<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 1, 1997 (NO FEE REQUIRED).
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO (NO FEE REQUIRED).
---------- ----------
Commission File Number 1-5742
RITE AID CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1614034
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Hunter Lane, Camp Hill, Pennsylvania 17011
- ------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 761-2633
----------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
Pacific Stock Exchange
6 3/4% Zero Coupon Convertible
Subordinated Notes due July 24, 2006 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
-1-
<PAGE> 2
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
/X/
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on May 23, 1997 based on the closing price at
which such stock was sold on the New York Stock Exchange on such date was
approximately $5,483,624,000.
The registrant's Common Stock outstanding at May 23, 1997 was 122,910,205
shares, par value $1.00 per share.
Portions of the Annual Report to Stockholders for the year ended March 1, 1997
are incorporated by reference into Parts I, II and IV of this Report. Portions
of the Proxy Statement prepared for the 1997 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Report.
-2-
<PAGE> 3
RITE AID CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
Caption Page
PART I
Item 1. Business......................................... 1
Item 2. Properties....................................... 2
Item 3. Legal Proceedings................................ 4
Item 4. Submission of Matters to a Vote
of Security Holders............................ 4
Unnumbered Item. Executive Officers of the Registrant.............. 5
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters................ 9
Item 6. Selected Financial Data.......................... 9
Item 7. Management's Discussion and Analysis
of Results of Operations and
Financial Condition............................ 9
Item 8. Financial Statements and Supplementary Data...... 10
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure........................... 10
PART III
Item 10. Directors and Executive Officers
of the Registrant.............................. 10
Item 11. Executive Compensation........................... 10
Item 12. Security Ownership of Certain
Beneficial Owners and Management............... 10
Item 13. Certain Relationships and Related
Transactions................................... 11
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.............. 11
-i-
<PAGE> 4
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The information set forth on the inside front cover and under
the captions "A Discussion with Rite Aid Management," "Real Estate/Store
Development," "Leading-edge Technology," "Store Operations," "Merchandising and
Marketing," "Financial Strategies" and "Supporting Our Communities," commencing
on page 3 and ending on page 12 of the Registrant's 1997 Annual Report to
Stockholders ("1997 Annual Report"), filed as an exhibit to this Annual Report
on Form 10-K, is incorporated herein by reference, excluding any projections and
forecasts, all of which shall not be deemed a part of this Annual Report on Form
10-K.
(b) Financial Information About Industry Segments
The company's primary business is the operation of retail
drugstores.
(c) Narrative Description of Business
The information set forth under the captions "A Discussion
with Rite Aid Management," "Real Estate/Store Development," "Leading-edge
Technology," "Store Operations," "Merchandising and Marketing," "Financial
Strategies" and "Supporting Our Communities," and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" commencing on page 3
and ending on page 17 of the 1997 Annual Report, is incorporated herein by
reference, excluding any
-1-
<PAGE> 5
projections and forecasts, all of which shall not be deemed a part of this
Annual Report on Form 10-K. At March 1, 1997, the Registrant employed
approximately 73,000 persons.
(d) Financial Information About Foreign and Domestic and Export
Sales
Not Applicable.
ITEM 2. PROPERTIES
The Registrant's general offices and corporate headquarters are located
in a 205,000 square foot building in Camp Hill, Pennsylvania owned by the
Registrant. The registrant also owns approximately 160,000 square feet of office
space in Wilsonville, Oregon that was formerly the corporate headquarters of
Thrifty PayLess, Inc.
The Registrant operates several distribution centers consisting of the
following locations and approximate square footage:
<TABLE>
<CAPTION>
Approximate
Location Square Footage
- -------- --------------
<S> <C>
Shiremanstown, Pennsylvania 350,000
Rome, New York 291,000
Nitro, West Virginia 280,000
Winnsboro, South Carolina 265,000
Pontiac, Michigan 370,000
Ogden, Utah 638,000
Woodland, California 500,000
Wilsonville, Oregon 500,000
Ontario, California 415,900
Las Vegas, Nevada 281,000
</TABLE>
With the exception of the Pontiac, Michigan and Las Vegas, Nevada facilities,
the Registrant owns each of its distribution centers.
-2-
<PAGE> 6
The Michigan distribution center is leased under a capitalized lease and was
financed with an industrial revenue bond issue. The lease expires in 2009, at
which time the Registrant has the option to purchase the facility for $100. The
South Carolina, West Virginia and New York distribution centers are subject to
liens arising under industrial development authority financing.
The Registrant has developed a plan to streamline its merchandise
distribution facilities by closing or relocating the operations of it's
Shiremanstown, Pennsylvania, Winnsboro, South Carolina and Ontario, California
distribution centers. The Registrant's Melbourne, Florida distribution center
was closed in August 1995. The Registrant has developed several strategies for
disposition of these properties.
The Registrant leases most of its drugstore facilities under
noncancelable operating leases, many of which expire within ten to fifteen
years. In addition to minimum rental payments, which are set at competitive
market rates, certain leases require additional payments based on sales volume,
as well as reimbursement for taxes, maintenance and insurance. Most of the
Registrant's leases contain renewal options, some of which involve rent
increases. At March 1, 1997, the Registrant had 3,623 retail drugstores.
The registrant also owns its 52,200 square foot ice cream manufacturing
facility located in El Monte, CA.
-3-
<PAGE> 7
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of Stockholders of the Registrant was held at the
Holiday Inn Harrisburg East, 4751 Lindle Road, Harrisburg, Pennsylvania, on
Thursday, December 12, 1996, to consider and vote upon a proposal to adopt an
Agreement and Plan of Merger, dated as of October 13, 1996, as amended (the
"Merger Agreement"), providing for the merger of Thrifty PayLess Holdings, Inc.
with and into Rite Aid, the issuance of shares of Rite Aid common stock
pursuant to the Merger Agreement and the amendment of Rite Aid's Certificate of
Incorporation in order to increase the total number of authorized shares of
Rite Aid common stock from 240 million to 300 million, simplify the purpose
clause, remove certain obsolete provisions and effect certain other minor
technical amendments, all as more fully described in the Joint Proxy
Statements/Prospectus dated November 12, 1996. The proposal to adopt the Merger
Agreement was approved by holders of 81.3% of Rite Aid common stock
(representing more than 97% of the votes cast at the meeting). Holders of 0.1%
of Rite Aid common stock voted against the proposal and holders of 18.6% of
Rite Aid common stock abstained from voting.
-4-
<PAGE> 8
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Annual Report on Form 10-K, the
following is included as an unnumbered Item in Part I of this Annual Report in
lieu of being included in the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on July 9, 1997.
The following is a list of names and ages of all of the executive
officers of the Registrant, indicating all positions and offices with the
Registrant held by each such person and each such person's principal occupations
or employment during the past five years. All such persons have been appointed
to serve until the next annual election of officers (which shall occur on July
9, 1997) and until their successors are appointed, or until their earlier
resignation or removal. No person other than those listed below has been chosen
to become an executive officer of the Registrant.
<TABLE>
<CAPTION>
First
Offices and Elected
Name Age Positions Held an Officer
---- --- -------------- ----------
<S> <C> <C> <C>
Martin L. Grass 43 Chairman of the Board, 1980
Chief Executive Officer
and Director
Timothy J. Noonan 55 President, Chief Operating 1973
Officer and Director
Frank M. Bergonzi 51 Executive Vice President 1977
Franklin C. Brown 69 Executive Vice President 1969
and Director
Beth J. Kaplan 39 Executive Vice President 1996
Kevin J. Mann 44 Executive Vice President 1988
Richard J. Varmecky 44 Treasurer 1987
</TABLE>
-5-
<PAGE> 9
<TABLE>
<CAPTION>
First
Offices and Elected
Name Age Positions Held an Officer
---- --- -------------- ----------
<S> <C> <C> <C>
I. Lawrence Gelman 50 Secretary 1981
Eric S. Elliott 33 Senior Vice President 1994
Elliot S. Gerson 55 Senior Vice President 1995
Charles R. Kibler 50 Senior Vice President 1987
Philip D. Markovitz 56 Senior Vice President 1974
Ronald A. Miller 57 Senior Vice President 1981
Robert R. Souder 57 Senior Vice President 1972
Joseph S. Speaker 38 Senior Vice President 1991
James M. Talton 51 Senior Vice President 1995
Kent L. Whiting 37 Senior Vice President 1992
</TABLE>
Each of the executive officers listed above has served the Registrant
or its subsidiaries in their present executive capacities for the past five
years, except for the following individuals:
Mr. Grass has been Chairman of the Board and Chief Executive Officer of
the Registrant since March 4, 1995. Previously, Mr. Grass was President and
Chief Operating Officer of the Registrant for more than five years.
Mr. Noonan was appointed President and Chief Operating Officer on March
4, 1995. Previously, Mr. Noonan was Executive Vice President of Drugstore
Operations for the Registrant, a position he held for more than five years.
Mr. Bergonzi was appointed Executive Vice President and Chief Financial
Officer for the Registrant on March 4, 1995. Previously, Mr. Bergonzi was Senior
Vice President of Finance for the Registrant, a position he held for more than
five years.
-6-
<PAGE> 10
Ms. Kaplan was appointed Executive Vice President of Marketing for the
Registrant on September 9, 1996. Previously, Ms. Kaplan was Vice President of
Procter & Gamble Cosmetics and Fragrances, from March 1994 to August 1996, and
General Manager, Procter & Gamble, Food and Beverage, from January 1991 to
February 1994, both divisions of Procter & Gamble N.A.
Mr. Mann was appointed Executive Vice President of Category Management
for the Registrant on September 1996. Previously, Mr. Mann was Executive Vice
President of Marketing for the Registrant since March 4, 1995. Prior to March 4,
1995, Mr. Mann was Senior Vice President of Purchasing for the Registrant, a
position he held for more than five years.
Mr. Varmecky was appointed Treasurer of the Registrant in July 1995.
Previously, Mr. Varmecky held the positions of Assistant Vice President and
Corporate Controller of the Registrant for more than five years.
Mr. Gelman was appointed Associate Counsel and Secretary of the
Registrant on January 11, 1995. Previously, Mr. Gelman held the positions of
Assistant Vice President and Assistant Secretary of the Registrant for more than
five years.
Mr. Elliott was appointed Senior Vice President, Managed Care of the
Registrant on March 31, 1997. Previously, Mr. Elliot held various positions
with the Registrant, including Vice President, Pharmacy Marketing from March
1996 to February 1997; Vice President, Third Party Administration from March
1995 to February 1996; Assistant Vice President, Third Party Administration
from March 1994 to February 1995;, Director, Third Party Administration from
November 1993 to February 1994 and
-7-
<PAGE> 11
Assistant Director Retail Accounting from August 1989 to November 1993.
Mr. Gerson joined the Registrant as Senior Vice President and Assistant
Chief Legal Counsel in November 1995. Previously, Mr. Gerson was a partner in
the law firm of Bolger, Picker, Hankin & Tannenbaum from May 1993 until joining
the Registrant, and a partner in the law firm of Wolf, Block, Schorr and
Solis-Cohen from May 1984 to May 1993.
Mr. Kibler was appointed Senior Vice President of Drugstore Operations
on March 4, 1995. Previously, Mr. Kibler served as Vice President of Drugstore
Operations for the Registrant for more than five years.
Mr. Speaker was appointed Senior Vice President of Accounting and
Administration on May 24, 1996. Previously, Mr. Speaker served as Vice President
and Retail Controller since April 1993. From February 1991 until his appointment
as Vice President, he had the positions of Assistant Vice President and Retail
Controller. Mr. Speaker attained the status of Retail Controller in June 1989.
Mr. Talton was appointed Senior Vice President of Human Resources in
November 1995. Mr. Talton joined the Registrant on April 1, 1995 as Vice
President of Human Resources. For the year prior to his employment with the
Registrant, he was a Senior Vice President for Executive Assets Company. Prior
thereto he held the position of Director of Employee and Labor Relations for
PECO Energy Company since 1989.
Mr. Whiting was appointed Senior Vice President of Information Services
on April 18, 1996. He rejoined the Registrant in February
-8-
<PAGE> 12
1996 as Vice President of Strategic Business Solutions. From March 1995 until
rejoining the Registrant, Mr. Whiting was Vice President of Operations for ADT
Data Systems. Prior thereto, he held the positions of Assistant Vice President
and Director of Strategic Business Solutions for the Registrant since 1988.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information set forth under the caption "Common Stock and
Dividends," which appears on the inside back cover page of the Registrant's 1997
Annual Report, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Ten-Year Financial
Review," which appears on pages 34 and 35 of the Registrant's 1997 Annual
Report, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information set forth under the caption "Management's Discussion
and Analysis of Results of Operations and Financial Condition," which appears on
pages 14 through 17 of the Registrant's 1997 Annual Report, is incorporated
herein by reference.
