UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File Number 33-73592-01
THRIFTY PAYLESS, INC.
(Exact Name of Registrant as Specified in its Charter)
California 95-4391249
(State of Incorporation) (I.R.S. Employer Identification No.)
30 Hunter Lane
Camp Hill, Pennsylvania 17011
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number Including Area Code: (717) 761-2633
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name on Each Exchange
Title of Each Class on which Registered
N/A N/A
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
the filing requirements for the past 90 days.
Yes [ X ] 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 ]
Shares of common stock outstanding at December 24, 1996 - 1,000
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THRIFTY PAYLESS, INC.
ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended September 29, 1996
Item Page
PART I
1. Business 1
2. Properties 11
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for the Registrant's Common Stock,
Debt Securities and Related Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant 23
11. Executive Compensation 28
12. Security Ownership of Certain Beneficial Owners and
Management 33
13. Certain Relationships and Related Transactions 34
PART IV
14. Exhibits, Financial Statement Schedule and Reports
on Form 8-K 39
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PART I
------
ITEM 1. BUSINESS
GENERAL
Thrifty PayLess, Inc. ("Thrifty PayLess" or the "Company"),
formerly a wholly owned subsidiary of Thrifty PayLess Holdings,
Inc. ("T P Holdings"), and effective December 12, 1996, a wholly
owned subsidiary of Rite Aid Corporation ("Rite Aid") as a result
of the merger of TP Holdings into Rite Aid (the "Merger"), is the
largest drug store chain on the West Coast and one of the largest
in the United States, with annual revenues of approximately $4.8
billion. On September 29, 1996, the Company operated a total of
1,004 Thrifty Drug and PayLess Drug stores, and its subsidiary Bi-
Mart Corporation ("Bi-Mart") operated 45 membership discount
stores. The Company's stores are located throughout the Western
United States with 677 stores in California, 155 in Washington, 113
in Oregon and an additional 104 in Alaska, Arizona, Colorado,
Hawaii, Idaho, Nevada, Utah and Wyoming.
The Company's drug stores offer a wide variety of affordable,
high quality products, including prescription drugs,
over-the-counter drugs, health and beauty aids, greeting cards,
cosmetics, photo finishing, general merchandise and consumable
products such as snack food, candy, ice cream and beverages,
including liquor. In addition to national name brand products, the
Company offers private label merchandise including
over-the-counter drugs, health and beauty aids, household products
and other items. Bi-Mart stores offer a broad range of health and
beauty aids and general merchandise, including housewares,
automotive products, hardware, electronics, sporting goods, toys
and photographic products, as well as full-service pharmacies. Bi-
Mart uses a "no frills" shopping format that enables it to provide
its approximately 1.2 million members with substantial discounts
from suggested retail prices. It is anticipated that the Company
will dispose of Bi-Mart promptly following the Merger.
History
The Company was formed in 1992 by Green Equity Investors, L.P.
("GEI"), an investor group led by Leonard Green & Associates, L.P.
("LGA") for the purpose of acquiring Thrifty Corporation, the
operator of the Thrifty Drug chain ("Thrifty Drug") from Pacific
Enterprises ("PE") (the "1992 Acquisition").
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Thrifty Drug was founded in 1929 and grew to a 593 drug store
chain with locations throughout the Western United States with
a history of consistent and increasing profits. In 1986 PE
purchased Thrifty Drug and changed its focus, resulting in
aggressive diversification and expansion campaigns. From 1986
through 1992, Thrifty Drug's profitability declined to significant
losses, the outcome of unsuccessful marketing campaigns and the
lack of management depth and infrastructure. When Thrifty Drug was
sold to the Company, Thrifty Drug sold or closed its stores in
states other than California and operated 494 drug stores. Bi-Mart
was acquired by Thrifty Drug in 1988.
PayLess Drug Stores Northwest, Inc. ("PayLess Drug") was
founded in 1939. In 1985, Kmart Corporation ("Kmart") acquired
PayLess Drug when it had 162 stores. PayLess Drug has grown
primarily through opening new stores and by acquisitions of stores
to complement its market penetration. Such acquisitions include 60
PayLess Drug Stores (a previously unaffiliated publicly traded
California corporation) in 1980; 24 Osco stores in 1987 and an
additional 51 Osco stores in 1991 from American Stores; and 124
Pay'n Save Stores in 1992 from Thrifty Drug. The Company acquired
PayLess Drug from Kmart on April 20, 1994 (the "Acquisition") and
merged it into Thrifty PayLess effective September 28, 1995.
BUSINESS STRATEGY
Management's strategic goal is for the Company to capitalize
on its position as the leading drug store retailer on the West
Coast. As third-party prescription drug payment plans
("Third-Party Plans") seek to offer convenient health care options
to their members, management believes that the Company, with its
extensive network of locations, will have a competitive advantage
in attracting additional business. Management also believes that
attracting business from Third-Party Plans is crucial to remain
competitive in the drug store industry as more people move to
managed care health coverage. As part of this strategic plan, the
Company will use its position as a provider of health and wellness
products to sell related traditional drug store merchandise and
services, particularly over-the-counter drugs (OTC), health and
beauty aids, photo finishing services and supplies, greeting cards
and consumable products.
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MERCHANDISING
All of the Company's stores offer a wide variety of name brand
and private label merchandise, including prescription and
over-the-counter drugs, health and beauty aids, cosmetics, photo
finishing, consumable products such as candy, snacks, beverages
(and tobacco and liquor in many locations), and seasonal
merchandise such as Christmas, Easter and Halloween items, holiday
greeting cards and back-to-school and beach supplies.
The following chart sets forth the percentage of total retail
sales attributable to each major product category for the Company
for fiscal 1996:
Prescription Drugs 33.3%
OTC Drugs/Health and Beauty Aids 19.9%
Candy/Tobacco/Food & Beverage 12.6%
Cards/Stationery/Magazines 5.6%
Photo finishing/Camera 3.5%
General Merchandise 25.1%
--------
100.0%
========
In addition to the many name brand products offered in its
stores, the Company intends to actively promote its private label
products. As of September 29, 1996, the Company offered
approximately 1,300 private label stock keeping units ("SKUs"),
including over-the-counter drugs, health and beauty aids, household
products and, at Thrifty Drug and certain PayLess Drug stores,
hand-dipped and packaged ice cream. These private label products
are produced to the Company's specifications by outside
manufacturers (with the exception of ice cream products, which the
Company manufactures itself) and are packaged in a manner designed
to create brand awareness for the Thrifty or PayLess private label.
The Company rolled out dual logo (Thrifty PayLess) private label
packaging designs in 1996, replacing PayLess Drug and Thrifty Drug
labeled products. This eliminated the need for two separate
designs and related manufacturing. These private label products
provide consumers with high-quality, lower-priced alternatives to
name brand products while generating higher gross profit margins
than brand name products. The Company's sales of private label
products in fiscal 1996 as a percentage of total non-pharmacy sales
was 8.6%, compared to 6.5% in fiscal 1995.
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To enhance its reputation for convenience and reliability, the
Company will continue to emphasize maintenance of a consistent
in-stock position in its merchandise, especially for advertised
items. To appeal to cost-conscious consumers, drug store
merchandise is generally priced to be competitive with other retail
drug store chains.
PayLess Drug and Thrifty Drug stores seek to meet consumer
requirements within particular neighborhoods and communities by
permitting individual stores flexibility in tailoring their product
assortments to suit local demographics, tastes and trends. For
example, individual stores may emphasize convenience foods,
sporting goods, homeopathic products, souvenirs or certain health
and beauty products to meet community needs. PayLess Drug and
Thrifty Drug also develop micro-marketing programs targeting
particular segments of their customer base, such as senior
citizens, new residents, new mothers and multi-cultural consumers.
PHARMACY
Pharmacy and over-the-counter drug sales will continue to be
a primary focus of the Company's business. Each of the Company's
stores operates a full-service pharmacy staffed with registered
pharmacists. The Company filled approximately 57.4 million
prescriptions in fiscal 1996, representing approximately 33.3% of
total sales, compared to 51.0 million prescriptions or
approximately 30.7% of total sales in fiscal 1995. The Company
plans to focus on improving pharmacy operations to capitalize on
its convenient locations and strong presence on the West Coast, to
build customer loyalty, to increase customer traffic in its stores
and thereby increase sales of other products.
The Company believes that its prescription drug business will
represent an increasingly significant portion of its sales and
profits due to the demographic trend towards an aging population,
the continued development of new pharmaceutical products and
changing trends in the delivery of health care.
The Company emphasizes the role of pharmacies and pharmacy
personnel as providers of high quality health care and "wellness"
services. Free blood pressure testing machines are in operation
in all pharmacies. In addition, all stores have installed a
"Health Information Center" offering a variety of health care
booklets and consultation information. The Company employs a
series of classroom and video programs to train its pharmacists and
pharmacy technicians in customer service techniques and company
policies and practices. Health Screenings have been instituted at
certain store locations and
various education and outreach programs have been designed to
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increase customer loyalty and trust and to enhance the relationship
between customers and pharmacy personnel.
The Company engages in aggressive marketing campaigns to
attract Third-Party Plans under which third-party payors, such as
insurance companies, health maintenance organizations, preferred
provider organizations and private employers, agree to pay for all
or part of a customer's eligible prescription purchases. The
percentage of the Company's total prescription drug sales
attributable to sales to Third-Party Plan customers was 74.9% for
fiscal 1996, compared to 70.0% for fiscal 1995. Although gross
margins on sales to third-party payors are generally lower than
other prescription drug sales due to the highly competitive nature
of pricing for this business and the purchasing power of
third-party payors, management believes the lower margins are more
than offset by the high volume of pharmacy sales to Third-Party
Plan customers. In addition, the Company believes that Third-Party
Plans result in additional general merchandise sales by increasing
customer count in the stores. As of September 29, 1996, the
Company had contracts with 1,736 Third-Party Plans. Generally, the
terms of such contracts relate to the third-party payor's
reimbursement of the costs of pharmacy products sold by the
Company. Management plans to pursue additional Third-Party Plan
contracts through a group of sales associates, all of whom have
insurance and/or pharmacy backgrounds. Management believes that
the Company will continue to compete effectively for Third-Party
Plans because of its large number of store locations, pricing
policies, advanced technology systems, good service and convenience
to customers and third-party payors.
The Company's pharmacies employ state-of-the-industry PDX
pharmacy computer systems that link the pharmacies in each chain
and enable them to provide customers with a broad range of
services. Through the computer network, prescriptions may be
transferred electronically between stores, thus permitting
customers to refill their prescriptions at any location at any
time, regardless of where their prescriptions were originally
filled. In addition, the computer network maintains customer
profiles with medical and other information and assists pharmacists
in detecting customers' potential allergic reactions and potential
adverse drug reactions and in monitoring compliance with doctors'
instructions regarding drug orders and refills. The computer
network also supplies information concerning drug purchases to
customers for income tax and insurance purposes and prepares
prescription labels and receipts.
In addition to improving customer service, the computer
network expedites transactions with many Third-Party Plans by
electronically transmitting prescription information directly to
the third-party payor while the prescription is being filled.
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Prior to sale, the third-party payor is able to determine customer
eligibility, coverage of the prescription and pricing
and co-payment requirements, if any. These computerized
transactions help reduce losses from rejected claims, accelerate
the payment process and lower billing and collection costs.
HEALTH AND BEAUTY AIDS
The Company's stores offer a wide selection of brand name and
private label health and beauty aids, including cosmetics and
fragrances and products in the categories of dental care, skin
care, baby care, feminine hygiene and family planning. In
addition, the Company's stores emphasize various "wellness"
products, such as vitamins and food supplements and homeopathic
medicines, in order to appeal to consumer demand for products that
contribute to a healthy lifestyle.
PHOTO FINISHING
The Company offers overnight photo finishing services in all
of its stores, as well as one-hour photo finishing services through
special photo finishing centers installed in 269 stores.
Management believes that photo finishing services also contribute
significantly to sales of other merchandise categories by
generating customer traffic since customers are generally required
to visit a store twice in order to drop off and pick up film.
PayLess Drug and Thrifty Drug have each entered into photo
finishing services agreements with nationally recognized leaders
in photo finishing services that are capable of providing high
quality, low cost photo finishing services.
Photo finishing services are designed for customer
convenience, with drop boxes for film developing packages and
accessible film displays. Management intends to seek to increase
consumer awareness of its photo finishing services by emphasizing
its various trade names for such services. In addition to photo
finishing services, the Company's photo finishing departments offer
camera and photo accessories, small electronics, batteries and
audio and video tape.
MARKETING AND ADVERTISING
The marketing and advertising strategy for PayLess Drug and
Thrifty Drug is designed to promote the common merchandise mix
offered by both chains. This strategy has allowed the Company to
provide combined logo advertising throughout the state of
California. PayLess Drug and Thrifty Drug stores are promoted as
convenient, local drug stores serving the public's health care
needs by offering high quality pharmacy services and a large
selection of core drug store merchandise.
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Advertisements are designed to focus on specially priced
promotional items to attract customers to the Company's stores,
highlight key products among the stores' broad assortment of
merchandise and include institutional pharmacy messages. The
Company's advertising activities primarily employ print, including
weekly color circulars distributed through local newspapers and
direct mail packages and coupon/value books mailed to select zip
codes within each store's designated trading area. The Company
also utilizes "micro-marketing" and broadcast advertising to
provide a comprehensive advertising and marketing program. In
addition, consumer surveys and focus groups are conducted to assist
in monitoring consumer requirements, attitudes and habits.
The Company's net advertising cost was $41.0 million or 0.9%
of sales for fiscal 1996. Gross advertising costs for the Company
are substantially offset through cooperative advertising allowances
received from vendors.
STORE OPERATIONS
All stores are open seven days a week for an average of 12 to
14 hours each day. The Company has 17 stores with a 24-hour
schedule and is evaluating the success of these stores to determine
if additional stores will adopt this schedule. Stores are
generally operated on a self-service basis (except for pharmacy,
photo finishing and ice cream product sales), with personnel
available for customer assistance when required. Store layout and
product displays are designed with the use of a computerized space
management system that maximizes productivity per square foot of
selling space, maintains consistency in merchandising and reduces
inventory requirements. The Company's stores share common design
features and merchandise mix for the convenience of customers and
to reinforce marketing and advertising efforts.
All store employees participate in training programs covering
such matters as electronic checkout systems, employment policies
and customer service techniques designed to create a friendly
shopping environment. Prior to assuming a management position,
each store manager attends a comprehensive management training
course that focuses on all elements of store operations, including
inventory ordering, merchandising, pricing policies, employee
relations and store maintenance, all with an emphasis on customer
service. In addition, assistant managers are trained for the
possibility of assuming overall management of new stores as they
are opened. Various management meetings are also conducted at all
levels of operations to ensure uniform implementation of corporate
initiatives and policies.
