more likely than not that a portion of these deferred tax assets will be utilized. Based upon the Company's expected future utilization, a portion of the valuation allowance at year end was reduced resulting in a non-cash tax benefit of $179,538 during fiscal 2005. An additional reduction in the valuation allowance of $5,293 was recorded as additional paid-in capital in fiscal 2005 to reflect the tax benefit associated with previously recorded stock based compensation. The Company continues to maintain a valuation allowance of $1,436,570 against remaining net deferred tax assets at fiscal year end 2005.
Following is a summary of indebtedness and lease financing obligations at February 26, 2005 and February 28, 2004:
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
2005 Transactions:
New Credit Facility
On September 22, 2004, the Company replaced its senior secured credit facility with a new senior secured credit facility. The new facility consists of a $450,000 term loan and a $950,000 revolving credit facility, which will mature in September 2009. The proceeds of the loans made on the closing date of the new credit facility along with available cash and proceeds from the receivables securitization agreements were used to repay outstanding amounts under the old credit facility. Borrowings under the new facility currently bear interest at LIBOR plus 1.75%, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus 0.75%. The Company is required to pay fees of 0.375% per annum on the daily unused amount of the revolving credit facility. Amortization payments of $1,125 related to the new term loan began on November 30, 2004 and will continue on a quarterly basis until May 31, 2009, with a final payment of $428,625 due August 31, 2009.
The new senior secured credit facility allows for the issuance of up to $700,000 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 it is not in default of any terms of the facility, nor is it in violation of any of its financial covenants. The new senior secured credit facility allows the Company to have outstanding, at any time, up to $1,800,000 in secured subordinated debt in addition to the senior secured credit facility (which amount is reduced by any additional unsecured debt that matures prior to December 31, 2009, as described below). The Company also has the ability to incur an unlimited amount of unsecured debt, if the debt does not mature or require scheduled payments of principal prior to December 31, 2009. The Company has the ability to incur additional unsecured debt of up to $200,000 with a scheduled maturity prior to December 31, 2009. The maximum amount of additional secured subordinated debt and unsecured debt with a maturity prior to December 31, 2009 that can be incurred is $1,800,000. At February 26, 2005, remaining additional permitted secured subordinated debt under the new senior secured credit facility is $798,000 in addition to what is available under the revolver; however, other debentures do not permit additional secured subordinated debt if the revolver is fully drawn. The new senior secured credit facility also allows for the repurchase of any debt with a maturity on or before September 22, 2009, and for the repurchase of debt with a maturity after September 22, 2009, if the Company maintains availability on the revolving credit facility of at least $300,000.
The new senior secured credit facility contains customary covenants, which place restrictions on the incurrence of debt beyond the restrictions described above, the payments of dividends, mergers and acquisitions and the granting of liens. The new senior secured credit facility also requires the Company to meet certain financial covenant ratios, but only if availability on the revolving credit facility is less than $300,000. If availability on the revolving credit facility had been less than $300,000, the covenants would have required the Company to maintain a maximum leverage ratio of 6.05:1 for the twelve months ended February 26, 2005. Subsequent to February 26, 2005, the ratio gradually decreases to 3.20:1 for the twelve months ending August 29, 2009. In addition, if the availability on the revolving credit facility had been less than $300,000, the Company would have been required to maintain a minimum fixed charge ratio of 1.05:1 for the twelve months ended February 26, 2005. Subsequent to February 26, 2005, the ratio gradually increases to 1.25:1 for the twelve months ending August 29, 2009.
The new senior secured credit facility provides for customary events of default, including nonpayments, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if the Company fails to make any required payment on debt having a principal amount in excess of $25,000 or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity of such debt.
66
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
The Company's ability to borrow under the new senior secured credit facility is based upon a specified borrowing base consisting of inventory and prescription files. At February 26, 2005, the term loan was fully drawn and the Company had no borrowings outstanding under the revolving credit facility. At February 26, 2005, the Company also had letters of credit outstanding against the revolving credit facility of $114,115, which gave the Company additional borrowing capacity of $835,885 at February 26, 2005.
As a result of the placement of the new senior secured credit facility and the receivable securitization agreements, the Company recorded a loss on debt modification of $20,020 for the year ended February 26, 2005.
Other Transactions
In January 2005, the Company issued $200,000 aggregate principal amount of 7½% senior secured notes due 2015. The notes are unsecured, unsubordinated obligations of Rite Aid Corporation, and rank equally in right of payment with all other unsecured, unsubordinated indebtedness. The Company's obligations under the notes are guaranteed, subject to certain limitations, by subsidiaries that guarantee the obligations under our new senior secured credit facility. The guarantees are secured, subject to the permitted liens, by shared second priority liens, with the holders of the Company's 12.5% senior notes, the 9.5% senior secured notes and the 8.125% senior secured notes, granted by the subsidiary guarantors on all of their assets that secure the obligations under the new senior secured credit facility, subject to certain exceptions. The indenture governing the Company's 7½% senior secured notes contains customary covenant provisions that, among other things, include limitations on our ability to pay dividends, make investments or other restricted payments, incur debt, grant liens, sell assets and enter into sale-leaseback transactions.
During the year ended February 26, 2005, the Company made open market purchases of the following securities (in thousands):
| | | | | | | | | | | | | | |
| Debt Repurchased | | Principal
Amount
Repurchased | | Amount
Paid | | Gain /
(loss) |
| 7.625% notes due 2005 | | $ | 27,500 | | | $ | 28,275 | | | $ | (795 | ) |
| 7.125% notes due 2007 | | | 26,000 | | | | 26,548 | | | | (605 | ) |
| 6.875% fixed rate senior notes due 2028 | | | 12,000 | | | | 9,660 | | | | 2,191 | |
| Total | | $ | 65,500 | | | $ | 64,483 | | | $ | 791 | |
|
The gain on the transactions listed above is recorded as part of the Company's loss on debt modifications for the year ended February 26, 2005.
2004 Transactions:
Credit Facility: On May 28, 2003, the Company replaced its senior secured credit facility with a new senior secured credit facility. The new facility consisted of a $1,150,000 term loan and a $700,000 revolving credit facility. 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.
As a result of the placement of the 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).
67
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
On October 1, 2003, the Company paid, at maturity, its remaining outstanding balance on the 6.0% 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 9.25% senior notes contains customary covenant provisions that, among 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-leaseback transactions.
In April 2003, the Company issued $360,000 aggregate principal amount of 8.125% senior secured notes due 2010. The notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all other unsecured, unsubordinated indebtedness. The Company's obligations under the notes are guaranteed, subject to certain limitations, by subsidiaries that guarantee the obligations under the Company's new senior secured credit facility. The guarantees are secured, subject to the permitted liens, by shared second priority liens, with the holders of the Company's 12.5% senior notes, the Company's 7½% senior secured notes and the Company's 9.5% senior 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 indenture governing the Company's 8.125% senior secured notes contains customary covenant provisions that, among 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-leaseback transactions.
During fiscal 2004 the Company repurchased the following securities:
| | | | | | | | | | | | | | |
| Debt Repurchased | | Principal
Amount
Repurchased | | Amount
Paid | | Gain/
(loss) |
| 6.0% fixed rate senior notes due 2005 | | $ | 37,848 | | | $ | 36,853 | | | $ | 865 | |
| 7.125% notes due 2007 | | | 124,926 | | | | 120,216 | | | | 4,314 | |
| 6.875% senior debentures due 2013 | | | 15,227 | | | | 13,144 | | | | 1,981 | |
| 7.7% notes due 2027 | | | 5,000 | | | | 4,219 | | | | 715 | |
| 6.875% fixed rate senior notes due 2028 | | | 10,000 | | | | 7,975 | | | | 1,895 | |
| 12.5% senior secured notes due 2006 | | | 10,000 | | | | 11,275 | | | | (1,888 | ) |
| Total | | $ | 203,001 | | | $ | 193,682 | | | $ | 7,882 | |
|
The gain on the transactions listed above is recorded as part of the loss on debt modifications in the accompanying statement of operations for fiscal 2004.
