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4 Lack 36 Lawsuit
3 Limitations 7 Liquidation
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65 Gains 17 Growth
51 Profitability 13 Settlement
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DOCUMENT: a19-11433_110q.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended June 1, 2019

 

OR

 

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

 

For the transition period from               to               

 

Commission File Number: 1-5742

 

RITE AID CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

23-1614034
(I.R.S. Employer
Identification No.)

 

30 Hunter Lane,
Camp Hill, Pennsylvania

 

17011

(Address of principal executive offices)

 

(Zip Code)

 

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

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report):

Not Applicable

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $1.00 par value

 

RAD

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “Large Accelerated Filer,” “Accelerated Filer,” “Smaller Reporting Company” and “Emerging Growth Company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o

Smaller reporting company o

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

The registrant had 53,805,922 shares of its $1.00 par value common stock outstanding as of June 25, 2019.

 

 

 


Table of Contents

 

RITE AID CORPORATION

 

TABLE OF CONTENTS

 

 

Cautionary Statement Regarding Forward-Looking Statements

2

 

 

 

 

PART I
FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements (unaudited):

 

 

Condensed Consolidated Balance Sheets as of June 1, 2019 and March 2, 2019

4

 

Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

5

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

6

 

Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

7

 

Condensed Consolidated Statements of Cash Flows for the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

8

 

Notes to Condensed Consolidated Financial Statements

9

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations

36

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

46

ITEM 4.

Controls and Procedures

47

 

 

 

 

PART II
OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

48

ITEM 1A.

Risk Factors

48

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

ITEM 3.

Defaults Upon Senior Securities

48

ITEM 4.

Mine Safety Disclosures

48

ITEM 5.

Other Information

48

ITEM 6.

Exhibits

49

 

1


Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

·                  our high level of indebtedness and 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;

 

·                  the ongoing impact of private and public third party payors’ continued reduction in prescription drug reimbursement rates and their efforts to limit access to payor networks, including through mail order;

 

·                  our ability to achieve the benefits of our efforts to reduce the costs of our generic and other drugs, and our ability to achieve and sustain drug pricing efficiencies;

 

·                  the risk that changes in federal or state laws or regulations, including the Health Care Education Affordability Reconciliation Act, the repeal of all or part of the Patient Protection and the Affordable Care Act (or “ACA”) and any regulations enacted thereunder may occur;

 

·                  the impact of the loss of one or more major third party payor contracts;

 

·                  the inability to complete the sale of remaining distribution centers to Walgreens Boots Alliance, Inc. (“WBA”), due to the failure to satisfy the minimal remaining conditions applicable only to the distribution centers being transferred at such distribution center closing;

 

·                  the impact on our business, operating results and relationships with customers, suppliers, third party payors, and employees, resulting from our efforts over the past several years to consummate significant transactions with WBA and Albertsons Companies, Inc. (“Albertsons”);

 

·                  the risk that we will not be able to meet our obligations under our Transition Services Agreement (“TSA”) with WBA, which could expose us to significant financial penalties;

 

·                  the risk that we cannot reduce our selling, general and administrative expenses enough to offset lost income from the TSA as the amount of stores serviced under the agreement decreases;

 

·                  the risk that we may need to take further impairment charges if our future results do not meet our expectations;

 

·                  our ability to refinance our indebtedness on terms favorable to us;

 

·                  our ability to improve the operating performance of our stores in accordance with our long term strategy;

 

·                  our ability to grow prescription count and realize front-end sales growth;

 

·                  our ability to successfully execute and achieve benefits from our leadership transition plan and organizational restructuring, including our chief executive officer search process, and to manage the transition to a new chief executive officer and other management;

 

·                  our ability to hire and retain qualified personnel;

 

·                  our ability to achieve cost savings through the organizational restructurings within our anticipated timeframe, if at all;

 

·                  decisions to close additional stores and distribution centers or undertake additional refinancing activities, which could result in further charges;

 

2


Table of Contents

 

·                  our ability to manage expenses and working capital;

 

·                  continued consolidation of the drugstore and the pharmacy benefit management (“PBM”) industries;

 

·                  the risk that provider and state contract changes may occur;

 

·                  risks related to compromises of our information or payment systems or unauthorized access to confidential or personal information of our associates or customers;

 

·                  our ability to maintain our current pharmacy services business and obtain new pharmacy services business, including maintaining renewals of expiring contracts, avoiding contract termination rights that may permit certain of our clients to terminate their contracts prior to their expiration, early price renegotiations prior to contract expirations and the risk that we cannot meet client guarantees;

 

·                  the continued impact of gross margin pressure in the PBM industry due to increased market competition and client demand for lower prices while providing enhanced service offerings;

 

·                  our ability to maintain our current Medicare Part D business and obtain new Medicare Part D business, as a result of the annual Medicare Part D competitive bidding process and meet the financial obligations of our bid;

 

·                  the expiration or termination of our Medicare or Medicaid managed care contracts by federal or state governments;

 

·                  risks related to other business effects, including the effects of industry, market, economic, political or regulatory conditions, future exchange or interest rates or credit ratings, changes in tax laws, regulations, rates and policies or competitive development including aggressive promotional activity from our competitors;

 

·                  the risk that we could experience deterioration in our current Star rating with the Centers of Medicare and Medicaid Services (“CMS”) or incur CMS penalties and/or sanctions;

 

·                  the nature, cost and outcome of pending and future litigation and other legal proceedings or governmental investigations, including any such proceedings related to the Sale and instituted against us and others;

 

·                  the potential reputational risk to our business during the period in which WBA is operating the Acquired Stores (as defined herein) under the Rite Aid banner;

 

·                  the inability to fully realize the benefits of our tax attributes; and

 

·                  other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

 

We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended March 2, 2019 (the “Fiscal 2019 10-K”), as well as in the “Risk Factors” section of the Fiscal 2019 10-K, which we filed with the SEC on April 25, 2019 and is available on the SEC’s website at www.sec.gov.

 

3


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

June 1,
2019

 

March 2,
2019

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

190,453

 

$

144,353

 

Accounts receivable, net

 

1,803,778

 

1,788,712

 

Inventories, net of LIFO reserve of $611,933 and $604,444

 

1,875,917

 

1,871,941

 

Prepaid expenses and other current assets

 

104,784

 

179,132

 

Current assets held for sale

 

153,811

 

117,581

 

Total current assets

 

4,128,743

 

4,101,719

 

Property, plant and equipment, net

 

1,284,680

 

1,308,514

 

Operating lease right-of-use assets

 

2,985,213

 

 

Goodwill

 

1,108,136

 

1,108,136

 

Other intangibles, net

 

400,084

 

448,706

 

Deferred tax assets

 

409,084

 

409,084

 

Other assets

 

213,749

 

215,208

 

Total assets

 

$

10,529,689

 

$

7,591,367

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

11,751

 

$

16,111

 

Accounts payable

 

1,556,425

 

1,618,585

 

Accrued salaries, wages and other current liabilities

 

782,205

 

808,439

 

Current portion of operating lease liabilities

 

450,933

 

 

Current liabilities held for sale

 

43,829

 

 

Total current liabilities

 

2,845,143

 

2,443,135

 

Long-term debt, less current maturities

 

3,582,037

 

3,454,585

 

Long-term operating lease liabilities

 

2,790,738

 

 

Lease financing obligations, less current maturities

 

22,679

 

24,064

 

Other noncurrent liabilities

 

253,875

 

482,893

 

Total liabilities

 

9,494,472

 

6,404,677

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share; 75,000 shares authorized; shares issued and outstanding 53,833 and 54,016

 

53,833

 

54,016

 

Additional paid-in capital

 

5,882,363

 

5,876,977

 

Accumulated deficit

 

(4,869,679

)

(4,713,244

)

Accumulated other comprehensive loss

 

(31,300

)

(31,059

)

Total stockholders’ equity

 

1,035,217

 

1,186,690

 

Total liabilities and stockholders’ equity

 

$

10,529,689

 

$

7,591,367

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

June 1, 2019

 

June 2, 2018

 

Revenues

 

$

5,372,589

 

$

5,388,490

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

4,245,866

 

4,219,741

 

Selling, general and administrative expenses

 

1,162,652

 

1,152,627

 

Lease termination and impairment charges

 

478

 

9,859

 

Interest expense

 

58,270

 

62,792

 

Loss on debt retirements, net

 

 

554

 

Gain on sale of assets, net

 

(2,712

)

(5,859

)

 

 

5,464,554

 

5,439,714

 

Loss from continuing operations before income taxes

 

(91,965

)

(51,224

)

Income tax expense (benefit)

 

7,374

 

(9,497

)

Net loss from continuing operations

 

(99,339

)

(41,727

)

Net (loss) income from discontinued operations, net of tax

 

(320

)

256,143

 

Net (loss) income

 

$

(99,659

)

$

214,416

 

Computation of (loss) income attributable to common stockholders:

 

 

 

 

 

Loss from continuing operations attributable to common stockholders—basic and diluted

 

$

(99,339

)

$

(41,727

)

(Loss) income from discontinued operations attributable to common stockholders—basic and diluted

 

(320

)

256,143

 

(Loss) income attributable to common stockholders—basic and diluted

 

$

(99,659

)

$

214,416

 

 

 

 

 

 

 

Basic and diluted (loss) income per share:

 

 

 

 

 

Continuing operations

 

$

(1.88

)

$

(0.79

)

Discontinued operations

 

$

0.00

 

$

4.86

 

Net basic and diluted (loss) income per share

 

$

(1.88

)

$

4.07

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

June 1, 2019

 

June 2, 2018

 

Net (loss) income

 

$

(99,659

)

$

214,416

 

Other comprehensive (loss) income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of net actuarial losses included in net periodic pension cost, net of $0 and $144 tax expense

 

415

 

364

 

Change in fair value of interest rate cap

 

(656

)

 

Total other comprehensive (loss) income

 

(241

)

364

 

Comprehensive (loss) income

 

$

(99,900

)

$

214,780

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Common Stock

 

Additional
Paid-In

 

Accumulated

 

Accumulated
Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Loss

 

Total

 

BALANCE MARCH 2, 2019

 

54,016

 

$

54,016

 

$

5,876,977

 

$

(4,713,244

)

$

(31,059

)

$

1,186,690

 

Net loss

 

 

 

 

 

 

 

(99,659

)

 

 

(99,659

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Defined Benefit Plans, net of $0 tax expense

 

 

 

 

 

 

 

 

 

415

 

415

 

Change in fair value of interest rate cap

 

 

 

 

 

 

 

 

 

(656

)

(656

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(99,900

)

Adoption of ASU 2016-02

 

