UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
March 18, 2015 (March 18, 2015)
Rite Aid Corporation
(Exact name of registrant as specified in its charter)
Delaware |
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1-5742 |
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23-1614034 |
(State or Other Jurisdiction
of Incorporation) |
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(Commission File Number) |
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(IRS Employer
Identification Number) |
30 Hunter Lane, Camp Hill, Pennsylvania 17011
(Address of principal executive offices, including zip code)
(717) 761-2633
(Registrants telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 7.01 Regulation FD Disclosure.
Furnished as Exhibit 99.3 hereto is certain information concerning the condensed combined unaudited pro forma financial data of the Company. Furnished as Exhibit 99.4 is certain additional information concerning the audited historical financial results of EnvisionRx. Furnished as Exhibit 99.5 hereto is certain summary historical and unaudited pro forma condensed combined financial and other data of the Company and summary historical financial and other data of EnvisionRx.
The information in Item 7.01 of this Current Report, including Exhibits 99.3, 99.4 and 99.5, is being furnished and shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of that section. The information in Item 7.01 of this Current Report, including Exhibits 99.3,
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99.4 and 99.5, shall not be incorporated by reference into any registration statement or other document filed pursuant to the Securities Act of 1933, as amended, or the Exchange Act.
Item 8.01. Other Events.
On March 18, 2015, Rite Aid Corporation (the Company) announced its intention to offer (the Notes Offering) $1.8 billion aggregate principal amount of senior notes due 2023 (the Notes). The Notes will be unsecured, unsubordinated obligations of the Company and will be guaranteed by substantially all of the Companys subsidiaries.
The Company intends to use the net proceeds from the Notes Offering, together with available cash and borrowings under its Senior Credit Facility, to fund the cash portion of the consideration and related fees and expenses payable by the Company to equity holders of Envision Pharmaceutical Services, LLC (EnvisionRx) upon the closing of the Companys previously announced acquisition of EnvisionRx. In the event the acquisition is not completed, the Company has the ability to use the net proceeds to refinance certain of its existing indebtedness or to redeem the notes.
As previously announced, the Company expects to close the Acquisition by September, 2015, subject to regulatory approvals and other customary closing conditions.
A copy of the press release announcing the commencement of the Notes Offering is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
The Company is also filing certain risk factors contained in its offering memorandum related to the offering for the purpose of updating the risk factor disclosure contained in its public filings, including the risk factors discussed under the caption Risk Factors in its Annual Report on Form 10-K for the fiscal year ended March 1, 2014, which was filed with the Securities and Exchange Commission on April 23, 2014. The risk factors are attached hereto as Exhibit 99.2 and incorporated herein by reference.
The Notes and the related subsidiary guarantees have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
This report does not constitute an offer to sell, or a solicitation of an offer to buy, any security. No offer, solicitation, or sale will be made in any jurisdiction in which such an offer, solicitation, or sale would be unlawful.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
99.1 Press Release announcing the commencement of the Notes Offering, dated March 18, 2015.
99.2 Certain Risk Factors of the Company.
99.3 Unaudited Pro Forma Condensed Combined Financial Data of Rite Aid Corporation.
99.4 Audited Historical and Financial Results of EnvisionRx and Additional Unaudited Financial Information of EnvisionRx.
99.5 Summary Historical and Unaudited Pro Forma Condensed Combined Financial and Other Data of Rite Aid Corporation and Summary Historical Financial and Other Data of EnvisionRx.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized.
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RITE AID CORPORATION |
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Dated: March 18, 2015 |
By: |
/s/ Marc A. Strassler |
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Name: |
Marc A. Strassler |
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Title: |
Executive Vice President, |
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General Counsel and Secretary |
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EXHIBIT INDEX
Exhibit No. |
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Description |
99.1 |
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Press Release announcing the commencement of the Notes Offering, dated March 18, 2015. |
99.2 |
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Certain Risk Factors of the Company. |
99.3 |
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Unaudited Pro Forma Condensed Combined Financial Data of Rite Aid Corporation. |
99.4 |
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Audited Historical and Financial Results of EnvisionRx and Additional Unaudited Financial Information of EnvisionRx. |
99.5 |
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Summary Historical and Unaudited Pro Forma Condensed Combined Financial and Other Data of Rite Aid Corporation and Summary Historical Financial and Other Data of EnvisionRx. |
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Exhibit 99.1
Press Release
For Further Information Contact:
INVESTORS
Matt Schroeder
(717) 214-8867
or investor@riteaid.com |
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MEDIA
Susan Henderson
(717) 730-7766 |
RITE AID ANNOUNCES OFFERING OF SENIOR UNSECURED NOTES IN CONNECTION WITH ITS ACQUISITION OF ENVISIONRX
CAMP HILL, Pa. (March 18, 2015) Rite Aid Corporation (NYSE: RAD) announced today its intention to offer $1.8 billion aggregate principal amount of senior unsecured notes due 2023 (the Notes). Rite Aid intends to use the net proceeds of the offering, together with other available cash, to fund the cash portion of the consideration and related fees and expenses payable by Rite Aid to equity holders of Envision Pharmaceutical Services (EnvisionRx) upon closing of Rite Aids previously announced acquisition of EnvisionRx. In the event the acquisition is not completed, Rite Aid has the ability use the net proceeds to refinance certain of its existing indebtedness or to redeem the Notes.
The Notes will be unsecured, unsubordinated obligations of Rite Aid and will be fully and unconditionally guaranteed, jointly and severally, on an unsubordinated basis, by substantially all of Rite Aids subsidiaries, and, upon completion of the acquisition, by EnvisionRx and certain of its domestic subsidiaries.
The acquisition is expected to close by September 2015, subject to regulatory approvals and other customary closing conditions.
The offering of the Notes is subject to market and other customary closing conditions, and is not conditioned upon the completion of the acquisition. There can be no assurance that the acquisition will be completed on the terms described herein or at all.
The Notes and the related subsidiary guarantees will be offered in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and outside the United States pursuant to Regulation S under the Securities Act. The Notes and the related subsidiary guarantees have not been registered under the Securities Act and may not be offered or sold in the United States without registration or an applicable exemption from the registration requirements.
This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of Notes in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.
Rite Aid is one of the nations leading drugstore chains with 4,570 stores in 31 states and the District of Columbia and fiscal 2014 annual revenues of $25.5 billion.
FORWARD-LOOKING STATEMENTS
Statements, including those regarding the impact of the transaction contemplated hereby on Rite Aids future financial performance, in this release that are not historical are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, continue, could, estimate, expect, intend, may, plan, predict, project, should, and will and variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, Rite Aids ability to complete the acquisition of EnvisionRx and realize the benefits of the transaction, EnvisionRxs ability to meet its projected 2015 revenue and EBITDA targets, our high level of indebtedness and our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our debt agreements, general economic, market, industry and competitive conditions, the risk that EnvisionRxs business will not be successfully integrated with Rite Aids business, costs associated with the merger, delays and other matters arising in connection with the parties efforts to comply with and satisfy applicable regulatory approvals and closing conditions relating to the transaction, risks associated with the financing of the transaction, other events that could adversely impact the completion of the transaction, our ability to improve the operating performance of our stores in accordance with our long term strategy, the impact of private and public third-party payers continued reduction in prescription drug reimbursements and efforts to encourage mail order, our ability to manage expenses and our investments in working capital, outcomes of legal and regulatory matters and changes in legislation or regulations, including healthcare reform. These and other risks, assumptions and uncertainties are described in Item 1A (Risk Factors) of our most recent Annual Report on Form 10-K and in other documents that we file or furnish with the Securities and Exchange Commission, which you are encouraged to read. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Rite Aid expressly disclaims any current intention to update publicly any forward-looking statement after the distribution of this release, whether as a result of new information, future events, changes in assumptions or otherwise.
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Exhibit 99.2
Risk Factors
Risks Related to our Financial Condition
Current economic conditions may adversely affect our industry, business and results of operations.
The United States economy is continuing to feel the impact of the economic downturn that began in late 2007, and the future economic environment may not fully recover to levels prior to the downturn. This economic uncertainty has and could further lead to reduced consumer spending. If consumer spending decreases or does not grow, we may not be able to sustain the improvement in our same store sales. In addition, reduced or flat consumer spending may drive us and our competitors to offer additional products at promotional prices, which would have a negative impact on our gross profit. We operate a number of stores in areas that are experiencing a lower or slower recovery than the economy on a national level. A continued softening or slow recovery in consumer spending may adversely affect our industry, business and results of operations. Reduced revenues as a result of decreased consumer spending may also reduce our liquidity and otherwise hinder our ability to implement our long term strategy.
We are highly leveraged. Our substantial indebtedness could limit cash flow available for our operations and could adversely affect our ability to service debt or obtain additional financing if necessary.
We had, as of November 29, 2014, approximately $5.851 billion of outstanding indebtedness and stockholders deficit of $1.793 billion. As of November 29, 2014, after giving effect to (a) the acquisition and (b) the Tranche 7 Adjustments, our total outstanding debt and other liabilities of our subsidiaries would have been approximately $7.745 billion. As of November 29, 2014, after giving effect to (a) the acquisition and (b) the Tranche 7 Adjustments, we had additional borrowing capacity under our Senior Credit Facility of approximately $907.4 million, net of outstanding letters of credit of approximately $71.1 million. Our earnings were sufficient to cover fixed charges for fiscal 2014 by $233.4 million. However, our earnings were insufficient to cover fixed charges and preferred stock dividends for fiscal 2013, 2012, 2011 and 2010 by $14.0 million, $412.4 million, $564.8 million and $498.4 million, respectively.
Our high level of indebtedness will continue to restrict our operations. Among other things, our indebtedness will:
· limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;
· place us at a competitive disadvantage relative to our competitors with less indebtedness;
· render us more vulnerable to general adverse economic, regulatory and industry conditions; and
· require us to dedicate a substantial portion of our cash flow to service our debt.
Our ability to meet our cash requirements, including our debt service obligations, both now and after the consummation of the pending acquisition of EnvisionRx, is dependent upon our ability to substantially improve our operating performance, which will be subject to general economic and competitive conditions and to financial, business and other factors, many of which are beyond our control. We cannot provide any assurance that our business will generate sufficient cash flow from operations to fund our cash requirements and debt service obligations.
We believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures through fiscal 2016 (including following the acquisition of EnvisionRx) and have no significant debt maturities prior to January 2020. However, if our operating results, cash flow or capital resources prove inadequate, or if interest rates rise significantly, we could face liquidity constraints. If we are unable to service our debt or experience a significant reduction in our liquidity, we could be forced to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek additional equity capital, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our existing debt agreements limit our ability to take certain of these actions. Our failure to generate sufficient operating cash flow to pay our debts or refinance our indebtedness could have a material adverse effect on us.
Borrowings under our Senior Credit Facility are based upon variable rates of interest, which could result in higher expense in the event of increases in interest rates.
As of November 29, 2014, after giving effect to (a) the acquisition and (b) the Tranche 7 Adjustments, approximately $2.991 billion of our outstanding indebtedness bore interest at a rate that varies depending upon the London Interbank Offered Rate (LIBOR). Borrowings under our Tranche 1 Term Loan and Tranche 2 Term Loan are subject to a minimum LIBOR floor of 100 basis points. Borrowings under our Senior Credit Facility are most sensitive to LIBOR fluctuations because there is no floor. If LIBOR rises, the interest rates on outstanding debt will increase. Therefore an increase in LIBOR would increase our interest payment obligations under those loans and have a negative effect on our cash flow and financial condition. We recently increased our borrowing capacity under our Senior Credit Facility from 1.795 billion to $3.0 billion (or $3.7 billion upon the repayment of the $650 million aggregate principal amount outstanding under our 8.00% Notes), which could increase our exposure to this risk. We currently do not maintain hedging contracts that would limit our exposure to variable rates of interest.
The covenants in the instruments that govern our current indebtedness may limit our operating and financial flexibility.
The covenants in the instruments that govern our current indebtedness limit our ability to:
· incur debt and liens;
· pay dividends;
· make redemptions and repurchases of capital stock;
· make loans and investments;
· prepay, redeem or repurchase debt;
· engage in acquisitions, consolidations, asset dispositions, sale- leaseback transactions and affiliate transactions (not including the proposed acquisition of EnvisionRx or the transactions contemplated thereby);
· change our business;
· amend some of our debt and other material agreements;
· issue and sell capital stock of subsidiaries;
· restrict distributions from subsidiaries; and
· grant negative pledges to other creditors.
The Senior Credit Facility contains covenants which place restrictions on the incurrence of debt beyond the restrictions described above, the payment of dividends, sale of assets, mergers and acquisitions and the granting of liens. Our Senior Credit Facility has a financial covenant which requires us to maintain a minimum fixed charge coverage ratio. The covenant requires that, if availability under the revolving credit facility (a) on any date is less than (i) in the case of dates prior to the repayment of our 8.00% Notes, $175.0 million and (ii) in the case of dates on and after the repayment of our 8.00% Notes, $200.0 million, or (b) for three consecutive business days is less than (i) in the case of dates prior to the repayment of our 8.00% Notes, $225.0 million and (ii) in the case of dates on or after the repayment of our 8.00% Notes, $250.0 million, we maintain a minimum fixed charge coverage ratio of 1.00 to 1.00. As of March 16th, 2015, we had availability under our revolving credit facility of approximately $1.229 billion, our fixed charge coverage ratio was greater than 1.00 to 1.00, and we were in compliance with the Senior Credit Facilitys financial covenant.
Risks Related to our Operations
We need to improve our operations in order to improve our financial condition, but our operations will not improve if we cannot effectively implement our business strategy or if our strategy is negatively affected by worsening economic conditions.
We have not yet achieved the sales productivity level of our major competitors. We believe that improving the sales of existing stores is important to improving profitability and operating cash flow. If we are not successful in implementing our strategies, including our efforts to increase sales and further reduce costs, or if our strategies are not effective, we may not be able to improve our operations. In addition, any further adverse change or continued weakness in general economic conditions or major industries can adversely affect drug benefit plans and reduce our pharmacy sales. Adverse changes in general economic conditions could affect consumer buying practices and consequently reduce our sales of front end products, and cause a decrease in our profitability. Failure to improve operations or a continued weakness in major industries or general economic conditions would adversely affect our results of operations, financial condition and cash flows and our ability to make principal or interest payments on our debt.
We purchase all of our brand and generic drugs from a single wholesaler. A disruption in this relationship may have a negative effect on us.
We purchase all of our brand prescription and, with limited exceptions, all of our generic drugs, from a single wholesaler, McKesson. Pharmacy sales represented approximately 67.9% of our total sales during fiscal 2014. While we believe that alternative sources of supply for most generic and brand name pharmaceuticals are readily available, a significant disruption in our relationship with McKesson could make it difficult for us to continue to operate our business on a regular basis until we executed a replacement wholesaler agreement or developed and implemented self-distribution processes. We believe we could obtain and qualify alternative sources, including through self-distribution, for substantially all of the prescription drugs we sell on an acceptable basis, and accordingly that the impact of any disruption would be temporary. In addition, because McKesson acts as a wholesaler for drugs purchased from ultimate manufacturers worldwide, any disruption in the supply of a given drug could adversely impact McKessons ability to fulfill our demands, which could adversely affect us.
A significant disruption in our computer systems or a cyber-security breach could adversely affect our operations.
We rely extensively on our computer systems to manage our ordering, pricing, point-of-sale, inventory replenishment and other processes. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism, severe weather conditions, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. Although we deploy a layered approach to address information security threats and vulnerabilities, including ones from a cyber-security standpoint, designed to protect confidential information against data security breaches, a compromise of our information security controls or of those businesses with whom we interact, which results in confidential information being accessed, obtained, damaged or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory actions and claims from customers and clients, financial institutions, payment card associations and other persons, any of which could adversely affect our business, financial position and results of operations. Moreover, a data security breach could require that we expend significant resources related to our information systems and infrastructure, and could distract management and other key personnel from performing their primary operational duties. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations. Any compromise or breach of our data security, whether external or internal, or misuse of customer, associate, supplier or our data could also result in a violation of applicable privacy and other laws, significant legal and financial exposure, fines or lawsuits, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. Although we maintain cyber security insurance, we cannot assure you that the coverage limits under our insurance program will be adequate to protect us against future claims. In addition, as the
regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business.
We accept payments using a variety of methods, including cash, checks, credit and debit cards, and gift cards, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely affected.
If we fail to protect the security of personal information about our customers and associates, we could be subject to costly government enforcement actions or private litigation.
Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our web site, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, security could be compromised and confidential customer or business information misappropriated, for which we have paid related penalties in the past. Loss of customer or business information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, payment card associations and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, compliance with more rigorous privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.
Risks Related to the Acquisition of EnvisionRx
We are subject to integration risks as a result of the acquisition, and we may not realize the anticipated benefits of the acquisition in the time frame anticipated, or at all.
We believe we will benefit from the integration of our client and patient packages with those of EnvisionRx, and realize other synergies as a result of the acquisition. However, we are subject to integration risks related to the acquisition, including difficulties in achieving anticipated cost savings, synergies, business opportunities and revenue opportunities from combining the businesses; difficulties in assimilation of employees; and challenges in keeping existing customers and obtaining new customers. Integration efforts between the two companies may also divert management attention and resources. Additionally, we may not be able to successfully capture all anticipated synergies in the time frame anticipated, or at all. Any inability to realize the potential benefits of the acquisition, as well as any delays in integration, could have an adverse effect on our business, financial condition and results of operations.
The announcement and pendency of the acquisition may cause disruptions in the business of EnvisionRx, which could have an adverse effect on their business, financial condition or results of operations and, post-closing, our business, financial condition or results of operations.
The announcement and pendency of the acquisition of could cause disruptions of the business of EnvisionRx. Specifically:
· current and prospective customers of EnvisionRx may experience uncertainty about the ability of EnvisionRx to meet their needs, which might cause customers to obtain PBM and other services elsewhere; and
· while we have entered into employment contracts with a number of key executives from EnvisionRx, current and prospective associates of EnvisionRx may experience uncertainty about their future roles with Rite Aid, which might adversely affect the ability of EnvisionRx to attract and retain key personnel.
These disruptions could be exacerbated by a delay in the completion of the acquisition and could have an adverse effect on the business, financial condition or results of operations of EnvisionRx prior to the completion of the acquisition and on Rite Aid following the completion of the acquisition.
The pending acquisition is subject to approvals from government entities. Failure to consummate the pending acquisition could have a material adverse effect on us.
We cannot complete the acquisition of EnvisionRx unless we receive various consents, approvals and clearances from antitrust and other authorities in the United States. While we believe that we will receive the requisite approvals from these authorities, there can be no assurance of this.
If the acquisition is not consummated for any reason, we will have incurred substantial expenses without realizing the anticipated benefits of the acquisition.
Subject to certain limitations, certain holders of equity interests in EnvisionRx may sell Rite Aid common stock following the completion of the acquisition of the EnvisionRx, which could cause our stock price to decrease.
