The following data should be read in conjunction with Footnotes 3, 4, 5 and 6 to the Financial Statement included herein under Item 8.
(2) Includes loss contracts expense of $46,600, merger-related expense of $68,807, restructuring expense of $31,098, asset writeoffs and expense accruals at the Company's Diagnostek, Inc. subsidiary of $12,898 and a loss accrual of $1,042 on the planned disposition of the Lewin-VHI, Inc. assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS -------------
Earnings from continuing operations before loss contract charges, merger-related expenses, restructuring charges, asset write-downs and certain other charges were $117.6 million in 1994, $138.7 million in 1995 and $130.0 million in 1996. Pre-tax earnings increased over prior years in the prescription drug and workers' compensation businesses in both 1996 and 1995 as revenues continued to grow. Earnings in disease management and information services increased in 1995 and decreased in 1996 due to the sale of Lewin-VHI in 1996, together with scheduled fee decreases in certain disease management contracts. Earnings in the mental health business decreased as revenue growth slowed in 1995 and revenues decreased in 1996.
Institutional pharmacy services are priced under a variety of methods including fee for service, fixed fee, cost plus or capitated basis. Under capitated methods clients are billed at pre-determined rates under a formula that specifies a ceiling cost or cap to clients based on a formula. Under this method the Company bears the risk/benefit to the extent institutional pharmacy costs vary from the capitation payment. Mental health and insurance services are generally priced on a fee for service basis. Certain mental health programs are priced on a fixed fee, per employee, per month basis, and the Company bears the risk/benefit if claims vary from the amount billed. Information services revenue from disease management programs are billed under negotiated contracts which provide for fees to be billed upon the achievement of certain milestones. Revenues from other clinical services are billed on a fee for service basis.
The following table sets forth certain consolidated financial data as percentages of total revenues for the three fiscal years ended December 31, 1996, 1995 and 1994, and the percentage changes in the dollar amounts of revenues and expenses for 1996 as compared to 1995 and for 1995 as compared to 1994.
Total revenues increased by $95.2 million in 1996 over 1995 and $247.9 million in 1995 over 1994. The addition of new customers increased revenues by $225.6 million in 1996 over 1995 and revenues from existing customers declined by $77.5 million in 1996 from 1995. Acquisitions accounted for $11.1 million of 1996 revenue growth. As discussed more fully below, revenues from the Company's joint ventures are not consolidated. Accordingly, reported prescription drug service revenues were reduced by $44.8 million as compared to 1995. The sale of Lewin- VHI and certain other non-core operations in 1996 caused revenues to decline by $14.7 million. Other revenues and investment income declined by $1.7 million and $2.6 million, respectively, as compared with 1995.
The addition of new customers increased revenues by $271.8 million in 1995 over 1994 and revenues from existing customers declined by $72.5 million in 1995 from 1994. Acquisitions accounted for $58.9 million of 1995 revenue growth. Other revenue and investment income declined by $7.5 million and $2.7 million, respectively, as compared with 1994.
Prescription drug product revenues (from the mail service pharmacy business) for 1996 of $433.9 million increased by $8.2 million or 1.9% over 1995 and 1995 revenues increased by $43.3 million or 11.3% over 1994. The addition of new customers increased revenues by $17.4 million in 1996 over 1995 and by $42.0 million in 1995 over 1994. Revenues from existing customers declined by $9.2 million in 1996 from 1995 and increased by $1.4 million in 1995 over 1994.
Mental health 1996 revenues of $210.4 million decreased by $7.5 million or 3.4% over 1995 and 1995 revenues increased by $19.3 million or 9.7% over 1994. The addition of new customers increased revenues by $17.5 million and $17.8 million in 1996 and 1995, respectively. Revenues from existing customers declined by $28.0 million in 1996 over 1995 and by $27.3 million in 1995 over 1994. These declines were due to enrollment reductions, lost business and price reductions. Acquisitions increased revenues by $3.1 million and $28.8 million in 1996 and 1995, respectively.
