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10-Q 1 a17-27851_110q.htm 10-Q

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 December 2, 2017

 

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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes 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
(Do not check if a
smaller reporting company)

 

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 1,067,509,844 shares of its $1.00 par value common stock outstanding as of December 28, 2017.

 

 

 



Table of Contents

 

RITE AID CORPORATION

 

TABLE OF CONTENTS

 

 

Cautionary Statement Regarding Forward-Looking Statements

3

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

ITEM 1.

Financial Statements (unaudited):

 

 

Condensed Consolidated Balance Sheets as of December 2, 2017 and March 4, 2017

5

 

Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended December 2, 2017 and November 26, 2016

6

 

Condensed Consolidated Statements of Comprehensive Income for the Thirteen Week Periods Ended December 2, 2017 and November 26, 2016

7

 

Condensed Consolidated Statements of Operations for the Thirty-Nine Week Periods Ended December 2, 2017 and November 26, 2016

8

 

Condensed Consolidated Statements of Comprehensive Income for the Thirty-Nine Week Periods Ended December 2, 2017 and November 26, 2016

9

 

Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Week Periods Ended December 2, 2017 and November 26, 2016

10

 

Notes to Condensed Consolidated Financial Statements

11

ITEM 2.

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

39

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

52

ITEM 4.

Controls and Procedures

53

 

 

 

PART II

OTHER INFORMATION

 

 

 

ITEM 1.

Legal Proceedings

53

ITEM 1A.

Risk Factors

53

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

ITEM 3.

Defaults Upon Senior Securities

55

ITEM 4.

Mine Safety Disclosures

55

ITEM 5.

Other Information

55

ITEM 6.

Exhibits

55

 

2



Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

·                  our high level of indebtedness;

 

·                  our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our credit facilities and other debt agreements;

 

·                  the continued impact of private and public third party payors reduction in prescription drug reimbursement rates and their ongoing 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 drug pricing efficiencies;

 

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

 

·                  the inability to complete the remaining subsequent closings of the Sale (as defined in Note 3 below) and recognize the corresponding expected gain due to the failure to satisfy the minimal remaining conditions applicable only to the stores being transferred at such subsequent closing and other risks related to obtaining the requisite consents to the remaining subsequent closings of the Sale;

 

·                  the impact on our business, operating results and relationships with customers, suppliers, third party payors, and employees, resulting from our efforts over the past two years to consummate a significant transaction with Walgreens Boots Alliance, Inc. (“WBA”), including the fact that we did not obtain the required antitrust regulatory approvals for the contemplated merger and the original version of the asset sale agreement that was entered into following the termination of the merger;

 

·                  the risk that our stock price may decline significantly if the remaining subsequent closings of the Sale are not completed;

 

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

 

·                  there may be changes to our strategy in the event that the remaining subsequent closings of the Sale do not close, which may include delaying or reducing capital or other expenditures, selling assets or other operations, closing underperforming stores, attempting to restructure or refinance our debt, seeking additional capital or incurring other costs associated with restructuring our business;

 

·                  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 hire and retain qualified personnel;

 

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

 

·                  our ability to manage expenses and working capital;

 

3



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

 

·                  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 “Patient Care Act”) and any regulations enacted thereunder may occur;

 

·                  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 and early price renegotiations prior to contract expirations;

 

·                  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;

 

·                  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 Merger or 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 below) under the Rite Aid banner;

 

·                  the risk that the Tax Cuts and Jobs Act that was enacted on December 22, 2017 may have a negative impact on our financial results;

 

·                  the inability to fully realize the benefits of our tax attributes despite our entry into the Tax Benefits Preservation Plan;

 

·                  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 Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended March 4, 2017 (the “Fiscal 2017 10-K”), which we filed with the SEC on May 3, 2017, our Quarterly Report on Form 10-Q for the thirteen weeks ended June 3, 2017 (the “First Quarter 2018 10-Q”) which we filed on July 6, 2017, and our Quarterly Report on Form 10-Q for the thirteen weeks ended September 2, 2017 (the “Second Quarter 2018 10-Q”) which we filed on October 5, 2017, as well as in the “Risk Factors” section of the Fiscal 2017 10-K. These documents are available on the SEC’s website at www.sec.gov.

 

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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)

 

 

 

December 2, 2017

 

March 4,
2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

169,800

 

$

245,410

 

Accounts receivable, net

 

1,796,919

 

1,771,126

 

Inventories, net of LIFO reserve of $627,718 and $607,326

 

1,853,886

 

1,789,541

 

Prepaid expenses and other current assets

 

240,712

 

211,541

 

Current assets held for sale

 

1,868,128

 

1,047,670

 

Total current assets

 

5,929,445

 

5,065,288

 

Property, plant and equipment, net

 

1,479,214

 

1,526,462

 

Goodwill

 

1,682,847

 

1,682,847

 

Other intangibles, net

 

618,274

 

715,406

 

Deferred tax assets

 

1,419,544

 

1,505,564

 

Other assets

 

211,290

 

215,917

 

Noncurrent assets held for sale

 

 

882,268

 

Total assets

 

$

11,340,614

 

$

11,593,752

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

20,354

 

$

17,709

 

Accounts payable

 

1,789,456

 

1,613,909

 

Accrued salaries, wages and other current liabilities

 

1,258,586

 

1,340,947

 

Current liabilities held for sale

 

3,837,519

 

32,683

 

Total current liabilities

 

6,905,915

 

3,005,248

 

Long-term debt, less current maturities

 

2,985,700

 

3,235,888

 

Lease financing obligations, less current maturities

 

31,654

 

37,204

 

Other noncurrent liabilities

 

592,201

 

643,950

 

Noncurrent liabilities held for sale

 

 

4,057,392

 

Total liabilities

 

10,515,470

 

10,979,682

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 1,067,887 and 1,053,690

 

1,067,887

 

1,053,690

 

Additional paid-in capital

 

4,846,213

 

4,839,854

 

Accumulated deficit

 

(5,048,182

)

(5,237,157

)

Accumulated other comprehensive loss

 

(40,774

)

(42,317

)

Total stockholders’ equity

 

825,144

 

614,070

 

Total liabilities and stockholders’ equity

 

$

11,340,614

 

$

11,593,752

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

December 2, 2017

 

November 26, 2016

 

Revenues

 

$

5,353,170

 

$

5,669,111

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

4,166,447

 

4,424,259

 

Selling, general and administrative expenses

 

1,166,514

 

1,168,646

 

Lease termination and impairment charges

 

3,939

 

7,199

 

Interest expense

 

50,308

 

50,304

 

Loss (gain) on sale of assets, net

 

205

 

(225

)

 

 

5,387,413

 

5,650,183

 

Loss (income) from continuing operations before income taxes

 

(34,243

)

18,928

 

Income tax benefit

 

(16,061

)

(4,682

)

Net (loss) income from continuing operations

 

(18,182

)

23,610

 

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

 

99,213

 

(8,600

)

Net income

 

$

81,031

 

$

15,010

 

Computation of (loss) income attributable to common stockholders:

 

 

 

 

 

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

 

$

(18,182

)

$

23,610

 

Income (loss) from discontinued operations attributable to common stockholders—basic and diluted

 

99,213

 

(8,600

)

Income attributable to common stockholders—basic and diluted

 

$

81,031

 

$

15,010

 

 

 

 

 

 

 

Basic (loss) income per share:

 

 

 

 

 

Continuing operations

 

$

(0.02

)

$

0.02

 

Discontinued operations

 

$

0.10

 

$

(0.01

)

Net basic income per share

 

$

0.08

 

$

0.01

 

 

 

 

 

 

 

Diluted (loss) income per share:

 

 

 

 

 

Continuing operations

 

$

(0.02

)

$

0.02

 

Discontinued operations

 

$

0.10

 

$

(0.01

)

Net diluted income per share

 

$

0.08

 

$

0.01

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

December 2, 2017

 

November 26, 2016

 

Net income

 

$

81,031

 

$

15,010

 

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $342 and $451 tax expense

 

514

 

681

 

Total other comprehensive income

 

514

 

681

 

Comprehensive income

 

$

81,545

 

$

15,691

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Thirty-Nine Week Period Ended

 

 

 

December 2, 2017

 

November 26, 2016

 

Revenues

 

$

16,134,704

 

$

17,024,154

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

12,624,365

 

13,308,505

 

Selling, general and administrative expenses

 

3,469,298

 

3,523,850

 

Lease termination and impairment charges

 

11,090

 

20,203

 

Interest expense

 

152,165

 

146,674

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

Gain on sale of assets, net

 

(20,623

)

(388

)

 

 

15,911,295

 

16,998,844

 

Income from continuing operations before income taxes

 

223,409

 

25,310

 

Income tax expense (benefit)

 

89,268

 

(3,824

)

Net income from continuing operations

 

134,141

 

29,134

 

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

 

42,257

 

(3,939

)

Net income

 

$

176,398

 

$

25,195

 

Computation of income (loss) attributable to common stockholders:

 

 

 

 

 

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

 

$

134,141

 

$

29,134

 

Income (loss) from discontinued operations attributable to common stockholders—basic and diluted

 

42,257

 

(3,939

)

Income attributable to common stockholders—basic and diluted

 

$

176,398

 

$

25,195

 

 

 

 

 

 

 

Basic income (loss) per share:

 

 

 

 

 

Continuing operations

 

$

0.13

 

$

0.03

 

Discontinued operations

 

$

0.04

 

$

(0.01

)

Net basic income per share

 

$

0.17

 

$

0.02

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

 

 

 

 

Continuing operations

 

$

0.13

 

$

0.03

 

Discontinued operations

 

$

0.04

 

$

(0.01

)

Net diluted income per share

 

$

0.17

 

$

0.02

 

 

See accompanying notes to condensed consolidated financial statements.

