1
EXHIBIT 13
Rite Aid
1998 Annual Report
[RITE AID LOGO]
It's not just a store. It's a solution. (SM)
www.RiteAid.com
2
WHY THE NEW LOOK?
This year, you can review our annual report on Rite Aid's web site. We have
taken this dramatic step forward because we wanted to take advantage of the
highly interactive and accessible Internet technology to enhance your knowledge
of Rite Aid. You will be able to review our fiscal 1998 financial results and
you will also be able to explore Rite Aid's progressive marketing, store
planning and consumer initiatives through store tours and an audio presentation.
While visiting our web site you can also have a prescription refilled,
receive advice from a Rite Aid pharmacist, read the latest health news and find
the location of a Rite Aid store nearest you. Investors can also keep up-to-date
on Rite Aid's financials, as monthly press releases are published on our web
site.
Look at Rite Aid's annual report in a whole new way, at WWW.RITEAID.COM.
www.RiteAid.com
Contents
1. To Our Stockholders
3. Financial Review
24. Directors and Corporate Officers
25. Investor Information
FINANCIAL HIGHLIGHTS
YEAR ENDED Year ended
FEBRUARY 28, 1998 March 1, 1997 %
Dollars in thousands except per share amounts (52 WEEKS) (52 Weeks) Change
- -----------------------------------------------------------------------------------------------------------------
Sales $ 11,375,105 $ 6,970,201 63.2
- -----------------------------------------------------------------------------------------------------------------
Income Before Nonrecurring Charges and Extraordinary Loss* $ 316,435 $ 202,897 56.0
- -----------------------------------------------------------------------------------------------------------------
Net Income* $ 316,435 $ 115,377 174.3
- -----------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Income Before Nonrecurring Charges and Extraordinary Loss* $ 1.26 $ 1.10 14.5
- -----------------------------------------------------------------------------------------------------------------
Net Income* $ 1.26 $ .63 100.0
- -----------------------------------------------------------------------------------------------------------------
Basic Weighted Average Shares 250,638,000 184,422,000
- -----------------------------------------------------------------------------------------------------------------
Diluted Earnings per Share:
Income Before Nonrecurring Charges and Extraordinary Loss* $ 1.22 $ 1.06 15.1
- -----------------------------------------------------------------------------------------------------------------
Net Income* $ 1.22 $ .62 96.8
- -----------------------------------------------------------------------------------------------------------------
Diluted Weighted Average Shares 271,634,000 198,758,000
- -----------------------------------------------------------------------------------------------------------------
Dividends per Common Share $ .4075 $ .3775 7.9
Total Assets $ 7,655,346 $ 6,416,981
Stockholders' Equity $ 2,916,464 $ 2,488,685
Number of Employees 83,000 73,000
- -----------------------------------------------------------------------------------------------------------------
Note: The company uses the LIFO method of accounting for substantially all of
its inventories. Under the FIFO method, net income would have been higher by
$12,504,000 or $.05 per basic and diluted share for the year ended February 28,
1998, and $9,975,000 or $.05 per basic and diluted share for the year ended
March 1, 1997.
*Income before nonrecurring charges and extraordinary loss for the year ended
February 28, 1998, was $316,435,000 or $1.26 per basic share, and $1.22 per
diluted share. Last year, income before nonrecurring charges and extraordinary
loss was $202,897,000 or $1.10 per basic share, and $1.06 per diluted share. Net
income for the year ended March 1, 1997, included nonrecurring and other charges
and an extraordinary loss on the early extinguishment of debt totaling
$87,520,000 or $.47 per basic share, and $.44 per diluted share.
3
TO OUR STOCKHOLDERS
We just completed the most challenging, exciting and profitable year in the
history of our company. The vast majority of the integration of Thrifty PayLess
Holdings, Inc., our largest acquisition ever, was successfully completed. In
addition, we simultaneously purchased the two largest privately-held drugstore
chains in the United States: Harco, Inc., based in Alabama, and K&B,
Incorporated, the predominant chain in Louisiana. We aggressively began the
melding of these 332 stores into Rite Aid.
Overall, corporate sales were $11.4 billion and net income was $316.4 million
or $1.26 per basic share. This compared to sales of $7.0 billion and income from
operations, before nonrecurring charges and extraordinary loss, of $202.9
million the previous year.
Meanwhile, we continued with the largest real estate development program in
the drugstore industry, opening 411 new storerooms during the year. In February
1995, we announced the company would build 1,000 new storerooms over the
following three years. We actually constructed 1,040 stores. This number of new
stores exceeded those of our competitors by a wide margin during this period.
Our new goal is more aggressive. We plan to build 400, 500 and 600 storerooms in
the next three years, respectively, a total of 1,500, by February 2001.
Substantially all of these new stores will be freestanding, with drive-up
pharmacy windows. Our real estate efforts are just gearing up in the western and
southern parts of the United States. In the recent acquisitions, we inherited
very few executed real estate deals for future stores. This year we have
announced 50 new stores in the former Thrifty PayLess territory and 10 in the
Gulf Coast. We have commenced a major remodeling effort of the Thrifty PayLess
stores that will encompass 200 storerooms this year.
The new, larger stores, which we began building three years ago, have been a
great success. When we embarked on our new course to change the character of the
company, it was apparent to us that we would have to build bigger and brighter
stores. The interior decor package we created has won industry awards for its
design appearance. The new stores are significantly different from the older,
bantam units in more than just size. In addition, from almost none three years
ago, we now have over 200 stores that are open 24 hours, more than 570 stores
with drive-up pharmacy windows and over 1,450 locations equipped with one-hour
photo departments. These are all services that are making Rite Aid drugstores
more attractive to our customers.
We continue to refine our marketing programs throughout the chain. Television
and radio advertising have become an important part of communicating our image
to consumers. During the past year we aired an award-winning commercial
highlighting the dangers of drug interactions. The commercial focused on the
Rite Aid Life Check pharmacy computer and its ability to compare thousands of
potential drug interactions. We also significantly increased our cosmetic
business through the use of a cosmetic money back guarantee, which we featured
in television commercials. Cosmetics have become one of the fastest growing
categories at Rite Aid. In September 1997, we introduced the Rite Aid Vitamin
Institute, training our pharmacists in vitamins and natural remedies. We also
began offering 10% off the purchase price of vitamins every Tuesday to members
of our Vitamin Club. Results to date are as strong as the sales increases we are
achieving in cosmetics.
Our television campaigns are airing uniformly in each of our major markets.
The print advertising program differs by market and consists of full-page
newspaper advertisements and circulars. Since this past Christmas season, we
have eliminated over $25 million annually of circular and other promotional
print advertising on the West Coast. It is our intention to have similar print
advertising programs, appropriate to each market.
The most important new marketing campaign is our Rite Rewards customer
loyalty card. This card enables our customers to receive discounts on everyday
merchandise, as well as larger discounts on private label products and photo
finishing. First introduced in the state of Maine in 1996, we further refined
Rite Rewards in the Harrisburg and Syracuse markets in 1997. A few months ago,
we launched Rite Rewards in
1
4
TO OUR STOCKHOLDERS (cont.)
Seattle, Boise, Salt Lake City and Portland, Oregon. We are now committed to
introducing it in all of our markets by next year. This should enable us
gradually to reduce item and price advertising, in both newspapers and
circulars.
Fiscal year 1999 will mark a turning point in our distribution strategy. We
have embarked upon a plan to build larger, highly sophisticated distribution
centers, featuring state-of-the-art computer and materials handling equipment
that will allow us to consolidate and replace obsolete facilities. The first new
center will open this fall in Perryman, Maryland, replacing a smaller,
inefficient warehouse in Pennsylvania. The new facility, at 875,000 square feet,
is more than twice the size of the building it is replacing. We expect to have
the capacity to supply more than 1,500 stores per week at peak capacity from
Perryman. In the beginning of April 1998, we broke ground on a similar facility
in Lancaster, California, which will have one million square feet and become
operational late next year. These two new distribution centers should produce
substantial efficiencies in delivering merchandise to our stores. This
two-pronged investment will total more than $160 million and is one crucial step
to enhancing our profitability.
There are many areas we want to focus on to improve the performance of our
company. First, we are mounting a full-scale push to reduce working capital
through the reduction of inventory invested in our business. Now that the dust
has settled from the integration of three acquisitions, we anticipate that more
than $150 million of inventory can be eliminated during the current year. The
second is the major job of teaching and training one of our greatest assets, the
thousands of new associates who joined us in recent acquisitions. We have
already undertaken comprehensive training and communication programs aimed at
instilling the culture and values that differentiate our company from their
previous employers. To date, we have implemented a comprehensive training
program at both the store and corporate levels. We believe this investment in
training will pay back many times over the cost of delivering it through lower
turnover, higher productivity and better customer service.
