RITE-AID CASE (1).pdf
part i
Analysis i. You want to compare Rite Aid's leverage to other firms in the Retail Pharmaceutical industry. To assist you, the table below reports the industry averages for several common debt ratios. Calculate each of the ratios in the table for Rite Aid for the years ending February 28, 2004 and March 1, 2003. How does Rite Aid compare to the industry? What conclusion would you reach as a credit analyst? Ratio Definition Industry average Rite Aid FY2004 Rite Aid FY2003 Total liabilities / Total assets 51.91% Common-size debt Common-size interest expense Debt to equity 0.65% 1.59 Interest expense / Net sales Total liabilities/Total shareholders' equity Long-term debt / Total shareholders' equity Long-term deht due in one year / Total long-term debt (Pre-tax income + interest expense) / Interest expense Long-term debt to equity Proportion of long-term deht due in one year Times-interest-eamed interest coverage) 0.58 13.00% 9.98 191 RITE AID CORPORATION AND SUBSIDIARTES CONSOLIDATED BALANCE SHEETS (In thoda, except the moms) P ASSETS Current sets Cash and cash equivalents .. . .. Accounts receivable, net. Inventories, net .. Prepaid expenses and other currer Total current assets ... . Property, plant and equipment, net Goodwill..*..* . Other intangibles, net... Other assets. Total assets ... $ 334,755 670,004 2.223,171 150,067 3,377,997 1,883,808 684,535 176,672 123 667 $ 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 $ $ 23,976 758,290 701,484 1,483,750 246,000 3,451,352 170,338 885,975 6,237,415 103,715 755,284 707.999 1.566,998 244,500 3,345,365 169,048 900,270 6,226,181 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 31 per shares 1.000,000 shares authorized; shares issued and outstanding 516,496 and 515,115 Additional and in capital Accumulated deficit Stock based and deferred compensation Accumulated other comprehensive loss Total stockholders' equity (deficit) Total liabilities and stockholders' equity (deficit) 19,663 417.803 393,795 516,496 3.133.277 (4.035,433) 515115 3,119.6519 (4,118,119) 5,369 28,018) 12.129 $6,133 SIS 12,879) 9,264 $ 6,246,679 The accompanying notes are an integral part of these consolidated financial statements. $15,166,170 11,697,912 3,422,383 (15,891) 21,007 251.617 396,064 41.894 RITE AID CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended Februn Mard 1 Revenues. $16,600,449 $15,791,278 Costs and expenses Cost of goods sold, including occupancy costs 12.568.405 12,035,537 Selling general and administrative expenses .. 3,594,405 3,471,573 Stock-based compensation expense (benefit). 29.821 4,806 Goodwill amortization....... Store closing and impairment charges .... 22,466 135,328 Interest expense. 313,498 330.020 Interest rate swap contracts..... 278 Loss gain) on debt modifications and retiremen net. 35,315 (13,628) Share of loss from equity investments.. Loss (gain) on sale of assets and investments, net 2,023 (18,620) 16.565.983 15.945.294 Income (loss) before income taxes 34 516 (154,016) Income tax benefit..... . (48,795) (41.940) Net income (loss). $ 83,311 $ (112,076) Computation of income (loss) applicable to common stockholders Net income (los)... 83,311 $ (112,076) Accretion of redeemable preferred stock (102) Preferred stock beneficial conversion.. (625 Cumulative preferred stock dividends. (24.098) (322013) Net income (loss) applicable to common stockholders. 58,486 $ (144,379) Basic and diluted income foss) per share! Net Income loss) per share.... (0.28) 221,054 12,092 (42.536 16005,596 (839,426) (11.745) 3 (827,681) (102) S (827,681) (104) (6,406) 27.530 (861.721) S (1.82 The accompanying notes are an integral part of these consolidated financial statements. RITE-AID%20CASE%20(1)%20-%20Copy.pdf RITE AID CORPORATION AND SUBSIDIARTIES CONSOLIDATED STATEMENTS OF CASE FLOWS ( theconda) $ 83,311 (112,076) $ (827.681) 264.288 22,466 285,334 135,328 278 (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) 11,162 227-515 14,803 40,555 24,018 (62,314) 6.899 305 183 (69,004) 112,649 (14,635) (5,004) 14,040 16343 Operating Activities Net Income (los)...... Adjustments to reconcile to net cash provided by operations Depreciation and amortization. Store closings and impairment loss... Interest rate swap contracts ........... Loss (kin) 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 debe 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 43940 484 214 45,700 (242,150) (72,214 342,531 1,378,462 (222,500) 502.950 (264,324) (4 513) 11541 30 985) (5.962) 300,000 (477.466) (12,936) 279 (15.818) (211.903 21.266 344.055 $365,321 392,500 (2.277431) (48.131) 530,589 (83.098) (107,109) 251,765 92200 144 055 ( 366) The accompanying notes are an integral part of these ansolidated financial statements, E-AIDX 20CASE%20(1)%20-%20Copy.pdf RITE AD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the Year Ended February 28, 2004, March 1, 2003 and March 2, 2002 (I thousands, except per share amounts) 10. Indebtes and Credit Agreements Following is a summary of indebtedness and lease financing obligations at February 28, 2001 and March 1, 2003: March 1, 2003 $1,150,000 1,372,500 Secured Debt: Senker 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 namortized 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). 9.56 senior secured notes due February 2011. Other........ . 145,882 137,867 355,832 300,000 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 namortized 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 9.255 Senior notes due June 2013 ($150,000 face value less unamortized discount of $2,221)... 6.875% senior debentures due August 2013... 2.75 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 1.759673 200,000 300,000 150,000 1.861.520 3,362.628 Total debt. 3,891,666 Short-term deb and current maturities of convertible notes, long- term debt and lease financing obtieatione (23.976) (103,715) Long-term debt and lease financing obligations, maturities 53.867.6% $3,758.913 RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ward For the Year Ended February 22, 2014 March 1, 2003 March 2, 2002 (le thomand, escept per here ) a 2006 Transactions New Credit Facily On May 28, 2003, the Company replaced its alor secured credit facility with a new co ncured 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 o the closing of the new credit facility were, among other things, used to repay the outstanding t s under the old facility and to purchase the land and building 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 borrowing 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 ferm 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 2.506 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 lice 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 w nior secured credit facility. Rite Aid Corporation direct obligations under the new senior secured credit facility are unsecured. ditional term The new senior secured credit facility allows for the issuance of up to $150,000 in 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 set in default of any terms of the facility, nor is in violation of any financial covenants. The new or secured credit facility allows the Company to have outstanding at any time, up to $1 in secured de i ddition to the senior secured credit facility. At February 28, 2004 the remainin i tion permitted secured debt under the new senior credit facility is $197975. The Company has the ability to incur an unlimited amount of unsecured debt, if the terms of such secured indeeds up with certain terms set forth in the credit a m et and subject to the Company's compliance with cert financial covenants. If the Company issues unsecured debe that does not meet the che pement restrictions, it reduces the amount of a persed e d . The new seit secured credit facility also allows for the repurchase of any de t h maturity April 2008, and for a limited amount of debt with a maturity April 2008 had e standing borrowing under the revolving credit facility and be a t the time the punch The senior secured credit facility contains a place restrictions incurrence of debt, the payment of dividends and se lechac transactions. The sur secured credit facility also requ est f a i t copia expenditures for the chosende Fe t he tetom levere ratio of 60 Su t tes February 2005 the address for the weetheday March 2008 We n n interest of 105 for the months and 2 6 , TE-AID%20KCASE%20(1)%20-%20Copy.pdf RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) For the Year Ended February 23, 2004, March 1, 2003 and March 2, 2002 (in thousands, except per the amounts) 2005. Subsequent to February 26, 2005, the ratio gradually increases to 1.25:1 for the twelve months ending March 1, 2008. Capital expenditures are limited to $386,085 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 debt covenants. However, variations in operating performance and unanticipated 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 default if any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of the Company's debt to accelerate the maturity of debt having a principal amount in excess 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. At February 28, 2004, the term loan was fully drawn and the Company had no outstanding draws on the revolving credit facility. Al February 28, 2004, the Company had additional borrowing capacity of $584,804, net of outstanding letters of credit of $115,196. As a result of the placement of the new senior secured credit facility, the Company recorded a loss on debt modification in fiscal 2004 of $43,197 (which included the write-off of previously deferred debt issue costs of $35,120). On October 1, 2003, the Company paid, at maturity, its remaining outstanding balance on the 6.09 dealer remarketable securities In May 2003, the Company issued $150,000 aggregate principal amount of 9.25% senior notes due 2013. These notes are unsecured and effectively subordinate to the Company's secured debt. The indenture governing the 9.259 senior notes contains customary covenant provisions that amount other things, include limitations on the Company's ability to pay dividends, make investments or other restricted payments, incur debt. grant liens, sell assets and enter into sale lease back transactions In April 2003, the Company issued $360,000 aggregate principal amount of 8.125 senior secured totes due 2010. The notes are unsecured, unsubordinated obligations to Rite Aid Corporation and rank equally in right of payment with all other secured unsubordinated indebtedness. The Company's obligations under the notes are guaranteed, subject to certain limitations, by subsidiaries that guarantee the obligations under our new semio secured credit facility The guarantees are secured, subject to the permitted lens, by shared second priority lions, with the holders of the Company 12.5L Senior notes and the Company 95 SLOT secured notes, granted by subsidiary guarantors on all of their assets that secure the obligations under the new senior secured credit facility subject to certain exceptions. The indentare owering the Company 8.1356 Senior secured notes contains custom covenant press the song other things include limitations on ability to pay dividends m e investments or other restricted payments incur debrint lens, sellets and enter into sales lease back trans E AIDX20CASE%20(1)%20-%20Copy.pdf RITE AID CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Created) For the Year End February 26, 2004, March 1, 2013 March 2013 (he th e pershare ) During the 2004 the Company repurchased the following securities e 120216 60 free doe 2005 71356wdue 2007 6 debeatures de 2013 75 s u e 2007................ 12.55 w urde die 2006 10,000 $19.00 ) W 2000 Troms Senior Sew The Company issued $300.000 950 wurd e 2011 February 2001 The were secured bordinated obligat of the Company and rank equally in right of payment with all of the Company's other unsecured w ordt indebtedness The Company ti der the notes are guaranteedwette limitations, by daries that rantee the o ptionsder the senior secured credit facility. The are secured to the permitted tiens, by shared second priority lens with the holders of the 12:56 o es and the 8.125 or curednote, ted by w ay on all that were the Company obligat under the senior secured credit facility subject to certain limitations Proceeds from these t we ed to redeem all the $149.500 of the Company's secured (har e ) notes de 2006 as well as to fund other debt repurchases and general corporate purposes Repurchase of Dut The Company repurchased 535,435 of its 60 dealer markette securities due 2001, $118.605 of its 604 es de 2005, and $15.000 of 7.1255 notes de 2007 during film In addition to the debt repurchase noted above, the Company retired SiOSO of 525 convertible subordinated notes at maturity in September 2002, and made quarterly mandatory repayments the secured credit faculty termont 27. duni a 2001 The 2003 transaction resulted in a pain of $13.68 on de m and 2003 OT O June 200 the Company G eda of the tot o por T hese They y placed by the The n cial string that extended the ond powded only and covered are described below w ere det credit facilita d o auth ADEIRASELJA During the third quarter of fiscal 2004, the Company recorded a non-recurring in me tax benefit driven by the approval by the Congressional Joint Committee on Thuation on the conclusions of the Internal Revenue Service Examination of the Companys federal tax return for the fecal years 1996 through 2000 During the first quarter of fiscal 2004, the Company recorded a loss on debt modification of $43,197 related to the placement of its new senior secured credit facility. During the fourth quarter offical 2003, the Company incurred 578,277 in store closing and impairment charges. The Company also recorded a $27,700 million credit related to the climination of several liabilities for former executives and 519,502 million reduction of its LIFO reserve related 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 2003, the company incurred a charge of $20,000 to reserve for probable loss related to the U.S. Attorney'investigation of former management business practices. The Company also recorded a tax benefit of $44,011 related to a tax law change that increased the carryback period from two years to five for certain net operating losses. 20. Financial Instruments The carrying amounts and fair values of financial instruments at February 28, 2004 and March 1. 2003 are listed as follows: Carrying Variable rate indebtedness... Fixed rate indebtedness.. $1,150,000 $2,558,497 $1,150,000 $1,372,500 $1,372,500 $2.640.995 $2,313,942 $2,027,603 Cash, trade receivables and trade payables are carried at market value, which approximates their fair values 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-based borrowings under credir facilities: 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 variable interest rates. Long-term indebtedness 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
