<PAGE>
FORM 10-QFORM 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 March 31, 1997
--------------
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
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VALUE HEALTH, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1194838
- ------------------------------------- --------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Waterville Road, Avon, Connecticut 06001
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 678-3400
--------------
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 May 7,
1997 was 54,640,727.
Exhibit Index located on Page 18.
<PAGE>
VALUE HEALTH, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997
AND DECEMBER 31, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
ENDED MARCH 31, 1997 AND 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
VALUE HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
(in thousands, except par value and share amounts)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
(unaudited) (audited)
-------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 98,941 $ 85,284
Restricted cash 2,089 4,030
Short-term investments 89 88
Accounts receivable (net of allowance for doubtful accounts of
$19,552 and $22,120, respectively) 380,134 363,320
Inventories 13,254 27,198
Prepaid expenses and other current assets 15,695 26,365
Deferred taxes 44,237 43,568
---------- ----------
Total current assets 554,439 549,853
---------- ----------
Fixed assets:
Land 3,519 3,513
Buildings 14,653 15,107
Furniture and fixtures 21,690 19,053
Equipment and software 187,089 168,728
Leasehold improvements 16,553 13,388
---------- ----------
243,504 219,789
Less accumulated depreciation and amortization (81,960) (74,216)
---------- ----------
Total fixed assets 161,544 145,573
---------- ----------
Long-term investments 5,696 6,022
Goodwill, net 334,026 337,558
Other assets 62,887 62,218
---------- ----------
402,609 405,798
---------- ----------
Total assets $1,118,592 $1,101,224
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to providers $ 197,785 $ 193,219
Accounts payable and accrued expenses 43,179 41,131
Due to former shareholder's of affiliates 58,609 64,009
Merger related expense 4,830 8,387
Accrued loss contracts 320 5,378
Restructuring reserve 12,639 16,043
Other liabilities 17,948 24,188
---------- ----------
Total current liabilities 335,310 352,355
---------- ----------
Capital lease obligations, less current portion 922 956
Borrowings under line of credit 97,500 87,500
Other liabilities 4,580 3,515
---------- ----------
Total long-term liabilities 103,002 91,971
---------- ----------
Total liabilities 438,312 444,326
---------- ----------
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 55,688,210 and 55,469,124 shares, respectively 509,877 505,649
Retained earnings 197,525 178,279
Treasury stock, at cost, 1,056,398 shares (27,030) (27,030)
Unrealized loss on securities available-for-sale, net of tax (92) -
---------- ----------
Total stockholders' equity 680,280 656,898
---------- ----------
Total liabilities and stockholders' equity $1,118,592 $1,101,224
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
VALUE HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
for the three months ended
March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES:
Prescription drugs - services $ 280,991 $ 294,875
Prescription drugs - products 97,188 98,849
Mental health 56,050 52,285
Workers' compensation 33,895 27,648
Disease management and information services 7,391 14,134
Other 1,800 1,389
Investment income 1,185 1,580
------------ ------------
Total revenues 478,500 490,760
------------ ------------
EXPENSES:
Costs of services 297,050 318,171
Costs of products 87,614 84,177
Selling, general and administrative 47,946 46,439
Depreciation and amortization 8,988 7,344
Amortization of goodwill 2,906 2,187
Interest expense 1,384 80
------------ ------------
Total expenses 445,888 458,398
------------ ------------
Earnings before income taxes 32,612 32,362
Provision for income taxes 13,366 13,268
------------ ------------
NET EARNINGS $ 19,246 $ 19,094
============ ============
Weighted average common shares
and common share equivalents outstanding 55,563 55,125
============ ============
NET EARNINGS PER SHARE $ 0.35 $ 0.35
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
VALUE HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1997 and 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 19,246 $ 19,094
------------- ------------
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 8,988 7,344
Provision for doubtful accounts and notes receivable 11 1,792
Deferred taxes (669) 5,450
Tax effect of certain stock option transactions 400 2,500
Amortization of goodwill 2,906 2,187
Amortization of deferred revenue (4,765) (4,788)
Amortization of investment premiums (3) 60
Loss on sales of securities 9 -
Change in assets and liabilities:
(Increase) decrease in assets:
Restricted cash 1,941 1,000