The shares of Rite Aid common stock that certain holders of equity interests in EnvisionRx will receive following the completion of the acquisition of EnvisionRx are restricted, but these holders may sell these shares following the acquisition under certain circumstances, including pursuant to a registered underwritten public offering under the Securities Act or in accordance with Rule 144 under the Securities Act. We have entered into a registration rights agreement with these holders, which will give these holders the right to require us to register all or a portion of their shares at certain times, subject to certain conditions and restrictions. The sale of a substantial number of our shares by these or other stockholders within a short period of time could cause our stock price to decrease, make it more difficult for us to raise funds through future offerings of Rite Aid common stock or acquire other businesses using Rite Aid common stock as consideration.
If goodwill or other intangible assets that we expect to record in connection with the EnvisionRx acquisition become impaired, such impairments could have an adverse impact on our earnings and capital.
In connection with the accounting for the acquisition, we expect to record a significant amount of goodwill and other intangible assets. Under GAAP, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets have been impaired. Finite-lived intangible assets will be assessed for impairment in the event of an impairment indicator. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could materially adversely affect our results of operations and stockholders equity in future periods.
Our unaudited pro forma condensed combined financial data accounting for the acquisition of EnvisionRx and the related supplemental information presenting the unaudited pro forma adjusted financial information of EnvisionRx accounting for its acquisition of MedTrak may not be reliable indicators of the future results of either Rite Aid or EnvisionRx.
Our unaudited pro forma condensed combined financial data for the 52 weeks ended November 29, 2014 was prepared by combining the unaudited consolidated financial information of Rite Aid as of and for the 52 weeks ended November 29, 2014 with the audited financial information of EnvisionRx as of and for the fiscal year ended December 31, 2014. This last 52 weeks presentation is not prepared in accordance with Regulation S-X. The supplemental unaudited pro forma adjusted EBITDA of EnvisionRx for the twelve months ended December 31, 2014 included in this offering memorandum is based upon the historical financial information and other available information, estimates and assumptions provided to us by EnvisionRx and includes certain adjustments to EnvisionRxs results of operations to present the pro forma impact of EnvisionRxs acquisition of MedTrak in September 2014 on its results of operations as if
such acquisition occurred on January 1, 2014. Certain of these adjustments are based on management estimates, including with respect to potential synergies and cost savings. Such financial information has not been audited and is based on various assumptions and estimates, which may be incorrect or incomplete.
Such unaudited pro forma condensed combined financial data and supplemental information related to EnvisionRx is presented for illustrative and informational purposes only and is not intended to represent or indicate what our or EnvisionRxs financial condition or results of operations would have been for the periods presented had the acquisition of EnvisionRx or MedTrak, as applicable, occurred at the specified times, nor what they may be in the future. Actual results could differ from these estimates and such differences could be material.
Such presentation of our unaudited pro forma condensed combined financial data and related supplemental information are considered to be non-GAAP disclosures and have not been prepared in compliance with public company reporting requirements. Additionally, the results of operations for MedTrak from January 1, 2014 through the date of its acquisition by EnvisionRx have not been audited or reviewed by an independent registered public accounting firm.
For these and other reasons specified in this offering memorandum, our unaudited pro forma condensed combined financial data of Rite Aid for the 52 weeks ended November 29, 2014 and the related supplemental information included in this offering memorandum does not reflect the financial condition, results of operations or cash flows that either Rite Aid or EnvisionRx would have achieved during the periods presented as stand-alone companies, and, therefore, may not be a reliable indicator of its future financial performance.
Risks Related to the PBM Industry
Risks of declining gross margins in the Pharmacy Benefits Management industry could adversely impact the profitability of EnvisionRx.
The pharmacy benefits management (PBM) industry has been experiencing margin pressure as a result of competitive pressures and increased client demands for lower prices, enhanced service offerings and/or better service levels, and higher rebate yields. With respect to rebate yields,
EnvisionRx maintains contractual relationships with brand name pharmaceutical manufacturers that provide for rebates on drugs dispensed by pharmacies in its retail network and by its mail order pharmacy (all or a portion of which may be passed on to clients). Manufacturer rebates often depend on a PBMs ability to meet contractual market share or other requirements, including in some cases the placement of a manufacturers products on the PBMs formularies. If EnvisionRx loses its relationship with one or more pharmaceutical manufacturers, or if the rebates provided by pharmaceutical manufacturers decline, after the consummation of the acquisition, our business and financial results could be adversely affected. Further, changes in existing federal or state laws or regulations or the adoption of new laws or regulations relating to patent term extensions, rebate arrangements with pharmaceutical manufacturers, or to formulary management or other PBM services could also reduce the manufacturer rebates EnvisionRx receives.
EnvisionRx also maintains contractual relationships with participating pharmacies that provide for discounts on retail transactions for generic drugs and brand drugs dispensed by pharmacies in its retail network. If EnvisionRx loses its relationship with one or more of the larger pharmacies in its network, or if the retail discounts provided by network pharmacies decline, after the consummation of the acquisition, our business and financial results could be adversely affected. In addition, changes in federal or state laws or regulations or the adoption of new laws or regulations relating to claims processing and billing, including EnvisionRxs ability to collect network administration and technology fees, could adversely impact EnvisionRxs profitability.
Efforts to reduce reimbursement levels and alter health care financing practices could adversely affect the results of operations of EnvisionRx.
The continued efforts of health maintenance organizations and other managed care organizations, PBM companies, government entities, and other third party payors to reduce prescription drug costs and
pharmacy reimbursement rates, may impact EnvisionRxs profitability. In particular, increased utilization of generic pharmaceuticals has resulted in pressure on PBM companies to decrease reimbursement payments to retail and mail order pharmacies for generic drugs. Historically, the effect of this trend has resulted in EnvisionRx providing contractual financial performance guarantees to certain of its PBM clients with respect to minimum generic drug price discounts for EnvisionRxs retail pharmacy network and its mail order pharmacy. Any inability of EnvisionRx to achieve guaranteed minimum generic drug price discounts provided to its PBM clients could have an adverse effect on our results of operations after consummation of the acquisition.
In addition, during the past several years, the United States health care industry has been subject to an increase in governmental regulation. Licensing, and audits at both the federal and state levels. Efforts to control health care costs, including prescription drug costs, are continuing at the federal and state government levels. Changing political, economic and regulatory influences may significantly affect health care financing and reimbursement practices. A change in the composition of pharmacy prescription volume toward programs offering lower reimbursement rates could negatively impact EnvisionRxs profitability.
The Patient Care Act and the Health Care and Education Reconciliation Act made several significant changes to Medicaid rebates and to reimbursement. One of these changes was to revise the definition of the AMP, a pricing element common to most payment formulas, and the reimbursement formula for multi-source (i.e., generic) drugs. In addition, the Patient Care Act and related federal acts made other changes that affect the coverage and plan designs that are or will be provided by many of our health plan clients, including the requirement for health insurers to meet a minimum medical loss ratio to avoid having to pay rebates to enrollees.
Another of these changes by Patient Care Act was to require stand-alone prescription plans and medical plans to coordinate data in order to keep track of maximum total out-of-pocket costs to covered individuals. This may result in fewer employer plans carving out prescription drug coverage could indirectly impact our services and/or business practices.
The possibility of PBM client loss and/or the failure to win new PBM business could impact the ability of EnvisionRx to secure new business.
EnvisionRxs PBM business generates net revenues primarily by contracting with clients to provide prescription drugs and related health care services to plan members. PBM client contracts often have terms of approximately three years in duration, so approximately one third of a PBMs client base typically is subject to renewal each year. In some cases, however, PBM clients may negotiate a shorter or longer contract term or may require early or periodic renegotiation of pricing prior to expiration of a contract. In addition, the reputational impact of a service-related incident could negatively affect our ability to grow and retain EnvisionRxs client base. Further, the PBM industry has been impacted by consolidation activity that may continue in the future. In the event one or more of Envision Rxs PBM clients is acquired by an entity that obtains PBM services from a competitor, Envision Rx may be unable to retain all or a portion of its clients business. For these reasons, EnvisionRx continually faces challenges in competing for new PBM business and retaining or renewing our existing PBM business. There can be no assurance that EnvisionRx will be able to win new business or secure renewal business on terms as favorable to it as the present terms. These circumstances, either individually or in the aggregate, could result in an adverse effect on our business and financial results after the consummation of the acquisition.
Possible changes in industry pricing benchmarks could impact the business of EnvisionRx.
It is possible that the pharmaceutical industry or regulators may evaluate and/or develop an alternative pricing reference to replace Average Wholesale Price (AWP), which is the pricing reference used for many of EnvisionRxs PBM client contracts, pharmaceutical manufacturer rebate agreements, retail pharmacy network contracts, specialty payor agreements and other contracts with third party payors in connection with the reimbursement of drug payments. Future changes to the use of AWP or to other published pricing benchmarks used to establish pharmaceutical pricing, including changes in the basis for calculating reimbursement by federal and state health programs and/or other payors, could
impact the reimbursement EnvisionRx receives from Medicare programs and Medicaid health plans, the reimbursement EnvisionRx receives from PBM clients and other payors and/or its ability to negotiate rebates with pharmaceutical manufacturers, acquisition discounts with wholesalers and retail discounts with network pharmacies. The effect of these possible changes on our business cannot be predicted at this time.
Regulatory or business changes relating to EnvisionRxs participation in Medicare Part D, the loss of Medicare Part D eligible members, or our failure to otherwise execute on our strategies related to Medicare Part D, may adversely impact our business and our financial results.
One of EnvisionRxs subsidiaries, Envision Insurance Company (EIC), is an insurer domiciled in Ohio (with Ohio as its primary insurance regulator) and licensed in all 50 states, and is approved to function as a Medicare Part D Prescription Drug Plan (PDP) plan sponsor for purposes of individual insurance products offered to Medicare-eligible beneficiaries and for purposes of making employer/union-only group waiver plans available for eligible clients. EnvisionRx also provides other products and services in support of our clients Medicare Part D plans or the Federal Retiree Drug Subsidy program. EnvisionRx has made, and may be required to make further, substantial investments in the personnel and technology necessary to administer its Medicare Part D strategy. There are many uncertainties about the financial and regulatory risks of participating in the Medicare Part D program, and if the acquisition is consummated, we can give no assurance that these risks will not materially adversely impact the business of EnvisionRx and our financial results in future periods after the consummation of the acquisition.
EIC is subject to various contractual and regulatory compliance requirements associated with participating in Medicare Part D. EIC is subject to certain aspects of state laws regulating the business of insurance in all jurisdictions in which EIC offers its PDP plans. As a PDP sponsor, EIC is required to comply with Federal Medicare Part D laws and regulations applicable to PDP sponsors. Additionally, the receipt of Federal funds made available through the Part D program by us, our affiliates, or clients is subject to compliance with the Part D regulations and established laws and regulations governing the Federal governments payment for healthcare goods and services, including the Anti-Kickback Statute and the False Claims Act. Similar to our requirements with other clients, EnvisionRxs policies and practices associated with operating its PDP are subject to audit. If material contractual or regulatory non-compliance was to be identified, monetary penalties and/or applicable sanctions, including suspension of enrollment and marketing or debarment from participation in Medicare programs, could be imposed. Further, the adoption or promulgation of new or more complex regulatory requirements associated with Medicare may require EnvisionRx to incur significant compliance-related costs which could adversely impact our business and our financial results after the consummation of the acquisition.
In addition, due to the availability of Medicare Part D, some of EnvisionRxs employer clients may decide to stop providing pharmacy benefit coverage to retirees, instead allowing the retirees to choose their own Part D plans, which could cause a reduction in demand for EnvisionRxs Medicare Part D group insurance products. Extensive competition among Medicare Part D plans could also result in the loss of Medicare Part D members by our managed care customers, which would also result in a decline in EnvisionRxs membership base. Like many aspects of EnvisionRxs business, the administration of the Medicare Part D program is complex. Any failure to execute the provisions of the Medicare Part D program may have an adverse effect on our financial position, results of operations or cash flows after the consummation of the acquisition. As discussed above, in March 2010, comprehensive healthcare reform was enacted into federal law through the passage of the Patient Care Act. Additionally, as described above, the Patient Care Act contains various changes to the Part D program and could have a financial impact on EnvisionRxs PDP and its clients demand for our other Part D products and services.
Exhibit 99.3
RITE AID CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the pending acquisition of EnvisionRx by Rite Aid and the related financing transactions. The acquisition of EnvisionRx will be accounted for as a business combination using the acquisition method of accounting under the provisions of Accounting Standards Codification 805, Business Combinations (ASC 805). The unaudited pro forma condensed combined financial information set forth below give effect to the following:
· The acquisition of EnvisionRx, including the Notes issued hereby to finance the cash portion of the consideration for the acquisition and the issuance of Rite Aid common stock, using the acquisition method of accounting;
· the amendment and restatement of the Senior Credit Facility, which, among other things, increased borrowing capacity from $1.795 billion to $3.0 billion (increasing to $3.7 billion upon the repayment of the 8.00% Notes, and extended the maturity to January 2020 from February 2018; and
· the use of borrowings under the amended and restated Senior Credit Facility to repay and retire all of the $1.147 billion outstanding under Rite Aids Tranche 7 Senior Secured Term Loan due 2020, along with associated fees and expenses.
The unaudited pro forma condensed combined balance sheet has been prepared as if the above occurred on November 29, 2014 and on November 30, 2013 for purposes of the unaudited pro forma condensed combined statement of operations. References to financial results through the 52 weeks ended November 29, 2014 have been calculated by subtracting the data for the 39 weeks ended November 30, 2013 from the data for the 52 weeks ended March 1, 2014, and adding the data for the 39 weeks ended November 29, 2014.
The historical consolidated financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the aforementioned transactions, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the consolidated results. The unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial statements were based on and should be read in conjunction with the:
· separate audited consolidated financial statements of Rite Aid as of and for the year ended March 1, 2014, included in Rite Aids Annual Report on Form 10-K for the year ended March 1, 2014;
· separate unaudited consolidated financial statements of Rite Aid as of and for the 39 weeks ended November 29, 2014 and November 30, 2013 and the related notes, included in Rite Aids Quarterly Report on Form 10-Q for the quarter ended November 29, 2014; and
· separate audited consolidated financial statements of EnvisionRx as of and for the year ended December 31, 2014 and the related notes, filed as Exhibit 99.4 to this 8-K.
The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined companys financial position or results of operations actually would have been had the acquisition of EnvisionRx or the related financing transactions been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company. The pro forma financial information is also not prepared in accordance with Regulations S-X as it includes certain adjustments not related to the acquisition and presents periods that represent a combination of portions of two fiscal years.
The unaudited pro forma condensed combined financial statements have been prepared using the acquisition method of accounting under GAAP. The accounting for the acquisition of EnvisionRx is dependent upon certain valuations that are provisional and are subject to change. Accordingly, the pro
forma adjustments are preliminary and have been made solely for the purpose of providing these unaudited pro forma condensed combined financial statements. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could be material. The differences, if any, could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and Rite Aids future results of operations and financial position.
In addition, the unaudited pro forma condensed combined financial statements do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisition of EnvisionRx or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. The unaudited pro forma condensed combined financial statements also do not include certain pro forma adjustments for EnvisionRxs prior acquisitions.
(Dollars in thousands)
|
|
Rite Aid Historical 52 weeks ended November 29, 2014 |
|
Envision Historical for the year ended December 31, 2014 |
|
Preliminary Pro Forma Adjustments for Transactions |
|
Total |
|
Revenues |
|
$ |
26,277,907 |
|
$ |
4,071,402 |
|
$ |
(268,098 |
)(1) |
$ |
30,081,211 |
|
Cost of goods sold |
|
18,771,320 |
|
3,832,928 |
|
(268,098 |
)(1) |
22,336,150 |
|
Selling, general and administrative expenses |
|
6,693,986 |
|
144,886 |
|
37,088 |
(2)(5) |
6,875,960 |
|
Depreciation and amortization |
|
|
|
30,198 |
|
(30,198 |
)(2) |
|
|
Lease termination and impairment charges |
|
37,931 |
|
|
|
|
|
37,931 |
|
Interest expense |
|
401,162 |
|
52,185 |
|
49,286 |
(3) |
502,633 |
|
Loss on debt retirements, net |
|
18,512 |
|
|
|
|
|
18,512 |
|
Gain on sale of assets, net |
|
(2,128 |
) |
|
|
|
|
(2,128 |
) |
Income (loss) before income taxes |
|
357,124 |
|
11,205 |
|
(56,176 |
) |
312,153 |
|
Income tax expense (benefit) |
|
27,606 |
|
(367 |
) |
(21,909 |
)(4) |
5,330 |
|
Net income (loss) |
|
$ |
329,518 |
|
$ |
11,572 |
|
$ |
(34,267 |
) |
$ |
306,823 |
|
These unaudited pro forma condensed combined financial statements contain estimated adjustments to be made upon completion of the financing and consummation of the Transactions which are based on information available to our management at the time this Form 8-K was prepared. Accordingly, the adjustments are subject to change and the impact of such changes may be material. See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements.
Rite Aid will account for the EnvisionRx acquisition using the acquisition method of accounting. The pro forma adjustments reflect preliminary estimates of the purchase price allocation, which are expected to change upon finalization of appraisals and other valuation studies. The final allocation will be based on the actual purchase price and the assets and liabilities that exist as of the date of the EnvisionRx acquisition. The final allocation may also result in deferred taxes for which information is not currently available. The final adjustments could be materially different from the unaudited pro forma adjustments presented herein.
The unaudited pro forma condensed combined statement of operations also includes certain accounting adjustments related to the acquisition that are expected to have a continuing impact on the combined results, such as increased depreciation and amortization of the acquired tangible and intangible assets, increased interest expense on the debt expected to be incurred to complete the acquisition, amortization of deferred financing fees and the tax impact of these pro forma adjustments.
The unaudited pro forma combined statement of operations does not reflect certain adjustments that are expected to result from the acquisition because they are considered to be of a non-recurring nature. These include transaction costs expected to be incurred related to the acquisition.
Rite Aid expects to realize synergies following the acquisition that are not reflected in the pro forma adjustments. No assurance can be given with respect to the ultimate level of such synergies and the timing of their realization.
Following the acquisition, Rite Aid will conduct a review of EnvisionRxs accounting policies in an effort to determine if differences in accounting policies require adjustment or reclassification of EnvisionRxs results of operations or reclassification of assets or liabilities to conform to Rite Aids accounting policies and
classifications. During the preparation of these unaudited pro forma condensed combined financial statements, Rite Aid was not aware of any material differences between accounting policies of the two companies, except for certain reclassifications necessary to conform to Rite Aids financial presentation, and accordingly, this unaudited pro forma condensed combined financial information do not assume any material differences in accounting policies between the two companies.
(1) Represents the elimination of intercompany revenues and cost of goods sold for the 52 week period ended November 29, 2014. These amounts represent actual payments made to Rite Aid for dispensing prescription drugs to EnvisionRx plan members for the 52 weeks ended November 29, 2014.
(2) Represents the reclassification of depreciation and amortization expense as reported by EnvisionRx for the 52 week period ended December 31, 2014 to conform to Rite Aids presentation. Rite Aid records substantially all depreciation and amortization in selling, general and administrative expenses.
