SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000, OR
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 or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
13900 Riverport Dr., Maryland Heights, Missouri 63043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 770-1666
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation of S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by
non-affiliates as of January 31, 2001, was $3,582,603,430 based on 38,600,441
such shares held on such date by non-affiliates and the last sale price for the
Class A Common Stock on such date of $92.8125 as reported on the Nasdaq National
Market. Solely for purposes of this computation, the Registrant has assumed that
all directors and executive officers of the Registrant are affiliates of the
Registrant and has assumed that NYLIFE LLC is not an affiliate of the
Registrant. On such date, NYLIFE LLC was the beneficial owner of 8,120,000
shares of the Registrant's Class A Common Stock, having an aggregate market
value of $753,637,500.
Common stock outstanding as of January 31, 2001: 38,786,311 Shares Class A
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 2001 Annual Meeting of Stockholders, which is
expected to be filed with the Securities and Exchange Commission not later than
120 days after the registrant's fiscal year ended December 31, 2000.
Information that we have included or incorporated by reference in this
Annual Report on Form 10-K, and information that may be contained in our other
filings with the Securities and Exchange Commission (the "SEC") and our press
releases or other public statements, contain or may contain forward-looking
statements. Please refer to a discussion of our forward looking statements and
associated risks in "Item 1 --Forward Looking Statements and Associated Risks"
in this Annual Report on Form 10-K.
PART I
THE COMPANY
Item 1 - Business
Industry Overview
Prescription drug costs are the fastest growing component of health care
costs in the United States. The U.S. Health Care Financing Administration
("HCFA") estimates that prescription drugs accounted for approximately 8% of
U.S. health care expenditures in 1998, and are expected to increase to 11% by
2008. U.S. prescription drug sales for 1998 were approximately $90.6 billion,
and HCFA projects continued sales increases at an average annual growth rate of
approximately 11% through 2008, compared to an average annual growth rate of
approximately 6% for total health care costs during this period. Based upon
information in our 1999 Annual Drug Trend report, described below under
"--Clinical Support", we estimate that average drug spending will grow at an
annual rate of 15% from 2000 through 2004 and average per member drug spend will
grow at a compound annual rate of 15% from 1995 through 2004, and that per
member drug spend in 2004 will be approximately $760 compared to $387 in 1999
and $216 in 1995. Factors underlying this trend include:
o increases in research and development expenditures by drug manufacturers,
resulting in many new drug introductions
o a shorter U.S. Food and Drug Administration approval cycle for new
pharmaceuticals
o high prices for new "blockbuster" drugs
o an aging population
o increased demand for prescription drugs due to increased disease awareness
by patients, effective direct-to-consumer advertising by drug manufacturers
and a growing reliance on medication in lieu of lifestyle changes
This trend creates a significant challenge for HMOs, health insurers,
employers and unions that provide a drug benefit as part of the health plans
they offer to members of their respective organizations. Certain of these health
benefit providers, or "payors", engage the services of pharmacy benefit
management ("PBM") companies to help them provide a cost-effective drug benefit
as part of their health plan and to better understand the impact of prescription
drug utilization on their overall health care expenditures.
In general, PBMs coordinate the distribution of outpatient pharmaceuticals
through a combination of benefit-management services, including retail drug card
programs, mail pharmacy services and formulary management programs. PBMs emerged
during the late 1980s by combining traditional pharmacy claims processing and
mail pharmacy services to create an integrated product offering that could help
manage the prescription drug benefit for payors. During the early 1990s,
numerous PBMs were created, with some providers offering a comprehensive,
integrated package of services. There are an estimated 60 PBMs serving a
population of approximately 180 million members and processing approximately 2.5
billion prescriptions annually. The PBM industry processed approximately $98
billion worth of prescriptions in 2000. The three largest PBMs account for
approximately 55% of prescription volume or member lives.
The services offered by the more sophisticated PBMs have broadened to
include disease management programs, compliance programs, outcomes research,
drug therapy management programs and sophisticated data analysis.
Company Overview
We are the third largest PBM in North America. We are independent from
pharmaceutical manufacturer ownership, and believe our independence is important
as it allows us to make unbiased formulary recommendations to our clients,
balancing both clinical efficacy and cost.
We provide a full range of pharmacy benefit management services, including
retail drug card programs, mail pharmacy services, drug formulary management
programs and other clinical management programs for approximately 19,000 client
groups that include HMOs, health insurers, third-party administrators,
employers, union-sponsored benefit plans and government health programs. As of
January 1, 2001, some of our largest clients include Aetna U.S. Healthcare,
Oxford Health Plans, Blue Cross Blue Shield of Massachusetts, the State of
Georgia, Blue Shield of California and Mutual of Omaha.
As of January 1, 2001, our PBM services were provided to approximately 43.5
million members in the United States and Canada who were enrolled in health
plans sponsored by our clients. In computing the number of members we serve we
make certain estimates and adjustments. We believe different PBMs use different
factors in making these estimates and adjustments. We also believe, however,
that these numbers are a reasonable approximation of the actual number of
members served by us.
Our PBM services include:
o network pharmacy management, mail pharmacy services, benefit
design consultation, drug utilization review, formulary
management programs, disease management, medical and drug data
analysis services, and compliance and therapy management programs
for our clients
o market research programs for pharmaceutical manufacturers
o medical information management services, which include outcome
assessments, the development of data warehouses combining medical
claims and prescription drug claims, and sophisticated decision
support tools to evaluate disease specific interventions on cost
and quality, through our wholly-owned subsidiary Practice
Patterns Science, Inc. ("PPS")
o informed decision counseling services through our Express Health
LineSM division
Our non-PBM services include:
o infusion therapy services through our wholly owned subsidiary,
Express Scripts Infusion Services
o distribution of pharmaceuticals requiring special handling or
packaging through our wholly owned subsidiary Express Scripts
Specialty Distribution Services
Our revenues are primarily generated from the delivery of prescription
drugs through our contractual network of retail pharmacies, mail pharmacy
services and infusion therapy services. In 2000, 1999 and 1998, revenues from
the delivery of prescription drugs to our members represented 94.1%, 93.4% and
98.2% of our total revenues, respectively. Revenues from services, such as the
administration of contracts between our clients and the clients' retail pharmacy
networks, market research programs, the sale of medical information management
services, the sale of informed decision counseling services and our Specialty
Distribution Services comprised the remainder of our revenues.
Prescription drugs are dispensed to members of the health plans we serve
primarily through networks of retail pharmacies that are under non-exclusive
contract with us and through five mail pharmacy service centers that we operate
out of leased facilities. More than 55,000 retail pharmacies, representing more
than 99% of all United States retail pharmacies, participate in one or more of
our networks. In 2000, we processed approximately 241.8 million network pharmacy
claims and 15.2 million mail pharmacy prescriptions, with an estimated total
drug spending of $11.2 billion, excluding United HealthCare ("UHC") network
pharmacy claims of 57.8 million having an estimating total drug spending of $2.7
billion. Our contract with UHC expired on May 31, 2000 and we transitioned the
UHC membership to another provider throughout 2000.
We were incorporated in Missouri in September 1986, and were reincorporated
in Delaware in March 1992. Our principal executive offices are located at 13900
Riverport Drive, Maryland Heights, Missouri 63043. Our telephone number is (314)
770-1666.
Products and Services
Pharmacy Benefit Management Services
Overview. Our PBM services involve the management of outpatient
prescription drug usage to foster high quality, cost-effective pharmaceutical
care through the application of managed care principles and advanced information
technologies. We offer our PBM services to our clients in the United States and
Canada. Our PBM services include:
o retail network pharmacy administration
o mail pharmacy services
o benefit plan design consultation
o formulary administration
o electronic point-of-sale claims processing
o drug utilization review
o the development of advanced formulary compliance and therapeutic
intervention programs
o therapy management services such as prior authorization, therapy
guidelines, step therapy protocols and formulary management
interventions
o sophisticated management information reporting and analytic
services
o outcomes assessments, the development of data warehouses
combining medical claims and prescription drug claims, and
sophisticated decision support tools to evaluate disease specific
interventions on cost and quality
o informed decision counseling
o drug information through our DrugDigest.org and
express-scripts.com websites
During 2000, 98.7% of our revenues were derived from PBM services, compared
to 98.5% and 97.9% during 1999 and 1998, respectively. The number of retail
pharmacy network claims processed and mail pharmacy claims processed, excluding
UHC, has increased to 241.8 million and 15.2 million claims, respectively, in
2000, from 57.8 million and 2.8 million claims, respectively, in 1996. During
1999 and 1998, we processed 211.3 million, excluding UHC, and 113.2 million
retail pharmacy network claims, respectively, and 10.6 million and 7.4 million
mail pharmacy claims, respectively.
Retail Pharmacy Network Administration. We contract with retail pharmacies
to provide prescription drugs to members of the pharmacy benefit plans managed
by us. In the United States, these pharmacies typically discount the price at
which they will provide drugs to members in return for designation as a network
pharmacy. We manage four nationwide networks in the United States that are
responsive to client preferences related to cost containment and convenience of
access for members. We also manage over 400 networks of pharmacies that we have
designed to meet the specific needs of some of our larger clients or that are
under direct contract with our managed care clients. We manage one nationwide
network in Canada.
All retail pharmacies in our pharmacy networks communicate with us on-line
and in real time to process prescription drug claims. When a member of a plan
presents his or her identification card at a network pharmacy, the network
pharmacist sends the specified claim data in an industry-standard format through
our systems, which process the claim and respond to the pharmacy, typically
within one or two seconds. The electronic processing of the claim involves:
o confirming the member's eligibility for benefits under the
applicable health benefit plan and the conditions to or
limitations of coverage, such as the amount of copayments or
deductibles the member must pay
o performing a concurrent drug utilization review analysis and
alerting the pharmacist to possible drug interactions and
reactions or other indications of inappropriate prescription drug
usage
o updating the member's prescription drug claim record
o if the claim is accepted, confirming to the pharmacy that it will
receive payment for the drug dispensed
Mail Pharmacy. We operate five mail pharmacies, located in Maryland
Heights, Missouri; Tempe, Arizona; Albuquerque, New Mexico; Bensalem,
Pennsylvania; and Troy, New York. These pharmacies provide members with
convenient access to maintenance medications and enable our clients and us to
control drug costs through operating efficiencies and economies of scale. In
addition, through our mail service pharmacies we are directly involved with the
prescriber and member, and are generally able to achieve a higher level of
generic substitutions and therapeutic interventions than can be achieved through
the retail pharmacy networks.
Benefit Plan Design and Consultation. We offer consultation and financial
modeling to assist our clients in selecting a benefit plan design that meets
their needs for member satisfaction and cost control. The most common benefit
design options we offer to our clients are:
o financial incentives and reimbursement limitations on the drugs
covered by the plan, including drug formularies, flat dollar or
percentage of prescription cost copayments, deductibles or annual
benefit maximum
o generic drug substitution incentives
o incentives or requirements to use only network pharmacies or to
order certain drugs only by mail
o reimbursement limitations on the number of days' supply of a drug
that can be obtained
The selected benefit design is entered into our electronic claims processing
system, which applies the plan design parameters as claims are submitted and
enables our clients and us to monitor the financial performance of the plan.
Formulary Development, Compliance and Therapy Management. Formularies are
lists of drugs for which coverage is provided under the applicable plan. We have
over 10 years of formulary development expertise and an extensive clinical
pharmacy department.
Our foremost consideration in the formulary development process is the
clinical appropriateness of the drug, not the cost of the drug. In developing
formularies, we first perform a rigorous therapeutic assessment of the drug's
clinical effectiveness. After the clinical recommendation is made, it is
evaluated on an economic basis. No drug is added to the formulary until our
National Pharmacy & Therapeutics Committee, a panel composed of 17 independent
physicians, our Chief Medical Officer and five of our pharmacists, approves it.