Accounts receivable (16,825) (14,353)
Inventories 13,944 6,624
Other current and non-current assets (335) (3,977)
Increase (decrease) in liabilities:
Payable to providers 4,566 (4,229)
Accounts payable and accrued expenses (381) (65)
Merger-related expense (3,557) (5,690)
Accrued contract losses (5,058) (5,817)
Restructuring reserve (3,180) (2,940)
Due to former shareholder's of affiliates (5,400) (400)
Income taxes payable 11,608 5,791
Other Liabilities (1,301) 7,153
------------- ------------
Total adjustments 2,899 (2,358)
------------- ------------
Net cash provided by operating activities 22,145 16,736
------------- ------------
Cash flows from investing activities:
Capital expenditures (25,889) (10,279)
Proceeds from sale of fixed assets - 6,536
Purchase of subsidiaries and assets, net of cash acquired - (1,514)
Sale of assets of subsidiary, net of cash sold 4,235 -
Purchases of securities - (14,172)
Proceeds from maturities and sales of investment securities (166) 24,632
------------- ------------
Net cash provided by (used in) investing activities (21,820) 5,203
------------- ------------
Cash flows from financing activities:
Proceeds from exercise of common stock options 3,837 7,709
Advances under financing agreements - -
Collections under financing agreements - -
Payments for common stock repurchase - (25,353)
Borrowings under line of credit 10,000 -
Payments of long-term debt and capital lease obligations (505) (324)
------------- ------------
Net cash provided by (used in) financing activities 13,332 (17,968)
------------- ------------
Net increase in cash and cash equivalents 13,657 3,971
Cash and cash equivalents at beginning of period 85,284 68,505
------------- ------------
Cash and cash equivalents at end of period $ 98,941 $ 72,476
============= ============
</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 periods ended March 31, 1997 and 1996, 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.
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,
1996. Accordingly, footnote disclosures which would substantially
duplicate the disclosures contained in the Company's December 31, 1996
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/A (Amendment No. 3) for the year ended December 31,
1996.
2. Merger
On January 15, 1997, the Company entered into a definitive Agreement and
Plan of Merger (the "Merger Agreement") involving a stock-for-stock
transaction with Columbia/HCA Healthcare Corporation ("Columbia"), a New
York Stock Exchange company and the largest provider of healthcare services
in the United States. On April 14, 1997, the Company entered into an
amended and restated Merger Agreement with Columbia providing for a merger
in which each outstanding share of Value Health common stock would be
exchanged for $20.50 in cash. Consummation of the Merger is subject to
satisfaction of certain conditions, including regulatory approvals and
approval by shareholders of Value Health. The Value Health shareholder
meeting date has been scheduled for June 18, 1997. In the event of
termination under specified conditions, Columbia may be entitled to receive
a fee of $45 million from the Company.
3. Investments:
Investments in debt and equity securities as of March 31, 1997 and December
31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED AGGREGATE
MARCH 31, 1997 COST GAIN LOSS FAIR VALUE
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government and
Agencies $5,471,000 $1,000 $ (10,000) $5,462,000
Equity Securities 470,000 - (147,000) 323,000
- ----------------------------------------------------------------------------
$5,941,000 $1,000 $(157,000) $5,785,000
============================================================================
</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 $88,000 $5,383,000 $5,471,000
Aggregate Fair Value $89,000 $5,373,000 $5,462,000
----------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of available-for-sale securities were $166,000 and
$19,590,000 for the three months ended March 31, 1997 and 1996,
respectively. Realized losses from these sales were $9,000 and $0 for the
three months ended March 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED AGGREGATE
DECEMBER 31, 1996 COST GAIN LOSS FAIR VALUE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government and
Agencies $5,468,000 $13,000 $ (5,000) $5,476,000
Equity Securities 644,000 -- (10,000) 634,000
-------------------------------------------------------------------------
$6,112,000 $13,000 $ (15,000) $6,110,000
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
DEBT
MATURITIES: LESS THAN ONE YEAR ONE TO FIVE YEARS TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C>
Amortized Cost $88,000 $5,380,000 $5,468,000
Aggregate Fair Value $88,000 $5,388,000 $5,476,000
-------------------------------------------------------------------------
</TABLE>
4. Merger Related Expense:
The following table is a reconciliation of the accrued merger related
expense for the three months ended March 31, 1997.
