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Is the difference material in any 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? h. Refer to Note 20, Financial Instruments. i. What is the fair-value of Rite Aid's fixed-rate debt at February 28, 2004? Why does it differ from the carrying amount? ii. What is the fair-value of the variable-rate debt at February 28, 2004? Why does it not differ from its carrying amount? iii. Why would financial statement users want to know the fair-value of Rite Aid's debt? With 3,382 stores in 28 states, Rite Aid is the third largest retail pharmacy in the U.S. The company has a first or second market position in approximately 60% of the markets where it operates. In fiscal 2004, Rite Aid pharmacists filled more than 200 million prescriptions, which accounted for 63.6% of total sales. In addition, Rite Aid stores sell a wide assortment of other merchandise including over-the-counter medications, health and beauty aids, household items, beverages, convenience foods, greeting cards, as well as photo processing. The company also offers 2,100 products under the Rite Aid private brand. a March 1. 23 RITE AID CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) Forary ASSETS Current assets: Cash and cash equivalents $ 334.755 Accounts receivable, net 670,004 Inventories, net 2,223,171 Prepaid expenses and other current assets 150,067 Total current assets 3,377,997 Property, plant and equipment, net 1,883,808 Goodwill 684,535 Other intangibles, net 176,672 Other assets. 123,667 Total assets $ 6.246,679 $365,321 575,518 2,195,030 108,018 3,243,887 1,868,579 684,535 199,768 136,746 $ 6,133,515 $ 23.976 758,290 701484 1.483,750 246,000 3.451,352 170,338 885975 6,237,415 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Short-term debt and current maturities of convertible notes long-term debt and lease financing obligations Accounts payable.... Accrued salaries, wages and other current liabilities Total current liabilities Convertible notes .. Long-term debt, less current maturities Lease financing obligations, less current maturities Other noncurrent liabilities Total liabilities Commitments and contingencies Redeemable preferred stock Stockholders' equity (deficit) Preferred stock, par value $1 per share; liquidation value $100 per share; 20,000 shares authorized; shares issued - 4,178 and 3,937 Common stock, par value $1 per share: 1,000,000 shares authorised; shares issued and outstanding $16,496 and 515,115 Additional paid.in capital Accumulated deficit Stock based and deferred compensation Accumulated other comprehensive loss Total stockholders' equity (deficit) Total liabilities and stockholders' equity (deficit). $ 103,715 755.284 707 999 1,566,998 244,500 3,345,365 169,048 900270 6,226,181 19,663 417,803 393,705 516,496 3,133,277 (4.035.433) 515,115 3,119,619 (4,118,119) 5,369 (28,018) (112,329) $ 6,133,515 (22,879) 9.264 $ 6.246,679 RITE AID CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended February 28 March 1. March 2 2001 Revenues..... $16,600,449 $15,791,278 $15.166,170 Costs and expenses: Cost of goods sold, including occupancy costs 12.568.405 12,035,537 11,697,912 Selling, general and administrative expenses 3.594,405 3,471,573 3,422,383 Stock-based compensation expense (benefit) 29.821 4,806 (15,891) Goodwill amortization.... 21,007 Store closing and impairment charges 22.466 135,328 251.617 Interest expense.. 313,498 330,020 396,064 Interest rate swap contracts 278 41,894 Loss (gain) on debt modifications and retirements, net...... 35,315 (13,628) 221,054 Share of loss from equity investments 12.092 Loss (gain) on sale of assets and investments, net 2.023 (18,620) (42.536) 16 565.933 15,945,294 16.005.596 Income (loss) before income taxes 34,516 (154,016) (839,426) Income tax benefit... (48,795) (41,940) (11,745 Net income (loss) 83,311 $ (112,076) (827681) Computation of income (Loss) applicable to common stockholders: Net income (loss)... $ 83,311 $ (112,076) $ (827,681) ( Accretion of redeemable preferred stock (102) (102) (104) Preferred stock beneficial conversion (625) (6,406) Cumulative preferred stock dividends (24,098) (32,201) Net income (los) applicable to common stockholders. 5 58,486 $(144,379) $ (861,721) Basic and diluted income (loss) per share: Net income (loss) per share. S 0.11 $ (0.28) $ (1.82) (27.500) RITE AID CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) February 2x 2001 Year Waded March 1, March 2 $ 83,311 $(112,076) $ (827,681) 264.288 22.466 285,334 135328 278 (18,620) 4,806 349,840 251,617 41,894 (42,536) (15,891) 2.023 29,821 35,315 (13,628) 221,054 (94.486) (48,014) (61,209) (17.162) 11,162 227515 14803 40.555 24,018 (62,314) 6,899 305363 (69,004) 112,649 (14,635) (5,004) 14,040 16,343 Operating Activities: Net income (loss)... Adjustments to reconcile to net cash provided by operations: Depreciation and amortization Store closings and impairment loss Interest rate swap contracts... Loss (gain) on sale of assets and investments, net. Stock-based compensation expense (benefit) Loss (gain) on debt modifications and retirements