UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 16, 2002
HEALTHEXTRAS, INC.
------------------
(Exact name of registrant as specified in its charter)
Delaware 0-31014 52-2181356
------------------------------ ---------- -------------
(State or other Jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
2273 Research Boulevard, 2nd Floor, Rockville, Maryland 20850
-------------------------------------------------------------
(Address of principal executive offices)
(301) 548-2900
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name or former address, if changed since last report.)
ITEM 2. ACQUISITION OF OR DISPOSITION OF ASSETS.
- ------ ----------------------------------------
As more fully described in HealthExtras, Inc.'s (the "Company") Form 8-K dated
December 16, 2002, the Company acquired 100% of the common stock of Pharmacy
Network National Corporation ("PNNC") for aggregate consideration of
approximately $21 million (the "Acquisition"). This Form 8-K/A amends the
aforementioned Form 8-K including the financial statements and exhibits set
forth under Item 7.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
- ------- -------------------------------------------------------------------
(a) Financial statements of business acquired:
Financial statements of PNNC as of and for the periods ended December
31, 2000 and 2001 and September 30, 2002, described below:
- Report of Independent Accountants
- Balance Sheets as of December 31, 2000 and 2001 and September 30,
2002 (unaudited)
- Statements of Operations for the nine-month period ended December
31, 2000, the year ended December 31, 2001, and the nine-month
period ended September 30, 2002 (unaudited)
- Statements of Stockholders' Equity for the nine-month period ended
December 31, 2000, the year ended December 31, 2001 and the nine-
month period ended September 30, 2002 (unaudited)
- Statements of Cash Flows for the nine-month period ended December
31, 2000, the year ended December 31, 2001 and the nine-month
period ended September 30, 2002 (unaudited)
- Notes to the Financial Statements
(b) Pro forma financial information:
The accompanying unaudited pro forma consolidated balance sheet
information as of September 30, 2002, assumes the Acquisition occurred on
September 30, 2002. The accompanying unaudited pro forma consolidated statements
of operations for the year ended December 31, 2001, and for the nine-month
period ended September 30, 2002 are presented to reflect the Acquisition as if
it occurred on January 1, 2001. In addition, the pro forma consolidated
statement of operations for the year ended December 31, 2001, has been prepared
assuming the Company had acquired 100% of its interest in Catalyst Rx, Inc. and
Catalyst Consultants, Inc. (collectively "Catalyst") on January 1, 2001. In
actuality, the Company acquired 80% of the outstanding ownership in Catalyst on
November 14, 2001; the Company then purchased the outstanding 20% minority
interest in Catalyst in the first quarter of 2002. Accordingly, the pro forma
net income(loss) per common share in the pro forma Consolidated Statements of
Operations also reflect the issuance of 685,763 shares of Company common stock
2
on January 1, 2001, assuming the acquisition of Catalyst and PNNC occurred on
January 1, 2001. In addition, the allocation of purchase price to the assets and
liabilities of PNNC is preliminary and the final allocation may differ from the
amounts reflected herein.
The accompanying unaudited pro forma consolidated financial statements
should be read in conjunction with the Company's historical consolidated
financial statements and notes thereto in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, and its Quarterly Report on Form 10-Q
for the period ended September 30, 2002, and the historical consolidated
financial statements and notes thereto of PNNC, which are referenced in Item 7
hereof and included in this Report. The unaudited pro forma consolidated
financial statements are presented for informational purposes only and are not
necessarily indicative of actual results had the foregoing transactions occurred
as described in the preceding paragraph, nor do they purport to represent
results of future operations.
(c) Exhibits:
Exhibit No. Description
----------- -----------
2.4* Pharmacy Network National Corporation Stock
Purchase Agreement dated as of December 1, 2002 by and
among HealthExtras, Inc. Purchaser, and Pharmacy
Network National Corporation Trust, Seller.
99.1* Press Release Dated December 16, 2002.
* Previously filed as an exhibit to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 16, 2002, and incorporated
herein by reference.
