RITE AID CORP - Quarter Report: 2015 August (Form 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 August 29, 2015

 

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)

 

 

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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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 1,046,265,328 shares of its $1.00 par value common stock outstanding as of September 28, 2015.

 

 

Table of Contents

 

RITE AID CORPORATION

 

TABLE OF CONTENTS

 

	Cautionary Statement Regarding Forward-Looking Statements	2
	PART I FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of August 29, 2015 and February 28, 2015	4
	Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended August 29, 2015 and August 30, 2014	5
	Condensed Consolidated Statements of Comprehensive Income for the Thirteen Week Periods Ended August 29, 2015 and August 30, 2014	6
	Condensed Consolidated Statements of Operations for the Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014	7
	Condensed Consolidated Statements of Comprehensive Income for the Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014	8
	Condensed Consolidated Statements of Cash Flows for the Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014	9
	Notes to Condensed Consolidated Financial Statements	10
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	44
ITEM 4.	Controls and Procedures	45
	PART II OTHER INFORMATION
ITEM 1.	Legal Proceedings	46
ITEM 1A.	Risk Factors	46
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
ITEM 3.	Defaults Upon Senior Securities	49
ITEM 4.	Mine Safety Disclosures	49
ITEM 5.	Other Information	49
ITEM 6.	Exhibits	50

 

1

Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

·                  our high level of indebtedness;

 

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

 

·                  general economic conditions, inflation and interest rate movements;

 

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

 

·                  our ability to achieve the benefits of our efforts to reduce the costs of our generic and other drugs;

 

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

 

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

 

·                  our ability to hire and retain qualified personnel;

 

·                  competitive pricing pressures, including aggressive promotional activity from our competitors;

 

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

 

·                  our ability to manage expenses and working capital;

 

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

 

·                  changes in state or federal legislation or regulations, and the continued impact from the ongoing implementation of the Patient Protection and Affordable Care Act as well as other healthcare reform;

 

·                  the outcome of lawsuits and governmental investigations;

 

·                  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 realize the benefits of our recent acquisition of EnvisionRx (the “Acquisition”);

 

·                  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 declining gross margins in the PBM industry due to increased market competition and client demand for lower prices while providing enhanced service offerings,

 

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

 

2

Table of Contents

 

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

 

We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” either included herein or in our Annual Report on Form 10-K for the fiscal year ended February 28, 2015 (the “Fiscal 2015 10-K”) which we filed with the SEC on April 23, 2015, and our Quarterly Report on Form 10-Q for the thirteen weeks ended May 30, 2015 (the “First Quarter 2016 10-Q”) which we filed on June 22, 2015. These documents are available on the SEC’s website at www.sec.gov.

 

3

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share amounts)

 

(unaudited)

 

		August 29, 2015			February 28, 2015
ASSETS
Current assets:
Cash and cash equivalents		$	152,647		$	115,899
Accounts receivable, net		1,872,976			980,904
Inventories, net of LIFO reserve of $1,009,501 and $997,528		2,902,749			2,882,980
Deferred tax assets		17,823			17,823
Prepaid expenses and other current assets		140,939			224,152
Total current assets		5,087,134			4,221,758
Property, plant and equipment, net		2,198,674			2,091,369
Goodwill		1,533,827			76,124
Other intangibles, net		1,225,531			421,480
Deferred tax assets		1,617,311			1,766,349
Other assets		316,754			286,172
Total assets		$	11,979,231		$	8,863,252
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and lease financing obligations		$	29,002		$	100,376
Accounts payable		1,594,411			1,133,520
Accrued salaries, wages and other current liabilities		1,703,545			1,193,419
Deferred tax liabilities		57,622			57,685
Total current liabilities		3,384,580			2,485,000
Long-term debt, less current maturities		7,361,079			5,483,415
Lease financing obligations, less current maturities		54,232			61,152
Other noncurrent liabilities		749,637			776,629
Total liabilities		11,549,528			8,806,196
Commitments and contingencies		—			—
Stockholders’ equity:
Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 1,045,622 and 988,558		1,045,622			988,558
Additional paid-in capital		4,795,106			4,521,023
Accumulated deficit		(5,366,370		)	(5,406,675		)
Accumulated other comprehensive loss		(44,655		)	(45,850		)
Total stockholders’ equity		429,703			57,056
Total liabilities and stockholders’ equity		$	11,979,231		$	8,863,252

 

See accompanying notes to condensed consolidated financial statements.

