au ww umuulivu material llarly year! f. Note 10 reports that Rite Aid engaged in some open-market debt transactions during year ended February 28, 2004 (see the part of note 10 marked "Debt Repurchased). i. Prepare the journal entry required to record the repurchase of these notes. ii. Why did Rite Aid not have to pay the face value to repurchase these notes on the open market? iii. Explain why Rite Aid recorded a gain on all of the repurchased notes except on the 12.5% note on which it recorded a loss? g. Consider the 4.75% Convertible notes. How would Rite Aid's balance sheet be affected if these notes were converted? Why do firms issue convertible notes? Why do investors buy such notes? RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 (In thousands, except per share amounts) 10. Indebtedness and Credit Agreements Following is a summary of indebtedness and lease financing obligations at February 28, 2004 and March 1, 2003: February 28, 2004 March 1, 2003 $1,150,000 1,372,500 Secured Debt: Senior secured credit facility due April 2008. ....... Senior secured credit facility due March 2005..... 12.5% senior secured notes due September 2006 ($142,025 and $152,025 face value less unamortized discount of $4,158 and 6,143)............................................... 8.125% senior secured notes due May 2010 ($360,000 face value less unamortized discount of $4,168)... 9.5% senior secured notes due February 2011 ......... Other............ 137,867 145,882 355,832 300,000 5,125 1,948,824 183,169 300,000 6,540 1,824,922 176,186 198,000 38,047 58,125 198,000 75,895 Lease Financing Obligations ........ Unsecured Debt: 6.0% dealer remarketable securities due October 2003 7.625% senior notes due April 2005..... 6.0% fixed-rate senior notes due December 2005 ....... 4.75% convertible notes due December 2006 ($250,000 face value less unamortized discount of $4,000 and $5,500)... 7.125% notes due January 2007 .... 11.25% senior notes due July 2008....... 6.125% fixed-rate senior notes due December 2008 ...... 9.25% senior notes due June 2013 ($150,000 face value less unamortized discount of $2,221).. 6.875% senior debentures due August 2013.......... 7.7% notes due February 2027 .... 6.875% fixed-rate senior notes due December 2028 246,000 210,074 150,000 150,000 244,500 335,000 150,000 150,000 147,779 184,773 295,000 140,000 1,759,673 200,000 300,000 150,000 1,861,520 3,891,666 3,862,628 Total debt ........ Short-term debt and current maturities of convertible notes, long- cam daht and lease financing obligations.... ......... (23.976) (103.715) -. ruULERUTES New Credit Facility: On May 28, 2003, the Company replaced its senior secured credit facility with a new senior secured credit facility. The new facility consists of a $1,150,000 term loan and a $700,000 revolving credit facility, and will mature on April 30, 2008. The proceeds of the loans made on the closing of the new credit facility were, among other things, used to repay the outstanding amounts under the old facility and to purchase the land and buildings at the Company's Perryman, MD and Lancaster, CA distribution centers, which had previously been leased through a synthetic lease arrangement. On August 4, 2003, the Company amended and restated the senior secured credit facility, which reduced the interest rate on term loan borrowings under the senior secured credit facility by 50 basis points. Borrowings under the new facility currently bear interest either at LIBOR plus 3.00% for the term loan and 3.50% for the revolving credit facility, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 2.00% for the term of the loan and 2.50% for the revolving credit facility. The Company is required to pay fees of 0.50% per annum on the daily unused amount of the revolving facility. Amortization payments of $2,875 related to the term loan will begin on May 31, 2004, and continue on a quarterly basis until February 28, 2008, with a final payment of $1,104,000 due April 30, 2008. Substantially all of Rite Aid Corporation's wholly-owned subsidiaries guarantee the obligations under the new senior secured credit facility. The subsidiary guarantees are secured by a first priority lien on, among other things, the inventory, accounts receivable and prescription files of the subsidiary guarantors. Rite Aid Corporation is a holding company with no direct operations and is dependent upon dividends, distributions and other payments from its subsidiaries to service payments under the new senior secured credit facility. Rite Aid Corporation's direct obligations under the new senior secured credit facility are unsecured. The