10-K 1 file001.htm FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


				ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

				For The Fiscal Year Ended March 1, 2003
				OR
				TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

				For The Transition Period From / To

Commission File Number 1-5742

RITE AID CORPORATION

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (717) 761-2633

Securities registered pursuant to Section 12(b) of the Act:
Title of each class

Common Stock, $1.00 par value

Name of each exchange on which registered
New York Stock Exchange
Pacific Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

The aggregate market value of the voting common stock of the registrant held by non-affiliates of the registrant based on the closing price at which such stock was sold on the New York Stock Exchange on September 1, 2002 was approximately $1,076,728,708. For purposes of this calculation, executive officers, directors and 5% shareholders are deemed to be affiliates of the registrant.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No

As of April 26, 2003 the registrant had outstanding 515,367,806 shares of common stock, par value $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant's annual meeting of shareholders to be held on June 25, 2003 are incorporated by reference into Part III.

TABLE OF CONTENTS


		Page
Cautionary Statement Regarding Forward Looking Statements			3
PART I
ITEM 1.	Business		4
ITEM 2.	Properties		10
ITEM 3.	Legal Proceedings		12
ITEM 4.	Submission of Matters to a Vote of Security Holders		14
PART II
ITEM 5.	Market for Registrant's Common Equity and Related Stockholder Matters		15
ITEM 6.	Selected Financial Data		15
ITEM 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		17
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risks		37
ITEM 8.	Financial Statements and Supplementary Data		38
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		38
PART III
ITEM 10.	Directors and Executive Officers of the Registrant		39
ITEM 11.	Executive Compensation		39
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		39
ITEM 13	Certain Relationships and Related Transactions		39
ITEM 14	Controls and Procedures		39
PART IV
ITEM 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		39

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as "anticipate," "believe," "intend," "estimate," "expect," "continue," "should," "could," "may," "plan," "project," "predict," "will" and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.

Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

•

our high level of indebtedness;

•

our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior secured credit facility and other debt agreements;

•

our ability to improve the operating performance of our existing stores in accordance with our management's long term strategy;

•

our ability to hire and retain pharmacists and other store personnel;

•

the outcomes of pending lawsuits and governmental investigations;

•

competitive pricing pressures and continued consolidation of the drugstore industry; and

•

the efforts of third party payors to reduce prescription drug costs, changes in state or federal legislation or regulations, the success of planned advertising and merchandising strategies, general economic conditions and inflation, interest rate movements, access to capital, and our relationships with our suppliers.

We undertake no obligation to revise the forward-looking statements included in this report to reflect any future events or circumstances. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview and Factors Affecting Our Future Prospects" included in this annual report on Form 10-K.

PART I

Item 1. Business

Overview

We are the third largest retail drugstore chain in the United States based on revenues and number of stores. We operate our drugstores in 28 states across the country and in the District of Columbia. We have a first or second market position in 68 of the 117 major U.S. metropolitan markets in which we operate. As of March 1, 2003, we operated 3,404 stores. Since the beginning of fiscal 1997, we have relocated 979 stores, opened 476 new stores, remodeled 608 stores and closed or sold an additional 1,404 stores. As a result, we believe we have a modern store base.

In our stores, we sell prescription drugs and a wide assortment of other merchandise which we call "front-end" products. In fiscal 2003, our pharmacists filled more than 200 million prescriptions which accounted for 63.2% of our total sales. We believe that our pharmacy operations will continue to represent a significant part of our business due to favorable industry trends, including an aging population, increased life expectancy and the discovery of new and better drug therapies. We offer approximately 24,000 front-end products, which accounted for the remaining 36.8% of our total sales in fiscal 2003. Front-end products include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and numerous other everyday and convenience products, as well as photo processing. We distinguish our stores from other national chain drugstores, in part, through our private brands and our strategic alliance with GNC, a leading retailer of vitamin and mineral supplements. We offer more than 1,900 products under the Rite Aid private brand, which contributed approximately 10.8% of our front-end sales in the categories where private brand products are offered in fiscal 2003.

Our stores range in size from approximately 5,000 to 40,000 square feet. The overall average size of each store in our chain is approximately 12,750 square feet. The larger stores are concentrated in the western United States. Approximately 54% of our stores are freestanding; approximately 38% of our stores include a drive-thru pharmacy; approximately 69% include one-hour photo shops; and approximately 28% include a GNC store-within-Rite Aid store.

Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, and our telephone number is (717) 761-2633. Our common stock is listed on the New York Stock Exchange and the Pacific Exchange under the trading symbol of "RAD". We were incorporated in 1968 and are a Delaware corporation.

Recent Events

Recent Changes to our Capital Structure and Proposed New Credit Facility

In February 2003, we issued $300.0 million aggregate principal amount of our 9.5% senior secured notes due 2011. In April 2003, we issued $360.0 million aggregate principal amount of our 8.125% senior secured notes due 2010. The 9.5% notes and 8.125% notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all of our other unsecured, unsubordinated indebtedness. Our obligations under the notes are guaranteed, subject to certain limitations, by our subsidiaries that guarantee our obligations under our senior credit facility. The guarantees are secured, subject to permitted liens, by shared second priority liens granted by our subsidiary guarantors on all of their assets that secure our obligations under the senior credit facility, subject to certain exceptions. The indentures governing the senior secured notes contain customary covenant provisions that, among other things, include limitations on our ability to pay dividends or make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale leaseback transactions.