 

 

 

 

 

 

(56,776

)

 

 

(56,776

)

Exchange of restricted shares for taxes

 

(5

)

(5

)

(190

)

 

 

 

 

(195

)

Cancellation of restricted stock

 

(178

)

(178

)

178

 

 

 

 

 

 

Amortization of restricted stock balance

 

 

 

 

 

5,016

 

 

 

 

 

5,016

 

Stock-based compensation expense

 

 

 

382

 

 

 

 

 

382

 

BALANCE JUNE 1, 2019

 

53,833

 

$

53,833

 

$

5,882,363

 

$

(4,869,679

)

$

(31,300

)

$

1,035,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE MARCH 3, 2018

 

53,366

 

$

53,366

 

$

5,864,664

 

$

(4,282,471

)

$

(34,549

)

$

1,601,010

 

Net income

 

 

 

 

 

 

 

214,416

 

 

 

214,416

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Defined Benefit Plans, net of $144 tax expense

 

 

 

 

 

 

 

 

 

364

 

364

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

214,780

 

Adoption of ASU 2014-09

 

 

 

 

 

 

 

(8,547

)

 

 

(8,547

)

Cancellation of restricted stock

 

(44

)

(44

)

44

 

 

 

 

 

 

Amortization of restricted stock balance

 

 

 

 

 

3,381

 

 

 

 

 

3,381

 

Stock-based compensation expense

 

 

 

 

 

778

 

 

 

 

 

778

 

Stock options exercised

 

38

 

38

 

871

 

 

 

 

 

909

 

BALANCE JUNE 2, 2018

 

53,360

 

$

53,360

 

$

5,869,738

 

$

(4,076,602

)

$

(34,185

)

$

1,812,311

 

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

June 1, 2019

 

June 2, 2018

 

Operating activities:

 

 

 

 

 

Net (loss) income

 

$

(99,659

)

$

214,416

 

Net (loss) income from discontinued operations, net of tax

 

(320

)

256,143

 

Net loss from continuing operations

 

$

(99,339

)

$

(41,727

)

Adjustments to reconcile to net cash used in operating activities of continuing operations:

 

 

 

 

 

Depreciation and amortization

 

83,926

 

94,529

 

Lease termination and impairment charges

 

478

 

9,859

 

LIFO charge

 

7,489

 

9,966

 

Gain on sale of assets, net

 

(2,712

)

(5,859

)

Stock-based compensation expense

 

5,380

 

5,031

 

Loss on debt retirements, net

 

 

554

 

Changes in deferred taxes

 

 

(12,355

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(17,565

)

(194,159

)

Inventories

 

(11,454

)

31,101

 

Accounts payable

 

(75,893

)

207,960

 

Operating lease right-of-use assets and operating lease liabilities

 

(11,893

)

 

Other assets

 

22,513

 

7,102

 

Other liabilities

 

47,831

 

(128,316

)

Net cash used in operating activities of continuing operations

 

(51,239

)

(16,314

)

Investing activities:

 

 

 

 

 

Payments for property, plant and equipment

 

(40,981

)

(47,971

)

Intangible assets acquired

 

(8,210

)

(13,655

)

Proceeds from dispositions of assets and investments

 

658

 

9,916

 

Proceeds from sale-leaseback transactions

 

 

2,587

 

Net cash used in investing activities of continuing operations

 

(48,533

)

(49,123

)

Financing activities:

 

 

 

 

 

Net proceeds from revolver

 

125,000

 

190,000

 

Principal payments on long-term debt

 

(1,780

)

(431,106

)

Change in zero balance cash accounts

 

36,387

 

1,083

 

Net proceeds from issuance of common stock

 

 

910

 

Payments for taxes related to net share settlement of equity awards

 

(195

)

 

Financing fees paid for early debt redemption

 

 

(13

)

Deferred financing costs paid

 

(186

)

 

Net cash provided by (used in) financing activities of continuing operations

 

159,226

 

(239,126

)

Cash flows from discontinued operations:

 

 

 

 

 

Operating activities of discontinued operations

 

(13,877

)

(74,050

)

Investing activities of discontinued operations

 

523

 

603,402

 

Financing activities of discontinued operations

 

 

(525,031

)

Net cash (used in) provided by discontinued operations

 

(13,354

)

4,321

 

Increase (decrease) in cash and cash equivalents

 

46,100

 

(300,242

)

Cash and cash equivalents, beginning of period

 

144,353

 

447,334

 

Cash and cash equivalents, end of period

 

$

190,453

 

$

147,092

 

 

See accompanying notes to condensed consolidated financial statements.

 

8


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen week period ended June 1, 2019 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Rite Aid Corporation (“Rite Aid”) and Subsidiaries (together with Rite Aid, the “Company”) Fiscal 2019 10-K.

 

Recently adopted accounting pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, (Topic 842) (“ASU-2016-02” or the “Lease Standard”), which is intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that engage in lease transactions (both lessee and lessor). This ASU requires organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet a right of use asset (“ROU asset”) and a lease liability for the obligations created by those leases. ASU No. 2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019.

 

During July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. Among other things, ASU 2018-11 provides administrative relief by allowing entities to implement the Lease Standard using an alternative transition method. Effectively, the alternative transition method permits adoption of the Lease Standard through an adjustment to its opening balance sheet for the period of adoption, with the cumulative effect accounted for as an adjustment to retained earnings, without restating prior periods.

 

The Company adopted the Lease Standard on March 3, 2019 under the alternative transition method as permissible under ASU 2018-11, and applied the Lease Standard to all leases through a cumulative-effect adjustment to beginning accumulated deficit.  As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.  The Company elected the package of practical expedients permitted under the transition guidance within the Lease Standard, which includes, among other things, the ability to carry forward the existing lease classification.  On March 3, 2019, the Company recorded a liability for operating leases of $3,295,327, a ROU asset for such leases of $3,026,976 and recorded an after-tax transition adjustment to increase accumulated deficit by $56,776.  The Lease Standard had a material impact on the unaudited condensed consolidated balance sheet, but did not have a material impact on the unaudited condensed consolidated statement of operations or the unaudited condensed consolidated statement of cash flows.

 

As permitted under the practical expedient concerning assessment of lease portfolio, the Company chose not to reassess its lease portfolio, and consequently, all existing leases that were classified as operating leases in accordance with Topic 840, continue to be classified as operating leases, and all existing leases that were classified as capital leases under Topic 840 continue to be classified as finance leases.

 

The Company performed an evaluation of ROU asset for impairment on transition.  Stores that had previously been impaired and continued to fail the recoverability test as of March 2, 2019 were evaluated.  Any store ROU asset with a carrying amount in excess of fair value was written down to the fair value.  Fair value of those ROU assets was determined based on a study of market rents for similar active/operating retails sites.  The result of this impairment assessment was a $81,745 write-down of the ROU assets on transition to accumulated deficit.  In addition, the Company recognized $24,969 of deferred gains as a reduction to accumulated deficit upon transition related to prior sale-leaseback transactions along with other minor adjustments.

 

As of March 2, 2019, the Company had $124,046 in closed store and lease exit liabilities under Topic 420 (“Topic 420 Liabilities”). Under transition to Topic 842, existing Topic 420 liabilities were eliminated by recording a reduction to the ROU asset balance.  However, in certain cases the Company had larger existing Topic 420 liabilities than the ROU asset balances.  This excess amount of $9,333 continues to be recorded as a liability and will reduce lease expense over the remaining lease term of the affected stores.  In addition, upon transition, the Company reclassified deferred rent, including unamortized tenant income allowances, prepaid rent, and favorable and unfavorable lease balances resulting from prior acquisition accounting to the ROU asset.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

The following is a discussion of the Company’s lease policy under the new lease accounting standard:

 

The Company determines if an arrangement contains a lease at the inception of a contract. Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and operating lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, determined by class of underlying asset, to discount the lease payments. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that we would pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.  We use quoted interest rates obtained from financial institutions in an input to derive our incremental borrowing rate as the discount rate for the lease.  The ROU asset is equal to the operating lease liability plus lease payments made before commencement, less lease incentives received from the landlord.

 

The Company’s real estate leases typically contain options that permit lease extensions for additional periods of up to five years each. For real estate leases, generally, the renewal periods are not included within the lease term and the associated payments are not included in the measurement of the ROU asset and operating lease liability as the options to extend are not considered reasonably certain to occur at lease commencement.  The Company reevaluates each lease on a regular basis to consider the economic and strategic incentives of exercising the renewal options and will include all reasonably certain options in the measurement of our lease term.  Generally, the renewal option periods are not included within the lease term and the associated payments are not included in the measurement of the operating lease right-of-use asset and the operating lease liability until the renewals are i) evaluated and ii) determined to be exercised.  The Company has an insignificant amount of non-real estate leases however, renewal options are not included in the lease term for non-real estate leases because they are not considered reasonably certain of being exercised at lease commencement. The Company rarely executes leases less than 12 months. On transition, the Company did include in its ROU asset balance leases with less than 12 month remaining.

 

For real estate leases, the Company accounts for lease components and non-lease components as a single lease component. Certain real estate leases require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the operating lease right-of-use assets and operating lease liabilities.

