1
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS Revco D.S., Inc. and Subsidiaries
(Dollars in Millions, Except Per Share Amounts) 1996 1995 Change
- -----------------------------------------------------------------------------------------------------------------
SUMMARY FINANCIAL INFORMATION
Net sales $ 5,087.7 $ 4,431.9 14.8%
Operating profit(1) 218.8 175.7 24.5%
Net income(1) 82.7 61.1 35.4%
Net income per share(1) $ 1.24 $ .95 30.5%
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FINANCIAL POSITION AT YEAR END
Total assets $ 2,133.5 $ 2,149.8 (.8%)
Inventories 968.4 962.9 .6%
Working capital 413.3 399.5 3.5%
Total debt (current and long-term) 514.9 681.2 (24.4%)
Stockholders' equity 868.6 773.1 12.4%
Book value per common share $ 12.68 $ 11.53 10.0%
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KEY STATISTICS
Average number of common shares outstanding (000s) 66,870 64,366 3.9%
Number of stores 2,184 2,118 3.1%
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PRICE RANGE OF COMMON STOCK
1996 1995
-------------------------- -----------------------
High Low High Low
First Quarter $25-3/8 $19-1/4 $19 $14-1/2
Second Quarter $25-7/8 $19-5/8 $23-1/4 $16-5/8
Third Quarter $29 $24-5/8 $24-1/2 $20
Fourth Quarter $29 $22-3/8 $24 $17-1/2
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<FN>
The Company's common stock is listed on the New York Stock Exchange (NYSE)
under the symbol "RXR". The preceding tables set forth the high and low sales
prices of the common stock as reported in the NYSE Composite Tape for the
quarterly periods indicated. No dividends were declared or paid during fiscal
1996 and 1995.
(1) Operating profit in 1996 is shown before the pretax effect of a
non-recurring charge for merger-related expenses of $12.6 million ($6.5
million, net of tax, or $.10 per share). Net income and net income per
share for 1996 are shown before the effect of this non-recurring charge and
for 1995, before an extraordinary item related to a loss on early
retirement of debt of $2.8 million, net of tax, or $.04 per share.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the consolidated
financial statements of the Company.
During fiscal 1995, the Company completed an acquisition (the "Acquisition") of
one of its competitors, Hook-SupeRx, Inc. ("HSI"). The operating results of the
Company include the operating results of HSI retained operations (801 drugstores
and a mail order facility) for all 52 weeks of fiscal 1996 and for 44 of the 53
weeks in fiscal 1995. To enhance comparability, unaudited pro forma amounts for
both fiscal 1995 and fiscal 1994 have been presented in Note 13 to the
consolidated financial statements, reflecting the financial results of the
Company as if the Acquisition had occurred at the beginning of the periods
presented.
RESULTS OF OPERATIONS
Comparison of the 52 Weeks Ended June 1, 1996 ("fiscal 1996") and the 53 weeks
ended June 3, 1995 ("fiscal 1995"): Net sales increased 14.8% to $5,087.7
million for fiscal 1996, from $4,431.9 million for fiscal 1995. HSI retained
operations generated $376.0 million of the net sales increase while net sales
from core Revco stores (stores operated prior to the Acquisition) increased
$279.8 million or 9.7%. On a comparable store basis, net sales increased 8.0%
for fiscal 1996, with core Revco stores rising 8.1% and HSI stores rising 7.8%.
Prescription sales, which comprised 58.1% of net sales for fiscal 1996, were
primarily responsible for the overall increase in net sales, increasing $458.9
million, or 18.4%. HSI retained operations generated $239.6 million of the
prescription sales increase. Prescription sales in core Revco stores increased
$219.3 million, or 13.6%. The number of prescriptions filled by the Company in
core Revco stores increased 8.0% from fiscal 1995 to fiscal 1996. Sales
comparisons in core Revco stores for fiscal 1996 are distorted by the fact that
fiscal 1995 contains a 53rd week of operating results. Excluding the 53rd week
of fiscal 1995 operating results, the growth in the number of prescriptions
filled in core Revco stores exceeded 10.0% in fiscal 1996. The increase in
prescription sales was attributable to an increase in managed care sales.
Managed care sales, that segment of the prescription business whereby someone
other than the customer (typically an insurance carrier) pays for the
prescription, continue to drive the overall growth rate in prescription
business. Managed care sales comprised 70.6% of total prescription sales for
fiscal 1996, compared to 64.9% in fiscal 1995.
Over-the-counter ("OTC") sales increased $196.9 million, or 10.2%, to $2,133.7
million for fiscal 1996. HSI retained operations generated $136.4 million of the
OTC sales increase. OTC sales in core Revco stores increased $60.5 million, or
4.8%. The majority of this increase was attributable to the growth in the number
of store locations.
Cost of sales increased 15.9% to $3,593.5 million in fiscal 1996 from $3,100.1
million in fiscal 1995. Gross margin increased 12.2% but declined as a
percentage of sales to 29.4% in fiscal 1996 from 30.1% in fiscal 1995. Margin
rates associated with prescription sales declined due to the increase in managed
care sales as a percentage of total prescription sales and continued pressure on
margin rates within the managed care business. Managed care sales have
positively impacted the Company's net sales and gross margin dollar growth, but
yield lower profit percentages than non-managed care sales. The LIFO charge
increased $2.9 million to $19.7 million in fiscal 1996 primarily due to higher
inflation rates, but remained constant as a percentage of sales at .4%. The
decline in the prescription margin rate and higher LIFO charge was partially
offset by a slight increase in the OTC gross margin rate due to continued
favorable purchasing terms.
Operating expenses increased $102.6 million, or 9.6%, but decreased as a
percentage of sales to 23.0% in fiscal 1996 from 24.0% in fiscal 1995. The
improvement in operating expenses as a percentage of sales was attributable to
the leveraging of relatively fixed, non-store expenses over a broader store base
made possible by the Acquisition, coupled with a more favorable store labor rate
to sales in the HSI stores as the Company realized the benefits of improved
store systems installed in these locations during fiscal 1995.
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3
The Company recorded a pretax non-recurring charge of $12.6 million in the
fourth quarter of fiscal 1996 for expenses related to a failed merger
transaction with Rite Aid Corporation ("Rite Aid"). The charge consisted of
professional fees, employee retention costs and other merger-related costs and
is discussed further in Note 2 to the consolidated financial statements.
Depreciation and amortization expense increased $16.7 million to $107.1 million
in fiscal 1996, due to the inclusion of HSI operations and HSI related goodwill
amortization in the Company's consolidated results of operations for 52 weeks in
fiscal 1996 versus 44 weeks in fiscal 1995 and increased depreciation expense
associated with the remodeling program in the HSI stores.
Net interest expense (interest expense net of interest income) was $59.3 million
for fiscal 1996 compared with $55.2 million for fiscal 1995. The increase in
interest expense between years was attributable to higher average debt balances
outstanding for the full fiscal year as a result of the Acquisition.
The Company's effective income tax rate of 48.1% for fiscal 1996 differs from
the federal income tax statutory rate of 35.0% principally because of state and
local income taxes (6.5%) and permanent differences arising from: (1)
amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $17.6 million; and (2) amortization of goodwill
totaling $9.8 million. The Company expects its taxes payable to be significantly
lower than the amounts recorded in its income tax provision due to the
utilization of net operating loss carryforwards ("NOLs"). See the discussion
under the caption "Certain Tax Matters" in the Liquidity and Capital Resources
section which follows.
