Shoppers Drug Mart Corporation 2001
ANNUAL REPORT
At a Glance
Our Customers and Locations
Yukon Northwest Over
Territories
2 825
1 convenient
British locations
Columbia
Alberta
77
75 Newfoundland
Saskatchewan and Labrador
28 Manitoba 26
25 Ontario New
Brunswick
438 Quebec
P.E.I.
77
40 6
We have been serving Nova
Canadians for over 40 years. Scotia
32
From an operating perspective, fiscal 2001 was a year of change and
[transition. In the face of a challenging economic environment, the
Company posted record system sales and EBITDA performance.
Financial Highlights
Summary Earnings Data ($000’s) 2001 2000 1999
Revenue
Operating costs(1) 3,634,567 3,188,148 2,821,516
Depreciation and amortization 3,217,476 2,798,604 2,485,181
Operating income 72,967 71,671 70,655
Interest 344,124 317,873 265,680
Income taxes 193,385(2) 180,385
20,790
Income before goodwill amortization 74,538 71,048 112,029
Goodwill amortization 76,201 66,440 132,861
53,288 50,343
Net income 22,913 16,097 15,166
117,695
Summary Operating Data(3) 4,996,360 4,535,026
System sales ($000’s) 9.2% 5.5% 4,275,086
Same-store sales growth 920 879 1.7%
Sales per square foot ($)(4) 871
Sales mix: 45.1% 43.7%
54.9% 56.3% 41.3%
Pharmacy 436,591 389,544 58.7%
Front store 12.1% 11.4% 349,735
EBITDA ($000’s)(5) 19.7%
EBITDA growth 8.7% 8.6%
EBITDA margin 99,701 91,142 8.2%
Capital expenditures ($000’s) 81,461
(1) Includes restructuring charges of $19,500 in 2001 and $13,400 in 1999.
(2) Includes a non-cash charge of $29,324 in respect of a write-off of deferred financing charges.
(3) Selected operating data for the Company and its store network.
(4) Retail drug store sales only, excluding Shoppers Home Health Care® store sales.
(5) EBITDA (earnings before interest, taxes, depreciation and amortization) in 2001 and 1999 excludes the impact of restructuring charges of $19,500 and $13,400, respectively.
System Sales $4,996 EBITDA
(millions) (millions)
$4,193 $4,535 $437*
$4,025
$4,275
$390
$350*
$292
$246
9975 9008 99 00 01 9975 9008 99 00 01
* EBITDA in 2001 and 1999 excludes the impact of restructuring
charges of $19.5 million and $13.4 million, respectively.
C o r p o r a t e P r o f i l e Shoppers Drug Mart (Pharmaprix in Quebec) is Canada’s
largest retail drug store group based on number of stores and system sales. The Company’s over
825 licensed drug stores are located in prime locations in every province and two territories,
making the Company one of the most convenient retailers in Canada. The Shoppers Drug Mart
name is one of the most widely recognized brands in Canadian retailing, trusted by consumers
for more than three generations for offering the highest standards of pharmacy service. In fiscal
2001, Shoppers Drug Mart stores recorded system sales of $5 billion.
Shoppers Drug Mart was founded in 1962 by Murray Koffler, who developed a unique approach
to the retail drug store industry in Canada by blending mass merchandising and low pricing with
innovative marketing strategies. He embarked on an expansion program founded upon the
concept of licensing the business operations of each drug store to a pharmacist/owner, which
has evolved into the successful Shoppers Associate Concept. Under the Associate Concept,
Shoppers Drug Mart and its Associates share store profits. This effectively aligns an Associate’s
interests with those of the Company in driving and maximizing store profitability.
Over a 40 year period, Shoppers Drug Mart has grown steadily through a combination of new
store openings, acquisitions and its Associate Concept. Today, Shoppers Drug Mart is the
leading player in Canada’s retail drug store marketplace and is the number one provider of
pharmacy products and services. Shoppers Drug Mart has successfully leveraged this
pre-eminent position in pharmacy and its convenient locations to capture a significant share of
the market in front store merchandise.
In addition, Shoppers Drug Mart owns and operates 37 Shoppers Home Health Care® stores,
making it the largest Canadian retailer of home health care products and services.
Shoppers Drug Mart/Pharmaprix is in the right business at the right
time. We are the best positioned drug store in an outstanding
growth market. We have the strengths, strategies, people and
commitment to generate healthy, long-term growth and build
shareholder value.
Message to Shareholders
Glenn Murphy
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
During an eventful year in 2001, Shoppers Drug Mart/Pharmaprix stores, along with
Shoppers Home Health Care®, achieved a milestone, reaching $5 billion in system
sales. This top line performance resulted in record operating profit for the Company.
The fact that this performance was achieved during a year of transition and in the midst of a
challenging economic environment speaks to the resiliency of our market, the strength of our
Company and the power of our trusted Shoppers Drug Mart/Pharmaprix brands. We are
indeed in the right business at the right time. We are positioned for healthy growth and we
are determined to build shareholder value.
While delivering a solid financial performance, we also forged ahead with a number of initiatives
and achievements that will pave the way for future growth. Since last June, we have introduced
new leadership, identified and begun to execute a set of new business strategies and
implemented a comprehensive cost reduction plan. We also completed a capital program which
saw the opening of 141 new, relocated or renovated stores during fiscal 2001. In addition to all
of this work, we successfully completed an initial public offering in November 2001.
Our strengthened position in this vibrant market is a clear indicator of future growth.
However, we do not take our position for granted. We are fully aware of the competition
we face, not just from traditional drug stores but – most notably – from national mass
merchandisers and food/drug retailers. The calibre of this competition is making us stronger
and better every day, because we know that in order to grow, we must continue to improve
and innovate. We plan to move forward aggressively, not simply to maintain, but to increase
our market share. We are working harder and are more committed than ever to achieving
this goal. We will accomplish this by capitalizing on the competitive advantages of
Shoppers Drug Mart/Pharmaprix.
2 SHOPPERS DRUG MART CORPORATION 2001 ANNUAL REPORT
Commitment to the Core
At Shoppers Drug Mart, we have a strong platform for growth with a solid foundation that
has been built over 40 years.
First and foremost, we are a drug store – Canada’s largest drug store group and the only one
operating nationally from coast to coast. As Canada’s drug store, Shoppers Drug Mart/
Pharmaprix is vitally important to the communities we serve. Our HealthWatch® pharmacists
are trusted by Canadians to provide the highest standards of patient care. This was the
remarkable vision of Murray Koffler – the founder of Shoppers Drug Mart – and it is a vision
that we are building upon and enhancing today.
At the core is our pharmacy business and the pharmacist/owners who operate our stores
through our unique Associate Concept. This strength has allowed us to grow and expand
nationally, with each store remaining a community-based business, supported by the
advantages of our centralized purchasing power, critical mass and powerful brands. The
opportunities presented through the Associate Concept ensure that we attract and retain
the best pharmacists in Canada – pharmacists who are also entrepreneurs with an inspiring
commitment to patient care and the practice of pharmacy. Another competitive advantage
is our pioneering HealthWatch® program, a value-added service that enables our
pharmacists to provide Canadians with counselling on medications, disease management
and drug interactions. Our HealthWatch® pharmacists play an integral role in the delivery of
health care in Canada and they are trusted by millions of Canadians.
Our leadership in health through our pharmacy business is equalled by our leadership in beauty
through our cosmetics business. Today, we have over 600 full-service cosmetic counters in our
stores. Our health and beauty focus is becoming increasingly important as the population ages
and new products and therapies come to market. More than ever, Canadians have a heightened
desire to improve their well-being and want to look good, as well as feel good.
Another point of differentiation – and one that is becoming more important as time goes
on – is our convenience. By virtue of our growing network of more than 825 locations, our
extended hours of service and our broad selection of health, beauty and everyday household
essentials, Shoppers Drug Mart/Pharmaprix is one of the most convenient retailers in
Canada. We are there for our patients and customers where and when they need us. The
combination of the quality of our pharmacy and cosmetic services, the convenience of our
stores and the power of our brands is an extraordinary platform from which to grow.
These pillars of our business are supported by superior technology and logistics, as well as a
new management information system designed to enhance customer relationship
management and maximize operating efficiencies.
3
Message to Shareholders
Commitment to Growth
The structural strengths of Shoppers Drug Mart, while vital to our long-term prosperity, are
only as good as the strategies we pursue and the people who act upon them. Much was
accomplished in 2001, a year of unprecedented change for this Company. I am especially
proud of the efforts and dedication of our Associate-owners and the more than 30,000
employees across our store network. These people, along with the employees in our corporate
and regional offices, are dedicated to their communities and to the business of caring.
While we are proud of the past success of Shoppers Drug Mart, there is much more to do. We
will improve and get stronger in every area and that improvement is already underway.
We started in 2001 by streamlining our administrative processes – thereby improving
efficiencies and reducing our cost structure to allow for greater reinvestment in our stores
and in our business. At the same time, we strengthened the management team with an
emphasis on retailing and merchandising. By year-end, with the successful completion of
our initial public offering, we strengthened our balance sheet, thereby improving our financial
position and providing ourselves with the flexibility to pursue expansion plans and attractive
growth opportunities.
In the year ahead, we will continue to expand and enhance our asset base through the
construction of new and larger stores, most of which will be free-standing, and through the
renovation and expansion of existing locations. We will grow front store sales through improved
merchandising and by focusing on consistent store operations. This will include the introduction
of new products and services, while enhancing everyday value and convenience for our
customers. We will maintain our leadership position in pharmacy by investing in technology and,
more importantly, in the recruitment and retention of pharmacists. We will also look to acquire
independent drug stores as and when attractive opportunities present themselves.
While building upon the foundations and improving the asset base with one of the largest
capital programs in the history of the Company, we will still generate a significant amount of
free cash flow which will be used to further strengthen the balance sheet.
Fiscal 2002 is going to be an exciting year, a prelude to an even more exciting future. We are
ready, we are energized and we are fully committed to moving forward and accelerating the
healthy growth of Shoppers Drug Mart/Pharmaprix.
Glenn Murphy, CHAIRMAN AND CHIEF EXECUTIVE OFFICER (SIGNED)
Glenn Murphy was appointed Chairman and Chief Executive Officer of Shoppers Drug Mart Corporation in June 2001, upon the retirement of David R. Bloom.
On behalf of the shareholders, Associates and employees of Shoppers Drug Mart/Pharmaprix, we pay tribute to David Bloom’s exceptional contribution to the
success and growth of the Company. We thank him for his 35 years of service, during which time he led the expansion of Shoppers Drug Mart to its position as
the largest drug store group in Canada and helped set the stage for future growth.
