aid Corporation and Timothy Noonan.
10.44 Commitment letter dated May 15, 2001 by and between Rite Aid Corporation, Solomon Filed herewith
Smith Barney Inc., Citicorp North America, Inc., The Chase Manhattan Bank, J.P.
Morgan Securities Inc., Credit Suisse First Boston, Fleet Retail Finance Inc., and
Fleet Securities, Inc.
10.45 Equity for Bank Debt Exchange Agreement dated April 12, 2001 between Rite Aid Filed herewith
Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P.,
Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.46 Side Letter to Equity for Bank Debt Exchange Agreement dated April 30, 2001 between Filed herewith
Rite Aid Corporation, Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund,
L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P.
10.47 Intentionally left blank
10.48 Employment Agreement by and between Rite Aid Corporation and Christopher Hall, Filed herewith
dated as of January 26, 2000*
10.49 Employment Agreement by and between Rite Aid Corporation and Robert B. Sari, dated Filed herewith
as of February 28, 2001*
11 Not Applicable
12 Statement regarding computation of ratios of earnings to fixed charges Filed herewith
13 Not Applicable
16 Not Applicable
|
Exhibit
Numbers Description Incorporation by reference to
------- ----------- -----------------------------
18 Letter re change in accounting principles Exhibit 18 to the Form
10-K filed on July 11, 2000
21 Subsidiaries of the registrant Filed herewith
22 Not Applicable
23 Consent of Independent Certified Public Accountants Not applicable
24 Not Applicable
|
(b)
Reports on Form 8-K
We did not file any current reports on Form 8-K during the fourth quarter of fiscal 2001.
EXHIBIT 10.1
RITE AID CORPORATION
1999 STOCK OPTION PLAN
(As amended on January 19, 2000)
The purposes of the 1999 Stock Option Plan of Rite Aid Corporation, (the "Plan") are to afford an incentive to employees of Rite Aid Corporation (the "Company") or any Subsidiary or Affiliate that now exists or hereafter is organized or acquired, to continue as employees to increase their efforts on behalf of the Company and to promote the success of the Company's business. This Plan is designed to comply and conform with the exemption for "broadly-based plans" as set forth in Section 312.03(a)(2) of the New York Stock Exchange Listed Company Manual, as in effect as of the Effective Date, and shall be interpreted accordingly.
(a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(d) "Committee" means the Compensation Committee of the Board which shall administer the Plan.
(e) "Company" means Rite Aid Corporation, a corporation organized under the laws of the State of Delaware, or any successor corporation.
(f) "Effective Date" means November 10, 1999.
(g) "Employee" means an Employee of the Company or any Subsidiary or Affiliate.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
(i) "Fair Market Value" means the fair market value of such Stock determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee in good faith, the per share Fair Market Value of Stock as of a particular date shall mean (i) the closing price per share of Stock on such date on the national securities exchange on which the Stock is principally traded, or (ii) if the shares of Stock are then traded in an over-the-counter market, the average of the closing bid and asked prices for the shares of Stock in such over-the-counter market for the last preceding date on which there was a sale of such Stock in such market, or (iii) if the shares of Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine.
(j) "NQSO" means an Option that is designated as a nonqualified stock option.
(k) "Option" means a right granted to an Employee under Section 6, to purchase shares of Stock.
(l) "Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option.
(m) "Plan" means this Rite Aid Corporation 1999 Stock Option Plan, as amended from time to time.
(n) "Stock" means shares of common stock, par value $1.00 per share, of the Company.
(o) "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company if, at the time of granting of an Option, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.
The Plan shall be administered by the Committee. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options; to determine the persons to whom and the time or times at which Options shall be granted;
to determine the number of shares of Stock to which an Option may relate and the terms, conditions and restrictions relating to any Option; to determine whether, to what extent, and under what circumstances an Option may be settled, cancelled, forfeited, exchanged, or surrendered; to make adjustments in the terms and conditions applicable to Options; to designate Affiliates; to construe and interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Option Agreements (which need not be identical for each Employee); and to make all other determinations deemed necessary or advisable for the administration of the Plan.
All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company, and any Subsidiary, Affiliate or Employee (or any person claiming any rights under the Plan from or through any Employee) and any stockholder.
No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder.
Options may be granted only to Employees of the Company, or of any of its Subsidiaries and Affiliates. In determining the persons to whom Options shall be granted, the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan.
The maximum number of shares of Stock reserved for the grant of Options under the Plan shall be 10,000,000, subject to adjustment as provided herein. Notwithstanding anything contained in the Plan to the contrary, at least a majority of the shares subject to Options awarded under the Plan shall be awarded to Employees of the Company who are neither "officers" (within the meaning of Rule 16a-(f) promulgated under the Exchange Act) nor directors of the Company. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. If any shares
subject to an Option are forfeited, cancelled, exchanged or surrendered or if an Option otherwise terminates or expires without a distribution of shares to the Employee, the shares of stock with respect to such Option shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Options under the Plan.
In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, Stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of any Employee to whom an Option has been granted under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of Stock or other property (including cash) that may thereafter be issued in connection with Options, (ii) the number and kind of shares of Stock or other property (including cash) issued or issuable in respect of outstanding Options and (iii) the exercise price relating to any Option.
(a) The Committee is authorized to grant Options to Employees, as deemed by the Committee to be consistent with the purposes of the Plan. The Committee shall determine the terms and conditions of such Options at the date of grant or thereafter. The Option Agreement evidencing the grant of an Option under the Plan shall designate the Option as a Nonqualified Stock Option.
(b) The exercise price per share of Stock purchasable under an Option shall be determined by the Committee; provided, however, that the Option price shall not be less than the Fair Market Value on the date of the grant. The exercise price for Stock subject to an Option may be paid in cash or by an exchange of Stock previously owned by the Employee, or a combination of both, in an amount having a combined value equal to such exercise price. An Employee to whom an Option has been granted may also elect to pay all or a portion of the aggregate exercise price by having shares of Stock with a Fair Market Value on the date of exercise equal to the aggregate exercise price withheld by the Company or sold by a broker-dealer.
(c) Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Option Agreement; provided that, the Committee shall have the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances, as it, in its sole
discretion, deems appropriate. An Option may be exercised to the extent of any or all full shares of Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Committee or its designated agent.
(d) Except as otherwise provided in this subsection, an Option may not be exercised unless the Employee is then in the employ of the Company or a Subsidiary or an Affiliate (or a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Employee has remained continuously so employed, or continuously maintained such relationship, since the date of grant of the Option; provided that (1) an employee whose employment terminates other than for cause shall be entitled to exercise all Options which were vested at the date of termination of employment until the earlier of the close of business on the date that is (a) 90 days from the date of termination of employment or (b) 10 years from the date the Option was granted, (2) an employee whose employment terminates by reason of death shall be entitled to exercise all Options which were vested at the date of death until the earlier of the close of business on the date that is (a) one year from the date of death or (b) 10 years from the date the Option was granted and (3) the Option Agreement may contain provisions extending the exercisability of Options, in such events as the Committee may determine at the date of grant, or thereafter, to a date not later than 10 years from the date the Option was granted.
(e) Options may be subject to such other conditions including, but not limited to, restrictions on transferability of the shares acquired upon exercise of such Options, as the Committee may prescribe in its discretion or as may be required by applicable law.
(a) Nontransferability. Unless otherwise provided in an Option Agreement, Options shall not be transferable by an Employee except by will or the laws of descent and distribution and shall be exercisable during the lifetime of an Employee only by such Employee or his guardian or legal representative.
(b) No Right to Continued Employment. Nothing in the Plan or in any Option granted under the Plan or in any Option Agreement or other agreement entered into pursuant hereto shall confer upon any Employee the right to continue in the employ of the Company, any Subsidiary or any Affiliate or to be entitled to any remuneration or benefits not set forth in the Plan or such Option Agreement or other agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Employee's employment.
(c) Withholding and Other Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any payment relating to an Option under the Plan, amounts of withholding and other taxes due with respect thereto, and to take such other action as the Committee may deem advisable to enable the Company and Employee to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of an Employee's tax obligations.
(d) Amendment and Termination. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Employee, without such Employee's consent, under any Option theretofore granted under the Plan. Unless earlier terminated by the Board pursuant to the provisions of the Plan, the Plan shall terminate on the tenth anniversary of its Effective Date. No Options shall be granted under the Plan after such termination date.
(e) No Rights to Options; No Stockholder Rights. No Employee shall have any claim to be granted any Option under the Plan, and there is no obligation for uniformity of treatment of Employees. Except as provided specifically herein, an Employee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to him for such shares.
(f) No Fractional Shares. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Option. The Committee shall determine whether cash or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(i) The obligation of the Company to sell or deliver Stock with respect to any Option granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.
(ii) Each Option is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Stock issuable pursuant to the Plan is required by any securities exchange
or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of Stock, no such Option shall be granted or payment made or Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee.
(iii) In the event that the disposition of Common Stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise exempt from such registration, such Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require an Employee receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to represent to the Company in writing that the Stock acquired by such Employee is acquired for investment only and not with a view to distribution.
(iv) In the event that at the date a vested Option is to expire, the disposition of Common Stock issuable upon exercise of that Option is not covered by a then current registration statement under the Securities Act, the expiration date of such Option shall be extended to the close of business on that date which is the earlier of the close of business on that date which is (1) 90 days after the date the disposition of Common Stock issuable upon exercise of that Option is covered by a then current registration statement under the Securities Act or (2) 10 years from the date the Option was granted.
(h) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware without giving effect to the conflict of laws principles thereof.
EXHIBIT 10.3
AS AMENDED THROUGH APRIL 4, 2001
RITE AID CORPORATION
2001 STOCK OPTION PLAN
The purposes of the 2001 Stock Option Plan of Rite Aid Corporation, (the "Plan") are to afford an incentive to employees of Rite Aid Corporation (the "Company") or any Subsidiary or Affiliate that now exists or hereafter is organized or acquired, to continue as employees to increase their efforts on behalf of the Company and to promote the success of the Company's business. This Plan is designed to comply and conform with the exemption for "broadly-based plans" as set forth in Section 312.03(a)(2) of the New York Stock Exchange Listed Company Manual, as in effect as of the Effective Date, and shall be interpreted accordingly.
(a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(d) "Committee" means the Compensation Committee of the Board which shall, subject to the unfettered right of the Board to act as the Committee, administer the Plan.
(e) "Company" means Rite Aid Corporation, a corporation organized under the laws of the State of Delaware, or any successor corporation.
(f) "Effective Date" means February 13, 2001
(g) "Employee" means an Employee of the Company or any Subsidiary or Affiliate.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
(i) "Fair Market Value" means the fair market value of such Stock determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee in good faith, the per share Fair Market Value of Stock as of a particular date shall mean (i) the closing price per share of Stock on such date on the national securities exchange on which the Stock is principally traded, or (ii) if the shares of Stock are then traded in an over-the-counter market, the average of the closing bid and asked prices for the shares of Stock in such over-the-counter market for the last preceding date on which there was a sale of such Stock in such market, or (iii) if the shares of Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine.
(j) "NQSO" means an Option that is designated as a nonqualified stock option.
(k) "Option" means a right granted to an Employee under Section 6, to purchase shares of Stock.
(l) "Option Agreement" means any written agreement, contract, or other instrument or document evidencing an Option.
(m) "Plan" means this Rite Aid Corporation 2001 Stock Option Plan, as amended from time to time.
(n) "Stock" means shares of common stock, par value $1.00 per share, of the Company.
(o) "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company if, at the time of granting of an Option, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.
The Plan shall be administered by the Committee. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options; to determine the persons to whom and the time or times at which Options shall be granted;
to determine the number of shares of Stock to which an Option may relate and the terms, conditions and restrictions relating to any Option; to determine whether, to what extent, and under what circumstances an Option may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the terms and conditions applicable to Options; to designate Affiliates; to construe and interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Option Agreements (which need not be identical for each Employee); and to make all other determinations deemed necessary or advisable for the administration of the Plan.
All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company, and any Subsidiary, Affiliate or Employee (or any person claiming any rights under the Plan from or through any Employee) and any stockholder.
No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder.
Options may be granted only to Employees of the Company, or of any of its Subsidiaries and Affiliates. In determining the persons to whom Options shall be granted, the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan.
The maximum number of shares of Stock reserved for the grant of Options under the Plan shall be 20,000,000, subject to adjustment as provided herein. Notwithstanding anything contained in the Plan to the contrary, at least a majority of the shares subject to Options awarded under the Plan shall be awarded to Employees of the Company who are neither "officers" (within the meaning of Rule 16a-(f) promulgated under the Exchange Act) nor directors of the Company. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. If any shares
subject to an Option are forfeited, canceled, exchanged or surrendered or if an Option otherwise terminates or expires without a distribution of shares to the Employee, the shares of stock with respect to such Option shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Options under the Plan.
In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, Stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of any Employee to whom an Option has been granted under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of Stock or other property (including cash) that may thereafter be issued in connection with Options, (ii) the number and kind of shares of Stock or other property (including cash) issued or issuable in respect of outstanding Options and (iii) the exercise price relating to any Option.
(a) The Committee is authorized to grant Options to Employees, as deemed by the Committee to be consistent with the purposes of the Plan. The Committee shall determine the terms and conditions of such Options at the date of grant or thereafter. The Option Agreement evidencing the grant of an Option under the Plan shall designate the Option as a Nonqualified Stock Option.
(b) The exercise price per share of Stock purchasable under an Option shall be determined by the Committee; provided, however, that the Option price shall not be less than the Fair Market Value on the date of the grant. The exercise price for Stock subject to an Option may be paid in cash or by an exchange of Stock previously owned by the Employee, or a combination of both, in an amount having a combined value equal to such exercise price. An Employee to whom an Option has been granted may also elect to pay all or a portion of the aggregate exercise price by having shares of Stock with a Fair Market Value on the date of exercise equal to the aggregate exercise price withheld by the Company or sold by a broker-dealer.
(c) Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Option Agreement; provided that, the Committee shall have the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances, as it, in its sole
discretion, deems appropriate. An Option may be exercised to the extent of any or all full shares of Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Committee or its designated agent.
(d) Except as otherwise provided in this subsection, an Option may not be exercised unless the Employee is then in the employ of the Company or a Subsidiary or an Affiliate (or a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Employee has remained continuously so employed, or continuously maintained such relationship, since the date of grant of the Option; provided that (1) an employee whose employment terminates other than for cause shall be entitled to exercise all Options which were vested at the date of termination of employment until the earlier of the close of business on the date that is (a) 90 days from the date of termination of employment or (b) 10 years from the date the Option was granted, (2) an employee whose employment terminates by reason of death shall be entitled to exercise all Options which were vested at the date of death until the earlier of the close of business on the date that is (a) one year from the date of death or (b) 10 years from the date the Option was granted and (3) the Option Agreement may contain provisions extending the exercisability of Options, in such events as the Committee may determine at the date of grant, or thereafter, to a date not later than 10 years from the date the Option was granted.
(e) Options may be subject to such other conditions including, but not limited to, restrictions on transferability of the shares acquired upon exercise of such Options, as the Committee may prescribe in its discretion or as may be required by applicable law.
(a) Nontransferability. Unless otherwise provided in an Option Agreement, Options shall not be transferable by an Employee except by will or the laws of descent and distribution and shall be exercisable during the lifetime of an Employee only by such Employee or his guardian or legal representative.
(b) No Right to Continued Employment. Nothing in the Plan or in any Option granted under the Plan or in any Option Agreement or other agreement entered into pursuant hereto shall confer upon any Employee the right to continue in the employ of the Company, any Subsidiary or any Affiliate or to be entitled to any remuneration or benefits not set forth in the Plan or such Option Agreement or other agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Employee's employment.
(c) Withholding and Other Taxes. The Company or any Subsidiary or Affiliate is authorized to withhold from any payment relating to an Option under the Plan, amounts of withholding and other taxes due with respect thereto, and to take such other action as the Committee may deem advisable to enable the Company and Employee to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Option. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of an Employee's tax obligations.
(d) Amendment and Termination. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Employee, without such Employee's consent, under any Option theretofore granted under the Plan. Unless earlier terminated by the Board pursuant to the provisions of the Plan, the Plan shall terminate on the tenth anniversary of its Effective Date. No Options shall be granted under the Plan after such termination date.
(e) No Rights to Options; No Stockholder Rights. No Employee shall have any claim to be granted any Option under the Plan, and there is no obligation for uniformity of treatment of Employees. Except as provided specifically herein, an Employee or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to him for such shares.
(f) No Fractional Shares. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Option. The Committee shall determine whether cash or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(i) The obligation of the Company to sell or deliver Stock with respect to any Option granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.
(ii) Each Option is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Stock issuable pursuant to the Plan is required by any securities exchange
or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of Stock, no such Option shall be granted or payment made or Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee.
(iii) In the event that the disposition of Common Stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise exempt from such registration, such Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require an Employee receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to represent to the Company in writing that the Stock acquired by such Employee is acquired for investment only and not with a view to distribution.
(iv) In the event that at the date a vested Option is to expire, the disposition of Common Stock issuable upon exercise of that Option is not covered by a then current registration statement under the Securities Act, the expiration date of such Option shall be extended to the close of business on that date which is the earlier of the close of business on that date which is (1) 90 days after the date the disposition of Common Stock issuable upon exercise of that Option is covered by a then current registration statement under the Securities Act or (2) 10 years from the date the Option was granted.
(h) Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware without giving effect to the conflict of laws principles thereof.
EXHIBIT 10.9
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT, by and between Rite Aid Corporation, a Delaware corporation (the "Company") and Robert G. Miller ("Executive") is entered into as of the 7th day of May, 2001 (the "Effective Date").
WHEREAS, Executive and the Company have previously entered into that certain Employment Agreement, dated as of December 5, 1999, as supplemented by side letter dated April 5, 2000 between counsel (the "Employment Agreement"); and
WHEREAS, the Company wishes to provide Executive additional bonus compensation to further incentivize Executive to remain in the employment of the Company;
NOW, THEREFORE, in consideration of the mutual premises set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive hereby agree as follows:
1. Amendment to Employment Agreement. As of the Effective Date, the Employment Agreement is hereby amended to incorporate by reference therein a new Appendix B, which is attached hereto as Exhibit 1.
2. Employment Agreement to Remain in Effect. Except as modified by this Amendment No. 1, the Employment Agreement shall remain in full force and effect in accordance with its terms. Without limiting the generality of the foregoing, the Additional Incentive Bonus payable to Executive as provided in Exhibit 1 shall not in any way limit and is not in derogation of the Company's obligations to fully indemnify Executive for fees, costs and expenses and any other matters (including the Kroger Suit referred to in Exhibit 1) pursuant to Section 3(f) of the Employment Agreement. In the event of a conflict between the provisions of this Amendment No. 1 and the Employment Agreement, this Amendment No. 1 shall be controlling.
3. Capitalized Terms. Capitalized terms used herein or in Exhibit 1 and not otherwise defined shall have the respective meanings set forth in the Employment Agreement.
4. Fees and Expenses. Promptly following the execution and delivery of this Amendment No. 1 by Executive, the Company shall reimburse Executive for legal fees and expenses incurred by Executive in negotiating and entering into this Amendment No. 1 (and incidental matters contemplated hereby).
IN WITNESS WHEREOF, Executive has hereunto set Executive's hand and, pursuant to due authorization, the Company has caused this Amendment No. 1 to be executed in its name and on its behalf, all as of the date and year first above written.
RITE AID CORPORATION
By /s/ Elliot Gerson -------------------------------- Its Senior Executive Vice President /s/ Robert G. Miller ----------------------------------- Robert G. Miller |
Exhibit 1
APPENDIX B
1. Entitlement to Incentive Bonus. In addition to the bonus and other compensation provided in the Employment Agreement, the Company shall pay Executive an incentive bonus in the amount set forth in Section 2 below (the "Additional Incentive Bonus") on or within 5 days after the date first described below:
(a) The Additional Incentive Bonus shall be paid on January 1, 2002, if Executive is either an employee or a member of the Board of Directors of the Company on that date; or
(b) The Additional Incentive Bonus shall be paid on the Date of Termination under the Employment Agreement, if Executive's employment is terminated, prior to, January 1, 2002 (i) by reason of Executive's death or Disability, (ii) by the Company without Cause, or (iii) by Executive for Good Reason; or
(c) The Additional Incentive Bonus shall be paid on the Date of Termination under the Employment Agreement, if Executive terminates his employment for any reason (or the Company terminates Executive's employment for any reason) prior to January 1, 2002 but such Date of Termination is simultaneous with or after the occurrence of a Change in Control of the Company; or
(d) The Additional Incentive Bonus shall be paid on the date Executive is neither an employee nor a member of the Board of Directors of the Company (except that this clause (d) shall not apply if Executive is no longer a member of the Board of Directors as a result of Executive's voluntary resignation from the Board or the termination by the Company of his Board service simultaneously with or following termination by the Company of his employment for Cause) if such date is prior to January 1, 2002.
The date as of which Executive first becomes entitled to receive the Additional Incentive Bonus is referred to as the "Bonus Payment Date." For purposes of this Amendment No. 1, Executive shall be deemed to be an employee of the Company (and accordingly his employment shall be deemed not to have terminated) unless and until the Date of Termination has occurred. Notwithstanding anything to the contrary herein, Executive shall not be entitled to receive any Additional Incentive Bonus if the company properly terminates Executive's employment for Cause and the actual Date of Termination is prior to January 1, 2002 and no Change in Control of the Company has occurred on or prior to such Date of Termination.
2. Amount of Incentive Bonus. The amount of the Additional Incentive Bonus shall be equal to the sum of(i) $5,022,658 (the "Base Amount"), plus (ii) simple interest thereon at the rate of nine percent (9%) per annum from December 5, 1999 through the applicable Bonus Payment Date (such sum, the "Additional Bonus Amount") subject to offset only in accordance with Section 3 below and repayment only in accordance with Section 4 below.
3. Reduction in the Amount of the Incentive Bonus. If, on or prior to the Bonus Payment Date, there has occurred a final settlement and/or a binding, nonappealable judgment by a court or other tribunal of competent jurisdiction (in either case, a "Final Determination") of all claims (including all Related Claims as defined below) in the lawsuit captioned Robert G. Miller v. The Kroger Co. (U.S. District Court, District of Oregon No. CV 00-182 NA) including any substitute or successor litigation thereto (collectively, the "Kroger Suit"), then the Additional Bonus Amount payable to Executive shall be reduced (but not below zero) by an amount equal to the excess, if any, of (i) the amount of any consideration paid by The Kroger Co. to Executive, that is not subject to forfeiture or offset, pursuant to such Final Determination (but excluding any payment in respect of punitive damages or by way of penalty) less (ii) the sum, without double counting, of (x) any consideration paid or payable by Executive
pursuant to or in connection with such Final Determination (and any counterclaims or cross-claims ("Related Claims") arising from, related to or in connection with the departure by Executive and/or any other employee from The Kroger Co., their consideration of and conduct in relation to employment by the Company and/or their, or anyone else's subsequent employment with the Company) and (y) all unpaid amounts (including, in any event, attorneys' fees and costs incurred by Executive in connection with the Kroger Litigation or Related Claims that have not been paid by the Company) required to be indemnified by the Company pursuant to Section 3(f) of the Employment Agreement (any such excess, the "Net Recovery Amount"). It is understood that there shall be no reduction of or offset to the Additional Incentive Bonus required to be paid by the Company to Executive by virtue of any Net Recovery Amount unless Executive shall have received the Net Recovery Amount prior to the Bonus Payment Date and a Final Determination has resolved all Related Claims against Executive by or in the right of The Kroger Co. and its affiliates.
