<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended February 27, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period From __________ To __________
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
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
Common Stock, $1.00 par value New York Stock Exchange
Pacific Stock Exchange
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. [X] Yes [ ] No
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 10, 1999 based on the closing price at which
such stock was sold on the New York Stock Exchange on such date was
approximately $7,228,526,408.
The registrant's Common Stock outstanding at May 10, 1999 was 258,883,816
shares, par value $1.00 per share.
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<PAGE>
RITE AID CORPORATION
INDEX TO ANNUAL REPORT ON FROM 10-K
<TABLE>
<CAPTION>
CAPTION PAGE
------- ----
<S> <C>
PART I
- ------
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 5
ITEM 3. LEGAL PROCEEDINGS 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
UNNUMBERED ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT 6
PART II
- -------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8
ITEM 6. SELECTED FINANCIAL DATA 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 41
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 41
ITEM 11. EXECUTIVE COMPENSATION 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 41
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 42
</TABLE>
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<PAGE>
PART I
------
ITEM 1. BUSINESS
- ------- --------
(a) General Development of Business
Rite Aid Corporation (Rite Aid or the company), incorporated in 1968, is
one of the largest retail drugstore chains in the United States. As of February
27, 1999, the company operated 3,821 drugstores. Typically the store size
average within a range of approximately 7,200 to 20,000 square feet, and are
located in 30 eastern, southern and western states and the District of Columbia.
In addition, 247 stores located primarily on the west coast are over 25,000
square feet in size. During the fiscal year ended February 27, 1999, the company
added 578 of the larger prototype storerooms, including 354 that were
relocations or expansions of existing stores and closed 378 smaller units.
On January 22, 1999, the company acquired all of the outstanding stock of
PCS Health Systems, Inc. (PCS) from Eli Lilly and Company for a purchase price
of $1.5 billion. PCS is a leader in pharmacy benefits management, as well as
other managed health care services.
On January 7, 1999, the company announced an alliance with General
Nutrition Companies, Inc. (GNC). Under the agreement, the company will open,
own and operate 1,500 GNC stores-within-a-store in Rite Aid stores across the
country. In addition, Rite Aid and GNC will jointly market a new brand of
vitamins and mineral supplements; GNC will manufacture certain of Rite Aid's
private label vitamins and supplements; and Rite Aid and GNC will jointly
operate a co-branded web-site that will feature nutritional information and
market the vitamins and minerals.
As described in Notes 2 and 18 to the Consolidated Financial Statements
(Item 14) and as discussed in Item 7. Management's Discussion and Analysis of
Results of Operation and Financial Condition, in the fourth quarter of fiscal
1999, the company made adjustments to its previously reported results of
operations for the prior quarters in fiscal 1999, each quarter in fiscal 1998
and for fiscal 1997.
(b) Financial Information About Industry Segments
The company's primary business is the operation of retail drugstores. In
addition, the company is engaged in pharmacy benefit management ("PBM"),
marketing prescription plans and selling other managed health care services to
employers, health plans and their members and government-sponsored employee
benefit programs. For further information regarding the business segments in
which the company operates, refer to Note 16 to the Consolidated
Financial Statements.
(c) Narrative Description of Business
Retail drugstore operations is the dominant business segment in which the
company operates, with pharmacy service forming the core of our business. Our
drugstores cater to convenience, offering a full selection of health and
personal care products, convenience food items, seasonal merchandise and a large
private label product line, in addition to pharmacy service. Express mail with
complementary services and one-hour photo departments have been added in select
locations.
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<PAGE>
The company operates retail drugstores in the eastern, southern and western
United States, including the District of Columbia. The company's strategy is to
operate drugstores in large, fast-growing metropolitan areas. Of the 60 largest
metropolitan statistical areas ("MSAs") in the United States, the company
operates in 33 and has either the largest or second largest retail drugstore
prescription sales in 23 of those 33 MSAs. The table below presents the
concentration of stores by state as of February 27, 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Store Store
State Count State Count
- ----- ----- ----- -----
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alabama 141 Nevada 29
Arizona 3 New Hampshire 43
California 645 New Jersey 182
Colorado 41 New York 397
Connecticut 46 Ohio 309
Delaware 16 Oregon 74
District of Columbia 8 Pennsylvania 384
Georgia 58 Tennessee 53
Idaho 24 Texas 5
Indiana 9 Utah 28
Kentucky 133 Vermont 14
Louisiana 104 Virginia 171
Maine 82 Washington 145
Maryland 166 West Virginia 119
Michigan 356 Wyoming 1
Mississippi 35
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The company is also engaged in pharmacy benefit management and other
managed health care services. With the recent acquisition of PCS, located in
Scottsdale, AZ, the company has enhanced its position as a pharmacy service
provider. The company believes that the addition of PCS will strengthen its
position in pharmaceutical services, which the company expects to continue to be
our key businesses due to the aging of the U.S. population, the continued
development of new drug products and changes in the delivery of health care in
the United States. PCS's pharmacy benefit management services focus on the
systematic management of prescription drug usage designed to foster high
quality, cost-effective pharmaceutical care through the application of managed
care principles and information technologies. PCS also provides pharmacy
benefit management services that involve the application of clinical expertise
and management information systems to provide formulary management, chronic
disease management and mail order services.
The company obtains both front end and pharmacy merchandise for both the
retail drugstores and mail order facility from numerous manufacturers and
wholesalers in the ordinary course of business. The company believes that the
necessary merchandise for operations is readily available and that the loss of
any one of the company's suppliers would not have a materially adverse impact on
the results of operations. In addition, the company's operations do not rely on
any single customer, whose loss would have a materially adverse impact on the
results of operations. The company cautions that there can be no guarantee that
in the future, merchandise necessary for operations will be readily available,
or that the company's operations will not be materially impacted by the loss of
any one customer or supplier.
Based on both store count and in terms of sales, Rite Aid is one of the
largest retail drugstore chains in the United States. The retail drugstore
industry is highly competitive with retail drugstore chains not only facing
competition within the industry, but also from supermarket chains offering
pharmacy services, mail order pharmacies, other retail outlets offering pharmacy
services, as well as internet-based outlets. In response to this competition,
Rite Aid competes on the basis of location and convenience, customer service,
selection and price. The company has undertaken a variety of measures designed
to distinguish Rite Aid from its competitors. In addition to modernizing our
stores to provide superior store format and design, catered to convenience, the
company also continues to refine and implement nationwide marketing programs
designed to increase customer loyalty. As a part of this effort, the company has
introduced a variety of consumer-oriented programs such as: a money back
guarantee on cosmetics, a telephone "hot-line" to enable customers to speak to a
pharmacist, one-hour photo departments, selected 24 hour stores, refills of
prescriptions by telephone or on the Internet, the introduction of rapid
automated refill systems
-4-
<PAGE>
and discounts for frequent shoppers. Additionally, as of February 27, 1999, the
company had over 1,000 stores with drive-through pharmacies for customer
convenience.
Additional information is set forth in Item 7 under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." At May 10, 1999, Rite Aid employed approximately 89,900 persons, of
who, approximately 2,900 persons were employed by PCS.
(d) Financial Information About Foreign and Domestic and Export Sales
Not Applicable.
ITEM 2. PROPERTIES
- ------- ----------
Rite Aid's general offices and corporate headquarters are located in a
205,000 square foot building in Camp Hill, Pennsylvania, owned by the
registrant. In addition, the company leases an 88,000 square foot building for
general office space located in Etters, Pennsylvania. Through PCS, the company
also owns a 327,000 square foot building and leases an additional 119,000 square
feet of office space in Scottsdale, Arizona, for the general offices and
headquarters of PCS.
The registrant operates the following distribution centers:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Owned or Approximate
Location Leased Square Footage
- -------- ------ --------------
<S> <C> <C>
Rome, New York Owned 291,000
Nitro, West Virginia Owned 280,000
Perryman, Maryland Leased 875,000
Tuscaloosa, Alabama Owned 285,000
Pontiac, Michigan Leased 370,000
Ogden, Utah Owned 638,000
Woodland, California Owned 500,000
Wilsonville, Oregon Leased 500,000
Las Vegas, Nevada Leased 281,000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The company also owns its 52,200 square foot ice cream manufacturing
facility located in El Monte, California and leases, through its subsidiary PCS
Health Systems, Inc., a 93,500 square foot mail order facility in Fort Worth,
Texas. PCS is in the process of constructing an additional 120,000 square foot
mail order facility in Birmingham, Alabama.
The company leases most of its drugstore facilities under noncancellable
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 company's
leases contain renewal options, some of which involve rent increases. At
February 27, 1999, the company had 3,821 retail drugstores.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
On March 12, 1999, the company announced that its preliminary estimate for
fully diluted earnings per share for the fourth quarter would be approximately
$0.30 to $0.32 as compared to the then existing First Call analysts' consensus
estimates of $0.52 per share. Subsequent to our March 12 announcement, several
purported class action lawsuits were commenced against Rite Aid, Martin Grass,
Chairman, Chief Executive Officer and a director, Timothy Noonan, President,
Chief Operating Officer and a director, Franklin Brown, Vice Chairman and a
director, and Frank Bergonzi, Senior Executive Vice President and Chief
Financial and Accounting Officer in the United States District Court for the
Eastern District of Pennsylvania. The plaintiffs in these suits allege that the
company failed to make prompt public disclosure of matters mentioned in its
March 12 announcement that affected results for the fourth quarter and seek to
recover damages on behalf of all purchasers of the company's common stock
between December 14, 1998 and March 11, 1999. Some of these plaintiffs also
allege that we improperly underpaid suppliers in an effort to artificially
inflate our reported earnings. These plaintiffs seek to recover damages on
behalf of all purchasers of the company's common stock between December 14, 1998
and March 31, 1999. All of the plaintiffs have asked to be awarded an
unspecified amount of damages plus their litigation expenses, including
attorney's fees, expert's fees and other costs and disbursements. On April 18,
1999, the court approved a stipulation among counsel that, among other things,
provided for consolidation of these suits. The company intends to deny the
material allegations in these complaints and to defend these actions
vigorously.
In May 1999, a shareholder filed a complaint in the United States District
court for the Eastern District of Pennsylvania derivatively and on behalf of the
company against the same officers and directors named in the class action
lawsuits and also directors Alex Grass, Philip Neivert, Gerald Tsai, Leonard I.
Green and Nancy A. Lieberman. The complaint alleges essentially the same
wrongful acts as are alleged in the class action lawsuits and charges the
defendants with mismanagement, waste of corporate resources and breach of
fiduciary duty. The complaint also alleges that certain of the transactions
discussed in the Current Report on Form 8-K filed by the company on February 9,
1999 constituted mismanagement, waste of corporate resources and breach of
fiduciary duty. The plaintiffs seek indemnity and contribution on behalf of the
company from the individual defendants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
A Special Meeting of Stockholders of the company was held on February 22,
1999 to approve an amendment to the company's Restated Certificate of
Incorporation to increase the number of authorized shares of common stock, par
value $1.00, which the company has the authority to issue from 300,000,000
shares to 600,000,000 shares. Total votes cast for the increase of the number of
authorized shares were 194,999,124. Total votes against the amendment were
8,426,583, with 537,203 withheld.
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<PAGE>
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 1999 Annual Meeting of
Stockholders to be held on June 30, 1999.
The following is a list of names and ages of all of the executive officers
of the company, indicating all positions and offices with the company 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 (to be held on June 30, 1999) 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 company.
<TABLE>
<CAPTION>
First
Elected
Name Age Offices and Positions Held an Officer
- ---- --- -------------------------- ----------
<S> <C> <C> <C>
Martin L. Grass 45 Chairman of the Board and Chief Executive Officer 1980
Timothy J. Noonan 57 President and Chief Operating Officer 1973
Franklin C. Brown 71 Vice Chairman 1969
Frank M. Bergonzi 53 Senior Executive Vice President and Chief Financial Officer 1977
Beth J. Kaplan 41 Senior Executive Vice President 1996
Elliot S. Gerson 57 Executive Vice President, General Counsel and Secretary 1995
James P. Mastrian 56 Executive Vice President 1998
William A.K. Titelman 52 Executive Vice President 1998
Gerald P. Cardinale 48 Senior Vice President 1998
Stanley J. Kahn 46 Senior Vice President 1999
Charles R. Kibler 52 Senior Vice President 1987
Roger Lekberg 51 Senior Vice President 1999
Philip D. Markovitz 58 Senior Vice President 1974
Robert R. Souder 59 Senior Vice President 1972
Joseph S. Speaker 40 Senior Vice President 1991
Matthew M. Sweeney 40 Senior Vice President 1998
Kent L. Whiting 39 Senior Vice President 1992
Richard J. Varmecky 46 Senior Vice President 1987
Glenn C. Gershenson 40 Treasurer 1999
</TABLE>
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<PAGE>
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 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 in March
1995. Previously, Mr. Noonan was Executive Vice President of Drugstore
Operations for the registrant, a position he held for more than five years.
Mr. Brown was appointed Vice Chairman in July 1997. Previously, Mr. Brown
was Executive Vice President and Chief Legal Counsel since March 1995. Prior to
March 1995 Mr. Brown held the position of Senior Vice President and Chief Legal
Counsel for the registrant, a position he held for more than five years.
Mr. Bergonzi was appointed Senior Executive Vice President and Chief
Financial Officer of the registrant in January 1999. Previously, Mr. Bergonzi
held the position of Executive Vice President and Chief Financial Officer of the
registrant since March 1995. Prior to March 1995, Mr. Bergonzi held the position
of Senior Vice President of Finance for the registrant, a position he held for
more than five years.
Ms. Kaplan was appointed Senior Executive Vice President of Marketing in
January 1999. Previously, Ms. Kaplan held the position of Executive Vice
President of Marketing since joining the registrant in September 1996. Prior to
joining the registrant, 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. Gerson was appointed Executive Vice President and General Counsel and
Secretary in January 1999. Previously, Mr. Gerson was Senior Vice President,
General Counsel and Secretary from July 1997 to January 1999 and Senior Vice
President and Assistant Chief Legal Counsel since joining the registrant in
November 1995. Prior to joining the registrant, Mr. Gerson was a partner in the
law firm of Bolger, Picker, Hankin & Tannenbaum from May 1993 to November 1995.
Mr. Mastrian joined the registrant in July 1998 as Executive Vice
President, Category Management. Previously, Mr. Mastrian was Senior Executive
Vice President, Merchandising and Marketing at OfficeMax from June 1997 to June
1998 and Executive Vice President, Marketing at Revco D.S., Inc. from September
1990 to May 1997.
Mr. Titelman joined the registrant in March 1998 as Executive Vice
President of Managed Care and Public Affairs. Previously, Mr. Titelman was a
partner and member of the executive committee in the law firm of Klett Lieber
Rooney & Schorling for more than five years.
Mr. Cardinale was appointed Senior Vice President, Category Management in
June 1998. Previously, Mr. Cardinale was Vice President, Information Systems
Development from March 1996 to May 1998. Prior to this position, Mr. Cardinale
was Vice President of Merchandising, a position he held for more than five
years.
Mr. Kahn joined the registrant in January 1999 as Senior Vice President,
Vitamin Initiatives. Prior to joining the registrant, Mr. Kahn held the
position of Executive Vice President, Sales at Leiner Health Products from April
1997. Previously, he held the position of Senior Vice President, Sales at
Leiner Health Products from March 1994 to March 1997.
Mr. Kibler was appointed Senior Vice President of Drugstore Operations on
March 1995. Previously, Mr. Kibler served as Vice President of Drugstore
Operations for the registrant for more than five years.
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<PAGE>
Mr. Lekberg rejoined the registrant in January 1999 as Senior Vice
President, Distribution and Logistics. From July 1998 until rejoining the
registrant, Mr. Lekberg was Vice President, Distribution Operations at Toys R
Us. Prior thereto, he held the position of Vice President, Distributions and
Logistics of the registrant from July 1997 until June 1998, Vice President,
Distributions for Golden Books Family Entertainment from October 1994 to June
1997 and Director of Logistics for Johnson and Johnson from January 1984 to
September 1994.
Mr. Speaker was appointed Senior Vice President of Accounting and
Administration in April 1999. Previously, Mr. Speaker served as Senior Vice
President of Finance and Administration since May 1996 and Vice President and
Retail Controller from April 1993 until April 1996.
Mr. Sweeney was appointed Senior Vice President of Information Services in
March 1999. Mr. Sweeney joined the registrant as Vice President of
Information Services Infrastructure in January 1998. Prior to joining the
registrant, he was a Senior Manager at IBM since January 1994.
Mr. Whiting was appointed Senior Vice President, Internet Technology in
March 1999. Previously, Mr. Whiting held the position of Senior Vice President
of Information Services since April 1996. He rejoined the registrant in February
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.
Mr. Varmecky was appointed Senior Vice President, Finance of the registrant
in April 1999. Previously, Mr. Varmecky held the positions of Vice President
and Treasurer since July 1995 and of Assistant Vice President and Corporate
Controller of the registrant, a position he held for more than five years.
Mr. Gershenson was appointed Treasurer of the registrant in April 1999.
Previously, Mr. Gershenson held the position of Assistant Treasurer since
January 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- -----------------------------------------------------------------
MATTERS
-------
Rite Aid Corporation's common stock is listed on the New York and Pacific
Stock Exchanges with the symbol RAD. On May 10, 1999, there were approximately
78,000 shareholders. Quarterly high and low stock prices, based on the 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>
1999 First 36 9/16 29 3/4 $.1075
Second 45 1/8 34 5/8 $.1075
Third 49 1/16 33 9/16 $.1075
Fourth 51 1/8 39 9/16 $.1150
- --------------------------------------------------------------------------------------------------------------------------
1998 First 24 11/16 20 9/16 $.1000
Second 27 3/16 22 1/2 $.1000
Third 32 31/32 25 1/32 $.1000
Fourth 34 3/8 26 5/8 $.1075
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
Phone: (312)360-5349
E-mail: [email protected]
The 1999 Annual Meeting of the stockholders of Rite Aid Corporation will be held
at the Four Points Sheraton Hotel, 980 Hospitality Way, Aberdeen, Maryland
21001, on June 30, 1999 at 10:00 A.M.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following table presents the ten-year financial review of the Company:
<TABLE>
<CAPTION>
In thousands of dollars except share and per share amounts
- ------------------------------------------------------------------------------------------------------------------------------
February 27, 1999 February 28, 1998 March 1, 1997
(52 Weeks) (1) (52 Weeks) (2) (52 Weeks) (3)
As Restated (5) As Restated (5)
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
<S> <C> <C> <C>
Sales $ 12,731,900 $ 11,375,105 $ 6,970,201
Cost of goods sold, including occupancy costs 9,396,432 8,290,888 5,113,047
Selling, general and administrative expenses 2,683,829 2,412,088 1,436,994
Interest expense 194,733 159,752 96,473
Provision for videocassette rental department closings -- -- --
Store closing and other charges, net 257,336 -- 62,562
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 199,570 512,377 261,125
Income taxes 55,884 206,507 99,228
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 143,686 305,870 161,897
Income (loss) from discontinued operations, net of income taxes -- -- --
Extraordinary loss, net of taxes -- -- (45,157)
Net income $ 143,686 $ 305,870 $ 116,740
- ------------------------------------------------------------------------------------------------------------------------------
Per Share of Common Stock*
Basic earnings per share:
Income from continuing operations $ 0.55 $ 1.22 $ 0.87
Net income $ 0.55 $ 1.22 $ 0.63
Diluted earnings per share:
Income from continuing operations $ 0.54 $ 1.18 $ 0.86
Net income $ 0.54 $ 1.18 $ 0.63
Dividends per share $ .4375 $ .4075 $ .3775
Book value, based on shares outstanding at year end $ 11.41 $ 11.26 $ 10.14
- ------------------------------------------------------------------------------------------------------------------------------
Year-End Financial Position
Working capital $ 111,873 $ 1,601,969 $ 1,600,057
Current ratio 1.03:1 1.92:1 2.37:1
Property, plant and equipment (net) $ 2,868,053 $ 2,157,797 $ 1,905,888
Long-term debt $ 3,304,240 $ 2,551,418 $ 2,415,652
Total assets $ 10,421,741 $ 7,612,266 $ 6,416,981
Stockholders' equity $ 2,953,732 $ 2,907,262 $ 2,490,048
- ------------------------------------------------------------------------------------------------------------------------------
Other Data*
Basic weighted average shares 258,499,000 250,638,000 184,422,000
Diluted weighted average shares 263,354,000 271,634,000 198,758,000
Number of retail drugstores 3,821 3,975 3,623
Number of employees 89,900 83,000 73,000
- ------------------------------------------------------------------------------------------------------------------------------
Supplementary Data*
Results Prepared on a FIFO basis:
Income from continuing operations $ 158,234 $ 318,374 $ 171,872
Basic earnings per share $ 0.61 $ 1.27 $ 0.93
Diluted earnings per share $ 0.60 $ 1.23 $ 0.91
Net income $ 158,234 $ 318,374 $ 126,715
Basic earnings per share $ 0.61 $ 1.27 $ 0.69
Diluted earnings per share $ 0.60 $ 1.23 $ 0.68
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to reflect the two-for-one stock split on February 2, 1998.