4 SHOPPERS DRUG MART CORPORATION 2001 ANNUAL REPORT
Positioned
for Growth
Positioned for Growth
our market
In the early years of a new millennium, Canada’s drug store market is the right business at
the right time. Already a $26 billion retail market, the growth projections are exceptional – and
long-term – driven by some very compelling factors.
We are in an outstanding growth market –
the Canadian drug store industry.
Number of individuals 1 Annual global 2
age 50–69 (000’s) pharmaceutical
Favourable demographics – R&D spending Continuing emphasis on
9,404.8 the aging of the baby boomer ($U.S. billions) research and development
generation, with their increasing by pharmaceutical
6,169.5 health care needs and $50.7 companies – leading to the
unprecedented awareness of development of new and more
health and beauty issues. $32.2 effective drug therapies and
lifestyle enhancement
products to meet the needs
of Canadians who are more
focused on health care issues.
2001 2016 199955 200000
Source: Statistics Canada –
population projections
3 4
Prescription sales in Canada, Increasing health care and Composition of Canadian Opportunities for
including dispensing fees prescription drug needs of pharmacy outlets, by type consolidation – given the
the aging Canadian fragmented nature of the
(billions) population – leading to 26% Canadian drug retailing
12% CAGR* continued double-digit growth 58% 16% marketplace.
$6.8 in the sale of prescription drugs
$7.2 and an expanded role for the
$8.0 pharmacy profession in the
$9.2 delivery of health care services.
$10.6
$12.0
Independent/Banner
Supermarket/Mass merchant
Chain
96 97 98 99 00 01 SHOPPERS DRUG MART CORPORATION 2001 ANNUAL REPORT
Source: IMS Health Compuscript,
12 months ending August
* Compound annual growth rate
6
Our HealthWatch® pharmacists
dispense more than prescriptions –
they dispense advice, counselling
and information that help Canadians
make informed decisions about their
family’s health and wellness.
Positioned for Growth
our market position
At Shoppers Drug Mart, we enjoy a position of leadership in the vibrant Canadian health and
beauty market. We are the largest player in the country, with system sales of $5 billion and over
825 stores from coast to coast. We are the only drug store group with a national presence. We
are also leaders in all the key product categories – with commanding market share positions in
the sale of prescription drugs, over-the-counter remedies, health and beauty products and
cosmetics. Along with share of market, we have extraordinary share of mind. The Shoppers
Drug Mart/Pharmaprix brands, combined with the HealthWatch® and PharmExpert™ brands,
are the best known and most trusted in the Canadian drug store industry. The Shoppers
Optimum™ card has, in less than two years, become one of the most widely
held loyalty cards in Canada with over six million cardholders, including one in
every three Canadian women. Shoppers Home Health Care®, while still relatively small,
has become the leading retailer in the growing market of home care products such as
wheelchairs and assistive devices and products for rehabilitation and self-care. Supporting our
leadership in market share and consumer awareness is our leadership in technology and
logistics. We have worked hard and invested wisely to attain our position of strength and
leadership and we have every intention of remaining at the forefront of the industry.
We are the best positioned retailer in our market.
8 SHOPPERS DRUG MART CORPORATION 2001 ANNUAL REPORT
Above Our HealthWatch® services
include patient counselling on disease
management and self-medication and
clinic days for a number of health
conditions including diabetes, heart
disease and asthma. Right Our 37
Shoppers Home Health Care® stores
sell medical equipment and assistive
devices to institutional and retail
customers.
Positioned for Growth
our service strength
The more than 3,500 HealthWatch® pharmacists and Associates of Shoppers Drug
Mart/Pharmaprix are leaders of their businesses and leaders in their communities. Supported
by the HealthWatch® program, they dispense more than prescriptions – they dispense advice,
counselling and information that help Canadians make informed decisions about their family’s
health and wellness. As valued health care providers delivering direct personal service, they
build customer relationships that form the basis of a service credo in our stores – stores which
are owned by pharmacists. Superior customer service and advice has been extended in
recent years to include full-time cosmeticians in more than 600 of our stores, evidence of our
commitment to providing quality service in both our health and beauty departments.
We are Canada’s drug store – trusted by generations
of Canadians for providing the highest standards of
patient care.
This strength of service – professional, caring service – is absolutely
fundamental to the success of Shoppers Drug Mart and to our
future. That is why we attract pharmacists who share our vision of
the profession and why our Associate Concept – which provides
pharmacists with an opportunity to own their own businesses – is
so important in terms of recruiting and retaining the best service
providers in the industry.
10 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
Our cosmetic areas are
merchandised as a combination
of self-serve and full-service
departments with full-time
cosmeticians at more than
600 locations. Our stores offer
a broad range of cosmetic and
beauty products including
selected prestige brands.
Positioned for Growth
our convenience
We are not just the most convenient drug store group in Canada – we are one of the most
convenient retailers in any category. Shoppers Drug Mart/Pharmaprix stores are located within
a few minutes of most Canadians. We are in communities and office towers, close to health
care facilities and on the best street corners, with ample parking and, in certain locations,
drive-through service. For those who are unable to get to the store, we offer the added
convenience of free prescription delivery and online prescription refills. Equally important to our
customers is that we are open when they need us. Most of our stores operate seven days a
week, many with extended hours – even 24-hour service in many locations. Canadians can
shop with us where they want, when they want. No drug store competitor has a more
convenient product range or can match our selection of health and beauty aids, cosmetics,
household essentials, seasonal items and snacks. Convenience is an increasingly valuable
commodity for our customers and we plan to keep pace with their needs.
We provide solutions for our customers and their
need for convenience.
12 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
We are one of the most convenient retailers in Canada, offering our customers and
patients a variety of convenient products and services. In addition to health and beauty
items, our stores offer a wide range of everyday household essentials. Among the
convenient services we offer are Canada Post outlets in many stores, drive-through
service at selected locations and online prescriptions refills from the comfort of your
home or office.
Positioned for Growth
our future
Our market is strong, our leadership is focused and our many strengths provide a dynamic
competitive advantage. The key is to capitalize upon opportunities by leveraging our strengths
and pursuing our growth strategies. We understand what is required – doing more of what we
do well and doing it better. That means more service – with advances in technology and building
on our Associate Concept. It means more convenience – with more of the right store locations
and the expansion and reformatting of existing locations so that they are large enough to
accommodate a broader range of convenient, everyday products and services, but small
enough to be accessible to our customers. It means further development of the Shoppers
Optimum™ loyalty card program, combined with other efforts to provide better everyday value to
our customers. It means more focus on the development of our private label brands – brands
that our customers have grown to trust. It also means continuing leadership in technology,
logistics and store-level operations. Delivering more requires the commitment and best efforts
of our people. We believe the commitment is there, we know the energy is there, and we are
determined to unlock the extraordinary potential of Shoppers Drug Mart/Pharmaprix.
We have the strengths, strategies, people and
commitment to generate healthy, long-term growth.
14 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
Our future is exciting. Our new stores will be larger, with an improved product offering
which will make them even more convenient. Most of these stores will be free-standing
and adjacent or close to medical clinics, offering patients easy access to the services
of our HealthWatch® pharmacists. More and more, Shoppers Drug Mart/Pharmaprix is
becoming Canada’s life store for health, beauty and convenience needs.
management’s
discussion and analysis
The following is a discussion of the consolidated financial condition and results of
operations of Shoppers Drug Mart Corporation (“Shoppers” or the “Company”) and its
predecessor for periods indicated and of certain factors that the Company believes may
affect its prospective financial condition, cash flows and results of operations. The
following discussion and analysis should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto for the 52-week period
ended December 29, 2001. The fiscal year of the Company consists of a 52 or 53 week
period ending on the Saturday closest to December 31.
OVERVIEW
Shoppers is the largest drug store group in Canada based on number of stores and system sales.
Shoppers is the only national drug store group, with the number one market share position in
prescription sales in eight out of ten provinces and the number one or two market share position in
most of Canada’s major metropolitan areas. As at December 29, 2001, there were 827 Shoppers Drug
Mart/Pharmaprix retail drug stores owned and operated under licence by Shoppers Associates.
In addition, Shoppers owns and operates 37 Shoppers Home Health Care® stores, making it the
largest Canadian retailer of home health care products and services.
The Company’s business strategy is designed to drive system sales growth, maximize gross margin
dollars, leverage cost reduction opportunities and build customer loyalty, thereby generating
increased revenue and profitability.
The following table presents a summary of certain selected operating data and consolidated financial
information for the Company and its store network. Comparative financial information presented for
the 52-week period ended December 30, 2000 is cumulative, representing the combined results of
the Company and those of its predecessor for the period. (See note 1 to the consolidated financial
statements of the Company.)
($000’s) Fiscal Fiscal $ Change % Change
2001 2000
System sales 4,996,360 4,535,026 461,334 10.2%
Revenue 3,634,567 3,188,148 446,419 14.0%
EBITDA(1) 12.1%
Net earnings 436,591 389,544 47,047 42.3%
22,913 16,097 6,816
(1) Earnings before interest, taxes, depreciation and amortization and excluding the staff restructuring charge of $19,500 in fiscal
2001.
System sales represents the combined sales to external customers of the stores owned by the
Associates and of the stores owned by the Company. System sales, other than sales of the stores
owned by the Company, do not form part of the Company’s revenue. (See note 1 to the consolidated
financial statements of the Company.)
16 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
The Company earns revenue from selling products and charging for services rendered to its network
of Associate-owned drug stores and from sales at its Shoppers Home Health Care® stores. These
activities are described below.
Distribution
A significant portion of the Company’s revenue is generated from the sale of goods to Associate-
owned drug stores. For fiscal 2001, in excess of 82% of all merchandise sold in Associate-owned
drug stores was purchased from the Company’s three distribution centres, compared to
approximately 80% during fiscal 2000.
Associate Operations
The Company also earns revenue from its licensing arrangements with Associates. An Associate is
a pharmacist and the owner of a corporation that is licensed to operate a retail drug store at a
specific location using the Company’s trademarks. Under the licensing arrangement, the Company
provides the capital to enable Associates to operate Shoppers Drug Mart/Pharmaprix stores without
any initial investment. The Company also provides a package of services to facilitate the growth and
profitability of each Associate’s business. These services include the use of trademarks, operational
support, marketing and advertising, purchasing and distribution, information technology and
accounting. In return for providing these and other services, Associates pay fees to the Company.
Fixtures, leasehold improvements and equipment are purchased by the Company and leased to
Associates over three, five and ten-year periods, with title retained by the Company. The Company
also provides its Associates with assistance in meeting their working capital and long-term financing
requirements through the provision of loans and loan guarantees. (See notes 4 and 15 to the
consolidated financial statements of the Company.)
