<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
November 17, 1998
January 19, 1999
---------------------------------
(Date of earliest event reported)
(Date of Report)
RITE AID CORPORATION
---------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 1-5742 23-1614034
------------------------------------------------------------------
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
30 Hunter Lane, Camp Hill, Pennsylvania 17011
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(717) 761-2633
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On November 17, 1998, Rite Aid Corporation (the "Registrant") and Eli
Lilly and Company ("Lilly") announced that they had entered into a Stock
Purchase Agreement, pursuant to which the Registrant has agreed to acquire (the
"PCS Acquisition") all of the outstanding capital stock of PCS Holding
Corporation ("PCS"), a wholly owned subsidiary of Lilly. This Form 8-K is being
filed to include the PCS audited consolidated financial statements as of
December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996 and
1997; the unaudited consolidated financial statements of PCS as of September 30,
1998 and for the nine months ended September 30, 1997 and 1998; and pro forma
financial information giving effect to the PCS acquisition.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
The audited consolidated financial statements of PCS Holding Corporation
and Subsidiaries are included in this Form 8-K as follows:
Report of Independent Auditors
Consolidated Balance Sheets
December 31, 1996 and 1997
Consolidated Statements of Operations
Years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
The unaudited consolidated financial statements of PCS Holding Corporation
and Subsidiaries are included in this Form 8-K as follows:
Consolidated Balance Sheet
September 30, 1998
Consolidated Statements of Operations
Nine months ended September 30, 1997 and 1998
Consolidated Statement of Shareholders' Equity
Nine months ended September 30, 1998
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1998
Notes to Consolidated Financial Statements
<PAGE> 3
(b) Pro forma financial information
The unaudited pro forma condensed consolidated financial data herein
includes the following:
Introduction to pro forma condensed consolidated financial data.
Unaudited pro forma condensed consolidated balance sheet
November 28, 1998
Unaudited pro forma condensed consolidated statements of operations
Year ended February 28, 1998 and thirty-nine weeks ended
November 28, 1998
Notes to unaudited pro forma condensed consolidated financial data.
(c) Exhibits
None.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
----------------------------
Name: Elliot S. Gerson
Title: Senior Vice President,
General Counsel and
Secretary
Date: January 19, 1999
<PAGE> 5
Consolidated Financial Statements
PCS HOLDING CORPORATION
AND SUBSIDIARIES
December 31, 1997
<PAGE> 6
PCS Holding Corporation and Subsidiaries
Consolidated Financial Statements
As of December 31, 1996 and 1997 and for the
Years Ended December 31, 1995, 1996 and 1997
CONTENTS
Report of Independent Auditors..........................................1
Consolidated Financial Statements
Consolidated Balance Sheets.............................................2
Consolidated Statements of Operations...................................3
Consolidated Statement of Shareholders' Equity..........................4
Consolidated Statements of Cash Flows...................................5
Notes to Consolidated Financial Statements..............................6
<PAGE> 7
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
Shareholders
PCS Holding Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of PCS Holding
Corporation and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PCS
Holding Corporation and Subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
[Ernst & Young LLP]
December 11, 1998
1
<PAGE> 8
PCS Holding Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,025 $ 2,157
Accounts receivable, less allowances of $14,630 in 1996 and
$12,995 in 1997.......................................................... 367,518 374,853
Due from Parent............................................................ 54,471 158,948
Other receivables.......................................................... 1,521 1,225
Inventories................................................................ 4,678 12,146
Prepaid expenses........................................................... 2,301 1,948
Deferred income taxes...................................................... 23,681 16,570
---------- ----------
Total current assets......................................................... 456,195 567,847
Goodwill, net of amortization of $214,160 in 1996 and
$279,170 in 1997.......................................................... 3,846,543 1,436,289
Property and equipment, net................................................. 84,704 79,568
Deferred income taxes....................................................... 1,488 2,896
Other assets, net........................................................... 13,690 16,632
---------- ----------
Total assets................................................................ $4,402,620 $2,103,232
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Claims and rebates payable................................................ $ 341,552 $ 354,341
Checks outstanding in excess of bank balances............................. 173,419 234,131
Deposits.................................................................. 16,249 22,713
Other liabilities......................................................... 81,700 103,550
---------- ----------
Total current liabilities................................................... 612,920 714,735
Noncurrent liabilities...................................................... 17,743 14,163
Shareholders' equity:
Common stock, $.01 par value; 1,000 shares authorized;
100 and 0 shares outstanding at December 31, 1996 and 1997,
respectively............................................................ -- --
Class A voting common stock, $1 par value; 1,000 shares authorized;
0 and 565 shares outstanding at December 31, 1996 and 1997,
respectively............................................................ -- 1
Class B voting convertible preferred stock, $1 par value; 0 and 160
shares authorized and outstanding at December 31, 1996 and 1997,
respectively............................................................ -- --
Additional paid-in capital.................................................. 3,953,037 3,953,036
Accumulated deficit......................................................... (181,080) (2,578,703)
---------- ----------
Total shareholders' equity.................................................. 3,771,957 1,374,334
---------- ----------
Total liabilities and shareholders' equity.................................. $4,402,620 $2,103,232
========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 9
PCS Holding Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996 1997
-------- --------- -----------
<S> <C> <C> <C>
REVENUE
Claims processing $151,764 $ 146,929 $ 171,371
Manufacturer programs 40,798 63,666 101,808
Mail order programs 36,309 111,090 224,094
Other 26,130 32,814 50,152
-------- --------- -----------
255,001 354,499 547,425
EXPENSES
Cost of services 163,142 248,015 428,705
Marketing and administrative 84,705 103,822 98,972
Goodwill amortization 101,684 101,518 65,010
Asset impairment -- -- 2,345,244
Interest, net 1,979 1,164 (1,202)
-------- --------- -----------
351,510 454,519 2,936,729
-------- --------- -----------
Loss before income taxes (96,509) (100,020) (2,389,304)
Income tax expense 1,393 6,213 6,264
-------- --------- -----------
Net loss $(97,902) $(106,233) $(2,395,568)
======== ========= ===========
</TABLE>
See accompanying notes.