 

Impact of the Lease Standard on Financial Statement Line Items

 

As a result of applying the alternative transition method to adopt the Lease Standard, the following adjustments were made to accounts on the unaudited condensed consolidated balance sheet as of March 3, 2019:

 

 

 

Impact of change in accounting policy

 

(in thousands)

 

As reported
March 2, 2019

 

Adjustments

 

As adjusted
March 3, 2019

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

144,353

 

$

 

$

144,353

 

Accounts receivable, net

 

1,788,712

 

 

1,788,712

 

Inventories, net

 

1,871,941

 

 

1,871,941

 

Prepaid expenses and other current assets

 

179,132

 

(51,448

)

127,684

 

Current assets held for sale

 

117,581

 

43,697

 

161,278

 

Total current assets

 

4,101,719

 

(7,751

)

4,093,968

 

Property, plant and equipment, net

 

1,308,514

 

 

1,308,514

 

Operating lease right-of-use asset

 

 

3,026,976

 

3,026,976

 

Goodwill

 

1,108,136

 

 

1,108,136

 

Other intangibles, net

 

448,706

 

(29,632

)

419,074

 

Deferred tax assets

 

409,084

 

 

409,084

 

Other assets

 

215,208

 

(1,086

)

214,122

 

Total assets

 

$

7,591,367

 

$

2,988,507

 

$

10,579,874

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

16,111

 

$

 

$

16,111

 

Accounts payable

 

1,618,585

 

 

1,618,585

 

Accrued salaries, wages and other current liabilities

 

808,439

 

(56,553

)

751,886

 

Current portion of operating lease liabilities

 

 

457,305

 

457,305

 

Current liabilities held for sale

 

 

45,167

 

45,167

 

Total current liabilities

 

2,443,135

 

445,919

 

2,889,054

 

Long-term debt, less current maturities

 

3,454,585

 

 

3,454,585

 

Long-term operating lease liabilities

 

 

2,838,022

 

2,838,022

 

Lease financing obligations, less current maturities

 

24,064

 

 

24,064

 

Other noncurrent liabilities

 

482,893

 

(238,658

)

244,235

 

Total liabilities

 

6,404,677

 

3,045,283

 

9,449,960

 

Commitments and contingencies

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $1 per share; 75,000 shares authorized; shares issued and outstanding 54,016

 

54,016

 

 

54,016

 

Additional paid-in capital

 

5,876,977

 

 

5,876,977

 

Accumulated deficit

 

(4,713,244

)

(56,776

)

(4,770,020

)

Accumulated other comprehensive loss

 

(31,059

)

 

(31,059

)

Total stockholders’ equity

 

1,186,690

 

(56,776

)

1,129,914

 

Total liabilities and stockholders’ equity

 

$

7,591,367

 

$

2,988,507

 

$

10,579,874

 

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

See Note 12 for additional information.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU No. 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), which amends the principal-versus-agent implementation guidance and in April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, which amends the guidance in those areas in the new revenue recognition standard. These ASUs, collectively the “new revenue standard”, are effective for annual reporting periods (including interim reporting periods within those periods) beginning January 1, 2018.

 

The Company adopted the new revenue standard as of March 4, 2018 using the modified retrospective method and applying the new standard to all contracts with customers. In connection with the adoption of the new revenue standard, the Company identified one difference in its Retail Pharmacy segment related to the timing of revenue recognition for third party prescription revenues, which was historically recognized at the time the prescription was filled. Upon adoption of ASU No. 2014-09, this revenue is recognized at the time the customer takes possession of the merchandise. In connection with its March 4, 2018 adoption of the new revenue standard on a modified retrospective basis, the Company recorded a reduction to accounts receivable of $57,897, a reduction to deferred tax assets of $1,771, an increase to inventory of $51,121, and a corresponding increase to accumulated deficit of $8,547 within its Retail Pharmacy segment.

 

In addition, the Company identified revenues under one specific rebate administration program under which the Company’s Pharmacy Services segment was determined to be the principal and historically recognized revenues and cost of revenues on a gross basis of approximately $123,500 during fiscal 2018. Upon adoption of the new revenue standard, the Company is now recording revenue from this program on a net basis.

 

The following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting standard:

 

Revenue Recognition

 

Retail Pharmacy Segment

 

For front-end sales, the Retail Pharmacy segment recognizes revenues upon the transfer of control of the goods to the customer. The Company satisfies its performance obligation at the point of sale for front-end transactions. The Retail Pharmacy segment front-end revenue is measured based on the amount of fixed consideration that we expect to receive, net of an allowance for estimated future returns. Return activity is immaterial to revenues and results of operations in all periods presented.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

For pharmacy sales, the Retail Pharmacy segment recognizes revenue upon the transfer of control of the goods to the customer. The Company satisfies its performance obligation, upon pickup by the customer, which is when the customer takes title to the product. Each prescription claim represents an individual arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims. The Company’s revenue is measured based on the amount of fixed consideration that we expect to receive, reduced by refunds owed to the third party payor for pricing guarantees and performance against defined value-based service and performance metrics. The inputs to these estimates are not highly subjective or volatile. The effect of adjustments between estimated and actual amounts have not been material to the Company’s results of operations or financial position. Prescriptions are generally not returnable.

 

The Retail Pharmacy segment offers a chain-wide loyalty card program titled wellness +. Individual customers are able to become members of the wellness + program. Members participating in the wellness + loyalty card program earn points on a calendar year basis for eligible front-end merchandise purchases and qualifying prescription purchases. One point is awarded for each dollar spent towards front-end merchandise and 25 points are awarded for each qualifying prescription.

 

Members reach specific wellness + tiers based on the points accumulated during the calendar year, which entitles such customers to certain future discounts and other benefits upon reaching that tier. For example, any customer that reaches 1,000 points in a calendar year achieves the “Gold” tier, enabling him or her to receive a 20% discount on qualifying purchases of front-end merchandise for the remaining portion of the calendar year and also the next calendar year. There is also a similar “Silver” level with a lower threshold and benefit level.

 

Points earned pursuant to the wellness+ program represent a performance obligation and the Company allocates revenue between the merchandise purchased and the wellness + points based on the relative stand-alone selling price of each performance obligation. The relative value of the wellness + points is initially deferred as a contract liability (included in other current and noncurrent liabilities). As members receive discounted front-end merchandise or when the benefit period expires, the Retail Pharmacy segment recognizes an allocable portion of the deferred contract liability into revenue. The Retail Pharmacy segment had accrued contract liabilities of $74,921 as of June 1, 2019, of which $51,581 is included in other current liabilities and $23,340 is included in noncurrent liabilities. The Retail Pharmacy segment had accrued contract liabilities of $63,720 as of March 2, 2019, of which $51,042 is included in other current liabilities and $12,678 is included in noncurrent liabilities.

 

The wellness + program also allows a customer to earn Bonus Cash based on qualifying purchases. Wellness + Rewards members have the opportunity to redeem their accumulated Bonus Cash on a future purchase with a 60 day expiration window.

 

For a majority of the Bonus Cash issuances, funding is provided by our vendors through contractual arrangements. This funding is treated as a contract liability and remains a contract liability until (i) wellness + Rewards members redeem their Bonus Cash, or (ii) wellness + Rewards members allow the Bonus Cash to expire. Upon utilization or expiration of the benefit period, the Retail Pharmacy segment recognizes an allocable portion of the accrued contract liability into revenue. For Bonus Cash issuances that are not vendor funded, the contract liability is recorded at the time of issuance through a reduction to revenues, and not recognized until the Bonus Cash is redeemed or expires.

 

Pharmacy Services Segment

 

The Pharmacy Services segment sells prescription drugs indirectly through its retail pharmacy network and directly through its mail service dispensing pharmacy. The Pharmacy Services segment recognizes revenue from prescription drugs sold by (i) its mail service dispensing pharmacy and (ii) under retail pharmacy network contracts where it is the principal at the contract prices negotiated with its clients, primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout the United States. Revenues include: (i) the portion of the price the client pays directly to the Pharmacy Services segment, net of any volume-related or other discounts paid back to the client (see “Drug Discounts” below), (ii) the price paid to the Pharmacy Services segment by client plan members for mail order prescriptions (“Mail Co-Payments”), (iii) client plan member copayments made directly to the retail pharmacy network and (iv) administrative fees. Revenue is recognized when the Pharmacy Services segment meets its performance obligations relative to each transaction type. The following revenue recognition policies have been established for the Pharmacy Services segment:

 

·                  Revenues generated from prescription drugs sold by third party pharmacies in the Pharmacy Services segment’s retail pharmacy network and associated administrative fees are recognized at the Pharmacy Services segment’s point-of-sale, which is when the claim is adjudicated by the Pharmacy Services segment’s online claims processing system. At this point the Company has performed all of its performance obligations.

 

·                  Revenues generated from prescription drugs sold by the Pharmacy Services segment’s mail service dispensing pharmacy are recognized when the prescription is shipped. At the time of shipment, the Pharmacy Services segment has performed all of its performance obligations under its client contracts, as control of and title to the product has passed to the client plan members. The Pharmacy Services segment does not experience a significant level of returns or reshipments.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

·                  Revenues generated from administrative fees based on membership or claims volume are recognized monthly based on the terms within the individual contracts, either a monthly member based fee, or a claims volume based fee.

 

In the majority of its contracts, the Pharmacy Services segment is the principal because its client contracts give clients the right to obtain access to its pharmacy contracts under which the Pharmacy Services segment directs its pharmacy network to provide the services (drug dispensing, consultation, etc.) and goods (prescription drugs) to the clients’ members at its negotiated pricing. The Pharmacy Services segment’s obligations under its client contracts are separate and distinct from its obligations to the third party pharmacies included in its retail pharmacy network contracts. In the majority of these contracts, the Pharmacy Services segment is contractually required to pay the third party pharmacies in its retail pharmacy network for products sold after payment is received from its clients. The Pharmacy Services segment has control over these transactions until the prescription is transferred to the member and, thus, that it is acting as a principal. As such, the Pharmacy Services segment records the total prescription price contracted with clients in revenues.

 

Amounts paid to pharmacies and amounts charged to clients are exclusive of the applicable co-payment under Pharmacy Services segment contracts. Retail pharmacy co-payments, which we instruct retail pharmacies to collect from members, are included in our revenues and our cost of revenues.

 

For contracts under which the Pharmacy Services segment acts as an agent or does not control the prescription drugs prior to transfer to the client, no revenue is recognized.

 

Drug Discounts—The Pharmacy Services segment deducts from its revenues that are generated from prescription drugs sold by third party pharmacies any rebates, inclusive of discounts and fees, earned by its clients based on utilization levels and other factors as negotiated with the prescription drug manufacturers or suppliers. Rebates are paid to clients in accordance with the terms of client contracts.

 

Medicare Part D—The Pharmacy Services segment, through its Envision Insurance Company (“EIC”) subsidiary, participates in the federal government’s Medicare Part D program as a Prescription Drug Plan (“PDP”). Please refer to Note 8, Medicare Part D.

 

Disaggregation of Revenue

 

The following tables disaggregate the Company’s revenue by major source in each segment for the thirteen week period ended June 1, 2019:

 

In thousands

 

For the thirteen week period
ended June 1, 2019

 

Retail Pharmacy segment:

 

 

 

Pharmacy sales

 

$

2,563,244

 

Front-end sales

 

1,265,361

 

Other revenue

 

36,203

 

Total Retail Pharmacy segment

 

3,864,808

 

Pharmacy Services segment

 

1,566,292

 

Intersegment elimination

 

(58,511

)

Total revenue

 

$

5,372,589

 

 

Reclassification of the Statements of Cash Flows presentation

 

During fiscal 2019, the Company expanded its disclosure on its Statements of Cash Flows to include changes in other assets separate from changes in other liabilities, which had historically been combined. Prior period amounts have been reclassified to conform to the current period presentation.