Under the licensing arrangement, Shoppers receives a substantial share of Associate store profits.
The Company’s share of Associate store profits is reflective of its investment in, and commitment
to, the operations of the Associates’ stores. The Company collects its share of Associate store
profits throughout the year by way of a service fee that is based on estimated store profitability.
Service fees are adjusted based on the actual year-end results of Associate stores, which have fiscal
year-ends at varying dates throughout the year.
Shoppers operates in Quebec under the Pharmaprix® trade name. Under Quebec law, profits
generated from the prescription area or dispensary may only be earned by a pharmacist or a
corporation controlled by a pharmacist. As a result of these restrictions, the licence agreement used
for Quebec Associates differs from the Associate agreement used in other provinces. Pharmaprix
stores benefit from the same infrastructure and support provided to all Shoppers Associates.
Shoppers Home Health Care®
The Company earns revenue from its 37 Shoppers Home Health Care® stores. These stores sell medical
equipment and devices to institutional and retail customers.
17
Management’s Discussion and Analysis
OPERATING PERFORMANCE
The following provides an overview of the Company’s operating performance in fiscal 2001:
• System sales of approximately $5 billion, an increase of 10.2%.
• Same-store sales growth of 9.2%.
• EBITDA of $437 million, excluding the impact of a staff restructuring charge of $20 million, an
increase of 12.1%.
• EBITDA margin, excluding the impact of the $20 million staff restructuring charge, improved to
8.74% from 8.59% in fiscal 2000.
• Completed a $100 million annual capital expenditure program, which included the opening of
41 new drug stores.
• Total drug store selling square footage increased by 7.1% to approximately 5.5 million square feet.
• Drug store sales per square foot increased to $920 from $879 in fiscal 2000.
• Introduced new senior management and completed a staff restructuring of the corporate office.
• Completed a $540 million initial public offering and repaid $591 million of long-term debt, reducing
the Company’s debt to equity ratio to 0.78:1 from 1.88:1 at the end of the previous fiscal year.
System sales
(millions)
$4,996
$4,535
Prescription sales Front store sales
(millions) (millions)
$2,253 $2,743 3000
2500
$2,553 2000
1500
$1,982 1000
00 01 500
0
EBITDA
(millions)
$437
00 01 $390 00 01
0000 0011
18 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
RESULTS OF OPERATIONS
The following table presents a summary of certain selected operating data and consolidated financial
information for the Company and its store network. Comparative financial information presented for
the 52-week period ended December 30, 2000 is cumulative, representing the combined results of
the Company and those of its predecessor for the period. (See note 1 to the consolidated financial
statements of the Company.)
($000’s) Fiscal Fiscal $ Change % Change
2001 2000
System sales 4,996,360 4,535,026 461,334 10.2%
Revenue 3,634,567 3,188,148 446,419 14.0%
Cost of goods sold and
3,217,476 (1) 2,798,604 (418,872) (15.0%)
other operating expenses 72,967 71,671 (1,296) (1.8%)
Depreciation and amortization 26,251 8.3%
344,124 317,873 (7.2%)
Operating income 193,385 (2) 180,385 (13,000)
Interest expense 9.6%
150,739 137,488 13,251 (4.9%)
Earnings before income taxes 74,538 71,048 (3,490)
and goodwill amortization 14.7%
76,201 66,440 9,761 (5.8%)
Income taxes 53,288 50,343 (2,945) 42.3%
22,913 16,097 6,816
Earnings before 12.1%
goodwill amortization 436,591(3) 389,544 47,047
Goodwill amortization
Net earnings
EBITDA
(1) Includes a staff restructuring charge of $19,500.
(2) Includes a non-cash charge of $29,324 in respect of a write-off of deferred financing charges.
(3) Excluding the staff restructuring charge of $19,500.
19
Management’s Discussion and Analysis
Drug store sales$823 System Sales
per square foot$858
$871 System sales for fiscal 2001 were $4.996 billion compared to $4.535 billion for fiscal 2000, an
97 98 99 00 01 $879 increase of $461 million or 10.2%, with strong growth in all regions across the country. On a same-
$920 store basis, system sales increased by 9.2% during fiscal 2001.
Prescription sales were $2.253 billion for fiscal 2001 compared to $1.982 billion for fiscal 2000, an
increase of $271 million or 13.7%. On a same-store basis, prescription sales increased by 13.4%
during fiscal 2001. During fiscal 2001, prescription sales accounted for 45.1% of the Company’s
system sales mix compared to 43.7% in fiscal 2000.
Front store sales were $2.743 billion for fiscal 2001 compared to $2.553 billion for fiscal 2000, an
increase of $190 million or 7.4%. On a same-store basis, front store sales increased by 5.9% during
fiscal 2001. All front store categories, excluding tobacco products, experienced sales increases
during the year. Fiscal 2001 was the first full year that the Company’s Shoppers Optimum™ loyalty
card program was in existence and this had a positive impact on sales gains in the front
store, particularly in the first half. This highly successful and valued program now has in excess of
six million members.
Drug store sales per square foot were $920 in fiscal 2001 compared to $879 in fiscal 2000, an
increase of 4.7%.
Revenue
Revenue was $3.635 billion for fiscal 2001 compared to $3.188 billion for fiscal 2000, an increase
of $447 million or 14.0%. This increase is largely attributable to higher distribution centre revenue
as a result of increased shipments in all product categories. The increase in shipments is a reflection
of the year-over-year growth in system sales and an increase in the percentage of total shipments
to Associate-owned stores originating from the Company’s distribution centres. A portion of the
increase in revenue can also be attributed to higher fees collected from Associates, a reflection of
increased sales and profitability at store level.
Cost of Goods Sold and Other Operating Expenses
Cost of goods sold is comprised of the cost of goods sold through the Company’s distribution
centres and Shoppers Home Health Care® stores. Other operating expenses include corporate
selling, general and administrative expenses and operating expenses at the Company’s distribution
centres and the Shoppers Home Health Care® stores. Total cost of goods sold and operating
expenses were $3.217 billion for fiscal 2001 compared to $2.799 billion for fiscal 2000, an increase
of $418 million or 15.0%. This increase can be largely attributed to the increased level of shipments
from the Company’s distribution centres to the Associate-owned drug stores and a third quarter staff
20 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
restructuring charge of approximately $20 million related to the streamlining of the Company’s
corporate office. Other operating expenses, excluding the impact of the staff restructuring charge,
amounted to 7.6% of system sales during fiscal 2001 compared to 8.3% in fiscal 2000. This
improvement was the result of the Company’s ability to further lever the fixed cost components of
its operations. In addition, a portion of this improvement can be attributed to the fact that the
Company incurred certain one-time costs in fiscal 2000 in conjunction with the launch of the
Shoppers Optimum™ program.
Depreciation and Amortization
Depreciation and amortization of capital assets was $73 million for fiscal 2001 compared to
$72 million for fiscal 2000, an increase of $1 million.
Operating Income
Operating income, excluding the impact of the staff restructuring charge, was $364 million for fiscal
2001 compared to $318 million for fiscal 2000, an increase of $46 million or 14.4%. As a percentage
of system sales, operating margin, excluding the impact of the restructuring charge, improved to
7.28% during fiscal 2001 from 7.01% in fiscal 2000. The Company’s EBITDA margin (EBITDA divided
by system sales), excluding the impact of the staff restructuring charge, was 8.74% in fiscal 2001
compared to 8.59% in fiscal 2000.
Interest Expense
Interest expense was $193 million for fiscal 2001 compared to $180 million for fiscal 2000, an
increase of $13 million or 7.2%. Fiscal 2001 interest expense includes a non-cash charge of
$29 million in respect of a write-off of deferred financing costs related to the repayment of the
Company’s senior subordinated debt facility. (See notes 9 and 17 to the consolidated financial
statements of the Company.) Excluding this write-off, interest expense for fiscal 2001 would have
been $164 million, an 8.9% decrease compared to fiscal 2000. This decrease can be attributed
to lower average borrowing levels and lower effective interest rates in fiscal 2001 compared to
fiscal 2000, combined with the impact of repaying the senior subordinated debt facility late in fiscal
2001. These savings were partially offset by the fact that the first 33 days of fiscal 2000 did not
include any interest costs in respect of financing the acquisition of Shoppers Drug Mart Inc.
(“SDMI”), which was completed on February 4, 2000. (See note 1 to the consolidated financial
statements of the Company.)
Interest expense includes amortization of deferred financing costs of $11 million in fiscal 2001
compared to $10 million in fiscal 2000. Interest expense also includes amortization of deferred
foreign currency translation adjustments related to the Company’s U.S. dollar denominated
borrowings. For fiscal 2001, this amount was $5 million compared to $2 million for fiscal 2000. (See
note 17 to the consolidated financial statements of the Company.)
21
Management’s Discussion and Analysis
Income Taxes
The Company’s effective income tax rate for fiscal 2001 was approximately 49.4% compared to a
rate of 51.7% for fiscal 2000. The decrease in the effective rate can be primarily attributed to a
reduction in statutory rates in various jurisdictions.
Goodwill Amortization
Goodwill amortization was $53 million for fiscal 2001 compared to $50 million for fiscal 2000, an
increase of $3 million or 5.8%. Goodwill amortization is principally related to the goodwill arising from
the acquisition of SDMI on February 4, 2000. The increase in goodwill amortization during fiscal 2001
can be attributed to the timing of the purchase of SDMI.
Net Earnings
Net earnings for fiscal 2001 were $23 million compared to $16 million for fiscal 2000. On a fully diluted
basis, net earnings for fiscal 2001 were $0.12 per share. Comparative per share earnings data for
the prior fiscal year is not applicable. Excluding goodwill amortization of $53 million and the impact
of the third quarter staff restructuring charge of $20 million, net earnings for fiscal 2001 were
$88 million, resulting in fully diluted earnings of $0.48 per share. On a pro-forma basis, incorporating
these adjustments and assuming the equity issue that closed on November 21, 2001 had been
completed at the beginning of the fiscal year, the Company estimates that net earnings for fiscal 2001
would have been $140 million, resulting in fully diluted earnings of $0.66 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company has two principal sources of liquidity: (i) cash provided by operating activities; and
(ii) cash available from a committed $350 million revolving credit facility under its senior credit facility.
At December 29, 2001, $2 million of the $350 million revolving credit facility was utilized, all in respect
of letters of credit and trade finance guarantees. At December 30, 2000, $8 million of this facility was
utilized, including drawings of $4 million in respect of letters of credit and trade finance guarantees.