 

8



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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(unaudited)

 

 

 

Thirty-Nine Week Period Ended

 

 

 

December 2, 2017

 

November 26, 2016

 

Net income

 

$

176,398

 

$

25,195

 

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $1,026 and $1,353 tax expense

 

1,543

 

2,043

 

Total other comprehensive income

 

1,543

 

2,043

 

Comprehensive income

 

$

177,941

 

$

27,238

 

 

See accompanying notes to condensed consolidated financial statements.

 

9



Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(unaudited)

 

 

 

Thirty-Nine Week Period Ended

 

 

 

December 2, 2017

 

November 26, 2016

 

Operating activities:

 

 

 

 

 

Net income

 

$

176,398

 

$

25,195

 

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

 

42,257

 

(3,939

)

Net income from continuing operations

 

$

134,141

 

$

29,134

 

Adjustments to reconcile to net cash provided by operating activities of continuing operations:

 

 

 

 

 

Depreciation and amortization

 

292,448

 

304,460

 

Lease termination and impairment charges

 

11,090

 

20,203

 

LIFO charge

 

20,393

 

25,266

 

Gain on sale of assets, net

 

(20,623

)

(388

)

Stock-based compensation expense

 

22,550

 

36,766

 

Changes in deferred taxes

 

98,597

 

6,165

 

Excess tax benefit on stock options and restricted stock

 

 

(3,809

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(19,865

)

(81,520

)

Inventories

 

(84,731

)

(128,568

)

Accounts payable

 

118,941

 

178,266

 

Other assets and liabilities, net

 

(148,491

)

(212,727

)

Net cash provided by operating activities of continuing operations

 

424,450

 

173,248

 

Investing activities:

 

 

 

 

 

Payments for property, plant and equipment

 

(140,816

)

(197,723

)

Intangible assets acquired

 

(20,201

)

(35,986

)

Proceeds from insured loss

 

3,627

 

 

Proceeds from dispositions of assets and investments

 

19,254

 

10,217

 

Net cash used in investing activities of continuing operations

 

(138,136

)

(223,492

)

Financing activities:

 

 

 

 

 

Net (payments to) proceeds from revolver

 

(264,080

)

280,000

 

Principal payments on long-term debt

 

(7,292

)

(12,728

)

Change in zero balance cash accounts

 

27,594

 

30,685

 

Net proceeds from issuance of common stock

 

4,416

 

4,412

 

Excess tax benefit on stock options and restricted stock

 

 

3,809

 

Payments for taxes related to net share settlement of equity awards

 

(4,103

)

(6,254

)

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

 

(243,465

)

299,924

 

Cash flows from discontinued operations:

 

 

 

 

 

Operating activities of discontinued operations

 

(62,294

)

(1,541

)

Investing activities of discontinued operations

 

189,175

 

(148,884

)

Financing activities of discontinued operations

 

(245,340

)

(3,698

)

Net cash used in discontinued operations

 

(118,459

)

(154,123

)

(Decrease) increase in cash and cash equivalents

 

(75,610

)

95,557

 

Cash and cash equivalents, beginning of period

 

245,410

 

124,471

 

Cash and cash equivalents, end of period

 

$

169,800

 

$

220,028

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen and Thirty-Nine Week Periods Ended December 2, 2017 and November 26, 2016

 

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

 

(unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen and thirty-nine week periods ended December 2, 2017 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 2017 10-K.

 

The discussion and presentation of the operating and financial results of our business segments have been impacted by the following event.

 

On November 27, 2017, the Company announced that it had completed the pilot closing and first subsequent closing under the previously announced Amended and Restated Asset Purchase Agreement (the “Amended and Restated Asset Purchase Agreement” or the “Sale”), dated as of September 18, 2017, by and among the Company, WBA and Walgreen Co., an Illinois corporation and wholly owned direct subsidiary of WBA (“Buyer”). Based on its magnitude and because the Company is exiting certain markets, the Sale represents 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 assets and liabilities to be sold, including 1,932 stores (the “Acquired Stores”), three (3) distribution centers, related inventory and other specified assets and liabilities related thereto (collectively the “Assets to be Sold” or “Disposal Group”) to assets and liabilities held for sale on its condensed consolidated balance sheets as of the periods ended December 2, 2017 and March 4, 2017, and reclassified the financial results of the Disposal Group in its condensed consolidated statements of operations and condensed consolidated statements of cash flows for all periods presented. Additionally, corporate support activities related to the Disposal Group were not reclassified to discontinued operations. Please see additional information as provided in Note 3 Asset Sale to WBA.

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends the accounting for certain aspects of share-based payments to employees in ASC Topic 718, Compensation — Stock Compensation. The new guidance eliminates the accounting for any excess tax benefits and deficiencies through equity and requires all excess tax benefits and deficiencies related to employee share-based compensation arrangements to be recorded in the income statement. This aspect of the new guidance is required to be applied prospectively. The new guidance also requires (i.) the presentation of excess tax benefits on the statement of cash flows as an operating activity rather than a financing activity, a change which may be applied prospectively or retrospectively and (ii.) the presentation of employee taxes paid when an employer withholds shares for tax withholding purposes on the statement of cash flows as a financing activity, a change which must be applied retrospectively. The new guidance further provides an accounting policy election to account for forfeitures as they occur rather than utilizing the estimated amount of forfeitures at the time of issuance. The Company adopted this new guidance effective March 5, 2017. The primary impact of adoption was (i.) the modified retrospective recognition of the cumulative amount of previously unrecognized excess tax benefits as an opening balance sheet adjustment and (ii.) the recognition of excess tax benefits in the income statement on a prospective basis, rather than equity. As a result, the Company (i.) increased the deferred tax asset and reduced accumulated deficit by $12,577 as of the beginning of the thirty-nine weeks ended December 2, 2017, and (ii.) the Company recognized a discrete income tax expense of $10,186 in income tax expense for the thirty-nine weeks ended December 2, 2017. The Company also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of fiscal 2018. The retrospective application of cash paid on employees’ behalf related to shares withheld for tax purposes resulted in an increase to “Net cash provided by operating activities” and a decrease to “Net cash provided by financing activities” of $6,254 for the thirty-nine weeks ended November 26, 2016. The Company’s stock-based compensation expense continues to reflect estimated

 

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forfeitures. None of the other provisions in this new guidance had a material impact on the Company’s condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In May 2015, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU removes inconsistencies, complexities and allows transparency and comparability of revenue transactions across entities, industries, jurisdictions and capital markets by providing a single comprehensive principles-based model with additional disclosures regarding uncertainties. The principles-based revenue recognition model has a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), an update to ASU 2014-09. This ASU amends ASU 2014-09 to defer the effective date by one year for annual reporting periods beginning after December 15, 2017 (fiscal 2019). Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. Early adoption is permitted for annual reporting periods beginning after December 15, 2016 (fiscal 2018). In transition, the ASU may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company does not intend to early adopt the new standard. The Company assembled a cross functional team to identify the population of contracts with customers, for both its Retail Pharmacy and Pharmacy Services segments, and evaluate them under the provisions of ASU 2014-09. The Company intends to adopt the new standard on a modified retrospective basis. Under this implementation method, the Company will recognize the cumulative effect of initially applying the new guidance as an adjustment to the opening retained earnings balance for the annual reporting period of initial application. While the Company is continuing its assessment of all of the potential impacts of the new standard, it does not expect the implementation of the standard to have a material impact on the Company’s consolidated financial position, results of operations or cash flow.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, (Topic 842), 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) that lease assets such as real estate and manufacturing equipment. This ASU will require organizations that lease assets—referred to as “leases”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU No. 2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019 (fiscal 2020). During its November 29, 2017 meeting, the FASB tentatively decided to amend certain aspects of the new leasing standard. The tentative amendments include a provision to allow entities to elect not to restate comparative periods in the period of adoption when transitioning to the new standard. The Company believes that the new standard will have a material impact on its financial position. The Company is currently evaluating the impact this standard implementation will have on its results of operations and cash flows.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, (Topic 350): Simplifying the Test for Goodwill Impairment, which is intended to simplify the subsequent measurement and impairment of goodwill. The ASU simplifies the complexity of evaluating goodwill for impairment by eliminating the second step of the impairment test, which compares the implied fair value of a reporting unit’s goodwill to the carrying amount of that goodwill. Instead, the ASU requires entities to compare the fair value of a reporting unit to its carrying amount in order to determine the amount of goodwill impairment recognized. ASU No. 2017-04 is effective for fiscal years and interim periods within those years beginning after December 15, 2019 (fiscal 2020). Early adoption of all the amendments for ASU 2017-04 is permitted. Amendments must be applied prospectively. The Company is in process of assessing the impact of the adoption of ASU No. 2017-04 on its financial position, results of operations and cash flows.