-9-
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statement information, which appears on
pages 19 through 33 of the Registrant's 1997 Annual Report, is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the
Registrant, reference is made to "Executive Officers of the Registrant," set
forth as an unnumbered item in Part I of this Annual Report on Form 10-K. The
information set forth under the caption "Election of Directors" in the
Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders to be
held July 9, 1997 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation of Executive
Officers" in the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held July 9, 1997 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the
-10-
<PAGE> 14
Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders to be
held July 9, 1997 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Related Party
Transactions" in the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held July 9, 1997 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Report
(1) Financial Statements
The following consolidated financial statements of
the Registrant and its subsidiaries, required to be included in Part II, Item 8
of this Annual Report on Form 10-K, are included in the 1997 Annual Report and
are incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets - March 1, 1997 and March
2, 1996
Consolidated Statements of Income - Each of the years
in the three year period ended March 1, 1997
Consolidated Statements of Stockholders' Equity -
Each of the years in the three year period ended
March 1, 1997
Consolidated Statements of Cash Flows - Each of the
years in the three year period ended March 1, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
-11-
<PAGE> 15
The following additional information for the years
1997, 1996 and 1995 is included in Part IV of this Report:
<TABLE>
<CAPTION>
Page No.
<S> <C>
Schedule II - Valuation and Qualifying Accounts 16
Independent Auditors' Report 17
</TABLE>
All other schedules are omitted because they are not
required, inapplicable or the information is included in the consolidated
financial statements or the notes thereto.
Financial statements of 50% or less owned companies
have been omitted since they do not constitute significant subsidiaries.
(3) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
Exhibit Incorporation
Numbers Description by Reference to
(2) Not Applicable -----
(3)(i) Restated Articles of Incorporation Exhibit (4.1) to Form S-3
dated December 12, 1996. filed January 10, 1997
(ii) By-laws Exhibit (3a) to Form S-1
Registration Statement
filed April 26, 1968
Amendments to By-laws approved Exhibit (3) to Form 10-K
April 6, 1983 filed May 29, 1983
(4) The rights of security holders of -----
Registrant are defined by a) the Laws
of the State of Delaware, b) the
Certificate of Incorporation of
Registrant and c) the By-laws of
Registrant. The Certificate of
Incorporation and By-laws of
Registrant are hereby incorporated by
reference in accordance with Exhibit
(3) above.
(9) Not Applicable -----
-12-
<PAGE> 16
(10)(i) Not Applicable -----
(ii) Not Applicable -----
(iii) Salary Continuation Agreement with Exhibit (10)(iii) to Form
Key Officers* 10-K filed May 29, 1983
1990 Omnibus Stock Incentive Plan, Exhibit 4 to Form S-8
as amended* filed July 12, 1996.
Annual Performance-Based Incentive Included in Proxy
Program* Statement dated June 7,
1995
Deferred Compensation Agreement* Exhibit (10)(iii) to Form
10-K filed May 31, 1996
(11) Statements re Computation of Per Included herein
Share Earnings
(12) Statements re Computation of Ratios Included herein
(13) 1997 Annual Report to Stockholders Included herein
(16) Not Applicable -----
(18) Not Applicable -----
(21) Registrant's Subsidiaries Included herein
(22) Not Applicable -----
(23) Consent of Independent Certified Public Included herein
Accountants
(24) Not Applicable -----
(27) Financial Data Schedule Included herein
(EDGAR Filing Only)
(28) Not Applicable -----
- -----------------------
* Constitutes a compensatory plan or arrangement required to be filed
with this Form.
-13-
<PAGE> 17
(b) Reports on Form 8-K
During the last quarter of the period covered by this Report
the Registrant filed Reports on Form 8-K as follows:
Report on Form 8-K dated December 16, 1996
Third quarter fiscal 1997 earnings announcement and
computation of fixed charged ratios.
Report on Form 8-K dated December 17, 1996
Pricing and underwriting agreements for debt securities.
Report on Form 8-K dated January 9, 1997
Financial statements, pro forma financial information and
exhibits of the acquired Thrifty PayLess Holdings, Inc.
Report on Form 8-K dated January 16, 1997
Pricing and underwriting agreements for common stock between
Rite Aid Corporation, K-Mart and Morgan Stanley & Co.
Incorporated.
Report on Form 8-K dated February 11, 1997
Pricing and underwriting agreements for common stock between
Rite Aid Corporation, Green Equity Investors, L.P. and Morgan
Stanley & Co. Incorporated.
-14-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 29, 1997 RITE AID CORPORATION
(Registrant)
By: /s/Martin L. Grass
-----------------------------------
Martin L. Grass, Chairman of
the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons, which include the
Principal Executive Officer, the Principal Accounting and Financial Officer and
a majority of the Board of Directors, on behalf of the Registrant and in the
capacities and on the dates indicated:
May 29, 1997 /s/Martin L. Grass
--------------------------
Martin L. Grass
Chairman of the Board of Directors,
Chief Executive Officer and Director
May 29, 1997 /s/Timothy J. Noonan
--------------------------
Timothy J. Noonan
President, Chief Operating Officer and Director
May 29, 1997 /s/Frank M. Bergonzi
--------------------------
Frank M. Bergonzi
Chief Financial Officer
May 29, 1997 /s/Franklin C. Brown
--------------------------
Franklin C. Brown
Director
May 29, 1997 /s/Alex Grass
--------------------------
Alex Grass
Director
May 29, 1997 /s/Nancy A. Lieberman
--------------------------
Nancy A. Lieberman
Director
May 29, 1997 /s/Preston Robert Tisch
--------------------------
Preston Robert Tisch
Director
May 29, 1997 /s/Leonard N. Stern
--------------------------
Leonard N. Stern
Director
-15-
<PAGE> 19
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND MARCH 4, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at Additions Additions Balance at
Beginning Charged to Charged to End
of Costs and Other of
Classification Period Expenses Accounts Deductions Period
- -------------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Allowances deducted from
accounts receivable for
estimated uncollectible
amounts:
Year ended March 1, 1997 5,545 13,178 7,503 (a) 11,643 14,583
Year ended March 2, 1996 5,079 16,785 - 16,319 5,545
Year ended March 4, 1995 342 22,938 3,769 (b) 21,970 5,079
</TABLE>
(a) Allowance for estimated uncollectible accounts acquired from Thrifty
PayLess Holdings Inc. on December 12, 1996.
(b) Allowance for estimated uncollectible accounts acquired from Perry
Drugstores on January 11, 1995.
-16-
<PAGE> 20
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Rite Aid Corporation:
Under date of April 24, 1997, we reported on the consolidated balance sheets of
Rite Aid Corporation and subsidiaries as of March 1, 1997 and March 2, 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended March 1, 1997, which
are incorporated by reference in the Company's annual report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Company's annual report on Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments in fiscal year 1995.
KMPG Peat Marwick LLP
Harrisburg, Pennsylvania
April 24, 1997
<PAGE> 21
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Statement Regarding Computation of Per Share Earnings.
12 Statement Regarding Computation of Ratios
of Earnings to Fixed Charges.
13 1997 Annual Report to Stockholders.
21 Registrant's Subsidiaries.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule (EDGAR filing only).
-18-
<PAGE> 1
EXHIBIT 11
Rite Aid Corporation and Subsidiaries
Statement Regarding Computation of Per Share Earnings
Years ended March 1, 1997, March 2, 1996 and March 4, 1995
In thousands except per share amounts
<TABLE>
<CAPTION>
EARNINGS PER COMMON SHARE - ASSUMING NO DILUTION 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Earnings
Income before extraordinary loss $160,534 $158,947 $141,286
Extraordinary loss, net of tax (45,157) -- --
-------- -------- ---------
Net Income $115,377 $158,947 $141,286
======== ======== =========
Shares
Weighted average number of common shares outstanding 92,211 83,808 84,771
======== ======== =========
Earnings per common share - assuming no dilution
Income before extraordinary loss $ 1.74 $ 1.90 $ 1.67
Extraordinary loss, net of tax (.49) -- --
-------- -------- --------
Net Income $ 1.25 $ 1.90 $ 1.67
======== ======== =========
EARNINGS PER COMMON SHARE - ASSUMING FULL DILUTION (b)
Earnings (b)
Income before extraordinary loss $160,534 $158,947 $141,286
Add after tax interest expense applicable
to 6 3/4% convertible debentures (a) 8,245 8,356 7,425
-------- -------- --------
Income before extraordinary loss, as adjusted 168,779 167,303 148,711
Extraordinary loss, net of tax (45,157) -- --
-------- -------- --------
Net Income $123,622 $167,303 $148,711
======== ======== =========
Shares (b)
Weighted average number of common shares outstanding 92,211 83,808 84,771
Assuming conversion of 6 3/4% convertible debentures 5,943 6,395 6,395
Assuming exercise of options reduced by the number of shares which could
have been purchased with the proceeds
from exercise of such options 1,724 585 657
-------- -------- --------
Weighted average number of common shares outstanding as
adjusted 99,878 90,788 91,823
======== ======== =========
Earnings per common share assuming full dilution (b)
Income before extraordinary loss $ 1.69 $ 1.84 $ 1.62
Extraordinary loss, net of tax (.45) -- --
-------- -------- --------
Net Income $ 1.24 $ 1.84 $ 1.62
======== ======== ========
</TABLE>
(a) Shown net of income taxes which were calculated at the Company's tax
rate.
(b) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by APB Opinion No. 15 since the
dilution is not material.
<PAGE> 1
EXHIBIT 12
Rite Aid Corporation and Subsidiaries
Statement Regarding Computation of Ratios of Earnings to Fixed Charges
Years ended March 1, 1997, March 2, 1996, March 4, 1995, February 26, 1994
and February 27, 1993
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
March 1, March 2, March 4, February 26, February 27,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest Expense $ 96,473 $ 68,341 $ 42,300 $ 28,683 $ 29,387
Interest Portion(1)
of Net Rental Expense 66,067 52,080 40,424 40,427 37,659
-------- -------- -------- -------- --------
Fixed Charges Before
Capitalized Interest 162,540 120,421 82,724 69,110 67,046
Capitalized Interest 1,897 1,948 373 217 445
-------- -------- -------- -------- --------
Total Fixed Charges $164,437 $122,369 $ 83,097 $ 69,327 $ 67,491
======== ======== ======== ======== ========
Earnings
Income Before Extra-
ordinary Loss and
Income Taxes $258,927(3) $256,202 $231,464 $ 45,670(2) $200,569
Fixed Charges Before
Capitalized Interest 162,540 120,421 82,724 69,110 67,046
-------- -------- -------- -------- --------
Total Adjusted Earnings $421,467 $376,623 $314,188 $114,780 $267,615
======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges 2.56 3.08 3.78 1.66 3.97
======== ======== ======== ======== ========
</TABLE>
(1) The interest portion of the net rental expense is estimated to be equal to
one-third of the minimum rental expense for the period.
(2) Income before extraordinary loss and income taxes for fiscal year 1994
includes a $149,196,000 one-time, pre-tax provision for corporate
restructuring and other charges.
(3) Income before extraordinary loss and income taxes for fiscal year 1997
includes a $68,057,000 one-time, pre-tax charge for nonrecurring and other
charges.
<PAGE> 1
EXHIBIT 13
RITE AID 1997 ANNUAL REPORT
[PHOTO OF WOMAN ON PHONE]
[PHOTO OF MAN WITH BABY]
[PHOTO OF TWO WOMEN RUNNING]
[PHOTO OF THREE PEOPLE SITTING ON GRASS]
For your life, Rite Aid's got it.
<PAGE> 2
73,000 associates 55 million customers
RITE AID CORPORATION IS ONE OF THE LARGEST RETAIL DRUGSTORE CHAINS IN THE
COUNTRY, OPERATING OVER 3,600 DRUGSTORES IN 27 EASTERN AND WESTERN STATES AND
THE DISTRICT OF COLUMBIA. RITE AID IS COMMITTED TO PROVIDING OUR CUSTOMERS WITH
SUPERIOR PRODUCTS AND SERVICE. FOUNDED IN 1962, RITE AID TODAY HAS OVER 73,000
ASSOCIATES WHO SERVE MORE THAN 55 MILLION CUSTOMERS ANNUALLY.
IN DECEMBER 1996, RITE AID ACQUIRED THRIFTY PAYLESS, INC., THE LARGEST
DRUGSTORE RETAILER IN THE WESTERN UNITED STATES WITH OVER 1,000 STORES IN 10
STATES. THE ACQUISITION GIVES RITE AID THE FIRST OR SECOND POSITION IN 25 OF THE
TOP 50 U.S. METROPOLITAN AREAS.
RITE AID ALSO OPERATES EAGLE MANAGED CARE CORPORATION, A WHOLLY OWNED
SUBSIDIARY THAT MARKETS PRESCRIPTION PLANS AND SELLS OTHER MANAGED HEALTHCARE
SERVICES TO EMPLOYERS, HEALTH MAINTENANCE ORGANIZATIONS AND GOVERNMENT-SPONSORED
EMPLOYEE BENEFIT PROGRAMS.
RITE AID COMMON STOCK IS LISTED ON THE NEW YORK AND PACIFIC STOCK
EXCHANGES AS RAD.
