1
RITE AID
CORPORATION
1994
ANNUAL
REPORT
[GRAPHICS -- SEE EDGAR APPENDIX]
2
HIGHLIGHTS
Years ended February 26, 1994, and February 27, 1993
- - ------------------------------------------------------------------------------------------------------------------------
1994 1993***
(52 WEEKS) (52 WEEKS)
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NET SALES $4,058,711,000 $3,833,591,000
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INCOME FROM CONTINUING OPERATIONS $ 26,208,000* $ 123,750,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (16,920,000)** 8,646,000
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NET INCOME $ 9,288,000 $ 132,396,000
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EARNINGS (LOSS) PER COMMON SHARE
CONTINUING OPERATIONS $ .30 $ 1.41
DISCONTINUED OPERATIONS (.19) .10
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NET INCOME $ .11 $ 1.51
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DIVIDENDS PER COMMON SHARE $ .60 $ .5625
AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 87,972,000 87,933,000
TOTAL ASSETS $1,989,070,000 $1,858,506,000
STOCKHOLDERS' EQUITY $ 954,714,000 $1,035,643,000
CURRENT RATIO 3.1:1 4.0:1
NUMBER OF EMPLOYEES 27,364 27,750
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Note: The company uses the LIFO method of accounting for a significant
portion of its inventories. Under the FIFO method, net income would have
been higher by $6,656,000 or $.07 per share and $10,585,000 or $.12 per
share for fiscal years 1994 and 1993, respectively.
* Income from continuing operations for the 52 weeks ended February 26,
1994, includes a $149,196,000 one-time, pre-tax provision for corporate
restructuring and other charges. The after-tax impact of this charge is
$90,637,000 or $1.03 per share. Earnings per share for income from
continuing operations excluding restructuring and other charges are $1.33
for the 52-week period (see Note 2 of Notes to Consolidated Financial
Statements).
** Income from discontinued operations for the 52 weeks ended February 26,
1994, includes a $42,000,000 loss on disposal of discontinued operations
less applicable income tax benefit of $16,380,000 (see Note 3 of Notes to
Consolidated Financial Statements).
*** Restated to reflect operations discontinued in fiscal year 1994 (see Note
3 of Notes to Consolidated Financial Statements).
ABOUT THE COMPANY
Rite Aid Corporation is one of the largest U.S. drugstore chains. On February
26, 1994, it operated 2,690 drugstores in 23 eastern states and the District of
Columbia. Pharmacy service forms the core of Rite Aid's business, with
prescriptions accounting for 50.8% of drugstore sales this year.
The company's bantam, 9,600-square-foot drugstores cater to convenience,
offering a full selection of health and personal care products, seasonal
merchandise and a large private label product line. Express mail with
complementary services and one-hour photo departments have recently been added
in select locations.
The company also operates Eagle Managed Care Corporation, a wholly owned
subsidiary that markets prescription plans and sells other managed health care
services to large employers and government-sponsored employee benefit programs.
CONTENTS
Letter to Stockholders 2
Strategies for Growth 5
Management's Discussion and Analysis of Results of
Operations and Financial Condition 12
Management's Responsibility for Financial Statements 15
Independent Auditors' Report 15
Consolidated Balance Sheet 16
Consolidated Statement of Income 17
Consolidated Statement of Stockholders' Equity 18
Consolidated Statement of Cash Flows 19
Notes to Consolidated Financial Statements 20
Interim Financial Results 27
Ten-Year Financial Review 28
Directors and Officers 30
Investment Information INSIDE BACK COVER
3
RITE AID IS POSITIONED FOR
GROWTH IN THE YEARS AHEAD--
AS OUR COUNTRY ADJUSTS TO
CHANGES IN HEALTH CARE AND
GENERAL MARKETPLACE CONDI-
TIONS. WE HAVE REFOCUSED OUR
RESOURCES ON OUR DRUGSTORE
BUSINESS AND HAVE UNDER-
TAKEN EXTENSIVE EFFORTS TO
GENERATE RAPID GROWTH IN
PRESCRIPTION REVENUES.
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LETTER TO STOCKHOLDERS
[PHOTO -- SEE EDGAR APPENDIX]
Fiscal 1994 was a year of major strategic change for Rite Aid Corporation. A
decision was made in January to focus all of our resources on the enhancement
of the drugstore business. Therefore, all four non-drugstore units were offered
for sale. By the end of this summer, we expect to have sold ADAP auto parts
stores, Encore bookstores, Concord Custom Cleaners and Sera-Tec Biologicals.
During this past year extensive efforts were undertaken to position your
company for rapid growth in prescription revenues. We created a new entity,
Eagle Managed Care, which will coordinate all of our efforts in pharmacy
benefit management. In addition, we completed the installation of a satellite
network that now links our stores to a central computer system in our corporate
data center in Shiremanstown, Pennsylvania.
Rite Aid was and continues to be a major industry proponent of national
health care, advocating legislation that includes universal prescription
coverage and comparable manufacturer pricing for all purchasers of
pharmaceuticals of like quantities. In addition, we strongly urged the National
Association of Chain Drug Stores (NACDS) to enter the pharmacy benefit
management industry on behalf of its constituents. NACDS formed a new
member-owned company named Pharmacy Direct Network, an entity that will
complement our own Eagle Managed Care. Lastly, Rite Aid was the lead plaintiff
in a lawsuit filed in Federal District Court against seven major pharmaceutical
manufacturers alleging price discrimination.
Earnings and sales for Rite Aid now reflect the elimination of the
businesses that are to be sold. Revenues in our drugstores advanced 5.9 percent
to $4,058,711,000 from $3,833,591,000 last year. Earnings from continuing
operations excluding restructuring and other charges were $116,845,000 or $1.33
per share compared to $123,750,000 or $1.41 per share the previous year. Lower
margins from the rapidly growing third-party prescription business, coupled
with expenses incurred in the implementation of new technology systems into our
stores, were the major reasons for the disappointing results. Taking into
account restructuring costs for store closings plus other charges and a
provision for the sale of the non-drugstore divisions, net income for the year
was $9,288,000 or $.11 per share.
Concurrent with our plan to divest the non-drugstore companies, we decided
to close 200 underperforming drugstores. The process has
[DRUGSTORE SALES BAR CHART -- SEE EDGAR APPENDIX]
Drugstore Sales
Dollars in Billions
(Graphic material omitted)
Fiscal Year 1985 $ 1.297
1986 1.470
1987 1.651
1988 2.381
1989 2.729
1990 3.011
1991 3.260
1992 3.531
1993 3.834
1994 4.059
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5
[PHOTO -- SEE EDGAR APPENDIX]
begun and we anticipate achieving this objective by the end of this summer. We
also announced a plan to repurchase up to 22,000,000 shares of Rite Aid common
stock in a tender offer. Unfortunately, only 2,077,271 shares were tendered to
the company at a price of $18.50 per share. Subsequent to this offer, the Board
of Directors authorized an additional share repurchase program of up to
5,000,000 shares in the open market.
Recognizing the growing significance of managed care to our pharmacy
business, we have established our own pharmacy benefit management company.
Eagle Managed Care was created by combining our third-party marketing group
with two modest acquisitions that occurred in January 1994. We purchased
Intell-Rx Incorporated, a drug utilization review company, and Pharmacy-Card,
Inc. (PCI), a full-scale pharmacy benefit manager. Intell-Rx has developed
proprietary computer software which it utilizes to retrospectively review the
prescribing patterns of physicians. Analyzing generic usage, therapeutic
equivalents, refill compliance and dosage strength, Intell-Rx works with
third-party payers in an effort to help them control their prescription costs.
PCI currently administers prescription coverage for over 2.5 million lives. It
provides state-of-the-art claims processing and on-line adjudication to more
than 26,000 drugstores across the United States. Also, PCI has a national sales
force that markets prescription programs throughout the country.
Eagle Managed Care possesses all of the capabilities of established
national pharmacy benefit managers. We now have a mechanism in place to market
pharmacy benefit management in areas where we have a large concentration of
stores, as well as where we do not have a Rite Aid presence. We intend to focus
in the near term on three principal customer groups - health maintenance
organizations, regional corporations and local government employees. We will be
expanding our sales force during the year to increase our marketing effort.
Rite Aid expects to rapidly become an important player in this expanding
business.
Fiscal 1994 was another period of major investment in technology in our
stores. Last December, we completed the installation of satellite receivers and
transmitters throughout the chain. At this time, we are introducing proprietary
on-line software created specifically to operate a centralized prescription
system. By the end of fiscal 1995, all Rite Aid stores will be able to fill
prescriptions for customers at any one of our units with the
[INCOME FROM CONTINUING OPERATIONS BAR CHART -- SEE EDGAR APPENDIX]
Income from Continuing Operations
Dollars in Millions
(Graphic material omitted)
Fiscal Year 1985 $ 60.9
1986 61.7
1987 69.2
1988 86.1
1989 87.7
1990 76.9 $ 90.3 **
1991 100.1
1992 114.9
1993 123.7
1994 26.2 116.8 *
* Income from continuing operations excluding the after-tax effect of the
provision for corporate restructuring and other charges.
** Income from continuing operations excluding the after-tax effect of the
provision for video cassette rental department closings.
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records maintained in a central computer file. Currently, 365 stores are
utilizing the system and the initial feedback from both customers and
pharmacists has been excellent. We are also in the process of implementing an
automatic inventory replenishment system throughout the chain. This software
and hardware enable our stores to produce computer-generated orders,
eliminating the need for manual order writing. We are able to maintain a better
in-stock condition with less inventory, while reducing costs and enhancing
sales. Installation of this system will be completed within the year.
Our store activity last year was the most aggressive in our history. We
opened 189 new stores and completely remodeled 204 units. These numbers include
78 existing profitable stores that were either relocated to larger premises or
expanded in place. This year we will add approximately 100 new stores and
continue to maintain a strong remodeling and replacement program. Our primary
focus will be to open freestanding units. Last month we unveiled a new
prototype of 9,600 square feet. This larger format will enable us to offer the
customer the ultimate in convenience and merchandise selection.
Our balance sheet continues to reflect our strong financial position.
Shareholders' equity at year end was $954,714,000 after the purchase of the
shares in the self-tender offer. Total assets were almost two billion dollars
and total debt was $644,330,000. Dividends were paid to shareholders for the
26th consecutive year. We are hopeful that our current efforts will be
reflected in an improvement in the price of the stock. The potential for
profitable expansion should increase as the industry continues to consolidate
in the next few years. Acquisition of smaller chains and independent drugstores
will enable us to strengthen our position in existing markets.