net... Changes in operating assets and liabilities: Accounts receivable. Inventories Income taxes receivable/payable Accounts payable. Other assets and liabilities, net Net cash provided by operating activities Investing Activities Expenditures for property, plant and equipment... Intangible assets acquired. Proceeds from the sale of Advance PCS securities and notes. Proceeds from dispositions Net cash (used in) provided by investing activities... Financing activities: Net proceeds from the issuance of long-term debt.. Net change in bank credit facilities... Proceeds from the issuance of bonds Principal payments on long-term debt Change in zero balance cash account Net proceeds from the issuance of common stock Deferred financing costs paid... Net cash used in financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (250,668) (16,705) (104.507) (11,647) (175,183) (12,200) 25 223 43.940 484,214 45,200 (242,150) (72,214) 342,531 (222,500) 502,950 (264,324) (4.613) 3.541 (30.985) (15,931) (30,566) 365,321 $ 334.755 1,378,462 (5.962) 300,000 392,500 (477466) (2.277431) (12,936) (48.131) 279 530,589 (15.818) (83.098) (211.903) (107 109) 21.266 251,765 344,055 92,290 S 365 321 $ 344,055 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 Secured Debt: Senior secured credit facility due April 2008 $1,150,000 $ Senior secured credit facility due March 2005 1,372,500 12.5% senior secured notes due September 2006 (5142,025 and $152,025 face value less unamortized discount of $4.158 and 6,143). 137,867 145 882 8.125% senior secured notes due May 2010 (5360,000 face value less namortized discount of $4.168) 355,832 9.5% senior secured notes due February 2011 300,000 300,000 Other 5.125 6.540 1.948.824 1.824,922 Lease Financing Obligations 183,169 176,186 Unsecured Debt 6,05 dealer remarketable securities due October 2003 58,125 7.625% senior notes due April 2005... 198,000 198,000 6,0% fixed-rate senior notes due December 2005 38,047 75.895 4.75% convertible notes due December 2006 (5250,000 face value less unamortized discount of $4,000 and $5,500) 246,000 244,500 7.125 notes due January 2007 ... 210,074 335,000 11.25% senior notes due July 2008 150,000 150,000 6,125% fixed-rate senior notes due December 2008 150,000 150,000 9.25% senior notes due June 2013 ($150,000 face value less namortized discount of $2,221) 147,779 6.875% senior debentures due August 2013.. 184,773 200,000 7.75 notes due February 2027 295,000 300,000 6.875% fixed-rate senior notes due December 2028 140.000 150,000 1.759673 1861.520 Total debt. 3.891,666 3,862,628 Short-term debt and current maturities of convertible notes, long term debt and lease financing obligations (23.976) (103,715) Long-term debt and lease financing obligations, less current maturities. $3,867,690 $3,758,913 RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED VINANCIAL STATEMENTS For the Year Ended February 28, 2004 March 1, 2003 and March 2, 2003 (In thousands, except per here) 2004 Transaction New Calle Pally On May 28, 2000, the Company replaced its senior credit facility with a new or cured credit facility. The new facility consists of a $1,150,000 term loan anda $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 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 teman borrowings under the senior secured credit facility by 0 basis points Borrowings under the new facility currently bear interest either a LIBOR plus 300 for the term loan and 3.506 for the revolving credit facility if the Company chooses to make LIBOR borrowings, or at Citibank baserade ples 2005 for the term of the loan and 2.505 for the revolving credit facility. The Company is required to pay fees of 0.50% pe am the daily used amount of the revolving facility Amortization payments of $2,875 related to the term will begin May 31, 2004, and continue on a quarterly basis until February 28, 2008, with a final payment of 51.100.000 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 counts receivable and prescription files of the subsidiary guarantees Rite Aid Corporation is a holding company with direct operations and is dependent upee dividends, distributions and other payments from its subsidiaries to vice payments under the new senior secured credit facility Rite Aid Corporations direct obligatio nder the new senior secured credit facility are unsecured The new senior secured credit facility allows for the race 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 default of any terms of the facility, nor is in violation of any financial coves. The new med credit facility allows the Company to have outstanding at any time, up to $1,000,000 in secured dat in addition to the senior secured credit facility. At February 28, 2004, the remains additional permitted secured debt under the new senior credit facility is $197975. The Company has the hility to incur an unlimited amount of secured debt, if the terms of such cured indebido comply with certain terms set forth in the credit agreement and to the Company compliance with certain financial covenants of the Company red debt that does not meet the credit