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, 1999
Express Scripts, Inc.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its Charter)
Delaware 0-20199 43-1420563
- -------------------------------------------------------------------------------
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction of Identification No.)
corporation)
13900 Riverport Drive, Maryland Heights, Missouri 63043
- -------------------------------------------------------------------------------
(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)
Item 2. Acquisition or Disposition of Assets.
On April 14, 1999, Express Scripts, Inc. filed a Current Report on Form 8-K
(the "Current Report") pertaining to its completed acquisition of the
outstanding common stock of Diversified Pharmaceutical Services, Inc. and
Diversified Pharmaceutical Services (Puerto Rico), Inc. (collectively "DPS"),
from SmithKline Beecham Corporation and SmithKline Beecham InterCredit BV,
respectively (collectively "SmithKline Beecham"). A copy of the Stock Purchase
Agreement was filed with a Form 8-K dated February 9, 1999, as Exhibit 2.1
thereto. Pursuant to the instructions for Item 7 of the Current Report, we
hereby amend Item 7 to the Current Report to include the financial statements of
DPS for the three months ended March 31, 1999 and the three years ended December
31, 1998, and the pro forma financial information.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements
The following Diversified Pharmaceutical Services, Inc. and Subsidiary (A
Wholly Owned Subsidiary of SmithKline Beecham Corporation) Unaudited Condensed
Consolidated Financial Statements are submitted herewith as Exhibit 99.2:
(i) Unaudited Condensed Consolidated Balance Sheet as of December 31, 1998
and March 31, 1999
(ii) Unaudited Condensed Consolidated Statement of Operations for the Three
Months Ended March 31, 1998 and 1999
(iii) Unaudited Condensed Consolidated Statement of Changes in
Stockholder's
Equity for the Three Months ended March 31, 1999
(iv) Unaudited Condensed Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 1998 and 1999
(v) Notes to Unaudited Condensed Consolidated Financial Statements
The following Diversified Pharmaceutical Services, Inc. and Subsidiary (A
Wholly Owned Subsidiary of SmithKline Beecham Corporation) Financial Statements
are submitted herewith as Exhibit 99.3:
(vi) Report of Independent Accountants
(vii) Balance Sheets as of December 31, 1997 and 1998
(viii) Statement of Operations for the Years Ended December 31, 1996, 1997
and 1998
(ix) Statement of Stockholder's Equity for the Years Ended December 31,
1996, 1997 and 1998
(x) Statements of Cash Flows for the Years Ended December 31, 1996, 1997
and 1998
(xi) Notes to Financial Statements
(b) Pro Forma Financial Information
The following unaudited consolidated condensed pro forma financial
statements are submitted herewith as Exhibit 99.4:
(i) Unaudited Consolidated Condensed Pro Forma Statement of Operations for
the Three Months Ended March 31, 1999
(ii) Notes to the Unaudited Consolidated Condensed Pro Forma Statement of
Operations for the Three Months Ended March 31, 1999
(iii) Unaudited Consolidated Condensed Pro Forma Statement of Operations
for the Year Ended December 31, 1998
(iv) Notes to the Unaudited Consolidated Condensed Pro Forma Statement of
Operations for the Year Ended December 31, 1998
(v) Unaudited Consolidated Condensed Pro Forma Balance Sheet as of March
31, 1999
(vi) Notes to the Unaudited Consolidated Condensed Pro Forma Balance Sheet
as of March 31, 1999
(c) Exhibits. The following exhibits are filed as part of this report on
Form 8-K/A:
Exhibit 23.1 - Consent of PricewaterhouseCoopers LLP
Exhibit 99.1 - Press Release, dated April 1, 1999, by Express Scripts,
Inc., incorporated by reference to Exhibit 99.1 to Express Scripts' Current
Report on Form 8-K filed April 14, 1999.
Exhibit 99.2 - Diversified Pharmaceutical Services, Inc. and Subsidiary (A
Wholly Owned Subsidiary of SmithKline Beecham Corporation) Unaudited Condensed
Consolidated Financial Statements as of December 31, 1998 and March 31, 1999 and
For the Three Months Ended March 31, 1998 and 1999.
Exhibit 99.3 - Diversified Pharmaceutical Services, Inc. and
Subsidiary (A Wholly Owned
Subsidiary of SmithKline Beecham Corporation) Financial Statements as of
December 31, 1997 and 1998 and For the Years Ended December 31, 1996, 1997 and
1998.
Exhibit 99.4 - Certain Unaudited Consolidated Condensed Pro Forma Financial
Data
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 11, 1999 By: /s/ Barrett A. Toan
Barrett A. Toan
President and Chief Executive Officer
Date: June 11, 1999 By: /s/ George Paz
George Paz
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
23.1 Consent of PricewaterhouseCoopers LLP
99.1 Press Release, dated April 1, 1999, by Express Scripts, Inc.,
incorporated by reference to Exhibit 99.1 to Express Scripts' Current
Report on Form 8-K filed April 14, 1999
99.2 Diversified Pharmaceutical Services, Inc. and Subsidiary (A Wholly
Owned Subsidiary of SmithKline Beecham Corporation) Unaudited
Condensed Consolidated Financial Statements as of December 31, 1998
and March 31, 1999 and For the Three Months Ended March 31, 1998 and
1999.
99.3 Diversified Pharmaceutical Services, Inc. and Subsidiary (A Wholly
Owned Subsidiary of SmithKline Beecham Corporation)Financial
Statements as of December 31, 1997 and 1998 and For the Years Ended
December 31, 1996, 1997 and 1998.
99.4 Certain Unaudited Consolidated Condensed Pro Forma Financial Data.
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-80255, 333,48779, 333-72441, 333-69855,
333-48767, 333- 48765, 333-27983, 333-04291, 333-64094, 33-64278, 33-93106) of
Express Scripts, Inc. of our report dated February 26, 1999, except Note 12 for
which the date is March 1, 1999, appearing in Exhibit 93.3 of this Form 8-K/A.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, MO
June 14, 1999
EXPRESS SCRIPTS, INC.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF SMITHKLINE BEECHAM CORPORATION)
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 and 1999
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
<S> <C> <C>
------------ ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash............................................... $ 1,686 $ --
---------- ----------
Receivables:
SmithKline Beecham Corporation.................. 371,827 --
Accounts receivable, less allowance for doubtful
accounts of $2,147 and $1,317, respectively... 82,746 120,884
---------- ----------
Total receivables.......................... 454,573 120,884
Other current assets............................... 3,849 2,904
---------- ----------
Total current assets....................... 460,108 123,788
Furniture and equipment, net......................... 27,394 27,894
Goodwill and intangible assets, net.................. 832,497 821,767
Deferred tax asset................................... 430,374 427,278
Other assets......................................... 7,122 --
---------- ----------
Total assets............................... $1,757,495 $1,400,727
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Rebates and pharmacy claims payable................ $ 191,727 $ 232,666
Accrued expenses and deferred revenue.............. 53,154 35,609
---------- ----------
Total current liabilities.................. 244,881 268,275
---------- ----------
Other liabilities.................................... -- 50
---------- ----------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding... -- --
Additional paid-in capital......................... 2,110,981 1,725,475
Accumulated deficit................................ (598,367) (593,073)
---------- ----------
Total stockholder's equity...................... 1,512,614 1,132,402
---------- ----------
Total liabilities and stockholder's
equity.................................. $1,757,495 $1,400,727
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net revenues............................................. $47,650 $65,366
------- -------
Operating expenses:
Other selling, general and administrative.............. 35,318 44,529
Depreciation and amortization.......................... 19,727 12,880
------- -------
Total operating expenses............................ 55,045 57,409
------- -------
Operating income (loss).................................. (7,395) 7,957
------- -------
Equity in loss of joint venture.......................... (431) (359)
Royalty income........................................... 1,145 792
------- -------
(Loss) income before income taxes...................... (6,681) 8,390
Provision (benefit) for income taxes..................... (2,338) (3,096)
------- -------
Net (loss) income........................................ $(4,343) $ 5,294
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998...... 100 $ -- $2,110,981 $(598,367) $1,512,614
Net income...................... 5,294 5,294
Allocation of expenses paid by
SmithKline Beecham
Corporation................... 642 642
SmithKline Beecham Corporation
receivable settled............ -- -- (386,148) -- (386,148)
--- --------- --------- --------- ---------
Balance at March 31, 1999......... 100 $ -- $1,725,475 $(593,073) $1,132,402
=== ========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................... $(4,343) $ 5,294
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 19,727 12,880
Allocation of expenses paid by SB Corp............... 642 642
Provision for bad debts.............................. 1,659 (500)
Deferred income taxes................................ (2,338) 3,096
Equity loss in joint venture......................... 431 359
Net changes in operating assets and liabilities...... (54,111) (18,585)
------- --------
Net cash (used in) provided by operating activities....... (38,333) 3,186
------- --------
Cash flows from investing activities:
Decrease (increase) in receivable from SmithKline
Beecham Corporation.................................. 41,471 (2,222)
Purchases of property and equipment..................... (4,395) (2,650)
Other................................................... 1,992 --
------- --------
Net cash used in investing activities..................... 39,068 (4,872)
------- --------
Net increase (decrease) in cash........................... 735 (1,686)
Cash at beginning of period............................... 619 1,686
------- --------
Cash at end of period..................................... $ 1,354 $ --
======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted in this consolidated condensed financial statement pursuant to
the Form 10-Q Rules and Regulations of the Securities and Exchange Commission.