Comparison of the 53 Weeks Ended June 3, 1995 ("fiscal 1995") and the 52 Weeks
Ended May 28, 1994 ("fiscal 1994"): Net sales increased 77.0% to $4,431.9
million for fiscal 1995, from $2,504.0 million for fiscal 1994. HSI retained
operations generated $1,535.2 million of the net sales increase while net sales
from core Revco stores increased $392.7 million or 15.7%. On a comparable store
basis, net sales in core Revco stores increased 9.4%.
Prescription sales, which comprised 56.3% of net sales for fiscal 1995, were
primarily responsible for the overall increase in net sales, increasing $1,161.3
million, or 87.1%. Prescription sales in core Revco stores increased $292.4
million, or 21.9%. The number of prescriptions filled by the Company in core
Revco stores increased 17.2% from fiscal 1994 to fiscal 1995. Although a portion
of this increase in prescriptions filled was attributable to an increase in the
number of core Revco store locations, the majority of the increase was
attributable to comparable store sales growth and the inclusion of an additional
week of operations in fiscal 1995. Excluding the additional week of operations,
the growth rate for prescriptions filled in core Revco stores was approximately
14.6%. The increase in prescription sales was attributable to an increase in
managed care sales. Managed care sales comprised 64.9% of total prescription
sales for fiscal 1995, compared to 54.4% in fiscal 1994.
OTC sales increased $766.6 million, or 65.5%, to $1,936.8 million for fiscal
1995 from $1,170.2 million in fiscal 1994. OTC sales in core Revco stores
increased $100.3 million, or 8.6%. Approximately $24.0 million of this increase
was attributable to an additional week of operations in fiscal 1995, with the
remainder of the increase attributable to the growth in the number of core Revco
store locations, which increased 5.0% to 1,311 retail locations at June 3, 1995
from 1,248 retail locations at May 28, 1994.
Cost of sales increased 78.0% to $3,100.1 million in fiscal 1995 from $1,742.0
million in fiscal 1994. Gross margin increased 74.8% but, as a percentage of
sales, declined to 30.1% in fiscal 1995 from 30.4% in fiscal 1994. Gross margin
was negatively impacted by a $9.6 million higher LIFO provision due to higher
inflation rates and inventory levels in fiscal 1995 versus fiscal 1994. The LIFO
charge in fiscal 1995 was $16.8 million or .4% of sales versus $7.2 million or
.3% of sales in fiscal 1994. The remaining decrease in gross margin as a
percentage of sales was attributable to a decline in margin rates on
prescription sales. Margin rates associated with prescription sales declined due
to the increase in managed care sales as a percentage of total prescription
sales. Managed care sales have positively impacted the Company's net sales and
gross margin growth, but yield lower profit percentages than non-managed care
sales.
2
4
Operating expenses increased $456.8 million, or 75.0%, but decreased as a
percentage of sales to 24.0% in fiscal 1995 from 24.3% in fiscal 1994. Despite
higher store labor and distribution costs in the HSI operations during fiscal
1995, the Company was able to leverage non-store expenses over a broader store
base made possible by the Acquisition.
Depreciation and amortization expense increased $37.8 million, from $52.6
million in fiscal 1994 to $90.4 million in fiscal 1995. Of this increase, $21.1
million was due to the inclusion of HSI retained operations in the Company's
consolidated results of operations. Depreciation expense associated with the
installation of the Company's Prescription Access Link ("PAL") system and
point-of-sale ("POS") scanning in retained HSI stores accounted for the majority
of the remaining increase. Goodwill recorded in the Acquisition of $385.0
million is being amortized using a forty-year life.
Net interest expense was $55.2 million for fiscal 1995 compared with $23.3
million for fiscal 1994. The increase in interest expense between years was
attributable to higher average debt balances outstanding as a result of the
Acquisition.
The Company's effective income tax rate of 49.3% for fiscal 1995 differs from
the federal income tax statutory rate of 35.0% principally because of state and
local income taxes (6.4%) and permanent differences arising from: (1)
amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $17.6 million; and (2) amortization of goodwill
totaling $8.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion regarding liquidity and capital resources should be
read in conjunction with the Company's Consolidated Balance Sheets and the
Consolidated Statements of Cash Flows as of and for the periods ended June 1,
1996 and June 3, 1995.
Fiscal 1996: Cash, including temporary cash investments, increased $5.0 million
during fiscal 1996 to $8.4 million. Cash generated by operations, before working
capital items, totaled $226.6 million, an improvement of $21.1 million from the
$205.5 million generated during fiscal 1995. Focused management of working
capital, particularly in the inventory position of the Company, resulted in a
$17.3 million source of cash from net changes in working capital items (and
other operating assets and liabilities).
Cash generated by operations includes $18.7 million in tax benefits from NOLs
expected to be utilized on the Company's 1996 federal income tax return. The
Company expects to utilize approximately $53.0 million of NOLs benefited in
fiscal 1996 and $28.0 million of NOLs benefited in fiscal 1995 on its 1996
federal income tax return. The status of the Company's NOLs is discussed further
under the caption "Certain Tax Matters".
Net cash provided by operating activities includes $10.4 million in cash
proceeds from the sale of substantially all of the assets of the Company's
wholly owned subsidiary, Revco Home Health Care Centers, Inc., which was sold in
the second quarter.
Net cash used for investing activities totaled $110.7 million, all of which
related to the Company's capital expenditures, as discussed further under the
caption "Capital Expenditures".
Net cash used by financing activities was $128.2 million, of which $166.3
million represents a net reduction in borrowings outstanding under the Company's
revolving credit facility (the "Revolving Credit Facility").
In May 1996, the Company's Board of Directors authorized the repurchase by the
Company of up to three million shares of common stock. Through July 12, 1996, no
shares have been repurchased by the Company under this authorization. During
fiscal 1995, the Company repurchased 700,000 shares of common stock at an
aggregate price of $12.8 million under a previously authorized repurchase
program.
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5
Fiscal 1995: Cash, including temporary cash investments, decreased $21.0 million
during fiscal 1995 to $3.4 million. Cash generated by operations, before working
capital items, totaled $205.5 million, an improvement of $78.5 million from the
$127.0 million generated in fiscal 1994. Net changes in working capital items
(and other operating assets and liabilities) resulted in a $192.7 million use of
cash. The majority of this use of cash, $161.7 million, represented an increase
in inventory levels, net of vendor support, to adequately stock the acquired HSI
stores.
Net cash used for investing activities during fiscal 1995 was $416.4 million,
$278.0 million of which related to the Acquisition and subsequent HSI
integration efforts. As discussed more fully in Note 3 to the consolidated
financial statements, during fiscal 1995 Revco acquired HSI for a total
acquisition value of $632.6 million, including acquired debt of HSI of $330.5
million, resulting in a net cash outlay to Revco of $302.1 million. Of this cash
outlay, $217.0 million was financed through a rights offering of the Company's
common stock. The Company completed a store divestiture program shortly after
the Acquisition date, divesting certain of the acquired HSI operations. The net
cash proceeds raised from this program, after estimated working capital
paydowns, were $128.8 million. Incremental and non-recurring costs of the
Acquisition totaled $97.3 million and were charged to an acquisition reserve
established in purchase accounting. The majority of these costs represented
severance and payroll costs to former HSI employees.
Additions to property, equipment and leasehold improvements of $138.4 million
for fiscal 1995 include the capitalizable costs of the installation of PAL, POS
scanning and distribution systems in the retained HSI operations and costs
related to the HSI and Revco store base, as discussed further under the caption
"Capital Expenditures".