4. Reimbursement of Amounts by Executive. Subject to the limitations set forth in Section 4(d), in the event the Company timely pays the full Additional Incentive Bonus to Executive pursuant to Section 1(a) (A) on January 1, 2002 or within 5 days thereafter (in the ease of subsection (a) below) or (B) prior to a Final Determination (in the Case of subsection (b) below), Executive shall be required to reimburse the Company for the amounts set forth in subsections (a) and (b) below (in the aggregate, the "Reimbursement Obligation"), provided, that in no event shall the aggregate amount of the Reimbursement Obligation exceed the amount of the Additional Incentive Bonus actually paid by the Company to Executive, plus attorneys' fees, if any, received by Executive pursuant to the Final Determination and already reimbursed by the Company.
(a) Proration of Incentive Bonus if Executive Terminates Employment Without Good Reason or Company Terminates for Cause between January 1, 2002 and December 5, 2002, Executive is not a Director and No Change in Control Has Occurred. If (i) Executive's employment is terminated by Executive without Good Reason or by the Company with Cause, (ii) the applicable Date of Termination is after January 1, 2002 and before December 5, 2002, (iii) no Change in Control of the Company has occurred prior to such Date of Termination (iv) Executive is not a member of the Board of Directors of the Company by reason of his voluntary resignation from the Board or the termination by the Company of his Board service prior to December 5, 2002 simultaneously with or following termination by the Company of his employment for Cause and (v) as provided above, the Company timely paid the full Additional Incentive Bonus pursuant to Section 1(a) on January 1, 2002, then the Additional Incentive Bonus to which Executive is entitled (the "Pro Rated Bonus") shall be deemed retroactively prorated, such that Executive shall be obligated to reimburse the Company for an amount equal to the excess, if any, of (x) the amount of the Additional Incentive Bonus actually paid to Executive over (y) the product of (A) the Additional Incentive Bonus actually paid and (B) a fraction, the numerator of which is the number of days between December 5, 1999 and the applicable Date of Termination (or, if later, the date of termination, of Board service), and the denominator of which is 1096, less any amount theretofore paid or payable by Executive to the Company pursuant to Section 4(b).
(b) Reimbursement if Executive Receives an Award in the Kroger Litigation After Receipt of Additional Incentive Bonus. If the Final Determination occurs after the Bonus Payment Date and, as provided above, the Company timely paid the full Additional Incentive Bonus pursuant to Section 1(a) on the Bonus Payment Date, Executive shall be obligated to reimburse the Company for an amount equal to the Net Recovery Amount received by Executive (not to exceed the Additional Bonus Amount theretofore actually paid by the Company to Executive, less any amount theretofore paid or payable by Executive to the Company pursuant to Section 4(a)), plus attorneys' fees, if any, received by Executive pursuant to the Final Determination and already reimbursed by the Company.
(c) Reimbursement Obligation Deferred Until Executive Receives Amounts in Excess of What Executive Is Entitled to Retain. Executive shall pay the Company the amounts required under Section 4(a) or (b) within 15 days following the date as to which any such Reimbursement Obligation arises, provided, that any such payment obligation (or portion thereof) shall not arise and shall be deferred until such time or times as Executive shall actually have received payment from the Additional Incentive Bonus and any Net Recovery Amount an amount that, in the aggregate, is in excess of the Pro Rated Bonus actually paid (in the case of Section 4(a)) or the full Additional Bonus Amount (in the case of Section 4(b)) and all legal fees then due in connection with the Kroger Suit have been paid or reimbursed. Any excess recovery in the Kroger Suit beyond the amount of the Reimbursement Obligation shall be retained by Executive.
(d) Amounts Payable to the Company. Any amount payable by Executive
to the Company pursuant to this Section 4 shall be net of: (x) any tax detriment
of any nature whatsoever suffered by Executive with respect to receipt of the
Additional Incentive Bonus, or portion thereof, the payment of the Reimbursement
Obligation and/or the receipt of any funds giving rise to the Reimbursement
Obligation, including without limitation, the tax detriments set forth in
Schedule 1 attached hereto (it being the intent of the parties that Executive be
in the same net after-tax position as if Executive (i) could deduct one-hundred
percent (100%) of the amount reimbursed to the Company in the year such
reimbursement is made and (ii) was not subject to any withholding, employment or
other incremental taxes from having received an excess payment from the Company
or Kroger Co., as the case may be, that is thereafter paid to the Company) and
(y) without duplication of any amounts already deducted in the calculation, all
amounts then owed, or which Executive in his good faith believes are owed, by
the Company to Executive pursuant to Section 3(f) of the Employment Agreement.
5. Amendment to Section 2(a) of Employment Agreement. The last line of
Section 2(a) of the Employment Agreement shall be amended to delete the words
"from the Board and." It is understood that Executive shall not be required to
resign from the Company's Board of Directors as a result of termination of his
employment prior to December 5, 2002 unless his employment simultaneously or
previously has been terminated by the Company for "Cause."
6. Payments. All amounts payable by the Company to Executive pursuant to this Amendment No. 1 (including without limitation any amounts due as a result of the application of Section 5(e) of the Employment Agreement) shall, be paid in a lump sum in cash, by wire transfer to an account designated by Executive.
7. Conduct of Kroger Litigation Settlement. The Company acknowledges and agrees that Executive shall have the full right to conduct the litigation with The Kroger Co. and its affiliates, including the defense of any counterclaim arising in connection therewith, in such manner as Executive may determine in his sole discretion. The Company further acknowledges and agrees that Executive has and shall have no duty to the Company to enter into or refrain from entering into any proposed settlement agreement, or to agree to or reject any particular term or condition thereof, and that Executive may enter into a settlement agreement with The Kroger Co. and its affiliates on terms and conditions acceptable to the Executive, or reject any proposed settlement in his sole discretion.
Schedule I
TAX DETRIMENTS
Detriments to be taken into account shall, include:
(a) any decrease in personal itemized deductions resulting from an increase in Executive's adjusted gross income ("AGI") (including the 7.5% (medical), 2% (miscellaneous) and 3% (general) AGI adjustments);
(b) Executive's portion of the increased Medicare premium resulting from the receipt of the Additional Incentive Bonus and the Net Recovery Amount; and
(c) any increased alternative minimum tax ("AMT") resulting from the treatment of state income taxes claimed as a deduction by Executive in respect of the Additional Incentive Bonus and the Net Recovery Amount.
(d) the amount of the Reimbursement Obligation disallowed as a deduction or as a result of the 2% floor imposed on miscellaneous itemized deductions in the year in which it is paid;
(e) any increased AMT resulting from the treatment of the Reimbursement Obligation for AMT purposes;
(f) any detriment related to the time value of money determined on the basis of an 8% annual discount rate resulting from a carryover or carry back, if any, of any portion of such Reimbursement Obligation that is not currently deductible in the year in which it is paid;
(g) any detriment resulting from the application of any limitation imposed upon the deductibility of the Reimbursement Obligation for state law purposes in the year in which it is paid;
(h) any detriment resulting from differences in tax brackets applied to Executive's taxable income for the taxable year that the Additional Incentive Bonus is received versus the tax brackets applied to Executive's taxable income for the taxable year that the Reimbursement Obligation is claimed as a deduction; and
(i) any detriment resulting from a change in either Federal, state, or local tax laws, including changes in the tax rates.
EXHIBIT 10.12
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT, by and between Rite Aid Corporation, a Delaware corporation (the "Company") and Mary Sammons ("Executive") is entered into as of the 7th day of May, 2001 (the "Effective Date ).
WHEREAS, Executive and the Company have previously entered into that certain Employment Agreement, dated as of December 5, 1999, as supplemented by side letter dated April 5, 2000 between counsel (the "Employment Agreement"); and
WHEREAS, the Company wishes to provide Executive additional bonus compensation to further incentivize Executive to remain in the employment of the Company;
NOW, THEREFORE, in consideration of the mutual premises set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive hereby agree as follows:
1. Amendment to Employment. As of the Effective Date, the Employment Agreement is hereby amended to incorporate by reference therein a new Appendix 13, which is attached hereto as Exhibit 1.
2. Employment Agreement to Remain in Effect. Except as modified by this Amendment No. 1, the Employment Agreement shall remain in lull force and effect in accordance with its terms. Without limiting the generality of the foregoing, the Additional Incentive Bonus payable to Executive as provided in Exhibit 1 shall not in any way limit and is not in derogation of the Company's obligations to fully indemnify Executive for fees, costs and expenses and any other matters pursuant to Section 3(1) of the Employment Agreement. In the event of a conflict between the provisions of flier Amendment No. 1 and the Employment Agreement, this Amendment No. 1 shall be controlling.
3. Capitalized Terms. Capitalized terms used herein or in Exhibit 1 and not otherwise defined shall have the respective meanings set forth in the Employment Agreement.
4. Fees and Expenses. Promptly following the execution and delivery of this Amendment No. 1 by Executive, the Company shall reimburse Executive for legal fees and expenses incurred by Executive in negotiating and entering into this Amendment No. 1 (and incidental matters contemplated hereby).
IN WITNESS WHEREOF, Executive has hereunto set Executive's hand and, pursuant to due authorization, the Company has caused this Amendment No, 1 to be executed in its name and on its behalf all as of the date and year first above written.
RITE AID CORPORATION
By: /s/ Elliot Gerson
-------------------------------
Its Senior Executive Vice President
/s/ Mary Sammon
-----------------------------------
Mary Sammons
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APPENDIX B
1. Entitlement to Incentive Bonus. In addition to the bonus and other compensation provided in the Employment Agreement, the Company shall pay Executive an incentive bonus in the amount set forth in Section 2 below (the "Additional Incentive Bonus") on or within 5 days after the date first described below:
(a) The Additional Incentive Bonus shall be paid on January 1, 2002, if Executive is an employee of the Company on that date; or
(b) The Additional Incentive Bonus shall be paid on the Date of Termination under the Employment Agreement, if Executive's employment is terminated prior to January 1, 2002 (i) by reason of Executive's death or Disability, (ii) by the Company without Cause, or (iii) by Executive for Good Reason; or
(c) The Additional Incentive Bonus shall be paid on the Date of Termination under the Employment Agreement, if Executive terminates her employment for any reason (or the Company terminates Executive's employment for any reason) prior to January 1, 2002 but such Date of Termination is simultaneous with or after the occurrence of a Change in Control of the Company; or
The date as of which Executive first becomes entitled to receive the Additional Incentive Bonus is referred to as the "Bonus Payment Date." For purposes of the Amendment No. 1, Executive shall be deemed to be an employee of the Company (and accordingly her employment shall be deemed not to have terminated) unless and until the Date of Termination has occurred. Notwithstanding anything to the contrary herein, Executive shall not be entitled to receive any Additional Incentive Bonus if the Company properly terminates Executive's employment for Cause and the actual Date of Termination is prior to January 1, 2002 and no Change in Control of the Company has occurred on or prior to such Date of Termination.
2. Amount of Incentive Bonus. The amount of the Additional Incentive Bonus shall be equal to the sum of (i) $1,624,000 (the "Base Amount"), plus (ii) simple interest thereon at the rate of nine percent (9%) per annum from December 5, 1999 through the applicable Bonus Payment Date (such sum, the "Additional Bonus Amount") subject to offset only in accordance with Section 3 below and repayment only in accordance with Section 4 below.
3. Reduction in the Amount of the Incentive Bonus. If, on or prior to the Bonus Payment Date, there has occurred a final settlement and/or a binding, nonappealable judgment by a court or other tribunal of competent jurisdiction (in either case, a "Final Determination") of all claims which Executive has arising out of or relating to Executive's Employment Protection Agreement, dated September 22, 1998, Fred Meyer, Inc., a subsidiary of with The Kroger Co. (collectively, the "Kroger Claim"), then the Additional Bonus Amount payable to Executive shall be reduced (but not below zero) by an amount equal to the excess, if any, of (i) the amount of any consideration paid by The Kroger Co. to Executive, that is not subject to forfeiture or offset, pursuant to such Final Determination (but excluding any payment in respect of punitive damages or by way of penalty) less (ii) the sum, without double counting, of (x) any consideration paid or payable by Executive pursuant to or in connection with such Final Determination (and any counterclaims or cross-claims ("Related Claims") arising from, related to or in connection with the departure by Executive and/or any other employee from The Kroger Co., their consideration of and conduct in relation to employment by the Company and/or their, or anyone else s subsequent employment with the Company) and (y) all unpaid amounts (including, in any event, attorneys fees and costs incurred by Executive in connection with the Kroger Claims or Related Claims that have not been paid by the Company) required to be indemnified by the Company pursuant to Section 3(f) of the Employment Agreement (any such excess, the "Net Recovery Amount"). It is understood that there shall be no reduction of or offset to the Additional Incentive Bonus required to be paid by the Company to Executive by virtue of any Net Recovery Amount unless Executive shall have received the Net Recovery Amount prior to the Bonus Payment Date and a Final Determination has resolved all Related Claims against Executive by or in the right of The Kroger Co. and its affiliates,
4. Reimbursement Amounts by Executive. Subject to the limitations set forth in Section 4(d), in the event the Company timely pays the full Additional Incentive Bonus to Executive pursuant to Section l(a) (A) on January 1, 2002 or within 5 days thereafter (in the case of subsection (a) below) or (B) prior to a Final Determination (in the case of subsection (b) below), Executive shall be required to reimburse the Company for the amounts set forth in subsections (a) and (b) below (in the aggregate, the "Reimbursement Obligation"), provided, that in no event shall the aggregate amount of the Reimbursement Obligation exceed the amount of the Additional Incentive Bonus actually paid by the Company to Executive, plus attorneys' fees, if any, received by Executive pursuant to the Final Determination and already reimbursed by the Company.
(a) Reimbursement if Executive Receives an Award in the Kroger Litigation After Receipt of Additional Incentive Bonus. If the Final Determination occurs after the Bonus Payment Date and, as provided above, the Company timely paid the full Additional Incentive Bonus pursuant to Section 1(a) on the Bonus Payment Date, Executive shall be obligated to reimburse the Company for an amount equal to the Net Recovery Amount received by Executive (not to exceed the Additional Bonus Amount theretofore actually paid by the Company to
Executive, less any amount theretofore paid or payable by Executive to the Company pursuant to Section 4(a)), plus attorneys fees, if any, received by Executive pursuant to the Final Determination and already reimbursed by the Company.
(b) Reimbursement Obligation Deferred Until Executive Receives Amounts in Excess of What Executive is Entitled to Retain. Executive shall pay the Company the amounts required under Section 4(a) or (b) within 15 days following the date as to which any such Reimbursement Obligation arises, provided, that any such payment obligation (or portion thereof) shall not arise and shall be deferred until such time or times as Executive shall actually have received payment from the Additional Incentive Bonus and any Net Recovery Amount an amount that, in the aggregate, is in excess of the full Additional Bonus Amount and all legal fees then due in connection with the Kroger Claim have been paid or reimbursed. Any excess recovery in the Kroger Claim beyond the amount of the Reimbursement Obligation shall be retained by Executive.
(c) Amounts Payable to the Company. Any amount payable by Executive
to the Company pursuant to this Section 4 shall be net of: (x) any tax detriment
of any nature whatsoever suffered by Executive with respect to receipt of the
Additional Incentive Bonus, or portion thereof, the payment of the Reimbursement
Obligation and/or the receipt of any funds giving rise to the Reimbursement
Obligation, including without limitation, the tax detriments set forth in
Schedule I attached hereto (it being the intent of the parties that Executive be
in the same net after-tax position as if Executive (i) could deduct one-hundred
percent (100%) of the amount reimbursed to the Company in the year such
reimbursement is made and (ii) was not subject to any withholding, employment or
other incremental taxes from having received an excess payment from the Company
or Kroger Co., as the case may be, that is thereafter paid to the Company) and
(y) without duplication of any amounts already deducted in the calculation, all
amounts then owed, or which Executive in her good faith believes are owed, by
the Company to Executive pursuant to Section 3(1) of the Employment Agreement.
5. Amendment to Section 2(a) of Employment Agreement. The last line of
Section 2(a) of the Employment Agreement shall be amended to delete the words
"from the Board and." It is understood that Executive shall not be required to
resign from the Company s Board of Directors as a result of termination of her
employment prior to December 5, 2002 unless her employment simultaneously or
previously has been terminated by the Company for "Cause."
6. Payments. All amounts payable by the Company to Executive pursuant to this Amendment No. 1 (including without limitation any amounts due as a result of the application of Section 5(e) of the Employment Agreement) shall be paid in a lump sum in cash, by wire transfer to an account designated by Executive.
7. Conduct of Claim Against Kroger; Settlement. The Company acknowledges and agrees that Executive shall have the full right to pursue her claim against The Kroger Co. and its affiliates and to fully control any litigation she institutes and the defense of any counterclaim arising in connection therewith, in such manner as Executive may determine in her sole discretion. The Company further acknowledges and agrees that Executive has and shall have no duty to the Company to enter into or refrain from entering into any proposed settlement agreement, or to agree to or reject any particular term or condition thereof, and that Executive may enter into a settlement agreement with The Kroger Co. and its affiliates on terms and conditions acceptable to the Executive, or reject any proposed settlement in her sole discretion.
Schedule 1
Detriments to be taken into account shall include:
(a) any decrease in personal itemized deductions resulting from an increase in Executive's adjusted gross income ("AGI") (including the 7.5% (medical), 2% (miscellaneous) and 3% (general) AGI adjustments);
(b) Executive's portion of the increased Medicare premium resulting from the receipt of the Additional Incentive Bonus and the Net Recovery Amount; and
(c) any increased alternative minimum tax ("AMT") resulting from the treatment of state income taxes claimed as a deduction by Executive in respect of the Additional Incentive Bonus and the Net Recovery Amount;
(d) the amount, of the Reimbursement Obligation disallowed as a deduction or as a result of the 2% floor imposed on miscellaneous itemized deductions in the year in which it is paid;
(e) any increased AMT resulting from the treatment of the Reimbursement Obligation for AMT purposes;
(f) any detriment related to the time value of money determined on the basis of an 8% annual discount rate resulting from a carryover or carryback, if any, of any portion of such Reimbursement Obligation that is not currently deductible in the year in which it is paid;
(g) any detriment resulting from the application of any limitation imposed upon the deductibility of the Reimbursement Obligation for state law purposes in the year in which it is paid;
(h) any detriment resulting from differences in tax brackets applied to Executive's taxable income for the taxable year that the Additional Incentive Bonus is received versus the tax brackets applied to Executive's taxable income for the taxable year that the Reimbursement Obligation is claimed as a deduction; and
(i) any detriment resulting from a change in either Federal, state, or local tax laws, including changes in the tax rates.
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the 16th day of November, 2000 (the "Effective Date") by and between Rite Aid Corporation, a Delaware corporation (the "Company"), and Elliot S. Gerson ("Executive").
WHEREAS, Executive desires to provide the Company with his services and the Company desires to employ Executive in the capacity of Senior Executive Vice President and General Counsel 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 parties hereto, intending to be legally bound, agree as follows:
1. Term of Employment.
The term of Executive's employment with the Company hereunder (the "Term") pursuant to this Agreement shall commence on the Effective Date and, unless earlier terminated pursuant to Section 5 below, shall continue for a period ending on the date that is two (2) years following the Effective Date; provided, however, that on each anniversary of the Effective Date occurring prior to the termination of Executive's employment hereunder (each such date a "Renewal Date"), an additional year shall be added to the Term, unless notice of non-renewal has been delivered by one party to the other party at least 180 days prior to such Renewal Date. For purposes of this Agreement, except as otherwise provided herein, the phrases "year during the Term" or "during any year of the Term" or similar language shall refer to each 12-month period commencing on the Effective Date or applicable anniversaries thereof.
2. Position And Duties.
2.1 Position. During the Term, Executive shall be employed as Senior Executive Vice President and General Counsel. 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.
2.2 Duties. Subject to the supervision and control of the Senior Executive Vice President and Chief Administrative Officer of the Company (or any designee), to whom he shall report, Executive shall do and perform all services and acts necessary or advisable to fulfill the duties and responsibilities of his position as Senior Executive Vice President and General Counsel and shall render such service on the terms set forth herein. In addition, Executive shall have such other executive and managerial powers and duties with respect to the Company and its subsidiaries, affiliates and strategic partners as may be assigned to him by the Senior Executive Vice President and Chief Administrative Officer of the Company or any designee. Except for sick leave, vacations (as provided in Section 4.3 below), and excused leaves of absence, Executive shall, throughout the Term, devote substantially all his working time, attention, knowledge and skills faithfully and to the best of his ability, to the duties and responsibilities of his position in furtherance of the business affairs and activities of the Company and its subsidiaries, affiliates and strategic partners. Executive shall at all times be subject to, observe and carry out such rules, regulations, policies, directions, and restrictions as the Company may from time to time establish for senior executive officers of the Company.
3. Compensation.
3.1 Base Salary. During the Term, as compensation for his services hereunder, Executive shall receive a salary at the annualized rate of Five Hundred Thousand Dollars ($500,000) per year ("Base Salary"), 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. 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. Executive's annual target bonus opportunity pursuant to such plan (the "Annual Target Bonus") shall equal 50% of the Base Salary in effect for Executive at the beginning of such fiscal year.
3.3 Stock Awards.
(a) Executive currently holds options (the "Options") to purchase 985,000 shares of the Company's common stock, par value $1.00 per share ("Company Stock"). These Options are non-qualified stock options with varying exercise prices and are subject to the acceleration, exercise and termination provisions set forth in Section 3.3(b) and Article 5 hereof and otherwise will be evidenced by and subject to the terms of the Company's form of stock option agreement for officers.
(b) Upon the occurrence of a Change in Control of the Company prior to the termination of Executive's employment with the Company, the Options or any other option to purchase Common Sock then held by Executive shall immediately vest and become exercisable in full and all remaining restrictions on any restricted stock granted to executive shall immediately lapse. For purposes of this Agreement "Change in Control" shall have the meaning set forth in the attached Appendix A.