In connection with the offering of the 9.5% senior secured notes and other debt retirement activities through April 30, 2003:

•

We redeemed all $149.5 million aggregate principal amount of our senior secured (shareholder) notes due 2006 prior to March 1, 2003;

•

We retired $118.6 million of our 6.0% fixed-rate senior notes due 2005, prior to March 1, 2003;

•

We retired $15.0 million of our 7.125% notes due 2007 prior to March 1, 2003;

•

We retired an additional $40.3 million of our 7.125% notes due 2007 subsequent to March 1, 2003; and

•

We retired an additional $33.2 million of our 6.0% fixed-rate senior notes due 2005 subsequent to March 1, 2003.

Separately, in March 2003, we made a scheduled principal payment of $7.5 million under our senior secured credit facility.

We used a portion of the net proceeds of the 8.125% senior secured notes to repay approximately $252.4 million of our term loan under our senior secured credit facility. The remaining $92.4 million will be used for general corporate purposes, which may include capital expenditures and repayments or repurchases of our outstanding indebtedness. In connection with the issuance of the 8.125% senior secured notes, we also permanently reduced our borrowing capacity under our revolving credit facility by the amount of the remainder of the net proceeds.

In April 2003, we announced that we intend to replace our existing senior secured credit facility with a new $2.0 billion senior secured credit facility that will consist of a $1.15 billion term loan and a $850 million revolving credit facility and will mature in April 2008. Our obligations under the proposed new senior secured credit facility will be guaranteed by substantially all of our wholly owned subsidiaries that guarantee our obligations under our existing senior credit facility. These subsidiary guarantees will be secured by a first priority security interest in substantially the same collateral that secures the guarantees under our existing senior credit facility. The proceeds of the new senior secured credit facility will be used to repay outstanding amounts under our existing credit facility, to refinance our synthetic lease, and to replace our existing revolving credit facility. Closing of the new facility is subject to negotiation of definitive documentation, successful syndication and satisfaction of customary closing conditions. We expect to enter into the new senior secured credit facility by the end of May 2003. Except as otherwise explicitly stated, this Annual Report on Form 10-K does not give effect to the new credit facility.

Management Changes

In April 2003, we announced that Mary F. Sammons, currently our President and Chief Operating Officer, will become our President and Chief Executive Officer effective June 25, 2003 at our annual meeting of stockholders. Robert G. Miller, currently our Chairman and Chief Executive Officer, will retain the position of Chairman. Mr. Miller will remain as Chairman until his term on our Board of Directors ends at our annual meeting in June, 2005. At that time, the decision will be made regarding his standing for re-election to our Board.

Strategy

Approximately 60% of our stores have been constructed, relocated or remodeled since the beginning of fiscal 1997. Although this substantial investment made in our store base over the last seven years has given us a modern store base, our store base has not yet achieved a level of sales productivity comparable to our major competitors. Accordingly, many of our new and relocated stores have not developed a critical mass of customers needed to achieve profitability. Our strategy is to focus on improving the productivity of our existing store base. We believe that improving the sales of existing stores is important to achieving profitability and continuing to improve cash flow. We believe that in the past year, the execution of this strategy has driven a 4.2% increase in revenues, from $15.2 billion in fiscal 2002 to $15.8 billion in fiscal 2003. We believe that the execution of our strategy has also led to a significant improvement in our operating results, as net loss has decreased from $827.7 million in fiscal 2002 to $112.1 million in fiscal 2003.

We believe the productivity of our existing store base will be improved by continuing to (i) grow our pharmacy prescription count and attract more customers; and (ii) improve customer satisfaction with focus on service and selection in our stores. Moreover, we estimate that pharmacy sales in the United States will increase at least 30% over the next three years based upon studies published by pharmacy

benefit management companies and the Congressional Budget Office. This anticipated growth is expected to be driven by the "baby boom" generation entering their fifties, the increasing life expectancy of the American population, the introduction of several new successful drugs and inflation. We believe this growth will also help increase the sales productivity of our existing store base.

The following paragraphs describe in more detail the components of our strategy to improve store productivity:

Grow Our Pharmacy Prescription Count and Attract More Customers. We have begun the installation of our next generation pharmacy system and we are piloting several e-prescription applications which will further enable our pharmacists to work directly with customers and adjudicate and fill prescriptions in a more efficient manner. We also drive prescription growth via our automatic refill program, prescription file buys and several initiatives aimed at managed care providers and doctors. We believe our focus on generic prescription drugs and Rite Aid brand products offer an attractive value to our existing customers and are an invitation to new customers. We believe that continued focus on weekly circulars, seasonal merchandising programs, cross-category merchandising and direct marketing efforts will attract new customers to our stores and increase sales per customer visit.

Grow Front End Sales. We continue to expand the categories of our front-end products and increase the emphasis on our Rite Aid brand products. Through the use of technology and attention to customers' needs and preferences, we are increasing our efforts to identify inventory and product categories that will enable us to offer more personalized products and services to our customers. We also continue to develop our GNC stores-within-Rite Aid stores and one-hour photo development departments. We continue to improve inventory and product categories to offer more personalized products and services to our customers, including better management of seasonal items. We are also increasing ethnic product offerings targeted to selected markets to enhance front-end sales growth. We also continue to strengthen our relationships with our suppliers in order to offer customers a wider selection of products and categories.