However, in the opinion of the Company, the disclosures contained herein are
adequate to make the information presented not misleading when read in
conjunction with the notes to financial statements of diversified Pharmaceutical
Services, Inc. and Subsidiary ("Diversified"), a wholly owned subsidiary of
SmithKline Beecham Corporation ("SB Corp") for the Year Ended December 31, 1998
included in this prospectus.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Unaudited
Condensed Consolidated Balance Sheet at March 31, 1999, the Unaudited Condensed
Consolidated Statement of Operations for the three months ended March 31, 1998,
and 1999, and the Unaudited Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 1998, and 1999.
2. RECEIVABLE FROM SB CORP
As a result of SB Corp's pending sale of Diversified (see Note 5), the
receivable from SB Corp of $386,148,000 has been settled and diversified
eliminated the receivable against additional paid-in capital.
3. ACCOUNTS RECEIVABLE
As of December 31, 1998 and March 31, 1999, unbilled accounts receivable
were $32,941,000 and $44,847,000, respectively.
4. DIVERSIFIED PRESCRIPTION DELIVERY L.L.C. JOINT VENTURE
As a result of SB Corp's pending sale of Diversified (see Note 5),
Diversified's investment in Diversified Prescription Delivery L.L.C. ("DPD") of
$6,252,000 was transferred to the receivable from SB Corp during the first
quarter of 1999. Additionally, the net receivable from DPD of $4,010,000 was
transferred to the receivable from SB Corp during the first quarter of 1999.
5. SUBSEQUENT EVENT
On April 1, 1999, SB Corp. consummated the sale of the outstanding common
stock of Diversified to Express Scripts, Inc. for $700 million in cash, such
amount being subject to adjustment based upon the amount of working capital of
Diversified at closing.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF SMITHKLINE BEECHAM CORPORATION)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Diversified Pharmaceutical Services, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholder's equity and cash flows, after the restatements
described in Notes 2 and 12, with which we concur, present fairly, in all
material respects, the financial position of Diversified Pharmaceutical
Services, Inc. and subsidiary (the "Company"), wholly owned by SmithKline
Beecham Corporation, at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 26, 1999, except
Note 12 for which the date
is March 1, 1999
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash........................................... $ 618,859 $ 1,685,600
Receivables:
SmithKline Beecham Corporation............... 343,589,242 371,827,141
Accounts receivable, net..................... 81,452,718 82,746,292
-------------- --------------
Total receivables......................... 425,041,960 454,573,433
Deferred tax asset............................. 1,400,000 1,880,237
Other current assets........................... 2,510,254 1,968,869
-------------- --------------
Total current assets...................... 429,571,073 460,108,139
Investment in joint venture.................... 8,534,000 6,610,471
Furniture and equipment, net................... 13,505,083 14,910,412
Internal use software, net..................... -- 12,482,501
Goodwill and intangible assets, net............ 1,998,439,000 832,497,469
Notes receivable............................... 511,597 511,597
Deferred tax asset............................. 42,029,677 430,374,187
-------------- --------------
Total assets.............................. $2,492,590,430 $1,757,494,776
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Rebates and pharmacy claims payable.......... 206,053,314 191,726,763
Accrued expenses............................. 52,876,383 51,779,710
Deferred revenues............................ 1,384,873 1,374,076
-------------- --------------
Total current liabilities................. 260,314,570 244,880,549
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized, 100 shares issued and
outstanding............................... 1 1
Additional paid-in capital................... 2,108,416,415 2,110,981,415
Retained earnings (Accumulated deficit)...... 123,859,444 (598,367,189)
-------------- --------------
Total stockholder's equity................ 2,232,275,860 1,512,614,227
-------------- --------------
Total liabilities and stockholder's
equity.................................. $2,492,590,430 $1,757,494,776
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Net revenues......................... $692,046,016 $228,616,730 $ 214,848,958
------------ ------------ ---------------
Operating expenses:
Pharmacy claims, net............... 490,370,203 58,685,047 548,258
Other selling, general and
administrative.................. 155,947,282 146,839,849 154,335,922
Depreciation and amortization...... 78,791,400 79,149,287 80,141,066
Cost of pharmaceutical
distribution.................... 48,466,917 -- --
Write down of assets............... -- -- 1,092,183,531
------------ ------------ ---------------
Total operating expenses........ 773,575,802 284,674,183 1,327,208,777
------------ ------------ ---------------
Operating loss....................... (81,529,786) (56,057,453) (1,112,359,819)
Gain on transfer of subsidiary net
assets to joint venture............ 19,849,000 -- --
Equity in loss of joint venture...... (631,480) (4,200,231) (1,923,529)
Royalty income (Note 2).............. 695,054 4,010,792 3,231,968
Other income......................... 432,087 -- --
------------ ------------ ---------------
Loss before income taxes........... (61,185,125) (56,246,892) (1,111,051,380)
Benefit for income taxes............. 21,047,574 20,960,217 388,824,747
------------ ------------ ---------------
Net loss............................. $(40,137,551) $(35,286,675) $ (722,226,633)
============ ============ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
--------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995...... 100 $1 $2,105,981,415 $ 199,283,670 $2,305,265,086
Net loss......................... -- -- (40,137,551) (40,137,551)
Allocation of expenses paid by SB
Corp (Note 12)................. -- 1,286,000 -- 1,286,000
--- -- -------------- ------------- --------------
Balances, December 31, 1996...... 100 1 2,107,267,415 159,146,119 2,266,413,535
Net loss......................... -- -- (35,286,675) (35,286,675)
Allocation of expenses paid by SB
Corp (Note 12)................. -- 1,149,000 -- 1,149,000
--- -- -------------- ------------- --------------
Balances, December 31, 1997...... 100 1 2,108,416,415 123,859,444 2,232,275,860
Net loss......................... -- -- (722,226,633) (722,226,633)
Allocation of expenses paid by SB
Corp (Note 12)................. -- 2,565,000 -- 2,565,000
--- -- -------------- ------------- --------------
Balances, December 31, 1998...... 100 $1 $2,110,981,415 $(598,367,189) $1,512,614,227
=== == ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------ --------------
<S> <C> <C> <C>
Operating activities:
Net loss.................................... $ (40,137,551) $(35,286,675) $ (722,226,633)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Deferred income taxes.................... (21,047,574) (20,960,217) (388,824,747)
Allocation of expenses paid by SB Corp... 1,286,000 1,149,000 2,565,000
Depreciation and amortization............ 78,791,400 79,149,287 80,141,066
Provision for bad debts.................. 1,157,416 150,679 1,891,782
Loss on disposal of furniture and
equipment.............................. 269,150 -- 1,355,731
Write down of assets..................... -- -- 1,092,183,531
Net gain on transfer of subsidiary net
assets to joint venture................ (19,849,000) -- --
Equity in loss of joint venture.......... 631,480 4,200,231 1,923,529
Changes in assets and liabilities, net of