<TABLE>
<CAPTION>
ASSET
WRITE-OFFS AND
COSTS OF REDUCTION OF
TRANSACTION COMBINING HEADCOUNT
(IN THOUSANDS) COSTS OPERATIONS AND CAPACITY TOTAL
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<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 210 $ -- $ 8,177 $8,387
Expenses Recorded -- -- -- --
Payments and Write-Offs (210) -- (3,347) (3,557)
-------------------------------------------------------------------------------------
Balance at March 31, 1997 $ -- $ -- $ 4,830 $4,830
=====================================================================================
</TABLE>
7
<PAGE>
VALUE HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. Restructuring Reserve:
The following table is a reconciliation of the restructuring reserve for
the three months ended March 31, 1997.
<TABLE>
<CAPTION>
LEASE VACATION
SEVERANCE AND AND OTHER
(IN THOUSANDS) RELATED BENEFITS ASSOCIATED COSTS TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 6,114 $ 9,929 $16,043
Expenses Recorded -- -- --
Payments and Write-Offs (1,773) (1,631) (3,404)
------------------------------------------------------------------------------------
Balance at March 31, 1997 $ 4,341 $ 8,298 $12,639
====================================================================================
</TABLE>
6. Supplemental Disclosures of Cash Flow Information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------
<S> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest $1,314,000 $ 70,000
Income Taxes $2,085,000 $ 2,082,000
---------------------------------------------------------------------
NONCASH TRANSACTIONS:
Common Stock Issued In Acquisitions $ - $23,065,000
Fixed Asset Writeoffs from Merger
and Restructuring $ 225,000 $ 5,738,000
---------------------------------------------------------------------
</TABLE>
8
<PAGE>
VALUE HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. Borrowings Under Line of Credit
On August 21, 1996, the Company entered into a five-year, $140 million
revolving credit agreement with a bank group. The agreement requires an
annual facility fee of .10% to .20%, as defined in the agreement.
Borrowings under the agreement bear interest based on the prime rate, the
federal funds rate, or LIBOR, as defined in the agreement. The Company has
the option to select either interest pricing method. The agreement
requires compliance with certain financial covenants, all of which the
Company has complied with as of March 31, 1997. At March 31, 1997, the
Company had borrowed $97.5 million under this agreement.
On April 30, 1997, the Company increased its borrowings under this
agreement to $140 million in order to fund it's earn-out payment on the
Community Care Network acquisition. Also, on May 6, 1997, the Company
entered into an agreement with Fleet Bank allowing it to borrow up to an
additional $35 million through June 30, 1997.
8. Accounting for Joint Ventures
The Company's investments in joint ventures are accounted for under the
equity method. The investment in joint ventures is included in other
assets and is increased/decreased by the Company's equity interest in
earnings/losses of the joint ventures. The balances at March 31, 1997 and
December 31, 1996 were $18,936,000 and $17,006,000, respectively.
9. Subsequent Events
In April, 1997 the Company funded redemption of Allegiance Corporation's
interest in its joint venture with Allegiance , for approximately $23.8
million in cash plus a note payable for $1.2 million.
10. Legal Proceedings
The Company is involved in certain litigation as more fully described in
its Annual Report on Form 10K/A (Amendment No. 3) for the year ended
December 31, 1996. The Company denies the allegations in those cases and
intends to defend them vigorously and does not believe the ultimate
resolution will have a material effect on its financial position, results
of operations or cash flows.
The Company is involved in other litigation arising in the normal course of
business. The Company believes that resolution 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,
notwithstanding possible insurance recoveries.
9
<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 benefit
programs to large corporations, insurance carriers, managed care organizations,
and federal, state, and local governments. The Company's businesses include:
pharmacy benefit management; mental health and substance abuse management;
workers' compensation, disability and group health management; and disease
management. Its programs provide services to more than 78 million people
nationwide.
On January 15, 1997, the Company entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement") involving a stock-for-stock transaction with
Columbia/HCA Healthcare Corporation ("Columbia"), a New York Stock Exchange
company and the largest provider of healthcare services in the United States. On
April 14, 1997, the Company entered into an amended and restated Merger
Agreement with Columbia providing for a merger in which each outstanding share
of Value Health common stock would be exchanged for $20.50 in cash. Consummation
of the Merger is subject to satisfaction of certain conditions, including
regulatory approvals and approval by shareholders of Value Health. The Value
Health shareholder meeting date has been scheduled for June 18, 1997. In the
event of termination under specified conditions, Columbia may be entitled to
receive a fee of $45 million from the Company.