(1) Includes the results of operations for 5 weeks from PCS, as well as 52
weeks from the former K&B and Harco stores.
(2) Includes the results of operations for 52 weeks from the former Thrifty
stores, as well as 26 weeks from the former K&B and Harco stores.
(3) Includes the results of operations for approximately 11 weeks from the
former Thrifty stores.
(4) Includes the results of operations for 52 weeks from the former Perry Drug
Stores, Inc. compared to 5 weeks in fiscal 1995.
(5) See Note 2 to the Consolidated Financial Statements for a description of
the adjustments resulting from the restatements.
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<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
March 2, 1996 March 4, 1995 Feb. 26, 1994 Feb. 27, 1993 Feb. 29, 1992 March 2, 1991 March 3, 1990
(52 Weeks) (4) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5,446,017 $ 4,533,851 $ 4,058,711 $ 3,833,591 $ 3,530,560 $ 3,259,766 $ 3,011,250
4,017,351 3,327,920 2,970,025 2,804,787 2,564,751 2,350,873 2,165,097
1,104,123 932,167 865,137 798,848 741,144 696,401 646,540
68,341 42,300 28,683 29,387 37,463 49,484 51,933
-- -- -- -- -- -- 22,000
-- -- 149,196 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
256,202 231,464 45,670 200,569 187,202 163,008 125,680
97,255 90,178 19,462 76,819 72,261 62,879 48,764
- -----------------------------------------------------------------------------------------------------------------
158,947 141,286 26,208 123,750 114,941 100,129 76,916
-- -- (16,920) 8,646 9,075 7,171 25,142
-- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
$ 158,947 $ 141,286 $ 9,288 $ 132,396 $ 124,016 $ 107,300 $ 102,058
- -----------------------------------------------------------------------------------------------------------------
$ 0.95 $ 0.83 $ 0.15 $ 0.70 $ 0.66 $ 0.60 $ 0.46
$ 0.95 $ 0.83 $ 0.05 $ 0.75 $ 0.71 $ 0.65 $ 0.62
$ 0.92 $ 0.81 $ 0.15 $ 0.69 $ 0.65 $ 0.60 $ 0.46
$ 0.92 $ 0.81 $ 0.05 $ 0.73 $ 0.70 $ 0.65 $ 0.61
$ .3475 $ .3100 $ .3000 $ .2813 $ .2563 $ .2313 $ .2100
$ 6.58 $ 6.01 $ 5.55 $ 5.88 $ 5.41 $ 4.66 $ 4.25
- ---------------------------------------------------------------------------------------------------------------
$ 835,049 $ 795,995 $ 763,216 $ 811,645 $ 723,195 $ 707,451 $ 633,326
2.33:1 2.38:1 3.11:1 4.03:1 3.49:1 3.98:1 3.93:1
$ 979,549 $ 778,479 $ 638,694 $ 551,392 $ 502,728 $ 493,947 $ 475,548
$ 994,321 $ 805,984 $ 613,418 $ 489,220 $ 427,503 $ 585,434 $ 542,051
$ 2,841,995 $ 2,472,607 $ 1,989,070 $ 1,858,506 $ 1,734,479 $ 1,666,958 $ 1,539,311
$ 1,103,619 $ 1,011,812 $ 954,714 $ 1,035,643 $ 950,575 $ 773,948 $ 704,413
- ---------------------------------------------------------------------------------------------------------------
167,616,000 169,542,000 175,944,000 175,866,000 173,834,000 165,992,000 165,916,000
182,112,000 182,916,000 176,224,000 189,548,000 182,008,000 165,992,000 166,032,000
2,759 2,829 2,690 2,573 2,452 2,420 2,352
35,700 36,700 28,550 27,750 27,607 27,290 26,935
- ---------------------------------------------------------------------------------------------------------------
$ 170,099 $ 150,663 $ 32,864 $ 134,335 $ 125,228 $ 111,290 $ 86,504
$ 1.01 $ 0.89 $ 0.19 $ 0.76 $ 0.72 $ 0.67 $ 0.52
$ 0.98 $ 0.86 $ 0.19 $ 0.74 $ 0.71 $ 0.67 $ 0.52
$ 170,099 $ 150,663 $ 15,944 $ 142,981 $ 134,303 $ 118,461 $ 111,646
$ 1.01 $ 0.89 $ 0.09 $ 0.81 $ 0.77 $ 0.71 $ 0.67
$ 0.98 $ 0.86 $ 0.09 $ 0.79 $ 0.76 $ 0.71 $ 0.67
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- ------- -----------------------------------------------------------------
FINANCIAL CONDITION
-------------------
Results of Operations
Restatement: Management's Discussion and Analysis Results of Operations and
Financial Conditions
The accompanying Management's Discussion and Analysis of Results of Operations
and Financial Condition for the years ended February 28, 1998 and March 1, 1997
set forth herein reflect adjustments recorded to previously reported results of
operations for fiscal 1998 and 1997. See Notes 2 and 18 to the Consolidated
Financial Statements for a discussion of these adjustments.
Sales:
Sales for the fiscal year ended February 27, 1999, totaled $12.7 billion, an
increase of $1.4 billion or 11.9% higher than last year. Included in fiscal 1999
are sales of approximately $90.2 million generated by PCS which was acquired on
January 22, 1999. Additionally, sales of $779.0 million are included for the
acquired Harco, Inc. (Harco) and K&B, Incorporated (K&B) stores representing
revenues from these stores for the entire fiscal year, compared to sales of
$458.2 million in the prior year, representing revenues from these stores from
their August 27, 1997 acquisition date. Total sales in 1998 as compared to 1997
benefited from a full year's inclusion of sales from the acquired Thrifty
Payless Holdings, Inc. (Thrifty) stores, whereas 1997 included only 11 weeks of
sales. Additionally, 26 weeks of sales were included for the Harco and K&B
stores. Same-store sales increases also contributed to the growth in sales.
Sales in 1997 benefited from the 11 weeks of sales from the Thrifty stores, as
well as same-store sales growth.
For 1999, prescription revenues led sales growth with same-store sales increases
of 14.9%. Front-end sales, which include all non-prescription sales such as
seasonal merchandise, convenience items and foods and other non-prescription
sales also increased, with same-store sales increases of 0.6%. Overall same-
store sales grew 7.8%. For fiscal years 1998 and 1997, sales were $11.4 billion
and $7.0 billion, respectively, representing increases of 63.2% and 28.0% over
the year-earlier periods.
Costs and Expenses:
Cost of goods sold including occupancy costs were 73.8% of sales for the current
year compared to 72.9% for fiscal 1998 and 73.4% for fiscal 1997. Gross margins
declined from a year ago as a result of increased liquidation costs relating to
the registrant's strategic exit plan, as well as additional costs to liquidate
inventories as a result of a modified merchandising strategy, designed to reduce
the selection of certain seasonal categories, implemented in the fourth quarter
of 1999. In addition, approximately $25.5 million of the total pre-tax charge
for the closing of 379 stores and other charges was recorded as cost of goods
sold, which principally related to incremental inventory liquidation costs and
included the use of liquidators. Also negatively impacting gross margins was the
trend of rising third party prescription sales coupled with decreasing margins
on third party reimbursed prescription sales. Third party prescription sales
typically have lower gross margins than other prescription sales because they
are paid by a person or entity other than the recipient of the prescribed
pharmaceutical and are generally subject to lower negotiated reimbursement rates
in conjunction with a pharmacy benefit plan. Pharmacy sales were 54.2%, 50.1%
and 54.0% of total drugstore sales and the ratios of third party sales to total
pharmacy sales were 85.4%, 83.4% and 79.9% for fiscal years 1999, 1998 and 1997,
respectively. These effects were partially offset by front-end gross margin
improvements. Also positively impacting gross margins was improvement in front-
end shrinkage expense, which is a component of cost of goods sold. For the
current year, front-end shrinkage was approximately $42.8 million or 0.34% of
sales compared to $53.7 million or 0.47% of sales in 1998 and $24.3 million or
0.35% of sales in 1997. Margins in fiscal 1998 and 1997 compared favorably to
the previous years due to improved front-end margins on certain categories and
Thrifty's greater proportion of non-pharmacy merchandise sales.
The company's weighted average internal inflation indexes were 1.4% for fiscal
1999, 1.3% for fiscal 1998 and 1.6% for fiscal 1997, resulting in LIFO (last in,
first out) inventory charges of $23.8 million, $20.9 million and $16.0 million,
respectively.
Selling, general and administrative expenses, excluding goodwill amortization
expenses and store closing and other charges, expressed as a percentage of
sales, were 20.7%, 20.9% and 20.5% for fiscal 1999, 1998 and 1997, respectively.
In 1998, higher operating costs contributed by the Thrifty stores is the main
reason for the period-to-period increase in the operating expense to sales ratio
in 1998 and expenses associated with acquisition integration activities.
Goodwill amortization expense increased during 1999 as compared to 1998 and 1997
due to the amortization of goodwill recorded in connection with the company's
recent acquisitions, including PCS in fiscal 1999, Harco and K&B
-11-
<PAGE>
in 1998 and Thrifty in 1997. Fiscal 1999 amortization expense was higher
compared to 1998 due to 5 weeks of amortization expense from PCS goodwill, as
well as a full year's amortization of goodwill recorded in connection with the
Harco and K&B acquisitions compared to only 26 weeks in fiscal 1998. Fiscal 1998
was higher as compared to 1997 due to a full year's amortization of goodwill
recorded in connection with Thrifty, compared to only 11 weeks in fiscal 1997,
as well as 26 weeks of goodwill amortization from the Harco and K&B
acquisitions.
As discussed in Note 3 to the Consolidated Financial Statements, the Company
acquired PCS on January 22, 1999. Immediately following the purchase, the
company's balance sheet included "goodwill" amounting to approximately 30% of
total assets and 105% of stockholders' equity. Approximately 52% or $1.6 billion
of this goodwill resulted from the acquisition of PCS. The company has
determined that the useful life of goodwill recorded with the PCS acquisition is
no less than 40 years, and accordingly, that goodwill is being amortized over a
40 year period. There is risk that this determination will prove to have been
incorrect and the company will be amortizing this goodwill over too long a
period. If this occurs, the company's earnings this year, and in the years
following will have been overstated, and, in later years, the company will be
burdened with a continuing charge to earnings without a corresponding benefit to
income. If management determines in a later year that the company is no longer
receiving the benefit of this goodwill, the company may have to write off the
remaining goodwill in that year, resulting in a reduction in earnings for that
fiscal year. The company reviewed the anticipated cash flows and other factors
when considering the cost the company was willing to incur to purchase PCS and
concluded that anticipated future cash flows associated with the intangible
assets acquired would continue indefinitely. Additionally, management has found
no persuasive evidence that any material portion of these intangible assets will
be depleted in less than 40 years, however, no assurance can be given that this
determination will prove to be correct.
Interest expense was $194.7 million in 1999, $159.8 million in 1998 and $96.5
million in 1997. Increases in interest expense are mainly due to higher levels
of indebtedness throughout each year. The level of the company's indebtedness
has increased each of the last three years, primarily to supplement cash flows
from operating activities to fund capital expenditures as well as acquisitions.
Also, in fiscal 1998 and 1997, higher indebtedness resulted from increases in
inventories at new and remodeled stores, which stock more inventory than the
older bantam East Coast stores. Interest expense for 1999 includes borrowings on
outstanding commercial paper issued to complete the acquisition of PCS on
January 22, 1999. Additionally, fiscal 1999 included interest expense on
borrowings related to the Harco and K&B acquisitions for the full year compared
to only 6 months in 1998, as well as additional borrowings related to the
company's store relocation and expansion program. Interest expense for 1998
compared to 1997 reflects the full year impact of debt attributed to the 1997
Thrifty acquisition as well as borrowings associated with the Harco and K&B
acquisitions for approximately 26 weeks and slightly higher borrowing costs.
During the fourth quarter of 1997, the company increased borrowings to refinance
debt assumed with the Thrifty acquisition and fund expenses associated with that
merger. The annual weighted average interest rates on the company's commercial
paper were 5.5%, 5.7% and 5.5% for fiscal years 1999, 1998 and 1997,
respectively.
When the company purchased PCS, it intended to finance substantially all of the
cost of the acquisition with equity and equity-linked securities, to replace the
commercial paper financing used to complete the acquisition. On March 12, 1999,
the company announced that the preliminary estimate for fully diluted earnings
per share for the fourth quarter would be $0.30 to $0.32 per share as compared
to the then existing First Call analysts' consensus estimates of $0.52 per
share. This announcement resulted in a substantial decline in the market price
of the company's common stock, which has created uncertainty concerning the
intended financing of the PCS acquisition with equity and equity-linked
securities. The company plans to issue approximately $700 million of mandatory
convertible preferred stock and $800 million of a 2-year note in the second
quarter of fiscal 2000 to replace the commercial paper used to finance the PCS
acquisition. Borrowings for fiscal 2000 will be higher than initially
forecasted, which, in the near term, will likely result in higher interest
expense.
Store Closing and Other Charges:
During 1999, the company recorded pre-tax charges, of $289,700,000 for the
closing of 379 stores and other charges for its retail drug segment. These
charges principally related to a strategic exit plan that included vacating
certain markets, closing bantam East Coast stores and consolidating certain
other store locations. The components of the pre-tax charges where comprised of
the following: i) $25,500,000 relating to certain incremental costs associated
with the disposal of inventory, including the use of liquidators, which are
included as a component of cost of goods sold; (ii) $144,800,000 for the present
value of noncancellable lease payments and related contractual obligations, net
of estimates for sublease income; (iii) $94,200,000 for impairment losses
associated with land, buildings, fixtures, leasehold improvements, prescription
files, lease acquisition costs and goodwill; and (iv) $25,200,000 for
noncancellable lease obligations and ancillary costs of stores closed at the
beginning of the fiscal year that were were identified in conjunction with the
assessment of store closing obligations for the strategic exit plan during the
current fiscal year.
During the third quarter of 1999, the company reevaluated certain planned store
closings and made the determination to keep certain of those stores open. The
liability associated with the stores designated to remain open was approximately
$7,300,000.
During the fourth quarter of fiscal 1999, the accrued liability for the 1999
exit plan was reduced by $27.5 million as a result of favorable store lease
terminations and closing costs. The company also reduced this accrued liability
by $21.9 million as a result of revisions to the 1999 store exit plan
assumptions based on favorable store lease termination experience. Revenues
generated by the 379 stores were $310,070,000 for the fiscal year ended February
27, 1999 compared to $654,317,000 in fiscal 1998. For fiscal 1999, these stores
had operating income of $335,000 compared to operating income of $5,527,000 last
year.
At February 27, 1998, the company's accrued liabilities relating to previously
closed stores approximately $76.9 million. During the fourth quarter of 1999,
the company recorded additional store closing expenses of $42.8 million to
increase the accrued liability related to closed stores not included in the
1999 exit plan, due to additional store closings and a reassessment of
assumptions used to develop this liability. The remaining accrued liability for
noncancellable lease payments and related contractual obligations was
$67,612,000 as of February 27, 1999.
During fiscal 1997, the company recorded nonrecurring and other charges of
$62,562,000 pretax, for expenses related to: (i) the attempted acquisition of
Revco D.S., (ii) an exit plan to realign certain merchandise distribution
facilities, (iii) the integration of Thrifty drugstores and (iv) other
charges.
In addition, the company accrued $49.8 million relating to closing additional
stores not included in the strategic exit plan and to increase the accrual
related to stores closed prior to fiscal 1999.
-12-
<PAGE>
The remaining accrued liability for noncancellable lease payments and related
contractual obligations relating to the 1999 strategic exit plan, net of
estimated sublease income, was $69.1 million as of February 27, 1999. Revenues
generated by the 379 stores were $310.1 million for the fiscal year ended
February 27, 1999 compared to $654.3 million in fiscal 1998. For fiscal 1999,
these stores had operating income of $.3 million compared to operating income of
$5.5 million last year.
The remaining accrued liability for noncancellable lease payments and related
contractual obligations related to the company's other 527 closed stores, net of
estimated sublease income, was $67.6 million as of Febuary 27, 1999.
During fiscal 1997, the company recorded nonrecurring and other charges of
$62.6 million pretax, for expenses related to: (i) the attempted acquisition of
Revco D.S., (ii) an exit plan to realign certain merchandise distribution
facilities, (iii) the integration of Thrifty drugstores and (iv) other
charges.
The company recorded expenses of approximately $16.1 million associated with
costs for the attempted acquisition of Revco consisting of fees paid for
investment banking, consulting, legal, accounting and financial printing
services as well as the cost of regulatory fees. Included were other costs
incurred related to preparing for the integration of Revco with the company.
The company recorded expenses of $9.9 million associated with its plan to close
and sell three of its distribution facilities as a result of vacating certain
southeastern markets and streamlining its merchandise distribution. The charge
consisted of $6.0 million for impairment of these facilities and liabilities of
$3.9 million for employee termination benefits. The distribution centers
identified in the plan were located in Winnsboro, South Carolina; Shiremanstown,
Pennsylvania and Melbourne, Florida and had carrying values of $9.8 million,
$2.5 million and $5.2 million, respectively.
In October 1996, the company signed a definitive contract to sell all of its 189
drugstores in North and South Carolina to J.C. Penney Company, Inc. (Penney).
Subsequently, Penney contracted to purchase Eckerd Corporation (Eckerd), a chain
of 1,748 drugstores. In order to proceed with the Eckerd purchase, Penney agreed
with the Federal Trade Commission (FTC), not to take possession of 126 of the
company's stores. In February 1997, the company agreed to an amendment to its
contract with Penney whereby Penney paid the company the contracted purchase
price for the stores. The amendment required the company to operate the stores
until Penney could find another buyer. Penney arranged for another drugstore
chain to begin taking possession of the stores on May 23, 1997. Transfer of the
stores was completed by July 1, 1997, at which time the South Carolina
distribution center ceased operations.