(3) Represents the estimated incremental interest expense after giving effect to (i) the issuance of $1.8 billion aggregate principal amount of notes offered hereby based on an interest rate of 6.25%. A 0.25% variance in the interest rate would change interest expense by approximately $4.5 million; (ii) the amortization of the related fees and expenses; (iii) the amendment and restatement of our Senior Credit Facility in January 2015, which increased the maximum commitment under the Senior Credit Facility to $3.0 billion (with the option to increase to $3.7 billion upon the repayment of the $650 million aggregate principal amount outstanding under our 8.00% Notes) and extended the term of the Senior Credit Facility to January 2020; and (iv) the repayment and retirement of all of the $1.147 billion outstanding under our Tranche 7 Senior Secured Term Loan due 2020, along with associated fees and expenses, with borrowings under the amended and restated Senior Credit Facility, calculated as follows:
|
|
Preliminary Pro Forma 52 weeks ended November 29, 2014 |
|
Rite Aid historical interest expense for the fifty-two week period ended November 29, 2014 |
|
$ |
401,162 |
|
(a) |
|
Incremental estimated annual interest expense related to the issuance of $1.8 billion aggregate principal amount of notes offered hereby ($1.8 billion at 6.25%) |
|
112,500 |
|
(b) |
|
Estimated full year amortization of anticipated debt issuance costs associated with the issuance of the $1.8 billion aggregate principal amount of notes offered hereby (Approximately $36.1 million of debt issuance fees amortized over 7 years) |
|
5,157 |
|
(c) |
|
Annualized anticipated interest savings generated from the repayment of all of the $1.147 billion outstanding under our Tranche 7 Senior Secured Term Loan due 2020 with borrowings under the amended and restated Senior Credit Facility |
|
(20,000 |
) |
(d) |
|
Estimated full year amortization of anticipated debt issuance costs associated with the amendment and restatement of our Senior Credit Facility (Approximately $19.1 million of debt issuance costs amortized over 5 years) |
|
3,814 |
|
Preliminary pro forma interest expense for the 52 week period ended November 29, 2014 |
|
$ |
502,633 |
|
2
The preliminary pro forma interest expense for the 52 week period ended November 29, 2014 excludes incremental interest associated with the $75.9 million of debt issuance costs and transaction fees and expenses that are expected to be funded by our Senior Credit Facility as those borrowings are expected to be repaid with cash in the near term.
(4) Represents the income tax benefit related to the preliminary pro forma adjustments for the acquisition based on an estimated statutory income tax rate of 39%.
(5) Represents the preliminary pro forma incremental amortization resulting from the preliminary fair value adjustments resulting from the preliminary purchase price allocation determined as follows:
Total pro forma incremental amortization adjustment |
|
Pro Forma Incremental Amortization Adjustment |
|
Additional incremental amortization associated with increased fair value of customer relationships and claims adjudication and other software(a) |
|
$ |
11,832 |
|
Reduction of incremental amortization associated with decreased fair value of patents, trademarks and other items |
|
(4,942 |
) |
Pro forma incremental amortization adjustment |
|
$ |
6,890 |
|
(a) The incremental amortization resulting from the preliminary allocation of the purchase price is preliminary and is based on information available to our management at the time this offering memorandum was prepared. Accordingly, the incremental amortization is subject to change and the impact of such changes may be material.
3
RITE AID CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Dollars in thousands)
|
|
Rite Aid Historical as of November 29, 2014 |
|
Envision Historical as of December 31, 2014 |
|
Preliminary Pro Forma Adjustments for Transactions |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
232,954 |
|
$ |
114,022 |
|
|
|
$ |
346,976 |
|
Investments, at amortized cost |
|
|
|
6,564 |
|
|
|
6,564 |
|
Accounts receivable, net |
|
996,545 |
|
648,947 |
|
$ |
(27,354 |
)(1) |
1,618,138 |
|
Accrued receivables |
|
|
|
101,353 |
|
|
|
101,353 |
|
Inventories, net of LIFO reserve of $1,023,213 |
|
2,997,595 |
|
6,140 |
|
|
|
3,003,735 |
|
Prepaid expenses and other current assets |
|
132,873 |
|
6,047 |
|
|
|
138,920 |
|
Total current assets |
|
4,359,967 |
|
883,073 |
|
(27,354 |
) |
5,215,686 |
|
Property, plant and equipment, net |
|
2,062,376 |
|
12,894 |
|
|
|
2,075,270 |
|
Goodwill |
|
76,124 |
|
424,401 |
|
693,079 |
(2) |
1,193,604 |
|
Other intangibles, net |
|
420,415 |
|
720,872 |
|
84,128 |
(3) |
1,225,415 |
|
Deferred tax assets |
|
|
|
940 |
|
|
|
940 |
|
Other assets |
|
267,104 |
|
24,221 |
|
33,271 |
(4) |
324,596 |
|
Total assets |
|
$ |
7,185,986 |
|
$ |
2,066,401 |
|
$ |
783,124 |
|
$ |
10,035,511 |
|
Liabilities and Stockholders Deficit |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt and lease financing obligations |
|
$ |
111,613 |
|
$ |
5,262 |
|
$ |
(5,262 |
)(5) |
$ |
111,613 |
|
Accounts payable |
|
1,205,887 |
|
480,247 |
|
(27,354 |
)(1) |
1,658,780 |
|
Accrued salaries, wages and other current liabilities |
|
1,147,174 |
|
357,592 |
|
|
|
1,504,766 |
|
Total current liabilities |
|
2,464,674 |
|
843,101 |
|
(32,616 |
) |
3,275,159 |
|
Long-term debt, less current maturities |
|
5,673,591 |
|
738,256 |
|
1,156,732 |
(5) |
7,568,579 |
|
Lease financing obligations, less current maturities |
|
65,483 |
|
|
|
|
|
65,483 |
|
Other noncurrent liabilities |
|
774,896 |
|
5,769 |
|
|
|
780,665 |
|
Total liabilities |
|
8,978,644 |
|
1,587,126 |
|
1,124,116 |
|
11,689,886 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
Stockholders deficit: |
|
|
|
|
|
|
|
|
|
Common stock |
|
981,773 |
|
|
|
27,862 |
(6) |
1,009,635 |
|
Additional paid-in capital |
|
4,502,631 |
|
|
|
172,138 |
(6) |
4,674,769 |
|
Members equity |
|
|
|
479,275 |
|
(479,275 |
)(7) |
|
|
Accumulated deficit |
|
(7,241,707 |
) |
|
|
(61,717 |
)(7) |
(7,303,424 |
) |
Accumulated other comprehensive loss |
|
(35,355 |
) |
|
|
|
|
(35,355 |
) |
Total stockholders deficit |
|
(1,792,658 |
) |
479,275 |
|
(340,992 |
) |
(1,654,375 |
) |
Total liabilities and stockholders deficit |
|
$ |
7,185,986 |
|
$ |
2,066,401 |
|
$ |
783,124 |
|
$ |
10,035,511 |
|
See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements.
(1) Represents actual amounts due to Rite Aid for dispensing prescription drugs to EnvisionRx plan members as of November 29, 2014.
(2) Represents the goodwill resulting from the acquisition. Please see note 3) below for the preliminary purchase price allocation. The preliminary purchase price allocation is subject to change, and the impact of such changes may be material.
4
(3) Represents the fair value adjustments resulting for the purchase price allocation determined as follows.
The following allocation of the purchase price is preliminary and is based on information available to our management at the time this offering memorandum was prepared. Accordingly, the allocation is subject to change and the impact of such changes may be material.
|
|
Preliminary Purchase Price Allocation |
|
The preliminary purchase price allocation is as follows: |
|
|
|
Preliminary purchase price: |
|
|
|
Cash consideration |
|
$ |
1,800,000 |
|
Stock consideration |
|
200,000 |
|
Total |
|
$ |
2,000,000 |
|
Preliminary purchase price allocation |
|
|
|
Cash, cash equivalents and investments |
|
$ |
120,586 |
|
Accounts receivable, net |
|
648,947 |
|
Accrued receivables |
|
101,353 |
|
Inventories |
|
6,140 |
|
Prepaid expenses and other current assets |
|
6,047 |
|
Property, plant and equipment, net |
|
12,894 |
|
Goodwill |
|
1,117,480 |
|
Other intangibles, net |
|
805,000 |
|
Other assets |
|
25,161 |
|
Total assets acquired |
|
2,843,608 |
|
Accounts payable |
|
(480,247 |
) |
Accrued expenses |
|
(357,592 |
) |
Total current liabilities assumed |
|
(837,839 |
) |
Other noncurrent liabilities |
|
(5,769 |
) |
Total liabilities assumed |
|
(843,608 |
) |
Net assets acquired |
|
$ |
2,000,000 |
|
The preliminary composition of other intangibles, net as of November 29, 2014 are as follows: |
|
|
|
Subject to amortization: |
|
|
|
Customer relationships |
|
$ |
573,000 |
|
Claims adjudication and other software |
|
55,000 |
|
Non-competition agreements |
|
10,000 |
|
|
|
638,000 |
|
Indefinite-lived intangible assets: |
|
|
|
CMS license |
|
90,000 |
|
Trade names |
|
77,000 |
|
|
|
167,000 |
|
Preliminary total other intangibles acquired |
|
$ |
805,000 |
|
(4) Represents the anticipated increase in capitalized debt issuance costs after giving effect to (a) the issuance of $1.800 billion aggregate principal amount of notes offered hereby, (b) the amendment and restatement of our Senior Credit Facility in January 2015, which increased the maximum commitments up to $3.0 billion (increasing to $3.7 billion upon the repayment of the $650 million aggregate principal amount outstanding under our 8.00% Notes) and extended the term to January 2020, and (c) the repayment of all outstanding
5
EnvisionRx indebtedness and write-off of the related capitalized debt issuance costs outstanding as of December 31, 2014, calculated as follows:
|
|
|
Preliminary Pro Forma as of November 29, 2014 |
|
(a) |
Anticipated debt issuance costs to be capitalized associated with the issuance of the $1.8 billion aggregate principal amount of notes offered herebyapproximately $36.1 million |
|
$ |
36,100 |
|
(b) |
Anticipated debt issuance costs to be capitalized associated with the issuance of the amendment and restatement of our Senior Credit Facilityapproximately $19.1 million |
|
19,071 |
|
(c) |
Write-off of the EnvisionRx capitalized debt issuance costs as of December 31, 2014 due to the repayment of all outstanding EnvisionRx indebtedness upon consummation of the acquisition |
|
(21,900 |
) |
|
Preliminary pro forma anticipated adjustment to other assets for debt issuance cost related items as of November 29, 2014 |
|
$ |
33,271 |
|
(5) Represents the anticipated impact on short-term and long-term indebtedness after giving effect to (a) the issuance of $1.800 billion aggregate principal amount of notes offered hereby, (b) the payment of anticipated debt issuance costs and other transaction fees and expenses, (c) the amendment and restatement of our Senior Credit Facility in January 2015, which increased the maximum commitments up to $3.0 billion (increasing to $3.7 billion upon the repayment of the $650 million aggregate principal amount outstanding under our 8.00% Notes) and extended the term to January 2020, (d) the repayment and retirement of all of the $1.147 billion outstanding under our Tranche 7 Senior Secured Term Loan due 2020, along with associated fees and expenses, with borrowings under the amended and restated Senior Credit Facility, calculated as follows:
|
Preliminary Pro Forma as of November 29, 2014 |
|
Rite Aid historical outstanding indebtedness as of November 29, 2014 |
|
$ |
5,850,687 |
|
(a) |
|
Issuance of $1.800 billion aggregate principal amount of notes offered hereby |
|
1,800,000 |
|
(b) |
|
Anticipated debt issuance costs and other transaction fees and expenses expected to be funded with our Senior Credit Facility |
|
75,917 |
|
(c) |
|
Anticipated debt issuance costs and other fees and expenses relating to the amendment and restatement of our Senior Credit Facility in January 2015, which increase the maximum commitments up to $3.0 billion (increasing to $3.7 billion upon the repayment of the $650 million aggregate principal amount outstanding under our 8.00% Notes) and extended the term to January 2020, which were funded with our Senior Credit Facility |
|
19,071 |
|
|
|
Preliminary pro forma short-term and long-term indebtedness, including capital leases, as of November 29, 2014 |
|
$ |
7,745,675 |
|
6
(6) Represents the issuance of 27,862,138 shares of our common stock with a market value of $200.0 million based on a stock price of $7.18 per share (as identified in the Merger Agreement) calculated as follows:
Total pro forma adjustment to common stock and additional paid-in capital |
|
Preliminary Pro Forma as of November 29, 2014 |
|
Issuance of 27.9 million shares of Rite Aid common stock, par value $1 per share, upon consummation of the acquisition |
|
$ |
27,862 |
|
Increase to additional paid-in capital resulting from the issuance of 27.9 million shares of Rite Aid common stock, par value $1 per share, at an assumed price of $7.18 per sharegross value of $200.0 million (27.9 million shares at $7.18 per share) less $27.9 million allocated to common stock(a) |
|
172,138 |
|
Aggregate increase in common stock and additional paid-in capital resulting from the issuance of 27.9 million shares of common stock in connection with the consummation of the acquisition |
|
$ |
200,000 |
|
(a) The aggregate increase in additional paid-in capital is based on a share price of $7.18 and a fixed number of shares. The adjustment is based on information available to our management at the time this offering memorandum was prepared. Accordingly, the adjustment to additional paid-in capital is subject to change and the impact of such changes may be material.
(7) Represents the aggregate pro forma adjustments for (a) the retirement of EnvisionRx equity as of December 31, 2014, (b) the write-off of anticipated EnvisionRx capitalized debt issuance costs as of December 31, 2014 due to the repayment of all outstanding EnvisionRx indebtedness upon consummation of the acquisition, (c) fees incurred in connection with bridge financing commitments, and (d) certain non-capital expenses and fees incurred in connection with the transaction, calculated as follows:
Pro forma adjustment to accumulated deficit |
|
Preliminary Pro Forma as of November 29, 2014 |
|
(a) |
Retirement of EnvisionRx equity as of December 31, 2014 |
|
$ |
(479,275 |
) |
(b) |
Write-off of the EnvisionRx capitalized debt issuance costs as of December 31, 2014 due to the repayment of all outstanding EnvisionRx indebtedness upon consummation of the acquisition |
|
(21,900 |
) |
(c) |
Fees incurred in connection with bridge financing commitments that expire upon completion of the $1.8 billion notes offered hereby |
|
(22,500 |
) |
(d) |
Certain non-capital expenses and fees incurred in connection with the transaction, including merger and acquisition consultation, legal, accounting and other professional services |
|
(17,317 |
) |
Total pro forma adjustment to accumulated deficit |
|
$ |
(540,992 |
) |
7
Exhibit 99.4
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, 2014 (SUCCESSOR),
PERIOD FROM NOVEMBER 4, 2013 TO DECEMBER 31, 2013 (SUCCESSOR),
PERIOD FROM JANUARY 1, 2013 TO NOVEMBER 3, 2013 (PREDECESSOR),
AND YEAR ENDED DECEMBER 31, 2012 (PREDECESSOR)
TABLE OF CONTENTS
|
PAGE NO. |
|
|
CONSOLIDATED BALANCE SHEETS |
|
December 31, 2014 (Successor), 2013 (Successor) and 2012 (Predecessor) |
1 |
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
|
For the year ended December 31, 2014 (Successor), period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor) and year ended December 31, 2012 (Predecessor) |
3 |
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY |
|
For the year ended December 31, 2014 (Successor), period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor) and year ended December 31, 2012 (Predecessor) |
4 |
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
For the year ended December 31, 2014 (Successor), period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor) and year ended December 31, 2012 (Predecessor) |
5 - 6 |
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
7 - 34 |
|
|
UNAUDITED SUPPLEMENTARY INFORMATION |
|
|
|
2014 PRO FORMA CONSOLIDATED STATEMENT OF INCOME |
35 |
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014, 2013 AND 2012
(in thousands)
|
|
Successor |
|
Successor |
|
Predecessor |
|
|
|
2014 |
|
2013 |
|
2012 |
|
ASSETS |
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
114,022 |
|
$ |
79,962 |
|
$ |
60,501 |
|
Investments, at amortized cost |
|
6,564 |
|
6,557 |
|
6,462 |
|
Accounts receivable, net |
|
648,947 |
|
393,870 |
|
314,574 |
|
Accrued receivables |
|
87,219 |
|
63,527 |
|
46,261 |
|
Reinsurance recoverable |
|
13,520 |
|
16,009 |
|
|
|
Income tax receivable |
|
614 |
|
|
|
|
|
Inventory |
|
6,140 |
|
5,478 |
|
4,628 |
|
Prepaid expenses and other current assets |
|
6,047 |
|
3,443 |
|
2,855 |
|
Deferred tax asset |
|
940 |
|
527 |
|
|
|
|
|
884,013 |
|
569,373 |
|
435,281 |
|
PROPERTY AND EQUIPMENTAT COST |
|
|
|
|
|
|
|
Land |
|
571 |
|
571 |
|
571 |
|
Building and improvements |
|
3,932 |
|
3,921 |
|
4,462 |
|
Furniture, fixtures and equipment |
|
11,759 |
|
9,247 |
|
13,490 |
|
|
|
16,262 |
|
13,739 |
|
18,523 |
|
Less: Accumulated depreciation and amortization |
|
(3,368 |
) |
(508 |
) |
(6,800 |
) |
|
|
12,894 |
|
13,231 |
|
11,723 |
|
OTHER ASSETS |
|
|
|
|
|
|
|
Employee advance |
|
|
|
|
|
316 |
|
Deposits and other assets |
|
540 |
|
528 |
|
2,328 |
|
Deferred financing fees, net |
|
21,931 |
|
19,361 |
|
5,010 |
|
Other investments |
|
1,750 |
|
1,750 |
|
1,750 |
|
Intangible assets, net |
|
720,872 |
|
562,403 |
|
37,459 |
|
Goodwill |
|
424,401 |
|
390,444 |
|
4,854 |
|
|
|
1,169,494 |
|
974,486 |
|
51,717 |
|
|
|
$ |
2,066,401 |
|
$ |
1,557,090 |
|
$ |
498,721 |
|
The accompanying notes are an integral part of these consolidated financial statements.
1
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 2014, 2013 AND 2012
(in thousands)
|
|
Successor |
|
Successor |
|
Predecessor |
|
|
|
2014 |
|
2013 |
|
2012 |
|
LIABILITIES |
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
5,262 |
|
$ |
4,468 |
|
$ |
10,262 |
|
Accounts payable |
|
480,247 |
|
374,663 |
|
263,747 |
|
Accrued expenses |
|
22,493 |
|
9,675 |
|
6,933 |
|
Income taxes payable |
|
|
|
246 |
|
|
|
Contract funds on deposit |
|
5,314 |
|
3,374 |
|
2,284 |
|
Ceded reinsurance premiums payable |
|
|
|
|
|
2,965 |
|
Funds held under reinsurance treaties |
|
329,785 |
|
185,277 |
|
143,761 |
|
|
|
843,101 |
|
577,703 |
|
429,952 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
Deferred tax liabilities |
|
104 |
|
113 |
|
|
|
Accrued expenses |
|
|
|
1,054 |
|
|
|
Interest rate swaps |
|
5,665 |
|
|
|
|
|
Long-term debt |
|
738,256 |
|
569,687 |
|
177,553 |
|
|
|
744,025 |
|
570,854 |
|
177,553 |
|
|
|
1,587,126 |
|
1,148,557 |
|
607,505 |
|
MEMBERS EQUITY |
|
|
|
|
|
|
|
SUCCESSOR: MEMBERS EQUITY |
|
486,348 |
|
407,234 |
|
|
|
SUCCESSOR: RETAINED EARNINGS (DEFICIT) |
|
(1,408 |
) |
1,299 |
|
|
|
SUCCESSOR: ACCUMULATED COMPREHENSIVE LOSS |
|
(5,665 |
) |
|
|
|
|
PREDECESSOR: COMMON STOCK, no par or stated value |
|
|
|
|
|
208 |
|
PREDECESSOR: ADDITIONAL PAID-IN CAPITAL |
|
|
|
|
|
435 |
|
PREDECESSOR: SUBSCRIPTION RECEIVABLE |
|
|
|
|
|
(1,661 |
) |
PREDECESSOR: RETAINED EARNINGS |
|
|
|
|
|
72,640 |
|
PREDECESSOR: TREASURY STOCK, at cost |
|
|
|
|
|
(180,406 |
) |
|
|
479,275 |
|
408,533 |
|
(108,784 |
) |
|
|
$ |
2,066,401 |
|
$ |
1,557,090 |
|
$ |
498,721 |
|
The accompanying notes are an integral part of these consolidated financial statements.