Improve Customer Satisfaction With Focus On Service and Selection in Our Stores. We continue to develop and implement programs designed to improve customer satisfaction. We believe that by executing our "With Us It's Personal" and "Ready When Promised" programs that are aimed at delivering more personalized service along with faster prescription delivery to our customers, our growth will continue. Although we are already an industry leader in dispensing generic drugs, we continue to take additional steps to further improve our generic efficiency, including adding functionality to our proprietary pharmacy information system to aid our pharmacists in dispensing generic prescriptions whenever possible. We are increasing customer loyalty by establishing a strong community presence through health expositions and not-for-profit activities, increasing promotional themes and exclusive offers, focusing on the attraction and retention of managed care customers, and partnering with several major drug suppliers to provide discount cards to senior citizens.

We continue to develop and implement associate training programs to improve customer service and educate our associates about the products we offer. We have implemented programs that create compensatory and other incentives for associates to provide customers with quality service, to promote our generic prescriptions and private label brands and to improve our corporate culture. We are also utilizing mystery shoppers and customer communications to improve our understanding of our customers' perceptions of us.

Contain Expenses. We continue to execute our cost management programs. Our emphasis is on targeted expense areas. Those areas are subject to specific work plans for improvement that are continuously monitored.

Products and Services

During fiscal 2003, sales of prescription drugs represented 63.2% of our total sales, an increase from 61.3% in fiscal 2002 and 59.5% in fiscal 2001. In fiscal years 2003, 2002 and 2001, prescription drug sales were $10.0 billion, $9.3 billion and $8.6 billion, respectively.

We sell approximately 24,000 different types of non-prescription, or front-end products. The types and number of front-end products in each store vary, and selections are based on available space and

customer needs and preferences. No single front-end product category contributed significantly to our sales during fiscal 2003 although certain front-end product classes contributed notably to our sales. Our principal classes of products in fiscal 2003 were the following:


Product Class	Percentage of Sales
Prescription drugs		63.2	%
Over-the-counter medications and personal care		10.0
Health and beauty aids		4.9
General merchandise and other		21.9

We offer approximately 1,900 products under the Rite Aid private brand, which contributed approximately 10.8% of our front-end sales in the categories where private brand products are offered in fiscal 2003. During fiscal 2003, we added approximately 240 products under our private brand. We intend to increase the number and the sales of our private label brand products.

We have a strategic alliance with GNC under which we have agreed to open 1,000 GNC "stores-within-Rite Aid stores" across the country by July 2003. GNC is a leading nationwide retailer of vitamin and mineral supplements and personal care, fitness and other health-related products. As of March 1, 2003, we operated 966 GNC stores-within-Rite Aid-stores.

Store Location

Many of our stores are located at convenient locations in fast-growing metropolitan areas. We have significantly reduced our store development program over the past three years in order to focus our efforts and resources on improving the operations of our existing store base, although we routinely evaluate expansion opportunities, including acquisitions. Consistent with our operating strategy, during fiscal 2003, we opened 3 new stores, acquired 1 store, relocated 12 stores, remodeled 138 stores and closed 97 stores. Our current plan for fiscal 2004 is to open 1 new store, relocate 13 stores and remodel 180 stores. Our fiscal 2004 planned store relocations are not concentrated in any specific geographic region.

Technology

All of our stores are integrated into a common information system, which enables our pharmacists to fill prescriptions more accurately and efficiently with reduced chances of adverse drug interaction and which can be expanded to accommodate new stores. We continue to make modifications to our proprietary pharmacy information system in order to improve its user interface and information output. Our customers may also order prescription refills over the Internet through www.riteaid.com powered by drugstore.com, or over the phone through our telephonic rapid automated refill systems. As of March 1, 2003, we had installed ScriptPro automated pharmacy dispensing units, which are linked to our pharmacists' computers and fill and label prescription drug orders, in 874 stores. The efficiency of ScriptPro units allows our pharmacists to spend an increased amount of time consulting with our customers. We are also focusing on technology initiatives such as the roll-out of our next generation pharmacy system, expansion of e-prescribing and enhancing our automated refill system. Additionally, each of our stores employs point-of-sale technology that facilitates inventory replenishment, sales analysis and recognition of customer trends. In fiscal 2003, we developed and implemented several new technologies and applications, including productivity improvements related to our piece picking and inventory movement management. We also simplified our cash register or point-of-sale processes and continue to enhance category management applications through the development of price optimization and market basket analysis.

Suppliers

During fiscal 2003, we purchased approximately 90% of the dollar volume of our prescription drugs from a single supplier, McKesson Corp. ("McKesson"), under a contract which runs until April 2004. Under the contract, McKesson has agreed to sell to us all of our requirements of branded pharmaceutical products. With limited exceptions, we are required to purchase all of our branded pharmaceutical products from McKesson. If our relationship with McKesson was disrupted, we could temporarily have

difficulty filling prescriptions until we found a replacement supplier, which would negatively affect our business. We purchase generic (non-brand name) pharmaceuticals from a variety of sources. We purchase our non-pharmaceutical merchandise from numerous manufacturers and wholesalers. We believe that competitive sources are readily available for substantially all of the non-pharmaceutical merchandise we carry and that the loss of any one supplier would not have a material effect on our business.

