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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
x EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File Number: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1420563
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
13900 Riverport Dr., Maryland Heights, Missouri 63043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 770-1666
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation of S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by
non-affiliates as of January 31, 2002, was $3,556,529,585 based on 77,670,443
such shares held on such date by non-affiliates and the last sale price for the
Common Stock on such date of $45.790 as reported on the Nasdaq National Market.
Solely for purposes of this computation, the Registrant has assumed that all
directors and executive officers of the Registrant are affiliates of the
Registrant.
Common stock outstanding as of January 31, 2002: 78,091,078 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 2002 Annual Meeting of Stockholders, which is
expected to be filed with the Securities and Exchange Commission not later than
120 days after the registrant's fiscal year ended December 31, 2001.
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Information that we have included or incorporated by reference in this
Annual Report on Form 10-K, and information that may be contained in our other
filings with the Securities and Exchange Commission (the "SEC") and our press
releases or other public statements, contains or may contain forward looking
statements. Please refer to a discussion of our forward looking statements and
associated risks in "Item 1 --Forward Looking Statements and Associated Risks"
in this Annual Report on Form 10-K.
PART I
THE COMPANY
Item 1 - Business
Industry Overview
Prescription drug costs are the fastest growing component of health
care costs in the United States. The U.S. Centers for Medicare & Medicaid
("CMS") estimates that prescription drugs accounted for approximately 9% of U.S.
health care expenditures in 2000, and are expected to increase to about 14% by
2010. U.S. prescription drug sales for 2000 were approximately $122 billion, and
CMS projects continued sales increases at an average annual growth rate of
approximately 12% through 2010, compared to an average annual growth rate of
approximately 7% for total health care costs during this period. Based upon
information in our 2000 Annual Drug Trend report, described below under
"--Clinical Support", we estimate that average drug spending will grow at an
annual rate of 13% from 2001 through 2005, and that per member drug spend in
2005 will be approximately $815 compared to $450 in 2000. Factors underlying
this trend include:
o increases in research and development expenditures by drug
manufacturers, resulting in many new drug introductions
o a shorter U.S. Food and Drug Administration approval cycle for
new pharmaceuticals
o high prices for new "blockbuster" drugs
o an aging population
o increased demand for prescription drugs due to increased disease
awareness by patients, effective direct-to-consumer advertising
by drug manufacturers and a growing reliance on medication in
lieu of lifestyle changes
This trend creates a significant challenge for HMOs, health insurers,
employers and unions that provide a drug benefit as part of the health plans
they offer to their members. Many of these health benefit providers, or
"payers", engage the services of us or other pharmacy benefit management ("PBM")
companies to help them provide a cost-effective drug benefit as part of their
health plan and to better understand the impact of prescription drug utilization
on their overall health care expenditures.
In general, PBMs coordinate the distribution of outpatient
pharmaceuticals through a combination of benefit management services, including
retail drug card programs, mail pharmacy services and formulary management
programs. PBMs emerged during the late 1980s by combining traditional pharmacy
claims processing and mail pharmacy services to create an integrated product
offering to manage the prescription drug benefit for payers. During the early
1990s, numerous PBMs were formed, and today there are an estimated 60 PBMs
serving a population of approximately 180 million members and processing
approximately 2.5 billion prescriptions annually. The three largest PBMs account
for approximately 50% of prescription volume. The services offered by the more
sophisticated PBMs have broadened to include disease management programs,
compliance programs, outcomes research, drug therapy management programs and
sophisticated data analysis.
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Company Overview
We are the third largest PBM in North America. We are independent from
pharmaceutical manufacturer ownership, and believe our independence is important
as it allows us to make unbiased formulary recommendations to our clients,
balancing both clinical efficacy and cost. We provide a full range of pharmacy
benefit management services, including retail drug card programs, mail pharmacy
services, drug formulary management programs and other clinical management
programs for approximately 19,000 client groups that include HMOs, health
insurers, third-party administrators, employers, union-sponsored benefit plans
and government health programs. As of January 1, 2002, some of our largest
clients include AARP (through a contract with UnitedHealth Group), Aetna U.S.
Healthcare, Blue Cross Blue Shield of Massachusetts, Blue Shield of California,
Mutual of Omaha and the State of Georgia.
Our PBM services include:
o network pharmacy management
o mail pharmacy services
o benefit design consultation o drug utilization review
o formulary management programs
o disease management
o medical and drug data analysis services
o compliance and therapy management programs for our clients
o market research programs for pharmaceutical manufacturers
o medical information management services
o informed decision counseling services through our Express
Health LineSM division
Our non-PBM services include:
o distribution of pharmaceuticals requiring special handling
or packaging through our wholly owned subsidiary Express
Scripts Specialty Distribution Services
o infusion therapy services through our wholly owned
subsidiary, Express Scripts Infusion Services. In June 2001,
substantially all of the assets of Express Scripts Infusion
Services were sold to Option Care, Inc. and we discontinued
our acute home infusion business.
Our revenues are generated primarily from the delivery of prescription
drugs through our contracted network of retail pharmacies, mail pharmacy
services and infusion therapy services. In 2001, 2000 and 1999, revenues from
the delivery of prescription drugs to our members represented 95.8%, 94.2% and
93.5% of our total revenues, respectively. Revenues from services, such as the
administration of some clients' retail pharmacy networks, market research
programs, the sale of medical information management services, the sale of
informed decision counseling services and our Specialty Distribution Services
comprised the remainder of our revenues.
Prescription drugs are dispensed to members of the health plans we
serve primarily through networks of retail pharmacies that are under
non-exclusive contract with us and through six mail pharmacy service centers
that we operate out of leased facilities. More than 56,000 retail pharmacies,
representing more than 99% of all United States retail pharmacies, participate
in one or more of our networks. In 2001, we processed approximately 294.0
million network pharmacy claims and 20.5 million mail pharmacy prescriptions,
with an estimated total drug spending of $16 billion. We also processed 1.9
million specialty distribution prescriptions with an estimated total drug
spending of approximately $0.8 million.
We were incorporated in Missouri in September 1986, and were
reincorporated in Delaware in March 1992. Our principal executive offices are
located at 13900 Riverport Drive, Maryland Heights, Missouri 63043. Our
telephone number is (314) 770-1666.
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Products and Services
Pharmacy Benefit Management Services
Overview. Our PBM services involve the management of outpatient
prescription drug usage to foster high quality, cost-effective pharmaceutical
care through the application of managed care principles and advanced information
technologies. We offer our PBM services to our clients in the United States and
Canada. Our PBM services include:
o retail network pharmacy administration
o mail pharmacy services
o benefit plan design consultation
o formulary administration and compliance
o electronic point-of-sale claims processing
o drug utilization review
o therapy management services such as prior authorization,
therapy guidelines, step therapy protocols and formulary
management interventions
o sophisticated management information reporting and analytic
services
o outcomes assessments
o informed decision counseling
o drug information through our DrugDigest.org and
express-scripts.com websites
During 2001, 99.2% of our revenues were derived from PBM services,
compared to 98.7% and 98.5% during 2000 and 1999, respectively. The number of
retail pharmacy network claims processed and mail pharmacy claims processed
increased to 294.0 million and 20.5 million claims, respectively, in 2001, from
73.2 million and 3.9 million claims, respectively, in 1997. During 2000 and
1999, excluding United HealthCare ("UHC"), we processed 241.8 million and 211.3
million retail pharmacy network claims, respectively, and 15.2 million and 10.6
million mail pharmacy claims, respectively. Our contract with UHC expired on May
31, 2000 and we transitioned the UHC membership to another provider throughout
2000.
Retail Pharmacy Network Administration. We contract with retail
pharmacies to provide prescription drugs to members of the pharmacy benefit
plans managed by us. In the United States, these pharmacies typically discount
the price at which they will provide drugs to members in return for designation
as an Express Scripts network pharmacy. We manage seven nationwide networks in
the United States that are responsive to client preferences related to cost
containment and convenience of access for members. We also manage networks of
pharmacies that are under direct contract with our managed care clients. We
manage one nationwide network in Canada.
All retail pharmacies in our pharmacy networks communicate with us
on-line and in real time to process prescription drug claims. When a member of a
plan presents his or her identification card at a network pharmacy, the network
pharmacist sends the specified claim data in an industry-standard format through
our systems, which process the claim and respond to the pharmacy, typically
within one or two seconds. The electronic processing of the claim involves:
o confirming the member's eligibility for benefits under the
applicable health benefit plan and the conditions to or
limitations of coverage, such as the amount of co-payments
or deductibles the member must pay
o performing a concurrent drug utilization review and alerting
the pharmacist to possible drug interactions and reactions
or other indications of inappropriate prescription drug
usage
o updating the member's prescription drug claim record
o if the claim is accepted, confirming to the pharmacy that it
will receive payment for the drug dispensed
Mail Pharmacy. We operate five mail pharmacies, located in Maryland
Heights, Missouri; Tempe, Arizona; Albuquerque, New Mexico; Bensalem,
Pennsylvania; and Troy, New York. In addition, we operate the former Retired
Persons Service, Inc. ("RPS") pharmacy, which serves AARP members. These
pharmacies provide members with convenient access to maintenance medications and
enable our clients and us to manage drug costs through operating
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efficiencies and economies of scale. In addition, through our mail service
pharmacies we are directly involved with the prescriber and member, and are
generally able to achieve a higher level of generic substitutions and
therapeutic interventions than can be achieved through the retail pharmacy
networks.
Benefit Plan Design and Consultation. We offer consultation and
financial modeling to assist our clients in selecting benefit plan designs that
meet their needs for member satisfaction and cost control. The most common
benefit design options we offer to our clients are:
o financial incentives and reimbursement limitations on the
drugs covered by the plan, including drug formularies, flat
dollar or percentage of prescription cost co-payments,
deductibles or annual benefit maximum
o generic drug substitution incentives
o incentives or requirements to use only network pharmacies or
to order certain drugs only by mail
o reimbursement limitations on the amount of a drug that can
be obtained in a specific period
The client's benefit design is entered into our electronic claims processing
system, which applies the plan design parameters as claims are submitted and
enables our clients and us to monitor the financial performance of the plan.
Formulary Development, Compliance and Therapy Management. Formularies
are lists of drugs for which coverage is provided under the applicable plan. We
have over 10 years of formulary development expertise and an extensive clinical
pharmacy department.
Our foremost consideration in the formulary development process is the
clinical appropriateness of the drug. In developing formularies, we first
perform a rigorous therapeutic assessment of the drug's clinical effectiveness.
After the clinical recommendation is made, it is evaluated on an economic basis.
No drug is added to the formulary until our National Pharmacy & Therapeutics
Committee, a panel composed of 18 independent physicians, our Chief Medical
Officer and 6 of our pharmacists, approves it. This panel does not consider any
information regarding the discount or formulary fee arrangement that might be
negotiated with the manufacturer in making its clinical recommendation. This
ensures that the clinical recommendation is not affected by the purchasing
arrangement.
We administer a number of different formularies for our clients that
identify preferred drugs whose use is encouraged or required through various
benefit design features. Historically, many clients have selected a plan design
that includes an open formulary in which all drugs are covered by the plan.
Increasingly, clients are selecting either restricted formularies (in which
various financial or other incentives exist for the selection of preferred drugs
over their non-preferred counterparts), or closed formularies (in which benefits
are available only for drugs listed on the formulary). Currently, about 41% of
all claims fall into the restricted or closed categories compared to 38% for
2000 and 37% for 1999. Formulary preferences can be encouraged:
o by restricting the formulary through plan design features,
such as tiered co-payments, which require the member to pay
a higher amount for a non-preferred drug
o through prescriber education programs, in which we or the
managed care client actively seek to educate the prescribers
about the formulary preferences
o through our drug choice management program, which actively
promotes therapeutic and generic interchanges to clinically
appropriate cost-effective products to reduce drug costs
We also provide formulary compliance services to our clients. For
example, if the doctor has not prescribed the preferred drug on a client
formulary, we notify the pharmacist through our claims processing system. The
pharmacist or we can then contact the doctor to attempt to obtain the doctor's
consent to switch the prescription to the preferred product. The doctor has the
final decision-making authority in prescribing the medication. The doctor will
consider the recommended substitution in light of the patient's medical history
and approve or deny the substitution.
We also offer innovative clinical intervention programs to assist and
manage patient quality of life, client drug trend, and physician
communication/education. These programs encompass comprehensive point of service
and retrospective drug utilization review, proactive patient prescription
compliance education, physician profiling, academic detailing, prior
authorization, disease care management, and clinical guideline dissemination to
physicians.
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Information Reporting and Analysis and Disease Management Programs.
Through the use of sophisticated information and reporting systems we are better
able to manage the prescription drug benefit. We can analyze prescription drug
data to identify cost trends and budget for expected drug costs, assess the
financial impact of plan design changes and assist clients in identifying costly
utilization patterns through an on-line prescription drug decision support tool
called ProAct(SM).
We offer disease management and education programs to assist health
benefit plans and our members in managing the total health care costs associated
with certain conditions such as asthma, diabetes and cardiovascular disease.
These programs are based on the premise that patient and physician behavior can
positively influence medical outcomes and reduce overall medical costs. We
identify patients who may benefit from these programs through claims data
analysis or self-enrollment.
Express Scripts offers a tiered approach to member education and
wellness starting with our Internet site, followed by mailed educational
interventions, followed by our intensive one-on-one registered nurse counseling.
We support our enrolled patients by offering access to clinical professionals 24
hours a day, 7 days a week. The programs include providing patient profiles
directly to their physicians, as well as outcome measurements with regard to
clinical, personal and economic impacts of the programs.
Electronic Claims Processing System. Our electronic claims processing
system enables us to implement sophisticated intervention programs to assist in
managing prescription drug utilization. The system can alert the pharmacist to
generic substitution and therapeutic intervention opportunities and formulary
compliance issues, or administer prior authorization and step-therapy protocol
programs at the time a claim is submitted for processing. Our claims processing
system also creates a database of drug utilization information that can be
accessed both at the time the prescription is dispensed and also on a
retrospective basis to analyze utilization trends and prescribing patterns for
more intensive management of the drug benefit.
Consumer Health and Medical Information. In the summer of 1999, we
launched an Internet site, DrugDigest.org to provide a comprehensive source of
non-commercial, fact-based drug information. DrugDigest currently has a
comprehensive portfolio of consumer-friendly drug information. This portfolio
includes information about adverse drug interactions, drug side effects, drug
administration tips, and other information useful in helping our members and
their health care professionals make informed medication decisions. In the
coming year, DrugDigest will expand its coverage of prescription,
over-the-counter, and herbal medications. The information and features available
in our web-based ExpressChoice will allow enrollees to examine a more
personalized version of DrugDigest that will include information about their
enrollment benefits and drug costs, and will generally allow members and clients
to more effectively manage their pharmacy benefit. Finally, the DrugDigest team
is expanding its activities into disease management. By tightly coupling
pharmaceutical and medical information, members will experience an even deeper
understanding of how their medications impact their overall medical care.
Non-PBM Services
In addition to PBM services, we also provide non-PBM services including
specialty distribution services and until June 2001, outpatient infusion therapy
to our clients. In 2001, we filled 1.9 million specialty distribution
prescriptions, compared to 1.1 million in 2000 and 0.6 million in 1999. During
2001, 0.8% of our revenues were derived from non-PBM services, compared to 1.3%
and 1.5% during 2000 and 1999, respectively. The decline in 2001 is mainly due
to the discontinuance of acute home infusion services, see discussion below
under --"Express Scripts Infusion Services."
Express Scripts Specialty Distribution Services. We provide specialty
distribution services, consisting of the distribution of, and creation of a
database of information for, products requiring special handling or packaging,
products targeted to a specific physician or patient population, and products
distributed to low-income patients. Our services may include eligibility,
fulfillment, inventory, insurance verification/authorization and payment.
Specialty distribution revenues are mostly derived from administrative fees
received from drug manufacturers. We also administer new sample card programs
for certain manufacturers where the ingredient costs of pharmaceuticals
dispensed from retail pharmacies are included in revenues, as well as costs of
revenues. SDS services are provided in our Maryland Heights, Missouri facility.
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Express Scripts Infusion Services. On June 12, 2001, we announced that
we entered into an agreement with Option Care, Inc. to sell substantially all of
the assets of our Express Scripts Infusion Services business, and we
discontinued acute home infusion services activities.
Segment Information. Information regarding our segments appears in Note
13 of the notes to our consolidated financial statements, which is incorporated
by reference herein.
Suppliers
We maintain an extensive inventory in our mail pharmacies of brand name
and generic pharmaceuticals. If a drug is not in our inventory, we can generally
obtain it from a supplier within one or two business days. We purchase our
pharmaceuticals either directly from manufacturers or through wholesalers.
During 2001, approximately 50.5% of our pharmaceutical purchases were through
one wholesaler, most of which were brand name pharmaceuticals. Generic
pharmaceuticals are generally purchased directly from manufacturers. We believe
that alternative sources of supply for most generic and brand name
pharmaceuticals are readily available.
Clients
We are a major provider of PBM services to the managed care industry,
including several large HMOs, government plans and large employers. Some of our
largest managed care clients are Aetna U.S. Healthcare, Inc., Blue Cross Blue
Shield Massachusetts and Blue Shield of California. Some of our largest employer
groups include the State of Georgia and the State of New York Empire Plan
Prescription Drug Program (through a subcontracting relationship with CIGNA
HealthCare). In 2001, we were awarded a contract by UnitedHealth Group to
provide pharmacy services to AARP. We also market our PBM services through
preferred provider organizations, group purchasing organizations, health
insurers, third party administrators of health plans and union-sponsored benefit
plans.
In connection with our 1999 acquisition of Diversified Pharmaceutical
Services ("DPS"), we acquired the contract to serve approximately 9.5 million
United Healthcare ("UHC") members. The contract with UHC expired on May 31,
2000, and UHC members were migrated to their new provider by the end of 2000.
Medicare Prescription Drug Coverage
The federal Medicare program provides a comprehensive medical benefit
program for individuals age 65 and over. Today Medicare covers only a few
outpatient prescription drugs. Key policy makers of both parties have proposed
changes to the Medicare program that would result in at least partial coverage
for most outpatient prescription drugs. The Medicare population is large, and
prescription drug utilization among seniors is substantially higher on average
than that of other age groups.
Many of the Medicare prescription drug proposals lack important details
regarding the administration of the plan, and there is no consensus on the scope
of the program. We believe that a Medicare prescription drug benefit could
provide us with substantial new business opportunities, but at the same time any
such program could adversely affect other aspects of our business. For example,
some of our clients sell medical policies to seniors that provide a prescription
drug benefit that we administer. Other clients provide a prescription drug
benefit to their retirees. Depending on the plan that is ultimately adopted, a
Medicare prescription drug benefit could make such policies or plans less
valuable to seniors, adversely affecting that segment of our business. While we
believe that there could be opportunities for new business under a Medicare plan
that would more than offset any adverse effects, we can give no assurance that
this would be the case.
Acquisitions and Joint Venture
On February 25 2002, we purchased substantially all of the assets
utilized in the operation of Phoenix Marketing Group (Holdings), Inc.
("Phoenix"), a wholly-owned subsidiary of Access Worldwide Communications, Inc.
for $33 million in cash plus the assumption of certain liabilities. Phoenix is
one of the largest prescription drug sample fulfillment companies, shipping
approximately 95 million sample units in 2001. The transaction will be accounted
for under the provisions of Financial Accounting Standards Board Statements
("FAS")
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141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets" and
was funded from our operating cash flow.
On February 6, 2002, we announced that we had signed a definitive
agreement to acquire the businesses comprising National Prescription
Administrators, Inc. ("NPA") for a net purchase price of $515 million. NPA is a
privately held full-service pharmacy benefit manager, and will strengthen our
presence in two key market segments, union and government sponsored plans. The
transaction is expected to close near the end of the first quarter of 2002,
subject to customary closing conditions and expiration of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act. The transaction will be
accounted for under the provisions of FAS 141 and FAS 142. The purchase price
will be funded with cash on hand, up to $100 million of borrowings on our
revolving credit facility, a $350 million new tack-on Term B loan and the
issuance of approximately 552,000 shares of our common stock.. We will file an
Internal Revenue Code ss.338(h)(10) election, making amortization expense of
intangible assets, including goodwill, tax deductible.
On February 22, 2001, we entered into an agreement with Advance
Paradigm, Inc. ("AdvancePCS") and Merck-Medco Managed Care, L.L.C.
("Merck-Medco") to form RxHub LLC ("RxHub"). RxHub is intended to develop an
electronic exchange enabling physicians who use electronic prescribing
technology to link to pharmacies, PBMs and health plans. RxHub is designed to
operate as a utility for the conduit of information among all parties engaging
in electronic prescribing. We own one-third of the equity of RxHub (as do each
of the other two founders), and have committed to invest up to $20 million over
the next five years with approximately $5.7 million spent in 2001. We record our
investment in RxHub under the equity method of accounting, which requires our
percentage interest in RxHub's results to be recorded in our Consolidated
Statement of Operations. RxHub will be operated to cover its expected operating
costs and to return the cost of capital to the founders.
On March 1, 2001, our Canadian subsidiary, ESI Canada, acquired all of
the outstanding shares of Centre d'autorisation et de paiement des services de
sante, a leading Quebec-based PBM, commonly referred to as CAPSS, for
approximately CAN$26.8 million (approximately US$17.5 million). The transaction
was accounted for under the purchase method of accounting and was funded from
our operating cash flow.
On April 1, 1999, we acquired DPS from SmithKline Beecham Corporation
and one of its affiliates for $715 million in cash, which reflects a purchase
price adjustment for closing working capital and transaction costs. The
acquisition positioned us as the third largest PBM in North America in terms of
total members and provided us with one of the largest managed care membership
bases of any PBM. In addition, the acquisition provided us with enhanced
clinical capabilities, systems and technologies.
On April 1, 1998, we acquired the PBM business known as "ValueRx" from
HCA - The HealthCare Corporation (formerly known as Columbia/HCA Healthcare) for
approximately $460 million in cash. Historically, while ValueRx, like us, served
all segments of the PBM market, we primarily focused on managed care and smaller
self-funded plan sponsors, and ValueRx concentrated on health insurance carriers
and large employer and union groups.
Company Operations
General. We operate five mail pharmacies and eight member
service/pharmacy help desk call centers out of leased facilities. In addition,
we operate the former RPS pharmacy, which serves AARP members. Electronic
pharmacy claims processing takes place at our Maryland Heights, Missouri and
Tempe, Arizona facilities, which are maintained, managed and operated by
Electronic Data Systems ("EDS"), or at facilities owned by EDS. At our Canadian
facility, we have sales and marketing, client services, pharmacy help desk,
clinical, provider relations and certain management information systems
capabilities.
Sales and Marketing. In the United States, our sales managers and
directors market and sell PBM services, supported by a team of client-service
representatives, clinical pharmacy managers and benefit analysis consultants.
This team works with clients to improve efficiency and effectiveness of the
pharmacy benefit program. A dedicated sales staff cross-markets Specialty
Distribution Services to our PBM clients. In Canada, marketing and sales efforts
are conducted by our representatives based in Mississauga, Ontario.
Member Services. Although we sell our services to payers, the ultimate
recipient of many of our services are the members of these health plans. We
believe that client satisfaction is dependent upon member satisfaction.
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Members can call us toll-free, 24 hours a day, 7 days a week, to obtain
information about their prescription drug plan from our trained member service
representatives.
Provider Relations. Our Provider Relations group is responsible for
contracting and administering our pharmacy networks. To participate in our
retail pharmacy networks, pharmacies must meet certain qualifications, including
the requirement that all applicable state licensing requirements are being
maintained. Pharmacies can contact our various pharmacy help desks toll-free, 24
hours a day, 7 days a week, for information and assistance in filling
prescriptions for members. In addition, our Provider Relations group audits
pharmacies in the retail pharmacy networks to determine compliance with the
terms of the contract.
Clinical Support. Our Health Management Services division employs
physicians, clinical pharmacists, registered nurses and data analysts who
provide technical support for our PBM services. These staff members assist in
providing clinical pharmacy services such as formulary development and
management, drug information programs, clinical interventions with physicians
and members, development of drug therapy guidelines and the evaluation of drugs
for inclusion in clinically sound therapeutic intervention programs. The
division is also responsible for developing and maintaining our relationships
with pharmaceutical manufacturers. The group contracts for retrospective
discount programs and ancillary programs on behalf of our clients.
The Health Management Services division conducts specific data analyses
to evaluate drug therapies, and analyzes and prepares reports on clinical
pharmacy data for our clients. For example, in June 2001 we released our 2000
Drug Trend Report, marking our fifth consecutive year of publishing such a
report. Based on a large sample of our membership base, the report examines
trends in pharmaceutical utilization and cost, and the factors that underlie
those trends. The division also evaluates pharmacy plan design strategies and
clinical offerings and conducts outcomes research studies to inform client
decision-making.
Information Systems. Our Information Systems department supports our
pharmacy claims processing systems and other management information systems that
are essential to our operations. Uninterrupted point-of-sale electronic retail
pharmacy claims processing is a significant operational requirement for us. All
claims are presently processed through systems, which are maintained, managed
and operated by EDS at our Maryland Heights, Missouri facility and Tempe,
Arizona facility, or at facilities owned by EDS. Disaster recovery services for
all systems are provided through our EDS services agreement. We have substantial
capacity for growth in our claims processing facilities.
Competition
We believe the primary competitive factors in each of our businesses
are price, quality and scope of service. We believe our principal competitive
advantages are our independence from pharmaceutical manufacturer ownership, our
strong managed care and employer group customer base that supports the
development of more sophisticated PBM services, and our commitment to provide
flexible and distinctive service to our clients.
There are other PBMs in the United States, most of which are smaller
than us and offer their services on a local or regional basis. We do, however,
compete with a number of large, national companies, including Merck-Medco, a
subsidiary of Merck & Co., Inc., AdvancePCS and CaremarkRx, Inc., as well as
large health insurers and certain HMOs which have their own PBM capabilities.
Several of these competitors may have greater financial, marketing and
technological resources than us. In addition, a competitor that is owned by a
pharmaceutical manufacturer may have pricing advantages that are unavailable to
us and other independent PBMs. On January 29, 2002, this manufacturer announced
plans to establish its PBM subsidiary as a separate, publicly traded company. We
believe our independence from pharmaceutical manufacturer ownership allows us to
make unbiased formulary recommendations to our clients, balancing clinical
efficacy and cost.
Consolidation has been, and may continue to be, an important factor in
all aspects of the pharmaceutical industry, including the PBM segment. We
believe the size of our membership base provides us with the necessary economies
of scale to compete effectively in a consolidating market.
Some of our PBM services, such as disease management services, compete
with those being offered by pharmaceutical manufacturers, other PBMs, large
national companies, specialized disease management companies and information
service providers. Our non-PBM services compete with a number of large national
companies as well as with local providers.
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Government Regulation
Many aspects of our businesses are regulated by federal and state laws
and regulations. Since sanctions may be imposed for violations of these laws,
compliance is a significant operational requirement. We believe we are in
substantial compliance with all existing legal requirements material to the
operation of our businesses. There are, however, significant uncertainties
involving the application of many of these legal requirements to our business.
In addition, there are numerous proposed health care laws and regulations at the
federal and state levels, many of which could adversely affect our business or
financial position. We are unable to predict what additional federal or state
legislation or regulatory initiatives may be enacted in the future relating to
our business or the health care industry in general, or what effect any such
legislation or regulations might have on us. We cannot provide any assurance
that federal or state governments will not impose additional restrictions or
adopt interpretations of existing laws that could have a material adverse affect
on our results of operations, financial position and/or cash flow from
operations.