Our successes as a corporation reflect the hard work and dedication of the
more than 27,000 associates who run the stores, operate the distribution
centers and manage our activities. Their efforts have made our achievements
possible over the years. We also express appreciation to our vendors and
suppliers whose goods and services play a vital role in our accomplishments.
/S/ ALEX GRASS
--------------
Alex Grass
Chairman of the Board and Chief Executive Officer
/S/ MARTIN L. GRASS
-------------------
Martin L. Grass
President and Chief Operating Officer
April 15, 1994
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STRATEGIES FOR GROWTH
[GRAPHICS -- SEE EDGAR APPENDIX]
MANAGED CARE
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PAGE 6
[GRAPHICS -- SEE EDGAR APPENDIX]
CONVENIENCE & MERCHANDISING
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PAGE 8
[GRAPHICS -- SEE EDGAR APPENDIX]
TECHNOLOGY
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PAGE 11
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MANAGED CARE
By 1995, a major portion of U.S. companies will offer their employees some type
of managed health care plan. * With pharmacy as the cornerstone of its retail
business, Rite Aid is uniquely positioned to participate in this changing
environment. The company's 23-state network offers enhanced pharmacy service to
growing numbers of prescription programs. * Soon, all Rite Aid pharmacists will
be using a sophisticated computer network to access centrally stored patient
records and manage drug therapies for patients and the companies who pay for
their prescriptions. Pharmacists can evaluate patient drug interaction
potential, make alternate, less costly prescribing recommendations to
physicians, and notify customers when they need to refill a prescription. * In
addition, Eagle Managed Care Corporation, a newly formed subsidiary, offers
full-scale managed care administrative services. Eagle can analyze a program's
current prescription costs, monitor members' drug use, identify costly
prescribing habits and make changes in patient therapies. Combined, these
services result in more positive medical outcomes that reduce overall health
care costs.
[GRAPHICS -- SEE EDGAR APPENDIX]
THIS PAGE
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CLOCKWISE FROM TOP: OF THE APPROXIMATELY 81 MILLION PRESCRIPTIONS FILLED BY
RITE AID, 57.5% WERE REIMBURSED BY THIRD-PARTY PLANS.
RITE AID'S MANAGED CARE TEAM DESIGNS COST-EFFECTIVE PRESCRIPTION PROGRAMS THAT
FOCUS ON IMPROVING OVERALL PATIENT HEALTH CARE.
TODAY, RITE AID IS THE ONLY DRUGSTORE CHAIN TO OFFER COMPREHENSIVE PRESCRIPTION
PROGRAMS THAT LOWER PROGRAM COSTS.
OPPOSITE PAGE
- - -------------
RITE AID PHARMACISTS WORK CLOSELY WITH PHYSICIANS AND PATIENTS TO IMPROVE
MEDICATION COMPLIANCE, HELPING TO LOWER HEALTH CARE EXPENSES.
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[GRAPHICS -- SEE EDGAR APPENDIX]
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CONVENIENCE & MERCHANDISING
Rite Aid drugstores are popular among customers for their convenient locations
and broad product selection. * A new 9,600-square-foot prototype preserves Rite
Aid's traditional drugstore format, and provides more room for expanding
product categories and convenience services that build sales. * New stores
feature a contemporary layout and full selection of health products, beauty
aids, seasonal merchandise, greeting cards and snack foods. Space is devoted to
discounted, national brand grocery and household items that are priced below
most competition. * Product mix is constantly evaluated to keep pace with
customer preferences and is adjusted from market to market. Surveys continue to
show that more customers are shopping drugstores for their convenient
neighborhood locations. Therefore, Rite Aid has begun to augment its core
product mix with added services that take advantage of the company's key
locations in 23 states. * Select stores offer expanded cosmetics departments
that sell designer bath products, fragrances and cosmetics. Rite Aid also has
added one-hour photo processing in many stores to build photo finishing sales.
Rite Express mail, fax, photocopy, money order and packaging services are
available now in select sites.
[GRAPHICS -- SEE EDGAR APPENDIX]
THIS PAGE
- - ---------
CLOCKWISE FROM TOP: RITE AID'S EXTENSIVE LINE OF 1,200 QUALITY PRIVATE LABEL
PRODUCTS IS ONE OF THE MOST SUCCESSFUL IN THE INDUSTRY, AND OFFERS CUSTOMERS
SIGNIFICANT SAVINGS.
RITE AID HAS ADDED ONE-HOUR PHOTO PROCESSING LABS IN SELECT STORES TO EXPAND
REVENUES IN THIS PROFITABLE SEGMENT.
BOUTIQUE-STYLE COSMETIC DEPARTMENTS ARE A NEW FEATURE IN MANY RITE AID STORES.
THEY OFFER COMPETITIVELY PRICED DESIGNER FRAGRANCES, BATH PRODUCTS AND A LARGER
ASSORTMENT OF COSMETICS.
OPPOSITE PAGE
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A WELL-ROUNDED SELECTION OF TRADITIONAL HEALTH AND BEAUTY CARE PRODUCTS ENSURES
THAT CUSTOMERS CAN ALWAYS FIND THE PRODUCTS THEY NEED.
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[GRAPHICS -- SEE EDGAR APPENDIX]
9
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[GRAPHICS -- SEE EDGAR APPENDIX]
10
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TECHNOLOGY
THIS PAGE
- - ---------
CLOCKWISE FROM TOP: STORE MANAGERS USE POINT-OF-SALE ELECTRONIC DEVICES TO
CALCULATE MERCHANDISE ORDERS BASED ON A STORE'S SALES HISTORY.
NEXT YEAR, RITE AID WILL REPLACE ITS MAINFRAME COMPUTER NETWORK WITH A MORE
FLEXIBLE, CENTRALIZED SYSTEM TO REDUCE COMPUTING COSTS AND ALLOW FOR BUSINESS
GROWTH.
EACH STORE NOW OPERATES WITH POINT-OF-SALE REGISTERS THAT RECORD SALES TRENDS
AND TRACK PRODUCT MOVEMENT. THIS REDUCES INVENTORIES AND PROVIDES USEFUL
MARKETING INFORMATION.
OPPOSITE PAGE
- - -------------
EACH MONTH, DIVISION MANAGERS IN 23 STATES PARTICIPATE IN INTERACTIVE
VIDEOCONFERENCES WITHOUT LEAVING THEIR OFFICES. THIS CAPABILITY IS ENHANCING
COMMUNICATIONS AND SAVING TRAVEL COSTS.
This year, Rite Aid finished installing satellite receivers throughout the
chain. The system will significantly lower the cost of transferring information
between the stores and corporate office and increase management efficiency. *
The company also placed point-of-sale cash registers in nearly all locations.
POS enables managers to track store performance, monitor inventories and make
better purchasing decisions. In addition corporate buyers can react to sales
trends with merchandising programs tailored to specific markets. * The company
plans to use POS information with software that automates management tasks such
as labor scheduling and cash management and improves decision making. Other
areas under development are debit card authorization and in-store coupon
programs. * The satellite network has other benefits as well. Rite Aid has
reduced travel costs and improved field communications with a new
videoconferencing capability. Instead of traveling to meetings, field managers
can participate in live videoconferences broadcast each month from corporate
headquarters. Live or pretaped programs communicate corporate messages to field
employees faster and carry the added benefit of visual support.
[GRAPHICS -- SEE EDGAR APPENDIX]
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
[PHARMACY SALES AS A PERCENTAGE OF DRUGSTORE SALES BAR CHART -- SEE EDGAR
APPENDIX]
Pharmacy Sales as a
Percentage of Drugstore Sales
(Graphic material omitted)
Fiscal year 1985 Percent 33.4
1986 35.6
1987 37.0
1988 39.3
1989 41.1
1990 43.0
1991 45.2
1992 46.4
1993 48.5
1994 50.8
RESTRUCTURING AND OTHER CHARGES
On January 7, 1994, the company announced a restructuring plan designed to
focus corporate resources on the retail drug segment, improve performance and
increase shareholder value. Details of the plan include sale of the
non-drugstore businesses, stock buyback program, closure of 200 underperforming
drugstores and write-off of other assets. To provide for the drugstore closings
and disposition of other assets, a pre-tax charge of $149.2 million was
recorded in the fourth quarter of fiscal year 1994. The after-tax effect of
this charge was to reduce income from continuing operations by $90.6 million or
$1.03 per share.
The components of the restructuring charge that related to the 200
drugstore closings were as follows: lease settlement costs--$44.5 million;
write-off of intangible and fixed assets--$31.0 million; inventory liquidation
costs--$13.6 million; severance costs--$4.5 million; and operating losses
during the closing period--$13.1 million. Of the remaining provision, $19.8
million related to impaired investments and $22.7 million was for the write-off
of other assets. All of the 200 drugstores are expected to be closed by August
1994. Cash of approximately $62 million will be required for the drugstore
closings to cover lease settlements, severance costs and operating losses
during the closing period. Most of the cash will be paid out during fiscal year
1995 except for a few unsettled store leases. A substantial portion of the cash
will be generated from liquidating the inventories of the closing stores.
The stock buyback program is intended to enhance shareholder value.
Initially, the company offered to buy back up to 22 million shares of its
common stock at prices ranging from $16.00 per share to $18.50 per share. A
total of 2,077,271 shares were tendered to the company during the offer period
at $18.50 per share. On February 16, 1994, the Board of Directors approved a
stock repurchase program to acquire up to 5 million shares of the company's
common stock in the open market from time to time or in privately negotiated
transactions. As of February 26, 1994, no shares had been purchased in
connection with this repurchase program.
DISCONTINUED OPERATIONS
As part of the restructuring strategy, the company planned to focus its
resources entirely on the drugstore segment. Consequently, the Board of
Directors authorized the sale of the four non-drugstore businesses. The
businesses to be sold are ADAP, an auto parts retailer with 96 stores; Encore
Books, which operates 98 stores; Concord Custom Cleaners with 168 outlets; and
Sera-Tec Biologicals, which consists of 33 plasma collection centers providing
plasma for use in therapeutic and diagnostic products. The sales of these
operations are expected to be completed by August 1994.
An after-tax provision of $25.6 million or $.29 per share was recorded in
the fourth quarter of fiscal 1994 for the loss on the disposal of these
businesses. Net sales for the discontinued operations amounted to $273.1
million in fiscal 1994, $251.5 million in fiscal 1993 and $217.8 million in
fiscal 1992. Net earnings were $8.7 million, $8.6 million and $9.1 million,
respectively. Prior years' financial statements were restated to segregate the
discontinued operations.