Net cash provided by financing activities was $382.6 million. Financing for the
Acquisition was accomplished through a $217.0 million rights offering of the
Company's common stock and new bank facilities.
CAPITAL EXPENDITURES: During fiscal 1996, the Company reinvested $110.7 million
in its operations, of which $61.0 million represented the Company's investment
in new stores and the upgrade through relocation or expansion of its existing
drugstore base. During fiscal 1996, the Company opened 85 new stores and
relocated 54 stores. The Company spent $13.4 million to upgrade POS registers
with improved technology in existing core Revco drugstores. An additional $16.4
million was spent on the HSI store base during fiscal 1996 to install anti-theft
detection systems in all of the remaining HSI stores and to continue remodeling
the HSI stores to Revco's store design and decor package. During fiscal 1996,
the Company completed the remodeling of 149 acquired HSI stores, bringing the
total number of former HSI stores remodeled since the Acquisition to 304 stores.
Finally, the Company invested $16.0 million in its distribution centers to
expand and upgrade its facilities.
During fiscal 1995, the Company reinvested $138.4 million in its operations,
$38.4 million of which represented the capitalizable costs of installing Revco's
PAL, POS scanning and distribution systems in the retained HSI operations. An
additional $32.1 million was spent on the HSI store base during fiscal 1995 to
remodel the HSI stores. During fiscal 1995, the Company completed the remodeling
of 155 HSI stores. In addition to the HSI stores, the Company reinvested $67.9
million in its core Revco business, the majority of which was used to expand and
upgrade the Revco store base. In addition to other store improvements, the
Company opened 75 new stores and relocated 37 stores.
During fiscal 1997, the Company intends to open 60 new stores and relocate 60
existing stores. More than 70% of these store projects will be the Company's
larger, freestanding units. The Company also intends to continue its remodeling
program in the HSI stores, with 150 store projects planned for fiscal 1997. The
Company has no material commitments in connection with these planned capital
expenditures. Funds for these expenditures are expected to be provided from the
Revolving Credit Facility and cash generated internally.
4
6
CERTAIN TAX MATTERS: As of June 3, 1995, estimated NOLs reported on the
Company's federal income tax returns were approximately $352.0 million.
Approximately $98.0 million of these NOLs are subject to a use limitation
("restricted NOLs") of approximately $27.0 million per year under Section 382 of
the Internal Revenue Code. The Company believes that it will not be able to
utilize approximately $81.0 million of the restricted NOLs because of the
allocation method for the annual use limitation under proposed income tax
regulations applicable to related corporations belonging to two separate
consolidated groups.
While the Company believes that it is justified in taking the positions that it
has taken with respect to the NOLs, the law with respect to the treatment of
some of the items making up the NOLs is unclear or unsettled. Although the
Company believes its calculations of the NOLs are reasonable, the NOLs and the
other items on the Company's tax returns are subject to audit by the Internal
Revenue Service ("IRS"). Due to the lack of specific guidance on certain
significant issues, the Company's position with respect to some or all of the
items making up the NOLs could be challenged by the IRS. If the IRS were to
successfully disallow some or all of the Company's NOLs, the Company would be
able to offset less of its taxable income with NOLs and other tax deductions.
For fiscal 1996, the Company will utilize approximately $11.0 million of
restricted NOLs and approximately $70.0 million of unrestricted NOLs to offset
projected taxable income of the Company, leaving estimated NOLs for fiscal 1997
of approximately $271.0 million, of which approximately $81.0 million the
Company may be unable to utilize, as discussed above.
SOURCES OF LIQUIDITY: The Company has three principal sources of liquidity: (1)
cash and cash equivalents; (2) the Revolving Credit Facility; and (3) cash from
operations. Management of the Company believes that the Company's cash on hand
and cash from operations, together with borrowings and letters of credit under
the Revolving Credit Facility, will be sufficient to cover its working capital,
capital expenditure and debt service requirements until the maturity date of the
Revolving Credit Facility.
The Revolving Credit Facility is an unsecured obligation of the Company maturing
on July 27, 2000 and provides for a total credit commitment of $650.0 million,
reducing to $600.0 million in July 1998 and $525.0 million in July 1999.
The Revolving Credit Facility includes minimum interest and lease expense
coverage ratio, maximum total indebtedness to adjusted earnings before interest,
income taxes, depreciation and amortization ("EBITDA") ratio, as well as
customary other covenants, representations and warranties, funding conditions
and events of default. The Company does not believe that the restrictions
contained in these financial and operating covenants will cause significant
limitations on the Company's financial flexibility.
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REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED JUNE 1, 1996, JUNE 3, 1995 AND MAY 28, 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
---- ---- ----
Net sales $5,087.7 $4,431.9 $2,504.0
Cost of sales 3,593.5 3,100.1 1,742.0
Operating expenses 1,168.3 1,065.7 608.9
Depreciation and amortization 107.1 90.4 52.6
Non-recurring charge 12.6 -- --
--------- --------- ---------
Operating profit 206.2 175.7 100.5
Interest expense 60.1 57.6 24.3
Interest income (.8) (2.4) (1.0)
--------- --------- ---------
Income before income taxes and
extraordinary item 146.9 120.5 77.2
Income tax provision 70.7 59.4 38.5
--------- --------- ---------
Net income before extraordinary item 76.2 61.1 38.7
Extraordinary item, loss related to early retirement
of debt, net of income tax benefit of $2.4 million -- (2.8) --
--------- --------- ---------
Net income $ 76.2 $ 58.3 $ 38.7
========= ========= =========
Net income per share:
Net income before extraordinary item $ 1.14 $ .95 $ .77
Extraordinary item -- (.04) --
--------- --------- ---------
Net income $ 1.14 $ .91 $ .77
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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8
REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT JUNE 1, 1996 AND JUNE 3, 1995
(DOLLARS IN MILLIONS)
1996 1995
---- ----
ASSETS
Current assets:
Cash, including temporary cash investments $ 8.4 $ 3.4
Accounts receivable, less allowance for doubtful
accounts of $24.6 and $21.7, respectively 120.6 102.5
Inventories 968.4 962.9
Prepaid expenses 19.4 20.2
-------- --------
Total current assets 1,116.8 1,089.0
Property, equipment and leasehold improvements, net 320.1 278.8
Leasehold interests, net 51.3 58.1
Goodwill, net 367.2 377.0
Reorganization value in excess of amounts allocable
to identifiable assets, net 205.0 241.3
Net deferred tax asset 13.6 38.2
Other assets 59.5 67.4
-------- --------
$2,133.5 $2,149.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank debit balances $ 52.5 $ 32.2
Current portion of long-term debt -- 41.6
Accounts payable 335.7 325.4
Accrued liabilities 315.3 290.3
-------- --------
Total current liabilities 703.5 689.5
Long-term debt 514.9 639.6
Long-term liabilities 46.5 47.6
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, par value $.01 per share; issued
and outstanding 68,486,112 and 67,064,611,
respectively .7 .7
Preferred stock, par value $.01 per share; no
shares issued or outstanding -- --
Additional paid-in capital 693.3 674.0
Retained earnings 187.4 111.2
Treasury stock, at cost, 700,000 shares (12.8) (12.8)
-------- --------
Total stockholders' equity 868.6 773.1
-------- --------
$2,133.5 $2,149.8
