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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 X For the quarterly period ended June 30, 2002.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
_____________.
Commission File Number: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1420563
(State of Incorporation) (I.R.S. employer 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
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 ___
Common stock outstanding as of July 31, 2002: 78,745,608 Shares
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EXPRESS SCRIPTS, INC.
INDEX
PAGE NUMBER
Part I Financial Information 3
Item 1. Financial Statements (unaudited)
a) Unaudited Consolidated Balance Sheet 3
b) Unaudited Consolidated Statement of Operations 4
c) Unaudited Consolidated Statement of Changes
in Stockholders' Equity 5
d) Unaudited Consolidated Statement of Cash Flows 6
e) Notes to Unaudited Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 29
Part II Other Information
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds -
(Not Applicable)
Item 3. Defaults Upon Senior Securities - (Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders - 32
Item 5. Other Information - (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Index to Exhibits 35
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 2002 2001
Assets
Current assets:
Cash and cash equivalents $ 167,548 $ 177,715
Receivables, net 1,032,390 883,827
Inventories 131,053 122,375
Deferred taxes 28,770 16,368
Prepaid expenses and other current assets 52,718 12,918
---------------- ----------------
Total current assets 1,412,479 1,213,203
Property and equipment, net 155,778 165,263
Goodwill, net 1,358,385 942,280
Other intangible assets, net 251,031 165,349
Other assets 18,043 14,150
---------------- ----------------
Total assets $ 3,195,716 $ 2,500,245
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Claims and rebates payable $ 1,060,999 $ 910,360
Other current liabilities 407,222 335,257
---------------- ----------------
Total current liabilities 1,468,221 1,245,617
Long-term debt 705,962 346,119
Other liabilities 78,106 76,512
---------------- ----------------
Total liabilities 2,252,289 1,668,248
---------------- ----------------
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 shares
authorized, and 79,796,000 and 79,230,000 shares issued and 797 792
outstanding, respectively
Additional paid-in capital 506,917 492,229
Unearned compensation under employee compensation plans (10,856) (15,452)
Accumulated other comprehensive income (3,327) (4,593)
Retained earnings 504,783 412,114
---------------- ----------------
998,314 885,090
Common Stock in treasury at cost, 1,058,000 and 1,199,000
shares, respectively (54,887) (53,093)
---------------- ----------------
Total stockholders' equity 943,427 831,997
---------------- ----------------
Total liabilities and stockholders' equity $ 3,195,716 $ 2,500,245
================ ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Revenues $ 3,402,638 $ 2,247,343 $ 6,151,707 $ 4,337,883
Cost of revenues 3,190,534 2,097,059 5,764,946 4,042,700
---------------- ---------------- ---------------- ----------------
Gross profit 212,104 150,284 386,761 295,183
Selling, general and administrative 121,311 92,590 217,698 182,388
---------------- ---------------- ---------------- ----------------
Operating income 90,793 57,694 169,063 112,795
---------------- ---------------- ---------------- ----------------
Other (expense) income:
Undistributed loss from joint venture (1,033) (658) (2,070) (658)
Interest income 1,319 2,274 2,379 3,684
Interest expense (11,654) (8,629) (19,782) (17,773)
---------------- ---------------- ---------------- ----------------
(11,368) (7,013) (19,473) (14,747)
---------------- ---------------- ---------------- ----------------
Income before income taxes 79,425 50,681 149,590 98,048
Provision for income taxes 30,725 20,437 56,921 39,725
---------------- ---------------- ---------------- ----------------
Net income $ 48,700 $ 30,244 $ 92,669 $ 58,323
================ ================ ================ ================
Basic earnings per share $ 0.62 $ 0.39 $ 1.19 $ 0.75
================ ================ ================ ================
Weighted average number of common shares
outstanding during the period - Basic EPS 78,367 78,010 78,029 77,777
================ ================ ================ ================
Diluted earnings per share $ 0.61 $ 0.38 $ 1.16 $ 0.73
================ ================ ================ ================
Weighted average number of common shares
outstanding during the period - Diluted EPS 80,277 80,128 79,941 79,909
================ ================ ================ ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Number
of
Shares Amount
--------- ---------------------------------------------------------------------------------
Unearned
Compensation Accumulated
Additional Under Employee Other
Common Common Paid-in Compensation Comprehensive Retained Treasury
(IN THOUSANDS) Stock Stock Capital Plans Income Earnings Stock Total
- ------------------------------------- --------- ---------- ----------- ------------------------------------------------------------
Balance at December 31, 2001 79,230 $ 792 $492,229 $ (15,452) $(4,593) $ 412,114 $ (53,093) $ 831,997
--------- -----------------------------------------------------------------------------------
Comprehensive income:
Net income 92,669 92,669
Other comprehensive income:
Foreign currency
translation adjustment 1,186 1,186
Realized and unrealized gains
on derivative financial
instruments, net of taxes 80 80
--------- -----------------------------------------------------------------------------------
Comprehensive income 1,266 92,669 93,935
Treasury stock acquired (35,904) (35,904)
Common stock issued under
employee plans 14 1,893 1,893
Amortization of unearned
compensation under
employee plans 4,596 4,596
Exercise of stock options (18,942) 34,110 15,168
Tax benefit relating to
Employee stock options 10,077 10,077
Repurchase and cancellation
of shares - (Note 6) (4,734) (4,734)
Stock issued for NPA acquisition 552 5 26,394 26,399
--------- -----------------------------------------------------------------------------------
Balance at June 30, 2002 79,796 $ 797 $506,917 $ (10,856) $(3,327) $ 504,783 $ (54,887) $ 943,427
========= ===================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
(IN THOUSANDS) 2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income $ 92,669 $ 58,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 53,276 38,200
Non-cash adjustments to net income 31,014 42,446
Net changes in operating assets and liabilities 18,555 (43,425)
---------------- ----------------
Net cash provided by operating activities 195,514 95,544
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (23,001) (18,963)
Acquisitions, net of cash acquired, and investment in joint venture (520,940) (18,499)
Other 508 (5,708)
---------------- ----------------
Net cash used in investing activities (543,433) (43,170)
---------------- ----------------
Cash flows from financing activities:
Proceeds from long-term debt 425,000 -
Repayment of long-term debt (65,000) -
Treasury stock acquired (35,904) -
Proceeds from employee stock plans 17,061 15,367
Other (3,771) -
---------------- ----------------
Net cash provided by financing activities 337,386 15,367
---------------- ----------------
Effect of foreign currency translation adjustment 366 (2)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (10,167) 67,739
Cash and cash equivalents at beginning of period 177,715 53,204
---------------- ----------------
Cash and cash equivalents at end of period $ 167,548 $ 120,943
================ ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted from this Form 10-Q pursuant to the Rules and Regulations of
the Securities and Exchange Commission. However, we believe that the disclosures
contained in this Form 10-Q are adequate to make the information presented not
misleading when read in conjunction with the notes to consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Securities and Exchange Commission on March 8,
2002.
We believe that the accompanying unaudited consolidated financial
statements reflect all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Unaudited Consolidated Balance
Sheet at June 30, 2002, the Unaudited Consolidated Statement of Operations for
the three months and six months ended June 30, 2002 and 2001, the Unaudited
Consolidated Statement of Changes in Stockholders' Equity for the six months
ended June 30, 2002, and the Unaudited Consolidated Statement of Cash Flows for
the six months ended June 30, 2002 and 2001. Operating results for the three
months and six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002.
NOTE 2 - GOODWILL AND OTHER INTANGIBLES
We adopted Financial Accounting Standards Board Statement No. ("FAS")
142, "Goodwill and Other Intangible Assets" effective January 1, 2002. FAS 142
requires that goodwill no longer be amortized. 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 completed our first impairment test
under FAS 142 during the second quarter of 2002, which did not result in an
impairment charge.
The following is a summary of our goodwill and other intangible assets
(amounts in thousands).