Disease management and information services 1996 revenues of $49.5 million decreased by $10.6 million or 17.7% from 1995 and 1995 revenues increased by $4.4 million or 8.0% over 1994. New customers, including disease management programs, added $4.6 million and $11.2 million to 1996 and 1995 revenues, respectively. Revenues from existing customers declined by $4.0 million in 1996 from 1995 and by $9.2 million in 1995 over 1994. The 1996 decline was due to enrollment reductions, lost business and scheduled fee decreases in certain major disease management contracts. This decline was partially offset by fees received in connection with the early termination of a certain disease management contract. The 1995 decline was due to enrollment reductions, completion of certain health policy consulting assignments and scheduled fee decreases in a certain major disease management contract. Acquisitions accounted for $2.2 million and $2.4 million of the revenue increases in 1996 and 1995, respectively. The sale of the assets of Lewin-VHI, Inc. in May, 1996 caused 1996 revenues to be reduced by $13.3 million from 1995.
Other revenues in 1996 of $5.1 million declined by $1.7 million from 1995 and 1995 revenues declined by $7.5 million from 1994. The declines in both years were due primarily to the sale of National Foot Care Program in 1995, as results in 1995 and 1994 include revenues from National Foot Care Program for three months and twelve months, respectively.
As a percentage of service revenues, costs of services for 1996 decreased to 81.1% from 81.7% in 1995 and 82.8% in 1994. Despite a competitive pricing environment, the costs of services ratio declined slightly in 1996, due primarily to the Company's restructuring and re-engineering programs implemented during 1996, resistance to rebids at excessively low margins and cancellation of certain loss contracts during 1995. The decline in the 1995 ratio was due primarily to a revenue mix shift toward insurance services and disease management programs which carry lower ratios.
As a percentage of product revenues, costs of products increased to 87.6% for 1996, from 84.7% during 1995 and increased from 85.6% during 1994. The increase in the costs of products ratio in 1996 was due primarily to the competitive pricing environment and the loss of certain profitable accounts since the third quarter of 1995. These cost increases cannot be practicably quantified on an individual basis, however, the Company expects the competitive pricing environment will continue to increase the costs of products ratio as increases in customer revenues lag drug price inflation. The loss of profitable accounts in the future cannot be reasonably estimated and will be a function of annual and multi-year contract renewals within the Company's competitive pricing environment. The cost of alternative sources of purchasing drugs through wholesalers are expected to level out in the future. The decrease in the costs of products ratio in 1995 was due primarily to economies of scale achieved from higher volume of mail service prescriptions as well as more favorable purchasing arrangements for prescription drugs.
In 1996, the Company recognized a restructuring charge of $3.5 million in connection with the acquisition and integration of Medview Services, Inc. In 1995, the Company recognized a restructuring charge of $31.1 million in connection with a program to reduce operating expenses at its subsidiaries. The restructuring program has resulted in annualized savings of $40 million (see notes 5 and 6).
Earnings (loss) before income taxes were $116.1 million, $(21.7) million and $99.6 million in 1996, 1995 and 1994, respectively.
In each year, the provision for income taxes includes, among other things, the utilization of net operating loss carryforwards, the tax benefit associated with certain stock option transactions, the result of goodwill reductions arising from the utilization of certain acquired net operating loss carryforwards and an estimate for state income taxes. The effective tax rate was 44.6%, (28.8%) and 40.2% for the years ended December 31, 1996, 1995 and 1994, respectively. The difference in the 1996 effective tax rate as compared to statutory rates is primarily the result of certain non-deductible asset writeoffs. The effective tax rate in 1995 results primarily from a high level of non-deductible expenses from the Diagnostek merger relative to the amount of reported loss before taxes, as well as the tax liability associated with the Lewin-VHI disposition. At December 31, 1996, the Company recorded a deferred tax asset of $50.1 million to reflect the future tax benefits of loss carryforwards and temporary differences (see note 13).
Management believes that sufficient taxes were paid in the carryback period and sufficient taxable income will be generated in the future to realize the deferred tax benefits. In 1996, the valuation allowance was decreased by $0.3 million to $4.9 million primarily due to the use of net operating losses from business combinations.
As of December 31,1996, the Company had working capital of $197.5 million and unrestricted cash and marketable securities of $91.4 million.
