Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial information is presented to illustrate the estimated effects of the June 24, 2015 acquisition of EnvisionRx by Rite Aid and the related financing transactions on Rite Aid’s historical balance sheets and statements of operations for the periods discussed below. The acquisition of EnvisionRx is being 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 gives effect to the following:
· The June 24, 2015 acquisition of EnvisionRx, including the April 2, 2015 issuance of $1.8 billion aggregate principal amount of Rite Aid’s 6.125% senior notes due 2023 to finance the cash portion of the consideration for the acquisition and the issuance of 27.8 million shares of Rite Aid common stock, using the acquisition method of accounting;
· The January 2015 amendment and restatement of Rite Aid’s Senior Credit Facility, which, among other things, increased borrowing capacity from $1.795 billion to $3.0 billion (which was increased to $3.7 billion upon the repayment of the 8.00% Notes in August 2015), and extended the maturity to January 2020 from February 2018; and
· The January 2015 use of borrowings under the amended and restated Senior Credit Facility to repay and retire all of the $1.147 billion outstanding under Rite Aid’s Tranche 7 Senior Secured Term Loan due 2020, along with associated fees and expenses.
The unaudited pro forma condensed combined balance sheets have been prepared as if the above occurred on February 28, 2015 and May 30, 2015, and on March 1, 2014 and February 28, 2015 for purposes of the unaudited pro forma condensed combined statements of operations.
The historical condensed combined 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 are 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 February 28, 2015, included in Rite Aid’s Annual Report on Form 10 K for the year ended February 28, 2015;
· Separate unaudited consolidated financial statements of Rite Aid as of and for the quarter ended May 30, 2015, included in Rite Aid’s Quarterly Report on From 10-Q for the quarter ended May 30, 2015;
· Separate audited consolidated financial statements of EnvisionRx as of and for the year ended December 31, 2014 and the related notes, filed herewith; and
· Separate unaudited consolidated financial statements of EnvisionRx as of and for the quarter ended March 31, 2015 and the related notes, filed herewith.
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 company’s 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 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 Aid’s 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 EnvisionRx’s prior acquisitions.
RITE AID CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the 52 weeks ended February 28, 2015 for Rite Aid Historical and the year ended December 31, 2015 for EnvisionRx Historical
(Dollars in thousands)
| | Rite Aid
Historical
52 weeks ended
February 28,
2015 | | EnvisionRx
Historical
for the
year ended
December 31,
2014 | | Preliminary
Pro Forma
Adjustments for
Transactions | | Total | |
Revenues | | $ | 26,528,377 | | $ | 4,071,402 | | $ | (271,544 | )(1) | $ | 30,328,235 | |
Cost of goods sold | | 18,951,645 | | 3,832,928 | | (271,544 | )(1) | 22,513,029 | |
Selling, general and administrative expenses | | 6,695,642 | | 144,886 | | 88,280 | (2)(5) | 6,928,808 | |
Depreciation and amortization | | — | | 30,198 | | (30,198 | )(2) | — | |
Lease termination and impairment charges | | 41,945 | | — | | — | | 41,945 | |
Interest expense | | 397,612 | | 52,185 | | 49,536 | (3) | 499,333 | |
Loss on debt retirements, net | | 18,512 | | — | | — | | 18,512 | |
Gain on sale of assets, net | | (3,799 | ) | — | | — | | (3,799 | ) |
Income (loss) before income taxes | | 426,820 | | 11,205 | | (107,618 | ) | 330,407 | |
Income tax benefit | | (1,682,353 | ) | (367 | ) | (41,971 | )(4) | (1,724,691 | ) |
Net income (loss) | | $ | 2,109,173 | | $ | 11,572 | | $ | (65,647 | ) | $ | 2,055,098 | |
These unaudited pro forma condensed combined financial statements contain estimated adjustments which are based on information available to our management at the time this document 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 is accounting 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 condensed 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.
Rite Aid is in process of conducting a review of EnvisionRx’s accounting policies in an effort to determine if differences in accounting policies require adjustment or reclassification of EnvisionRx’s results of operations or reclassification of assets or liabilities to conform to Rite Aid’s 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 Aid’s financial presentation, and accordingly, this unaudited pro forma condensed combined financial information does 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 February 28, 2015. These amounts represent actual payments made to Rite Aid for dispensing prescription drugs to EnvisionRx plan members for the 52 week period ended February 28, 2015.
