SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1 To
Current Report
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 1, 1998
Express Scripts, Inc.
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(Exact Name of Registrant as specified in its Charter)
Delaware 0-20199 43-1420563
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(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of corporation) Identification No.)
14000 Riverport Drive, Maryland Heights, Missouri 63043
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (314) 770-1666
--------------------------
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On April 14, 1998, Express Scripts, Inc. ("Express Scripts") filed a
Current Report on Form 8-K (the "Current Report") pertaining to its April 1,
1998 acquisition of the outstanding common stock of Value Health, Inc. ("Value
Health Pharmacy Benefit Management") and Managed Prescription Network, Inc., the
sole assets of which are various subsidiaries each now or formerly conducting
business as a pharmacy benefit management company (collectively, the "Acquired
Entities" or "ValueRx") from Columbia/HCA Healthcare Corporation ("Columbia").
At the time of the filing of the Current Report, it was impractical for Express
Scripts to provide financial statements for the Acquired Entities or pro forma
financial information for Express Scripts relative to the acquisition of
ValueRx. Pursuant to the instructions for Item 7 of the Current Report, Express
Scripts hereby amends Item 7 to the Current Report to include the previously
omitted information as follows:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired.
The following financial statements of Value Health Pharmacy
Benefit Management are submitted herewith as Exhibit 99.2:
(i) Report of Independent Auditors - Ernst & Young LLP
(ii) Combined Balance Sheet as of December 31, 1997
(iii)Combined Statements of Operations Predecessor Basis -
January 1, 1997 to July 31, 1997; Successor Basis -
August 1, 1997 to December 31, 1997
(iv) Combined Statements of Changes in Stockholder's Equity
Predecessor Basis - January 1, 1997 to July 31, 1997;
Successor Basis - August 1, 1997 to December 31, 1997
(v) Combined Statements of Cash Flows Predecessor Basis -
January 1, 1997 to July 31, 1997; Successor Basis -
August 1, 1997 to December 31, 1997
(vi) Notes to Combined Financial Statements
The following financial statements of Value Health
Pharmacy Benefit Management are submitted herewith as Exhibit
99.3:
(vii) Report of Independent Accountants - Coopers &
Lybrand L.L.P.
(viii)Combined Balance Sheet as of December 31, 1996
(ix) Combined Statements of Operations for the Years Ended
December 31, 1996 and 1995
(x) Combined Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995
(xi) Notes to Combined Financial Statements
The following financial statements of Managed Prescription
Network, Inc. d/b/a Columbia Pharmacy Solutions are submitted
herewith as Exhibit 99.4:
(i) Report of Independent Auditors - Ernst & Young LLP
(ii) Balance Sheets as of December 31, 1997 and 1996
(iii) Statements of Operations and Retained Earnings
(Deficit) for the Years Ended December 31, 1997, 1996,
and 1995
(iv) Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995
(v) Notes to Financial Statements
(b) Pro Forma Financial Information
The following unaudited consolidated condensed pro forma
financial statements are submitted herewith as Exhibit 99.5:
(i) Unaudited Consolidated Condensed Pro Forma Statement
of Operations for the Year Ended December 31, 1997
(ii) Notes to the Unaudited Consolidated Condensed Pro
Forma Statement of Operations
(iii) Unaudited Consolidated Condensed Pro Forma Balance
Sheet as of December 31, 1997
(iv) Notes to the Unaudited Consolidated Condensed Pro
Forma Balance Sheet
(c) Exhibits. The following exhibits are filed as part of this
report on Form 8-K:
Exhibit 2.1 - First Amendment to Stock Purchase Agreement by
and among Columbia/HCA Healthcare Corporation, VH Holdings,
Inc., Galen Holdings, Inc. and Express Scripts, Inc., dated as
of March 31, 1998, and related Exhibits (all Exhibits are
omitted from this filing, but will be filed with the
Commission supplementary upon request), incorporated by
reference to Exhibit No. 2.1 to Express Scripts' Current
Report on Form 8-K filed April 14, 1998.
Exhibit 23.1 - Consent of Ernst & Young LLP, Minneapolis,
Minnesota
Exhibit 23.2 - Consent of Coopers & Lybrand L.L.P.
Exhibit 23.3 - Consent of Ernst & Young LLP, Pittsburgh,
Pennsylvania
Exhibit 99.1 - Press Release, dated April 1, 1998, by Express
Scripts, Inc., incorporated by reference to Exhibit No. 99.1
to Express Scripts' Current Report on Form 8-K filed April 14,
1998.
Exhibit 99.2 - Combined Financial Statements of Value Health
Pharmacy Benefit Management As Of December 31, 1997 And For
The Seven-Month Period Ended July 31, 1997 And The Five-Month
Period Ended December 31, 1997.
Exhibit 99.3 - Value Health Pharmacy Benefit Management
Combined Financial Statements As Of December 31, 1996 And For
The Year Ended December 31, 1996 and 1995.
Exhibit 99.4 - Audited Financial Statements Of Managed
Prescription Network, Inc. d/b/a Columbia Pharmacy Solutions.
Exhibit 99.5 - Certain Unaudited Consolidated Condensed Pro
Forma Financial Data
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EXPRESS SCRIPTS, INC.
Date: June 12, 1998 By: /S/ BARRETT A. TOAN
-------------------
Barrett A. Toan
President and Chief Executive Officer
Date: June 12, 1998 By: /S/ GEORGE PAZ
--------------
George Paz
Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 First Amendment to Stock Purchase Agreement by and among
Columbia/HCA Healthcare Corporation, VH Holdings, Inc.,
Galen Holdings, Inc. and Express Scripts, Inc., dated as
of March 31, 1998, and related Exhibits (all Exhibits are
omitted from this filing, but will be filed with the
Commission supplementary upon request), incorporated by
reference to Exhibit No. 2.1 to Express Scripts' Current
Report on Form 8-K filed April 14, 1998.
23.1 Consent of Ernst & Young LLP, Minneapolis, Minnesota
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Ernst & Young LLP, Pittsburgh, Pennsylvania
99.1 Press Release, dated April 1, 1998, by Express Scripts,
Inc., incorporated by reference to Exhibit No. 99.1 to
Express Scripts' Current Report on Form 8-K filed April
14, 1998.
99.2 Combined Financial Statements of Value Health
Pharmacy Benefit Management As Of December 31, 1997 And For
The Seven-Month Period Ended July 31, 1997 And The Five-Month
Period Ended December 31, 1997.
99.3 Value Health Pharmacy Benefit Management
Combined Financial Statements As Of December 31, 1996 And For
The Year Ended December 31, 1996 and 1995.
99.4 Audited Financial Statements Of Managed
Prescription Network, Inc. d/b/a Columbia Pharmacy Solutions.
99.5 Certain Unaudited Consolidated Condensed Pro Forma Financial
Data
Exhibit 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference of our report dated June 4,
1998, with respect to the combined financial statements of Value Health Pharmacy
Benefit Management included in this Form 8-K/A for Express Scripts, Inc., in the
Registration Statements of Express Scripts, Inc. (Form S-8 No. 33-64278)
pertaining to the 1992 Stock Option Plan, (Form S-8 No. 33-64094) pertaining to
the 1992 Stock Option Plan for Outside Directors, (Form S-8 No. 33-93106)
pertaining to the 1994 Stock Option Plan, (Form S-8 No. 333-04291) pertaining to
the Amended and Restated 1992 Stock Option Plan for Outside Directors, (Form S-8
No. 333-48765) pertaining to the Amended and Restated 1992 Stock Option Plan,
and (Form S-8 No. 333-27983), (Form S-8 No. 333-48767) and (Form S-8 No.
333-48779) pertaining to the Amended and Restated 1994 Stock Option Plan.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 10, 1998
Exhibit 23.2
Consent of Coopers & Lybrand L.L.P.
We consent to the incorporation by reference in the registration statements
of Express Scripts, Inc. on Forms S-8 (File Nos. 33-64094, 33-64278, 33-93106,
333-04291, 333-27983, 333-48765, 333-48767 and 333-48779) of our report dated
April 30, 1998, on our audits of the combined financial statements of Value
Health Pharmacy Benefit Management of December 31, 1996, and for the years ended
December 31, 1996, and 1995, which report is included in this Form 8-K/A
Amendment No. 1 dated June 12, 1998.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
June 10, 1998
Exhibit 23.3
Consent of Ernst & Young LLP
We consent to the incorporation by reference of our report dated June 1,
1998, with respect to the financial statements of Managed Prescription Network,
Inc. d/b/a Columbia Pharmacy Solutions included in this Form 8-K/A for Express
Scripts, Inc., in the Registration Statements of Express Scripts, Inc. (Form S-8
No. 33-64278) pertaining to the 1992 Stock Option Plan, (Form S-8 No. 33-64094)
pertaining to the 1992 Stock Option Plan for Outside Directors, (Form S-8 No.