3
<PAGE> 10
PCS Holding Corporation and Subsidiaries
Consolidated Statement of Shareholders' Equity
Years Ended December 31
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMON STOCK CLASS A STOCK CLASS B STOCK
---------------------------------------------------- ADDITIONAL
NUMBER OF PAR NUMBER OF PAR NUMBER OF PAR PAID-IN ACCUMULATED
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL DEFICIT TOTAL
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 100 $ -- -- $ -- -- $ -- $3,953,037 $ 23,055 $ 3,976,092
Net loss -- -- -- -- -- -- -- (97,902) (97,902)
--------------------------------------------------------------------------------------------
Balance at December 31, 1995 100 -- -- -- -- -- 3,953,037 (74,847) 3,878,190
Net loss -- -- -- -- -- -- -- (106,233) (106,233)
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 100 -- -- -- -- -- 3,953,037 (181,080) 3,771,957
Net loss -- -- -- -- -- -- -- (2,395,568) (2,395,568)
Recapitalization, on October 7, 1997 (100) -- 565 1 160 -- (1) -- --
Dividends to Class B shareholder -- -- -- -- -- -- -- (2,055) (2,055)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- $ -- 565 $ 1 160 $ -- $3,953,036 $(2,578,703) $ 1,374,334
============================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 11
PCS Holding Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996 1997
-----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(97,902) $(106,233) $(2,395,568)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 116,564 118,163 82,694
Asset impairment -- -- 2,345,244
Provision for losses on receivables and other
allowances 6,008 13,525 12,091
Deferred income tax expense 1,211 8,558 5,703
Changes in operating assets and liabilities:
Receivables 15,200 117,619 (9,236)
Inventories (325) (3,649) (7,468)
Prepaid expenses (3,977) 410 353
Claims and rebates payable 57,450 (56,002) 12,789
Checks outstanding in excess of bank balances 32,578 (93,356) 60,712
Accrued and other liabilities (11,006) (4,946) 14,840
------------------------------------
Net cash provided by (used in) operating activities 115,801 (5,911) 122,154
INVESTING ACTIVITIES
Additions to property and equipment (17,591) (17,525) (10,047)
Change in other long-term assets (2,849) (13,074) (5,443)
------------------------------------
Net cash used in investing activities (20,440) (30,599) (15,490)
FINANCING ACTIVITIES
Change in due to/from Parent (95,772) 36,061 (104,477)
Dividends to Class B shareholder -- -- (2,055)
------------------------------------
Net cash (used in) provided by financing activities (95,772) 36,061 (106,532)
------------------------------------
Net (decrease) increase in cash (411) (449) 132
Cash at beginning of year 2,885 2,474 2,025
------------------------------------
Cash at end of year $ 2,474 $ 2,025 $ 2,157
====================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,983 $ 363 $ 566
====================================
Cash paid for income taxes $ 4,317 $ 645 $ 1,706
====================================
</TABLE>
See accompanying notes.
5
<PAGE> 12
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. DESCRIPTION OF BUSINESS
PCS Holding Corporation and Subsidiaries ("the Company") is an
information-driven health solutions company operating in the United States. The
Company provides managed pharmaceutical-related programs and services that can
directly and positively improve the health of patients, and help reduce health
care costs.
On November 21, 1994, the Company was acquired by Eli Lilly and Company
("Parent") for approximately $4.1 billion. The acquisition was accounted for as
a purchase by its Parent, and the resulting goodwill was pushed down to the
Company's consolidated balance sheet (see Asset Impairment note).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company include PCS
Holding Corporation and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Management believes that the consolidated statements of operations include an
appropriate allocation of all material costs incurred by the Parent on the
Company's behalf.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform with the classifications of the 1997
consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures at the date of the consolidated
financial statements and during the reporting period. Actual results could
differ from those estimates.
New Financial Accounting Standards
In June 1997, Statement of Financial Accounting Standard (SFAS) No. 130,
Reporting Comprehensive Income, was issued. The statement must be adopted by
the Company in the first quarter of 1998. Under the provisions of this
statement, the Company will be required to include
6
<PAGE> 13
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a financial statement presentation of comprehensive income and its components
to conform to these new requirements. As a consequence of this change, certain
reclassifications may be necessary for previously reported amounts to achieve
the required presentation of comprehensive income. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
In June 1997, SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information, was issued. The statement must be adopted by the Company
on December 31, 1998. Under the provisions of this statement, the Company will
be required to modify or expand the financial statement disclosures for
operating segments, products and services and geographic areas. Implementation
of this disclosure standard will not affect the Company's financial position or
results of operations.
In December 1997, SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, was issued and is effective for the Company's 1998
fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retiree benefits. Implementation of this
disclosure standard will not affect the Company's financial position or results
of operations.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist
principally of (i) claims reimbursement receivables and claim fees receivable
and (ii) the Company's portion of manufacturer program receivables. The Company
monitors the credit worthiness of the customers to which it grants credit terms
in the normal course of business and takes deposits from customers when
considered necessary to collateralize its position. Concentrations of credit
risk associated with these trade receivables are considered minimal due to a
diverse, geographically dispersed customer base. However, one customer
accounted for 8.5 percent, 5.5 percent, and 4.7 percent of the Company's
revenues during 1995, 1996, and 1997, respectively.
Manufacturer program receivables are concentrated in the drug manufacturing
industry and had a net balance of $36,030 and $55,053 at December 31, 1996 and
1997, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid financial instruments
purchased with a maturity of three months or less, and the carrying value
approximates fair value.
7
<PAGE> 14
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable and Claims and Rebates Payable
Accounts receivable consists primarily of claims reimbursement receivables,
claims processing fees receivable and manufacturer program receivables. Because
these items are short-term in nature, their carrying amounts approximate fair
value.
Claims reimbursement receivables and claims payables arise from the adjudication
of pharmacy claims. These amounts, along with the related claims processing fees
receivable, are recorded when a reimbursement request is received by the
Company. Reimbursements for claim payments are not included in revenues, and
payments to member pharmacies are not included in expenses. Checks outstanding
are classified as liabilities because they are drawn on zero balance accounts.
Manufacturers' rebates receivable and rebates payable arise from manufacturers'
rebate programs and are recorded when a claim eligible for rebate is processed
by the Company. Rebates are paid to customers upon collection from manufacturers
and are either contractually limited to actual collections from manufacturers or
are guaranteed for a certain rebate per claim. Liabilities associated with the
guarantees per claim are included in other liabilities. The Company generally
retains a portion of rebates collected as a processing fee. The remainder of
rebates collected is not included in revenues, and payments of rebates to
customers are not included in expenses.
Due from Parent
The Company participates in the daily cash management program of its Parent
through which it invests excess cash and has access to short-term borrowings.
The Company pays or receives interest on its balances in the program at the per
annum interest rate of 90-day dealer placed commercial paper.
Inventories
Inventories consist primarily of pharmaceutical products for the mail order
programs. Inventories are recorded at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Deferred Income Taxes
Deferred income taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based on enacted tax laws
and rates.
8
<PAGE> 15
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill represents the amount of the purchase price paid in excess of the net
tangible assets acquired and is being amortized on a straight-line basis over 40
years. On a periodic basis, the Company estimates the future undiscounted cash
flows of its business to which goodwill relates in order to ensure that the
carrying value of goodwill has not been impaired (see Asset Impairment note).
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Provisions for depreciation are generally computed by the straight-line method
at rates based on the estimated useful lives of the underlying assets as
follows:
<TABLE>
<S> <C>
Buildings and improvements 5 to 20 years
Equipment 3 to 5 years
Furniture and fixtures 10 years
</TABLE>
When property or equipment is retired or sold, its cost and related accumulated
depreciation are written off and the resulting gain or loss is included in net
earnings.
