UNITED STATES

~~UNITED STATES~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 31, 2019

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

For the transition period from to

~~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~~

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)		17011 (Zip Code)

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

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

Not Applicable

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $1.00 par value		RAD		New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically ~~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 ◻

~~Accelerated~~Non-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~~54,874,888 shares of its $1.00 par value common stock outstanding as of ~~December 28, 2017.~~September 25, 2019.

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RITE AID CORPORATION

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	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~~August 31, 2019 and March ~~4, 2017~~2, 2019	56
	Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018	67
	Condensed Consolidated Statements of Comprehensive ~~Income~~Loss for the Thirteen Week Periods Ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018	78
	Condensed Consolidated Statements of Operations for the ~~Thirty-Nine~~Twenty-Six Week Periods Ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018	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 Comprehensive Loss for the Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018	10
	Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen and Twenty-Six Week Periods Ended August 31, 2019	11
	Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen and Twenty-Six Week Periods Ended September 1, 2018	12
	Condensed Consolidated Statements of Cash Flows for the ~~Thirty-Nine~~Twenty-Six Week Periods Ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018	1013
	Notes to Condensed Consolidated Financial Statements	1114
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations	3957
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	5271
ITEM 4.	Controls and Procedures	5372

	PART II OTHER INFORMATION

ITEM 1.	Legal Proceedings	5373
ITEM 1A.	Risk Factors	5373
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5373
ITEM 3.	Defaults Upon Senior Securities	5573
ITEM 4.	Mine Safety Disclosures	5573
ITEM 5.	Other Information	5573
ITEM 6.	Exhibits	5573

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

our ability to successfully execute and achieve benefits from our recent changes in senior management and organizational restructuring;

●

our ability to hire and retain qualified personnel;

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●

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

●

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

●

our ability to manage expenses and working capital;

●

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

●

the risk that provider and state contract changes may occur;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

the nature, cost and outcome of pending and future litigation and other legal proceedings or governmental investigations, including any proceedings related to our industry and pharmaceutical companies generally as well as those related to the sale of stores to WBA;

●

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

●

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

●

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

· ~~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;~~

· ~~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

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achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended March ~~4, 2017~~2, 2019 (the “Fiscal ~~2017 10-K”~~2019 10-K"), which we filed with the SEC on ~~May 3, 2017,~~April 25, 2019, and our Quarterly Report on Form 10-Q for the thirteen weeks ended June ~~3, 2017 (the “First Quarter 2018 10-Q”)~~1, 2019, 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,~~11, 2019, as well as in the ~~“Risk Factors”~~"Risk Factors" section of the Fiscal ~~2017~~2019 10-K. These documents are available on the SEC’s website at www.sec.gov.

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PART I. FINANCIAL INFORMATION

~~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


	August 31,		March 2,
	2019		2019
ASSETS
Current assets:
Cash and cash equivalents	$	142,181	$	144,353
Accounts receivable, net		1,945,600		1,788,712
Inventories, net of LIFO reserve of $619,437 and $604,444		1,968,937		1,871,941
Prepaid expenses and other current assets		183,428		179,132
Current assets held for sale		145,213		117,581
Total current assets		4,385,359		4,101,719
Property, plant and equipment, net		1,270,467		1,308,514
Operating lease right-of-use assets		2,944,651		—
Goodwill		1,108,136		1,108,136
Other intangibles, net		381,369		448,706
Deferred tax assets		382,105		409,084
Other assets		201,126		215,208
Total assets	$	10,673,213	$	7,591,367
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and lease financing obligations	$	10,704	$	16,111
Accounts payable		1,570,178		1,618,585
Accrued salaries, wages and other current liabilities		732,787		808,439
Current portion of operating lease liabilities		502,706		—
Current liabilities held for sale		43,364		—
Total current liabilities		2,859,739		2,443,135
Long-term debt, less current maturities		3,834,605		3,454,585
Long-term operating lease liabilities		2,745,598		—
Lease financing obligations, less current maturities		22,540		24,064
Other noncurrent liabilities		250,145		482,893
Total liabilities		9,712,627		6,404,677
Commitments and contingencies		—		—
Stockholders’ equity:
Common stock, par value $1 per share; 75,000 shares authorized; shares issued and outstanding 54,896 and 54,016		54,896		54,016
Additional paid-in capital		5,885,550		5,876,977
Accumulated deficit		(4,948,958)		(4,713,244)
Accumulated other comprehensive loss		(30,902)		(31,059)
Total stockholders’ equity		960,586		1,186,690
Total liabilities and stockholders’ equity	$	10,673,213	$	7,591,367

See accompanying notes to condensed consolidated financial statements.

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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


	Thirteen Week Period Ended
	August 31, 2019		September 1, 2018
Revenues	$	5,366,264	$	5,421,362
Costs and expenses:
Cost of revenues		4,221,825		4,260,211
Selling, general and administrative expenses		1,135,530		1,153,991
Lease termination and impairment charges		1,471		39,609
Goodwill and intangible asset impairment charges		—		375,190
Interest expense		60,102		56,233
Gain on sale of assets, net		(1,587)		(4,965)
		5,417,341		5,880,269
Loss from continuing operations before income taxes		(51,077)		(458,907)
Income tax expense (benefit)		27,628		(106,559)
Net loss from continuing operations		(78,705)		(352,348)
Net loss from discontinued operations, net of tax		(574)		(6,792)
Net loss	$	(79,279)	$	(359,140)
Computation of loss attributable to common stockholders:
Loss from continuing operations attributable to common stockholders—basic and diluted	$	(78,705)	$	(352,348)
Loss from discontinued operations attributable to common stockholders—basic and diluted		(574)		(6,792)
Loss attributable to common stockholders—basic and diluted	$	(79,279)	$	(359,140)
Basic and diluted loss per share:
Continuing operations	$	(1.48)	$	(6.67)
Discontinued operations	$	(0.01)	$	(0.13)
Net basic and diluted loss per share	$	(1.49)	$	(6.80)

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME~~LOSS

(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


	Thirteen Week Period Ended
	August 31, 2019		September 1, 2018
Net loss	$	(79,279)	$	(359,140)
Other comprehensive income:
Defined benefit pension plans:
Amortization of net actuarial losses included in net periodic pension cost, net of $0 and $144 tax expense		415		364
Change in fair value of interest rate cap		(17)		—
Total other comprehensive income		398		364
Comprehensive loss	$	(78,881)	$	(358,776)

See accompanying notes to condensed consolidated financial statements.

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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


	Twenty-Six Week Period Ended
	August 31, 2019		September 1, 2018
Revenues	$	10,738,853	$	10,809,852
Costs and expenses:
Cost of revenues		8,467,691		8,479,952
Selling, general and administrative expenses		2,298,182		2,306,618
Lease termination and impairment charges		1,949		49,468
Goodwill and intangible asset impairment charges		—		375,190
Interest expense		118,372		119,025
Loss on debt retirements, net		—		554
Gain on sale of assets, net		(4,299)		(10,824)
		10,881,895		11,319,983
Loss from continuing operations before income taxes		(143,042)		(510,131)
Income tax expense (benefit)		35,002		(116,056)
Net loss from continuing operations		(178,044)		(394,075)
Net (loss) income from discontinued operations, net of tax		(894)		249,351
Net loss	$	(178,938)	$	(144,724)
Computation of loss attributable to common stockholders:
Loss from continuing operations attributable to common stockholders—basic and diluted	$	(178,044)	$	(394,075)
(Loss) income from discontinued operations attributable to common stockholders—basic and diluted		(894)		249,351
Loss attributable to common stockholders—basic and diluted	$	(178,938)	$	(144,724)
Basic and diluted loss per share:
Continuing operations	$	(3.35)	$	(7.47)
Discontinued operations	$	(0.02)	$	4.73
Net basic and diluted loss per share	$	(3.37)	$	(2.74)

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME~~LOSS

(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


	Twenty-Six Week Period Ended
	August 31, 2019		September 1, 2018
Net loss	$	(178,938)	$	(144,724)
Other comprehensive income:
Defined benefit pension plans:
Amortization of net actuarial losses included in net periodic pension cost, net of $0 and $288 tax expense		830		728
Change in fair value of interest rate cap		(673)		—
Total other comprehensive income		157		728
Comprehensive loss	$	(178,781)	$	(143,996)

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY

(In ~~thousands)~~thousands, except per share amounts)

(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


								Accumulated
				Additional				Other
	Common Stock			Paid-In		Accumulated		Comprehensive
	Shares	Amount		Capital		Deficit		Loss		Total
BALANCE MARCH 2, 2019	54,016	$	54,016	$	5,876,977	$	(4,713,244)	$	(31,059)	$	1,186,690
Net loss							(99,659)				(99,659)
Other comprehensive loss:
Changes in Defined Benefit Plans, net of $0 tax expense									415		415
Change in fair value of interest rate cap									(656)		(656)
Comprehensive loss											(99,900)
Adoption of ASU 2016-02							(56,776)				(56,776)
Exchange of restricted shares for taxes	(5)		(5)		(190)						(195)
Cancellation of restricted stock	(178)		(178)		178						—
Amortization of restricted stock balance					5,016						5,016
Stock-based compensation expense					382						382
BALANCE JUNE 1, 2019	53,833		53,833		5,882,363		(4,869,679)		(31,300)		1,035,217
Net loss							(79,279)				(79,279)
Other comprehensive loss:
Changes in Defined Benefit Plans, net of $0 tax expense									415		415
Change in fair value of interest rate cap									(17)		(17)
Comprehensive loss											(78,881)
Exchange of restricted shares for taxes	(134)		(134)		(656)						(790)
Issuance of restricted stock	1,257		1,257		(1,257)						—
Cancellation of restricted stock	(60)		(60)		60						—
Amortization of restricted stock balance					5,003						5,003
Stock-based compensation expense	—		—		37						37
BALANCE AUGUST 31, 2019	54,896	$	54,896	$	5,885,550	$	(4,948,958)	$	(30,902)	$	960,586

See accompanying notes to condensed consolidated financial statements.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share amounts)

(unaudited)


								Accumulated
				Additional				Other
	Common Stock			Paid-In		Accumulated		Comprehensive
	Shares	Amount		Capital		Deficit		Loss		Total
BALANCE MARCH 3, 2018	53,366	$	53,366	$	5,864,664	$	(4,282,471)	$	(34,549)	$	1,601,010
Net income							214,416				214,416
Other comprehensive income:
Changes in Defined Benefit Plans, net of $144 tax expense									364		364
Comprehensive income											214,780
Adoption of ASU 2014-09							(8,547)				(8,547)
Cancellation of restricted stock	(44)		(44)		44						—
Amortization of restricted stock balance					3,381						3,381
Stock-based compensation expense					778						778
Stock options exercised	38		38		871						909
BALANCE JUNE 2, 2018	53,360		53,360		5,869,738		(4,076,602)		(34,185)		1,812,311
Net loss							(359,140)				(359,140)
Other comprehensive loss:
Changes in Defined Benefit Plans, net of $144 tax expense									364		364
Comprehensive loss											(358,776)
Exchange of restricted shares for taxes	(63)		(63)		(2,181)						(2,244)
Cancellation of restricted stock	(12)		(12)		12						—
Amortization of restricted stock balance					3,860						3,860
Stock-based compensation expense					406						406
Stock options exercised	18		18		374						392
BALANCE SEPTEMBER 1, 2018	53,303	$	53,303	$	5,872,209	$	(4,435,742)	$	(33,821)	$	1,455,949

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Twenty-Six Week Period Ended
	August 31, 2019		September 1, 2018
Operating activities:
Net loss	$	(178,938)	$	(144,724)
Net (loss) income from discontinued operations, net of tax		(894)		249,351
Net loss from continuing operations	$	(178,044)	$	(394,075)
Adjustments to reconcile to net cash used in operating activities of continuing operations:
Depreciation and amortization		166,970		184,272
Lease termination and impairment charges		1,949		49,468
Goodwill and intangible asset impairment charges		—		375,190
LIFO charge		14,993		13,324
Gain on sale of assets, net		(4,299)		(10,824)
Stock-based compensation expense		10,092		10,246
Loss on debt retirements, net		—		554
Changes in deferred taxes		26,979		(124,807)
Changes in operating assets and liabilities:
Accounts receivable		(153,269)		(323,724)
Inventories		(111,990)		(31,650)
Accounts payable		(85,623)		207,943
Operating lease right-of-use assets and operating lease liabilities		34,982		—
Other assets		(44,674)		(11,232)
Other liabilities		(8,104)		(245,587)
Net cash used in operating activities of continuing operations		(330,038)		(300,902)
Investing activities:
Payments for property, plant and equipment		(84,060)		(92,565)
Intangible assets acquired		(15,708)		(20,519)
Proceeds from dispositions of assets and investments		4,423		15,729
Proceeds from sale-leaseback transactions		—		2,587
Net cash used in investing activities of continuing operations		(95,345)		(94,768)
Financing activities:
Net proceeds from revolver		375,000		1,335,000
Principal payments on long-term debt		(3,451)		(433,746)
Change in zero balance cash accounts		54,712		(17,101)
Net proceeds from issuance of common stock		—		1,302
Payments for taxes related to net share settlement of equity awards		(986)		(2,244)
Financing fees paid for early debt redemption		—		(13)
Deferred financing costs paid		(315)		—
Net cash provided by financing activities of continuing operations		424,960		883,198
Cash flows from discontinued operations:
Operating activities of discontinued operations		(2,272)		(62,003)
Investing activities of discontinued operations		523		603,402
Financing activities of discontinued operations		—		(1,343,793)
Net cash used in discontinued operations		(1,749)		(802,394)
Decrease in cash and cash equivalents		(2,172)		(314,866)
Cash and cash equivalents, beginning of period		144,353		447,334
Cash and cash equivalents, end of period	$	142,181	$	132,468

See accompanying notes to condensed consolidated financial statements.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and ~~Thirty-Nine~~Twenty-Six Week Periods Ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018

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

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Rite Aid Corporation (“Rite Aid”) and Subsidiaries (together with Rite Aid, the “Company”) Fiscal ~~2017~~2019 10-K.

~~The discussion and presentation of~~In addition to 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~~accounting policies discussed in the Company’s ~~operations and financial results. Accordingly,~~Fiscal 2019 10-K, the Company has ~~applied discontinued operations treatment~~added the following significant accounting policies as a result of its adoption of ASU No. 2016-02 and 2018-11, Leases, (Topic 842) on March 3, 2019 under the alternative transition method as permissible under ASU 2018-11 (please see Note 12. Leases, 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.~~details).

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

~~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) (“ASU-2016-02” or the “Lease Standard”), which is intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that engage in lease transactions (both lessee and lessor) ~~that lease assets such as real estate and manufacturing equipment.~~. This ASU ~~will require~~requires organizations that lease assets—referred to as ~~“leases”~~“lessees”—to recognize on the balance sheet ~~the assets~~a right of use asset (“ROU asset”) and ~~liabilities~~a lease liability 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).~~ 2019.

During ~~its November 29, 2017 meeting,~~July 2018, the FASB ~~tentatively decided~~issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. Among other things, ASU 2018-11 provides administrative relief by allowing entities to ~~amend certain aspects~~implement the Lease Standard using an alternative transition method. Effectively, the alternative transition method permits adoption of the ~~new leasing standard. The tentative amendments include a provision~~Lease Standard through an adjustment to ~~allow entities to elect not to restate comparative periods in~~its opening balance sheet for the period of adoption, ~~when transitioning~~with the cumulative effect accounted for as an adjustment to ~~the new standard.~~ retained earnings, without restating prior periods.

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

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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

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

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

The following is ~~currently evaluating~~a discussion of the ~~impact this standard implementation~~Company’s lease policy under the new lease accounting standard:

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

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

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

real estate leases because they are not considered reasonably certain of being exercised at lease commencement. The Company rarely executes leases less than 12 months. On transition, the Company did include in its ROU asset balance leases with less than 12 months remaining.

For real estate leases, the Company accounts for lease components and non-lease components as a single lease component. Certain real estate leases require additional payments based on ~~its results~~sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Other real estate leases contain 1 fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of ~~operations~~the lease payment and ~~cash flows.~~included in the operating lease right-of-use assets and operating lease liabilities.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

Impact of the Lease Standard on Financial Statement Line Items

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


	Impact of change in accounting policy
(in thousands)	As reported				As adjusted
	March 2, 2019		Adjustments		March 3, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	144,353	$	—	$	144,353
Accounts receivable, net		1,788,712		—		1,788,712
Inventories, net		1,871,941		—		1,871,941
Prepaid expenses and other current assets		179,132		(51,448)		127,684
Current assets held for sale		117,581		43,697		161,278
Total current assets		4,101,719		(7,751)		4,093,968
Property, plant and equipment, net		1,308,514		—		1,308,514
Operating lease right-of-use asset		—		3,026,976		3,026,976
Goodwill		1,108,136		—		1,108,136
Other intangibles, net		448,706		(29,632)		419,074
Deferred tax assets		409,084		—		409,084
Other assets		215,208		(1,086)		214,122
Total assets	$	7,591,367	$	2,988,507	$	10,579,874

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and lease financing obligations	$	16,111	$	—	$	16,111
Accounts payable		1,618,585		—		1,618,585
Accrued salaries, wages and other current liabilities		808,439		(56,553)		751,886
Current portion of operating lease liabilities		—		457,305		457,305
Current liabilities held for sale		—		45,167		45,167
Total current liabilities		2,443,135		445,919		2,889,054
Long-term debt, less current maturities		3,454,585		—		3,454,585
Long-term operating lease liabilities		—		2,838,022		2,838,022
Lease financing obligations, less current maturities		24,064		—		24,064
Other noncurrent liabilities		482,893		(238,658)		244,235
Total liabilities		6,404,677		3,045,283		9,449,960
Commitments and contingencies		—		—		—
Stockholders’ equity:
Common stock, par value $1 per share; 75,000 shares authorized; shares issued and outstanding 54,016		54,016		—		54,016
Additional paid-in capital		5,876,977		—		5,876,977
Accumulated deficit		(4,713,244)		(56,776)		(4,770,020)
Accumulated other comprehensive loss		(31,059)		—		(31,059)
Total stockholders’ equity		1,186,690		(56,776)		1,129,914
Total liabilities and stockholders’ equity	$	7,591,367	$	2,988,507	$	10,579,874

See Note 12 for additional information.

In ~~January 2017,~~May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU No. ~~2017-04,~~2016-08, ~~Intangibles—Goodwill and Other, (Topic 350): Simplifying the Test for Goodwill Impairment~~Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), which ~~is intended to simplify~~amends the ~~subsequent measurement~~principal-versus-agent implementation guidance and ~~impairment of goodwill. The ASU simplifies~~in April 2016, 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.FASB issued ASU No. ~~2017-04 is~~2016-10, Identifying Performance Obligations and Licensing, which amends the guidance in those areas in the new revenue recognition standard. These ASUs, collectively the “new revenue standard“, are effective for ~~fiscal years and~~annual reporting periods (including interim reporting periods within those ~~years~~periods) beginning ~~after December 15, 2019 (fiscal 2020). Early~~January 1, 2018.

The Company adopted the new revenue standard as of March 4, 2018 using the modified retrospective method and applying the new standard to all contracts with customers. In connection with the adoption of ~~all~~ the ~~amendments~~new revenue standard, the Company identified one difference in its Retail Pharmacy segment related to the timing of revenue recognition for ~~ASU 2017-04 is permitted. Amendments must be applied prospectively. The Company is in process of assessing~~third party prescription revenues, which was historically recognized at the ~~impact of~~time the prescription was filled. Upon adoption of ASU No. ~~2017-04~~2014-09, this revenue is recognized at the time the customer takes possession of the merchandise. In connection with its March 4, 2018 adoption of the new revenue standard on a modified retrospective basis, the Company recorded a reduction to accounts receivable of $57,897, a reduction to deferred tax assets of $1,771, an increase to inventory of $51,121, and a corresponding increase to accumulated deficit of $8,547 within its ~~financial position,~~Retail Pharmacy segment.

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

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

Revenue Recognition

Retail Pharmacy Segment

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

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

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~~2. Acquisition~~RITE AID CORPORATION AND SUBSIDIARIES

~~On June 24, 2015,~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the ~~Company acquired TPG VI Envision BL, LLC~~Thirteen and ~~Envision Topco Holdings, LLC (“EnvisionRx”),~~Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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

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

Points earned pursuant to the wellness+ program represent a performance obligation and the Company allocates revenue between the merchandise purchased and the wellness + points based on the relative stand-alone selling price of each performance obligation. The relative value of the wellness + points is initially deferred as a contract liability (included in other current and noncurrent liabilities). As members receive discounted front-end merchandise or when the benefit period expires, the Retail Pharmacy segment recognizes an allocable portion of the deferred contract liability into revenue. The Retail Pharmacy segment had accrued contract liabilities of $76,445 as of August 31, 2019, of which $57,901 is included in other current liabilities and $18,544 is included in noncurrent liabilities. The Retail Pharmacy segment had accrued contract liabilities of $63,720 as of March 2, 2019, of which $51,042 is included in other current liabilities and $12,678 is included in noncurrent liabilities.

The wellness + program also allows a customer to earn Bonus Cash based on qualifying purchases. Wellness + Rewards members have the opportunity to redeem their accumulated Bonus Cash on a future purchase with a 30 day expiration window.

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

Pharmacy Services Segment

The Pharmacy Services segment sells prescription drugs indirectly through its retail pharmacy network and directly through its mail service dispensing pharmacy. The Pharmacy Services segment recognizes revenue from prescription drugs sold by (i) its mail service dispensing pharmacy and (ii) under retail pharmacy network contracts where it is the principal at the contract prices negotiated with its clients, primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout the United States. Revenues include: (i) the portion of the price the client pays directly to the Pharmacy Services segment, net of any volume-related or other discounts paid back to the client (see “Drug Discounts” below), (ii) the price paid to the Pharmacy Services segment by client plan members for mail order

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

prescriptions (“Mail Co-Payments”), (iii) client plan member copayments made directly to the retail pharmacy network and (iv) administrative fees. Revenue is recognized when the Pharmacy Services segment meets its performance obligations relative to each transaction type. The following revenue recognition policies have been established for the Pharmacy Services segment:

●

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

●

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

●

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

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

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

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and ~~traditional pharmacy benefit manager (“PBM”) service options~~Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

Medicare Part D—The Pharmacy Services segment, through its ~~EnvisionRx and MedTrak PBMs, respectively. EnvisionRx also offers fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies; access to~~Envision Insurance Company ("EIC") subsidiary, participates in 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~~federal government’s Medicare Part D ~~prescription drug plan through Envision Insurance~~program as a Prescription Drug Plan (“PDP”). Please refer to Note 8, Medicare Part D.

Disaggregation of Revenue

The following tables disaggregate the Company’s ~~(“EIC”) EnvisionRx Plus Silver product~~revenue by major source in each segment for the ~~low income auto-assign market~~thirteen and ~~its Clear Choice product for the chooser market. EnvisionRx is headquartered in Twinsburg, Ohio and operates as a 100 percent owned subsidiary~~twenty-six week periods ended August 31, 2019:


	Thirteen Week Period Ended		Twenty-Six Week Period Ended
In thousands	August 31, 2019		August 31, 2019
Retail Pharmacy segment:
Pharmacy sales	$	2,561,468	$	5,137,222
Front-end sales		1,251,489		2,516,850
Other revenue		35,147		58,840
Total Retail Pharmacy segment		3,848,104		7,712,912
Pharmacy Services segment		1,579,069		3,145,361
Intersegment elimination		(60,909)		(119,420)
Total revenue	$	5,366,264	$	10,738,853

Reclassification of the ~~Company.~~Statements of Cash Flows presentation

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

Recasting 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.~~ per-share amounts

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

implemented a reverse stock ~~was $240,907 based on a stock price of $8.68 per share, representing the closing price~~split of the Company’s common stock at a reverse stock split ratio of 1-for-20. The Company’s common stock began trading on a split-adjusted basis on the ~~closing date~~NYSE at the market open on April 22, 2019. Accordingly, all share and per-share amounts for the prior period has been recasted to reflect the reverse stock split.

2. Restructuring

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

In April 2019, the Company implemented its Path to the Future transformation initiative, which focuses primarily on opportunities to drive further growth and operating efficiency, including i) building tools to work with regional health plans to improve patient health outcomes, ii) rationalize SKU’s in its front-end offering to free up

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

working capital, improve front-end profitability and improve the customer experience, iii) an assessment of the Company’s pricing and promotional strategy and, iv) a continued review of the Company’s cost structure, which includes opportunities to use technology and vendor partners to help reduce costs.

For the thirteen week period ended August 31, 2019, the Company incurred total restructuring-related costs of $25,145, which are included as a component of SG&A. These costs are as follows:


	Retail Pharmacy		Pharmacy
	segment		Services segment		Total

Restructuring-related costs
Severance and related costs associated with the March 2019 reorganization (a)	$	7,870	$	511	$	8,381
Non-executive retention costs associated with the March 2019 reorganization (b)		2,830		1,257		4,087
Professional and other fees relating to the Path to the Future transformation initiative (c)		10,355		2,322		12,677
Total restructuring-related costs	$	21,055	$	4,090	$	25,145

For the twenty-six week period ended August 31, 2019, the Company incurred total restructuring-related costs of $68,495, which are included as a component of SG&A. These costs are as follows:


	Retail Pharmacy		Pharmacy
	segment		Services segment		Total

Restructuring-related costs
Severance and related costs associated with the March 2019 reorganization (a)	$	33,142	$	2,315	$	35,457
Non-executive retention costs associated with the March 2019 reorganization (b)		7,329		3,422		10,751
Professional and other fees relating to the Path to the Future transformation initiative (c)		19,965		2,322		22,287
Total restructuring-related costs	$	60,436	$	8,059	$	68,495

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

A summary of activity for the twenty-six week period ended August 31, 2019 in the restructuring-related liabilities associated with the programs noted above, which is included in accrued salaries, wages and other current liabilities, is as follows:


	Severance and related				Professional and
	costs (a)		Retention costs (b)		other fees (c)		Total

Balance at March 2, 2019	$	—	$	4,704	$	—	$	4,704
Additions charged to expense		27,076		6,664		9,610		43,350
Cash payments		(4,653)		(242)		(9,610)		(14,505)
Balance at June 1, 2019		22,423		11,126		—		33,549
Additions charged to expense		8,381		4,087		12,677		25,145
Cash payments		(4,580)		(11,200)		(6,768)		(22,548)
Balance at August 31, 2019	$	26,224	$	4,013	$	5,909	$	36,146

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

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

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

The Company’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.

~~During~~Company anticipates its total 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.

~~(3)~~ ~~Primarily relates to deferred tax liabilities.~~

~~The above goodwill represents future economic benefits expected~~2020 restructuring-related costs 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.approximately $90,000.

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,~~Walgreen Co., an Illinois corporation and 100% owned subsidiary of WBA (“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.~~Buyer (the “Original Asset Purchase Agreement”). Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer ~~will~~agreed to purchase from the Company 1,932 stores (the “Acquired Stores”), ~~three (3)~~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,~~$4,375,000, on a cash-free, debt-free basis (the “Asset Sale” or “Sale”).

The Company announced on September 19, 2017 that the waiting period under the ~~Hart-Scott-Rodino Antitrust Improvements~~HSR Act, ~~of 1976, as amended (the “HSR Act”),~~ expired with respect to the Sale. ~~On November 27, 2017, the~~The Company ~~announced that it had~~ completed the ~~pilot closing and first subsequent closings under the Amended and Restated Asset Purchase Agreement, resulting~~store transfer process in March of 2018, which resulted in the transfer of ~~97 Rite Aid~~all 1,932 stores and related assets to WBA, and received cash proceeds of $4,156,686.

On September 13, 2018, the ~~Buyer. With~~Company completed the ~~final significant closing condition met,~~sale of 1 of its distribution centers and ~~the successful completion~~related assets to WBA for proceeds of $61,251. The impact of the sale of the ~~pilot closing~~distribution center and related assets resulted in a pre-tax gain of $14,151, which has been included in the ~~first subsequent closings,~~results of operations and cash flows of discontinued operations during the ~~Sale will proceed as contemplated under~~fifty-two week period ended March 2, 2019. The transfer of the ~~Amended~~remaining 2 distribution centers and ~~Restated Asset Purchase Agreement. The Sale~~ related assets

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

remains subject to minimal customary closing conditions applicable only to ~~individual stores~~the distribution centers being transferred at such ~~subsequent~~distribution center closings, as specified in the Amended and Restated Asset Purchase Agreement.

The parties to the Amended and Restated Asset Purchase Agreement have each made customary representations and warranties. The Company has agreed to various covenants and agreements, including, among others, the Company’s agreement to conduct its business at the ~~Acquired Stores~~distribution centers being sold to WBA in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the ~~subsequent closings.~~distribution center closing. 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,~~TSA, the Company ~~has the option to purchase pharmaceutical drugs through an affiliate~~provides various services on behalf of WBA, ~~under terms,~~ including ~~cost, that are substantially equivalent~~but not limited to ~~Walgreen’s for a period~~the purchase and distribution of ~~ten (10) years, subject to certain terms~~inventory and ~~conditions.~~

~~Divestiture~~virtually all selling, general and administrative activities. The term of the ~~Assets~~TSA has been extended to ~~be Sold~~

~~During the thirteen weeks ended December 2, 2017,~~October 17, 2020. In connection with these services, the Company ~~sold 97 stores~~purchases the related inventory and ~~related assets to~~incurs cash payments for the ~~Buyer in exchange for proceeds of $240,920,~~selling, general and ~~recognized a pre-tax gain of approximately $157,010. During December 2017,~~administrative activities, which, the Company ~~sold an additional 260 stores and related assets~~bills on a cash neutral basis 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,~~terms as outlined in the ~~divestiture~~TSA. Total billings for these items during the thirteen and twenty-six week periods ended August 31, 2019 were $913,965 and $2,106,756, respectively, of which $196,002 is included in Accounts receivable, net. Total billings for these ~~assets represents~~items during the thirteen and twenty-six week periods ended September 1, 2018 were $1,835,484 and $3,876,559, respectively, of which $385,936 is included in Accounts receivable, net. The Company recorded WBA TSA fees of $11,308 and $25,533 during the thirteen and twenty-six week periods ended August 31, 2019, respectively, which are reflected as a reduction to selling, general and administrative expenses. The Company recorded WBA TSA fees of $23,213 and $46,948 during the thirteen and twenty-six week periods ended September 1, 2018, respectively, which are reflected as a reduction to selling, general and administrative expenses.

Based on its magnitude and because the Company exited certain markets, the Sale represented a significant strategic shift that has a material effect on the ~~Company’s~~Company's operations and financial results. Accordingly, the Company has applied discontinued operations treatment for the Sale as required by Accounting Standards Codification 210-05-Discontinued Operations (ASC 205-20). In accordance with ASC 205-20, the Company reclassified the Disposal Group to assets and liabilities held for sale on its consolidated balance sheets as of the periods ended August 31, 2019 and March 2, 2019, and reclassified the financial results of the Disposal Group in its consolidated statements of operations and consolidated statements of cash flows for all periods presented. The Company also revised its discussion and presentation of operating and financial results to be reflective of its continuing operations as required by ASC 205-20.

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


	August 31,		March 2,
	2019		2019
Inventories	$	54,761	$	68,233
Property and equipment		49,346		49,348
Operating lease right-of-use asset		41,106		—
Current assets held for sale	$	145,213	$	117,581
Current portion of operating lease liabilities	$	3,798	$	—
Long-term operating lease liabilities		39,566		—
Current liabilities held for sale	$	43,364	$	—

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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
)


	August 31,		September 1,		August 31,		September 1,
	2019		2018		2019		2018
	(13 weeks)		(13 weeks)		(26 weeks)		(26 weeks)
Revenues	$	(36)	$	4,716	$	(124)	$	28,116
Costs and expenses:
Cost of revenues(a)		197		182		461		17,263
Selling, general and administrative expenses(a)		379		2,570		866		16,445
Loss on debt retirements, net		—		18,075		—		22,645
Interest expense(b)		—		—		—		4,615
Loss (gain) on stores sold to Walgreens Boots Alliance		—		15		—		(360,542)
Loss (gain) on sale of assets, net		—		11		(522)		11
		576		20,853		805		(299,563)
(Loss) income from discontinued operations before income taxes		(612)		(16,137)		(929)		327,679
Income tax (benefit) expense		(38)		(9,345)		(35)		78,328
Net (loss) income from discontinued operations, net of tax	$	(574)	$	(6,792)	$	(894)	$	249,351

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

~~(b)~~ In accordance with ASC 205-20, the operating results for the thirteen 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.

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

(b)

In accordance with ASC 205-20, the operating results for the thirteen and twenty-six week periods ended August 31, 2019 and September 1, 2018, respectively, for the discontinued operations include interest expense relating to the outstanding indebtedness repaid with the estimated excess proceeds from the Sale.

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

~~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~~Loss Per Share

Basic ~~(loss) income~~loss 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~~loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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


	Thirteen Week Period Ended				Twenty-Six Week Period Ended
	August 31,		September 1,		August 31,		September 1,
	2019		2018		2019		2018
Basic and diluted loss per share:
Numerator:
Net loss from continuing operations	$	(78,705)	$	(352,348)	$	(178,044)	$	(394,075)
Net (loss) income from discontinued operations		(574)		(6,792)		(894)		249,351
Loss attributable to common stockholders— basic and diluted	$	(79,279)	$	(359,140)	$	(178,938)	$	(144,724)
Denominator:
Basic weighted average shares		53,041		52,823		53,084		52,771
Outstanding options and restricted shares, net		—		—		—		—
Diluted weighted average shares		53,041		52,823		53,084		52,771
Basic and diluted loss per share:
Continuing operations	$	(1.48)	$	(6.67)	$	(3.35)	$	(7.47)
Discontinued operations		(0.01)		(0.13)		(0.02)		4.73
Net basic and diluted loss per share	$	(1.49)	$	(6.80)	$	(3.37)	$	(2.74)

Due to their antidilutive effect, ~~9,861~~1,367 and ~~3,320~~1,258 potential common shares related to stock options have been excluded from the computation of diluted income (loss) per share for the thirteen and twenty-six week ~~period~~periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018, respectively. ~~Due to their antidilutive effect, 5,195 and 3,320 potential common shares related to stock options have been~~Also, excluded

from the computation of diluted income (loss) per share for the ~~thirty-nine~~thirteen and twenty-six week ~~period~~periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016, respectively.~~September 1, 2018 are restricted shares of 1,628 and 390, respectively, which are included in shares outstanding.

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

Table of Contents

5RITE AID CORPORATION AND SUBSIDIARIES

.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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

									Thirteen Week Period				Twenty-Six Week Period
									Ended				Ended
									August 31,			September 1,	August 31,			September 1,
									2019		2018		2019		2018
Impairment charges	$	315	$	890	$	946	$	1,578	$	1,289	$	33,562	$	1,412	$	33,845
Lease termination charges	3,624		6,309		10,144		18,625			—		6,047		—		15,623
	$	3,939	$	7,199	$	11,090	$	20,203
Facility exit charges										182		—		537		—
									$	1,471	$	39,609	$	1,949	$	49,468

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.

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

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

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

Non-Financial Assets Measured on a Non-Recurring Basis

Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017,~~August 31, 2019, long-lived assets from continuing operations with a carrying value of ~~$1,224,~~$1,412, primarily store assets, were written down to their fair value of ~~$278,~~$0, resulting in an impairment charge of ~~$946~~$1,412 of

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

which ~~$315~~$1,289 relates to the thirteen week period ended ~~December 2, 2017.~~August 31, 2019. During the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016,~~September 1, 2018, long-lived assets from continuing operations with a carrying value of ~~$3,309,~~$40,488, primarily store assets, were written down to their fair value of ~~$1,731,~~$6,643, resulting in an impairment charge of ~~$1,578~~$33,845 of which ~~$890~~$33,562 relates to the thirteen week period ended ~~November 26, 2016.~~September 1, 2018. 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~~August 31, 2019 and ~~November 26, 2016:~~September 1, 2018:


							Fair Values		Total
							as of		Charges
	Level 1		Level 2		Level 3		Impairment Date		August 31, 2019
Long-lived assets held for use	$	—	$	—	$	—	$	—	$	(1,412)
Long-lived assets held for sale	$	—	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—	$	(1,412)

~~Fair Value Measurement Using~~


							Fair Values		Total
							as of		Charges
	Level 1		Level 2		Level 3		Impairment Date		September 1, 2018
Long-lived assets held for use	$	—	$	—	$	6,643	$	6,643	$	(33,562)
Long-lived assets held for sale	$	—	$	1,292	$	—	$	1,292	$	(283)
Total	$	—	$	1,292	$	6,643	$	7,935	$	(33,845)

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 dodue to their immateriality have not been reclassified to assets held for sale.

Lease Termination and Facility Exit Charges

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

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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				Twenty-Six Week Period
	Ended				Ended
	August 31,		September 1,		August 31,		September 1,
	2019		2018		2019		2018
Balance—beginning of period	$	9,333	$	131,182	$	124,046	$	133,290
Existing Topic 420 liabilities eliminated by recording a reduction to the ROU asset		—		—		(112,288)		—
Provision for present value of noncancellable lease payments of closed stores		—		3,201		—		11,331
Changes in assumptions about future sublease income, terminations and changes in interest rates		—		324		—		(714)
Interest accretion		—		2,556		—		5,241
Cash payments, net of sublease income		(2,992)		(15,075)		(5,417)		(26,960)
Balance—end of period	$	6,341	$	122,188	$	6,341	$	122,188

6. Fair Value Measurements

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

As of ~~December~~August 31, 2019 and March 2, ~~2017 and November 26, 2016,~~2019, the Company did not have any financial assets measured on a recurring basis.

Other Financial Instruments

Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable. These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature. In addition, as of ~~December~~August 31, 2019 and March 2, ~~2017~~2019, 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~~$6,944 and $7,191, respectively, 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~~is estimated based on the quoted market price of the financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company’s other long-term indebtedness are estimated based on quoted market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company’s total long-term indebtedness was ~~$6,772,270~~$3,834,605 and ~~$6,588,733,~~$3,326,965, respectively, as of ~~December 2, 2017. There were no outstanding derivative financial instruments~~

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

August 31, 2019. The carrying amount and estimated fair value of the Company's total long-term indebtedness was $3,454,585 and $3,120,335, respectively, as of ~~December~~March 2, ~~2017~~2019.

On March 15, 2019, the Company entered into an interest rate cap (“Cap”), which has been designated to the variable interest rate payments on the first $650.0 million notional amount of variable rate indebtedness. The Cap has an effective date of March 21, 2019 and expires on March ~~4, 2017.~~21, 2021. The Cap provides the Company with interest rate protection in the event that LIBOR increases above 2.75%. The nominal fair market value of the Cap is recorded as a component of other assets.

7. Income Taxes

The Company recorded an income tax expense from continuing operations of $27,628 and an income tax benefit from continuing operations of ~~$16,061 and $4,682~~$106,559 for the thirteen week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018 respectively, and an income tax expense from continuing operations of ~~$89,268~~$35,002 and an income tax benefit from continuing operations of ~~$3,824~~$116,056 for the ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018, respectively. The effective tax rate for the thirteen week periods

ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 was ~~46.9%~~(54.1)% and ~~(24.7)%~~23.2%, respectively. The effective tax rate for the ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 was ~~40.0%~~(24.5)% and ~~(15.1)%~~22.8%, respectively. The effective tax rate for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017 includes~~August 31, 2019 was net of an adjustment of ~~13%~~(78.4)% and 1%(50.2)%, respectively, ~~for changes~~ to increase the valuation allowance ~~primarily relating~~against deferred tax assets created this period as well as for certain existing state deferred taxes whose realization is now uncertain due to ~~state NOLs.~~a restructuring of our legal entities. The effective tax rate for the ~~thirty-nine~~thirteen and twenty-six week ~~period~~periods ended ~~December 2, 2017 also includes~~September 1, 2018 included an adjustment of ~~55%, primarily~~(4.2)% and (3.9)% to increase the valuation allowance 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.certain state deferred taxes.

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

~~While~~The Company believes that it is ~~expected~~reasonably possible that ~~the amount~~a decrease of up to $7,372 in unrecognized tax benefits ~~will change~~related to state exposures may be necessary in the next twelve months ~~the Company~~however management does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

The Company regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain. Management will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. The Company continues to maintain a valuation allowance against net deferred tax assets of ~~$826,798~~$1,088,033 and ~~$226,726,~~$1,091,416, which relates ~~primarily~~ to federal and state deferred tax assets that may not be realized based on the Company's future projections of taxable income at ~~December 2, 2017~~August 31, 2019 and March ~~4, 2017,~~2, 2019, 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~~30

Table of ~~fiscal 2018 between $200,000 and $325,000, primarily due to the re-measurement of its net deferred tax assets.~~

Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

8.Medicare Part D

The Company offers Medicare Part D benefits through EIC, which has contracted with ~~Centers of Medicare and Medicaid Services (“CMS”)~~CMS to be a ~~Prescription Drug Plan (“PDP”)~~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~~$24,573 as of ~~September~~June 30, ~~2017.~~2019. EIC was in excess of the minimum required amounts in these states as of ~~December 2, 2017.~~August 31, 2019.

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

As of ~~December~~August 31, 2019 and March 2, ~~2017,~~2019, accounts receivable, net included ~~$279,148~~$592,278 and $392,400 due from CMS respectively.

9. Manufacturer Rebates Receivables

The Pharmacy Services Segment has manufacturer rebates receivables of $478,869 and ~~accrued salaries, wages and other current liabilities~~$445,200 included ~~$130,211 of EIC liabilities under certain reinsurance contracts.~~ ~~As of March 4, 2017, accounts~~in Accounts receivable, net, ~~included $245,766 due from CMS~~as of August 31, 2019 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.March 2, 2019, respectively.

9.10. 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~~There was no goodwill 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 goodwillcharge for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December~~August 31, 2019. At August 31, 2019 and March 2, ~~2017.~~2019, accumulated impairment losses for the Pharmacy Services segment was $574,712.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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~~August 31, 2019 and March ~~4, 2017.~~2, 2019.

	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

																	August 31,2019								March 2, 2019
																							Remaining								Remaining
																							Weighted								Weighted
																	Gross						Average		Gross						Average
																	Carrying		Accumulated				Amortization		Carrying		Accumulated				Amortization
																	Amount		Amortization		Net		Period		Amount		Amortization		Net		Period
Favorable leases and other(a)																	$	182,587	$	(161,096)	$	21,491	3	years	$	370,855	$	(318,503)	$	52,352	7	years
Prescription files	898,351		(795,003		)	103,348		3 years	894,330		(764,840		)	129,490		3 years		931,050		(848,144)		82,906	3	years		919,749		(827,222)		92,527	3	years
Customer relationships(a)	465,000		(157,639		)	307,361		15 years	465,000		(110,653		)	354,347		16 years		388,000		(213,837)		174,163	12	years		388,000		(193,352)		194,648	13	years
CMS license	57,500		(5,597		)	51,903		23 years	57,500		(3,872		)	53,628		24 years		57,500		(9,622)		47,878	21	years		57,500		(8,472)		49,028	22	years
Claims adjudication and other developed software	58,987		(20,509		)	38,478		5 years	58,995		(14,188		)	44,807		6 years		58,985		(35,245)		23,740	3	years		58,985		(31,030)		27,955	4	years
Trademarks	20,100		(4,891		)	15,209		8 years	20,100		(3,383		)	16,717		9 years		20,100		(8,409)		11,691	6	years		20,100		(7,404)		12,696	7	years
Backlog	11,500		(9,328		)	2,172		1 year	11,500		(6,453		)	5,047		2 years		11,500		(11,500)		—	0	years		11,500		(11,500)		—	0	years
Total finite	$	1,896,375	$	(1,311,601	)	$	584,774		$	1,894,061	$	(1,212,155	)	$	681,906		$	1,649,722	$	(1,287,853)		361,869			$	1,826,689	$	(1,397,483)	$	429,206

Trademarks	33,500		—			33,500		Indefinite	33,500		—			33,500		Indefinite		19,500		—		19,500	Indefinite			19,500		—		19,500	Indefinite
Total	$	1,929,875	$	(1,311,601	)	$	618,274		$	1,927,561	$	(1,212,155	)	$	715,406		$	1,669,222	$	(1,287,853)	$	381,369			$	1,846,189	$	(1,397,483)	$	448,706

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

~~(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~~August 31, 2019 and March ~~4, 2017~~2, 2019 are unfavorable lease intangibles with a net carrying amount of ~~$20,740~~$0 and ~~$23,703,~~$14,763, respectively. ~~These intangible liabilities are amortized over their remaining~~In connection with the Adoption of ASU 2016-02, Leases (Topic 842), both favorable and unfavorable leases were reclassified into operating 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.right-of-use assets.

Amortization expense for these intangible assets and liabilities was ~~$35,490~~$26,596 and ~~$112,772~~ $54,256 for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017,~~ August 31, 2019, respectively. Amortization expense for these intangible assets and liabilities was ~~$41,654~~$32,500 and ~~$124,060~~$67,900 for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~November 26, 2016, respectively.~~September 1, 2018, respectively The anticipated annual amortization expense for these intangible assets and liabilities is ~~2018—$172,501; 2019—$120,319;~~ 2020—$~~96,399;~~100,380; 2021—$~~72,519~~78,477; 2022—$58,037; 2023—$42,964 and ~~2022—~~2024—$~~50,715.~~29,386.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

~~10.~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

11. Indebtedness and Credit Agreements

Following is a summary of indebtedness and lease financing obligations at ~~December 2, 2017~~August 31, 2019 and March ~~4, 2017:~~

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

2, 2019:

~~Reconciliation of indebtedness included in continuing operations and discontinued operations:~~


	August 31,		March 2,
	2019		2019
Secured Debt:
Senior secured revolving credit facility due December 2023 ($1,250,000 and $875,000 face value less unamortized debt issuance costs of $21,706 and $24,069)	$	1,228,294	$	850,931
FILO term loan due December 2023 ($450,000 face value less unamortized debt issuance costs of $3,458 and $3,918)		446,542		446,082
		1,674,836		1,297,013
Guaranteed Unsecured Debt:
6.125% senior notes due April 2023 ($1,753,490 face value less unamortized debt issuance costs of $14,899 and $16,982)		1,738,591		1,736,508
		1,738,591		1,736,508
Unguaranteed Unsecured Debt:
7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,212 and $1,295)		293,788		293,705
6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $610 and $642)		127,390		127,358
		421,178		421,063
Lease financing obligations		33,244		40,176
Total debt		3,867,849		3,494,760
Current maturities of long-term debt and lease financing obligations		(10,704)		(16,111)
Long-term debt and lease financing obligations, less current maturities	$	3,857,145	$	3,478,649

Credit Facility

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,~~On December 20, 2018, the Company ~~is estimating that~~entered into a new senior secured credit agreement, consisting of a new $2,700,000 senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a new $450,000 “first-in, last out” senior secured term loan facility (“Senior Secured Term Loan”) (collectively the ~~Sale will provide total excess cash proceeds of approximately $4,027,400 which will be~~“New Facilities”).

Proceeds from the New Facilities were used to ~~repay outstanding indebtedness. As such,~~refinance 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.

~~Credit Facility~~

~~The~~ Company’s prior $2,700,000 Amended and Restated Senior Secured Credit Facility due January 2020 (the “Old Facility,” the New Facilities and the Old Facility are collectively referred to herein as the “Facilities”). The New Facilities extend the Company’s debt maturity profile and provide additional liquidity. The New Facilities mature in December 2023, subject to an earlier maturity on December 31, 2022 if the Company has ~~a borrowing capacity of $3,700,000 and matures in January 2020. Borrowings under the revolver~~not repaid or refinanced its existing 6.125% Senior Notes due 2023 prior to such date. The Company’s new Senior Secured Revolving Credit Facility will bear interest at a rate ~~per annum between (i)~~of LIBOR plus ~~1.50% and LIBOR plus 2.00% with respect~~125 to ~~Eurodollar borrowings and (ii) the~~175 basis points (or an alternate base rate plus ~~0.50% and~~25 to 75 basis points), depending on availability under the revolving facility. The Company’s new Senior Secured Term Loan bears interest at a rate of LIBOR plus 300 basis points (or an alternate base rate plus ~~1.00% with respect to ABR borrowings,~~200 basis points).

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

(Dollars and share information 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%~~thousands, except 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.share amounts)

(unaudited)

The Company’s ability to borrow under the ~~revolver~~New Facilities is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At ~~December 2, 2017,~~August 31, 2019, the Company had ~~$1,925,000~~$1,700,000 of borrowings outstanding under the ~~revolver~~New Facilities and had letters of credit outstanding against the ~~revolver~~New Facilities of ~~$59,343~~$83,195 which resulted in additional borrowing capacity of ~~$1,715,657.~~$1,366,805.

The ~~Amended and Restated Senior Secured Credit Facility restricts~~New Facilities restrict 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~~excess of ~~outstanding~~$200,000 at any time revolving loans ~~under the Amended~~are outstanding (not including cash located in its stores and ~~Restated Senior Secured Credit Facility~~lockbox deposit account and ~~then~~cash necessary to ~~be held as collateral for the senior obligations.~~cover current liabilities).

The ~~Amended and Restated Senior Secured Credit Facility allows~~New Facilities allow the Company to have outstanding, at any time, up to $1,500,000 in secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock in addition to borrowings under the ~~Amended and Restated Senior Secured Credit Facility~~New Facilities and existing indebtedness, provided that not in excess of $750,000 of such secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest of ~~(a)~~(i) the fifth anniversary of the effectiveness of the ~~Amended~~New Facilities and ~~Restated Senior Secured Credit Facility and (b)~~(ii) the latest maturity date of any Term Loan or Other Revolving ~~Loan~~Commitment (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)New Facilities). Subject to the limitations described in clauses ~~(a)~~(i) and ~~(b)~~(ii) of the immediately preceding sentence, the ~~Amended and Restated Senior Secured Credit Facility~~New Facilities additionally ~~allows~~allow 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)~~New Facilities) is not in effect; provided, however, that certain of the Company’s other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The ~~Amended and Restated Senior Secured Credit Facility~~New Facilities also ~~contains~~contain certain restrictions on the amount of secured first priority debt the Company is able to incur. The ~~Amended and Restated Senior Secured Credit Facility~~New Facilities also ~~allows~~allow for the voluntary repurchase of any debt or other convertible debt, so long as the ~~Amended and Restated Senior Secured Credit Facility is~~New Facilities are 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~~New Facilities have a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 ~~(a)~~(i) on any date on which availability under the revolver is less than $200,000 or ~~(b)~~(ii) on the third consecutive business day on which availability under the revolver is less than $250,000 and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the ~~revolver~~New Facilities is equal to or greater than $250,000. As of ~~December 2, 2017,~~August 31, 2019, the Company had availability under its ~~revolver~~New Facilities of ~~$1,715,657,~~$1,366,805, 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~~New Facilities' financial covenant. The ~~Amended and Restated Senior Secured Credit Facility~~New Facilities also ~~contains~~contain covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens.

The ~~Amended and Restated Senior Secured Credit Facility~~New Facilities also ~~provides~~provide 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,~~New Facilities and unsecured guaranteed notes. The ~~Amended and Restated Senior Secured Credit Facility and second priority secured term loan~~

~~facilities~~New 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~~New Facilities and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several, and there are no restrictions on the ability of the Company to obtain funds from its subsidiaries. The Company has no independent assets or operations. 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, otherOther than EIC, the subsidiaries, including joint ventures, that do not guarantee the ~~credit facility, second priority secured term loan facilities~~New Facilities and applicable notes, are minor. As such, condensed consolidating financial information for the Company, its guaranteeing subsidiaries and ~~non-guaranteeing~~non-

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

guaranteeing subsidiaries is presented for those periods subsequent to the ~~Acquisition.~~acquisition of EnvisionRx. See Note 1517 “Guarantor and Non-Guarantor Condensed Consolidating Financial Information” for additional disclosure.

~~Maturities~~Fiscal 2019 and 2020 Transactions

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

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

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

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

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

Maturities

The aggregate annual principal payments of long-term debt for the remainder of fiscal ~~2018~~2020 and thereafter are as follows: ~~2018—$90; 2019—~~2020—$0; ~~2020—$1,925,000;~~ 2021—$~~1,372,000;~~0; 2022—$~~1,310,000~~0; 2023—$0; 2024—$3,453,490 and ~~$2,223,000~~$423,000 thereafter. These aggregate annual principal payments of long-term debt assume that the Company has not repaid or refinanced its existing 6.125% Senior Notes due 2023 prior to December 31, 2022.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

12. Leases

The ~~proceeding amounts do~~Company leases most of its retail stores and certain distribution facilities under noncancellable operating and capital leases, most of which have initial lease terms ranging from 5 to 22 years. The Company also leases certain of its equipment and other assets under noncancellable operating leases with initial terms ranging from 3 to 10 years. In addition to minimum rental payments, certain store leases require additional payments based on sales volume, as well as reimbursements for taxes, maintenance and insurance. Most leases contain renewal options, certain of which involve rent increases.

The following table is a summary of the Company’s components of net lease cost for the thirteen and twenty-six week periods ended August 31, 2019:


	Thirteen Week Period		Twenty-Six Week Period
	Ended August 31, 2019		Ended August 31, 2019
Operating lease cost	$	164,002	$	328,985
Financing lease cost:
Amortization of right-of-use asset		1,508		3,044
Interest on long-term finance lease liabilities		856		1,762
Total finance lease costs	$	2,364	$	4,806
Short-term lease costs		115		116
Variable lease costs		42,768		83,314
Less: sublease income		(5,407)		(11,158)
Net lease cost	$	203,842	$	406,063

Supplemental cash flow information related to leases for the twenty-six week period ended August 31, 2019:


	Twenty-Six Week Period
	Ended August 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	293,884
Operating cash flows paid for interest portion of finance leases		1,762
Financing cash flows paid for principal portion of finance leases		4,453
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		158,463
Finance leases		—

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

Supplemental balance sheet information related to leases as of August 31, 2019 (in thousands, except lease term and discount rate):


	August 31,
	2019
Operating leases:
Operating lease right-of-use asset	$	2,944,651

Short-term operating lease liabilities	$	502,706
Long-term operating lease liabilities		2,745,598
Total operating lease liabilities	$	3,248,304

Finance leases:
Property, plant and equipment, net	$	23,852

Current maturities of long-term debt and lease financing obligations	$	10,704
Lease financing obligations, less current maturities		22,540
Total finance lease liabilities	$	33,244
Weighted average remaining lease term
Operating leases		8.0
Finance leases		8.4

Weighted average discount rate
Operating leases		6.0	%
Finance leases		10.0	%

The following table summarizes the maturity of lease liabilities under finance and operating leases as of August 31, 2019:


	August 31, 2019
	Finance		Operating
Fiscal year	Leases		Leases (1)		Total
2020 (remaining twenty-six weeks)	$	9,482	$	345,844	$	355,326
2021		9,155		645,871		655,026
2022		4,275		579,569		583,844
2023		3,983		524,643		528,626
2024		3,711		462,675		466,386
Thereafter		18,660		1,594,345		1,613,005
Total lease payments		49,266		4,152,947		4,202,213
Less: imputed interest		(16,022)		(904,643)		(920,665)
Total lease liabilities	$	33,244	$	3,248,304	$	3,281,548

(1)	– Future operating lease payments have not been reduced by minimum sublease rentals of $53 million due in the future under noncancelable leases.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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


	Lease
	Financing		Operating
Fiscal year	Obligations		Leases
2020	$	19,300	$	687,412
2021		4,811		610,874
2022		4,588		545,863
2023		4,383		490,864
2024		4,042		431,714
Later years		20,470		1,541,408
Total minimum lease payments		57,594	$	4,308,135
Amount representing interest		(17,418)
Present value of minimum lease payments	$	40,176

During the thirteen and twenty-six week periods ended August 31, 2019 and September 1, 2018, the Company did not ~~reflect repayments associated~~enter into any sale-leaseback transactions whereby the Company sold owned operating stores to independent third parties and concurrent with ~~excess proceeds~~the sale, entered into an agreement to lease the store back from the ~~Sale~~.purchasers.

~~11.~~13. 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~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 include ~~$22,549~~$10,092 and ~~$36,766,~~$10,246, 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~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018, the Company incurred ~~$3,482 and $14,448~~a benefit of $348 compared to expense of $1,724 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~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 are as follows:

	December 2, 2017			November 26, 2016
	Shares	Weighted Average Fair Value		Shares	Weighted Average Fair Value

							August 31, 2019			September 1, 2018
							Shares	Weighted Average Fair Value		Shares	Weighted Average Fair Value
Stock options granted	1,000	$	1.08	—	$	N/A	503	$	3.54	—	$	N/A
Restricted stock awards granted	13,856	$	2.82	3,613	$	7.73	1,232	$	7.60	25	$	33.40
Total awards	14,856			3,613			1,735			25

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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~~

As of ~~December 2, 2017,~~August 31, 2019, 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

August 31, 2019

Unvested

stock

restricted

performance

options

stock

shares

Unrecognized pre-tax costs

7,057

38,971

12,253

1,743

16,518

246

Weighted average amortization period

1.62 years

2.1 years

2.3 years

3.9 years

2.2 years

0.5 years

~~12.~~14. Retirement Plans

Net periodic pension expense recorded in the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018, 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

													Defined Benefit				Defined Benefit
													Pension Plan				Pension Plan
													Thirteen Week Period Ended				Twenty-Six Week Period Ended
													August 31,		September 1,		August 31,		September 1,
													2019		2018		2019		2018
Service cost	$	346		$	292		$	1,038		$	876		$	143	$	312	$	285	$	624
Interest cost	1,603			1,621			4,809			4,863				1,556		1,578		3,111		3,156
Expected return on plan assets	(1,147		)	(1,142		)	(3,441		)	(3,426		)		(1,214)		(1,435)		(2,427)		(2,869)
Amortization of unrecognized prior service cost	—			—			—			—				—		—		—		—
Amortization of unrecognized net loss	856			1,132			2,569			3,396				415		507		830		1,015
Net periodic pension expense	$	1,658		$	1,903		$	4,975		$	5,709		$	900	$	962	$	1,799	$	1,926

During the thirteen and ~~thirty-nine~~twenty-six week ~~period~~ periods ended ~~December 2, 2017~~August 31, 2019 the Company contributed ~~$8,210~~$0 and $0, respectively, to the Defined Benefit Pension Plan. During the remainder of fiscal ~~2018,~~2020, the Company expects to contribute ~~$813~~$0 to the Defined Benefit Pension Plan.

~~13.~~15. 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~~The Company has ~~realigned its internal management reporting to reflect two~~2 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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

products, seasonal merchandise and a large private brand product line. The Pharmacy Services segment offers a full range of pharmacy benefit management services including plan design and administration, on both a transparent pass-through model and traditional model, formulary management and claims processing. Additionally, the Pharmacy Services segment offers specialty and mail order services, infertility treatment, and drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.

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

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


	Retail		Pharmacy
	Pharmacy		Services		Eliminations(1)		Consolidated
August 31, 2019:
Total Assets	$	8,040,905	$	2,646,710	$	(14,402)	$	10,673,213
Goodwill		43,492		1,064,644		—		1,108,136
March 2, 2019:
Total Assets	$	5,071,055	$	2,534,771	$	(14,459)	$	7,591,367
Goodwill		43,492		1,064,644		—		1,108,136

(1)

As of August 31, 2019 and March 2, 2019, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $0 against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $14,402 and $14,459, respectively, that represents amounts owed from the Pharmacy Services segment to the Retail Pharmacy segment that are created when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

The following table is a reconciliation of the Company’s business segments to the ~~condensed~~ consolidated financial statements for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016:~~September 1, 2018:


	Retail		Pharmacy		Intersegment
	Pharmacy		Services		Eliminations(1)		Consolidated
Thirteen Week Period Ended		��
August 31, 2019:
Revenues	$	3,848,104	$	1,579,069	$	(60,909)	$	5,366,264
Gross Profit		1,032,444		111,995		—		1,144,439
Adjusted EBITDA(2)		92,673		41,517		—		134,190
Additions to property and equipment and intangible assets		43,328		7,249		—		50,577
September 1, 2018:
Revenues	$	3,911,512	$	1,561,811	$	(51,961)	$	5,421,362
Gross Profit		1,051,637		109,514		—		1,161,151
Adjusted EBITDA(2)		103,618		44,963		—		148,581
Additions to property and equipment and intangible assets		47,302		4,156		—		51,458
Twenty-Six Week Period Ended
August 31, 2019:
Revenues	$	7,712,912	$	3,145,361	$	(119,420)	$	10,738,853
Gross Profit		2,062,939		208,223		—		2,271,162
Adjusted EBITDA(2)		176,681		67,856		—		244,537
Additions to property and equipment and intangible assets		87,572		12,196		—		99,768
September 1, 2018:
Revenues	$	7,809,277	$	3,104,573	$	(103,998)	$	10,809,852
Gross Profit		2,121,094		208,806		—		2,329,900
Adjusted EBITDA(2)		207,747		78,826		—		286,573
Additions to property and equipment and intangible assets		105,369		7,715		—		113,084

(1)

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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~~loss to Adjusted EBITDA for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016:~~September 1, 2018:

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


	August 31,		September 1,		August 31,		September 1,
	2019		2018		2019		2018
	(13 weeks)		(13 weeks)		(26 weeks)		(26 weeks)(a)
Net loss from continuing operations	$	(78,705)	$	(352,348)	$	(178,044)	$	(394,075)
Interest expense		60,102		56,233		118,372		119,025
Income tax expense (benefit)		27,628		(106,559)		35,002		(116,056)
Depreciation and amortization		83,044		89,743		166,970		184,272
LIFO charge		7,504		3,358		14,993		13,324
Lease termination and impairment charges		1,471		39,609		1,949		49,468
Goodwill and intangible asset impairment charges		—		375,190		—		375,190
Loss on debt retirements, net		—		—		—		554
Merger and Acquisition-related costs		514		19,031		3,599		26,219
Stock-based compensation expense		4,712		5,215		10,092		10,246
Restructuring-related costs		25,145		—		68,495		—
Inventory write-downs related to store closings		3,149		1,300		3,990		5,133
Litigation settlement		—		18,000		—		18,000
Gain on sale of assets, net		(1,587)		(4,965)		(4,299)		(10,824)
Other		1,213		4,774		3,418		6,097
Adjusted EBITDA from continuing operations	$	134,190	$	148,581	$	244,537	$	286,573

~~The following is balance sheet information~~(a) During fiscal 2019, the Company revised its definition of Adjusted EBITDA to no longer exclude the impact of revenue deferrals related to our customer loyalty program and further revised its disclosure by presenting certain amounts previously included within Other as separate reconciling items. Consequently, the Company revised Adjusted EBITDA for the ~~Company’s reportable segments:~~thirteen and twenty-six week periods ended September 1, 2018 to conform with the revised definition and present separate reconciling items previously included with Other.

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

~~(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.~~16. Commitments, Contingencies and ~~Contingencies~~Guarantees

Legal Matters and Regulatory Proceedings

The Company is involved in legal ~~proceedings~~matters including litigation, arbitration, and other claims, and is subject to regulatory proceedings including investigations, inspections, ~~claims,~~ audits, inquiries, and similar actions by pharmacy, health care, tax and other governmental authorities arising in the ordinary course of its business, including, without limitation, the matters described below. The Company records accruals for outstanding legal matters and applicable regulatory proceedings when it believes it is probable that a loss ~~will be~~has been incurred, and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters and regulatory proceedings that could affect the amount of any existing accrual and developments that would make a loss contingency both probable and reasonably estimable, and as a result, warrant an ~~account.~~accrual. If a loss contingency is not both probable and estimable, the Company

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

does not establish an accrued liability. None of the Company’s accruals for outstanding legal matters or regulatory proceedings are material individually or in the aggregate to the Company’s consolidated financial position.

The Company’s contingencies are subject to significant uncertainties, many of which are beyond the Company’s control, including, among other factors: (i) proceedings are in early stages; (ii) whether class or collective action status is sought and the likelihood of a class being certified; (iii) the outcome of pending appeals or motions; (iv) the extent of potential damages, fines or penalties, which are often unspecified or indeterminate; (v) the impact of discovery on the matter; (vi) whether novel or unsettled legal theories are at issue; (vii) there are significant factual issues to be resolved; and/or (viii) in the case of certain government agency investigations, whether a ~~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~~ While 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

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 eithercannot predict the outcome of ~~this lawsuit~~any of the contingencies, the Company’s management does not believe that the outcome of any of these legal matters or ~~estimate a potential range of loss with respect~~regulatory proceedings will be material to the ~~lawsuit. The~~ Company’s ~~management believes,~~consolidated financial position. It is possible, however, ~~that this lawsuit is without merit and is vigorously defending this lawsuit.~~the Company’s results of operations or cash flows could be materially affected by unfavorable outcomes in outstanding legal matters or regulatory proceedings.

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

~~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~~lawsuit filed by qui tamplaintiff Azam Rahimi (“Relator”) in the District Court for the Eastern District of

Michigan. On January 19, 2017, the court unsealed Relator’s Second Amended Complaint against the Company; it alleges that the Company failed to report Rx Savings prices as its usual and customary charges under the Medicare Part D program and to federal and state Medicaid programs in 18 states and the District of Columbia; and that the Company is thus liable under the federal FCA and similar state statutes. In its ruling on the Company’s motion to dismiss the complaint, the Court held that Relator’s complaint was deficient, but allowed Relator the opportunity to re-plead. Relator filed a Third Amended Complaint on May 11, 2018. The Company ~~has~~ filed a motion to dismiss the ~~complaint, which~~Third Amended Complaint on May 25, 2018. On March 30, 2019, the Company’s motion to dismiss the Third Amended Complaint was denied. The court entered a scheduling order on May 29, 2019, and the case is ~~pending.~~proceeding through discovery. On July 31, 2019, Rite Aid filed a motion to dismiss and for judgment on the pleadings based on the False Claims Act’s public disclosure bar. Relator’s opposition to the motion is due on September 11, 2019, and Rite Aid’s reply is due on October 9, 2019. 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.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

On April 26, 2012, the Company ~~received~~was served with an administrative subpoena from the U.S. Drug Enforcement Administration (“DEA”), Albany, New York District Office, requesting information regarding the Company’s sale of products containing pseudoephedrine (“PSE”). In April 2012, it also received a communication from the U.S. Attorney’s Office ~~(“USAO”)~~ for the Northern District of New York ~~concerning~~(“USAO”) regarding an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 (“CMEA”). Additional subpoenas were ~~issued~~served in 2013, 2014, and 2015 ~~seeking~~requesting 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 ofCivil 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~~civil penalties against the Company. The Company ~~had~~has 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~~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~~the Company is not able to predict the outcome of the ~~investigations.~~investigation.

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

In June 2013, the Company was served with a Civil Investigative Demand (“CID”) by the United States Attorney’s Office for the Eastern District of California (the “USAO”) regarding (1) the Company’s Drug Utilization Review (“DUR”) and prescription dispensing protocol; and (2) the dispensing of drugs designated as “Code 1” by the State of California. The Company cooperated with the investigation, researched the government’s allegations, and refuted the government’s position. The Company produced documents including certain prescription files related to Code 1 drugs to the USAO’s office and the State of California Department of Justice’s Bureau of Medical Fraud and Elder Abuse (“CADOJ”). In August 2014, the USAO and 8 states’ attorneys general declined to intervene in a California False Claim Act (“FCA”) action (“Action”) filed under seal in the Eastern District of California by qui tam plaintiff Loyd F. Schmuckley (“Relator”) based on DUR and Code 1 allegations. In July 2016, the Commonwealth of Massachusetts and the District of Columbia also declined to intervene in the Action. On May 15, 2017, Relator and the CADOJ stipulated to dismiss all DUR-related claims and 18 other state-based claims. On September 21, 2017, the CADOJ filed a sealed complaint-in-intervention in the Action, asserting causes under the FCA, for unjust enrichment and for payment by mistake related to the Code 1 allegations. The Action was unsealed on September 26, 2017. On September 28, 2017, Relator filed a First Amended Complaint under the FCA also concerning the Code 1 allegations. The Company filed a motion to dismiss Relator’s and CADOJ’s respective complaints in January 2018, the hearing was held on March 23, 2018. On September 5, 2018, the court issued an order denying the motion to dismiss. The case was divided into phases, with the first phase focused upon plaintiffs’ proposed sampling methodology for determining liability and damages. Following fact and expert discovery, the Company’s ~~deadline~~motion challenging plaintiffs’ proposed sampling methodology was heard on July 15, 2019. Supplemental briefing was requested by the Court and filed on July 29, 2019, and to ~~respond to the CADOJ’s and Relator’s complaints is currently scheduled for January 2018.~~date, no decision has been rendered. 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 (Complaint”) against the Company and various purported related entities on September 27, 2016 alleging violations of the Mississippi

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

Medicaid Fraud Control Act, violations

of the Mississippi Unfair and Deceptive Trade Practices Act, fraud and unjust enrichment. The Complaint alleges the Company failed to accurately report usual and customary prices to Mississippi’s Division of Medicaid. On November 14, 2016, the Company filed motions to dismiss based on ~~substantive~~jurisdictional and ~~jurisdictional~~substantive grounds, as well as a motion to transfer ~~venue. These motions are~~venue, all of which were stayed pending ~~and~~ the ~~action is stayed while~~resolution of related litigation ~~is resolved~~involving another chain pharmacy on appeal. In September 2018, the stay of the case was lifted. On November 28, 2018, the case was transferred to the Circuit Court of Desoto County and consolidated with related cases containing similar allegations brought by Mississippi against other chain pharmacies. On June 11, 2019, the court (i) dismissed the claims against the Company for lack of personal jurisdiction; and (ii) dismissed the fraud-based claims against the Company’s purportedly related entities (Rite Aid Hdqtrs. Corp., Harco, Inc., and K&B of Mississippi Corporation) for failure to plead the fraud-based claims with particularity, but with leave to amend. The court did not dismiss the claims against the purportedly related entities for unjust enrichment or for restitution under the Mississippi Consumer Protection Act. On August 2, 2019, the State of Mississippi filed a Second Amended Complaint that does not assert any claims against the Company, but does assert claims against the purportedly related entities for fraud, unjust enrichment, and for restitution under the Mississippi Consumer Protection Act. 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~~The Company is named in multiple opioid-related lawsuits filed by counties, cities, municipalities, Native American tribes, hospitals, and third-party payers across the United States. Specifically, as of September 24, 2019, a total of 1,262 opioid-related lawsuits have been filed against the Company. 1,104 lawsuits have been filed in federal court, of which 1,018 have been transferred to the multi-district litigation (“MDL”) pending 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~~U.S. District Court for ~~the Shelby County action are federal lawsuits that have been consolidated in~~ the Northern District of Ohio before Judge Dan Polster ~~as part of the~~ under In ~~re:~~re National Prescription Opiate Litigation (Case No. 17-MD-2804). ~~No responsive pleadings~~There are approximately 158 lawsuits that name the Company in some capacity that have been filed ~~by Rite Aid because~~outside the MDL in state court. The plaintiffs in all of these opioid-related lawsuits generally allege claims concerning the impacts of widespread opioid abuse against defendants along the pharmaceutical supply chain, including manufacturers, wholesale distributors, and retail pharmacies.

New lawsuits continue to be added to the MDL, including lawsuits filed in Alabama, Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Since December 2017, nearly all related lawsuits pending in federal district courts have been transferred to the MDL. NaN of the Ohio lawsuits in the MDL (referred to as the “Track One” or “bellwether” lawsuits) have been set for an October 21, 2019 trial date: The County of Summit, Ohio v. Purdue Pharma L.P., et al., Case No. 18-OP-45090 (N.D. Ohio); and The County of Cuyahoga v. Purdue Pharma L.P., et al., Case No. 17-OP-45004 (N.D. Ohio). On August 15, 2019, Judge Polster granted the plaintiffs’ motion to sever several defendants, including the Company. As a result, the Company will not be a defendant in the first bellwether trial, but could be a defendant in a subsequent trial involving the same plaintiffs. A group of West Virginia lawsuits ~~had all~~have already been ~~stayed prior to consolidation~~selected for the second bellwether track, which include lawsuits filed by Cabell and ~~Rite Aid has~~Huntington Counties.

The federal lawsuits that are not ~~yet been served with~~part of the ~~Shelby County complaint.~~MDL are filed by counties and municipalities in California, Georgia, Idaho, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, New Jersey, New York, North Dakota, Oklahoma, Pennsylvania, Utah, Vermont, Virginia, and West Virginia. The ~~complaints allege generally that defendants, including Rite Aid, created a public nuisance~~lawsuits filed outside the MDL in state

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For 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. Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

courts include lawsuits filed by counties and municipalities in Connecticut, Delaware, Georgia, Idaho, Illinois, Louisiana, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Washington, and West Virginia.

At this stage of ~~these~~the proceedings, the Company is not able to predict the outcome of the opioid-related lawsuits or estimate a potential range of loss regarding the lawsuits. However, the Company has and will continue to vigorously defend itself against all opioid-related lawsuits. Additionally, the Company is also responding to subpoenas, civil investigative demands, and/or other requests regarding opioids that it has received from the Attorney Generals of several states.

The Company is involved in 2 putative consumer class action lawsuits in the United States District Court for the Southern District of California, alleging that it overcharged customers’ insurance companies for prescription drug purchases, resulting in overpayment of co-pays. The first lawsuit, Byron Stafford v. Rite Aid Corp., Case No. 17-CV-01340-AJB-JLB, was filed on June 30, 2017, and the second case, Robert Josten v. Rite Aid Corp., Case No. 18-CV-00152-AJB-JLB, was filed on January 23, 2018. Each lawsuit alleges that (i) the Company was obligated to charge the plaintiffs’ insurance companies a “usual and customary” price for their prescription drugs; and (ii) the Company failed to do so properly because the prices it reported were not equal to or adjusted to account for the prices that Rite Aid offers to uninsured and underinsured customers through its Rx Savings Program.

On December 19, 2017, the court granted the Company’s motion to dismiss Stafford’s complaint with leave to amend for failure to plead compliance with the applicable statutes of limitations. After Stafford amended the complaint on January 9, 2018, the Company filed another motion to dismiss on January 23, 2018. The Court denied that motion and opened discovery. Stafford’s deadline to file his class certification motion is December 11, 2019. On June 17, 2019, Rite Aid filed a motion to compel all Stafford’s claims to an individual arbitration and an accompanying motion to stay the entire action pending the court’s decision on its motion to compel arbitration. The court took the motion to compel arbitration under consideration for decision without a hearing, but denied the motion to stay the case pending a decision on that motion.

Rite Aid moved to dismiss Josten’s complaint on March 16, 2018. The court granted the motion to dismiss most of Josten’s claims for failure to plead compliance with the applicable statute of limitations but with leave to amend. The Company moved to dismiss Josten’s amended complaint on the grounds that the statute of limitations expired and that he failed to exhaust Medicare administrative remedies. The court denied that motion on August 7, 2019. A case management conference is scheduled for September 24, 2019, where the court will likely set a pretrial schedule, including with respect to discovery and class certification.

At this stage of the proceedings, the Company is not able to either predict the outcome of ~~these~~the Stafford or Josten lawsuits or estimate a potential range of loss with respect to the lawsuits and is vigorously defending ~~the~~these lawsuits.

In addition to the above described matters, the Company is subject from time to time to various claims and lawsuits and governmental investigations arising in the ordinary course of business. While the Company’s management cannot predict the outcome of any of the claims, the Company’s management does not believe that the outcome of any of these ~~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.

Table of Contents

~~15. Supplementary Cash Flow Data~~RITE AID CORPORATION AND SUBSIDIARIES

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.~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

17. 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~~100% owned subsidiaries guarantee the obligations under the ~~Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes~~New Facilities and unsecured guaranteed notes (the “Subsidiary Guarantors”). Additionally, with the exception of EIC, the subsidiaries, including joint ventures, that do not guarantee the

~~Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes~~ New Facilities and unsecured guaranteed notes, are minor.

For the purposes of preparing the information below, Rite Aid Corporation uses the equity method to account for its investment in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in the non-guarantor subsidiaries. The subsidiary guarantees related to the Company’s ~~Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities and secured guaranteed notes~~New Facilities and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. Presented below is condensed consolidating financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the non-guarantor subsidiaries at ~~December~~August 31, 2019, March 2, ~~2017, March 4, 2017,~~2019 and for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016.~~September 1, 2018. Separate financial statements for Subsidiary Guarantors are not presented.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

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

$
359,615

$
(8,463,971
)
$
11,340,614

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current maturities of long-term debt and lease financing obligations

$
90

$
20,264

$
—

$
—

$
20,354

Accounts payable

—

1,780,226

9,230

—

1,789,456

Intercompany payable

—

—

200,895

(200,895
)(a)
—

Accrued salaries, wages and other current liabilities

94,613

1,082,686

81,287

—

1,258,586

Current liabilities held for sales

3,786,480

51,039

—

—

3,837,519

Total current liabilities

3,881,183

2,934,215

291,412

(200,895
)
6,905,915

Long-term debt, less current maturities

2,985,700

—

—

—

2,985,700

Lease financing obligations, less current maturities

—

31,654

—

—

31,654

Intercompany payable

261,847

—

—

(261,847
)(a)
—

Other noncurrent liabilities

—

571,353

20,848

—

592,201

Total liabilities

7,128,730

3,537,222

312,260

(462,742
)
10,515,470

Commitments and contingencies

—

—

—

—

—

Total stockholders’ equity

825,144

7,953,874

47,355

(8,001,229
)(b)
825,144

Total liabilities and stockholders’ equity

$
7,953,874

$
11,491,096

$
359,615

$
(8,463,971
)
$
11,340,614


	Rite Aid Corporation
	Condensed Consolidating Balance Sheet
	August 31, 2019
	(unaudited)
	Rite Aid
	Corporation				Non-
	(Parent		Subsidiary		Guarantor
	Company Only)		Guarantors		Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	122,321	$	19,860	$	—		$	142,181
Accounts receivable, net		—		1,349,635		595,965		—			1,945,600
Intercompany receivable		—		563,908		—		(563,908)	(a)		—
Inventories, net of LIFO reserve of $0, $619,437, $0, $0, and $619,437		—		1,968,937		—		—			1,968,937
Prepaid expenses and other current assets		—		180,331		3,097		—			183,428
Current assets held for sale		—		145,213		—		—			145,213
Total current assets		—		4,330,345		618,922		(563,908)			4,385,359
Property, plant and equipment, net		—		1,270,467		—		—			1,270,467
Operating lease right-of-use assets		—		2,944,651		—		—			2,944,651
Goodwill		—		1,108,136		—		—			1,108,136
Other intangibles, net		—		333,491		47,878		—			381,369
Deferred tax assets		10,828		381,315		(10,038)		—			382,105
Investment in subsidiaries		8,171,685		57,488		—		(8,229,173)	(b)		—
Intercompany receivable		—		3,372,868		—		(3,372,868)	(a)		—
Other assets		46		194,136		6,944		—			201,126
Total assets	$	8,182,559	$	13,992,897	$	663,706	$	(12,165,949)		$	10,673,213
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and lease financing obligations	$	—	$	10,704	$	—	$	—		$	10,704
Accounts payable		—		1,560,560		9,618		—			1,570,178
Intercompany payable		—		—		563,908		(563,908)	(a)		—
Accrued salaries, wages and other current liabilities		14,500		693,595		24,692		—			732,787
Current portion of operating lease liabilities		—		502,706		—		—			502,706
Current liabilities held for sale		—		43,364		—		—			43,364
Total current liabilities		14,500		2,810,929		598,218		(563,908)			2,859,739
Long-term debt, less current maturities		3,834,605		—		—		—			3,834,605
Long-term operating lease liabilities		—		2,745,598		—		—			2,745,598
Lease financing obligations, less current maturities		—		22,540		—		—			22,540
Intercompany payable		3,372,868		—		—		(3,372,868)	(a)		—
Other noncurrent liabilities		—		242,145		8,000		—			250,145
Total liabilities		7,221,973		5,821,212		606,218		(3,936,776)			9,712,627
Commitments and contingencies		—		—		—		—			—
Total stockholders’ equity		960,586		8,171,685		57,488		(8,229,173)	(b)		960,586
Total liabilities and stockholders’ equity	$	8,182,559	$	13,992,897	$	663,706	$	(12,165,949)		$	10,673,213

(a)	Elimination of intercompany accounts receivable and accounts payable amounts.

(b)	Elimination of investments in consolidated subsidiaries.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)


	Rite Aid Corporation
	Condensed Consolidating Balance Sheet
	March 2, 2019
	Rite Aid
	Corporation				Non-
	(Parent		Subsidiary		Guarantor
	Company Only)		Guarantors		Subsidiaries		Eliminations			Consolidated
		(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	122,134	$	22,219	$	—		$	144,353
Accounts receivable, net		—		1,377,342		411,370		—			1,788,712
Intercompany receivable		—		400,526		—		(400,526)	(a)		—
Inventories, net of LIFO reserve of $0, $604,444, $0, $0, and $604,444		—		1,871,941		—		—			1,871,941
Prepaid expenses and other current assets		—		172,448		6,684		—			179,132
Current assets held for sale		—		117,581		—		—			117,581
Total current assets		—		4,061,972		440,273		(400,526)			4,101,719
Property, plant and equipment, net		—		1,308,514		—		—			1,308,514
Goodwill		—		1,108,136		—		—			1,108,136
Other intangibles, net		—		399,678		49,028		—			448,706
Deferred tax assets		—		419,122		(10,038)		—			409,084
Investment in subsidiaries		8,294,315		55,109		—		(8,349,424)	(b)		—
Intercompany receivable		—		3,639,035		—		(3,639,035)	(a)		—
Other assets		—		208,018		7,190		—			215,208
Total assets	$	8,294,315	$	11,199,584	$	486,453	$	(12,388,985)		$	7,591,367
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and lease financing obligations	$	—	$	16,111	$	—	$	—		$	16,111
Accounts payable		—		1,612,181		6,404		—			1,618,585
Intercompany payable		—		—		400,526		(400,526)	(a)		—
Accrued salaries, wages and other current liabilities		14,005		778,020		16,414		—			808,439
Total current liabilities		14,005		2,406,312		423,344		(400,526)			2,443,135
Long-term debt, less current maturities		3,454,585		—		—		—			3,454,585
Lease financing obligations, less current maturities		—		24,064		—		—			24,064
Intercompany payable		3,639,035		—		—		(3,639,035)	(a)		—
Other noncurrent liabilities		—		474,893		8,000		—			482,893
Total liabilities		7,107,625		2,905,269		431,344		(4,039,561)			6,404,677
Commitments and contingencies		—		—		—		—			—
Total stockholders’ equity		1,186,690		8,294,315		55,109		(8,349,424)	(b)		1,186,690
Total liabilities and stockholders’ equity	$	8,294,315	$	11,199,584	$	486,453	$	(12,388,985)		$	7,591,367

(a)	Elimination of intercompany accounts receivable and accounts payable amounts.

(b)	Elimination of investments in consolidated subsidiaries.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)


	Rite Aid Corporation
	Condensed Consolidating Statement of Operations
	Thirteen Week Period Ended August 31, 2019
	(unaudited)
	Rite Aid
	Corporation				Non-
	(Parent		Subsidiary		Guarantor
	Company Only)		Guarantors		Subsidiaries		Eliminations			Consolidated
		(in thousands)
Revenues	$	—	$	5,268,112	$	103,167	$	(5,015)	(a)	$	5,366,264
Costs and expenses:
Cost of revenues		—		4,131,064		95,679		(4,918)	(a)		4,221,825
Selling, general and administrative expenses		—		1,129,058		6,569		(97)	(a)		1,135,530
Lease termination and impairment charges		—		1,471		—		—			1,471
Interest expense		56,863		3,404		(165)		—			60,102
Gain on sale of assets, net		—		(1,587)		—		—			(1,587)
Equity in earnings of subsidiaries, net of tax		22,416		(1,084)		—		(21,332)	(b)		—
		79,279		5,262,326		102,083		(26,347)			5,417,341
(Loss) income from continuing operations before income taxes		(79,279)		5,786		1,084		21,332			(51,077)
Income tax expense		—		27,628		—		—			27,628
Net (loss) income from continuing operations	$	(79,279)	$	(21,842)	$	1,084	$	21,332		$	(78,705)
Net loss from discontinued operations		—		(574)		—		—			(574)
Net (loss) income		(79,279)		(22,416)		1,084		21,332	(b)		(79,279)
Total other comprehensive income (loss)		398		415		—		(415)			398
Comprehensive (loss) income	$	(78,881)	$	(22,001)	$	1,084	$	20,917		$	(78,881)

(a)	Elimination of intercompany revenues and expenses.

(b)	Elimination of equity in earnings of subsidiaries.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)


	Rite Aid Corporation
	Condensed Consolidating Statement of Operations
	Thirteen Week Period Ended September 1, 2018
	(unaudited)
	Rite Aid
	Corporation				Non-
	(Parent		Subsidiary		Guarantor
	Company Only)		Guarantors		Subsidiaries		Eliminations			Consolidated
	(in thousands)
Revenues	$	—	$	5,347,051	$	101,900	$	(27,589)	(a)	$	5,421,362
Costs and expenses:
Cost of revenues		—		4,193,129		94,470		(27,388)	(a)		4,260,211
Selling, general and administrative expenses		—		1,147,491		6,701		(201)	(a)		1,153,991
Lease termination and impairment charges		—		39,609		—		—			39,609
Goodwill and intangible asset impairment charges		—		375,190		—		—			375,190
Interest expense		52,365		3,811		57		—			56,233
Gain on sale of assets, net		—		(4,965)		—		—			(4,965)
Equity in earnings of subsidiaries, net of tax		288,700		(852)		—		(287,848)	(b)		—
		341,065		5,753,413		101,228		(315,437)			5,880,269
(Loss) income from continuing operations before income taxes		(341,065)		(406,362)		672		287,848			(458,907)
Income tax benefit		—		(106,379)		(180)		—			(106,559)
Net (loss) income from continuing operations	$	(341,065)	$	(299,983)	$	852	$	287,848		$	(352,348)
Net (loss) income from discontinued operations		(18,075)		11,283		—		—			(6,792)
Net (loss) income		(359,140)		(288,700)		852		287,848	(b)		(359,140)
Total other comprehensive income (loss)		364		364		—		(364)			364
Comprehensive (loss) income	$	(358,776)	$	(288,336)	$	852	$	287,484		$	(358,776)

(a)	Elimination of intercompany revenues and expenses.

(b)	Elimination of equity in earnings of subsidiaries.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)


	Rite Aid Corporation
	Condensed Consolidating Statement of Operations
	Twenty-Six Week Period Ended August 31, 2019
	(unaudited)
	Rite Aid
	Corporation				Non-
	(Parent		Subsidiary		Guarantor
	Company Only)		Guarantors		Subsidiaries		Eliminations			Consolidated
	(in thousands)
Revenues	$	—	$	10,549,436	$	207,588	$	(18,171)	(a)	$	10,738,853
Costs and expenses:
Cost of revenues		—		8,293,206		192,462		(17,977)	(a)		8,467,691
Selling, general and administrative expenses		—		2,285,284		13,092		(194)	(a)		2,298,182
Lease termination and impairment expenses		—		1,949		—		—			1,949
Interest expense		111,818		6,899		(345)		—			118,372
Gain on sale of assets, net		—		(4,299)		—		—			(4,299)
Equity in earnings of subsidiaries, net of tax		67,120		(2,379)		—		(64,741)	(b)		—
		178,938		10,580,660		205,209		(82,912)			10,881,895
(Loss) income before income taxes		(178,938)		(31,224)		2,379		64,741			(143,042)
Income tax expense		—		35,002		—		—			35,002
Net (loss) income from continuing operations		(178,938)		(66,226)		2,379		64,741			(178,044)
Net loss from discontinued operations		—		(894)		—		—			(894)
Net (loss) income	$	(178,938)	$	(67,120)	$	2,379	$	64,741	(b)	$	(178,938)
Total other comprehensive income (loss)		157		157		—		(157)			157
Comprehensive (loss) income	$	(178,781)	$	(66,963)	$	2,379	$	64,584		$	(178,781)

(a)	Elimination of intercompany revenues and expenses.

(b)	Elimination of equity in earnings of subsidiaries.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)


	Rite Aid Corporation
	Condensed Consolidating Statement of Operations
	Twenty-Six Week Period Ended September 1, 2018
	(unaudited)
	Rite Aid
	Corporation				Non-
	(Parent		Subsidiary		Guarantor
	Company Only)		Guarantors		Subsidiaries		Eliminations			Consolidated
	(in thousands)
Revenues	$	—	$	10,668,075	$	197,485	$	(55,708)	(a)	$	10,809,852
Costs and expenses:
Cost of revenues		—		8,351,757		183,502		(55,307)	(a)		8,479,952
Selling, general and administrative expenses		—		2,292,321		14,698		(401)	(a)		2,306,618
Lease termination and impairment expenses		—		49,468		—		—			49,468
Goodwill and intangible asset impairment charges		—		375,190		—					375,190
Interest expense		112,304		6,756		(35)		—			119,025
Loss on debt retirements, net		—		554		—					554
Gain on sale of assets, net		—		(10,824)		—		—			(10,824)
Equity in earnings of subsidiaries, net of tax		9,730		633		—		(10,363)	(b)		—
		122,034		11,065,855		198,165		(66,071)			11,319,983
(Loss) income before income taxes		(122,034)		(397,780)		(680)		10,363			(510,131)
Income tax benefit		—		(116,009)		(47)		—			(116,056)
Net (loss) income from continuing operations		(122,034)		(281,771)		(633)		10,363			(394,075)
Net (loss) income from discontinued operations		(22,690)		272,041		—		—			249,351
Net (loss) income	$	(144,724)	$	(9,730)	$	(633)	$	10,363	(b)	$	(144,724)
Total other comprehensive income (loss)		728		728		—		(728)			728
Comprehensive (loss) income	$	(143,996)	$	(9,002)	$	(633)	$	9,635		$	(143,996)

(a)	Elimination of intercompany revenues and expenses.

(b)	Elimination of equity in earnings of subsidiaries.

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)


	Rite Aid Corporation
	Condensed Consolidating Statement of Cash Flows
	Twenty-Six Week Period Ended August 31, 2019
	(unaudited)
	Rite Aid
	Corporation				Non-
	(Parent		Subsidiary		Guarantor
	Company Only)		Guarantors		Subsidiaries		Eliminations		Consolidated
	(in thousands)
Operating activities:
Net cash used in operating activities	$	(106,302)	$	(221,377)	$	(2,359)	$	—	$	(330,038)
Investing activities:
Payments for property, plant and equipment		—		(84,060)		—		—		(84,060)
Intangible assets acquired		—		(15,708)		—		—		(15,708)
Intercompany activity		—		271,864		—		(271,864)		—
Proceeds from dispositions of assets and investments		—		4,423		—		—		4,423
Net cash provided by (used in) investing activities		—		176,519		—		(271,864)		(95,345)
Financing activities:
Net proceeds from revolver		375,000		—		—		—		375,000
Principal payments on long-term debt		3,481		(6,932)		—		—		(3,451)
Change in zero balance cash accounts		—		54,712		—		—		54,712
Payments for taxes related to net share settlement of equity awards		—		(986)		—		—		(986)
Deferred financing costs paid		(315)		—		—		—		(315)
Intercompany activity		(271,864)		—		—		271,864		—
Net cash provided by financing activities		106,302		46,794		—		271,864		424,960
Cash flows of discontinued operations:
Operating activities of discontinued operations		—		(2,272)		—		—		(2,272)
Investing activities of discontinued operations		—		523		—		—		523
Financing activities of discontinued operations		—		—		—		—		—
Net cash used in discontinued operations		—		(1,749)		—		—		(1,749)
Increase (decrease) in cash and cash equivalents		—		187		(2,359)		—		(2,172)
Cash and cash equivalents, beginning of period		—		122,134		22,219		—		144,353
Cash and cash equivalents, end of period	$	—	$	122,321	$	19,860	$	—	$	142,181

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)


	Rite Aid Corporation
	Condensed Consolidating Statement of Cash Flows
	Twenty-Six Week Period Ended September 1, 2018
	(unaudited)
	Rite Aid
	Corporation
	(Parent				Non-
	Company		Subsidiary		Guarantor
	Only)		Guarantors		Subsidiaries		Eliminations		Consolidated
	(in thousands)
Operating activities:
Net cash (used in) provided by operating activities	$	(158,413)	$	(165,518)	$	23,029	$	—	$	(300,902)
Investing activities:
Payments for property, plant and equipment		—		(92,565)		—		—		(92,565)
Intangible assets acquired		—		(20,519)		—		—		(20,519)
Intercompany activity		—		(597,415)		—		597,415		—
Proceeds from dispositions of assets and investments		—		15,729		—		—		15,729
Proceeds from sale-leaseback transactions		—		2,587		—		—		2,587
Net cash (used in) provided by investing activities		—		(692,183)		—		597,415		(94,768)
Financing activities:
Net proceeds from revolver		1,335,000		—		—		—		1,335,000
Principal payments on long-term debt		(426,307)		(7,439)		—		—		(433,746)
Change in zero balance cash accounts		—		(17,101)		—		—		(17,101)
Net proceeds from issuance of common stock		1,302		—		—		—		1,302
Payments for taxes related to net share settlement of equity awards		—		(2,244)		—		—		(2,244)
Financing fees paid for early redemption		—		(13)		—		—		(13)
Intercompany activity		597,415		—		—		(597,415)		—
Net cash provided by (used in) financing activities		1,507,410		(26,797)		—		(597,415)		883,198
Cash flows of discontinued operations:
Operating activities of discontinued operations		(4,615)		(57,388)		—		—		(62,003)
Investing activities of discontinued operations		—		603,402		—		—		603,402
Financing activities of discontinued operations		(1,344,382)		589		—		—		(1,343,793)
Net cash (used in) provided by discontinued operations		(1,348,997)		546,603		—		—		(802,394)
(Decrease) increase in cash and cash equivalents		—		(337,895)		23,029		—		(314,866)
Cash and cash equivalents, beginning of period		—		441,244		6,090		—		447,334
Cash and cash equivalents, end of period	$	—	$	103,349	$	29,119	$	—	$	132,468

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Thirteen and Twenty-Six Week Periods Ended August 31, 2019 and September 1, 2018

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

(unaudited)

18.Supplementary Cash Flow Data


	Twenty-Six Week Period Ended
	August 31, 2019		September 1, 2018
Cash paid for interest(a)	$	110,401	$	165,995
Cash payments for income taxes, net(a)	$	4,059	$	19,314
Change in operating lease right-of-use assets	$	82,125	$	—
Change in operating lease liabilities	$	(47,143)	$	—
Equipment financed under capital leases	$	2,077	$	2,275
Gross borrowings from revolver(a)	$	1,524,000	$	2,237,000
Gross repayments to revolver(a)	$	1,149,000	$	902,000

(a) ~~Elimination~~— Amounts are presented on a total company basis.

Significant components of ~~intercompany accounts receivable~~cash used in Other Liabilities of $8,104 for the twenty-six week period ended August 31, 2019 includes cash used resulting from a decrease in compensation and ~~accounts payable amounts.~~

~~(b) Elimination~~benefit related accruals of ~~investments~~$44,506 partially offset by an increase in ~~consolidated subsidiaries.~~

Rite Aid Corporation

Condensed Consolidating Balance Sheet

March 4, 2017

(unaudited)

Rite Aid
Corporation (Parent
Company Only)

Subsidiary
Guarantors

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(in thousands)

ASSETS

Current assets:

Cash and cash equivalents

$
—

$
213,104

$
32,306

$
—

$
245,410

Accounts receivable, net

—

1,506,288

264,838

—

1,771,126

Intercompany receivable

215,862

—

(215,862
)(a)
—

Inventories, net of LIFO reserve of $0, $607,326, $0, $0, and $607,326

—

1,789,541

—

—

1,789,541

Prepaid expenses and other current assets

—

203,033

8,508

—

211,541

Current assets held for sale

—

1,047,670

—

—

1,047,670

Total current assets

—

4,975,498

305,652

(215,862
)
5,065,288

Property, plant and equipment, net

—

1,526,462

—

—

1,526,462

Goodwill

—

1,682,847

—

—

1,682,847

Other intangibles, net

—

661,778

53,628

—

715,406

Deferred tax assets

—

1,505,564

—

—

1,505,564

Investment in subsidiaries

15,275,488

50,004

—

(15,325,492
)(b)
—

Intercompany receivable

—

7,331,675

—

(7,331,675
)(a)
—

Other assets

—

215,917

—

—

215,917

Noncurrent assets held for sale

—

882,268

—

—

882,268

Total assets

$
15,275,488

$
18,832,013

$
359,280

$
(22,873,029
)
$
11,593,752

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current maturities of long-term debt and lease financing obligations

$
90

$
17,619

$
—

$
—

$
17,709

Accounts payable

—

1,609,025

4,884

—

1,613,909

Intercompany payable

—

—

215,862

(215,862
)(a)
—

Accrued salaries, wages and other current liabilities

66,365

1,207,240

67,342

—

1,340,947

Current liabilities held for sales

—

32,683

—

—

32,683

Total current liabilities

66,455

2,866,567

288,088

(215,862
)
3,005,248

Long-term debt, less current maturities

3,235,888

—

—

—

3,235,888

Lease financing obligations, less current maturities

—

37,204

—

—

37,204

Intercompany payable

7,331,675

—

—

(7,331,675
)(a)
—

Other noncurrent liabilities

—

622,762

21,188

—

643,950

Noncurrent liabilities held for sale

4,027,400

29,992

4,057,392

Total liabilities

14,661,418

3,556,525

309,276

(7,547,537
)
10,979,682

Commitments and contingencies

—

—

—

—

—

Total stockholders’ equity

614,070

15,275,488

50,004

(15,325,492
)(b)
614,070

Total liabilities and stockholders’ equity

$
15,275,488

$
18,832,013

$
359,280

$
(22,873,029
)
$
11,593,752

~~(a) Elimination of intercompany accounts receivable~~legal, professional and ~~accounts payable amounts.~~

~~(b) Elimination of investments in consolidated subsidiaries.~~

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirteen Weeks Ended December 2, 2017
(unaudited)

Rite Aid
Corporation
(Parent
Company Only)

Subsidiary
Guarantors

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(in thousands)

Revenues

$
—

$
5,331,788

$
47,064

$
(25,682
)(a)
$
5,353,170

Costs and expenses:

Cost of revenues

—

4,146,272

45,063

(24,888
)(a)
4,166,447

Selling, general and administrative expenses

—

1,162,416

4,892

(794
)(a)
1,166,514

Lease termination and impairment expenses

—

3,939

—

—

3,939

Interest expense

45,586

5,040

(318
)
—

50,308

Gain on sale of assets, net

—

205

—

—

205

Equity in earnings of subsidiaries, net of tax

(186,073
)
1,793

—

184,280
(b)
—

(140,487
)
5,319,665

49,637

158,598

5,387,413

Earnings from continuing operations before income taxes

140,487

12,123

(2,573
)
(184,280
)
(34,243
)
Income tax expense (benefit)

—

(15,281
)
(780
)
—

(16,061
)
Net income (loss) from continuing operations

140,487

27,404

(1,793
)
(184,280
)
(18,182
)
Net income (loss) from discontinued operations

(59,456
)
158,669

—

—

99,213

Net income (loss)

$
81,031

$
186,073

$
(1,793
)
$
(184,280
)(b)
$
81,031

Total other comprehensive income (loss)

514

514

—

(514
)
514

Comprehensive income (loss)

$
81,545

$
186,587

$
(1,793
)
$
(184,794
)
$
81,545

~~(a)~~ ~~Elimination of intercompany revenues~~occupancy and ~~expenses.~~

~~(b)~~ ~~Elimination of equity in earnings of subsidiaries.~~

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirteen Weeks Ended November 26, 2016
(unaudited)

Rite Aid
Corporation
(Parent
Company Only)

Subsidiary
Guarantors

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(in thousands)

Revenues

$
—

$
5,641,856

$
57,044

$
(29,789
)(a)
$
5,669,111

Costs and expenses:

Cost of revenues

—

4,395,976

57,270

(28,987
)(a)
4,424,259

Selling, general and administrative expenses

—

1,167,983

1,465

(802
)(a)
1,168,646

Lease termination and impairment expenses

—

7,199

—

—

7,199

Interest expense

45,959

4,322

23

—

50,304

Gain on sale of assets, net

—

(225
)
—

—

(225
)
Equity in earnings of subsidiaries, net of tax

(116,974
)
3,059

—

113,915
(b)
—

(71,015
)
5,578,314

58,758

84,126

5,650,183

Earnings from continuing operations before income taxes

71,015

63,542

(1,714
)
(113,915
)
18,928

Income tax expense (benefit)

—

(6,027
)
1,345

—

(4,682
)
Net income (loss) from continuing operations

71,015

69,569

(3,059
)
(113,915
)
23,610

Net income (loss) from discontinued operations

(56,005
)
47,405

—

—

(8,600
)
Net income (loss)

$
15,010

$
116,974

$
(3,059
)
$
(113,915
)(b)
$
15,010

Total other comprehensive income (loss)

681

681

—

(681
)
681

Comprehensive income (loss)

$
15,691

$
117,655

$
(3,059
)
$
(114,596
)
$
15,691

~~(a)~~ ~~Elimination of intercompany revenues and expenses.~~

~~(b)~~ ~~Elimination of equity in earnings of subsidiaries.~~

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirty-Nine Weeks Ended December 2, 2017
(unaudited)

Rite Aid
Corporation
(Parent
Company Only)

Subsidiary
Guarantors

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(in thousands)

Revenues

$
—

$
16,070,256

$
128,391

$
(63,943
)(a)
$
16,134,704

Costs and expenses:

Cost of revenues

—

12,565,600

122,926

(64,161
)(a)
12,624,365

Selling, general and administrative expenses

—

3,459,511

9,569

218
(a)
3,469,298

Lease termination and impairment expenses

—

11,090

—

—

11,090

Interest expense

137,562

14,896

(293
)
—

152,165

Walgreens Boots Alliance, Inc. termination fee

(325,000
)
—

—

—

(325,000
)
Gain on sale of assets, net

—

(20,623
)
—

—

(20,623
)
Equity in earnings of subsidiaries, net of tax

(167,757
)
2,649

—

165,108
(b)
—

(355,195
)
16,033,123

132,202

101,165

15,911,295

Earnings from continuing operations before income taxes

355,195

37,133

(3,811
)
(165,108
)
223,409

Income tax expense (benefit)

—

90,430

(1,162
)
—

89,268

Net income (loss) from continuing operations

355,195

(53,297
)
(2,649
)
(165,108
)
134,141

Net income (loss) from discontinued operations

(178,797
)
221,054

—

—

42,257

Net income (loss)

$
176,398

$
167,757

$
(2,649
)
$
(165,108
)(b)
$
176,398

Total other comprehensive income (loss)

1,543

1,543

—

(1,543
)
1,543

Comprehensive income (loss)

$
177,941

$
169,300

$
(2,649
)
$
(166,651
)
$
177,941

~~(a)~~ ~~Elimination of intercompany revenues and expenses.~~

~~(b)~~ ~~Elimination of equity in earnings of subsidiaries.~~

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirty-Nine Weeks Ended November 26, 2016
(unaudited)

Rite Aid
Corporation
(Parent
Company Only)

Subsidiary
Guarantors

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(in thousands)

Revenues

$
—

$
16,946,453

$
176,153

$
(98,452
)(a)
$
17,024,154

Costs and expenses:

Cost of revenues

—

13,233,024

170,883

(95,402
)(a)
13,308,505

Selling, general and administrative expenses

—

3,519,465

7,435

(3,050
)(a)
3,523,850

Lease termination and impairment expenses

—

20,203

—

—

20,203

Interest expense

133,208

13,436

30

—

146,674

Gain (loss) on sale of assets, net

—

(388
)
—

—

(388
)
Equity in earnings of subsidiaries, net of tax

(328,539
)
3,704

—

324,835
(b)
—

(195,331
)
16,789,444

178,348

226,383

16,998,844

Earnings from continuing operations before income taxes

195,331

157,009

(2,195
)
(324,835
)
25,310

Income tax expense (benefit)

—

(5,333
)
1,509

—

(3,824
)
Net income (loss) from continuing operations

195,331

162,342

(3,704
)
(324,835
)
29,134

Net income (loss) from discontinued operations

(170,136
)
166,197

—

—

(3,939
)
Net income (loss)

$
25,195

$
328,539

$
(3,704
)
$
(324,835
)(b)
$
25,195

Total other comprehensive income (loss)

2,043

2,043

—

(2,043
)
2,043

Comprehensive income (loss)

$
27,238

$
330,582

$
(3,704
)
$
(326,878
)
$
27,238

~~(a)~~ ~~Elimination of intercompany revenues and expenses.~~

~~(b)~~ ~~Elimination of equity in earnings of subsidiaries.~~

Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended December 2, 2017
(unaudited)

Rite Aid
Corporation
(Parent
Company
Only)

Subsidiary
Guarantors

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(in thousands)

Operating activities:

Net cash provided by operating activities

$
229,578

$
220,721

$
(25,849
)
$
—

$
424,450

Investing activities:

Payments for property, plant and equipment

—

(140,816
)
—

—

(140,816
)
Intangible assets acquired

—

(20,201
)
—

—

(20,201
)
Intercompany activity

—

(449,803
)
—

449,803

—

Proceeds from dispositions of assets and investments

—

19,254

—

—

19,254

Proceeds from insured loss

—

3,627

—

—

3,627

Net cash (used in) provided by investing activities

—

(587,939
)
—

449,803

(138,136
)
Financing activities:

Net payments to revolver

(264,080
)
—

—

—

(264,080
)
Principal payments on long-term debt

—

(7,292
)
—

—

(7,292
)
Change in zero balance cash accounts

—

27,594

—

—

27,594

Net proceeds from issuance of common stock

4,416

—

—

—

4,416

Payments for taxes related to net share settlement of equity awards

—

(4,103
)
—

—

(4,103
)
Intercompany activity

449,803

—

—

(449,803
)
—

Net cash provided by (used in) financing activities

190,139

16,199

—

(449,803
)
(243,465
)
Cash flows of discontinued operations:

Operating activities of discontinued operations

(178,797
)
116,503

—

—

(62,294
)
Investing activities of discontinued operations

—

189,175

—

—

189,175

Financing activities of discontinued operations

(240,920
)
(4,420
)
—

—

(245,340
)
Net cash provided by (used in) discontinued operations

(419,717
)
301,258

—

—

(118,459
)
(Decrease) increase in cash and cash equivalents

—

(49,761
)
(25,849
)
—

(75,610
)
Cash and cash equivalents, beginning of period

—

213,104

32,306

—

245,410

Cash and cash equivalents, end of period

$
—

$
163,343

$
6,457

$
—

$
169,800

Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended November 26, 2016
(unaudited)

Rite Aid
Corporation
(Parent
Company
Only)

Subsidiary
Guarantors

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(in thousands)

Operating activities:

Net cash (used in) provided by operating activities

$
(92,312
)
$
259,647

$
5,913

$
—

$
173,248

Investing activities:

Payments for property, plant and equipment

—

(197,723
)
—

—

(197,723
)
Intangible assets acquired

—

(35,986
)
—

—

(35,986
)
Intercompany activity

—

21,964

—

(21,964
)
—

Proceeds from dispositions of assets and investments

—

10,217

—

—

10,217

Net cash used in investing activities

—

(201,528
)
—

(21,964
)
(223,492
)
Financing activities:

Net proceeds from revolver

280,000

—

—

—

280,000

Principal payments on long-term debt

—

(12,728
)
—

—

(12,728
)
Change in zero balance cash accounts

—

30,685

—

—

30,685

Net proceeds from issuance of common stock

4,412

—

—

—

4,412

Excess tax benefit on stock options and restricted stock

—

3,809

—

—

3,809

Payments for taxes related to net share settlement of equity awards

—

(6,254
)
—

—

(6,254
)
Intercompany activity

(21,964
)
—

—

21,964

—

Net cash provided by financing activities

262,448

15,512

—

21,964

299,924

Cash flows of discontinued operations:

Operating activities of discontinued operations

(170,136
)
168,595

—

—

(1,541
)
Investing activities of discontinued operations

—

(148,884
)
—

—

(148,884
)
Financing activities of discontinued operations

—

(3,698
)
—

—

(3,698
)
Net cash provided by (used in) discontinued operations

(170,136
)
16,013

—

—

(154,123
)
Increase in cash and cash equivalents

—

89,644

5,913

—

95,557

Cash and cash equivalents, beginning of period

—

90,569

33,902

—

124,471

Cash and cash equivalents, end of period

$
—

$
180,213

$
39,815

$
—

$
220,028

~~17. Subsequent Event~~

On January 3, 2018, the Company entered into a Tax Benefits Preservation Plan (the “Plan”) with Broadridge Corporate Issuer Solutions, as rights agent, and its Board of Directors declared a dividend distribution of one right (a “Right”) for each outstanding share of common stock, par value $1.00 per share, to stockholders of record at the close of business on January 16, 2018. Each Right is governed by the terms of the Plan and entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share of Series J Junior Participating Preferred Stock, par value $1.00 per share, at a purchase price of $8.00 per unit, subject to adjustment. The purpose of the Plan is to preserve our ability to use the Company’s net operating loss carryforwards and other tax attributes (collectively, “Tax Benefits”) which would be substantially limited if the Company experienced an “ownership change” as defined under Section 382wellness deferral related accruals of ~~the Internal Revenue Code. In general, an ownership change would occur if Company shareholders who are treated as owning 5 percent or more~~$30,099.

Table of its outstanding shares for purposes of Section 382 (“5-percent shareholders”) collectively increase their aggregate ownership in the Company’s overall shares outstanding by more than 50 percentage points. Whether this change has occurred would be measured by comparing each 5-percent shareholder’s current ownership as of the measurement date to such shareholders’ lowest ownership percentage during the three year period preceding the measurement date. The adoption of the Plan is intended to ensure that the Company will be able to utilize Tax Benefits in connection with the Sale.Contents

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations

Overview

We are a pharmacy retail healthcare company, providing our customers and communities with a high level of care and service through various programs we offer through our two reportable business segments, our Retail Pharmacy segment and our Pharmacy Services segment. We accomplish our goal of delivering comprehensive care to our customers through our retail drugstores, RediClinic walk-in retail health clinics and our transparent and traditional PBMs, EnvisionRxOptions and ~~MedTrak PBMs.~~MedTrak. We also offer fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies. Additionally through EIC, EnvisionRxOptions also serves one of the fastest-growing demographics in healthcare: seniors enrolled in Medicare Part D. When combined with our retail platform, this comprehensive suite of services allows us to provide value and choice to customers, patients and payors and allows us to ~~succeed~~compete in ~~today’s~~today's evolving healthcare marketplace.

Retail Pharmacy Segment

Our Retail Pharmacy segment sells brand and generic prescription drugs, as well as an assortment of front-end products including health and beauty aids, personal care products, seasonal merchandise, and a large private brand product line. Our Retail Pharmacy segment generates the majority of its revenue through the sale of prescription drugs and front-end products at our ~~2,569~~2,464 retail stores. We replenish our retail stores through a combination of direct store delivery of pharmaceutical products facilitated

through our ~~pharmacy~~pharmaceutical Purchasing and Delivery Agreement with McKesson, ~~Corporation,~~ and the majority of our ~~front end~~front-end products through our network of ~~ten~~ distribution centers. In addition, the Retail Pharmacy segment includes 7965 RediClinic walk-in retail clinics, of which, ~~43 are~~29 were located within Rite Aid retail stores in the Philadelphia ~~Seattle~~ and New Jersey markets.

Pharmacy Services Segment

Our Pharmacy Services segment ~~which was formed on June 24, 2015 through our acquisition of EnvisionRxOptions,~~ provides a full range of pharmacy benefit ~~services.~~services through EnvisionRxOptions. The Pharmacy Services segment provides both transparent and traditional ~~pharmacy benefit management (“PBM”)~~PBM options through its EnvisionRxOptions and MedTrak PBMs, respectively. EnvisionRxOptions 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 EIC’s EnvisionRx Plus product offering. The segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, other sponsors of health benefit plans and individuals throughout the United States.

Restructuring

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

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

As a result of the restructuring that we announced in March, we expect to achieve annual cost savings of approximately $55.0 million, of which approximately $42.0 million is expected to be realized during the fiscal year ended February 29, 2020. These savings offset the reduction in TSA fees that we experienced in Fiscal 2020. We have

Table of Contents

also incurred restructuring costs to support our Path to the Future initiatives, which we expect to provide future growth and expense efficiency benefits. We anticipate our total fiscal 2020 restructuring-related costs to be approximately $90.0 million and expect to realize the full benefit of this investment over the next two years.

Asset Sale to WBA

~~Termination of Merger Agreement with WBA~~

~~Entry Into Amended and Restated Asset Purchase Agreement with WBA~~

On September 18, 2017, we entered into the Amended and Restated Asset Purchase Agreement with WBA and ~~the~~ Buyer, which amended and restated in its entirety the previously disclosed Original ~~APA.~~Asset Purchase Agreement. Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, ~~the~~ Buyer ~~will~~agreed to purchase from usRite Aid 1,932 ~~stores,~~Acquired Stores, three ~~(3)~~ distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4.375 billion, on a cash-free, debt-free basis, ~~plus~~in the ~~Buyer’s assumption of certain liabilities of Rite Aid and its affiliates. On~~Sale.

We announced on September 19, 2017 ~~we announced~~ that the waiting period under the HSR Act expired with respect to the Sale. ~~On November 27, 2017, we announced that we had~~We completed the ~~pilot closing and first subsequent closings under the Amended and Restated Asset Purchase Agreement, resulting~~store transfer process in March of 2018, which resulted in the transfer of ~~97 Rite Aid~~all 1,932 stores and related assets to WBA and received cash proceeds of $4.157 billion. On September 13, 2018, we completed the ~~Buyer. The majority~~sale of ~~the closing conditions to the Sale have been satisfied, and the subsequent transfers~~one of our ~~stores~~distribution centers and related assets ~~remain~~to WBA for proceeds of $61.2 million. The transfer of the two remaining distribution centers and related assets remains subject to minimal customary closing conditions applicable only to the ~~stores~~distribution centers being transferred at such ~~subsequent closing,~~distribution center closings, as specified in the Amended and Restated Asset Purchase Agreement. We will receive additional proceeds of $157.0 million upon completion of the sale of the remaining distribution centers and related assets.

~~We, WBA~~The parties to the Amended and ~~the Buyer~~Restated Asset Purchase Agreement have each made customary representations and warranties. We have agreed to various covenants and agreements, including, among others, our agreement to conduct our business at the ~~Acquired Stores~~distribution centers being sold to WBA in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the ~~subsequent closings of the Sale.~~distribution center closing. We have also agreed to provide transition services to ~~the~~ 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 we enter into an agreement to sell all of the remainder of Rite Aid or over 50% of our stock or assets to a third party prior to the end of the transition period under the TSA, any potential acquirer would be obligated to assume our remaining obligations under the TSA. Under the terms of the ~~Amended and Restated Asset Purchase Agreement,~~TSA, we ~~have the option to purchase pharmaceutical drugs through an affiliate~~provide various services on behalf of WBA, ~~under terms,~~ including ~~cost, that are substantially equivalent~~but not limited to ~~Walgreen’s for a period~~the purchase and distribution of ~~ten (10) years, subject to certain terms~~inventory and ~~conditions.~~

~~Divestiture~~virtually all selling, general and administrative activities. The term of the ~~Assets~~TSA has been extended to ~~be Sold~~

On October 17, ~~2017,~~2020. In connection with these services, we ~~began~~purchase the ~~process of~~related inventory and incur cash payments for the selling, ~~the Assets to be Sold~~general and administrative activities, which, we bill on a cash neutral basis to WBA in accordance with ~~the~~ terms ~~and provisions~~ as ~~contained~~outlined in the ~~Amended and Restated Asset Purchase Agreement. During~~TSA. Total billings for these items during the thirteen ~~weeks~~and twenty-six week periods ended ~~December 2, 2017, we sold 97 stores~~August 31, 2019 were $0.9 billion and ~~related assets~~$2.1 billion, respectively, of which $196.0 million is included in Accounts receivable, net. Total billings for these items during the thirteen and twenty-six week periods ended September 1, 2018 were $1.8 billion and $3.9 billion, respectively, of which $385.9 million is included in Accounts receivable, net. We recorded WBA TSA fees of $11.3 million and $25.5 million during the thirteen and twenty-six week periods ended August 31, 2019, respectively, which are reflected as a reduction to selling, general and administrative expenses. We recorded WBA ~~in exchange for proceeds~~TSA fees of ~~$240.9~~$23.2 million and $46.9 million during the thirteen and twenty-six week periods ended September 1, 2018, respectively, which ~~were used~~are reflected as a reduction to ~~repay outstanding debt,~~selling, general and recognized a pre-tax gain of $157.0 million. During December 2017, we sold an additional 260 stores and related assets to WBA for proceeds of $474.0 million. We estimate that the total pre-tax gain on the Sale will be approximately $2.5 billion. We expect to complete the majority of the Sale by the end of our first quarter of fiscal 2019.administrative expenses.

Based on its magnitude and because we ~~are exiting~~exited certain markets, the Sale ~~represents~~represented a significant strategic shift that has a material effect on our operations and financial results. Accordingly, we have applied discontinued operations treatment for the Sale as required by GAAP.

Overview of Financial Results from Continuing Operations

Our net loss from continuing operations for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 was ~~$18.2~~$78.7 million or ~~$0.02~~$1.48 per basic and diluted share compared to a net ~~income~~loss of ~~$23.6~~$352.3 million or ~~$0.02~~$6.67 per basic and diluted share for the thirteen week period ended ~~November 26, 2016.~~September 1, 2018. Our net ~~income~~loss from continuing operations for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 was ~~$134.1~~$178.0 million or ~~$0.13~~$3.35 per basic and diluted share compared to a net ~~income~~loss of ~~$29.1~~$394.1 million or ~~$0.03~~$7.47 per basic and diluted share for the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016.~~September 1, 2018. The ~~decline~~improvement in our operating results for the thirteen and twenty-six week ~~period~~periods ended ~~December 2, 2017 was due a decrease in our Adjusted EBITDA, partially offset by a higher income tax benefit. The increase in the thirty-nine week operating results~~August 31, 2019 was due primarily to goodwill and intangible asset impairment charges recognized in the ~~receipt~~prior year of ~~the $325.0~~$375.2 million, ~~Walgreens Boots Alliance merger~~lower depreciation and amortization

Table of Contents

and lease termination ~~fee for the termination of the merger agreement, effective June 28, 2017,~~and impairment charges, partially offset by restructuring-related costs incurred in connection with our Path to the Future initiative in the current year, a decrease in Adjusted EBITDA and higher income tax expense.

Our Adjusted EBITDA from continuing operations for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 was ~~$129.2 million or 2.4 percent of revenues and $402.5~~$134.2 million or 2.5 percent of revenues and $244.5 million or 2.3 percent of revenues, respectively, compared ~~$191.3~~to $148.6 million or ~~3.4~~2.7 percent of revenues and ~~$572.5~~$286.6 million or ~~3.4~~2.7 percent of revenues for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~November 26, 2016,~~September 1, 2018, respectively. The ~~decline~~decrease in Adjusted EBITDA for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 was due primarily to a decrease of ~~$50.0~~$10.9 million in the Retail Pharmacy segment. The decrease in the Retail Pharmacy segment Adjusted EBITDA was due primarily ~~driven by a decline in pharmacy reimbursement rates, which we were unable~~ to ~~fully offset with generic purchasing efficiencies,~~ lower ~~script counts and lower net favorable legal settlements of approximately $15.0 million. The decline in pharmacy~~front-end gross profit ~~was~~resulting primarily from lower front-end sales and a reduction in WBA TSA fee income due to fewer stores being serviced under the TSA. These items were partially offset by ~~a reduction of SG&A expenses of $8.6 million resulting from cost~~lower salaries and benefit expense related to our recent corporate restructuring and strong labor and expense control ~~initiatives in our Retail Pharmacy segment.~~at the stores. Adjusted EBITDA decreased by $3.4 million in the Pharmacy Services segment. Pharmacy Services segment ~~decreased~~Adjusted EBITDA benefited from improvements in pharmacy network performance, however these improvements were offset by ~~$12.1 million as a result of our election~~increases in SG&A to ~~participate~~support current year and future growth.

The decrease in ~~fewer Medicare Part D regions and a decline in commercial business.~~

~~The decline in our~~ Adjusted EBITDA for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 was due primarily to a decrease of ~~$164.6~~$31.1 million in the Retail Pharmacy segment. The decrease in the Retail Pharmacy segment Adjusted EBITDA was due primarily to a reduction in gross profit, partially offset by decreases in SG&A. The reduction in gross profit was due to reimbursement rate pressure and a reduction in front-end sales. Retail Pharmacy segment SG&A improvement was driven by ~~lower reimbursement rates~~strong labor and ~~a decrease~~expense control at the stores and labor savings and expense management relating to the recent corporate restructuring. Adjusted EBITDA decreased by $11.0 million in ~~prescription count.~~the Pharmacy Services segment. The decline in pharmacy reimbursement rates were partially offset by generic drug purchasing efficiencies and a reduction of SG&A expenses of $76.3 million resulting from expense reduction initiatives in our Retail Pharmacy segment. Adjusted EBITDA was also impacted by a decrease of $5.4 million ofthe Pharmacy Services segment Adjusted EBITDA was driven by ~~our election~~ margin compression in its commercial business and other operating investments to ~~participate in fewer Medicare Part D regions~~support current year and ~~a decline in commercial business.~~future growth. Please see the sections entitled “Segment Analysis” and “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.

Consolidated Results of Operations-Continuing Operations

Revenues and Other Operating Data

Thirteen Week Period Ended

Thirty-Nine Week Period Ended

December 2,
2017

November 26,
2016

December 2,
2017

November 26,
2016

(dollars in thousands except per share amounts)

Revenues(a)

$
5,353,170

$
5,669,111

$
16,134,704

$
17,024,154

Revenue (decline) growth

(5.6
)%
0.3
%
(5.2
)%
13.9
%
Net (loss) income from continuing operations

$
(18,182
)
$
23,610

$
134,141

$
29,134

Net (loss) income from continuing operations per diluted share

$
(0.02
)
$
0.02

$
0.13

$
0.03

Adjusted EBITDA from continuing operations(b)

$
129,249

$
191,334

$
402,490

$
572,480

Adjusted Net Income (Loss) from continuing operations(b)

$
1,619

$
26,755

$
(10,082
)
$
64,727

Adjusted Net Income (Loss) per Diluted Share — continuing operations(b)

$
0.00

$
0.03

$
(0.01
)
$
0.06


	Thirteen Week Period Ended						Twenty-Six Week Period Ended
	August 31,			September 1,			August 31,			September 1,
	2019			2018			2019			2018
	(dollars in thousands except per share amounts)
Revenues(a)	$	5,366,264		$	5,421,362		$	10,738,853		$	10,809,852
Revenue (decline) growth		(1.0)	%		1.4	%		(0.7)	%		0.3	%
Net loss	$	(78,705)		$	(352,348)		$	(178,044)		$	(394,075)
Net loss per diluted share	$	(1.48)		$	(6.67)		$	(3.35)		$	(7.47)
Adjusted EBITDA(b)	$	134,190		$	148,581		$	244,537		$	286,573
Adjusted Net Income (Loss)(b)	$	6,288		$	(7,877)		$	(1,231)		$	(6,507)
Adjusted Net Income (Loss) per Diluted Share(b)	$	0.12		$	(0.15)		$	(0.02)		$	(0.12)

(a)

Revenues for the thirteen and twenty-six week periods ended August 31, 2019 exclude $60,909 and $119,420, respectively, of inter-segment activity that is eliminated in consolidation. Revenues for the thirteen and twenty-six week periods ended September 1, 2018 exclude $51,961 and $103,998, respectively, of inter-segment activity that is eliminated in consolidation.

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

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~~(a)~~Revenues

Revenues decreased 1.0% and 0.7% for the thirteen and ~~thirty-nine~~twenty-six weeks ended December 2, 2017 exclude $50,972 and $149,703, respectively, of inter-segment activity that is eliminated in consolidation. Revenues for the thirteen and thirty-nine weeks ended November 26, 2016 exclude $59,002 and $178,361, respectively, of inter-segment activity that is eliminated in consolidation.

~~(b)~~ ~~See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.~~

~~Revenues~~

~~Revenues decreased 5.6% and 5.2% for the thirteen and thirty-nine weeks ended December 2, 2017,~~August 31, 2019, respectively, compared to an increase of ~~0.3%~~1.4% and ~~13.9%~~0.3% for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~November 26, 2016, respectively.~~September 1, 2018. Revenues for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 were negatively impacted by a ~~$123.3~~$63.4 million decrease in Retail Pharmacy segment revenues, ~~and~~partially offset by a ~~$200.7~~$17.3 million ~~decrease~~increase in Pharmacy Services segment revenues. Revenues for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 were negatively impacted by a ~~$486.3~~$96.4 million decrease in Retail Pharmacy segment revenues, ~~and~~partially offset by a ~~$431.9~~$40.8 million ~~decrease~~increase in Pharmacy Services segment revenues. Same store sales trends for the thirteen ~~and thirty-nine~~ week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 are described in the “Segment Analysis” section below.

Please see the section entitled “Segment Analysis” below for additional details regarding revenues.

Costs and Expenses

	Thirteen Week Period Ended						Thirty-Nine Week Period Ended
	December 2, 2017			November 26, 2016			December 2, 2017			November 26, 2016
	(dollars in thousands)
Cost of revenues (a)	$	4,166,447		$	4,424,259		$	12,624,365		$	13,308,505

													Thirteen Week Period Ended						Twenty-Six Week Period Ended
													August 31,			September 1,			August 31,			September 1,
													2019			2018			2019			2018
													(dollars in thousands)
Cost of revenues(a)													$	4,221,825		$	4,260,211		$	8,467,691		$	8,479,952
Gross profit	1,186,723			1,244,852			3,510,339			3,715,649				1,144,439			1,161,151			2,271,162			2,329,900
Gross margin	22.2		%	22.0		%	21.8		%	21.8		%		21.3	%		21.4	%		21.1	%		21.6	%
Selling, general and administrative expenses	1,166,514			1,168,646			3,469,298			3,523,850			$	1,135,530		$	1,153,991		$	2,298,182		$	2,306,618
Selling, general and administrative expenses as a percentage of revenues	21.8		%	20.6		%	21.5		%	20.7		%		21.2	%		21.3	%		21.4	%		21.3	%
Lease termination and impairment charges	3,939			7,199			11,090			20,203				1,471			39,609			1,949			49,468
Goodwill and intangible asset impairment charges														—			375,190			—			375,190
Interest expense	50,308			50,304			152,165			146,674				60,102			56,233			118,372			119,025
(Gain) loss on sale of assets, net	205			(225		)	(20,623		)	(388		)

Gain on sale of assets, net														(1,587)			(4,965)			(4,299)			(10,824)

(a)

Cost of revenues for the thirteen and twenty-six week periods ended August 31, 2019 exclude $60,909 and $119,420, respectively, of inter-segment activity that is eliminated in consolidation. Cost of revenues for the thirteen and twenty-six week periods ended September 1, 2018 exclude $51,961 and $103,998, respectively, of inter-segment activity that is eliminated in consolidation.

~~(a)~~ Cost of revenues for the thirteen and thirty-nine weeks ended December 2, 2017 exclude $50,972 and $149,703, respectively, of inter-segment activity that is eliminated in consolidation. Cost of revenues for the thirteen and thirty-nine weeks ended November 26, 2016 exclude $59,002 and $178,361, respectively, of inter-segment activity that is eliminated in consolidation.

Gross Profit and Cost of Revenues

Gross profit decreased by ~~$58.1~~$16.7 million for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 compared to the thirteen week period ended ~~November 26, 2016.~~September 1, 2018. Gross profit decreased by ~~$205.3~~$58.7 million for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 compared to the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016.~~September 1, 2018. Gross profit for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 includes a ~~decline~~decrease of ~~$53.9~~$19.2 million in our Retail Pharmacy segment, ~~and a decline~~partially offset by an increase of ~~$4.2~~$2.5 million in our Pharmacy Services segment. Gross profit for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 includes a ~~decline~~decrease of ~~$223.0~~$58.2 million in our Retail Pharmacy segment ~~partially offset by increased gross profit~~and a decrease of ~~$17.7~~$0.6 million in our Pharmacy Services segment. Gross margin was ~~22.2% and 21.8%, respectively,~~21.3% for the thirteen ~~and thirty-nine~~ week ~~periods~~period ended ~~December 2, 2017~~August 31, 2019 compared to ~~22.0% and 21.8%, respectively,~~21.4% for the thirteen ~~and thirty-nine~~ week ~~periods~~period ended ~~November 26, 2016.~~September 1, 2018. The decline in gross margin was due primarily to a decline in pharmacy gross margin, partially offset by an increase in front-end gross margin due to lower markdown activity in the Retail Pharmacy segment. Gross margin was 21.1% for the twenty-six week period ended August 31, 2019 compared to 21.6% for the twenty-six week period ended September 1, 2018. The decline in gross margin was due primarily to a decline in pharmacy gross margin, partially offset by an increase in front-end gross margin due to lower markdown activity in the Retail Pharmacy segment. Please see the section entitled “Segment Analysis” for a more detailed description of gross profit and gross margin results by segment.

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Selling, General and Administrative Expenses

SG&A decreased ~~$2.1~~by $18.5 million and ~~$54.6~~$8.4 million for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017,~~August 31, 2019, respectively, compared to the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~November 26, 2016.~~September 1, 2018. The decrease in SG&A for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 includes a decrease of ~~$8.6~~$24.1 million relating to our Retail Pharmacy segment, partially offset by an increase of ~~$6.4~~$5.6 million relating to our Pharmacy Services segment. The decrease in SG&A for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 includes a decrease of ~~$76.3~~$17.2 million ~~relating~~related to our Retail Pharmacy segment, partially offset by an increase of

~~$21.8~~ $8.8 million relating to our Pharmacy Services segment. Please see the section entitled “Segment Analysis” below for additional details regarding SG&A.

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

									Thirteen Week				Twenty-Six Week
									Period Ended				Period Ended
									August 31,			September 1,	August 31,		September 1,
									2019		2018		2019		2018
Impairment charges	$	315	$	890	$	946	$	1,578	$	1,289	$	33,562	$	1,412	$	33,845
Lease termination charges	3,624		6,309		10,144		18,625			—		6,047		—		15,623
	$	3,939	$	7,199	$	11,090	$	20,203
Facility exit charges										182		—		537		—
									$	1,471	$	39,609	$	1,949	$	49,468

Effective March 3, 2019, the Company adopted the Lease Standard. See the Recently Adopted Accounting Pronouncements section of Note 1 to the unaudited condensed consolidated financial statements for a detailed discussion of the adoption of this new lease standard.

Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations—Lease Termination and Impairment Charges” included in our Fiscal ~~2017~~2019 10-K for a detailed description of our impairment and lease termination ~~methodology.~~methodology for fiscal 2019.

Interest Expense

Interest expense was ~~$50.3~~$60.1 million and ~~$152.2~~$118.4 million for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017,~~August 31, 2019, respectively, compared to ~~$50.3~~$56.2 million and ~~$146.7~~$119.0 million for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~November 26, 2016,~~September 1, 2018, respectively. Interest expense was higher infor the ~~thirty-nine~~thirteen week period ended ~~December 2, 2017~~August 31, 2019 due to higher revolver borrowings, partially offset by lower average ~~outstanding borrowings on our~~ ~~Amended and Restated Senior Secured Credit Facility.~~interest rates. The weighted average interest ~~rates~~rate on our indebtedness for the ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016 were 5.5%~~September 1, 2018 was 5.4% and ~~5.3%~~6.2%, respectively.

Income Taxes

We recorded an income tax ~~benefit~~expense from continuing operations of ~~$16.0~~$27.6 million and ~~$4.7~~an income tax benefit from continuing operations of $106.6 million for the thirteen week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016, respectively, and~~September 1, 2018, respectively. We recorded an income tax expense from continuing operations of ~~$89.3~~$35.0 million and an income tax benefit from continuing operations of ~~$3.8~~$116.1 million for the ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018, respectively. The effective tax rate for the thirteen week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 was ~~46.9%~~(54.1)% and ~~(24.7)%~~23.2%, respectively. The effective tax rate for the ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 was ~~40.0%~~(24.5)% and ~~(15.1)%~~22.8%, respectively. The effective tax rate for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017 includes~~August 31, 2019 was net of an adjustment of ~~13%~~(78.4)% and 1%(50.2)%, respectively, ~~for changes~~ to increase the valuation allowance ~~primarily relating~~against deferred tax assets created this period as well as for certain existing state deferred taxes whose realization is now uncertain due to ~~state NOLs.~~a restructuring of our legal entities. The effective tax rate for the ~~thirty-nine~~thirteen and twenty-six week ~~period~~periods ended ~~December 2, 2017 also includes~~September 1, 2018 included an adjustment of ~~55%, primarily~~(4.2)% and (3.9)% to increase the valuation allowance related to ~~the tax impact~~certain state deferred taxes.

Table 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.Contents

We recognize 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~~We believe that it is ~~expected~~reasonably possible that ~~the amount~~a decrease of up to $7.4 million in unrecognized tax benefits ~~will change~~related to state exposures may be necessary in the next twelve months however management does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We 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. We continue to maintain a valuation allowance against net deferred tax assets of ~~$826.8~~$1,088.0 million and ~~$226.7~~$1,091.4 million, which relates ~~primarily~~ to federal and state deferred tax assets that may not be realized based on our future projections of taxable income at ~~December 2, 2017~~August 31, 2019 and March ~~4, 2017,~~2, 2019, 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. We expect to record a tax expense in the fourth quarter of fiscal 2018 between $200 million and $325 million, primarily due to the re-measurement of our net deferred tax assets. The new U.S. tax legislation is subject to a number of complex provisions, which we are currently reviewing, however we expect future earnings to be positively impacted largely due to the reduction of the U.S. federal corporate income tax rate from 35% to 21% (effective January 1, 2018).

Segment Analysis

We evaluate the Retail Pharmacy and Pharmacy Services segments’ performance based on revenue, gross profit, and Adjusted EBITDA. The following is a reconciliation of our segments to the condensed consolidated financial statements:

Retail
Pharmacy
Segment

Pharmacy Services
Segment

Intersegment
Eliminations (1)

Consolidated
Totals

Thirteen Week Period Ended

December 2, 2017:

Revenue

$
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:

Revenue

$
4,082,278

$
1,645,835

$
(59,002
)
$
5,669,111

Gross Profit

1,141,794

103,057

—

1,244,851

Adjusted EBITDA (2)

138,903

52,431

—

191,334

Thirty-Nine Week Period Ended

December 2, 2017:

Revenue

$
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:

Revenue

$
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


	Retail		Pharmacy		Intersegment
	Pharmacy		Services		Eliminations(1)		Consolidated
Thirteen Week Period Ended
August 31, 2019:
Revenues	$	3,848,104	$	1,579,069	$	(60,909)	$	5,366,264
Gross Profit		1,032,444		111,995		—		1,144,439
Adjusted EBITDA(*)		92,673		41,517		—		134,190
September 1, 2018:
Revenues	$	3,911,512	$	1,561,811	$	(51,961)	$	5,421,362
Gross Profit		1,051,637		109,514		—		1,161,151
Adjusted EBITDA(*)		103,618		44,963		—		148,581
Twenty-Six Week Period Ended
August 31, 2019:
Revenues	$	7,712,912	$	3,145,361	$	(119,420)	$	10,738,853
Gross Profit		2,062,939		208,223		—		2,271,162
Adjusted EBITDA(*)		176,681		67,856		—		244,537
September 1, 2018:
Revenues	$	7,809,277	$	3,104,573	$	(103,998)	$	10,809,852
Gross Profit		2,121,094		208,806		—		2,329,900
Adjusted EBITDA(*)		207,747		78,826		—		286,573

(1)

~~(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 $32.4 million and $97.6 million for the thirteen and thirty-nine week periods ended December 2, 2017 and $32.4 million and $97.3 million for the thirteen and thirty-nine week periods ended November 26, 2016.

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

Table of Contents

Retail Pharmacy Segment Results of Operations

Revenues and Other Operating Data

Thirteen Week Period Ended

Thirty-Nine Week Period Ended

December 2,
2017

November 26,
2016

December 2,
2017

November 26,
2016

(dollars in thousands)

Revenues

$
3,959,002

$
4,082,278

$
11,833,195

$
12,319,445

Revenue decline

(3.0
)%
(3.1
)%
(3.9
)%
(1.7
)%
Same store sales decline

(2.5
)%
(3.2
)%
(3.3
)%
(1.7
)%
Pharmacy sales decline

(4.4
)%
(4.6
)%
(5.2
)%
(2.8
)%
Same store prescription count (decline) growth, adjusted to 30-day equivalents

(2.4
)%
(0.2
)%
(1.9
)%
1.2
%
Same store pharmacy sales decline

(3.5
)%
(4.6
)%
(4.5
)%
(2.7
)%
Pharmacy sales as a % of total retail sales

66.5
%
67.3
%
66.2
%
67.1
%
Front-end sales (decline) growth

(1.3
)%
(0.1
)%
(1.5
)%
0.4
%

Thirteen Week Period Ended

Thirty-Nine Week Period Ended

December 2,
2017

November 26,
2016

December 2,
2017

November 26,
2016

(dollars in thousands)

Same store front-end sales (decline) growth

(0.5
)%
(0.3
)%
(0.8
)%
0.4
%
Front-end sales as a % of total retail sales

33.5
%
32.7
%
33.8
%
32.9
%
Adjusted EBITDA — continuing operations(*)

$
88,886

$
138,903

$
264,253

$
428,864

Store data (Total):

Total stores (beginning of period)

4,507

4,550

4,536

4,561

New stores

1

3

3

10

Store acquisitions

—

1

—

3

Sold to WBA

(97
)

(97
)

Closed stores

(7
)
(7
)
(38
)
(27
)
Total stores (end of period)

4,404

4,547

4,404

4,547

Relocated stores

9

9

14

19

Remodeled and expanded stores

21

95

144

259

Store data (Discontinued Operations):

Total stores to be sold to WBA

1,932

1,932

1,932

1,932

Sold to WBA

(97
)
—

(97
)
—

Total stores remaining to be sold to WBA

1,835

1,932

1,835

1,932

Store data (Continuing Operations):

Total stores (end of period- Total)

4,404

4,547

4,404

4,547

Stores remaining to be sold to WBA

(1,835
)
(1,932
)
(1,835
)
(1,932
)
Total stores (end of period — Continuing Operations)

2,569

2,615

2,569

2,615


	Thirteen Week Period Ended						Twenty-Six Week Period Ended
	August 31,			September 1,			August 31,			September 1,
	2019			2018			2019			2018
	(dollars in thousands)
Revenues	$	3,848,104		$	3,911,512		$	7,712,912		$	7,809,277
Revenue (decline) growth		(1.6)	%		0.2	%		(1.2)	%		(0.8)	%
Same store sales growth		0.4	%		1.0	%		0.9	%		0.1	%
Pharmacy sales (decline) growth		(0.5)	%		0.9	%		—	%		(0.2)	%
Same store prescription count growth (decline), adjusted to 30-day equivalents		2.7	%		1.1	%		3.2	%		(0.2)	%
Same store pharmacy sales growth		1.5	%		1.6	%		1.9	%		0.7	%
Pharmacy sales as a % of total retail sales		67.2	%		66.4	%		67.1	%		66.4	%
Front-end sales decline		(3.8)	%		(0.9)	%		(3.1)	%		(1.9)	%
Same store front-end sales decline		(1.8)	%		(0.1)	%		(1.1)	%		(1.0)	%
Front-end sales as a % of total retail sales		32.8	%		33.6	%		32.9	%		33.6	%
Adjusted EBITDA(*)	$	92,673		$	103,618		$	176,681		$	207,747
Store data:
Total stores (beginning of period)		2,466			2,533			2,469			2,550
New stores		—			1			1			1
Store acquisitions		—			—			—			—
Closed stores		(2)			(8)			(6)			(25)
Total stores (end of period)		2,464			2,526			2,464			2,526
Relocated stores		1			—			1			—
Remodeled and expanded stores		24			33			51			82

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

Revenues

Revenues decreased ~~3.0%~~1.6% for the thirteen weeks ended ~~December 2, 2017~~August 31, 2019 compared to ~~a decrease~~an increase of ~~3.1%~~0.2% for the thirteen weeks ended ~~November 26, 2016.~~September 1, 2018. The decrease in revenues for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 was primarily a result of ~~the decrease~~store closings, partially offset by an increase in ~~pharmacy~~ same store sales.

Pharmacy same store sales ~~decreased~~increased by ~~3.5%~~1.5% for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 compared to ~~the 4.6% decrease~~an increase of 1.6% in the thirteen week period ended ~~November 26, 2016.~~September 1, 2018. The ~~decrease~~increase in the current period is due primarily to the 2.4% decrease in same store prescription count compared to the prior year period driven in part by being excluded from certain pharmacy networks that we participated in last year. Same store prescription sales were also impacted by continued lower reimbursement rates and an approximate 2.0% negative impact from generic introductions, partially offset by the impact of brand drug inflation.

~~Front-end same store sales decreased 0.5% during the thirteen week period ended December 2, 2017 compared to a decrease of 0.3% during the thirteen week period ended November 26, 2016.~~

Revenues decreased 3.9% for the thirty-nine weeks ended December 2, 2017 compared to a decrease of 1.7% for the thirty-nine weeks ended November 26, 2016. The decrease in revenues for the thirty-nine week period ended December 2, 2017 was primarily a result of the decrease in pharmacy same store sales.

~~Pharmacy same store sales decreased by 4.7% for the thirty-nine week period ended December 2, 2017 compared~~ to the 2.7% decrease in the thirty-nine week period ended November 26, 2016. The decrease in the current period is due primarily to continued lower reimbursement rates, an approximate 2.0% negative impact from generic introductions, and a 1.9% decrease30-day equivalent increase in same store prescription count, partially offset by ~~the impact of brand drug inflation.~~continued reimbursement rate pressure.

Front-end same store sales decreased ~~by 0.8%~~1.8% during the ~~thirty-nine~~thirteen week period ended ~~December 2, 2017~~August 31, 2019 compared to a decrease of 0.1% during the ~~0.4%~~thirteen week period ended September 1, 2018. Front-end same store sales, excluding cigarettes and tobacco products, decreased 0.6% during the thirteen week period ended August 31, 2019.

Revenues decreased 1.2% for the twenty-six weeks ended August 31, 2019 compared to a decrease of 0.8% for the twenty-six weeks ended September 1, 2018. The decrease in revenues for the twenty-six week period ended August 31, 2019 was primarily a result of store closings, partially offset by an increase in same store sales.

Pharmacy same store sales increased by 1.9% for the twenty-six week period ended August 31, 2019 compared to an increase of 0.7% in the twenty-six week period ended September 1, 2018. The increase in the ~~thirty-nine~~current period is due to the 3.2% 30-day equivalent increase in same store prescription count, partially offset by continued reimbursement rate pressure.

Table of Contents

Front-end same store sales decreased 1.1% during the twenty-six week period ended ~~November 26, 2016.~~August 31, 2019 compared to a decrease of 1.0% during the twenty-six week period ended September 1, 2018. Front-end same store sales, excluding cigarettes and tobacco products, decreased 0.1% during the twenty-six week period ended August 31, 2019.

We include in same store sales all stores that have been open at least one year. Relocation stores are not included in same store sales until one year has lapsed.

Costs and Expenses

Thirteen Week Period
Ended

Thirty-Nine Week Period
Ended

December 2,
2017

November 26,
2016

December 2,
2017

November 26,
2016

(dollars in thousands)

Cost of revenues

$
2,871,114

$
2,940,484

$
8,629,925

$
8,893,180

Gross profit

1,087,888

1,141,794

3,203,270

3,426,265

Gross margin

27.5
%
28.0
%
27.1
%
27.8
%
FIFO gross profit(*)

1,094,672

1,150,167

3,223,663

3,451,531

FIFO gross margin(*)

27.7
%
28.2
%
27.2
%
28.0
%
Selling, general and administrative expenses

1,086,857

1,095,409

3,235,309

3,311,655

Selling, general and administrative expenses as a percentage of revenues

27.5
%
26.8
%
27.34
%
26.9
%


	Thirteen Week Period Ended						Twenty-Six Week Period Ended
	August 31,			September 1,			August 31,			September 1,
	2019			2018			2019			2018
	(dollars in thousands)
Cost of revenues	$	2,815,660		$	2,859,875		$	5,649,973		$	5,688,183
Gross profit		1,032,444			1,051,637			2,062,939			2,121,094
Gross margin		26.8	%		26.9	%		26.7	%		27.2	%
FIFO gross profit(*)		1,039,948			1,054,995			2,077,932			2,134,418
FIFO gross margin(*)		27.0	%		27.0	%		26.9	%		27.3	%
Selling, general and administrative expenses	$	1,044,818		$	1,068,944			2,116,143			2,133,331
Selling, general and administrative expenses as a percentage of revenues		27.2	%		27.3	%		27.4	%		27.3	%

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

Gross Profit and Cost of Revenues

Gross profit decreased ~~$53.9~~$19.2 million for the thirteen week period ended ~~December 2, 2017 as~~August 31, 2019 compared to the thirteen week period ended ~~November 26, 2016.~~ September 1, 2018, driven by a decline in front-end gross profit and an increase in LIFO charges. Front-end gross profit was worse than the prior year’s second quarter due to a decline in front-end sales. Pharmacy gross profit was flat as reimbursement rate declines were offset by generic purchasing efficiencies and the increase in same store prescription count.

Gross profit decreased $58.2 million for the twenty-six week period ended August 31, 2019 compared to the twenty-six week period ended September 1, 2018. Pharmacy gross profit was negatively impacted by ~~lower~~ reimbursement ~~rates~~rate declines that we were not ~~fully~~able to offset bywith both the generic ~~drug~~ purchasing efficiencies and ~~a decrease~~the increase in same store prescription count. ~~Also impacting~~A portion of the ~~decrease~~decline in reimbursement rates was caused by adjusting our estimate for retroactive rate adjustments expected from a ~~legal settlement of $9.0 million that benefited~~state Medicaid agency. Front-end gross profit was worse than the prior year ~~results.~~

Gross profit decreased $223.0 million for the thirty-nine week period ended December 2, 2017 as compared to the thirty-nine week period ended November 26, 2016. Gross profit was negatively impacted by the decrease in pharmacy gross profit due to ~~lower reimbursement rates that were not fully offset by generic drug purchasing efficiencies and~~ a ~~decrease~~decline in ~~prescription count.~~front-end sales.

Gross margin was ~~27.4% and 27.0%~~26.8% of sales for the thirteen ~~and thirty-nine~~ week ~~periods~~period ended ~~December 2, 2017, respectively,~~August 31, 2019 which was flat compared to ~~28.0% and 27.8%~~26.9% of sales for the thirteen ~~and thirty-nine~~ week ~~periods~~period ended ~~November 26, 2016, respectively.~~September 1, 2018.

Gross margin was 26.7% of sales for the twenty-six week period ended August 31, 2019 compared to 27.2% of sales for the twenty-six week period ended September 1, 2018. The ~~decrease~~reduction in gross margin for the ~~thirteen and thirty-nine~~twenty-six week period was due primarily to ~~lower~~ reimbursement ~~rates~~rate declines that we were not ~~fully~~able to offset bywith generic ~~drug~~ purchasing efficiencies, partially offset by aan improvement in front-end gross profit resulting from lower ~~estimated LIFO charge.~~markdowns.

We use the last-in, first-out (“LIFO”) method of inventory valuation, which is estimated on a quarterly basis and is finalized at year end when inflation rates and inventory levels are final. Therefore, LIFO costs for interim period financial statements are estimated. LIFO charges were ~~$6.8~~$7.5 million and ~~$20.4~~$15.0 million for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017,~~August 31, 2019, respectively, compared to ~~$8.4~~$3.4 million and ~~$25.3~~$13.3 million for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~November 26, 2016,~~September 1, 2018, respectively.

Table of Contents

Selling, General and Administrative Expenses

SG&A expenses decreased $24.1 million for the thirteen week period ended August 31, 2019 due primarily to strong labor and expense control at the stores, labor savings and expense management relating to the recent corporate restructuring, a prior year legal settlement and higher professional fees incurred in the prior year relating to the WBA and Albertsons transactions, partially offset by restructuring-related expenses incurred in connection with our Path to the Future transformation initiative and a reduction in WBA TSA fees due to servicing fewer stores.SG&A expenses as a percentage of revenues ~~were 27.5% in~~for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 was flat compared to ~~26.8% in~~ the thirteen week period ended ~~November 26, 2016. The increase~~September 1, 2018 as the decrease in SG&A expenses as noted above was offset by a ~~percentage~~loss of ~~revenues was due primarily to fixed costs increasing as a percentage of revenues,~~revenue leverage, as revenues declined.

SG&A ~~dollars~~expenses decreased ~~by $8.6~~$17.2 million for the twenty-six week period ended August 31, 2019 due to strong labor and expense ~~efficiency initiatives that resulted~~control at the stores, labor savings and expense management relating to the recent corporate restructuring, a prior year legal settlement and higher professional fees incurred in ~~reduced payroll~~the prior year relating to the WBA and ~~operating expenses. The effect of these initatives were~~Albertsons transactions, partially offset by ~~higher bonus expense of $10.0 million~~restructuring-related expenses incurred in connection with our Path to the Future transformation initiative and ~~legal settlements of $6.0 million that benefited the prior year results.~~

a reduction in WBA TSA fees due to servicing fewer stores. SG&A expenses as a percentage of revenues ~~were 27.4% in~~for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 was flat compared to ~~26.9% in~~ the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016. The increase~~September 1, 2018 as the decrease in SG&A expenses as noted above was offset by a ~~percentage~~loss of ~~revenues was due primarily to fixed costs increasing as a percentage of revenues,~~revenue leverage, as revenues declined. ~~SG&A dollars decreased by $76.3 million due to expense efficiency initiatives that resulted in reduced payroll and operating expenses.~~

Pharmacy Services Segment Results of Operations

~~Acquisition of EnvisionRx~~

On June 24, 2015, we completed our acquisition of EnvisionRx, pursuant to the terms of the agreement (“Agreement”) dated February 10, 2015. EnvisionRx, our Pharmacy Services segment, is a full-service pharmacy benefit provider. EnvisionRx provides both transparent and traditional PBM options through its EnvisionRx and MedTrak PBMs. 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 EIC’s EnvisionRx Plus Silver product for the low income auto-assign market and its Clear Choice product for the chooser market. EnvisionRx operates as our 100 percent owned subsidiary. The acquisition of EnvisionRx enabled us to expand our retail healthcare platform and enhance our health and wellness offerings by combining EnvisionRx’s broad suite of PBM and pharmacy-related businesses with our established retail platform to provide our customers and patients with an integrated offering across retail, specialty and mail-order channels.

Revenues and Other Operating Data

Thirteen Week Period Ended

Thirty-Nine Week Period Ended

December 2,
2017

November 26,
2016

December 2,
2017

November 26,
2016

(dollars and plan
members in thousands)

Revenues

$
1,445,140

$
1,645,835

$
4,451,212

$
4,883,070

Revenue (decline) growth (1)

(12.2
)%
9.7
%
(8.8
)%
N/A

Adjusted EBITDA(*)

$
40,363

$
52,431

$
138,237

$
143,616

Plan Members

3,780

4,062

3,780

4,062


	Thirteen Week Period Ended						Twenty-Six Week Period Ended
	August 31,			September 1,			August 31,			September 1,
	2019			2018			2019			2018
	(dollars in thousands)
Revenues	$	1,579,069		$	1,561,811		$	3,145,361		$	3,104,573
Revenue growth		1.1	%		4.6	%		1.3	%		3.3	%
Adjusted EBITDA(*)	$	41,517		$	44,963		$	67,856		$	78,826

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

~~(1)~~ ~~The thirty-nine week period ended November 26, 2016 amount is labeled N/A as we do not have a full comparable period.~~

Revenues

Pharmacy Services segment ~~revenue~~revenues for the thirteen week period ended ~~December 2, 2017 was $1,445.1~~August 31, 2019 were $1,579.1 million as compared to ~~revenue~~revenues of ~~$1,645.8~~$1,561.8 million for the thirteen week period ended ~~November 26, 2016.~~September 1, 2018. Pharmacy Services segment ~~revenue~~revenues for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017 was $4,451.2~~August 31, 2019 were $3,145.4 million as compared to ~~revenue~~revenues of ~~$4,883.1~~$3,104.6 million for the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016.~~September 1, 2018. The ~~decrease~~increase in ~~the thirteen and thirty-nine week revenue~~revenues for the segment is primarily due to ~~our election to participate~~an increase in ~~fewer~~ Medicare Part D ~~regions, which caused a decrease~~Membership revenues, partially offset by client losses in ~~covered lives at EIC, and a decline in~~our commercial business.

Table of Contents

Costs and Expenses

	Thirteen Week Period Ended						Thirty-Nine Week Period Ended
	December 2, 2017			November 26, 2016			December 2, 2017			November 26, 2016
	(dollars in thousands)

													Thirteen Week Period Ended						Twenty-Six Week Period Ended
													August 31,			September 1,			August 31,			September 1,
													2019			2018			2019			2018
													(dollars in thousands)
Cost of revenues	$	1,346,305		$	1,542,778		$	4,144,143		$	4,593,686		$	1,467,074		$	1,452,297		$	2,937,138		$	2,895,767
Gross profit	98,835			103,057			307,069			289,384				111,995			109,514			208,223			208,806
Gross margin	6.8		%	6.3		%	6.9		%	5.9		%		7.1	%		7.0	%		6.6	%		6.7	%
Selling, general and administrative expenses	79,657			73,237			233,989			212,195			$	90,712		$	85,047			182,039			173,287
Selling, general and administrative expenses as a percentage of revenues	5.5		%	4.4		%	5.3		%	4.3		%		5.7	%		5.4	%		5.8	%		5.6	%

Gross Profit and Cost of Revenues

Gross profit for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 was ~~$98.8~~$112.0 million as compared to gross profit of ~~$103.1~~$109.5 million for the thirteen week period ended ~~November 26, 2016.~~ September 1, 2018. Gross profit for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 was ~~$307.1~~$208.2 million as compared to gross profit of ~~$289.4~~$208.8 million for the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016. The decrease in the thirteen week gross profit for the segment is due primarily to reduced revenues caused by our election to participate in~~

~~fewer Medicare Part D regions and a decline in commercial business.~~ September 1, 2018. The increase in the ~~thirty-nine~~thirteen week gross profit for the segment is primarily due to improved ~~customer mix.~~pharmacy network management. Gross profit for the twenty-six week period was flat to the prior year.

Gross margin was ~~6.8%~~7.1% of sales for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 compared to ~~6.3%~~7.0% of sales for the thirteen week period ended ~~November 26, 2016.~~September 1, 2018. Gross margin was ~~6.9%~~6.6% of sales for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 compared to ~~5.9%~~6.7% of sales for the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016. The increase in the thirteen and thirty-nine week gross margin for the segment is due primarily to improved customer mix.~~September 1, 2018.

Selling, General and Administrative Expenses

Pharmacy Services segment selling, general and administrative expenses for the thirteen week period ended ~~December 2, 2017~~August 31, 2019 was ~~$79.7~~$90.7 million ~~or 5.5% of revenues~~ as compared to ~~$73.2~~$85.0 million ~~or 4.4% of revenues~~ for the thirteen week period ended ~~November 26, 2016.~~September 1, 2018. Pharmacy Services segment selling, general and administrative expenses for the ~~thirty-nine~~twenty-six week period ended ~~December 2, 2017~~August 31, 2019 was ~~$234.0~~$182.0 million ~~or 5.3% of revenues~~ as compared to ~~$212.2~~$173.3 million ~~or 4.3% of revenues~~ for the ~~thirty-nine~~twenty-six week period ended ~~November 26, 2016.~~September 1, 2018. Selling, general and administrative expenses as a percentage of Pharmacy Services segment revenue was 5.7% and 5.4% for the thirteen week periods ended August 31, 2019 and September 1, 2018, respectively. Selling, general and administrative expenses as a percentage of Pharmacy Services segment revenue was 5.8% and 5.6% for the twenty-six week periods ended August 31, 2019 and September 1, 2018, respectively. The increase in the thirteen and ~~thirty-nine~~twenty-six week ~~period~~periods selling, general and administrative expenses is primarily the result of ~~increased headcount~~strategic investments to support ~~business infrastructure~~current year and ~~our growing chooser Medicare Part D business.~~future growth.

Liquidity and Capital Resources

General

We have two primary sources of liquidity: (i) cash provided by operating activities and (ii) borrowings under our ~~Amended and Restated Senior Secured Credit Facility.~~New Facilities. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt and to fund capital expenditures. Total liquidity as of ~~December 2, 2017~~August 31, 2019 was ~~$1,746.1~~$1,400.9 million, which consisted of revolver borrowing capacity of ~~$1,715.7~~$1,366.8 million and invested cash of ~~$30.4~~$34.1 million.

Credit Facilities

~~Our~~On December 20, 2018, we entered into a new senior secured credit agreement, consisting of a new $2.7 billion senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a new $450.0 million “first-in, last out” senior secured term loan facility (“Senior Secured Term Loan”) (collectively the “New Facilities”). Proceeds from the New Facilities were used to refinance our prior $2.7 billion Amended and Restated Senior Secured Credit Facility ~~has a borrowing capacity~~due January 2020 (the “Old Facility”, the New Facilities and the Old Facility are collectively referred to herein as the “Facilities”). The New Facilities extend our debt maturity profile and provide additional

Table of ~~$3.7 billion and matures~~Contents

liquidity. The New Facilities mature in ~~January 2020. Borrowings under~~December 2023, subject to an earlier maturity on December 31, 2022 if we have not repaid or refinanced our existing 6.125% Senior Notes due 2023 prior to such date. It is our intention to repay or refinance our existing 6.125% Senior Notes due 2023 prior to the ~~revolver~~early maturity becoming effective. Our Senior Secured Revolving Credit Facility will bear interest at a rate ~~per annum between (i)~~of LIBOR plus ~~1.50% and LIBOR plus 2.00% with respect~~125 to ~~Eurodollar borrowings and (ii) the~~175 basis points (or an alternate base rate plus ~~0.50% and~~25 to 75 basis points), depending on availability under the revolving facility. Our new Senior Secured Term Loan will bear interest at a rate of LIBOR plus 300 basis points (or an 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)~~200 basis points). We are 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.

Our ability to borrow under ~~the revolver~~our New Facilities is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At ~~December 2, 2017,~~August 31, 2019, we had ~~$1,925.0~~$1,700.0 million of borrowings outstanding under the ~~revolver~~New Facilities and had letters of credit outstanding against the ~~revolver~~New Facilities of ~~$59.3~~$83.2 million, which resulted in additional borrowing capacity of ~~$1,715.7~~$1,366.8 million. If at any time the total credit exposure outstanding under our ~~Amended and Restated Senior Secured Credit Facility~~New Facilities and the principal amount of our other senior obligations ~~exceeds~~exceed the borrowing base, we ~~will be~~are required to make certain other mandatory prepayments to eliminate such shortfall.

The ~~Amended and Restated Senior Secured Credit Facility restricts~~New Facilities restrict us and all of our subsidiaries that guarantee our obligations under the ~~Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes~~New Facilities and unsecured guaranteed notes (the “Subsidiary Guarantors”) from accumulating cash on hand in excess of $200.0 million at any time when revolving loans are outstanding (not including cash located in our store and lockbox deposit accounts and cash necessary to cover our current liabilities) ~~and from accumulating cash on hand with revolver borrowings in excess of $100.0 million over three consecutive business days.~~. The ~~Amended and Restated Senior Secured Credit Facility~~New Facilities also ~~states~~state that if at any time (other than following the exercise of remedies or acceleration of any senior obligations or second priority debt and receipt of a triggering notice by the senior collateral agent from a representative of the senior obligations or the second priority debt) either ~~(a)~~(i) an event of default exists under our ~~Amended and Restated Senior Secured Credit Facility~~New Facilities or ~~(b)~~(ii) the sum of revolver availability under our ~~Amended and Restated~~ Senior Secured Revolving Credit Facility and certain amounts held on deposit with the senior collateral agent in a concentration account is less than $275.0 million for three consecutive business days or less than or equal to $200.0 million on any day (a “cash sweep period”), the funds in our deposit accounts will be swept to a concentration account with the senior collateral agent and will be applied first to repay outstanding revolving loans under the ~~Amended and Restated Senior Secured Credit Facility,~~New Facilities, and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of our ~~Amended and Restated Senior Secured Credit Facility.~~New Facilities.

The ~~Amended and Restated Senior Secured Credit Facility allows~~New Facilities allow us to have outstanding, at any time, up to $1.5 billion 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~~New Facilities and existing indebtedness, provided that not in excess of $750.0 million 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)~~(i) the fifth anniversary of the effectiveness of the ~~Amended~~New Facilities and ~~Restated Senior Secured Credit Facility and (b)~~(ii) the latest maturity date of any Term Loan or Other Revolving ~~Loan~~Commitment (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)New Facilities). Subject to the limitations described in clauses ~~(a)~~(i) and ~~(b)~~(ii) of the immediately preceding sentence, the ~~Amended and Restated Senior Secured Credit Facility~~New Facilities additionally ~~allows~~allow us 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)~~New Facilities) is not in effect; provided, however, that certain of our 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~~New Facilities also ~~contains~~contain certain restrictions on the amount of secured first priority debt we are able to incur. The ~~Amended and Restated Senior Secured Credit Facility~~New Facilities also ~~allows~~allow for the voluntary repurchase of any debt or other convertible debt, so long as the ~~Amended and Restated Senior Secured Credit Facility is~~New Facilities are not in default and we maintain availability under our revolver of more than $365.0 million.

The ~~Amended and Restated Senior Secured Credit Facility has~~New Facilities have a financial covenant that requires us to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 ~~(a)~~(i) on any date on which availability under the revolver is less than $200.0 million or ~~(b)~~(ii) on the third consecutive business day on which availability under the revolver is less than $250.0 million 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 $250.0 million. As of ~~December 2, 2017,~~August 31, 2019, we had availability under our ~~revolver~~New Facilities of ~~$1,715.7~~$1,366.8 million, our fixed charge coverage ratio was greater than 1.00 to 1.00, and we were in compliance with the ~~senior secured credit facility’s~~New Facilities’ financial covenant. The ~~Amended and Restated Senior Secured Credit Facility~~New Facilities also ~~contains~~contain covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens.

The ~~Amended and Restated Senior Secured Credit Facility provides~~New Facilities provide for customary events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the

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lapse of time would enable, the holder of such debt to accelerate the maturity or require the repayment repurchase, redemption or defeasance of such debt.

We also have 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 we choose 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 we choose to make LIBOR borrowings, or at Citibank’s base rate plus 2.875%.

The ~~second priority secured term loan facilities and the indentures~~indenture that ~~govern~~governs our ~~secured and~~ guaranteed unsecured notes ~~contain~~contains restrictions on the amount of additional secured and unsecured debt that can be incurred by us. As of ~~December 2, 2017,~~August 31, 2019, the amount of additional secured debt that could be incurred under the most restrictive covenant of the ~~second priority secured term loan facilities and these indentures~~indenture was approximately ~~$2.1~~$1.8 billion (which amount does not include the ability to enter into certain sale and leaseback transactions). Assuming a fully drawn revolver and the outstanding letters of credit, we could incur an additional $350.0 million in secured debt. The ability to issue additional unsecured debt under ~~these indentures~~the indenture is generally governed by an interest coverage ratio test. As of ~~December 2, 2017,~~August 31, 2019, we had the ability to issue additional unsecured debt under ~~the second lien credit facilities and~~our other indentures.

Net Cash Provided by/Used in Operating, Investing and Financing Activities

Cash ~~flow provided by~~used in operating activities was ~~$424.5~~$330.0 million and ~~$173.2~~$300.9 million infor the ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018, respectively. Operating cash flow was ~~positively~~negatively impacted by the ~~$325.0 million WBA merger termination fee, the corresponding change in deferred taxes, and an~~ increase in ~~accounts payable. Accounts payable increased~~amounts due from CMS, seasonal inventory build, payments to fund the fiscal 2019 401(k) contribution and bonus payments, as well as the timing of ~~inventory purchases at our Retail Pharmacy segment and increased amounts payable to our pharmacy network in our Pharmacy Services segment. These positive~~ working capital ~~changes were partially offset by increases in inventory and other assets and liabilities. Front end inventory increased at our Retail Pharmacy segment~~ due to seasonal inventory build. Cash used by other assets and liabilities resulted from reductions in accrued expenses relating to payments made under our CMS reinsurance contracts at our Pharmacy Services segment.items.

Cash used in investing activities was ~~$138.1~~$95.3 million and ~~$223.5~~$94.8 million for the ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016,~~September 1, 2018, respectively. Cash used for the purchase of property, plant, and equipment was ~~lower than in~~consistent with the prior ~~year primarily due to fewer Wellness store remodels in~~year. During the ~~current year. Included in cash provided by investing activities of discontinued operations is $240.9 million of proceeds received from stores sold to Walgreens Boots Alliance. A corresponding payment to the revolver is included in the financing activities of discontinued operations.~~

~~Cash used in financing activities was $243.5 million for the thirty-nine~~twenty-six week period ended ~~December 2, 2017 as compared to cash~~August 31, 2019, we remodeled 51 stores and spent $15.7 million on file buys.

Cash flow provided by financing activities ~~of $299.9~~was $425.0 million for the thirty-nine week period ended November 26, 2016. Cash used in financing activities for the thirty-nine week period ended December 2, 2017 reflects net payments on the revolver and scheduled payments on our long-term debt and capital leases. As noted above,compared to cash flow used in financing activities of ~~discontinued operations includes $240.9~~$883.2 million for the twenty-six week periods ended August 31, 2019 and September 1, 2018, respectively. Cash provided by financing activities for the twenty-six weeks ended August 31, 2019 reflects net revolver borrowings and the change in our zero balance accounts due to the timing of ~~revolver payments~~.payments.

Capital Expenditures

During the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016~~September 1, 2018 capital expenditures were as follows:

	Thirteen Week Period Ended				Thirty-Nine Week Period Ended
	December 2, 2017		November 26, 2016		December 2, 2017		November 26, 2016

									Thirteen Week Period Ended				Twenty-Six Week Period Ended
									August 31,		September 1,		August 31,		September 1,
									2019		2018		2019		2018

New store construction, store relocation and store remodel projects	$	25,990	$	36,087	$	64,466	$	96,660	$	16,727	$	20,986	$	37,334	$	45,875
Technology enhancements, improvements to distribution centers and other corporate requirements	35,710		18,672		76,350		101,063			26,352		23,608		46,726		46,690
Purchase of prescription files from other retail pharmacies	10,522		13,573		20,201		35,986			7,498		6,864		15,708		20,519
Total capital expenditures	$	72,222	$	68,332	$	161,017	$	233,709	$	50,577	$	51,458	$	99,768	$	113,084

Future Liquidity

We are highly leveraged. Our high level of indebtedness could: (i) limit our ability to obtain additional financing; (ii) limit our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) place us at a competitive disadvantage relative to our competitors with less debt; (iv) render us more vulnerable to general adverse economic and industry conditions; and (v) require us to dedicate a substantial portion of our cash flow to service our debt. Based upon our current levels of operations, we believe that cash flow from operations together with available borrowings under the revolver and other sources of liquidity will be adequate to meet our requirements for working capital, debt service and capital expenditures at least for the next twelve months. Based on our liquidity position, which we expect to remain strong throughout the 2020 fiscal year, we do not expect to be subject to the fixed charge covenant in our ~~Amended and Restated Senior Secured Credit Facility~~New Facilities in the next twelve months. We will continue to assess our liquidity position and potential sources of

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supplemental liquidity in light of our operating performance, and other relevant circumstances. From time to time, we may seek additional deleveraging or refinancing transactions, including entering into transactions to exchange debt for shares of common stock, issuance of equity (including preferred stock and convertible securities), repurchase or redemption of outstanding indebtedness, or seek to refinance our outstanding debt (including our ~~Amended and Restated Senior Secured Credit Facility)~~Facilities) or may otherwise seek transactions to reduce interest expense and extend debt ~~maturities.~~maturities, particularly following the Sale and implementation of our strategies following the termination of the Merger. Any of these transactions could impact our financial results. We may also use additional Sale proceeds for one or more of these purposes in accordance with our outstanding agreements.

Critical Accounting Policies and Estimates

For a description of the critical accounting policies that require the use of significant judgments and estimates by management, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations—Critical Accounting Policies and Estimates” included in our Fiscal ~~2017 10-K.~~2019 10-K, which we filed with the SEC on April 25, 2019, and the First Quarter 2020 10-Q, which we filed on July 11, 2019.

Factors Affecting Our Future Prospects

For a discussion of risks related to our financial condition, operations and industry, refer to “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” included in our Fiscal ~~2017~~2019 10-K.

Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures

In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP ~~metrics~~measures serve as an appropriate measure in evaluating the performance of our business. We define Adjusted EBITDA as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), charges or credits for facility closing and impairment, goodwill and intangible asset impairment charges, inventory write-downs related to store closings, loss on debt retirements, the ~~Walgreens Boots Alliance~~WBA merger termination fee, and other items (including stock-based compensation expense, merger and acquisition-related costs, a non-recurring litigation settlement (as further discussed below), severance, restructuring-related costs and costs related to ~~distribution center~~facility closures and gain or loss on sale of ~~assets, and revenue deferrals related to our customer loyalty program)~~assets). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical periods and external comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.

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The following is a reconciliation of our net ~~(loss) income~~loss to Adjusted EBITDA ~~from continuing operations~~ for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016:~~September 1, 2018:


	Thirteen Week Period Ended				Twenty-Six Week Period Ended
	August 31,		September 1,		August 31,		September 1,
	2019		2018		2019		2018(a)
	(dollars in thousands)
Net loss from continuing operations	$	(78,705)	$	(352,348)	$	(178,044)	$	(394,075)
Interest expense		60,102		56,233		118,372		119,025
Income tax expense (benefit)		27,628		(106,559)		35,002		(116,056)
Depreciation and amortization		83,044		89,743		166,970		184,272
LIFO charge		7,504		3,358		14,993		13,324
Lease termination and impairment charges		1,471		39,609		1,949		49,468
Goodwill and intangible asset impairment charges		—		375,190		—		375,190
Loss on debt retirements, net		—		—		—		554
Merger and Acquisition‑related costs		514		19,031		3,599		26,219
Stock-based compensation expense		4,712		5,215		10,092		10,246
Restructuring-related costs		25,145		—		68,495		—
Inventory write-downs related to store closings		3,149		1,300		3,990		5,133
Litigation settlement		—		18,000		—		18,000
Gain loss on sale of assets, net		(1,587)		(4,965)		(4,299)		(10,824)
Other		1,213		4,774		3,418		6,097
Adjusted EBITDA from continuing operations	$	134,190	$	148,581	$	244,537	$	286,573

(a)

During fiscal 2019, we revised our definition of Adjusted EBITDA to no longer exclude the impact of revenue deferrals related to our customer loyalty program and further revised our disclosure by presenting certain amounts previously included within Other as separate reconciling items. Consequently, we revised Adjusted EBITDA for the thirteen and twenty-six week period ended September 1, 2018 to conform with the revised definition and present separate reconciling items previously included with Other.

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 income — discontinued operations

$
99,213

$
(8,600
)
$
42,257

$
(3,939
)
Interest expense

59,456

56,005

178,797

170,136

Income tax expense (benefit)

60,155

(3,405
)
26,705

356

Depreciation and amortization expense

21,952

41,292

99,372

119,624

LIFO charge

4,469

5,377

13,366

15,995

Lease termination and impairment charges

11

66

74

76

Gain on stores sold to Walgreens Boots Alliance

(157,010
)
—

(157,010
)

Other

(3,320
)
(7,922
)
13,958

(1,926
)
Adjusted EBITDA - discontinued operations

$
84,926

$
82,813

$
217,519

$
300,322

The following is a reconciliation of our net income (loss) from continuing operations to Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per Diluted Share for the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December 2, 2017~~August 31, 2019 and ~~November 26, 2016.~~September 1, 2018. Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of amortization ~~of EnvisionRx intangible assets,~~expense, merger and acquisition-related costs, a non-recurring litigation settlement (as further discussed below), loss on debt retirements, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), goodwill and intangible asset impairment charges, restructuring-related costs and the ~~Walgreens Boots Alliance~~WBA merger termination fee. We calculate Adjusted Net Income (Loss) per Diluted Share using our above-referenced definition of Adjusted Net Income (Loss). We believe Adjusted Net Income (Loss) and Adjusted

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Net Income (Loss) per Diluted Share ~~serve as appropriate measures to be used in evaluating the performance~~are useful indicators of ~~our business and help our investors better compare~~ our operating performance over multiple periods.

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 from continuing operations

$
(18,182
)
$
23,610

$
134,141

$
29,134

Add back—Income tax (benefit) expense

(16,061
)
(4,682
)
89,268

(3,824
)
(Loss) income before income taxes — continuing operations

(34,243
)
18,928

223,409

25,310

Adjustments:

Amortization of EnvisionRx intangible assets

19,139

21,049

59,415

62,217

LIFO charge

6,784

8,373

20,393

25,266

Merger and Acquisition-related costs

6,550

1,964

17,274

6,117

Walgreens Boots Alliance merger termination fee

—

—

(325,000
)
—

Adjusted (loss) income before income taxes — continuing operations

(1,770
)
50,314

(4,509
)
118,910

Adjusted income tax (benefit) expense (a)

(3,389
)
23,559

5,573

54,183

Adjusted net income (loss) from continuing operations

$
1,619

$
26,755

$
(10,082
)
$
64,727

Net (loss) income per diluted share — continuing operations

$
(0.02
)
$
0.02

$
0.13

$
0.03

Adjusted net income (loss) per diluted share — continuing operations

$
0.00

$
0.03

$
(0.01
)
$
0.06

~~(a)~~ ~~The fiscal year 2018 and 2017 annual effective tax rates, adjusted to exclude amortization~~ Adjusted Net Income (Loss) per Diluted Share is calculated using our above-referenced definition of ~~EnvisionRx intangible assets, LIFO charges, Merger and Acquisition-related costs~~Adjusted Net Income (Loss):


	Thirteen Week Period Ended				Twenty-Six Week Period Ended
	August 31,		September 1,		August 31,		September 1,
	2019		2018		2019		2018(b)
	(dollars in thousands)
Net loss	$	(78,705)	$	(352,348)	$	(178,044)	$	(394,075)
Add back - Income tax expense (benefit)		27,628		(106,559)		35,002		(116,056)
Loss before income taxes		(51,077)		(458,907)		(143,042)		(510,131)
Adjustments:
Amortization expense		26,596		32,500		54,256		67,900
LIFO charge		7,504		3,358		14,993		13,324
Goodwill and intangible asset impairment charges		—		375,190		—		375,190
Loss on debt retirements, net		—		—		—		554
Merger and Acquisition‑related costs		514		19,031		3,599		26,219
Restructuring-related costs		25,145		—		68,495		—
Litigation settlement		—		18,000		—		18,000
Adjusted income (loss) before income taxes		8,682		(10,828)		(1,699)		(8,944)
Adjusted income tax expense (benefit) (a)		2,394		(2,951)		(468)		(2,437)
Adjusted net income (loss)		6,288	$	(7,877)	$	(1,231)	$	(6,507)
Net loss per diluted share	$	(1.48)	$	(6.67)	$	(3.35)	$	(7.47)
Adjusted net income (loss) per diluted share	$	0.12	$	(0.15)	$	(0.02)	$	(0.12)

(a)	The fiscal year 2020 and 2019 annual effective tax rates, calculated using a federal rate plus a net state rate that excluded the impact of state NOL’s, state credits and valuation allowance, was used for the thirteen and twenty-six weeks ended August 31, 2019 and September 1, 2018, respectively.

(b)

During fiscal 2019, we revised our definition of Adjusted Net Loss and Adjusted Net Loss per Diluted Share to exclude the impact of all amortization expense rather than only the impact of amortization expense related to the EnvisionRx intangible assets. Consequently, we have updated the ~~Walgreens Boots Alliance merger termination fee from book income, are used for the thirteen and thirty-nine weeks ended December 2, 2017 and November 26, 2016, respectively.~~

~~In addition to Adjusted EBITDA,~~ Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share for the thirteen and twenty-six week periods ended September 1, 2018 to be reflective of our modified definition.

In addition to Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per Diluted Share, we occasionally refer to several other Non-GAAP measures, on a less frequent basis, in order to describe certain components of our business and how we utilize them to describe our results. These measures include but are not limited to Adjusted EBITDA Gross Margin and Gross Profit (gross margin/gross profit excluding non-Adjusted EBITDA items), Adjusted EBITDA SG&A (SG&A expenses excluding non-Adjusted EBITDA items), FIFO Gross Margin and FIFO Gross Profit (gross margin/gross profit before LIFO charges), and Free Cash Flow (Adjusted EBITDA less cash paid for interest, rent on closed stores, capital expenditures, acquisition costs and the change in working capital).

We include these non-GAAP financial measures in our earnings announcements in order to provide transparency to our investors and enable investors to better compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. Our major market

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risk exposure is changing interest rates. Increases in interest rates would increase our interest expense. We enter into debt obligations to support capital expenditures, acquisitions, working capital needs and general corporate purposes. Our policy is to manage interest rates through the use of a combination of variable-rate credit facilities, fixed-rate long-term obligations and derivative transactions. ~~We currently do not have any derivative transactions outstanding.~~

The table below provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal payments and the related weighted average interest rates by expected maturity dates as of August 31, 2019 and assumes that we have not repaid or refinanced our existing 6.125% Senior Notes due 2023 prior to December ~~2, 2017.~~31, 2022.

Fiscal Year

2018

2019

2020

2021

2022

Thereafter

Total

Fair Value
at
12/02/2017

(dollars in thousands)

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

Fixed Rate

$
90

$
—

$
—

$
902,000

$
810,000

$
2,223,000

$
3,935,090

$
3,691,346

Average Interest Rate

7.61
%
0.00
%
0.00
%
9.25
%
6.75
%
6.38
%
7.11
%

Variable Rate

$
—

$
—

$
1,925,000

$
470,000

$
500,000

$
—

$
2,895,000

$
2,897,387

Average Interest Rate

0.00
%
0.00
%
2.97
%
5.96
%
5.09
%
0.00
%
3.82
%


																						Fair Value at
	2020			2021			2022			2023			2024			Thereafter			Total			August 31, 2019
	(Dollars in thousands)
Long-term debt, including current portion, excluding financing lease obligations
Fixed Rate	$	—		$	—		$	—		$	—		$	1,753,490		$	423,000		$	2,176,490		$	1,626,965
Average Interest Rate		0.00	%		0.00	%		0.00	%		0.00	%		6.13	%		7.45	%		6.38	%
Variable Rate	$	—		$	—		$	—		$	—		$	1,700,000		$	—		$	1,700,000		$	1,700,000
Average Interest Rate		0.00	%		0.00	%		0.00	%		0.00	%		3.89	%		0.00	%		3.89	%

Our ability to satisfy interest payment obligations on our outstanding debt will depend largely on our future performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service our interest payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations could be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed.

The interest rate on our variable rate borrowings, which include our revolving credit facility ~~Tranche 1 Term Loan~~ and our ~~Tranche 2 Term Loan,~~term loan facility, are ~~all~~ based on LIBOR. ~~However, the interest rate on our Tranche 1 Term Loan and Tranche 2 Term Loan have a LIBOR floor of 100 basis points.~~ If the market rates of interest for LIBOR changed by 100 basis points as of ~~December 2, 2017,~~August 31, 2019, our annual interest expense would change by approximately ~~$31.0~~$17.0 million. Our annual interest expense would change by approximately $12.8 million when considering the benefit of the Cap which became effective on March 21, 2019.

A change in interest rates does not have an impact upon our future earnings and cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and if additional debt is acquired to fund the debt repayment, future earnings and cash flow may be affected by changes in interest rates. This effect would be realized in the periods subsequent to the periods when the debt matures. Increases in interest rates would also impact our ability to refinance existing maturities on favorable terms.

ITEM 4. Controls and Procedures

(a)Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

(b) Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The information in response to this item is incorporated herein by reference to Note ~~14,~~16, Commitments, Contingencies and ~~Contingencies~~Guarantees, of the Consolidated Condensed Financial Statements of this Quarterly Report.

ITEM 1A. Risk Factors

In addition to the information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Fiscal ~~2017~~2019 10-K, which could materially affect our business, financial condition or future results.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Repurchases of Equity Securities. The table below is a listing of repurchases of common stock during the ~~third~~second quarter of fiscal ~~2018.~~2020.

Fiscal period:

Total
Number of
Shares
Repurchased

Average
Price Paid
Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Maximum Number of
Shares that may yet be
Purchased under the
Plans or Programs

September 3 to September 30, 2017(1)

12

$
2.64

—

—

October 1 to October 28, 2017

—

$
—

—

—

October 29 to December 2, 2017

—

$
—

—

—


	Total			Total Number of Shares	Maximum Number of
	Number of	Average		Purchased as Part of	Shares that may yet be
	Shares	Price Paid		Publicly Announced	Purchased under the
Fiscal period:	Repurchased	Per Share		Plans or Programs	Plans or Programs
June 2 to June 29, 2019	39	$	7.74	—	—
June 30 to July 27, 2019	33	$	7.79	—	—
July 28 to August 31, 2019	62	$	5.81	—	—

~~(1)~~ ~~Represents shares withheld by the Company, at the election of certain holders of vested restricted stock, with a market value approximating the amount of withholding taxes due.~~

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits

~~(a)~~ ~~The following exhibits are filed as part of this report.~~

(a)

The following exhibits are filed as part of this report.


Exhibit Numbers		Description		~~Description~~	Incorporation By Reference To
2.1	Amended and Restated Asset Purchase Agreement, dated September 18, 2017, among Rite Aid Corporation, Walgreens Boots Alliance, Inc. and Walgreen Co.**		Exhibit 2.1 to Form 8-K, filed on September 19, 2017
2.2	Agreement and Plan of Merger, dated February 18, 2018, among Rite Aid Corporation, Albertsons Companies, Inc., Ranch Acquisition II LLC and Ranch Acquisition Corp.**		Exhibit 2.1 to Form 8-K, filed on February 20, 2018
2.3	Termination Agreement, dated as of August 8, 2018, among Rite Aid Corporation, Albertsons Companies, Inc., Ranch Acquisition II LLC and Ranch Acquisition Corp.		Exhibit 2.1 to Form 8-K, filed on August 8, 2018
3.1	Amended and Restated Certificate of Incorporation ~~dated January 22, 2014~~		Exhibit 3.1 to Form ~~10-K,~~8-K, filed on April ~~23, 2014~~18, 2019

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Exhibit Numbers	Description	Incorporation By Reference To
3.2	Amended and Restated By-Laws	Exhibit ~~3.2 to Form 10-Q, filed on January 6, 2016~~
~~3.3~~	~~Certificate of Designations, Preferences and Rights of Series J Junior Participating Preferred Stock of Rite Aid Corporation~~	~~Exhibit 31.~~3.1 to Form 8-K, filed on ~~January 3, 2018~~April 10, 2019
4.1	Indenture, dated as of February 27, 2012, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, related to the Company’s 9.25% Senior Notes due 2020	~~Exhibit 4.1 to Form 8-K, filed on February 27, 2012~~
~~4.2~~	First Supplemental Indenture, dated as of May 15, 2012, among Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Mellon Trust Company, N.A. to the Indenture, dated as of February 27, 2012, among Rite Aid Corporation, the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., related to the Company’s 9.25% Senior Notes due 2020	~~Exhibit 4.23 to the Registration Statement on Form S-4, File No. 181651, filed on May 24, 2012~~
~~4.3~~	Indenture, dated as of August 1, 1993, between Rite Aid Corporation, as issuer, and Morgan Guaranty Trust Company of New York, as trustee, related to the Company’s 7.70% Notes due 2027	Exhibit 4A to Registration Statement on Form S-3, File No. 033-63794, filed on June 3, 1993
~~4.4~~4.2	Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and U.S. Bank Trust National Association (as successor trustee to Morgan Guaranty Trust Company of New York) to the Indenture dated as of August 1, 1993, between Rite Aid Corporation and Morgan Guaranty Trust Company of New York, relating to the Company’s 7.70% Notes due 2027	Exhibit 4.1 to Form 8-K filed on February 7, 2000
~~4.5~~4.3	Indenture, dated as of December 21, 1998, between Rite Aid Corporation, as issuer, and Harris Trust and Savings Bank, as trustee, related to the Company’s 6.875% Notes due 2028	Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-74751, filed on March 19, 1999
~~4.6~~4.4	Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and Harris Trust and Savings Bank to the Indenture, dated December 21, 1998, between Rite Aid Corporation and Harris Trust and Savings Bank, related to the Company’s 6.875% Notes due 2028	Exhibit 4.4 to Form 8-K, filed on February 7, 2000

~~4.7~~4.5	~~Indenture,~~Registration Rights Agreement, dated as of ~~July 2, 2013,~~February 10, 2015, by and among Rite Aid Corporation, ~~as issuer, the subsidiary guarantors named therein~~TPG VI Envision, L.P., TPG VI DE BDH, L.P. and ~~The Bank of New York Mellon Trust Company, N.A., related to the Company’s 6.75% Senior Notes due 2021~~Envision Rx Options Holdings Inc.	Exhibit ~~4.1~~10.3 to Form 8-K, filed on ~~July 2, 2013~~February 13, 2015
~~4.8~~4.6	Indenture, dated as of April 2, 2015, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., related to the Company’s 6.125% Senior Notes due 2023	Exhibit 4.1 to Form 8-K, filed on April 2, 2015
~~4.9~~4.8	~~Tax Benefits Preservation Plan,~~Supplemental Indenture, dated as of ~~January 3,~~August 23, 2018, ~~between~~among Rite Aid Corporation, the subsidiary guarantors named therein and ~~Broadridge Corporate Issuer Solutions~~The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of April 2, 2015, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., related to the Company’s 6.125% Senior Notes due 2023	Exhibit 4.1 to Form 8-K filed on ~~January 3,~~August 23, 2018
~~4.10~~4.9	~~Specimen Common Stock Certificate~~Supplemental Indenture, dated as of February 8, 2019, among Rite Aid Corporation, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., to the Indenture, dated as of April 2, 2015, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., related to the Company’s 6.125% Senior Notes due 2023	Exhibit ~~4.2~~4.9 to Form 10-K filed on April 25, 2019
10.1	2000 Omnibus Equity Plan	Included in Proxy Statement dated October 24, 2000
10.2	2001 Stock Option Plan	Exhibit 10.3 to Form 10-K, filed on May 21, 2001
10.3	2004 Omnibus Equity Plan	Exhibit 10.4 to Form 10-K, filed on April 29, 2005
10.4	2006 Omnibus Equity Plan	Exhibit 10 to Form 8-K, filed on January 22, 2007
10.5	2010 Omnibus Equity Plan	Exhibit 10.1 to Form 8-K, filed on June 25, 2010

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Exhibit Numbers	Description	Incorporation By Reference To
10.6	Amendment No. 1, dated September 21, 2010, to the 2010 Omnibus Equity Plan	Exhibit 10.7 to Form 10-Q, filed on October 7, 2010
10.7	Amendment No. 2, dated January 16, 2013, to the 2010 Omnibus Equity Plan	Exhibit 10.8 to Form 10-K, filed on April 23, 2013
10.8	2012 Omnibus Equity Plan	Exhibit 10.1 to Form 8-K, filed on June 25, 2012
10.9	Amendment No. 1, dated January 16, 2013, to the 2012 Omnibus Equity Plan	Exhibit 10.10 to Form 10-K, filed on April 23, 2013
10.10	2014 Omnibus Equity Plan	Exhibit 10.1 to Form 8-K, filed on June 23, 2014
10.11	Form of Award Agreement	Exhibit 10.2 to Form 8-K, filed on May 15, 2012
10.12	Supplemental Executive Retirement Plan	Exhibit 10.6 to Form 10-K, filed on April 28, 2010
10.13	Executive Incentive Plan for Officers of Rite Aid Corporation	Exhibit 10.1 to Form 8-K, filed on February 24, 2012
10.14	Amended and Restated Employment Agreement by and between Rite Aid Corporation and John T. Standley, dated as of January 21, 2010	Exhibit 10.7 to Form 10-K, filed on April 28, 2010
10.15	Employment Agreement by and between Rite Aid Corporation and Douglas E. Donley, dated as of August 1, 2000	Exhibit 10.1 to Form 10-Q, filed on December 22, 2005
10.16	Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Douglas E. Donley, dated as of December 18, 2008	Exhibit 10.4 to Form 10-Q, filed on January 7, 2009
10.17	Employment Agreement, dated as of July 24, 2014, by and between Rite Aid Corporation and Darren W. Karst	Exhibit 10.2 to Form 10-Q, filed on October 2, 2014
10.18	Letter Agreement, dated October 26, 2015, to the Employment Agreement by and between Rite Aid Corporation and Darren W. Karst, dated as of July 24, 2014	Exhibit 10.1 to Form 8-K, filed on October 28, 2015
10.19	Employment Agreement by and between Rite Aid Corporation and Jocelyn Konrad dated as of August 18, 2015	Exhibit 10.1 to Form 10-Q, filed on January 6, 2016
10.20	Employment Agreement by and between Rite Aid Corporation and Bryan Everett dated as of June 22, 2015	Exhibit 10.2 to Form 10-Q, filed on January 6, 2016
10.21	Employment Agreement by and between Rite Aid Corporation and David Abelman dated as of August 3, 2015	Exhibit 10.3 to Form 10-Q, filed on January 6, 2016
10.22	Form of Retention Award Agreement	Exhibit 10.1 to Form 8-K, filed on January 7, 2016
10.23	Form of December 31, 2015 Retention Award Agreement	Exhibit 10.2 to Form 8-K, filed on January 7, 2016
10.24	Credit Agreement, dated as of December 20, 2018, among Rite Aid Corporation, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent and collateral agent.	Exhibit 10.1 to Form 8-K, filed on December 20, 2018

Table of Contents


Exhibit Numbers	Description	Incorporation By Reference To
10.25	Amended and Restated Collateral Trust and Intercreditor Agreement, including the related definitions annex, dated as of June 5, 2009, among Rite Aid Corporation, each subsidiary named therein or which becomes a party thereto, Wilmington Trust Company, as collateral trustee, Citicorp North America, Inc., as senior collateral processing agent, The Bank of New York Trust Company, N.A., as trustee under the 2017 7.5% Note Indenture (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as trustee under the 2016 10.375% Note Indenture (as defined therein), and each other Second Priority Representative and Senior Representative which becomes a party thereto	Exhibit 10.3 to Form 8-K, filed on June 11, 2009
10.26	Standstill Agreement, dated as of February 18, 2018, among Rite Aid Corporation, Albertsons Companies, Inc. and Cerberus Capital Management, L.P.	Exhibit 10.1 to Form 8-K, filed on February 20, 2018
1110.27	~~Statement regarding computation of earnings per share (See Note 4 to~~Employment Agreement by and between RxOptions, LLC and its affiliates operating the ~~condensed consolidated financial statements)~~EnvisionRXOptions business and Ben Bulkley dated February 15, 2019	~~Filed herewith~~Exhibit 10.27 to Form 10-K, filed on April 25, 2019
10.28	Separation Agreement by and between Rite Aid Corporation and John T. Standley, dated as of March 12, 2019	Exhibit 10.28 to Form 10-Q, filed on July 11, 2019
10.29	Separation Agreement by and between Rite Aid Corporation and Darren Karst, dated as of March 12, 2019	Exhibit 10.29 to Form 10-Q, filed on July 11, 2019
10.30	Separation Agreement by and between Rite Aid Corporation and Kermit Crawford, dated as of March 12, 2019	Exhibit 10.30 to Form 10-Q, filed on July 11, 2019
10.31	Amendment to Employment Agreement by and between Rite Aid Corporation and Bryan Everett, dated as of March 12, 2019	Exhibit 10.31 to Form 10-Q, filed on July 11, 2019
10.32	Amendment to Employment Agreement by and between Rite Aid Corporation and Jocelyn Z. Konrad, dated as of March 12, 2019	Exhibit 10.32 to Form 10-Q, filed on July 11, 2019
10.33	Amendment to Employment Agreement by and between Rite Aid Corporation and Matthew C. Schroeder, dated as of March 12, 2019	Exhibit 10.33 to Form 10-Q, filed on July 11, 2019
10.34	Amendment to Employment Agreement by and between Rite Aid Corporation and Brian Hoover, dated as of March 12, 2019	Exhibit 10.34 to Form 10-Q, filed on July 11, 2019
10.35	Amendment to Employment Agreement by and between Rite Aid Corporation and Brian Hoover, dated as of December 5, 2017	Exhibit 10.35 to Form 10-Q, filed on July 11, 2019
10.36	Amendment to Employment Agreement by and between Rite Aid Corporation and Brian Hoover, dated as of August 10, 2016	Exhibit 10.36 to Form 10-Q, filed on July 11, 2019
10.37	Employment Agreement by and between Rite Aid Corporation and Brian Hoover, dated as of January 1, 2001	Exhibit 10.37 to Form 10-Q, filed on July 11, 2019
10.38	Eleventh Amendment to Supply Agreement by and between Rite Aid Corporation and McKesson Corporation, dated as of February 28, 2019*	Exhibit 10.38 to Form 10-Q, filed on July 11, 2019
10.39	Employment Agreement by and between Rite Aid Corporation and Heyward Donigan, dated August 8, 2019**	Exhibit 10.1 to Form 8-K, filed on August 12, 2019
10.40	Employment Inducement Award Agreement by and between Rite Aid Corporation and Heyward Donigan, dated August 12, 2019	Exhibit 10.2 to Form 8-K, filed on August 12, 2019

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Exhibit Numbers	Description	Incorporation By Reference To
10.41	Consulting Agreement by and between Rite Aid Corporation and Avalon Retail Consulting, Inc., through its president, John T. Standley, dated August 14, 2019	Exhibit 10.1 to Form 8-K, filed on August 16, 2019
31.1	Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended	Filed herewith
31.2	Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended	Filed herewith
32	Certification of CEO and CFO pursuant to 18 United States Code, Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
~~101.~~101.INS	~~The following materials~~XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at December 2, 2017 and March 4, 2017, (ii) Condensed Consolidated Statements of Operations forembedded within the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016, (iii) Condensed Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine week periods ended December 2, 2017 and November 26, 2016, (iv) Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended December 2, 2017 and November 26, 2016 and (v) Notes to Condensed Consolidated Financial Statements, tagged in detail.Inline XBRL document.	Filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document.	Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.	Filed herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.	Filed herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.	Filed herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.	Filed herewith
104	Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.	Filed herewith

* Confidential portions of this Exhibit were redacted pursuant to Item 601(b)(10) of Regulation S-K and Rite Aid Corporation agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule and/or exhibit upon request.

**Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and Rite Aid Corporation agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule and/or exhibit upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: ~~January 11, 2018~~October 3, 2019	RITE AID CORPORATION

	By:			~~/s/ DARREN W. KARST~~
					~~Darren W. Karst~~
			~~Senior Executive Vice President, Chief Financial Officer and Chief Administrative Officer~~

~~Date: January 11, 2018~~	~~By:~~			/s/ MATTHEW C. SCHROEDER
		Matthew C. Schroeder
		Chief Financial Officer

Date: October 3, 2019	By:	/s/ BRIAN T. HOOVER
		Brian T. Hoover
		Senior Vice President and Chief Accounting Officer ~~and Treasurer~~

	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

*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

	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

	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

	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

	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

	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

	Rite Aid Corporation Condensed Consolidating Statement of Operations For the Thirteen Weeks Ended December 2, 2017 (unaudited)
	Rite Aid Corporation (Parent Company Only)			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Revenues	$	—		$	5,331,788		$	47,064		$	(25,682	)(a)	$	5,353,170
Costs and expenses:
Cost of revenues	—			4,146,272			45,063			(24,888		)(a)	4,166,447
Selling, general and administrative expenses	—			1,162,416			4,892			(794		)(a)	1,166,514
Lease termination and impairment expenses	—			3,939			—			—			3,939
Interest expense	45,586			5,040			(318		)	—			50,308
Gain on sale of assets, net	—			205			—			—			205
Equity in earnings of subsidiaries, net of tax	(186,073		)	1,793			—			184,280		(b)	—
	(140,487		)	5,319,665			49,637			158,598			5,387,413
Earnings from continuing operations before income taxes	140,487			12,123			(2,573		)	(184,280		)	(34,243		)
Income tax expense (benefit)	—			(15,281		)	(780		)	—			(16,061		)
Net income (loss) from continuing operations	140,487			27,404			(1,793		)	(184,280		)	(18,182		)
Net income (loss) from discontinued operations	(59,456		)	158,669			—			—			99,213
Net income (loss)	$	81,031		$	186,073		$	(1,793	)	$	(184,280	)(b)	$	81,031
Total other comprehensive income (loss)	514			514			—			(514		)	514
Comprehensive income (loss)	$	81,545		$	186,587		$	(1,793	)	$	(184,794	)	$	81,545

	Rite Aid Corporation Condensed Consolidating Statement of Cash Flows For the Thirty-Nine Weeks Ended December 2, 2017 (unaudited)
	Rite Aid Corporation (Parent Company Only)			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating activities:
Net cash provided by operating activities	$	229,578		$	220,721		$	(25,849	)	$	—		$	424,450
Investing activities:
Payments for property, plant and equipment	—			(140,816		)	—			—			(140,816		)
Intangible assets acquired	—			(20,201		)	—			—			(20,201		)
Intercompany activity	—			(449,803		)	—			449,803			—
Proceeds from dispositions of assets and investments	—			19,254			—			—			19,254
Proceeds from insured loss	—			3,627			—			—			3,627
Net cash (used in) provided by investing activities	—			(587,939		)	—			449,803			(138,136		)
Financing activities:
Net payments to revolver	(264,080		)	—			—			—			(264,080		)
Principal payments on long-term debt	—			(7,292		)	—			—			(7,292		)
Change in zero balance cash accounts	—			27,594			—			—			27,594
Net proceeds from issuance of common stock	4,416			—			—			—			4,416
Payments for taxes related to net share settlement of equity awards	—			(4,103		)	—			—			(4,103		)
Intercompany activity	449,803			—			—			(449,803		)	—
Net cash provided by (used in) financing activities	190,139			16,199			—			(449,803		)	(243,465		)
Cash flows of discontinued operations:
Operating activities of discontinued operations	(178,797		)	116,503			—			—			(62,294		)
Investing activities of discontinued operations	—			189,175			—			—			189,175
Financing activities of discontinued operations	(240,920		)	(4,420		)	—			—			(245,340		)
Net cash provided by (used in) discontinued operations	(419,717		)	301,258			—			—			(118,459		)
(Decrease) increase in cash and cash equivalents	—			(49,761		)	(25,849		)	—			(75,610		)
Cash and cash equivalents, beginning of period	—			213,104			32,306			—			245,410
Cash and cash equivalents, end of period	$	—		$	163,343		$	6,457		$	—		$	169,800

	Retail Pharmacy Segment		Pharmacy Services Segment		Intersegment Eliminations (1)			Consolidated Totals
Thirteen Week Period Ended
December 2, 2017:
Revenue	$	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:
Revenue	$	4,082,278	$	1,645,835	$	(59,002	)	$	5,669,111
Gross Profit	1,141,794		103,057		—			1,244,851
Adjusted EBITDA (2)	138,903		52,431		—			191,334
Thirty-Nine Week Period Ended
December 2, 2017:
Revenue	$	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:
Revenue	$	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

Fiscal period:	Total Number of Shares Repurchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased under the Plans or Programs
September 3 to September 30, 2017(1)	12	$	2.64	—	—
October 1 to October 28, 2017	—	$	—	—	—
October 29 to December 2, 2017	—	$	—	—	—