In February 1997 after the North and South Carolina stores were sold, the
company recorded a charge of $.5 million to provide termination benefits for the
South Carolina distribution center's 168 employees. Termination benefits were
paid in fiscal year 1998 and amounted to $.4 million. The remaining unused
liability balance for the termination benefits was recorded as a reduction of
selling, general and administrative (S,G&A) expenses on the statement of income
in the fourth quarter of fiscal 1998. Also, in February 1997, an impairment
charge of $3.3 million was recorded to the carrying value of the South Carolina
distribution center and depreciation expense was suspended. The suspended
depreciation expense totaled $.1 million for fiscal 1997 and $.7 million for
fiscal 1998. The facility was sold in the fourth quarter of fiscal 1998 and
resulted in a gain of $.1 million. The gain was recorded as a reduction of S,G&A
on the statement of income.
In the fourth quarter of fiscal year 1997, the company committed to the
construction of a new distribution center near Baltimore, Maryland. The new
distribution center was scheduled to be completed in August 1998 and would
replace the existing distribution facility in Pennsylvania. The Pennsylvania
distribution center was scheduled to close and all of its 734 employees would be
terminated in October 1998 when the Maryland facility would be fully
operational. As a result of this exit plan, a liability of $3.4 million for
termination benefits was recorded in the fourth quarter of 1997. The termination
benefits were determined through negotiations with the union representative. The
benefits were based on years of service and included payment of health insurance
coverage for several months after the termination date. In order to receive the
termination benefits, the employees were required to work until they received a
termination notice from the company. As a result of subsequent negotiations with
union representatives, an additional liability of $4.0 million for termination
benefits was recorded in fiscal 1998. The facility was closed in March 1999, and
the Company expects that the majority of payments related to the liability will
be made in the first quarter of fiscal 2000.
The Florida distribution center closed in August 1995 and costs were
expensed as incurred. In the fourth quarter of fiscal 1997, the company
recorded
-13-
<PAGE>
an impairment charge of $2.8 million for the facility and depreciation expense
was suspended. The amount of suspended depreciation expense was $.4 million for
fiscal year 1997 and $.3 million for fiscal year 1998. In the fourth quarter of
fiscal year 1998, the Florida facility was sold for a gain of $.3 million and
was recorded as a reduction of S,G&A expenses on the statement of income.
During the second quarter of fiscal 1998, the company closed its distribution
center in Ontario, California and terminated all of its 177 employees. The costs
associated with closing the California facility including termination benefit
payments of approximately $.4 million were expensed as they were incurred during
fiscal 1998. The termination benefits were determined through negotiations with
the union representatives and were largely based on years of service and
included some health insurance benefits. The facility was sold in the second
quarter of fiscal 1998 for its adjusted carrying value of approximately $11.4
million.
The costs related to the integration of Thrifty stores consisted of the
following: (i) personnel and travel costs of $6.0 million to train and assist
the Thrifty associates in the operation of Rite Aid's systems and procedures;
(ii) personnel, travel and other costs of $2.3 million associated with the
merchandise file alignment and conversion related to remerchandising the Thrifty
stores to the company's product mix and developing planograms to be able to
reset the Thrifty stores to the company's format; (iii) duplicate equipment
costs of $2.1 million associated with the acquired equipment located at the
Thrifty stores; and (iv) costs of $2.9 million for removal and repairs of the
duplicate equipment located at the Thrifty stores. The above integration costs
were expensed as incurred during fiscal year 1997.
The other charges that related to Thrifty totaled $23.3 million and consisted
mainly of contract settlement costs to vendors of greeting cards, merchandise
security tags, photo finishing and discontinued merchandise lines. Contract
terminations resulted in a cash payment of $2.9 million in fiscal 1997 and a
$1.0 million non-cash charge recorded to the accrual in fiscal 1998. In
addition, an accrual adjustment of $12.5 million was recorded as a reduction of
selling, general and administrative expenses on the statement of income in
fiscal 1998 as a result of certain contract terminations that resulted in
favorable resolution to the company. The remaining liabilities at February 27,
1999 are for contract terminations. The amounts payable related to these
terminations are in dispute, however, the company's counsel believes that there
is no reasonable possibility that the losses resulting from these claims will
exceed the amounts accrued.
-14-
<PAGE>
The following table reconciles the liability balances for the years ended
February 27, 1999, February 28, 1998 and March 1, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
In thousands of
dollars 1997(1) 1998 (1) 1999
- -----------------------------------------------------------------------------------------------------------------------
Non- Non-
recurring Non- Year Non- Cash Additions Year Year
and other Cash Cash End Cash Cash Adjust- to End End
Charges Expenses Charges Accrual Expenses Charges ments (2) Accrual Accrual Accrual
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Attempted Revco
Acquisition $16,057 $16,057 $ - $ - $ - $ - $ - $ - $ -$ -
Distribution Center
Closings:
Impairment 6,055 - 6,055 - - - - - - -
Termination
Benefits 3,875 - - 3,875 422 - 28 4,000 7,425 7,425
Thrifty Payless
Integration:
Training 5,992 5,992 - - - - - - - -
Remerchandising
and Resetting 2,325 2,325 - - - - - - - -
Duplicate 4,983 4,983 - - - - - - - -
equipment
Contract Settlement 23,275 2,868 - 20,407 - 1,000 12,500 - 6,907 6,907
$62,562 $32,225 $6,055 $24,282 $ 422 $1,000 $12,528 $ 4,000 $14,332 $14,332
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Note 2 to the Consolidated Financial Statements
(2) Non-cash adjustments to these liabilities reduced selling, general and
administrative expenses during fiscal 1998
Income Taxes:
The effective income tax rate was 28.0% for fiscal 1999, 40.3% for fiscal 1998
and 38.0% for fiscal 1997. The decrease in the effective tax rate for 1999 was
primarily the result of the reversal of tax liabilities determined to no longer
be required and lower state income taxes, offset by increases in intangible
amortization expenses associated with recent acquisitions that are included in
the determination of net income, but are not deductible for income tax purposes.
The increase in the effective tax rate for 1998 compared to 1997 was largely due
to increases in intangible amortization expenses. The company anticipates that
the effective tax rate for fiscal 2000 will increase substantially as a result
of having a full year of intangible amortization expenses associated with the
PCS acquisition compared to 5 weeks in 1999.
Income Before Extraordinary Loss:
Income before extraordinary loss declined to $143.7 million for fiscal year
1999, compared to $305.9 million in 1998 and $161.9 million in 1997. Adversely
impacting 1999 were store closing and other charges of $257.3 million. In
addition, several other factors which had a negative impact on 1999 results were
as follows: i) higher than anticipated costs and expenses associated with store
openings and relocations; ii) the acquisition of PCS five weeks earlier than
planned which did not allow sufficient time for the company to realize benefits
from synergies; iii) start-up software problems at the company's new
distribution center in Perryman, MD which delayed the closing of the older
Shiremanstown, PA distribution center for 11 weeks; and iv) a revised
merchandising strategy designed to reduce the selection of certain seasonal
categories resulted in increased markdowns during the fourth quarter. In
addition, higher interest costs and intangible amortization expenses and
declining gross margins negatively impacted 1999. For fiscal 1998, income before
extraordinary loss rose to $305.9 million compared to $161.9 million in 1997.
Results for 1998 advanced because of same-store sales increases and improved
gross margins despite proportionally higher operating expenses, interest expense
and effective income tax rate. Adversely impacting 1997 were nonrecurring and
other charges, decreases in pharmacy gross profit margins and increased interest
expense.
Extraordinary Loss:
For the year ended March 1, 1997, early extinguishment of certain Thrifty
indebtedness resulted in an extraordinary loss of $45.1 million, net of taxes.
The extraordinary loss consisted primarily of premiums associated with the
tender
-15-
<PAGE>
offer for 12 1/4% senior subordinated notes and write-off of the related debt
discount, unamortized debt issuance costs and other costs associated with
completing the tender offer.
Net Income:
Net income was $143.7 million, $305.9 million and $116.7 million for fiscal
years 1999, 1998 and 1997, respectively. Store closing and other charges
adversely impacted 1999 results. Nonrecurring charges and extraordinary losses
on early debt extinguishment adversely impacted net income in 1997.
1999 Fourth Quarter Results and Restatement of Prior Quarters:
A number of items significantly impacted the operating results of the fourth
quarter including:
The large number of new stores (79), relocated stores (127) and store closings
(210) resulted in increased operating expenses and reduced gross profit margins.
Besides the costs associated with opening a store and the initial losses from
the operations of new stores, the closing of a store location usually results in
an accrual for the future costs associated with the lease liability. During the
year, the company recorded a charge in the second quarter to exit 379 stores. In
addition to the stores included in that charge the company also closed stores in
connection with the relocation of stores and closing of stores not included in
the exit plan. During the fourth quarter the company charged $49 million to
operations for stores closed in the quarter that were not part of the 1999
strategic exit plan, as well as a reassessment of assumptions used to develop
these costs.
The company increased the level of advertising in the fourth quarter to support
the large store-opening program; the cost of this increased advertising
increased operating costs by $10.6 million during the period. The large number
of store closings and relocations in a short period of time resulted in losses
on liquidating these inventories significantly above the company's expectations
and consequently reduced the gross profit margin in the quarter. Also
contributing to the decline in gross profit margin for the quarter was the
company's decision to reduce the selection in certain seasonal categories
primarily in the eastern and southern stores with an increased level of
markdowns.
The new distribution center in Perryman, Maryland developed start-up software
problems and was delayed in opening, resulting in the need to continue operating
the Shiremanstown, Pennsylvania facility during the quarter. The Shiremanstown
facility closed in March 1999, but the incremental cost of operating both
facilities added at least $16 million to costs during the period.
The company has made certain adjustments in the fourth quarter of fiscal 1999
that resulted in the restatement of its results of operation for the prior
three-quarters of fiscal 1999. These adjustments include changes in estimates,
expensing costs previously capitalized and the reclassification of certain
expenses from acquisition costs to current operations costs.
Fourth quarter adjustments that significantly impact the company's operating
results in fiscal 1999 include the following items: reversal of capitalized
project costs related to store planning, development, construction and other
costs of $19.5 million; additional provision for closed store accruals of $49.8
million; change in estimate for unprocessed advertising and purchase term
discounts of $11.4 million; certain other charges of $15.8 million; income of
($35.0) million from the settlement of two lawsuits; adjustments to the current
year exit plan for favorable store lease terminations and closing costs of
($27.5) million; revision made to the store exit plan assumptions based on
actual store lease termination experience of ($21.9) million; and, the reversal
of tax liabilities no longer required of ($21.0) million.
Liquidity and Capital Resources
Cash provided by operating activities was $94.9 million, $683.3 million and
$254.3 million for fiscal years 1999, 1998 and 1997, respectively. Cash provided
by operating activities during the current year was adversely impacted by
approximately $204.9 million of cash used by PCS operations since its
acquisition date. In addition, operating cash flows were negatively impacted by
increased store opening and relocation expenses, particularly in the fourth
quarter, as well as reduced operating margins resulting from the liquidation of
inventory at the closed stores and the revised merchandising strategy
implemented during the fourth quarter. The company's strategic store closing
program will also have a negative effect on future cash flows for lease
obligations associated with closed store locations. The company has an accrual
of approximately $ 136.7 million as of February 27, 1999 for lease
obligations for closed stores and currently expects to fund $39.9 million of
this obligation in fiscal 2000.
An accounts receivable securitization program provided additional cash of
approximately $32.3 million during fiscal 1999. Total proceeds from the sale of
the company's accounts receivable at February 27, 1999 were $291.5 million
compared to $259.2 million at February 28, 1998. In addition, a reduction in
inventory provided cash of approximately $152.2 million during the current year.
Offsetting cash provided from operating activities during 1999 were decreases in
accounts payable and other current assets and liabilities. During 1998 and 1997,
amounts offsetting operating cash flows were increased inventories for new and
remodeled stores and cash expenditures to settle liabilities associated with the
Thrifty, Harco and K&B acquisitions. Overall, fiscal 1998 cash provided by
operating activities increased over 1997 as a result of improved operating
margins and better working capital utilization. Also, adversely impacting cash
provided from operating activities in 1997 were increases in third party
accounts receivable.
Net working capital was $111.9 million at February 27, 1999, compared to $1.6
billion at February 28, 1998 and March 1, 1997. The current ratios were 1.0:1,
1.9:1 and 2.4:1, respectively. At February 27, 1999, commercial paper
borrowings of $1.5 billion used to finance the PCS acquisition were classified
as current as the agreement supporting these borrowings expires in October 1999.
The company plans to refinance the outstanding commercial paper issued in the
acquisition with $700 million of mandatory convertible preferred stock and $800
million of a 2-year note in the second quarter of fiscal 2000. The Company
cautions that there can be no assurances that the Company will be successful in
completing these transactions.
Typically, cash provided by operations is adequate to supply working capital,
provide cash for dividend payments and 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, including the company's
capital investments in its store relocation and expansion program. The company
issues commercial paper rated A-2 by Standard & Poors and P-2 by Moody's,
supported by unused credit commitments, to supplement cash generated by
operations. Outstanding commercial paper of the company amounted to $1,783.1
million at February 27, 1999, $400.0 million at February 28, 1998 and $701.5
million at March 1, 1997. The increase in commercial paper in 1999 was due to
the acquisition of PCS late in the year, which accounted for approximately
$1,500 million of the total outstanding commercial paper at the end of the year.
Offsetting the increase were net proceeds received from the issuance of $700
million in long-term debt in December 1998 and net proceeds from the issuance of
$200 million dealer remarketable securities in September 1998. Reductions in
commercial paper during 1998 were achieved through the issuance of $650 million,
5.25% convertible subordinated notes in the third quarter of fiscal 1998.
Supplementing liquidity in 1999 and 1998 were proceeds of approximately $526.9
million and $329.8 million, respectively, received from sale and leaseback
transactions completed in each respective year. See Item 7A. Quantitative and
Qualitative Disclosures about Market Risk.
On December 15, 1998, the company completed the sale of securities aggregating
$700 million. The sale of securities included $200 million, 5.50% notes due
December 15, 2000; $200 million, 6.00%
-16-
<PAGE>
notes due December 15, 2005; $150 million, 6.125% notes due December 15, 2008;
and $150 million, 6.875% debentures due December 15, 2028. Interest is payable
semi-annually on December 15 and June 15. Financing costs for each issue are
being amortized over the period until the maturity date. Net proceeds from the
sale of securities were used to repay commercial paper previously issued by the
company.
On September 22, 1998, the company issued $200 million of dealer remarketable
securities ("Drs.") due October 1, 2013. The Drs. bear interest at a rate of
6.00% from September 22, 1998 until October 1, 2003 (the remarketing date).
Interest is payable semi-annually on April 1 and October 1 of each year
commencing April 1, 1999. Finance costs are being amortized over the period
until the remarketing date. If the remarketing dealer elects to remarket the
Drs., the Drs. will be subject to mandatory tender on the remarketing date. If
the remarketing dealer elects not to remarket the Drs., or for any reason does
not purchase all the Drs. on the remarketing Date, the company will be required
to purchase on the remarketing date any Drs. that have not been purchased by the
remarketing dealer. Net proceeds from the sale of securities were used to repay
commercial paper previously issued by the company.
On September 10, 1997, the company completed the sale of $650 million, 5.25%
convertible subordinated notes due September 15, 2002. The notes are convertible
into shares of the company's common stock at any time on or after the 90th day
following the last issuance of notes and prior to the close of business on the
maturity date, unless previously redeemed or repurchased. The conversion price
is $36.1376 per share (equivalent to a conversion rate of 27.672 shares per
$1,000 principal amount of notes), subject to adjustment in certain events.
Interest on the notes is payable semiannually on March 15 and September 15 of
each year. The notes may be redeemed at the option of the company on or after
September 15, 2000, in whole or in part. The proceeds from the sale of the notes
were used to refinance and repay commercial paper previously issued by the
company.
On October 15, 1997, the company completed redemption of outstanding 6.75% zero
coupon convertible subordinated notes. Most holders of the 6.75% zero coupon
convertible subordinated notes exercised conversion rights prior to the October
15, 1997 redemption date, resulting in issuance of approximately 11.8 million
shares of common stock.
On December 20, 1996, the company issued $1 billion in debt securities,
consisting of $350 million, 6.70% notes due December 15, 2001; $350 million,
7.125% notes due January 15, 2007 and $300 million, 7.70% debentures due
February 15, 2027. The net proceeds from these securities were used to repay
commercial paper initially issued by the company in connection with the Thrifty
merger and to refinance other commercial paper borrowings previously issued by
the company.
Management believes that the company will continue to be able to borrow as
needed to finance its operations.
Total debt, including capital lease obligations, rose to 61.8% of total
capitalization at fiscal year end 1999, compared to 47.1% in 1998 and 49.7% in
1997. During 1999, the company added additional debt to complete the acquisition
of PCS, as well as to fund the company's store relocation and expansion program.
Year 2000
The company began in 1996, a comprehensive project to convert the company's
information technology ("IT") and non-information technology ("non-IT") systems
to be Year 2000 (Y2K) date compliant. The Y2K issue creates risk to the company
from unforeseen problems in its own computer systems and from that of the
systems of other companies and governmental agencies on which the company's
operations rely. The company has developed a Y2K remediation plan to assess the
compliance of our IT and non-IT systems, as well as consideration of the
remediation efforts of key customers, vendors, suppliers, financial institutions
and governmental agencies (collectively referred to as "business partners") to
identify the nature and potential impact of issues presented by the Y2K problem
on operating activities. The remediation process includes creating an inventory
of systems subject to the Y2K problem and assessing the scope of the problem as
it relates to those systems; remediating Y2K problems; testing the systems
following remediation; and using the systems for a period of time following
remediation. To date, the company has completed the initial assessment phase of
all our IT systems, giving highest priority to those systems that are considered
critical to the company's operations. Of these systems, approximately 45% have
<PAGE>
infrastructure. The company is currently in various stages of assessment and
research, as well as actively following developed business plans to remediate
certain systems, and 60% of the non-IT systems have been determined compliant or
have been updated so that they are compliant. The remaining 40% have either been
determined non-compliant or have not been assessed. As the assessment and
research phase is completed, non-compliant systems will either be replaced or
repaired as applicable. Currently, the company anticipates that all non-IT
systems will be compliant by June of 1999.
The company is also assessing the potential risks associated with key business
partners and their own Y2K compliance programs through continuing
communications, Y2K questionnaires and on-site visits. Although there can be no
assurance that the company will not be adversely affected, we will continue to
monitor the progress of our key business partners throughout 1999. The company
is also in the process of developing contingency plans in order to minimize the
risks associated with those partners who will not be Y2K compliant, including
assessing the need to locate alternative vendors or service providers.
The impact on business operations from the company's failure to comply with Y2K
requirements, or by the failure of any of our business partners could be
material to the company's future results of operations, liquidity and capital
resources. The most likely worst case scenario includes, but is not limited to,
disruption of store operations, the inability to communicate with key third
party vendors, service providers, customers and financial institutions, as well
as pharmacy system or point-of-sale failure. This could result in the temporary
inability to properly stock our stores, bill and receive payment on third party
receivables, as well as limiting access to capital resources necessary to fund
operating and other investing activities. Although there can be no assurance
that the company will correctly identify and resolve all Y2K related issues,
remediation efforts are progressing in accordance with established timetables.
Additionally, contingency plans in the event of non-compliant systems have been
completed for certain critical areas while other areas are in various stages of
development. These contingency plans include, but are not limited to, off-line
prescription fill, off-line point-of-sale mode or paper processing at the stores
and other manual processing where computer systems have failed or are not
reliable. The various contingency plans in place, or under development, would be
utilized in the event that operations are adversely affected by the Y2K problem,
despite the company's best efforts or due to events outside of our control.