Pharmacy Benefit Management Regulation Generally. Certain federal and
state laws and regulations affect or may affect aspects of our PBM business.
Among these are the following:
Anti-Remuneration/Fraud and Abuse Laws. Subject to certain exceptions
and "safe harbors," Federal law prohibits an entity from paying or receiving any
remuneration to induce the referral of individuals covered by private insurance
and federally funded health care programs, including Medicare, Medicaid and
CHAMPUS or the purchase (or the arranging for or recommending of the purchase)
of items or services for which payment may be made under private insurance and
Medicare, Medicaid, CHAMPUS or other federally-funded health care programs.
Several states also have similar laws. State laws vary and have been
infrequently interpreted by courts or regulatory agencies. Sanctions for
violating these federal and state anti-remuneration laws may include
imprisonment, criminal and civil fines, and exclusion from participation in the
Medicare and Medicaid programs.
The federal statute has been interpreted broadly by courts, the Office
of Inspector General ("OIG") within the Department of Health and Human Services,
and administrative bodies. Because of the federal statute's broad scope, federal
regulations establish certain "safe harbors" from liability. Safe harbors exist
for certain properly reported discounts received from vendors, certain
investment interests, certain properly disclosed payments made by vendors to
group purchasing organizations, and certain discount and payment arrangements
between PBMs and HMO risk contractors serving Medicaid and Medicare members. A
practice that does not fall within a safe harbor is not necessarily unlawful,
but may be subject to scrutiny and challenge. In the absence of an applicable
exception or safe harbor, a violation of the statute may occur even if only one
purpose of a payment arrangement is to induce patient referrals or purchases.
Among the practices that have been identified by the OIG as potentially improper
under the statute are certain "product conversion programs" in which benefits
were given by drug manufacturers to pharmacists or physicians for changing a
prescription (or recommending or requesting such a change) from one drug to
another. Such laws have been cited as a partial basis, along with state consumer
protection laws discussed below, for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail
pharmacies in connection with such programs.
To our knowledge, these anti-remuneration laws have not been applied to
prohibit PBMs from receiving amounts from drug manufacturers in connection with
drug purchasing and formulary management programs, to therapeutic intervention
programs conducted by independent PBMs, or to the contractual relationships such
as those we have with certain of our clients. In late 1999, it was reported that
the U.S. Attorney's Office in Philadelphia had issued subpoenas to Merck-Medco
and PCS Health Systems (now AdvancePCS), both PBMs, and Schering-Plough Corp., a
pharmaceutical manufacturer. We have not been served with any such subpoena, nor
are we privy to information concerning the scope of information being requested
by these subpoenas. However, the U.S. Attorney's Office has been quoted to the
effect that one issue being investigated is whether certain practices engaged in
by those PBMs violate certain anti-remuneration statutes.
We believe that we are in substantial compliance with the legal
requirements imposed by such laws and regulations, and we believe that there are
material differences between drug-switching programs that have historically been
challenged under these laws and the programs we offer to our clients. However,
there can be no assurance that we will not be subject to scrutiny or challenge
under such laws or regulations. Any such challenge could have a material adverse
effect on us.
9
ERISA Regulation. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which we have
agreements to provide PBM services. We believe that the conduct of our business
is not generally subject to the fiduciary obligations of ERISA, and our
agreements with our clients support this contention by providing that we are not
the fiduciary of the applicable plan. However, there can be no assurance that
the U.S. Department of Labor, which is the agency that enforces ERISA, would not
assert that the fiduciary obligations imposed by the statute apply to certain
aspects of our operations.
In addition to its fiduciary provisions, ERISA imposes civil and
criminal liability on service providers to health plans and certain other
persons if certain forms of illegal remuneration are made or received. These
provisions of ERISA are similar, but not identical, to the health care
anti-remuneration statutes discussed in the immediately preceding section; in
particular, ERISA lacks the statutory and regulatory "safe harbor" exceptions
incorporated into the health care statute. Like the health care
anti-remuneration laws, the corresponding provisions of ERISA are broadly
written and their application to particular cases is often uncertain. We have
implemented policies, which include disclosure to health plan sponsors with
respect to any commissions paid by us that might fall within the scope of such
provisions, and accordingly believe we are in substantial compliance with these
provisions of ERISA. However, we can provide no assurance that our policies in
this regard would be found by the appropriate enforcement authorities to meet
the requirements of the statute.
In December 2001, a lawsuit was filed against us in the Federal
District Court for Arizona alleging that certain of our business practices
violated the provisions of ERISA. The suit purports to be a class action on
behalf of a class of our clients consisting of self-funded health plans. Similar
cases are pending in several courts against Merck-Medco and AdvancePCS. See Item
3 - Legal Proceedings.
FDA Regulation. The U.S. Food and Drug Administration ("FDA") generally
has authority to regulate drug promotional materials that are disseminated "by
or on behalf of" a drug manufacturer. In January, 1998, the FDA issued a Notice
and Draft Guidance regarding its intent to regulate certain drug promotion and
switching activities of pharmacy benefit managers that are controlled, directly
or indirectly, by drug manufacturers. The position taken by the FDA in the Draft
Guidance was that promotional materials used by an independent PBM or managed
care organization may be subject to FDA regulation depending upon the
circumstances, including the nature of the relationship between the PBM, the HMO
and the manufacturer. We, along with various other parties, submitted written
comments to the FDA regarding the basis for FDA regulation of PBM and HMO
activities. It was our position that, while the FDA may have jurisdiction to
regulate drug manufacturers, the Draft Guidance went beyond the FDA's
jurisdiction. After extending the comment period due to numerous industry
objections to the proposed Draft, the FDA withdrew the Draft Guidance in the
fall of 1998, stating that it would reconsider the basis for such a Guidance.
The FDA has not addressed the issue since the withdrawal. However, there can be
no assurance that the FDA will not again attempt to assert jurisdiction over
certain aspects of our PBM business in the future and, in such event, the impact
could materially adversely affect our results of operations, financial position
and/or cash flow from operations.
Proposed Changes in Canadian Healthcare System. In Canada, the
provincial health plans provide universal coverage for basic health care
services, but prescription drug coverage under the government plans is provided
only for the elderly and the indigent. In late 1997, a proposal was made by a
federal government health care task force to include coverage for prescription
drugs under the provincial health insurance plans, which was endorsed by the
federal government's Health Minister. This report was advisory in nature, and
not binding upon the federal or provincial governments. We believe this
initiative is dormant, and we are unable to determine the likelihood of adoption
of the proposal in the future.
Numerous state laws and regulations also affect aspects of our PBM
business. Among these are the following:
Comprehensive PBM Regulation. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced previously in a number of states, and currently in Georgia. In
addition, certain quasi-regulatory organizations, such as the National
Association of Boards of Pharmacy ("NABP," an organization of state boards of
pharmacy), the National Association of Insurance Commissioners ("NAIC," an
organization of state insurance regulators), and the National Committee on
Quality Assurance ("NCQA," an accreditation organization) are considering
proposals to regulate PBMs and/or PBM
10
activities, such as formulary development and utilization management. While the
actions of the NABP and NAIC would not have the force of law, they may influence
states to adopt model legislation that such organizations promulgate. In
addition, standards established by NCQA could materially impact us directly as a
PBM, and indirectly through the impact on our managed care and health insurance
clients.
Consumer Protection Laws. Most states have consumer protection laws
that have been the basis for investigations and multi-state settlements relating
to financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with seventeen states on October 25, 1995, Merck-Medco
agreed to have pharmacists affiliated with Merck-Medco mail service pharmacies
disclose to physicians and patients the financial relationships between Merck,
Merck-Medco, and the mail service pharmacy when such pharmacists contact
physicians seeking to change a prescription from one drug to another. We believe
that our contractual relationships with drug manufacturers and retail pharmacies
do not include the features that were viewed by enforcement authorities as
problematic in these settlement agreements. However, no assurance can be given
that we will not be subject to scrutiny or challenge under one or more of these
laws.
Network Access Legislation. A majority of states now have some form of
legislation affecting our ability to limit access to a pharmacy provider network
or removal of a network provider. Such legislation may require us or our clients
to admit any retail pharmacy willing to meet the plan's price and other terms
for network participation ("any willing provider" legislation); or may provide
that a provider may not be removed from a network except in compliance with
certain procedures ("due process" legislation). We have not been materially
affected by these statutes.
Legislation Affecting Plan Design. Some states have enacted legislation
that prohibits managed care plan sponsors from implementing certain restrictive
benefit plan design features, and many states have introduced legislation to
regulate various aspects of managed care plans, including provisions relating to
the pharmacy benefit. For example, some states, under so-called "freedom of
choice" legislation, provide that members of the plan may not be required to use
network providers, but must instead be provided with benefits even if they
choose to use non-network providers. Other states have enacted legislation
purporting to prohibit health plans from offering members financial incentives
for use of mail service pharmacies. Legislation has been introduced in some
states to prohibit or restrict therapeutic intervention, or to require coverage
of all FDA approved drugs. Other states mandate coverage of certain benefits or
conditions, and require health plan coverage of specific drugs if deemed
medically necessary by the prescribing physician. Such legislation does not
generally apply to us directly, but it may apply to certain of our clients, such
as HMOs and health insurers. If such legislation were to become widely adopted
and broad in scope, it could have the effect of limiting the economic benefits
achievable through pharmacy benefit management. This development could have a
material adverse effect on our results of operations, financial position and/or
cash flow from operations.
Licensure Laws. Many states have licensure or registration laws
governing certain types of ancillary health care organizations, including PPOs,
TPAs, and companies that provide utilization review services. The scope of these
laws differs from state to state, and the application of such laws to the
activities of pharmacy benefit managers often is unclear. We have registered
under such laws in those states in which we have concluded, after discussion
with the appropriate state agency, that such registration is required. Because
of increased regulatory requirements on some of our managed care clients
affecting prior authorization of drugs before coverage is approved, we have
obtained utilization review licenses in selected states through our new
subsidiary, ESI Utilization Management Co. In addition, accreditation agencies'
requirements for managed care organizations and Medicare + Choice regulations
may also affect the services we provide to such organizations.
Legislation Affecting Drug Prices. Some states have adopted so-called
"most favored nation" legislation providing that a pharmacy participating in the
state Medicaid program must give the state the best price that the pharmacy
makes available to any third party plan. Such legislation may adversely affect
our ability to negotiate discounts in the future from network pharmacies. Other
states have enacted "unitary pricing" legislation, which mandates that all
wholesale purchasers of drugs within the state be given access to the same
discounts and incentives. Such legislation has been introduced in the past but
not enacted in Missouri, Arizona, Pennsylvania, New York, and New Mexico, all
states where we operate mail service pharmacies. Such legislation, if enacted in
a state where one of our mail service pharmacies is located, could adversely
affect our ability to negotiate discounts on our purchase of prescription drugs
to be dispensed by our mail service pharmacies.
11
In addition, various federal and state Medicaid agencies are
investigating the effects of pharmaceutical industry pricing practices such as
how average wholesale price ("AWP") is calculated. AWP is a standard pricing
measure used throughout the industry, as well as by us, as the basis for
calculating drug prices under our health plans and pharmacies and rebates with
pharmaceutical manufacturers. Changes to the standard have been suggested that
could alter the calculation of drug prices for federal programs. We are unable
to predict whether any such changes will be adopted, and if so, if such changes
would have a material adverse impact on our results of operations, financial
position and/or cash flow from operations.
Regulation of Financial Risk Plans. Fee-for-service prescription drug
plans generally are not subject to financial regulation by the states. However,
if a PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. In those cases in which we have contracts in which we
are materially at risk to provide the pharmacy benefit, we believe we have
complied with all applicable laws.
Regulation of Informed Decision Counseling and Disease Management
Services. Our health care decision support counseling and disease management
programs are affected by many of the same types of state laws and regulations as
our other activities. In addition, all states regulate the practice of medicine
and the practice of nursing. We do not believe our informed decision counseling
or disease management activities constitute either the practice of medicine or
the practice of nursing. However, there can be no assurance that a regulatory
agency in one or more states may not assert a contrary position, and we are not
aware of any controlling legal precedent for services of this kind.
ERISA Preemption. Many of the state laws described above may be
preempted in whole or in part by ERISA, which provides for comprehensive federal
regulation of employee benefit plans. However, the scope of ERISA preemption is
uncertain and is subject to conflicting court rulings, and we provide services
to certain clients, such as governmental entities, that are not subject to
ERISA. Other state laws may be invalid in whole or in part as an
unconstitutional attempt by a state to regulate interstate commerce, but the
outcome of challenges to these laws on this basis is uncertain. Accordingly,
compliance with state laws and regulations remains a significant operational
requirement for us.
Mail Pharmacy Regulation. Our mail service pharmacies are located in
Arizona, Missouri, New Mexico, New York and Pennsylvania, and we are licensed to
do business as a pharmacy in each such state. Many of the states into which we
deliver pharmaceuticals have laws that require out-of-state mail service
pharmacies to register with, or be licensed by, the board of pharmacy or similar
regulatory body in the state. These states generally permit the mail service
pharmacy to follow the laws of the state in which the mail service pharmacy is
located, although certain states require that we also employ a pharmacist
licensed in that state. We have registered each of our pharmacies in every state
in which such registration is required.
Other statutes and regulations affect our mail service operations.
Federal statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide clients with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the delivery of drugs and medicines through the mail to a
degree that could have an adverse effect on our mail service operations.
Privacy Legislation. Most of our activities involve the receipt or use
of confidential, medical information concerning individual members. In addition,
we use aggregated and anonymized data for research and analysis purposes.
Regulations have been proposed at the federal level and legislation has been
proposed, and in some cases enacted, in several states to restrict the use and
disclosure of confidential medical information. To date, no such legislation has
been enacted that adversely impacts our ability to provide our services, but
there can be no assurance that federal or state governments will not enact
legislation, impose restrictions or adopt interpretations of existing laws that
could have a material adverse effect on our operations.
12
In December 2000, the Department of Health and Human Services ("DHHS")
issued final privacy regulations, pursuant to the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"), which, among other things, impose
extensive restrictions on the use and disclosure of individually identifiable
health information by certain entities. We will be required to comply with
certain aspects of the regulations. We have established a plan and a process for
implementing all necessary changes to our business operations by the compliance
date of April 2003. We believe compliance with these regulations will have a
significant impact on our business operations. We have completed an assessment
of the costs we will incur in complying with these regulations and do not
believe they will be material to our results of operations, financial position
and/or cash flow from operations. However DHHS plans to issue additional
regulations in 2002 and we can give no assurance that our implementation costs
will not be material to us as a result of such changes.
Even without new legislation and beyond the final federal regulations,
individual health plan sponsor customers could prohibit us from including their
patients' medical information in our various databases of medical data. They
could also prohibit us from offering services that involve the compilation of
such information.
Non-PBM Regulatory Environment. Our non-PBM activities operate in a
regulatory environment that is quite similar to that of our PBM activities.
Future Regulation. We are unable to predict accurately what additional
federal or state legislation or regulatory initiatives may be enacted in the
future relating to our businesses or the health care industry in general, or
what effect any such legislation or regulations might have on us. There can be
no assurance that federal or state governments will not impose additional
restrictions or adopt interpretations of existing laws that could have a
material adverse effect on our business or financial position.
Service Marks and Trademarks
We, and our subsidiaries, have registered the service marks "Express
Scripts", "PERx", "ExpressTherapeutics", "IVTx", "PERxCare", "RxWorkbench",
"PTE", "InformRX", "M.U.S.I.C.", "ValueRx", "Value Health, Inc." and
"Diversified", among others, with the United States Patent and Trademark Office.
Our rights to these marks will continue so long as we comply with the usage,
renewal filing and other legal requirements relating to the renewal of service
marks. We are in the process of applying for registration of several other
trademarks and service marks. If we are unable to obtain any additional
registrations, we believe there would be no material adverse effect on our
business.
Insurance
Our PBM operations, including the dispensing of pharmaceutical products
by our mail service pharmacies, and the services rendered in connection with our
disease management and informed decision counseling services, and our non-PBM
operations, such as the products and services previously provided in connection
with our infusion therapy programs (including the associated nursing services),
may subject us to litigation and liability for damages. For 2002, property and
casualty insurance rates have significantly increased and in certain respects,
available coverage has been reduced. We believe this is an insurance
industry-wide situation and is not a reflection of increased risk in our
business specifically. While we believe that our insurance protection is
adequate for our present business operations, there can be no assurance that we
will be able to maintain our professional and general liability insurance
coverage in the future or that such insurance coverage will be available on
acceptable terms or adequate to cover any or all potential product or
professional liability claims. A successful product or professional liability
claim in excess of our insurance coverage, or one for which an exclusion from
coverage applies, could have a material adverse effect upon our results of
operations, financial position and/or cash flow from operations.
13
Employees
As of January 1, 2002, we employed a total of 5,671 employees in the
U.S. and 94 employees in Canada. Approximately 700 of the U.S. employees are
members of collective bargaining units. Specifically, we employ members of the
Service Employees International Union at our Bensalem, Pennsylvania facility,
members of the United Auto Workers Union at our Farmington Hills, Michigan
facility, and members of the United Food and Commercial Workers Union at our
Albuquerque, New Mexico facility. We believe our relationships with our
employees and the unions that represent them are good.
Executive Officers of the Registrant
Our executive officers and their ages as of March 1, 2002 are as
follows:
Name Age Position
Barrett A. Toan 54 Chairman of the Board,
President and Chief Executive
Officer
David A. Lowenberg 52 Chief Operating Officer
Stuart L. Bascomb 60 Executive Vice President - Sales
and Provider Relations and
Director
Thomas M. Boudreau 50 Senior Vice President, General
Counsel and Secretary
Mabel F. Chen 59 Senior Vice President and
Director of Site Operations
Edward J. Tenholder 50 Senior Vice President and Chief
Information Systems Officer
Mark O. Johnson 48 Senior Vice President of
Integration and Administration
Linda L. Logsdon 54 Executive Vice President of
Health Management Services
George Paz 46 Senior Vice President and Chief
Financial Officer
Joseph W. Plum 54 Vice President and Chief
Accounting Officer
Mr. Toan was elected Chairman of the Board of Directors in November
2000, Chief Executive Officer in March 1992 and President and a director in
October 1990.
Mr. Lowenberg was elected our Chief Operating Officer in September
1999, and served as our Director of Site Operations from October 1994 until
September 1999.
Mr. Bascomb was elected Executive Vice President in March 1989 and a
director in January 2000. Mr. Bascomb has served as Executive Vice President -
Sales and Provider Relations since May 1996 and served as Chief Financial
Officer and Treasurer from March 1992 until May 1996.
Mr. Boudreau was elected Senior Vice President, General Counsel and
Secretary in October 1994. He has served as General Counsel since June 1994.
Ms. Chen was elected Senior Vice President and Director of Site
Operations in November 1999. From March 1996 until November 1999, Ms. Chen
served as Vice President and General Manager of our Tempe facility. From January
1995 until joining Express Scripts, Ms. Chen served as the Director of Medicaid
for the State of Arizona.
Mr. Tenholder was elected Senior Vice President and Chief Information
Systems Officer in December 2000. Mr. Tenholder served as Executive Vice
President and Chief Operating Officer of Blue Cross and Blue Shield of Missouri
from October 1997 to December 2000. From April 1994 to October 1997, Mr.
Tenholder was Senior Vice President, Client Services and Operations of Right
Choice Managed Care, Inc.
Mr. Johnson joined us and was elected Senior Vice President of
Integration in May 1999, and has served as Senior Vice President of Integration
and Administration since February 2000. Prior to joining us, Mr. Johnson served
as President of DPS from May 1998 to April 1999 and Senior Vice President,
Client Service and Sales of
14
DPS from May 1997 to May 1998. From August 1996 to May 1997, Mr. Johnson was
President and Chief Executive Officer of American Day Treatment Center, Inc. and
also served as Executive Vice President, Operations and Chief Operating Officer
from March 1992 to August 1996.
Ms. Logsdon was elected Executive Vice President of Health Management
Services in May 1999, and served as Senior Vice President of Health Management
Services from May 1997 until May 1999. Ms. Logsdon served as Vice President of
Demand and Disease Management from November 1996 until May 1997. Prior to
joining us in November 1996, Ms. Logsdon served as Vice President of Corporate
Services and Chief Operating Officer of United HealthCare's Midwest
Companies-GenCare/Physicians Health Plan/MetraHealth, a St. Louis-based health
maintenance organization, from February 1995 to October 1996.
Mr. Paz joined us and was elected Senior Vice President and Chief
Financial Officer in January 1998. Prior to joining us, Mr. Paz was a partner in
the Chicago office of Coopers & Lybrand from December 1995 to December 1997.
Mr. Plum was elected Vice President in October 1994 and has served as
Chief Accounting Officer since March 1992 and Corporate Controller since March
1989.
Forward Looking Statements and Associated Risks
Information that we have included or incorporated by reference in this
Annual Report on Form 10-K, and information that may be contained in our other
filings with the SEC and our press releases or other public statements, contain
or may contain forward-looking statements. These forward-looking statements
include, among others, statements of our plans, objectives, expectations or
intentions.
Our forward-looking statements involve risks and uncertainties. Our
actual results may differ significantly from those projected or suggested in any
forward-looking statements. We do not undertake any obligation to release
publicly any revisions to such forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. Factors that might cause such a difference to occur
include, but are not limited to:
o risks associated with our ability to maintain growth rates, or
to control operating or capital costs
o continued pressure on margins resulting from client demands
for enhanced service offerings and higher service levels, and
the possible termination of, or unfavorable modification to,
contracts with key clients or providers
o competition, including price competition, and our ability to
consummate contract negotiations with prospective clients, as
well as competition from new competitors offering services
that may in whole or in part replace services that we now
provide to our customers
o adverse results in regulatory matters, the adoption of new
legislation or regulations (including increased costs
associated with compliance with new laws and regulations, such
as privacy regulations under the Health Insurance Portability
and Accountability Act (HIPAA)), more aggressive enforcement
of existing legislation or regulations, or a change in the
interpretation of existing legislation or regulations
o the possible loss of relationships with pharmaceutical
manufacturers, or changes in pricing, discount or other
practices of pharmaceutical manufacturers
o adverse results in litigation, including a pending case
challenging the company's business practices under the
Employee Retirement Income Security Act (ERISA)
o risks associated with our leverage and debt service
obligations, including the effect of certain covenants in our
borrowing agreements
o risks associated with our ability to continue to develop new
products, services and delivery channels
o general developments in the health care industry, including
the impact of increases in health care costs, changes in drug
utilization and cost patterns and introductions of new drugs
o uncertainties regarding the implementation and the ultimate
terms of proposed government initiatives, including a Medicare
prescription drug benefit
o risks associated with our acquisitions of Phoenix and NPA,
including integration risks and costs, risks of client
retention, and risks associated with the operations of
acquired businesses
o increase in credit risk relative to our clients due to adverse
economic trends
15
o other risks described from time to time in our filings with
The Securities and Exchange Commission
These and other relevant factors, including any other information
included or incorporated by reference in this Report, and information that may
be contained in our other filings with the SEC, should be carefully considered
when reviewing any forward-looking statement. The occurrence of any of the
following risks, among others, could materially adversely affect our results of
operations, financial position and/or cash flow from operations.
Failure to Maintain Growth Rates, or to Control Operating or Capital Costs,
Could Adversely Affect Our Business
We have experienced rapid growth over the past several years. Our
ability to maintain this growth rate is dependent upon our ability to attract
new clients, achieve growth in the membership base of our existing clients as
well as cross-sell additional services to our existing clients. If we are unable
to continue our client and membership growth, and manage our operating and
capital costs, our results of operations, financial position and/or cash flow
from operations could be materially adversely affected.
Client Demands for Enhanced Service Levels or Possible Loss or Unfavorable
Modification of Contracts with Clients or Providers, Could Pressure Margins
As our clients face the continued rapid growth in prescription drug
costs, they may demand additional services and enhanced service levels to help
mitigate the increase in spending. We operate in a very competitive PBM
environment, and we may not be able to increase our fees to compensate for these
increased services, which could put pressure on our margins.
We currently provide PBM services to approximately 19,000 client
groups. Our acquisitions have diversified our client base and reduced our
dependence on any single client and no single client represents more than
approximately 5% of our total membership. Our contracts with clients generally
do not have terms of longer than three years and, in some cases, are terminable
by the client on relatively short notice. Our larger clients generally seek bids
from other PBM providers in advance of the expiration of their contracts. If
several of these large clients elect not to extend their relationship with us,
and we are not successful in generating sales to replace the lost business, our
future business and operating results could be materially adversely affected. In
addition, we believe the managed care industry is undergoing substantial
consolidation, and another party that is not our client could acquire some of
our managed care clients. In such case, the likelihood such client would renew
its PBM contract with us could be reduced.
More than 56,000 retail pharmacies, which represent more than 99% of
all United States retail pharmacies, participate in one or more of our networks.
However, the top ten retail pharmacy chains represent approximately 44% of the
total number of stores in our largest network, and these pharmacy chains
represent even higher concentrations in certain areas of the United States. Our
contracts with retail pharmacies, which are non-exclusive, are generally
terminable on relatively short notice. If one or more of the top pharmacy chains
elects to terminate its relationship with us, our members' access to retail
pharmacies and our business could be materially adversely affected. In addition,
many large pharmacy chains either own PBMs today, or could attempt to acquire a
PBM in the future. Ownership of PBMs by retail pharmacy chains could have
material adverse effects on our relationships with such pharmacy chains and on
our results of operations, financial position and/or cash flow from operations.
Competition in the PBM Industry Could Reduce Our Client Membership and Our
Profit Margins
The PBM business is very competitive. Our competitors include large and
well-established companies that may have greater financial, marketing and
technological resources than we do. One major competitor, Merck-Medco, is owned
by a large pharmaceutical manufacturer, which may give them purchasing or other
advantages over us. Consolidation in the PBM industry may lead to increased
competition among a smaller number of large PBM companies. Competition may also
come from other sources in the future. We cannot predict what effect, if any,
these new competitors may have on the marketplace or on our business.
Over the last several years competition in the marketplace has caused
many PBMs, including us, to reduce the prices charged to clients for core
services and share a larger portion of the formulary fees and related revenues
received from pharmaceutical manufacturers with clients. This combination of
lower pricing and increased revenue sharing, as well as increased demand for
enhanced service offerings and higher service levels, have put pressure on
operating
16
margins. However, to date, we have been successful in offsetting these pressures
through increased mail penetration, improved formulary compliance and other
value-added clinical programs. We expect to continue marketing our services to
larger clients, who typically have greater bargaining power than smaller
clients. This might create continuing pressure on our margins. We can give no
assurance that new services provided to these clients will fully compensate for
these reduced margins.
