Exhibit 99.2
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIODS ENDED MARCH 31, 2015 AND 2014
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
FOR THE PERIODS ENDED MARCH 31, 2015 AND 2014
TABLE OF CONTENTS
| PAGE NO |
| |
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2015 and December 31, 2014 | 2 |
| |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
For the three months ended March 31, 2015 and 2014 | 3 |
| |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 2015 and 2014 | 4 |
| |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | 5 - 22 |
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2015 AND DECEMBER 31, 2014
(in thousands)
ASSETS
| | March 31, | | December 31, | |
| | 2015 | | 2014 | |
CURRENT ASSETS | | | | | |
Cash and cash equivalents | | $ | 116,125 | | $ | 114,022 | |
Investments, at amortized cost | | 6,697 | | 6,564 | |
Accounts receivable, net | | 661,727 | | 648,947 | |
Accrued receivables | | 112,510 | | 87,219 | |
Reinsurance recoverable | | — | | 13,520 | |
Uninsured plans receivable | | 24,561 | | — | |
Income tax receivable | | — | | 614 | |
Inventory | | 6,490 | | 6,140 | |
Prepaid expenses and other current assets | | 13,986 | | 6,047 | |
Deferred tax asset | | 644 | | 940 | |
| | 942,740 | | 884,013 | |
PROPERTY AND EQUIPMENT - AT COST | | | | | |
Land | | 571 | | 571 | |
Building and improvements | | 3,926 | | 3,932 | |
Furniture, fixtures and equipment | | 12,650 | | 11,759 | |
| | 17,147 | | 16,262 | |
Less: Accumulated depreciation and amortization | | (4,095 | ) | (3,368 | ) |
| | 13,052 | | 12,894 | |
OTHER ASSETS | | | | | |
Deposits and other assets | | 540 | | 540 | |
Deferred financing fees, net | | 20,985 | | 21,931 | |
Other investments | | 1,750 | | 1,750 | |
Intangible assets, net | | 714,595 | | 720,872 | |
Goodwill | | 424,401 | | 424,401 | |
| | 1,162,271 | | 1,169,494 | |
| | $ | 2,118,063 | | $ | 2,066,401 | |
LIABILITIES
| | March 31, | | December 31, | |
| | 2015 | | 2014 | |
CURRENT LIABILITIES | | | | | |
Current portion of long-term debt | | $ | 5,132 | | $ | 5,262 | |
Accounts payable | | 508,220 | | 480,247 | |
Accrued expenses | | 29,719 | | 22,493 | |
Income taxes payable | | 43 | | — | |
Contract funds on deposit | | 3,450 | | 5,314 | |
Ceded reinsurance premiums payable | | 21,967 | | — | |
Funds held under reinsurance treaties | | 324,239 | | 329,785 | |
| | 892,770 | | 843,101 | |
LONG-TERM LIABILITIES | | | | | |
Deferred tax liabilities | | 105 | | 104 | |
Interest rate swaps | | — | | 5,665 | |
Long-term debt | | 737,000 | | 738,256 | |
| | 737,105 | | 744,025 | |
| | 1,629,875 | | 1,587,126 | |
| | | | | | | |
MEMBERS’ EQUITY
MEMBERS’ EQUITY | | 489,600 | | 486,348 | |
ACCUMULATED DEFICIT | | (1,412 | ) | (1,408 | ) |
ACCUMULATED COMPREHENSIVE LOSS | | — | | (5,665 | ) |
| | 488,188 | | 479,275 | |
| | $ | 2,118,063 | | $ | 2,066,401 | |
| | | | | | | |
See notes to condensed consolidated financial statements (unaudited).
2
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(in thousands)
| | For the three | | For the three | |
| | months ended | | months ended | |
| | March 31, 2015 | | March 31, 2014 | |
REVENUES | | $ | 1,262,815 | | $ | 934,268 | |
COST OF REVENUES | | 1,184,914 | | 878,545 | |
GROSS PROFIT | | 77,901 | | 55,723 | |
| | | | | |
OPERATING EXPENSES | | | | | |
Selling, general and administrative | | 43,293 | | 34,242 | |
Depreciation and amortization | | 9,067 | | 6,971 | |
| | 52,360 | | 41,213 | |
INCOME FROM OPERATIONS | | 25,541 | | 14,510 | |
| | | | | |
OTHER INCOME (EXPENSES) | | | | | |
Interest income | | 63 | | 55 | |
Interest expense | | (21,312 | ) | (11,181 | ) |
State and local taxes and other | | (90 | ) | (124 | ) |
| | (21,339 | ) | (11,250 | ) |
INCOME BEFORE PROVISION FOR FEDERAL INCOME TAXES | | 4,202 | | 3,260 | |
PROVISION FOR FEDERAL INCOME TAXES | | | | | |
Current | | 657 | | — | |
Deferred | | 297 | | 33 | |
| | 954 | | 33 | |
NET INCOME | | $ | 3,248 | | $ | 3,227 | |
| | | | | |
COMPREHENSIVE INCOME: | | | | | |
Net income | | $ | 3,248 | | $ | 3,227 | |
Change in fair market value of interest rate swaps | | 5,665 | | — | |
| | | | | | | |
TOTAL COMPREHENSIVE INCOME | | $ | 8,913 | | $ | 3,227 | |
See notes to condensed consolidated financial statements (unaudited).