CONTINUING OPERATIONS
Sales
Net sales for fiscal year 1994 increased 5.9% to $4.059 billion compared to
$3.834 billion for fiscal 1993 and $3.531 billion for fiscal 1992. The 1993 and
1992 revenue gains over their year-earlier periods were 8.6% and 8.3%,
respectively. Although higher sales can be attributed to additional revenues
generated by the drugstores added to the chain each year and same-store sales
increases, the decline in sales growth for fiscal 1994 is the result of lower
same-store gains. For the current year, same-store sales increased 2.8% versus
5.1% a year ago and 7.1% for fiscal 1992. The downward trend reflects a
continued decrease in the inflation rate for pharmaceutical products and soft
demand for non-pharmacy merchandise. Current year sales were also affected by
lower retail cigarette prices resulting from large price decreases by the
manufacturers. During fiscal years 1994, 1993 and 1992, the net number of
drugstores added to the store base were 117, 121 and 32, respectively. At
February 26, 1994, the company operated 2,690 drugstores, including the 200
stores to be closed in accordance with the restructuring plan.
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[THIRD-PARTY SALES AS A PERCENTAGE OF PHARMACY SALES BAR CHART -- SEE EDGAR
APPENDIX]
Third-Party Sales as a Percentage
of Pharmacy Sales
(Graphic material omitted)
Fiscal Year 1985 Percent 33.0
1986 36.0
1987 39.0
1988 39.8
1989 41.5
1990 43.6
1991 46.5
1992 48.0
1993 51.3
1994 54.1
Costs and Expenses
Cost of goods sold including occupancy costs amounted to 73.2% of sales for
both fiscal years 1994 and 1993 compared to 72.6% in fiscal 1992. Despite
continued pressure on gross profits from the growth of lower margin,
third-party prescription reimbursements, fiscal 1994 benefited from a drop in
LIFO inventory charges due to a decline in the company's internal inflation
indexes. Prescription sales reimbursed by third-party payers accounted for
54.1%, 51.3% and 48.0% of total pharmacy revenues for fiscal years 1994, 1993
and 1992, respectively. Fiscal 1994 also was adversely impacted by a higher
occupancy costs to sales percentage, reversing the trend of the two previous
fiscal years of proportionally lower occupancy costs.
Selling, general and administrative expenses, expressed as a percentage of
net sales, were 21.3% in fiscal 1994, 20.8% in fiscal 1993 and 21.0% in fiscal
1992. Although controlling operating costs at the store level and corporate
headquarters received ongoing emphasis, the current year expense ratio was
higher than fiscal 1993. This was due to the reduced benefit realized from
leveraging lower same-store sales increases against operating expenses. Also,
there were additional costs associated with the chainwide installation of
point-of-sale cash registers and satellite equipment, as well as a larger
number of store openings and closings. For fiscal 1994, there were 189
drugstores opened and 72 units closed versus 165 openings and 44 closings in
1993, and 80 openings and 48 closings in 1992.
Interest expense amounted to $28.7 million in 1994, $29.4 million in 1993
and $37.5 million in 1992. The lower interest expense reflects the decline in
short-term interest rates during the three-year period. The weighted average
rates on Rite Aid's commercial paper were 3.2%, 3.5% and 5.7% for fiscal years
1994, 1993 and 1992, respectively. The company had also replaced some of its
higher rate long-term debt issues with lower rate commercial paper. Commercial
paper borrowings were used to redeem 8 3/4% notes totaling $75 million in
January 1993 and $4 million of 9 5/8% sinking fund debentures in November 1992.
In October 1991, commercial paper was used to replace $60 million of 12 1/2%
notes.
A large portion of the company's outstanding short-term debt was financed
on a long-term basis in August 1993 through the issuance of 20-year, 6 7/8%
senior debentures having an aggregate principal value of $200 million. This has
resulted in higher current interest payments but has fixed the interest cost on
a long-term basis at favorable rates.
The effective income tax rate rose to 42.6% for fiscal 1994 from 38.3% and
38.6% for the two previous years. The higher current year effective rate
reflects the change in the federal corporate income tax rate from 34% to 35%
legislated in August 1993 by the Omnibus Budget Reconciliation Act of 1993. In
accordance with Statement of Financial Accounting Standards No. 109, deferred
tax balances were also recomputed using the enacted rate, resulting in a charge
to the income tax provision of $1.7 million.
Earnings
Income from continuing operations was $26.2 million, $123.8 million and $114.9
million for fiscal years 1994, 1993 and 1992, respectively. The drop in current
year earnings reflects the $149.2 million pre-tax provision for restructuring
and other charges. Excluding the after-tax effect of this provision, income
from continuing operations for fiscal 1994 was $116.8 million. Also adversely
affecting current year earnings were lower same-store sales increases, a larger
operating expense ratio and a higher effective income tax rate. The increase in
income for fiscal 1993 over fiscal 1992 resulted from less interest expense and
proportionally lower operating costs.
Net income, which includes the operating results from discontinued
operations, was $9.3 million for fiscal 1994, down from $132.4 million in
fiscal 1993 and $124.0 million in fiscal 1992. Included in the fiscal 1994 loss
from discontinued operations is the $25.6 million after-tax provision for loss
on disposal of the company's four non-drugstore businesses.
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LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased to $222.7 million in fiscal
1994 from $199.4 million in fiscal 1993 and $162.1 million in fiscal 1992.
Included in these amounts are cash flows generated by operating activities of
discontinued operations before income taxes of $14.4 million, $7.8 million and
$14.6 million, respectively. Contributing to the higher cash amounts provided
by operating activities were lower cash payments for income taxes and interest.
Typically, cash provided by operations is adequate to supply working capital,
provide cash for dividend payments and substantially contribute to investing
activities. External sources of cash are used mainly to help finance the
purchase of businesses and other large cash requirements.
The company issues commercial paper rated A-2 by Standard & Poor's and P-2
by Moody's to supplement cash generated by operations. Unused credit
commitments are maintained to support commercial paper issuances. Outstanding
commercial paper of the company amounted to $186 million at February 26, 1994,
$272 million at February 27, 1993, and $180 million at February 29, 1992.
Commercial paper indebtedness was reduced in August 1993 through the use of net
proceeds received from the 20-year, 6 7/8% senior debentures totaling $200
million. Additional commercial paper borrowings during fiscal 1994 were used to
finance business acquisitions and the stock self-tender offer. The prior year
increase reflects the utilization of lower rate commercial paper to retire $75
million of 8 3/4% notes and $4 million of 9 5/8% sinking fund debentures.
The additional cash requirements needed for fiscal year 1995 related to
the 200 drugstore closings and stock buyback program will be provided by the
net proceeds received from liquidation of the closing stores' inventories, sale
of the non-drugstore businesses and external sources. In January 1994, the
company obtained $600 million in revolving credit commitments in contemplation
of these and other future cash needs. The $600 million of credit commitments
replaces previously held credit agreements totaling $400 million. There also
remains $225 million of registered debt securities available on a Form S-3
shelf registration statement filed in July 1993.
Net working capital was $763.2 million at February 26, 1994, $811.6
million at February 27, 1993, and $723.2 million at February 29, 1992. The
ratios of current assets to current liabilities were 3.1:1, 4.0:1 and 3.5:1,
respectively. The decrease in net working capital and current ratio for fiscal
1994 reflects the liabilities recorded for restructuring and other charges, and
net loss on disposal of discontinued operations.
Total debt as a percentage of capitalization (i.e., total debt and
stockholders' equity) was 40.3% for fiscal year-end 1994 versus 33.4% and 34.6%
for the two previous years. The current year increase resulted from higher
outstanding debt of the company coupled with the decrease in stockholders'
equity. At February 26, 1994, stockholders' equity amounted to $954.7 million
compared to $1.036 billion at February 27, 1993, and $950.6 million at February
29, 1992.
The company remains financially strong and the restructuring plan will
allow the company to focus entirely on the retail drug business, positioning
itself for future growth.
IMPACT OF INFLATION AND CHANGING PRICES
The company's internal inflation indexes declined in each of the last three
fiscal years. Though not significant, inflation continues to cause increases in
product, occupancy and operating costs, as well as the cost of acquiring
capital assets. The effects of higher costs are minimized by achieving
operating efficiencies and passing vendor price increases along to customers.
The company uses the last-in, first-out (LIFO) method of accounting for a
substantial portion of its inventories. In periods of changing prices, the LIFO
method provides a proper matching of sales and cost of sales dollars of
approximately the same purchasing power. The LIFO charge decreased earnings per
share by $.07 in 1994, $.12 in 1993 and $.12 in 1992.
COMMON STOCK AND DIVIDENDS
Rite Aid Corporation's common stock is listed on the New York and Pacific Stock
Exchanges with the stock symbol RAD. On April 25, 1994, there were
approximately 9,000 shareholders. Quarterly high and low stock prices, based on
New York Stock Exchange composite transactions, together with dividend
information are shown below:
- - ---------------------------------------------------------------------------------
FISCAL QUARTER HIGH LOW DIVIDEND
- - ---------------------------------------------------------------------------------
1994 First 20 7/8 17 5/8 15.00 cents
Second 19 1/8 16 1/4 15.00 cents
Third 17 3/4 15 1/4 15.00 cents
Fourth 19 3/8 15 1/4 15.00 cents
- - ---------------------------------------------------------------------------------
1993 First 22 1/8 20 13.75 cents
Second 22 3/8 19 1/4 13.75 cents
Third 24 20 1/2 13.75 cents
Fourth 24 1/8 19 3/8 15.00 cents
- - ---------------------------------------------------------------------------------
14
17
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The management of Rite Aid Corporation is responsible for the preparation,
integrity and objectivity of the consolidated financial statements contained in
this annual report. The financial statements have been prepared in conformity
with generally accepted accounting principles appropriate in the circumstances
and necessarily include some amounts that are based on our best estimates and
judgments. The other financial information in this annual report is consistent
with the financial statements.
The company maintains an effective internal control structure designed to
provide reasonable assurance at reasonable costs that assets are safeguarded
from material loss, that transactions are executed in accordance with
management's authorization and that financial records are reliable for use in
preparing financial statements. In addition, the company maintains an internal
auditing department to review the adequacy, application and compliance of
internal accounting controls.
KPMG Peat Marwick, independent Certified Public Accountants, have been
engaged to audit the financial statements and to render an opinion as to their
conformity with generally accepted accounting principles. Their audit is
conducted in accordance with generally accepted auditing standards and includes
such procedures deemed necessary to provide reasonable assurance that the
financial statements are presented fairly. KPMG Peat Marwick is a member of the
SEC Practice Section of the American Institute of Certified Public Accountants
and has submitted a copy of their peer review results to management.