This panel does not consider any information regarding the discount or formulary
fee arrangement that might be negotiated with the manufacturer in making its
clinical recommendation. This ensures that the clinical recommendation is not
affected by the purchasing arrangement.
We administer a number of different formularies for our clients that
identify preferred drugs whose use is encouraged or required through various
benefit design features. Historically, many clients have selected a plan design
that includes an open formulary in which all drugs are covered by the plan and
preferred drugs, if any, are merely recommended. Other options consist of
restricted formularies, in which various financial or other incentives exist for
the selection of preferred drugs over their non-preferred counterparts, or
closed formularies, in which benefits are available only for drugs listed on the
formulary. Formulary preferences can be encouraged:
o by restricting the formulary through plan design features, such
as tiered copayments, which require the member to pay a higher
amount for a non-preferred drug
o through prescriber education programs, in which we or the managed
care client actively seek to educate the prescribers about the
formulary preferences
o through our drug choice management program, which actively
promotes therapeutic and generic interchanges to clinically
appropriate cost-effective products to reduce drug costs
We also provide formulary compliance services to our clients. For example,
if the doctor has not prescribed the preferred drug on a client formulary, we
notify the pharmacist through our claims processing system. The pharmacist or we
can then contact the doctor to attempt to obtain the doctor's consent to switch
the prescription to the preferred product. The doctor has the final
decision-making authority in prescribing the medication. The doctor will
consider the recommended substitution in light of the patient's medical history
and approve or deny the substitution. We also offer innovative proprietary drug
utilization review and clinical intervention programs to assist clients in
managing compliance with the prescribed drug therapy by identifying potential
and inappropriate prescribing practices.
Information Reporting and Analysis and Disease Management Programs. Through
the use of sophisticated information and reporting systems, we are better able
to manage the prescription drug benefit. We are able to analyze prescription
drug data to identify cost trends and budget for expected drug costs, to assess
the financial impact of plan design changes and to assist clients to identify
costly utilization patterns through an on-line prescription drug decision
support tool called ProActSM. This service allows our clients to analyze
prescription drug data on-line.
In addition, our PPS subsidiary builds sophisticated data warehouses
combining medical claims, prescription drug claims, and clinical laboratory data
to provide decision support to the health care industry. Proprietary PPS
applications enable users to quickly evaluate shifts in medical conditions
afflicting membership and the effectiveness of interventions from a cost and
quality of care perspective. PPS users can evaluate the impact of new
prescription drugs on the cost and results of treating specific medical
conditions. Working with leading health care organizations, PPS continues to
push the sophistication of data warehouses and the applications to provide
insight into the subtleties of health care delivery.
We offer disease management and education programs to assist health benefit
plans and our members in managing the total health care costs associated with
certain diseases, such as asthma, diabetes and cardiovascular disease. These
programs are based upon the premise that patient and provider behavior can
positively influence medical outcomes and reduce overall medical costs. We
identify patients who may benefit from these programs through claims data
analysis or self-enrollment. We conduct risk stratification surveys to establish
a plan of care for individual program participants. We provide patient education
primarily through a series of telephone and written communications with nurses
and pharmacists, and both providers and patients receive progress reports on a
regular basis. We conduct outcome surveys to analyze the clinical, personal and
economic impact of the program.
Electronic Claims Processing System. Our electronic claims processing
system enables us to implement sophisticated intervention programs to assist in
managing prescription drug utilization. The system can be used to alert the
pharmacist to generic substitution and therapeutic intervention opportunities
and formulary compliance issues, or to administer prior authorization and
step-therapy protocol programs at the time a claim is submitted for processing.
Our claims processing system also creates a database of drug utilization
information that can be accessed both at the time the prescription is dispensed
and also on a retrospective basis to analyze utilization trends and prescribing
patterns for more intensive management of the drug benefit.
Informed Decision Counseling. We offer health care decision counseling
services through our Express Health LineSM division. This service allows a
member to call a toll-free telephone number and discuss health care matters with
a care counselor. The care counselor utilizes on-line decision support protocols
and other guidelines to provide the member information to assist them in making
an informed decision in seeking appropriate treatment. Records of each call are
kept on-line for future reference. This service is available 24 hours a day and
staffed by registered nurses. Some multilingual capabilities and service for the
hearing impaired are also available. The care counselors make a follow-up phone
call to determine the outcome of the initial call and offer additional
assistance if needed. Member satisfaction and cost savings associated with
redirections to appropriate care levels are measured through a combination of
member surveys and system reports.
Consumer Health and Medical Information. In the summer of 1999, we launched
an Internet site, DrugDigest.org to provide a comprehensive source of
non-commercial, fact-based drug information. DrugDigest currently has a
comprehensive portfolio of consumer-friendly drug information. This portfolio
includes information about adverse drug interactions, drug side effects, drug
administration tips, and other information useful in helping Express Scripts
members and their health care professionals make informed medication decisions.
In the coming year, DrugDigest will expand its coverage of prescription,
over-the-counter, and herbal medications. The information and features available
in our web-based ExpressChoice will allow enrollees to examine a more
personalized version of DrugDigest that will include information about their
enrollment benefits and drug costs and will generally, allow members and
clients to more effectively manage their pharmacy benefit. Finally, the
DrugDigest team is expanding their activities into disease management. By
tightly coupling pharmaceutical and medical information, members will experience
an even deeper understanding of how their medications impact their overall
medical care.
Non-PBM Services
In addition to PBM services, we also provide non-PBM services including
specialty distribution services and outpatient infusion therapy to our clients.
During 2000, 1.3% of our revenues were derived from non-PBM services, compared
to 1.5% and 2.1% during 1999 and 1998, respectively. This slight decline is
partially due to the inclusion of Diversified Pharmaceutical Services ("DPS")
for a full year in 2000 versus only nine months of 1999 and as a result of an
increase in PBM revenues due to the conversion of clients from networks
contracted by our client to one contracted by us. The decline from 1998 to 1999
is due to the acquisitions of ValueRx and DPS, which significantly increased our
PBM service revenues.
Express Scripts Specialty Distribution Services. We provide specialty
distribution services by assisting pharmaceutical manufacturers with the
distribution of, and creation of a database of information for, products
requiring special handling/packaging, products targeted to a specific physician
or patient population and products distributed to indigent patients. Our
services may include eligibility, fulfillment, inventory, insurance
verification/authorization and reimbursement. These services are provided in our
Maryland Heights, Missouri facility located next to our Corporate Headquarters.
Express Scripts Infusion Services. We provide infusion therapy services
which involve the administration of prescription drugs and other products to a
patient by catheter, feeding tube or intravenously, through our wholly owned
subsidiary, IVTx, Inc., operating under the name Express Scripts Infusion
Services. Our clients benefit from outpatient infusion therapy services because
the length of hospital stays can be reduced. Rather than receiving infusion
therapy in a hospital, we provide infusion therapy services to patients at home,
in a physician's office or in a free-standing center operated by a managed care
organization or other entity. We have facilities supporting our infusion
services operations in Houston, Texas; Irvine, Texas; Columbia, Maryland;
Maryland Heights, Missouri; Columbia, Missouri; Springfield, New Jersey; and
West Chester, Pennsylvania.
Segment Information. Information regarding our segments appears in Note 12
of the notes to our consolidated financial
statements, which is incorporated by reference herein.
Suppliers
We maintain an extensive inventory in our mail pharmacies of brand name and
generic pharmaceuticals. If a drug is not in our inventory, we can generally
obtain it from a supplier within one or two business days. We purchase our
pharmaceuticals either directly from manufacturers or through wholesalers.
During 2000, approximately 60.0% of our pharmaceutical purchases were through
one wholesaler, most of which were brand name pharmaceuticals. Generic
pharmaceuticals are generally purchased directly from manufacturers. We believe
that alternative sources of supply for most generic and brand name
pharmaceuticals are readily available.
Clients
We are a major provider of PBM services to the managed care industry,
including several large HMOs, government plans and large employers. Some of our
largest managed care clients are Aetna U.S. Healthcare, Inc., Oxford Health
Plans, Blue Cross Blue Shield of Massachusetts and Blue Shield of California.
Some of our largest employer groups include the State of Georgia and the State
of New York Empire Plan Prescription Drug Program (through a subcontracting
relationship with CIGNA HealthCare). We also market our PBM services through
preferred provider organizations, group purchasing organizations, health
insurers, third-party administrators of health plans and union-sponsored benefit
plans.
In connection with our 1999 acquisition of Diversified Pharmaceutical
Services ("DPS"), we acquired the contract to serve approximately 9.5 million
UHC members. The contract with UHC expired on May 31, 2000. We developed a
migration plan to transition the UHC members to their new provider through 2000.
We believe the termination and transition of this contract did not materially
adversely affect our business and results of operations.
Medicare Prescription Drug Coverage
The federal Medicare program provides a comprehensive medical benefit
program for individuals age 65 and over. Today Medicare covers only a few
outpatient prescription drugs. Key policy makers on both sides of the political
aisle have proposed changes to the Medicare program that would result in at
least partial coverage for most outpatient prescription drugs. The Medicare
population is large, and prescription drug utilization among seniors is
substantially higher on average than that of other age groups.
Many of the Medicare prescription drug proposals lack important details
regarding the administration of the plan. We believe that a Medicare
prescription drug benefit could provide us with substantial new business
opportunities, but at the same time any such program could adversely affect
other aspects of our business. For example, some of our clients sell medical
policies to seniors that provide a prescription drug benefit that we administer.
Other clients provide a prescription drug benefit to their retirees. Depending
on the plan that is ultimately adopted, a Medicare prescription drug benefit
could make such policies or plans less valuable to seniors, adversely affecting
that segment of our business. While we believe that there could be opportunities
for new business under a Medicare plan that would more than offset any adverse
effects, we can give no assurance that this would be the case.
Joint Venture and Acquisitions
On February 22, 2001, we announced that we entered into an agreement with
AdvancePCS and Merck-Medco to form RxHub LLC ("RxHub"). RxHub is intended to
develop an electronic exchange enabling physicians who use electronic
prescribing technology to link to pharmacies, PBMs and health plans, which their
patients use. The company is designed to operate as a utility for the conduit of
information among all parties engaging in electronic prescribing. We will own
one-third of the equity of RxHub (as will each of the other two founders), and
have committed to invest up to $20 million over the next five years with
approximately $6 million committed for 2001. We will record our investment in
RxHub under the equity method of accounting, which requires our percentage
interest in RxHub's results to be recorded in our Consolidated Statement of
Operations. RxHub will be operated to cover its expected operating costs and to
return the cost of capital to the founders.
As previously announced the shareholders of Centre d'autorisation et de
paiement des services de sante, a leading Quebec-based PBM commonly referred to
as CAPSS, accepted an offer made by our Canadian subsidiary, ESI Canada, Inc.,
to acquire all of the outstanding shares of CAPSS, subject to satisfaction of
certain conditions, for approximately CAN$25 million (approximately US$16.5
million). The transaction, which will be accounted for under the purchase method
of accounting, will be funded with our operating cash flow. We expect to close
the transaction during March 2001 and it will add approximately 1.5 million
lives to ESI Canada's membership base. The transaction is not expected to be
dilutive to earnings in 2001 and is expected to be slightly accretive in 2002.
On April 1, 1999, we acquired DPS from SmithKline Beecham Corporation and
one of its affiliates for $715 million in cash, which reflects a purchase price
adjustment for closing working capital and transaction costs. The acquisition
positioned us as the third largest PBM in North America in terms of total
members and provided us with one of the largest managed care membership bases of
any PBM. In addition, the acquisition provides us with enhanced clinical
capabilities, systems and technologies.