2003 Transactions:
Senior Secured Notes: The Company issued $300,000 of 9.5% senior secured notes due 2011 in February 2003. The notes were unsecured, unsubordinated obligations of the Company and rank equally in right of payment with all of the Company's other unsecured, unsubordinated, indebtedness. The Company's obligations under the notes are guaranteed, subject to certain limitation, by subsidiaries that guarantee the obligations under the senior secured credit facility. The guarantees of the notes are secured, subject to permitted liens, by shared second priority liens ranked by subsidiary guarantors on all assets that secure the Company's obligations under the senior secured credit facility. Proceeds from these notes were used to redeem all the $149,500 of the Company's senior secured (shareholders) notes due 2006 as well as to fund other debt repurchases and general corporate purposes.
Repurchase of Debt: The Company repurchased $25,425 of its 6.0% dealer remarketable securities due 2003, $118,605 of its 6.0% notes due 2005, and $15,000 of its 7.125% notes due 2007 during fiscal
68
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
2003. In addition to the debt repurchases noted above, the Company retired $150,500 of its 5.25% convertible subordinated notes at maturity in September 2002, and made quarterly mandatory repayments on the senior secured credit facility term loan totaling $27,500 during fiscal 2003. These fiscal 2003 transactions resulted in a gain of $13,628 on debt retirements and modifications.
Other:
The Company had outstanding letters of credit of $114,115 at February 26, 2005 and $115,196 at February 28, 2004.
The annual weighted average interest rate on the Company's indebtedness was 7.0%, 6.8% and 7.3% for fiscal 2005, 2004 and 2003, respectively.
The aggregate annual principal payments of long-term debt for the five succeeding fiscal years are as follows: 2006 – $214,554; 2007 – $575,942; 2008 – $5,370; 2009 – $304,591; 2010 – $429,870 and $1,612,726 in 2011 and thereafter. The Company is in compliance with restrictions and limitations included in the provisions of various loan and credit agreements.
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 due under the new senior credit facility. Rite Aid Corporation's direct obligations under the new senior credit facility are unsecured. The 12.5% senior secured notes due 2006, the 9.5% senior secured notes due 2011 the 8.125% senior secured notes due 2010 and the 7½% senior secured notes due 2015 are guaranteed by substantially all of the Company's wholly-owned subsidiaries and are secured on a second priority basis by the same collateral as the new senior secured credit facility.
The subsidiary guarantees related to the Company's credit facilities are full and unconditional and joint and several and there are no restrictions on the ability of the parent to obtain funds from its subsidiaries. Also, the parent company's assets and operations are not material and subsidiaries not guaranteeing the credit facilities are minor. Accordingly, condensed consolidating financial information for the parent and subsidiaries is not presented.
11. Leases
The Company leases most of its retail stores and certain distribution facilities under noncancellable operating and capital leases, most of which have initial lease terms ranging from five to 22 years. The Company also leases certain of its equipment and other assets under noncancellable operating leases with initial terms ranging from 3 to 10 years. In addition to minimum rental payments, certain store leases require additional payments based on sales volume, as well as reimbursements for taxes, maintenance and insurance. Most leases contain renewal options, certain of which involve rent increases. Total rental expense, net of sublease income of $7,499, $8,892 and $9,470, was $555,940, $553,956 and $566,409 in fiscal 2005, 2004 and 2003, respectively. These amounts include contingent rentals of $33,051, $32,143, and $29,679 in fiscal 2005, 2004 and 2003, respectively.
During fiscal 2005, the Company sold the land and buildings on 36 owned stores to several outside entities. Proceeds from these sales totaled $94,151. The Company entered into agreements to lease these stores back from the purchasers over minimum lease terms of 20 years. The leases are being accounted for as operating leases. Gains on these transactions of $14,500 have been deferred and are being recorded over the related minimum lease terms. Losses of $3,151, which relate to certain stores in these transactions, were recorded as losses on the sale of assets and investments for the year ended February 26, 2005.
69
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
The Company also leases certain facilities through sale-leaseback arrangements accounted for using the financing method. The net book values of assets under capital leases and sale-leasebacks accounted for under the financing method at February 26, 2005 and February 28, 2004 are summarized as follows:
| | | | | | | | | | |
| | | 2005 | | 2004 |
| Land | | $ | 5,108 | | | $ | 11,209 | |
| Buildings | | | 166,057 | | | | 170,154 | |
| Equipment | | | 11,353 | | | | 12,187 | |
| Accumulated depreciation | | | (60,322 | ) | | | (52,765 | ) |
| | | $ | 122,196 | | | $ | 140,785 | |
|
Following is a summary of lease finance obligations at February 26, 2005 and February 28, 2004:
| | | | | | | | | | |
| | | 2005 | | 2004 |
| Obligations under capital leases | | $ | 168,285 | | | $ | 183,169 | |
| Less current obligation | | | (9,262 | ) | | | (12,831 | ) |
| Long-term lease finance obligations | | $ | 159,023 | | | $ | 170,338 | |
|
Following are the minimum lease payments net of sublease income that will have to be made in each of the years indicated based on non-cancelable leases in effect as of February 26, 2005:
| | | | | | | | | | |
| Fiscal year | | Lease Financing
Obligations | | Operating
Leases |
| 2006 | | $ | 24,014 | | | $ | 551,800 | |
| 2007 | | | 23,505 | | | | 525,984 | |
| 2008 | | | 23,204 | | | | 491,176 | |
| 2009 | | | 21,739 | | | | 456,381 | |
| 2010 | | | 20,548 | | | | 429,522 | |
| Later years | | | 162,572 | | | | 3,258,714 | |
| Total minimum lease payments | | $ | 275,582 | | | $ | 5,713,577 | |
| Amount representing interest | | | (107,297 | ) | | | | |
| Present value of minimum lease payments | | $ | 168,285 | | | | | |
|
12. Redeemable Preferred Stock
In March 1999 and February 1999, Rite Aid Lease Management Company, a wholly owned subsidiary of the Company, issued 63,000 and 150,000 shares of Cumulative Preferred Stock, Class A, par value $100 per share, respectively. The Class A Cumulative Preferred Stock is mandatorily redeemable on April 1, 2019 at a redemption price of $100 per share plus accumulated and unpaid dividends. The Class A Cumulative Preferred Stock pays dividends quarterly at a rate of 7.0% per annum of the par value of $100 per share when, as and if declared by the Board of Directors of Rite Aid Lease Management Company in its sole discretion. The amount of dividends payable in respect of the Class A Cumulative Preferred Stock may be adjusted under certain events. The outstanding shares of the Class A Preferred Stock were recorded at their estimated fair value of $19,253 for the fiscal 2000 issuances, which equaled the sale price on the date of issuance. Because the fair value of the Class A Preferred Stock was less than the mandatory redemption amount at issuance, periodic accretions to stockholders' equity using the interest method are made so that the carrying amount
70
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
equals the redemption amount on the mandatory redemption date. Accretion was $102 in fiscal 2005, 2004 and 2003. Pursuant to the adoption of SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity", this instrument is recorded in Other Non-Current Liabilities as of February 26, 2005 and February 28, 2004.