(See note 9 to the consolidated financial statements of the Company.)
22 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
Shoppers’ operating and investing activities are typically financed by cash flow generated from its Capital expenditures$50,619
operations. For fiscal 2001, operating activities net of investing activities generated cash flow of (000’s) $70,386
$125 million compared to $202 million for fiscal 2000. The comparative figures for fiscal 2000 exclude $81,461
the impact of the February 4, 2000 acquisition of SDMI, which was financed with new long-term debt 97 98 99 00 01 $91,142
and the issuance of common shares. The $77 million decrease is primarily attributable to the working $99,701
capital impact of the Company’s Y2K planning initiatives. Towards the end of fiscal 1999, the Total selling
Company invested in additional distribution centre inventory in order to ensure that sufficient product square footage –
levels would be available in the event of any Y2K related supply chain disruptions. A significant drug stores
portion of this inventory was paid for prior to the 1999 fiscal year-end. Accordingly, during the first (000’s ft2)
quarter of fiscal 2000, the Y2K working capital investment reversed.
97 98 99 00 01
Capital expenditures during fiscal 2001 were $100 million compared to $91 million for fiscal 2000.
The majority of this capital was invested in the Company’s store network. During fiscal 2001, 41 drug
stores and one Shoppers Home Health Care® store were opened or acquired (2000 – 17 drug stores
opened or acquired) and 11 drug stores and one Shoppers Home Health Care® store were closed
(2000 – ten drug stores and one Shoppers Home Health Care® store closed). During fiscal 2001,
23 drug stores were relocated (2000 – 25 drug stores relocated) and 76 drug stores were renovated
or expanded (2000 – 85 drug stores renovated or expanded).
The following table provides a summary of the Company’s store network, and investment therein,
for the periods indicated.
Fiscal 2001 Fiscal 2000
Drug Stores Total Stores Drug Stores Total Stores
Store count – beginning of year 797 834 790 828 4,842
Stores opened 41 42 17 17 4,837
Stores closed 11 12 10 11 4,844
Store count – end of year 827 864 797 834 5,133
5,496
Stores relocated 23 23 25 25
Stores renovated 76 76 85 85
At the end of fiscal 2001, there were 864 stores in the Company’s system (2000 – 834 stores),
comprised of 827 drug stores (2000 – 797 drug stores) and 37 Shoppers Home Health Care® stores
(2000 – 37 Shoppers Home Health Care® stores). At the end of fiscal 2001, total drug store selling
square footage was 5,496,000 square feet (2000 – 5,133,000 square feet).
23
Management’s Discussion and Analysis
FINANCING ACTIVITIES
During fiscal 2001, the Company raised net proceeds of approximately $510 million through the sale
of 30 million common shares at an issue price of $18.00 per share. The share offering closed on
November 21, 2001. These funds, along with additional cash flow generated from operations, were
used to repay $591 million of long-term debt. Of this amount, $526 million was used to completely
repay the Company’s senior subordinated loan, with the balance of $65 million being applied to
reduce amounts outstanding under the Company’s senior credit facility. Total long-term debt at
December 29, 2001 was $1.110 billion compared to $1.662 billion at December 30, 2000. (See
note 9 to the consolidated financial statements of the Company.) At December 29, 2001, the
Company’s long-term debt to equity ratio was 0.77:1 compared to 1.85:1 at the end of fiscal 2000.
($000’s) Fiscal 2001 Fiscal 2000
Senior debt 1,109,545 1,136,008
Senior subordinated debt — 525,969
Long-term debt 1,109,545 1,661,977
Shareholders’ equity 1,434,331 899,949
Total capitalization 2,543,876 2,561,926
Long-term debt:Equity 0.77:1 1.85:1
Long-term debt:EBITDA 2.54:1 4.27:1
EBITDA:Cash interest expense 2.95:1 2.31:1
Fiscal 2001 EBITDA excludes the $19,500 staff restructuring charge.
FUTURE LIQUIDITY
Shoppers believes that its current credit facilities, together with cash generated from operating
activities, will be sufficient to fund the Company’s operations, investing activities and commitments
for the foreseeable future.
24 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
RISKS AND RISK MANAGEMENT
Regulatory Environment and Factors Affecting the Sale of Prescription Drugs
The Company’s operations are subject to numerous federal, provincial, territorial and local laws and
regulations governing the approval of new drugs and the packaging, disposal, sale, marketing,
advertising, handling, distribution and dispensing of pharmaceuticals. Non-compliance with or
amendments to any such laws or regulations, particularly those that provide for the licensing and
conduct of pharmacists, the regulation and ownership of pharmacies and the advertising of
pharmacies and prescription services, could adversely affect the Company, as it relies on prescription
drug sales for a significant and growing portion of its revenues and profits. Sales of prescription drugs
may be affected by changes in the health care industry, including changes to programs providing
for reimbursement of the cost of prescription drugs by third-party payors, such as government and
private sources. Federal or provincial legislative changes affecting prescription drug coverage,
allowable mark-ups to the cost of a drug or to professional or dispensing fees could also affect the
Company’s sales and profitability.
While certain provincial governments have implemented a number of pharmacy services cost control
measures over the past few years, there has not been any recent expansion of these initiatives. In
fact, the Company believes that there has been a shift in government interest toward an expanded
role for pharmacy services in the delivery of health care services to Canadians. The Company is an
active proponent of this position and believes that properly managed pharmacy services are part of
the solution to controlling rising health care costs.
Certain third-party payors, such as corporate employers, continue to seek ways to manage the cost
of their drug programs. While traditional cost control mechanisms such as the capping of dispensing
fees and the sharing of costs with employees are still in use, the Company believes that corporate
employers are becoming more aware of the beneficial role that pharmacy can play in improving the
health of their employees. The Company’s approach to this issue is to demonstrate to employers
that properly managed pharmacy services result in a workforce that is better educated about the
importance of disease management and health and wellness, which provides savings to employers
in areas such as absenteeism and long-term disability, while increasing productivity.
Ability to Attract and Retain Pharmacists
The Company is dependent on its ability to attract, motivate and retain pharmacists for the stores in
its network. Demographic trends and increased competition have led to a shortage of pharmacists in
certain markets in Canada. The inability to attract and retain pharmacists could adversely affect the
Company’s business, financial conditions and results of operations.
The Company believes that its Associate Concept provides it with a competitive advantage when
recruiting pharmacists. In particular, pharmacy school graduates are attracted to Shoppers because
its Associate Concept enables pharmacists to own their own businesses while benefitting from the
training and capital provided by the Company. Shoppers has also implemented an aggressive
25
Management’s Discussion and Analysis
recruitment strategy to increase the number of pharmacists hired each year. Moreover, the Associate-
owned stores in the Company’s network will employ more pharmacy students and interns to ensure
a source of supply of new graduates in future years. Results of a recent pharmacist survey show
that Shoppers has made significant progress in this area. During 2002, the Company will look at
opportunities to further enhance its retention programs for existing pharmacists.
Competition
The Company faces competition from many retailers in the front store merchandise and non-
prescription drug categories. The Company’s competitors in the retail pharmacy business include
independent operators, banner groups, retail chains, mass merchandisers and larger supermarket
chains with combination food/drug retail operations. These competitors may reduce prices in front
store merchandise or reduce dispensing fees to increase market share, which could have an adverse
impact on the Company’s earnings.
The Company believes that it is well positioned to compete against drug store chains, as well as
supermarkets, mass merchandisers and independent drug stores, by concentrating on providing high
levels of professional service and focussing on improving patient self-management and outcomes.
While mass merchandisers compete aggressively on price, the Company believes that consumers
will pay for its value-added pharmacy services such as patient counselling and disease management
clinics, and will be attracted by its convenient locations, extended hours of service and broad
selection of health, beauty and everyday household essentials.
Exposure to Interest Rate and Currency Fluctuations
The Company is exposed to interest rates and currency exchange rates by virtue of its borrowings
under its senior credit facility. (See note 9 to the consolidated financial statements of the Company.)
Increases in interest rates and increases in the value of the U.S. dollar in relation to the Canadian
dollar will have an adverse effect on the earnings of the Company.
The Company uses interest rate derivatives to manage its exposure to fluctuations in interest rates.
The Company also enters into currency derivatives to hedge a portion of its U.S. dollar denominated
debt. (See note 2 to the consolidated financial statements of the Company.)
As at December 29, 2001, the Company had entered into interest rate derivative agreements
converting an aggregate notional principal amount of $350 million of floating rate debt into fixed rate
debt. The fixed rates payable by the Company under these agreements range from 6.07% to 6.10%.
These agreements mature on April 14, 2005. (See note 19 to the consolidated financial statements
of the Company.)
26 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
As at December 29, 2001, the Company had entered into currency derivative agreements to
exchange a notional principal amount of U.S. $243 million of debt for Canadian dollar denominated
debt. These agreements mature on June 16, 2003. (See notes 4 and 19 to the consolidated financial
statements of the Company.)
Changes in the underlying interest rates and exchange rates of the Company’s interest rate and
currency derivative agreements will result in market gains and losses. Furthermore, the Company
may be exposed to losses should any counterparty to its derivative agreements fail to fulfill its
obligations. The Company has sought to minimize counterparty risk by transacting with
counterparties that are large international financial institutions.
Property and Casualty Exposures
Certain property and casualty risks and exposures are inherent in the operation of the Company’s
business. The Company has a number of integrated risk management programs in place, which are
designed to reduce its exposures and mitigate any losses. These include self-insuring certain
exposures to levels appropriate and customary for a company the size of Shoppers and purchasing
excess insurance coverage from financially stable third-party insurance companies to provide
adequate coverage for all normal insurable commercial risks.
OUTLOOK
The Company believes that it is well positioned to capitalize on the projected growth in the retail drug
store industry given its strong brand recognition, focus on pharmacy and health care services,
convenient locations and the dedication of its Associate-owners. The demographic trends of the
aging Canadian population are expected to fuel continued strong growth in the pharmacy category.
The Company intends to maintain its leadership in pharmacy by investing in technology and, more
importantly, in the recruitment and retention of pharmacists. The Company believes that its primary
focus on pharmacy products and services will continue to drive customer traffic and provide profitable
growth in its front store categories. The Company expects that front store sales growth will also be
driven by improved merchandising, an increased focus on operational excellence and through the
introduction of new products and services.
Due to the fragmented nature of the Canadian retail drug store industry, Shoppers believes that it is
well positioned to capitalize on consolidation opportunities, given its strong cash flow and significantly
improved balance sheet and capital structure. The Company also intends to continue making
significant investments in its store base, particularly by replacing its smaller format stores with larger
stores and by opening new stores. The Company plans to allocate $130 million to capital
expenditures in fiscal 2002, which will be funded entirely from internally generated cash flow.