We sell private brand and co-branded products that generally are supplied by numerous competitive sources. The Rite Aid and GNC co-branded PharmAssure vitamin and mineral supplement products and the GNC branded vitamin and mineral supplement products that we sell in our stores are developed by GNC, and along with our Rite Aid brand vitamin and mineral supplements, are manufactured by GNC.

Customers and Third-Party Payors

During fiscal 2003, our stores served an average of 1.8 million customers per day. The loss of any one customer would not have a material adverse impact on our results of operations. No single customer or health plan contract accounted for more than 10% of our total revenues in fiscal 2003.

In fiscal 2003, 92.7% of our pharmacy sales were to customers covered by health plan contracts, which typically contract with a third-party payor (such as an insurance company, a prescription benefit management company, a governmental agency, a private employer, a health maintenance organization or other managed care provider) that agrees to pay for all or a portion of a customer's eligible prescription purchases in exchange for reduced prescription rates. During fiscal 2003, the top five third-party payors, which provide administrative and payment services for multiple health plan contracts and customers, accounted for approximately 29% of our total sales, the largest of which represented 10.4% of our total sales. During fiscal 2003, the top five state sponsored Medicaid agencies accounted for approximately 11% of our total sales, the largest of which was less than 3% of our total sales. Any significant loss of third-party payor business could have a material adverse effect on our business and results of operations.

Competition

The retail drugstore industry is highly competitive. We compete with, among others, retail drugstore chains, independently owned drugstores, mass merchandisers, discount stores and mail order pharmacies. We compete on the basis of store location and convenient access, customer service, product selection and price. We believe continued consolidation of the drugstore industry and continued new store openings will further increase competitive pressures in the industry.

Marketing and Advertising

In fiscal 2003, marketing and advertising expense was $242.0 million, which was spent primarily on nationwide weekly advertising circulars. We have implemented various programs that are designed to improve our image with customers. These include several customer events, including our Rite Aid Health and Beauty Expos. Our front-end and prescription suppliers are invited to participate in these events by displaying, demonstrating and sampling their products and services in exhibit booths. We continue to implement programs that are specifically directed to our pharmacy business. These include an increased focus on attracting and retaining managed care customers and partnering with the major drug suppliers to provide discount cards to senior citizens.

Associates

We believe that our relationships with our associates are good. As of March 1, 2003, we had approximately 72,000 associates, 13% of which were pharmacists, 44% of which were part-time and 36% of which were unionized. There is a national shortage of pharmacists. We have implemented various associate incentive plans, including the implementation of a stock option plan for field associates, in order to attract and retain qualified pharmacists. We are also implementing an initiative to increase recruitment of pharmacists in hard to staff areas.

Research and Development

We do not make significant expenditures for research and development.

Licenses, Trademarks and Patents

The Rite Aid name is our most significant trademark and the most important factor in marketing our stores and private brand products. We hold licenses to sell beer, wine and liquor, cigarettes and lottery tickets. Additionally, we hold licenses granted to us by the Nevada Gaming Commission that allow us to place slot machines in our Nevada stores. We also hold licenses to operate our pharmacies and our distribution facilities. Together, these licenses are material to our operations.

Seasonality

We experience moderate seasonal fluctuations in our results of operations concentrated in the fourth fiscal quarter as the result of the concentration of the holidays. We tailor certain front-end merchandise to capitalize on holidays and seasons. We increase our inventory levels during our third fiscal quarter in anticipation of the seasonal fluctuations described above. Our results of operations in the fourth and first fiscal quarter may fluctuate based upon the timing and severity of the cold and flu season, both of which are unpredictable.

Regulation

Our business is subject to various federal and state regulations. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990 ("OBRA") and comparable state regulations, our pharmacists are required to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists and may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effect.

Our pharmacies and pharmacists must be licensed by the appropriate state boards of pharmacy. Our pharmacies and distribution centers are also registered with the Federal Drug Enforcement Administration and are subject to Federal Drug Enforcement Agency regulations relative to our pharmacy operations, including purchasing, storing and dispensing of controlled substances. Applicable licensing and registration requirements require our compliance with various state statutes, rules and/or regulations. If we were to violate any applicable statute, rule or regulation, our licenses and registrations could be suspended or revoked.

Our pharmacy business is subject to patient privacy and other obligations, including corporate, pharmacy and associate responsibility imposed by the Health Insurance Portability and Accountability Act. As a covered entity, we are required to implement privacy standards, train our associates on the permitted uses and disclosures of protected health information, provide a notice of privacy practice to our pharmacy customers and permit pharmacy customers to access and amend their records and receive an accounting of disclosures of protected health information. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties.

We are also subject to laws governing our relationship with associates, including minimum wage requirements, overtime and working conditions. Increases in the federal minimum wage rate, associate benefit costs or other costs related to associates could adversely affect our results of operations.

In addition, in connection with the ownership and operations of our stores, distribution centers and other sites, we are subject to laws and regulations relating to the protection of the environment and health and safety matters, including those governing the management and disposal of hazardous substances and the cleanup of contaminated sites. Violations of or liabilities under these laws and regulations as a result of our current or former operations or historical activities at our sites, such as gasoline service stations and dry cleaners, could result in significant costs.