Changes in State and Federal Regulations Could Restrict Our Ability to Conduct
Our Business
Numerous state and federal laws and regulations affect our business and
operations. The categories include, but are not necessarily limited to:
o health care fraud and abuse laws and regulations, which
prohibit certain types of referral and other payments
o ERISA and related regulations, which regulate many health care
plans
o proposed comprehensive state PBM legislation
o consumer protection laws and regulations
o network pharmacy access laws, including "any willing provider"
and "due process" legislation, that regulate aspects of our
pharmacy network contracts
o legislation imposing benefit plan design restrictions, which
limit how our clients can design their drug benefit plans
o various licensure laws, such as managed care and third party
administrator licensure laws
o drug pricing legislation, including "most favored nation"
pricing and "unitary pricing" legislation
o mail pharmacy laws and regulations
o privacy and confidentiality laws and regulations, including
those under the Federal Health Insurance Portability and
Accountability Act of 1996 ("HIPAA")
o Medicare prescription drug coverage proposals
o other Medicare and Medicaid reimbursement regulations
o potential regulation of the PBM industry by the U.S. Food and
Drug Administration
o pending legislation regarding importation of drug products
into the United States
These and other regulatory matters are discussed in more detail under "Business
- - Government Regulation" above.
We believe we are operating our business in substantial compliance with
all existing legal requirements material to the operation of our business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to our business, and we cannot provide any assurance
that a regulatory agency charged with enforcement of any of these laws or
regulations will not interpret them differently or, if there is an enforcement
action brought against us, that our interpretation would prevail. In addition,
there are numerous proposed healthcare laws and regulations at the federal and
state levels, many of which could materially affect our ability to conduct our
business or adversely affect our results of operations. We are unable to predict
what additional federal or state legislation or regulatory initiatives may be
enacted in the future relating to our business or the healthcare industry in
general, or what affect any such legislation or regulations might have on us.
We are aware through reports in the press and other sources that a U.S.
Assistant Attorney General in Philadelphia is conducting an investigation into
certain PBM business practices. These reports have indicated that some of our
PBM competitors have received subpoenas in connection with this investigation
during 1999. We have not received a subpoena or been requested to testify or
produce documents in connection with this investigation. Press reports indicate
that a possible subject of the investigation is contractual relationships
between the PBMs and pharmaceutical manufacturers. We cannot predict what
effect, if any, this investigation may ultimately have on us or on the PBM
industry generally.
In December 2000, the Department of Health and Human Services ("DHHS")
issued final privacy regulations, pursuant to the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"), which impose extensive restrictions on
the use and disclosure of individually identifiable health information by
certain entities. We will be required to comply with certain aspects of the
regulations. We have established a plan and a process for implementing all
necessary changes to our business operations by the statutory compliance date of
April 2003. We
17
believe compliance with these regulations will have a significant impact on our
business operations. We have completed an assessment of the costs we will incur
in complying with these regulations and do not believe they will be material to
our results of operations, financial position and/or cash flow from operations.
However DHHS plans to issue additional regulations in 2002 and we can give no
assurance that our implementation costs will not be material to us as a result
of such changes.
The federal Medicare program provides a comprehensive medical benefit
program for individuals age 65 and over, but currently covers only a few
outpatient prescription drugs. Currently key policy makers from both parties
have proposed various changes to the Medicare program that would result in at
least partial coverage for most prescription drugs. We believe that a Medicare
prescription drug benefit could provide us with substantial new business
opportunities, but at the same time any such program could adversely affect
other aspects of our business. For instance, some of our clients sell medical
policies to seniors that provide a prescription drug benefit that we administer.
Other clients provide a prescription drug benefit to their retirees. Depending
on the plan that is ultimately adopted, a Medicare prescription drug benefit
could make such policies or plans less valuable to seniors, adversely affecting
that segment of our business. While we believe that there would be opportunities
for new business under a Medicare plan that would more than offset any adverse
effects, we can give no assurance that this would be the case.
Loss of Relationships with Pharmaceutical Manufacturers and Changes in the
Regulation of Discounts and Formulary Fees Provided to Us by Pharmaceutical
Manufacturers Could Decrease Our Profits
We maintain contractual relationships with numerous pharmaceutical
manufacturers that provide us with:
o discounts at the time we purchase the drugs to be dispensed
from our mail pharmacies
o formulary fees based upon sales of drugs from our mail
pharmacies and through pharmacies in our retail networks
o administrative fees based upon the development and maintenance
of formularies which include the particular manufacturer's
products
These fees are all commonly referred to as formulary fees or formulary
management fees.
We also provide various services for, or services which are funded
wholly or partially by, pharmaceutical manufacturers. These services include:
o compliance programs, which involve instruction and counseling
of patients concerning the importance of compliance with the
drug treatment regimen prescribed by their physician
o therapy management programs, which involve education of
patients having specific diseases, such as asthma and
diabetes, concerning the management of their condition
o market research programs, in which we provide information to
manufacturers concerning drug utilization patterns
These arrangements are generally terminable on relatively short notice. If
several of these arrangements are terminated or materially altered by the
pharmaceutical manufacturers, our operating results could be materially
adversely affected. In addition, formulary fee programs, as well as some of the
services we provide to the pharmaceutical manufacturers, have been the subject
of debate in federal and state legislatures and various other public and
governmental forums. Changes in existing laws or regulations or in their
interpretations of existing laws or regulations or the adoption of new laws or
regulations relating to any of these programs, may materially adversely affect
our business.
Pending and Future Litigation Could Materially Affect Our Relationships with
Pharmaceutical Manufacturers or Subject Us to Significant Monetary Damages
Since 1993, retail pharmacies have filed over 100 separate lawsuits
against drug manufacturers, wholesalers and certain PBMs challenging brand name
drug pricing practices under various state and federal antitrust laws. The
plaintiffs alleged, among other things, that the manufacturers had offered, and
certain PBMs had knowingly accepted, discounts and rebates on purchases of brand
name prescription drugs that violated the Federal Sherman Act. Some
manufacturers settled certain of these actions, including a Sherman Act case
brought on behalf of a nationwide class of retail pharmacies. The class action
settlements generally provided for commitments by the manufacturers in their
discounting practices to retail pharmacies. The defendants who did not settle
won the Sherman Act class action on a directed verdict. With respect to the
cases filed by plaintiffs who opted out of the class action, some drug
manufacturers
18
have settled certain of these actions, but such settlements are not part of the
public record. The Robinson-Patman Act cases are still pending.
We are not currently a party to any of these antitrust proceedings. To
date, we do not believe any of these settlements have had a material adverse
effect on our business. However, we cannot provide any assurance that the terms
of the settlements will not materially adversely affect us in the future or that
we will not be made a party to any separate lawsuit.
We are defending a putative class action suit alleging that certain of
our business practices violate provisions of ERISA. We are also defending a
putative class action suit alleging that we improperly calculated co-payments on
a cancer drug, Tamoxifen. We believe these suits are without merit, but we
cannot predict the outcome of these cases with certainty. See Item 3--Legal
Proceedings.
We are also subject to risks relating to litigation and liability for
damages in connection with our PBM operations, including the dispensing of
pharmaceutical products by our mail pharmacies, the services rendered in
connection with our formulary management and informed decision counseling
services, and our non-PBM operations, including the products and services
provided in connection with our infusion therapy programs (and the associated
nursing services). We believe our insurance protection is adequate for our
present operations. However, we cannot provide any assurance that we will be
able to maintain our professional and general liability insurance coverage in
the future or that such insurance coverage will be available on acceptable terms
to cover any or all potential product or professional liability claims. A
successful product or professional liability claim in excess of our insurance
coverage could have a material adverse effect on our business.
Our Leverage and Debt Service Obligations Could Impede Our Operations and
Flexibility
As of December 31, 2001, our net debt to net capitalization ratio is
16.8%, and we have substantial interest expense and future repayment
obligations. As of December 31, 2001, we had total consolidated debt of
approximately $346.1 million.
In connection with our acquisition of NPA, we will incur additional
indebtedness of approximately $450 million. This will raise our ratio of net
debt to net capitalization to approximately 44%, increasing our leverage and the
risks associated with that leverage.
Our level of debt and the limitations imposed on us by our debt
agreements could have important consequences, including the following:
o we will have to use a portion of our cash flow from operations
for debt service rather than for our operations
o we may from time to time incur additional indebtedness under
our revolving credit facility, which is subject to a variable
interest rate, making us vulnerable to increases in interest
rates
o we could be less able to take advantage of significant
business opportunities, such as acquisition opportunities, and
react to changes in market or industry conditions
o we could be more vulnerable to general adverse economic and
industry conditions
o we may be disadvantaged compared to competitors with less
leverage
Furthermore, our ability to satisfy our obligations, including our debt
service requirements, will be dependent upon our future performance. Factors
which could affect our future performance include, without limitation,
prevailing economic conditions and financial, business and other factors, many
of which are beyond our control and which affect our results of operations,
financial position and/or cash flow from operations.
Our bank credit facility is secured by the capital stock of each of our
existing and subsequently acquired domestic subsidiaries, excluding ValueRx of
Michigan, Inc., Diversified NY IPA, Inc., and Diversified Pharmaceutical
Services (Puerto Rico), Inc., and 65% of the stock of our Canadian subsidiaries.
If we are unable to meet our obligations under this bank credit facility, these
creditors could exercise their rights as secured parties and take possession of
the pledged capital stock of these subsidiaries. This would materially adversely
affect our results of operations and financial condition.
19
Failure to Continue to Develop New Products, Services and Delivery Channels May
Adversely Affect Our Business
We operate in a highly competitive environment. We, as well as our
competitors, continually develop new products and services to assist our clients
in managing the pharmacy benefit. If we are unsuccessful in continuing to
develop innovative products and services, our ability to attract new clients and
retain existing clients may suffer.
Technology is also an important component of our business, as we
continue to utilize new and better channels, such as the Internet, to
communicate and interact with our clients, members and business partners. If our
competitors are more successful than us in employing this technology, our
ability to attract new clients, retain existing clients and operate efficiently
may suffer.
Efforts to Reduce Health Care Costs and Alter Health Care Financing Practices
Could Adversely Affect Our Business
Efforts are being made in the United States to control health care
costs, including prescription drug costs, in response to increases in
prescription drug utilization rates and drug prices. If these efforts are
successful or if prescription drug utilization rates were to decrease
significantly, our business and results of operations could be materially
adversely affected.
We have designed our business to compete within the current structure
of the U.S. health care system. Changing political, economic and regulatory
influences may affect health care financing and reimbursement practices. If the
current health care financing and reimbursement system changes significantly,
our business could be materially adversely affected. Congress periodically
considers proposals to reform the U.S. health care system. These proposals may
increase government involvement in health care and regulation of PBM services,
or otherwise change the way our clients do business. Health plan sponsors may
react to these proposals and the uncertainty surrounding them by reducing or
delaying purchases of cost control mechanisms and related services that we
provide. We cannot predict what effect, if any, these proposals may have on our
business. Other legislative or market-driven changes in the health care system
that we cannot anticipate could also materially adversely affect our results of
operations, financial position and/or cash flow from operations.
It is uncertain when certain government initiatives will be implemented and how
it will impact our company
Today, Medicare covers only a few prescription drugs and several
proposals have been initiated through the political process that would provide
some help to seniors. Proposals range from initiating a Medicare Discount Card
program to proving at least partial coverage for most prescription drugs. Many
of the proposals lack important details regarding the administration of the
plan. While we believe there are opportunities for new business for us under a
Medicare drug plan, we cannot assess the benefits, or potential adverse effects
on other parts of our business, until a plan is ultimately initiated.
Failure to operate and integrate recent acquisitions could adversely affect our
business
The company's recently announced acquisitions are subject to subject to
customary closing conditions and approval by applicable Federal regulatory
agencies. These conditions and approvals must be satisfied before the
acquisitions can be closed. We are developing an integration plan to address
items such as:
o client retention
o retention of key employees
o consolidation of administrative and other duplicative
functions
o coordination of sales, marketing, customer service and
clinical functions
o systems integration
o facility rationalization
While the company has had success in integrating previous acquisitions
into its operations, there are always risks associated with integrating and
operating newly acquired businesses. We can give no assurance that we will
successfully operate these new businesses after closing.
Increased credit risk relative to our clients
20
We manage over $16 billion of drug spend for our clients and bill
substantial amounts to many of our clients. A deterioration of credit risks of
any of our larger clients could impact our ability to collect revenue or provide
future services, which could negatively impact the results of our operations.
While we are focused on managing working capital, we can give no assurances that
the deteriorating of the credit risks relative to our clients would not have an
adverse impact on our results of operations, financial position and/or cash flow
from operations.
Item 2 - Properties
We operate our United States and Canadian PBM and non-PBM businesses
out of leased facilities throughout the United States and Canada.
PBM Facilities Non-PBM Facilities
-------------------------- --------------------------
Maryland Heights, Missouri Maryland Heights, Missouri
Tempe, Arizona Lincoln Park, New Jersey
Bloomington, Minnesota Montville, New Jersey
Bensalem, Pennsylvania
Troy, New York
Farmington Hills, Michigan
Albuquerque, New Mexico
Horsham, Pennsylvania
Montreal, Quebec
Mississauga, Ontario
Our Maryland Heights, Missouri facility houses our corporate offices
and our Specialty Distribution Services operations. We believe our facilities
have been well maintained and are in good operating condition. Our existing
facilities comprise approximately 1,390,000 square feet in the aggregate.
We own and lease computer systems at the processing centers. In late
1999, we entered into a five-year agreement with EDS to outsource our
information systems operations. EDS has responsibility for operating and
maintaining the computer systems. Our software for claims processing and drug
utilization review and other products has been developed internally by us or
purchased under perpetual, nonexclusive license agreements with third parties.
Our computer systems at each site are extensively integrated and share common
files through local and wide area networks. Uninterruptable power supply and
diesel generators allow our computers, telephone systems and mail pharmacy at
each major site to continue to function during a power outage. To protect
against loss of data and extended downtime, we store software and redundant
files at both on-site and off-site facilities on a regular basis and have
contingency operation plans in place. We cannot, however, provide any assurance
that our contingency or disaster recovery plans would adequately address all
relevant issues.
Item 3 - Legal Proceedings
The Company is a defendent in Minshew v. Express Scripts, No. Civ. 01 -
2412 PHX MHM (D.AZ.). On December 12, 2001, the purported class action lawsuit
was filed by Gerald R. Minshew in the United States District Court for the
District of Arizona. The Minshew complaint asserts that certain of our business
practices, including those relating to our contracts with pharmaceutical
manufacturers for retrospective discounts on pharmaceuticals and those related
to our retail pharmacy network contracts, violate certain fiduciary duties that
we allegedly owe to a class consisting of some of our clients. The purported
class consists of health benefit plans that are self-funded by an employer
client. The complaint seeks money damages on behalf of this class of health
plans, and injunctive relief. We believe the complaint is without merit, and
will vigorously defend the matter. Although the ultimate outcome is uncertain, a
determination adverse to us could result in changes in our business practices
with respect to our formulary and rebate programs and our retail pharmacy
network contracting, and/or an award of money damages, either of which could
have a material adverse effect on our results of operations, financial position
and/or cash flow from operations.
The Company is also a defendant in Dubrin v. Express Scripts, No.
CO200128, Superior Court of the State of California, County of Contra Costa. On
January 31, 2002, a purported class action lawsuit was filed against us by
Beverly Dubrin. The Dubrin complaint asserts that the plaintiff was improperly
charged brand drug copayments for the cancer drug Tamoxifen in violation of
certain statutes in California regulating trade practices and consumer
protection, as well as a common law claim for unjust enrichment. The complaint
asserts that Tamoxifen is a generic drug for which a lower copayment should have
been charged. We believe that the complaint is without merit, and will
vigorously defend this matter. We have not yet filed our answer or other
responsive pleading in the case, nor have we made any estimate of a potential
financial exposure.
As discussed in detail in our Quarterly Report on Form 10-Q for the
period ended June 30, 1998, filed with the Securities and Exchange Commission on
August 13, 1998 (the "Second Quarter, 1998 10-Q"), we acquired all of the
outstanding capital stock of Value Health, Inc., a Delaware corporation ("Value
Health"), and Managed Prescription Network, Inc., a Delaware corporation ("MPN")
from HCA-The Healthcare Corporation (formerly, "Columbia HCA/HealthCare
Corporation") ("HCA") and its affiliates on April 1, 1998 (the "Acquisition").
Value Health, MPN and/or their subsidiaries (collectively, the "Acquired
Entities"), were party to various legal proceedings, investigations or claims at
the time of the Acquisition. The effect of these actions on our future financial
results is not subject to reasonable estimation because considerable uncertainty
exists about the outcomes. Nevertheless, in the opinion of management, the
ultimate liabilities resulting from any such lawsuits, investigations or claims
now pending should not materially affect our consolidated financial position,
results of operations and/or cash flows. A brief description of the most notable
of the proceedings follows:
Bash, et al. v. Value Health, Inc., et al., No. 3:97cv2711
(JCH)(D.Conn.) ("Bash"). On December 15, 1995, a purported shareholder class
action lawsuit was filed in the United States District Court for the District of
New Mexico against Diagnostek, Inc. ("Diagnostek"), certain former Diagnostek
officers, Value Health, Inc. ("Value Health"), and certain of Value Health's
former officers. The Bash Complaint asserts that Value Health and certain
21
other defendants made false or misleading statements to the public in connection
with Value Health's acquisition of Diagnostek in 1995, and that Diagnostek and
certain of its former officers and directors made false or misleading statements
concerning its financial condition prior to the acquisition by Value Health. The
Bash Complaint asserts claims under the Securities Act of 1933 and the
Securities Exchange Act of 1934, as well as common law claims, and seeks
certification of a class consisting of all persons (with certain exclusions) who
purchased or otherwise acquired either Value Health or Diagnostek common stock
during certain specific time periods, and does not specify the amount of damages
sought. On November 28, 1997, the New Mexico court entered an order transferring
the action to the District of Connecticut, where the earlier-filed Freedman
action (discussed below) was pending. On March 17, 1998, the defendants filed a
motion to consolidate the Bash lawsuit with the Freedman lawsuit discussed
below, and the court granted the motion on April 24, 1998.
Freedman, et al. v. Value Health, Inc., et al., No. 3:95 CV 2038
(JCH)(D.Conn). On September 22 and 25, 1995, two related lawsuits were filed
against Value Health and certain other defendants in the United States District
Court for the District of Connecticut. On February 16, 1996, a single,
consolidated class action complaint was filed covering both suits (the "Freedman
Complaint"), naming as defendants Value Health, Robert E. Patricelli, William J.
McBride, Steven J. Shulman, David M. Wurzer, David J. McDonnell, Walter J.
McNerny, Rodman W. Moorhead, III, Constance P. Newman, and John L. Vogelstein,
all former Value Health directors and officers, and Nunzio P. DeSantis, the
former president of Diagnostek. The Freedman Complaint alleges that Value Health
and certain other defendants made false or misleading statements to the public
in connection with Value Health's acquisition of Diagnostek in 1995. The
Freedman Complaint asserts claims under the Securities Act of 1933 and the
Securities Exchange Act of 1934, and seeks certification of a class consisting
of all persons (with certain exceptions) who purchased shares of Value Health
common stock during the period March 27, 1995 (the date certain adverse
developments were disclosed by Value Health). The Freedman Complaint does not
specify the amount of damages sought. On March 17, 1998, the defendants filed a
motion to consolidate this lawsuit with the Bash lawsuit, discussed above, and
the motion was granted on April 24, 1998.
In the consolidated Bash and Freedman action, the court granted
plaintiffs' motions for class certification and certified a class consisting of
(i) all persons who purchased or otherwise acquired shares of Value Health
during the period from April 3, 1995, through and including November 7, 1995,
including those who acquired shares in connection with the Diagnostek merger;
and (ii) all persons who purchased or otherwise acquired shares of Diagnostek
during the period from March 27, 1995, through and including July 28, 1995. On
March 20, 2001, the court granted defendant's motion for summary judgement on
all claims. At the same time, the court devised a motion for partial summary
judgement on all claims under Sections 11 and 12(2) of the Securities Act of
1933. Plaintiffs had filed a Notice of Appeal of several orders by the court,
including the order with respect to the motions for summary judgement and the
April 24, 1998 order regarding consolidation of the lawsuits. The parties
have filed briefs with the United States Court of Appeals for the Second
Circuit. Oral arguments have been scheduled for April 10, 2002.
In connection with the Acquisition, HCA has agreed to defend and hold
the Company and its affiliates (including Value Health) harmless from and
against any liability that may arise in connection with either of the foregoing
proceedings. Consequently, the Company does not believe it will incur any
material liability in connection with the foregoing matters.
22
In addition, in the ordinary course of our business, there have arisen
various legal proceedings, investigations or claims now pending against our
subsidiaries unrelated to the Acquisition and us. The effect of these actions on
future financial results is not subject to reasonable estimation because
considerable uncertainty exists about the outcomes. Nevertheless, in the opinion
of management, the ultimate liabilities resulting from any such lawsuits,
investigations or claims now pending will not materially affect our consolidated
financial position, results of operations and/or cash flows.
Since 1993, retail pharmacies have filed over 100 separate lawsuits
against drug manufacturers, wholesalers and certain PBMs, challenging brand name
drug pricing practices under various state and federal antitrust laws. The
plaintiffs alleged, among other things, that the manufacturers had offered, and
certain PBMs had knowingly accepted, discounts and rebates on purchases of brand
name prescription drugs that violated the federal Robinson-Patman Act. Some
plaintiffs also filed claims against the drug manufacturers and drug wholesalers
alleging a conspiracy not to discount pharmaceutical drugs in violation of
Section 1 of the Sherman Act, and these claims were certified as a class action.
Some of the drug manufacturers settled both the Sherman Act and the Robinson
Patman claims against them. The class action Sherman Act settlements generally
provide that the manufacturers will not refuse to pay discounts or rebates to
retail pharmacies based on their status as such. Settlements with plaintiffs who
opted out of the class are not part of the public record. The drug manufacturer
and wholesaler defendants in the class action who did not settle went to trial
and were dismissed by the court on a motion for directed verdict. That dismissal
was affirmed by the Court of Appeals for the Seventh Circuit. One aspect of the
case was remanded to the trial court and has now been dismissed. Plaintiffs who
opted out of the class action will still have the opportunity to try their
Sherman Act claims in separate lawsuits. The class action did not involve the
Robinson-Patman claims, so many of those matters are still pending. We are not a
party to any of these proceedings. To date, we do not believe any settlements
have had a material adverse effect on our business. However, we cannot provide
any assurance that the terms of the settlements will not materially adversely
affect us in the future. In addition, we cannot predict the outcome or possible
ramifications to our business of the cases in which the plaintiffs are trying
their claims separately, and we cannot provide any assurance that we will not be
made a party to any such separate lawsuits in the future.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2001.
23
PART II
Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters
Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
Market Information. Our Common Stock is traded on the Nasdaq National
Market ("Nasdaq") tier of The Nasdaq Stock Market under the symbol "ESRX". The
high and low prices, as reported by the Nasdaq, are set forth below for the
periods indicated. These prices have been adjusted to reflect the two-for-one
stock split effective June 22, 2001, in the form of a stock dividend of one
share for each outstanding share to holders of record on June 8, 2001.
Fiscal Year 2001 Fiscal Year 2000
Common Stock High Low High Low
First Quarter $ 51.4375 $ 34.8440 $ 33.5000 $ 14.2500
Second Quarter 58.0000 40.7500 33.3125 17.3125
Third Quarter 61.4500 44.1000 39.0000 28.1250
Fourth Quarter 61.1000 36.7400 53.5000 31.8750
In May 2001 the Stockholders approved our Amended and Restated
Certificate of Incorporation. Among the changes to the Certificate of
Incorporation was an amendment that consolidated and renamed our classes of
common stock. Prior to the amendment we had 181,000,000 authorized shares of
common stock consisting of 150,000,000 shares of Class A Common Stock and
31,000,000 shares of Class B Common Stock, and no shares of the Class B Common
Stock were outstanding. Pursuant to the Amended and Restated Certificate of
Incorporation, the Class B Common Stock was eliminated and each share of Class A
Common Stock was renamed as "Common Stock." As a result, we now have 181,000,000
shares of Common Stock authorized.
Holders. As of January 31, 2002, there were 386 stockholders of record
of our Common Stock. We estimate there are approximately 29,000 beneficial
owners of our Common Stock.
Dividends. The Board of Directors has not declared any cash dividends
on our common stock since the initial public offering. The Board of Directors
does not currently intend to declare any cash dividends in the foreseeable
future. The terms of our existing credit facility and the indenture under which
our public debt was issued contain certain restrictions on our ability to
declare or pay cash dividends.
Recent Sales of Unregistered Securities
None.
24
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and "Item 7
- --Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Year Ended December 31,
(in thousands, except per share data) 2001 2000(2) 1999(3) 1998(4) 1997
- -------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues:
Revenues $ 9,328,782 $ 6,901,026 $ 4,402,197 $ 2,902,318 $ 1,270,624
Other revenues - 10,423 3,000 - -
-------------- -------------- -------------- -------------- --------------
9,328,782 6,911,449 4,405,197 2,902,318 1,270,624
-------------- -------------- -------------- -------------- --------------
Costs and expenses:
Cost of revenues 8,732,914 6,372,482 3,943,998 2,662,443 1,159,157
Selling, general and administrative 358,691 338,755 294,194 148,990 62,617
Non-recurring charges - - 30,221 1,651 -
-------------- -------------- -------------- -------------- --------------
9,091,605 6,711,237 4,268,413 2,813,084 1,221,774
-------------- -------------- -------------- -------------- --------------
Operating income 237,177 200,212 136,784 89,234 48,850
Other (expense) income, net (28,933) (204,680) 128,682 (12,994) 5,856
-------------- -------------- -------------- -------------- --------------
Income (loss) before income taxes 208,244 (4,468) 265,466 76,240 54,706
Provision for income taxes 83,172 3,553 108,098 33,566 21,277
-------------- -------------- -------------- -------------- --------------
Income (loss) before extraordinary item 125,072 (8,021) 157,368 42,674 33,429
Extraordinary item, net of tax (372) (1,105) (7,150) - -
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 124,700 $ (9,126) $ 150,218 $ 42,674 $ 33,429
============== ============== ============== ============== ==============
Basic earnings (loss) per share:(1)
Before extraordinary item $ 1.60 $ (0.10) $ 2.18 $ 0.64 $ 0.51
Extraordinary item, net of tax - (0.02) (0.10) - -
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 1.60 $ (0.12) $ 2.08 $ 0.64 $ 0.51
============== ============== ============== ============== ==============
Diluted earnings (loss) per share:(1)
Before extraordinary item $ 1.56 $ (0.10) $ 2.13 $ 0.63 $ 0.50
Extraordinary item, net of tax - (0.02) (0.10) - -
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 1.56 $ (0.12) $ 2.03 $ 0.63 $ 0.50
============== ============== ============== ============== ==============
Weighted average shares outstanding:(1)
Basic 77,857 76,392 72,190 66,210 65,426
Diluted(5) 79,827 76,392 74,066 67,396 66,244
- -------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $ 177,715 $ 53,204 $ 132,630 $ 122,589 $ 64,155
Working capital (32,414) (117,775) (34,003) 117,611 166,062
Total assets 2,500,245 2,276,664 2,487,311 1,095,461 402,508
Debt:
Short-term debt - - - 54,000 -
Long-term debt 346,119 396,441 635,873 306,000 -
Stockholders' equity 831,997 705,244 699,482 249,694 203,701
- -------------------------------------------------------------------------------------------------------------------------
Selected Data:
Annual drug spending -PBM(6) $15,908,869 $13,874,691 $11,160,389 $ 4,495,051 $ 2,486,380
Annual drug spending - Specialty Dist.(6)(7) $ 774,655 $ 604,209 $ 401,717 - -
Network pharmacy claims processed 293,996 299,584 273,909 113,177 73,164
Mail pharmacy prescriptions filled 20,493 15,183 10,608 7,426 3,899
Specialty distribution prescriptions 1,889 1,120 604 - -
filled(7)
EBITDA(8) $ 317,260 $ 278,827 $ 208,651 $ 115,683 $ 59,320
Cash flows provided by operating activities $ 280,990 $ 245,910 $ 214,059 $ 126,574 $ 52,391
Cash flows (used in) investing activities $ (76,719) $ (73,578) $ (759,576) $ (426,052) $ (16,455)
Cash flows (used in) provided by
financing activities $ (79,549) $ (251,627) $ 555,450 $ 357,959 $ 3,033
- -------------------------------------------------------------------------------------------------------------------------
25
(1) Earnings per share and weighted average shares outstanding have been
restated to reflect the two-for-one stock splits effective June 22, 2001 and
October 30, 1998.