3
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(in thousands)
| | For the three | | For the three | |
| | months ended | | months ended | |
| | March 31, 2015 | | March 31, 2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income | | $ | 3,248 | | $ | 3,227 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | |
Add back: Items not affecting cash | | | | | |
Depreciation and amortization | | 9,067 | | 6,971 | |
Deferred financing fees amortization | | 946 | | 726 | |
Bad debts | | 213 | | 629 | |
Interest incurred on payoff of interest rate swap | | 7,076 | | — | |
Amortization of investments | | 24 | | 25 | |
Amortization of original issue discount | | 239 | | 197 | |
Deferred income taxes | | 297 | | 33 | |
Compensation expense for equity grant | | — | | 50 | |
Cash provided by (used in) changes in the following items: | | | | | |
Increase in accounts receivable | | (12,993 | ) | (52,409 | ) |
(Increase) decrease in accrued receivables | | (25,291 | ) | 7,295 | |
Decrease in reinsurance recoverable | | 13,520 | | 6,403 | |
Increase in uninsured plans receivable | | (24,561 | ) | (13,438 | ) |
(Increase) decrease in inventory | | (350 | ) | 949 | |
Increase in prepaid expenses and other current assets | | (7,939 | ) | (354 | ) |
Increase (decrease) in accounts payable | | 27,973 | | (7,225 | ) |
Increase (decrease) in accrued expenses | | 7,226 | | (1,386 | ) |
(Increase) decrease in income taxes receivable/payable, net | | 657 | | (315 | ) |
Decrease in contract funds on deposit | | (1,864 | ) | (1,306 | ) |
Increase in ceded reinsurance premiums payable | | 21,967 | | — | |
Increase (decrease) in funds held under reinsurance treaties | | (5,546 | ) | 26,830 | |
Net cash provided by (used in) operating activities | | 13,909 | | (23,098 | ) |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Acquisitions of property and equipment | | (891 | ) | (375 | ) |
Investment in intangible assets | | (2,057 | ) | (1,841 | ) |
Purchases of investments, net | | (157 | ) | — | |
Net cash used in investing activities | | (3,105 | ) | (2,216 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Payments of principal on long-term debt | | (1,625 | ) | (1,333 | ) |
Payoff of interest rate swaps | | (7,076 | ) | — | |
Capital contributions | | — | | 1,670 | |
Distributions | | — | | (29 | ) |
Net cash provided by (used in) financing activities | | (8,701 | ) | 308 | |
| | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 2,103 | | (25,006 | ) |
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | | 114,022 | | 79,962 | |
CASH AND CASH EQUIVALENTS - END OF PERIOD | | $ | 116,125 | | $ | 54,956 | |
See notes to condensed consolidated financial statements (unaudited).
4
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and therefore do not include all of the information and footnotes required by GAAP for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim period. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the December 31, 2014 audited consolidated financial statements and notes thereto.
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).
These are the condensed consolidated financial statements of Topco, Intermediate Holdings, EAC, and Envision Holdings and the Subsidiaries (collectively, the Company).
Consolidation Policy
The condensed consolidated financial statements include the accounts of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
Subsequent Events
The Company has evaluated subsequent events through August 18, 2015, the date these financial statements were available to be issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements.
5
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. PLANNED MERGER WITH RITE AID CORPORATION
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 Topco’s governing documents), without interest and subject to any applicable tax withholding, of an aggregate purchase price comprised of 27,862,138 shares of Rite Aid’s common stock and $1.8 billion in cash, less Topco’s 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 EIC’s 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.
The parties to the Merger Agreement have each made customary representations, warranties and covenants in the Merger Agreement, including, among others, (i) Topco’s 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 Aid’s 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.