 

4

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

		Thirteen Week Period Ended
		August 29, 2015			August 30, 2014
Revenues		$	7,664,776		$	6,522,584
Costs and expenses:
Cost of revenues		5,742,485			4,628,005
Selling, general and administrative expenses		1,725,826			1,640,524
Lease termination and impairment charges		9,637			7,111
Interest expense		115,410			100,950
Loss on debt retirements, net		33,205			—
Loss (gain) on sale of assets, net		281			(1,715		)
		7,626,844			6,374,875
Income before income taxes		37,932			147,709
Income tax expense		16,463			19,860
Net income		$	21,469		$	127,849
Computation of income attributable to common stockholders:
Net income		$	21,469		$	127,849
Add back — interest on convertible notes		—			1,364
Income attributable to common stockholders—diluted		$	21,469		$	129,213
Basic and diluted income per share		$	0.02		$	0.13

 

See accompanying notes to condensed consolidated financial statements.

 

5

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(unaudited)

 

		Thirteen Week Period Ended
		August 29, 2015			August 30, 2014
Net income		$	21,469		$	127,849
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 $398 and $0 tax expense		598			660
Total other comprehensive income		598			660
Comprehensive income		$	22,067		$	128,509

 

See accompanying notes to condensed consolidated financial statements.

 

6

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

		Twenty-Six Week Period Ended
		August 29, 2015			August 30, 2014
Revenues		$	14,312,337		$	12,988,115
Costs and expenses:
Cost of revenues		10,530,516			9,290,557
Selling, general and administrative expenses		3,425,411			3,284,878
Lease termination and impairment charges		14,659			11,959
Interest expense		239,017			201,770
Loss on debt retirements, net		33,205			—
Loss (gain) on sale of assets, net		320			(2,085		)
		14,243,128			12,787,079
Income before income taxes		69,209			201,036
Income tax expense		28,904			31,741
Net income		$	40,305		$	169,295
Computation of income attributable to common stockholders:
Net income		$	40,305		$	169,295
Add back — interest on convertible notes		—			2,728
Income attributable to common stockholders—diluted		$	40,305		$	172,023
Basic income per share		$	0.04		$	0.18
Diluted income per share		$	0.04		$	0.17

 

See accompanying notes to condensed consolidated financial statements.

 

7

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(unaudited)

 

		Twenty-Six Week Period Ended
		August 29, 2015			August 30, 2014
Net income		$	40,305		$	169,295
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 $796 and $0 tax expense		1,195			1,319
Total other comprehensive income		1,195			1,319
Comprehensive income		$	41,500		$	170,614

 

See accompanying notes to condensed consolidated financial statements.

 

8

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(unaudited)

 

		Twenty-Six Week Period Ended
		August 29, 2015			August 30, 2014
Operating activities:
Net income		$	40,305		$	169,295
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization		237,348			204,589
Lease termination and impairment charges		14,659			11,959
LIFO charges		11,973			3,089
Loss (gain) on sale of assets, net		320			(2,085		)
Stock-based compensation expense		16,201			9,892
Loss on debt retirements, net		33,205			—
Changes in deferred taxes		1,574			—
Excess tax benefit on stock options and restricted stock		(20,869		)	(27,058		)
Changes in operating assets and liabilities:
Accounts receivable		8,119			441
Inventories		(24,469		)	68,917
Accounts payable		31,909			(26,750		)
Other assets and liabilities, net		(8,703		)	(50,058		)
Net cash provided by operating activities		341,572			362,231
Investing activities:
Payments for property, plant and equipment		(271,683		)	(193,633		)
Intangible assets acquired		(43,462		)	(40,023		)
Acquisition of businesses, net of cash acquired		(1,779,571		)	(69,793		)
Proceeds from dispositions of assets and investments		6,081			6,102
Net cash used in investing activities		(2,088,635		)	(297,347		)
Financing activities:
Proceeds from issuance of long-term debt		1,800,000			1,152,293
Net proceeds from revolver		728,000			5,000
Principal payments on long-term debt		(661,217		)	(1,165,623		)
Change in zero balance cash accounts		(51,309		)	(57,545		)
Net proceeds from issuance of common stock		8,105			14,791
Financing fees paid for early debt redemption		(26,003		)	—
Excess tax benefit on stock options and restricted stock		20,869			27,058
Deferred financing costs paid		(34,634		)	(1,506		)
Net cash provided by (used in) financing activities		1,783,811			(25,532		)
Increase in cash and cash equivalents		36,748			39,352
Cash and cash equivalents, beginning of period		115,899			146,406
Cash and cash equivalents, end of period		$	152,647		$	185,758
Supplementary cash flow data:
Cash paid for interest (net of capitalized amounts of $87 and $90, respectively)		$	170,053		$	192,319
Cash payments of income taxes, net of refunds		$	3,154		$	4,118
Equipment financed under capital leases		$	1,271		$	3,925
Equipment received for noncash consideration		$	2,011		$	1,337
Stock consideration issued in connection with business acquisitions		$	240,907		$	—
Conversion of the 8.5% convertible notes to common stock		$	64,089		$	—
Gross borrowings from revolver		$	2,904,000		$	1,556,000
Gross payments to revolver		$	2,176,000		$	1,551,000