2
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
Successor |
|
Successor |
|
Predecessor |
|
Predecessor |
|
|
|
For the year ended December 31, 2014 |
|
November 4, 2013 through December 31, 2013 |
|
January 1, 2013 through November 3, 2013 |
|
For the year ended December 31, 2012 |
|
REVENUES |
|
$ |
4,071,402 |
|
$ |
640,936 |
|
$ |
3,003,492 |
|
$ |
2,743,946 |
|
COST OF REVENUES |
|
3,832,928 |
|
608,418 |
|
2,833,265 |
|
2,573,145 |
|
GROSS PROFIT |
|
238,474 |
|
32,518 |
|
170,227 |
|
170,801 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
144,886 |
|
20,398 |
|
97,054 |
|
100,715 |
|
Depreciation and amortization |
|
30,198 |
|
4,176 |
|
4,510 |
|
3,767 |
|
Incurred in connection with Acquisition |
|
|
|
878 |
|
24,246 |
|
|
|
|
|
175,084 |
|
25,452 |
|
125,810 |
|
104,482 |
|
INCOME FROM OPERATIONS |
|
63,390 |
|
7,066 |
|
44,417 |
|
66,319 |
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
Interest income |
|
46 |
|
13 |
|
113 |
|
208 |
|
Interest expense |
|
(52,226 |
) |
(7,169 |
) |
(6,477 |
) |
(5,335 |
) |
Write-off of deferred financing fees |
|
|
|
|
|
(4,014 |
) |
(4,540 |
) |
State and local taxes and other |
|
(5 |
) |
|
|
(1,149 |
) |
(1,393 |
) |
|
|
(52,185 |
) |
(7,156 |
) |
(11,527 |
) |
(11,060 |
) |
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) FEDERAL INCOME TAXES |
|
11,205 |
|
(90 |
) |
32,890 |
|
55,259 |
|
PROVISION FOR (BENEFIT FROM) FEDERAL INCOME TAXES |
|
|
|
|
|
|
|
|
|
Current |
|
55 |
|
247 |
|
|
|
|
|
Deferred |
|
(422 |
) |
103 |
|
|
|
|
|
|
|
(367 |
) |
350 |
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
11,572 |
|
$ |
(440 |
) |
$ |
32,890 |
|
$ |
55,259 |
|
COMPREHENSIVE INCOME (LOSS): |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,572 |
|
$ |
(440 |
) |
$ |
32,890 |
|
$ |
55,259 |
|
Change in fair market value of interest rate swaps |
|
(5,665 |
) |
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME (LOSS) |
|
$ |
5,907 |
|
$ |
(440 |
) |
$ |
32,890 |
|
$ |
55,259 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
(in thousands, except shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
Additional |
|
|
|
Retained |
|
|
|
Accumulated |
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
|
|
Common Stock |
|
Paid-in Capital |
|
Subscription Receivable |
|
Earnings (Deficit) |
|
Treasury Stock |
|
Comprehensive Loss |
|
Members Equity |
|
Total |
|
1,689,500 |
|
199,030 |
|
Predecessor: Balance at December 31, 2011 |
|
$ |
208 |
|
$ |
335 |
|
$ |
(2,964 |
) |
$ |
45,375 |
|
$ |
(2,450 |
) |
$ |
|
|
$ |
|
|
40,504 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
55,259 |
|
|
|
|
|
|
|
55,259 |
|
|
|
360,577 |
|
Treasury stock buyback |
|
|
|
|
|
|
|
|
|
(177,956 |
) |
|
|
|
|
(177,956 |
) |
2,500 |
|
|
|
Receipt of subscription receivable |
|
|
|
100 |
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection of subscription receivable |
|
|
|
|
|
1,403 |
|
|
|
|
|
|
|
|
|
1,403 |
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
(27,994 |
) |
|
|
|
|
|
|
(27,994 |
) |
1,692,000 |
|
559,607 |
|
Balance at December 31, 2012 |
|
208 |
|
435 |
|
(1,661 |
) |
72,640 |
|
(180,406 |
) |
|
|
|
|
(108,784 |
) |
|
|
|
|
Net income |
|
|
|
|
|
|
|
32,890 |
|
|
|
|
|
|
|
32,890 |
|
2,500 |
|
|
|
Receipt of subscription receivable |
|
|
|
100 |
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
(45,354 |
) |
|
|
|
|
|
|
(45,354 |
) |
1,694,500 |
|
559,607 |
|
Predecessor: Balance at November 3, 2013 |
|
$ |
208 |
|
$ |
535 |
|
$ |
(1,761 |
) |
$ |
60,176 |
|
$ |
(180,406 |
) |
$ |
|
|
$ |
|
|
$ |
(121,248 |
) |
|
|
|
|
Successor: Balance at November 4, 2013 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
Capital contribution from members, net of transaction costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
382,546 |
|
382,546 |
|
|
|
|
|
Opening deferred tax assets |
|
|
|
|
|
|
|
517 |
|
|
|
|
|
|
|
517 |
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
782 |
|
|
|
|
|
(1,222 |
) |
(440 |
) |
|
|
|
|
Capital contributions for Laker purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
17,000 |
|
17,000 |
|
|
|
|
|
Rollover of Laker member interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
8,910 |
|
8,910 |
|
|
|
|
|
Successor: Balance at December 31, 2013 |
|
|
|
|
|
|
|
1,299 |
|
|
|
|
|
407,234 |
|
408,533 |
|
|
|
|
|
Capital contributions for MedTrak purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
54,808 |
|
54,808 |
|
|
|
|
|
Rollover of MedTrak member interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
13,090 |
|
13,090 |
|
|
|
|
|
Grant of member interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
50 |
|
|
|
|
|
Contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,570 |
|
2,570 |
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,683 |
) |
(5,683 |
) |
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
(5,665 |
) |
|
|
(5,665 |
) |
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
(2,707 |
) |
|
|
|
|
14,279 |
|
11,572 |
|
|
|
|
|
Successor: Balance at December 31, 2014 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
(1,408 |
) |
$ |
|
|
$ |
(5,665 |
) |
$ |
486,348 |
|
$ |
479,275 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
|
Successor |
|
November 4, |
|
January 1, |
|
Predecessor |
|
|
|
For the year ended December 31, 2014 |
|
2013 through December 31, 2013 |
|
2013 through November 3, 2013 |
|
For the year ended December 31, 2012 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,572 |
|
$ |
(440 |
) |
$ |
32,890 |
|
$ |
55,259 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Add back (deduct): Items not affecting cash |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
30,198 |
|
4,176 |
|
4,510 |
|
3,767 |
|
Loss on disposals of intangible assets |
|
40 |
|
|
|
|
|
|
|
Deferred financing fees amortization |
|
3,181 |
|
460 |
|
887 |
|
957 |
|
Write-off of deferred financing fees |
|
|
|
|
|
4,014 |
|
4,540 |
|
Bad debts |
|
205 |
|
205 |
|
1,790 |
|
1,186 |
|
Amortization of investments |
|
2 |
|
13 |
|
69 |
|
61 |
|
Amortization of original issue discount |
|
844 |
|
124 |
|
|
|
|
|
Deferred income taxes |
|
(422 |
) |
103 |
|
|
|
|
|
Compensation expense for equity grant |
|
50 |
|
|
|
|
|
|
|
Cash provided by (used in) changes in the following items: |
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable |
|
(239,091 |
) |
(236,335 |
) |
156,568 |
|
(155,620 |
) |
(Increase) decrease in accrued receivables |
|
(5,956 |
) |
356,604 |
|
(373,870 |
) |
(12,432 |
) |
(Increase) decrease in reinsurance recoverable |
|
2,489 |
|
(16,009 |
) |
|
|
5,402 |
|
Increase in inventory |
|
(662 |
) |
(554 |
) |
(296 |
) |
(592 |
) |
(Increase) decrease in prepaid expenses and other current assets |
|
(2,523 |
) |
796 |
|
(1,381 |
) |
56 |
|
(Increase) decrease in deposits and other assets |
|
15 |
|
2,507 |
|
(707 |
) |
(2,087 |
) |
Increase in accounts payable |
|
74,786 |
|
14,727 |
|
96,160 |
|
62,413 |
|
Increase (decrease) in accrued expenses |
|
(608 |
) |
4,135 |
|
10,236 |
|
(763 |
) |
Increase in income taxes receivable/payable |
|
(860 |
) |
246 |
|
|
|
|
|
Increase (decrease) in contract funds on deposit |
|
1,940 |
|
(585 |
) |
1,675 |
|
(3,134 |
) |
Increase (decrease) in ceded reinsurance premiums payable |
|
|
|
|
|
(2,965 |
) |
2,965 |
|
Increase (decrease) in funds held under reinsurance treaties |
|
144,508 |
|
(73,533 |
) |
115,049 |
|
125,468 |
|
Net cash provided by operating activities |
|
19,708 |
|
56,640 |
|
44,629 |
|
87,446 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Acquisitions of property and equipment |
|
(1,876 |
) |
(1,154 |
) |
(1,474 |
) |
(795 |
) |
Investment in intangible assets |
|
(8,247 |
) |
(1,095 |
) |
(3,612 |
) |
(4,358 |
) |
(Purchases of) proceeds from investments, net |
|
(9 |
) |
(8 |
) |
(169 |
) |
20 |
|
Acquisition of Laker Software, LLC, net of cash acquired |
|
|
|
(35,121 |
) |
|
|
|
|
Acquisition of Envision Pharmaceutical Holdings, LLC and Subsidiaries |
|
|
|
(620,002 |
) |
|
|
|
|
Acquisition of MedTrak Services, LLC, net of cash acquired |
|
(189,631 |
) |
|
|
|
|
|
|
Collection of advance to employee |
|
|
|
313 |
|
3 |
|
3 |
|
Net cash used in investing activities |
|
(199,763 |
) |
(657,067 |
) |
(5,252 |
) |
(5,130 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt borrowings |
|
173,250 |
|
572,450 |
|
|
|
139,437 |
|
Payments of principal on long-term debt |
|
(5,079 |
) |
(179,292 |
) |
(7,896 |
) |
(5,861 |
) |
Financing fees incurred |
|
(5,751 |
) |
(19,712 |
) |
|
|
(657 |
) |
Purchase of treasury shares |
|
|
|
|
|
|
|
(177,956 |
) |
Collection of subscription receivable |
|
|
|
1,761 |
|
|
|
1,403 |
|
Capital contributions |
|
57,378 |
|
258,554 |
|
|
|
|
|
Distributions |
|
(5,683 |
) |
|
|
(45,354 |
) |
(27,994 |
) |
Net cash provided by (used in) financing activities |
|
214,115 |
|
633,761 |
|
(53,250 |
) |
(71,628 |
) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
34,060 |
|
33,334 |
|
(13,873 |
) |
10,688 |
|
CASH AND CASH EQUIVALENTSBEGINNING OF PERIOD |
|
79,962 |
|
46,628 |
|
60,501 |
|
49,813 |
|
CASH AND CASH EQUIVALENTSEND OF PERIOD |
|
$ |
114,022 |
|
$ |
79,962 |
|
$ |
46,628 |
|
$ |
60,501 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
|
Successor |
|
November 4, |
|
January 1, |
|
Predecessor |
|
|
|
For the year ended December 31, 2014 |
|
2013 through December 31, 2013 |
|
2013 through November 3, 2013 |
|
For the year ended December 31, 2012 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
CASH PAID DURING THE YEAR FOR: |
|
|
|
|
|
|
|
|
|
INTEREST |
|
$ |
48,947 |
|
$ |
6,596 |
|
$ |
5,590 |
|
$ |
4,490 |
|
INCOME TAXES |
|
$ |
892 |
|
$ |
|
|
$ |
1,149 |
|
$ |
1,155 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company incurred capital lease obligations to directly finance the acquisition of various equipment of $0.3 million, $0.9 million and $2.5 million during the year ended December 31, 2014 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor) and year ended December 31, 2012 (Predecessor), respectively.
Various shareholders exercised stock options in exchange for subscription receivables held by the Company in the amount of $.1 million during the period from January 1, 2013 to November 3, 2013 (Predecessor) and year ended December 31, 2012 (Predecessor).
During the period from November 4, 2013 to December 31, 2013 (Successor), the Company recognized a deferred tax asset of $.5 million as a result of EIC becoming a C corporation.
During the year ended December 31, 2012 (Predecessor), the Company executed two term loan refinancings. In addition to cash received, the refinancing provided for the settlement of $157.5 million of previously held term loans, $3.7 million of previously held subordinate debt instruments, and $9.3 million of fees incurred for the refinancing.
The accompanying notes are an integral part of these consolidated financial statements.
6
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Envision Topco Holdings, LLC (Topco or the Parent) was formed by, and is majority-owned by, funds affiliated with TPG Capital L.P. (the Sponsor) on July 1, 2013. Topco wholly owns Envision Intermediate Holdings, LLC (Intermediate Holdings). Intermediate Holdings was formed on July 1, 2013, and Intermediate Holdings wholly owns Envision Acquisition Company, LLC (EAC). EAC was formed on July 1, 2013, and EAC acquired Envision Pharmaceutical Holdings, LLC (Envision Holdings) on November 4, 2013 (the Acquisition Date) in a transaction (the Acquisition) sponsored by the Sponsor. Topco does not have any business activities other than its investment in Intermediate Holdings. Intermediate Holdings does not have any business activities other than in connection with its investment in EAC. EAC does not have any business activities other than in connection with its investment in Envision Holdings.
Envision Holdings wholly owns, directly or indirectly, each of the following entities (collectively, the Subsidiaries): Rx Options, LLC, Envision Pharmaceutical Services, LLC (Ohio), Envision Pharmaceutical Services, LLC (Nevada), MedTrak Services, LLC (MedTrak), Envision Medical Solutions, LLC, First Florida Insurers of Tampa, LLC (FFI), Advance Benefits, LLC (ABI), Envision Insurance Company (EIC), Ascend Health Technologies, LLC (formerly, Midwest Technology Investments LLC), Laker Software, LLC (Laker); Design Rx Holdings LLC, Design Rx, LLC, Design Rxclusives, LLC, Rx Initiatives L.L.C. (collectively, Design Rx Companies); and Orchard Pharmaceutical Services, LLC (Orchard).
Throughout 2012 and 2013, the Design Rx Companies, FFI and ABI were single member limited liability companies. As of December 31, 2012, all other companies included in the consolidated financial statements were S corporations. Effective November 4, 2013, all companies included in the consolidated financial statements (other than EIC) are single member limited liability companies. Effective November 4, 2013, EIC is a C corporation.
Basis of Presentation
These are the financial statements of Topco, Intermediate Holdings, EAC, and Envision Holdings and the Subsidiaries (collectively, the Company).
In connection with the Acquisition: (i) Envision Holdings converted from an S corporation to a limited liability company and continues as a disregarded entity for tax purposes, with the same Delaware File Number and Federal Employer Identification Number both before and after the Acquisition, and (ii) all Subsidiaries (other than EIC) which were not limited liability companies, converted to limited liability companies. However, a new accounting basis was established in order to account for the merger as a business combination. The accompanying consolidated statements of operations, cash flows and equity are presented for the years ended December 31, 2014, 2013 and 2012. However, the year ended December 31, 2013 is presented in two periods: the Predecessor fiscal 2013 period (January 1, 2013 to November 3, 2013) and the Successor fiscal 2013 period (November 4, 2013 to December 31, 2013), which relate to the period preceding the Acquisition Date and the period including and succeeding the Acquisition Date, respectively. Although the accounting policies are consistent for the Predecessor and Successor periods, financial information for such periods has been prepared under two different historical cost bases of accounting and is therefore not comparable. The results of the periods presented are not necessarily indicative of the results that may be achieved for future periods.
7
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consolidation Policy
The consolidated financial statements include the accounts of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations
Certain subsidiaries of Envision Holdings are engaged in the design, service and sale of benefit cost-sharing prescription drug programs primarily to employer groups, health plans, business coalitions, unions, and governmental agencies throughout the United States. This is achieved through use of a preferred drug list, which is a tiered benefit based upon safety, efficacy, cost of the medication, and partner contributions (pharmaceutical and pharmacy companies).
EIC participates as a prescription drug plan sponsor through Part D of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Part D). Part D is administered by the Center for Medicare and Medicaid Services (CMS).
Laker provides claims processing systems and support services for prescription drug benefit programs.
The Design Rx Companies are engaged by pharmaceutical manufacturers and specialty pharmacies to offer programs to assist individuals with minimal prescription drug coverage by providing managed cash programs, coupon programs, co-pay offset programs, prescription data services, generics programs, direct to consumer programs, and patient education service programs. The Design Rx Companies also provide pharmacy claims adjudication services.
Orchard is a mail-order prescription drug pharmacy and specialty pharmacy.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect certain amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company generates its pharmacy benefit management revenue primarily from charging a flat fee per employee/member per month or per claim to enroll under the Companys drug plans. The Company recognizes revenue over the period to which the fee is applied.
The Company also provides a variety of pharmacy benefit programs that include such services as claims processing, nationwide pharmacy network, mail services, and formulary management. Revenue is recognized at the time these services are rendered.
The Company receives premiums for plans offered under a national Medicare Part D Prescription Drug Plan. Premiums are earned on a monthly basis over the terms of the contract.
In accordance with GAAP, when the Company provides certain pharmacy benefit management services in the fulfillment of prescriptions through the retail pharmacy network, revenues are recognized at the gross prescription price (ingredient cost plus dispensing fee less applicable
8
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
co-payment). Gross reporting is appropriate because the Company has separate contractual relationships with clients and with pharmacies and has credit risk for the prescription price due from the client.
In limited instances where there are no financial risks to the Company, revenue is recorded at the net amount of the administrative fee earned for processing the claim.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Investments
The Company invests in debt securities to satisfy licensing and other requirements of various state insurance regulations. The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity.
Other investments consist of a minority investment in another company carried at cost. GAAP requires that an impairment loss be recognized if the carrying value is deemed to be not recoverable or exceeds fair value. During the years ended December 31, 2014, 2013, and 2012, the Company did not incur any impairment loss.