27
Management’s Discussion and Analysis
ACCOUNTING POLICY AND DISCLOSURE CHANGES
SUBSEQUENT TO 2001
In August 2001, the Canadian Institute of Chartered Accountants (CICA) approved new accounting
standards for: (i) business combinations; and (ii) goodwill and other intangible assets. Goodwill and
other intangible assets with an indefinite life will no longer be amortized, but will be tested for
impairment at least on an annual basis. Intangible assets with definite lives will continue to be
amortized over their useful lives. The Company will evaluate its existing intangible assets that were
acquired in a prior business combination and make any necessary reclassification in order to conform
to the new criteria for recognition apart from goodwill. The Company will apply the new accounting
standards beginning January 2002, at which time the Company will discontinue amortizing its
goodwill and indefinite life intangible assets. At December 29, 2001, the Company reported
$1.956 billion in goodwill and indefinite life intangible assets on its balance sheet. During fiscal 2001,
the Company recorded $53 million of goodwill amortization, net of an income tax recovery of less
than $1 million. The Company does not expect to record any goodwill or intangible asset impairment
charges for the foreseeable future.
In November 2001, the CICA approved new accounting standards for foreign currency translation.
The new standards eliminate the deferral and amortization method of accounting for unrealized
translation gains and losses on non-current monetary assets and liabilities. The new standards
also require disclosure of exchange gains and losses included in net income. The Company will
apply the new accounting standards beginning January 2002, at which time the Company will be
required to retroactively restate its fiscal 2000 and fiscal 2001 results of operations to recognize
unrealized foreign exchange losses related to its U.S. dollar denominated long-term debt. The
restatement will result in an after-tax charge to earnings of $28 million and $16 million for fiscal 2000
and fiscal 2001, respectively.
In November 2001, the CICA approved new accounting standards for stock-based compensation.
The new standards require that companies include in compensation expense certain types of
stock-based compensation awards that are granted to employees and others. The new standards
are applied to awards granted on or after the date of adoption and to certain forms of awards
outstanding at the date of adoption. The Company will apply the new accounting standards
beginning January 2002 and does not expect that the new standards will have a material impact
on the financial results of the Company.
In November 2001, the CICA approved new accounting standards for hedging relationships. The
new standards provide for expanded criteria for hedge accounting, covering such matters as
documentation, designation and the concept of effectiveness. The Company will apply the new
accounting standards beginning January 2003. The Company is in the process of evaluating the
impact of these new guidelines on its financial statements.
28 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
NON-GAAP EARNINGS REFERENCES
The foregoing contains references to non-GAAP earnings measures, such as EBITDA and pro-forma
earnings. EBITDA means earnings before interest, taxes, depreciation and amortization. Pro-forma
earnings are calculated by adjusting actual earnings to give effect to events occurring during the fiscal
period as if they had occurred at the beginning of the fiscal period. Non-GAAP earnings measures
do not have standardized meanings prescribed by GAAP and therefore may not be comparable to
similar measures presented by other reporting issuers.
FORWARD-LOOKING STATEMENTS
The foregoing contains forward-looking statements related to expected future events and financial
results and operating results of the Company that involve risks and uncertainties. Actual results may
differ materially from management expectations as projected in such forward-looking statements for
a variety of reasons, including market and general economic conditions and the risks and
uncertainties discussed above and in other disclosure materials filed from time to time by the
Company with Canadian securities regulatory authorities.
29
Management Report
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and presentation of the accompanying consolidated financial statements and
all other information in the Annual Report. This responsibility includes the selection and consistent application of appropriate
accounting principles and methods in addition to making the judgements and estimates necessary to prepare the consolidated
financial statements in accordance with Canadian generally accepted accounting principles. It also includes ensuring that the
financial information presented elsewhere in the Annual Report is consistent with the consolidated financial statements.
In fulfilling its responsibilities, management has developed and maintains systems of internal controls. Although no cost-
effective system of internal controls will prevent or detect all errors and irregularities, these systems are designed to provide
reasonable assurance that resources are safeguarded from material loss or inappropriate use, that transactions are authorized,
recorded and reported properly and that financial records are reliable for preparing the consolidated financial statements.
Internal auditors, who are employees of the Company, review and evaluate internal controls on management’s behalf. The
consolidated financial statements have been audited by the independent auditors, Deloitte & Touche LLP, in accordance with
generally accepted auditing standards. Their report follows.
The Board of Directors, acting through an Audit Committee which is comprised solely of directors who are not employees of
the Company, is responsible for determining that management fulfills its responsibility for financial reporting and internal
control. This responsibility is carried out through periodic meetings with senior officers, financial management, internal audit
and the independent auditors, to discuss audit activities, the adequacy of internal financial controls and financial reporting
matters. The Audit Committee has reviewed these consolidated financial statements and the Management’s Discussion and
Analysis and has recommended their approval by the Board of Directors prior to their inclusion in this Annual Report.
Glenn K. Murphy (SIGNED) Bradley S. Lukow (SIGNED)
CHAIRMAN AND CHIEF EXECUTIVE OFFICER S E N I O R V I C E - P R E S I D E N T, F I N A N C E
Auditors’ Report
TO THE SHAREHOLDERS OF SHOPPERS DRUG MART CORPORATION
We have audited the consolidated balance sheets of Shoppers Drug Mart Corporation as at December 29, 2001 and
December 30, 2000 and the consolidated statements of earnings, retained earnings and cash flows for the period from
December 31, 2000 to December 29, 2001 and for the period from February 4, 2000 to December 30, 2000. We have also
audited the combined statements of earnings and cash flows for the period from January 2, 2000 to February 3, 2000 of
Shoppers Drug Mart Group, the Predecessor Entity. These financial statements are the responsibility of the respective
companies’ management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that
we plan and perform an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Shoppers
Drug Mart Corporation as at December 29, 2001 and December 30, 2000 and the results of its operations and its cash flows
for the periods from December 31, 2000 to December 29, 2001 and February 4, 2000 to December 30, 2000, in accordance
with Canadian generally accepted accounting principles. Further, in our opinion, the combined financial statements present fairly,
in all material respects, the results of operations and cash flows of Shoppers Drug Mart Group for the period from
January 2, 2000 to February 3, 2000 in accordance with Canadian generally accepted accounting principles.
CHARTERED ACCOUNTANTS (SIGNED) SHOPPERS DRUG MART CORPORATION 2001 ANNUAL REPORT
TORONTO, ONTARIO
FEBRUARY 7, 2002
30
Consolidated Statements of Earnings
(in thousands of dollars, except per share amounts) Shoppers Drug Predecessor Shoppers Drug “Cumulative”
Mart Corporation Entity Mart Corporation For the period
January 2, 2000
For the period For the period For the period to December 30,
December 31, 2000 January 2, 2000 February 4, 2000
to December 30, 2000
to December 29, to February 3, (note 1)
2000
2001 2000 (note 1) $ 3,188,148
(note 1)
Revenue $ 3,634,567 $ 2,929,587 2,798,604
Operating expenses $ 258,561 71,671
3,217,476
Cost of goods sold and 72,967 223,066 2,575,538 317,873
other operating expenses (note 16) 6,199 65,472 180,385
344,124
Depreciation and amortization 193,385 29,296 288,577 137,488
1,597 178,788
Operating income 150,739 57,151
Interest expense (note 17) 27,699 109,789 13,897
59,291 71,048
Earnings before income taxes and 15,247 (283) 57,434 66,440
goodwill amortization 74,538 12,836 1,061 50,343
76,201 $ 16,097
Income taxes (note 18) 53,288 12,553 58,495
Current $ 22,913
Future 15,146 51,294
1,469 48,874
Earnings before goodwill amortization
Goodwill amortization (note 7) $ 13,677 $ 2,420
Net earnings
Per common share (note 11): $ 0.42
Earnings before goodwill $ 0.41
amortization(1) $ 0.12
Basic $ 0.12
Diluted
Net earnings(1)
Basic
Diluted
(1) Not applicable for the cumulative period ended December 30, 2000.
Consolidated Statements of Retained Earnings For the period For the period
December 31, 2000 February 4, 2000
(in thousands of dollars) to December 30,
to December 29,
Retained earnings, beginning of period 2000
Net earnings for the period 2001 (note 1)
Premium on share capital purchased for cancellation (note 11)
Stock option plan cash payments, net of tax (note 11) $ 2,337 $—
Retained earnings, end of period 22,913 2,420
(8,201) (83)
(1,323) —
$ 15,726 $ 2,337
31
Consolidated Balance Sheets
As at December 29, 2001 and December 30, 2000 (in thousands of dollars) 2001 2000
Assets $ 312,273 $ 338,553
CURRENT 243,878 151,312
3,597 3,226
Accounts receivable 7,971 15,646
Inventory
Prepaid expenses 567,719 508,737
Future income taxes (note 18) 100,218 63,620
360,915
Long-term receivables (note 4) 334,183
Capital assets (note 5) 84,789 109,631
Deferred costs (note 6) 17,809
Future income taxes (note 18) 1,955,636 17,069
Goodwill and other intangibles (note 7) 2,007,305
Total assets $ 3,087,086
$ 3,040,545
Liabilities
CURRENT $ 293 $ 29,666
480,492 421,443
Bank indebtedness (note 8) 43,337 8,633
Accounts payable and accrued liabilities
Income taxes payable 524,122 459,742
1,109,545 1,661,977
Long-term debt (note 9)
Other long-term liabilities (note 10) 19,088 18,877
Shareholders’ equity 1,652,755 2,140,596
Share capital (note 11)
Retained earnings 1,418,605 897,612
15,726 2,337
Total liabilities and shareholders’ equity
1,434,331 899,949
ON BEHALF OF THE BOARD OF DIRECTORS:
$ 3,087,086 $ 3,040,545
Glenn K. Murphy (SIGNED)
DIRECTOR Paul E. Raether (SIGNED)
DIRECTOR
32 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
Consolidated Statements of Cash Flows
(in thousands of dollars) Shoppers Drug Predecessor Shoppers Drug “Cumulative”
Mart Corporation Entity Mart Corporation For the period
January 2, 2000
For the period For the period For the period to December 30,
December 31, 2000 January 2, 2000 February 4, 2000
to December 30, 2000
to December 29, to February 3, (note 1)
2000
2001 2000 (note 1) $ 16,097
(note 1)
Operating activities $ 22,913 $ 2,420 133,789
Net earnings for the period $ 13,677 10,690
Items not affecting cash 169,731 126,524 1,348
15,247 7,265 1,061
Depreciation and amortization 2,978 9,629 945 161,924
Future income taxes
Loss on disposal of capital assets 403 130,950 102,341
30,974 2,764
Net change in non-cash 210,869 89,516
working capital balances (note 14) 12,825 5,140 267,029
30,578 (2,376)
Increase (decrease) in long-term liabilities 2,281 41,423 225,606 (2,590,442)
(1,747)
Cash flows from operating activities 243,728 — (2,590,442)
(136) (1,611) (91,142)
Investing activities — (10,624) (3,076)
Acquisition of predecessor entity (2,444) 4,127 (80,518)
(99,701) (6,633) (7,203) (2,686,407)
including bank debt (note 3) (16,631)
Other business acquisitions — (2,679,774) (91,472)
Capital asset expenditures — 1,725,969
Long-term receivables — (91,472)
— 1,725,969 4,215
Cash flows used in investing activities (118,776) — (96,574)
— 4,215 900,248
Financing activities (72) — (96,574)
Deferred financing charges 264 — 900,248 (2,718)
Long-term debt (4,215) 34,790 —
Revolving term debt (591,232) (49,956) (2,718)
Repayment of long-term debt 520,579 $ (15,166) — 2,439,668
Issuance of share capital (18,616) 20,290
Repurchase of share capital (2,287) $ 2,844 2,439,668 (49,956)
Repurchase of stock options $ 1,288 (14,500)
(15,166) $ (29,666)
Cash flows (used in) from financing activities (95,579)
$ (29,666) $ 131,869
Increase (decrease) in cash 29,373 $ 55,173
Bank indebtedness, beginning of period (29,666) $ 129,025
$ 53,885
Bank indebtedness, end of period $ (293)
Supplemental cash flow information $ 165,668
Interest paid $ 23,489
Income taxes paid
33
Notes to the Consolidated Financial Statements
December 29, 2001 and December 30, 2000 (in thousands of dollars, except per share data)
1. BASIS OF PRESENTATION
Shoppers Drug Mart Corporation (formerly SDM Corporation) (the “Company”), incorporated on November 16, 1999,
commenced operations upon acquiring Shoppers Drug Mart Group (the “Predecessor Entity”), a group of companies which
were subsidiaries of Imperial Tobacco Canada Limited (“ITCL”), a wholly-owned subsidiary of British American Tobacco p.l.c.,
for cash consideration of $2,590,442 on February 4, 2000. The Company became publicly listed on the Toronto Stock
Exchange on November 21, 2001.