It is understand and acknowledged by Executive that the securities underlying the Options will 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 5.3 and 5.5, the securities underlying the then vested and exercisable portion of the Options (or any other option to purchase Company Stock then held by Executive) are not subject to an effective registration statement, the 90-day periods in Section 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. The Company further agrees that if, as of the date of Executive's voluntary termination of employment other than for Good Reason, the securities underlying the then vested and exercisable portion of the Options (or any other option to purchase Company Stock then held by Executive) are not subject to an effective registration statement, Executive will be permitted to exercise the Options and any other option to purchase Common Stock then held by Executive, to the extent vested and exercisable as of the date of such termination of employment, during the 30-day period following the first date such securities become subject to an effective registration statement.
4. Additional Benefits.
4.1 Employee Benefits. During the Term, Executive shall be entitled to participate in the employee benefit plans in which management employees of the Company are generally eligible to participate, subject to any eligibility requirements and the other generally applicable terms of such plans.
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 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 $750.00 per month.
4.5 Annual Financial Planning Allowance. During each year of the Term, the Company shall provide Executive with an executive planning allowance in the amount of $5,000.
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 Executive's employment with and service as an Officer 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. Following any termination of Executive's employment or service with the Company, the Company shall cause any Director and Officer liability insurance policies applicable to 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" shall mean (i) Executive's gross negligence or willful misconduct in the
performance of the duties or responsibilities of his position with the Company
or any subsidiary, or failure to timely carry out any lawful directive of the
Senor Executive Vice President and Chief Administrative Officer or any designee;
(ii) Executive's misappropriation of any funds or property of the Company or any
subsidiary; (iii) the commission by Executive of an act of fraud or dishonesty
toward the Company or any subsidiary; or (iv) the use or imparting by Executive
of any confidential or proprietary information of the Company, or any subsidiary
in violation of any confidentiality or proprietary agreement to which Executive
is a party.
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's voluntarily without Good Reason:
(a) Executive shall be entitled to receive (i) all amounts of
accrued but unpaid Base Salary through the effective date of such termination,
(ii) reimbursement for reasonable and necessary expenses incurred by Executive
through the date of notice of such termination, to the extent otherwise provided
under Section 4.2 above 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 ((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.
(b) Except as provided in Section 3.3(c), any portion of the Options or any other then outstanding stock options that has not been exercised prior to the date of termination shall immediately terminate as of such date, and any portion of any Restated 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.
Any termination of Executive's employment by Executive voluntarily without Good Reason shall be effective upon 30 days' notice to the Company.
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 or by Executive for Good Reason. In the event that Executive's employment hereunder is terminated by the Company other than for Cause or by Executive for Good Reason:
(a) Executive shall be entitled to receive (i) the Accrued Benefits, (ii) an amount equal to two times 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 years following the date of termination of employment, and (iii) continued health insurance coverage for Executive and his immediate family for a period of two years following the date of termination of employment. In addition, if such termination occurs following the start of the Company's fiscal year beginning on or about March 2001, Executive shall also be entitled to receive 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) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of restricted stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.3(c), 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 90 days following the date of termination of employment (or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate. Any remaining portions of Executive's stock options that have not 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 5.65 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.
Any termination of employment pursuant to this Section 5.3 shall be effective upon thirty (30) days notice thereof.
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 material adverse alteration in Executive's titles, positions, status, duties, authorities, reporting relationship or responsibilities with the Company or its subsidiaries from those specified in this Agreement, as the same may be augmented from time to time;
(b) The assignment to Executive of any duties or responsibilities materially inconsistent with Executive's status as Senior Executive Vice President and General Counsel of the Company; or
(c) Any other material breach of this Agreement by the Company, including, without limitation, any decrease in Executive's then Base Salary or Annual Target Bonus opportunity as set forth in Sections 3.1 and 3.2;
provided, however, that in each such case the Company shall have the right, within ten (10) days after receipt of notice from Executive of the Company's violation of any of the foregoing, to cure 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.
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) the Accrued Benefits, (ii) any other benefits payable under the then current disability and/or death benefit plans, as applicable, in which Executive is a participant and (iii) continued health insurance coverage for Executive and/or his immediate family, as applicable, for a period of two years following the date of termination of employment.
(b) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of Restricted Stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.3(c), 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 90 days following the date of termination of employment (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 option that have not 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 in connection with
Executive's employment with the Company shall terminate effective as of the date
of such termination of employment.
"Total Disability" shall mean any physical or mental disability that prevents Executive from performing one or more of the essential functions of his position for a period of not less than 90 days in any 12-month period and/or which is expected to be of permanent duration.
5.6 Survival. In the event of any termination of Executive's employment for any reason, Executive and the Company nevertheless shall continue to be bound by the terms and conditions set forth in Sections 5.8, 6 through 10 below, which shall survive the expiration of the Term.
5.7 Exercise Tax Gross-Up.
(a) In the event that any payment or benefit received or to be
received by 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 equal 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 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 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
accounting firm which was, immediately prior to the event giving rise to the
Payment, the Company's independent auditor (the "Auditor"), a Payment (in whole
or in part) does not constitute a "parachute payment" within the meaning of
section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or
in part) are not subject to the Excise Tax, (2) the amount of the Payments that
shall be treated as subject to the Excise Tax shall be equal to the lesser of
(A) the total amount of the Payments or (B) the amount of "excess parachute
payments" within the meaning of section 280G(b)(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 Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, 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
Executive's residence in the calendar year in which the Gross-Up Payment is to
be made, net of the maximum reduction in federal income taxes that can be
obtained from deduction of such state and local taxes, taking into account any
limitations applicable to individuals subject to federal income tax at the
highest marginal rates.
(b) The Gross-Up Payment provided for in Section 5.7(a) hereof shall be made upon the earlier of (i) ten days following the date of termination of Executive's employment or (ii) the imposition upon Executive or payment by 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, Executive shall repay to the Company within thirty (30) days of 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 Executive if and to the extent that such repayment results in a reduction in Excise Tax and a dollar-for-dollar reduction in Executive's taxable income and wages for the purpose of federal, state and local income taxes) plus any interest received by Executive on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service preceding 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. 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, 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 expense of the Auditor and 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 other than by reason of death or total disability.
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, the markets for their products, key personnel, past, present or future actual or threatened litigation, trade secrets, 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, 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, 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.
6.2 Return of Company Property, Record 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, 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.
7. Noncompetition and Other Matters.
7.1 Noncompetition. During the Term and, as applicable, for the two-year period immediately following the date of termination of Executive's employment either (x) by the Company for Cause or (y) by Executive other than for Good Reason, 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 services to, any Competing Business; or (iii) become interested in any Competing Business in any capacity, including, without limitation, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; 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 1% or more of any class of securities of such entity and (ii) provide legal services as an independent contractor. 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 drug stores.
7.2 Noninterference. During the Term and for the two-year period immediately following the date of termination of Executive's employment at any time and for any reason (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 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.
8. Rights and Remedies upon Breach.
If Executive breaches, or threatens to commit a breach of, any of the provisions of Sections 6 or 7 above (the "Restrictive Covenants"), the Company and its subsidiaries, affiliates, strategic partners, successors or assigns shall have the following rights and remedies, each of which shall be independent of the others and severally enforceable, and each of which shall be in addition to, and not in lieu of, any other rights or remedies available to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns at law or in equity.
8.1 Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction by injunctive decree or otherwise, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns and that money damages would not provide an adequate remedy to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns.
8.2 Accounting. The right and remedy to require Executive to account for and pay over to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns, as the case may be, all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as a result of any transaction or activity constituting a breach of any of the Restrictive Covenants.
8.3 Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographic and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect without regard to the invalid portions.
8.4 Modification by the Court. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or scope of such provision, such court shall have the power (and is hereby instructed by the parties) to reduce the duration or scope of such provision, as the case may be (it being the intent of the parties that any such reduction be limited to the minimum extent necessary to render such provision enforceable), and, in its 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 breach 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 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.
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 words, trade secrets, or other proprietary rights);
(ii) it is not a party to any conflicting agreements with third parties, which will prevent him from fulfilling the terms of employment and the obligations of this Agreement;
(iii) does not have in his possession any confidential or proprietary information or documents belonging to others and will not disclose to the Company, use, or induce the Company to use, any confidential or proprietary information or documents of others; and
(iv) agrees to respect any and all valid obligations which he may now have to prior employers or to others relating to confidential information, inventions, discoveries or other intellectual property which are the property of those prior employers or others, as the case may be.
Executive 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 binding arbitration in Harrisburg, Pennsylvania according to the National Employment Dispute Resolution Rules and procedures of the American Arbitration Association. The parties agree that the parties shall each bear his or its own attorney's fees and costs in connection with any such arbitration. 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 Employment 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.
11. Assignment.
Neither this Agreement, nor any of Executive's rights or obligations hereunder, may be assigned or otherwise subject to hypothecation by Executive. The Company may assign its rights and obligations hereunder, in whole or in part, (i) to any of the Company's subsidiaries, affiliates, or parent corporations; 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.
12. Notices.
All notices and other communications under this Agreement shall be in
writing and shall be given by fax or first class mail, certified or registered
with return receipt requested, and shall be deemed to have been duly given three
(3) days after mailing or twenty-four (24) hours after transmission of a fax to
the respective persons named below:
If to the Company: Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: Chief Administrative Officer
Fax: (717) 975-5905
with a copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
Attention: Andrew Ash, Esq.
Fax: (310) 788-1200
If to Executive: Elliot S. Gerson
538 Bridgeview Drive
Lemoyne, Pennsylvania 17043
Fax: 717-731-1438
|
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 set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against Executive or others whether in respect of claims made under this Agreement or otherwise. In no event shall 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 Executive under any of the provisions of this Agreement, and such amounts shall not be reduced, regardless of whether Executive obtains other employment.
13.2 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflicts of laws principles thereof which might refer such interpretations to the laws of a different state or jurisdiction.
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 Executive and the Company and/or any subsidiary or affiliate, except for the Deferred Compensation Agreement, dated November 15, 1999 between the Company and Executive.
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 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 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 Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of Executive in the event of insolvency or bankruptcy.
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.
IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date first written above.
RITE AID CORPORATION
/s/ David R. Jessick ------------------------------------------ |
EXECUTIVE:
/s/ Elliot Gerson ------------------------------------------ |
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:
ARTICLE 1 any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
ARTICLE 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
ARTICLE 3 there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
ARTICLE 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.
"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 10.19
Rite Aid Corporation
MARTIN L. GRASS
Chairman
Chief Executive Officer
April 2, 1999
Mr. Eric Sorkin
Dear Eric,
We appreciate your good nature in allowing us to turn you right around again and, this time, send you and your lovely wife to Phoenix, Arizona. You will no longer be based at Rite Aid headquarters, but, as you know, Rite Aid is the sole shareholder of PCS and your duties will be performed for both PCS and Rite Aid.
You have expressed concerns about this move and the remoteness to Rite Aid. For your assurance, Rite Aid Corporation agrees that if you are no longer employed by either PCS or Rite Aid ("Such Termination") you will be paid for a period of three years from the date of Such Termination at the rate of your then established salary together with a guarantee of the most recent annual bonus which you had received prior to Such Termination.
In addition, in the event of Such Termination, any stock options in Rite Aid Corporation held by you at such time shall vest and shall be exercisable in whole or in part from time to time for the ensuing three years.
Further, starting three years after Such Termination, if at any time you are not gainfully employed for a period of at least one month you shall have the right to call for commencement of payments under your Deferred Compensation contract. If you have done so and thereafter you resume gainful employment, such payments shall suspend until your 58th birthday at which time you may accelerate the re-commencement date thereof.
We wish you success and pleasure in Phoenix.
Sincerely,
/jsk /s/ Martin L. Grass |
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the 27th day of September, 2000 (the "Effective Date"), by and between Rite Aid Corporation, a Delaware corporation (the "Company"), and James Mastrian (the "Executive").
WHEREAS, Executive is currently employed as Senior Executive Vice President, Marketing and Logistics and desires to continue to provide the Company with his services, and the Company desires to continue to employ Executive in such capacity 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 parties hereto, intending to be legally bound, agree as follow:
1. Term of Employment
The term of Executive's employment with the Company hereunder (the "Term") shall commence on the Effective Date and, unless earlier terminated pursuant to Section 5 below, shall continue for a period ending on the date that is three (3) years following the Effective Date; provided, however, that on each anniversary of the Effective Date occurring prior to the termination of Executive's employment hereunder (each such date a "Renewal Date"), an additional year shall be added to the Term, unless notice of non-renewal has been delivered by one party to the other party at least 180 days prior to such Renewal Date. For purposes of this Agreement, the phrases "year during the Term" or "during any year of the Term" or similar language shall refer to each 12-month period commencing on the Effective Date or applicable anniversaries thereof.
2. Position and Duties.
2.1 Position. During the Term, Executive shall be employed as Senior Executive Vice President, Marketing and Logistics of the Company. 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.
2.2 Duties. Subject to the supervision and control of the President and Chief Operating Officer of the Company, to whom he shall report, Executive shall do and perform all services and acts necessary or advisable to fulfill the duties and responsibilities of his position as Senior Executive Vice President, Marketing and Logistics, and shall render such services on the terms set forth herein. In addition, Executive shall have such other executive and managerial powers and duties with respect to the Company and its subsidiaries, affiliates and strategic partners as may be assigned to him by the President and Chief Operating Officer. Except for sick leave, vacations (as provided in Section 4.3 below), and excused leaves of absence, Executive shall, throughout the Term, devote substantially all his working time, attention, knowledge and skills faithfully and to the best of his ability, to the duties and responsibilities of his position in furtherance of the business affairs and activities of the Company and its subsidiaries, affiliates and strategic partners. Executive shall at all times be subject to, observe and carry out such rules, regulations, policies, directions, and restrictions as the Board of Directors of the Company (the "Board") or the Chief Executive Officer of the Company may from time to time establish for senior executive officers of the Company.
3. Compensation.
3.1 Base Salary. During the Term, as compensation for his services hereunder, Executive shall receive a salary at the annualized rate of Five Hundred Seventy Five Thousand Dollars ($575,000) per year ("Base Salary"), 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. During the Term the Base Salary shall be reviewed periodically by the Compensation Committee of the Board for possible increase. Any increase in the Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. The Base Salary shall not be reduced after any such increase, and the term "Base Salary" shall thereafter refer to the Base Salary as from time to time so increased.
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. The Executive's annual target bonus opportunity pursuant to such plans (the "Annual Target Bonus") shall equal 60% of the Base Salary payable to Executive with respect to such fiscal year.
3.3 Stock Awards.
(a) Upon the occurrence of a Change in Control of the Company prior to the termination of Executive's employment with the Company, all of Executive's then outstanding options to purchase common stock of the Company, par value $1.00 per share ("Company Stock"), shall immediately vest and become exercisable in full, and all remaining restrictions on any shares of restricted stock shall immediately lapse. For purposes of this Agreement "Change in Control" shall have the meaning set forth in the attached Appendix A.
(b) It is understood and acknowledged by Executive that the securities underlying his options will 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 5.3 and 5.5, the securities underlying the then vested and exercisable portion of any option to purchase Company Stock then held by Executive are not subject to an effective registration statement, the 90-day periods in Sections 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. The Company further agrees that if, as of the date of Executive's voluntary termination of employment other than for Good Reason, the securities underlying the then vested and exercisable portion of any option to purchase Company Stock then held by Executive are not subject to an effective registration statement, Executive will be permitted to exercise such option, to the extent vested and exercisable as of the date of such termination of employment, during the 30-day period following the first date such securities become subject to an effective registration statement.
4. Additional Benefits.
4.1 Employee Benefits. During the Term, Executive shall be entitled to participate in the employee benefit plans in which executive officers of the Company are generally eligible to participate, subject to any eligibility requirements and the other generally applicable terms of such plans.
4.2 Expense. 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 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 $750 per month.
4.5 Annual Financial Planning Allowance. During each year of the Term, the Company shall provide Executive with a financial planning allowance in the amount of $5,000.
4.6 Certain Travel Expenses. Executive shall continue to receive reimbursement for travel between Harrisburg, Pennsylvania and Cleveland, Ohio on the same basis as currently provided by the Company.
4.7 Indemnification. The Company shall (a) indemnify and hold Executive harmless, to the full extent permitted under applicable law, for, from and against any and all losses, claims, costs, expenses, damages, liabilities or actions (including security holder actions, in respect thereof) related to or arising out of the Executive's employment with and service as an officer 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. Following any 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. In addition, the indemnification provisions regarding the investigation of the Company by the Securities and Exchange Commission set forth in that certain letter agreement between Executive and the Company shall remain in full force and effect.
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" shall mean (i) Executive's gross negligence or willful misconduct in the
performance of the duties or responsibilities of his position with the Company
or any subsidiary, or failure to timely carry out any lawful directive of the
Board, the Chief Executive Officer or the President and Chief Operating Officer;
(ii) Executive's misappropriation of any funds or property of the Company or any
subsidiary; (iii) the commission by Executive of an act of fraud or dishonesty
toward the Company or any subsidiary; or (iv) the use or imparting by Executive
of any confidential or proprietary information of the Company or any subsidiary
in violation of any confidentiality or proprietary agreement to which Executive
is a party.
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 (i) all amounts of
accrued but unpaid Base Salary through the effective date of such termination,
(ii) reimbursement for reasonable and necessary expenses incurred by Executive
through the date of notice of such termination, to the extent otherwise provided
under Section 4.2 above 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 ((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.
(b) Except as provided in Section 3.3(b), any portion of any then outstanding stock option that has not been exercised prior to the date of termination shall immediately terminate as of such date, and any portion of any restricted stock or 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.
Any termination of Executive's employment by Executive voluntarily without Good Reason shall be effective upon 30 days' notice to the Company.
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 or by Executive for Good Reason. In the event that Executive's employment hereunder is terminated by the Company other than for Cause or by Executive for Good Reason:
(a) Executive shall be entitled to receive (i) the Accrued
Benefits, (ii) 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,
(iii) an amount equal to two times the sum of Executive's 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 executive officers over a period of two years following the date
of termination of employment, and (iv) continued health insurance coverage for
Executive and his immediate family for a period of two years following the date
of termination of employment.
(b) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of restricted stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.3(b), 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 90 days following the date of termination of employment (or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate. Any portion of Executive's stock options that have not 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 employment.
Any termination of employment pursuant to this Section 5.3 shall be effective upon thirty (30) days notice thereof.
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 material adverse alteration in Executive's titles, positions, status, duties, authorities, reporting relationships or responsibilities with the Company or its subsidiaries from those specified in this Agreement, as the same may be augmented from time to time;
(b) the assignment to Executive of any duties or responsibilities materially inconsistent with Executive's status as Senior Executive Vice President, Marketing and Logistics of the Company; or
(c) any other material breach of this Agreement by the Company, including without limitation any decrease in Executive's Base Salary or Annual Target Bonus opportunity as set forth in Sections 3.1 and 3.2;
provided, however, that in each such case the Company shall have the right, within ten (10) days after receipt of notice from Executive of the Company's violation of any of the foregoing, to cure 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.
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) the Accrued Benefits, (ii) any other benefits payable under the then current disability and/or death benefit plans, as applicable, in which Executive is a participant and (iii) continued health insurance coverage for Executive and/or his immediately family, as applicable, for a period of two years following the date of termination of employment.
(b) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of restricted stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.3(b), 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 90 days following the date of termination of employment (or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate. Any portion of Executive's stock options that have not 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 employment.
"Total Disability" shall mean any physical or mental disability that prevents Executive from performing one or more of the essential functions of his position for a period of not less than 90 days in any 12-month period and/or which is expected to be of permanent duration.
5.6 Survival. In the event of any termination of Executive's employment for any reason, Executive and the Company nevertheless shall continue to be bound by the terms and conditions set forth in 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 of any other plan, arrangement or agreement of the Company (or any affiliate) (collectively, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), as determined as provided below, the Company shall pay to the 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 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 "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to Executive and selected by the accounting firm which was, immediately prior to the event giving rise to the Payment, the Company's independent auditor (the "Auditor"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of section 280G(b)(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 Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the 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 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) ten 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 Auditor and 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.
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, the markets for their products, key personnel, past, present or future actual or threatened litigation, trade secrets, 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, 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.
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 all 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.
7. Noncompetition and Other Matters.
7.1 Noncompetition. During the Term and, as applicable, for the two-year period immediately following the date of termination of Executive's employment either (x) by the Company for Cause or (y) by Executive other than for Good Reason, 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, engaged 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 services to, any Competing Business; or (iii) become interested in any Competing Business in any capacity, including, without limitation, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; provided, however, Executive may 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 1% 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 drug stores.
7.2 Noninterference. During the Term and for the two-year period immediately following the date of termination of Executive's employment at any time and for any reason (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 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.
8. Rights and Remedies upon Breach.
If Executive breaches, or threatens to commit a breach of, any of the provisions of Sections 6 or 7 above (the "Restrictive Covenants"), the Company and its subsidiaries, affiliates, strategic partners, successors or assigns shall have the following rights and remedies, each of which shall be independent of the others and severally enforceable, and each of which shall be in addition to, and not in lieu of, any other rights or remedies available to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns at law or in equity.
8.1 Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction by injunctive decree or otherwise, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns and that money damages would not provide an adequate remedy to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns.
8.2 Accounting. The right and remedy to require Executive to account for and pay over to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns, as the case may be, all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as a result of any transaction or activity constituting a breach of any of the Restrictive Covenants.
8.3 Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographic and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect without regard to the invalid portions.
8.4 Modification by the Court. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or scope of such provision, such court shall have the power (and is hereby instructed by the parties) to reduce the duration or scope of such provision, as the case may be (it being the intent of the parties that any such reduction be limited to the minimum extent necessary to render such provision enforceable), and, in its 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.
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
(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 to which Executive is subject which includes any obligation of confidentiality, assignment of intellectual property or non-competition.
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 binding arbitration in Harrisburg, Pennsylvania according to the National Employment Dispute Resolution Rules and procedures of the American Arbitration Association. The parties agree that the parties shall each bear his or its own attorneys' fees and costs in connection with any such arbitration. 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.
11. Assignment.
Neither this Agreement, nor any of Executive's rights or obligations hereunder, may be assigned or otherwise subject to hypothecation by Executive. The Company may assign its rights and obligations hereunder, in whole or in part, (i) to any of the Company's subsidiaries, affiliates, or parent corporations; 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.
12. Notices.
All notices and other communications under this Agreement shall be in
writing and shall be given by fax or first class mail, certified or registered
with return receipt requested, and shall be deemed to have been duly given three
(3) days after mailing or twenty-four (24) hours after transmission of a fax to
the respective persons named below:
If to the Company: Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: General Counsel
Fax: (717) 760-7867
with a copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
Attention: Andrew Ash, Esq.
Fax: (310) 788-1200
If to Executive: James Mastrian
____________________
____________________
Fax: _______________
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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 set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others whether in respect of claims made under this Agreement or otherwise. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts, benefits and other compensation payable or otherwise provided to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced, regardless of whether the Executive obtains other employment.