Other Assets
Other assets consist primarily of capitalized computer software costs, which are
stated at cost less accumulated amortization. Provisions for amortization of
capitalized computer software costs are computed under the straight-line method
at rates based on the estimated useful lives of the software, which range from 2
to 8 years.
Revenues
Revenues include claims processing fees which are accrued when the related claim
is processed and approved for payment. Certain of the Company's agreements
require its customers to pay a fee per covered member rather than a fee per
claim processed. The Company records these fees monthly based upon member counts
provided by its customers. Revenues from manufacturer programs are recognized
when services are performed. Mail order program revenue is recognized when
prescriptions are shipped. Other revenues are generally recognized as the
related services are performed.
9
<PAGE> 16
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Total sales to unaffiliated customers, all of which are generated in the United
States, were approximately $225,000, $347,000 and $527,000 during 1995, 1996,
and 1997, respectively.
3. ASSET IMPAIRMENT
The Parent purchased the Company for approximately $4.1 billion in November
1994. Substantially all of the purchase price was allocated to goodwill.
During 1997, pursuant to SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of, the Parent
evaluated the recoverability of long-lived assets, including intangibles, of the
Company's health-care-management businesses. While revenues and profits had
grown since acquisition and new capabilities were being developed at the
Company, the rapidly changing, competitive and highly regulated environment in
which the Company operates had prevented the Company from significantly
increasing its operating profits from levels that existed prior to the
acquisition. In addition, since the acquisition, the health-care-industry trend
toward increased managed care had been slower than originally expected and the
possibility of selling a portion of the Company's equity to a strategic partner
had not been realized. In the second quarter of 1997, concurrent with the
Company's annual planning process, the Parent determined that the Company's
estimated future undiscounted cash flows were below the carrying value of the
Company's long-lived assets. Accordingly, the carrying value of the Company's
long-lived assets, primarily goodwill, was adjusted to their estimated fair
value of approximately $1.5 billion, resulting in a noncash impairment loss of
approximately $2.3 billion during 1997. The estimated fair value was based on
anticipated future cash flows discounted at a rate commensurate with the risk
involved.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land $ 29,329 $ 29,329
Buildings and improvements 36,885 31,905
Equipment 78,193 86,362
Furniture and fixtures 14,100 14,689
Construction in progress - 4,077
-------- --------
158,507 166,362
Accumulated depreciation (73,803) (86,794)
-------- --------
$ 84,704 $ 79,568
======== ========
</TABLE>
10
<PAGE> 17
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
4. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense during 1995, 1996 and 1997 was $12,359, $15,499 and
$15,191, respectively.
5. INCOME TAXES
The Company was included in its Parent's consolidated federal income tax returns
for periods from January 1, 1995 through October 15, 1997. For the period from
October 16, 1997 through December 31, 1997, the Company filed its own tax return
(see Stockholders' Equity note). The Company's income tax expense provision has
been computed as if the Company filed separate income tax returns for all years.
Following is the composition of income tax expense for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal ............................ $ 128 $(3,498) $(400)
State .............................. 54 1,153 961
------ ------ ------
182 (2,345) 561
Deferred:
Federal ............................ 848 1,523 5,440
State .............................. 363 7,035 263
------ ------ ------
1,211 8,558 5,703
------ ------ ------
$1,393 $6,213 $6,264
====== ====== ======
</TABLE>
Income tax expense differs from the amount computed by applying the federal
statutory rate to the loss before income taxes for the years ended December 31
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Income tax benefit computed at
federal statutory rate ... $(34,271) $(35,007) $(836,975)
State income taxes, net of federal
benefit ............................. 275 5,342 385
Amortization of goodwill .............. 36,082 35,531 22,754
Asset impairment ...................... -- -- 820,835
Other, net ............................ (693) 347 (735)
-------- -------- ---------
$ 1,393 $ 6,213 $ 6,264
======== ======== =========
</TABLE>
11
<PAGE> 18
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income tax assets and liabilities at December 31 are
as follows:
<TABLE>
<CAPTION>
1996 1997
----------------------
<S> <C> <C>
Current deferred income tax assets:
Risk reserves $14,131 $12,614
Allowances 9,435 3,634
Accrued vacation pay 22 -
Deferred compensation 93 136
Other - 186
----------------------
Net current deferred income tax asset $23,681 $16,570
======================
Long-term deferred income tax (liabilities) assets:
Risk reserves $ 1,097 $ 206
Postretirement plan 1,986 1,894
Deferred compensation 2,076 2,747
Net operating loss carryforward 458 1,360
Capitalized software 759 (1,136)
Accelerated depreciation (4,067) (4,324)
Other (821) 2,149
----------------------
Net long-term deferred income tax asset $ 1,488 $ 2,896
======================
</TABLE>
The Company's federal net operating loss carryforward will expire in 2012.
Management expects to utilize the net operating loss carryforward in 1998.
6. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
----------------------
<S> <C> <C>
Accounts payable $12,598 $ 31,778
Employee compensation 15,700 24,905
Other 53,402 46,867
----------------------
$81,700 $103,550
======================
</TABLE>
12
<PAGE> 19
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
7. LEASES
Future minimum operating lease payments for facilities and equipment at December
31, 1997 are as follows:
1998................................ $ 9,258
1999................................ 4,734
2000................................ 1,746
2001................................ 718
2002................................ 491
Thereafter.......................... 445
-------
$17,392
=======
Rent expense during 1995, 1996, and 1997 was $9,620, $12,556, and $14,287,
respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company enters into risk contracts with certain customers in the ordinary
course of business. These contracts provide that the Company assume varying
percentages of the risk associated with claims experience differing from fixed
fee arrangements under managed care programs. In addition, the Company
guarantees a specific amount of savings for certain customers. Included in other
liabilities in the accompanying consolidated balance sheets are management's
estimates of the amounts required to cover losses incurred under such contracts.
The Company is subject to various claims, including possible legal actions
brought by plan sponsors for alleged errors or omissions arising out of the
ordinary course of business. Management believes that it has a combination of
adequate insurance coverage and reserves against potential losses and that the
outcome of such claims will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
9. SHAREHOLDERS' EQUITY
At December 31, 1995 and 1996, the Company's capital structure included one cent
par value preferred stock; 10,000,000 shares authorized; no shares outstanding,
and one cent par value common stock; 1,000 shares authorized; 100 shares
outstanding.
On October 7, 1997, the Certificate of Incorporation for PCS Holding Corporation
was restated. Upon filing the Restated Certificate of Incorporation, the shares
of Common Stock of PCS
13
<PAGE> 20
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
9. SHAREHOLDERS' EQUITY (CONTINUED)
Holding Corporation then outstanding were recapitalized into the aggregate of
565 shares of Class A voting common stock and 160 shares of Class B voting
convertible preferred stock of PCS Holding Corporation.
Under the Restated Certificate of Incorporation, the Company has authority to
issue 1,000 shares of Class A stock, 160 shares of Class B Stock, and 1,000
shares of Class C Stock, par value of one dollar per share, issuable in series.
