<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1935
For the fiscal year ended DECEMBER 31, 1996
-----------------
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 (IRS Employer Identification No.)
incorporation or organization)
22 Waterville Road, Avon, Connecticut 06001
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 678-3400
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Without Par Value
Preferred Stock Purchase Rights, $0.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [_]
The Aggregate market value, as of March 3, 1997, of Common Stock held by non-
affiliates of the registrant: $974,526,399 based on the last reported sale
price on the New York Stock Exchange.
The Number of shares of Common Stock, without par value, outstanding as of March
3, 1997: 54,618,815.
<PAGE>
VALUE HEALTH, INC.
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I
Page
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<S> <C> <C>
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............. 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................10
Item 6. Selected Financial Data.........................................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................11
Item 8. Financial Statements and Supplementary Data.....................19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................48
PART III
Item 10. Directors and Executive Officers of the Registrant..............49
Item 11. Executive Compensation..........................................51
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................................61
Item 13. Certain Relationships and Related Transactions..................64
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.........................................64
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
- ------- --------
Value Health, Inc. ("Value Health" or the "Company") provides specialty
managed health care benefit programs and health care information services. The
Company's specialty managed health care benefit programs are designed to manage
costs and maintain quality in selected health care sectors that are of
particular concern to employers and other benefit plan sponsors due to their
size, rapid cost escalation and potential for overutilization. These areas
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 over 78 million people.
Value Health was incorporated in Delaware in March 1987 for the purpose of
acquiring and developing specialty managed health care businesses meeting its
strategic objectives. From 1987 to 1996, the company made over 20 acquisitions
of companies in the pharmacy benefit management, mental health and substance
abuse, workers' compensation and health care information services fields.
On January 15, 1997, the Company entered into a definitive Agreement and Plan
of Merger (the "Merger Agreement") 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. In the event of termination under specified
conditions, Columbia may be entitled to receive a fee of $45 million from the
Company. As a result of the planned Merger with Columbia, the Company canceled
its plans to spin off its ValueRx subsidiary and canceled its stock repurchase
program.
The principal operating subsidiaries of the Company are ValueRx, Value
Behavioral Health ("VBH"), Community Care Network ("CCN") and Value Health
Sciences ("VHS").
This Annual Report on Form 10-K/A 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, competition, the loss of
contracts or failure to secure new contracts, 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.
1
<PAGE>
PRODUCTS AND SERVICES
PHARMACY BENEFITS AND MEDICATION MANAGEMENT
- -------------------------------------------
The Company offers the following prescription drug cost and quality management
programs through its ValueRx subsidiary.
INTEGRATED PHARMACY SERVICES.
-----------------------------
The Company, through its contracted retail network and its owned mail pharmacy
dispensing centers, markets point-of-service integrated pharmacy benefit
management programs to corporations, labor unions, government entities and other
benefit plan sponsors, including health maintenance and preferred provider
organizations ("HMOs" and "PPOs"). Retail network revenues are reported in
prescription drug services and mail pharmacy dispensing revenues are reported in
prescription drug products on the statement of operations.
MANAGED PRESCRIPTION DRUG BENEFIT PLANS.
----------------------------------------
The Company's outpatient prescription drug plans incorporate benefit plan
design services, a network of retail pharmacies, clinically-based utilization
review, claims processing, a mail service prescription option and participant
prescription drug support services.
ValueRx's prescription drug preferred provider organization includes a
national network of chain and independent pharmacies. As part of its
prescription drug benefit programs, Value Health employs specialized proprietary
claims administration software which it believes processes claims at a lower
cost than general medical claims systems used by insurance companies and Third
Party Administrators ("TPAs"). The system links most network pharmacies through
on-line terminals. The Company gathers information through its software
programs to monitor its customers' drug benefit plans. The Company also
provides reports to customers regarding drug utilization, costs and other
information.
Under certain 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 ("AWP") plus a claim processing fee and a fee for specific
clinical services provided, such as formulary management. In such arrangements,
the Company bears no financial risk for increases in the number of prescriptions
because it has already negotiated costs for the medications. In some of these
arrangements, however, the Company's fees are subject to adjustment depending
upon performance as measured against targeted criteria. Under certain other
ValueRx prescription drug benefit plans, the Company agrees to provide
prescription drug benefits for a fixed monthly payment per employee. Under such
arrangements, the Company is responsible for paying all approved prescription
drug claims and bears the risk/benefit that claims may vary from the amount of
fixed monthly payments.
The Company's mail service prescription option is integrated with its managed
prescription drug benefit plans. Mail prescription service is typically
provided 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. Mail service dispensing centers are
located in Albuquerque, New Mexico; Bensalem, Pennsylvania and Troy, New York.
ValueRx is generally compensated by health benefit plan sponsors for its mail
pharmacy services on a charge per prescription basis at a rate discounted from
AWP, plus a dispensing fee, less a co-payment and/or deductible paid by the plan
participants.
2
<PAGE>
INSTITUTIONAL PHARMACY SERVICES.
--------------------------------
Through its 50-50 joint venture with the Allegiance Corporation, the Company
provides contract pharmacy management services to health care provider
organizations.
The joint venture provides contract pharmacy services to hospitals, long-term
care facilities, and other health provider institutions. The joint venture
relieves hospital administrators of daily responsibility for pharmacy operations
and provides customers with a more efficient process for dispensing,
administering, and controlling pharmaceuticals. In addition, the joint venture
markets a variety of specialized pharmaceutical and therapeutic education
courses for physicians, pharmacists and nurses, and performs drug utilization
evaluation and review studies.
The joint venture is compensated for its contract pharmacy management services
under three different pricing methods. "Service Charge" methods provide for
billing to clients at a stipulated rate for each medication or pharmacy service
provided. Under "Management Fee" methods, the Company provides pharmacy
management to clients on a fixed fee or cost-plus basis. "Capitated" methods
provide for billing to clients at rates pre-determined under a formula which
specifies a "cap" or ceiling cost to clients based on a per-patient-day or
diagnosis rate or on a formula for certain patient types (e.g., Medicare,
Medicaid, Blue Cross), with the company bearing the risk/benefit to the extent
that pharmacy service costs vary from the cap.
COMPUTER-BASED MEDICATION MANAGEMENT SYSTEMS AND SERVICES.
----------------------------------------------------------
Through its Medintell subsidiary, the Company is developing computer-based
medication management systems and services for institutional pharmacies and
health care providers. Its systems are primarily designed for hospitals and
provide medication management capabilities to help ensure the correct drug is
given to each patient and at the proper time. Medintell's products will provide
the medical institution marketplace with unique, integrated pharmaceutical care
systems which are intended to provide medical enterprises with the means to
improve their pharmaceutical care.
PRESCRIPTION DRUG UTILIZATION REVIEW (DURBASE).
-----------------------------------------------
The Company's DURbase product is a proprietary computerized drug claims review
program which identifies people at high risk for drug-induced illness. DURbase
was developed with over fifteen years of research and operation, and
incorporates a database of more than five million patient records which is
updated frequently with information from the 144 million medical and
prescription claims reviewed annually by the Company. DURbase applies over 200
clinically-based screens to review drug claims and to identify patients at high
risk for drug-induced illness. When such patients are identified, ValueRx
communicates by alert letter with the prescribing physicians.
The DURbase product is provided as an integral part of ValueRx's prescription
drug benefit plans, and as a freestanding product charged for on a per-
prescription or per-member basis.
PHYSICIAN PRESCRIPTION PROFILING AND EDUCATION.
-----------------------------------------------
Value Health provides programs designed to achieve cost effective prescribing
by physicians through the profiling of prescription drug claims to identify
physicians who appear to use improper prescribing practices, followed by
education, or "counter detailing" of the identified physicians on the use of
lower cost drug therapies.
3
<PAGE>
CLINICALLY-BASED PRESCRIPTION DRUG FORMULARY.
---------------------------------------------
Another program for promoting cost effective prescribing by physicians
involves the adoption of a recommended list of covered drugs, or formulary, sold
as part of the design of a health benefit plan or as a clinically-based stand
alone product line.
MENTAL HEALTH, SUBSTANCE ABUSE AND EMPLOYEE ASSISTANCE PROGRAMS
- ---------------------------------------------------------------
The Company's VBH subsidiary offers the following services to assist its
customers in containing costs and assuring quality in the area of mental health
and substance abuse.
MANAGED MENTAL HEALTH BENEFIT PLANS.
------------------------------------
The Company offers specially designed mental health and substance abuse
programs which incorporate preferred provider networks, clinically-based
utilization review and case management, benefit design, member support and
claims administration services. As part of the Company's programs, networks are
established with psychiatrists, psychologists, social workers, other mental
health practitioners and health care facilities whereby these health care
providers agree to provide services at discounted rates and abide by plan rules
relating to matters such as utilization review, quality assurance and
professional licensing. The Company's utilization review and case management
procedures are applied within its provider networks to give customers an
integrated cost containment solution to mental health care needs.
VBH's principal product is a comprehensive managed care mental health and
substance abuse program which offers customized plan design, access to VBH's
national preferred provider networks of practitioners and facilities, telephone-
based patient evaluation, referral and concurrent utilization review by
professional clinicians, and claims review and management reporting and
analysis. In connection with the sale of this comprehensive program, VBH offers
two additional program elements - employee assistance programs ("EAP") and
claims payment services.
CASE EVALUATION, PATIENT REFERRAL AND CONCURRENT UTILIZATION REVIEW.
--------------------------------------------------------------------
Each client of the comprehensive program is assigned an individual toll-free
information and referral telephone access number which is available to all plan
beneficiaries 24 hours a day. This evaluation and referral system is staffed by
clinically-trained case managers, most of whom hold a masters or a doctorate
degree in psychology or psychiatric social work or a degree in nursing and have
a minimum of three years experience in the psychiatric and/or substance abuse
field. Case managers evaluate each beneficiary's clinical situation and refer
the beneficiary to an appropriate provider within VBH's network, if possible.
Each inpatient case is assigned to one of VBH's clinical case managers
responsible for reviewing the treatment plan and progress from the time of
initial evaluation and referral through the conclusion of treatment. Working
directly with the assigned provider, the case manager assists in determining
whether the proposed course and setting for treatment is certifiable as
medically necessary and appropriate. The case manager also interacts with the
provider to establish the patient's discharge plan. The case manager is guided
by VBH's proprietary clinical database, which employs protocols developed by VBH
based on established national norms.
CLAIMS REVIEW AND MANAGEMENT REPORTING AND ANALYSIS.
----------------------------------------------------
Details regarding a patient's treatment are entered into an on-line
interactive information system which tracks utilization and cost information.
VBH recommends payment only for treatment which its clinical case manager
determines to be certifiable as medically necessary and appropriate. This
information system is also used to report utilization data to VBH's clients.
4
<PAGE>
ADDITIONAL PROGRAMS AND SERVICES.
---------------------------------
In connection with the delivery of its comprehensive programs, VBH offers as
additional components an EAP and certain claims payment services. The employee
assistance program provides employees and their dependents with short-term
counseling sessions for a wide range of personal and work-related problems. The
EAP product is also available on a stand-alone basis.
Employers generally contract with VBH for its mental health program under one
of two different payment structures. Under the first payment structure, the
employer or other benefit plan sponsors typically self-insures its mental health
and substance abuse claims and pays VBH an administrative fee. In some of these
arrangements, the Company's fee is subject to adjustment upward or downward
depending upon performance as measured against targeted criteria. Under the
second payment structure, the Company receives a fixed premium per plan
beneficiary and is responsible for paying all approved claims, thereby bearing
the risk/benefit that claims may vary from premiums paid. In these
arrangements, the Company uses cost sharing arrangements with network providers,
as well as utilization review, case management and other techniques to manage
its claims risk.
The Company's principal customers for its managed care mental health and
substance abuse programs are large self-insured employers who contract with VBH
to provide the plan on a "carved out" basis separate from the balance of the
customer's health care programs.
VBH's programs utilize a network of approximately 33,000 practitioners and
inpatient facilities nationwide.
MANAGED WORKERS' COMPENSATION, GROUP HEALTH AND RELATED SERVICES
- ----------------------------------------------------------------
CCN develops clinically and technically sophisticated managed care programs
and services for the workers' compensation and group health industry as well as
the emerging market for integrated occupational and non-occupational disability
management services. Programs include comprehensive provider networks in over
40 states, each of which has met stringent credentialing requirements,
utilization management programs accredited by the Utilization Review
Accreditation Commission, disability management services, and healthcare data
analysis. On November 15, 1996, the Company acquired MedView Services,
Incorporated, ("MedView") a provider of workers' compensation managed care
services. MedView operations will be integrated with CCN.
UTILIZATION MANAGEMENT SERVICES.
--------------------------------
CCN's utilization management services include management of hospital inpatient
medical necessity and length of stay on a continuous basis to ensure patients
receive appropriate treatment. Reviews are performed by clinical utilization
teams to achieve continuity of care throughout all stages of treatment.
Outpatient pre-procedure review is designed to target overutilized outpatient
procedures for injured workers. CCN case managers are registered nurses who work
in close communication with the physician, employer and claims adjuster to
channel patients to the most appropriate medical facility and to assure the
number and frequency of services delivered are medically appropriate.
PROFESSIONAL BILL REVIEW.
-------------------------
CCN identifies inaccuracies as well as charges for unnecessary services. Bills
are then repriced to state fee schedules or contract rates. Bill review enables
the Company to monitor provider practices and billing patterns that help further
reduce customer costs.
5
<PAGE>
DISABILITY MANAGEMENT.
----------------------
The Company offers occupational and non-occupational disability management
programs that employ objective medically-developed protocols combined with the
expertise of registered occupational health nurses. Disability case managers
serve as client advocates, working in concert with employers, providers, claims
managers and injured workers in order to return workers to employment as soon as
possible.
GROUP HEALTH MANAGEMENT.
------------------------
Through its provider networks, CCN offers preferred provider and point-of-
service systems, utilization management services and claims administration.
CCN is compensated for its services on a fee-for-service or shared savings
basis. CCN's customers include insurance companies, TPAs, self-insured
employers and labor union trust funds.
DISEASE MANAGMENT PROGRAMS AND CLINICAL REVIEW SERVICES
- -------------------------------------------------------
VHS is engaged in the development of comprehensive programs that improve
patient outcomes and control costs by organizing managed care initiatives around
high cost diseases. VHS is also engaged in the development and sale of software
and services designed to assist in the identification and elimination of
inappropriate medical services and the profiling of provider practices.
DISEASE MANAGEMENT SERVICES.
----------------------------
VHS is developing on behalf of pharmaceutical company partners, disease
management programs that integrate the clinical delivery of healthcare with
expert decision support, national guidelines, expert judgment and advanced case
management techniques. Disease management programs under development are
tailored to meet the specific needs of employers, managed care organizations and
provider groups.
MEDICAL REVIEW SYSTEM.
----------------------
VHS has developed a highly differentiated proprietary software product, the
Medical Review System ("MRS"), which employs algorithms based on clinical
standards to determine the medical appropriateness of 34 high-cost inpatient and
outpatient procedures. MRS' artificial intelligence "smart questioning" logic
permits nurses and clinicians to efficiently gather clinical data about a
patient over the telephone, match the data to scoring algorithms, and recommend
certification of a procedure or refer doubtful cases to reviewing physicians.
The MRS software is licensed to insurance carriers, Blue Cross and Blue Shield
plans, and numerous HMOs for an annual license fee.
PRACTICE REVIEW SYSTEM.
-----------------------
While MRS permits the pretreatment review of high cost procedures, efficient
pre-authorization review of large numbers of lower cost procedures to identify
inappropriate utilization is not practicable. The Practice Review System ("PRS")
adds two new tools: a pre-payment claims review tool to evaluate the medical
necessity and quality of coding for lower cost procedures, and a post-payment
tool for profiling providers.
The pre-payment tool permits payers to challenge or readjust claims for such
factors as procedure code unbundling, physician visit code inflation, and
excessive tests and procedures for individual patients. The post-payment tool
permits payers who are managing provider networks to profile their providers
against a range of criteria to determine those with the highest and lowest rates
of best practices and to understand clinical utilization patterns for over 200
conditions.
6
<PAGE>
REVENUES
Revenues during the past three fiscal years as percentages of total revenues
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Prescription Drugs - Services 58.6% 56.4% 55.0%
Prescription Drugs - Products 22.1 22.8 23.6
Mental Health 10.7 11.7 12.2
Workers' Compensation 5.5 5.2 4.2
Disease Management and Information Services 2.5 3.2 3.4
Other, Net 0.3 0.3 0.9
Investment Income 0.3 0.4 0.7
----- ----- -----
TOTAL REVENUES 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
SALES AND MARKETING
Value Health markets its products 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 self-insured employers, insurance companies, HMOs, PPOs and TPAs, 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, 1996, no customer accounted for more than 10%
of the company's total revenues.
COMPETITION
Value Health faces competition from many group insurance companies, HMOs,
PPOs, and TPAs and other specialty managed care companies. Many of the
Company's competitors are significantly larger and have greater financial
resources than the Company, including several drug manufacturers which have
acquired large pharmacy benefit management companies. Value Health believes
that its principal competitive strengths are its ability to control employer
health care costs in targeted specialty sectors, its provider networks and
clinically-based managed care techniques, and its ability to serve multi-state
employers.
INTELLECTUAL PROPERTY
Value Health's software for MRS, PRS, DURbase and other products has been
developed internally by the Company and under research and development
agreements with third parties. In addition, the Company has acquired licenses
and other rights to certain information used in research and development
activities. The Company claims copyrights to its MRS, PRS and DURbase software
and certain related documentation.
7
<PAGE>
GOVERNMENT REGULATION
Many states in which Value Health provides certain specialty benefit programs
and utilization review services require the Company to receive regulatory
approval or licenses in order to conduct business. In order to maintain
licenses and approvals for certain specialty benefit programs, Value Health must
comply with various regulations relating to matters such as financial reserves
and deposits, premium rates, benefit design and disclosure. Regulations
relating to utilization review typically impose requirements with respect to
qualification of personnel, appeal procedures, confidentiality and other matters
relating to utilization review services. In some cases, more than one
regulatory agency in each jurisdiction has authority over the activities of
Value Health. State licensing laws and other regulations are subject to
amendment and to interpretation by regulatory authorities with broad
discretionary powers.
Certain states and the federal government have enacted laws and regulations
that apply to the Company's mail order pharmacy services. Such laws and
regulations typically require registration and, in certain instances, may result
in economic disincentives for benefit sponsors' use of prescription mail order
services such as those offered by the Company. The application of these laws
and regulations to out-of-state mail pharmacy services is unclear in some
jurisdictions and questions could arise with respect to compliance by the
Company with such laws and regulations.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
governs aspects of the relationship between employer sponsored health benefit
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 Internal Revenue Service and the Department of Labor. ERISA imposes certain
requirements on the manner in which the Company does business with 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.
The Company believes that it is in compliance in all material respects with
applicable current regulations governing its provision of managed care services.
The Company monitors its compliance with applicable laws and regulations and
works with regulators concerning various compliance issues that arise from time
to time in the course of the licensing and regulatory review process. There can
be no assurance that the Company's future operations will not be adversely
affected by existing or new regulatory requirements or interpretations.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries employed
approximately 4,800 people. The Company has experienced no work stoppages and
believes that its employee relations are good.
8
<PAGE>
ITEM 2. PROPERTIES
- ------- ----------
The Company's principal corporate offices are located in Avon, Connecticut.
The Company also maintains offices in a number of locations throughout the
United States. Subsidiary headquarters are located in the Washington, DC,
Minneapolis, San Diego and Los Angeles areas. The Company leases approximately
1,886,000 square feet of space and owns approximately 216,000 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.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
In September 1995, two purported shareholder class action lawsuits, Freedman
- --------
v. Value Health, Inc., at 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, certain of its current and former directors
and senior officers and Nunzio Desantis. The two lawsuits, which assert claims
under the Securities Act and the Exchange Act, allege principally that Value
Health and the individual defendants made false or misleading statements to the
public in connection with Value Health's acquisition of Diagnostek in 1995. The
complaints, which were consolidated on February 16, 1996, do not specify the
amount of damages sought. On March 6, 1997, the court entered an order granting
in part and denying in part the defendants' motion to dismiss.
On July 11, 1994, a purported shareholder class action lawsuit, Bash, et al.
------------
v. Diagnostek, et al. ("Bash"), was filed in the federal court in New Mexico
- ---------------------
against Diagnostek and certain of its former directors and senior officers
alleging that the defendants made false or misleading statements to the public
in connection with Diagnostek's financial results for the fiscal year ended
March 31, 1994, the termination in August 1994 of Diagnostek's contracts with
subsidiaries of CIGNA Corp. and the announcement in August 1994 of the award to
Diagnostek of a contract with CHAMPUS. On September 10, 1996, the parties to
Bash I reached a settlement, subject to court approval and other conditions. In
a second action, Bash, et al v. Value Health, Inc., et al. ("Bash II"), the
-----------------------------------------
Bash I plaintiffs filed suit in federal court in New Mexico on December 15, 1995
against the same defendants, as well as Value Health and certain of its current
or former directors and officers, asserting the same factual allegations made in
Bash I, and, in addition, alleging that Value Health and certain individual
defendants made false and misleading statements to the public in connection with
Value Health's acquisition of Diagnostek in 1995. The complaint asserts claims
under the Securities Act and the Exchange Act, as well as common law claims.
The complaint does not specify the amount of damages sought. As part of the
settlement reached in Bash I, Value Health expects that the overlapping claims
in Bash II will be dropped.
Value Health intends to defend the allegations in each of the lawsuits
described above vigorously and does not believe the ultimate resolution will
have a material effect on financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
CORPORATE INFORMATION
Value Health common stock is traded on the New York Stock Exchange under the
symbol "VH". Options on the Value Health common stock are traded on the Chicago
Board of Options Exchange under the symbol "VH". At December 31, 1996 there
were approximately 55,469,000 shares outstanding and approximately 20,000
shareholders.