JUNE 30, 2002 DECEMBER 31, 2001
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- --------------------------------------------- ------------------- ------------------ ---- ------------------ -------------------
Goodwill
PBM $ 1,443,312 $ 106,623 $ 1,048,831 $ 106,551
Non-PBM 21,696 - - -
------------------- ------------------ ------------------ -------------------
$ 1,465,008 $ 106,623 $ 1,048,831 $ 106,551
=================== ================== ================== ===================
Other intangible assets
PBM
Customer contracts $ 261,147 $ 51,783 $ 184,612 $ 46,659
Other 68,229 32,659 56,148 28,752
------------------- ------------------ ------------------ -------------------
329,376 84,442 240,760 75,411
Non-PBM
Customer contracts $ 4,300 $ 179 - -
Other 1,990 14 - -
------------------- ------------------ ------------------ -------------------
6,290 193 - -
------------------- ------------------ ------------------ -------------------
Total other intangible assets $ 335,666 $ 84,635 $ 240,760 $ 75,411
=================== ================== ================== ===================
The aggregate amount of amortization expense of other intangible assets
was $5,348,000 and $3,015,000 for the three months ended June 30, 2002 and 2001,
respectively, and $9,043,000 and $5,961,000 for the six months ended June 30,
2002 and 2001, respectively. The future aggregate amount of amortization expense
of other intangible assets is $19,621,000 for 2002, $19,993,000 for 2003,
$19,657,000 for 2004, $18,322,000 for 2005, and $16,477,000 for 2006. The
7
weighted average amortization period of intangible assets subject to
amortization is 17 years in total, and by major intangible class is 20 years for
customer contracts and 6 years for other intangible assets.
The following table compares our net income and per share amounts for
the three and six months ended June 30, 2002, to net income and per share
amounts for the three and six months ended June 30, 2001, adjusted for the
amortization of goodwill (in thousands, except per share amounts).
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
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Reported net income $ 48,700 $ 30,244 $ 92,669 $ 58,323
Add back: Goodwill amortization, net of tax - 6,571 - 13,082
--------------------------------------------------------
Adjusted net income $ 48,700 $ 36,815 $ 92,669 $ 71,405
========================================================
Reported basic earnings per share $ 0.62 $ 0.39 $ 1.19 $ 0.75
Add back: Goodwill amortization, net of tax - 0.08 - 0.17
--------------------------------------------------------
Adjusted basic earnings per share $ 0.62 $ 0.47 $ 1.19 $ 0.92
========================================================
Reported diluted earnings per share $ 0.61 $ 0.38 $ 1.16 $ 0.73
Add back: Goodwill amortization, net of tax - 0.08 - 0.16
--------------------------------------------------------
Adjusted diluted earnings per share $ 0.61 $ 0.46 $ 1.16 $ 0.89
========================================================
NOTE 3 - CHANGES IN BUSINESS
On April 12, 2002, we completed the acquisition of National
Prescription Administrators, Inc. and certain affiliated companies (collectively
"NPA") for a purchase price of approximately $513 million, which includes the
issuance of 552,000 shares of our common stock (fair value of $26.4 million upon
the transaction announcement date), and transaction costs. Excluded from the
purchase price is a $40.0 million receivable, included in other current assets,
anticipated for a working capital purchase price adjustment. NPA was a privately
held full-service pharmacy benefit manager. The transaction was accounted for
under the provisions of FAS 141, "Business Combinations" and FAS 142. The
purchase price has been preliminarily 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 preliminarily
allocated to intangible assets, consisting of customer contracts in the amount
of $76,290,000 and non-competition agreements in the amount of $2,860,000, which
are being amortized using the straight-line method over the estimated useful
lives of 20 years and five years, respectively. These assets are classified in
other intangible assets. In addition, the excess of purchase price over tangible
net assets acquired has been preliminarily allocated to goodwill in the amount
of $393,670,000, which is not being amortized.
The acquisition was funded with a new $325 million Term B loan facility
(see Note 8), $78 million of cash on hand, the issuance of 552,000 shares of our
common stock (fair value of $26.4 million upon the transaction announcement
date), and $25 million in borrowings under our revolving credit facility. The
transaction was structured as a purchase of assets, making amortization expense
of intangible assets, including goodwill, tax deductible. In addition, we
borrowed an additional $75 million under our revolving credit facility to fund
post-closing working capital requirements of NPA.
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 $34.1 million in cash, including acquisition-related costs, 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 acquisition has been accounted for under the provisions of
FAS 141 and FAS 142. The purchase price has been preliminarily 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 preliminarily to intangible assets, consisting of customer
contracts in the amount of $4,300,000 and non-competition agreements in the
8
amount of $190,000, which are being amortized using the straight-line method
over the estimated lives of eight years and four years, respectively, and trade
name in the amount of $1,800,000, which is not being amortized. These assets are
included in other intangible assets. In addition, the excess of purchase price
over tangible net assets acquired was allocated preliminarily to goodwill in the
amount of $21,696,000, which is not being amortized. The transaction was
structured as a purchase of assets, making amortization expense of intangible
assets, including goodwill, tax deductible.
The following unaudited pro forma information presents a summary of our
combined results of operations and those of NPA and Phoenix as if the
acquisitions had occurred at the beginning of the periods presented, along with
certain pro forma adjustments to give effect to amortization of other intangible
assets, interest expense on acquisition debt and other adjustments. The
following 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 (in
thousands, except per share data):
SIX MONTHS ENDED JUNE SIX MONTHS ENDED
30, 2002 JUNE 30, 2001
----------------------- -----------------------
Total revenues $ 6,796,864 $ 5,510,856
Net income $ 94,766 $ 63,921
Basic earnings per share $ 1.21 $ 0.82
Diluted earnings per share $ 1.18 $ 0.80
On June 12, 2001, we announced that we entered into an agreement with
Option Care, Inc. to sell our Express Scripts Infusion Services branch offices
for an amount approximating the 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 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 at the acquisition date). The transaction, which
was accounted for under the purchase method of accounting, was funded with our
operating cash flows. The results of operations of CAPSS have been included in
our 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 was allocated to intangible assets consisting
of customer contracts in the amount of US$5,149,000, which are being amortized
using the straight-line method 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 effective January 1, 2002 is no longer being amortized. Pro
forma information, as if CAPSS had been acquired as of the beginning of 2001, is
not being presented as the inclusion of CAPSS financial data would not have a
material impact to our consolidated financial statements.
On February 22, 2001, we announced that we entered into an agreement
with AdvancePCS and Merck-Medco, L.L.C. 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
exchange 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 five years with approximately
$7.7 million invested through June 30, 2002. 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 the six months ended June 30,
2002 is $2,070,000 ($1,285,000 net of tax) compared to $658,000 ($407,000 net of
tax) for the six months ended June 30, 2001. These losses have been recorded in
other income (expense) in our Unaudited Consolidated Statement of Operations.
Our investment in RxHub (approximately $3,696,000 at June 30, 2002) is recorded
in other assets on our Consolidated Balance Sheet.
NOTE 4 - RECEIVABLES
Included in accounts receivable, net, as of June 30, 2002 and December
31, 2001, are allowance for doubtful accounts of $35,312,000 and $24,157,000,
respectively.
9
As of June 30, 2002 and December 31, 2001, unbilled receivables were
$557,451,000 and $435,708,000, respectively. Unbilled receivables are billed to
clients typically within 30 days of the transaction date based on the
contractual billing schedule agreed upon with the client.
NOTE 5 - PROPERTY AND EQUIPMENT
During the first quarter of 2002, the estimated useful lives of certain
computer equipment and software associated with our legacy computer systems were
shortened due to the continued progress of our integration to one point-of-sale
claim adjudication platform. This change in the estimated useful lives increased
depreciation and amortization expense by approximately $18 million during the
first six months of 2002.
NOTE 6 - CONTRACTUAL AGREEMENTS
In March 2002, we renegotiated certain terms of our relationship with
The Manufacturer's Life Insurance Company ("Manulife") and entered into an
amended agreement which, among other things, extended the term of the agreement
through March 2009. During 2001, Manulife earned 101,000 shares to be issued in
2002. These shares, or a pro rata portion thereof, were to be returned to us if
Manulife terminated the contract early and, as such, were recorded as other
intangible assets as of December 31, 2001. In lieu of the issuance of the
101,000 shares, we made a cash payment to Manulife. Therefore, the advance
discount recorded in other intangible assets as of December 31, 2001 was
recorded against revenue during the first quarter of 2002. In addition, the
amendment eliminated the ability for Manulife to receive shares of our common
stock or the warrants contemplated in the original agreement.
NOTE 7 - 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
dilutive potential common shares had been issued. The following, which reflects
the two-for-one stock split effective June 22, 2001, is the reconciliation
between the number of weighted average shares used in the basic and diluted
earnings per share calculation for all periods (amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Weighted average number of common shares
outstanding during the period -
Basic EPS 78,367 78,010 78,029 77,777
Outstanding stock options 1,683 1,925 1,690 1,953
Executive deferred compensation plan 35 20 33 16
Restricted stock awards 192 173 189 163
--------------------------------------
Weighted average number of common shares
outstanding during the period -
Diluted EPS 80,277 80,128 79,941 79,909
======================================
The above shares are all calculated under the "treasury stock" method in
accordance with FAS 128, "Earnings Per Share."