 

See accompanying notes to condensed consolidated financial statements.

 

9

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen and twenty-six week periods ended August 29, 2015 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Rite Aid Corporation and Subsidiaries (the “Company”) Fiscal 2015 10-K.

 

In addition to the significant accounting policies discussed in the Company’s Fiscal 2015 10-K, the Company has added the following significant accounting policies as a result of its June 24, 2015 acquisition of EnvisionRx (the “Acquisition”), and the related addition of the new Pharmacy Services segment (please see Note 2. Acquisition and Note 13. Segment Reporting for additional details):

 

Revenue Recognition — Pharmacy Services Segment

 

The Pharmacy Services segment (“Pharmacy Services”) sells prescription drugs indirectly through its retail pharmacy network and directly through its mail service dispensing pharmacy. The Pharmacy Services segment recognizes revenue from prescription drugs sold by (i) its mail service dispensing pharmacy and (ii) under retail pharmacy network contracts where it is the principal using the gross method at the contract prices negotiated with its clients, primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout the United States. Revenues include: (i) the portion of the price the client pays directly to the Pharmacy Services segment, net of any volume-related or other discounts paid back to the client (see “Drug Discounts” on the following page), (ii) the price paid to the Pharmacy Services segment by client plan members for mail order prescriptions (“Mail Co-Payments”), and (iii) administrative fees. Sales taxes are not included in revenue. Revenue is recognized when: (i) persuasive evidence that the prescription drug sale has occurred or a contractual arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. The following revenue recognition policies have been established for the Pharmacy Services segment:

 

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

·                  Revenues generated from prescription drugs sold by the Pharmacy Services segment’s mail service dispensing pharmacy are recognized when the prescription is delivered. At the time of delivery, the Pharmacy Services segment has performed substantially all of its obligations under its client contracts and does not experience a significant level of returns or reshipments.

·                  Revenues generated from administrative fees based on membership or claims volume are recognized monthly upon active membership in the plan or actual claims volume.

 

The Pharmacy Services segment determines whether it is the principal or agent for its retail pharmacy network transactions on a contract by contract basis. In the majority of its contracts, the Pharmacy Services segment has determined it is the principal due to it: (i) being the primary obligor in the arrangement, (ii) having discretion in supplier selection, (iii) having involvement in the determination of product or service specifications, and (iv) having credit risk. The Pharmacy Services segment’s obligations under its client contracts for which revenues are reported using the gross method are separate and distinct from its obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these contracts, the Pharmacy Services segment is contractually required to pay the third party pharmacies in its retail pharmacy network for products sold, regardless of whether the

 

10

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

Pharmacy Services segment is paid by its clients. The Pharmacy Services segment’s responsibilities under its client contracts typically include validating eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible adverse drug interactions for the pharmacist to address with the prescriber prior to dispensing, suggesting generic alternatives where clinically appropriate and approving the prescription for dispensing. Although the Pharmacy Services segment does not have credit risk with respect to retail co-payments, management believes that all of the other applicable indicators of gross revenue reporting are present.

 

Drug Discounts — The Pharmacy Services segment deducts from its revenues that are generated from prescription drugs sold by third party pharmacies any rebates, inclusive of discounts and fees, earned by its clients. Rebates are paid to clients in accordance with the terms of client contracts.

 

Medicare Part D — The Pharmacy Services segment, through its Envision Insurance Company (“EIC”) subsidiary, participates in the federal government’s Medicare Part D program as a Prescription Drug Plan (“PDP”). Net revenues include insurance premiums earned by the PDP, which are determined based on the PDP’s annual bid and related contractual arrangements with the Centers for Medicare and Medicaid Services (“CMS”). The insurance premiums include a direct premium paid by CMS and a beneficiary premium, which is the responsibility of the PDP member, but is subsidized by CMS in the case of low-income members. Premiums collected in advance are initially deferred in accrued expenses and are then recognized in net revenues over the period in which members are entitled to receive benefits.