13. Capital Stock
During the fourth quarter of fiscal 2005, the Company issued 2,500 shares of Series E Mandatory Convertible preferred stock ("Series E preferred stock") at an offering price of $49 per share. Dividends on the Series E preferred stock are $3.50 per share per year, and are due and payable on a quarterly basis beginning on May 2, 2005. The dividends are payable in either cash or common stock or a combination thereof at our election. The Series E preferred stock will automatically convert into common stock on February 1, 2008 at a rate that is dependent upon the adjusted applicable market value of the Company's common stock (as defined in the Series E preferred stock agreement). If the adjusted applicable market value of the Company's common stock is $5.36 a share or higher at the conversion date, then the Series E preferred stock is convertible at a rate of 9.3284 shares (or higher) of the Company's common stock for every share of Series E preferred stock outstanding. If the adjusted applicable market value of the Company's common stock is less than or equal to $3.57 per share at the conversion date, then the Series E preferred stock is convertible at a rate of 14.0056 shares of the Company's common stock for every share of Series E preferred stock outstanding. If the adjusted applicable market value of the Company's common stock is between $3.57 per share and $5.36 per share at the conversion date, then the Series E preferred stock is convertible into common stock at a rate that is between 14.0056 and 9.3284 shares. The Series E preferred stock is also convertible at the Company's option, but only if the adjusted applicable market value of the Company's common stock exceeds $8.04.
Proceeds of $120,000, net of estimated issuance cost of $2,500, from the offering of the Company's Series E preferred stock were used to redeem 1,040 shares of the Company's Series D preferred stock. In accordance with the provisions of the Series D stock agreement, the Company paid a premium of 105% of the liquidation preference of $100 per share. The total premium was $5,650 million and was recorded as a reduction to accumulated deficit in the year ended February 26, 2005. Subsequent to the issuance of the Series E preferred stock, the Company exchanged the remaining 3,483 shares of Series D preferred stock for equal amounts of Series F, G and H preferred stock. The Series F, G and H preferred stock have substantially the same terms as the Series D preferred stock, except for differences in dividend rates and redemption features. The Series F preferred stock pays dividends at 8% of liquidation preference and can be redeemed at the Company's election at any point after issuance. The Series G preferred stock pays dividends at 7% of liquidation preference and can be redeemed at the Company's election after January 2009. The Series H preferred stock pays dividends of 6% of liquidation preference and can be redeemed at the Company's election after January 2010. All dividends can be paid in either cash or in additional shares of preferred stock, at the election of the Company. Any redemptions are at 105% of the liquidations preference of $100 per share, plus accrued and unpaid dividends. The Series F, G, and H shares are all convertible into common stock of the Company, at the holder's option, at a conversion rate of $5.50 per share.
As of February 26, 2005, the authorized capital stock of the Company consists of 1,000,000 shares of common stock and 20,000 shares of preferred stock, each having a par value of $1.00 per share. Preferred stock is issued in series, subject to terms established by the Board of Directors.
14. Stock Option and Stock Award Plans
The Company reserved 22,000 shares of its common stock for the granting of stock options and other incentive awards to officers and key associates under the 1990 Omnibus Stock Incentive Plan
71
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
(the 1990 Plan), which was approved by the shareholders. Options may be granted, with or without stock appreciation rights ("SAR"), at prices that are not less than the fair market value of a share of common stock on the date of grant. The exercise of either a SAR or option automatically will cancel any related option or SAR. Under the 1990 Plan, the payment for SARs will be made in shares, cash or a combination of cash and shares at the discretion of the Compensation Committee.
In November 1999, the Company adopted the 1999 Stock Option Plan (the 1999 Plan), under which 10,000 shares of common stock are authorized for the granting of stock options at the discretion of the Board of Directors.
In December 2000, the Company adopted the 2000 Omnibus Equity Plan (the 2000 Plan) under which 22,000 shares of common stock are reserved for granting of restricted stock, stock options, phantom stock, stock bonus awards and other stock awards at the discretion of the Board of Directors.
In February 2001, the Company adopted the 2001 Stock Option Plan (the 2001 Plan) which was approved by the shareholders under which 20,000 shares of common stock are authorized for granting of stock options at the discretion of the Board of Directors.
In April 2004, the Board of Directors adopted the 2004 Omnibus Equity Plan, which was approved by the shareholders. Under the plan, 20,000 shares of common stock are authorized for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the direction of the Board of Directors.
All of the plans provide for the Board of Directors (or at its election, the Compensation Committee) to determine both when and in what manner options may be exercised; however, it may not be more than 10 years from the date of grant. All of the plans provide that stock options may be granted at prices that are not less than the fair market value of a share of common stock on the date of grant. The aggregate number of shares authorized for issuance for all plans is 71,017 as of February 26, 2005.
The Company has issued 9,122 options to certain senior executives pursuant to their individual employment contracts. These options were not issued out of the plans listed above, but are included in the option tables herein.
Stock Options
Following is a summary of stock option transactions for the fiscal years ended February 26, 2005, February 28, 2004 and March 1, 2003:
72
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
| | | | | | | | | | |
| | | Shares | | Weighted
Average
Price Per
Share |
| Balance, March 2, 2002 | | | 60,759 | | | $ | 6.18 | |
| Granted | | | 10,033 | | | | 2.36 | |
| Exercised | | | (101 | ) | | | 2.75 | |
| Cancelled | | | (6,015 | ) | | | 12.41 | |
| Balance, March 1, 2003 | | | 64,676 | | | | 5.01 | |
| Granted | | | 4,687 | | | | 4.65 | |
| Exercised | | | (1,291 | ) | | | 2.82 | |
| Cancelled | | | (6,077 | ) | | | 8.54 | |
| Balance, February 28, 2004 | | | 61,995 | | | | 4.72 | |
| Granted | | | 6,220 | | | | 5.22 | |
| Exercised | | | (1,105 | ) | | | 2.78 | |
| Cancelled | | | (2,179 | ) | | | 5.50 | |
| Balance, February 26, 2005 | | | 64,931 | | | $ | 4.78 | |
|
For various price ranges, weighted average characteristics of outstanding stock options at February 26, 2005 were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Outstanding Options | | Exercisable Options |
| Range of exercise prices | | Number
Outstanding
as of
February 26, 2005 | | Remaining
life (years) | | Weighted
Average
Price | | Shares | | Weighted
Average
Price |
| $1.98 to $2.26 | | | 8,223 | | | | 7.37 | | | $ | 2.17 | | | | 5,289 | | | $ | 2.19 | |
| $2.30 to $2.70 | | | 3,289 | | | | 7.60 | | | $ | 2.55 | | | | 1,570 | | | $ | 2.55 | |
| $2.71 to $2.75 | | | 14,186 | | | | 4.98 | | | $ | 2.75 | | | | 14,174 | | | $ | 2.75 | |
| $3.00 to $3.69 | | | 1,562 | | | | 7.31 | | | $ | 3.41 | | | | 878 | | | $ | 3.32 | |
| $3.73 to $4.05 | | | 18,763 | | | | 5.96 | | | $ | 4.05 | | | | 18,575 | | | $ | 4.05 | |
| $4.06 to $5.38 | | | 7,977 | | | | 7.36 | | | $ | 5.12 | | | | 3,545 | | | $ | 5.20 | |
| $5.40 to $8.56 | | | 8,058 | | | | 7.43 | | | $ | 6.93 | | | | 3,819 | | | $ | 7.79 | |
| $9.25 to $45.56 | | | 2,859 | | | | 2.66 | | | $ | 23.21 | | | | 2,859 | | | $ | 23.21 | |
| $48.56 to $48.56 | | | 11 | | | | 3.86 | | | $ | 48.56 | | | | 11 | | | $ | 48.56 | |
| $48.81 to $48.81 | | | 3 | | | | 3.86 | | | $ | 48.81 | | | | 3 | | | $ | 48.81 | |
| $1.98 to $48.81 | | | 64,931 | | | | 6.25 | | | $ | 4.78 | | | | 50,723 | | | $ | 4.89 | |
|
At February 28, 2004 and March 1, 2003, the amount of exercisable options and corresponding weighted average price per share was 46,928 and $4.98 and 38,725 and $5.70, respectively.