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In order to reduce inventory shrinkage, the Company has
various incentive programs, including training and awareness
programs, tailored audit programs for district managers, internal
auditors and loss prevention specialists, and computerized
exception reporting for, among other things, customer refunds,
voids and cash overages and shortages from daily register
check-outs. In addition, the Company has installed Electronic
Article Surveillance (EAS) equipment in approximately 450 stores
located in high risk areas in order to reduce theft-related
shrinkage and intends to install EAS units Company wide throughout
fiscal 1997.
PURCHASING AND DISTRIBUTION
Approximately 75 percent of store merchandise, including
prescription drugs, are centrally purchased directly from
manufacturers to take advantage of promotional and volume discount
programs offered to retailers. The balance of store merchandise
is shipped directly to the Company's stores from manufacturers and
distributors at prices negotiated at the corporate level. The
Company utilizes electronic purchase orders via Electronic Data
Interchange (EDI) by transmitting orders to more than 300 of its
suppliers. EDI allows for the paperless ordering of products with
immediate confirmation from the vendor on price, delivery terms and
amount of goods ordered. In addition, the Company uses an
automated replenishment system at its distribution centers. For
fiscal 1996, no single vendor accounted for more than 10.0% of
total Company purchases. The Company believes it has numerous
alternative sources of supply for the merchandise sold in its
stores.
TECHNOLOGY AND MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems consist of
computer networks designed to improve customer service, refine
merchandising information, reduce operating costs and inventory
levels and support management's decision-making process. All
stores are equipped with point-of-sale scanning devices that record
the sale of every product, enabling stores to generate daily sales
data with respect to each item and category of merchandise as well
as every department in each store. In addition, hand-held
terminals are used for inventory ordering and auditing, which tend
to improve store productivity and the accuracy of data generated.
The Company utilizes satellite communications and a video
networking system linking together all of its stores. The
communication network enables the Company to disseminate
information quickly and efficiently and maintain close contact
between corporate headquarters and each store.
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REGULATION
The Company's pharmacists and pharmacy technicians are
required to be licensed by the appropriate state board of pharmacy.
All stores with pharmacies and certain distribution centers are
also registered with the Federal Drug Enforcement Administration.
The majority of stores sell alcoholic beverages and are subject to
various state and local licensing requirements as a result. In
addition, some stores sell firearms and ammunition and as a result
are subject to additional regulatory requirements. By virtue of
these license and registration requirements, the Company will be
obligated to observe certain rules and regulations, and a violation
of such rules and regulations could result in a suspension or
revocation of one or more licenses or registrations.
In 1990, the United States Congress enacted the Omnibus Budget
Reconciliation Act of 1990 ("OBRA"), which requires states to
implement pharmaceutical drug use review programs for Medicaid
beneficiaries by January 1, 1993. Under OBRA, pharmacists are
required to offer counseling, without additional charge, to
customers covered by Medicaid about their medication, dosage,
delivery system, common side effects and other information deemed
significant by the pharmacists. The states in which the Company
operates have enacted broader regulations that require pharmacists
to provide such counseling to all customers, regardless of whether
they are covered by Medicaid. As a result, the Company's
pharmacists must provide counseling to customers and have a duty
to warn customers regarding any potential adverse effects of a
prescription drug if the warning could reduce or negate such
effects. The Company believes its series of training programs for
pharmacy personnel and state-of-the-industry pharmacy computer
network are well designed to ensure that these requirements are
satisfied, but violations of these regulations could have an
adverse impact on the Company.
In recent years, prescription drug sales have represented a
growing portion of the Company's revenues. These revenues may be
affected by changes within the health care industry, including
changes in programs providing for reimbursement of the cost of
prescription drugs by third-party payors and regulatory changes
relating to the approval process for prescription drugs. Although
no health care reform legislation was adopted in the most recent
session of Congress, it is likely that Congress will revisit the
issue in the future. The Company cannot predict whether or in what
form health care reform legislation may be adopted in the future,
at the federal or state level, or the impact of any such
legislation on the Company's financial position or results of
operations. However, to the extent health care reform expands the
number of persons receiving health care benefits covering the
purchase of prescription
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drugs, it could result in increased purchases of such drugs and
could thereby have a favorable impact on both the Company and the
retail drug industry in general. Nevertheless, there can be no
assurance that any such legislation will be enacted or, if enacted,
that such legislation will have a favorable effect on the Company.
The Company has contracts with numerous Third-Party Plans
under which its stores provide pharmacy services. Several of the
states where these stores are located have enacted "freedom of
choice" statutes that entitle any pharmacy to provide pharmacy
services under these contracts. Such statutes tend to increase
competition for Third-Party Plan contracts and therefore could
negatively impact the Company. Management believes, however, that
the Company will be well positioned to compete for Third-Party Plan
contracts based on its large number of store locations, pricing
policies, advanced technology systems, reputation for good service
and convenience to customers and third-party payors.
The Company is subject to laws governing its relationship with
employees, including minimum wage requirements, overtime and
working conditions. An increase in the minimum wage rate, employee
benefit costs or other costs associated with employees could
adversely affect the Company.
COMPETITION
The Company competes in its markets with several national,
regional and local drug store chains, large grocery stores and
supermarkets, membership clubs, deep discount drug stores,
combination food and drug stores, discount general merchandise
stores, mass merchandisers, independent drug stores and local
merchants. In addition to competition with the foregoing, the
Company's pharmacy departments also compete with hospitals, health
maintenance organizations and mail order providers, which have
experienced significant growth in their market share, and the
Company's photo finishing centers also compete with a variety of
mini-lab photo-processors and photo-specialty shops. Many of the
Company's competitors have substantially greater financial
resources than the Company.
The Company believes that the primary elements of competition
in its industries include pricing, store location and design,
product selection and customer service. The Company believes that
it competes successfully because of its pricing policies,
reputation for reliability, convenient store locations, superior
pharmacy services, broad selection of merchandise and effective
sales techniques. However, the competitive environment is often
affected by factors beyond a particular retailer's control, such
as shifts in consumer preferences, economic conditions, and
population and traffic
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patterns. The Company believes that in the future, the ability
to compete effectively will be increasingly dependent on superior
merchandising and customer service, the effectiveness of cost
containment measures, especially with respect to pharmacy services,
and superior information systems for general management.
EMPLOYEES
As of September 29, 1996, the Company had approximately 32,500
employees, of which approximately 61% were full-time.
Approximately 13,300 employees were covered by collective
bargaining agreements and represented by various union locals. The
collective bargaining agreements have express expiration dates and
are therefore subject to review and renewal on a regular basis.
Most of the employees covered by such collective bargaining
agreements work at Thrifty Drug stores in California and in PayLess
Drug stores in Northern California and in the greater Seattle area
in Washington. The Company has not experienced any material
business interruption as a result of labor disputes within the past
five years, and considers its employee relations to be good.
TRADE NAMES AND TRADEMARKS
The Company uses various trade names and trademarks, including
PayLess Drug, Thrifty Drug, Thrifty Jr., Rexall Square Drugs,
Bi-Mart and RxMart, and has registered the trademarks PayLess Drug
and Thrifty with the United States Patent and Trademark Office.
ITEM 2. PROPERTIES
STORE LOCATIONS
As of September 29, 1996, the Company's stores by type and
location are as follows:
PayLess Drug Thrifty Drug Bi-Mart Total
-------------- ------------ ------- ------
California 220 457 - 677
Washington 147 - 8 155
Oregon 76 - 37 113
Colorado 30 - - 30
Utah 27 - - 27
Idaho 19 - - 19
Nevada 13 - - 13
Alaska 10 - - 10
All other stores 5 - - 5
----- ----- ---- -------
Total 547 457 45 1,049
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The Company's stores average approximately 17,575 square feet
of selling space and are located in neighborhood and community
shopping centers or in freestanding buildings.
As of September 29, 1996, the Company owned 153 operating
stores in fee. The balance of the stores are leased with an
average remaining lease term of 25 years, including all options.
Most of the store leases are "triple net", requiring the Company
to pay all taxes, insurance and common area maintenance expenses
associated with the properties, and provide for fixed minimum
rentals together with a percentage rental based upon sales.
During fiscal 1996, the Company closed or sold 10 stores. Of
the total number of stores closed or sold, 9 were closed or sold
due to their inability to achieve adequate returns. One store was
closed due to its close proximity to a nearby PayLess Drug.
Management will consider closing certain other stores based on a
case-by-case review of the performance and profitability of each
store.
As of September 29, 1996, the Company had a portfolio of 80
non-operating properties, 13 of which are owned in fee and 67 of
which are leased properties. The Company has in place a number of
strategies to dispose of these properties.
WAREHOUSE FACILITIES
The Company's warehouse facilities consist of the following:
Approximate
Location Square Footage
--------- ---------------
Ogden, Utah 638,000
Woodland, California 500,000
Wilsonville, Oregon 500,000
Ontario, California 415,900
Eugene, Oregon 200,000
Yakima, Washington 20,000
The facilities in Ogden, Utah, Woodland and Ontario,
California and Wilsonville, Oregon, are owned in fee. Those
located in Eugene, Oregon and Yakima, Washington are leased.
The Company leases four warehouse facilities, pursuant to a
master lease. The master lease includes two facilities that are
subleased to certain affiliates of the Company. See "Item 13.
Certain Relationships and Related Transactions - Relationship With
Big 5" and "- Relationship With Gart." The other two facilities
located in Yakima, Washington and Eugene,
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Oregon serve Bi-Mart stores exclusively. The master lease provides
the Company with options to purchase any real property under such
lease for an amount equal to the greater of the property's fair
market value (as agreed upon by the parties or determined by an
independent appraiser, exclusive of the value of any ground lease
or lessee improvements) or the property's "Adjusted Acquisition
Cost", as defined.
OTHER PROPERTIES
The Company's corporate headquarters which is owned in fee is
located in 160,000 square feet of office space in Wilsonville,
Oregon, adjacent to the Wilsonville distribution center. The
Company also owns its 52,200 square foot ice cream manufacturing
plant located in El Monte, California.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time
involved in ordinary routine litigation incidental to the conduct
of their business. The Company regularly reviews all pending
litigation matters in which it is involved and establishes reserves
deemed appropriate for such litigation matters. Management
believes that no such pending litigation matters will have a
material adverse effect on the Company's financial statements taken
as a whole or on its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND DEBT
SECURITIES AND RELATED STOCKHOLDER MATTERS
All of the outstanding common stock of Thrifty PayLess is held
by Rite Aid.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
OF THRIFTY PAYLESS, INC.
(Dollars in millions)
The following selected historical consolidated financial data
presented in the table below is derived in part from, and should
be read in conjunction with, the Consolidated Financial Statements
and Notes thereto of the Company included elsewhere herein. The
Company had no operations prior to the 1992 Acquisition.
Accordingly, financial information for the 39 weeks ended September
27, 1992 is that of Thrifty Corporation ("Predecessor Company")
<TABLE>
<CAPTION>
Predecessor
The Company (1) Company (1)(2)
1996 1995 1994 1993 1992(3)(4)
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Sales.................................. $ 4,798.9 $ 4,658.8 $ 3,163.3 $ 2,119.1 $ 1,917.9
Cost of sales, buying and occupancy 3,517.5 3,413.0 2,311.1 1,571.0 1,431.8
Gross Profit................... 1,281.4 1,245.8 852.2 548.1 486.1
Selling and administration......... 1,022.7 1,065.5 746.8 538.8 559.7
Write-off of goodwill.............. - - - - 17.2
Depreciation and amortization...... 68.4 69.1 30.1 1.8 31.5
Operating profit(loss)......... 190.3 111.2 75.3 7.5 (122.3)
Interest expense, net.............. (104.0) (119.4) (56.6) (11.8) (27.8)
Loss on sale of assets............. - - - - (25.6)
Income (loss) before income
taxes........................ 86.3 (8.2) 18.7 (4.3) (175.7)
Income tax (expense) benefit....... (36.0) 2.1 (8.3) 1.1 (0.5)
Income (loss) from continuing
operations........................ 50.3 (6.1) 10.4 (3.2) (176.2)
Income(loss) from discontinued
operations, net of income taxes... - - 5.2 3.7 39.1
Extraordinary loss on debt
extinguishment.................... (85.5) (7.4) - - -
Net income (loss).......... $ (35.2) $ (13.5) $ 15.6 $ 0.5 $ (137.1)
OTHER OPERATING DATA:
Number of stores at end of period.. 1,049 1,040 1,068 535 637
Same-store sales increases......... 3.3% 2.5% 4.0% 1.4% 4.9%
Prescription sales ($)............. $ 1,600.6 $ 1,429.0 $ 896.8 $ 548.7 $ 497.3
Prescription sales (%)............. 33.3% 30.7% 28.3% 25.9% 25.9%
Cash provided by (used in)
operations..................... $ 119.4 $ 8.5 $ 64.6 $ (77.9) $ (6.2)
EBITDAL (5)........................ 268.0 204.3 106.0 10.0 (75.6)
Capital expenditures (6)........... 42.7 54.3 82.3 31.5 25.0
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................... $ 499.0 $ 509.3 $ 469.6 $ 139.5 $ 280.2
Total assets (7)................... 2,067.9 2,101.5 2,139.4 688.8 1,046.2
Long-term debt..................... 794.4 913.2 866.9 62.4 91.1
Shareholder's equity............... 378.8 294.9 308.4 46.1 261.1
OTHER DATA:
Ratio of earnings to fixed charges. 1.5x N/A 1.2x N/A N/A
</TABLE>
14
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
OF THRIFTY PAYLESS, INC.
(Dollars in Millions)
(1) The fiscal periods include 52 weeks for fiscal 1996, 1995 and
1994, 53 weeks for fiscal 1993, and 39 weeks for fiscal 1992.
(2) The Predecessor Company period include the operations of Pay'n
Save until July 25, 1992, when it was sold to PayLess Drug.
(3) Includes the initial two days (September 26 and September 27)
of the Company's period.
(4) The fiscal period ended September 27, 1992, represents the
nine-month period created by a change in fiscal year end of Thrifty
Drug from December to September.
(5) EBITDAL represents operating income plus depreciation and
amortization expense, write-off of goodwill and LIFO provision,
including step-up. EBITDAL is not intended to represent cash flow
or any other measure of performance in accordance with Generally
Accepted Accounting Principles (GAAP). EBITDAL is included here
because management believes that certain investors find it to be
a useful tool for measuring a company's ability to service its
debt. See the Consolidated Statements of Cash Flows in the
Consolidated Financial Statements for Thrifty PayLess included
elsewhere herein.
(6) Capital expenditures do not include expenditures for business
acquisitions.