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
9
REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
COMMON STOCK
--------------------------
ADDITIONAL TREASURY TOTAL
NUMBER OF PAID-IN RETAINED STOCK, AT STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COST EQUITY
------ ------ ------- -------- ---- ------
BALANCE, MAY 29, 1993 50,023,772 $ .5 $ 439.0 $ 14.2 $ -- $ 453.7
Net income -- -- -- 38.7 -- 38.7
Exercise of stock options 203,490 -- 1.8 -- -- 1.8
Compensation expense -- -- 1.0 -- -- 1.0
Common stock issued to
401(k) Savings Plan 343,035 -- 4.5 -- -- 4.5
---------- ----- ------- ------- -------- -------
BALANCE, MAY 28, 1994 50,570,297 .5 446.3 52.9 -- 499.7
Net income -- -- -- 58.3 -- 58.3
Exercise of stock options 164,965 -- 1.6 -- -- 1.6
Compensation expense -- -- .8 -- -- .8
Common stock issued to
401(k) Savings Plan 132,204 -- 2.6 -- -- 2.6
Common stock issued to
Stock Purchase Plan 697,780 -- 9.1 -- -- 9.1
Rights offering 15,499,365 .2 216.8 -- -- 217.0
Stock issuance costs -- -- (3.2) -- -- (3.2)
Purchase of treasury stock -- -- -- -- (12.8) (12.8)
---------- ----- ------- ------- -------- -------
BALANCE, JUNE 3, 1995 67,064,611 .7 674.0 111.2 (12.8) 773.1
Net income -- -- -- 76.2 -- 76.2
Exercise of stock options and
other stock awards 967,967 -- 8.9 -- -- 8.9
Compensation expense -- -- .9 -- -- .9
Common stock issued to
401(k) Savings Plan 214,607 -- 5.2 -- -- 5.2
Common stock issued to
Stock Purchase Plan 238,927 -- 4.3 -- -- 4.3
---------- ----- ------- ------- -------- -------
BALANCE, JUNE 1, 1996 68,486,112 $ .7 $ 693.3 $ 187.4 $ (12.8) $ 868.6
========== ===== ======= ======= ======== =======
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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10
REVCO D.S., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 1, 1996, JUNE 3, 1995 AND MAY 28, 1994
(DOLLARS IN MILLIONS)
1996 1995 1994
---- ---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76.2 $ 58.3 $ 38.7
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 107.1 90.4 52.6
Deferred income taxes 24.6 37.0 11.0
Net operating loss carryforwards utilized 18.7 17.0 24.7
Extraordinary item, loss on early retirement
of debt, net of income tax benefit -- 2.8 --
Changes in operating assets and liabilities:
(Increase) in accounts receivable, net (18.1) (28.9) (7.8)
(Increase) in inventories (5.5) (234.4) (17.6)
(Increase) decrease in prepaid expenses .8 (13.5) (.8)
(Increase) in other assets (1.0) (13.2) (9.1)
Increase in accounts payable 10.3 72.7 24.0
Increase in accrued liabilities 30.8 24.6 8.6
------- ------- -------
Net cash flows provided by operating
activities 243.9 12.8 124.3
------- ------- -----
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, equipment and leasehold
improvements (110.7) (138.4) (36.0)
Purchase of Hook-SupeRx, Inc. subsidiary,
net of cash acquired -- (302.1) --
Payment of professional fees associated with
the Acquisition -- (7.4) --
Proceeds from Store Divestiture Program -- 128.8 --
Acquisition Reserve payments -- (97.3) --
------- ------- ---------
Net cash flows used by investing
activities (110.7) (416.4) (36.0)
------- ------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank debit balances 20.3 32.2 --
Payments of long-term debt (248.4) (432.3) (161.2)
Proceeds from issuance of long-term debt 82.1 582.4 85.0
Payment of debt and stock issuance costs -- (14.4) (4.5)
Payment of consent solicitation fees -- -- (10.3)
Proceeds from stock rights offering -- 217.0 --
Proceeds from common stock issued under employee
benefit plans 17.8 10.5 9.5
Purchase of treasury stock -- (12.8) --
-------- -------- -------
Net cash flows provided (used) by financing
activities (128.2) 382.6 (81.5)
-------- -------- -------
Net increase (decrease) in cash and
temporary cash investments 5.0 (21.0) 6.8
Cash and temporary cash investments at
beginning of period 3.4 24.4 17.6
-------- -------- -------
Cash and temporary cash investments at
end of period $ 8.4 $ 3.4 $ 24.4
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS FOR:
Interest $ 45.9 $ 52.6 $ 21.0
Income taxes 39.2 9.4 3.2
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
11
REVCO D.S., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revco D.S., Inc. (the "Company") operates 2,184 retail drugstores in
fourteen contiguous Midwestern, Southeastern and Eastern states. The
Company's stores are health-oriented neighborhood pharmacies offering
pharmaceuticals and related merchandise.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Since actual results may differ
from those estimates, the Company revises its estimates and assumptions
as new information becomes available.
The significant accounting policies applied in preparing the accompanying
consolidated financial statements of the Company are summarized below:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated. Certain balances have been reclassified to conform to the
presentation at June 1, 1996.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to May 31. The
fiscal year refers to the year in which the period ends (e.g., fiscal
1996 ended June 1, 1996). Fiscal years generally consist of 52 weeks,
with the exception of fiscal year 1995 which contains 53 weeks.
CASH AND TEMPORARY CASH INVESTMENTS
Temporary cash investments include all highly liquid investments with
original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
substantially all inventories is determined on a last-in, first-out
(LIFO) basis. If the first-in, first-out (FIFO) method of inventory
accounting had been used, inventories would have been approximately $55.8
million and $36.1 million higher than reported at June 1, 1996 and June
3, 1995, respectively.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation expense is computed on a straight-line basis. Leasehold
improvements are amortized over the life of the asset or the term of the
lease, whichever is shorter.
The ranges of estimated useful lives used in computing depreciation and
amortization are as follows:
Buildings and improvements 20 years
Fixtures and equipment 3 to 7 years
Autos and trucks 5 years
Leasehold improvements 3 to 10 years
LEASEHOLD INTERESTS
Leasehold interests are being amortized over the remaining lease term or
15 years, whichever is shorter. At June 1, 1996 and June 3, 1995,
accumulated amortization was $13.9 million and $8.6 million,
respectively.
GOODWILL
Goodwill recorded in the acquisition of Hook-SupeRx, Inc. ("HSI") is
being amortized on a straight-line basis over 40 years. This amortization
is a non-deductible expense for tax purposes. At June 1, 1996, and June
3, 1995, accumulated amortization was $17.8 million and $8.0 million,
respectively.
6
12
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets
("reorganization goodwill") is being amortized on a straight-line basis
over 20 years. This amortization is a non-deductible expense for tax
purposes.
The Company has net operating loss carryforwards ("NOLs") available to
offset future federal and state taxable income. These NOLs are attributable
to the time period prior to the Company's emergence from Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") in fiscal 1992. Under the
recommended accounting principles for entities emerging from Chapter 11
("Fresh Start Reporting"), any benefits realized from the utilization of
these NOLs should reduce reorganization goodwill. Below is a reconciliation
of the original reorganization goodwill recorded by the Company upon
emergence from Chapter 11 to the net amount reflected in the fiscal 1996
and 1995 balance sheets (dollars in millions):
1996 1995
---- ----
Original balance recorded $352.1 $352.1
Accumulated amortization (70.4) (52.8)
Cumulative NOLs utilized (76.7) (58.0)
------ ------
$205.0 $241.3
====== ======
INCOME TAXES
Deferred income taxes are provided for at the current statutory rates on
the difference between financial statement basis and tax basis of assets
and liabilities and are classified in the balance sheet as current or
non-current consistent with the expected reversal date of the temporary
differences.