Accounts Receivable
The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the previous loss history, the customers current ability to pay their obligations, and the general economy as a whole. The Company writes off accounts receivable when it determines them to be uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Any differences between estimated rebate billings and subsequent collections on those billings are recorded as a direct addition to rebate revenue. At December 31, 2014, 2013, and 2012, the Company provided an allowance for doubtful accounts of $1.6 million, $1.5 million, and $870 thousand, respectively.
Uninsured Plans
Portions of Part D are uninsured plans whereby the Company acts as an administrator and has no underwriting risk. The Company receives prospective payments from CMS in relation to Part D and amounts actually paid by the Company in excess of the prospective payments are recorded as a receivable due from CMS.
CMS reconciles the amounts actually paid and remits the final payment to the Company subsequent to year-end. Receivables from uninsured plans amounted to approximately $454 million, $258 million, and $193 million as of December 31, 2014, 2013 and 2012, respectively, and are included in accounts receivable in the accompanying consolidated balance sheets.
9
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accrued Receivables
Accrued receivables result from services provided to customers and earned rebates that have not been formally invoiced as of December 31, 2014, 2013, and 2012. Such amounts are generally invoiced on a monthly or quarterly basis.
Reinsurance
In the normal course of business, EIC seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by reinsuring certain levels of risk with a reinsurance company. EIC reports balances pertaining to reinsurance transactions gross on the balance sheet, meaning that reinsurance recoverable on unpaid losses and loss adjustment expenses are not deducted from insurance reserves but are recorded as a reinsurance recoverable asset.
Funds Held Under Reinsurance Treaties
The Company holds certain funds due to reinsurers as collateral for future claims to be paid. Amounts held in excess of payment of all claim obligations would be returned to the respective party.
Property and Equipment
Depreciation and amortization of property and equipment are provided by use of the straight-line method over the following estimated useful lives:
Building and improvements |
|
40 years |
Furniture, fixtures and equipment |
|
5 - 7 years |
For the year ended December 31, 2014 (Successor), period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor), and year ended December 31, 2013 (Predecessor), depreciation expense was $2.9 million, $.5 million, $1.9 million and $1.8 million, respectively.
Deferred Financing Fees
Deferred financing fees represent fees paid to third parties that provided services in relation to securing financing. Amortization is recognized as a component of interest expense and is computed using the straight-line method over the life of the term loan.
Intangible Assets
Intangible assets are recorded at cost and consist primarily of patents, computer software development, pharmacy benefit management accreditation license, specialty pharmacy network, non-compete agreements, customer relationships, backlog, trademarks, state insurance license costs, and manufacturer rebate contracts. Patents and computer software development costs are being amortized over their estimated useful lives of 17 and 5 years, respectively. The pharmacy benefit management accreditation license is amortized over the life of the economic benefit received, 3 years. Specialty pharmacy network is being amortized over the estimated useful life of 30 years. Non-compete agreements are being amortized over 3 to 5 years, the terms of the agreements. Customer relationships are being amortized over their estimated useful lives of 30 years. Certain trademarks are being
10
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
amortized over their estimated useful lives of 20 years. Backlog is being amortized over its useful life, 3 years. Certain trademarks and the state insurance licenses have indefinite lives and as such are tested for impairment on an annual basis. The manufacturer rebate contracts are being amortized over the life of the contracts, 3 years. For the year ended December 31, 2014, the period from November 4, 2013 to December 31, 2013 (Successor), the period from January 1, 2013 to November 3, 2013 (Predecessor) and year ended December 31, 2012 (Predecessor), amortization expense was $27.3 million, $3.7 million, $2.6 million and $1.9 million, respectively.
The Company assesses its intangible assets for impairment in accordance with GAAP. GAAP requires that an impairment loss be recognized if the carrying amount of an intangible asset is deemed not to be recoverable and its carrying amount exceeds its fair value. During the years ended December 31, 2014, 2013 and 2012, the Company did not incur any impairment charges related to intangible assets.
Goodwill
As of December 31, 2012, the Company recorded $4.9 million of goodwill in relation to the 2006 acquisition of FFI and ABI and the 2010 acquisition of the Design Rx Companies. Goodwill represents the excess of cost over the fair value of the tangible net assets acquired. This goodwill has been tested for impairment using qualitative analysis and, if necessary, fair value measurement techniques. At December 31, 2012, no impairment charge was necessary.
As of December 31, 2013, the Company recorded $390.4 million of goodwill in relation to the 2013 acquisitions described in Note 2. This goodwill has been tested for impairment using qualitative analysis and, if necessary, fair value measurement techniques. At December 31, 2014, no impairment charge was necessary.
During the year ended December 31, 2014, the Company recorded $34.0 million of goodwill in relation to the MedTrak acquisition described in Note 2, which will be tested for impairment in 2015 and thereafter.
Contract Funds on Deposit
The Company holds certain funds as collateral for future claims to be paid and for expenses incurred related to the administration of contracts with Part D clients. Deposits are returned to clients subsequent to the expiration of the contracts.
Inventory
Inventory is carried at the lower of cost or market, with cost being determined by the first-in, first-out (FIFO) method. At December 31, 2014, 2013 and 2012, inventory consisted of prescription drugs purchased by Orchard.
Derivative Instruments and Hedging Activities
The Company utilizes interest rate swaps to hedge potential rate increases in its variable rate debt. At the inception of the interest rate swap contracts, the Company determined that the contracts were derivative instruments. Because the instruments are designed as an effective cash flow hedge, the
11
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
mark-to-market gains or losses on each swap are deferred and included as a component of accumulated other comprehensive income or loss to the extent affected.
Federal Income Taxes
For the period from January 1, 2013 through November 3, 2013 and the year ended December 31, 2012, Envision Holdings and subsidiaries, with the consent of its shareholders, elected under the Internal Revenue Code to be taxed as an S Corporation. In lieu of corporation Federal income taxes, the shareholders of an S Corporation are taxed on their proportionate share of a companys taxable income. Therefore, no provision or liability for Federal income taxes has been included in these consolidated financial statements. Envision Holdings and subsidiaries have no uncertain tax positions that have been taken and believes it can defend its tax returns to any tax jurisdiction. Envision Holdings and the Subsidiaries are no longer subject to examination by tax authorities for years before 2011.
Effective November 4, 2013, the Company, other than EIC, is a single member limited liability company. The Company is treated as a disregarded entity for Federal income tax purposes. In lieu of corporation Federal income taxes, the members of the Parent are taxed on their proportionate share of the Companys taxable income. Therefore, no provision or liability for Federal income taxes has been included in these consolidated financial statements for these entities.
The Parent files income tax or information returns in the U.S. Federal jurisdiction, and various state and local jurisdictions. The Parent currently has no uncertain tax positions that have been taken and believes it can defend its tax returns to any tax jurisdiction. The Parent is subject to examination by tax authorities for 2014 and 2013.
Effective with the acquisition of Envision Holdings by the Sponsor and its conversion to a limited liability company on November 4, 2013, EIC became taxed as a C Corporation under the Internal Revenue Code. Tax provisions for the year ended December 31, 2014 and the period from November 4, 2013 to December 31, 2013 have been recorded and applicable deferred taxes have been recorded as of December 31, 2014 and 2013. EIC currently has no uncertain tax positions that have been taken and believes it can defend its tax returns to any tax jurisdiction. EIC is subject to examination by tax authorities for 2014 and 2013.
EIC recognizes interest and penalties related to tax contingencies in operating expenses. As of and for the year ended December 31, 2014, as of December 31, 2013 and for the period from November 4, 2013 to December 31, 2013, EIC did not recognize any expense for interest and penalties.
Subsequent Events
The Company has evaluated subsequent events through March 9, 2015, the date these financial statements were available to be issued. Other than the matter described in Note 20, there were no material subsequent events that required recognition or additional disclosure in these financial statements.
12
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS
AcquisitionTPG
Envision Holdings was acquired on the Acquisition Date through the Acquisition described in Note 1.
The Acquisition has been accounted for as a purchase business combination. Acquisition-related transaction costs include investment banking, legal and accounting fees, and other external costs directly related to the Acquisition. Such transaction costs paid at closing totaled $65.6 million and include $19.7 million that was capitalized as debt issuance costs and $25.1 million which are included in operating expenses in the consolidated statements of operations.
The remaining $20.8 million was paid by the Company out of equity proceeds from the Acquisition. These costs have been reflected in the consolidated financial statements as a reduction of the capital contribution from the Sponsor.
Sources and Uses of Funds
The sources and uses of funds in connection with the Acquisition are summarized below (in thousands):
|
|
Successor |
|
|
|
2013 |
|
Sources: |
|
|
|
Proceeds from 1st Lien Term Loan, net of discount |
|
$ |
400,950 |
|
Proceeds from 2nd Lien Term Loan, net of discount |
|
171,500 |
|
Proceeds from equity contributions |
|
403,372 |
|
Envision Holdings cash used in transaction |
|
15,000 |
|
Company cash used for post-closing adjustment |
|
51,124 |
|
|
|
$ |
1,041,946 |
|
Uses: |
|
|
|
Payoff November 2012 Term Loan |
|
$ |
178,063 |
|
Equity purchase price |
|
759,338 |
|
Transaction costs |
|
52,405 |
|
Employee retention program |
|
2,820 |
|
Excess cash to balance sheet |
|
49,320 |
|
|
|
$ |
1,041,946 |
|
Proceeds from equity contributions of $403.4 million include $141 million rollover equity contributions from certain employees who were shareholders of Envision Holdings prior to the Acquisition.
The Acquisition was recorded under the acquisition method of accounting by the Parent and pushed-down to the Company by allocating the purchase consideration of $951.6 million to the cost of the assets acquired, including intangible assets, based on their estimated fair values at the Acquisition Date. The allocation of purchase price is based on managements judgment after evaluating several factors, including, but not limited to, valuation assessments of tangible and intangible assets. The excess
13
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS (Continued)
of the total purchase price over the fair value of assets acquired and the liabilities assumed of $372.5 million is recorded as goodwill. The goodwill arising from the Acquisition consists largely of the commercial potential of the Company. The fair value of intangible assets acquired and residual goodwill was determined based on a third party valuation.
Purchase Price Allocation
The following sets forth the Companys purchase price allocation (in thousands):
Cash and cash equivalents |
|
$ |
46,628 |
|
Investments |
|
6,562 |
|
Accounts receivable and accrued receivables |
|
588,492 |
|
Prepaid and other |
|
4,009 |
|
Inventory |
|
4,924 |
|
Property and equipment |
|
12,284 |
|
Intangible assets |
|
540,576 |
|
Goodwill |
|
372,490 |
|
Other assets |
|
4,785 |
|
Current liabilities |
|
(629,149 |
) |
Total purchase price allocation |
|
$ |
951,601 |
|
Identifiable Intangible Assets
In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analyses of historical financial performance and estimates of future performance. The following table sets forth the components of intangible assets as of the date of the Acquisition (in thousands):
Intangible Asset |
|
Fair Value |
|
Useful Life (in years) |
|
Customer relationships |
|
$ |
253,100 |
|
30 |
|
Backlog |
|
19,500 |
|
3 |
|
Patented technology |
|
11,200 |
|
14 |
|
Non-compete agreements |
|
12,138 |
|
3 to 5 |
|
CMS license |
|
186,600 |
|
indefinite |
|
Trademarks |
|
49,900 |
|
indefinite |
|
Other |
|
8,138 |
|
3 to 5 |
|
|
|
$ |
540,576 |
|
|
|
Customer relationships represent the fair value of the Companys existing customer base. Backlog represents the fair value of the Companys backlog of client contracts. Patented technology represents the fair value of the Companys patented technology for passing 100% of earned rebates to the benefit payer at the point of sale for the Companys pharmacy benefit management business. Non-compete agreements represent the fair value of the Companys non- compete agreements with certain employees.
14
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS (Continued)
Useful lives of the amortizable intangible assets were based on estimated economic useful lives and are being amortized using the straight-line method.
CMS license represents the fair value of the Companys Part D license with CMS. Trademarks represent the fair value of the Companys established trademarks in the pharmacy benefit management business and the infertility and fertility pharmacy services business. CMS license and trademarks are not amortized, but will be evaluated for potential impairment on a periodic basis.
AcquisitionLaker
On November 26, 2013 the Company purchased 100% of the equity interest of Laker Software LLC (Laker). The aggregate purchase price was $44.6 million and was comprised of the following (in thousands):
Cash |
|
$ |
35,705 |
|
Class B Units of Topco |
|
8,910 |
|
Total purchase price |
|
$ |
44,615 |
|
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the purchase of Laker (in thousands):
Cash |
|
$ |
584 |
|
Accounts receivable |
|
1,524 |
|
Prepaid expenses |
|
3 |
|
Property and equipment, net |
|
300 |
|
Claims adjudication software |
|
20,500 |
|
Other intangibles |
|
3,900 |
|
Goodwill |
|
17,954 |
|
Total assets acquired |
|
44,765 |
|
Accounts payable and accrued expenses |
|
150 |
|
Total liabilities assumed |
|
150 |
|
Net purchase price |
|
$ |
44,615 |
|
The excess of the purchase price over the fair value of the net assets acquired and identifiable intangible assets acquired was allocated to goodwill. The Company believes the acquisition of Laker creates synergies from combining the operations of the Company and Laker, complements its existing business, increases the Companys capabilities, and should enable the Company to provide broader product offerings to new and existing customers.
The fair value of $8.9 million for 8.9 million Class B units of Topco issued as part of the consideration paid for Laker was determined based on negotiations between the Company and the members of Laker. The fair value of intangible assets acquired and residual goodwill was determined based on a third party valuation.
15
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS (Continued)
As part of the Laker transaction, the Company incurred professional fees of $571 thousand during 2013, which are included as an element of selling, general and administrative expense in the accompanying Successor consolidated statement of operations.
In connection with the acquisition of Laker on November 26, 2013, certain Laker employees were granted 2,000,000 phantom units of Topco (the Phantom Units).
The Company entered into employment agreements through November 26, 2016 with two of the three individuals who were the sellers of Laker. The Company entered into a consulting agreement through November 26, 2015 with the third individual who was one of the sellers of Laker. The employment agreements and consulting agreement contain an annual incentive compensation plan based on Lakers annual achievement of EBITDA in excess of a threshold level. The three individuals who were the sellers of Laker also entered into non-compete agreements.
AcquisitionMedTrak
On September 8, 2014 the Company purchased 100% of the equity interest of MedTrak Services, LLC (MedTrak). The aggregate purchase price was $211.8 million and was comprised of the following (in thousands):
Cash |
|
$ |
198,693 |
|
Class B Units of Topco |
|
13,090 |
|
Total purchase price |
|
$ |
211,783 |
|
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the purchase of MedTrak (in thousands):
Cash |
|
$ |
9,062 |
|
Accounts receivable |
|
33,927 |
|
Prepaid expenses |
|
81 |
|
Property and equipment, net |
|
299 |
|
Deposits and other assets |
|
27 |
|
Customer relationships |
|
140,800 |
|
Trademarks |
|
36,400 |
|
Other intangibles |
|
400 |
|
Goodwill |
|
33,957 |
|
Total assets acquired |
|
254,953 |
|
Accounts payable and accrued expenses |
|
43,170 |
|
Total liabilities assumed |
|
43,170 |
|
Net purchase price |
|
$ |
211,783 |
|
The excess of the purchase price over the fair value of the net assets acquired and identifiable intangible assets acquired was allocated to goodwill. The Company believes the acquisition of Laker complements its existing business, increases the Companys capabilities, and should enable the Company to provide broader product offerings to new and existing customers.
16
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS (Continued)
The fair value of $13.1 million for 12.6 million Class B units of Topco issued as part of the consideration paid for MedTrak was determined based on negotiations between the Company and the members of MedTrak. The fair value of intangible assets acquired and residual goodwill was determined based on a third party valuation.
As part of the MedTrak acquisition, transaction costs paid at closing totaled $6.5 million and include $5.8 million that was capitalized as debt issuance costs and $0.7 million that are included as an element of selling, general and administrative expense in the accompanying consolidated statement of operations.
The Company entered into employment agreements through September 8, 2017 with three members of MedTrak management. The employment agreements contain an annual incentive compensation plan based on the Companys annual achievement of EBITDA in excess of a threshold level. The three individuals also entered into non-compete agreements.
The following pro forma consolidated statements of income for 2014, 2013 and 2012 have been prepared as if the acquisitions of Laker and MedTrak had occurred on January 1, 2012 (in thousands):
|
|
2014 |
|
2013 |
|
2012 |
|
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
Revenues |
|
$ |
4,242,608 |
|
$ |
3,986,570 |
|
$ |
3,052,644 |
|
Cost of revenues |
|
3,983,088 |
|
3,743,601 |
|
2,847,342 |
|
Gross profit |
|
259,520 |
|
242,969 |
|
205,302 |
|
Operating expenses: |
|
|
|
|
|
|
|
Selling, general and administrative |
|
149,521 |
|
128,256 |
|
110,973 |
|
Depreciation and amortization |
|
38,009 |
|
19,567 |
|
14,724 |
|
Incurred in connection with Acquisition |
|
|
|
25,124 |
|
|
|
|
|
187,530 |
|
172,947 |
|
125,697 |
|
Income from operations |
|
71,990 |
|
70,022 |
|
79,605 |
|
Other expenses |
|
(52,352 |
) |
(18,745 |
) |
(10,959 |
) |
Income before (provision for) benefit from Federal income taxes |
|
19,638 |
|
51,277 |
|
66,646 |
|
(Provision for) benefit from Federal income taxes |
|
367 |
|
(350 |
) |
|
|
Net income |
|
20,005 |
|
50,927 |
|
66,646 |
|
Other expenses |
|
52,352 |
|
18,745 |
|
10,959 |
|
Provision for (benefit from) Federal income taxes |
|
(367 |
) |
350 |
|
|
|
Depreciation and amortization |
|
38,009 |
|
19,567 |
|
14,724 |
|
EBITDA |
|
$ |
109,999 |
|
$ |
89,589 |
|
$ |
94,329 |
|
Operating earnings before interest, income taxes, depreciation and amortization (EBITDA) shown on a pro forma basis in the table above is calculated as net income excluding the impact of income taxes, interest expense, interest income, write-off of deferred financing fees, and depreciation and amortization, and has not been adjusted to remove expenses incurred in connection with the Acquisition or other non-recurring and/or non- operating items included in income from operations.
17
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. ACQUISITIONS (Continued)
EBITDA in the table above has not been adjusted to reflect the increase in gross profit realized through post-acquisition operational improvements and synergies.
However, EBITDA in the table above has been adjusted to remove professional fees expense incurred in 2013 for the acquisition of Laker and 2014 for the acquisition of MedTrak, and to reflect contractual changes in compensation expense for 2013 for Laker. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisitions of Laker and MedTrak been consummated as of January 1, 2012.
3. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
The Company uses EBITDA as a primary measurement of the Companys earnings. The Companys consolidated EBITDA for the year ended December 31, 2014, period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor), and year ended December 31, 2012 (Predecessor) is summarized as follows (in thousands):
|
|
Successor |
|
Successor |
|
Predecessor |
|
Predecessor |
|
|
|
2014 |
|
2013 |
|
2013 |
|
2012 |
|
Net income (loss) |
|
$ |
11,572 |
|
$ |
(440 |
) |
$ |
32,890 |
|
$ |
55,259 |
|
Interest expense |
|
52,226 |
|
7,169 |
|
6,477 |
|
5,335 |
|
Other (income) expenses |
|
(41 |
) |
(13 |
) |
5,050 |
|
5,725 |
|
Provision for (benefit from) Federal income taxes |
|
(367 |
) |
350 |
|
|
|
|
|
Depreciation and amortization |
|
30,198 |
|
4,176 |
|
4,510 |
|
3,767 |
|
EBITDA |
|
$ |
93,588 |
|
$ |
11,242 |
|
$ |
48,927 |
|
$ |
70,086 |
|
EBITDA shown in the table above has not been adjusted to remove expenses incurred in connection with the Acquisition, the Laker transaction, the MedTrak transaction, or other non-recurring and/or non-operating items included in income from operations.
4. INVESTMENTS
At December 31, 2014, 2013 and 2012, EIC held investments in U.S. Treasury debt securities that were classified as held to maturity and carried at amortized cost. The amortized cost and estimated fair values of investments at December 31, 2014, 2013, and 2012 were as follows (in thousands):
|
|
Successor |
|
Successor |
|
Predecessor |
|
|
|
2014 |
|
2013 |
|
2012 |
|
Amortized cost |
|
$ |
6,564 |
|
$ |
6,557 |
|
$ |
6,462 |
|
Gross unrealized gains |
|
12 |
|
38 |
|
77 |
|
Estimated fair value |
|
$ |
6,576 |
|
$ |
6,595 |
|
$ |
6,539 |
|
18
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS (Continued)
Contractual maturities of held-to-maturity securities at December 31, 2014, 2013 and 2012, were as follows (in thousands):
|
|
Successor |
|
Successor |
|
Predecessor |
|
|
|
2014 |
|
2013 |
|
2012 |
|
Due in one year or less |
|
$ |
5,994 |
|
$ |
300 |
|
$ |
4,757 |
|
Due after one year but less than five years |
|
570 |
|
6,257 |
|
1,705 |
|
|
|
$ |
6,564 |
|
$ |
6,557 |
|
$ |
6,462 |
|
5. INTANGIBLE ASSETS
The following is a summary of the intangible assets that are presented in the accompanying consolidated balance sheets as of December 31, 2014, 2013, and 2012 (in thousands):
|
|
Successor |
|
|
|
2014 |
|
Description |
|
Cost |
|
Accumulated Amortization |
|
Net Carrying Value |
|
Subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog |
|
$ |
19,500 |
|
$ |
7,529 |
|
$ |
11,971 |
|
Claims adjudication software |
|
20,500 |
|
2,841 |
|
17,659 |
|
Computer software development |
|
11,733 |
|
1,915 |
|
9,818 |
|
Customer relationships |
|
395,600 |
|
11,844 |
|
383,756 |
|
Other intangibles |
|
5,376 |
|
1,565 |
|
3,811 |
|
Non-compete agreements |
|
12,938 |
|
3,855 |
|
9,083 |
|
Pharmacy benefit management accreditation license |
|
176 |
|
77 |
|
99 |
|
Patents |
|
11,200 |
|
926 |
|
10,274 |
|
Trademarks |
|
36,400 |
|
476 |
|
35,924 |
|
|
|
$ |
513,423 |
|
$ |
31,028 |
|
482,395 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
State insurance license costs |
|
|
|
|
|
177 |
|
CMS license |
|
|
|
|
|
186,600 |
|
Trademarks |
|
|
|
|
|
51,700 |
|
|
|
|
|
|
|
238,477 |
|
|
|
|
|
|
|
$ |
720,872 |
|
19
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INTANGIBLE ASSETS (Continued)
|
|
Successor |
|
|
|
2013 |
|
Description |
|
Cost |
|
Accumulated Amortization |
|
Net Carrying Value |
|
Subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog |
|
$ |
19,500 |
|
$ |
1,029 |
|
$ |
18,471 |
|
Claims adjudication software |
|
20,500 |
|
248 |
|
20,252 |
|
Computer software development |
|
4,347 |
|
292 |
|
4,055 |
|
Customer relationships |
|
254,800 |
|
1,261 |
|
253,539 |
|
Other intangibles |
|
4,555 |
|
225 |
|
4,330 |
|
Non-compete agreements |
|
12,538 |
|
500 |
|
12,038 |
|
Pharmacy benefit management accreditation license |
|
176 |
|
13 |
|
163 |
|
Patents |
|
11,200 |
|
122 |
|
11,078 |
|
|
|
$ |
327,616 |
|
$ |
3,690 |
|
323,926 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
State insurance license costs |
|
|
|
|
|
177 |
|
CMS license |
|
|
|
|
|
186,600 |
|
Trademarks |
|
|
|
|
|
51,700 |
|
|
|
|
|
|
|
238,477 |
|
|
|
|
|
|
|
$ |
562,403 |
|
|
|
Predecessor |
|
|
|
2012 |
|
Description |
|
Cost |
|
Accumulated Amortization |
|
Net Carrying Value |
|
Subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer software development |
|
$ |
2,764 |
|
$ |
1,148 |
|
$ |
1,616 |
|
Other intangibles |
|
5,512 |
|
1,390 |
|
4,122 |
|
Non-compete agreements |
|
2,300 |
|
1,162 |
|
1,138 |
|
Pharmacy benefit management accreditation license |
|
238 |
|
156 |
|
82 |
|
Patents |
|
881 |
|
406 |
|
475 |
|
Specialty pharmacy network |
|
19,300 |
|
1,951 |
|
17,349 |
|
|
|
$ |
30,995 |
|
$ |
6,213 |
|
24,782 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
State insurance license costs |
|
|
|
|
|
177 |
|
Trademarks |
|
|
|
|
|
12,500 |
|
|
|
|
|
|
|
12,677 |
|
|
|
|
|
|
|
$ |
37,459 |
|
20
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INTANGIBLE ASSETS (Continued)
The Company expects amortization expense for the next 5 years to be as follows (in thousands):
YEAR ENDING DECEMBER 31, |
|
|
|
2015 |
|
$ |
31,881 |
|
2016 |
|
30,271 |
|
2017 |
|
23,263 |
|
2018 |
|
20,668 |
|
2019 |
|
19,197 |
|
|
|
|
|
|
6. DEFERRED FINANCING FEES
Deferred financing fees of $21.9 million, $19.4 million, and $5.0 million at December 31, 2014, 2013, and 2012, respectively, represents fees paid to third parties that provided services in relation to securing financing. The deferred financing fees are shown net of accumulated amortization of $3.2 million, $460 thousand, and $122 thousand at December 31, 2014, 2013, and 2012, respectively.
Expected future amortization expense for the deferred financing fees for the next 5 years is as follows (in thousands):
YEAR ENDING DECEMBER 31, |
|
|
|
2015 |
|
$ |
3,761 |
|
2016 |
|
3,732 |
|
2017 |
|
3,732 |
|
2018 |
|
3,661 |
|
2019 |
|
3,277 |
|
|
|
$ |
18,344 |
|
7. LINE OF CREDIT AND LONG-TERM DEBT
Predecessor
On November 30, 2012, the Company and the bank group entered into an amended and restated credit agreement (the 2012 Credit Agreement), which provided the Company with (i) a $185 million term loan (the 2012 Term Loan) payable in quarterly installments with a balloon payment in November 2017 and (ii) a $50 million revolving line of credit (the 2012 Line of Credit) maturing in November 2017.
The 2012 Term Loan and any outstanding borrowings on the 2012 Line of Credit bore interest at a variable rate based on the one-month LIBOR plus an interest margin based on the Companys leverage ratio. As of December 31, 2012, the Company had $0 borrowings on the 2012 Line of Credit. The 2012 Term Loan and the 2012 Line of Credit were collateralized by (i) a first lien on substantially all assets of the Company (other than the assets of EIC) and (ii) a pledge of the stock of each of the Companys subsidiaries (other than EIC). Each of the Companys subsidiaries (other than EIC) guaranteed the 2012 Term Loan and the 2012 Line of Credit. The 2012 Credit Agreement required the Company to maintain certain financial covenants pertaining to leverage and fixed charges. The Company was in compliance with the covenants as of December 31, 2012.
21
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LINE OF CREDIT AND LONG-TERM DEBT (Continued)
Successor
In connection with the Acquisition, on November 4, 2013, EAC and various lenders entered into agreements for (i) a $65 million revolving credit facility (the Revolving Credit Facility), (ii) a $405 million first lien term loan (the 1st Lien Term Loan) and (iii) a $175 million second lien term loan (the 2nd Lien Term Loan). The 2012 Term Loan was repaid in-full on November 4, 2013 in connection with the Acquisition.
In connection with the acquisition of MedTrak, on September 8, 2014 EAC and various lenders entered into: (i) incremental amendment No. 1 to the first lien credit agreement which increased the 1st Lien Term Loan principal amount by $125 million (the Incremental 1st Lien Term Loan), (ii) incremental amendment No. 1 to the second lien term loan credit agreement which increased the 2nd Lien Term Loan principal amount by $50 million (the Incremental 2nd Lien Term Loan) and (iii) incremental amendment No. 2 to the first lien credit agreement which increased the Revolving Credit Facility from $65 million to $100 million.
The Revolving Credit Facility is fully available for borrowing, and is not subject to a borrowing base or any other availability calculations. The Revolving Credit Facility matures in November 2018, and any outstanding borrowings bear interest at a variable rate based on the one-month LIBOR plus an interest margin (based on the Companys leverage ratio) in the range of 4.50% to 4.75%. As of December 31, 2014 and 2013, the Company had $0 borrowings on the Revolving Credit Facility. The Revolving Credit Facility requires the Company to comply with a financial covenant pertaining to secured first lien leverage as of the end of each quarter. The Company was in compliance with the financial covenant as of December 31, 2014 and 2013.
The 1st Lien Term Loan is payable in quarterly installments of $1.3 million, with a balloon payment in November 2020. The 1st Lien Term Loan and Incremental 1st Lien Term Loan bears cash interest based on the one-month LIBOR (subject to a LIBOR floor of 1.00%) plus 4.75%. The 1st Lien Term loan was issued net of an original issue discount of $4.0 million (the 1st Lien OID). The 1st Lien OID is amortized to interest expense over the contractual term of the 1st Lien Term Loan, which results in an effective interest rate of 6.01% annually. The Incremental 1st Lien Term Loan of $125 million was issued net of an original issue discount of $0.6 million (the Incremental 1st Lien OID). The Incremental 1st Lien OID is amortized to interest expense over the contractual term of the Incremental 1st Lien Term Loan, which results in an effective interest rate of 5.93% annually.
The 2nd Lien Term Loan is non-amortizing, and matures in November 2021. The 2nd Lien Term Loan and Incremental 2nd Lien Term Loan bears cash interest based on the one-month LIBOR (subject to a LIBOR floor of 1.00%) plus 8.75%. The 2nd Lien Term loan was issued net of an original issue discount of $3.5 million (the 2nd Lien OID). The 2nd Lien OID is amortized to interest expense over the contractual term of the 2nd Lien Term Loan, which results in an effective interest rate of 10.26% annually. The Incremental 2nd Lien Term Loan of $50 million was issued net of an original issue discount of $0.3 million (the Incremental 2nd Lien OID). The Incremental 2nd Lien OID is amortized to interest expense over the contractual term of the Incremental 2nd Lien Term Loan, which results in an effective interest rate of 9.98% annually.
The Revolving Credit Facility and 1st Lien Term Loan are collateralized by (i) a first lien on substantially all assets of the Company (other than the assets of EIC) and (ii) a pledge of the stock of
22
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LINE OF CREDIT AND LONG-TERM DEBT (Continued)
each of the Companys subsidiaries (other than EIC). Each of the Companys subsidiaries (other than EIC) guaranteed the Revolving Credit Facility and the 1st Lien Term Loan.
The 2nd Lien Term Loan is collateralized by (i) a second lien on substantially all assets of the Company (other than the assets of EIC) and (ii) a pledge of the stock of each of the Companys subsidiaries (other than EIC). Each of the Companys subsidiaries (other than EIC) guaranteed the 2nd Lien Term Loan.
As of December 31, 2014, 2013, and 2012, the Company has interest cap agreements with commercial banks which provide hedges that set the maximum LIBOR rate at 2.75% for approximately $76 million of debt principal outstanding through November 2015.
The first lien credit agreement and the second lien credit agreement restrict the Companys ability to pay dividends or distributions to the amount that is required for income tax purposes.
23
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LINE OF CREDIT AND LONG-TERM DEBT (Continued)
At December 31, 2014, 2013, and 2012, long-term debt consisted of the following (in thousands):
|
|
Successor |
|
Successor |
|
Predecessor |
|
|
|
2014 |
|
2013 |
|
2012 |
|
2012 Term Loan payable to a bank group in quarterly installments of principal ranging between $2.3 million and $4.6 million plus variable rate interest (3.7% at December 31, 2012) subject to interest rate cap agreements through November 2015; collateralized by a first lien on substantially all assets of the Company (other than the assets of EIC) and a pledge of the stock of each of the Companys subsidiaries (other than EIC) |
|
$ |
|
|
$ |
|
|
$ |
185,000 |
|
1st Lien Term Loan payable to a lender group in quarterly installments of principal of $1.3 million plus variable interest (5.75% at December 31, 2014 and 2013) with a balloon payment in November 2020; collateralized by a first lien on substantially all assets of the Company (other than the assets of EIC) and a pledge of the stock of each of the Companys subsidiaries (other than EIC); outstanding amount as of December 31, 2014 and 2013, is net of original issue discount of $4.1 million and $4.0 million, respectively |
|
520,244 |
|
400,016 |
|
|
|
2nd Lien Term Loan payable to a lender group in-full at maturity in November 2021 with variable interest (9.75% at December 31, 2014 and 2013) payable quarterly; collateralized by a second lien on substantially all assets of the Company (other than the assets of EIC) and a pledge of the stock of each of the Companys subsidiaries (other than EIC); outstanding amount as of December 31, 2014 and 2013, is net of original issue discount of $3.4 million and $3.4 million, respectively. |
|
221,607 |
|
171,546 |
|
|
|
|
|
741,851 |
|
571,562 |
|
185,000 |
|
Capital leases payable to various vendors expiring in various years through 2017; collateralized by certain equipment and a vehicle with a cost of $5.5 million and a net book value of $2.9 million. |
|
1,667 |
|
2,593 |
|
2,815 |
|
|
|
743,518 |
|
574,155 |
|
187,815 |
|
Less: Current portion |
|
(5,262 |
) |
(4,468 |
) |
(10,262 |
) |
|
|
$ |
738,256 |
|
$ |
569,687 |
|
$ |
177,553 |
|
24
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LINE OF CREDIT AND LONG-TERM DEBT (Continued)
Future maturities of long-term debt are as follows (in thousands):
YEAR ENDING DECEMBER 31, |
|
|
|
2015 |
|
$ |
5,262 |
|
2016 |
|
4,845 |
|
2017 |
|
4,335 |
|
2018 |
|
4,108 |
|
2019 |
|
4,022 |
|
Thereafter |
|
720,946 |
|
|
|
$ |
743,518 |
|
8. CAPITALIZATION
The following table sets forth the fully vested Class A Units and Class B Units of Topco as of December 31, 2013 and 2014:
|
|
Class A Units |
|
Class B Units |
|
Total Class A and Class B Units |
|
Issued at $1.00 per unit and outstanding as of December 31, 2013 |
|
279,380,000 |
|
149,902,280 |
|
429,282,280 |
|
Issued at $1.00 per unit during 2014 |
|
1,650,000 |
|
|
|
1,650,000 |
|
Redeemed at $1.00 per unit during 2014 |
|
|
|
(200,000 |
) |
(200,000 |
) |
Granted at deemed value of $1.00 per unit during 2014 and vested in 2014 |
|
720,000 |
|
|
|
720,000 |
|
Issued at $1.04 per unit during 2014 |
|
48,586,308 |
|
16,941,030 |
|
65,527,388 |
|
Issued and outstanding at December 31, 2014 |
|
330,336,308 |
|
166,643,310 |
|
496,979,618 |
|
All Class A Units and Class B Units outlined in the table above were issued in exchange for an actual or deemed cash contribution to Topco of either $1.00 per Unit or $1.04 per Unit, which represented fair market value at the date of issuance.
Class B Units are subject to certain restrictions not imposed upon the Class A Units owned by the Sponsor. Such restrictions include limitations on transfer, such as (i) requisite holding periods, (ii) non-transferability to competitors, (iii) drag-along covenants imposed by, and rights of first offer in favor of, the Sponsor, (iv) call rights in favor of Topco in certain circumstances, and (v) lock-up periods which may be different than those imposed on Class A Units in the event of a public offering of Envision Holdings or Topcos securities. Class A Units not owned by the Sponsor are similarly subject to the restrictions outlined in (iii) and (iv) of the previous sentence. In addition, owners of Class B Units are essentially restricted in their activities to being an investment vehicle in Topco, and may not perform certain business functions (including incurring indebtedness, redeeming equity outside of the parameters of the Limited Liability Company Agreement of Topco or issuing additional securities).
A member of Topcos board of directors was granted 720,000 Class A Units in 2014 which are included in the Class A Units outlined in the table above, and are comprised of (i) 670,000 Class A Units, which vested in full on the date of grant, January 8, 2014, and (ii) 50,000 Class A Units, which
25
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. CAPITALIZATION (Continued)
vested in full on November 4, 2014. In addition, this board member was granted the right to receive a number of Class A Units with a fair market value of $50,000 on each November 4th (so long as he remains a member of Topcos board of directors on such date), beginning with November 4, 2014, which Class A Units vest in full on the one-year anniversary of the date of grant. 48,077 Class A Units granted on November 4, 2014 pursuant to the arrangement set forth in the previous sentence are not reflected in the table set forth above.
In connection with the acquisition of Laker on November 26, 2013, 12 Laker employees were granted a total of 1,999,992 phantom units of Topco (the Phantom Units) (166,666 Phantom Units each). The Phantom Units are the economic equivalent of Class B Units of Topco, and vest as follows: (i) 0.5 million vested on November 26, 2014, (ii) 0.5 million on November 26, 2015 (subject to continuing employment) and (iii) 1.0 million immediately upon a qualifying liquidity event (subject to continuing employment) in which the Sponsor receives a multiple of money of at least 3.0 times its initial investment. The Phantom Units are not reflected in the table set forth above.