Total estimated Y2K remediation costs of $12.0 million will be funded through
operating cash flows and expensed in the period incurred, of which,
approximately $6.9 million has been incurred to date. Total Y2K remediation
costs are based upon management's best estimate and are subject to change as
additional information becomes available.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued two new
pronouncements for which provisions were effective for this fiscal year,
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The adoption of SFAS 130 and SFAS 131 did
not have a significant effect on the company's financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The company adopted
SFAS 132 during the current fiscal year, which did not have a significant effect
on the company's financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". This statement provides guidance on
which costs to purchase or develop internal use software should be capitalized
and which should not, and is effective for financial statements for fiscal years
beginning after December 15, 1998. Therefore, the company will adopt SOP 98-1 in
the first quarter of fiscal 2000 statements. The company is in the process of
determining the impact, that adoption of SOP 98-1 will have on its financial
statements. The company anticipates that certain costs which are being
capitalized will be expensed after implementation of the SOP.
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5. "Reporting on the Cost of Start-Up Activities". SOP 98-5 requires that
certain one-time activities relating to opening a new facility, introducing a
new product line or service, conducting business in a new territory, conducting
business with a new class of customers, initiating a new process in an existing
facility, or commencing some new operation be expensed as incurred. This SOP
is effective for financial statements for periods beginning after December 15,
1998. Initial application of this SOP should be reported as a change in
accounting principle. The company is currently studying the provisions of SOP
98-5, and has not adopted such provisions in its February 27, 1999 consolidated
financial statements.
In June 1998, the FASB issued SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS133"). SFAS 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 amends the guidance in SFAS No.52, "Foreign Currency
Translation," to permit special accounting for a hedge of a foreign currency
forecasted transaction with a derivative. It also supersedes SFAS No.80,
"Accounting for Futures Contracts," SFAS No.105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," and SFAS No.119, "Disclosure
about Derivative Financial Instruments." In addition, it amends SFAS No.107,
"Disclosures about Fair Value of Financial Instruments," to include in SFAS
No.107 the disclosure provisions about concentrations of credit risk from SFAS
No.105. SFAS 133 is effective for financial statements for periods beginning
after June 30 1999, however, the FASB has an exposure draft that will delay the
SFAS until June 30, 2000. The company is studying the provisions of SFAS 133 and
has not adopted such provisions in its February 27, 1999 consolidated financial
statements.
In 1999, the FASB issued SFAS No. 135 "Revision of FASB Statement No. 75 and
Technical Corrections." Statement No. 135 is effective for fiscal year ending
after February 15, 1999. It provides technical correction to 29 accounting
documents. The Company is currently studying the provisions of SFAS No. 135, and
has not adopted such provisions in its February 27, 1999 consolidated financial
statements.
-18-
<PAGE>
Impact of Inflation and Changing Prices
The company's internal inflation trend remained consistent during the most
recent three-year period. For 1999, inflation on front-end merchandise remained
flat, while pharmacy costs increased consistent with 1998 and 1997. 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.
Review By Securities and Exchange Commission
In connection with the review by the staff of the Securities and Exchange
Commission of a Registration Statement relating to debt securities previously
sold by the company, the company is discussing with the staff certain accounting
matters. As a result of those discussions and the companys' review, the company
has made adjustments to its financial statements for fiscal years 1997 and 1998.
While the company made all adjustments it considered necessary, additional
adjustments may result before the review process is completed. The company does
not believe that any such restatements will have a material effect on its
financial condition.
Risks and Uncertainties in the Future
Certain statements contained in this 1999 Form 10-K, that are not historical
facts, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements address activities or events that the company expects
will or may occur in the future. The company cautions that a number of important
factors could cause actual results to differ materially from those expressed in
any forward-looking statements, whether written or oral, made by or on behalf of
the company. Such factors include, but are not limited to, competitive pricing
pressures, third party prescription reimbursement levels, continued
consolidation of the drugstore industry, consumer preferences, regulatory
changes governing pharmacy practices, general economic conditions, inflation,
merchandise supply constraints, interest rate movements, access to capital,
including the company's plans to refinance the commercial paper issued in the
PCS acquisition, availability of real estate, construction and start-up of
drugstore and distribution center facilities, the effect of adoption of new
accounting pronouncements the effects, if any, that may result from
discussions with the staff of the Securities and Exchange Commisison, and of
technological difficulties including successful completion of Year 2000
conversion activities. Consequently, all of the forward-looking statements made
are qualified by these and other factors, risks and uncertainties. Investors are
also directed to consider other risks and uncertainties discussed in documents
filed by the company with the Securities and Exchange Commission.
See also Item 7A. "Quantitative and Qualitative Disclosures About Market
Risk."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Increases in interest rates would increase the company's interest expense, which
would adversely affect cash flow. As of February 27, 1999, the company has
$1,783.1 million in commercial paper that bears interest at a floating rate and
is supported by committed lines of credit.
The company's future earnings, cash flow and fair values relevant to financial
instruments are dependent upon prevalent market rates. Market risk is the risk
of loss from adverse changes in market prices and interest rates. The company
enters into debt obligations to support general corporate purposes including
capital expenditures, acquisitions and working capital needs. The company's
policy is to manage interest rates through the use of a combination of
commercial paper and fixed-rate long-term obligations.
If the market rates of interest on the company's variable rate debt change by
10% (or approximately 50 basis points) the company's annual interest expense
would change by approximately $8.9 million, assuming the amount of commercial
paper outstanding remains at $1,783.1 million, the balance at February 27, 1999.
Furthermore, carrying value of the commercial paper balance approximates market
value at February 27, 1999.
A change in interest rates generally does not impact future earnings and cash
flows for fixed rate debt instruments, but as fixed rate debt matures and if
additional debt is acquired to fund the repayments under maturing facilities,
future earnings and cash flows may be impacted by changes in interest rates.
This impact would be realized in the periods subsequent to the periods when the
debt matures. The following is a summary of the fixed rate debt maturities (in
thousands):
2000 $ 20,211
2001 222,910
2002 402,604
2003 655,222
2004 201,736
thereafter 1,568,642
---------
$3,071,325
=========
Assuming the repayments of fixed rate debt are made in accordance with the
terms and conditions of notes, a 10 percent change in the market interest rate
for the respective fixed rate debt instruments would change the estimated fair
value of the Company's fixed rate debt by approximately $119 million. The fair
market value of the fixed rate debt instruments at February 27, 1999 was
approximately $3,298 million.
Of the total amount of commercial paper outstanding as of February 27, 1999,
$1,500 million represents commercial paper issued in connection with the PCS
acquisition, which the company intends to refinance on a long-term basis through
a combination of mandatory redeemable preferred stock and long-term debt. In
addition, the company classifies an additional $30 million of the outstanding
commercial paper as current, representing amounts anticipated to be repaid
within one year. The remaining outstanding commercial paper is classified as
long-term, with a maturity date coinciding with the expiration date of the
current credit agreement. Standard & Poor's and Moody's Investors Service are
currently reviewing the company's credit ratings. The deterioration in the
company's operating income in the fiscal year ended February 27, 1999 increases
the likelihood that the company's credit rating will be downgraded. If it is,
the company will experience an increase in its cost to borrow. If that increase
is not offset by improvement in operating results, the increase will have a
continuing adverse effect on the company's future earnings.
-19-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rite Aid Corporation:
We have audited the accompanying consolidated balance sheets of Rite Aid
Corporation and subsidiaries as of February 27, 1999 and February 28, 1998 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended February 27, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rite Aid Corporation
and subsidiaries as of February 27, 1999 and February 28, 1998, and the results
of operations and their cash flows for each of the years in the three-year
period ended February 27, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 2, the accompanying consolidated balance sheet as of
February 28, 1998 and the consolidated statements of income, stockholders'
equity and cash flows for each of the years in the two year period ended
February 28, 1998 have been restated.
KPMG LLP
Harrisburg, Pennsylvania
May 28, 1999
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
the Form 10-K. 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 form 10-K 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 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 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 LLP and the internal audit
department have free access to the audit committee, with and without the
presence of management.
Consolidated Balance Sheets Rite Aid Corporation and Subsidiaries
<TABLE>
<CAPTION>
In thousands of dollars except share and per share data February 27, and February 28,
as restated (Note 2)
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 82,949 $ 90,968
Accounts receivable, net (Note 1) 749,606 165,429
Inventories, net (Note 1) 2,893,143 3,018,606
Prepaid expenses and other current assets 76,653 60,700
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 3,802,351 3,335,703
- ---------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment (Note 8):
Land 496,177 362,564
Buildings 446,048 492,528
Leasehold improvements 1,140,313 826,252
Equipment 1,546,738 1,232,780
Construction in progress 201,300 133,684
- ---------------------------------------------------------------------------------------------------------------------------
3,830,576 3,047,808
Accumulated depreciation and amortization 962,523 890,011
- ---------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment, net 2,868,053 2,157,797
- ---------------------------------------------------------------------------------------------------------------------------
Intangible assets (Note 1):
Goodwill (less accumulated amortization of $97,037 and $54,948) 3,106,582 1,569,585
Lease acquisition costs and other intangible assets (less accumulated amortization of
$180,417 and $147,636) 440,881 410,598
- ---------------------------------------------------------------------------------------------------------------------------
Total intangible assets 3,547,463 1,980,183
- ---------------------------------------------------------------------------------------------------------------------------
Other assets 203,874 138,583
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $10,421,741 $7,612,266
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt and current maturities of long-term debt (Note 7) $ 1,550,211 $ 47,516
Accounts payable 1,455,516 1,183,892
Income taxes (Notes 1 and 6) 246,833 146,036
Sales and other taxes payable 34,464 41,372
Accrued salaries, wages and other current liabilities 403,454 314,918
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,690,478 1,733,734
- ---------------------------------------------------------------------------------------------------------------------------
Convertible subordinated notes (Note 7) 649,991 650,000
Long-term debt less current maturities (Note 7) 2,584,255 1,815,948
Capital lease obligations (Note 7) 69,994 85,470
Deferred income taxes (Note 6) 138,327 252,207
Other noncurrent liabilities 311,405 167,645
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 7,444,450 4,705,004
- ---------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock, $25,000 redemption amount (Note 13) 23,559 --
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 11 and 17)
Stockholders' equity (Notes 12 And 15):
Preferred stock, par value $1 per share, none issued or outstanding -- --
Common stock, par value $1 per share, issued 258,862,411 and 258,214,768 shares 258,862 258,215
Additional paid-in capital 1,360,219 1,345,131
Retained earnings 1,334,651 1,304,703
Accumulated other comprehensive income -- (787)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,953,732 2,907,262
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $10,421,741 $7,612,266
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-20-
<PAGE>
Consolidated Statements of Income Rite Aid Corporation and Subsidiaries
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts Years ended February 27, February 28, March 1,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
(52 Weeks) (52 Weeks) (52 Weeks)
as restated (Note 2) as restated (Note 2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $12,731,900 $11,375,105 $6,970,201
Costs and expenses:
Cost of goods sold, including occupancy costs 9,396,432 8,290,888 5,113,047
Selling, general and administrative expenses 2,639,739 2,375,636 1,428,215
Goodwill amortization 44,090 36,452 8,779
Interest expense 194,733 159,752 96,473
Store closing and other charges, net (Note 4) 257,336 -- 62,562
- ------------------------------------------------------------------------------------------------------------------------------------
12,532,330 10,862,728 6,709,076
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss and income taxes 199,570 512,377 261,125
Income taxes (Note 6) 55,884 206,507 99,228
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 143,686 305,870 161,897
- ------------------------------------------------------------------------------------------------------------------------------------
Extraordinary loss--early extinguishment of debt, net of income taxes
(Notes 6 and 7) -- -- (45,157)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 143,686 $ 305,870 $ 116,740
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (Notes 1 and 14):
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ .55 $ 1.22 $ 0.87
Extraordinary loss, net of taxes -- -- (0.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ .55 $ 1.22 $ 0.63
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share (Notes 1 and 14):
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss $ .54 $ 1.18 $ 0.86
Extraordinary loss, net of taxes -- -- (0.23)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ .54 $ 1.18 $ 0.63
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity Rite Aid Corporation and Subsidiaries
In thousands of dollars except per share amounts Years ended February 27, 1999, February 28, 1998 and March 1, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
------------------------- Paid-in Retained Comprehensive
Issued Treasury Capital Earnings Income Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance March 2, 1996 $ 90,380 $(104,746) $ 62,623 $1,055,795 $ (433) $1,103,619
Two-for-one stock split (Note 12) 90,380 (90,380) -
Net income 116,740 116,740
Other comprehensive income:
Minimum pension liability adjustment (1,434)
-------------
Other comprehensive income (1,434) (1,434)
----------
Comprehensive income 115,306
Stock options exercised 552 4,638 5,190
Cash dividends paid on common stock
($.3775 per share post-split) (70,987) (70,987)
Redemption of stockholders' rights (839) (839)
Acquisition of Thrifty Payless
Holdings, Inc. 77,352 1,260,065 1,337,417
Conversion of debt securities 20 322 342
- ----------------------------------------------------------------------------------------------------------------------------
Balance March 1, 1997, as restated (Note 2) 258,684 (104,746) 1,236,429 1,101,548 (1,867) 2,490,048
Net income 305,870 305,870
Other comprehensive income:
Minimum pension liability adjustment 1,080
-------------
Other comprehensive income 1,080 1,080
----------
Comprehensive income 306,950
Stock options exercised 808 8,889 9,697
Stock grants 28 602 630
Bond conversions 11,759 190,893 202,652
Cancel treasury shares (13,064) 104,746 (91,682) -
Cash dividends paid on common stock
($.4075 per share post-split) (102,715) (102,715)
- ----------------------------------------------------------------------------------------------------------------------------
Balance February 28, 1998, as restated (Note 2) 258,215 - 1,345,131 1,304,703 (787) 2,907,262
Net income 143,686 143,686
Other comprehensive income:
Minimum pension liability adjustment 787
-------------
Other comprehensive income 787 787
----------
Comprehensive income 144,473
Stock options exercised 633 8,603 9,236
Stock option income tax benefit 5,807 5,807
Stock grants 14 669 683
Bond conversion - 9 9
Dividends on redeemable preferred stock (627) (627)
Cash dividends paid on common stock
($.4375 per share post-split) (113,111) (113,111)
- ----------------------------------------------------------------------------------------------------------------------------
Balance February 27, 1999 $258,862 $ - $1,360,219 $1,334,651 $ - $2,953,732
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-22-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Rite Aid Corporation and Subsidiaries
In thousands of dollars Years ended February 27, 1999, February 28, 1998 and March 1, 1997
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
as restated as restated
(Note 2) (Note 2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary loss and income taxes $ 199,570 $ 512,377 $ 261,125
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY OPERATIONS
BEFORE EXTRAORDINARY LOSS AND INCOME TAXES:
Depreciation and amortization 302,598 274,194 168,064
Store closing and other charges (Note 4) 233,010 - 42,725
Other adjustments (69,987) 1,176 27,975
Changes in operating assets and liabilities, net of effects
from acquisitions (Note 3)
(Increase) decrease in accounts receivable (194,713) 218,207 (41,777)
(Increase) decrease in inventories 152,196 (624,560) (29,404)
(Increase) decrease in prepaid expenses and other current
assets (14,582) (1,994) 15,047
Increase (decrease) in accounts payable (379,510) 503,904 (35,950)
(Decrease) in accrued expenses and other current
liabilities (82,958) (138,621) (124,793)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by continuing operations before extraordinary
loss and income taxes 145,624 744,683 283,012
Income taxes paid (50,772) (62,356) (28,743)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 94,852 682,327 254,269
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (776,327) (470,563) (371,226)
Purchases of businesses, net of cash acquired (Note 3) (1,390,620) (330,425) (35,087)
Intangible assets acquired (95,508) (70,487) (26,316)
Investments and advances in joint venture - - (30,714)
Proceeds from dispositions - 77,531 106,937
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (2,262,455) (793,944) (356,406)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt (Note 7) 896,017 641,293 1,068,401
Proceeds from redeemable preferred stock 23,559 - -
Net proceeds (payments) of commercial paper borrowings 1,383,125 (301,500) 144,735
Principal payments on long-term debt (38,615) (51,232) (1,040,452)
Cash dividends paid (113,738) (102,715) (70,987)
Redemption of stockholders' rights - - (839)
Proceeds from the sale of stock 9,236 9,697 5,190
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,159,584 195,543 106,048
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (8,019) 83,926 3,911
Cash at beginning of year 90,968 7,042 3,131
- ----------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 82,949 $ 90,968 $ 7,042
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash paid for interest (net of
amounts capitalized of $9,212, $3,834 and $1,897) $ 180,527 $ 129,503 $ 75,434
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-23-
<PAGE>
1. Summary of Significant Accounting Policies
Description of Business
Rite Aid Corporation operates retail drugstores in the eastern, southern and
western states and the District of Columbia. In addition, through its recently
acquired subsidiary, PCS Health Systems, Inc., the company is engaged in
pharmacy benefits management and other managed health care services and mail
order pharmacy.
Fiscal Year
The company's fiscal year ends on the Saturday closest to February 29 or March
1. The fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997
contained 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
all of its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the fiscal 1998 and 1997
consolidated financial statements to conform to the classifications of the
fiscal 1999 consolidated financial statements.
Cash
Cash consists of cash on hand and highly liquid investments which are readily
converted to known amounts of cash and which have maturities of three months or
less when purchased.
Accounts Receivable
During November 1997, the company and certain of its subsidiaries entered into
an agreement to sell, on an ongoing basis, a pool of receivables to a wholly-
owned bankruptcy-remote special purpose funding subsidiary (the "funding
subsidiary") of the company. The funding subsidiary is a distinct legal entity
that engages in no trade or business in order to make remote the possibility
that the entity would enter bankruptcy or other receivership and the entity is
consolidated for financial reporting purposes. The company and certain
subsidiaries transfer all their accounts receivable (principally representing
amounts owed by third party prescription payers) to the funding subsidiary for a
beneficial interest in the funding subsidiary. The funding subsidiary has sold
and, subject to certain conditions, may from time to time sell an undivided
fractional ownership interest in the pool of receivables to a multi-seller
receivables securitization company, for which there are no repurchase agreements
as of February 27, 1999. The accounts receivable transferred to the funding
subsidiary and sold as an undivided fractional ownership interest to the
securitization company have been eliminated on the company's consolidated
balance sheet. The remaining receivables, representing retained interests of the
company and certain of its subsidiaries in the funding subsidiary, continue to
be carried on the company's consolidated balance sheet at their estimated fair
value, which was $68,220,000 and $70,313,000 as of February 27, 1999 and
February 28, 1998, respectively.
Under the terms of the agreement, new receivables are sold as collections reduce
previously sold accounts receivable. The company services, administers and
collects the receivables on behalf of the purchaser. Total proceeds outstanding
from the securitization of receivables as of February 27, 1999 were
approximately $291,500,000, representing an increase of approximately
$32,300,000 from the February 28, 1998 balance of $259,200,000. The additional
proceeds received during fiscal 1999 were used to reduce outstanding commercial
paper borrowings and are reflected as operating cash flows in the accompanying
consolidated statements of cash flows. Since all of the securitized receivables
were for prescription sales and most prescription sales result in third party
receivables, the company considers the receivables and their securitization
costs an integral component of the cost of the prescription. Accordingly,
expenses of $15,532,000 and $2,773,000 associated with the securitization
program were recognized as a component of cost of goods sold for the years ended
February 27, 1999 and February 28, 1998, respectively.