13.2 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflicts of laws principles thereof which might refer such interpretations to the laws of a difference state or jurisdiction.
13.3 Entire Agreement. Subject to the last sentence of Section 4.7, 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 waving 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 No 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.
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.
IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date first written above.
RITE AID CORPORATION
/s/ Mary Sammons ----------------------------- By: Mary Sammons Its: President & COO |
EXECUTIVE
/s/ James Mastrian ----------------------------- |
APPENDIX A
A "Change in Control of the Company" shall be deemed to have occurred if, as the result of a single transaction or a series of transactions, the event set forth in any one of the following paragraphs shall have occurred:
(1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
(2) Incumbent Directors cease at any time and for any reason to constitute a majority of the number of directors then serving on the Board. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the Effective Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors to the Board); or
(3) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
(4) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under
Section 12 of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act, except that a Person shall not be deemed to be the Beneficial Owner of any securities which are properly filed on a Form 13G.
"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 10.44
EXECUTION COPY
SALOMON SMITH BARNEY INC.
390 GREENWICH STREET
NEW YORK, NEW YORK 10013
CITICORP NORTH AMERICA, INC. THE CHASE MANHATTAN BANK
388 GREENWICH STREET J.P. MORGAN SECURITIES INC.
NEW YORK, NEW YORK 10013 270 PARK AVENUE
NEW YORK, NEW YORK 10017
CREDIT SUISSE FIRST BOSTON FLEET RETAIL FINANCE INC.
ELEVEN MADISON AVENUE FLEET SECURITIES, INC.
NEW YORK, NEW YORK 10010 40 BROAD STREET, 10TH FLOOR
BOSTON, MASSACHUSETTS 02109
May 15, 2001
Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: Mr. Robert G. Miller
Chairman of the Board of Directors
and Chief Executive Officer
|
Rite Aid Corporation $1,900,000,000 Senior Secured Credit Facility Commitment Letter
Ladies and Gentlemen:
Rite Aid Corporation ("Rite Aid") has advised Citi/SSB, JPMorgan, CSFB and Fleet (as defined below) that Rite Aid desires to establish the Senior Facility (as defined in Exhibit A) in connection with the transactions described in Exhibit A hereto (the "Transaction Description"). Capitalized terms used in this Commitment Letter but not defined herein shall have the meanings given to them in the Transaction Description.
Subject to the terms and conditions described in this Commitment Letter (including Exhibits A, B and C hereto), and in the Fee Letters referred to below, Citi/SSB, JPMorgan, CSFB and Fleet are pleased to inform Rite Aid of their several commitments to provide the following principal amounts of the Senior Facility:
Citi/SSB $475,000,000
JPMorgan $475,000,000
CSFB $475,000,000
Fleet $475,000,000
--------------
Total $1,900,000,000
|
Each of Citi/SSB, JPMorgan, CSFB and Fleet shall be liable only for its own commitment hereunder, and shall not have any liability with respect to the commitment of any other party.
The commitments of each of Citi/SSB, JPMorgan, CSFB and Fleet hereunder will be irrevocably reduced by the amount of the commitments of any other prospective Senior Lenders (as defined below) which execute commitments relating to the Senior Facility to the extent expressly stated in such commitment of such other prospective Senior Lenders. Such reductions will be allocated among the commitments of Citi/SSB, JPMorgan, CSFB and Fleet as agreed by them.
For purposes of this Commitment Letter, "Citi/SSB" shall mean Citicorp North America, Inc. and/or any affiliate thereof, including Salomon Smith Barney Inc. ("SSBI"), as Citi/SSB shall determine to be appropriate to provide the services contemplated herein. "CSFB" means Credit Suisse First Boston or any affiliate thereof. "Fleet" means Fleet Retail Finance Inc. and/or any affiliate thereof, including Fleet Securities, Inc., as Fleet Retail Finance Inc. shall determine to be appropriate to provide the services contemplated herein. "JPMorgan" means J.P. Morgan Securities Inc. and/or any affiliate thereof, including The Chase Manhattan Bank, as JPMorgan shall determine to be appropriate to provide the services contemplated herein. Citi/SSB, JPMorgan, Fleet and CFSB are referred to collectively as the "Agents".
1. Conditions Precedent. The commitments of Citi/SSB, JPMorgan, CSFB and Fleet hereunder are subject to:
(a) The Agents' completion of, and satisfaction in all respects with, the results of its ongoing due diligence investigation of the business, assets, operations, properties, condition (financial or otherwise), contingent liabilities, prospects and material agreements of Rite Aid. Each of the Agents confirms its satisfaction with the results of its due diligence investigation of Rite Aid to date and expects that its due diligence investigation will be completed within 30 days of the date of delivery to the Agents of Rite Aid's Annual Report on Form 10-K for the fiscal year ended March 3, 2001.
(b) The preparation, execution and delivery of definitive documentation with respect to the Senior Facility, including a credit agreement, security agreements and guarantees incorporating substantially the terms and conditions outlined in this Commitment Letter and otherwise reasonably satisfactory to the Agents and Citi/SSB's counsel (the "Operative Documents"), on or before August 31, 2001.
(c) There not having occurred any material adverse change in the business, assets, operations, properties, condition (financial or otherwise), contingent liabilities, prospects or material agreements of Rite Aid and its subsidiaries, taken as a whole, since March 3, 2001.
(d) There not having occurred any disruption of or change in loan syndication, financial, banking or capital market conditions that, in the reasonable judgment of the Agents, could materially impair the syndication of the Senior Facility.
(e) The accuracy and completeness of all representations that Rite Aid and its affiliates make to the Agents and all information that Rite Aid and its affiliates furnish to the Agents.
(f) The payment in full of all fees, expenses and other amounts payable under this Commitment Letter and the Fee Letters.
(g) The Agents' reasonable satisfaction with (i) the structure of the Transactions and all related tax, legal and accounting matters, (ii) the material terms of the Transactions and of all agreements and instruments to be entered into in connection with the Transactions and (iii) the capitalization, structure and equity ownership of Rite Aid and its subsidiaries after giving effect to the Transactions.
(h) The Agents' satisfaction that Rite Aid is not subject to material contractual or other material restrictions that would be violated by the Transactions, including the granting of perfected first priority security interests and guarantees and the payment of dividends by subsidiaries.
(i) The execution, delivery and compliance with the terms of (i) this Commitment Letter and (ii) the Fee Letters.
(j) The completion of the Additional Financings on substantially similar terms and conditions as those described in this Commitment Letter (including Exhibits A, B and C hereto).
(k) There not having been any material changes to the five-year business plan of Rite Aid which has been previously delivered to the Agents.
(l) The Agents' receipt of valuations and appraisals of the Collateral by independent appraisal firms satisfactory to the Agents which valuations and appraisals shall be satisfactory to the Agents.
(m) Citi/SSB's completion of a field examination of the Collateral, the results of which shall be satisfactory to the Agents.
Please note that the terms and conditions of Citi/SSB's, JPMorgan's, CSFB's and Fleet's commitments hereunder are not limited to those set forth in this Commitment Letter and that those matters that are not covered or made clear in this Commitment Letter are subject to mutual agreement of the parties.
2. Commitment Termination. The commitments set forth in this Commitment Letter will terminate on the earlier of August 31, 2001 and the date of execution and delivery of the Operative Documents. Before such date, the Agents may terminate this Commitment Letter if any event occurs or information becomes available that, in their reasonable judgment, results or is likely to result in the failure to satisfy any condition set forth in Section 1, unless, in the judgment of the Agents, such event or condition is capable of being cured and Rite Aid is working diligently to the satisfaction of the Agents to effect such a cure.
3. Syndication. Each of the Agents reserves the right, before or after the execution of the Operative Documents, to syndicate all or a portion of its commitment to one or more other financial institutions, in consultation with Rite Aid, that will become parties to the Operative Documents pursuant to syndications to be managed by the Joint Lead Arrangers (as defined below) (the financial institutions becoming parties to the Operative Documents being collectively referred to herein as the "Senior Lenders"). Rite Aid understands that the Joint Lead Arrangers intend to commence such syndication of the Senior Facility promptly and that the Joint Lead Arrangers may elect to appoint one or more syndication agents to direct such syndication efforts on their behalf.
The Joint Lead Arrangers will act as the joint lead syndication agents with respect to the Senior Facility and will manage all aspects of the syndications in consultation with Rite Aid and the Syndication Agents, including the timing of all offers to potential Senior Lenders, the determination of all amounts offered to potential Senior Lenders, the selection of Senior Lenders, the allocation of commitments among the Senior Lenders, the assignment of any titles and the compensation to be provided to the Senior Lenders.
Rite Aid shall take all action that the Joint Lead Arrangers may reasonably request to assist them in forming syndicates acceptable to each of the Joint Lead Arrangers and Rite Aid. Rite Aid's assistance in forming such syndicates shall include but not be limited to: (i) making senior management, representatives and advisors of Rite Aid available to participate in informational meetings with potential Senior Lenders at such times and places as the Joint Lead Arrangers may reasonably request; (ii) using its reasonable best efforts to ensure that the syndication efforts benefit from Rite Aid's existing lending relationships; (iii) assisting (including using its best efforts to cause its affiliates and advisors to assist) in the preparation of a confidential information memorandum for the Senior Facility and other marketing materials to be used in connection with the syndications; and (iv) promptly providing the Joint Lead Arrangers with all information reasonably deemed necessary by them to successfully complete the syndications.
To ensure an orderly and effective syndication of the Senior Facility, Rite Aid agrees that, from the date hereof until the termination of the syndications (as determined by the Joint Lead Arrangers), it will not and will not permit any of its affiliates to, syndicate or issue, attempt to syndicate or issue, announce or authorize the announcement of the syndication or issuance of, or engage in discussions concerning the syndication or issuance of, any debt security or commercial bank or other debt facility (including any renewals thereof), without the prior written consent of the Joint Lead Arrangers other than as contemplated by the Transactions.
Rite Aid agrees that (a) Citicorp USA, Inc. will act as the sole administrative agent for the Senior Facility, (b) SSBI and JPMorgan will act as joint lead arrangers and joint book managers (the "Joint Lead Arrangers") for the Senior Facility, and (c) JPMorgan, CSFB and Fleet will act as syndication agents for the Senior Facility. No additional agents, co-agents, arrangers or co- arrangers, will be appointed, or other titles conferred, without the consent of the Joint Lead Arrangers. Rite Aid agrees that no Senior Lender will receive any compensation of any kind for its participation in the Senior Facility, except as expressly provided in the Fee Letters or in Exhibit A, B or C.
4. Fees. In addition to the fees described in Exhibits B and C, Rite Aid will pay the fees set forth in the fee letter relating to the Senior Facility dated the date hereof between Rite Aid and the Agents (the "Senior Facility Fee Letter") and the fee letter dated the date hereof between Rite Aid and Citi/SSB (the "Arrangement Fee Letter" and, together with the Senior Facility Fee Letter, the "Fee Letters"). The terms of the Senior Facility Fee Letter are an integral part of the Agents' commitments hereunder and constitute part of this Commitment Letter for all purposes hereof. Each of the fees described in the Fee Letters and Exhibits B and C shall be nonrefundable when paid.
5. Indemnification. Rite Aid agrees to indemnify and hold harmless the Agents, each Senior Lender and each of their respective affiliates and each of their respective officers, directors, employees, agents, advisors and representatives (each, an "Indemnified Person") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and disbursements of counsel), joint or several, that may be incurred by or asserted or awarded against any Indemnified Person, (including, without limitation, in connection with any investigation, litigation or proceeding or the preparation of a defense in connection therewith), in each case arising out of or in connection with or by reason of this Commitment Letter or the Operative Documents or the Transactions contemplated hereby or thereby, or any use made or proposed to be made with the proceeds of the Senior Facility, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Person's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this paragraph applies, such indemnity shall be effective, whether or not such investigation, litigation or proceeding is brought by Rite Aid, any of its directors, securityholders or creditors, an Indemnified Person or any other person, or an Indemnified Person is otherwise a party thereto and whether or not the Transactions contemplated hereby are consummated.
No Indemnified Person shall have any liability (whether in contract, tort or otherwise) to Rite Aid or any of its directors, securityholders or creditors for or in connection with the Transactions contemplated hereby, except for direct damages (as opposed to special, indirect, consequential or punitive damages including, without limitation, any loss of profits, business or anticipated savings) determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Person's gross negligence or willful misconduct.
If any litigation or proceeding is brought against any Indemnified Person in
respect of which indemnification may be sought against Rite Aid pursuant to this
Section 5, such Indemnified Person shall promptly notify Rite Aid in writing of
the commencement of such litigation or proceeding, but the failure so to notify Rite Aid shall relieve Rite Aid from any liability which it may have hereunder only if, and to the extent that, it has been materially prejudiced by such failure and will not in any event relieve Rite Aid from any other obligation or liability that it may have to any Indemnified Person other than under this Commitment Letter. In case any such litigation or proceeding shall be brought against any Indemnified Person and such Indemnified Person shall notify Rite Aid in writing of the commencement of such litigation or proceeding, Rite Aid shall be entitled to participate in such litigation or proceeding, and, after written notice from Rite Aid to such Indemnified Person, to assume the defense of such litigation or proceeding with counsel of its choice at its expense; provided, however, that such counsel shall be satisfactory to the Indemnified Person in the exercise of its reasonable judgment; and provided further, however, that Rite Aid shall not have the right to assume the defense of any litigation or proceeding related to the security interests granted in favor of the Senior Lenders or the validity or enforceability of the documentation for the Senior Facility. Notwithstanding the election of Rite Aid to assume the defense of such litigation or proceeding, such Indemnified Person shall have the right to employ separate counsel and to participate in the defense of such litigation or proceeding, and Rite Aid shall bear the reasonable fees, costs and expenses of such separate counsel and shall pay such fees, costs and expenses at least quarterly (provided that with respect to any single litigation or proceeding or with respect to several litigations or proceedings involving substantially similar legal claims, Rite Aid shall not be required to bear the fees, costs and expenses of more than one such counsel except where such Indemnified Person requires local counsel, in which case Rite Aid shall also be required to bear the fees, costs and expenses of such local counsel) if (i) the use of counsel chosen by Rite Aid to represent such Indemnified Person would present such counsel with a conflict of interest (based upon written advice of counsel to the Indemnified Person), (ii) the defendants in, or targets of, any such litigation or proceeding include both an Indemnified Person and Rite Aid, and such Indemnified Person shall have reasonably concluded that there may be legal defenses available to it or to other Indemnified Persons which are different from or additional to those available to Rite Aid (in which case Rite Aid shall not have the right to direct the defense of such action on behalf of the Indemnified Person), (iii) Rite Aid shall not have employed counsel satisfactory to such Indemnified Person, in the exercise of the Indemnified Person's reasonable judgment, to represent such Indemnified Person within a reasonable time after notice of the institution of such litigation or proceeding or (iv) Rite Aid shall authorize in writing such Indemnified Person to employ separate counsel at the expense of Rite Aid. In any action or proceeding the defense of which Rite Aid assumes, the Indemnified Person shall have the right to participate in such litigation and retain its own counsel at such Indemnified Person's own expense. Rite Aid and each Indemnified Person agrees to use all reasonable efforts to cooperate in the defense of any action or proceeding pursuant to which a claim for indemnification is made under this Section 5.
No Indemnified Person seeking indemnification under this Commitment Letter shall, without Rite Aid's prior written consent (which consent shall not be unreasonably withheld), settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding in respect of which indemnification may be sought hereunder.
6. Costs and Expenses. Rite Aid shall pay or reimburse Citi/SSB on demand for all reasonable out-of-pocket costs and expenses incurred by Citi/SSB (whether incurred before or after the date hereof), in each case in connection with the
Senior Facility and the preparation, negotiation, execution and delivery of this Commitment Letter, the Operative Documents and any security arrangements in connection with the Senior Facility, including valuation and appraisal of the Collateral (which costs and expenses will be documented in reasonable detail), and the reasonable fees and disbursements of counsel and appraisal firms (whether incurred before or after the date hereof), whether or not any of the Transactions contemplated hereby are consummated. Rite Aid further agrees to pay all costs and expenses of Citi/SSB (including, without limitation, reasonable fees and disbursements of counsel) incurred in connection with the enforcement of any of its rights and remedies hereunder.
7. Confidentiality. By accepting delivery of this Commitment Letter, Rite Aid
agrees that this Commitment Letter is for its confidential use only and that
neither its existence nor the terms hereof will be disclosed by it to any person
other than its officers, directors, employees, accountants, attorneys and other
advisors, and then only on a confidential and "need to know" basis in connection
with the Transactions contemplated hereby. Notwithstanding the foregoing,
following Rite Aid's acceptance of the provisions hereof and its return of an
executed counterpart of this Commitment Letter to Citi/SSB as provided below,
(i) Rite Aid may file a copy of this Commitment Letter (other than the Fee
Letters) in any public record in which it is required by law to be filed and
(ii) Rite Aid may make such other public disclosures of the terms and conditions
hereof as (a) Rite Aid is required by law, in the opinion of its counsel, to
make and (b) may be necessary or advisable in connection with the Transactions.
8. Representations and Warranties. Rite Aid represents and warrants that (i) all information (other than financial projections) that has been or will hereafter be made available to the Agents, any Senior Lender or any potential Senior Lender by or on behalf of Rite Aid or any of its representatives in connection with the Transactions contemplated hereby is and will be complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which such statements were or are made and (ii) all financial projections, if any, that have been or will be prepared by or on behalf of Rite Aid or any of its representatives and made available to the Agents, any Senior Lender or any potential Senior Lender have been or will be prepared in good faith based upon assumptions that are reasonable at the time made and at the time the related financial projections are made available to the Agents. If, at any time from the date hereof until the execution and delivery of the Operative Documents, any of the representations and warranties in the preceding sentence would be incorrect if the information or financial projections were being furnished, and such representations and warranties were being made, at such time, then Rite Aid will promptly supplement the information and the financial projections so that such representations and warranties will be correct under those circumstances.
In issuing this Commitment Letter and in arranging the Senior Facility including the syndication of the Senior Facility, the Agents will be entitled to use, and to rely on the accuracy of, the information furnished to it by or on behalf of Rite Aid or any of its representatives without responsibility for independent verification thereof.
9. No Third Party Reliance, Etc. The agreements of the Agents hereunder and of
any Senior Lender that issues a commitment to provide financing under the Senior
Facility are made solely for the benefit of Rite Aid and may not be relied upon
or enforced by any other person (other than Indemnified Persons pursuant to
Section 5). This Commitment Letter is not intended to create a fiduciary
relationship among the parties hereto.
10. Sharing Information. Rite Aid acknowledges that the Agents may provide debt financing, equity capital or other services (including financial advisory services) to parties whose interests regarding the Transactions described herein and otherwise may conflict with Rite Aid's interests. Consistent with the Agents' policy to hold in confidence the affairs of its customers, the Agents will not furnish confidential information obtained from Rite Aid or its affiliates to any of its other customers. Furthermore, the Agents will not use in connection with the Transactions contemplated hereby, or furnish to Rite Aid, confidential information obtained by the Agents from any other person.
11. Assignments. Rite Aid may not assign this Commitment Letter or the Agents' commitments hereunder without the Agents' prior written consent, and any attempted assignment without such consent shall be void.
12. Amendments. This Commitment Letter may not be amended or any provision hereof waived or modified except by an instrument in writing signed by each party hereto.
13. Governing Law, Etc. This Commitment Letter shall be governed by, and construed in accordance with, the laws of the State of New York. This Commitment Letter sets forth the entire agreement among the parties with respect to the matters addressed herein and supersedes all prior communications, written or oral, with respect hereto. This Commitment Letter may be executed in any number of counterparts, each of which, when so executed, shall be deemed to be an original and all of which, taken together, shall constitute one and the same Commitment Letter. Delivery of an executed counterpart of a signature page to this Commitment Letter by telecopier shall be as effective as delivery of a manually executed counterpart of this Commitment Letter. Sections 3 through 8, 10, 13 and 14 shall survive the expiration or termination of this Commitment Letter whether or not the Operative Documents shall be executed and delivered, but, after the effectiveness of the Operative Documents, only to the extent not inconsistent with the Operative Documents.
14. Waiver of Jury Trial. Each party hereto irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Commitment Letter or the Transactions contemplated hereby or the actions of the parties hereto in the negotiation, performance or enforcement hereof.
Please indicate your acceptance of the provisions hereof by signing the enclosed copy of this Commitment Letter and the Fee Letters and returning them to Richard D. Banziger, Managing Director, Salomon Smith Barney Inc., 390 Greenwich Street, New York, New York 10013 (telecopier: (212) 723-8544) at or before 5:00 p.m. (New York City time) on May 15, 2001, at which time the commitment of the Agents set forth above (if such acceptance, deposits and payments have not occurred prior thereto) will expire.
If you elect to deliver this Commitment Letter by telecopier, please arrange for the executed original to follow by next-day courier.
Very truly yours,
CITICORP NORTH AMERICA, INC.,
By___________________________
Name:
Title: Vice President
SALOMON SMITH BARNEY INC.,
By___________________________
Name:
Title: Managing Director
THE CHASE MANHATTAN BANK,
By___________________________
Name:
Title:
J.P. MORGAN SECURITIES INC.,
By___________________________
Name:
Title:
CREDIT SUISSE FIRST BOSTON,
By___________________________
Name:
Title:
FLEET RETAIL FINANCE INC.,
By___________________________
Name:
Title:
FLEET SECURITIES, INC.,
By___________________________
Name:
Title:
ACCEPTED AND AGREED on May 15, 2001:
RITE AID CORPORATION,
By_______________________
Name:
Title:
CONFIDENTIAL EXHIBIT A
May 15, 2001
Rite Aid Corporation $1,900,000,000 Senior Secured Credit Facility Transaction Description
All capitalized terms used herein but not defined herein shall have the meanings provided in the Commitment Letter relating to this Transaction Description. The following transactions are referred to herein as the "Transactions".
1. Rite Aid will obtain a new senior secured credit facility in an aggregate principal amount of $1,900,000,000 (the "Senior Facility"), which shall be unconditionally guaranteed by its subsidiaries and secured by a first priority security interest in the Collateral (as described in Exhibit B to the Commitment Letter).
2. Rite Aid will seek to raise not less than $1,050,000,000 of gross proceeds from a combination of financings (the "Additional Financings") as described below, in each case in form and substance, including structure and terms, satisfactory to the Agents:
(a) from equity financings (other than debt for equity swaps), gross proceeds of at least $400,000,000 in cash (the "Additional Equity Financing"); and
(b) the balance from a combination of debt for equity swaps or public or private debt securities and/or real estate financings (the "Additional Debt Financing"); provided that at least $300,000,000 of such balance consists of debt for equity swaps (including those effected since March 3, 2001, other than those effected through the public exchange offer by Rite Aid in respect of its $156,000,000 5.25% Convertible Subordinated Notes due 2002 and $110,000,000 6.00% Dealer Remarketable Securities due 2003) or other equity financings.