(7) Included in total assets are net assets related to
discontinued operations of $49.1, and $57.4, at October 3, 1993,
and September 25, 1992, respectively.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARABILITY OF FINANCIAL DATA
As a result of the Acquisition, PayLess Drug's operations are
included in the Company's financial statements beginning April 20,
1994. Consequently, results of operations for the Company between
fiscal 1995 and 1994 are not comparable. Additionally, concurrent
with the Company's acquisition of PayLess Drug, certain sporting
goods operations were discontinued and have been accounted for as
discontinued operations. The accompanying discussion and analysis
does not discuss discontinued operations.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth the Company's operating results
for the periods indicated, both in millions of dollars and
expressed as a percentage of sales.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995 Fiscal 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales $4,798.9 $ 4,658.8 $ 3,163.3
Cost of sales, buying and occupancy 3,517.5 3,413.0 2,311.1
Gross profit 1,281.4 1,245.8 852.2
Selling and administration 1,022.7 1,065.5 746.8
Depreciation and amortization 68.4 69.1 30.1
Operating profit 190.3 111.2 75.3
Interest expense, net (104.0) (119.4) (56.6)
Income (loss) before taxes 86.3 (8.2) 18.7
Income tax (expense) benefit (36.0) 2.1 (8.3)
Income (loss) from continuing operations $ 50.3 $ (6.1) $ 10.4
EBITDAL $ 268.0 $ 204.3 $ 106.0
Sales 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy 73.3 73.3 73.1
Gross profit 26.7 26.7 26.9
Selling and administration 21.3 22.9 23.6
Depreciation and amortization 1.4 1.5 1.0
Operating profit 4.0 2.4 2.4
Interest expense, net (2.2) (2.6) (1.8)
Income (loss) before taxes 1.8 (0.2) 0.6
Income tax (expense) benefit (0.8) - (0.3)
Income (loss) from continuing operations 1.0 % (0.2)% 0.3%
EBITDAL 5.6 % 4.4 % 3.4%
</TABLE>
16
<PAGE>
COMPARISON OF THE 52 WEEK PERIOD ENDED SEPTEMBER 29, 1996 ("FISCAL
1996") WITH THE 52 WEEK PERIOD ENDED OCTOBER 1, 1995 ("FISCAL
1995")
Sales for fiscal 1996 increased by $140.1 million or 3.0
percent as compared to fiscal 1995. Comparable store sales
increased 3.3 percent with pharmacy comparable store sales up 12.4
percent and non-pharmacy merchandise comparable store sales lower
by 0.7 percent. Pharmacy sales as a percentage of total sales were
33.3 percent for fiscal 1996, up from 30.7 percent of sales in
fiscal 1995. Third-party pharmacy sales as a percent of total
pharmacy sales were 74.9 percent for fiscal 1996 compared to 70.0
percent in fiscal 1995.
Gross profit as a percent of sales was 26.7 percent for fiscal
1996, consistent with fiscal 1995. FIFO gross profit as a
percentage of sales was 26.9 percent in fiscal 1996 compared to
27.3 percent the prior year. The decrease in FIFO gross profit
results primarily from continued pressure on gross margins related
to lower margin third-party pharmacy sales.
Selling and administration expenses for fiscal 1996 were 21.3
percent of sales compared to 22.9 percent in fiscal 1995. The
decrease results primarily from cost reductions realized by
combining administrative services and operations of Thrifty Drug
and PayLess Drug stores including a reduction in advertising
expense of $31.5 million. Additionally, a gain on the sale of
properties of $7.8 million was realized in fiscal 1996 with no such
gain in fiscal 1995.
Net interest expense decreased by $15.4 million to $104.0
million or 2.2% of sales in fiscal 1996 compared with $119.4
million or 2.6% of sales in fiscal 1995. In April 1996, T P
Holdings and the Company completed a recapitalization, as described
below, reducing both the level of long term debt and the average
effective interest rate.
The effective income tax rate for fiscal 1996 was 41.7%
compared to 25.6% for fiscal 1995. The change in the effective tax
rate results from the leveraged effect of goodwill amortization,
and other items not deductible for income tax purposes.
Operating profit increased $79.1 million to $190.3 million
or 4.0 percent of sales in fiscal 1996 compared to $111.2 million
or 2.4 percent of sales in fiscal 1995.
As discussed in Note 3 of the Consolidated Financial
Statements, the Company completed a recapitalization in fiscal 1996
resulting in an $85.5 million (net of a $9.5 million tax benefit)
extraordinary loss associated with early extinguishment
17
<PAGE>
of debt. In the prior year, the Company realized a $7.4 million
(net of a $4.5 million tax benefit) extraordinary loss related to
early extinguishment of debt.
EBITDAL was $268.0 million or 5.6 percent of sales for fiscal
1996 compared to $204.3 million or 4.4 percent of sales in fiscal
1995.
COMPARISON OF THE 52 WEEK PERIOD ENDED OCTOBER 1, 1995 ("FISCAL
1995") WITH THE 52 WEEK PERIOD ENDED OCTOBER 2, 1994 ("FISCAL
1994")
The financial results of fiscal 1994 include approximately 23
weeks of operations of PayLess Drug compared to 52 weeks for fiscal
1995. Accordingly, an increase of approximately 44% in sales with
related costs and operating expenses in fiscal 1995 compared to
fiscal 1994 relate to the additional weeks of PayLess Drug's
operations.
Sales for fiscal 1995 were $4,658.8 million compared to
$3,163.3 million for fiscal 1994, an increase of $1,495.5 million
or 47.3%. In addition to the increase noted above, comparable
store sales (excluding PayLess Drug) increased by 2.5% compared to
fiscal 1994 with an 8.6% increase in pharmacy sales and a 0.4%
increase in non-pharmacy merchandise comparable store sales. On a
pro forma combined basis (including PayLess Drug), comparable store
sales increased by 2.8% in fiscal 1995 compared to fiscal 1994 with
an 11.3% increase in pharmacy sales and a 0.5% decrease in non-
pharmacy merchandise sales.
Pharmacy sales as a percentage of total sales were 30.7% for
fiscal 1995 as compared to 28.5% for fiscal 1994 on a pro forma
combined basis. The growth in pharmacy sales was primarily the
result of increased third-party payors sales, which as a percentage
of total pharmacy sales was 70.0% in fiscal 1995, compared to 65.8%
for fiscal 1994, on a pro forma combined basis.
Gross profit, net of buying and occupancy costs, as a
percentage of sales was 26.7% for fiscal 1995 compared to 26.9% for
fiscal 1994. The decrease was due in part to reduced gross profit
margins in the pharmacy area. Additionally, the LIFO valuation
expense (income) was $24.0 million in fiscal 1995 compared with
$(0.6) million in fiscal 1994.
Selling and administration expenses as a percentage of sales
were 22.9% for fiscal 1995 compared to 23.6% for fiscal 1994. The
decrease is primarily related to reductions in administration
expense as the Company combined administrative services of Thrifty
Drug and PayLess Drug into one location.
18
<PAGE>
Depreciation and amortization expense increased to $69.1
million in fiscal 1995 as compared to $30.1 million in fiscal 1994.
The increase relates to a full year charge for PayLess Drug and
depreciation on capital additions during fiscal 1995.
Net interest expense was $119.4 million for fiscal 1995
compared to $56.6 million for fiscal 1994. The increase is
primarily the result of a full 52 week period of interest in fiscal
1995 compared to approximately 23 weeks borrowing in fiscal 1994
and a balance outstanding in fiscal 1995 under the Company's
revolving line of credit.
The effective income tax rate for fiscal 1995 was 25.6%
compared to 44.4% in fiscal 1994. The change in effective tax
rate is primarily the result of the leveraged effect of goodwill
amortization, a non-deductible expense.
In September 1995, PayLess Drug was merged into the Company
which required early payment of a debt obligation. The early
payment resulted in an extraordinary charge of $7.4 million, net
of a tax benefit of $4.5 million.
Net income (loss) for fiscal 1995 was ($13.5) million
compared to $15.6 million in fiscal 1994. The decrease is related
to items noted above.
EBITDAL was $204.3 million or 4.4% of sales in fiscal 1995,
compared to $106.0 million or 3.4% of sales for fiscal 1994 as a
result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of liquidity have
been cash from operations and borrowings under its $750.0 million
secured bank facility. The secured bank facility has historically
been used to meet seasonal fluctuations in working capital
requirements, primarily inventory purchases, with such requirements
peaking in November, and capital expenditures.
For fiscal 1996, cash flow provided by operating activities
was $119.4 million. Included as uses of cash are payments for store
closures, cancellation of leases and employee severance of $26.0
million related primarily to the Acquisition and the consolidation
of operations. Cash used in investing activities was $37.7 million
with capital expenditures of $42.7 million and proceeds from the
sale of assets of $14.6 million. Cash used in financing activities
was $81.3 million, primarily the net effect of the 1996
recapitalization.
19
<PAGE>
Management estimates capital expenditures for fiscal 1997 to
be $84.1 million. In addition, management anticipates that
approximately $16.5 million in payments will be made in fiscal 1997
relating to leases on closed stores and Acquisition related
severance costs. Management believes that cash from operations,
combined with borrowing from Rite Aid Corporation and other
financing sources, in the ordinary course of business, will be
sufficient to enable the Company to meet all of its obligations
when due.
In connection with the Merger, Rite Aid entered into a 364
day revolving credit facility with a syndicate of commercial banks
that provides for loans in an aggregate amount of up to $1.0
billion. This credit facility is a revolving credit facility that
converts in December 1997 to a term loan that will mature in
December 1998. In addition, Rite Aid has a 5 year, $1.0 billion
revolving credit facitly that expires on July 19, 2001. The
facilities have per annum facility fees of .07% and .085%,
respectively, and will be used for general corporate purposes
including loans to Thrifty PayLess and support of Rite Aid's
commercial paper program. Loans under the credit facilities bear
interest at a floating rate based, at Rite Aid's option, on LIBOR,
Money Market, CD rates or the lenders' Base Rate. No amounts were
outstanding under the Rite Aid Credit Facilities as of December 20,
1996.
The funds for the repayment of Thrifty PayLess' outstanding
obligations under its secured bank facility (approximately $718.1
million aggregate principal amount at December 12, 1996), the
conversion of outstanding T P Holdings stock options into cash upon
consummation of the Merger (approximately at $46.3 million) and the
payment of certain fees and expenses relating to the Merger
(estimated at $30.0 million) were provided through the issuance of
commercial paper by Rite Aid.
On December 20, 1996, Rite Aid Corporation issued certain
unsecured notes and debentures (the "Securities") with an aggregate
principal amount of $1.0 billion. These securities will not be
redeemable prior to maturity and will not be subject to any sinking
fund. Three tranches were issued as follows:
Principal
Amount Rate Security Maturity
--------- ---- -------- -------------------
$350,000,000 6.70% Notes Due December 15, 2001
$350,000,000 7.125% Notes Due January 15, 2007
$300,000,000 7.70% Debenture Due February 15, 2027
Interest on the 6.70% notes is payable semiannually on June
15 and December 15 of each year, commencing June 15, 1997; interest
on the 7.125% notes is payable semiannually on July 15
20
<PAGE>
and January 15 of each year, commencing July 15, 1997; and interest
on the 7.70% Debentures is payable semiannually on August 15 and
February 15 of each year, commencing August 15, 1997.
The net proceeds to Rite Aid were $991.6 million after
deducting expenses and were used to repay commercial paper issued
by Rite Aid in connection with the extinguishment of Thrifty
PayLess' secured bank facility and to refinance other commercial
paper previously issued by Rite Aid. Rite Aid's commercial paper
to be repaid has a weighted average interest rate of approximately
5.5% per annum. Obligations repaid under Thrifty PayLess' secured
bank facility in connection with the Merger had an average
interest rate of 7.2% per annum and an average maturity of 31 days
as of November 24,1996.
As a result of the Merger, Rite Aid is obligated to offer to
purchase all of Thrifty PayLess' outstanding 12 1/4% Senior
Subordinated Notes due 2004 (approximately $195.0 million aggregate
principal amount) at 101% of the principal amount thereof. On
December 23, 1996, Rite Aid began its tender offer to purchase
these securities and solicited consents that would eliminate
substantially all covenants governing this debt.
The Company's financial condition is affected by economic
conditions in its primary markets, including California, Oregon and
Washington, and by regulatory conditions relating to the industries
in which the Company competes. Management cannot predict the
nature or effect of any health care legislation that may be passed;
however, the implementation of certain types of regulations could
adversely affect the pricing of prescription drugs, the amount of
reimbursements paid by governmental agencies and third-party payors
or the amount of insurance coverage the Company is required to
provide its employees.
The Company has adopted various tax positions (including the
adoption of the LIFO method of inventory accounting), which
positions it believes comply with applicable tax laws and
regulations. However, in the event such positions are challenged
and are not upheld, there could be a material adverse effect on the
Company's liquidity and financial condition. The Company's
consolidated federal tax returns for the fiscal years 1992 through
1994 are currently being examined by the Internal Revenue Service,
which has challenged and/or raised issues with respect to certain
positions adopted by the Company.
21
<PAGE>
FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impaired of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Statement No. 121 provides specific guidance
regarding when impairment of long lived assets such as plant,
equipment and certain intangibles, including goodwill, should be
recognized and how impairment losses of such assets should be
measured. Statement No. 121 is effective for fiscal years
beginning after December 15, 1995. The Company is preparing to
adopt Statement No. 121 in fiscal 1997 and expects that the impact
on its statements of operations and financial position will not be
material.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's internal inflation trend remained consistent
during the three-year period ended September 29, 1996 with
decreases in front end merchandise offset by higher pharmacy costs.
Though not significant, inflation continues to cause increases in
product, occupancy and operating expenses, as well as the cost of
acquiring capital assets. The effect of higher costs is minimized
by achieving operating efficiencies and passing vendor price
increases along to consumers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to Item 14 of this Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT
The following table sets forth information with respect to the
Company's directors and executive officers as constituted September
29, 1996 through the date of the Merger (December 12, 1996).
Following the Merger, the following persons ceased to hold the
positions indicated below.
Name Age Positions with the Company
----------------------- ---- --------------------------
Gordon D. Barker 50 Chief Executive Officer,
President and Director
David R. Jessick 43 Executive Vice President
& Chief Financial Officer
Richard Juliano 49 Executive Vice President-
Merchandising
Barbara R. Crane 45 Senior Vice President,
Store Operations- North
James W. Gaube 47 Senior Vice President,
Real Estate
John J. Greer 54 Senior Vice President,
Store Operations-South
Don P. Davis 45 Senior Vice President, MIS
James C. Hamilton 53 Senior Vice President,
Human Resources
Andrew A. Striefel 51 Senior Vice President,
Merchandising
& Advertising
Willard E. Wilson 54 Senior Vice President,
Health Services
Gary S. Meade 50 Vice President,
Legal Affairs & Secretary
Leonard I. Green 63 Director
Jonathan D. Sokoloff 39 Director
Jennifer Holden Dunbar 33 Director
Jack W. Goodall 58 Director
Richard J. Lynch, Jr. 45 Director
Frank G. Felicella 49 Director
The executive officers of the Company served at the pleasure
of the Board of Directors. The directors of the Company were
elected at each annual meeting of stockholders to serve for a term
of one year or until their successors have been elected and
qualified.