The Company issued 565 shares of Class A stock and 160 shares of Class B stock
to Lilly, who then sold the Class B shares to an institutional investor (see
Subsequent Events note). The Class B stock is convertible preferred stock and
pays dividends on a quarterly basis at 25 basis points above the three-month
LIBOR rate. The Class B stock is convertible on a one-to-one basis into the
Company's Class A stock at the option of the holder at any time. The Company may
redeem the Class B stock for $1,000 per share plus accrued and unpaid dividends
five years from the date of issuance and upon each fifth-year anniversary
thereafter. Also, the stock may be redeemed by the Company upon various
redemption events, as defined in the stockholder's agreement, or at the option
of the holder seven years from the date of issuance for $1,000 per share plus
accrued and unpaid dividends.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of the Company, the Class B stockholders are entitled
to be paid out of the assets of the Company available for distribution to its
stockholders an amount per share in cash equal to $1,000 plus all accrued and
unpaid dividends, before any such payment shall be made or assets distributed to
the holders of the Class A Stock, or any other security junior in rank to the
Class B stock.
No shares of Class C stock have been issued or are outstanding.
10. RETIREMENT BENEFITS
The Company has a defined benefit pension plan (the Plan) covering substantially
all of its employees. Plan benefits are based on years of service and the
employee's compensation during the last five years of employment. The Company's
funding policy is to contribute annually the minimum amount that is required to
be funded in accordance with provisions of the Employee Retirement Income
Security Act of 1974 (ERISA). Plan assets consist primarily of equity and fixed
income securities. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
14
<PAGE> 21
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
10. RETIREMENT BENEFITS (CONTINUED)
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated financial statements as provided by consulting
actuaries:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
-----------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$4,827 in 1996 and $7,993 in 1997 $ 6,994 $11,669
=================
Projected benefit obligation for service rendered to date $12,397 $21,969
Plan assets at fair value, primarily listed stocks and bonds 8,861 13,978
-----------------
Funded status - deficiency of plan assets over projected benefit
obligation $ 3,536 $ 7,991
=================
Comprised of:
Accrued pension cost $ 3,929 $ 3,105
Unrecognized net (gain) loss (393) 4,886
-----------------
$ 3,536 $ 7,991
=================
</TABLE>
Net pension cost includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1996 1997
---------------------------
<S> <C> <C> <C>
Service cost - benefits earned during period $1,835 $2,497 $ 2,843
Interest cost on projected benefit obligation 554 837 991
Return on plan assets (366) (784) (1,452)
Net amortization and deferral - 265 481
---------------------------
$2,023 $2,815 $ 2,863
===========================
</TABLE>
15
<PAGE> 22
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
10. RETIREMENT BENEFITS (CONTINUED)
The assumptions used to develop the Plan's benefit expense and the value of the
accumulated benefit obligations are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.6% 8.1% 7.5%
Rate of increase in future compensation levels 4.5-9.5% 4.5-8.0% 4.0-8.0%
Weighted-average expected long-term rate of
return on plan assets 10.5% 10.5% 10.5%
</TABLE>
The discount rate decrease between December 31, 1996 and 1997, increased the
projected benefit obligation by approximately $2.5 million.
The Company also sponsors a defined contribution plan (the Savings Plan)
covering substantially all employees. The Savings Plan is subject to the
provisions of ERISA. The Savings Plan allows participants to contribute up to
sixteen percent of their base pay and the Company matches the contribution
between fifty and 100 percent up to a maximum contribution of six percent of
base pay. The expense recognized related to the Savings Plan is $1,228, $3,019,
and $3,352 in 1995, 1996, and 1997, respectively.
In addition to the defined benefit and defined contribution pension plans, the
Company also provides postretirement benefits in the form of health plan
benefits. Substantially all employees are eligible for these benefits if the sum
of an employee's age and the employee's years of service is equal to or greater
than eighty. The amount of health care benefits an employee is eligible for is
based on the level of health plan benefits at retirement and Medicare benefits.
This plan is currently unfunded and the Company has no immediate plans to fund
it. Included in the acquisition balance sheet recorded in connection with the
Parent's acquisition was $900 in accrued medical cost. The Company and the
Parent did not agree upon a post-acquisition substantive plan until 1996. As a
result, there was no net postretirement benefit cost in 1995 and there were no
other changes to the accrual in 1995.
16
<PAGE> 23
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
10. RETIREMENT BENEFITS (CONTINUED)
The following table sets forth the funded status of these additional
postretirement plans and amounts recognized in the Company's 1996 and 1997
consolidated financial statements as provided by consulting actuaries:
<TABLE>
<CAPTION>
December 31
1996 1997
------------------
<S> <C> <C>
Actuarial present value of postretirement benefit obligations:
Accumulated postretirement benefit obligation, including $22
and $140 resulting from retirees, $281 and $489 resulting
from other fully eligible plan participants, $1,108 and $1,389
resulting from other active plan participants at December 31,
1996 and December 31, 1997, respectively $1,411 $2,018
Plan assets at fair value -- --
------ ------
Funded status-deficiency of plan assets over accumulated
postretirement benefit obligation $1,411 $2,018
====== ======
Comprised of:
Accrued medical cost $1,323 $1,826
Unrecognized prior service cost 185 139
Unrecognized net (gain) loss (97) 53
------ ------
$1,411 $2,018
====== ======
</TABLE>
Net postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Years Ended December 31
1995 1996 1997
------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during period $ -- $292 $344
Interest cost on accumulated postretirement benefit
obligation -- 85 113
Net amortization -- 46 46
---- ---- ----
$ -- $423 $503
==== ==== ====
</TABLE>
As the plan is currently unfunded, there are no plan assets on which a return is
earned.
17
<PAGE> 24
PCS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands)
10. RETIREMENT BENEFITS (CONTINUED)
The assumptions used to develop the net postretirement benefit expense and the
value of the accumulated postretirement benefit obligations are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Weighted-average discount rate 7.5% 8.0% 7.5%
Expected long-term rate of return 10.5% 10.5% 10.5%
Health care cost trend rate for participants:
Under age 65 7.0% 7.0% 7.0%
Over age 65 5.0% 5.0% 5.0%
</TABLE>
The health care cost trend rate for post-65 participants is expected to remain
at 5 percent per annum. The health care cost trend rate for pre-65 participants
is expected to decrease in 0.5 percent annual increments from 7 percent in 1998
to 5 percent in 2002 and is expected to remain at 5 percent after 2002.
If these trends rates were to be increased by one percentage point each future
year, the December 31, 1997, accumulated postretirement benefit obligation would
increase by 10 percent and the aggregate of the service and interest cost
components of 1997 annual expense from continuing operations would increase by
14 percent. The decrease in the discount rate at December 31, 1997, increased
the accumulated postretirement benefit obligation by approximately $.1 million.