6
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. PLANNED MERGER WITH RITE AID CORPORATION (continued)
On April 2, 2015, Rite Aid issued $1.8 billion aggregate principal amount of 6.125% senior notes (the “6.125% Notes”) due 2023 to finance the cash portion of the pending acquisition of Topco. Upon completion of the Closing, Topco and certain of its subsidiaries other than EIC (the “Guarantors”) fully and unconditionally guarantee, jointly and severally, on an unsubordinated basis, the 6.125% Notes and other Rite Aid debt totaling $4.9 billion. The guarantees are unsecured. The 6.125% Notes are unsecured, unsubordinated obligations of Rite Aid and rank equally in right of payment with all of Rite Aid’s other unsecured, unsubordinated indebtedness.
The Closing occurred on June 24, 2015.
Guarantor and Non-Guarantor Statements
The following schedules present the financial information for the Guarantors and EIC (Non- Guarantor). Investments in subsidiaries are accounted for by their parent using the equity method of accounting. The Guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
| | Condensed Consolidating Statements of Operations | |
| | and Comprehensive Income (Loss) (Unaudited) | |
| | For the Three Months Ended March 31, 2015 | |
| | (in thousands) | |
| | Guarantors | | Non-Guarantor | | Eliminations | | Total | |
| | | | | | | | | | | | | |
Revenues | | $ | 1,261,152 | | $ | 57,894 | | $ | (56,231 | ) | $ | 1,262,815 | |
Cost of revenues | | 1,184,914 | | 55,240 | | (55,240 | ) | 1,184,914 | |
| | | | | | | | | |
Gross profit | | 76,238 | | 2,654 | | (991 | ) | 77,901 | |
| | | | | | | | | |
Operating expenses | | | | | | | | | |
Selling, general and administrative | | 42,576 | | 1,708 | | (991 | ) | 43,293 | |
Depreciation and amortization | | 9,067 | | — | | — | | 9,067 | |
| | 51,643 | | 1,708 | | (991 | ) | 52,360 | |
| | | | | | | | | |
Income from operations | | 24,595 | | 946 | | — | | 25,541 | |
| | | | | | | | | |
Other income (expenses) | | | | | | | | | |
Interest income | | 15 | | 63 | | (15 | ) | 63 | |
Interest expense | | (21,268 | ) | (59 | ) | 15 | | (21,312 | ) |
State and local taxes and other | | (90 | ) | — | | — | | (90 | ) |
| | (21,343 | ) | 4 | | — | | (21,339 | ) |
Income before provision for Federal income taxes | | 3,252 | | 950 | | — | | 4,202 | |
| | | | | | | | | |
Provision for Federal income taxes | | — | | 954 | | — | | 954 | |
| | | | | | | | | |
Income before equity in loss of consolidated subsidiary | | 3,252 | | (4 | ) | — | | 3,248 | |
| | | | | | | | | |
Equity in loss of consolidated subsidiary | | (4 | ) | — | | 4 | | — | |
| | | | | | | | | |
Net income (loss) | | $ | 3,248 | | $ | (4 | ) | $ | 4 | | $ | 3,248 | |
| | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | |
| | | | | | | | | |
Net income (loss) | | $ | 3,248 | | $ | (4 | ) | $ | 4 | | $ | 3,248 | |
Change in fair market value of interest rate swaps | | 5,665 | | — | | — | | 5,665 | |
| | | | | | | | | |
Total comprehensive income (loss) | | $ | 8,913 | | $ | (4 | ) | $ | 4 | | $ | 8,913 | |
7
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. PLANNED MERGER WITH RITE AID CORPORATION (continued)
| | Condensed Consolidating Statements of Income
and Comprehensive Income (Unaudited) | |
| | For the Three Months Ended March 31, 2014 | |
| | (in thousands) | |
| | Guarantors | | Non-Guarantor | | Eliminations | | Total | |
| | | | | | | | | |
Revenues | | $ | 932,777 | | $ | 30,616 | | $ | (29,125 | ) | $ | 934,268 | |
Cost of revenues | | 878,545 | | 28,086 | | (28,086 | ) | 878,545 | |
| | | | | | | | | |
Gross profit | | 54,232 | | 2,530 | | (1,039 | ) | 55,723 | |
| | | | | | | | | |
Operating expenses | | | | | | | | | |
Selling, general and administrative | | 32,825 | | 2,456 | | (1,039 | ) | 34,242 | |
Depreciation and amortization | | 6,970 | | 1 | | — | | 6,971 | |