After real estate, the largest amount of our capital is spent on the
development of information technology and its implementation throughout the
chain. During the past year we completed the development of our automatic
pharmacy replenishment system, which complements the already very successful
system used in the front end of our stores. We also are implementing our direct
store delivery check-in and pricing system to gain better control over costs and
to increase the profitability of merchandise sent directly to the stores. We
have rolled out to more than 1,500 stores our voice response units that allow
customers to order prescription refills through the use of a touch-tone
telephone. This system can be used 24 hours a day. All 4,000 drugstores will
have this system installed by the end of the current year. We are in the final
stages of development and have just begun the testing of RADS II, the latest
version of our on-line proprietary pharmacy system. RADS II will offer the
pharmacist additional information from a distributed computer system to
supplement the satellite-linked system currently in place. RADS II will be the
most sophisticated pharmacy reporting system in the industry. It will allow us
to continue to monitor our pharmacy performance right down to the individual
pharmacist providing the service. This will prove crucial as pharmacy services
provided to managed care become more performance-measured.
During the past year the Board of Directors named Franklin Brown to the
position of Vice Chairman of the Board. This promotion recognizes the more than
thirty years of service Mr. Brown has contributed to the company in providing
outstanding leadership and guidance in legal and business-related matters. Our
senior executive team was also strengthened with the addition of William A.K.
Titelman as Executive Vice President of Managed Care and Government Affairs.
At Rite Aid, we are involved in the greatest growth period in our history. We
are extremely confident in the direction we are taking the business. We are also
vitally aware of the necessity of continuously improving our performance. The
retail marketplace is a very dynamic one. We are well aware of the rewards that
can be reaped by our stockholders and associates if we continue to perform and
grow the earnings of the company. This is an organization with tens of thousands
of smart, hardworking, dedicated, loyal associates who are striving to enhance
our profitability. Our confidence level for strong earnings performance in our
business has never been higher.
/s/ Martin L. Grass
Martin L. Grass
Chairman and Chief Executive Officer
/s/ Timothy J. Noonan
Timothy J. Noonan
President and Chief Operating Officer
2
5
FINANCIAL REVIEW
Contents
4. Management's Discussion and Analysis of Results of Operations and Financial Condition
8. Management's Responsibility for Financial Statements
8. Independent Auditors' Report
9. Consolidated Balance Sheets
10. Consolidated Statements of Income
11. Consolidated Statements of Stockholders' Equity
12. Consolidated Statements of Cash Flows
13. Notes to Consolidated Financial Statements
21. Interim Financial Results (Unaudited)
22. Ten-Year Financial Review
3
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Sales:
Sales for the fiscal year ended February 28, 1998, totaled $11.4 billion, an
increase of $4.4 billion or 63.2% higher than last year. Included in fiscal 1998
are sales of approximately $4.5 billion generated by 1,007 West Coast stores
reflecting revenues from the Thrifty PayLess (Thrifty) stores for the entire
fiscal year compared to $1.1 billion in Thrifty sales for only an eleven-week
period in 1997. Additionally, sales of $.5 billion are included for the 332
Harco, Inc. and K&B, Incorporated stores since their August 27, 1997 acquisition
date. Prescription revenues lead sales growth with East Coast same-store sales
increases of 13.8% and 11.4% for West Coast comparable pharmacy sales gains.
Overall, East Coast same-store sales grew 9.7% while West Coast same-store sales
advanced 3.1%. For fiscal years 1997 and 1996, sales were $7.0 billion and $5.4
billion, respectively, representing increases of 28% and 20.1% over the
year-earlier periods. Same-store sales growth was 7.9% in 1997 and 6.6% in 1996.
Costs and Expenses:
Cost of goods sold including occupancy costs were 72.9% of sales for the current
year compared to 73.4% for fiscal 1997 and 73.8% for fiscal 1996. Gross margins
for fiscal 1998 were higher than a year ago as a result of improved front-end
margins and a higher percentage of front-end sales to total sales. The trend of
rising third party sales coupled with decreasing margins on third party
reimbursed prescription sales continued to negatively impact pharmacy gross
margins, but were more than offset by front-end gross margin improvements.
Pharmacy sales were 50.1%, 54.0% and 55.2% of total drugstore sales, and the
ratios of third party sales to total pharmacy sales were 83.4%, 79.9% and 75.3%
for fiscal years 1998, 1997 and 1996, respectively. Fiscal 1997 compared
favorably to 1996 due to improved front-end margins on certain categories and
Thrifty's greater proportion of non-pharmacy merchandise sales. Cost of sales
for fiscal 1996 compared to the year earlier was adversely impacted by the
inclusion of the Perry drugstores, which had higher third party sales and lower
gross margins than the rest of the chain.
The company's weighted average internal inflation indexes were 1.3% for
fiscal 1998, 1.6% for fiscal 1997 and 2.2% for fiscal 1996, resulting in LIFO
(last in, first out) inventory charges of $20.9 million, $16.0 million and $18.0
million, respectively.
Selling, general and administrative expenses, expressed as a percentage of
sales, were 21.0%, 20.6% and 20.3% for fiscal years 1998, 1997 and 1996,
respectively. Higher operating costs contributed by the Thrifty stores is the
main reason for the period-to-period increase in the operating expense to sales
ratio. Also, the company incurred expenses associated with acquisition
integration activities which accounted for a slight increase in the operating
expense ratio.
PHARMACY SALES AS A
PERCENTAGE OF DRUGSTORE SALES
(percent)
[GRAPHIC]
THIRD PARTY SALES AS A
PERCENTAGE OF PHARMACY SALES
(percent)
[GRAPHIC]
4
7
The lower operating expense ratio in fiscal 1996, compared to the prior year,
was due primarily to benefits derived from integration of the Perry acquisition
and 215 stores with historically higher expense to sales ratios that were sold
or closed during that year.
Interest expense was $159.8 million in 1998, $96.5 million in 1997 and $68.3
million in 1996. Increases in interest expense are mainly due to higher levels
of indebtedness throughout each year. The annual weighted average interest rates
on the company's commercial paper were 5.7%, 5.5% and 5.9% for fiscal years
1998, 1997 and 1996, respectively. Interest expense for 1998 reflects the full
year impact of debt attributed to the 1997 Thrifty acquisition, borrowings
associated with the Harco and K&B acquisitions, store remodelings, relocations
and expansions, and slightly higher borrowing costs when compared to 1997.
During the fourth quarter of 1997, the company increased borrowings to refinance
debt assumed with the Thrifty acquisition and fund expenses associated with that
merger, in addition to borrowings for other acquisitions and store remodelings,
relocations and expansions earlier in the year. In 1996, higher debt resulted
from increased borrowings for acquisitions and for store remodelings,
relocations and expansions.
Nonrecurring and Other Charges:
During fiscal 1997, the company recorded nonrecurring and other charges of $68.1
million related to certain noncapitalizable costs associated with the
integration of Thrifty, costs associated with closing certain distribution
facilities, and expenses associated with the attempted acquisition of Revco
D.S., Inc. The company has completed its integration of the Thrifty drugstores
and has closed its distribution facilities in the southeast region as of
February 28, 1998.
Income Taxes:
The effective income tax rate was 40.3% for fiscal 1998 and 38.0% for fiscal
years 1997 and 1996. The increase in the effective tax rate for 1998 is largely
due to increases in intangible amortization associated with acquisitions that
are included in the determination of net income, but are not deductible for
income tax purposes.
Income Before Extraordinary Loss:
Income before extraordinary loss for fiscal 1998 rose to $316.4 million compared
to $160.5 million in 1997 and $158.9 million in 1996. Current year income
advanced because of same-store sales increases and improved gross margins
despite proportionally higher operating expenses, interest expense and effective
income tax rate. Adversely impacting 1997 were nonrecurring and other charges,
decreases in pharmacy gross profit margins and increased interest expense.
During 1996, the Perry acquisition enhanced income by contributing a full year
of sales combined with a more favorable operating expense ratio compared to
1995. The higher earnings for fiscal 1996 also resulted from solid same-store
sales gains and a decrease in the effective income tax rate, despite continued
pressure on margins from third party reimbursements and higher interest cost.
Extraordinary Loss:
For the year ended March 1, 1997, early extinguishment of certain Thrifty
indebtedness resulted in an extraordinary loss of $45.1 million, net of taxes.
The extraordinary loss consisted primarily of premiums associated with the
tender offer of 12 1/4% senior subordinated notes and write-off of the related
debt discount, unamortized debt issuance costs and other costs associated with
completing the tender offer.
Net Income:
Net income was $316.4 million, $115.4 million and $158.9 million for fiscal
years 1998, 1997 and 1996, respectively. Nonrecurring charges and extraordinary
losses on early debt extinguishment of approximately $87.5 million, net of
taxes, adversely impacted net income in 1997 when compared to 1998 and 1996 net
income amounts.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $691.6 million, $226.3 million and
$148.6 million for fiscal years 1998, 1997 and 1996, respectively. Fiscal 1998
cash provided by operating activities increased over 1997 and 1996 amounts as a
result of improved operating margins and better working capital utilization. The
accounts receivable securitization program provided cash of approximately $259.2
million for the year ended February 28, 1998. Offsetting cash provided from
operating activities during 1998 and 1997 were amounts utilized to increase
inventories for new and remodeled stores and to settle liabilities associated
with the Thrifty, Harco and K&B acquisitions. Also adversely impacting cash
provided from operating activities in 1997 were increases in third party
accounts receivable. For fiscal year 1996, improved cash flows from operating
income were offset by the use of cash to increase inventory levels, fund store
closings and settle accrued liabilities assumed from the Perry acquisition.