33-93106) pertaining to the 1994 Stock Option Plan, (Form S-8 No. 333-04291)
pertaining to the Amended and Restated 1992 Stock Option Plan for Outside
Directors, (Form S-8 No. 333-48765) pertaining to the Amended and Restated 1992
Stock Option Plan, and (Form S-8 No. 333-27983), (Form S-8 No. 333-48767) and
(Form S-8 No. 333-48779) pertaining to the Amended and Restated 1994 Stock
Option Plan.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
June 8, 1998
Exhibit 99.2
COMBINED FINANCIAL STATEMENTS
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT
AS OF DECEMBER 31, 1997 AND FOR THE SEVEN-MONTH
PERIOD ENDED JULY 31, 1997 AND THE FIVE-MONTH
PERIOD ENDED DECEMBER 31, 1997
Value Health Pharmacy Benefit Management
Combined Financial Statements
As of December 31, 1997 and the
seven-month period ended July 31, 1997
and the five-month period ended December 31, 1997
CONTENTS
Report of Independent Auditors
Combined Financial Statements
Combined Balance Sheet
Combined Statements of Operations
Combined Statements of Changes in Stockholder's Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements
<PAGE>
Report of Independent Auditors
Board of Directors
Value Health Pharmacy Benefit Management
Plymouth, Minnesota
We have audited the accompanying combined balance sheet of Value Health
Pharmacy Benefit Management ("Successor") as of December 31, 1997, and the
related combined statements of operations, changes in stockholder's equity, and
cash flows for the five-month period ended December 31, 1997 ("Successor
period"). We also have audited Value Health Pharmacy Benefit Management
("Predecessor") combined statements of operations, changes in stockholder's
equity, and cash flows for the seven-month period ended July 31, 1997
("Predecessor period"). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Value Health
Pharmacy Benefit Management at December 31, 1997 and the combined results of its
operations and its cash flows for the Successor period and Predecessor period in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 4, 1998
<PAGE>
<TABLE>
Value Health Pharmacy Benefit Management
Combined Balance Sheet
(IN THOUSANDS)
December 31, 1997
<CAPTION>
SUCCESSOR
<S> <C>
----------------
ASSETS
Current assets:
Cash and cash equivalents $ 32,036
Accounts receivable, trade (net of allowance
for bad debts of $25,233) 187,830
Inventories 13,140
Prepaid expenses and other current assets 3,218
Deferred taxes 38,201
----------------
Total current assets 274,425
Property, improvements and equipment, net 99,652
Long-term investments 455
Goodwill and other intangibles, net 256,012
Other assets 8,139
----------------
264,606
================
Total assets $638,683
================
LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities:
Payables to providers $154,893
Accounts payable and accrued expenses 51,205
Merger-related and restructuring 3,325
Accrued loss contracts 83
Accrued compensation 5,265
Current portion of capital lease obligations 148
Deferred revenue 494
----------------
Total current liabilities 215,413
Capital lease obligations, less current portion 449
Other liabilities 6,160
----------------
Total liabilities 222,022
Commitments and contingencies
Stockholder's equity 416,661
================
Total liabilities and stockholder's equity $638,683
================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
Value Health Pharmacy Benefit Management
Combined Statements of Operations
(IN THOUSANDS)
<CAPTION>
PREDECESSOR SUCCESSOR
=========================================
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 1 TO
JULY 31, 1997 DECEMBER 31, 1997
<S> <C> <C>
=========================================
Revenues and interest:
Prescription drugs, services $657,444 $ 488,594
Prescription drugs, products 224,982 158,227
Other, net (1,121) 107
Interest income 267 53
-----------------------------------------
Total revenues and interest 881,572 646,981
Expenses:
Costs of services 583,407 442,445
Costs of products 185,390 134,665
Selling, general and administrative 89,261 44,239
Depreciation and amortization 8,604 10,115
Amortization of goodwill 2,150 7,332
Interest expense 30 118
Write-down of goodwill - 273,000
----------------------------------------
Total expenses 868,842 911,914
----------------------------------------
Income (loss) before income taxes 12,730 (264,933)
Provision for income taxes 6,410 6,114
----------------------------------------
Net income (loss) before cumulative effect of a change
in accounting principle 6,320 (271,047)
Cumulative effect of a change in accounting for
reengineering costs, net of taxes of $2,059 - (3,088)
----------------------------------------
Net income (loss) $ 6,320 $(274,135)
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
Value Health Pharmacy Benefit Management
Combined Statements of Changes in Stockholder's Equity
(IN THOUSANDS)
<CAPTION>
PREDECESSOR
<S> <C>
Balance at December 31, 1996 $273,244
Net income 6,320
Net distributions to parent (12,416)
=====================
Balance at July 31, 1997 $267,148
=====================
SUCCESSOR
Initial investment at July 31, 1997 $698,145
Net distributions to parent (7,349)
Net loss (274,135)
=====================
Balance at December 31, 1997 $416,661
=====================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
Value Health Pharmacy Benefit Management
Combined Statements of Cash Flows
(IN THOUSANDS)
<CAPTION>
PREDECESSOR SUCCESSOR
==========================================
PERIOD FROM JANUARY PERIOD FROM
1 TO AUGUST 1 TO
JULY 31, 1997 DECEMBER 31, 1997
<S> <C> <C>
==========================================
OPERATING ACTIVITIES
Net income (loss) $ 6,320 $(274,135)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,604 10,115
Provision for bad debts, including notes receivable 6,843 849
Deferred taxes 14,678 (1,700)
Amortization and write-down of goodwill 2,150 280,332
Loss on sale of assets 1,606 520
Change in operating assets and liabilities:
Accounts receivable 26,726 36,468
Inventories 17,233 (3,175)
Other current and noncurrent assets 3,343 2,636
Payable to providers 23,225 (51,756)
Accounts payable and accrued expenses 8,027 3,598
Merger-related and restructuring expense (7,683) 2,224
Accrued loss contracts (4,993) (302)
Other current and noncurrent liabilities 8,990 (876)
------------------------------------
Net cash provided by operating activities 115,069 4,798
INVESTING ACTIVITIES
Capital expenditures (36,801) (24,192)
Proceeds from sale of fixed assets 4 2,437
------------------------------------
Net cash used in investing activities (36,797) (21,755)
FINANCING ACTIVITIES
Net payments to parent (22,330) (16,084)
Payments of capital lease obligations (31) (52)
------------------------------------
Net cash used in financing activities (22,361) (16,136)
------------------------------------
Net increase (decrease) in cash and cash equivalents 55,911 (33,093)
Cash and cash equivalents at beginning of period 9,218 65,129
------------------------------------
Cash and cash equivalents at end of period $ 65,129 $ 32,036
------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On April 1, 1998, Express Scripts, Inc. ("Express Scripts") acquired the
outstanding common stock of Value Health, Inc. ("VHI") from Columbia/HCA
Healthcare Corporation ("Columbia"). Prior to the acquisition, Columbia spun-off
or otherwise disposed of various VHI subsidiaries such that, on April 1, 1998
the subsidiaries of VHI included only its remaining subsidiaries, which operate
in the pharmacy benefits management (PBM) business. These financial statements
present the combined financial position, results of operations and cash flows of
the PBM business of VHI, herein referred to as Value Health Pharmacy Benefit
Management or the Company, as if it were a separate entity for all periods
presented. The combined financial statements include the accounts of Cost
Containment Corporation of America; Denali Associates, Inc. (D/B/A Complete
Pharmacy Network); Diagnostek, Inc.; Health Care Services, Inc.; Health
Information Designs, Inc.; Medcounter, Inc.; Prescription Drug Services, Inc.;
RxNet, Inc.; ValueRx Northeast, Inc.; ValueRx of Iowa, Inc.; and ValueRx
Pharmacy Program, Inc. All material intercompany transactions and balances have
been eliminated in combination. The combined financial statements exclude the
accounts of Medintell Systems Corporation ("Medintell"), a developer and
marketer of advanced pharmacy information systems and services. On January 10,
1996, VHI issued common stock valued at $22,997,000 to acquire Medintell. This
transaction was accounted for as a purchase. On August 28, 1997, certain
Medintell assets were sold for $1,410,000.
On August 6, 1997, Columbia acquired VHI. For financial statement purposes, the
acquisition was accounted for effective as of July 31, 1997 under the purchase
method. The Company's financial statements as of and for the five-month period
ended December 31, 1997 ("Successor") reflect the application of purchase
accounting by Columbia, having pushed down to the Company an initial goodwill of
$527,896,000.
Subsequent to the August 1997 acquisition, Columbia decided to sell various
businesses of VHI, including the Company. Based on cash offers received,
Columbia wrote down its investment in the Company by $273,000,000 as of December
31, 1997. Such write-down was pushed down and is reflected in the Company's
balance sheet and statement of operations as of and for the five-month period
ended December 31, 1997. The financial statements for the seven-month period
ended July 31, 1997 ("Predecessor") are presented on the historical basis of
accounting.
NATURE OF BUSINESS
The Company administers a pharmacy program through a preferred provider
organization and also administers a mail order pharmacy program. Prescription
drugs are provided to program members for a fee that is based on either a fixed
charge per prescription (fee-for-service) or a fixed per capita payment paid
each month (capitation fee) by program sponsors, employers and insurers. These
contracts are negotiated on a one-to-three year basis and the majority are
subject to cancellation after the initial term of the contract by the employer
group or the Company upon 90 days' written notice.
The Company received revenues from its five major customers totaling
approximately 17% and 20% of total revenues for the seven-month period ended
July 31, 1997 and the five-month period ended December 31, 1997, respectively.
Certain VHI centralized general and administrative functions, including legal,
accounting, tax, treasury, employee benefits, sales and marketing and insurance
services have been allocated to the Company. Fees allocated for those services
($1,300,000 for the seven-month period ended July 31, 1997) were allocated based
on a percentage of adjusted pre-tax earnings of the Company. During Columbia's
ownership, the services provided were more limited and no fee was allocated. In
the opinion of management, VHI's methods for allocating such costs to the
Company were reasonable. However, such costs are not necessarily indicative of
the costs that would have been incurred if the Company had performed these
functions.
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The most
significant areas that require the use of management's estimates relate to
rebates receivable, the determination of the allowance for bad debts and
accruals for loss contracts and merger and restructuring related expenses.
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.
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.
The Company purchased a majority of its pharmaceutical products through one
wholesaler for the year ended December 31, 1997. The Company believes that other
alternative sources are readily available in the event needed.
FIXED ASSETS
Fixed assets are recorded at cost. The Company uses a straight-line method of
depreciation over the estimated useful lives of the assets, which range from
three to twenty-five years. Assets acquired under capital lease agreements are
recorded at the lesser of the present value of the minimum lease payments or the
fair value of the underlying asset. 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 operations as
incurred and renewals and improvements are capitalized. Upon sale or retirement
of fixed assets, the cost and related accumulated depreciation or amortization
are removed from the accounts and any resulting gain or loss is credited or
charged to operations.
Included in equipment and software at December 31, 1997 are capitalized computer
software costs, related to purchased software and software developed internally
of $54,266,000. Accumulated amortization on computer software was $4,449,000 at
December 31, 1997 and is included in accumulated depreciation and amortization.
The Company uses the straight-line amortization method over estimated useful
lives of the software, which range from three to five years.
CHANGE IN ACCOUNTING FOR REENGINEERING COSTS
The Company capitalized certain costs for the development of software for
internal use, some of which related to reengineering activities. In accordance
with EITF Issue 97-13, ACCOUNTING FOR COSTS INCURRED IN CONNECTION WITH A
CONSULTING OR AN INTERNAL PROJECT THAT COMBINES BUSINESS PROCESS REENGINEERING
AND INFORMATION TECHNOLOGY TRANSFORMATION, the Company changed its policy of
accounting for such previously capitalized reengineering costs in the fourth
quarter of 1997 and expensed $3,088,000, net of tax, of such costs as the
cumulative effect of a change in accounting.
GOODWILL AND OTHER INTANGIBLE ASSETS
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
of goodwill resulting from the Columbia acquisition and pushed down to the
Company was $7,332,000 at December 31, 1997. The Company reviews its
amortization policy and carrying value of goodwill and other intangible assets
on an ongoing basis. This review includes an analysis of whether carrying values
and amortization periods are appropriate based upon product life cycle, company
performance compared to expectations and industry practice.