| | 39,795 | | 2,457 | | (1,039 | ) | 41,213 | |
| | | | | | | | | |
Income from operations | | 14,437 | | 73 | | — | | 14,510 | |
| | | | | | | | | |
Other income (expenses) | | | | | | | | | |
Interest income | | 32 | | 23 | | — | | 55 | |
Interest expense | | (11,176 | ) | (5 | ) | — | | (11,181 | ) |
State and local taxes and other | | (124 | ) | — | | — | | (124 | ) |
| | (11,268 | ) | 18 | | — | | (11,250 | ) |
Income before provision for Federal income taxes | | 3,169 | | 91 | | — | | 3,260 | |
| | | | | | | | | |
Provision for Federal income taxes | | — | | 33 | | — | | 33 | |
| | | | | | | | | |
Income before equity in income of consolidated subsidiary | | 3,169 | | 58 | | — | | 3,227 | |
| | | | | | | | | |
Equity in income of consolidated subsidiary | | 58 | | — | | (58 | ) | — | |
| | | | | | | | | |
Net income | | $ | 3,227 | | $ | 58 | | $ | (58 | ) | $ | 3,227 | |
| | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | |
| | | | | | | | | |
Net income (loss) | | $ | 3,227 | | $ | 58 | | $ | (58 | ) | $ | 3,227 | |
Change in fair market value of interest rate swaps | | — | | — | | — | | — | |
| | | | | | | | | |
Total comprehensive income (loss) | | $ | 3,227 | | $ | 58 | | $ | (58 | ) | $ | 3,227 | |
8
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. PLANNED MERGER WITH RITE AID CORPORATION (continued)
| | Condensed Consolidating Balance Sheet
March 31, 2015 (Unaudited) | |
| | (in thousands) | |
| | Guarantors | | Non-Guarantor | | Eliminations | | Total | |
Current assets | | | | | | | | | |
Cash and cash equivalents | | $ | 83,454 | | $ | 32,671 | | $ | — | | $ | 116,125 | |
Investments, at amortized cost | | — | | 6,697 | | — | | 6,697 | |
Accounts receivable, net | | 211,329 | | 450,398 | | — | | 661,727 | |
Related party receivable | | 108,970 | | — | | (108,970 | ) | — | |
Accrued receivables | | 112,466 | | 44 | | — | | 112,510 | |
Uninsured plans receivable | | — | | 24,561 | | — | | 24,561 | |
Inventory | | 6,490 | | — | | — | | 6,490 | |
Prepaid expenses and other current assets | | 8,145 | | 5,841 | | — | | 13,986 | |
Deferred tax asset | | — | | 644 | | — | | 644 | |
| | 530,854 | | 520,856 | | (108,970 | ) | 942,740 | |
Property and equipment, net | | 13,052 | | — | | — | | 13,052 | |
| | | | | | | | | |
Other assets | | | | | | | | | |
Investment in subsidiary | | 27,621 | | — | | (27,621 | ) | — | |
Related party note receivable | | 30,000 | | — | | (30,000 | ) | — | |
Related party accrued interest receivable | | 15 | | — | | (15 | ) | — | |
Deposits and other assets | | 540 | | — | | — | | 540 | |
Deferred financing fees, net | | 20,985 | | — | | — | | 20,985 | |
Other investments | | 1,750 | | — | | — | | 1,750 | |
Intangible assets, net | | 713,867 | | 728 | | — | | 714,595 | |
Goodwill | | 424,401 | | — | | — | | 424,401 | |
| | 1,219,179 | | 728 | | (57,636 | ) | 1,162,271 | |
Total assets | | $ | 1,763,085 | | $ | 521,584 | | $ | (166,606 | ) | $ | 2,118,063 | |
| | | | | | | | | |
Current liabilities | | | | | | | | | |
Current portion of long-term debt | | $ | 5,132 | | $ | — | | $ | — | | $ | 5,132 | |
Accounts payable | | 508,144 | | 76 | | — | | 508,220 | |
Related party payable | | — | | 108,970 | | (108,970 | ) | — | |
Accrued expenses | | 21,171 | | 8,548 | | — | | 29,719 | |
Income taxes payable | | — | | 43 | | — | | 43 | |
Contract funds on deposit | | 3,450 | | — | | — | | 3,450 | |
Ceded reinsurance premiums payable | | — | | 21,967 | | — | | 21,967 | |
Funds held under reinsurance treaties | | — | | 324,239 | | — | | 324,239 | |
| | 537,897 | | 463,843 | | (108,970 | ) | 892,770 | |
| | | | | | | | | |
Long-term liabilities | | | | | | | | | |
Deferred tax liabilities | | — | | 105 | | — | | 105 | |
Related party note payable | | — | | 30,000 | | (30,000 | ) | — | |
