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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934
VALUERX, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 54-1468668
- ---------------------------------- -----------------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
22 Waterville Road
Avon, Connecticut 06001
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(Address of principal (Zip Code)
executive offices)
(860) 678-3400
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(Registrant's telephone number, including area code)
Securities to be registered
pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Common Stock, par value $0.01 New York Stock Exchange, Inc.
Series A Junior Participating New York Stock Exchange, Inc.
Preferred Stock Purchase Rights
(Traded with common stock)
Securities to be registered
pursuant to Section 12(g) of the Act: None
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ValueRx, Inc.
Cross-Reference Sheet Between Information Statement
and Items of Form 10
Item 1. Business.
The information required by this item is set forth under the captions
"Information Statement Summary," "Summary Financial Data," "Special Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and in the Combined Financial Statements in the
Information Statement, and is hereby incorporated by reference.
Item 2. Financial Information.
The information required by this item is set forth under the captions
"Information Statement Summary," "Summary Financial Data," "Pro Forma Financial
Data," "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and in the
Combined Financial Statements in the Information Statement, and is hereby
incorporated by reference.
Item 3. Properties.
The information required by this item is set forth under the caption "Business--
Properties" in the Information Statement, and is hereby incorporated by
reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is set forth under the captions
"Management" and "Beneficial Ownership of ValueRx Common Stock" in the
Information Statement, and is hereby incorporated by reference.
Item 5. Directors and Executive Officers.
The information required by this item is set forth under the caption
"Management" in the Information Statement, and is hereby incorporated by
reference.
Item 6. Executive Compensation.
The information required by this item is set forth under the caption
"Management" in the Information Statement, and is hereby incorporated by
reference.
Item 7. Certain Relationships and Related Transactions.
The information required by this item is set forth under the caption "Certain
Transactions" in the Information Statement, and is hereby incorporated by
reference.
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Item 8. Legal Proceedings.
The information required by this item is set forth under the caption "Business--
Legal Proceedings" in the Information Statement, and is hereby incorporated by
reference.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) Market Information
There is currently no established trading market for the Company's common
equity.
(b) Holders
Prior to the distribution discussed in the Information Statement, there is only
one holder of the Company's common equity, Value Health, Inc.
(c) Dividends
The information required by this item is set forth under the caption
"Information Statement Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the Combined Financial
Statements in the Information Statement, and is hereby incorporated by
reference.
Item 10. Recent Sales of Unregistered Securities.
None.
Item 11. Description of Registrant's Securities to be Registered.
The information required by this item is set forth under the caption
"Description of Capital Stock" in the Information Statement, and is hereby
incorporated by reference.
Item 12. Indemnification of Directors and Officers.
The information required by this item is set forth under the caption
"Description of Capital Stock--Director Liability and Indemnification" in the
Information Statement, and is hereby incorporated by reference.
Item 13. Financial Statements and Supplementary Data.
The information required by this item is set forth under the captions
"Information Statement Summary," "Pro Forma Financial Data," "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the Combined Financial Statements in the
Information Statement, and is hereby incorporated by reference.
<PAGE>
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
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Description Page
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Report of Coopers & Lybrand L.L.P., Independent Public Accountants....... F-2
Combined Balance Sheets as of September 30, 1996 (unaudited)
and as of December 31, 1995 and 1994...................................... F-3
Combined Statements of Operations for the nine month periods
ended September 30, 1996 and 1995 (unaudited) and for each
of the years ended December 31, 1995, 1994 and 1993....................... F-4
Combined Statements of Changes in Stockholder's Equity for the
nine month period ended September 30, 1996 (unaudited) and for
each of the years ended December 31, 1995, 1994 and 1993.................. F-5
Combined Statements of Cash Flows for the nine month periods
ended September 30, 1996 and 1995 (unaudited) and for each
of the years ended December 31, 1995, 1994 and 1993....................... F-6
Notes to Combined Financial Statements.................................... F-7
Report of Coopers & Lybrand L.L.P., Independent Public Accountants........ S-1
Schedule II - Valuation and Qualifying Accounts........................... S-2
Report of KPMG Peat Marwick LLP, Independent Public Accountants........... S-3
</TABLE>
(b) Exhibits
<TABLE>
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Exhibit Number Description
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**2 Form of Reorganization Agreement with Value Health
**3.1 Form of Amended and Restated Certificate of Incorpora-
tion of ValueRx
**3.2 Form of Amended and Restated Bylaws of ValueRx
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**4.1 Form of Rights Agreement, by and between ValueRx
and the rights agent named therein
**10.1 Form of ValueRx 1997 Stock Incentive Plan
**10.2 Form of ValueRx 1997 Employee Stock Purchase Plan
**10.3 Form of ValueRx 1997 Replacement Plan
**10.4 Form of Tax Sharing Agreement with Value Health
**10.5 Form of License Agreement with Value Health
**22 Subsidiaries of ValueRx
*27 Financial Data Schedule
</TABLE>
Note:
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* Filed herewith
** To be filed by amendment
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Value Health Logo
, 1997
To all Value Health Stockholders:
I am pleased to inform you that on ____________, 1997, the Value Health
Board of Directors approved a pro rata stock dividend of all the outstanding
shares of common stock of ValueRx, currently a Value Health wholly owned
subsidiary, to Value Health common stockholders of record on _________, 1997.
The date of the distribution will be ___________, 1997. If you are a Value
Health stockholder of record, you will receive one share of ValueRx stock for
every [two] shares of Value Health common stock you own. Boston EquiServe, LLP
is acting as distribution agent for this transaction. Beginning _____________,
they will be responsible for mailing ValueRx stock certificates to all Value
Health stockholders of record. No action is required by you in order to receive
your shares.
The enclosed Information Statement describes the distribution in detail.
It contains important information about ValueRx, including financial statements.
Questions about stock certificates, as well as requests for additional
copies of the Information Statement, should be addressed to Boston EquiServe,
LLP, at Investor Relations Diversified, 45-02-64 150 Royal Street, Canton, MA
02021, telephone number (617) 575-2490.
Sincerely,
Robert E. Patricelli
Chairman, President and Chief Executive Officer
<PAGE>
ValueRx, Inc.
22 Waterville Road
Avon, Connecticut 06001
(860) 678-3400
, 1997
Dear Stockholder:
I am pleased to welcome you as a stockholder of ValueRx, Inc. We are the
nation's leading independent pharmacy benefit and medication management company.
We are committed to helping our customers control their health care costs while
providing high quality care. Our success will build from our commitment to
leading-edge clinical capabilities, superior customer service, clinical and
financial independence, and our flexibility in a dynamic market.
I encourage you to learn more about your company in the attached Information
Statement. We have grown to be one of the largest companies in our market by
providing our customers with innovative solutions to manage health care costs.
Our new management team has rebuilt and reenergized the company. Our financial
strength is demonstrated by our track record of operating profitability and our
growing revenue base, to an annual run rate through the first nine months of
1996 of over $1.5 billion.
ValueRx was one of the pioneers in the development of the pharmacy benefit
management market. We have always been known for our strong clinical
orientation, and our financial independence from pharmaceutical manufacturers is
an important factor differentiating us in the marketplace. In addition, we are
unique in our ability to serve the medication management needs of customers in
both the in-patient and out-patient settings. This provides us with a clear
opportunity as vertically integrated delivery systems continue to develop.
Your management team is excited to be leading the creation of the largest
independent company focused solely on comprehensive pharmacy benefit, medication
management and information services. It is with great pleasure that we welcome
you as stockholder of our new company.
Sincerely,
Steven J. Shulman
Chairman and Chief Executive Officer
<PAGE>
Information Statement
Subject to completion, dated November __, 1996
[LOGO]
VALUERX COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Information Statement is being furnished to stockholders of Value
Health, Inc. ("Value Health") in connection with the distribution (the
"Distribution") by Value Health to its stockholders of all the outstanding
shares of common stock, $.01 par value (the "ValueRx Common Stock"), of its
wholly owned subsidiary, ValueRx, Inc. ("ValueRx").
It is expected that the Distribution will be made on February __, 1997, to
holders of record of Value Health common stock on February __, 1997, on the
basis of one share of ValueRx Common Stock for every [two] shares of common
stock of Value Health. No consideration will be required to be paid by
stockholders of Value Health for the shares of ValueRx Common Stock to be
distributed, nor will they be required to surrender or exchange shares of common
stock of Value Health or take any other action in order to receive ValueRx
Common Stock. Application will be made to list the ValueRx Common Stock on the
New York Stock Exchange ("NYSE") under the symbol " ."
In reviewing this Information Statement, you should carefully consider the
matters described under the caption "Special Factors." Neither Value Health nor
ValueRx will receive any cash or other proceeds from the Distribution.
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE
DISTRIBUTION. WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement is February __, 1997.
<PAGE>
AVAILABLE INFORMATION
ValueRx has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form 10 (as amended, the "Registration
Statement") under the Securities Exchange Act of 1934, as amended, and the rules
promulgated thereunder (the "Exchange Act"), with respect to its common stock
and preferred stock purchase rights. This Information Statement does not
contain all of the information in the Registration Statement and the related
exhibits and schedules. Statements in this Information Statement as to the
contents of any contract, agreement or other document are summaries only and are
not necessarily complete. For complete information as to these matters, refer
to the applicable exhibit to the Registration Statement. The Registration
Statement and the related exhibits and schedules filed by ValueRx with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, as well as at the Regional Offices of the
Commission at Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Northeastern Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such information
may be obtained by mail at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
electronic copies of the Registration Statement and all related exhibits and
schedules may be accessed on the world wide web via the Commission's EDGAR
database at its website (http://www.sec.gov/edgarhp.htm).
Following the Distribution, ValueRx will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. ValueRx will also be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its stockholders in connection with its annual
meeting of stockholders.
NO PERSON IS AUTHORIZED BY VALUE HEALTH OR VALUERX TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. NEITHER THE DELIVERY OF THIS
INFORMATION STATEMENT NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL
IMPLY THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN
THE AFFAIRS OF VALUE HEALTH OR THE COMPANY SINCE THE DATE HEREOF.
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Information Statement
Table of Contents
<TABLE>
<CAPTION>
DESCRIPTION PAGE
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INFORMATION STATEMENT SUMMARY............................................. 4
THE COMPANY............................................................... 8
SUMMARY FINANCIAL DATA.................................................... 9
THE DISTRIBUTION.......................................................... 10
SPECIAL FACTORS........................................................... 16
ARRANGEMENTS BETWEEN VALUE HEALTH AND VALUERX............................. 20
CAPITALIZATION............................................................ 22
PRO FORMA FINANCIAL DATA.................................................. 23
SELECTED FINANCIAL DATA................................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 26
BUSINESS.................................................................. 35
MANAGEMENT................................................................ 51
BENEFICIAL OWNERSHIP OF VALUERX COMMON STOCK.............................. 59
CERTAIN TRANSACTIONS...................................................... 60
HART-SCOTT-RODINO FILING REQUIREMENT...................................... 60
DESCRIPTION OF CAPITAL STOCK.............................................. 61
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 66
INDEX TO COMBINED FINANCIAL STATEMENTS.................................... F-1
</TABLE>
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<PAGE>
INFORMATION STATEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including the Combined
Financial Statements and Pro Forma Financial Data, included elsewhere herein,
which should be read in its entirety. As used herein, the terms "Company" and
"ValueRx," unless the context otherwise indicates, refer to the business of
ValueRx, Inc. and its subsidiaries, and the term "Value Health" refers to Value
Health, Inc. and its consolidated subsidiaries as of the relevant date. The
shares of ValueRx Common Stock are subject to certain risk factors and other
considerations. See "Special Factors." Neither Value Health, the Company, nor
any other person makes any representation as to the present or future value of
the Value Health or ValueRx Common Stock.
<TABLE>
<CAPTION>
The Distribution
<S> <C>
Distributing Company................Value Health, Inc., a Delaware corporation
("Value Health").
Shares to be Distributed............Approximately [27,200,000] shares of common
stock, par value $.01 per share (the "ValueRx
Common Stock"), of ValueRx, Inc., a Delaware
corporation ("ValueRx"), along with associated
preferred stock purchase rights, based on
approximately [54,400,000] million shares of
common stock of Value Health ("Value Health Common
Stock") outstanding on the Record Date (as
defined). See "Description of Capital Stock."
Business of ValueRx.................ValueRx is the largest independent provider of
pharmacy benefit management ("PBM") services in
the U.S., providing managed prescription drug
programs to managed care organizations ("MCOs"),
insurance companies, corporations, labor unions,
government entities, other benefit plan sponsors
and physician practice management companies.
Comprehensive services offered by the Company
include retail pharmacy networks, mail service
pharmacies, therapeutic pharmaceutical management
programs (such as customized formularies), patient
and physician profiling and education, claims
processing, clinically based drug utilization
review and disease management programs. The
business to be conducted by ValueRx after the
Distribution is referred to herein as the "ValueRx
Business." See "Business."
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Reasons for the Distribution........The Distribution will enable each management
team at Value Health and ValueRx to better
focus on the profitable growth opportunities
in their respective markets. ValueRx
believes that it will be better positioned
after the Distribution to capitalize on its
clinical and financial independence in an
industry which has experienced significant
market growth and vertical integration.
Value Health will seek to implement its
strategy as an acquiror and developer of
specialty businesses based on health care
provider networks and practice management.
Value Health expects that the Distribution
will enhance its ability to make
acquisitions in its existing and new lines
of business, in particular through
acquisitions involving stock consideration.
The Company further believes that the
Distribution will allow investors to better
evaluate the merits of ValueRx and the
remaining Value Health businesses, enhancing
the likelihood that each will achieve
appropriate market recognition for its
performance, and thereby create a more
valuable acquisition currency for Value
Health. See "The Distribution--Reasons for
the Distribution."
Distribution Ratio..................One share of ValueRx Common Stock for every
[two] shares of Value Health Common Stock.
See "The Distribution--Manner of Effecting
The Distribution."
Fractional Shares of ValueRx Stock..No fractional shares of ValueRx Common Stock
will be distributed. Fractional share
interests will be aggregated into whole
shares and sold by the Distribution Agent
(as defined) on behalf of the stockholders
who would otherwise be entitled to receive
fractional shares. The cash proceeds will be
distributed to the stockholders entitled to
a portion thereof. See "The Distribution--
Manner of Effecting The Distribution."
Special Factors.....................The business of ValueRx is subject to
certain risks, and ValueRx Common Stock will
be subject to those same risks. Stockholders
should carefully consider the matters
described under "Special Factors."
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Businesses retained by Value Health....After the Distribution, Value Health will
continue to operate its mental health management,
workers' compensation and disease management
businesses.
Distribution Agent.....................Boston EquiServe, LLP.
Record Date............................The close of business on February __, 1997 (the
"Record Date").
Distribution Date......................February __, 1997 (the "Distribution Date"). On
the Distribution Date, the Distribution Agent will
begin distribution of certificates for ValueRx
Common Stock to holders of Value Health Common
Stock on the Record Date. Value Health
stockholders will not be required to make any
payment or to take any other action to receive
their ValueRx Common Stock. See "The
Distribution--Manner of Effecting the
Distribution."
Federal Income Tax Consequences........Value Health has applied for a tax ruling
(the "Tax Ruling") from the U.S. Internal Revenue
Service (the "IRS") to the effect, among other
things, that the receipt of ValueRx Common Stock
by stockholders of Value Health in the
Distribution will be tax-free for federal income
tax purposes. The Distribution is contingent upon
receipt of a Tax Ruling (or a favorable opinion of
counsel as to the tax-free treatment of the
Distribution) on or prior to ________, 1997. See
"The Distribution--Certain Federal Income Tax
Consequences of the Distribution."
Relationship between Value Health
and ValueRx after the Distribution.....Following the Distribution, Value Health
and ValueRx will be operated as independent public
companies. Value Health and ValueRx will,
however, continue to have a relationship as a
result of the agreements being entered into
between Value Health and ValueRx in connection
with the Distribution, including the
Reorganization Agreement, the Tax Sharing
Agreement, Services Agreement and the License
Agreement. Except as referred to above or as
otherwise described herein, Value Health and
ValueRx will not have any material contractual
or other material relationships with each other
at the
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
time of the Distribution. See "Arrangements
between Value Health and ValueRx."
ValueRx Dividend Policy................ValueRx does not anticipate paying cash dividends
in the foreseeable future.
ValueRx Stock Listing..................Application will be made to list the ValueRx
Common Stock on the NYSE under the symbol " ."
See "The Distribution--Listing and Trading of
ValueRx Common Stock."
</TABLE>
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<PAGE>
THE COMPANY
ValueRx, the largest independent pharmacy benefit manager in the U.S.,
provides managed prescription drug programs to managed care organizations
("MCOs"), insurance companies, corporations, labor unions, government entities,
other benefit plan sponsors and physician practice management companies.
Comprehensive services offered by the Company include retail pharmacy networks,
mail service pharmacies, therapeutic pharmaceutical management programs (such as
customized formularies), patient and physician profiling and education, claims
processing, clinically based drug utilization review and disease management
programs.
ValueRx provides its services to more than 2,500 customers covering 27
million lives. Based on results through the first nine months of 1996, ValueRx
expects to manage for the entire year approximately $2.2 billion in annual drug
spending, process more than 60 million prescriptions and review approximately
230 million prescription drug and medical claims through its drug utilization
review program.
The Company believes that it enjoys several competitive advantages over
other pharmaceutical benefit managers. As the largest independent PBM, ValueRx
benefits from both the scale necessary to operate efficiently and the freedom to
act in the best interests of its clients, beneficiaries and providers. Unlike
its vertically integrated competitors which are owned by pharmaceutical
companies, ValueRx has the freedom to select the most appropriate drug from both
an economic and clinical perspective. ValueRx is also a leader in the
development of clinical and information tools to help manage the medication
process, with over fifteen years of experience in clinically driven analysis of
prescription data and clinical interventions. The Company's clinical
capabilities are becoming increasingly important in meeting the demand for
comprehensive medical management and information services.
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<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary financial information with respect
to ValueRx. The unaudited historical financial information for the nine months
ended September 30, 1996 and 1995 includes all adjustments, consisting only of
normal recurring accruals, that are considered necessary for a fair presentation
of combined operating results for such interim periods. Results for the interim
periods are not necessarily indicative of results for the full year. The
historical financial data that relate to the three year period ended December
31, 1995, have been derived from the Combined Financial Statements audited by
Coopers & Lybrand L.L.P., independent public accountants. The historical
financial data for the two year period ended December 31, 1992, have been
derived from unaudited historical financial statements. In the opinion of
management, the unaudited historical financial statements reflect all
adjustments, consisting of normal adjustments necessary to present fairly the
financial position of the Company at December 31, 1992 and 1991 and the results
of operations and cash flows for the years then ended. The historical financial
data of the Company may not reflect the results of operations or financial
position that could have been obtained had the Company been a separate, stand-
alone company. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements and related notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
--------------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ------------ ------------ ----------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenues........................... $1,193,581 $1,080,218 $1,492,666 $1,288,645 $871,807 $595,918 $404,149
Costs & Expenses:
Costs of Services and Products......... 1,064,437 951,218 1,320,401 1,142,461 753,764 518,825 346,194
Selling, General and Administrative.... 77,791 85,748 113,884 106,402 80,115 53,264 32,988
Other Charges (A)...................... --- 110,753 117,690 5,985 --- --- ---
---------- ---------- ---------- ---------- -------- -------- --------
Earnings(Loss) Before Income Taxes....... 51,353 (67,501) (59,309) 33,797 37,928 23,829 24,967
Provision (Benefit) for Income Taxes..... 20,541 (21,926) (14,832) 14,590 14,987 9,597 7,834
---------- ---------- ---------- ---------- -------- -------- --------
Net Earnings (Loss)...................... $ 30,812 $ (45,575) $ (44,477) $ 19,207 $ 22,941 $ 14,232 $ 17,133
========== ========== ========== ========== ========= ======== ========
BALANCE SHEET DATA:
Working Capital........................ $ 100,074 $ 62,404 $ 58,406 $ 63,929 $ 22,695 $ 31,494 $116,715
Total Assets........................... $ 568,193 $ 532,214 $ 555,247 $ 480,263 $431,126 $317,769 $253,238
Long-term Debt......................... --- --- --- $ 12,187 $ 12,267 $ 18,000 $ 24,125
Stockholder's Equity................... $ 301,903 $ 241,318 $ 242,298 $ 271,900 $225,990 $194,650 $174,144
</TABLE>
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(A) Amounts represent certain charges for loss contracts, merger-related and
restructuring accruals. See Notes 3 and 4 to the Combined Financial
Statements included elsewhere herein.
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<PAGE>
THE DISTRIBUTION
Background
On October 7, 1996, the Board of Directors of Value Health (the "Value
Health Board") authorized management to proceed with a plan to separate Value
Health into two companies by means of a spin-off of its ValueRx Business (as
defined below). The spin-off will be effected through a distribution (the
"Distribution") to holders of Value Health Common Stock of all of the
outstanding shares of ValueRx Common Stock. At the time of the Distribution,
ValueRx will own the assets, liabilities and operations that prior to the date
of the Distribution (the "Distribution Date") comprised Value Health's pharmacy
benefit and medication management business. See "Business." On the Distribution
Date, Value Health will effect the Distribution by delivering all of the
outstanding shares of ValueRx Common Stock to Boston EquiServe, LLP, as the
distribution agent (the "Distribution Agent"), for distribution to the holders
of record of Value Health Common Stock at the close of business on February __,
1997 (the "Record Date"). ValueRx's principal executive offices are located at
22 Waterville Road, Avon, Connecticut 06001 and 4700 Nathan Lane North,
Plymouth, Minnesota 55442.
Stockholders of Value Health with inquiries relating to the Distribution
prior to the Distribution Date should contact the Distribution Agent, telephone
number (212) - or Value Health, Inc., Value Health Investor Relations
Department, 22 Waterville Road, Avon, Connecticut 06001, telephone number (860)
678-3400. After the Distribution Date, stockholders of ValueRx with inquiries
relating to the Distribution or their investment in ValueRx should contact
ValueRx, Inc., ValueRx Investor Relations Department, 22 Waterville Road, Avon,
Connecticut 06001, telephone number (860) 678-3400, ValueRx's transfer agent and
registrar, Boston EquiServe, LLP, at Investor Relations Diversified, 45-02-64
150 Royal Street, Canton, MA 02021, telephone number (617) 575-2490.
Reasons for the Distribution
The Distribution will enable each management team at Value Health and
ValueRx to better focus on the profitable growth opportunities in their
respective markets. ValueRx believes that it will be better positioned after the
Distribution to capitalize on its clinical and financial independence in an
industry which has experienced significant market growth and vertical
integration. Value Health will seek to implement its strategy as an acquiror and
developer of specialty businesses based on health care provider networks and
practice management. Value Health expects that the Distribution will enhance its
ability to make acquisitions in its existing and new lines of business, in
particular through acquisitions involving stock consideration. The Company
further believes that the Distribution will allow investors to better evaluate
the merits of ValueRx and the remaining Value Health businesses, enhancing the
likelihood that each will achieve appropriate market recognition for its
performance, and thereby create a more valuable acquisition currency for Value
Health.
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<PAGE>
Manner of Effecting the Distribution
The Distribution is expected to be declared by the Value Health Board on
_______________, 1997 and will be made on the Distribution Date to stockholders
of record of Value Health as of the close of business on the Record Date. On or
prior to the Distribution Date, share certificates for ValueRx Common Stock will
be delivered to the Distribution Agent. Commencing on the Distribution Date, the
Distribution Agent will begin mailing such share certificates to holders of
Value Health Common Stock as of the close of business on the Record Date on the
basis of one share of ValueRx Common Stock for every [two] shares of Value
Health Common Stock held on the Record Date. All such shares of ValueRx Common
Stock will be fully paid and non-assessable and holders thereof will not be
entitled to preemptive rights. See "Description Of Capital Stock--ValueRx Common
Stock." No certificates or scrip representing fractional shares of ValueRx
Common Stock will be issued to Value Health stockholders as part of the
Distribution. The Distribution Agent will aggregate fractional shares into whole
shares of ValueRx Common Stock and sell them in the open market at then
prevailing prices on behalf of holders who otherwise would be entitled to
receive fractional shares, and such persons will receive instead a check in
payment for the amount of their allocable share of the total sale proceeds. See
"--Certain Federal Income Tax Consequences of the Distribution." Such sales are
expected to be made as soon as practicable after the mailing of the ValueRx
Common Stock to Value Health stockholders. Value Health will bear the cost of
any commissions incurred in connection with such sales.