In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. The legislative initiatives include prescription drug benefit proposals for Medicare participants. Although we believe we are well positioned to respond to these developments, we cannot predict the outcome or effect of legislation resulting from these reform efforts.

Available Information

Our investor relations website is www.riteaid.com. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as soon as practical after we file these reports with the SEC.

Item 2. Properties

We own our corporate headquarters, which is located in a 205,000 square foot building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a 100,000 square foot building near Harrisburg, Pennsylvania for use by additional administrative personnel. We lease 3,133 of our operating drugstore facilities under non-cancelable leases, many of which have original terms of 10 to 22 years. In addition to minimum rental payments, which are set at competitive market rates, certain leases require additional payments based on sales volume, as well as reimbursement for taxes, maintenance and insurance. Most of our leases contain renewal options, some of which involve rent increases.

As of March 1, 2003, we operated 3,404 retail drugstores. The overall average selling square feet of each store in our chain is 11,100 square feet. The overall average total square feet of each store in our chain is 12,700. The stores on the east coast average 8,700 selling square feet per store (9,600 average total square feet per store). The central stores average 9,500 selling square feet per store (10,200 average total square feet per store). The west coast stores average 16,800 selling square feet per store (20,600 average total square feet per store).

The table below identifies the number of stores by state as of March 1, 2003:


State	Store Count
Alabama		118
Arizona		3
California		584
Colorado		29
Connecticut		36
Delaware		26
District of Columbia		8
Georgia		49
Idaho		20
Indiana		9
Kentucky		117
Louisiana		87
Maine		80
Maryland		138
Michigan		323
Mississippi		32
Nevada		35
New Hampshire		39
New Jersey		167
New York		389
Ohio		237
Oregon		70
Pennsylvania		351
Tennessee		47
Utah		27
Vermont		12
Virginia		134
Washington		134
West Virginia		103
Total		3,404

Our stores have the following attributes at March 1, 2003:


Attribute	Number		Percentage
Freestanding		1,833		54	%
Drive through pharmacy		1,281		38	%
One-hour photo development department		2,355		69	%
GNC stores-within a Rite Aid-store		966		28	%

We operate the following distribution centers and overflow storage locations, which we own or lease as indicated:


Location	Owned or Leased		Approximate Square Footage
Rome, New York		Owned		291,000
Utica, New York (1)		Leased		172,000
Poca, West Virginia		Owned		264,000
Dunbar, West Virginia (1)		Leased		109,000
Perryman, Maryland (2)		Leased		885,000
Tuscaloosa, Alabama		Owned		238,000
Cottondale, Alabama (1)		Leased		155,000
Pontiac, Michigan		Owned		362,000
Woodland, California		Owned		521,300
Woodland, California (1)		Leased		200,000
Wilsonville, Oregon		Leased		518,000
Lancaster, California (2)		Leased		917,000

(1)	Overflow storage locations.

(2)	These properties will be repurchased upon completion of the new senior secured credit facility which we expect to have in place by the end of May 2003.

The original terms of the leases for our distribution centers range from five to 22 years. In addition to minimum rental payments, certain distribution centers require tax reimbursement, maintenance and insurance. Most leases contain renewal options, some of which involve rent increases. Although from time to time, we may be near capacity at some of our distribution facilities, particularly at our older facilities, we believe that the capacity of our facilities is adequate for the foreseeable future.

We also own a 52,200 square foot ice cream manufacturing facility located in El Monte, California.

On a regular basis and as part of our normal business, we evaluate store performance and may reduce in size, close or relocate a store if the store is redundant, under performing or otherwise deemed unsuitable. When we reduce in size, close or relocate a store, we often continue to have leasing obligations. We attempt to sublease this space. As of March 1, 2003, we subleased 5,278,700 square feet of space and an additional 4,296,200 square feet of space in closed or relocated stores was not subleased.

Item 3. Legal Proceedings

We are party to numerous legal proceedings, as described below.

Federal investigations

There are currently pending federal governmental investigations, both civil and criminal, by the United States Attorney, involving various matters related to former management. We are cooperating fully with the United States Attorney. We have begun settlement discussions with the United States Attorney for the Middle District of Pennsylvania. The United States Attorney has proposed that the government would not institute any criminal proceeding against us if we enter into a consent judgement providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on our financial condition and results of operations. We have recorded an accrual of $20.0 million in connection with the resolution for these matters; however, we may incur charges in excess of that amount and we are unable to estimate the possible range of loss. We will continue to evaluate our estimate and to the extent that additional information arises or our strategy changes, we will adjust our accrual accordingly.

These investigations and settlement discussions are ongoing and we cannot predict their outcomes. If we were convicted of any crime, certain licenses and government contracts such as Medicaid plan reimbursement agreements that are material to our operations may be revoked, which would have a material adverse effect on our results of operations, financial condition or cash flows. In addition, substantial penalties, damages or other monetary remedies assessed against us, including a settlement, could also have a material adverse effect on our results of operations, financial condition or cash flows.