new senior secured credit facility allows for the issuance of up to $150,000 in additional term loans or additional revolver availability. The Company may request the additional loans at any time prior to the maturity of the senior secured credit facility, provided that the Company is not in default of any terms of the facility, nor is in violation of any financial covenants. The new senior secured credit facility allows the Company to have outstanding, at any time, up to $1,000,000 in secured debt in addition to the senior secured credit facility. At February 28, 2004, the remaining additional permitted secured debt under the new senior credit facility is $197,975. The Company has the ability to incur an unlimited amount of unsecured debt, if the terms of such unsecured indebtedness comply with certain terms set forth in the credit agreement and subject to the Company's compliance with certain financial covenants. If the Company issues unsecured debt that does not meet the credit agreement restrictions, it reduces the amount of available permitted secured debt. The new senior secured credit facility also allows for the repurchase of any debt with a maturity prior to April 30, 2008, and for a limited amount of debt with a maturity after April 30, 2008, based upon outstanding borrowings under the revolving credit facility and available cash at the time of the repurchase. The new senior secured credit facility contains customary covenants, which place restrictions on incurrence of debt, the payment of dividends, mergers, liens and sale and leaseback transactions. The new senior secured credit facility also requires us to meet various financial ratios and limits capital expenditures. For the twelve months ending February 26, 2005, the covenants require us to maintain a maximum leverage ratio of 6.05:1. Subsequent to February 26, 2005, the ratio gradually decreases to 3.8:1 for the twelve months ending March 1, 2008. We must also maintain a minimum interest coverage ratio of 2.05:1 for the twelve months ending February 26, 2005. Subsequent to February 26, 2005, the ratio gradually increases to 3.25:1 for the twelve months ending March 1, 2008. In addition, we must maintain a minimum fixed charge ratio of 1.10:1 for the twelve months ending February 26, au ww umuulivu material llarly year! f. Note 10 reports that Rite Aid engaged in some open-market debt transactions during year ended February 28, 2004 (see the part of note 10 marked "Debt Repurchased). i. Prepare the journal entry required to record the repurchase of these notes. ii. Why did Rite Aid not have to pay the face value to repurchase these notes on the open market? iii. Explain why Rite Aid recorded a gain on all of the repurchased notes except on the 12.5% note on which it recorded a loss? g. Consider the 4.75% Convertible notes. How would Rite Aid's balance sheet be affected if these notes were converted? Why do firms issue convertible notes? Why do investors buy such notes? RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the Years Ended February 28, 2004, March 1, 2003 and March 2, 2002 (In thousands, except per share amounts) 10. Indebtedness and Credit Agreements Following is a summary of indebtedness and lease financing obligations at February 28, 2004 and March 1, 2003: February 28, 2004 March 1, 2003 $1,150,000 1,372,500 Secured Debt: Senior secured credit facility due April 2008. ....... Senior secured credit facility due March 2005..... 12.5% senior secured notes due September 2006 ($142,025 and $152,025 face value less unamortized discount of $4,158 and 6,143)............................................... 8.125% senior secured notes due May 2010 ($360,000 face value less unamortized discount of $4,168)... 9.5% senior secured notes due February 2011 ......... Other............ 137,867 145,882 355,832 300,000 5,125 1,948,824 183,169 300,000 6,540 1,824,922 176,186 198,000 38,047 58,125 198,000 75,895 Lease Financing Obligations ........ Unsecured Debt: 6.0% dealer remarketable securities due October 2003 7.625% senior notes due April 2005..... 6.0% fixed-rate senior notes due December 2005 ....... 4.75% convertible notes due December 2006 ($250,000 face value less unamortized discount of $4,000 and $5,500)... 7.125% notes due January 2007 .... 11.25% senior notes due July 2008....... 6.125% fixed-rate senior notes due December 2008 ...... 9.25% senior notes due June 2013 ($150,000 face value less unamortized discount of $2,221).. 6.875% senior debentures due August 2013.......... 7.7% notes due February 2027 .... 