In November 2000, the Company reduced the exercise price of 16,684 options and issued after December 4, 1999 to $2.75 a share, which represents the fair market value of a share of common stock on the date of the repricing. In connection with the repricing, the Company recognized compensation expense for these options using variable plan accounting in fiscal 2003. Under variable plan accounting, the Company recognized compensation expense over the option vesting period. In addition, subsequent changes in the market value of the Company's common stock during the option period, or until exercised, generated changes in the compensation expense recognized on the repriced options. The Company recognized a reduction of expense of approximately $2,497 during fiscal 2003, related to the repriced options. As described in Note 1, the Company adopted SFAS No. 123
73
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
"Accounting for Stock – Based Compensation" effective March 2, 2003, and therefore recorded compensation expense in fiscal 2005 and 2004 for all options using the fair value method under the modified prospective approach.
Restricted Stock
The Company provides restricted stock grants to associates under plans approved by the stockholders. Shares awarded under the plans vest in installments up to three years and unvested shares are forfeited upon termination of employment. Additionally, vesting of certain of the shares awarded is conditional upon the Company meeting specified performance targets. The Company made the following grants during fiscal 2005, 2004 and 2003:
Following is a summary of restricted stock transactions for the fiscal years ended February 26, 2005, February 28, 2004, and March 1, 2003.
| | | | | | | | | | |
| | | Shares | | Weighted Average
Price Per Share |
| Balance, March 2, 2002 | | | 65 | | | | 8.56 | |
| Granted | | | — | | | | — | |
| Vested | | | (22 | ) | | | 8.56 | |
| Cancelled | | | — | | | | — | |
| Balance, March 1, 2003 | | | 43 | | | | 8.56 | |
| Granted | | | 185 | | | | 5.44 | |
| Vested | | | (22 | ) | | | 8.56 | |
| Cancelled | | | — | | | | — | |
| Balance, February 28, 2004 | | | 206 | | | | 5.77 | |
| Granted | | | 6,232 | | | | 4.65 | |
| Vested | | | (83 | ) | | | 6.25 | |
| Cancelled | | | (1,884 | ) | | | 5.37 | |
| Balance, February 26, 2005 | | | 4,471 | | | | 4.37 | |
|
Compensation expense related to all restricted stock grants is being recorded over a one to three year vesting period of these grants. For the years ended February 26, 2005, February 28, 2004 and March 1, 2003, the Company recognized expense of $2,311, $693 and $7,333, respectively, related to restricted share awards.
Stock Appreciation Units
The Company has issued stock appreciation units to various members of field management. The grant price for each unit is the closing price of the Company's common stock on the date of grant. The units vest four years from the date of grant. For each outstanding unit, the Company was obligated to pay out the difference between the grant price and the average market price of one share of the Company's common stock for the last twenty trading days before the vesting date. The payment could have been in cash or shares, at the discretion of the Company; however, the Company historically made cash payments. The Company's obligations under the stock appreciation units were remeasured at each balance sheet date and amortized to compensation expense over the vesting period.
At March 1, 2003, there were approximately 2,990 stock appreciation rights units outstanding, which were paid during fiscal 2004. As of February 26, 2005, the Company had no stock appreciation units left outstanding. Amounts expensed relating to the stock appreciation rights units for fiscal 2005, 2004 and 2003 were $0, $1,062 and $0, respectively.
74
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
15. Retirement Plans
Defined Contribution Plans
The Company and its subsidiaries sponsor several retirement plans that are primarily 401(k) defined contribution plans covering salaried associates and certain hourly associates. The Company does not contribute to all of the plans. Effective January 1, 2002, the Company significantly improved the Company's match for its principal 401(k) plan. During fiscal 2003, the Company committed to maintaining the current level of benefits in its principal 401(k) plan through December 31, 2006. Total expenses recognized for the above plans was $30,358 in 2005, $29,855 in 2004 and $29,878 in 2003.
Senior executive officers are entitled to supplemental retirement arrangements in accordance with their employment agreements, which vest monthly. The Company makes monthly investments to fund obligations. Other officers, who are not participating in the defined benefit nonqualified executive retirement plan, are included in a supplemental retirement plan, which is a defined contribution plan that is subject to a five year graduated vesting schedule. The Company makes annual investments to fund the obligations. The expenses recognized for these plans was $5,170 in 2005, $5,084 in 2004 and $2,064 in 2003.
Defined Benefit Plans
The Company and its subsidiaries also sponsor a qualified defined benefit pension plan that requires benefits to be paid to eligible associates based upon years of service and, in some cases, eligible compensation. Prior to February 28, 2002, the Company and its subsidiaries sponsored four separate qualified defined benefit pension plans. However, effective February 28, 2002, the Company merged these four plans into a single plan, the Rite Aid Pension Plan (the "Defined Benefit Pension Plan"). The Company merged these plans to take advantage of financial and administrative economies of scale; the merger had no effect on the benefits provided to eligible employees. The Company's funding policy for the Defined Benefit Pension Plan is to contribute the minimum amount required by the Employee Retirement Income Security Act of 1974. The Company made no discretionary contributions in fiscal 2005. In fiscal 2004, the Company made a discretionary contribution of $5,000.
The Company has established the nonqualified executive retirement plan for certain officers who, pursuant to their employment agreements, are not participating in the defined contribution suplemental retirement plan. Generally, eligible participants receive an annual benefit, payable monthly over fifteen years, equal to a percentage of the highest base salary and highest bonus paid or accrued for each participant within the ten fiscal years prior to the date of the event giving rise to payment of the benefit. This defined benefit plan is unfunded. In fiscal 2004 and 2003, the Company determined that the obligation for certain former executives that had either been indicted by the U.S. Attorney's office, or had pleaded guilty to certain criminal charges, were no longer binding. Therefore, the Company recorded a settlement benefit, due to the elimination of these obligations.
The Company uses a February 28 measurement date for the majority of its plans.