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 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 included in Other on the consolidated
statements of operations.
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,
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.
10
<PAGE>
VALUE HEALTH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
- ---------------------
Revenues for the three months ended March 31, 1997 of $478.5 million decreased
$12.3 million or 2.5% from the first quarter of 1996. Earnings before income
taxes were $32.6 million during the first quarter of 1997 as compared with $32.4
million during the first quarter of 1996.
The following table sets forth certain consolidated financial data as
percentages of revenues for the three month period ended March 31, 1997 and
1996.
<TABLE>
<CAPTION>
----------------------------------------------------------------
PERCENTAGE OF REVENUES
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------------------------------------------
1997 1996
----------------------------------------------------------------
<S> <C> <C>
REVENUES:
Prescription Drugs - Services 58.7% 60.1%
Prescription Drugs - Products 20.3 20.1
Mental Health 11.7 10.7
Workers' Compensation 7.1 5.6
Disease Management and
Information Services 1.5 2.9
Other 0.4 0.3
Investment Income 0.3 0.3
----------------------------------------------------------------
TOTAL REVENUES 100.0% 100.0%
----------------------------------------------------------------
EXPENSES:
Costs of Services(1) 62.1% 64.8%
Costs of Products(2) 18.3 17.2
Selling, General & Administrative 10.0 9.5
Depreciation & Amortization 1.9 1.5
Amortization of Goodwill 0.6 0.4
Interest Expense 0.3 0.0
----------------------------------------------------------------
TOTAL EXPENSES 93.2% 93.4%
-----------------------------------------------------------------
Earnings Before Income Taxes 6.8% 6.6%
Provision For Income Taxes 2.8% 2.7%
-----------------------------------------------------------------
NET EARNINGS 4.0% 3.9%
=================================================================
=================================================================
(1) Costs Of Services As A Percentage
Of Services Revenues 78.5% 81.8%
=================================================================
(2) Costs Of Products As A Percentage
Of Products Revenues 90.1% 85.2%
=================================================================
</TABLE>
11
<PAGE>
VALUE HEALTH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
Total revenues during the first quarter of 1997 decreased by $12.3 million from
1996. The addition of new customers increased revenues by $29.3 million in 1997
and revenues from existing customers declined by $17.7 million in 1997 from
1996. Acquisitions accounted for $10.7 million of 1997 revenue growth. As
discussed more fully below, revenues from the Company's joint ventures are not
consolidated. Accordingly, reported prescription drug service revenues were
reduced by $21.0 million as compared to 1996 as a result of the Company entering
into the joint venture with Allegiance in July 1996. The sale of the assets of
Lewin-VHI and certain other non-core operations in 1996 caused 1997 revenues to
decline by $13.6 million. Other revenues increased by $0.4 million and
investment income declined by $0.4 million, as compared with 1996.
Prescription drug service revenues (from the retail pharmacy network and
institutional businesses) decreased by $13.9 million or 4.7% from the first
quarter of 1996. As discussed above, joint venture accounting treatment caused
1997 revenues to decline by $21.0 million from 1996.The addition of new
customers increased revenues by $16.8 million and revenues from existing
customers declined by $4.7 million, due primarily to certain loss contracts
canceled by the Company and due to contracts canceled by customers. The decline
was partially offset by $5.0 million in fees received in connection with the
early termination of a certain data services management contract. Also, the sale
of the assets of Diagnostek Pharmacy, Inc. in December, 1996 caused 1997
revenues to decline by $5.0 million compared to the prior year first quarter.
Prescription drug product revenues (from the mail service pharmacy business) for
the first quarter of 1997 decreased by $1.7 million or 1.7% from the first
quarter of 1996. The addition of new customers increased revenues by $0.6
million while revenues from existing customers declined by $2.3 million, due
primarily to lost business. Increased utilization among existing customers
partially offset lost business.
Mental health revenues for the first quarter of 1997 increased by $3.8 million
or 7.2% over the first quarter of 1996. New business added $10.5 million to 1997
revenues. Revenues from existing customers decreased by $6.7 million as a result
of lost business and price reductions.