(2) Represents the reclassification of depreciation and amortization expense as reported by EnvisionRx for the year ended December 31, 2014 to conform to Rite Aid’s presentation. Rite Aid records substantially all depreciation and amortization in selling, general and administrative expenses.
(3) Represents the incremental interest expense after giving effect to (a) the April 2, 2015 issuance of $1.8 billion aggregate principal amount of 6.125% senior notes due 2023; (b) the amortization of the related fees and expenses; (c) 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 (which was increased to $3.7 billion upon the repayment of the $650 million aggregate principal amount outstanding under our 8.00% Notes in August 2015) and extended the term of the Senior Credit Facility to January 2020; and (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
52 weeks ended
February 28,
2015 | |
Rite Aid historical interest expense for the fifty-two week period ended February 28, 2015 | | $ | 397,612 | |
(a) | | Incremental annual interest expense related to the April 2, 2015 issuance of $1.8 billion aggregate principal amount of our 6.125% senior notes due 2023 ($1.8 billion at 6.125%) | | 110,250 | |
(b) | | Incremental full year amortization of anticipated debt issuance costs associated with the issuance of $1.8 billion aggregate principal amount of our 6.125% senior notes due 2023 (approximately $36.1 million of debt issuance fees amortized over 7 years) | | 5,157 | |
(c) | | Incremental annualized anticipated interest savings generated from the January 2015 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 (approximately $20.0 million per year) | | (17,500 | ) |
(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 February 28, 2015 | | $ | 499,333 | |
The preliminary pro forma interest expense for the 52 week period ended February 28, 2015 excludes incremental interest associated with the $74.4 million of debt issuance costs and transaction fees and expenses that were 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.
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 document was prepared. Accordingly, the incremental amortization is subject to change and the impact of such change may be material.
RITE AID CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of February 28, 2015 for Rite Aid Historical and December 31, 2014 for EnvisionRx Historical
(Dollars in thousands)
| | Rite Aid
Historical
as of
February 28,
2015 | | EnvisionRx
Historical
as of
December 31,
2014 | | Preliminary
Pro Forma
Adjustments for
Transactions | | Total | |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 115,899 | | $ | 114,022 | | $ | (114,783 | )(1) | $ | 115,138 | |
Investments, at amortized cost | | — | | 6,564 | | — | | 6,564 | |
Accounts receivable, net | | 980,904 | | 648,947 | | | 71,603 | (2) | 1,701,454 | |
Accrued receivables | | — | | 101,353 | | (101,353 | )(2) | — | |
Inventories, net of LIFO reserve of $997,528 | | 2,882,980 | | 6,140 | | — | | 2,889,120 | |
Deferred tax assets | | 17,823 | | 940 | | — | | 18,763 | |
Prepaid expenses and other current assets | | 224,152 | | 6,047 | | — | | 230,199 | |
Total current assets | | 4,221,758 | | 884,013 | | (144,533 | ) | 4,961,238 | |
Property, plant and equipment, net | | 2,091,369 | | 12,894 | | — | | 2,104,263 | |
Goodwill | | 76,124 | | 424,401 | | 1,056,791 | (3) | 1,557,316 | |
Other intangibles, net | | 421,480 | | 720,872 | | 104,228 | (4) | 1,246,580 | |
Deferred tax assets | | 1,766,349 | | — | | — | | 1,766,349 | |
Other assets | | 286,172 | | 24,221 | | 14,200 | (5) | 324,593 | |
Total assets | | $ | 8,863,252 | | $ | 2,066,401 | | $ | 1,030,686 | | $ | 11,960,339 | |
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Current maturities of long-term debt and lease financing obligations | | $ | 100,376 | | $ | 5,262 | | $ | (5,262 | )(6) | $ | 100,376 | |
Accounts payable | | 1,133,520 | | 480,247 | | 86,750 | (7) | 1,700,517 | |
Accrued salaries, wages and other current liabilities | | 1,193,419 | | 357,592 | | (13,925 | )(5) | 1,537,086 | |
Deferred tax liabilities | | 57,685 | | — | | — | | 57,685 | |
Total current liabilities | | 2,485,000 | | 843,101 | | 67,563 | | 3,395,664 | |
Long-term debt, less current maturities | | 5,483,415 | | 738,256 | | 1,104,766 | (6) | 7,326,437 | |
Lease financing obligations, less current maturities | | 61,152 | | — | | — | | 61,152 | |
Deferred tax liabilities | | — | | — | | 143,000 | (8) | 143,000 | |
Other noncurrent liabilities | | 776,629 | | 5,769 | | (5,665 | )(5) | 776,733 | |
Total liabilities | | 8,806,196 | | 1,587,126 | | 1,309,664 | | 11,702,986 | |
Commitments and contingencies | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | |
Common stock | | 988,558 | | — | | 27,754 | (9) | 1,016,312 | |
Additional paid-in capital | | 4,521,023 | | — | | 213,153 | (9) | 4,734,176 | |
Members’ equity | | — | | 479,275 | | (479,275 | )(10) | — | |
Accumulated deficit | | (5,406,675 | ) | — | | (40,610 | )(10) | (5,447,285 | ) |
Accumulated other comprehensive loss | | (45,850 | ) | — | | — | | (45,850 | ) |
Total stockholders’ equity | | 57,056 | | 479,275 | | (278,978 | ) | 257,353 | |
Total liabilities and stockholders’ equity | | $ | 8,863,252 | | $ | 2,066,401 | | $ | 1,030,686 | | $ | 11,960,339 | |
See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements.