NOTE 8 - FINANCING
In April 2002, we amended our existing credit facility to add on a $325
million Term B loan facility. We amended certain covenants of the credit
facility relating to restricted junior payments, asset sales and a provision
enabling a future accounts receivable securitization facility. The Term B loans
have a maturity of six years and amortize 1% in years one through four, 25% in
year five and 71% in year six. Interest is payable quarterly on an interest rate
10
spread of 200 basis points based on several London Interbank Offered Rates
("LIBOR") or base rate options. The Term B loans are secured on the same basis
as our existing credit facility.
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, we adopted FAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by FAS 137 and FAS
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.
As of June 30, 2002, we have one swap agreement to fix the variable
interest payments on approximately $89 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 $89 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 before reducing to $60 million in April 2003 and to $20 million in
April 2004 until maturing in April 2005.
Our present interest rate swap agreement is a cash flow hedge under
which we agree to pay a fixed-rate 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 ($5,664,000 pre-tax at June 30, 2002) and the related
gains or losses on these agreements are deferred in stockholders' equity as a
component of other comprehensive income (a $3,509,000, net of taxes reduction at
June 30, 2002). 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. If any of these
agreements are determined to have hedge ineffectiveness, the gains or losses
associated with the ineffective portion of these agreements are immediately
recognized in income. For the three and six months ended June 30, 2002 and 2001,
the gains and losses on the ineffective portion of our swap agreement were not
material to our consolidated financial statements.
NOTE 10 - COMMON STOCK
As of June 30, 2002, we have repurchased a total of 4,417,000 shares of
our Common Stock under the stock repurchase program that we announced on October
25, 1996, of which 660,000 shares were repurchased during the first six months
of 2002. Approximately 3,317,000 shares have been reissued in connection with
employee compensation plans through June 30, 2002. In July 2002, our Board of
Directors approved an increase in the stock purchase program from 6,500,000
shares to 10,000,000 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.
In May 2001, we announced a two-for-one stock split of our Common Stock
for stockholders of record on June 8, 2001, which was effective June 22, 2001.
The split was effected in the form of a dividend by issuance of one share of
Common Stock for each share of Common Stock outstanding. The earnings per share
and the weighted average number of shares outstanding for basic and diluted
earnings per share have been adjusted for the stock split.
NOTE 11 - STOCK-BASED COMPENSATION PLANS
We apply APB 25 and related interpretations in accounting for our
stock-based compensation 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 as the exercise
price of the options was not less than the fair market value of the shares at
the time of grant. If compensation cost for stock option grants had 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 year period, the pro forma
impact shown for the three and six months ended June 30, 2002 and 2001 are not
necessarily representative of the impact in future years.
11
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
- ------------------------------------ --------------------- --------------------- ------------------ -------------------
Net income
As reported $ 48,700 $ 30,244 $ 92,669 $ 58,323
Pro forma 46,336 28,071 87,375 54,040
Basic earnings per share
As reported $ 0.62 $ 0.39 $ 1.19 $ 0.75
Pro forma 0.59 0.36 1.12 0.69
Diluted earnings per share
As reported $ 0.61 $ 0.38 $ 1.16 $ 0.73
Pro forma 0.58 0.35 1.09 0.68
The fair value of options granted (which is amortized 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:
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
- ------------------------------------- ---------------------- --------------------- ------------------- ------------------
2002 2001 2002 2001
- ------------------------------------- ---------------------- --------------------- ------------------- ------------------
Expected life of option 2-5 years 2-5 years 2-5 years 2-5 years
Risk-free interest rate 1.71%-4.32% 4.35%-4.93% 1.71%-4.32% 3.95%-5.01%
Expected volatility of stock 55% 55% 55% 55%
Expected dividend yield None None None None
A summary of the status of our fixed stock option plans as of June 30,
2002 and December 31, 2001, and changes during the periods ending on those dates
is presented below.
JUNE 30, 2002 DECEMBER 31, 2001
----------------------------------------------------------
Weighted-Average
Exercise Weighted-Average
(SHARE DATA IN THOUSANDS) Shares Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------
Outstanding at beginning of year 5,992 $ 26.26 6,448 $ 20.58
Granted 232 $ 53.50 1,230 $ 41.93
Exercised (759) $ 21.26 (1,531) $ 15.25
Forfeited/Cancelled (21) $ 32.59 (155) $ 22.93
------------- -------------
Outstanding at end of period 5,444 $ 28.16 5,992 $ 26.26
============= =============
Options exercisable at period end 2,668 2,758
============= =============
Weighted-average fair value of
options granted during the year $ 24.24 $ 19.06
============= =============
12
The following table summarizes information about fixed stock options
outstanding at June 30, 2002:
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) 6/30/02 Contractual Life Exercise Price at 6/30/02
- ---------------------- ------------------- ------------------- -------------------- ----------------- ----------------
$3.53 - $19.31 1,863 5.04 $ 15.10 1,374 $ 14.22
19.47 - 27.56 1,331 6.91 25.96 696 25.81
28.22 - 39.24 1,454 6.91 36.49 434 33.77
40.19 - 54.90 790 6.18 48.45 164 45.35
57.81 - 57.81 6 6.75 57.81 - -
------------------- -----------------
$3.53 - 57.81 5,444 6.31 $ 28.16 2,668 $ 22.34
=================== =================
NOTE 12 - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Our Senior Notes are unconditionally and jointly and severally
guaranteed by our wholly-owned domestic subsidiaries other than 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 2000 and 2001, we undertook internal corporate
reorganizations 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. ("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. Effective December 31, 2001, Practice Patterns Science, Inc. ("PPS")
was dissolved. The condensed consolidated non-guarantors financial statement for
2001 include the assets, liabilities and operations of PPS. In addition, in 2002
we established a new entity, Phoenix Marketing Group LLC, to acquire the assets
of Phoenix, and its assets, liabilities and operations are incorporated in those
of the Guarantors.
