2. Acquisition

On June 24, 2015, the Company completed its previously announced acquisition of TPG VI Envision BL, LLC and Envision Topco Holdings, LLC (“EnvisionRx”), pursuant to the terms of an agreement (“Agreement”) dated February 10, 2015. EnvisionRx, which was a portfolio company of TPG Capital L.P. prior to its acquisition by the Company, is a full-service pharmacy services provider. EnvisionRx provides both transparent and traditional pharmacy benefit manager (“PBM”) options through its EnvisionRx and MedTrak PBMs, respectively. EnvisionRx also offers fully integrated mail-order and specialty pharmacy services through Orchard Pharmaceutical Services; access to the nation’s largest cash pay infertility discount drug program via Design Rx; an innovative claims adjudication software platform in Laker Software; and a national Medicare Part D prescription drug plan through EIC’s EnvisionRx Plus Silver product for the low income auto-assign market and its Clear Choice product for the chooser market. EnvisionRx is headquartered in Twinsburg, Ohio and operates as a 100 percent owned subsidiary of the Company.

Pursuant to the terms of the Agreement, as consideration for the Acquisition, the Company paid $1,882,211 in cash and issued 27,754 shares of Rite Aid common stock. The Company financed the cash portion of the Acquisition with borrowings under its senior secured revolving credit facility, and the net proceeds from the April 2, 2015 issuance of $1,800,000 aggregate principal amount of 6.125% senior notes due 2023 (the “6.125% Notes”). The consideration associated with the common stock was $240,907 based on a stock price of $8.68 per share, representing the closing price of the Company’s common stock on the closing date of the Acquisition. The closing balance sheet has not yet been finalized, as the Company is still in process of finalizing the valuation, and therefore, the final purchase price and related purchase price allocation of the Acquisition is subject to change.

The Company’s consolidated financial statements for the thirteen and thirty-nine week periods ended November 28, 2015 include EnvisionRx results of operations from the Acquisition date of June 24, 2015 through November 28, 2015 (please see Note 14 Segment Reporting for the Pharmacy Services segment results included within the consolidated financial statements for the thirteen and thirty-nine week periods ended November 28, 2015, which reflects the results of EnvisionRx). The Company’s financial statements reflect preliminary purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the Acquisition date.

The following allocation of the purchase price and the estimated transaction costs is preliminary and is based on information available to the Company’s management at the time the consolidated financial statements were prepared. Accordingly, the allocation is subject to change and the impact of such changes may be material.

Preliminary purchase price
Cash consideration	$	1,882,211
Stock consideration	240,907

Total	$	2,123,118

Preliminary purchase price allocation
Cash and cash equivalents	$	103,834
Accounts receivable	896,473
Inventories	7,276
Deferred tax assets	516
Prepaid expenses and other current assets	13,820

Total current assets	1,021,919
Property and equipment	13,196
Intangible assets(1)	825,100
Goodwill	1,478,623
Other assets	8,919

Total assets acquired	3,347,757

Accounts payable	491,672
Reinsurance funds held	381,225
Other current liabilities(2)	208,352

Total current liabilities	1,081,249
Other long term liabilities(3)	143,390

Total liabilities assumed	1,224,639

Net assets acquired	$	2,123,118

(1)

Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a preliminary valuation prepared by an independent third party. The fair values assigned to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earnings methods. The major assumptions used in arriving at the estimated identifiable intangible asset values included management’s preliminary estimates of future cash flows, discounted at an appropriate rate of return which are based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. The estimated fair value of intangible assets and related useful lives as included in the preliminary purchase price allocation include:

	Estimated Fair Value		Estimated Useful Life (In Years)
Customer relationships	$	585,500	17
CMS license	108,000		25
Claims adjudication and other developed software	59,500		7
Trademarks	15,600		10
Backlog	12,500		3
Trademarks	44,000		Indefinite

Total	$	825,100

(2)

Other current liabilities includes $116,500 due to TPG under the terms of the Agreement, representing the amounts due to EnvisionRx from CMS, less corresponding amounts due to various reinsurance providers under certain reinsurance programs, for CMS activities that relate to the year ended December 31, 2014. This liability was satisfied with a payment to TPG on November 5, 2015.