The following table sets forth the range of high and low sales prices of the
Company's Common Stock on the New York Stock Exchange.
<TABLE>
<CAPTION>
--------------------------------------------------
1996 High Low
--------------------------------------------------
<S> <C> <C>
Fourth Quarter $20.88 $16.63
Third Quarter $25.00 $14.63
Second Quarter $29.88 $23.63
First Quarter $28.25 $21.00
--------------------------------------------------
1995
--------------------------------------------------
Fourth Quarter $29.00 $21.25
Third Quarter $39.38 $24.63
Second Quarter $40.50 $31.88
First Quarter $40.75 $34.00
--------------------------------------------------
</TABLE>
The Company has never paid dividends and does not intend to pay dividends in
1997.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following data should be read in conjunction with Footnotes 3, 4, 5 and 6 to
the Financial Statement included herein under Item 8.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
(In thousands, except per share data) 1996 (1) 1995 (2) 1994 (3) 1993 (4) 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $1,963,775 $1,868,539 $1,620,667 $1,116,000 $732,085
--------------------------------------------------------------
Earnings (Loss):
Earnings (Loss) From Continuing Operations $ 64,329 $ (27,967) $ 59,521 $ 14,930 $ 26,718
Earnings (Loss) Per Share From Continuing
Operations $1.17 $(0.51) $1.10 $0.28 $0.55
Total Assets $1,101,224 $ 904,035 $ 791,542 $ 713,679 $588,658
Long Term Liabilities $ 91,971 $ 6,580 $ 19,668 $ 22,570 $ 27,384
Weighted Average Number of Common Shares
Outstanding 54,844 54,343 54,191 52,443 48,145
Cash Dividends Declared Per Common Share None None None None None
==============================================================================================================
</TABLE>
All applicable periods have been restated for the 1995 pooling transaction with
Diagnostek, Inc.
(1) Includes asset writedowns and spin-off costs of $10,455 and restructuring
expense of $3,500.
(2) Includes loss contracts expense of $46,600, merger-related expense of
$68,807, restructuring expense of $31,098, asset writeoffs and expense
accruals at the Company's Diagnostek, Inc. subsidiary of $12,898 and a loss
accrual of $1,042 on the planned disposition of the Lewin-VHI, Inc. assets.
(3) Includes merger-related expense of $5,986 and litigation and settlement
expense of $12,022.
(4) Includes merger-related expense of $38,409 and litigation and settlement
expense of $6,752.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
Value Health, Inc. ("the Company") is a 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.
The Company's prescription drug service revenues consist of revenues from its
retail network and institutional pharmacy management businesses. Prescription
drug product revenues consist of revenues from the Company's mail service
pharmacy business. Mental health revenues consist of revenues from the
Company's managed mental health benefit plans, including case management,
utilization review, claims payment and employee assistance programs. Workers'
compensation revenues consist of revenues from managed care programs for the
workers' compensation and group health industry. Information services revenues
consist of revenues from disease management programs and clinical review
services.
11
<PAGE>
Earnings from continuing operations before loss contract charges, merger-related
expenses, restructuring charges, asset write-downs and certain other charges
were $117.6 million in 1994, $138.7 million in 1995 and $130.0 million in 1996.
Pre-tax earnings increased over prior years in the prescription drug and
workers' compensation businesses in both 1996 and 1995 as revenues continued to
grow. Earnings in disease management and information services increased in 1995
and decreased in 1996 due to the sale of Lewin-VHI in 1996, together with
scheduled fee decreases in certain disease management contracts. Earnings in
the mental health business decreased as revenue growth slowed in 1995 and
revenues decreased in 1996.
Revenue is recognized at the time related services are performed. Revenue from
the sale of mail order prescription drugs is recognized at the time of shipment.
Prescription drug service revenue from the retail network business under certain
arrangements is billed to plan sponsors on a per prescription basis plus a
claims processing fee together with a fee for specific clinical services. Under
certain other arrangements, the Company bills plan sponsors a fixed monthly
payment per employee, known generally as "capitation". Under the former
arrangement the Company bears no financial risk for increases in the number of
prescriptions. Under the latter arrangement the Company is responsible for
paying all approved prescription drug claims and bears the risk/benefit that
claims may vary from the fixed monthly, capitated amount.
Institutional pharmacy services are priced under a variety of methods including
fee for service, fixed fee, cost plus or capitated basis. Under capitated
methods clients are billed at pre-determined rates under a formula that
specifies a ceiling cost or cap to clients based on a formula. Under this
method the Company bears the risk/benefit to the extent institutional pharmacy
costs vary from the capitation payment. Mental health and insurance services
are generally priced on a fee for service basis. Certain mental health programs
are priced on a fixed fee, per employee, per month basis, and the Company bears
the risk/benefit if claims vary from the amount billed. Information services
revenue from disease management programs are billed under negotiated contracts
which provide for fees to be billed upon the achievement of certain milestones.
Revenues from other clinical services are billed on a fee for service basis.
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, net on the
consolidated statements of operations.
On January 15, 1997, the Company entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement") 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. In the event of termination under specified
conditions, Columbia may be entitled to receive a fee of $45 million from the
Company.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as
percentages of total revenues for the three fiscal years ended December 31,
1996, 1995 and 1994, and the percentage changes in the dollar amounts of
revenues and expenses for 1996 as compared to 1995 and for 1995 as compared to
1994.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES PERCENTAGE INCREASE
FOR THE YEAR ENDED DECEMBER 31, (DECREASE)
--------------------------------------- -----------------------------
1996 1995
1996 1995 1994 OVER 1995 OVER 1994
- --------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Prescription drugs - services 58.6% 56.4% 55.0% 9.3% 18.2%
Prescription drugs - products 22.1 22.8 23.6 1.9 11.3
Mental health 10.7 11.7 12.2 (3.4) 9.7
Workers' compensation 5.5 5.2 4.2 11.5 43.5
Disease management and
information services 2.5 3.2 3.4 (17.7) 8.0
Other, net 0.3 0.3 0.9 (24.8) (52.7)
Investment income 0.3 0.4 0.7 (31.7) (25.2)
- ---------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 5.1 15.3
- ---------------------------------------------------------------------------------
EXPENSES:
Costs of services 62.7 62.4 62.0 5.6 16.1
Costs of products 19.4 19.3 20.2 5.5 10.2
Selling, general and administrative 9.3 9.6 9.6 2.1 14.8
Depreciation and amortization 1.4 1.5 1.2 (2.4) 52.4
Amortization of goodwill 0.5 0.4 0.3 27.6 22.3
Interest expense 0.1 0.1 0.2 (32.5) (35.6)
Asset writedowns and spinoff costs 0.5 -- -- N/A N/A
Loss contracts -- 2.5 -- 100.0 N/A
Merger-related -- 3.7 0.4 (100.0) 1,049.5
Restructuring 0.2 1.7 -- (88.7) N/A
- ---------------------------------------------------------------------------------
Total Expenses 94.1 101.2 93.9 (2.3) 24.3
- ---------------------------------------------------------------------------------
Earnings (loss) before income taxes 5.9 (1.2) 6.1 634.7 (121.8)
- ---------------------------------------------------------------------------------
Provision for income taxes 2.6 0.3 2.4 726.8 (84.4)
- ---------------------------------------------------------------------------------
Earnings (loss) 3.3% (1.5)% 3.7% 330.0% (147.0%)
=================================================================================
</TABLE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Revenues in 1996 of $1,963.8 million increased $95.2 million or 5.1% over 1995,
and 1995 revenues of $1,868.5 million were 15.3% ahead of 1994. The Company had
earnings before income taxes of $116.1 million for 1996, compared to a loss of
$21.7 million in 1995 and earnings of $99.6 million in 1994.
13
<PAGE>
Total revenues increased by $95.2 million in 1996 over 1995 and $247.9 million
in 1995 over 1994. The addition of new customers increased revenues by $225.6
million in 1996 over 1995 and revenues from existing customers declined by $77.5
million in 1996 from 1995. Acquisitions accounted for $11.1 million of 1996
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 $44.8 million as compared to 1995. The sale of Lewin-
VHI and certain other non-core operations in 1996 caused revenues to decline by
$14.7 million. Other revenues and investment income declined by $1.7 million and
$2.6 million, respectively, as compared with 1995.
The addition of new customers increased revenues by $271.8 million in 1995 over
1994 and revenues from existing customers declined by $72.5 million in 1995 from
1994. Acquisitions accounted for $58.9 million of 1995 revenue growth. Other
revenue and investment income declined by $7.5 million and $2.7 million,
respectively, as compared with 1994.
Prescription drug service revenues (from the retail and pharmacy network and
institutional business) for 1996 of $1,151.7 million increased by $98.2 million,
or 9.3% over 1995 and 1995 revenues increased by $161.8 million or 18.2% over
1994. The addition of new customers increased revenues by $182.2 million in
1996. Revenues from existing customers declined by $39.1 million in 1996 due
primarily to certain loss contracts canceled by the Company and due to contracts
canceled by customers. The Company's joint venture with Allegiance Corporation
commenced operations in July, 1996. Under generally accepted accounting
principles, joint venture revenue is not consolidated with the Company's
revenue. Accordingly, reported prescription drug service revenue from existing
(institutional) customers was reduced from 1995 by approximately $44.8 million.
The addition of new customers increased revenues by $196.2 million in 1995 over
1994 while revenues from existing customers declined by $34.4 million in 1995
from 1994 due primarily to lost business and price reductions on existing
business.
Prescription drug product revenues (from the mail service pharmacy business) for
1996 of $433.9 million increased by $8.2 million or 1.9% over 1995 and 1995
revenues increased by $43.3 million or 11.3% over 1994. The addition of new
customers increased revenues by $17.4 million in 1996 over 1995 and by $42.0
million in 1995 over 1994. Revenues from existing customers declined by $9.2
million in 1996 from 1995 and increased by $1.4 million in 1995 over 1994.
Mental health 1996 revenues of $210.4 million decreased by $7.5 million or 3.4%
over 1995 and 1995 revenues increased by $19.3 million or 9.7% over 1994. The
addition of new customers increased revenues by $17.5 million and $17.8 million
in 1996 and 1995, respectively. Revenues from existing customers declined by
$28.0 million in 1996 over 1995 and by $27.3 million in 1995 over 1994. These
declines were due to enrollment reductions, lost business and price reductions.
Acquisitions increased revenues by $3.1 million and $28.8 million in 1996 and
1995, respectively.
14
<PAGE>
Workers' compensation 1996 revenues of $107.7 million increased by $11.1 million
or 11.5% over 1995 and 1995 revenues increased by $29.3 million or 43.5% over
1994. The addition of new customers increased revenues by $3.9 million and $4.6
million in 1996 and 1995, respectively. Revenues from existing customers
increased by $2.8 million in 1996 and decreased by $3.0 million in 1995.
Acquisitions added $5.8 million and $27.7 million to 1996 and 1995 revenues,
respectively. Revenues in 1996 were decreased by $1.4 million as a result of the
divestiture and discontinuance of certain non-core operations.
Disease management and information services 1996 revenues of $49.5 million
decreased by $10.6 million or 17.7% from 1995 and 1995 revenues increased by
$4.4 million or 8.0% over 1994. New customers, including disease management
programs, added $4.6 million and $11.2 million to 1996 and 1995 revenues,
respectively. Revenues from existing customers declined by $4.0 million in 1996
from 1995 and by $9.2 million in 1995 over 1994. The 1996 decline was due to
enrollment reductions, lost business and scheduled fee decreases in certain
major disease management contracts. This decline was partially offset by fees
received in connection with the early termination of a certain disease
management contract. The 1995 decline was due to enrollment reductions,
completion of certain health policy consulting assignments and scheduled fee
decreases in a certain major disease management contract. Acquisitions accounted
for $2.2 million and $2.4 million of the revenue increases in 1996 and 1995,
respectively. The sale of the assets of Lewin-VHI, Inc. in May, 1996 caused 1996
revenues to be reduced by $13.3 million from 1995.
Other revenues in 1996 of $5.1 million declined by $1.7 million from 1995 and
1995 revenues declined by $7.5 million from 1994. The declines in both years
were due primarily to the sale of National Foot Care Program in 1995, as results
in 1995 and 1994 include revenues from National Foot Care Program for three
months and twelve months, respectively.
Investment income in 1996 of $5.6 million declined by $2.6 million or 31.7% from
1995 and 1995 investment income declined by $2.7 million or 25.2% from 1994. The
declines in each year were due to lower investment balances from the previous
year.
The Company's costs of services consist of direct expenses of providing
specialty managed care and information services, including costs of retail
drugs, mental health and substance abuse provider charges, salaries and wages of
medical management and health policy consultants, customer service and claims
processing personnel and certain data processing costs. Costs of services for
1996 increased by $65.9 million or 5.6% over 1995 and 1995 costs were $162.0
million or 16.1% greater than 1994. 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 1996 decreased to
81.1% from 81.7% in 1995 and 82.8% in 1994. Despite a competitive pricing
environment, the costs of services ratio declined slightly in 1996, due
primarily to the Company's restructuring and re-engineering programs implemented
during 1996, resistance to rebids at excessively low margins and cancellation of
certain loss contracts during 1995. The decline in the 1995 ratio was due
primarily to a revenue mix shift toward insurance services and disease
management programs which carry lower ratios.
15
<PAGE>
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 1996 increased by
$19.7 million or 5.5% over 1995 and 1995 costs were $33.3 million or 10.2%
greater than 1994.
As a percentage of product revenues, costs of products increased to 87.6% for
1996, from 84.7% during 1995 and increased from 85.6% during 1994. The increase
in the costs of products ratio in 1996 was due primarily to the competitive
pricing environment and the loss of certain profitable accounts since the third
quarter of 1995. These cost increases cannot be practicably quantified on an
individual basis, however, the Company expects the competitive pricing
environment will continue to increase the costs of products ratio as increases
in customer revenues lag drug price inflation. The loss of profitable accounts
in the future cannot be reasonably estimated and will be a function of annual
and multi-year contract renewals within the Company's competitive pricing
environment. The cost of alternative sources of purchasing drugs through
wholesalers are expected to level out in the future. The decrease in the costs
of products ratio in 1995 was due primarily 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 expenses for 1996 increased $3.8 million or
2.1% over 1995 and 1995 expenses were $23.2 million or 14.8% greater than 1994.
The increases in both years were due 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. In addition, 1995 expenses include a $1.0 million charitable
contribution made by Diagnostek prior to the completion of the merger in July
1995 and $5.6 million in additional charges for Diagnostek-related asset write-
offs and litigation accruals. Selling, general and administrative expenses also
include Diagnostek litigation and settlement expenses of $12.0 million in 1994.
As a percentage of revenues, selling, general and administrative expenses were
9.3%, 9.6% and 9.6% in 1996, 1995 and 1994, respectively. The lower ratio during
1996 is due in part to the Company's restructuring and re-engineering cost
reduction programs implemented during 1996. In 1996, selling, general and
administrative expenses declined by approximately $2.0 million as a result of
these cost reduction programs. The majority of these cost reduction programs
were implemented by December 31, 1996, with the remainder to be completed during
the first half of 1997.
Depreciation and amortization expense, which consists of the depreciation of
property and equipment and the amortization of purchased and internally
developed software, was $27.9 million in 1996 as compared to $28.6 million in
1995 and $18.7 million in 1994. The reduction in depreciation and amortization
expense during 1996 was due to significant writedowns in 1996 resulting from the
Company's restructuring programs. The higher level of depreciation and
amortization in 1995 was attributable to increased investment in fixed assets to
support growth in the Company's business and increased amortization of
capitalized computer software.
Amortization of goodwill arising from acquisitions was $8.9 million in 1996 as
compared with $7.0 million in 1995 and $5.7 million in 1994. The higher levels
of amortization in each year were due to purchase acquisitions completed in
1996, 1995 and 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 other
borrowings, and was $1.1 million in 1996, $1.7 million in 1995 and $2.6 million
in 1994. In 1996, interest expense includes $0.7 million from the Company's line
of credit (see note 7). Interest expense in 1995 and 1994 includes interest on
Diagnostek, Inc. borrowings which were paid off in 1995, after its merger with
the Company.
16
<PAGE>
In 1996, the Company recognized $10.5 million of charges primarily in connection
with expenses of the planned spinoff of its ValueRx subsidiary as well as asset
writedowns related to the sale of assets of its Value Health Management
subsidiary (see note 21).
In 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. As more fully described in note 4, during the first and third
quarters of 1995, it was determined that certain contracts, including the State
of New Jersey, Ford Motor Company and others, would result in losses over their
remaining terms. Losses of $12.6 million and $34.0 million were accrued during
the first and third quarters of 1995, respectively. The Company computed losses
by estimating future revenues and variable expenses associated with these
contracts. As of December 31, 1996, $5.4 million of the $46.6 million remained
accrued. The future estimated losses of $5.4 million will result in cash
outflows during future periods but will not have a material impact on the
Company's financial condition or results of operations.
In 1995, the Company recognized merger-related expense of $68.8 million in
connection with the Diagnostek merger. In 1994, the Company recognized merger-
related expense of $6.0 million in connection with its mergers with Prescription
Drug Service, Inc., Prescription Drug Service West, Inc. and RxNet, Inc. (see
notes 3 and 5). As of December 31, 1996, $8.4 million of the $68.8 million
remained accrued. This amount will result in future cash payments but will not
have a material impact on the Company's financial condition or results of
operations.
In 1996, the Company recognized a restructuring charge of $3.5 million in
connection with the acquisition and integration of Medview Services, Inc. In
1995, the Company recognized a restructuring charge of $31.1 million in
connection with a program to reduce operating expenses at its subsidiaries. The
restructuring program has resulted in annualized savings of $40 million (see
notes 5 and 6).
Earnings (loss) before income taxes were $116.1 million, $(21.7) million and
$99.6 million in 1996, 1995 and 1994, respectively.
In each year, the provision for income taxes includes, among other things, the
utilization of net operating loss carryforwards, the tax benefit associated with
certain stock option transactions, the result of goodwill reductions arising
from the utilization of certain acquired net operating loss carryforwards and an
estimate for state income taxes. The effective tax rate was 44.6%, (28.8%) and
40.2% for the years ended December 31, 1996, 1995 and 1994, respectively. The
difference in the 1996 effective tax rate as compared to statutory rates is
primarily the result of certain non-deductible asset writeoffs. The effective
tax rate in 1995 results primarily from a high level of non-deductible expenses
from the Diagnostek merger relative to the amount of reported loss before taxes,
as well as the tax liability associated with the Lewin-VHI disposition. At
December 31, 1996, the Company recorded a deferred tax asset of $50.1 million to
reflect the future tax benefits of loss carryforwards and temporary differences
(see note 13).
Management believes that sufficient taxes were paid in the carryback period and
sufficient taxable income will be generated in the future to realize the
deferred tax benefits. In 1996, the valuation allowance was decreased by $0.3
million to $4.9 million primarily due to the use of net operating losses from
business combinations.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures primarily from
the proceeds of stock issuances and internally generated cash. On August 21,
1996, the Company entered into a five-year $140 million revolving credit
agreement with a bank group (see note 7). The Company borrowed $87.5 million
under this agreement to fund the MedView acquisition on November 15, 1996 (see
note 3).
As of December 31,1996, the Company had working capital of $197.5 million and
unrestricted cash and marketable securities of $91.4 million. During 1996,
accounts receivable grew faster than revenues primarily as a result of changes
at the prescription drug services operations. Throughout 1996, the Company
continued its consolidation and integration initiatives at its prescription drug
services operations associated with the Diagnostek merger. A major component of
these initiatives was the integration of the customer and pharmaceutical
manufacturer invoicing and collection functions. Systems consolidation
initiatives associated with these functions were implemented in the fourth
quarter of 1996, which resulted in delays in issuing certain invoices and
subsequently resulted in the growth in accounts receivable noted above. The
Company anticipates collections activity will return to previous levels during
the remainder of 1997.
For 1996, net cash provided by operating activities was $59.5 million. During
1996, the Company incurred cash expenditures in connection with acquisitions and
investments of $107.3 million and capital expenditures for property and
equipment were approximately $61.3 million. During 1996, the Company
repurchased approximately 1,056,000 shares of its common stock. The stock
repurchase program announced in October 1996 was canceled in January 1997.
The Company's remaining contingent payments for CCN under its Acquisition
Agreement dated May 18, 1994, are expected to approximate $61 million through
the first half of 1997.
The Company believes that existing available cash and marketable securities,
cash from operations and amounts available under its credit line will be
sufficient to meet its liquidity and funding requirements for normal operations.
The Company has never paid dividends and does not expect to pay dividends in
1997.
INFLATION
Health care costs are rising and are expected to continue to rise at rates
higher than the Consumer Price Index. The Company believes that its provider
discount and risk sharing arrangements, together with its cost control measures
such as utilization review and its pricing practices, help to protect against
any adverse effect of inflation on its operations.
RECENTLY ENACTED PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. This pronouncement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
It replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures. This
statement is effective for financial statements issued for periods ending after
December 15, 1997. The Company has not yet determined the impact of this
pronouncement on its EPS calculation.