13
CONDENSED CONSOLIDATING BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------------------------
EXPRESS NON-
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ --------------- ---------------- ---------------- --------------- ---------------
AS OF JUNE 30, 2002
Current assets $ 959,036 $ 440,552 $ 12,891 $ - $ 1,412,479
Property and equipment, net 115,248 38,193 2,337 - 155,778
Investments in subsidiaries 1,694,121 267,435 - (1,961,556) -
Intercompany 241,338 (206,016) (35,322) - -
Goodwill, net 241,457 1,101,259 15,669 - 1,358,385
Other intangible assets, net 66,591 175,145 9,295 - 251,031
Other assets 88,905 (70,871) 9 - 18,043
--------------- ---------------- ---------------- --------------- ---------------
Total assets $ 3,406,696 $ 1,745,697 $ 4,879 $ (1,961,556) $ 3,195,716
=============== ================ ================ =============== ===============
Current liabilities $ 469,156 $ 997,789 $ 1,276 $ - $ 1,468,221
Long-term debt 705,962 - - - 705,962
Other liabilities 138,224 (59,710) (408) - 78,106
Stockholders' equity 2,093,354 807,618 4,011 (1,961,556) 943,427
--------------- ---------------- ---------------- --------------- ---------------
Total liabilities and stockholders' equity $ 3,406,696 $ 1,745,697 $ 4,879 $ (1,961,556) $ 3,195,716
=============== ================ ================ =============== ===============
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
=============== ================ ================ =============== ===============
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
EXPRESS
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ ----------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2002
Total revenues $ 1,734,726 $ 1,663,905 $ 4,007 $ - $ 3,402,638
Operating expenses 1,698,298 1,609,598 3,949 - 3,311,845
----------------------------------------------------------------------------------
Operating income 36,428 54,307 58 - 90,793
Undistributed loss from joint venture (2,071) 1,038 - - (1,033)
Interest (expense) income, net (10,624) 239 50 - (10,335)
----------------------------------------------------------------------------------
Income before tax effect 23,733 55,584 108 - 79,425
Income tax provision (benefit) 9,167 21,554 4 - 30,725
----------------------------------------------------------------------------------
Net income $ 14,566 $ 34,030 $ 104 $ - $ 48,700
==================================================================================
THREE MONTHS ENDED JUNE 30, 2001
Total revenues $ 1,396,478 $ 846,865 $ 4,000 $ - $ 2,247,343
Operating expenses 1,348,971 837,108 3,570 - 2,189,649
----------------------------------------------------------------------------------
Operating income 47,507 9,757 430 - 57,694
Undistributed loss from joint venture (658) - - - (658)
Interest (expense) income, net (6,396) (4) 45 - (6,355)
----------------------------------------------------------------------------------
Income before tax effect 40,453 9,753 475 - 50,681
Income tax provision 16,667 3,572 198 - 20,437
----------------------------------------------------------------------------------
Net income $ 23,786 $ 6,181 $ 277 $ - $ 30,244
==================================================================================
SIX MONTHS ENDED JUNE 30, 2002
Total revenues $ 3,393,977 $ 2,753,978 $ 3,752 $ - $ 6,151,707
Operating expenses 3,300,123 2,675,208 7,313 - 5,982,644
----------------------------------------------------------------------------------
Operating income (loss) 93,854 78,770 (3,561) - 169,063
Undistributed loss from joint venture (2,070) - - - (2,070)
Interest (expense) income, net (17,705) 202 100 - (17,403)
----------------------------------------------------------------------------------
Income (loss) before tax effect 74,079 78,972 (3,461) - 149,590
Income tax provision (benefit) 28,623 29,755 (1,457) - 56,921
----------------------------------------------------------------------------------
Net income (loss) $45,456 $ 49,217 $ (2,004) $ - $ 92,669
==================================================================================
SIX MONTHS ENDED JUNE 30, 2001
Total revenues $ 2,718,707 $ 1,610,239 $ 8,937 $ - $ 4,337,883
Operating expenses 2,631,491 1,586,196 7,401 - 4,225,088
----------------------------------------------------------------------------------
Operating income 87,216 24,043 1,536 - 112,795
Undistributed loss from joint venture (658) - - - (658)
Interest (expense) income, net (14,167) (5) 83 - (14,089)
----------------------------------------------------------------------------------
Income before tax effect 72,391 24,038 1,619 - 98,048
Income tax provision 30,062 9,025 638 - 39,725
----------------------------------------------------------------------------------
Net income $ 42,329 $ 15,013 $ 981 $ - $ 58,323
==================================================================================
15
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
EXPRESS NON-
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
Net cash provided by (used in)
operating activities $ 94,227 $ 108,661 $ (7,374) $ - $ 195,514
---------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (21,105) (386) (1,511) - (23,001)
Acquisitions and joint venture 170 (521,109) - - (520,940)
Other 508 - - - 508
---------------------------------------------------------------------------------
Net cash (used in)
Investing activities (20,427) (521,495) (1,511) - (543,433)
---------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 425,000 - - - 425,000
Repayment of long-term debt (65,000) - - - (65,000)
Treasury stock acquired (35,904) - - - (35,904)
Proceeds from employee stock plans 17,061 - - - 17,061
Net transactions with parent (396,508) 390,195 6,313 - -
Other (3,771) - - (3,771)
---------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (59,122) 390,195 6,313 - 337,386
---------------------------------------------------------------------------------
Effect of foreign currency
translation adjustment (4,711) - 5,077 - 366
---------------------------------------------------------------------------------
Net increase (decrease) in cash and -
cash equivalents 9,967 (22,639) 2,505 (10,167)
Cash and cash equivalents at beginning
of the period 272,891 (102,163) 6,987 - 177,715
---------------------------------------------------------------------------------
Cash and cash equivalents at end
of the period $ 282,858 $ (124,802) $ 9,492 $ - $ 167,548
=================================================================================
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
EXPRESS NON-
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
Net cash (used in) provided by
operating activities $ (69,457) $ 148,744 $ 16,404 $ (147) $ 95,544
----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (11,359) (6,705) (899) - (18,963)
Acquisitions and joint venture (2,192) - (16,307) - (18,499)
Other 13 (6,531) 810 - (5,708)
----------------------------------------------------------------------------------
Net cash (used in) investing activities (13,538) (13,236) (16,396) - (43,170)
----------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from employee stock plans 15,367 - - - 15,367
Net transaction with parent 125,329 (127,632) 2,156 147 -
----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 140,696 (127,632) 2,156 147 15,367
----------------------------------------------------------------------------------
Effect of foreign currency
translation adjustment - - (2) - (2)
----------------------------------------------------------------------------------
Net increase in cash and cash equivalents 57,701 7,876 2,162 - 67,739
Cash and cash equivalents at beginning
of the period 148,311 (98,519) 3,412 - 53,204
----------------------------------------------------------------------------------
Cash and cash equivalents at end
of the period $ 206,012 $ (90,643) $ 5,574 $ - $ 120,943
==================================================================================
17
NOTE 13 - SEGMENT REPORTING
We are organized on the basis of services offered and have determined
that we have two reportable segments: pharmacy benefit management ("PBM")
services and non-PBM services. We manage the pharmacy benefit within an
operating segment that encompasses a fully integrated PBM service. The remaining
three operating service lines (Specialty Distribution Services, Phoenix 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:
(IN THOUSANDS) PBM NON-PBM TOTAL
- ---------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2002
Product revenues $ 3,258,175 $ 18,761 $ 3,276,936
Service revenues 102,208 23,494 125,702
----------------------------------------
Total revenues 3,360,383 42,255 3,402,638
Income before income taxes 71,860 7,565 79,425
THREE MONTHS ENDED JUNE 30, 2001
Product revenues $ 2,148,850 $ 7,427 $ 2,156,277
Service revenues 80,002 11,064 91,066
----------------------------------------
Total revenues 2,228,852 18,491 2,247,343
Income before income taxes 50,830 (149) 50,681
SIX MONTHS ENDED JUNE 30, 2002
Product revenues $ 5,898,343 $ 30,361 $ 5,928,704
Service revenues 182,240 40,763 223,003
----------------------------------------
Total revenues 6,080,583 71,124 6,151,707
Income before income taxes 136,395 13,195 149,590
SIX MONTHS ENDED JUNE 30, 2001
Product revenues $ 4,138,123 $ 18,840 $ 4,156,963
Service revenues 158,857 22,063 180,920
----------------------------------------
Total revenues 4,296,980 40,903 4,337,883
Income before income taxes 95,258 2,790 98,048
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IN THIS ITEM 2, "WE," "US," "OUR" AND THE "COMPANY" REFER TO EXPRESS
SCRIPTS, INC. AND ITS SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE.
INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q, AND INFORMATION THAT
MAY BE CONTAINED IN OTHER FILINGS BY US WITH THE SECURITIES AND EXCHANGE
COMMISSION ("SEC") AND RELEASES ISSUED OR STATEMENTS MADE BY US, CONTAIN OR MAY
CONTAIN FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED TO STATEMENTS OF
OUR PLANS, OBJECTIVES, EXPECTATIONS OR INTENTIONS. SUCH FORWARD-LOOKING
STATEMENTS NECESSARILY INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THOSE PROJECTED OR SUGGESTED IN ANY FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE TO OCCUR INCLUDE, BUT ARE
NOT LIMITED TO:
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 RISKS ASSOCIATED WITH OUR ABILITY TO MAINTAIN INTERNAL GROWTH RATES, OR
TO CONTROL OPERATING OR CAPITAL COSTS
o CONTINUED PRESSURE ON MARGINS RESULTING FROM CLIENT DEMANDS FOR LOWER
PRICES, ENHANCED SERVICE OFFERINGS AND/OR HIGHER SERVICE LEVELS, AND
THE POSSIBLE TERMINATION OF, OR UNFAVORABLE MODIFICATION TO, CONTRACTS
WITH KEY CLIENTS OR PROVIDERS
o COMPETITION IN THE PBM INDUSTRY, AND OUR ABILITY TO CONSUMMATE CONTRACT
NEGOTIATIONS WITH PROSPECTIVE CLIENTS
o 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 RISKS ARISING FROM INVESTIGATIONS OF CERTAIN PBM PRACTICES AND
PHARMACEUTICAL PRICING, MARKETING AND DISTRIBUTION PRACTICES CURRENTLY
BEING CONDUCTED BY THE U.S. ATTORNEY OFFICES IN PHILADELPHIA AND BOSTON
o THE POSSIBLE LOSS, OR ADVERSE MODIFICATION OF THE TERMS, OF OUR
RELATIONSHIPS WITH PHARMACEUTICAL MANUFACTURERS, OR CHANGES IN PRICING,
DISCOUNT OR OTHER PRACTICES OF PHARMACEUTICAL MANUFACTURERS
o ADVERSE RESULTS IN LITIGATION, INCLUDING A PENDING CASE WHICH PURPORTS
TO BE A CLASS ACTION, CHALLENGING EXPRESS SCRIPTS' BUSINESS PRACTICES
UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA)
o RISKS ASSOCIATED WITH THE USE AND PROTECTION OF THE INTELLECTUAL
PROPERTY WE USE IN OUR BUSINESS
o RISKS ASSOCIATED WITH OUR LEVERAGE AND DEBT SERVICE OBLIGATIONS,
INCLUDING THE EFFECT OF CERTAIN COVENANTS IN OUR CREDIT 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 INCREASE IN CREDIT RISK RELATIVE TO OUR CLIENTS DUE TO ADVERSE ECONOMIC
TRENDS
o RISKS ASSOCIATED WITH OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL
o OTHER RISKS DESCRIBED FROM TIME TO TIME IN OUR FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION
SEE THE MORE COMPREHENSIVE DESCRIPTION OF RISK FACTORS UNDER THE CAPTIONS
"FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS" CONTAINED IN ITEM 1 -
"BUSINESS" OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
2001. WE DO NOT UNDERTAKE ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO
SUCH FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
19
OVERVIEW
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"), sampling services through our Phoenix
Marketing Group subsidiary, and prior to June 12, 2001, infusion therapy
services through our wholly-owned subsidiary IVTx, Inc., operating as Express
Scripts Infusion Services.
