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EX-99.1 - EXHIBIT 99.1 - CENTENE CORPd864570dex991.htm
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8-K - FORM 8-K - CENTENE CORPd864570d8k.htm

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF

CENTENE AND FIDELIS CARE

The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2018, and for the year ended December 31, 2017, combine the historical consolidated statements of operations of Centene Corporation (“Centene” or the “Company”) and New York State Catholic Health Plan, Inc. (d/b/a Fidelis Care New York) (“Fidelis Care”), giving effect to the Fidelis Acquisition (as defined in Note 1) and the financing of the Fidelis Acquisition (the “Acquisition Financing”) as if they each had occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet as of March 31, 2018, combines the historical consolidated balance sheets of the Company and Fidelis Care, giving effect to the Acquisition Financing and the Fidelis Acquisition, as more fully described in Note 7 and Note 1, respectively, as if they each had occurred on March 31, 2018. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (i) directly attributable to the Fidelis Acquisition, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with the following historical consolidated financial statements and accompanying notes:

 

    separate historical unaudited interim financial statements of the Company as of and for the three months ended, March 31, 2018, and the related notes included in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2018;

 

    separate historical unaudited interim financial statements of Fidelis Care as of and for the three months ended, March 31, 2018, and the related notes, included in the Company’s Current Report on Form 8-K filed on April 30, 2018;

 

    separate historical audited financial statements of the Company as of and for the year ended, December 31, 2017, and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017; and

 

    separate historical audited financial statements of Fidelis Care as of and for the year ended, December 31, 2017, and the related notes, included in the Company’s Current Report on Form 8-K filed on March 26, 2018.

The unaudited pro forma condensed combined financial information has been prepared by us using the acquisition method of accounting in accordance with GAAP. We have been treated as the acquirer in the Fidelis Acquisition for accounting purposes. The acquisition accounting is dependent upon certain valuation and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. In addition, under certain relevant laws and regulations, before completion of the Fidelis Acquisition, there were certain limitations regarding what we could learn about Fidelis Care prior to closing. Due to the recent completion of the Fidelis Acquisition, we have not yet reviewed all relevant information. The assets and liabilities of Fidelis Care have been measured based on various preliminary estimates using assumptions that we believe are reasonable based on information that is currently available. Differences between these preliminary estimates and the final acquisition accounting may occur, and those differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position. The pro forma adjustments are preliminary and have been made solely for informational purposes.

We intend to commence the necessary valuation and other studies required to complete the acquisition accounting promptly and will finalize the acquisition accounting as soon as practicable within the required measurement period in accordance with ASC 805, but in no event later than one year following completion of the Fidelis Acquisition.

 

-1-


The unaudited pro forma adjustments are based upon available information and certain assumptions that our management believes are reasonable. The unaudited pro forma condensed combined financial information has been presented for informational purposes only and is based on assumptions and estimates considered appropriate by our management; however, it is not necessarily indicative of our financial position or results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or of the future consolidated results of operations or of the financial position of the combined company. You should not place undue reliance on the unaudited pro forma condensed combined financial information in making investment decisions.

Management expects that the strategic and financial benefits of the Fidelis Acquisition will result in certain cost savings opportunities. However, given the preliminary nature of those cost savings, they have not been reflected in the accompanying unaudited pro forma condensed combined statements of operations. For a discussion of risks related to anticipated cost savings, see “Risk Factors—Factors that may affect Future Results and the Trading Price of Our Common Stock—The combined company may be unable to successfully integrate our business with the assets acquired in the Proposed Fidelis Acquisition and realize the anticipated benefits of the Proposed Fidelis Acquisition” in Item 1A. of Part II of our Quarterly Report on Form 10-Q for the three months ended March 31, 2018.