(2) Includes a non-cash write-off of $165,207 ($103,089 net of tax) of our
investment in PlanetRx.com, Inc. Includes an ordinary gain of $1,500 ($926
net of tax) on the restructuring of our interest rate swap agreements.
Excluding these amounts, our basic and diluted earnings per share before
extraordinary loss would have been $1.23 and $1.21, respectively.
(3) Includes the acquisition of DPS effective April 1, 1999. Also includes
non-recurring operating charges and a one-time non-operating gain of $30,221
($18,188 net of tax) and $182,930 ($112,037 net of tax), respectively.
Excluding these amounts, our basic and diluted earnings per share before
extraordinary loss would have been $0.88 and $0.86, respectively.
(4) Includes the acquisition of ValueRx effective April 1, 1998. Also includes a
non-recurring charge of $1,651 ($1,002 net of tax). Excluding this charge,
our basic and diluted earnings per share would have been $0.66 and $0.65,
respectively.
(5) In accordance with FAS 128, basic weighted average shares were used to
calculate 2000 diluted EPS as the 2000 net loss and the actual diluted
weighted average shares (78,066 as of December 31, 2000) cause diluted EPS
to be anti-dilutive.
(6) Drug spending is a measure of the gross aggregate dollar value of drug
expenditures of all programs managed by us. The difference between annual
drug spending and revenue reported by us is the combined effect of excluding
from reported revenues:
o the drug ingredient cost for those clients that have established their
own pharmacy networks, whereby we recognize as revenue only
administrative fees
o the co-pay portion of drug expenditures that are the responsibility of
members of health plans serviced by us Therefore, drug spending
provides a common basis to quantify the drug expenditures managed by a
company. Drug spend, however, is not an accepted reporting measurement
under generally accepted accounting principles and should not be
considered as an alternative to revenue.
(7) The specialty distribution drug spend and prescriptions filled are not
available prior to 1999. The specialty distribution business was just
starting up in the 1997-1998 time frame, and therefore the volume of
activity was very small.
(8) EBITDA is earnings before other income (expense), interest, taxes,
depreciation and amortization, or operating income plus depreciation and
amortization. EBITDA is presented because it is a widely accepted indicator
of a company's ability to service indebtedness. EBITDA, however, should not
be considered as an alternative to net income, as a measure of operating
performance, as an alternative to cash flow or as a measure of liquidity. In
addition, our calculation of EBITDA may not be identical to that used by
other companies.
26
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
We derive our revenues primarily from the sale of PBM services in the
United States and Canada. When we independently have a contractual obligation to
pay our network pharmacy providers for benefits provided to our clients'
members, we include the total payments from these clients as revenue, and
payments to the network pharmacy provider as cost of revenue (the "Gross Basis")
(See Footnote 1). These transactions require us to assume credit risk. If we
merely administer clients' network pharmacy contracts in which we do not assume
credit risks, we record only our administrative or dispensing fees as revenue
(the "Net Basis").
Management services provided to drug manufacturers include various
services relating to administration of manufacturer rebate programs. Revenues
relating to these services are recognized as earned based upon detailed drug
utilization data. Rebates payable to customers in accordance with the applicable
contracts are excluded from revenues. We estimate fees receivable from
pharmaceutical manufacturers on a quarterly basis converting total prescriptions
dispensed to estimated rebatable scripts (i.e., those prescriptions with respect
to which we are contractually entitled to submit claims for rebates) multiplied
by the contractually agreed manufacturer rebate amount. Estimated fees
receivable from pharmaceutical manufacturers are recorded when we determine them
to be realizable, and realization is not dependent upon future pharmaceutical
sales. Estimates are revised once the actual rebatable scripts are calculated
and rebates are billed to the manufacturer.
Non-PBM revenues are derived from administrative fees received from
drug manufacturers for the dispensing or distribution of pharmaceuticals
requiring special handling or packaging. We also administer sample card programs
for certain manufacturers and include the ingredient costs of pharmaceuticals
dispensed from retail pharmacies in our Specialty Distribution Services
subsidiary ("SDS") revenues. Additionally, the associated costs for this sample
card program are recorded in cost of revenues. Non-PBM revenues are also
generated from the sale of pharmaceuticals for and the provision of infusion
therapy services through our Express Scripts Infusion Services subsidiary
("Infusion Services"). On June 12, 2001, we announced that we entered into an
agreement with Option Care, Inc. to sell substantially all of the assets of our
Infusion Services business, and we discontinued our acute home infusion
services.
Our business has grown through strategic acquisitions over the last few
years. On April 1, 1999, we acquired Diversified Pharmaceutical Services, Inc.
("DPS") from SmithKline Beecham Corporation for approximately $715 million. On
April 1, 1998, we consummated our first major acquisition by acquiring Value
Health, Inc. and Managed Prescription Network, Inc. (collectively, "ValueRx"),
the PBM operations of HCA-Healthcare Corporation, for approximately $460 million
in cash. Consequently, our operating results include those of DPS from April 1,
1999 and ValueRx from April 1, 1998. In addition to growth through acquisitions,
we have been successful in adding net new clients each year such as the contract
we were awarded by UnitedHealth Group in 2001 to provide retail network and mail
pharmacy services to members of AARP.
Earnings per share and weighted average shares outstanding included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been restated to reflect the two-for-one stock split effective
June 22, 2001.
27
RESULTS OF OPERATIONS
REVENUES
Year Ended December 31,
Increase/ Increase/
(in thousands) 2001 (Decrease) 2000 (Decrease) 1999
- --------------------------------------------------------------------------------------------------------------
Gross Basis revenues $ 9,198,790 39.2% $ 6,608,451 60.2% $ 4,124,170
Net Basis revenues 55,724 (72.8)% 204,531 (3.6)% 212,217
Other revenues - nm 10,423 247.4% 3,000
----------------------------------------------------------------------
Total PBM revenues 9,254,514 35.6% 6,823,405 57.2% 4,339,387
Non-PBM revenues 74,268 (15.6)% 88,044 33.8% 65,810
----------------------------------------------------------------------
Total revenues $ 9,328,782 35.0 % $ 6,911,449 56.9% $ 4,405,197
======================================================================
nm = not meaningful
Revenues for network pharmacy claims increased $1,687,020,000, or
33.9%, in 2001 over 2000 and $1,832,003,000, or 58.3%, in 2000 over 1999. These
increases are due to a higher mix of clients utilizing retail pharmacy networks
contracted by us, increased membership and member utilization, and higher drug
ingredient costs. Network pharmacy claims processed increased 21.6% to
293,996,000 in 2001 over 2000 (excluding the 57,765,000 claims processed for the
United HealthCare ("UHC") contract, which terminated effective May 31, 2000).
The average revenue per network pharmacy claim increased 36.4% to $22.65 over
2000 due to the termination of the UHC contract (recorded on the Net Basis) and
a higher mix of clients utilizing retail pharmacy networks contracted by us
versus retail pharmacy networks contracted by the client. As previously
discussed under "--Overview", we record the associated revenues for clients
utilizing our retail pharmacy networks on the Gross Basis, therefore this shift
to our retail pharmacy networks results in an increase in Gross Basis revenues
(and corresponding cost of revenues) and revenue per claim. In 2002, we expect
to see a higher mix of clients on the Gross Basis due to the loss of a large Net
Basis client at the beginning of the year. During 2000, network pharmacy claims
processed increased 25,675,000 or 9.4% over 1999. The average revenue per
network pharmacy claim increased 44.7% in 2000 over 1999 primarily as a result
of the increased rate of historical Express Scripts and DPS clients moving from
retail pharmacy networks contracted by the clients to one contracted by us.
Mail pharmacy services revenues and mail pharmacy services
prescriptions filled increased $758,457,000, or 42.5% and 5,310,000, or 35.0%,
respectively, during 2001 over 2000. These increases are primarily due to
increased membership and utilization by existing members. Revenues for mail
pharmacy services increased $638,834,000, or 55.7%, in 2000 over 1999 as a
result of the growth in mail pharmacy claims processed of 4,575,000, or 43.1% in
2000 over 1999. These increases are primarily due to the addition of new members
with high mail utilization rates, the cross selling of mail pharmacy services
and increased utilization by existing members. The average revenue per mail
pharmacy claim increased 5.6% in 2001 over 2000 and 8.8% in 2000 over 1999
primarily due to higher drug ingredient costs.
The decrease in revenue for non-PBM services for the year ended
December 31, 2001 from December 31, 2000 is primarily due to our sale of our
Infusion Services subsidiary on June 12, 2001, partially offset by the
additional volume in SDS. The increase in revenue for non-PBM services during
2000 compared to 1999 is primarily due to additional volume within SDS resulting
from a new contract that took effect during the fourth quarter of 1999.
Other revenue decreased $10,423,000 in 2001 from 2000 due to the
agreement with PlanetRx.com, Inc. (PlanetRx), which was restructured in July
2000. We received a $4,300,000 fee from PlanetRx to terminate the prior contract
and no additional cash payments were made to us under the restructured
agreement. Other revenues increased $7,423,000 in 2000 over 1999 due to the fees
received under the agreement with PlanetRx, which became effective in December
1999.
28
COSTS AND EXPENSES
Year Ended December 31,
Increase/ Increase/
(in thousands) 2001 Decrease 2000 Decrease 1999
- --------------------------------------------------------------------------------------------------------------
PBM cost of revenues $ 8,685,016 37.6% $ 6,311,705 62.2% $ 3,891,711
Non-PBM cost of revenues 47,898 (21.2)% 60,777 16.2% 52,287
-------------- -------------- -------------
Total cost of revenues 8,732,914 37.0% 6,372,482 61.6% 3,943,998
Selling, general and administrative 294,939 8.5 % 271,921 17.4% 231,543
Depreciation and amortization(1) 63,752 (4.6)% 66,834 6.7% 62,651
Non-recurring expenses - - 30,221
----------------------------------------------------------------------
Total costs and expenses $ 9,091,605 35.5% $ 6,711,237 57.2% $ 4,268,413
======================================================================
nm = not meaningful
(1) Represents depreciation and amortization expense included in selling,
general and administrative expenses on our Statement of Operations. Cost of
revenues, above, also includes depreciation and amortization expense on
property and equipment of $16,331, $11,781 and $9,216 for the years ended
2001, 2000 and 1999, respectively.
Our cost of revenues for PBM services increased 37.6% in 2001 over
2000, and 62.2% in 2000 over 1999 mainly as a result of the increase in PBM
revenues discussed above. The PBM cost of revenues grew slightly faster than
revenues in 2001 and 2000 as a result of a larger percentage of our clients
being recorded each year on the Gross Basis, for which we record the drug
ingredient cost in cost of revenues (see further discussion under "--Overview").
We have been successful in offsetting margin pressure due to lower pricing on
administrative fees and other clinical programs with higher profits from
increased mail penetration, improved formulary compliance and other value-added
clinical programs.
Cost of revenues for non-PBM services decreased 21.2% from 2000, while
non-PBM revenues decreased only 15.6% primarily due to the discontinuance of our
acute home infusion services (discussed above), which was less profitable than
our SDS business. Cost of revenues for non-PBM services increased 16.2% in 2000
from 1999, while non-PBM revenues increased 33.8%, primarily due to additional
volume of business within SDS, which represents a larger percentage of non-PBM
revenues, where we primarily record as revenue only our administrative fee for
distributing pharmaceutical manufacturers' products. SDS was also able to derive
operating cost efficiencies as a result of the increase in volume serviced under
a contract that took effect in the fourth quarter of 1999.
Selling, general and administrative expenses, excluding depreciation
and amortization, increased $23,018,000, or 8.5%, in 2001 over 2000 and
$40,378,000 or 17.4%, in 2000 over 1999. The increases in 2001 and 2000 are
primarily due to expenditures required to expand operational and administrative
support functions in order to enhance management of the pharmacy benefit. The
increase in 2000 is also due to the inclusion of DPS for a full twelve months
during 2000 versus nine months of 1999. As a percentage of total revenues,
selling, general and administrative expenses, excluding depreciation and
amortization, for 2001 decreased to 3.2% from 3.9% in 2000 and 5.3% in 1999.
Depreciation and amortization decreased for the year ended December 31,
2001 from 2000 primarily due to amortization of the UHC customer contract
intangible asset, which fully amortized during 2000. This reduction was
partially offset by increased depreciation and amortization expense associated
with additional property and equipment placed into service. Depreciation and
amortization increased during 2000 over 1999 due to the expansion of our
operations and enhancement of our information systems to better serve our
clients. This increase was slightly offset by the decrease in amortization of
customer contracts as a result of the UHC customer contract intangible asset
being fully amortized during 2000. The remaining increase in 2000 was primarily
due to the acquisition of DPS, as 1999 only included amortization of the DPS
goodwill and other intangible assets for nine months.
During 1999, we recorded the following items in our Consolidated
Statement of Operations in the non-recurring charges line (there were no such
items during 2001 or 2000):
29
o During the second quarter of 1999, we incurred a $9,400,000
charge for the consolidation of our Plymouth, Minnesota
facility into our Bloomington, Minnesota facility. In December
1999 and September 2000, the associated accrual was reduced by
$2,301,000 and $44,000, primarily as a result of subleasing a
portion of the unoccupied space. The consolidation plan
included the relocation of all employees at the Plymouth
facility to the Bloomington facility that began in August
1999, with completion delayed until the first quarter of 2001.
Included in the charge were anticipated cash expenditures of
approximately $4,779,000 for lease termination fees and rent
on unoccupied space to be paid through April 2001 and
anticipated non-cash charges of approximately $2,276,000 for
the write-down of leasehold improvements and furniture and
fixtures. The charge does not include any costs associated
with the physical relocation of the employees.
o During December 1999, we recorded a pre-tax restructuring
charge of $2,633,000 associated with the outsourcing of our
computer operations to Electronic Data Systems Corporation.
The principal actions of the plan included cash expenditures
of approximately $2,148,000 for the transition of 51 employees
to the outsourcer and the elimination of contractual
obligations of ValueRx, which had no future economic benefit
to us, and non-cash charges of approximately $485,000 due to
the reduction in the carrying value of certain capitalized
software to its net realizable value. This plan was completed
during the second quarter of 2000 when remaining cash payments
were made.
o Also in December 1999, we recorded a pre-tax restructuring
charge of $969,000 associated with restructuring our PPS
majority-owned subsidiary and the purchase of the remaining
PPS common stock from management. The charge consisted of cash
expenditures of $559,000 relating to stock compensation
expense and $410,000 of severance payments to 9 employees.
This plan was completed in January 2000.
o In conjunction with the sale of the assets of
YourPharmacy.com, Inc. to PlanetRx, we recorded a $19,520,000
stock compensation charge relating to former YourPharmacy.com
employees. The amount of the charge was determined using the
initial public offering price of $16 per share for PlanetRx
common stock.
OTHER INCOME (EXPENSE), NET
On February 22, 2001, we entered into an agreement with AdvancePCS and
Merck-Medco to form RxHub, LLC ("RxHub"). RxHub will be an electronic exchange
enabling physicians who use electronic prescribing technology to link to
pharmacies, PBMs and health plans. The company is designed to operate as a
utility for the conduit of information among all parties engaging in electronic
prescribing. We own one-third of the equity of RxHub (as do each of the other
two founders) and have committed to invest up to $20 million over the next five
years with approximately $5.7 million invested during 2001 and an additional
$4.3 million expected to be invested through 2003. We have recorded our
investment in RxHub under the equity method of accounting, which requires our
percentage interest in RxHub's results to be recorded in our Consolidated
Statement of Operations. Our percentage of RxHub's loss for 2001 is $1,834,000
($1,139,000 net of tax), and has been recorded in other income (expense) in our
Consolidated Statement of Operations. Our investment in RxHub (approximately
$3,866,000 at December 31, 2001) is recorded in other assets on our Consolidated
Balance Sheet.
The $12,374,000, or 31.3%, decrease in net interest expense for the year
ended December 31, 2001 over 2000 is primarily due to the reduction in debt of
$50 million in 2001 and $240 million in 2000. Our interest expense, net
decreased $14,775,000 during 2000 compared to 1999. The decrease is a result of
utilizing the $299,378,000 proceeds from our June 1999 common stock offering to
repay a portion of our credit facility, as well as utilizing $344,131,000 of our
own cash to pay-down our credit facility from June 1999 through December 31,
2000. Associated with the prepayment of our loans during 2000, we recorded an
ordinary gain in interest expense of $1.5 million ($926,000 net of tax) due to
the restructuring of our interest rate swap agreements (see "--Market Risk").
Additionally, we repurchased $10,115,000 of our Senior Notes as of December 31,
2000 (see "--Liquidity and Capital Resources").
30
During 1999, we recognized a one-time non-cash gain of $182,930,000
related to the sale of the assets of YourPharmacy.com, Inc. in exchange for a
19.9% ownership interest in PlanetRx.
During 2000, we recorded a $165,207,000 ($103,089,000 net of tax)
non-cash impairment charge on our investment in PlanetRx common stock as the
loss in value was deemed to be other than temporary. Any unrealized loss
associated with recording our investment in PlanetRx at current market value
previously recorded in stockholders' equity was written off to the current
period earnings, in addition to any additional charges necessary to write-off
our investment in accordance with Financial Accounting Standards Board Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Additionally, during 2000, we made charitable donations of 200,000 shares of our
PlanetRx common stock (after giving effect to the December 4, 2000 8-for-1
reverse stock split) and realized selling, general and administrative expense
related to the donation of approximately $713,000. Therefore, our ownership of
PlanetRx as of December 31, 2001 consisted of approximately 1,096,000 common
shares, or 17.8%, of PlanetRx common shares outstanding (after giving effect to
the December 4, 2000 8-for-1 reverse stock split) which are carried at no value.
PROVISION FOR INCOME TAXES
Our effective tax rate decreased to 39.9% for 2001 from 40.9% in 2000,
excluding the $62,118,000 tax benefit from the write-off of marketable
securities and the $574,000 in tax expense from the ordinary gain on the
restructuring of our swaps in 2000, both discussed under "--Other Income
(Expense)". This decrease is due primarily to lower taxes paid in several states
as well as a decrease in non-deductible goodwill as a percentage of taxable
income. Excluding the one-time gain (see "--Other (Expense) Income, Net") and
non-recurring items (see "--Cost and Expenses") in 1999, our effective tax rate
would have been 43.7% for 1999. The decrease in 2000 from 1999 is primarily due
to the reduction in the non-deductible goodwill and customer contract
amortization expense associated with the ValueRx acquisition as a percentage of
income before income taxes. The goodwill and customer contract amortization for
the DPS acquisition is deductible for income tax purposes due to the filing of
an Internal Revenue Code ss.338(h)(10) election.
NET INCOME AND EARNINGS PER SHARE
Our net income increased $133,826,000 in 2001 from a loss of $9,126,000
in 2000, which decreased $159,344,000, or 106.1% from 1999. Net income for 2000
and 1999 were affected by the following one-time items:
Year Ended December 31, 2000
o A non-cash impairment charge during the second and fourth
quarters of 2000 totaling $165,207,000 ($103,089,000 net of
tax) relating to our PlanetRx investment (see "--Other Income
(Expense), Net")
o An extraordinary loss on the early retirement of debt due to
the write-off of deferred financing fees during the third and
fourth quarters of 2000 totaling $1,790,000 ($1,105,000 net of
tax) discussed in "--Liquidity and Capital Resources"
o An ordinary gain in the amount of $1,500,000 ($926,000 net of
tax) on the restructuring of our interest rate swap agreements
related to the early retirement of debt in the third quarter
of 2000 (see "--Market Risk")
Year Ended December 31, 1999
o Non-recurring charges discussed in "--Cost and Expenses"
totaling $30,221,000 ($18,188,000 net of tax)
o One-time gain of $182,930,000 ($112,037,000 net of tax)
discussed in "--Other Income (Expense), Net"
o An extraordinary loss on the early retirement of debt during
the second and third quarters of 1999 totaling $11,642,000
($7,150,000 net of tax)
31
Excluding these one-time items and excluding financing costs on the
temporary debt associated with the acquisition of DPS, after assuming our equity
and Senior Notes offerings had been completed on April 1, 1999, net income for
2000 would have been $94,142,000, or $1.23 per basic share and $1.21 per diluted
share, compared to $67,326,000, or $0.90 per basic share and $0.88 per diluted
share for 1999, respectively.
Excluding these one-time items above related to 2000 and 1999, and
assuming no anti-dilution using the potentially dilutive common shares of
1,674,000 for 2000, basic and diluted earnings per share before extraordinary
items increased 30.1% and 28.9% in 2001 over 2000 and 36.6% and 37.5% in 2000
over 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During 2001 net cash provided by operations increased $35,080,000 to
$280,990,000 from $245,910,000 in 2000. This increase is primarily due to
increased cash earnings.
As a percent of accounts receivables, our allowance for doubtful
accounts was 2.7% and 2.8% at December 31, 2001 and 2000, respectively.
Our investment in net working capital as of December 31, 2001 increased
to a $32,414,000 deficit from a $117,775,000 deficit as of December 31, 2000 and
a $34,003,000 deficit as of December 31, 1999. The increase in working capital
from the December 31, 2000 level reflects additional cash on hand as of December
31, 2001 in anticipation of cash required to close recently announced
acquisitions in early 2002, and the timing of collections and payments.
Our capital expenditures in 2001 decreased $22,932,000, or 28.6%, from
2000 and increased $43,260,000, or 117.1%, in 2000 over 1999. The decrease in
2001 reflects the completion of various projects in 2000 including the
renovation of our St. Louis operations facilities, enhancement of services
provided to our clients and activities related to the integration of acquired
companies. The increase in 2000 over 1999 is due primarily to the projects
discussed above. We will continue to invest in technology that will provide
efficiencies in operations, manage growth and enhance service levels. We expect
to fund anticipated capital expenditures primarily out of operating cash flow
or, to the extent necessary, with working capital borrowings under our $150
million revolving credit facility, discussed below. We believe our capital
expenditures for 2002 will approximate the level in 2001, excluding the impact
of the NPA acquisition.
On March 1, 2001, our Canadian subsidiary, ESI Canada, Inc., completed
its acquisition of Centre d'autorisation et de paiement des services de sante,
Inc. ("CAPSS"), a leading Quebec-based PBM, for approximately CAN$26.8
million (approximately US$17.5 million), which includes a purchase price
adjustment for closing working capital. The transaction, which has been
accounted for under the purchase method of accounting, was funded with our
operating cash flow. The results of operations of CAPSS have been included in
the consolidated financial statements and PBM segment since March 1, 2001. The
purchase price has been allocated based upon the estimated fair value of net
assets acquired at the date of the acquisition. The excess of purchase price
over tangible net assets acquired has been allocated to intangible assets
consisting of customer contracts in the amount of US$5,149,000 which are being
amortized using the straight-line methods over the estimated useful life of 20
years and are included in other intangible assets, and goodwill in the amount of
US$11,655,000 which was amortized using the straight-line method over the
estimated useful life of 30 years.
On February 25 2002, we purchased substantially all of the assets
utilized in the operation of Phoenix Marketing Group (Holdings), Inc.
("Phoenix"), a wholly-owned subsidiary of Access Worldwide Communications, Inc.
for $33 million in cash plus the assumption of certain liabilities. Phoenix is
one of the largest prescription drug sample fulfillment companies, shipping
approximately 95 million sample units in 2001. The transaction will be accounted
for under the provisions of FAS 141, "Business Combinations" and FAS 142,
"Goodwill and Other Intangible Assets" and was funded with our operating cash
flow.
On February 6, 2002, we signed a definitive agreement to acquire the
businesses comprising National Prescription Administrators, Inc. ("NPA") for
$515 million. NPA is a privately held full-service pharmacy benefit manager and
will strengthen our participation in two key market segments, union and
government sponsored plans. The transaction is expected to close near the end of
the first quarter of 2002, subject to customary closing conditions and the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act. The transaction
32
will be accounted for under the provisions of FAS 141, and FAS 142. The purchase
price will be funded with cash on hand, up to $100 million of borrowings on our
revolving credit facility, a $350,000 million new tack-on Term B loan and the
issuance of approximately 552,000 shares of our common stock. We will file an
Internal Revenue Code ss.338(h)(10) election, making amortization expense of
intangible assets, including goodwill, tax deductible.
In September 2000, we sold our Albuquerque, New Mexico property and
building for $7,806,000. These assets were then leased back from the purchaser
for a term of ten years with the option to extend the term up to an additional
ten years. The resulting lease is being accounted for as an operating lease, and
the resulting deferred gain of $4,136,000 is being amortized over the ten-year
life of the lease.
In December 2000, the Department of Health and Human Services ("DHHS")
issued final privacy regulations, pursuant to the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"), which impose extensive restrictions on
the use and disclosure of individually identifiable health information by
certain entities. We will be required to comply with certain aspects of the
regulations. We have established a plan and a process for implementing all
necessary changes to our business operations by the statutory compliance date of
April 2003. We believe compliance with these regulations will have a significant
impact on our business operations. We have completed an assessment of the costs
we will incur in complying with these regulations and do not believe they will
be material to our results of operations, financial position and/or cash flow
from operations. However, DHHS plans to issue additional regulations in 2002 and
we can give no assurance that our implementation costs will not be material to
us as a result of such changes.
During 2001, we utilized internally generated cash to prepay $50
million of our Term A loans (described below) and to repurchase 1,227,000 shares
of our Common Stock for $54,500,000. As of December 31, 2001, we repurchased a
total of 3,757,000 shares of our Common Stock (reflecting the two-for-one stock
split effective June 22, 2001) under the stock repurchase program that we
announced on October 25, 1996. Approximately 2,558,000 shares have been reissued
in connection with employee compensation plans through December 31, 2001. In
February 2002, our Board of Directors authorized an increase in our stock
repurchase program from 5,000,000 shares to 6,500,000 and placed no limit on the
duration of the program. Additional debt repayments or common stock repurchases,
if any, will be made in such amounts and at such times as we deem appropriate
based upon prevailing market and business conditions, subject to restrictions on
stock repurchases contained in our bank credit facility and the Indenture which
governs our Senior Notes.
We have a credit facility with a commercial bank syndicate consisting
of $105 million of Term A loans and a $150 million revolving credit facility. As
a result of the prepayment of our Term A loans noted above, we recorded an
extraordinary charge during 2001 for the deferred financing fees in the amount
of $372,000, net of tax. The Term A loans and the revolving credit facility
mature on March 31, 2005. The capital stock of each of our existing and
subsequently acquired domestic subsidiaries, excluding ValueRx of Michigan,
Inc., Diversified NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto
Rico), Inc., and 65% of the stock of our Canadian subsidiaries have been pledged
as collateral for the credit facility.