3
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
To the Board of Directors and Stockholders
of Pharmacy Network National Corporation:
In our opinion, the accompanying balance sheets, and the related statements of
operations, of stockholders' equity and of cash flows, present fairly, in all
material respects, the financial position of Pharmacy Network National
Corporation ("PNNC") as of December 31, 2000 and 2001, and the results of its
operations and its cash flows for the nine-month period ended December 31, 2000
and the year ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of PNNC's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audit of these financial statements in accordance with auditing standards
generally accepted in the United States of America, 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 our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
McLean, Virginia
January 10, 2003
4
PHARMACY NETWORK NATIONAL CORPORATION
BALANCE SHEETS
December 31, December 31, September 30,
2000 2001 2002
------------ ------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 374,069 $ 4,107,107 $ 5,560,211
Accounts receivable, net ............................... 11,441,832 14,744,969 12,298,028
Other current assets ................................... 10,511 91,830 --
------------ ------------ ------------
Total current assets .................................. 11,826,412 18,943,906 17,858,239
------------ ------------ ------------
Deferred income taxes .................................. -- 59,722 165,805
Fixed assets, net ...................................... 92,129 108,780 87,767
Intangible assets, net ................................. -- 249,985 204,233
------------ ------------ ------------
Total assets .......................................... $ 11,918,541 $ 19,362,393 $ 18,316,044
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 7,128,236 $ 12,216,443 $ 9,502,109
Accrued expenses and other current liabilities ......... 429,851 732,610 496,471
Notes payable .......................................... -- -- 200,000
Deferred income taxes .................................. 107,684 158,401 174,723
------------ ------------ ------------
Total current liabilities ............................. 7,665,771 13,107,454 10,373,303
Deferred income taxes .................................. 14,000 -- --
------------ ------------ ------------
Total liabilities ..................................... 7,679,771 13,107,454 10,373,303
------------ ------------ ------------
Stockholders' equity
Common stock, Class A voting and Class B non-voting
no par value, 100,000 shares authorized, 30,000 Class
A shares and no Class B shares issued outstanding ... 3,000 3,000 3,000
Capital in excess of par ............................... -- 1,098,740 1,098,740
Deferred compensation .................................. -- (915,617) (640,932)
Retained earnings ...................................... 4,235,770 6,068,816 7,481,933
------------ ------------ ------------
Total stockholders' equity ......................... 4,238,770 6,254,939 7,942,741
------------ ------------ ------------
Total liabilities and stockholders' equity ......... $ 11,918,541 $ 19,362,393 $ 18,316,044
============ ============ ============
The accompanying notes are an integral part of these financial statements
5
PHARMACY NETWORK NATIONAL CORPORATION
STATEMENTS OF OPERATIONS
Nine-Months Nine-Months
Ended Year Ended Ended
December 31, December 31, September 30,
2000 2001 2002
------------ ------------ -----------
(unaudited)
Revenue ........................... $ 70,489,082 $ 109,334,094 $ 87,891,129
Expenses:
Direct ............................ 66,762,012 102,299,452 82,639,634
Selling, general and administrative 2,576,442 4,129,288 2,972,389
------------ ------------ -----------
Total operating expenses . 69,338,454 106,428,740 85,612,023
------------ ------------ -----------
Operating income ......... 1,150,628 2,905,354 2,279,106
Interest income, net .............. 88,948 94,957 40,191
------------ ------------ -----------
Income before income taxes 1,239,576 3,000,311 2,319,297
Provision for income taxes ........ 478,816 1,165,165 900,180
------------ ------------ -----------
Net income ........................ $ 760,760 $ 1,835,146 $ 1,419,117
============ ============= ============
The accompanying notes are an integral part of these financial statements
6
PHARMACY NETWORK NATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Nine-Months Ended December 31, 2000
Year Ended December 31, 2001 and Nine-Months Ended September 30, 2002
Capital Total
Common in Excess Deferred Retained Stockholders
Stock of Par Compensation Earnings Equity
----------- --------- ------------ ----------- -----------
Balance, March 31, 2000 ............... $ -- $ -- $ -- $ 3,475,010 $ 3,475,010
Issuance of common stock ......... 3,000 -- -- -- 3,000
Net income ....................... -- -- -- 760,760 760,760
----------- --------- ------------ ----------- -----------
Balance, December 31, 2000 ............ 3,000 -- -- 4,235,770 4,238,770