Gordon D. Barker was named Chief Executive Officer and a
Director of the Company in January 1996 and continued to serve as
President, which position he has held since December 1994. He had
previously served as Chief Operating Officer of the Company since
December 1994 and as the Senior Executive Vice President of the
Company from the Acquisition to December 1994.
23
<PAGE>
Prior to the Acquisition, Mr. Barker had served in a variety of
positions since joining PayLess in 1968, including appointments as
Executive Vice President in 1993, Senior Vice President of
operations in 1991, Senior Vice President of Pharmacy in 1990 and
Vice President, Pharmacy in 1989.
David R. Jessick has served as Executive Vice President -
Finance and Chief Financial Officer of the Company since the
Acquisition. Mr. Jessick became Senior Vice President and Chief
Financial Officer of PayLess in December 1990. For more than five
years prior to 1990, he served in a variety of positions with
PayLess, including Vice President and Corporate Controller and
Assistant Treasurer.
Richard Juliano was named Executive Vice President of
Merchandising, Marketing and Advertising in April 1996. Prior to
joining the Company, Mr. Juliano was Senior Vice President of
Merchandising and Marketing at Phar-Mor, a position he held since
1990.
Barbara R. Crane has been Senior Vice President of Operations
- North since October, 1995. Prior to this, Ms. Crane was Senior
Vice President of Operations of the Company since the Acquisition.
Prior to the Acquisition, Ms. Crane had served in a variety of
positions since joining PayLess in 1970, including appointments as
Vice President of Merchandising Systems in 1993 and District
Manager in 1985.
James W. Gaube has served as Senior Vice President of Real
Estate, Design and Construction since April, 1995. Mr. Gaube was
the Western Regional Real Estate Director for Home Depot, Inc. from
July, 1994 through March, 1995. From the Acquisition to June,
1994, Mr. Gaube served as Senior Vice President of Real Estate for
the Company. Prior to the Acquisition, Mr. Gaube served as Senior
Vice President of Real Estate for PayLess, having been promoted to
that position in 1990.
John J. Greer has served as Senior Vice President of Store
Operations - South since October, 1995. Mr. Greer served as Vice
President, Labor Relations from May 1995 to October 1995. From the
Acquisition to May, 1995, Mr. Greer served as Group Vice President,
Labor Relations for the Company. Prior to the Acquisition, Mr.
Greer served in a number of store operations positions after
joining Thrifty Corporation in 1965, including Vice President of
Store Operations and Regional Vice President of Operations for the
Southern Division.
24
<PAGE>
Don P. Davis has served as Senior Vice President of MIS of the
Company since November 1994. Prior to such time, he was Vice
President of MIS for the Company since the Acquisition. Prior to
that time, Mr. Davis had served in a variety of positions since
joining PayLess in 1982, including as Vice President of MIS since
1990 and Planning Manager prior to that.
James C. Hamilton has been Senior Vice President of Human
Resources of the Company since August 1994. Before then, he had
served as District Manager for PayLess' operations in Northern
California and Southern Oregon since 1980.
Andrew A. Striefel has served as Senior Vice President of
Merchandising and Advertising of the Company since September 1994.
Prior to that time, Mr. Striefel has served in a variety of
positions since joining PayLess in 1967, including appointments as
Vice President of Merchandise in 1991 and Director of Merchandise
in 1990.
Willard E. Wilson has served as Senior Vice President of
Health Services of the Company since the Acquisition. Prior to the
Acquisition, Mr. Wilson had served in a variety of positions since
joining PayLess in 1965, including appointments as Vice President
of Pharmacy Operations in 1991 and Director of Merchandising in
1988.
Gary S. Meade was named Secretary of the Company in March
1995. He has served as Vice President, Legal Affairs of the
Company since August 1993. Prior to that time, Mr. Meade had
served in a variety of positions since joining the Thrifty
Corporation Legal Department in 1970, including as Vice President,
Legal Affairs since 1986.
Leonard I. Green has served as director of the Company since
September 1992. Since 1989, he has been, individually or through
a corporation, a partner of LGA, which is the general partner of
GEI. Before forming LGA in 1989, Mr. Green had been a partner of
the merchant banking firm of Gibbons, Green, van Amerongen for more
than five years. Mr. Green is also a director of Carr-Gottstein
Foods Co., Foodmaker Inc., Horace Mann Educators Corp. and several
private companies.
Jonathan D. Sokoloff has been a director of the Company since
September 1992. He joined LGA as a partner in 1990. Mr. Sokoloff
was previously a Managing Director at Drexel Burnham Lambert
Incorporated. Mr. Sokoloff is also a director of Carr-Gottstein
Foods Co., and several private companies.
Jennifer Holden Dunbar has been a director of the Company
since September 1992. She joined LGA as an associate in 1989,
became a principal in 1993, and through a corporation became a
25
<PAGE>
partner in 1994. Ms. Holden Dunbar previously was an associate
with the merchant banking firm of Gibbons, Green, van Amerongen and
a financial analyst in mergers and acquisitions with Morgan Stanley
& Co. Ms. Holden Dunbar is also a director of Kash n' Karry Food
Stores, Inc., and several private companies.
Jack W. Goodall became a director of the Company in October
1992. He has been President of Foodmaker, Inc., since April 1970,
its Chief Executive Officer since February 1979 and its Chairman
since October 1985. He is director of Ralcorp Holdings, Inc. and
Van Camp Seafood Company, Inc. Mr. Goodall indirectly owns an
approximately 0.5% limited partnership interest in GEI.
Richard J. Lynch, Jr. has served as a director of the Company
since the Acquisition. Since February 1996, Mr. Lynch has served
as the President and Chief Operating Officer of The Sports
Authority, Inc., a publicly owned retail sporting goods chain.
Prior thereto, since 1988, he had served as Senior Vice President,
Chief Financial Officer, Treasurer and Secretary of such company.
Prior to 1988, Mr. Lynch served as Executive Vice President and
Chief Financial Officer of Sportsclub, Inc.
Frank G. Felicella has served as a director of the Company
since the Acquisition. Mr. Felicella has served since 1993 as the
Chief Executive Officer and President of Builders Square, Inc., a
chain of retail home improvement centers and a wholly-owned
subsidiary of Kmart. Mr. Felicella joined Builders Square in 1992
as its President and Chief Operating Officer. Prior to such time,
Mr. Felicella served as Executive Vice President of Lechmere, Inc.
until 1989 when he became Executive Vice President and Director of
LMR Acquisition Corp., a company which was formed to acquire, and
subsequently acquired, Lechmere, Inc.
Following the effectiveness of the Merger on December 12,
1996, the following individuals assumed the positions indicated
below with the Company:
Name Age Positions with the Company
----------------- --- ----------------------
Charles R. Kibler 50 President
Franklin C. Brown 68 Executive Vice President and
Director
Frank M. Bergonzi 51 Executive Vice President,
Chief Financial Officer
and Director
Elliot S. Gerson 55 Senior Vice President and
Assistant Secretary
Joseph S. Speaker 38 Senior Vice President and
Treasurer
James E. Krahulec 50 Vice President and Director
I. Lawrence Gelman 50 Secretary
26
<PAGE>
Charles R. Kibler was appointed President on December 12,
1996. Mr. Kibler is an executive officer of Rite Aid and was
appointed Senior Vice President of Drugstore Operations on March
4, 1995; previously, Mr. Kibler served as Vice President of
Drugstore Operations of Rite Aid for more than five years.
Franklin C. Brown was appointed Executive Vice President and
Director on December 12, 1996. Mr. Brown is an executive officer
of Rite Aid and was appointed Executive Vice President and Chief
Legal Counsel in April 1993; previously, Mr. Brown was Senior Vice
President and General Counsel for more than five years.
Frank M. Bergonzi was appointed Executive Vice President,
Chief Financial Officer and Director on December 12, 1996. Mr.
Bergonzi is an executive officer of Rite Aid and was appointed
Executive Vice President and Chief Financial Officer of Rite Aid
on March 4, 1995; previously, Mr. Bergonzi was Senior Vice
President of Finance of Rite Aid Corporation for more than five
years.
Elliot S. Gerson was appointed Senior Vice President and
Assistant Secretary on December 12, 1996. Mr. Gerson is an
executive officer of Rite Aid and joined Rite Aid as Senior Vice
President and Assistant Chief Legal Counsel in November 1995;
previously, Mr. Gerson was a partner in the law firm of Bolger,
Picker, Hankin & Tannenbaum from May 1993 until joining Rite Aid,
and a partner in the law firm of Wolf, Block, Schorr and Solis-
Cohen from May 1984 to May 1993.
Joseph S. Speaker was appointed Senior Vice President and
Treasurer on December 12, 1996. Mr. Speaker is an executive
officer of Rite Aid and was appointed Senior Vice President of
Accounting and Administration on May 24, 1996; previously, Mr.
Speaker served as Vice President and Retail Controller since April
1993. From February 1991 until his appointment as Vice President,
he had the positions of Assistant Vice President and Retail
Controller.
James E. Krahulec was appointed Vice President and Director
on December 12, 1996. Mr. Krahulec is an executive officer of Rite
Aid and was appointed Vice President of Government and Trade
Relations in July 1984, a position he has held for more than five
years.
I. Lawrence Gelman was appointed Secretary on December 12,
1996. Mr. Gelman is an officer of Rite Aid and was appointed
Associate Counsel and Secretary on January 11, 1995; previously,
Mr. Gelman held the position of Assistant Vice President and
Assistant Secretary of Rite Aid for more than five years.
27
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth for the periods shown the
annual and long-term compensation of the Company's Chief Executive
Officer, former Chief Executive Officer and three additional most
highly compensated Executive Officers as of September 29, 1996.
On December 12, 1996, upon consummation of the Merger, all of the
executive officers named below were replaced as indicated above
under Item 10.
<TABLE>
<CAPTION>
Long-Term Compensation
Awards Payouts
Securities
Other Annual Restricted Underlying All Other
Name and Positions Annual Compensation Compensation Stock Options LTIP Compensation
Held with the Company Fiscal Year Salary($) Bonus($) ($) Awards($) SARs(#)(1) Payouts($) ($)(2)(5)
- --------------------- ----------- -------- ---------- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gordon D. Barker 1996 $360,769 $1,098,916 $ - $ - 225,100 $ - $16,007
Chief Executive Officer 1995 300,000 - - - 161,700 - 8,608
and Director (beginning 1994(3) 135,989 149,263 - - - - 1,546
January 16, 1996) and
President; Formerly
Chief Operating Officer
David R. Jessick 1996 281,923 1,007,587 - - 75,000 - 8,231
Executive Vice President 1995 250,000 - - - 156,000 - 7,740
and Chief Financial 1994(3) 113,324 124,386 - - - - 1,103
Officer
Barbara R. Crane 1996 164,365 331,235 - - 45,000 - 9,787
Senior Vice President, 1995 163,352 - - - 78,000 - 7,203
Store Operations - 1994(3) 67,995 55,974 - - - - 1,200
North
Willard E. Wilson 1996 174,326 339,672 - - 45,000 - 18,667
Senior Vice President, 1995 172,253 - - - 78,000 - 9,073
Health Services 1994(3) 67,995 55,974 - - - - 1,992
Marty W. Smith 1996(5) 378,365 278,284 - - - - 17,886
Chairman and 1995(4) 342,308 175,000 - - 300,000 - 38,066
Chief Executive Officer
(Up to January 16, 1996)
</TABLE>
1) The securities underlying the options are shares of the TP
Holdings Class B Stock. For a description of terms pertaining to
such options and other information relating thereto, see "1994
Management Equity Plan".
2) For Messrs., Barker, Jessick, Wilson and Ms. Crane, data
represents the sum of (i) contributions under the PayLess Stores
Retirement Plan and the TPI 401(k) Retirement Savings Plan of
$12,839, $7,001 and $835 for Mr. Barker; $7,313, $6,890 and $797
for Mr. Jessick; $16,940, $6,878 and $1,051 for Mr. Wilson; and
$8,813, $6,750 and $1,049 for Ms. Crane, for 1996, 1995 and 1994,
respectively; (ii) payment of premiums for term life insurance of
$3,168, $1,607 and $711 for Mr. Barker; $918, $850 and $306 for Mr.
Jessick; $1,727, $2,195 and $941 for Mr. Wilson; and $974, $453 and
$154 for Ms. Crane, for 1996, 1995
28
<PAGE>
and 1994, respectively. For Mr. Smith, represents amounts received
after December 2, 1994 as follows; (I) contributions under the TPI
401(k) Retirement Savings Plan of $3,981; and (ii) payment of
premiums for term life insurance of $432 and $33,653 in accrued
vacation. Amounts for 1994 are for the period from the Acquisition
through the end of fiscal 1994.
3) For Messrs. Barker, Jessick, Wilson and Ms. Crane, data
represent compensation received from the Company after the date of
the Acquisition through the end of the 1994 fiscal year. Mr.
Barker was named the Company's Chief Executive Officer as of
January 16, 1996, following the end of the Company's first quarter
of fiscal 1996. For the period from October 3, 1993 to the date
of the Acquisition, Messrs. Barker, Jessick, Wilson and Ms. Crane
received compensation from PayLess (which was then a wholly owned
subsidiary of Kmart) in the amounts of $143,761, $117,986, $71,835
and $67,871, respectively. No data are shown for these individuals
either (a) in respect of compensation received from Kmart at any
time or (b) in respect of compensation received from PayLess for
periods prior to fiscal 1994. For each of the persons listed in
the table, other annual compensation did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus individuals.
4) Mr. Smith was named Chairman and Chief Executive Officer of the
Company on December 2, 1994 and resigned such position as of
January 16, 1996, following the end of the Company's first quarter
of fiscal 1996. Prior to his appointment, Mr. Smith was the Chief
Executive Officer of Bi-Mart, to which position he returned
following his resignation. Compensation reported here includes
1995 compensation earned at Bi-Mart consisting of $62,500 in
salary, $33,653 in accrued vacation and $175,000 in Bonus. Mr.
Smith's other annual compensation did not exceed the lesser of
$50,000 or 10% of his total annual salary.
5) For Mr. Smith, includes 1996 compensation earned at Bi-Mart of
$156,250 in salary and $278,284 in bonus. Other compensation
includes $2,326 premiums for term life insurance and $15,560 for
contributions under the PayLess Stores Retirement Plan.