Our credit facility requires us to pay interest quarterly on an
interest rate spread based on several London Interbank Offered Rates ("LIBOR")
or base rate options. Using a LIBOR spread, the Term A loans had an interest
rate of 3.37% on December 31, 2001. To alleviate interest rate volatility, we
have entered into interest rate swap arrangements, one of which expired in
October 2001, which are discussed in "--Market Risk" below. The credit facility
contains covenants that limit the indebtedness we may incur, dividends paid and
the amount of annual capital expenditures. The covenants also establish a
minimum interest coverage ratio, a maximum leverage ratio, and a minimum fixed
charge coverage ratio. In addition, we are required to pay an annual fee of
0.25%, payable in quarterly installments, on the unused portion of the revolving
credit facility ($150 million at December 31, 2001). At December 31, 2001, we
are in compliance with all covenants associated with the credit facility.
In June 1999, we issued $250 million of 9.625% Senior Notes due 2009,
which require interest to be paid semi-annually on June 15 and December 15. The
Senior Notes are callable at specified prepayment premiums beginning in June
2004. The Senior Notes are unconditionally and jointly and severally guaranteed
by our wholly-owned domestic subsidiaries other than PPS, Great Plains
Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and
Diversified Pharmaceutical Services (Puerto Rico), Inc. During the second
quarter of 2000, we repurchased $10,115,000 of our Senior Notes on the open
market for $10,150,000, which includes $385,000 of accrued interest.
33
The following table sets fourth our schedule of current maturities of
our long-term debt, excluding the deferred interest rate swap gain of $648,000
at December 31, 2001, and future minimum lease payments due under noncancellable
operating leases (in thousands):
Year Ended December 31, Current Maturities Future Minimum
Of Long-term Debt Lease Payments
- --------------------------------------------------------------------------------
2002 $ - $ 13,521
2003 - 13,298
2004 39,450 13,361
2005 65,550 13,085
2006 11,691
Thereafter 240,771 23,960
--------------------------------------------
$ 345,771 $ 88,916
============================================
As previously mentioned, to fund the acquisition of NPA we are amending
our existing credit facility to add a $350 million Term B loan. The Term B loan
will have a maturity of six years and will amortize 1% in years one through
four, 25% in year five and 71% in year six. Interest will be payable quarterly
on an interest rate spread based on several LIBOR or base rate options. The
anticipated interest rate spread for LIBOR borrowings will be 225 basis points.
The Term B loan will be secured on the same basis as our existing credit
facility. In addition, we are requesting in the amendment to adjust certain
covenants, relating to restricted junior payments and asset sales, and to
provide for a future accounts receivable facility.
We regularly review potential acquisitions and affiliation
opportunities. We believe that available cash resources, bank financing or the
issuance of additional common stock could be used to finance future acquisitions
or affiliations. However, there can be no assurance we will make acquisitions or
affiliations in 2002 or thereafter, other than our previously announced
acquisitions of Phoenix and NPA.
OTHER MATTERS
During July 2001, the Financial Accounting Standards Board issued
Financial Accounting Statement Number ("FAS") 141, "Business Combinations" and
FAS 142, "Goodwill and Other Intangible Assets". FAS 141 requires that all
business combinations be accounted for using the purchase method of accounting.
FAS 141 also defines acquired intangible assets and requires that a reassessment
of a company's preexisting acquired intangible assets and goodwill be evaluated
and adjusted to conform with that definition. We do not believe that FAS 141
will have a significant impact on our consolidated financial position,
consolidated results of operations and/or our consolidated cash flows once
implemented.
FAS 142 requires that goodwill no longer be amortized under any
circumstances. Instead, all goodwill (including goodwill associated with
acquisitions consummated prior to the adoption of FAS 142) is to be evaluated
for impairment annually or when events or circumstances occur indicating that
goodwill might be impaired. In accordance with the implementation provisions of
FAS 142, we expect to complete our first impairment test under FAS 142 by the
end of the second quarter of 2002, and we do not anticipate incurring an
impairment charge. All goodwill impairment losses are to be presented as a
separate line item in the operating section of the consolidated results of
operations (unless the impairment loss is associated with a discontinued
operation). FAS 142 requires the disclosure of income before extraordinary items
and net income, and earnings per share for both income measures, all computed on
a pro forma basis by reversing the goodwill amortized in the periods presented.
Such pro forma disclosures are required in the period of adoption and thereafter
until all periods presented reflect goodwill accounted for in accordance with
FAS 142. Had FAS 142 been effective for 2001, our net income (loss) before
extraordinary items would have been $151,111,000, or $1.94 per basic share and
$1.89 per diluted share; $17,687,000, or $0.23 per basic and diluted share; and
$178,480,000, or $2.47 per basis share and $2.41 per diluted share; for the
years ended December 31, 2001, 2000 and 1999, respectively.
During October 2001, the Financial Accounting Standards Board issued
FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS
144 requires that long -lived assets to be disposed of by sale be measured at
the lower of book value or fair value less cost to sell. Additionally, FAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the
34
rest of the entity and (2) will be eliminated from the ongoing operations of the
entity in a disposal transaction. FAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally, its
provisions are to be applied prospectively. We do not believe implementation of
FAS 144 will have a significant impact on our consolidated financial position,
consolidated results of operations and/or our consolidated cash flows.
In May 2001, our stockholders approved our Amended and Restated
Certificate of Incorporation. Among the changes to the Certificate of
Incorporation was an amendment that consolidated and renamed our classes of
Common Stock. Prior to the amendment we had 181,000,000 authorized shares of
Common Stock consisting of 150,000,000 shares of Class A Common Stock and
31,000,000 shares of Class B Common Stock. No shares of the Class B Common Stock
were outstanding. Pursuant to the Amended and Restated Certificate of
Incorporation, the Class B Common Stock was eliminated and each share of Class A
Common Stock was renamed as "Common Stock." As a result, we now have 181,000,000
shares of Common Stock authorized.
At December 31, 2001, NYLIFE LLC owned shares of our Common Stock
representing approximately 21% of the outstanding shares, which includes the
right to vote 6,900,000 shares of Common Stock that the Trust may deliver upon
exchange of the Trust issued investment units. New York Life has agreed on
behalf of itself and its subsidiaries, to vote these 6,900,000 shares of our
Common Stock prior to delivery thereof by the Trust to the holders of the Trust
investment units in the same proportion and to the same effect as the votes cast
by our other stockholders at any meeting of stockholders, subject to the
following exceptions: New York Life has agreed to vote its 16,240,000 shares
(which includes the above described 6,900,000 shares) in favor of the slate of
nominees for directors recommended by our Board of Directors for election by
stockholders (provided that, so long as New York Life is entitled to
representation on the Board of Directors, such slate includes New York Life's
nominees).
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals affect our revenues and cost of revenues. To date, we have been
able to recover substantially all price increases from our clients under the
terms of our agreements, although under selected arrangements in which we have
performance measurements tied to drug costs, we could be adversely affected by
inflation in drug costs if the result is an overall increase in the cost of the
drug plan. To date, changes in pharmaceutical prices have not had a significant
adverse affect on us.
MARKET RISK
Effective January 1, 2001, we adopted FAS 133 as amended, Accounting
for Derivative Instruments and Hedging Activities. FAS 133 requires all
derivative financial instruments, such as interest rate swaps, to be recognized
as either assets or liabilities in the Consolidated Balance Sheet and measured
at fair value. The adoption of FAS 133 did not have a material effect on our
financial statements, but did reduce other comprehensive income during 2001 by
$3,589,000, net of taxes, in the accompanying Unaudited Consolidated Statement
of Changes in Stockholders' Equity due to a cumulative effect of change in
accounting principle of $612,000 as of January 1, 2001, and additional deferred
losses recorded during 2001 of $2,977,000.
We use interest rate swap agreements to manage our interest rate risk
on future variable interest payments under our bank credit facility. As of
December 31, 2001, we have only one outstanding swap agreement to fix the
variable interest payments on approximately $98 million of our variable rate
debt under our credit facility. Under this interest rate swap agreement, we
agree to receive a floating rate of interest on the notional principal amount of
approximately $98 million based upon a three month LIBOR rate in exchange for
payment of a fixed rate of 6.25% per annum. The notional principal amount will
increase to $100 million in October 2002 and beginning in April 2003, it will
reduce to $60 million and in April 2004, it will reduce to $20 million until
maturing in April 2005.
Our present interest rate swap agreement is a cash flow hedge as it
requires us to pay fixed-rates of interest, which hedges against changes in the
amount of future cash flows associated with variable interest obligations.
Accordingly, the fair value of our swap agreement is reported on the
Consolidated Balance Sheet in other liabilities ($5,798,000 pre-tax at December
31, 2001) and the related deferred loss on this agreement is recorded in
shareholders' equity as a component of other comprehensive income (a $3,589,000,
net of taxes, reduction at December 31, 2001). This deferred loss is then
recognized as an adjustment to interest expense over the same period
35
in which the related interest payments being hedged are recorded in income. The
loss associated with the ineffective portion of this agreement is immediately
recognized in income. For the year ended December 31, 2001, the loss on the
ineffective portion of our swap agreement was not material to the consolidated
financial statements.
A sensitivity analysis is used to determine the impact interest rate
changes will have on the fair value of the interest rate swap, measuring the
change in the net present value arising from the change in the interest rate.
The fair value of the swap is then determined by calculating the present value
of all cash flows expected to arise thereunder, with future interest rate levels
implied from prevailing mid-market yields for money-market instruments, interest
rate futures and/or prevailing mid-market swap rates. Anticipated cash flows are
then discounted on the assumption of a continuously compounding zero-coupon
yield curve. A 10 basis point (0.1%) decline in interest rates at December 31,
2001 would have caused the fair value of the swap to change by $198,000 pretax,
resulting in a liability with a fair value of $5,996,000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
Response to this item is included in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Market Risk"
above.
36
Item 8 - Consolidated Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and
Stockholders of Express Scripts, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 65 present fairly, in all material
respects, the financial position of Express Scripts, Inc. and its subsidiaries
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) on page 65 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. 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 conducted
our audits of these 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 that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 1, 2002, except as to paragraphs 2,3, and 4 of Note 2 which are as of
February 25, 2002
37
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------------------------------------------------
December 31,
(in thousands, except share data) 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 177,715 $ 53,204
Receivables, net 883,827 802,790
Inventories 122,375 110,053
Deferred taxes 16,368 22,180
Prepaid expenses and other current assets 12,918 9,942
------------------- -------------------
Total current assets 1,213,203 998,169
------------------- -------------------
Property and equipment, net 165,263 147,709
Goodwill, net 942,280 967,017
Other intangible assets, net 165,349 157,094
Other assets 14,150 6,655
------------------- -------------------
Total assets $ 2,500,245 $ 2,276,644
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Claims and rebates payable $ 910,360 $ 878,622
Accounts payable 181,784 94,407
Accrued expenses 153,473 142,915
------------------- -------------------
Total current liabilities 1,245,617 1,115,944
Long-term debt 346,119 396,441
Other liabilities 76,512 59,015
------------------- -------------------
Total liabilities 1,668,248 1,571,400
------------------- -------------------
Commitments and Contingencies (Notes 2, 3, and 8)
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, and no shares
issued and outstanding - -
Common Stock, $0.01 par value, 181,000,000 and 150,000,000 shares
authorized, respectively, and 79,230,000 and 39,044,000 shares
issued and outstanding, respectively 792 390
Class B Common Stock, $0.01 par value, no shares and 31,000,000 shares
authorized, respectively, and no shares issued and outstanding - -
Additional paid-in capital 492,229 441,387
Unearned compensation under employee compensation plans (15,452) (13,676)
Accumulated other comprehensive income (4,593) (97)
Retained earnings 412,114 287,414
------------------- -------------------
885,090 715,418
Common Stock in treasury at cost, 1,199,000 and 270,000
shares, respectively (53,093) (10,174)
------------------- -------------------
Total stockholders' equity 831,997 705,244
------------------- -------------------
Total liabilities and stockholders' equity $ 2,500,245 $ 2,276,644
=================== ===================
See accompanying Notes to Consolidated Financial Statements.
38
CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(in thousands, except per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Revenues:
Revenues $ 9,328,782 $ 6,901,026 $ 4,402,197
Other revenues - 10,423 3,000
-----------------------------------------------------------
9,328,782 6,911,449 4,405,197
-----------------------------------------------------------
Costs and expenses:
Cost of revenues 8,732,914 6,372,482 3,943,998
Selling, general and administrative 358,691 338,755 294,194
Non-recurring - - 30,221
-----------------------------------------------------------
9,091,605 6,711,237 4,268,413
-----------------------------------------------------------
Operating income 237,177 200,212 136,784
-----------------------------------------------------------
Other income (expense):
Undistributed loss from joint venture (1,834) - -
Write-off of marketable securities - (165,207) -
Gain on sale of assets - - 182,930
Interest income 7,120 8,430 5,762
Interest expense (34,219) (47,903) (60,010)
-----------------------------------------------------------
(28,933) (204,680) 128,682
-----------------------------------------------------------
Income (loss) before income taxes 208,244 (4,468) 265,466
Provision for income taxes 83,172 3,553 108,098
-----------------------------------------------------------
Income (loss) before extraordinary item 125,072 (8,021) 157,368
Extraordinary item, net of taxes (372) (1,105) (7,150)
-----------------------------------------------------------
Net income (loss) $ 124,700 $ (9,126) $ 150,218
===========================================================
Basic earnings (loss) per share:
Before extraordinary items $ 1.60 $ (0.10) $ 2.18
Extraordinary item, net of taxes - (0.02) (0.10)
-----------------------------------------------------------
Net income (loss) $ 1.60 $ (0.12) $ 2.08
===========================================================
Weighted average number of common shares
outstanding during the period - Basic EPS 77,857 76,392 72,190
===========================================================
Diluted earnings (loss) per share:
Before extraordinary item $ 1.56 $ (0.10) $ 2.13
Extraordinary item, net of taxes - (0.02) (0.10)
-----------------------------------------------------------
Net income (loss) $ 1.56 $ (0.12) $ 2.03
===========================================================
Weighted average number of common shares
outstanding during the period - Diluted EPS 79,827 76,392 74,066
===========================================================
See accompanying Notes to Consolidated Financial Statements
39
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------
Number of Shares Amount
------------------ ---------------------------------------------------
Unearned
Compensation
Class B Class B Additional Under
Common Common Common Common Paid-in Employee
(in thousands) Stock Stock Stock Stock Capital Compensation
Plans
- -------------------------------------------------------- ---------------------------------------------------
Balance at December 31, 1998 18,610 15,020 $ 186 $ 150 $ 110,099 $ -
--------------------- ---------------------------------------------------
Comprehensive income:
Net income - - - - - -
Other comprehensive (loss)
income,
Foreign currency
translation adjustment - - - - - -
Unrealized loss on
investment, net of taxes - - - - - -
--------------------- ---------------------------------------------------
Comprehensive income - - - - - -
Issuance of common stock 5,175 - 52 - 299,326 -
Common stock issued under
employee plans 10 - - - 551 -
Exercise of stock options 186 - 2 - 5,744 -
Tax benefit relating to
employee stock plans - - - - 3,201 -
--------------------- ---------------------------------------------------
Balance at December 31, 1999 23,981 15,020 240 150 418,921 -
--------------------- ---------------------------------------------------
Comprehensive income:
Net loss - - - - - -
Other comprehensive income,
Foreign currency
translation adjustment - - - - - -
Recognition of prior
period unrealized
loss on investment - - - - - -
--------------------- ---------------------------------------------------
Comprehensive income (loss) - - - - - -
Conversion of Class B Common
Stock to Class A Common
Stock 15,020 (15,020) 150 (150) - -
Treasury stock acquired - - - - - -
Common stock issued under
employee plans 43 - - - 9,031 (15,160)
Amortization of unearned
compensation under
employee plans - - - - - 1,484
Exercise of stock options - - - - (2,021) -
Tax benefit relating to
employee stock options - - - - 15,456 -
--------------------- ---------------------------------------------------
Balance at December 31, 2000 39,044 - 390 - 441,387 (13,676)
--------------------- ---------------------------------------------------
Comprehensive income:
Net income - - - - - -
Other comprehensive income,
Foreign currency
translation adjustment - - - - - -
Cumulative effect of change
in accounting for
derivative financial
instruments, net of taxes - - - - - -
Realized and unrealized
losses on derivative
financial instruments, net
of taxes - - - - - -
--------------------- ---------------------------------------------------
Comprehensive (loss) income - - - - - -
Stock split in form of stock
dividend 39,292 - 393 - (393) -
Treasury stock acquired - - - - - -
Common stock issued under
employee plans 78 - 1 - 13,728 (12,266)
Amortization of unearned
compensation under
employee plans - - - - - 10,490
Exercise of stock options 816 - 8 - 11,899 -
Tax benefit relating to
employee stock options - - - - 20,769 -
Shares to be issued under
contractual agreement - - - - 4,839 -
--------------------- ---------------------------------------------------
Balance at December 31, 2001 79,230 - $ 792 $ - $ 492,229 $ (15,452)
--------------------- ---------------------------------------------------
Amount
----------------------------------------------------
Accumulated
Other
Comprehensive Retained Treasury
(in thousands) Income Earnings Stock Total
- ------------------------------------------------------------------------------------
Balance at December 31, 1998 $ (74) $ 146,322 $ (6,989) $ 249,694
----------------------------------------------------
Comprehensive income:
Net income - 150,218 - 150,218
Other comprehensive (loss)
income,
Foreign currency
translation adjustment 108 - - 108
Unrealized loss on
investment, net of taxes (9,555) - - (9,555)
----------------------------------------------------
Comprehensive income (9,447) 150,218 - 140,771
Issuance of common stock - - - 299,378
Common stock issued under
employee plans - - - 551
Exercise of stock options - - 141 5,887
Tax benefit relating to
employee stock plans - - - 3,201
----------------------------------------------------
Balance at December 31, 1999 (9,521) 296,540 (6,848) 699,482
----------------------------------------------------
Comprehensive income:
Net loss - (9,126) - (9,126)
Other comprehensive income,
Foreign currency
translation adjustment (131) - - (131)
Recognition of prior
period unrealized
loss on investment 9,555 - - 9,555
----------------------------------------------------
Comprehensive income (loss) 9,424 (9,126) - 298
Conversion of Class B Common
Stock to Class A Common
Stock - - - -
Treasury stock acquired - - (30,247) (30,247)
Common stock issued under
employee plans - - 7,607 1,478
Amortization of unearned
compensation under
employee plan - - - 1,484
Exercise of stock options - - 19,314 17,293
Tax benefit relating to
employee stock options - - - 15,456
----------------------------------------------------
Balance at December 31, 2000 (97) 287,414 (10,174) 705,244
----------------------------------------------------
Comprehensive income:
Net income - 124,700 - 124,700
Other comprehensive income,
Foreign currency
translation adjustme (907) - - (907)
Cumulative effect of change
in accounting for
derivative financial
instruments, net of taxes (612) - - (612)
Realized and unrealized
losses on derivative
financial instruments, net
of taxes (2,977) - - (2,977)
----------------------------------------------------
Comprehensive (loss) income (4,496) 124,700 - 120,204
Stock split in form of stock
dividend - - - -
Treasury stock acquired - - (54,463) (54,463)
Common stock issued under
employee plans - - - 1,463
Amortization of unearned
compensation under
employee plans - - - 10,490
Exercise of stock options - - 11,544 23,451
Tax benefit relating to
employee stock options - - - 20,769
Shares to be issued under
contractual agreements - - - 4,839
----------------------------------------------------
Balance at December 31, 2001 $ (4,593) $ 412,114 $(53,093) $831,997
----------------------------------------------------
40
CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 124,700 $ (9,126) $ 150,218
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 80,083 78,615 71,867
Deferred income taxes 19,435 (42,092) 76,217
Bad debt expense 8,356 12,843 4,989
Write-off of marketable securities - 165,207 -
Gain on sale of assets, net of cash paid - - (185,650)
Non-recurring charges, net of cash paid - - 22,281
Tax benefit relating to employee stock options 20,769 15,456 3,201
Extraordinary loss on early retirement of debt 602 1,790 11,642
Amortization of unearned comp. under employee plans 10,490 1,286 -
Other, net 7,828 3,235 2,164
Changes in operating assets and liabilities, net of
changes resulting from acquisitions:
Receivables (90,209) (35,286) (217,977)
Inventories (12,321) 3,103 (54,059)
Other current and non-current assets (18,746) 745 (2,177)
Claims and rebates payable 31,738 29,806 279,714
Other current and non-current liabilities 98,265 20,328 51,629
-----------------------------------------------------------
Net cash provided by operating activities 280,990 245,910 214,059
-----------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (57,286) (80,218) (36,958)
Proceeds from sale of property and equipment 844 8,831 -
Acquisitions, net of cash acquired, and investment in joint venture (20,265) - (722,618)
Other (12) (2,191) -
-----------------------------------------------------------
Net cash (used in) investing activities (76,719) (73,578) (759,576)
-----------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (50,000) (240,069) (1,015,000)
Proceeds from long-term debt - - 1,290,950
Treasury stock acquired (54,463) (30,247) -
Net proceeds from issuance of common stock - - 299,378
Deferred financing fees - - (26,316)
Cash received from employee stock-based plans 24,914 18,689 6,438
-----------------------------------------------------------
Net cash (used in) provided by financing activities (79,549) (251,627) 555,450
-----------------------------------------------------------
Effect of foreign currency translation adjustment (211) (131) 108
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 124,511 (79,426) 10,041
Cash and cash equivalents at beginning of year 53,204 132,630 122,589
-----------------------------------------------------------
Cash and cash equivalents at end of year $ 177,715 $ 53,204 $ 132,630
===========================================================
Supplemental data:
Cash paid during the year for:
Restructuring charges $ 127 $ 3,318 $ 4,683
Income taxes 23,367 30,814 1,080
Interest 31,488 48,172 61,607
See accompanying Notes to Consolidated Financial Statements
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies
Organization and operations. We are one of the largest full-service
pharmacy benefit management ("PBM") companies independent of pharmaceutical
manufacturer ownership in North America. We provide health care management and
administration services on behalf of clients that include health maintenance
organizations, health insurers, third-party administrators, employers and
union-sponsored benefit plans. Our fully integrated PBM services include network
claims processing, mail pharmacy services, benefit design consultation, drug
utilization review, formulary management, disease management, medical and drug
data analysis services, medical information management services, and informed
decision counseling services through our Express Health LineSM division. We also
provide non-PBM services which include distribution services through our Express
Scripts Specialty Distribution Services subsidiary ("SDS"), and prior to June
12, 2001, infusion therapy services through our wholly-owned subsidiary IVTx,
Inc., operating as Express Scripts Infusion Services.
Basis of presentation. The consolidated financial statements include
our accounts and those of all our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Investments in
affiliated companies, 20% to 50% owned, are carried at equity. Certain amounts
in prior years have been reclassified to conform with the 2001 classifications.
The preparation of the consolidated financial statements conforms to generally
accepted accounting principles in the U.S., and requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from those
estimates and assumptions.
Earnings per share and weighted average shares outstanding included in
Notes To Consolidated Financial Statements have been restated to reflect the
two-for-one stock split effective June 22, 2001.
Cash and cash equivalents. Cash and cash equivalents include cash on
hand and investments with original maturities of three months or less. We have
banking relationships resulting in certain cash disbursement accounts being
maintained by banks not holding our cash concentration accounts. As a result,
cash disbursement accounts carrying negative balances of $107,113,000 and
$83,691,000 have been reclassified to claims and rebates payable at December 31,
2001 and 2000, respectively.
Accounts receivable. As of December 31, 2001 and 2000, unbilled
receivables were $435,708,000 and $394,205,000, respectively. Unbilled
receivables are billed to clients typically within 30 days based on the
contractual billing schedule agreed upon with the client. As of December 31,
2001 and 2000, we have an allowance for doubtful accounts of $24,157,000 and
$22,677,000, respectively.
Inventories. Inventories consist of prescription drugs and medical
supplies that are stated at the lower of first-in first-out cost or market.
Property and equipment. Property and equipment is carried at cost and
is depreciated using the straight-line method over estimated useful lives of
seven years for furniture, five years for equipment and purchased computer
software and three years for personal computers. Leasehold improvements are
amortized on a straight-line basis over the term of the lease or the useful life
of the asset, if shorter. Expenditures for repairs, maintenance and renewals are
charged to income as incurred. Expenditures that improve an asset or extend its
estimated useful life are capitalized. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income. Research and development
expenditures relating to the development of software to be marketed to clients,
or to be used for internal purposes, are charged to expense until technological
feasibility is established. Thereafter, the remaining software production costs
up to the date of general release to customers, or to the date placed into
production, are capitalized and included as Property and Equipment. Amortization
of the capitalized amounts commences on the date of general release to
customers, or the date placed into production, and is computed on a
product-by-product basis using the straight-line method over the remaining
estimated economic life of the product but not more than five years. Reductions,
if any, in the carrying value of capitalized software costs to net realizable
value are expensed.
42
Marketable securities. All investments not included as cash and cash
equivalents are accounted for under Financial Accounting Standards Board
Statement ("FAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management determines the appropriate classification of our
marketable securities at the time of purchase and reevaluates such determination
at each balance sheet date. All marketable securities at December 31, 2001 and
2000 were recorded in other assets on our Consolidated Balance Sheet.
Securities bought and held principally for the purpose of selling them
in the near term are classified as trading securities. Trading securities are
reported at fair value, which is based upon quoted market prices, with
unrealized holding gains and loss included in earnings. We held trading
securities, consisting primarily of mutual funds, of $8,662,000 and $2,295,000
as of December 31, 2001 and 2000, respectively. We maintain our trading
securities to offset changes in certain liabilities related to our deferred
compensation plan discussed in Note 10. Net losses realized on the trading
portfolio were $396,000 and $75,000 in 2001 and 2000, respectively.
Available-for-sale securities are reported at fair value, which is
based upon quoted market prices, with unrealized gains and losses, net of tax,
reported as a component of other comprehensive income in stockholders' equity
until recognized. Unrealized losses are recognized as expense when a decline in
fair value is determined to be other than temporary. At December 31, 2001 and
2000, our investment in PlanetRx was the only available-for-sale security we
held. During 2000, we recorded a non-cash impairment charge to write-off the
value of our investment (see Note 2).
Goodwill. Goodwill has been amortized on a straight-line basis over
periods from 10 to 30 years. The amount reported is net of accumulated
amortization of $106,979,000 and $71,348,000 at December 31, 2001 and 2000,
respectively. Amortization expense, included in selling, general and
administrative expenses, was $35,631,000, $35,031,000 and $28,203,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
Other intangible assets. Other intangible assets include, but are not
limited to, customer contracts, non-compete agreements, deferred financing fees
and certain fees paid to clients under contractual agreements and are amortized
on a straight-line basis over periods from 2 to 20 years. The amount reported is
net of accumulated amortization of $47,686,000 and $55,954,000 at December 31,
2001 and 2000, respectively. Amortization expense for customer contracts and
non-compete agreements included in selling, general and administrative expenses
was $9,136,000, $18,030,000 and $25,094,000 for the years ended December 31,
2001, 2000 and 1999, respectively. Amortization expense for deferred financing
fees included in interest expense was $2,009,000, $2,391,000, and $2,241,000 for
the years ended December 31, 2001, 2000 and 1999, respectively. Amortization
expense for contractual agreements with customers is recorded against revenue
and was $1,981,000 and $577,000 for 2001 and 2000, respectively; there was no
expense in 1999.