We derive our revenues primarily from the sale of pharmacy benefit
management ("PBM") services in the United States and Canada. Tangible products
consisting of the dispensing of prescription drugs to our members represented
96.3% and 96.4%, respectively, of our total revenues for the three and six
months ended June 30, 2002, compared to 95.9% and 95.8%, respectively, for the
same periods last year. Revenues from services, such as the administration of
some clients' retail pharmacy networks, market research programs, the sale of
informed decision counseling services and our Specialty Distribution Services
comprised the remainder of our revenues.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from dispensing prescriptions from our mail pharmacies, which
include the co-payment received from our members, are recorded when the
prescription is shipped. Revenues from the sales of prescription drugs by retail
pharmacies in our nationwide network are recognized when the claim is processed,
and exclude co-payments that our members pay to the retail pharmacy. 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"). These transactions require us
to assume credit risk. If we merely administer clients' network pharmacy
contracts in which we do not assume credit risk, we record only our
administrative or dispensing fees as revenue (the "Net Basis").
We receive payments from drug manufacturers including those relating to
the administration of manufacturer rebate and discount programs. Revenues
relating to these services, which include manufacturer rebates and associated
administrative fees, are recognized as earned when the prescriptions covered
under contractual agreements with the manufacturers are dispensed; these
revenues are not dependent upon future pharmaceutical sales. The portion of the
rebate which is payable to customers is excluded from revenues. With respect to
rebates that are based on market share performance, we estimate rebates
receivable from pharmaceutical manufacturers on a quarterly basis based on our
estimate of the number of rebatable prescriptions and rebate per prescription.
These estimates are adjusted to actual when the number of rebatable
prescriptions and rebate per prescription have been determined and the billing
to the manufacturers has been completed. With respect to rebates that are not
based on market share performance, no estimation is required as the amount is
determinable when the drug is dispensed.
Non-PBM revenues are derived from the following sources:
o Administrative fees received from drug manufacturers for dispensing or
distributing of pharmaceuticals requiring special handling or
packaging. We also administer sample card programs for certain
manufacturers and include the ingredient costs of those drug samples
dispensed from retail pharmacies in our SDS revenues, and the
associated costs for this sample card program in cost of revenues.
Because we have an independent contractual obligation to pay our
network pharmacy providers for free samples dispensed to patients under
the sample card program, we include the total payments from these
manufacturers (including ingredient costs) as revenue, and payments to
the network pharmacy provider as cost of revenue. These transactions
require us to assume credit risk.
20
o Our Phoenix Marketing Group subsidiary, which is one of the largest
prescription drug sample fulfillment companies, shipping approximately
95 million sample units in 2001. Phoenix records an administrative fee
for distributing samples to doctors based on orders received from
pharmaceutical sales representatives.
o 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.
COST OF REVENUES
Cost of revenues includes product costs, network pharmacy claims
payments and other direct costs associated with dispensing prescriptions from
our mail service pharmacies, including shipping and handling.
ACCOUNTS RECEIVABLE
Based on our revenue recognition procedures discussed above, certain
claims at the end of a period will be unbilled. Unbilled receivables are billed
to clients typically within 30 days based on the contractual billing schedule
agreed upon with the client.
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
certain computer equipment, which exceed minimum capitalization levels.
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 are charged to expense until technological feasibility
is established. Thereafter, the remaining software production costs up to the
date placed into production, are capitalized and included as Property and
Equipment. Amortization of the capitalized amounts commences on 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. We continually review the useful lives of assets
and adjust the remaining lives based on the deployment of new technologies.
Reductions, if any, in the carrying value of capitalized software costs to net
realizable value are expensed.
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.
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 and other intangible assets, 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
21
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.
No such impairment existed as of June 30, 2002 and December 31, 2001.
We adopted Financial Accounting Standards Board Statement No. ("FAS")
142, "Goodwill and Other Intangible Assets" effective January 1, 2002. FAS 142
requires that goodwill no longer be amortized. 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 completed our first impairment test
under FAS 142 during the second quarter of 2002, which did not result in an
impairment charge.
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.
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. We do not
enter into foreign currency hedging transactions because we do not believe the
risks are material at current levels.
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. Had we utilized the
fair value method within FAS 123, pro forma net income for the three and six
months ended June 30, 2002 would have been $46,336,000, or $0.58 per diluted
share and $87,375, or $1.09 per diluted share, respectively.
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.
We are organized on the basis of services offered and have determined
that we have two reportable segments: pharmacy benefit management ("PBM")
services and non-PBM services. We manage the pharmacy benefit within an
operating segment that encompasses a fully integrated PBM service. The remaining
three operating service lines (Specialty Distribution Services, Phoenix and
Express Scripts Infusion Services) have been aggregated into a non-PBM reporting
segment.
22
RESULTS OF OPERATIONS
PBM GROSS PROFIT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
INCREASE/ INCREASE/
(IN THOUSANDS) 2002 DECREASE 2001 2002 DECREASE 2001
- ------------------------------------------------------------------------------------------------------------
PBM Gross Basis revenues $ 3,353,599 51.4% $ 2,215,604 $6,071,199 42.3% $ 4,265,922
PBM Net Basis revenues 6,784 (48.8)% 13,248 9,384 (69.8)% 31,058
---------------------------------------------------------------------------
Total PBM revenues 3,360,383 50.8% 2,228,852 6,080,583 41.5% 4,296,980
Cost of PBM revenues 3,159,704 51.7% 2,082,375 5,713,043 42.3% 4,013,496
---------------------------------------------------------------------------
PBM Gross Profit $ 200,679 37.0% $ 146,477 $ 367,540 29.7% $ 283,484
===========================================================================
Revenues for network pharmacy claims increased $786,583,000, or 49.1%,
and $1,206,732,000, or 38.9%, respectively, during the three months and six
months ended June 30, 2002 over 2001. These increases are due to the acquisition
of National Prescription Administrators, Inc. ("NPA"), increased membership and
member utilization, higher drug ingredient costs and a higher mix of clients
utilizing retail pharmacy networks contracted by us. The increase in drug
ingredient costs is partially attributable to increases in the average wholesale
price index that is used to calculate payments due to pharmacies and payments
due from clients. We anticipate these increases will continue to benefit gross
profit in future quarters. Network pharmacy claims processed increased 28.5% to
91,610,000 during the second quarter of 2002 over 2001 and 19.5% to 171,722,000
during the six months ended June 30, 2002 over 2001. Excluding NPA, network
pharmacy claims processed increased 14.2% and 12.4%, respectively, for the three
and six months ended June 30, 2002.
The average revenue per network pharmacy claim increased 16.1 % to
$26.07 and 16.3% to $25.08, respectively, over the three and six months ended
June 30, 2001 due to a higher mix of clients utilizing retail pharmacy networks
contracted by us versus retail pharmacy networks contracted by the client, and
higher drug ingredient costs. 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 increased Gross Basis revenues (and corresponding cost of
revenues) and revenue per claim. As expected, we saw a higher mix of clients on
the Gross Basis in 2002 due to the loss of a large Net Basis client at the
beginning of 2002.