Net working capital was $1.6 billion at February 28, 1998 and March 1, 1997,
and $.8 billion at March 2, 1996. The current ratios were 1.9:1, 2.4:1 and
2.3:1, respectively. 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 to fund other large cash
requirements.
The company issues commercial paper rated A-2 by Standard & Poors and P-2 by
Moody's, supported by unused credit commitments, to supplement cash generated by
operations. Outstanding commercial paper of the company amounted to $400 million
at February 28, 1998, $701.5 million at March 1, 1997 and $556.8 million at
March 2,
5
8
1996. Reductions in commercial paper for the current year were achieved through
the issuance of $650 million, 5.25% convertible subordinated notes in the third
quarter of fiscal 1998. For 1997, the increases in commercial paper borrowings
were used to finance capital expenditures. Supplementing liquidity in 1997 were
proceeds of approximately $277.4 million received for drugstore dispositions,
the sale of Bi-Mart Membership Discount Stores and a sale and leaseback
transaction for 56 drugstores.
On September 10, 1997, the company completed the sale of $650 million, 5.25%
convertible subordinated notes due September 15, 2002. The notes are convertible
into shares of the company's common stock at any time on or after the 90th day
following the last issuance of notes and prior to the close of business on the
maturity date, unless previously redeemed or repurchased. The conversion price
is $36.1376 per share (equivalent to a conversion rate of 27.672 shares per
$1,000 principal amount of notes), subject to adjustment in certain events.
Interest on the notes is payable semiannually on March 15 and September 15 of
each year, commencing on March 15, 1998. The notes may be redeemed at the option
of the company on or after September 15, 2000, in whole or in part. The proceeds
from the sale of the notes were used to refinance and repay commercial paper
previously issued by the company.
On October 15, 1997, the company completed redemption of outstanding 6 3/4%
zero coupon convertible subordinated notes. Most holders of the 6 3/4% zero
coupon convertible subordinated notes exercised conversion rights prior to the
October 15, 1997 redemption date, resulting in issuance of approximately 11.8
million shares of common stock.
On December 20, 1996, the company issued $1 billion in debt securities,
consisting of $350 million, 6.70% notes due December 15, 2001; $350 million,
7.125% notes due January 15, 2007 and $300 million, 7.70% debentures due
February 15, 2027. The net proceeds from these securities were used to repay
commercial paper initially issued by the company in connection with the Thrifty
merger and to refinance other commercial paper borrowings previously issued by
the company.
In March 1995, $50 million of 8.5% convertible debentures acquired from
Perry were redeemed by the company through proceeds from commercial paper
borrowings. In April 1995, the company issued $200 million of 7 5/8% senior
notes, due April 15, 2005, to repay part of its outstanding commercial paper.
The company redeemed its 9 5/8% sinking fund debentures totaling $45 million in
July 1995.
Total debt, including capital lease obligations, was 47.1% of total
capitalization at fiscal year end 1998, compared to 49.7% in 1997 and 52.6% in
1996. During 1998, approximately $202.7 million of the company's 6 3/4% zero
coupon convertible subordinated notes were converted from long-term debt to
common stock. Both debt and equity increased during fiscal year 1997 as a result
of acquisitions and store construction, relocation and expansion. The company
utilized its common stock to effect the Thrifty merger, converting each share of
Thrifty common stock for 0.325 shares of Rite Aid common stock. Approximately
77.4 million shares of Rite Aid common stock were issued to holders of Thrifty
common stock at a fair market value of $17.29 per share. The fair market value
was measured for the time period beginning before the date agreement of the
purchase price was reached, until after the date that the transaction was
announced to the public. Management believes that the company has additional
debt capacity available, if needed, to capitalize on future growth
opportunities.
The company surpassed its goal of opening 1,000 new, 10,500 square-foot
prototype stores by February 28, 1998, and plans to open an additional 1,500 of
these new storerooms over the next three years. The company is performing a
comprehensive review of its current store base to evaluate the impact on sales
and expenses associated with a plan to eliminate and relocate the remaining
older, smaller stores. In addition to the greater level of capital expenditures
necessary for the new prototype stores, estimated at $410 million for fiscal
year 1999, the company is evaluating store closing costs including charges for
future minimum lease obligations associated with closing older locations.
YEAR 2000
The company is engaged in a comprehensive project to convert its computer
systems to be Year 2000 (Y2K) date compliant and expects to successfully
complete this project on a timely basis. The Y2K issue creates risk for the
company from unforeseen problems in its own computer systems and from that of
the systems of other companies and governmental agencies on which the company's
operations rely. The company is working with its key customers, vendors and
suppliers to identify the nature and potential impact of issues presented by the
Y2K problem in completing transactions with their businesses. Total estimated
Y2K conversion costs of $12 million will be funded through operating cash flows
and expensed in the period incurred. The company anticipates completion of the
Y2K project by June 1999 for its most critical applications and November 1999
for all other applications.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued two new
pronouncements for which provisions are effective for the fiscal year that will
end February 27, 1999, Statement of Financial Accounting Standards (SFAS)
No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, while SFAS
6
9
No. 131 requires an enterprise to report financial and descriptive information
about its reportable segments. The company is studying the provisions of SFAS
No. 130 and SFAS No. 131 and has not adopted such provisions in its February 28,
1998 consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post Retirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
SFAS No. 132 standardizes the disclosure requirements of SFAS No. 87 and
SFAS No. 106 to the extent practical and recommends a parallel format for
presenting information about pensions and other postretirement benefits. SFAS
No. 132 only addresses disclosure and does not change any of the measurement or
recognition provisions provided for in SFAS No. 87, SFAS No. 88 or SFAS No. 106.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
The company is studying the provisions of SFAS No. 132 and has not adopted such
provisions in its February 28, 1998 consolidated financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The company's internal inflation trend remained consistent during the three-year
period with decreases in front end merchandise offset by higher pharmacy costs.
Though not significant, inflation continues to cause increases in product,
occupancy and operating expenses, as well as the cost of acquiring capital
assets. The effect of higher costs is minimized by achieving operating
efficiencies and passing vendor price increases along to consumers.
7
10
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
audit department to review the adequacy, application and compliance of internal
accounting controls.
KPMG Peat Marwick LLP, 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 LLP 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 LLP 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
We have audited the accompanying consolidated balance sheets of Rite Aid
Corporation and subsidiaries as of February 28, 1998 and March 1, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended February 28, 1998. 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 28, 1998 and March 1, 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 28, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
April 14, 1998
8
11
CONSOLIDATED BALANCE SHEETS
Rite Aid Corporation and Subsidiaries
In thousands of dollars February 28, 1998 and March 1, 1997
- -------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 90,968 $ 7,042
Accounts receivable, net (Note 1) 165,429 370,588
Inventories (Note 1) 3,061,211 2,336,659
Prepaid expenses and other current assets 60,700 57,210
- -------------------------------------------------------------------------------------------------------------
Total current assets 3,378,308 2,771,499
- -------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE 7):
Land 362,564 352,416
Buildings 492,528 547,077
Leasehold improvements 833,879 680,297
Equipment 1,238,505 1,024,673
Construction in progress 133,684 65,393
- -------------------------------------------------------------------------------------------------------------
3,061,160 2,669,856
Accumulated depreciation and amortization 890,011 773,786
- -------------------------------------------------------------------------------------------------------------
Total property, plant and equipment, net 2,171,149 1,896,070
- -------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS (NOTE 1):
Excess of cost over underlying equity in subsidiaries
(less accumulated amortization of $54,930 and $19,595) 1,556,708 1,260,777
Lease acquisition costs and other intangible assets
(less accumulated amortization of $147,636 and $132,696) 410,598 383,862
- -------------------------------------------------------------------------------------------------------------
Total intangible assets 1,967,306 1,644,639
OTHER ASSETS 138,583 104,773
Total Assets $ 7,655,346 $ 6,416,981
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt (Note 6) $ 47,516 $ 44,255
Accounts payable 1,183,892 601,301
Income taxes (Notes 1 and 5) 131,276 18,484
Sales and other taxes payable 41,372 34,985
Accrued salaries, wages and other current liabilities 366,875 472,985
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 1,770,931 1,172,010
- -------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 6) 2,465,948 2,317,789
CAPITAL LEASE OBLIGATIONS (NOTE 6) 85,470 97,863
DEFERRED INCOME TAXES (NOTES 1 AND 5) 248,888 221,855
OTHER NONCURRENT LIABILITIES 167,645 118,779
- -------------------------------------------------------------------------------------------------------------
Total liabilities 4,738,882 3,928,296
- -------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 10 AND 14)
STOCKHOLDERS' EQUITY (NOTES 11 AND 13):
Preferred stock, par value $1 per share, none issued or outstanding -- --
Common stock, par value $1 per share, issued 258,214,768 and
129,342,043 shares 258,215 129,342
Additional paid-in capital 1,345,131 1,365,771
Retained earnings 1,313,905 1,100,185
Cumulative pension liability adjustments (Note 9) (787) (1,867)
Treasury stock, at cost (6,532,169 shares at March 1, 1997) -- (104,746)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,916,464 2,488,685
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 7,655,346 $ 6,416,981
=============================================================================================================
The accompanying notes are an integral part of these financial statements.