 

-2-


Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2018

(In millions, except per share data in dollars and shares in thousands)

 

     Centene     Fidelis
Care
    Pro Forma
Adjustments
(Note 6)
         Pro Forma
Combined
 

Revenues:

           

Premium

   $ 11,903     $ 2,618     $ 6     (a)    $ 14,527  

Service

     653       —         —            653  
  

 

 

   

 

 

   

 

 

      

 

 

 

Premium and service revenues

     12,556       2,618       6          15,180  

Premium tax and health insurer fee

     638       —         92     (a),(b)      730  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     13,194       2,618       98          15,910  
  

 

 

   

 

 

   

 

 

      

 

 

 

Expenses:

           

Medical costs

     10,039       2,362       —            12,401  

Cost of services

     543       —         —            543  

Selling, general and administrative expenses

     1,316       164       —            1,480  

Amortization of acquired intangible assets

     39       —         19     (c)      58  

Premium tax expense

     546       —         45     (a)      591  

Health insurer fee expense

     171       —         41     (b)      212  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total operating expenses

     12,654       2,526       105          15,285  
  

 

 

   

 

 

   

 

 

      

 

 

 

Earnings from operations

     540       92       (7        625  

Other income (expense):

           

Investment and other income

     41       2       —       (d)      43  

Interest expense

     (68     (1     (25   (e)      (94
  

 

 

   

 

 

   

 

 

      

 

 

 

Earnings from operations, before income tax expense

     513       93       (32        574  

Income tax expense

     175       —         24     (f)      199  
  

 

 

   

 

 

   

 

 

      

 

 

 

Net earnings

     338       93       (56        375  

Loss attributable to noncontrolling interests

     2       —         —            2  
  

 

 

   

 

 

   

 

 

      

 

 

 

Net earnings attributable to common stockholders

   $ 340     $ 93     $ (56      $ 377  
  

 

 

   

 

 

   

 

 

      

 

 

 

Net earnings per common share attributable to Centene Corporation:

           

Basic earnings per common share

   $ 1.95            $ 1.88  

Diluted earnings per common share

   $ 1.91            $ 1.85  

Weighted average number of common shares outstanding:

 

    

Basic

     173,921         26,604     (g)      200,525  

Diluted

     177,690         26,604     (g)      204,294  

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of this statement. The pro forma adjustments are explained in Note 6. Income Statement Pro Forma Adjustments, beginning on page 9.

 

-3-


Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2017

(In millions, except per share data in dollars and shares in thousands)

 

     Centene     Fidelis
Care
    Pro Forma
Adjustments
(Note 6)
         Pro Forma
Combined
 

Revenues:

           

Premium

   $ 43,353     $ 9,718     $ 18     (a)    $ 53,089  

Service

     2,267       —         —            2,267  
  

 

 

   

 

 

   

 

 

      

 

 

 

Premium and service revenues

     45,620       9,718       18          55,356  

Premium tax

     2,762       —         157     (a)      2,919  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total revenues

     48,382       9,718       175          58,275  
  

 

 

   

 

 

   

 

 

      

 

 

 

Expenses:

           

Medical costs

     37,851       8,878       —            46,729  

Cost of services

     1,847       —         —            1,847  

Selling, general and administrative expenses

     4,446       576       —            5,022  

Amortization of acquired intangible assets

     156       —         77     (c)      233  

Premium tax expense

     2,883       —         175     (a)      3,058  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total operating expenses

     47,183       9,454       252          56,889  
  

 

 

   

 

 

   

 

 

      

 

 

 

Earnings from operations

     1,199       264       (77        1,386  

Other income (expense):

           

Investment and other income

     190       90       (20   (d)      260  

Interest expense

     (255     (2     (100   (e)      (357
  

 

 

   

 

 

   

 

 

      

 

 

 

Earnings from operations before income tax expense

     1,134       352       (197        1,289  

Income tax expense

     326       —         57     (f)      383  
  

 

 

   

 

 

   

 

 

      

 

 

 

Net earnings

     808       352       (254        906  

Loss attributable to noncontrolling interests

     20       —         —            20  
  

 

 

   

 

 

   

 

 

      

 

 

 

Net earnings attributable to common stockholders

   $ 828     $ 352     $ (254      $ 926  
  

 

 

   

 

 

   

 

 

      

 

 

 

Net earnings per common share attributable to Centene Corporation:

           

Basic earnings per common share

   $ 4.80            $ 4.65  

Diluted earnings per common share

   $ 4.69            $ 4.55  

Weighted average number of common shares outstanding:

 

    

Basic

     172,427         26,604     (g)      199,031  

Diluted

     176,702         26,604     (g)      203,306  

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of this statement. The pro forma adjustments are explained in Note 6. Income Statement Pro Forma Adjustments, beginning on page 9.