 

Recasting of per-share amounts

 

As previously announced, the Company implemented a reverse stock split of the Company’s common stock at a reverse stock split ratio of 1-for-20. The Company’s common stock began trading on a split-adjusted basis on the NYSE at the market open on April 22, 2019. Accordingly, all share and per-share amounts for the prior period has been recasted to reflect the reverse stock split.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

2. Restructuring

 

In March 2019, the Board of Directors implemented a reorganization of our executive management team to further streamline our business.  In addition, the Company announced a restructuring plan that will reduce managerial layers and consolidate roles across the organization, resulting in the elimination of approximately 400 full-time positions located at the Company’s headquarters and across the field organization. Approximately two-thirds of the reductions took place at the time of the announcement and the balance will occur by the end of fiscal 2020.

 

In April 2019, the Company implemented its Path to the Future transformation initiative, which focuses primarily on opportunities to drive further growth and operating efficiency, including i) building tools to work with regional health plans to improve patient health outcomes, ii) rationalize SKU’s in its front-end offering to free up working capital, improve front-end profitability and improve the customer experience, iii) an assessment of the Company’s pricing and promotional strategy and, iv) a continued review of the Company’s cost structure, which includes opportunities to use technology and vendor partners to help reduce costs.

 

For the thirteen week period ended June 1, 2019, the Company incurred total restructuring-related costs of $43,350, which are included as a component of SG&A.  These costs are as follows:

 

 

 

Retail Pharmacy
 segment

 

Pharmacy
Services segment

 

Total

 

 

 

 

 

 

 

 

 

Restructuring-related costs

 

 

 

 

 

 

 

Severance and related costs associated with the March 2019 reorganization (a)

 

$

25,272

 

$

1,804

 

$

27,076

 

Non-executive retention costs associated with the March 2019 reorganization (b)

 

4,499

 

2,165

 

6,664

 

Professional and other fees relating to the Path to the Future transformation initiative (c)

 

9,610

 

 

9,610

 

Total restructuring-related costs

 

$

39,381

 

$

3,969

 

$

43,350

 

 

A summary of activity for the thirteen week period ended June 1, 2019 in the restructuring-related liabilities associated with the programs noted above, which is included in accrued salaries, wages and other current liabilities, is as follows:

 

 

 

Severance and related
costs (a)

 

Retention costs (b)

 

Professional and
other fees (c)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at March 2, 2019

 

$

 

$

4,704

 

$

 

$

4,704

 

Additions charged to expense

 

27,076

 

6,664

 

9,610

 

43,350

 

Cash payments

 

(4,653

)

(242

)

(9,610

)

(14,505

)

Balance at June 1, 2019

 

$

22,423

 

$

11,126

 

$

 

$

33,549

 

 


(a) — Severance and related costs reflect severance accruals, executive search fees, outplacement services and other similar charges associated with the March 2019 reorganization.

 

(b) — As part of its March 2019 reorganization, the Company incurred costs with the implementation of a retention plan for certain of its key associates.

 

(c) — Professional and other fees include costs incurred in connection with the identification and implementation of transformation initiatives associated with the Path to the Future initiative.

 

The Company anticipates its total fiscal 2020 restructuring-related costs to be approximately $55,000.

 

3. Asset Sale to WBA

 

On September 18, 2017, the Company entered into the Amended and Restated Asset Purchase Agreement with WBA and Buyer, which amended and restated in its entirety the previously disclosed Asset Purchase Agreement, dated as of June 28, 2017, by and among the Company, WBA and Buyer. Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer agreed to purchase from the Company 1,932 Acquired Stores, three distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of $4,375,000, on a cash-free, debt-free basis in the Sale.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

The Company announced on September 19, 2017 that the waiting period under the HSR Act, expired with respect to the Sale. The Company completed the store transfer process in March of 2018, which resulted in the transfer of all 1,932 stores and related assets to WBA, and the received of cash proceeds of $4,156,686.

 

On September 13, 2018, the Company completed the sale of one of its distribution centers and related assets to WBA for proceeds of $61,251. The impact of the sale of the distribution center and related assets resulted in a pre-tax gain of $14,151, which has been included in the results of operations and cash flows of discontinued operations during the fifty-two week period ended March 2, 2019. The transfer of the remaining two distribution centers and related assets remains subject to minimal customary closing conditions applicable only to the distribution centers being transferred at such distribution center closings, as specified in the Amended and Restated Asset Purchase Agreement.

 

The parties to the Amended and Restated Asset Purchase Agreement have each made customary representations and warranties. The Company has agreed to various covenants and agreements, including, among others, the Company’s agreement to conduct its business at the distribution centers being sold to WBA in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the distribution center closing. The Company has also agreed to provide transition services to Buyer for up to three years after the initial closing of the Sale. Under the terms of the TSA, the Company provides various services on behalf of WBA, including but not limited to the purchase and distribution of inventory and virtually all selling, general and administrative activities. The term of the TSA has been extended to October 17, 2020. In connection with these services, the Company purchases the related inventory and incurs cash payments for the selling, general and administrative activities, which, the Company bills on a cash neutral basis to WBA in accordance with terms as outlined in the TSA. Total billings for these items during the thirteen week periods ended June 1, 2019 and June 2, 2018 were $1,192,791 and $2,041,075, respectively, of which $224,385 and $447,305 is included in Accounts receivable, net. The Company charged WBA TSA fees of $14,225 and $23,735 during the thirteen week periods ended June 1, 2019 and June 2, 2018, respectively, which are reflected as a reduction to selling, general and administrative expenses.

 

Based on its magnitude and because the Company exited certain markets, the Sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for the Sale as required by Accounting Standards Codification 210-05—Discontinued Operations (ASC 205-20). In accordance with ASC 205-20, the Company reclassified the Disposal Group to assets and liabilities held for sale on its consolidated balance sheets as of the periods ended June 1, 2019 and March 2, 2019, and reclassified the financial results of the Disposal Group in its consolidated statements of operations and consolidated statements of cash flows for all periods presented. The Company also revised its discussion and presentation of operating and financial results to be reflective of its continuing operations as required by ASC 205-20.

 

The carrying amount of the Assets to be Sold, which were included in the Retail Pharmacy segment, have been reclassified from their historical balance sheet presentation to current assets and liabilities held for sale as follows:

 

 

 

June 1,
2019

 

March 2,
2019

 

Inventories

 

$

62,351

 

$

68,233

 

Property and equipment

 

49,346

 

49,348

 

Operating lease right-of-use asset

 

42,114

 

 

Current assets held for sale

 

$

153,811

 

$

117,581

 

Current portion of operating lease liabilities

 

$

3,213

 

$

 

Long-term operating lease liabilities

 

40,616

 

 

Current liabilities held for sale

 

$

43,829

 

$

 

 

15


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

The operating results of the discontinued operations that are reflected on the consolidated statements of operations within net income (loss) from discontinued operations are as follows:

 

 

 

June 1,
2019
(13 weeks)

 

June 2,
2018
(13 weeks)

 

Revenues

 

$

(88

)

$

23,400

 

Costs and expenses:

 

 

 

 

 

Cost of revenues(a)

 

265

 

17,081

 

Selling, general and administrative expenses(a)

 

486

 

13,875

 

Lease termination and impairment charges

 

 

 

Loss on debt retirements, net

 

 

4,570

 

Interest expense(b)

 

 

4,615

 

Gain on stores sold to Walgreens Boots Alliance

 

 

(360,557

)

Gain on sale of assets, net

 

(522

)

 

 

 

229

 

(320,416

)

(Loss) income from discontinued operations before income taxes

 

(317

)

343,816

 

Income tax expense

 

3

 

87,673

 

Net (loss) income from discontinued operations, net of tax

 

$

(320

)

$

256,143

 

 


(a)                                 Cost of revenues and selling, general and administrative expenses for the discontinued operations excludes corporate overhead. These charges are reflected in continuing operations.

 

(b)                                 In accordance with ASC 205-20, the operating results for the thirteen week periods ended June 1, 2019 and June 2, 2018, respectively, for the discontinued operations include interest expense relating to the outstanding indebtedness repaid with the estimated excess proceeds from the Sale.

 

The operating results reflected above do not fully represent the Disposal Group’s historical operating results, as the results reported within net income from discontinued operations only include expenses that are directly attributable to the Disposal Group.

 

4. (Loss) Income Per Share

 

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

 

 

 

Thirteen Week Period
Ended

 

 

 

June 1,
2019

 

June 2,
2018

 

Basic and diluted (loss) income per share:

 

 

 

 

 

Numerator:

 

 

 

 

 

Net loss from continuing operations

 

$

(99,339

)

$

(41,727

)

Net (loss) income from discontinued operations

 

(320

)

256,143

 

(Loss) income attributable to common stockholders— basic and diluted

 

$

(99,659

)

$

214,416

 

Denominator:

 

 

 

 

 

Basic weighted average shares

 

52,976

 

52,719

 

Outstanding options and restricted shares, net

 

 

 

Diluted weighted average shares

 

52,976

 

52,719

 

 

 

 

 

 

 

Basic and diluted (loss) income per share:

 

 

 

 

 

Continuing operations

 

$

(1.88

)

$

(0.79

)

Discontinued operations

 

0.00

 

4.86

 

Net basic and diluted (loss) income per share

 

$

(1.88

)

$

4.07

 

 

16


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

Due to their antidilutive effect, 992 and 1,288 potential common shares related to stock options have been excluded from the computation of diluted income (loss) per share for the thirteen week period ended June 1, 2019 and June 2, 2018, respectively. Also, excluded from the computation of diluted income (loss) per share as of June 1, 2019 and June 2, 2018 are restricted shares of 813 and 567, respectively, which are included in shares outstanding.

 

On April 10, 2019, the Company’s Board of Directors approved a one-for-twenty reverse stock split of the Company’s outstanding shares of common stock. The reverse stock split was effected on April 18, 2019 at 5:00 p.m. Eastern time. At the effective time, every twenty issued and outstanding shares of the Company’s common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split, and in lieu thereof, each stockholder holding fractional shares was entitled to receive a cash payment (without interest or deduction) from the Company’s transfer agent in an amount equal to such stockholder’s respective pro rata shares of the total net proceeds from the Company’s transfer agent sale of all fractional shares at the then-prevailing prices on the open market. In connection with the reverse stock split, the number of authorized shares of our common stock was also reduced on a one-for-twenty basis, from 1,500,000 to 75,000. The par value of each share of common stock remained unchanged. A proportionate adjustment was also made to the maximum number of shares issuable under the Company’s 2014 Equity Incentive Plan.