75
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
Net periodic pension expense for the defined benefit plans included the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Defined Benefit Pension Plans | | Nonqualified Executive
Retirement Plan |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| Service cost | | $ | 2,843 | | | $ | 2,614 | | | $ | 2,486 | | | $ | 71 | | | $ | 85 | | | $ | 158 | |
| Interest cost | | | 4,844 | | | | 4,615 | | | | 4,492 | | | | 1,241 | | | | 1,450 | | | | 2,641 | |
| Expected return on plan assets | | | (2,687 | ) | | | (1,481 | ) | | | (3,492 | ) | | | — | | | | — | | | | — | |
Amortization of unrecognized
net transition (asset)/obligation | | | — | | | | — | | | | (19 | ) | | | 87 | | | | 87 | | | | 87 | |
Amortization of unrecognized
prior service cost | | | 669 | | | | 452 | | | | 458 | | | | — | | | | — | | | | — | |
Amortization of unrecognized
net loss | | | 1,862 | | | | 3,287 | | | | 1,047 | | | | 387 | | | | 335 | | | | 394 | |
| Curtailment and settlement | | | — | | | | — | | | | — | | | | — | | | | (5,222 | ) | | | (10,376 | ) |
| Change due to plan amendment | | | — | | | | — | | | | — | | | | — | | | | | | | | 156 | |
| Net pension expense (credit) | | $ | 7,531 | | | $ | 9,487 | | | $ | 4,972 | | | $ | 1,786 | | | $ | (3,265 | ) | | $ | (6,940 | ) |
|
76
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
The table below sets forth a reconciliation from the beginning of the year for both the benefit obligation and plan assets of the Company's defined benefits plans, as well as the funded status and amounts recognized in the Company's balance sheet as of February 26, 2005 and February 28, 2004:
| | | | | | | | | | | | | | | | | | |
| | | Defined Benefit
Pension Plan | | Nonqualified Executive
Retirement Plan |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| Change in benefit obligations: | | | | | | | | | | | | | | | | |
| Benefit obligation at end of prior year | | $ | 81,907 | | | $ | 71,905 | | | $ | 21,724 | | | $ | 27,046 | |
| Service cost | | | 2,843 | | | | 2,614 | | | | 71 | | | | 85 | |
| Interest cost | | | 4,844 | | | | 4,615 | | | | 1,241 | | | | 1,450 | |
| Distributions | | | (6,382 | ) | | | (5,088 | ) | | | (2,074 | ) | | | (2,110 | ) |
| Settlements | | | — | | | | — | | | | — | | | | (5,222 | ) |
| Change due to change in assumptions | | | 2,909 | | | | 5,049 | | | | 227 | | | | 503 | |
| Change due to plan amendment | | | 2,088 | | | | 1,706 | | | | — | | | | — | |
| Actuarial (gain) or loss | | | 964 | | | | 1,106 | | | | 267 | | | | (28 | ) |
| Benefit obligation at end of year | | $ | 89,173 | | | $ | 81,907 | | | $ | 21,456 | | | $ | 21,724 | |
| Change in plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 59,985 | | | $ | 50,566 | | | $ | — | | | $ | — | |
| Employer contributions | | | 4,438 | | | | 5,000 | | | | 2,074 | | | | 2,110 | |
| Actual return on plan assets | | | 7,201 | | | | 11,315 | | | | — | | | | — | |
| Distributions (including expenses paid by the plan) | | | (7,974 | ) | | | (6,896 | ) | | | (2,074 | ) | | | (2,110 | ) |
| Fair value of plan assets at end of year | | $ | 63,650 | | | $ | 59,985 | | | $ | — | | | $ | — | |
| Funded status | | $ | (25,523 | ) | | $ | (21,922 | ) | | $ | (21,456 | ) | | $ | (21,724 | ) |
| Unrecognized net loss | | | 20,975 | | | | 21,887 | | | | 260 | | | | 1,705 | |
| Unrecognized prior service cost | | | 4,272 | | | | 2,852 | | | | — | | | | — | |
| Unrecognized net transition loss obligation | | | — | | | | — | | | | 1,813 | | | | 347 | |
| Prepaid or (accrued) pension cost recognized | | $ | (276 | ) | | $ | 2,817 | | | $ | (19,383 | ) | | $ | (19,672 | ) |
| Amounts recognized in consolidated balance sheets consisted of: | | | | | | | | | | | | | | | | |
| Prepaid pension cost | | $ | — | | | $ | 2,817 | | | $ | — | | | $ | — | |
| Accrued pension liability | | | (25,001 | ) | | | (24,288 | ) | | | (21,195 | ) | | | (21,462 | ) |
| Pension intangible asset | | | 4,272 | | | | 2,852 | | | | 260 | | | | 347 | |
| Accumulated other comprehensive income | | | 20,453 | | | | 21,436 | | | | 1,552 | | | | 1,443 | |
| Net amount recognized | | $ | (276 | ) | | $ | 2,817 | | | $ | (19,383 | ) | | $ | (19,672 | ) |
|
77
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
The increase in minimum liability included in other comprehensive income was as follows:
| | | | | | | | | | | | | | | | | | |
| | | Defined Benefit
Pension Plans | | Nonqualified Executive
Retirement Plan |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| Increase (decrease) in minimum liability included in other comprehensive income | | $ | (983 | ) | | $ | (5,163 | ) | | $ | 109 | | | $ | 24 | |
|
The accumulated benefit obligation for all defined benefit pension plans was $109,847 and $102,918 as of February 26, 2005 and February 28, 2004, respectively.
The significant actuarial assumptions used for all defined benefit pension plans to determine the benefit obligation as of February 26, 2005, February 28, 2004, and March 1, 2003 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Defined Benefit Pension Plan | | Nonqualified Executive
Retirement Plan |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| Discount rate | | | 5.75 | % | | | 6.00 | % | | | 6.50 | % | | | 5.75 | % | | | 6.00 | % | | | 6.50 | % |
Rate of increase in future
compensation levels | | | 4.50 | | | | 4.50 | | | | 4.50 | | | | 3.00 | | | | 3.00 | | | | 3.00 | |
|
Weighted average assumptions used to determine net cost for years ended February 26, 2005, February 28, 2004 and March 1, 2003 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Defined Benefit Pension Plan | | Nonqualified Executive
Retirement Plan |
| | | 2005 | | 2004 | | 2003 | | 2005 | | 2004 | | 2003 |
| Discount rate | | | 6.00 | % | | | 6.50 | % | | | 7.00 | % | | | 6.00 | % | | | 6.32 | % | | | 7.18 | % |
| Rate of increase in future compensation levels | | | 4.50 | | | | 4.50 | | | | 4.50 | | | | 3.00 | | | | 3.00 | | | | 3.00 | |
| Expected long-term rate of return on plan assets | | | 8.00 | | | | 8.00 | | | | 8.00 | | | | N/A | | | | N/A | | | | N/A | |
|
To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 8.00% long-term rate of return on assets assumption for fiscal 2005, 2004 and 2003.
The Company's pension plan asset allocations at February 26, 2005 and February 28, 2004 by asset category were as follows:
| | | | | | | | | | |
| | | February 26, 2005 | | February 28, 2004 |
| Equity securities | | | 67 | % | | | 68 | % |
| Debt securities | | | 33 | % | | | 32 | % |
| Total | | | 100 | % | | | 100 | % |
|
The investment objectives of the Defined Benefit Pension Plan, the only defined benefit plan with assets, are to:
| |
| • | Achieve a rate of return on investments that exceeds inflation by at least 4% over a full market cycle, consistent with actuarial assumptions; |
| |
| • | Diversify the portfolio among various asset classes with the goal of reducing volatility of return (risk), and among various issuers of securities to reduce principal risk; |
78
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
| |
| • | Maintain liquidity in the portfolio sufficient to meet plan obligations as they come due; and |
| |
| • | Control administrative and management costs. |
The asset allocation established for the pension investment program reflects the risk tolerance of the Company, as determined by:
| |
| • | The current and anticipated financial strength of the Company; |
| |
| • | the funded status of the plan; and |
| |
| • | plan liabilities. |
Exposure to both the equity and fixed income markets will be maintained, recognizing that historical results indicate that equities (primarily common stocks) have higher expected returns than fixed income investments. It is also recognized that the expected higher equity returns may be accompanied by higher volatility of equity asset values. The proportion of total assets allocated to equity investments will be a major determinant of the risk level of the investment program.
The following targets are to be applied to the allocation of plan assets.
| | | | | | |
| Category | | Target Allocation |
| U.S. equities | | | 50 | % |
| International equities | | | 15 | % |
| U.S. fixed income | | | 25 | % |
| High yield fixed income | | | 10 | % |
| Total | | | 100 | % |
|
The Company expects to contribute $4,670 to the Defined Benefit Pension Plan and $2,240 to the Nonqualified Executive Retirement Plan during fiscal 2006.
Following are the future benefit payments expected to be paid for the Defined Benefit Pension Plan and the Nonqualified Executive Retirement Plans during the years indicated:
| | | | | | | | | | |
| Fiscal Year | | Defined Benefit
Pension Plan | | Nonqualified
Executive
Retirement Plans |
| 2006 | | $ | 4,670 | | | $ | 2,240 | |
| 2007 | | | 4,812 | | | | 2,227 | |
| 2008 | | | 4,972 | | | | 2,220 | |
| 2009 | | | 5,140 | | | | 2,214 | |
| 2010 | | | 5,376 | | | | 1,985 | |
| 2011 – 2015 | | | 29,976 | | | | 8,875 | |
| Total | | $ | 54,946 | | | $ | 19,761 | |
|
Other Plans
The Company participates in various multi-employer union pension plans that are not sponsored by the Company. Total expenses recognized for the multi-employer plans were $11,750 in 2005, $9,682 in 2004 and $5,781 in 2003.