Workers' compensation revenues for the first quarter of 1997 increased by $6.2
million or 22.6% over the first quarter of 1996. The acquisition of Medview
Services, Inc. added $10.7 million to 1997 revenues. Revenues from existing
customers decreased by $2.8 million in 1997. The sale and closure of certain
non-core businesses in 1996 accounted for revenue decreases of $2.3 million in
1997. New business added $0.6 million to 1997 revenues.
Disease management and information services revenues for the first quarter of
1997 decreased by $6.7 million or 47.7% from the first quarter of 1996. New
customers added $0.9 million to revenues. Revenues from existing customers
decreased by $1.3 million, primarily due to enrollment and rate reductions. The
sale of the assets of Lewin-VHI, Inc. in May, 1996 caused revenues to decrease
by $5.4 million in 1997. The sale of the assets of Value Health Management, Inc.
in January, 1997 caused revenues to decline by $0.9 million in 1997.
Other revenues for the first quarter of 1997 increased by $0.4 million from the
first quarter of 1996.
12
<PAGE>
VALUE HEALTH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
Investment income for the three-month period ended March 31, 1997 declined by
$0.4 million from 1996 due primarily to lower investment balances in 1997.
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 March 31, 1997 decreased by $21.1 million or 6.6% from the first
quarter of 1996. Most of the decrease is attributed to costs of services for the
Company's joint venture with Allegiance that are not consolidated in 1997. As a
percentage of service revenues, costs of services for the first quarter of 1997
were 78.5% as compared with 81.8% during the first quarter of 1996. The decrease
in the costs of services ratio in 1997 was due to the expiration of certain
unprofitable or low margin pharmacy benefit management contracts and lower
direct expenses resulting from the Company's restructuring and re-engineering
programs implemented in 1996.
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
March 31, 1997 increased by $3.4 million or 4.1% from the first quarter of 1996.
As a percentage of product revenues, costs of products increased to 90.1% for
the three months ended March 31, 1997 from 85.2% during the first quarter of
1996. The increase in the costs of products ratio in 1997 is due to the loss of
certain profitable accounts since early 1996 and increased per unit ingredient
costs in 1997.
Selling, general and administrative expenses for the three months ended March
31, 1997, increased by $1.5 million or 3.2% over the first quarter of 1996. As a
percentage of revenues, selling, general and administrative expenses increased
to 10.0% for the first quarter of 1997 from 9.5% during the first quarter of
1996. The increase in the ratio in 1997 is due primarily to additional spending
on infrastructure to support future growth.
Depreciation and amortization expense, which consists of the depreciation of
property and equipment and the amortization of purchased and internally
developed software, was $9.0 million during the first three months of 1997 as
compared to $7.3 million during the first three months of 1996. The higher level
of depreciation and amortization in 1997 was attributable to increased
investment in fixed assets and computer software to support growth in the
Company's business.
13
<PAGE>
VALUE HEALTH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------
Amortization of goodwill arising from acquisitions was $2.9 million in the first
three months of 1997 as compared with $2.2 million during the first quarter of
1996. The higher level of amortization in 1997 was due to additional goodwill in
connection with the acquisition of Medview Services, Inc. in November 1996 and
the earnout payments made in 1996 and 1997 in connection with the acquisition of
Community Care Network, Inc. in 1994. The Company determines the amortization
period of intangible assets by estimating the periods benefited by the
intangible and by comparing these periods to those used on comparable
transactions within the managed health care industry. The amortization period is
calculated on a transaction specific basis after considering legal, regulatory
and contractual provisions that may limit the useful life and determining if
obsolescence, demand or competition will affect the usefulness of the
intangibles purchased.
Interest expense consists of interest on capitalized leases and borrowings under
the Company's line of credit agreement, and was $1.4 million during the first
quarter of 1997 as compared with $80,000 during the first quarter of 1996. The
increase in 1997 is due primarily to drawdowns under the line of credit
agreement beginning in November, 1996 to fund the Medview Services, Inc.
acquisition.
The provision for income taxes in both years includes estimates of federal and
state income taxes. The effective tax rate for the three months ended March 31,
1997 and 1996 was approximately 41%.
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, bank borrowings and internally generated cash.