11. RELATED PARTY TRANSACTIONS
Certain expenses, principally employee benefits and general liability and
workers' compensation insurance premiums, are paid on behalf of, and charged to
the Company by the Parent. In addition, the Company uses certain resources and
administrative staff of its Parent, including financial, legal, tax, internal
audit, accounting advice, and other personnel and employee benefit services.
Management believes that the consolidated statements of operations include an
appropriate allocation of all material costs incurred by the Parent on the
Company's behalf.
Certain of the Company's employees are periodically granted options by the
Parent to purchase the Parent's stock. The exercise price of these options is
equal to the market value of the stock at the date of grant.
18
<PAGE> 25
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company additionally recognized the following transactions with the Parent
in its consolidated statements of operations:
<TABLE>
<CAPTION>
1996 1997
------------------------
<S> <C> <C>
Revenue:
Administration fee revenue $ 825 $ 3,147
Outcomes research revenue 3,500 3,720
RxReview revenue 2,700 8,100
Other -- 5,660
------------------------
Total revenue $7,025 $20,627
========================
</TABLE>
There were no such transactions in 1995.
12. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has determined that it will be required to modify or replace certain
portions of its software, hardware and equipment so that its systems and
equipment will function properly with respect to dates in the year 2000 and
thereafter. The Company is utilizing both internal and external resources to
reprogram, or replace, and test the software and equipment for year 2000
readiness. The majority of the Company's business is performed with third
parties via interfaced systems. As a result, the Company's Year 2000 project
includes a review of the third parties to determine the extent the company will
be affected by third party failures to mitigate their own Year 2000 issues.
The Company anticipates substantially completing the Year 2000 project by June
1999. The total cost of the Year 2000 project is estimated to be approximately
$11.3 million, which includes approximately $.3 million for the purchase of new
software and equipment that will be capitalized and $11 million that will be
expensed as incurred, and is not expected to have a material effect on the
results of operations. To date, the Company has incurred approximately $3.4
million ($3.1 million expensed and $.3 million capitalized for new systems and
equipment), related to the assessment of, and preliminary efforts on, its Year
2000 project and the development of a modification plan, purchase of new systems
and equipment, and systems modifications.
The costs for the year 2000 project and the date on which the Company believes
it will complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources. In the event that the
remediation plans are unsuccessful, the Company is developing
19
<PAGE> 26
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands)
12. IMPACT OF YEAR 2000 (UNAUDITED)(CONTINUED)
a contingency plan for continuing operations. The Company's operating results
could be materially impacted if actual costs of the Year 2000 project are
significantly higher than management estimates or if the systems and equipment
of the Company or those of other companies on which it relies are not compliant
in a timely manner.
13. SUBSEQUENT EVENTS
In November 1998, the Parent entered into an agreement with Rite Aid Corporation
(Rite Aid) whereby Rite Aid will purchase from the Parent all shares of the
Company's Class A stock for approximately $1.5 billion, with the Parent
retaining $100 million of additional cash. In connection with this transaction,
the Company bought back all outstanding Class B shares for $172,660. Class B
dividends of $5,671 were paid at the time of the buy back of the Class B shares.
The buy back of the Class B shares and the payment of the dividends were
primarily funded by a $177,120 capital contribution from the Parent.
The terms of the sale agreement support the future benefit of the carrying value
of goodwill and net deferred tax assets. The Company is not aware of any plans
or intentions, in connection with the proposed sale, to terminate any of the
Company's pension or other postretirement employee benefit plans.
20
<PAGE> 27
Consolidated Financial Statements (Unaudited)
PCS HOLDING CORPORATION
AND SUBSIDIARIES
As of September 30, 1998 and for the Nine
Months Ended September 30, 1998 and 1997
<PAGE> 28
PCS Holding Corporation and Subsidiaries
Consolidated Financial Statements
(Unaudited)
As of September 30, 1998 and for the Nine Months Ended
September 30, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet................................................ 1
Consolidated Statements of Operations..................................... 2
Consolidated Statement of Shareholders' Equity............................ 3
Consolidated Statements of Cash Flows..................................... 4
Notes to Consolidated Financial Statements................................ 5
</TABLE>
<PAGE> 29
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, 1998
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,848
Accounts receivable, less
allowances of $7,715 403,486
Due from Parent 119,248
Other receivables 1,022
Inventories 15,270
Prepaid expenses 2,060
Deferred income taxes 15,681
------------
Total current assets 560,615
Goodwill, net of amortization of $308,370 1,407,090
Property and equipment, net 70,040
Other assets, net 30,614
------------
Total assets $ 2,068,359
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Claims and rebates payable $ 233,462
Checks outstanding in excess of bank balances 320,803
Deposits 20,365
Other liabilities 102,453
------------
Total current liabilities 677,083
Noncurrent liabilities:
Other liabilities 12,724
Deferred income taxes 1,885
Shareholders' equity:
Class A voting common stock, $1 par value; 1,000
shares authorized; 565 shares outstanding 1
Class B voting convertible preferred stock, $1
par value; 160 shares authorized and outstanding -
Additional paid-in capital 3,952,908
Accumulated deficit (2,576,242)
------------
Total shareholders' equity 1,376,667
------------
Total liabilities and shareholders' equity $ 2,068,359
============
</TABLE>
See accompanying notes.
1
<PAGE> 30
PCS Holding Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1998
-----------------------------------
<S> <C> <C>
REVENUE
Claims processing........................................... $ 128,757 $ 107,213
Manufacturer programs....................................... 76,735 130,029
Mail order programs......................................... 153,539 329,575
Other....................................................... 24,232 34,003
-----------------------------------
383,263 600,820
EXPENSES
Cost of services........................................... 302,409 469,172
Marketing and administrative............................... 62,466 72,619
Goodwill amortization...................................... 55,276 29,200
Asset impairment........................................... 2,345,244 --
Interest, net.............................................. (864) (1,673)
-----------------------------------
2,764,531 569,318
-----------------------------------
(Loss) income before income taxes.......................... (2,381,268) 31,502
Income tax expense......................................... 5,339 21,723
-----------------------------------
Net (loss) income.......................................... $(2,386,607) $ 9,779
===================================
</TABLE>
See accompanying notes
2
<PAGE> 31
PCS Holding Corporation and Subsidiaries
Consolidated Statement of Shareholders' Equity
(Unaudited)
Nine Months Ended September 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Class A Class B
----------------- -----------------
Number of Par Number of Par Additional Accumulated
Shares Value Shares Value Paid-In Capital Deficit Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 565 $1 160 $ -- $3,953,036 $(2,578,703) $1,374,334
Net income -- -- -- -- -- 9,779 9,779
Dividends to Class B shareholder -- -- -- -- -- (7,318) (7,318)
Other equity transfers -- -- -- -- (128) -- (128)
---------------------------------------------------------------------------------------
Balance at September 30, 1998 565 $1 160 $ -- $3,952,908 $(2,576,242) $1,376,667
=======================================================================================
</TABLE>
See accompanying notes.