All other recently enacted pronouncements either have been adopted by, or do not
apply to, the Company.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
VALUE HEALTH, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(In thousands) 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 85,284 $ 68,505
Restricted cash 4,030 5,806
Short-term investments 88 25,514
Accounts receivable (net allowance for doubtful
accounts of $22,120 and $17,171 in 1996 and
1995, respectively 363,320 304,272
Inventories 27,198 30,052
Prepaid expenses and other current assets 26,365 31,495
Deferred taxes 43,568 71,797
- ----------------------------------------------------------------------------
Total current assets 549,853 537,441
- ----------------------------------------------------------------------------
Fixed Assets:
Land 3,513 3,532
Buildings and improvements 15,107 14,226
Furniture and fixtures 19,053 19,820
Equipment and software 168,728 150,425
Leasehold improvements 13,388 15,709
- ----------------------------------------------------------------------------
219,789 203,712
Less accumulated depreciation and amortization 74,216 71,242
- ----------------------------------------------------------------------------
145,573 132,470
- ----------------------------------------------------------------------------
Long-term investments 6,022 12,868
Goodwill, net 337,558 190,605
Other assets 62,218 30,651
- ----------------------------------------------------------------------------
405,798 234,124
- ----------------------------------------------------------------------------
TOTAL ASSETS $1,101,224 $904,035
============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
VALUE HEALTH, INC. CONSOLIDATED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
(In thousands, except par value) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Payable to providers $ 193,219 $116,166
Due to former shareholders of affiliates 64,009 400
Accounts payable and accrued expenses 41,131 64,795
Merger-related expenses 8,387 49,767
Accrued contract losses 5,378 30,386
Restructuring reserve 16,043 30,597
Other liabilities 24,188 24,300
- ------------------------------------------------------------------------------------------
Total current liabilities 352,355 316,411
- ------------------------------------------------------------------------------------------
Capital lease obligations, less current portion 956 2,130
Borrowings under line of credit 87,500 --
Other liabilities 3,515 4,450
- ------------------------------------------------------------------------------------------
91,971 6,580
- ------------------------------------------------------------------------------------------
Total liabilities 444,326 322,991
- ------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, authorized
1,000 shares, none issued -- --
Common stock - without par value,
authorized 100,000 shares, issued 55,469 and 53,689
shares, for 1996 and 1995, respectively 505,649 467,325
Retained earnings 178,279 113,950
Common stock in treasury, at cost, 1,056 shares at
December 31, 1996 (27,030) --
Unrealized loss on securities available-for-sale, net of tax -- (231)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 656,898 581,044
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,101,224 $904,035
==========================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
VALUE HEALTH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
(In thousands, except per share) 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Prescription drugs - services $1,151,680 $1,053,436 $ 891,611
Prescription drugs - products 433,892 425,661 382,326
Mental health 210,366 217,865 198,599
Workers' compensation 107,687 96,544 67,268
Disease management and information services 49,529 60,158 55,721
Other, net 5,069 6,745 14,271
Investment income 5,552 8,130 10,871
- ---------------------------------------------------------------------------------------
Total revenues 1,963,775 1,868,539 1,620,667
- ---------------------------------------------------------------------------------------
EXPENSES
Costs of services 1,232,347 1,166,471 1,004,452
Costs of products 380,231 360,563 327,307
Selling, general and administrative 183,278 179,511 156,305
Depreciation and amortization 27,892 28,568 18,740
Amortization of goodwill 8,866 6,950 5,684
Interest expense 1,134 1,680 2,610
Asset writedowns and spinoff costs 10,455 -- --
Loss contracts -- 46,600 --
Merger-related -- 68,807 5,986
Restructuring 3,500 31,098 --
- ---------------------------------------------------------------------------------------
Total expenses 1,847,703 1,890,248 1,521,084
- ---------------------------------------------------------------------------------------
Earnings (loss) before income taxes 116,072 (21,709) 99,583
Provision for income taxes 51,743 6,258 40,062
- ---------------------------------------------------------------------------------------
Net earnings (loss) $ 64,329 $ (27,967) $ 59,521
- ---------------------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE $1.17 $(0.51) $1.10
=======================================================================================
</TABLE>
The accompanying notes are integral part of the consolidated financial
statements.
21
<PAGE>
VALUE HEALTH, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands) COMMON STOCK IN RETAINED
COMMON STOCK TREASURY EARNINGS TOTAL
--------------------------------------------------------------------
For the years ended December 31, SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 51,384 $412,358 -- $ -- $ 82,396 $494,540
Exercise of common stock options 1,259 15,523 -- -- -- 15,523
Tax benefits related to common stock option
exercises and restricted stock activity -- 11,305 -- -- -- 11,305
Amortization of deferred compensation -- 161 -- -- -- 161
Adjustment to acquisition (132) (4,113) -- -- -- (4,113)
Issuance of common stock in litigation
settlement 69 3,000 -- -- -- 3,000
Change in unrealized loss on securities
available-for-sale, net of tax -- -- -- -- -- (3,691)
Net earnings -- -- -- -- 59,521 59,521
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 52,580 438,234 -- -- 141,917 576,246
Exercise of common stock options 829 14,532 -- -- -- 14,532
Tax benefits related to common stock option
exercises and restricted stock activity -- 4,421 -- -- -- 4,421
Issuance of common stock in acquisition 280 10,138 -- -- -- 10,138
Change in unrealized loss on securities
available-for-sale, net of tax -- -- -- -- -- 3,674
Net loss -- -- -- -- (27,967) (27,967)
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 53,689 467,325 -- -- 113,950 581,044
Exercise of common stock options 937 12,439 -- -- -- 12,439
Tax benefits related to common stock option
exercises and restricted stock activity -- 2,888 -- -- -- 2,888
Issuance of common stock in acquisition 843 22,997 -- -- -- 22,997
Repurchase of common stock -- -- (1,056) (27,030) -- (27,030)
Change in unrealized loss on securities
available-for-sale, net of tax -- -- -- -- -- 231
Net earnings -- -- -- -- 64,329 64,329
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 55,469 $505,649 (1,056) $(27,030) $178,279 $656,898
=================================================================================================================
</TABLE>
The accompanying notes are integral part of the consolidated financial
statements.
22
<PAGE>
VALUE HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 64,329 $(27,967) $ 59,521
- --------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 27,892 28,568 18,740
Asset writedowns 8,975 -- --
Deferred compensation expense -- -- 161
Provision for doubtful accounts and notes receivable 14,122 8,798 5,915
Deferred taxes 28,229 (62,031) 5,908
Tax effect on goodwill of acquired loss carryforward utilization 801 202 416
Tax effect of certain stock option and restricted stock transactions 2,888 4,421 11,305
Amortization of goodwill 8,866 6,950 5,684
Amortization of deferred revenue (4,788) (2,606) (4,871)
Amortization of investment premiums 98 465 826
(Gain) loss on sales of investment securities -- 559 (566)
Change in assets and liabilities:
(Increase) decrease in assets:
Restricted cash 1,776 (4,881) 356
Accounts receivable (61,873) (97,197) (65,407)
Inventories 2,854 11,167 (9,079)
Other current and non-current assets (27,290) (4,732) (5,424)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (24,246) (4,617) 863
Merger related expense (29,115) 41,684 (10,374)
Restructuring reserve (4,942) 30,597 --
Accrued contract losses (25,008) 30,386 --
Payable to providers 77,053 31,560 13,472
Other liabilities (1,166) (628) (7,352)
- --------------------------------------------------------------------------------------------------------------------
Total adjustments (4,874) 18,665 (39,427)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 59,455 (9,302) 20,094
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (61,281) (54,530) (44,188)
Proceeds from sale of fixed assets 5,961 -- --
Acquisitions and investments, net of cash acquired (107,342) (13,910) (40,334)
Sale of subsidary, net of cash sold 18,017 -- --
Purchases of investment securities (31,751) (96,511) (112,232)
Proceeds from maturities and sales of investment securities 62,348 172,619 180,089
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (114,048) 7,668 (16,665)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options and warrants
and issuance of restricted stock 12,439 14,123 15,523
Payments of long-term debt and capital lease obligations (1,537) (46,358) (16,707)
Advances under financing agreements -- (200) (1,039)
Proceeds from debt 87,500 16,500 22,000
Payments for common stock repurchase (27,030) -- --
Repayments of advances under financing agreements -- 1,175 --
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 71,372 (14,760) 19,777
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 16,779 (16,394) 23,206
Cash and cash equivalents at beginning of year 68,505 84,899 61,693
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 85,284 $ 68,505 $ 84,899
====================================================================================================================
</TABLE>
The accompanying notes are integral part of the consolidated financial
statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is a leading provider of specialty managed health care benefit
programs in the areas of prescription drugs, mental health and substance abuse,
workers' compensation and disability and disease management. The Company also
provides other health care information services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The preparation of the consolidated 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.
RESTRICTED CASH
Restricted cash consists of amounts on deposit in compliance with state
regulatory requirements and building and equipment lease agreements.
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.
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 December 31, 1996 and December 31, 1995 were
$17,006,000 and $500,000, respectively.
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 stockholders' 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.
24
<PAGE>
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 25 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 at December 31, 1996 and 1995 are capitalized computer
software costs, related to purchased software and software developed internally
for sale as part of its product lines, of $67,751,000 and $45,341,000,
respectively. The Company capitalizes costs of software to be sold once
technological feasibility has been established. Accumulated amortization on
computer software was $14,557,000 and $11,170,000 at December 31, 1996 and 1995,
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 $26,818,000 and $20,623,000 at December 31, 1996 and 1995, 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 projected cash flows, product
life cycle, company performance compared to expectations and industry practice.
The amount of impairment, if any, is measured based on discounted future cash
flows using a discount rate reflecting the Company's average cost of funds.
PAYABLES TO PROVIDERS
Payables to providers are recorded as services are rendered. The costs of claims
for services rendered but not yet reported are estimated based on historical
data, current enrollment statistics, patient census data and other information.
Such estimates and the resulting accrued liabilities are periodically reviewed
and updated. Any adjustments resulting therefrom are reflected in earnings
currently.
DEFERRED RENT
The Company has received rent abatements for limited periods in connection with
leases for certain office space. Costs associated with these leases, recorded on
a straight-line basis over the full lease term, resulted in a deferred rent
liability of $2,881,000 and $3,648,000 at December 31, 1996 and 1995,
respectively.
25
<PAGE>
REVENUE RECOGNITION
Revenue is recognized at the time related services are performed. Revenue from
sales of mail order prescription drugs is recognized at the time of shipment.
Deferred revenue represents amounts advanced to the Company on contracts for
which performance is expected to be completed in future periods.
The Company's prescription drug service revenues consist of revenues from its
retail network and institutional pharmacy management businesses. Prescription
drug product revenues consist of revenues from the Company's mail service
pharmacy business. Mental health revenues consist of revenues from the
Company's managed mental health benefit plans, including case management,
utilization review, claims payment and employee assistance programs. Insurance
services revenues consist of revenues from managed care programs for the
workers' compensation and group health industry. Information services revenues
consist of revenues from disease management programs and clinical review
services.
Prescription drug service revenue from the retail network business under certain
arrangements is billed to plan sponsors on a per prescription basis plus a
claims processing fee together with a fee for specific clinical services. Under
certain other arrangements, the Company bills plan sponsors a fixed monthly
payment per employee, known generally as "capitation". Under the former
arrangement the Company bears no financial risk for increases in the number of
prescriptions. Under the latter arrangement the Company is responsible for
paying all approved prescription drug claims and bears the risk/benefit that
claims may vary from the fixed monthly, capitated amount.
Institutional pharmacy services are priced under a variety of methods including
fee for service, fixed fee, cost plus or capitated basis. Under capitated
methods clients are billed at pre-determined rates under a formula that
specifies a ceiling cost or cap to clients based on a formula. Under this
method the Company bears the risk/benefit to the extent institutional pharmacy
costs vary from the capitation payment. Mental health and insurance services
are generally priced on a fee for service basis. Certain mental health programs
are priced on a fixed fee, per employee, per month basis, and the Company bears
the risk/benefit if claims vary from the amount billed. Information services
revenue from disease management programs, as discussed below, are billed under
negotiated contracts which provide for fees to be billed upon the achievement of
certain milestones. Revenues from other clinical services are billed on a fee
for service basis.
The Company develops software and a number of other products under significant
disease management research and development agreements entered into with third
parties, including Pfizer, Inc. and Sandoz Pharmaceutical Corp. Under these
arrangements, the Company develops value-added programs, products and services
that will address all aspects of a disease, including health promotion,
screening, diagnosis, treatment and maintenance. The ultimate goal of these
programs is to assist managed care organizations and medical providers in
developing high quality, cost effective health care. These contracts, typically
for periods of three to five years, include the formation of multi-disciplinary
teams of Company personnel dedicated to developing sophisticated disease
management tools.
The Company accounts for these "cost-plus" research and development contracts
by expensing costs, net of reimbursements, as incurred and recognizing amounts
billed, in excess of reimbursements from third parties, as revenue when earned.
No customer accounted for 10% or more of consolidated total revenues for the
years ended December 31, 1996, 1995 or 1994.
26
<PAGE>
LICENSURE COSTS
Costs directly incurred to obtain licenses to do business in new market areas
are capitalized and amortized on a straight-line basis over three years.
COMPENSATION COSTS
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), electing the disclosure provisions of SFAS 123.
Compensation cost for all years presented in the consolidated statements of
operations has been measured using the intrinsic value based method prescribed
by APB Opinion No. 25. Given that the Company grants all stock options at market
value on the date of grant, the intrinsic value based method results in $0 of
compensation expense being recorded in the consolidated financial statements.
The Company has made pro forma disclosures of net income and earnings per share
as required by SFAS 123 (see note 18).
INCOME TAXES
The Company files a consolidated federal income tax return which includes all of
its subsidiaries. The Company's income tax liability has been determined under
the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, 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
consolidated financial statements as of the date of the consolidated 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.
NET EARNINGS PER SHARE
Net earnings per share are based on the weighted average number of common shares
and common share equivalents (if dilutive) resulting from options outstanding
during the periods. The weighted average number of common shares and common
share equivalents outstanding is approximately 54,844,000, 54,343,000 and
54,191,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
There is not a significant difference between primary and fully diluted earnings
per share.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. This pronouncement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
It replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures. This
statement is effective for financial statements issued for periods ending after
December 15, 1997. The Company has not yet determined the impact of this
pronouncement on its EPS calculation.
RECLASSIFICATIONS
Certain amounts from the 1995 and 1994 consolidated financial statements are
reclassified to conform with the 1996 presentation.
27
<PAGE>
2 MERGER
On January 15, 1997, the Company entered into a definitive Agreement and Plan of
Merger (the "Merger Agreement") with Columbia/HCA Healthcare Corporation
("Columbia"), a New York Stock Exchange company and the largest provider of
healthcare services in the United States, and Columbia Merger-Sub. Corp., a
wholly-owned subsidiary of Columbia pursuant to which the Company will become a
wholly-owned subsidiary of Columbia (the "Merger"). 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.
In the event of termination under specified conditions, Columbia may
be entitled to receive a fee of $45 million from the Company.
3 MERGERS AND ACQUISITIONS, DIVESTITURE AND JOINT VENTURE
On November 15, 1996, the Company completed its acquisition of MedView Services,
Inc. (MedView), a provider of workers' compensation managed care services, in
exchange for $87.5 million in cash. The acquisition was accounted for as a
purchase. Goodwill of $80.3 million was recorded and is being amortized over 35
years. The results of operations of MedView are included in the Company's
Consolidated Statements of Operations from the date the acquisition was
completed. Pro forma information is not presented as it is immaterial.
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.
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.
The Company has recognized a loss of approximately $1.0 million in its 1995
consolidated statement of operations in connection with this transaction.
On January 10, 1996, the Company completed its acquisition of Medintell Systems
Corporation ("Medintell"), a developer and marketer of advanced pharmacy
information systems and services. This acquisition was accounted for as a
purchase in which the Company issued 842,571 shares of its common stock for all
of the issued and outstanding shares of Medintell. In connection with this
transaction, the Company repurchased an equivalent number of shares, completing
the repurchase on March 21, 1996. Goodwill of approximately $28.3 million was
recorded and is being amortized over 20 years. The results of operations of
Medintell are included in the Company's Consolidated Statements of Operations
from the date the acquisition was completed. Pro forma information is not
presented as it is immaterial.
28
<PAGE>
On July 28, 1995, the Company completed its merger with Diagnostek. The Company
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 has been accounted for as a pooling of interests and financial
statements for all periods prior to this combination have been restated to
reflect the combined operations.
On May 11, 1995, the Company completed its acquisition of Value Health
Management, Inc. ("VHM"), an information services and management consulting
company. The purchase price was $9.5 million based on the closing price of Value
Health common stock on the date of purchase. The acquisition was accounted for
as a purchase in which the Company 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 20
years. The results of operations of VHM are included in the Company's
Consolidated Statement of Operations from the date the acquisition was
completed. On January 31, 1997, the Company completed the sale of substantially
all of the assets of its VHM subsidiary (see note 21).
On March 28, 1995, the Company completed its sale of National Foot Care Program,
Inc. at approximately book value, in exchange for $2.9 million of notes
receivable.
On February 15, 1995, the Company completed its acquisition of Health Management
Strategies International, Inc. ("HMS") for $13.9 million in cash. Goodwill of
approximately $13.0 million was recorded and is being amortized over 25 years.
The results of operations of HMS are included in the Company's Consolidated
Statement of Operations from the date the acquisition was completed.
On August 29, 1994, the Company completed its merger with Prescription Drug
Service, Inc. and Prescription Drug Service West, Inc. ("Prescdrug"). The
Company 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, the Company acquired by merger all of the outstanding common
stock of RxNet, Inc. by issuing 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
restated to reflect the combined operations.
On June 21, 1994, the Company completed its acquisition of Community Care
Network, Inc. (CCN). The purchase price was $40 million in cash and contingent
consideration of up to an additional $80 million, of which $18.6 million had
been paid as of December 31, 1996. The contingent consideration is payable in
cash and is based upon CNN's earnings during a twelve month calculation period,
which period ended December 31, 1996. Goodwill of $23.4 million was initially
recorded and is being amortized over 35 years. Additional goodwill of $78
million was recorded in 1996. Of this amount, approximately $61 million in
payments are expected to be made in 1997 and are accrued at December 31, 1996.
The results of operations of CCN are included in the Company's Consolidated
Statement of Operations from the date the acquisition was completed.
On May 1, 1994, the Company and Pfizer Inc entered into a joint venture
partnership to develop specialty disease management programs. The partnership
was dissolved in 1996.
29
<PAGE>
4 LOSS CONTRACTS
The Company has $5.4 million and $30.4 million accrued for loss contracts as of
December 31, 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 reviews its various
risk-based customer contracts on a quarterly basis to determine whether
estimates of future revenues, excluding investment income, are sufficient to
cover estimated future costs of providing services and settling claim payments.
For purposes of evaluating potential loss contracts, only incremental costs are
included in determining the estimated costs to provide services and settle claim
payments.
The $5.4 and $30.4 million loss accruals at December 31, 1996 and 1995 relate to
ten full risk, capitated contracts. The largest of the contracts was with Ford
Motor Company ("Ford"). During the third quarter of 1995, the Company estimated
its capitated contract with Ford would incur a loss for 1996 as a result of
projected increases in utilization and unit prices. Utilization trends were
projected to increase compared to prior quarters, and management determined in
the third quarter that certain savings and other initiatives previously
discussed with, and committed to, by Ford would not achieve the levels
projected.
Eight of the other nine contracts accrued for as of December 31, 1996 and 1995,
relate to the Company's application of its loss contract accounting policy to
the book of business associated with Diagnostek. Upon closing of the Diagnostek
merger in the third quarter of 1995, significant Diagnostek customer agreements,
primarily signed in late 1994 and early 1995 (prior to the Company's merger with
Diagnostek) were reviewed by the Company to determine projected profitability.
Following this review, appropriate loss contract reserves were established in
the third quarter of 1995.
In addition to the above, during the first quarter of 1995, contract losses over
the three-year term of the Company's contract with the State of New Jersey in
the amount of $12.6 million were recorded. In the third quarter of 1995, an
additional $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
this contract, thereby effectively mitigating further losses. Later in 1996,
this contract was permanently assigned to the subcontracting party. No loss
accruals related to the State of New Jersey remained on the books as of December
31, 1996
5 MERGER-RELATED EXPENSE
During the third quarter of 1995, the Company recorded a charge of $68.8 million
in connection with its merger with Diagnostek. Approximately $8.8 million was
incurred for transaction costs and $60.0 million 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. Principal locations identified for combination included Albuquerque,
NM, Davenport, IA and Bloomfield Hills, MI. These combination efforts will
eliminate approximately 400 operations and administrative positions. Of the
$60.0 million charge, $17.9 million related to systems integration and
conversion projects, $14.2 million in severance and related benefits and $27.9
million in expected lease vacation, asset write-offs and other associated costs.
30
<PAGE>
As a result of the merger with Diagnostek, the Company embarked on a plan to
integrate certain of the combined Companies' EDP systems. The costs of the
integration and conversion were computed based on the estimated costs of
contracts with consultants engaged to assist in the integration of the various
software and hardware systems.
Severance and related benefits were estimated based upon costs associated with
identified employees as well as targeted head count reductions.
As a result of the plan to combine certain of the Company's operations, specific
locations and facilities were identified to be vacated. Lease vacation costs
were then computed for those locations based on actual lease termination costs
as provided for in existing lease agreements and/or the estimated cost of idle
space from the time of vacating the space to the end of the lease term.
Similarly, asset write-offs were identified for each of the locations to be
vacated and were computed based on the estimated book value of the identified
assets at the anticipated date of write-off.
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.
During the fourth quarter of 1993, the Company recorded a charge of $38.4
million in connection with its merger with Preferred. Of this amount,
approximately $9.3 million was incurred for transaction costs and $29.1 million
was related to costs associated with the combining of operations and the related
combination activities.
At December 31, 1996, all consolidation and combination activities except for
those associated with Diagnostek were substantially complete. The Diagnostek
activities are expected to be completed during early 1997.
The following table is a reconciliation of the merger-related expense for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Asset Writeoffs
and Costs of Reduction of
Transaction Combining Headcount and
(In thousands) Costs Operations Capacity Total
=============================================================================================
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 306 $ 1,193 $ 6,804 $ 8,303
Expenses recorded 8,799 35,348 24,660 68,807
Payments and writeoffs (8,760) (5,073) (13,510) (27,343)
- ---------------------------------------------------------------------------------------------
Balance at December 31, 1995 345 31,468 17,954 49,767
Expenses recorded -- -- -- --
Payments and writeoffs (135) (31,468) (9,777) (41,380)
Balance at December 31, 1996 $ 210 $ -- $ 8,177 $ 8,387
- ---------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
6 RESTRUCTURING EXPENSE
In connection with its acquisition of MedView, the Company accrued $12.3 million
in the fourth quarter of 1996. $8.8 million and $3.5 million of this accrual was
capitalized as goodwill and charged to restructuring expense, respectively.
MedView is being integrated into CCN.
In December 1996, in conjunction with the Company's acquisition of Medview,
management approved plans to re-engineer and exit certain operations of the
Company's existing workers' compensation business. In connection with this plan,
the Company recognized a charge of $3.5 million, of which $3.0 million was for
asset write-offs (facilities, systems and PP&E) and $0.5 million related to
other restructuring activities.
In addition, an $8.8 million charge was recognized related to the
allocation of the acquisition cost in accordance with EITF 95-3. Of the $8.8
million, $0.3 million was related to direct transaction costs, $5.3 million was
for severance and related benefits, $2.0 million was for lease termination
costs, $0.6 million was for asset write-offs and $0.6 million related to other
combination activities.
During the fourth quarter of 1995, the Company's senior management approved
plans to re-engineer certain operations in the Company's prescription drug,
mental health and workers' compensation businesses. In connection with this
comprehensive plan, the Company recognized a fourth quarter charge in 1995 of
$31.1 million, including $8.2 million in severance and related benefits and
$22.9 million in expected lease vacation and other associated costs. Principal
locations identified for re-engineering include Wilton, CT, Tampa, FL, Irvine
and Marina Del Ray, CA, Seattle, WA, Hawthorne, NY, and Farmington Hills, MI.
These re-engineering efforts eliminated approximately 800 operations and
administrative positions Company-wide and resulted in vacation of approximately
222,400 square feet of leased space. At December 31, 1996, the plan had been
substantially implemented.
The following table is a reconciliation of the restructuring reserve for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Lease Vacation
Severance and and Other
(In thousands) Related Benefits Associated Total
Costs
==========================================================================
<S> <C> <C> <C>
Balance at December 31, 1994 $ -- $ -- $ --
Expenses recorded 8,233 22,865 31,098
Payments and writeoffs (501) -- (501)
- --------------------------------------------------------------------------
Balance at December 31, 1995 7,732 22,865 30,597
Expenses recorded and amounts
capitalized 6,718 5,542 12,260
Payments and writeoffs (8,336) (18,478) (26,814)
- --------------------------------------------------------------------------
Balance at December 31, 1996 $ 6,114 $ 9,929 $ 16,043
- --------------------------------------------------------------------------
</TABLE>
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. Repayments under this line are due August 21, 2001. The
agreement requires compliance with certain financial covenants, including net
worth, fixed charge coverage and total indebtedness, all of which the Company
has complied with as of December 31, 1996. The agreement also includes
restrictive provisions in connection with a change in control of the Company.
At December 31, 1996, the Company's outstanding principal balance under the
agreement was $87.5 million.
32
<PAGE>
8 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>
1997 $ 1,502,000
1998 553,000
1999 205,000
2000 156,000
2001 106,000
- -------------------------------------------------------------------------
Total future minimum lease payments 2,522,000
Less amount representing interest 171,000
- -------------------------------------------------------------------------
Present value of minimum lease payments 2,351,000
Less current portion 1,395,000
- -------------------------------------------------------------------------
Capital lease obligations, less current portion $ 956,000
- -------------------------------------------------------------------------
</TABLE>
Included in fixed assets are the following assets under capital leases:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $2,004,000 $2,089,000
Equipment 5,694,000 5,720,000
- -------------------------------------------------------------------------
7,698,000 7,809,000
Less accumulated amortization 3,578,000 4,317,000
- -------------------------------------------------------------------------
$4,120,000 $3,492,000
- -------------------------------------------------------------------------
</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 $22,963,000, $25,671,000 and $19,252,000, in 1996, 1995 and 1994,
respectively. The Company's minimum future lease payments under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Years ended December 31:
- -------------------------------------------------------------------------
<S> <C>
1997 $ 24,038,000
1998 23,716,000
1999 19,935,000
2000 17,841,000
2001 15,972,000
Thereafter 57,705,000
- -------------------------------------------------------------------------
$159,207,000
- -------------------------------------------------------------------------
</TABLE>
33
<PAGE>
9 CAPITAL STOCK
The Company has one class of common stock outstanding. At December 31, 1996,
there were 54,412,726 shares of common stock and no shares of preferred stock
outstanding. Under the Company's certificate of incorporation, as amended, the
authorized capital stock is 100,000,000 shares of common and 1,000,000 shares of
undesignated preferred stock.
In connection with a Shareholder Rights Plan adopted in February, 1994, the
Company granted to holders of record of the Company's common stock on March 7,
1994, a preferred stock purchase right for each share of Common Stock held. The
rights entitle stockholders, in certain circumstances, to purchase 1/1000th of a
share of the Company's Series A Junior Participating Preferred Stock at an
exercise price of $120.
10 STOCK OPTION PLANS
In February, 1991, the Company adopted the 1991 Stock Plan (the "1991 Plan"). As
of December 31, 1996, the 1991 Plan, as amended, provides that options to
purchase up to 6,058,236 shares of Company common stock may be granted to
officers and key employees. Under the 1991 Plan, the Company may grant incentive
stock options, non-qualified stock options, restricted stock, stock appreciation
rights and performance units. Options are exercisable in installments as
determined by the Board of Directors of the Company. Incentive stock options
must have a term not exceeding 10 years and an exercise price not less than the
fair market value of the Company common stock on the date of grant.
The maximum number of shares authorized under the 1991 plan is calculated each
year to increase by a number of shares equal to two percent of the Company's
Common Stock outstanding at the end of the immediately preceding year.
Preferred's Stock Incentive Plan (the "Preferred Plan") provided that up to
1,751,000 shares of Preferred common stock were available for granting of stock
options or awards of restricted stock. On the date of the merger with Preferred,
the Company replaced all options outstanding under the Preferred Plan with
options to purchase shares of the Company's Common Stock based on the exchange
ratio of .88 to 1.
Diagnostek had stock option plans under which both incentive and non-qualified
options had been granted to employees and non-employees. The terminated 1983
plan allowed for the purchase of up to 2,000,000 shares of Diagnostek common
stock of which substantially all options had been granted. During 1994, an
additional 1,000,000 shares of common stock were authorized for issuance under
the Diagnostek 1991 plan. The Diagnostek 1991 plan, as amended in 1994,
permitted granting of options for the purchase of up to 1,950,000 shares. On the
date of the merger with Diagnostek, the Company replaced all options outstanding
under the Diagnostek plans with options to purchase shares of the Company's
common stock based on the exchange ratio of 0.4975 to 1.
34
<PAGE>
Common stock option transactions under the 1987 Plan, the 1991 Plan, the
Preferred Plan, and the Diagnostek plans, follow:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------
Common
Shares
Available For Common Average Option
Grant Shares Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1993 891,606 4,987,995 $ 0.01-39.00
Change in shares reserved 1,355,260 -- --
Options:
Granted (1,168,200) 1,168,200 7.09-48.00
Exercised -- (1,122,670) 0.01-39.00
Forfeited 188,235 (188,235) 3.48-42.25
- ------------------------------------------------------------
Balance, December 31, 1994 1,266,901 4,845,290 0.01-48.00
Change in shares reserved 796,012 -- --
Options:
Granted (2,179,861) 2,179,861 7.59-37.13
Exercised -- (724,975) 0.09-38.75
Forfeited 491,563 (491,563) 7.59-48.00
- ------------------------------------------------------------
Balance, December 31, 1995 374,615 5,808,613 2.90-48.00
Change in shares reserved 1,073,775 -- --
Options:
Granted (5,881,888) 5,881,888 14.63-32.66
Exercised -- (768,876) 2.90-26.75
Forfeited 6,039,231 (6,039,231) 5.94-48.00
- ------------------------------------------------------------
Balance, December 31, 1996 1,605,733 4,882,394 $ 5.81-37.13
- ------------------------------------------------------------
</TABLE>
Options exercisable to purchase shares of common stock under the above plans at
December 31, 1996, 1995 and 1994 were 981,933, 3,205,496, and 2,561,637
respectively. The options exercisable at December 31, 1996 have exercise prices
ranging from $5.81 to $37.13.
During 1996, the Company permitted certain option holders to surrender their
options in exchange for new options with an exercise price of $18.375. Under
this program, the new options vest over the same period of time, beginning on
the new grant date, as did the original options surrendered. The new options
terminate on the same date as the original options.
On June 29, 1990, the Company issued certain other non-qualified options to
purchase 480,000 shares of its common stock at $.0073 per share. These options
were issued outside the 1987 Plan under separate agreements. During 1995, and
1994, approximately 8,303, and 9,926, of these options were exercised,
respectively. At December 31, 1996 and 1995, there were no options outstanding.
35
<PAGE>
In February, 1991, the Company adopted the 1991 Non-Employee Director Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides that options
to purchase up to 112,500 shares of the Company's Common Stock may be granted to
certain non-employee directors of the Company. The exercise price per share of
options granted under the Directors' Plan will be equal to the fair market value
of the Company's Common Stock at the date of grant. Initially, options granted
under the Directors' Plan expired five years from the date of grant. One-half of
the shares covered by the options become exercisable upon the date of grant and
the remaining one-half of such shares become exercisable on the first
anniversary of the date of grant. On May 4, 1994, the Company amended and
restated the Directors' Plan to provide for: (i) the increase in the number of
shares of Common Stock subject to the Directors' Plan from 112,500 to 250,000;
(ii) the automatic annual grant of vested options to acquire up to 2,500 shares
of the Company's Common Stock to continuing eligible directors beginning upon
the second anniversary of initial election to the Board; (iii) the automatic
grant of vested options to acquire an additional 500 shares to such continuing
directors who serve as Chairmen of the Company's Audit Committee or Compensation
Committee; and (iv) the extension of the period of time such options are
exercisable from five years to 10 years. At December 31, 1996, options to
purchase 128,500 shares of common stock at prices ranging from $8.00 to $37.50
per share had been granted and 105,740 options were outstanding. Approximately
104,240 of these options were exercisable at December 31, 1996.
In November, 1991, Preferred's Board of Directors approved the 1991 Directors'
Stock Option Plan (the "1991 Directors' Plan"). Under the 1991 Directors' Plan,
certain non-employee directors of the Company were each granted options to
purchase 4,400 shares of the Company's stock. The options under the 1991
Directors' Plan were immediately vested and exercisable at the fair market value
of the Company's common stock at the date of grant. No shares were granted in
1996, 1995 or 1994. At December 31, 1996, 13,200 options were both outstanding
and exercisable.
In connection with the Company's acquisition of Medintell, the Company assumed
all of the outstanding common stock options of Medintell. At December 31, 1996,
options to purchase 192,469 shares of common stock at prices ranging from $2.12
to $17.00 per share had been granted and 134,324 options were outstanding.
Approximately 26,187 of these options were exercisable at December 31, 1996.
The weighted average exercise price and remaining contractual life of options
outstanding at December 31, 1996, under all of the Company's option plans are
approximately $19.61 and 7.5 years, respectively. The weighted average exercise
price and remaining contractual life of options exercisable at December 31,
1996, under all of the Company's option plans are approximately $20.66 and 6.0
years, respectively.
No options were granted to non-employees during the period beginning December
16, 1995 through December 31, 1996, with the exception of grants to non-employee
outside directors as discussed above. Options granted to non-employee outside
directors were made at fair market value on the date of grant and no
compensation expense was recognized.
11 OTHER EMPLOYEE BENEFITS
In February, 1991, the Company established the 1991 Employee Stock Purchase Plan
(the "Purchase Plan"), providing for the purchase, by employees of the Company,
of up to 750,000 shares of common stock. The Purchase Plan commenced May 1,
1991. All employees of the Company on May 1, 1991, and all persons who become
employees thereafter are eligible to participate in the Purchase Plan. Employees
who own five percent or more of the Company's stock and directors who are not
employees of the Company may not participate in the Purchase Plan. During 1996,
1995 and 1994, participating employees purchased 113,464, 99,384 and 53,945
shares, respectively, of Common Stock under the Purchase Plan at average prices
of $18.75, $24.23 and $30.54 per share, respectively.
36
<PAGE>
The Company adopted a 401(k) Retirement Savings Plan (the "Savings Plan") for
all employees, which became effective on May 1, 1991. The Company made matching
contributions to the Savings Plan, subject to certain limitations, equal to 100%
of each participant's pre-tax contribution of an amount up to 2% of such
participant's total compensation and 50% of the next 2% of such participant's
compensation in 1996, 1995 and 1994. All employees of the Company on May 1,
1991, and all persons who become employees thereafter and complete at least one
year of employment with the Company, are eligible to participate in the Savings
Plan. The Company's matching contribution expense was $2,800,000 $2,800,000 and
$929,000 in 1996, 1995 and 1994, respectively.
Effective January 1, 1995, the Preferred Health Care Savings and Investment
Plan, a qualified defined contribution plan with Section 401(k) features ("the
Preferred Savings Plan") and the Community Care Network, Inc. 401(k) Savings
Plan ("the CCN Plan") were merged into the Value Health 401(k) Retirement
Savings Plan. Aggregate Company contributions to the Preferred Savings Plan and
the CCN Plan were $640,000 in 1994.
37
<PAGE>
12 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 816,000 $ 1,695,000 $ 2,566,000
Income Taxes $33,156,000 $61,245,000 $19,112,000
- -----------------------------------------------------------------------------------------------
Noncash transactions:
Capital leases entered into for equipment $ -- $ -- $ 731,000
Notes receivable from sale of subsidiary $ -- $ 2,900,000 $ --
Assets contributed in exchange for equity
interest in joint venture $18,577,000 $ -- $ --
Common stock issued in acquisitions $23,065,000 $10,138,000 $(4,113,000)
Common stock issued in litigation settlement $ -- $ -- $ 3,000,000
Fixed asset writeoffs from merger and restructuring $21,609,000 $ -- $ --
- -----------------------------------------------------------------------------------------------
</TABLE>
13 INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1995 and
1994 consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current payable:
Federal $16,786,000 $ 52,417,000 $31,398,000
State 6,229,000 8,734,000 5,723,000
Deferred taxes:
Provision (benefit) 28,776,000 (55,357,000) 1,856,000
Valuation allowance (849,000) 262,000 669,000
Goodwill reduction for acquired net operating
loss carryforward utilization 801,000 202,000 416,000
- -----------------------------------------------------------------------------------------
$51,743,000 $ 6,258,000 $40,062,000
- -----------------------------------------------------------------------------------------
</TABLE>
Taxes payable for 1996, 1995 and 1994 were reduced by $2,888,000, $4,421,000 and
$11,305,000 respectively for the tax benefit of disqualified dispositions of
common stock and the exercise of non-qualified common stock options.
38
<PAGE>
The tax benefits of carryforwards and temporary differences related to the
deferred tax asset at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Carryforwards:
Net operating loss carryforwards related to purchase
business combinations $ 9,975,000 $ 8,598,000
- -----------------------------------------------------------------------------------------
Temporary differences:
Merger-related expense 3,355,000 19,409,000
Loss contracts 2,151,000 11,850,000
Restructuring 3,017,000 11,933,000
Estimated claims liabilities 22,557,000 12,527,000
Depreciation and amortization (8,353,000) (3,141,000)
Other 17,405,000 17,707,000
- -----------------------------------------------------------------------------------------
40,132,000 70,285,000
- -----------------------------------------------------------------------------------------
Gross deferred tax benefit 50,107,000 78,883,000
Valuation allowance (4,917,000) (5,238,000)
- -----------------------------------------------------------------------------------------
Net deferred tax benefit 45,190,000 73,645,000
Less current portion 43,568,000 71,797,000
- -----------------------------------------------------------------------------------------
Long-term portion $ 1,622,000 $ 1,848,000
- -----------------------------------------------------------------------------------------
</TABLE>
The deferred tax asset decreased to $50.1 million at December 31, 1996 from
$78.9 million at December 31, 1995. 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 decreased in 1996 by $321,000 in connection with the
use of net operating losses from business combinations. The valuation allowance
of $4,917,000 and $5,238,000 at December 31, 1996 and 1995, respectively, has
been maintained primarily due to the uncertainty regarding the timing of net
operating loss utilization related to certain business combinations. At December
31, 1996 and 1995 the valuation allowance included approximately $3,921,000 and
$3,400,000, respectively, for net operating loss carryforwards related to
purchase business combinations. 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>
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax expense at statutory rate 35.0% (35.0%) 35.0%
State income tax expense, net 5.2 1.7 3.7
Tax exempt income (0.5) (3.4) (1.0)
Non deductible merger-related expense 2.4 46.1 2.6
Disposition of assets 3.2 21.0 --
Other (0.7) (1.6) (0.1)
- ---------------------------------------------------------------------------
44.6% 28.8% 40.2%
- ---------------------------------------------------------------------------
</TABLE>
39
<PAGE>
The Company had the following income tax carryforwards available at December 31,
1996:
<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 $28,500,000 2002-2007
U.S. federal AMT net operating loss carryforwards
acquired in purchase business combinations $25,509,000 2002-2007
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14 RELATED PARTIES AND CERTAIN TRANSACTIONS
Pursuant to a 1988 agreement, the Company acquired for $230,000 a 27% equity
interest in a house purchased by the President of one of its subsidiaries. The
Company is entitled to a proportional share of the proceeds when the house is
sold. The interest is carried at cost which approximates fair value, and is
included in other assets.
In connection with the merger with Preferred on December 14, 1993, the Company
terminated the employment of the former chief executive officer of Preferred.
Accordingly, under an existing employment agreement, the Company is obligated to
pay the former executive officer severance in the amount of $304,500, to be
increased through 1997, by approximately 5% per year. These obligations were
included as part of the Company's 1995 merger charges.
On March 28, 1995, the Company sold its National Foot Care Program, Inc.
("NFCP") subsidiary to a former executive officer. As consideration, the Company
received a promissory note of $2,582,000 at 5.5%. This note is collateralized by
the stock of NFCP. In addition, the Company received a separate promissory note
of $325,000 at 5.5%. This note is not collateralized. These notes are due
November 30, 2007.
Separately, the Company has three other notes receivable from this former
executive officer. One note, for $238,000, bears interest at 9%. Two other notes
aggregating $419,108 bear interest at 5.5%. These three notes are partially
collateralized by the pledge of the former executive officer's common stock of
the Company. The above notes are due February 28, 2007.
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.
40
<PAGE>
In connection with the construction of a new residence, the former chief
executive officer of Diagnostek borrowed $2,231,750 from Diagnostek. The loan
bears interest at 7.5% per annum and is payable over 30 years ending December 1,
2021. The loan is evidenced by a promissory note and mortgage. The amount
receivable at December 31, 1996, including accrued interest was $2,180,000.
In connection with the purchase of a residence, a former executive officer of
Diagnostek borrowed $330,000 from Diagnostek during 1990. The indebtedness,
which is evidenced by a promissory note, bears interest at the rate of 7.5% per
annum and is payable in 1998. The amount receivable at December 31, 1996,
including accrued interest was $338,000.
In March, 1995, a former executive officer of Diagnostek borrowed $327,000 from
Diagnostek. The indebtedness, which is evidenced by a promissory note, bears
interest at the rate of 7.5% per annum and is payable in 1998. The amount
receivable at December 31, 1996, including accrued interest was $335,000.
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
and $626,000 during the years ended December 31, 1995 and 1994, respectively.
The Company also maintains employment agreements with certain of its executive
officers providing for severance payments of up to three years' current base
salary in the event any of the agreements are terminated, under certain
specified conditions.
15 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
Notes receivable consist of loans to officers and other entities (see notes 3
and 14). 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.
41
<PAGE>
LONG-TERM INVESTMENTS
Fair value for these securities is based on quoted market prices. At December
31, 1996 and 1995, 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
The carrying value of accounts receivable, accounts payable and accrued expenses
approximates their fair values due to their short maturities.
16 COMMITMENTS AND CONTINGENCIES
In September 1995, two purported shareholder class action lawsuits, Freedman v.
- -----------
Value Health, Inc., at al. and Balkheimer, et al. v. Value Inc., et al., were
- ------------------- ---------------------------------
filed in the United States District Court for the District of Connecticut
against Value Health, certain of its current and former directors and senior
officers and Nunzio DeSantis. The two lawsuits, which assert claims under the
Securities Act and the Exchange Act, allege principally that Value Health and
the individual defendants made false or misleading statements to the public in
connection with Value Health's acquisition of Diagnostek in 1995. The
complaints, which were consolidated on February 16, 1996, do not specify the
amount of damages sought. On March 6, 1997, the court entered an order granting
in part and denying in part the defendants' motion to dismiss.
On July 11, 1994, a purported shareholder class action lawsuit, Bash, et al. v.
---------------
Diagnostek, et al. ("Bash"), was filed in the federal court in New Mexico
- ------------------
against Diagnostek and certain of its former directors and senior officers
alleging that the defendants made false or misleading statements to the public
in connection with Diagnostek's financial results for the fiscal year ended
March 31, 1994, the termination in August 1994 of Diagnostek's contracts with
subsidiaries of CIGNA Corp. and the announcement in August 1994 of the award to
Diagnostek of a contract with CHAMPUS. On September 10, 1996, the parties to
Bash I reached a settlement, subject to court approval and other conditions. In
a second action, Bash, et al v. Value Health, Inc., et al. ("Bash II"), the
-----------------------------------------
Bash I plaintiffs filed suit in federal court in New Mexico on December 15, 1995
against the same defendants, as well as Value Health and certain of its current
or former directors and officers, asserting the same factual allegations made in
Bash I, and, in addition, alleging that Value Health and certain individual
defendants made false and misleading statements to the public in connection with
Value Health's acquisition of Diagnostek in 1995. The complaint asserts claims
under the Securities Act and the Exchange Act, as well as common law claims.
The complaint does not specify the amount of damages sought. As part of the
settlement reached in Bash I, Value Health expects that the overlapping claims
in Bash II will be dropped.
Value Health intends to defend the allegations in each of the lawsuits described
above vigorously and does not believe the ultimate resolution will have a
material effect on its financial position, results of operations or cash flows.
42
<PAGE>
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.
17 INVESTMENTS
Investments in debt and equity securities as of December 31, 1996 and 1995 are
summarized as follows:
<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 Less than One To Five To After
Maturities: One Year Five Years Ten Years Ten Years Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <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>
Proceeds from the sale of available-for-sale securities were $50,677,000 and
$139,978,000 for the years ended December 31, 1996 and 1995, respectively.
Realized gains (losses) from these sales were $0 and $(559,000) in 1996 and
1995, 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 Less than One To
Maturities: One Year 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>
43
<PAGE>
18 COMPENSATION COSTS
Pro forma net earnings (loss) and net earnings (loss) per share for the years
ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Net Earnings (Loss) $56,096,000 $(31,223,000)
Net Earnings (Loss) Per Share $ 1.02 $ (0.57)
- -----------------------------------------------------------------
</TABLE>
The fair value of each option granted is estimated on the date of grant using a
modified Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Dividend yield None None
Expected stock price volatility 50% 50%
Risk-free interest rate 6.33% 6.71%
Expected option lives 5.3 years and .5 years 5.3 years and .5 years
</TABLE>
Because some options vest over several years and additional awards generally are
made each year, the pro forma amounts above may not be representative of the
effects on net earnings (loss) for future years.
19 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 December 31, 1996
and 1995 were $363.3 million and $304.3 million, respectively. Nearly 40% of
this increase relates to receivables in connection with 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. 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 entered 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.
44
<PAGE>
20 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands,
except per Costs of Earnings (loss) Net Earnings
share data) services before income Earnings (loss)
Quarter Revenues and products taxes (loss) per share
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
First $ 490,760 $ 402,348 $ 32,362 $ 19,094 $ 0.35
Second 498,211 411,992 32,651 19,273 0.35
Third 475,613 391,706 32,490 19,136 0.35
Fourth 499,191 406,532 18,569 6,826 0.12
- --------------------------------------------------------------------------------------------
Year $1,963,775 $1,612,578 $116,072 $ 64,329 $ 1.17
- --------------------------------------------------------------------------------------------
1995
First $ 444,217 $ 356,611 $ 23,450 $ 13,893 $ 0.25
Second 456,071 367,963 38,198 22,871 0.42
Third 462,148 383,542 (82,926) (54,688) (1.00)
Fourth 506,103 418,918 (431) (10,043) (0.18)
- --------------------------------------------------------------------------------------------
Year $1,868,539 $1,527,034 $(21,709) $(27,967) $(0.51)
- --------------------------------------------------------------------------------------------
</TABLE>
21 SUBSEQUENT EVENTS
On January 31, 1997, the Company completed the sale of substantially all of the
assets of its VHM subsidiary. The Company has accrued, at December 31, 1996, a
pre-tax loss of $8.0 million on the sale which is included in asset writedowns
and spin-off costs on the Consolidated Statement of Operations.
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Value Health, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Value Health, Inc. and its subsidiaries, listed in Item
14(a)(1) and 14(a)(2) of this Form 10-K/A. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We did not audit the
financial statements of Diagnostek, Inc. for the year ended December 31, 1994,
which statements reflect revenues of approximately 39% of the related
consolidated total. Those statements were audited by another auditor whose
report has been furnished to us, and our opinion, insofar as it relates to
amounts included for Diagnostek, Inc., which is a wholly-owned subsidiary of
Value Health, Inc., is based solely on the report of such other auditor.
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 report of another auditor, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Value Health, Inc. and its subsidiaries
as of December 31, 1996 and 1995, and the results of their operations and cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. In addition, in our
opinion, based on our audits and the report of another auditor, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Hartford, Connecticut
February 19, 1997, except for Note 2,
as to which the date is April 14, 1997.
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Stockholders' and The Board of Directors
Diagnostek, Inc.:
We have audited the consolidated statement of earnings, cash flows and changes
in stockholders' equity of Diagnostek, Inc. and subsidiaries for the year ended
December 31, 1994, included herein. 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
audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Diagnostek, Inc. and subsidiaries as of December 31, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
February 16, 1996
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
48
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
ROBERT E. PATRICELLI, age 57, the founder of the Company, has been the
Chief Executive Officer and a director of the Company since its organization and
Chairman of the Board since February 1990. Mr. Patricelli also currently serves
as President of the Company. From 1983 to 1986, Mr. Patricelli was President of
the Affiliated Businesses Group, an operating division of CIGNA Corporation
("CIGNA"), where he managed several health care businesses, including CIGNA
Healthplan, Inc. (a group of health maintenance organizations), a prepaid dental
company, and Intracorp (a rehabilitation and medical review services company).
Mr. Patricelli is a member of the Institute of Medicine of the National Academy
of Sciences and is a member of the Board of Directors (or Trustees) of Northeast
Utilities, Inc., The American Association of Health Plans, The Connecticut
Business and Industry Association, Hartford Hospital, Wesleyan University, and
The Bushnell Memorial Hall.
STEVEN J. SHULMAN, age 45, has been a director of the Company since April
1991, an Executive Vice President from September 1993 to November 1995 and has
served as President, Pharmacy & Disease Management Group since November 1995.
From November 1987 to September 1993 he served as Senior Vice President of the
Company. From October 1990 through April 1991, he also served as the acting
President and Chief Executive Officer of the Company's American PsychManagement,
Inc. subsidiary. Prior to joining the Company, 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 is also 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 at the University of Hartford Art School.
WILLIAM J. MCBRIDE, age 52, has been a director of the Company since August
1987 and served as President and Chief Operating Officer of the Company from
September 1993 through December 1995. From August 1987 to September 1993, he
served as Executive Vice President. He has also served as the Company's
Treasurer from 1988 to September 1993. Prior to joining the Company, Mr.
McBride served in a number of positions at CIGNA and its predecessor, INA
Corporation, including serving from 1984 to 1987 as the President and Chief
Executive Officer of CIGNA Healthplan, Inc.
DAVID J. MCDONNELL, age 54, has been a director of the Company since
December 1993. From October 1988 through December 1993, he was Chief Executive
Officer of Preferred Health Care Ltd. ("Preferred") and served as Chairman of
the Board of Directors of Preferred from December 1991 through December 1993.
From October 1988 until April 1992, he served as President of Preferred.
49
<PAGE>
WALTER J. MCNERNEY, age 71, has been a director of the Company since April
1991. Since 1982, he has been the Herman Smith Professor of Health Policy at
the J.L. Kellogg Graduate School of Management, Northwestern University, and the
managing partner of Walter J. McNerney and Associates, a management consulting
firm in the health field. From 1978 to 1981, Mr. McNerney was the President and
Chief Executive Officer of the Blue Cross and Blue Shield Associations, which
functioned as the national coordinating agencies for 135 Blue Cross and Blue
Shield Plans. Mr. McNerney is a director, and since 1988 has been the Chairman
of the Board, of American Health Properties, Inc., a real estate investment
trust. Mr. McNerney served as Chief Executive Officer of American Health
Properties, Inc. from 1988 to 1992. He is also a director of Hanger Orthopedic
Group, Inc., Medicus Systems Corp., Nellcor Corporation, Osteotech, Inc., The
Stanley Works, and Ventritex, Inc.
RODMAN W. MOORHEAD, III, age 53, has been a director of the Company since
May 1987. Mr. Moorhead is Senior Managing Director of E.M. Warburg, Pincus &
Co., a direct equity investor with whom he has been since 1973. He is also a
director of AgriDyne Technologies, Inc., Cambridge NeuroScience, Inc., and
NeXstar, Inc., as well as a number of private firms.
CONSTANCE B. NEWMAN, age 61, has been a director of the Company since June
1993. She has served as Under Secretary and chief operating officer of the
Smithsonian Institution since July 1992. From June 1989 to June 1992, she was
Director of the Office of Personnel Management of the United States. Before
that she served in a variety of positions in private business and the federal
government, including service as Director of VISTA, Vice Chairman of The
Consumer Product Safety Commission, and Assistant Secretary of The Department of
Housing and Urban Development.
JOHN L. VOGELSTEIN, age 62, has been a director of the Company since June
1993. He has been Vice Chairman of the Board of Directors of E.M. Warburg,
Pincus & Co., Inc., for more than the past five years, and its President since
January 1994. He is also a director of ADVO, Inc., Aegis Group, plc, LCI
International and Mattel, Inc.
HICKS B. WALDRON, age 73, has been a director of the Company since May
1994. Mr. Waldron was Chairman and Chief Executive Officer of Avon Products,
Inc. from 1983 through 1988. Prior to joining Avon, he was Executive Vice
President of R.J. Reynolds Industries, Inc., which he joined when R.J. Reynolds
acquired Heublein, Inc. in 1982. He joined Heublein in 1973 as President and
became Chief Executive Officer in 1975 and Chairman in 1982. From 1946 to 1973,
Mr. Waldron was associated with General Electric Company, acting in various
management and executive capacities. He is currently serving as a director of
Ryder System, Inc. and is a member of the Board of Directors of the Horatio
Alger Association of Distinguished Americans and the National Center for Health
Education.
In employment agreements with Messrs. Patricelli and Shulman, the Company has
agreed to use its best efforts to cause each of them to be elected as a director
of the Company for so long as he serves as an officer of the Company.
JAMES E. BUNCHER, age 60, has been the President of the Health Plans Group
of the Company since September 1995. He also serves as Chairman of the Board,
President and Chief Executive Officer of CCN, which he joined in August of 1992.
From January 1992 to August 1992, he was a consultant and a Vice President for
TakeCare, Inc., an HMO. From 1987 to 1992, Mr. Buncher was a general partner of
an investment partnership.
50
<PAGE>
PAUL M. FINIGAN, age 42, has been Senior Vice President, General Counsel
and Secretary of the Company since September 1995. From 1992 to September 1995,
Mr. Finigan was Vice President, General Counsel and Secretary of the Company.
From 1988 to 1991, Mr. Finigan was Associate General Counsel and Secretary of
the Company.
WILLIAM J. GOSS, age 43, has been the Senior Vice President for Strategy
and Development of the Company since September 1995. From 1993 until September
1995, he was President and Chief Executive Officer of Value Health Management,
Inc., a wholly-owned subsidiary, acquired in May 1995. From 1991 to 1993, Mr.
Goss was Manager of Health Programs for the General Electric Corporation. Mr.
Goss serves on the boards of directors of the Health Outcomes Institute and the
Medical Quality Commission.
DAVID M. WURZER, age 38, has been Senior Vice President, Treasurer and
Chief Financial Officer of the Company since 1995. From February 1994 to
September 1995, he was Vice President, Treasurer and Chief Financial Officer of
the Company. From September 1993 to February 1994, he was Vice President,
Finance and Investor Relations of the Company. From December 1990 to August
1993, Mr. Wurzer was Director of Operations Planning and Control of the Company.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
COMPENSATION PHILOSOPHY
- -----------------------
The compensation policies of the Company comprising the Management Incentive
Program (the "MIP") are reviewed and approved annually by the Compensation
Committee of the Board of Directors (the "Committee"). Ms. Newman and Messrs.
McNerney, Moorhead, Vogelstein and Waldron are the Committee's members, with Mr.
Moorhead serving as chairman. In addition, the Committee: (i) determines the
total compensation to be paid to the Chief Executive Officer, (ii) reviews and
comments on the total compensation for each of the other members of the
Company's senior management, and (iii) approves awards of stock options under
the Company's 1991 Stock Plan (the "Plan"). Compensation under the MIP is
comprised of base salary, annual cash incentive compensation, and long-term
incentive compensation in the form of stock options.
The goals of the MIP are to (i) focus the attention of executives on the
achievement of the Company's annual and long-term profit targets; (ii) assist
the Company in attracting and retaining qualified executive officers and senior
management; and (iii) increase ownership of Company stock by management in order
to align their long-term interests with those of other shareholders. Each
executive's compensation is based upon the financial performance of the Company
and/or of a particular business unit, and upon his or her individual performance
and job content.
The Committee also monitors the compensation offered by certain comparable
corporations in the managed care industry. These corporations have been chosen
to reflect a range of market values and revenues which fairly encompass the
Company's value and size. Actual compensation may be greater or less than
industry averages based upon annual and long-term Company performance. For
1996, the Committee believes that total compensation for the Company's
executives was competitive within the managed care industry.
51
<PAGE>
The Committee is aware of the $1,000,000 limit on deductibility of executive
compensation for the Chief Executive Officer and certain other executive
officers created by (S)162(m) of the Internal Revenue Code of 1986, as amended,
and will consider this limit in compensation decisions.
EXECUTIVE OFFICER COMPENSATION
- ------------------------------
BASE SALARY.
- -----------
In setting base salary compensation levels for the Chief Executive Officer,
the Committee takes into account such factors as (i) degree of impact in
achieving corporate and divisional financial results, (ii) contribution to
strategic direction setting and personnel development, (iii) the individual's
past performance and compensation, and (iv) base compensation levels in
comparable companies. Based on these factors, the Committee determines the base
salary of the Chief Executive Officer, and reviews and comments on the Chief
Executive Officer's recommendations for the base salaries of other executive
officers and senior management. In setting or reviewing the base salary for the
Company's executives, the Committee has not, and does not believe it is
practicable to, quantify or otherwise attempt to assign relative weights to the
specific factors its considers.
ANNUAL INCENTIVE COMPENSATION.
- -----------------------------
The annual incentive compensation element of the MIP consists of performance-
based cash bonuses that depend upon the achievement of financial goals by the
Company or a particular business unit, and the achievement of specified
nonfinancial goals by the executive. Two-thirds of an executive's targeted bonus
is based upon meeting financial performance goals established by the Committee
at the beginning of each fiscal year. For 1996, those financial goals consisted
of the achievement of targeted pre-tax earnings for either the Company as a
whole or a particular business unit. The remaining one-third of the targeted
bonus depends upon achieving defined nonfinancial goals, such as the development
and execution of strategic plans, human resource or information system
objectives, and the attainment of satisfactory customer service levels. Targeted
bonus amounts range from 10% to 100% of base salary, and an executive may earn
up to 200% of his or her targeted bonus for performance that exceeds established
performance goals. The Committee believes such targets are competitive with
levels generally established within the managed care industry.
For 1996, the Compensation Committee determined that the financial performance
of the Company, resulted in bonus awards of 60% of target for this portion of
the executive's bonus. The Committee further determined that the executive
officers produced an extraordinary overall performance in strategic
restructuring in leading the Company through the announcement of a spin-off of
ValueRx and then the negotiations with Columbia/HCA and other parties, and that
therefore Messrs. Patricelli, Shulman, Buncher, Finigan and Goss achieved
performance that resulted in bonus awards of 140% of their non-financial target.
The committee awarded the executives 87% of their respective total target
bonuses.
LONG-TERM COMPENSATION.
- ----------------------
The long-term compensation element of the MIP consists of annual stock option
awards pursuant to the Company's 1991 Stock Plan. The objectives of these awards
are to align the long-term interests of executives and shareholders by creating
a strong, direct link between executive pay and shareholder return, and to
encourage executive retention through deferred vesting schedules. The
Committee's decision to grant options under the Plan and the size of any such
grant is based on the Committee's consideration of the same performance-based
factors described above for annual incentive compensation.
52
<PAGE>
On September 27, 1996, the Compensation Committee approved a stock option
cancellation and replacement program (the "Replacement Program"), pursuant to
which officers and employees holding incentive stock options and non-statutory
options under the Company's 1991 Stock Option Plan (the "Plan") were given the
opportunity, on or after September 27, 1996, to exchange such options for new
options.
The Company's long-term incentive compensation program is implemented through
the grant of stock options. Due to recent declines in the market value of the
Company's Common Stock, many of management's stock options were exercisable at a
price which exceeded the market value of the Common Stock. At the same time,
the Board of Directors was considering a proposed tax-free spin-off of its
ValueRx subsidiary. Accordingly, the Compensation Committee felt it was
important to offer the management to exchange previously granted options
(including vested options) for new options through the Replacement Program, in
order to retain management during this critical time period, and regain the
incentive that options were originally intended to provide. In adopting the
Replacement Program, however, the Compensation Committee believed it was
appropriate that the new options vest over the same period of time from the new
grant date as did the options that the officer surrendered. In all other
respects, the terms of the options agreements for the replacement options are
the same terms as the existing options.
On February 6, 1997, the Committee granted stock options for 1996 performance to
certain employees participating in the MIP. No awards of options were granted
to executive officers of the Company pursuant to the terms of the merger
agreement with Columbia/HCA. The options granted to employees of the Company
have an exercise price equal to the fair market value of the Company's Common
Stock on the date of grant, vest in equal annual installments on the first three
anniversaries of the grant date, and are exercisable over a ten-year period.
The value realizable from exercisable options is dependent upon the market price
of the Company's Common Stock at any particular point in time.
The Compensation Committee is satisfied that the executive officers of the
Company are dedicated to achieving significant improvements in the long-term
financial performance of the Company and that the compensation policies and
programs implemented and administered have contributed and will continue to
contribute towards achieving this goal.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
- --------------------------------------
On February 6, 1997, the Committee reviewed Mr. Patricelli's total compensation.
With respect to 1996 performance, the Committee determined that Mr. Patricelli
had substantially met his non-financial goals and only partially achieved his
financial goals. The Committee then concluded he should receive 87% of his
targeted bonus, as indicated above. The Committee noted that Mr. Patricelli had
completed the restructuring activities at ValueRx and Value Behavioral Health
and had completed the strategic review of Value Health regarding various
structural options for spin-off or merger, thereby maximizing shareholder value.
53
<PAGE>
In light of the merger agreement between the Company and Columbia/HCA, the
Committee did not amend Mr. Patricelli's base salary for 1997 and awarded no
option shares as long-term compensation, as noted above. Mr. Patricelli was
awarded a bonus of $593,775.
Constance B. Newman
Walter J. McNerney
Rodman W. Moorhead, III
John L. Vogelstein
Hicks B. Waldron
The following table sets forth the compensation received by the Chief Executive
Officer and the four most highly compensated executive officers of the company
for the three fiscal years ended December 31, 1996. The Company has granted no
stock appreciation rights during the fiscal years indicated below.
54
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------- ------------------------ ------------------
OTHER
ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
NAME AND COMPEN STOCK UNDERLYING PAY- COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (1) SATION ($) AWARDS ($) OPTION ($) OUTS ($) SATION ($)
- -------------------------- ------ ----------- ------------- ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert E. Patricelli
Chairman of the 1996 $677,000 $593,775 - - 424,800 (4) - $10,193 (5)
Board of Directors, 1995 623,077 253,000 - - 30,000 (3) - 8,325 (5)
President and 1994 475,000 475,000 (2) - - 247,500 (2)(3) - 8,325 (5)
Chief Executive Officer
Steven J. Shulman 1996 416,620 274,050 - - 337,750 (4) - 5,788 (5)
President Pharmacy & Disease 1995 355,772 218,000 - - 80,000 (3) - 5,010 (5)
Management Group and Director 1994 300,000 195,000 (2) - - 99,500 (2)(3) - 5,010 (5)
James E. Buncher (6) 1996 344,359 228,375 - - 200,000 (3)(4) - 8,010 (5)
President, Health Plans group 1995 259,381 106,261 - - 100,000 (3) - 6,212 (5)
1994 113,821 102,137 - - - - 4,987 (5)
Paul M. Finigan 1996 245,769 87,000 - - 151,167 (3)(4) - 4,908 (5)
Senior Vice President, General 1995 211,892 54,000 - - 60,000 (3) - 4,724 (5)
Counsel and Secretary 1994 148,461 50,000 (2) - - 40,000 (2)(3) - 4,699 (5)
William J. Goss (7) 1996 237,462 83,520 - - 120,000 (3)(40 - 4,879 (5)
Senior Vice President. 1995 69,231 25,000 - - 90,000 (3) - 2,166 (5)
Strategy and Development 1994 - - - - - - -
</TABLE>
(1) Amounts awarded under the Management Incentive Program for the respective
fiscal year's performance.
(2) For 1994 performance, Messrs Patricelli, Shulman and Finigan received such
amounts in the form of stock option grants of 47,500, 19,500 and 5,000
shares, respectively.
(3) Options granted under the Company's Management Incentive Program for the
respective fiscal year's performance.
(4) Options granted under the Company's 1996 option cancel and replace program.
(5) The Company made matching contributions under the Company's 401 (k) Plan
for Messrs., Patricelli, Shulman, Buncher, Finigan and Goss, respectively,
in the amounts of $4,500, $4,500, $4,500, $4,500 and $4,500, respectively,
for fiscal 1996, $4,500, $4,500, $4,500, $4,500 and $2,077, respectively,
for fiscal 1995 and $4,500, $4,500, $4,240, $4,500 and $0, respectively,
for fiscal 1994. The Company also made contributions under its group term
life insurance policy, in the amounts of $5,693, $1,288, $3,510, $408 and
$379, respectively, for fiscal year 1996 and $3,825, $510, $1,712, $224 and
$89, for fiscal 1995 and $3,825, $510, $747, $199 and $0, respectively, for
fiscal 1994.
(6) Mr. Buncher joined the Company in connection with the purchase of Community
Care Network in June 1994.
(7) Mr. Goss joined the Company in connection with the purchase of Value Health
Management in May 1995.
55
<PAGE>
1996 OPTION/SAR GRANTS
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10%($)
- ---------------------- ----------------- ----------------- ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Patricelli 424,800 (1) - $18.375 2/7/02-2/6/06 $3,632,552 $8,718,166
Steven J. Shulman 337,750 (1) - 18.375 2/7/02-2/6/06 2,845,411 6,807,110
James E. Buncher 100,000 (1) - 18.375 11/2/05 1,037,295 2,568,885
100,000 (2) 7.00% 18.375 9/27/06 1,155,594 2,928,502
Paul M. Finigan 141,167 (1) - 18.375 2/23/03-6/13/06 1,341,868 3,276,122
10,000 (3) 0.70% 26.750 6/13/06 168,229 426,326
William J. Goss 110,000 (1) - 18.375 5/11/05-6/13/06 1,125,245 2,780,280
10,000 (3) 0.70% 26.750 6/13/06 168,229 426,326
</TABLE>
_______________________
(1) Options granted to named officers under the Company's 1996 option cancel
and replace program. Options granted to named officers are one-third
exercisable on September 27, 1997, one-third exercisable on September
27,1998 and the remaining one-third exercisable on September 27, 1999,
except for 107,500, 32,250 and 5,000 shares for Messrs. Patricelli, Shulman
and Finigan, respectively, which were fully vested when granted. All other
terms remain unchanged from the original grant, including the grant
expiration date. The potential realizable value is calculated based on each
original grant expiration date (see Ten-Year Option/SAR Repricing table).
Options granted under the Company's 1996 option cancel and replace program
were not included in the calculation of the percentage of total options
granted to employees in 1996.
(2) Options granted to named officer for 1996 performance are one-third
exercisable on September 27, 1997, one-third exercisable on September 27,
1998 and the remaining one-third exercisable on September 27, 1999.
(3) Options granted to named officers for 1996 performance are one-third
exercisable on June 13, 1997, one-third exercisable on June 13, 1998 and
the remaining one-third exercisable on June 13, 1999. These grants were
subsequently canceled under the 1996 cancel and replace program.
56
<PAGE>
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON EXERCISE VALUE OPTIONS AT FISCAL YEAR END (#) FISCAL YEAR END ($)(1)
-------------------------------- ---------------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- -------------- -------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Patricelli - - 107,500 317,300 $ 120,938 $ 356,963
Steven J. Shulman - - 35,250 305,500 39,656 343,688
James E. Buncher - - - 200,000 - 225,000
Paul M. Finigan - - 5,000 136,167 5,625 153,188
William J. Goss - - - 155,000 - 174,375
</TABLE>
_____________
(1) Based on the closing price on the New York Stock Exchange---Composite
Transactions of the Company's Common Stock on that date ($19.50).
57
<PAGE>
REPLACEMENT OPTION TABLE
The following table sets forth certain information concerning all replacement or
repricing of options held by any executive officer of the Company during the
last ten completed fiscal years. See "Report of the Compensation Committee of
the Board of Directors."
TEN-YEAR OPTIONS/SAR REPRICINGS
-------------------------------
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES OPTION TERM
UNDERLYING MARKET PRICE REMAINING
OPTIONS/ OF STOCK AT EXERCISE PRICE AT DATE OF
SARS TIME OF AT TIME OF NEW REPRICING OR
NAME AND REPRICED OR REPRICING OR REPRICING OR EXERCISE AMENDMENT
PRINCIPAL POSITION DATE AMENDED(#) AMENDMENTS($) AMENDMENT($) PRICE($) (MONTHS)
- ---------------------------------- --------- ------------ -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Patricelli 9/27/96 30,000 $18.375 $23.000 $18.375 113
Chairman of the Board 9/27/96 150,000 18.375 35.250 18.375 102
of Directors, President and 9/27/96 50,000 18.375 37.125 18.375 101
Chief Executive Officer 9/27/96 47,500 18.375 32.250 18.375 100
9/27/96 50,000 18.375 38.750 18.375 89
9/27/96 37,300 18.375 26.750 18.375 77
9/27/96 60,000 18.375 21.833 18.375 65
Stephen J. Shulman 9/27/96 20,000 18.375 23.000 18.375 113
President, Pharmacy & Disease 9/27/96 60,000 18.375 23.250 18.375 110
Management Group and Director 9/27/96 20,000 18.375 37.125 18.375 101
9/27/96 19,500 18.375 35.250 18.375 100
9/27/96 60,000 18.375 45.000 18.375 95
9/27/96 20,000 18.375 38.750 18.375 89
9/27/96 90,000 18.375 29.625 18.375 84
9/27/96 16,000 18.375 26.750 18.375 77
9/27/96 32,250 18.375 21.833 18.375 65
James E. Buncher 9/27/96 100,000 18.375 23.250 18.375 110
President, Health Plans Group
Paul M. Finigan 9/27/96 10,000 18.375 26.750 18.375 117
Senior Vice President, General 9/27/96 30,000 18.375 23.000 18.375 113
Counsel and Secretary 9/27/96 30,000 18.375 23.250 18.375 110
9/27/96 10,000 18.375 37.125 18.375 101
9/27/96 5,000 18.375 35.250 18.375 100
9/27/96 25,000 18.375 45.000 18.375 95
9/27/96 5,000 18.375 38.750 18.375 89
9/27/96 25,000 18.375 36.750 18.375 86
9/27/96 1,167 18.375 26.750 18.375 77
William J. Goss 9/27/96 10,000 18.375 26.750 18.375 117
Senior Vice President, 9/27/96 10,000 18.375 23.000 18.375 113
Strategy and Development 9/27/96 50,000 18.375 23.250 18.375 110
9/27/96 40,000 18.375 33.875 18.375 104
David M. Wurzer 9/27/96 32,500 18.375 23.000 18.375 113
Senior Vice President and 9/27/96 30,000 18.375 23.250 18.375 110
Chief Financial Officer 9/27/96 10,000 18.375 37.125 18.375 101
9/27/96 4,500 18.375 35.250 18.375 100
9/27/96 25,000 18.375 45.000 18.375 95
9/27/96 25,000 18.375 38.750 18.375 89
</TABLE>
58
<PAGE>
STOCK PERFORMANCE TABLE
The Stock Price Performance Graph set forth below compares the cumulative total
stockholder return on the Common Stock of the Company from December 31, 1991
to February 28, 1997, with the cumulative total return of the S&P 500 and the
S&P Healthcare composite index over the same period.
COMPARISON OF CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 2/28/97
<S> <C> <C> <C> <C> <C> <C> <C>
Value Health, Inc. 100 211 168 198 146 104 127
S & P 500 100 108 118 120 165 203 217
S & P Health Care Composite 100 84 77 87 137 165 186
</TABLE>
Assumes Initial Investment of $100
59
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Patricelli, Shulman, Buncher,
Finigan and Goss. Pursuant to those agreements, Mr. Patricelli serves as the
Company's Chairman, President and Chief Executive Officer; Mr. Shulman serves as
the Company's President, Pharmacy & Disease Management Group; Mr. Buncher serves
as the Company's President, Health Plans Group; Mr. Finigan as the Company's
Senior Vice President and General Counsel and Mr. Goss as the Company's Senior
Vice President and Strategy and Development. Each of the agreements is subject
to one-year renewals after the expiration of an initial term. The current terms
expire for Messrs. Patricelli, Shulman, Buncher, Finigan and Goss expire on
February 28, 1998.
These employment agreements that generally provide that if, within 24 months
following the closing of a "Strategic Transaction,"(as defined in each of the
employment agreements), (a) the executive officer is terminated without cause or
(b) the executive officer terminates his employment due to either a material
reduction in responsibility, authority or compensation, or a requirement that
the executive relocate, then the executive officer is entitled to receive,
depending on the executive involved, a lump-sum payment equal to either three
times or two and one-half times the sum of the executive officer's base
compensation and annual performance bonus at the target level for the year in
which such termination occurs. If his employment is terminated within 24 months
following a Strategic Transaction, each of Messrs. Patricelli, Shulman, Buncher,
Finigan, and Goss would be entitled to receive severance payments of equal to
three times base compensation plus target bonus in the case of Messrs.
Patricelli, Shulman and Buncher and two and a half times base compensation plus
target bonus in the case of Messrs. Finigan, and Goss. In the event of a
termination or constructive termination of employment as described above, the
executive officer is entitled to continue to receive the same health benefits
for up to one year following termination of employment. In addition to the
foregoing, Messrs. Finigan, and Goss are entitled, pursuant to the terms of
their employment agreements, to receive transaction bonuses of $1,500,000 and
$1,000,000, respectively, upon consummation of a Strategic Transaction. These
transaction bonuses initially were approved on September 27, 1996 in connection
with the announced spin-off of ValueRx , and, because the merger with
Columbia/HCA also would constitute a "Strategic Transaction," would be payable
upon completion of the Merger.
In addition, in the event of a termination or constructive termination of
employment as described above, pursuant to the terms of executive officers
employment agreements, all unvested options of Value Health held by such
executive officer will immediately become vested and exercisable.
Under Sections 280G and 4999 of the Code, certain payments and benefits provided
to Value Health employees under the plans and agreements described above may not
be fully deductible by Value Health, and such payments and benefits may be
subject to a 20% excise tax payable by the recipient. The employment agreements
referred to above generally provide that if an excise tax is imposed on a
covered employee on any of these amounts, the employee will be provided a gross-
up payment to permit the employee to receive a net amount equal to what would
have been received had the excise tax not been imposed. Should such sections of
the Code apply, certain of the payments and benefits described above may not be
fully deductible by Value Health and the gross-up payments would become payable
and may also be nondeductible.
60
<PAGE>
CONSULTING AND NON-COMPETITION AGREEMENTS. In connection with merger with
Columbia/HCA, Value Health has entered into Consulting and Non-Competition
Agreements with Robert E. Patricelli, Chairman, President and Chief Executive
Officer of Value Health, and Steven J. Shulman, President, Pharmacy & Disease
Management Group of Value Health, effective as of the closing of the merger,
pursuant to which each of Messrs. Patricelli and Shulman have agreed to provide
certain consulting services to Value Health for a period of one year and have
agreed to refrain from competing with the business of Value Health for a period
of three years after the effective date of the merger. Under such agreements,
Value Health has agreed to pay Messrs. Patricelli and Shulman $4,500,000 and
$3,000,000, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 10, 1997 (i) by each person
who is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) by each director of the Company, and (iii) by each
executive officer named in the Summary Compensation Table above, and (iv) by all
executive officers and directors of the Company as a group.
61
<PAGE>
<TABLE>
<CAPTION>
Amount & Nature of Percentage of Common Stock
Name and Address Beneficial Ownership (1) Outstanding
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Warburg, Pincus Capital
Company, L.P. (2)
466 Lexington Avenue
New York, New York 10017 7,772,510 14.2%
Smith Barney Holdings, Inc. (3)
Travelers Group Inc.
388 Greenwich Street
New York, NY 10013 5,583,007 10.2%
Robert E. Patricelli (4) 1,844,408 3.4%
Steven J. Shulman (5) 131,813 *
James E. Buncher 1,406 *
Paul M. Finigan (6) 5,100 *
William J. Goss 3,797 *
William J. McBride (7) 52,900 *
David J. McDonnell (9) 338,364 *
Walter J. McNerney (8) 30,000 *
Rodman W. Moorhead, III (2) 7,772,510 14.2%
Constance B. Newman (10) 27,500 *
John R. Vogelstein (2) 7,772,510 14.2%
Hicks B. Waldron (11) 24,000 *
All executive officers & directors
as a group (13 persons) (2)(12) 10,237,695 18.4%
* Less than 1%
</TABLE>
62
<PAGE>
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"). E.M. Warburg, Pincus & Co., LLC, a New York limited liability
company ("EMW LLC") manages Warburg. The members of EMW LLC are
substantially the same as the partners of WP. Lionel I. Pincus is the
Managing Partner of WP and the Managing Member of EMW LLC and may be deemed
to control both WP and EMW LLC. WP, as the sole general partner of Warburg,
has a 20% interest in the profits of Warburg. Mr. Moorhead, a director of
the Company, is a Member and Senior Managing Director of EMW LLC and a
general partner of WP. Mr. Vogelstein, a Director of the Company, is a
Member, Vice Chairman and President of EMW LLC and a general partner of WP.
As such, Mr. Moorhead and Mr. Vogelstein may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Exchange
Act) in an indeterminate portion of the shares beneficially owned by
Warburg, EMW LLC and WP. All of the shares indicated as owned by Mr.
Moorhead and Mr. Vogelstein are owned directly by Warburg and are included
because of their affiliation with Warburg. Mr. Moorhead and Mr. Vogelstein
disclaim "beneficial ownership" of these shares within the meaning of Rule
13d-3 under the Exchange Act, except to the extent of their indirect
pecuniary interest.
3. Smith Barney Holdings, Inc. ("SB Holdings") and Travelers Group Inc.
("TRV") have jointly filed a Schedule 13G dated January 31, 1997, pursuant
to Section 13 of the Securities Exchange Act of 1934, as amended and the
foregoing information is derived from such Schedule 13G. SB Holdings and
TRV disclaim beneficial ownership of all such shares .
4. Includes 107,500 shares of Common Stock which Mr. Patricelli has the right
to acquire within 60 days of April 10, 1997, upon exercise of outstanding
options. Also, includes 10,000 shares held by Mr. Patricelli's wife as to
which Mr. Patricelli disclaims beneficial ownership.
5. Includes 35,250 shares of Common Stock which Mr. Shulman has the right to
acquire within 60 days of April 10, 1997, upon exercise of outstanding
options. Also, includes 30,000 shares held by Mr. Shulman's wife and 500
shares held by his children as to which Mr. Shulman disclaims beneficial
ownership.
6. Includes 5,000 shares of Common Stock which Mr. Finigan has the right to
acquire within 60 days of April 10, 1997, upon exercise of outstanding
options.
7. Includes 48,200 shares of Common Stock which Mr. McBride has the right to
acquire within 60 days of April 10, 1997, upon exercise of outstanding
options.
8. Includes 30,000 shares of Common Stock which Mr. McNerney has the right to
acquire within 60 days of April 10, 1997, upon exercise of outstanding
options.
9. Includes 289,801 shares of Common Stock which Mr. McDonnell has the right
to acquire within 60 days of April 10, 1997, upon exercise of outstanding
options.
10. Includes 27,240 shares of Common Stock which Ms. Newman has the right to
acquire within 60 days of April 10, 1997, upon exercise of outstanding
options.
11. Includes 22,500 shares of Common Stock which Mr. Waldron has the right to
receive upon exercise of outstanding options.
12. Includes 569,991 shares of Common Stock which executive officers and
directors as a group have the right to acquire within 60 days of April 10,
1997, upon exercise of outstanding options.
63
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements of Value Health, Inc. and its subsidiaries
are included in Part II, Item 8, pages 19 through 47 of this
report and include:
. Consolidated Balance Sheets as of December 31, 1996 and 1995
. Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
. Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994
. Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
. Notes to Consolidated Financial Statements
. Report of Independent Accountants - Coopers & Lybrand L.L.P.
. Independent Auditors' Report - KPMG Peat Marwick LLP
(a)(2) FINANCIAL STATEMENT SCHEDULE
The following supplemental schedule and related information for
the years ended December 31, 1996, 1995 and 1994, is included on
page 70 of this report:
. Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or the notes thereto.
64
<PAGE>
(A) (3) LIST OF EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
3.1, 4.1 -Restated Certificate of Incorporation of the Registrant, as amended.
(filed as Exhibit 3.1, 4.1 to the Registrant's Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by this
reference)
3.2, 4.2 -Amended and Restated By-laws of the Registrant. (filed as Exhibit 3
to the Registrant's Current Report on Form 8-K dated February 9, 1994,
and incorporated herein by this reference)
4.3 -Specimen certificate representing the Common Stock. (filed as Exhibit
4.4 to the Registration Statement on Form S-1, Registration No. 33-
39134, and incorporated herein by this reference)
10.1 -Amended and Restated 1987 Stock Plan. (filed as Exhibit 10.1 to the
Registrant's Form S-1, Registration Statement No. 33-39134, and
incorporated herein by this reference)
10.2 -1991 Stock Plan, as amended. (filed as Exhibit 10.2 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by this reference)
10.3 -1991 Employee Stock Purchase Plan. (filed as Exhibit 10.3 to the
Registration Statement on Form S-1, registration No. 33-39134, and
incorporated herein by this reference)
10.4 -1991 Non-Employee Director Stock Option Plan, as amended. (filed as
Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by this reference)
10.5** -Amended and Restated Employment Agreement dated as of September 1,
1993, by and between the Registrant and Robert E. Patricelli. (filed
as Exhibit 10.5 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by this reference)
10.5a -Amendment, dated September 27, 1996 to Employment Agreement between
the Registrant and Robert E. Patricelli.
10.6 -Amended and Restated Employment Agreement dated as of March 1, 1994,
by and between the Registrant and Steven J. Shulman. (filed as Exhibit
10.8 to the Registrant's Form 10-K for the fiscal year ended December
31, 1994 and incorporated herein by this reference)
10.6a -Amendment, dated September 27, 1996 to Employment Agreement between
the Registrant and Steven J. Shulman.
10.7 -Employment Agreement dated as of September 8, 1995 by and between the
Registrant and James E. Buncher. (filed as Exhibit 10.8 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by this reference)
65
<PAGE>
10.7a -Amendment dated September 27, 1996 to Employment Agreement between
the Registrant and James E. Buncher.
10.8 -Employment Agreement dated as of March 1, 1996 by and between the
Registrant and Paul M. Finigan.
10.8a Amendment dated September 27, 1996 to Employment Agreement between the
Registrant and Paul M. Finigan.
10.9 -Employment Agreement dated as of September 2, 1996 by and between the
Registrant and William J. Goss.
10.9a Amendment dated September 27, 1996 to Employment Agreement between the
Registrant and William J. Goss.
10.10** -Employment Agreement, dated January 1, 1993 between Preferred Heath
Care, Ltd. and David J. McDonnell. (filed as Exhibit 10.9 to the
Preferred Health Care Ltd. Form 10-K for the fiscal year ended
December 31, 1992 and incorporated herein by this reference)
10.11 -Registration Rights Agreement dated as of February 22, 1991 by and
among the Registrant, Warburg, Pincus Capital Company, L.P., Robert E.
Patricelli, William J. McBride and Steven J. Shulman. (filed as
Exhibit 10.12 to the Registration Statement on Form S-1, Registration
No. 33-39134, and incorporated herein by this reference)
10.12 -Rights Agreement, dated as of November 2, 1995, between Value Health,
Inc. and Bank of Boston. (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated February 9, 1994 and incorporated
herein by this reference)
10.13 Form of Indemnification Agreement between the Registrant and its
directors and certain of its officers. (filed as Exhibit 10.13 to the
Registration Statement on Form S-1, Registration No. 33-39134, and
incorporated herein by this reference)
10.14 -Agreement and Plan of Merger dated as of September 23, 1993 among the
Registrant, VH Merger-Sub Corp. and Preferred Health Care Ltd. (filed
as Exhibit 2.1 to the Registration Statement on Form S-4, Registration
No. 33-71404 and incorporated herein by this reference)
10.15 -Stock Incentive Plan, as amended and restated (as of March 17, 1992).
(filed as Exhibit 10(a) to the Preferred Health Care Ltd. Form 10-K
for the fiscal year ended December 31, 1992 and incorporated herein by
this reference)
10.16 -Stock Purchase Agreement dated May 18, 1994 by and among Value
Health, Inc., Community Care Network, Inc., and Alliance Healthcare
Foundation, Robert M. Colasanto, Sandra M. Foote, Richard C. Morgan,
George S. Murphy, Nancy B. Plaxico, Douglas J. Reeves and Patrick J.
Sullivan. (filed as Exhibit 2.1 to the Registrant's Current Report on
Form 8-K dated May 18, 1994, File No. 0-19039, and incorporated herein
by this reference)
10.17 -Agreement and Plan of Merger dated as of March 27, 1995 among Value
Health, Inc., VHI Merger-Sub Corporation, and Diagnostek, Inc.
(incorporated herein by reference to previously filed exhibit to
Current Report on Form 8-K dated March 25, 1995, File No. 0-19039)
66
<PAGE>
10.18 -Consulting Agreement dated as of March 27, 1995, as amended on June
4, 1995 among Value Health, Inc., Diagnostek, Inc. and Nunzio P.
DeSantis (incorporated herein by reference to previously filed exhibit
to Current Report on Form 8-K dated March 25, 1995, File No. 0-19039)
10.19 -Agreement not to Compete dated as of March 27, 1995, as amended on
June 4, 1995 among Value Health, Inc., Diagnostek, Inc. and Nunzio P.
DeSantis (incorporated herein by reference to previously filed exhibit
to Current Report on Form 8-K filed by Diagnostek, Inc. dated June 8,
1995)
10.20 -First Amendment to Agreement and Plan of Merger, dated as of June 4,
1995, by and among Value Health, Inc., VHI Merger-Sub. Corporation and
Diagnostek, Inc. (incorporated herein by reference to previously filed
exhibit to Current Report on Form 8-K filed by Diagnostek, Inc. dated
June 8, 1995)
10.21 Agreement and Plan of Merger, dated January 15, 1997 among
Columbia/HCA Healthcare Corporation, CVH Acquisition Corporation and
Value Health, Inc. (incorporated herein by reference to previously
filed exhibit to Current Report on Form 8-K dated January 15, 1997,
File No. 001-11239).