On April 1, 1998, we acquired the PBM business known as "ValueRx" from HCA
- - The HealthCare Corporation (formerly known as Columbia/HCA Healthcare) for
approximately $460 million in cash. Historically, while ValueRx, like us, served
all segments of the PBM market, we primarily focused on managed care and smaller
self-funded plan sponsors, and ValueRx concentrated on health insurance carriers
and large employer and union groups.
Company Operations
General. We operate five mail pharmacies and eight member service/pharmacy
help desk call centers out of leased facilities. Electronic pharmacy claims
processing takes place at our Maryland Heights, Missouri and Tempe, Arizona
facilities, which are maintained, managed and operated by Electronic Data
Systems ("EDS"), or at facilities owned by EDS. At our Canadian facility, we
have sales and marketing, client services, pharmacy help desk, clinical,
provider relations and certain management information systems capabilities.
Sales and Marketing. We market and sell our PBM services in the United
States primarily through an internal staff of sales directors and sales managers
located throughout the United States. The sales representatives are supported by
a staff of client service representatives, clinical pharmacy managers and
business analyst consultants who focus on assisting our clients in managing the
rising trend in pharmacy costs. Marketing and sales in Canada are conducted by
representatives located in Mississauga, Ontario. Although we cross-sell our
infusion services to our PBM clients, Infusion Services and Specialty
Distribution Services also employ personnel to sell these specific products.
Member Services. Although we sell our services to clients, the ultimate
recipient of many of our services are the members of health plans sponsored by
our clients. We believe, therefore, that client satisfaction is dependent upon
member satisfaction. Members can call us toll-free, 24 hours a day, 7 days a
week, to obtain information about their prescription drug plan from our trained
member service representatives.
Provider Relations. Our Provider Relations group is responsible for
contracting and administering our pharmacy networks. To participate in our
retail pharmacy networks, pharmacies must meet certain qualifications and are
periodically required to represent to us that their applicable state licensing
requirements are being maintained and that they are in good standing. Pharmacies
can contact our various pharmacy help desks toll-free, 24 hours a day, 7 days a
week, for information and assistance in filling prescriptions for members. In
addition, our Provider Relations group audits pharmacies in the retail pharmacy
networks to determine compliance with the terms of the contract with our clients
or us.
Clinical Support. Our Health Management Services division employs
clinical pharmacists, data analysts and outcomes researchers who provide
technical support for our PBM services. These staff members assist in providing
high level clinical pharmacy services such as formulary development, drug
information programs, clinical interventions with physicians, development of
drug therapy guidelines and the evaluation of drugs for inclusion in clinically
sound therapeutic intervention programs.
The Health Management Services division conducts specific data analyses to
evaluate drug therapies, and analyzes and prepares reports on clinical pharmacy
data for our clients. For example, in June 2000 we released our 1999 Drug Trend
Report, marking our fourth consecutive year of publishing such a report. Based
on a large sample of our membership base, the report examines trends in
pharmaceutical utilization and cost and the factors that underlie those trends.
The division also evaluates pharmacy plan design strategies and clinical
offerings and conducts outcomes research studies to inform client
decision-making.
Information Systems. Our Information Systems department supports our
pharmacy claims processing systems and other management information systems that
are essential to our operations. Uninterrupted point-of-sale electronic retail
pharmacy claims processing is a significant operational requirement for us. All
claims are presently processed through systems which are maintained, managed and
operated by EDS at our Maryland Heights, Missouri facility and Tempe, Arizona
facility, or at facilities owned by EDS, who maintains certain computer hardware
for us at its facility in Plano, Texas. Disaster recovery services for all
systems are provided through our EDS services agreement. We have substantial
capacity for growth in our claims processing facilities.
Competition
We believe the primary competitive factors in each of our businesses are
price, quality of service and scope of available services. We believe our
principal competitive advantages are our independence from pharmaceutical
manufacturer ownership, our strong managed care and employer group customer base
which supports the development of more sophisticated PBM services, and our
commitment to provide flexible and distinctive service to our clients.
There are other PBMs in the United States, most of which are smaller than
us and offer their services on a local or regional basis. We do, however,
compete with a number of large, national companies, including Merck-Medco
Managed Care, L.L.C., a subsidiary of Merck & Co., Inc., ("Merck-Medco");
AdvancePCS and CaremarkRx, Inc.; as well as large health insurers and certain
HMOs which have their own PBM capabilities. Several of these other companies may
have greater financial, marketing and technological resources than us. In
addition, a competitor that is owned by a pharmaceutical manufacturer may have
pricing advantages that are unavailable to us and other independent PBMs.
However, we believe our independence from pharmaceutical manufacturer ownership
allows us to make unbiased formulary recommendations to our clients, balancing
both clinical efficacy and cost.
Consolidation has been, and may continue to be, an important factor in all
aspects of the pharmaceutical industry, including the PBM segment. We believe
the size of our membership base provides us with the necessary economies of
scale to compete effectively in a consolidating market.
Some of our PBM services, such as disease management services, informed
decision counseling services and medical information management services,
compete with those being offered by pharmaceutical manufacturers, other PBMs,
large national companies, specialized disease management companies and
information service providers. Our non-PBM services compete with a number of
large national companies as well as with local providers.
Government Regulation
Various aspects of our businesses are governed by federal and state laws
and regulations. Since sanctions may be imposed for violations of these laws,
compliance is a significant operational requirement. We believe we are in
substantial compliance with all existing legal requirements material to the
operation of our businesses. There are, however, significant uncertainties
involving the application of many of these legal requirements to our business.
In addition, there are numerous proposed health care laws and regulations at the
federal and state levels, many of which could adversely affect our business or
financial position. We are unable to predict what additional federal or state
legislation or regulatory initiatives may be enacted in the future relating to
our business or the health care industry in general, or what effect any such
legislation or regulations might have on us. We cannot provide any assurance
that federal or state governments will not impose additional restrictions or
adopt interpretations of existing laws that could have a material adverse affect
on our business or financial position.
Pharmacy Benefit Management Regulation Generally. Certain federal and state
laws and regulations affect or may affect aspects of our PBM business. Among
these are the following:
FDA Regulation. The U.S. Food and Drug Administration ("FDA") generally has
authority to regulate drug promotional materials that are disseminated "by or on
behalf of" a drug manufacturer. In January, 1998, the FDA issued a Notice and
Draft Guidance regarding its intent to regulate certain drug promotion and
switching activities of pharmacy benefit managers that are controlled, directly
or indirectly, by drug manufacturers. The position taken by the FDA in the Draft
Guidance was that promotional materials used by an independent PBM or managed
care organization may be subject to FDA regulation depending upon the
circumstances, including the nature of the relationship between the PBM, the HMO
and the manufacturer. We, along with various other parties, submitted written
comments to the FDA regarding the basis for FDA regulation of PBM and HMO
activities. It was our position that, while the FDA may have jurisdiction to
regulate drug manufacturers, the Draft Guidance went beyond the FDA's
jurisdiction. After extending the comment period due to numerous industry
objections to the proposed Draft, the FDA withdrew the Draft Guidance in the
fall of 1998, stating that it would reconsider the basis for such a Guidance.
The FDA has not addressed the issue since the withdrawal. However, there can be
no assurance that the FDA will not again attempt to assert jurisdiction over
certain aspects of our PBM business in the future and, in such event, the impact
could materially adversely affect our operations, business or financial
position.
Anti-Remuneration/Fraud and Abuse Laws. Federal law prohibits, among other
things, an entity from paying or receiving, subject to certain exceptions and
"safe harbors," any remuneration to induce the referral of individuals covered
by federally funded health care programs, including Medicare, Medicaid and
CHAMPUS or the purchase (or the arranging for or recommending of the purchase)
of items or services for which payment may be made under Medicare, Medicaid,
CHAMPUS or other federally-funded health care programs. Several states also have
similar laws that are not limited to services for which Medicare or Medicaid
payment may be made. State laws vary and have been infrequently interpreted by
courts or regulatory agencies. Sanctions for violating these federal and state
anti-remuneration laws may include imprisonment, criminal and civil fines, and
exclusion from participation in the Medicare and Medicaid programs.
The federal statute has been interpreted broadly by courts, the Office of
Inspector General ("OIG") within the Department of Health and Human Services,
and administrative bodies. Because of the federal statute's broad scope, federal
regulations establish certain "safe harbors" from liability. Safe harbors exist
for certain properly reported discounts received from vendors, certain
investment interests, certain properly disclosed payments made by vendors to
group purchasing organizations, and certain discount and payment arrangements
between PBMs and HMO risk contractors serving Medicaid and Medicare members. A
practice that does not fall within a safe harbor is not necessarily unlawful,
but may be subject to scrutiny and challenge. In the absence of an applicable
exception or safe harbor, a violation of the statute may occur even if only one
purpose of a payment arrangement is to induce patient referrals or purchases.
Among the practices that have been identified by the OIG as potentially improper
under the statute are certain "product conversion programs" in which benefits
are given by drug manufacturers to pharmacists or physicians for changing a
prescription (or recommending or requesting such a change) from one drug to
another. Such laws have been cited as a partial basis, along with state consumer
protection laws discussed below, for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail
pharmacies in connection with such programs.
To our knowledge, these anti-remuneration laws have not been applied to
prohibit PBMs from receiving amounts from drug manufacturers in connection with
drug purchasing and formulary management programs, to therapeutic intervention
programs conducted by independent PBMs, or to the contractual relationships such
as those we have with certain of our clients. In late 1999, it was reported that
the U.S. Attorney's Office in Philadelphia had issued subpoenas to Merck-Medco
and PCS (now AdvancePCS), both PBMs, and Schering-Plough Corp., a pharmaceutical
manufacturer. We have not been served with any such subpoena, nor are we privy
to information concerning the scope of information being requested by these
subpoenas. However, the U.S. Attorney's Office has been quoted to the effect
that one issue being investigated is whether certain practices engaged in by
those PBMs violate certain anti-remuneration statutes. We believe that we are in
substantial compliance with the legal requirements imposed by such laws and
regulations, and we believe that there are material differences between
drug-switching programs that have historically been challenged under these laws
and the programs we offer to our clients. However, there can be no assurance
that we will not be subject to scrutiny or challenge under such laws or
regulations. Any such challenge could have a material adverse effect on us.
ERISA Regulation. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which we have
agreements to provide PBM services. We believe that the conduct of our business
is not generally subject to the fiduciary obligations of ERISA, and our
agreements with our clients support this contention by providing that we are not
the fiduciary of the applicable plan. However, there can be no assurance that
the U.S. Department of Labor, which is the agency that enforces ERISA, would not
assert that the fiduciary obligations imposed by the statute apply to certain
aspects of our operations.
In addition to its fiduciary provisions, ERISA imposes civil and criminal
liability on service providers to health plans and certain other persons if
certain forms of illegal remuneration are made or received. These provisions of
ERISA are similar, but not identical, to the health care anti-remuneration
statutes discussed in the immediately preceding section; in particular, ERISA
lacks the statutory and regulatory "safe harbor" exceptions incorporated into
the health care statute. Like the health care anti-remuneration laws, the
corresponding provisions of ERISA are broadly written and their application to
particular cases is often uncertain. We have implemented policies, which include
disclosure to health plan sponsors with respect to any commissions paid by us
that might fall within the scope of such provisions, and accordingly believe we
are in substantial compliance with these provisions of ERISA. However, we can
provide no assurance that our policies in this regard would be found by the
appropriate enforcement authorities to meet the requirements of the statute.