9
12
CONSOLIDATED STATEMENTS OF INCOME
Rite Aid Corporation and Subsidiaries
Years ended February 28, 1998,
In thousands of dollars except per share amounts March 1, 1997 and March 2, 1996
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Sales $11,375,105 $ 6,970,201 $ 5,446,017
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs 8,290,888 5,113,047 4,017,351
Selling, general and administrative expenses 2,394,424 1,433,697 1,104,123
Interest expense 159,752 96,473 68,341
Nonrecurring and other charges (Note 3) -- 68,057 --
- -----------------------------------------------------------------------------------------------------------
10,845,064 6,711,274 5,189,815
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary loss and income taxes 530,041 258,927 256,202
Income taxes (Notes 1 and 5) 213,606 98,393 97,255
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary loss 316,435 160,534 158,947
- -----------------------------------------------------------------------------------------------------------
Extraordinary loss--early extinguishment of debt,
net of taxes (Notes 5 and 6) -- (45,157) --
- -----------------------------------------------------------------------------------------------------------
Net income $ 316,435 $ 115,377 $ 158,947
===========================================================================================================
BASIC EARNINGS PER SHARE (NOTES 1 AND 12):
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ 1.26 $ .87 $ .95
Extraordinary loss, net of taxes -- (.24) --
- -----------------------------------------------------------------------------------------------------------
Net income $ 1.26 $ .63 $ .95
===========================================================================================================
DILUTED EARNINGS PER SHARE (NOTES 1 AND 12):
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ 1.22 $ .85 $ .92
Extraordinary loss, net of taxes -- (.23) --
- -----------------------------------------------------------------------------------------------------------
Net income $ 1.22 $ .62 $ .92
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
10
13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Rite Aid Corporation and Subsidiaries
Years ended February 28, 1998, March 1, 1997 and March 2, 1996
In thousands of dollars except per share amounts
- --------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE ADJUSTMENTS
COMMON STOCK ADDITIONAL ----------------------
------------------------- PAID-IN RETAINED UNREALIZED PENSION
ISSUED TREASURY CAPITAL EARNINGS SECURITIES GAIN LIABILITY TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 4, 1995 $ 90,290 $ (95,777) $ 60,655 $ 955,111 $ 2,847 $ (1,314) $ 1,011,812
Stock acquired for treasury (8,969) (8,969)
Stock options exercised 90 1,968 2,058
Net income 158,947 158,947
Cash dividends paid
($.3475 per share post-split) (58,263) (58,263)
Sale of marketable securities (2,847) (2,847)
Minimum pension liability
adjustments 881 881
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 2, 1996 90,380 (104,746) 62,623 1,055,795 -- (433) 1,103,619
Stock options exercised 276 4,914 5,190
Net income 115,377 115,377
Cash dividends paid
($.3775 per share post-split) (70,987) (70,987)
Redemption of
stockholders' rights (839) (839)
Acquisition of Thrifty
PayLess Holdings, Inc. 38,676 1,298,741 1,337,417
Conversion of debt securities 10 332 342
Minimum pension liability
adjustments (1,434) (1,434)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 1, 1997 129,342 (104,746) 1,365,771 1,100,185 -- (1,867) 2,488,685
Stock options exercised 404 9,293 9,697
Stock grants 14 616 630
Bond conversions 5,875 196,777 202,652
Two-for-one stock split 135,644 (135,644) --
Cancel treasury shares (13,064) 104,746 (91,682) --
Net income 316,435 316,435
Cash dividends paid
($.4075 per share post-split) (102,715) (102,715)
Minimum pension liability
adjustments 1,080 1,080
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE FEBRUARY 28, 1998 $ 258,215 $ -- $ 1,345,131 $ 1,313,905 $ -- $ (787) $ 2,916,464
================================================================================================================================
The accompanying notes are an integral part of these financial statements.
11
14
CONSOLIDATED STATEMENTS OF CASH FLOWS
Rite Aid Corporation and Subsidiaries
In thousands of dollars Years ended February 28, 1998, March 1, 1997 and March 2, 1996
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income before extraordinary loss and income taxes $ 530,041 $ 258,927 $ 256,202
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY
OPERATIONS BEFORE EXTRAORDINARY LOSS AND INCOME TAXES:
Depreciation and amortization 274,176 168,064 118,662
Accreted interest on long-term debt 18,095 15,310 12,855
Nonrecurring and other charges (Note 3) -- 48,220 --
Changes in operating assets and liabilities
net of effects from acquisitions (Note 2)
(Increase) decrease in accounts receivable 218,207 (41,777) (20,195)
(Increase) in inventories (624,560) (29,404) (111,087)
(Increase) decrease in prepaid
expenses and other current assets (1,994) 15,047 (21,092)
Increase (decrease) in accounts payable 503,904 (35,950) (1,859)
(Decrease) in accrued expenses
and other current liabilities (163,914) (143,400) (52,306)
- ------------------------------------------------------------------------------------------------------------------------
Cash provided by continuing operations
before extraordinary loss and income taxes 753,955 255,037 181,180
Cash provided by discontinued operations
before income taxes -- -- 890
Income taxes paid (62,356) (28,743) (33,453)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 691,599 226,294 148,617
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (470,563) (371,226) (315,120)
Purchase of businesses, net of cash acquired (Note 2) (330,425) (35,087) (131,714)
Intangible assets acquired (70,487) (26,316) (15,909)
Investments and advances in joint venture -- (30,714) --
Proceeds from dispositions 67,083 106,937 136,928
Other 1,176 27,975 (6,774)
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (803,216) (328,431) (332,589)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt (Note 6) 641,293 1,068,401 224,212
Net proceeds (payments) of commercial paper borrowings (301,500) 144,735 120,265
Principal payments on long-term debt (51,232) (1,040,452) (99,348)
Cash dividends paid (102,715) (70,987) (58,263)
Redemption of stockholders' rights -- (839) --
Stock acquired for treasury -- -- (8,969)
Proceeds from the sale of stock 9,697 5,190 2,058
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 195,543 106,048 179,955
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 83,926 3,911 (4,017)
Cash at beginning of year 7,042 3,131 7,148
- ------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 90,968 $ 7,042 $ 3,131
========================================================================================================================
Supplemental disclosure of cash paid for interest
(net of amounts capitalized of $3,834, $1,897 and $1,948) $ 129,503 $ 75,434 $ 56,851
========================================================================================================================
The accompanying notes are an integral part of these financial statements.
12
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rite Aid Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Rite Aid Corporation operates 3,975 retail drugstores in the eastern, southern
and western United States.
Fiscal Year
The company's fiscal year ends on the Saturday closest to February 29 or March
1. The fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996
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.
Accounts Receivable
During November 1997, the company and certain of its subsidiaries entered into
an agreement to sell, on an ongoing basis, a pool of receivables to a wholly
owned bankruptcy-remote special purpose funding subsidiary (the "funding
subsidiary") of the company. Accordingly, the company and certain subsidiaries
transfer all their accounts receivable (principally representing amounts owed by
third party prescription payers) to the funding subsidiary. The funding
subsidiary has sold and, subject to certain conditions, may from time to time
sell an undivided fractional ownership interest in the pool of receivables to a
multi-seller receivables securitization company. Under the terms of the
agreement, new receivables are added to the pool as collections reduce
previously sold accounts receivable. The company services, administers and
collects the receivables on behalf of the purchaser. Proceeds of approximately
$259,200,000 were received as of February 28, 1998 from the securitization of
receivables. The proceeds were used to reduce outstanding commercial paper
borrowings and are reflected as operating cash flows in the accompanying
consolidated statement of cash flows. Expenses associated with the
securitization program are recognized as a component of cost of goods sold.
The company maintains an allowance for doubtful accounts receivable based
upon the expected collectibility of all trade receivables, including receivables
sold. The company has recorded an allowance for uncollectible accounts of
$14,096,000 at February 28, 1998 and $14,583,000 at March 1, 1997. Most of the
company's accounts receivable are due from third party providers (e.g.,
insurance companies and governmental agencies) under third party payment plans
and are booked net of any allowances provided for under the respective plans.
Since payments due from third party payers are sensitive to payment criteria
changes and legislative actions, the allowance is reviewed continually and
adjusted for accounts deemed uncollectible by management.
Inventories
Inventories are stated at the lower of cost or market. The company uses the
last-in, first-out (LIFO) method of accounting for substantially all of its
inventories. At February 28, 1998, March 1, 1997 and March 2, 1996,
respectively, inventories were $196,511,000, $166,702,000 and $178,932,000 lower
than the amounts that would have been reported using the first-in, first-out
(FIFO) method.
Intangible Assets
The excess of cost over underlying equity in subsidiaries (goodwill) generally
is being amortized on a straight-line basis over 40 years. 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.
Patient prescription file purchases are amortized over their estimated useful
lives. The company reviews the realizability of its intangible assets annually,
based upon expectations of nondiscounted cash flows and operating income. As of
February 28, 1998, management believes that there are no materially impaired
intangible assets.
Marketable Securities
During fiscal year 1996, the company sold all of its marketable securities,
categorized as available-for-sale, and recognized a pre-tax gain of $8,343,000
on the transaction.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation cost for
stock appreciation rights and performance equity units is recorded annually
based on the quoted market price of the company's stock at the end of the
period.
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.
Advertising
Advertising costs are expensed as incurred.