 

2. Acquisition

 

On June 24, 2015, the Company acquired TPG VI Envision BL, LLC and Envision Topco Holdings, LLC (“EnvisionRx”), pursuant to the terms of an agreement (“Agreement”) dated February 10, 2015 (the “Acquisition”). EnvisionRx, which has been rebranded as EnvisionRxOptions (“EnvisionRx” or “EnvisionRxOptions”), is a full-service pharmacy services provider. EnvisionRx provides both transparent and traditional pharmacy benefit manager (“PBM”) service options through its EnvisionRx and MedTrak PBMs, respectively. EnvisionRx also offers fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies; access to the nation’s largest cash pay infertility discount drug program via Design Rx; an innovative claims adjudication software platform in Laker Software; and a national Medicare Part D prescription drug plan through Envision Insurance Company’s (“EIC”) EnvisionRx Plus Silver product for the low income auto-assign market and its Clear Choice product for the chooser market. EnvisionRx is headquartered in Twinsburg, Ohio and operates as a 100 percent owned subsidiary of the Company.

 

Pursuant to the terms of the Agreement, as consideration for the Acquisition, the Company paid $1,882,211 in cash and issued 27,754 shares of Rite Aid common stock. The Company financed the cash portion of the Acquisition with borrowings under its Amended and Restated Senior Secured Revolving Credit Facility, and the net proceeds from the April 2, 2015 issuance of $1,800,000 aggregate principal amount of 6.125% senior notes due 2023 (the “6.125% Notes”). The consideration associated with the common

 

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stock was $240,907 based on a stock price of $8.68 per share, representing the closing price of the Company’s common stock on the closing date of the Acquisition.

 

The Company’s condensed consolidated financial statements for the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016 include EnvisionRx results of operations (please see Note 13 Segment Reporting for the Pharmacy Services segment results included within the condensed consolidated financial statements for the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016, which reflects the results of EnvisionRx). The Company’s condensed consolidated financial statements reflect the purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the Acquisition date.

 

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During fiscal 2017, the Company finalized the valuation of the identifiable assets acquired and the liabilities assumed. The following is the allocation of the purchase price:

 

Final purchase price

 

 

 

Cash consideration

 

$

1,882,211

 

Stock consideration

 

240,907

 

Total

 

$

2,123,118

 

Final purchase price allocation

 

 

 

Cash and cash equivalents

 

$

103,834

 

Accounts receivable

 

892,678

 

Inventories

 

7,276

 

Prepaid expenses and other current assets

 

13,386

 

Total current assets

 

1,017,174

 

Property and equipment

 

13,196

 

Intangible assets(1)

 

646,600

 

Goodwill

 

1,639,355

 

Other assets

 

7,219

 

Total assets acquired

 

3,323,544

 

Accounts payable

 

491,672

 

Reinsurance funds held

 

381,225

 

Other current liabilities(2)

 

215,770

 

Total current liabilities

 

1,088,667

 

Other long term liabilities(3)

 

111,759

 

Total liabilities assumed

 

1,200,426

 

Net assets acquired

 

$

2,123,118

 

 


(1)                                 Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a final valuation prepared by an independent third party. The fair values assigned to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earnings methods. The major assumptions used in arriving at the estimated identifiable intangible asset values included management’s estimates of future cash flows, discounted at an appropriate rate of return which are based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. The estimated fair value of intangible assets and related useful lives as included in the final purchase price allocation include:

 

 

 

Estimated
Fair Value

 

Estimated
Useful Life
(In Years)

 

Customer relationships

 

$

465,000

 

17

 

CMS license

 

57,500

 

25

 

Claims adjudication and other developed software

 

59,000

 

7

 

Trademarks

 

20,100

 

10

 

Backlog

 

11,500

 

3

 

Trademarks

 

33,500

 

Indefinite

 

Total

 

$

646,600

 

 

 

 

(2)                                 Other current liabilities includes $116,057 due to TPG under the terms of the Agreement, representing the amounts due to EnvisionRx from CMS, less corresponding amounts due to various reinsurance providers under certain reinsurance programs, for CMS activities that relate to the year ended December 31, 2014. This liability was satisfied with a payment to TPG on November 5, 2015.

 

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(3)                                 Primarily relates to deferred tax liabilities.

 

The above goodwill represents future economic benefits expected to be recognized from the Company’s expansion into the pharmacy services market, as well as expected future synergies and operating efficiencies from combining operations with EnvisionRx. Goodwill resulting from the Acquisition of $1,639,355 has been allocated to the Pharmacy Services segment of which $1,368,657 is deductible for tax purposes.

 

3. Asset Sale to WBA

 

Termination of Merger Agreement with WBA

 

On June 28, 2017, Rite Aid, WBA and Victoria Merger Sub, Inc. entered into a Termination Agreement (the “Merger Termination Agreement”) under which the parties agreed to terminate the Merger Agreement.  The Merger Termination Agreement provides that WBA would pay to Rite Aid a termination fee in the amount of $325,000, which was received on June 30, 2017.

 

Entry Into Amended and Restated Asset Purchase Agreement with 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 (the “Original APA”), 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 will purchase from the Company 1,932 stores (the “Acquired Stores”), three (3) distribution centers, related inventory and other specified assets and liabilities related thereto (collectively the “Assets to be Sold” or “Disposal Group”) for a purchase price of approximately $4.375 billion, on a cash-free, debt-free basis (the “Sale”).

 

The Company announced on September 19, 2017 that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), expired with respect to the Sale.  On November 27, 2017, the Company announced that it had completed the pilot closing and first subsequent closings under the Amended and Restated Asset Purchase Agreement, resulting in the transfer of 97 Rite Aid stores and related assets to the Buyer. With the final significant closing condition met, and the successful completion of the of the pilot closing and the first subsequent closings, the Sale will proceed as contemplated under the Amended and Restated Asset Purchase Agreement.  The Sale remains subject to minimal customary closing conditions applicable only to individual stores being transferred at such subsequent 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 Acquired Stores in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the subsequent closings.  The Company has also agreed to provide transition services to Buyer for up to three (3) years after the initial closing of the Sale.  During the thirteen week period ended December 2, 2017, the amount charged to Buyer for transition services was nominal.

 

In the event that the Company enters into an agreement to sell all of the remainder of Rite Aid or over 50% of its stock or assets to a third party prior to the end of the transition period under the Transition Services Agreement (“TSA”), any potential acquirer would be obligated to assume the Company’s remaining obligations under the TSA.  Under the terms of the Amended and Restated Asset Purchase Agreement, the Company has the option to purchase pharmaceutical drugs through an affiliate of WBA under terms, including cost, that are substantially equivalent to Walgreen’s for a period of ten (10) years, subject to certain terms and conditions.

 

Divestiture of the Assets to be Sold

 

During the thirteen weeks ended December 2, 2017, the Company sold 97 stores and related assets to the Buyer in exchange for proceeds of $240,920, and recognized a pre-tax gain of approximately $157,010.  During December 2017, the Company sold an additional 260 stores and related assets to WBA for proceeds of $473,980. The Company estimates that the total pre-tax gain on the Sale will be approximately $2.5 billion.  The Company expects to complete the majority of the Sale by the end of its first quarter of fiscal 2019.

 

The Company classified the operating results of the Disposal Group as discontinued operations in its financial statements in accordance with GAAP, as the divestiture of these assets represents a significant strategic shift that has a material effect on the Company’s operations and financial results.

 

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 and non-current assets and liabilities held for sale as follows:

 

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December 2,
2017

 

March 4,
2017

 

Inventories

 

$

1,071,253

 

$

1,047,670

 

Property and equipment

 

666,118

 

 

Goodwill (a)

 

30,994

 

 

Intangible assets

 

96,461

 

 

Other assets

 

3,302

 

 

Current assets held for sale

 

$

1,868,128

 

$

1,047,670

 

Property and equipment

 

$

 

$

725,230

 

Goodwill (a)

 

 

32,632

 

Intangible assets

 

 

120,389

 

Other assets

 

 

4,017

 

Noncurrent assets held for sale

 

$

 

$

882,268

 

Current maturities of long-term lease financing obligations

 

$

1,908

 

$

3,626

 

Accrued salaries, wages and other current liabilities

 

24,020

 

29,057

 

Long-term debt, less current maturities (b)

 

3,786,480

 

 

Lease financing obligations, less current maturities

 

4,164

 

 

Other noncurrent liabilities

 

20,947

 

 

Current liabilities held for sale

 

$

3,837,519

 

$

32,683

 

Long-term debt, less current maturities (b)

 

$

 

$

4,027,400

 

Lease financing obligations, less current maturities

 

 

6,866

 

Other noncurrent liabilities

 

 

23,126

 

Noncurrent liabilities held for sale

 

$

 

$

4,057,392

 

 


(a)         The Company had $76,124 of goodwill in its Retail Pharmacy segment resulting from the acquisition of Health Dialog and RediClinic, which is accounted for as Retail Pharmacy segment enterprise goodwill.  The Company has allocated a portion of its Retail Pharmacy segment enterprise goodwill to the discontinued operation.