10.22 Revolving Credit Agreement dated August 21, 1996. (filed as exhibit 10
to the Registrant's Form 10-Q for the three months ended September 30,
1996 and incorporated herein by this reference)
11. -Computation of Net Earning Per Share.
21. -Consent of Independent Accountants.
* Confidential Treatment Previously Granted.
** Executive Compensation Plans and Arrangements.
(B) REPORTS OF FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1996.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
VALUE HEALTH, INC.
DATE: March 24, 1997
BY: \s\ David M. Wurzer
---------------------------------------
David M. Wurzer
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES(S) DATE
--------- --------- ----
<S> <C> <C>
Chairman of the Board, President March 24, 1997
\s\ Robert E. Patricelli Chief Executive Officer, and
- -------------------------------
Robert E. Patricelli Director (Principal Executive Officer)
\s\ Steven J. Shulman President, Pharmacy and Disease March 24, 1997
- -------------------------------
Steven J. Shulman Management Group and
Director
\s\ William J. McBride Director March 24, 1997
- -------------------------------
William J. McBride
\s\ David J. McDonnell Director March 24, 1997
- -------------------------------
David J. McDonnell, D.S.W.
Director March 24, 1997
- -------------------------------
Walter J. McNerney
\s\ Rodman W. Moorhead, III Director March 24, 1997
- -------------------------------
Rodman W. Moorhead, III
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C>
\s\ Constance B. Newman Director March 24, 1997
- -------------------------------
Constance B. Newman
\s\ John L. Vogelstein Director March 24, 1997
- -------------------------------
John L. Vogelstein
\s\ Hick B. Waldron Director March 24, 1997
- -------------------------------
Hicks B. Waldron
</TABLE>
69
<PAGE>
VALUE HEALTH, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------------------------------
ADDITIONS
- ------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS PERIOD
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996:
Valuation Allowance For
Deferred Tax Asset $ 5,238,000 - - $ 321,000 $ 4,917,000
Allowance For Doubtful
Accounts $17,171,000 $ 14,122,000 - $9,173,000/(2)/ $22,120,000
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995:
Valuation Allowance For
Deferred Tax Asset $ 4,976,000 $ 262,000 - - $ 5,238,000
Allowance For Doubtful
Accounts $11,811,000 $8,798,000/(3)/ $ 284,000/(3)/ $3,722,000/(2)/ $17,171,000
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994:
Valuation Allowance For
Deferred Tax Asset $ 4,307,000 $ 669,000 -- -- $ 4,976,000
Allowance For Doubtful
Accounts $ 6,167,000 $ 5,915,000 $2,103,000/(1)/ $2,374,000/(2)/ $11,811,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Acquisition of Community Care Network, Inc. in June 1994, as well as
amounts written off directly against revenue.
(2) Write-Off of uncollectible accounts, net of recoveries, and sale of Lewin-
VHI in May 1996. Acquisition of Value Health Management, Inc. in May 1995,
and Health Management Strategies in February 1995.
70
<PAGE>
EXHIBIT 10.5A
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
This First Amendment dated as of September 27, 1996, is to the Employment
Agreement between Value Health, Inc. (the "Company") and Robert E. Patricelli
(the "Executive"), dated as of September 1, 1993 ("Employment Agreement").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement as follows, as permitted under Section 14 of the Employment Agreement:
1. Section 8 of the Employment Agreement is hereby deleted and the
following is added in its place:
8. TERMINATION AFTER A STRATEGIC TRANSACTION. In the event of a
"Strategic Transaction" of the Company (as defined in Section 17
of this Agreement), if, within twenty-four (24) months following
the closing of such Strategic Transaction (or at any time prior
thereto but in contemplation thereof): (i) the Executive is
terminated without cause; (ii) the Executive is not retained in
an executive position of responsibility, authority and
compensation comparable in all material respects to the position
of the Executive immediately prior to the Strategic Transaction;
(iii) the Executive does not retain all rights and privileges
accorded under this Agreement as a result of the Strategic
Transaction; (iv) the Executive terminates his employment with
the Company due to either a material reduction in responsibility,
authority or compensation, or a requirement that the Executive
relocate, each on account of the Strategic Transaction; then the
Executive shall receive within five (5) business days following
the date of termination, a lump sum payment (less all amounts
required to be withheld and deducted) equal to 3 times the sum of
the Executive's then current base compensation and annual
performance bonus at the target level for the year in which such
termination occurs, and the Executive shall be deemed to have
been terminated without cause for purposes of Section 7. In
addition, in the event of a termination of the Executive in
accordance with the preceding sentence, the Executive shall
receive the same health benefits available to Company executives,
upon the same terms and conditions and at the same cost to the
Executive, for the lesser of one (1) year from the date of
termination or the first day of the first month in which the
Executive obtains new employment providing health benefits
coverage.
2. Section 17 is hereby added to the Employment Agreement to read in its
entirety as follows:
17. STRATEGIC TRANSACTION. A Strategic Transaction shall be
deemed to occur if at any time during the term of this Agreement
any of the following events occur:
71
<PAGE>
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a
result of such merger, consolidation or reorganization,
less than 50% of the combined voting power of the then-
outstanding securities of such corporation or person
immediately after such transaction are held in the
aggregate by the holders of Voting Stock (as that term is
hereafter defined) of the Company immediately prior to
such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation
or other legal person, and as a result of such sale or
transfer, less than 50% of the combined voting power of
the then-outstanding voting securities of such corporation
or person are held in the aggregate by the holders of
Voting Stock of the Company immediately prior to such
sale;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of
1934 (the "Exchange Act"), disclosing that any person as
the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial
owner (as the term "beneficial owner" is defined under
Rule 13d-3 or any successor rule or regulation promulgated
under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding
securities of the Company entitled to vote generally in
the election of members of the Board of Directors of the
Company ("Voting Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the
Exchange Act disclosing in response to Form 8-K or
Schedule 14A (or any successor schedule, form or report or
item therein) that a strategic transaction of the Company
has or may have occurred or will or may occur in the
future pursuant to any then-existing contract or
transaction;
(v) If during the period of two (2) consecutive years
individuals who at the beginning of any such period
constitute the members of the Board of Directors of the
Company (the "Directors") cease for any reason to
constitute at least a majority thereof unless the
election, or the nomination for election by the Company's
shareholders, of each Director first elected during such
period was approved by a vote of at least two-thirds of
the Directors then still in office who were Directors at
the beginning of any such period (excluding for this
purpose the election of any new Director in connection
with an actual or threatened election of proxy contest);
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(vi) The Company: (i) sells at least 85% of the assets or
outstanding stock of a subsidiary to an unrelated party
(or completes a transaction having a similar effect), (ii)
distributes all or substantially all of the common stock
of a subsidiary as a dividend to stockholders of the
Company; or (iii) sells voting stock of a subsidiary in an
underwritten public offering.
3. Section 4 of the Employment Agreement is hereby amended by replacing
the first sentence thereof with the following:
The Company shall pay the Executive base compensation for his
services at an annual rate of $682,500.
4. Section 18 is hereby added to the Employment Agreement to read in its
entirety as follows:
18. Indemnification. If there is a final determination that any
---------------
portion of the amounts payable to the Executive under the
Employment Agreement constitutes an "excess parachute payment" as
such term is used in Section 280G and 4999 of the Internal
Revenue Code, then the Company shall pay to the Executive an
additional sum such that after all taxes applicable to the
receipt of such amount have been subtracted therefrom, the
remaining amount will equal the sum of the amount of the tax
imposed with respect to the "excess parachute payment", plus any
interest and penalties thereon.
5. The Employment Agreement, except as herein amended, is hereby
ratified, confirmed and approved in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Agreement as of the date written above.
Signed on behalf of
Value Health, Inc.
_________________________________
__________________________________
Signed by Robert E. Patricelli
73
<PAGE>
EXHIBIT 10.6A
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
This First Amendment dated as of September 27, 1996, is to the Employment
Agreement between Value Health, Inc. (the "Company") and Steven J. Shulman (the
"Executive"), dated as of March 1, 1994 ("Employment Agreement").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement as follows, as permitted under Section 14 of the Employment Agreement:
1. Section 8 of the Employment Agreement is hereby deleted and the
following is added in its place:
8. TERMINATION AFTER A STRATEGIC TRANSACTION. In the event of a
"Strategic Transaction" of the Company (as defined in Section 17
of this Agreement), if, within twenty-four (24) months following
the closing of such Strategic Transaction (or at any time prior
thereto but in contemplation thereof): (i) the Executive is
terminated without cause; (ii) the Executive is not retained in
an executive position of responsibility, authority and
compensation comparable in all material respects to the position
of the Executive immediately prior to the Strategic Transaction;
(iii) the Executive does not retain all rights and privileges
accorded under this Agreement as a result of the Strategic
Transaction; (iv) the Executive terminates his employment with
the Company due to either a material reduction in responsibility,
authority or compensation, or a requirement that the Executive
relocate, each on account of the Strategic Transaction; then the
Executive shall receive within five (5) business days following
the date of termination, a lump sum payment (less all amounts
required to be withheld and deducted) equal to 3 times the sum of
the Executive's then current base compensation and annual
performance bonus at the target level for the year in which such
termination occurs, and the Executive shall be deemed to have
been terminated without cause for purposes of Section 7. In
addition, in the event of a termination of the Executive in
accordance with the preceding sentence, the Executive shall
receive the same health benefits available to Company executives,
upon the same terms and conditions and at the same cost to the
Executive, for the lesser of one (1) year from the date of
termination or the first day of the first month in which the
Executive obtains new employment providing health benefits
coverage.
2. Section 17 is hereby added to the Employment Agreement to read in its
entirety as follows:
17. STRATEGIC TRANSACTION. A Strategic Transaction shall be
deemed to occur if at any time during the term of this Agreement
any of the following events occur:
74
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(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a
result of such merger, consolidation or reorganization,
less than 50% of the combined voting power of the then-
outstanding securities of such corporation or person
immediately after such transaction are held in the
aggregate by the holders of Voting Stock (as that term is
hereafter defined) of the Company immediately prior to
such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation
or other legal person, and as a result of such sale or
transfer, less than 50% of the combined voting power of
the then-outstanding voting securities of such corporation
or person are held in the aggregate by the holders of
Voting Stock of the Company immediately prior to such
sale;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of
1934 (the "Exchange Act"), disclosing that any person as
the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial
owner (as the term "beneficial owner" is defined under
Rule 13d-3 or any successor rule or regulation promulgated
under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding
securities of the Company entitled to vote generally in
the election of members of the Board of Directors of the
Company ("Voting Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the
Exchange Act disclosing in response to Form 8-K or
Schedule 14A (or any successor schedule, form or report or
item therein) that a strategic transaction of the Company
has or may have occurred or will or may occur in the
future pursuant to any then-existing contract or
transaction;
(v) If during the period of two (2) consecutive years
individuals who at the beginning of any such period
constitute the members of the Board of Directors of the
Company (the "Directors") cease for any reason to
constitute at least a majority thereof unless the
election, or the nomination for election by the Company's
shareholders, of each Director first elected during such
period was approved by a vote of at least two-thirds of
the Directors then still in office who were Directors at
the beginning of any such period (excluding for this
purpose the election of any new Director in connection
with an actual or threatened election of proxy contest);
75
<PAGE>
(vi) The Company: (i) sells at least 85% of the assets or
outstanding stock of a subsidiary to an unrelated party
(or completes a transaction having a similar effect), (ii)
distributes all or substantially all of the common stock
of a subsidiary as a dividend to stockholders of the
Company; or (iii) sells voting stock of a subsidiary in an
underwritten public offering.
3. Section 4 of the Employment Agreement is hereby amended by replacing
the first sentence thereof with the following:
The Company shall pay the Executive base compensation for his
services at an annual rate of $420,000.
4. Section 18 is hereby added to the Employment Agreement to read in its
entirety as follows:
18. Indemnification. If there is a final determination that any
----------------
portion of the amounts payable to the Executive under the
Employment Agreement constitutes an "excess parachute payment" as
such term is used in Section 280G and 4999 of the Internal
Revenue Code, then the Company shall pay to the Executive an
additional sum such that after all taxes applicable to the
receipt of such amount have been subtracted therefrom, the
remaining amount will equal the sum of the amount of the tax
imposed with respect to the "excess parachute payment", plus any
interest and penalties thereon.
5. The Employment Agreement, except as herein amended, is hereby
ratified, confirmed and approved in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Agreement as of the date written above.
Signed on behalf of
Value Health, Inc.
_________________________________
__________________________________
Signed by Steven J. Shulman
76
<PAGE>
EXHIBIT 10.7A
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
This First Amendment dated as of September 27, 1996 is to the Employment
Agreement between Value Health, Inc. (the "Company") and James E. Buncher (the
"Executive"), dated as of September 8, 1995 ("Employment Agreement").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement as follows, as permitted under Section 13 of the Employment Agreement:
1. Section 7 of the Employment Agreement is hereby deleted and the
following is added in its place:
7. TERMINATION AFTER A STRATEGIC TRANSACTION. In the event of a
"Strategic Transaction" of the Company (as defined in Section 16 of
this Agreement), if, within twenty-four (24) months following closing
of such Strategic Transaction (or at any time prior thereto but in
contemplation thereof): (i) the Executive is terminated without cause;
(ii) the Executive is not retained in an executive position of
responsibility, authority and compensation comparable in all material
respects to the position of the Executive immediately prior to the
Strategic Transaction; (iii) the Executive does not retain all rights
and privileges accorded under this Agreement as a result of the
Strategic Transaction; (iv) the Executive terminates his employment
with the Company due to either a material reduction in responsibility,
authority or compensation, or a requirement that the Executive
relocate, each on account of the Strategic Transaction; then the
Executive shall receive within five (5) business days following the
date of termination, a lump sum payment (less all amounts required to
be withheld and deducted) equal to 3 times the sum of the Executive's
then current base compensation and annual performance bonus at the
target level for the year in which such termination occurs, and the
Executive shall be deemed to have been terminated without cause for
purposes of Section 6. In addition, in the event of a termination of
the Executive in accordance with the preceding sentence: (i) the
Executive shall receive the same health benefits available to Company
executives, upon the same terms and conditions and at the same cost to
the Executive, for the lesser of one (1) year from the date of
termination or the first day of the first month in which the Executive
obtains new employment providing health benefits coverage; and (ii)
unvested stock options or stock awards granted to the Executive under
the 1991 Stock Plan shall become fully vested as of the termination
date.
2. Section 16 is hereby added to the Employment Agreement to read in its
entirety as follows:
16. STRATEGIC TRANSACTION. A Strategic Transaction shall be deemed to
occur if at any time during the term of this Agreement any of the
following events occur:
77
<PAGE>
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a
result of such merger, consolidation or reorganization,
less than 50% of the combined voting power of the then-
outstanding securities of such corporation or person
immediately after such transaction are held in the
aggregate by the holders of Voting Stock (as that term is
hereafter defined) of the Company immediately prior to
such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation
or other legal person, and as a result of such sale or
transfer, less than 50% of the combined voting power of
the then-outstanding voting securities of such corporation
or person are held in the aggregate by the holders of
Voting Stock of the Company immediately prior to such
sale;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of
1934 (the "Exchange Act"), disclosing that any person as
the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial
owner (as the term "beneficial owner" is defined under
Rule 13d-3 or any successor rule or regulation promulgated
under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding
securities of the Company entitled to vote generally in
the election of members of the Board of Directors of the
Company ("Voting Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the
Exchange Act disclosing in response to Form 8-K or
Schedule 14A (or any successor schedule, form or report or
item therein) that a strategic transaction of the Company
has or may have occurred or will or may occur in the
future pursuant to any then-existing contract or
transaction;
(v) If during the period of two (2) consecutive years
individuals who at the beginning of any such period
constitute the members of the Board of Directors of the
Company (the "Directors") cease for any reason to
constitute at least a majority thereof unless the
election, or the nomination for election by the Company's
shareholders, of each Director first elected during such
period was approved by a vote of at least two-thirds of
the Directors then still in office who were Directors at
the beginning of any such period (excluding for this
purpose the election of any new Director in connection
with an actual or threatened election of proxy contest);
78
<PAGE>
(vi) The Company: (i) sells at least 85% of the assets or
outstanding stock of a subsidiary to an unrelated party
(or completes a transaction having a similar effect), (ii)
distributes all or substantially all of the common stock
of a subsidiary as a dividend to stockholders of the
Company; or (iii) sells voting stock of a subsidiary in an
underwritten public offering.
3. Section 3 of the Employment Agreement is hereby amended by replacing
the first sentence thereof with the following:
The Company shall pay the Executive base compensation for his
services at an annual rate of $350,000.
4. Section 17 is hereby added to the Employment Agreement to read in its
entirety as follows:
17. Indemnification. If there is a final determination that any
----------------
portion of the amounts payable to the Executive under the
Employment Agreement constitutes an "excess parachute payment" as
such term is used in Section 280G and 4999 of the Internal
Revenue Code, then the Company shall pay to the Executive an
additional sum such that after all taxes applicable to the
receipt of such amount have been subtracted therefrom, the
remaining amount will equal the sum of the amount of the tax
imposed with respect to the "excess parachute payment", plus any
interest and penalties thereon.
5. The Employment Agreement, except as herein amended, is hereby
ratified, confirmed and approved in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Agreement as of the date written above.
Signed on behalf of
Value Health, Inc.
_________________________________
__________________________________
Signed by James E. Buncher
79
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
AGREEMENT dated as of March 1, 1994, by and between Value Health, Inc., a
Delaware corporation (the "Company"), and Paul M. Finigan (the "Executive").
Company desires to employ Executive to devote full time to the business of
the Company, and Executive desires to be so employed.
The parties agree as follows:
1. EMPLOYMENT. Company agrees to employ Executive, and Executive agrees to be
so employed, in the capacity of Vice President and General Counsel. Executive
shall perform such functions and undertake such responsibilities as are
customarily associated with such capacities. Employment shall be for an initial
one-year term ending February 28, 1995 and shall be renewed for successive one-
year terms unless terminated as provided hereunder.
2. TIME AND EFFORTS. Executive shall diligently and conscientiously devote his
full and exclusive time and attention and best efforts in discharging his duties
as the Company's Vice President and General Counsel.
3. COMPENSATION. Commencing as of the effective date of this Agreement, the
Company shall pay the Executive base compensation for his services at an annual
rate of $145,000. This amount shall be paid in equal bi-weekly installments.
The parties agree to negotiate increases in such compensation at least annually.
In addition, Executive shall be eligible to earn an annual performance bonus at
a target level to be established annually pursuant to criteria approved by the
Board of Directors of VHI (or the Compensation Committee thereof).
4. BENEFITS. The Executive shall be entitled to participate in, and receive
benefits from any insurance, medical, disability or pension plan of the Company
which may be in effect at any time during the term hereof and which shall
generally be available to senior executive officers of the Company.
5. EXPENSE REIMBURSEMENT. The Company shall reimburse Executive for all
reasonable and necessary expenses incurred in carrying out his duties under this
Agreement. Executive shall present to the Company from time to time an itemized
account of such expenses in any form required by the Company.
6. TERMINATION WITHOUT CAUSE.
(a) BY THE COMPANY. The Company may without cause terminate this Agreement
at any time by notifying the Executive thirty days prior to such
termination.
(i) In that event, for a period of one (1) year commencing on the
date of the termination becomes effective, Executive shall be
entitled to receive his base compensation as provided by Section
4 (less all amounts required to be withheld and deducted).
80
<PAGE>
(ii) In that event, the Company shall provide Executive, upon the same
terms and conditions and at the same cost to Executive, with the
same health benefits available to all the Company's executives,
for the lesser of one year from the date of termination or the
first day of the first month in which Executive obtains new
employment provided health benefits coverage.
(iii) In the event either of (a) termination without cause or (b)
nonrenewal of this Agreement by the Company, from the date the
termination or nonrenewal because effective, no portion of any
stock option awarded to the Executive pursuant to the Company's
1991 Stock Plan which has not already vested shall thereafter
becomes vested.
(b) BY THE EXECUTIVE. The Executive may without cause terminate this
Agreement by giving 60 days' written notice to the Company. In such
event, at the sole discretion of the Company, the Executive shall
continue to render his services and shall be paid his regular
compensation as provided by Section 4 up to the date of termination,
but he shall not receive any payment thereafter nor shall any stock
option or restrictive stock that is not otherwise vested or
nonforfeitable on the date of termination become vested or
nonforfeitable on such date.
7. TERMINATION AFTER MERGER OR ACQUISITION. In the event of the merger of the
Company or the acquisition of substantially all of the Company's stock or assets
(a "Reorganization"), Executive shall either be terminated without cause
pursuant to Section 6 or shall: (i) be retained by the Company in an executive
position of responsibility, authority and compensation comparable in all
material respects to the position of the Executive immediately prior to the
Reorganization; (ii) retain all rights accorded under this Agreement; and (iii)
be afforded all privileges accorded to other Company executives. If the
Executive is terminated without cause in connection with a Reorganization: (i)
in applying 6 (a) (i) "two" years shall be substituted for one year; and (ii) on
the date the termination or nonrenewal becomes effective, any portion of any
stock option awarded to the Executive pursuant to the Company's 1991 Stock Plan
not already vested shall become fully vested.
8. TERMINATION FOR CAUSE. The Company may for cause terminate this Agreement at
any time by notifying the Executive of such termination and the cause therefor.