On August 21, 1996, the Company entered into a five-year $140 million revolving
credit agreement with a bank group. In addition, on May 6, 1997, the Company
entered into an agreement with Fleet Bank to borrow up to $35 million through
June 30, 1997. As of March 31, 1997, the Company had working capital of $219.1
million and unrestricted cash and marketable securities of $104.7 million.
Capital additions were approximately $25.9 million for the three months ended
March 31, 1997. Capital additions were primarily for computer hardware and
software, furniture and leasehold improvements.
In April, 1997 the Company funded redemption of Allegiance Corporation's
interest in its joint venture with Allegiance, for approximately $23.8 million
in cash plus a note payable for $1.2 million.
On April 30, 1997, the Company completed its acquisition of Community Care
Network, Inc. by making contingent payments of approximately $55 million. To
fund these payments, the Company borrowed $52.5 million under its revolving
credit agreement, bringing the total outstanding under that agreement to $140
million on April 30, 1997.
Management believes that existing cash and marketable securities, cash from
operations and amounts available under its credit arrangements, together with
internally generated cash will be sufficient to meet the company's normal
operating requirements.
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 10K/A (Amendment No. 3) for the year ended December 31,
1996. The Company denies the allegations in those cases and intends to defend
them vigorously and does not believe the ultimate resolution will have a
material effect on its financial position, results of operations or cash flows.
The Company is involved in other litigation arising in the normal course of
business. The Company believes that resolution 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, notwithstanding
possible insurance recoveries.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibit 11 - Schedule of Computation of Net Earnings Per Share
(b) A report on Form 8-K was filed on January 28, 1997 in connection with the
Company's Agreement and Plan of Merger dated as of January 15, 1997 with
Columbia/HCA Healthcare Corporation.
The Company also filed a report on Form 8-K on April 16, 1997 in connection
with the Company's Amended and Restated Agreement and Plan of Merger, dated
as of April 14, 1997 with Columbia/HCA Healthcare Corporation.
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: May 14, 1997 VALUE HEALTH, INC.
By: /s/ Robert E. Patricelli
-----------------------------------
Robert E. Patricelli
Chairman, President
and Chief Executive Officer
DATE: May 14, 1997 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
- ------------------------------
EXHIBIT 11 SCHEDULE OF COMPUTATION OF
NET EARNINGS PER SHARE
18
<PAGE>
VALUE HEALTH, INC.
EXHIBIT 11 - SCHEDULE OF COMPUTATION OF NET EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------------
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
NET EARNINGS $19,246,000 $19,094,000
====================================================================
Weighted Average Number Of Shares
Outstanding During The Period 54,540,078 54,697,443
Add:
Common Stock Equivalent Shares
Represented By Employer Stock
Options Granted Related To
Stock Plans 1,022,505 427,898
--------------------------------------------------------------------
Weighted Average Number Of Common
Shares Used In The Computation Of
Net Earnings Per Share 55,562,583 55,125,341
====================================================================
NET EARNINGS PER SHARE $ 0.35 $ 0.35
====================================================================
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 101,030 89,314
<SECURITIES> 89 88
<RECEIVABLES> 399,686 385,440
<ALLOWANCES> 19,552 22,120
<INVENTORY> 13,254 27,198
<CURRENT-ASSETS> 551,689 549,853
<PP&E> 243,504 219,789
<DEPRECIATION> 81,960 74,216
<TOTAL-ASSETS> 1,115,842 1,101,224
<CURRENT-LIABILITIES> 335,310 352,355
<BONDS> 0 0
0 0
0 0
<COMMON> 509,877 505,649
<OTHER-SE> 170,403 151,249
<TOTAL-LIABILITY-AND-EQUITY> 1,115,842 1,101,224
<SALES> 97,188 98,849
<TOTAL-REVENUES> 478,500 490,760
<CGS> 87,614 84,177
<TOTAL-COSTS> 384,664 402,348
<OTHER-EXPENSES> 59,840 55,970
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,384 80
<INCOME-PRETAX> 32,612 32,362
<INCOME-TAX> 13,366 13,268
<INCOME-CONTINUING> 19,246 19,094
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,246 19,094
<EPS-PRIMARY> .35 .35
<EPS-DILUTED> .35 .35
</TABLE>