 

(b)         In connection with the Sale, the Company is estimating that the Sale will provide excess cash proceeds of approximately $4,027,400 which will be used to repay outstanding indebtedness.  As such, the $4,027,400 of estimated repayment of outstanding indebtedness has been included in liabilities held for sale as of March 4, 2017. As of December 2, 2017, the Company repaid outstanding indebtedness of $240,920 with transaction proceeds received.

 

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

 

 

 

Thirteen Week Period
Ended

 

Thirty-Nine Week Period
Ended

 

 

 

December 2,
2017

 

November 26,
2016

 

December 2,
2017

 

November 26,
2016

 

Revenues

 

$

2,386,710

 

$

2,452,996

 

$

7,130,653

 

$

7,376,859

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues(a)

 

1,752,664

 

1,802,987

 

5,274,187

 

5,386,605

 

Selling, general and administrative expenses(a)

 

572,809

 

605,216

 

1,765,621

 

1,821,506

 

Lease termination and impairment charges

 

11

 

66

 

74

 

76

 

Interest expense (b)

 

59,456

 

56,006

 

178,797

 

170,136

 

Gain on stores sold to Walgreens Boots Alliance

 

(157,010

)

 

(157,010

)

 

(Gain) loss on sale of assets, net

 

(589

)

726

 

23

 

2,119

 

 

 

2,227,341

 

2,465,001

 

7,061,692

 

7,380,442

 

Income (loss) from discontinued operations before income taxes

 

159,369

 

(12,005

)

68,961

 

(3,583

)

Income tax expense (benefit)

 

60,155

 

(3,405

)

26,705

 

356

 

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

 

$

99,213

 

$

(8,600

)

$

42,257

 

$

(3,939

)

 


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

 

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(b)                                 In accordance with ASC 205-20, the operating results for the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016 for the discontinued operations include interest expense relating to the $4,027,400 of outstanding indebtedness expected to be 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.

 

The Company will continue to generate pharmacy services revenue from the Disposal Group after the Sale is completed.  As such, the Company has increased revenues and cost of revenues of the continuing operations to reflect amounts that were previously eliminated in consolidation relating to intercompany sales between the Company and the Disposal Group.  Accordingly, the Company has not eliminated $32,381 and $97,301 from revenues and cost of revenues for the thirteen and thirty-nine week periods ended November 26, 2016.  Please refer to Note 13 Segment Reporting for the impact on the thirteen and thirty-nine week periods ended December 2, 2017.

 

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

 

Thirty-Nine Week Period
Ended

 

 

 

December 2,
 2017

 

November 26, 
2016

 

December 2, 
2017

 

November 26, 
2016

 

Basic and diluted (loss) income per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(18,182

)

$

23,610

 

$

134,141

 

$

29,134

 

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

 

99,213

 

(8,600

)

42,257

 

(3,939

)

Income (loss) attributable to common stockholders basic and diluted

 

$

81,031

 

$

15,010

 

$

176,398

 

$

25,195

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares

 

1,048,502

 

1,045,028

 

1,048,342

 

1,043,887

 

Outstanding options and restricted shares, net

 

7,367

 

15,735

 

18,948

 

17,117

 

Diluted weighted-average shares

 

1,055,869

 

1,060,763

 

1,067,290

 

1,061,004

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) earnings per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.02

)

$

0.02

 

$

0.13

 

$

0.03

 

Discontinued operations

 

0.10

 

(0.01

)

0.04

 

(0.01

)

Net earnings per share

 

$

0.08

 

$

0.01

 

$

0.17

 

$

0.02

 

 

Due to their antidilutive effect, 9,861 and 3,320 potential common shares related to stock options have been excluded from the computation of diluted income per share for the thirteen week period ended December 2, 2017 and November 26, 2016, respectively. Due to their antidilutive effect, 5,195 and 3,320 potential common shares related to stock options have been excluded

 

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from the computation of diluted income per share for the thirty-nine week period ended December 2, 2017 and November 26, 2016, respectively.

 

5. Lease Termination and Impairment Charges

 

Lease termination and impairment charges consist of amounts as follows:

 

 

 

Thirteen Week Period
Ended

 

Thirty-Nine Week Period
Ended

 

 

 

December 2,
2017

 

November 26,
2016

 

December 2,
2017

 

November 26,
2016

 

Impairment charges

 

$

315

 

$

890

 

$

946

 

$

1,578

 

Lease termination charges

 

3,624

 

6,309

 

10,144

 

18,625

 

 

 

$

3,939

 

$

7,199

 

$

11,090

 

$

20,203

 

 

Impairment Charges

 

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

 

Lease Termination Charges

 

As part of the Company’s ongoing business activities, the Company assesses stores and distribution centers for potential closure or relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease termination charges, lease exit costs and inventory liquidation charges, as well as impairment of assets at these locations. The following table reflects the closed store and distribution center charges that relate to new closures, changes in assumptions and interest accretion:

 

 

 

Thirteen Week Period
Ended

 

Thirty-Nine Week Period
Ended

 

 

 

December 2,
2017

 

November 26,
2016

 

December 2,
2017

 

November 26,
2016

 

Balance—beginning of period

 

$

144,011

 

$

190,708

 

$

165,138

 

$

208,421

 

Provision for present value of noncancellable lease payments of closed stores

 

1,138

 

2,725

 

2,051

 

5,877

 

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

 

(264

)

137

 

(612

)

2,044

 

Interest accretion

 

2,776

 

3,482

 

8,778

 

10,878

 

Cash payments, net of sublease income

 

(11,800

)

(17,073

)

(39,494

)

(47,241

)

Balance—end of period

 

$

135,861

 

$

179,979

 

$

135,861

 

$

179,979

 

 

6. Fair Value Measurements

 

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the 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.

 

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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 thirty-nine week period ended December 2, 2017, long-lived assets from continuing operations with a carrying value of $1,224, primarily store assets, were written down to their fair value of $278, resulting in an impairment charge of $946 of which $315 relates to the thirteen week period ended December 2, 2017. During the thirty-nine week period ended November 26, 2016, long-lived assets from continuing operations with a carrying value of $3,309, primarily store assets, were written down to their fair value of $1,731, resulting in an impairment charge of $1,578 of which $890 relates to the thirteen week period ended November 26, 2016.   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 December 2, 2017 and November 26, 2016:

 

Fair Value Measurement Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
December 2,
2017

 

Long-lived assets held for use

 

$

 

$

 

$

174

 

$

174

 

Long-lived assets held for sale

 

$

 

$

104

 

$

 

$

104

 

Total

 

$

 

$

104

 

$

174

 

$

278

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
November 26,
2016

 

Long-lived assets held for use

 

$

 

$

 

$

708

 

$

708

 

Long-lived assets held for sale

 

$

 

$

1,023

 

$

 

$

1,023

 

Total

 

$

 

$

1,023

 

$

708

 

$

1,731

 

 

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.

 

As of December 2, 2017 and November 26, 2016, 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 December 2, 2017 the Company has $7,295 of investments, carried at amortized cost as these investments are being held to maturity, which are included as a component of other assets.  As of March 4, 2017 the Company has $6,874 of investments, carried at amortized cost as these investments are being held to maturity, which are included as a component of prepaid expenses and other current assets.  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 and first and second lien term loans are estimated based on the quoted market price of the financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company’s other long-term indebtedness are estimated based on quoted market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company’s total long-term indebtedness was $6,772,270 and $6,588,733, respectively, as of December 2, 2017. There were no outstanding derivative financial instruments as of December 2, 2017 and March 4, 2017.

 

7. Income Taxes

 

The Company recorded an income tax benefit of $16,061 and $4,682 for the thirteen week periods ended December 2, 2017 and November 26, 2016, respectively, and an income tax expense of $89,268 and an income tax benefit of $3,824 for the thirty-nine week periods ended December 2, 2017 and November 26, 2016, respectively.  The effective tax rate for the thirteen week periods

 

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ended December 2, 2017 and November 26, 2016 was 46.9% and (24.7)%, respectively.  The effective tax rate for the thirty-nine week periods ended December 2, 2017 and November 26, 2016 was 40.0% and (15.1)%, respectively.  The effective tax rate for the thirteen and thirty-nine week periods ended December 2, 2017 includes an adjustment of 13% and 1%, respectively, for changes to the valuation allowance primarily relating to state NOLs.  The effective tax rate for the thirty-nine week period ended December 2, 2017 also includes an adjustment of 55%, primarily related to the tax impact of the Walgreens Boots Alliance merger termination fee received in the second quarter of fiscal 2018. The tax benefit for the thirteen and thirty-nine week periods ended November 26, 2016 was the result of lower projected earnings for the Retail Pharmacy segment which resulted in a cumulative adjustment to the annual effective tax rate.