Proposed Changes in Canadian Healthcare System. In Canada, the provincial
health plans provide universal coverage for basic health care services, but
prescription drug coverage under the government plans is provided only for the
elderly and the indigent. In late 1997, a proposal was made by a federal
government health care task force to include coverage for prescription drugs
under the provincial health insurance plans, which was endorsed by the federal
government's Health Minister. This report was advisory in nature, and not
binding upon the federal or provincial governments. We believe this initiative
is dormant at the present time, and we are unable to determine the likelihood of
adoption of the proposal in the future.
Numerous state laws and regulations also affect aspects of our PBM
business. Among these are the following:
Comprehensive PBM Regulation. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced previously in a number of states, and currently in Georgia. In
addition, certain quasi-regulatory organizations, such as the National
Association of Boards of Pharmacy ("NABP", an organization of state boards of
pharmacy), the National Association of Insurance Commissioners ("NAIC", an
organization of state insurance regulators), and the National Committee on
Quality Assurance ("NCQA", an accreditation organization) are considering
proposals to regulate PBMs and/or PBM activities, such as formulary development
and utilization management. While the actions of the NABP and NAIC would not
have the force of law, they may influence states to adopt any requirements or
model acts they promulgate. In addition, standards established by NCQA could
materially impact us directly as a PBM, and indirectly through the impact on our
health plan clients.
Consumer Protection Laws. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with seventeen states on October 25, 1995, Merck-Medco
Managed Care, LLC ("Medco"), the PBM subsidiary of pharmaceutical manufacturer
Merck & Co., agreed to have pharmacists affiliated with Medco mail service
pharmacies disclose to physicians and patients the financial relationships
between Merck, Medco, and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another. We
believe that our contractual relationships with drug manufacturers and retail
pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no assurance
can be given that we will not be subject to scrutiny or challenge under one or
more of these laws.
Network Access Legislation. A majority of states now have some form of
legislation affecting our ability to limit access to a pharmacy provider network
or removal of a network provider. Such legislation may require us or our clients
to admit any retail pharmacy willing to meet the plan's price and other terms
for network participation ("any willing provider" legislation); or may provide
that a provider may not be removed from a network except in compliance with
certain procedures ("due process" legislation). We have not been materially
affected by these statutes.
Legislation Affecting Plan Design. Some states have enacted legislation
that prohibits certain types of managed care plan sponsors from implementing
certain restrictive design features, and many states have introduced legislation
to regulate various aspects of managed care plans, including provisions relating
to the pharmacy benefit. For example, some states, under so-called "freedom of
choice" legislation, provide that members of the plan may not be required to use
network providers, but must instead be provided with benefits even if they
choose to use non-network providers. Other states have enacted legislation
purporting to prohibit health plans from offering members financial incentives
for use of mail service pharmacies. Legislation has been introduced in some
states to prohibit or restrict therapeutic intervention, or to require coverage
of all FDA approved drugs. Other states mandate coverage of certain benefits or
conditions, and require health plan coverage of specific drugs if deemed
medically necessary by the prescribing physician. Such legislation does not
generally apply to us directly, but it may apply to certain of our clients, such
as HMOs and health insurers. If such legislation were to become widely adopted
and broad in scope, it could have the effect of limiting the economic benefits
achievable through pharmacy benefit management. This development could have a
material adverse effect on our business.
Licensure Laws. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including PPOs, TPAs, and
companies that provide utilization review services. The scope of these laws
differs significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers often is unclear. We have registered
under such laws in those states in which we have concluded, after discussion
with the appropriate state agency, that such registration is required. Because
of increased regulatory requirements on some of our managed care clients
affecting prior authorization of drugs before coverage is approved, we have
obtained utilization review licenses in selected states through our new ESI
Utilization Management Co. In addition, accreditation agencies' requirements for
managed care organizations may also affect those delegated services we provide
to such organizations.
Legislation Affecting Drug Prices. Some states have adopted so-called "most
favored nation" legislation providing that a pharmacy participating in the state
Medicaid program must give the state the best price that the pharmacy makes
available to any third party plan. Such legislation may adversely affect our
ability to negotiate discounts in the future from network pharmacies. Other
states have enacted "unitary pricing" legislation, which mandates that all
wholesale purchasers of drugs within the state be given access to the same
discounts and incentives. Such legislation has been introduced in the past but
not enacted in Missouri, Arizona, Pennsylvania, New York, and New Mexico, all
states where we operate mail service pharmacies. Such legislation, if enacted in
a state where one of our mail service pharmacies is located, could adversely
affect our ability to negotiate discounts on our purchase of prescription drugs
to be dispensed by our mail service pharmacies.
In addition, various federal and state Medicaid agencies have raised the
issue of how average wholesale price ("AWP") is calculated. AWP is a standard
pricing unit used throughout the industry, as well as by us, as the basis for
calculating drug prices under our health plans and pharmacies and rebates with
pharmaceutical manufacturers. Changes to the standard have been suggested that
could alter the calculation of drug prices for federal programs. We are unable
to predict whether any such changes will be adopted, and if so, if such changes
would have a material adverse impact on our financial operations.
Regulation of Financial Risk Plans. Fee-for-service prescription drug plans
are generally not subject to financial regulation by the states. However, if the
PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. In those cases in which we have contracts in which we
are materially at risk to provide the pharmacy benefit, we believe we have
complied with all applicable laws.
Many of the state laws described above may be preempted in whole or in part
by ERISA, which provides for comprehensive federal regulation of employee
benefit plans. However, the scope of ERISA preemption is uncertain and is
subject to conflicting court rulings, and we provide services to certain
clients, such as governmental entities, that are not subject to the preemption
provisions of ERISA. Other state laws may be invalid in whole or in part as an
unconstitutional attempt by a state to regulate interstate commerce, but the
outcome of challenges to these laws on this basis is uncertain. Accordingly,
compliance with state laws and regulations remains a significant operational
requirement for us.
Mail Pharmacy Regulation. Our mail service pharmacies are located in
Arizona, Missouri, New Mexico, New York and Pennsylvania, and we are licensed to
do business as a pharmacy in each such state. Many of the states into which we
deliver pharmaceuticals have laws and regulations that require out-of-state mail
service pharmacies to register with, or be licensed by, the board of pharmacy or
similar regulatory body in the state. These states generally permit the mail
service pharmacy to follow the laws of the state within which the mail service
pharmacy is located, although two states require that we also employ a
pharmacist licensed in that state. We have registered our pharmacies in every
state in which such registration is required.
Other statutes and regulations affect our mail service operations. Federal
statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide clients with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the transmission of drugs and medicines through the mail
to a degree that could have an adverse effect on our mail service operations.
Regulation of Informed Decision Counseling and Disease Management Services.
Our health care decision support counseling and disease management programs are
affected by many of the same types of state laws and regulations as our other
activities. In addition, all states regulate the practice of medicine and the
practice of nursing. We do not believe our informed decision counseling or
disease management activities constitute either the practice of medicine or the
practice of nursing. However, there can be no assurance that a regulatory agency
in one or more states may not assert a contrary position, and we are not aware
of any controlling legal precedent for services of this kind.
Privacy and Confidentiality Legislation. Most of our activities involve the
receipt or use of confidential, medical information concerning individual
members. In addition, we use aggregated and anonymized data for research and
analysis purposes. Regulations have been proposed at the federal level and
legislation has been proposed, and in some cases enacted, in several states to
restrict the use and disclosure of confidential medical information. To date, no
such legislation has been enacted that adversely impacts our ability to provide
our services, but there can be no assurance that federal or state governments
will not enact legislation, impose restrictions or adopt interpretations of
existing laws that could have a material adverse effect on our operations.
In December 2000, the Department of Health and Human Services 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 retained a consulting firm to assist us in assessing the steps we will
have to take in complying with these regulations, which provide for a two year
implementation period. While this assessment is not yet complete, we believe
compliance with these regulations will have a significant impact on our business
operations. We have not yet completed an assessment of the costs we will incur
in complying with these regulations, and can give no assurance that such costs
will not be material to us.
Even without new legislation and beyond the final federal regulations,
individual health plan sponsor customers could prohibit us from including their
patients' medical information in our various databases of medical data. They
could also prohibit us from offering services that involve the compilation of
such information.
Non-PBM Regulatory Environment. Our non-PBM activities operate in a
regulatory environment that is quite similar to that of our PBM activities.
Regulation of Infusion Therapy Services. Our infusion therapy services
business is subject to many of the same or similar federal and state laws and
regulations affecting our pharmacy benefit management business, including
anti-remuneration, physician self-referral, and other fraud and abuse type laws
and regulations. In addition, some states require that providers of infusion
therapy services be licensed. We are licensed as a home health agency and
pharmacy in Texas, as a residential service agency and pharmacy in Maryland, and
as a pharmacy in New Jersey, Missouri, Arizona and Pennsylvania. We are also
licensed as a non-resident pharmacy in various states. We believe that we are in
substantial compliance with such licensing requirements.
The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), a non-profit, private organization, has established written standards
for health care organizations and home care services, including standards for
services provided by home infusion therapy companies. All of our infusion
therapy facilities have received JCAHO accreditation, which allows us to market
infusion therapy services to Medicare and Medicaid programs. If we expand our
home infusion therapy services to other states or to Medicare or Medicaid
programs, we may be required to comply with other applicable laws and
regulations.
Future Regulation. We are unable to predict accurately what additional
federal or state legislation or regulatory initiatives may be enacted in the
future relating to our businesses or the health care industry in general, or
what effect any such legislation or regulations might have on us. There can be
no assurance that federal or state governments will not impose additional
restrictions or adopt interpretations of existing laws that could have a
material adverse effect on our business or financial position.
Service Marks and Trademarks
We, and our subsidiaries, have registered the service marks "Express
Scripts", "PERx", "ExpressTherapeutics", "IVTx", "PERxCare", "RxWorkbench",
"PTE", "InformRX", "M.U.S.I.C.", "ValueRx", "Value Health, Inc." and
"Diversified", among others, with the United States Patent and Trademark Office.
Our rights to these marks will continue so long as we comply with the usage,
renewal filing and other legal requirements relating to the renewal of service
marks. We are in the process of applying for registration of several other
trademarks and service marks. If we are unable to obtain any additional
registrations, we believe there would be no material adverse effect on our
business.
Insurance
Our PBM operations, including the dispensing of pharmaceutical products by
our mail service pharmacies, and the services rendered in connection with our
disease management and informed decision counseling services, and our non-PBM
operations, such as the products and services provided in connection with our
infusion therapy programs (including the associated nursing services), may
subject us to litigation and liability for damages. We believe that our
insurance protection is adequate for our present business operations, but there
can be no assurance that we will be able to maintain our professional and
general liability insurance coverage in the future or that such insurance
coverage will be available on acceptable terms or adequate to cover any or all
potential product or professional liability claims. A successful product or
professional liability claim in excess of our insurance coverage, or one for
which an exclusion from coverage applies, could have a material adverse effect
upon our financial position or results of operations.
Employees
As of February 1, 2001, we employed a total of 5,259 employees in the U.S.
and 87 employees in Canada. Approximately 652 of the U.S. employees are members
of collective bargaining units. Specifically, we employ members of the Service
Employees International Union at our Bensalem, Pennsylvania facility, members of
the United Auto Workers Union at our Farmington Hills, Michigan facility, and
members of the United Food and Commercial Workers Union at our Albuquerque, New
Mexico facility. We believe our relationships with our employees and our unions
are good.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of the Annual Report on Form 10-K, the
information regarding our executive officers required by Item 401 of Regulation
S-K is hereby included in Part I of this report.