If this review indicates that goodwill and other intangible assets will not be
recoverable, as determined based on future undiscounted cash flows of the entity
or book of business acquired over the remaining amortization period, the
Company's carrying value of the goodwill and other intangible assets is reduced
by the estimated cash flow shortfall. As noted under Basis of Presentation
above, Columbia wrote down the goodwill related to its acquisition of the
Company by $273,000,000 in December 1997.
PAYABLES TO PROVIDERS
Payables to providers represent amounts owed to network pharmacies and rebates
payable. Payables to providers are recorded as services are rendered.
LOSS CONTRACTS
The Company reviews its various contracts to determine whether estimates of
future revenues, excluding investment income, are sufficient to cover future
costs of providing services and settling claim payments. For purposes of
evaluating potential loss contracts, only incremental costs are included in
determining the costs to provide services and settle claim payments. Estimated
future costs in excess of future revenues from such contracts are accrued and
charged to operations.
REVENUE RECOGNITION
Revenues from dispensing prescription products from the Company's mail service
pharmacies are recorded upon shipment. Revenues from sales of prescription drugs
by pharmacies in the Company's nationwide network as well as pharmacy claims
processing revenues are recognized when the claims are adjudicated. When the
Company has an independent contractual obligation to pay its network pharmacy
providers for benefits provided to members of its clients' pharmacy benefit
plans, the Company includes payments from the plan sponsors for these benefits
as revenues and payments to these pharmacy providers as costs of services or
products. If the Company is administering only the plan sponsors' network
pharmacy contracts, the Company records fees derived from these contracts as net
revenue.
COSTS OF SERVICES AND PRODUCTS
Costs of services and products include product costs, pharmacy claims payments
and other direct costs associated with dispensing prescriptions and claims
processing operations, reduced by rebates received from pharmaceutical
manufacturers in connection with the Company's drug purchasing and formulary
management programs, and incremental discounts from existing vendor
relationships.
Pharmaceutical manufacturer rebate arrangements contribute 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.
INCOME TAXES
The Company, including all of its subsidiaries and affiliates, was included
historically in the consolidated federal income tax returns filed by VHI and
Columbia for their respective periods of ownership. For purposes of these
stand-alone financial statements, the provision for income taxes has been
determined as if the Company had filed separate tax returns for the periods
presented.
Deferred income taxes are recognized for the future tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
2. PROPERTY, IMPROVEMENTS AND EQUIPMENT
Property, improvements and equipment of the Company consisted of the following
at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Land $ 2,621
Buildings and improvements 5,778
Furniture and fixtures 6,115
Equipment and software 88,630
Leasehold improvements 6,234
--------------------
109,378
Less accumulated depreciation and amortization (9,726)
====================
$ 99,652
====================
</TABLE>
3. LOSS CONTRACTS
The Company had approximately $5.4 million accrued for loss contracts as of
December 31, 1996, the adequacy of which was evaluated on an ongoing basis. No
loss accrual was considered necessary at December 31, 1997 as all capitated
contracts had been terminated during 1997.
<PAGE>
4. LEASE OBLIGATIONS
CAPITAL LEASES
As of December 31, 1997, future minimum lease payments due under noncancelable
capital leases with terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
<C> <C>
1998 $174
1999 182
2000 182
2001 114
------------
Total future minimum lease payments 652
Less amount representing interest 55
------------
Present value of minimum lease payments 597
Less current portion 148
------------
Capital lease obligations, less current portion $449
============
</TABLE>
<TABLE>
Included in fixed assets are the following assets under capital leases (in
thousands):
<CAPTION>
DECEMBER 31,
1997
<S> <C>
-------------
Equipment and software $830
Less accumulated depreciation and amortization (358)
=============
$472
=============
</TABLE>
OPERATING LEASES
The Company has cancelable and noncancelable operating lease agreements for
equipment and office space, which include renewable options. Total rental
expense was approximately $1,815,000 and $1,296,000 for the seven-month period
ended July 31, 1997 and the five-month period ended December 31, 1997,
respectively. The Company's net minimum future lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
NET
MINIMUM LEASE MINIMUM SUB-LEASE MINIMUM
PAYMENTS INCOME PAYMENTS
<C> <C> <C> <C>
--------------------------------------------------------
1998 $ 3,049,630 $ (574,001) $ 2,475,629
1999 2,578,209 (591,221) 1,986,988
2000 2,231,912 (608,958) 1,622,954
2001 2,165,689 (627,227) 1,538,462
2002 2,336,116 (646,043) 1,690,073
Thereafter 15,574,301 (1,759,449) 13,814,852
========================================================
$27,935,857 $(4,806,899) $23,128,958
========================================================
</TABLE>
5. OTHER EMPLOYEE BENEFITS
Prior to Columbia's acquisition of VHI, employees of the Company participated in
VHI's 401(k) Retirement Savings Plan (the Savings Plan). Company contributions
to the plan were determined annually and were based on contributions of
participating employees. The cost of this plan charged to the Company was
approximately $383,000 for the seven month period ended July 31, 1997. Employees
of the Company with balances in VHI's plan were allowed to transfer their
balances and accumulated Company contributions, vested and unvested, to
Columbia's plan. Company contributions for the period August 1 to December 31,
1997 were $266,000.
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
============================================
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 1 TO
JULY 31, 1997 DECEMBER 31, 1997
<S> <C> <C>
============================================
Cash paid during the period for (in thousands):
Interest $ 30 $118
Income taxes 37,600 -
</TABLE>
7. INCOME TAXES
The provision (benefit) for income taxes for the periods ended July 31 and
December 31, 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
================================================
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 1 TO
JULY 31, 1997 DECEMBER 31, 1997
<S> <C> <C>
================================================
Currently payable:
Federal $ (606) $(3,419)
State 1,286 865
Deferred taxes:
Provision 5,157 6,609
Valuation allowance 573 -
=================================================
$6,410 $ 4,055
=================================================
</TABLE>
The tax benefits of carryforwards and temporary differences related to the net
deferred tax asset at December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Carryforwards:
<S> <C>
Net operating loss carryforwards related to
prior purchase business combinations $ 8,122
Temporary differences:
Estimated claims liabilities 24,390
Accounts receivable reserves, accruals and other 12,432
Other 61
Depreciation and amortization (4,018)
------------
32,865
------------
Net deferred tax asset 40,987
Valuation allowance (2,786)
============
Reported deferred tax asset $38,201
</TABLE>
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
net deferred tax benefits.
During the seven-month period ended July 31, 1997, the valuation allowance
increased by $573,000. The valuation allowance is related to prior business
combinations accounted for as purchases and has been maintained primarily due to
the uncertainty regarding the timing of net operating loss utilization. Should
deferred tax assets subsequently be recognized for such carryforwards, the
reduction of the valuation allowance will be offset by a corresponding reduction
of goodwill.
<TABLE>
The Company's effective income tax rate differs from the federal statutory
income tax rate as follows:
<CAPTION>
PREDECESSOR SUCCESSOR
=============================================
PERIOD FROM JANUARY 1 PERIOD FROM AUGUST 1
TO TO
JULY 31, 1997 DECEMBER 31, 1997
<S> <C> <C>
=============================================
Federal tax at statutory rate 35.0% (35.0)%
State income tax, net 5.0 0.3
Nondeductible goodwill, merger
and other expenses 5.8 37.0
Change in valuation allowance 4.5 -
==============================================
50.3% 2.3%
==============================================
</TABLE>
Subject to certain statutory and regulatory limitations, the Company had the
following income tax carryforwards available at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
YEARS OF
AMOUNT EXPIRATION
<S> <C> <C> <C>
-----------------------------------
U.S. federal regular net operating loss carryforwards acquired
in purchase business combinations available for offset
against future taxable income $22,168 2002-2007
</TABLE>
8. RELATED PARTIES AND CERTAIN TRANSACTIONS
In connection with a 1995 merger, the Company entered into a Consulting
Agreement and an Agreement Not to Compete. 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 not to exceed $327,000 per year. The term of the
Consulting Agreement, which commenced July 28, 1995, is five years. Under the
Agreement Not to Compete, the Company paid $3.5 million on January 2, 1996 in
exchange for agreement from the former chief executive officer 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.
In connection with Columbia's acquisition of VHI in 1997, one-year consulting
and three-year non-compete agreements were executed with two executive officers
of VHI. The present value of these agreements of $6,903,000 was recorded as of
the acquisition and is being amortized over the periods of the agreements.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet, for
which it is practicable to estimate the value. Financial instruments include
cash and short-term investments, long-term investments, 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. 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 impractical to determine fair value.
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.
LONG-TERM INVESTMENTS
Fair value for these securities is based on quoted market prices. At December
31, 1997, long-term investments are carried at fair value.
10. COMMITMENTS AND CONTINGENCIES
In September 1995, two purported shareholder class action lawsuits, Freedman v.
Value Health, Inc., et al. and Balkheimer, et al. v. Value Health, Inc., et al.,
were filed in the United States District Court for the District of Connecticut
against VHI, 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 VHI and the individual defendants
made false or misleading statements to the public in connection with VHI's
acquisition of Diagnostek in 1995. The complaints, which were consolidated on
February 16, 1996, do not specify the amount of damages sought.
On July 11, 1994, a purported shareholder class action lawsuit, Bash, et al. v.
Diagnostek, et al. (Bash I) was filed in 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 settled for $11,700.
Diagnostek funded approximately $3,000 of the settlement. The remainder was
funded by insurance carriers. 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 VHI and
certain of its current or former directors and officers, asserting the same
factual allegations made in Bash I and, in addition, alleging that VHI and
certain individual defendants made false and misleading statements to the public
in connection with VHI'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. In
1997, the Bash II plaintiffs filed an amended complaint that deleted those
allegations that overlapped with the allegations contained in the Bash I
complaint. On April 24, 1998, the Bash II lawsuit and the Freedman lawsuit were
consolidated.
VHI intends to defend the allegations in the lawsuits described above
vigorously. In connection with the acquisition of the outstanding common stock
of VHI by Express Scripts, Columbia/HCA Healthcare Corporation has agreed to
provide full indemnification to Express Scripts for any adverse outcome of
these matters.
The Company is involved in other litigation and claims arising in the normal
course of business. The Company believes that resolution of all these matters
will not result in any payment that, in the aggregate, would be material to the
combined financial position or combined results of operations or cash flows of
the Company.
During 1996, the Company negotiated an arrangement with a large outsourcing
systems vendor to provide outsourcing services for the Company's data center
operations. The agreement is for a five-year term, which expires in November
2001, with approximately $25 million in fees to be paid by the Company over the
life of the agreement.
Columbia is involved in other various investigations by government agencies into
billing practices, possible provider overpayments and compliance with laws and
regulations. Columbia is also the subject of a formal order of investigation by
the Securities and Exchange Commission (the "Commission"). Columbia understands
that the Commission investigation includes the anti-fraud, periodic reporting
and internal accounting control provisions of the federal securities laws. None
of the entities comprising the Company have been named directly in any of these
investigations at this time and management has no reason to believe that they
will be named in the future. Management does not expect the ultimate resolution
of these matters will have a material impact on the Company.