STORE PRE-OPENING EXPENSES
Non-capital expenditures incurred prior to the opening of a new or
remodeled store are charged to operating expense when incurred.
ADVERTISING
Advertising costs are expensed as incurred. Total advertising expenses were
$88.6, $85.3 and $50.2 million for the three fiscal years ended June 1,
1996, respectively.
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
The Company's present benefit structure does not provide for postemployment
benefits other than pensions for current employees. The Company provides
certain health and life insurance benefits for selected retired employees
who met eligibility requirements and are grandfathered under former benefit
plans which have since been amended or terminated. The costs of these
benefits have been fully accrued by the Company.
The Company is a party to deferred compensation and supplemental retirement
arrangements with 58 current and former officers and employees of the
Company. The Company has accrued a liability equal to the present value of
future amounts payable under the terms of these agreements. The agreements
also provide survivor benefits in the event of death prior to retirement
for current officers and employees.
The Company is a party to employment agreements (the "Employment
Agreements") with each of its current officers and two non-officer
employees. Each of the Employment Agreements is effective until terminated
by the Company or the employee, with or without cause. (The aggregate
annual salaries provided by the Employment Agreements are approximately
$5.0 million.) The Employment Agreements provide that, in the event of a
termination for "good reason" by the employee or a termination without
cause by the Company, the Company will have an obligation to continue
benefits and to pay the terminated employee's salary for a specified period
(the "Severance Period"). The Employment Agreements provide for Severance
Periods of 24 months for members of the Company's management executive
committee and 12 months for the other officers as well as the non-officer
employees, with additional enhancements to the Severance Periods in the
event of a change in control of the Company.
7
13
EARNINGS PER SHARE
Earnings per share were computed using weighted average number of shares
and common stock equivalents outstanding of 66,869,823, 64,365,943 and
50,318,177 for the three fiscal years ended June 1, 1996, respectively.
Fully diluted earnings per share are the same as primary earnings per
share.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") during fiscal 1997.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," was issued in March 1995 and is
effective for fiscal years that begin after December 15, 1995. This
standard requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that full
recoverability is questionable. Management has performed a preliminary
review and has determined that this statement will not have a material
impact on the Company's reported results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
October 1995 and is effective for fiscal years that begin after December
15, 1995. This standard establishes accounting and disclosure requirements
using a fair value based method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either adopt the
new fair value based accounting method or continue the intrinsic value
based method under current accounting standards and provide pro forma
disclosures of net income and net income per share as if the accounting
provisions of SFAS No. 123 had been adopted. The Company plans to continue
to account for its stock-based employee compensation plans using the
intrinsic value based method under current accounting standards and adopt
the disclosure requirements of SFAS No. 123.
(2) NON-RECURRING CHARGE
In November 1995, Rite Aid Corporation ("Rite Aid") and the Company
announced that they had entered into a definitive merger agreement in which
Rite Aid would acquire the Company. In April 1996, Rite Aid informed the
Company that Rite Aid was withdrawing its tender offer for the Company's
common stock. Following Rite Aid's announcement, the Company and Rite Aid
terminated the merger agreement pursuant to which the tender offer had been
made.
The Company recorded a non-recurring charge of $12.6 million for expenses
related to the failed merger attempt consisting of professional fees,
employee retention costs and other merger-related costs.
(3) ACQUISITION OF HOOK-SUPERX, INC.
In July 1994, Revco completed its acquisition of HSI (the "Acquisition")
for a total acquisition value of $632.6 million, including acquired debt of
HSI of $330.5 million. The Acquisition was accounted for using the purchase
method. Accordingly, the carrying values of HSI's net assets, including the
establishment of the acquisition reserve (the "Acquisition Reserve")
discussed below, have been adjusted to their estimated fair values. The
excess of the purchase price over the net identifiable assets and
liabilities of HSI totaled $385.0 million and is reported as goodwill.
To finance the Acquisition, the Company replaced its former bank
facilities. The accelerated amortization of unamortized deferred financing
costs associated with the former bank facilities totaled $5.2 million,
before applicable income tax benefit of $2.4 million, and has been
accounted for as a net extraordinary loss of $2.8 million in fiscal 1995.
8
14
As a result of the Acquisition, results of operations for the Company for
fiscal 1996 are not comparable to results of operations for fiscal 1995 and
fiscal 1994. Operating results of the Company include the operating results
of retained HSI operations (801 drugstores and a mail order facility) since
the Acquisition date, or for all 52 weeks of fiscal 1996 and for 44 of the
53 weeks included in fiscal 1995. To enhance comparability and to provide a
more meaningful analysis of operating trends, unaudited pro forma amounts
for both fiscal 1995 and 1994 have been presented in Note 13.
STORE DIVESTITURE PROGRAM
Operations of HSI that the Company had targeted for divestiture, 271 HSI
stores and two distribution centers that were sold or closed in non-overlap
states and 42 HSI stores that were consolidated into existing Revco stores
in overlap states (the "Store Divestiture Program") have been excluded from
the Company's results of operations since the date of the Acquisition. The
Store Divestiture Program was completed during the second quarter of fiscal
1995, in a series of unrelated transactions. Net cash proceeds raised,
after estimated working capital paydowns, were $128.8 million.
ACQUISITION RESERVE
Severance and payroll costs associated with the Store Divestiture Program
and the shutdown of HSI's administrative offices, completed during fiscal
1995, as well as the costs of the discontinued activities of these
operations during the closing process, were charged to the Acquisition
Reserve, along with certain incremental non-recurring costs directly
attributable to the Acquisition. Activity charged to the Acquisition
Reserve from the date of the Acquisition through the completion of the
divestiture and integration process at the end of fiscal 1995 totaled $97.3
million and included severance and payroll costs of $39.8 million,
discontinued activities expenses of $32.0 million and other direct,
incremental and non-recurring costs of $25.5 million.
(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of (dollars in
millions):
1996 1995
---- ----
Land $ 17.1 $ 17.6
Buildings and improvements 60.8 52.1
Fixtures and equipment 264.3 209.3
Autos and trucks 2.6 1.5
Leasehold improvements 128.7 97.9
Construction in progress 6.1 7.5
------- -------
479.6 385.9
Less accumulated depreciation and amortization (159.5) (107.1)
------- -------
$ 320.1 $ 278.8
======= =======
(5) FINANCING
Long-term debt consists of (dollars in millions):
1996 1995
---- ----
Bank facilities $230.0 $396.3
9.125% Senior Notes 140.0 140.0
10.125% Senior Notes 144.9 144.9
------ ------
514.9 681.2
Less current portion -- (41.6)
------ ------
Total long-term debt $514.9 $639.6
====== ======
Future maturities of long-term debt are as follows (dollars in millions):
FISCAL YEAR
-----------
1997 $ --
1998 --
1999 --
2000 140.0
2001 230.0
2002 and thereafter 144.9
9
15
(6) ACCRUED LIABILITIES
Accrued liabilities consist of (dollars in millions):
1996 1995
---- ------
Store rental obligations $ 74.3 $ 79.8
Salaries and wages 83.0 68.2
Other employee benefits 59.7 45.5
Insurance 31.0 32.2
Income and non-income taxes 9.2 8.2
Other 58.1 56.4
------- -------
$ 315.3 $ 290.3
======= =======
Accruals for store rental obligations include any rental obligations
associated with closed store locations.