The Company is a licensor of approximately 830 Shoppers Drug Mart/Pharmaprix full-service retail drug stores across
Canada. The Shoppers Drug Mart/Pharmaprix stores are licensed to associate owners (“Associates”). In addition, the
Company owns and operates 37 Home Health Care stores. Sales to external customers of the retail drug stores owned by
the Associates and of the stores owned by the Company (“system sales”) are $4,996,360 and $4,535,026 for the periods
December 31, 2000 to December 29, 2001 and January 2, 2000 to December 30, 2000, respectively. System sales, other
than sales of Company owned stores, do not form part of the Company’s revenue.
The acquisition of the Predecessor Entity has been accounted for using the purchase method of accounting (note 3). The
consolidated balance sheets include the accounts of the Company and its wholly-owned subsidiaries. The statement of
earnings, retained earnings and cash flows for the period February 4, 2000 to December 30, 2000 include the consolidated
results of the operations of the Company from the date of acquisition. The Company had no operations from its incorporation
to February 3, 2000.
The statements of income and cash flows for the period January 2, 2000 to December 30, 2000 represent the “cumulative” results
of the operations of the Predecessor Entity for the period January 2, 2000 to February 3, 2000, and the results of operations of
the Company from the date of acquisition to December 30, 2000. The results of operations prior to February 4, 2000 do not
represent the Company’s ownership of those operations; however, the “cumulative” amounts are presented herein to facilitate
comparison of the current year with the “cumulative” prior period.
The fiscal year of the Company consists of a 52 or 53 week period ending on the Saturday closest to December 31.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with Canadian generally accepted accounting principles.
Revenue recognition
Revenue, as presented in the Consolidated Statements of Earnings, is generated from the sale of goods to Associates and
is recognized when goods are shipped. Charges for services provided are recognized when services have been rendered.
The Company collects its share of Associate store profits throughout the year by way of a service fee that is based on
estimated store profitability. Service fees are adjusted based on the actual year-end results of Associate stores, which have
fiscal year-ends at varying dates throughout the year. Revenue is only recognized when collection is probable and the Company
has reasonable assurance as to its measurement.
Revenue from corporate-owned stores is recognized at the time goods are sold to external customers, net of returns.
Inventory
Inventory is valued at the lower of cost and estimated net realizable value, with cost being determined on the first-in, first-out basis.
34 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
Capital assets
Capital assets are recorded at cost. Depreciation and amortization is recorded on a straight-line basis over the estimated useful
lives of the assets at the rates indicated below.
Buildings 20 years
Equipment and fixtures 5 or 10 years
Computer software and equipment 3 to 5 years
Leasehold improvements Lesser of term of the lease and 10 years
Deferred financing costs
Deferred financing costs are being amortized on a straight-line basis over the terms of the debt to which they relate, which range
from 7 to 10 years. Any unamortized amounts are charged against earnings when the related debt has been substantially settled.
Goodwill and other intangibles
Goodwill and other intangibles are amortized on a straight-line basis over 40 years. Goodwill and other intangibles recorded
by the Predecessor Entity were being amortized on a straight-line basis over a period not to exceed 15 years.
Management reviews the value of goodwill and other intangibles annually to assess whether the value has been impaired based
primarily on the ability to recover the balance of the goodwill from expected future operating cash flows on an undiscounted
basis. Any permanent impairment in the value for the unamortized portion of goodwill and other intangibles is written-down
with a charge against earnings.
Foreign currency translation
Transactions in foreign currencies are translated into Canadian dollars at rates in effect at the date of the transaction. At the
balance sheet date, monetary foreign currency assets and liabilities are translated at exchange rates then in effect. Exchange
gains or losses are included in the determination of net earnings, except for gains and losses related to long-term monetary
items, which are deferred and amortized over the remaining term to maturity.
Employee future benefits
The Company accrues its obligations for employee benefit plans under the following policies:
• The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected
benefit method pro-rated on service and management’s best estimate of expected plan investment performance, salary
escalation, retirement ages of employees and expected health care costs.
• For the purpose of calculating the expected return on plan assets, those assets are valued at fair value.
• The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan
assets is amortized over the average remaining service period of active employees. The average remaining service period
of the active employees covered by the pension plans and covered by the other retirement benefit plans is 12 and 15
years, respectively.
35
Notes to the Consolidated Financial Statements
December 29, 2001 and December 30, 2000 (in thousands of dollars, except per share data)
Income taxes
The Company accounts for income taxes using the liability method of accounting. Under the liability method, future income
tax assets and liabilities are determined based on differences between the carrying amounts of balance sheet items and their
corresponding tax values. The liability method requires the computation of future income taxes using the substantively enacted
corporate income tax rates for the years in which the differences are expected to reverse.
Financial instruments
The Company uses interest rate derivatives to manage its exposure to fluctuations in interest rates related to the Company’s
long-term debt. The income or expense arising from the use of these instruments is included in interest expense for the year.
The Company also enters into currency derivatives to hedge a portion of its United States dollar denominated debt. Unrealized
gains or losses on currency derivatives offset unrealized gains or losses on the hedged portion of the related debt.
Estimates
The preparation of the consolidated financial statements in conformity with Canadian 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 consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination
of impairment of assets, pension and other employee benefits, useful lives for amortization, income taxes and future income taxes,
the redemption obligation under the Company’s loyalty program, and service fees. These estimates are revised periodically to
reflect current expectations. Results, as determined by actual events, could differ materially from the above estimates.
3. ACQUISITION
As explained in note 1, on February 4, 2000, the Company acquired the Predecessor Entity for cash consideration of
$2,590,442, including costs incurred in connection with the acquisition. The total cost of the purchase was allocated to the
net assets on the basis of their fair market values as follows:
Current assets $ 370,316
Capital assets 319,134
Other long-term assets 64,170
Current bank indebtedness (15,166)
Other current liabilities (191,755)
Long-term liabilities (11,668)
Net assets acquired 535,031
Goodwill and other intangibles 2,055,411
Purchase price $ 2,590,442
36 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
4. LONG-TERM RECEIVABLES 2001 2000
Long-term receivables from Associates $ 67,030 $ 58,823
Other long-term receivables 33,188 4,797
$ 100,218 $ 63,620
Long-term receivables from Associates are comprised primarily of notes receivable which are interest bearing, due on demand,
have no fixed terms of repayment and are partially secured by the assets of the Associates’ stores. The Company does not
plan to redeem the notes within the next year. The interest rate is set annually and was 10.5% as at December 29, 2001 and
8.0% as at December 30, 2000.
Other long-term receivables consist of loans to certain key employees under the Stock Purchase Plan to acquire common
shares of the Company (note 11), employee relocation loans and a currency adjustment receivable arising from the currency
derivative agreements (note 19). The share purchase loans receivable are non-interest bearing, mature in 2007 and 2008, are
subject to certain terms of repayment pursuant to a Shareholders’ Agreement and are secured by the shares to which the
loans relate.
5. CAPITAL ASSETS
Land Cost Accumulated 2001 Cost Accumulated 2000
Buildings depreciation/ depreciation/
Equipment, fixtures and computer $ 25,258 amortization Net book value $ 25,245 amortization Net book value
54,790 54,466
software and equipment $— $ 25,258 $— $ 25,245
Leasehold improvements 244,513 6,201 48,589 188,579 2,789 51,677
160,974 128,224
$ 485,535 85,459 159,054 $ 396,514 44,350 144,229
32,960 128,014 15,192 113,032
$ 124,620 $ 360,915 $ 62,331 $ 334,183
6. DEFERRED COSTS
Deferred financing costs Cost Accumulated 2001 Cost Accumulated 2000
Deferred foreign exchange loss amortization amortization
$ 54,722 Net book value $ 91,472 Net book value
50,359 $ 13,703 29,895 $ 9,877
6,589 $ 41,019 1,859 $ 81,595
$ 105,081 43,770 $ 121,367 28,036
$ 20,292 $ 11,736
$ 84,789 $ 109,631
37
Notes to the Consolidated Financial Statements
December 29, 2001 and December 30, 2000 (in thousands of dollars, except per share data)
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles Cost Accumulated 2001 Cost Accumulated 2000
amortization amortization
$ 2,058,641 Net book value $ 2,057,022 Net book value
$ 103,005 $ 49,717
$ 1,955,636 $ 2,007,305
Amortization recorded on the consolidated statements of earnings of the Company for the period February 4, 2000 to
December 30, 2000 and for the period December 31, 2000 to December 29, 2001 is net of income tax recoveries of $843
and $825, respectively. Amortization recorded on the combined statement of earnings of the Predecessor Entity for the
period January 2, 2000 to February 3, 2000 is net of income tax recoveries of $85.