 

-4-


Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2018

(In millions, except shares in thousands)

 

     Centene      Fidelis
Care
     Pro Forma
Adjustments
(Note 7)
            Pro Forma
Combined
 

ASSETS

              

Current assets:

              

Cash and cash equivalents

   $ 5,668      $ 2,824      $ (523      (a),(e)      $ 7,969  

Premium and trade receivables

     3,648        221        —             3,869  

Short-term investments

     507        776        (115      (a)        1,168  

Other current assets

     1,153        231        92        (f)        1,476  
  

 

 

    

 

 

    

 

 

       

 

 

 

Total current assets

     10,976        4,052        (546         14,482  

Long-term investments

     5,535        —          —             5,535  

Restricted deposits

     140        492        —             632  

Property, software and equipment, net

     1,250        207        (139      (a)        1,318  

Goodwill

     5,295        16        1,392        (b)        6,703  

Intangible assets, net

     1,519        —          1,000        (c)        2,519  

Other long-term assets

     455        —          —             455  
  

 

 

    

 

 

    

 

 

       

 

 

 

Total assets

   $ 25,170      $ 4,767      $ 1,707         $ 31,644  
  

 

 

    

 

 

    

 

 

       

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, STOCKHOLDERS’ EQUITY AND NET ASSETS

 

Current liabilities:

              

Medical claims liability

   $ 4,771      $ 1,353      $ —           $ 6,124  

Accounts payable and accrued expenses

     4,962        1,003        443        (a),(c),(f)        6,408  

Return of premium payable

     515        —          —             515  

Unearned revenue

     638        114        —             752  

Current portion of long-term debt

     4        14        (14      (a)        4  
  

 

 

    

 

 

    

 

 

       

 

 

 

Total current liabilities

     10,890        2,484        429           13,803  

Long-term debt

     5,172        68        1,033        (a),(d),(e)        6,273  

Other long-term liabilities

     1,520        —          —             1,520  
  

 

 

    

 

 

    

 

 

       

 

 

 

Total liabilities

     17,582        2,552        1,462           21,596  

Commitments and contingencies

              

Redeemable noncontrolling interests

     8        —          —             8  

Stockholders’ equity:

              

Preferred stock

     —          —          —             —    

Common stock (1)

     —          —          —             —    

Additional paid-in capital

     4,592        —          2,778        (e)        7,370  

Accumulated other comprehensive (loss)

     (54      —          —             (54

Retained earnings

     3,104        —          (318      (f)        2,786  

Treasury stock, at cost

     (139      —          —             (139
  

 

 

    

 

 

    

 

 

       

 

 

 

Total stockholders’ equity attributable to common stockholders

     7,503        —          2,460           9,963  

Noncontrolling interest

     77        —          —             77  
  

 

 

    

 

 

    

 

 

       

 

 

 

Total stockholders’ equity

     7,580        —          2,460           10,040  
  

 

 

    

 

 

    

 

 

       

 

 

 

Net assets

      $ 2,215      $ (2,215      (g)     
  

 

 

    

 

 

    

 

 

       

 

 

 

Total liabilities, redeemable noncontrolling interests, stockholders’ equity and net assets

   $ 25,170      $ 4,767      $ 1,707         $ 31,644  
  

 

 

    

 

 

    

 

 

       

 

 

 

 

(1) On a historical basis, share information of the Company is as follows: 400,000 shares authorized; 180,643 shares issued and outstanding. On a pro forma combined basis, share information is as follows: 400,000 shares authorized; 207,247 shares issued and outstanding.

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of this statement. The pro forma adjustments are explained in Note 7. Balance Sheet Pro Forma Adjustments, beginning on page 10.

 

-5-


NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

(UNAUDITED)

1. Description of Transaction

Effective on July 1, 2018, pursuant to the Asset Purchase Agreement, between the Company and Fidelis Care, dated as of September 12, 2017, Centene acquired substantially all of the assets and assumed certain liabilities of Fidelis Care for $3.75 billion in cash, reduced by a $375.0 million escrow which will be used to satisfy any post-closing indemnification claims, subject to a working capital adjustment (the “Fidelis Acquisition”).