The company maintains an allowance for doubtful accounts receivable based upon
the expected collectibility of all trade receivables, including receivables
sold. The company recorded an allowance for uncollectible accounts of
$18,005,000 at February 27, 1999 and $14,096,000 at February 28, 1998. The
company's accounts receivable from retail drugstores are due primarily 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
-24-
<PAGE>
reviewed continually and adjusted for accounts deemed uncollectible by
management. Additionally, accounts receivable for the company's subsidiary PCS
are due primarily from claims reimbursement receivables, claims processing fees
receivables and manufacturer program receivables.
Inventories
Inventories are stated at the lower of cost or market. The company uses the
last-in, first-out (LIFO) method of accounting for substantially all of its
inventories. At February 27, 1999, February 28, 1998 and March 1, 1997,
respectively, inventories were $220,340,000, $196,511,000 and $166,702,000 lower
than the amounts that would have been reported using the first-in, first-out
(FIFO) method.
Impairment of Long-Lived Assets
The company adopted the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
during the fiscal year ended March 2, 1996. SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
company reviews long-lived assets and certain identifiable intangibles to be
held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the company recognizes
an impairment loss. Impairment losses are measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Long-lived
assets and certain identifiable intangibles to be disposed, whether by sale or
abandonment, are reported at the lower of carrying amount or fair value less
cost to sell.
For purposes of recognizing and measuring impairment of long-lived assets, the
company categorizes assets of operating stores as "Assets to Be Held and
Used" and assets of stores that have been closed as "Assets to Be Disposed Of".
Operating assets or "Assets to Be Held and Used" are grouped at the market
level. Assets being tested for recoverability that were acquired in a business
combination accounted for using the purchase method, include a pro-rata
allocation of goodwill and other intangibles that arose in that transaction as
part of the asset grouping in determining recoverability. Assets of closed
stores, or "Assets to Be Disposed Of", are grouped at the store level for
purposes of recognizing and evaluating impairment.
Intangible Assets
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 life. The company reviews intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment losses are
recognized whenever asset values exceed future undiscounted cash flows. In
addition, whenever a large population or separable group of assets of an
acquired company are to be disposed of, all or a portion of the unamortized cost
of the goodwill and other intangibles recognized in the acquisition are included
in the cost of the assets to be sold or otherwise disposed. Debt financing costs
are deferred and amortized, using the interest method, over the term of the
related debt.
Internal-Use Software
The company's capitalization policy for internal-use software is to capitalize
the direct incremental development costs, and direct external application
development costs. For fiscal 1999, 1998 and 1997, the company capitalized
approximately $32,104,000, $25,200,000 and $30,540,000, respectively.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". This statement provides guidance on
which costs to purchase or develop internal use software should be capitalized
and which should not, and is effective for financial statements for fiscal years
beginning after December 15, 1998. Therefore, the company will adopt SOP 98-1 in
the first quarter of fiscal 2000. The Company is in the process of determining
the impact that adoption of SOP 98-1 will have on its financial statements,
however, the Company anticipates that certain costs which have been capitalized
previously will be expensed after implementation of the SOP.
-25-
<PAGE>
at fair value. The company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Compensation cost for stock appreciation rights and performance
equity units is recorded annually based on the quoted market price of the
company's stock at the end of the period.
Preopening Expenses
Noncapital expenses incurred prior to the opening of a new store
or associated with a remodeled store, or related to the opening of a
distribution facility, are charged against earnings as administrative and
general expenses when incurred.
Advertising
Advertising costs are expensed as incurred.
Insurance
The company is self-insured with respect to certain general liability and
workers' compensation claims that occurred prior to December 31, 1996. With
respect to claims occurring subsequent to January 1, 1997 for the company's East
coast operations, substantially all general liability and workers' compensation
claims are insured through a fixed cost premium-based policy. The company
maintained self insurance through December 31, 1998 for the company's West coast
operations, however, effective January 1, 1999, substantially all general
liability and workers' compensation claims are now covered through a fixed cost
premium-based policy. The company is self-insured for certain covered employee
medical claims.
Excess insurance coverage is maintained for the company's self-insured workers'
compensation and general liability claims exceeding $250,000. As of January 1,
1999, all claims for workers' compensation and general liability are insured.
The company utilizes actuarial studies as the basis for estimating claims
incurred but not reported, relating to the company's self-insurance. As of
February 27, 1999, for all claims that are self-insured, the company 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 using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
Earnings per Share
The company adopted the provisions of SFAS No. 128 "Earnings per Share" in the
year ended February 28, 1998. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. All share and per
share data have also been restated to reflect a two-for-one stock split
effected on February 2, 1998.
Comprehensive Income
In fiscal 1999, the company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130), which requires companies
to report and display comprehensive income and its components in financial
statements. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Excluding net earnings, the company's source of other
comprehensive income is from a minimum pension liability adjustment. All prior
period financial statements have been reclassified to be consistent with
1999.
Segment Information
At December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which requires companies to present financial and
descriptive segment information (see Note 16.)
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.
-26-
<PAGE>
2. FINANCIAL STATEMENT RESTATEMENTS FOR FISCAL YEARS 1998 AND 1997
In connection with the review by the staff of the Securities and Exchange
Commission of a registration statement relating to debt securities previously
sold by the company, the company is discussing with the staff certain accounting
matters. As a result of those discussions and the company's review, the company
has made adjustments to its financial statements for fiscal years 1997 and 1998.
While the company made all adjustments it considered necessary, additional
adjustments may result before the review process is completed. The company does
not believe that any such adjustments will have a material effect on its
financial condition.
The adjustment for 1998 decreased previously reported net income by
$10,565,000, consisting of the following adjustments: an increase to selling,
general and administrative expenses and a decrease to goodwill of $11,448,000 to
record the gain on the sale of the Ontario, California distribution center as an
acquisition adjustment; an increase in selling, general and administrative
expenses of $2,216,000 to record costs related to closing a distribution center,
an increase to selling, general and administrative expenses and accrued
liabilities of $4,000,000 to record an additional provision for severance costs
related to a distribution center closing; and a reduction of income tax expense
of $7,099,000 related to these adjustments.
The adjustment for 1997 relates to a reduction of selling, general and
administrative expenses and accrued liabilities by $2,198,000 to eliminate the
accrual of certain costs incurred in fiscal 1998 related to the closing of a
distribution center. This amount was partially offset by income tax expense of
$835,000. These adjustments resulted in an increase to previously reported net
income of $1,363,000.
3. ACQUISITIONS
On January 22, 1999, the company completed its acquisition of PCS Health
Systems, Inc. (PCS), a pharmacy benefits management subsidiary of Eli Lilly and
Company for $1,500,000,000 which was financed with commercial paper. The results
of operations for PCS have been included in these consolidated financial
statements since the date of acquisition.The PCS acquisition is being accounted
for using the purchase method of accounting for business combinations. The
company has recorded the assets and liabilities of PCS at the date of
acquisition at their estimated fair values. The excess of the cost of PCS over
the estimated fair value of the recorded assets and liabilities has been
recorded as goodwill. Based upon the company's preliminary purchase price
allocation, goodwill of approximately $1,636,488,000 was recorded in the
company's consolidated balance sheet. Although these amounts are subject to
change based upon any appraisals and/or evaluations performed subsequently, the
final purchase price allocation is not expected to materially differ from those
recorded in the February 27, 1999 consolidated balance sheet. As a result of
appraisals and/or evaluations to be performed, a portion of the purchase price
may be allocated to other intangible assets which may have a shorter useful life
than goodwill. The company has determined that the estimated useful life of the
goodwill recorded with the PCS acquisition is primarily indeterminate and likely
exceeds 40 years. This estimate is based upon a review of the anticipated future
cash flows and other factors when the company considered the cost it was willing
to incur for the purchase of PCS. Additionally, management has found no
persuasive evidence that any material portion of these intangible assets will be
depleted in less than 40 years. Accordingly, the company will amortize goodwill
over the maximum allowable period of 40 years.
There is a risk that the determination that the PCS goodwill will benefit the
company for no less than 40 years will prove to have been incorrect and that the
company will be amortizing this goodwill over too long a period. If the company
has done this, earnings reports for the periods immediately following the
acquisition will be overstated, and, in later years, the company will be
burdened with a continuing charge against earnings without a corresponding
benefit to income. If the company determines in a later year that it is no
longer receiving the benefit of this goodwill, the company may have to write off
the remaining goodwill in that year, resulting in a reduction in earnings for
that fiscal year. The company can give no assurance that its determination will
prove to be correct.
On August 27, 1997, the company completed the acquisitions of Harco, Inc.
(Harco) and K&B, Incorporated (K&B). The combined cost of these companies
was approximately $340,000,000 and was financed through commercial paper
borrowings. These acquisitions were also accounted for using the purchase method
of accounting, and accordingly, the company recorded the assets and liabilities
of Harco and K&B at the date of acquisition at their estimated fair values. The
excess of the cost over the fair value of the recorded assets and liabilities
has been recorded as goodwill, which approximated $270,920,000. The company has
determined that the estimated useful life of the goodwill recorded with the
Harco and K&B acquisitions is primarily indeterminate and likely exceeds 40
years. Accordingly the company will amortize goodwill over the maximum allowable
period of 40 years. The consolidated financial statements for the current year
include a full year's results for the acquired Harco and K&B stores, including
goodwill amortization expenses, whereas fiscal year 1998 included only the
results of operations for 26 weeks, representing the results from the date of
acquisition.
The unaudited pro forma results of operations for the year ended
February 28, 1998 include the Harco, K&B and PCS acquisitions as if they had
taken place as of the beginning of fiscal year 1998. The unaudited pro forma
results of operations for the year ended February 27, 1999 include the PCS
acquisition as if it had taken place as of the beginning of fiscal year 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
In thousands of dollars except per share amounts Pro Forma (Unaudited)
- ------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 27, 1999 February 28, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $13,514,153 $ 12,397,205
Asset impairment charge - 2,345,244
All other costs and expenses 13,401,336 12,180,159
- ------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss $ 112,817 (2,128,198)
Extraordinary loss - -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 112,817 (2,128,198)
- ------------------------------------------------------------------------------------------------------------
Earnings per share:
- -------------------
Basic earnings per share:
Income (loss) before extraordinary loss $ 0.44 ($8.49)
Net income (loss) $ 0.44 ($8.49)
Diluted earnings per share:
Income (loss) before extraordinary loss $ 0.43 ($8.49)
Net income (loss) $ 0.43 ($8.49)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the pro forma operating results for the fiscal year ended February
28, 1998 were asset impairment charges recorded in the historical financial
statements of PCS, totaling $2,345,244,000. The charge related to the write-
down of goodwill to its estimated fair value when PCS was a wholly-owned
subsidiary of Eli Lilly and Company. Excluding these charges, pro forma net
income (unaudited) would have been $217,046,000 and basic and diluted earnings
per share would have been $0.87 and $0.85 respectively.
On December 12, 1996, Thrifty PayLess Holdings, Inc. (Thrifty) was merged with
and into the company. Pursuant to the merger agreement, as amended, each share
of Thrifty common stock was converted to Rite Aid common stock at the exchange
ratio of 0.325 shares of Rite Aid common stock for each share of Thrifty common
stock. The company exchanged approximately 77,352,000 shares with an aggregate
fair market value of
-27-
<PAGE>
approximately $1,337,417,000. The value of goodwill assigned to Thrifty amounted
to approximately $1,115,003,000. The company provided liabilities of $26,200,000
for severance (involuntary employee termination benefits in accordance with EITF
95-3) and $49,000,000 for equipment lease terminations (exit costs in accordance
with EITF 95-3) in the total cost of Thrifty. Severance costs are for
termination of 573 Thrifty associates. Executive management was terminated in
accordance with management's plan to convert and integrate Thrifty back-office
functions to those of the company. Conversion and integration of Thrifty back-
office functions were substantially completed by August 1997. Severance payments
were $11,800,000 during the year ended March 1, 1997 and $14,400,000 during the
year ended February 28, 1998. The remaining liability was $14,400,000 at March
1, 1997 and no liability remained as of February 28, 1998. The cost of Thrifty
stock options was $46,300,000 and was paid in accordance with terms of the
purchase agreement at the date of acquisition. There was no remaining liability
for stock option payments as of March 1, 1997. The registrant provided a
liability for costs to abandon equipment with remaining lease obligations at the
acquisition date. The registrant will satisfy the contractual obligations in
accordance with existing terms and conditions, unless a mutually acceptable
arrangement can be made to effect an early termination. Equipment lease payments
amounted to $2,600,000 during the year ended March 1, 1997 and $23,700,000
(including $14,800,000 for early terminations) during the year ended February
28, 1998. The remaining liability was $46,400,000 at March 1, 1997 and
$22,700,000 at February 28, 1998. During the year ended February 27, 1999, the
company made additional payments of $9,800,000 and an adjustment of $4,400,000
was recorded as a reduction in the cost of Thrifty as a result of favorable
termination of certain equipment lease obligations during the year. The
remaining liability at February 27, 1999 was $8,500,000. The registrant expects
to incur costs of $3,800,000 during fiscal 2000, $2,700,000 during 2001 and
$2,000,000 thereafter.
During 1997, the company also purchased the assets of Taylor Drug Stores, Inc.,
and Concord Drugs, Inc. The total consideration paid for these acquisitions
amounted to approximately $35,087,000. The value of goodwill assigned to these
acquisitions was approximately $2,673,000.
Results of operations for acquisitions are included with those of Rite Aid since
each respective acquisition date. The purchase method of accounting for
acquisitions was utilized for all transactions consummated in fiscal 1999, 1998
and 1997. Accordingly, the acquired assets and liabilities were recorded at
their estimated fair values at the date of acquisition.
4. STORE CLOSING AND OTHER CHARGES
During 1999, the company recorded pre-tax charges, of $289,700,000 for the
closing of 379 stores and other charges for its retail drug segment. These
charges principally related to a strategic exit plan that included vacating
certain markets, closing bantam East Coast stores and consolidating certain
other store locations. The components of the pre-tax charges were comprised of
the following: i) $25,500,000 relating to certain incremental costs associated
with the disposal of inventory, including the use of liquidators, which are
included as a component of cost of goods sold; (ii) $144,800,000 for the present
value of noncancellable lease payments and related contractual obligations, net
of estimates for sublease income; (iii) $94,200,000 for impairment losses
associated with land, buildings, fixtures, leasehold improvements, prescription
files, lease acquisition costs and goodwill; and (iv) $25,200,000 for
noncancellable lease obligations and ancillary costs of stores closed at the
beginning of the fiscal year that were were identified in conjunction with the
assessment of store closing obligations for the strategic exit plan during the
current fiscal year.
During the third quarter of 1999, the company reevaluated certain planned store
closings and made the determination to keep certain of those stores open. The
liability associated with the stores designated to remain open was approximately
$7,300,000, which was reversed in the third quarter.
During the fourth quarter of fiscal 1999, the accrued liability for the 1999
exit plan was reduced by $27.5 million as a result of favorable store lease
terminations and closing costs. The company also reduced this accrued liability
by $21.9 million as a result of revisions to the 1999 store exit plan
assumptions based on favorable store lease termination experience. Revenues
generated by the 379 stores were $310,070,000 for the fiscal year ended February
27, 1999 compared to $654,317,000 in fiscal 1998. For fiscal 1999, these stores
had operating income of $335,000 compared to operating income of $5,527,000 last
year.
At February 27, 1998, the company's accrued liabilities relating to previously
closed stores approximated $76.9 million. During the fourth quarter of 1999,
the company recorded additional store closing expenses of $49.8 million to
increase the accrued liability related to closed stores not included in the
1999 exit plan, due to additional store closings and a reassessment of
assumptions used to develop this liability. The remaining accrued liability for
noncancellable lease payments and related contractual obligations was
$67,612,000 as of February 27, 1999.
During fiscal 1997, the company recorded nonrecurring and other charges of
$62,562,000 pretax, for expenses related to: (i) the attempted acquisition of
Revco D.S., (ii) an exit plan to realign certain merchandise distribution
facilities, (iii) the integration of Thrifty drugstores and (iv) other charges.
-28-
<PAGE>
In fiscal 1997 the company recorded expenses of approximately $16,057,000
associated with costs for the attempted acquisition of Revco consisting of fees
paid for investment banking, consulting, legal, accounting and financial
printing services as well as the cost of regulatory fees. Included were other
costs incurred related to preparing for the integration of Revco with the
company.
Also in Fiscal 1997, the company recorded expenses of $9,930,000 associated with
its plan to close and sell three of its distribution facilities as a result of
vacating certain southeastern markets and streamlining its merchandise
distribution. The charge consisted of $6,055,000 for impairment of these
facilities and liabilities of $3,875,000 for employee termination benefits. The
distribution centers identified in the plan were located in Winnsboro, South
Carolina; Shiremanstown, Pennsylvania and Melbourne, Florida and had carrying
values of $9,757,000, $2,512,000 and $5,228,000, respectively.
In October 1996, the company signed a definitive contract to sell all of its 189
drugstores in North and South Carolina to J.C. Penney Company, Inc. (Penney).
Subsequently, Penney contracted to purchase Eckerd Corporation (Eckerd), a chain
of 1,748 drugstores. In order to proceed with the Eckerd purchase, Penney
agreed with the Federal Trade Commission (FTC), not to take possession of 126 of
the company's stores. In February 1997, the company agreed to an amendment to
its contract with Penney whereby Penney paid the company for the sale of the
stores and to operate the stores until Penney could find another buyer. Penney
arranged for another drugstore chain to begin taking possession of the stores on
May 23, 1997. Transfer of the stores was completed by July 1, 1997, at which
time the South Carolina distribution center ceased operations.
In February 1997 after the North and South Carolina stores were sold, the
company recorded a charge of $450,000 to provide termination benefits for the
South Carolina distribution center's 168 employees. Termination benefits were
paid in fiscal year 1998 and amounted to $422,000. The remaining unused
liability balance for the termination benefits was $28,000, and was recorded as
a reduction of selling, general and administrative (S,G&A) expenses on the
statement of income in the fourth quarter of fiscal 1998. Also, in February
1997, an impairment charge of $3,325,000 was recorded to the carrying value of
the South Carolina distribution center and depreciation expense was suspended.
The suspended depreciation expense totaled $133,000 for fiscal 1997 and $674,000
for fiscal 1998. The facility was sold in the fourth quarter of fiscal 1998 and
resulted in a gain of $141,000. The gain was recorded as a reduction of S,G&A on
the statement of income.
In the fourth quarter of fiscal year 1997, the company committed to the
construction of a new distribution center near Baltimore, Maryland. The new
distribution center was scheduled to be completed in August 1998 and would
replace the existing distribution facility in Pennsylvania. The Pennsylvania
distribution center was scheduled to close and all of its 734 employees would be
terminated in October 1998 when the Maryland facility would be fully
operational. As a result of this exit plan, a liability of $3,425,000 for
termination benefits was recorded in the fourth quarter of 1997. The
termination benefits were based on years of service and included payment of
health insurance coverage for several months after the termination date. In
order to receive the termination benefits, the employees were required to work
until they received a termination notice from the company. As a result of
subsequent negotiations with union representatives, an additional liability of
$4,000,000 for termination benefits was recorded to the reserve in the fourth
quarter of fiscal 1998.
The Florida distribution center closed in August 1995 and costs were expensed as
incurred. In the fourth quarter of fiscal year 1997, the company recorded an
impairment charge of $2,730,000 for the facility and depreciation expense was
suspended. The amount of suspended depreciation expense was $351,000 for fiscal
year 1997 and $253,000 for fiscal year 1998. In the fourth quarter of fiscal
year 1998, the Florida facility was sold for a gain of $343,000 which was
recorded to
-29-
<PAGE>
S,G&A expenses on the statement of income.
During the second quarter of fiscal 1998, the company closed its distribution
center in Ontario, California and terminated all of its 177 employees. The
costs associated with closing the California facility including termination
benefit payments of approximately $400,000 were expensed as they were incurred
during fiscal 1998. The termination benefits were determined through
negotiations with the union representatives and were largely based on years of
service and included some health insurance benefits. The facility was sold in
the second quarter of fiscal 1998 for its carrying value of approximately
$11,448,000.
The costs related to the integration of Thrifty stores consisted of the
following: (i) personnel and travel costs of $5,992,000 to train and assist the
Thrifty associates in the operation of Rite Aid's systems and procedures; (ii)
personnel, travel and other costs of $2,325,000 associated with the merchandise
file alignment and conversion related to remerchandising the Thrifty stores to
the company's product mix and developing planograms to be able to reset the
Thrifty stores to the company's format; (iii) duplicate equipment costs of
$2,120,000 associated with the acquired equipment located at the Thrifty stores;
and (iv) costs of $2,863,000 for removal and repairs of the duplicate equipment
located at the Thrifty stores. The above integration costs were expensed as
incurred during fiscal year 1997.
The other charges that related to Thrifty totaled $23,275,000 and consisted
mainly of contract settlement costs to vendors of greeting cards, merchandise
security tags, photo finishing and discontinued merchandise lines. Contract
terminations resulted in a cash payment of $2,868,000 in fiscal 1997 and a
$1,000,000 non-cash charge recorded to the accrual in fiscal 1998. In addition,
an accrual adjustment of $12,500,000 was recorded as a reduction of S,G&A on the
statement of income in fiscal 1998 as a result of certain contract terminations
that resulted in favorable resolution to the company. The remaining liabilities
at February 28, 1998 are for contract terminations. The amounts payable related
to these terminations are in dispute, however, the company's counsel believes
that there is no reasonable possibility that the losses resulting from these
claims will exceed the amounts accrued.
5. DISPOSITIONS
In fiscal 1998, the company sold its distribution center in Ontario, California
it had acquired through the Thrifty acquisition as discussed in Note 3.
Accordingly, the fair market value was adjusted to the net proceeds received of
$11,448,000 and resulted in no gain recognition.
As discussed in Note 3, in fiscal 1997, 126 stores in North Carolina and South
Carolina were sold and subsequently transferred to a party designated by J.C.
Penney, completing the store disposition plan. Also in 1997, 63 stores in North
Carolina and South Carolina were sold to a unit of Penney. These transactions
resulted in a pretax gain of $6,700,000.
In February 1997, the Company completed its sale of Bi-Mart Membership Discount
Stores. Disposition of Bi-Mart was planned at the time of the Thrifty PayLess
Holdings, Inc. merger. Accordingly, the fair market value of acquired Bi-Mart
assets was adjusted to the proceeds received upon disposition and resulted in no
gain recognition.
The Company received total proceeds from dispositions of approximately
$77,531,000 and $106,937,000 for the years ended February 28, 1998 and March 1,
1997, respectively.
-30-
<PAGE>
6. INCOME TAXES
Total income tax expense for fiscal years ended February 27, 1999, February 28,
1998 and March 1, 1997 is allocated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before extraordinary loss $ 55,884 $206,507 $ 99,228
Extraordinary loss - - (27,678)
Total income tax expense $ 55,884 $206,507 $ 71,550
- --------------------------------------------------------------------------------------------------------
</TABLE>
Income tax benefits of $27,678,000 associated with early debt extinguishment
losses are included in income taxes currently payable as of March 1, 1997. The
components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $130,243 $145,436 $ 5,316
State 11,990 23,904 7,081
- ---------------------------------------------------------------------------------------------------------
142,233 169,340 12,397
- ---------------------------------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal (71,792) 29,041 47,053
State (14,557) 8,126 12,100
- ---------------------------------------------------------------------------------------------------------
(86,349) 37,167 59,153
- ---------------------------------------------------------------------------------------------------------
Total income tax expense $ 55,884 $206,507 $71,550
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Presented below are the deferred tax liabilities and deferred tax assets at
February 27, 1999 and February 28, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation and amortization $ 269,398 $178,168
Inventory valuation 238,912 177,725
Purchased tax benefits - 5,951
Prepaid and other expenses 23,771 32,013
- ------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 532,081 393,857
- ------------------------------------------------------------------------------------------------
Deferred tax assets:
Accrued expenses (234,563) (18,928)
Net operating loss carryforwards (94,563) (76,654)
- ------------------------------------------------------------------------------------------------
Total gross deferred tax assets (329,126) (95,582)
Valuation allowance 10,532 10,161
- -------------------------------------------------------------------------------------------------
Net deferred tax assets (318,594) (85,421)
- -------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ 213,487 $308,436
- ------------------------------------------------------------------------------------------------
</TABLE>
Net deferred tax assets of $8,581,000 associated with the PCS acquisition are
included in the above table for 1999. Based on the company's historical and
current pre-tax earnings, management believes it is more likely than not that
the company will realize the net deferred tax assets. The valuation allowance as
of February 27, 1999 and February 28, 1998 principally applies to net operating
loss (NOLs) carryforwards for state income tax purposes. The company has federal
NOLs of $208,400,000 that expire as follows: $26,500,000 in 2008, $86,400,000 in
2009, $66,900,000 in 2010 and $28,600,000 in 2020. State NOLs of $123,600,000,
net of the valuation allowance, expire annually through 2015. For the five
succeeding fiscal years, the following State NOLs expire: $260,000 in 2000,
$2,079,000 in 2001, $0 in 2002, $9,297,000 in 2003, $5,116,000 in 2004, and
$106,848,000 thereafter. Certain NOLs are subject to separate return limitation
rules, however, the company believes that this will not impact their
realizability. The company believes that the valuation allowance is sufficient
for the amount of NOLs that will ultimately expire for which there will be no
tax benefit realized.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the company will realize the benefits of these deductible
differences, net of the existing valuation allowances at February 27, 1999.
The current portions of net deferred taxes for 1999 and 1998 amounted to
$75,160,000 and $56,229,000, respectively, and are included with income taxes on
the balance sheet. State income taxes, nondeductible expenses and tax credits
account for most of the differences between the actual provision for income
taxes and taxes computed by applying the
-31-
<PAGE>
statutory rate for the year ended February 27, 1999. Following is a
reconciliation of the statutory to effective tax rate for the three years ended
February 27, 1999, February 28, 1998 and March 1, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Percentage 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0 35.0 35.0
State income taxes, net of federal tax benefit 1.7 4.1 6.3
Nondeductible expenses 8.7 2.1 1.9
Adjustments to prior year tax liabilities - (.8) (2.9)
Tax credits (3.6) (1.7) (1.0)
Reversal of liabilities no longer required (10.1) - -
Other, net (3.7) 1.6 (1.3)
- --------------------------------------------------------------------------------------
28.0 40.3 38.0
- --------------------------------------------------------------------------------------
</TABLE>
7. INDEBTEDNESS AND CREDIT AGREEMENTS
Following is a summary of indebtedness at February 27, 1999 and February 28,
1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, 5.0% and 5.7% weighted average rates at year-end 1999 and 1998 $ 1,783,125 $ 400,000
5.25% convertible subordinated notes due 2002 649,991 650,000
6.70% notes due 2001 350,000 350,000
7.125% notes due 2007 350,000 350,000
7.70% debentures due 2027 300,000 300,000
5.50% notes due 2000 200,000 -
6.00% dealer remarketable securities due 2003 200,000 -
6.00% notes due 2005 200,000 -
7.625% notes due 2005 200,000 200,000
6.875% debentures due 2013 200,000 200,000
6.125% notes due 2008 150,000 -
6.875% debentures due 2028 150,000 -
5.875% to 10.475% industrial development bonds due through 2016 8,672 19,730
Obligations under capital leases 87,010 95,698
Other 25,653 33,506
- ----------------------------------------------------------------------------------------------------------------------
4,854,451 2,598,934
Short-term debt and current maturities of long-term debt (1,550,211) (47,516)
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt less current maturities $ 3,304,240 $2,551,418
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The company has a $1,000,000,000 revolving credit facility to support its
commercial paper program that expires in July 2001. Additionally, in January
1999, the company entered into a $1,300,000,000 revolving credit facility to
support commercial paper borrowings used to complete the acquisition of PCS,
which expires in October 1999. Interest rates are based upon various money
market rate options selected by the company at the time of borrowing. The credit
facilities have per annum fees, irrespective of usage. The $1,000,000,000 credit
facility pays per annum fees of 12 basis points and the $1,300,000,000 credit
facility pays per annum fees of 10 basis points. The revolving credit facilities
contain certain covenants that the company must adhere to, including a debt to
net worth ratio and fixed charge coverage (all as defined). Other covenants
include restrictions on sales with leases back and a limitation on minority
investments. At February 27, 1999 and February 28, 1998 there were no amounts
outstanding under these agreements. The company maintains at all times unused
long-term revolving credit agreement commitments at least equal to the principal
amount of its outstanding commercial paper that the company intends to carry on
a long-term basis.
On December 15, 1998, the company completed the sale of securities aggregating
$700,000,000. The sale of securities included $200,000,000, 5.50% notes due
December 15, 2000; $200,000,000, 6.00% notes due December 15, 2005;
$150,000,000, 6.125% notes due December 15, 2008; and $150,000,000, 6.875%
debentures due December 15, 2028. Interest is payable semi-annually on December
15 and June 15. Financing costs for each issue are being amortized over the
period until the maturity date. Net proceeds from the sale of securities were
used to repay commercial paper previously issued by the company.
On September 22, 1998, the company issued $200 million of dealer remarketable
securities (Drs.) due October 1, 2013. The Drs. bear interest at a rate of
6.00% from September 22, 1998 until October 1, 2003 (the remarketing date).
Interest is payable semi-annually on April 1 and October 1 of each year
commencing April 1, 1999. Finance costs are being amortized over the period
until the remarketing date. If the remarketing dealer elects to remarket the
Drs., the Drs. will be subject to mandatory tender on the remarketing date. If
the remarketing dealer elects not to remarket the
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<PAGE>
Drs., or for any reason does not purchase all the Drs. on the remarketing date,
the company will be required to purchase on the remarketing date any Drs. that
have not been purchased by the remarketing dealer. Net proceeds from the sale of
securities were used to repay commercial paper previously issued by the
company.
On September 10, 1997, the company completed the sale of $650,000,000, 5.25%
convertible subordinated notes due September 15, 2002. The notes have a fixed
interest rate of 5.25% and are convertible into shares of the company's common
stock at any time on or after the 90th day following the last issuance of notes
and prior to the close of business on the maturity date, unless previously
redeemed or repurchased. The conversion price is $36.1376 per share (equivalent
to a conversion rate of 27.672 shares per $1,000 principal amount of notes),
subject to adjustment in certain events. Interest on the notes is payable
semiannually on March 15 and September 15 of each year, commencing on March 15,
1998. The notes may be redeemed at the option of the company on or after
September 15, 2000, in whole or in part. The proceeds from the sale of the notes
were used to refinance and repay commercial paper previously issued by the
company.
On October 15, 1997, the company completed redemption of outstanding 6 3/4% zero
coupon convertible subordinated notes. Most holders of the 6 3/4% zero coupon
convertible subordinated notes exercised conversion rights prior to the October
15, 1997 redemption date, resulting in issuance of approximately 11,800,000
shares of common stock.
On December 20, 1996, the company issued fixed rate 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 merger and to refinance other commercial
paper borrowings previously issued by the company.
Early extinguishment of certain Thrifty indebtedness, during the year ended
March 1, 1997, resulted in an extraordinary loss of $45,157,000, net of taxes.
Repayment of Thrifty 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.
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 lease. The lease obligation
accrues interest at the rate of 5.6% in the first year, 6.8% for years two
through six and 12.5% for years seven through nine. As part of the consideration
of the transaction, the company received a $20,000,000, 12.5% note receivable
from the lessor which matures in six years. The company may exercise a purchase
option for $40,600,000 at the end of the sixth year.
The aggregate annual principal payments of long-term debt for the five
succeeding fiscal years are as follows: 2000, $1,550,211,000; 2001,
$222,910,000; 2002, $655,729,000, 2003, $655,222,000 and 2004, $201,736,000.
These amounts include principal payments associated with capital lease
obligations. The company has complied with restrictions and limitations
included in the provisions of various loan and credit agreements. At February
27, 1999, retained earnings were not restricted as to payment of dividends by
these provisions.
8. 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 of property, plant and equipment, which includes
depreciation of assets recorded under capital leases, were $209,348,000 for
1999, $184,252,000 for 1998 and $120,751,000 for 1997. Additionally, assets and
the related accumulated depreciation recorded under capital leases are included
under the caption Property, Plant and Equipment in the consolidated balance
sheet. Interest cost for the development of certain long-term assets are
capitalized and amortized over the related assets' estimated useful lives. The
company capitalized interest costs of $9,212,000 in 1999, $3,834,000 in 1998 and
$1,897,000 in 1997.
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5, "Reporting on the Cost of Start-up Activities". SOP 98-5 requires that
certain one-time activities relating to opening a new facility introducing a new
product line or service, conducting business in a new territory, conducting
business with a new class of customers, initiating a new process in an existing
facility, or commencing some new operation be expensed as incurred. This SOP is
effective for financial statements for periods beginning after December 15,
1998. Initial application for this SOP should be reported as a change in
accounting principle. The company is currently studying the provisions of SOP
98-5, and has not adopted such provisions in its February 27, 1999 consolidated
financial statements.
-33-
<PAGE>
9. FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments at
February 27, 1999 and February 28, 1998 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Carrying Fair Value Carrying Fair Value
Amount Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper indebtedness $1,783,125 $1,783,125 $ 400,000 $ 400,000
Long-term indebtedness 3,071,326 3,298,436 2,103,236 2,263,751
Note receivable 20,000 20,000 20,000 20,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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 of the financial instruments. If quoted market prices were not
available, the company estimated the fair value based on the quoted market price
of a financial instrument with similar characteristics or based on the present
value of estimated future cash flows using a discount rate on similar long-term
indebtedness issued by the company.
Note receivable:
The carrying value of the note receivable approximates market.
10. 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 and other defined contribution plans.
Contributions for the profit sharing plan are a percent of each covered
employee's salary, as determined by the Board of Directors based on the
company's profitability. Total expenses recognized for the profit sharing plan
were $6,091,000 in 1999, $2,363,000 in 1998 and $5,124,000 in 1997. Employer
contributions for other defined contribution plans are generally based upon a
percentage of employee contributions. The purpose of these plans is to provide
additional financial security during retirement and to provide employees with an
incentive to make regular savings. The expenses recognized for these plans were
approximately $7,847,000 in 1999, $8,293,000 in 1998 and $4,707,000 in 1997.
Total expenses for other defined contribution plans for 1999 include costs
related to PCS from the date of acquisition, which were not significant.
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.
Net periodic pension cost for the defined benefit plans includes the following
components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
In thousands of dollars Defined Benefit Pension Plan Retiree Health Benefits Plan
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 5,363 $ 5,015 $ 2,088 $ 57 $ - $ -
Interest Cost 4,091 3,559 2,112 22 - -
Expected return on plan assets (5,117) (4,219) (2,610) - -
Amortization of unrecognized net transition (asset) (160) (160) (160) - -
Amortization of unrecognized prior service cost 473 390 245 - -
Amortization of unrecognized net (gain) loss (202) - 75 - -
- --------------------------------------------------------------------------------------------------------------------
Pension expense $ 4,448 $ 4,585 $ 1,750 $ 79 $ - $ -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
The table below sets forth a reconciliation from the beginning of the year for
both the benefit obligation and plan assets of the company's defined benefit and
retiree health benefits plans, as well as the funded status and amounts
recognized in the company's balance sheet as of February 27, 1999 and February
28, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
In thousands of dollars Defined Benefit Retiree Health
Pension Plans Benefits Plans
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $58,048 $47,541 $ - $ -
Service cost 5,363 5,015 57 -
Interest cost 4,091 3,559 22 -
Distributions (6,097) (2,764) (5) -
Purchase of PCS 23,537 - 3,359 -
Change due to change in assumptions 1,486 2,017 - -
Change due to plan amendment 665 1,157 - -
Actuarial (gain) loss (185) 1,523 - -
- ------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $86,908 $58,048 $ 3,433 $ -
- -----------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $58,212 $49,604 $ - $ -
Employer contributions 7,315 1,964 5 -
Actual return on plan assets 13,727 9,709 - -
Purchase of PCS 21,507 - - -
Distributions (including assumed expenses) (6,744) (3,065) (5) -
- -----------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $94,017 $58,212 $ - $ -
- -----------------------------------------------------------------------------------------------------------------
Funded status $ 7,109 $ 164 $(3,433) $ -
Unrecognized net loss (gain) (7,369) (908) - -
Unrecognized prior service cost 2,752 2,560 - -
Unrecognized net transition (asset) or obligation (498) (658) - -
- -----------------------------------------------------------------------------------------------------------------
Prepaid or (accrued) pension cost recognized $ 1,994 $ 1,158 $(3,433) $ -
- -----------------------------------------------------------------------------------------------------------------
Amounts recognized in consolidated balance sheets consisted of:
Prepaid pension cost $ 4,551 $ 3,825 $ - $ -
Accrued pension liability (3,596) (5,959) (3,433) -
Pension intangible asset 1,039 2,505 - -
Accumulated other comprehensive income - 787 - -
- -----------------------------------------------------------------------------------------------------------------
Net amount recognized $ 1,994 $ 1,158 $(3,433) $ -
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
For the year ended February 27, 1999, the aggregate benefit obligation for plans
with benefit obligations in excess of plan assets was $59,248,000 and the
aggregate value of plan assets was $56,699,000. This compares to an aggregate
benefit obligation of $29,003,000 and aggregate plan assets of $24,072,000 at
February 28, 1998.
The significant actuarial assumptions used for all defined benefit pension plans
excluding those assumed with the acquisition of PCS were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Percentage 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.75 7.00 7.25
Rate of increase in future compensation levels 4.50 4.75 5.00
Expected long-term rate of return on plan assets 9.00 9.00 9.00
- -------------------------------------------------------------------------------------------------
</TABLE>
The defined benefit pension plans assumed with the PCS acquisition used a
discount rate of 6.75 percent, an expected long-term rate of return on plan
assets of 9.00 percent and an assumed rate of increase in future compensation
levels of 5.90 percent.
Assets of the defined benefit plans are invested in a directed trust that
invests in money market funds, corporate bonds, U.S. government obligations and
common stock, including common stock of the company. Included in plan assets of
the company's defined benefit retirement plans for the year ended February 27,
1999 was approximately $32,000 of common stock in the company.
-35-
<PAGE>
Through its acquisition of PCS, the company also assumed a retiree health
benefits plan that provides for certain health benefits at retirement for
covered employees. Health care cost trend rates were assumed to increase at an
annual rate of 6.5 percent in 1999 for participants under the age of 65, and
decrease one-half percent per year to 5.0 percent in 2002 and thereafter. For
participants over the age of 65, the rate was assumed to increase 5.0 percent in
1999 and thereafter.
The assumed health care cost trend rates have a significant effect on the
retiree health benefits amounts reported. If these trend rates were to be
increased by one percentage point each future year, the accumulated
postretirement benefit obligation would increase by 15.0 percent and the
aggregate service and interest cost components of the expense recognized in 1999
would increase by 17.7 percent. A one percentage point decrease in these rates
would reduce the accumulated postretirement benefit obligation by 13.0 percent
and the aggregate service and interest cost components of the expense recognized
in 1999 would decrease by 15.2 percent.