(7) STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 125,000,000
shares of stock, of which 25,000,000 shares, $.01 par value per share,
are preferred stock and 100,000,000 shares, $.01 par value per share, are
common stock.
COMMON STOCK
The holders of the common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders.
Subject to any preferential rights held by holders of the preferred
stock, holders of the common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds
legally available therefor.
In July 1994, a rights offering was completed, raising gross proceeds of
$217.0 million to partially finance the Acquisition. In connection with
the rights offering, the Company entered into a standby purchase
agreement with Zell/Chilmark Fund, L.P. ("Zell/Chilmark"), pursuant to
which Zell/Chilmark agreed to acquire from the Company all shares of
common stock subject to its basic subscription privilege and any and all
of the underlying shares which remained after the exercise of the rights
and the satisfaction of all subscriptions pursuant to an oversubscription
privilege. The Company paid a fee of $2.9 million to Zell/Chilmark in
connection with the standby purchase agreement.
PREFERRED STOCK
The Company's Board of Directors (the "Board") has the authority to issue
25,000,000 shares of preferred stock in one or more series and to fix the
designation and relative powers, preferences and rights and
qualifications, limitations or restrictions of all shares of each such
series, without any further vote or action by the stockholders. The
Company has no present plans to issue any of the preferred stock.
TREASURY STOCK
In May 1996, the Board authorized the repurchase by the Company of up to
three million of the Company's outstanding shares of common stock.
Through July 12, 1996, no shares have been repurchased by the Company
under this authorization. During fiscal 1995, the Company repurchased a
total of 700,000 shares at an aggregate purchase price of $12.8 million
under a previously authorized repurchase program.
11
16
(8) STOCK PURCHASE AND OPTION PLANS
The Company's 1993 Employee Stock Purchase Plan (the "Stock Purchase
Plan") enables all employees of the Company to subscribe to shares of
common stock on offering dates generally coinciding with the Company's
fiscal year, at a purchase price equal to the lesser of 85% of the fair
market value of the common stock on the first or last day of the offering
period. During fiscal 1996, the Company's stockholders approved an
increase in the maximum number of shares of common stock reserved for
issuance under the Stock Purchase Plan from 1,200,000 to 2,700,000. At
June 1, 1996, 1,763,293 shares remained available for issuance through
the Stock Purchase Plan.
The Company has two plans under which stock awards may be granted.
The 1992 Long-Term Incentive Plan (the "Incentive Plan") provides for the
granting of stock awards to officers and other key employees of the
Company. The stock awards may consist of non-qualified stock options,
restricted stock awards and other performance awards. A maximum of
6,520,000 shares of common stock are reserved for issuance under the
Incentive Plan.
The 1992 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") provides for the granting of non-qualified stock options to
certain non-employee directors of the Company. A maximum of 270,000
shares of common stock are reserved for issuance under the Directors'
Plan.
Non-qualified stock options granted under the Incentive Plan and
Directors' Plan provide for the option to purchase common stock over a
10-year period, at a price not less than the fair market value on the
date of grant. On each anniversary of the date of grant, the exercise
price for each non-vested option increases by an amount equal to 5% of
the option price then in effect.
The Incentive Plan and Directors' Plan are administered by the Human
Resources Committee of the Board of Directors of the Company (the
"Committee"). Options become exercisable at such times and in such
installments as set by the Committee. Participants generally vest in the
options over a five-year period.
Information regarding the Company's stock option plans is summarized
below:
INCENTIVE DIRECTORS' PRICE
NUMBER OF OPTIONS PLAN PLAN PER SHARE
------------------------- ---------------- --------------- -----------------
Outstanding May 29, 1993 2,146,000 60,000 $ 8.38 - 10.88
Granted 258,000 50,000 11.50 - 17.00
Exercised (201,490) (2,000) 8.38 - 9.92
Canceled (41,460) -- 9.01 - 15.50
--------- ---------
Outstanding May 28, 1994 2,161,050 108,000 8.75 - 17.00
Granted 1,485,239 49,473 18.00 - 22.13
Exercised (150,119) (14,846) 8.75 - 18.00
Canceled (118,774) (6,000) 9.01 - 19.88
--------- ---------
Outstanding June 3, 1995 3,377,396 136,627 8.75 - 22.13
Granted 1,808,700 35,000 20.75 - 27.75
Exercised (681,917) (5,000) 8.80 - 23.24
Canceled (156,054) -- 9.01 - 23.24
--------- ---------
Outstanding June 1, 1996 4,348,125 166,627 $ 8.75 - 27.75
========= ========= ==============
EXERCISABLE
AT JUNE 1, 1996 943,298 131,671 $ 8.75 - 27.75
========= ========= ==============
RESERVED FOR FUTURE GRANT 732,299 81,527
========= =========
In May 1996, the Committee awarded an aggregate of 281,050 shares of
restricted stock to certain officers and key employees as a retention
incentive in light of the failed Rite Aid merger transaction. The
restricted stock awards vest over periods not to exceed two years and
require, among other things, continued employment over the vesting
period. Compensation expense of $6.5 million was recognized in
connection with the restricted stock award grants and was included in
the non-recurring charge (see Note 2) recorded in fiscal 1996.
12
17
(9) LEASES
The Company conducts certain warehousing and substantially all
retailing operations in leased premises. Initial lease terms normally
range from three to 20 years, and are generally renewable at the option
of the Company. Leases are either gross leases, which provide for
annual rentals that include executory expenses such as real estate
taxes, insurance, common area and other operating costs which are paid
by the lessor, or net leases which provide that the Company pay the
above-mentioned expenses. Certain leases include a provision for the
payment of contingent rent based upon a percentage of sales in excess
of defined minimums. The Company also leases certain transportation and
data processing equipment under leases expiring at various dates during
the next ten years. All leases meet the criteria of, and are accounted
for, as operating leases.