EXHIBIT 99.3
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
C O N T E N T S
Report of Independent Accountants
Combined Financial Statements:
Balance Sheet
Statements of Operations
Statements of Cash Flows
Notes to Combined Financial Statements
<PAGE>
Report of Independent Accountants
To the Board of Directors of
Value Health Pharmacy Benefit Management:
We have audited the accompanying combined balance sheet of Value Health Pharmacy
Benefit Management as of December 31, 1996, and the related combined statements
of operations and cash flows for the years ended December 31, 1996 and 1995.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We 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, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Value
Health Pharmacy Benefit Management as of December 31, 1996, and the combined
results of their operations and their cash flows for the years ended December
31, 1996 and 1995, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
April 30, 1998
<PAGE>
<TABLE>
Value Health Pharmacy Benefit Management
Combined Balance Sheet
December 31, 1996
(in thousands)
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 9,218
Accounts receivable, net 258,716
Inventories 27,198
Prepaid expenses and other current assets 11,615
Deferred taxes 51,179
----------
Total current assets 357,926
----------
Property, improvements and equipment, net 61,946
Long-term investments 634
Goodwill, net 88,848
Other assets 5,541
----------
95,023
----------
Total assets $ 514,895
==========
LIABILITIES AND NET ASSETS
Current liabilities:
Payable to providers 183,424
Accounts payable and accrued expenses 39,580
Merger-related and restructuring 8,784
Accrued loss contracts 5,378
Accrued compensation 3,066
Current portion of capital lease obligations 149
Deferred revenue 243
---------
Total current liabilities 240,624
Capital lease obligations, less current portion 532
Other liabilities 495
---------
Total liabilities 241,651
Net assets 273,244
---------
Total liabilities and net assets $ 514,895
=========
</TABLE>
<PAGE>
<TABLE>
Value Health Pharmacy Benefit Management
Combined Statements of Operations
for the years ended December 31, 1996 and 1995
(in thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Revenues and interest:
Prescription drugs, services $ 1,098,743 $1,053,436
Prescription drugs, products 473,933 425,661
Other, net 11,731 6,658
Interest income 3,927 3,874
------------ -----------
Total revenues and interest 1,588,334 1,489,629
------------ -----------
Expenses:
Costs of services 980,451 957,989
Costs of products 423,270 360,563
Selling, general and administrative 137,954 93,659
Depreciation and amortization 8,203 11,768
Amortization of goodwill 3,588 3,622
Interest expense 1,511 2,882
Loss contracts 46,600
Merger-related and restructuring 71,090
------------ ----------
Total expenses 1,554,977 1,548,173
------------ ----------
Income (loss) before income taxes 33,357 (58,544)
Provision (benefit) for income taxes 16,048 (14,674)
Net income (loss) $ 17,309 $ (43,870)
============ ===========
</TABLE>
<PAGE>
<TABLE>
Value Health Pharmacy Benefit Management
Combined Statements of Cash Flows
for the years ended December 31, 1996 and 1995
(in thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $17,309 $ (43,870)
Adjustments to reconcile net income
(loss) to net cash:
Depreciation and amortization 8,203 11,768
Provision for bad debts, including
notes receivable 29,288 3,412
Provision for write-down of
investments 1,010
Deferred taxes 3,927 (44,825)
Amortization of goodwill 3,588 3,622
Amortization of deferred revenue (97) (269)
Loss on sales of securities 559
Change in operating assets and
liabilities:
Accounts receivable (52,287) (79,070)
Inventories 2,85 11,167
Other current and noncurrent
assets (13,309) 9,754
Payable to providers 75,677 31,082
Accounts payable and accrued
expenses (8,088) 290
Merger-related and restructuring
expense (28,110) 50,499
Accrued loss contracts (25,007) 30,386
Other current and noncurrent
liabilities (3,150) (1,999)
----------- ---------
Net cash provided by (used in)
operating activities 11,808 (17,494)
----------- ---------
Cash flows from investing activities:
Capital expenditures (29,618) (23,568)
Proceeds from sale of fixed assets 5,961
Proceeds from sale of subsidiary 107
Purchases of securities (8,993)
Maturities and sales of securities and
short-term investments 67,325
----------- ---------
Net cash (used in) provided by
investing activities (23,550) 34,764
----------- ---------
Cash flows from financing activities:
Proceeds from exercise of common
stock options 1,369
Proceeds from issuance of debt 16,500
Payments of debt and capital lease
obligations (114) (43,264)
----------- ---------
Net cash used in financing
activities (114) (25,395)
----------- ---------
Net decrease in cash and cash equivalents (11,856) (8,125)
Cash and cash equivalents at beginning of
year 21,074 29,199
----------- ---------
Cash and cash equivalents at end of year $ 9,218 $ 21,074
=========== =========
</TABLE>
<PAGE>
1. Summary of Significant Accounting Policies:
Nature of Business:
Value Health Pharmacy Benefit Management (the Company) administers a pharmacy
program through a preferred provider organization and also administers a mail
order pharmacy program.
Prescription drugs are provided to program members for a fee that is based on
either a fixed charge per prescription (fee-for-service) or a fixed per capita
payment paid each month (capitation fee) by program sponsors, employers and
insurers. These contracts are negotiated on a one- to three-year basis and the
majority are subject to cancellation after the initial term of the contract by
the employer group or the Company upon 90 days written notice. Accounts
receivable are net of an allowance for bad debts of $5,400 at December 31, 1996.
The Company received revenues from its five major customers totaling
approximately 25% and 23% of total revenues for the years ended December 31,
1996 and 1995, respectively. One of the five major customers terminated its
contract with the Company in 1997. This customer accounted for 8% and 10% of
total revenues for the years ended December 31, 1996 and 1995, respectively. In
addition, another one of these five major customers terminated its contract with
the Company in 1998. This customer accounted for 7% and 3% of total revenues for
the years ended December 31, 1996 and 1995, respectively. During 1996, the
Company recognized $5,000 of revenues for data processing services provided to
Baxter Corporation pursuant to terms of a data processing services agreement.
This agreement was terminated in 1997.
Basis of Presentation:
On April 1, 1998, Express Scripts, Inc. (Express Scripts) acquired the
outstanding common stock of Value Health, Inc. (VHI). Prior to the acquisition
of VHI, the parent company of VHI (Columbia/HCA Healthcare Corporation or
Columbia) spun-off or otherwise disposed of various VHI subsidiaries such that,
on April 1, 1998, the subsidiaries of VHI included only its remaining
subsidiaries which operate in the pharmacy benefits management (PBM) business.
These financial statements present the combined financial position, results of
operations and cash flows of the PBM business of VHI, herein referred to as
Value Health Pharmacy Benefit Management or the Company. These financial
statements present the combined financial position, results of operations and
cash flows of the Company as if it were a separate entity for all periods
presented. The combined financial statements include the accounts of Cost
Containment Corporation of America; Denali Associates, Inc. (D/B/A Complete
Pharmacy Network); Diagnostek, Inc.; Health Care Services, Inc.; Health
Information Designs, Inc.; Medcounter, Inc.; Prescription Drug Services, Inc.;
RxNet, Inc.; ValueRx Northeast, Inc.; ValueRx of Iowa, Inc. and ValueRx Pharmacy
Program, Inc. The combined financial statements exclude all of the accounts of
VHI because the assets and liabilities of VHI were excluded from the acquisition
by Express Scripts. The combined financial statements also exclude the accounts
of Medintell Systems Corporation (Medintell), a developer and marketer of
advanced pharmacy information systems and services. On January 10, 1996, VHI
acquired Medintell in exchange for 843 shares of its common stock with a market
value of $22,997. This transaction was accounted for as a purchase. On August
28, 1997, VHI sold Medintell for approximately $1,410. All material intercompany
transactions and balances between the Company, its subsidiaries and affiliates
have been eliminated.
The Company has utilized certain of VHI's centralized general and administrative
functions, including legal, accounting, tax, treasury, employee benefits, sales
and marketing and insurance services. Fees for those services have been
allocated based on a percentage of adjusted pre-tax earnings of the Company. In
the opinion of management, VHI's methods for allocating such costs to the
Company are reasonable. However, such costs are not necessarily indicative of
the costs that would have been incurred if the Company had performed these
functions.
Use of Estimates:
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to
rebates receivable, the determination of the allowance for bad debts and
accruals for loss contracts and merger and restructuring related expenses.
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.
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. The Company
purchased a majority of its pharmaceutical products through one wholesaler for
the year ended December 31, 1996. The Company believes that other alternative
sources are readily available in the event needed.
Investments:
The Company has classified its investments in equity securities as "available
for sale" and carries such securities at market value based upon quoted market
prices. Accordingly, the net unrealized gains or losses, net of tax, are
included as a separate component of net assets. In determining the gain or loss
on sales of investments, cost is based on specific identification of the asset
sold.
Fixed Assets:
Fixed assets are recorded at cost. The Company uses straight-line and
accelerated methods of depreciation over the estimated useful lives of the
assets, which range from three to twenty-five years. Assets acquired under
capital lease agreements are recorded at the lesser of the present value of the
minimum lease payments or the fair value of the underlying asset. 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 operations as incurred and renewals and improvements are capitalized. Upon
sale or retirement of fixed assets, the cost and related accumulated
depreciation or amortization are removed from the accounts and any resulting
gain or loss is credited or charged to operations.
Included in equipment and software at December 31, 1996 are capitalized computer
software costs, related to purchased software and software developed internally
of $27,698. Accumulated amortization on computer software was $6,150 at December
31, 1996, and is included in accumulated depreciation and amortization. The
Company uses the straight-line amortization method over estimated useful lives
of the software which range from three to five years.
Goodwill and Other Intangible Assets:
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 $16,426 at December 31, 1996. The Company reviews its amortization policy
and carrying value of goodwill and other intangible assets on an ongoing basis.
This review includes an analysis of whether carrying values and amortization
periods are appropriate based upon product life cycle, company performance
compared to expectations and industry practice. If this review indicates that
goodwill and other intangible assets will not be recoverable, as determined
based on future undiscounted cash flows of the entity or book of business
acquired, over the remaining amortization period, the Company's carrying value
of the goodwill and other intangible assets would be reduced by the estimated
cash flow shortfall.
Payables to Providers:
Payables to providers represent amounts owed to network pharmacies and rebates
payable. Payables to providers are recorded as services are rendered.