 

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

 

While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

 

The 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 $826,798 and $226,726, which relates primarily to state deferred tax assets at December 2, 2017 and March 4, 2017, respectively.  The increase in valuation allowance for the period December 2, 2017 relates primarily to a Pennsylvania law change which required an increase to the state deferred tax asset for certain net operating losses with an offsetting valuation allowance adjustment.

 

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into legislation.  The Company expects to record a tax expense in the fourth quarter of fiscal 2018 between $200,000 and $325,000, primarily due to the re-measurement of its net deferred tax assets.

 

8. Medicare Part D

 

The Company offers Medicare Part D benefits through EIC, which has contracted with Centers of Medicare and Medicaid Services (“CMS”) to be a Prescription Drug Plan (“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.

 

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 $36,426 as of September 30, 2017. EIC was in excess of the minimum required amounts in these states as of December 2, 2017.

 

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 December 2, 2017, accounts receivable, net included $279,148 due from CMS and accrued salaries, wages and other current liabilities included $130,211 of EIC liabilities under certain reinsurance contracts. As of March 4, 2017, accounts receivable, net included $245,766 due from CMS and accrued salaries, wages and other current liabilities included $145,903 of EIC liabilities under certain reinsurance contracts. During calendar 2017, EIC limited its exposure to loss and recovers a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company.

 

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9. Goodwill and Other Intangible Assets

 

Goodwill and indefinitely-lived assets, such as certain trademarks acquired in connection with acquisition transactions, are not amortized, but are instead evaluated for impairment on an annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that impairment may be more likely. During the thirteen and thirty-nine weeks ended December 2, 2017 and the fifty-three weeks ended March 4, 2017, no impairment charges have been taken against the Company’s goodwill or indefinitely-lived intangible assets. No changes were made to the carrying amount of goodwill for the thirteen and thirty-nine week periods ended December 2, 2017.

 

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 December 2, 2017 and March 4, 2017.

 

 

 

December 2, 2017

 

March 4, 2017

 

 

 

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)

 

$

384,937

 

$

(318,634

)

$

66,303

 

7 years

 

$

386,636

 

$

(308,766

)

$

77,870

 

7 years

 

Prescription files

 

898,351

 

(795,003

)

103,348

 

3 years

 

894,330

 

(764,840

)

129,490

 

3 years

 

Customer relationships(a)

 

465,000

 

(157,639

)

307,361

 

15 years

 

465,000

 

(110,653

)

354,347

 

16 years

 

CMS license

 

57,500

 

(5,597

)

51,903

 

23 years

 

57,500

 

(3,872

)

53,628

 

24 years

 

Claims adjudication and other developed software

 

58,987

 

(20,509

)

38,478

 

5 years

 

58,995

 

(14,188

)

44,807

 

6 years

 

Trademarks

 

20,100

 

(4,891

)

15,209

 

8 years

 

20,100

 

(3,383

)

16,717

 

9 years

 

Backlog

 

11,500

 

(9,328

)

2,172

 

1 year

 

11,500

 

(6,453

)

5,047

 

2 years

 

Total finite

 

$

1,896,375

 

$

(1,311,601

)

$

584,774

 

 

 

$

1,894,061

 

$

(1,212,155

)

$

681,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

33,500

 

 

33,500

 

Indefinite

 

33,500

 

 

33,500

 

Indefinite

 

Total

 

$

1,929,875

 

$

(1,311,601

)

$

618,274

 

 

 

$

1,927,561

 

$

(1,212,155

)

$

715,406

 

 

 

 


(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 December 2, 2017 and March 4, 2017 are unfavorable lease intangibles with a net carrying amount of $20,740 and $23,703, respectively. These intangible liabilities are amortized over their remaining lease terms at the time of acquisition.  Included in noncurrent liabilities held for sale as of December 2, 2017 and March 4, 2017 are unfavorable lease intangibles with a net carrying amount of $13,394 and $14,539, respectively.

 

Amortization expense for these intangible assets and liabilities was $35,490 and $112,772 for the thirteen and thirty-nine week periods ended December 2, 2017, respectively. Amortization expense for these intangible assets and liabilities was $41,654 and $124,060 for the thirteen and thirty-nine week periods ended November 26, 2016, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2018—$172,501; 2019—$120,319; 2020—$96,399; 2021—$72,519 and 2022—$50,715.

 

10. Indebtedness and Credit Agreements

 

Following is a summary of indebtedness and lease financing obligations at December 2, 2017 and March 4, 2017:

 

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December 2,
2017

 

March 4,
2017

 

Secured Debt:

 

 

 

 

 

Senior secured revolving credit facility due January 2020 ($1,925,000 and $2,430,000 face value less unamortized debt issuance costs of $18,308 and $24,918)

 

$

1,906,692

 

$

2,405,082

 

Tranche 1 Term Loan (second lien) due August 2020 ($470,000 face value less unamortized debt issuance costs of $3,249 and $4,167)

 

466,751

 

465,833

 

Tranche 2 Term Loan (second lien) due June 2021 ($500,000 face value less unamortized debt issuance costs of $2,008 and $2,431)

 

497,992

 

497,569

 

Other secured

 

90

 

90

 

 

 

2,871,525

 

3,368,574

 

Guaranteed Unsecured Debt:

 

 

 

 

 

9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $1,568 and $2,071 and less unamortized debt issuance costs of $5,575 and $7,527)

 

897,993

 

896,544

 

6.75% senior notes due June 2021 ($810,000 face value less unamortized debt issuance costs of $5,247 and $6,360)

 

804,753

 

803,640

 

6.125% senior notes due April 2023 ($1,800,000 face value less unamortized debt issuance costs of $22,777 and $25,984)

 

1,777,223

 

1,774,016

 

 

 

3,479,969

 

3,474,200

 

Unguaranteed Unsecured Debt:

 

 

 

 

 

7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,501 and $1,625)

 

293,499

 

293,375

 

6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $723 and $771)

 

127,277

 

127,229

 

 

 

420,776

 

420,604

 

Lease financing obligations

 

57,990

 

65,315

 

Total debt

 

6,830,260

 

7,328,693

 

Current maturities of long-term debt and lease financing obligations

 

(22,262

)

(21,335

)

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

 

$

6,807,998

 

$

7,307,358

 

 

Reconciliation of indebtedness included in continuing operations and discontinued operations:

 

 

 

December 2, 2017

 

 

 

Debt

 

Lease Financing
 Obligations

 

Total Debt and
 Lease Financing
 Obligations

 

Balance, December 2, 2017 — per above table

 

$

6,772,270

 

$

57,990

 

$

6,830,260

 

Amounts reclassified as current and noncurrent liabilities held for sale in connection with the Sale (a)

 

(3,786,480

)

(6,072

)

(3,792,552

)

Total debt and lease financing obligations

 

2,985,790

 

51,918

 

3,037,708

 

Current maturities of long-term debt and lease financing obligations — continuing operations

 

(90

)

(20,264

)

(20,354

)

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

 

$

2,985,700

 

$

31,654

 

$

3,017,354

 

 

 

 

March 4, 2017

 

 

 

Debt

 

Lease Financing 
Obligations

 

Total Debt and
 Lease Financing
 Obligations

 

Balance, March 4, 2017 — per above table

 

$

7,263,378

 

$

65,315

 

$

7,328,693

 

Amounts reclassified as current and noncurrent liabilities held for sale in connection with the Sale (a)

 

(4,027,400

)

(10,492

)

(4,037,892

)

Total debt and lease financing obligations

 

3,235,978

 

54,823

 

3,290,801

 

Current maturities of long-term debt and lease financing obligations — continuing operations

 

(90

)

(17,619

)

(17,709

)

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

 

$

3,235,888

 

$

37,204

 

$

3,273,092

 

 


(a)         In connection with the Sale, the Company is estimating that the Sale will provide total excess cash proceeds of approximately $4,027,400 which will be used to repay outstanding indebtedness.  As such, the Company included $3,786,480 (total estimated excess cash proceeds of $4,027,400 less proceeds received through the quarter ended December 2, 2017 of $240,900) and $4,027,400 of estimated proceeds as of March 4, 2017 as repayment of outstanding indebtedness that has been included in liabilities held for sale.  Additionally, as part of the Sale, the Company will be relieved of approximately $6,072 and $10,492, respectively, of capital lease obligations as of December 2, 2017 and March 4, 2017.  These amounts are also reflected as liabilities held for sale.  Please see Note 3 for additional details.

 

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Credit Facility

 

The Company’s Amended and Restated Senior Secured Credit Facility has a borrowing capacity of $3,700,000 and matures in January 2020. Borrowings under the revolver bear interest at a rate per annum between (i) LIBOR plus 1.50% and LIBOR plus 2.00% with respect to Eurodollar borrowings and (ii) the alternate base rate plus 0.50% and the alternate base rate plus 1.00% with respect to ABR borrowings, in each case, based upon the Average Revolver Availability (as defined in the Amended and Restated Senior Secured Credit Facility). The Company is required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the revolver, depending on the Average Revolver Availability (as defined in the Amended and Restated Senior Secured Credit Facility). Amounts drawn under the revolver become due and payable on January 13, 2020.