3. Costs and expenses (including, without limitation, all fees and amounts payable under the Fee Letters) incurred for services actually provided to Rite Aid in connection with the foregoing transactions will be paid in an amount up to approximately $94,000,000 (the "Transaction Costs").
4. The estimated sources and uses of the funds necessary to consummate the Transactions are set forth in Annex I hereto (the "Sources and Uses of Funds").
ANNEX I
to Transaction Description
Rite Aid Corporation
$1,900,000,000 Senior Secured Credit Facility Sources and Uses of Funds
Sources Uses*
-------------------------------------------------------- -----------------------------------------------------------
Senior Facility -- Refinancing Existing Senior
drawn** $1,400,000,000 Facility -- drawn** $ 600,000,000
Refinancing Second Priority
Additional Financings $1,050,000,000 Indebtedness
RCF Facility $730,000,000
PCS Facility 154,000,000
Exchange Debt 170,000,000
10.5% Notes 468,000,000
Synthetic Leases 213,000,000
Prudential Notes 21,000,000
------------
$1,756,000,000
Transaction Costs and Premiums $ 94,000,000
-------------- --------------
TOTAL SOURCES $2,450,000,000 TOTAL USES $2,450,000,000
============== ==============
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CONFIDENTIAL EXHIBIT B
May 15, 2001
Rite Aid Corporation $1,900,000,000 Senior Secured Credit Facility Summary of Principal Terms and Conditions
All capitalized terms used herein but not defined herein shall have the meanings provided in the Commitment Letter and the Transaction Description relating to this Summary of Principal Terms and Conditions.
Borrower: Rite Aid Corporation, a Delaware corporation.
Transactions: As described in the Transaction Description.
Administrative Agent: Citicorp USA, Inc., or an affiliate thereof
designated by SSBI (in its individual capacity
"CUSA" and in its capacity as Administrative
Agent, the "Administrative Agent").
Collateral Agent: CUSA (in its capacity as Collateral Agent, the
"Collateral Agent").
Joint Lead Arrangers and
Joint Book Managers: Salomon Smith Barney Inc. ("SSBI") and J.P. Morgan
Securities Inc. ("JPMorgan" and, together with
SSBI, the "Joint Lead Arrangers").
Syndication Agents: JPMorgan, Credit Suisse First Boston and Fleet
Retail Finance Inc. (collectively, the
"Syndication Agents" and, together with the
Administrative Agent and the Collateral Agent, the
"Agents").
Other Agents: Other Agent titles to be determined.
Senior Lenders: A syndicate of financial institutions arranged by
SSBI (the "Senior Lenders").
Senior Facility: (A) An Amortizing Senior Secured Tranche A Term
Loan Facility (the "Tranche A Term Facility") in
an aggregate principal amount of $1,400,000,000
less the aggregate principal amount outstanding on
the Senior Facility closing date of the Borrower's
10.5% Senior Secured Notes due 2002 (the "10.5%
Notes"), after giving effect to the Borrower's
tender therefor, such aggregate principal amount
of the Tranche A Term Facility to be allocated, as
determined by the Joint Lead
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Arrangers in their discretion, entirely to or
between one or more term loan facilities.
(B) An Amortizing Senior Secured Delayed Draw
Tranche B Term Loan Facility in an aggregate
principal amount equal to the aggregate principal
amount outstanding on the Senior Facility closing
date of the 10.5% Notes, after giving effect to
the Borrower's tender therefor (the "Tranche B
Term Facility" and, together with the Tranche A
Term Facility, the "Term Facilities"); provided,
however, that to the extent the Borrower
consummates debt for equity swaps in respect of,
or otherwise reduces the outstanding principal
amount of, the 10.5% Notes after the closing of
the Senior Facility, such financings will reduce
the commitments under the Tranche B Term Facility
on a dollar-for-dollar basis.
(C) A Senior Secured Revolving Credit Facility in
an aggregate principal amount of $500,000,000 (the
"Revolving Facility").
(D) Up to $125,000,000 of the Revolving Facility
will be available as a letter of credit
subfacility.
(E) Up to $100,000,000 of the Revolving Facility
will be available as an uncommitted swing line
facility. Swing line loans must be repaid not
later than seven days after being drawn and may
not be refinanced with swing line loans.
Purpose and Availability: The Tranche A Term Facility will be fully drawn on
the date on which the conditions to the initial
borrowing specified below are satisfied (the
"Initial Funding Date"). The Tranche B Term
Facility will be available at any time on or
before the final maturity of the 10.5% Notes to
purchase the 10.5% Notes at a purchase price no
greater than par. The Revolving Facility will be
available on and after the Initial Funding Date
and at any time before the final maturity of the
Revolving Facility, in minimum principal amounts
to be agreed by the Agents and the Borrower.
Amounts borrowed under the Term Facilities that
are repaid or prepaid may not be reborrowed.
Amounts repaid under the Revolving Facility may be
reborrowed.
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Amounts borrowed under the Senior Facility will be
utilized by the Borrower solely (1) to refinance
the existing senior facility and the Second
Priority Indebtedness identified in the Sources
and Uses of Funds, (2) to pay up to approximately
$94,000,000 of transaction costs and premiums for
the Transactions, (3) to refinance $24,000,000 of
existing standby letters of credit issued by
Mellon Bank and Citibank, and (4) to finance
working capital requirements and capital
expenditures and for other permitted general
corporate purposes. Letters of credit may be
issued in the ordinary course of the Borrower's
business for permitted general corporate purposes.
Certain interest rate hedging arrangements with
Fleet and Citibank for the benefit of the Borrower
and its subsidiaries will remain outstanding, and
will be secured by a shared first-priority lien on
the Collateral. Treatment of existing trade
letters of credit issued for the benefit of the
Borrower and its subsidiaries will be as agreed in
the Operative Documents.
Final Maturity: The Term Facilities and the Revolving Facility
will mature (and all lending commitments under the
Revolving Facility will terminate) on the fourth
anniversary of the date on which definitive
documentation for the Senior Facility is executed
and delivered; provided, however, that to the
extent more than $20,000,000 of the Borrower's
$200,000,000 7.625% Debentures due April 15, 2005
remain outstanding on December 31, 2004, the Term
Facilities and the Revolving Facility will mature
(and all lending commitments under the Revolving
Facility will terminate) on March 15, 2005.
Amortization: [Term Facilities amortization schedules to be
determined by the Agents and the Borrower.]
Borrowing Base: All loans and other extensions of credit under the
Senior Facility will be subject to a borrowing
base (the "Borrowing Base") calculated as
percentages to be agreed by the Agents and the
Borrower of Eligible Receivables and Eligible
Inventory pledged as Collateral. The components,
standards of calculation and initial advance rates
of the Borrowing Base will be determined at the
reasonable judgment and consistent with the
customary practices of the Agents. Availability
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under the Borrowing Base will be reduced by (i) a
reserve in an amount equal to the Borrower's then-
current exposure upon early termination under its
existing and future interest rate hedging
agreements that have a shared security interest in
the collateral securing the Senior Facility and
(ii) a reserve in an amount equal to the aggregate
principal amount then outstanding of the
Borrower's 10.5% Notes. The Collateral Agent may
use its reasonable judgment to increase the
initial advance rates by 5%. Any increase greater
than that amount will be subject to a 662/3% vote
of the Senior Lenders and any increase in advance
rates above 80% of the orderly liquidation value
of the Eligible Inventory or 85% of the Eligible
Receivables will be subject to a 100% vote of the
Senior Lenders. The Borrowing Base will be
computed weekly with respect to accounts
receivable and store location inventory, monthly
with respect to distribution center inventory and
at other times requested by the Collateral Agent.
A Borrowing Base Certificate presenting the
Borrower's computation will be delivered to the
Collateral Agent not later than four business days
after the end of each week or the date of any such
request by the Collateral Agent and not later than
14 days after the end of each month, as
applicable.
Guarantee: All obligations of the Borrower under the Senior
Facility and under any interest protection or
other hedging arrangements entered into with a
Senior Lender (or any affiliate thereof) will be
unconditionally guaranteed (the "Guarantees") by
each existing and subsequently acquired or
organized domestic and, to the extent no adverse
tax consequences would result, foreign direct or
indirect subsidiary of the Borrower (collectively,
the "Subsidiary Guarantors") owning any assets
consisting of inventory, accounts receivable,
script lists, intellectual property, certain owned
real estate (including owned fixtures, furnishings
and equipment) and other assets to be agreed by
the Agents and the Borrower ("Specified Assets").
Collateral: The Senior Facility, the Guarantees, certain
existing and future interest protection and other
hedging arrangements entered into with a Senior
Lender (or any affiliate thereof) will be secured
by a first priority pledge of, or mortgages on,
all Specified Assets of each Subsidiary Guarantor
(whether existing or subsequently acquired or
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organized) and all proceeds of the foregoing
(collectively, the "Collateral"). Any 10.5% Notes
that remain outstanding on the Senior Facility
closing date, after giving effect to the
Borrower's tender therefor (the "Remaining 10.5%
Notes"), may be secured on a pari passu basis by a
silent first priority lien on the Collateral,
shared with the Senior Facility. Any indebtedness
incurred as Additional Debt Financings may be
secured on a pari passu basis by a silent second
priority lien on the Collateral (such secured
Additional Debt Financings, the "Second Priority
Indebtedness"). Such liens will not entitle the
Remaining 10.5% Notes or the Second Priority
Indebtedness to take any action whatsoever with
respect to the Collateral, and the Senior Lenders
will at all times control all remedies or other
actions relating to the Collateral. The holders of
the obligations under the Senior Facility and the
Remaining 10.5% Notes will have the right to
receive all proceeds of any realization on the
Collateral pursuant to the exercise of remedies on
a pari passu basis until all obligations under the
Senior Facility and the Remaining 10.5% Notes have
been paid in full. The Remaining 10.5% Notes and
the Second Priority Indebtedness will have secured
claims in bankruptcy proceedings, but the
intercreditor provisions will provide that the
holders of the Remaining 10.5% Notes and the
Second Priority Indebtedness may not vote such
claims or exercise rights with respect to such
claims in a manner adverse to the Senior Facility.
Cash Dominion: The Borrower will continue its current cash
management system. Upon the occurrence of trigger
events to be agreed by the Agents and the
Borrower, the Collateral Agent, upon its
determination or upon request by the Majority
Banks, may deliver cash sweep notices, requiring
funds in the blocked accounts to be swept to a
single concentration account. After delivery of
cash sweep notices, unless required to do
otherwise pursuant to intercreditor arrangements,
the Collateral Agent will use each day's proceeds
to reduce outstanding obligations under the
Revolving Facility and thereafter to deposit into
a cash sweep cash collateral account for the
benefit of the Senior Facility secured parties, as
collateral for the payment and performance of the
Senior Facility obligations. As long as no default
or event of default shall have occurred and be
continuing, the Borrower will have access to the
Revolving Facility during a cash sweep period. The
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Collateral Agent may send a cash sweep notice on
each occasion of the occurrence of a trigger
event.
During a cash sweep period, upon the occurrence of
certain events to be agreed by the Agents and the
Borrower, the Collateral Agent shall automatically
rescind any Cash Sweep Notice.
Interest Rates and Fees: As set forth in Annex I hereto and in the Senior
Facility Fee Letter.
Optional Prepayments and
Reductions in Commitments: Optional prepayments of borrowings under the
Senior Facility, and optional reductions of the
unutilized portion of the Senior Facility
commitments, will be permitted at any time, in
minimum principal amounts to be agreed by the
Agents and the Borrower, without premium or
penalty, subject to reimbursement of the Senior
Lenders' redeployment costs in the case of a
prepayment of LIBOR borrowings other than on the
last day of the relevant interest period.
Mandatory Prepayments: The Senior Facility will be subject to mandatory
prepayment as follows:
(a) with the net cash proceeds of sales of
Specified Assets and sales of capital stock of
any subsidiary of the Borrower owning any
Specified Assets (other than sales in the
ordinary course of business and other limited
exceptions to be agreed by the Agents and the
Borrower), to be applied pro rata to the
Revolving Facility, the Tranche A Term
Facility and the Tranche B Term Facility.
(b) with the net cash proceeds of certain
permitted capital markets transactions, to be
applied:
(i) first, to the extent that the Borrower
is not in compliance with the Borrowing
Base requirements, pro rata to the
Revolving Facility, the Tranche A Term
Facility and the Tranche B Term Facility
until such noncompliance is remedied,
and
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(ii) second, in an amount up to $300,000,000, to the payment or defeasance of the Borrower's $156,000,000 5.25% Convertible Subordinated Notes due 2002, and $110,000,000 6.00% Dealer Remarketable Securities due 2003 (or the deposit in a cash collateral account securing the Senior Facility of an amount required to repay such securities when callable at par), with the balance, if any, of such $300,000,000 to be available to the Borrower for general corporate purposes, and
(iii) third, with respect to 75% of the balance of such net cash proceeds, pro rata to the Tranche A Term Facility and the Tranche B Term Facility and, with respect to 25% of the balance of such net cash proceeds, to general corporate purposes of the Borrower.
Such permitted capital markets transactions may consist of equity or of certain capital markets debt.
In the case of prepayments in respect of sales of Specified Assets and sales of capital stock of any subsidiary of the Borrower owning any Specified Assets, allocations within the Senior Facility will be made pro rata based on the outstanding amounts of the Tranche A Term Facility and the Tranche B Term Facility and the outstanding amount plus unused commitments of the Revolving Facility. Funds allocated to the Revolving Facility from prepayments in respect of sales of Specified Assets and sales of capital stock of any subsidiary of the Borrower owning any Specified Assets will be applied to permanently reduce the Revolving Facility commitment (with corresponding prepayments of obligations under the Revolving Facility). In the case of prepayments in respect of permitted capital markets transactions, allocations within the Senior Facility in respect of prepayments required to be applied pro rata to the Revolving Facility, the Tranche A Term Facility and the Tranche B Term Facility will be made pro rata based on the outstanding amounts of the Revolving Facility, the Tranche A Term Facility and the Tranche B Term Facility. Funds allocated to the Revolving Facility, the Tranche A Term Facility or the Tranche B Term Facility from prepayments in respect of permitted capital markets transactions will be applied to prepay
outstanding principal amounts, and, in the case of
the Term Facilities, will be allocated to
scheduled amortization payments in reverse
chronological order.
Borrowings under the Senior Facility (including
the face amount of outstanding letters of credit)
must be prepaid (or cash collateralized) on any
date when the aggregate principal amount thereof
exceeds the Borrowing Base by an amount sufficient
to eliminate such excess.
Letters of Credit: Letters of credit under the Revolving Facility
will be issued by one or more Senior Lenders (or
an affiliate thereof) to be agreed (collectively,
the "Issuing Lender"). Each letter of credit shall
expire not later than the earlier of (a) 12 months
after its date of issuance and (b) the fifth
business day before the final maturity of the
Revolving Facility.
Drawings under any letter of credit shall be
reimbursed by the Borrower (or converted to loans
under the Revolving Facility) on the same business
day. To the extent that the Borrower does not
reimburse the Issuing Lender on the same business
day, the Senior Lenders under the Revolving
Facility shall be irrevocably obligated to
reimburse the Issuing Lender pro rata based upon
their respective Revolving Facility commitments,
with the amount of such reimbursement payment
being deemed to be a drawing under the Revolving
Facility.
The issuance of all letters of credit shall be
subject to the customary procedures of the Issuing
Lender.
Representations
and Warranties: Usual for facilities and transactions of this type
and others appropriate to this transaction to be
reasonably specified by the Agents (including
customary exceptions and materiality thresholds),
including, without limitation:
1. Corporate status and authority.
2. Execution, delivery, and performance of loan
documents and transactions contemplated
thereby do not violate law or other
agreements.
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3. No government or regulatory approvals required, other than approvals in effect.
4. No litigation which would (i) have a material adverse effect on the business, financial position, results of operations or prospects of the Borrower and its subsidiaries, taken as a whole, (ii) affect the legality, validity and enforceability of the loan documents (including without limitation, the validity, enforceability or priority of security interests to be granted) or (iii) impair the Borrower's or its subsidiaries' ability to perform its or their obligations under the loan documents.
5. Environmental matters.
6. There not having occurred any material adverse change in the business, assets, operations, properties, condition (financial or otherwise), contingent liabilities, prospects or material agreements of Rite Aid and its subsidiaries, taken as a whole, since March 3, 2001.
7. Financial condition; accuracy of financial statements.
8. Material compliance with laws and regulations (including ERISA, margin regulations and all applicable environmental laws and regulations) and material agreements.
9. Legality, validity, binding effect and enforceability of the loan documents.
10. Inapplicability of the Investment Company Act and Public Utility Holding Company Act.
11. Solvency.
12. Payment of taxes.
13. Validity, priority and perfection of security interests in the Collateral, and location of accounts receivable, inventory, receivables, real estate and intellectual property in Subsidiary Guarantors.
14. No conflicts with laws, material contracts,
etc.
15. Properties.
16. Insurance.
17. Labor matters.
18. Accuracy of information.
19. Subsidiaries.
Conditions Precedent
to Initial Borrowing: Usual for facilities and transactions of this
type, including those specified in the Summary of
Additional Conditions Precedent attached as
Exhibit C to the Commitment Letter, and others
appropriate to this transaction to be reasonably
specified by the Agents.
Affirmative Covenants: Usual for facilities and transactions of this type
and others appropriate to this transaction to be
reasonably specified by the Agents (to be
applicable to the Borrower and the Borrower's
subsidiaries), including, without limitation, and
subject, in each case, to customary exceptions and
materiality standards to be agreed by the Agents
and the Borrower:
1. Preservation of corporate existence and
maintenance of material rights.
2. Material compliance with laws (including ERISA
and applicable environmental laws).
3. Payment of taxes.
4. Payment or performance of obligations.
5. Delivery of audited and unaudited financial
statements.
6. Other reporting requirements, including with
respect to the Borrowing Base and information
with respect to the Collateral and perfection
of security interests, and notices of default,
litigation and other adverse matters.
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7. Visitation rights, including Collateral and
Borrowing Base reviews.
8. Maintenance of books and records.
9. Maintenance of properties.
10. Maintenance of insurance.
11. Use of proceeds.
Negative Covenants: Usual for facilities and transactions of this type
and others appropriate to this transaction to be
reasonably specified by the Agents (to be
applicable to the Borrower and the Borrower's
subsidiaries), including, without limitation,
subject in each case to customary exceptions and
materiality standards to be agreed by the Agents
and the Borrower:
1. Limitations on liens. Security interests with
respect to existing trade letters of credit
that continue after the closing date will be
permitted.
2. Limitations on incurrence of debt (including
obligations in respect of foreign currency
exchange and other hedging arrangements) and
contingent obligations. Treatment of existing
trade letter of credit arrangements will be as
agreed in the Operative Documents. The Senior
Facility will permit the issuance of certain
capital markets debt as described below, the
proceeds of which will not be required to be
applied as a "Mandatory Prepayment": (a) up to
$200,000,000 aggregate principal amount of
secured debt, subordinated only to the Senior
Facility and any Remaining 10.5% Notes, with
terms and conditions satisfactory to Senior
Lenders holding more than 66 2/3% of the
aggregate amount of the loans and commitments
under the Senior Facility and (b) an aggregate
principal amount of debt with the same terms
as the Additional Debt Financing described in
item 1(a) of Exhibit C in an amount not in
excess of (x) $300,000,000 plus (y) an amount,
not in excess of $140,000,000, by which the
equity financing component (including debt for
equity swaps) of the Additional Financings
effected on or prior to the closing of the
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Senior Facility exceeds $700,000,000, provided
that not less than $260,000,000 of the
proceeds of such debt are used to refinance
outstanding debt of the Borrower.
3. Limitations on dividends, redemptions and
repurchases with respect to capital stock and
on loans and investments.
4. Limitations on prepayments, redemptions and
repurchases of certain debt.
5. Limitations on loans and investments.
6. Limitations on capital expenditures.
7. Limitations on mergers, consolidations,
acquisitions, asset dispositions and
sale/leaseback transactions.
8. Limitations on transactions with affiliates.
9. Limitations on changes in business conducted
by the Borrower and its subsidiaries.
10. Limitations on amendment of certain debt and
other material agreements.
11. Limitations on the issuance and sale of
capital stock of subsidiaries.
12. Limitations on restrictions on distributions
from subsidiaries.
13. Limitation on negative pledges granted to
other creditors.
Selected Financial
Covenants: Usual for facilities and transactions of this
type, including, without limitation, minimum
EBITDA, a minimum interest coverage ratio and a
minimum fixed charge coverage ratio.
Events of Default: Usual for facilities and transactions of this type
and others appropriate to this transaction to be
reasonably specified by the Agents, including,
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without limitation:
1. Failure to pay principal when due and interest
or any other amount within five days of the
due date thereof.
2. Representations or warranties materially
incorrect when given.
3. Failure to comply with covenants (with notice
and cure periods as applicable).
4. Cross-default to payment defaults on principal
aggregating $25,000,000, or default or event
of default if the effect is to accelerate or
(with lapse of time, notice or both) permit
acceleration.
5. Unsatisfied judgment or order in excess of
$25,000,000 individually or of $25,000,000 in
the aggregate.
6. Bankruptcy or insolvency.
7. ERISA events.
8. Change of control or ownership.
9. Actual invalidity, or invalidity asserted by
Rite Aid or any of its subsidiaries, of any
loan document.
10. Invalidity, non-perfection or loss of priority
of any material lien (with cure periods as
applicable).
Voting: Amendments and waivers of the loan documents will
require the approval of Senior Lenders holding
more than 50% of the aggregate amount of the loans
and commitments under the Senior Facility, except
that (a) the consent of each affected Senior
Lender shall be required with respect to matters
usual for facilities and transactions of this
type, including those matters set forth in the
existing senior facility (with such changes
appropriate to this transaction as may be
reasonably satisfactory to the Agents) and
including, (i) waiver of any condition precedent
to the initial borrowing, (ii) increases in
commitments of the Senior Lenders, (iii)
reductions of principal, interest or fees, (iv)
extensions of any date fixed for payment of
principal or interest or of final maturity, (v)
releases of all or substantially all of the
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Collateral (other than in connection with any sale or financing of Collateral permitted by the loan documents) and (b) the consent of Senior Lenders holding more than 50% of the Revolving Facility and more than 50% of each adversely affected tranche of the Term Facilities shall be required with respect to any amendment that changes the allocation between the Revolving Facility, the Tranche A Term Facility and the Tranche B Term Facility (or any combination thereof) of any mandatory prepayments under the Senior Facility.
Assignment and Participation: The Senior Lenders will have the right to assign
loans and commitments to (i) their affiliates,
(ii) other Senior Lenders or (iii) any Federal
Reserve Bank, in each case without restriction, or
to other financial institutions, with the consent,
not to be unreasonably withheld, of the Agents and
the Borrower (but the Borrower's consent shall not
be required if an Event of Default shall have
occurred and be continuing). Minimum aggregate
assignment level (except other Senior Lenders) of,
in the case of the Revolving Facility, $5,000,000
and, in the case of the Term Facilities,
$1,000,000 and increments of $1,000,000 in excess
thereof. The parties to the assignment (other than
the Borrower) shall pay to the Administrative
Agent an administrative fee of $1,000.
Each Senior Lender will have the right to sell
participations in its rights and obligations under
the loan documents, subject to customary
restrictions on the participants' voting rights.
Yield Protection, Taxes
and Other Deductions: (1) The loan documents will contain yield
protection provisions, customary for
facilities of this nature, protecting the
Senior Lenders in the event of unavailability
of funding, funding losses, reserve and
capital adequacy requirements.
(2) All payments to be free and clear of any
present or future taxes, withholdings or other
deductions whatsoever (other than income taxes
in the jurisdiction of the Senior Lender's
applicable lending office). The Senior Lenders
will use reasonable efforts to minimize to the
extent possible any applicable taxes and the
Borrower will indemnify the Senior Lenders and
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the Agents for such taxes paid by the Senior
Lenders or the Agents.
Expenses: The Borrower will reimburse all reasonable out-of-
pocket expenses (including, without limitation,
expenses incurred in connection with due
diligence, Collateral and Borrowing Base
appraisals and fees and expenses of counsel) (a)
of Citi/SSB and SSBI incurred by them in
connection with the preparation, syndication and
execution of the Senior Facility and the loan
documents and (b) of Citi/SSB, SSBI and the Senior
Lenders incurred by them in connection with the
waiver, modification and enforcement of the Senior
Facility and the loan documents. Such amounts
shall be reimbursed by the Borrower upon
presentation of a statement of account, whether or
not the Initial Funding Date occurs or the loan
documents are executed and delivered.
Governing Law and Forum: New York.
Counsel to Citi/SSB and SSBI: Cravath, Swaine & Moore.
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ANNEX I
to Exhibit B
Rite Aid Corporation
$1,900,000,000 Senior Secured Credit Facility Interest Rates and Fees
Interest Rates: The interest rates under the Revolving Facility
and the Term Facility are LIBOR plus a spread of
3.50% or Base Rate plus a spread of 2.50%.
The Borrower may choose LIBOR or Base Rate pricing
and may elect interest periods of 7 days or 1, 1
1/2, 2, 3 or 6 months for LIBOR borrowings, except
that all swing line loans will have Base Rate
pricing.
Calculation of interest shall be on the basis of
actual days elapsed in a year of 360 days (or 365
or 366 days, as the case may be, in the case of
Base Rate loans).
Interest will be payable in arrears (a) for loans
accruing interest at a rate based on LIBOR, at the
end of each interest period (but not less
frequently than every 3 months) and on the
maturity date, (b) for loans accruing interest
based on the Base Rate, quarterly in arrears and
on the maturity date.
"Base Rate" means the highest of (a) Citibank,
N.A.'s base rate, (b) the Federal Funds Effective
Rate plus 1/2 of 1% and (c) the Base CD Rate plus
1/2 of 1%.
LIBOR will at all times include statutory
reserves.
Default Rate: The applicable interest rate plus 2% per annum.
Commitment Fees: 0.5% per annum on the undrawn portion of the
commitments in respect of the Revolving Facility,
payable quarterly in arrears. 0.75% per annum on
the undrawn portion of the commitments in respect
of the Tranche B Term Facility, payable quarterly
in arrears.
Letter of Credit Fee: A per annum fee equal to the spread over LIBOR
under the Revolving Facility will accrue on the
aggregate face amount of outstanding letters of
credit under the Revolving Facility, payable
quarterly in arrears and on the termination of the
Revolving Facility, in each case for the actual
number of days elapsed over a 360-day year. Such
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fees shall be distributed to the Senior Lenders
participating in the Revolving Facility pro rata
in accordance with the amount of each such Senior
Lender's Revolving Facility commitment. In
addition, the Borrower shall pay to the Issuing
Lender, for its own account, (a) a fronting fee of
1/4 of 1% per annum on the aggregate face amount
of outstanding letters of credit, payable
quarterly in arrears and on the termination of the
Revolving Facility, in each case for the actual
number of days elapsed over a 360-day year, and
(b) customary issuance and administration fees.
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CONFIDENTIAL EXHIBIT C
May 15, 2001
Rite Aid Corporation $1,900,000,000 Senior Secured Credit Facility Summary of Additional Conditions Precedent
All capitalized terms used herein but not defined herein shall have the meanings provided in the Transaction Description and the Summary of Principal Terms and Conditions relating to this Summary of Additional Conditions Precedent.
The initial borrowing under the Senior Facility shall be subject to the following additional conditions precedent:
1. Consummation of Additional Financings. The Additional Financings shall have been consummated, and in connection therewith:
(a) Any indebtedness incurred as Additional Debt Financing shall:
(i) Have a maturity date after January 1, 2006.
(ii) If any security is granted, be limited to a silent second priority security interest in the Collateral on terms acceptable to the Agents. If any real estate financings are consummated, collateral therefor shall be limited to the real estate financed.
(iii) Have no rights to additional collateral.
The terms and conditions of the Additional Financings, and all documentation and agreements relating thereto, shall be reasonably satisfactory to the Agents and the Senior Lenders.
2. Senior Facility Documentation. The documentation for the Senior Facility shall have been executed and delivered and shall be reasonably satisfactory to each of the Agents and the Senior Lenders. The holders of the Remaining 10.5% Notes and the Second Priority Indebtedness or their representatives shall have entered into, or otherwise become subject to, intercreditor arrangements reasonably satisfactory to the Agents and the Senior Lenders providing for, in the case of the Remaining 10.5% Notes, the silent first priority lien shared with the Senior Facility on the Collateral and, in the case of the Second Priority Indebtedness, the silent second priority lien on the Collateral, in each case described under the heading "Collateral" in the Summary of Principal Terms and Conditions.
3. Collateral and Guarantees. All Specified Assets of the Borrower's subsidiaries (other than foreign subsidiaries to the extent adverse tax consequences would result and de minimis Specified Assets owned by the Borrower) shall be owned by Subsidiary Guarantors and the Senior Lenders shall have a first-priority perfected security interest in the Collateral. Notwithstanding anything to the contrary, none of the assets of the Borrower shall be pledged as Collateral. The Agents shall be reasonably satisfied that all material Specified Assets acquired as of and after the Funding Date will be owned by Subsidiary
Guarantors and subject to a first priority perfected security interest securing the Senior Facility obligations and, on a silent pari passu basis, the Remaining 10.5% Notes.
4. Business Plan. There not having been any material changes to the five-year business plan of Rite Aid which has been previously delivered to the Agents.
5. Borrowing Base; Valuation and Appraisal; Field Examination. The Borrowing Base shall be sufficient to support the initial borrowings under the Senior Facility. The Administrative Agent shall have received such valuations and appraisals of the Borrowing Base by independent appraisal firms reasonably satisfactory to the Administrative Agent as the Administrative Agent shall reasonably request. The Administrative Agent shall have completed completion of a field examination of the Collateral, the results of which shall be satisfactory to the Senior Lenders.
6. Environmental and Employee Health and Safety. The Agents and the Senior Lenders shall be reasonably satisfied as to the amount and nature of any environmental liabilities and exposures relating to the properties to be mortgaged, and any employee health and safety liabilities and exposures to which the Borrower and its subsidiaries may be subject and with the plans of the Borrower with respect thereto. The Agents shall have received such information as they may reasonably request from an environmental consulting firm satisfactory to the Agents.
7. Litigation. There shall be no litigation which would (i) have a material adverse effect on the business, financial position, results of operations or prospects of the Borrower and its subsidiaries, taken as a whole, (ii) affect the legality, validity and enforceability of the loan documents (including without limitation, the validity, enforceability or priority of security interests to be granted) or (iii) impair the Borrower's or its subsidiaries' ability to perform its or their obligations under the loan documents.
8. Working Capital. The Agents shall be reasonably satisfied with the sufficiency of amounts available under the Senior Facility, and immediately following the consummation of the Transactions, actual borrowing availability under the Revolving Facility shall be at least $200,000,000.
9. No Conflicts. The consummation of the Transactions, including the Senior Facility and the other transactions contemplated hereby, shall not (a) violate any applicable law, statute, rule or regulation or (b) conflict with, or result in a default or event of default or an acceleration of any rights or benefits under, any material agreement of the Borrower or any of its subsidiaries, and the Agents and the Senior Lenders shall have received one or more legal opinions to such effect, satisfactory to the Agents, from counsel to the Borrower satisfactory to the Agents.
10. Consents. All requisite material governmental authorities and third parties shall have approved or consented to the transactions contemplated hereby to the extent required, all applicable appeal periods shall have expired and there shall be no governmental or judicial action, actual or threatened, that could reasonably be expected to restrain, prevent or impose burdensome conditions on the transactions contemplated hereby.
11. Material Adverse Change. Absence of any material adverse change in the business, assets, operations, properties, condition (financial or otherwise), contingent liabilities, prospects or material agreements of Rite Aid and its subsidiaries, taken as a whole, since March 3, 2001.
12. Contractual Restrictions. The Senior Lenders' satisfaction that the Borrower and its subsidiaries are not subject to material contractual or other restrictions that would be violated by the contemplated transactions, including the granting of security interests and guarantees by subsidiaries.
13. Title Searches. The Collateral Agent shall have received mortgage and lien searches with respect to the real estate Collateral reasonably satisfactory to the Agents; provided that, in the case of real estate Collateral with respect to which mortgage and lien searches were performed in connection with the existing senior facility, such searches shall be limited to updates of the searches previously performed.
14. 10.5% Notes. The 10.5% Notes shall have been redeemed or defeased or a tender offer for any and all 10.5% Notes shall have been consummated on an any or all basis by the Borrower, on terms reasonably satisfactory to the Agents.
15. Miscellaneous Closing Conditions. Other customary closing conditions, including delivery of satisfactory legal opinions of the Borrower's and the Agents' counsel, other financial information to be agreed by the Agents and the Borrower; accuracy of representations and warranties; absence of defaults, prepayment events or creation of liens under debt instruments or other agreements as a result of the transactions contemplated hereby; evidence of authority; compliance with applicable laws and regulations (including but not limited to ERISA, margin regulations and environmental laws); payment of fees
and expenses; and obtaining of satisfactory insurance.
EXHIBIT 10.45
EQUITY FOR BANK DEBT EXCHANGE AGREEMENT
This Equity for Bank Debt Exchange Agreement (the "Exchange Agreement"), dated as of April 12, 2001 (the "Effective Date"), is entered into by and between Rite Aid Corporation, a Delaware corporation (the "Company"), and Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P. (collectively, "Fir Tree").
WHEREAS, the Company desires to reduce its indebtedness; and
WHEREAS, Fir Tree holds, or has entered into agreements to acquire, $53,535,249 aggregate principal amount of indebtedness under the Company's RCF Credit Facility due August 15, 2002 (the "RCF Facility"); and
WHEREAS, Fir Tree desires to exchange $53,535,249 aggregate principal amount of the RCF Facility (the "Bank Debt") for shares of common stock, $1.00 par value per share (the "Common Stock") of the Company (the "Exchange"); and
WHEREAS, Fir Tree and the Company have agreed that it is in their mutual interest to exchange the Bank Debt for shares of Common Stock;
NOW THEREFORE, in consideration of the premises and the agreements and representations contained herein, the parties hereto do hereby agree as follows:
1. Definitions. As used herein, the following terms have the following meanings:
"Average Price" means the sum of the volume weighted average price (as calculated for the period beginning at 9:30 a.m. New York Time ("NYT") and concluding at 4:00 p.m. NYT) per share of Common Stock on the NYSE for each day of the Pricing Period as reported by Bloomberg Financial LP (using the AQR function) divided by 30.
"Bank Debt Exchange Price" means 100% of the principal amount of the Bank Debt.
"Interest Rate" means the interest rate payable to holders of Euro-Dollar Loans pursuant to the RCF Facility provided that if the RCF Facility has been redeemed, the last interest rate payable prior to the date of redemption of the RCF Facility.
"NYSE" means the New York Stock Exchange.
"Pricing Period" means the 30 consecutive trading days on the NYSE, beginning April 9, 2001.
"Stock Exchange Price" means 96% of the Average Price during the Pricing Period.
2. Exchange. Within three business days following the last day of the Pricing Period, Fir Tree will deliver the Bank Debt (except and only to such extent that Fir Tree is unable to close any acquisition of any Bank Debt as a result of circumstances beyond its reasonable control) to such person or entity as the Company and Fir Tree mutually agree (the "Escrow Agent") and the Company will deliver to the Escrow Agent a certificate representing such number of shares, rounded to the nearest whole number (the "Shares"), of Common Stock and a certificate representing an equal number of shares of Class C Preferred Stock of the Company (the "Preferred Shares") having the designations rights and preferences set forth in the certificate of designation attached as Exhibit A hereto, equal to the Bank Debt divided by the Stock Exchange Price. Any interest paid on the Bank Debt while held in escrow will be paid promptly to Fir Tree. The Company will use its best efforts to file a registration statement to cover resales of the Shares pursuant to the Securities Act of 1933, as amended (the "Securities Act"). The Exchange Date shall be deemed to be the earlier of (x) the date upon which the Shares are registered (the "Registration Date") for resale under the Securities Act (the "Registration Exchange Date"), and, (y) the date upon which the aggregate principal amount of the RCF Facility is repaid in full (the "Refinancing Exchange Date"). During the Pricing Period, the Company, Fir Tree and the Escrow Agent will enter into an escrow agreement on terms as the parties mutually agree.
3. Exchange Date on or Before August 20, 2001. If the Exchange Date occurs on or before August 20, 2001 and the Exchange Date is the Registration Exchange Date, the Escrow Agent will deliver (a) the certificate(s) representing the Shares to Fir Tree in such names and denominations as Fir Tree provides in writing to the Company, and (b) the Bank Debt and a certificate representing the Preferred Shares to the Company. If the Exchange Date occurs on or before August 20, 2001 and the Exchange Date is the Refinancing Exchange Date, the Escrow Agent will deliver (a) the certificate(s) representing the Preferred Shares to Fir Tree in such names and denominations as Fir Tree provides in writing to the Company, and (b) the Bank Debt and a certificate representing the Shares to the
Company. On the Exchange Date, whether such Exchange Date is the Registration Exchange Date or the Refinancing Exchange Date, the Company shall pay Fir Tree the accrued and unpaid interest on the Bank Debt pursuant to the RCF Facility.
4. Exchange Date Between August 21, 2001 and November 21,
2001. If both the Exchange Date and the Registration Date occur between August
21, 2001 and November 21, 2001, in addition to the obligations set forth in
Section 3 above, the Company shall pay Fir Tree, as liquidated damages
("Liquidated Damages") for the Company's failure to cause the registration
statement covering the Shares to be declared effective by August 21, 2001, an
amount equal to 12% per annum of the Bank Debt minus the Interest Rate (the
"Liquidated Damages Rate") for each day in the period from August 21, 2001 until
the Exchange Date, provided that both the Exchange Date and the Registration
Date occur on or before November 21, 2001. Liquidated Damages shall be paid by
the Company to Fir Tree on the same dates and in the same manner as if such
payment was a payment of interest pursuant to Section 2.04 of the RCF Facility.
5. Exchange Date After November 21, 2001. If both the Exchange Date and the Registration Date do not occur by November 21, 2001, then the Liquidated Damages Rate shall increase to 18% per annum minus the Interest Rate for each day in the period from November 22, 2001 until both the Exchange Date and the Registration Date have occurred. Liquidated Damages shall be paid by the Company to Fir Tree on the same dates and in the same manner as if such payment was a payment of interest pursuant to Section 2.04 of the RCF Facility
6. Event of Default on RCF Facility. If prior to the Exchange Date, an Event of Default has occurred under the RCF Facility, as defined in the RCF Facility, then Fir Tree shall have the option not to consummate the Exchange, and to instruct the Escrow Agent to release the Bank Debt to Fir Tree including interest thereon, and the certificates evidencing the Shares and the Preferred Shares shall be delivered to the Company for cancellation and this Exchange Agreement shall be deemed null and void and neither Fir Tree nor the Company shall have any liability to the other arising out of this Exchange Agreement. Fir Tree must make such election within five business days notice of such Event of Default.
7. Representations and Warranties. The Company represents and warrants to Fir Tree that: (x) the issuance and delivery of the Shares or the Preferred Shares, as the case may be, to Fir Tree will not violate: (a) the Company's Articles of Incorporation or Bylaws, (b) any material agreement to which the Company is a party, including any indenture; or (c) any applicable federal or state statute,
rule or regulation that would prevent the Company from carrying out its obligations hereunder; (y) no representation or warranty contained herein or information appearing in any writing in connection with the transactions contemplated hereby furnished to Fir Tree or in any document filed since October 11, 2000 with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading, (z) the Shares or the Preferred Shares, as the case may be, when released from escrow and issued in accordance with this Exchange Agreement, will be validly issued, fully paid and non-assessable, and (aa) this Exchange Agreement has been validly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, subject to standard bankruptcy and equitable remedies exceptions.
8. Investment Representations. Fir Tree understands that the Shares and the Preferred Shares have not been registered under the Securities Act and that the certificates for the Shares and the Preferred Shares will bear a legend to that effect. Fir Tree also understands that the Shares and the Preferred Shares, as the case may be, are being offered and sold pursuant to an exemption from registration contained in the Securities Act, based in part upon their representations contained in this Exchange Agreement. Fir Tree hereby represents and warrants as follows:
(a) Acquisition for Own Account. Fir Tree is acquiring the Shares or the Preferred Shares, as the case may be, for its own account for investment and not with a view toward distribution.
(b) General Solicitation. Neither Fir Tree nor anyone acting on its behalf has made or will make offers or sales of the Shares or the Preferred Shares in the United States by means of any form of general solicitation or general advertising (each within the meaning of Regulation D under the Securities Act) in the United States in violation of applicable securities laws.
(c) Ability to Protect Own Interests. Fir Tree represents that by reason of its business or financial experience, or the business and financial experience of its management, it has the capacity to protect its own interests in connection with the transaction contemplated in this Exchange Agreement. Fir Tree is not a corporation formed for the specific purpose of consummating this transaction.
(d) Accredited Investor. Fir Tree represents that it is an "accredited investor" as that term is defined in Regulation D promulgated under the Securities Act.
(e) Access to Information. Fir Tree has been given access to all publicly available Company documents, records, and other information, has received physical delivery of all those which it has requested, and has had adequate opportunity to ask questions of, and receive answers from, the Company's officers, employees, agents, accountants, and representatives concerning the Company's business, operations, financial condition, assets, liabilities, and all other matters relevant to its investment in the Shares or the Preferred Shares, as the case may be.
(f) Compliance with Laws. Fir Tree and its transferees will comply with all material filing and other reporting obligations under all applicable law which shall be applicable to it with respect to the Shares and the Preferred Shares, as the case may be.
(g) Enforceability. This Exchange Agreement has been duly authorized, and executed and delivered by Fir Tree and (assuming the due authorization, execution and delivery thereof by the Company) constitutes a valid and binding obligation of Fir Tree, enforceable in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity).
9. Furnishing Information by Fir Tree. The Company may require Fir Tree to furnish to the Company such information, including but not limited to the names and denominations to be included in the registration statement, regarding Fir Tree and Fir Tree's intended method of distribution of the Shares as the Company may from time to time reasonably request in writing, Fir Tree agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by Fir Tree to the Company or of the occurrence of any event in either case as a result of which any prospectus relating to such registration contains or would contain an untrue statement of a material fact regarding Fir Tree or Fir Tree's intended method of distribution of Shares or omits to state any material fact regarding Fir Tree or Fir Tree's intended method of distribution of Shares required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly to furnish
information so required so that such prospectus shall not contain, with respect to Fir Tree or the distribution of such Shares, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing.
10. Indemnity.
(a) The Company will indemnify Fir Tree and its officers, directors, partners, agents, employees and representatives against all expenses, claims, losses and liabilities arising out of or based upon any breach of any representation, warranty or covenant contained herein, or arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document incident to the registration of the Shares, qualification or compliance, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse Fir Tree for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in strict conformity with written information furnished to the Company by Fir Tree and provided specifically for use therein.
(b) Fir Tree will indemnify the Company and its officers, directors, partners, agents, employees and representatives against all expenses, claims, losses and liabilities arising out of or based upon any breach of any representation, warranty or covenant contained herein, or arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document incident to the registration of the Shares, qualification or compliance, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse the Company for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in strict conformity with written information furnished to Fir Tree by the Company and provided specifically for use therein.
(c) Each party entitled to indemnification under this Section
10 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claims as to which indemnity may be sought and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party, whose approval shall not
unreasonably be withheld or delayed, and the Indemnified Party may participate
in such defense with counsel reasonably acceptable to and paid for by the
Indemnifying Party but otherwise at the Indemnified Party's expense, and
provided, further, that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 10 to the extent such failure is not materially prejudicial.
No Indemnifying Party in the defense of any such claim or litigation shall
except with the consent of each Indemnified Party, consent to entry of any
judgement or enter into any settlement which does not include an unconditional
release of such Indemnified Party from all liability in respect of such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 10 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statements of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
11. Governing Law. This Exchange Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law rules contained therein.
12. Amendments and Waivers. Any term of this Exchange Agreement may be amended or modified and the observance of any term of this Exchange Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the prior written consent of the Company and Fir Tree.
13. Further Assurances. The Company and Fir Tree agree to enter into a registration rights agreement during the Pricing Period, on customary terms, which terms will include but not be limited to customary black-outs, carve outs and indemnity.
14. Miscellaneous. This Exchange Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns and affiliates of the parties hereto, whether so expressed or not. Except as aforesaid, this Exchange Agreement shall not inure to the benefit of any third party. This Exchange Agreement embodies the entire agreement and understanding between Fir Tree and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof. The headings in this Exchange Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Exchange Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.
15. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile or similar writing) and shall be given to such party at its address, facsimile number or telex number set forth on the signature pages hereof. Each such notice, request or other communication shall be effective (i) if given by telex, when transmitted to the telex number referred to in this Section 15 and the appropriate answer back is received, (ii) if given by facsimile, when transmitted to the facsimile number referred to on the signature page and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address referred to in this Section.
IN WITNESS WHEREOF, the parties have caused this Exchange Agreement to be duly executed as of the Effective Date.
FIR TREE VALUE FUND, L.P.
FIR TREE INSTITUTIONAL VALUE FUND, L.P.
FIR TREE VALUE PARTNERS LDC
FIR TREE RECOVERY MASTER FUND, L.P.
RITE AID CORPORATION
EXHIBIT 10.46
RITE AID CORPORATION
30 Hunter Lane
Camp Hill, Pennsylvania 17011
April 30, 2001
Ladies and Gentlemen:
Reference is made to that certain Equity for Bank Debt Exchange Agreement, dated as of April 12, 2001, by and between Rite Aid Corporation (the "Company") and Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P., Fir Tree Value Partners LDC and Fir Tree Recovery Master Fund, L.P. (collectively, "Fir Tree"). All capitalized terms used but not defined herein shall have the meanings set forth in the Exchange Agreement. In connection with the exchange of up to $135 million aggregate principal amount of indebtedness under the Company's RCF Credit Facility for shares of Common Stock, we hereby agree as follows:
(1) The definition of "Bank Debt" is hereby amended and will hereinafter be defined as $132,658,503.67 of the RCF Facility. As of the date hereof, Fir Tree has acquired $45,035,248.82 (the "Acquired Bank Debt") of the Bank Debt and has executed definitive and binding agreements to acquire the remaining $87,623,254.85 of the Bank Debt (the "Remaining Bank Debt").
(2) The definition of "Pricing Period" is hereby amended and will hereinafter be defined as the nineteen (19) consecutive trading days on the NYSE, beginning on April 9, 2001 and ending on May 4, 2001.
(3) The definition of "Average Price" is hereby amended and will
hereinafter be defined as the sum of the volume weighted
average price (as calculated for the period beginning at 9:30
a.m. New York Time ("NYT") and concluding at 4:00 p.m. NYT)
per share of Common Stock on the NYSE for each day of the
Pricing Period as reported by Bloomberg Financial LP (using
the AQR function) divided by 30.
(4) Computershare Trust Company, Inc. will serve as the Escrow Agent.
(5) Section 2 of the Exchange Agreement is hereby deleted in its entirety and is amended and replaced with the following:
"Within three business days following the last day of the
Pricing Period, Fir Tree will deliver an assignment, in the
form attached as Exhibit A hereto, with respect to (the
"Assignment") the Acquired Bank Debt to such person or entity
as the Company and Fir Tree mutually agree (the "Escrow
Agent") and the Company will deliver to the Escrow Agent (a)
an instruction letter to the Company's transfer agent,
Computershare Investor Services (the "Transfer Agent"),
authorizing and directing the Transfer Agent to issue a
certificate or certificates representing, or to issue and
electronically deliver, such number of shares, rounded to the
nearest whole number (the "Shares" which term includes any
Shares that may become issuable upon Fir Tree's acquisition
and exchange of any and all Remaining Bank Debt) of Common
Stock equal to the Acquired Bank Debt divided by the Stock
Exchange Price (the "Common Stock Instruction Letter"), and
(b) an instruction letter to the Transfer Agent authorizing
and directing the Transfer Agent to issue certificate or
certificates representing such number of shares of Class C
Preferred Stock of the Company that are convertible into the
Shares (the "Preferred Shares" which term includes any
Preferred Shares that may become issuable upon Fir Tree's
acquisition and exchange of any and all Remaining Bank Debt)
having the designations rights and preferences set forth in
the certificate of designation attached as Exhibit B hereto
(the "Series C Preferred Stock Instruction Letter"). Any
accrued and unpaid interest on the Acquired Bank Debt while
held in escrow will be paid promptly to Fir Tree. The Company
will use commercially reasonable efforts to file a
registration statement to cover resales of the Shares pursuant
to the Securities Act of 1933, as amended (the "Securities
Act") within forty-five (45) days after the Company files its
annual report on Form 10-K for the fiscal year ended March 3,
2001. The Exchange Date shall be deemed to be the earlier of
(x) the date upon which the Shares are registered (the
"Registration Date") for resale under the Securities Act (the
"Registration Exchange Date"), and, (y) the date upon which
the aggregate principal amount of the RCF Facility is repaid
in full (the "Refinancing Exchange Date"). During the Pricing
Period, the Company, Fir Tree and the Escrow Agent will enter
into an escrow agreement on terms as the parties mutually
agree (the "Escrow Agreement").
Upon Fir Tree's acquisition of any Remaining Bank Debt, within three business days of such acquisition, Fir Tree and the Company will each take all such actions as described in the
immediately preceding paragraph as if such acquired Remaining Bank Debt was Acquired Bank Debt as of the date of this Agreement.
(6) Rite Aid will not be obligated to file the Certificate of Designation with the Secretary of State of Delaware unless and until such time as the Series C Preferred Stock Instruction Letter is released from escrow and delivered to the Transfer Agent in accordance with the terms herein and in the Escrow Agreement.
(7) Section 3 of the Exchange Agreement is hereby deleted in its entirety and is amended and replaced with the following:
"3. Exchange Date on or Before August 20, 2001. If the Exchange Date occurs on or before August 20, 2001 and the Exchange Date is the Registration Exchange Date, the Escrow Agent will deliver (a) the Common Stock Instruction Letter to the Transfer Agent and the Transfer Agent will promptly deliver the certificate(s) representing, or electronically deliver, the Shares to Fir Tree in such names and denominations as Fir Tree provides in writing to the Company, and (b) the Assignment and the Series C Preferred Stock Instruction Letter to the Company. If the Exchange Date occurs on or before August 20, 2001 and the Exchange Date is the Refinancing Exchange Date, the Escrow Agent will deliver (a) the Preferred Stock Instruction Letter to the Transfer Agent and the Transfer Agent will promptly deliver the certificate(s) representing the Preferred Shares to Fir Tree in such names and denominations as Fir Tree provides in writing to the Company, and (b) the Assignment and the Common Stock Instruction Letter to the Company. On the Exchange Date, whether such Exchange Date is the Registration Exchange Date or the Refinancing Exchange Date, the Company shall pay Fir Tree the accrued and unpaid interest on the Bank Debt up to the date the Common Stock Instruction Letter and the Preferred Stock Instruction Letter are released from escrow, pursuant to the RCF Facility."
(8) Fir Tree agrees to use commercially reasonable efforts to acquire the Remaining Bank Debt as soon as possible and promptly inform Rite Aid of Fir Tree's acquisition of any and all Remaining Bank Debt.
[the signature page follows]
If you are in agreement with the foregoing, please execute and return a copy of this Letter Agreement which will constitute our agreement to the subject matter hereof.
Very truly yours,
RITE AID CORPORATION
Title:
Agreed to and accepted as of the date first above written.
FIR TREE VALUE FUND, L.P.
FIR TREE INSTITUTIONAL VALUE FUND, L.P.
FIR TREE VALUE PARTNERS LDC
FIR TREE RECOVERY MASTER FUND, L.P.
EXHIBIT 10.48
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the 26th day of January, 2000 (the "Effective Date") by and between Rite Aid Corporation, a Delaware corporation (the "Company"), and Christopher Hall (the "Executive").
WHEREAS, Executive desires to provide the Company with his services and that Company desires to employ Executive in the capacity of Senior Vice President and Chief Accounting Officer 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 parties hereto, intending to be legally bound, agree as follows:
The term of Executive's employment with the Company hereunder (the "Term") shall commence on the Effective Date and, unless earlier terminated pursuant to Section 5 below, shall continue for a period ending on the date that is three (3) years following the Effective Date; provided, however, that on each anniversary of the Effective Date occurring prior to the termination of Executive's employment hereunder (each such date a "Renewal Date"), an additional year shall be added to the Term, unless notice of non-renewal has been delivered by one party to the other party at least 180 days prior to such Renewal Date. For purposes of this Agreement, the phrases "year during the Term" or "during any year of the Term" or similar language shall refer to each 12-month period commencing on the Effective Date or applicable anniversaries thereof.
2.1 Position. During the Term, Executive shall be employed as Senior Vice President and Chief Accounting Officer of the Company. 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.
2.2 Duties. Subject to the supervision and control of the Chief Financial Officer of the Company, to whom he shall report, Executive shall do and perform all services and acts necessary or advisable to fulfill the duties and responsibilities of his position as Senior Vice President and Chief Accounting Officer and shall render such services on the terms set forth herein. In addition, Executive shall have such other executive and managerial powers and duties with respect to the Company and its subsidiaries, affiliates and strategic partners as may be assigned to him by the Chief Financial Officer. Except for sick leave, vacations (as provided in Section 4.3 below), and excused leaves of absence, Executive shall, throughout the Term, devote substantially all his working time, attention, knowledge and skills faithfully and to the best of his ability, to the duties and responsibilities of his position in furtherance of the business affairs and activities of the Company and its
subsidiaries, affiliates and strategic partners. Executive shall at all times be subject to, observe and carry out such rules, regulations, policies, directions and restrictions as the Board of Directors of the Company (the "Board") or the Chief Executive Officer of the Company may from time to time establish for senior executive officers of the Company.
3.1 Base Salary. During the Term, as compensation for his services hereunder, Executive shall receive a salary at the annualized rate of Three Hundred Fifty Thousand Dollars ($350,000) per year ("Base Salary"), 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. During the Term the Base Salary shall be reviewed periodically by the Compensation Committee of the Board for possible increase. Any increase in the Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. The Base Salary shall not be reduced after any such increase, and the term "Base Salary" shall thereafter refer to the Base Salary as from time to time so increased.
3.2 Guaranteed Bonus. Executive shall be entitled to receive a guaranteed bonus (the "Guaranteed Bonus") in the amount of $116,000 payable on April 1, 2000, provided Executive is employed with the Company hereunder on that date.
3.3 Annual Performance Bonus. Commencing with the Company's fiscal year beginning on or about February 27, 2000, the Executive shall participate 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. The Executive's annual target bonus opportunity pursuant to such plans (the "Annual Target Bonus") shall equal 50% of the Base Salary in effect for the Executive at the beginning of each such fiscal year.
3.4 Stock Awards.
(a) The Compensation Committee of the Board has approved the grant to Executive of an option (the "Option") to purchase 350,000 shares of the Company's common stock, par value $1.00 per share ("Company Stock"). The Option shall (i) be a non-qualified stock option, (ii) have an exercise price equal to the closing price of the Company Stock as reported on the New York Stock Exchange on the Effective Date, (iii) have a term of ten (10) years following the Effective Date, (iv) vest and become exercisable as to one-third of the shares of Company Stock subject to the Option on each of the first three anniversaries of the Effective Date, (v) be subject to the acceleration, exercise and termination provisions set forth in Section 3.4(o) and Article 5 hereof and (vi) otherwise be evidenced by and subject to the terms of the Company's form of stock option agreement for officers.
(b) The Compensation Committee of the Board has approved the grant to Executive of 50,000 shares of restricted Company Stock (the "Restricted Stock"). Subject to (i) the acceleration and forfeiture provisions set forth in Section 3.4(c) and Article 5 hereof and (ii) the terms of the Company's form of restricted stock agreement for officers, the restrictions applicable to the Restricted Stock shall lapse to one-third of such shares on each of the first three anniversaries of the Effective Date.
(c) Upon the occurrence of a Change in Control of the Company prior to the termination of Executive's employment with the Company, the Option shall immediately vest and become exercisable in full, and all remaining restrictions on the Restricted Stock shall immediately lapse. 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 Option will 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 5.3 and 5.5, the securities underlying the then vested and exercisable portion of the Option (or any other option to purchase Company Stock then held by Executive) are not subject to an effective registration statement, the 90-day periods in Sections 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. The Company further agrees that if, as of the date of Executive's voluntary termination of employment other than for Good Reason, the securities underlying the then vested and exercisable portion of the Option (or any other option to purchase Company Stock then held by Executive) are not subject to an effective registration statement, Executive will be permitted to exercise the Option, to the extent vested and exercisable as of the date of such termination of employment, during the 30-day period following the first date such securities become subject to an effective registration statement.
4.1 Employee Benefits. During the Term, Executive shall be entitled to participate in the employee benefit plans in which executive officers of the Company are generally eligible to participate, subject to any eligibility requirements and the other generally applicable terms of such plans.
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 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 $750 per month.
4.5 Annual Financial Planning Allowance. During each year of the Term, the Company shall provide Executive with a financial planning allowance in the amount of $5,000.
4.6 Relocation Expenses.
(a) The Company shall reimburse Executive for his reasonable expenses incurred in moving his household goods and cars from the Los Angeles, California area to the Harrisburg, Pennsylvania area, in accordance with the Company's moving expense policies applicable to executive officers generally.
(b) The Company shall reimburse Executive for any loss incurred upon sale of his principal Los Angeles residence (measured as the excess, if any, of (i) the sum of (A) the original purchase price of the residence plus (B) the documented actual cost of any improvement thereto since the date of purchase, the approximate aggregate amount of which has previously been disclosed to the Company, plus (C) a standard real estate commission over (ii) the sale price), such amount to be "grossed up" to offset in full any net increase in Executive's federal, state and local income, employment and other taxes resulting therefrom (and from such gross-up); provided, that the aggregate amount payable pursuant to this Section 4.6(b), including any such gross-up, shall not exceed $100,000. Executive agrees that he shall use his best efforts to sell such residence at its fair market value.
(c) The Company shall reimburse Executive for his reasonable living expenses for a temporary residence in the Harrisburg area until the date of relocation.
(d) The Company shall reimburse Executive for the reasonable costs of round trip air travel between Harrisburg and Los Angeles for each weekend during the period from the Effective Date through the earlier of his relocation date or August 31, 2000. The Company shall also reimburse Executive for a reasonable number of round-trip visits between Los Angeles and the Harrisburg area by his immediate family members prior to the relocation date, including reasonable costs for meals, lodging and transportation during such trips.
(e) The Company shall pay Executive an additional "gross-up" amount to offset in full any net increase in Executive's federal, state and local income, employment and other taxes resulting from any of the amounts and/or benefits payable pursuant to Section 4.6(a), (c) and (d) being taxable to Executive.
4.7 Indemnification. The Company shall (a) indemnify and hold Executive harmless, to the full extent permitted under applicable law, for, from and against any and all losses, claims, costs, expenses, damages, liabilities or actions (including security holder actions, in respect thereof) related to or arising out of the Executive's employment with and service as an officer 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. Following any 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.
5.1 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" shall mean (i) Executive's gross negligence or willful misconduct in the
performance of the duties or responsibilities of his position with the Company
or any subsidiary, or failure to timely carry out any lawful directive of the
Board, the Chief Executive Officer or Chief Financial Officer; (ii) Executive's
misappropriation of any funds or property of the Company or any subsidiary;
(iii) the commission by Executive of an act of fraud or dishonesty toward the
Company or any subsidiary; or (iv) the use or imparting by Executive of any
confidential or proprietary information of the Company or any subsidiary in
violation of any confidentiality or proprietary agreement to which Executive is
a party.
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 (i) all amounts accrued but unpaid Base Salary through the effective date of such termination, (ii) reimbursement for reasonable and necessary expenses incurred by Executive through the date of notice of such termination, to the extent otherwise provided under Section 4.2 above 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 ((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.
(b) Except as provided in Section 3.4(d), any portion of the Option or any other then outstanding stock option that has not been exercised prior to the date of termination shall immediately terminate as of such date, and any portion of the Restricted Stock or any other restricted stock or 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.
Any termination of Executive's employment by Executive voluntarily without Cause shall be effective upon 30 days' notice to the Company.
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 or by Executive for Good Reason. In the event that Executive's employment hereunder is terminated by the Company other than for Cause or by Executive for Good Reason:
(a) Executive shall be entitled to receive (i) the Accrued Benefits, (ii) any previously unpaid Guaranteed Bonus, (iii) 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, (iv) an amount equal to two times the sum of Executive's 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 executive officers over a period of two years following the date of termination of employment, and (v) continued health insurance coverage for Executive and his immediate family for a period of two years following the date of termination of employment.
(b) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of restricted stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.4(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 90 days following the date of termination of employment (or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate. Any portion of Executive's stock options that have not 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 employment.
Any termination of employment pursuant to this Section 5.3 shall be effective upon thirty (30) days notice thereof.
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 material adverse alteration in Executive's titles, positions, status, duties, authorities, reporting relationships or responsibilities with the Company or its subsidiaries from those specified in this Agreement, as the same may be augmented from time to time;
(b) the assignment to Executive of any duties or responsibilities materially inconsistent with Executive's status as Senior Vice President and Chief Accounting Officer of the Company (it being understood that, if the Company is no longer a public company, the failure of Executive to hold such positions and the attendant duties and responsibilities with any ultimate corporate or other parent of the Company or any successor shall be deemed to constitute such Good Reason); or
(c) any other material breach of this Agreement by the Company, including, without limitation, any decrease in Executive's Base Salary or Annual Target Bonus opportunity as set forth in Sections 3.1 and 3.3;
provided, however, that in each such case the Company shall have the right, within ten (10) days after receipt of notice from Executive of the Company's violation of any of the foregoing, to cure 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.
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) the Accrued Benefits, (ii) any previously unpaid Guaranteed Annual Bonus, (iii) any other benefits payable under the then current disability and/or death benefit plans, as applicable, in which Executive is a participant and (iv) continued health insurance coverage for Executive and/or his immediate family, as applicable, for a period of two years following the date of termination of employment.
(b) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of restricted stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.4(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 90 days following the date of termination of employment (or, if earlier, until the expiration of the respective terms of the options), whereupon all such options shall terminate. Any portion of Executive's stock options that have not 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 employment.
"Total Disability" shall mean any physical or mental disability that prevents Executive from performing one or more of the essential functions of his position for a period of not less than 90 days in any 12-month period and/or which is expected to be of permanent duration.
5.6 Survival. In the event of any termination of Executive's employment for any reason, Executive and the Company nevertheless shall continue to be bound by the terms and conditions set forth in 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 of any
other plan, arrangement or agreement of the Company (or any affiliate)
(collectively, the "Payments") would be subject to the excise tax (the "Excise
Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), as determined as provided below, the Company shall pay to the
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 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 "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to
the extent that, in the opinion of tax counsel ("Tax Counsel") reasonably
acceptable to Executive and selected by the accounting firm which was,
immediately prior to the event giving rise to the Payment, the Company's
independent auditor (the "Auditor"), a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of section 280G(b)(2) of the
Code, or such "excess parachute payments" (in whole or in part) are not subject
to the Excise Tax, (2) the amount of the Payments that shall be treated as
subject to the Excise Tax shall be equal to the lesser of (A) the total amount
of the Payments or (B) the amount of "excess parachute payments" within the
meaning of section 280G(b)(1) of the code (after applying cause (1) hereof), and
(3) the value of any noncash benefits or any deferred payment or benefit shall
be determined by the Auditor in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the 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 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 Payments provided for in Section 5.7(a) hereof shall be made upon the earlier of (i) ten 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 purposes 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 proceedings. 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 Auditor and 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.
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, the markets for their products, key personnel, past, present or future actual or threatened litigation, trade secrets, 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, 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
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.
7.1 Noncompetition. During the Term and, as applicable, for the two-year period immediately following the date of termination of Executive's employment either (x) by the Company for Cause or (y) by Executive other than for Good Reason, 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 operations of retail drugstores (i) engage in a Competing Business for Executive's own account; (ii) enter the employ of, or render any consulting services to, any Competing Business; or (iii) become interested in any Competing Business in any capacity, including, without limitation, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; provided, however, Executive may 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 1% 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 drug stores.
7.2 Noninterference. During the Term and for the two-year period immediately following the date of termination of Executive's employment at any time and for any reason (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 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.
If Executive breaches, or threatens to commit a breach of, any of the provisions of Sections 6 or 7 above (the "Restrictive Covenants"), the Company and its subsidiaries, affiliates, strategic partners, successors or assigns shall have the following rights and remedies, each of which shall be independent of the others and severally enforceable, and each of which shall be in addition to, and not in lieu of, any other rights or remedies available to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns at law or in equity.
8.1 Specific Performance. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction by injunctive decree or otherwise, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns and that money damages would not provide an adequate remedy to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns.
8.2 Accounting. The right and remedy to require Executive to account for and pay over to the Company or its subsidiaries, affiliates, strategic
partners, successors or assigns, as the case may be, all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as a result of any transaction or activity constituting a breach of any of the Restrictive Covenants.
8.3 Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographic and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect without regard to the invalid portions.
8.4 Modification by the Court. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or scope of such provisions, such court shall have the power (and is hereby instructed by the parties) to reduce the duration or scope of such provisions, as the case may be (it being the intent of the parties that any such reductions be limited to the minimum extent necessary to render such provision enforceable), and, in its reduced form, such provision shall then be enforceable.
8.5 Enforceability in Jurisdiction. 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.
Executive represents, warrants and covenants that he:
(i) will not, in the course of employment, infringe upon or violate any proprietary rights of any third party (including, without limitation, any third party confidential relationships, patents, copyrights, mask works, trade secrets, or other proprietary rights);
(ii) is not a party to any conflicting agreements with third parties which will prevent him from fulfilling the terms of employment and the obligations of this Agreement;
(iii) does not have in his possession any confidential or proprietary information or documents belonging to others and will not disclose to the Company, use, or induce the Company to use, any confidential or proprietary information or documents of others; and
(iv) agrees to respect any and all valid obligations which he may now have to prior employers or to others relating to confidential information, inventories, 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 to which Executive is subject which includes any obligations of confidentiality, assignment of intellectual property or noncompetition.
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.
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 binding arbitration in Harrisburg, Pennsylvania according to the National Employment Dispute Resolution Rules and procedures of the American Arbitration Association. The parties agree that the parties shall each bear his or its own attorneys' fees and costs in connection with any such arbitration. 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 cause 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, beach 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.
Neither this Agreement, nor any of Executive's rights or obligations hereunder, may be assigned or otherwise subject to hypothecation by Executive.
The Company may assign its rights and obligations hereunder, in whole or in part, (i) to any of the Company's subsidiaries, affiliates, or parent corporations; 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.
All notices and other communications under this Agreement shall be in
writing and shall be given by fax or first class mail, certified or registered
with return receipt requested, and shall be deemed to have been duly given three
(3) days after mailing or twenty-four (24) hours after transmission of a fax to
the respective persons named below:
If to the Company: Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: General Counsel
Fax: (717) 760-7867
With a copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
Attention: Andrew Ash, Esq.
Fax: (310) 788-1200
If to Executive: Christopher Hall
________________
________________
Fax: ___________
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Any party may change such party's address for notices by notice duly given pursuant hereto.
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 set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others whether in respect of claims made under this Agreement or otherwise. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts, benefits and other compensation payable or otherwise provided to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced, regardless of whether the Executive obtains other employment.
13.2 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflicts of laws principles thereof which might refer such interpretations to the laws of a different state or jurisdiction.
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 provisions 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 No 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.
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.
IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date first written above.
RITE AID CORPORATION
/s/ David R. Jessick ------------------------------------- By: David R. Jessick Its: Senior Executive Vice President |
EXECUTIVE
/s/ Christopher Hall ------------------------------------- |
APPENDIX A
A "Change in Control of the Company" shall be deemed to have occurred if, as the result of a single transaction or a series of transactions, the event set forth in any one of the following paragraphs shall have occurred:
(1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
(2) Incumbent Directors cease at any time and for any reason to constitute a majority of the number of directors then serving on the Board. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the Effective Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors to the Board); or
(3) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
(4) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under
Section 12 of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act, except that a Person shall not be deemed to be the Beneficial Owner of any securities which are properly filed on a Form 13G.
"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 10.49
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the 28th day of February, 2001 (the "Effective Date") by and between Rite Aid Corporation, a Delaware corporation (the "Company"), and Robert B. Sari (the "Executive").
WHEREAS, Executive desires to provide the Company with his services and the Company desires to employ Executive in the capacity of Senior Vice President, Deputy General Counsel, Secretary 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 parties hereto, intending to be legally bound, agree as follows:
1. Term of Employment.
The term of Executive's employment with the Company hereunder (the "Term") pursuant to this Agreement shall commence on the Effective Date and, unless earlier terminated pursuant to Section 5 below, shall continue for a period ending on the date that is two (2) years following the Effective Date; provided, however, that on each anniversary of the Effective Date occurring prior to the termination of Executive's employment hereunder (each such date a "Renewal Date"), an additional year shall be added to the Term, unless notice of non-renewal has been delivered by one party to the other party at least 180 days prior to such Renewal Date. For purposes of this Agreement, except as otherwise provided herein, the phrases "year during the Term" or "during any year of the Term" or similar language shall refer to each 12-month period commencing on the Effective Date or applicable anniversaries thereof.
2. Position And Duties
2.1 Position. During the Term, Executive shall be employed as Senior Vice President, Deputy General Counsel, Secretary. 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.
2.2 Duties. Subject to the supervision and control of the General
Counsel of the Company (or any designee), to whom he shall report, Executive
shall do and perform all services and acts necessary or advisable to fulfill the
duties and responsibilities of his position as Senior Vice President, Deputy
General Counsel, Secretary and shall render such services on the terms set forth
herein. In addition, Executive shall have such other executive and managerial
powers and duties with respect to the Company and its subsidiaries, affiliates
and strategic partners as may be assigned to him by the General Counsel of the
Company or any designee. Except for sick leave, vacations (as provided in
Section 4.3 below), and excused leaves of absence, Executive shall, throughout
the Term, devote substantially all his working time, attention, knowledge and
skills faithfully and to the best of his ability, to the duties and
responsibilities of his position in furtherance of the business affairs and
activities of the Company and its subsidiaries, affiliates and strategic
partners. Executive shall at all times be subject to, observe and carry out such
rules, regulations, policies, directions, and restrictions as the Company may
from time to time establish for senior executive officers of the Company.
3. Compensation
3.1 Base Salary. During the Term, as compensation for his services hereunder, Executive shall receive a salary at the annualized rate of Two Hundred Twenty Five Thousand Dollars ($225,000) per year ("Base Salary"), 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. The Executive's annual target bonus opportunity pursuant to such plan (the "Annual Target Bonus") shall equal 25% of the Base Salary for the Executive at the beginning of such fiscal year.
3.3 Stock Awards.
(a) Executive currently holds options (the "Options") to purchase a number of shares of the Company's common stock, par value $1.00 per share ("Company Stock"), and may subsequently receive more options to purchase additional shares of the Company's Common Stock, par value $1.00. These Options are non-qualified stock options with varying exercise prices and are subject to the acceleration, exercise and termination provisions set forth in Section 3.3(b) and Article 5 hereof and otherwise will be evidenced by and subject to the terms of the Company's form of stock option agreement for officers.
(b) Upon the occurrence of a Change in Control of the Company prior to the termination of Executive's employment with the Company, the Options then held by Executive shall immediately vest and become exercisable in full and all remaining restrictions on any restricted stock granted to executive shall immediately lapse. For purposes of this Agreement "Change in Control" shall have the meaning set forth in the attached Appendix A.
(c) It is understood and acknowledged by Executive that the securities underlying the Options will 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 5.3 and 5.5, the securities underlying the then vested and exercisable portion of the Options are not subject to an effective registration statement, the 90-day periods in Section 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. The Company further agrees that if, as of the date of Executive's voluntary termination of employment other than for Good Reason, the securities underlying the then vested and exercisable portion of the Options are not subject to an effective registration statement, Executive will be permitted to exercise the Options to the extent vested and exercisable as of the date of such termination of employment, during the 30-day period following the first date such securities become subject to an effective registration statement.
4. Additional Benefits.
4.1 Employee Benefits. During the Term, Executive shall be entitled to participate in the employee benefit plans in which management employees of the Company are generally eligible to participate, subject to any eligibility requirements and the other generally applicable terms of such plans.
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 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 $750.00 per month.
4.5 Annual Financial Planning Allowance. During each year of the Term, the Company shall provide Executive with an executive planning allowance in the amount of $3,000.
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; 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. Following any 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" shall mean (i) Executive's gross negligence or willful misconduct in the performance of the duties or responsibilities of his position with the Company or any subsidiary, or failure to timely carry out any lawful directive of the General Counsel or any designee; (ii) Executive's misappropriation of any funds or property of the Company or any subsidiary; (iii) the commission by Executive of an act of fraud or dishonesty toward the Company or any subsidiary; or (iv) the use or imparting by Executive of any confidential or proprietary information of the Company, or any subsidiary in violation of any confidentiality or proprietary agreement to which Executive is a party.
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 (i) all amounts of
accrued but unpaid Base Salary through the effective date of such termination,
(ii) reimbursement for reasonable and necessary expenses incurred by Executive
through the date of notice of such termination, to the extent otherwise provided
under Section 4.2 above 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 ((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.
(b) Except as provided in Section 3.3(c), any portion of the Options that has not been exercised prior to the date of termination shall immediately terminate as of such date, and 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.
Any termination of Executive's employment by Executive voluntarily without Good Reason shall be effective upon 30 days' notice to the Company.
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 or by Executive for Good Reason. In the event that Executive's employment hereunder is terminated by the Company other than for Cause or by Executive for Good Reason:
(a) Executive shall be entitled to receive (i) the Accrued Benefits, (ii) an amount equal to two times 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 years following the date of termination of employment, and (iii) continued health insurance coverage for Executive and his immediate family for a period of two years following the date of termination of employment. In addition, if such termination occurs following the start of the Company's fiscal year beginning on or about March 2001, Executive shall also be entitled to receive 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) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of restricted stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.3(c), 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 90 days following the date of termination of employment (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 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 employment.
Any termination of employment pursuant to this Section 5.3 shall be effective upon thirty (30) days notice thereof.
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 material adverse alteration in Executive's titles, positions, status, duties, authorities, reporting relationship or responsibilities with the Company or its subsidiaries from those specified in this Agreement, as the same may be augmented from time to time;
(b) The assignment to Executive of any duties or responsibilities materially inconsistent with Executive's status as Senior Vice President, Deputy General Counsel, Secretary of the Company; or
(c) Any other material breach of this Agreement by the Company, including without limitation any decrease in Executive's then Base Salary or Annual Target Bonus opportunity as set forth in Sections 3.1 and 3.2;
provided, however, that in each such case the Company shall have the right, within ten (10) days after receipt of notice from Executive of the Company's violation of any of the foregoing, to cure the event or circumstances given rise to such Good Reason, in the event of which cure such event or circumstances shall be deemed not to 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) the Accrued Benefits, (ii) any other benefits payable under the then current disability and/or death benefit plans, as applicable, in which Executive is a participant and (iii) continued health insurance coverage for Executive and/or his immediate family, as applicable, for a period of two years following the date of termination of employment.
(b) All stock option awards held by Executive shall vest and become immediately exercisable and the restrictions with respect to any awards of Restricted Stock shall lapse, in each case to the extent such options would otherwise have become vested and exercisable (or such restrictions would have lapsed) had Executive remained in the employ of the Company for a period of two years following the date of termination. Except as provided in Section 3.3(c), 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 90 days following the date of termination of employment (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 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 employment.
"Total Disability" shall mean any physical or mental disability that prevents Executive from performing one or more of the essential functions of his position for a period of not less than 90 days in any 12-month period and/or which is expected to be of permanent duration.
5.6 Survival. In the event of any termination of Executive's employment for any reason, Executive and the Company nevertheless shall continue to be bound by the terms and conditions set forth in Section 6 through 10 below, which 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 equal 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 accounting firm which was,
immediately prior to the event giving rise to the Payment, the Company's
independent auditor (the "Auditor"), a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of section 280G(b)(2) of the
Code, or such "excess parachute payments" (in whole or in part) are not subject
to the Excise Tax, (2) the amount of the Payments that shall be treated as
subject to the Excise Tax shall be equal to the lesser of (A) the total amount
of the Payments or (B) the amount of "excess parachute payments" within the
meaning of section 280G(b)(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 Auditor in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the 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 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) ten 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 purposes 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 Auditor and 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.
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, the markets for their products, key personnel, past, present or future actual or threatened litigation, trade secrets, 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, 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.
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, Record 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.
7. Noncompetition and Other Matters.
7.1 Noncompetition. During the Term and, as applicable, for the two-year period immediately following the date of termination of Executive's employment either (x) by the Company or Cause or (y) by Executive other than for Good Reason, 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 resulting services to, any Competing Business; or (iii) become interested in any Competing Business in any capacity, including, without limitation, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; provider, 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 1% 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 drug stores.
7.2 Noninterference During the Term and for the two-year period immediately following the date of termination of Executive's employment at any Time and for any reason (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 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.
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 any pay over to the Company or its subsidiaries, affiliates, strategic partners, successors or assigns, as the case may be, all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as a result of any transaction or activity constituting a breach of any of the Restrictive Covenants.
8.3 Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographic and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect without regard to the invalid portions.
8.4 Modification by the Court. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or scope of such provision, such court shall have the power (and is hereby instructed by the parties) to reduce the duration or scope of such provision, as the case may be (it being the intent of the parties that any such reduction be limited to the minimum extent necessary to render such provision enforceable), and, in its 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.
9. No Violation of Third-Party Rights. Executive represents, warrants and covenants that be:
(i) Will not, in the course of employment, infringe upon or violate any proprietary rights of any third party (including, without limitation, any third party confidential relationships, patents, copyrights, mask works, trade secrets, or other proprietary rights);
(ii) Is not a party to any conflicting agreements with third parties, which will prevent him from fulfilling the terms of employment and the obligations of this Agreement;
(iii) Does not have in his possession any confidential or proprietary information or documents belonging to others and will not disclose to the Company, use, or induce the Company to use, any confidential or proprietary information or documents of others; and
(iv) Agrees to respect any and all valid obligations which he may now have to prior employers or to others relating to confidential information, inventions, discoveries or other intellectual property which are the property of those prior employers or others, as the case may be.
Executive has supplied to the Company a copy of each written agreement to which Executive is subject, which includes any obligation of confidentiality, assignment of intellectual property or non-competition.
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 of their subsidiaries, affiliates; strategic partners, successors or assigns, shall be submitted to binding arbitration in Harrisburg, Pennsylvania according to the National Employment Dispute Resolution Rules and procedures of the American Arbitration Association. The parties agree that the parties shall each bear his or its own attorneys' fees and costs in connection with any such arbitration. 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 1976, as amended, and any other state or federal law.
11. Assignment.
Neither this Agreement, nor any of Executive's rights or obligations hereunder, may be assigned or otherwise subject to hypothecation by Executive. The Company may assign its rights and obligations hereunder, in whole or in part, (i) to any of the Company's subsidiaries, affiliates, or parent corporations; 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.
12. Notices.
All notices and other communications under this Agreement shall be in
writing and shall be given by fax or first class mail, certified or registered
with return receipt requested, and shall be deemed to have been duly given three
(3) days after mailing or twenty-four (24) hours after transmission of a fax to
the respective persons named below:
If to the Company: Rite Aid Corporation
30 Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: General Counsel
Fax: (717) 760-7867
with a copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
Attention: Andrew Ash, Esq.
Fax: (310) 788-1200
If to Executive: Robert B. Sari
19 Charisma
Camp Hill, PA 17011
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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 set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others whether in respect of claims made under this Agreement or otherwise. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts, benefits and other compensation payable or otherwise provided to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced, regardless of whether the Executive obtains other employment.
13.2 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflicts of laws principles thereof which might refer such interpretations to the laws of a different state or jurisdiction.
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 Amendment: 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 at 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.
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.
IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of the date first written above.
RITE AID CORPORATION
/s/ David R. Jessick ---------------------------------------- By: David R. Jessick |
Its: Senior Executive Vice President
EXECUTIVE
/s/ Robert B. Sari ---------------------------------------- |
APPENDIX A
A "Change in Control of the Company" shall be deemed to have occurred if, as the result of a single transaction or a series of transactions, the event set forth in any one of the following paragraphs shall have occurred:
(1) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
(2) Incumbent Directors cease at any time and for any reason to constitute a majority of the number of directors then serving on the Board. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the Effective Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened election contest, including but not limit to a consent solicitation, relating to the election of directors to the Board); or
(3) There is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or
(4) The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
"Affiliate" shall have the meaning set forth in Rule 12b-2 under
Section 12 of the Exchange Act.
"Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act, except that a Person shall not be deemed to be the Beneficial Owner of any securities which are properly filed on a Form 13G.
"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 12
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Years Ended March 3, 2001, February 26, 2000, and February 27, 1999
(dollars in thousands)
2001 2000 1999
----------- ----------- ---------
Fixed Charges:
Interest Expense......................................................................... $ 649,926 $ 542,028 $ 274,826
Interest Portion of Net Rental Expense (1)............................................... 159,066 146,852 139,104
----------- ----------- ---------
Fixed Charges Before Capitalized Interest and Preferred Stock Dividend Requirements...... 808,992 688,880 413,930
Preferred Stock Dividend Requirement (2)................................................. 42,445 15,554 965
Capitalized Interest..................................................................... 1,836 5,292 7,069
----------- ----------- ---------
Total Fixed Charges...................................................................... $ 853,273 $ 709,726 $ 421,964
----------- ----------- ---------
Earnings:
Loss From Continuing Operations Before Income Taxes and Cumulative Effect of Accounting
Change................................................................................. $(1,282,807) $(1,123,296) $(665,040)
Share of Loss From Equity Method Investees............................................... 36,675 15,181 448
Fixed Charges Before Capitalized Interest................................................ 851,437 704,434 414,895
----------- ----------- ---------
Total Adjusted Earnings.................................................................. (394,695) (403,681) (249,697)
----------- ----------- ---------
Earnings to Fixed Charges, Deficiency.................................................... $(1,247,968) $(1,113,407) $(671,661)
=========== =========== =========
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(2) The Preferred Stock Dividend Requirement is computed as the pre-tax earnings that would be required to cover preferred stock dividends.
EXHIBIT 21
Rite Aid Corporation & Subsidiaries
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Company DBA State Inc
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Rite Aid Corporation Rite Aid Delaware
112 Burleigh Avenue Norfolk, LLC Virginia
1515 West State Street Boise, Idaho, LLC Delaware
1525 Cortyou Road - Brooklyn, LLC New York
1640 Associates, LLC Michigan
1740 Associates, LLC Michigan
3518 Carter Hill Road - Montgomery 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 Broadway St. Corp. New Jersey
764 South Broadway-Geneva, Ohio, LLC Ohio
912 Elmwood Avenue, Buffalo, LLC New York
Ann & Government Streets Mobile Alabama, LLC Delaware
Apex Drug Stores, Inc. Rite Aid Michigan
Baltimore/Annapolis Boulevard & Governor Richie Highway-Glen Burnie, Maryland, LLC Delaware
Broadview & Wallings-Broadview Heights Ohio, Inc. Ohio
Central Avenue & Main Street Petal, MS, LLC Delaware
Dominion Action Four Corporation Delaware
Dominion Action One Corporation Delaware
Dominion Action Three Corporation Delaware
Dominion Action Two Corporation Delaware
Dominion Drug Stores Corporation Nevada
Drug Fair of PA, Inc. Rite Aid Pennsylvania
Drug Fair, Inc. Rite Aid Maryland
Eagle Managed Care Corp. Delaware
Eighth & Water Streets-Urichsville, Ohio, LLC Delaware
England Street - Asheland Corp. Virginia
Euclid & Wilders Roads - Bay City, LLC Michigan
Fairground, LLC Virginia
Fiona One Corp. Delaware
Fiona Three Corp. Delaware
Fiona Two Corp. Delaware
GDF, Inc. Maryland
Gettysburg & Hoover - Dayton, Ohio, LLC Ohio
Grand River & Fenkel, LLC Delaware
Gratiot & Center-Saginaw Township, Michigan, LLC Delaware
Harco, Inc. Rite Aid Alabama
Jaime Nathan Travis Corporation Pennsylvania
K & B Alabama Corporation Rite Aid Alabama
K & B Florida Corporation Rite Aid Florida
K & B Louisiana Corporation Rite Aid Louisiana
K & B Mississippi Corporation Rite Aid Mississippi
K & B Services, Inc. Louisiana
K & B Tennessee Corporation Rite Aid Tennessee
K & B Texas Corporation Rite Aid Texas
K & B Trainees, Inc. Louisiana
K & B, Incorporated Delaware
Katz & Bestoff, Incorporated Louisiana
Keystone Centers, Inc. Rite Aid Pennsylvania
Lakehurst & Broadway Corporation New Jersey
Lane Drug Company, Inc. Rite Aid Ohio
Laverdiere's Enterprises, Inc. Rite Aid Maine
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Rite Aid Corporation & Subsidiaries
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Company DBA State Inc
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Leader Drugs, Inc. Rite Aid Maryland
Louisville Avenue & North 18th Street-Monroe, Louisiana, LLC Delaware
Main & McPhearson - Clyde, LLC Ohio
Mayfield & Chillicothe Roads - Chesterknol, LLC Ohio
Munson & Andrews, LLC Delaware
Name Rite, LLC Delaware
Northline & Dix - Toledo - Southgate, LLC Michigan
Ocean Acquisition Corporation Delaware
P. L. D. Enterprises, Inc. Nevada
Patton Drive & Navy Boulevard Property Corporation Florida
Paw Paw Lake Road & Paw Paw Avenue-Coloma, Michigan, LLC Delaware
PDS-1 Michigan, Inc. Rite Aid Michigan
Perry Distributors, Inc. Michigan
Perry Drug Stores, Inc. Rite Aid Michigan
Pharmacy Card, Inc. Ohio
PL Xpress, Inc. Oregon
Portfolio Medical Services, Inc. Delaware
Rack Rite Distributors, Inc. Pennsylvania
Ram-Utica, Inc. Michigan
RDS Detroit, Inc. Rite Aid Michigan
Reads, Inc. Maryland
Richmond Road & Monticello Boulevard - Richmond Heights, Ohio, LLC Delaware
Rite Aid Drug Palace, Inc. Rite Aid Delaware
Rite Aid Funding, LLC California
Rite Aid Hdqtrs. Corp. Delaware
Rite Aid Lease Management Company California
Rite Aid of Alabama, Inc. Rite Aid Alabama
Rite Aid of Connecticut, Inc. Rite Aid Connecticut
Rite Aid of Delaware, Inc. Rite Aid Delaware
Rite Aid of Florida, Inc. Rite Aid Florida
Rite Aid of Georgia, Inc. Rite Aid Georgia
Rite Aid of Illinois, Inc. Rite Aid Illinois
Rite Aid of Indiana, Inc. Rite Aid Indiana
Rite Aid of Kentucky, Inc. Rite Aid Kentucky
Rite Aid of Maine, Inc. Rite Aid Maine
Rite Aid of Maryland, Inc. Rite Aid Maryland
Rite Aid of Massachusetts, Inc. Rite Aid Massachusetts
Rite Aid of Michigan, Inc. Rite Aid Michigan
Rite Aid of New Hampshire, Inc. Rite Aid New Hampshire
Rite Aid of New Jersey, Inc. Rite Aid New Jersey
Rite Aid of New York, Inc. Rite Aid New York
Rite Aid of North Carolina, Inc. Rite Aid North Carolina
Rite Aid of Ohio, Inc. Rite Aid Ohio
Rite Aid of Pennsylvania, Inc. Rite Aid Pennsylvania
Rite Aid of South Carolina, Inc. Rite Aid South Carolina
Rite Aid of Tennessee, Inc. Rite Aid Tennessee
Rite Aid of Vermont, Inc. Rite Aid Vermont
Rite Aid of Virginia, Inc. Rite Aid Virginia
Rite Aid of Washington, D.C., Inc. Rite Aid Washington, D.C.
Rite Aid of West Virginia, Inc. Rite Aid West Virginia
Rite Aid Realty Corp. Delaware
Rite Aid Risk Management Corp. Delaware
Rite Aid Rome Distribution Center, Inc. New York
Rite Aid Transport, Inc. Delaware
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Rite Aid Corporation & Subsidiaries
------------------------------------------------------------------------------------------------------------------------------
Company DBA State Inc
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Rite Aid Venturer #1, Inc. Delaware
Rite Fund, Inc. Delaware
Rite Inventory Management Corporation Pennsylvania
Rite Investments Corporation Delaware
Route 1 & Hood Road Fredericksburg, LLC Virginia
Route 202 at Route 124 Jaffrey-New Hampshire, LLC Delaware
Rx Choice, Inc. Delaware
Rx USA, Inc. Delaware
Script South, Inc. Alabama
Seven Mile & Evergreen - Detroit, LLC Michigan
Silver Springs Road-Baltimore, Maryland/One, LLC Delaware
Silver Springs Road-Baltimore, Maryland/Two, LLC Delaware
Sophie One Corp. Delaware
Sophie Three Corp. Delaware
Sophie Two Corp. Delaware
State & Fortification Streets - Jackson, Mississippi, LLC Delaware
State Street & Hill Road-Gerard, Ohio, LLC Delaware
Super Beverage of Texas No. 2, Inc. Texas
Super Beverage of Texas No. 3, Inc. Texas
Super Beverage of Texas No. 4, Inc. Texas
Super Beverage of Texas No. 5, Inc. Texas
Super Beverage of Texas No. 6, Inc. Texas
Super Distributors, Inc. Louisiana
Super Ice Cream Suppliers, Inc. Louisiana
Super Laboratories, Inc. Louisiana
Super Pharmacy Network, Inc. Florida
Super Tobacco Distributors, Inc. Mississippi
The Muir Company Rite Aid Ohio
Thrifty Corporation California
Thrifty Payless, Inc. Rite Aid California
Thrifty Wilshire, Inc. California
TP Retail Corporation Pennsylvania
Tyler and Sanders Roads, Birmingham-Alabama, LLC Delaware
Virginia Corporation Delaware
WRAC, Inc. Pennsylvania
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