Issuance of common stock
options .......................... -- 1,098,740 (1,098,740) -- --
Amortization of deferred
compensation ..................... -- -- 183,123 -- 183,123
Dividends paid ($0.07 per share) . -- -- -- (2,100) (2,100)
Net income ....................... -- -- -- 1,835,146 1,835,146
----------- --------- ------------ ----------- -----------
Balance, December 31, 2001 ............ 3,000 1,098,740 (915,617) 6,068,816 6,254,939
Amortization of deferred
compensation - unaudited ........ -- 274,685 -- -- 274,685
Dividends paid ($0.20 per share) -
unaudited ........................ -- -- -- (6,000) (6,000)
Net income - unaudited ........... -- -- -- 1,419,117 1,419,117
----------- --------- ------------ ----------- -----------
Balance, September 30, 2002 - unaudited $ 3,000 $ 1,098,740 $ (640,932) $ 7,481,933 $ 7,942,741
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
7
PHARMACY NETWORK NATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
Nine-Months Nine-Months
Ended Year-Ended Ended
December 31, December 31, September 30,
2000 2001 2002
----------- ----------- -------------
(unaudited)
Cash flows from operating activities:
Net income .............................................. $ 760,760 $ 1,835,146 $ 1,419,117
Depreciation expense .................................... 20,543 26,445 28,918
Non-cash charges ........................................ -- 183,123 274,685
Amortization of intangible assets ....................... -- 9,259 16,422
Loss on disposal of fixed assets ........................ 2,939 8,678 --
Deferred income taxes ................................... (90,203) (23,005) (89,761)
Changes in assets and liabilities:
Accounts receivable, net ............................... (1,036,603) (3,303,137) 2,446,941
Other assets ........................................... (10,511) (81,319) 91,830
Accounts payable and accrued expenses .................. (886,635) 5,227,743 (2,787,250)
----------- ----------- -------------
Net cash (used in) provided by operating activities ... (1,239,710) 3,882,93 31,400,902
----------- ----------- -------------
Cash flows from investing activities:
Capital expenditures .................................... (43,480) (68,551) (7,905)
Purchase of intangible assets ........................... -- (96,021) (133,893)
Proceeds from disposal of fixed assets .................. 4,000 16,777 --
----------- ----------- -------------
Net cash used in investing activities ................. (39,480) (147,795 (141,798)
----------- ----------- -------------
Cash flows from financing activities:
Proceeds from borrowings ................................ 200,000 300,000 800,000
Repayment of borrowings ................................. (200,000) (300,000) (600,000)
Proceeds from issuance of common stock .................. 3,000 -- --
Dividends paid .......................................... -- (2,100) (6,000)
----------- ----------- -------------
Net cash provided by (used in) financing activities ... 3,000 (2,100) 194,000
----------- ----------- -------------
Net increase (decrease) in cash and cash equivalents ...... (1,276,190) 3,733,038 1,453,104
Cash and cash equivalents at the beginning
of period ............................................... 1,650,259 374,069 4,107,107
----------- ----------- -------------
Cash and cash equivalents at the end of period ............ $ 374,069 $ 4,107,107 5,560,211
=========== =========== ==============
Noncash transactions:
Amounts payable for purchase of intangible assets ....... $ -- $ 163,223 $ --
=========== =========== ==============
Adjustment to purchase price of intangible assets ....... $ -- $ -- $ (30,000)
=========== =========== ==============
The accompanying notes are an integral part of these financial statements
8
PHARMACY NETWORK NATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(Information as of September 30, 2002 and for the
nine-month period then ended is unaudited)
1. NATURE OF OPERATIONS:
- -- ---------------------
Pharmacy Network National Corporation ("the Company" or "PNNC") manages
prescription drug plans for self-insured employers and third party
administrators. PNNC provides pharmacy benefit management services to a diverse
client base with significant geographic concentration in the Carolinas and
Tennessee. PNNC changed its fiscal year end from March to December effective
April 1, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES:
- -- --------------------------------
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United State of America requires PNNC to
make estimates and assumptions that affect the reported amounts in the financial
statements and disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. PNNC estimates reserves for doubtful accounts
receivable, rebates receivable and payable and income taxes as of each balance
sheet date. The Company has historically had very limited exposure to bad debts
due to the nature of the employee benefits involved and the general financial
strength of its customer base.