 

5. Lease Termination and Impairment Charges

 

Lease termination and impairment charges consist of amounts as follows:

 

 

 

Thirteen Week Period
Ended

 

 

 

June 1,
2019

 

June 2,
2018

 

Impairment charges

 

$

123

 

$

283

 

Lease termination charges

 

 

9,576

 

Facility exit charges

 

355

 

 

 

 

$

478

 

$

9,859

 

 

Impairment Charges

 

These amounts include the write-down of long-lived assets at locations that were assessed for impairment because of management’s intention to relocate or close the location or because of changes in circumstances that indicated the carrying value of an asset may not be recoverable.

 

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

 

·                  Level 1—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·                  Level 2—Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

 

·                  Level 3—Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

 

Non-Financial Assets Measured on a Non-Recurring Basis

 

Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the thirteen week period ended June 1, 2019, long-lived assets from continuing operations with a carrying value of $123, primarily store assets, were written down to their fair value of $0, resulting in an impairment charge of

 

17


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

$123. During the thirteen week period ended June 2, 2018, long-lived assets from continuing operations with a carrying value of $1,575, primarily store assets, were written down to their fair value of $1,292, resulting in an impairment charge of $283. If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired in the current period may be further impaired in future periods.

 

The following table presents fair values for those assets measured at fair value on a non-recurring basis at June 1, 2019 and June 2, 2018:

 

Fair Value Measurement Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
June 1,
2019

 

Long-lived assets held for use

 

$

 

$

 

$

 

$

 

Long-lived assets held for sale

 

$

 

$

 

$

 

$

 

Total

 

$

 

$

 

$

 

$

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
June 2,
2018

 

Long-lived assets held for use

 

$

 

$

 

$

 

$

 

Long-lived assets held for sale

 

$

 

$

1,292

 

$

 

$

1,292

 

Total

 

$

 

$

1,292

 

$

 

$

1,292

 

 

The above assets reflected in the caption Long-lived assets held for sale are separate and apart from the Assets to be Sold and do to their immateriality have not been reclassified to assets held for sale.

 

Lease Termination and Facility Exit Charges

 

As part of the Company’s ongoing business activities, the Company assesses stores and distribution centers for potential closure or relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease termination charges, lease exit costs and inventory liquidation charges, as well as impairment of assets at these locations. When a store or distribution center is closed, the Company records an expense for unrecoverable costs and accrues a liability equal to the present value at current credit adjusted risk-free interest rates of any anticipated executory costs which are not included within the store or distribution center’s respective lease liability under Topic 842. Other store or distribution center closing and liquidation costs are expensed when incurred.

 

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

 

 

 

Thirteen Week Period
Ended

 

 

 

June 1,
2019

 

June 2,
2018

 

Balance—beginning of period

 

$

124,046

 

$

133,290

 

Existing Topic 420 liabilities eliminated by recording a reduction to the ROU asset

 

(112,288

)

 

Provision for present value of noncancellable lease payments of closed stores

 

 

8,130

 

Changes in assumptions about future sublease income, terminations and changes in interest rates

 

 

(1,038

)

Interest accretion

 

 

2,685

 

Cash payments, net of sublease income

 

(2,425

)

(11,885

)

Balance—end of period

 

$

9,333

 

$

131,182

 

 

18


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

6. Fair Value Measurements

 

The Company utilizes the three-level valuation hierarchy as described in Note 5, Lease Termination and Impairment Charges, for the recognition and disclosure of fair value measurements.

 

As of June 1, 2019 and March 2, 2019, the Company did not have any financial assets measured on a recurring basis.

 

Other Financial Instruments

 

Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable. These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature. In addition, as of June 1, 2019 and March 2, 2019, the Company has $6,968 and $7,191, respectively, of investments carried at amortized cost as these investments are being held to maturity. These investments are included as a component of other assets as of June 1, 2019 and as a component of prepaid expenses and other current assets as of March 2, 2019. The Company believes the carrying value of these investments approximates their fair value.

 

The fair value for LIBOR-based borrowings under the Company’s senior secured credit facility is estimated based on the quoted market price of the financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company’s other long-term indebtedness are estimated based on quoted market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company’s total long-term indebtedness was $3,582,037 and $3,172,793, respectively, as of June 1, 2019. The carrying amount and estimated fair value of the Company’s total long-term indebtedness was $3,454,585 and $3,120,335, respectively, as of March 2, 2019.

 

On March 15, 2019, the Company entered into an interest rate cap (“Cap”), which has been designated to the variable interest rate payments on the first $650.0 million notional amount of variable rate indebtedness. The Cap has an effective date of March 21, 2019 and expires on March 21, 2021. The Cap provides the Company with interest rate protection in the event that LIBOR increases above 2.75%.  The fair market value of the Cap is recorded as a component of other assets.

 

7. Income Taxes

 

The Company recorded an income tax expense from continuing operations of $7,374 and an income tax benefit from continuing operations of $9,497 for the thirteen week periods ended June 1, 2019 and June 2, 2018. The effective tax rate for the thirteen week periods ended June 1, 2019 and June 2, 2018 was (8.0)% and 18.5%, respectively. The effective tax rate for the thirteen week period ended June 1, 2019 is net of an adjustment of (34.5)% to increase the valuation allowance for additional deferred tax assets created this period.  The effective tax rate for the thirteen week period ended June 2, 2018 included an adjustment of (2.3)% to increase the valuation allowance related to certain state deferred  taxes.

 

The Company recognizes tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

 

The Company believes that it is reasonably possible that a decrease of up to $7,295 in unrecognized tax benefits related to state exposures may be necessary in the next twelve months however management does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

 

The Company regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain. Management will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. The Company continues to maintain a valuation allowance against net deferred tax assets of $1,048,101 and $1,091,416, which relates to federal and state deferred tax assets that may not be realized based on the Company’s future projections of taxable income at June 1, 2019 and March 2, 2019, respectively.

 

8. Medicare Part D

 

The Company offers Medicare Part D benefits through EIC, which has contracted with CMS to be a PDP and, pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, must be a risk-bearing entity regulated under state insurance laws or similar statutes.

 

19


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

EIC is a licensed domestic insurance company under the applicable laws and regulations. Pursuant to these laws and regulations, EIC must file quarterly and annual reports with the National Association of Insurance Commissioners (“NAIC”) and certain state regulators, must maintain certain minimum amounts of capital and surplus under formulas established by certain states and must, in certain circumstances, request and receive the approval of certain state regulators before making dividend payments or other capital distributions to the Company. The Company does not believe these limitations on dividends and distributions materially impact its financial position. EIC is subject to minimum capital and surplus requirements in certain states. The minimum amount of capital and surplus required to satisfy regulatory requirements in these states is $23,314 as of March 31, 2019. EIC was in excess of the minimum required amounts in these states as of June 1, 2019.

 

The Company has recorded estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims management and enrollment systems. Significant estimates arising from its participation in this program include: (i) estimates of low-income cost subsidies, reinsurance amounts, and coverage gap discount amounts ultimately payable to CMS based on a detailed claims reconciliation that will occur in the following year; (ii) an estimate of amounts receivable from CMS under a risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been incurred but have not yet been reported.

 

As of June 1, 2019 and March 2, 2019, accounts receivable, net included $448,266 and $392,400 due from CMS respectively.

 

9. Manufacturer Rebates Receivables

 

The Pharmacy Services Segment has manufacturer rebates receivables of $465,562 and $445,200 included in Accounts receivable, net, as of June 1, 2019 and March 2, 2019, respectively.

 

10. Goodwill and Other Intangible Assets

 

There was no impairment charge for the thirteen week period ended June 1, 2019. At June 1, 2019 and March 2, 2019, accumulated impairment losses for the Pharmacy Services segment was $574,712.

 

The Company’s intangible assets are primarily finite-lived and amortized over their useful lives. Following is a summary of the Company’s finite-lived and indefinite-lived intangible assets as of June 1, 2019 and March 2, 2019.

 

 

 

June 1, 2019

 

March 2, 2019

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Remaining
Weighted
Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Remaining
Weighted
Average
Amortization
Period

 

Favorable leases and other(a)

 

$

180,435

 

$

(158,605

)

$

21,830

 

3 years

 

$

370,855

 

$

(318,503

)

$

52,352

 

7 years

 

Prescription files

 

926,101

 

(837,819

)

88,282

 

3 years

 

919,749

 

(827,222

)

92,527

 

3 years

 

Customer relationships(a)

 

388,000

 

(204,023

)

183,977

 

12 years

 

388,000

 

(193,352

)

194,648

 

13 years

 

CMS license

 

57,500

 

(9,047

)

48,453

 

21 years

 

57,500

 

(8,472

)

49,028

 

22 years

 

Claims adjudication and other developed software

 

58,985

 

(33,137

)

25,848

 

3 years

 

58,985

 

(31,030

)

27,955

 

4 years

 

Trademarks

 

20,100

 

(7,906

)

12,194

 

6 years

 

20,100

 

(7,404

)

12,696

 

7 years

 

Backlog

 

11,500

 

(11,500

)

 

0 years

 

11,500

 

(11,500

)

 

0 years

 

Total finite

 

$

1,642,621

 

$

(1,262,037

)

380,584

 

 

 

$

1,826,689

 

$

(1,397,483

)

$

429,206

 

 

 

Trademarks

 

19,500

 

 

19,500

 

Indefinite

 

19,500

 

 

19,500

 

Indefinite

 

Total

 

$

1,662,121

 

$

(1,262,037

)

$

400,084

 

 

 

$

1,846,189

 

$

(1,397,483

)

$

448,706

 

 

 

 


(a)                                      Amortized on an accelerated basis which is determined based on the remaining useful economic lives of the customer relationships that are expected to contribute directly or indirectly to future cash flows.

 

Also included in other non-current liabilities as of June 1, 2019 and March 2, 2019 are unfavorable lease intangibles with a net carrying amount of $0 and $14,763, respectively. In connection with the Adoption of ASU 2016-02, Leases (Topic 842), both favorable and unfavorable leases were reclassified into operating lease right-of-use assets.

 

Amortization expense for these intangible assets and liabilities was $27,660 and $35,400 for the thirteen week periods ended June 1, 2019 and June 2, 2018, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2020—$99,436; 2021—$76,988; 2022—$56,559; 2023—$41,485 and 2024—$27,910.