Rental expense for the periods indicated was as follows (dollars in
millions):
1996 1995 1994
---- ---- ----
Minimum rentals $131.4 $112.4 $66.7
Contingent rentals 41.7 30.4 17.2
------ ------ -----
$173.1 $142.8 $83.9
====== ====== =====
At June 1, 1996, future minimum rental commitments under all
noncancelable leases were as follows (dollars in millions):
REAL
FISCAL YEAR PROPERTY EQUIPMENT TOTAL
----------- -------- --------- -----
1997 $ 131.5 $4.0 $ 135.5
1998 123.4 2.3 125.7
1999 113.0 1.5 114.5
2000 100.1 .8 100.9
2001 85.1 .5 85.6
2002 and thereafter 471.4 .7 472.1
-------- ---- --------
$1,024.5 $9.8 $1,034.3
======== ==== ========
(10) INCOME TAXES
The income tax provision consists of (dollars in millions):
1996 1995 1994
---- ---- ----
Current:
Federal $39.9 $ 15.2 $ 22.1
State and local 13.8 4.8 5.4
----- ------ ------
53.7 20.0 27.5
Utilization of NOLs (18.7) (17.0) (24.7)
----- ------ ------
Net current provision 35.0 3.0 2.8
Deferred:
Federal 16.0 29.9 8.3
State and local 1.0 7.1 2.7
----- ------ ------
17.0 37.0 11.0
----- ------ ------
Provision before add back of NOLs 52.0 40.0 13.8
Add back utilization of NOLs which cannot be
benefited under Fresh Start Reporting 18.7 17.0 24.7
----- ------ ------
70.7 57.0 38.5
Extraordinary benefit -- 2.4 --
----- ------ ------
Income tax provision as reported $70.7 $ 59.4 $ 38.5
===== ====== ======
For financial reporting purposes, the changes in deferred tax assets
(liabilities) are as follows (dollars in millions):
1996 1995 1994
---- ---- ----
Net change in accruals/reserves $(10.8) $(32.4) $(13.0)
Depreciation and amortization 1.5 1.8 1.7
Other, net (7.7) (6.4) .3
------- ------ ------
Deferred tax provision (17.0) (37.0) (11.0)
Acquired tax assets -- 94.8 --
AMT credit carryforward (1.1) 2.4 1.1
Reconciliation to prior year tax return (6.5) (1.5) (1.9)
------- ------ ------
Net change in deferred tax assets (liabilities) $(24.6) $ 58.7 $(11.8)
======= ====== ======
13
18
The following is a reconciliation of the statutory federal income tax
rate to the actual effective income tax rate:
1996 1995 1994
---- ---- ----
Federal tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal tax benefit 6.5 6.4 6.9
Amortization of intangible assets 6.5 7.4 8.0
Other .1 .5 --
---- ---- ----
Effective income tax rate 48.1% 49.3% 49.9%
==== ==== ====
Significant components of deferred tax assets and liabilities as of the end of fiscal 1996 and 1995 are as
follows (dollars in millions):
1996 1995
---- ----
Deferred tax assets:
Pension, vacation and other employee
benefit accruals $ 31.6 $ 30.9
Store rental obligations 21.0 22.2
Self insurance, contingency and other
reserves 21.8 25.2
Reserves for uncollectible receivables 16.4 17.8
AMT carryforwards 14.3 15.4
Other 13.4 18.1
------- ------
118.5 129.6
------- ------
Deferred tax liabilities:
Excess book over tax bases of inventory (68.0) (71.2)
Excess book over tax bases of fixed assets
and intangibles (19.2) (17.7)
Other (17.7) (2.5)
------- ------
(104.9) (91.4)
------- ------
Net deferred tax asset $ 13.6 $ 38.2
======= ======
As of June 3, 1995, estimated NOLs reported on the Company's federal
income tax returns were approximately $352.0 million. Approximately $98.0
million of these NOLs are subject to a use limitation ("restricted NOLs")
of approximately $27.0 million per year under Section 382 of the Internal
Revenue Code. The Company believes that it will not be able to utilize
approximately $81.0 million of the restricted NOLs because of the
allocation method for the annual use limitation under proposed income tax
regulations applicable to related corporations belonging to two separate
consolidated groups.
While the Company believes that it is justified in taking the positions
that it has taken with respect to the NOLs, the law with respect to the
treatment of some of the items making up the NOLs is unclear or
unsettled. Although the Company believes its calculations of the NOLs are
reasonable, the NOLs and the other items on the Company's tax returns are
subject to audit by the Internal Revenue Service ("IRS"). Due to the lack
of specific guidance on certain significant issues, the Company's
position with respect to some or all of the items making up the NOLs
could be challenged by the IRS. If the IRS were to successfully disallow
some or all of the Company's NOLs, the Company would be able to offset
less of its taxable income with NOLs and other tax deductions.
For fiscal 1996, the Company will utilize approximately $11.0 million of
restricted NOLs and approximately $70.0 million of unrestricted NOLs to
offset projected taxable income of the Company, leaving estimated NOLs
for fiscal 1997 of approximately $271.0 million, of which approximately
$81.0 million the Company may be unable to utilize, as discussed
previously.
A large portion of the Company's NOLs are attributable to the time period
prior to the Company's emergence from Chapter 11 in fiscal 1992. Under
Fresh Start Reporting, benefits realized from these NOLs should reduce
reorganization goodwill. Accordingly, estimated NOLs to be utilized
during the three fiscal years ended June 1, 1996 have not been included
in the Company's computation of its income tax provision, but reflected
instead as a reduction of reorganization goodwill.
14
19
(11) RETIREMENT BENEFITS
The principal retirement plans for employees are a non-contributory
defined benefit pension plan (the "Retirement Income Plan") and a 401(k)
savings plan (the "401(k) Savings Plan").
The Retirement Income Plan covers all full-time employees who are 20 1/2
years of age with six months of service and who are not covered by
collective bargaining agreements. Benefits paid to retirees are based
upon age at retirement, years of credited service and average
compensation during the final five years of employment. It is the policy
of the Company to fund its plan at amounts required by the applicable
regulations. The Company made cash contributions of $1.0, $7.8 and $3.1
million to the plan during the three fiscal years ended June 1, 1996,
respectively.
Net periodic pension cost includes the following components (dollars in
millions):
1996 1995 1994
---- ---- ----
Service cost-benefits $ 7.4 $ 7.1 $ 3.5
Interest cost 13.0 10.3 5.0
Return on plan assets (24.2) (10.8) (4.6)
Net amortization and deferral 11.4 (.1) --
----- ------ ------
Net periodic pension cost $ 7.6 $ 6.5 $ 3.9
===== ===== =====
The following table sets forth the plan's funded status and amounts
recognized in the Company's Consolidated Balance Sheets (dollars in
millions):
1996 1995
---- ----
Accumulated benefit obligations, including vested
benefits of $156.5 and $143.6, respectively $165.3 $151.7
====== ======
Projected benefit obligation $185.7 $170.4
Plan assets at fair value 158.4 140.2
------ --------
Projected benefit obligation in excess of plan assets 27.3 30.2
Unrecognized net loss (9.2) (18.5)
Unrecognized prior service cost (3.0) (3.3)
------- --------
Accrued pension cost $ 15.1 $ 8.4
======= ========
Assumptions used to measure the actuarial present value of the projected
benefit obligation are as follows:
1996 1995
---- ----
Assumed discount rate 7.75% 7.75%
Assumed rate of compensation increase 4.50% 4.50%
Assumed rate of return on plan assets 9.00% 9.00%
Plan assets primarily consist of mutual funds, with the balance invested
in money market funds, common stock and insurance contracts.
The 401(k) Savings Plan covers all employees of the Company meeting
certain eligibility requirements and is funded by voluntary employee
contributions and by Company contributions equal to a certain percentage
of employee contributions. Employees' interests in Company contributions
vest over five years. The cost of the plan was $3.4, $1.3 and $1.0
million for the three fiscal years ended June 1, 1996, respectively.
In addition to the above mentioned plans, and pursuant to various labor
agreements, the Company and certain subsidiaries are required to make
contributions to various union-administered pension plans which
aggregated $1.2, $1.3 and $.8 million in each of the three fiscal years
ended June 1, 1996. The Company may be liable for its share of the plans'
unfunded liabilities if the plans are terminated.