NO HOLDER OF VALUE HEALTH COMMON STOCK WILL BE REQUIRED TO PAY ANY CASH OR
OTHER CONSIDERATION FOR THE SHARES OF VALUERX COMMON STOCK TO BE DISTRIBUTED OR
TO SURRENDER OR EXCHANGE SHARES OF VALUE HEALTH COMMON STOCK OR TO TAKE ANY
OTHER ACTION IN ORDER TO RECEIVE VALUERX COMMON STOCK WHICH SUCH HOLDER IS
ENTITLED TO RECEIVE.
Certain Federal Income Tax Consequences of the Distribution
Value Health has applied for a ruling (the "Tax Ruling") from the United
States Internal Revenue Service (the "IRS") to the effect, among other things,
that the Distribution will qualify under Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code") and, accordingly, that under United States
federal income tax law:
1. No income, gain or loss will be recognized by a holder of Value
Health Common Stock solely as a result of the receipt of ValueRx Common
Stock pursuant to the Distribution;
2. In general, no gain or loss will be recognized by Value Health or
ValueRx as a result of the Distribution;
3. The tax basis of Value Health Common Stock held by a holder of
Value Health Common Stock immediately prior to the Distribution will be
apportioned (based upon relative market values on the Distribution Date)
between such Value Health
-11-
<PAGE>
Common Stock and the ValueRx Common Stock received (including any
fractional share interest deemed received) by such stockholder pursuant to
the Distribution; and
4. Assuming that Value Health Common Stock is held as a capital asset
on the Distribution Date, the holding period for the ValueRx Common Stock
received pursuant to the Distribution by a holder of Value Health Common
Stock will include the period during which such Value Health Common Stock
has been held.
If a Tax Ruling has not been issued by the IRS by the date when the Value
Health Board meets formally to set the Record Date and the Distribution Date,
the Value Health Board may decide to effect the Distribution in reliance on an
opinion of tax counsel or to delay the Distribution until the IRS has granted
the requested Tax Ruling.
If the Distribution does not qualify under Section 355 of the Code, then:
(i) Value Health will recognize taxable gain on the Distribution and (ii) each
holder of Value Health Common Stock who receives shares of ValueRx Common Stock
pursuant to the Distribution will be treated as having received a taxable
dividend equal to the fair market value of such stock, to the extent of the
current and accumulated earnings and profits of Value Health.
The Distribution, though intended to be free from United States federal
income tax as of the Distribution Date, could be rendered taxable as a result of
subsequent actions or events, some of which are not within the control of Value
Health or ValueRx. Value Health and ValueRx will agree not to undertake any
such actions within their control and will agree under specified circumstances
to indemnify the other for taxes, liabilities, and associated expenses incurred
as a result of specified actions or events. See "Arrangements between Value
Health and ValueRx--Reorganization Agreement."
A holder of Value Health Common Stock who receives cash in lieu of a
fractional share interest in ValueRx Common Stock will be treated as if such
fractional share interest had been received as part of the Distribution and then
sold. Accordingly, gain or loss will be recognized for United States federal
income tax purposes measured by the difference, if any, between the amount of
cash received and the tax basis allocable (as described above) to such holder's
fractional share interest. Such gain or loss will be capital gain or loss to the
holder, provided that the Value Health Common Stock has been held as a capital
asset on the Distribution Date.
Stockholders are urged to consult their own tax advisors as to the
particular consequences to them of the Distribution, including the application
of state, local and non-U.S. tax laws.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL
INFORMATION ONLY. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO
THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING
THE APPLICATION OF STATE, LOCAL AND NON-U.S. TAX LAWS,
-12-
<PAGE>
AND AS TO POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES
DESCRIBED ABOVE. THIS SUMMARY MAY NOT BE APPLICABLE TO STOCKHOLDERS WHO RECEIVED
THE VALUERX COMMON STOCK PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS
COMPENSATION (INCLUDING HOLDERS OF RESTRICTED STOCK) OR WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES.
Listing and Trading of ValueRx Common Stock
An application will be filed for listing the ValueRx Common Stock on the
NYSE. ValueRx initially will have approximately _______ stockholders of record,
based on the number of record holders of Value Health Common Stock on the Record
Date. The transfer agent and registrar for ValueRx Common Stock will be Boston
EquiServe, LLP. For certain information regarding certain options to purchase
ValueRx Common Stock that will be granted after the Distribution, see
"Management--Compensation of Executive Officers."
Shares of ValueRx Common Stock distributed to Value Health stockholders in
the Distribution will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of ValueRx under the Securities Act
of 1933, as amended, and the rules promulgated thereunder (the "Securities
Act"). Persons who may be deemed to be affiliates of ValueRx after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, ValueRx, and may include
certain officers and directors of ValueRx as well as principal stockholders of
ValueRx, if any. Persons who are affiliates of ValueRx will be permitted to sell
their shares of ValueRx Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemption afforded by Rule 144
promulgated thereunder.
Future Management of ValueRx
Following the Distribution, ValueRx will have substantially the same
operating management as before the Distribution. See "Management--Executive
Officers."
Opinion of Financial Advisor
Merrill Lynch & Co. ("Merrill Lynch") was retained to act as financial
advisor to Value Health in connection with the Distribution. Merrill Lynch was
selected by Value Health because of Merrill Lynch's familiarity with Value
Health and its businesses and the qualifications and expertise of Merrill Lynch
in providing advice to companies in the businesses in which Value Health is
engaged, as well as Merrill Lynch's reputation as an internationally recognized
investment banking firm.
The Value Health Board has requested that Merrill Lynch deliver an opinion
to the Value Health Board in connection with the Distribution with respect to
the fairness of the Distribution, from a financial point of view, to the holders
of Value Health Common Stock. Such an opinion would be rendered by Merrill
Lynch on or about the date the Distribution is
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<PAGE>
declared by the Value Health Board and would be based upon facts and
circumstances as of the date Merrill Lynch renders its opinion. Accordingly,
there is no assurance that such an opinion will be rendered by Merrill Lynch.
The following is a description of the form of opinion which Merrill Lynch
currently anticipates it would render, assuming that Merrill Lynch in fact were
to render an opinion with respect to the Distribution. Such description has
been bracketed in its entirety to indicate that the form of opinion is
preliminary and is not necessarily indicative of the final text of the opinion,
if rendered by Merrill Lynch.
[At the request of the Value Health Board, on ______________, 1997, Merrill
Lynch delivered a written opinion to the Value Health Board that, based upon and
subject to the matters set forth in the written opinion and in light of the fact
that the Distribution will be on a pro rata basis to the holders of Value Health
Common Stock, as of such date, the Distribution is fair from a financial point
of view to such holders. In connection with its opinion, Merrill Lynch: (i)
reviewed Value Health's Annual Reports, Forms 10-K and the related financial
information for the three fiscal years ended December 31, [1993, 1994, 1995]
and Value Health's Form 10-Q and the related unaudited financial information for
the three quarterly periods ended [September 30, 1996]; (ii) analyzed certain
historical business and financial information of, and reviewed public
information relating to, Value Health and the business to be transferred to
ValueRx, including public financial statements, and reviewed certain rating
agency presentations; (iii) reviewed certain financial forecasts provided by
Value Health for Value Health after the Distribution ("New Value Health") and
ValueRx for the fiscal years [1997 through 2001]; (iv) conducted discussions
with members of the current senior management of Value Health and ValueRx,
concerning the historical business of Value Health and the current business to
be transferred to ValueRx, the prospects of Value Health, New Value Health and
ValueRx, the anticipated effects of the Distribution on New Value Health's and
ValueRx's initial and projected capital structures, cash flow and results of
operations, and the plans and programs for the financing of current and
projected capital and operating requirements of New Value Health and ValueRx;
(v) reviewed public information, including historical market prices and trading
activity, with respect to other companies in lines of businesses Merrill Lynch
believed to be generally comparable to the businesses conducted by Value Health
and the businesses to be conducted by New Value Health and ValueRx; (vi)
reviewed the Information Statement; and (vii) reviewed such other financial
studies and analyses and performed such other investigations and took into
account such other matters as Merrill Lynch deemed necessary.
In preparing its opinion, Merrill Lynch relied upon the accuracy and
completeness of all information made available to Merrill Lynch by Value Health
and ValueRx and did not independently verify such information or undertake an
independent appraisal of the assets of Value Health, New Value Health or
ValueRx. With respect to the financial forecasts furnished by Value Health,
Merrill Lynch assumed that they were reasonably prepared and reflected the best
currently available estimates and the judgment of Value Health's management as
to the expected future financial performance of Value Health, New Value Health
and ValueRx. Further, Merrill Lynch's opinion was based on economic, monetary
and market conditions existing on the date of its opinion. Merrill Lynch did
not undertake to
-14-
<PAGE>
reaffirm or review or supplement its opinion based upon any events occurring
after the date of its opinion.
Merrill Lynch assumed, with Value Health's consent, that the receipt of the
ValueRx Common Stock will be tax-free for federal income tax purposes to the
stockholders of Value Health, except to the extent cash is received in lieu of
fractional shares, and that none of Value Health, New Value Health and ValueRx
will recognize any income, gain or loss as a result of the Distribution.
Merrill Lynch assumed, with Value Health's consent, that the Distribution will
comply with applicable laws, including, without limitation, laws relating to the
payment of dividends, bankruptcy, insolvency, reorganization, fraudulent
conveyance, fraudulent transfer and other similar laws affecting creditors'
rights generally.
Based upon and subject to the foregoing and in light of the fact that the
Distribution will be on a pro rata basis to each of the holders of Value Health
Common Stock, Merrill Lynch is of its opinion that, as of the date of such
opinion, the Distribution is fair from a financial point of view to such
holders.]
The foregoing bracketed description of the opinion Merrill Lynch is
currently expected to render in connection with the Distribution is preliminary
and is included in this Information Statement for illustrative purposes only.
As of the date of this Information Statement, Merrill Lynch has not rendered an
opinion with respect to the Distribution and there can be no assurance that such
opinion will be rendered. If the Merrill Lynch opinion is in fact rendered,
there could be material differences between the final text of such opinion and
the form of opinion described above.
Merrill Lynch will receive customary fees, including reimbursement of
expenses, for its services as financial advisor to Value Health in connection
with the Distribution, a portion of which is contingent upon the consummation of
the Distribution. Value Health also has agreed to indemnify Merrill Lynch
against certain liabilities and expenses in connection with its services as
financial advisor, including liabilities arising under federal securities laws.
In the ordinary course of its business, Merrill Lynch may actively trade in
the debt and equity securities of Value Health and, after the Distribution, New
Value Health and ValueRx, for its own account or for the accounts of its
customers and, accordingly, may at any time hold long or short positions in such
securities.
-15-
<PAGE>
SPECIAL FACTORS
Certain statements in this Information Statement constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward looking statements involve known and unknown
risks, including, but not limited to, general economic and business conditions,
competition, changing trends in customer profiles, changes in governmental
regulations and certain other risks identified below. Although ValueRx believes
that its expectations with respect to the forward looking statements are based
upon reasonable assumptions within the bounds of its knowledge of its business
and operations, there can be no assurance that actual results, performance or
achievements of ValueRx will not differ materially from any future results,
performance or achievements expressed or implied by such forward looking
statements.
Competition
Certain of the companies with which ValueRx competes are significantly
larger and have greater financial resources than ValueRx, including several drug
manufacturers which have recently acquired large PBM companies. During 1994 and
1995, these PBMs owned by pharmaceutical companies began to price their services
aggressively, thereby decreasing margins for the industry. There can be no
assurance that ValueRx will continue to remain competitive with respect to the
foregoing factors or successfully market integrated PBM services to new
customers. There can be no assurance that consolidation and alliances within
the PBM industry will not adversely impact the operations and prospects for
independent PBMs such as ValueRx. See "Business--Competition."
Consolidation Among Customers
Over the past several years, insurance companies and MCOs have experienced
significant consolidation. ValueRx's managed care customers have been and may
continue to be subject to consolidation pressures. Although the Company may
benefit from certain consolidations in the industry, there can be no assurance
that customers will not be lost as a result of acquisitions and no assurance
that such activity will not have a material adverse effect upon ValueRx's
business, operating results and financial condition.
Drug Manufacturer Rebates
ValueRx has arrangements with certain pharmaceutical manufacturers whereby
it receives payments based upon the volume of pharmaceuticals it manages or
purchases from manufacturers. To the extent that there are changes in such
arrangements, such changes, in the aggregate, could have a material adverse
effect on ValueRx's operating margins.
-16-
<PAGE>
Certain Contracts
ValueRx's integrated pharmacy service contracts typically have initial
terms of one to three years. The loss of certain major pharmacy service
customers could, in the aggregate, have a material adverse effect on ValueRx's
results of operations.
Moreover, under certain of such contracts, none of which are material in
the aggregate, ValueRx agrees to arrange and pay for providing prescription drug
services to plan beneficiaries for a fixed amount regardless of the cost to
ValueRx of providing such services. Other of such agreements (where the claims
are paid by plan sponsors or their insurers and ValueRx receives an
administrative fee) include provisions whereby ValueRx's fee is adjusted
depending upon performance as measured against targeted criteria. ValueRx uses
various mechanisms to predict and reduce its financial risks under such
agreements. There can be no assurance, however, that, in the future, increases
in health care costs or higher than anticipated utilization rates, significant
aspects of which are outside the control of ValueRx, will not cause expenses
associated with such agreements to exceed revenues or projected targets, which
could have a material adverse effect on the results of operations or financial
condition of ValueRx.
Dependence on Management
The Company believes that its continued success will depend to a
significant extent upon the continued services of its senior management. The
loss of the services of such persons in senior management, on a cumulative
basis, could have a material adverse effect on the Company's business.
Government Regulation
The PBM industry is subject to federal and state laws and regulations, and
compliance with such laws and regulations imposes certain operational
requirements upon ValueRx. Certain regulatory requirements with which ValueRx
must comply in conducting its business vary from state to state. Management
believes that ValueRx is in substantial compliance with all existing statutes
and regulations material to the operation of its business. The impact of future
legislation and regulatory changes on ValueRx's business cannot be predicted,
and there can be no assurance that ValueRx's business will be able to obtain or
maintain the regulatory approvals required to operate its business. See
"Business--Government Regulation."
Potential Taxability
The Distribution, though intended to be free from United States federal
income tax as of the Distribution Date, could be rendered taxable as a result of
subsequent actions or events. The Company will agree not to undertake specified
actions and will agree that under specified circumstances it will indemnify
Value Health for taxes, liabilities and associated expenses incurred as a result
of any such actions or events.
-17-
<PAGE>
No Prior Market for ValueRx Common Stock
There has been no prior trading market for ValueRx Common Stock and there
can be no assurance as to the prices at which ValueRx Common Stock will trade
before or after the Distribution Date. Until the ValueRx Common Stock is fully
distributed and an orderly market develops, the prices at which ValueRx Common
Stock trades may fluctuate significantly. Prices for ValueRx Common Stock will
be determined in the trading markets and may be influenced by many factors,
including the depth and liquidity of the market for ValueRx Common Stock,
investor perceptions of ValueRx and its business, ValueRx's dividend policy, and
general economic and market conditions. See "The Distribution--Listing and
Trading of ValueRx Common Stock."
Reliance on Data Processing
Certain aspects of the business of ValueRx are dependent upon its ability
to store, retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors or other
computer problems could have a material adverse effect on the business of
ValueRx.
Effects on Value Health and ValueRx Common Stock
After the Distribution, Value Health Common Stock will continue to be
listed and traded on the NYSE. As a result of the Distribution, the trading
price of Value Health Common Stock will likely be lower than the trading price
of Value Health Common Stock immediately prior to the Distribution. The
combined trading prices of Value Health Common Stock and ValueRx Common Stock
after the Distribution may be less than, equal to or greater than the trading
prices of Value Health Common Stock immediately prior to the Distribution. In
addition, until the market has fully analyzed the operations of the two separate
companies, the prices at which both Value Health and ValueRx Common Stock trade
may fluctuate significantly.
Certain Antitakeover Effects
The Company's Amended and Restated Certificate of Incorporation and By-
laws, the shareholder rights plan to become effective upon consummation of the
Distribution and the General Corporation Law of the State of Delaware ("Delaware
Law") contain several provisions that could make more difficult a change of
control of ValueRx in a transaction not approved by the Board of Directors of
ValueRx (the "ValueRx Board"). In addition, the ValueRx Board may adopt certain
other programs, plans and agreements with its management and/or employees that
may make such a change of control more expensive. See "Description of Capital
Stock."
-18-
<PAGE>
Professional and General Liability Insurance
Various aspects of ValueRx's business, including the dispensing of
pharmaceutical products, may subject it to litigation and liability for damages.
While ValueRx maintains and intends to continue to maintain professional and
general liability insurance coverage, there can be no assurance that ValueRx
will be able to maintain such insurance in the future or that such insurance
will be available on acceptable terms or will be adequate to cover any or all
potential product or professional liability claims. A successful product or
professional liability claim in excess of ValueRx's insurance coverage could
have a material adverse effect upon ValueRx's business, operating results and
financial condition. See "Business."
-19-
<PAGE>
ARRANGEMENTS BETWEEN VALUE HEALTH AND VALUERX
For the purpose of governing certain of the ongoing relationships between
Value Health and ValueRx after the Distribution, and to facilitate an orderly
transition to the status of two separate, publicly traded companies, Value
Health and ValueRx will enter into the various agreements described in this
section. The agreements summarized below have been, or will be, filed as
exhibits to the Registration Statement or an amendment thereto, of which this
Information Statement is a part, and the following summaries are qualified in
their entirety by reference to the agreements as filed.
Reorganization Agreement
Value Health and ValueRx will enter into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") providing for, among other
things, the principal corporate transactions required to effect the separation
of the ValueRx Business from the remaining Value Health businesses and the
Distribution, and certain other agreements governing the relationship between
Value Health and ValueRx with respect to or in consequence of the Distribution,
including provisions relating to the treatment of employee benefit matters and
other compensation arrangements for certain former and current ValueRx employees
and their beneficiaries and dependents.
The Reorganization Agreement will contain provisions relating to the tax
treatment of the Distribution, including a requirement that ValueRx refrain from
taking certain specified actions in order to avoid potentially adverse tax
consequences relating to the Distribution. The Reorganization Agreement will
also provide that if, as a result of certain transactions occurring after the
Distribution Date involving either the stock or assets of either ValueRx or any
of its subsidiaries, or any combination thereof, the Distribution fails to
qualify as tax-free under the provisions of Section 355 of the Code, ValueRx
will indemnify Value Health for all taxes, liabilities, and associated expenses,
including penalties and interest, incurred as a result of such failure of the
Distribution to qualify under Section 355 of the Code. See "The Distribution--
Certain Federal Income Tax Consequences of the Distribution."
The Reorganization Agreement will provide for certain cross-indemnities
principally designed to place financial responsibility for the contingent
liabilities that may arise out of certain litigation relating to the ValueRx
Business with ValueRx and financial responsibility for the contingent
liabilities that may arise out of certain litigation relating to Value Health's
retained businesses and its other subsidiaries with Value Health. The
Reorganization Agreement also will provide for the allocation of benefits
between Value Health and ValueRx under existing insurance policies after the
Distribution Date for claims made or occurrences prior to the Distribution Date
and will set forth procedures for the administration of insured claims.
Finally, the Reorganization Agreement will provide that the Distribution
will not be made until certain conditions are satisfied or waived by the Value
Health Board in its sole discretion, including: (i) the receipt of the Tax
Ruling or an acceptable opinion of tax counsel as to the tax-free status of the
Distribution; (ii) final approval by the Value Health Board of
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<PAGE>
the Distribution; (iii) receipt of all material consents required to effect the
Distribution; (iv) the Registration Statement being declared effective; (v) the
ValueRx Board, composed of the persons identified herein, being duly elected;
(vi) the receipt of the opinion of the Financial Advisor described under "The
Distribution--Opinion of Financial Advisor"; (vii) the ValueRx Common Stock
being approved for listing on the NYSE; (viii) the transactions contemplated by
the Reorganization Agreement in connection with the organization of ValueRx and
the separation of the ValueRx Business and the Value Health remaining businesses
being consummated in all material respects; (ix) Value Health and ValueRx having
entered into each of the agreements, instruments, understandings, assignments
and other arrangements to be entered into in connection with the transactions
contemplated by the Reorganization Agreement, including, without limitation, any
conveyance documents, the Tax Sharing Agreement, and each such agreement being
in full force and effect; and (x) no order, injunction or decree having been
issued by any court of competent jurisdiction or other legal restraint or
prohibition preventing consummation of the Distribution being in effect. Even if
all the conditions are satisfied, the Reorganization Agreement may be terminated
and the Distribution abandoned by the Value Health Board, in its sole
discretion, without the approval of the Value Health stockholders, at any time
prior to the Distribution Date.
Tax Sharing Agreement
Value Health and ValueRx will enter into a tax sharing agreement (the "Tax
Sharing Agreement") which will allocate tax liabilities and responsibility for
tax audits for periods prior to, and subsequent to the Distribution Date. The
Tax Sharing Agreement will also allocate consolidated alternative minimum tax
and other tax credit carry-forwards, if any, as of the Distribution Date between
Value Health and ValueRx.
Services Agreement
The Company and Value Health will enter into a services agreement, pursuant
to which Value Health will provide to ValueRx certain administrative and
marketing services that may be necessary for the conduct of the ValueRx
Business. Such services are day-to-day in nature and are not, cumulatively,
material to either ValueRx or Value Health. These services include employee
benefit and payroll administration, production of certain marketing support
materials, procurement and coordination of insurance policies and tax
preparation. In addition, Value Health and ValueRx expect to cooperate on
certain sales and account service opportunities and ValueRx will provide
pharmaceutical support, on favorable terms, to Value Health's physician practice
management activities.
License Agreement
The Company and Value Health will enter into a license agreement granting
the Company certain rights, including but not limited to the worldwide,
perpetual, royalty-free right to use the Practice Review System ("PRS"). See
"Business--Information Services--Disease Assessment and Analysis."
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<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1996, the
capitalization of ValueRx as adjusted to give effect to the Distribution and
related transactions. This information should be read in conjunction with the
"Pro Forma Financial Data," "Selected Financial Data" and the Combined Financial
Statements included elsewhere herein. The pro forma information set forth below
may not reflect the capitalization of ValueRx in the future or as it would have
been had ValueRx been a separate, stand-alone company at September 30, 1996.
<TABLE>
<CAPTION>
As of September 30, 1996
-----------------------------------------------------------
(In thousands, except per share data)
(unaudited)
Pro Forma
Historical Adjustments(A) As Adjusted
-------------- ------------------ ---------------
<S> <C> <C> <C>
Long-term debt:
Capitalized lease obligations.................... $ 569 $ - $ 569
Borrowings....................................... - - -
-------- --------- --------
Total long-term debt........................... 569 - 569
-------- --------- --------
Stockholder's equity:
Investment by Value Health, Inc.................. 302,351 (302,351) -
Preferred stock - no par value,
authorized 1,000 shares,
none issued - - -
Common stock, $.01 par value,
authorized 50,000 shares,
outstanding 27,200 shares...................... - 272 272
Additional paid-in capital....................... - 230,257 230,257
Retained earnings................................ - 71,822 71,822
Unrealized loss on securities available
for sale, net of tax........................... (448) - (448)
-------- --------- --------
Total stockholder's equity..................... 301,903 - 301,903
-------- --------- --------
Total capitalization......................... $302,472 $ - $302,472
======== ========= ========
</TABLE>
- --------------------------
(A) To reflect the anticipated distribution of [27,200] shares of ValueRx
Common Stock (at an assumed distribution ratio of one share of ValueRx
Common Stock for every [two] shares of Value Health Common Stock held on
the Record Date) and the elimination of Value Health's equity investment
effected by the Distribution.
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<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data presents the combined
results of ValueRx and its financial position assuming that the Distribution and
related transactions had been completed as of the beginning of each period
presented, for the combined statements of operations, and as of September 30,
1996, for the combined balance sheet. The unaudited pro forma information has
been prepared utilizing the historical Combined Financial Statements of ValueRx.
This information should be read in conjunction with the Combined Financial
Statements of ValueRx and related notes thereto included elsewhere herein. The
unaudited pro forma financial data does not purport to be indicative of the
results of ValueRx in the future or what the financial position and results of
operations would have been had ValueRx been a separate, stand-alone entity
during the periods shown.
ValueRx, Inc.