agreement restrictions, it reduces the amount of alle permitted secured debt. The newesen secured credit facility also allows for the repurchase of any debt with a maturity prior to April 2008, and for a limited amount of debt with a maturity et April 2008 based upon standing borrowing under the revolving credit facility and available at the time of the purchase The new or secured credit facility tais customary covenants, which placereticions on incurrence of debt, the payment of dividendi, mergers, in and sale and each transactions. The new or cured credit facility also requires us to meet ancial and limits capital expenditures For the twelve months ending February 26, 2005, the coveries to maintain maximum leverage ratio of 6.051. Subsequent to February 26, 2005, the ratio gradually decreases to 381 for the twelve months ending March 1, 2008. We also maintain an interest coverage ratio of 2.00:1 for the twelve months ending February 26, 2005. Setto Peruary 2005, the ratio gradually increases to 3.251 for the twelve months ending March 1, 2008. In addition, we must maintain a minimum fed charge ratio of 1.101 for the twelve months ending February 26 RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the Year Ended February 28, 2004, March 1, 2003 and March 2, 2002 (In thousands, except per share amounts) 2005. Subsequent to February 26, 2005, the ratio gradually increases to 1.2.1 for the twelve months ending March 1, 2008. Capital capenditures are limited to $386.ORS for the fiscal year ending February 26, 2005, with the allowable amount increasing in subsequent years. The Company was in compliance with the covenants of the new senior secured credit facility and its other debt instruments as of February 28, 2004. With continuing improvements in operating performance, the Company anticipates that it will remain in compliance with its debit covenants However, variations in operating performance and anticipated developments may adversely affect the Company's ability to remain in compliance with the applicable debt covenants The new senior secured credit facility provides for customary events of default, including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of defuit any event occurs that enables, or which with the giving of notice or the lape of time would enable the holder of the Company debt to accelerate the maturity of debt having principal amount in oss of $25.000 The Company's ability to borrow under the senior secured credit facility is based on a specified borrowing base consisting of eligible accounts receivable, inventory and prescription files. Ai February 28, 2004, the term loan was fully drawn and the Company had no outstanding dress on the revolving credit facility. At February 28, 2004, the Company had additional borrowing capacity of 5584,804, met of outstanding letters of credit of $115,196. As a result of the placement of the new senior cured credit facility, the Company recorded a lou on debt modification in fiscal 2004 of 543,197 (which included the write-off of previously deferred debt in costs of $35.120) On October 1, 2003, the Company pold, at maturity, it remaining outstanding balance on the 6.05 dealer remarketable curities In May 2013, the Company wed $150,000 regte principal amount of 9.25% ir notes due 2013. These notes are unsecured and effectively subordinate to the Company cured debit. The indenture governing the 925 wir notes contains tomary covenani provision that amount other things, include limitations on the Company's ability to pay dividendi, make investments or other restricted payment incur debt, gratis, elles and enter into se lease-back transaction In April 2001, the Company led 60,000 regate principal amount of 1256 senior secured notes de 2010. The notes de coured, unsubordinated obligations to the Aid Corporation and rank equally in right of payment with all other secured, subordinated indebtedness. The Company obligations under the notes are guaranteed, subject to certain limitations, by hidi that rantee the obligations under our new senior secured credit facility. The guarantees are cured, subject to the permitted liens, by shared second priority liens, with the holders of the Company 12.5% senior notes and the Company 95% no secured notes, granted by websidiary guarantons on all of their wets that secure the obligations under the new secured credit facility subject to certain exceptions. The indenture gerning the Company 8.1255 senior oured notes contains customary covenant provisions that among other things include limitations on our ability to pay dividends, make investments or other restricted payments, incur debit grant liens, sellasets and cnter into sales lease back transactions RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued For the Year Ended February 28, 2004, March 1, 2003 and March 2, 2002 (In thousands, exepper share amounts) During fiscal 2004 the Company repurchased the following securities Am Am $ (65) (4,314) Daht Represed 6.0% fixed wie senior notes de 2005 7.1255 notes due 2007 6.875% wnior debentures de 2013 7.75 notes due 2027... 