(1) Represents the overall change in cash resulting from the receipt of the net proceeds of the issuance of $1.8 billion 6.125% senior notes due 2023 less the cash consideration portion of the purchase price.
| | Preliminary
Pro Forma
as of February 28,
2015 | |
Combined cash on hand as of February 28, 2015 | | $ | 229,921 | |
Gross proceeds from the issuance of $1.8 billion aggregate principle amount of our 6.125% senior notes due 2023 | | 1,800,000 | |
Debt issuance costs associated with the issuance of the 6.125% senior notes due 2023 that were deducted from the gross proceeds upon issuance | | (31,378 | ) |
Cash consideration portion of the purchase price, plus the additional cash paid at settlement including estimated interim EBITDA. | | (1,883,405 | ) |
Pro forma cash and cash equivalents as of February 28, 2015 | | $ | 115,138 | |
(2) Represents i) the actual amounts due to Rite Aid for dispensing prescription drugs to EnvisionRx plan members as of February 28, 2015, and ii) the reclassification of accrued receivables as reported by EnvisionRx as of December 31, 2014 to conform with Rite Aid’s presentation.
(3) Represents the goodwill resulting from the acquisition. Please see note (4) 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) Represents the fair value adjustments resulting from 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 document 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 | |
Additional cash paid at settlement including estimated interim EBITDA | | 83,405 | |
Stock consideration | | 240,907 | |
Total | | $ | 2,124,312 | |
Preliminary purchase price allocation | | | |
Cash and cash equivalents | | $ | 114,022 | |
Investments, at amortized cost | | 6,564 | |
Accounts receivable, net | | 749,686 | |
Income tax receivable | | 614 | |
Inventories | | 6,140 | |
Prepaid expenses and other current assets | | 6,047 | |
Deferred tax asset | | 940 | |
Property, plant and equipment, net | | 12,894 | |
Goodwill | | 1,481,192 | |
Other intangibles, net | | 825,100 | |
Other assets | | 24,221 | |
Total assets acquired | | 3,227,420 | |
Accounts payable | | (596,747 | ) |
Accrued expenses | | (357,592 | ) |
Total current liabilities assumed | | (954,339 | ) |
Deferred tax liabilities | | (143,000 | ) |
Other noncurrent liabilities | | (5,769 | ) |
Total liabilities assumed | | (1,103,108 | ) |
Net assets acquired | | $ | 2,124,312 | |
The preliminary composition of other intangibles, net as of February 28, 2015 are as follows: | | | |
Subject to amortization: | | | |
Customer relationships | | $ | 585,500 | |
CMS license | | 108,000 | |
Claims adjudication and other software | | 72,000 | |
Trademarks | | 15,600 | |
| | 781,100 | |
Indefinite-lived intangible assets: | | | |
Trademarks | | 44,000 | |
| | 44,000 | |
Preliminary total other intangibles acquired | | $ | 825,100 | |
(5) Represents the anticipated impact on other assets, accrued salaries, wages and other current liabilities and other non-current liabilities as follows:
Other assets - Capitalization of $36.1 million of debt issuance costs relating to our April 2, 2015 issuance of $1.8 billion aggregate principal amount of our 6.125% senior notes due 2023, less the write-off of EnvisionRx capitalized debt issuance costs of $21.9 million.