CONTENTS
1 Financial Highlights
2 To Our Stockholders
3 A Discussion with Rite Aid Management
4 Real Estate / Store Development
6 Leading-edge Technology
7 Store Operations
8 Merchandising and Marketing
11 Financial Strategies
12 Supporting Our Communities
13 Financial Review
36 Directors and Corporate Officers
37 Investor Information
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 1, 1997 MARCH 2, 1996
Dollars in thousands except per share amounts (52 WEEKS) (52 WEEKS)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 6,970,201 $ 5,446,017
- --------------------------------------------------------------------------------------------------
Income Before Nonrecurring Charges and Extraordinary Loss $ 202,897* $ 158,947
- --------------------------------------------------------------------------------------------------
Net Income $ 115,377* $ 158,947
- --------------------------------------------------------------------------------------------------
Earnings per Common Share:
Income Before Nonrecurring Charges and Extraordinary Loss $ 2.20* $ 1.90
- --------------------------------------------------------------------------------------------------
Net Income $ 1.25* $ 1.90
- --------------------------------------------------------------------------------------------------
Dividends per Common Share $ .755 $ .695
- --------------------------------------------------------------------------------------------------
Average Number of Common Shares Outstanding 92,211,000 83,808,000
Total Assets $ 6,416,981 $ 2,841,995
Stockholders' Equity $ 2,488,685 $ 1,103,619
Number of Employees 73,000 35,700
----------- -----------
</TABLE>
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
$9,975,000 or $.11 per share, and $11,152,000 or $.13 per share, for fiscal
years 1997 and 1996, respectively.
* Income before nonrecurring charges and extraordinary loss was $202,897,000 or
$2.20 per share, compared with $158,947,000 or $1.90 per share last year. Net
income for the year ended March 1, 1997 included nonrecurring and other
charges of $42,363,000 or $.46 per share and an extraordinary loss on the
early extinguishment of debt totaling $45,157,000 or $.49 per share.
DRUGSTORE SALES
<TABLE>
<CAPTION>
93 94 95 96 97
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
dollars in billions 3.83 4.06 4.53 5.45 6.97
</TABLE>
INCOME BEFORE NONRECURRING
CHARGES AND EXTRAORDINARY LOSS
<TABLE>
<CAPTION>
93 94 95 96 97
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
dollars in millions 123.8 116.8 141.3 158.9 202.9
</TABLE>
1
<PAGE> 4
TO OUR STOCKHOLDERS
Fiscal 1997 was another successful year as we continued our efforts to
restructure our business to operate larger, higher volume and more profitable
drugstores. We achieved record revenues and earnings and, at the same time,
implemented an unprecedented real estate program.
Sales for the year ended March 1, 1997 were $6.97 billion and earnings
from operations before nonrecurring charges and extraordinary items were $202.9
million. More importantly, our same-store sales increased 7.9% for the year as
compared to 6.6% in fiscal 1996. This trend of higher pharmacy and front-end
sales has been accomplished in an environment that has yielded inflation of only
1.6%.
The consolidation in the drugstore industry continued full force. In
June we purchased Taylor Drugs, a chain of 34 stores operating in metropolitan
Louisville, Kentucky. This acquisition strengthened our presence in Kentucky,
where we were already the largest drugstore operator, and enabled us to enter
Louisville with a major share of the market.
In December we consummated the largest acquisition in our history,
merging with Thrifty PayLess, Inc. Thrifty PayLess had sales of $4.4 billion in
1,007 stores located in the western part of the United States. It is the largest
chain drugstore operator in California, Oregon, Washington, Utah and Idaho. This
transaction has positioned us at an entirely new level in the industry. We now
operate more than 3,600 stores with revenue for fiscal 1998 anticipated to
exceed $11 billion.
Today we are integrating the West Coast operation into our chain. We
are installing new computer hardware in all Thrifty PayLess stores, a process we
expect to complete by the end of May. The software systems necessary to operate
Thrifty PayLess as Rite Aid stores will be fully operational by September. The
opportunity to enhance our earnings from Thrifty PayLess is enormous. In fact,
core Rite Aid store operating margins should be achievable on the West Coast
approximately two years after the integration is finished.
In November we entered into a joint venture to provide mail order
pharmacy services with SmithKline Beecham's Diversified Pharmaceutical Services,
one of the nation's leading pharmacy benefit managers. This business will give
us another channel of distribution to provide prescriptions to select managed
care customers. First-year revenues are expected to be more than $100 million.
As we continue to seek opportunities to expand through mergers and
acquisitions, we will follow a very disciplined strategy of only entering into
transactions that are not dilutive to earnings per share. Not all drugstore
chains fit into our strategic plan or are worth the same multiple of cash flow.
We continue to turn down more acquisition opportunities than we accept.
In September we hired Beth J. Kaplan as Executive Vice President of
Marketing. Beth was previously a corporate Vice President with Procter & Gamble
in charge of cosmetics and fragrances. Beth has assumed responsibility for all
of our marketing, advertising, category management and merchandising. She is
well on her way to continuing the transformation begun in 1995 to create a more
marketing-oriented Rite Aid, focused on creating a major brand in the drugstore
industry.
During the year, Leonard Green, Senior Partner of Leonard Green
Partners, an investment firm, and William J. Bratton, current President of First
Security Consulting, Inc. and former Commissioner of the New York City Police
Department, were appointed to the Board of Directors. We look forward to their
contributions as we move forward. Henry Taub, the founder of ADP Services, has
retired from our Board after 13 years of excellent service. Henry provided
insightful, careful analysis to the Board and senior management benefited from
his probing questions.
In fiscal 1998 we will challenge and motivate our 73,000 associates
toward another year of record sales and earnings. The Rite Aid management team
is committed to enhancing shareholder value. This is the number one measurement
in determining our success.
/s/ Martin L. Grass /s/ Timothy J. Noonan
Martin L. Grass Timothy J. Noonan
Chairman and President and
Chief Executive Officer Chief Operating Officer
May 2, 1997
2
<PAGE> 5
A DISCUSSION WITH RITE AID MANAGEMENT
Our growth initiatives generated real
momentum in fiscal 1997 as we acquired
Thrifty PayLess and moved ahead
aggressively to expand and enhance our
store base in the East. As a result, we
acquired or opened more than 1,300
stores, creating a company with over $11
billion a year in revenue. In the pages
that follow, our senior executive team
takes a look at the rapidly changing
face of Rite Aid.
BUILDING
OUR BUSINESS
FROM COAST
TO COAST
[ 3 PICTURES OF PEOPLE ]
3
<PAGE> 6
REAL ESTATE / STORE DEVELOPMENT
Martin Grass [ PICTURE OF MARTIN GRASS ]
Chairman & CEO
WHAT MADE THRIFTY PAYLESS THE RIGHT ACQUISITION CANDIDATE? WHAT DOES THE DEAL
MEAN FOR SHAREHOLDERS?
A number of factors made Thrifty PayLess the right choice for us. First, we
believe the purchase will be good for our customers, who will benefit from the
buying power of a large chain. Second, the acquisition strengthens our position
with managed care customers, which translates into better options and more
benefits for their plan members. Third, Thrifty PayLess will introduce us to
product categories not currently offered in Rite Aid stores.
The acquisition also responds to our belief that to survive and prosper
in this business, you have to get bigger. With Thrifty PayLess, we've not only
extended our reach to include a base of 1,007 outlets in 10 western states,
we've added the dominant drugstore chain on the West Coast, with the number one
or two market share position in 18 of its 20 metropolitan markets. With the
ongoing consolidation in our industry, we had to move quickly or this
opportunity would have disappeared.
It's also the right deal because it shortly will become a major
contributor to our bottom line. The cost of the purchase worked out to $34.58
per share. The acquisition is not dilutive to earnings. We incurred a one-time
charge of approximately $125 million principally related to the integration of
the acquired stores and the closing of Thrifty PayLess headquarters in Oregon.
With a total of 3,623 stores in 27 states and the District of Columbia, and the
first or second position in 25 of the nation's top 50 drugstore markets, we
anticipate even stronger performance in fiscal 1998. We are well on our way to
achieving our most fundamental objective: to grow Rite Aid's revenue, profits
and most importantly, the value of our stock.
3,623 DRUGSTORES
[ 3 PICTURES OF DRUGSTORES ]
MOST OF OUR NEW STORES ARE FREESTANDING UNITS
WITH A DRIVE-THRU PHARMACY WINDOW AND PARKING FOR
50 OR MORE CARS.
4
<PAGE> 7
DO YOU EXPECT GROWTH TO COME EQUALLY FROM ALL OF YOUR NATIONAL MARKETS?
Yes. There are tremendous expansion opportunities for us on the West Coast.
California is once again recording a rapid increase in population. In addition,
major cities such as Seattle, Portland and Las Vegas are showing explosive
growth. In the East, we expect to continue to add stores at a record rate in our
existing markets. We are, very simply, extending the growth plan we've been
implementing on the East Coast to the West Coast. In fiscal 1998, we expect to
add 100 new stores on the East Coast and as many as 30 on the West Coast.
Looking further ahead, we plan to open 100 new stores a year in both regions.
HOW MANY STORES DID YOU OPEN IN FISCAL 1997?
We opened 369 new, larger 10,500 square-foot prototype stores. The added space
and innovative design of these units is already paying off in a big way. On an
annualized basis, they're generating first-year volume of greater than $3
million compared with the $2 million average of our older, smaller stores. Given
the number of new stores we've opened during the past two years, we'll easily
surpass our goal of 1,000 new prototype stores in place by the end of 1998.
WHAT IS THE RATIONALE FOR THE CLOSURE AND SALE OF 200 STORES IN THE SOUTHEAST?
The rationale is straightforward. We're doing everything we can to enhance our
business, and it doesn't make sense to deploy resources in markets where we have
limited market share or little growth potential. We sold our stores in North
Carolina and South Carolina to J.C. Penney Co., Inc., eliminating states where
we had weak market penetration. All of this frees us to concentrate our energies
on markets where we believe we can secure a more dominant market share and
become the low-cost retailer of prescription service.
WHAT IS YOUR REAL ESTATE STRATEGY?
Today we are primarily opening new stores in freestanding locations. Typically
these sites encompass an acre of ground and have parking for at least 50 cars.
Almost all new freestanding stores include a drive-thru window for pharmacy
service. We open stores in every type of neighborhood. You will find profitable
Rite Aid stores in urban cities, suburbia and smaller, rural towns.
[ GRAPHIC OF MAP OF U.S. SHOWING LOCATIONS OF DRUGSTORES ]
5
<PAGE> 8
LEADING-EDGE TECHNOLOGY
[ 2 GRAPHICS OF COMPUTER SCREENS DISPLAYING RITE AID WEB SITE ]
OUR WEB SITE PROVIDES UP-TO-THE-MINUTE INFORMATION ABOUT ALL ASPECTS OF THE
CORPORATION.
HOW WILL RITE AID'S LEADERSHIP IN TECHNOLOGY AFFECT THRIFTY PAYLESS' OPERATIONS?
When completed, the rollout of Rite Aid's superior systems will enhance Thrifty
PayLess' efficiencies. To date, we have installed our satellite, point-of-sale,
office computer and front-end auto-replenishment systems in almost all Thrifty
PayLess stores. We are already seeing a substantial reduction in the workload at
store levels and a smooth flow of financial and marketing data to our home
office. By Fall 1997, we expect to complete installation of our pharmacy system,
which will give us better control over third party payments and reduce rejects.
The pharmacy system will enable our customers to fill prescriptions at any store
in the Rite Aid network.
YOU'VE DEMONSTRATED YOUR COMMITMENT TO TECHNOLOGY. WHAT WAS NEWSWORTHY IN FISCAL
1997 AND WHAT'S NEXT?
Being committed to technology means being in constant motion. In fiscal 1997, we
continued to keep Rite Aid on the cutting edge of the chain drug industry with a
number of initiatives. Our new point-of-sale decision-support technology enables
us to view data at the product level, allowing us to identify the best selling
mix of merchandise or the effectiveness of promotions. We can break this
information down by region, store type and time frame to make decisions from
market to market, and even from store to store. We are currently test marketing
a program of Smart Cards that contain either monetary value or marketing
incentives tailored to customers' individual shopping patterns.
Advanced technology is what is allowing us to eliminate more than 780
jobs at Thrifty PayLess headquarters in Wilsonville, Oregon. Our ability to
collect and analyze data will enable us to integrate all back office functions
in less than six months.
To enhance customer service, we have introduced a voice response unit
that is being installed throughout the chain, enabling customers to refill
prescriptions by telephone 24 hours a day. This capability saves hours of our
pharmacists' time. We are also in the process of developing a new, automated
prescription-filling system that will completely transform the way in which
prescriptions are filled, allowing our pharmacists to provide more personalized
service. In addition, the rollout of our auto-replenishment system for pharmacy
merchandise will begin this September, further reducing the time required to
write orders and maintain better in-stock positions with a smaller inventory
investment.
TECHNOLOGY ENABLES US TO REACT TO CONSTANTLY CHANGING CONSUMER PREFERENCES.
[ PICTURE OF PEOPLE WORKING ]
6
<PAGE> 9
STORE OPERATIONS
Tim Noonan [ PICTURE OF TIM NOONAN ]
President & COO
HOW DO YOU PLAN TO INTEGRATE RITE AID'S 10,500 SQUARE-FOOT PROTOTYPE STORE INTO
THE THRIFTY PAYLESS STORES?
Thrifty PayLess stores will become Rite Aid stores. We are implementing our
prototype design and our brand identity in all our West Coast units and have
developed a 17,300 square-foot prototype for the region. A similar format to our
East Coast prototype, the new design emphasizes cosmetics and over-the-counter
items but also accommodates Thrifty PayLess' additional product categories and
seasonal offerings.
Our merchandising philosophy of stressing drugstore basics,
supplemented with convenience items, is being well received by Thrifty PayLess
customers. The remerchandising and remodeling effort is under way. We expect the
Thrifty PayLess stores to benefit from a better in-stock condition at the
distribution centers on the West Coast as well.