OPTION GRANTS IN FISCAL 1996
Prior to the Merger, the executive officers were participants
in the 1994 Management Equity Plan of T P Holdings, and the
securities underlying the options were Class B common stock of T
P Holdings. The following table sets forth options to acquire T
P Holdings' capital stock granted to the named executive officers
during the fiscal year ending September 29, 1996.
29
<PAGE>
<TABLE>
<CAPTION>
Potential realizable
value at assumed rates
Number of Percent of total of stock price
securities options granted Exercise or appreciation for
underlying to employees base price Expiration option term
Name Options granted in fiscal year (#/Sh) Date 5% 10%
- --------------- --------------- -------------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gordon D. Barker 110,100 8.4% $12.50 01/17/06 $ 865,516 $2,193,388
115,000 8.8% $14.00 04/22/06 $1,012,520 $2,565,925
David R. Jessick 75,000 5.7% $14.00 04/22/06 $ 660,339 $1,673,430
Barbara R. Crane 45,000 3.5% $14.00 04/22/06 $ 396,204 $1,004,058
Willard E. Wilson 45,000 3.5% $14.00 04/22/06 $ 396,204 $1,004,058
</TABLE>
There were no exercises of options to acquire shares of
T P Holdings common stock during the year. Pursuant to the Merger
all options on T P Holdings' common stock converted into a right
to receive cash equal to the difference between the option exercise
price and 65 percent of the closing price of Rite Aid's common
stock on December 12, 1996. The closing price for Rite Aid's
common stock on that date was $39.375.
1994 MANAGEMENT EQUITY PLAN
Effective October 19, 1994, the Board of Directors of T P
Holdings adopted the 1994 Management Equity Plan (the "Plan"). The
Plan terminated on December 12, 1996 in connection with the Merger.
Prior to its termination, the Plan provided for the sale to key
employees of shares of T P Holding's common stock and for the grant
to key employees of options to purchase such shares. A maximum of
3,600,000 shares of Class A Stock and 7,200,000 shares of Class B
Stock were available for issuance under the Plan. The Plan was
administered by the Compensation Committee of the Board of
Directors.
Purchase of shares were made pursuant to a Management
Subscription and Stockholders Agreement (the "Subscription
Agreement"), which provided for payment to be made by means of a
combination of cash, recourse promissory notes ("Recourse Notes")
and non-recourse promissory notes "Non-Recourse Notes") as
determined by the Company. The promissory notes were secured by
a pledge of all of the shares purchased by the individual, and were
due five years from the date of issuance and bear interest at the
rate of 8% per annum. They also contain provisions requiring
prepayments of principal and interest payments out of bonuses
received by the individual.
30
<PAGE>
Effective October 24, 1994, T P Holdings issued a total of
413,760 shares of Class B Stock to members of management at a price
of $10.50 per share, including 36,000 shares to each of Barbara R.
Crane, Andrew A. Striefel and Willard E. Wilson; 30,000 shares to
James C. Hamilton; and 19,200 share to Don P. Davis. The
consideration from these individuals consisted of cash and
promissory notes as follows: from each of Barbara R. Crane, Andrew
A. Streifel and Willard E, Wilson, a Recourse Note in the amount
of $141,750, a Non-Recourse Note in the amount of $189,000 and cash
in the total amount of $47,250; from Mr. Hamilton, a Recourse Note
in the amount of $118,125, a Non-Recourse Not in the amount of
$157,500 and cash in the amount of $39,375; from Don P. Davis, a
Recourse Note in the amount of $75,600, a Non-Recourse Not in the
amount of $100,800 and cash in the amount of $25,200. Effective
February 23, 1995, the Company issued 72,300 shares of Class B
Stock to Mr. Barker and 48,000 shares of Class B Stock to Mr.
Jessick at a price of $10.50 per share. The consideration from
these individuals consisted of the release and termination by the
respective purchasers of their rights under the Pay Less Drug Store
Northwest, Inc. Supplemental Executive Retirement Plan,
representing the estimated present value of their accrued benefits
in the amounts of $759,150 and $504,000, respectively. Effective
April 15, 1995, T P Holdings' issued 25,548 shares of Class B Stock
to Mr. Smith at a price of $10.50 per share. The consideration
from Mr. Smith consisted of cash in the amount of $100,044 and the
cancellation of a note payable from T P Holdings held by Mr. Smith
in the aggregate principal amount of $224,255, which for this
purpose were valued at approximately 75% of the face amount.
Grants of stock options under the Plan were made pursuant to
Stock Option and Stockholders Agreements ("Options Agreements").
The Option Agreements generally provided that the options vested
in installments of 20% per annum over a five-year period from the
date of grant.
On December 12, 1996, effective with the Marger, the Plan was
terminated, and all outstanding options under the Plan converted
to a right to receive cash equal to the difference between the
option exercise price and 65 percent of the closing price of Rite
Aid's common stock on December 12, 1996.
COMPENSATION OF DIRECTORS
Prior to the Merger, Directors who were also officers of the
Company or its subsidiaries received no additional compensation for
their services as directors. The Company's non-management
directors received compensation for their service on T P Holdings'
and the Company's Boards of Directors consisting of an annual
retainer fee of $30,000 ($100,000 in the case of the Chairman of
the Board) plus $1,500 for attendance at
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<PAGE>
any meeting of the Board of Directors or any committee thereof plus
direct out-of-pocket costs related to such attendance. In
addition, under the T P Holdings' Deferred Compensation Plan for
Non-Management Directors, each non-management director was allowed
to defer any portion or all of such compensation. Amounts deferred
under such plan's equity option were immediately converted to stock
equivalents at the then current market price of T P Holdings'
common stock and matched at a 25% rate by T P Holdings'. A
director's stock equivalents account was distributed to the
director in cash, based upon the ending number of stock equivalents
and the market price of the T P Holdings' common stock, at the
effective date of the Merger. Further, pursuant to T P Holdings'
Non-Employee Director Stock Option Plan, effective upon
consummation of the 1996 recapitalization, each of Mr. Lynch and
Mr. Felicella received options to acquire 30,000 shares of T P
Holdings Class B Stock, subject to vesting, with an exercise price
of $14.00 per share. Both the deferred compensation plan for Non-
Management Directors and the Non-Employee Director Stock Option
Plan were terminated upon consummation of the Merger.
On September 1, 1993, T P Holdings granted Mr. Goodall an
option to purchase 150,000 shares of its Class A Stock at a price
of $1.67 per share. In connection with the Acquisition, Mr.
Goodall received from T P Holdings a payment in lieu of his pro
rata share of the distribution to the pre-Acquisition shareholders
allocable to the shares subject to the option, consisting of cash
in the amount of $852,750 plus PIK Notes in the principal amount
of $418,000.
Pursuant to a Management Services Agreement between the
Company and LGA (the "Management Services Agreement"), prior to the
consummation of the 1996 recapitalization, LGA was paid an annual
fee for providing management, consulting and financial planning
services (the "General Services"). In connection with the 1996
recapitalization, the General Services provisions of the Management
Services Agreement were canceled. Pursuant to the Management
Services Agreement, the Company may also pay LGA for reasonable and
customary fees and reasonable expenses from time to time for
providing financial advisory and investment banking services in
connection with major financial transactions (the "Investment
Services"). During fiscal 1996, in consideration of the Investment
Services provided by LGA in connection with the 1996
recapitalization and the cancellation of the General Services
provisions, the Company paid LGA an aggregate fee of $16.3 million
upon consummation of the 1996 recapitalization.
32
<PAGE>
SEVERANCE AGREEMENTS
In accordance with the terms of the Merger, Rite Aid agreed
to extend certain severance arrangements to executives of the
Company (the "Severance Plan"). The Severance Plan applies to
employees of the Company specified below who were terminated
December 12, 1996 (the "Effective Time") or who continue to be
employed following the Effective Time. Payments will be made to
each eligible employees whose employment with Rite Aid or any of
its subsidiaries is terminated by Rite Aid or such subsidiary
without cause (as defined) or who terminates such employment for
good reason (as defined), in either case (I) without being offered
a position with Rite Aid or any of its subsidiaries at
substantially comparable responsibility or compensation and (ii)
within 24 months of the Effective Time. The Severance Plan
provides for unmitigated severance payments, payable in a lump sum
payment. The categories of executives specified below
(collectively, the "Covered Executives") are entitled to severance
benefits equal to the applicable multiple specified below,
multiplied by their total salary plus "On Plan/Target" bonus for
the Company's 1996 fiscal year.
<TABLE>
<CAPTION>
Office or Category Multiple
------------------ --------
<S> <C>
Chief Executive Officer........................................... 3.0
Executive Vice President and Chief Financial Officer.............. 2.0
Group A........................................................... 1.5
Group B........................................................... 1.0
</TABLE>
For purposes of the foregoing, (I) "Group A" means current or
previously board-approved Senior Vice Presidents as of October 13,
1996, as well as three additional officers specified in the Merger
Agreement and (ii) "Group B" means all vice presidents as of October
13, 1996. In addition, a third group of employees consisting of group
vice presidents and certain department heads are entitled to certain
severance benefits. Eligible employees under the Severance Plan are
also entitled to (I) the continuation of health insurance for the
severance period or until covered by a new employer's plan, whichever
occurs first, and (ii) outplacement services to be provided by Rite
Aid. The Chief Executive Officer and Chief Financial Officer of the
Company will also be entitled to retain the cars provided to them by
the Company without payment to either Rite Aid or the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 24, 1996 the Company had 1,000 shares of Common
Stock outstanding all of which are owned by Rite Aid.
33
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE ACQUISITION
The Purchase and Sale Agreement dated as of December 1, 1993,
among the Company, T P Holdings and Kmart (the "Acquisition
Agreement"), pursuant to which the Acquisition was consummated,
contains representations and warranties customary for transactions
similar to the Acquisition, most of which expired at the closing
of the Acquisition. Accordingly, neither the Company nor Kmart
has, in general, any recourse with regard to a breach of any of the
representations and warranties made by the other. However, Kmart
has agreed to indemnify the Company against any liabilities for
income taxes of PayLess and its subsidiaries for any period ending
on or before the closing date of the Acquisition.
THE 1992 ACQUISITION
In connection with the 1992 Acquisition, Pacific Enterprises
agreed to indemnify T P Holdings and the Company against any
uninsured losses arising out of any breach of any of Pacific
Enterprises' representations and warranties (except with respect
to certain tax and ERISA liabilities that were addressed in a
separate Tax indemnity Agreement (see "Tax Indemnity Agreement"
below)) and any of its covenants and agreements. In connection
with the Acquisition, the Company and Pacific Enterprises released
each other from all indemnification claims arising in respect of
breaches of representations and warranties other than environmental
indemnity claims and tax and ERISA claims under the Tax Indemnity
Agreement.
The 1992 Acquisition was treated for both financial
accounting and income tax purposes as an acquisition of assets.
The Company's purchase price was substantially less than the
seller's aggregate carrying cost of the assets purchased. The
Company's financial cost and tax bases for such assets reflected
this bargain purchase price. Because of the differences between
income tax and financial reporting respecting determination of the
purchase price, allocation of the purchase price among the assets
purchased (including inventory) and revenue and expense
recognition, among other things, the Company's income for income
tax purposes may differ substantially from its income for financial
accounting purposes.
Also in connection with the 1992 Acquisition, Thrifty
Corporation sold all of the outstanding capital stock of United
Merchandising Corp. ("Big 5"), the operator of the Big 5 Sporting
Goods chain, to Big 5 Holding, Inc. ("Big 5 Holdings"). Big 5 is
a wholly-owned subsidiary of Big 5 Corporation, a Delaware
corporation, whose majority stockholder is GEI. At the
34
<PAGE>
time of such sale of Big 5, the Company and Big 5 Holding entered
into a separate agreement to implement and supplement, as between
them, the provisions of the Thrifty Corporation and Big 5 purchase
agreements relating to their respective indemnification claims
against Pacific Enterprises. In connection with the Acquisition,
this agreement was amended to reflect the Company's release of
certain indemnification claims against Pacific Enterprises. In
addition, in connection with the Acquisition, all of the capital
stock of Gart Sports Company ("Gart") and MC Sports Company ("MC")
were distributed to the Company's pre-Acquisition stockholders.
In connection therewith, the Company, Gart and MC entered into an
agreement pursuant to which the Company conferred upon Gart and MC
the economic benefit of those indemnification claims arising in the
Company's favor under the Thrifty Corporation purchase agreement
that relate to breaches of Pacific Enterprises' representations and
warranties concerning Gart and MC, respectively.
TRANSACTIONS WITH LGA
LGA is the general partner of GEI, which, prior to the
Purchase, held approximately 83% of the outstanding shares of T
P Holdings Class A Stock, which gave GEI control over the election
of five of the seven members of T P Holdings and the Company's
Boards of Directors. The general partners of LGA include (I)
Tardy-Green, Inc., a Delaware corporation, the capital stock of
which is wholly owned by the Leonard and Emese Green Living Trust,
whose co-trustees are Leonard and Emese Green, (ii) Jonathan D.
Sokoloff, and (iii) Willow III, Inc., a California corporation, the
capital stock of which is beneficially owned by Jennifer Holden
Dunbar. Messrs. Green and Sokoloff and Ms. Holden Dunbar are
directors of the Company and T P Holdings. See "Item 10.
Directors, Executive Officers, Promoters and Control Persons of the
Registrant." Each of them is also a director of Big 5, and Mr.
Sokoloff and Ms. Holden Dunbar are also directors of Gart and MC.
TAX INDEMNITY AGREEMENT
In connection with the 1992 Acquisition and the Big 5 Sale,
Pacific Enterprises, T P Holdings, Thrifty Corporation and Big 5
Holdings entered into a Tax Indemnity Agreement. This agreement
sets forth the parties' agreements with respect to various tax
matters and obligations under ERISA, including the allocation of
various tax obligations relating to the inclusion of member s of
the affiliated group of corporations of which the Company is the
common parent in certain consolidated and/or unitary tax returns
of Pacific Enterprises and the obligations of the parties to
cooperate in the preparation of tax returns or any examination
thereof.
35
<PAGE>
RELATIONSHIP WITH BIG 5, GART AND MC
COMMON CONTROL AND OWNERSHIP
Prior to the 1992 Acquisition, Big 5 was a wholly-owned
subsidiary of Thrifty Corporation. As noted previously, in
connection with the 1992 Acquisition, Thrifty Corporation sold all
of the outstanding capital stock of Big 5 to Big 5 Holdings, a
wholly-owned subsidiary of Big 5 Corporation, whose majority
stockholder is GEI. Accordingly, GEI controls both Big 5 and the
Company, and Messrs. Green and Sokoloff and Ms. Holden Dunbar are
members of the Boards of Directors of both the Company and Big 5.
In addition, prior to the Acquisition, each of Gart and MC was a
wholly-owned indirect subsidiary of the Company. In connection
with the Acquisition, all of the outstanding capital stock of Gart
and MC was distributed to the Company's pre-Acquisition
stockholders on a pro rata basis. As a result, GEI received
approximately 83% of the outstanding shares of each of Gart and MC.