Accrued salaries, wages and other current liabilities - Payment of $7.1 million of accrued bridge commitment fees incurred in connection with bridge financing commitments that expired upon completion of the $1.8 billion notes offering on April 2, 2015 and the payment of $6.8 million of accrued acquisition costs.
Other non-current liabilities — Write-off of EnvisionRx interest rate swap liability in connection with the repayment of all outstanding EnvisionRx indebtedness upon closing.
(6) Represents the impact on short-term and long-term indebtedness after giving effect to (a) the April 2, 2015 issuance of $1.8 billion aggregate principal amount our 6.125% senior notes due 2023 and (b) the payment of anticipated debt issuance costs and other transaction fees and expenses, calculated as follows:
| | Preliminary
Pro Forma
as of February 28,
2015 | |
Rite Aid historical outstanding indebtedness as of February 28, 2015 | | $ | 5,644,943 | |
(a) | The April 2, 2015 issuance of $1.8 billion aggregate principal amount of our 6.125% senior notes due 2023 | | 1,800,000 | |
(b) | Anticipated debt issuance costs and other transaction fees and expenses funded with our Senior Credit Facility | | 43,022 | |
| Preliminary pro forma short-term and long-term indebtedness, including capital leases, as of February 28, 2015 | | $ | 7,487,965 | |
(7) Represents $116,500 due to the seller upon collection of a $452,600 CMS receivable relating to December 31, 2014 activities, less a corresponding payable under certain reinsurance contracts of $336,100, as well as actual amounts due to Rite Aid for dispensing prescription drugs to EnvisionRx plan members as of February 28, 2015.
(8) This represents the deferred income tax liability resulting from the difference in fair value step-up of the acquired assets between book and tax.
(9) Represents the issuance of 27,754,300 shares of our common stock with a market value of $240.9 million based on a stock price of $8.68 per share as of June 24, 2014 calculated as follows:
Total pro forma adjustment to common stock and additional paid-in capital | | Preliminary
Pro Forma
as of February 28,
2015 | |
Issuance of 27.8 million shares of Rite Aid common stock, par value $1 per share, upon completion of the acquisition | | $ | 27,754 | |
Increase to additional paid-in capital resulting from the issuance of 27.8 million shares of Rite Aid common stock, par value $1 per share, at an assumed price of $8.68 per share—gross value of $240.9 million (27.8 million shares at $8.68 per share) less $27.8 million allocated to common stock | | 213,153 | |
Aggregate increase in common stock and additional paid-in capital resulting from the issuance of 27.8 million shares of common stock in connection with the completion of the acquisition | | $ | 240,907 | |
(10) Represents the aggregate pro forma adjustments for (a) the retirement of EnvisionRx equity as of December 31, 2014, (b) the write-off of EnvisionRx capitalized debt issuance costs as of December 31, 2014 due to the repayment of all outstanding EnvisionRx indebtedness upon completion of the acquisition, (c) the write-off of the EnvisionRx accrued interest rate swap liability in connection with the repayment of all outstanding EnvisionRx indebtedness upon completion of the acquisition, (d) 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 February 28,
2015 | |
(a) | Retirement of EnvisionRx equity as of December 31, 2014 | | $ | (479,275 | ) |
(b) | Write-off of EnvisionRx capitalized debt issuance costs as of December 31, 2014 due to the repayment of all outstanding EnvisionRx indebtedness upon completion of the acquisition | | (21,900 | ) |
(c) | Write-off of the EnvisionRx accrued interest rate swap liability in connection with the repayment of all outstanding indebtedness upon closing. | | 5,665 | |
(d) | Unamortized fees incurred in connection with bridge financing commitments that expired upon completion of the $1.8 billion notes offering on April 2, 2015 | | (15,375 | ) |
(e) | Certain non-capital expenses and fees incurred in connection with the transaction, including merger and acquisition consultation, legal, accounting and other professional services | | (9,000 | ) |