The investigations conducted by the U.S. Department of Labor and by an independent trustee of matters related to our employee benefits plans have been concluded. In addition, the class action lawsuit filed on behalf of the plans and their participants in the United States District Court for the Eastern District of Pennsylvania has been settled. Under the agreement, our insurance companies paid $5.5 million and in November 2002 we paid $4.0 million into a settlement fund for the benefit of plan participants. We also agreed to implement certain changes in the way in which we administer our employee benefit plans and to maintain the current level of benefits through December 31, 2006. On March 11, 2003, the District Court approved the settlement and dismissed the complaint with prejudice.

Stockholder litigation

Our settlement of the consolidated securities class action lawsuits brought on behalf of securityholders who purchased our securities on the open market between May 2, 1997 and November 10, 1999 (and based on the allegation that our financial statements for fiscal 1997, fiscal 1998 and fiscal 1999 fraudulently misrepresented our financial position and results of operations for these periods) was approved by the United States District Court for the Eastern District of Pennsylvania by Order entered August 16, 2001. Although that Order was appealed by certain non-settling defendants (including our former auditor, KPMG, our former chief executive officer, Martin Grass, and our former chief financial officer, Frank Bergonzi), those non-settling defendants have now also settled with plaintiffs and have agreed to dismiss their appeal, which settlement has received preliminary approval by the District Court. A hearing to consider final approval of the settlement is scheduled for May 30, 2003. In accordance with the agreement settling plaintiffs' claims against us, in April 2002, we issued $149.5 million of senior secured (shareholder) notes (subsequently redeemed in February 2003) and paid $45.0 million in cash, which was fully funded by our officers' and directors' liability insurance. If the settlement does not become final, this litigation could result in a material adverse effect on the Company's results of operations, financial condition or cash flows. Several members of the class have elected to "opt-out" of the class and, as a result, they will be free to pursue their claims. Management believes that their claims, individually and in the aggregate, are not material.

A purported class action has been instituted by a stockholder against us in Delaware state court on behalf of stockholders who purchased shares of our common stock prior to March 1, 1997, and who continued to hold them after October 18, 1999, alleging claims similar to the claims alleged in the consolidated securities class action lawsuits described above. The amount of damages sought was not specified and may be material. We have filed a motion to dismiss this complaint for failure to state a claim for which relief could be granted. On December 19, 2002, the court dismissed the class action and breach of fiduciary duty claims with prejudice and the individual claims without prejudice. The plaintiffs have filed a notice of appeal in the Delaware Supreme Court.

Reimbursement Matters

We are being investigated by multiple state attorneys general for our reimbursement practices relating to partially filled prescriptions and fully filled prescriptions that are not picked up by ordering customers. We are supplying similar information with respect to these matters to the United States Department of Justice. We believe that these investigations are similar to investigations which were, and are being, undertaken with respect to the practices of others in the retail drug industry. We also believe that our existing policies and procedures fully comply with the requirements of applicable law and intend to fully cooperate with these investigations. We cannot, however, predict their outcomes at this time. An individual acting on behalf of the United States of America, has filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania under the Federal False Claims Act alleging that we defrauded federal healthcare plans by failing to appropriately issue refunds for partially filled prescriptions and prescriptions which were not picked up by customers. The United States Department of Justice has intervened in this lawsuit, as is its right under the law. We have reached an agreement to settle these investigations and the lawsuit filed by the private individual for $7.2 million, which is subject to court approval. We have reserved $7.2 million against this potential liability.

These claims are ongoing and we cannot predict their outcome. If any of these cases result in a substantial monetary judgment against us or are settled on unfavorable terms, our results of operations, financial position and cash flows could be materially adversely affected.

Other

In June of 2002, the United States Attorney indicted several former executive officers on various criminal charges, including securities fraud, and one former executive officer pled guilty to charges of obstruction of an internal investigation. We currently have separation and other arrangements with some of these executives. As a result of these indictments, we ceased payments under these obligations. On December 11, 2002, we concluded our investigation of the separation and other arrangements relating to these employees, and we determined, effective December 11, 2002, that we have no binding obligation under these arrangements. Therefore, we recorded an adjustment of $27.7 million in fiscal 2003 to reverse our liability for these contractual obligations. The adjustment was recorded as a reduction in selling, general and administrative expenses.

On January 13, 2003 the Federal Trade Commission notified the Company that the investigation commenced on September 11, 2002 regarding the Company's pharmacy compliance center activities has been closed and that no further action would be taken.

We, together with a significant number of major U.S. retailers, have been sued by the Lemelson Foundation in a complaint which alleges that portions of the technology included in our point-of-sale system infringe upon a patent held by the plaintiffs. The amount of damages sought is unspecified and may be material. We cannot predict the outcome of this litigation or whether it could result in a material adverse effect on our results of operations, financial conditions or cash flows.

We are subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of our management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on our financial condition, results of operations or cash flows if decided adversely.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of our security holders during the fourth quarter of our fiscal year covered by this report.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Our common stock is listed on the New York Stock Exchange and Pacific Exchanges under the symbol "RAD." On April 26, 2003, we had approximately 15,990 record shareholders. Quarterly high and low stock prices, based on the New York Stock Exchange composite transactions, are shown below.