The Company believes that existing available cash and marketable securities, cash from operations and amounts available under its credit line will be sufficient to meet its liquidity and funding requirements for normal operations.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. This pronouncement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. This statement is effective for financial statements issued for periods ending after December 15, 1997. The Company has not yet determined the impact of this pronouncement on its EPS calculation.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"). Under SFAS 115, the Company has classified its investments in debt securities as "available-for-sale" securities and carries such securities at market value. Accordingly, the net unrealized gain or loss, net of tax, is included as a separate component of stockholders' equity. Premiums are amortized on a straight-line basis until maturity. In determining the gain or loss on sales of investments, cost is based on specific identification of the asset sold.
Fixed assets are recorded at cost. The Company uses straight-line and accelerated methods of depreciation over the estimated useful lives of the assets, which range from three to 25 years. Assets acquired under capital lease agreements are recorded at the lesser of the present value of the minimum lease payments or the fair value of the property.
These assets are amortized on a straight-line basis over periods consistent with the Company's depreciation policy for similar purchased assets or over the lease term, whichever is shorter.
Included in equipment at December 31, 1996 and 1995 are capitalized computer software costs, related to purchased software and software developed internally for sale as part of its product lines, of $67,751,000 and $45,341,000, respectively. The Company capitalizes costs of software to be sold once technological feasibility has been established. Accumulated amortization on computer software was $14,557,000 and $11,170,000 at December 31, 1996 and 1995, respectively, and is included in accumulated depreciation and amortization. The Company uses the straight-line amortization method over estimated useful lives which range from three to five years.
The Company has received rent abatements for limited periods in connection with leases for certain office space. Costs associated with these leases, recorded on a straight-line basis over the full lease term, resulted in a deferred rent liability of $2,881,000 and $3,648,000 at December 31, 1996 and 1995, respectively.
Prescription drug service revenue from the retail network business under certain arrangements is billed to plan sponsors on a per prescription basis plus a claims processing fee together with a fee for specific clinical services. Under certain other arrangements, the Company bills plan sponsors a fixed monthly payment per employee, known generally as "capitation". Under the former arrangement the Company bears no financial risk for increases in the number of prescriptions. Under the latter arrangement the Company is responsible for paying all approved prescription drug claims and bears the risk/benefit that claims may vary from the fixed monthly, capitated amount.
Institutional pharmacy services are priced under a variety of methods including fee for service, fixed fee, cost plus or capitated basis. Under capitated methods clients are billed at pre-determined rates under a formula that specifies a ceiling cost or cap to clients based on a formula. Under this method the Company bears the risk/benefit to the extent institutional pharmacy costs vary from the capitation payment. Mental health and insurance services are generally priced on a fee for service basis. Certain mental health programs are priced on a fixed fee, per employee, per month basis, and the Company bears the risk/benefit if claims vary from the amount billed. Information services revenue from disease management programs, as discussed below, are billed under negotiated contracts which provide for fees to be billed upon the achievement of certain milestones. Revenues from other clinical services are billed on a fee for service basis.
The Company develops software and a number of other products under significant disease management research and development agreements entered into with third parties, including Pfizer, Inc. and Sandoz Pharmaceutical Corp. Under these arrangements, the Company develops value-added programs, products and services that will address all aspects of a disease, including health promotion, screening, diagnosis, treatment and maintenance. The ultimate goal of these programs is to assist managed care organizations and medical providers in developing high quality, cost effective health care. These contracts, typically for periods of three to five years, include the formation of multi-disciplinary teams of Company personnel dedicated to developing sophisticated disease management tools.
The Company files a consolidated federal income tax return which includes all of its subsidiaries. The Company's income tax liability has been determined under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, requiring an asset and liability approach for financial accounting and reporting for income taxes. The liability is based on the current and deferred tax consequences of all events recognized in the consolidated financial statements as of the date of the consolidated balance sheet. Deferred taxes are provided for temporary differences which will result in taxable or deductible amounts in future years, primarily attributable to a different basis in certain assets and liabilities for financial and tax reporting purposes, including recognition of deferred tax assets net of a related valuation allowance.
On July 3, 1996, the Company contributed the assets of its institutional pharmacy business to a joint venture with Allegiance Corporation. The Company's investment in the joint venture is recorded using the equity method.