INTERIM FINANCIAL STATEMENTS
The financial statements as of September 30, 2002, and for the nine-month
period then ended are unaudited and in the opinion of management, include all
adjustments (consisting only of normal recurring items) necessary for the fair
presentation of the results of the interim period. The results for the
nine-month period ended September 30, 2002, are not necessarily indicative
annual results of operations.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term investments with maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents include overnight deposit
accounts with a financial institution for the purpose of investing excess cash
on a short-term basis.
CONCENTRATIONS OF CREDIT RISK
As of September 30, 2002, PNNC had cash and cash equivalents on deposit with
a major financial institution that were in excess of FDIC insured limits. The
concentration of credit risk in these uninsured deposits is mitigated by the
Company's policy of placing such deposits with a financial institution of high
credit rating. Historically, the Company has not experienced any loss of its
cash and cash equivalents due to such concentration of credit risk.
9
PHARMACY NETWORK NATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(Information as of September 30, 2002 and for the
nine-month period then ended is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES: CONTINUED
- -- ------------------------------------------
FIXED AND INTANGIBLE ASSETS
Fixed assets, which consists of furniture and fixtures, automobiles, and
equipment, are recorded at cost. Depreciation is provided on a straight-line
method over the estimated useful lives of the respective assets; seven to ten
years for furniture, fixtures, machinery and equipment, five for automobiles,
and five for computer equipment and software. Maintenance and repairs are
charged to expense as incurred. Major renewals and betterments are capitalized.
When fixed assets are sold or retired, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
included in the results of operations. In accordance with Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", the carrying values of PNNC's
assets are re-evaluated when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Intangible assets represent the cost of contracts to manage certain
prescription drug plans. These assets are recorded at cost and amortized over
their estimated useful lives of seven years.
In accordance with Statement of Financial Accounting Standard No. 142, PNNC
annually tests the carrying value of intangible assets for possible impairment.
No impairment losses were deemed necessary in 2001.
REVENUE RECOGNITION
PNNC manages prescription drug plans for self-insured employers and third
party administrators. When PNNC has a contractual obligation to pay its network
pharmacy providers for benefits provided to its clients' members, total payments
from these clients are recorded as revenue and payments to the network pharmacy
provider as direct expenses. The transactions require PNNC to assume the credit
risk of its clients' abilities to pay. In addition, under most of its client
contracts PNNC is at risk for the difference between the negotiated ingredient
costs PNNC receives from its clients and the negotiated ingredient costs PNNC
pays to its pharmacies.
When PNNC administers pharmacy reimbursement contracts and does not assume a
credit risk, PNNC records only its administrative or dispensing fees as revenue.
Rebate revenues earned under arrangements with manufacturers are recognized
as they are earned in accordance with contractual agreements and recorded as a
reduction of direct expenses. Any portion of rebates shared with plan sponsors
is recorded as a reduction from revenue.
DIRECT EXPENSES
PNNC does not carry product inventory. However, it does incur product costs
for prescription medicines supplied directly to employee participants by
participating pharmacies. Direct costs includes such product costs, net of
earned manufacturers rebates. PNNC recognizes manufacturers rebates based on the
terms of its underlying agreement.
10
PHARMACY NETWORK NATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(Information as of September 30, 2002 and for the
nine-month period then ended is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES: CONTINUED
- -- ------------------------------------------
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), which is effective for all business combinations after June 30,
2001; and Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which is effective for fiscal years
beginning after December 15, 2001. In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which is effective for fiscal years
beginning after December 15, 2001. SFAS 141 requires that companies use the
purchase method of accounting for all business combinations initiated after June
30, 2001 and addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. SFAS 142 addresses
initial recognition and measurements of intangible assets acquired outside a
business combination and the recognition and measurement of goodwill and other
intangible assets subsequent to acquisition. SFAS 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal transactions.