 

See Note 13 for additional information about the revenues of the Company’s business segments.

 

Cost of Revenues — Pharmacy Services Segment

 

The Pharmacy Services segment’s cost of revenues includes the cost of prescription drugs sold during the reporting period indirectly through its retail pharmacy network and directly through its mail service dispensing pharmacy.  The cost of prescription drugs sold component of cost of revenues includes: (i) the cost of the prescription drugs purchased from manufacturers or distributors and shipped to members in clients’ benefit plans from the Pharmacy Services segment’s mail service dispensing pharmacy, net of any volume-related or other discounts (see “Vendor allowances and purchase discounts” below) and (ii) the cost of prescription drugs sold through the Pharmacy Services segment’s retail pharmacy network under contracts where it is the principal, net of any volume-related or other discounts.

 

As a result of the Acquisition, and the related addition of the Pharmacy Services segment, the Company now refers to its cost of goods sold as its cost of revenues, as these costs are now inclusive of the cost of prescription drugs sold through the Pharmacy Services segment’s retail pharmacy network under contracts where it is the principal.

 

See Note 13 for additional information about the cost of revenues of the Company’s business segments.

 

Vendor Allowances and Purchase Discounts — Pharmacy Services Segment

 

The Company accounts for vendor allowances and purchase discounts as follows:

 

The Pharmacy Services segment receives purchase discounts on products purchased. The Pharmacy Services segment’s contractual arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services segment to receive purchase discounts from established list prices in one, or a combination, of the following forms: (i) a direct discount at the time of purchase, or (ii) a discount (or rebate) paid subsequent to dispensing when products are purchased indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy). These rebates are recognized when prescriptions are dispensed and are generally calculated and billed to manufacturers within 30 days of the end of each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected has not been material to the Pharmacy Services segment’s results of operations. The Pharmacy Services segment accounts for the effect of any such differences as a change in accounting estimate in the period the reconciliation is completed. The Pharmacy Services segment also receives additional discounts under its wholesaler contracts.  In addition, the Pharmacy Services segment receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of “Cost of revenues”.

 

New Accounting Pronouncements

 

In May 2013, the FASB issued a proposed Accounting Standards Update, Leases (Topic 842): a revision of the 2010 proposed Accounting Standards Update, Leases (Topic 840), that would require an entity to recognize assets and liabilities arising

 

11

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

under lease contracts on the balance sheet. The proposed standard, as currently drafted, will have a material impact on the Company’s reported results of operations and financial position.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2014-09 on its financial position, results of operations and cash flows.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation—Amendments to the Consolidation Analysis (Topic 810). This ASU requires reporting entities to reevaluate whether they should consolidate certain legal entities under the revised consolidation model. This standard modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs), eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs, especially those that have fee arrangements and related party relationships. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2015-02 on its financial position, results of operations and cash flows.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30). This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of the debt liability, which is consistent with the treatment of debt discounts. The new guidance should be applied on a retrospective basis, and upon transition, an entity is required to comply with the applicable disclosures necessary for a change in accounting principle. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2015-03 on its financial position.

 

In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting—Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962) Health and Welfare Benefit Plans (Topic 965). There are three parts to the ASU that aim to simplify the accounting and presentation of plan accounting. Part I of this ASU requires fully benefit-responsive investment contracts to be measured at contract value instead of the current fair value measurement. Part II of this ASU requires investments (both participant-directed and nonparticipant-directed investments) of employee benefit plans be grouped only by general type, eliminating the need to disaggregate the investments in multiple ways. Part III of this ASU provides a similar measurement date practical expedient for employee benefit plans as available in ASU No. 2015-04, which allows employers to measure defined benefit plan assets on a month-end date that is nearest to the year’s fiscal year-end when the fiscal period does not coincide with a month-end. Parts I and II of the new guidance should be applied on a retrospective basis. Part III of the new guidance should be applied on a prospective basis. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2015-12 on its financial position and results of operations.