Related party accrued interest payable | | — | | 15 | | (15 | ) | — | |
Long-term debt | | 737,000 | | — | | — | | 737,000 | |
| | 737,000 | | 30,120 | | (30,015 | ) | 737,105 | |
| | | | | | | | | |
| | 1,274,897 | | 493,963 | | (138,985 | ) | 1,629,875 | |
| | | | | | | | | |
Members’ equity | | | | | | | | | |
Members’ equity | | 488,188 | | 3,333 | | (1,921 | ) | 489,600 | |
Common stock | | — | | 2,000 | | (2,000 | ) | — | |
Additional paid-in capital | | — | | 23,700 | | (23,700 | ) | — | |
Accumulated deficit | | — | | (1,412 | ) | — | | (1,412 | ) |
| | 488,188 | | 27,621 | | (27,621 | ) | 488,188 | |
| | | | | | | | | |
Total liabilities and members’ equity | | $ | 1,763,085 | | $ | 521,584 | | $ | (166,606 | ) | $ | 2,118,063 | |
9
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. PLANNED MERGER WITH RITE AID CORPORATION (continued)
| | Condensed Consolidating Balance Sheet
December 31, 2014 | |
| | (in thousands) | |
| | Guarantors | | Non-Guarantor | | Eliminations | | Total | |
Current assets | | | | | | | | | |
Cash and cash equivalents | | $ | 94,515 | | $ | 19,507 | | $ | — | | $ | 114,022 | |
Investments, at amortized cost | | — | | 6,564 | | — | | 6,564 | |
Accounts receivable, net | | 183,515 | | 465,432 | | — | | 648,947 | |
Related party receivable | | 135,020 | | — | | (135,020 | ) | — | |
Accrued receivables | | 87,179 | | 40 | | — | | 87,219 | |
Reinsurance recoverable | | — | | 13,520 | | — | | 13,520 | |
Income tax receivable | | — | | 614 | | — | | 614 | |
Inventory | | 6,140 | | — | | — | | 6,140 | |
Prepaid expenses and other current assets | | 5,736 | | 311 | | — | | 6,047 | |
Deferred tax asset | | — | | 940 | | — | | 940 | |
| | 512,105 | | 506,928 | | (135,020 | ) | 884,013 | |
Property and equipment, net | | 12,696 | | 198 | | — | | 12,894 | |
| | | | | | | | | |
Other assets | | | | | | | | | |
Investment in subsidiary | | 27,625 | | — | | (27,625 | ) | — | |
Related party note receivable | | 15,000 | | — | | (15,000 | ) | — | |
Deposits and other assets | | 540 | | — | | — | | 540 | |
Deferred financing fees, net | | 21,931 | | — | | — | | 21,931 | |
Other investments | | 1,750 | | — | | — | | 1,750 | |
Intangible assets, net | | 720,144 | | 728 | | — | | 720,872 | |
Goodwill | | 424,401 | | — | | — | | 424,401 | |
| | 1,211,391 | | 728 | | (42,625 | ) | 1,169,494 | |
| | | | | | | | | |
Total assets | | $ | 1,736,192 | | $ | 507,854 | | $ | (177,645 | ) | $ | 2,066,401 | |
| | | | | | | | | |
Current liabilities | | | | | | | | | |
Current portion of long-term debt | | $ | 5,262 | | $ | — | | $ | — | | $ | 5,262 | |
Accounts payable | | 480,028 | | 219 | | — | | 480,247 | |
Related party payable | | — | | 135,020 | | (135,020 | ) | — | |
Accrued expenses | | 22,392 | | 101 | | — | | 22,493 | |
Contract funds on deposit | | 5,314 | | — | | — | | 5,314 | |
Funds held under reinsurance treaties | | — | | 329,785 | | — | | 329,785 | |
| | 512,996 | | 465,125 | | (135,020 | ) | 843,101 | |
Long-term liabilities | | | | | | | | | |
Deferred tax liabilities | | — | | 104 | | — | | 104 | |
Interest rate swaps | | 5,665 | | — | | — | | 5,665 | |
Related party note payable | | — | | 15,000 | | (15,000 | ) | — | |
Long-term debt | | 738,256 | | — | | — | | 738,256 | |
| | 743,921 | | 15,104 | | (15,000 | ) | 744,025 | |
| | 1,256,917 | | 480,229 | | (150,020 | ) | 1,587,126 | |
| | | | | | | | | |
Members’ equity | | | | | | | | | |
Members’ equity | | 484,940 | | 3,333 | | (1,925 | ) | 486,348 | |
Common stock | | — | | 2,000 | | (2,000 | ) | — | |
Additional paid-in capital | | — | | 23,700 | | (23,700 | ) | — | |
Accumulated deficit | | — | | (1,408 | ) | — | | (1,408 | ) |
Accumulated comprehensive loss | | (5,665 | ) | — | | — | | (5,665 | ) |
| | 479,275 | | 27,625 | | (27,625 | ) | 479,275 | |
| | | | | | | | | |