Impairment of long lived assets. We evaluate whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long lived assets, including goodwill, may warrant revision or that the
remaining balance of an asset may not be recoverable. The measurement of
possible impairment is based on the ability to recover the balance of assets
from expected future operating cash flows on an undiscounted basis. Impairment
losses, if any, would be determined based on the present value of the cash flows
using discount rates that reflect the inherent risk of the underlying business.
In our opinion no such impairment existed as of December 31, 2001 or 2000 (see
Note 11).
Fair value of financial instruments. The carrying value of cash and
cash equivalents, accounts receivable, claims and rebates payable, and accounts
payable approximated fair values due to the short-term maturities of these
instruments. The fair value, which approximates the carrying value, of our
Credit Facility was estimated using either quoted market prices or the current
rates offered to us for debt with similar maturity. The fair value of the
interest rate swaps (an obligation of $5,798,000 and $991,000 at December 31,
2001 and 2000, respectively) was based on quoted market prices, which reflect
the present values of the difference between estimated future fixed rate
payments and future variable rate receipts. The fair value of our senior note
facility ($265,073,000 and $245,882,000 at December 31, 2001 and 2000,
respectively) was estimated based on quoted market prices.
Revenue recognition. Revenues from dispensing prescriptions from our
mail pharmacies are recorded when the prescription is shipped. Revenue from
sales of prescription drugs by retail pharmacies in our nationwide network and
pharmacy claims processing revenues are recognized when the claims are
processed. When we independently have a contractual obligation to pay our
network pharmacy provider for benefits provided to our clients' members, we
include
43
payments from these clients as revenue, and payments to the network pharmacy
provider as cost of revenue (the "Gross Basis") in accordance with Emerging
Issues Task Force ("EITF") 99-19, "Recording Revenue Gross as a Principal versus
Net as an Agent". These transactions require us to assume credit risk and act as
a principal. If we are merely administering clients' network pharmacy contracts
in which we do not assume credit risks, but act as an agent, we record only our
administrative or dispensing fees as revenue (the "Net Basis").
Management services provided to drug manufacturers include
administration of manufacturer rebate programs. Revenues relating to these
services are recognized as earned based upon detailed drug utilization data.
Rebates received on behalf of customers in accordance with the applicable
contracts are excluded from revenues. Fees receivable from pharmaceutical
manufacturers are calculated by converting total prescriptions dispensed to
rebatable scripts (i.e., those prescriptions with respect to which we are
contractually entitled to submit claims for rebates) multiplied by the
contractually agreed manufacturer rebate amount. Fees receivable from
pharmaceutical manufacturers are recorded when we determine them to be
realizable, and realization is not dependent upon future pharmaceutical sales.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. ("SAB") 101, "Revenue Recognition in Financial
Statements" and EITF 99-19 was issued in July 2000. SAB 101 and EITF 99-19
summarize certain views in applying generally accepted accounting principles to
revenue recognition in financial statements. We adopted SAB 101 and EITF 99-19
during 2000 and their adoption did not have a material affect on our financial
statements.
Cost of revenues. Cost of revenues includes product costs, network
pharmacy claims payments and other direct costs associated with dispensing
prescriptions, including shipping and handling.
Income taxes. Deferred tax assets and liabilities are recognized based
on temporary differences between financial statement basis and tax basis of
assets and liabilities using presently enacted tax rates.
Earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed in the same manner as basic earnings per share
but adds the number of additional common shares that would have been outstanding
for the period if the potential dilutive common shares had been issued. The
difference between the number of weighted average shares used in the basic and
diluted calculation for all years are outstanding stock options and stock
warrants (1,738,000, 833,000 and 938,000 in 2001, 2000 and 1999, respectively),
any unvested shares and shares issuable pursuant to employee elected deferral
under the executive deferred compensation plan (22,000 and 3,000 in 2001 and
2000, respectively) and restricted stock we have issued (196,000 and 1,000 in
2001 and 2000, respectively), all calculated under the "treasury stock" method
in accordance with FAS 128, "Earnings Per Share". Due to the net loss in 2000,
all potentially dilutive common shares (942,000) have been excluded as they are
anti-dilutive.
Foreign currency translation. The financial statements of ESI Canada,
our Canadian operations, are translated into U.S. Dollars using the exchange
rate at each balance sheet date for assets and liabilities and a weighted
average exchange rate for each period for revenues, expenses, gains and losses.
The functional currency for ESI Canada is the local currency and cumulative
translation adjustments are recorded within the other comprehensive income
component of stockholders' equity.
Employee stock-based compensation. We account for employee stock
options in accordance with Accounting Principles Board No. ("APB") 25,
"Accounting for Stock Issued to Employees." Under APB 25, we apply the intrinsic
value method of accounting and, therefore, have not recognized compensation
expense for options granted, because options have only been granted at a price
equal to market value at the time of grant. During 1996, FAS 123 became
effective for us. FAS 123 prescribes the recognition of compensation expense
based on the fair value of options determined on the grant date. However, FAS
123 grants an exception that allows companies currently applying APB 25 to
continue using that method. We have, therefore, elected to continue applying the
intrinsic value method under APB 25. For companies that choose to continue
applying the intrinsic value method, FAS 123 mandates certain pro forma
disclosures as if the fair value method had been utilized (see Note 10).
Comprehensive income. In addition to net income, our components of
comprehensive income (net of taxes) are foreign currency translation
adjustments, cumulative effect of changes in accounting for derivative financial
instruments, realized and unrealized losses on derivative financial instruments
designated as cash flow
44
hedges, and unrealized losses on available-for-sale securities. We have
displayed comprehensive income within the Statement of Changes in Stockholders'
Equity.
Segment reporting. The segment information is derived from the
management approach which designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of our reportable segments (see Note 13).
New accounting guidance. During July 2001, the Financial Accounting
Standards Board issued FAS 141, "Business Combinations" and FAS 142, "Goodwill
and Other Intangible Assets". FAS 141 requires that all business combinations be
accounted for using the purchase method of accounting. FAS 141 also defines
acquired intangible assets and requires that a reassessment of a company's
preexisting acquired intangible assets and goodwill be evaluated and adjusted to
conform with that definition. We do not believe that FAS 141 will have a
significant impact on our consolidated financial position, consolidated results
of operations, and/or our consolidated cash flows once implemented.
FAS 142 requires goodwill no longer be amortized under any
circumstances. Instead, all goodwill (including goodwill associated with
acquisitions consummated prior to the adoption of FAS 142) is to be evaluated
for impairment annually in accordance with FAS 142 and when events or
circumstances occur indicating that goodwill might be impaired. In accordance
with the implementation provisions of FAS 142, we expect to complete our first
impairment test under FAS 142 by the end of the second quarter of 2002, and we
do not anticipate incurring an impairment charge. All goodwill impairment losses
are to be presented as a separate line item in the operating section of the
consolidated results of operations (unless the impairment loss is associated
with a discontinued operation). FAS 142 requires the disclosure of income before
extraordinary items and net income, and earnings per share for both income
measures, all computed on a pro forma basis by reversing the goodwill amortized
in the periods presented. Such pro forma disclosures are required in the period
of adoption and thereafter until all periods presented reflect goodwill
accounted for in accordance with FAS 142. Had FAS 142 been effective for 2001,
our net income before extraordinary items would have been $151,111,000, or $1.94
per basic share and $1.89 per diluted share, and $17,687,000, or $0.23 per basic
and diluted share, for the year ended December 31, 2001 and 2000, respectively.
During October 2001, the Financial Accounting Standards Board issued
FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". FAS
144 requires that long -lived assets to be disposed of by sale be measured at
the lower of book value or fair value less cost to sell. Additionally, FAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. FAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and, generally, its provisions
are to be applied prospectively. We do not believe implementation of FAS 144
will have a significant impact on our consolidated financial position,
consolidated results of operations and/or our consolidated cash flows.
2. Changes in business
Joint venture. On February 22, 2001, we entered into an agreement with
AdvancePCS and Merck-Medco, to form RxHub, LLC ("RxHub"). RxHub will be an
electronic exchange enabling physicians who use electronic prescribing
technology to link to pharmacies, pharmacy benefit management ("PBM") companies
and health plans. The company is designed to operate as a utility for the
conduit of information among all parties engaging in electronic prescribing. We
own one-third of the equity of RxHub (as do each of the other two founders) and
have committed to invest up to $20 million over the next five years with
approximately $5.7 million invested during 2001. We have recorded our investment
in RxHub under the equity method of accounting, which requires our percentage
interest in RxHub's results to be recorded in our Consolidated Statement of
Operations. Our percentage of RxHub's loss for 2001 is $1,834,000 ($1,139,000
net of tax), and has been recorded in other income (expense) in our Unaudited
Consolidated Statement of Operations. Our investment in RxHub (approximately
$3,866,000 at December 31, 2001) is recorded in other assets on our Consolidated
Balance Sheet.
On February 6, 2002, we announced that we had signed a definitive
agreement to acquire the businesses comprising National Prescription
Administrators, Inc. ("NPA") for a net purchase price of $515 million. NPA is a
privately held full-service pharmacy benefit manager, and will strengthen
Express Scripts' participation in two key market segments, union and government
sponsored plans. The transaction is expected to close near the end of the
45
first quarter of 2002, subject to customary closing conditions and expiration of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The
transaction will be accounted for under the provisions of FAS 141 and FAS 142.
The purchase price will be funded with cash on hand, up to $100 million of
borrowings on our revolving credit facility, a $350,000 million new tack-on Term
B loan and the issuance of approximately 552,000 shares of our common stock. We
will file an Internal Revenue Code ss.338(h)(10) election, making amortization
expense of intangible assets, including goodwill, tax deductible.
To fund the acquisition of NPA we are amending our existing credit
facility to add a $350 million Term B loan. The Term B loan will have a maturity
of six years and will amortize 1% in years one through four, 25% in year five
and 71% in year six. Interest will be payable quarterly on an interest rate
spread based on several London Interbank Offered Rates ("LIBOR") or base rate
options. The anticipated interest rate spread for LIBOR borrowings will be 225
basis points. The Term B loan will be secured on the same basis as our existing
credit facility. In addition, we are requesting in the amendment to adjust
certain covenants, relating to restricted junior payments and asset sales, and
to provide for a future accounts receivable facility.
On February 25 2002, we purchased substantially all of the assets
utilized in the operation of Phoenix Marketing Group (Holdings), Inc.
("Phoenix"), a wholly-owned subsidiary of Access Worldwide Communications, Inc.
for $33 million in cash plus the assumption of certain liabilities. Phoenix is
one of the largest prescription drug sample fulfillment companies, shipping
approximately 95 million sample units in 2001. The transaction, which will be
accounted for under the provisions of FAS 141 and FAS 142.
On March 1, 2001, our Canadian subsidiary, ESI Canada, Inc., completed
its acquisition of Centre d'autorisation et de paiement des services de sante,
Inc. ("CAPSS"), a leading Quebec-based PBM, for approximately CAN$26.8 million
(approximately US$17.5 million), which includes a purchase price adjustment for
closing working capital. The transaction, which has been accounted for under the
purchase method of accounting, was funded with our operating cash flow. The
results of operations of CAPSS have been included in the consolidated financial
statements and PBM segment since March 1, 2001. The purchase price has been
allocated based upon the estimated fair value of net assets acquired at the date
of the acquisition. The excess of purchase price over tangible net assets
acquired has been allocated to intangible assets consisting of customer
contracts in the amount of US$5,149,000 which are being amortized using the
straight-line methods over the estimated useful life of 20 years and are
included in other intangible assets, and goodwill in the amount of US$11,655,000
which was amortized using the straight-line method over the estimated useful
life of 30 years. Pro forma information, as if CAPSS had been acquired as of the
beginning of the year, is not being presented as the inclusion of CAPSS
financial data would not have a material impact to our consolidated financial
statements.
On April 1, 1999, we completed our acquisition of Diversified
Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto
Rico) Inc. (collectively, "DPS"), from SmithKline Beecham Corporation and
SmithKline Beecham InterCredit BV (collectively, "SB") for approximately $715
million, which includes a purchase price adjustment for closing working capital
and transaction costs. We filed an Internal Revenue Code ss.338(h)(10) election,
making amortization expense of intangible assets, including goodwill, tax
deductible. We used approximately $48 million of our own cash and financed the
remainder of the purchase price and related acquisition costs.
The acquisition has been accounted for using the purchase method of
accounting. The results of operations of DPS have been included in the
consolidated financial statements and PBM segment since April 1, 1999. The
purchase price has been allocated based on the estimated fair values of net
assets acquired at the date of the acquisition. The excess of purchase price
over tangible net assets acquired has been allocated to other intangible assets
consisting of customer contracts in the amount of $129,500,000 which began
amortizing in 1999 using the straight-line method over the estimated useful
lives of 2 to 20 years and goodwill in the amount of $754,236,000 which was
amortized using the straight-line method over the estimated useful life of 30
years.
The following unaudited pro forma information presents a summary of our
combined results of operations and those of DPS as if the acquisition had
occurred at the beginning of the period presented, along with certain pro forma
adjustments to give effect to amortization of goodwill, other intangible assets,
interest expense on acquisition debt and other adjustments. The pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transaction been effected on the assumed date,
nor is it an indication of trends in future results.
46
Year Ended
December 31,
(in thousands, except per share data) 1999
- -------------------------------------------------------------------------------
Total revenues $ 4,353,470
Income before extraordinary loss 158,423
Extraordinary loss (7,150)
-----------------------
Net income $ 151,273
=======================
Basic earnings per share
Before extraordinary loss $ 2.20
Extraordinary loss (0.10)
-----------------------
Net income $ 2.10
=======================
Diluted earnings per share
Before extraordinary loss $ 2.14
Extraordinary loss (0.10)
-----------------------
Net income $ 2.04
=======================
Sale of assets. On June 12, 2001, we entered into an agreement with
Option Care, Inc. to sell our Express Scripts Infusion Services branch offices
for an amount approximating book value of the assets. In addition, we
discontinued all of our remaining acute home infusion services revenue
generating activities. The sale to Option Care, Inc. did not have a material
effect on our financial statements.
On August 31, 1999, we, along with YourPharmacy.com, Inc. ("YPC"), our
wholly-owned subsidiary, entered into an Asset Contribution and Reorganization
Agreement (the "Contribution Agreement") with PlanetRx, PRX Holdings, Inc.
("Holdings"), and PRX Acquisition Corp. ("Acquisition Sub"). Pursuant to the
Contribution Agreement, YPC agreed to contribute certain operating assets
constituting its e-commerce business in prescription and non-prescription drugs
and health and beauty aids to Holdings in exchange for 19.9% of the post-initial
public offering common equity of Holdings (the "IPO"), and PlanetRx was also to
assume certain obligations of YPC. Simultaneously with this transaction,
Acquisition Sub was to merge into PlanetRx and PlanetRx shareholders would
receive stock in Holdings, which would change its name to "PlanetRx.com, Inc."
As a result of the transactions, YPC would be a 19.9% shareholder in the new
PlanetRx (formerly Holdings), which would conduct business as an Internet
pharmacy.
On October 13, 1999, the transactions described in the Contribution
Agreement were consummated, YPC received 10,369,990 unregistered shares, or
19.9%, of the common equity of PlanetRx, and PlanetRx assumed options granted to
YPC employees which converted into options to purchase approximately 1.8 million
shares of PlanetRx common stock. In connection with the IPO, we also executed a
180 day lock-up agreement that prevented us from selling our shares until April
10, 2000. The consummation of the transaction occurred immediately preceding the
closing of PlanetRx's IPO of common stock. Based on the IPO price of $16 per
share, YPC received consideration valued at $165,920,000. We recorded a one-time
gain during 1999 (in other income) of $182,930,000 on the transaction, and a
one-time stock compensation expense during 1999 (included in non-recurring
expenses) of $19,520,000 relating to the YPC employee stock options. We
accounted for this investment in PlanetRx on the cost method and reported our
investment on the balance sheet at fair value in accordance with FAS 115 (see
Note 1).
As part of our agreement, PlanetRx was to pay us an annual fee of
$11,650,000 and reimbursement for certain expenses of $3,000,000 over a 5 year
term, which could have extended to 10 years if we met certain performance
measures. Additionally, we were eligible to receive an incremental fee based
upon the number of our members who placed their first order for prescription
drug or non-prescription merchandise with PlanetRx. We recorded $10,423,000 and
$3,000,000 of revenue during 2000 and 1999, respectively. We also reduced
selling and general administrative expenses by $1,500,000 and $750,000 for
reimbursement of certain expenses relating to our Internet initiative during
2000 and 1999, respectively.
Effective July 5, 2000, we restructured our agreement with PlanetRx in
exchange for a one-time cash payment of $8 million. Approximately $3.7 million
of the payment represented amounts earned through the second quarter of 2000,
the remaining $4.3 million represented a fee for the termination of the prior
contract. No additional cash payments were paid to us under the restructured
agreement.
47
During 2000, we recorded a non-cash impairment charge to write-off our
investment in PlanetRx common stock as the loss in value was deemed to be other
than temporary. Therefore, any unrealized losses associated with recording our
investment in PlanetRx at current market value that we had recorded in
stockholders' equity were written off to the current period earnings, in
addition to any additional charges necessary to write-off our investment.
Additionally, during 2000 we donated approximately 200,000 shares (after giving
effect to the 8-for-1 reverse stock split on December 4, 2000) of PlanetRx
common stock and realized expenses related to the donation of approximately
$713,000. At December 31, 2001 we own approximately 1,096,000 shares, or 17.8%
(after giving effect to the 8-for-1 reverse stock split on December 4, 2000) of
PlanetRx which are carried at no value.
3. Contractual agreements
Effective January 1, 1996, we executed a multi-year contract with The
Manufacturers Life Insurance Company ("Manulife"), to provide PBM services in
Canada. Under the terms of the agreement, we are the exclusive third-party
provider of PBM services to Manulife's Canadian clients. We are required to
issue shares of our common stock as an advance discount to Manulife based upon
achievement of certain volumes of Manulife pharmacy claims we process during
years four through six of the agreement. Based on the claims processed through
2001, Manulife has earned 101,000 shares of our common stock to be issued during
2002. These shares have been included as outstanding in the basic and diluted
earnings per share computation as if they were issued on December 31, 2001. In
addition, as of December 31, 2001 we have recorded an advance discount (included
in other intangible assets) of $4.7 million to be amortized against revenue over
the period of the contract.
Upon issuance of the shares, the Manulife contract will be extended for
10 years. Should Manulife terminate the agreement early, they would be required
to reimburse us for the unamortized discount. As a result, the advance discount
will be amortized over the 10-year extended contract period. Except for certain
exemptions from registration under the 1933 Act, the shares issued to Manulife
cannot be traded until they have been registered under the 1933 Act and
applicable state laws. If Manulife attains additional claims processing volume,
the maximum amount of total shares that could be issued to Manulife under the
terms of this agreement cannot exceed approximately 474,000.
The agreement with Manulife provides Manulife with the option to
terminate upon the occurrence of certain specific events. If Manulife has not
exercised the early termination option at the end of the tenth year of the
agreement, we will issue at that time a ten-year warrant to purchase up to
approximately 237,000 additional shares of our Common Stock exercisable at 85%
of the then market price. The actual number of shares for which such warrant is
to be issued is based on the volume of Manulife pharmacy claims we process in
year ten. The agreement also includes similar provisions under which the Company
would have issued a warrant to Manulife at the end of year six of the agreement,
however, Manulife did not meet the claim volume necessary during year six to
earn this warrant. .
4. Property and equipment
Property and equipment, at cost, consists of the following:
December 31,
(in thousands) 2001 2000
- ------------------------------------------------------------------------------
Land $ 400 $ 400
Furniture 19,254 18,210
Equipment 106,299 87,515
Computer software 115,447 101,075
Leasehold improvements 18,237 14,594
-------------------------------------------
259,637 221,794
Less accumulated depreciation
and amortization 94,374 74,085
-------------------------------------------
$ 165,263 $ 147,709
===========================================
48
5. Financing
Long-term debt consists of:
December 31,
(in thousands) 2001 2000
- --------------------------------------------------------------------------------
Term A loans due March 31, 2005 with an
interest rate of 3.37% and 7.52% at
December 31, 2001 and 2000, and a
deferred interest rate swap gain of $648
and $847 at December 31, 2001 and 2000 $ 105,648 $ 155,847
9.625% Senior Notes due June 15, 2009, net
of an unamortized discount of $941 and
$1,024, and an unamortized interest rate
lock of $1,527 and $1,733 240,471 240,594
----------------- ------------------
$ 346,119 $ 396,441
================= ==================
We have a credit facility with a commercial bank syndicate which
consists of $105 million of Term A loans and a $150 million revolving credit
facility. During 2001, we utilized $50 million of our own internally generated
cash to prepay a portion of our Term A loans. As a result of the prepayment, we
recorded an extraordinary charge during 2001 for the deferred financing fees in
the amount of $602,000 ($372,000 net of tax). The prepayment on the Term A loans
eliminated the scheduled principal payments for fiscal year 2003, and a portion
of the scheduled principal payment for fiscal year 2004. The capital stock of
each of our existing and subsequently acquired domestic subsidiaries, excluding
PPS, Great Plains Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY
IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico), Inc., and 65%
of the stock of our foreign subsidiaries have been pledged as collateral for the
credit facility.
The credit facility requires us to pay interest quarterly on an
interest rate spread based on several LIBOR or base rate options. To alleviate
interest rate volatility, we have entered into interest rate swap arrangements
(see Note 6), which are discussed below. The credit facility contains covenants
that limit the indebtedness we may incur, dividends paid and the amount of
annual capital expenditures. The covenants also establish a minimum interest
coverage ratio, a maximum leverage ratio, and a minimum fixed charge coverage
ratio. In addition, we are required to pay an annual fee of 0.25%, payable in
quarterly installments, on the unused portion of the revolving credit facility
($150 million at December 31, 2001). At December 31, 2001, we are in compliance
with all covenants associated with the credit facility. In conjunction with the
NPA acquisition, we are amending our credit facility to add a $350 million Term
B loan and adjusting certain covenants (see Note 2)
In June 1999, we issued $250 million of 9.625% Senior Notes due 2009,
which require interest to be paid semi-annually on June 15 and December 15. The
Senior Notes are callable at specified prepayment premiums beginning in June
2004. The Senior Notes are unconditionally and jointly and severally guaranteed
by our wholly-owned domestic subsidiaries other than PPS, Great Plains
Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and
Diversified Pharmaceutical Services (Puerto Rico), Inc. During the second
quarter of 2000, we repurchased $10,115,000 of our Senior Notes on the open
market for $10,150,000, which includes $385,000 of accrued interest.
The following represents the schedule of current maturities for our
long-term debt, excluding the deferred interest rate swap gain of $648,000 at
December 31, 2001 (in thousands):
Year Ended December 31,
- -------------------------------------------------------------------------
2002 $ -
2003 -
2004 39,450
2005 65,550
2006 -
-----------------------
$ 105,000
=======================
49
During 2000, we received $2,397,000 to restructure an existing interest
rate swap agreement in conjunction with a prepayment of the Term A loans. We
recognized $1,500,000 ($926,000 net of tax) against interest expense as an
ordinary gain related to the prepayment of debt and the remaining $897,000 has
been deferred and is being amortized over the remaining term of the loans.
Interest expense was reduced by $199,000 and $50,000 during 2001 and 2000,
respectively.
During 1999, we entered into an interest rate lock related to our
offering of $250 million Senior Notes. Upon issuance of the Senior Notes, we
received $2,135,000, which is being amortized against interest expense over the
term of the Senior Notes. Interest expense was reduced by $206,000 and $286,000
during 2001 and 2000, respectively.
6. Derivative financial instruments
Effective January 1, 2001, we adopted FAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by FAS 137 and 138
("FAS 133"). FAS 133 requires all derivative financial instruments, such as
interest rate swaps, to be recognized as either assets or liabilities in the
statement of financial position and measured at fair value. The adoption of FAS
133 did not have a material effect on our financial statements, but did reduce
other comprehensive income during 2001 by $3,589,000, net of taxes, in the
accompanying Unaudited Consolidated Statement of Changes in Stockholders' Equity
due to a cumulative effect of change in accounting principle of $612,000 as of
January 1, 2001, and additional deferred losses recorded during 2001 of
$2,977,000.
We use interest rate swap agreements to manage our interest rate risk
on future variable interest payments. As of December 31, 2001, we have one swap
agreement to fix the variable interest payments on approximately $98 million of
our debt under our credit facility. Under this swap agreement, we agree to
receive a floating rate of interest on the notional principal amount of
approximately $98 million based upon a three month LIBOR rate in exchange for
payment of a fixed rate of 6.25% per annum. The notional principal amount will
increase to $100 million in October 2002 and beginning in April 2003, will
reduce to $60 million and in April 2004 will reduce to $20 million until
maturing in April 2005.
Our present interest rate swap agreement is a cash flow hedge as it
requires us to pay fixed-rates of interest, which hedges against changes in the
amount of future cash flows associated with variable interest obligations.
Accordingly, the fair value of our swap agreement is reported on the balance
sheet in other liabilities ($5,798,000 pre-tax at December 31, 2001) and the
related gains or losses on this agreement are deferred in shareholders' equity
as a component of other comprehensive income (a $3,589,000, net of taxes,
reduction at December 31, 2001). These deferred gains or losses are then
recognized as an adjustment to interest expense over the same period in which
the related interest payments being hedged are recorded in income. The gains or
losses associated with the ineffective portion of this agreement are immediately
recognized in income. For the year ended December 31, 2001, the gains and losses
on the ineffective portion of our swap agreement were not material to the
consolidated financial statements.
7. Income taxes
The income tax provision consists of the following:
Year Ended December 31,
(in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Current provision:
Federal $ 57,601 $ 40,515 $ 26,933
State 6,754 5,668 4,190
Foreign (276) (538) 758
-----------------------------------------
Total current provision 64,079 45,645 31,881
-----------------------------------------
Deferred provision:
Federal 18,045 (37,757) 68,627
State 1,112 (4,335) 7,590
Foreign (64) - -
-----------------------------------------
Total deferred provision 19,093 (42,092) 76,217
-----------------------------------------
Total current and deferred provision $ 83,172 $ 3,553 $ 108,098
=========================================
50
Income taxes included in the Consolidated Statement of Operations are:
Year Ended December 31,
(in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Continuing operations $ 83,172 $ 3,553 $ 108,098
Extraordinary loss on early retirement
of debt (228) (685) (4,492)
---------------------------------------
$ 82,944 $ 2,868 $ 103,606
=======================================
A reconciliation of the statutory federal income tax rate and the
effective tax rate follows (the effect of foreign taxes on the effective tax
rate for 2000, 1999 and 1998 is immaterial):
Year Ended December 31,
2001 2000 1999
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.6 3.3 3.6
Non-deductible amortization of goodwill and
customer contracts 2.2 (103.6) 1.8
Other, net 0.1 (14.2) 0.3
----------------------------------
Effective tax rate 39.9% (79.5)% 40.7%
==================================
The deferred tax assets and deferred tax liabilities recorded in the
consolidated balance sheet are as follows:
December 31,
(in thousands) 2001 2000
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 8,519 $ 9,087
Accrued expenses 4,866 16,203
Non-compete agreements 2,151 2,292
Net operating loss carryforward - 2,975
Deferred compensation 3,862 1,006
Restricted stock 3,762
Deferred loss on interest rate swap 2,209 -
Other 1,373 1,360
----------------------------
Gross deferred tax assets 26,742 32,923
----------------------------
Deferred tax liabilities:
Depreciation and property differences (26,489) (17,799)
Goodwill and customer contract amortization (23,677) (15,026)
Other (3,061) (2,341)
----------------------------
Gross deferred tax liabilities (53,227) (35,166)
----------------------------
Net deferred tax liabilities $ (26,485) $ (2,243)
============================
8. Commitments and contingencies
We have entered into noncancellable agreements to lease certain office
and distribution facilities with remaining terms from one to ten years. Rental
expense under the office and distribution facilities leases in 2001, 2000 and
1999 was $14,654,000, $12,041,000 and $11,147,000, respectively. The future
minimum lease payments due under noncancellable operating leases are as follows
(in thousands):
51
Year Ended December 31,
- -----------------------------------------------------------------
2002 $ 13,521
2003 13,298
2004 13,361
2005 13,085
2006 11,691
Thereafter 23,960
------------------
$ 88,916
==================
For the year ended December 31, 2001, approximately 50.5% of our
pharmaceutical purchases were through one wholesaler. We believe other
alternative sources are readily available and that no other concentration risks
exist at December 31, 2001.