WHAT IS RITE AID'S DISTRIBUTION STRATEGY AND HOW DOES THE WEST COAST
DISTRIBUTION SYSTEM FIT IN?
Actually, there is room to make major improvements on both Coasts. Recently, we
announced the building of a state-of-the-art, 835,000 square-foot facility in
Perryman, Maryland. This $70 million distribution center should be operational
in late 1998. When it commences operation, we will close an older, antiquated
building in Shiremanstown, Pennsylvania. We also are closing an ineffective
Thrifty PayLess facility located in Ontario, California, and replacing it with a
cross-dock facility in Las Vegas, Nevada. A study is under way to identify
additional opportunities in distribution.
HOW HAS YOUR AUTO-REPLENISHMENT CAPABILITY PAID OFF?
We've now instituted auto-replenishment for all front-end merchandise that comes
out of our distribution centers. As goods are sold, they're reordered
automatically by computer. This innovation alone saves us about 15 hours a week
of writing orders at the store level. Plus, it greatly improves our in-stock
condition. Our research has confirmed that we have better same-store sales with
less inventory when using the auto-replenishment system.
WHAT ARE YOUR PLANS FOR THE THIRD PARTY BUSINESS?
The integration of Thrifty PayLess' pharmacy benefits management unit (PBM) --
Thrifty PayLess Health Services -- into our Eagle Managed Care Corporation (EMC)
has created one of the largest PBMs owned by a drug chain. Today, EMC covers
three million people. Given the current environment, we believe growth will be
exponential. The expansion makes us more attractive to third party payers, since
with more stores and greater efficiency, we can offer managed care plans lower
prescription pricing. For example, with EMC now covering such a vast area, we
can more effectively market our services to large national managed care
organizations.
In fiscal 1997, EMC continued to be very active in formulary management
with its Preferred Prescription Program, which offers lower-cost prescription
items within a class of therapeutic drugs. We also are continuing to develop
Intel-Rx, which performs drug utilization reviews and operates a compliance
telephone call center. Additionally, we recently made a 24-hour drug information
phone line available in six markets, which sets a new standard for customer
service in the industry.
HOW LARGE IS YOUR THIRD PARTY BUSINESS? ARE THERE ANY NEW INITIATIVES?
We're already quite strong in this area. Both Rite Aid and Thrifty PayLess have
been among the most active companies in the industry when it comes to dealing
with managed care. Over 83% of prescriptions at Rite Aid, and 75% at Thrifty
PayLess, are paid for by third party providers.
We've continuously taken steps to build this part of our business --
redesigning our drug dispensing areas and installing sophisticated computer
systems to enhance pharmacy operations. In fiscal 1997 we entered the mail order
prescription business through a joint venture with SmithKline Beecham. As a
result, EMC is now a full-service managed care provider with significant new
growth potential. In addition, we have implemented sophisticated patient
education through such vehicles as our disease state management and wellness
programs.
7
<PAGE> 10
MERCHANDISING AND MARKETING
Beth Kaplan, Executive [ PICTURE OF BETH KAPLAN ]
Vice President, Marketing
HOW ARE YOU BUILDING BRAND EQUITY FOR RITE AID?
Today, more than ever, we are aggressively competing for a greater share of our
customers' drugstore purchases. We are trying to create more loyalty to the Rite
Aid brand. This is especially true of our target customers -- women, 25 to 54
years old with families and jobs. It's our goal to be their first choice
whenever they need a prescription, beauty care item, greeting card or film
processed. To achieve this, we are concentrating on establishing Rite Aid as the
superior choice in terms of assortment, value and service.
We've begun by developing meaningful, proprietary benefits around a
number of core front-end businesses. Last month we launched a holistic marketing
program that includes print and broadcast advertising, as well as continual
updates of our cosmetics assortment and displays. In addition, we have
instituted a money-back cosmetic guarantee. We are pursuing similar marketing
initiatives in the vitamin, photo and greeting card categories -- all areas
where we have tremendous upside potential.
While our product assortments are obviously critical, we're equally
committed to being the premier customer-oriented service provider in our
industry. Rite Aid today is creating a culture of service. We're training store
associates and pharmacists to assist customers more effectively. We're also
leading with innovations like our 24-hour drug information line and
voice-activated prescription refill service.
HOW, SPECIFICALLY, WILL YOU BUILD RITE AID'S IMAGE ON THE WEST COAST?
We'll go about establishing our presence and image in the West in much the same,
systematic, bold way we did it in the East. We're in the process of introducing
the Rite Aid identity in our new markets -- getting the message across to
Thrifty PayLess customers that everything they liked about the chain stays, but
now they'll get a whole lot more. A key focus of our brand-building effort is
our superior pharmacy system. Rite Aid customers on both Coasts count on quick
service, accurate advice and timely information -- all of which go far in
building customer loyalty.
YOUR STORES NOW OFFER EVERYTHING FROM PHARMACEUTICALS TO COSMETICS TO
CONVENIENCE FOODS. HOW ARE THESE AREAS ADDING SALES MOMENTUM? WHAT MIGHT YOU ADD
TO THE CURRENT MERCHANDISE MIX?
For starters, we intend to maximize the return in the categories we know sell
well. Cosmetics, our fastest-growing product category, offers enormous growth
opportunity. Not only is it profitable, but the category hits a bull's-eye with
our target audience.
We are always studying new business opportunities. For example, we
began
[ PICTURE OF WOMAN ON BIKE ]
OUR ENHANCED PRODUCT OFFERINGS, PARTICULARLY IN BEAUTY CARE AND NATURAL HEALTH,
RESPOND TO OUR TARGET CONSUMERS.
8
<PAGE> 11
testing our Natural Health Centers, situated next to the pharmacy, which offer a
selection of homeopathic and herbal remedies, nutritional products and
literature on the subject. We are pleased with early results from this growing
category. We are also learning from our Thrifty PayLess units about product
categories our East Coast units don't presently offer, such as green goods and
extra-large seasonal displays. With our ability to customize the mix unit by
unit, it's easy for us to offer items that may be unique to a particular store
or market.
While individual products and categories are building sales momentum
incrementally, our new prototype is driving growth across the board. The new
format, unveiled in Baltimore, has enabled Rite Aid to add SKUs and bolster its
products in hot categories. Cosmetics and photo departments, convenience food
sections and checkouts have all been dramatically enhanced.
HOW DOES THE THRIFTY PAYLESS APPROACH TO MERCHANDISING FIT WITH YOURS?
It is complementary in the sense that the Thrifty PayLess units also offer a mix
of products tailored to their diverse markets. At this point, we only plan minor
alterations to the merchandise mix. The chain clearly went through the process
of analyzing what product selection they needed to fill their stores profitably.
From the start, we've maintained the attitude that we would keep everything they
have in the mix -- such as large seasonal assortments, Thrifty-brand ice cream
and plants and garden items -- and learn to do it better.
[ 2 PICTURES OF LATE NIGHT SERVICE AT DRUGSTORES ]
AROUND THE CLOCK OR IN A RUSH, RITE AID CUSTOMERS COUNT ON CONVENIENT SERVICE.
HOW DO YOU INTERACT WITH YOUR VENDORS?
We place tremendous value on our relationships with our suppliers. Of all the
things we have done to develop true partnerships with our vendors, our
commitment to category management is probably the most important. It signifies a
total partnership with suppliers in all our product categories. Suppliers work
closely with us, helping with logistics, inventory control, merchandise mix and
promotions of every category in their area. Category management is an evolving
process, so as we achieve our initial goals, we keep setting new ones.
The vendor community has been very receptive to this program as it
ensures we both win satisfied customers. The exchange of data enables all of us
to make accurate, targeted data-based decisions. We are experiencing phenomenal
increases in market share in categories where we have implemented this approach.
9
<PAGE> 12
[ PICTURE OF PERSON HOLDING A CARD ]
OUR RITE REWARDS CARD IDENTIFIES AND REWARDS OUR BEST CUSTOMERS WITH SPECIAL
SAVINGS, DISCOUNTS AND TARGETED OFFERS.
WHEN WILL YOU ROLLOUT THE PREFERRED CUSTOMER CARD PROGRAM?
We've test marketed a loyalty incentive program called Rite Rewards in New
England where it's been well received. The average transaction size, in both
dollars and units, increased significantly -- better than in any other market in
the chain. Since all card purchases are tracked electronically, we now have a
valuable database we can use to market directly to those customers and
cross-promote other categories as well.
Most importantly, Smart Card technology is an example of our growing
ability to invest marketing dollars towards our most profitable customers. The
data we've gathered has helped us identify the 40 percent of our customer base
that generates roughly 80 percent of our sales. We are leveraging our
technological expertise to reward these customers with incentives to increase
their purchases. We'll do more and more of this in the future.
KEEPING UP WITH TRENDS IN OUR PRIVATE LABEL OFFERINGS IS ANOTHER WAY WE DELIVER
VALUE TO OUR CUSTOMERS.
[ PICTURE OF RITE AID PRODUCTS ]
10
<PAGE> 13
FINANCIAL STRATEGIES
Frank Bergonzi, Executive [ PICTURE OF FRANK BERGONZI ]
Vice President & CFO
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
93 94 95 96 97
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
dollars in millions 114.8 169.1 182.7 315.1 371.2
</TABLE>
WHAT IMPACT DOES THE THRIFTY PAYLESS DEAL HAVE ON CASH FLOWS?
It's important to mention that the chain drug industry is known for generating
strong cash flows, and this has long been true of Rite Aid. We are acutely
aware, however, that to stay successful we have to invest our cash flow back
into our business, which is one of the things we did in purchasing Thrifty
PayLess. For the short term, the acquisition will have an impact on cash flows
as we absorb an anticipated expense of $50 million to $60 million for
integrating the two companies. We will use some of Thrifty PayLess' cash flow to
cover the costs of remodeling and relocating units on the West Coast, but we
expect Thrifty PayLess to be cash-flow positive by the end of fiscal 1998.
WHAT SORT OF GROWTH RATE DO YOU ANTICIPATE FOR THE COMBINED BUSINESSES?
Our expectation is that, with the Thrifty PayLess transaction, the stores we're
opening and expanding, and the strong same-store sales reported in fiscal 1997,
we will have sales growth for the next few years in the 13 to 15 percent range.
It will take roughly a year and a half to ramp up expansion on the West Coast,
where we expect to open 30 new stores in fiscal 1998. Therefore, we will
continue to derive a greater proportion of business from our East Coast
operations in the near term.
Overall we are very optimistic about what lies ahead, in terms of Rite
Aid specifically and our industry sector as a whole. Our industry is benefiting
from three of the most robust demand trends in retailing. The aging U.S.
population, new pharmaceuticals extending life expectancy, along with the growth
of managed care, all lead to stronger prescription business. With increased
traffic at the pharmacy counter we derive greater sales from additional
categories, such as over-the-counter drugs, cosmetics, beauty aids and vitamins.
LOOKING AHEAD, WHAT IS YOUR FINANCIAL STRATEGY, ESPECIALLY REGARDING THE CAPITAL
INVESTMENTS PROMISED ON BOTH COASTS?
We will continue to invest in our business to achieve dominance in the markets
we serve, and in the new markets we choose to enter. We believe there's a
tremendous opportunity to enhance our earnings at a faster rate with the
addition of Thrifty PayLess. Our strategy is focused on maintaining the highest
operating margin in the industry. To accomplish this we have to improve our
return on assets. It is our goal to achieve better working capital utilization
over the next two years. In addition, we will relocate or enlarge approximately
250 stores annually, expanding our square footage on the East Coast by seven to
eight percent per year -- achieving one of the fastest growth rates in the
drugstore industry. We'll continue to leverage technology to drive costs down
with productivity improvements and by enhancing revenues with marketing
programs.
11
<PAGE> 14
SUPPORTING OUR COMMUNITIES
WHAT CHAIN-WIDE COMMUNITY PROGRAMS DOES RITE AID SPONSOR ON A NATIONAL LEVEL?
We are very committed to supporting children's and women's healthcare. One of
our signature programs is the Children's Miracle Network (CMN), a national
organization that raises funds for more than 160 pediatric hospitals around the
country. Rite Aid has been a supporter of CMN since its inception in 1984. In
fiscal 1997, we expanded our commitment to the national level through Miracle
Balloon Sales in all Rite Aid and Thrifty PayLess stores and raised over a
million dollars.
Rite Aid's Mother's Day Mammogram program is fast becoming one of the
nation's largest breast cancer education and outreach campaigns. It encourages
women 40 and older to get regular mammogram screenings and provides free
mammograms to uninsured or underinsured women. Thousands of women have already
benefitted from the program. We plan to expand the campaign to the West Coast in
fiscal 1998.
HOW DO YOU PARTICIPATE ON A LOCAL LEVEL IN YOUR MARKETS?
Rite Aid is proud to support many different kinds of programs that serve our
communities on a grassroots level. For example, our School-to-Business program,
which was launched four years ago in Philadelphia, is a notable success. The
program helps disadvantaged inner-city high school students, who work as interns
for a range of participating businesses, including hospitals, banks and Rite
Aid. Students earn academic credit and grades and acquire the fundamental skills
they'll need to enter the job market upon graduation.
Poison prevention has become another focus in many of our markets. A
good example is the poison control effort we kicked off at a Washington,
D.C.-area elementary school. This program exemplifies the level of commitment we
bring as a company and as individuals to our communities. In addition to
presiding over presentations about poison control, we distributed educational
materials and stickers, and certified participating children as "Rite Aid Junior
Poison Prevention Officers." Plans are under way to expand this successful
program to other neighborhood schools.