8. BANK INDEBTEDNESS
Bank indebtedness as at December 29, 2001 and December 30, 2000 is comprised primarily of outstanding cheques,
net of cash.
9. LONG-TERM DEBT 2001 2000
Non-revolving term facilities $ 1,109,545 $ 1,131,793
Senior subordinated loans — 525,969
Revolving term facility — 4,215
Less current portion of long-term debt 1,109,545 1,661,977
— —
$ 1,109,545 $ 1,661,977
Term facilities
On February 4, 2000, the Company entered into a credit agreement with a syndicate of banks providing for the following
loan facilities:
(a) a $350,000, seven-year, revolving term facility maturing February 2, 2007;
(b) a $450,000, non-revolving, reducing term facility maturing January 26, 2007;
(c) a $25,000, non-revolving, reducing term facility maturing February 4, 2008;
(d) a U.S. $242,976, non-revolving, reducing term facility maturing February 4, 2008;
(e) a $25,000, non-revolving, reducing term facility maturing February 4, 2009; and
(f) a U.S. $242,976, non-revolving, reducing term facility maturing February 4, 2009.
These facilities bear interest based on Prime and Bankers’ Acceptance rates for Canadian dollar loans, and Prime and LIBOR
rates for U.S. dollar loans. As security for these facilities, the Company has provided a general security agreement covering
substantially all of the assets of the Company. The credit agreement specifies the priority of security under each facility and
provides for certain restrictive undertakings and covenants to be complied with by the Company.
On February 4, 2000, the full amount of the facilities noted in (b) through (f) above, together with $35,000 of the facility noted
in (a), above, were drawn in conjunction with the acquisition of the Predecessor Entity (see note 1). During 2000 and 2001,
38 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
$75,000 and $25,000, respectively, of borrowings under the $450,000 facility noted in (b) above were repaid, reducing the
amount of this facility to $350,000. During 2001, $15,000 of borrowings under the $25,000 facility noted in (c) above and
$25,000 of borrowings under the facility noted in (e) above were repaid, reducing the amount of each of these facilities to $10,000
and nil, respectively. During 2000, U.S. $7,300 of borrowings under each of the U.S. $242,976 facilities noted in (d) and (f) above
were repaid, reducing the amount of each of these facilities to U.S. $235,676.
As at December 29, 2001, $1,882 of the $350,000 revolving facility noted in (a) above was utilized, all in respect of letters of
credit and trade finance guarantees. As at December 30, 2000, $8,431 of the $350,000 revolving facility noted in (a) above
was utilized, including $4,216 in respect of letters of credit and trade finance guarantees.
Senior subordinated loan agreement
During 2001, the Company fully repaid the senior subordinated loans with the net proceeds from its initial public offering
(note 11) together with cash flow from operations.
Minimum repayments $—
12,500
Minimum required repayments of long-term debt for the next five calendar years are as follows: 87,500
2002 107,694
2003 107,728
2004 794,123
2005
2006 $ 1,109,545
2007–2009
10. OTHER LONG-TERM LIABILITIES
Employee future benefits
The Company maintains registered defined benefit pension plans under which benefits are available to substantially all employees.
The Company also makes supplementary retirement benefits available to certain employees under an unregistered plan.
The pension plans are funded through contributions based on actuarial cost methods as permitted by pension regulatory
bodies as applicable. Earnings are charged with the cost of benefits earned by employees as services are rendered. Benefits
under these plans are based on the employee’s years of service and final average earnings.
The Company also maintains post-retirement benefit plans, other than pensions, covering benefits such as health and life
insurance benefits for retirees. The cost of these plans is charged to earnings as benefits are earned by employees on the
basis of service rendered.
Included in other long-term liabilities are employee future benefits in the amount of $9,345 as at December 29, 2001 and
$11,345 as at December 30, 2000 in respect of pension and other post-retirement benefit plans.
39
Notes to the Consolidated Financial Statements
December 29, 2001 and December 30, 2000 (in thousands of dollars, except per share data)
Information about the Company’s pension and other post-retirement benefit plans is as follows:
Pension 2001 Pension 2000
plans plans
Other Other
benefit plans benefit plans
Accrued benefit obligation $ 57,546 $ 2,703 $ 48,186 $ 2,403
Fair value of plan assets —
39,533 — 34,172
Funded status – plan deficit 2,403
Unrecognized losses (gains) 18,013 2,703 14,014 (7)
11,378 (7) 5,079
Accrued benefit liability $ 2,410
$ 6,635 $ 2,710 $ 8,935
Accrued benefit obligations $ 48,186 $ 2,403 $ 41,572 $ 2,127
Benefit obligation, beginning of period
Service cost 3,357 409 2,539 359
Interest cost
Participant contributions 2,441 187 1,975 162
Actuarial loss (gain)
Benefits paid 910 — 688 —
Accrued benefit obligation, end of period 4,012 — 3,783 (7)
(1,360) (296) (2,371) (238)
$ 57,546 $ 2,703 $ 48,186 $ 2,403
Fair value of plan assets $ 34,172 $ — $ 32,155 $ —
Market value of plan assets, beginning of period (1,213) $ — 251 $ —
Actual return on plan assets 7,024 296 238
Company contribution 910 — 3,449 —
Participant contributions (1,360) (296) 688 (238)
Benefits paid
$ 39,533 — (2,371) —
Fair value of plan assets, end of period
$ 34,172
The significant actuarial assumptions adopted in measuring the Company’s accrued benefit liability are as follows:
Registered Non-registered 2001 Registered Non-registered 2000
pension plans pension plan pension plans pension plan
Other Other
benefit plans benefit plans
Discount rate 6.50% 3.25% 7.00% 7.00% 3.50% 7.00%
Expected return on assets 7.50% 3.75% N/A 7.50% 3.75% N/A
Compensation increase 4.50% 4.50% 4.50% 4.50%
4.50% 4.00%
The health care cost trend rate used was 8.5%, which is reduced 1% each year after 2001, to an ultimate rate of 5.5% for
2004 and later years. A one percentage point decrease (increase) in the assumed health care costs trend rate, holding all
other assumptions constant, would increase (decrease) the service and interest cost components of 2001 net periodic benefit
cost by $23 ($20) and would increase (decrease) the December 29, 2001 benefit obligation by $182 ($149).
The components of the Company’s pension and other post-retirement benefit plans expense are as follows:
Pension 2001 Pension 2000
plans plans
Other Other
benefit plans benefit plans
Service cost $ 3,357 $ 409 $ 2,539 $ 359
Interest on benefit obligation and service cost 2,441 187 1,975 162
Expected return on assets (1,826) —
Amortization 52 — (1,547) —
——
Net expense $ 4,024 $ $ 521
596 $ 2,967
40 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
11. SHARE CAPITAL 2001 2000
Authorized $ 1,418,605 $ 856,553
Unlimited number of common shares — 41,059
Unlimited number of non-voting shares
$ 1,418,605 $ 897,612
Issued
Common shares
December 29, 2001 – 209,671,705
December 30, 2000 – 171,310,000
Non-voting shares
December 29, 2001 – nil
December 30, 2000 – 8,211,705
Weighted average shares outstanding
December 29, 2001
Basic – 183,306,247
Diluted – 184,291,972
December 30, 2000 – not applicable
The Company was capitalized on February 4, 2000 by the issuance of 171,622,000 common shares and 8,281,705 non-voting
shares at $5.00 per share for total proceeds of $899,519. The non-voting shares were issued to certain Associates and
converted to common shares upon the Company becoming public.
During the period February 4, 2000 to December 30, 2000, an additional 145,000 common shares were issued for net proceeds
of $728 and 457,000 common shares were repurchased for cancellation for $2,363 which includes a $78 premium, over the
stated capital, that has been charged against the retained earnings. In addition, 70,000 non-voting shares were repurchased for
cancellation for $355 which includes a $5 premium, over the stated capital, that has been charged against the retained earnings.
On November 21, 2001, the Company issued 30,000,000 common shares through an initial public offering at $18.00 per
common share for gross proceeds of $540,000 and incurred $19,054 of share issuance costs, net of tax of $10,774. In
addition, during the period December 31, 2000 to December 29, 2001, 1,935,440 common shares were issued for net
proceeds of $10,462, net of tax of $55, and 1,785,440 common shares were repurchased for cancellation for $18,616 which
includes an $8,201 premium, over the stated capital, that has been charged against retained earnings.
The common shares that may be issued under the Company’s stock option plan have a dilutive impact on the weighted
average number of shares of 985,725.
Individual shareholder agreements address matters related to the transfer of certain shares issued to the Company’s
management and Associates, including shares issued under options granted to management. In particular, each provides,
subject to certain exceptions, for a general prohibition on any transfer of a member of management’s or an Associate’s shares
for a period of five years from the date that the individual entered into the shareholder agreement. As at December 29, 2001,
6,470,000 and 8,301,705 shares issued to management and Associates, respectively are subject to this restriction.
Stock option plan
The Company has issued to certain employees options to purchase common shares. Options are granted in equal proportions
between time-based vesting and performance-based vesting criteria. Time-based options are exercisable 20% per year on the
41
Notes to the Consolidated Financial Statements
December 29, 2001 and December 30, 2000 (in thousands of dollars, except per share data)
anniversary of the grant date in each of the five subsequent years. Performance-based options are exercisable 20% per year on
the anniversary of the grant date in each of the five subsequent years provided that the Company achieves specified
earnings-based performance targets. Performance targets not achieved are considered to be met if the performance is achieved
on a cumulative basis in subsequent years. The performance-based options become fully exercisable on the ninth anniversary
of the date of grant, provided that they have not otherwise been terminated, whether or not the performance targets are achieved.
Upon the termination of an optionee’s employment, all unexercisable options expire immediately and exercisable options
expire within 180 days of the date of termination. The plan and certain termination agreements provide for the Company to
pay, in cash, terminated option holders any appreciation value of the options to cancel exercisable options. The Company’s
payments of $2,287 ($1,323, net of tax) to option holders in respect of the appreciation value of the exercisable options
have been charged to retained earnings. Subject to certain prior events of expiry, such as the termination of the employee’s
employment for cause, all exercisable options expire on the tenth anniversary of the date of grant.