Total pro forma adjustment to accumulated deficit | | $ | (519,885 | ) |
RITE AID CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the 13 weeks ended May 30, 2015 for Rite Aid Historical and the quarter ended March 31, 2015 for EnvisionRx Historical
(Dollars in thousands)
| | Rite Aid
Historical
13 weeks ended
May 30,
2015 | | EnvisionRx
Historical
for the
quarter ended
March 31,
2015 | | Preliminary
Pro Forma
Adjustments for
Transactions | | Total | |
Revenues | | $ | 6,647,561 | | $ | 1,262,815 | | $ | (79,755 | )(1) | $ | 7,830,621 | |
Cost of goods sold | | 4,788,031 | | 1,184,914 | | (79,755 | )(1) | 5,893,190 | |
Selling, general and administrative expenses | | 1,699,585 | | 43,293 | | 22,070 | (2)(5) | 1,764,948 | |
Depreciation and amortization | | — | | 9,067 | | (9,067 | )(2) | — | |
Lease termination and impairment charges | | 5,022 | | — | | — | | 5,022 | |
Interest expense | | 123,607 | | 21,339 | | (11,081 | )(3) | 133,865 | |
Loss on debt retirements, net | | — | | — | | — | | — | |
Gain on sale of assets, net | | 39 | | — | | — | | 39 | |
Income before income taxes | | 31,277 | | 4,202 | | (1,922 | ) | 33,557 | |
Income tax expense | | 12,441 | | 954 | | (750 | )(4) | 12,645 | |
Net income | | $ | 18,836 | | $ | 3,248 | | $ | (1,172 | ) | $ | 20,912 | |
These unaudited pro forma condensed combined financial statements contain estimated adjustments which are based on information available to our management at the time this document 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 is accounting 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 condensed 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.
Rite Aid is in process of conducting a review of EnvisionRx’s accounting policies in an effort to determine if differences in accounting policies require adjustment or reclassification of EnvisionRx’s results of operations or reclassification of assets or liabilities to conform to Rite Aid’s 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 Aid’s financial presentation, and accordingly, this unaudited pro forma condensed combined financial information does 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 13 week period ended May 30, 2015. These amounts represent actual payments made to Rite Aid for dispensing prescription drugs to EnvisionRx plan members for the 13 week period ended May 30, 2015.
(2) Represents the reclassification of depreciation and amortization expense as reported by EnvisionRx for the quarter ended March 31, 2015 to conform to Rite Aid’s presentation. Rite Aid records substantially all depreciation and amortization in selling, general and administrative expenses.
(3) Represents the incremental interest expense after giving effect to (a) the April 2, 2015 issuance of $1.8 billion aggregate principal amount of our 6.125% senior notes due 2023; and (b) the amortization of the related fees and expenses, calculated as follows:
| | | | Preliminary
Pro Forma
13 weeks ended
May 30,
2015 | |
Rite Aid historical interest expense for the thirteen week period ended May 30, 2015 | | $ | 123,607 | |
(a) | | Incremental full quarter interest expense related to the April 2, 2015 issuance of $1.8 billion aggregate principal amount of our 6.125% senior notes due 2023 ($1.8 billion at 6.125%) | | 9,800 | |
(b) | | Incremental full quarter amortization of debt issuance costs associated with the issuance of $1.8 billion aggregate principal amount of our 6.125% senior notes due 2023 (Approximately $36.1 million of debt issuance fees amortized over 7 years) | | 458 | |
Pro forma interest expense for the 13 week period ended May 30, 2015 | | $ | 133,865 | |
The preliminary pro forma interest expense for the 13 week period ended May 30 28, 2015 excludes incremental interest associated with the $35.5 million of debt issuance costs and transaction fees and expenses that were 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.
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 document was prepared. Accordingly, the incremental amortization is subject to change and the impact of such change may be material.