Our executive officers and their ages as of March 1, 2001 are as
follows:
Name Age Position
Barrett A. Toan 53 Chairman of the Board,
President and Chief Executive
Officer
David A. Lowenberg 51 Chief Operating Officer
Terrence D. Arndt 57 Senior Vice President of Marketing
Stuart L. Bascomb 59 Executive Vice President - Sales
and Provider Relations and
Director
Thomas M. Boudreau 49 Senior Vice President, General
Counsel and Secretary
Mabel F. Chen 58 Senior Vice President and
Director of Site Operations
Edward J. Tenholder 49 Senior Vice President and Chief
Information Systems Officer
Mark O. Johnson 47 Senior Vice President of
Integration and Administration
Linda L. Logsdon 53 Executive Vice President of
Health Management Services
George Paz 45 Senior Vice President and Chief
Financial Officer
Joseph W. Plum 53 Vice President and Chief
Accounting Officer
Mr. Toan was elected Chairman of the Board of Directors in November 2000,
Chief Executive Officer in March 1992 and President and a director in October
1990.
Mr. Lowenberg was elected Express Scripts, Inc.'s Chief Operating Officer
in September 1999, and served as our Director of Site Operations from October
1994 until September 1999.
Mr. Arndt joined Express Scripts, Inc. and was elected Senior Vice
President of Marketing in April 1999. Prior to joining Express Scripts, Inc.,
Mr. Arndt was President and Chief Operating Officer of EDI USA from July 1997 to
April 1999. Mr. Arndt served as Vice President of Business Development for Card
Establishment Services, a former division of CitiBank, owned by the firm of
Welsh, Carson, Anderson and Stowe, from July 1994 to July 1997.
Mr. Bascomb was elected Executive Vice President in March 1989 and a
director in January 2000. Mr. Bascomb has served as Executive Vice President -
Sales and Provider Relations since May 1996 and served as Chief Financial
Officer and Treasurer from March 1992 until May 1996.
Mr. Boudreau was elected Senior Vice President, General Counsel and
Secretary in October 1994. He has served as General Counsel since June 1994.
Ms. Chen was elected Senior Vice President and Director of Site Operations
in November 1999. From March 1996 until November 1999, Ms. Chen served as Vice
President and General Manager of Express Scripts, Inc.'s Tempe facility. From
January 1995 until joining Express Scripts, Ms. Chen served as the Director of
Medicaid for the State of Arizona.
Mr. Tenholder was elected Senior Vice President and Chief Information
Systems Officer in December 2000. Mr. Tenholder served as Executive Vice
President and Chief Operating Officer of Blue Cross and Blue Shield of Missouri
from October 1997 to December 2000. From April 1994 to October 1997, Mr.
Tenholder was Senior Vice President, Client Services and Operations of Right
Choice Managed Care, Inc.
Mr. Johnson joined Express Scripts, Inc. and was elected Senior Vice
President of Integration in May 1999, and has served as Senior Vice President of
Integration and Administration since February 2000. Prior to joining Express
Scripts, Inc., Mr. Johnson served as President of DPS from May 1998 to April
1999 and Senior Vice President, Client Service and Sales of DPS from May 1997 to
May 1998. From August 1996 to May 1997, Mr. Johnson was President and Chief
Executive Officer of American Day Treatment Center, Inc. and also served as
Executive Vice President, Operations and Chief Operating Officer from March 1992
to August 1996.
Ms. Logsdon was elected Executive Vice President of Health Management
Services in May 1999, and served as Senior Vice President of Health Management
Services from May 1997 until May 1999. Ms. Logsdon served as Vice President of
Demand and Disease Management from November 1996 until May 1997. Prior to
joining Express Scripts, Inc. in November 1996, Ms. Logsdon served as Vice
President of Corporate Services and Chief Operating Officer of United
HealthCare's Midwest Companies-GenCare/Physicians Health Plan/MetraHealth, a St.
Louis-based health maintenance organization, from February 1995 to October 1996.
Mr. Paz joined Express Scripts, Inc. and was elected Senior Vice President
and Chief Financial Officer in January 1998. Prior to joining Express Scripts,
Inc., Mr. Paz was a partner in the Chicago office of Coopers & Lybrand from
December 1995 to December 1997.
Mr. Plum was elected Vice President in October 1994 and has served as Chief
Accounting Officer since March 1992 and Corporate Controller since March 1989.
Forward Looking Statements and Associated Risks
Information that we have included or incorporated by reference in this
Annual Report on Form 10-K, and information that may be contained in our other
filings with the SEC and our press releases or other public statements, contain
or may contain forward-looking statements. These forward-looking statements
include, among others, statements of our plans, objectives, expectations or
intentions.
Our forward-looking statements involve risks and uncertainties. Our actual
results may differ significantly from those projected or suggested in any
forward-looking statements. We do not undertake any obligation to release
publicly any revisions to such forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. Factors that might cause such a difference to occur
include, but are not limited to:
o risks associated with our ability to maintain internal growth
rates, or to control operating or capital costs
o continued pressure on margins resulting from client demands for
enhanced service offerings and higher service levels
o competition, including price competition, and our ability to
consummate contract negotiations with prospective clients, as
well as competition from new competitors offering services that
may in whole or in part replace services that we now provide to
our customers
o adverse results in regulatory matters, the adoption of new
legislation or regulations (including increased costs associated
with compliance with new laws and regulations, such as privacy
regulations under the Health Insurance Portability and
Accountability Act (HIPAA)), more aggressive enforcement of
existing legislation or regulations, or a change in the
interpretation of existing legislation or regulations
o the possible termination of contracts with key clients or
providers
o the possible loss of relationships with pharmaceutical
manufacturers, or changes in pricing, discount or other practices
of pharmaceutical manufacturers
o adverse results in litigation
o risks associated with our leverage and debt service obligations
o risks associated with our ability to continue to develop new
products, services and delivery channels
o 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 risks associated with our financial commitment relating to
the RxHub venture
o other risks described from time to time in our filings with the
SEC
These and other relevant factors, including any other information included or
incorporated by reference in this Report, and information that may be contained
in our other filings with the SEC, should be carefully considered when reviewing
any forward-looking statement. The occurrence of any of the following risks,
among others, could materially adversely affect our business, results of
operations and financial condition.
Failure to Maintain Internal Growth Rates, or to Control Operating or Capital
Costs, Could Adversely Affect Our Business
We have experienced rapid internal growth over the past several years. Our
ability to maintain this internal growth rate is dependent upon our ability to
attract new clients, achieve growth in the membership base of our existing
clients as well as cross-sell additional services to our existing clients. If we
are unable to continue our client and membership growth, and manage our
operating and capital costs, our results of operations and financial position
could be materially adversely affected.
Competition in the PBM Industry Could Reduce Our Client Membership and Our
Profit Margins
Pharmacy benefit management is a very competitive business. Our competitors
include large and well-established companies that may have greater financial,
marketing and technological resources than we do. One major competitor in the
PBM business, Merck-Medco is a large pharmaceutical manufacturer, which may give
them purchasing or other advantages over us by virtue of this ownership
structure, and enable them to succeed in taking away some of our clients.
Consolidation in the PBM industry, such as the recently completed acquisition of
PCS, Inc. by Advance Paradigm, Inc., may also lead to increased competition
among a smaller number of large PBM companies. Competition may also come from
other sources in the future, including from Internet-based connectivity
companies. We cannot predict what effect, if any, these new competitors may have
on the marketplace or on our business.
Over the last several years intense competition in the marketplace has
caused many PBMs, including us, to reduce the prices charged to clients for core
services and share a larger portion of the formulary fees and related revenues
received from pharmaceutical manufacturers with clients. This combination of
lower pricing and increased revenue sharing, as well as increased demand for
enhanced service offerings and higher service levels, has caused our operating
margins to decline. We expect to continue marketing our services to larger
clients, who typically have greater bargaining power than smaller clients. This
might create continuing pressure on our margins. We can give no assurance that
new services provided to these clients will fully compensate for these reduced
margins.
Changes in State and Federal Regulations Could Restrict Our Ability to Conduct
Our Business
Numerous state and federal laws and regulations affect our business and
operations. The categories include, but are not necessarily limited to:
o health care fraud and abuse laws and regulations, which prohibit
certain types of referral and other payments
o the Employee Retirement Income Security Act and related
regulations, which regulate many health care plans
o proposed comprehensive state PBM legislation
o consumer protection laws and regulations
o network pharmacy access laws, including "any willing provider"
and "due process" legislation, that regulate aspects of our
pharmacy network contracts
o legislation imposing benefit plan design
restrictions, which limit how our clients can design their drug
benefit plans
o various licensure laws, such as managed care and third party
administrator licensure laws
o drug pricing legislation,
including "most favored nation" pricing and "unitary pricing"
legislation
o mail pharmacy laws and regulations o privacy and
confidentiality laws and regulations, including those under the
Federal Health Insurance Portability and Accountability Act of
1996 ("HIPAA")
o Medicare prescription drug coverage proposals o
other Medicare and Medicaid reimbursement regulations
o potential regulation of the PBM industry by the U.S. Food and
Drug Administration
o pending legislation regarding importation of drug products into
the United States
These and other regulatory matters are discussed in more detail under "Business
- - Government Regulation" above.
We believe we are operating our business in substantial compliance with all
existing legal requirements material to the operation of our business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to our business, and we cannot provide any assurance
that a regulatory agency charged with enforcement of any of these laws or
regulations will not interpret them differently or, if there is an enforcement
action brought against us, that our interpretation would prevail. In addition,
there are numerous proposed healthcare laws and regulations at the federal and
state levels, many of which could materially affect our ability to conduct our
business or adversely affect our results of operations. We are unable to predict
what additional federal or state legislation or regulatory initiatives may be
enacted in the future relating to our business or the healthcare industry in
general, or what affect any such legislation or regulations might have on us.
We are aware through reports in the press and other sources that a U.S.
Assistant Attorney General in Philadelphia is conducting an investigation into
certain practices of PBMs. These reports have indicated that some of our PBM
competitors have received subpoenas in connection with this investigation during
1999. We have not received a subpoena or been requested to testify or produce
documents in connection with this investigation. Press reports indicate that a
possible subject of the investigation is contractual relationships between the
PBMs and pharmaceutical manufacturers. We cannot predict what effect, if any,
this investigation may ultimately have on us or on the PBM industry generally.
In December 2000, the Department of Health and Human Services 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 retained a consulting firm to assist us in assessing the steps we will
have to take in complying with these regulations, which provide for a two year
implementation period. While this assessment is not yet complete, we believe
compliance with these regulations will have a significant impact on our business
operations. We have not yet completed an assessment of the costs we will incur
in complying with these regulations, and can give no assurance that such costs
will not be material to us.
The federal Medicare program provides a comprehensive medical benefit
program for individuals age 65 and over, but currently covers only a few
outpatient prescription drugs. Currently key policy makers on both sides of the
political aisle have proposed various changes to the Medicare program that would
result in at least partial coverage for most prescription drugs. We believe that
a Medicare prescription drug benefit could provide us with substantial new
business opportunities, but at the same time any such program could adversely
affect other aspects of our business. For instance, some of our clients sell
medical policies to seniors that provide a prescription drug benefit that we
administer. Other clients provide a prescription drug benefit to their retirees.
Depending on the plan that is ultimately adopted, a Medicare prescription drug
benefit could make such policies or plans less valuable to seniors, adversely
affecting that segment of our business. While we believe that there would be
opportunities for new business under a Medicare plan that would more than offset
any adverse effects, we can give no assurance that this would be the case.
Failure to Retain Key Clients and Network Pharmacies Could Adversely Affect Our
Business and Limit Our Access to Retail Pharmacies
We currently provide PBM services to approximately 19,000 client groups.
Our acquisitions have diversified our client base and reduced our dependence on
any single client. Our top 10 clients, measured as of January 1, 2001, represent
approximately 29% of our total membership base, but no single client represents
more than approximately 5% of our membership base. Our contracts with clients
generally do not have terms of longer than three years and, in some cases, are
terminable by either party on relatively short notice. Our larger clients
generally distribute requests for proposals and seek bids from other PBM
providers in advance of the expiration of their contracts. If several of these
large clients elect not to extend their relationship with us, and we are not
successful in generating sales to replace the lost business, our future business
and operating results could be materially adversely affected. In addition, we
believe the managed care industry is undergoing substantial consolidation, and
another party that is not our client could acquire some of our managed care
clients. In such case, the likelihood such client would renew its PBM contract
with us could be reduced.
More than 55,000 retail pharmacies, which represent more than 99% of all
United States retail pharmacies, participate in one or more of our networks.
However, the top 10 retail pharmacy chains represent approximately 38% of the
55,000 pharmacies, with these pharmacy chains representing even higher
concentrations in certain areas of the United States. Our contracts with retail
pharmacies, which are non-exclusive, are generally terminable by either party on
relatively short notice. If one or more of the top pharmacy chains elects to
terminate its relationship with us, our members' access to retail pharmacies and
our business could be materially adversely affected. In addition, large pharmacy
chains either own PBMs today, or could attempt to acquire a PBM in the future.
Ownership of PBMs by retail pharmacy chains could have material adverse effects
on our relationships with such pharmacy chains and on our business and results
of operations.
Loss of Relationships with Pharmaceutical Manufacturers and Changes in the
Regulation of Discounts and Formulary Fees Provided to Us by Pharmaceutical
Manufacturers Could Decrease Our Profits
We maintain contractual relationships with numerous pharmaceutical
manufacturers that provide us with:
o discounts at the time we purchase the drugs to be dispensed from
our mail pharmacies
o formulary fees based upon sales of drugs from our mail pharmacies
and through pharmacies in our retail networks
o administrative fees based upon the development and maintenance of
formularies which include the particular manufacturer's products
These fees are all commonly referred to as formulary fees or formulary
management fees.
We also provide various services for, or services which are funded wholly
or partially by, pharmaceutical manufacturers. These services include:
o compliance programs, which involve instruction and counseling of
patients concerning the importance of compliance with the drug
treatment regimen prescribed by their physician
o therapy management programs, which involve education of patients
having specific diseases, such as asthma and diabetes, concerning
the management of their condition
o market research programs in which we provide information to
manufacturers concerning drug utilization patterns
These arrangements are generally terminable by either party on relatively short
notice. If several of these arrangements are terminated or materially altered by
the pharmaceutical manufacturers, our operating results could be materially
adversely affected. In addition, formulary fee programs, as well as some of the
services we provide to the pharmaceutical manufacturers, have been the subject
of debate in federal and state legislatures and various other public and
governmental forums. Changes in existing laws or regulations or in their
interpretations of existing laws or regulations or the adoption of new laws or
regulations relating to any of these programs, may materially adversely affect
our business.
Pending and Future Litigation Could Materially Affect Our Relationships with
Pharmaceutical Manufacturers or Subject Us to Significant Monetary Damages
Since 1993, retail pharmacies have filed over 100 separate lawsuits against
drug manufacturers, wholesalers and certain PBMs, challenging brand name drug
pricing practices under various state and federal antitrust laws. The plaintiffs
alleged, among other things, that the manufacturers had offered, and certain
PBMs had knowingly accepted, discounts and rebates on purchases of brand name
prescription drugs that violated the Federal Sherman Act. Some manufacturers
settled certain of these actions, including a Sherman Act case brought on behalf
of a nationwide class of retail pharmacies. The class action settlements
generally provided for commitments by the manufacturers in their discounting
practices to retail pharmacies. The defendants who did not settle won the
Sherman Act class action on a directed verdict. With respect to the cases filed
by plaintiffs who opted out of the class action, some drug manufacturers have
settled certain of these actions, but such settlements are not part of the
public record. The Robinson-Patman Act cases are still pending.
We are not currently a party to any of these proceedings. To date, we do
not believe any of these settlements have had a material adverse effect on our
business. However, we cannot provide any assurance that the terms of the
settlements will not materially adversely affect us in the future or that we
will not be made a party to any separate lawsuit. In addition, we cannot predict
the outcome or possible ramifications to our business of the Robinson-Patman Act
cases (see Item 3 - Legal Proceedings).
We are also subject to risks relating to litigation and liability for
damages in connection with our PBM operations, including the dispensing of
pharmaceutical products by our mail pharmacies, the services rendered in
connection with our formulary management and informed decision counseling
services, and our non-PBM operations, including the products and services
provided in connection with our infusion therapy programs (and the associated
nursing services). We believe our insurance protection is adequate for our
present operations. However, we cannot provide any assurance that we will be
able to maintain our professional and general liability insurance coverage in
the future or that such insurance coverage will be available on acceptable terms
to cover any or all potential product or professional liability claims. A
successful product or professional liability claim in excess of our insurance
coverage could have a material adverse effect on our business.
Our Leverage and Debt Service Obligations Could Impede Our Operations and
Flexibility
As of December 31, 2000, our net debt to net capitalization ratio is 32.7%,
which means that the amount of our outstanding debt is significant compared to
the net book value of our assets, and we have substantial interest expense and
future repayment obligations. As of December 31, 2000, we had total consolidated
debt of approximately $396.4 million. We may incur additional indebtedness in
the future.
Our level of debt and the limitations imposed on us by our debt agreements
could have important consequences, including the following:
o we will have to use a portion of our cash flow from operations
for debt service rather than for our operations
o we may from time to time incur indebtedness under our credit
facility, which is subject to a variable interest rate, making us
vulnerable to increases in interest rates
o we could be less able to take advantage of significant business
opportunities, such as acquisition opportunities, and react to
changes in market or industry conditions
o we could be more vulnerable to general adverse economic and
industry conditions
o we may be disadvantaged compared to competitors with less
leverage
Furthermore, our ability to satisfy our obligations, including our debt
service requirements, will be dependent upon our future performance. Factors
which could affect our future performance include, without limitation,
prevailing economic conditions and financial, business and other factors, many
of which are beyond our control and which affect our business and operations.
Our bank credit facility is secured by the capital stock of each of our
existing and subsequently acquired domestic subsidiaries, excluding Practice
Patterns Science, Inc., Great Plains Reinsurance Co., ValueRx of Michigan, Inc.,
Diversified NY IPA, Inc., and Diversified Pharmaceutical Services (Puerto Rico),
Inc., and 65% of the stock of our foreign subsidiaries. If we are unable to meet
our obligations under this bank credit facility, these creditors could exercise
their rights as secured parties and take possession of the pledged capital stock
of these subsidiaries. This would materially adversely affect our results of
operations and financial condition.
Failure to Continue to Develop New Products, Services and Delivery Channels May
Adversely Affect Our Business
We operate in a highly competitive environment. We, as well as our
competitors, continually develop new products and services to assist our clients
in managing the pharmacy benefit. If we are unsuccessful in continuing to
develop innovative products and services, our ability to attract new clients and
retain existing clients may suffer.
Technology is also an important component of our business, as we continue
to utilize new and better channels, such as the Internet, to communicate and
interact with our clients, members and business partners. If our competitors are
more successful than us in employing this technology, our ability to attract new
clients, retain existing clients and operate efficiently may suffer.
Efforts to Reduce Health Care Costs and Alter Health Care Financing Practices
Could Adversely Affect Our Business
Efforts are being made in the United States to control health care costs,
including prescription drug costs, in response to, among other things, increases
in prescription drug utilization rates and drug prices. If these efforts are
successful or if prescription drug utilization rates were to decrease
significantly, our business and results of operations could be materially
adversely affected.
We have designed our business to compete within the current structure of
the U.S. health care system. Changing political, economic and regulatory
influences may affect health care financing and reimbursement practices. If the
current health care financing and reimbursement system changes significantly,
our business could be materially adversely affected. Congress is currently
considering proposals to reform the U.S. health care system. These proposals may
increase governmental involvement in health care and PBM services, and otherwise
change the way our clients do business. Health care organizations may react to
these proposals and the uncertainty surrounding them by reducing or delaying
purchases of cost control mechanisms and related services that we provide. We
cannot predict what effect, if any, these proposals may have on our business.
Other legislative or market-driven changes in the health care system that we
cannot anticipate could also materially adversely affect our business.
Our Commitment to Invest in RxHub Could Impede Our Ability to Pursue Other
Opportunities
We have entered into a joint venture agreement with AdvancePCS and
Merck-Medco to form RxHub, which is designed to operate as a utility for the
conduit of information between pharmacies, PBMs and health plans. In doing so,
we have committed to invest up to $20 million over the next five years to fund
the venture. Committing our future cash flow to this investment my limit our
ability to invest in other opportunities.
Item 2 - Properties
We operate our United States and Canadian PBM and non-PBM businesses out of
leased facilities throughout the United States and Canada.
PBM Facilities Non-PBM Facilities
Maryland Heights, Missouri Maryland Heights, Missouri
Earth City, Missouri Columbia, Missouri
Tempe, Arizona Irvine, Texas
Bloomington, Minnesota Houston, Texas
Bensalem, Pennsylvania Columbia, Maryland
Troy, New York Springfield, New Jersey
Farmington Hills, Michigan West Chester, Pennsylvania
Albuquerque, New Mexico
Horsham, Pennsylvania
Mississauga, Ontario
Our Maryland Heights, Missouri facility houses our corporate offices.
Express Scripts Infusion Services and Specialty Distribution Services corporate
offices are also located at our Maryland Heights, Missouri facility. Specialty
Distribution Services is operated out of our facility in Maryland Heights,
Missouri. We believe our facilities have been generally well maintained and are
in good operating condition. Our existing facilities contain approximately
1,300,000 square feet in area, in the aggregate.
We own and lease computer systems at the processing centers. In late 1999,
we entered into a five year agreement with EDS to outsource our information
systems operations. Under the terms of the agreement, EDS has responsibility for
operating and maintaining the computer systems. Our software for drug
utilization review and other products has been developed internally by us or
purchased under perpetual, nonexclusive license agreements with third parties.
Our computer systems at each site are extensively integrated and share common
files through local and wide area networks. Uninterruptable power supply and
diesel generators allow our computers, telephone systems and mail pharmacy at
each major site to continue to function during a power outage. To protect
against loss of data and extended downtime, we store software and redundant
files at both on-site and off-site facilities on a regular basis and have
contingency operation plans in place. We cannot, however, provide any assurance
that our contingency or disaster recovery plans would adequately address all
relevant issues.
Item 3 - Legal Proceedings
As discussed in detail in our Quarterly Report on Form 10-Q for the period
ended June 30, 1998, filed with the Securities and Exchange Commission on August
13, 1998 (the "Second Quarter, 1998 10-Q"), we acquired all of the outstanding
capital stock of Value Health, Inc., a Delaware corporation ("Value Health"),
and Managed Prescription Network, Inc., a Delaware corporation ("MPN") from
HCA-The Healthcare Corporation (formerly, "Columbia HCA/HealthCare Corporation")
("HCA") and its affiliates on April 1, 1998 (the "Acquisition"). Value Health,
MPN and/or their subsidiaries (collectively, the "Acquired Entities"), were
party to various legal proceedings, investigations or claims at the time of the
Acquisition. The effect of these actions on our future financial results is not
subject to reasonable estimation because considerable uncertainty exists about
the outcomes. Nevertheless, in the opinion of management, the ultimate
liabilities resulting from any such lawsuits, investigations or claims now
pending should not materially affect our consolidated financial position,
results of operations or cash flows. A brief description of the most notable of
the proceedings follows:
Bash, et al. v. Value Health, Inc., et al., No. 3:97cv2711 (JCH)(D.Conn.)
("Bash"). On December 15, 1995, a purported shareholder class action lawsuit was
filed by Irwin Bash and Leykin, Hyman & Bash Associates in the United States
District Court for the District of New Mexico against Diagnostek, Inc.
("Diagnostek"), Nunzio P. DeSantis, William Baron, and Courtland Miller (all
former Diagnostek officers). Also named as defendants in Bash are Value Health,
Inc. ("Value Health"), Robert E. Patricelli, William J. McBride and Steven J.
Shulman (certain of Value Health's former officers). The Bash Complaint asserts
that Value Health and certain other defendants made false or misleading
statements to the public in connection with Value Health's acquisition of
Diagnostek in 1995, and that Diagnostek and certain of its former officers and
directors made false or misleading statements concerning its financial condition
prior to the acquisition by Value Health. The Bash Complaint asserts claims
under the Securities Act of 1933 and the Securities Exchange Act of 1934, as
well as common law claims, and seeks certification of a class consisting of all
persons (with certain exclusions) who purchased or otherwise acquired (a)
Diagnostek common stock from March 27, 1994 through July 28, 1995; (b) Value
Health common stock pursuant to a Proxy and Prospectus and merger in which their
Diagnostek shares were converted into Value Health shares; and (c) Value Health
common stock from March 27, 1995 through November 7, 1995. The Bash Complaint
does not specify the amount of damages sought. On March 26, 1996, the former
Diagnostek officers filed a motion seeking either dismissal of the case or a
transfer to the District of Connecticut, where the earlier-filed Freedman action
(discussed below) was pending. In the late summer of 1997, the Bash plaintiffs
filed an Amended Complaint that deleted those allegations that overlapped with
the allegations contained in an earlier lawsuit filed against Diagnostek and
certain of its former officers. A formal order approving the settlement of this
earlier lawsuit was entered by the United States District Court for the District
of New Mexico on November 21, 1997. In addition, defendants filed a renewed
motion to transfer the action to Connecticut. On October 24, 1997, an answer was
filed on behalf of Value Health, Diagnostek, and the former directors and
officers of Value Health who had been named as defendants. On November 28, 1997,
the New Mexico court entered an order transferring the action to Connecticut. On
February 4, 1998, the court ordered that plaintiffs in the Freedman action,
discussed below, share all discovery obtained from the defendants and third
parties in their lawsuit with the plaintiffs in the Bash lawsuit. On March 17,
1998, the defendants filed a motion to consolidate this lawsuit with the
Freedman lawsuit discussed below, and the court granted the motion on April 24,
1998.
Freedman, et al. v. Value Health, Inc., et al., No. 3:95 CV 2038
(JCH)(D.Conn). On September 22 and 25, 1995, two related lawsuits were filed
against Value Health and certain other defendants in the United States District
Court for the District of Connecticut. On February 16, 1996, a single,
consolidated class action complaint was filed covering both suits (the "Freedman
Complaint"), naming as defendants Value Health, Robert E. Patricelli, William J.
McBride, Steven J. Shulman, David M. Wurzer, David J. McDonnell, Walter J.
McNerny, Rodman W. Moorhead, III, Constance P. Newman, and John L. Vogelstein,
all former Value Health directors and officers, and Nunzio P. DeSantis, the
former president of Diagnostek. The Freedman Complaint alleges that Value Health
and certain other defendants made false or misleading statements to the public
in connection with Value Health's acquisition of Diagnostek in 1995. The
Freedman Complaint asserts claims under the Securities Act of 1933 and the
Securities Exchange Act of 1934, and seeks certification of a class consisting
of all persons (with certain exceptions) who purchased shares of Value Health
common stock during the period March 27, 1995 (the date certain adverse
developments were disclosed by Value Health). The Freedman Complaint does not
specify the amount of damages sought. On March 17, 1998, the defendants filed a
motion to consolidate this lawsuit with the Bash lawsuit, discussed above, and
the motion was granted on April 24, 1998.
In the consolidated Bash and Freedman action, the court granted plaintiffs'
motions for class certification and certified a class consisting of (i) all
persons who purchased or otherwise acquired shares of Value Health during the
period from April 3, 1995, through and including November 7, 1995, including
those who acquired shares in connection with the Diagnostek merger; and (ii) all
persons who purchased or otherwise acquired shares of Diagnostek during the
period from March 27, 1995, through and including July 28, 1995. Fact discovery
in the consolidated lawsuit is complete, and expert discovery will be completed
over the course of the next several months. Motions for summary judgment were
filed by both the plaintiffs and the defendants, and a hearing on the motions is
scheduled for February 28, 2001. No trial date has been set.
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.
In addition, in the ordinary course of our business, there have arisen
various legal proceedings, investigations or claims now pending against our
subsidiaries unrelated to the Acquisition and us. The effect of these actions on
future financial results is not subject to reasonable estimation because
considerable uncertainty exists about the outcomes. Nevertheless, in the opinion
of management, the ultimate liabilities resulting from any such lawsuits,
investigations or claims now pending will not materially affect our consolidated
financial position, results of operations or cash flows.
Since 1993, retail pharmacies have filed over 100 separate lawsuits against
drug manufacturers, wholesalers and certain PBMs, challenging brand name drug
pricing practices under various state and federal antitrust laws. The plaintiffs
alleged, among other things, that the manufacturers had offered, and certain
PBMs had knowingly accepted, discounts and rebates on purchases of brand name
prescription drugs that violated the federal Robinson-Patman Act. Some
plaintiffs also filed claims against the drug manufacturers and drug wholesalers
alleging a conspiracy not to discount pharmaceutical drugs in violation of
Section 1 of the Sherman Act, and these claims were certified as a class action.
Some of the drug manufacturers settled both the Sherman Act and the Robinson
Patman claims against them. The class action Sherman Act settlements generally
provide that the manufacturers will not refuse to pay discounts or rebates to
retail pharmacies based on their status as such. Settlements with plaintiffs who
opted out of the class are not part of the public record. The drug manufacturer
and wholesaler defendants in the class action who did not settle went to trial
and were dismissed by the court on a motion for directed verdict. That dismissal
was affirmed by the Court of Appeals for the Seventh Circuit. One aspect of the
case was remanded to the trial court and has now been dismissed. Plaintiffs who
opted out of the class action will still have the opportunity to try their
Sherman Act claims in separate lawsuits. The class action did not involve the
Robinson-Patman claims, so many of those matters are still pending. We are not a
party to any of these proceedings. To date, we do not believe any settlements
have had a material adverse effect on our business. However, we cannot provide
any assurance that the terms of the settlements will not materially adversely
affect us in the future. In addition, we cannot predict the outcome or possible
ramifications to our business of the cases in which the plaintiffs are trying
their claims separately, and we cannot provide any assurance that we will not be
made a party to any such separate lawsuits in the future.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters
Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters
Market Information. Our Class A Common Stock is traded on the Nasdaq
National Market ("Nasdaq") tier of The Nasdaq Stock Market under the symbol
"ESRX". The high and low prices, as reported by the Nasdaq, are set forth below
for the periods indicated.
Fiscal Year 2000 Fiscal Year 1999
Class A Common Stock High Low High Low
First Quarter $ 67.0000 $ 28.5000 $ 105.5000 $ 59.1250
Second Quarter 66.6250 34.6250 91.0000 55.0000
Third Quarter 78.0000 56.2500 92.3750 61.5000
Fourth Quarter 107.0000 63.7500 88.6875 44.3750
Our Class B Common Stock has no established public trading market and there
are no shares outstanding as of December 31, 2000.
Holders. As of January 31, 2001, there were 403 stockholders of record of
our Class A Common Stock. We estimate there are approximately 30,000 beneficial
owners of the Class A Common Stock.
Dividends. The Board of Directors has not declared any cash dividends on
our common stock since the initial public offering. The Board of Directors does
not currently intend to declare any cash dividends in the foreseeable future.
The terms of our existing credit facility and the indenture under which our
public debt was issued contain certain restrictions on our ability to declare or
pay cash dividends.
Recent Sales of Unregistered Securities
None.
Item 6 - Selected Financial Data
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and "Item 7
- --Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Year Ended December 31,
(in thousands, except per share data) 2000(2) 1999(3) 1998(4) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues:
Revenues $ 6,776,441 $ 4,285,104 $ 2,824,872 $ 1,230,634 $ 773,615
Other revenues 10,423 3,000 - - -
------------------------------------------------------------------------
6,786,864 4,288,104 2,824,872 1,230,634 773,615
-------------------------------------------------------- ---------------
Costs and expenses:
Cost of revenues 6,247,192 3,826,905 2,584,997 1,119,167 684,882
Selling, general and administrative 339,460 294,194 148,990 62,617 49,103
Non-recurring charges - 30,221 1,651 - -
------------------------------------------------------------------------
6,586,652 4,151,320 2,735,638 1,181,784 733,985
------------------------------------------------------------------------
Operating income 200,212 136,784 89,234 48,850 39,630
Other (expense) income, net (204,680) 128,682 (12,994) 5,856 3,450
------------------------------------------------------------------------
(Loss) income before income taxes (4,468) 265,466 76,240 54,706 43,080
Provision for income taxes 3,553 108,098 33,566 21,277 16,932
------------------------------------------------------------------------
(Loss) income before extraordinary loss (8,021) 157,368 42,674 33,429 26,148
Extraordinary loss on early retirement of
debt (1,105) (7,150) - - -
------------------------------------------------------------------------
Net (loss) income $ (9,126) $ 150,218 $ 42,674 $ 33,429 $ 26,148
========================================================================
Basic earnings per share:(1)
Before extraordinary loss $ (0.21) $ 4.36 $ 1.29 $ 1.02 $ 0.81
Extraordinary loss on early retirement of
debt (0.03) (0.20) - - -
-------------------------------------------------------------------------
Net (loss) income $ (0.24) $ 4.16 $ 1.29 $ 1.02 $ 0.81
=========================================================================
Diluted earnings per share:(1)
Before extraordinary loss $ (0.21) $ 4.25 $ 1.27 $ 1.01 $ 0.80
Extraordinary loss on early retiremen of
debt (0.03) (0.19) - - -
-------------------------------------------------------------------------
Net (loss) income $ (0.24) $ 4.06 $ 1.27 $ 1.01 $ 0.80
=========================================================================
Weighted average shares outstanding:(1)
Basic 38,196 36,095 33,105 32,713 32,160
Diluted(5) 38,196 37,033 33,698 33,122 32,700
- ------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $ 53,204 $ 132,630 $ 122,589 $ 64,155 $ 25,211
Working capital (117,775) (34,003) 117,611 166,062 128,259
Total assets 2,276,664 2,487,311 1,095,461 402,508 300,425
Debt:
Short-term debt - - 54,000 - -
Long-term debt 396,441 635,873 306,000 - -
Stockholders' equity 705,244 699,482 249,694 203,701 164,090
- -----------------------------------------------------------------------------------------------------------------------
Selected Data:
Pharmacy benefit covered lives(6) 43,500 48,000 23,500 12,300 10,000
Annual drug spending(7) $13,874,691 $11,160,389 $ 4,495,088 $ 2,486,380 $ 1,635,890
Network pharmacy claims processed 299,584 273,909 113,177 73,164 57,838
Mail pharmacy prescriptions filled 15,183 10,608 7,426 3,899 2,770
EBITDA(8) $ 278,827 $ 208,651 $ 115,683 $ 59,320 $ 46,337
Cash flows provided by operating activities $ 245,910 $ 214,059 $ 126,574 $ 52,391 $ 29,863
Cash flows (used in) investing activities $ (73,578) $ (759,576) $ (426,052) $ (16,455) $ (64,808)
Cash flows (used in) provided by
financing activities $ (251,627) $ 555,450 $ 357,959 $ 3,033 $ 48,652
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Earnings per share and weighted average shares outstanding have been
restated to reflect the two-for-one stock split effective October 30, 1998.