On May 11, 1995, the Company completed its acquisition of Value Health Management, Inc. ("VHM"), an information services and management consulting company. The purchase price was $9.5 million based on the closing price of Value Health common stock on the date of purchase. The acquisition was accounted for as a purchase in which the Company issued 279,738 shares of its common stock to acquire all of the issued and outstanding shares of VHM common and preferred stock. Goodwill of $12.0 million was recorded and is being amortized over 20 years. The results of operations of VHM are included in the Company's Consolidated Statement of Operations from the date the acquisition was completed. On January 31, 1997, the Company completed the sale of substantially all of the assets of its VHM subsidiary (see note 21).
On June 21, 1994, the Company completed its acquisition of Community Care Network, Inc. (CCN). The purchase price was $40 million in cash and contingent consideration of up to an additional $80 million, of which $18.6 million had been paid as of December 31, 1996. The contingent consideration is payable in cash and is based upon CNN's earnings during a twelve month calculation period, which period ended December 31, 1996. Goodwill of $23.4 million was initially recorded and is being amortized over 35 years. Additional goodwill of $78 million was recorded in 1996. Of this amount, approximately $61 million in payments are expected to be made in 1997 and are accrued at December 31, 1996. The results of operations of CCN are included in the Company's Consolidated Statement of Operations from the date the acquisition was completed.
The Company has $5.4 million and $30.4 million accrued for loss contracts as of December 31, 1996 and December 31, 1995, respectively. During 1995, $34.0 million of expense was recognized in the third quarter and $12.6 million of expense was recognized in the first quarter. The Company reviews its various risk-based customer contracts on a quarterly basis to determine whether estimates of future revenues, excluding investment income, are sufficient to cover estimated future costs of providing services and settling claim payments. For purposes of evaluating potential loss contracts, only incremental costs are included in determining the estimated costs to provide services and settle claim payments.
The $5.4 and $30.4 million loss accruals at December 31, 1996 and 1995 relate to ten full risk, capitated contracts. The largest of the contracts was with Ford Motor Company ("Ford"). During the third quarter of 1995, the Company estimated its capitated contract with Ford would incur a loss for 1996 as a result of projected increases in utilization and unit prices. Utilization trends were projected to increase compared to prior quarters, and management determined in the third quarter that certain savings and other initiatives previously discussed with, and committed to, by Ford would not achieve the levels projected.
In addition to the above, during the first quarter of 1995, contract losses over the three-year term of the Company's contract with the State of New Jersey in the amount of $12.6 million were recorded. In the third quarter of 1995, an additional $4.0 million was recorded by the Company. During the first quarter of 1996, the Company entered into a subcontracting agreement for the transfer of this contract, thereby effectively mitigating further losses. Later in 1996, this contract was permanently assigned to the subcontracting party. No loss accruals related to the State of New Jersey remained on the books as of December 31, 1996
During the third quarter of 1995, the Company recorded a charge of $68.8 million in connection with its merger with Diagnostek. Approximately $8.8 million was incurred for transaction costs and $60.0 million related to costs associated with the combining of operations and the related combination activities, such as reduction of head count and elimination of duplicate facilities and excess capacity. Principal locations identified for combination included Albuquerque, NM, Davenport, IA and Bloomfield Hills, MI. These combination efforts will eliminate approximately 400 operations and administrative positions. Of the $60.0 million charge, $17.9 million related to systems integration and conversion projects, $14.2 million in severance and related benefits and $27.9 million in expected lease vacation, asset write-offs and other associated costs.
At December 31, 1996, all consolidation and combination activities except for those associated with Diagnostek were substantially complete. The Diagnostek activities are expected to be completed during early 1997.
The following table is a reconciliation of the merger-related expense for the years ended December 31, 1996 and 1995.
In connection with its acquisition of MedView, the Company accrued $12.3 million in the fourth quarter of 1996. $8.8 million and $3.5 million of this accrual was capitalized as goodwill and charged to restructuring expense, respectively. MedView is being integrated into CCN.