 

20


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

11. Indebtedness and Credit Agreements

 

Following is a summary of indebtedness and lease financing obligations at June 1, 2019 and March 2, 2019:

 

 

 

June 1,
2019

 

March 2,
2019

 

Secured Debt:

 

 

 

 

 

Senior secured revolving credit facility due December 2023 ($1,000,000 and $875,000 face value less unamortized debt issuance costs of $22,972 and $24,069)

 

$

977,028

 

$

850,931

 

FILO term loan due December 2023 ($450,000 face value less unamortized debt issuance costs of $3,662 and $3,918)

 

446,338

 

446,082

 

 

 

1,423,366

 

1,297,013

 

Guaranteed Unsecured Debt:

 

 

 

 

 

6.125% senior notes due April 2023 ($1,753,490 face value less unamortized debt issuance costs of $15,940 and $16,982)

 

1,737,550

 

1,736,508

 

 

 

1,737,550

 

1,736,508

 

Unguaranteed Unsecured Debt:

 

 

 

 

 

7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,253 and $1,295)

 

293,747

 

293,705

 

6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $626 and $642)

 

127,374

 

127,358

 

 

 

421,121

 

421,063

 

Lease financing obligations

 

34,430

 

40,176

 

Total debt

 

3,616,467

 

3,494,760

 

Current maturities of long-term debt and lease financing obligations

 

(11,751

)

(16,111

)

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

 

$

3,604,716

 

$

3,478,649

 

 

Credit Facility

 

On December 20, 2018, the Company entered into a new senior secured credit agreement, consisting of a new $2,700,000 senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a new $450,000 “first-in, last out” senior secured term loan facility (“Senior Secured Term Loan”) (collectively the “New Facilities”).

 

Proceeds from the New Facilities were used to refinance the Company’s prior $2,700,000 Amended and Restated Senior Secured Credit Facility due January 2020 (the “Old Facility” the New Facilities and the Old Facility are collectively referred to herein as the “Facilities”). The New Facilities extend the Company’s debt maturity profile and provide additional liquidity. The New Facilities mature in December 2023, subject to an earlier maturity on December 31, 2022 if the Company has not repaid or refinanced its existing 6.125% Senior Notes due 2023 prior to such date. The Company’s new Senior Secured Revolving Credit Facility will bear interest at a rate of LIBOR plus 125 to 175 basis points (or an alternate base rate plus 25 to 75 basis points), depending on availability under the revolving facility. The Company’s new Senior Secured Term Loan will bear interest at a rate of LIBOR plus 300 basis points (or an alternate base rate plus 200 basis points).

 

The Company’s ability to borrow under the New Facilities is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At June 1, 2019, the Company had $1,450,000 of borrowings outstanding under the New Facilities and had letters of credit outstanding against the New Facilities of $83,205 which resulted in additional borrowing capacity of $1,616,795.

 

The New Facilities restrict the Company and the Subsidiary Guarantors (as defined herein) from accumulating cash on hand in excess of $200,000 at any time revolving loans are outstanding (not including cash located in its stores and lockbox deposit account and cash necessary to cover current liabilities).

 

The New Facilities allow the Company to have outstanding, at any time, up to $1,500,000 in secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock in addition to borrowings under the New Facilities and existing indebtedness, provided that not in excess of $750,000 of such secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest of (i) the fifth anniversary of the effectiveness of the New Facilities and (ii) the latest maturity date of any Term Loan or Other Revolving Commitment (each as defined in the New Facilities). Subject to the limitations described in clauses (i) and (ii) of the immediately preceding sentence, the New Facilities additionally allow the Company to issue or incur an unlimited amount of

 

21


Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the New Facilities) is not in effect; provided, however, that certain of the Company’s other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The New Facilities also contain certain restrictions on the amount of secured first priority debt the Company is able to incur. The New Facilities also allow for the voluntary repurchase of any debt or other convertible debt, so long as the New Facilities are not in default and the Company maintains availability under its revolver of more than $365,000.

 

The New Facilities have a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (i) on any date on which availability under the revolver is less than $200,000 or (ii) on the third consecutive business day on which availability under the revolver is less than $250,000 and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the New Facilities is equal to or greater than $250,000. As of June 1, 2019, the Company had availability under its New Facilities of $1,616,795, its fixed charge coverage ratio was greater than 1.00 to 1.00, and the Company was in compliance with the New Facilities’ financial covenant. The New Facilities also contain covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens.

 

The New Facilities also provide for customary events of default.

 

With the exception of EIC, substantially all of Rite Aid Corporation’s 100% owned subsidiaries guarantee the obligations under the New Facilities and unsecured guaranteed notes. The New Facilities are secured, on a senior priority basis, by a lien on, among other things, accounts receivable, inventory and prescription files of the Subsidiary Guarantors. The subsidiary guarantees related to the Company’s New Facilities and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several, and there are no restrictions on the ability of the Company to obtain funds from its subsidiaries. The Company has no independent assets or operations. Other than EIC, the subsidiaries, including joint ventures, that do not guarantee the New Facilities and applicable notes, are minor. As such, condensed consolidating financial information for the Company, its guaranteeing subsidiaries and non-guaranteeing subsidiaries is presented for those periods subsequent to the acquisition of EnvisionRx. See Note 16 “Guarantor and Non-Guarantor Condensed Consolidating Financial Information” for additional disclosure.

 

Fiscal 2019 and 2020 Transactions

 

On March 13, 2018, the Company issued a notice of redemption for all of the 9.25% Notes that were outstanding on April 12, 2018, pursuant to the terms of the indenture of the 9.25% Notes. On April 12, 2018, the Company redeemed 100% of the remaining outstanding 9.25% Notes. In connection therewith, the Company recorded a loss on debt retirement of $3,422 which included unamortized debt issuance costs, partially offset by unamortized discount. The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On April 19, 2018, the Company announced that it had commenced an offer to purchase up to $700,000 of its outstanding 6.75% Notes and its 6.125% Notes pursuant to the asset sale provisions of such indentures. On May 21, 2018, the Company accepted for payment, pursuant to its offer to purchase, $1,360 aggregate principal amount of the 6.75% Notes and $4,759 aggregate principal amount of the 6.125% Notes. The debt repayment and related loss on debt retirement of $8 for the 6.75% Notes is included in the results of operations and cash flows of discontinued operations. The debt repayment and related loss on debt retirement of $56 for the 6.125% Notes is included in the results of operations and cash flows of continuing operations.

 

On April 29, 2018, the Company further reduced the borrowing capacity on its Old Facility from $3,000,000 to $2,700,000. In connection therewith, the Company recorded a loss on debt retirement of $1,091, which included unamortized debt issuance costs. The loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On June 25, 2018, the Company redeemed the remaining $805,169 of its 6.75% Notes, which resulted in a loss on debt retirement of $18,075. The loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On March 15, 2019, the Company entered into a Cap, which has been assigned to the variable interest rate payments on the first $650,000 notional amount of variable rate indebtedness. The Cap has an effective date of March 21, 2019 and expires on March 21, 2021. The Cap provides the Company with interest rate protection in the event that LIBOR increases above 2.75%.

 

Maturities

 

The aggregate annual principal payments of long-term debt for the remainder of fiscal 2020 and thereafter are as follows: 2020—$0; 2021—$0; 2022—$0; 2023—$0; 2024—$3,203,490 and $423,000 thereafter. These aggregate annual principal payments of long-term debt assume that the Company has not repaid or refinanced its existing 6.125% Senior Notes due 2023 prior to December 31, 2022.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

12. Leases

 

The Company leases most of its retail stores and certain distribution facilities under noncancellable operating and capital leases, most of which have initial lease terms ranging from 5 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.

 

The following table is a summary of the Company’s components of net lease cost for the thirteen week period ended June 1, 2019:

 

 

 

For the thirteen week period
ended June 1, 2019

 

Operating lease cost

 

$

164,983

 

Financing lease cost:

 

 

 

Amortization of right-of-use asset

 

1,536

 

Interest on long-term finance lease liabilities

 

905

 

Total finance lease costs

 

$

2,441

 

Short-term lease costs

 

1

 

Variable lease costs

 

40,545

 

Less: sublease income

 

(5,751

)

Net lease cost

 

$

202,219

 

 

Supplemental cash flow information related to leases for the thirteen week period ended June 1, 2019:

 

 

 

For the thirteen week period
ended June 1, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows paid for operating leases

 

$

176,237

 

Operating cash flows paid for interest portion of finance leases

 

905

 

Financing cash flows paid for principal portion of finance leases

 

3,490

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

Operating leases

 

77,384

 

Finance leases

 

0

 

 

Supplemental balance sheet information related to leases as of June 1, 2019 (in thousands, except lease term and discount rate):

 

 

 

June 1,
2019

 

Operating leases:

 

 

 

Operating lease right-of-use asset

 

$

2,985,213

 

 

 

 

 

Short-term operating lease liabilities

 

$

450,933

 

Long-term operating lease liabilities

 

2,790,738

 

Total operating lease liabilities

 

$

3,241,671

 

 

 

 

 

Finance leases:

 

 

 

Property, plant and equipment, net

 

$

24,825

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

11,751

 

Lease financing obligations, less current maturities

 

22,679

 

Total finance lease liabilities

 

$

34,430

 

Weighted average remaining lease term

 

 

 

Operating leases

 

8.5

 

Finance leases

 

8.4

 

 

 

 

 

Weighted average discount rate

 

 

 

Operating leases

 

6.0

%

Finance leases

 

10.3

%

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

The following table summarizes the maturity of lease liabilities under finance and operating leases as of June 1, 2019:

 

 

 

June 1, 2019

 

Fiscal year

 

Finance
Leases

 

Operating
Leases (1)

 

Total

 

2020 (remaining thirty-nine weeks)

 

$

10,774

 

$

519,217

 

$

529,991

 

2021

 

6,922

 

630,612

 

637,534

 

2022

 

4,360

 

563,470

 

567,830

 

2023

 

4,143

 

508,479

 

512,622

 

2024

 

3,842

 

447,507

 

451,349

 

Thereafter

 

20,469

 

1,554,206

 

1,574,675

 

Total lease payments

 

50,510

 

4,223,491

 

4,274,001

 

Less: imputed interest

 

(16,080

)

(981,820

)

(997,900

)

Total lease liabilities

 

$

34,430

 

$

3,241,671

 

$

3,276,101

 

 


(1)         — Future operating lease payments have not been reduced by minimum sublease rentals of $60 million due in the future under noncancelable leases.

 

Following are the minimum lease payments for all properties under a lease agreement that will have to be made in each of the years indicated based on non-cancelable leases in effect as of March 2, 2019:

 

Fiscal year

 

Lease
Financing
Obligations

 

Operating
Leases

 

2020

 

$

19,300

 

$

687,412

 

2021

 

4,811

 

610,874

 

2022

 

4,588

 

545,863

 

2023

 

4,383

 

490,864

 

2024

 

4,042

 

431,714

 

Later years

 

20,470

 

1,541,408

 

Total minimum lease payments

 

57,594

 

$

4,308,135

 

Amount representing interest

 

(17,418

)

 

 

Present value of minimum lease payments

 

$

40,176

 

 

 

 

During the thirteen week periods ended June 1, 2019 and June 2, 2018, the Company did not enter into any sale-leaseback transactions whereby the Company sold owned operating stores to independent third parties and concurrent with the sale, entered into an agreement to lease the store back from the purchasers.