The Board of Directors pursues its responsibility for these financial
statements through its audit committee, composed of outside directors, which
meets periodically with both management and the independent auditors to assure
that each is carrying out its responsibilities. KPMG Peat Marwick and the
internal audit department have free access to the audit committee, with and
without the presence of management.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rite Aid Corporation
Camp Hill, Pennsylvania
We have audited the accompanying consolidated balance sheets of Rite Aid
Corporation and subsidiaries as of February 26, 1994 and February 27, 1993, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three year period ended February 26, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rite Aid
Corporation and subsidiaries as of February 26, 1994 and February 27, 1993, and
the results of their operations and their cash flows for each of the years in
the three year period ended February 26, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed
its method of accounting for income taxes to conform with Statement of
Financial Accounting Standards No. 109 in the fiscal year ended February 27,
1993.
/S/ KPMG PEAT MARWICK
- - ---------------------
KPMG Peat Marwick
Harrisburg, Pennsylvania
April 15, 1994
15
18
CONSOLIDATED BALANCE SHEET
Rite Aid Corporation and Subsidiaries
February 26, 1994, and February 27, 1993
- - ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1994 1993*
- - ------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 17,403 $ 2,416
Trade accounts and notes receivable 185,857 186,052
Inventories (Notes 1 and 6) 844,074 791,654
Prepaid expenses and other current assets 19,231 26,265
Net current assets of discontinued operations (Note 3) 58,860 73,297
- - ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,125,425 1,079,684
- - ------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost (Note 8)
Land 57,746 41,730
Buildings 197,381 180,051
Leasehold improvements 360,662 334,464
Equipment 556,334 484,878
Construction in progress 25,138 13,190
- - ------------------------------------------------------------------------------------------------------------------------
1,197,261 1,054,313
Accumulated depreciation and amortization 558,567 502,921
- - ------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 638,694 551,392
- - ------------------------------------------------------------------------------------------------------------------------
Intangible assets (Note 1)
Excess of cost over underlying equity in subsidiaries (less accumulated
amortization of $7,299 and $6,850) 27,149 15,724
Lease acquisition costs (less accumulated amortization of $97,885 and $89,482) 98,893 104,954
- - ------------------------------------------------------------------------------------------------------------------------
Total intangible assets 126,042 120,678
- - ------------------------------------------------------------------------------------------------------------------------
Other assets 21,125 35,346
- - ------------------------------------------------------------------------------------------------------------------------
Net noncurrent assets of discontinued operations (Note 3) 77,784 71,406
- - ------------------------------------------------------------------------------------------------------------------------
$1,989,070 $1,858,506
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt and current maturities of long-term debt (Note 7) $ 30,912 $ 30,694
Accounts payable 173,825 168,407
Income taxes (Notes 1 and 5) 5,016 32,912
Sales and other taxes payable 10,569 9,751
Accrued salaries, wages and other current liabilities 40,587 26,275
Reserve for restructuring and other charges (Note 2) 101,300 --
- - ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 362,209 268,039
Long-term debt, less current maturities (Note 7) 613,418 489,220
Deferred income taxes (Notes 1 and 5) 58,729 65,604
- - ------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,034,356 822,863
- - ------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 11 and 15)
Stockholders' equity (Notes 12, 13 and 14)
Preferred stock, par value $1 per share, series A junior participating preferred stock -- --
Common stock, par value $1 per share, issued 90,287,859 and 90,240,399 shares 90,288 90,240
Additional paid-in capital 59,423 58,592
Retained earnings 866,134 909,673
Cumulative translation adjustments -- (923)
Cumulative pension liability adjustments (Note 10) (1,916) (1,153)
Treasury stock, at cost (4,277,271 and 2,200,000 shares) (59,215) (20,786)
- - ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 954,714 1,035,643
- - ------------------------------------------------------------------------------------------------------------------------
$1,989,070 $1,858,506
========================================================================================================================
The accompanying notes are an integral part of these financial statements.
*Restated to reflect operations discontinued in fiscal year 1994 (see Note 3).
16
19
CONSOLIDATED STATEMENT OF INCOME
Rite Aid Corporation and Subsidiaries
Years ended February 26, 1994, February 27, 1993, and February 29, 1992
- - -----------------------------------------------------------------------------------------------------------------------
In thousands of dollars except per share amounts 1994 1993* 1992*
- - -----------------------------------------------------------------------------------------------------------------------
Net sales $4,058,711 $3,833,591 $3,530,560
Costs and expenses
Cost of goods sold, including occupancy costs (Note 6) 2,970,025 2,804,787 2,564,751
Selling, general and administrative expenses 865,137 798,848 741,144
Interest expense 28,683 29,387 37,463
Restructuring and other charges (Note 2) 149,196 -- --
- - -----------------------------------------------------------------------------------------------------------------------
4,013,041 3,633,022 3,343,358
- - -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 45,670 200,569 187,202
Income taxes (Notes 1 and 5) 19,462 76,819 72,261
- - -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 26,208 123,750 114,941
- - -----------------------------------------------------------------------------------------------------------------------
Discontinued operations (Note 3)
Income from operations (less applicable income
taxes of $5,809, $5,366 and $5,704) 8,700 8,646 9,075
Provision for dispositions (less applicable
income tax benefit of $16,380) (25,620) -- --
- - -----------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations (16,920) 8,646 9,075
- - -----------------------------------------------------------------------------------------------------------------------
Net income $ 9,288 $ 132,396 $ 124,016
=======================================================================================================================
Earnings (loss) per share (Notes 1 and 12)
Continuing operations $ .30 $ 1.41 $ 1.32
Discontinued operations (.19) .10 .11
- - -----------------------------------------------------------------------------------------------------------------------
Net income $ .11 $ 1.51 $ 1.43
=======================================================================================================================
The accompanying notes are an integral part of these financial statements.
*Restated to reflect operations discontinued in fiscal year 1994 (see Note 3).
17
20
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Rite Aid Corporation and Subsidiaries
- - ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars except per share amounts Years ended February 26,1994, February 27,1993, and February 29, 1992
- - ------------------------------------------------------------------------------------------------------------------------
Cumulative Adjustments
Common Stock Additional ----------------------
------------ Paid-in Retained Pension
Issued Treasury Capital Earnings Translation Liability Total
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 2, 1991 $42,626 $(20,786) $ 5,421 $747,086 $ -- $ (399) $ 773,948
Public stock offering 2,310 92,536 94,846
Two-for-one stock split 44,936 (44,936) --
Stock options exercised 142 2,237 2,379
Net income 124,016 124,016
Cash dividends paid
($.5125 per share) (44,383) (44,383)
Minimum pension liability
adjustments (231) (231)
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, FEB. 29, 1992 90,014 (20,786) 55,258 826,719 -- (630) 950,575
Stock options exercised 226 3,334 3,560
Net income 132,396 132,396
Cash dividends paid
($.5625 per share) (49,442) (49,442)
Foreign currency translation
adjustments (923) (923)
Minimum pension liability
adjustments (523) (523)
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, FEB. 27, 1993 90,240 (20,786) 58,592 909,673 (923) (1,153) 1,035,643
Stock acquired through
self-tender offer (38,429) (38,429)
Stock options exercised 48 831 879
Net income 9,288 9,288
Cash dividends paid
($.60 per share) (52,827) (52,827)
Foreign currency translation
adjustments 923 923
Minimum pension liability
adjustments (763) (763)
- - ------------------------------------------------------------------------------------------------------------------------
BALANCE, FEB. 26, 1994 $90,288 $(59,215) $59,423 $866,134 $ -- $(1,916) $ 954,714
========================================================================================================================
The accompanying notes are an integral part of these financial statements.
18
21
CONSOLIDATED STATEMENT OF CASH FLOWS
Rite Aid Corporation and Subsidiaries
Years ended February 26, 1994, February 27, 1993, and February 29, 1992
- - ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1994 1993* 1992*
- - ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income from continuing operations before income taxes $ 45,670 $200,569 $187,202
Adjustments to reconcile to net cash provided
by continuing operating activities:
Depreciation and amortization 95,668 90,266 85,604
Accreted interest on zero coupon notes 11,487 10,306 6,097
Restructuring and other charges (Note 2) 123,781 -- --
Changes in operating assets and liabilities net of
effects from acquisitions (Note 4)
(Increase) decrease in accounts and notes receivable 4,120 (10,710) 7,418
(Increase) in inventories (36,737) (59,155) (54,689)
(Increase) decrease in prepaid expenses
and other current assets 8,043 1,437 (8,990)
Increase in accounts payable 2,161 22,521 1,956
Increase in accrued expenses and other current liabilities 14,569 7,655 8,575
- - ------------------------------------------------------------------------------------------------------------------------
Cash provided by continuing operations before income taxes 268,762 262,889 233,173
Pre-tax income from discontinued operations including
$553 loss during phaseout period 13,956 14,012 14,779
Adjustments to reconcile to net cash provided by
discontinued operating activities:
Depreciation and amortization 10,150 8,509 7,875
Changes in net operating assets (9,668) (14,695) (8,085)
- - ------------------------------------------------------------------------------------------------------------------------
Cash provided by discontinued operations before income taxes 14,438 7,826 14,569
Income taxes paid (60,541) (71,316) (85,646)
- - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 222,659 199,399 162,096
- - ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (169,142) (114,795) (80,490)
Purchase of businesses, net of cash acquired (Note 4) (35,416) (43,329) (3,069)
Intangible assets acquired (5,853) (1,063) (2,066)
Investing activities of discontinued operations (17,020) (12,968) (7,969)
Other (483) (9,696) 3,172
- - ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (227,914) (181,851) (90,422)
- - ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of senior debentures (Note 7) 197,690 -- --
Net proceeds (payments) of commercial paper borrowings (86,000) 92,000 (203,000)
Proceeds from the issuance of zero coupon notes -- -- 144,447
Principal payments on long-term debt (1,071) (86,765) (64,952)
Cash dividends paid (52,827) (49,442) (44,383)
Stock acquired through self-tender offer (Note 12) (38,429) -- --
Proceeds from the sale of stock 879 3,560 97,225
- - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 20,242 (40,647) (70,663)
- - ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 14,987 (23,099) 1,011
Cash at beginning of year 2,416 25,515 24,504
- - ------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 17,403 $ 2,416 $ 25,515
========================================================================================================================
Supplemental disclosure of cash paid for interest
(net of amounts capitalized of $217, $445 and $721) $ 16,231 $ 20,178 $ 30,040
========================================================================================================================
The accompanying notes are an integral part of these financial statements.
*Restated to reflect operations discontinued in fiscal year 1994 (see Note 3).