PNNC has reviewed the impact of the implementation of SFAS 142, and 144, and
their adoption will not have a material effect on the PNNC's financial positions
or results of operations.
3. ACCOUNTS RECEIVABLE
- -- --------------------
Accounts receivable consists of the following:
December 31, December 31, September 30,
2000 2001 2002
------------------ ----------------- ------------------
(unaudited)
Trade receivables $ 11,505,938 $ 14,831,770 $ 12,384,829
Less: Allowance for doubtful accounts 64,106 86,801 86,801
------------------ ----------------- ------------------
Accounts receivable, net $ 11,441,832 $ 14,744,969 $ 12,298,028
==================== =================== ===================
PNNC had one customer which accounted for approximately 10% of its revenue
during the year ended December 31, 2001. At December 31, 2000 and 2001
receivables from a single customer represented 11% and 12% of trade
receivables, respectively.
11
PHARMACY NETWORK NATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(Information as of September 30, 2002 and for the
nine-month period then ended is unaudited)
4. INCOME TAXES
- -- ------------
The provisions for income taxes are as follows:
Nine-months Year Nine-Months
Ended Ended Ended
December 31, December 31, September 30,
2000 2001 2002
------------------- ------------------ -------------------
(unaudited)
Current - Federal $ 468,110 $ 969,298 $ 820,582
Current - State 100,909 218,872 169,359
Deferred - Federal (79,060) (20,253) (79,023)
Deferred - State (11,143) (2,752) (10,738)
------------------- ------------------ -------------------
$ 478,816 $ 1,165,165 $ 900,180
===================== ==================== =====================
Differences between anticipated federal and state income taxes at statutory
rates and the actual provision for income taxes are as follows:
December 31, December 31, September 30,
2000 2001 2002
------------------ ------------------ ------------------
(unaudited)
Federal income tax at
statutory rates $ 421,456 $ 1,020,106 $ 788,561
State income taxes, net of
federal income tax benefit 57,268 138,614 107,151
Non-deductible expenses and
other 92 6,445 4,468
------------------ ------------------ ------------------
$ 478,816 $ 1,165,165 $ 900,180
===================== ===================== ====================
12
The components of the net deferred tax assets and liabilities computed
at an effective tax rate of 38.8% are as follows:
December 31, December 31, September 30,
2000 2001 2002
(unaudited)
------------ ------------- --------------
Current deferred tax assets (liabilities)
Allowance for doubtful accounts .......... $ 25,000 $ 34,000 $ 34,000
Rebates receivable ....................... (132,684) (192,401) (208,723)
------------ ------------- --------------
$(107,684) $(158,401) $ (174,723)
============ ============= ==============
Long-term-current deferred tax assets (liabilities)
Compensation from stock options ............. -- $ 70,722 $ 176,805
Depreciation on fixed assets ................. (14,000) (11,000) (11,000)
------------ ------------- --------------
$ (14,000) $ 59,722 $ 165,805
============ ============= ==============
Income tax payments of approximately $828,000, $1.3 million and $762,000 were
made during the nine-month period ended December 31, 2000, the year ended
December 31, 2001, and the nine-month period ended September 30, 2002.
5. NOTES PAYABLE
- -- -------------
On October 1, 1999, PNNC arranged a revolving line of credit for $500,000 to
support PNNC's working capital requirements. The line of credit was increased to
$1.0 million in October 2001. The line of credit is collateralized by all
accounts receivable. Under the terms of the agreement, the outstanding principal
and accrued interest were to be paid on October 11, 2003. The facility bears
interest at the prime rate plus 0.5%. The effective interest rate was 5.25% at
both December 31, 2001 and September 30, 2002. Interest expense was
approximately $1,900, $4,500 and $6,000 for the nine-month period ended December
31, 2000, the year ended December 31, 2001 and the nine-month period ended
September 30, 2002, respectively. PNNC had an outstanding balance of $200,000 at
September 30, 2002. All outstanding principal and accrued interest was paid in
full in October 2002. The line of credit was subsequently closed with the
financial institution in January 2003.