RITE AID CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of May 30, 2015 for Rite Aid Historical and March 31, 2015 for EnvisionRx Historical
(Dollars in thousands)
| | Rite Aid
Historical
as of
May 30,
2015 | | EnvisionRx
Historical
as of
March 31,
2015 | | Preliminary
Pro Forma
Adjustments for
Transactions | | Total | |
Assets | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | | $ | 1,922,129 | | $ | 116,125 | | $ | (1,883,405 | )(1) | $ | 154,849 | |
Investments, at amortized cost | | — | | 6,697 | | — | | 6,697 | |
Accounts receivable, net | | 969,725 | | 686,288 | | 74,138 | (2) | 1,730,151 | |
Accrued receivables | | — | | 112,510 | | (112,510 | )(2) | — | |
Inventories, net of LIFO reserve of $1,003,515 | | 2,820,784 | | 6,490 | | — | | 2,827,274 | |
Deferred tax assets | | 17,823 | | 644 | | — | | 18,467 | |
Prepaid expenses and other current assets | | 100,386 | | 13,986 | | — | | 114,372 | |
Total current assets | | 5,830,847 | | 942,740 | | (1,921,777 | ) | 4,851,810 | |
Property, plant and equipment, net | | 2,143,575 | | 13,052 | | — | | 2,156,627 | |
Goodwill | | 76,124 | | 424,401 | | 1,042,987 | (3) | 1,543,512 | |
Other intangibles, net | | 403,085 | | 714,595 | | 110,505 | (4) | 1,228,185 | |
Deferred tax assets | | 1,756,809 | | — | | — | | 1,756,809 | |
Other assets | | 319,334 | | 23,275 | | (21,900 | )(5) | 320,709 | |
Total assets | | $ | 10,529,774 | | $ | 2,118,063 | | $ | (790,185 | ) | $ | 11,857,652 | |
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Current maturities of long-term debt and lease financing obligations | | $ | 35,039 | | $ | 5,132 | | $ | (5,132 | )(6) | $ | 35,039 | |
Accounts payable | | 1,167,354 | | 508,220 | | 78,128 | (7) | 1,753,702 | |
Accrued salaries, wages and other current liabilities | | 1,144,889 | | 379,418 | | (26,500 | )(5) | 1,497,807 | |
Deferred tax liabilities | | 57,685 | | — | | — | | 57,685 | |
Total current liabilities | | 2,404,967 | | 892,770 | | 46,496 | | 3,344,233 | |
Long-term debt, less current maturities | | 7,142,247 | | 737,000 | | (701,500 | )(6) | 7,177,747 | |
Lease financing obligations, less current maturities | | 57,585 | | — | | — | | 57,585 | |
Deferred tax liabilities | | — | | — | | 143,000 | (8) | 143,000 | |
Other noncurrent liabilities | | 772,244 | | 105 | | — | | 772,349 | |
Total liabilities | | 10,377,043 | | 1,629,875 | | (512,004 | ) | 11,494,914 | |
Commitments and contingencies | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | |
Common stock | | 1,014,827 | | — | | 27,754 | (9) | 1,042,581 | |
Additional paid-in capital | | 4,570,996 | | — | | 213,153 | (9) | 4,784,149 | |
Members’ equity | | — | | 488,188 | | (488,188 | )(10) | — | |
Accumulated deficit | | (5,387,839 | ) | — | | (30,900 | )(10) | (5,418,739 | ) |
Accumulated other comprehensive loss | | (45,253 | ) | — | | — | | (45,253 | ) |
Total stockholders’ equity | | 152,731 | | 488,188 | | (278,181 | ) | 362,738 | |
Total liabilities and stockholders’ equity | | $ | 10,529,774 | | $ | 2,118,063 | | $ | (790,185 | ) | $ | 11,857,652 | |
See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements.
(1) Represents the overall change in cash resulting from the cash consideration portion of the purchase price.
| | Preliminary
Pro Forma
as of May 30,
2015 | |
Combined cash on hand as of May 30, 2015 | | $ | 2,038,254 | |
Cash consideration portion of the purchase price plus the additional cash paid at settlement including estimated interim EBITDA. | | (1,883,405 | ) |
Pro forma cash and cash equivalents as of May 30, 2015 | | $ | 154,849 | |
(2) Represents i) the actual amounts due to Rite Aid for dispensing prescription drugs to EnvisionRx plan members as of May 30, 2015, and ii) the reclassification of accrued receivables as reported by EnvisionRx as of March 31, 2015 to conform with Rite Aid’s presentation.