Revenues for mail pharmacy services and mail pharmacy claims processed
increased $344,640,000, or 56.0%, and 2,088,000, or 42.8%, respectively, for the
second quarter of 2002 over 2001. Revenues for mail pharmacy services and mail
pharmacy claims processed increased $574,940,000, or 48.9%, and 3,631,000, or
38.7%, respectively, for the first six months of 2002 over 2001. These increases
are primarily due to the acquisition of NPA, increased membership and
utilization by existing members. For the three and six months ended June 30,
2002, the average revenue per mail pharmacy claim increased 9.3% and 7.3%,
respectively, over 2001 primarily due to higher drug ingredient costs. Excluding
NPA, mail pharmacy claims processed increased 27.2% and 30.6%, respectively, for
the three and six months ended June 30, 2002.
Our cost of revenues for PBM services increased 51.7% in the second
quarter of 2002 over 2001, and 42.3% in the first six months of 2002 over 2001
primarily as a result of the increase in PBM revenues. The increase for the six
months ended June 30, 2002 was partially offset by the renegotiation of a
contract with a large client, in which we eliminated a contract pricing reserve,
resulting in a non-recurring, non-cash decrease in cost of revenues of
approximately $15 million in the first quarter of 2002. The PBM cost of revenues
grew slightly faster than revenues in the second quarter and first six months of
2002 as a result of a larger percentage of our clients being recorded 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 caused by lower
pricing on administrative fees and other clinical programs with higher profits
from increased utilization of our mail service pharmacies, improved formulary
compliance and increased utilization of generic drugs. Our PBM gross profit
23
increased $54,202,000, or 37.0% over the second quarter of 2001 and $84,056,000,
or 29.7% over the first six months of 2001. A portion of these increases was due
to the acquisition of NPA, the increase in the average wholesale price index and
the renegotiation of a contract with a large client in the first quarter of
2002, discussed above.
NON-PBM GROSS PROFIT
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
INCREASE/ INCREASE/
(IN THOUSANDS) 2002 DECREASE 2001 2002 DECREASE 2001
- --------------------------------------------------------------------------------
Non-PBM revenues $ 42,255 128.5% $ 18,491 $ 71,124 73.9% $ 40,903
Non-PBM cost of revenues 30,830 110.0% 14,684 51,903 77.7% 29,204
-------------------------------------------------------
Non-PBM gross profit $ 11,425 200.1% $ 3,807 $ 19,221 64.3% $ 11,699
=======================================================
The increase in revenue for non-PBM services in the three months and
six months ended June 30, 2002 over 2001 is primarily due to the additional
volume in SDS, including the sample card programs we administer for certain
manufacturers, where we include the ingredient costs of pharmaceuticals
dispensed from retail pharmacies in our SDS revenues. We also began recording
revenues from Phoenix after the acquisition was completed on February 25, 2002.
These increases were partially offset by the discontinuance of our acute home
infusion services revenue generating activities on June 12, 2001.
Gross profit from non-PBM services increased 200.1% for the three
months ended June 30, 2002 over 2001, reflecting mainly the increased volume in
SDS and the addition of Phoenix. The slower growth in non-PBM costs of revenues
compared to non-PBM revenues is partially due to Phoenix, which does not
purchase samples from the manufacturers, but records an administrative fee for
distributing samples to doctors based on orders received from pharmaceutical
sales representatives. In addition, the acute home infusion services, which was
discontinued last year, was less profitable than our SDS business. These
decreases were partially offset by the additional volume in the sample card
program (discussed above), where we include the ingredient costs of
pharmaceuticals dispensed from retail pharmacies in our SDS revenues and costs
of revenues.
Non-PBM gross profit increased 64.3% for the first six months of 2002
primarily due to the additional volume in SDS and the addition of Phoenix,
partially offset by the discontinuance of our acute home infusion business.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $28,721,000, or
31.0%, in the second quarter of 2002 over 2001, and $35,310,000, or 19.4% for
the first six months of 2002 over 2001 due in part to the acquisition of NPA and
Phoenix, and costs incurred during the integration of NPA and Phoenix ($977,000
during the three months ended June 30, 2002). These increases were also
partially due to expenditures required to expand operational and administrative
support functions in order to enhance management of the pharmacy benefit.
Additionally, we continually review the useful lives of assets that support our
claims processing system and other technologies. Depreciation expense has
increased as useful lives were shortened due to the continued progress of our
integration to one adjudication platform and the deployment of new technologies.
These increases were partially offset by the adoption of Financial
Accounting Standards Board Statement No. ("FAS") 142, "Goodwill and Other
Intangible Assets", which pertains to the elimination of goodwill amortization.
A total of $8.9 million ($6.6 million after tax) and $17.8 million ($13.1
million after tax) of goodwill was amortized in the second quarter and the six
months ended June 2001, respectively. Excluding depreciation and amortization,
selling, general and administrative expenses were 3.1% of total revenue for the
three months ended June 30, 2002 compared to 3.4% last year, and 2.9% for the
six months ended June 30, 2002 compared to 3.5% last year.
24
OTHER INCOME (EXPENSE)
On February 22, 2001, we announced that we entered into an agreement
with AdvancePCS and Merck-Medco, L.L.C. to form RxHub. RxHub will be an
electronic exchange enabling physicians who use electronic prescribing
technology to link to pharmacies, PBM companies and health plans. The company is
designed to operate as a utility for the exchange 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 five years with approximately $7.7 million invested to date
through June 2002. 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 Unaudited Consolidated Statement of Operations. Our
percentage of RxHub's loss for the three and six months ended June 30, 2002 was
$1,033,000 ($641,000 net of tax) and $2,070,000 ($1,285,000 net of tax),
respectively, compared to $658,000 ($407,000 net of tax) for the three and six
months ended June 30, 2001. These amounts been recorded in other income
(expense) in our Unaudited Consolidated Statement of Operations.
The $3,980,000, or 62.6%, increase in net interest expense for the
second quarter of 2002 over 2001 and $3,314,000, or 23.5% increase for the six
months ended June 30, 2002 is primarily due to the additional debt incurred to
finance the NPA acquisition. These increases were partially offset by the
reduction in debt of $50 million in the third quarter of 2001.
PROVISION FOR INCOME TAXES
Our effective tax rate decreased to 38.7% for the second quarter of
2002 from 40.3% in 2001 and decreased to 38.1% for the first six months of June
2002 from 40.5% in 2001. These decreases are due primarily to the adoption of
FAS 142 in which we no longer amortize goodwill, a portion of which was
non-deductible.
NET INCOME AND EARNINGS PER SHARE
Our net income increased $18,456,000, or 61.0%, and $34,346,000, or
58.9%, respectively, for the three months and six months ended June 30, 2002
over 2001. Basic and diluted earnings per share increased 59.0% and 60.5%,
respectively, for the second quarter of 2002 over 2001, and 58.7% and 58.9%,
respectively, for the six months ended June 30, 2002 over 2001. Reflecting the
application of FAS 142 in 2001, our net income increased $11,885,000, or 32.3%
for the second quarter of 2002 over 2001, while basic and diluted earnings per
share increased 31.9% and 32.6%, respectively. Reflecting the application of FAS
142 in 2001, our net income increased $21,264,000, or 29.8%, for the first six
months of 2002 over 2001, while basic and diluted earnings per share increased
29.3% and 30.3%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OPERATIONAL CASH FLOW
During the first six months of 2002, net cash provided by operations
increased $99,970,000 to $195,514,000 from $95,544,000 in 2001. This increase is
primarily due to increased cash earnings, working capital improvements, and the
acquisition of NPA. In addition, net cash provided by operations for the first
half of 2001 was negatively impacted by the termination of a large contract in
late 2000, which resulted in the payment of the remaining liabilities in the
first and second quarters of 2001.
As a percent of accounts receivables, our allowance for doubtful
accounts was 3.4% and 2.8% at June 30, 2002 and December 31, 2001, respectively.
This increase is primarily due to certain customers who are experiencing
financial difficulties in the current economy.
Our capital expenditures for the six months ended June 30, 2002
increased $4,038,000 or 21.2% from 2001. We expect to continue to invest in
technology that we believe will provide efficiencies in operations, manage
growth and enhance the service we provide to our clients. Future anticipated
capital expenditures will be funded primarily from operating cash flow or, to
the extent necessary, with borrowings under our revolving credit facility,
discussed below.
25
In December 2000, the Department of Health and Human Services ("HHS")
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.