In such event, neither Section 7 nor Section 8 (if otherwise applicable) shall
apply; provided, however, that in the event the Company terminates this
Agreement on account of the Executive's prolonged disability, solely for
purposes of Section 6 (a) (ii) the Company shall be deemed to have terminated
this Agreement without cause. "Cause" shall mean the Executive's death,
prolonged disability or the significant failure to perform the Executive's
duties hereunder.
9. CONFIDENTIALITY, INVENTION AND NON-COMPETE AGREEMENT. Simultaneously with
the execution of this Agreement the Executive shall execute the Confidentiality,
Invention and Non-compete Agreement attached hereto as Exhibit A.
10. INDEMNIFICATION. The Executive shall be indemnified for his acts as an
officer and director of the Company in accordance with the by-laws of the
Company.
11. NOTICES. All notices required or permitted to be given under this
Agreement shall be given by certified mail, return receipt requested, to the
parties at the following addresses or to such other addresses as either may
designate in writing to the other party.
If to Company:
81
<PAGE>
Chairman and Chief Executive Officer
Value Health, Inc.
22 Waterville Road
Avon, CT 06001
If to Executive:
Paul M. Finigan
Three Brendan's Way
Granby, CT 06035
12. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Connecticut.
13. AMENDMENTS. This Agreement may be amended only in writing, signed by both
parties.
14. NON-WAIVER. A delay or failure by either party to exercise a right under
this Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
15. BINDING EFFECT. The provisions of this Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns. In witness whereof, Company has by its appropriate officers, signed and
affixed its seal and Executive has signed and sealed this Agreement.
VALUE HEALTH, INC. PAUL M. FINIGAN
By: /s/ William J. McBride By: /s/ Paul M. Finigan
------------------------------ --------------------------
Date: March 4, 1994 Date: March 4, 1994
-------------------------- ------------------------
82
<PAGE>
EXHIBIT 10.8A
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
This First Amendment dated as of September 27, 1996 is to the Employment
Agreement between Value Health, Inc. (the "Company") and Paul M. Finigan (the
"Executive"), dated as of March 1, 1994 ("Employment Agreement").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement as follows, as permitted under Section 13 of the Employment Agreement:
1. Section 7 of the Employment Agreement is hereby deleted and the
following is added in its place:
7. TERMINATION AFTER A STRATEGIC TRANSACTION. In the event of a
"Strategic Transaction" of the Company (as defined in Section 16
of this Agreement), if, within twenty-four (24) months following
the closing of such Strategic Transaction (or at any time prior
thereto but in contemplation thereof): (i) the Executive is
terminated without cause; (ii) the Executive is not retained in
an executive position of responsibility, authority and
compensation comparable in all material respects to the position
of the Executive immediately prior to the Strategic Transaction;
(iii) the Executive does not retain all rights and privileges
accorded under this Agreement as a result of the Strategic
Transaction; (iv) the Executive terminates his employment with
the Company due to either a material reduction in responsibility,
authority or compensation, or a requirement that the Executive
relocate, each on account of the Strategic Transaction; then the
Executive shall receive within five (5) business days following
the date of termination, a lump sum payment (less all amounts
required to be withheld and deducted) equal to 2.5 times the sum
of the Executive's then current base compensation and annual
performance bonus at the target level for the year in which such
termination occurs, and the Executive shall be deemed to have
been terminated without cause for purposes of Section 6. In
addition, in the event of a termination of the Executive in
accordance with the preceding sentence: (i) the Executive shall
receive the same health benefits available to Company executives,
upon the same terms and conditions and at the same cost to the
Executive, for the lesser of one (1) year from the date of
termination or the first day of the first month in which the
Executive obtains new employment providing health benefits
coverage; and (ii) unvested stock options or stock awards granted
to the Executive under the 1991 Stock Plan shall become fully
vested as of the termination date.
2. Section 16 is hereby added to the Employment Agreement to read in its
entirety as follows:
16. STRATEGIC TRANSACTION. A Strategic Transaction shall be
deemed to occur if at any time during the term of this
Agreement any of the following events occur:
83
<PAGE>
(i) The Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and as a result of
such merger, consolidation or reorganization, less than 50% of
the combined voting power of the then-outstanding securities of
such corporation or person immediately after such transaction are
held in the aggregate by the holders of Voting Stock (as that
term is hereafter defined) of the Company immediately prior to
such transaction;
(ii) The Company sells or otherwise transfers all or substantially all
of its assets to any other corporation or other legal person, and
as a result of such sale or transfer, less than 50% of the
combined voting power of the then-outstanding voting securities
of such corporation or person are held in the aggregate by the
holders of Voting Stock of the Company immediately prior to such
sale;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), each as promulgated pursuant
to the Securities Exchange Act of 1934 (the "Exchange Act"),
disclosing that any person as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is
defined under Rule 13d-3 or any successor rule or regulation
promulgated under the Exchange Act) of securities representing
20% or more of the combined voting power of the then-outstanding
securities of the Company entitled to vote generally in the
election of members of the Board of Directors of the Company
("Voting Stock");
(iv) The Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Exchange Act disclosing
in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a strategic
transaction of the Company has or may have occurred or will or
may occur in the future pursuant to any then-existing contract or
transaction;
(v) If during the period of two (2) consecutive years individuals who
at the beginning of any such period constitute the members of the
Board of Directors of the Company (the "Directors") cease for any
reason to constitute at least a majority thereof unless the
election, or the nomination for election by the Company's
shareholders, of each Director first elected during such period
was approved by a vote of at least two-thirds of the Directors
then still in office who were Directors at the beginning of any
such period (excluding for this purpose the election of any new
Director in connection with an actual or threatened election of
proxy contest);
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<PAGE>
(vi) The Company: (i) sells at least 85% of the assets or outstanding
stock of a subsidiary to an unrelated party (or completes a
transaction having a similar effect), (ii) distributes all or
substantially all of the common stock of a subsidiary as a
dividend to stockholders of the Company; or (iii) sells voting
stock of a subsidiary in an underwritten public offering.
3. Section 3 of the Employment Agreement is hereby amended by replacing
the first sentence thereof with the following:
The Company shall pay the Executive base compensation for his
services at an annual rate of $250,000.
4. Section 3 of the Employment Agreement is hereby further amended by
adding the following at the end thereof:
Within two (2) weeks after closing of the first Strategic
Transaction, the Executive shall be awarded an additional
discretionary bonus determined by the Chief Executive Officer of
the Company, that shall be no less than $1,500,000.
5. Section 17 is hereby added to the Employment Agreement to read in its
entirety as follows:
17. Indemnification. If there is a final determination that any
----------------
portion of the amounts payable to the Executive under the Employment
Agreement constitutes an "excess parachute payment" as such term is
used in Section 280G and 4999 of the Internal Revenue Code, then the
Company shall pay to the Executive an additional sum such that after
all taxes applicable to the receipt of such amount have been
subtracted therefrom, the remaining amount will equal the sum of the
amount of the tax imposed with respect to the "excess parachute
payment", plus any interest and penalties thereon.
6. The Employment Agreement, except as herein amended, is hereby
ratified, confirmed and approved in all respects.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Agreement as of the date written above.
Signed on behalf of
Value Health, Inc.
_________________________________
__________________________________
Signed by Paul M. Finigan
85
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
AGREEMENT dated as of September 2, 1995, by and between Value Health, Inc.,
a Delaware corporation (the "Company"), and William J. Goss (the "Executive").
Company desires to employ Executive to devote full time to the business of
the Company, and Executive desires to be so employed.
The parties agree as follows:
1. EMPLOYMENT. Company agrees to employ Executive, and Executive agrees to
be so employed, in the capacity of Senior Vice President, Strategy and
Development of the Company and President of Value Health Management, Inc.
("VHM"). Executive shall perform such functions and undertake such
responsibilities as are customarily associated with such capacities. Employment
shall be for an initial term ending February 29, 1997 and shall be renewed for
successive one-year terms unless terminated as provided hereunder.
2. TIME AND EFFORTS. Executive shall diligently and conscientiously
devote his full and exclusive time and attention and best efforts in discharging
his duties as the Company's Senior Vice President, Strategy and Development and
President of VHM.
3. COMPENSATION. Commencing as of the effective date of this Agreement,
the Company shall pay the Executive base compensation for his services at an
annual rate of $225,000. This amount shall be paid in equal bi-weekly
installments. The parties agree to negotiate increases in such compensation at
least annually.
In addition, Executive shall be eligible to earn an annual performance
bonus at a target level to be established annually pursuant to criteria approved
by the Board of Directors of VHI (or the Compensation Committee thereof).
As of the effective date of this Agreement, the Company and the Executive
shall also enter into the stock Option Agreement attached hereto as Exhibit A.
----------
4. BENEFITS. The Executive shall be entitled to participate in, and
receive benefits from any insurance, medical, disability or pension plan of the
Company which may be in effect at any time during the term hereof and which
shall generally be available to senior executive officers of the Company.
5. EXPENSE REIMBURSEMENT. The Company shall reimburse Executive for
all reasonable and necessary expenses incurred in carrying out his duties under
this Agreement. Executive shall present to the Company from time to time an
itemized account of such expenses in any form required by the Company.
86
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TERMINATION WITHOUT CAUSE.
(a) BY THE COMPANY. The Company may without cause terminate this
Agreement at any time by notifying the Executive thirty days prior to such
termination. Non-renewal of this Agreement shall be deemed to be a termination
without cause unless the Company provides Executive with notice in accordance
with the provisions of Section 8 of this Agreement.
(i) In that event, for a period of one (1) year commencing on the
date the termination becomes effective, Executive shall be entitled to
receive his base compensation as provided by Section 3 (less all
amounts required to be withheld and deducted).
(ii) In that event, the Company shall provide Executive, upon the
same terms and conditions and at the same cost to Executive, with the
same health benefits available to all the Company's executives, for
the lesser of one year from the date of termination or the first day
of the first month in which Executive obtains new employment provided
health benefits coverage.
(iii) In the event either of (a) termination without cause by the
Company, from the date the termination because effective, no portion
of any stock option awarded to the Executive pursuant to the Company's
1991 Stock Plan which has not already vested shall thereafter becomes
vested.
(b) BY THE EXECUTIVE. The Executive may without cause terminate
this Agreement by giving 60 days' written notice to the Company. In such event,
at the sole discretion of the Company, the Executive shall continue to render
his services and shall be paid his regular compensation as provided by Section 3
up to the date of termination, but he shall not receive any payment thereafter
nor shall any stock option or restrictive stock that is not otherwise vested or
nonforfeitable on the date of termination become vested or nonforfeitable on
such date.
7. TERMINATION AFTER MERGER OR ACQUISITION. In the event of the merger
of the Company or the acquisition of substantially all of the Company's stock or
assets (a "Reorganization"), Executive shall either be terminated without cause
pursuant to Section 6 or shall: (i) be retained by the Company in an executive
position of responsibility, authority and compensation comparable in all
material respects to the position of the Executive immediately prior to the
Reorganization; (ii) retain all rights accorded under this Agreement; and (iii)
be afforded all privileges accorded to other Company executives. If the
Executive is terminated without cause in connection with a Reorganization: (i)
in applying 6 (a) (i) "two" years shall be substituted for one year; and (ii) on
the date the termination becomes effective, any portion of any stock option
awarded to the Executive pursuant to the Company's 1991 Stock Plan not already
vested shall become fully vested.
8. TERMINATION FOR CAUSE. The Company may for cause terminate this
Agreement at any time by notifying the Executive of such termination and the
cause therefor. In such event, neither Section 6 nor Section 7 (if otherwise
applicable) shall apply; provided, however, that in the event the Company
terminates this Agreement on account of the Executive's inability to perform his
functions due to prolonged disability, solely for purposes of Section 6 (a) (ii)
the Company shall be deemed to have terminated this Agreement without cause.
"Cause" shall mean the Executive's death, significant and repeated failure to
adhere to Company policies or to perform the duties required hereunder, or the
87
<PAGE>
conviction of the Executive of, or the entry of a pleading of guilty or nolo
contendere by the Executive to, any crime involving moral turpitude or any
felony.
9. CONFIDENTIALITY, INVENTION AND NON-COMPETE AGREEMENT. Simultaneously
with the execution of this Agreement the Executive shall execute the
Confidentiality, Invention and Non-compete Agreement attached hereto as Exhibit
-------
B.
- --
10. INDEMNIFICATION. The Executive shall be indemnified for his acts as
an officer and director of the Company in accordance with the by-laws of the
Company.
11. NOTICES. All notices required or permitted to be given under this
Agreement shall be given by certified mail, return receipt requested, to the
parties at the following addresses or to such other addresses as either may
designate in writing to the other party.
If to Company:
Chairman and Chief Executive Officer
Value Health, Inc.
22 Waterville Road
Avon, CT 06001
If to Executive:
William J. Goss
12. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Connecticut.
13. AMENDMENTS. This Agreement may be amended only in writing, signed by
both parties.
14. NON-WAIVER. A delay or failure by either party to exercise a right
under this Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
15. BINDING EFFECT. The provisions of this Agreement shall be binding
upon and inure to the benefit of both parties and their respective successors
and assigns
16. TERMINATION OF PRIOR EMPLOYMENT AGREEMENT. Company and Executive
agree that any prior Employment Agreement, oral or written, entered into by
Executive and VHM is hereby terminated and of no further force and effect
88
<PAGE>
IN WITNESS WHEREOF, Company has by its appropriate officers, signed and
affixed its seal and Executive has signed and sealed this Agreement.
VALUE HEALTH, INC. William J. Goss
By: /s/ Robert Patricelli By: /s/ William J. Goss
---------------------------- ---------------------------
Date: September 1, 1995 Date: September 2, 1995
-------------------------- -------------------------
89
<PAGE>
EXHIBIT 10.9A
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
This First Amendment dated as of September 27, 1996 is to the Employment
Agreement between Value Health, Inc. (the "Company") and William J. Goss (the
"Executive"), dated as of September 2, 1995 ("Employment Agreement").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement as follows, as permitted under Section 13 of the Employment Agreement:
1. Section 7 of the Employment Agreement is hereby deleted and the
following is added in its place:
7. TERMINATION AFTER A STRATEGIC TRANSACTION. In the event of a
"Strategic Transaction" of the Company (as defined in Section 16
of this Agreement), if, within twenty-four (24) months following
closing of such Strategic Transaction (or at any time prior
thereto but in contemplation thereof): (i) the Executive is
terminated without cause; (ii) the Executive is not retained in
an executive position of responsibility, authority and
compensation comparable in all material respects to the position
of the Executive immediately prior to the Strategic Transaction;
(iii) the Executive does not retain all rights and privileges
accorded under this Agreement as a result of the Strategic
Transaction; (iv) the Executive terminates his employment with
the Company due to either a material reduction in responsibility,
authority or compensation, or a requirement that the Executive
relocate, each on account of the Strategic Transaction; then the
Executive shall receive within five (5) business days following
the date of termination, a lump sum payment (less all amounts
required to be withheld and deducted) equal to 2.5 times the sum
of the Executive's then current base compensation and annual
performance bonus at the target level for the year in which such
termination occurs, and the Executive shall be deemed to have
been terminated without cause for purposes of Section 6. In
addition, in the event of a termination of the Executive in
accordance with the preceding sentence: (i) the Executive shall
receive the same health benefits available to Company executives,
upon the same terms and conditions and at the same cost to the
Executive, for the lesser of one (1) year from the date of
termination or the first day of the first month in which the
Executive obtains new employment providing health benefits
coverage; and (ii) unvested stock options or stock awards granted
to the Executive under the 1991 Stock Plan shall become fully
vested as of the termination date.
<PAGE>
2. Section 16 is hereby added to the Employment Agreement to read in its
entirety as follows:
16. STRATEGIC TRANSACTION. A Strategic Transaction shall be
deemed to occur if at any time during the term of this Agreement
any of the following events occur:
(i) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and as a
result of such merger, consolidation or reorganization, less
than 50% of the combined voting power of the then-
outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate
by the holders of Voting Stock (as that term is hereafter
defined) of the Company immediately prior to such
transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or
other legal person, and as a result of such sale or
transfer, less than 50% of the combined voting power of the
then-outstanding voting securities of such corporation or
person are held in the aggregate by the holders of Voting
Stock of the Company immediately prior to such sale;
(iii) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934
(the "Exchange Act"), disclosing that any person as the term
"person" is used in Section 13(d)(3) or Section 14(d)(2) of
the Exchange Act) has become the beneficial owner (as the
term "beneficial owner" is defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange
Act) of securities representing 20% or more of the combined
voting power of the then-outstanding securities of the
Company entitled to vote generally in the election of
members of the Board of Directors of the Company ("Voting
Stock");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange
Act disclosing in response to Form 8-K or Schedule 14A (or
any successor schedule, form or report or item therein) that
a strategic transaction of the Company has or may have
occurred or will or may occur in the future pursuant to any
then-existing contract or transaction;
91
<PAGE>
(v) If during the period of two (2) consecutive years
individuals who at the beginning of any such period
constitute the members of the Board of Directors of the
Company (the "Directors") cease for any reason to constitute
at least a majority thereof unless the election, or the
nomination for election by the Company's shareholders, of
each Director first elected during such period was approved
by a vote of at least two-thirds of the Directors then still
in office who were Directors at the beginning of any such
period (excluding for this purpose the election of any new
Director in connection with an actual or threatened election
of proxy contest);
(vi) The Company: (i) sells at least 85% of the assets or
outstanding stock of a subsidiary to an unrelated party (or
completes a transaction having a similar effect), (ii)
distributes all or substantially all of the common stock of
a subsidiary as a dividend to stockholders of the Company;
or (iii) sells voting stock of a subsidiary in an
underwritten public offering.
3. Section 3 of the Employment Agreement is hereby amended by replacing
the first sentence thereof with the following:
The Company shall pay the Executive base compensation for his
services at an annual rate of $240,000.
4. Section 3 of the Employment Agreement is hereby further amended by
adding the following at the end thereof:
Within two (2) weeks after the closing of the first Strategic
Transaction, the Executive shall be awarded an additional
discretionary bonus determined by the Chief Executive Officer of
the Company, that shall be no less than $1,000,000.
5. Section 17 is hereby added to the Employment Agreement to read in its
entirety as follows:
17. Indemnification. If there is a final determination that
----------------
any portion of the amounts payable to the Executive under the
Employment Agreement constitutes an "excess parachute payment" as
such term is used in Section 280G and 4999 of the Internal
Revenue Code, then the Company shall pay to the Executive an
additional sum such that after all taxes applicable to the
receipt of such amount have been subtracted therefrom, the
remaining amount will equal the sum of the amount of the tax
imposed with respect to the "excess parachute payment", plus any
interest and penalties thereon.
6. The Employment Agreement, except as herein amended, is hereby
ratified, confirmed and approved in all respects.
92
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Agreement as of the date written above.
Signed on behalf of
Value Health, Inc.
_________________________________
__________________________________
Signed by William J. Goss
93
<PAGE>
EXHIBIT 11
VALUE HEALTH, INC.
SCHEDULE OF COMPUTATION OF NET EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
NET EARNINGS (LOSS) $64,329,000 $(27,967,000) $59,521,000
- -----------------------------------------------------------------------------------
Weighted Average Number Of Shares
Outstanding During The Year 54,448,920 53,182,815 51,936,571
- -----------------------------------------------------------------------------------
Add:
Common Stock Equivalent Shares
Represented By Stock Options Granted
Related To Stock Plans 394,946 1,160,001 2,254,001
- -----------------------------------------------------------------------------------
Contingently Issuable Shares (a) (a) (a)
- -----------------------------------------------------------------------------------
Weighted Average Number Of Common
Shares Used In The Computation Of
Net Earnings (Loss) Per Share 54,843,866 54,342,816 54,190,572
- -----------------------------------------------------------------------------------
Net Earnings (Loss) Per Share $ 1.17 $ (0.51) $ 1.10
- -----------------------------------------------------------------------------------
</TABLE>
(a) The dilution of earnings (loss) per share represented by the inclusion of
contingently issuable shares is less than 3%.
94
<PAGE>
EXHIBIT 21
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statements of
Value Health, Inc. and Subsidiaries on Form S-8 (File Nos. 33-74002, 33-42969
and 33-310695) and on Form S-3 (File Nos. 33-85568, 33-89248 and 33-30082) of
our report dated February 19, 1997, except for Note 2, as to which the date is
April 14, 1997, on our audits of the consolidated financial statements and
financial statement schedule of Value Health, Inc. and Subsidiaries as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, which reports are included in this Annual Report on Form
10-K/A.
Coopers & Lybrand L.L.P.
Hartford, Connecticut
April 17, 1997
95
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 89,314 74,311
<SECURITIES> 88 25,514
<RECEIVABLES> 385,440 321,443
<ALLOWANCES> 22,120 17,171
<INVENTORY> 27,198 30,052
<CURRENT-ASSETS> 549,853 537,441
<PP&E> 219,789 203,712
<DEPRECIATION> 74,216 71,242
<TOTAL-ASSETS> 1,101,224 904,035
<CURRENT-LIABILITIES> 352,355 316,411
<BONDS> 0 0
0 0
0 0
<COMMON> 505,649 467,325
<OTHER-SE> 151,249 113,719
<TOTAL-LIABILITY-AND-EQUITY> 1,101,224 904,035
<SALES> 433,892 425,661
<TOTAL-REVENUES> 1,963,775 1,868,539
<CGS> 380,231 360,563
<TOTAL-COSTS> 1,612,578 1,527,034
<OTHER-EXPENSES> 233,991 314,934
<LOSS-PROVISION> 0 46,600
<INTEREST-EXPENSE> 1,134 1,680
<INCOME-PRETAX> 116,072 (21,709)
<INCOME-TAX> 51,743 6,258
<INCOME-CONTINUING> 64,329 (27,967)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 64,329 (27,967)
<EPS-PRIMARY> 1.17 (.51)
<EPS-DILUTED> 1.17 (.51)
</TABLE>