Insurance
The company is self-insured with respect to certain general liability, workers'
compensation and covered employee medical claims. Excess insurance coverage is
maintained for general liability and workers' compensation claims. The company
believes its reserve for claims reported and claims incurred but not reported is
adequate.
13
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
Income Taxes
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. 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
The company adopted the provisions of SFAS No. 128 "Earnings per Share" in the
year ended February 28, 1998. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. SFAS
No. 128 requires restatement of all prior-period earnings per share data
presented. All share and per share data have also been restated to reflect a
two-for-one stock split distributed to shareholders on February 2, 1998.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. ACQUISITIONS
On August 27, 1997, the company completed its acquisitions of Harco, Inc. and
K&B, Incorporated. The combined costs of these companies were approximately
$340,000,000 and were financed through commercial paper borrowings. The value of
goodwill assigned to these acquisitions were approximately $274,289,000.
On December 12, 1996, Thrifty PayLess Holdings, Inc. (Thrifty PayLess) was
merged with and into the company. Pursuant to the merger agreement, as amended,
each share of Thrifty PayLess common stock was converted to Rite Aid common
stock at the exchange ratio of 0.325 shares of Rite Aid common stock for each
share of Thrifty PayLess common stock. The company exchanged approximately
77,352,000 shares with an aggregate fair market value of approximately
$1,337,417,000. The value of goodwill assigned to Thrifty amounted to
approximately $1,148,109,000. During 1997, the company also purchased the assets
of Taylor Drug Stores, Inc., and Concord Drugs, Inc. The total consideration
paid for these acquisitions amounted to approximately $35,087,000. The value of
goodwill assigned to these acquisitions was approximately $2,673,000.
Results of operations for acquisitions are included with those of Rite Aid
since each respective acquisition date. The purchase method of accounting for
acquisitions was utilized for all transactions consummated in 1998 and 1997;
accordingly, the acquired assets and liabilities were recorded at their
estimated fair values at date of acquisition.
3. NONRECURRING AND OTHER CHARGES
During 1997, the company began the integration of Thrifty PayLess and developed
a plan to realign certain merchandise distribution facilities. The company
recorded $68,057,000 pretax, nonrecurring and other charges related to certain
noncapitalizable costs associated with the integration of the Thrifty PayLess
operations, closing of certain distribution facilities, expenses incurred in the
attempted acquisition of Revco D. S., Inc. and other charges. The company has
completed its integration of the Thrifty PayLess drugstores and has closed its
distribution facilities in the southeast region as of February 28, 1998.
4. DISPOSITIONS
During 1998, approximately 126 stores in North Carolina and South Carolina were
transferred to a party designated by J. C. Penney, completing the store
disposition plan that began in 1997. Previously, in February 1997, 63 stores in
North Carolina and South Carolina were sold to a unit of J.C. Penney Co. An
additional 121 stores were closed or sold during the year ended March 1, 1997.
In February 1997, the company completed its sale of Bi-Mart Membership Discount
Stores. Disposition of Bi-Mart was planned pursuant to the Thrifty PayLess
Holdings, Inc. merger. Accordingly, the fair market value of acquired Bi-Mart
assets was adjusted to the proceeds received upon disposition and resulted in no
gain recognition. The company received total proceeds from dispositions of
approximately $67,083,000 and $106,937,000 for the years ended February 28, 1998
and March 1, 1997, respectively. Gains from drugstore closings and dispositions
were not significant.
14
17
Rite Aid Corporation and Subsidiaries
5. INCOME TAXES
Total income tax expense for fiscal years ended February 28, 1998, March 1, 1997
and March 2, 1996, is allocated as follows:
- --------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Income before extra-
ordinary loss $213,606 $ 98,393 $ 97,255
Extraordinary loss -- (27,678) --
- --------------------------------------------------------------------------------
Total income tax expense $213,606 $ 70,715 $ 97,255
================================================================================
Income tax benefits of $27,678,000 associated with early debt extinguishment
losses are included in income taxes currently payable as of March 1, 1997. The
components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- --------------------------------------------------------------------------------
CURRENTLY PAYABLE:
Federal $149,743 $ 5,316 $ 21,488
State 24,261 7,081 4,927
- --------------------------------------------------------------------------------
174,004 12,397 26,415
- --------------------------------------------------------------------------------
DEFERRED TAX EXPENSE:
Federal 30,560 46,954 60,486
State 9,042 11,364 10,354
- --------------------------------------------------------------------------------
39,602 58,318 70,840
- --------------------------------------------------------------------------------
Total income tax expense $213,606 $ 70,715 $ 97,255
================================================================================
Presented below are the deferred tax liabilities and deferred tax assets at
February 28, 1998 and March 1, 1997:
- --------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Accelerated depreciation
and amortization $ 178,168 $ 150,011
Inventory valuation 153,383 137,121
Purchased tax benefits 5,951 5,951
Prepaid and other expenses 32,013 33,014
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 369,515 326,097
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accrued expenses (80,229) (78,701)
Net operating loss carryforwards (13,753) (3,081)
- --------------------------------------------------------------------------------
Total gross deferred tax assets (93,982) (81,782)
Valuation allowance 10,161 1,777
- --------------------------------------------------------------------------------
Net deferred tax assets (83,821) (80,005)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 285,694 $ 246,092
================================================================================
Net deferred tax liabilities of $22,243,000 associated with acquisitions
made during 1997 are included in the above table. 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 28, 1998 and March 1, 1997 principally
applies to net operating loss (NOLs) carryforwards for state income tax
purposes.
The current portions of net deferred taxes for 1998 and 1997 amounted to
$36,806,000 and $24,237,000, respectively, and are included with income taxes on
the balance sheet. State income taxes, nondeductible expenses and tax credits
account for most of the differences between the actual provision for income
taxes and taxes computed by applying the statutory rate for the year ended
February 28, 1998. Following is a reconciliation of the statutory to effective
tax rate for the three years ended February 28, 1998:
- --------------------------------------------------------------------------------
Percentage 1998 1997 1996
- --------------------------------------------------------------------------------
Federal statutory rate 35.0 35.0 35.0
State income taxes, net of
federal tax benefit 4.1 6.3 4.0
Nondeductible expenses 2.1 1.9 .7
Adjustments to prior year
tax liabilities (.8) (2.9) --
Tax credits (1.7) (1.0) --
Other, net 1.6 (1.3) (1.7)
- --------------------------------------------------------------------------------
40.3 38.0 38.0
================================================================================
6. INDEBTEDNESS AND CREDIT AGREEMENTS
Following is a summary of indebtedness at February 28, 1998 and March 1, 1997:
- --------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- --------------------------------------------------------------------------------
5.25% convertible subordinated
notes due 2002 $ 650,000 $ --
Commercial paper, 5.7% and 5.5%
weighted average rates at
year-end 1998 and 1997 400,000 701,500
6.70% notes due 2001 350,000 350,000
7.125% notes due 2007 350,000 350,000
7.70% debentures due 2027 300,000 300,000
7 5/8% senior notes due 2005 200,000 200,000
6 7/8% senior debentures due 2013 200,000 200,000
6 3/4% zero coupon convertible
subordinated notes due 2006 -- 199,111
5 7/8% to 10.475% industrial
development bonds
due through 2016 19,730 19,050
Obligations under capital leases 95,698 108,565
Other 33,506 31,681
- --------------------------------------------------------------------------------
2,598,934 2,459,907
Short-term debt and current
maturities of long-term debt (47,516) (44,255)
- --------------------------------------------------------------------------------
Long-term debt,
less current maturities $ 2,551,418 $ 2,415,652
================================================================================
15
18
Notes to Consolidated Financial Statements (cont.)
The company has a $1,000,000,000 revolving credit facility to support its
commercial paper program that expires in July 2001. Interest rates are based
upon various money market rate options selected by the company at the time of
borrowing. The credit facility has per annum fees, irrespective of usage, of 10
basis points. At February 28, 1998 and March 1, 1997, there were no amounts
outstanding under this agreement. The company maintains, at all times, unused
long-term revolving credit agreement commitments at least equal to the principal
amount of its outstanding commercial paper that the company intends to carry on
a long-term basis.
On September 10, 1997, the company completed the sale of $650,000,000, 5.25%
convertible subordinated notes due September 15, 2002. The notes are convertible
into shares of the company's common stock at any time on or after the 90th day
following the last issuance of notes and prior to the close of business on the
maturity date, unless previously redeemed or repurchased. The conversion price
is $36.1376 per share (equivalent to a conversion rate of 27.672 shares per
$1,000 principal amount of notes), subject to adjustment in certain events.
Interest on the notes is payable semiannually on March 15 and September 15 of
each year, commencing on March 15, 1998. The notes may be redeemed at the option
of the company on or after September 15, 2000, in whole or in part. The proceeds
from the sale of the notes were used to refinance and repay commercial paper
previously issued by the company.
On October 15, 1997, the company completed redemption of outstanding 6 3/4%
zero coupon convertible subordinated notes. Most holders of the 6 3/4% zero
coupon convertible subordinated notes exercised conversion rights prior to the
October 15, 1997 redemption date, resulting in issuance of approximately
11,800,000 shares of common stock.