STOCK REPURCHASE PROGRAM
As of June 30, 2002, we have repurchased a total of 4,417,000 shares of
our Common Stock under the stock repurchase program that we announced on October
25, 1996. As of June 30, 2002, approximately 3,317,000 shares have been reissued
in connection with employee compensation plans. In July 2002, our Board of
Directors authorized an increase in our stock repurchase program from 6,500,000
shares to 10,000,000 and placed no limit on the duration of the program.
Additional 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 under which our Senior Notes were issued.
ACQUISITIONS
On April 12, 2002, we completed the acquisition of the businesses
comprising National Prescription Administrators, Inc. (collectively "NPA") for a
purchase price of approximately $513 million, which includes the issuance of
552,000 shares of our common stock (fair value of $26.4 million), upon the
transaction announcement date and transaction costs. Excluded from the purchase
price is a $40.0 million receivable, included in other current assets,
anticipated for a working capital purchase price adjustment. NPA was a privately
held full-service pharmacy benefit manager. The transaction was accounted for
under the provisions of FAS 141, "Business Combinations," and FAS 142. The
purchase price has been preliminarily 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 preliminarily
allocated to intangible assets consisting of customer contracts in the amount of
$76,290,000 and non-competition agreements in the amount of $2,860,000, which
are being amortized using the straight-line method over the estimated useful
lives of 20 years and 5 years, respectively. These assets are classified in
other intangible assets. In addition, the excess of purchase price over tangible
net assets acquired has been preliminarily allocated to goodwill in the amount
of $393,670,000, which is not being amortized.
The acquisition of NPA was funded with the proceeds of a new $325
million Term B loan facility, $78 million of cash on hand, the issuance of
552,000 shares of our common stock (fair value of $26.4 million when issued),
and $25 million in borrowings under our revolving credit facility. We plan to
file an Internal Revenue Code ss.338(h)(10) election, making amortization
expense of intangible assets, including goodwill, tax deductible. We estimate
this election will provide a tax benefit to us of approximately $85 million on a
present value basis. In addition, we borrowed an additional $75 million under
our revolving credit facility to fund post-closing working capital requirements
of NPA.
On February 25, 2002, we purchased substantially all of the assets
utilized in the operation of Phoenix , a wholly-owned subsidiary of Access
Worldwide Communications, Inc. for $34.1 million in cash, including
acquisition-related costs, 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 acquisition has been
accounted for under the provisions of FAS 141 and FAS 142. The purchase price
has been preliminarily 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 preliminarily allocated to intangible
assets consisting of customer contracts in the amount of $4,300,000 and
non-competition agreements in the amount of $190,000 which are being amortized
using the straight-line method over the estimated lives of eight years and four
years, respectively, and trade name in the amount of $1,800,000, which is not
being amortized. These assets are included in other intangible assets. In
addition, the excess of purchase price over tangible net assets acquired was
preliminarily allocated to goodwill in the amount of $21,696,000, which is not
being amortized. The transaction was structured as a purchase of assets, making
amortization expense of intangible assets, including goodwill, tax deductible.
26
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 was 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 our 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 was allocated to intangible assets consisting of customer contracts in
the amount of US$5,149,000, which are being amortized using the straight-line
method 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 effective
January 1, 2002 is no longer being amortized.
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
establish affiliations in 2002 or thereafter, other than our previously
announced acquisitions of Phoenix and NPA.
BANK CREDIT FACILITY
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, of
which $35 million is outstanding at June 30, 2002. During the second quarter of
2002, we repaid $65 million under the revolving credit agreement. 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., 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 and the revolving
credit facility have a weighted average interest rate per annum of 3.09% and
2.97%, respectively, on June 30, 2002. To alleviate interest rate volatility, we
have entered into interest rate swap arrangements, 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
($113,650,000 at June 30, 2002). At June 30, 2002, we are in compliance in all
material respects with all covenants associated with the credit facility.
To fund the acquisition of NPA, we amended our existing credit facility
to add a $325 million Term B loan. The Term B loan has 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 of 200 basis
points based on several LIBOR or base rate options, and had an interest rate of
4.15% on June 30, 2002. The Term B loan is secured on the same basis as our
existing credit facility. In addition, the lenders approved the amendment of
certain covenants, relating to restricted junior payments and asset sales, and a
provision enabling a future accounts receivable securitization facility.
BONDS
In June 1999, we issued $250 million of 9 5/8% Senior Notes due 2009,
which require interest to be paid semi-annually on June 15 and December 15. As
of June 30, 2002, $239,885,000 of Senior Notes remain outstanding. The Senior
Notes are callable at specified rates 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. The Senior Notes have covenants that limit the
indebtedness we may incur, dividends paid, and the amount and the sale of assets
and subsidiary stock.
27
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets fourth our schedule of current maturities of
our long-term debt, excluding the deferred interest rate swap gain of $548,000
at June 30, 2002, 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 (reflects July 2002 to December 2002) $ - $ 8,172
2003 3,250 16,380
2004 42,700 16,248
2005 103,800 16,081
2006 3,250 14,510
Thereafter 552,414 27,386
-----------------------------------
$ 705,414 $ 98,777
===================================
OTHER MATTERS
In 2002, we adopted FAS 141, and FAS 142. FAS 141 requires all business
combinations be accounted for using the purchase method of accounting. FAS 141
also defines acquired intangible assets and requires a reassessment of a
company's preexisting acquired intangible assets and goodwill be evaluated and
adjusted to conform with that definition. The adoption of FAS 141 did not have a
significant impact on our consolidated financial position, consolidated results
of operations and/or our consolidated cash flows.
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 or when events or circumstances occur indicating that
goodwill might be impaired. In accordance with the implementation provisions of
FAS 142, we completed our first impairment test under FAS 142 during the second
quarter of 2002and did not incur 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 or the initial adoption of FAS 142, which would be
recorded as a change in accounting principle).
Effective January 1, 2002, we adopted 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.
The implementation of FAS 144 did not have an impact on our consolidated
financial position, consolidated results of operations and/or our consolidated
cash flows.
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 price increases from our clients under the terms of our
agreements.
MARKET RISK
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 $612,000, net of taxes due to a
cumulative effect of change in accounting principle.
28
As of June 30, 2002, we have one swap agreement to fix the variable
interest payments on approximately $89 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 $89 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 before reducing to $60 million in April 2003 and to $20 million in
April 2004 until maturing in April 2005.
Our present interest rate swap agreement is a cash flow hedge under
which we agree to pay a fixed-rate of interest which hedges against changes in
the amount of future cash flows associated with our variable interest
obligations. Accordingly, the fair value of our swap agreement is reported on
the balance sheet in other liabilities ($5,664,000 pre-tax at June 30, 2002) and
the related gains or losses on these agreements are deferred in shareholders'
equity as a component of other comprehensive income (a $3,509,000, net of taxes
reduction at June 30, 2002). 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. If any of these
agreements are determined to have hedge ineffectiveness, the gains or losses
associated with the ineffective portion of these agreements are immediately
recognized in income. For the three and six months ended June 30, 2002 and 2001,
the gains and losses on the ineffective portion of our swap agreement were not
material to our consolidated financial statements.
Interest rate risk is monitored on the basis of changes in the fair
value and a sensitivity analysis is used to determine the impact interest rate
changes will have on the fair value of the interest rate swaps, measuring the
change in the net present value arising from the change in the interest rate.
The fair value of the swaps are 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 decline in interest rates at June 30, 2002 would
have caused the fair value of the swaps to change by $153,000, resulting in a
liability with a fair value of $5,818,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Market Risk"
above.
29
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in MINSHEW V. EXPRESS SCRIPTS, No. Civ. 01 -
2412 PHX MHM (D.Az.). On December 12, 2001, this purported class action lawsuit
was filed by Gerald R. Minshew in the United States District Court for the
District of Arizona. On May 21, 2002, a substantially identical case, VOUGHT V.
EXPRESS SCRIPTS, No. Civ. 02 - 0949 PHX MHM (D.Az.), which does not purport to
be a class action, was filed in the same court. The MINSHEW and VOUGHT
complaints assert 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 fiduciary duties that we allegedly owe to certain of our
clients. The purported class in the MINSHEW case consists of health benefit
plans that are self-funded by an employer client. The complaint seeks money
damages and injunctive relief on behalf of this class of health plans. We
believe the complaints are without merit and will vigorously defend them. The
company's motion to transfer the MINSHEW case to a different forum is pending.
Although the ultimate outcome of these cases 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, this 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 made any estimate of our
potential financial exposure in the event of an adverse outcome in this matter.