 

The Company’s ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At December 2, 2017, the Company had $1,925,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $59,343 which resulted in additional borrowing capacity of $1,715,657.

 

The Amended and Restated Senior Secured Credit Facility restricts the Company and the Subsidiary Guarantors (as defined herein) from accumulating cash on hand, and under certain circumstances, requires the funds in the Company’s deposit accounts to be applied first to the repayment of outstanding revolving loans under the Amended and Restated Senior Secured Credit Facility and then to be held as collateral for the senior obligations.

 

The Amended and Restated Senior Secured Credit Facility allows 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 Amended and Restated Senior Secured Credit Facility 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 (a) the fifth anniversary of the effectiveness of the Amended and Restated Senior Secured Credit Facility and (b) the latest maturity date of any Term Loan or Other Revolving Loan (each as defined in the Amended and Restated Senior Secured Credit Facility) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date and, with respect to any escrow notes issued by Rite Aid, excluding any special mandatory redemption of the type described in clause (iii) of the definition of “Escrow Notes” in the Amended and Restated Senior Secured Credit Facility). Subject to the limitations described in clauses (a) and (b) of the immediately preceding sentence, the Amended and Restated Senior Secured Credit Facility additionally allows the Company to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the Amended and Restated Senior Secured Credit Facility) 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 Amended and Restated Senior Secured Credit Facility also contains certain restrictions on the amount of secured first priority debt the Company is able to incur. The Amended and Restated Senior Secured Credit Facility also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended and Restated Senior Secured Credit Facility is not in default and the Company maintains availability under its revolver of more than $365,000.

 

The Amended and Restated Senior Secured Credit Facility has a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (a) on any date on which availability under the revolver is less than $200,000 or (b) 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 revolver is equal to or greater than $250,000. As of December 2, 2017, the Company had availability under its revolver of $1,715,657, its fixed charge coverage ratio was greater than 1.00 to 1.00, and the Company was in compliance with the senior secured credit facility’s financial covenant. The Amended and Restated Senior Secured Credit Facility also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens.

 

The Amended and Restated Senior Secured Credit Facility also provides for customary events of default.

 

The Company also has two second priority secured term loan facilities, the Tranche 1 Term Loan and the Tranche 2 Term Loan. The Tranche 1 Term Loan matures on August 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 4.75% with a LIBOR floor of 1.00%, if the Company chooses to make LIBOR borrowings, or at Citibank’s base rate plus 3.75%. The Tranche 2 Term Loan matures on June 21, 2021 and currently bears interest at a rate per annum equal to LIBOR plus 3.875% with a LIBOR floor of 1.00%, if the Company chooses to make LIBOR borrowings, or at Citibank’s base rate plus 2.875%.

 

With the exception of EIC, substantially all of Rite Aid Corporation’s 100 percent owned subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, and unsecured guaranteed notes. The Amended and Restated Senior Secured Credit Facility and second priority secured term loan

 

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facilities are secured, on a senior or second priority basis, as applicable, by a lien on, among other things, accounts receivable, inventory and prescription files of the Subsidiary Guarantors. The subsidiary guarantees related to the Company’s Amended and Restated Senior Secured Credit Facility and second priority secured term loan 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. Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended and Restated Senior Secured Credit Facility, the credit facility, second priority secured term loan facilities and applicable notes, were minor. Accordingly, condensed consolidating financial information for the Company and subsidiaries is not presented for those periods. Subsequent to the Acquisition, other than EIC, the subsidiaries, including joint ventures, that do not guarantee the credit facility, second priority secured term loan 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. See Note 15 “Guarantor and Non-Guarantor Condensed Consolidating Financial Information” for additional disclosure.

 

Maturities

 

The aggregate annual principal payments of long-term debt for the remainder of fiscal 2018 and thereafter are as follows: 2018—$90; 2019—$0; 2020—$1,925,000; 2021—$1,372,000; 2022—$1,310,000 and $2,223,000 thereafter.  The proceeding amounts do not reflect repayments associated with excess proceeds from the Sale.

 

11. Stock Options and Stock Awards

 

The Company recognizes share-based compensation expense over the requisite service period of the award, net of an estimate for the impact of forfeitures. Operating results for the thirty-nine week periods ended December 2, 2017 and November 26, 2016 include $22,549 and $36,766, respectively, of compensation costs related to the Company’s stock-based compensation arrangements.

 

Beginning in fiscal 2015, the Company provided certain of its associates with performance based incentive plans under which the associates will receive a certain number of shares of the Company’s common stock based on the Company meeting certain financial and performance goals. During fiscal 2018, the Company issued performance units to certain of its associates. The performance units will be settled in cash based on the actual performance of the Company relative to certain financial performance goals and the stock price upon vesting. During the thirty-nine week periods ended December 2, 2017 and November 26, 2016, the Company incurred $3,482 and $14,448 related to these performance based incentive plans, respectively, which is recorded as a component of stock-based compensation expense.

 

The total number and type of newly awarded grants and the related weighted average fair value for the thirty-nine week periods ended December 2, 2017 and November 26, 2016 are as follows:

 

 

 

December 2, 2017

 

November 26, 2016

 

 

 

Shares

 

Weighted
Average
Fair Value

 

Shares

 

Weighted
Average
Fair Value

 

Stock options granted

 

1,000

 

$

1.08

 

 

$

N/A

 

Restricted stock awards granted

 

13,856

 

$

2.82

 

3,613

 

$

7.73

 

Total awards

 

14,856

 

 

 

3,613

 

 

 

 

Typically, stock options granted vest, and are subsequently exercisable in equal annual installments over a four-year period for employees. Restricted stock awards typically vest in equal annual installments over a three-year period.

 

The Company calculates the fair value of stock options using the Black- Scholes-Merton option pricing model. The following assumptions were used in the Black-Scholes-Merton option pricing model:

 

 

 

Thirty-Nine Week Period
Ended

 

 

 

December 2,
2017

 

November 26,
2016

 

Expected stock price volatility

 

58

%

N/A

 

Expected dividend yield

 

0

%

N/A

 

Risk-free interest rate

 

1.9

%

N/A

 

Expected option life

 

5.5 years

 

N/A

 

 

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As of December 2, 2017, the total unrecognized pre-tax compensation costs related to unvested stock options and restricted stock awards granted, net of estimated forfeitures and the weighted average period of cost amortization are as follows:

 

 

 

December 2, 2017

 

 

 

Unvested
stock
options

 

Unvested
restricted
stock

 

Unvested
performance
shares

 

Unrecognized pre-tax costs

 

$

7,057

 

$

38,971

 

$

12,253

 

Weighted average amortization period

 

1.62 years

 

2.1 years

 

2.3 years

 

 

12. Retirement Plans

 

Net periodic pension expense recorded in the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016, for the Company’s defined benefit plan includes the following components:

 

 

 

Defined Benefit
Pension Plan

 

Defined Benefit
Pension Plan

 

 

 

Thirteen Week Period Ended

 

Thirty-Nine Week Period Ended

 

 

 

December 2,
2017

 

November 26,
2016

 

December 2,
2017

 

November 26,
2016

 

Service cost

 

$

346

 

$

292

 

$

1,038

 

$

876

 

Interest cost

 

1,603

 

1,621

 

4,809

 

4,863

 

Expected return on plan assets

 

(1,147

)

(1,142

)

(3,441

)

(3,426

)

Amortization of unrecognized prior service cost

 

 

 

 

 

Amortization of unrecognized net loss

 

856

 

1,132

 

2,569

 

3,396

 

Net periodic pension expense

 

$

1,658

 

$

1,903

 

$

4,975

 

$

5,709

 

 

During the thirteen and thirty-nine week period ended December 2, 2017 the Company contributed $8,210 to the Defined Benefit Pension Plan. During the remainder of fiscal 2018, the Company expects to contribute $813 to the Defined Benefit Pension Plan.

