Edgar Filing: RITE AID CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 29, 2015

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 (Address of principal executive offices)		17011 (Zip Code)

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

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

Not Applicable

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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 1,046,265,328 shares of its $1.00 par value common stock outstanding as of September 28, 2015.

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RITE AID CORPORATION

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

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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;

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

· general economic conditions, inflation and interest rate movements;

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

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

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

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

· our ability to hire and retain qualified personnel;

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

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

· our ability to manage expenses and working capital;

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

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

· the outcome of lawsuits and governmental investigations;

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

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

· our ability to maintain our current pharmacy services business and obtain new pharmacy services business, including maintaining renewals of expiring contracts, avoiding contract termination rights that may permit certain of our clients to terminate their contracts prior to their expiration and early price renegotiations prior to contract expirations;

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

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

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

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

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(unaudited)

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(unaudited)

	Thirteen Week Period Ended
	August 29, 2015		August 30, 2014
Net income	$	21,469	$	127,849
Other comprehensive income:
Defined benefit pension plans:
Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $398 and $0 tax expense	598		660
Total other comprehensive income	598		660
Comprehensive income	$	22,067	$	128,509

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

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

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(unaudited)

	Twenty-Six Week Period Ended
	August 29, 2015		August 30, 2014
Net income	$	40,305	$	169,295
Other comprehensive income:
Defined benefit pension plans:
Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $796 and $0 tax expense	1,195		1,319
Total other comprehensive income	1,195		1,319
Comprehensive income	$	41,500	$	170,614

See accompanying notes to condensed consolidated financial statements.

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RITE AID CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

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

See accompanying notes to condensed consolidated financial statements.

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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 29, 2015 and August 30, 2014

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

(unaudited)

1. Basis of Presentation

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

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

Revenue Recognition — Pharmacy Services Segment

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

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

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

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

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

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

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

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

Cost of Revenues — Pharmacy Services Segment

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

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

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

Vendor Allowances and Purchase Discounts — Pharmacy Services Segment

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

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

New Accounting Pronouncements

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

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

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

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

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

2. Acquisition

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

Pursuant to the terms of the Agreement, as consideration for the Acquisition, the Company paid $1,883,405 in cash and issued 27,754 shares of Rite Aid common stock. The Company financed the cash portion of the Acquisition with borrowings under its senior secured revolving credit facility, and the net proceeds from the April 2, 2015 issuance of $1,800,000 aggregate principal amount of 6.125% senior notes due 2023 (the “6.125% Notes”). The consideration associated with the common stock was $240,907 based on a stock price of $8.68 per share, representing the closing price of the Company’s common stock on the closing date of the Acquisition. The closing balance sheet has not yet been finalized and therefore, the final purchase price and related purchase price allocation of the Acquisition is subject to change.

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

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

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

(1) Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a preliminary valuation prepared by an independent third party. The fair values assigned to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty and the multi-period excess

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

earnings methods. The major assumptions used in arriving at the estimated identifiable intangible asset values included management’s preliminary estimates of future cash flows, discounted at an appropriate rate of return which are based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. The estimated fair value of intangible assets and related useful lives as included in the preliminary purchase price allocation include:

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

(2) Other current liabilities includes $116,500 due to TPG under the terms of the Agreement, representing the amounts due to EnvisionRx from CMS, less corresponding amounts due to various reinsurance providers under certain reinsurance programs, for CMS activities that relate to the year ended December 31, 2014.

(3) Primarily relates to deferred tax liabilities.

The above goodwill represents future economic benefits expected to be recognized from the Company’s expansion into the pharmacy services market, as well as expected future synergies and operating efficiencies from combining operations with EnvisionRx. Goodwill resulting from the Acquisition has been allocated to the Pharmacy Services segment and should be deductible for tax purposes. At the time the financial statements were issued, initial accounting for the business combination related to tax matters were preliminary and may be adjusted during the measurement period.

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

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

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

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

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

· Debt extinguishment charges incurred by EnvisionRx.

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

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

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

	Thirteen week Periods Ended						Twenty-Six week Periods Ended
	August 29, 2015			August 30, 2014			August 29, 2015			August 30, 2014
	Pro forma			Pro forma			Pro forma			Pro forma
Net revenues as reported	$	7,664,776		$	6,522,584		$	14,312,337		$	12,988,115
EnvisionRx revenue, prior to the acquisition	364,159			997,946			1,735,635			1,986,324
Less pre-acquisition intercompany revenue	(23,777		)	(65,511		)	(104,731		)	(131,413		)
Pro forma combined revenues	$	8,005,158		$	7,455,019		$	15,943,241		$	14,843,026

Net income as reported	$	21,469		$	127,849		$	40,305		$	169,295
EnvisionRx net income (loss) before income taxes, prior to the acquisition	(56,544		)	3,467			(45,307		)	7,352
Incremental interest expense on the 6.125% Notes issued on April 2, 2015	—			(28,852		)	(11,097		)	(57,703		)
Incremental amortization resulting from fair value adjustments of the identifiable intangible assets	(3,778		)	(15,179		)	(16,509		)	(26,530		)
Transaction expenses incurred by both the Company and EnvisionRx	36,754			—			55,864			—
Debt extinguishment charges incurred by EnvisionRx	31,601			—			31,601			—
Income tax expense relating to pro forma adjustments	(3,294		)	—			(5,966		)	—
Pro forma net income	$	26,208		$	87,285		$	48,891		$	92,414

Basic income per share	$	0.03		$	0.09		$	0.05		$	0.09
Diluted income per share	$	0.02		$	0.08		$	0.05		$	0.09

3. Income Per Share

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

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

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

4. Lease Termination and Impairment Charges

Lease termination and impairment charges consist of amounts as follows:

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

Impairment Charges

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

Lease Termination Charges

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

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

5. Fair Value Measurements

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

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

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

Non-Financial Assets Measured on a Non-Recurring Basis

Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the twenty-six week period ended August 29, 2015, long-lived assets from continuing operations with a carrying value of $2,193, primarily store assets, were written down to their fair value of $1,915, resulting in an impairment charge of $278 of which $5 relates to the thirteen week period ended August 29, 2015. During the twenty-six week period ended August 30, 2014, long-lived assets from continuing operations with a carrying value of $1,849, primarily store assets, were written down to their fair value of $1,566, resulting in an impairment charge of $283 of which $132 relates to the thirteen-week period ended August 30, 2014. If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired in the current period may be further impaired in future periods.

The following table presents fair values for those assets measured at fair value on a non-recurring basis at August 29, 2015 and August 30, 2014:

Fair Value Measurement Using

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

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

As of August 29, 2015 and August 30, 2014, the Company did not have any financial assets measured on a recurring basis.

Other Financial Instruments

Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable. These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature. In addition, the Company has $6,598 of investments, carried at amortized cost as these investments are being held to maturity, which are included as a component of other assets as of August 29, 2015. The Company believes the carrying value of these investments approximates their fair value.

The fair value for LIBOR-based borrowings under the Company’s senior secured credit facility and first and second lien term loans are estimated based on the quoted market price of the financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company’s other long-term indebtedness are estimated based on quoted market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company’s total long-term indebtedness was $7,361,170 and $7,508,010, respectively, as of August 29, 2015. There were no outstanding derivative financial instruments as of August 29, 2015 and February 28, 2015.

6. Income Taxes

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

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

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

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

The Company regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain. Management will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. As a result of the Company’s historical operating performance and the more favorable near term outlook for profitability, the Company released $1,841,304 of valuation allowance in the fourth quarter of fiscal year 2015. The Company continues to maintain a valuation allowance against net deferred tax assets of $231,683 and $231,679, which relates primarily to state deferred tax assets at August 29, 2015 and February 28, 2015, respectively.

7. Medicare Part D

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

EIC is a licensed domestic insurance company under the applicable laws and regulations. Pursuant to these laws and regulations, EIC must file quarterly and annual reports with the National Association of Insurance Commissioners (“NAIC”) and certain state regulators, must maintain certain minimum amounts of capital and surplus under formulas established by certain states and must, in certain circumstances, request and receive the approval of certain state regulators before making dividend payments or other capital distributions to the Company. The Company does not believe these limitations on dividends and distributions materially impact its financial position. EIC is subject to minimum capital and surplus requirements in certain states. The minimum amount of capital and surplus required to satisfy regulatory requirements in these states is $44,400 as of August 29, 2015. EIC was in excess of the minimum required amounts in these states as of August 29, 2015.

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

As of August 29, 2015, accounts receivable, net included $573,348 due from CMS and accrued salaries, wages and other current liabilities included $394,197 of EIC liabilities under certain reinsurance contracts. EIC limits its exposure to loss and recovers a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company. Additionally, as of August 29, 2015, accrued salaries, wages and other current liabilities included $116,500 due to TPG under the terms of the Agreement, which represents the amounts due to EnvisionRx from CMS, less corresponding amounts due to various reinsurance providers under certain reinsurance programs, for CMS activities that relate to the year ended December 31, 2014.

8. Goodwill and Other Intangible Assets

Goodwill and indefinitely-lived intangible assets, such as certain trademarks acquired in connection with acquisition transactions, are not amortized, but are instead evaluated for impairment on an annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that impairment may be more likely. During the twenty-six weeks ended August 29, 2015 and the fifty-two weeks ended February 28, 2015, no impairment charges have been taken against the Company’s goodwill. During the twenty-six weeks ended August 29, 2015, no impairment charges have been taken against the Company’s indefinitely-lived intangible assets. Below is a summary of the changes in the carrying amount of goodwill for the twenty-six week period ended August 29, 2015:

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

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

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

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

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

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

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

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

9. Indebtedness and Credit Agreements

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

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

Credit Facility

On January 13, 2015, the Company amended and restated its senior secured credit facility (“Amended and Restated Senior Secured Credit Facility” or “revolver”), which, among other things, increased borrowing capacity from $1,795,000 to $3,000,000 (which further increased to $3,700,000 upon the redemption of its 8.00% senior secured notes due August 2020 (“8.00% Notes”) on August 15, 2015), and extended the maturity to January 2020 from February 2018. The Company used borrowings under the revolver to repay and retire all of the $1,143,650 outstanding under its Tranche 7 Senior Secured Term Loan due 2020, along with associated fees and expenses. Borrowings under the revolver bear interest at a rate per annum between LIBOR plus 1.50% and LIBOR plus 2.00% based upon the average revolver availability (as defined in the Amended and Restated Senior Secured Credit Facility). The Company is required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the revolver, depending on the Average Revolver Availability (as defined in the Amended and Restated Senior Secured Credit Facility). Amounts drawn under the revolver become due and payable on January 13, 2020.

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

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

The Amended and Restated Senior Secured Credit Facility restricts the Company and the Subsidiary Guarantors (as defined herein) from accumulating cash on hand, and under certain circumstances, requires the funds in the Company’s deposit accounts to be applied first to the repayment of outstanding revolving loans under the Amended and Restated Senior Secured Credit Facility and then to be held as collateral for the senior obligations. This provision did not apply to the proceeds from the 6.125% Notes as discussed in the “Financing for the Acquisition” section below.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

The Amended and Restated Senior Secured Credit Facility allows the Company to have outstanding, at any time, up to $1,500,000 (or $1,800,000 solely to the extent incurred for the purpose of funding of the Acquisition) in secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock in addition to borrowings under the Amended and Restated Senior Secured Credit Facility and existing indebtedness, provided that not in excess of $750,000 of such secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest of (a) the fifth anniversary of the effectiveness of the Amended and Restated Senior Secured Credit Facility and (b) the latest maturity date of any Term Loan or Other Revolving Loan (each as defined in the Amended and Restated Senior Secured Credit Facility) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date and, with respect to any escrow notes issued by Rite Aid, excluding any special mandatory redemption of the type described in clause (iii) of the definition of “Escrow Notes” in the Amended and Restated Senior Secured Credit Facility). Subject to the limitations described in clauses (a) and (b) of the immediately preceding sentence, the Amended and Restated Senior Secured Credit Facility additionally allows the Company to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the Amended and Restated Senior Secured Credit Facility) is not in effect; provided, however, that certain of the Company’s other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The Amended and Restated Senior Secured Credit Facility also contains certain restrictions on the amount of secured first priority debt the Company is able to incur. The Amended and Restated Senior Secured Credit Facility also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended and Restated Senior Secured Credit Facility is not in default and the Company maintains availability under its revolving credit facility of more than $365,000.

As of January 13, 2015, the Amended and Restated Senior Secured Credit Facility has a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (a) on any date on which availability under the revolving credit facility is less than $200,000 or (b) on the third consecutive business day on which availability under the revolving credit facility 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 revolving credit facility is equal to or greater than $250,000. As of August 29, 2015, the availability was at a level that did not trigger this covenant. The Amended and Restated Senior Secured Credit Facility also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens.

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

The Company also has two second priority secured term loan facilities. The first includes a $470,000 second priority secured term loan (the “Tranche 1 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 second includes a $500,000 second priority secured term loan (the “Tranche 2 Term Loan”). The Tranche 2 Term Loan matures on June 21, 2021 and currently bears interest at a rate per annum equal to LIBOR plus 3.875% with a LIBOR floor of 1.00%, if the Company chooses to make LIBOR borrowings, or at Citibank’s base rate plus 2.875%.

With the exception of EIC, substantially all of Rite Aid Corporation’s 100 percent owned subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, and unsecured guaranteed notes. The Amended and Restated Senior Secured Credit Facility and second priority secured term loan facilities are secured, on a senior or second priority basis, as applicable, by a lien on, among other things, accounts receivable, inventory and prescription files of the Subsidiary Guarantors. The subsidiary guarantees related to the Company’s Amended and Restated Senior Secured Credit Facility and second priority secured term loan facilities and, on an unsecured basis, the unsecured guaranteed notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Company to obtain funds from its subsidiaries. The Company has no independent assets or operations. Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended and Restated Senior Secured Credit Facility, the credit facility, second priority secured term loan facilities and applicable notes, were minor. Accordingly, condensed consolidating financial information for the Company and subsidiaries is not presented for those periods. Subsequent to the Acquisition, other than EIC, the subsidiaries, including joint ventures, that do not guarantee the credit facility, second priority secured term loan facilities and applicable notes, are minor. As such, condensed consolidating financial information for the Company, its guaranteeing subsidiaries and non-guaranteeing subsidiary, EIC, is presented for those periods subsequent to the Acquisition. See Note 15 “Guarantor and Non-Guarantor Condensed Consolidating Financial Information” for additional disclosure.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

Financing for the Acquisition

On April 2, 2015, the Company issued $1,800,000 aggregate principal amount of its 6.125% Notes, the net proceeds of which, along with other available cash and borrowings under its Amended and Restated Senior Secured Credit Facility, were used to finance the cash portion of the Acquisition, which closed on June 24, 2015. The Company’s obligations under the notes are fully and unconditionally guaranteed, jointly and severally, on an unsubordinated basis, by all of its subsidiaries that guarantee the Company’s obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, the 9.25% senior notes due 2020 (the “9.25% Notes”) and the 6.75% senior notes due 2021 (the “6.75% Notes”) (the “Rite Aid Subsidiary Guarantors”), including EnvisionRx and certain of its domestic subsidiaries other than, among others, EIC (the “EnvisionRx Subsidiary Guarantors” and, together with the Rite Aid Subsidiary Guarantors, the “Subsidiary Guarantors”). The guarantees are unsecured. The 6.125% Notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all of its other unsecured, unsubordinated indebtedness.

Other Transactions

During May 2015, $64,089 of the Company’s 8.5% convertible notes due 2015 were converted into 24,762 shares of common stock, pursuant to their terms. The remaining $79 of the Company’s 8.5% convertible notes due 2015 were repurchased by the Company upon maturity.

On August 15, 2015, the Company completed the redemption of all of its outstanding $650,000 aggregate principal amount of its 8.00% Notes. In connection with the redemption, the Company recorded a loss on debt retirement, including call premium and unamortized debt issue costs, of $33,205 during the second quarter of fiscal 2016.

Maturities

The aggregate annual principal payments of long-term debt for the remainder of fiscal 2016 and thereafter are as follows: 2016—$90; 2017—$0; 2018—$0; 2019—$0; 2020—$2,453,000 and $4,905,001 thereafter.

10. 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 twenty-six week periods ended August 29, 2015 and August 30, 2014 include $16,201 and $9,892, 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 the twenty-six week periods ended August 29, 2015 and August 30, 2014, the Company incurred $4,413 and $444 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 twenty-six week periods ended August 29, 2015 and August 30, 2014 are as follows:

	August 29, 2015			August 30, 2014
	Shares	Weighted Average Fair Value		Shares	Weighted Average Fair Value
Stock options granted	3,647	$	4.45	3,113	$	4.43
Restricted stock awards granted	2,177	$	8.68	3,304	$	7.01
Total awards	5,824			6,417

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:

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

	Twenty-Six Week Period Ended
	August 29, 2015	August 30, 2014
Expected stock price volatility	56%	74%
Expected dividend yield	0%	0%
Risk-free interest rate	1.7%	1.7%
Expected option life	5.5 years	5.5 years

As of August 29, 2015, 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:

	August 29, 2015
	Unvested stock options		Unvested restricted stock		Unvested performance shares
Unrecognized pre-tax costs	$	27,657	$	32,336	$	33,571
Weighted average amortization period	3.0 years		2.5 years		2.2 years

11. Reclassifications from Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss and the changes in balances of each component of accumulated other comprehensive loss, net of tax as applicable, for the thirteen and twenty-six week periods ended August 29, 2015 and August 30, 2014:

	Thirteen Week Period Ended August 29, 2015						Thirteen Week Period Ended August 30, 2014						Twenty-Six Week Period Ended August 29, 2015						Twenty-Six Week Period Ended August 30, 2014
	Defined benefit pension plans			Accumulated other comprehensive loss			Defined benefit pension plans			Accumulated other comprehensive loss			Defined benefit pension plans			Accumulated other comprehensive loss			Defined benefit pension plans			Accumulated other comprehensive loss
Accumulated other comprehensive loss
Balance-beginning of period	$	(45,253	)	$	(45,253	)	$	(36,675	)	$	(36,675	)	$	(45,850	)	$	(45,850	)	$	(37,334	)	$	(37,334	)
Amounts reclassified from accumulated other comprehensive loss to net income, net of $398, $0, $796, and $0 tax expense	598			598			660			660			1,195			1,195			1,319			1,319
Balance-end of period	$	(44,655	)	$	(44,655	)	$	(36,015	)	$	(36,015	)	$	(44,655	)	$	(44,655	)	$	(36,015	)	$	(36,015	)

The following table summarizes the effects on net income of significant amounts classified out of each component of accumulated other comprehensive loss for the thirteen and twenty-six week periods ended August 29, 2015 and August 30, 2014:

	Thirteen Week Periods Ended August 29, 2015 and August 30, 2014
	Amount reclassified from accumulated other comprehensive loss
Details about accumulated other comprehensive loss components	August 29, 2015			August 30, 2014			Affected line item in the condensed consolidated statements of operations
Defined benefit pension plans
Amortization of unrecognized prior service cost(a)	$	(18	)	$	(60	)	Selling, general and administrative expenses
Amortization of unrecognized net loss(a)	(978		)	(600		)	Selling, general and administrative expenses
	(996		)	(660		)	Total before income tax expense
	398			—			Income tax expense(b)
	$	(598	)	$	(660	)	Net of income tax expense

	Twenty-Six Week Periods Ended August 29, 2015 and August 30, 2014
	Amount reclassified from accumulated other comprehensive loss
Details about accumulated other comprehensive loss components	August 29, 2015			August 30, 2014			Affected line item in the condensed consolidated statements of operations
Defined benefit pension plans
Amortization of unrecognized prior service cost(a)	$	(34	)	$	(120	)	Selling, general and administrative expenses
Amortization of unrecognized net loss(a)	(1,957		)	(1,199		)	Selling, general and administrative expenses
	(1,991		)	(1,319		)	Total before income tax expense
	796			—			Income tax expense(b)
	$	(1,195	)	$	(1,319	)	Net of income tax expense

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

(a) See Note 12, Retirement Plans for additional details.

(b) Income tax expense is $0 for August 30, 2014 due to the valuation allowance. See Note 6, Income Taxes for additional details.

12. Retirement Plans

Net periodic pension expense recorded in the thirteen and twenty- six week periods ended August 29, 2015 and August 30, 2014, for the Company’s defined benefit plans includes the following components:

	Defined Benefit Pension Plan						Nonqualified Executive Retirement Plans				Defined Benefit Pension Plan						Nonqualified Executive Retirement Plans
	Thirteen Week Period Ended										Twenty-Six Week Period Ended
	August 29, 2015			August 30, 2014			August 29, 2015		August 30, 2014		August 29, 2015			August 30, 2014			August 29, 2015		August 30, 2014
Service cost	$	513		$	792		$	—	$	—	$	1,025		$	1,585		$	—	$	—
Interest cost	1,634			1,631			119		135		3,267			3,262			237		270
Expected return on plan assets	(1,593		)	(1,929		)	—		—		(3,186		)	(3,858		)	—		—
Amortization of unrecognized prior service cost	18			60			—		—		34			120			—		—
Amortization of unrecognized net loss	978			600			—		—		1,957			1,199			—		—
Net pension expense	$	1,550		$	1,154		$	119	$	135	$	3,097		$	2,308		$	237	$	270

During the thirteen and twenty-six week periods ended August 29, 2015 the Company contributed $395 and $772, respectively, to the Nonqualified Executive Retirement Plans and $0 to the Defined Benefit Pension Plan. During the remainder of fiscal 2016, the Company expects to contribute $769 to the Nonqualified Executive Retirement Plans and $0 to the Defined Benefit Pension Plan.

13. Segment Reporting

Prior to June 24, 2015, the Company’s operations were within one reportable segment. As a result of the completion of the Acquisition, the Company has realigned its internal management reporting to reflect two reportable segments, its retail drug stores (“Retail Pharmacy”), and its pharmacy services (“Pharmacy Services”) segments.

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

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

The following table is a reconciliation of the Company’s business segments to the condensed consolidated financial statements:

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

	Retail Pharmacy		Pharmacy Services		Intersegment Eliminations (1)			Consolidated
Thirteen Week Period Ended
August 29, 2015:
Revenues	$	6,647,243	$	1,071,889	$	(54,356	)	$	7,664,776
Gross Profit	1,860,513		61,778		—			1,922,291
Adjusted EBITDA	313,602		33,222		—			346,824
August 30, 2014:
Revenues	$	6,522,584	$	—	$	—		$	6,522,584
Gross Profit	1,894,579		—		—			1,894,579
Adjusted EBITDA	364,166		—		—			364,166
Twenty-Six Week Period Ended
August 29, 2015:
Revenues	$	13,294,804	$	1,071,889	$	(54,356	)	$	14,312,337
Gross Profit	3,720,043		61,778		—			3,781,821
Adjusted EBITDA	612,865		33,222		—			646,087
August 30, 2014:
Revenues	$	12,988,115	$	—	$	—		$	12,988,115
Gross Profit	3,697,558		—		—			3,697,558
Adjusted EBITDA	646,779		—		—			646,779

(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.

The following table reconciles net income to Adjusted EBITDA for the thirteen and twenty-six week periods ended August 29, 2015 and August 30, 2014:

	Thirteen Week Period Ended				Twenty-Six Week Period Ended
	August 29, 2015		August 30, 2014		August 29, 2015		August 30, 2014
	(dollars in thousands)
Net income	$	21,469	$	127,849	$	40,305	$	169,295
Interest expense	115,410		100,950		239,017		201,770
Income tax expense	16,463		19,860		28,904		31,741
Depreciation and amortization expense	127,699		101,484		237,348		204,589
LIFO charges	5,986		1,544		11,973		3,089
Lease termination and impairment charges	9,637		7,111		14,659		11,959
Loss on debt retirements, net	33,205		—		33,205		—
Other	16,955		5,368		40,676		24,336
Adjusted EBITDA	$	346,824	$	364,166	$	646,087	$	646,779

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

	Retail Pharmacy		Pharmacy Services		Eliminations (2)			Consolidated
August 29, 2015:
Total Assets	$	8,848,115	$	3,310,325	$	(179,209	)	$	11,979,231
Goodwill	76,124		1,457,703		—			1,533,827
Additions to property and equipment and intangible assets	314,774		371		—			315,145
February 28, 2015:
Total Assets	$	8,863,252	$	—	$	—		$	8,863,252
Goodwill	76,124		—		—			76,124
Additions to property and equipment and intangible assets	539,386		—		—			539,386

(2) Intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $143,000 against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $36,209, as of August 29, 2015, that represents amounts owed from the

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

Pharmacy Services segment to the Retail Pharmacy segment that are created when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products.

14. Commitments and Contingencies

Legal Matters

The Company is a party to legal proceedings, investigations and claims in the ordinary course of its business, including the matters described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.

The Company’s contingencies are subject to significant uncertainties, 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.

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, punitive 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. At this time, 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. The Company’s management believes, however, that this lawsuit is without merit and is vigorously defending this lawsuit.

The Company is currently a defendant in several putative class action lawsuits filed in state Courts in California alleging violations of California wage and hour laws, rules and regulations pertaining primarily to failure to pay overtime, pay for missed meals and rest periods, failure to reimburse business expenses and failure to provide employee seating (the “California Cases”). These suits purport to be class actions and seek substantial damages. The Company has aggressively challenged both the merits of the lawsuits and the allegations that the cases should be certified as class or representative actions.

With respect to cases involving pharmacist meal and rest periods (Chase and Scherwin v. Rite Aid Corporation pending in Los Angeles County Superior Court and Kyle v. Rite Aid Corporation pending in Sacramento County Superior Court), during the period ended March 1, 2014, the Company recorded a legal accrual with respect to these matters. The Company and the attorneys representing the putative class of pharmacists have agreed to a class wide settlement of the case of $9.0 million subject to final Court approval. The parties are in the process of obtaining Court approval.

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 are stayed pending a decision by the California Supreme Court in two similar cases. With respect to the California Cases (other than Chase and Scherwin and Kyle), the Company, at this time, is not able to predict either the outcome of these lawsuits or estimate a potential range of loss with respect to said lawsuits.

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RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

The Company was served with a Civil Investigative Demand Subpoena Duces Tecum dated August 26, 2011 by the United States Attorney’s Office for the Eastern District of Michigan. The subpoena requests records regarding the relationship of Rite Aid’s Rx Savings Program to the reporting of usual and customary charges to publicly funded health programs. In connection with the same investigation, the Company was served with a Civil Subpoena Duces Tecum dated February 22, 2013 by the State of Indiana Office of the Attorney General requesting additional information regarding both Rite Aid’s Rx Savings Program and usual and customary charges. The Company has responded to both of the subpoenas. To enable the parties to discuss a possible resolution, the Medicaid Fraud Control Units of the several states, commonwealths and the District of Columbia and Rite Aid have entered into an agreement tolling the statute of limitations until October 7, 2015. The parties agreed to extend the tolling agreement until April 7, 2016. At this stage of the proceedings, Rite Aid is unable to predict the outcome of any review by the government of such information.

In April 2012, the Company received an administrative subpoena from the 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 United States Attorney’s Office (“USAO”) for the Northern District of New York concerning an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 (“CMEA”). In April 2013, the Company received additional administrative subpoenas from DEA concerning certain retail PSE transactions at New York stores and the USAO commenced discussions with the Company regarding whether, from 2009 (upon implementation of an electronic PSE transaction logbook system) through the present, the Company sold products containing PSE in violation of the CMEA. The Company received additional administrative subpoenas from the DEA beginning in December 2013 requesting information in connection with an investigation of violations of the CMEA in West Virginia and New York. On September 2, 2015, the Company received a grand jury subpoena from the United States District Court for the Southern District of West Virginia seeking additional information in connection with the investigation of violations of the CMEA in West Virginia. Violations of the CMEA could result in the imposition of administrative, civil and/or criminal penalties against the Company. The Company is cooperating with the government and continues to provide information responsive to the subpoenas. The Company has entered into a tolling agreement with the USAO. Discussions are underway to resolve these matters with the United States Attorney’s Offices for the Northern District of New York, the Eastern District of New York, and the Southern District of West Virginia, but whether an agreement can be reached and on what terms are 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.

In January 2013, the DEA, Los Angeles District Office, served an administrative subpoena on the Company seeking documents related to prescriptions by a certain prescriber. The USAO, Central District of California, also contacted the Company about a related investigation into allegations that Rite Aid pharmacies filled certain controlled substance prescriptions for a number of practitioners after their DEA registrations had expired or otherwise become invalid in violation of the federal Controlled Substances Act and DEA regulations. The Company responded to the administrative subpoena and subsequent informal requests for information from the USAO. The Company met with the USAO and DEA in January 2014 and is involved in ongoing discussions with the government regarding this matter. The Company recorded a legal accrual during the period ended March 1, 2014.

The Company was served with a Civil Investigative Demand (“CID”) dated June 21, 2013 by the USAO for the Eastern District of California and the Attorney General’s Office of the State of California (the “AG”). The CID requests records and responses to interrogatories regarding Rite Aid’s Drug Utilization Review and prescription dispensing protocol and the dispensing of drugs designated “Code 1” by the State of California. The Company is in the process of producing responsive documents and interrogatory responses to the USAO and AG and is unable to predict the timing or outcome of any review by the government of such information.

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.

Contingencies

The California Department of Health Care Services (“DHCS”), the agency responsible for administering the State of California Medicaid program, implemented retroactive reimbursement rate reductions effective June 1, 2011, impacting the medical provider community in California, including pharmacies. Numerous medical providers, including representatives of both chain and independent pharmacies, filed suits against DHCS in Federal District Court in California and obtained preliminary injunctions against the rate cuts, subject to a trial on the merits. DHCS appealed the preliminary injunctions to the Ninth Circuit Court of Appeals, which Court vacated the injunctions. Based upon the actions of DHCS and the decision of the Appeals Court, the Company recorded an appropriate accrual. In January 2014, the Center for Medicare and Medicaid Services approved a state plan amendment that excluded certain drugs from the retroactive reimbursement rate reductions effective March 31, 2012. Accordingly, the Company adjusted its

Table of Contents

RITE AID CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

(unaudited)

accrual during that fiscal year to take into account this exclusion. As pertinent facts and circumstances develop, this accrual may be adjusted further.

15. Guarantor and Non-Guarantor Condensed Consolidating Financial Information

Rite Aid Corporation conducts the majority of its business through its subsidiaries. With the exception of EIC, substantially all of Rite Aid Corporation’s 100 percent owned subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes (the “Subsidiary Guarantors”). Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes, were minor. Accordingly, condensed consolidating financial information for the Company and subsidiaries is not presented for those periods. Condensed consolidating financial information for the Company, its Subsidiary Guarantors and non-guarantor subsidiaries, is presented for periods subsequent to the Acquisition.

For the purposes of preparing the information below, Rite Aid Corporation uses the equity method to account for its investment in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in the non-guarantor subsidiaries. The subsidiary guarantees related to the Company’s Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities and secured guaranteed notes and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. Presented below is condensed consolidating financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the Non-Guarantor Subsidiaries at August 29, 2015 and for the thirteen and twenty-six week periods ended August 29, 2015. Separate financial statements for Subsidiary Guarantors are not presented.

	Rite Aid Corporation
	Condensed Consolidating Balance Sheet
	August 29, 2015
	(unaudited)
	Rite Aid Corporation (Parent Company Only)		Subsidiary Guarantors		Non- Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	120,905	$	31,742	$	—		$	152,647
Accounts receivable, net	—		1,299,313		573,663		—			1,872,976
Intercompany receivable			271,673		—		(271,673		)(a)	—
Inventories, net of LIFO reserve of $0, $1,009,501, $0, $0, and $1,009,501	—		2,902,749		—		—			2,902,749
Deferred tax assets	—		17,122		701		—			17,823
Prepaid expenses and other current assets	—		137,841		3,098		—			140,939
Total current assets	—		4,749,603		609,204		(271,673		)	5,087,134
Property, plant and equipment, net	—		2,198,674		—		—			2,198,674
Goodwill	—		1,533,827		—		—			1,533,827
Other intangibles, net	—		1,117,595		107,936		—			1,225,531
Deferred tax assets	—		1,617,311		—		—			1,617,311
Investment in subsidiaries	14,527,800		129,383		—