Pro Forma Combined Statements Of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996 Year Ended December 31, 1995
---------------------------------------- ------------------------------------------
Pro Forma Pro Forma
Historical Adjustments As Adjusted Historical Adjustments As Adjusted
---------- ----------- ----------- ---------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Prescription drugs - services $ 856,757 - $ 856,757 $1,053,436 - $1,053,436
Prescription drugs - products 325,521 - 325,521 425,661 - 425,661
Other, net 11,303 - 11,303 13,569 - 13,569
------------ ------------ ------------ ------------ ------------ ------------
Total revenues 1,193,581 - 1,193,581 1,492,666 - 1,492,666
------------ ------------ ------------ ------------ ------------ ------------
Expenses:
Costs of services 781,483 - 781,483 959,838 - 959,838
Costs of products 282,954 - 282,954 360,563 - 360,563
Selling, general and administrative 65,965 1,500(A) 67,465 94,837 2,000(A) 96,837
Depreciation and amortization 6,257 - 6,257 11,930 - 11,930
Amortization of goodwill 4,179 - 4,179 4,022 - 4,022
Interest expense 1,390 - 1,390 3,095 - 3,095
Loss contracts -- - 46,600 - 46,600
Merger-related and restructuring -- - 71,090 - 71,090
------------ ------------ ------------ ------------ ------------ ------------
Total expenses 1,142,228 1,500 1,143,728 1,551,975 2,000 1,553,975
------------ ------------ ------------ ------------ ------------ ------------
Earnings (loss) before income taxes 51,353 (1,500) 49,853 (59,309) (2,000) (61,309)
Provision (benefit) for income taxes 20,541 (600)(B) 19,941 (14,832) (800)(B) (15,632)
------------ ------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ 30,812 ($900) $ 29,912 ($44,477) ($1,200) ($45,677)
============ ============ ============ ============ ============ ============
Shares to be issued (C) 27,200 27,200
============ ============
Net earnings (loss) per share (C) $1.10 $(1.68)
============ ============
</TABLE>
- ----------------------------------------
(A) To reflect the estimated incremental costs associated with being an
independent public company, including costs associated with corporate
administrative services such as tax, treasury, risk management and
insurance, legal, shareholder relations and marketing.
(B) To reflect the estimated tax impact, at statutory rates, for pro forma
adjustments.
(C) Pro forma net income per share is computed as if the distribution of
approximately [27,200] shares of ValueRx Common Stock (at an assumed
distribution ratio of one share of ValueRx Common Stock for every [two]
shares of Value Health Common Stock held on the Record Date) had been
outstanding for the periods presented.
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<PAGE>
ValueRx, Inc.
Pro Forma Combined Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
September 30, 1996
-------------------------------------------------------
Pro Forma
Historical Adjustments As Adjusted
------------ ---------------- -------------
Assets: (In Thousands)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 41,809 $ (35,139)(A) $ 6,670
Accounts receivable, net 249,428 -- 249,428
Inventories 27,983 -- 27,983
Prepaid expenses and other current assets 12,341 -- 12,341
Deferred taxes 33,675 -- 33,675
----------- ---------------- -------------
Total current assets 365,236 (35,139) 330,097
----------- ---------------- -------------
Fixed assets, net 50,774 -- 50,774
Long-term investments 903 -- 903
Goodwill, net 132,392 -- 132,392
Other assets 18,888 -- 18,888
----------- ---------------- -------------
Total assets $ 568,193 $ (35,139) $ 533,054
=========== ================ =============
Liabilities and Stockholder's Equity:
Current liabilities:
Payable to providers $ 143,755 -- $ 143,755
Accounts payable and accrued expenses 52,039 -- 52,039
Due to affiliates, net 35,139 (35,139)(A) --
Accrued loss contracts 12,128 -- 12,128
Merger-related and restructuring 14,984 -- 14,984
Other liabilities 7,117 -- 7,117
----------- ---------------- -------------
Total current liabilities 265,162 (35,139) 230,023
----------- ---------------- -------------
--
Capital lease obligations, less current portion 569 -- 569
Long-term borrowings -- -- --
Other liabilities 559 -- 559
----------- ---------------- -------------
Total liabilities 266,290 (35,139) 231,151
----------- ---------------- -------------
Stockholder's equity:
Investment by Value Health, Inc. 302,351 (302,351)(B) --
Preferred stock - no par value, authorized,
1,000 shares, none issued -- -- --
Common stock, $.01 par value, authorized
50,000 shares, outstanding 27,200 shares -- 272(B) 272
Additional paid-in capital -- 230,257(B) 230,257
Retained Earnings -- 71,822(B) 71,822
Unrealized loss on securities available for
sale, net of tax (448) -- (448)
----------- ---------------- -------------
Total stockholder's equity 302,351 -- 302,351
----------- ---------------- -------------
Total liabilities and stockholder's equity $ 568,193 $ (35,139) $ 533,054
=========== ================ =============
</TABLE>
- ----------------------------------------
(A) To record the planned repayment of net payables to Value Health.
(B) To reflect the anticipated distribution of approximately [27,200] shares
of ValueRx Common Stock (at an assumed distribution ratio of one share of
ValueRx Common Stock for every [two] shares of Value Health Common Stock
held on the Record Date) and the elimination of Value Health's equity
investment effected by the Distribution.
-24-
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial information with respect
to ValueRx. Selected unaudited historical financial information for the nine
months ended September 30, 1996 and 1995 includes all adjustments, consisting
only of normal recurring accruals that are considered necessary for a fair
presentation of combined operating results for such interim periods. Results
for the interim periods are not necessarily indicative of results for the full
year. The selected historical financial data that relate to the three year
period ended December 31, 1995, have been derived from the Combined Financial
Statements audited by Coopers & Lybrand L.L.P., independent public accountants.
The selected historical financial data for the two year period ended December
31, 1992, have been derived from unaudited historical financial statements. In
the opinion of management, the unaudited historical financial statements reflect
all adjustments, consisting of normal adjustments necessary to present fairly
the financial position of the Company at December 31, 1992 and 1991, and the
results of operations and cash flows for the years then ended. The historical
financial data of the Company may not reflect the results of operations or
financial position that could have been obtained had the Company been a
separate, stand-alone company. The information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Combined Financial Statements and related
notes thereto contained elsewhere herein. Historical per share data for net
income has not been presented because ValueRx was operated as a wholly owned
subsidiary of Value Health for the periods presented below.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------------- ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenues.......................... $1,193,581 $1,080,218 $1,492,666 $1,288,645 $871,807 $595,918 $404,149
Costs & Expenses:
Costs of Services and Products........ 1,064,437 951,218 1,320,401 1,142,461 753,764 518,825 346,194
Selling, General and Administrative... 77,791 85,748 113,884 106,402 80,115 53,264 32,988
Other Charges (A)..................... --- 110,753 117,690 5,985 --- --- ---
------------ ------------ ------------ ------------ ---------- --------- ----------
Earnings (Loss) Before Income Taxes.... 51,353 (67,501) (59,309) 33,797 37,928 23,829 24,967
Provision (Benefit) for Income Taxes... 20,541 (21,926) (14,832) 14,590 14,987 9,597 7,834
------------ ------------ ------------ ------------ ---------- --------- ----------
Net Earnings (Loss).................... $ 30,812 $ (45,575) $ (44,477) $ 19,207 $ 22,941 $ 14,232 $ 17,133
============ =========== ============ ============ ========== ========= ==========
BALANCE SHEET DATA:
Working Capital........................ $ 100,074 $ 62,404 $ 58,406 $ 63,929 $ 22,695 $ 31,494 $116,715
Total Assets........................... $ 568,193 $ 532,214 $ 555,247 $ 480,263 $431,126 $317,769 $253,238
Long-term Debt......................... --- --- --- $ 12,187 12,267 18,000 24,125
Stockholder's Equity................... $ 301,903 $ 241,318 $ 242,298 $ 271,900 $225,990 $194,650 $174,144
</TABLE>
- --------------------------------------
(A) Amounts represent certain charges for loss contracts, merger-related and
restructuring accruals. See Notes 3 and 4 to the Combined Financial
Statements included elsewhere herein.
-25-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of ValueRx's historical results of
operations and of its liquidity and capital resources should be read in
conjunction with the historical and pro forma Combined Financial Statements and
related notes thereto included elsewhere herein.
Overview
ValueRx, the largest independent pharmacy benefit manager in the U.S.,
provides managed prescription drug programs to managed care organizations
("MCOs"), insurance companies, corporations, labor unions, government entities,
other benefit plan sponsors and physician practice management companies.
Comprehensive services offered by the Company include retail pharmacy networks,
mail service pharmacies, therapeutic pharmaceutical management programs (such as
customized formularies), patient and physician profiling and education, claims
processing, clinically based drug utilization review and disease management
programs.
The Company historically was operated as part of Value Health. On October
7, 1996, the Value Health Board authorized management to proceed with a plan to
separate Value Health into two companies by means of a spin-off of the ValueRx
Business. At the time of the Distribution, ValueRx will own the assets,
liabilities and operations that prior to the date of the Distribution comprised
Value Health's pharmacy benefit and medication management business. Following
the Distribution, Value Health and ValueRx will be operated as independent
public companies.
On July 28, 1995, Value Health completed a merger with Diagnostek, Inc.
("Diagnostek"), a pharmacy benefit manager based in Albuquerque, New Mexico.
The transaction was accounted for as a pooling of interests and its historical
results are included in the combined ValueRx financial statements for all
periods presented. During the third and fourth quarters of 1995, the Company
recorded merger and restructuring related charges primarily as a result of its
acquisition of Diagnostek, including certain special charges to eliminate
duplicate facilities, systems and personnel. Additional special charges were
recorded to reserve for certain loss contracts, to accrue for shareholder
litigation exposures, and to write-off certain balance sheet amounts that were
not deemed recoverable upon the Company's review of the books and records of
Diagnostek subsequent to the merger. Excluding the foregoing charges, earnings
from continuing operations before income taxes would have been $55.4 million,
for the nine month period ended September 30, 1995, and $70.5 million and $51.8
million, for the full years ended December 31, 1995 and 1994, respectively.
Earnings (loss) from continuing operations before income taxes, as reported,
were ($67,501) for the nine month period ended September 30, 1995, and,
($59,309) and $33,797, for the full years ended December 31, 1995 and 1994,
respectively.
On July 3, 1996, the Company contributed the assets of its institutional
pharmacy business to a joint venture with Allegiance Corporation. The Company's
investment in the
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<PAGE>
joint venture is recorded using the equity method, eliminating recognition of
revenues and expenses of such business in the Company's results of operations
subsequent to July 3, 1996. The Company's proportionate share of joint venture
results of operations is reflected in Other, net.
Results Of Operations
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
The following table sets forth certain combined financial data and such
data as percentages of total revenues for the periods presented:
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
(unaudited)
(In thousands, except percentages)
<S> <C> <C> <C> <C>
Revenues
Prescription drugs - services.................. $ 856,757 71.8% $ 751,464 69.6%
Prescription drugs - products.................. 325,521 27.3% 318,183 29.4%
Other, net..................................... 8,844 0.7% 7,391 0.7%
Investment income.............................. 2,459 0.2% 3,180 0.3%
------------ ------------ ------------ ------------
Total revenues................................... 1,193,581 100.0% 1,080,218 100.0%
------------ ------------ ------------ ------------
Expenses
Costs of services.............................. 781,483 65.6% 684,258 63.3%
Costs of products.............................. 282,954 23.7% 266,960 24.7%
Selling, general and administrative............ 65,965 5.5% 71,484 6.6%
Depreciation and amortization.................. 6,257 0.5% 8,459 0.8%
Amortization of goodwill....................... 4,179 0.3% 2,951 0.3%
Interest expense............................... 1,390 0.1% 2,854 0.3%
Loss contracts................................. - 0.0% 46,600 4.3%
Merger-related and restructuring............... - 0.0% 64,153 5.9%
------------ ------------ ------------ ------------
Total expenses................................... 1,142,228 95.7% 1,147,719 106.2%
------------ ------------ ------------ ------------
Earnings (loss) before income taxes.............. 51,353 4.3% (67,501) (6.2%)
Provision (benefit) for income taxes........... 20,541 1.7% (21,926) (2.0%)
------------ ------------ ------------ ------------
Net earnings (loss).............................. $ 30,812 2.6% ($ 45,575) (4.2%)
============ ============ ============ ============
</TABLE>
Revenues
Total revenues for the nine months ended September 30, 1996 of $1,193.6
million increased by $113.4 million or 10.5% compared to the same period in
1995. The addition of new customers increased revenues by $169.0 million, which
amount was offset by $38.4 million in non-renewed business. Non-renewal of
prescription drug service and product business occurred as a result of certain
loss contracts canceled by the Company as well as contracts canceled by certain
customers. As a result of the formation of the joint venture with Allegiance
discussed above, revenues for the nine month period ended September 30, 1996
were $18.0 million lower than in the comparable prior year period.
Prescription Drugs - Services. Prescription drug service revenues from the
retail and hospital pharmacy management business for the nine months ended
September 30, 1996 of $856.8 million increased by $105.3 million or 14.0%
compared to the same period in 1995. The addition of new customers increased
revenues by $152.5 million, which amount was offset by $29.2 million in non-
renewed business. The increase in prescription drug service
-27-
<PAGE>
revenues was also offset by the accounting treatment for the Company's revenues
from its joint venture with Allegiance Corporation, as discussed above.
Prescription Drugs - Products. Prescription drug product revenues from the
mail service pharmacy business for the nine months ended September 30, 1996 of
$325.5 million increased by $7.3 million or 2.3% compared to the same period in
1995. The addition of new customers increased revenues by $16.5 million, which
amount was offset by $9.2 million in non-renewed business.
Other, Net. Other revenues primarily consist of revenue from standalone
drug utilization review programs and information services consulting. Other
revenues for the nine month period ended September 30, 1996 of $8.8 million
increased $1.5 million or 19.7% compared to the same period in 1995.
Investment Income. Investment income for the nine month period ended
September 30, 1996 of $2.5 million decreased by $0.7 million or 22.7% compared
to the same period in 1995. The decrease in investment income was primarily due
to lower investment balances in the first six months of 1996.
Expenses
Costs of Services. The Company's costs of services consist of direct
expenses of providing specialty managed care services, including pharmacy claim
payments and costs associated with claims processing operations, offset by fees
received from pharmaceutical manufacturers in connection with the Company's
formulary management and rebate programs. Costs of services for the nine month
period ended September 30, 1996 of $781.5 million increased by $97.2 million or
14.2% compared to the same period in 1995. As a percentage of service revenues,
costs of services for the nine month period ended September 30, 1996 of 91.2%
were at substantially the same level as in the same period in 1995.
Costs of Products. The Company's costs of products consist of the cost of
mail order prescription drugs, including labor and overhead charges associated
with warehousing, processing and shipping activities. Costs of products for the
nine months ended September 30, 1996 of $283.0 million increased by $16.0
million or 6.0% compared to the same period in 1995. As a percentage of product
revenues, costs of products increased to 86.9% during the nine months ended
September 30, 1996 compared to 83.9% for the same period in 1995. The higher
costs of products ratio was primarily related to the competitive pricing
environment and the loss of certain profitable accounts since the third quarter
of 1995. The Company's continuing automation of its mail service pharmacies,
which will significantly increase pharmaceutical dispensing capacity, should
allow for increased economies of scale to the extent the Company experiences
higher volumes of mail service prescriptions in the future.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended September 30, 1996 of $66.0 million decreased
$5.5 million or 7.7% compared to the same period in 1995. The decrease was
primarily a result of the Company's restructuring and reengineering programs
implemented in 1996. As a percentage of revenues,
-28-
<PAGE>
selling, general and administrative expenses were 5.5% for the nine month period
ended September 30, 1996, compared to 6.6% for the same period in 1995. The
lower ratio during 1996 is due to the increase in revenues during 1996 and the
impact of the Company's restructuring and reengineering programs implemented
during 1996. The Company expects that selling, general and administrative
expenses as a percentage of revenues will decrease further, as the Company
continues to implement its reengineering programs.
Depreciation and Amortization. Depreciation and amortization expense,
which consists of depreciation of property and equipment and the amortization of
intangible assets arising from purchased and internally developed software, for
the nine months ended September 30, 1996 of $6.3 million decreased by $2.2
million or 26.0% compared to the same period in 1995. The decrease in
depreciation and amortization expense was primarily due to 1995 write-offs of
property, plant and equipment balances as a result of Diagnostek merger-related
activities and restructuring programs.
Amortization of Goodwill. Amortization of goodwill for the nine months
ended September 30, 1996 of $4.2 million increased by $1.2 million or 41.6%
compared to the same period in 1995, primarily as a result of the Company's
acquisition of Medintell Systems Corporation in January of 1996.
Interest Expense. Interest expense for the nine months ended September 30,
1996 of $1.4 million decreased by $1.5 million or 51.3% compared to the same
period in 1995, due to repayment of outstanding debt in the third quarter of
1995.
Loss Contracts. During the first nine months of 1995, the Company
recognized $46.6 million of expense to accrue future estimated losses on certain
risk-based or full risk pharmacy benefits management contracts. See Note 3 to
the Combined Financial Statements included elsewhere herein.
Merger-Related and Restructuring. As discussed above, during the first
nine months of 1995, the Company recognized merger-related and restructuring
expense of $64.2 million in connection with the Diagnostek merger. See Note 4 to
the Combined Financial Statements included elsewhere herein.
Earnings (loss) Before Income Taxes. Earnings (loss) from continuing
operations before income taxes for the nine months ended September 30, 1996 and
1995 were $51.4 million and ($67.5) million, respectively.
Provision (benefit) for Income Taxes. The effective tax rates/(benefit)
for the nine month period ended September 30, 1996 and 1995 were 40% and
(32.5%), respectively. The income tax provision for both periods includes the
utilization of net operating loss carryforwards and an estimate for state income
taxes. The benefit rate for the nine month period ended September 30, 1995 is
lower than the comparable effective tax rate for 1996 as a result of a high
level of non-deductible merger-related and other expenses relative to the
reported losses before taxes. At September 30, 1996, the Company has recorded a
deferred tax asset of $33.7 million to reflect the future tax benefits of loss
carryforwards and temporary differences. Management believes that sufficient
taxes were paid in the carryback period and
-29-
<PAGE>
that sufficient taxable income will be generated in the future to realize the
deferred tax benefits.
Net Earnings (loss). As a result of the foregoing, the Company had net
earnings (loss) for the nine months ended September 30, 1996 and 1995 of $30.8
million and ($45.6) million, respectively.
Fiscal Years Ended December 31, 1995, 1994 and 1993
The following table sets forth certain combined financial data and such
data as percentages of total revenues for the periods presented:
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Prescription drugs - services............ $1,053,436 70.6% $ 891,611 69.2% $523,278 60.0%
Prescription drugs - products............ 425,661 28.5% 382,326 29.7% 321,948 36.9%
Other, net............................... 9,690 0.6% 8,635 0.7% 12,165 1.4%
Investment income........................ 3,879 0.3% 6,073 0.4% 14,416 1.7%
------------ ------------ ------------ ------------ ------------ ------------
Total revenues............................. 1,492,666 100.0% 1,288,645 100.0% 871,807 100.0%
------------ ------------ ------------ ------------ ------------ ------------
Expenses
Costs of services........................ 959,838 64.3% 815,154 63.3% 471,460 54.1%
Costs of products........................ 360,563 24.2% 327,307 25.4% 282,304 32.4%
Selling, general and administrative...... 94,837 6.3% 91,301 7.1% 68,327 7.8%
Depreciation and amortization............ 11,930 0.8% 7,239 0.6% 5,595 0.6%
Amortization of goodwill................. 4,022 0.3% 3,679 0.3% 2,356 0.3%
Interest expense......................... 3,095 0.2% 4,183 0.3% 3,837 0.5%
Loss contracts........................... 46,600 3.1% - 0.0% - 0.0%
Merger-related and restructuring......... 71,090 4.8% 5,985 0.4% - 0.0%
------------ ------------ ------------ ------------ ------------ ------------
Total expenses............................. 1,551,975 104.0% 1,254,848 97.4% 833,879 95.7%
------------ ------------ ------------ ------------ ------------ ------------
Earnings (loss) before income taxes........ (59,309) (4.0%) 33,797 2.6% 37,928 4.3%
Provision (benefit) for income taxes..... (14,832) (1.0%) 14,590 1.1% 14,987 1.7%
------------ ------------ ------------ ------------ ------------ ------------
Net earnings (loss)........................ ($44,477) (3.0%) $ 19,207 1.5% $ 22,941 2.6%
============ ============ ============ ============ ============ ============
</TABLE>
Revenues
Total 1995 revenues of $1,492.7 million increased by $204.0 million or
15.8% compared to 1994, and 1994 revenues of $1,288.6 million increased by
$416.8 million or 47.8% compared to 1993. The addition of new customers
increased revenues by $235.8 million and $350.9 million in 1995 and 1994,
respectively. Revenues from existing customers declined by $33.1 million and
increased by $73.0 million in 1995 and 1994, respectively. In addition,
acquisitions accounted for $2.4 million and $4.8 million of 1995 and 1994
revenue growth.
Prescription Drugs - Services. Prescription drug service revenues for 1995
of $1,053.4 million increased by $161.8 million or 18.1% compared to 1994, and
1994 revenues increased by $368.3 million or 70.4% compared to 1993. The
addition of new customers, primarily in the Company's fee-for-service based
business, increased revenues by $196.2 million and $77.6 million in 1995 and
1994, respectively. Revenues from existing customers
-30-
<PAGE>
declined by $34.4 million and increased by $80.9 million in 1995 and 1994,
respectively. The $34.4 million decrease was primarily due to non-renewal of
business and price reductions on existing business. Also in 1994, revenues
increased by $214.1 million over 1993 as a result of Diagnostek's acquisition of
Perform Cost Management, Inc., a retail pharmacy benefit management company.
Prescription Drug - Products. Prescription drug product revenues for 1995
of $425.7 million increased by $43.3 million or 11.3% compared to 1994, and 1994
revenues increased by $60.4 million or 18.8% compared to 1993. The addition of
new customers increased revenues by $42.0 million and $64.0 million in 1995 and
1994, respectively. Revenues from existing customers increased by $1.3 million
and decreased by $7.9 million in 1995 and 1994, respectively.
Other, Net. Other revenues for 1995 of $9.6 million increased by $1.1
million or 12.2% compared to 1994, and other revenues for 1994 of $8.6 million
decreased $3.5 million or 29.0% compared to 1993. The increase in other
revenues in 1995 over 1994 was primarily due to the Company's acquisition of
Value Health Management. The decrease in 1994 over 1993 was due to the Company
exiting certain ancillary businesses.
Investment Income. Investment income in 1995 of $3.9 million declined by
$2.2 million or 36.1% compared to 1994, and 1994 investment income of $6.1
million declined by $8.3 million or 57.9% compared to 1993. The 1995 decline
was due to lower investment balances and interest rates in 1995 as compared to
1994. The 1994 decline was due to an unusual gain on marketable securities of
$6.0 million recorded in 1993, together with lower investment balances in 1994
as compared to 1993.
Expenses
Costs of Services. Costs of services for 1995 increased by $144.7 million
or 17.7% compared to 1994, and 1994 costs increased by $343.7 million or 72.9%
compared to 1993. These increases were primarily due to an increased number of
plan participants and drug price increases as well as the impact of the Perform
Cost Management, Inc. acquisition discussed above. Costs of services as a
percentage of prescription drug services revenues were 91.1%, 91.4% and 90.1% in
1995, 1994 and 1993, respectively.
Costs of Products. Costs of products for 1995 increased by $33.3 million
or 10.2% compared to 1994, and 1994 costs increased by $45.0 million or 15.9%
compared to 1993. As a percentage of product revenues, costs of products
decreased to 84.7% for 1995, from 85.6% during 1994 and 87.7% during 1993. The
decrease in the costs of products ratio in 1995 over 1994 and 1994 over 1993 was
due to economies of scale achieved from higher volume of mail service
prescriptions as well as more favorable purchasing arrangements for prescription
drugs.
Selling, General and Administrative. Selling, general and administrative
expenses for the full year 1995 increased by $3.5 million or 3.9% compared to
1994, and 1994 expenses increased by $23 million or 33.6% compared to 1993. The
increases in both years were due
-31-
<PAGE>
to staffing and related costs associated with new contracts, added investment in
claims processing capability and continued growth in overhead costs to support
growth within the Company's product lines. As a percentage of revenues, selling,
general and administrative expenses were 6.3%, 7.1%, and 7.8% in 1995, 1994, and
1993, respectively. The 1995 and 1994 decreases were primarily due to greater
operating efficiencies from a larger revenue base.
Depreciation and Amortization. Depreciation and amortization expense was
$11.9 million in 1995 as compared to $7.2 million in 1994 and $5.6 million in
1993. The higher level of depreciation and amortization in each year was
attributable to increased investment in fixed assets to support growth in the
Company's business and increased amortization of capitalized software.
Amortization of Goodwill. Amortization expense was $4.0 million in 1995 as
compared to $3.7 million in 1994, and $2.4 million in 1993. The higher level of
amortization in each year was attributable to acquisitions.
Interest Expense. Interest expense for 1995 decreased by $1.1 million or
26% compared to 1994, and 1994 expense increased by $.3 million or 9% compared
to 1993. The decrease in 1995 was primarily due to repayment of outstanding
debt in the third quarter of 1995. The increase in 1994 was primarily due to
increased interest rates.
Loss Contracts. During the first nine months of 1995, the Company
recognized $46.6 million of expense to accrue future estimated losses on certain
risk-based or full risk pharmacy benefits management contracts. See Note 3 to
the Combined Financial Statements included elsewhere herein.
Merger-Related and Restructuring. In 1995, the Company recognized merger-
related and restructuring expense of $71.1 million in connection with the
Diagnostek merger. The restructuring program and merger-related activities
described above are expected to result in annualized savings of $25 million. In
1994, the Company recognized merger-related expense of $6.0 million in
connection with its mergers with PrescDrug and RxNet. See Note 4 to the
Combined Financial Statements included elsewhere herein.
Earnings (loss) Before Income Taxes. Earnings (losses) from continuing
operations before income taxes were ($59.3) million, $33.8 million and $37.9
million in 1995, 1994, and 1993, respectively. Results for 1994 and 1993
included litigation and settlement expenses at Diagnostek of $12.0 million and
$6.8 million, respectively.
Provision (benefit) for Income Taxes. The income tax provisions for the
years ended December 31, 1995, 1994, and 1993 include, among other things, the
utilization of net operating loss carryforwards and an estimate for state income
taxes. The effective tax rates (benefit) for the years ended December 31, 1995,
1994, and 1993 were (25.0%), 43.2% and 39.5%, respectively. The effective
benefit rate in 1995 was lower than the comparable effective tax rate for 1994
and 1993 due to the high level of non-deductible merger-related and other
expenses. The increased effective tax rate in 1994 as compared to 1993 was
attributable
-32-
<PAGE>
to certain non-deductible merger-related and other expenses, including
litigation settlement expenses. At December 31, 1995 and 1994, the Company
recorded deferred tax assets of $56.1 million and $11.0 million, respectively,
which are net of a $5.2 million and $3.0 million valuation allowance. The
increase in the allowance between 1994 and 1995 was due to the acquisition of
certain net operating losses from business combinations.
Net Earnings (loss). For the years ended December 31, 1995, 1994, and
1993, the Company had net earnings (loss) of ($44.5) million, $19.2 million and
$22.9 million, respectively, as a result of the matters described above.
Liquidity and Capital Resources
Management assesses ValueRx's liquidity in terms of its overall ability to
access cash in support of its ongoing business needs and to fund its growth.
The Company has historically funded its operations and capital expenditures
primarily from the proceeds of Value Health stock issuances and internally
generated cash from operating activities. Value Health also provided the
Company access to its $140 million revolving credit agreement with a bank group.
In connection with the planned spin-off of the Company, it is expected that this
agreement will be modified to provide future liquidity to ValueRx as a stand-
alone entity. As of September 30, 1996, the Company had working capital of
$100.1 million and unrestricted cash and marketable securities of $42.7 million.
Capital additions, net of disposals, were approximately $8.6 million for
the nine months ended September 30, 1996. Capital additions of $14.6 million
were primarily for computer hardware and software, furniture, leasehold
improvements. Disposals of $6.0 million primarily related to closure of a mail
service facility in conjunction with the Company's plan of merger and
restructuring discussed above. The Company expects its capital expenditures
will increase slightly from year to date levels during the fourth quarter of
1996 and throughout 1997, primarily as a result of continued investment in
computer hardware and software, mail service automation equipment, and leasehold
improvements associated with planned growth and continued reengineering
activities.
Management believes that existing cash and cash equivalents, together with
internally generated cash and its anticipated stand-alone revolving credit
agreement, will be sufficient to meet the Company's normal operating needs
through 1997. The Company does not anticipate paying cash dividends in the
foreseeable future.
Inflation
Health care costs are rising and are expected to continue to rise at rates
higher than the Consumer Price Index. Changes in prices charged by
manufacturers and wholesalers for pharmaceuticals directly affect the Company's
cost of products and services. For the majority of its business, the Company is
able to directly recover from its customers the impact of such price changes.
With respect to risk sharing arrangements, where the impact of price increases
is borne by the Company, management believes that its cost control measures
including utilization review and pricing practices help to mitigate the effect
of inflation on its operations.
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<PAGE>
Recently Adopted Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
This pronouncement establishes accounting standards for the impairment of long-
lived assets and certain identifiable intangibles to be disposed of or held and
used by an entity, and is effective for fiscal years beginning after December
15, 1995. Effective January 1, 1996, the Company adopted SFAS No. 121. The
adoption of this statement did not result in a material impact on financial
condition, results of operations or cash flows during the first nine months of
1996.
Recently Enacted Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). This pronouncement establishes financial
accounting and reporting standards for stock-based employee compensation plans,
and is effective for fiscal years beginning after December 15, 1995, although
earlier implementation is encouraged. SFAS 123 defines a fair value-based
method of accounting for an employee stock option or similar equity instrument,
and encourages all entities to adopt that method of accounting for all of their
employee stock option compensation plans. However SFAS No. 123 also allows the
Company to continue to measure compensation costs for stock-based compensation
using the intrinsic value-based method of accounting prescribed by APB No. 25
"Accounting for Stock Issue to Employees," and make pro forma disclosures of net
income and earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied. The Company has elected not to adopt
the accounting requirements of SFAS No. 123 and will continue to account for
stock-based compensation plans in accordance with APB No. 25. The Company's
full year 1996 financial statements will include the pro forma disclosure
requirements of SFAS No. 123.
All other recently enacted pronouncements either have been adopted by, or
do not apply to, the Company.
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BUSINESS
Overview
ValueRx, the largest independent pharmacy benefit manager in the U.S.,
provides managed prescription drug programs to managed care organizations
("MCOs"), insurance companies, corporations, labor unions, government entities,
other benefit plan sponsors and physician practice management companies.
Comprehensive services offered by the Company include national retail pharmacy
networks, mail service pharmacies, therapeutic pharmaceutical management
programs (such as customized formularies), patient and physician profiling and
education, claims processing, clinically based drug utilization review and
disease management programs.
ValueRx provides its services to more than 2,500 customers covering 27
million lives. Based on results through the first nine months of 1996, ValueRx
expects to manage for the entire year approximately $2.2 billion in annual drug
spending, process more than 60 million prescriptions and review approximately
230 million prescription drug and medical claims through its drug utilization
review program.
The Company believes that it enjoys several competitive advantages over
other pharmaceutical benefit managers. As the largest independent PBM, ValueRx
benefits from both the scale necessary to operate efficiently and the freedom to
act in the best interests of its clients, beneficiaries and providers. Unlike
its vertically integrated competitors which are owned by pharmaceutical
companies, ValueRx has the freedom to select the most appropriate drug from both
an economic and clinical perspective. ValueRx is also a leader in the
development of clinical and information tools to help manage the medication
process, with over fifteen years of experience in clinically driven analysis of
prescription data and clinical interventions. The Company's clinical
capabilities are becoming increasingly important in meeting the demand for
comprehensive medical management and information services.
Market Characteristics
The managed care industry has grown rapidly in response to escalating
health care costs. The industry's emphasis on cost efficient treatment
alternatives, in addition to continuing advances in both medical technology and
new drug development, have produced and is expected to continue to produce
significant increases in drug utilization and related costs. This has increased
an existing need for more appropriate, efficient, cost effective drug delivery
management. PBMs initially emerged in the early 1980s primarily to provide cost
effective drug claims processing for the health care industry. In the mid-1980s
they evolved to include pharmacy networks and drug utilization review to address
the need to manage the total cost of pharmaceutical services. Through volume
discounts, retail pharmacy networks, mail pharmacy services, formulary
administration, claims processing and drug utilization review, PBMs created an
opportunity for health benefit plan sponsors to deliver drugs to their members
in a more cost effective manner, while improving physician and patient
compliance with recommended guidelines for safe and effective drug use.
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The PBM industry has experienced substantial growth both in terms of
revenues and lives covered. According to industry sources, PBM market revenues
have grown at an annual rate of approximately 35% for the last three years, and
approximately 50% of the U.S. population was covered by a PBM in 1995, more than
double the lives covered in 1990.
PBMs have focused on cost containment by (i) obtaining price discounts
through retail pharmacy networks, and from drug wholesalers and pharmaceutical
manufacturers for mail distribution, (ii) establishing drug utilization review
programs to reduce the risk of inappropriate drug complications, (iii)
encouraging substitution of generic for branded medications, and (iv) generating
rebates from pharmaceutical companies. Over the last several years, in response
to increasing payor demand, PBMs have begun to develop sophisticated formulary
management capabilities and comprehensive, on-line customer decision support
tools in an attempt to better manage the delivery of health care and,
ultimately, costs. Simultaneously, health benefit plan sponsors have begun to
focus on the quality and efficiency of care, emphasizing disease prevention, or
wellness, and care management to lower overall health care costs. This has
resulted in a rapidly growing demand among payors for comprehensive disease
management programs. By effectively managing appropriate prescription use, PBMs
can positively affect both overall medical costs and improve clinical outcomes.
It is estimated that there are currently over 75 competitors in the U.S.
outpatient PBM market, but a majority of the market is served by the five
largest companies: ValueRx, Merck-Medco Managed Care, Inc. ("Merck-Medco"), a
subsidiary of Merck & Co., Inc., a major pharmaceutical manufacturer; PCS Health
Systems, Inc. ("PCS"), a subsidiary of Eli Lilly and Company, a major
pharmaceutical manufacturer; Diversified Pharmaceutical Services, Inc. ("DPS"),
a subsidiary of SmithKline Beecham plc, a major pharmaceutical manufacturer; and
Caremark International Inc. ("Caremark"), a subsidiary of MedPartners, Inc., a
major physician practice management company. A number of consumer and retail
pharmacy industry groups have petitioned the Federal Trade Commission ("FTC") to
reexamine its approval of specific acquisitions and to impose market conduct and
operating requirements on the vertically integrated pharmaceutical-PBM
companies. The FTC recently issued a subpoena to at least one such company as
part of its continuing oversight of these integrated companies.
The Company believes that future growth in the PBM industry will be driven
by (i) increased utilization of PBM services currently provided to existing PBM
clients, (ii) a continuing trend toward outsourcing of pharmacy management
services by MCOs, insurance companies, corporations, labor unions, government
entities, other benefit plan sponsors and physician practice management
companies, (iii) increasing penetration by MCOs, which are large consumers of
PBM services, into the growing Medicare and Medicaid market and (iv) demand for
comprehensive pharmacy benefit, medication management and disease management
services as health care service providers and physician practice management
companies assume medical care risk from MCOs.
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Strategy
The Company's goal is to extend its leadership in the PBM industry by
capitalizing on its position as the largest independent PBM, expanding its
client base through customer service improvements, leveraging its size,
independence and clinical capabilities to gain market share. It will also
leverage its existing clinical and information tools to meet the growing demand
for a PBM to impact not only pharmacuetical costs, but overall medical costs
through comprehensive medical and disease management services.
Capitalize on Position as the Largest Independent PBM. The Company will
seek to leverage its position as the largest independent PBM in the U.S. to
improve its margins and gain market share. The Company intends to capitalize on
its size to improve margins by improving its financial relationships with
manufacturers and by introducing creative mechanisms through plan design and
clinical management to influence provider prescribing patterns, thereby
directing market share to certain products. As the largest independent PBM in
the U.S., the Company can offer drug manufacturers access to its more than 2,500
customers covering 27 million lives and managing approximately $2.2 billion in
annual drug spending. The Company intends to increase its market share relative
to competitors by emphasizing the strengths of its independence to potential
clients, including its ability to provide unbiased and flexible formulary
decisions free of the conflicting economic interests intrinsic to its vertically
integrated competitors. See "--Market Characteristics."
Expand Client Base through Customer Service Excellence. The Company
intends to increase its market share through demonstrating significant
improvements in customer service. Recent customer service improvements include
implementation of Client Centered Service Teams (CCSTs), investment of
approximately $7.8 million in 1996 in its customer call centers and mail service
pharmacies to upgrade equipment, reengineer processes, establish a new call
center and improve dispensing accuracy and increase efficiency. See "--Pharmacy
Benefit Management Administration--Client Services." The Company believes it
now has a market leading customer service capability.
Leverage Size, Independence and Clinical Capabilities to Gain Market Share.
The Company believes that it can extend its leadership in the PBM industry by
increasing the use of therapeutic management techniques, including restricted
and closed formularies, promoting more cost-effective therapeutic equivalents
for prescribed drugs through the Company's preferred drug program and developing
on-line connections with physicians to influence the choice of drug at the point
of prescribing. By effectively implementing these interventions, leveraging the
Company's size and independence to obtain higher price discounts from drug
manufacturers (especially non-integrated pharmaceutical manufacturers), by
providing focused provider communications and education and leveraging the
Company's extensive clinical analytic tools to influence prescribing patterns,
the Company believes it can deliver a better service to potential clients than
those currently offered by its competitors.
Use Clinical Tools to Meet Growing Demand for Comprehensive Medical
Management and Information Services. As a leader in the development of clinical
tools to help manage the medication process, the Company will seek to benefit
from the rapidly growing demand among MCOs for comprehensive programs to manage
their total health care resources to
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achieve better health outcomes at a lower cost. The Company is capable of
satisfying this demand through its ability to offer clients disease management
programs that target high-volume, high-cost illnesses with demonstrated
variation in drug utilization where there is an ability to intervene to improve
medical management, and hence outcomes, while lowering costs. In addition, the
Company can offer clients The Disease Assessment and Management Report, an
innovative medical management support tool that produces profiles of the key
disease states in a target population. The Company can then provide the client
with the disease management programs and other clinical interventions to help
manage those illnesses. See "Business--Clinical Services--Disease Management
Programs" and "--Information Services."
Pharmacy Benefit Management Services
The Company markets its integrated pharmacy benefit management programs
product line through its mail pharmacy dispensing centers and its contracted
retail networks to MCOs, insurance companies, corporations, labor unions,
government entities, other benefit plan sponsors and physician practice
management companies.
Mail Service Pharmacy
The Company's mail service prescription option is fully integrated with its
managed prescription drug benefit plans to enable plan sponsors to realize cost
savings, while benefiting from the Company's clinical capabilities. See "--
Clinical Services." Mail prescription service is available as a convenience to
individuals who prefer to fill prescriptions by mail. Mail service
prescriptions are typically for long-term maintenance medications to treat
chronic disorders, which comprise over 70% of prescription costs. The Company's
mail service dispensing centers are located in Albuquerque, New Mexico,
Bensalem, Pennsylvania and Troy, New York. Based on results through the first
nine months of 1996, the Company's mail prescription service is expected to
process approximately 5.7 million prescriptions in 1996, representing
approximately $475 million in drug spending. As an added convenience, to
provide additional cost savings to clients and as an additional source of
revenues, the Company anticipates introducing over-the-counter medications
through its mail service in 1997.
In addition to offering beneficiaries greater convenience, mail service
pharmacies offer customers greater savings than are typically generated through
the use of retail networks. These additional savings derive from two sources.
First, the Company can offer customers greater discounts on drugs dispensed
through the mail service pharmacy since the Company eliminates the retailer and
purchases directly from wholesale distributors and manufacturers. Second, the
Company can offer its preferred drug program through its mail service pharmacy.
This program generates additional savings by active intervention by ValueRx
employees with providers to change prescriptions to more cost effective and
equally safe and effective medications. See "--Clinical Services."
ValueRx recently implemented a program to further improve the operating
efficiencies of its mail service operations through a complete reengineering and
automation of its mail order process. A significant component of this program
involves upgrading to the latest generation of automated dispensing equipment.
For example, the Company is investing
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approximately $5 million to purchase and implement state-of-the-art automated
pharmaceutical dispensing machines for each of its Bensalem and Albuquerque
facilities. These new machines will enhance current dispensing functions,
significantly reducing reliance on labor-intensive dispensing processes. Other
advantages of the machines include the minimization of dispensing errors, a
substantial increase in overall prescription capacity for each facility and
greater efficiencies in the order inspection process. Registered pharmacists
continue to play a critical role in the Company's mail service operations,
providing value-added clinical services, ensuring effective quality control and
inspecting each prescription prior to shipment. Installation of the machines is
expected to be completed in Bensalem in the fourth quarter of 1996 and in
Albuquerque in 1997.
The Company has also expanded the use of bar code and scanning technology
at each of its dispensing centers to (i) track orders throughout the fulfillment
process to enable the Company to update location and status of a prescription at
any time, (ii) minimize errors in shipping and (iii) improve communications with
payors.
Retail Pharmacy Benefit Management Administration
ValueRx's prescription drug preferred provider organization includes a
national network of contracted chain and independent pharmacies. As part of its
prescription drug benefit programs (including its mail service), the Company
employs a specialized proprietary claims administration system which collects
data and administers a wide variety of ValueRx plan designs. The system links
network pharmacies through on-line terminals that enable the pharmacist to
process prescription drug claims. When a ValueRx plan member presents his or
her identification card at a network pharmacy, the network pharmacist sends the
specified claim data in an industry standard format to the Company, which
processes the claim and within seconds responds to the pharmacy. The processing
of the claim involves (i) checking and alerting the pharmacist, if necessary, as
to member eligibility, non-covered items, prior authorizations, early refills,
duplicate dispensing (including for same drug and therapeutic duplication), drug
interactions (including for drug-drug, drug-disease, drug-age and drug-gender
interaction) and over- or underutilization, (ii) updating the member's
prescription drug claim record, (iii) if the claim is accepted, confirming to
the pharmacy that it will receive payment for the drug dispensed and (iv)
informing the pharmacist of the amount required to be paid by the member ("co-
payment"). The Company's on-line linkage includes the capability to vary the
amount of co-payment based either on the choice of drug dispensed (e.g.,
branded, generic or preferred), the prescribing physician (e.g., in or out of
network) or the dispensing pharmacy (e.g., in or out of network). The Company
also gathers information through its software programs to monitor its clients'
drug benefit plans and supplies statistical reports to clients regarding drug
utilization, costs and other information. See "--Clinical Services."
Based on results through the first nine months of 1996, ValueRx expects to
process approximately 56 million retail prescriptions, representing
approximately $1.7 billion of drug spending. The Company offers prescription
benefits through flexible retail networks that can be customized for clients in
order to balance their need for access with their concern for limiting cost.
Clients can choose among any of the Company's existing networks, the largest
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of which contains more than 47,000 pharmacies, representing approximately 80% of
all retail pharmacies in the U.S.
Under the majority of ValueRx prescription drug benefit plans, plan
beneficiaries obtain medications from a network pharmacy which then bills the
Company at previously negotiated rates. ValueRx is reimbursed by the plan
sponsor on a per-prescription basis reflecting a discount off the medication's
average wholesale price plus a claim processing and dispensing fee. The Company
bears no financial risk for increases in the number of prescriptions, nor does
it carry any significant risk for unit price changes, because the cost of the
medications has been previously negotiated. Some arrangements, however, adjust
the Company's fees by measuring performance against targeted cost criteria.
According to certain other ValueRx prescription drug benefit plans, the Company
agrees to provide prescription drug benefits for a fixed monthly payment per
employee. For such arrangements, the Company bears the risk or enjoys the
benefit that claims may vary from the amount of fixed monthly payments.
Client Services
ValueRx has recently reorganized its client services by implementing Client
Centered Service Teams (CCSTs). These dedicated teams consist of an account
director and specialists in sales, implementation and clinical services. Each
team is supported by dedicated staff resources in areas such as finance and
information systems. These teams provide clients with a central point of
contact and accountability, a seamless interface between sales and service,
coordinated planning and implementation, consultative services, focused
management of account information and efficient problem resolution.
ValueRx has invested approximately $7.8 million in 1996 in its customer
call centers and mail service pharmacies to upgrade equipment, reengineer
processes and establish a new call center. These initiatives have resulted in
significant improvements in customer service as measured by average length of
time to answer incoming client, beneficiary, pharmacy and physician calls,
percentage of incoming calls met with a busy signal and percentage of mail order
prescriptions shipped within two days of receipt.
ValueRx operates four customer call centers, which answer client and
beneficiary questions about ValueRx plans, receive prescriptions from physicians
and prescription refill orders from patients for the mail service pharmacies,
provide clinical information and assist in patient education. In 1996, the
Company established a new, state-of-the-art customer call center in Plymouth,
Minnesota, installed leading-edge telephone switching equipment at its
Albuquerque and Plymouth call centers and extensively retrained and upgraded
staff. Through these technology and management enhancements, ValueRx has
created a "virtual" call center which allows for calls coming into one center to
be automatically re-routed to another center to better balance call center
volume and speed answer time. ValueRx's call center operations are staffed 24
hours per day, seven days per week and have multilingual capabilities.
The Company has also upgraded its on-line pharmacy links to enhance
flexibility in managing restricted and closed formularies. See "--Clinical
Services--Management of Drug Selection--Formulary Compliance Programs." ValueRx
is making additional investments in
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its mail service facilities to improve dispensing accuracy and increase
efficiency. See "--Mail Service Pharmacy."
Clinical Services
As an integral component of its PBM services, the Company develops and
implements customized programs of clinical services designed to reduce drug
benefit costs while promoting clinically appropriate drug usage to obtain the
best medical outcome. These programs focus on (i) promoting more cost-effective
alternatives, within the same therapeutic class, and managing the drug selection
process through implementation of formulary compliance programs, and (ii)
managing the drug utilization process by identifying inappropriate prescribing
patterns, drug interactions and over- or underutilization as well as case
management and medical necessity review aimed at ensuring that high-cost drugs
are prescribed and used appropriately, (iii) physician profiling and patient
education services aimed at improving the efficacy and cost-effectiveness of
physician prescribing and (iv) disease management programs.
Management of Drug Selection
Formulary Compliance Programs. ValueRx offers clinical formulary
-----------------------------
compliance programs that can provide ValueRx clients with significant cost
savings by exchanging more economical and therapeutically appropriate formulary
medications for certain drugs prescribed by a patient's physician. Formularies,
or lists of preferred drugs, are one of several interventions used by ValueRx to
manage prescribers and patients by encouraging quality, cost-effective
prescription choices. ValueRx's clients may select from an open formulary plan
design, in which all drugs, formulary or not, are covered by the plan and
preferred drugs are merely recommended. The Company also offers formularies
with a variety of provisions, in which various financial or other incentives
exist to encourage the selection of preferred drugs, and closed formularies, in
which benefits are available only for drugs listed on the formulary. The
Company's formularies can be customized to reflect regional prescribing patterns
and customer requests.
Formularies are developed by ValueRx's independent Pharmacy and
Therapeutics ("P&T") Committee of nationally-recognized, independent medical
specialists and practitioners. ValueRx's in-house clinical staff conducts
research, designs formulary strategies and makes recommendations to the P&T
Committee. Only therapeutically equivalent and A-rated FDA approved drugs are
used. The Company's independence assures that formulary decisions are unbiased
and based on clinically sound criteria free of the conflicting economic
interests of a parent organization. This further enables the Company to utilize
its formularies as a tool to leverage its purchasing power with pharmaceutical
manufacturers and obtain discounts. In addition to formulary decisions, the
committee approves new disease management and other clinical programs.
The Company also offers clients the option of instituting varied plan
designs into their benefit program in order to better manage drug selection.
These may include, for example, deductibles or differential copayments to
promote the use of mail order pharmacies, generic
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drugs and lower cost, branded drugs within the same therapeutic class. This
feature is designed to encourage beneficiaries to take advantage of more cost
effective prescription drug options by reducing the amount of out-of-pocket
payment by the beneficiary for those preferred options.
Preferred Drug Program. The Company's preferred drug program achieves
----------------------
client savings currently in connection with ValueRx's Mail Service Pharmacy
through active clinical intervention to change prescriptions. This program
screens patient and physician profiles to identify prescriptions for which a
less expensive, but equally safe and effective medication could be prescribed.
A dedicated team of registered pharmacists then contacts the prescribing
physician to obtain consent to the substitution of a more cost effective
medication. These more cost effective medications include branded and generic
drugs which are within the same therapeutic class as the drug originally
prescribed and produce similar effects. As the Company develops on-line
connections with physicians, ValueRx will seek to influence the choice of drug
at the point-of-prescribing for retail and mail order, rather than the point-of-
sale.
Management of Drug Utilization
Drug Utilization Review (DURbase). DURbase is targeted to address
---------------------------------
hospitalizations which are caused by drug conflicts. The Food and Drug
Administration estimates that the annual cost of hospitalizations due to
inappropriate prescription drug use is $20 billion. The Company's DURbase
products, consisting of Concurrent DUR and Retrospective DUR, is a proprietary
drug utilization review program that identifies inappropriate prescribing
patterns, drug interactions (including for drug-drug, drug-disease, drug-age and
drug-gender interaction) and over- or underutilization. DURbase is a product
that leverages the Company's more than fifteen years of experience in clinically
driven analysis of prescription data and incorporates a database which is
updated frequently with information from the approximately 290 million medical
and prescription claims reviewed annually by the Company. DURbase applies
sophisticated clinically-based screens to review drug claims and to identify
patients at high risk for drug-induced illness.
The Company's Concurrent DUR consists of on-line point-of-sale
identifications in which each prescription presented by a patient to a
pharmacist is checked against the patient's prescription history. Where a
possible conflict is found, an on-line alert message is sent to the pharmacy
before the drug is dispensed. If the pharmacist overrides the alert message, she
will be promptly contacted by a qualified clinician, typically within 24 hours
of the override.
The Company's Retrospective DUR is a physician and patient profiling
mechanism designed to identify inappropriate prescribing patterns, drug
interactions (including for drug-drug, drug-disease, drug-age and drug-gender
interaction) and over- or underutilization. Each prescription is checked against
the patient's relevant drug history. Where a possible conflict is found, the
physician is contacted.
Case Management and Medical Necessity Review. ValueRx's Case Management and
--------------------------------------------
Medical Necessity Review Program is a prior authorization program that targets
high-cost
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drugs, such as human growth hormone and immune globulin, to ensure that such
drugs are prescribed and used appropriately. In addition to providing on-line
dispensing limits, the Company conducts comprehensive reviews using
sophisticated clinical algorithms. ValueRx's program provides a high savings
return for dollars invested while also ensuring that patients are not
unnecessarily exposed to adverse side effects of these drugs.
Physician Profiling and Education Services
ValueRx provides services designed to improve the efficacy and cost-
effectiveness of physician prescribing through the use of profiling techniques,
followed up by targeted and highly effective education and intervention
programs. These programs educate physicians about the efficacy and cost of
various drug alternatives and provide them with up-to-date clinical guidelines.
The Company analyzes claims data using proprietary clinical guidelines to
identify physicians who are either prescribing needlessly expensive drugs and/or
prescribing when no medication is necessary. The Company also analyzes dosage
of drug and duration of therapy to identify other inappropriate prescribing
patterns. Physician profiles are reviewed by specially-trained clinicians to
confirm the clinical significance of the prescribing problem. A cost effective
education plan is then implemented, using a mix of mailed educational materials
and telephone and face-to-face sessions. Physicians are re-profiled semi-
annually, with follow-ups as necessary. Re-profiling has documented that these
interventions have a significant positive effect on physician prescribing
habits.
Disease Management Programs
ValueRx's disease management programs target high-volume, high cost
illnesses with a high level of variation in treatment patterns, where
intervention can improve medical and pharmaceutical management, and hence
outcomes, while lowering clients' overall health care costs. The Company
focuses on diseases for which pharmaceuticals are a major component of the
treatment regimen. Disease management programs are designed to help health plan
managers leverage drug and medical information to implement more effective and
consistent treatment strategies.
The Company's programs begin with a baseline assessment of a given
population's drug claims data and, when available, medical claims data, to
determine the prevalence of certain diseases within that population. Where
there is a high incidence of a target disease or diseases are identified that
display a high variability in treatment, provider prescribing patterns are
evaluated to determine how that disease is being treated. Specific educational
and clinical interventions are then used to encourage the use of optimal
treatment patterns. These interventions involve interaction with physicians
through a variety of mechanisms. The program is evaluated through outcomes
studies which measure qualitative and quantitative criteria.
ValueRx also offers its clients the ability to combine and analyze their
prescription drug and medical data to better understand the effect of
prescription drug use on their overall health care costs and outcomes. This
information can then be used to establish guidelines for the most effective use
of prescription drugs in treating various diseases. ValueRx then
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supports the implementation of such guidelines through a variety of approaches.
See "--Information Services."
The baseline assessment indicates which disease conditions are most
prevalent and analyzes physicians' prescribing patterns. A report is provided
to the client with an action plan for education and/or clinical intervention. A
variety of provider oriented interventions can be implemented, such as supplying
complete patient drug histories, treatment and prescribing guidelines, targeted
physician education and enhanced on-line messaging to pharmacists. Patient-
oriented programs, such as educational brochures, self-management techniques and
enhanced drug utilization review, are also employed. After the program has been
in place for a pre-determined length of time, ValueRx conducts an outcomes
study, based on comparisons of drug utilization pre-and-post-program and written
feedback from both patients and physicians.
The Company's Gastrointestinal ("GI") Disease Management Program
illustrates how such programs can work to improve the treatment of a specific
illness. Since certain gastrointestinal disorders are usually treated with
prescription drugs used exclusively to treat such disorders, they are easily
identified through ValueRx's drug claims analysis. In addition to the GI
program, ValueRx currently offers disease management programs covering asthma
and senior citizens and is currently developing a program for diabetes.
Information Services
In the course of its business, ValueRx collects a significant amount of
prescription drug and, when available, medical data. Using sophisticated
proprietary clinical and analytical software capabilities, this data can be a
powerful tool in helping to improve quality of care and manage costs. ValueRx
provides a number of information services which help health plans, employee
benefits managers, pharmaceutical manufacturers and others better understand
health care costs and develop improved health care strategies.
Disease Assessment and Analysis
ValueRx offers health plan and benefits managers the capability of linking
their drug and medical claims data to better understand their total health care
costs and more effectively design treatment strategies. The Company offers
clients an innovative medical management support tool called "The Disease
Assessment and Management Report."
The Disease Assessment and Management Report is produced using the
sophisticated clinical logic of the Practice Review System developed by VHS,
which examines treatment patterns and determines the episode of illness (the
clinically based duration of an illness). The system takes into account gender,
age, the severity of a patient's illness, the medication the patient is taking,
the presence of other diseases and the patient's medical history, allowing for a
profile of the patient population that accounts for such factors. In this way,
the system is able to place each patient in context, rather than merely
comparing each case to normative data. Each episode of illness is then
evaluated using "best practice" clinical standards which are developed by panels
of clinicians, academics and other experts. These evaluations
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are aggregated to produce profiles of physician and network performance.
Physician practice patterns are adjusted for variations in patient and case mix
and are then compared to clinical norms and to peers.
The Disease Assessment and Management Report also provides a detailed
assessment of a client's population, specifically how such diseases are
currently being treated in that population, along with suggested interventions
to enhance treatment. Key findings are used to benchmark and measure the
success of the interventions on a routine basis. ValueRx offers additional
services to help health plan managers design and implement their own disease
management programs, as well as the ability to outsource those programs
completely to ValueRx.
Profiling Systems
ValueRx offers clients proprietary systems designed to profile physicians
and patients. The Company's ProView system is specifically designed for MCOs to
profile physician prescribing patterns to identify providers who exhibit
inappropriate prescribing practices. The ProView system incorporates the
clinical logic embedded in the Company's DURbase program to identify both
clinical and financial elements of prescribing patterns. In addition to
screening for high-cost drug use, the system can screen for appropriate step
therapy (the use of the right drug at the right dose in the clinically
appropriate order), the use of generics versus branded drugs and the use of
newer, more therapeutically- or cost-effective medications. High cost patient
populations can also be profiled to identify populations for which pre-
certification or case management programs might be effective.
Medicaid Clinical Management and Database
ValueRx provides clinical management to nine state Medicaid programs
covering approximately 7.2 million beneficiaries and 230 million annual
prescription drug and health care claims. The Company has access to the
prescription drug and, in certain cases, the medical data of these programs.
This data provides a significant supplement to the data collected through
ValueRx's managed prescription drug programs enabling the Company to leverage
its information services capabilities in creating norms and benchmark values.
Medicaid programs, in general, provide for different drug benefits than those
typically offered by private providers. As a result of ValueRx's experience in
providing clinical services to these programs, the Company believes it is well
positioned to capture additional business in this segment as MCOs continue to
penetrate the growing Medicare and Medicaid markets.
Supplier to FDA
ValueRx supplies integrated drug and medical managed care data to the FDA
for use in the agency's adverse drug reaction ("ADR") monitoring efforts. These
data sets, which are based on disease conditions and drug exposure, help the FDA
understand the potential causal relationships between various drugs and medical
procedures which could lead to ADRs.
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Medication Management Products and Services for Institutions
Through a joint venture with Allegiance Corporation, ValueRx serves the
institutional market with comprehensive medication management services. These
services include (i) the management of hospital and other alternative
institutional pharmacies, (ii) process consulting designed to help institutions
manage the medication process more efficiently and (iii) the provision of
clinical software services designed to enhance accuracy and efficiency in the
ordering and administering of medications and to facilitate the sharing of
medication and other medical information within the institution.
It is currently estimated that total in-patient drug spending in hospitals
and other institutions approximates $15 billion per year. When the associated
costs of managing the medication process are added in, this figure approaches
$50 billion annually, representing approximately 15% of the total operating
costs of the typical hospital.
The Company believes that the $15 billion in-patient hospital pharmacy
market is underpenetrated, with only 11% of the nation's hospitals estimated to
be contracting with outside pharmacy management organizations like ValueRx.
ValueRx believes that, through its joint venture with Allegiance Corporation, it
is the only company among the five largest PBMs which currently offers both
institutional and out-patient pharmacy management services. In addition, the
Company believes that the demand for providers of medication management services
across the in-patient and out-patient settings will continue to grow in the
future. As a company in the PBM market that can provide such integrated
medication management services, the Company and this joint venture are
positioned to benefit from this burgeoning market by offering enterprise-wide
medication management across the entire continuum of care.
Sales and Marketing
ValueRx markets its products primarily through a direct sales force which
is complemented by full-time account representatives who assist in responding to
requests for proposals and closing sales. While most products are sold directly
to MCOs, insurance companies, corporations, labor unions, government entities,
other benefit plan sponsors and physician practice management companies, the
Company has developed commission arrangements with regional and local
independent insurance brokers.
Major Customers
The Company enters into one-year arrangements with most of its customers.
During the year ended December 31, 1995, no customer accounted for more than 10%
of the Company's total revenues.
Competition
It is estimated that there are currently over 75 competitors in the out-
patient PBM market, but a majority of the market is served by the five largest
companies: ValueRx; Merck-Medco; PCS; DPS; and Caremark. ValueRx faces
competition from many group
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<PAGE>
insurance companies, MCOs and other specialty managed care companies. Certain of
the Company's competitors are significantly larger and have greater financial
resources than the Company, including several large PBM companies that have been
acquired by drug manufacturers. ValueRx believes that its principal competitive
strengths are its size, independence and clinical capabilities. See "Special
Factors--Competition."
Intellectual Property
ValueRx's software for DURbase and other products has been developed
internally by the Company and under research and development agreements with
third parties. In addition, the Company acquired licenses and other rights to
certain information which was used in early research and development activities.
The Company claims copyrights to its DURbase software and certain related
documentation. The Company will have a license to use the Practice Review
System developed by VHS. See "Arrangements Between Value Health and ValueRx--
License Agreement."
Government Regulation
Various aspects of the ValueRx's business are governed by federal and state
laws and regulations, and compliance is a significant operational requirement.
The Company believes that it is in substantial compliance with all existing
legal requirements material to the operation of its business.
Anti-Remuneration Laws
Medicare and Medicaid Laws and certain state laws prohibit, subject to
certain exceptions and "safe harbors," payment or receipt of any remuneration to
induce, arrange for or recommend the purchase of certain health care items or
services. Such laws and other state laws designed to protect consumers have
been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with such programs. In addition, one recent settlement under state
consumer protection laws involved certain drug switching practices of a PBM
owned by a pharmaceutical company. To the Company's knowledge, such laws have
not yet been applied to prohibit contractual relationships between PBMs and drug
manufacturers related to drug purchasing and formulary management programs, or
to contractual relationships of the type the Company has with certain of its
clients. No assurances can be given that the Company will not be subject to
scrutiny or challenge under one or more of these laws or that any such challenge
would not have a material adverse effect upon the Company.
ERISA Regulation
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
governs aspects of the relationship between employer sponsored health care plans
and providers of administrative services to such plans through a series of
complex statutes and regulations that are subject to periodic interpretation by
the IRS and the Department of Labor. ERISA imposes certain requirements on the
manner in which the Company does business with
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<PAGE>
employers who provide self-insured benefit plans. Ongoing enforcement activities
of the Department of Labor may result in additional limitations on how the
Company serves self-insured employer accounts.
Consumer Protection Laws
Investigations and multi-state settlements under state consumer protection
laws have probed the financial incentives provided by pharmaceutical companies
to retail pharmacies in connection with drug switching programs. Pursuant to a
settlement agreement entered into with 17 states on October 25, 1995, Merck-
Medco, the PBM subsidiary of pharmaceutical manufacturer Merck & Co., Inc.
("Merck & Co."), agreed to pay nearly $2 million and agreed to require
pharmacists affiliated with Merck-Medco mail service pharmacies to disclose to
physicians and patients the financial relationships between Merck & Co., Merck-
Medco and the mail service pharmacy when such pharmacists contact physicians
seeking to change a prescription from one drug to another. ValueRx believes
that its contractual relationships with drug manufacturers and retail pharmacies
do not include the features that were viewed by enforcement authorities as
problematic in these settlement agreements. However, no assurance can be given
that the Company will not be subject to scrutiny or challenge under one or more
of these laws.
Network Access Legislation
A majority of states have adopted some form of legislation affecting the
ability of ValueRx to limit access to pharmacy provider networks or to remove
network providers. Such legislation may require the Company or its customers to
admit any retail pharmacy willing to meet the plan's price and other terms for
network participation; this legislation is sometimes referred to as "any
willing provider" legislation. To date, ValueRx has not been materially
affected by these statutes, but there can be no assurance that these statutes,
or other statutes enacted in the future, will not adversely affect ValueRx's
business.
Legislation Imposing Plan Design Restrictions
Some states have legislation prohibiting plan sponsors from implementing
certain restrictive design features. For example, some states provide that
members of a plan may not be required to use network providers, but must also be
provided with benefits even if they choose to use non-network providers; this
legislation is sometimes referred to as "freedom of choice" legislation. Other
states mandate coverage of certain benefits or conditions. Such legislation
does not generally apply to ValueRx, but it may apply to certain of the
Company's customers such as HMOs and insurers. If such legislation were to
become widespread and broad in scope, it could limit the economic benefits of
pharmacy benefit management.
Licensure Laws
Many states have licensure or registration laws governing certain types of
ancillary health care organizations, including companies that provide
utilization review and claims administration services. The scope of these laws
differs significantly from state to state, and
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<PAGE>
the application of such laws to the activities of pharmacy benefit managers is
often unclear. The Company believes that it is in substantial compliance with
all material requirements of those laws which are applicable to the Company's
operations.
Legislation Affecting Drug Prices
In the past, some states have adopted legislation requiring pharmacies that
participate in a Medicaid program to give the state the best price that the
pharmacies make available to any third party plan; this legislation is sometimes
referred to as "most favored nation" legislation. Such legislation, if enacted
in any state, may adversely affect ValueRx's ability to negotiate discounts in
the future from network pharmacies.
Mail Pharmacy Regulation
Many of the states into which ValueRx delivers pharmaceuticals have laws
and regulations that require out-of-state mail service pharmacies to register
with the board of pharmacy or similar regulatory body in the state. These
states generally permit the mail service pharmacy to follow the laws of the
state within which the mail service pharmacy is located. ValueRx has registered
in every state in which, to the Company's knowledge, such registration is
required. In addition, various pharmacy associations and boards of pharmacy
have promoted enactment of laws and regulations directed at restricting or
prohibiting the operation of out-of-state mail service pharmacies by, among
other things, requiring compliance with all laws of certain states into which
the mail service pharmacy dispenses medications whether or not those laws
conflict with the laws of the state in which the pharmacy is located. To the
extent that such laws or regulations are found to be applicable to ValueRx, the
Company would be required to comply with them.
Other statutes and regulations impact ValueRx's mail service operations.
Federal statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide customers with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the transmission of drugs and medicines through the mail
to a degree that could have an adverse effect on the Company's mail service
operations. The U.S. Postal Service has exercised such statutory authority
only with respect to controlled substances. Alternative means of delivery are
available to the Company.
Employees
As of December 31, 1996, the Company and its subsidiaries employed
approximately 1,700 people. The Company has experienced no work stoppages and
believes that its employee relations are good.
-49-
<PAGE>
Properties
The Company's principal corporate offices are located in Avon, Connecticut
and Plymouth, Minnesota. The Company also maintains office space in
Minneapolis, Minnesota and three mail service facilities located in Albuquerque,
New Mexico, Bensalem, Pennsylvania and Troy, New York. The Company leases
approximately 256,000 square feet of space and owns approximately 110,000 square
feet of space. The Company believes that its facilities are adequate for its
current needs and that suitable additional space will be available as required.
Legal Proceedings
In September 1995, two purported class action lawsuits, Freedman v. Value
-----------------
Health, Inc., et al. and Balkheimer et al. v. Value Health, Inc. et al., were
- -------------------- ----------------------------------------------
filed in the United States District Court for the District of Connecticut
against Value Health and its directors, and certain of its senior officers. The
two lawsuits, which allege violations of the federal securities laws, have been
consolidated.
On September 10, 1996, the parties to Bash, et al. v. Diagnostek, et al., a
----------------------------------
suit filed in federal court in New Mexico in 1994 against Diagnostek and certain
of its former senior officers, reached a settlement, subject to court approval
and other conditions. As part of the settlement, Value Health expects that the
overlapping claims in a second action, Bash, et al. v. Value Health, Inc., et
--------------------------------------
al. ("Bash II") will be dropped.
-------
Value Health denies the allegations in each of the lawsuits described above
and intends to defend them vigorously. Value Health and ValueRx anticipate that
they will share equally the amount of any adverse judgment in or settlement of
Freedman, Balkheimer and Bash II, if any, which is not covered by insurance.
- -------- ---------- -------
In addition to the suits described above, the Company is involved in other
litigation arising in the normal course of business. The Company believes that
resolution of all of these matters will not result in any payment that, in the
aggregate, would be material to the financial position or results of operations
or cash flows of the Company.
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<PAGE>
MANAGEMENT
Directors
Immediately after the Distribution Date, the ValueRx Board is expected to
consist of the individuals named in the table below. The ValueRx Board will be
divided into three classes. Each director will serve for a term expiring at the
annual meeting of stockholders in the year indicated below. Following
consummation of the Distribution, the Company intends to appoint two directors
who are neither officers nor employees of the Company (the "Independent
Directors"). See "Description of Capital Stock--Delaware Law and Certain
Charter and By-Law Provisions--Certificate of Incorporation and By-Laws."
<TABLE>
<CAPTION>
Term Expires at
Name Age Annual Meeting in
----------------------- -------------------- --------------------
<S> <C> <C>
Steven J. Shulman 45 2000
Rodman W. Moorhead, III 53 1999
Kevin L. Roberg 45 1998
</TABLE>
Mr. Shulman will be the Chairman of the Board and Chief Executive Officer
of ValueRx. Mr. Schulman was one of the three original senior executives of
Value Health, and has served as a director since April 1991, an Executive Vice
President from September 1993 until September 1995 and President of the Pharmacy
& Disease Management Group since September 1995. From November 1987 until
September 1993, he served as Senior Vice President of Value Health. From October
1990 through April 1991, he also served as the acting President and Chief
Executive Officer of Value Health's American PsychManagement, Inc. subsidiary.
Prior to joining Value Health, Mr. Shulman held a number of positions at CIGNA
Healthplan, Inc., including serving as the President of its East Central
Division from 1986 to 1987. Mr. Shulman also held a variety of positions with
KaiserPermanente Medical Care Program from 1973 to 1983. Mr. Shulman is a
director of Ramsay Health Care, Inc., a psychiatric hospital operator, and
Novametrix Medical Systems, Inc., a medical instruments company. Mr. Shulman is
also a member of the Board of Trustees of the University of Hartford Art School.
Mr. Moorhead is Senior Managing Director of E.M. Warburg, Pincus & Co.,
with which he has been since 1973. He was a director of Value Health since May
1987. He is also a director of Arcon Healthcare Inc., Global Health Group,
Inc., NeXstar Pharmaceuticals, Inc., Transkaryotic Therapies, Inc. and Xomed
Surgical Products, Inc., as well as a number of private firms.
Mr. Roberg will be Executive Vice President of ValueRx and President and
Chief Executive Officer of ValueRx Pharmacy Program, Inc., a wholly owned
subsidiary of ValueRx. At Value Health, Mr. Roberg has served as Chief
Executive Officer and President of ValueRx Pharmacy Program, Inc. since January
1996. He served as Chief Executive Officer and President of Medintell Systems
Corporation in 1995. He served as President of
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<PAGE>
Western Health Plans, a division of EBP Health Plans, Inc. ("EBP"), and
PRIMExtra, Inc., a subsidiary of EBP from 1994 to 1995. He served in a variety
of positions at DPS, including Chief Operating Officer and President of the Self
Funded and Private Label Division from 1993 to 1994, and Chief Operating Officer
from 1990 to 1993 of DPS. He also served as Vice President of HMO Operations for
Partners National Health Plans from March 1988 to December 1988.
Messrs. Shulman and Moorhead are currently directors of Value Health, and
will resign such positions shortly prior to the Distribution Date.
Committees of the Board of Directors
The Board of Directors is expected to establish an Audit Committee and a
Compensation Committee. The Audit Committee will, among other things, oversee
the accounting and financial functions of ValueRx, including matters relating to
the appointment and activities of the Company's independent auditors. The
Compensation Committee will, among other things, determine the compensation of
the Company's executive officers. It is expected that the Independent Directors
will be members of the Audit Committee and the Compensation Committee. The
ValueRx By-laws permit the ValueRx Board to establish other committees from time
to time as it deems appropriate.
Compensation of Directors
Following the Distribution, it is anticipated that compensation of non-
employee directors, other than Mr. Moorhead, will consist of an annual retainer,
payable one-half in cash and one-half in ValueRx Common Stock. In addition,
non-employee directors will receive fees for each board and each committee
meeting attended. Chairpersons of committees will receive additional annual
retainers. Directors are reimbursed for all reasonable travel and other
expenses of attending meetings of the ValueRx Board.
ValueRx anticipates that pursuant to ValueRx's 1997 Stock Incentive Plan
(the "1997 Plan"), non-employee directors will be granted nonqualified stock
options in a manner complying with the provisions of Rule 16b-3(b) under the
Exchange Act.
Executive Officers
The following table below sets forth the names, ages and titles of the
executive officers of the Company following the Distribution.
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Steven J. Shulman.......... 45 Chairman of the Board and Chief Executive
Officer
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Kevin L. Roberg............ 45 Executive Vice President of the Company and
President and Chief Executive Officer of
ValueRx Pharmacy Program, Inc.
Paul M. Finigan............ 42 Executive Vice President and Chief Legal
Officer
Rene Lerer, M.D............ 41 Executive Vice President and Corporate
Development Officer
</TABLE>
Steven J. Shulman, 45, will be Chairman of the Board and Chief Executive
Officer of ValueRx. Mr. Shulman was one of the three original senior executives
of Value Health, and has been a director since April 1991, an Executive Vice
President from September 1993 until September 1995 and President of the Pharmacy
& Disease Management Group since September 1995. From November 1987 until
September 1993, he served as Senior Vice President of Value Health. From October
1990 through April 1991, he also served as the acting President and Chief
Executive Officer of Value Health's American PsychManagement, Inc. subsidiary.
Prior to joining Value Health, Mr. Shulman held a number of positions at CIGNA
Healthplan, Inc., including serving as the President of its East Central
Division from 1986 to 1987. Mr. Shulman also held a variety of positions with
KaiserPermanente Medical Care Program from 1973 to 1983. Mr. Shulman is a
director of Ramsay Health Care, Inc., a psychiatric hospital operator, and
Novametrix Medical Systems, Inc., a medical instruments company. Mr. Shulman is
also a member of the Board of Trustees of the University of Hartford Art School.
Kevin L. Roberg, 45, will be Executive Vice President of ValueRx and
President and Chief Executive Officer of ValueRx Pharmacy Program, Inc., a
wholly owned subsidiary of ValueRx. At Value Health, Mr. Roberg has served as
Chief Executive Officer and President of ValueRx Pharmacy Program, Inc. since
January 1996. He served as Chief Executive Officer and President of Medintell
Systems Corporation in 1995. He served as President of Western Health Plans, a
division of EBP, and PRIMExtra, Inc., a subsidiary of EBP from 1994 to 1995. He
served in a variety of positions at DPS, including Chief Operating Officer and
President of the Self Funded and Private Label Division from 1993 to 1994, and
Chief Operating Officer from 1990 to 1993 of DPS. He also served as Vice
President of HMO Operations for Partners National Health Plans from March 1988
to December 1988.
Paul M. Finigan, 42, will be Executive Vice President and Chief Legal
Officer of ValueRx. Mr. Finigan has served as Senior Vice President, General
Counsel and Secretary of Value Health since September 1995. From 1992 to
September 1995, Mr. Finigan was Vice President, General Counsel and Secretary of
Value Health. From 1991 to 1992, he was General Counsel and Secretary of Value
Health. From 1988 to 1991, Mr. Finigan was Associate General Counsel and
Secretary of Value Health.
Rene Lerer, M.D., 41, will be Executive Vice President and Corporate
Development Officer of ValueRx. At Value Health, he has served as Senior Vice
President, Group Operations of the Pharmacy Disease Management Group since
September 1995. He has also served as Senior Vice President of Corporate
Development at Value Health Sciences and
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<PAGE>
Medical Director of Value Health Management from August 1992 to September 1995.
He also served in a variety of positions at Travelers Insurance Company.
Compensation of Executive Officers
The following table shows the compensation for services rendered by the
Chairman of the Board and Chief Executive Officer of ValueRx and the individuals
who are expected to be the four most highly compensated executive officers of
ValueRx (collectively, the "named executive officers") based on their Value
Health compensation for the fiscal year ending December 31, 1995. The
compensation shown in this table was paid by Value Health (or its subsidiaries)
for all of their services to Value Health and its subsidiaries. References to
"stock options" means options to purchase Value Health Common Stock. Amounts
shown are for each individual in their last position with Value Health, and do
not necessarily reflect the compensation which these individuals will earn in
their new capacities as executive officers of ValueRx.
-54-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- ----------------------------------------------------------
Awards Payouts
------------------------------- -------------------------
Other
Annual Restricted Stock Securities LTIP All Other
Name and Salary Bonus Compensa- Award(s) Underlying Payouts Compensation
Principal Position Year ($) ($) (1) tion ($) ($) Options ($) ($)
- ------------------- ----- -------- --------- --------------- ----------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven J. Shulman 1995 355,772 218,000 -- -- 80,000(2) -- 5,010(3)
Chairman of the
Board and Chief
Executive
Officer
Kevin L. Roberg 1995(4) -- -- -- -- -- -- --
Executive Vice
President and
President and
Chief
Executive
Officer of
ValueRx
Pharmacy
Program, Inc.
Paul M. Finigan 1995 211,892 54,000 -- -- 60,000(2) -- 3,689(3)
Executive Vice
President and
Chief Legal
Officer
Rene Lerer, M.D. 1995 214,979 49,275 -- -- 39,216(2) -- 4,846(3)
Executive Vice
President and
Corporate
Development
Officer
- ----------------------------
</TABLE>
(1) Amounts awarded under the Value Health Management Incentive Program for
the respective fiscal year's performance.
(2) Options granted under Value Health's 1991 Stock Plan for the respective
fiscal year's performance. It is anticipated that these Value Health
options will be converted into ValueRx Common Stock or options following
the Distribution, pursuant to a formula to be determined prior to the
Distribution.
(3) Value Health made matching contributions under Value Health's 401(k) Plan
for Messrs. Shulman, Finigan and Dr. Lerer, respectively, in the amount of
$4,500, $4,500 and $4,500 for fiscal 1995. Value Health also made
contributions under its group term life insurance policy on behalf of
Messrs. Shulman, Finigan and Dr. Lerer, respectively, in the amount of
$510, $224 and $346 for fiscal 1995.
(4) Mr. Roberg joined the Company in January 1996.
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<PAGE>
Stock Option Grants
The following table contains information relating to the Value Health stock
option grants made in respect of performance for 1995 under Value Health's 1991
Stock Plan to the named executive officers.
Options/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------- Potential Realizable Value At
Number of Percentage of Assumed Annual Rates of
Securities Total Options Stock Price Appreciation For
Underlying Granted to Exercise Option Term
Options Employees in Price Expiration -----------------------------
Name Granted Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ------------------------ --------------- --------------- --------------- ------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Shulman 60,000 3.75% $ 23.25 11/02/05 $877,308 $ 2,223,271
20,000 1.25% 23.00 02/06/06 289,292 733,122
Paul M. Finigan 30,000 1.875% 23.25 11/02/05 438,654 1,111,635
30,000 1.875% 23.00 02/06/06 433,937 1,099,682
Rene Lerer, M.D. 15,216 0.95% 33.875 05/11/05 324,159 821,482
20,000 1.25% 23.25 11/02/05 292,436 741,090
4,000 0.25% 23.00 02/06/06 57,858 146,624
</TABLE>
- ------------------------
Stock Option Exercises
The following table contains information relating to the exercise of Value
Health stock options by the named executive officers, as well as the number and
value of their unexercised Value Health stock options as of December 31, 1995.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options
Fiscal Year End at Fiscal Year End ($)(1)
----------------------------- -----------------------------
Shares
Acquired on Value
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------------- ------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Shulman 5,358 $198,445 182,082 138,668 $207,751 $349,001
Paul M. Finigan 2,767 40,725 31,667 99,500 0 263,376
Rene Lerer, M.D. 0 0 33,133 41,683 176,890 103,950
</TABLE>
- --------------------------------------------
(1) Based on the closing price on the New York Stock Exchange Composite
Transactions of Value Health's common stock on that date ($27.50).
Employment Agreements
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<PAGE>
ValueRx intends to enter into employment agreements with Steven J. Shulman,
Kevin L. Roberg, Paul M. Finigan and Rene Lerer, M.D., prior to the
Distribution. The initial term of each of the respective employment agreements
will be [three or five] years and such agreements will be automatically renewed
for successive one-year periods after the expiration of the initial term. The
compensation payable to such persons pursuant to their respective agreements
will be determined prior to the Distribution. The agreements will provide,
respectively, for the employment of Mr. Shulman as Chief Executive Officer of
ValueRx, Mr. Roberg as Executive Vice President of ValueRx and President and
Chief Executive Officer of ValueRx Pharmacy Program, Inc., Mr. Finigan as
Executive Vice President and Chief Legal Officer of ValueRx and Dr. Lerer as
Executive Vice President and Corporate Development Officer of ValueRx.
Incentive Plans
1997 Stock Incentive Plan
It is anticipated that, prior to the Distribution, the ValueRx Board will
adopt the 1997 Plan, and that Value Health, as sole stockholder of ValueRx, will
approve the 1997 Plan. Under the 1997 Plan, which will be administered by the
Committee (as defined in the 1997 Plan), awards may be granted to eligible
persons in the form of non-qualified stock options, incentive stock options
(within the meaning of Section 422 of the Code), stock appreciation rights,
restricted stock awards, performance share unit awards and authorizations to
make stock purchases. The 1997 Plan will also provide for the automatic grant
of options to all non-employee directors upon their initial election or
appointment to the ValueRx Board and upon each anniversary of their initial
election or appointment to the ValueRx Board.
1997 Replacement Plan
It is anticipated that, prior to the Distribution, the ValueRx Board will
adopt the ValueRx, Inc. 1997 Replacement Plan (the "1997 Replacement Plan") and
that Value Health, as sole stockholder of ValueRx, will approve the 1997
Replacement Plan. Under the 1997 Replacement Plan, the Committee (as defined in
the 1997 Replacement Plan) will have authority to grant incentive stock options
(within the meaning of Section 422 of the Code), non-qualified stock options,
share appreciation rights, restricted stock and performance share unit awards
("Incentive Awards") in replacement of such awards made under Value Health's
1991 Stock Plan.
1997 Employee Stock Purchase Plan
It is anticipated that, prior to the Distribution, the ValueRx Board will
adopt the 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan"), and
that Value Health, as sole stockholder of ValueRx, will approve the Stock
Purchase Plan. The Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, is designed to provide eligible employees the
opportunity to purchase ValueRx Common Stock through payroll deductions. Under
the Stock Purchase Plan, which will be administered by the Committee (as defined
in the Stock Purchase Plan), eligible employees may subscribe for ValueRx Common
Stock at a
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<PAGE>
purchase price equal to 85% of the lesser of (i) the fair market value of the
ValueRx Common Stock on the effective date of the subscription, or (ii) the fair
market value of the ValueRx Common Stock on the date of exercise.
Subscriptions for Value Health Common Stock (the "Value Health
Subscriptions") pursuant to the Value Health 1991 Employee Stock Purchase Plan
of any employee of Value Health who becomes an employee of ValueRx as of the
Distribution will be converted into subscriptions for a number of shares of
ValueRx Common Stock ("ValueRx Subscriptions") at a per share purchase price to
be determined based upon an equitable adjustment formula determined by the
ValueRx Board, in accordance with the applicable tax and accounting rules, prior
to the Distribution, such that the aggregate purchase price and value of the
ValueRx Subscriptions equals the aggregate purchase price and value of the Value
Health Subscriptions. Other than the purchase price and the number of shares,
the ValueRx Subscriptions will be subject to the same terms and conditions as
the Value Health Subscriptions.
-58-
<PAGE>
BENEFICIAL OWNERSHIP OF VALUERX COMMON STOCK
Until the Distribution Date, Value Health will own all of the outstanding
shares of ValueRx Common Stock. The following table sets forth certain
information regarding beneficial ownership of ValueRx's Common Stock after the
Distribution (based upon the shares of Value Health Common Stock held by such
persons as of November 15, 1996 and assuming a distribution ratio of one share
of ValueRx Common Stock for every [two] shares of Value Health Common Stock) (i)
by each person who is known by ValueRx to own beneficially more than 5% of the
outstanding shares of Value Health Common Stock, (ii) by each director and
director nominee of ValueRx, and (iii) by each of the named executive officers
and (iv) by all executive officers and directors of ValueRx as a group.
<TABLE>
<CAPTION>
Shares Beneficially
Name and Address Owned(1) Percentage
- ---------------- ------------------- -----------
<S> <C> <C>
Warburg, Pincus Capital 3,886,255 14.3%
Company, L.P.(2)
466 Lexington Avenue
New York, New York 10017
Smith Barney Holdings, Inc.(3) 1,387,250 5.1%
Travelers Group, Inc.
388 Greenwich Street
New York, New York 10013
Steven J. Shulman
Kevin L. Roberg
Rodman W. Moorhead, III(2)
Paul M. Finigan
Rene Lerer, M.D.
All executive officers & directors
as a group
(5 persons)
</TABLE>
- ---------------------------------------
* Less than 1%
(1) The persons and entities named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by them,
except as noted in the footnotes below.
(2) The sole general partner of Warburg, Pincus Capital Company, L.P.
("Warburg") is Warburg, Pincus & Co., a New York general partnership
("WP"), Lionel I. Pincus is the managing partner of WP and may be deemed to
control it. E.M. Warburg, Pincus & Co. ("EMW"), through a wholly owned
subsidiary, manages Warburg. WP owns all of the outstanding stock of EMW
and, as the sole general partner of Warburg, has a 20% interest in the
profits of Warburg. EMW owns 0.9% of the limited partnership interests in
Warburg. Mr. Moorhead, Senior Managing Director of EMW, is a general
partner of WP and is a Director of the Company. As such, Mr. Moorhead may
be deemed to have an indirect pecuniary interest (within the meaning of
Rule 16a-1 under the Securities Exchange Act of 1934) in an indeterminate
portion of the shares beneficially owned by Warburg, EMW and WP. All of
the shares indicated as owned by Mr. Moorhead are owned directly by Warburg
and are included because of Mr. Moorhead's affiliation with Warburg. Mr.
Moorhead disclaims "beneficial ownership" of these shares within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934.
(3) Smith Barney Mutual Funds Management, Inc. ("MFM"), Smith Barney, Inc.
("SB"), Smith Barney Holdings, Inc. ("SB Holdings") and Travelers Group
Inc. ("TRV") have jointly filed a Schedule 13G dated October 9, 1996,
pursuant to Section 13 of the Securities Exchange Act of 1934, as amended,
and the foregoing information is derived from such Schedule 13G. Each
disclaim beneficial ownership of all such shares.
-59-
<PAGE>
CERTAIN TRANSACTIONS
ValueRx has in the past engaged in numerous transactions with Value Health.
Such transactions have included, among other things, various types of financial
support by Value Health. Following the Distribution, Value Health will continue
to have a relationship with the Company as a result of the agreements being
entered into between Value Health and the Company in connection with the
Distribution. Except as referred to above or as otherwise described in this
Information Statement, Value Health and the Company will cease to have any
material contractual or other material relationships with each other. See
"Arrangements between Value Health and ValueRx."
HART-SCOTT-RODINO FILING REQUIREMENT
Any person receiving shares of ValueRx Common Stock pursuant to the
Distribution and meeting the criteria set forth below may be required to file a
Pre-merger Notification and Report pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). In general, if (i) a
person receiving shares of ValueRx Common Stock pursuant to the Distribution
would own, upon consummation of the Distribution, ValueRx Common Stock that
exceeds $15 million in value, (ii) certain jurisdictional requirements are met
and (iii) no exemption applies, then the HSR Act would require that such person
file a Pre-merger Notification and Report Form and observe the applicable
waiting periods under the HSR Act prior to acquiring ValueRx Common Stock
pursuant to the Distribution.
If such waiting periods have not expired or been terminated at the
Distribution Date with respect to such recipient, Value Health may be required
to deliver such recipient's shares of ValueRx Common Stock into an escrow
facility pending the expiration or termination of such waiting period. Holders
of Value Health Common Stock are urged to consult their legal counsel to
determine whether the requirements of the HSR Act will apply to the receipt by
them of shares of ValueRx Common Stock in the Distribution.
-60-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
The authorized capital stock of ValueRx will consist of 50,000,000 shares
of ValueRx Common Stock, par value $.01, and 1,000,000 shares of preferred
stock, no par value (the "ValueRx Preferred Stock"). No shares of ValueRx
Preferred Stock will be issued in connection with the Distribution. Based on
the number of shares of Value Health Common Stock outstanding as of September
30, 1996, up to approximately [27,200,000] million shares of ValueRx Common
Stock will be issued to stockholders of Value Health in the Distribution. All of
the shares of ValueRx Common Stock issued in the Distribution will be validly
issued, fully paid and non-assessable. The following summary description of the
capital stock of ValueRx is qualified in its entirety by reference to the
proposed forms of the Amended and Restated Certificate of Incorporation and By-
laws of ValueRx.
ValueRx Common Stock
Holders of ValueRx Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and, except as described
under "--Delaware Law and Certain Charter and By-Law Provisions," a majority of
the votes cast is required for all action to be taken by stockholders. Holders
of ValueRx Common Stock do not have cumulative voting rights in the election of
directors and have no preemptive, subscription, redemption, sinking fund or
conversion rights. Subject to preferences that may be applicable to holders of
any outstanding shares of any ValueRx Preferred Stock, holders of ValueRx Common
Stock are entitled to such dividends as may be declared by the ValueRx Board out
of funds legally available therefor. Upon any liquidation, dissolution or
winding-up of ValueRx, the assets legally available for distribution to
stockholders are distributable ratably among the holders of ValueRx Common Stock
at that time outstanding, subject to prior distribution rights of creditors of
ValueRx and to the preferential rights of any outstanding shares of ValueRx
Preferred Stock.
ValueRx Preferred Stock
Under the Amended and Restated Certificate of Incorporation the ValueRx
Board is authorized to provide for the issuance of ValueRx Preferred Stock, in
one or more series, and to determine, with respect to any such series, the
designations, voting powers, preferences and rights of such series, and such
qualifications, limitations or restrictions thereof, as the ValueRx Board shall
determine. See "--Delaware Law and Certain Charter and By-Law Provisions." In
connection with the Rights Agreement to be adopted by ValueRx prior to the
Distribution, the ValueRx Board will designate a series of Preferred Stock. See
"--Delaware Law and Certain Charter and By-Law Provisions--ValueRx Rights
Agreement."
Delaware Law and Certain Charter and By-Law Provisions
Certain provisions of the General Corporation Law of the State of Delaware
and of the Amended and Restated Certificate of Incorporation and By-laws,
summarized in the following
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<PAGE>
paragraphs, may be considered to have an anti-takeover effect and may delay,
deter or prevent a tender offer, proxy contest or other takeover attempt that a
stockholder might consider to be in such stockholder's best interest, including
such an attempt as might result in payment of a premium over the market price
for shares held by stockholders.
Certificate Of Incorporation and By-Laws
The Amended and Restated Certificate of Incorporation and the By-laws of
ValueRx contain certain provisions that could make more difficult the
acquisition of ValueRx by means of a tender offer, proxy contest or otherwise.
The description set forth below is intended as a summary only and is qualified
in its entirety by reference to the Amended and Restated Certificate of
Incorporation and the By-laws, forms of which have been filed as exhibits to the
Registration Statement of which this Information Statement forms a part.
Classified Board of Directors
-----------------------------
The Amended and Restated Certificate of Incorporation of ValueRx provides
that the ValueRx directors (other than those who may be elected by the holders
of any series of ValueRx Preferred Stock under specified circumstances), will be
divided into three classes of directors, with the classes to be as nearly equal
in number as possible. Immediately after the Distribution, the ValueRx Board
will consist of the persons referred to in "ValueRx Management--Directors." The
Amended and Restated Certificate of Incorporation provides that the term of
office of the first class will expire at the 1998 annual meeting of
stockholders, the term of office of the second class will expire at the 1999
annual meeting of stockholders and the term of office of the third class will
expire at the 2000 annual meeting of stockholders.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the ValueRx Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the ValueRx Board. Such a delay may
help ensure that ValueRx's directors, if confronted by a holder attempting to
force a proxy contest, a tender or exchange offer or an extraordinary corporate
transaction, would have sufficient time to review the proposal as well as any
available alternatives to the proposal and to act in what they believe to be the
best interest of the stockholders. The classification provisions will apply to
every election of directors, however, regardless of whether a change in the
composition of the ValueRx Board would be beneficial to ValueRx and its
stockholders and whether or not a majority of ValueRx's stockholders believe
that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of ValueRx, even though such an attempt might be
beneficial to ValueRx and its stockholders. The classification of the ValueRx
Board could thus increase the likelihood that incumbent directors will retain
their position. In addition, because the classification provisions may
discourage accumulations of large blocks of ValueRx's stock by purchasers whose
objective is to take control of ValueRx and remove a majority of the ValueRx
Board, the classification of the ValueRx Board could tend to reduce the
likelihood of fluctuations in the
-62-
<PAGE>
market price of ValueRx Common Stock that might result from accumulations of
large blocks. Accordingly, stockholders could be deprived of certain
opportunities to sell their shares of ValueRx Common Stock at a higher market
price than might otherwise be obtainable.
Number of Directors; Filling Vacancies; Removal
-----------------------------------------------
The ValueRx Amended and Restated Certificate of Incorporation provides
that, subject to any rights of holders of ValueRx Preferred Stock to elect
additional directors under specific circumstances, the number of directors will
be the number from time to time fixed by the ValueRx Board. In addition, the
Amended and Restated Certificate of Incorporation provides that, subject to any
rights of holders of ValueRx Preferred Stock, any vacancy that results from an
increase in the number of directors or for any other reason, may be filled by a
majority of directors then in office. Accordingly, absent an amendment to the
Amended and Restated Certificate of Incorporation, the ValueRx Board could
prevent any stockholder from enlarging the ValueRx Board and filling the new
directorships created thereby with such stockholder's own nominees. Under
Delaware Law, unless otherwise provided in the certificate of incorporation,
directors serving on a classified board may only be removed by the stockholders
for cause.
No Stockholder Action by Written Consent; Special Meetings
----------------------------------------------------------
The ValueRx Amended and Restated Certificate of Incorporation prohibits
stockholder action by written consent in lieu of a meeting. The By-laws provide
that special meetings of the stockholders may be called only (a) by the chairman
of the board or the secretary, and shall be called upon a request signed by a
majority of the directors or (b) by resolution of the directors.
The provisions of the Amended and Restated Certificate of Incorporation of
ValueRx prohibiting stockholder action by written consent may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called at the request of a majority of the ValueRx
Board. These provisions would also prevent the holders of a majority of the
voting power of the ValueRx Common Stock entitled to vote (the "Voting Stock")
from unilaterally using the written consent procedure to take stockholder
action. Moreover, a stockholder could not force stockholder consideration of a
proposal over the opposition of the ValueRx Board by calling a special meeting
of stockholders prior to the time a majority of the ValueRx Board believes such
consideration to be appropriate.
Advance Notice Requirements for Stockholder Proposals and Director
------------------------------------------------------------------
Nominations.
-----------
The By-laws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at a meeting of stockholders, must provide timely notice thereof in
writing to the Secretary. A stockholder's notice will be deemed to be timely if
delivered to, or mailed and received at, the principal executive office of the
Company by the Secretary, not less than 30 days prior to the scheduled meeting,
provided, however, that if less than 40 days, notice or prior public disclosure
of the date of the annual meeting is given or made to stockholders, notice by
the stockholder will be
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<PAGE>
deemed to be timely only if it is delivered or received not later than the close
of business on the seventh day following the earlier of (i) the day on which
such notice of the date of the meeting was mailed, or (ii) the day on which
public disclosure of the date of the annual meeting was made. The By-laws also
specify certain requirements pertaining to the form and substance of a
stockholder's notice. These provisions may preclude some stockholders from
making nominations for directors at an annual meeting or from bringing other
matters before a meeting of the stockholders.
Amendment of Certain Provisions of the Certificate of Incorporation and By-
--------------------------------------------------------------------------
Laws
----
Under Delaware Law, the stockholders have the right to adopt, amend or
repeal the by-laws and, with the approval of the board of directors, the
certificate of incorporation of a corporation. In addition, under Delaware Law,
if the certificate of incorporation so provides, the by-laws may be adopted,
amended or repealed by the board of directors. The Amended and Restated
Certificate of Incorporation provides that the affirmative vote of the holders
of at least 66 2/3% of the voting power of the outstanding shares of Voting
Stock, voting together as a single class, is required to amend provisions of the
Amended and Restated Certificate of Incorporation relating to: the prohibition
of stockholder action without a meeting; the number, election and term of
ValueRx's directors; and the issuance of rights. The By-laws may be amended by
the ValueRx Board or by the affirmative vote of the holders of at least 66 2/3%
of the voting power of the outstanding shares of Voting Stock, voting together
as a single class. These 66 2/3% voting requirements will have the effect of
making more difficult any amendment by stockholders of the By-laws or of any of
the provisions of the Amended and Restated Certificate of Incorporation
described above, even if a majority of ValueRx's stockholders believe that such
amendment would be in their best interests.
ValueRx Rights Agreement.
The ValueRx Board intends to adopt a shareholder rights plan that will
become effective upon consummation of the Distribution. Rights issued under the
shareholder rights plan will not trade separately from the ValueRx Common Stock,
and will not be exercisable, until a triggering event occurs under the plan.
The shareholders rights plan provides, among other things, that if any person or
group of persons becomes the beneficial owner of [15%] or more of the ValueRx
Common Stock, all holders of rights issued pursuant to the plan (other than such
person or group of persons and their affiliates, associates and transferees)
will have the right to acquire additional shares of ValueRx Common Stock at 50%
of the then current market value.
Delaware Antitakeover Law
The Company, a Delaware corporation, is subject to the provisions of
Section 203 of the General Corporation Law of the State of Delaware. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date on which such person became an interested stockholder
unless: (i) prior to such date, the Board of Directors approved either the
business combination or transaction in which the stockholder became an
interested
-64-
<PAGE>
stockholder; or (ii) upon becoming an interested stockholder, the stockholder
owned at least 85% of the corporation's outstanding voting stock; or (iii) the
business combination is approved by both the Board of Directors and by holders
of at least 66 2/3% of the corporation's outstanding voting stock, excluding
shares owned by the interested stockholder. For these purposes, the terms
"business combination" includes mergers, asset sales and other similar
transactions with an "interested stockholder," and "interested stockholder"
means a person who, together with its affiliates and associates, owns (or,
within the prior three years, has owned) more than 15% of the outstanding voting
stock. Although Section 203 permits a corporation to elect not to be governed by
its provisions, the Company has not made this election.
Director Liability and Indemnification
The ValueRx Amended and Restated Certificate of Incorporation provides that
a director of ValueRx will not be personally liable to ValueRx or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
ValueRx or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Law, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit.
While the Amended and Restated Certificate of Incorporation provides
directors with protection from awards for monetary damages for breaches of their
duty of care, it does not eliminate such duty. Accordingly, the Amended and
Restated Certificate of Incorporation will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions of the Amended and Restated
Certificate of Incorporation described above apply to an officer of ValueRx only
if he or she is a director of ValueRx and is acting in his or her capacity as
director, and do not apply to officers of ValueRx who are not directors.
The ValueRx Amended and Restated Certificate of Incorporation provides that
each person who is or was or had agreed to become a director, officer, employee
or agent of ValueRx, and each person who serves or may have served at the
request of ValueRx as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (including
the heirs, executors, administrators or estate of such person), will be
indemnified by ValueRx to the fullest extent permitted from time to time by
Delaware Law, as the same exists or may hereafter be amended.
The Amended and Restated Certificate of Incorporation provides that ValueRx
may enter into an agreement with any person which provides for greater or
different indemnification than that set forth in the Amended and Restated
Certificate of Incorporation.
-65-
<PAGE>
Transfer Agent and Registrar
The Transfer Agent and Registrar for the ValueRx Common Stock is Boston
EquiServe, LLP, at Investor Relations Diversified, 45-02-64 150 Royal Street,
Canton MA 02021.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company's Board of Directors anticipates appointing Coopers & Lybrand
L.L.P. as the Company's independent public accountants to audit the Company's
financial statements for the year ending December 31, 1996.
-66-
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Combined Balance Sheets as of September 30, 1996 (unaudited) and as of
December 31, 1995 and 1994................................................. F-3
Combined Statements of Operations for the nine month periods
ended September 30, 1996 and 1995 (unaudited) and for each of
the years ended December 31, 1995, 1994 and 1993........................... F-4
Combined Statements of Changes in Stockholder's Equity for the nine month
period ended September 30, 1996 (unaudited) and for each of the years ended
December 31, 1995, 1994 and 1993........................................... F-5
Combined Statements of Cash Flows for the nine month periods ended
September 30, 1996 and 1995 (unaudited) and for each of the years ended
December 31, 1995, 1994 and 1993........................................... F-6
Notes to Combined Financial Statements..................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder
of ValueRx, Inc.
We have audited the combined financial statements of ValueRx, Inc. (as defined
in Note 1 to the combined financial statements - the Company), as listed in the
Index to Combined Financial Statements on page F-1. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Diagnostek, Inc.,
which is a wholly-owned subsidiary of Value Health, Inc., for the years ended
December 31, 1994 and 1993, which statements reflect revenues of approximately
51% and 50%, respectively, for the years ended December 31, 1994 and 1993, and
total assets of approximately 53% as of December 31, 1994, of the related
combined totals. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to amounts
included for this subsidiary, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the financial position of ValueRx, Inc. as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As stated in Note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, as of January 1, 1994.
/s/ COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
November 18, 1996
F-2
<PAGE>
VALUERX, INC.
COMBINED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
--------------- ---------------------
1996 1995 1994
--------------- --------- ---------
(unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 41,809 $ 21,043 $ 29,199
Accounts receivable-trade (net of allowance for doubtful accounts of
$7,982 (unaudited), $7,914 and $7,331 in 1996, 1995
and 1994 respectively)............................................... 249,428 236,874 157,240
Inventories........................................................... 27,983 30,052 41,219
Prepaid expenses and other current assets............................. 12,341 27,105 23,251
Deferred taxes........................................................ 33,675 55,371 6,415
--------------- --------- ---------
Total current assets.................................................... 365,236 370,445 257,324
--------------- --------- ---------
Fixed assets:
Land.................................................................. 2,871 2,871 2,871
Buildings and improvements............................................ 9,835 9,815 9,761
Furniture and fixtures................................................ 3,903 5,875 5,012
Equipment and software................................................ 55,655 70,200 48,442
Leasehold improvements................................................ 4,187 6,844 6,128
--------------- --------- ---------
76,451 95,605 72,214
Less accumulated depreciation and amortization........................ 25,677 32,388 21,209
--------------- --------- ---------
50,774 63,217 51,005
--------------- --------- ---------
Long-term investments................................................... 903 1,249 54,574
Goodwill, net........................................................... 132,392 114,205 105,915
Other assets............................................................ 18,888 6,131 11,445
--------------- --------- ---------
152,183 121,585 171,934
--------------- --------- ---------
Total assets............................................................ $ 568,193 $555,247 $480,263
=============== ========= =========
<CAPTION>
Liabilities and Stockholder's Equity
<S> <C> <C> <C>
Current liabilities:
Payable to providers.................................................. $ 143,755 $107,747 $ 76,665
Short-term borrowings................................................. - - 14,127
Accounts payable and accrued expenses................................. 52,039 47,695 47,126
Due to affiliates, net................................................ 35,139 65,859 44,081
Merger-related and restructuring...................................... 14,984 53,615 3,336
Accrued loss contracts................................................ 12,128 30,385 -
Income tax payable.................................................... - - 3,078
Accrued compensation.................................................. 6,188 6,281 4,033
Current portion of capital lease obligations.......................... 152 118 680
Deferred revenue...................................................... 777 339 269
--------------- --------- ---------
Total current liabilities............................................... 265,162 312,039 193,395
--------------- --------- ---------
Capital lease obligations, less current portion....................... 569 333 205
Notes payable, less current portion................................... - - 12,187
Other liabilities..................................................... 559 577 2,576
--------------- --------- ---------
1,128 910 14,968
--------------- --------- ---------
Total liabilities....................................................... 266,290 312,949 208,363
--------------- --------- ---------
Commitments and contingencies
Stockholder's equity:
Investment by Value Health, Inc....................................... 302,351 242,544 275,513
Unrealized loss on securities available for sale, net of tax.......... (448) (246) (3,613)
--------------- --------- ---------
Total stockholder's equity.............................................. 301,903 242,298 271,900
--------------- --------- ---------
Total liabilities and stockholder's equity.............................. $ 568,193 $555,247 $480,263
=============== ========= =========
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
F-3
<PAGE>
VALUERX, INC.
COMBINED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30, For the years ended December 31,
---------------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
--------------- --------------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Prescription drugs - services.......... $ 856,757 $ 751,464 $1,053,436 $ 891,611 $ 523,278
Prescription drugs - products.......... 325,521 318,183 425,661 382,326 321,948
Other, net............................. 8,844 7,391 9,690 8,635 12,165
Investment income...................... 2,459 3,180 3,879 6,073 14,416
--------------- --------------- ------------ ------------ ------------
Total revenues........................... 1,193,581 1,080,218 1,492,666 1,288,645 871,807
--------------- --------------- ------------ ------------ ------------
Expenses
Costs of services...................... 781,483 684,258 959,838 815,154 471,460
Costs of products...................... 282,954 266,960 360,563 327,307 282,304
Selling, general and administrative.... 65,965 71,484 94,837 91,301 68,327
Depreciation and amortization.......... 6,257 8,459 11,930 7,239 5,595
Amortization of goodwill............... 4,179 2,951 4,022 3,679 2,356
Interest expense....................... 1,390 2,854 3,095 4,183 3,837
Loss contracts......................... - 46,600 46,600 - -
Merger-related and restructuring....... - 64,153 71,090 5,985 -
--------------- --------------- ------------ ------------ ------------
Total expenses........................... 1,142,228 1,147,719 1,551,975 1,254,848 833,879
--------------- --------------- ------------ ------------ ------------
Earnings (loss) before income taxes...... 51,353 (67,501) (59,309) 33,797 37,928
Provision (benefit) for income taxes... 20,541 (21,926) (14,832) 14,590 14,987
--------------- --------------- ------------ ------------ ------------
Net earnings (loss)...................... $ 30,812 ($ 45,575) ($ 44,477) 19,207 $ 22,941
=============== =============== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
F-4
<PAGE>
VALUERX, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Investment by
Value Health, Inc. Total
----------------------- ---------------
<S> <C> <C>
Balance at December 31, 1992....................... $194,650 $194,650
Net earnings..................................... 22,941 22,941
Additional investments........................... 8,613 8,613
Other............................................ (214)
----------------------- ---------------
Balance at December 31, 1993....................... 226,204 225,990
Net earnings..................................... 19,207 19,207
Additional investments........................... 30,102 30,102
Change in unrealized loss on securities
available for sale, net of tax................. (3,399)
----------------------- ---------------
Balance at December 31, 1994....................... 275,513 271,900
Net loss......................................... (44,477) (44,477)
Additional investments........................... 11,508 11,508
Change in unrealized loss on securities
available for sale, net of tax................. 3,367
----------------------- ---------------
Balance at December 31, 1995....................... 242,544 242,298
(unaudited)
Net earnings for the nine months ended
September 30, 1996............................. 30,812 30,812
Additional investments........................... 28,995 28,995
Change in unrealized loss on securities
available for sale, net of tax................. (202)
----------------------- ---------------
Balance at September 30, 1996...................... $302,351 $301,903
======================= ===============
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
F-5
<PAGE>
VALUERX, INC.
COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
------------------------- -----------------------------------
1996 1995 1995 1994 1993
-------- --------- --------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 30,812 $(45,575) $(44,477) $ 19,207 $ 22,941
-------- --------- --------- -------- ---------
Adjustments to reconcile net earnings (loss) to net cash:
Depreciation and amortization 6,257 8,459 11,930 7,239 5,595
Provision for doubtful accounts and notes receivable 7,028 1,226 3,412 2,173 3,731
Deferred taxes 21,704 (47,072) (48,900) (3,983) 5,579
Amortization of goodwill 4,179 2,951 4,022 3,679 2,356
Amortization of deferred revenue (339) (269) (269) (2,063) (2,125)
(Gain) loss on sales of securities 3 559 559 (625) (5,842)
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (12,622) (55,311) (80,216) (46,874) (28,581)
Inventories 2,069 5,500 12,328 (9,080) (8,079)
Other current and non-current assets 9,018 (2,457) (5,177) (5,951) 2,188
Increase (decrease) in liabilities:
Payable to providers 36,008 21,208 31,082 8,559 42,756
Accounts payable and accrued expenses 4,344 2,886 569 12,307 (21,914)
Due to affiliates, net (31,107) 460 20,690 32,151 18,732
Merger-related and restructuring expense (28,705) 47,246 50,499 3,336 -
Accrued loss contracts (18,257) 38,087 30,385 - -
Other current and non-current liabilities 666 (1,438) (2,530) (659) (5,319)
-------- --------- --------- -------- ---------
Total adjustments 246 22,035 28,384 209 9,077
-------- --------- --------- -------- ---------
Net cash provided by (used in) operating activities 31,058 (23,540) (16,093) 19,416 32,018
-------- --------- --------- -------- ---------
Cash flows from investing activities:
Capital expenditures (14,591) (16,372) (23,609) (21,219) (19,448)
Proceeds from sale of fixed assets 5,961 - - - -
Purchase of subsidiaries and assets, net of cash acquired (1,584) (416) (416) (1,177) (44,674)
Purchases of securities (55) (8,945) (8,993) (25,375) (271,759)
Maturities and sales of securities 52 67,325 67,325 29,045 306,920
-------- --------- --------- -------- ---------
Net cash provided by (used in) investing activities (10,217) 41,592 34,307 (18,726) (28,961)
-------- --------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from exercise of common stock options - 1,369 1,369 1,402 1,533
Advances under financing agreements - 200 200 - -
Repayments of advances under financing agreements - (1,175) (1,175) - -
Payments for common stock repurchase (1,140)
Proceeds from issuance of debt - 16,500 16,500 22,000 -
Payments of debt and capital lease obligations (75) (43,134) (43,264) (14,882) (6,492)
-------- --------- --------- -------- ---------
Net cash provided by (used in) financing activities (75) (26,240) (26,370) 8,520 (6,099)
-------- --------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents 20,766 (8,188) (8,156) 9,210 (3,042)
Cash and cash equivalents at beginning of period 21,043 29,199 29,199 19,989 23,031
-------- --------- --------- -------- ---------
Cash and cash equivalents at end of period $ 41,809 $ 21,011 $ 21,043 $ 29,199 $ 19,989
======== ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
F-6
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Business
On October 7, 1996, the Board of Directors of Value Health, Inc., ("Value
Health") approved, subject to a final plan, including specific terms and
conditions, a distribution (the "Distribution" or the "Spin-off") to holders of
Value Health's common stock of all outstanding shares of common stock of its
pharmacy benefit management ("PBM") operations known as ValueRx, Inc. ("ValueRx"
or the "Company") on a pro rata basis. Significant PBM operations include
ValueRx Pharmacy Program, Inc., Diagnostek, Inc., Prescription Drug Service,
Inc., Prescription Drug Service West, Inc. and RxNet, Inc. Under the proposed
plan, ValueRx will become a publicly traded company that will include the PBM
businesses of Value Health. If such conditions are satisfied and final approval
is received from Value Health's Board of Directors, it is currently anticipated
that the Spin-off will be completed during the first quarter of 1997. The
Company is the largest independent provider of PBM services in the United
States, providing managed prescription drug programs to both retail payors, such
as self-insured employers, and wholesale markets, such as managed care
organizations and insurance carriers.
These financial statements present the combined financial position, results of
operations and cash flows of ValueRx as if it were a separate entity for all
periods presented. All material intercompany transactions and balances between
ValueRx, its subsidiaries and affiliates have been eliminated.
ValueRx has utilized certain of Value Health's centralized general and
administrative functions, including legal, accounting, tax, treasury, employee
benefits, sales and marketing and insurance services. Fees for those services
have been allocated based on a percentage of adjusted pre-tax earnings of
ValueRx. In the opinion of management, Value Health's methods for allocating
costs are believed to be reasonable. However, such costs are not necessarily
indicative of the costs that would have been incurred if ValueRx had performed
these functions. Subsequent to the Distribution, the Company will perform these
functions and management believes the general and administrative services can be
replaced at comparable costs.
For purposes of governing certain of the ongoing relationships between ValueRx
and Value Health after the Distribution and to provide for orderly transition,
ValueRx and the Corporation will enter into various agreements including the
Reorganization Agreement, the Services Agreement, the Tax Sharing Agreement and
the License Agreement.
Basis of Financial Statement Presentation
The preparation of the combined financial statements requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and revenues and expenses. Actual results could differ
significantly from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, investments with original maturities of
three months or less are considered to be cash equivalents.
F-7
<PAGE>
Inventories
Inventories consist of prescription drugs and are stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
Interim Period Financial Statements
The unaudited combined financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position of the Company at September 30, 1996 and its results of
operations and cash flows for the nine months ended September 30, 1996 and 1995.
Interim results are not necessarily indicative of full year performance.
Investments
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 115"). Under SFAS 115, the Company has classified its
investments in debt securities as "available-for-sale" securities and carries
such securities at market value. Accordingly, the net unrealized gain or loss,
net of tax, is included as a separate component of stockholder's equity.
Premiums are amortized on a straight-line basis until maturity. In determining
the gain or loss on sales of investments, cost is based on specific
identification of the asset sold.
Fixed Assets
Fixed assets are recorded at cost. The Company uses straight-line and
accelerated methods of depreciation over the estimated useful lives of the
assets, which range from three to twenty-five years. Assets acquired under
capital lease agreements are recorded at the lesser of the present value of the
minimum lease payments or the fair value of the property. These assets are
amortized on a straight-line basis over periods consistent with the Company's
depreciation policy for similar purchased assets or over the lease term,
whichever is shorter. Expenditures for maintenance and repairs are charged to
income as incurred and renewals and improvements are capitalized. Upon sale or
retirement of fixed assets, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is credited or charged
to income.
Included in equipment and software at December 31, 1995 and 1994 are capitalized
computer software costs, related to purchased software and software developed
internally of $17,983,000 and $9,551,000, respectively. Accumulated
amortization on computer software was $4,207,000 and $1,208,000 at December 31,
1995 and 1994, respectively, and is included in accumulated depreciation and
amortization. The Company uses the straight-line amortization method over
estimated useful lives which range from three to five years.
Goodwill
Goodwill related to acquisitions represents the excess of cost over fair value
of net tangible and separately identifiable intangible assets acquired, and is
amortized on a straight-line basis over 15 to 40 years. Accumulated
amortization was $17,150,000 (unaudited), $14,176,000 and $10,154,000 at
September 30, 1996, December 31, 1995 and 1994, respectively. The Company
reviews its amortization policy and carrying value of goodwill on an ongoing
basis. This review includes an analysis of whether carrying values and
amortization periods are appropriate based upon product life cycle, company
performance compared to expectations and industry practice.
F-8
<PAGE>
Payables to Providers
Payables to providers are recorded as services are rendered.
Revenue Recognition
Revenues from dispensing prescription products from the Company's mail service
pharmacies are recorded upon shipment. Revenues from sales of prescription
drugs by pharmacies in the Company's nationwide network as well as pharmacy
claims processing revenues are recognized when the claims are adjudicated. When
the Company has an independent contractual obligation to pay its network
pharmacy providers for benefits provided to members of its clients' pharmacy
benefit plans, the Company includes payments from the plan sponsors for these
benefits as revenues and payments to these pharmacy providers in costs of
services or products. If the Company is only administering the plans sponsors'
network pharmacy contracts, the Company records fees derived from these
contracts as net revenue.
No customer accounted for 10% or more of combined total revenues for the nine
month period ended September 30, 1996 or in each of the years ended December 31,
1995, 1994 or 1993.
Costs of Services and Products
Costs of Services and Products include product costs, pharmacy claims payments
and other direct costs associated with dispensing prescriptions and claims
processing operations, offset by fees received from pharmaceutical manufacturers
in connection with the Company's drug purchasing and formulary management
programs.
Income Taxes
The Company, including all of its subsidiaries, was historically included in the
consolidated federal income tax returns filed by Value Health, Inc. For
purposes of these stand alone financials, the provision for income taxes has
been determined as if ValueRx had filed separate tax returns under its existing
structure for the periods presented. Accordingly, the effective tax rate of
ValueRx in future years could vary from its historical effective tax rates.
The Company's income tax liability has been determined under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"), requiring an asset and liability approach for financial accounting
and reporting for income taxes. The liability is based on the current and
deferred tax consequences of all events recognized in the combined financial
statements as of the date of the combined balance sheet. Deferred taxes are
provided for temporary differences which will result in taxable or deductible
amounts in future years, primarily attributable to a different basis in certain
assets and liabilities for financial and tax reporting purposes, including
recognition of deferred tax assets net of a related valuation allowance.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adoption of this statement did not
result in a material impact on financial condition, results of operations or
cash flows during the first nine months of 1996.
F-9
<PAGE>
Recently Enacted Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company has elected not to adopt the
accounting requirements of SFAS No. 123 and will continue to account for stock-
based compensation plans in accordance with APB No. 25. The Company's full year
1996 financial statements will include the pro forma disclosure requirements of
SFAS No. 123.
2. Mergers, Acquisitions and Joint Venture
---------------------------------------
On January 10, 1996, Value Health completed its acquisition of Medintell Systems
Corporation ("Medintell"). This acquisition was accounted for as a purchase in
which Value Health issued 842,571 shares of its common stock for all of the
issued and outstanding shares of Medintell. In connection with this
transaction, Value Health announced its intention to repurchase an equivalent
number of shares. The repurchase was completed on March 21, 1996. Goodwill of
$28.4 million was recorded in connection with this transaction and is being
amortized over 20 years. Medintell develops and markets advanced pharmacy
information systems and services.
On July 3, 1996, the Company's joint venture with Allegiance Corporation to
provide medication management services to hospitals and other health-care
facilities commenced operating. The Company contributed substantially all of
the operating assets and contracts of its HPI Health Care Services, Inc.
subsidiary ("HPI") to the joint venture, for a net investment of approximately
$18.5 million. Because the joint venture is accounted for under the equity
method, revenues of the joint venture for the period July 3, 1996 through
September 30, 1996 have not been reported as revenues of the Company.
Accordingly, Company reported revenues for the nine month period ended September
30, 1996 were reduced by approximately $18 million as compared to the same
period in 1995.
On July 28, 1995, Value Health completed its merger with Diagnostek, a PBM.
Value Health issued 12,213,075 shares of its common stock in exchange for all of
the outstanding common stock of Diagnostek at an exchange ratio of 0.4975:1.
The transaction was accounted for as a pooling of interests and financial
statements for all periods prior to this combination have been stated to reflect
the combined operations. The ValueRx, Inc. combined financial statements
include the operations of Diagnostek for all periods presented.
Included in the combined results of operations of ValueRx, Inc. for the year
ended December 31, 1995 are the following unaudited results of the previously
separate companies for the period January 1, 1995 to June 30, 1995:
<TABLE>
<CAPTION>
Period ended June 30, 1995
---------------------------------------------------------------
(In thousands) Company Diagnostek Eliminations Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $371,160 $361,173 $(18,755) $713,578
Net earnings $ 13,459 $ 2,680 $ -- $ 16,139
- -------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
The following are revenues and net earnings of the previously separate companies
for the years ended December 31, 1994 and 1993, with the combined amounts
currently presented in the financial statements for those years:
<TABLE>
<CAPTION>
Year ended December 31, 1994
------------------------------------------------------------
(In thousands) Company Diagnostek Eliminations Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $659,381 $660,522 $(31,258) $1,288,645
Net earnings $ 9,307 $ 9,900 $ -- $ 19,207
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1993
------------------------------------------------------------
(In thousands) Company Diagnostek Eliminations Combined
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $445,262 $439,874 $(13,329) $871,807
Net earnings $ 15,009 $ 7,932 $ -- $ 22,941
- -------------------------------------------------------------------------------
</TABLE>
On May 11, 1995, Value Health completed its acquisition of Value Health
Management, Inc. ("VHM"), an information services and management consulting
company. The acquisition was accounted for as a purchase in which Value Health
issued 279,738 shares of its common stock to acquire all of the issued and
outstanding shares of VHM common and preferred stock. Goodwill of $12.0 million
was recorded and is being amortized over twenty years.
On August 29, 1994, Value Health completed its merger with Prescription Drug
Service, Inc. and Prescription Drug Service West, Inc. (together, "PrescDrug").
Value Health issued 937,178 shares of its common stock in exchange for all of
the outstanding common and preferred stock of PrescDrug.
On August 31, 1994, Value Health completed its merger with RxNet, Inc.
("RxNet"). Value Health issued 256,136 shares of its common stock for all of
the outstanding common stock of RxNet.
The PrescDrug and RxNet transactions were accounted for as poolings of interests
and financial statements for all periods prior to these combinations were stated
to reflect the combined operations.
All other acquisitions by the Company, since its inception, were accounted for
as purchases. The purchase prices assigned to the net assets acquired were
based on the fair value of such assets and liabilities at the respective
acquisition dates.
3. Loss Contracts
--------------
The Company has $12.1 million (unaudited) and $30.4 million accrued for loss
contracts as of September 30, 1996 and December 31, 1995, respectively. During
1995, $34.0 million of expense was recognized in the third quarter and $12.6
million of expense was recognized in the first quarter. The Company evaluates
the adequacy of this accrual on an ongoing basis.
On February 1, 1995, the Company's HPI subsidiary began performing under a
contract with the State of New Jersey to provide unit dose medications to the
state's hospital system. The Company estimated that it will incur losses over
the three year term of the contract. In the first quarter of 1995, contract
losses over the three year term were estimated at $12.6 million and were
recorded in
F-11
<PAGE>
the Company's results. In the third quarter 1995, an additional
accrual of $4.0 million was recorded by the Company. During the first quarter
of 1996, the Company entered into a subcontracting agreement for the transfer of
the State of New Jersey contract, thereby effectively mitigating any further
contract losses. The Company is currently negotiating the permanent assignment
of this contract to the subcontracting party.
During the third quarter of 1995, the Company estimated its full-risk, capitated
contract with Ford Motor Company would incur a loss for 1996 as a result of
projected increases in utilization and unit prices. The current term of the
Ford contract expires December 31, 1996. The Company also estimated that
certain other risk-based accounts would incur losses over their remaining terms.
4. Restructuring and Merger-Related Expenses
-----------------------------------------
During the third and fourth quarters of 1995, the Company recorded a charge of
$71.0 million in connection with its merger with Diagnostek and plan to
reengineer certain operations. Of this amount, approximately $8.8 million was
incurred for transaction costs and $62.2 million was related to costs associated
with the combining of operations and the related combination activities, such as
reduction of head count and elimination of duplicate facilities and excess
capacity. It is expected that the merger-related and restructuring initiatives
will be substantially completed by the end of 1996, and are expected to result
in annualized savings of $25 million.
During the third quarter of 1994, the Company recorded a charge of $6.0 million
in connection with its mergers with PrescDrug and RxNet. Of this amount,
approximately $2.8 million was incurred for transaction costs and $3.2 million
was related to costs associated with the combining of operations and the related
combination activities.
The following table is a reconciliation of the restructuring and merger-related
expenses for the years ended December 31, 1995 and 1994 and for the nine months
ended September 30, 1996 (unaudited).
<TABLE>
<CAPTION>
Asset
Write-offs Reduction of
and Costs of Headcount
Transaction Combining and
(In Thousands) Costs Operations Capacity Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- $ -- $ -- $ --
Expenses recorded 2,799 1,193 1,993 5,985
Payments and write-offs (2,493) -- (156) (2,649)
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 306 1,193 1,837 3,336
Expenses recorded 8,800 38,548 23,742 71,090
Payments and write-offs (8,761) (5,073) (6,977) (20,811)
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (unaudited) 345 34,668 18,602 53,615
Payments and write-offs (95) (31,468) (7,068) (38,631)
- ----------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ 250 $ 3,200 $ 11,534 $ 14,984
- ----------------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
5. Investments
-----------
Investments in debt and equity securities as of September 30, 1996 (unaudited),
December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
Available-for-Sale Amortized Unrealized Unrealized Aggregate
September 30, 1996 (unaudited) Cost Gain Loss Fair Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Equity securities $ 1,649,000 $ -- $ (746,000) $ 903,000
- ------------------------------------------------------------------------------------------------------------------
Available-for-Sale Amortized Unrealized Unrealized Aggregate
December 31, 1995 Cost Gain Loss Fair Value
- ------------------------------------------------------------------------------------------------------------------
Equity securities $ 1,654,000 $ -- $ (405,000) $ 1,249,000
- ------------------------------------------------------------------------------------------------------------------
Available-for-Sale Amortized Unrealized Unrealized Aggregate
December 31, 1994 Cost Gain Loss Fair Value
- ------------------------------------------------------------------------------------------------------------------
Obligations of States and $ 9,874,000 $ -- $ (637,000) $ 9,237,000
Municipalities
Obligations of U.S. 22,117,000 -- (2,211,000) 19,906,000
Government and Agencies
Equity Securities 364,000 -- (9,000) 355,000
Corporate Bonds 28,240,000 -- (3,164,000) 25,076,000
- ------------------------------------------------------------------------------------------------------------------
$60,595,000 $ -- $(6,021,000) $54,574,000
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Debt Less than One To Five to After
Maturities: One Year Five Years Ten Years Ten Years Total
- ------------------------------------------------------------------------------------------------------------------
Amortized Cost $ -- $25,590,000 $27,534,000 $ 7,107,000 $60,231,000
Aggregate Fair Value $ -- $23,238,000 $24,666,000 $ 6,315,000 $54,219,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of available-for-sale securities were $48,000
(unaudited), $67,325,000 and $29,045,000 for the periods ended September 31,
1996, December 31, 1995 and 1994, respectively. Realized gains (losses) from
these sales were $0 (unaudited), $(559,000) and $625,000 in 1996, 1995 and 1994,
respectively.
6. Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1994
- ---------------------------------------------------------------------------------
<S> <C>
Notes payable to insurance company in annual
installments of $6,000,000 from
December 1992 through December 1996, $ 12,000,000
at an interest rate of 10.02%
Bank line of credit 14,000,000
Interest payable on debt 55,000
Other 259,000
- ---------------------------------------------------------------------------------
Total 26,314,000
Less: current portion (14,127,000)
- ---------------------------------------------------------------------------------
Long-term debt, excluding current portion $ 12,187,000
- ---------------------------------------------------------------------------------
</TABLE>
All of the above obligations were satisfied in 1995.
F-13
<PAGE>
7. Lease Obligations
-----------------
Capital Leases
Future minimum lease payments under noncancelable capital leases having terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
Years ended December 31:
- ------------------------------------------------------------------------------
<S> <C>
1996 $145,000
1997 126,000
1998 112,000
1999 103,000
2000 29,000
- ------------------------------------------------------------------------------
Total future minimum lease payments 515,000
Less amount representing interest 64,000
- ------------------------------------------------------------------------------
Present value of minimum lease payments 451,000
Less current portion 118,000
- ------------------------------------------------------------------------------
Capital lease obligations, less current portion $333,000
- ------------------------------------------------------------------------------
</TABLE>
Included in fixed assets are the following assets under capital leases:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1995 1994
<S> <C> <C>
- -------------------------------------------------------------------------------------------
Furniture and fixtures $26,000 $26,000
Equipment and software 3,715,000 3,829,000
- -------------------------------------------------------------------------------------------
3,741,000 3,855,000
Less accumulated depreciation and amortization 2,355,000 1,790,000
- -------------------------------------------------------------------------------------------
$1,386,000 $2,065,000
- -------------------------------------------------------------------------------------------
</TABLE>
Operating Leases
The Company has cancelable and noncancelable operating lease agreements for
equipment and office space which include renewal options. Total rental expense
was $6,354,000, $5,371,000 and $5,401,000, in 1995, 1994 and 1993, respectively.
The Company's minimum future lease payments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
Years ended December 31:
- --------------------------------------------------------------------------
<S> <C>
1996 $ 5,140,000
1997 4,312,000
1998 3,018,000
1999 1,442,000
2000 551,000
Thereafter 840,000
- --------------------------------------------------------------------------
$15,303,000
- --------------------------------------------------------------------------
</TABLE>
The amounts above include payments on certain leases in the amount of
approximately $2,200,000 which the Company has accrued in its merger and
restructuring charges in 1995. (See note 4).
During the first quarter of 1996, the Company entered into a noncancelable lease
for office space in Plymouth, Minnesota. The lease is for the period March 1,
1996 through June 30, 2011 and has minimum monthly lease payments of
approximately $95,000.
F-14
<PAGE>
8. Stock Option Plans
------------------
The Company's employees participate in the Value Health, Inc. stock option
incentive plans, which provide for award of options on common shares to
employees. Options are exercisable in installments as determined by the Board
of Directors of Value Health. Incentive stock options that are granted have
terms not exceeding 10 years and exercise prices not less than the fair market
value at the date of grant. The Company expects to establish similar plans for
its employees after the Distribution, whereby options in the Value Health, Inc.
plan will be converted into options in the ValueRx plan based upon a formula.
9. Other Employee Benefits
-----------------------
Employees of the Company have participated in Value Health's 1991 Employee Stock
Purchase Plan, providing for the purchase, with certain restrictions, by the
employees of the Company of common stock of Value Health. The Company expects
to adopt a similar plan for its employees after the Distribution.
Employees of the Company have participated in Value Health's 401(k) Retirement
Savings Plan (the "Savings Plan"). Company contributions to the plan are
determined annually and are based on contributions of participating employees.
The cost of this plan charged to the Company was approximately $456,000,
$323,000 and $151,000 in 1995, 1994 and 1993 respectively. The Company expects
to adopt a similar plan for its employees after the Distribution. Employees of
ValueRx with balances in Value Health's plan will be allowed to transfer their
balances and accumulated Company contributions, vested and unvested, to the
ValueRx plan.
10. Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(unaudited)
Cash paid during the year for:
Interest $ 22,000 $ 1,544,000 $ 2,238,000 $ 2,696,000
Income taxes $ 3,235,000 $26,380,000 $ 9,389,000 $ 9,907,000
- -----------------------------------------------------------------------------------------------------------------
Noncash transactions:
Capital leases entered into for equipment - - $ 572,000 $ 701,000
Value Health common stock issued in
acquisitions $ 23,065,000 $10,138,000 $(4,113,000) $ 6,150,000
Value Health common stock issued in
litigation settlement - $ 3,000,000 -
Forgiveness of debt - - $29,000,000 -
Fixed asset write-offs from merger and - - -
restructuring activities $ 15,875,000
Net assets contributed in
exchange for equity interest
in joint venture $ 18,577,000 - - -
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
11. Income Taxes
------------
F-15
<PAGE>
The provision for income taxes for the years ended December 31, 1995, 1994 and
1993 consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $25,676,000 $13,908,000 $13,211,000
State 4,581,000 2,721,000 1,476,000
Deferred taxes:
Provision (benefit) (47,500,000) (2,037,000) (964,000)
Valuation allowance 2,209,000 (418,000) 1,264,000
Goodwill reduction for
acquired net operating loss
carryforward utilization 202,000 416,000 --
----------------------------------------------------------------------------------------------
$(14,832,000) $14,590,000 $14,987,000
----------------------------------------------------------------------------------------------
</TABLE>
The tax benefits of carryforwards and temporary differences related to the
deferred tax asset at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------------------------
<S> <C> <C>
Carryforwards:
Net operating loss
carryforwards related to
purchase business combinations $8,591,000 $7,029,000
----------------------------------------------------------------------------------------------
Temporary differences:
Merger-related expense 17,901,000 867,000
Loss contracts 12,153,000 --
Restructuring 2,706,000 --
Estimated claims liabilities 11,750,000 133,000
Depreciation and amortization (1,126,000) (4,863,000)
Unrealized loss on securities -- 2,408,000
Other 9,403,000 8,483,000
-----------------------------------------------------------------------------------------------
52,787,000 7,028,000
-----------------------------------------------------------------------------------------------
Gross deferred tax benefit 61,378,000 14,057,000
Valuation allowance (5,238,000) (3,029,000)
-----------------------------------------------------------------------------------------------
Net deferred tax benefit 56,140,000 11,028,000
Less current portion 55,371,000 6,415,000
-----------------------------------------------------------------------------------------------
Long term portion $769,000 $4,613,000
-----------------------------------------------------------------------------------------------
</TABLE>
The deferred tax asset increased to $61.4 million at December 31, 1995 from
$14.1 million at December 31, 1994. Management believes that sufficient taxes
were paid in the carryback period and that sufficient taxable income will be
generated in the future to realize the deferred tax benefits.
The valuation allowance was increased in 1995 by $2,675,000 for net operating
losses of VHM which was acquired on May 11, 1995 (see Note 2), and decreased by
$466,000 due to the utilization of net operating losses from prior business
combinations. The valuation allowance of $5,238,000
F-16
<PAGE>
and $3,029,000 at December 31, 1995 and 1994, respectively, is related to the
purchase of business combinations and has been maintained primarily due to the
uncertainty regarding the timing of net operating loss utilization. Should
deferred tax assets subsequently be recognized for such carryforwards, the
reduction of the valuation allowance will be offset by a corresponding reduction
of goodwill.
The Company's effective tax rate on earnings from continuing operations before
income taxes differs from the Federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax expense at statutory rate (35.0)% 35.0% 35.0%
State income tax expense, net (2.2)% 5.0% 4.0%
Non-deductible merger and other 12.2% 3.2% 0.5%
expenses
--------------------------------------------------------------------------------------
(25.0)% 43.2% 39.5%
--------------------------------------------------------------------------------------
</TABLE>
The Company had the following income tax carryforwards available at
December 31, 1995:
<TABLE>
<CAPTION>
Tax Reporting
Years of
Amount Expiration
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. federal regular net operating loss carryforwards
acquired in purchase business combinations available
for offset against future taxable income $24,546,000 2002 - 2007
U.S. federal AMT net operating loss carryforwards
acquired in purchase business combinations $24,298,000 2002 - 2007
- -----------------------------------------------------------------------------------------------------
</TABLE>
In connection with the Spin-off, Value Health and the Company will enter into a
tax sharing agreement (the "Tax Sharing Agreement") which will allocate tax
liabilities and responsibility for tax audits for periods prior to, and
subsequent to the Distribution Date. The Tax Sharing Agreement will also
allocate consolidated alternative minimum tax and other tax credit carry-
forwards, if any, as of the Distribution Date between Value Health and ValueRx.
12. Related Parties and Certain Transactions
----------------------------------------
In connection with the Diagnostek merger, the Company entered into a Consulting
Agreement and an Agreement Not to Compete with the former chief executive
officer of Diagnostek. Under the consulting agreement, the Company will pay the
former chief executive officer an annual consulting fee of $120,000 and make
continued payments of certain split dollar life insurance policy premiums at an
amount previously funded by Diagnostek, but not to exceed $327,000 per year.
The term of the Consulting Agreement is five years and commenced July 28, 1995.
Under the Agreement Not to Compete, the Company paid the former chief executive
officer $3.5 million on January 2, 1996 in exchange for his agreement not to
compete with the Company in any of its businesses and not to solicit or
otherwise intentionally interfere with the Company's employees or customers for
a 10 year period beginning July 28, 1995.
F-17
<PAGE>
Prior to its acquisition by the Company, Diagnostek provided two executive
officers with loans. The Company assumed the receivables for these loans in
conjunction with its acquisition of Diagnostek. The amount receivable at
December 31, 1995 for the first loan, including accrued interest, was
$2,290,000. The amount receivable at December 31, 1995 for the second loan,
including accrued interest, was $349,117.
Diagnostek utilized the legal services of a firm whose partners included a
director of Diagnostek. Legal fees to this firm totaled approximately
$1,451,000, $626,000 and $1,867,000 during the years ended December 31, 1995,
1994 and 1993, respectively.
The Company has provided loans to certain of its employees for relocation and
other costs. The amount of these loans, individually and in the aggregate, are
immaterial to the Company and are deemed by management to be collectable.
The Company also maintains employment agreements with certain of its executive
officers providing for severance payments of up to two years' current base
salary in the event any of the agreements are terminated, under certain
specified conditions.
13. Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate the value. Financial
instruments include cash and short-term investments, notes receivable, long-term
investments, other investments and accounts receivable, accounts payable and
accrued expenses. The methods and assumptions used to estimate the fair value
of each class of financial instruments are as follows:
Cash and Short-Term Investments
The carrying amount for cash and short-term investments is a reasonable estimate
of those assets' fair value. Notes receivable consist of loans to officers or
former officers (see note 12). There are no established trading markets for
these loans which management intends to hold to maturity. Generally, fair value
is determined by discounting future cash flows using current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. However, due to the nature of certain notes
receivable, it is impracticable to determine fair value.
Long-Term Investments
Fair value for these securities is based on quoted market prices. At September
30, 1996, December 31, 1995 and 1994, long-term investments are carried at fair
value.
Other Investments
Due to the nature of certain other investments, it is impracticable to determine
fair value. With respect to real estate, fair value is determined based upon
local market data.
Accounts Receivable, Accounts Payable and Accrued Expenses
F-18
<PAGE>
The carrying value of accounts receivable, accounts payable and accrued expenses
approximates their fair values due to their short maturities.
Short-Term Borrowings and Notes Payable
The fair value of the Company's debt with an insurance company (note 6) is based
on the present value of the cash flows from that debt, assuming an interest rate
of 9.68 percent at December 31, 1994. Fair market value of this debt was
approximately $12,031,000 at December 31, 1994.
14. Commitments and Contingencies
-----------------------------
In September, 1995, two purported class action lawsuits, Freedman v. Value
-----------------
Health, Inc., et al. and Balkheimer et al. v. Value Health, Inc. et al., were
- ------------------- ---------------------------------------------
filed in the United States District Court for the District of Connecticut
against Value Health and its directors, and certain of its senior officers. The
two lawsuits, which allege violations of the federal securities laws, have been
consolidated.
On September 10, 1996, the parties to Bash, et al. v. Diagnostek, et al., a
----------------------------------
suit filed in federal court in New Mexico in 1994 against Diagnostek and certain
of its former senior officers, reached a settlement, subject to court approval
and other conditions. As part of the settlement, Value Health expects that the
overlapping claims in a second action, Bash, et al. v. Value Health, Inc.,
-----------------------------------
et al. ("Bash II"), will be dropped.
- ----- -------
Value Health denies the allegations in each of the lawsuits described above and
intends to defend them vigorously. Value Health and ValueRx anticipate that
they will share equally the amount of any adverse judgment in or settlement of,
Freedman, Balkheimer and Bash II, if any, which is not covered by insurance.
- -------- ---------- -------
In addition to the suits described above, the Company is involved in other
litigation arising in the normal course of business. The Company believes that
resolution of all of these matters will not result in any payment that, in the
aggregate, would be material to the financial position or results of operations
or cash flows of the Company.
The Reorganization Agreement, will provide for certain cross-indemnities
principally designed to place financial responsibility for contingent
liabilities that may arise out of certain litigation relating to the ValueRx
business with ValueRx and financial responsibility for the obligations and
contingent liabilities that may arise out of certain litigation relating to
Value Health's retained businesses and its other subsidiaries with Value Health.
In 1994, the Company established a $22.4 million letter of credit on behalf of
one of its customers. The authorized amount was increased to $27.5 million in
1995. The letter had not been drawn upon as of September 30, 1996.
The Company is in the process of negotiating an arrangement with a large
outsourcing systems vendor to provide outsourcing services for the Company's
data center operations. The proposed agreement is for a five-year term with
approximately $25 million in fees to be paid by the Company over the life of the
agreement. Management expects to sign and implement the agreement by year end
1996.
F-19
<PAGE>
15. Risks and Uncertainties
-----------------------
Rebates from pharmaceutical manufacturers are recorded by the Company as
reductions in costs of services and products. Pharmaceutical manufacturer
rebate arrangements contribute significantly to the Company's profitability.
The Company intends to continue seeking such arrangements in the future, but
there can be no assurance future arrangements will be secured on similar terms.
Accounts receivable net of allowance for doubtful accounts at September 30, 1996
(unaudited), December 31, 1995, and 1994 were $249.4 million, $236.9 million and
$157.2 million, respectively. The December 31, 1995 balance represents an
increase of 50% over 1994, primarily because of growth in the prescription drugs
product lines and growth in the rebate programs, as discussed above. The
billing and collection cycle for such programs is longer than that of monthly
service fees and other revenue sources. Rebate programs have been in effect
since 1993 and therefore have a relatively short collections history.
Management monitors and evaluates collectibility of receivables on an ongoing
basis.
The Company purchased approximately 70% of its pharmaceutical products through
one wholesaler for the year ended December 31, 1995. During the fourth quarter
of 1996, the Company anticipates entering into a primary wholesale relationship
with a new supplier. The Company anticipates that it will purchase a similar
percentage of its pharmaceuticals from this supplier. The Company believes that
other alternative sources are readily available in the event needed.
16. Transactions with Affiliates
----------------------------
ValueRx has utilized certain centralized general and administrative functions of
Value Health (see note 1) and is charged a fee for such services. The fees
charged totaled $6,188,000 and $4,257,000 for the periods ended September 30,
1996 and 1995, respectively (unaudited) and $5,994,000, $3,347,000 and
$3,970,000 for the years ended December 31, 1995, 1994 and 1993, respectively,
and have been included in selling, general and administrative expenses.
F-20
<PAGE>
17. Selected Quarterly Financial Data (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
(In Thousands) Earnings (loss)
from continuing
Quarter Costs of services operations before
Revenues and products taxes Net earnings (loss)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
First $305,154 $280,634 $2,312 $1,314
Second 323,434 286,303 9,705 5,515
Third 326,771 278,591 6,625 3,765
Fourth 333,286 296,933 15,155 8,613
- ---------------------------------------------------------------------------------------------------------------------
Year $1,288,645 $1,142,461 $33,797 $19,207
- ---------------------------------------------------------------------------------------------------------------------
1995
First $352,775 $325,067 $7,771 $4,663
Second 360,803 326,189 19,127 11,476
Third 369,721 299,962 (94,401) (61,719)
Fourth 409,367 369,183 8,194 1,103
- ---------------------------------------------------------------------------------------------------------------------
Year $1,492,666 $1,320,401 $(59,309) ($44,477)
- ---------------------------------------------------------------------------------------------------------------------
1996
First $398,362 $353,069 $16,371 $9,823
Second 405,632 364,001 18,210 10,926
Third 389,587 347,367 16,772 10,063
- ---------------------------------------------------------------------------------------------------------------------
Year to date $1,193,581 $1,064,437 $51,353 $30,812
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
PART II
INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
**2 Form of Reorganization Agreement with Value Health
**3.1 Form of Amended and Restated Certificate of Incorporation of
ValueRx
**3.2 Form of Amended and Restated Bylaws of ValueRx
**4.1 Form of Rights Agreement, by and between ValueRx and the
rights agent named therein
**10.1 Form of ValueRx 1997 Stock Incentive Plan
**10.2 Form of ValueRx 1997 Employee Stock Purchase Plan
**10.3 Form of ValueRx 1997 Replacement Plan
**10.4 Form of Tax Sharing Agreement with Value Health
**10.5 Form of License Agreement with Value Health
**22 Subsidiaries of ValueRx
*27 Financial Data Schedule
NOTE:
* Filed herewith
** To be filed by amendment
II-1
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized.
VALUERX, INC.
By:/s/ Steven J. Shulman
---------------------
Steven J. Shulman
Chairman of the Board and Chief Executive
Officer
DATE: November 22, 1996
II-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholder
of ValueRx, Inc.:
Our report on the combined financial statements of ValueRx has been included in
this Form 10 on page F-2. In connection with our audits of such combined
financial statements, we also have audited the related financial statement
schedule included in this Form 10 on page S-2. We did not audit the financial
statements of Diagnostek, Inc., which is a wholly-owned subsidiary of
ValueHealth, Inc., for the years ended December 31, 1994 and 1993, which
statements reflect revenues of approximately 51% and 50%, respectively, for the
years ended December 31, 1994 and 1993, and total assets of approximately 53% as
of December 31, 1994, of the related combined totals. Those financial
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for this
subsidiary in the above mentioned schedule, is based solely on the reports of
such other auditors.
In our opinion, based on our audits and reports of other auditors, the financial
statement schedule referred to above, when considered in relation to the basic
combined financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
November 18, 1996
S-1
<PAGE>
VALUERX, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
==========================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
- --------------------------------------------------------------------------------------------------------------------------
BALANCE CHARGED
AT TO COSTS CHARGED BALANCE AT
DESCRIPTION BEGINNING AND TO OTHER ACCOUNTS DEDUCTIONS END
OF PERIOD EXPENSES OF PERIOD
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995:
Valuation Allowance For
Deferred Tax Asset: $3,029,000 $2,675,000 - $466,000 $5,238,000
Allowance for Doubtful
Accounts: $7,331,000 $3,412,000 $232,000/(3)/ $3,061,000/(2)/ $7,914,000
- --------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1994:
Valuation Allowance For
Deferred Tax Asset: $3,585,000 - - $556,000 $3,029,000
Allowance for Doubtful
Accounts: $5,090,000 $2,173,000 $1,158,000/(4)/ $1,090,000/(2)/ $7,331,000
- --------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1993:
Valuation Allowance For
Deferred Tax Asset: $1,366,000 $2,356,000 - $137,000 $3,585,000
Allowance for Doubtful
Accounts: $3,640,000 $3,731,000 $319,000/(1)/ $2,600,000/(2)/ $5,090,000
==========================================================================================================================
</TABLE>
(1) Acquisition of Complete Pharmacy Network, Perform Cost Management, Inc. and
Diagnostek Pharmacy, Inc. in 1993.
(2) Write-Off of uncollectible accounts, net of recoveries.
(3) Acquisition of Value Health Management, Inc. in May 1995.
(4) Amounts written off directly against revenue.
S-2
<PAGE>
Independent Auditors' Report
----------------------------
To Stockholders' and The Board of Directors
Diagnostek, Inc.:
We have audited the consolidated statement of financial position of Diagnostek,
Inc. and subsidiaries as of December 31, 1994 and the related consolidated
statements of earnings, cash flows and changes in stockholders' equity for each
of the years in the two year period ended December 31, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diagnostek, Inc. and
subsidiaries as of December 31, 1994 and the results of their operations and
their cash flows for each of the years in the two year period ended December 31,
1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
February 16, 1996
S-3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 41,809 21,043
<SECURITIES> 0 0
<RECEIVABLES> 257,410 244,788
<ALLOWANCES> 7,982 7,914
<INVENTORY> 27,983 30,052
<CURRENT-ASSETS> 365,236 370,445
<PP&E> 76,451 95,605
<DEPRECIATION> 25,677 32,388
<TOTAL-ASSETS> 568,193 555,247
<CURRENT-LIABILITIES> 265,162 312,039
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 301,903 242,298
<TOTAL-LIABILITY-AND-EQUITY> 568,193 555,247
<SALES> 325,521 318,183
<TOTAL-REVENUES> 1,193,581 1,080,218
<CGS> 282,954 266,960
<TOTAL-COSTS> 1,064,437 951,218
<OTHER-EXPENSES> 76,401 147,047
<LOSS-PROVISION> 0 46,600
<INTEREST-EXPENSE> 1,390 2,854
<INCOME-PRETAX> 51,353 (67,501)
<INCOME-TAX> 20,541 (21,926)
<INCOME-CONTINUING> 30,812 (45,575)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 30,812 (45,575)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