effects of assets transferred to joint
venture:
Accounts receivable...................... (17,410,844) 134,433,011 (3,185,356)
Other current assets..................... (3,675,967) 1,441,311 541,385
Pharmacy claims and rebates payable...... 128,821,042 (82,869,288) (14,326,551)
Accrued expenses......................... 2,858,448 13,575,278 (1,096,673)
Deferred revenues........................ (23,085,416) (2,504,104) (10,797)
------------- ------------ --------------
Net cash provided by operating
activities............................. 88,608,584 92,478,513 50,931,267
------------- ------------ --------------
Investing activities:
Increase in receivable from SmithKline
Beecham Corporation...................... (103,708,181) (88,017,729) (28,237,899)
Purchase of furniture and equipment, net of
effects of assets transferred to joint
venture.................................. (12,081,717) (1,390,225) (7,801,578)
Proceeds received in connection with
establishing joint venture............... 29,214,000 -- --
Contribution to joint venture............... (1,500,000) (2,500,000) --
Issuance of notes receivable................ -- (511,597) --
Internal use software costs................. -- -- (14,130,045)
Proceeds received on disposal of furniture
and equipment............................ -- -- 304,996
------------- ------------ --------------
Net cash used in investing activities.... (88,075,898) (92,419,551) (49,864,526)
------------- ------------ --------------
Net increase in cash.......................... 532,686 58,962 1,066,741
Cash, as of beginning of year................. 27,211 559,897 618,859
------------- ------------ --------------
Cash, as of end of year....................... $ 559,897 $ 618,859 $ 1,685,600
============= ============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND:
Diversified Pharmaceutical Services, Inc. (Diversified) is a wholly owned
subsidiary of SmithKline Beecham Corporation (SB Corp). SB Corp is a wholly
owned subsidiary of SmithKline Beecham plc (SB plc). Diversified's services
,which are all in a single operating segment, include the establishment of a
pharmacy provider network, installation and operation of a pharmacy claims
processing system, establishment and administration of a manufacturer rebate
program with respect to brand-name prescription drug products, and maintenance
of a prescription information database. In addition, Diversified provides drug
formulary development and maintenance along with maximum allowable costs (MAC)
lists for generic drugs. Diversified also assists its clients in utilization
management. From March 6, 1995 to October 28, 1996, Diversified's services also
included dispensing (through a wholly owned subsidiary, Diversified Prescription
Delivery, a mail service pharmacy subsidiary) medications and products to
patients for outpatient usage. On February 9, 1999, SB Corp entered into an
agreement to sell Diversified (see note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
Financial Statements:
On May 27, 1994, SB Corp acquired the common stock of Diversified from
United Healthcare Corporation (UHC) for $2.3 billion in cash (the Acquisition).
Identifiable intangible assets, primarily existing customer relationships, of
approximately $0.4 billion recorded in connection with the Acquisition are being
amortized over their estimated useful lives ranging from 5 to 16 years. Goodwill
of approximately $1.8 billion recorded in connection with the Acquisition is
being amortized over 40 years.
The financial statements as of December 31, 1997 and for the years ended
December 31, 1997 and 1996, have been restated to reflect the historical cost
basis of SB Corp and give effect to the impact of purchase accounting as a
result of the Acquisition. Previously issued financial statements do not give
effect to the Acquisition. The restatement resulted in an increase in total
equity of $2,147,376,886, $2,094,216,360 and $2,039,416,427 at December 31,
1995, 1996 and 1997, respectively, and a decrease in net income of $46,682,933
in both 1997 and 1996.
In connection with the Acquisition, Diversified and SB Corp entered into a
six-year cooperation agreement with UHC, under which UHC will provide certain
data and provide support for outcomes research and other services. UHC will
receive a fixed percentage of Diversified's total annual formulary-managed drug
expenditures as a fee under this agreement. Such fees, included in other
selling, general and administrative expenses, were approximately $27.0 million,
$28.0 million and $33.8 million in 1996, 1997 and 1998, respectively. In
addition, UHC agreed to use Diversified as the pharmacy benefit manager for all
of UHC's health plans for the term of the aforementioned cooperation agreement.
Acquisition of DPD:
On March 6, 1995, Diversified acquired all the common stock of Prescription
Delivery Services, a mail service pharmacy provider for approximately $15.0
million in cash. In connection with this acquisition, SB Corp made a capital
contribution of $15.0 million to
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Diversified to fund the purchase of the net assets of Prescription Delivery
Services. The acquired entity was subsequently named Diversified Prescription
Delivery (DPD), and was reported as a wholly owned subsidiary of Diversified.
DPD Joint Venture:
On October 28, 1996, Diversified entered into an agreement (the Agreement)
with another entity (the joint owner) to form and to jointly own and operate a
limited liability company to engage in the mail service pharmacy business. The
name of the new company is Diversified Prescription Delivery L.L.C. (the Joint
Venture). Concurrent with the execution of the Agreement, Diversified
transferred all the assets and liabilities of DPD plus $1.5 million of cash to
the Joint Venture. Simultaneously, the joint owner transferred certain
contracts, bids and liabilities plus $30.7 million of cash to the Joint Venture.
In accordance with the terms of the Limited Liability Company Agreement, the
Joint Venture then paid $29.2 million of cash to Diversified. Diversified and
the joint owner share management control and profits or losses equally. In
substance, Diversified sold half of its interest in the net assets of DPD to the
joint owner for $29.2 million and, accordingly, recorded a gain on the transfer
of subsidiary net assets to the Joint Venture of $19.8 million.
The Diversified investment in this Joint Venture is being accounted for
using the equity method of accounting. Diversified's 50% share of the net losses
of the Joint Venture for the period from October 28, 1996 through December 31,
1996 and for the years ended December 31, 1997 and 1998, have been included in
equity in loss of joint venture on the statements of operations.
On October 28, 1996, Diversified also entered into a Trademark License
Agreement and a Royalty Agreement with the Joint Venture to allow it to use
certain trademarks owned by Diversified. Pursuant to this Trademark License
Agreement, the Joint Venture has agreed to pay Diversified between 2 and 4
percent of certain revenues, as defined.
Unaudited condensed financial information of the Joint Venture as of
December 31, 1997 and 1998 and for the years then ended is summarized below (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Current assets..................................... $12,081 $15,587
Noncurrent assets.................................. 16,043 11,270
Current liabilities................................ 10,033 5,901
Members' equity.................................... 17,068 13,221
DPD net loss....................................... 8,400 3,847
</TABLE>
DPD's net loss for the period from October 28, 1996 through December 31,
1996 was approximately $1,263,000.