 

12

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

2. Acquisition

 

On June 24, 2015, the Company completed its previously announced acquisition of TPG VI Envision BL, LLC and Envision Topco Holdings, LLC (“EnvisionRx”), pursuant to the terms of an agreement (“Agreement”) dated February 10, 2015. EnvisionRx, which was a portfolio company of TPG Capital L.P. prior to its acquisition by the Company, is a full-service pharmacy services provider. EnvisionRx provides both transparent and traditional pharmacy benefit manager (“PBM”) options through its EnvisionRx and MedTrak PBMs, respectively. EnvisionRx also offers fully integrated mail-order and specialty pharmacy services through Orchard Pharmaceutical Services; 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 EIC’s 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 100 percent owned subsidiary of the Company.

 

Pursuant to the terms of the Agreement, as consideration for the Acquisition, the Company paid $1,883,405 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 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 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 closing balance sheet has not yet been finalized and therefore, the final purchase price and related purchase price allocation of the Acquisition is subject to change.

 

The Company’s consolidated financial statements for the thirteen and twenty-six week periods ended August 29, 2015 include EnvisionRx results of operations from the Acquisition date of June 24, 2015 through August 29, 2015 (please see Note 13. Segment Reporting for the Pharmacy Services segment results included within the consolidated financial statements for the thirteen and twenty-six week periods ended August 29, 2015, which reflects the results of EnvisionRx). The Company’s financial statements reflect preliminary purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the Acquisition date.

 

The following allocation of the purchase price and the estimated transaction costs is preliminary and is based on information available to the Company’s management at the time the consolidated financial statements were prepared. Accordingly, the allocation is subject to change and the impact of such changes may be material.

 

Preliminary purchase price
Cash consideration		$	1,883,405
Stock consideration		240,907
Total		$	2,124,312
Preliminary purchase price allocation
Cash and cash equivalents		$	103,834
Accounts receivable		900,473
Inventories		7,276
Deferred tax assets		516
Prepaid expenses and other current assets		13,820
Total current assets		1,025,919
Property and equipment		13,196
Intangible assets(1)		842,585
Goodwill		1,457,703
Other assets		8,919
Total assets acquired		3,348,322
Accounts payable		491,672
Reinsurance funds held		381,225
Other current liabilities(2)		207,723
Total current liabilities		1,080,620
Other long term liabilities(3)		143,390
Total liabilities assumed		1,224,010
Net assets acquired		$	2,124,312

 

(1)            Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a preliminary 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

 

13

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

earnings methods.  The major assumptions used in arriving at the estimated identifiable intangible asset values included management’s preliminary 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 preliminary purchase price allocation include:

 

		Estimated Fair Value			Estimated Useful Life (In Years)
Customer relationships		$	585,500		17
CMS license		108,000			25
Claims adjudication and other developed software		59,500			7
Trademarks		15,600			10
Backlog		12,500			3
Other		17,485			5
Trademarks		44,000			Indefinite
Total		$	842,585

 

(2)            Other current liabilities includes $116,500 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.

 

(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 has been allocated to the Pharmacy Services segment and should be deductible for tax purposes. At the time the financial statements were issued, initial accounting for the business combination related to tax matters were preliminary and may be adjusted during the measurement period.

 

During the thirteen and twenty-six weeks periods ended August 29, 2015, acquisition costs of $9,613, and $27,072, respectively, were expensed as incurred. The following unaudited pro forma combined financial data gives effect to the Acquisition as if it had occurred as of March 1, 2014.

 

These unaudited pro forma combined results have been prepared by combining the historical results of the Company and historical results of EnvisionRx. The unaudited pro forma combined financial data for all periods presented were adjusted to give effect to proforma events that 1) are directly attributable to the aforementioned transaction, 2) factually supportable, and 3) expected to have a continuing impact on the consolidated results of operations.  Specifically, these adjustments reflect:

 

·                  Incremental interest expense relating to the $1,800,000 6.125% Notes issued on April 2, 2015, the net proceeds of which were used finance the cash portion of the Acquisition.

 

·                  Incremental amortization resulting from increased fair value of the identifiable intangible assets as noted in the preliminary purchase price allocation.

 

·                  Removal of costs incurred in connection with the Acquisition by both the Company and EnvisionRx, including bridge loan commitment fees of $15,375.

 

·                  Debt extinguishment charges incurred by EnvisionRx.

 

·                  Inclusion of the 27,754 shares of Rite Aid common stock issued to fund the stock portion of the purchase price in the basic and diluted share calculation.

 

The unaudited combined pro forma results do not include any incremental cost savings that may result from the integration. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material.