On August 21, 1996, the Company entered into a five-year, $140 million revolving credit agreement with a bank group. The agreement requires an annual facility fee of .10% to .20%, as defined in the agreement. Borrowings under the agreement bear interest based on the prime rate, the federal funds rate, or LIBOR, as defined in the agreement. The Company has the option to select either interest pricing method. Repayments under this line are due August 21, 2001. The agreement requires compliance with certain financial covenants, including net worth, fixed charge coverage and total indebtedness, all of which the Company has complied with as of December 31, 1996. The agreement also includes restrictive provisions in connection with a change in control of the Company. At December 31, 1996, the Company's outstanding principal balance under the agreement was $87.5 million.
Future minimum lease payments under noncancelable capital leases having terms in excess of one year are as follows:
The Company has cancelable and noncancelable operating lease agreements for equipment and office space which include renewal options. Total rental expense was $22,963,000, $25,671,000 and $19,252,000, in 1996, 1995 and 1994, respectively. The Company's minimum future lease payments under noncancelable operating leases are as follows:
In connection with a Shareholder Rights Plan adopted in February, 1994, the Company granted to holders of record of the Company's common stock on March 7, 1994, a preferred stock purchase right for each share of Common Stock held. The rights entitle stockholders, in certain circumstances, to purchase 1/1000th of a share of the Company's Series A Junior Participating Preferred Stock at an exercise price of $120.
The maximum number of shares authorized under the 1991 plan is calculated each year to increase by a number of shares equal to two percent of the Company's Common Stock outstanding at the end of the immediately preceding year.
On June 29, 1990, the Company issued certain other non-qualified options to purchase 480,000 shares of its common stock at $.0073 per share. These options were issued outside the 1987 Plan under separate agreements. During 1995, and 1994, approximately 8,303, and 9,926, of these options were exercised, respectively. At December 31, 1996 and 1995, there were no options outstanding.
In connection with the Company's acquisition of Medintell, the Company assumed all of the outstanding common stock options of Medintell. At December 31, 1996, options to purchase 192,469 shares of common stock at prices ranging from $2.12 to $17.00 per share had been granted and 134,324 options were outstanding. Approximately 26,187 of these options were exercisable at December 31, 1996.
The weighted average exercise price and remaining contractual life of options outstanding at December 31, 1996, under all of the Company's option plans are approximately $19.61 and 7.5 years, respectively. The weighted average exercise price and remaining contractual life of options exercisable at December 31, 1996, under all of the Company's option plans are approximately $20.66 and 6.0 years, respectively.
In February, 1991, the Company established the 1991 Employee Stock Purchase Plan (the "Purchase Plan"), providing for the purchase, by employees of the Company, of up to 750,000 shares of common stock. The Purchase Plan commenced May 1, 1991. All employees of the Company on May 1, 1991, and all persons who become employees thereafter are eligible to participate in the Purchase Plan. Employees who own five percent or more of the Company's stock and directors who are not employees of the Company may not participate in the Purchase Plan. During 1996, 1995 and 1994, participating employees purchased 113,464, 99,384 and 53,945 shares, respectively, of Common Stock under the Purchase Plan at average prices of $18.75, $24.23 and $30.54 per share, respectively.
The deferred tax asset decreased to $50.1 million at December 31, 1996 from $78.9 million at December 31, 1995. Management believes that sufficient taxes were paid in the carryback period and that sufficient taxable income will be generated in the future to realize the deferred tax benefits.
The Company had the following income tax carryforwards available at December 31, 1996:
Pursuant to a 1988 agreement, the Company acquired for $230,000 a 27% equity interest in a house purchased by the President of one of its subsidiaries. The Company is entitled to a proportional share of the proceeds when the house is sold. The interest is carried at cost which approximates fair value, and is included in other assets.
In March, 1995, a former executive officer of Diagnostek borrowed $327,000 from Diagnostek. The indebtedness, which is evidenced by a promissory note, bears interest at the rate of 7.5% per annum and is payable in 1998. The amount receivable at December 31, 1996, including accrued interest was $335,000.
Diagnostek utilized the legal services of a firm whose partners included a director of Diagnostek. Legal fees to this firm totaled approximately $1,451,000 and $626,000 during the years ended December 31, 1995 and 1994, respectively.
The carrying amount for cash and short-term investments is a reasonable estimate of those assets' fair value.
Fair value for these securities is based on quoted market prices. At December 31, 1996 and 1995, long-term investments are carried at fair value.
Due to the nature of certain other investments, it is impracticable to determine fair value. With respect to real estate, fair value is determined based upon local market data.
The carrying value of accounts receivable, accounts payable and accrued expenses approximates their fair values due to their short maturities.
In September 1995, two purported shareholder class action lawsuits, Freedman v. - ----------- Value Health, Inc., at al. and Balkheimer, et al. v. Value Inc., et al., were - ------------------- --------------------------------- filed in the United States District Court for the District of Connecticut against Value Health, certain of its current and former directors and senior officers and Nunzio DeSantis. The two lawsuits, which assert claims under the Securities Act and the Exchange Act, allege principally that Value Health and the individual defendants made false or misleading statements to the public in connection with Value Health's acquisition of Diagnostek in 1995. The complaints, which were consolidated on February 16, 1996, do not specify the amount of damages sought. On March 6, 1997, the court entered an order granting in part and denying in part the defendants' motion to dismiss.
On July 11, 1994, a purported shareholder class action lawsuit, Bash, et al. v. --------------- Diagnostek, et al. ("Bash"), was filed in the federal court in New Mexico - ------------------ against Diagnostek and certain of its former directors and senior officers alleging that the defendants made false or misleading statements to the public in connection with Diagnostek's financial results for the fiscal year ended March 31, 1994, the termination in August 1994 of Diagnostek's contracts with subsidiaries of CIGNA Corp. and the announcement in August 1994 of the award to Diagnostek of a contract with CHAMPUS. On September 10, 1996, the parties to Bash I reached a settlement, subject to court approval and other conditions. In a second action, Bash, et al v. Value Health, Inc., et al. ("Bash II"), the ----------------------------------------- Bash I plaintiffs filed suit in federal court in New Mexico on December 15, 1995 against the same defendants, as well as Value Health and certain of its current or former directors and officers, asserting the same factual allegations made in Bash I, and, in addition, alleging that Value Health and certain individual defendants made false and misleading statements to the public in connection with Value Health's acquisition of Diagnostek in 1995. The complaint asserts claims under the Securities Act and the Exchange Act, as well as common law claims. The complaint does not specify the amount of damages sought. As part of the settlement reached in Bash I, Value Health expects that the overlapping claims in Bash II will be dropped.
Value Health intends to defend the allegations in each of the lawsuits described above vigorously and does not believe the ultimate resolution will have a material effect on its financial position, results of operations or cash flows.
Because some options vest over several years and additional awards generally are made each year, the pro forma amounts above may not be representative of the effects on net earnings (loss) for future years.
Rebates from pharmaceutical manufacturers are recorded by the Company as reductions in costs of services and products. Pharmaceutical manufacturer rebate arrangements contribute significantly to the Company's profitability. The Company intends to continue seeking such arrangements in the future, but there can be no assurance future arrangements will be secured on similar terms.
Accounts receivable net of allowance for doubtful accounts at December 31, 1996 and 1995 were $363.3 million and $304.3 million, respectively. Nearly 40% of this increase relates to receivables in connection with rebate programs, as discussed above. The billing and collection cycle for such programs is longer than that of monthly service fees and other revenue sources. Rebate programs have been in effect since 1993. Management monitors and evaluates collectibility of receivables on an ongoing basis.
The Company purchased approximately 70% of its pharmaceutical products through one wholesaler for the year ended December 31, 1995. During the fourth quarter of 1996, the Company entered into a primary wholesale relationship with a new supplier. The Company anticipates that it will purchase a similar percentage of its pharmaceuticals from this supplier. The Company believes that other alternative sources are readily available in the event needed.
We have audited the consolidated financial statements and the financial statement schedule of Value Health, Inc. and its subsidiaries, listed in Item 14(a)(1) and 14(a)(2) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Diagnostek, Inc. for the year ended December 31, 1994, which statements reflect revenues of approximately 39% of the related consolidated total. Those statements were audited by another auditor whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for Diagnostek, Inc., which is a wholly-owned subsidiary of Value Health, Inc., is based solely on the report of such other auditor.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Value Health, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, based on our audits and the reports of other auditors, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.