79
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
16. Commitments, Contingencies and Guarantees
Legal Proceedings
Federal investigations
There are currently pending federal governmental investigations, both civil and criminal, by the United States Attorney, involving various matters related to prior management's business practices. The Company is cooperating fully with the United States Attorney. The Company has begun settlement discussions with the United States Attorney for the Middle District of Pennsylvania. The United States Attorney has proposed that the government would not institute any criminal proceeding against the Company if it enters into a consent judgement providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on the Company's financial condition and results of operations. The Company has recorded an accrual of $20,000 in fiscal 2003 in connection with the resolution for these matters; however, the Company may incur charges in excess of that amount and is unable to estimate the possible range of loss. The Company will continue to evaluate its estimate and to the extent that additional information arises or its strategy changes, the Company will adjust the accrual accordingly.
These investigations and settlement discussions are ongoing and the Company cannot predict their outcomes. If the Company was convicted of any crime, certain licenses and government contracts such as Medicaid plan reimbursement agreements that are material to the Company's operations may be revoked, which would have a material adverse effect on the Company's results of operations, financial condition or cash flows. In addition, substantial penalties, damages or other monetary remedies assessed against the Company, including a settlement, could also have a material adverse effect on the Company's results of operations, financial condition or cash flows.
Other
In June 2000, the Company was sued by the Lemelson Foundation in a complaint which alleges that portions of the technology included in the Company's point-of-sale system infringe upon a patent held by the plaintiffs. The Lemelson Foundation has brought a similar suit against a significant number of major U.S. retailers. The amount of damages sought is unspecified and may be material. Management cannot predict the outcome of this litigation or whether it could result in a material adverse effect on the Company's results of operations, financial conditions or cash flows.
The Company is subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of the Company's management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on its financial conditions, results of operations or cash flows if decided adversely.
Guaranteed Lease Obligations
In connection with certain business dispositions, the Company continues to guarantee lease obligations for 109 former stores. The respective purchasers assume the Company's obligations and are, therefore, primarily liable for these obligations. Assuming that each respective purchaser became insolvent, an event which the Company believes to be highly unlikely, management estimates that it could settle these obligations for amounts substantially less than the aggregate obligation of $217,759 as of February 26, 2005. The obligations are for varying terms dependent upon the respective lease, the longest of which lasts through January 1, 2021.
80
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
In the opinion of management, the ultimate disposition of these guarantees will not have a material effect on the Company's results of operations, financial position or cash flows.
17. Supplementary Cash Flow Data
| | | | | | | | | | | | | | |
| | | Year Ended |
| | | February 26,
2005 | | February 28,
2004 | | March 1,
2003 |
| Cash paid for interest (net of capitalized amounts of $250, $133 and $301) | | $ | 274,964 | | | $ | 295,235 | | | $ | 287,707 | |
| Cash (refunds from) paid for income taxes | | $ | (24,557 | ) | | $ | 7,539 | | | $ | (68,668 | ) |
| Equipment financed under capital leases | | $ | 12,349 | | | $ | 17,828 | | | $ | 544 | |
| Equipment received for noncash consideration | | $ | 1,439 | | | $ | 24,781 | | | $ | — | |
| Preferred stock dividends paid in additional shares | | $ | 34,441 | | | $ | 24,098 | | | $ | 32,201 | |
| Exchange of preferred shares | | $ | 348,243 | | | $ | — | | | $ | — | |
|
18. Related Party Transactions
Included in other assets at February 26, 2005 and February 28, 2004 were receivables from related parties of $1,025, and $589.
On May 27, 2001, the Company amended the employment agreements of Robert Miller, currently Chairman of the Board, and Mary Sammons, currently President and Chief Executive Officer, to provide for the payment, subject to certain conditions, of bonuses representing the difference between the amounts called for under their severance agreements from a former employer and the amounts they actually receive. In January 2002, the Company made payments of $5,971 to Mr. Miller and $1,931 to Ms. Sammons for these bonuses. The bonuses were repayable to the extent of each executive's recovery of severance due from the former employer. The Company recorded the payment to Mr. Miller as recoverable, as a summary judgment had been filed by the courts in his favor. In December 2003, the case was resolved in Mr. Miller's favor, and the Company received a full reimbursement of the advanced funds from Mr. Miller. The Company expensed the payment to Ms. Sammons over the term of her employment contract. In February 2004, an arbitrator awarded Ms. Sammons $997. The Company received reimbursement of $696 from Ms. Sammons in March 2004, and received the remaining $301 by the end of fiscal 2005.
During fiscal 2005, the Company redeemed 1,040 shares of the Company's Series D preferred stock, which is held by Green Equity Investors, III, L.P. The remaining 3,483 shares of Series D preferred stock were exchanged for Series F, G, and H preferred stock, which are also held by Green Equity Investors, III, L.P. The Series F, G, and H preferred stock have substantially the same terms as the Series D preferred stock, except for differences in dividend rates and redemption features, as discussed further in Note 13.
During fiscal 2005, 2004 and 2003, the Company paid Leonard Green & Partners, L.P., fees of $875, $990 and $1,167 for financial advisory services, respectively. Jonathan D. Sokoloff and John G. Danhakl, two directors, are equity owners of Leonard Green & Partners, L.P. The Company has entered into a one year agreement with Leonard Green & Partners, L.P., effective January 1, 2005, as amended whereby the Company has agreed to pay Leonard Green & Partners, L.P., an annual fee of $300 for its consulting services. The consulting agreement also provides for the reimbursement of out-of-pocket expenses incurred by Leonard Green & Partners, L.P. This agreement is an extension of the Company's existing consulting agreement with Leonard Green & Partners, L.P.
81
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
During fiscal 2004 and 2003, the Company incurred $64 and $47, respectively, in legal fees payable to Janice Jackson, the sister of Mary F. Sammons, for representation of Ms. Sammons in a dispute concerning her employment agreement with a former employer.
19. Interim Financial Results (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2005 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
| Revenues | | $ | 4,244,357 | | | $ | 4,123,906 | | | $ | 4,107,336 | | | $ | 4,340,840 | | | $ | 16,816,439 | |
| Cost of goods sold, including occupancy costs | | | 3,191,456 | | | | 3,098,211 | | | | 3,098,555 | | | | 3,220,766 | | | | 12,608,988 | |
| Selling, general and administrative expenses | | | 912,845 | | | | 926,153 | | | | 909,016 | | | | 973,428 | | | | 3,721,442 | |
| Store closing and impairment (credits) charges | | | (4,595 | ) | | | 13,461 | | | | 2,397 | | | | 24,392 | | | | 35,655 | |
| Interest expense | | | 77,801 | | | | 76,519 | | | | 70,653 | | | | 69,898 | | | | 294,871 | |
| (Gain) loss on debt modifications and retirements, net | | | — | | | | (791 | ) | | | 20,216 | | | | (196 | ) | | | 19,229 | |
| (Gain) loss on sale of assets and investments, net | | | (1,918 | ) | | | (254 | ) | | | 849 | | | | 3,570 | | | | 2,247 | |
| | | | 4,175,589 | | | | 4,113,299 | | | | 4,101,686 | | | | 4,291,858 | | | | 16,682,432 | |
| Income before income taxes | | | 68,768 | | | | 10,607 | | | | 5,650 | | | | 48,982 | | | | 134,007 | |
| Income tax expense (benefit) | | | 5,049 | | | | 728 | | | | 5,362 | | | | (179,610 | ) | | | (168,471 | ) |
| Net income | | $ | 63,719 | | | $ | 9,879 | | | $ | 288 | | | $ | 228,592 | | | $ | 302,478 | |
| Basic income (loss) per share(1) | | $ | 0.11 | | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.41 | | | $ | 0.50 | |
| Diluted income (loss) per share(1) | | $ | 0.10 | | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.35 | | | $ | 0.47 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year 2004 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Year |
| Revenues | | $ | 4,046,168 | | | $ | 4,052,091 | | | $ | 4,105,844 | | | $ | 4,396,346 | | | $ | 16,600,449 | |
| Cost of goods sold, including occupancy costs | | | 3,068,214 | | | | 3,087,771 | | | | 3,105,333 | | | | 3,307,411 | | | | 12,568,729 | |
| Selling, general and administrative expenses | | | 899,568 | | | | 902,199 | | | | 893,117 | | | | 929,342 | | | | 3,624,226 | |
| Store closing and impairment charges (credits) | | | 6,246 | | | | (9,002 | ) | | | 3,055 | | | | 21,775 | | | | 22,074 | |
| Interest expense | | | 78,958 | | | | 79,409 | | | | 77,718 | | | | 77,413 | | | | 313,498 | |
| Loss on debt modifications and retirements, net | | | 33,427 | | | | 1,888 | | | | — | | | | — | | | | 35,315 | |
| Loss (gain) on sale of assets and investments, net | | | (1,504 | ) | | | 342 | | | | 879 | | | | 2,306 | | | | 2,023 | |
| | | | 4,084,909 | | | | 4,062,607 | | | | 4,080,102 | | | | 4,338,247 | | | | 16,565,865 | |
| Income (loss) before income taxes | | | (38,741 | ) | | | (10,516 | ) | | | 25,742 | | | | 58,099 | | | | 34,584 | |
| Income tax benefit | | | — | | | | — | | | | (47,518 | ) | | | (1,277 | ) | | | (48,795 | ) |
| Net income (loss) | | $ | (38,741 | ) | | $ | (10,516 | ) | | $ | 73,260 | | | $ | 59,376 | | | $ | 83,379 | |
| Basic income (loss) per share(1) | | $ | (0.08 | ) | | $ | (0.04 | ) | | $ | 0.13 | | | $ | 0.10 | | | $ | 0.11 | |
| Diluted income (loss) per share(1) | | $ | (0.08 | ) | | $ | (0.04 | ) | | $ | 0.12 | | | $ | 0.09 | | | $ | 0.11 | |
|
| |
| (1) | Income (loss) per share amounts for each quarter may not necessarily total to the yearly income (loss) per share due to the weighting of shares outstanding on a quarterly and year-to-date basis. |
82
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(In thousands, except per share amounts)
Certain reclassifications have been made to prior period amounts to conform to current period classifications.
During the fourth quarter of fiscal 2005, the Company recorded an income tax benefit of $179,500 from the reduction of a valuation allowance for deferred tax assets. The Company recorded a credit of $36,195 in costs of goods sold for an adjustment in LIFO pricing that was triggered by a decrease in pricing indices caused by generic drug deflation. The Company recorded $24,392 in store closing and impairment charges.
During the third quarter of fiscal 2005, the Company recorded a loss on debt modification of $20,216 related to the placement of its new senior secured credit facility and accounts receivable securitization agreement. The Company recorded $13,083 of non-recurring gains in selling, general and administrative expenses related to favorable litigation payments.
During the fourth quarter of fiscal 2004, the Company incurred $21,775 in store closing and impairment charges. The Company recorded $12,550 of non-recurring gains in selling, general and administrative expenses related to favorable litigation payments.
During the third quarter of fiscal 2004, the Company recorded a non-recurring income tax benefit, driven by the approval by the Congressional Joint Committee on Taxation on the conclusions of the Internal Revenue Service examination of the Company's federal tax returns for the fiscal 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.
20. Financial Instruments
The carrying amounts and fair values of financial instruments at February 26, 2005 and February 28, 2004 are listed as follows:
| | | | | | | | | | | | | | | | | | |
| | | 2005 | | 2004 |
| | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Variable rate indebtedness | | $ | 448,875 | | | $ | 448,875 | | | $ | 1,150,000 | | | $ | 1,150,000 | |
| Fixed rate indebtedness | | $ | 2,694,176 | | | $ | 2,665,951 | | | $ | 2,558,497 | | | $ | 2,640,995 | |
|
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 credit 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.
83
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended February 26, 2005, February 28, 2004 and March 1, 2003
(dollars in thousands)
| | | | | | | | | | | | | | | | | | |
Allowances deducted from accounts receivable
for estimated uncollectible amounts: | | Balance at
Beginning
of Period | | Additions
Charged to
Costs and
Expenses | | Deductions | | Balance at
End of
Period |
| Year ended February 26, 2005 | | $ | 35,054 | | | $ | 48,368 | | | $ | 32,610 | | | $ | 50,812 | |
| Year ended February 28, 2004 | | | 35,711 | | | | 29,437 | | | | 30,094 | | | | 35,054 | |
| Year ended March 1, 2003 | | | 31,039 | | | | 36,904 | | | | 32,232 | | | | 35,711 | |
|
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RITE AID CORPORATION
By: /s/ MARY F. SAMMONS
Mary F. Sammons
President and Chief Executive Officer |
| Dated: April 29, 2005 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their respective capacities on April 29, 2005.
| | | | | | | | | | |
| Signature | | Title | |
/s/ ROBERT G. MILLER
Robert G. Miller | | Chairman of the Board of Directors | | |
/s/ MARY F. SAMMONS
Mary F. Sammons | | Chief Executive Officer, President, and Director | | |
/s/ JOHN T. STANDLEY
John T. Standley | | Chief Financial Officer, Chief Administrative Officer, and Senior Executive Vice President | |
/s/ KEVIN TWOMEY
Kevin Twomey | | Chief Accounting Officer and Senior Vice President | |
/s/ JOHN G. DANHAKL
John G. Danhakl | | Director | |
/s/ MICHAEL A. FRIEDMAN, MD
Michael A. Friedman, MD | | Director | |
/s/ ALFRED M. GLEASON
Alfred M. Gleason | | Director | |
/s/ GEORGE G. GOLLEHER
George G. Golleher | | Director | |
/s/ COLIN V. REED
Colleen V. Reed | | Director | |
/s/ PHILIP G. SATRE
Philip G. Satre | | Director | |
/s/ STUART M. SLOAN
Stuart M. Sloan | | Director | |
/s/ JONATHAN D. SOKOLOFF
Jonathan D. Sokoloff | | Director | |
|
85
EXHIBIT INDEX
| | | | | | | | | | |
Exhibit
Numbers | | Description | | Incorporation By
Reference To |
| 3.1 | | Restated Certificate of Incorporation dated December 12, 1996 | | Exhibit 3(i) to Form 8-K, filed on November 2, 1999 |
| 3.2 | | Certificate of Amendment to the Restated Certificate of Incorporation dated February 22, 1999 | | Exhibit 3(ii) to Form 8-K, filed on November 2, 1999 |
| 3.3 | | Certificate of Amendment to the Restated Certificate of Incorporation dated June 27, 2001 | | Exhibit 3.4 to Registration Statement on Form S-1, File No. 333-64950, filed on July 12, 2001 |
| 3.4 | | 7.0% Series E Mandatory Convertible Preferred Stock Certificate of Designation dated January 25, 2005 | | Exhibit 3.1 to Form 8-K, filed on February 1, 2005 |
| 3.5 | | 8% Series F Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Designation dated January 28, 2005 | | Exhibit 3.1 to Form 8-K, filed on February 2, 2005 |
| 3.6 | | 7% Series G Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Designation dated January 28, 2005 | | Exhibit 3.2 to Form 8-K, filed on February 2, 2005 |
| 3.7 | | 6% Series H Cumulative Convertible Pay-in-Kind Preferred Stock Certificate of Designation dated January 28, 2005 | | Exhibit 3.3 to Form 8-K, filed on February 2, 2005 |
| 3.8 | | By-laws, as amended on November 8, 2000 | | Exhibit 3.1 to Form 8-K, filed on November 13, 2000 |
| 3.9 | | Amendment to By-laws, adopted January 30, 2002 | | Exhibit T3B.2 to Form T-3, filed on March 4, 2002 |
| 4.1 | | Indenture, dated August 1, 1993, by and between Rite Aid Corporation, as issuer, and Morgan Guaranty Trust Company of New York, as trustee, related to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013 | | Exhibit 4A to Registration Statement on Form S-3, File No. 033-63794, filed on June 3, 1993 |
| 4.2 | | Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation, as issuer, and U.S. Bank Trust National Association as successor to Morgan Guaranty Trust Company of New York, to the Indenture dated as of August 1, 1993, relating to the Company's 6.70% Notes due 2001, 7.125% Notes due 2007, 7.70% Notes due 2027, 7.625% Notes due 2005 and 6.875% Notes due 2013 | | Exhibit 4.1 to Form 8-K filed on February 7, 2000 |
| 4.3 | | Indenture, dated as of December 21, 1998, between Rite Aid Corporation, as issuer, and Harris Trust and Savings Bank, as trustee, related to the Company's 5.50% Notes due 2000, 6% Notes due 2005, 6.125% Notes due 2008 and 6.875% Notes due 2028 | | Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-74751, filed on March 19, 1999 |
|
86
| | | | | | | | | | |
Exhibit
Numbers | | Description | | Incorporation By
Reference To |
| 4.4 | | Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and Harris Trust and Savings Bank, to the Indenture dated December 21, 1998, between Rite Aid Corporation and Harris Trust and Savings Bank, related to the Company's 5.50% Notes due 2000, 6% Notes due 2005, 6.125% Notes due 2008 and 6.875% Notes due 2028 | | Exhibit 4.4 to Form 8-K, filed on February 7, 2000 |
| 4.5 | | Indenture, dated as of June 27, 2001, between Rite Aid Corporation, as issuer, and State Street Bank and Trust Company, as trustee, related to the Company's 12.50% Senior Secured Notes due 2006 | | Exhibit 4.7 to Registration Statement on Form S-1, File No. 333-64950, filed on July 12, 2001 |
| 4.6 | | Indenture, dated as of June 27, 2001 between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 11¼% Senior Notes due 2008 | | Exhibit 4.8 to Registration Statement on Form S-1, File No. 333-64950, filed on July 12, 2001 |
| 4.7 | | Indenture, dated as of November 19, 2001, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 4.75% Convertible Notes due December 1, 2006 | | Exhibit 4.3 to Form 10-Q, filed on January 15, 2002 |
| 4.8 | | Indenture, dated as of February 12, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 9½% Senior Secured Notes due 2011 | | Exhibit 4.1 to Form 8-K, filed on March 5, 2003 |
| 4.9 | | Indenture, dated as of April 22, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 8.125% Senior Secured Notes due 2010 | | Exhibit 4.11 to Form 10-K, filed on May 2, 2003 |
| 4.10 | | Indenture, dated as of May 20, 2003, between Rite Aid Corporation, as issuer, and BNY Midwest Trust Company, as trustee, related to the Company's 9.25% Senior Notes due 2013 | | Exhibit 4.12 to Form 10-Q, filed on July 3, 2003 |
| 4.11 | | Registration Rights Agreement, dated as of January 11, 2005, by and among the Company, certain subsidiaries of the Company, named therein, as guarantors, and Citigroup Global Markets Inc. and J.P. Morgan Securities, Inc., as initial purchasers, related to the Company's 7.5% Senior Secured Notes due January 15, 2015. | | Exhibit 99.1 to Form 8-K, filed on January 13, 2005 |
| 4.12 | | Indenture, dated as of January 11, 2005, among the Company, the subsidiary guarantors described therein, and BNY Midwest Trust Company, as trustee, related to the Company's 7.5% Senior Secured Notes due January 15, 2005 | | Exhibit 99.2 to Form 8-K, filed on January 13, 2005 |
| 4.13 | | Amended and Restated Registration Rights Agreement, dated as of January 31, 2005, by and among the Company and Green Equity Investors, III, L.P. | | Exhibit 1.1 to Form 8-K, filed on February 2, 2005 |
| 10.1 | | 1999 Stock Option Plan* | | Exhibit 10.1 to Form 10-K, filed on May 21, 2001 |
| 10.2 | | 2000 Omnibus Equity Plan* | | Included in Proxy Statement dated October 24, 2000 |
|
87
| | | | | | | | | | |
Exhibit
Numbers | | Description | | Incorporation By
Reference To |
| 10.3 | | 2001 Stock Option Plan* | | Exhibit 10.3 to Form 10-K, filed on May 21, 2001 |
| 10.4 | | 2004 Omnibus Equity Plan | | Filed herewith |
| 10.5 | | Employment Agreement by and between Rite Aid Corporation and Robert G. Miller dated as of December 5, 1999* | | Exhibit 10.1 to Form 8-K, filed on January 18, 2000 |
| 10.6 | | Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Robert G. Miller, dated as of May 7, 2001* | | Exhibit 10.9 to Form 10-K, filed on May 21, 2001 |
| 10.7 | | Employment Agreement by and between Rite Aid Corporation and Robert G. Miller, dated as of April 9, 2003* | | Exhibit 10.7 to Form 10-K, filed on May 2, 2003 |
| 10.8 | | Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Robert G. Miller, dated as of April 28, 2005 | | Filed herewith |
| 10.9 | | Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of December 5, 1999, by and between Rite Aid Corporation and Robert G. Miller* | | Exhibit 4.31 to Form 8-K, filed on January 18, 2000 |
| 10.10 | | Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of December 5, 1999* | | Exhibit 10.2 to Form 8-K, filed on January 18, 2000 |
| 10.11 | | Amendment No. 1 to Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of May 7, 2001* | | Exhibit 10.12 to Form 10-K, filed on May 21, 2001 |
| 10.12 | | Amendment No. 2 to Employment Agreement by and between Rite Aid Corporation and Mary F. Sammons, dated as of September 30, 2003* | | Exhibit 10.3 to Form 10-Q, Filed on october7, 2003 |
| 10.13 | | Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of December 5, 1999, by and between Rite Aid Corporation and Mary F. Sammons* | | Exhibit 4.32 to Form 8-K, filed on January 18, 2000 |
| 10.14 | | Employment Agreement by and between Rite Aid Corporation and John T. Standley, dated as of December 5, 1999* | | Exhibit 10.4 to Form 8-K, filed on January 18, 2000 |
| 10.15 | | Rite Aid Corporation Restricted Stock and Stock Option Award Agreement, made as of December 5, 1999, by and between Rite Aid Corporation and John T. Standley* | | Exhibit 4.34 to Form 8-K, filed on January 18, 2000 |
| 10.16 | | Employment Agreement by and between Rite Aid Corporation and James Mastrian, dated as of September 27, 1999* | | Exhibit 10.20 to Form 10-K, filed on May 21, 2001 |
| 10.17 | | Rite Aid Corporation Special Executive Retirement Plan* | | Exhibit 10.15 to Form 10-K filed on April 26, 2004 |
| 10.18 | | Employment Agreement by and between Rite Aid Corporation and Robert B. Sari, dated as of February 28, 2001* | | Exhibit 10.49 to Form 10-K filed on May 21, 2001 |
| 10.19 | | Employment Agreement by and between Rite Aid Corporation and Kevin Twomey, dated as of September 30, 2003* | | Exhibit 10.4 to Form10-Q, filed on October 7, 2003 |
| 11 | | Statement regarding computation of earnings per share (see note 4 to the consolidated financial statements) | | Filed herewith |
|
88
| | | | | | | | | | |
Exhibit
Numbers | | Description | | Incorporation By
Reference To |
| 12 | | Statement regarding computation of ratio of earnings to fixed charges | | Filed herewith |
| 14 | | Code of Ethics for the Chief Executive Officers and Senior Financial Officers | | Exhibit 14 to Form 10-K, filed on April 26, 2004 |
| 21 | | Subsidiaries of the Registrant | | Filed herewith |
| 23 | | Consent of Independent Registered Public Accounting Firm | | Filed herewith |
| 31.1 | | Certification of CEO pursuant to Rule 13a-14 (a) /15d-14(a) under the Securities Exchange Act of 1934 | | Filed herewith |
| 31.2 | | Certification of CFO pursuant Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 | | Filed herewith |
| 32 | | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
|
| |
| * | Constitutes a compensatory plan or arrangement required to be filed with this Form 10-K. |
89
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR