<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11506
-------
Value Health, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1194838
---------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
22 Waterville Road, Avon, Connecticut 06001
----------------------------------------------------------
(Address of principal executive offices, Zip Code)
(860) 678-3400
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
The number of shares of Common Stock, without par value, outstanding on July 29,
1996 was 54,393,496.
<PAGE>
Value Health, Inc.
Table of Contents
- --------------------------------------------------------------------------------
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1996
And December 31, 1995 3
Consolidated Statements Of Operations For The Three And
Six Months Ended June 30, 1996 And 1995 4
Consolidated Statements Of Cash Flows For The Six
Months Ended June 30, 1996 And 1995 5
Notes To Consolidated Financial Statements 6
</TABLE>
Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 9
<TABLE>
<CAPTION>
PART II -- OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings 16
Item 4. Submission Of Matters To A Vote Of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits And Reports On Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
VALUE HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(in thousands, except par value and share amounts)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(unaudited) (audited)
--------------- --------------------
ASSETS
<S>
Current assets: <C> <C>
Cash and cash equivalents $ 103,510 $ 68,505
Restricted cash 4,247 5,806
Short-term investments 2,049 25,514
Accounts receivable (net of allowance for doubtful accounts of
$17,137, and $17,171, respectively) 319,878 304,272
Inventories 30,285 30,052
Prepaid expenses and other current assets 29,440 31,495
Deferred taxes 60,087 71,797
-------------- ---------------------
Total current assets 549,496 537,441
-------------- ---------------------
Fixed assets:
Land 3,532 3,532
Buildings 14,262 14,226
Furniture and fixtures 18,274 19,820
Equipment and software 137,457 150,425
Leasehold improvements 15,082 15,709
--------------- --------------------
188,607 203,712
Less accumulated depreciation and amortization (69,633) (71,242)
--------------- --------------------
Total fixed assets 118,974 132,470
--------------- --------------------
Long-term investments 6,485 12,868
Goodwill, net 217,786 190,605
Other assets 26,404 30,651
--------------- -------------------
250,675 234,124
--------------- --------------------
Total assets $ 919,145 $ 904,035
=============== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to providers $ 150,312 $ 116,166
Accounts payable and accrued expenses 53,579 65,195
Merger-related expense 22,110 49,767
Accrued loss contracts 18,314 30,386
Restructuring reserve 19,530 30,597
Other liabilities 20,390 24,300
--------------- --------------------
Total current liabilities 284,235 316,411
--------------- --------------------
Capital lease obligations, less current portion 1,497 2,130
Other liabilities 3,939 4,450
--------------- --------------------
Total long-term liabilities 5,436 6,580
--------------- --------------------
Total liabilities 289,671 322,991
--------------- --------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, authorized 1,000,000
shares, no shares issued - -
Common stock - without par value, authorized 100,000,000
shares, issued and outstanding 54,387,504 and
53,688,740 shares, respectively 502,833 467,325
Retained earnings 152,317 113,950
Treasury stock, at cost, 959,998 shares at June 30, 1996 (25,353) -
Unrealized loss on securities available-for-sale, net of tax (323) (231)
--------------- --------------------
Total stockholders' equity 629,474 581,044
--------------- --------------------
Total liabilities and stockholders' equity $ 919,145 $ 904,035
=============== ====================
See notes to consolidated financial statements.
3
</TABLE>
<PAGE>
VALUE HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
for the three months ended for the six months ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Prescription drugs - services $ 284,931 $ 250,149 $ 579,806 $ 488,862
Prescription drugs - products 118,054 105,571 216,903 214,993
Mental health 53,123 55,173 105,408 107,944
Workers' compensation 26,621 23,532 54,269 46,990
Disease management and information services 12,643 17,763 26,777 31,796
Other 1,445 1,309 2,834 4,573
Investment income 1,394 2,574 2,974 5,131
--------- --------- --------- --------
Total revenues 498,211 456,071 988,971 900,289
--------- --------- --------- --------
Expenses:
Costs of services 308,385 281,854 626,556 549,933
Costs of products 103,607 86,110 187,784 174,641
Selling, general and administrative 44,798 40,710 91,237 83,391
Depreciation and amortization 6,396 6,954 13,740 13,705
Amortization of goodwill 2,213 1,679 4,400 3,236
Interest expense 161 566 241 1,134
Loss contract - - - 12,600
-------- -------- -------- --------
Total expenses 465,560 417,873 923,958 838,640
-------- -------- -------- --------
Earnings before income taxes 32,651 38,198 65,013 61,649
Provision for income taxes 13,378 15,328 26,646 24,884
-------- -------- -------- --------
Net earnings $ 19,273 $ 22,870 $ 38,367 $ 36,765
======== ======== ======== ========
Weighted average common shares
and common share equivalents outstanding 54,927 54,375 55,026 54,247
======== ======== ======== ========
Net earnings per share $ 0.35 $ 0.42 $ 0.70 $ 0.68
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
VALUE HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 38,367 $ 36,765
--------- ---------
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 13,740 13,705
Provision for doubtful accounts and notes receivable 4,584 4,764
Deferred taxes 11,710 (2,536)
Tax effect of certain stock option transactions 2,900 724
Amortization of goodwill 4,400 3,236
Amortization of deferred revenue (4,788) (2,606)
Amortization of investment premiums 107 266
Gain on sales of securities - (613)
Change in assets and liabilities:
(Increase) decrease in assets:
Restricted cash 1,559 (119)
Accounts receivable (24,850) (37,057)
Inventories (233) 4,483
Other current and non-current assets (3,221) (10,304)
Increase (decrease) in liabilities:
Payable to providers 34,146 8,961
Accounts payable and accrued expenses (10,848) (6,511)
Merger-related expense (17,836) (3,886)
Accrued loss contracts (12,072) -
Restructuring reserve (6,327) -
Other current and non-current liabilities (1,200) 7,661
-------- --------
Total adjustments (8,229) (19,832)
-------- --------
Net cash provided by operating activities 30,138 16,933
-------- --------
Cash flows from investing activities:
Capital expenditures (22,223) (25,478)
Proceeds from sale of fixed assets 5,961 -
Purchase of subsidiaries and assets, net of cash acquired (10,111) (13,910)
Sale of subsidiary, net of cash sold 18,017 -
Advances under financing agreements - (200)
Collections under financing agreements - 1,174
Purchases of securities (22,754) (21,514)
Maturities and sales of securities 52,389 34,906
--------- --------
Net cash provided by (used in) investing activities 21,279 (25,022)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock - 1,221
Proceeds from exercise of common stock options 9,610 7,144
Payments for common stock repurchase (25,353) -
Proceeds from issuance of long-term debt - 6,500
Payments of long-term debt and capital lease obligations (669) (18,296)
-------- -------
Net cash used in financing activities (16,412) (3,431)
-------- -------
Net increase (decrease) in cash and cash equivalents 35,005 (11,520)
Cash and cash equivalents at beginning of period 68,505 84,899
-------- -------
Cash and cash equivalents at end of period $103,510 $ 73,379
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Value Health, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The unaudited interim consolidated financial statements included herein, as
of and for the three-month and six-month periods ended June 30, 1996 and
1995, contain all adjustments which, in the opinion of management, are
necessary to present a fair statement of the financial condition, results
of operations and cash flows for the interim periods reported. Operating
results for the interim periods are not necessarily indicative of those
expected for the full year. Certain prior year amounts have been
reclassified to conform to the 1996 presentation.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and the
rules and regulations of the Securities and Exchange Commission. These
financial statements have been prepared under the presumption that users of
the interim financial information have either read or have access to the
Company's audited financial statements for the year ended December 31,
1995. Accordingly, footnote disclosures which would substantially
duplicate the disclosures contained in the Company's December 31, 1995
audited financial statements have been omitted from these interim financial
statements. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
instructions, rules and regulations. Although the Company believes that
the disclosures are adequate to make the information presented not
misleading, it is suggested that these unaudited interim consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
2. Investments:
Investments in debt and equity securities as of June 30, 1996 and December
31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Available-for-Sale Amortized Unrealized Unrealized Aggregate
June 30, 1996 Cost Gain Loss Fair Value
- ----------------------------------------------------------------------------
Obligations of States and
Municipalities $2,000,000 $ - $ - $2,000,000
Obligations of U.S.
Government and
Agencies 5,422,000 2,000 (7,000) 5,417,000
Equity Securities 1,653,000 - (535,000) 1,118,000
- ----------------------------------------------------------------------------
$9,075,000 $2,000 $(542,000) $8,535,000
============================================================================
</TABLE>
6
<PAGE>
Value Health, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
Debt
Maturities: Less Than One Year One To Five Years Total
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Amortized Cost $2,048,000 $5,374,000 $7,422,000
Aggregate Fair Value $2,050,000 $5,367,000 $7,417,000
- -------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of available-for-sale securities were $22,617,000
and $11,852,000 for the three months ended June 30, 1996 and 1995,
respectively. Realized gains from these sales were $0 and $65,000 for the
three months ended June 30, 1996 and 1995, respectively. Proceeds from the
sale of available-for-sale securities were $42,207,000 and $15,155,000 for
the six months ended June 30, 1996 and 1995, respectively. Realized gains
from these sales were $0 and $613,000, respectively.
<TABLE>
<CAPTION>
Available-for-Sale Amortized Unrealized Unrealized Aggregate
December 31, 1995 Cost Gain Loss Fair Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of States
and Municipalities $31,751,000 $ 14,000 $ -- $31,765,000
Obligations of U.S.
Government and
Agencies 5,364,000 4,000 -- 5,368,000
Equity Securities 1,654,000 -- (405,000) 1,249,000
- -----------------------------------------------------------------------------------------
$38,769,000 $ 18,000 $(405,000) $38,382,000
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Debt
Maturities: Less Than One Year One To Five Years Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortized Cost $25,499,000 $11,616,000 $37,115,000
Aggregate Fair Value $25,514,000 $11,619,000 $37,133,000
- -------------------------------------------------------------------------------------------
</TABLE>
3. Merger-Related Expense:
The following table is a reconciliation of the accrued merger-related expense
for the six months ended June 30, 1996.
<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, $345 $31,468 $17,954 $49,767
1995
Expenses Recorded -- -- -- --
Payments and Write-Offs (78) (22,664) (4,915) (27,657)
- -------------------------------------------------------------------------------------------------
Balance at June 30, 1996 $267 $8,804 $13,039 $22,110
=================================================================================================
</TABLE>
7
<PAGE>
Value Health, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Restructuring Reserve:
The following table is a reconciliation of the restructuring reserve for the
six months ended June 30, 1996.
<TABLE>
<CAPTION>
Lease
Severance and Vacation and
(In thousands) Related Other Total
Benefits Associated
Costs
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, $7,732 $22,865 $30,597
1995
Expenses Recorded -- -- --
Payments and Write-Offs (3,955) (7,112) (11,067)
- -------------------------------------------------------------------------------
Balance at June 30, 1996 $3,777 $15,753 $19,530
===============================================================================
</TABLE>
5. Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
Effective January 1, 1996, the Company adopted SFAS 121. There was no
material impact on financial condition, results of operations or cash flows
during the first six months of 1996.
6. Supplemental Disclosures of Cash Flow Information:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
- ------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Cash Paid During The Period For:
Interest $ 213,000 $ 1,097,000
Income Taxes $25,777,000 $33,848,000
- ------------------------------------------------------------------
Noncash Transactions:
Note Receivable From Sale Of $
Subsidiary -- $ 2,900,000
Common Stock Issued In Acquisitions $23,065,000 $10,138,225
Fixed Asset Write-Offs From Merger And
Restructuring $20,522,000 $ --
- ------------------------------------------------------------------
</TABLE>
8
<PAGE>
Value Health, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Value Health, Inc. ("the Company") is a leading provider of specialty managed
health care benefit programs.
Revenues for the three months ended June 30, 1996 of $498.2 million increased
$42.1 million or 9.2% over the second quarter of 1995. For the first six months
of 1996, revenues were $989.0 million, up 9.9% over the first six months of
1995. The Company's revenues are from specialized managed health care services
in the areas of prescription drugs, mental health and substance abuse, workers'
compensation and disability management, and disease management and information
services.
The Company's net earnings for the second quarter of 1996 were $19.3 million as
compared with net earnings of $22.9 million during the second quarter of 1995.
Year to date net earnings of $38.4 million were 4.4% higher than the comparable
prior year period. The decline in net earnings during the three months ended
June 30, 1996 from the three months ended June 30, 1995 was due primarily to
reduced prescription drug product profit margins and decreases in disease
management and information services revenues in 1996.
This Quarterly Report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein which are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes, "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by the forward-looking
statements. These factors could include, but not be limited to, the impact of
increases in health care costs and utilization on expenses, the amount of
rebates from pharmaceutical manufacturers, competition, the loss of contracts or
failure to secure new contracts, the timing of obtaining new business, the
timing of cost reductions from the Company's re-engineering programs, government
regulation, potential legal liability resulting from errors and/or omissions in
providing services, reliance on data processing and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings.
9
<PAGE>
Value Health, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, Continued
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain consolidated financial data as
percentages of revenues for the three and six-month periods ended June 30, 1996
and 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage of Revenues Percentage of Revenues
for the three months for the six months
ended June 30, ended June 30,
- --------------------------------------------------------------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Prescription Drugs -
Services 57.2% 54.8% 58.6% 54.3%
Prescription Drugs -
Products 23.7 23.1 21.9 23.9
Mental Health 10.7 12.1 10.7 12.0
Workers Compensation 5.3 5.2 5.5 5.2
Disease Management
and Information Services 2.5 3.9 2.7 3.5
Other 0.3 0.3 0.3 0.5
Investment Income 0.3 0.6 0.3 0.6
- --------------------------------------------------------------------------------
Total Revenues 100.0 100.0 100.0 100.0
- --------------------------------------------------------------------------------
Expenses:
Costs of Services/(1)/ 61.9 61.8 63.4 61.1
Costs of Products/(2)/ 20.8 18.9 19.0 19.4
Selling, General &
Administrative 9.0 8.9 9.2 9.3
Depreciation &
Amortization 1.7 1.9 1.8 1.9
Interest Expense 0.0 0.1 0.0 0.1
Loss Contract 0.0 0.0 0.0 1.4
- --------------------------------------------------------------------------------
Total Expenses 93.4 91.6 93.4 93.2
- --------------------------------------------------------------------------------
Earnings Before Income
Taxes 6.6 8.4 6.6 6.8
Provision For Income Taxes 2.7 3.4 2.7 2.7
- --------------------------------------------------------------------------------
Net Earnings 3.9% 5.0% 3.9% 4.1%
================================================================================
================================================================================
/(1)/Costs Of Services As
A Percentage
Of Services Revenues 81.7% 81.3% 81.8% 81.4%
================================================================================
/(2)/Costs Of Products
As A Percentage
Of Products Revenues 87.8% 81.6% 86.6% 81.2%
================================================================================
</TABLE>
10
<PAGE>
Value Health, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, Continued
RESULTS OF OPERATIONS (Continued)
- ---------------------
Revenues increased by $42.1 million or 9.2% over the second quarter of 1995.
The addition of new customers increased revenues by $62.3 million, and
acquisitions increased revenues by $1.4 million. Revenues from existing
customers declined by $18.5 million and the sale of Lewin in 1996 caused second
quarter 1996 revenues to decline by $2.1 million from 1995. Other revenues
increased by $0.1 million and investment income declined by $1.2 million from
1995. Year to date revenues increased by $88.7 million or 9.9% over the first
six months of 1995. New customers and acquisitions increased revenues by $137.5
million and $5.9 million, respectively. Revenues from existing customers
declined by $48.8 million and the sale of Lewin-VHI, Inc. in May, 1996 caused
revenues to decline by $2.1 million. Other revenues and investment income
declined by $1.7 million and $2.2 million, respectively.
Prescription drug service revenues (from the retail pharmacy network and
institutional businesses) increased by $34.8 million or 13.9% over the second
quarter of 1995. The addition of new customers increased revenues by $49.7
million and revenues from existing customers declined by $15.0 million. Lost
business was partially offset by increases in enrollment and expansion programs
within existing accounts. Year to date prescription drug service revenues
increased by $90.9 million over the first six months of 1995. The addition of
new customers increased revenues by $110.2 million while revenues from existing
customers declined by $19.3 million.
Prescription drug product revenues (from the mail service pharmacy business)
for the second quarter increased by $12.5 million or 11.8% from the second
quarter of 1995. The addition of new customers increased revenues by $7.0
million and revenues from existing customers increased by $5.5 million. Year to
date prescription drug product revenues increased by $1.9 million over the first
six months of 1995. The addition of new customers increased revenues by $13.6
million while revenues from existing customers declined by $11.7 million.
Lost prescription drug service and product business occurred as a result of
certain loss contracts canceled by the Company as well as profitable contracts
canceled by certain customers. The Company expects revenue decreases from
existing prescription drug customers to continue during the third quarter of
1996, as compared with the third quarter of 1995, due to its decision to cancel
certain loss accounts and to resist rebids at excessively low margins. The
Company's joint venture with Baxter HealthCare Corporation commenced
operations in July, 1996 (See Item 5). Under generally accepted accounting
principles, joint venture revenue will not be consolidated with the Company's
revenue. Accordingly, beginning in the third quarter of 1996, reported
prescription drug service revenue from existing (institutional) customers will
decline from prior periods by approximately $20 million per quarter for the
remainder of 1996.
11
<PAGE>
Value Health, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, Continued
RESULTS OF OPERATIONS (Continued)
- ---------------------
Mental health revenues for the second quarter of 1996 decreased by $2.0 million
or 3.7% from the second quarter of 1995. New business added $3.5 million to
1996 revenues. Revenues from existing customers decreased by $5.5 million as a
result of enrollment reductions, lost business and price reductions. Year to
date mental health revenues declined by $2.5 million from the first six months
of 1995. The addition of new customers and acquisitions increased revenues by
$7.4 million and $3.1 million, respectively, over the first six months of 1995.
Revenues from existing customers declined by $13.0 million. The decrease was
due to enrollment reductions, lost business and price reductions.
Workers' compensation revenues for the second quarter of 1996 increased by $3.1
million or 13.1% over the second quarter of 1995. New business and acquisitions
added $1.2 million and $0.3 million, respectively, to 1996 revenues. Revenues
from existing customers increased by $1.6 million in 1996 primarily due to
enrollment increases. Year to date workers' compensation revenues increased by
$7.3 million over the first six months of 1995. New business and acquisitions
added $3.3 million and $0.6 million, respectively, to 1996 revenues. Revenues
from existing customers increased by $3.4 million primarily due to enrollment
increases.
Disease management and information services revenues for the second quarter of
1996 decreased by $5.1 million or 28.8% from the second quarter of 1995. New
customers, including disease management programs added $1.0 million to revenues.
Acquisitions added $1.1 million to 1996 revenues. Revenues from existing
customers decreased by $5.1 million, primarily due to enrollment reductions,
lost business and scheduled fee decreases in a certain major disease management
contract. Year to date disease management and information services revenues
declined by $5.0 million. New customers, including disease management programs
added $3.1 million to revenues. Acquisitions added $2.2 million and revenues
from existing customers declined by $8.2 million due to enrollment reductions,
lost business and scheduled fee decreases in a certain major disease management
contract. The sale of the assets of Lewin-VHI, Inc. in May, 1996 accounted for
$2.1 million of the revenue decrease. Revenues during the third and fourth
quarters in 1996 are expected to be lower than the comparable periods in 1995
due to the Lewin sale and scheduled fee decreases as discussed above.
Other revenues for the second quarter of 1996 increased by $0.1 million from
the second quarter of 1995, while year to date revenues declined by $1.7
million. The year to date decline was primarily due to the sale of National
Foot Care Program in 1995.
Investment income for the three-month and six-month periods ended June 30, 1996
declined by $1.2 million and $2.2 million, respectively, due primarily to lower
investment balances in 1996.
12
<PAGE>
Value Health, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, Continued
RESULTS OF OPERATIONS (Continued)
- ---------------------
The Company's costs of services consist of direct expenses of providing
specialty managed care and information services, including costs of retail
prescription drugs, mental health and substance abuse provider charges, salaries
and wages of medical management, customer service and claims processing
personnel and certain data processing costs. Costs of services for the three
months ended June 30, 1996 increased by $26.5 million or 9.4% over the second
quarter of 1995. Costs of services for the six months ended June 30, 1996
increased by $76.6 million or 13.9% over the first six months of 1995. Most of
these increases were due to an increased number of plan participants and
provider and drug price increases. As a percentage of service revenues, costs
of services for the second quarter of 1996 were 81.7% as compared with 81.3%
during the second quarter of 1995 and 81.8% for the six months ended June 30,
1996 as compared with 81.4% during the first six months of 1995. Despite a
competitive pricing environment, the Company has maintained a relatively stable
cost of services ratio during 1996 as compared with 1995. This is due primarily
to the Company's restructuring and re-engineering programs implemented during
1996, resistance to rebids at excessively low margins and the reserving for and
cancellation of certain loss contracts during 1995.
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 three months
ended June 30, 1996 increased by $17.5 million or 20.3% over the second quarter
of 1995. Costs of products for the first six months of 1996 increased by $13.1
million or 7.5% over the first six months of 1995. As a percentage of product
revenues, costs of products increased to 87.8% for the three months ended June
30, 1996, from 81.6% during the second quarter of 1995, and to 86.6% during the
six months ended June 30, 1996 from 81.2% during the six months ended June 30,
1995. The increase in the costs of products ratio is due to the competitive
pricing environment and the loss of certain profitable accounts since the second
quarter of 1995.
Selling, general and administrative expenses for the three months ended June
30, 1996, increased by $4.1 million or 10.0% over the second quarter of 1995.
Selling, general and administrative expenses for the first six months of 1996
increased by $7.8 million or 9.4% over the first six months of 1995. As a
percentage of revenues, selling, general and administrative expenses were 9.0%
for the second quarter of 1996 and 8.9% during the second quarter of 1995. For
the six months ended June 30, selling, general and administrative expenses as a
percentage of revenue was 9.2% in 1996 and 9.3% in 1995.
13
<PAGE>
Value Health, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, Continued
RESULTS OF OPERATIONS (Continued)
- ---------------------
Depreciation and amortization expense, which consists of the depreciation of
property and equipment and the amortization of purchased and internally
developed software, was $6.4 million for the three months ended June 30, 1996 as
compared to $7.0 million for the second quarter of 1995 and $13.7 million for
the six months ended June 30, 1996 and 1995. The reduction in depreciation and
amortization expense during the second quarter of 1996, was due to lower
property, plant and equipment balances resulting from the Company's
restructuring programs. Amortization of goodwill arising from purchase
acquisitions was $2.2 million for the three months ended June 30, 1996 as
compared to $1.7 million during the three months ended June 30, 1995 and $4.4
million for the six months ended June 30, 1996 as compared to $3.2 million
during the six months ended June 30, 1995. The higher level of 1996 goodwill
amortization was due to purchase acquisitions completed in 1995 and 1996,
together with earnout payments made in 1995 and 1996 in connection with the
acquisition of Community Care Network, Inc. in 1994. Such earnout payments are
recorded as additional goodwill. The Company expects depreciation, amortization
and goodwill amortization to continue to increase over prior year levels
throughout the remainder of 1996.
During the first quarter of 1995, the Company recorded $12.6 million of
estimated losses from its contract with the State of New Jersey. In 1996, this
contract was assigned to a third party.
The provision for income taxes in both years includes estimates of federal and
state income taxes. The effective tax rate for the three and six-month periods
ended June 30, was 41% in 1996 and 40% in 1995. The higher effective tax rate
in 1996 is due to an increase in the Company's effective state tax rate.
14
<PAGE>
Value Health, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, Continued
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has funded its operations and capital expenditures primarily from
the proceeds of stock issuances and internally generated cash. As of June 30,
1996, the Company had working capital of $265.3 million and unrestricted cash
and marketable securities of $112.0 million.
During the first quarter of 1996, the Company repurchased 959,998 shares of its
common stock in connection with the Medintell acquisition and an earnout from a
previous acquisition. The Company may consider additional repurchases of its
shares in the future, but has no specific plan to do so at this time.
Capital additions were approximately $22.7 million for the six months ended
June 30, 1996. Capital additions were primarily for computer hardware and
software, furniture, leasehold improvements and software development for
information services.
The Company's remaining contingent payments to CCN under its Acquisition
Agreement dated May 18, 1995, may be up to $73 million through the second half
of 1997 and are not expected to have a material impact on its financial
condition or results of operations.
The Company has announced its intent to invest up to $10 million over the next
two years in development expenses to expand its medicaid managed mental health
capability. The Company is also investing in new product development to serve
the cancer care market. The Company may in the future acquire certain
businesses or products complementary to its strategy. If the Company's
available cash and marketable securities are not sufficient to meet its
acquisition-related liquidity and funding requirements, then the Company will
pursue additional capital from a variety of sources, including but not limited
to equity and debt offerings, bank lines of credit and other sources. Although
the Company is confident that it will be able to obtain such additional
financing, there can be no assurance that the Company will be able to secure
financing or that its terms will be favorable to the Company.
Management believes that existing cash and marketable securities, together with
internally generated cash will be sufficient to meet the company's normal
operating requirements through 1996.
15
<PAGE>
Value Health, Inc.