6.875% fixed rate senior notes due 2028 12.5% senior secured notes due 2006 Total $ 37,848 124,926 15.227 5.000 10.000 10.000 S203.001 $36,853 120,216 13.144 4.219 7.975 11,275 $19.682 (715) (1.895) 1 $(7 82) 2003 Thus Senior Sucured Now The Company red $300,000 of 9.56 senior secured notes de 2011 in February 2018. The notes were unsecured, mubordinated obligations of the Company and rank qually in light of payment with all of the Company other secured subordinated indebtedness, The Companys obligations under the notes are guaranteed, subject to certain limitations by subsidiaries that parantee the obligations under the senior secured credit facility. The guarantees are secured, wobject to the permitted liom, by shared second priority liems with the holders of the 12:56 senior notes and the 1256 red notes, granted by subsidiary urators on all that secure the Company's obligations under the senior secured credit facility, subject to certain limitations Proceeds from these notes were used to redeem all the $149.500 of the Company's need (shareholdes) notes de 2006 as well as to find other debt repurchases and general corporate purposes Repurch of Debe The Company repurchased $25,425 of its 6.05 dealer marketable securities de 2003,5118,605 of its 6.05 Botes de 2005, and 515.000 ofis 71256 notes de 2007 during focal 2003. In addition to the debt repurchas noted above, the Company retired $150,500 of its 5.25convertible subordinated notes at maturity in September 2009, and made quarterly mandatory repayments on the senior secured credit facility term loan totaling $2750 during fiscal 2003. These al 2003 ansactions resulted in a pain of 511/08 on debt retirements and modifications 2002 Refinancing and Other Train On June 27, 2001, the Company completed a major financial restructuring that extended the maturity dues of the majority of its debt to 2005 or beyond, provided additional equity and converted portion of its debt to equity. These transactions are described below Senior Secured Credie ocity The Company entered into a new $1,900,000 senior secured credit facility. This facility was replaced by the new Senior secured credit facility discussed above. High Yield Not The Company wed $150,000 of 11.255 notes due July 2008 These notes are secured and are effectively subordinate to the secured debt of the Company Debe for Debe change. The Company exchanged $152.005 of its existing 10.5% senior secured notes due 2002 for an equal amount of 12.586 or notes due September 2006. In addition, holders of these stes received warrants to purchase 3.000 shares of Company common stock 6.00 per share. On June 29, 2001, the warrant holders exercised these warrants, on a cashless basis, and a result approximately 982 shares of common Mock were issued During the third quarter of local 2004, the Company recorded a non recurring income tax benet, driven by the approval by the Congressional Joint Committee on Taxation on the conclusions of the Internal Revenue Service emition of the Company's federal tax returns for the fiscal years 1986 through 2000 During the first quarter of fiscal 2004, the Company recorded a low on debt modification of 543,191 related to the placement of its new wnior secured credit facility During the fourth quarter of facal 2003, the Company incurred $78.277 in store closing and impairment changes. The Company also recorded a $2,700 million credit related to the elimination of several liabilities for former executives and a $19,502 million reduction of in LIFO reverted to a lower level of inflation than originally estimated During the second quarter of fiscal 2003, the Company incurred $58,223 in store closing and impairment charges. In the first quarter of fiscal 2009, the company incurred a charge of $20,000 to reserve for probable lo related to the U.S. Attorney's investigation of former management business practices. The Company who recorded a tax benetle of $4,011 related to a tax law change that increased the carryback period from two years to five for certain net operatings callstruments The carrying amounts and fair values of financial instruments at Pebruary 28, 2004 and March 1 2003 are listed as follows Carling Curly Fle Variable rate indebtedne. $1,150,000 $1,150,000 $1,372,500 $1,372,500 Fixed rate indebtedness $2,558,497 32.140,995 $2.313.99 2,027405 Cash, trade receivables and trade payables are carried at market value, which approximates their fair valos due to the short term maturity of these instruments The following methods and assumptions were used in estimating fair value disclosures for financial instruments: LIBOR-a urowings under The carrying amounts for LIBOR-based borrowings under the credit facilities, term loans and term notes approximate their fair values due to the short-term nature of the obligations and the variabile interest rates Lorem indeed The fair values of long-term indebtedness is estimated based on the quoted market prices of the financial instruments. If quoted market prices were not available, the Company estimated the fair value based on the quoted market price of a financial instrument