Rite Aid 2016 Annual Report Download - page 50

Pursuant to the terms of the Agreement, as consideration for the acquisition of EnvisionRx (the
‘‘Acquisition’’), we paid $1,882.2 million in cash, after giving effect to certain adjustments, and issued
27,754,000 shares of Rite Aid common stock. At closing, $15.0 million of the cash purchase price was
placed into an adjustment escrow account. Rite Aid and Shareholder Representative Services LLC
(‘‘SRS’’) entered into a Final Adjustment Amount Resolution Agreement and Release on November 5,
2015, pursuant to which (i) $1.2 million was released from the adjustment escrow account to Rite Aid
and (ii) $13.8 million, constituting the remainder of the funds in the adjustment escrow account and all
investment earnings and income on the funds held in the adjustment escrow account, was released to
SRS on behalf of the sellers. The escrow agent distributed the funds in accordance with the agreement
between the parties. We financed the cash portion of the Acquisition with borrowings under our Senior
Secured Credit Facility and the net proceeds from the April 2, 2015 issuance of $1.8 billion aggregate
principal amount of 6.125% senior notes due 2023 (the ‘‘6.125% Notes’’). The consideration associated
with the common stock was $240.9 million based on a stock price of $8.68 per share, representing the
closing price of Rite Aid common stock on the date of the Acquisition. In addition, following the
closing, we were obligated to pay the former owners of EnvisionRx their pro rata share of the
settlement payment to be received by EnvisionRx from the Centers of Medicare and Medicaid Services
(‘‘CMS’’) for the 2014 plan year, net of amounts due to EnvisionRx’ reinsurer. The settlement payment
of approximately $116.1 million was made on November 5, 2015. The purchase accounting for the
Acquisition has not yet been finalized, and the impact of the changes on our financial statements may
be material.
Pharmacy Services Segment Results of Operations
Pharmacy Services segment revenue for fiscal 2016 was $4,103.5 million. Pharmacy Services
Adjusted EBITDA for fiscal 2016 was $101.4 million or 2.5 percent of Pharmacy Services revenue. In
addition, gross profit and gross margin for fiscal 2016 was $230.8 million or 5.6%, respectively, for our
Pharmacy Services segment. Pharmacy Services segment selling, general and administrative expenses for
fiscal 2016 were $188.6 million. Revenues and gross profit for fiscal 2016 were positively impacted by
mid-year customer additions, partially offset by increased selling, general and administrative expenses
for the year as a result of ramp up costs due to the onboarding of new PBM customers.
As our core PBM business grows, added opportunities are created for our Envision mail and
specialty pharmacies. With specialty drugs expected to comprise 50% of all prescription spending by
2018, our specialty pharmacy is being embraced by more clients and has seen a 26% increase in
monthly prescription volume over the past eight months.
In addition, based on preliminary 2016 benchmark results received from CMS, the Envision
Insurance Company will retain 14 of 34 CMS regions, which compares to 24 regions in 2015. With the
annual Part D bidding process becoming increasingly price competitive, we are maintaining a focus on
acquiring low income subsidy and chooser members at a premium level that is profitable and ensures
the continued delivery of attractive benefits and satisfying service. While we are decreasing in
geographies and anticipate a reduction in covered lives of approximately 30,000, we have approximately
365,000 individual Medicare Part D program Prescription Drug Plan (‘‘PDP’’) lives as of February 27,
2016 and increased membership in the Rite Aid retail footprint.
Liquidity and Capital Resources
General
We have two primary sources of liquidity: (i) cash provided by operating activities and
(ii) borrowings under our Amended and Restated Senior Secured Credit Facility. Our principal uses of
cash are to provide working capital for operations, to service our obligations to pay interest and
principal on debt and to fund capital expenditures. Total liquidity as of February 27, 2016 was
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