(3) Represents the goodwill resulting from the acquisition. Please see note (4) 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) Represents the fair value adjustments resulting from 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 | |
Additional cash paid at settlement including estimated interim EBITDA | | 83,405 | |
Stock consideration | | 240,907 | |
Total | | $ | 2,124,312 | |
Preliminary purchase price allocation | | | |
Cash and cash equivalents | | $ | 116,125 | |
Investments, at amortized cost | | 6,697 | |
Accounts receivable, net | | 798,798 | |
Income tax receivable | | — | |
Inventories | | 6,490 | |
Prepaid expenses and other current assets | | 13,986 | |
Deferred tax asset | | 644 | |
Property, plant and equipment, net | | 13,052 | |
Goodwill | | 1,467,388 | |
Other intangibles, net | | 825,100 | |
Other assets | | 23,275 | |
Total assets acquired | | 3,271,555 | |
Accounts payable | | (624,720 | ) |
Accrued expenses | | (379,418 | ) |
Total current liabilities assumed | | (1,004,138 | ) |
Deferred tax liabilities | | (143,000 | ) |
Other noncurrent liabilities | | (105 | ) |
Total liabilities assumed | | (1,147,243 | ) |
Net assets acquired | | $ | 2,124,312 | |
The preliminary composition of other intangibles, net as of May 30, 2015 are as follows: | | | |
Subject to amortization: | | | |
Customer relationships | | $ | 585,500 | |
CMS license | | 108,000 | |
Claims adjudication and other software | | 72,000 | |
Trademarks | | 15,600 | |
| | 781,100 | |
Indefinite-lived intangible assets: | | | |
Trademarks | | 44,000 | |
| | 44,000 | |
Preliminary total other intangibles acquired | | $ | 825,100 | |
(5) Represents the anticipated impact on other assets, accrued salaries, wages and other current liabilities as follows:
Other assets - Write-off of EnvisionRx capitalized debt issuance costs of $21.9 million.
Accrued salaries, wages and other current liabilities - Payment of $22.5 million of accrued bridge commitment fees incurred in connection with bridge financing commitments that expired upon completion of the $1.8 billion notes offering on April 2, 2015 and the payment of $4.0 million of accrued acquisition costs.
(6) Represents the impact on short-term and long-term indebtedness after giving effect to (a) the payment of anticipated debt issuance costs and other transaction fees and expenses, calculated as follows:
| | Preliminary
Pro Forma
as of May 30,
2015 | |
Rite Aid historical outstanding indebtedness as of May 30, 2015 | | $ | 7,234,871 | |
(a) | Debt issuance costs and other transaction fees and expenses funded with our Senior Credit Facility | | 35,500 | |
| Preliminary pro forma short-term and long-term indebtedness, including capital leases, as of May 30, 2015 | | $ | 7,270,371 | |
(7) Represents $116,500 due to the seller upon collection of a $452,600 CMS receivable relating to December 31, 2014 activities, less a corresponding payable under certain reinsurance contracts of $336,100, as well as actual amounts due to Rite Aid for dispensing prescription drugs to EnvisionRx plan members as of May 30, 2015.
(8) This represents the deferred income tax liability resulting from the difference in fair value step-up of the acquired assets between book and tax.
(9) Represents the issuance of 27,754,300 shares of our common stock with a market value of $240.9 million based on a stock price of $8.68 per share as of June 24, 2014 calculated as follows:
Total pro forma adjustment to common stock and additional paid-in capital | | Preliminary
Pro Forma
as of May 30,
2015 | |
Issuance of 27.8 million shares of Rite Aid common stock, par value $1 per share, upon completion of the acquisition | | $ | 27,754 | |
Increase to additional paid-in capital resulting from the issuance of 27.8 million shares of Rite Aid common stock, par value $1 per share, at an assumed price of $8.68 per share—gross value of $240.9 million (27.8 million shares at $8.68 per share) less $27.8 million allocated to common stock | | 213,153 | |
Aggregate increase in common stock and additional paid-in capital resulting from the issuance of 27.8 million shares of common stock in connection with the completion of the acquisition | | $ | 240,907 | |
(10) Represents the aggregate pro forma adjustments for (a) the retirement of EnvisionRx equity as of March 31, 2015, (b) the write-off of anticipated EnvisionRx capitalized debt issuance costs as of March 31, 2015 due to the repayment of all outstanding EnvisionRx indebtedness upon completion of the acquisition, and (c) 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 May 30,
2015 | |
(a) | Retirement of EnvisionRx equity as of March 31, 2015 | | $ | (488,188 | ) |
(b) | Write-off of the EnvisionRx capitalized debt issuance costs as of March 31, 2015 due to the repayment of all outstanding EnvisionRx indebtedness upon completion of the acquisition | | (21,900 | ) |
(e) | Certain non-capital expenses and fees incurred in connection with the transaction, including merger and acquisition consultation, legal, accounting and other professional services | | (9,000 | ) |
Total pro forma adjustment to accumulated deficit | | $ | (519,088 | ) |