On November 21, 2001, the Company issued time-based options to purchase 60,000 common shares at an exercise price
equal to the initial public offering price to each of seven of its directors. One-third of the options become exercisable in each
of the following three years on the anniversary of the date of the grant. Unexercisable options expire upon the optionee
ceasing to be a director.
A summary of the status of the Company’s stock option plan as at December 29, 2001 and December 30, 2000, and changes
during the respective periods then ended are presented below:
For the period For the period
December 31, 2000 to December 29, February 4, 2000 to December 30,
2001 2000
Options on Weighted average Options on Exercise
common exercise price common price
shares per share shares
per share
Outstanding, beginning of period 9,995,000 $ 5.00 — $ —
Granted 4,366,600 6.65 11,314,500 5.00
Exercised $
Expired — $ —— —
(7,341,100) 5.05 (1,319,500) 5.00
Outstanding, end of period
7,020,500 5.98 9,995,000 $ 5.00
Options exercisable, end of period
2,297,400 5.01 — —
Weighted average remaining contractual life
8.0 years 9.0 years
Deferred share unit plan for non-employee directors
During the year, the Company established a deferred share unit (DSU) plan to provide directors with the option to elect to receive
DSUs in lieu of cash payment for all or a portion of their director fees to be earned in the following year. When elected, the
Company will credit to the account of each director a number of DSUs (each equivalent in value to a common share) equal to
the amount of fees deferred divided by the fair market value of the common shares on the date of deferral. The directors’
accounts shall be credited with dividend equivalents in the form of additional DSUs if and when the Company pays dividends
on the common shares. Upon the director ceasing to be a member of the Board of Directors, the director shall receive a cash
amount equal to the number of DSUs in his or her account multiplied by the fair market value of the common shares on the
date the director ceases to be a member of the Board of Directors or on a later date selected by the director, which shall in
any event be a date prior to the end of the following calendar year. The plan became active subsequent to December 29, 2001.
42 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
12. OBLIGATIONS UNDER OPERATING LEASES
The minimum lease payments on a calendar year basis under long-term leases for store locations and office space are
as follows:
2002 2003 2004 2005 2006 Thereafter
Total lease obligations $ 122,641 $ 112,402 $ 98,297 $ 87,529 $ 75,624 $ 282,722
The Company charges Associates rent to recover rentals payable for store locations.
13. CONTRACTUAL OBLIGATIONS
The Company has entered into an agreement with a third party to provide distribution services to the Company’s locations
to December 31, 2005. Under the terms of this agreement, the third party will charge the Company specified costs incurred
to provide the distribution services, plus an annual management fee.
14. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
Shoppers Drug Predecessor Shoppers Drug “Cumulative”
Mart Corporation Entity Mart Corporation
For the period
For the period For the period For the period January 2, 2000
December 31, 2000 January 2, 2000 February 4, 2000 to December 30,
to December 30,
to December 29, to February 3, 2000
2000 (note 1)
2001 2000 (note 1)
(note 1)
Accounts receivable $ 26,280 $ 78,206 $ (144,476) $ (66,270)
Inventory (92,566) 47,088 (6,382) 40,706
Prepaid expenses (371) (106) 477 371
Accounts payable and accrued liabilities 59,049 (74,670)
Due to ITCL — (30,744) 229,688 155,018
Income tax payable 38,186 (6,949) — (30,744)
$ 30,578 $ 12,825 10,209 3,260
$ 89,516 $ 102,341
15. CONTINGENT LIABILITIES
Guarantees
As at December 29, 2001 and December 30, 2000, the Company has provided guarantees of approximately $331,000 and
$296,000, respectively, to various banks in respect of borrowings by Associates.
Lawsuits
Under the terms of its acquisition of the Predecessor Entity (note 1), the Company has indemnified ITCL for all legal claims
against the Company for the period prior to February 4, 2000. In addition, the Company is involved in certain legal claims
arising in the normal course of business.
In the opinion of management, the eventual settlement of such claims will not have a significant effect on the Company’s
financial position or results of operations. Management has recorded a provision for these claims based on their best estimate
of the final settlements.
43
Notes to the Consolidated Financial Statements
December 29, 2001 and December 30, 2000 (in thousands of dollars, except per share data)
16. CORPORATE RESTRUCTURING
Included in cost of goods sold and other operating expenses for the period ended December 29, 2001 is a charge of $19,500
in respect of staff restructuring costs related to the streamlining of business processes.
17. INTEREST EXPENSE
The significant components of the Company’s interest expense are as follows:
Interest on long-term debt Shoppers Drug Predecessor Shoppers Drug “Cumulative”
Amortization of: Mart Corporation Entity Mart Corporation For the period
January 2, 2000
Deferred financing costs For the period For the period For the period to December 30,
Foreign exchange losses December 31, 2000 January 2, 2000 February 4, 2000
Other interest expense to December 30, 2000
to December 29, to February 3, (note 1)
2000
2001 2000 (note 1) $ 166,748
(note 1)
$ 146,900 $ 166,748
$—
40,648 — 9,877 9,877
4,981 — 1,859 1,859
856 1,597 1,901
304
$ 193,385 $ 1,597 $ 178,788 $ 180,385
Included in the amortization of deferred financing costs for the period ended December 29, 2001 is a $29,324 write-off of
deferred financing costs related to the senior subordinated debt facility that was fully repaid during the period (note 9).
18. INCOME TAXES 2001 2000
The significant components of the Company’s future income tax assets are as follows: $ 14,756 $ 16,976
2,329 —
Current (7,921) —
Non-deductible accruals (1,193)
Deductible share issuance costs (1,330)
Income not taxed in current year $ 7,971
Other $ 15,646
Long-term $ 6,226 $ 6,129
Non-deductible accruals 5,983 —
Deductible share issuance costs 5,713
Depreciable assets (623) 12,741
Deductible financing costs 510 (1,620)
Other
$ 17,809 (181)
$ 17,069
44 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
The significant components of the income tax expense are as follows: Predecessor Shoppers Drug “Cumulative”
Entity Mart Corporation
Shoppers Drug For the period
Mart Corporation For the period For the period January 2, 2000
January 2, 2000 February 4, 2000 to December 30,
For the period to December 30,
December 31, 2000 to February 3, 2000
2000 (note 1)
to December 29, 2000 (note 1)
(note 1)
2001
Current income tax $ 55,532 $ (283) $ 53,347 $ 53,064
Large corporations tax 3,759 — 4,087 4,087
Future income tax resulting from reversal of temporary differences (2,017)
Future income tax resulting from tax rate change 13,155 12,836 3,078 10,819
2,092 — 3,078
$ 58,495
$ 74,538 $ 12,553 $ 71,048
The effective income tax rate is comprised of the following: Predecessor Shoppers Drug “Cumulative”
Entity Mart Corporation For the period
Shoppers Drug January 2, 2000
Mart Corporation For the period For the period to December 30,
January 2, 2000 February 4, 2000
For the period to December 30, 2000
December 31, 2000 to February 3, (note 1)
2000
to December 29, 2000 (note 1) 44.0%
(note 1)
2001 43.8%
44.4%
Combined Canadian federal and provincial statutory tax rate 42.0%
Adjusted for: — 3.7% 3.0%
2.5%
Large corporations tax — 2.8% 2.2%
Decrease in future income taxes 1.4% 0.9% 2.9% 2.5%
3.5%
resulting from statutory tax rate reduction 49.4% 45.3% 53.2% 51.7%
Non-deductible charges 26.9% 2.6% 42.7% 29.6%
76.3%
Effective income tax rate before goodwill amortization 47.9% 95.9% 81.3%
Non-deductible goodwill amortization
Effective income tax rate
19. FINANCIAL INSTRUMENTS
Interest rate derivatives
The Company has entered into interest rate derivative agreements converting an aggregate notional principal amount of
$350,000 of floating rate debt into fixed rate debt. The fixed rates payable by the Company under these agreements range
from 6.07% to 6.10%. These agreements mature on April 14, 2005.
Based on market values at December 29, 2001 and December 30, 2000, the Company would have incurred losses of
$20,966 and $7,479, respectively, to terminate these interest rate derivative agreements. Market values were determined based
on information received from the Company’s counterparties to these agreements.
45
Notes to the Consolidated Financial Statements
December 29, 2001 and December 30, 2000 (in thousands of dollars, except per share data)
Currency derivatives
The Company has entered into currency derivative agreements to exchange a notional principal amount of U.S. $242,976 of
debt for Canadian dollar denominated debt. These agreements mature on June 16, 2003. Currency adjustments receivable
or payable arising from these agreements may be settled in cash on maturity. As at December 29, 2001 and
December 30, 2000, a currency adjustment of $19,967 and $2,071, respectively, related to these agreements was included
in long-term receivables and other long-term liabilities, respectively.
Based on market values at December 29, 2001 and December 30, 2000, excluding the currency adjustments noted above,
the Company would have incurred a gain of $1,028 and a loss of $674, respectively, to terminate these currency derivative
agreements. Market values were determined based on information received from the Company’s counterparties to these
agreements.
Counterparty risk
Changes in the underlying interest rates and exchange rates of the Company’s interest rate and currency derivative agreements
will result in market gains and losses. Furthermore, the Company may be exposed to losses should any counterparty to its
derivative agreements fail to fulfill its obligations. The Company has sought to minimize counterparty risk by transacting with
counterparties that are large international financial institutions.
Credit risk
The Company has credit risk associated with accounts receivable and long-term receivables from Associates. The risk of
collection is mitigated since these balances owed are spread over a number of different Associates.
Fair value of financial instruments
The fair value of a financial instrument is the estimated amount that the Company would receive or pay to terminate the
contracts at the reporting date.
The fair values of accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximate their carrying
values given their short-term maturities. The fair values of long-term receivables, long-term liabilities and long-term debt
approximate their carrying values given the current market rates associated with these instruments.
The fair value of the interest rate and currency derivatives, as noted above, is determined based on current market rates and
on information received from the Company’s counterparties to these agreements.
20. RELATED PARTY TRANSACTIONS
The Corporation incurred management fees and expenses of $2,165 and $2,206 during the period ended December 29, 2001
and the period February 4, 2000 to December 30, 2000, respectively, and financing and acquisition related fees of $30,414
during the period February 4, 2000 to December 30, 2000, to certain shareholders who collectively hold 78.7% of the
common shares of the Company at December 29, 2001.
46 S H O P P E R S D R U G M A R T C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T
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As leaders in the retail health care industry in Canada, Shoppers Drug Mart/Pharmaprix has a special interest in the health and well-being of Canadians in communities ...
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