Loss Contracts:
The Company reviews its various contracts to determine whether estimates of
future revenues, excluding investment income, are sufficient to cover future
costs of providing services and settling claim payments. For purposes of
evaluating potential loss contracts, only incremental costs are included in
determining the costs to provide services and settle claim payments. Estimated
future costs in excess of future revenues from such contracts are accrued and
charged to operations.
Revenue Recognition:
Revenues from dispensing prescription products from the Company's mail service
pharmacies are recorded upon shipment. Revenues from sales of prescription drugs
by pharmacies in the Company's nationwide network as well as pharmacy claims
processing revenues are recognized when the claims are adjudicated. When the
Company has an independent contractual obligation to pay its network pharmacy
providers for benefits provided to members of its clients' pharmacy benefit
plans, the Company includes payments from the plan sponsors for these benefits
as revenues and payments to these pharmacy providers in costs of services or
products. If the Company is only administering the plan sponsors' network
pharmacy contracts, the Company records fees derived from these contracts as net
revenue.
Costs of Services and Products:
Costs of services and products include product costs, pharmacy claims payments
and other direct costs associated with dispensing prescriptions and claims
processing operations, reduced by fees received from pharmaceutical
manufacturers in connection with the Company's drug purchasing and formulary
management programs, and incremental discounts from existing vendor
relationships.
Rebates from pharmaceutical manufacturers are recorded by the Company as
reductions in costs of services and products. Pharmaceutical manufacturer rebate
arrangements contribute 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.
Income Taxes:
The Company, including all of its subsidiaries and affiliates, was historically
included in the consolidated federal income tax returns filed by VHI. For
purposes of these stand-alone financial statements, the provision for income
taxes has been determined as if the Company had filed separate tax returns for
the periods presented.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Compensation Costs:
In accordance with SFAS No. 123, the Company has chosen to continue to account
for stock-based compensation for grants related to VHI stock options using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation costs for stock options granted to employees is
measured as the excess, if any, of the value of VHI's stock at the date of the
grant over the amount an employee must pay to acquire the stock. Such
compensation costs, if any, are amortized on a straight-line basis over the
underlying option vesting terms.
2. Mergers and Acquisitions:
On July 28, 1995, VHI completed its merger with Diagnostek, a Pharmacy Benefit
Manager (PBM). VHI issued 12,213,075 shares of its common stock in exchange for
all of the outstanding common stock of Diagnostek at an exchange ratio of
0.4975:1. The transaction was accounted for as a pooling of interests and
financial statements for all periods prior to this combination were restated to
reflect the combined operations. The Company's combined financial statements
include the operations of Diagnostek for all periods presented.
Included in the combined results of operations of the Company for the year ended
December 31, 1995 are the following unaudited results of the previously separate
companies for the period January 1, 1995 through June 30, 1995:
<TABLE>
<CAPTION>
Company Diagnostek Eliminations(1) Combined
<S> <C> <C> <C> <C>
Total revenues $ 368,204 $ 361,173 $(18,755) $710,622
Net income 13,465 2,680 16,145
<FN>
(1) Eliminations reflect revenues for certain clients where Diagnostek
served in a sub-contractor relationship with the Company.
</FN>
</TABLE>
3. Property, Improvements and Equipment:
Property, improvements and equipment consisted of the following at December 31,
1996:
<TABLE>
<S> <C>
Land $ 2,871
Buildings and improvements 9,835
Furniture and fixtures 3,727
Equipment and software 67,979
Leasehold improvements 2,276
------------
Less accumulated depreciation and
amortization 86,688
(24,742)
------------
$ 61,946
============
</TABLE>
4. Investments:
Investments in equity securities as of December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Aggregate
Cost Gain Loss Fair Value
<S> <C> <C> <C> <C>
Available for Sale
Equity securities $ 644 $ - $ (10) $ 634
</TABLE>
Proceeds from the sale of available for sale securities were $67,325 for the
year ended December 31, 1995. During 1996, the Company recorded a $1,010
write-down to reflect a decline in the investment fair value not considered to
be temporary.
5. Loss Contracts:
The Company has approximately $5,400 accrued for loss contracts as of December
31, 1996. During 1995, $34,000 of expense was recognized in the third quarter
and $12,600 of expense was recognized in the first quarter. The Company
evaluates the adequacy of this accrual on an ongoing basis.
On February 1, 1995, the Company's subsidiary, HPI Health Care Services, Inc.,
began performing under a contract with the State of New Jersey to provide unit
dose medications to the state's hospital system. The Company estimated that it
would incur losses over the three year term of the contract. In the first
quarter of 1995, contract losses over the three year term were estimated at
$12,600 and were recorded in the Company's results.
In the third quarter of 1995, an additional accrual of $4,000 was recorded by
the Company. During the first quarter of 1996, the Company entered into a
subcontracting agreement for the transfer of the State of New Jersey contract to
an unrelated company thereby eliminating any further losses. As of January 1,
1997, this subcontract was converted to an assignment of the contract to this
unrelated company. Accordingly, the Company has no additional exposure to losses
under this contract.
During the third quarter of 1995, the Company estimated that its full-risk,
capitated contract with Ford Motor Company (Ford) would generate a loss for 1996
as a result of projected increases in utilization and unit prices. The Ford
contract expired on February 28, 1997. The Company also estimated that certain
other risk-based accounts would incur losses over their remaining terms.
6. Restructuring and Merger-Related Expenses:
During the third and fourth quarters of 1995, the Company recorded a charge of
$71,000 in connection with its merger with Diagnostek (see Note 2) and its plan
to reorganize certain operations. Of this amount, approximately $8,800 was
incurred for transaction costs and $62,200 was related to costs associated with
the combining of operations and the related combination activities, such as
reduction of head count and elimination of duplicate facilities and excess
capacity. Merger-related and restructuring initiatives were completed in 1997.
The following table is a reconciliation of the restructuring and merger-related
expenses for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Asset
Write-offs
and Costs of Reduction of
Transaction Combining Headcount
Costs Operations and Capacity Total
<S> <C> <C> <C> <C>
Balances at December 31, 1995 $ 345 $ 34,668 $ 18,602 $ 53,615
Payments and write-offs (345) (34,668) (9,818) (44,831)
---------- --------- --------- ---------
Balances at December 31, 1996 - - $ 8,784 $ 8,784
========== ========= ========= =========
</TABLE>
During 1997, the Company recorded restructuring charges of approximately $1,800
related to an office closure. Restructuring and merger-related activities were
completed in 1997.
7. Net Assets:
Net assets is comprised of the following components at December 31, 1996:
Investment by VHI $273,250
Unrealized loss on securities available-for-sale, net of tax (6)
---------
$273,244
=========
8. Lease Obligations:
Capital Leases:
As of December 31, 1996, future minimum lease payments due under noncancellable
capital leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C>
1997 $ 181
1998 164
1999 156
2000 156
2001 106
Total future minimum lease payments 763
Less amount representing interest (82)
---------
Present value of minimum lease payments 681
Less current portion (149)
--------
Capital lease obligations, less
current portion $ 532
========
</TABLE>
Included in fixed assets are the following assets under capital leases:
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
<S> <C> <C>
Equipment and software $ 830 $ 3,741
Less accumulated depreciation and amortization (311) (2,355)
------- --------
$ 519 $ 1,386
======= ========
</TABLE>
Operating Leases:
The Company has cancellable and noncancellable operating lease agreements for
equipment and office space which include renewal options. Total rental expense
was $5,453 and $6,158 in 1996 and 1995, respectively. The Company's minimum
future lease payments under noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C>
1997 $ 3,378
1998 3,136
1999 2,801
2000 2,738
2001 2,667
Thereafter 21,995
--------
$ 36,715
========
</TABLE>
The amounts above include approximately $2,200 of payments due on certain leases
which the Company accrued in 1995 as part of its merger and restructuring
charges.
9. Stock Option Plan:
Prior to August 1997, VHI maintained a stock option plan pursuant to which
options to purchase common stock of VHI were granted to certain employees of the
Company. All such options granted to employees of the Company were granted with
exercise prices equal to the fair value of VHI's common stock on the date of the
grants (VHI options). In connection with the acquisition of VHI by Columbia, all
of the Company's option holders received cash from Columbia in exchange for
their vested options and all nonvested VHI options held by employees of the
Company were exchanged for options to purchase Columbia common stock, with terms
essentially identical to the VHI options.
As of December 31, 1996, there were 839 VHI stock options outstanding under the
plan held by employees of the Company with a weighted average exercise price of
$28.78.
No compensation cost has been recognized for the VHI stock option plan. Had
compensation cost for the VHI stock option plan been determined based on the
fair value of VHI options at the grant date for awards in 1996 and 1995, the
Company's net income would have been equal to the pro forma amounts indicated
below, based upon pro forma allocations from VHI:
<TABLE>
<CAPTION>
1996
<S> <C>
Net income:
As reported $ 17,309
Pro forma 16,126
1995
Net loss:
As reported $ (43,870)
Pro forma (44,133)
</TABLE>
The pro forma effect on the Company's operating results for 1996 and 1995 is not
fully representative of the pro forma effect on the Company's operating results
in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996 and 1995.
The aggregate fair value was calculated by using the fair value of each option
grant on the date of grant, utilizing the Black-Scholes option pricing model and
the following key assumptions for the stock option plan:
<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>
10. Other Employee Benefits:
Employees of the Company have participated in VHI's 1991 Employee Stock Purchase
Plan, providing for the purchase, with certain restrictions, by the employees of
the Company of common stock of VHI.
Employees of the Company have participated in VHI's 401(k) Retirement Savings
Plan (the Savings Plan). Company contributions to the plan are determined
annually and are based on contributions of participating employees. The cost of
this plan charged to the Company was approximately $700 and $425 in 1996 and
1995, respectively. Employees of the Company with balances in VHI's plan will be
allowed to transfer their balances and accumulated Company contributions, vested
and unvested, to the Company's plan.
11. Supplemental Disclosure of Cash Flow Information:
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
<S> <C> <C>
Cash paid during the year for:
Income taxes $ 16,783 $ 30,634
Noncash transactions:
Capital leases entered into for equipment 344
Fixed asset write-offs from merger and restructuring
activities 16,721
Other noncurrent assets received for sale of
subsidiary 6,000
</TABLE>
12. Income Taxes:
The provision (benefit) for income taxes for the years ended December 31, 1996
and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Currently payable:
Federal $ 9,361 $ 25,834
State 2,289 4,581
Deferred taxes:
Provision (benefit) 3,927 (44,825)
Valuation allowance 495 (466)
Goodwill reduction for acquired net operating
loss carryforward utilization (24) 202
-------- ---------
$16,048 $(14,674)
======== =========
</TABLE>
The tax benefits of carryforwards and temporary differences related to the
deferred tax asset at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Carryforwards:
<S> <C>
Net operating loss carryforwards related to purchase
business combinations $ 6,158
--------
Temporary differences:
Merger-related expense 2,340
Loss contracts 3,351
Restructuring 975
Estimated claims liabilities 19,103
Accounts receivable reserves, accruals and other 27,623
Depreciation and amortization (4,790)
--------
48,602
--------
Net Deferred tax asset 54,760
Valuation allowance (2,213)
--------
Reported deferred tax asset 52,547
Less current portion 51,179
--------
Long-term portion $ 1,368
========
</TABLE>
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 is related to business combinations accounted for as
purchases and has been maintained primarily due to the uncertainty regarding the
timing of net operating loss utilization. Should deferred tax assets
subsequently be recognized for such carryforwards, the reduction of the
valuation allowance will be offset by a corresponding reduction of goodwill.