Total liabilities and members’ equity | | $ | 1,736,192 | | $ | 507,854 | | $ | (177,645 | ) | $ | 2,066,401 | |
10
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. PLANNED MERGER WITH RITE AID CORPORATION (continued)
| | Condensed Consolidating Statement of Cash Flows | |
| | For the Three Months Ended March 31, 2015 (Unaudited) | |
| | (in thousands) | |
| | Guarantors | | Non-Guarantor | | Eliminations | | Total | |
Cash flows from operating activities: | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 15,786 | | $ | (1,877 | ) | $ | — | | $ | 13,909 | |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Acquisitions of property and equipment | | (891 | ) | — | | — | | (891 | ) |
Proceeds from sale (purchase) of property and equipment from related party | | (198 | ) | 198 | | — | | — | |
Investment in intangible assets | | (2,057 | ) | — | | — | | (2,057 | ) |
Purchases of investments, net | | — | | (157 | ) | — | | (157 | ) |
Issuance of related party note receivable | | (15,000 | ) | — | | 15,000 | | — | |
Net cash provided by (used in) investing activities | | (18,146 | ) | 41 | | 15,000 | | (3,105 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Payments of principal on long-term debt | | (1,625 | ) | — | | — | | (1,625 | ) |
Proceeds from issuance of related party note payable | | — | | 15,000 | | (15,000 | ) | — | |
Payoff of interest rate swaps | | (7,076 | ) | — | | — | | (7,076 | ) |
Net cash provided by (used in) financing activities | | (8,701 | ) | 15,000 | | (15,000 | ) | (8,701 | ) |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | (11,061 | ) | 13,164 | | — | | 2,103 | |
| | | | | | | | | |
Cash and cash equivalents — beginning of year | | 94,515 | | 19,507 | | — | | 114,022 | |
| | | | | | | | | |
Cash and cash equivalents — end of year | | $ | 83,454 | | $ | 32,671 | | $ | — | | $ | 116,125 | |
| | Condensed Consolidating Statement of Cash Flows | |
| | For the Three Months Ended March 31, 2014 (Unaudited) | |
| | (in thousands) | |
| | Guarantors | | Non-Guarantor | | Eliminations | | Total | |
| | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (29,459 | ) | $ | 6,361 | | $ | — | | $ | (23,098 | ) |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Acquisitions of property and equipment | | (375 | ) | — | | — | | (375 | ) |
Investment in intangible assets | | (1,841 | ) | — | | — | | (1,841 | ) |
Net cash provided by (used in) investing activities | | (2,216 | ) | — | | — | | (2,216 | ) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Payments of principal on long-term debt | | (1,333 | ) | — | | — | | (1,333 | ) |
Capital contributions | | 1,670 | | — | | — | | 1,670 | |
Distributions | | (29 | ) | — | | — | | (29 | ) |
Net cash provided by (used in) financing activities | | 308 | | — | | — | | 308 | |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | (31,367 | ) | 6,361 | | — | | 25,006 | |
| | | | | | | | | |
Cash and cash equivalents — beginning of period | | 65,555 | | 14,407 | | — | | 79,962 | |
| | | | | | | | | |
Cash and cash equivalents — end of period | | $ | 34,188 | | $ | 20,768 | | $ | — | | $ | 54,956 | |
11
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
The Company uses EBITDA as a primary measurement of the Company’s earnings. The Company’s consolidated EBITDA for the three months ended March 31, 2015 and 2014 is summarized as follows (in thousands):
| | 2015 | | 2014 | |
Net income | | $ | 3,248 | | $ | 3,227 | |
Interest expense | | 21,312 | | 11,181 | |
Other expenses | | 27 | | 69 | |
Provision for (benefit from) | | | | | |
Federal income taxes | | 954 | | 33 | |
Depreciation and amortization | | 9,067 | | 6,971 | |
| | | | | |
EBITDA | | $ | 34,608 | | $ | 21,481 | |
EBITDA shown in the table above has not been adjusted to remove non-recurring and/or non- operating items included in income from operations.