11. LEASES
The company leases most of its retail stores under noncancellable operating
leases, many of which expire within 10 to 15 years, as well as certain of its
distribution facilities and other equipment. The approximate minimum rental
commitments of $6,427,175,000 at February 27, 1999, are payable as follows:
2000, $512,759,000; 2001, $484,895,000; 2002, $455,570,000; 2003, $430,673,000;
2004, $403,522,000 and $4,139,756,000 thereafter. These amounts are net of
sublease income on certain store leases, which is not significant. In addition
to minimum rental payments, certain store 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
$438,353,000 in 1999, $359,457,000 in 1998 and $211,359,000 in 1997. These
amounts include contingent rentals of $28,920,000, $23,628,000, and $13,158,000,
respectively.
The company develops certain facilities through sale and leaseback arrangements.
Proceeds from sale and leaseback programs were approximately $526,854,000 in
1999, $329,764,000 in 1998 and $105,270,000 in 1997. Deferred gains associated
with these transactions were approximately $42,242,000 in 1999, $22,641,000 in
1998 and $6,153,000 in 1997 and are amortized to rent expense over the lease
term. The company estimates that its capital expenditures for fiscal year 2000
will be approximately $450,000,000, mostly consisting of costs to complete the
facility development projects including costs under noncancelable development
contracts. The majority of the development costs will be incurred in 2000.
Future minimum rental commitments associated with noncancellable operating
leases for these facilities are included above. In addition, the company has
agreed to lease certain facilities that presently are under construction or are
in the process of renovation. The terms of these leases generally will commence
upon completion of the building and will extend from seven to 22 years with
options to renew for varying terms at market rents.
12. CAPITAL STOCK
At a Special Meeting of Stockholders held on February 22, 1999, an amendment to
the company's Restated Certificate of Incorporation was approved to increase the
authorized number of shares of common stock, $1.00 par value, from 300,000,000
to 600,000,000. Accordingly, the authorized capital stock of the company
consists of 600,000,000 shares of common stock and 20,000,000 shares of
preferred stock, both having a par value of $1.00 per share. Preferred stock is
issuable in series subject to terms established by the Board of Directors. As of
February 27, 1999, no preferred stock had been issued.
On February 2, 1998, the Company effected a two-for-one stock split of the
Company's common stock to stockholders of record at the close of business on
January 20, 1998. The stock split increased the number of shares outstanding by
135,644,000 shares.
13. REDEEMABLE PREFERRED STOCK
In February 1999, Rite Aid Lease Management Company, a wholly-owned subsidiary
of the company, sold 150,000 shares of Cumulative Preferred Stock, Class A, par
value $100 per share. The Class A Preferred Stock is mandatorily redeemable on
April 1, 2019 at the redemption price of $100 per share plus accumulated and
unpaid dividends. The Class A Preferred Stock pays dividends quarterly on
January 1, April 1, July 1 and October 1 of each year at a rate of 7.0 percent
of the par value of $100 per share when, as and if declared by the Board of
Directors of Rite Aid Lease Management Company in its sole discretion. The
amount of dividends payable in respect of the Class A Preferred Stock may be
adjusted under certain events. In the Consolidated Balance Sheet of the company,
the outstanding shares of the Class A Preferred Stock were recorded at their
estimated fair value of $13,559,000. Because the fair value of the Class A
Preferred Stock was less than the mandatory redemption amount at issuance,
periodic accretions to stockholders' equity using the interest method will be
made so that the carrying amount equals the
-36-
<PAGE>
redemption amount on the mandatory redemption date. Rite Aid Lease Management
Company is authorized to issue 213,000 shares, of which 150,000 shares were
issued and outstanding.
In March 1998, RX Choice, Inc., a wholly-owned subsidiary of the company, issued
10,000 shares of Preferred Stock, par value $0.01, with a Liquidation Preference
of $1,000 per share. Granted to the holder of each share of Preferred
Stock was an option ("Put Option") to sell to Rite Aid all or any portion of the
Preferred Stock held by the holder on the date the Put Option is exercised. Each
Put Option may be exercised any time after March 20, 2003 and before March 20,
2004. In addition, granted to the company was an option ("Call Option") to
purchase from the holders of the Preferred Stock, all or any portion of the
shares of Preferred Stock upon the exercise of the Call Option. The Call Option
may be exercised by Rite Aid any time after March 20, 2004 and before March 20,
2005. The Preferred Stock carries a mandatory obligation to declare and pay
preferential dividends at the rate of 7.70 percent per annum of the Liquidation
Preference Per Share, payable quarterly on April 15, July 15, October 15 and
January 15 of each year. As amended and restated, the articles of incorporation
of RX Choice, Inc. authorize the issuance of 10,000 shares of preferred stock,
of which, 10,000 shares have been issued and are outstanding.
14. RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS
PER SHARE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
In thousands of dollars except share and per share amounts 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic earnings per share:
Income before extraordinary loss $ 143,686 $ 305,870 $ 161,897
Extraordinary loss - - (45,157)
Cumulative dividends on preferred stock 793 - -
- --------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 142,893 $ 305,870 $ 116,740
- --------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities
6.75% zero coupon convertible subordinated notes $ - $ 5,281 $ 8,245
5.25 convertible subordinated notes - 9,920 -
- --------------------------------------------------------------------------------------------------------------------
Income available for common stockholders before extraordinary loss
assuming dilution $ 142,893 $ 321,071 $ 170,142
- --------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders assuming dilution $ 142,893 $ 321,071 $ 124,985
- --------------------------------------------------------------------------------------------------------------------
Denominator:
Basic weighted average shares 258,499,000 250,638,000 184,422,000
Effect of dilutive securities:
Employee stock options 4,855,000 5,512,000 2,450,000
6.75% zero coupon convertible subordinated notes - 7,034,000 11,886,000
5.25 convertible subordinated notes - 8,450,000 -
- -------------------------------------------------------------------------------------------------------------------
Dilutive potential weighted average shares 4,855,000 20,996,000 14,336,000
- -------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 263,354,000 271,634,000 198,758,000
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income available for common stockholders before extraordinary loss $ 0.55 $ 1.22 $ 0.88
Extraordinary loss - - (.25)
- -------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 0.55 $ 1.22 $ 0.63
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share
Income available for common stockholders before extraordinary loss $ 0.54 $ 1.18 $ 0.86
Extraordinary loss - - (.23)
- -------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 0.54 $ 1.18 $ 0.63
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
15. STOCK OPTION AND STOCK AWARD PLANS
The company reserved 22,000,000 shares of its common stock for the granting of
stock options and other incentive awards to officers and key employees under the
1990 Omnibus Stock Incentive Plan. Options may be granted, with or without
stock appreciation rights (SARs), at prices that are not less than the fair
market value of a share of common stock on the date of grant. The 1990 Plan
provides for the Compensation Committee to determine both when and in
-37-
<PAGE>
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 a combination of cash and shares at the discretion of
the Compensation Committee. Following is a summary of stock option transactions
for the three fiscal years ended February 27, 1999, February 28, 1998 and March
1, 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Price per Share
---------------------
- -----------------------------------------------------------------------------------------
Weighted
Shares Average
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Balance, March 2, 1996 6,116,578 10.58
Granted 4,615,100 16.62
Exercised (551,802) 9.41
Canceled (128,726) 9.58
Balance, March 1, 1997 10,051,150 13.43
Granted 2,426,500 15.21
Exercised (771,500) 12.60
Canceled (306,376) 12.89
Balance, February 28, 1998 11,399,774 13.88
Granted 4,146,000 32.54
Exercised (633,575) 14.58
Canceled (239,500) 20.09
Balance, February 27, 1999 14,672,699 19.02
- ---------------------------------------------------------------------------------------
</TABLE>
For various price ranges, weighted average characteristics of outstanding stock
options at February 27, 1999 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Outstanding Options Exercisable Options
- ---------------------------------------------------------------------------------------------------------------
Remaining Weighted Weighted
Range of exercise prices Shares life (years) Average Price Shares Average Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.91 - $12.69 4,633,099 4.56 $ 9.86 4,471,799 $ 9.78
$13.88 - $20.81 5,695,350 4.76 16.34 4,411,500 16.49
$21.00 - $31.50 3,401,000 9.15 30.37 70,250 23.11
$31.625 - $46.88 692,750 9.29 36.27 750 31.63
$47.50 - $48.81 250,500 9.88 47.62 - -
- -------------------------------------------------------------------------------------------------------------
$ 8.91 - $48.81 14,672,699 6.02 $ 19.02 8,954,299 13.19
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
issued in October 1995. In accordance with the provisions of SFAS No. 123, the
company applies APB Opinion 25 and related interpretations in accounting for its
stock option plans. 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 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available for common-stockholders - as reported $ 142,893 $ 305,870 $116,740
Net income available for common stockholders - pro forma 131,312 $ 300,173 $114,300
Basic earnings per share - as reported $ .55 $ 1.22 $ 0.63
Basic earnings per share - pro forma .51 $ 1.20 $ 0.62
Net income available for commons stockholders assuming dilution - as reported $ 142,893 $ 321,071 $124,985
Net income available for common stockholders assuming dilution - pro forma 131,312 $ 315,374 $122,545
Diluted earnings per share - as reported $ .54 $ 1.18 $ 0.63
Diluted earnings per share - pro forma .50 $ 1.16 $ 0.62
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
-38-
<PAGE>
The pro forma amounts only take into account the options issued since March 5,
1995. The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected stock price volatility 30.7% 25.0% 23.0%
Expected dividend yield 1.0 1.5 3.0
Risk-free interest rate 5.6 6.0 5.5
Expected life of options 6.7 years 5 years 5 years
</TABLE>
The average fair value of options granted during 1999, 1998 and 1997 was $12.36,
$3.55 and $3.43, respectively.
16. BUSINESS SEGMENTS
The company operates in primarily two business segments; i) the Retail Drug
segment, and ii) a Pharmacy Benefit Management ("PBM") segment, that includes
other managed health care services and mail-order pharmacy services. The
company's business segments are organized according to the products and services
offered to its customers. The company's dominant segment is the Retail Drug
segment, which consists of the operation of retail drugstores across the United
States. The company's drugstores' primary business is pharmacy services, with
prescription drugs accounting for 54.2 percent of total segment sales. In
addition, the company's drugstores offer a full selection of health and personal
care products, seasonal merchandise and a large private label product line.
The company also operates a PBM segment. Through its PBM segment, the company
offers pharmacy benefit management, mail-order pharmacy services, marketing
prescription plans and selling other managed health care services to employers,
health plans and their members and government-sponsored employee benefit
programs.
Prior to fiscal 1999, the company operated one business segment, the Retail Drug
segment.
-39-
<PAGE>
The accounting policies of each segment are substantially the same as those
described in Note 1 and Note 8. In addition, segments are evaluated based upon a
profit or loss measurement on a FIFO basis. Accordingly, financial information
for each segment is reported on this basis. The following table presents
selected financial information for each business segment and a reconciliation to
the selected financial information on a consolidated basis:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Retail PBM LIFO Consolidated
In Thousands Segment Segment Charge Totals
- ----------------------------------------------------------------------------------------------------------
1999:
<S> <C> <C> <C> <C>
Net sales $12,641,699 $ 90,201 $ - $12,731,900
Interest expense 187,407 7,326 - 194,733
Depreciation and amortization expense 297,664 4,934 - 302,598
Store closing and other charges 282,810 - - 282,810
Income tax expense (benefit) 65,841 (676) (9,281) 55,884
Extraordinary loss, net of tax - - - -
Net income (loss) $ 169,494 $ (1,060) (14,548) $ 143,686
Total assets $ 8,126,002 $2,295,739 $10,421,741
Total expenditures for additions to long-lived assets $ 867,473 $ 4,362 $ 871,835
Significant non-cash charges $ 282,810 $ - $ 282,810
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
1998:
Net sales $11,375,105 $ - $ - $11,375,105
Interest expense 159,752 - - 159,752
Depreciation and amortization expense 274,194 - - 274,194
Store closing and other charges - - - -
Income tax expense 214,948 - (8,441) 206,507
Extraordinary loss, net of tax - - - -
Net income (loss) $ 318,374 $ - (12,504) $ 305,870
Total assets $ 7,612,266 $ - $ 7,612,266
Total expenditures for additions to long-lived assets $ 541,050 $ - $ 541,050
Significant non-cash charges $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------
1997:
Net sales $ 6,970,201 $ - $ - $ 6,970,201
Interest expense 96,473 - - 96,473
Depreciation and amortization expense 168,064 - - 168,064
Store closing and other charges 62,562 - - 62,562
Income tax expense 105,341 - (6,113) 99,228
Extraordinary loss, net of tax 45,157 - - 45,157
Net income (loss) $ 126,715 $ - (9,975) $ 116,740
Total assets $ 6,416,981 $ - $ 6,416,981
Total expenditures for additions to long-lived assets $ 428,256 $ - $ 428,256
Significant non-cash charges $ 62,562 $ - $ 62,562
- ---------------------------------------------------------------------------------------------------------
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
On March 12, 1999, the company announced that the preliminary estimate for fully
diluted earnings per share for the fourth quarter would be approximately $0.30
to $0.32 as compared to the then existing First Call analysts' consensus
estimates of $0.52 per share. Subsequent to the March 12 announcement, several
purported class action lawsuits were commenced against the company, Martin
Grass, Chairman, Chief Executive Officer and a director, Timothy Noonan,
President, Chief Operating Officer and a director, Franklin Brown, Vice Chairman
and a director, and Frank Bergonzi, Senior Executive Vice President and Chief
Financial and Accounting Officer in the United States District Court for the
Eastern District of Pennsylvania. The plaintiffs in these suits allege that the
company failed to make prompt public disclosure of matters mentioned in the
company's March 12 announcement that affected results for the fourth quarter and
seek to recover damages on behalf of all purchasers of the company's common
stock between December 14, 1998 and March 11, 1999. On April 18, 1999, the court
approved a stipulation among counsel that, among other things, provided
-40-
<PAGE>
for consolidation of these suits. The company intends to deny the material
allegations in these complaints and to defend these actions vigorously.
In May 1999, a shareholder filed a complaint in the United States District court
for the Eastern District of Pennsylvania derivatively and on behalf of the
company against the same officers and directors named in the class action
lawsuits and also directors Alex Grass, Philip Neivert, Gerald Tsai, Leonard I.
Green and Nancy A. Lieberman. The complaint alleges essentially the same
wrongful acts as are alleged in the class action lawsuits and charges the
defendants with mismanagement, waste of corporate resources and breach of
fiduciary duty. The complaint also alleges that certain of the transactions
discussed in the Current Report on Form 8-k filed by the company on February 9,
1999 constituted mismanagement, waste of corporate resources and breach of
fiduciary duty. The plaintiffs seek indemnity and contribution on behalf of the
companys from the individual defendants. Management believes that the resolution
of these actions will not have a material effect on the Company's financial
position, results of operation or liquidity.
The company is also the defendant in other 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. As of February 27,
1999, the company does not believe that it has a material, estimable, and
probable liability regardless of insurance coverage. The company had outstanding
letters of credit of $41,544,000 and $62,948,000 at February 27, 1999 and
February 28, 1998, respectively.
18. INTERIM FINANCIAL RESULTS (Unaudited)
<TABLE>
<CAPTION>
In thousands of dollars except per share amounts Year 1999
- -----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $3,032,681 $3,011,029 $3,122,930 $3,565,260 $12,731,900
Costs and expenses excluding store closing
and other charges 2,902,230 2,894,676 2,995,965 3,482,123 12,274,994
Store closing and other charges - 264,204 (7,298) 430 257,336
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 130,451 (147,851) 134,263 82,707 199,570
Income taxes (benefit) 52,179 (59,139) 53,705 9,139 55,884
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 78,272 $ (88,712) $ 80,558 $ 73,568 $ 143,686
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .30 $ (.34) $ .31 $ 0.28 $ .55
Diluted earnings per share $ .30 $ (.34) $ 0.31 $ 0.28 $ 0.54
</TABLE>
Fourth quarter adjustments that significantly impact the company's operating
results in fisal 1999 include the following items: reversal of capitalized
project costs related to store planning, development, construction and other
costs of $19.5 million; additional provision for closed store revenues of $49.8
million; change in estimate for unprocesssed advertising and purchase term
discounts of $11.4 million; certain other charges of $15.8 million; income of
($35) million from the settlement of two lawsuits; adjustments to the current
year exit plan for favorable store lease termination and closing costs of
($27.5) million; revision made to the store exit plan assumption based on actual
store lease termination experience of ($21.9) million; and, the reversal of
liabilities no longer required of ($21.0) million.
The impact of the adjustments to the previously reported results for the first
three quarters are as follows:
<TABLE>
<CAPTION>
In thousands of dollars Year 1999
- ---------------------------------------------------------------------------------------
First Second Third
Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Costs and expenses excluding store closing and
other charges
As previously reported $2,881,288 $2,901,244 $2,978,169
Adjustments: 20,942 (6,568) 17,796
---------- ---------- ----------
As restated 2,902,230 2,894,676 2,995,965
Store closing and other charges
As previously reported - 264,204 -
Adjustments: - - (7,298)
---------- ---------- ----------
As restated - 264,204 (7,298)
Income before income taxes
As previously reported 151,393 (154,419) 144,761
Adjustments: (20,942) (6,568) (10,498)
---------- ---------- ----------
As restated 130,451 (147,851) 134,263
Income taxes
As previously reported 60,556 (61,766) 57,904
Adjustments: (8,377) 2,627 (4,199)
---------- ---------- ----------
As restated 52,179 (59,139) 53,705
Net Income
As previously reported 90,837 (92,653) 86,857
Adjustments: (12,565 (3,941) (6,299)
---------- ---------- ----------
As restated $ 78,272 $ (88,712) $ 80,558
---------- ---------- ----------
<CAPTION>
In thousands of dollars
- ----------------------------------------------------------------------------------------
First Second Third
Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adjustments to operating expenses:
Reversal of costs charged to acquisition
accruals $ 15,933 $ 3,992 $ 2,657
Related to store planning, development,
construction and other costs to current
operating expense from reversal of
capitalized project costs 4,400 4,400 4,401
Adjustment of accounts receivable 1,373 1,373
Adjustment of depreciation expense 609 609 609
---------------------------------------
$ 20,942 $ 10,374 $ 9,040
---------------------------------------
Adjustments to Store Closing and Other Charges: - - $ 7,298
---------------------------------------
Adjustments to cost of good sold:
Allocation of inventory disposal costs $ (16,942) $ 8,756
---------------------------------------
$ - $ (16,942) $ 8,756
---------------------------------------
<CAPTION>
In thousands of dollars except per share amounts Year 1998
- -----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $2,664,600 $2,634,200 $2,885,666 $3,190,639 $11,375,105
Costs and expenses 2,551,838 2,544,190 2,772,164 2,994,536 10,862,728
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 112,762 90,010 113,502 196,103 512,377
Income taxes 45,444 36,275 45,741 79,047 206,507
- -----------------------------------------------------------------------------------------------------------------
Net income $ 67,318 $ 53,735 $ 67,761 $ 117,056 $ 305,870
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.27 $ 0.22 $ 0.27 $ 0.45 $ 1.22
Diluted earnings per share $ 0.27 $ 0.21 $ 0.26 $ 0.43 $ 1.18
</TABLE>
The company made adjustments to its previously reported results of operations
for fiscal year 1998. Distribution costs previously recorded to a reserve were
reclassified and charged to operating expenses. Adjustments were made to
goodwill amortization resulting from purchase accounting goodwill adjustments. A
gain recorded on the sale of the Ontario, California distribution center was
reclassified to a purchase accounting goodwill adjustment. The impact of these
previously reported adjustments to the quarters were as follows:
<TABLE>
<CAPTION>
In thousands of dollars Year 1998
- -----------------------------------------------------------------------------------------------------------------
First Second Third Fourth As previously
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Costs and expenses
As previously reported $2,550,294 $2,532,669 $2,771,942 $2,990,159 $10,845,064
Adjustments: 1,544 11,521 222 4,377 17,664
---------- ---------- ---------- ---------- -----------
As restated 2,551,838 2,544,190 2,772,164 2,994,536 10,862,728
Income before income taxes
As previously reported 114,306 101,531 113,724 200,480 530,041
Adjustments: (1,544) (11,521) (222) (4,377) (17,664)
---------- ---------- ---------- ---------- -----------
As restated 112,762 90,010 113,502 196,103 512,377
Income taxes
As previously reported 46,065 40,918 45,830 80,793 213,606
Adjustments: (621) (4,643) (89) (1,746) (7,099)
---------- ---------- ---------- ---------- -----------
As restated 45,444 36,275 45,741 79,047 206,507
Net Income
As previously reported 68,241 60,613 67,894 119,687 316,435
Adjustments: (923) (6,878) (133) (2,631) (10,565)
---------- ---------- ---------- ---------- -----------
As restated $ 67,318 $ 53,735 $ 67,761 $ 117,056 $ 305,870
---------- ---------- ---------- ---------- -----------
<CAPTION>
In thousands of dollars Year 1998
- -----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Adjustments to operating expenses:
Reverse exit cost accrual in fiscal 1997
related to a disposal of distribution
center, and record the expenses in fiscal 1998 $ 1,615 $ 144 $ 142 $ 297 $ 2,198
Additional liability for termination benefits
related to distribution center closing 4,000 4,000
Adjustments to goodwill amortization resulting
from purchase accounting goodwill adjustments (71) (71) 80 80 18
Reverse Income recorded on sale of Ontario,
California distribution center to reflect
gain as a purchase price adjustment 11,448 11,448
----------------------------------------------------------------
$ 1,544 $ 11,521 $ 222 $ 4,377 $ 17,684
----------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K which is included in Part I hereof as an
unnumbered item pursuant to General Instruction G(3)), Item 11, Executive
Compensation, Item 12, Security Ownership of Certain Beneficial Owners and
Management, and Item 13, Certain Relationships and Related Transactions, is
hereby incorporated by reference to the Registrant's Definitive Proxy Statement
for its Annual Meeting of Stockholders to be held on June 30, 1999.