(3)

Primarily relates to deferred tax liabilities.

The above goodwill represents future economic benefits expected to be recognized from the Company’s expansion into the pharmacy services market, as well as expected future synergies and operating efficiencies from combining operations with EnvisionRx. Goodwill resulting from the Acquisition has been allocated to the Pharmacy Services segment and should be deductible for tax purposes. At the time the financial statements were issued, initial accounting for the business combination related to tax matters were preliminary and may be adjusted during the measurement period.

During the thirteen and thirty-nine weeks periods ended November 28, 2015, acquisition costs of $0, and $27,072, respectively, were expensed as incurred. The following unaudited pro forma combined financial data gives effect to the Acquisition as if it had occurred as of March 1, 2014.

These unaudited pro forma combined results have been prepared by combining the historical results of the Company and historical results of EnvisionRx. The unaudited pro forma combined financial data for all periods presented were adjusted to give effect to proforma events that 1) are directly attributable to the aforementioned transaction, 2) factually supportable, and 3) expected to have a continuing impact on the consolidated results of operations. Specifically, these adjustments reflect:

Incremental interest expense relating to the $1,800,000 6.125% Notes issued on April 2, 2015, the net proceeds of which were used finance the cash portion of the Acquisition.

Incremental amortization resulting from increased fair value of the identifiable intangible assets as noted in the preliminary purchase price allocation.

Removal of costs incurred in connection with the Acquisition by both the Company and EnvisionRx, including bridge loan commitment fees of $15,375.

Removal of interest expense incurred by EnvisionRx as the underlying debt was repaid upon the acquisition date.

Removal of debt extinguishment charges incurred by EnvisionRx.

Inclusion of the 27,754 shares of Rite Aid common stock issued to fund the stock portion of the purchase price in the basic and diluted share calculation.

The unaudited pro forma combined results do not include any incremental cost savings that may result from the integration. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material.

The unaudited pro forma combined information is for informational purposes only. The unaudited pro forma combined information is not necessarily indicative of what the combined company’s results actually would have been had the Acquisition been completed as of the beginning of the periods as indicated. In addition, the unaudited pro forma combined information does not purport to project the future results of the combined company.

	Thirteen week Periods Ended					Thirty-Nine week Periods Ended
	November 28, 2015		November 29, 2014			November 28, 2015			November 29, 2014
	Pro forma		Pro forma			Pro forma			Pro forma
Net revenues as reported	$	8,154,184	$	6,692,333		$	22,466,521		$	19,680,448
EnvisionRx revenue, prior to the acquisition	—		1,080,693			1,735,635			3,067,017
Less pre-acquisition intercompany revenue	—		(68,154		)	(104,731		)	(199,567		)

Pro forma combined revenues	$	8,154,184	$	7,704,872		$	24,097,425		$	22,547,898

Net income as reported	$	59,543	$	104,846		$	99,848		$	274,141
EnvisionRx net income (loss) before income taxes, prior to the acquisition	—		1,922			(45,307		)	9,320
Incremental interest expense on the 6.125% Notes issued on April 2, 2015	—		(28,852		)	(11,097		)	(86,555		)
Incremental amortization resulting from fair value adjustments of the identifiable intangible assets	—		(13,088		)	(16,509		)	(39,618		)
Transaction expenses incurred by both the Company and EnvisionRx	—		—			55,864			—
Interest expense incurred by EnvisionRx	—		14,678			21,984			37,382
Debt extinguishment charges incurred by EnvisionRx	—		—			31,601			—
Income tax expense relating to pro forma adjustments	—		—			(15,601		)	—

Pro forma net income	$	59,543	$	79,506		$	120,783		$	194,670


Basic income per share	$	0.06	$	0.08		$	0.12		$	0.20
Diluted income per share	$	0.06	$	0.08		$	0.12		$	0.19

The unaudited pro forma combined information for the thirteen weeks ended November 28, 2015 is identical to the actual results reported by the Company as EnvisionRx results were included in the consolidated operations of the Company for the entire period.