with similar characteristics Is the difference material in any 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? h. Refer to Note 20, Financial Instruments. i. What is the fair-value of Rite Aid's fixed-rate debt at February 28, 2004? Why does it differ from the carrying amount? ii. What is the fair-value of the variable-rate debt at February 28, 2004? Why does it not differ from its carrying amount? iii. Why would financial statement users want to know the fair-value of Rite Aid's debt? With 3,382 stores in 28 states, Rite Aid is the third largest retail pharmacy in the U.S. The company has a first or second market position in approximately 60% of the markets where it operates. In fiscal 2004, Rite Aid pharmacists filled more than 200 million prescriptions, which accounted for 63.6% of total sales. In addition, Rite Aid stores sell a wide assortment of other merchandise including over-the-counter medications, health and beauty aids, household items, beverages, convenience foods, greeting cards, as well as photo processing. The company also offers 2,100 products under the Rite Aid private brand. a March 1. 23 RITE AID CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) Forary ASSETS Current assets: Cash and cash equivalents $ 334.755 Accounts receivable, net 670,004 Inventories, net 2,223,171 Prepaid expenses and other current assets 150,067 Total current assets 3,377,997 Property, plant and equipment, net 1,883,808 Goodwill 684,535 Other intangibles, net 176,672 Other assets. 123,667 Total assets $ 6.246,679 $365,321 575,518 2,195,030 108,018 3,243,887 1,868,579 684,535 199,768 136,746 $ 6,133,515 $ 23.976 758,290 701484 1.483,750 246,000 3.451,352 170,338 885975 6,237,415 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Short-term debt and current maturities of convertible notes long-term debt and lease financing obligations Accounts payable.... Accrued salaries, wages and other current liabilities Total current liabilities Convertible notes .. Long-term debt, less current maturities Lease financing obligations, less current maturities Other noncurrent liabilities Total liabilities Commitments and contingencies Redeemable preferred stock Stockholders' equity (deficit) Preferred stock, par value $1 per share; liquidation value $100 per share; 20,000 shares authorized; shares issued - 4,178 and 3,937 Common stock, par value $1 per share: 1,000,000 shares authorised; shares issued and outstanding $16,496 and 515,115 Additional paid.in capital Accumulated deficit Stock based and deferred compensation Accumulated other comprehensive loss Total stockholders' equity (deficit) Total liabilities and stockholders' equity (deficit). $ 103,715 755.284 707 999 1,566,998 244,500 3,345,365 169,048 900270 6,226,181 19,663 417,803 393,705 516,496 3,133,277 (4.035.433) 515,115 3,119,619 (4,118,119) 5,369 (28,018) (112,329) $ 6,133,515 (22,879) 9.264 $ 6.246,679 RITE AID CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended February 28 March 1. March 2 2001 Revenues..... $16,600,449 $15,791,278 $15.166,170 Costs and expenses: Cost of goods sold, including occupancy costs 12.568.405 12,035,537 11,697,912 Selling, general and administrative expenses 3.594,405 3,471,573 3,422,383 Stock-based compensation expense (benefit) 29.821 4,806 (15,891) Goodwill amortization.... 21,007 Store closing and impairment charges 22.466 135,328 251.617 Interest expense.. 313,498 330,020 396,064 Interest rate swap contracts 278 41,894 Loss (gain) on debt modifications and retirements, net...... 35,315 (13,628) 221,054 Share of loss from equity investments 12.092 Loss (gain) on sale of assets and investments, net 2.023 (18,620) (42.536) 16 565.933 15,945,294 16.005.596 Income (loss) before income taxes 34,516 (154,016) (839,426) Income tax benefit... (48,795) (41,940) (11,745 Net income (loss) 83,311 $ (112,076) (827681) Computation of income (Loss) applicable to common stockholders: Net income (loss)... $ 83,311 $ (112,076) $ (827,681) ( Accretion of redeemable preferred stock (102) (102) (104) Preferred stock beneficial conversion (625) (6,406) Cumulative preferred stock dividends (24,098) (32,201) Net income (los) applicable to common stockholders. 5 58,486 $(144,379) $ (861,721) Basic and diluted income (loss) per share: Net income (loss) per share. S 0.11 $ (0.28) $ (1.82) (27.500) RITE AID CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) February 2x 2001 Year Waded March 1, March 2 $ 83,311 $(112,076) $ (827,681) 264.288 22.466 285,334 135328 278 (18,620) 4,806 349,840 251,617 41,894 (42,536) (15,891) 2.023 29,821 35,315 (13,628) 221,054 (94.486) (48,014) (61,209) (17.162) 11,162 227515 14803 40.555 24,018 (62,314) 6,899 305363 (69,004) 112,649 (14,635) (5,004) 14,040 16,343 Operating Activities: Net income (loss)... Adjustments to reconcile to net cash provided by operations: Depreciation and amortization Store closings and impairment loss Interest rate swap contracts... Loss (gain) on sale of assets and investments, net. Stock-based compensation expense (benefit) Loss (gain) on debt modifications and retirements net... Changes in operating assets and liabilities: Accounts receivable. Inventories Income taxes receivable/payable Accounts payable. Other assets and liabilities, net Net cash provided by operating activities Investing Activities Expenditures for property, plant and equipment... Intangible assets acquired. Proceeds from the sale of Advance PCS securities and notes. Proceeds from dispositions Net cash (used in) provided by investing activities... Financing activities: Net proceeds from the issuance of long-term debt.. Net change in bank credit facilities... Proceeds from the issuance of bonds Principal payments on long-term debt Change in zero balance cash account Net proceeds from the issuance of common stock Deferred financing costs paid... Net cash used in financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (250,668) (16,705) (104.507) (11,647) (175,183) (12,200) 25 223 43.940 484,214 45,200 (242,150) (72,214) 342,531 (222,500) 502,950 (264,324) (4.613) 3.541 (30.985) (15,931) (30,566) 365,321 $ 334.755 1,378,462 (5.962) 300,000 392,500 (477466) (2.277431) (12,936) (48.131) 279 530,589 (15.818) (83.098) (211.903) (107 109) 21.266 251,765 344,055 92,290 S 365 321 $ 344,055 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 Secured Debt: Senior secured credit facility due April 2008 $1,150,000 $ Senior secured credit facility due March 2005 1,372,500 12.5% senior secured notes due September 2006 (5142,025 and $152,025 face value less unamortized discount of $4.158 and 6,143). 137,867 145 882 8.125% senior secured notes due May 2010 (5360,000 face value less namortized discount of $4.168) 355,832 9.5% senior secured notes due February 2011 300,000 300,000 Other 5.125 6.540 1.948.824 1.824,922 Lease Financing Obligations 183,169 176,186 Unsecured Debt 6,05 dealer remarketable securities due October 2003 58,125 7.625% senior notes due April 2005... 198,000 198,000 6,0% fixed-rate senior notes due December 2005 38,047 75.895 4.75% convertible notes due December 2006 (5250,000 face value less unamortized discount of $4,000 and $5,500) 246,000 244,500 7.125 notes due January 2007 ... 210,074 335,000 11.25% senior notes due July 2008 150,000 150,000 6,125% fixed-rate senior notes due December 2008 150,000 150,000 9.25% senior notes due June 2013 ($150,000 face value less namortized discount of $2,221) 147,779 6.875% senior debentures due August 2013.. 184,773 200,000 7.75 notes due February 2027 295,000 300,000 6.875% fixed-rate senior notes due December 2028 140.000 150,000 1.759673 1861.520 Total debt. 3.891,666 3,862,628 Short-term debt and current maturities of convertible notes, long term debt and lease financing obligations (23.976) (103,715) Long-term debt and lease financing obligations, less current maturities. $3,867,690 $3,758,913 RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED VINANCIAL STATEMENTS For the Year Ended February 28, 2004 March 1, 2003 and March 2, 2003 (In thousands, except per here) 2004 Transaction New Calle Pally On May 28, 2000, the Company replaced its senior credit facility with a new or cured credit facility. The new facility consists of a $1,150,000 term loan anda $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 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 teman borrowings under the senior secured credit facility by 0 basis points Borrowings under the new facility currently bear interest either a LIBOR plus 300 for the term loan and 3.506 for the revolving credit facility if the Company chooses to make LIBOR borrowings, or at Citibank baserade ples 2005 for the term of the loan and 2.505 for the revolving credit facility. The Company is required to pay fees of 0.50% pe am the daily used amount of the revolving facility Amortization payments of $2,875 related to the term will begin May 31, 2004, and continue on a quarterly basis until February 28, 2008, with a final payment of 51.100.000 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 counts receivable and prescription files of the subsidiary guarantees Rite Aid Corporation is a holding company with direct operations and is dependent upee dividends, distributions and other payments from its subsidiaries to vice payments under the new senior secured credit facility Rite Aid Corporations direct obligatio nder the new senior secured credit facility are unsecured The new senior secured credit facility allows for the race 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 default of any terms of the facility, nor is in violation of any financial coves. The new med credit facility allows the Company to have outstanding at any time, up to $1,000,000 in secured dat in addition to the senior secured credit facility. At February 28, 2004, the remains additional permitted secured debt under the new senior credit facility is $197975. The Company has the hility to incur an unlimited amount of secured debt, if the terms of such cured indebido comply with certain terms set forth in the credit agreement and to the Company compliance with certain financial covenants of the Company red debt that does not meet the credit agreement restrictions, it reduces the amount of alle permitted secured debt. The newesen secured credit facility also allows for the repurchase of any debt with a maturity prior to April 2008, and for a limited amount of debt with a maturity et April 2008 based upon standing borrowing under the revolving credit facility and available at the time of the purchase The new or secured credit facility tais customary covenants, which placereticions on incurrence of debt, the payment of dividendi, mergers, in and sale and each transactions. The new or cured credit facility also requires us to meet ancial and limits capital expenditures For the twelve months ending February 26, 2005, the coveries to maintain maximum leverage ratio of 6.051. Subsequent to February 26, 2005, the ratio gradually decreases to 381 for the twelve months ending March 1, 2008. We also maintain an interest coverage ratio of 2.00:1 for the twelve months ending February 26, 2005. Setto Peruary 2005, the ratio gradually increases to 3.251 for the twelve months ending March 1, 2008. In addition, we must maintain a minimum fed charge ratio of 1.101 for the twelve months ending February 26 RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the Year Ended February 28, 2004, March 1, 2003 and March 2, 2002 (In thousands, except per share amounts) 2005. Subsequent to February 26, 2005, the ratio gradually increases to 1.2.1 for the twelve months ending March 1, 2008. Capital capenditures are limited to $386.ORS for the fiscal year ending February 26, 2005, with the allowable amount increasing in subsequent years. The Company was in compliance with the covenants of the new senior secured credit facility and its other debt instruments as of February 28, 2004. With continuing improvements in operating performance, the Company anticipates that it will remain in compliance with its debit covenants However, variations in operating performance and anticipated developments may adversely affect the Company's ability to remain in compliance with the applicable debt covenants The new senior secured credit facility provides for customary events of default, including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of defuit any event occurs that enables, or which with the giving of notice or the lape of time would enable the holder of the Company debt to accelerate the maturity of debt having principal amount in oss of $25.000 The Company's ability to borrow under the senior secured credit facility is based on a specified borrowing base consisting of eligible accounts receivable, inventory and prescription files. Ai February 28, 2004, the term loan was fully drawn and the Company had no outstanding dress on the revolving credit facility. At February 28, 2004, the Company had additional borrowing capacity of 5584,804, met of outstanding letters of credit of $115,196. As a result of the placement of the new senior cured credit facility, the Company recorded a lou on debt modification in fiscal 2004 of 543,197 (which included the write-off of previously deferred debt in costs of $35.120) On October 1, 2003, the Company pold, at maturity, it remaining outstanding balance on the 6.05 dealer remarketable curities In May 2013, the Company wed $150,000 regte principal amount of 9.25% ir notes due 2013. These notes are unsecured and effectively subordinate to the Company cured debit. The indenture governing the 925 wir notes contains tomary covenani provision that amount other things, include limitations on the Company's ability to pay dividendi, make investments or other restricted payment incur debt, gratis, elles and enter into se lease-back transaction In April 2001, the Company led 60,000 regate principal amount of 1256 senior secured notes de 2010. The notes de coured, unsubordinated obligations to the Aid Corporation and rank equally in right of payment with all other secured, subordinated indebtedness. The Company obligations under the notes are guaranteed, subject to certain limitations, by hidi that rantee the obligations under our new senior secured credit facility. The guarantees are cured, subject to the permitted liens, by shared second priority liens, with the holders of the Company 12.5% senior notes and the Company 95% no secured notes, granted by websidiary guarantons on all of their wets that secure the obligations under the new secured credit facility subject to certain exceptions. The indenture gerning the Company 8.1255 senior oured notes contains customary covenant provisions that among other things include limitations on our ability to pay dividends, make investments or other restricted payments, incur debit grant liens, sellasets and cnter into sales lease back transactions RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued For the Year Ended February 28, 2004, March 1, 2003 and March 2, 2002 (In thousands, exepper share amounts) During fiscal 2004 the Company repurchased the following securities Am Am $ (65) (4,314) Daht Represed 6.0% fixed wie senior notes de 2005 7.1255 notes due 2007 6.875% wnior debentures de 2013 7.75 notes due 2027... 