-41-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) 1. The following consolidated financial statements of the Company are
included in Part II, Item 8:
Independent Auditors' Report...............................20
Consolidated Balance Sheets, February 27, 1999
and February 28, 1998..................................20
Consolidated Statements of Income - Years ended
February 27, 1999, February 28, 1998 and
March 1, 1997..........................................21
Consolidated Statements of Cash Flows - Years ended
February 27, 1999, February 28, 1998 and
March 1, 1997..........................................23
Consolidated Statements of Stockholders' Equity -
Years ended February 27, 1999, February 28, 1998
and March 1, 1997......................................22
Notes to Consolidated Financial Statements.................24
2. The following financial statement schedules and other information
required to be filed by Items 8 and 14(d) of Form 10-K are
included in Part IV:
Schedule II - Valuation and Qualifying Accounts
Independent Auditors' Report
All other schedules are omitted because they are not applicable, not
required or the required information is included in the consolidated
financial statements of 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)
<TABLE>
<CAPTION>
Exhibit Incorporation
Numbers Description by Reference to
------- -------------- ---------------
<S> <C> <C>
(2) Not Applicable -
(3)(i) Restated Certificate of Incorporation Exhibit (4.1) to Form S-3
dated December 12, 1996 filed January 10, 1997
Amendment to Restated Certificate of Filed herewith
Incorporation dated February 22, 1999
(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 -
(10)(i) Material Contracts - Agreement with McKesson Exhibit (10) to Form 10-Q
Dated April 10, 1998 filed July 2, 1998
(ii) Salary Continuation Agreement with Exhibit (10)(iii) to Form
Key Officers* 10-K filed May 29, 1983
(iii) 1990 Omnibus Stock Incentive Plan, Exhibit 4 to Form S-8
as amended* filed July 12, 1996.
(iv) Annual Performance-Based Incentive Included in Proxy
</TABLE>
-42-
<PAGE>
<TABLE>
<S> <C> <C>
Program* Statement dated June 7, 1995
(v) Deferred Compensation Agreement* Exhibit (10)(iii) to Form
10-K filed May 31, 1996
(11) Statements re Computation of Per Share Earnings Included herein
(12) Statements re Computation of Ratios Included herein
(13) 1999 Annual Report to Stockholders Item 8. of this Form 10-K
(16) Not Applicable -
(18) Not Applicable -
(21) Subsidiaries of the registrant Included herein
(23) Consent of Independent Certified Public Included herein
Accountants
(24) Not applicable -
(27) Financial Data Schedules Included herein
(EDGAR Filing Only)
(27.1) Restated Financial Data Schedule Included herein
(EDGAR Filing Only)
(28) Not Applicable -
</TABLE>
* Constitutes a compensatory plan or arrangement required to be
filed with this Form.
(b) Reports on Form 8-K
(i) Rite Aid Corporation filed a Current Report on Form 8-K on
January 19, 1999 regarding its intended acquisition of PCS Health
Systems, Inc. Included in the Current Report were the following
PCS financial statements:
a. Consolidated Balance Sheets (Audited) for the years
ended December 31, 1998, 1997 and 1996
b. Consolidated Statements of Operations (Audited) for the
years ended December 31, 1998, 1997 and 1996
c. Consolidated Statements of Shareholders' Equity
(Audited) for the years ended December 31, 1998, 1997
and 1996
d. Consolidated Statements of Cash Flows (Audited) for the
years ended December 31, 1998, 1997 and 1996
e. Consolidated Balance Sheets (Unaudited) for the nine
months ended September 30, 1998, 1997 and 1996
f. Consolidated Statements of Operations (Unaudited) for
the nine months ended September 30, 1998, 1997 and 1996
g. Consolidated Statements of Shareholders' Equity
(Unaudited) for the nine months ended September 30,
1998, 1997 and 1996
h. Consolidated Statements of Cash Flows (Unaudited) for
the nine months ended September 30, 1998, 1997 and 1996
(ii) Rite Aid Corporation filed a Current Report on Form 8-K on
February 9, 1999 which disclosed the results on an internal
review of related party transactions.
-43-
<PAGE>
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: June 1, 1999 RITE AID CORPORATION
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 on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
June 1, 1999 /s/ Martin L. Grass June 1, 1999
----------------------------------- -----------------------------
Martin L. Grass Philip Neivert
Chairman of the Board of Director
Directors, Chief Executive
Officer and Director
June 1, 1999 /s/ Timothy J. Noonan June 1, 1999 /s/ Nancy A. Liberman
----------------------------------- -----------------------------
Timothy J. Noonan Nancy A. Lieberman
President, Chief Operating Director
Officer and Director
June 1, 1999 /s/ Frank M. Bergonzi June 1, 1999 /s/ Leonard N. Stern
----------------------------------- -----------------------------
Frank M. Bergonzi Leonard N. Stern
Chief Financial Officer Director
and Chief Accounting
Officer
June 1, 1999 /s/ William J. Bratton June 1, 1999 /s/ Preston Robert Tisch
----------------------------------- -----------------------------
William J. Bratton Preston Robert Tisch
Director Director
June 1, 1999 /s/ Franklin C. Brown June 1, 1999
----------------------------------- -----------------------------
Franklin C. Brown Gerald Tsai, Jr.
Director Director
June 1, 1999
-----------------------------------
Alex Grass
Director
June 1, 1999
-----------------------------------
Leonard I. Green
Director
</TABLE>
-44-
<PAGE>
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED FEBRUARY 27, 1999, FEBRUARY 28, 1998 AND MARCH 1, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Balance at Additions Additions
Beginning Charged to Charged to Balance at
Allowances deducted from accounts receivable of Costs and Other End of
for estimated uncollectible amounts: Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended February 27, 1999 $14,096 16,123 9,229 (c) 21,443 $18,005
Year ended February 28, 1998 $14,583 11,001 1,800 (b) 13,288 $14,096
Year ended March 1, 1997 $ 5,545 13,178 7,503 (a) 11,643 $14,583
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Allowance for estimated uncollectible accounts acquired through the
acquisition of Thrifty PayLess Holdings, Inc. on December 12, 1996.
(b) Allowance for estimated uncollectible accounts acquired from Harco, Inc.
and K&B, Incorporated on August 27, 1997.
(c) Allowance for estimated uncollectible accounts acquired from PCS Health
Systems Inc. on January 22, 1999.
-45-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rite Aid Corporation:
Under date of May 28, 1999, we reported on the consolidated balance sheets of
Rite Aid Corporation and subsidiaries as of February 27, 1999 and February 28,
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended February 27,
1999. These consolidated financial statements and our report thereon are
included in the annual report on Form 10-K for the year 1999. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule as listed in the
accompanying index (Item 14). 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.
KPMG LLP
Harrisburg, Pennsylvania
May 28, 1999
-46-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3(i) Amendment to Restated Certificate of Incorporation
11 Statement Regarding Computation of Per Share Earnings.
12 Statement Regarding Computation of Ratios of Earnings to Fixed
Charges.
21 Registrant's Subsidiaries.
23 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule for the Year Ended February 27, 1999.
(EDGAR filing only)
27.1 Restated Financial Data Schedule for the Year Ended February 28,
1998 (EDGAR filing only)
<PAGE>
EXHIBIT 3(i)
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
RITE AID CORPORATION
------------------------------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
------------------------------------------
Rite Aid Corporation, a Delaware corporation (hereinafter called
the "Corporation"), does hereby certify as follows:
FIRST: The first paragraph of Article FOURTH of the
Corporation's Restated Certificate of Incorporation is hereby amended to read in
its entirety as set forth below:
"FOURTH: The total number of shares of stock which the
corporation shall have authority to issue shall be six hundred
twenty million (620,000,000) shares of which six hundred million
(600,000,000) shares shall be Common Stock of the par value of
$1.00 per share, and twenty million (20,000,000) shares shall be
Preferred Stock of the par value of $1.00 per share."
SECOND: This amendment to the Restated Certificate of
Incorporation was duly adopted in accordance with Section 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Rite Aid Corporation has caused this
Certificate to be duly executed in its corporate name this 22nd day of February,
1999.
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
-------------------------------
Name: Elliot S. Gerson
Title: Executive Vice President and Secretary
<PAGE>
EXHIBIT 11
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED FEBRUARY 27, 1999, FEBRUARY 28, 1998 AND MARCH 1, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
In thousands of dollars except share and per share amounts 1999 1998 1997
As Restated As Restated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic earnings per share:
Income before extraordinary loss $ 143,686 $ 305,870 $ 161,897
Extraordinary loss - - (45,157)
- ------------------------------------------------------------------------------------------------------------------
Net income 143,686 305,870 116,740
Cumulative dividends on preferred stock 793 - -
- ------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 142,893 $ 305,870 $ 116,740
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Basic weighted average shares 258,499,000 250,638,000 184,422,000
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income available for common stockholders before extraordinary loss $ 0.55 $ 1.22 $ 0.87
Extraordinary loss - - (.24)
- ------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 0.55 $ 1.22 $ 0.63
- ------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share:
Income available for common stockholders before extraordinary loss $ 142,893 $ 305,870 $ 161,897
Effect of dilutive securities:
6.75% zero coupon convertible subordinated notes (a) - 5,281 8,245
5.25 convertible subordinated notes (a) - 9,920 -
- ------------------------------------------------------------------------------------------------------------------
Income available for common stockholders before extraordinary loss
assuming dilution 142,893 321,071 170,142
Extraordinary loss - - (45,157)
- ------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders assuming dilution $ 142,893 $ 321,071 $ 124,985
- ------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share:
Basic weighted average shares 258,499,000 250,638,000 184,422,000
Effect of dilutive securities:
Employee stock options 4,855,000 5,512,000 2,450,000
6.75% zero coupon convertible subordinated notes - 7,034,000 11,886,000
5.25% convertible subordinated notes - 8,450,000 -
- ------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 4,855,000 20,996,000 14,336,000
- ------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 263,354,000 271,634,000 198,758,000
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income available for common stockholders before extraordinary loss
assuming dilution $ 0.54 $ 1.18 $ 0.86
Extraordinary loss - - (.23)
- ------------------------------------------------------------------------------------------------------------------
Income available for common stockholders assuming dilution $ 0.54 $ 1.18 $ 0.63
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) shown net of income taxes which were calculated at the registrant's tax rate
<PAGE>
EXHIBIT 12
RITE AID CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED FEBRUARY 27, 1999, FEBRUARY 28, 1998, MARCH 1, 1997, MARCH 2, 1996,
AND MARCH 4, 1995
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
February 27, February 28, March 1, March 2, March 4,
1999 1998 1997 1996 1995
As Restated As Restated
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest Expense $194,733 $159,752 $ 96,473 $ 68,341 $ 42,300
Interest Portion of Net Rental
Expense (1) 136,478 111,943 66,067 52,080 40,424
- ----------------------------------------------------------------------------------------------------------------------
Preferred Stock
Dividend Requirements 331,211 271,695 162,540 120,421 82,724
Preferred Stock Dividend
Requirement (2) 1,299 - - - -
Capitalized Interest 9,212 3,834 1,897 1,948 373
- ----------------------------------------------------------------------------------------------------------------------
Total Fixed Charges $341,722 $275,529 $164,437 $122,369 $ 83,097
- ----------------------------------------------------------------------------------------------------------------------
Earnings
Income Before Extraordinary Loss
and Income Taxes $199,570 (4) $516,377 $261,125 (3) $256,202 $231,464
Fixed Charges Before Capitalized
Interest and Preferred Stock
Dividend Requirements 331,211 271,695 162,540 120,421 82,724
- ----------------------------------------------------------------------------------------------------------------------
Total Adjusted Earnings $530,781 $784,072 $423,665 $376,623 $314,188
- ----------------------------------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 1.55 2.45 2.58 3.08 3.78
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Interest Portion of Net Rental Expense is estimated to be equal to one-
third of the minimum rental expense for the period.
(2) The Preferred Stock Dividend Requirement is computed as the pre-tax
earnings that would be required to cover preferred stock dividends.
(3) Income before extraordinary loss and income taxes for fiscal year 1997
includes a $62,562,000 one-time, pre-tax charge for nonrecurring and other
charges.
(4) Income before extraordinary loss and income taxes for fiscal year 1999
includes a $233,010,000 charge for store closing and other charges.
<PAGE>
EXHIBIT 21
REGISTRANT'S SUBSIDIARIES
The following table sets forth certain of the subsidiaries of the registrant at
February 27, 1999, all of which are directly or indirectly wholly owned and are
included in the consolidated financial statements:
Name Organized Under the Laws of
- ---- ---------------------------
APEX Drugstores Inc. Michigan
Eagle Managed Care Corp. Delaware
GDF, Inc. Maryland
Harco, Inc. Alabama
K & B, Inc. Delaware
K & B Alabama Corporation Alabama
K & B Florida Corporation Florida
K & B Louisiana Corporation Louisiana
K & B Mississippi Corporation Mississippi
K & B Services, Inc. Louisiana
K & B Tennessee Corporation Tennessee
K & B Texas Corporation Texas
K&B Trainees, Inc. Louisiana
Keystone Centers, Inc. Pennsylvania
Lane Drug Company Ohio
Name Rite LLC Delaware
Ocean Acquisition Corporation Delaware
PCS Health Systems, Inc. Delaware
Perry Drug Stores, Inc. Michigan
PL Xpress, Inc. Oregon
Rack Rite Distributors, Inc. Pennsylvania
Rite Aid Drug Palace, Inc. Delaware
Rite Aid Funding LLC California
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, DC, Inc. District of Columbia
Rite Aid of West Virginia, Inc. West Virginia
Rite Aid Lease Management Company California
Rite Aid Realty Corp. Delaware
Rite Aid Rome Distribution Center, Inc. New York
Rite Aid Transport, Inc. Delaware
Rite Fund, Inc. Delaware
Rite Investments Corporation Delaware
RDS Detroit, Inc. Michigan
RX Choice, Inc. Delaware
PDS-1 Michigan, Inc. Michigan
Perry Distributors, Inc. Michigan
PLD Enterprises, Inc. Nevada
Super Distributors, Inc. Louisiana
Super Ice Cream Suppliers, Inc. Louisiana
Super Laboratories, Inc. Louisiana
Super Tobacco Distributors Mississippi
Super Pharmacy Networks, Inc. Florida
Thrifty Corporation California
Thrifty PayLess, Inc. California
Thrifty Wilshire, Inc. California
Virginia Corporation Delaware
WRAC, Inc. Pennsylvania
At February 27, 1999, 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>
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, registration statement (No. 333-21207) on Form S-3, and
registration statement (No. 333-39699) on Form S-3 of Rite Aid Corporation of
our reports dated May 28, 1999, relating to the consolidated balance sheets of
Rite Aid Corporation and subsidiaries as of February 27, 1999 and February 28,
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended February 27,
1999, and the related schedule, which reports appear in the February 27, 1999
annual report on Form 10-K of Rite Aid Corporation.
As discussed in Note 2, the consolidated balance sheets as of February 28, 1998
and the consolidated statements of income, stockholders' equity and cash flows
for each of the years in the two year period ended February 28, 1998 have been
restated.
KPMG LLP
Harrisburg, Pennsylvania
May 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-END> FEB-27-1999
<CASH> 82,949
<SECURITIES> 0
<RECEIVABLES> 767,611
<ALLOWANCES> 18,005
<INVENTORY> 2,893,143
<CURRENT-ASSETS> 3,802,351
<PP&E> 3,830,576
<DEPRECIATION> 962,523
<TOTAL-ASSETS> 10,421,741
<CURRENT-LIABILITIES> 3,690,478
<BONDS> 3,304,240
23,559
0
<COMMON> 258,862
<OTHER-SE> 2,694,870
<TOTAL-LIABILITY-AND-EQUITY> 10,421,741
<SALES> 12,731,900
<TOTAL-REVENUES> 12,731,900
<CGS> 9,396,432
<TOTAL-COSTS> 9,396,432
<OTHER-EXPENSES> 257,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194,733
<INCOME-PRETAX> 199,570
<INCOME-TAX> 55,884
<INCOME-CONTINUING> 143,686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,686
<EPS-BASIC> .55
<EPS-DILUTED> .54
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<CASH> 90,968
<SECURITIES> 0
<RECEIVABLES> 179,525
<ALLOWANCES> 14,096
<INVENTORY> 3,018,606
<CURRENT-ASSETS> 3,047,303
<PP&E> 3,047,808
<DEPRECIATION> 890,011
<TOTAL-ASSETS> 7,612,266
<CURRENT-LIABILITIES> 1,733,734
<BONDS> 2,551,418
0
0
<COMMON> 258,215
<OTHER-SE> 2,649,047
<TOTAL-LIABILITY-AND-EQUITY> 7,612,266
<SALES> 11,375,105
<TOTAL-REVENUES> 11,375,105
<CGS> 8,290,888
<TOTAL-COSTS> 8,290,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159,752
<INCOME-PRETAX> 512,377
<INCOME-TAX> 206,507
<INCOME-CONTINUING> 305,870
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,870
<EPS-BASIC> 1.22
<EPS-DILUTED> 1.18
</TABLE>