During September 2000, we sold our Albuquerque, New Mexico property and
building for $7,806,000. These assets were then leased back from the purchaser
over a period of 10 years with the option to extend the terms up to an
additional 10 years. The resulting lease is being accounted for as an operating
lease, and the resulting deferred gain of $4,136,000 is being amortized over the
10 year life of the lease.
In the ordinary course of business (which includes the business
conducted by entities we have acquired prior to acquiring them, respectively),
various legal proceedings, investigations or claims pending have arisen against
us and our subsidiaries (ValueRx and DPS continue to be a party to proceedings
that arose prior to their April 1, 1998 and April 1, 1999 respective acquisition
dates). The effect of these actions on future financial results is not subject
to reasonable estimation because considerable uncertainty exists about the
outcomes. Nevertheless, in our opinion, the ultimate liabilities resulting from
any such lawsuits, investigations or claims now pending are not expected to
materially affect our consolidated financial position, results of operations
and/or cash flows.
9. Common stock
In May 2001, we announced a two-for-one stock split of our Class A
Common Stock for stockholders of record on June 8, 2001, effective June 22,
2001. The split was effected in the form of a dividend by issuance of one share
of Class A Common Stock for each share of Class A Common Stock outstanding. The
earnings per share and the weighted average number of shares outstanding for
basic and diluted earnings per share for all years presented have been adjusted
for the stock split.
Also in May 2001, the Stockholders approved an Amended and Restated
Certificate of Incorporation. Among the changes to the Certificate of
Incorporation was an amendment, which consolidated and renamed our classes of
common stock. Prior to the amendment we had 181,000,000 authorized shares of
common stock consisting of 150,000,000 shares of Class A Common Stock and
31,000,000 shares of Class B Common Stock, and no shares of the Class B Common
Stock were outstanding. Pursuant to the Amended and Restated Certificate of
Incorporation, the Class B Common Stock was eliminated and each share of Class A
Common Stock was renamed as "Common Stock." As a result, we now have 181,000,000
shares of Common Stock authorized.
Prior to November 7, 2000, NYLife Healthcare Management, Inc., a
subsidiary of New York Life Insurance Company, owned all of our outstanding
shares of Class B Common Stock. On November 7, 2000, NYLife Healthcare
Management, Inc. exchanged each outstanding share of Class B Common Stock for
one share of our Class A Common Stock and then immediately distributed such
shares to NYLIFE LLC, another subsidiary of New York Life. Consequently, on
November 7, 2000, we reacquired all of our outstanding Class B Common Stock.
Immediately following the exchange and distribution to NYLIFE LLC, NYLIFE LLC
completed the sale of 13,800,000 shares of our Class A Common Stock to the
public through a secondary offering. Contemporaneous with this stock offering,
the Express Scripts Automatic Exchange Security Trust, a closed-end investment
company that is not affiliated with us, sold 6,900,000 investment units to the
public. Upon maturity of the investment units, the Trust may deliver up to
6,900,000 shares of our Class A Common Stock owned by NYLIFE LLC to the holders
of the investment units. We did not receive any proceeds from the secondary
offering or the offering by the Trust.
52
At December 31, 2001, NYLIFE LLC owned shares of our Common Stock
representing approximately 20.8% of the combined voting power of all classes of
our common stock, which includes the right to vote 6,900,000 Common Stock that
the Trust may deliver upon exchange of the Trust issued investment units. New
York Life has agreed on behalf of itself and its subsidiaries, to vote these
6,900,000 shares of our Common Stock prior to delivery thereof by the Trust to
the holders of the Trust investment units in the same proportion and to the same
effect as the votes cast by our other stockholders at any meeting of
stockholders, subject to the following exceptions: New York Life has agreed to
vote its 16,240,000 shares (which includes the above described 6,900,000 shares)
in favor of the slate of nominees for directors recommended by our Board of
Directors for election by stockholders (provided that, so long as New York Life
is entitled to representation on the Board of Directors, such slate includes New
York Life's nominees). On February 11, 2002, NYLIFE LLC completed a distribution
of 11,740,000 of its shares of our Common Stock to its parent, New York Life.
This distribution does not affect New York Life's rights or obligations with
respect to our Common Stock as described above.
In June 1999, we consummated our offering of 10,350,000 shares of our
Class A Common Stock at a price of $30.50 per share. The net proceeds of
$299,378,000 were used to retire the $150 million senior subordinated bridge
credit facility and a portion of the Term B loans under the $1.05 billion credit
facility.
As of December 31, 2001, we have repurchased a total of 3,757,000
shares of our Common Stock under the stock repurchase program that we announced
on October 25, 1996, of which, 1,227,000 shares were repurchased during 2001.
Approximately 2,558,000 shares have been reissued in connection with employee
compensation plans through December 31, 2001. In February 2002, our Board of
Directors approved an increase in our stock repurchase program from 5,000,000
shares (adjusted for the June 2002 two for one stock split) to 6,500,000 shares,
and placed no limit on the duration of the program. Additional purchases, if
any, will be made in such amounts and at such times as we deem appropriate based
upon prevailing market and business conditions, subject to restrictions on stock
repurchases contained in our bank credit facility and the Indenture under which
our Senior Notes were issued.
As of December 31, 2001, approximately 2,015,000 shares of our Common
Stock have been reserved for issuance to organizations with which we have signed
contractual agreements (see Note 3) and for employee benefit plans (see Note
10).
10. Employee benefit plans and stock-based compensation plans
Retirement savings plan. We offer all of our full-time employees a
retirement savings plan under Section 401(k) of the Internal Revenue Code.
Employees may elect to enter a written salary deferral agreement under which a
maximum of 15% of their salary, subject to aggregate limits required under the
Internal Revenue Code, may be contributed to the plan. We match 100% of the
first 4% of the employees' compensation contributed to the Plan. For the years
ended December 31, 2001, 2000 and 1999, we had contribution expense of
approximately $4,994,000, $4,718,000 and $3,604,000, respectively.
Employee stock purchase plan. We offer an employee stock purchase plan
that qualifies under Section 423 of the Internal Revenue Code and permits all
employees, excluding certain management level employees, to purchase shares of
our Common Stock. Participating employees may elect to contribute up to 10% of
their salary to purchase common stock at the end of each six month participation
period at a purchase price equal to 85% of the fair market value of our Common
Stock at the end of the participation period. During 2001 and 2000,
approximately 34,000 and 64,000 shares of our Common Stock were issued under the
plan, respectively. Our Common Stock reserved for future employee purchases
under the plan is 383,000 at December 31, 2001.
Deferred compensation plan. We maintain a non-qualified deferred
compensation plan (the "Executive Deferred Compensation Plan") that provides
benefits payable to eligible key employees at retirement, termination or death.
Benefit payments are funded by a combination of contributions from participants
and us. Participants may elect to defer up to 50% of their base earnings and
100% of specific bonus awards. Participants become fully vested in our
contributions on the third anniversary of the end of the plan year for which the
contribution is credited to their account. For 2001, our contribution was equal
to 6% of each qualified participant's total annual compensation, with 25% being
allocated as a hypothetical investment in our Common Stock and the remaining
being allocated to a variety of investment options. We have chosen to fund our
liability for this plan through investing in trading securities, which primarily
consists of mutual funds (see Note 1). We incurred approximately $2,090,000,
$89,000
53
and $224,000 of compensation expense in 2001, 2000 and 1999, respectively. At
December 31, 2001, 99,000 shares of our Common Stock have been reserved for
future issuance under the plan.
Stock-based compensation plans. In August 2000, the Board of Directors
adopted the Express Scripts, Inc. 2000 Long-Term Incentive Plan which was
subsequently amended in February 2001 (as amended, the "2000 LTIP"), which
provides for the grant of various equity awards to our officers, Board of
Directors and key employees selected by the Compensation Committee of the Board
of Directors. The amended 2000 LTIP was approved by our stockholders in May
2001. As of December 31, 2001, 616,000 shares of our Common Stock are available
for issuance under this plan. During 2001 and 2000, we granted approximately
228,000 and 453,000 restricted shares of Common Stock, 455,000 were issued from
shares held in treasury, under the 2000 LTIP to certain of our officers and
employees. These shares are subject to various cliff-vesting periods from three
to ten years with provisions allowing for accelerated vesting based upon
specific performance criteria. Prior to vesting, these restricted shares are
subject to forfeiture to us without consideration upon termination of employment
under certain circumstances. Approximately 93,000 shares have been forfeited as
of February 28, 2002. Unearned compensation relating to the restricted shares is
recorded as a separate component of stockholders' equity and is amortized to
non-cash compensation expense over the estimated vesting periods. As of December
31, 2001 and 2000, unearned compensation was $11,944,000 and $13,594,000,
respectively, which is net of compensation expense for 2001 and 2000 of
$9,425,000 and $1,247,000, respectively.
As a result of the Board's adoption and stockholder approval of the
2000 LTIP, no additional awards will be granted under either of our 1992 amended
and restated stock option plans (discussed below) or under our 1994 amended and
restated Stock Option Plan (discussed below). However, these plans are still in
existence as there are outstanding grants under these plans.
In April 1992, we adopted a stock option plan that we amended and
restated in 1995 and amended in 1999, which provided for the grant of
nonqualified stock options and incentive stock options to our officers and key
employees selected by the Compensation Committee of the Board of Directors. In
June 1994, the Board of Directors adopted the Express Scripts, Inc. 1994 Stock
Option Plan, also amended and restated in 1995 and amended in 1997, 1998 and
1999. Under either plan, the exercise price of the options was not less than the
fair market value of the shares at the time of grant, and the options typically
vest over a five-year period from the date of grant.
In April 1992, we also adopted a stock option plan that was amended and
restated in 1995 and amended in 1996 and 1999 that provided for the grant of
nonqualified stock options to purchase 48,000 shares to each director who is not
an employee of ours or our affiliates. In addition, the second amendment to the
plan gave each non-employee director who was serving in such capacity as of the
date of the second amendment the option to purchase 2,500 additional shares. The
second amendment options will vest over three years. The plan provides that the
options vest over a two-, three- or five-year period from the date of grant
depending upon the circumstances of the grant.
We apply APB 25 and related interpretations in accounting for our
plans. Accordingly, compensation cost has been recorded based upon the intrinsic
value method of accounting for restricted stock and no compensation cost has
been recognized for stock options granted. Had compensation cost for stock
option grants been determined based on the fair value at the grant dates
consistent with the method prescribed by FAS 123, our net income and earnings
per share would have been reduced to the pro forma amounts indicated below.
Because future options may be granted and vesting typically occurs over a three
to five year period, the pro forma impact shown for 2001, 2000 and 1999 is not
necessarily representative of the impact in future years.
54
(in thousands, except per share data) 2001 2000 1999
- --------------------------------------------------------------------------------
Net income
As reported $ 124,700 $ (9,126) $ 150,218
Pro forma 114,937 (19,796) 142,753
Basic earnings per share
As reported $ 1.60 $ (0.12) $ 2.08
Pro forma 1.48 (0.26) 1.98
Diluted earnings per share
As reported $ 1.56 $ (0.12) $ 2.03
Pro forma 1.44 (0.26) 1.93
The fair value of options granted (which is amortized to expense over
the option vesting period in determining the pro forma impact), is estimated on
the date of grant using the Black-Scholes multiple option-pricing model with the
following weighted average assumptions:
2001 2000 1999
- --------------------------------------------------------------------------------
Expected life of option 2-5 years 1-6 years 2-7 years
Risk-free interest rate 1.7%-4.9% 6.0%-6.7% 4.6%-6.3%
Expected volatility of stock 55% 56%-60% 59%
Expected dividend yield None None None
A summary of the status of our fixed stock option plans as of December
31, 2001, 2000 and 1999, and changes during the years ending on those dates is
presented below.
2001 2000 1999
--------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
(share data in thousands) Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 6,448 $ 20.58 6,572 $ 17.62 5,560 $ 14.01
Granted 1,230 41.93 1,782 24.03 1,686 30.22
Exercised (1,531) 15.25 (1,554) 11.16 (392) 15.14
Forfeited/Cancelled (155) 22.93 (352) 24.28 (282) 25.18
------------- ------------- ------------
Outstanding at end of year 5,992 26.26 6,448 20.58 6,572 17.62
============= ============= ============
Options exercisable at year end 2,758 2,524 2,782
============= ============= ============
Weighted-average fair value of
options granted during the year $ 19.06 $ 10.85 $ 16.20
============= ============= ============
The following table summarizes information about fixed stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------------ ----------------------------------
Range of
Exercise Prices Number Weighted-Average Number Weighted-Average
(share data in Outstanding at Remaining Weighted-Average Exercisable Exercise Price
thousands) 12/31/01 Contractual Life Exercise Price at 12/31/01
- ----------------------------------------------------------------------------------- ----------------------------------
$1.63 - $19.31 2,274 5.45 $ 14.90 1,360 $ 13.29
19.47 - 27.56 1,503 7.43 25.96 800 25.96
28.22 - 39.24 1,662 7.45 35.94 550 33.53
40.19 - 48.34 515 6.30 45.15 48 41.88
53.90 - 53.90 38 6.57 53.90 - -
------------------- -----------------
$1.63 - 53.90 5,992 6.72 $ 26.26 2,758 $ 21.52
=================== =================
55
11. Corporate restructuring
During the second quarter of 1999, we recorded a pre-tax restructuring
charge of $9,400,000 associated with the consolidation of our Plymouth,
Minnesota facility into our Bloomington, Minnesota facility. In December 1999
and September 2000, the associated accrual was reduced by $2,301,000 and
$44,000, primarily as a result of subleasing a portion of the unoccupied space.
The consolidation plan includes the relocation of all employees at the Plymouth
facility to the Bloomington facility that began in August 1999, with completion
delayed until the first quarter of 2001 from the previously disclosed third
quarter of 2000. Included in the restructuring charge are anticipated cash
expenditures of approximately $4,779,000 for lease termination fees and rent on
unoccupied space (which payments will continue through April 2001, when the
lease expires) and anticipated non-cash charges of approximately $2,276,000 for
the write-down of leasehold improvements and furniture and fixtures. The
restructuring charge does not include any costs associated with the physical
relocation of the employees.
During December 1999, we recorded a pre-tax restructuring charge of
$2,633,000 associated with the outsourcing of our computer operations to
Electronic Data Systems Corporation. The principal actions of the plan included
cash expenditures of approximately $2,148,000 for the transition of 51 employees
to the outsourcer and the elimination of contractual obligations of ValueRx
which had no future economic benefit to us, and non-cash charges of
approximately $485,000 due to the reduction in the carrying value of certain
capitalized software to its net realizable value. The plan was completed during
the second quarter of 2000 when all cash payments were made.
Also in December 1999, we recorded a pre-tax restructuring charge of
$969,000 associated with restructuring our PPS majority-owned subsidiary and the
purchase of the remaining PPS common stock from management. The charge consists
of cash expenditures of $559,000 relating to stock compensation expense and
$410,000 of severance payments to 9 employees (of which $133,000 was paid during
December 1999). This plan was completed in January 2000.
Balance at Balance at Balance at
December 31, 2000 2000 December 31, 2001 December 31,
(in thousands) 1999 Reversals Usage 2000 Usage 2001
- ------------------------------------------------------------------------------------------------------------------------
NON-CASH
Write-down of long-lived
assets $ 28 $ - $ - $ 28 $ 28 $ -
CASH
Employee transition costs 1,592 - 1,592 - - -
Stock compensation 559 - 559 - - -
Lease termination fees and
rent 1,338 44 1,167 127 127 -
--------------------------------------------------------------------------------------------
$ 3,517 $ 44 $ 3,318 $ 155 $ 155 $ -
============================================================================================
All of the restructuring charges which include tangible assets to be
disposed of are written down to their net realizable value, less cost of
disposal. We expect recovery to approximate its cost of disposal. Considerable
management judgment is necessary to estimate fair value; accordingly, actual
results could vary from such estimates.
12. Condensed consolidating financial statements
Our Senior Notes are unconditionally and jointly and severally
guaranteed by our wholly-owned domestic subsidiaries other than Practice
Patterns Science, Inc., Great Plains Reinsurance Co., ValueRx of Michigan, Inc.,
Diversified NY IPA, Inc., and Diversified Pharmaceutical Services (Puerto Rico),
Inc. The following condensed consolidating financial information has been
prepared in accordance with the requirements for presentation of such
information. We believe that this information, presented in lieu of complete
financial statements for each of the guarantor subsidiaries, provides sufficient
detail to allow investors to determine the nature of the assets held by, and the
operations of, each of the consolidating groups. During 2001 and 2000, we
undertook an internal corporate reorganization to eliminate various entities
whose existence was deemed to be no longer necessary, including, among others,
ValueRx, and to create several new entities to conduct certain activities,
including Express Scripts Specialty Distribution Services ("SDS"), ESI Mail
Pharmacy Service, Inc. ("ESI MPS"), Express Access Pharmacy, Inc.
56
("EAP") and ESI Resources, Inc. ("ERI"). Consequently, the assets, liabilities
and operations of ValueRx are incorporated into those of the issuer, Express
Scripts, Inc. and the assets, liabilities and operations of SDS, ESI MPS, EAP
and ERI are incorporated into those of the Guarantors.
57
Condensed Consolidating Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2001
Current assets $ 972,844 $ 230,303 $ 10,056 $ - $ 1,213,203
Property and equipment, net 131,567 32,500 1,196 - 165,263
Investments in subsidiaries 1,208,931 752,256 - (1,961,187) -
Intercompany 214,531 (185,148) (29,383) - -
Goodwill, net 241,457 685,893 14,930 - 942,280
Other intangible assets, net 62,198 93,787 9,364 - 165,349
Other assets 87,024 (72,492) (382) - 14,150
----------------------------------------------------------------------------------
Total assets $ 2,918,552 $ 1,537,099 $ 5,781 $ (1,961,187) $ 2,500,245
==================================================================================
Current liabilities $ 482,157 $ 759,969 $ 3,491 $ - $ 1,245,617
Long-term debt 346,119 - - - 346,119
Other liabilities 151,754 (73,173) (2,069) - 76,512
Stockholders' equity 1,938,522 850,303 4,359 (1,961,187) 831,997
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,918,552 $ 1,537,099 $ 5,781 $ (1,961,187) $ 2,500,245
==================================================================================
AS OF DECEMBER 31, 2000
Current assets $ 755,995 $ 236,311 $ 5,863 $ - $ 998,169
Property and equipment, net 120,754 24,724 2,231 - 147,709
Investments in subsidiaries 866,561 - 2,261 (868,822) -
Intercompany (219,809) 226,975 (7,166) - -
Goodwill, net 251,139 711,062 4,816 - 967,017
Other intangible assets, net 55,175 101,640 279 - 157,094
Other assets 77,505 (73,162) 2,312 - 6,655
----------------------------------------------------------------------------------
Total assets $ 1,907,320 $ 1,227,550 $ 10,596 $ (868,822) $ 2,276,644
==================================================================================
Current liabilities $ 630,888 $ 478,583 $ 6,473 $ - $ 1,115,944
Long-term debt 396,441 - - - 396,441
Other liabilities 125,264 (64,514) (1,735) - 59,015
Stockholders' equity 754,727 813,481 5,858 (868,822) 705,244
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,907,320 $ 1,227,550 $ 10,596 $ (868,822) $ 2,276,644
==================================================================================
58
Condensed Consolidating Statement of Operations
Express Non-
(in thousands) Scripts, Inc. Guarantors Guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
Total revenues $ 5,766,958 $ 3,545,124 $ 16,700 $ - $ 9,328,782
Operating expenses 5,586,168 3,487,001 18,436 - 9,091,605
----------------------------------------------------------------------------------
Operating income (loss) 180,790 58,123 (1,736) - 237,177
Undistributed loss from joint venture (1,834) - - - (1,834)
Interest (expense) income (26,489) (16) (594) - (27,099)
----------------------------------------------------------------------------------
Income (loss) before tax effect 152,467 58,107 (2,330) - 208,244
Income tax provision (benefit) 62,574 21,285 (687) - 83,172
----------------------------------------------------------------------------------
Income (loss) before extraordinary item 89,893 36,822 (1,643) - 125,072
Extraordinary item (372) - - - (372)
----------------------------------------------------------------------------------
Net income (loss) $ 89,521 $ 36,822 $ (1,643) $ - $ 124,700
==================================================================================
YEAR ENDED DECEMBER 31, 2000
Total revenues $ 4,387,439 $ 2,512,197 $ 11,813 $ - $ 6,911,449
Operating expenses 4,284,531 2,411,737 14,969 - 6,711,237
----------------------------------------------------------------------------------
Operating income (loss) 102,908 100,460 (3,156) - 200,212
Write-off of marketable securities - (165,207) - - (165,207)
Interest (expense) income (39,506) (12) 45 - (39,473)
----------------------------------------------------------------------------------
Income (loss) before tax effect 63,402 (64,759) (3,111) - (4,468)
Income tax provision (benefit) 29,705 (24,910) (1,242) - 3,553
----------------------------------------------------------------------------------
Income (loss) before extraordinary item 33,697 (39,849) (1,869) - (8,021)
Extraordinary item (1,105) - - - (1,105)
----------------------------------------------------------------------------------
Net income (loss) $ 32,592 $ (39,849) $ (1,869) $ - $ (9,126)
==================================================================================
YEAR ENDED DECEMBER 31, 1999
Total revenues $ 2,375,045 $ 1,989,237 $ 40,915 $ - $ 4,405,197
Operating expenses 2,257,237 1,971,696 39,480 - 4,268,413
----------------------------------------------------------------------------------
Operating income 117,808 17,541 1,435 - 136,784
Gain on sale of assets - 182,930 - - 182,930
Interest (expense) income (54,700) 292 160 - (54,248)
----------------------------------------------------------------------------------
Income before tax provision 63,108 200,763 1,595 - 265,466
Income tax provision 34,799 72,031 1,268 - 108,098
----------------------------------------------------------------------------------
Income before extraordinary loss 28,309 128,732 327 - 157,368
Extraordinary item (7,150) - - - (7,150)
----------------------------------------------------------------------------------
Net income $ 21,159 $ 128,732 $ 327 $ - $ 150,218
==================================================================================
59
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
Net cash (used in) provided by
operating activities $ (62,479) $ 348,738 $ (5,122) $ (147) $ 280,990
----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (43,994) (13,059) (233) - (57,286)
Proceeds from sales of property
and equipment 22 810 12 - 844
Acquisitions and joint venture (3,866) - (16,399) - (20,265)
Other (12) - - - (12)
----------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (47,850) (12,249) (16,620) - (76,719)
----------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (50,000) - - - (50,000)
Treasury stock acquired (54,463) - - - (54,463)
Proceeds from employee stock plans 24,914 - - - 24,914
Net transactions with parent 314,458 (340,133) 25,528 147 -
----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 234,909 (340,133) 25,528 147 (79,549)
----------------------------------------------------------------------------------
Effect of foreign currency
translation adjustment - - (211) - (211)
----------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 124,580 (3,644) 3,575 - 124,511
Cash and cash equivalents at beginning
of year 148,311 (98,519) 3,412 - 53,204
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 272,891 $ (102,163) $ 6,987 $ - $ 177,715
==================================================================================
YEAR ENDED DECEMBER 31, 2000
Net cash (used in) provided by
operating activities $ (316,793) $ 571,125 $ (8,275) $ (147) $ 245,910
----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (107,171) 27,215 (262) - (80,218)
Proceeds from sales of property
and equipment 8,831 - - - 8,831
Other (2,191) - - - (2,191)
----------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (100,531) 27,215 (262) - (73,578)
----------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (240,069) - - - (240,069)
Treasury stock acquired (30,247) - - - (30,247)
Other 18,689 - - - 18,689
Net transactions with parent 693,540 (701,057) 7,370 147 -
----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 441,913 (701,057) 7,370 147 (251,627)
----------------------------------------------------------------------------------
60
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of foreign currency
translation adjustment - - (131) - (131)
----------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 24,589 (102,717) (1,298) - (79,426)
Cash and cash equivalents at beginning
of year 123,722 4,198 4,710 - 132,630
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 148,311 $ (98,519) $ 3,412 $ - $ 53,204
=============== ================ ================ =============== ================
13. Segment information
We are organized on the basis of services offered and have determined
we have two reportable segments: PBM services and non-PBM services (defined in
Note 1 "organization and operations"). We manage the pharmacy benefit within an
operating segment that encompasses a fully-integrated PBM service. The remaining
operating service lines (SDS and Express Scripts Infusion Services) have been
aggregated into a non-PBM reporting segment.
The following table presents information about the reportable segments
for the years ended December 31:
(in thousands) PBM Non-PBM Total
- --------------------------------------------------------------------------------
2001
Total revenues $ 9,254,514 $ 74,268 $ 9,328,782
Depreciation and amortization expense 79,133 950 80,083
Interest income 7,120 - 7,120
Interest expense 33,403 816 34,219
Income before income taxes 192,661 15,583 208,244
Total assets 2,437,323 62,922 2,500,245
Capital expenditures 54,581 2,705 57,286
- --------------------------------------------------------------------------------
2000
Total revenues $ 6,823,405 $ 88,044 $ 6,911,449
Depreciation and amortization expense 77,830 785 78,615
Interest income 8,430 - 8,430
Interest expense 47,898 5 47,903
Income before income taxes (19,666) 15,198 (4,468)
Total assets 2,227,348 49,296 2,276,644
Capital expenditures 78,065 2,153 80,218
- --------------------------------------------------------------------------------
1999
Total revenues $ 4,339,387 $ 65,810 $ 4,405,197
Depreciation and amortization expense 71,156 711 71,867
Interest income 5,761 1 5,762
Interest expense 60,001 9 60,010
Income before income taxes 259,182 6,284 265,466
Total assets 2,479,746 7,565 2,487,311
Capital expenditures 35,895 1,063 36,958
- --------------------------------------------------------------------------------
61
14. Quarterly financial data (unaudited)
- --------------------------------------------------------------------------------
Quarters
-----------------------------------------------
(in thousands,
except per share data) First Second Third Fourth
- --------------------------------------------------------------------------------
FISCAL 2001
Total revenues $2,090,540 $ 2,247,343 $ 2,381,252 $ 2,609,647
Cost of revenues 1,945,641 2,097,059 2,236,799 2,453,415
Selling, general and
administratitive 89,798 92,590 84,222 92,081
Operating income 55,101 57,694 60,231 64,151
Extraordinary item - - (372) -
-------------------------------------------------
Net income $ 28,079 $ 30,244 $ 32,191 $ 34,186
=================================================
Basic earnings per share
Before extraordinary item $ 0.36 $ 0.39 $ 0.41 $ 0.44
Extraordinary item - - - -
-------------------------------------------------
Net income $ 0.36 $ 0.39 $ 0.41 $ 0.44
=================================================
Diluted earnings per share:
Before extraordinary item $ 0.35 $ 0.38 $ 0.40 $ 0.43
Extraordinary item - - - -
-------------------------------------------------
Net income $ 0.35 $ 0.38 $ 0.40 $ 0.43
=================================================
- --------------------------------------------------------------------------------
Quarters
---------------------------------------------
(in thousands,
except per share data) First Second(1) Third(2) Fourth(3)
- --------------------------------------------------------------------------------
FISCAL 2000
Total revenues $1,504,645 $1,698,044 $1,757,825 $1,950,935
Cost of revenues 1,372,291 1,560,748 1,625,094 1,814,349
Selling, general and
administrative 83,279 87,314 82,579 85,583
Operating income 49,075 49,982 50,152 51,003
Extraordinary item - - (898) (207)
---------------------------------------------
Net income (loss) $ 21,432 $ (74,177)$ 23,875 $ 19,744
=============================================
Basic earnings (loss) per share:
Before extraordinary item $ 0.28 $ (0.98) $ 0.32 $ 0.26
Extraordinary item - - (0.01)
---------------------------------------------
Net income (loss) $ 0.28 $ (0.98) $ 0.31 $ 0.26
=============================================
Diluted earnings (loss)
per share:(4)
Before extraordinary item $ 0.27 $ (0.98) $ 0.31 $ 0.25
Extraordinary item - - (0.01) -
---------------------------------------------
Net income (loss) $ 0.27 $ (0.98) $ 0.30 $ 0.25
=============================================
(1) Includes a non-cash write-off of $155,500 ($97,032 net of tax) on our
investment in PlanetRx. Excluding this amount, our basic and diluted
earnings per share would have been $0.30 each.
(2) Includes an ordinary gain of $1,500 ($926 net of tax) on the restructuring
of our interest rate swap agreements. Excluding this amount, our basic and
diluted earnings per share before extraordinary items would have been $0.31
and $0.30, respectively.
(3) Includes a non-cash write-off of $9,707 ($6,057 net of tax) on our
investment in PlanetRx. Excluding this amount, our basic and diluted
earnings per share would have been $0.34 and $0.33, respectively.
(4) In accordance with FAS 128, basic weighted average shares were used to
calculate second quarter 2000 diluted EPS as the net loss and the actual
diluted weighted average shares (38,507 as of June 30, 2000) cause diluted
EPS to be anti-dilutive.
62
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
63
PART III
Item 10 - Directors and Executive Officers of the Registrant
The information required by this item will be incorporated by reference
from our definitive Proxy Statement for our 2002 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A (the "Proxy Statement") under the heading
"I. Election of Directors"; provided that the Compensation Committee Report on
Executive Compensation, the Audit Committee Report and the performance graph
contained in the Proxy Statement shall not be deemed to be incorporated herein;
and further provided that some of the information regarding our executive
officers required by Item 401 of Regulation S-K has been included in Part I of
this report.
Item 11 - Executive Compensation
The information required by this item will be incorporated by reference
from the Proxy Statement under the headings "Directors' Compensation,"
"Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation."
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be incorporated by reference
from the Proxy Statement under the headings "Security Ownership of Certain
Beneficial Owners and Management."
Item 13 - Certain Relationships and Related Transactions
The information required by this item will be incorporated by reference
from the Proxy Statement under the heading "Certain Relationships and Related
Transactions."
64
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
(1) Financial Statements
The following report of independent accountants and our
consolidated financial statements are contained in this Report on the
page indicated
Page No. In
Form 10-K
-----------------
Report of Independent Accountants 37
Consolidated Balance Sheet as of
December 31, 2001 and 2000 38
Consolidated Statement of Operations
for the years ended December 31, 2001,
2000 and 1999 39
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999 40
Consolidated Statement of Cash Flows for
the years ended December 31, 2001,
2000 and 1999 41
Notes to Consolidated Financial Statements 42
(2) The following financial statement schedule is contained in this Report
on the page indicated.
Page No. In
Financial Statement Schedule: Form 10-K
-----------------
VIII. Valuation and Qualifying Accounts
and Reserves for the years ended
December 31, 2001, 2000 and 1999 69
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or the notes thereto.
(3) List of Exhibits
See Index to Exhibits on pages 70 - 76
(b) Reports on Form 8-K
(i) On October 19, 2001, we filed a Current Report on
Form 8-K dated October 19, 2001, under Items 5, 7,
and 9, regarding a press release we issued covering
our third quarter 2001 financial performance.
65
(ii) On December 26, 2001, we filed a Current Report on
Form 8-K dated December 24, 2001, under Item 5,
regarding a private class action suit which had been
filed in the United States District Court in Arizona.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
March 8 , 2002 By: /s/ Barrett A. Toan
---------------------------
Barrett A. Toan, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Barrett A. Toan President, March 8, 2002
- ----------------------------
Barrett A. Toan Chief Executive
Officer and
Chairman of the Board
Of Directors
/s/ George Paz Senior Vice President and March 8, 2002
- ----------------------------
George Paz Chief Financial Officer
/s/ Joseph W. Plum Vice President and March 8, 2002
- ----------------------------
Joseph W. Plum Chief Accounting Officer
/s/ Stuart L. Bascomb Director March 8, 2002
- ----------------------------
Stuart L. Bascomb
Director March __, 2002
- ----------------------------
Gary G. Benanav
/s/ Frank J. Borelli Director March 8, 2002
- ----------------------------
Frank J. Borelli
/s/ Nicholas J. LaHowchic Director March 8, 2002
- ----------------------------
Nicholas J. LaHowchic
/s/ Thomas P. Mac Mahon Director March 8, 2002
- ----------------------------
Thomas P. Mac Mahon
67
/s/ John O. Parker Director March 8, 2002
- ----------------------------
John O. Parker
Director March __, 2002
- ----------------------------
Seymour Sternberg
Director March __, 2002
- ----------------------------
Howard L. Waltman
/s/ Norman Zachary Director March 8, 2002
- ----------------------------
Norman Zachary
68
EXPRESS SCRIPTS, INC.
Schedule VIII - Valuation and Qualifying Accounts and Reserves Years
Ended December 31, 2001, 2000 and 1999
Col. A Col. B Col. C Col. D Col. E
- ---------------------- ------------ ------------------------------- -------------- -------------
Additions
-------------------------------
Balance Charges Charges Balance
at to Costs to Other at End
Beginning and and of
Description of Period Expenses Accounts (Deductions) Period
- ---------------------- ------------ ------------- -------------- -------------- -------------
Allowance for Doubtful
Accounts Receivable
Year Ended 12/31/99 $ 17,806,284 $ 4,989,041 $ (937,616)(1) $ 4,576,997 $ 17,280,712
Year Ended 12/31/00 $ 17,280,712 $ 12,843,253 $ (1,370,986)(2) $ 6,075,618 $ 22,677,361
Year Ended 12/31/01 $ 22,677,361 $ 8,355,536 $ - $ 6,875,519 $ 24,157,378
(1) Represents the opening balance sheet adjustment for ValueRx and the opening
balance sheet for our April 1, 1999 acquisition of DPS.
(2) Represents the opening balance sheet adjustment for DPS.
69
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
Exhibit Exhibit
Number
2.1a Stock Purchase Agreement by and among SmithKline Beecham
Corporation, SmithKline Beecham InterCredit BV and Express Scripts,
Inc., dated as of February 9, 1999, and certain related Schedules,
incorporated by reference to Exhibit No. 2.1 to the Company's
Current Report on Form 8-K filed February 18, 1999.
2.2 Asset Contribution and Reorganization Agreement dated August 31,
1999 by and among PlanetRx.com, Inc., PRX Holdings, Inc., PRX
Acquisition, Corp., YourPharmacy.com, Inc., and Express Scripts,
Inc. (incorporated by reference to the Exhibit No. 2.1 to PlanetRx's
Registration Statement on Form S-1, as amended (Registration Number
333-82485)).
2.3 Asset Purchase Agreement, dated as of December 19, 2001, by and
among the Company, Phoenix Marketing Group (Holdings), Inc., and
Access Worldwide Communications, Inc.("Access"), incorporated by
reference to Appendix A to Access' Definitive Proxy Statement on
Schedule 14A, filed January 15, 2002.
3.1b Amended and Restated Certificate of Incorporation of the Company, as
amended.
3.2 Third Amended and Restated Bylaws, incorporated by reference to
Exhibit No. 3.2 to the Company's Annual Report on Form 10-K for the
year ending December 31, 2000.
4.1 Form of Certificate for Class A Common Stock, incorporated by
reference to Exhibit No. 4.1 to the Company's Registration Statement
on Form S-1 filed June 9, 1992 (Registration Number 33-46974).
4.2 Indenture, dated as of June 16, 1999, among the Company, Bankers
Trust Company, as trustee, and Guarantors named therein,
incorporated by reference to Exhibit No. 4.4 to the Company's
Registration Statement on Form S-4 filed August 4, 1999
(Registration Number 333-83133).
4.3 Supplemental Indenture, dated as of October 6, 1999, to Indenture
dated as of June 16, 1999, among the Company, Bankers Trust Company,
as trustee, and Guarantors named therein, incorporated by reference
to Exhibit No. 4.3 to the Company's Annual Report on Form 10-K for
the year ending December 31, 1999.
4.4 Second Supplemental Indenture, dated as of July 19, 2000, to
Indenture dated as of June 16, 1999, among the Company, Bankers
Trust Company, as trustee, and Guarantors named therein,
incorporated by reference to Exhibit No. 4.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
4.5 Stockholder and Registration Rights Agreement dated as of October 6,
2000 between the Company and New York Life Insurance Company,
incorporated by reference to Exhibit No. 4.2 to the Company's
Amendment No. 1 to Registration Statement on Form S-3 filed October
17, 2000 (Registration Number 333-47572).
70
4.6 Asset Acquisition Agreement dated October 17, 2000, between NYLIFE
Healthcare Management, Inc., the Company, NYLIFE LLC and New York
Life Insurance Company, incorporated by reference to Exhibit No. 4.3
to the Company's amendment No. 1 to the Registration Statement on
Form S-3 filed October 17, 2000 (Registration Number 333-47572).
4.7 Rights Agreement, dated as of July 25, 2001, between the Corporation
and American Stock Transfer & Trust Company, as Rights Agent, which
includes the Certificate of Designations for the Series A Junior
Participating Preferred Stock as Exhibit A, the Form of Right
Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C, incorporated by reference to Exhibit
No. 4.1 to the Company's Current Report on Form 8-K filed July 31,
2001.
10.1 Lease Agreement dated March 3, 1992, between Riverport, Inc. and
Douglas Development Company--Irvine Partnership in commendam and the
Company, incorporated by reference to Exhibit No. 10.21 to the
Registration Statement on Form S-1 filed June 9, 1992 (Registration
Number 33-46974).
10.2 First Amendment to Lease dated as of December 29, 1992, between
Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.13 to the Company's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1993.
10.3 Second Amendment to Lease dated as of May 28, 1993, between
Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.14 to the Company's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1993.
10.4 Third Amendment to Lease entered into as of October 15, 1993, by and
between Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.69 to the Company's Annual Report on
Form 10-K for the year ending 1993.
10.5 Fourth Amendment to Lease dated as of March 24, 1994, by and between
Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.70 to the Company's Annual Report on
Form 10-K for the year ending 1993.
10.6 Fifth Amendment to Lease made and entered into June 30, 1994,
between Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ending June 30, 1994.
10.7 Sixth Amendment to Lease made and entered into January 31, 1995,
between Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.70 to the Company's Annual Report on
Form 10-K for the year ending 1994.
10.8 Seventh Amendment to Lease dated as of August 14, 1998, by and
between Duke Realty Limited Partnership, by and through its general
partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ending September 30,
1998.
71
10.9 Eighth Amendment to Lease dated as of August 14, 1998, by and
between Duke Realty Limited Partnership, by and through its general
partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ending September 30,
1998.
10.10 Ninth Amendment to Lease dated as of February 19, 1999, by and
between Duke Realty Limited Partnership, by and through its general
partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.29 to the Company's
Annual Report on Form 10-K/A for the year ending 1998.
10.11c Express Scripts, Inc. 1992 Stock Option Plan, incorporated by
reference to Exhibit No. 10.23 to the Registration Statement on Form
S-1 filed June 9, 1992 (Registration Number 33-46974).
10.12c Express Scripts, Inc. Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit No. 10.24 to the Registration
Statement on Form S-1 filed June 9, 1992 (Registration Number
33-46974).
10.13c Express Scripts, Inc. 1994 Stock Option Plan, incorporated by
reference to Exhibit No. 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1994.
10.14c Amended and Restated Express Scripts, Inc. 1992 Employee Stock
Option Plan, incorporated by reference to Exhibit No. 10.78 to the
Company's Annual Report on Form 10-K for the year ending 1994.
10.15c First Amendment to Express Scripts, Inc. Amended and Restated 1992
Stock Option Plan incorporated by reference to Exhibit D to the
Company's Proxy Statement dated April 22, 1999.
10.16c Second Amendment to Express Scripts, Inc. Amended and Restated 1992
Stock Option Plan incorporated by reference to Exhibit F to the
Company's Proxy Statement dated April 22, 1999.
10.17c Amended and Restated Express Scripts, Inc. Stock Option Plan for
Outside Directors, incorporated by reference to Exhibit No. 10.79 to
the Company's Annual Report on Form 10-K for the year ending 1994.
10.18c First Amendment to Express Scripts, Inc. Amended and Restated 1992
Stock Option Plan for Outside Directors incorporated by reference to
Exhibit A to the Company's Proxy Statement dated April 9, 1996.
10.19c Second Amendment to Express Scripts, Inc. Amended and Restated 1992
Stock Option Plan for Outside Directors incorporated by reference to
Exhibit G to the Company's Proxy Statement dated April 22, 1999.
10.20c Amended and Restated Express Scripts, Inc. 1994 Stock Option Plan
incorporated by reference to Exhibit No. 10.80 to the Company's
Annual Report on Form 10-K for the year ending 1994.
72
10.21c First Amendment to Express Scripts, Inc. Amended and Restated 1994
Stock Option Plan incorporated by reference to Exhibit A to the
Company's Proxy Statement dated April 16, 1997.
10.22c Second Amendment to Express Scripts, Inc. Amended and Restated 1994
Stock Option Plan incorporated by reference to Exhibit A to the
Company's Proxy Statement dated April 21, 1998.
10.23c Third Amendment to Express Scripts, Inc. Amended and Restated 1994
Stock Option Plan, incorporated by reference to Exhibit C to the
Company's Proxy Statement dated April 22, 1999.
10.24c Fourth Amendment to Express Scripts, Inc. Amended and Restated 1994
Stock Option Plan, incorporated by reference to Exhibit E to the
Company's Proxy Statement dated April 22, 1999.
10.25c Express Scripts, Inc. 2000 Long Term Incentive Plan, incorporated by
reference to Exhibit No. 4.3 to the Company's Registration Statement
on Form S-8, filed with the Securities and Exchange Commission on
August 9, 2000 (Registration Number 333-43336).
10.26c Amended and restated Express Scripts, Inc. 2000 Long-Term Incentive
Plan, incorporated by reference to Exhibit No. 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30, 2001.
10.27b,c Second Amendment to the Express Scripts, Inc. 2000 Long-Term
Incentive Plan.
10.28c Express Scripts, Inc. Employee Stock Purchase Plan incorporated by
reference to Exhibit No. 4.1 to the Company's Registration Statement
on Form S-8 filed December 29, 1998 (Registration Number 333-69855).
10.29c Express Scripts, Inc. Executive Deferred Compensation Plan, as
amended, incorporated by reference to Exhibit No 10.1 to the
Company's Quarterly Report on From 10-Q for the quarter ending June
30, 2000.
10.30c Employment Agreement effective as of April 1, 1999, between Barrett
A. Toan and the Company, incorporated by reference to Exhibit No.
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ending March 31, 1999.
10.31c Amendment to the Employment Agreement between the Company and
Barrett A. Toan, incorporated by reference to Exhibit No. 10.1 to
the Company's Current Report on Form 8-K dated October 17, 2000 and
filed October 18, 2000.
10.32b,c Severance Agreement dated as of May 26, 1999, between the Company
and Mark O. Johnson.
10.33c Executive Employment Agreement, effective March 15, 2001, between
the Company and Stuart L. Bascomb, incorporated by reference to
Exhibit No. 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ending March 31, 2001.
73
10.34c Executive Employment Agreement, effective March 15, 2001, between
the Company and David A. Lowenburg, incorporated by reference to
Exhibit No. 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ending March 31, 2001.
10.35c Executive Employment Agreement, effective March 15, 2001, between
the Company and George Paz, incorporated by reference to Exhibit No.
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ending March 31, 2001.
10.36c Form of Executive Employment Agreements entered into effective March
15, 2001 between the Company and each of Thomas Boudreau, Mabel Chen
and Linda Logsdon, incorporated by reference to Exhibit No. 10.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ending
March 31, 2001.
10.37 Credit Agreement dated as of April 1, 1999 among the Company, the
Lenders listed therein, Credit Suisse First Boston as lead Arranger,
Administrative Agent and Collateral Agent, Bankers Trust Company as
Syndication Agent, BT Alex. Brown Incorporated as Co-Arranger, The
First National Bank of Chicago as Co-Documentation Agent, and
Mercantile Bank, N.A. as co-Documentation Agent, incorporated by
reference to Exhibit No. 10.8 to the Company's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1999.
10.38 Amendment No.1 to Credit Agreement dated as of April 1, 1999 among
the Company, the Lenders listed therein, Credit Suisse First Boston
as Lead Arranger, Administrative Agent and BT Alex. Brown
Incorporated as Co-Arranger, The First National Bank of Chicago as
Co-Documentation Agent, and Mercantile Bank, N.A. as
Co-Documentation Agent, incorporated by reference to Exhibit No.
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1999.
10.39 Amendment No. 2 to Credit Agreement dated as of April 1, 1999 among
the Company, the Lenders listed therein, Credit Suisse First Boston
as Lead Arranger, Administrative Agent and Collateral Agent, Bankers
Trust Company as Syndication Agent, BT Alex. Brown Incorporated as
Co-Arranger, The First National Bank of Chicago as Co-Documentation
Agent, and Mercantile Bank, N.A. as Co-Documentation Agent,
incorporated by reference to Exhibit No. 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ending September 30,
1999.
10.40 Amendment No. 3 and Waiver to Credit Agreement dated as of April 1,
1999 among the Company, the Lenders listed therein, Credit Suisse
First Boston as Lead Arranger, Administrative Agent and Collateral
Agent, Bankers Trust Company as Syndication Agent, BT Alex. Brown
Incorporated as Co-Arranger, The First National Bank of Chicago as
Co-Documentation Agent, and Mercantile Bank, N.A. as
Co-Documentation Agent, incorporated by reference to Exhibit No.
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1999.
10.41 Amendment No.4 Waiver and Consent to Credit Agreement dated as of
April 1, 1999 among the Company, the Lenders listed therein, Credit
Suisse First Boston as Lead Arranger, Administrative Agent and
Collateral Agent, Bankers Trust Company as Syndication Agent, BT
Alex. Brown Incorporated as Co-Arranger, The First National Bank of
Chicago as Co-Documentation Agent, and Mercantile Bank, N.A. as
Co-Documentation Agent, and certain related schedules, incorporated
by reference to Exhibit No. 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ending June 30, 2001.
74
10.42 Amendment No.5 to Credit Agreement dated as of April 1, 1999 among
the Company, the Lenders listed therein, Credit Suisse First Boston
as Lead Arranger, Administrative Agent and Collateral Agent, Bankers
Trust Company as Syndication Agent, BT Alex. Brown Incorporated as
Co-Arranger, The First National Bank of Chicago as Co-Documentation
Agent, and Mercantile Bank, N.A. as Co-Documentation Agent,
incorporated by reference to Exhibit No. 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ending October 31,
2001.
10.43 Subsidiary Guaranty dated as of April 1, 1999, in favor of Credit
Suisse First Boston as Collateral Agent and the Lenders listed in
the Credit Agreement, by the following parties: Managed Prescription
Network, Inc., Value Health, Inc., IVTx, Inc., Express Scripts
Vision Corp., ESI/VRx Sales Development Co., HealthCare Services,
Inc., MHI, Inc., ValueRx, Inc., ValueRx Pharmacy Program, Inc.,
Diversified Pharmaceutical Services, Inc., ESI OnLine, Inc.,
incorporated by reference to Exhibit No. 10.9 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30, 1999.
10.44 Company Pledge Agreement dated as of April 1, 1999, by the Company
in favor of Credit Suisse First Boston as Collateral Agent and the
Lenders listed in the Credit Agreement, incorporated by reference to
Exhibit No. 10.10 to the Company's Quarterly Report on Form 10-Q for
the quarter ending June 30, 1999.
10.45 Addendum to Company Pledge Agreement dated as of April 1, 1999, by
the Company in favor of Credit Suisse First Boston as Collateral
Agent and the Lenders listed in the Credit Agreement, in the form of
Exhibit I to the Company Pledge Agreement, dated May 4, 2001,
incorporated by reference to Exhibit No. 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30, 2001.
10.46 Addendum to Company Pledge Agreement dated as of April 1, 1999, by
the Company in favor of Credit Suisse First Boston as Collateral
Agent and the Lenders listed in the Credit Agreement, in the form of
Exhibit I to the Company Pledge Agreement, dated June 20, 2001,
incorporated by reference to Exhibit No. 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30, 2001.
10.47 Subsidiary Pledge Agreement dated as of April 1, 1999, in favor of
Credit Suisse First Boston as Collateral Agent and the Lenders
listed in the Credit Agreement, by the following parties: ESI Canada
Holdings, Inc., Value Health, Inc., ValueRx, Inc., incorporated by
reference to Exhibit No. 10.11 to the Company's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1999.
10.48 Addenda to the Subsidiary Pledge Agreement dated as of April 1,
1999, in favor of Credit Suisse First Boston as Collateral Agent and
the Lenders listed in the Credit Agreement, by ESI Canada Holdings,
Inc., Value Health, Inc., ValueRx, Inc., each in the from of Exhibit
I to the Subsidiary Pledge Agreement, adding ESI Partnership, ESI
Mail Pharmacy Service, Inc. and ESI-GP Holdings as parties,
incorporated by reference to Exhibit No. 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30, 2001.
10.49 International Swap Dealers Association, Inc. Master Agreement dated
as of April 3, 1998, between the Company and The First National Bank
of Chicago, incorporated by reference to Exhibit No. 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter ending June
30, 1998.
75
10.50 Swap Transaction Confirmation Agreement between the Company and
Bankers Trust Company dated June 17, 1999, incorporated by reference
to Exhibit No. 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ending September 30, 1999.
10.51d Agreement dated June 19, 2000 by and among the Company and
PlanetRx.com, Inc., incorporated by reference to Exhibit No. 7 to
Schedule 13D dated June 19, 2000 (filed June 29, 2000), filed by the
Company with respect to PlanetRx.com, Inc.
10.52 Amended and Restated Investor's Rights Agreement dated as of June 3,
1999, incorporated by reference to the Exhibit No. 4.2 to PlanetRx's
Registration Statement on Form S-1, as amended (Registration Number
333-82485).
10.53 Amendment of Amended and Restated Investor's Rights Agreement dated
as of October 13, 1999 by and between PlanetRx.com, Inc. and
YourPharmacy.com, Inc. (incorporated by reference to Exhibit 4 to
Schedule 13D dated October 21, 1999 filed October 22, 1999) filed by
Express Scripts, Inc. with respect to PlanetRx.com, Inc. (File No.
000-27437).
12.1b Computation of Ratios of Earnings to Fixed Charges.
21.1b List of Subsidiaries.
23.1b Consent of PricewaterhouseCoopers LLP.
a The Company agrees to furnish supplementally a copy of any omitted schedule
to this agreement to the Commission upon request.
b Filed herein.
c Management contract or compensatory plan or arrangement.
d Confidential treatment was granted for certain portions of this exhibit.
76
EXHIBIT 12.1
EXPRESS SCRIPTS, INC.
STATEMENT OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, 2001, 2000, 1999, 1998, AND 1997
Year Ended December 31,
--------------------------------------------------------------------------
(in thousands) 2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Fixed charges:
Interest expense (1) $ 34,219 $ 47,903 $ 60,010 $ 20,230 $ 225
Interest portion of rental expense 4,885 4,014 3,716 1,292 757
------------ ------------ ------------ ------------ ------------
Total fixed charges 39,104 51,917 63,726 21,522 982
Earnings:
Income before income taxes and
extraordinary items (2) 208,244 (4,468) 265,466 76,240 54,706
------------ ------------ ------------ ------------ ------------
Total adjusted earnings $ 247,348 $ 47,449 $ 329,192 $ 97,762 $ 55,688
============ ============ ============ ============ ============
Ratio of earnings to fixed charges 6.33 0.91 5.17 4.54 56.71
============ ============ ============ ============ ============
(1) Interest expense includes the amortization on our deferred financing fees.
(2) Income before income taxes and extraordinary items includes a non-cash
write-off of our investment in marketable securities, non-recurring charges
and a one-time gain on sale of assets.
77
EXHIBIT 21.1
The following is a list of all of the Company's subsidiaries, regardless of the
materiality of their operations. Each of these subsidiaries is included in the
Company's Consolidated Financial Statements.
Subsidiary State of Organization D/B/A
Diversified NY IPA, Inc. New York None
Diversified Pharmaceutical Services
(Puerto Rico), Inc. Puerto Rico None
Diversified Pharmaceutical Services,
Inc. Minnesota None
ESI Canada Ontario, Canada None
ESI Claims, Inc. Delaware None
ESI-GP Canada, ULC New Brunswick, Canada None
ESI-GP Holdings, Inc. Delaware None
ESI Mail Pharmacy Service, Inc. Delaware None
ESI Partnership Delaware None
ESI Resources, Inc. Minnesota None
Express Access Pharmacy, Inc. Delaware None
Express Scripts Canada Co. New Brunswick, Canada None
Express Scripts Canada Holding, Co. Delaware None
Express Scripts Sales Development Co.
Delaware None
Express Scripts Specialty Distribution
Services, Inc. Delaware None
Express Scripts Utilization Management Delaware None
Co.
Express Scripts Vision Corporation Delaware ESI Vision Care
IVTx, Inc. Delaware Express Scripts
Infusion
Services
Great Plains Reinsurance Company Arizona None
Value Health, Inc. Delaware None
ValueRx of Michigan, Inc. Michigan None
YourPharmacy.com, Inc. Delaware None
78
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-43336, 333-80255, 333-72441, 333-69855,
333-48779, 333-48767, 333-48765, 333-27983, 333-04291, 33-64094, 33-64278,
33-93106) of Express Scripts, Inc. of our report dated February 1, 2002, except
as to paragraphs 2,3 and 4 of Note 2 which are as of February 25, 2002, relating
to the financial statements and financial statement schedule, which appears in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 8, 2002
79