6.875% fixed rate senior notes due 2028 12.5% senior secured notes due 2006 Total $ 37,848 124,926 15.227 5.000 10.000 10.000 S203.001 $36,853 120,216 13.144 4.219 7.975 11,275 $19.682 (715) (1.895) 1 $(7 82) 2003 Thus Senior Sucured Now The Company red $300,000 of 9.56 senior secured notes de 2011 in February 2018. The notes were unsecured, mubordinated obligations of the Company and rank qually in light of payment with all of the Company other secured subordinated indebtedness, The Companys obligations under the notes are guaranteed, subject to certain limitations by subsidiaries that parantee the obligations under the senior secured credit facility. The guarantees are secured, wobject to the permitted liom, by shared second priority liems with the holders of the 12:56 senior notes and the 1256 red notes, granted by subsidiary urators on all that secure the Company's obligations under the senior secured credit facility, subject to certain limitations Proceeds from these notes were used to redeem all the $149.500 of the Company's need (shareholdes) notes de 2006 as well as to find other debt repurchases and general corporate purposes Repurch of Debe The Company repurchased $25,425 of its 6.05 dealer marketable securities de 2003,5118,605 of its 6.05 Botes de 2005, and 515.000 ofis 71256 notes de 2007 during focal 2003. In addition to the debt repurchas noted above, the Company retired $150,500 of its 5.25convertible subordinated notes at maturity in September 2009, and made quarterly mandatory repayments on the senior secured credit facility term loan totaling $2750 during fiscal 2003. These al 2003 ansactions resulted in a pain of 511/08 on debt retirements and modifications 2002 Refinancing and Other Train On June 27, 2001, the Company completed a major financial restructuring that extended the maturity dues of the majority of its debt to 2005 or beyond, provided additional equity and converted portion of its debt to equity. These transactions are described below Senior Secured Credie ocity The Company entered into a new $1,900,000 senior secured credit facility. This facility was replaced by the new Senior secured credit facility discussed above. High Yield Not The Company wed $150,000 of 11.255 notes due July 2008 These notes are secured and are effectively subordinate to the secured debt of the Company Debe for Debe change. The Company exchanged $152.005 of its existing 10.5% senior secured notes due 2002 for an equal amount of 12.586 or notes due September 2006. In addition, holders of these stes received warrants to purchase 3.000 shares of Company common stock 6.00 per share. On June 29, 2001, the warrant holders exercised these warrants, on a cashless basis, and a result approximately 982 shares of common Mock were issued During the third quarter of local 2004, the Company recorded a non recurring income tax benet, driven by the approval by the Congressional Joint Committee on Taxation on the conclusions of the Internal Revenue Service emition of the Company's federal tax returns for the fiscal years 1986 through 2000 During the first quarter of fiscal 2004, the Company recorded a low on debt modification of 543,191 related to the placement of its new wnior secured credit facility During the fourth quarter of facal 2003, the Company incurred $78.277 in store closing and impairment changes. The Company also recorded a $2,700 million credit related to the elimination of several liabilities for former executives and a $19,502 million reduction of in LIFO reverted to a lower level of inflation than originally estimated During the second quarter of fiscal 2003, the Company incurred $58,223 in store closing and impairment charges. In the first quarter of fiscal 2009, the company incurred a charge of $20,000 to reserve for probable lo related to the U.S. Attorney's investigation of former management business practices. The Company who recorded a tax benetle of $4,011 related to a tax law change that increased the carryback period from two years to five for certain net operatings callstruments The carrying amounts and fair values of financial instruments at Pebruary 28, 2004 and March 1 2003 are listed as follows Carling Curly Fle Variable rate indebtedne. $1,150,000 $1,150,000 $1,372,500 $1,372,500 Fixed rate indebtedness $2,558,497 32.140,995 $2.313.99 2,027405 Cash, trade receivables and trade payables are carried at market value, which approximates their fair valos due to the short term maturity of these instruments The following methods and assumptions were used in estimating fair value disclosures for financial instruments: LIBOR-a urowings under The carrying amounts for LIBOR-based borrowings under the credit facilities, term loans and term notes approximate their fair values due to the short-term nature of the obligations and the variabile interest rates Lorem indeed The fair values of long-term indebtedness is estimated based on the quoted market prices of the financial instruments. If quoted market prices were not available, the Company estimated the fair value based on the quoted market price of a financial instrument with similar characteristics