FURNITURE AND EQUIPMENT:
Furniture, fixtures and computer equipment are recorded at cost. The cost
of additions and improvements are capitalized, while maintenance and repairs are
expensed as incurred.
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided for using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures............................ 5 - 10 years
Computer equipment................................ 3 years
</TABLE>
Leasehold improvements are stated at cost. These amounts are amortized over
the estimated useful life of leasehold improvements or the remaining term of the
lease, whichever is shorter.
INTERNAL USE SOFTWARE:
Software development costs are costs incurred in connection with the
development of computer software applications to support management services
provided by Diversified. Such costs, which include dedicated staff costs and
third party costs pursuant to the development of computer software applications,
are amortized over their estimated useful lives of four years, beginning when
the related application has been implemented.
Effective January 1, 1998, Diversified has adopted the provisions of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires the
capitalization of certain costs incurred in connection with developing or
obtaining internal use software and provides guidance for determining whether
computer software is for internal use. All software development costs incurred
in 1996 and 1997 totaling approximately $16.0 million and $13.9 million,
respectively, were expensed. During 1998, approximately $14.1 million of
internal use software development costs were capitalized pursuant to SOP 98-1.
REBATES PAYABLE:
Rebates payable represent amounts due to customers who participate in
Diversified's drug manufacturer rebate programs. These amounts are distributed
to customers periodically according to contracts and allocation schedules
established by Diversified. The estimates of the resulting liability is
continually reviewed and updated, and any adjustments resulting therefrom are
reflected in current operations.
REVENUE AND EXPENSE RECOGNITION:
Diversified provides pharmacy benefit management services as described in
Note 1 to numerous customers throughout the United States.
Pharmacy Services -- Pharmacy service revenues are received from customers
for providing pharmacy benefits on a guaranteed total cost (capitated) basis.
These revenues are recognized either on a per claim basis or per member, per
month basis over the life of the contract period. Revenues from certain pharmacy
services billed one month prior to service delivery are deferred until the next
month. As of December 31, 1998, there were no capitated contracts outstanding.
Management Services -- Management services revenues include administrative
fees for services provided to customers and drug manufacturers.
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management services to customers include pharmacy claims processing and
other administrative services provided on a fee for service basis. Revenues
relating to these services are recognized according to the terms of the
applicable contracts, either on a per claim basis or per member, per month
basis. Amounts received from customers and paid out by Diversified for pharmacy
claims reimbursements, other than those under capitated arrangements, are
excluded from revenues and expenses.
Management services provided to drug manufacturers include various services
relating to administration of the manufacturer rebate program. Revenues relating
to these services are recognized as earned based on detailed drug utilization
data. Rebates payable to customers in accordance with the applicable contracts
are excluded from revenues and expenses.
Pharmaceutical Distribution -- Pharmaceutical distribution revenues
represent mail service pharmacy revenues earned prior to October 28, 1996 that
were recognized when medication and products were shipped.
Pharmacy Claims Expense -- Pharmacy claims expense includes claims paid,
claims in process and pending, and estimated unreported claims and charges by
pharmacies for services rendered to enrolled members under capitation
arrangements during the period.
Cost of Pharmaceutical Distribution -- Cost of pharmaceutical distribution
includes the costs of medication and products distributed through the mail
service pharmacy operations prior to October 28, 1996. Such costs were
recognized when medication and products were shipped.
RECEIVABLE FROM SB CORP:
Diversified participates in SB Corp's consolidated cash pool whereby SB
Corp sweeps Diversified's cash accounts on a daily basis in accordance with SB
Corp cash management practices.
ACCOUNTS RECEIVABLE:
Accounts receivable, including unbilled amounts, represent amounts due from
manufacturers for administrative fees and rebates payable under Diversified's
rebate program and customer fee for service receivables. At December 31, 1997
and 1998, unbilled accounts receivable were $19.1 million and $32.9 million,
respectively.
INCOME TAXES:
Diversified's operating results are included in the consolidated federal
income tax return of SB Corp. However, for financial reporting purposes,
Diversified's provision (benefit) for income taxes are computed on a separate
entity basis. Income tax expense (benefit) represents the taxes that would have
been payable (receivable) for the year and the change in deferred tax assets and
liabilities during the year.
Deferred income taxes are recorded to reflect the tax consequences in
future years of differences between tax basis of assets and liabilities and
their financial reporting amounts at 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.
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
manufacturer agreements and related accounts receivable. Recognition of such
revenues requires the use of estimated pharmaceutical and fulfillment volumes
and mix data, until actual volume and mix data becomes available. Changes in
estimated 1995 pharmacy and management service revenues recorded in 1996
resulted in a $24.5 million reduction in 1996 net revenues. Other significant
areas which require the use of management estimates include the allowance for
uncollectible accounts receivable and the estimated useful life of identifiable
intangibles, internal use software and goodwill.
3. SELECTED BALANCE SHEET INFORMATION:
Accounts receivable, net consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accounts receivable......................... $82,879,783 $84,892,951
Allowance for doubtful accounts............. (1,427,065) (2,146,659)
----------- -----------
Accounts receivable, net.................. $81,452,718 $82,746,292
=========== ===========
</TABLE>
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Furniture and fixtures..................... $ 10,893,684 $13,189,431
Computer equipment and purchased
software................................. 10,059,836 6,695,083
Leasehold improvements..................... 5,213,657 2,914,698
Construction in progress................... -- 638,026
------------ -----------
26,167,177 23,437,238
Less accumulated depreciation and
amortization............................. (12,662,094) (8,526,826)
------------ -----------
Furniture and equipment, net............. $ 13,505,083 $14,910,412
============ ===========
</TABLE>
Internal use software, net consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Internal use software....................... $ -- $14,130,045
Less accumulated amortization............... -- (1,647,544)
----------- -----------
Internal use software, net................ $ -- $12,482,501
=========== ===========
</TABLE>
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and intangibles, net consisted of the following:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Customer List.......................... $ 400,000,000 $ 400,000,000
Acquired internally developed
software............................. 12,500,000 12,500,000
Databank software...................... 4,000,000 4,000,000
Goodwill............................... 1,850,230,000 758,046,469
-------------- --------------
2,266,730,000 1,174,546,469
Accumulated amortization............... (268,291,000) (342,049,000)
-------------- --------------
Net balance............................ $1,998,439,000 $ 832,497,469
============== ==============
</TABLE>
Amortization related to these intangibles and goodwill, excluding the
$1,092,183,531 write-down of goodwill discussed in Note 11, was $73,758,000 for
each of the three years in the period ended December 31, 1998.
4. RELATED PARTY TRANSACTIONS:
Diversified provided SB Corp with pharmacy benefit management services in
connection with its self-funded health plan in 1996, 1997 and 1998. Related
revenues for these services were $305,855, $234,923 and $269,017 in 1996, 1997
and 1998, respectively. SB Corp participates in Diversified's drug manufacturers
rebate program on terms similar to other participating manufacturers. Amounts
paid or payable by SB Corp under the program totaled approximately $10,400,000,
$7,900,000 and $7,200,000 in 1996, 1997 and 1998, respectively. In addition, SB
participates in utilization management programs on terms similar to other
participating manufacturers offered to Diversified's customers. Total revenue
from SB Corp related to the utilization management programs was $77,250 and
$810,000 in 1997 and 1998 respectively. No such revenues were generated by
Diversified in 1996. SB also purchases certain drug information products from
Diversified. These products provide manufacturers timely information about drug
utilization. Revenue from SB Corp for these information products was $5,000 and
$1,203,369 in 1997 and 1998, respectively. No such revenues were generated by
Diversified in 1996. Included in accounts receivable is $4,267,454 and
$1,910,694 from SB Corp as of December 31, 1997 and 1998, respectively.