6.875% fixed-rate senior notes due December 2028 246,000 210,074 150,000 150,000 244,500 335,000 150,000 150,000 147,779 184,773 295,000 140,000 1,759,673 200,000 300,000 150,000 1,861,520 3,891,666 3,862,628 Total debt ........ Short-term debt and current maturities of convertible notes, long- cam daht and lease financing obligations.... ......... (23.976) (103.715) -. ruULERUTES New Credit Facility: On May 28, 2003, the Company replaced its senior secured credit facility with a new senior secured credit facility. The new facility consists of a $1,150,000 term loan and a $700,000 revolving credit facility, and will mature on April 30, 2008. The proceeds of the loans made on the closing of the new credit facility were, among other things, used to repay the outstanding amounts under the old facility and to purchase the land and buildings at the Company's Perryman, MD and Lancaster, CA distribution centers, which had previously been leased through a synthetic lease arrangement. On August 4, 2003, the Company amended and restated the senior secured credit facility, which reduced the interest rate on term loan borrowings under the senior secured credit facility by 50 basis points. Borrowings under the new facility currently bear interest either at LIBOR plus 3.00% for the term loan and 3.50% for the revolving credit facility, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 2.00% for the term of the loan and 2.50% for the revolving credit facility. The Company is required to pay fees of 0.50% per annum on the daily unused amount of the revolving facility. Amortization payments of $2,875 related to the term loan will begin on May 31, 2004, and continue on a quarterly basis until February 28, 2008, with a final payment of $1,104,000 due April 30, 2008. Substantially all of Rite Aid Corporation's wholly-owned subsidiaries guarantee the obligations under the new senior secured credit facility. The subsidiary guarantees are secured by a first priority lien on, among other things, the inventory, accounts receivable and prescription files of the subsidiary guarantors. Rite Aid Corporation is a holding company with no direct operations and is dependent upon dividends, distributions and other payments from its subsidiaries to service payments under the new senior secured credit facility. Rite Aid Corporation's direct obligations under the new senior secured credit facility are unsecured. The new senior secured credit facility allows for the issuance of up to $150,000 in additional term loans or additional revolver availability. The Company may request the additional loans at any time prior to the maturity of the senior secured credit facility, provided that the Company is not in default of any terms of the facility, nor is in violation of any financial covenants. The new senior secured credit facility allows the Company to have outstanding, at any time, up to $1,000,000 in secured debt in addition to the senior secured credit facility. At February 28, 2004, the remaining additional permitted secured debt under the new senior credit facility is $197,975. The Company has the ability to incur an unlimited amount of unsecured debt, if the terms of such unsecured indebtedness comply with certain terms set forth in the credit agreement and subject to the Company's compliance with certain financial covenants. If the Company issues unsecured debt that does not meet the credit agreement restrictions, it reduces the amount of available permitted secured debt. The new senior secured credit facility also allows for the repurchase of any debt with a maturity prior to April 30, 2008, and for a limited amount of debt with a maturity after April 30, 2008, based upon outstanding borrowings under the revolving credit facility and available cash at the time of the repurchase. The new senior secured credit facility contains customary covenants, which place restrictions on incurrence of debt, the payment of dividends, mergers, liens and sale and leaseback transactions. The new senior secured credit facility also requires us to meet various financial ratios and limits capital expenditures. For the twelve months ending February 26, 2005, the covenants require us to maintain a maximum leverage ratio of 6.05:1. Subsequent to February 26, 2005, the ratio gradually decreases to 3.8:1 for the twelve months ending March 1, 2008. We must also maintain a minimum interest coverage ratio of 2.05:1 for the twelve months ending February 26, 2005. Subsequent to February 26, 2005, the ratio gradually increases to 3.25:1 for the twelve months ending March 1, 2008. In addition, we must maintain a minimum fixed charge ratio of 1.10:1 for the twelve months ending February 26