 

The unaudited combined pro forma information is for informational purposes only.  The pro forma information is not necessarily

 

14

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

indicative of what the combined company’s results actually would have been had the Acquisition been completed as of the beginning of the periods as indicated.  In addition, the unaudited pro forma information does not purport to project the future results of the combined company.

 

		Thirteen week Periods Ended						Twenty-Six week Periods Ended
		August 29, 2015			August 30, 2014			August 29, 2015			August 30, 2014
		Pro forma			Pro forma			Pro forma			Pro forma
Net revenues as reported		$	7,664,776		$	6,522,584		$	14,312,337		$	12,988,115
EnvisionRx revenue, prior to the acquisition		364,159			997,946			1,735,635			1,986,324
Less pre-acquisition intercompany revenue		(23,777		)	(65,511		)	(104,731		)	(131,413		)
Pro forma combined revenues		$	8,005,158		$	7,455,019		$	15,943,241		$	14,843,026
Net income as reported		$	21,469		$	127,849		$	40,305		$	169,295
EnvisionRx net income (loss) before income taxes, prior to the acquisition		(56,544		)	3,467			(45,307		)	7,352
Incremental interest expense on the 6.125% Notes issued on April 2, 2015		—			(28,852		)	(11,097		)	(57,703		)
Incremental amortization resulting from fair value adjustments of the identifiable intangible assets		(3,778		)	(15,179		)	(16,509		)	(26,530		)
Transaction expenses incurred by both the Company and EnvisionRx		36,754			—			55,864			—
Debt extinguishment charges incurred by EnvisionRx		31,601			—			31,601			—
Income tax expense relating to pro forma adjustments		(3,294		)	—			(5,966		)	—
Pro forma net income		$	26,208		$	87,285		$	48,891		$	92,414
Basic income per share		$	0.03		$	0.09		$	0.05		$	0.09
Diluted income per share		$	0.02		$	0.08		$	0.05		$	0.09

 

3. Income Per Share

 

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

 

		Thirteen Week Period Ended						Twenty-Six Week Period Ended
		August 29, 2015			August 30, 2014			August 29, 2015			August 30, 2014
Numerator for income per share:
Net income		$	21,469		$	127,849		$	40,305		$	169,295
Add back—interest on convertible notes		—			1,364			—			2,728
Income attributable to common stockholders—diluted		$	21,469		$	129,213		$	40,305		$	172,023
Denominator:
Basic weighted average shares		1,029,793			970,664			1,008,242			966,997
Outstanding options and restricted shares, net		19,341			26,132			18,959			26,141
Convertible notes		—			24,796			—			24,796
Diluted weighted average shares		1,049,134			1,021,592			1,027,201			1,017,934
Basic income per share		$	0.02		$	0.13		$	0.04		$	0.18
Diluted income per share		$	0.02		$	0.13		$	0.04		$	0.17

 

15

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

Due to their antidilutive effect, the following potential common shares have been excluded from the computation of diluted income per share as of August 29, 2015 and August 30, 2014:

 

		Thirteen Week Period Ended				Twenty-Six Week Period Ended
		August 29, 2015		August 30, 2014		August 29, 2015		August 30, 2014
Stock options		2,893		2,836		2,893		2,836
		2,893		2,836		2,893		2,836

 

During May 2015, $64,089 of the Company’s 8.5% convertible notes due 2015 were converted into 24,762 shares of common stock, pursuant to their terms.

 

16

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

4. Lease Termination and Impairment Charges

 

Lease termination and impairment charges consist of amounts as follows:

 

		Thirteen Week Period Ended						Twenty-Six Week Period Ended
		August 29, 2015			August 30, 2014			August 29, 2015			August 30, 2014
Impairment charges		$	5		$	132		$	278		$	283
Lease termination charges		9,632			6,979			14,381			11,676
		$	9,637		$	7,111		$	14,659		$	11,959

 

Impairment Charges

 

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

 

Lease Termination Charges

 

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

 

		Thirteen Week Period Ended						Twenty-Six Week Period Ended
		August 29, 2015			August 30, 2014			August 29, 2015			August 30, 2014
Balance—beginning of period		$	230,803		$	270,322		$	241,047		$	284,270
Provision for present value of noncancellable lease payments of closed stores		4,426			294			5,972			436
Changes in assumptions about future sublease income, terminations and changes in interest rates		1,005			1,844			434			1,417
Interest accretion		4,217			4,845			8,520			9,827
Cash payments, net of sublease income		(16,784		)	(16,175		)	(32,306		)	(34,820		)
Balance—end of period		$	223,667		$	261,130		$	223,667		$	261,130