The following table sets forth the Class C-1 Units of Topco (the Class C-1 Units) and the Class C-2 Units of Topco (the Class C-2 Units) as of December 31, 2013 and 2014:
|
|
Class C-1 Units |
|
Class C-2 Units |
|
Total Class C-1 and Class C-2 Units |
|
Granted at $1.00 per unit hurdle and outstanding as of December 31, 2013 |
|
5,735,000 |
|
7,485,000 |
|
13,220,000 |
|
Granted at $1.00 per unit hurdle rate during 2014 |
|
7,230,000 |
|
7,230,000 |
|
14,460,000 |
|
Previously granted at $1.00 per unit hurdle rate and cancelled during 2014 |
|
(180,000 |
) |
(180,000 |
) |
(360,000 |
) |
Granted at $1.04 per unit hurdle rate during 2014 |
|
2,360,000 |
|
2,360,000 |
|
4,720,000 |
|
Granted and outstanding at December 31, 2014 |
|
15,145,000 |
|
16,895,000 |
|
32,040,000 |
|
As outlined in the table above, in 2013 certain employees and a member of Topcos board of directors were granted 5,735,000 Class C-1 Units at a $1.00 per Unit hurdle rate and 7,485,000 Class C-2 Units at a $1.00 per Unit hurdle rate, which represented fair market value at the date of grant. As outlined in the table above, in 2014 certain employees and certain members of Topcos board of directors were granted 2,360,000 Class C-1 Units at a $1.04 per Unit hurdle rate and 2,360,000 Class C-2 Units at a $1.04 per Unit hurdle rate, which represented fair market value at the date of grant. All Class C-1 Units vest (subject to continuing employment) 20% per year on each of the first five anniversaries of the Acquisition Date (or first five anniversaries of the date of grant for Class C-1 Units grants subsequent to December 18, 2013). Except as outlined in the next sentence, Class C-2 Units vest (subject to continuing employment) 20% per year from 2014 through 2018 if the Company achieves a target-level of EBITDA established annually by Topcos board of directors. A certain amount of Class C-2 Units granted to a member of Topcos board of directors vest only upon a qualifying liquidity event in which the Sponsor receives a multiple of money of at least 3.0 times its initial investment. All Class C-2 Units immediately vest in full (subject to continuing employment) upon a qualifying liquidity event in which the Sponsor receives a multiple of money of at least 3.5 times its initial investment. All Class C-1 Units and Class C-2 Units are intended to represent Profits Interests in Topco within the meaning of IRS Revenue Procedure 93-27 (June 9, 1993) and IRS Revenue
26
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. CAPITALIZATION (Continued)
Procedure 2001-43 (August 3, 2001), will not receive distributions from Topco (other than certain tax distributions) until such time as the holders of Class A Units and Class B Units have received their unreturned capital contributions from Topco.
In accordance with the terms of the Merger Agreement summarized in Note 20, all Phantom Units, Class C-1 Units and Class C-2 Units outstanding on the Closing date will be paid-out in connection with the Closing as if fully vested.
The shares of common stock authorized, issued and outstanding at December 31, 2012 (Predecessor) were as follows:
|
|
Predecessor |
|
|
|
2012 |
|
Authorized |
|
2,000,000 |
|
Issued |
|
1,692,000 |
|
Outstanding |
|
1,132,393 |
|
9. COMMITMENTS
Leases
The Company leases office facilities and office equipment under various non-cancelable operating lease agreements through 2023.
The Company also leases a vehicle and equipment under various capital lease agreements. These leases are included in long-term debt and the related assets have been capitalized.
Minimum annual rentals for operating and capital leases under the remaining lease terms are as follows (in thousands):
YEAR ENDING DECEMBER 31, |
|
Capital Leases |
|
Operating Leases |
|
2015 |
|
$ |
1,009 |
|
$ |
3,882 |
|
2016 |
|
586 |
|
3,965 |
|
2017 |
|
143 |
|
3,208 |
|
2018 |
|
8 |
|
3,191 |
|
2019 |
|
|
|
3,209 |
|
Thereafter |
|
|
|
9,863 |
|
|
|
1,746 |
|
$ |
27,318 |
|
Less: Interest included in capital lease obligations |
|
(79 |
) |
|
|
|
|
$ |
1,667 |
|
|
|
For the year ended December 31, 2014 (Successor), period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor), and year ended December 31, 2012 (Predecessor), the Company incurred rent expense of $3.8 million, $.5 million, $2.6 million, and $2.4 million, respectively.
27
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, EAC, Intermediate Holdings and Topco entered into a management services agreement with TPG VI Management, LLC (Management), an affiliate of the Sponsor, pursuant to which Management, its affiliates and designees received on the closing date an aggregate transaction fee and reimbursement of expenses in the amount of $20.8 million in cash, which was paid by the Company out of equity proceeds from the Acquisition. In addition, pursuant to such agreement, and in exchange for on-going consulting and management advisory services that will be provided to the Company, the Sponsor will receive an annual monitoring fee of 1% of consolidated EBITDA. For the year ended December 31, 2014 (Successor) and the period from November 4, 2013 to December 31, 2013 (Successor), $964 thousand and $151 thousand, respectively, was recorded for monitoring fees and expenses and is included in general and administrative expenses in the consolidated statements of operations.
11. CONCENTRATIONS
The Company places its cash with regulated financial institutions. Balances with the financial institutions may exceed Federally insured limits.
12. CONTINGENCIES
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the outcome of such current proceedings will not materially affect the Companys operations, cash flows or financial position.
13. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) covering substantially all of its employees who are at least age 21 and have completed six months of service. Participating employees may elect to contribute, on a tax deferred basis, a portion of their compensation in accordance with Section 401(k) of the Internal Revenue Code. Additional matching contributions may be made to the Plan at the discretion of the Company. For the year ended December 31, 2014 (Successor), period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor), and year ended December 31, 2012 (Predecessor), the Company contributed $2.5 million, $2.1 million, $.3 million and $1.5 million, respectively.
14. DERIVATIVES
The Company entered into various interest rate swaps during 2014 with maturities ranging from 2015 to 2019. A net settlement is made quarterly based on the difference between various fixed rates (depending on the hedge) and the greater of the three-month LIBOR or one percent. The net settlement is recorded to interest expense. As a result of the swap agreements, interest expense was increased by $3.1 million for the year ended December 31, 2014.
At December 31, 2014, the Company recorded a liability of $5.7 million for the present value of the estimated increase in interest over the remaining term of the swap agreements. A corresponding charge or credit for the net change was made to other comprehensive loss for the year ended December 31, 2014.
28
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. FAIR VALUE MEASUREMENTS
GAAP requires disclosure of a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories:
· Level 1Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement.
· Level 2Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists, or in instances where prices vary substantially over time or among brokered market makers.
· Level 3Model derived valuations in which one or more significant inputs of significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Companys own assumptions that market participants would use to price the assets or liabilities based on the best available information.
The assets or liabilitys fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.
The following is a description of the valuation methodology used for liabilities measured at fair value at December 31, 2014.
Interest rate swapsValued by observable market data of similar liabilities
The preceding method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table presents the Companys net liability measured at fair value on a recurring basis at December 31, 2014 (in thousands):
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Interest rate swaps |
|
$ |
|
|
$ |
5,665 |
|
$ |
|
|
$ |
5,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Instruments
The fair value of current assets and liabilities approximate carrying value because of the short-term nature of these items. There is no quoted market value for the 1st Lien Term Loan or 2nd Lien Term Loan. Accordingly, management estimates that the recorded value of 1st Lien Term Loan and 2nd Lien Term Loan approximates the fair value of those instruments.
29
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. STOCK OPTIONS, PHANTOM STOCK AND TREASURY STOCK
At December 31, 2012, employees had unexercised stock options outstanding to acquire 7,000 shares of the Companys common stock at an exercise price of approximately $40 per share. At December 31, 2012, 3,000 shares of unexercised stock options outstanding were vested and the remaining 4,000 shares of unexercised stock options outstanding vested in January 2013. The fair value of the previously issued stock option awards, as estimated using a valuation model, was not significant. Accordingly, no compensation costs related to the awards has been recognized. All outstanding stock options were exercised immediately prior to the Acquisition.
In 2012, the Company granted 25,000 shares of phantom stock to employees at a base price of $392 per share. Subsequent to December 31, 2012, the Company granted 17,500 shares of phantom stock to employees at a base price of $400 per share. All phantom stock became immediately fully vested as a result of the Acquisition and was redeemed. The Predecessor consolidated statement of operations for the period from January 1, 2013 through November 3, 2013 includes phantom stock expense of $10.2 million.
During 2012, the Company purchased 360,577 shares of the Companys common stock as treasury shares. During 2013, all treasury stock was retired as a result of the Acquisition.
17. REINSURANCE ACTIVITY
EIC cedes insurance to a reinsurance company on a quota-share basis. The reinsurance contracts do not relieve EIC from its obligations to policyholders. Failure of the reinsurer to honor its obligations could result in losses to EIC; consequently, allowances are established for amounts deemed uncollectible. EIC evaluates the financial condition of its reinsurer and monitors concentrations of credit risk arising from the reinsurer to minimize its exposure to significant losses from reinsurer insolvency. In the opinion of management, no allowance was considered necessary as of December 31, 2014, 2013, and 2012.
EICs reinsurance contract was based on 75% quota-share reinsurance for 2014, 2013 and 2012. During 2014, EIC entered into a new reinsurance contract effective January 1, 2015 which extends through December 31, 2017. Under the terms of the contract, the reinsurer provides EIC with 50% quota-share reinsurance for 2015 and a minimum of 50% quota-share reinsurance for 2016 and 2017.
In accordance with GAAP, reinsurance activity is reflected in the consolidated statements of operations on a net basis. The net effects of reinsurance on premiums written and earned for the year ended December 31, 2014 (Successor), period from November 4, 2013 to December 31, 2013 (Successor), period from January 1, 2013 to November 3, 2013 (Predecessor) and year ended December 31, 2012 (Predecessor) are as follows (in thousands):
|
|
Successor |
|
Successor |
|
|
|
2014 |
|
2013 |
|
|
|
Written |
|
Earned |
|
Written |
|
Earned |
|
Direct |
|
$ |
435,291 |
|
$ |
435,291 |
|
$ |
88,372 |
|
$ |
88,372 |
|
Ceded |
|
(315,360 |
) |
(315,360 |
) |
(66,089 |
) |
(66,089 |
) |
|
|
$ |
119,931 |
|
$ |
119,931 |
|
$ |
22,283 |
|
$ |
22,283 |
|
30
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. REINSURANCE ACTIVITY (Continued)
|
|
Predecessor |
|
Predecessor |
|
|
|
2013 |
|
2012 |
|
|
|
Written |
|
Earned |
|
Written |
|
Earned |
|
Direct |
|
$ |
445,817 |
|
$ |
445,817 |
|
$ |
393,049 |
|
$ |
393,049 |
|
Ceded |
|
(333,404 |
) |
(333,404 |
) |
(285,641 |
) |
(285,641 |
) |
|
|
$ |
112,413 |
|
$ |
112,413 |
|
$ |
107,408 |
|
$ |
107,408 |
|
18. STATUTORY SURPLUS AND NET INCOME
EIC is statutorily required to file financial statements with state and other regulatory authorities. The accounting principles used to prepare such statutory financial statements follow prescribed or permitted accounting practices as defined in the National Association of Insurance Commissioners Accounting Practices and Procedures Manual, which principles may differ from GAAP. Permitted statutory accounting practices encompass all accounting practices not so prescribed, but allowed by the Ohio Department of Insurance. EIC has no permitted statutory accounting practices. EICs statutory reporting period is January 1 through December 31. For the year ended December 31, 2014, EICs statutory net loss was $3.1 million. For the years ended December 31, 2013 and 2012, EICs statutory net income was $1.8 million and $1.3 million, respectively. As of December 31, 2014, 2013, and 2012, EICs statutory surplus was $37.6 million, $25.5 million and $22.0 million, respectively.
EIC is generally restricted by insurance laws of the State of Ohio with regard to amounts that can be transferred to Envision Holdings in the form of dividends, loans, or advances without the approval of the Department to the greater of (a) 10 percent of statutory surplus as of December 31 of the year preceding the dividend, loan or advancement or (b) 100 percent of statutory net income for the year ended December 31 preceding the dividend, loan or advancement. The Company did not declare and/or pay any dividends to the Envision Holdings during 2014, 2013, and 2012.
EIC is subject to minimum capital and surplus requirements in the states of California, Florida, Ohio, and Wisconsin. The amount of capital and surplus required to satisfy regulatory requirements in California, Florida, Ohio, and Wisconsin is $4.8 million, $37.1 million, $34.8 million, and $8.9 million, respectively, for the year ended December 31, 2014. EIC was in excess of the minimum required amounts in these four states as of December 31, 2014.
31
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. FEDERAL INCOME TAXES
Deferred income taxes for EIC at December 31, 2014 and 2013 (Successor) reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured on an income tax basis. Temporary differences that give rise to the net deferred tax asset at December 31 were as follows (in thousands):
|
|
Successor |
|
Successor |
|
|
|
2014 |
|
2013 |
|
Deferred tax assets: |
|
|
|
|
|
Fixed assets |
|
$ |
26 |
|
$ |
32 |
|
Bad debt reserve |
|
509 |
|
495 |
|
NOL carryforwards |
|
411 |
|
|
|
Accrued audit and actuary fees |
|
20 |
|
|
|
Total deferred tax assets |
|
966 |
|
527 |
|
Deferred tax liabilities: |
|
|
|
|
|
Intangible assets |
|
(130 |
) |
(113 |
) |
Net deferred tax asset |
|
$ |
836 |
|
$ |
414 |
|
At December 31, 2014, EIC has an available unused net operating loss carryforward that may be applied against future taxable income which expires in 2034.
Current income taxes incurred consisted of the following major components for the year ended December 31, 2014 (Successor) and the period from November 4, 2013 through December 31, 2013 (Successor) (in thousands):
|
|
Successor |
|
Successor |
|
|
|
2014 |
|
2013 |
|
Current income tax expense: |
|
|
|
|
|
Federal income tax expense |
|
$ |
55 |
|
$ |
247 |
|
Net change in deferred taxes: |
|
|
|
|
|
Change in deferred tax assets |
|
$ |
419 |
|
$ |
(100 |
) |
Change in deferred tax liabilities |
|
(16 |
) |
(3 |
) |
Net change in deferred taxes |
|
403 |
|
(103 |
) |
Provision to return adjustments |
|
19 |
|
|
|
Cumulative effect of change in tax status |
|
|
|
517 |
|
Gross change in deferred taxes |
|
$ |
422 |
|
$ |
414 |
|
The following table reconciles the EICs effective income tax rate with that which would be expected if the Federal statutory rate of 34% were applied to income before income taxes for the year
32
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. FEDERAL INCOME TAXES (Continued)
ended December 31, 2014 (Successor) and the period from November 4, 2013 through December 31, 2013 (Successor) (in thousands):
|
|
Successor |
|
Successor |
|
|
|
2014 |
|
2013 |
|
Income tax provision (benefit) at US Federal statutory rates |
|
$ |
(1,045 |
) |
$ |
349 |
|
Affordable Care Act (ACA) 9010 Fee |
|
642 |
|
|
|
Other |
|
1 |
|
1 |
|
Provision to return adjustments |
|
35 |
|
|
|
Provision for (benefit from) income taxes |
|
$ |
(367 |
) |
$ |
350 |
|
20. SUBSEQUENT EVENTS
On February 10, 2015, Topco and Rite Aid Corporation (Rite Aid) entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Rite Aid will acquire Topco through a merger of a wholly-owned subsidiary of Rite Aid with and into Topco, with Topco continuing as the surviving limited liability company and a wholly-owned subsidiary of Rite Aid. Rite Aid will also acquire TPG VI Envision BL, LLC (the Blocker) through a merger of a wholly-owned subsidiary of Rite Aid with and into the Blocker, with the Blocker continuing as the surviving limited liability company and a wholly-owned subsidiary of Rite Aid.
Upon consummation of the merger (the Closing), each of the issued and outstanding limited liability company interests in Topco and the Blocker and each of the restricted stock units and phantom units of Topco (other than any such interests or units held by Rite Aid, Topco or any of their direct or indirect wholly-owned subsidiaries) will be cancelled and converted into the right to receive the pro rata share (in accordance with the waterfall provisions in Topcos governing documents), without interest and subject to any applicable tax withholding, of an aggregate purchase price comprised of 27,862,138 shares of Rite Aids common stock and $1.8 billion in cash, less Topcos existing indebtedness and certain expenses and plus certain cash amounts, and subject to certain adjustments, all as further described in the Merger Agreement. In addition, following the Closing, Rite Aid is obligated to pay to the sellers representative on behalf of the former holders of company interests, restricted stock units and phantom units such former holders pro rata share of the settlement payment to be received by EIC from the Centers for Medicare and Medicaid Services in respect of the 2014 plan year, net of amounts due to EICs reinsurer.
The parties obligations to consummate the Mergers are subject to conditions, including, among others, customary closing conditions relating to (i) the expiration or termination of the applicable antitrust waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, (ii) the receipt of applicable required insurance and healthcare regulatory approvals, and (iii) the absence of a material adverse effect, as defined in the Merger Agreement, on Topco or Rite Aid, as applicable. There is no financing condition to Closing in the Merger Agreement. On February 10, 2015, holders representing a majority of the outstanding limited liability company interests of Topco entitled to vote delivered a written consent approving and adopting the Merger Agreement and the transactions contemplated by the Merger Agreement.
33
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. SUBSEQUENT EVENTS (Continued)
The parties to the Merger Agreement have each made customary representations, warranties and covenants in the Merger Agreement, including, among others, (i) Topcos agreement to conduct its business in the ordinary course consistent with past practice between the date of the Merger Agreement and the Closing, (ii) the parties agreement to obtain governmental approvals, subject to certain exceptions, and (iii) Rite Aids agreement to use reasonable best efforts to obtain debt financing to pay the cash portion of the merger consideration on the terms set forth in the debt commitment letters executed in connection with the Merger Agreement.
The Merger Agreement contains certain termination rights of the parties, including if (i) the Closing has not occurred on or prior to September 10, 2015 (subject to extension to September 24, 2015 in certain cases), (ii) an order or law permanently prohibiting the merger has become final and non-appealable or (iii) the other party has breached its representations, warranties or covenants, subject to customary materiality qualifications and abilities to cure. In addition, Topco may also terminate the Merger Agreement if upon the satisfaction of closing conditions and the expiration of a marketing period in connection with Rite Aids debt financing, Rite Aid fails to consummate the Mergers. Upon such a termination, if Topco so elects, Rite Aid is required to pay Topco a cash termination fee of $200 million. In the event the Merger Agreement is terminated in certain circumstances involving a failure to obtain required regulatory approvals, if Topco so elects, Rite Aid is required to pay Topco a cash termination fee of $60 million.