 

13. Segment Reporting

 

Prior to June 24, 2015, the Company’s operations were within one reportable segment. As a result of the completion of the Acquisition, the Company has realigned its internal management reporting to reflect 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 table is a reconciliation of the Company’s business segments to the condensed consolidated financial statements for the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016:

 

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Retail
Pharmacy

 

Pharmacy
Services

 

Intersegment
Eliminations (1)

 

Consolidated

 

Thirteen Week Period Ended

 

 

 

 

 

 

 

 

 

December 2, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,959,002

 

$

1,445,140

 

$

(50,972

)

$

5,353,170

 

Gross Profit

 

1,087,888

 

98,835

 

 

1,186,723

 

Adjusted EBITDA (2)

 

88,886

 

40,363

 

 

129,249

 

November 26, 2016:

 

 

 

 

 

 

 

 

 

Revenues

 

$

4,082,278

 

$

1,645,835

 

$

(59,002

)

$

5,669,111

 

Gross Profit

 

1,141,794

 

103,057

 

 

1,244,852

 

Adjusted EBITDA (2)

 

138,903

 

52,431

 

 

191,334

 

Thirty-Nine Week Period Ended

 

 

 

 

 

 

 

 

 

December 2, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

11,833,195

 

$

4,451,212

 

$

(149,703

)

$

16,134,704

 

Gross Profit

 

3,203,270

 

307,069

 

 

3,510,339

 

Adjusted EBITDA (2)

 

264,253

 

138,237

 

 

402,490

 

November 26, 2016:

 

 

 

 

 

 

 

 

 

Revenues

 

$

12,319,445

 

$

4,883,070

 

$

(178,361

)

$

17,024,154

 

Gross Profit

 

3,426,265

 

289,384

 

 

3,715,649

 

Adjusted EBITDA (2)

 

428,864

 

143,616

 

 

572,480

 

 


(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.  In accordance with ASC 205-20, the Company reduced its intersegment eliminations to reflect the ongoing cash flows which are expected to continue between the Company and the Disposal Group of $32,438 and $97,560 for the thirteen and thirty-nine week periods ended December 2, 2017 and $32,381 and $97,301 for the thirteen and thirty-nine week periods ended November 26, 2016.  Please see Note 3 for additional information.

 

(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 income to Adjusted EBITDA for the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016:

 

 

 

Thirteen Week
Period Ended

 

Thirty-Nine Week
Period Ended

 

 

 

December 2,
2017

 

November 26,
2016

 

December 2,
2017

 

November 26,
2016

 

 

 

(dollars in thousands)

 

Net (loss) income — continuing operations

 

$

(18,182

)

$

23,610

 

$

134,141

 

$

29,134

 

Interest expense

 

50,308

 

50,304

 

152,165

 

146,674

 

Income tax (benefit) expense

 

(16,061

)

(4,682

)

89,268

 

(3,824

)

Depreciation and amortization expense

 

95,764

 

101,953

 

292,448

 

304,460

 

LIFO charge

 

6,784

 

8,373

 

20,393

 

25,266

 

Lease termination and impairment charges

 

3,939

 

7,199

 

11,090

 

20,203

 

Walgreens Boots Alliance merger termination fee

 

 

 

(325,000

)

 

Other

 

6,697

 

4,577

 

27,985

 

50,567

 

Adjusted EBITDA

 

$

129,249

 

$

191,334

 

$

402,490

 

$

572,480

 

 

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

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Eliminations (2)

 

Consolidated

 

December 2, 2017:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

8,361,424

 

$

3,146,288

 

$

(167,098

)

$

11,340,614

 

Goodwill

 

43,492

 

1,639,355

 

 

1,682,847

 

Additions to property and equipment and intangible assets

 

150,043

 

10,974

 

 

161,017

 

March 4, 2017:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

8,664,216

 

$

3,087,143

 

$

(157,607

)

$

11,593,752

 

Goodwill

 

43,492

 

1,639,355

 

 

1,682,847

 

Additions to property and equipment and intangible assets(1)

 

281,072

 

12,725

 

 

293,797

 

 

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(1)                                 Includes additions to property and equipment and intangible assets for the fifty-three week period ended March 4, 2017.

 

(2)                                 As of December 2, 2017 and March 4, 2017, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $154,119 and $140,865, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $12,979 and $16,742, 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.

 

14. Commitments and Contingencies

 

Legal Matters and Regulatory Proceedings

 

The Company is involved in legal proceedings and is subject to investigations, inspections, claims, audits, inquiries, and similar actions by 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 will be 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 account. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.

 

The Company’s contingencies are subject to significant uncertainties, 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 sealed qui tam lawsuit (“whistleblower” action) has been filed and whether the government agency makes a decision to intervene in the lawsuit following investigation.

 

After the announcement of the proposed Merger between the Company and Walgreens Boots Alliance, Inc. (WBA), a putative class action lawsuit was filed in Pennsylvania in the Court of Common Pleas of Cumberland County (Wilson v. Rite Aid Corp., et al.) by purported Company stockholders against the Company, its directors (the Individual Defendants, together with the Company, the Rite Aid Defendants), WBA and Victoria Merger Sub Inc. (Victoria) challenging the transactions contemplated by the Merger agreement. The complaint alleged primarily that the Individual Defendants breached their fiduciary duties by, among other things, agreeing to an allegedly unfair and inadequate price, agreeing to deal protection devices that allegedly prevented the directors from obtaining higher offers from other interested buyers for the Company and allegedly failing to protect against certain purported conflicts of interest in connection with the Merger. The complaint further alleged that the Company, WBA and/or Victoria aided and abetted these alleged breaches of fiduciary duty. The complaint sought, among other things, to enjoin the closing of the Merger as well as money damages and attorneys’ and experts’ fees.

 

Also in connection with the proposed Merger, an action was filed in the United States District Court for the Middle District of Pennsylvania (the Pennsylvania District Court), asserting a claim for violations of Section 14(a) of the Exchange Act and SEC Rule 14a-9 against the Rite Aid Defendants, WBA and Victoria and a claim for violations of Section 20(a) of the Exchange Act against the Individual Defendants and WBA (Hering v. Rite Aid Corp., et al.).  The complaint in the Hering action alleged, among other things, that the Rite Aid Defendants disseminated an allegedly false and materially misleading proxy and sought to enjoin the shareholder vote on the proposed Merger, a declaration that the proxy was materially false and misleading in violation of federal securities laws and an award of money damages and attorneys’ and experts’ fees.  On January 14 and 16, 2016, respectively, the plaintiff in the Hering action filed a motion for preliminary injunction and a motion for expedited discovery.  On January 21, 2016, the Rite Aid Defendants filed a motion to dismiss the Hering complaint.  At a hearing held on January 25, 2016, the Pennsylvania District Court orally denied the plaintiff’s motion for expedited discovery and subsequently denied the plaintiff’s motion for preliminary injunction on January 28, 2016.  On March 14, 2016, the Pennsylvania District Court appointed Jerry Hering, Don Michael Hussey and Joanna Pauli Hussey as lead plaintiffs for the putative class and approved their selection of Robbins Geller Rudman & Dowd LLP as lead counsel.  On April 14, 2016, the Pennsylvania District Court granted the lead plaintiffs’ unopposed motion to stay the Hering action for all purposes pending consummation of the Merger.

 

On March 17, 2017, the Hering plaintiffs filed a motion to lift the stay for the purpose of filing a proposed amended complaint.  Defendants opposed the motion, and briefing concluded on April 17, 2017.  The proposed amended complaint asserted state law breach of fiduciary duty claims against the Individual Defendants, a claim of aiding and abetting the alleged breaches of fiduciary duty against Rite Aid, WBA and Victoria, as well as claims for violations of Section 14(a) of the Exchange Act and SEC

 

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Rule 14a-9 against the Rite Aid Defendants, WBA and Victoria, claims for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 against the Rite Aid Defendants, WBA, Victoria and certain WBA executives, and a claim for violations of Section 20(a) of the Exchange Act against the Individual Defendants, WBA and Victoria.  August 4, 2017, the Pennsylvania District Court entered an order lifting the stay, noting that the original claims in this matter are now moot, and directed the plaintiffs to file a motion for leave to amend the complaint, with brief in support thereof, on or before September 15, 2017 which deadline was subsequently extended to September 22, 2017.  On September 22, 2017, the lead plaintiffs gave notice that plaintiffs Don Michael Hussey and Joanna Pauli Hussey were withdrawing as lead plaintiffs, and that plaintiff Jerry Hering (the Lead Plaintiff) would continue to represent the proposed class in the Hering action going forward.  That same day, Lead Plaintiff filed a motion for leave to file an amended complaint, which the Pennsylvania District Court granted on November 27, 2017.  On December 11, 2017, Lead Plaintiff filed the amended complaint (the Amended Complaint), which alleges a claim for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 and a claim for violations of Section 20(a) of the Exchange Act against the Rite Aid Defendants, WBA, and certain WBA executives.  The Rite Aid Defendants intend to move to dismiss the Amended Complaint.

 

The Company has been named in a collective and class action lawsuit, Indergit v. Rite Aid Corporation, et al., pending in the United States District Court for the Southern District of New York, filed purportedly on behalf of current and former store managers working in the Company’s stores at various locations around the country. The lawsuit alleges that the Company failed to pay overtime to store managers as required under the FLSA and under certain New York state statutes. The lawsuit also seeks other relief, including liquidated damages, attorneys’ fees, costs and injunctive relief arising out of state and federal claims for overtime pay. On April 2, 2010, the Court conditionally certified a nationwide collective group of individuals who worked for the Company as store managers since March 31, 2007. The Court ordered that Notice of the Indergit action be sent to the purported members of the collective group (approximately 7,000 current and former store managers) and approximately 1,550 joined the Indergit action. Discovery as to certification issues has been completed. On September 26, 2013, the Court granted Rule 23 class certification of the New York store manager claims as to liability only, but denied it as to damages, and denied the Company’s motion for decertification of the nationwide collective action claims. The Company filed a motion seeking reconsideration of the Court’s September 26, 2013 decision which motion was denied in June 2014. The Company subsequently filed a petition for an interlocutory appeal of the Court’s September 26, 2013 ruling with the U. S. Court of Appeals for the Second Circuit which petition was denied in September 2014. Notice of the Rule 23 class certification as to liability only has been sent to approximately 1,750 current and former store managers in the state of New York. Discovery related to the merits of the claims is ongoing. On January 12, 2017, the parties reached a settlement in principle of this matter, for an immaterial amount of money, which is subject to preliminary and final approval by the court. On August 3, 2017, the court entered an order granting plaintiff’s unopposed motion for preliminary approval of the settlement and notice of the settlement was issued to putative class members on September 7, 2017.  A final approval hearing is scheduled to be heard on January 11, 2018.  In the event the settlement does not receive final approval by the court, the litigation may resume. If such occurs, the Company presently is not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit. The Company’s management believes, however, that this lawsuit is without merit and is vigorously defending this lawsuit.