4. INVESTMENTS
At March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014 were as follows (in thousands):
| | March 31, | | December 31, | |
| | 2015 | | 2014 | |
Amortized cost | | $ | 6,697 | | $ | 6,564 | |
Gross unrealized gains | | 37 | | 12 | |
| | | | | |
Estimated fair value | | $ | 6,734 | | $ | 6,576 | |
Contractual maturities of held-to-maturity securities at March 31, 2015 for the remainder of fiscal year 2015 and thereafter are as follows (in thousands):
| | March 31, | |
| | 2015 | |
Due in one year or less | | $ | 1,930 | |
Due after one year but less than five years | | 4,767 | |
| | $ | 6,697 | |
12
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. INTANGIBLE ASSETS
The following is a summary of the intangible assets that are presented in the accompanying condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014 (in thousands):
| | March 31, 2015 | |
Description | | Cost | | Accumulated
Amortization | | Net Carrying
Value | |
Subject to amortization: | | | | | | | | | | |
Backlog | | $ | 19,500 | | $ | 9,154 | | $ | 10,346 | |
Claims adjudication software | | 20,500 | | 3,481 | | 17,019 | |
Computer software development | | 13,645 | | 2,544 | | 11,101 | |
Customer relationships | | 395,600 | | 15,497 | | 380,103 | |
Other intangibles | | 5,521 | | 1,917 | | 3,604 | |
Non-compete agreements | | 12,938 | | 4,699 | | 8,239 | |
Pharmacy benefit management accreditation license | | 176 | | 89 | | 87 | |
Patents | | 11,200 | | 1,126 | | 10,074 | |
Trademarks | | 36,400 | | 855 | | 35,545 | |
| | $ | 515,480 | | $ | 39,362 | | $ | 476,118 | |
Indefinite-lived intangible assets: | | | | | | | |
State insurance license costs | | | | | | 177 | |
CMS license | | | | | | 186,600 | |
Trademarks | | | | | | 51,700 | |
| | | | | | 238,477 | |
| | | | | | $ | 714,595 | |
| | December 31, 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 | |
Balance to next page | | $ | 513,423 | | $ | 31,028 | | $ | 482,395 | |
13
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. INTANGIBLE ASSETS (continued)
| | March 31, 2014 | |
| | | | Accumulated | | Net Carrying | |
Description | | Cost | | Amortization | | Value | |
| | | | | | | |
Balance from previous page | | $ | 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 | |
| | | | | | | | | | |
6. LINE OF CREDIT AND LONG-TERM DEBT
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).
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 Company’s leverage ratio) in the range of 4.50% to 4.75%. As of March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014.
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.
14
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. LINE OF CREDIT AND LONG-TERM DEBT (continued)
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 each of the Company’s subsidiaries (other than EIC). Each of the Company’s 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 Company’s subsidiaries (other than EIC). Each of the Company’s subsidiaries (other than EIC) guaranteed the 2nd Lien Term Loan.
The first lien credit agreement and the second lien credit agreement restrict the Company’s ability to pay dividends or distributions to the amount that is required for income tax purposes.
At March 31, 2015 and December 31, 2014, long-term debt consisted of the following (in thousands):
| | March 31, | | December 31, | |
| | 2015 | | 2014 | |
1st Lien Term Loan payable to a lender group in quarterly installments of principal of $1.3 million plus variable interest (5.75% at March 31, 2015 and December 31, 2014) 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 Company’s subsidiaries (other than EIC); outstanding amount as of March 31, 2015 and December 31, 2014, is net of original issue discount of $3.9 million and $4.1 million, respectively | | $ | 519,069 | | $ | 520,244 | |
Balance to next page | | 519,069 | | 520,244 | |
| | | | | | | |
15
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. LINE OF CREDIT AND LONG-TERM DEBT (continued)
| | March 31, | | December 31, | |
| | 2015 | | 2014 | |
| | | | | |
Balance from previous page | | $ | 519,069 | | $ | 520,244 | |
| | | | | |
2nd Lien Term Loan payable to a lender group in-full at maturity in November 2021 with variable interest (9.75% at March 31, 2015 and December 31, 2014) payable quarterly; collateralized bya 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 Company’s subsidiaries (other than EIC); outstanding amount as of March 31, 2015 and December 31, 2014, is net of original issue discount of $3.3 million and $3.4 million, respectively | | 221,694 | | 221,607 | |
| | | | | |
Capital leases payable to various vendors expiring in various years through 2017; collateralized by certain equipment and a vehicle | | 1,369 | | 1,667 | |
| | 742,132 | | 743,518 | |
Less: Current portion | | (5,132 | ) | (5,262 | ) |
| | | | | |
| | $ | 737,000 | | $ | 738,256 | |
Future maturities of long-term debt for the remainder of fiscal year 2015 and thereafter are as follows (in thousands):
YEAR ENDING | | | |
DECEMBER 31, | | | |
2015 | | $ | 3,876 | |
2016 | | 4,845 | |
2017 | | 4,335 | |
2018 | | 4,108 | |
2019 | | 4,022 | |
Thereafter | | 720,946 | |
| | | |
| | $ | 742,132 | |
16
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. CAPITALIZATION
The following table sets forth the fully vested Class A Units and Class B Units of Topco as of March 31, 2015 and December 31, 2014:
| | | | | | Total Class A | |
| | Class A | | Class B | | and Class B | |
| | Units | | Units | | Units | |
Issued and outstanding at March 31, 2015 and 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 Topco’s 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).