 

5. Fair Value Measurements

 

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

 

17

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

Non-Financial Assets Measured on a Non-Recurring Basis

 

Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the twenty-six week period ended August 29, 2015, long-lived assets from continuing operations with a carrying value of $2,193, primarily store assets, were written down to their fair value of $1,915, resulting in an impairment charge of $278 of which $5 relates to the thirteen week period ended August 29, 2015. During the twenty-six week period ended August 30, 2014, long-lived assets from continuing operations with a carrying value of $1,849, primarily store assets, were written down to their fair value of $1,566, resulting in an impairment charge of $283 of which $132 relates to the thirteen-week period ended August 30, 2014. 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 August 29, 2015 and August 30, 2014:

 

Fair Value Measurement Using

 

		Level 1			Level 2			Level 3			Total as of August 29, 2015
Long-lived assets held for use		$	—		$	—		$	1,726		$	1,726
Long-lived assets held for sale		$	—		$	—		$	189		$	189
Total		$	—		$	—		$	1,915		$	1,915

 

		Level 1			Level 2			Level 3			Total as of August 30, 2014
Long-lived assets held for use		$	—		$	—		$	1,566		$	1,566
Long-lived assets held for sale		$	—		$	—		$	—		$	—
Total		$	—		$	—		$	1,566		$	1,566

 

As of August 29, 2015 and August 30, 2014, 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, the Company has $6,598 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 August 29, 2015.  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 $7,361,170 and $7,508,010, respectively, as of August 29, 2015. There were no outstanding derivative financial instruments as of August 29, 2015 and February 28, 2015.

 

6. Income Taxes

 

The Company recorded an income tax expense of $16,463 and $19,860 for the thirteen week periods ended August 29, 2015 and August 30, 2014, respectively, and an income tax expense of $28,904 and $31,741 for the twenty-six week periods ended August 29, 2015 and August 30, 2014, respectively. The income tax expense for the thirteen and twenty-six week periods ended August 29, 2015 was based on an estimated effective tax rate of 43.4% and 41.8%, respectively.  The income tax expense for the thirteen and

 

18

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

twenty-six week periods ended August 30, 2014 was primarily attributable to an increase in the deferred tax valuation allowance to offset the windfall tax benefits recorded in Additional Paid in Capital (“APIC”) pursuant to the tax law ordering approach.

 

The 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. As a result of the Company’s historical operating performance and the more favorable near term outlook for profitability, the Company released $1,841,304 of valuation allowance in the fourth quarter of fiscal year 2015. The Company continues to maintain a valuation allowance against net deferred tax assets of $231,683 and $231,679, which relates primarily to state deferred tax assets at August 29, 2015 and February 28, 2015, respectively.

 

7. Medicare Part D

 

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

 

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 $44,400 as of August 29, 2015.  EIC was in excess of the minimum required amounts in these states as of August 29, 2015.

 

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 August 29, 2015, accounts receivable, net included $573,348 due from CMS and accrued salaries, wages and other current liabilities included $394,197 of EIC liabilities under certain reinsurance contracts.  EIC limits its exposure to loss and recovers a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company.   Additionally, as of August 29, 2015, accrued salaries, wages and other current liabilities included $116,500 due to TPG under the terms of the Agreement, which represents 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.

 

8. Goodwill and Other Intangible Assets

 

Goodwill and indefinitely-lived intangible 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 twenty-six weeks ended August 29, 2015 and the fifty-two weeks ended February 28, 2015, no impairment charges have been taken against the Company’s goodwill. During the twenty-six weeks ended August 29, 2015, no impairment charges have been taken against the Company’s indefinitely-lived intangible assets. Below is a summary of the changes in the carrying amount of goodwill for the twenty-six week period ended August 29, 2015:

 

19

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

		August 29, 2015
		Retail Pharmacy			Pharmacy Services			Total
Balance, February 28, 2015		$	76,124		$	—		$	76,124
Acquisition (see Note 2. Acquisition)		—			1,457,703			1,457,703
Balance, August 29, 2015		$	76,124		$	1,457,703		$	1,533,827

 

The Company’s other intangible assets are finite-lived and amortized over their useful lives. Following is a summary of the Company’s finite-lived and indefinitely-lived intangible assets as of August 29, 2015 and February 28, 2015.

 

		August 29, 2015											February 28, 2015
		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		$	663,323		$	(498,624	)	$	164,699		8 years		$	653,377		$	(481,041	)	$	172,336		8 years
Prescription files		1,470,997			(1,235,710		)	235,287			3 years		1,440,154			(1,191,010		)	249,144			3 years
Customer relationships(a)		585,500			(12,769		)	572,731			17 years		—			—			—
CMS license		108,000			(792		)	107,208			25 years		—			—			—
Claims adjudication and other developed software		59,500			(1,558		)	57,942			7 years		—			—			—
Trademarks		15,600			(286		)	15,314			10 years		—			—			—
Backlog		12,500			(764		)	11,736			3 years		—			—			—
Other		17,485			(871		)	16,614			5 years		—			—			—
Total finite		$	2,932,905		$	(1,751,374	)	1,181,531					$	2,093,531		$	(1,672,051	)	$	421,480
Trademarks		44,000			—			44,000			Indefinite		—			—			—
Total		$	2,976,905		$	(1,751,374	)	$	1,225,531				$	2,093,531		$	(1,672,051	)	$	421,480

 

(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 August 29, 2015 and February 28, 2015 are unfavorable lease intangibles with a net carrying amount of $51,382 and $55,571, respectively. These intangible liabilities are amortized over their remaining lease terms at the time of acquisition.

 

Amortization expense for these intangible assets and liabilities was $48,609 and $80,550 for the thirteen and twenty-six week periods ended August 29, 2015, respectively. Amortization expense for these intangible assets and liabilities was $28,532 and $57,769 for the thirteen and twenty-six week periods ended August 30, 2014, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2016—$186,283; 2017—$206,363; 2018—$166,250; 2019—$130,231 and 2020—$100,716.

 

20

Table of Contents

 

RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

For the Thirteen and Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014

 

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

 

(unaudited)

 

9. Indebtedness and Credit Agreements

 

Following is a summary of indebtedness and lease financing obligations at August 29, 2015 and February 28, 2015:

 

		August 29, 2015			February 28, 2015
Secured Debt:
Senior secured revolving credit facility due January 2020		$	2,453,000		$	1,725,000
8.00% senior secured notes (senior lien) due August 2020		—			650,000
Tranche 1 Term Loan (second lien) due August 2020		470,000			470,000
Tranche 2 Term Loan (second lien) due June 2021		500,000			500,000
Other secured		91			5,367
		3,423,091			3,350,367
Unsecured Guaranteed Debt:
9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $3,079 and $3,415)		905,079			905,415
6.75% senior notes due June 2021		810,000			810,000
6.125% senior notes due April 2023		1,800,000			—
		3,515,079			1,715,415
Unsecured Unguaranteed Debt:
8.5% convertible notes due May 2015		—			64,168
7.7% notes due February 2027		295,000			295,000
6.875% fixed-rate senior notes due December 2028		128,000			128,000
		423,000			487,168
Lease financing obligations		83,143			91,993
Total debt		7,444,313			5,644,943
Current maturities of long-term debt and lease financing obligations		(29,002		)	(100,376		)
Long-term debt and lease financing obligations, less current maturities		$	7,415,311		$	5,544,567

 

Credit Facility

 

On January 13, 2015, the Company amended and restated its senior secured credit facility (“Amended and Restated Senior Secured Credit Facility” or “revolver”), which, among other things, increased borrowing capacity from $1,795,000 to $3,000,000 (which further increased to $3,700,000 upon the redemption of its 8.00% senior secured notes due August 2020 (“8.00% Notes”) on August 15, 2015), and extended the maturity to January 2020 from February 2018. The Company used borrowings under the revolver to repay and retire all of the $1,143,650 outstanding under its Tranche 7 Senior Secured Term Loan due 2020, along with associated fees and expenses. Borrowings under the revolver bear interest at a rate per annum between LIBOR plus 1.50% and LIBOR plus 2.00% 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.

 

On February 10, 2015, the Company amended the Amended and Restated Senior Secured Credit Facility to, among other things, increase the flexibility of Rite Aid to incur and/or issue unsecured indebtedness, including in connection with the Acquisition, and made certain other modifications to the covenants applicable to Rite Aid and its subsidiaries.

 

The Company’s ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At August 29, 2015, the Company had $2,453,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $70,916, which resulted in additional borrowing capacity of $1,176,084.

 

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. This provision did not apply to the proceeds from the 6.125% Notes as discussed in the “Financing for the Acquisition” section below.

 

21