2. Basis of Presentation

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting and was based on the historical financial statements of the Company and Fidelis Care. The acquisition method of accounting is based on ASC 805 and uses the fair value concepts defined in ASC 820, Fair Value Measurements.

ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. In addition, ASC 805 requires that the consideration transferred be measured at the date the Fidelis Acquisition is completed at the then-current market price.

ASC 820 defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, the Company may be required to record the fair value of assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under the acquisition method of accounting, the assets acquired and liabilities assumed will be recorded, as of completion of the Fidelis Acquisition, primarily at their respective fair values and added to those of the Company. Financial statements and reported results of operations of the Company issued after completion of the Fidelis Acquisition will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of Fidelis Care.

Under ASC 805, acquisition-related transaction costs (e.g., advisory, legal, accounting, valuation and other professional fees) are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Total acquisition-related transaction costs expected to be incurred by the Company are estimated to be approximately $410 million, of which $15 million had been incurred as of March 31, 2018. Acquisition-related transaction costs expected to be incurred by the Company include fees related to a bridge financing commitment agreement and other advisory fees associated with the transaction as well as certain anticipated undertakings with the New York State Department of Health. Those costs are reflected in the unaudited pro forma condensed combined balance sheet as an increase to accrued expenses and other current liabilities, with the related tax benefits reflected as an increase in other current assets and the after tax impact presented as a decrease to retained earnings.

The unaudited pro forma condensed combined financial statements do not reflect the projected realization of any anticipated cost savings following completion of the Fidelis Acquisition. These potential cost savings opportunities are expected to arise from network and medical management savings, as well as administrative cost savings. The unaudited pro forma condensed combined financial statements do not reflect projected pretax restructuring and integration charges associated with the projected cost savings.

 

-6-


3. Accounting Policies

The Company is in the process of reviewing Fidelis Care’s accounting policies to determine if differences in accounting policies require restatement or reclassification of results of operations or reclassification of assets or liabilities to conform to the Company’s accounting policies and classifications. As a result of that review, the Company may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the combined financial statements. At this time, the Company is not aware of any differences that would have a material impact on the combined financial statements. The unaudited pro forma condensed combined financial statements assume there are no material differences in accounting policies.

4. Consideration Transferred

The following is a summary of consideration transferred to effect the acquisition of Fidelis Care:

 

     Estimated Fair Value  

Consideration Transferred:

  

Cash

   $ 3,750  

Centene Common Stock

     —    
  

 

 

 

Total Consideration Transferred

   $ 3,750  
  

 

 

 

5. Estimate of Assets Acquired and Liabilities Assumed

The following is a preliminary estimate of the assets acquired and the liabilities assumed by the Company in the Fidelis Acquisition, reconciled to the total consideration transferred:

 

     As of March 31, 2018  

Assets Acquired and Liabilities Assumed:

  

Net book value of net assets acquired

   $ 1,358  

Less: historical goodwill

     (16
  

 

 

 

Adjusted book value of net assets acquired

   $ 1,342  

Goodwill (a)

     1,408  

Identified intangible assets (b)

     1,000  

Adjustment to Property and equipment (c)

     —    
  

 

 

 

Consideration transferred

   $ 3,750  
  

 

 

 

 

(a) Goodwill is calculated as the difference between the acquisition date fair value of the total consideration transferred and the aggregate values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized.

 

(b) As of completion of the Fidelis Acquisition, identifiable intangible assets are required to be measured at fair value, and these acquired assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of these unaudited pro forma condensed combined financial statements and consistent with the ASC 820 requirements for fair value measurements, it is assumed that all assets will be used, and that all assets will be used in a manner that represents the highest and best use of those assets, but it is not assumed that any market participant synergies will be achieved.