During 1996, the valuation allowance decreased by $24 and $821 for utilization
of net operating losses and deferred benefits acquired in prior business
combinations. The allowance was also increased by $495 during 1996 for a capital
loss carryover which may expire before fully utilized.
The Company's effective income tax rate differs from the Federal statutory
income tax rate as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
<S> <C> <C>
Federal tax at statutory rate 35.0 % (35.0)%
State income tax, net 8.6 % 2.0 %
Valuation reserve 1.5 %
Nondeductible goodwill, merger and other expenses 3.4 % 8.7 %
Other (.4)% (.8)%
------ ------
48.1 % (25.1)%
====== =======
</TABLE>
Subject to certain statutory and regulatory limitations, the Company had the
following income tax carryforwards available at December 31, 1996:
<TABLE>
<CAPTION>
Years of
Amount Expiration
<S> <C> <C> <C>
U.S. federal regular net operating loss
carryforwards acquired in purchase business
combinations available for offset against
future taxable income $17,594 2002 - 2007
U.S. federal Alternative Minimum Tax (AMT)
net operating loss carryforwards acquired
in purchase business combinations $14,174 2002 - 2007
</TABLE>
13. Related Parties and Certain Transactions:
In connection with the Diagnostek merger (see Note 2), 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 and
make continued payments of certain split dollar life insurance policy premiums
at an amount previously funded by Diagnostek, but not to exceed $327 per year.
The term of the Consulting Agreement, which commenced July 28, 1995, is five
years. Under the Agreement Not to Compete, the Company paid the former chief
executive officer $3,500 on January 2, 1996 in exchange for his agreement not to
compete with the Company in any of its businesses and his agreement not to
solicit or otherwise intentionally interfere with the Company's employees or
customers for a 10-year period beginning July 28, 1995.
Prior to its acquisition by the Company, Diagnostek provided two executive
officers with loans. The Company assumed these loans in conjunction with its
acquisition of Diagnostek. The amounts receivable at December 31, 1996,
including accrued interest, for these loans was $338 and $335, respectively.
Diagnostek utilized the legal services of a firm whose partners included a
director of Diagnostek. Legal fees to this firm totaled approximately $1,451
during the year ended December 31, 1995.
The Company has provided loans to certain of its employees for relocation and
other costs. The amount of these loans, individually and in the aggregate, are
immaterial to the Company and are deemed by management to be collectable.
The Company also maintains employment agreements with certain of its executive
officers providing for severance payments of up to two years' current base
salary in the event any of the agreements are terminated, under certain
specified conditions.
14. 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 on 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 Cash Equivalents:
The carrying amount for cash and cash equivalents is a reasonable estimate of
those assets' fair value. Notes receivable consist of loans to officers or
former officers (see Note 13). There are no established trading markets for
these loans which management intends to hold to maturity. Generally, fair value
is determined by discounting future cash flows using current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. However, due to the nature of certain notes
receivable, it is impracticable to determine fair value.
Long-Term Investments:
Fair value for these securities is based on quoted market prices. At December
31, 1996, 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.
15. Commitments and Contingencies:
In September 1995, two purported shareholder class action lawsuits, Freedman v.
Value Health, Inc., et al. and Balkheimer, et al. v. Value Health, Inc., et al.,
were filed in the United States District Court for the District of Connecticut
against VHI, 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 VHI and the individual defendants
made false or misleading statements to the public in connection with VHI's
acquisition of Diagnostek in 1995. The complaints, which were consolidated on
February 16, 1996, do not specify the amount of damages sought.
On July 11, 1994, a purported shareholder class action lawsuit, Bash, et al. v.
Diagnostek, et al. (Bash I) was filed in 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 settled for $11,700.
Diagnostek funded approximately $3,000 of the settlement. The remainder was
funded by insurance carriers. 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 VHI and
certain of its current or former directors and officers, asserting the same
factual allegations made in Bash I and, in addition, alleging that VHI and
certain individual defendants made false and misleading statements to the public
in connection with VHI'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. In
1997, the Bash II plaintiffs filed an amended complaint that deleted those
allegations that overlapped with the allegations contained in the Bash I
complaint. On April 24, 1998, the Bash II lawsuit and the Freedman lawsuit were
consolidated.
VHI intends to defend the allegations in the lawsuits described above
vigorously. In connection with the acquisition of the outstanding common stock
of VHI by Express Scripts, Columbia/HCA Healthcare Corporation has agreed to
provide full indemnification to Express Scripts for any adverse outcome in these
matters.
The Company is involved in other litigation and claims arising in the normal
course of business. The Company believes that resolution of all 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.
In 1994, the Company established a $22,400 letter of credit on behalf of one of
its customers. The authorized amount was increased to $27,500 in 1995. The
letter had not been drawn upon as of December 31, 1996. This letter of credit
was terminated in 1997.
During 1996, the Company negotiated an arrangement with a large outsourcing
systems vendor to provide outsourcing services for the Company's data center
operations. The agreement is for a five-year term which expires in November 2001
with approximately $25,000 in fees to be paid by the Company over the life of
the agreement.
16. Subsequent Events:
On August 6, 1997, VHI was acquired by Columbia, a company listed on the New
York Stock Exchange, for approximately $1,300,000. In accordance with the terms
and conditions of the acquisition, each share of VHI's common stock and vested
VHI common stock options were tendered for $20.50 in cash.
On April 1, 1998, Express Scripts, Inc. (Express Scripts) acquired the
outstanding common stock of Value Health, Inc.
(VHI) (see Note 1).
Exhibit 99.4
Audited Financial Statements
Managed Prescription Network, Inc.
d/b/a Columbia Pharmacy Solutions
Years ended December 31, 1997, 1996 and 1995
with Report of Independent Auditors
<PAGE>
Managed Prescription Network, Inc.
d/b/a Columbia Pharmacy Solutions
Audited Financial Statements
Years ended December 31, 1997, 1996 and 1995
Contents
Report of Independent Auditors
Audited Financial Statements
Balance Sheets
Statements of Operations and Retained Earnings (Deficit)
Statements of Cash Flows
Notes to Financial Statements
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholder
of Managed Prescription Network, Inc.
We have audited the accompanying balance sheets of Managed Prescription Network,
Inc. d/b/a Columbia Pharmacy Solutions (the Company) as of December 31, 1997 and
1996, and the related statements of operations and retained earnings (deficit)
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Managed Prescription Network,
Inc. d/b/a Columbia Pharmacy Solutions at December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
June 1, 1998
<PAGE>
<TABLE>
Managed Prescription Network, Inc.
d/b/a Columbia Pharmacy Solutions
Balance Sheets
<CAPTION>
December 31
1997 1996
<S> <C> <C>
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 38,975 $ 151,559
Accounts receivable, trade (net of allowance for doubtful accounts of
$1,970,234 and $1,241,024 in 1997 and 1996, respectively)
17,358,391 13,169,826
Inventories - 911,153
Prepaid expenses and other current assets 68,597 909,606
Deferred income taxes 3,536,000 2,225,000
-----------------------------------
Total current assets 21,001,963 17,367,144
Equipment and leasehold improvements, net 1,120,946 1,452,508
Goodwill, net 245,846 267,699
Deferred income taxes - 1,477,000
-----------------------------------
1,366,792 3,197,207
====================================
Total assets $ 22,368,755 $ 20,564,351
====================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
-----------------------------------
Liabilities and stockholder's deficit Current liabilities:
Trade accounts payable $ 9,742,479 $ 8,473,988
Accrued rebates 1,371,415 802,287
Due to affiliate, net 12,844,705 13,148,489
Accrued loss contract 4,219,374 5,265,275
Accrued merger costs 3,905,099 -
Deferred revenue - 1,189,280
Other accrued liabilities 200,613 291,383
------------------------------------
Total current liabilities 32,283,685 29,170,702
Accrued loss contract, less current portion - 4,219,374
------------------------------------
Total liabilities 32,283,685 33,390,076
Stockholder's deficit:
Common stock 1,000 1,000
Paid-in capital 375,000 375,000
Retained earnings (deficit) (10,290,930) (13,201,725)
------------------------------------
Total stockholder's deficit (9,914,930) (12,825,725)
====================================
Total liabilities and stockholder's deficit $ 22,368,755 $ 20,564,351
====================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Managed Prescription Network, Inc.
d/b/a Columbia Pharmacy Solutions
Statements of Operations and Retained Earnings (Deficit)
<CAPTION>
Year ended December 31
1997 1996 1995
<S> <C> <C> <C>
-----------------------------------------------------------
Prescription drug revenues:
Services $102,443,315 $ 75,283,004 $ 21,603,868
Products 15,581,604 12,881,695 1,115,556
-----------------------------------------------------------
Total prescription drug revenues 118,024,919 88,164,699 22,719,424
Expenses:
Cost of services 88,439,339 67,899,621 18,366,142
Cost of products 14,201,766 11,115,936 4,227,826
Cost of sales--other 863,883 739,618 80,669
Selling, general and administrative 5,554,565 7,371,372 5,981,877
Depreciation and amortization 336,319 184,416 108,096
Loss contract - - 14,832,947
-----------------------------------------------------------
Total expenses 109,395,872 87,310,963 43,597,557
-----------------------------------------------------------
Income (loss) from operations 8,629,047 853,736 (20,878,133)
Other expense, merger costs 4,150,252 - -
-----------------------------------------------------------
Income (loss) before income taxes 4,478,795 853,736 (20,878,133)
Provision (benefit) for income taxes 1,568,000 299,000 (7,308,000)
-----------------------------------------------------------
Net income (loss) 2,910,795 554,736 (13,570,133)
Retained earnings (deficit), beginning of year (13,201,725) (13,756,461) (186,328)
-----------------------------------------------------------
Retained earnings (deficit), end of year $ (10,290,930) $(13,201,725) $(13,756,461)
===========================================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
Managed Prescription Network, Inc.