34
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
UNAUDITED SUPPLEMENTARY INFORMATION
2014 PRO FORMA CONSOLIDATED STATEMENT OF INCOME
The following pro forma consolidated statement of income for 2014 has been prepared as if the acquisition of MedTrak Services, LLC (MedTrak) had occurred on January 1, 2014 (in thousands):
|
|
The Company Consolidated Statement of Operations 2014 |
|
Adjustments for Professional Fees Paid in Connection with MedTrak Acquisition |
|
MedTrak January 1, 2014 through September 7, 2014 |
|
The Company Pro Forma 2014 |
|
Revenues |
|
$ |
4,071,402 |
|
$ |
|
|
$ |
171,206 |
|
$ |
4,242,608 |
|
Cost of revenues |
|
3,832,928 |
|
|
|
150,160 |
|
3,983,088 |
|
Gross profit |
|
238,474 |
|
|
|
21,046 |
|
259,520 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
144,886 |
|
(749 |
) |
5,384 |
|
149,521 |
|
Depreciation and amortization |
|
30,198 |
|
|
|
7,811 |
|
38,009 |
|
|
|
175,084 |
|
(749 |
) |
13,195 |
|
187,530 |
|
Income from operations |
|
63,390 |
|
749 |
|
7,851 |
|
71,990 |
|
Other expenses |
|
(52,185 |
) |
|
|
(167 |
) |
(52,352 |
) |
Income before benefit from Federal income taxes |
|
11,205 |
|
749 |
|
7,684 |
|
19,638 |
|
Benefit from Federal income taxes |
|
367 |
|
|
|
|
|
367 |
|
Net income |
|
11,572 |
|
749 |
|
7,684 |
|
20,005 |
|
Other expenses |
|
52,185 |
|
|
|
167 |
|
52,352 |
|
Benefit from Federal income taxes |
|
(367 |
) |
|
|
|
|
(367 |
) |
Depreciation and amortization |
|
30,198 |
|
|
|
7,811 |
|
38,009 |
|
EBITDA |
|
$ |
93,588 |
|
$ |
749 |
|
$ |
15,662 |
|
$ |
109,999 |
|
Operating earnings before interest, income taxes, depreciation and amortization (EBITDA) shown on a pro forma basis in the table above is calculated as net income excluding the impact of income taxes, interest expense, interest income, and depreciation and amortization, and has not been adjusted to remove expenses other non-recurring and/or non-operating items included in income from operations. EBITDA in the table above has not been adjusted to reflect the increase in gross profit realized through post- acquisition operational improvements and synergies.
However, EBITDA in the table above has been adjusted to remove professional fees expense incurred in 2014 for the acquisition of MedTrak. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition of MedTrak been consummated as of January 1, 2014.
35
Exhibit 99.5
Summary Historical and Unaudited Pro Forma Condensed
Combined Financial and Other Data of Rite Aid
We derived the following summary historical financial data from our audited financial statements for fiscal years 2012 through 2014 and our unaudited financial statements for the 39 weeks ended November 30, 2013 and November 29, 2014. Our audited financial statements for fiscal years 2012 through 2014 and our unaudited financial statements for the 39 weeks ended November 30, 2013 and November 29, 2014 are incorporated by reference in this offering memorandum. We derived the following pro forma summary combined financial data by combining the unaudited consolidated financial statements of Rite Aid as of and for the 52 weeks ended November 29, 2014 with the audited financial statements of EnvisionRx as of and for the fiscal year ended December 31, 2014 and certain pro forma adjustments for the transactions. Such a presentation is not prepared in accordance with Regulation S-X. The audited financial statements of EnvisionRx do not include certain pro forma adjustments for EnvisionRxs prior acquisitions, which adjustments are described in the footnotes below.
This information is only a summary. You should read the data set forth in the table below in conjunction with Unaudited Pro Forma Condensed Combined Financial Statements included as Exhibit 99.3 to this 8-K and Managements Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements and the accompanying notes in our Annual Report on Form 10-K for the year ended March 1, 2014, Managements Discussion and Analysis of Financial Condition and Results of Operations and our unaudited consolidated financial statements and the accompanying notes in our Quarterly Report on Form 10-Q for the quarter ended November 29, 2014, and the audited financial statements of EnvisionRx for the fiscal year ended December 31, 2014 included as Exhibit 99.4 to this 8-K.
|
|
52 weeks Ended |
|
39 Weeks Ended |
|
Fiscal Year Ended |
|
|
|
November 29, 2014 Pro Forma for Transactions |
|
November 29, 2014 (39 weeks) |
|
November 30, 2013 (39 weeks) |
|
March 1, 2014 (52 weeks) |
|
March 2, 2013 (52 weeks) |
|
March 3, 2012 (53 weeks) |
|
|
|
(Dollars in thousands) |
|
Summary of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
30,081,211 |
|
$ |
19,680,448 |
|
$ |
18,928,954 |
|
$ |
25,526,413 |
|
$ |
25,392,263 |
|
$ |
26,121,222 |
|
Costs and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
22,336,150 |
|
14,059,577 |
|
13,490,936 |
|
18,202,679 |
|
18,073,987 |
|
19,327,887 |
|
Selling, general and administrative expenses(1) |
|
6,875,960 |
|
4,977,315 |
|
4,844,491 |
|
6,561,162 |
|
6,600,765 |
|
6,531,411 |
|
Lease termination and impairment charges |
|
37,931 |
|
20,661 |
|
24,034 |
|
41,304 |
|
70,859 |
|
100,053 |
|
Interest expense |
|
502,633 |
|
299,170 |
|
322,599 |
|
424,591 |
|
515,421 |
|
529,255 |
|
Loss on debt retirements, net |
|
18,512 |
|
18,512 |
|
62,443 |
|
62,443 |
|
140,502 |
|
33,576 |
|
Gain on sale of assets and investments, net |
|
(2,128 |
) |
(2,540 |
) |
(16,396 |
) |
(15,984 |
) |
(16,776 |
) |
(8,703 |
) |
Total costs and expenses |
|
29,769,058 |
|
19,372,695 |
|
18,728,107 |
|
25,276,195 |
|
25,384,758 |
|
26,513,479 |
|
Income (loss) before income taxes |
|
312,153 |
|
307,753 |
|
200,847 |
|
250,218 |
|
7,505 |
|
(392,257 |
) |
Income tax expense (benefit) |
|
5,330 |
|
33,612 |
|
6,810 |
|
804 |
|
(110,600 |
) |
(23,686 |
) |
Net income (loss) |
|
$ |
306,823 |
|
$ |
274,141 |
|
$ |
194,037 |
|
$ |
249,414 |
|
$ |
118,105 |
|
$ |
(368,571 |
) |
Year-End Financial Position: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
1,940,527 |
|
$ |
1,895,293 |
|
$ |
1,881,169 |
|
$ |
1,777,673 |
|
$ |
1,830,777 |
|
$ |
1,934,267 |
|
Property, plant and equipment, net |
|
2,075,270 |
|
2,062,376 |
|
1,957,584 |
|
1,957,329 |
|
1,895,650 |
|
1,902,021 |
|
Total assets |
|
10,035,511 |
|
7,185,986 |
|
7,138,167 |
|
6,944,871 |
|
7,078,719 |
|
7,364,291 |
|
Total debt(2) |
|
7,745,675 |
|
5,850,687 |
|
5,952,426 |
|
5,757,143 |
|
6,033,531 |
|
6,328,201 |
|
Stockholders deficit |
|
(1,654,375 |
) |
(1,792,658 |
) |
(2,228,825 |
) |
(2,113,702 |
) |
(2,459,434 |
) |
(2,586,756 |
) |
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(3) |
|
$ |
1,429,466 |
|
$ |
979,548 |
|
$ |
968,629 |
|
$ |
1,324,959 |
|
$ |
1,128,379 |
|
$ |
942,902 |
|
Supplemental pro forma adjusted EBITDA(4) |
|
1,481,743 |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
Cash flows (used in) provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
N/A |
|
473,959 |
|
507,918 |
|
702,046 |
|
819,588 |
|
266,537 |
|
Investing activities |
|
N/A |
|
(463,781 |
) |
(286,840 |
) |
(364,924 |
) |
(346,305 |
) |
(221,169 |
) |
Financing activities |
|
N/A |
|
76,370 |
|
(167,318 |
) |
(320,168 |
) |
(506,116 |
) |
25,801 |
|
Capital expenditures |
|
516,019 |
|
404,547 |
|
319,874 |
|
421,223 |
|
382,980 |
|
250,137 |
|
Number of retail drugstores |
|
4,572 |
|
4,572 |
|
4,595 |
|
4,587 |
|
4,623 |
|
4,667 |
|
Number of associates |
|
88,400 |
|
87,200 |
|
87,800 |
|
89,000 |
|
89,000 |
|
90,000 |
|
(1) Includes stock-based compensation expense. Stock based compensation expense for all fiscal years presented was determined using the fair value method set forth in ASC 718, CompensationStock Compensation.
(2) Total debt included capital lease obligations of $96.1 million and $109.7 million as of November 29, 2014 and November 30, 2013, respectively and $107.4 million, $115.2 million and $127.0 million as of March 1, 2014, March 2, 2013 and March 3, 2012, respectively. As of November 29, 2014, pro forma for the acquisition, total debt would have included capital lease obligations of $96.1 million.
(3) We define Adjusted EBITDA as net income excluding the impact of income taxes (and any corresponding adjustments to tax indemnification asset), interest expense, depreciation and amortization, LIFO adjustments, charges or credits for facility closing and impairment, inventory write-downs related to store closings, debt retirements, and other items (including stock-based compensation expense, sale of assets and investments, and revenue deferrals related to our customer loyalty program). We reference this particular non- GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods and external comparisons to competitors historical operating performance. In addition, incentive compensation is based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA. We include this non-GAAP financial measure in order to provide transparency to investors and enable investors to better compare our operating performance with the operating performance of our competitors.
2
Set forth below is a reconciliation of Adjusted EBITDA to our net income (loss) for the periods presented.
|
|
52 weeks Ended |
|
39 Weeks Ended |
|
Fiscal Year Ended |
|
|
|
November 29, 2014 Pro Forma for Transactions |
|
November 29, 2014 (39 weeks) |
|
November 30, 2013 (39 weeks) |
|
March 1, 2014 (52 weeks) |
|
March 2, 2013 (52 weeks) |
|
March 3, 2012 (53 weeks) |
|
|
|
(Dollars in thousands) |
|
Reconciliation of net income (loss) to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
306,823 |
|
$ |
274,141 |
|
$ |
194,037 |
|
$ |
249,414 |
|
$ |
118,105 |
|
$ |
(368,571 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
502,633 |
|
299,170 |
|
322,599 |
|
424,591 |
|
515,421 |
|
529,255 |
|
Income tax (benefit) expense |
|
5,330 |
|
33,612 |
|
6,810 |
|
804 |
|
(110,600 |
) |
(23,686 |
) |
Reduction of tax indemnification asset(a) |
|
|
|
|
|
|
|
30,516 |
|
91,314 |
|
|
|
Depreciation and amortization expense |
|
448,351 |
|
309,203 |
|
301,681 |
|
403,741 |
|
414,111 |
|
440,582 |
|
LIFO charges (credits) |
|
48,774 |
|
4,632 |
|
60,000 |
|
104,142 |
|
(147,882 |
) |
188,722 |
|
Lease termination and impairment charges |
|
37,931 |
|
20,661 |
|
24,034 |
|
41,304 |
|
70,859 |
|
100,053 |
|
Other |
|
79,624 |
|
38,129 |
|
59,468 |
|
70,447 |
|
177,051 |
|
76,547 |
|
Adjusted EBITDA(b) |
|
$ |
1,429,466 |
|
$ |
979,548 |
|
$ |
968,629 |
|
$ |
1,324,959 |
|
$ |
1,128,379 |
|
$ |
942,902 |
|
(a) The income tax benefit from the IRS settlement described in Footnote 5 in the notes to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal years ended March 1, 2014 and March 2, 2013 and the corresponding reduction of the tax indemnification asset had no net effect on Adjusted EBITDA.
(b) An unaudited reconciliation of pro forma adjusted EBITDA to net income (loss) for the 52 weeks ended November 29, 2014 for Rite Aid and 52 weeks ended December 31, 2014 for EnvisionRx is summarized as follows:
|
|
Rite Aid Historical 52 weeks ended November 29, 2014 |
|
EnvisionRx Historical 52 weeks ended December 31, 2014 |
|
Preliminary Pro Forma Adjustments for Transactions(i) |
|
Total |
|
|
|
(Dollars in thousands) |
Net income (loss) |
|
$ |
329,518 |
|
$ |
11,572 |
|
$ |
(34,267 |
) |
$ |
306,823 |
|
Interest expense |
|
401,162 |
|
52,185 |
|
49,286 |
|
502,633 |
|
Income (tax) benefit expense |
|
27,606 |
|
(367 |
) |
(21,909 |
) |
5,330 |
|
Depreciation and amortization expense |
|
411,263 |
|
30,198 |
|
6,890 |
|
448,351 |
|
Other(ii) |
|
166,329 |
|
|
|
|
|
166,329 |
|
Adjusted EBITDA |
|
$ |
1,335,878 |
|
$ |
93,588 |
|
$ |
|
|
$ |
1,429,466 |
|
(i) See Unaudited Pro Forma Condensed Combined Financial Statements for a further explanation of adjustments and applicable reconciliations.
(ii) Includes LIFO charges (credits), lease termination and impairment charges and other expenses.
(4) We define Supplemental Pro Forma Adjusted EBITDA as Adjusted EBITDA as further adjusted to give effect to (a) the acquisition by EnvisionRx of MedTrak (the MedTrak Acquisition) on September 6, 2014 as though the MedTrak Acquisition had been completed on January 1, 2014 and (b) additional estimated synergies, cost savings and other adjustments associated with the acquisition of EnvisionRx and the MedTrak Acquisition. These adjustments do not comply with Commission rules regarding the preparation of pro forma financial data and there can be no assurance that actual results would not differ from these adjustments and estimates, and such differences may be material. However, we include this non-GAAP financial measure in this offering memorandum in order to provide investors with an estimate of Adjusted EBITDA after giving effect to the acquisition of EnvisionRx and the MedTrak Acquisition. For further information regarding the MedTrak Acquisition, see note (2) to the
3
EnvisionRx financial statements included elsewhere in this offering memorandum. A reconciliation of Adjusted EBITDA to Supplemental Pro Forma Adjusted EBITDA is set forth below:
|
|
Rite Aid Historical 52 weeks ended November 29, 2014 |
|
Envision Supplemental Pro Forma Adjusted EBITDA 52 weeks ended December 31, 2014 |
|
EnvisionRx Acquisition Adjustments |
|
Total |
|
|
|
(Dollars in thousands) |
|
Adjusted EBITDA(a) |
|
$ |
1,335,878 |
|
$ |
93,588 |
|
$ |
|
|
$ |
1,429,466 |
|
MedTrak EBITDA from January 1, 2014 through September 6, 2014(b) |
|
$ |
|
|
$ |
15,662 |
|
$ |
|
|
$ |
15,662 |
|
MedTrak synergies(c) |
|
|
|
4,200 |
|
|
|
4,200 |
|
EnvisionRx cost savings(d) |
|
|
|
5,500 |
|
|
|
5,500 |
|
Non-recurring guarantee accruals(e) |
|
|
|
5,400 |
|
|
|
5,400 |
|
Non-recurring expenses(f) |
|
|
|
7,615 |
|
|
|
7,615 |
|
Cost synergies for combined entity(g) |
|
|
|
|
|
13,900 |
|
13,900 |
|
Supplemental Pro forma Adjusted EBITDA |
|
$ |
1,335,878 |
|
$ |
131,965 |
|
$ |
13,900 |
|
$ |
1,481,743 |
|
(a) See note (3) above.
(b) Represents stand-alone EBITDA of MedTrak for the period from January 1, 2014 to September 6, 2014, the date of the MedTrak Acquisition. The results of operations for MedTrak from January 1, 2014 through September 6, 2014 have not been audited or reviewed by an independent registered public accounting firm.
(c) Represents an estimate of the pro forma impact of revenue synergies realized from EnvisionRxs acquisition of MedTrak due to pricing adjustments.
(d) Represents the full year impact of estimated cost savings that EnvisionRx expects to realize through the renegotiation of certain drug purchasing agreements and reduction of other selling, general and administrative costs, including printing and temporary labor.
(e) Adjustment for non-recurring rate guarantees for clients that are not expected to recur.
(f) Adjustment to eliminate various non-recurring expenses including costs to acquire MedTrak, payments to the former owners and founders that will not be retained by EnvisionRx and other non-recurring expenses, net of the estimated annualized cost impact of new employees hired during 2014.
(g) Represents a portion of the cost synergies of $25.0 to $30.0 million that we expect to obtain as a result of the acquisition. This portion represents the full amount of synergies expected to be achieved from the use of the EnvisionRx platform to process existing Rite Aid pharmacy benefit programs and a portion of the synergies expected to be obtained from the cross leveraging of existing infrastructure. We have limited the adjustment to include only this portion of total expected synergies because they are expected to be obtained in the first year after the acquisition.
4
Summary Historical Financial and Other Data of EnvisionRx
We derived the following historical summary of financial and other data from the audited consolidated financial statements of EnvisionRx for the fiscal year ended December 31, 2014, which are included in this offering memorandum. The audited financial statements of EnvisionRx do not include certain pro forma adjustments for EnvisionRxs prior acquisitions, which adjustments are described in footnote 3(b) under Summary Historical and Unaudited Pro Forma Condensed Combined Financial and Other Data of Rite Aid.
This information is only a summary. You should read the data set forth in the table below in conjunction with EnvisionRxs audited consolidated financial statements and the accompanying notes included in this offering memorandum.
|
|
Year Ended December 31, 2014 |
|
|
|
(Dollars in thousands) |
|
Summary of Operations: |
|
|
|
Revenues |
|
$ |
4,071,402 |
|
Cost of revenues |
|
3,832,928 |
|
Gross profit |
|
238,474 |
|
Operating expenses: |
|
|
|
Selling, general and administrative |
|
144,886 |
|
Depreciation and amortization |
|
30,198 |
|
Income from operations |
|
63,390 |
|
Other income (expenses): |
|
|
|
Interest income |
|
46 |
|
Interest expense |
|
(52,226 |
) |
State and local taxes and other |
|
(5 |
) |
|
|
(52,185 |
) |
Income before provision for (benefit from) Federal income taxes |
|
11,205 |
|
Provision for (benefit from) federal income taxes |
|
|
|
Current |
|
55 |
|
Deferred |
|
(422 |
) |
Net income |
|
$ |
11,572 |
|
5
|
|
As of December 31, 2014 |
|
|
|
(Dollars in thousands) |
|
Balance Sheet Data: |
|
|
|
Total current assets |
|
$ |
884,013 |
|
Property, plant and equipment, net |
|
12,894 |
|
Total other assets |
|
1,169,494 |
|
Total assets |
|
$ |
2,066,401 |
|
Total current liabilities |
|
$ |
843,101 |
|
Total long-term liabilities |
|
744,025 |
|
Total liabilities |
|
$ |
1,587,126 |
|
Total members equity |
|
479,275 |
|
Total liabilities and members equity |
|
$ |
2,066,401 |
|
Other Data: |
|
|
|
EBITDA(1) |
|
$ |
93,588 |
|
(1) EnvisionRx defines EBITDA as net income excluding the impact of income taxes, interest expense, interest income, write-off of deferred financing fees, and depreciation and amortization. EnvisionRx uses EBITDA as a measurement of earnings. We include this non-GAAP financial measure in this offering memorandum in order to provide transparency to investors and enable investors to better compare EnvisionRxs operating performance with the operating performance of its competitors.
A reconciliation of EnvisionRxs consolidated EBITDA for the year ended December 31, 2014 is summarized as follows:
|
|
Year Ended December 31, 2014 |
|
|
|
(Dollars in thousands) |
|
Reconciliation of net income to EBITDA: |
|
|
|
Net income |
|
$ |
11,572 |
|
Adjustments: |
|
|
|
Interest expense |
|
52,226 |
|
Other (income) |
|
(41 |
) |
Benefit from Federal income taxes |
|
(367 |
) |
Depreciation and amortization |
|
30,198 |
|
EBITDA |
|
$ |
93,588 |
|
6
Rite Aid (NYSE:RAD)
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Rite Aid (NYSE:RAD)
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