Corporate services, overhead and other expenses are charged to Diversified
by SB Corp and to SB Corp by Diversified wherever possible on a direct basis,
such as resource usage or dedicated support percentage. The net expense from
these charges was approximately $5,100,000, $600,000 and $1,300,000 in 1996,
1997 and 1998, respectively, and are included in selling, general and
administrative expenses in the accompanying statements of operations.
Diversified incurred pharmacy claims expense of $5,198,749 in 1996 related
to Diversified Prescription Delivery L.L.C. for services performed for one of
Diversified's customers. Diversified paid on behalf of Diversified Prescription
Delivery L.L.C. disbursements of $1,326,249, $1,720,911 and $1,231,005 in 1996,
1997 and 1998, respectively, consisting of salaries, benefits, and other
services. Such amounts are billed to
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Diversified Prescription Delivery L.L.C. in the year incurred. In addition,
in 1996, 1997 and 1998, Diversified earned royalties from Diversified
Prescription Delivery L.L.C. (Note 2) totaling $695,054, $4,010,792 and
$3,231,968, respectively. Included in accounts receivable are amounts receivable
from Diversified Prescription Delivery L.L.C. of $2,903,750 and $5,468,694 as of
December 31, 1997 and 1998, respectively.
At December 31, 1997 and 1998, Diversified has a total of $511,597
noninterest bearing notes receivable from Diversified Prescription Delivery
L.L.C. Although these notes are payable on demand, Diversified does not expect
to require repayment of them in 1999 and has therefore classified them as
long-term assets.
5. SIGNIFICANT CUSTOMERS:
Diversified recognized revenues for providing UHC with pharmacy benefit
management services of $389,502,444, $75,574,757 and $116,045,072 in 1996, 1997
and 1998, respectively. These revenues totaled approximately 56.3 percent, 33.1
percent and 54.0 percent of total revenues for the years ended December 31,
1996, 1997 and 1998, respectively.
In 1996, the agreement with UHC was structured on a capitated risk-sharing
basis. Adjustments to the amount payable to Diversified for services provided
were to be made based upon UHC's actual pharmacy claims experience. The
structure of the pharmacy benefit management agreement between Diversified and
UHC changed as of January 1, 1997 and contains a cost-based fee arrangement.
This agreement provides for UHC to pay all pharmacy claims and pharmacy benefit
management costs as incurred.
Total amounts receivable, from UHC including the provisions disclosed
above, were $10,988,971 and $4,970,219 as of December 31, 1997 and 1998,
respectively.
Corporate charges for services from UHC totaled $4,996,148, $1,366,498 and
$998,544 in 1996, 1997 and 1998, respectively. These charges are for services
provided by UHC to Diversified.
Receivables from two customers represented 13.5 percent and 13.2 percent of
accounts receivable as of December 31, 1997. Receivables from two customers
represented 19.1 percent and 17.3 percent of the accounts receivable as of
December 31, 1998.
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
Diversified is obligated under various noncancelable operating leases for
office facilities and equipment. These operating leases expire at various dates
through 2008. Rent expense was $6,121,964, $6,843,070 and $7,671,347 for 1996,
1997 and 1998, respectively. Future minimum rental payments required under
noncancelable operating leases with initial or remaining lease terms in excess
of one year as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 6,311,202
2000...................................................... 6,287,416
2001...................................................... 6,070,773
2002...................................................... 5,118,824
2003...................................................... 5,148,122
Thereafter................................................ 23,682,366
-----------
$52,618,703
===========
</TABLE>
Diversified is party to certain disputes that arise in the normal course of
business. While the outcome of these matters cannot be predicted with certainty,
management presently believes that resulting adjustments, if any, would not have
a material effect on the financial position, results of operations or liquidity
of Diversified.
7. RETIREMENT PLANS:
MULTIEMPLOYER PENSION PLAN:
Diversified employees are eligible to participate in the SmithKline Beecham
Pension Plan, a multiemployer pension plan (the Pension Plan). Contributions to
the Pension Plan are determined in accordance with actuarial determinations made
by SB Corp. Diversified contributed $545,100, $900,000 and $1,152,000 to the
Pension Plan in 1996, 1997 and 1998, respectively.
OTHER EMPLOYEE BENEFIT PLANS:
Diversified participates in the SB Corp 401(k) Savings Plan (the Plan). All
employees of Diversified who have worked at least 900 hours in a year and have
met certain employment period requirements, as defined by the Plan, are eligible
to participate. Participants may contribute up to 15% of their eligible
compensation. Diversified matches a percentage of employees' contributions to
the Plan. Diversified contributed $2,247,695, $973,197 and $1,285,817 to the
Plan in 1996, 1997 and 1998, respectively.
Effective January 1, 1999, SB Corp redesigned the pension plans and 401(k)
savings plans which resulted in the addition of an SB Corp. stock investment
option and modification of certain eligibility and vesting terms.
8. STOCK OPTION PLAN:
SB plc offers a stock option incentive program for certain employees. The
options are granted annually at exercise prices equal to the market value of the
stock as of the date of grant. Stock options vest after three years from the
date of grant and must be exercised within 10 years from the date of grant.
Diversified and SB plc follows the method of accounting for employee stock
compensation plans prescribed by APB No. 25, which is permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). In accordance with APB No 25, the Company has not
recognized compensation expense for stock options because the exercise price of
the options equal the market price of the underlying stock on the date of the
grant, which is the measurement date. Certain management personnel of
Diversified received SB plc stock options. If Diversified had followed the fair
value method for stock option plans in accordance with SFAS No. 123 in 1996,
1997 and 1998, the net loss would have increased by approximately $300,000,
$1,000,000 and $2,300,000, respectively, for each of the years then ended.
The fair value of the options granted are estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 1.6.%
(1996 -- 2.6%), volatility of 32% (1996 -- 22%), risk free investment rate of
6.5% (1996 -- 7.5%), assumed forfeiture rate of 1% and an expected life of seven
years.
9. INCOME TAXES:
Income tax benefit consisted of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Current tax (benefit)..... $ -- $ -- $ --
Deferred tax expense
(benefit)............... (21,047,574) (20,960,217) (388,824,747)
------------ ------------ -------------
Benefit for income
taxes................ $(21,047,574) $(20,960,217) $(388,824,747)
============ ============ =============
</TABLE>
The taxable income of Diversified is included in the consolidated federal
income tax return of SB Corp. Diversified's income taxes are based on the
approximate amount that would have been computed on a separate company basis
utilizing the statutory federal and state tax rates on Diversified's earnings.
In 1996, 1997 and 1998, the difference between the federal statutory income
tax rate and the effective rate was primarily due to state income taxes.
Due to certain elections made by SB Corp at the date of acquisition, to
achieve a step-up in the tax basis of Diversified's assets, Diversified would
not (on a separate tax return basis) be required to pay federal income taxes for
the foreseeable future due to the deductibility of the amortization of goodwill
and intangibles relating to SB Corp's acquisition of Diversified. Such
amortization would offset Diversified's separate company taxable income. The
deferred tax asset and related tax benefit is also reflected in Diversified's
financial statements as if Diversified filed on a separate tax return basis.
Diversified's net deferred tax assets and liabilities as of December 31,
1997 and 1998 relate primarily to goodwill and intangibles.
<PAGE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the balance sheet for cash, receivables
and notes receivable approximate fair value due to the short maturity of these
instruments.
There are no quoted market prices for Diversified's investment in joint
venture. Therefore, Diversified believes it is not practical to estimate a fair
market value different from the investment in joint venture carrying value.
11. SUBSEQUENT EVENT:
On February 9, 1999, SB Corp entered into an agreement to sell all of the
outstanding stock of Diversified in exchange for $700,000,000 of cash and the
unconditional termination of the SB Corp. receivables owed to Diversified.
Completion of the transaction, subject to regulatory review, is expected during
the second quarter of 1999. The Company and SB Corp have also agreed that, prior
to the closing of the sale, the assets and liabilities related to Diversified's
investment in Diversified Prescription Delivery L.L.C. will be transferred to SB
Corp.
As a result of the pending sale, management evaluated the recoverability of
the Company's long-lived assets, including goodwill and intangibles pursuant to
Statement of Financial Accounting Standards (SFAS) No. 121. In accordance with
SFAS No. 121, the Company recorded a provision of approximately $1.1 billion to
reduce the carrying value of certain long-lived assets. The tax benefit arising
from this charge has been recorded as a deferred tax asset in 1998. Also, as a
result of the above pending sale, the realizability of certain tax assets and
liabilities may be impacted.
12. CORPORATE COST ALLOCATION:
The financial statements of Diversified for the years ended December 31,
1996 and 1997, as previously prepared included direct costs incurred or
allocated to Diversified by SB Corp. Additional corporate overhead costs have
been included in these financial statements based on the relative percentage of
operating income of Diversified to the consolidated operating income of SB Corp
(excluding the effects of amortization of goodwill and intangible assets related
to SB Corp's acquisition of Diversified) which management believes is a
reasonable basis for such cost allocation. The following additional costs have
been included in Other selling, general and administrative on the statement of
operations.
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Loss before income taxes, as
previously reported................ $(59,899,125) $(55,097,892) $(1,108,486,380)
Adjustments for expenses not
previously allocated............... (1,286,000) (1,149,000) (2,565,000)
------------ ------------ ---------------
Loss before income taxes, after
allocated costs.................... $(61,185,125) $(56,246,892) $(1,111,051,380)
============ ============ ===============
</TABLE>
Exhibit 99.4
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL DATA
The following unaudited consolidated condensed pro forma statement of
operations combines the historical statement of operations of us and DPS for the
three months ended March 31, 1999 and us, Value Health, Inc., Managed
Prescription Network, Inc., together comprising the business known as ValueRx,
and DPS for the year ended December 31, 1998. On April 1, 1998, we consummated
the acquisition of ValueRx. Therefore, the financial information of ValueRx is
included in our consolidated statement of operations subsequent to April 1,
1998. The unaudited consolidated condensed pro forma statement of operations for
the three months ended March 31, 1999 has been prepared to reflect the
acquisition of DPS and the related financing as if these events had occurred on
January 1, 1999. The unaudited consolidated condensed pro forma statement of
operations for the year ended December 31, 1998 has been prepared to reflect the
acquisitions of ValueRx and DPS and the related financings as if these events
had occurred on January 1, 1998. Any cost savings we may realize in connection
with the integration of ValueRx or DPS are not reflected in the pro forma
presentation.
The following unaudited consolidated condensed pro forma balance sheet
combines the historical consolidated balance sheet of us and DPS as of March 31,
1999. The unaudited consolidated condensed pro forma balance sheet has been
prepared to reflect the acquisition of DPS and the related financing as if these
events had occurred on March 31, 1999.
The detailed assumptions used to prepare the unaudited consolidated
condensed pro forma financial data are contained in the notes to the unaudited
consolidated condensed pro forma financial data. The unaudited consolidated
condensed pro forma financial data reflects the use of the purchase method of
accounting for the acquisitions of ValueRx and DPS. Under the purchase method of
accounting, the basis of accounting for the acquired assets and liabilities is
based upon their fair values at the date of acquisition.
The pro forma adjustments represent our preliminary determination based
upon available information and assumptions which we consider reasonable under
the circumstances. The unaudited consolidated condensed pro forma data is not
necessarily indicative of our future results of operations or the results of
operations as they might have been had the acquisitions and the related
financings been effective on the first day of the period presented. The
unaudited consolidated condensed pro forma financial data should be read in
conjunction with our separate historical consolidated financial statements and
notes included in our Annual Report on Form 10-K for the year ended December 31,
1998 (filed March 30, 1999), the separate historical consolidated financial
statements and notes of ValueRx included in our Current Report on Form 8-K/A
(filed June 12, 1998), the separate unaudited combined condensed financial
statements and notes for ValueRx for the three months ended March 31, 1998
included in our amended Registration Statement on Form S-3 (dated June 11,
1999), the separate historical financial statements and notes of DPS for the
year ended December 31, 1998 included in Exhibit 99.3 of this current
Registration Form 8-K/A, and the separate unaudited consolidated financial
statements and notes for DPS for the three months ended March 31, 1999 included
in Exhibit 99.2 of this current Report on Form 8-K/A.
When reading the historical consolidated financial statements of us and
DPS, a notable difference exists with respect to the revenue recognition for
each of the companies. A substantial portion of our net revenues include
administrative fees, dispensing fees and the drug ingredient costs, as most
clients use one of our pharmacy networks. Where we only administer the contracts
between our clients and our clients' retail pharmacy networks, we record as net
revenues only the administrative fees we receive from our activities. DPS's net
revenues include its administrative fee from the activity of processing the
claim irrespective of a member utilizing a retail pharmacy included in one of
DPS's networks or its clients' network. The fundamental difference in the
revenue recognition is that DPS does not include the associated drug ingredient
costs in its net revenues as it does not have any liability to reimburse the
retail pharmacy included in its network unless DPS receives payment from its
client.
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
DPS
EXPRESS PRO FORMA CONSOLIDATED
SCRIPTS DPS ADJUSTMENTS PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues................... $ 899,087 $65,366(2) $ -- $ 964,453
Cost and expenses:
Cost of revenues............. 823,647(1) -- -- 823,647
Selling, general and administrative.. 46,440(1) 57,409 (10,401)(3) 90,578
(1,890)(4)
(980)(5)
--------- ------- ------------ ---------
870,087 57,409 (13,271) 914,225
--------- ------- ------------ ---------
Operating income............... 29,000 7,957 13,271 50,228
Other income (expense)......... -- 433 359 (6) 792
Interest income................ 1,393 -- (541)(7) 852
Interest expense............... (6,222) -- (17,134)(8) (23,356)
---------- ------- ------------ ----------
Income (loss) before income taxes...... 24,171 8,390 (4,045) 28,516
Provision (benefit) for income taxes... 10,628 3,096 (1,618)(9) 12,106
---------- ------- ------------ ----------
Net income..................... $ 13,543 $ 5,294 $ (2,427) $ 16,410
========== ==========
Basic earnings per share....... $ 0.41 $ 0.49
========== ==========
Diluted earnings per share..... $ 0.40 $ 0.48
========== ==========
Weighted average number of common shares
outstanding during the period-Basic
EPS............................ 33,211 33,211
========== ===========
Weighted average number of common shares
outstanding during the period-Diluted
EPS............................ 34,154 34,154
========== ===========
__________
<FN>
(1) Cost of revenues and selling, general and administrative expense
include $2,265 and $6,222 of depreciation and amortization, respectively, for us
during the first quarter of 1999. The pro forma consolidated cost of revenues
and selling, general and administrative expense include $2,265 and $16,232 of
depreciation and amortization, respectively.
(2) Net revenues for DPS include revenues from SmithKline Beecham.
Subsequent to our acquisition of DPS, revenues are anticipated to be consistent
with historical revenues as DPS's existing contract with SmithKline Beecham
remains in place.
(3) Adjustment reflects the elimination of management fees paid to United
HealthCare of $10,401 which under the DPS purchase agreement is to be reimbursed
to us by SmithKline Beecham.