15
20
REVCO D.S., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1996
Net sales $ 1,076.7 $1,137.0 $ 1,243.3 $ 1,630.7
========= ======== ========= =========
Gross profit $ 320.8 $ 328.3 $ 363.2 $ 481.9
========= ======== ========= =========
Net income $ 8.4 $ 11.5 $ 24.7 $ 31.6
========= ======== ========= =========
Net income per share $ .13 $ .17 $ .37 $ .47
========= ======== ========= =========
1995
Net sales $ 694.4 $1,027.2 $ 1,133.0 $ 1,577.3
========= ======== ========= =========
Gross profit $ 206.9 $ 301.7 $ 335.8 $ 487.4
========= ======== ========= =========
Net income before extraordinary item $ 5.8 $ 5.0 $ 17.7 $ 32.6
Extraordinary item (2.8) -- -- --
--------- -------- -------- ---------
Net income $ 3.0 $ 5.0 $ 17.7 $ 32.6
========= ======== ========= =========
Net income per share:
Net income before extraordinary item $ .10 $ .08 $ .27 $ .49
Extraordinary item (.05) -- -- --
--------- -------- --------- ---------
Net income $ .05 $ .08 $ .27 $ .49
========= ======== ========= =========
The Company reports its quarterly results of operations on the basis of
12-week periods for each of the first three quarters and a 16-week period
for the fourth quarter. The fourth quarter of fiscal 1995 includes an
additional week of operations due to the timing of the Company's fiscal
year end which ends on the Saturday closest to May 31.
As explained in Note 2, during the fourth quarter of fiscal 1996, the
Company recorded a non-recurring charge of $12.6 million for expenses
related to a failed merger attempt.
Fourth quarter results include normal year end adjustments relating to
estimates made during the year. The effect of such adjustments in fiscal
years 1996 and 1995 were not material to the reported results.
(13) PRO FORMA DATA (UNAUDITED)
The unaudited pro forma data below reflects the financial results of the
Company as if the acquisition of HSI had occurred, and such transactions
had been consummated, as of the beginning of the periods presented. The
unaudited pro forma data reflects pro forma adjustments to historical
results of operations of the Company to: (a) include retained operations
of HSI; (b) record additional interest expense on the incremental debt
levels used to finance the Acquisition; (c) record amortization of
goodwill recognized in connection with the Acquisition; (d) adjust
historical depreciation and amortization expense of HSI as a result of
purchase accounting adjustments; and (e) record adjustments to the
historical tax provision based upon a revised effective tax rate.
The pro forma information presented does not attempt to quantify any
operating expense synergies or cost reductions of the combined operations
of the Company and HSI.
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AS REPORTED PRO FORMA
---------------------------------- --------------------------------
1995 1994 1995 1994
---------------- ----------------- ---------------- ---------------
Net sales $4,431.9 $2,504.0 $4,723.3 $4,320.9
Cost of sales 3,100.1 1,742.0 3,304.8 3,009.1
Operating expenses 1,065.7 608.9 1,146.1 1,107.6
Depreciation and
amortization 90.4 52.6 97.4 85.5
-------- -------- -------- --------
Operating profit $ 175.7 $ 100.5 $ 175.0 $ 118.7
======== ======== ======== ========
Net income $ 61.1 $ 38.7 $ 56.2 $ 27.5
======== ======== ======== ========
Net income per share $ .95 $ .77 $ .87 $ .42
======== ======== ======== ========
16
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Revco D.S., Inc.:
We have audited the accompanying consolidated balance sheets of Revco D.S., Inc.
and Subsidiaries (collectively the "Company") as of June 1, 1996 and June 3,
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three fiscal years in the
period ending June 1, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 1, 1996
and June 3, 1995, and the results of their operations and their cash flows for
each of the three fiscal years ended June 1, 1996 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Cleveland, Ohio,
July 12, 1996.
1
22
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL YEARS ENDED
-------------------------------------------------------------------------------
| PREDECESSOR
| COMPANY(2)
JUNE 1, JUNE 3, MAY 28, MAY 29, | MAY 30,
1996 1995(1) 1994 1993 | 1992
--------------- -------------- -------------- --------------- | ---------------
|
PERIOD DATA: |
Operations: |
Net sales $ 5,087.7 $ 4,431.9 $ 2,504.0 $ 2,242.1 | $2,086.3
Cost of sales 3,593.5 3,100.1 1,742.0 1,568.3 | 1,461.1
Operating expenses 1,168.3 1,065.7 608.9 551.5 | 528.2
Depreciation and amortization 107.1 90.4 52.6 46.3 | 51.2
Non-recurring charge 12.6 -- -- -- | --
--------- ---------- --------- --------- | --------
Operating profit 206.2 175.7 100.5 76.0 | 45.8
Interest expense, net 59.3 55.2 23.3 41.0 | 35.0
Reorganization items (2) -- -- -- -- | 356.9
Income tax provision (benefit) 70.7 59.4 38.5 20.8 | (8.5)
--------- ---------- ---------- --------- | --------
Net income (loss) before |
extraordinary item 76.2 61.1 38.7 14.2 | (337.6)
Extraordinary item -- (2.8) -- -- | 635.3(2)
--------- ---------- ---------- --------- | --------
Net income $ 76.2 $ 58.3 $ 38.7 $ 14.2 | $ 297.7
========= ========== ========== ========= | ========
Net income before non-recurring |
charge and extraordinary item $ 82.7 $ 61.1 $ 38.7 $ 14.2 |
========= ========== ========== ========= |
|
Earnings Per Share(2): |
Net income per share before non- |
recurring charge and extraordinary item $ 1.24 $ .95 $ .77 $ .35 |
========= ========== ========== ========== |
|
Net income per share $ 1.14 $ .91 $ .77 $ .35 |
========= ========== ========== ========= |
Average number of common shares |
outstanding 66,869,823 64,365,943 50,318,177 40,933,214 |
========== ========== =========== ========== |
JUNE 1, JUNE 3, MAY 28, MAY 29, MAY 30,
1996 1995(1) 1994 1993 1992
--------------- -------------- -------------- --------------- ---------------
BALANCE SHEET DATA (AT PERIOD END):
Total assets $ 2,133.5 $ 2,149.8 $ 1,060.8 $ 1,045.2 $1,056.3
========= ========= ========= ========= ========
Inventories $ 968.4 $ 962.9 $ 505.4 $ 487.8 $ 436.1
========= ========= ========= ========= ========
Working capital $ 413.3 $ 399.5 $ 243.9 $ 222.0 $ 257.2
========= ========= ========= ========= ========
Capitalization:
Long-term debt $ 514.9 $ 639.6 $ 200.0 $ 253.3 $ 435.2
Stockholders' equity 868.6 773.1 499.7 453.7 320.0
--------- --------- --------- --------- --------
Total capitalization $ 1,383.5 $ 1,412.7 $ 699.7 $ 707.0 $ 755.2
========= ========= ========= ========= ========
Debt to total capitalization percentage 37.2% 45.3% 28.6% 35.8% 57.6%
========= ========= ========= ========= ========
Number of drugstores in
operation 2,184 2,118 1,248 1,190 1,143
========= ========= ========= ========= ========
<FN>
(1) Fiscal 1995 consisted of 53 weeks. All other fiscal years presented consist
of 52 weeks.
(2) On June 1, 1992, the Company, and certain of its subsidiaries which filed
petitions for relief, emerged from Chapter 11 of the United States
Bankruptcy Code pursuant to a confirmed plan of reorganization of the
Company's predecessor company.
The Company implemented the recommended accounting principles for entities
emerging from Chapter 11 ("Fresh Start Reporting"). As a result of the
Company's emergence from bankruptcy and its adoption of Fresh Start
Reporting as of May 30, 1992, the Company's results of operations for the
periods subsequent to May 30, 1992, are not comparable to the predecessor
company's consolidated financial statements. Among other things, the
predecessor company's results of operations for the year ended May 30,
1992, includes as an extraordinary item a one-time gain of $635.3 million
relating to debt discharged, and a one-time reorganization item of $325.6
million to record assets and liabilities at their estimated fair values.
Per share data is not presented for the predecessor company due to the
general lack of comparability with the revised capital structure of the
Company.