The Company described the consolidated cases of BASH, ET AL. V. VALUE
HEALTH, INC., ET AL., No. 3:97cv2711 (JCH)(D.Conn.) ("Bash") and FREEDMAN, ET
AL. V. VALUE HEALTH, INC., ET AL., No. 3:95 CV 2038 (JCH)(D.Conn) ("Freedman")
in several previous filings including our Form 10-Q for the quarter ended March
31, 2002, and our Form 10-K for the year ended December 31, 2001. On March 20,
2001, the court granted defendant's motion for summary judgment on all claims in
the consolidated BASH and FREEDMAN action. At the same time, the court granted a
motion for partial summary judgment on all claims under Sections 11 and 12(2) of
the Securities Act of 1933. Plaintiffs appealed several orders by the court,
including the order with respect to the motions for summary judgment and the
April 24, 1998 order regarding consolidation of the lawsuits, and, on May 1,
2002, the Court of Appeals affirmed the District Court's rulings. On May 15,
2002, plaintiffs/appellants filed a Petition for Rehearing and a Petition for
Rehearing EN BANC.
As discussed in our previous filings, on April 1, 1998, 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. At the time of the acquisition Value
Health, certain of its affiliates, and certain of their former officers were
parties under the BASH and FREEDMAN actions. 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.
On April 22, 2002, Express Scripts received an administrative subpoena
duces tecum issued by the U.S. Attorney's Office in Boston, Massachusetts. On
April 26, 2002, a substantially identical subpoena was issued to Express
Scripts' wholly-owned subsidiary Diversified Pharmaceutical Services, Inc.
("DPS"). The U.S. Attorney's Office has informed the Company's counsel that
neither the Company nor DPS is currently a target of the investigation. The
subpoenas state that they are issued in connection with an investigation of
various health care offenses and other federal crimes. The subpoenas ask for
information pertaining to Express Scripts' and DPS' relationship with TAP
Pharmaceuticals, and specifically with respect to TAP's two principal drugs,
Lupron and Prevacid. The Company believes that its services and business
practices are in compliance with all applicable laws, rules and regulations in
all material respects, and it will cooperate in the investigation. The Company
cannot predict the outcome of the investigation at this time; however, if
Express Scripts were to become a target of the investigation, an unfavorable
outcome could result in the imposition of monetary fines or penalties, or
injunctive or administrative remedies.
30
On August 6, 2002, Express Scripts received a subpoena duces tecum
issued by the Defense Criminal Investigative Service of the Office of Inspector
General of the Department of Defense. This subpoena seeks information pertaining
to the purchase of Lipitor, a cholesterol-reducing drug, from Parke-Davis,
Incorporated, Warner Lambert Company and Pfizer, Inc. for sale to the TRICARE
program, a Department of Defense health care program. Express Scripts provides
PBM services to TriWest Healthcare Alliance Corp., which has contracted with
TRICARE to provide health care services to TRICARE members in certain regions of
the United States. The Company has not had any communication with the Department
of Defense since the receipt of this subpoena, and has no further information
regarding the nature of this specific investigation. The Company will cooperate
with the investigation.
In addition to the matters described above, in the ordinary course of
our business there have arisen various other legal proceedings, investigations
or claims now pending against us or 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 are not expected to 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.
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of stockholders was held on May 22, 2002.
(b) The following persons were elected directors of the Company to serve until
the next Annual Meeting of Stockholders and until their respective successors
are elected and qualified:
Stuart L. Bascomb, Gary G. Benanav, Frank J. Borelli, Thomas P. Mac Mahon,
Seymour Sternberg, Barrett A. Toan, Howard L. Waltman, Norman Zachary
(c) The stockholder vote for each director was as follows:
VOTES CAST FOR VOTES WITHHELD
Stuart L. Bascomb 54,119,506 14,843,232
Gary A. Benanav 65,511,053 3,451,685
Frank J. Borelli 64,842,751 4,119,987
Barbara B. Hill 53,887,506 15,075,232
Nicholas LaHowchic 65,904,530 3,058,208
Thomas P. Mac Mahon 64,842,751 4,119,987
John O. Parker, Jr. 65,904,430 3,058,308
Seymour Sternberg 65,511,253 3,451,485
Barrett A. Toan 54,568,716 14,394,022
Howard L. Waltman 65,904,530 3,058,208
Norman Zachary 65,904,430 3,058,208
The stockholders also voted to ratify the appointment of PricewaterhouseCoopers
LLP as the Corporation's Independent Accountants for 2002 (65,673,930
affirmative votes; 3,254,022 negative votes; 34,786 abstention votes).
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. See Index to Exhibits on page 20.
(b) REPORTS ON FORM 8-K.
(i) On April 22, 2002, we filed a Current Report on Form
8-K, dated April 22, 2002, under Items 5, 7 and 9,
regarding a press release we issued concerning our
first quarter 2002 financial performance.
(ii) On April 26, 2002, we filed a Current Report on Form
8-K, dated April 26, 2002, under Items 2 and 7,
regarding a press release issued announcing the
completion of the acquisition of National
Prescription Administrators, Inc.
(iii) On May 2, 2002, we filed a Current Report on Form
8-K, dated May 2, 2002, under Item 5 regarding an
administrative subpoena duces tecum we received from
the U.S. Attorney's Office in Boston, Massachusetts.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
(Registrant)
Date: August 13, 2002 By: /s/ Barrett A. Toan
---------------------------
Barrett A. Toan, Chairman of the Board,
and Chief Executive Officer
Date: August 13, 2002 By: /s/ George Paz
---------------------------
George Paz, Senior Vice President and
Chief Financial Officer
34
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
Exhibit
NUMBER EXHIBIT
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)).
2.3a 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.
2.4a Stock and Asset Purchase Agreement dated February 5, 2002 by and among
the Company, Richard O. Ullman and the other Shareholders of National
Prescription Administrators, Inc., Central Fill, Inc., CFI of New
Jersey, Inc., and NPA of New York, IPA, Inc., Richard O. Ullman as
agent for such Shareholders, The Ullman Family Partnership, LP, and
Airport Properties, LLC, incorporated by reference to Exhibit No. 2.1
to the Company's Current Report on Form 8-K filed April 26, 2002.
2.5a Amendment No. 1 to Stock and Asset Purchase Agreement dated April 12,
2002 by and among the Company, Richard O. Ullman and the other
Shareholders of National Prescription Administrators, Inc., Central
Fill, Inc., CFI of New Jersey, Inc., and NPA of New York, IPA, Inc.,
Richard O. Ullman as agent for such Shareholders, The Ullman Family
Partnership, LP, and Airport Properties, LLC, incorporated by reference
to Exhibit No. 2.2 to the Company's Current Report on Form 8-K filed
April 26, 2002.
3.1 Amended and Restated Certificate of Incorporation of the Company,
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ending December 31, 2001.
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 Common Stock, incorporated by reference to
Exhibit No. 4.1 to the Company's Registration Statement on Form S-1
filed June 9, 1992 (No. 33-46974) (the "Registration Statement").
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 (No. 333-83133) (the "S-4 Registration
Statement").
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).
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.
10.1a,b Amendment No. 6 to Credit Agreement dated as of April 1, 1999 (the
"Credit Agreement") 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, The First
National Bank of Chicago as Co-Documentation Agent, and Mercantile
Bank, N.A. as Co-Documentation Agent.
35
10.2b Amendment No. 1 to Company Pledge Agreement dated as of April 1, 1999
(the "Company Pledge Agreement"), by the Company in favor of Credit
Suisse First Boston as Collateral Agent and as Secured Party for the
Lenders listed in the Credit Agreement, dated April 12, 2002.
10.3b Amendment No. 1 to Subsidiary Pledge Agreement dated as of April 1,
1999 (the "Subsidiary Pledge Agreement"), by the Company in favor of
Credit Suisse First Boston as Collateral Agent and as Secured Party for
the Lenders listed in the Credit Agreement, dated April 12, 2002.
10.4b Letter Agreement, dated April 12, 2002, among the New Pledgors listed
therein and Credit Suisse First Boston as Collateral Agent and as
Secured Party for the Lenders listed in the Credit Agreement, with
respect to the Subsidiary Pledge Agreement, as amended.
10.5b Addenda to Company Pledge Agreement, each in the form of Exhibit I to
the Company Pledge Agreement, and each dated April 12, 2002.
10.6b Addendum to Subsidiary Pledge Agreement, in the form of Exhibit I to
the Subsidiary Pledge Agreement, dated April 12, 2002.
- --------------------------------
a The Company agrees to furnish supplementally a copy of any omitted
schedule to this agreement to the Commission upon request.
b Filed herein.
36