(4) Adjustment reflects the net decrease in the first quarter of 1999 of
depreciation and amortization expense to $260 from $2,150 recorded by DPS
resulting from the allocation of the purchase price to the assets acquired at
their fair market value and to conform estimated and useful lives. Furniture,
equipment and internal use software are being depreciated by us using the
straight-line method over estimated useful lives of 5 to 8 years.
(5) Adjustment reflects the net decrease in the first quarter of 1999 of
amortization expense for goodwill and other intangible assets. DPS's goodwill
and other intangible assets amortization expense of $10,730 has been reversed,
and our goodwill and other intangible assets, consisting of customer contracts,
amortization of $9,750 has been included. Goodwill is being amortized using the
straight-line method over the estimated useful life of 30 years. We have
preliminarily assigned an estimated fair value to other intangible assets and
are amortizing them using the straight-line method over the estimated useful
lives of 1 to 20 years. We anticipate spending an estimated $10 million to $20
million in non-recurring costs during the first twelve months subsequent to our
acquisition of DPS relating to the integration of DPS's operations. These
non-recurring costs have not been reflected in the unaudited consolidated
condensed pro forma statement of operations.
(6) Adjustment reflects the elimination of DPS's $359 equity loss in its
joint venture. SmithKline Beecham retained the equity interest in the joint
venture.
(7) Adjustment reflects the decrease in interest income resulting from
expending $48,081 of cash to consummate the acquisition of DPS. The adjustment
was calculated using a current interest rate of 4.5% earned by us on our cash
balances.
(8) Adjustment reflects the following:
- the elimination of $5,508 in actual interest expense, exclusive of the
impact of our hedge on variable rate interest, incurred during the first quarter
of 1999 on $360,000 of debt outstanding under our $440,000 credit facility,
which has been replaced with the $1,050,000 credit facility
- the addition of $21,677 in interest expense from borrowings of $890,000
under the $1,050,000 credit facility and $150,000 under the senior subordinated
bridge credit facility, assuming interest rates on the $1,050,000 credit
facility of 7.67% for the revolving facility and the Term A facility and 8.42%
for the Term B facility, and a rate of 9.97% on the senior subordinated bridge
credit facility, based on the actual rates incurred by us at consummation of the
$1,050,000 credit facility and $150,000 senior subordinated bridge facility
- the addition of $921 in deferred financing fees amortization and $44 in
annual administrative fees; these deferred financing fees are being amortized
using the straight-line method over 6 to 8 years, which represents the maturity
of the term loans under the $1,050,000 credit facility
(9) Adjustment reflects the tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
</FN>
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
VALUERX DPS
EXPRESS PRO FORMA VALUERX PRO FORMA PRO FORMA
SCRIPTS, INC. VALUERX(1) ADJUSTMENTS PRO FORMA DPS ADJUSTMENTS CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........... $2,824,872 $ 409,928 $ -- $3,234,800 $ 214,849(7) $ -- $3,449,649
Cost and expenses:
Cost of revenues...... 2,584,997(2) 375,295 -- 2,960,292 548 -- 2,960,840
Selling, general and
administrative...... 148,990(2) 27,628 (3,606)(3) 173,012 234,477 (33,837)(8) 337,141
(1,688)(9)
(34,823)(10)
Corporate
restructuring....... 1,651 -- -- 1,651 -- 1,651
Write down of
assets.............. -- -- -- -- 1,092,184 -- 1,092,184
---------- -------- -------- ---------- ----------- -----------
2,735,638 402,923 (3,606) 3,134,955 1,327,209 (70,348) 4,391,816
---------- -------- -------- ---------- ----------- -------- -----------
Operating income
(loss)................ 89,234 7,005 3,606 99,845 (1,112,360) 70,348 (942,167)
Other income (net)..... -- -- -- -- 1,308 1,924(11) 3,232
Interest income........ 7,236 56 (1,261)(4) 6,031 -- (2,164)(12) 3,867
Interest expense....... (20,230) -- (7,007)(5) (27,237) -- (65,282)(13) (92,519)
---------- -------- -------- --------- ----------- -------- -----------
Income (loss) before
income taxes.......... 76,240 7,061 (4,662) 78,639 (1,111,052) 4,826 (1,027,587)
Provision (benefit) for
income taxes.......... 33,566 3,665 (1,865)(6) 35,366 (388,825) 1,930(14) (351,529)
---------- --------- -------- ---------- ----------- -------- -----------
Net income (loss)...... $ 42,674 $ 3,396 $(2,797) $ 43,273 $ (722,227) $ 2,896 $ (676,058)(15)
========== ========= ======== ========== =========== ======== ===========
Basic earnings per
share................. $ 1.29 $ (20.42)
========== ===========
Diluted earnings per
share................. $ 1.27 $ (20.06)
========== ===========
Weighted average number
of common shares
outstanding during the
period -- Basic....... 33,105 33,105
========== ==========
Weighted average number
of common shares
outstanding during the
period -- Diluted..... 33,698 33,698
========== =========
__________
<FN>
(1) These historical amounts represent the unaudited statement of
operations of ValueRx from January 1, 1998 through March 31, 1998.
(2) Cost of revenues and selling, general and administrative expense
include $7,559 and $18,874 of depreciation and amortization, respectively, for
us in 1998. The pro forma consolidated cost of revenues and selling, general and
administrative expense include $7,559 and $67,709 of depreciation and
amortization, respectively.
(3) Adjustment reflects the net decrease in depreciation and amortization
of property and equipment and intangible assets, including goodwill resulting
from our allocation of the ValueRx purchase price and conforming estimated
useful lives. ValueRx depreciation and amortization expense of $8,811 has been
eliminated and $5,205 has been added based on the fair value of property and
equipment, goodwill, and other intangible assets. The fair value of property and
equipment ($33,756) is being depreciated using the straight-line method over 3
to 20 years. Goodwill ($289,863) and other intangible assets, consisting of
non-compete agreements ($9,130) and customer contracts ($48,523), are being
amortized using the straight-line method over 30 years and 2 to 20 years,
respectively.
(4) Adjustment reflects the decrease in interest income resulting from our
expending $100,908 of our short-term investments and cash equivalents to
consummate the acquisition of ValueRx. The adjustment was calculated using the
average interest rate (5.0%) earned by us on our investments during the quarter
prior to the ValueRx acquisition.
(5) Adjustment records the additional net interest expense and the
amortization of the deferred financing fees during the first quarter of 1998
associated with the $440,000 credit facility utilized for the acquisition of
ValueRx. The additional interest expense was determined assuming an average
borrowing rate of 7.13% on the $360,000 borrowed under the $440,000 credit
facility incurred to consummate the acquisition.
(6) Adjustment reflects the tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
(7) Net revenues for DPS include revenues from SmithKline Beecham.
Subsequent to our acquisition of DPS, revenues are anticipated to be consistent
with historical revenues as DPS's existing contract with SmithKline Beecham
remains in place.
(8) Adjustment reflects the elimination of management fees paid to United
HealthCare of $33,837, which under the DPS purchase agreement is to be
reimbursed to us by SmithKline Beecham.
(9) Adjustment reflects the net decrease in the 1998 depreciation and
amortization expense to $4,695 from $6,383 recorded by DPS resulting from the
allocation of the purchase price to the assets acquired at their fair market
value and to conform estimated and useful lives. Furniture, equipment and
internal use software are being depreciated by us using the straight-line method
over estimated useful lives of 5 to 8 years.