d/b/a Columbia Pharmacy Solutions
Statements of Cash Flows
<CAPTION>
Year ended December 31
1997 1996 1995
<S> <C> <C> <C>
----------------------------------------------------
Cash flows from operating activities
Net income (loss) $2,910,795 $ 554,736 $(13,570,133)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Provision for doubtful accounts 729,210 679,102 561,922
Depreciation and amortization 336,319 184,416 108,030
Loss on disposal of fixed assets 42,744 - -
Deferred income taxes 166,000 1,699,000 (5,401,000)
Change in operating assets and liabilities:
Accounts receivable, trade (4,917,775) (7,424,081) (5,582,984)
Inventories 911,153 59,665 (521,201)
Prepaid expenses and other current assets 841,009 (901,606) 31,543
Trade accounts payable 1,268,491 4,502,218 3,402,815
Accrued rebates 569,128 784,582 17,705
Due to affiliate, net (303,784) 5,088,548 6,459,909
Accrued loss contract (5,265,275) (5,348,298) 14,832,947
Accrued merger costs 3,905,099 - -
Deferred revenue (1,189,280) 1,189,280 -
Other accrued liabilities (90,770) 48,746 245,192
----------------------------------------------------
Net cash (used in) provided by operating activities (86,936) 1,116,308 584,745
Cash flows from investing activities
Capital expenditures (25,648) (1,137,281) (412,213)
-----------------------------------------------------
Net cash used in investing activities (25,648) (1,137,281) (412,213)
-----------------------------------------------------
Net (decrease) increase in cash and cash equivalents (112,584) (20,973) 172,532
Cash and cash equivalents at beginning of year 151,559 172,532 -
=====================================================
Cash and cash equivalents at end of year $ 38,975 $ 151,559 $ 172,532
=====================================================
</TABLE>
See accompanying notes.
<PAGE>
Managed Prescription Network, Inc.
d/b/a Columbia Pharmacy Solutions
Notes to Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Operations
Managed Prescription Network, Inc. (the Company) is a wholly owned subsidiary of
Columbia/HCA Healthcare Corporation (Columbia). The Company administers
prescription drug benefit plans on behalf of various employee benefit program
sponsors. The Company dispenses drugs to program members through a preferred
provider organization of retail pharmacies throughout the United States. The
Company also administered a mail order pharmacy through September 5, 1997. The
mail order pharmacy was subsequently transferred to a subsidiary of Columbia
(Note 6).
Prescription drugs are provided to program members for a fee that is based on
either a fixed charge per prescription (fee-for-service) or a fixed per capita
payment paid each month (capitated fee) by program sponsors. These contracts are
negotiated on a one- to three-year basis, and the majority are subject to
cancellation after the initial term of the contract by the sponsor or the
Company upon 90 days written notice.
The Company received revenues from five major customers totaling approximately
52%, 55% and 27% of total revenues during the years ended December 31, 1997,
1996 and 1995, respectively.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ 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.
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.
The Company purchased a majority of its pharmaceutical products through one
wholesaler for the years ended December 31, 1997, 1996 and 1995. The Company
believes that other alternative sources are readily available in the event
needed.
Fixed Assets
Fixed assets are recorded at cost. Fixed assets are comprised principally of
office furniture and fixtures, computer hardware, and certain equipment related
to the mail order pharmacy business. The Company uses the straight-line method
of depreciation over the estimated useful lives of the assets, which range from
four to ten years. Expenditures for maintenance and repairs are charged to
operations as incurred. Upon sale or retirement of fixed assets, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any resulting gain or loss is credited or charged to operations.
Goodwill
Goodwill arose out of the 1994 acquisition of the Company by Columbia, and
represents the excess of cost over the fair value of the assets acquired. This
amount is being amortized on a straight-line basis over 15 years. Accumulated
amortization was $81,948 and $60,095 at December 31, 1997 and 1996,
respectively.
Accrued Loss Contract
The Company reviews its various capitated contracts to determine whether
estimates of future revenues are sufficient to cover future costs of providing
services and settling claim payments. Estimated future costs in excess of future
revenues from such contracts are accrued and charged to operations.
Revenue and Cost Recognition
Prescription drug service revenues are related to fee-for-service prescription
drug sales by retail pharmacies in the Company's preferred provider network and
capitated contract revenues, as well as pharmacy claims processing fees charged
to plan sponsors for administration of the network pharmacy contracts.
Fee-for-service revenues and pharmacy claims processing fees are recognized when
the claims are adjudicated, while capitated contract revenues are recorded over
the life of the contract. The cost of services includes pharmacy claims payments
and adjudication fees and is recognized in the period that services are
delivered.
Prescription drug product revenues and cost of products are related to the
Company's mail order pharmacy program and are recognized upon shipment of the
products.
Rebates from pharmaceutical manufacturers are recorded by the Company as
reductions in cost of services and products. Pharmaceutical manufacturer rebate
arrangements contribute to the Company's profitability. The Company intends to
continue seeking such arrangements in the future under the merged operations
with Columbia's newly acquired subsidiary's pharmacy benefit management business
(ValueRx) (Note 6), but there can be no assurance future arrangements will be
secured on similar terms.
Deferred revenue at December 31, 1996 represents advanced payments received
related to a capitated fee contract.
Income Taxes
The Company's operating results are included in the consolidated federal income
tax return filed by Columbia. The current tax liabilities and tax benefits
attributable to the Company's taxable income or loss are recognized by the
Company through adjustments to the amount due to affiliate.
Deferred income taxes are provided to recognize the tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts recognized for income tax purposes.
2. Prepaid Expenses and Other Current Assets
At December 31, 1996, the prepaid expenses and other current assets are
principally comprised of a deposit made by the Company with a drug manufacturer
in order to participate in a certain rebate program.
3. Equipment and Leasehold Improvements
<TABLE>
Equipment and leasehold improvements consisted of the following at December 31:
<CAPTION>
1997 1996
<S> <C> <C>
--------------------------------------
Office and pharmacy equipment $1,494,820 $1,527,838
Leasehold improvements 186,072 186,072
--------------------------------------
1,680,892 1,713,910
Less accumulated depreciation and amortization (559,946) (261,402)
======================================
$1,120,946 $1,452,508
======================================
</TABLE>
4. Accrued Loss Contract
During the fourth quarter of 1995, the Company entered into a three-year
capitated fee contract with a drug program sponsor, for which $14,832,947 of
expense was recorded to account for the estimated future losses under the
contract. The accrual has been reduced during subsequent years to offset the
losses realized on the contract, and the remaining accrual at December 31, 1997
of $4,219,374 is considered to be sufficient to cover the remaining estimated
losses on the contract through its expiration during 1998.
5. Other Employee Benefits
Employees of the Company participate in Columbia's Employee Stock Purchase Plan
(the Stock Plan), providing for the purchase, with certain restrictions, of
Columbia's common stock.
Employees of the Company have participated in Columbia's Salary Deferral
Plan/401(k) (the 401(k) Plan). Company contributions to the 401(k) Plan are
funded periodically during the year and are computed at 25% to 100% of a
participant's contribution up to certain maximum levels.
The Company also contributes to noncontributory defined contribution retirement
plans (the Pension Plans) administered by Columbia.
Company contributions to the Pension Plans are determined annually as a
percentage of a participant's earned income and are vested over specified
periods of employee service. The cost of the 401(k) Plan and Pension Plans
charged to the Company was approximately $30,000, $40,000 and $25,000 in 1997,
1996 and 1995, respectively.
6. Accrued Merger Costs
During 1997, Columbia initiated a plan to merge the operations of the Company
with ValueRx. With the exception of the Company's mail order pharmacy
operations, which were merged with ValueRx on September 5, 1997, the Company
began to transition its operations to ValueRx on January 1, 1998. The Company
has recorded merger related expenses during 1997 of $4,150,252, and at December
31, 1997 $3,905,099 remains accrued for future expenditures. Amounts recorded
relate to an obligation under a vacated facility lease, employee severance pay
and a provision for the write-down of certain fixed assets to their net
realizable value under the merged operations.
7. Income Taxes
The provision (benefit) for income taxes for the years ended December 31,
1997, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
-----------------------------------------------------------
Current payable (benefit):
Federal $1,402,000 $(1,400,000) $(1,907,000)
Deferred income taxes:
Provision (benefit) 166,000 1,699,000 (5,401,000)
===========================================================
$1,568,000 $ 299,000 $(7,308,000)
===========================================================
</TABLE>
The current income tax payable or receivable is included in the due to
affiliate, net at December 31, 1997 and 1996.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
----------------------------------------
Accrued loss contract $1,477,000 $3,319,000
Accrued merger costs 1,453,000 -
Accounts receivable reserves, accruals and other 710,000 458,000
Depreciation and amortization (104,000) (75,000)
----------------------------------------
Net deferred tax asset 3,536,000 3,702,000
----------------------------------------
Less current portion 3,536,000 1,477,000
========================================
Long-term portion $ - $2,225,000
========================================
</TABLE>
The net federal deferred tax assets are expected to be recovered by utilizing
the benefits to offset future consolidated taxable income of Columbia.
The Company's effective income tax rate equals the federal statutory income tax
rate for the years ended December 31, 1997, 1996 and 1995. Although the Company
files a separate state tax return, no state tax benefit or provision has been
recognized due to certain net operating loss carryforward limitations.
8. Related Party Transactions
The amount due to affiliate, net represents the net effect of all working
capital, fixed asset and other transactions which were paid to or financed by
Columbia, including the current income tax provisions. Additionally, the Company
contracts with Columbia to provide prescription drug products and services to
Columbia's employees. Revenues recognized under this contract totaled
approximately $32,682,000, $27,232,000 and $858,000 during 1997, 1996 and 1995,
respectively.
9. Subsequent Event
On February 19, 1998, Columbia entered into a stock purchase agreement to sell
100% of its interest in the Company. The impact of this transaction on the
recorded assets and liabilities has not been reflected in these financial
statements.
Exhibit 99.5
CERTAIN UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL DATA
On April 1, 1998, Express Scripts, Inc. ("Express Scripts" or "the
Company") completed its acquisition of certain pharmacy benefit operations
("ValueRx") from Columbia/HCA Healthcare Corporation ("Columbia"). The
transaction was consummated pursuant to the terms of a Stock Purchase Agreement
among Columbia, VH Holdings, Inc., Galen Holdings, Inc., and Express Scripts
dated February 19, 1998, pursuant to which Express Scripts acquired all of the
outstanding capital stock of Value Health, Inc. ("VHI" or "Value Health Pharmacy
Benefit Management") and Managed Prescription Network, Inc. ("MPN"), the sole
assets of which are various subsidiaries each now or formerly conducting
business as a pharmacy benefit management company (collectively, the "Acquired
Entities"), including ValueRx Pharmacy Program, Inc., for approximately $445
million in cash (approximately $360 million of which was obtained through a
five-year bank credit facility), said amount being subject to adjustment based
on the amount of working capital and certain balance sheet reserves of the
Acquired Entities at closing, and the amount of certain employee obligations, as
per the Stock Purchase Agreement. A preliminary calculation of the adjustment
reduces the purchase price by approximately $34 million.