19
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. The company's fiscal year ends on the Saturday closest to February
29 or March 1. The fiscal years ended February 26, 1994, February 27, 1993, and
February 29, 1992, contained 52 weeks.
Principles of Consolidation. The consolidated financial statements include the
accounts of the company and all of its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The investments in and operating results of 50% or less owned
companies are included in the statements on the basis of the equity method of
accounting.
Inventories. Inventories are stated at the lower of cost or market. The company
uses the last-in, first-out (LIFO) method of accounting for a substantial
portion of its inventories. Other inventories are determined on a first-in,
first-out (FIFO) method.
Intangible Assets. The excess of cost over underlying equity in subsidiaries
(goodwill) purchased after October 31, 1970, is being amortized on a
straight-line basis over 40 years. Goodwill purchased prior to November 1, 1970
($1,834,000), is considered to have continuing value over an indefinite period
and is not amortized. Lease acquisition costs incurred principally for the
purchase of new and existing store locations are generally amortized over the
terms of the leases on a straight-line basis.
Preopening Expenses. Expenditures of a noncapital nature incurred prior to the
opening of a new store or associated with a remodeled store are charged against
earnings as administrative and general expenses when incurred.
Income Taxes. In fiscal year 1993, the company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset
and liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS No. 109, the effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
Earnings per Share. Primary earnings per share have been computed based on the
weighted average number of shares of common stock outstanding during each
fiscal year (87,972,000 in 1994, 87,933,000 in 1993 and 86,917,000 in 1992).
Fully diluted earnings per share are not shown since the dilution is not
material.
Employee Benefits. Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits," requires postemployment
benefits to be accrued if the obligation is attributable to employees' services
already rendered, employees' rights to those benefits accumulate or vest,
payment of the benefits is probable and the amount of the benefits can be
reasonably estimated. When adopted in fiscal year 1995, the new standard will
not have a material effect on the company's results of operations or financial
position.
2. RESTRUCTURING AND OTHER CHARGES
In January 1994, the company announced a corporate restructuring including the
sale of its four non-drugstore businesses (see Note 3), a stock buyback program
(see Note 12), the closing of 200 underperforming drugstores and the
disposition of other assets. Consequently, a pre-tax charge of $149,196,000
was recorded in the fourth quarter of fiscal year 1994. Of the total charge,
$106,700,000 relates to lease settlements, severance costs, write-off of
intangible and fixed assets, inventory liquidation costs and operating losses
during the closing period of the 200 drugstores. The remaining provision is for
the write-off of impaired investments and other assets.
3. DISCONTINUED OPERATIONS
As part of the corporate restructuring strategy, the company planned to
concentrate its focus and resources entirely on the drugstore segment and,
therefore, authorized the sale of its four non-drugstore businesses. The
businesses to be sold are ADAP, an auto parts retailer with 96 stores; Encore
Books, which operates 98 stores; Concord Custom Cleaners with 168 outlets; and
Sera-Tec Biologicals, which consists of 33 plasma collection centers providing
plasma for use in therapeutic and diagnostic products.
20
23
A pre-tax provision of $42,000,000 for loss on disposal of these
discontinued operations was recorded in the fourth quarter of fiscal 1994 and
is shown on the consolidated statement of income net of a $16,380,000 income
tax benefit. The provision includes after-tax income from operations during the
phaseout period of $959,000.
Net sales for the discontinued operations were $273,149,000, $251,462,000
and $217,816,000 for fiscal years 1994, 1993 and 1992, respectively. The
interest expense allocation was $4,490,000 in 1994, $3,501,000 in 1993 and
$3,358,000 in 1992. Assets and liabilities of the discontinued operations have
been reclassified to separately identify them on the consolidated balance
sheet. The net current assets of discontinued operations principally consist of
inventories and for fiscal 1994 includes the $42,000,000 disposition reserve
with applicable income tax benefit of $16,380,000. The net noncurrent assets of
discontinued operations primarily consist of property, leasehold improvements,
store fixtures and equipment. Prior years' consolidated financial statements
and notes to the consolidated financial statements have been restated, except
where otherwise noted, to reflect continuing operations.
4. ACQUISITIONS
In the fourth quarter of fiscal year 1994, Rite Aid Corporation purchased two
companies for its managed care subsidiary. The companies are Pharmacy-Card,
Inc., which offers full-service prescription drug benefit administration, and
Intell-Rx Incorporated, a provider of drug utilization reviews and other drug
information services. In addition, during fiscal years 1994, 1993 and 1992,
Rite Aid obtained certain assets, mainly inventories, pharmacy prescription
files, store fixtures and favorable lease agreements, through various drugstore
acquisitions. The aggregate consideration paid totaled $35,416,000 for 1994,
$43,329,000 for 1993 and $3,069,000 for 1992.
Among the drugstore acquisitions were 35 Reliable Drugs' stores in Indiana
and Kentucky acquired in fiscal 1994, and 34 Wellby Super Drug stores located
throughout Maine and New Hampshire acquired in fiscal 1993.
These acquisitions were accounted for as purchases; accordingly, the
acquired assets and liabilities were recorded at their estimated fair values at
date of acquisition. Operating results of the acquired companies were included
with those of Rite Aid since their respective acquisition dates. Including the
results of operations of these acquisitions on a pro forma basis would not
significantly change the consolidated operating results as reported.
5. INCOME TAXES
Total income tax expense for fiscal years ended February 26, 1994, February 27,
1993, and February 29, 1992, is allocated as follows:
- - -------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- - -------------------------------------------------------------------------
Continuing operations $19,462 $76,819 $72,261
Discontinued operations (10,571) 5,366 5,704
- - -------------------------------------------------------------------------
Total income tax expense $ 8,891 $82,185 $77,965
=========================================================================
The income tax expense attributable to income from continuing operations
consists of the following components:
- - -------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- - -------------------------------------------------------------------------
Currently payable:
Federal $45,119 $69,625 $71,179
State 3,999 6,434 6,250
- - -------------------------------------------------------------------------
49,118 76,059 77,429
- - -------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal (27,064) 503 (6,257)
State (2,592) 257 1,089
- - -------------------------------------------------------------------------
(29,656) 760 (5,168)
- - -------------------------------------------------------------------------
Total income taxes $19,462 $76,819 $72,261
=========================================================================
The tax effects of temporary differences that give rise to the deferred tax
expense (benefit) are as follows:
- - -------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- - -------------------------------------------------------------------------
Depreciation $ 3,707 $(1,694) $(2,861)
Inventory valuation 10,150 3,821 (907)
Lease acquisition costs (3,100) (1,686) (2,193)
Prepaid expenses 5,622 -- --
Purchased tax benefits (221) 3,539 (900)
Provision for restructuring
and other charges (44,812) -- --
Insurance reserve (1,661) (1,768) --
Other 659 (1,452) 1,693
- - -------------------------------------------------------------------------
Deferred tax expense (benefit) $(29,656) $ 760 $(5,168)
=========================================================================
21
24
Presented below are the deferred tax liabilities and deferred tax assets
at February 26, 1994, and February 27, 1993:
- - --------------------------------------------------------------
In thousands of dollars 1994 1993
- - --------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 38,021 $34,314
Inventory valuation 37,765 27,615
Lease acquisition costs 21,457 24,558
Purchased tax benefits 11,896 12,117
Prepaid expenses 5,622 --
Other 2,065 1,149
- - --------------------------------------------------------------
Total gross deferred tax liabilities 116,826 99,753
- - --------------------------------------------------------------
Deferred tax assets:
Provision for restructuring and
other charges (44,812) --
State net operating loss carryforwards (7,815) (7,566)
Insurance reserve (3,428) (1,767)
Deferred compensation accrual (2,453) (1,781)
Other (2,379) (2,766)
- - --------------------------------------------------------------
Total gross deferred tax assets (60,887) (13,880)
Valuation allowance 7,037 6,759
- - --------------------------------------------------------------
Net deferred tax assets (53,850) (7,121)
- - --------------------------------------------------------------
Net deferred tax liabilities $ 62,976 $92,632
==============================================================
Based on the company's historical and current pre-tax earnings, management
believes it is more likely than not that the company will realize the net
deferred tax assets.
The valuation allowance as of February 26, 1994, and February 27, 1993,
principally results from net operating loss carryforwards for state income tax
purposes. The current portions of net deferred taxes for 1994 and 1993 amounted
to $4,247,000 and $27,028,000, respectively, and are included with income taxes
on the balance sheet.
State income taxes account for most of the differences between the actual
provision for income taxes attributable to continuing operations and taxes
computed by applying the statutory rate. Following is a reconciliation of the
statutory to effective tax rate:
- - -------------------------------------------------------------------------
Percentage 1994 1993 1992
- - -------------------------------------------------------------------------
Federal statutory rate 35.0 34.0 34.0
State income taxes, net of
federal tax benefit 6.0 2.6 2.3
Effect of tax rate changes on
deferred taxes 3.6 -- --
Retroactive targeted jobs credit (2.5) -- --
Change in valuation
allowance .1 (0.4) --
Other, net .4 2.1 2.3
- - -------------------------------------------------------------------------
42.6 38.3 38.6
=========================================================================
6. INVENTORIES
As of February 26, 1994, and February 27, 1993, inventories in the amount of
$841,428,000 and $786,886,000, respectively, were valued under the LIFO method.
Under the FIFO method, these inventories would have been higher by $155,102,000
and $144,191,000, respectively.
7. INDEBTEDNESS AND CREDIT AGREEMENTS
Following is a summary of indebtedness at February 26, 1994, and February 27,
1993:
- - --------------------------------------------------------------
In thousands of dollars 1994 1993
- - --------------------------------------------------------------
Commercial paper, 3.2% and
3.5% weighted average rates $186,000 $272,000
6 7/8% senior debentures due 2013 200,000 --
6 3/4% zero coupon subordinated
convertible notes due 2006 175,662 164,175
9 5/8% sinking fund debentures,
5% of principal amount due from
1997 through 2016 61,000 61,000
5 7/8% to 10.475% industrial
development bonds due
through 2016 19,050 19,050
Other 2,618 3,689
- - --------------------------------------------------------------
644,330 519,914
Short-term debt and current
maturities of long-term debt (30,912) (30,694)
- - --------------------------------------------------------------
Long-term debt,
less current maturities $613,418 $489,220
==============================================================
In January 1994, the company obtained $600,000,000 in revolving credit
commitments to finance its stock repurchase program (see Note 12) and for
general corporate purposes. These commitments consist of a $250,000,000,
364-day facility and a $350,000,000 five-year facility that replace previous
revolving credit agreements totaling $400,000,000. Borrowings under these
facilities bear interest rates, at the company's option, based on the prime,
federal funds, certificate of deposit or London interbank rates, as well as
competitive bid. Pricing on loans and commitments will vary commensurate with
credit quality. The 364-day facility has a 1/10% per annum facility fee on the
entire commitment amount irrespective of usage. The five-year facility has a
1/8% per annum facility fee on the entire commitment amount
22
25
and a 1/40% per annum commitment fee on the unused portion of the facility.
Both credit facilities also have a 1/16% per annum utilization fee on
borrowings in excess of 50% of the facilities. At February 26, 1994, and
February 27, 1993, there were no amounts outstanding under these agreements.
Rite Aid maintains, at all times, unused revolving credit agreement
commitments at least equal to the principal amount of its outstanding
commercial paper. Accordingly, outstanding commercial paper of $156,000,000 at
February 26, 1994, and $242,000,000 at February 27, 1993, which the company
intends to carry on a long-term basis, was classified as long-term debt on the
consolidated balance sheet. The remaining outstanding commercial paper of
$30,000,000 for both years was classified as short-term debt.
In August 1993, Rite Aid issued 6 7/8% senior debentures having an
aggregate principal amount of $200,000,000. These debentures are due August 15,
2013, and may not be redeemed prior to maturity or be entitled to any sinking
fund. The net proceeds from this issuance were used for working capital and
general corporate purposes, including the repayment of outstanding commercial
paper of the company.
The 6 3/4% zero coupon subordinated convertible notes due on July 24,
2006, are convertible at any time by the holder into Rite Aid common stock at a
rate of 15.993 shares per note. The conversion rate will not be adjusted for
accrued original issue discount. Any note will be purchased by the company, at
the option of the holder, on July 24, 1996, and July 24, 2001, for a purchase
price per note of $514.86 and $717.54, respectively, representing the issue
price plus accrued original issue discount to each such date. The company may
redeem the notes for cash at any time, in whole or in part, at redemption
prices equal to the issue price plus accrued original issue discount to the
date of redemption.
The aggregate annual principal payments of long-term debt for the five
succeeding fiscal years are as follows: 1995, $912,000; 1996, $1,002,000; 1997,
$264,000; 1998, $533,000; and 1999, $6,407,000.
The company has complied with restrictions and limitations included in the
provisions of various loan and credit agreements. At February 26, 1994,
retained earnings were not restricted as to payment of dividends by these
provisions.
8. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization expenses were $76,312,000 for 1994, $71,998,000
for 1993 and $69,371,000 for 1992. Depreciation and amortization generally are
computed on a straight-line basis over the following estimated lives:
Buildings, 30 to 45 years; Leasehold improvements, term of lease or useful
lives of assets, whichever is shorter; and Equipment, 3 to 15 years.
Accelerated methods are used for income tax purposes.
At February 26, 1994, land, buildings and related equipment with a
carrying value of $10,089,000 were pledged to secure certain long-term debt
totaling $10,404,000.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at February 26,
1994, and February 27, 1993, are listed as follows:
- - ------------------------------------------------------------------------------------
In thousands of dollars 1994 1993
- - ------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- - ------------------------------------------------------------------------------------
Noncurrent
marketable
securities $ 3,793 $ 11,390 $ 5,208 $ 9,883
Commercial paper
indebtedness 186,000 186,000 272,000 272,000
Long-term
indebtedness 458,330 446,943 247,914 253,249
- - ------------------------------------------------------------------------------------
It was not practicable to estimate the fair values of non-marketable
investments because of the lack of quoted market prices and the inability to
estimate fair values without incurring excessive costs. The carrying amount of
$2,209,000 at February 26, 1994, and February 27, 1993, represents the original
cost of the investments currently owned, which management believes are not
impaired.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Marketable securities: The fair values for marketable securities are based upon
quoted market prices.
Commercial paper indebtedness: The carrying amounts for commercial paper
indebtedness approximate their fair market values.
Long-term indebtedness: The fair values of long-term indebtedness are estimated
based on the quoted market prices for the same or similar issues, or on the
current rates offered to the company for debt of the same remaining maturities.
23
26
In May 1993, the Financial Accounting Standards Board issued Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities," which
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. The company will adopt the provisions of this new standard for
fiscal year 1995. The effect of adoption will not be material to the company's
financial condition or results of operations.
10. RETIREMENT PLANS
The company and its subsidiaries have several retirement plans covering
salaried employees and certain hourly-paid employees. Amounts charged to
earnings for retirement plans totaled $4,795,000 in 1994, $3,691,000 in 1993
and $3,590,000 in 1992.
The retirement plans include a profit sharing retirement plan.
Contributions are a percent of each covered employee's salary, as determined by
the Board of Directors based on the company's profitability.
There are also several defined benefit plans that call for benefits to be
paid to eligible employees based upon years of service with the company or
formulas applied to their compensation. The company's funding policy is to
contribute the minimum required by the Employee Retirement Income Security Act
of 1974.
The table below sets forth the funded status and amounts recognized in the
company's balance sheet for its defined benefit plans as of February 26, 1994,
and February 27, 1993:
- - ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------
PLAN ASSETS ACCUMULATED PLAN ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS PLAN ASSETS BENEFITS PLAN ASSETS
- - ------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $ (8,503) $(12,435) $(7,783) $(10,518)
Nonvested benefits (180) (909) (124) (732)
- - ------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (8,683) (13,344) (7,907) (11,250)
Effect of anticipated future compensation levels
and other events (551) -- (698) --
- - ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (9,234) (13,344) (8,605) (11,250)
Fair value of assets held in the plans 11,287 11,316 10,763 10,157
- - ------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) benefit obligation 2,053 (2,028) 2,158 (1,093)
Unrecognized net loss 577 2,130 419 1,282
Unrecognized prior service cost 10 425 11 456
Unrecognized net obligation (asset) at March 1, 1987,
net of amortization (1,118) (177) (1,257) (201)
Adjustment to recognize additional minimum liability -- (2,378) -- (1,537)
- - ------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 1,522 $ (2,028) $ 1,331 $ (1,093)
========================================================================================================================
The significant actuarial assumptions used were as follows:
- - -------------------------------------------------------------------------
Percentage 1994 1993 1992
- - -------------------------------------------------------------------------
Discount rate 7.0 7.5 8.0
Rate of increase in future
compensation levels 5.0 6.0 6.0
Expected long-term rate of
return on plan assets 9.0 9.0 9.0
=========================================================================
Assets of the defined benefit plans are invested in a directed trust that
invests in money market funds, common stock, corporate bonds and U.S.
government obligations.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions," an additional minimum
pension liability was recognized resulting in a direct reduction of
stockholders' equity of $1,916,000 at February 26, 1994, and $1,153,000 at
February 27, 1993.
24
27
Pension expense for the defined benefit plans includes the following
components:
- - -------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- - -------------------------------------------------------------------------
Service cost $ 1,417 $ 1,247 $ 1,016
Interest cost 1,433 1,335 1,218
Actual return on plan assets (2,374) (1,672) (1,432)
Net amortization and deferral 452 (176) (156)
- - -------------------------------------------------------------------------
Pension expense $ 928 $ 734 $ 646
=========================================================================
11. LEASES
The company leases most of its retail store facilities under noncancelable
operating leases, many of which expire within ten years. The approximate
minimum rental commitments of $716,115,000 at February 26, 1994, are payable as
follows: 1995, $116,800,000; 1996, $111,720,000; 1997, $98,428,000; 1998,
$84,632,000; 1999, $70,609,000; and $233,926,000 thereafter. These amounts are
net of sublease income, which is not significant, and include the 200
drugstores to be closed as part of the restructuring plan.
In addition to minimum rental payments, certain leases require additional
payments based on sales volume, as well as reimbursements for taxes,
maintenance and insurance. Most leases contain renewal options, certain of
which involve rent increases.
Total rental expense, net of sublease income, was approximately
$128,692,000 in 1994, $120,401,000 in 1993 and $112,309,000 in 1992. These
amounts include contin-gent rentals of $7,411,000, $7,423,000 and $7,491,000,
respectively.
In addition, the company has agreed to lease certain store locations that
presently are under construction or in the process of renovation. The terms of
these leases generally will commence upon completion of the building and will
extend from 5 to 15 years with options to renew for varying terms. The minimum
annual rentals are not determinable at the present time and, therefore, are not
included above.
12. CAPITAL STOCK
The authorized capital stock of the company consists of 120,000,000 shares of
common stock and 100,000 shares of preferred stock, both having a par value of
$1.00 per share. The preferred stock is issuable in series with terms as fixed
by the Board of Directors. No preferred stock has been issued. However, 45,000
shares of Series A Junior Participating Preferred Stock with a $1.00 per share
par value have been authorized and reserved for issuance in connection with the
Stockholder Rights Plan as discussed in Note 13.
As part of the company's restructuring, the Board of Directors authorized
a "Dutch Auction" cash self-tender offer for up to 22,000,000 shares of its
common stock. The tender offer commenced on January 10, 1994, and expired on
February 7, 1994, at tender prices ranging from $16.00 per share to $18.50 per
share. A total of 2,077,271 shares were tendered at $18.50 per share.
On February 16, 1994, the Board of Directors approved a stock repurchase
program to acquire up to 5,000,000 shares of the company's common stock in the
open market from time to time or in privately negotiated transactions. As of
February 26, 1994, no shares were purchased in connection with this repurchase
program.
13. STOCKHOLDER RIGHTS PLAN
The company maintains a Stockholder Rights Plan designed to deter coercive or
unfair takeover tactics, to prevent a person or group from gaining control of
the company without offering fair value to all stockholders and to deter other
abusive takeover tactics that are not in the best interests of stockholders.
Under the terms of the Plan, each outstanding share of common stock is
accompanied by one Right. Each Right entitles the registered holder to purchase
from the company a unit consisting of one two-thousandth of a share of Series A
Junior Participating Preferred Stock of the company at an exercise price of
$60. The Rights trade with the company's common stock until exercisable. They
become exercisable after any person or group acquires 20% or more of the
company's outstanding common stock or announces an offer that would result in
such person or group acquiring 20% or more of the company's common stock, or
15% of the company's common stock is acquired by an "Adverse Person," as
declared by a majority of the company's independent directors. The Rights
expire on April 5, 1999, and may be redeemed by the company for $.01 per Right
until 10 business days after a person or group acquires 20% or more of the
company's common stock. If 20% or more of the company's common stock is
acquired or following such an acquisition, there is a merger or other business
combination involving the company, each Right entitles its holder to buy shares
of Rite Aid common stock having a market value of twice the current exercise
price of each Right.
25
28
14. STOCK OPTION AND STOCK AWARD PLANS
The company reserves 3,000,000 shares of its common stock for the granting of
stock options and other incentive awards to officers and key employees under
the 1990 Omnibus Stock Incentive Plan. No further grants may be made under the
1979 and 1983 Employee Stock Option and Appreciation Rights Plans.
Options may be granted, with or without stock appreciation rights (SARs),
at prices that are not less than the fair market value of a share of common
stock on the date of grant. Under the 1979 and 1983 Plans, options are
exercisable at the cumulative rate of 25% a year after one year from the date
of grant and expire five years after the date of granting. The 1990 Plan
provides for the Compensation Committee to determine when and the manner in
which options may be exercised; however, it may not be more than ten years from
the date of grant. The exercise of either an SAR or option automatically will
cancel any related option or SAR. Under the Plans, the payment for SARs will be
made in shares, cash or cash and shares at the discretion of the Compensation
Committee.
Following is a summary of stock option transactions for the three fiscal
years ended February 26, 1994:
- - -------------------------------------------------------------------------
Shares under option 1994 1993 1992
- - -------------------------------------------------------------------------
Stock options:
Outstanding - beginning
of year 2,599,756 755,830 1,044,122
Granted 13,500 2,201,250 3,000
Exercised ($15.00 to
$18.25 per share) (65,400) (321,446) (143,851)
Surrendered for
exercised SARs -- -- (48,984)
Expired and canceled (110,250) (35,878) (98,457)
Outstanding - end of year
($15.00 to $18.50
per share) 2,437,606 2,599,756 755,830
Exercisable - end of year 796,919 274,206 462,505
Stock appreciation rights:
Outstanding - beginning
of year -- 3,200 83,084
Granted -- -- --
Exercised -- -- (48,984)
Expired and canceled -- (3,200) (30,900)
Outstanding - end of year -- -- 3,200
=========================================================================
The 1990 Plan also permits the granting of restricted stock and
stock-based awards that may require, among other things, continued employment
and/or the attainment of specified performance objectives. In fiscal year 1991,
445,000 shares were granted for stock-based awards, which will be expensed over
the five-year vesting period. Amounts charged to earnings for the stock-based
awards were $1,409,000 in 1994, $1,652,000 in 1993 and $1,844,000 in 1992.
As of February 26, 1994, February 27, 1993, and February 29, 1992, there
were 397,750 shares, 353,750 shares and 3,569,300 shares, respectively,
available for future grants under the Plans.
15. COMMITMENTS AND CONTINGENCIES
The company had standby letters of credit of $31,004,000 and $21,922,000 at
February 26, 1994, and February 27, 1993, respectively.
The company is the defendant in claims and lawsuits arising in the
ordinary course of business. In the opinion of management, these matters are
covered adequately by insurance, or if not so covered, are without merit or are
of such nature or involve such amounts as would not have a material effect on
the financial position or results of operations of the company if decided
adversely.
A significant amount of the company's prescription drug sales and related
accounts receivable are due from third-party payers (e.g., insurance companies
and governmental agencies). As a result, reimbursement for future third-party
prescription sales may be sensitive to changes related to payment criteria
established by insurance companies and legislative actions affecting
governmental agencies.
26
29
INTERIM FINANCIAL RESULTS (UNAUDITED)
Rite Aid Corporation and Subsidiaries
- - --------------------------------------------------------------------------------------------------------------------------
In thousands of dollars except per share amounts YEAR 1994
- - --------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER* QUARTER* QUARTER* QUARTER YEAR
- - --------------------------------------------------------------------------------------------------------------------------
Net sales $999,540 $973,147 $1,008,586 $1,077,438 $4,058,711
Costs and expenses 948,100 934,910 974,799 1,155,232** 4,013,041
- - --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 51,440 38,237 33,787 (77,794) 45,670
Income taxes 19,804 16,660 13,120 (30,122) 19,462
- - --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 31,636 21,577 20,667 (47,672) 26,208
Income (loss) from discontinued operations 2,522 2,008 2,294 (23,744)*** (16,920)
- - --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 34,158 $ 23,585 $ 22,961 $ (71,416) $ 9,288
==========================================================================================================================
Earnings (loss) per share
Continuing operations $ .36 $ .25 $ .23 $ (.54) $ .30
Discontinued operations .03 .02 .03 (.27) (.19)
- - --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .39 $ .27 $ .26 $ (.81) $ .11
==========================================================================================================================
- - --------------------------------------------------------------------------------------------------------------------------
In thousands of dollars except per share amounts YEAR 1993
- - --------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER* QUARTER* QUARTER* QUARTER* YEAR*
- - --------------------------------------------------------------------------------------------------------------------------
Net sales $922,816 $921,598 $ 946,489 $1,042,688 $3,833,591
Costs and expenses 873,395 880,951 906,611 972,065 3,633,022
- - --------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 49,421 40,647 39,878 70,623 200,569
Income taxes 19,060 15,679 15,379 26,701 76,819
- - --------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 30,361 24,968 24,499 43,922 123,750
Income from discontinued operations 2,652 2,252 1,879 1,863 8,646
- - --------------------------------------------------------------------------------------------------------------------------
Net income $ 33,013 $ 27,220 $ 26,378 $ 45,785 $ 132,396
==========================================================================================================================
Earnings per share
Continuing operations $ .35 $ .28 $ .28 $ .50 $ 1.41
Discontinued operations .03 .03 .02 .02 .10
- - --------------------------------------------------------------------------------------------------------------------------
Net income $ .38 $ .31 $ .30 $ .52 $ 1.51
==========================================================================================================================
* Restated to reflect operations discontinued in fiscal year 1994 (see Note
3 of Notes to Consolidated Financial Statements).
** Includes a one-time, pre-tax provision of $149,196,000 for corporate
restructuring and other charges (see Note 2 of Notes to Consolidated
Financial Statements).
*** Includes a $42,000,000 charge for loss on disposal of discontinued
operations less applicable income tax benefit of $16,380,000 (see Note 3
of Notes to Consolidated Financial Statements).
27
30
TEN-YEAR FINANCIAL REVIEW
Rite Aid Corporation and Subsidiaries
- - ------------------------------------------------------------------------------------------------------------------------
Feb. 26, 1994 Feb. 27, 1993 Feb. 29, 1992
In thousands of dollars except per share amounts (52 Weeks) (52 Weeks) (52 Weeks)
- - ------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (1)
Net sales $ 4,058,711 $ 3,833,591 $ 3,530,560
Cost of goods sold, including occupancy costs 2,970,025 2,804,787 2,564,751
Selling, general and administrative expenses 865,137 798,848 741,144
Interest expense 28,683 29,387 37,463
Provision for videocassette rental department closings -- -- --
Restructuring and other charges 149,196 -- --
- - ------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 45,670 200,569 187,202
Income taxes 19,462 76,819 72,261
- - ------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 26,208 123,750 114,941
Income (loss) from discontinued operations (2) (16,920) 8,646 9,075
Cumulative effect of accounting change -- -- --
- - ------------------------------------------------------------------------------------------------------------------------
Net income $ 9,288 $ 132,396 $ 124,016
========================================================================================================================
PER SHARE OF COMMON STOCK (1)
Income from continuing operations $ .30 $ 1.41 $ 1.32
Net income $ .11 $ 1.51 $ 1.43
Dividends per share $ .60 $ .5625 $ .5125
Book value, based on shares outstanding at year end $ 11.10 $ 11.76 $ 10.82
- - ------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION (1)
Working capital $ 763,216 $ 811,645 $ 723,195
Current ratio 3.11:1 4.03:1 3.49:1
Property, plant and equipment (net) $ 638,694 $ 551,392 $ 502,728
Long-term debt $ 613,418 $ 489,220 $ 427,503
Total assets $ 1,989,070 $ 1,858,506 $ 1,734,479
Stockholders' equity $ 954,714 $ 1,035,643 $ 950,575
- - ------------------------------------------------------------------------------------------------------------------------
OTHER DATA (1)
Weighted average shares outstanding 87,972,000 87,933,000 86,917,000
Number of retail drugstores 2,690 2,573 2,452
Number of employees 27,364 27,750 27,607
- - ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA (1)
Results prepared on a FIFO basis:
Income from continuing operations $ 32,864 $ 134,335 $ 125,228
Per share amount $ .37 $ 1.53 $ 1.44
Net income $ 15,944 $ 142,981 $ 134,303
Per share amount $ .18 $ 1.63 $ 1.55
========================================================================================================================
(1) Restated to reflect operations discontinued in fiscal year 1994 (see Note
3 of Notes to Consolidated Financial Statements).
(2) Net of income taxes.
28
31
Years ended
- - ---------------------------------------------------------------------------------------------------------------------------
March 2, 1991 March 3, 1990 March 4, 1989 Feb. 27, 1988
In thousands of dollars except per share amounts (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
- - ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (1)
Net sales $ 3,259,766 $ 3,011,250 $ 2,729,325 $ 2,381,022
Cost of goods sold, including occupancy costs 2,350,873 2,165,097 1,960,627 1,721,528
Selling, general and administrative expenses 696,401 646,540 583,860 481,921
Interest expense 49,484 51,933 40,840 32,344
Provision for videocassette rental department closings -- 22,000 -- --
Restructuring and other charges -- -- -- --
- - ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 163,008 125,680 143,998 145,229
Income taxes 62,879 48,764 56,325 59,135
- - ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 100,129 76,916 87,673 86,094
Income (loss) from discontinued operations (2) 7,171 25,142 7,537 54,747
Cumulative effect of accounting change -- -- -- 3,712
- - ---------------------------------------------------------------------------------------------------------------------------
Net income $ 107,300 $ 102,058 $ 95,210 $ 144,553
===========================================================================================================================
PER SHARE OF COMMON STOCK (1)
Income from continuing operations $ 1.21 $ .93 $ 1.06 $ 1.04
Net income $ 1.29 $ 1.23 $ 1.15 $ 1.75
Dividends per share $ .4625 $ .42 $ .38 $ .34
Book value, based on shares outstanding at year end $ 9.32 $ 8.49 $ 7.67 $ 6.90
- - ---------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION (1)
Working capital $ 707,451 $ 633,326 $ 297,334 $ 309,130
Current ratio 3.98:1 3.93:1 1.62:1 1.86:1
Property, plant and equipment (net) $ 493,947 $ 475,548 $ 434,801 $ 383,653
Long-term debt $ 585,434 $ 542,051 $ 228,260 $ 227,153
Total assets $ 1,666,958 $ 1,539,311 $ 1,417,520 $ 1,224,244
Stockholders' equity $ 773,948 $ 704,413 $ 636,184 $ 571,014
- - ---------------------------------------------------------------------------------------------------------------------------
OTHER DATA (1)
Weighted average shares outstanding 82,996,000 82,958,000 82,904,000 82,660,000
Number of retail drugstores 2,420 2,352 2,184 2,072
Number of employees 27,290 26,935 27,347 26,703
- - ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA (1)
Results prepared on a FIFO basis:
Income from continuing operations $ 111,290 $ 86,504 $ 95,481 $ 92,041
Per share amount $ 1.34 $ 1.04 $ 1.15 $ 1.11
Net income $ 118,461 $ 111,646 $ 103,018 $ 150,500
Per share amount $ 1.42 $ 1.35 $ 1.24 $ 1.82
===========================================================================================================================
- - ------------------------------------------------------------------------------------------------------------
Feb. 28, 1987 March 1, 1986 March 2, 1985
In thousands of dollars except per share amounts (52 Weeks) (52 Weeks) (52 Weeks)
- - ------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (1)
Net sales $ 1,650,643 $ 1,469,532 $ 1,297,054
Cost of goods sold, including occupancy costs 1,181,719 1,051,627 925,633
Selling, general and administrative expenses 323,435 280,633 240,774
Interest expense 19,992 17,683 11,178
Provision for videocassette rental department closings -- -- --
Restructuring and other charges -- -- --
- - ------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 125,497 119,589 119,469
Income taxes 56,329 57,870 58,536
- - ------------------------------------------------------------------------------------------------------------
Income from continuing operations 69,168 61,719 60,933
Income (loss) from discontinued operations (2) 8,816 828 9,003
Cumulative effect of accounting change -- -- --
- - ------------------------------------------------------------------------------------------------------------
Net income $ 77,984 $ 62,547 $ 69,936
============================================================================================================
PER SHARE OF COMMON STOCK (1)
Income from continuing operations $ .84 $ .75 $ .74
Net income $ .94 $ .76 $ .85
Dividends per share $ .30 $ .26 $ .2165
Book value, based on shares outstanding at year end $ 5.48 $ 4.82 $ 4.29
- - ------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION (1)
Working capital $ 234,391 $ 233,652 $ 165,972
Current ratio 1.74:1 2.09:1 1.85:1
Property, plant and equipment (net) $ 298,820 $ 235,960 $ 177,106
Long-term debt $ 153,399 $ 146,146 $ 81,451
Total assets $ 964,330 $ 792,167 $ 662,205
Stockholders' equity $ 452,544 $ 397,993 $ 353,665
- - ------------------------------------------------------------------------------------------------------------
OTHER DATA (1)
Weighted average shares outstanding 82,562,000 82,470,000 82,558,000
Number of retail drugstores 1,586 1,392 1,275
Number of employees 19,454 16,217 15,795
- - ------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA (1)
Results prepared on a FIFO basis:
Income from continuing operations $ 73,049 $ 65,243 $ 65,171
Per share amount $ .88 $ .79 $ .79
Net income $ 81,865 $ 66,071 $ 74,174
Per share amount $ .99 $ .80 $ .90
============================================================================================================
29
32
DIRECTORS AND OFFICERS
DIRECTORS CORPORATE OFFICERS VICE PRESIDENTS ASSISTANT VICE PRESIDENTS
Alex Grass
Franklin C. Brown Chairman of the Board and Thomas R. Coogan I. Lawrence Gelman
Executive Vice President Chief Executive Officer Vice President and Assistant Vice President and
Treasurer Assistant Secretary
Alex Grass Martin L. Grass
Chairman of the Board and President and Charles J. Slane Ted W. Armstrong
Chief Executive Officer Chief Operating Officer Associate Counsel Front End Personnel
and Secretary
Martin L. Grass Franklin C. Brown Barry E. Criss
President and Executive Vice President Gerald P. Cardinale Store Planning
Chief Operating Officer Chief Legal Counsel Marketing Coordination
Eric Elliott
Philip Neivert Timothy J. Noonan Mark E. Fogg Third-Party Administration
Private Investor Executive Vice President Pharmacy Services
Rochester, NY Drugstore Operations Daniel E. Garber
Allan Goldman Rack Rite Distributors
Leonard N. Stern Alex Schamroth Merchandising
Chairman of the Board and Executive Vice President Vernon G. Meadows
Chief Executive Officer Pharmacy Operations Charles R. Kibler Real Estate
The Hartz Group, Inc. Drugstore Operations
New York, NY SENIOR VICE PRESIDENTS John R. Mullen
W. Michael Knievel Drugstore Operations
Henry Taub Frank M. Bergonzi Corporate Security
Honorary Chairman Finance Thomas J. Slovenkay
of the Board James E. Krahulec Purchasing
Automatic Data Dennis J. Bowman Government and Trade Relations
Processing, Inc. Information Systems Richard J. Varmecky
Roseland, NJ James O. Lott Corporate Controller
Joel F. Feldman Risk Management
Preston Robert Tisch Managed Care Services Frederick H. Wendte
President and Raymond B. McKeeby Pharmacy Operations
Co-chief Executive Officer Kevin J. Mann Marketing Research
Loews Corporation Purchasing Kent L. Whiting
New York, NY Suzanne Mead Strategic Business Solutions
Philip D. Markovitz Advertising and
Gerald Tsai, Jr. Corporate Real Estate Corporate Communications ASSISTANT TREASURER
Chairman, President and Glenn Gershenson
Chief Executive Officer Ronald A. Miller Gregg W. Montgomery
Delta Life Corporation Distribution Pharmacy Operations
Memphis, TN
Robert R. Souder Michael F. Morris
Personnel Store Planning
Joseph S. Speaker
Retail Controller
30
33
RITE AID DRUGSTORES INVESTMENT INFORMATION
ANNUAL MEETING
The annual meeting will be held on July 7, 1994, at 11:00 a.m. at the
Harrisburg Hilton and Towers
One North Second Street
Harrisburg, PA 17101
(717) 233-6000
FORM 10-K
The annual report to the Securities and Exchange Commission on Form 10-K is
available upon written request to the secretary of the company.
DIVIDEND REINVESTMENT
The company offers an automatic dividend reinvestment plan for the convenience
of stockholders and employees. For further information, contact:
Harris Trust Company
of New York
Dividend Reinvestment Plan
P.O. Box A3309
Chicago, IL 60690-3309
REGISTRAR AND
TRANSFER AGENT
Harris Trust Company
of New York
77 Water Street
New York, NY 10005
AUDITORS
KPMG Peat Marwick
225 Market Street
Harrisburg, PA 17108
PRINCIPAL SECURITIES MARKETS
The common stock is listed on the New York and Pacific Stock Exchanges. The
trading symbol is RAD.
RITE AID CORPORATION
General Offices:
30 Hunter Lane
Camp Hill, PA 17011-2404
MAILING ADDRESS
P.O. Box 3165
Harrisburg, PA 17105-0042
(717) 761-2633
RITE AID AREA OF OPERATIONS
[GRAPHIC ---SEE EDGAR APPENDIX]
DESIGN:
Arnold Saks Associates
MAJOR PHOTOGRAPHY:
Mason Morfit
34
(LOGO)
Rite Aid Corporation
P.O. Box 3165
Harrisburg, PA 17105
35
EDGAR APPENDIX
EDGAR VERSION TYPESET VERSION
- - ------------- ---------------
1994 Form 10-K, Exhibit 13 -- 1994 Form 10-K, Exhibit 13 --
(Rite Aid Corporation's 1994 (Rite Aid Corporation's 1994
Annual Report to Shareholders) Annual Report to Stockholders)
Front Cover -- Graphics omitted. Front Cover -- Four photographs
depicting (clockwise from top) Rite
Aid pharmacist counseling patient,
designer fragrances, Rite Aid's
videoconferencing capability and
Rite Aid's private label products.
Page 2 -- Photograph omitted. Page 2 -- Photograph of Alex Grass,
Chairman of the Board and Chief
Executive Officer.
Page 2 -- One bar chart omitted. Page 2 -- One bar chart depicting
drugstore sales in billions of
dollars from fiscal year 1985 to
fiscal year 1994. (The text and
numbers used in this chart appear
in the text of the EDGAR Version).
Page 3 -- Photograph omitted. Page 3 -- Photograph of Martin L.
Grass, President and Chief Operating
Officer.
Page 3 -- One bar chart omitted Page 3 -- One bar chart depicting
income from continuing operations in
millions of dollars from fiscal year
1985 to fiscal year 1994. (The text
and numbers used in this chart appear
in the text of the EDGAR Version).
Page 5 -- Managed care Page 5 -- One photograph depicting
graphic omitted. prescription card and managed care
literature.
Page 5 -- Convenience & Page 5 -- One photograph depicting
merchandising graphic omitted. drugstore merchandise.
Page 5 -- Technology graphic Page 5 -- One photograph depicting
omitted. Rite Aid Corporation's videoconferenc-
ing capability.
Page 6 -- Managed care graphics Page 6 -- Three photographs depicting
omitted. (clockwise from top) prescriptions
being filled, Rite Aid's managed care
team and managed care literature.
36
EDGAR APPENDIX (CONTINUED)
EDGAR VERSION TYPESET VERSION
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Page 7 -- Graphic omitted. Page 7 -- One photograph depicting
Rite Aid pharmacist counseling
patient.
Page 8 -- Convenience & Page 8 -- Three photographs depicting
merchandising graphics omitted. (clockwise from top) Rite Aid's
private label products, Rite Aid's
one-hour photo processing service and
boutique-style cosmetic department.
Page 9 -- Graphic omitted. Page 9 -- One photograph depicting
customers shopping at a Rite Aid
drugstore.
Page 10 -- Graphic omitted. Page 10 -- One photograph depicting
Rite Aid Corporation's video-
conferencing capability.
Page 11 -- Graphics omitted. Page 11 -- Three photographs depicting
(clockwise from top) point-of-sale
electronic devise used to calculate
merchandise orders, Rite Aid
Corporation's computer center and
point-of-sale cash register.
Page 12 -- One bar chart Page 12 -- One bar chart depicting
omitted. pharmacy sales as a percentage of
drugstore sales from fiscal year 1985
to fiscal year 1994. (The text and
numbers used in this chart appear in
the text of the EDGAR Version).
Page 13 -- One bar chart Page 13 -- One bar chart depicting
omitted. third-party sales as a percentage of
pharmacy sales from fiscal year 1985
to fiscal year 1994. (The text and
numbers used in this chart appear in
the text of the EDGAR Version).
Inside Back Cover -- graphic Inside Back Cover -- map of eastern
omitted. United States of America depicting
Rite Aid's area of operation.