6. LEASE COMMITMENTS
- -- -----------------
PNNC began leasing new office space in February 2001. The lease expires in
2006. Rental expense was approximately $39,000 for the nine-month period ended
December 31, 2000, $90,000 for the year ended December 31, 2001, and $72,000 for
the nine-month period ended September 30, 2002.
13
PHARMACY NETWORK NATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(Information as of September 30, 2002 and for the
nine-month period then ended is unaudited)
Additionally, the Company leases equipment. The equipment leases expire at
various dates through September 2004. Rental expense was approximately $4,500
for the nine-month period ended December 31, 2000, $10,000 for the year ended
December 31, 2001, and $12,000 for the nine-month ended September 30, 2002.
The minimum rental commitments for the non-cancelable leases as of December
31, 2001 are as follows:
Minimum
Fiscal Rental
Year Commitment
---- ------------------
2002 $ 111,429
2003 113,891
2004 110,764
2005 105,523
2006 8,815
--------------
Total $ 450,422
===============
7. COMMON STOCK
- -- -------------
During 2000, PNNC issued 3,000 shares of common stock. On July 17, 2001, a
10 for 1 stock split was declared by the Board of Directors. The financial
statements for all periods presented, have been restated to reflect the 10 for 1
stock split.
8. Stock Options
- -- -------------
In 2001, the Company adopted the PNNC Employee Stock Option Plan (Employee
SOP) and the PNNC Non-Employee Directors' Stock Option Plan (Directors' SOP).
The maximum number of the Company's Class B non-voting common stock reserved for
issuance pursuant to the grant of options under the Employee SOP and the
Directors' SOP are 1,500 and 6,500 shares, respectively. Under both plans,
options granted are exercisable on the third anniversary date of the grant or
earlier in the event of a change in control. The maximum contractual life of all
stock options granted under the Employee SOP and the Directors' SOP is ten
years.
In July of 2001, the Company granted 7,480 stock options under these plans at
a price per share for Class B non-voting stock of $20.00. All of the 7,480
options were outstanding, and not exercisable as of December 31, 2001 and
September 30, 2002 with remaining contractual lives of 9.5 and 8.7 years,
respectively.
Under the provisions of Accounting Principles Board Opinion 25: "Accounting
for Stock Issued to Employees" compensation expense related to stock options of
approximately $183,000 and $275,000 was recognized for the year ended December
31, 2001, and the nine month period ended September 30, 2002.
The following table reflects pro forma net income and net income per share
for the year ended December 31, 2001, and the nine month period ended September
30, 2002 had the Company elected to adopt the fair value approach of Financial
Accounting Standards Board issued Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation":
14
PHARMACY NETWORK NATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
(Information as of September 30, 2002 and for the
nine-month period then ended is unaudited)
Nine-months
Year ended ended
December 31, September 30,
2001 2002
----------- -----------
Net income
As reported $ 1,835,146 $ 1,419,117
Pro forma 1,832,745 1,415,516
The estimated fair value of each option was calculated using the modified
American Black-Scholes economic option-pricing model. The following table
summarizes the assumptions used for stock options granted in 2001:
Risk-free interest rate 4.31%
Expected years until exercise 3 years
Expected volatility 0%
Dividend yield 0.1%
Weighted average fair value per share $148.82
9. PENSION PLAN
- -- ------------
In 2001 and 2002, PNNC had a 401(k) plan. The plan covers all full-time
employees who have one year of service. The Company contributes 5% of eligible
wages. Pension expense was approximately $34,000 for the year ended December 31,
2001 and $39,000 for the nine-month period ended September 30, 2002.
In 2000, PNNC had a simplified employee pension plan agreement. The plan
covered all employees who qualified as to age and length of service. Annual
contributions to the plan were determined by the Board of Directors. Pension
expenses for the nine-month period ended December 31, 2000, was approximately
$23,000.
10. LITIGATION
- --- ----------
PNNC is subject to various litigation that arises in the course of its
business. Based on discussions with counsel, management is of the opinion that
such litigation will have no material effect on the financial position of the
Company or its results of operations or liquidity.
