Picking up the pieces after a tumultuous week that saw the resignation of its chairman and the disclosure that earnings had been inflated by half a billion dollars, Rite Aid Corp. said yesterday that it has worked out a deal that gives it an extra year to pay off $1.3 billion that otherwise would have been due tomorrow.
It was a piece of good news in a year marred by disappointing earnings and damaging revelations about company dealings.
The No. 3 drugstore chain's chairman and chief executive, Martin L. Grass, resigned last week as the company announced that it had misstated earnings by at least $500 million for the past three years, half of its profit for the period.
Under the agreement announced yesterday, a $1.3 billion revolving credit line was extended to Nov. 1, 2000, and a $300 million loan from Morgan Guaranty that had been due on demand was extended for a year.
Rite Aid has an additional $1.1 billion in credit lines, the terms of which were recently amended. Details about those amendments will not be available until next week, when the company files documents with the Securities and Exchange Commission, said Rite Aid spokeswoman Sarah Datz.
Shares of the Camp Hill, Pa.-based company, which had reached nearly $51 in January, closed up 87.5 cents yesterday at $9.25.
"I think everyone heaves a sigh of relief to know that this [restructuring] has been completed," said Sally H. Wallick, an analyst at Legg Mason in Baltimore. "They've got a little over a year, which gives them a good bit of breathing room to further explore selling some assets and strengthening their balance sheet, and they have the issue of leadership to deal with."
Rite Aid also received an infusion from Leonard Green & Partners, which bought $300 million of the company's preferred stock with an 8 percent dividend payable in cash or additional shares. It is convertible to common stock at $11 a share.
Green was one of the owners of Thrifty PayLess Holdings Inc., an Oregon-based drugstore chain purchased by Rite Aid in 1996 for $1.55 billion in stock and $890 million in debt. Bringing Thrifty into the Rite Aid chain is seen by analysts as one of Grass' key missteps because Thrifty's stores were too large to properly manage and because Rite Aid had no customer base in the West.
After the deal closed, Green served on Rite Aid's board from January 1997 through June 1999. The deal announced yesterday puts Green on the board again. His business partner, Jonathan Sokoloff, also gets a seat.
They will join a family-run company whose history is strewn with battles over power and wealth. In 1995, Grass was handed the position of chief executive from his father, Alex Grass, who founded the company 37 years ago. Shortly thereafter, while Alex Grass was on a plane home from Israel, his son orchestrated a boardroom coup, taking the title of chairman from his father.
The two rarely speak, and the senior Grass, who is still on the board, said in an interview recently that the events of the past few years have "saddened me quite a bit."
Another deal put together by Martin Grass last year was Rite Aid's purchase of health benefits manager PCS Health Systems for $1.5 billion. Rite Aid had planned to pay for PCS largely through selling its stock, but a series of damaging revelations caused the stock price to drop so low that the offering wouldn't have made sense. Rite Aid was forced to pay for PCS, which it is now trying to sell, through debt.
Rite Aid also was damaged this year by a Wall Street Journal report that detailed the company's leasing of land owned by Rite Aid's principals or close associates. The lease relationships had not been disclosed to investors. An internal investigation, the result of another Journal story, found that Rite Aid was doing business with suppliers that were at least partly owned by Rite Aid officials or their family members.
Company officials declined to discuss details of the debt restructuring yesterday, but they did say that the new terms forbid Rite Aid from paying cash dividends and from redeeming or purchasing its capital stock. Rite Aid has paid a dividend of 11.5 cents for each of the past four quarters, a total of about $30 million every three months. The company had 259 million shares outstanding as of June.
Wallick, the Legg Mason analyst, said discontinuing the dividend won't make or break Rite Aid but added, "At this point when there is a lot of focus on the company's financial stability, I think every little bit helps."