On December 20, 1996, the company issued securities aggregating
$1,000,000,000. The sale of securities included $350,000,000, 6.70% notes due
December 15, 2001; $350,000,000, 7.125% notes due January 15, 2007 and
$300,000,000, 7.70% debentures due February 15, 2027. The net proceeds from the
sale of these securities were used to repay commercial paper issued by the
company in connection with the Thrifty PayLess merger and to refinance other
commercial paper borrowings previously issued by the company.
Early extinguishment of certain Thrifty PayLess indebtedness, during the
year ended March 1, 1997, resulted in an extraordinary loss of $45,157,000, net
of taxes. Repayment of Thrifty PayLess indebtedness included revolving notes
payable of $504,000,000, a term loan of $243,667,000 and 12 1/4% senior
subordinated notes of $195,000,000 due April 15, 2004. The extraordinary loss
consisted primarily of premiums associated with the tender offer of the 12 1/4%
senior subordinated notes and write-off of the related debt discount,
unamortized debt issuance costs and other costs associated with completing the
tender offer.
On April 20, 1995, the company issued $200,000,000 of 7 5/8% senior notes
due April 15, 2005. Net proceeds from the sale of the notes were used for
general corporate purposes, including the repayment of outstanding commercial
paper of the company. The notes may not be redeemed prior to maturity and will
not be entitled to any sinking fund.
In August 1993, the company 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.
In February 1996, the company entered into a sale and leaseback transaction
of certain leasehold improvements for which it received consideration totaling
$120,700,000 and was accounted for as a financing. The lease obligation accrues
interest at the rate of 5.6% in the first year, 6.8% for years two through six
and 12.5% for years seven through nine. As part of the consideration of the
transaction, the company received a $20,000,000, 12.5% note receivable from the
lessor which matures in six years. The company may exercise a purchase option
for $40,600,000 at the end of the sixth year.
The aggregate annual principal payments of long-term debt for the five
succeeding fiscal years are as follows: 1999, $47,516,000; 2000, $21,514,000;
2001, $22,706,000; 2002, $393,944,000 and 2003, $655,216,000. The company has
complied with restrictions and limitations included in the provisions of various
loan and credit agreements. At February 28, 1998, retained earnings were not
restricted as to payment of dividends by these provisions.
7. PROPERTY, PLANT AND EQUIPMENT
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, three to 15 years. Accelerated methods are used for income tax
purposes. Depreciation and amortization expenses were $184,252,000 for 1998,
$120,751,000 for 1997 and $96,974,000 for 1996.
8. FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at February 28,
1998 and March 1, 1997 are listed as follows:
- ---------------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- ---------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ---------------------------------------------------------------------------------------
Commercial paper
indebtedness $ 400,000 $ 400,000 $ 701,500 $ 701,500
Long-term
indebtedness 2,103,236 2,263,751 1,649,842 1,689,030
Note receivable 20,000 20,000 20,000 20,000
=======================================================================================
16
19
Rite Aid Corporation and Subsidiaries
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 amounts of
$34,426,000 at February 28, 1998 and $33,260,000 at March 1, 1997 represent the
costs 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:
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.
Note receivable:
The fair value of the fixed rate note receivable was determined using the
present value of projected cash flows. The discount rate was based upon the U.S.
Treasury yield curve adjusted for credit risk.
9. RETIREMENT PLANS
The company and its subsidiaries have several retirement plans covering
salaried employees and certain hourly paid employees. 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.
Pension expense for the defined benefit plans includes the following
components:
- --------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost $ 5,015 $ 2,088 $ 1,390
Interest cost 3,559 2,112 1,782
Actual return on plan assets (8,537) (3,757) (5,258)
Net amortization and deferral 4,548 1,307 3,118
- --------------------------------------------------------------------------------
Pension expense $ 4,585 $ 1,750 $ 1,032
================================================================================
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 28, 1998
and March 1, 1997:
- --------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
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 $(28,169) $(26,713) $(25,518) $(19,717)
Nonvested benefits (245) (2,290) (213) (1,253)
- --------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (28,414) (29,003) (25,731) (20,970)
Effect of anticipated future compensation levels
and other events (631) -- (840) --
- --------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (29,045) (29,003) (26,571) (20,970)
Fair value of assets held in the plans 34,140 24,072 31,428 18,176
- --------------------------------------------------------------------------------------------------------------------------
Plan assets in excess (less than) benefit obligation 5,095 (4,931) 4,857 (2,794)
Unrecognized net (gain) loss (1,794) 886 (840) 1,986
Unrecognized prior service cost 55 2,505 63 1,730
Unrecognized net obligation (asset) at March 1, 1987,
net of amortization (559) (99) (699) (119)
Adjustment to recognize additional minimum liability -- (3,292) -- (3,597)
- --------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 2,797 $ (4,931) $ 3,381 $ (2,794)
==========================================================================================================================
17
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
The significant actuarial assumptions used were as follows:
- --------------------------------------------------------------------------------
Percentage 1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate 7.00 7.25 7.25
Rate of increase in future
compensation levels 4.75 5.00 5.00
Expected long-term rate of
return on plan assets 9.00 9.00 9.00
================================================================================
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. An additional minimum pension liability was recognized resulting in
a direct reduction of stockholders' equity of $787,000 at February 28, 1998 and
$1,867,000 at March 1, 1997.
10. LEASES
The company leases most of its facilities under noncancelable operating leases,
many of which expire within 10 to 15 years. The approximate minimum rental
commitments of $4,691,612,000 at February 28, 1998, are payable as follows:
1999, $399,709,000; 2000, $382,452,000; 2001, $357,987,000; 2002, $335,428,000;
2003, $314,419,000 and $2,901,617,000 thereafter. These amounts are net of
sublease income, which is not significant. 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 $359,457,000 in 1998, $211,359,000 in
1997 and $163,965,000 in 1996. These amounts include contingent rentals of
$23,628,000, $13,158,000 and $7,728,000, respectively. The company develops
certain facilities through sale and leaseback arrangements. Proceeds from sale
and leaseback programs were approximately $329,764,000 for the year ended
February 28, 1998, and $105,270,000 for the year ended March 1, 1997. Gains
associated with these transactions were not significant and are amortized to
rent expense over the lease term. Future minimum rental commitments associated
with noncancelable operating leases for these facilities are included above. In
addition, the company has agreed to lease certain facilities 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
seven to 22 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.
11. CAPITAL STOCK
The authorized capital stock of the company consists of 300,000,000 shares of
common stock and 20,000,000 shares of preferred stock, both having a par value
of $1.00 per share. Preferred stock is issued in series subject to terms
established by the Board of Directors. No preferred stock has been issued.
18
21
Rite Aid Corporation and Subsidiaries
12. RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE
- ------------------------------------------------------------------------------------------------------------------
In thousands of dollars except per share amounts 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
NUMERATOR FOR BASIC EARNINGS PER SHARE:
Income before extraordinary loss $ 316,435 $ 160,534 $ 158,947
- ------------------------------------------------------------------------------------------------------------------
Extraordinary loss -- (45,157) --
- ------------------------------------------------------------------------------------------------------------------
Net income $ 316,435 $ 115,377 $ 158,947
- ------------------------------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES:
6.75% zero coupon convertible subordinated notes $ 5,281 $ 8,245 $ 8,356
5.25% convertible subordinated notes 9,920 -- --
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss assuming dilution $ 331,636 $ 168,779 $ 167,303
- ------------------------------------------------------------------------------------------------------------------
Net income assuming dilution $ 331,636 $ 123,622 $ 167,303
==================================================================================================================
DENOMINATOR:
Basic weighted average shares 250,638,000 184,422,000 167,616,000
EFFECT OF DILUTIVE SECURITIES:
Employee stock options 5,512,000 2,450,000 1,706,000
6.75% zero coupon convertible subordinated notes 7,034,000 11,886,000 12,790,000
5.25% convertible subordinated notes 8,450,000 -- --
- ------------------------------------------------------------------------------------------------------------------
Dilutive potential weighted average shares 20,996,000 14,336,000 14,496,000
- ------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 271,634,000 198,758,000 182,112,000
==================================================================================================================
BASIC EARNINGS PER SHARE:
Income before extraordinary loss $ 1.26 $ .87 $ .95
Extraordinary loss -- (.24) --
- ------------------------------------------------------------------------------------------------------------------
Net income $ 1.26 $ .63 $ .95
==================================================================================================================
DILUTED EARNINGS PER SHARE:
Income before extraordinary loss $ 1.22 $ .85 $ .92
Extraordinary loss -- (.23) --
- ------------------------------------------------------------------------------------------------------------------
Net income $ 1.22 $ .62 $ .92
==================================================================================================================
19
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
13. STOCK OPTION AND STOCK AWARD PLANS
The company reserved 22,000,000 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. 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. The 1990 Plan provides
for the Compensation Committee to determine both when and in what manner options
may be exercised; however, it may not be more than 10 years from the date of
grant. The exercise of either a SAR or option automatically will cancel any
related option or SAR. Under the Plan, 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 28, 1998:
- ------------------------------------------------------------------------------------
Shares under option 1998 1997 1996
- ------------------------------------------------------------------------------------
Outstanding at the
beginning of the year 10,051,150 6,116,578 4,969,302
Granted 2,426,500 4,615,100 1,646,800
Exercised (771,500) (551,802) (179,374)
Converted to and
exercised as SARs -- -- (306,400)
Expired and cancelled (306,376) (128,726) (13,750)
- ------------------------------------------------------------------------------------
Outstanding at the end
of the year 11,399,774 10,051,150 6,116,578
- ------------------------------------------------------------------------------------
Exercisable at the end
of the year 8,386,724 3,287,544 2,782,152
Available to grant at
the end of the year 8,850,878 1,997,426 6,483,800
Weighted average exercise
price of options
exercised $ 12.60 $ 9.41 $ 9.26
Weighted average exercise
price of options out-
standing at the end
of the year 13.88 13.43 10.58
====================================================================================
The company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with the provisions of SFAS No. 123, the
company applies APB Opinion 25 and related interpretations in accounting for its
stock option plans and, accordingly, does not recognize compensation cost. If
the company had elected to recognize compensation cost based upon the fair value
of the options granted at the grant date as prescribed by SFAS No. 123, net
income and earnings per share would have been reduced to the pro forma amounts
indicated in the table below:
- ---------------------------------------------------------------------------------------
In thousands of dollars except
per share amounts 1998 1997 1996
- ---------------------------------------------------------------------------------------
Net income-as reported $ 316,435 $ 115,377 $ 158,947
Net income-pro forma 310,737 112,937 158,436
Basic earnings per
share-as reported $ 1.26 $ .63 $ .95
Basic earnings per
share-pro forma 1.24 .61 .95
Net income assuming
dilution-as reported $ 331,636 $ 123,622 $ 167,303
Net income assuming
dilution-pro forma 325,938 121,182 166,792
Diluted earnings per
share-as reported $ 1.22 $ .62 $ .92
Diluted earnings per
share-pro forma 1.20 .61 .92
=======================================================================================
The pro forma amounts only take into account the options issued since March
5, 1995. The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Expected stock price volatility 25.0% 23.0% 23.5%
Expected dividend yield 1.5 3.0 3.0
Risk-free interest rate 6.0 5.5 6.5
Expected life of options 5 years 5 years 5 years
=================================================================================
The average fair value of options granted during 1998, 1997 and 1996 was
$3.55, $3.43 and $2.84, respectively.
14. COMMITMENTS AND CONTINGENCIES
The company had outstanding letters of credit of $62,948,000 and $112,592,000 at
February 28, 1998 and March 1, 1997, 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 statements of the company
if decided adversely.
20
23
INTERIM FINANCIAL RESULTS (Unaudited)
Rite Aid Corporation and Subsidiaries
In thousands of dollars except per share amounts YEAR 1998
- -------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
- -------------------------------------------------------------------------------------------------------------------------
Sales $ 2,664,600 $ 2,634,200 $ 2,885,666 $ 3,190,639 $11,375,105
Costs and expenses 2,550,294 2,532,669 2,771,942 2,990,159 10,845,064
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 114,306 101,531 113,724 200,480 530,041
Income taxes 46,065 40,918 45,830 80,793 213,606
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 68,241 $ 60,613 $ 67,894 $ 119,687 $ 316,435
=========================================================================================================================
Basic earnings per share $ .28 $ .25 $ .27 $ .46 $ 1.26
=========================================================================================================================
Diluted earnings per share $ .27 $ .24 $ .26 $ .44 $ 1.22
=========================================================================================================================
In thousands of dollars except per share amounts Year 1997
- --------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------------------------------------------------------
Sales $ 1,405,302 $ 1,423,076 $ 1,484,641 $ 2,657,182 $ 6,970,201
Costs and expenses 1,352,362 1,366,107 1,424,106 2,568,699 6,711,274
- --------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss
and income taxes 52,940 56,969 60,535 88,483 258,927
Income taxes 20,224 21,760 23,126 33,283 98,393
- --------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 32,716 35,209 37,409 55,200 160,534
Extraordinary loss, net of taxes -- -- -- (45,157) (45,157)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 32,716 $ 35,209 $ 37,409 $ 10,043 $ 115,377
================================================================================================================================
Basic earnings per share*:
- --------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ .20 $ .21 $ .22 $ .23 $ .87
Extraordinary loss, net of taxes -- -- -- (.19) (.24)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ .20 $ .21 $ .22 $ .04 $ .63
================================================================================================================================
Diluted earnings per share*:
- --------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ .19 $ .20 $ .22 $ .23 $ .85
Extraordinary loss, net of taxes -- -- -- (.18) (.23)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ .19 $ .20 $ .22 $ .05 $ .62
================================================================================================================================
*Common stock issued in connection with the acquisition of Thrifty PayLess
Holdings, Inc. is included in the calculation of weighted average shares since
the date of acquisition. Weighted average shares were 66,302,000 for the fourth
quarter and 16,576,000 for the year ended March 1, 1997. As a result of the
weighting differences for the fourth quarter and annual periods, aggregation of
quarterly earnings per share data do not equal annual earnings per share
amounts.
21
24
Rite Aid Corporation and Subsidiaries
Ten-Year Financial Review
In thousands of dollars except per share amounts Years ended
- -------------------------------------------------------------------------------------------------------------------------------
FEBRUARY 28, 1998 March 1, 1997 March 2, 1996 March 4, 1995 Feb. 26, 1994
(52 WEEKS) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Sales $ 11,375,105 $ 6,970,201 $ 5,446,017 $ 4,533,851 $ 4,058,711
Cost of goods sold, including
occupancy costs 8,290,888 5,113,047 4,017,351 3,327,920 2,970,025
Selling, general and administrative
expenses 2,394,424 1,433,697 1,104,123 932,167 865,137
Interest expense 159,752 96,473 68,341 42,300 28,683
Provision for videocassette rental
department closings -- -- -- -- --
Restructuring and other charges -- 68,057 -- -- 149,196
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 530,041 258,927 256,202 231,464 45,670
Income taxes 213,606 98,393 97,255 90,178 19,462
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 316,435 160,534 158,947 141,286 26,208
Income (loss) from discontinued
operations, net of income taxes -- -- -- -- (16,920)
Extraordinary loss, net of taxes -- (45,157) -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 316,435 $ 115,377 $ 158,947 $ 141,286 $ 9,288
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK*
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 1.26 $ 0.87 $ 0.95 $ 0.83 $ 0.15
Net income $ 1.26 $ 0.63 $ 0.95 $ 0.83 $ 0.05
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 1.22 $ 0.85 $ 0.92 $ 0.81 $ 0.15
Net income $ 1.22 $ 0.62 $ 0.92 $ 0.81 $ 0.05
Dividends per share $ .4075 $ .3775 $ .3475 $ .3100 $ .3000
Book value, based on shares
outstanding at year end $ 11.29 $ 10.13 $ 6.58 $ 6.01 $ 5.55
- -------------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $ 1,607,377 $ 1,599,489 $ 835,049 $ 795,995 $ 763,216
Current ratio 1.91:1 2.36:1 2.33:1 2.38:1 3.11:1
Property, plant and equipment (net) $ 2,171,149 $ 1,896,070 $ 979,549 $ 778,479 $ 638,694
Long-term debt $ 2,551,418 $ 2,415,652 $ 994,321 $ 805,984 $ 613,418
Total assets $ 7,655,346 $ 6,416,981 $ 2,841,995 $ 2,472,607 $ 1,989,070
Stockholders' equity $ 2,916,464 $ 2,488,685 $ 1,103,619 $ 1,011,812 $ 954,714
- -------------------------------------------------------------------------------------------------------------------------------
OTHER DATA*
Basic weighted average shares 250,638,000 184,422,000 167,616,000 169,542,000 175,944,000
Diluted weighted average shares 271,634,000 198,758,000 182,112,000 182,916,000 176,224,000
Number of retail drugstores 3,975 3,623 2,759 2,829 2,690
Number of employees 83,000 73,000 35,700 36,700 28,550
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA*
RESULTS PREPARED ON A FIFO BASIS:
Income from continuing operations $ 328,939 $ 170,509 $ 170,099 $ 150,663 $ 32,864
Basic earnings per share $ 1.31 $ 0.92 $ 1.01 $ 0.89 $ 0.19
Diluted earnings per share $ 1.27 $ 0.90 $ 0.98 $ 0.86 $ 0.19
Net income $ 328,939 $ 125,352 $ 170,099 $ 150,663 $ 15,944
Basic earnings per share $ 1.31 $ 0.68 $ 1.01 $ 0.89 $ 0.09
Diluted earnings per share $ 1.27 $ 0.67 $ 0.98 $ 0.86 $ 0.09
===============================================================================================================================
* Restated to reflect the two-for-one stock split on February 2, 1998
22
25
In thousands of dollars except per share amounts Years ended
- ---------------------------------------------------------------------------------------------------------------------------
Feb. 27, 1993 Feb. 29, 1992 March 2, 1991 March 3, 1990 March 4, 1989
(52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks)
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Sales $ 3,833,591 $ 3,530,560 $ 3,259,766 $ 3,011,250 $ 2,729,325
Cost of goods sold, including
occupancy costs 2,804,787 2,564,751 2,350,873 2,165,097 1,960,627
Selling, general and administrative
expenses 798,848 741,144 696,401 646,540 583,860
Interest expense 29,387 37,463 49,484 51,933 40,840
Provision for videocassette rental
department closings -- -- -- 22,000 --
Restructuring and other charges -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 200,569 187,202 163,008 125,680 143,998
Income taxes 76,819 72,261 62,879 48,764 56,325
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 123,750 114,941 100,129 76,916 87,673
Income (loss) from discontinued
operations, net of income taxes 8,646 9,075 7,171 25,142 7,537
Extraordinary loss, net of taxes -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 132,396 $ 124,016 $ 107,300 $ 102,058 $ 95,210
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK*
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 0.70 $ 0.66 $ 0.60 $ 0.46 $ 0.53
Net income $ 0.75 $ 0.71 $ 0.65 $ 0.62 $ 0.57
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 0.69 $ 0.65 $ 0.60 $ 0.46 $ 0.53
Net income $ 0.73 $ 0.70 $ 0.65 $ 0.61 $ 0.57
Dividends per share $ .2813 $ .2563 $ .2313 $ .2100 $ .1900
Book value, based on shares
outstanding at year end $ 5.88 $ 5.41 $ 4.66 $ 4.25 $ 3.84
- ---------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $ 811,645 $ 723,195 $ 707,451 $ 633,326 $ 297,334
Current ratio 4.03:1 3.49:1 3.98:1 3.93:1 1.62:1
Property, plant and equipment (net) $ 551,392 $ 502,728 $ 493,947 $ 475,548 $ 434,801
Long-term debt $ 489,220 $ 427,503 $ 585,434 $ 542,051 $ 228,260
Total assets $ 1,858,506 $ 1,734,479 $ 1,666,958 $ 1,539,311 $ 1,417,520
Stockholders' equity $ 1,035,643 $ 950,575 $ 773,948 $ 704,413 $ 636,184
- ---------------------------------------------------------------------------------------------------------------------------
OTHER DATA*
Basic weighted average shares 175,866,000 173,834,000 165,992,000 165,916,000 165,808,000
Diluted weighted average shares 189,548,000 182,008,000 165,992,000 166,032,000 165,872,000
Number of retail drugstores 2,573 2,452 2,420 2,352 2,184
Number of employees 27,750 27,607 27,290 26,935 27,347
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA*
RESULTS PREPARED ON A FIFO BASIS:
Income from continuing operations $ 134,335 $ 125,228 $ 111,290 $ 86,504 $ 95,481
Basic earnings per share $ 0.76 $ 0.72 $ 0.67 $ 0.52 $ 0.58
Diluted earnings per share $ 0.74 $ 0.71 $ 0.67 $ 0.52 $ 0.58
Net income $ 142,981 $ 134,303 $ 118,461 $ 111,646 $ 103,018
Basic earnings per share $ 0.81 $ 0.77 $ 0.71 $ 0.67 $ 0.62
Diluted earnings per share $ 0.79 $ 0.76 $ 0.71 $ 0.67 $ 0.62
===========================================================================================================================
* Restated to reflect the two-for-one stock split on February 2, 1998
23
26
DIRECTORS AND CORPORATE OFFICERS
DIRECTORS
- --------------------------------------------------------------------------------------------------------------------------------
WILLIAM J. BRATTON MARTIN L. GRASS PHILIP NEIVERT PRESTON ROBERT TISCH
President Chairman of the Board and Private Investor Co-chairman and Co-chief
CARCO Group Inc. Chief Executive Officer Executive Officer
TIMOTHY J. NOONAN Loews Corporation
FRANKLIN C. BROWN LEONARD I. GREEN President and
Vice Chairman of the Senior Partner Chief Operating Officer GERALD TSAI, JR.
Board of Directors Leonard Green and Partners Chairman, President and
LEONARD N. STERN Chief Executive Officer
ALEX GRASS NANCY A. LIEBERMAN Chairman of the Board and Delta Life Corporation
Honorary Chairman Partner, Skadden, Arps, Slate, Chief Executive Officer
of the Board and Chairman of Meagher and Flom The Hartz Group, Inc.
the Executive Committee
CHAIRMAN PRESIDENT EXECUTIVE VICE PRESIDENTS
- --------------------------- ----------------------------- ----------------------------------------------------------
MARTIN L. GRASS TIMOTHY J. NOONAN FRANK M. BERGONZI KEVIN J. MANN
Chief Executive Officer Chief Operating Officer Chief Financial Officer Category Management
VICE CHAIRMAN BETH J. KAPLAN WILLIAM A. K. TITELMAN
Franklin C. Brown Marketing Managed Care and
Government Affairs
SENIOR VICE PRESIDENTS
- --------------------------------------------------------------------------------------------------------------------------------
ERIC S. ELLIOTT CHARLES R. KIBLER RONALD A. MILLER JOSEPH S. SPEAKER
President and Chief Executive Drugstore Operations Distribution and Logistics Finance and Administration
Officer of Eagle Managed Care
PHILIP D. MARKOVITZ ROBERT R. SOUDER KENT L. WHITING
ELLIOT S. GERSON Store Development Human Resources and Information Services
General Counsel and Secretary Labor Relations
VICE PRESIDENTS
- ------------------------------------------------------------------------------------------------------------------------------
GERALD P. CARDINALE W. MICHAEL KNIEVEL RAYMOND B. MCKEEBY MATTHEW SWEENEY
Information Services Corporate Security Pricing IS Infrastructure
DENNIS M. DOWN JAMES E. KRAHULEC SUZANNE MEAD RICHARD J. VARMECKY
Human Resources Government and Corporate Communications Treasurer
Trade Relations
I. LAWRENCE GELMAN MICHAEL F. MORRIS MARY A. VERBRYKE
Real Estate Law and ROGER LEKBERG Store Development Category Management,
Assistant Secretary Distribution and Logistics Purchasing
ERIC S. SORKIN
STEPHEN J. KINDLER JAMES O. LOTT Pharmacy Purchasing
Corporate Controller Risk Management
24
27
Investor Information
RISKS AND UNCERTAINTIES IN THE FUTURE
Certain statements contained in the 1998 Annual Report, that are not historical
facts, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements address activities or events which the company
expects will or may occur in the future. The company cautions that a number of
important factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether written or oral, made by or
on behalf of the company. Such factors include, but are not limited to,
competitive pricing pressures, third party prescription reimbursement levels,
continued consolidation of the drugstore industry, consumer preferences,
regulatory changes governing pharmacy practices, general economic conditions,
inflation, merchandise supply constraints, interest rate movements, access to
capital, availability of real estate, construction and start-up of drugstore and
distribution center facilities, and the effects of technological difficulties
including successful completion of Year 2000 conversion activities.
Consequently, all of the forward-looking statements made are qualified by these
and other factors, risks and uncertainties. Investors are also directed to
consider other risks and uncertainties discussed in documents filed by the
company with the Securities and Exchange Commission.
ANNUAL MEETING
The annual meeting will
be held on June 24, 1998, at 10:00 a.m. at:
Radisson Penn Harris
Hotel and
Convention Center,
1150 Camp Hill Bypass
Camp Hill, PA 17011
717 763 7117
FORM 10-K
The annual report to the Securities and Exchange Commission on Form 10-K is
available upon written request to the treasurer of the company, or through the
SEC EDGAR database on the World Wide Web at: www.sec.gov.
REGISTRAR AND TRANSFER AGENT
Harris Trust Company
of New York
c/o Harris Bank
311 West Monroe Street
11th Floor
Chicago, IL 60606
312 360 5345
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
312 360 5345
DRUGSTORE LOCATIONS
AS OF FEBRUARY 28,1998
- ----------------------------------------
Alabama 126
Alaska 10
Arizona 3
California 684
Colorado 32
Connecticut 50
Delaware 17
District of Columbia 6
Florida 18
Georgia 64
Idaho 21
Indiana 35
Kentucky 138
Louisiana 109
Maine 88
Maryland 174
Michigan 378
Mississippi 31
Nevada 13
New Hampshire 38
New Jersey 192
New York 375
Ohio 329
Oregon 79
Pennsylvania 411
Tennessee 54
Texas 5
Utah 27
Vermont 12
Virginia 172
Washington 151
West Virginia 132
Wyoming 1
- ----------------------------------------
TOTAL 3,975
CORPORATE INFORMATION
General information about the company, including corporate background and
current announcements, is available on the company's web site at:
www.RiteAid.com.
Rite Aid Corporation
General Offices:
30 Hunter Lane
Camp Hill, PA 17011-2404
Mailing Address:
P.O. Box 3165
Harrisburg, PA 17105-3165
717 761 2633
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 May 4, 1998, there were approximately
40,000 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
- ------------------------------------------------------------------------
1998 First 24 11/16 20 9/16 10.00(cent)
Second 27 3/16 22 1/2 10.00(cent)
Third 32 31/32 25 1/32 10.00(cent)
Fourth 34 3/8 26 5/8 10.75(cent)
- ------------------------------------------------------------------------
1997 First 17 1/4 14 5/16 9.25(cent)
Second 16 13/16 13 5/8 9.25(cent)
Third 20 7/16 15 11/16 9.25(cent)
Fourth 21 5/8 18 13/16 10.00(cent)
========================================================================
25
28
[RITE AID LOGO]
Rite Aid Corporation
General Offices:
30 Hunter Lane
Camp Hill, PA 17011-2404
www.RiteAid.com