Accordingly, GEI controls Gart, MC and the Company, and Mr.
Sokoloff and Ms. Holden Dunbar are members of the Boards of
Directors of Gart, MC and the Company. Each of Big 5, Gart and MC
is a sporting goods retailer.
SUBLEASES
The Company currently subleases a warehouse facility located
in Denver, Colorado, to Gart and certain business equipment and
other personal property to Big 5, Gart and MC pursuant to subleases
with such companies. The Company leases such property from MLTC
Funding, Inc. ("MLTC") pursuant to two Master Lease Agreements with
MLTC dated as of December 15, 1988, as amended (the "Master
Leases"). The terms of the subleases are structured so that the
obligations of Big 5, Gart and MC thereunder are the same as the
Company's obligations under the Master Leases. Accordingly, the
Company believes the terms of the subleases are comparable to those
that could be obtained from an unrelated third party.
Under the terms of the subleases, the monthly rental fees for
the property subject thereto are calculated based on the
acquisition price of such property in accordance with formulae set
forth in the Master Leases. The annual basic rent under the Big
5 equipment sublease, the Gart warehouse sublease, the Gart
equipment sublease and the MC equipment sublease is approximately
$0.8 million, $0.2 million, $0.2 million and $0.3 million,
respectively. In addition, the sublessee under such subleases is
required to pay expenses related to the property, including taxes
(other than income taxes) and charges for utilities and
communication services assessed with respect to the Gart warehouse
as well as insurance coverage against loss of damage by fire, theft
and certain other risks in amounts equal
36
<PAGE>
to the full replacement value of property subject to the subleases.
The sublessee is further required to pay all costs incurred by MLTC
in connection with the financing and leasing of the property
subject to the subleases, plus penalty interest on overdue amounts.
The Gart warehouse sublease generally has the same term as the
Master Lease to which it is subject. The subleases pertaining to
equipment have different terms for various types of equipment
(generally five, ten or twenty years from the date the item of
equipment was first placed in service), subject to extension.
Pursuant to the Master Leases, the Company has an option to
purchase the property subject thereto from MLTC for an amount equal
to the Adjusted Acquisition Cost (as defined in the Master Leases)
at the date of purchase. The Adjusted Acquisition Cost of property
subject to the Master Leases is calculated based on the original
acquisition cost thereof less a designated portion of monthly
rental fees paid through the date of purchase. The Adjusted
Acquisition Cost decreases during the term of the Master Leases to
a de minimis amount by the expiration of the term of the Master
Leases. Pursuant to the subleases, the sublessees have an option
to purchase the property thereunder at any time on terms identical
to those contained in the Master Leases, regardless of whether such
property is then owned by MLTC or the Company.
LEASE GUARANTEES
The Company is the guarantor of approximately 89 of the leases
for Big 5 store locations, 13 of the leases for Gart store
locations, and one lease for an MC store location, which leases
currently require aggregate annual rent payments of approximately
$7.1 million, $1.0 million and $0.4 million, respectively. Such
guarantees expire upon the expiration of the respective leases.
The Company does not receive any separate consideration for such
lease guarantees but does not believe such obligations present any
material risk of substantial loss.
TAX SHARING AGREEMENT
T P Holdings has a Tax Sharing Agreement with its subsidiaries
including the Company, which agreement allocates any income tax
burdens or benefits generally based on the hypothetical separate
tax return status of such companies. Pursuant to such agreement,
T P Holdings, on the one hand, and Gart and MC, on the other, have
certain continuing obligations to one another arising in respect
of the period that Gart and MC were subsidiaries of the Company.
37
<PAGE>
LEASE OF CLOSED STORE SITES
The Company anticipates that the sites of certain of its
stores that may be closed in the future may be leased to Gart or
Big 5. Any such leases to Gart or Big 5 are expected to be on
terms no less favorable than those that could be obtained from an
unrelated third party.
TRANSACTIONS WITH MANAGEMENT
Loans to Executive Officers in Connection with Acquisitions
----------------------------------------------------------
of Common Stock.
----------------
In connection with their acquisition of shares of T P
Holdings' Class B common stock pursuant to the 1994 Management
Equity Plan effective October 24, 1994, T P Holdings made both
recourse and non-recourse loans to certain of its executive
officers. See "Item 11, Executive Compensation 1994 Management Equity
Plan".
Loans to Executive Officers in Connection with House
----------------------------------------------------
Purchases.
----------
In connection with their purchases of houses or refinancing
of existing mortgages in 1987 and 1988, PayLess Drug made secured
loans of $200,000 to each of Gordon D. Barker, David R. Jessick and
Don P. Davis. Effective April 25, 1988, PayLess Drug assigned the
notes to a bank. Under the terms of the assignment, the bank may
require PayLess Drug to repurchase the note relating to a
particular executive upon the occurrence of certain events,
including, without limitation, default in payment of interest or
principal or termination of the executive's employment with PayLess
Drug.
The loans bear interest at the rate of 8.5% per annum. As
part of their compensation packages, the Company pays the interest
on the loans on behalf of the executives. For the Company's 1996
fiscal year, the interest paid on behalf of Messrs. Barker, Jessick
and Davis amounted to $8,783, $8,783 and $12,466, respectively.
The loans are payable on demand and require amortization on
a level payment basis over a 15-year period from the date of
issuance. At September 29, 1996, the outstanding balances owed by
Messrs. Barker, Jessick and Davis were $93,336, $93,336 and
$133,335, respectively, down from $137,895, $138,172 and $155,556,
respectively, at October 1, 1995.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
Listed below are all financial statements, notes, schedules
and exhibits filed as part of this Annual Report on Form 10-K:
(a)(1), (2) Financial Statements
--------------------
The following financial statements of the Registrant,
together with the Independent Auditors' Report dated December 3,
1996, on pages F-1 to F-18 of this Form 10-K are filed herewith:
(I) Financial Statements
---------------------
Independent Auditors' Report
Consolidated Balance Sheets as of September 29, 1996 and
October 1, 1995
Consolidated Statements of Operations for the fiscal years
ended September 29, 1996, October 1, 1995, and October 2, 1994.
Consolidated Statements of Shareholder's Equity for the
fiscal years ended September 29, 1996, October 1, 1995, and October
2,1994 .
Consolidated Statements of Cash Flows for the fiscal years
ended September 29, 1996, October 1, 1995, and October 2, 1994.
Notes to Consolidated Financial Statements
All schedules are omitted as the required information is
inapplicable or the information is presented in the respective
consolidated financial statements or related notes.
(a)(3) Exhibits
--------
The following exhibits are filed with or incorporated by
reference into this Annual Report:
39
<PAGE>
Exhibit
Number Description
------ -----------
2.1 Purchase and Sale Agreement, dated as of December 1, 1993,
among Thrifty PayLess, T P Holdings, and Kmart (1)
2.2 Plan of Merger, dated as of May 26, 1995, between Thrifty
PayLess and PayLess Drug Stores Northwest, Inc. ("PayLess
Drug") providing for the merger of PayLess Drug into Thrifty
PayLess, together with Articles of Merger filed with the
State of Maryland Department of Assessments and Taxation and
Certificate of Ownership filed with the State of California
Secretary of State to consummate such merger (2)
2.3 Agreement and Plan of Merger between T P Holdings and Rite
Aid Corporation dated as of October 13, 1996, and amended
November 11, 1996 (3)
3.1 Articles of Incorporation of Thrifty PayLess filed with the
California Secretary of State on May 14, 1992 (1)
3.7 Certificate of Amendment of Articles of Incorporation of
Thrifty PayLess filed with the Secretary of State of
California on March 25, 1994 (1)
4.1 Form of Indenture between Thrifty PayLess and First Trust
National Association relating to the Senior Subordinated
Notes (1)
4.2 Form of Senior Subordinated Notes (filed together with Exhibit
4.1)
4.3 Note Purchase Agreement dated March 1, 1990 by PayLess Drug
in favor of Nationwide Life Insurance Company and West Coast
Life Insurance Company (1)
4.4 Form of Indenture between Thrifty PayLess and First Trust
National Association relating to the Senior Notes (1)
4.5 Form of Senior Notes (filed together with Exhibit 4.4)
10.1 Tax Indemnity Agreement, dated as of September 25, 1992,
among PE, T P Holdings, Thrifty Corporation and Big 5
Holdings (1)
10.2 1994 Management Equity Plan (including forms of Management
Subscription and Stockholders Agreement and Management Stock
Option and Stockholders Agreement) (2)
10.3 Credit Agreement dated as of April 20, 1994 among Thrifty
PayLess and Bankers Trust Company, Citicorp USA, Inc. and
Union Bank of Switzerland as Managing Agents, Union Bank of
Switzerland as Facilities Manager and the Banks named
therein (1)
10.4 Amendment No. 1 dated as of August 17, 1994 to Credit
Agreement (2)
40
<PAGE>
10.5 Amendment No. 2 dated as of June 23, 1995, to Credit
Agreement (2)
10.6 Amendment No. 3 and Waiver to the Credit Agreement dated as
of September 28, 1995 (2)
10.9 Severance Agreement dated June 7, 1995, among T P Holdings,
Thrifty PayLess and Marty W. Smith (2)
10.10 Tax Sharing Agreement dated as of September 25, 1992 among
T P Holdings and its direct and indirect corporate
subsidiaries (1)
10.12 Term Sheet between PayLess Drug and McKesson Drug Company
dated August 1, 1992 (1)
10.13 Form of Amended and Restated Master Lease Agreement among
Thrifty PayLess, Thrifty Corporation and MLTC Funding, Inc.
(1)
10.15 Form of Agreement and Release among PE, T P Holdings, Thrifty
PayLess, Thrifty Corporation and Big 5 (1)
10.16 Form of Management Services Agreement between Thrifty PayLess
and Leonard Green & Associates, L.P. (1)
10.17 Shareholders Agreement dated as of April 20, 1994 among GEI,
Kmart, T P Holdings and Thrifty PayLess (2)
10.18 First Amendment to Shareholders Agreement dated as of
September 15, 1995 (2)
10.19 Second Amendment to Shareholders Agreement dated as of
September 15, 1995 (2)
10.10 Third Amendment to Shareholders Agreement dated as of
November 7, 1995 (2)
12 Computation of Thrifty PayLess' Ratio of Earnings to Fixed
Charges (4)
21 Subsidiaries of the Registrant (1)
27 Financial Data Schedule (4)
___________
(1) Incorporated by reference to the Registration Statement on Form
S-1 filed by the Company and T P Holdings (No. 33-73592).
(2) Incorporated by reference to the Annual Report on Form 10-K
filed by the Company for the fiscal year ended October 1, 1995
41
<PAGE>
(3) Incorporated by reference to the form 8-K of T P Holdings
dated October 24, 1996.
(4) Filed herewith.
(b) Reports on Form 8-K
N/A
42
<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, as of December 24, 1996.
THRIFTY PAYLESS INC.
By: /s/ Charles R. Kibler
-----------------------
Charles R. Kibler
President (Principal
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 indicated as of December 24,
1996.
Signature Title
/s/ Charles R. Kibler
----------------------------
Charles R. Kibler President (Principal
Executive Officer)
/s/ Frank M. Bergonzi
----------------------------
Frank M. Bergonzi Executive Vice President,
Chief Financial Officer
and Director (Principal
Financial and Accounting
Officer)
/s/ James E. Krahulec
----------------------------
James E. Krahulec Vice President and
Director
43
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Thrifty PayLess, Inc.:
We have audited the accompanying consolidated balance sheets of Thrifty
PayLess, Inc., and subsidiaries as of September 29, 1996 and October
1, 1995 and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the years in the three-
year period ended September 29, 1996. 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
Thrifty PayLess, Inc. and subsidiaries as of September 29, 1996 and
October 1, 1995 and the results of their operations and their cash
flows for each of the years in the three-year period ended September
29, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
December 3, 1996
Except Note 14 which is as of December 13, 1996
F-1
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 5.6 $ 5.2
Receivables, net of allowance for doubtful
accounts of $10.8 in 1996 and $5.9 in 1995... 106.4 82.6
Inventories.................................... 1,160.0 1,160.7
Prepaid expenses and other current assets...... 33.1 42.8
Total current assets.................... 1,305.1 1,291.3
Property, plant and equipment, net................ 557.4 581.9
Leasehold interests, net.......................... 86.7 93.6
Deferred income taxes............................. 19.8 15.8
Other assets...................................... 98.9 118.9
$2,067.9 $ 2,101.5
LIABILITIES AND SHAREHOLDER'S EQUITY
1996 1995
Current liabilities:
Current maturities of long-term debt........... $ 28.1 $ 27.1
Accounts payable............................... 366.9 347.9
Accrued expenses .............................. 237.3 260.4
Deferred income taxes.......................... 173.8 146.6
Total current liabilities............... 806.1 782.0
Long-term debt, excluding current maturities...... 794.4 913.2
Other long-term liabilities....................... 88.6 111.4
Total liabilities ...................... 1,689.1 1,806.6
Commitments and Contingencies
Common shareholder's equity:
Common stock (no par value, 1,000 shares
authorized and outstanding) and
paid-in-capital.............................. 411.8 292.7
Accumulated earnings (deficit)................. (33.0) 2.2
Total shareholder's equity................... 378.8 294.9
$ 2,067.9 $ 2,101.5
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales............................................ $4,798.9 $4,658.8 $3,163.3
Cost of goods sold, buying and occupancy......... 3,517.5 3,413.0 2,311.1
Gross Profit............................. 1,281.4 1,245.8 852.2
Costs and expenses:
Selling and administration................... 1,022.7 1,065.5 746.8
Depreciation and amortization................ 68.4 69.1 30.1
Operating profit ........................ 190.3 111.2 75.3
Non-operating income (expense):
Interest expense............................. (105.0) ( 120.4) (59.1)
Interest income.............................. 1.0 1.0 2.5
Income (loss) from continuing operations
before income taxes and
extraordinary loss.................. 86.3 ( 8.2) 18.7
Income tax (expense) benefit..................... (36.0) 2.1 (8.3)
Income (loss) from continuing operations
before extraordinary loss........... 50.3 ( 6.1) 10.4
Income from discontinued operations, net of
income tax expense of $3.2 in 1994........... - - 5.2
Income (loss) before extraordinary loss.. 50.3 ( 6.1) 15.6
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $9.5 and
$4.5 in 1996 and 1995, respectively.......... (85.5) ( 7.4) -
Net income (loss)........................ $ (35.2) $ (13.5) $ 15.6
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(Dollars in millions)
<TABLE>
<CAPTION>
Common Stock
and Total
Paid-in Capital Accumulated Shareholder's
Shares Amount Earnings (Deficit) Equity
--------- ------ ------------------ --------
(In thousands)
<S> <C> <C> <C> <C>
Balance at
October 3, 1993........ 1.0 $ 46.0 $ 0.1 $ 46.1
Contribution of PayLess
Drug common stock from
T P Holdings....... - 246.7 - 246.7
Net income........... - - 15.6 15.6
Balance at
October 2, 1994........ 1.0 292.7 15.7 308.4
Net loss............. - - (13.5) (13.5)
Balance at
October 1, 1995........ 1.0 292.7 2.2 294.9
Cash contribution from
T P Holdings........... - 119.1 - 119.1
Net loss............. - - (35.2) (35.2)
Balance at
September 29, 1996..... 1.0 $411.8 $(33.0) $378.8
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Operating Activities:
Net income (loss) ........................... $ (35.2) $ (13.5) $ 15.6
Adjustments to reconcile net income (loss) to
net cash provided by operating
activities:
Depreciation and amortization............ 68.4 69.1 30.1
Debt discount and fee amortization....... 7.3 9.0 3.6
Deferred tax provision .................. 32.8 8.6 11.8
Gain on sale of assets................... (7.8) - -
Extraordinary loss....................... 85.5 7.4 -
Changes in operating assets and liabilities:
Receivables................................... (19.2) (4.6) (4.6)
Inventories................................... 0.7 51.6 (53.8)
Prepaid expenses.............................. 9.7 (12.2) (0.4)
Accounts payable.............................. 18.9 (48.3) 50.3
Accrued expenses.............................. (41.7) (58.6) 12.0
Net cash provided by
operating activities.......... 119.4 8.5 64.6
Investing activities:
Additions to property, plant and equipment.... (42.7) (54.3) (82.3)
Proceeds from sale of properties............. 14.6 22.2 19.7
Decrease (increase) in other assets........... (9.6) (16.9) 0.4
Acquisition of PayLess Drug, net of cash
acquired................................. - - (528.8)
Investing activities related to discontinued
operations............................... - - (7.6)
Net cash used in investing
activities..................... (37.7) (49.0) (598.6)
Financing activities:
New borrowings................................ 669.6 159.9 723.3
Distribution to T P Holdings.................. - - (101.9)
Contributions from T P Holdings............... 119.1 - 4.3
Principal payments on long-term debt.......... (870.0) (118.2) (185.9)
Payments on ESOP reimbursement liability...... - - (53.1)
Financing activities related to discontinued
operations............................... - - 9.8
Net cash provided by (used in)
financing activities.............. (81.3) 41.7 396.5
Increase (decrease) in cash and cash equivalents... 0.4 1.2 (137.5)
Cash and cash equivalents, beginning of year....... 5.2 4.0 141.5
Cash and cash equivalents, end of year............. $ 5.6 $ 5.2 $ 4.0
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................. $ 112.9 $ 130.7 $ 25.8
Income taxes............................. $ 2.0 $ - $ -
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(1) THE COMPANY
The accompanying consolidated financial statements present the
financial position and results of operations of Thrifty PayLess, Inc.