 

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The fair value of identifiable intangible assets is determined primarily using variations of the “income approach,” which is based on the present value of the future after-tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, are also considered in estimating the fair value. Under the Hart-Scott-Rodino Antitrust Improvements Act and other relevant laws and regulations, there were significant limitations on the Company’s ability to obtain specific information about the Fidelis Care intangible assets prior to completion of the Fidelis Acquisition. Due to the recent completion of the Fidelis Acquisition, the Company has not yet reviewed all such relevant information.

At this time, the Company has not yet sufficiently reviewed relevant information as to the amount, timing and risk of cash flows of all of Fidelis Care’s identifiable intangible assets to determine their fair value. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including revenue and profitability); the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset. However, for purposes of these unaudited pro forma condensed combined financial statements and using publicly available information, such as historical revenues, Fidelis Care’s cost structure, industry information for comparable intangible assets and certain other high-level assumptions, the fair value of Fidelis Care’s identifiable intangible assets and their weighted-average useful lives have been estimated as follows:

 

     Estimated
Fair Value
     Estimated
Useful Life
(Years)
 

State and Federal Contracts

   $ 800     

Trademarks / trade names

     120     

Provider networks

     80     
  

 

 

    

Total

   $ 1,000        13  
  

 

 

    

These preliminary estimates of fair value and weighted-average useful life will likely be different from the final acquisition accounting, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. Once the Company has sufficiently reviewed information about Fidelis Care’s intangible assets, additional insight will be gained that could impact (i) the estimated total value assigned to intangible assets, (ii) the estimated allocation of value between finite-lived and indefinite-lived intangible assets and/or (iii) the estimated useful lives of intangible assets. The estimated intangible asset values and their useful lives could be impacted by a variety of factors that may become known to the Company only upon sufficient review of additional information and/or by changes in such factors. These factors include, but are not limited to, changes in the regulatory, legislative, legal, technological and competitive environments. Increased knowledge about these and/or other elements could result in a change to the estimated fair value of the identifiable Fidelis Care intangible assets and/or to the estimated weighted-average useful lives from what the Company has assumed in these unaudited pro forma condensed combined financial statements. The combined effect of any such changes could then also result in a significant increase or decrease to the Company’s estimate of associated amortization expense.

 

(c) As of completion of the Fidelis Acquisition, property and equipment is required to be measured at fair value, unless those assets are classified as held-for-sale on the acquisition date. The acquired assets can include assets that are not intended to be used or sold, or that are intended to be used in a manner other than their highest and best use. The Company does not have sufficient information at this time as to the specific nature, age, condition or location of Fidelis Care’s property and equipment, and the Company does not know the appropriate valuation premise, in-use or in-exchange, as the valuation premise requires a certain level of knowledge about the assets being evaluated as well as a profile of the associated market participants. All of these elements can cause differences between fair value and net book value. Accordingly, for the purposes of these unaudited pro forma condensed combined financial statements, the Company has assumed that the current Fidelis Care book values represent the best estimate of fair value. This estimate is preliminary and subject to change and could vary materially from the actual value.

 

-8-


6. Income Statement Pro Forma Adjustments

This note should be read in conjunction with Note 1. Description of Transaction; Note 2. Basis of Presentation; Note 4. Consideration Transferred; and Note 5. Estimate of Assets Acquired and Liabilities Assumed. Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:

 

(a) Prior to the Fidelis Acquisition, Fidelis Care was a not-for-profit entity, not subject to premium tax expense. The Company’s estimates of premium revenue, premium tax revenue and premium tax expense are as follows:

 

     Three Months Ended
March 31, 2018
     Year Ended
December 31, 2017
 

Premium revenue

   $ 6      $ 18  

Premium tax revenue

     39        157  

Premium tax expense

     45        175  

 

(b) The Company estimates certain Fidelis Care revenues will be subject to the Health Insurer fee following the first year of the closing of the Fidelis Acquisition. The Company’s estimates of health insurer fee revenue and health insurer fee expense are as follows:

 

     Three Months Ended
March 31, 2018
 

Health insurer fee revenue

     53  

Health insurer fee expense

     41  

 

(c) To record intangible amortization expense, as follows:

 

     Three Months Ended
March 31, 2018
     Year Ended
December 31, 2017
 

Estimated intangible asset amortization expense (*)

   $ 19      $ 77  

(*) Assumes an estimated $1.0 billion of finite-lived intangibles and a weighted average amortization period of 13 years (Refer to Note 5. Estimate of Assets Acquired and Liabilities Assumed).