(10) Adjustment reflects the net decrease in the 1998 amortization expense
for goodwill and other intangible assets. DPS's goodwill and other intangible
assets amortization expense of $73,758 has been reversed, and our goodwill and
other intangible assets, consisting of customer contracts, amortization of
$38,935 has been included. Goodwill is being amortized using the straight-line
method over the estimated useful life of 30 years. We have preliminarily
assigned an estimated fair value to other intangible assets and are amortizing
them using the straight-line method over the estimated useful lives of 1 to 20
years. We anticipate spending an estimated $10 million to $20 million in
non-recurring costs during the first twelve months subsequent to our acquisition
of DPS relating to the integration of DPS's operations. These non-recurring
costs have not been reflected in the unaudited consolidated condensed pro forma
statement of operations.
(11) Adjustment reflects the elimination of DPS's $1,924 equity loss in its
joint venture. SmithKline Beecham retained the equity interest in the joint
venture.
(12) Adjustment reflects the decrease in interest income resulting from
expending $48,081 of cash to consummate the acquisition of DPS. The adjustment
was calculated using a current interest rate of 4.5% earned by us on our cash
balances.
(13) Adjustment reflects the following:
- the elimination of $26,413 in actual interest expense, exclusive of the
impact of our hedge on variable rate interest, incurred during fiscal 1998 on
$360,000 of debt outstanding under our $440,000 credit facility, which has been
replaced with the $1,050,000 credit facility
- the addition of $87,832 in interest expense from borrowings of $890,000
under the $1,050,000 credit facility and $150,000 under the senior subordinated
bridge credit facility, assuming interest rates on the $1,050,000 credit
facility of 7.67% for the revolving facility and the Term A facility and 8.42%
for the Term B facility, and an average rate of 10.72% on the senior
subordinated bridge credit facility, based on the actual rates incurred by us at
consummation of the $1,050,000 credit facility and $150,000 senior subordinated
bridge facility. The interest rate on the senior subordinated bridge facility
loan increases 0.5% every quarter starting at 9.97% and increasing to 11.47%
- the addition of $3,688 in deferred financing fees amortization and $175
in annual administrative fees; these deferred financing fees are being amortized
using the straight-line method over 6 to 8 years, which represents the maturity
of the term loans under the $1,050,000 credit facility
(14) Adjustment reflects the tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
(15) The write-down of assets on DPS's books of $1,092,184 relates to the
impairment of goodwill. If the acquisition of DPS had occurred on January 1,
1998, goodwill on DPS's books would have been eliminated. Therefore, the
impairment charge for goodwill would not have existed. Net income excluding this
impairment charge would have been $33,862, or $1.02 per basic share and $1.00
per diluted share.
</FN>
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
MARCH 31, 1999
EXPRESS ACQUISITION
SCRIPTS, PRO FORMA PRO FORMA
INC. DPS ADJUSTMENTS CONSOLIDATED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash..................................... $ 115,838 $ -- $ (48,081)(1) $ 67,757
Accounts receivable...................... 446,453 120,884 -- 567,337
Intercompany receivable.................. -- -- -- --
Other current assets..................... 100,836 2,904 (1,880)(2) 101,860
---------- ---------- ----------- ----------
Total current assets................... 663,127 123,788 (49,961) 736,954
Property and equipment, net................ 73,346 27,894 (19,602)(3) 81,638
Goodwill, net.............................. 268,081 542,184 185,148(4) 995,413
Deferred income taxes...................... -- 427,278 (427,278)(2) --
Other assets............................... 92,396 279,583 (131,040)(5) 240,939
---------- ---------- ----------- ----------
Total assets........................... $1,096,950 $1,400,727 $ (442,733) $2,054,944
========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities:
Current maturities of long-term
debt................................... $ 54,000 $ -- $ (49,350)(6) $ 4,650
Claims and rebates payable............... 331,525 232,666 -- 564,191
Accounts payable......................... 65,715 -- -- 65,715
Accrued expenses......................... 71,666 35,609 11,619(7) 118,894
---------- ---------- ----------- -----------
Total current liabilities.............. 522,906 268,275 (37,731) 753,450
---------- ---------- ----------- -----------
Revolving debt............................. -- -- 140,000(6) 140,000
Term debt.................................. 306,000 -- 439,350(6) 745,350
Senior subordinated bridge credit
facility................................. -- -- 150,000(6) 150,000
---------- ----------- ----------- -----------
Total long-term debt................... 306,000 -- 729,350 1,035,350
---------- ----------- ----------- -----------
Other long-term liabilities................ 502 50 -- 552
---------- ----------- ----------- -----------
Total liabilities...................... 829,408 268,325 691,619 1,789,352
Stockholders' equity....................... 267,542 1,132,402 (1,134,352)(8) 265,592
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity................. $1,096,950 $1,400,727 $ (442,733) $2,054,944
========== =========== ============= ===========
__________
<FN>
(1) Adjustment reflects the use of $48,081 of our cash balances to fund the
purchase of DPS.
(2) Adjustment reflects the elimination of the historical deferred tax
assets of DPS. As part of its acquisition, we will file an Internal Revenue Code
sec. 338(h)(10) election. Accordingly, at March 31, 1999, the tax basis balance
sheet and the book basis balance sheet are estimated to be the same, and
therefore no deferred taxes are recognized with respect to DPS.
(3) Adjustment reflects the fair value assigned to DPS property and
equipment.
(4) Adjustment reflects the excess of the purchase price of DPS over the
estimated fair market value of the identified assets acquired. The purchase
price of $700 million, plus an estimated $25 million in transaction costs, plus
the assumption and incurrence of liabilities totalling $284,325 was
preliminarily allocated in the following manner:
Current assets....... $ 121,908
Property and equipment 8,292
Deferred financing fees 19,483
Customer contracts... 132,310
Goodwill............. 727,332
Liabilities.......... 284,325
We anticipate assessing the value of all long-lived assets acquired where
events or circumstances have occurred that indicate the remaining estimated
useful life of long-lived assets may warrant revision or that the remaining
balance of an asset may not be receivable.
(5) Adjustment reflects the following:
- elimination of the unamortized deferred financing fees in the amount of
3,250 related to the extinguishment of our $440,000 credit facility
- elimination of other intangible assets of DPS in the amount of $279,583
- These eliminations were offset by $19,483 paid in deferred financing fees
related to the $1,050,000 credit facility used to finance the DPS acquisition
and the preliminary allocation of fair value to customer contracts in the amount
of $132,310. We are in the process of establishing fair values for all
identifiable assets and will adjust the fair value allocated to customer
contracts accordingly when complete.
(6) Adjustment reflects borrowings of $890,000 under our $1,050,000 credit
facility and $150,000 under the senior subordinated bridge credit facility to
finance the acquisition of DPS and which refinanced our existing outstanding
debt of $360,000 under our $440,000 credit facility. The $1,050,000 credit
facility consists of a $300,000 revolving credit facility, of which $140,000 has
been borrowed, and a $750,000 term facility.
(7) Adjustment reflects the reduction of taxes payable by $1,300 for the
write-off of deferred financing fees, and the payment of accrued interest of
$5,063 associated with the repayment of the $440,000 credit facility. These
amounts were offset by accruals of $17,982 for transaction costs and an
estimated $16,000 for other liabilities associated with the purchase of DPS,
such as facility consolidation and employee transition costs, that we are
presently identifying and evaluating.
(8) Adjustment reflects the elimination of the DPS pre-acquisition equity
balances and the write-off of our unamortized deferred financing fees of $1,950,
net of tax, from our $440,000 credit facility as an extraordinary item. After
the write-off of the unamortized deferred financing fees, net income after
extraordinary items for the three months ended March 31, 1999 would have been
$18,125, or $0.48 per basic share and $0.47 per diluted share.
</FN>
</TABLE>