15
HEALTHEXTRAS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of September 30, 2002
HealthExtras, Inc. Pro Forma
Historical PNNC Adjustments Pro Forma
------------- ------------- ------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents .................... $ 22,668,488 $ 5,560,211 $ -- $ 28,228,699
Accounts receivable, net ..................... 26,077,810 12,298,028 -- 38,375,838
Deferred charges:
Direct ................................... 1,025,623 -- -- 1,025,623
Marketing and promotion .................. 1,511,047 -- -- 1,511,047
Other current assets ......................... 923,321 34,000 -- 957,321
------------- ------------- ------------- -------------
Total current assets ..................... 52,206,289 17,892,239 -- 70,098,528
Fixed assets, net ............................ 5,189,127 87,767 -- 5,276,894
Intangible assets, net ....................... 6,323,073 204,233 7,795,767 (A) 14,323,073
Goodwill ..................................... 20,758,074 -- 8,916,397 (A) 29,674,471
Restricted cash .............................. 1,000,000 -- -- 1,000,000
Deferred income taxes ........................ -- 176,805 -- 176,805
Other assets ................................. 1,820,445 -- -- 1,820,445
------------- ------------- ------------- -------------
Total assets ................................. $ 87,297,008 $ 18,361,044 $ 16,712,164 $ 122,370,216
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 22,206,604 $ 9,502,109 $ -- $ 31,708,713
Accrued expenses and other current liabilities 2,698,204 496,471 -- 3,194,675
Notes payable ................................ 9,056,000 200,000 -- 9,256,000
Purchase consideration due ................... -- -- 21,565,305 (A) 21,565,305
Deferred revenue ............................. 3,902,541 -- -- 3,902,541
Deferred income taxes ........................ -- 208,723 -- 208,723
------------- ------------- ------------- -------------
Total current liabilities ................ 37,863,349 10,407,303 21,565,305 69,835,957
Deferred income taxes ........................ -- 11,000 3,089,600 (F) 3,100,600
------------- ------------- ------------- -------------
Total liabilities ........................ 37,863,349 10,418,303 24,654,905 72,936,557
------------- ------------- ------------- -------------
Stockholders' equity
Preferred stock .............................. -- -- -- --
Common stock ................................. 322,781 3,000 (3,000) (A) 322,781
Additional paid-in capital ................... 70,224,154 1,098,740 (1,098,740) (A) 70,224,154
Deferred compensation ........................ (19,995) (640,932) 640,932 (A) (19,995)
Retained earnings (accumulated deficit) ...... (21,093,281) 7,481,933 (7,481,933 (A) (21,093,281)
------------- ------------- ------------- -------------
Total stockholders' equity ............... 49,433,659 7,942,741 (7,942,741) 49,433,659
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity ... $ 87,297,008 $ 18,361,044 $ 16,712,164 $ 122,370,216
============= ============= ============= =============
16
HEALTHEXTRAS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For The Nine-Months Ended September 30, 2002
HealthExtras, Inc. PNNC Prior Pro Forma
Historical to Acquisition Adjustments Pro Forma
------------- ------------- -------------- -------------
Revenues .................................... $ 173,807,699 $ 87,891,129 $ -- $ 261,698,828
------------- ------------- -------------- -------------
Expenses
Direct ...................................... 144,073,833 82,639,634 -- 226,713,467
Selling, general and administrative expenses 26,034,646 2,972,389 300,000 (D) 29,307,035
------------- ------------- -------------- -------------
Total operating expenses ................. 170,108,479 85,612,023 300,000 256,020,502
------------- ------------- -------------- -------------
Operating income ......................... 3,699,220 2,279,106 (300,000) 5,678,326
Interest income (expense), net .............. (26,668) 40,191 -- 13,523
------------- ------------- -------------- -------------
Income before minority interest and
income taxes .............................. 3,672,552 2,319,297 (300,000) 5,691,849
Minority interest ........................... 44,992 -- (44,992)(B) --
------------- ------------- -------------- -------------
Income before income taxes .................. 3,627,560 2,319,297 (255,008) 5,691,849
Provision for income taxes .................. -- 900,180 (900,180)(C) --
------------- ------------- -------------- -------------