Fiscal Year	Quarter	High		Low
2004 (through April 26, 2003)	First		3.49		2.17

2003	First		4.22		3.01
	Second		3.24		1.75
	Third		2.65		1.79
	Fourth		3.05		2.02

2002	First		9.06		5.35
	Second		9.74		7.37
	Third		8.39		4.69
	Fourth		5.06		2.06

Equity Compensation Plan Information


	Number of securities to be issued upon exercise of outstanding options		Weighted-avg exercise price		Securities available for future issuance
Plans approved by shareholders		30,449	$	8.13		1,304
Plans not approved by shareholders		34,227		3.57		4,677
Total		64,676				5,981

We have not declared or paid any cash dividends on our common stock since the third quarter of fiscal 2000 and we do not anticipate paying cash dividends in the foreseeable future. Our senior secured credit facility does not allow us to pay cash dividends. Some of the indentures that govern our other outstanding indebtedness also restrict our ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We have not sold any unregistered equity securities during the period covered by this report that was not previously disclosed in one of our Quarterly Reports on Form 10-Q.

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and related notes appearing on pages 47-90.


	Fiscal Year Ended
	March 1, 2003 (52 weeks)			March 2, 2002 (52 weeks)			March 3, 2001 (53 weeks)(1)			February 26, 2000 (52 weeks)(1)			February 27, 1999 (52 weeks)
	(Dollars in thousands, except per share amounts)
Summary of Operations:
Revenues	$	15,800,920		$	15,171,146		$	14,516,865		$	13,338,947		$	12,438,442
Costs and expenses:
Cost of goods sold, including occupancy costs		12,109,183			11,742,309			11,151,490			10,213,428			9,406,831
Selling, general and administrative expenses		3,407,569			3,382,962			3,412,442			3,651,248			3,168,363
Stock-based compensation expense (benefit)		4,806			(15,891	)		45,865			(43,438	)		32,200
Goodwill amortization		—			21,007			20,670			24,457			26,055
Store closing and impairment charges		135,328			251,617			388,078			139,448			195,359
Interest expense		330,020			396,064			649,926			542,028			274,826
Interest rate swap contracts		278			41,894			—			—			—
Loss on debt and lease conversions and modifications		—			154,465			100,556			—			—
Share of loss from equity investments		—			12,092			36,675			15,181			448
(Gain) on sale of assets and investments, net		(18,620	)		(42,536	)		(6,030	)		(80,109	)		—
Total cost and expenses		15,968,564			15,943,983			15,799,672			14,462,243			13,104,082

Loss from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change		(167,644	)		(772,837	)		(1,282,807	)		(1,123,296	)		(665,640	)
Income tax expense (benefit)		(41,940	)		(11,745	)		148,957			(8,375	)		(216,941	)
Loss from continuing operations before extraordinary items and cumulative effect of accounting change		(125,704	)		(761,092	)		(1,431,764	)		(1,114,921	)		(448,699	)
Income (loss) from discounted operations, net of income tax expense (benefit) of $13,846, $30,903, and $(5,925)		—			—			11,335			9,178			(12,823	)
Loss on disposal of discontinued operations, net of income tax benefit of $734		—			—			(168,795	)		—			—
Extraordinary item, gain (loss) on early extinguishment of debt, net of income taxes of $0		13,628			(66,589	)		—			—			—
Cumulative effect of accounting change, net of income tax benefit of $18,200		—			—			—			(27,300	)		—
Net loss	$	(112,076	)	$	(827,681	)	$	(1,589,224	)	$	(1,133,043	)	$	(461,522	)
Basic and diluted (loss) income per share:
Loss from continuing operations	$	(0.31	)	$	(1.68	)	$	(5.15	)	$	(4.34	)	$	(1.74	)
Income (loss) from discontinued operations		—			—			(0.50	)		0.04			(0.05	)
Income (loss) from extraordinary item		0.03			(0.14	)		—			—			—
Cumulative effect of accounting change		—			—			—			(0.11	)		—
Net loss per share	$	(0.28	)	$	(1.82	)	$	(5.65	)	$	(4.41	)	$	(1.79	)
Year-End Financial Position:
Working capital (deficit)	$	1,676,889		$	1,580,218		$	1,955,877		$	752,657		$	(892,115	)
Property, plant and equipment (net)		1,868,579			2,096,030			3,041,008			3,445,828			3,328,499
Total assets		6,133,515			6,491,759			7,913,911			9,845,566			9,778,451
Total debt (2)		3,862,628			4,056,468			5,894,548			6,612,868			5,922,504
Redeemable preferred stock		19,663			19,561			19,457			19,457			23,559
Stockholders' equity (deficit)		(112,329	)		9,616			(354,435	)		432,509			1,339,617


	Fiscal Year Ended
	March 1, 2003 (52 weeks)			March 2, 2002 (52 weeks)			March 3, 2001 (53 weeks)(1)			February 26, 2000 (52 weeks)(1)			February 27, 1999 (52 weeks)
	(Dollars in thousands, except per share amounts)
Other Data:
Cash flows from continuing operations provided by (used in):
Operating activities	$	305,383		$	16,343		$	(704,554	)	$	(623,098	)	$	278,947
Investing activities		(72,214	)		342,531			677,653			(504,112	)		(2,705,043	)
Financing activities		(211,903	)		(107,109	)		(64,324	)		905,091			2,660,341
Capital expenditures		116,154			187,383			141,504			641,070			1,314,423
Cash dividends declared per common share	$	0		$	0		$	0		$	.3450		$	.4375
Basic weighted average shares		515,129,000			474,028,000			314,189,000			259,139,000			258,516,000
Diluted weighted average shares		515,129,000			474,028,000			314,189,000			259,139,000			258,516,000
Number of retail drugstores		3,404			3,497			3,648			3,802			3,870
Number of associates		72,000			75,000			75,500			77,300			89,900

(1)	PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS. Accordingly, our Pharmacy Benefit Management ("PBM") segment is reported as a discontinued operation for all periods presented. See note 21 of the notes to the consolidated financial statements.