PART II
OTHER INFORMATION
Item 1. - Legal Proceedings
- ---------------------------
The Company is involved in certain litigation as more fully described in its
Annual Report on Form 10-K for the year ended December 31, 1995. The Company
denies the allegations in those cases and intends to defend them vigorously. Any
potential losses cannot be estimated at this time.
Item 4. - Submission of Matters to a Vote of Security-Holders
- -------------------------------------------------------------
The Company held its annual meeting of stockholders on April 30, 1996.
<TABLE>
<CAPTION>
Election of Directors For Against Abstentions
- ----------------------- --- ------- -----------
<S> <C> <C> <C>
Patricelli 39,908,713 876,360
Shulman 39,908,540 876,533
McBride 39,909,105 875,968
McDonnell 39,912,162 872,911
McNerney 39,962,828 822,245
Moorhead 39,909,205 875,868
Newman 39,960,436 824,637
Vogelstein 39,908,232 876,841
Waldron 39,905,666 879,407
Ratification of
Selection of Auditors 40,126,887 169,102 489,084
- -----------------------
</TABLE>
Item 5. - Other Information
- ---------------------------
On May 13, 1996, the Company completed the sale of all the operating assets of
the Company's Lewin-VHI, Inc. subsidiary to Quintiles Transnational Corporation.
In July, 1996, the Company's joint venture with Baxter Healthcare Corporation to
provide medication management services to hospitals and other health-care
facilities commenced operations. The Company contributed substantially all of
the operating assets and contracts of its HPI Health Care Services, Inc.
subsidiary to the joint venture.
Item 6. - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibit 11 - Schedule of Computation of Net Earnings Per Share
(b) No reports on Form 8-K were filed during the three-month period ended June
30, 1996.
16
<PAGE>
Value Health, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 12, 1996 Value Health, Inc.
By: \s\ Robert E. Patricelli
------------------------
Robert E. Patricelli
Chairman, President
and Chief Executive Officer
DATE: August 12, 1996 By: \s\ David M. Wurzer
-------------------
David M. Wurzer
Senior Vice President
and Chief Financial Officer
(Principal Financial
and Accounting Officer)
17
<PAGE>
Value Health, Inc.
EXHIBIT INDEX
Exhibit Number and Description Page
- ------------------------------ ----
Exhibit 11 - Schedule of Computation of
Net Earnings Per Share
Exhibit 27 - Financial Data Schedule
18
<PAGE>
Value Health, Inc.
EXHIBIT 11 - SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Earnings $19,273,000 $22,870,000 $38,367,000 $36,765,000
================================================================================
Weighted Average Number of
Shares Outstanding During The
Period 54,290,070 52,969,826 54,493,756 52,909,508
Add:
Common Stock Equivalent
Shares Represented By
Employer Stock
Options Granted
Related To Stock Plans 637,034 1,405,403 532,466 1,337,092
- --------------------------------------------------------------------------------
Weighted Average Number Of
Common Shares
Used In The Computation
Of Net Earnings Per Share 54,927,104 54,375,229 55,026,222 54,246,600
================================================================================
Net Earnings Per Share $0.35 $0.42 $0.70 $0.68
================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 107,757 74,311
<SECURITIES> 2,049 25,514
<RECEIVABLES> 337,015 321,443
<ALLOWANCES> 17,137 17,171
<INVENTORY> 30,285 30,052
<CURRENT-ASSETS> 549,496 537,441
<PP&E> 188,607 203,712
<DEPRECIATION> 69,633 71,242
<TOTAL-ASSETS> 919,145 904,035
<CURRENT-LIABILITIES> 284,235 316,411
<BONDS> 0 0
0 0
0 0
<COMMON> 502,833 467,325
<OTHER-SE> 126,641 113,719
<TOTAL-LIABILITY-AND-EQUITY> 919,145 904,035
<SALES> 216,903 214,993
<TOTAL-REVENUES> 988,971 900,289
<CGS> 187,784 174,641
<TOTAL-COSTS> 814,340 724,574
<OTHER-EXPENSES> 109,377 100,332
<LOSS-PROVISION> 0 12,600
<INTEREST-EXPENSE> 241 1,134
<INCOME-PRETAX> 65,013 61,649
<INCOME-TAX> 26,646 24,884
<INCOME-CONTINUING> 38,367 36,765
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 38,367 36,765
<EPS-PRIMARY> .70 .68
<EPS-DILUTED> .70 .68
</TABLE>