Net income .................................. $ 3,627,560 $ 1,419,117 $ 645,172 $ 5,691,849
============= ============= ============== ==============
Net income per share, basic ................. $ 0.11 $ 0.18
Net income per share, diluted ............... $ 0.11 $ 0.18
Weighted shares of common stock
outstanding (in thousands), basic ........ 32,212 32,281
Weighted shares of common stock
outstanding (in thousands), diluted ...... 32,383 32,452
17
HEALTHEXTRAS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For The Year Ended December 31, 2001
HealthExtras, Inc. Catalyst Prior PNNC Prior Pro Forma
Historical (D) to Acquisition to Adjustments Adjustment Pro Forma
------------- ------------ ------------- ------------ -------------
Revenues .................................... $ 118,225,919 $ 52,633,216 $ 109,334,094 $ -- $280,193,229
------------- ------------ ------------- ------------ -------------
Expenses
Direct ...................................... 114,755,190 49,632,694 102,299,452 -- 266,687,336
Selling, general and administrative expenses 11,242,182 1,512,653 4,129,288 400,000 (D)
(614,839) (G) 16,669,284
------------- ------------ ------------- ------------ -------------
Total operating expenses........ 125,997,372 51,145,347 106,428,740 (214,839) 283,356,620
------------- ------------ ------------- ------------ -------------
Operating (loss) income ........ (7,771,453) 1,487,869 2,905,354 214,839 (3,163,391)
Interest income (expense), net .............. 1,092,446 116,060 94,957 -- 1,303,463
------------- ------------ ------------- ------------ -------------
Income (loss) before minority interest and
income taxes (6,679,007) 1,603,929 3,000,311 214,839 (1,859,928)
Minority interest ........................... (95,642) -- -- (95,642) (B) --
------------- ------------ ------------- ------------ -------------
Income (loss) before income taxes ........... (6,774,649) 1,603,929 3,000,311 310,481 (1,859,928)
Provision for income taxes .................. -- -- 1,165,165 (1,165,165)(C) --
------------- ------------ ------------- ------------ -------------
Net (loss) income ........................... $ (6,774,649) $ 1,603,929 $ 1,835,146 $ 1,475,646 $ (1,859,928)
============= ============ ============== ============= ===============
Net income (loss) per share, basic .......... $ (0.23) $ (0.06)
Net income (loss) per share, diluted ........ $ (0.23) $ (0.06)
Weighted shares of common stock
outstanding (in thousands), basic .. 29,731 30,369
Weighted shares of common stock
outstanding (in thousands), diluted 29,731 30,369
18
HEALTHEXTRAS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
A. Pro forma adjustment to give effect to the purchase of PNNC for $21.6
million as if the acquisition had occurred on September 30, 2002 (including
transaction cost).
B. Pro forma adjustment to eliminate minority interest and reflect 100%
ownership in Catalyst Rx and Catalyst Consultants acquired in March 2002.
C. Pro forma adjustment to reflect elimination of income tax expense due to
consolidated net operating loss carryforwards subject to a full valuation
allowance.
D. Pro forma adjustment to give effect to the amortization of PNNC intangible
assets over a period of twenty years.
E. Effective January 1, 2002, the Company adopted EITF 01-9, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products", ("EITF 01-9"), which was issued in November 2001. The Company's
adoption of EITF 01-9 resulted in changing the way the Company recognizes
the cost of consideration provided to a marketing partner under a warrant
agreement. Effective January 1, 2002, the charge or credit of this
consideration is to be recorded as a reduction or credit to revenue from the
marketing partner rather than as a charge or credit to direct expense, as
required in prior periods. The Company's statement of operations for the
year ended December 31, 2001 has been reclassified to comply with these
provisions resulting in a reduction of revenue and direct expenses of
$6,125,137.
F. Pro forma adjustment to recognize deferred tax liability related to
acquired customer relationship intangible assets.
G. Pro forma adjustment to remove amortization of goodwill recorded in the
Company's financial statements as if SFAS 142 was adopted January 1, 2001.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 3, 2003 By: /s/ Michael P. Donovan
------------------------
Michael P. Donovan
Chief Financial Officer and
Chief Accounting Officer