(2)	Total debt includes capital lease obligations of $176.2 million, $182.6 million, $1.1 billion, $1.1 billion, and $1.1 billion as of March 1, 2003, March 2, 2002, March 3, 2001, February 26, 2000, and February 27, 1999, respectively.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Net loss for fiscal 2003 was $112.1 million, compared to $827.7 million in fiscal 2002 and $1,589.2 million in fiscal 2001. Reasons for the substantial improvement in our results in fiscal 2003 are described in more detail in the Results of Operations and Liquidity and Capital Resources sections of Item 7. However, some of the key factors that impacted this improvement are summarized as follows:

Productivity of Existing Store Base. Our strategy is to focus on improving the productivity of our existing store base. We have focused our efforts on improving the productivity of our stores by implementing programs to drive prescription count growth, improving the consistency and focus of our marketing efforts, improving our product categories to offer more personalized products and service to our customers, increasing our mix of private brand and generic drug sales, developing programs that are specifically directed toward improving our pharmacy service and implementing associate programs that create compensatory and other incentives for associates to provide customers with better service. We believe that our improvements in revenues, gross margin as a percentage of sales and selling, general and administrative costs (SG&A) as a percent of sales that are detailed in the Results of Operations section are a direct result of our success in implementing the strategy of improving the productivity of our stores, evidenced by a rise in average revenue per store from $4.3 million in fiscal 2002 to $4.6 million in fiscal 2003.

Debt Refinancing. In fiscal 2001 and 2002, we took several steps to reduce our debt load and improve our leverage. The most significant item was a substantial refinancing in fiscal 2002, which extended the maturity of the majority of our debt, converted a portion of our debt to equity and rescinded purchase options on certain sale-leaseback leases, resulting in their reclassification from capital leases to operating leases. These activities resulted in aggregate charges of $221.1 million in fiscal 2002. In fiscal 2001, we converted a portion of our debt to equity, which resulted in charges of $100.6 million. These steps have enabled us to reduce our debt from $6.6 billion as of February 26, 2000 to $3.9 billion as of March 1, 2003, and to extend the maturity of the majority of our debt to 2005 and beyond.

Divestiture of Non-Core Businesses. During the past three years, we have divested our investments in non-core operations. These divestitures were necessary to enable us to focus on our core business of operating retail drug stores and resulted in significant charges or credits in the periods presented. These transactions are described below.

On October 2, 2000, we sold PCS, our PBM segment, to Advance Paradigm (now AdvancePCS). The selling price of PCS consisted of $710.5 million in cash, $200.0 million in principal amount of AdvancePCS 11% promissory notes and AdvancePCS equity securities. Accordingly, the PBM segment is presented as a discontinued operation in the fiscal 2001 financial statements and the operating income of the PBM segment through October 2, 2000, the date of sale, is reflected separately from the income from continuing operations. The loss on the disposal of the PBM segment was $168.8 million, which was recorded in fiscal 2001. Also recorded in fiscal 2001 was an increase to the tax valuation allowance and income tax expense of $146.9 million related to this disposal.

In March 2001, we sold our investment in AdvancePCS equity securities for $284.2 million, resulting in a gain of $53.2 million, which was recorded in fiscal 2002. Additionally, AdvancePCS repurchased the 11% promissory notes for $200.0 million, plus accrued interest.

In July 1999, we purchased shares of drugstore.com, an on-line pharmacy, and entered into an agreement to provide access to our networks of pharmacies and third party providers, advertising commitments and exclusivity agreements. During fiscal 2001, we recorded impairment charges of $112.1 million to write-down our investment in drugstore.com, based upon declines in the market value of drugstore.com stock which we concluded were other than temporary. In January 2002, April 2002 and May 2002, we sold our shares of drugstore.com, and as of March 1, 2003 have no investment in drugstore.com. We recorded gains from these sales of $15.8 million and $4.4 million in fiscal 2003 and 2002, respectively.

Closure of Under-Performing Stores. In fiscal 2003, 2002 and 2001, we performed a rigorous review of underperforming stores, and, based on these reviews, decided to close 40, 116 and 144 stores in fiscal 2003, 2002 and 2001, respectively. As a result of these reviews, we have recorded store closing and related impairment charges of $135.3 million, $251.3 million and $271.9 million in fiscal 2003, 2002 and 2001, respectively. We believe that these closures were necessary to improve the productivity of our remaining store base and to eliminate underperforming stores. As part of our ongoing business activities, we will continue to assess stores for potential closure. There can be no assurance that other such actions may not be required in the future, or that such actions would not have a material adverse effect on our operating results for the period in which we take those actions.

Delaware
(State or other jurisdiction of
incorporation or organization)

23-1614034
(I.R.S. Employer Identification No.)

30 Hunter Lane, Camp Hill, Pennsylvania
(Address of principal executive offices)

17011
(Zip Code)