The following unaudited consolidated condensed pro forma statement of
operations and balance sheet combines the historical statement of operations and
balance sheet of the Company and the Acquired Entities for the year ended and as
of December 31, 1997, respectively. The unaudited consolidated condensed pro
forma statement of operations has been prepared to reflect the acquisition of
the Acquired Entities and the related financing as if such events had occurred
on January 1, 1997. The unaudited consolidated condensed pro forma balance sheet
has been prepared to reflect the acquisition of the Acquired Entities and the
related financing as if such events had occurred on December 31, 1997.
The detailed assumptions used to prepare the unaudited consolidated
condensed pro forma financial information are contained in the notes to
unaudited consolidated condensed pro forma financial information. The unaudited
consolidated condensed pro forma financial information reflects the use of the
purchase method of accounting for the Acquired Entities. Under the purchase
method of accounting, the basis of accounting for the Acquired Entities' assets
and liabilities is based upon their fair values at the date of acquisition.
The pro forma adjustments represent the Company's preliminary
determination of these adjustments and are based upon available information and
certain assumptions which the Company considers reasonable under the
circumstances. Final amounts could differ from those set forth below. The
unaudited consolidated condensed pro forma information is not necessarily
indicative of the future results of operations of the Company or the results of
operations as they might have been had the acquisition been effective on the
first day of the period presented. The unaudited consolidated condensed pro
forma financial information should be read in conjunction with the separate
historical financial statements and notes thereto of the Company, included in
the Company's report on Form 10-K (filed March 27, 1998), and the Acquired
Entities, included within this report.
<TABLE>
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
EXPRESS PRO FORMA PRO FORMA
SCRIPTS VHI (1) MPN ADJUSTMENTS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
--------------- --------------- --------------- --------------- ---------------
Net revenues $ 1,230,634 $ 1,529,247 $ 118,025 $ - $ 2,877,906
Cost and expenses
Cost of revenues
1,119,167 1,345,907 103,505 - 2,568,579
Selling, general and
administrative 62,617 161,701 5,891 (14,073)(2) 216,136
Write down of goodwill - 273,000 - (273,000)(3) -
--------------- --------------- --------------- --------------- ---------------
1,181,784 1,780,608 109,396 (287,073) 2,784,715
--------------- --------------- --------------- --------------- ---------------
Operating income 48,850 (251,361) 8,629 287,073 93,191
Other income (expense) 6,081 (694) (4,150) (2,875)(4) (1,638)
Interest expense (225) (148) - (26,409)(5) (26,782)
--------------- --------------- --------------- --------------- ---------------
Income before income taxes 54,706 (252,203) 4,479 257,789 64,771
Provision for income taxes 21,277 12,524 1,568 (4,285)(6) 31,084
--------------- --------------- --------------- --------------- ---------------
Net income $ 33,429 $ (264,727) $ 2,911 $ 262,074 $ 33,687
=============== =============== =============== =============== ===============
Basic earnings per share $ 2.04 $ 2.06
=============== ===============
Weighted average number of common
shares outstanding during the
period - Basic EPS 16,356 16,356
=============== ===============
Diluted earnings per share $ 2.02 $ 2.03
=============== ===============
Weighted average number of common
shares outstanding during the
period - Diluted EPS 16,561 16,561
=============== ===============
<FN>
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
The following explanations describe the assumptions used in determining the
unaudited consolidated condensed pro forma statement of operations of the
Company for the year ended December 31, 1997. (Amounts in Thousands)
(1) These historical amounts represent the combination of the predecessor basis
from January 1, 1997 to July 31, 1997 and the successor basis from August
1, 1997 to December 31, 1997. See the statements of operation included in
the 1997 audited financial statements of Value Health Pharmacy Benefit
Management as found in Exhibit 99.2 included within this current report.
(2) Adjustment reflects the net decrease in depreciation and amortization
expense arising from the application of purchase accounting as required by
GAAP as of January 1, 1997 and changes in expenses to conform accounting
principles to those historically used by Express Scripts. Property and
equipment are being depreciated by Express Scripts using the straight-line
method over estimated useful lives of 3 to 20 years. Goodwill is being
amortized using the straight-line method over the estimated useful life of
30 years. Other intangible assets are being amortized using the
straight-line method over the estimated useful lives of 2 to 20 years.
During 1997, VHI incurred $13,802 in non-recurring costs for executive
management compensation, regulatory matters, and Columbia merger
expenditures. These non-recurring costs were reduced by approximately
$7,725 to conform VHI's capitalization policy to Express Scripts'
historical policy.
HISTORICAL PRO FORMA
Property and $17,902 $ 4,234
equipment
Goodwill 9,504 10,546
Other intangible 1,131 5,761
assets
------------ -------------
$28,537 $20,541
============ =============
The Company anticipates spending an estimated $6 million to $10 million in
non-recurring costs during the first twelve months subsequent to the
Company's acquisition of the Acquired Entities relating to the integration
of the Acquired Entities operations into the Company. These non-recurring
costs have been excluded from the unaudited consolidated condensed pro
forma statement of operations.
(3) Adjustment reflects the reversal of a one time, pre-acquisition write down
of goodwill by Columbia based on an assessment of impairment by Columbia
management arising from the sale to Express Scripts. See Note 1 in the 1997
audited financial statements of Value Health Pharmacy Benefit Management as
found in Exhibit 99.2 included within this current report. The Company has
assessed the recoverability of goodwill resulting from its acquisition of
the Acquired Entities and does not believe any impairment exists at this
time.
(4) Adjustment reflects the decrease in interest income of $5,044 resulting
from the Company expending $100,908 of its cash and short-term investments
to consummate the acquisition of the Acquired Entities reduced by $2,169
for one time losses resulting from the pre-acquisition sale of assets by
VHI.
(5) Adjustment records the additional net interest expense and the amortization
of the deferred financing fees associated with the five-year bank credit
facility. The additional net interest expense was determined assuming an
average borrowing rate of 7.13% on the $360 million incurred to consummate
the acquisition of the Acquired Entities reduced by the VHI interest
expense. Deferred financing fees are being amortized over the term of the
credit agreement.
(6) Adjustment reflects the income tax effect on the pro forma adjustments at
an effective tax rate of 38.9% exclusive of the impact of goodwill
amortization and other non-deductible expenses.
</FN>
</TABLE>
<PAGE>
<TABLE>
Express Scripts, Inc.
Unaudited Consolidated Condensed Pro Forma Balance Sheet
(Amounts In Thousands)
<CAPTION>
DECEMBER 31, 1997
EXPRESS PRO FORMA PRO FORMA
SCRIPTS VHI MPN ADJUSTMENTS CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
-------------- -------------- ------------- --------------- --------------
ASSETS
Current assets:
Cash $ 64,155 $ 32,036 $ 39 $ (42,970)(1) $ 53,260
Short-term investments 57,938 - - (57,938)(1) -
Accounts receivable 210,291 187,830 17,358 - 415,479
Other current assets 31,584 54,559 3,605 (13,533)(2) 76,215
-------------- -------------- ------------- ------------- --------------
Total current assets 363,968 274,425 21,002 (114,441) 544,954
Property and equipment, net 26,821 99,652 1,121 (61,950)(3) 65,644
Goodwill, net 251 247,780 246 68,325(4) 316,602
Other intangible assets, net - 8,232 - 50,678(5) 58,910
Other assets 11,468 8,594 - 19,062(6) 39,124
-------------- -------------- ------------- ------------- --------------
Total assets $ 402,508 $ 638,683 $ 22,369 $ (38,326) $ 1,025,234
============== ============== ============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Claims payable $ 153,051 $ 154,893 $ - $ - $ 307,944
Accounts payable and accrued expenses 44,855 60,520 32,284 8,420(7) 146,079
-------------- -------------- ------------- --------------- --------------
Total current liabilities 197,906 215,413 32,284 8,420 454,023
Long-term debt - - - 360,000(8) 360,000
Other long-term liabilities 901 6,609 - - 7,510
-------------- -------------- ------------- --------------- --------------
Total liabilities 198,807 222,022 32,284 368,420 821,533
Stockholders' equity (deficit) 203,701 416,661 (9,915) (406,746)(9) 203,701
-------------- -------------- ------------- --------------- --------------
Total Liabilities and stockholders'
equity $ 402,508 $ 638,683 $ 22,369 $ (38,326) $1,025,234
============== ============= ============= =============== ==============
<FN>
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
The following explanations describe the assumptions used in determining the unaudited consolidated condensed pro
forma balance sheet of the Company as of December 31, 1997. (Amounts in Thousands)
(1) Adjustment reflects the cash paid by Express Scripts to purchase the
Acquired Entities.
(2) Adjustment to eliminate the Acquired Entities historical deferred taxes of
$41,737 and recognize $29,605 of current deferred taxes related to the VHI
and MPN assets and liabilities acquired. The additional $1,401 eliminated
represents other current assets of VHI and MPN for which there is no value
to the Company as of the acquisition date.
(3) Adjustment reflects the reduction of the Acquired Entities property and
equipment to their estimated fair values at the acquisition date. The
significant reduction from historical value is due primarily to the write
down of $45,753 for capitalized software costs related to information
systems not used by the combined entities subsequent to the date of
acquisition.
(4) Adjustment required to reflect the excess of purchase price over fair
market value of the identified assets acquired.
(5) Adjustment required to reflect the estimated fair values assigned to
customer contracts and non-compete agreements of $48,523 and $2,397,
respectively, reduced by $242 for other intangibles of VHI for which there
is no value to the Company as of the acquisition date..
(6) Adjustment reflects the long term deferred tax assets of $15,634 related to
the VHI and MPN assets and liabilities acquired and $3,963 in deferred
financing fees paid in conjunction with the five-year bank credit facility.
These adjustments were reduced by other long term assets of VHI and MPN for
which there is no value to the Company as of the acquisition date.
(7) Adjustment reflects the elimination of the Acquired Entities amounts due to
affiliates of $12,845 offset by accruals of $21,265 for transaction costs
and other liabilities associated with the purchase of the Acquired
Entities.
(8) Adjustment reflects the proceeds from the five-year bank credit facility
obtained to assist in funding the Company's acquisition.
(9) Adjustment reflects the elimination of the Acquired Entities pre-
acquisition equity balances.
</FN>
</TABLE>