 

(d) The Company estimates reduced investment income to reflect lower investment balances associated with the acquired assets. The estimated reduction is as follows:

 

     Three Months Ended
March 31, 2018
     Year Ended
December 31, 2017
 

Estimated investment income reduction

   $ —        $ (20

 

(e) The Company estimates the following adjustments to interest expense associated with debt incurred to finance the Fidelis Acquisition:

 

    Additional interest expense of approximately $24 million in the three months ended March 31, 2018 and $97 million in the year ended December 31, 2017, based on $1.8 billion of long term fixed-rate indebtedness the Company incurred to finance a portion of the cash consideration payable in connection with the Fidelis Acquisition and to pay related fees and expenses. The calculation of interest expense on the long-term indebtedness is based on an annual interest rate of 5.375%.

 

    Additional interest expense of approximately $1 million for the three months ended March 31, 2018 and $3 million for the year ended December 31, 2017, related to the amortization of debt issuance costs associated with the $1.8 billion of long-term indebtedness the Company incurred to finance a portion of the cash consideration payable in connection with the Fidelis Acquisition and to pay related fees and expenses. Issuance costs related to such long-term indebtedness will be amortized over a term of eight years.

 

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(f) The Company assumed blended tax rates of 38% and 37% for 2018 and 2017, respectively, when estimating the tax impact of the acquisition, representing the federal and state tax rates. The effective tax rate of the combined company could be significantly different depending upon post-acquisition activities of the combined company.

 

(g) Basic and diluted shares outstanding have been adjusted to reflect the shares issued by Centene in connection with the acquisition as follows: an increase of 26,604 thousand for the three months ended March 31, 2018 and for the year ended December 31, 2017, related to equity issued to finance the Fidelis Acquisition, based on approximately $2.86 billion issued at the public offering price of $107.50 per share.

7. Balance Sheet Pro Forma Adjustments

This note should be read in conjunction with Note 1. Description of Transaction; Note 2. Basis of Presentation; Note 4. Consideration Transferred; and Note 5. Estimate of Assets Acquired and Liabilities Assumed. Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:

 

(a) To eliminate assets not acquired and liabilities not assumed, as follows:

 

Assets

  

Cash and cash equivalents

   $ (652

Short term investments

     (115

Property, software and equipment

     (139

Liabilities

  

Accounts payable and accrued expenses

     (1

Short-term debt

     (14

Long-term debt

     (68
  

 

 

 

Total, net

   $ (823
  

 

 

 

 

(b) To adjust goodwill to an estimate of acquisition-date goodwill, as follows:

 

Eliminate Fidelis Care’s historical goodwill

   $ (16

Estimated transaction goodwill

     1,408  
  

 

 

 

Total

   $ 1,392  
  

 

 

 

 

(c) To record intangible assets to an estimate of fair value of $1.0 billion and to record an employee benefit liability at an estimated fair value of $34 million.

 

(d) The Company incurred $1.8 billion of long-term indebtedness to finance a portion of the cash consideration payable in connection with the Fidelis Acquisition and to pay related fees and expenses and incurred debt issuance costs of approximately $24 million.

 

(e) The Company issued the $2.86 billion of equity to finance a portion of the cash consideration payable in connection with the Fidelis Acquisition, and excess funds are used as follows: to pay down the remaining $675 million revolving credit facility balance, to pay related fees and expenses, and incur equity issuance costs of $82 million. The Company expects to have remaining excess cash on hand of $129 million.

 

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(f) To record estimated acquisition-related transaction costs:

 

    Total acquisition-related transaction costs estimated to be incurred by the Company are approximately $410 million and are recorded as an increase to accrued liabilities. These acquisition-related transaction costs are not included in the pro forma condensed combined statements of operations.

 

    Estimated current tax asset for acquisition-related transaction costs of $92 million.

 

    Retained earnings adjustment for the after-tax transaction costs incurred of $318 million.

 

(g) To eliminate Fidelis Care’s historical net assets of $2.2 billion.

 

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