 

The Company is currently a defendant in several lawsuits filed in courts in California alleging violations of California 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 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 legal proceedings, have merit.  The Company has aggressively challenged the merits of the lawsuits and, where applicable, the allegations that the cases 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.

 

In the employee seating case (Hall v. Rite Aid Corporation, San Diego County Superior Court), the Court, in October 2011, granted the plaintiff’s motion for class certification. The Company filed its motion for decertification, which motion was granted in November 2012. Plaintiff subsequently appealed the Court’s order which appeal was granted in May 2014. The Company filed a petition for review of the appellate court’s decision with the California Supreme Court, which petition was denied in August 2014. Proceedings in the Hall case were stayed pending a decision by the California Supreme Court in two similar cases. That decision was rendered on April 4, 2016. A status conference in the case was held on November 18, 2016, at which time the court lifted the stay and scheduled the case for trial on January 26, 2018.  Thereafter, the Court continued the trial to March 9, 2018, and is scheduled to hear Rite Aid’s pending motion for summary judgment on February 2, 2018.

 

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”) action filed by qui tam plaintiff Azam Rahimi (“Relator”) in the District Court for the Eastern District of

 

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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. The Company has filed a motion to dismiss the complaint, which is pending.  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 received 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 (“USAO”) for the Northern District of New York concerning an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 (“CMEA”). Additional subpoenas were issued in 2013, 2014, and 2015 seeking broader documentation regarding PSE sales and recordkeeping requirements. Assistant U.S. Attorneys from the Northern and Eastern Districts of New York and the Southern District of West Virginia are currently investigating, but no lawsuits or charges have been filed. Between September 2015 and August 2017, the Company received several grand jury subpoenas from the U.S. District Court for the Southern District of West Virginia seeking additional information in connection with the investigation of violations of the CMEA and/or the Controlled Substances Act (“CSA”). Violations of the CMEA or the CSA could result in the imposition of administrative, civil and/or criminal penalties against the Company. The Company had entered into tolling agreements with the United States with respect to both the civil and grand jury investigations, which expired on June 30, 2017 and August 3, 2016, respectively.  There was no request to renew the agreements.  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. While the Company’s management cannot predict the outcome of these matters, it is possible that the Company’s results of operations or cash flows could be materially affected by an unfavorable resolution. At this stage of the investigation, Rite Aid is not able to predict the outcome of the investigations.

 

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’s deadline to respond to the CADOJ’s and Relator’s complaints is currently scheduled for January 2018.  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.

 

Relator, Matthew Omlansky, filed a qui tam action, State of California ex rel. Matthew Omlansky v. Rite Aid Corporation, on behalf of the State of California against Rite Aid in the Superior Court of the State of California. In his Complaint, Relator alleges that Rite Aid violated the California False Claims Act by (i) failing to comply with California rules governing the Company’s reporting of its usual and customary prices; (ii) failing to dispense the least expensive equivalent generic drug in certain circumstances, in violation of applicable regulations; and (iii) dispensing, and seeking reimbursement for, restricted brand name drugs without prior approval. Relator filed his Second Amended Complaint on April 19, 2016.  On October 5, 2016, Rite Aid’s demurrer to the Second Amended Complaint was granted, with leave for Relator to file an amended complaint.  Relator filed his Third Amended Complaint to which Rite Aid filed a second demurrer, which the Court granted with leave for Relator to amend on April 20, 2017.  Relator filed his Fourth Amended Complaint on May 1, 2017.  On July 7, 2017, the Company’s demurrer to the Fourth Amended Complaint was sustained without leave for Relator to amend.  The court entered a final judgment of dismissal of each of Relator’s claims on August 3, 2017.  Relator’s deadline to appeal the judgment passed on October 9, 2017.  Relator filed an untimely notice of appeal in the action on October 13, 2017, and thereafter moved the California Court of Appeal for the Third District to construe an October 5, 2017 notice of appeal erroneously filed in another action brought by Relator as a timely appeal of this action.  The Court of Appeal denied Relator’s motion, and the Company has moved to dismiss the attempted appeal.  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 against the Company and various purported related entities on September 27, 2016 alleging violations of the Mississippi Medicaid Fraud Control Act, violations

 

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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 substantive and jurisdictional grounds, as well as a motion to transfer venue.  These motions are pending and the action is stayed while related litigation is resolved on appeal.  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.

 

Rite Aid is in the preliminary stages of litigation with 10 West Virginia counties and Shelby County, Tennessee related to the alleged costs of opioid addiction by their residents.  All lawsuits except for the Shelby County action are federal lawsuits that have been consolidated in the Northern District of Ohio before Judge Polster as part of the In re: National Prescription Opiate Litigation.  No responsive pleadings have been filed by Rite Aid because the West Virginia lawsuits had all been stayed prior to consolidation and Rite Aid has not yet been served with the Shelby County complaint.  The complaints allege generally that defendants, including Rite Aid, created a public nuisance in the plaintiff counties.  Along with other distributors, these Counties accuse Rite Aid of distributing an excessive amount of opiates to licensed pharmacies, or otherwise failing to refuse suspicious orders.  At this stage of these 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 the 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 legal matters will be material to the Company’s consolidated financial position. It is possible, however, that the Company’s results of operations or cash flows could be materially affected by an unfavorable resolution of pending litigation or contingencies.

 

15. Supplementary Cash Flow Data

 

 

 

Thirty-Nine Weeks
Ended December
2, 2017

 

 

 

 

 

Cash paid for interest (net of capitalized amounts of $263)

 

$

285,022

 

Cash payments of income taxes, net of refunds

 

$

8,353

 

Equipment financed under capital leases

 

$

10,295

 

Equipment received for noncash consideration

 

$

2,044

 

Reduction in lease financing obligation

 

$

4,740

 

Gross borrowings from revolver

 

$

2,203,000

 

Gross payments to revolver

 

$

2,467,080

 

 

 

 

Thirty-Nine Weeks
Ended November
26, 2016

 

 

 

 

 

Cash paid for interest (net of capitalized amounts of $99)

 

$

273,761

 

Cash payments of income taxes, net of refunds

 

$

6,506

 

Equipment financed under capital leases

 

$

3,881

 

Equipment received for noncash consideration

 

$

746

 

Gross borrowings from revolver

 

$

2,774,000

 

Gross payments to revolver

 

$

2,494,000

 

 

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 percent owned subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes (the “Subsidiary Guarantors”). Additionally, with the exception of EIC, the subsidiaries, including joint ventures, that do not guarantee the

 

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Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes 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 Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities and secured guaranteed notes and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. Presented below is condensed consolidating financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the non-guarantor subsidiaries at December 2, 2017, March 4, 2017, and for the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016. Separate financial statements for Subsidiary Guarantors are not presented.

 

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Rite Aid Corporation

 

 

 

Condensed Consolidating Balance Sheet

 

 

 

December 2, 2017

 

 

 

(unaudited)

 

 

 

Rite Aid
Corporation (Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

163,343

 

$

6,457

 

$

 

$

169,800

 

Accounts receivable, net

 

 

1,503,578

 

293,341

 

 

1,796,919

 

Intercompany receivable

 

 

 

200,895

 

 

(200,895

)(a)

 

Inventories, net of LIFO reserve of $0, $627,718, $0, $0, and $627,718

 

 

1,853,886

 

 

 

1,853,886

 

Prepaid expenses and other current  assets

 

 

240,093

 

619

 

 

240,712

 

Current assets held for sale

 

 

1,868,128

 

 

 

1,868,128

 

Total current assets

 

 

5,829,923

 

300,417

 

(200,895

)

5,929,445

 

Property, plant and equipment, net

 

 

1,479,214

 

 

 

1,479,214

 

Goodwill

 

 

1,682,847

 

 

 

1,682,847

 

Other intangibles, net

 

 

566,371

 

51,903

 

 

618,274

 

Deferred tax assets

 

 

1,419,544

 

 

 

1,419,544

 

Investment in subsidiaries

 

7,953,874

 

47,355

 

 

(8,001,229

)(b)

 

Intercompany receivable

 

 

261,847

 

 

(261,847

)(a)

 

Other assets

 

 

203,995

 

7,295

 

 

211,290

 

Total assets

 

$

7,953,874

 

$

11,491,096