3
<PAGE> 32
PCS Holding Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1997 1998
------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income............................................. $(2,386,607) $ 9,779
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation and amortization............................. 68,634 41,627
Asset impairment.......................................... 2,345,244 --
Provision for losses on receivables and other allowances.. 3,075 1,980
Deferred income tax expense............................... 4,990 5,670
Changes in operating assets and liabilities:
Receivables............................................. (39,327) (25,910)
Inventories............................................. (1,209) (3,124)
Other current assets.................................... (76) (112)
Claims and rebates payable.............................. (134,929) (120,879)
Checks outstanding in excess of bank balances........... 100,975 86,672
Accrued and other liabilities........................... (5,236) (9,384)
------------ ---------
Net cash used in operating activities......................... (44,466) (13,681)
INVESTING ACTIVITIES
Additions to property and equipment........................... (9,162) (16,882)
------------ ---------
Net cash used in operating activities......................... (9,162) (16,882)
FINANCING ACTIVITIES
Change in due to/from Parent.................................. 53,766 39,572
Dividends to Class B shareholder.............................. -- (7,318)
------------ ---------
Net cash provided by financing activities..................... 53,766 32,254
------------ ---------
Net increase in cash......................................... 138 1,691
Cash at beginning of period.................................. 2,025 2,157
------------ ---------
Cash at end of period........................................ $ 2,163 $ 3,848
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest....................................... $ 413 $ 469
=========== =========
Cash paid for income taxes................................... $ 1,053 $ 9,413
=========== =========
</TABLE>
See accompanying notes.
<PAGE> 33
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in thousands)
1. DESCRIPTION OF BUSINESS
PCS Holding Corporation and Subsidiaries ("the Company") is an
information-driven health solutions company operating in the United States. The
Company provides managed pharmaceutical-related programs and services that can
directly and positively improve the health of patients, and help reduce health
care costs.
On November 21, 1994, the Company was acquired by Eli Lilly and Company
("Parent") for approximately $4.1 billion. The acquisition was accounted for as
a purchase by its Parent, and the resulting goodwill was pushed down to the
Company's consolidated balance sheet (see Asset Impairment note).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements do not include all
information and footnotes necessary for a fair presentation of consolidated
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles and therefore should be read with the
audited December 31, 1997 consolidated financial statements.
All material intercompany balances and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results of interim periods.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures at the date of the consolidated
financial statements and during the reporting period. Actual results could
differ from those estimates.
5
<PAGE> 34
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(Dollars in thousands)
3. ASSET IMPAIRMENT
The Parent purchased the Company for approximately $4.1 billion in November
1994. Substantially all the purchase price was allocated to goodwill.
During 1997, pursuant to Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Parent evaluated the recoverability of long-lived assets,
including intangibles, of the Company's healthcare-management businesses. While
revenues and profits had grown since acquisition and new capabilities were
being developed at the Company, the rapidly changing, competitive and highly
regulated environment in which the Company operates had prevented the Company
from significantly increasing its operating profits from levels that existed
prior to the acquisition. In addition, since the acquisition, the
health-care-industry trend toward increased managed care had been slower than
originally expected and the possibility of selling a portion of the Company's
equity to a strategic partner had not been realized. In the second quarter of
1997, concurrent with the Company's annual planning process, the Parent
determined that the Company's estimated future undiscounted cash flows were
below the carrying value of the Company's long-lived assets. Accordingly, the
carrying value of the Company's long-lived assets, primarily goodwill, was
adjusted to their estimated fair value of approximately $1.5 billion, resulting
in a noncash impairment loss of approximately $2.3 billion during 1997. The
estimated fair value was based on anticipated future cash flows discounted at a
rate commensurate with the risk involved.
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Accounts payable $ 23,207
Employee compensation 29,915
Other 49,331
--------
$102,453
========
</TABLE>
6
<PAGE> 35
PCS Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(Dollars in thousands)
5. SUBSEQUENT EVENTS
In November 1998, the Parent entered into an agreement with Rite Aid Corporation
(Rite Aid) whereby Rite Aid will purchase from the Parent all shares of the
Company's Class A stock for approximately $1.5 billion, with the Parent
retaining $100 million of additional cash. In connection with this transaction,
the Company bought back all outstanding Class B shares for $172,660. Class B
dividends of $5,671 were paid at the time of the buy back of the Class B shares.
The buy back of the Class B shares and the payment of the dividends were
primarily funded by a $177,120 capital contribution from the Parent.
The terms of the sale agreement support the future benefit of the carrying value
of goodwill and net deferred tax assets. The Company is not aware of any plans
or intentions, in connection with the proposed sale, to terminate any of the
Company's pension or other postretirement employee benefit plans.
7
<PAGE> 36
Item 7. (b) Pro forma financial information
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
INTRODUCTION TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA.
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the 39 weeks ended November 28, 1998 and the fiscal year ended
February 28, 1998 present unaudited pro forma operating results for the
registrant as if the PCS acquisition and the other transactions described in the
next paragraph (the "Pro Forma Transactions") had occurred as of the beginning
of the periods presented. The following Unaudited Pro Forma Condensed
Consolidated Balance Sheet presents the unaudited pro forma financial condition
of the Company as if the Pro Forma Transactions had occurred as of November 28,
1998. The excess of the purchase price of PCS over the net identifiable assets
and liabilities of PCS is reported as goodwill. The carrying values of PCS' net
assets are assumed to equal their fair values for purposes of these unaudited
pro forma condensed consolidated financial statements unless indicated otherwise
in the Notes to Unaudited Pro Forma Condensed Consolidated Financial Data. These
values are subject to revision following the results of any appraisals and
evaluation of identifiable intangibles, if any, after consummation of the PCS
acquisition and related transactions. The Pro Forma Transactions are: (i) the
PCS acquisition, which is accounted for under the purchase method of accounting;
(ii) the establishment by the registrant of a new credit facility (the "Credit
Facility") with a syndicate of commercial banks that provides for loans in the
aggregate amount of $1.3 billion; (iii) the payment of certain fees and expenses
relating to the PCS acquisition (estimated at $10.0 million), through the
issuance by the registrant of commercial paper, and (iv) the reduction of the
PCS accounts receivable and additional paid-in capital to reflect cash to be
retained by Lilly as part of the PCS transaction, each as more fully described
in the accompanying Notes to Unaudited Pro Forma Condensed Consolidated
Financial Data. While the pro forma adjustments are based upon certain
assumptions the registrant considered reasonable in the circumstances, final
amounts will differ from those set forth in the following unaudited pro forma
condensed consolidated financial data. The unaudited pro forma condensed
consolidated financial data does not reflect any synergies expected to be
realized after the PCS acquisition (because their realization cannot be
assured). The accompanying Notes to Unaudited Pro Forma Condensed Consolidated
Financial Data describe other adjustments related to the PCS acquisition.
THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA IS PRESENTED FOR
INFORMATIONAL PURPOSES ONLY AND IS NOT NECESSARILY INDICATIVE OF THE OPERATING
RESULTS OR FINANCIAL POSITION THAT WOULD HAVE OCCURRED HAD THE PCS ACQUISITION
AND OTHER TRANSACTIONS DESCRIBED HEREIN BEEN CONSUMMATED AT THE DATES INDICATED,
NOR IS IT NECESSARILY INDICATIVE OF THE FUTURE OPERATING RESULTS OR FINANCIAL
POSITION OF THE COMPANY FOLLOWING THE PCS ACQUISITION.
The unaudited pro forma condensed consolidated financial data should be read in
conjunction with each of the consolidated financial statements of the registrant
and PCS and the related notes thereto contained in (i) the registrant's Annual
Report on Form 10-K for the year ended February 28, 1998, (ii) the registrant's
Quarterly Report on Form 10-Q for the quarter ended November 28, 1998, (iii)
PCS' audited financial statements for the year ended December 31, 1997 included
herein, and (iv) PCS' unaudited financial statements for the 9 months ended
September 30, 1998 included herein.
<PAGE> 37
RITE AID CORPORATION AND PCS HOLDING CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in millions of dollars)
<TABLE>
<CAPTION>
HISTORICAL (UNAUDITED)
-----------------------
RITE AID PCS PRO FORMA
NOV 28 SEPT 30 PRO FORMA NOV 28
1998 1998 ADJUSTMENTS 1998
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Cash................................................ $ 97.8 $ 3.8 $ (5.8)(d) $ 95.8
Accounts and notes receivable....................... 204.1 523.8 (100.0)(e) 627.9
Inventories......................................... 3,075.0 15.3 -- 3,090.3
Prepaid expenses and other current assets........... 84.7 17.7 -- 102.4
-------- -------- ------------ ---------
Total Current Assets............................ 3,461.6 560.6 (105.8) 3,916.4
Property, plant and equipment, net.................. 2,665.3 70.0 -- 2,735.3
Intangible assets................................... 1,931.8 1,407.1 233.3(e) 3,572.2
Other assets........................................ 200.5 30.7 5.8(d) 237.0
-------- -------- ------------ ---------
Total Assets........................................ $8,259.2 $2,068.4 $ 133.3 $10,460.9
======== ======== ============ =========
LIABILITIES
Short-term debt and current maturities of
long-term debt.................................... $ 188.4 -- $1,500.0(d) $ 1,688.4
Accounts payable.................................... 874.8 233.5 -- 1,108.3
Other current liabilities........................... 448.8 443.6 10.0(e) 902.4
-------- -------- ------------ ---------
Total Current Liabilities....................... 1,512.0 677.1 1,510.0 3,699.1
long-term debt and capital leases, less
current maturities................................ 3,228.9 -- -- 3,228.9
Other noncurrent liabilities........................ 593.1 14.6 -- 607.7
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share................ 258.7 -- -- 258.7
Additional paid-in capital.......................... 1,352.1 3,952.9 (3,952.9)(e) 1,352.1
Retained earnings\(accumulated deficit)............. 1,315.2 (2,576.2) 2,576.2(e) 1,315.2
Accumulated other comprehensive income.............. (0.8) -- -- (0.8)
-------- -------- ------------ ---------
Total Stockholders' Equity.......................... 2,925.2 1,376.7 (1,376.7) 2,925.2
-------- -------- ------------ ---------
Total Liabilities and Stockholders' Equity.......... $8,259.2 $2,068.4 $ 133.3 $10,460.9
======== ======== ============ =========
</TABLE>
<PAGE> 38
RITE AID CORPORATION AND PCS HOLDING CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions except per share earnings)
<TABLE>
<CAPTION>
HISTORICAL (AUDITED)
--------------------------
RITE AID PCS PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED AMORTIZATION PRO FORMA YEAR ENDED
FEB 28 DEC 31 AND IMPAIRMENT FINANCING FEB 28
1998 1997 ADJUSTMENTS TRANSACTIONS 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales............................................ $11,375.1 $ 547.4 $ -- $ -- $11,922.5
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs.... 8,290.9 428.7 -- -- 8,719.6
Selling, general and administrative expense...... 2,394.4 162.8 (24.0)(a) -- 2,533.2
Interest expense................................. 159.8 -- 89.2(b) 249.0
Asset impairment................................. -- 2,345.2 (2,345.2)(c) -- --
--------- --------- -------- ------ ---------
10,845.1 2,936.7 (2,369.2) 89.2 11,501.8
--------- --------- -------- ------ ---------
Income before income taxes....................... 530.0 (2,389.3) 2,369.2 (89.2) 420.7
Income taxes..................................... 213.6 6.3 -- (35.4)(f) 184.5
--------- --------- -------- ------ ---------
Net Income....................................... $ 316.4 $(2,395.6) $2,369.2 $(53.8) $ 236.2
========= ========= ======== ====== =========
Effect of dilutive securities
6.75% zero coupon convertible subordinated
notes........................................ 5.3 -- -- -- 5.3
5.25% convertible subordinated notes........... 9.9 -- -- -- 9.9
--------- --------- -------- ----- ---------
Net Income assuming dilution..................... $ 331.6 $(2,395.6) $2,369.2 $(53.8) $ 251.4
========= ========= ======== ====== =========
Basic weighted average shares.................... 250.6 -- -- -- 250.6
Employee stock options......................... 5.5 -- -- -- 5.5
6.75% zero coupon convertible subordinated
notes........................................ 7.0 -- -- -- 7.0
5.25% convertible subordinated notes........... 8.5 -- -- -- 8.5
--------- --------- -------- ------ ---------
Dilutive weighted average shares................. 271.6 -- -- -- 271.6
========= ========= ======== ====== =========
Basic earnings per share......................... $ 1.26 $ -- $ -- $ -- $ 0.94
========= ========= ======== ====== =========
Diluted earnings per share....................... $ 1.22 $ -- $ -- $ -- $ 0.93
========= ========= ======== ====== =========
</TABLE>
<PAGE> 39
RITE AID CORPORATION AND PCS HOLDING CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS EXCEPT PER SHARE EARNINGS)
<TABLE>
<CAPTION>
HISTORICAL (UNAUDITED)
---------------------
RITE AID PCS PRO FORMA PRO FORMA
39 WEEKS ENDED 9 MONTHS ENDED GOODWILL PRO FORMA 39 WEEKS ENDED
NOV 28 SEPT 30 AMORTIZATION FINANCING NOV 28
1998 1998 ADJUSTMENTS TRANSACTIONS 1998
-------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Sales................................................... $ 9,166.6 $ 600.8 $ -- $ -- $ 9,767.4
COSTS AND EXPENSES:
Cost of goods sold, including occupancy costs........... 6,721.2 469.2 -- -- 7,190.4
Selling, general and administrative expense............. 1,911.4 100.1 1.6(a) -- 2,013.1
Interest expense........................................ 128.1 -- -- 66.9 (b) 195.0
Store closing and other costs........................... 264.2 -- -- -- 264.2
-------- --------- ------- ------- ----------
9,024.9 569.3 1.6 66.9 9,662.7
-------- --------- ------- ------- ----------
Income before income taxes.............................. 141.7 31.5 (1.6) (66.9) 104.7
Income taxes............................................ 56.7 21.7 -- (26.6)(f) 51.8
-------- -------- ------- ------- -----------
Net Income.............................................. $ 85.0 $ 9.8 $ (1.6) $ (40.3) $ 52.9
======== ============ ======== ========== ===========
Effect of dilutive securities
6.75% zero coupon convertible subordinated notes...... -- -- -- -- --
5.25% convertible subordinated notes.................. -- -- -- -- --
-------- ----------- ------- --------- -----------
Net Income assuming dilution........................... $ 85.0 $ 9.8 $ (1.6) $ (40.3) $ 52.9
======== =========== ======= ========== ===========
Basic weighted average shares........................... 258.4 -- -- -- 258.4
Employee stock options................................. 7.1 -- -- -- 7.1
6.75% zero coupon convertible subordinated notes....... -- --
5.25% convertible subordinated notes................... -- -- -- -- --
-------- ----------- ------- --------- ------------
Dilutive weighted average shares........................ 265.5 -- -- -- 265.5
========= =========== ======= ========= ============
Basic earnings per share................................ $ 0.33 $ -- $ -- $ -- $ 0.20
========= =========== ======= ========= ============
Diluted earnings per share.............................. $ 0.32 $ -- $ -- $ -- $ 0.20
========= =========== ======= ========= ============
</TABLE>
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
BASIS OF CONSOLIDATION
PCS' most recent audited fiscal year data, included in this Form 8-K, is for the
year ended December 31, 1997. For purposes of the Unaudited Pro Forma Condensed
Consolidated Statement of Operations for the fiscal year ended February 28,
1998, the registrant's historical information is from the fiscal year ended
February 28, 1998, and the results of operations for PCS are for the 12 months
ended December 31, 1997. For purposes of the interim Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the 39 weeks ended November
28, 1998, the results of operations for the 39-week period ended November 28,
1998 were used for the registrant, and the results of operations for the 9 month
period ended September 30, 1998 were used for PCS. The registrant expects to
achieve synergies and cost reductions as a result of integrating PCS into Rite
Aid. However, for purposes of the Unaudited Pro Forma Condensed Consolidated
Statements of Operations, these and other potential synergies have not been
reflected because their realization cannot be assured.
DETERMINATION AND ALLOCATION OF PURCHASE PRICE
At the date of the PCS acquisition, all of the outstanding shares of PCS Common
Stock will be purchased for $1,500,000,000. The PCS acquisition will be
recorded using the purchase method of accounting for business combinations. The
preliminary allocation of the pro forma purchase price by the registrant is as
follows:
<TABLE>
<S> <C>
PCS purchase price $1,500,000,000
Transaction costs 10,000,000
--------------
Pro forma purchase price $1,510,000,000
==============
Pro forma purchase price $1,510,000,000
Net liabilities acquired 130,400,000
--------------
Goodwill $1,640,400,000
==============
</TABLE>
Pro Forma Adjustments
(a) Pro forma goodwill amortization adjustments resulted in a net reduction
of amortization expense of $24,000,000 for the year ended February 28,
1998 and additional amortization expense of $1,600,000 for the
thirty-nine weeks ended November 28, 1998. Goodwill amortization expense
results from pro forma goodwill of approximately $1,640,400,000. The
registrant has determined that the estimated useful life of goodwill
resulting from the PCS acquisition is primarily indeterminate and likely
exceed 40 years. Accordingly, the registrant will amortize goodwill as
prescribed in Accounting Principles Board Opinion No. 17, Intangible
Assets, over the maximum allowable period of 40 years, not an arbitrary
shorter period. Pro forma goodwill amortization expenses are
approximately $41,000,000 for the year ended February 28, 1998 and
$30,800,000 for the thirty-nine weeks ended November 28, 1998. PCS had
recorded goodwill amortization expense in its historical financial
statements including $65,010,000 for the year ended December 31, 1997
and $29,200,000 for the 9 months ended September 30, 1998. Accordingly,
pro forma adjustments have been made to eliminate these amounts included
in the historical financial statements of PCS.
(b) Pro forma interest expense of $89,200,000 for the year ended February
28, 1998 and $66,850,000 for the thirty-nine weeks ended November 28,
1998 resulted from pro forma borrowings to complete the PCS transaction.
Pro forma proceeds of approximately
<PAGE> 41
$1,500,000,000 from commercial paper borrowings were assumed for purposes
of completing the transaction. The registrant's weighted average commercial
paper interest rates were 5.7% for the year ended February 28, 1998 and
thirty-nine weeks ended November 28, 1998. Pro forma interest expense was
computed using a rate of 5.8% reflecting the 5.7% weighted average rates
for these periods plus 10 basis points for credit facility usage fees.
Accordingly, pro forma interest expense is approximately $87,000,000 for
the year ended February 28, 1998 and $65,250,000 for the thirty-nine weeks
ended November 28, 1998. In addition, the registrant paid approximately
$5,800,000 for financing costs associated with a credit facility supporting
the commercial paper borrowings. Amortization of these deferred financing
costs through the facility expiration date resulted in pro forma interest
expense of $2,200,000 for the year ended February 28, 1998 and $1,600,000
for the thirty-nine weeks ended November 28, 1998.
(c) Pro forma adjustment of $2,345,244,000 is to reverse impairment losses
resulting from goodwill reported in the historical PCS operating results to
reflect pro forma operating results of the registrant for the year ended
February 28, 1998. The impairment loss related to goodwill reported in the
historical financial statements of PCS during 1997 would not have occurred
in the pro forma operating results of the registrant because pro forma
goodwill of $1,640,400,000 as of the beginning of 1997 is less than
goodwill of $3,846,543,000 reported in PCS's historical financial
statements as of January 1, 1997. The historical impairment loss related
directly to PCS goodwill of $3,846,543,000.
(d) Pro forma adjustments to reflect the net proceeds of commercial paper
borrowings used to complete the PCS transaction and pay debt issuance
costs. Debt issuance costs consist primarily of underwriting and credit
facility commitment fees. The net effect on cash was a reduction of
$5,800,000, an increase in deferred finance costs of $5,800,000 and an
increase in debt of $1,500,000,000.
(e) Pro forma adjustments to record the registrant's $1,500,000,000 investment
in PCS, eliminate $1,276,700,000 of the net equity acquired of PCS, record
pro forma reserves of $10,000,000 for direct acquisition expenses, reduce
accounts receivable due from Lilly and equity $100,000,000 to reflect cash
retained by Lilly and adjust goodwill $233,300,000 to reflect the
registrant's pro forma purchase price allocation for goodwill of
$1,640,400,000.
(f) The tax effects of pro forma adjustments were calculated using statutory
rates in effect during the year ended February 28, 1998 and the thirty-nine
weeks ended November 28, 1998.