 

13. Retirement Plans

 

Net periodic pension expense recorded in the thirteen week periods ended June 1, 2019 and June 2, 2018, for the Company’s defined benefit plan includes the following components:

 

 

 

Defined Benefit
Pension Plan

 

 

 

Thirteen Week Period Ended

 

 

 

June 1,
2019

 

June 2,
2018

 

Service cost

 

$

143

 

$

312

 

Interest cost

 

1,556

 

1,578

 

Expected return on plan assets

 

(1,214

)

(1,434

)

Amortization of unrecognized prior service cost

 

 

 

Amortization of unrecognized net loss

 

415

 

508

 

Net periodic pension expense

 

$

900

 

$

964

 

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

During the thirteen week period ended June 1, 2019 the Company contributed $0 to the Defined Benefit Pension Plan. During the remainder of fiscal 2020, the Company expects to contribute $0 to the Defined Benefit Pension Plan.

 

14. Segment Reporting

 

The Company has two reportable segments, its retail drug stores (“Retail Pharmacy”), and its pharmacy services (“Pharmacy Services”) segments, collectively the “Parent Company”.

 

The Retail Pharmacy segment’s primary business is the sale of prescription drugs and related consultation to its customers. Additionally, the Retail Pharmacy segment sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line. The Pharmacy Services segment offers a full range of pharmacy benefit management services including plan design and administration, on both a transparent pass-through model and traditional model, formulary management and claims processing. Additionally, the Pharmacy Services segment offers specialty and mail order services, infertility treatment, and drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.

 

The Parent Company’s chief operating decision makers are its Parent Company Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Operating Officer—Retail Pharmacy, and the Chief Executive Officer—Pharmacy Services, (collectively the “CODM”). The CODM has ultimate responsibility for enterprise decisions. The CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy and Pharmacy Services segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. The CODM relies on internal management reporting that analyzes enterprise results on certain key performance indicators, namely, revenues, gross profit, and Adjusted EBITDA.

 

The following is balance sheet information for the Company’s reportable segments:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Eliminations(1)

 

Consolidated

 

June 1, 2019:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

7,918,381

 

$

2,628,214

 

$

(16,906

)

$

10,529,689

 

Goodwill

 

43,492

 

1,064,644

 

 

1,108,136

 

March 2, 2019:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,071,055

 

$

2,534,771

 

$

(14,459

)

$

7,591,367

 

Goodwill

 

43,492

 

1,064,644

 

 

1,108,136

 

 


(1)                                 As of June 1, 2019 and March 2, 2019, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $0 against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $16,906 and $14,459, respectively, that represents amounts owed from the Pharmacy Services segment to the Retail Pharmacy segment that are created when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products.

 

The following table is a reconciliation of the Company’s business segments to the consolidated financial statements for the thirteen week periods ended June 1, 2019 and June 2, 2018:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Intersegment
Eliminations(1)

 

Consolidated

 

June 1, 2019:

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,864,808

 

$

1,566,292

 

$

(58,511

)

$

5,372,589

 

Gross Profit

 

1,030,495

 

96,228

 

 

1,126,723

 

Adjusted EBITDA(2)

 

84,008

 

26,339

 

 

110,347

 

Additions to property and equipment and intangible assets

 

44,244

 

4,947

 

 

49,191

 

June 2, 2018:

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,897,765

 

$

1,542,762

 

$

(52,037

)

$

5,388,490

 

Gross Profit

 

1,069,457

 

99,292

 

 

1,168,749

 

Adjusted EBITDA(2)

 

104,129

 

33,863

 

 

137,992

 

Additions to property and equipment and intangible assets

 

58,067

 

3,559

 

 

61,626

 

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 


(1)                                 Intersegment eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services segments record the revenue on a stand-alone basis.

 

(2)                                 See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” in MD&A for additional details.

 

The following is a reconciliation of net (loss) income to Adjusted EBITDA for the thirteen week periods ended June 1, 2019 and June 2, 2018:

 

 

 

June 1,
2019
(13 weeks)

 

June 2,
2018
(13 weeks)(a)

 

Net loss from continuing operations

 

$

(99,339

)

$

(41,727

)

Interest expense

 

58,270

 

62,792

 

Income tax expense (benefit)

 

7,374

 

(9,497

)

Depreciation and amortization

 

83,926

 

94,529

 

LIFO charge

 

7,489

 

9,966

 

Lease termination and impairment charges

 

478

 

9,859

 

Loss on debt retirements, net

 

 

554

 

Merger and Acquisition-related costs

 

3,085

 

7,188

 

Stock-based compensation expense

 

5,380

 

5,031

 

Restructuring-related costs

 

43,350

 

 

Inventory write-downs related to store closings

 

841

 

3,833

 

Gain on sale of assets, net

 

(2,712

)

(5,859

)

Other

 

2,205

 

1,323

 

Adjusted EBITDA from continuing operations

 

$

110,347

 

$

137,992

 

 


(a)                                 During fiscal 2019, the Company revised its definition of Adjusted EBITDA to no longer exclude the impact of revenue deferrals related to our customer loyalty program and further revised its disclosure by presenting certain amounts previously included within Other as separate reconciling items. Consequently, the Company revised Adjusted EBITDA for the thirteen week period ended June 2, 2018 to conform with the revised definition and present separate reconciling items previously included with Other.

 

15. Commitments, Contingencies and Guarantees

 

Legal Matters and Regulatory Proceedings

 

The Company is involved in legal proceedings including litigation, arbitration, and other claims, and is subject to investigations, inspections, audits, inquiries, and similar actions by pharmacy, health care, tax and other governmental authorities arising in the ordinary course of its business, including, without limitation, the matters described below. The Company records accruals for outstanding legal matters and applicable regulatory proceedings when it believes it is probable that a loss has been incurred, and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters and regulatory proceedings that could affect the amount of any existing accrual and developments that would make a loss contingency both probable and reasonably estimable, and as a result, warrant an accrual. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. None of the Company’s accruals for outstanding legal matters or regulatory proceedings are material individually or in the aggregate to the Company’s consolidated financial position.

 

The Company’s contingencies are subject to significant uncertainties, many of which are beyond the Company’s control, including, among other factors: (i) proceedings are in early stages; (ii) whether class or collective action status is sought and the likelihood of a class being certified; (iii) the outcome of pending appeals or motions; (iv) the extent of potential damages, fines or penalties, which are often unspecified or indeterminate; (v) the impact of discovery on the matter; (vi) whether novel or unsettled legal theories are at issue; (vii) there are significant factual issues to be resolved; and/or (viii) in the case of certain government agency investigations, whether a qui tam lawsuit (“whistleblower” action) has been filed and whether the government agency makes a decision to intervene in the lawsuit following investigation. While the Company cannot predict the outcome of any of the

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

contingencies, the Company’s management does not believe that the outcome of any of these legal matters or regulatory proceedings will be material to the Company’s consolidated financial position. It is possible, however, the Company’s results of operations or cash flows could be materially affected by unfavorable outcomes in outstanding legal matters or regulatory proceedings.

 

The Company is currently a defendant in several lawsuits filed in courts in California alleging violations of California Business and Professions Code, industry wage orders, wage-and-hour laws, rules and regulations pertaining primarily to failure to pay overtime, failure to pay for missed meals and rest periods, failure to reimburse business expenses and failure to provide employee seating (the “California Cases”). Some of the California Cases purport or may be determined to be class actions or PAGA representative actions and seek substantial damages and penalties. The single-plaintiff and multi-plaintiff California Cases regarding violations of wage-and-hour laws, failure to pay overtime and failure to pay for missed meals and rest periods, in the aggregate, seek substantial damages. The Company believes that its defenses and assertions in the California Cases, as well as other lawsuits, have merit. The Company has aggressively challenged the merits of the lawsuits and, where applicable, the allegations that the lawsuits should be certified as class or representative actions. Additionally, at this time the Company is not able to predict either the outcome of or estimate a potential range of loss with respect to the California Cases and is vigorously defending them.

 

Following service of subpoenas on the Company in 2011 and 2013 by the United States Attorney’s Office for the Eastern District of Michigan (“USAO”) and the State of Indiana’s Office of the Attorney General, respectively, the Company cooperated with inquiries regarding the relationship of Rite Aid’s Rx Savings Program to the reporting of usual and customary charges to publicly funded health programs. In January 2017, the USAO, 18 states and the District of Columbia declined to intervene in a sealed False Claims Act (“FCA”) lawsuit filed by qui tam plaintiff Azam Rahimi (“Relator”) in the District Court for the Eastern District of Michigan. On January 19, 2017, the court unsealed Relator’s Second Amended Complaint against the Company; it alleges that the Company failed to report Rx Savings prices as its usual and customary charges under the Medicare Part D program and to federal and state Medicaid programs in 18 states and the District of Columbia; and that the Company is thus liable under the federal FCA and similar state statutes. In its ruling on the Company’s motion to dismiss the complaint, the Court held that Relator’s complaint was deficient, but allowed Relator the opportunity to re-plead. Relator filed a Third Amended Complaint on May 11, 2018. The Company filed a motion to dismiss the Third Amended Complaint on May 25, 2018. On March 30, 2019, the Company’s motion to dismiss the Third Amended Complaint was denied.  The court entered a scheduling order on May 29, 2019, and the case is proceeding through discovery.  At this stage of the proceedings, the Company is not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit and is vigorously defending this lawsuit.

 

On April 26, 2012, the Company was served with an administrative subpoena from the U.S. Drug Enforcement Administration (“DEA”), Albany, New York District Office, requesting information regarding the Company’s sale of products containing pseudoephedrine (“PSE”). In April 2012, it also received a communication from the U.S. Attorney’s Office for the Northern District of New York (“USAO”) regarding an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 (“CMEA”). Additional subpoenas were served in 2013, 2014, and 2015 requesting broader documentation regarding PSE sales and recordkeeping requirements. Assistant U.S. Attorneys from the Northern and Eastern Districts of New York are currently investigating, but no lawsuits have been filed. Civil violations of the CMEA could result in the imposition of administrative and/or civil penalties against the Company. The Company has entered into tolling agreements with the United States, and discussions have been held to attempt to resolve these matters with those USAOs and the Department of Justice, but whether any agreements can be reached and on what terms is uncertain. At this stage of the investigation, the Company is not able to predict the outcome of the investigation.

 

In December 2017, Rite Aid executed a non-prosecution agreement with the United States Attorney’s Office for the Southern District of West Virginia (countersigned by the government in January 2018), which concluded the criminal investigation into Rite Aid’s PSE sales. Pursuant to the non-prosecution agreement, the government agreed not to bring any criminal charges against Rite Aid and Rite Aid agreed to pay an immaterial amount of money as restitution. The civil investigation is ongoing.

 

In June 2013, the Company was served with a Civil Investigative Demand (“CID”) by the United States Attorney’s Office for the Eastern District of California (the “USAO”) regarding (1) the Company’s Drug Utilization Review (“DUR”) and prescription dispensing protocol; and (2) the dispensing of drugs designated as “Code 1” by the State of California. The Company cooperated with the investigation, researched the government’s allegations, and refuted the government’s position. The Company produced documents including certain prescription files related to Code 1 drugs to the USAO’s office and the State of California Department of Justice’s Bureau of Medical Fraud and Elder Abuse (“CADOJ”). In August 2014, the USAO and 8 states’ attorneys general declined to intervene in a California False Claim Act (“FCA”) action (“Action”) filed under seal in the Eastern District of California by qui tam plaintiff Loyd F. Schmuckley (“Relator”) based on DUR and Code 1 allegations. In July 2016, the Commonwealth of Massachusetts and the District of Columbia also declined to intervene in the Action. On May 15, 2017, Relator and the CADOJ stipulated to dismiss all DUR-related claims and 18 other state-based claims. On September 21, 2017, the CADOJ filed a sealed complaint-in-intervention in the Action, asserting causes under the FCA, for unjust enrichment and for payment by mistake related to the Code 1 allegations. The Action was unsealed on September 26, 2017. On September 28, 2017, Relator filed a First Amended Complaint under the FCA also concerning the Code 1 allegations. The Company filed a motion to dismiss Relator’s and CADOJ’s respective complaints in

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

January 2018, the hearing was held on March 23, 2018. On September 5, 2018, the court issued an order denying the motion to dismiss. The case is proceeding with the first stage of discovery, which focuses on plaintiffs’ proposed sampling methodology for determining liability and damages. The Company’s motion challenging plaintiffs’ proposed sampling methodology was filed on April 15, 2019, and is scheduled to be heard on June 28, 2019.  At this stage of the proceedings, the Company is not able to either predict the outcome of this matter or estimate a potential range of loss with respect to this matter and is vigorously defending this lawsuit.

 

The State of Mississippi, by and through its Attorney General, filed a First Amended Complaint (Complaint”) against the Company and various purported related entities on September 27, 2016 alleging violations of the Mississippi Medicaid Fraud Control Act, violations of the Mississippi Unfair and Deceptive Trade Practices Act, fraud and unjust enrichment. The Complaint alleges the Company failed to accurately report usual and customary prices to Mississippi’s Division of Medicaid. On November 14, 2016, the Company filed motions to dismiss based on jurisdictional and substantive grounds, as well as a motion to transfer venue, all of which were stayed pending the resolution of related litigation involving another chain pharmacy on appeal. In September 2018, the stay of the case was lifted. On November 28, 2018, the case was transferred to the Circuit Court of Desoto County and consolidated with related cases containing similar allegations brought by Mississippi against other chain pharmacies.  On June 11, 2019, the court (i) dismissed the claims against the Company for lack of personal jurisdiction; and (ii) dismissed the fraud-based claims against the Company’s purportedly related entities (Rite Aid Hdqtrs. Corp., Harco, Inc., and K&B of Mississippi Corporation) for failure to plead the fraud-based claims with particularity, but with leave to amend.  The court did not dismiss the claims against the purportedly related entities for unjust enrichment or for restitution under the Mississippi Consumer Protection Act.  To date, the State of Mississippi has not indicated how it intends to proceed in response to the court’s decision.  At this stage of the proceedings, the Company is not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit and is vigorously defending this lawsuit.

 

The Company is a defendant in the consolidated multidistrict litigation proceeding, In re National Prescription Opiate Litigation (Case No. 17-md-2804), pending in the U.S. District Court for the Northern District of Ohio. Various plaintiffs (such as counties, cities, hospitals, and third-party payors) allege claims generally concerning the impacts of widespread opioid abuse against defendants along the pharmaceutical supply chain, including manufacturers, wholesale distributors, and retail pharmacy chains. Since December 2017, nearly all related cases pending in federal district courts have been transferred to this multi-district litigation. Two Ohio lawsuits (referred to as the “Track One” or “bellwether” cases) have been set for trial in the multi-district litigation: The County of Summit, Ohio v. Purdue Pharma L.P., et al., Case No. 18-OP-45090 (N.D. Ohio); and The County of Cuyahoga v. Purdue Pharma L.P., et al., Case No. 17-OP-45004 (N.D. Ohio). On January 29, 2019, the multi-district litigation court entered an order moving the trial date from September 3, 2019 to October 21, 2019 for the two bellwether cases.

 

On May 25, 2018, the Company and other defendants filed Motions to Dismiss the Complaints in the bellwether cases. On October 5, 2018, the magistrate judge assigned to review these Motions to Dismiss issued a report and recommendation to the district court judge on the multi-district litigation. The magistrate judge recommended granting dismissal of two claims, the common law absolute public nuisance claim and the City of Akron’s public nuisance claim. The report otherwise recommended denying all the defendants’ Motions to Dismiss. The Company filed its objections to the magistrate judge’s report on November 2, 2018 (along with other defendants).  The district court judge overseeing the multi-district litigation reviewed the magistrate judge’s report and recommendation, along with the parties’ Objections to the report, and their Responses.  The district court subsequently ruled that Defendants’ Motions to Dismiss were denied with the following exceptions.  The City of Akron’s statutory public nuisance claim was dismissed for lack of standing.  The district court judge also ruled that the County of Summit’s statutory public nuisance claim was limited to seeking injunctive relief. The Company (as well as most of the parties in the litigation) has engaged in intensive and extensive discovery, and participated in numerous depositions.  The bellwether cases are now in expert discovery.

 

New cases continue to be added each week to the multi-district litigation, which currently includes over 920 federal lawsuits that name the Company, including lawsuits filed by counties and municipalities in California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Texas, Virginia, West Virginia, and Wisconsin. There are also approximately 136 similar lawsuits that name the Company in some capacity that have been filed outside the multi-district litigation, including lawsuits filed in Connecticut, Georgia, Idaho, Illinois, Louisiana, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Washington, and West Virginia. At this stage of the proceedings, the Company is not able to either predict the outcome of these lawsuits or estimate a potential range of loss with respect to the lawsuits and is vigorously defending them. Additionally, the Company has received from the Attorney Generals of several states subpoenas, civil investigative demands, and/or other requests regarding opioids.

 

The Company is involved in two putative consumer class action lawsuits in the United States District Court for the Southern District of California, alleging that it overcharged customers’ insurance companies for prescription drug purchases, resulting in overpayment of co-pays. The first lawsuit, Byron Stafford v. Rite Aid Corp., Case No. 17-CV-01340-AJB-JLB, was filed on June 30, 2017, and the second case, Robert Josten v. Rite Aid Corp., Case No. 18-CV-00152-AJB-JLB, was filed on January 23, 2018. Each

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

lawsuit alleges that (i) the Company was obligated to charge the plaintiffs’ insurance companies a “usual and customary” price for their prescription drugs; and (ii) the Company failed to do so properly because the prices it reported were not equal to or adjusted to account for the prices that Rite Aid offers to uninsured and underinsured customers through its Rx Savings Program. On December 19, 2017, the court granted the Company’s motion to dismiss Stafford’s complaint with leave to amend for failure to plead compliance with the applicable statutes of limitations. After Stafford amended the complaint on January 9, 2018, the Company filed another motion to dismiss on January 23, 2018, and a similar motion to dismiss Josten’s complaint on March 16, 2018. The court granted the motion to dismiss most of Josten’s claims for failure to plead compliance with the applicable statute of limitations but with leave to amend. The Company’s motion to dismiss Josten’s amended complaint on the grounds that the statute of limitations expired and that he failed to exhaust Medicare administrative remedies, is scheduled to be heard on July 18, 2019. The court denied the motion to dismiss Stafford’s claims, opened discovery, and set a June 19, 2019 deadline for Stafford’s class certification motion. On June 17, 2019, Stafford filed a motion seeking to extend the time for filing of his class certification motion until December 11, 2019; and the court’s decision on that unopposed motion is pending.  Also on June 17, 2019, Rite Aid filed a motion to compel all Stafford’s claims to an individual arbitration; and that motion is scheduled to be heard on September 5, 2019.  Relatedly, on June 19, 2019, Rite Aid filed an ex parte motion to stay the entire action pending the court’s decision on its motion to compel arbitration; Plaintiff’s opposition is due on June 20, 2019, and the Court will thereafter make a ruling without a hearing.  At this stage of the proceedings, the Company is not able to either predict the outcome of these lawsuits or estimate a potential range of loss with respect to the lawsuit and is vigorously defending these lawsuits.

 

In addition to the above described matters, the Company is subject from time to time to various claims and lawsuits and governmental investigations arising in the ordinary course of business. While the Company’s management cannot predict the outcome of any of the claims, the Company’s management does not believe that the outcome of any of these matters will be material to the Company’s consolidated financial position. It is possible, however, that the Company’s results of operations or cash flows could be materially affected by an unfavorable resolution of pending litigation or contingencies.

 

16. Guarantor and Non-Guarantor Condensed Consolidating Financial Information

 

Rite Aid Corporation conducts the majority of its business through its subsidiaries. With the exception of EIC, substantially all of Rite Aid Corporation’s 100% owned subsidiaries guarantee the obligations under the New Facilities and unsecured guaranteed notes (the “Subsidiary Guarantors”). Additionally, with the exception of EIC, the subsidiaries, including joint ventures, that do not guarantee the New Facilities and unsecured guaranteed notes, are minor.

 

For the purposes of preparing the information below, Rite Aid Corporation uses the equity method to account for its investment in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in the non-guarantor subsidiaries. The subsidiary guarantees related to the Company’s New Facilities and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. Presented below is condensed consolidating financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the non-guarantor subsidiaries at June 1, 2019, March 2, 2019 and for the thirteen week periods ended June 1, 2019 and June 2, 2018. Separate financial statements for Subsidiary Guarantors are not presented.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen Week Periods Ended June 1, 2019 and June 2, 2018

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

 

 

Rite Aid Corporation
Condensed Consolidating Balance Sheet
June 1, 2019

(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS