Overview

Net loss for the thirteen week period ended May 30, 2009 was $98.4 million compared to net loss of $156.6 million for the thirteen week period ended May 31, 2008. Revenues have decreased in the current quarter due to store closures and the current economic environment. There has also been a slight decrease in gross margin rate, due to reimbursement rate pressures, and an increase in store closing and impairment charges. These items were more than offset by a decrease in selling, general and administrative expenses ("SG&A") as a percent of revenues, and an increase in gain on the sale of fixed assets, which was driven by sales of prescription files at certain closed stores and the sale of twelve stores in California and Idaho. These items are described in further detail in the following sections.

Results of Operations

     Revenues and Other Operating Data

                                                        Thirteen Week Period Ended
                                                         May 30,           May 31,
                                                           2009             2008
                                                          (dollars in thousands)
 Revenues                                              $   6,531,178     $ 6,612,856
 Revenue (decline)growth                                        (1.2 )%         49.3 %
 Same store sales growth                                         0.6 %           1.5 %
 Pharmacy sales (decline) growth                                (0.3 )%         55.7 %
 Same store pharmacy sales growth                                1.6 %           1.4 %
 Pharmacy sales as a % of total sales                           68.2 %          67.6 %
 Third party sales as a % of total pharmacy sales               96.3 %          96.2 %
 Front-end sales (decline) growth                               (3.2 )%         35.3 %
 Same store front-end sales (decline) growth                    (1.6 )%          1.7 %
 Front-end sales as a % of total sales                          31.8 %          32.4 %
 Store data:
     Total stores beginning of period                          4,901           5,059
     New stores                                                   10               5
     Store acquisitions, net                                       -               8
     Closed stores                                               (86 )           (68 )
     Total stores end of period                                4,825           5,004
     Relocated stores                                             17               6
     Remodeled stores                                              3              39

Revenue declined 1.2% for the thirteen week period ended May 30, 2009. This revenue decline was driven primarily by a reduction in the store base. Revenue growth in the thirteen week period ended May 31, 2008 was driven primarily by the acquisition of the Brooks Eckerd stores on June 4, 2007. Same store sales trends, which include the Brooks Eckerd stores, are described in the following paragraphs.

Pharmacy same store sales increased by 1.6% in the thirteen week period ended May 30, 2009, primarily driven by an increase in same store prescription growth of 2.2%. Our script growth was positively impacted by the growth of our Rx Savings Card program, the benefit of grassroots marketing initiatives in our high-volume front-end/low-volume pharmacy stores, our automated refill reminder program and growth in our courtesy refill program. The impact of the increase in prescription count on our same store pharmacy sales was partially offset by an increase in generic sales.

Front-end same store sales decreased by 1.6% in the thirteen week period ended May 30, 2009. The decrease was due to weakness in the overall economic environment and not running certain Brooks-Eckerd promotional sales that were run in the prior year.

We include in same store sales all stores that have been open or owned at least one year. Relocated stores are not included in the same store sales for one year. Stores in liquidation are considered closed.

     Costs and Expenses

                                              Thirteen Week Period Ended
                                                May 30,          May 31,
                                                 2009             2008
                                                (dollars in thousands)
          Cost of goods sold                 $    4,757,112    $ 4,804,610
          Gross profit                            1,774,066      1,808,246
          Gross margin rate                            27.2 %         27.3 %
          Selling, general and
          administrative expenses                 1,710,672      1,792,974
          Selling, general and
          administrative expenses as a
          percentage of revenues                       26.2 %         27.1 %
          Lease termination and
          impairment charges                         66,986         36,262
          Interest expense                          109,478        118,240

Gross margin rate was 27.2% for the thirteen week period ended May 30, 20098 compared to 27.3% for the thirteen week period ended May 31, 2008. The decrease in gross margin rate was concentrated in pharmacy gross margin, due to a reduction in reimbursement rates. The reimbursement rate reduction was similar to last year's first quarter; however, this year we were unable to fully offset the impact of these reductions with generic product cost reductions and improvement in generic penetration. Front end gross margin rates improved slightly over prior year, due to improvements in shrink and private brand penetration, offset partially by lower vendor allowances resulting from reduced purchases.

We use the last-in, first-out (LIFO) method of inventory valuation, which is determined annually when inflation rates and inventory levels are finalized. Therefore, LIFO costs for interim period financial statements are estimated. Cost of sales includes LIFO charges of $14.8 million for the thirteen week period ended May 30, 2009 versus LIFO charges of $15.1 million for the thirteen week period ended May 31, 2008.

SG&A as a percentage of revenues was 26.2% in the thirteen week period ended May 30, 2009 compared to 27.1% in the thirteen week period ended May 31, 2008. The decrease in SG&A as a percentage of revenues is due to a decrease in expenses related to the integration of the Brooks Eckerd stores and distribution centers, a decrease in salaries and benefit costs due to better labor control, and reductions in administrative expenses due to various efforts to reduce costs.

Lease termination and Impairment Charges

Lease termination and impairment charges consist of:

                                                        Thirteen Week
                                                        Period Ended
                                                May 30, 2009     May 31, 2008
                                                   (dollars in thousands)
      Impairment charges                        $       3,484    $       2,594
      Store and equipment lease exit charges           63,502           33,668

                                                $      66,986    $      36,262

Impairment Charges: Impairment charges include non-cash charges of $3.5 million and $2.6 million in the thirteen week periods ended May 30, 2009 and May 31, 2008, respectively, for the impairment of long-lived assets at 23 and 30 stores, respectively. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable.

Store and Equipment Lease Exit Charges: During the thirteen week periods ended May 30, 2009 and May 31, 2008, we recorded charges for 64 and 49 stores, respectively, closed or relocated under long-term leases. Charges to close a store, which principally consist of lease termination costs, are recorded at the time the store is closed and all inventory is liquidated, pursuant to the guidance set forth in SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". We calculate our liability for closed stores on a store-by-store basis. The calculation includes the discounted effect of future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or favorable lease terminations. We evaluate these assumptions each quarter and adjust the liability accordingly. The increase in the store and equipment lease exit charge for the thirteen week period ended May 30, 2009 is primarily due to an increase in the number of stores closed during the quarter.

As part of our ongoing business activities, we assess stores for potential closure. Decisions to close stores in future periods would result in charges for store lease exit costs and liquidation of inventory, as well as impairment of assets at these stores.

Interest expense was $109.5 million for the thirteen week period ended May 30, 2009, compared to $118.2 million for the thirteen week period ended May 31, 2008. The decrease in interest expense for the thirteen week period ended May 30, 2009 was primarily due to decreased borrowings on the revolver under senior secured credit facility as well as the decreased LIBOR rates. As a result of the Refinancing, we expect interest expense to increase for the remainder of the fiscal year and to be in the range of $515.0 million to $530.0 million for the year.

The weighted average interest rates on our indebtedness for the thirteen week periods ended May 30, 2009 and May 31, 2008 were 6.3% and 7.0%, respectively.

We recorded an income tax expense of $5.3 million and $5.0 million for the thirteen week periods ended May 30, 2009 and May 31, 2008, respectively. The expense for income taxes for the thirteen week period ended May 30, 2009 and May 31, 2008 is primarily attributable to the accrual of state and local taxes respectively.

As of May 30, 2009 the total amount of unrecognized tax benefits related to business combinations that would have been recorded as an adjustment to goodwill and not impact the effective tax rate in a future period was $259.0 million under SFAS 141. However, upon the adoption of SFAS 141(R), which applies to our fiscal year 2010, changes in income tax uncertainties recorded in a business combination will be recorded in income tax expense and will no longer impact goodwill. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is maintained against our net deferred tax assets. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, we do not expect the change to have a significant impact on the results of operations or the financial position of our company.

We recognize tax liabilities in accordance with FIN 48 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.

Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. In determining whether a valuation allowance is required, we take into account all available positive and negative evidence with regard to the recognition of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect recognition of a deferred tax asset, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. According to SFAS No. 109, a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, SFAS No. 109 precludes relying on projections of future taxable income to support the recognition of deferred tax assets. Accordingly, the valuation allowance on federal and state net deferred tax assets was increased during the third and fourth quarters of 2009 related to the write-down of our remaining net Federal and State deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.

Liquidity and Capital Resources

We have four primary sources of liquidity: (i) cash and cash equivalents,
(ii) cash provided by operating activities, (iii) the sale of accounts receivable under our receivable securitization agreements and (iv) the revolving credit facility under our senior secured credit facility. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt, to fund capital expenditures and to provide funds for the prepayment of debt.

In June 2009, we repaid all borrowings outstanding under our revolving credit facility due September 2010 and cancelled all of our $1.75 billion of commitments thereunder. We also paid all borrowings due under our $145.0 million Tranche 1 Term Loan due September 2010. We financed these repayments with borrowings under a new $1.0 billion revolving credit facility due September 2012, the issuance of a $525.0 million Tranche 4 term loan due June 2015 and the issuance of $410.0 million of new 9.75% senior secured notes due June 2016 (the "Refinancing"). The terms of our senior secured credit facility were amended to permit the Refinancing and provided additional flexibility to refinance the accounts receivable securitization facilities. We incurred fees of approximately $45.0 million to consummate the Refinancing, which will be deferred and amortized over the terms of the related debt instruments. The descriptions of the key terms of our credit facility and other key debt transactions reflect the changes made by the Refinancing, where appropriate.

As of May 30, 2009, we had a $1.75 billion revolving credit facility. Borrowings under this revolving credit facility bore interest at LIBOR plus 1.50%, if we chose to make LIBOR borrowings, or at Citibank's base rate plus 0.50%. The interest rate could fluctuate depending on the amount of revolver availability, as specified in the senior secured credit facility. We were required to pay fees of 0.25% per annum on the daily unused amount of the revolving credit facility.

Our ability to borrow under the revolving credit facility was based upon a specified borrowing base consisting of inventory and prescription files. At May 30, 2009, we had $535.0 million of borrowings outstanding under the revolving credit facility. At May 30, 2009, we also had letters of credit outstanding against the revolving credit facility of $187.1 million. We had additional borrowing capacity of $901.8 million under the revolving credit facility as of May 30, 2009.

As a result of the Refinancing, we repaid all borrowings outstanding under our revolving credit facility (and cancelled all of our commitments thereunder) and entered into a new $1.0 billion revolving credit facility. Borrowings under the new revolving credit facility bear interest at LIBOR plus 4.50% (with a minimum LIBOR of 3.00%), if we choose to make LIBOR borrowings, or at Citibank's base rate plus 3.50% (with a minimum base rate of 4.00%). After November 30, 2009, the interest rate can fluctuate between 4.25% and 4.75%, based upon the amount of revolver availability, as defined in the senior secured credit facility. We are required to pay fees of 1.00% per annum, and, following the second fiscal quarter after the effective date of the new revolver, between 0.75% and 1.00% per annum on the daily unused amount of the new revolving credit facility, depending on the amount of revolver availability. Amounts drawn under the new revolving credit facility become due and payable in September 2012.

In November 2006, we entered into an amendment of our senior secured credit facility and borrowed $145.0 million under a senior secured term loan (the "Tranche 1 Term Loans"). The Tranche 1 Term Loans bore interest at LIBOR plus 1.50%, if we chose to make LIBOR borrowings, or at Citibank's base rate plus 0.50%. Subsequent to May 30, 2009, the Tranche 1 Term Loans were repaid as part of the Refinancing.

On June 4, 2007, we further amended our senior secured credit facility to establish a new senior secured term loan in the aggregate principal amount of $1,105.0 million and borrowed the full amount thereunder. A portion of the proceeds from the borrowings under this senior secured term loan (the "Tranche 2 Term Loans") were used to fund the acquisition of Brooks Eckerd. The Tranche 2 Term Loans will mature on June 4, 2014 and currently bear interest at LIBOR plus 1.75%, if we choose to make LIBOR borrowings, or at Citibank's base rate plus 0.75%. We must make mandatory prepayments of the Tranche 2 Term Loans with the proceeds of asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by us (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and debt (subject to certain exceptions). If at any time there is a shortfall in our borrowing base under our senior secured credit facility, prepayment of the Tranche 2 Term Loans may also be required.

In July 2008, we issued a new senior secured term loan (the "Tranche 3 Term Loan") of $350.0 million under our existing secured credit facility. The Tranche 3 Term Loan was issued at a discount of 90% of par. The Tranche 3 Term Loan matures on June 4, 2014 and bears interest at LIBOR (with a minimum LIBOR of 3.00%) plus 3.00%, if we choose to make LIBOR borrowings, or at Citibank's base rate (with a minimum base rate of 4.00%) plus 2.00%. We must make mandatory prepayments of the Tranche 3 Term Loan with the proceeds of asset dispositions (subject to certain limitations), with a portion of any excess cash flow generated by us (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and debt (subject to certain exceptions). If at any time there is a shortfall in our borrowing base under the senior secured credit facility, prepayment of the Tranche 3 Term Loans may also be required.

In June 2009, as part of the Refinancing, we issued a new senior secured term loan (the "Tranche 4 Term Loan") of $525.0 million under our existing secured credit facility. The Tranche 4 Term Loan was issued at a discount of 96% of par. The Tranche 4 Term Loan matures on June 10, 2015 and bears interest at a rate per annum equal to, at our option, either (a) an adjusted LIBOR rate (with a LIBOR floor of 3.00% per annum) plus 6.50% or (b) Citibank's base rate (with a floor of 4.00% per annum) plus 5.50%. We must make mandatory prepayments of the Tranche 4 Term Loan with the proceeds of certain asset dispositions (subject to certain limitations), with a portion of any excess cash flow generate by us (as defined in the senior secured credit facility) and with the proceeds of certain issuances of equity and debt (subject to certain exceptions). If at any time there is a shortfall in our borrowing base under the senior secured credit facility, prepayment of the Tranche 4 Term Loan may also be required.

The senior secured credit facility allows us to have outstanding, at any time, up to $1.5 billion in secured second priority debt and unsecured debt in addition to borrowings under the senior secured credit facility and existing indebtedness, provided that not in excess of $750.0 million of such secured second priority debt and unsecured debt shall mature or require scheduled payments of principal prior to three months after June 4, 2014. The senior secured credit facility allows us to incur an unlimited amount of unsecured debt with a maturity beyond three months after June 4, 2014; however other notes limit the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence of said debt. The senior secured facility also allows, so long as the senior secured credit facility is not in default, for the repurchase of any debt with a maturity on or before June 4, 2014 and for the voluntary repurchase of debt with a maturity after June 4, 2014 if we maintain availability on the revolving credit facility of at least $100.0 million. The amendments to the senior secured credit facility that were implemented as part of the Refinancing allow us greater flexibility to refinance our other indebtedness, including our accounts receivable securitization facilities.

The senior secured credit facility contains covenants, which place restrictions on the incurrence of debt beyond the restrictions described above, the payment of dividends, mergers and acquisitions and the granting of liens. The senior secured credit facility also requires us to maintain a minimum fixed charge coverage ratio, but only if availability on the revolving credit facility is less than $150.0 million.

The senior secured credit facility provides for events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity or require the repurchase of such debt.

In June 2009, as part of the Refinancing, we issued $410.0 million of 9.75% senior secured notes due June 12, 2016. These notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsubordinated indebtedness. Our obligations under these notes are guaranteed, subject to certain limitations, by the same subsidiaries that guarantee the obligations under the senior secured credit facility. These guarantees are shared, on a senior basis, with debt outstanding under the senior secured credit facility. The indenture that governs the 9.75% notes contains covenant provisions that, among other things, allow the holders of the notes to participate along with the term loan holders in mandatory prepayments resulting from the proceeds of certain asset dispositions (at the option of the noteholder) and include limitations on our ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale-leaseback transactions. The 9.75% senior secured notes due June 2016 were issued at 98.2% of par.

The indentures that govern our secured and guaranteed unsecured notes contain restrictions on the amount of additional secured and unsecured debt that can be incurred by us. As of May 30, 2009, the amount of additional secured and unsecured debt that could be incurred under these indentures is $1.2 billion.

There were no sale leaseback transactions for the thirteen week period ended May 30, 2009.

During the thirteen week period ended May 31, 2008, we sold a total of 35 owned stores to independent third parties. Net proceeds from these sales were $98.8 million. Concurrent with these sales, we entered into agreements to lease the stores back from the purchasers over minimum lease terms of 20 years. We accounted for 31 of these leases as operating leases and four were initially being accounted for under the financing method as these lease agreements contain a clause that allows the buyer to force us to repurchase the property under certain conditions. Gains on these transactions of $2.3 million have been deferred and are being recorded over the related minimum lease terms. Losses of $0.1 million which relate to certain stores in these transactions, were recorded as losses on the sale of assets and investments. Subsequent to May 31, 2008, the clause that allowed the buyer to force us to repurchase the properties lapsed on two of the four leases. Therefore, these leases are now accounted for as operating leases.

We maintain securitization agreements (the "First Lien Facility") with several multi-seller asset-backed commercial paper vehicles ("CPVs"). Under the terms of the First Lien Facility, we sell substantially all of our eligible third party pharmaceutical receivables to a bankruptcy remote Special Purpose Entity ("SPE") and retain servicing responsibility. The assets of the SPE are not available to satisfy the creditors of any other person, including any of our affiliates. These agreements provide for us to sell, and for the SPE to purchase these receivables. The SPE then transfers an interest in these receivables to various CPVs. We guarantee certain performance obligations of our affiliates under the securitization agreements, which include continued servicing of such receivables, but do not guarantee the collectibility of the receivables and obligor creditworthiness. These agreements provide for us to sell and for the SPE to purchase these receivables. The SPE then transfers an interest in these receivables to various CPVs.

Under the terms of the First Lien Facility, the amount of interest in receivables that can be transferred to the CPVs is $345.0 million at May 30, 2009. The amount of transferred receivables outstanding at any one time is dependent upon a formula that takes into account such factors as default history, obligor concentrations and potential dilution ("Securitization Formula"). Adjustments to this amount can occur, at the discretion of the CPVs, on a weekly basis. At May 30, 2009 and February 28, 2009, the total of outstanding receivables that had been transferred to the CPVs were $300.0 million and $330.0 million, respectively. The following table details receivable transfer activity for the thirteen week periods presented (in thousands):

                                                 May 30,       May 31,
                                                  2009          2008
            Average amount of outstanding
            receivables transferred            $   253,736   $   421,538
. . .