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 March 31, 2015 and December 31, 2014:
| | | | | | Total Class C-1 | |
| | Class C-1 | | Class C-2 | | and Class C-2 | |
| | Units | | Units | | Units | |
Granted and outstanding at March 31, 2015 and December 31, 2014 | | 15,145,000 | | 16,895,000 | | 32,040,000 | |
17
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. CAPITALIZATION (continued)
As outlined in the table above, in 2014 certain employees and certain members of Topco’s 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 Topco’s board of directors. A certain amount of Class C-2 Units granted to a member of Topco’s 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 Procedure 2001-43 (August 3, 2001), and 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 2, 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.
8. RELATED PARTY TRANSACTIONS
Pursuant to a management services agreement with TPG VI Management, LLC (Management), an affiliate of the Sponsor, and in exchange for on-going consulting and management advisory services provided to the Company, the Sponsor receives an annual monitoring fee of 1% of consolidated EBITDA. For the three months ended March 31, 2015 and 2014, $285 thousand and $247 thousand, respectively, was recorded for monitoring fees and expenses and is included in general and administrative expenses in the consolidated statements of operations.
9. CONCENTRATIONS
The Company places its cash with regulated financial institutions. Balances with the financial institutions may exceed Federally insured limits.
10. 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 Company’s operations, cash flows or financial position.
18
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11. DERIVATIVES AND OTHER COMPREHENSIVE INCOME
During the three months ended March 31, 2015, the Company paid off all of its interest rate swaps at their net fair value, which resulted in incremental interest expense of $7.1 million for the three months ended March 31, 2015. A credit for the net change was made to other comprehensive income (loss) for the three months ended March 31, 2015.
Balances of components comprising accumulated other comprehensive income (loss), included in members’ equity, at March 31, 2015 are as follows:
| | Interest | |
| | Rate | |
| | Swaps | |
| | | |
Balance at December 31, 2014 | | $ | (5,665 | ) |
| | | |
Other comprehensive loss before reclassifications | | (1,411 | ) |
| | | |
Amounts reclassified from other comprehensive | | | |
Loss (included as a component of interest expense) | | 7,076 | |
| | | |
Net current-period other comprehensive income | | 5,665 | |
| | | |
Balance at March 31, 2015 | | $ | — | |
12. 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 1 — Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement.
· Level 2 — Quoted 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 3 — Model derived valuations in which one or more significant inputs of significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the assets or liabilities based on the best available information.
19
ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12. FAIR VALUE MEASUREMENTS (continued)
The asset’s or liability’s 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 swaps — Valued 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 Company’s 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.
13. 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 March 31, 2015 and December 31, 2014.
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.
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ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13. REINSURANCE ACTIVITY (continued)
In accordance with GAAP, reinsurance activity is reflected in the consolidated statements of income on a net basis. The net effects of reinsurance on premiums written and earned for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
| | Three months ended | | Three months ended | |
| | March 31, 2015 | | March 31, 2014 | |
| | Written | | Earned | | Written | | Earned | |
| | | | | | | | | |
Direct | | $ | 111,410 | | $ | 111,410 | | $ | 110,539 | | $ | 110,539 | |
Ceded | | (53,530 | ) | (53,530 | ) | (79,923 | ) | (79,923 | ) |
| | $ | 57,880 | | $ | 57,880 | | $ | 30,616 | | $ | 30,616 | |
14. 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. EIC’s statutory reporting period is January 1 through December 31. For the three months ended March 31, 2015 and 2014, EIC’s statutory net loss was $5.3 million and $201 thousand, respectively. As of March 31, 2015 and December 31, 2014, EIC’s statutory surplus was $47.2 million and $37.6 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 the three months ended March 31, 2015 and 2014.
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 $5.8 million, $41.0 million, $35.1 million, and $10.9 million, respectively, for the three months ended March 31, 2015. EIC was in excess of the minimum required amounts in these four states as of March 31, 2015.
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ENVISION TOPCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
15. FEDERAL INCOME TAXES
The Company’s provision for Federal income taxes for the three months ended March 31, 2015 and 2014 have been computed based on EIC’s estimated taxable income for the three months then ended. Income before Federal income taxes differs from taxable income principally due to the effect of bad debt reserving and carryforward of net operating losses. Deferred income taxes for EIC 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.
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.
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