and subsidiaries (the "Company" or "Thrifty PayLess"), a wholly owned
subsidiary of Thrifty PayLess Holdings, Inc. ("T P Holdings").
The Company was incorporated in 1992 under the laws of the State
of California and was established for the purpose of assisting in the
acquisition of Thrifty Corporation and its subsidiaries ( "Thrifty
Drug") from Pacific Enterprises ("PE"),("the 1992 Acquisition"). On
September 25, 1992, PE transferred its ownership of Thrifty Drug to the
Company. Concurrently, the Company was acquired by T P Holdings, a
corporation newly formed for the purpose of the 1992 Acquisition by
Green Equity Investors, L.P. ("GEI") an investor group led by Leonard
Green & Associates, L.P. ("LGA"), for a purchase price of $50.0.
Additionally, on April 20, 1994, the Company purchased PayLess Drug
Stores Northwest, Inc. ("PayLess Drug") from Kmart Corporation
("Kmart"). Operations of PayLess Drug are included in the consolidated
financial statements since the date of acquisition.
The Company is the largest drug store chain on the West Coast and
one of the largest in the United States. As of September 29, 1996, the
Company operated a total of 1,004 Thrifty Drug and PayLess Drug stores
and 45 Bi-Mart membership stores. The Company's stores are located
throughout the Western United States with 677 in California, 155 in
Washington, 113 in Oregon and additional 104 stores in other western
states.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain amounts reflected in
prior years' financial statements have been reclassified to conform
with the current year presentation.
(B) FISCAL YEAR. The Company's fiscal year ends on the Sunday
closest to September 30. The fiscal year refers to the year in which
the period ends (e.g.; fiscal 1996 ended September 29, 1996).
(C) CASH AND CASH EQUIVALENTS. The Company considers all highly
liquid debt investments with an original maturity of three months or
less such as certificates of deposit, commercial paper, government
paper and money market accounts, to be cash equivalents.
F-6
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(D) INVENTORIES. Inventories consist of merchandise held for
resale and are stated at the lower of last-in, first-out (LIFO) cost
or market. A summary of inventories follows:
1996 1995
Merchandise inventories, at lower of
FIFO cost or market.............. $ 1,066.7 $1,058.1
Acquisition step-up costs............ 106.8 110.8
LIFO reserve......................... (13.5) (8.2)
Merchandise inventories, at lower of
LIFO cost or market.............. $ 1,160.0 $1,160.7
(E) PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment
are stated at cost. Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets. Useful lives for
buildings are between 20 and 30 years, and for furniture, fixtures and
equipment are between 5 and 20 years. Major renewal and renovations
are capitalized. Maintenance and repairs are charged to expense.
(F) LEASEHOLD INTERESTS. Leasehold interests represent the
present value of the excess of current market rents at dates of
acquisition over the below market rents of leases acquired. Such costs
are amortized on a straight-line basis over the remaining lives of the
underlying leases (approximately 15 years). At September 29, 1996 and
October 1, 1995, accumulated amortization was $17.1 and $10.2,
respectively.
(G) PRE-OPENING AND CLOSING COSTS. Costs incurred with the
opening of a new store are expensed during the first full month of
operations. Upon deciding to close a store, the Company expenses the
undiscounted future net lease obligation, non-recoverable investment
in fixed assets and other expenses directly related to discontinuance
of store operations.
(H) GOODWILL. Goodwill is amortized on a straight-line basis
over 15 years. Amortization expense was $3.6, $3.6 and $1.3 for fiscal
1996, 1995 and 1994, respectively. The Company reviews the
realizability of its intangible assets, including goodwill, annually,
based upon expectations of nondiscounted cash flows and operating
income. As of September 29, 1996, management believes that there are
no materially impaired intangible assets.
(I) INSURANCE. The Company is primarily self insured for workers'
compensation and public liability expenses. Self insurance liabilities
are based on claims filed and estimates for claims incurred but not
reported. These liabilities are not discounted.
(J) ADVERTISING. Net advertising costs are expensed when incurred
and were $41.0, $72.5, and $42.7 for fiscal 1996, 1995, and 1994,
respectively.
F-7
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(K) INCOME TAXES. Deferred income taxes are provided at the
current statutory rates on the difference between financial statement
and tax basis of assets and liabilities and are classified in the
consolidated balance sheet as current or long-term consistent with the
classification of the related asset or liability giving rise to the
deferred income taxes.
(L) ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates
(3) THE RECAPITALIZATION
In April 1996, the Company and T P Holdings implemented a
recapitalization plan (the "Recapitalization") designed to reduce
indebtedness and interest expense, improve operating and financial
flexibility and increase shareholder's equity. The Recapitalization
included the following components: (I) the offering of 24.3 million of
T P Holding's Class B common stock with net proceeds to T P Holdings
of approximately $307.3; (ii) the redemptions, with proceeds of the
offering, of $105.0 in outstanding principal amount of the Company's
12 1/4% Senior Subordinated Notes due 2004 and $175.5 in outstanding
principal amount of T P Holdings' 11 5/8% Senior Notes due 2006 (the
"PIK Notes"); (iii) the repurchase, with proceeds of the offering, of
$12.8 million of the remaining outstanding principal amount of T P
Holdings' PIK Notes that were not redeemable; (iv) the repurchase, with
borrowings under the new bank facility (the "New Bank Facility") of
$249.7 in outstanding principal amount of the Company's 11 3/4% Senior
Notes due 2003; and, (v) the procurement of the $1 billion New Bank
Facility which (a) refinanced the Company's existing indebtedness under
its Credit Agreement ("Old Bank Facility"), dated April 20, 1994, as
amended, (b) provided financing used to repurchase the 11 3/4% Senior
Notes and, provided for a lower interest rate on the Company's
indebtedness. Under the Old Bank Facility, interest rates were at
LIBOR plus a spread ranging between 2.625% and 3.375% with respect to
various tranches. The New Bank Facility interest rate is LIBOR plus
1.50%, subject to reduction upon achieving certain performance
measures. As a result of the Recapitalization, the Company incurred
an extraordinary charge in fiscal 1996 of $85.5 (net of a $9.5 tax
benefit) to write-off deferred financing fees, original issue
discounts, consent fees, premiums, and other expenses.
F-8
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(4) PURCHASE OF PAYLESS ("THE ACQUISITION")
On April 20, 1994, the Company and T P Holdings acquired PayLess
Drug from Kmart for approximately $983.8. Shortly after the purchase,
the Company repaid $46.6 of PayLess Drug's long-term debt which is
reflected as part of the purchase price. Consideration for the
purchase consisted of; (1) cash of $572.6 from the Company and T P
Holdings (including expenses of $30.5); (2) senior notes of $100.0
(valued at $76.2) from T P Holdings; (3) $50.0 senior subordinated
notes (valued at $44.7) from T P Holdings; (4) $5.3 in Class C common
stock of T P Holdings and (5) all the outstanding Class B common stock
of T P Holdings (valued at $285.0 and representing 48.3% of all T P
Holdings outstanding voting common stock). The Acquisition has been
accounted for using the purchase method of accounting; wherein, $58.9
in goodwill was recognized after recording $103.6 in leasehold
interests. The operations of PayLess Drug are included in the
Consolidated Statement of Operations as of the date acquired.
In connection with the Acquisition, the Company transferred the
stock of its sporting goods subsidiaries, Gart Sports Company ("Gart")
and MC Sports Company ("MC"), and $101.9 in cash to T P Holdings in
partial consideration of the shares of PayLess Drug's capital stock
sold by T P Holdings to the Company. To finance, in part, the
Acquisition and related transactions, the Company and T P Holdings
raised $800.0 through bank debt and the sale of publicly traded debt
securities of the Company and Class C common stock of T P Holdings.
Effective with the Recapitalization described in Note 3, all Class C
common shares converted to Class B common shares on a basis of 20
shares of Class C converting to 6 shares of Class B.
F-9
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(5) ACQUISITION RESERVE
Upon the consummation of the Acquisition and the 1992 Acquisition,
the Company had plans to close specific overlapping and unprofitable
stores. Accordingly, the Company accrued, as part of the acquisitions,
the estimated future cash payments, primarily future lease payments and
costs and expenses associated with subleasing or terminating such
leases. At September 29, 1996, minimum annual lease payments for the
closed stores was $12.6. Remaining terms of the leases related to
these closed stores range up to 20 years. As of September 29, 1996,
and October 1, 1995, the acquisition reserve for these future costs was
$42.0 and $68.0, respectively. Additionally, amounts charged to this
reserve in fiscal 1996 and 1995, were $26.0 and $27.3, respectively.
(6) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
1996 1995
Land..................................... $ 100.1 $ 104.3
Buildings................................ 349.0 339.8
Furniture, fixtures and equipment........ 235.2 214.1
684.3 658.2
Less accumulated depreciation ........... 126.9 76.3
Property, plant and equipment, net.. $ 557.4 $ 581.9
In the 1992 Acquisition, the excess of estimated market value of
the net assets acquired over the purchase price was greater than the
noncurrent assets acquired. Accordingly, the noncurrent assets,
including property, plant and equipment, was reduced to zero at
September 25, 1992. The aforementioned amounts reflect assets acquired
subsequent to the 1992 Acquisition.
(7) ACCRUED EXPENSES
Accrued expenses consists of the following:
1996 1995
Employee wages and benefits.............. $ 83.8 $ 67.7
Self Insurance........................... 35.4 39.7
Income and non-income taxes.............. 36.0 33.5
Interest................................. 18.2 33.2
Other.................................... 63.9 86.3
$ 237.3 $ 260.4
F-10
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(8) LONG-TERM DEBT
Long-term debt consists of the following: 1996 1995
Revolving note payable, under a working capital line
of credit agreement, bears interest of LIBOR + 1.50%
or at the average of the three lead banks' prime rate
+ 0.5%. Final maturity is December 31, 2002. Weighted
average interest rate at September 29, 1996 was 7.11%. $355.5 $ -
Term Loan, secured by substantially all of the
Company's assets including capital stock of its
subsidiaries and bears interest of LIBOR + 1.50% or
at the average of the three lead banks' prime rate
+ 0.5%. Final maturity is December 31, 2002.
Interest rate at September 29, 1996 was 7.0%.......... 249.9 -
Senior Subordinated Notes, unsecured and bearing an
effective interest rate of 14.3% due April 15, 2004;
35% of principal called in April 1996 and remaining
principal callable subsequent to April 15, 1999.
Amounts are net of unamortized discount of $18.0 and
$29.7 in 1996 and 1995, respectively.................. 177.0 270.3
Term Loan Notes payable with tranches A, B and C
bearing interest at varying rates including at the
average of the three lead banks' prime rate + 1.5% to
2.25 or the average of LIBOR + 2.625% to 3.375.
Prepaid April 1996.................................... - 302.9
Senior Notes, unsecured and bearing interest at 11.75%
due April 15, 2003; Redeemed April 1996............... 0.3 250.0
Revolving note payable, under a working capital line
of credit agreement with interest due at the three
lead banks' prime rate plus 1.5% or the average of
LIBOR + 2.625%. Prepaid April 1996.................... - 69.9
Notes payable, bearing interest at 5 - 12% are
in varying installments through April 1, 2010.
Secured by various owned properties of the Company.... 39.8 47.2
Total notes payable............................. 822.5 940.3
Less current maturities......................... 28.1 27.1
Long-term debt.................................. $794.4 $913.2
F-11
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(8) LONG-TERM DEBT (CONTINUED)
Annual maturities of long-term debt at September 29, 1996, are
as follows:
1997............................................. $ 28.1
1998............................................. 28.2
1999............................................. 33.1
2000............................................. 38.1
2001............................................. 42.9
Thereafter....................................... 652.1
$ 822.5
As of September 29, 1996, the Company had available a $650.0
revolving line of credit of which $50.0 was available for import
letters of credit. As of September 29, 1996, $275.3 was available for
working capital requirements, including $30.8 for import letters of
credit. In addition, the Company had a $100.0 line of standby letters
of credit of which $82.0 was being used as collateral for the Company's
master lease facility (see "Commitments and Contingencies") and as
deposits with various states for the Company's self insured workers
compensation plan. Commitment fees for these standby letters of credit
range from 0.20% to 0.375% per year.
The Term Loan, revolving working capital line of credit agreement,
and the Senior Subordinated Note Indentures include various
restrictions on the Company including, among other things, (1) the
payment of dividends on and redemption of capital stock by the Company,
(2) the incurrence of indebtedness by the Company or its subsidiaries
or the issuance of preferred stock by the Company's subsidiaries, (3)
certain sales of assets and capital stock, (4) the creation of liens,
(5) the Company's and its subsidiaries' ability to consolidate or merge
with or into, or to transfer all or substantially all of its assets to
another person, and (6) transactions with affiliates, including certain
fees and payments to affiliates. In addition, the Senior Subordinated
Note Indenture prohibits the incurrence of indebtedness that is
subordinated to the Senior Subordinated Notes. These restrictions are
subject to a number of qualifications or exceptions.
The Senior Subordinated Notes are general unsecured obligations
of Thrifty PayLess. Since bank indebtedness is secured by
substantially all of the assets of Thrifty PayLess and its
subsidiaries, in the event of a bankruptcy, the banks would have a
prior claim on such assets. Further, the Senior Subordinated Notes are
effectively subordinated to the indebtedness of Thrifty PayLess'
subsidiaries (primarily Bi-Mart) and are on a parity with Thrifty
PayLess' trade creditors.
F-12
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
The Company has an interest rate cap agreement which caps the
interest rate on $84.0 at between 8.875% and 10.125% for a three year
period. As consideration for this agreement, the Company paid $1.2
which is being amortized over the three year period of the agreement.
In addition, the Company has an interest rate collar agreement covering
$16.0 million of debt with a ceiling rate of 10.375% and a Floor rate
of 8.045%.
In September 1995, the Company merged PayLess Drug into the
Company. The merger obligated the Company to prepay $87.6 of a note
payable, which was due October 1, 2004, plus pay a prepayment premium.
The prepayment of the note payable resulted in an extraordinary after-
tax loss of $7.4, net of a related income tax benefit of $4.5.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain
financial instruments. The estimated fair value amounts of the
Company's financial instruments have been determined by management,
using market information and valuation methodologies. Considerable
judgment is required to develop the estimates of fair value, thus, the
estimates provided herein are not necessarily indicative of the amounts
that could be realized in a current market exchange. The use of
different market assumptions or valuation methodologies may have a
material effect on the estimated fair value amounts. The Company
determines fair value of its long-term notes payable based on rates
currently available to the Company for debt with similar terms and
maturities. The estimated fair value for long-term notes payable as
of September 29, 1996 was $863.7 compared to the carrying value of
$822.5.
(10) EMPLOYEE BENEFIT PLANS
The Company contributed and charged to expense $4.0 , $3.4 and
$1.8 in fiscal 1996, 1995 and 1994, respectively, for collective
bargained, multi-employer pension plans. These contributions are
determined in accordance with provisions of negotiated labor contracts
and generally are based on the number of years worked.
The Company also sponsors various other retirement and savings
plans which cover a significant number of employees not covered by
multi-employer pension plans. These plans include individual accounts
for each participant and specify how contributions to the participant's
account are to be determined. Company contributions, which in some
cases are discretionary, to these plans are based on a percentage of
an employee's contributions or compensation. The cost of these plans
was $15.2, $15.4 and $12.1 in fiscal 1996, 1995 and 1994, respectively.
The Company does not provide post-employment or post-retirement
medical benefits to its management and employees.
F-13
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(11) COMMITMENTS AND CONTINGENCIES
The Company leases certain stores, distribution facilities,
vehicles and equipment with terms expiring at various dates from 1996
through 2024. Certain of these leases are covered under a master lease
facility. Certain operating leases include contingent rentals based
upon a percentage of sales over specific amounts.
Total rent expense for each fiscal year was:
1996 1995 1994
Minimum rentals............... $155.5 $141.1 $102.2
Contingent rentals............ 17.9 15.2 17.0
Sublease rental income........ (23.2) (21.6) ( 10.6)
Total..................... $150.2 $134.7 $108.6
At September 29, 1996, minimum rental commitments for the next
five fiscal years and thereafter under noncancelable leases were as
follows: 1997 - $136.3; 1998 - $130.0; 1999 - $121.5; 2000 - $111.8;
2001 - $101.2; and thereafter - $1,426.0. Minimum sublease rental
income to be received in the future under operating leases totaled
$76.8 at September 29, 1996.
The Company is a party to several legal proceedings and claims
arising in the normal course of business. Although the outcome of such
proceedings and claims cannot be determined with certainty, management
believes that their final outcome should not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
F-14
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(12) INCOME TAXES
Income tax (expense) benefit related to continuing operations
consists of the following:
1996 1995 1994
Current income taxes:
Federal taxes.......................... $ (2.9) $ 12.5 $ 1.6
State and local taxes.................. (0.3) (1.8) 1.9
(3.2) 10.7 3.5
Deferred income taxes:
Federal taxes.......................... (26.2) (10.7) (8.5)
State and local taxes.................. (6.6) 2.1 (3.3)
(32.8) (8.6) (11.8)
$(36.0) $ 2.1 $ (8.3)
The Company is party to a tax sharing agreement with T P Holdings
that provides for, among other things, the inclusion of the Company in
T P Holdings' consolidated income tax return. In general, such tax
sharing agreement provides that the Company and each of its
subsidiaries will be responsible for paying to T P Holdings its
Separate Tax Liability (as defined in the tax sharing agreement),
computed as a flat tax on its income at the highest marginal rate
applicable to corporations under the various income tax systems
provided under the Internal Revenue Code. Similar provisions apply
with respect to the filing of combined or consolidated state income or
franchise tax returns and the payment of tax. As a result of the tax
sharing agreement and the filing of consolidated tax returns with T P
Holdings, substantially all accrued taxes payable is an intercompany
account with T P Holdings.
The effective income tax rate (expense) benefit varied from the
expected expense (benefit), based upon application of the Federal
statutory income tax rate, as follows:
1996 1995 1994
Expected tax (expense) benefit............ $(30.2) $ 2.9 $ (6.5)
State and local taxes, net of
federal tax effect...................... (4.5) (0.2) (1.4)
Goodwill amortization..................... (1.3) (1.3) (0.4)
Federal and state tax rate change......... - 0.3 -
Other, net................................ - 0.4 -
$(36.0) $ 2.1 $(8.3)
F-15
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
September 29, 1996 and October 1, 1995, are presented below:
1996 1995
Deferred tax assets:
Accrued expenses................................. $ 64.4 $ 66.9
Property, plant and equipment.................... 7.8 19.0
Net operating loss carryforward benefit.......... 62.6 44.3
Deductible transaction costs..................... 8.4 9.6
Alternative minimum tax credit prepayment........ 1.0 1.2
Other............................................ 0.9 1.5
Total gross deferred tax assets............. 145.1 142.5
Valuation allowance for deferred tax assets...... (116.2) (87.7)
Net deferred tax assets..................... 28.9 54.8
Deferred tax liabilities:
Inventories...................................... 136.7 138.9
Debt obligations................................. 27.2 26.0
Discount on notes................................ - 4.9
Stock of subsidiaries............................ 13.7 13.7
Other............................................ 5.3 2.1
Total gross deferred tax liabilities........ 182.9 185.6
Net deferred tax liability............. $154.0 $130.8
The net increase in valuation allowance for fiscal 1996 of $28.5
primarily relates to net operating loss deferred tax assets generated
in fiscal 1996. The net change in the total valuation allowances for
fiscal 1995 of $9.9 related primarily to the Acquisition. It is
management's opinion that it is more likely than not that the net
deferred tax assets of $28.9 will be realized.
At September 29, 1996, the Company has federal regular income tax
and alternative tax net operating loss carryforwards for income tax
purposes of approximately $167.7 and $19.5, respectively. The net
operating loss carry-forwards expire between years 2009 and 2011.
(13) RELATED PARTY TRANSACTIONS
Thrifty PayLess has provided certain administrative support
services to Big 5, Gart and MC and was reimbursed monthly for such
services. Thrifty PayLess was reimbursed $0.3 and $2.2 for
administrative services in 1995 and 1994, respectively. Sublease
revenues from Big 5, Gart and MC amounted to $0.4 in 1996, 1995 and
1994. Additionally, Thrifty PayLess is a guarantor of certain lease
obligations for Big 5, Gart and MC which leases currently require
aggregate annual rent payments of approximately $8.5.
F-16
<PAGE>
THRIFTY PAYLESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
In consideration with the Acquisition, the Company entered into
a ten year Management Services Agreement (the Agreement) with LGA for
management, consulting and financial planning services. The Agreement
provided for an annual fee of $1.0 million plus reasonable expenses.
The Company paid $0.5, $0.9 and $0.8 in 1996, 1995 and 1994,
respectively to LGA under this Agreement. As part of the
Recapitalization, the General Services provision of the Agreement was
canceled. In consideration of Investment Services provided by LGA in
connection with the Recapitalization and the cancellation of the
General Services provision of the Agreement, the Company paid LGA an
aggregate of $16.3 million. In 1995, the Company paid LGA $0.45 for
consulting services associated with obtaining tranch C of the Term
Loan. During 1994, the Company paid LGA $15.1 for services related to
the Acquisition. Additionally, the Company paid $5.0 to an investment
banking firm that held 6% of T P Holdings' voting stock for its
services related to the Acquisition.
During fiscal 1994, Kmart billed the Company $20.5 for imported
merchandise and $0.4 for various administrative services, $20.4 of
which was paid to Kmart during fiscal 1995. During fiscal 1995 the
Company also purchased pharmacy files and inventories from Kmart for
$0.2. In addition, pursuant to the Purchase and Sale Agreement related
to the Acquisition, the Company received $4.3 in fiscal 1995 as an
adjustment of the purchase price related to income taxes.
(14) SUBSEQUENT EVENT
On December 12, 1996, T P Holdings was merged into Rite Aid
Corporation (Rite Aid). As a condition of the merger, all outstanding
debt under the Company's term loan and revolving line of credit
agreement were paid off by Rite Aid and replaced with inter-company
notes payable to Rite Aid.
F-17
<PAGE>
(15) QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Annual
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FOR THE 52 WEEK PERIOD ENDED
SEPTEMBER 29, 1996
Net sales ................... $1,307.1 $1,123.1 $1,213.4 $1,155.3 $4,798.9
Gross profit ................ 360.8 290.9 318.1 311.6 1,281.4
Net income (loss) from
continuing operations........ 27.7 (7.8) 10.5 19.9 50.3
EBITDAL...................... 100.7 40.5 62.6 64.2 268.0
FOR THE 52 WEEK PERIOD ENDED
OCTOBER 1, 1995
Net sales ................... $1,301.5 $1,098.0 $1,172.7 $1,086.6 $4,658.8
Gross profit ................ 363.7 286.5 312.6 283.0 1,245.8
Net income (loss) from
continuing operations........ 19.9 (12.7) 1.3 (14.6) (6.1)
EBITDAL...................... 80.1 31.7 51.2 41.3 204.3
FOR THE 52 WEEK PERIOD ENDED
OCTOBER 2, 1994
Net sales.................... $ 556.6 $ 497.5 $1,024.4 $1,084.8 $3,163.3
Gross profit................. 141.3 129.0 275.8 306.1 852.2
Net income (loss) from
continuing operations........ 6.1 (3.1) 3.1 4.3 10.4
EBITDAL...................... 15.5 0.5 43.3 46.7 106.0
</TABLE>
EBITDAL REPRESENTS OPERATING INCOME BEFORE INTEREST AND TAXES PLUS
DEPRECIATION AND AMORTIZATION EXPENSE AND THE LIFO PROVISION, INCLUDING
ACQUISITION STEP-UP COSTS. EBITDAL IS NOT INTENDED TO REPRESENT CASH
FLOW OR ANY OTHER MEASURE OF PERFORMANCE IN ACCORDANCE WITH GENERALLY
ACCEPTED PRINCIPLES (GAAP). EBITDAL IS INCLUDED BECAUSE MANAGEMENT
BELIEVES THAT CERTAIN INVESTORS FIND IT TO BE A USEFUL TOOL FOR
MEASURING A COMPANY'S ABILITY TO SERVICE ITS DEBT.
F-18
<PAGE>
EXHIBIT 12.1
THRIFTY PAYLESS INC. AND SUBSIDIARIES
Calculation of Ratio of Earnings to Fixed Charges
(Dollars in millions)
<TABLE>
<CAPTION>
Predecessor
The Company Company
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Computation of earnings from
continuing operations before
fixed charges:
Income (loss) from
continuing operations
before income taxes.... $ 86.3 $ (8.2) $ 18.7 $ (4.3) $(175.7)
Fixed charges............ 162.8 166.9 94.9 45.7 49.7
Earnings from continuing
operations before fixed
charges..................... $ 249.1 $ 158.7 $ 113.6 $ 41.4 $(126.0)
Computation of fixed charges:
Interest expense......... $ 105.0 $ 120.4 $ 59.1 $ 20.2 $ 27.8
Interest portion of
rental expense........ 57.8 46.5 35.8 25.5 21.9
$ 162.8 $ 166.9 $ 94.9 $ 45.7 $ 49.7
Ratio of earnings from
continuing operations to
fixed charges.............. 1.5 N/A 1.2 N/A N/A
Excess (deficiency) of
earnings from continuing
operations to fixed charges $ 86.3 $ (8.2) $ 18.7 $ (4.3) $(175.7)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 29, 1996 and the Consolidated
Statement of Operations for the fiscal year ended September 29, 1996,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> OCT-02-1995
<PERIOD-END> SEP-29-1996
<CASH> 5600
<SECURITIES> 0
<RECEIVABLES> 117200
<ALLOWANCES> 10800
<INVENTORY> 1160000
<CURRENT-ASSETS> 1305100
<PP&E> 684300
<DEPRECIATION> 126900
<TOTAL-ASSETS> 2067900
<CURRENT-LIABILITIES> 806100
<BONDS> 794400
0
0
<COMMON> 0
<OTHER-SE> 378800
<TOTAL-LIABILITY-AND-EQUITY> 2067900
<SALES> 4798900
<TOTAL-REVENUES> 4798900
<CGS> 3517500
<TOTAL-COSTS> 3517500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105000
<INCOME-PRETAX> 86300
<INCOME-TAX> 36000
<INCOME-CONTINUING> 50300
<DISCONTINUED> 0
<EXTRAORDINARY> (85500)
<CHANGES> 0
<NET-INCOME> (35200)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