[ 2 PICTURES ONE OF BOOKLETS ONE OF PEOPLE ]
WE ARE COMMITTED TO PARTICIPATING ACTIVELY IN OUR COMMUNITIES AND SUPPORT A WIDE
RANGE OF HEALTH AND EDUCATIONAL PROGRAMS.
12
<PAGE> 15
FINANCIAL REVIEW
CONTENTS
14 Management's Discussion and Analysis of
Results of Operations and Financial Condition
18 Management's Responsibility for
Financial Statements
19 Independent Auditors' Report
20 Consolidated Balance Sheets
21 Consolidated Statements of Income
22 Consolidated Statements of Stockholders' Equity
23 Consolidated Statements of Cash Flows
24 Notes to Consolidated Financial Statements
33 Interim Financial Results (Unaudited)
34 Ten-Year Financial Review
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Sales:
Net sales for the fiscal year ended March 1, 1997, totaled $6.970 billion, an
increase of $1.524 billion or 28% higher than last year. Included in fiscal 1997
are sales of approximately $1.071 billion generated by 1,007 Thrifty PayLess
("Thrifty") stores since their December 12, 1996 acquisition date. Prescription
revenues lead sales growth with same-store sales increases of 11.6%. Overall
same-store sales grew 7.9%. For fiscal years 1996 and 1995, net sales were
$5.446 billion and $4.534 billion, respectively, representing increases of 20.1%
and 11.7% over the year-earlier periods. Fiscal 1996 sales were favorably
impacted by the inclusion of a full year of Perry drugstore sales compared to
only five weeks of Perry revenue in fiscal 1995. Same-store sales growth was
6.6% in 1996 and 7.2% in 1995. Fiscal 1995 benefited from having one additional
sales week for a 53-week fiscal year.
Costs and Expenses:
Cost of goods sold including occupancy costs were 73.4% of sales for the current
year compared to 73.8% for fiscal 1996 and 73.4% for fiscal 1995. Favorably
impacting gross profits were sales gains in certain higher margin front-end
categories and Thrifty's greater proportion of non-pharmacy merchandise.
Pharmacy sales, representing 54.0%, 55.2% and 53.1% of total drugstore sales for
fiscal years 1997, 1996 and 1995, respectively, resulted in declines of pharmacy
gross profit margins because of increases in lower margin third party sales. The
ratios of third party sales to total pharmacy sales were 79.9%, 75.3% and 71.0%,
for fiscal years 1997, 1996 and 1995, respectively. Fiscal 1996 compared to 1995
was 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 1.6% for fiscal 1997, 2.2% for
fiscal 1996 and 2.0% for fiscal 1995 resulting in LIFO (last in, first out)
inventory charges of $16.0 million, $18.0 million and $15.4 million,
respectively.
<TABLE>
<CAPTION>
PHARMACY SALES AS A
PERCENTAGE OF DRUGSTORE SALES
- --------------------------------
(percent)
<S> <C>
93 48.5
94 50.8
95 53.1
96 55.2
97 54.0
</TABLE>
<TABLE>
<CAPTION>
THIRD PARTY SALES AS A
PERCENTAGE OF PHARMACY
- --------------------------------
(percent)
<S> <C>
93 63.8
94 66.6
95 71.0
96 75.3
97 79.9
</TABLE>
14
<PAGE> 17
Selling, general and administrative expenses, expressed as a percentage
of sales, were 20.6%, 20.3% and 20.6% for fiscal years 1997, 1996 and 1995,
respectively. The growth in the operating expense ratio in fiscal 1997 was
attributable to incremental overhead expenses associated with Thrifty's
headquarters operations and costs associated with integration of the Thrifty
drugstores. The lower operating expense ratio in fiscal 1996 was due primarily
to benefits derived from integration of the Perry acquisition and 215 stores
that were sold or closed during the year; because of their lower sales volume
these stores had higher expense to sales ratios. Fiscal 1995, compared to the
previous year, benefited from higher same-store sales increases and an
additional week of sales in which to leverage operating expenses.
Interest expense was $96.5 million in 1997, $68.3 million in 1996 and
$42.3 million in 1995. The upward trend was mainly due to higher levels of
indebtedness throughout each year. The annual weighted average interest rates on
the company's commercial paper were 5.5%, 5.9% and 5.0% for fiscal years 1997,
1996 and 1995, respectively. Proceeds from increased borrowings were used to
refinance Thrifty debt and fund expenses associated with the merger; finance
other acquisitions; and finance store remodeling, relocations and expansions.
During the current year, 167 stores were acquired or built, along with 169
relocations and 46 expansions to the larger store prototype. In prior years,
higher debt resulted from increased borrowings for acquisitions and for store
remodeling, 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 distribution facilities in
the midatlantic and southeast regions, expenses associated with the attempted
acquisition of Revco D. S., Inc. and other charges.
Income Taxes:
The effective income tax rate was 38.0% for fiscal years 1997 and 1996, a
decline from 39.0% for fiscal 1995. In 1996, the decline in the tax rate from
1995 resulted from tax planning strategies which utilized state net operating
loss carryforwards (NOLs), the tax benefits of which were previously considered
unlikely to be realized. Consequently, the deferred tax benefits related to
these state NOLs carried a valuation allowance in prior years.
Income Before Extraordinary Loss:
Income before extraordinary loss for fiscal 1997 rose to $160.5 million compared
to $158.9 million in 1996 and $141.3 million in 1995. The current year benefited
from solid same-store sales increases, Thrifty operating results since its
acquisition date and lower LIFO inventory charges. Adversely impacting 1997 were
nonrecurring and other charges, decreases in pharmacy gross profit margins and
increased interest expense. In the prior year, the Perry acquisition positively
impacted income by contributing a full year of sales with a more favorable
operating expense ratio as 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. Results from 1995 reflected strong
same-store sales increases, an additional sales week and the favorable impact of
a lower ratio of expense to sales compared to the year earlier. Adversely
affecting fiscal 1995 were a greater percentage of third party prescription
sales, higher interest cost and a larger LIFO inventory charge.
Extraordinary Loss:
Early extinguishment of certain Thrifty indebtedness resulted in an
extraordinary loss of $45.1 million, net of taxes, for the year ended March 1,
1997. 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.
15
<PAGE> 18
Net Income:
Net income was $115.4 million, $158.9 million and $141.3 million for fiscal
years 1997, 1996 and 1995, 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 1996 and 1995 net
income amounts.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $226.3 million, $148.6 million and
$190.2 million for fiscal years 1997, 1996 and 1995, respectively. Cash provided
by operating activities outpaced growth from income before extraordinary loss
during 1997 because of greater depreciation and amortization expenses, a decline
in income taxes paid and increases in accrued expenses. Adversely impacting cash
provided from operating activities were increases in accounts receivable
reflecting the trend of greater numbers of prescriptions being reimbursed by
third party payers, and increases in inventories in new and remodeled stores
during the year. Prior year earnings increases did not result in additional
levels of cash provided by operations largely due to increases in inventory
levels and cash expenditures for store closings of $28.2 million in 1996 and
$29.1 million in 1995. In fiscal year 1996, cash outlays were also necessary to
settle accrued liabilities acquired from Perry. Net working capital was $1.6
billion at March 1, 1997, $835 million at March 2, 1996 and $796 million at
March 4, 1995. The current ratios were 2.4:1, 2.3:1 and 2.4:1, 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 revolving credit commitments, to supplement
cash generated by operations. Outstanding commercial paper of the company
amounted to $701.5 million at March 1, 1997, $556.8 million at March 2, 1996 and
$436.5 million at March 4, 1995. Increases in commercial paper borrowings were
used to finance acquisitions and 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 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 49.7% of total
capitalization at fiscal year end 1997, compared to 52.6% in 1996, and 48.3% for
1995. Both debt and equity increased during the year as a result of
acquisitions, debt refinancing 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 0.65 shares of Rite Aid common stock.
Approximately 38.7 million shares of Rite Aid common stock were issued to
holders of Thrifty common stock at a fair market value of $34.58 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. Accordingly, the improved debt to total
capitalization ratio in 1997 reflects the strong financial position that the
company has attained. Management believes that the company has additional debt
capacity available, if needed, to capitalize on future growth opportunities.
16
<PAGE> 19
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The FASB
issued SFAS No. 123 "Accounting for Stock-Based Compensation" in October 1995.
The company adopted SFAS 123 during the year ending March 1, 1997 in accordance
with its provisions, and has included pro forma disclosures as part of the notes
to the consolidated financial statements. The adoption of SFAS 121 during the
year ended March 2, 1996, and SFAS 123 during 1997, did not have a significant
effect on the company's financial statements.
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share."
SFAS 128 establishes standards for computing and presenting earnings per share.
In accordance with the effective date of SFAS 128, the company will adopt
SFAS 128 for the year ending February 28, 1998. This statement is not expected
to have a material impact on the company's 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.
17
<PAGE> 20
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.
18
<PAGE> 21
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 March 1, 1997 and March 2, 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended March 1, 1997. 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 March 1, 1997 and March 2, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 1, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the company changed
its method of accounting for investments to conform with Statement of Financial
Accounting Standards No. 115 in fiscal year 1995.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
April 24, 1997
19
<PAGE> 22
CONSOLIDATED BALANCE SHEETS Rite Aid Corporation and Subsidiaries
<TABLE>
<CAPTION>
In thousands of dollars March 1, 1997 and March 2, 1996
- ------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 7,042 $ 3,131
Accounts receivable, net (Note 1) 370,588 246,966
Inventories (Note 1) 2,336,659 1,170,747
Prepaid expenses and other current assets 57,210 44,204
- ------------------------------------------------------------------------------------------------------------------
Total current assets 2,771,499 1,465,048
- ------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE 7):
Land 352,416 109,246
Buildings 547,077 269,095
Leasehold improvements 680,297 509,523
Equipment 1,024,673 765,286
Construction in progress 65,393 24,360
- ------------------------------------------------------------------------------------------------------------------
2,669,856 1,677,510
Accumulated depreciation and amortization 773,786 697,961
- ------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment, net 1,896,070 979,549
- ------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS (NOTE 1):
Excess of cost over underlying equity in subsidiaries (less accumulated
amortization of $19,595 and $9,619) 1,260,777 141,266
Lease acquisition costs and other intangible assets (less accumulated
amortization of $132,696 and $115,430) 383,862 197,129
- ------------------------------------------------------------------------------------------------------------------
Total intangible assets 1,644,639 338,395
- ------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 104,773 59,003
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 6,416,981 $ 2,841,995
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt (Note 6) $ 44,255 $ 232,811
Accounts payable 601,301 271,782
Income taxes (Notes 1 and 5) 18,484 42,463
Sales and other taxes payable 34,985 13,913
Accrued salaries, wages and other current liabilities (Note 10) 472,985 69,030
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,172,010 629,999
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 6) 2,317,789 974,321
CAPITAL LEASE OBLIGATIONS (NOTE 6) 97,863 20,000
DEFERRED INCOME TAXES (NOTES 1 AND 5) 221,855 114,056
OTHER NONCURRENT LIABILITIES (NOTE 10) 118,779 --
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 3,928,296 1,738,376
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 10 AND 14)
STOCKHOLDERS' EQUITY (NOTES 11, 12 AND 13):
Preferred stock, par value $1 per share, none issued or outstanding -- --
Common stock, par value $1 per share, issued 129,342,043 and 90,379,823 shares 129,342 90,380
Additional paid-in capital 1,365,771 62,623
Retained earnings 1,100,185 1,055,795
Cumulative pension liability adjustments (Note 9) (1,867) (433)
Treasury stock, at cost (6,532,169 shares) (104,746) (104,746)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,488,685 1,103,619
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 6,416,981 $ 2,841,995
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 23
CONSOLIDATED STATEMENTS OF INCOME Rite Aid Corporation and Subsidiaries
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts Years ended March 1, 1997, March 2, 1996 and March 4, 1995
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 6,970,201 $5,446,017 $4,533,851
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs 5,113,047 4,017,351 3,327,920
Selling, general and administrative expenses 1,433,697 1,104,123 932,167
Interest expense 96,473 68,341 42,300
Nonrecurring and other charges (Note 3) 68,057 -- --
- -------------------------------------------------------------------------------------------------------------------
6,711,274 5,189,815 4,302,387
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and income taxes 258,927 256,202 231,464
Income taxes (Notes 1 and 5) 98,393 97,255 90,178
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 160,534 158,947 141,286
- -------------------------------------------------------------------------------------------------------------------
Extraordinary loss--early extinguishment of debt,
net of taxes (Notes 5 and 6) (45,157) -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 115,377 $ 158,947 $ 141,286
- -------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE (NOTES 1 AND 11):
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ 1.74 $ 1.90 $ 1.67
Extraordinary loss, net of taxes (.49) -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 1.25 $ 1.90 $ 1.67
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 24
CONSOLIDATED STATEMENTS OF Rite Aid Corporation and Subsidiaries
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts Years ended March 1, 1997, March 2, 1996 and March 4, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE ADJUSTMENTS
COMMON STOCK ADDITIONAL ------------------------------
-------------------- PAID-IN RETAINED UNREALIZED PENSION
ISSUED TREASURY CAPITAL EARNINGS SECURITIES GAIN LIABILITY TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE FEBRUARY 26, 1994 $ 90,288 $ (59,215) $ 59,423 $ 866,134 $ -- $(1,916) $ 954,714
Stock acquired for treasury (36,562) (36,562)
Stock options exercised 2 1,232 1,234
Net income 141,286 141,286
Cash dividends paid
($.62 per share) (52,309) (52,309)
Net unrealized gain on
marketable securities 2,847 2,847
Minimum pension liability
adjustments 602 602
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE MARCH 4, 1995 90,290 (95,777) 60,655 955,111 2,847 (1,314) 1,011,812
Stock acquired for treasury (8,969) (8,969)
Stock options exercised 90 1,968 2,058
Net income 158,947 158,947
Cash dividends paid
($.695 per share) (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
($.755 per share) (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
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 25
CONSOLIDATED STATEMENTS OF Rite Aid Corporation and Subsidiaries
CASH FLOWS
<TABLE>
<CAPTION>
In thousands of dollars Years ended March 1, 1997, March 2, 1996 and March 4, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary loss and income taxes $ 258,927 $ 256,202 $ 231,464
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY INCOME BEFORE EXTRAORDINARY
LOSS AND INCOME TAXES:
Depreciation and amortization 168,064 118,662 98,560
Accreted interest on long-term debt 15,310 12,855 12,215
Nonrecurring and other charges (Note 3) 48,220 -- --
Changes in operating assets and liabilities
net of effects from acquisitions (Note 2)
(Increase) in accounts receivable (41,777) (20,195) (23,291)
(Increase) in inventories (29,404) (111,087) (63,911)
(Increase) decrease in prepaid
expenses and other current assets 15,047 (21,092) (3,646)
Increase (decrease) in accounts payable (35,950) (1,859) 33,184
(Decrease) in accrued expenses
and other current liabilities (143,400) (52,306) (21,276)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by continuing operations
before extraordinary loss and income taxes 255,037 181,180 263,299
Cash provided by (used in) discontinued operations
before income taxes -- 890 (1,339)
Income taxes paid (28,743) (33,453) (71,717)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 226,294 148,617 190,243
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (371,226) (315,120) (182,665)
Purchase of businesses, net of cash acquired (Note 2) (35,087) (131,714) (175,729)
Intangible assets acquired (26,316) (15,909) (14,476)
Investments and advances in joint venture (30,714) -- --
Investing activities of discontinued operations -- -- (14,336)
Proceeds from dispositions 106,937 136,928 91,488
Other 27,975 (6,774) 1,215
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (328,431) (332,589) (294,503)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt (Note 6) 1,068,401 224,212 --
Net proceeds of commercial paper borrowings 144,735 120,265 197,662
Principal payments on long-term debt (1,040,452) (99,348) (16,020)
Cash dividends paid (70,987) (58,263) (52,309)
Redemption of stockholders' rights (839) -- --
Stock acquired for treasury -- (8,969) (36,562)
Proceeds from the sale of stock 5,190 2,058 1,234
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 106,048 179,955 94,005
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 3,911 (4,017) (10,255)
Cash at beginning of year 3,131 7,148 17,403
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 7,042 $ 3,131 $ 7,148
===================================================================================================================================
Supplemental disclosure of cash paid for interest
(net of amounts capitalized of $1,897, $1,948 and $373) $ 75,434 $ 56,851 $ 32,664
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Rite Aid Corporation operates over 3,600 retail drugstores in the eastern 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 March 1, 1997 and March 2, 1996 contained 52 weeks.
The fiscal year ended March 4, 1995 contained 53 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
Accounts receivable are stated net of an allowance for uncollectible accounts of
$14,583,000 at March 1, 1997 and $5,545,000 at March 2, 1996. 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 March 1, 1997, March 2, 1996 and March 4, 1995, respectively,
inventories were $166,702,000, $178,932,000 and $170,464,000 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
March 1, 1997, management believes that there are no materially impaired
intangible assets.
Marketable Securities
In fiscal year 1995, the company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115). During fiscal year 1996, the company sold all of its
marketable securities and recognized a pre-tax gain of $8,343,000 on the
transaction. At March 4, 1995, the company's investment in marketable equity
securities was categorized as available-for-sale. The resulting gross unrealized
holding gain of $4,380,000 was reported, net of income taxes, as a separate
component of stockholders' equity.
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.
Insurance
The company is substantially self-insured with respect to general liability,
workers' compensation and covered employee medical claims. Excess insurance
coverage is maintained for general liability and workers' compensation claims.
Management believes its reserve for claims reported and claims incurred but not
reported is adequate.
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
24
<PAGE> 27
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.
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.
Earnings per Share
Primary earnings per share have been computed based on the weighted average
number of shares of common stock outstanding during each fiscal year (92,211,000
in 1997, 83,808,000 in 1996 and 84,771,000 in 1995). Fully diluted earnings per
share are not shown since the dilution is not material.
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 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 0.65 shares of Rite Aid common stock for each
share of Thrifty PayLess common stock. Total Rite Aid common stock exchanged in
connection with this transaction was approximately 38,676,000 shares.
The fair market value per share of the Rite Aid common stock exchanged
in consideration of the Thrifty PayLess common stock was $34.58. The fair market
value was measured for the time period beginning before the date that an
agreement of the purchase price was reached, until after the date that the
transaction was announced to the public. The aggregate fair market value of
stock issued was approximately $1,337,417,000.
The purchase method of accounting for business combinations was used to
record the merger of Thrifty PayLess. Total consideration given for Thrifty
PayLess amounted to approximately $1,496,428,000 as of March 1, 1997, including
direct acquisition costs, involuntary employee termination benefits and costs to
exit activities of Thrifty PayLess. The value of goodwill assigned to Thrifty
amounted to approximately $1,112,109,000 and is being amortized on a
straight-line basis over 40 years.
Results of operations for Thrifty PayLess are included in these
consolidated financial statements since December 12, 1996. The following
represents the unaudited pro forma results of operations as if the merger of
Thrifty PayLess had occurred at the beginning of fiscal years 1997 and 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars except per share amounts PRO FORMA
- --------------------------------------------------------------------------------
UNAUDITED YEAR ENDED YEAR ENDED
MARCH 1, 1997 MARCH 2, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $10,742,704 $10,110,500
Income before
extraordinary loss $ 236,362 $ 163,000
Net income $ 78,405 $ 151,100
EARNINGS PER SHARE:
Income before
extraordinary loss $ 1.93 $ 1.33
Net income $ .64 $ 1.23
================================================================================
</TABLE>
25
<PAGE> 28
The company also purchased the assets of Taylor Drug Stores, Inc., Concord
Drugs, Inc., and acquired a 50% interest in mail order pharmacy provider
Diversified Prescription Delivery, L.L.C. ("DPD"). The total consideration paid
for these acquisitions amounted to approximately $64,301,000.
The acquisitions of Taylor Drug Stores, Inc. and Concord Drugs, Inc.
were accounted for as purchases; accordingly, the acquired assets and
liabilities were recorded at their estimated fair values at date of acquisition.
The value of goodwill assigned to these acquisitions was approximately
$2,673,000 and is being amortized on a straight-line basis over 40 years.
As of March 1, 1997, the company had investment and advances of
$30,714,000 in DPD and is accounting for this investment using the equity
method. The investment in DPD is included with other assets on the balance
sheet. Results of operations for each of these acquisitions are included with
those of Rite Aid since each respective acquisition date.
In July 1995, the company purchased the entire chain of conventional,
freestanding drugstores owned and operated by Pathmark Stores, Inc. The chain
consisted of 30 stores located in the New York metropolitan region. In October
1995, an additional 20 stores, located in the state of Maine, were purchased
from Brooks Pharmacy. Also during fiscal 1996, Rite Aid obtained certain assets,
mainly inventories, pharmacy prescription files, store fixtures and favorable
lease agreements, through various single store acquisitions. Total consideration
paid for the above acquisitions amounted to $105,878,000. The value of goodwill
assigned to the acquisitions totaled $15,062,000 and is being amortized on a
straight-line basis over 40 years.
All of the 1996 acquisitions discussed above were accounted for as
purchases; accordingly, the acquired assets and liabilities were recorded at
their estimated fair values at date of acquisition. Operating results of the
acquired companies were included with those of Rite Aid since their respective
acquisition dates.
3. NONRECURRING AND OTHER CHARGES
During 1997, the company began 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 distribution facilities in the midatlantic and southeast
regions, expenses incurred in the attempted acquisition of Revco D. S., Inc. and
other charges. The company is converting the Thrifty PayLess drugstores to the
Rite Aid prototype through the following activities:
- - remodeling Thrifty PayLess stores to Rite Aid's store design and
signage,
- - installing the Rite Aid Dispensing System in all Thrifty PayLess
stores,
- - installing Rite Aid's point-of-sale systems in all Thrifty PayLess
stores,
- - merchandising Thrifty PayLess stores with Rite Aid's preferred product
mix, and
- - installing Rite Aid's pricing and advertising programs.
Conversion of the Thrifty PayLess store systems to Rite Aid store
systems is anticipated to be completed in the third quarter of fiscal 1998.
Accordingly, the company will incur duplicative overhead expenses during the
integration period.
4. DISPOSITIONS
In February 1997, 63 stores in North Carolina and South Carolina were sold to a
unit of J.C. Penney Co., and 126 units are expected to be transferred in May
1997 to a party designated by J. C. Penney. An additional 121 stores were closed
or sold during the year ended March 1, 1997. The company received proceeds
amounting to approximately $106,937,000 associated with drugstore dispositions.
Gains from drugstore closings and dispositions were not significant.
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
26
<PAGE> 29
value of acquired Bi-Mart assets was adjusted to the proceeds received upon
disposition and resulted in no gain recognition.
During fiscal year 1996, Rite Aid sold 37 drugstores and the assets of
72 other stores located in Florida to the Eckerd Corporation, 33 stores and the
assets of 21 other stores located in Massachusetts and Rhode Island to Brooks
Pharmacy and CVS, Inc., and completed the sale of its nursing home pharmacy
business. As a result of these transactions, the company received approximately
$85,873,000 in cash proceeds. The gain from these transactions was not
significant.
5. INCOME TAXES
Total income tax expense for fiscal years ended March 1, 1997, March 2, 1996,
and March 4, 1995, is allocated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations $98,393 $97,255 $90,178
Extraordinary loss (27,678) -- --
- --------------------------------------------------------------------------------
Total income tax expense $70,715 $97,255 $90,178
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENTLY PAYABLE:
Federal $ 5,316 $21,488 $53,617
State 7,081 4,927 4,632
- --------------------------------------------------------------------------------
12,397 26,415 58,249
- --------------------------------------------------------------------------------
DEFERRED TAX EXPENSE:
Federal 46,954 60,486 30,149
State 11,364 10,354 1,780
- --------------------------------------------------------------------------------
58,318 70,840 31,929
- --------------------------------------------------------------------------------
Total income tax expense $70,715 $97,255 $90,178
================================================================================
</TABLE>
Presented below are the deferred tax liabilities and deferred tax assets at
March 1, 1997 and March 2, 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated depreciation
and amortization $150,011 $105,298
Inventory valuation 137,121 45,416
Purchased tax benefits 5,951 16,559
Prepaid and other expenses 33,014 20,360
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 326,097 187,633
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accrued expenses (75,550) (15,917)
Net operating loss carryforwards (3,081) (3,198)
Other (3,151) (4,764)
- --------------------------------------------------------------------------------
Total gross deferred tax assets (81,782) (23,879)
Valuation allowance 1,777 1,777
- --------------------------------------------------------------------------------
Net deferred tax assets (80,005) (22,102)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $246,092 $165,531
================================================================================
</TABLE>
Net deferred tax liabilities of $22,243,000 and net deferred tax assets
of $23,477,000 associated with acquisitions made during fiscal years 1997 and
1996, respectively, 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 March 1, 1997 and March 2, 1996
principally applies to net operating loss carryforwards (NOLs) for state income
tax purposes. The current portions of net deferred taxes for 1997 and 1996
amounted to $24,237,000 and $51,475,000, respectively, and are included with
income taxes on the balance sheet.
State income taxes and prior year accrual adjustments account for most
of the differences between the actual provision for income taxes and taxes
computed
27
<PAGE> 30
by applying the statutory rate. Following is a reconciliation of the statutory
to effective tax rate:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage ` 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0 35.0 35.0
State income taxes, net of
federal tax benefit 6.3 4.0 1.6
Nondeductible expenses 1.9 .7 .4
Adjustments to prior year
tax liabilities (2.9) -- --
Tax credits (1.0) -- --
Change in valuation allowance -- (2.4) .4
Other, net (1.3) .7 1.6
- --------------------------------------------------------------------------------
38.0 38.0 39.0
================================================================================
</TABLE>
6. INDEBTEDNESS AND CREDIT AGREEMENTS
Following is a summary of indebtedness at March 1, 1997 and March 2, 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, 5.5% and 5.4%
weighted average rates at
year-end 1997 and 1996 $ 701,500 $ 556,765
6.70% notes due 2001 350,000 --
7.125% notes due 2007 350,000 --
7.70% debentures due 2027 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 199,111 200,680
5 7/8% to 10.475% industrial
development bonds
due through 2016 19,050 19,050
Obligations under capital leases 108,565 44,200
Other 31,681 6,437
- --------------------------------------------------------------------------------
2,459,907 1,227,132
Short-term debt and current
maturities of long-term debt (44,255) (232,811)
- --------------------------------------------------------------------------------
Long-term debt,
less current maturities $2,415,652 $ 994,321
================================================================================
</TABLE>
The company has $1,500,000,000 in revolving credit commitments to
support its commercial paper program consisting of a $1,000,000,000 facility
that expires July 2001, and a $500,000,000 facility that converts in December
1997 to a term loan that will mature in December 1998. Borrowings under these
facilities bear interest rates, at the company's option, based on the prime,
federal funds, certificate of deposit or London interbank rates, as well as
competitive bid. Pricing on loans and commitments will vary commensurate with
credit quality. The $1,000,000,000 and $500,000,000 commitments have per annum
facility fees, irrespective of usage, of 8.5 basis points and 7 basis points,
respectively. At March 1, 1997 and March 2, 1996, there were no amounts
outstanding under these agreements.
Rite Aid 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 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 resulted
in an extraordinary loss of $45,157,000, net of taxes during the year ended
March 1, 1997. 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
28
<PAGE> 31
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, Rite Aid issued 6 7/8% senior debentures having an
aggregate principal amount of $200,000,000. These debentures are due August 15,
2013 and may not be redeemed prior to maturity or be entitled to any sinking
fund. The net proceeds from this issuance were used for working capital and
general corporate purposes, including the repayment of outstanding commercial
paper of the company.
The 6 3/4% zero coupon convertible subordinated notes due on July 24,
2006 are convertible at any time by the holder into Rite Aid common stock at a
rate of 15.993 shares per note. The conversion rate will not be adjusted for
accrued original issue discount. Any note will be purchased by the company, at
the option of the holder, on July 24, 2001 for a purchase price per note of
$717.54, representing the issue price plus accrued original issue discount. The
company may redeem the notes for cash at any time, in whole or in part, at
redemption prices equal to the issue price plus accrued original issue discount
to the date of redemption.
On July 24, 1996, the company redeemed 27,608 zero coupon convertible
subordinated notes for a purchase price per note of $514.86. Noteholders
converted an additional 645 notes to common stock during the year at prices per
note ranging from approximately $502 to $535.
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 a 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. Principal
maturities of $24,200,000 were repaid to the lessor during the year ended March
1, 1997.
The aggregate annual principal payments of long-term debt for the five
succeeding fiscal years are as follows: 1998, $44,255,000; 1999, $17,962,000;
2000, $21,780,000; 2001, $23,213,000 and 2002, $374,462,000.
The company has complied with restrictions and limitations included in
the provisions of various loan and credit agreements. At March 1, 1997, 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, 3 to 15 years. Accelerated methods are used for income tax purposes.
Depreciation and amortization expenses were $120,751,000 for 1997, $96,974,000
for 1996 and $82,740,000 for 1995.
8. FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial instruments at March 1, 1997
and March 2, 1996 are listed as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- --------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial
paper
indebtedness $ 701,500 $ 701,500 $556,765 $556,765
Long-term
indebtedness 1,649,842 1,689,030 626,167 646,009
Note receivable 20,000 20,000 20,000 20,000
================================================================================
</TABLE>
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 $33,260,000 at
March 1, 1997 and $4,702,000 at March 2, 1996 represent the original costs of
the investments currently owned, which management believes are not impaired.
29
<PAGE> 32
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $2,088 $1,390 $1,776
Interest cost 2,112 1,782 1,570
Actual return on plan assets (3,757) (5,258) 527
Net amortization and deferral 1,307 3,118 (2,606)
- --------------------------------------------------------------------------------
Pension expense $1,750 $1,032 $1,267
================================================================================
</TABLE>
The table below sets forth the funded status and amounts recognized in the
company's balance sheet for its defined benefit plans as of March 1, 1997 and
March 2, 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
PLAN ASSETS ACCUMULATED PLAN ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS PLAN ASSETS BENEFITS PLAN ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEfiT OBLIGATIONS:
Vested benefits $(25,518) $(19,717) $ (8,556) $(15,251)
Nonvested benefits (213) (1,253) (185) (884)
- --------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (25,731) (20,970) (8,741) (16,135)
Effect of anticipated future compensation levels
and other events (840) -- (678) (510)
- --------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (26,571) (20,970) (9,419) (16,645)
Fair value of assets held in the plans 31,428 18,176 12,385 15,451
- --------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) benefit obligation 4,857 (2,794) 2,966 (1,194)
Unrecognized net (gain) loss (840) 1,986 (456) 1,082
Unrecognized prior service cost 63 1,730 70 1,150
Unrecognized net obligation (asset) at March 1, 1987,
net of amortization (699) (119) (838) (139)
Adjustment to recognize additional minimum liability -- (3,597) -- (1,584)
- --------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 3,381 $ (2,794) $ 1,742 $ (685)
==========================================================================================================================
</TABLE>
30
<PAGE> 33
The significant actuarial assumptions used were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25 7.25 8.0
Rate of increase in future
compensation levels 5.0 5.0 5.0
Expected long-term rate of
return on plan assets 9.0 9.0 9.0
================================================================================
</TABLE>
Assets of the defined benefit plans are invested in a directed trust
that invests in money market funds, common stock, corporate bonds and U.S.
government obligations.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions," an additional minimum
pension liability was recognized resulting in a direct reduction of
stockholders' equity of $1,867,000 at March 1, 1997 and $433,000 at March 2,
1996.
10. LEASES
The company leases most of its retail store facilities under noncancelable
operating leases, many of which expire within ten to fifteen years. The
approximate minimum rental commitments of $3,918,467,000 at March 1, 1997, are
payable as follows: 1998, $332,662,000; 1999, $320,408,000; 2000, $295,054,000;
2001, $266,446,000; 2002, $240,669,000; and $2,463,228,000 thereafter. Included
in other current liabilities and noncurrent liabilities are accrued minimum
rental commitments for store closings totaling $86,531,000 and $63,500,000,
respectively, as of March 1, 1997. 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
$211,359,000 in 1997, $163,965,000 in 1996 and $130,788,000 in 1995. These
amounts include contingent rentals of $13,158,000, $7,728,000 and $9,516,000,
respectively. During February 1997, the company completed a sale and leaseback
transaction for certain owned retail store facilities, receiving approximately
$105,270,000 representing the net book value of these assets. Future minimum
rental commitments associated with noncancelable operating leases for these
facilities have been included above.
In addition, the company has agreed to lease certain store locations
that presently are under construction or in the process of renovation. The terms
of these leases generally will commence upon completion of the building and will
extend from 10 to 15 years with options to renew for varying terms. The minimum
annual rentals are not determinable at the present time and, therefore, are not
included above.
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. The preferred stock is issuable in series with terms
established by the Board of Directors. No preferred stock has been issued.
12. STOCKHOLDER RIGHTS PLAN
The company redeemed its preferred stock purchase rights program in accordance
with stockholder resolution at the 1996 annual meeting of stockholders.
Redemption of preferred stock purchase rights amounted to approximately $839,000
at March 1, 1997.
13. STOCK OPTION AND STOCK AWARD PLANS
The company reserved 7,000,000 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.
31
<PAGE> 34
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 March 1, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares under option 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCK OPTIONS:
Outstanding--beginning
of year 3,058,289 2,484,651 2,437,606
Granted 2,307,550 823,400 604,400
Exercised ($15.88 to
$33.50 per share) (275,901) (89,687) (375)
Converted to and
exercised as SARs -- (153,200) (312,592)
Expired and cancelled (64,363) (6,875) (244,388)
Outstanding--end of year
($15.88 to $42.00
per share) 5,025,575 3,058,289 2,484,651
Exercisable--end of year 1,643,772 1,391,076 190,876
================================================================================
</TABLE>
As of March 1, 1997, March 2, 1996 and March 4, 1995 there were
998,713, 3,241,900 and 3,067,162 shares, respectively, available for future
grants under the Plan.
The company adopted Statement of Financial Accounting Standards (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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
In thousands of dollars except per share amounts 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income--as reported $115,377 $158,947
Net income--pro forma 112,937 158,436
Earnings per share--as reported $ 1.25 $ 1.90
Earnings per share--pro forma 1.22 1.89
================================================================================
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Expected stock price volatility 23.0% 23.5%
Expected dividend yield 3.0 3.0
Risk-free interest rate 5.5 6.5
Expected life of options 5 YEARS 5 years
================================================================================
</TABLE>
The weighted average fair value of options granted was $6.86 per share
in 1997 and $5.67 in 1996.
14. COMMITMENTS AND CONTINGENCIES
The company had letters of credit of $112,592,000 and $33,188,000 at
March 1, 1997 and March 2, 1996, 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.
32
<PAGE> 35
INTERIM FINANCIAL RESULTS (UNAUDITED) Rite Aid Corporation and Subsidiaries
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts YEAR 1997
- -----------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net 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
=============================================================================================================================
EARNINGS PER SHARE*:
- -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ .39 $ .42 $ .45 $ .47 $ 1.74
Extraordinary loss, net of taxes -- -- -- (.38) (.49)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ .39 $ .42 $ .45 $ .09 $ 1.25
=============================================================================================================================
</TABLE>
*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 33,151,000 for the fourth
quarter and 8,288,000 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.
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts YEAR 1996
- --------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,354,841 $1,328,399 $1,331,796 $1,430,981 $5,446,017
Costs and expenses 1,291,918 1,277,912 1,278,343 1,341,642 5,189,815
- --------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss
and income taxes 62,923 50,487 53,453 89,339 256,202
Income taxes 24,540 19,577 20,793 32,345 97,255
- --------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ 38,383 $ 30,910 $ 32,660 $ 56,994 $ 158,947
Extraordinary loss, net of taxes -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 38,383 $ 30,910 $ 32,660 $ 56,994 $ 158,947
==========================================================================================================================
EARNINGS PER SHARE:
- --------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ .46 $ .37 $ .39 $ .68 $ 1.90
Extraordinary loss, net of taxes -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net income $ .46 $ .37 $ .39 $ .68 $ 1.90
==========================================================================================================================
</TABLE>
33
<PAGE> 36
TEN-YEAR FINANCIAL REVIEW Rite Aid Corporation and Subsidiaries
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 1, 1997 MARCH 2, 1996 MARCH 4, 1995 FEB. 26, 1994
(52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 6,970,201 $ 5,446,017 $ 4,533,851 $ 4,058,711
Cost of goods sold, including occupancy costs 5,113,047 4,017,351 3,327,920 2,970,025
Selling, general and administrative expenses 1,433,697 1,104,123 932,167 865,137
Interest expense 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 258,927 256,202 231,464 45,670
Income taxes 98,393 97,255 90,178 19,462
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 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) -- -- --
Cumulative effect of accounting change -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 115,377 $ 158,947 $ 141,286 $ 9,288
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK
Income from continuing operations $ 1.74 $ 1.90 $ 1.67 $ .30
Net income $ 1.25 $ 1.90 $ 1.67 $ .11
Dividends per share $ .755 $ .695 $ .62 $ .60
Book value, based on shares outstanding at year end $ 20.26 $ 13.16 $ 12.02 $ 11.10
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $ 1,599,489 $ 835,049 $ 795,995 $ 763,216
Current ratio 2.36:1 2.33:1 2.38:1 3.11:1
Property, plant and equipment (net) $ 1,896,070 $ 979,549 $ 778,479 $ 638,694
Long-term debt $ 2,415,652 $ 994,321 $ 805,984 $ 613,418
Total assets $ 6,416,981 $ 2,841,995 $ 2,472,607 $ 1,989,070
Stockholders' equity $ 2,488,685 $ 1,103,619 $ 1,011,812 $ 954,714
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Weighted average shares outstanding 92,211,000 83,808,000 84,771,000 87,972,000
Number of retail drugstores 3,623 2,759 2,829 2,690
Number of employees 73,000 35,700 36,700 28,550
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA
RESULTS PREPARED ON A FIFO BASIS:
Income from continuing operations $ 170,509 $ 170,099 $ 150,663 $ 32,864
Per share amount $ 1.85 $ 2.03 $ 1.78 $ .37
Net income $ 125,352 $ 170,099 $ 150,663 $ 15,944
Per share amount $ 1.36 $ 2.03 $ 1.78 $ .18
===================================================================================================================================
</TABLE>
34
<PAGE> 37
TEN-YEAR FINANCIAL REVIEW Rite Aid Corporation and Subsidiaries
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts
- -----------------------------------------------------------------------------------------------------------------------------------
FEB. 27, 1993 FEB. 29, 1992 MARCH 2, 1991 MARCH 3, 1990
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 3,833,591 $ 3,530,560 $ 3,259,766 $ 3,011,250
Cost of goods sold, including occupancy costs 2,804,787 2,564,751 2,350,873 2,165,097
Selling, general and administrative expenses 798,848 741,144 696,401 646,540
Interest expense 29,387 37,463 49,484 51,933
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
Income taxes 76,819 72,261 62,879 48,764
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 123,750 114,941 100,129 76,916
Income (loss) from discontinued operations, net of income taxes 8,646 9,075 7,171 25,142
Extraordinary loss, net of taxes -- -- -- --
Cumulative effect of accounting change -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 132,396 $ 124,016 $ 107,300 $ 102,058
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK
Income from continuing operations $ 1.41 $ 1.32 $ 1.21 $ .93
Net income $ 1.51 $ 1.43 $ 1.29 $ 1.23
Dividends per share $ .5625 $ .5125 $ .4625 $ .42
Book value, based on shares outstanding at year end $ 11.76 $ 10.82 $ 9.32 $ 8.49
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $ 811,645 $ 723,195 $ 707,451 $ 633,326
Current ratio 4.03:1 3.49:1 3.98:1 3.93:1
Property, plant and equipment (net) $ 551,392 $ 502,728 $ 493,947 $ 475,548
Long-term debt $ 489,220 $ 427,503 $ 585,434 $ 542,051
Total assets $ 1,858,506 $ 1,734,479 $ 1,666,958 $ 1,539,311
Stockholders' equity $ 1,035,643 $ 950,575 $ 773,948 $ 704,413
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Weighted average shares outstanding 87,933,000 86,917,000 82,996,000 82,958,000
Number of retail drugstores 2,573 2,452 2,420 2,352
Number of employees 27,750 27,607 27,290 26,935
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA
RESULTS PREPARED ON A FIFO BASIS:
Income from continuing operations $ 134,335 $ 125,228 $ 111,290 $ 86,504
Per share amount $ 1.53 $ 1.44 $ 1.34 $ 1.04
Net income $ 142,981 $ 134,303 $ 118,461 $ 111,646
Per share amount $ 1.63 $ 1.55 $ 1.42 $ 1.35
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts YEARS ENDED
- ---------------------------------------------------------------------------------------------------
MARCH 4, 1989 FEB. 27, 1988
(53 WEEKS) (52 WEEKS)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
SUMMARY OF OPERATIONS
Net sales $ 2,729,325 $ 2,381,022
Cost of goods sold, including occupancy costs 1,960,627 1,721,528
Selling, general and administrative expenses 583,860 481,921
Interest expense 40,840 32,344
Provision for videocassette rental department closings -- --
Restructuring and other charges -- --
- ---------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 143,998 145,229
Income taxes 56,325 59,135
- ---------------------------------------------------------------------------------------------------
Income from continuing operations 87,673 86,094
Income (loss) from discontinued operations, net of income taxes 7,537 54,747
Extraordinary loss, net of taxes -- --
Cumulative effect of accounting change -- 3,712
- ---------------------------------------------------------------------------------------------------
Net income $ 95,210 $ 144,553
- ---------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK
Income from continuing operations $ 1.06 $ 1.04
Net income $ 1.15 $ 1.75
Dividends per share $ .38 $ .34
Book value, based on shares outstanding at year end $ 7.67 $ 6.90
- ---------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION
Working capital $ 297,334 $ 309,130
Current ratio 1.62:1 1.86:1
Property, plant and equipment (net) $ 434,801 $ 383,653
Long-term debt $ 228,260 $ 227,153
Total assets $ 1,417,520 $ 1,224,244
Stockholders' equity $ 636,184 $ 571,014
- ---------------------------------------------------------------------------------------------------
OTHER DATA
Weighted average shares outstanding 82,904,000 82,660,000
Number of retail drugstores 2,184 2,072
Number of employees 27,347 26,703
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTARY DATA
RESULTS PREPARED ON A FIFO BASIS:
Income from continuing operations $ 95,481 $ 92,041
Per share amount $ 1.15 $ 1.11
Net income $ 103,018 $ 150,500
Per share amount $ 1.24 $ 1.82
===================================================================================================
</TABLE>
35
<PAGE> 38
DIRECTORS AND CORPORATE OFFICERS
<TABLE>
DIRECTORS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WILLIAM J. BRATTON MARTIN L. GRASS PHILIP NEIVERT PRESTON ROBERT TISCH
Vice Chairman of First Chairman of the Board and Private Investor Co-chairman and Co-chief
Security Services Corporation Chief Executive Officer Executive Officer
President of First TIMOTHY J. NOONAN Loews Corporation
Security Consulting, Inc. LEONARD I. GREEN President and
Senior Partner, Leonard Chief Operating Officer GERALD TSAI, JR.
FRANKLIN C. BROWN Green and Partners Chairman, President and
Executive Vice President LEONARD N. STERN Chief Executive Officer
and Chief Legal Counsel NANCY A. LIEBERMAN Chairman of the Board and Delta Life Corporation
Partner, Skadden, Arps, Chief Executive Officer
ALEX GRASS Slate, Meagher and Flom The Hartz Group, Inc.
Honorary Chairman
of the Board and Chairman
of the Executive Committee
</TABLE>
<TABLE>
<CAPTION>
CHAIRMAN PRESIDENT EXECUTIVE VICE PRESIDENTS
- ----------------------- ----------------------- ----------------------------------------------
<S> <C> <C> <C>
MARTIN L. GRASS TIMOTHY J. NOONAN FRANK M. BERGONZI BETH J. KAPLAN
Chief Executive Officer Chief Operating Officer Chief Financial Officer Marketing
FRANKLIN C. BROWN KEVIN J. MANN
Chief Legal Counsel Category Management
</TABLE>
<TABLE>
SENIOR VICE PRESIDENTS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ERIC S. ELLIOTT CHARLES R. KIBLER RONALD A. MILLER JAMES M. TALTON
Pharmacy Marketing Drugstore Operations Distribution Human Resources
ELLIOT S. GERSON PHILIP D. MARKOVITZ ROBERT R. SOUDER KENT L. WHITING
Assistant Chief Store Development Labor Relations Information Services
Legal Counsel
JOSEPH S. SPEAKER
Finance and Administration
</TABLE>
<TABLE>
VICE PRESIDENTS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EUGENE P. BROWN STEPHEN J. KINDLER JAMES O. LOTT ERIC S. SORKIN
Information Services Corporate Controller Risk Management Pharmacy Purchasing
GERALD P. CARDINALE W. MICHAEL KNIEVEL RAYMOND B. MCKEEBY RICHARD J. VARMECKY
Information Services Corporate Security Pricing Treasurer
I. LAWRENCE GELMAN JAMES E. KRAHULEC SUZANNE MEAD MARY A. VERBRYKE
Associate Counsel Government and Corporate Communications Category Management,
and Secretary Trade Relations Purchasing
MICHAEL F. MORRIS
Store Development
</TABLE>
36
<PAGE> 39
INVESTOR INFORMATION
ANNUAL MEETING
- --------------------------------------------------------------------------------
The Annual meeting will be held on July 9, 1997, 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 secretary of the company, or through the
SEC EDGAR database on the World Wide Web at: http://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
312 461 3309
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
312 461 3309
COMMON STOCK AND DIVIDENDS
- --------------------------------------------------------------------------------
Rite Aid Corporation's common stock is listed on the New York and Pacific Stock
Exchanges with the stock symbol RAD. On April 22, 1997, there were approximately
25,000 shareholders. Quarterly high and low stock prices, based on New York
Stock Exchange composite transactions, together with dividend information are
shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
FISCAL QUARTER HIGH LOW DIVIDEND
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 First 34 1/2 28 5/8 18.5(cent)
Second 33 5/8 27 1/4 18.5(cent)
Third 40 7/8 31 3/8 18.5(cent)
Fourth 43 1/4 37 5/8 20.0(cent)
- ------------------------------------------------------------------
1996 First 25 1/2 22 1/4 17.0(cent)
Second 29 24 1/4 17.0(cent)
Third 32 5/8 26 5/8 17.0(cent)
Fourth 34 1/4 30 1/4 18.5(cent)
==================================================================
</TABLE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
General information about the company, including corporate background and
current announcements, is available through the company's News-On-Demand fax
service at 800 916 7788, and our World Wide Web site at: http://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
UNCERTAINTIES IN THE FUTURE
- --------------------------------------------------------------------------------
"Safe Harbor" Statements under the U.S. Private Securities Litigation Reform Act
of 1995: Some statements in the 1997 Annual Report are forward-looking and
actual results may differ materially from those stated. In addition to the
factors discussed, among the other factors that may affect actual results are
product demand and supply, the effect of economic conditions, interest-rate
movements, the impact of competitive pricing, commercialization and
technological difficulties and changes in governmental regulations. Investors
are also directed to consider other risks and uncertainties discussed in
documents filed by the company with the Securities and Exchange Commission.
DRUGSTORE LOCATIONS AS OF MARCH 1, 1997
- ---------------------------------------
Alaska 10
Arizona 3
California 681
Colorado 30
Connecticut 48
Delaware 19
District of Columbia 8
Georgia 55
Idaho 19
Indiana 34
Kentucky 139
Maine 93
Maryland 172
Michigan 361
Nevada 13
New Hampshire 42
New Jersey 192
New York 364
Ohio 324
Oregon 77
Pennsylvania 413
Tennessee 40
Utah 27
Vermont 13
Virginia 164
Washington 148
West Virginia 133
Wyoming 1
- ---------------------------------------
TOTAL 3,623
37
<PAGE> 40
[LOGO]
Rite Aid Corporation
General Offices:
30 Hunter Lane
Camp Hill, PA 17011-2404
http://www.RiteAid.com
<PAGE> 1
EXHIBIT 21
Registrant's Subsidiaries
The following table sets forth certain of the subsidiaries of
the Registrant at March 1, 1997, all of which are wholly-owned and are included
in the consolidated financial statements:
Organized
Name Under the Laws of
---- -----------------
APEX Drugstores Inc. Michigan
Eagle Managed Care Corp. Delaware
GDF, Inc. Maryland
Gray Drug Fair, Inc. Ohio
Keystone Centers, Inc. Pennsylvania
Lake Acquisition Corporation Delaware
Lane Drug Company Ohio
Name Rite, Inc. Delaware
Ocean Acquisition Corporation Delaware
Perry Drug Stores, Inc. Michigan
PL Xpress, Inc Oregon
Rack Rite Distributors, Inc. Pennsylvania
RAFS, Inc. Delaware
Rite Aid Drug Palace, Inc. Delaware
Rite Aid Hdqtrs. Corp. Delaware
Rite Aid of Alabama, Inc. Alabama
Rite Aid of Connecticut, Inc. Connecticut
Rite Aid of Delaware, Inc. Delaware
Ride Aid of Florida, Inc. Florida
Rite Aid of Georgia, Inc. Georgia
Rite Aid of Indiana, Inc. Indiana
Rite Aid of Kentucky, Inc. Kentucky
Rite Aid of Maine, Inc. Maine
Rite Aid of Maryland, Inc. Maryland
Rite Aid of Massachusetts, Inc. Massachusetts
Rite Aid of Michigan, Inc. Michigan
Rite Aid of New Hampshire, Inc. New Hampshire
Rite Aid of New Jersey, Inc. New Jersey
Rite Aid of New York, Inc. New York
Rite Aid of North Carolina, Inc. North Carolina
Rite Aid of Ohio, Inc. Ohio
Rite Aid of Pennsylvania, Inc. Pennsylvania
Rite Aid of South Carolina, Inc. South Carolina
Rite Aid of Tennessee, Inc. Tennessee
Rite Aid of Vermont, Inc. Vermont
Rite Aid of Virginia, Inc. Virginia
Rite Aid of Washington, D.C., Inc. District of Columbia
Rite Aid of West Virginia, Inc. West Virginia
Rite Aid Realty Corp. Delaware
Rite Aid Rome Distribution Center, Inc. New York
Rite Fund, Inc. Delaware
Rite Investments, Inc. Delaware
Thrifty Corporation California
Thrifty PayLess, Inc. California
Thrifty Realty Company California
WRAC, Inc. Pennsylvania
At March 1, 1997, the Registrant also had additional wholly-owned subsidiaries,
which considered in the aggregate, would not constitute a significant subsidiary
under Rule 1-02 of Regulation S-X.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Rite Aid Corporation:
We consent to incorporation by reference in the Registration Statement
(No. 333-08071) on Form S-8 and Registration Statement (No. 333-21207) on
Form S-3 of Rite Aid Corporation of our reports dated April 24, 1997, relating
to the consolidated balance sheets of Rite Aid Corporation and subsidiaries as
of March 1, 1997 and March 2, 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended March 1, 1997, and the related schedule, which reports
appear in or are incorporated by reference in the March 1, 1997 Annual Report
on Form 10-K of Rite Aid Corporation.
Our reports on the consolidated financial statements and schedule refer to a
change in the method of accounting for investments in the fiscal year 1995.
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
May 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-END> MAR-01-1997
<CASH> 7,042
<SECURITIES> 0
<RECEIVABLES> 385,171
<ALLOWANCES> 14,583
<INVENTORY> 2,336,659
<CURRENT-ASSETS> 2,771,499
<PP&E> 2,669,856
<DEPRECIATION> 773,786
<TOTAL-ASSETS> 6,416,981
<CURRENT-LIABILITIES> 1,172,010
<BONDS> 2,415,652
0
0
<COMMON> 129,342
<OTHER-SE> 2,359,343
<TOTAL-LIABILITY-AND-EQUITY> 6,416,981
<SALES> 6,970,201
<TOTAL-REVENUES> 6,970,201
<CGS> 5,113,047
<TOTAL-COSTS> 5,113,047
<OTHER-EXPENSES> 1,501,754
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,473
<INCOME-PRETAX> 258,927
<INCOME-TAX> 98,393
<INCOME-CONTINUING> 160,534
<DISCONTINUED> 0
<EXTRAORDINARY> 45,157
<CHANGES> 0
<NET-INCOME> 115,377
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.24
</TABLE>