(2) Includes a non-cash write-off of $165,207 ($103,089 net of tax) of our
investment in PlanetRx. Includes an ordinary gain of $1,500 ($926 net of
tax) on the restructuring of our interest rate swap agreements. Excluding
these amounts, our basic and diluted earnings per share before extraordinary
loss would have been $2.46 and $2.41, respectively.
(3) Includes the acquisition of DPS effective April 1, 1999. Also includes
non-recurring operating charges and a one-time non-operating gain of $30,221
($18,188 net of tax) and $182,930 ($112,037 net of tax), respectively.
Excluding these amounts, our basic and diluted earnings per share before
extraordinary loss would have been $1.76 and $1.72, respectively.
(4) Includes the acquisition of ValueRx effective April 1, 1998. Also includes a
non-recurring charge of $1,651 ($1,002 net of tax). Excluding this charge,
our basic and diluted earnings per share would have been $1.32 and $1.30,
respectively.
(5) In accordance with FAS 128, basic weighted average shares were used to
calculate 2000 diluted EPS as the 2000 net loss and the actual diluted
weighted average shares (39,033 as of December 31, 2000) cause diluted EPS
to be anti-dilutive.
(6) Reflects the addition or loss of members to arrive at January 1, 2001, 2000,
1999, 1998 or 1997 membership. In computing the number of lives we serve we
make certain estimates and adjustments. We believe different PBMs use
different factors in making these estimates and adjustments. We also
believe, however, that these numbers are a reasonable approximation of the
actual number of lives served by us.
(7) Drug spending is a measure of the gross aggregate dollar value of drug
expenditures of all programs managed by us. The difference between annual
drug spending and revenue reported by us is the combined effect of excluding
from reported revenues:
o the drug ingredient cost for those clients that have established
their own pharmacy networks
o the expenditures for drugs of those companies on formulary-only
programs managed by us
o the co-pay portion of drug expenditures that are the
responsibility of members of health plans serviced by us
Therefore, drug spending provides a common basis to quantify the drug
expenditures managed by a company. Drug spend, however, is not an accepted
reporting measurement under generally accepted accounting principles and
should not be considered as an alternative to revenue.
(8) EBITDA is earnings before other income (expense), interest, taxes,
depreciation and amortization, or operating income plus depreciation and
amortization. EBITDA is presented because it is a widely accepted indicator
of a company's ability to incur and service indebtedness. EBITDA, however,
should not be considered as an alternative to net income, as a measure of
operating performance, as an alternative to cash flow or as a measure of
liquidity. In addition, our calculation of EBITDA may not be identical to
that used by other companies.
</FN>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
We derive our revenues primarily from the sale of pharmacy benefit
management ("PBM") services in the United States and Canada. Our PBM revenues
generally include administrative fees, dispensing fees and ingredient costs of
pharmaceuticals dispensed from retail pharmacies included in one of our networks
or from one of our mail pharmacies, and the associated costs are recorded in
cost of revenues (the "Gross Basis"). Where we only administer the contracts
between our clients and the clients' network pharmacies, we record as revenues
only the administrative fee we receive from our activities (the "Net Basis"). We
also derive PBM revenues from the sale of informed decision counseling services
through our Express Health LineSM division, and the sale of medical information
management services (which include the development of data warehouses to combine
medical claims and prescription drug claims), disease management support
services and quality and outcomes assessments through our Health Management
Services ("HMS") division and Practice Patterns Science, Inc. ("PPS")
subsidiary.
Non-PBM revenues are derived from administrative fees received from drug
manufacturers for the dispensing or distribution of pharmaceuticals requiring
special handling or packaging through our Express Scripts Specialty Distribution
Services subsidiary ("SDS"). Non-PBM revenues are also generated from the sale
of pharmaceuticals for and the provision of infusion therapy services through
our Express Scripts Infusion Services subsidiary.
Reflecting the addition of new client groups at January 1, 2001, our
membership was approximately 43.5 million members compared to approximately 38.5
million members as of January 1, 2000, representing a 13.0% increase. The
membership count excludes 9.5 million members at January 1, 2000 served under
the United HealthCare ("UHC") contract, which expired on May 31, 2000. We
developed a migration plan to transition the UHC members to their new provider
throughout 2000. The migration is now complete. The increase in membership from
January 1, 2000 is due in part to the addition of new clients such as the State
of Georgia. Additionally, we continue to develop new products and services for
sale to existing clients and pharmaceutical manufacturers and expand the
services provided to existing clients. During 2000, approximately 6.3 million
members began utilizing expanded services that provide for more advanced
formulary management and the addition of mail and network services where only
one or two of these services were previously utilized. In 1999, we increased
membership by approximately 15.0 million members from 23.5 million members as of
January 1, 1999, representing a 63.8% increase. This increase excludes the
impact of approximately 9.5 million UHC members added during 1999. The increase
from January 1, 1999 is primarily due to our second major acquisition on April
1, 1999, discussed below. The increase in membership in 1998 was primarily due
to the purchase of ValueRx on April 1, 1998. In computing the number of lives we
serve we make certain estimates and adjustments. We believe different PBMs use
different factors in making these estimates and adjustments. We also believe,
however, that these numbers are a reasonable approximation of the actual number
of lives served by us.
As previously discussed, on April 1, 1999, we acquired Diversified
Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto
Rico) Inc. (collectively, "DPS"), from SmithKline Beecham Corporation
("SmithKline Beecham") and SmithKline Beecham InterCredit BV for approximately
$715 million, which includes a purchase price adjustment for closing working
capital and transaction costs. On April 1, 1998, we consummated our first major
acquisition by acquiring Value Health, Inc. and Managed Prescription Network,
Inc. (collectively, "ValueRx"), the PBM operations of HCA-The Healthcare
Corporation (formerly, "Columbia/HCA Healthcare Corporation"), for approximately
$460 million in cash, which includes transaction costs and executive management
severance costs of approximately $6.7 million and $8.3 million, respectively.
Consequently, our operating results include those of DPS from April 1, 1999 and
ValueRx from April 1, 1998. The net assets acquired from DPS and ValueRx have
been recorded at their estimated fair value, resulting in $754,236,000 and
$278,113,000 of goodwill, respectively, that is being amortized over 30 years.
Both acquisitions have been accounted for under the purchase method of
accounting.
RESULTS OF OPERATIONS
REVENUES
Year Ended December 31,
Increase/
(in thousands) 2000 (Decrease) 1999 Increase 1998
- --------------------------------------------------------------------------------------------------------------
Gross Basis revenues $ 6,483,866 61.8% $ 4,007,077 46.1% $ 2,742,485
Net Basis revenues 204,531 (3.6)% 212,217 837.9% 22,626
Other revenues 10,423 247.4% 3,000 nm -
----------------------------------------------------------------------
Total PBM revenues 6,698,820 58.7% 4,222,294 52.7% 2,765,111
Non-PBM revenues 88,044 33.8% 65,810 10.1% 59,761
----------------------------------------------------------------------
Total revenues $ 6,786,864 58.3% $ 4,288,104 51.8% $ 2,824,872
======================================================================
nm = not meaningful
Our growth in PBM revenues during 2000 over 1999 is primarily due to a
combination of the following factors: the conversion of historical Express
Scripts and DPS clients to our own retail pharmacy networks; higher utilization;
increased membership; the conversion of certain clients to a manufacturer
formulary management program in which we derive an administrative fee for our
services, which is recorded in revenue, from a program whereby amounts received
from pharmaceutical manufacturers are recorded as a reduction of cost of
revenues; higher drug ingredient costs resulting from price increases for
existing drugs and new drugs introduced into the marketplace; and DPS revenues
being reported for all of 2000 compared to only nine months of 1999. These
increases were slightly offset by the reduction in Net Basis revenues received
under the UHC contract since its termination in May 2000. Our growth in PBM
revenues during 1999 over 1998 is primarily due to the inclusion of ValueRx for
the full twelve months of 1999 compared to only nine months of 1998, the
inclusion of DPS for nine months of 1999, increased member utilization and
higher drug ingredient costs resulting from price increases for existing drugs,
new drugs introduced into the marketplace and changes in therapeutic mix and
dosage.
Revenues for network pharmacy claims increased $1,813,434,000, or 59.6%, in
2000 over 1999 and $1,039,588,000, or 51.8%, in 1999 over 1998. Network pharmacy
claims processed increased 9.4% to 299,584,000 in 2000 over 1999. The average
revenue per network pharmacy claim increased 46.4% to $16.28 over 1999 primarily
as a result of the increased rate of historical Express Scripts and DPS clients
moving from retail pharmacy networks contracted by the clients to one contracted
by us. 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. During 1999, network pharmacy claims processed increased
273,909,000 over 1998. The average revenue per network pharmacy claim decreased
37.2% in 1999 from 1998 primarily due to the acquisition of DPS, as the DPS
contracts required us to record revenue on the Net Basis which substantially
reduces the average revenue per network pharmacy claim. Excluding DPS, the
average revenue per network pharmacy claim increased 8.2% over 1998.
Mail pharmacy services revenues and mail pharmacy services prescriptions
filled increased $631,914,000, or 56.1% and 4,575,000, or 43.1%, respectively,
during 2000 over 1999. These increases are primarily due to the addition of new
members with high mail utilization rates, the cross-selling of mail pharmacy
services and increased utilization by existing members. Revenues for mail
pharmacy services increased $389,244,000, or 52.8%, in 1999 over 1998 as a
result of the growth in mail pharmacy claims processed of 3,182,000, or 42.8% in
1999 over 1998. These increases are primarily due to the acquisitions of ValueRx
and DPS, increased utilization by existing members as well as the addition of
new members. The average revenue per mail pharmacy claim increased 9.1% in 2000
over 1999 and 7.0% in 1999 over 1998 primarily due to higher drug ingredient
costs as stated above.
Other revenue increased $7,423,000 during 2000 over 1999 due to fees
received under our agreement with PlanetRx.com, Inc. ("PlanetRx"), which became
effective in December 1999. Effective July 5, 2000 we restructured our agreement
with PlanetRx in exchange for a one-time cash payment of $8,000,000.
Approximately $3,700,000 of the payment represents amounts earned through the
second quarter of 2000, the remaining $4,300,000 represents a fee for the
termination of the prior contract. No additional cash payments will be paid to
us under the restructured agreement.
The increase in revenue for non-PBM services during 2000 compared to 1999
is primarily due to additional volume within SDS resulting from a new contract
that took effect during the fourth quarter of 1999. The increase in revenue for
non-PBM services in 1999 is primarily due to additional business within SDS and
continued changes in the product mix sold in our Infusion Services business that
resulted in higher drug ingredient costs. This increase was partially offset by
the reduction in revenue from our managed vision business due to the
restructuring of this operation during 1999.
COSTS AND EXPENSES
Year Ended December 31,
(in thousands) 2000 Increase 1999 Increase 1998
- --------------------------------------------------------------------------------------------------------------
PBM cost of revenues $ 6,186,415 63.9% $ 3,774,618 48.6% $ 2,540,360
Percentage of total PBM revenues 92.4% 89.4% 91.9%
Non-PBM cost of revenues 60,777 16.2% 52,287 17.1% 44,637
Percentage of non-PBM revenues 69.0% 79.5% 74.7%
------------------------------------------------------------------
Total Cost of revenues 6,247,192 63.2% 3,826,905 48.0% 2,584,997
Percentage of total revenues 92.0% 89.2% 91.5%
Selling, general and administrative 272,049 17.5% 231,543 78.0% 130,116
Percentage of total revenues 4.0% 5.4% 4.6%
Depreciation and amortization(1) 67,411 7.6% 62,651 231.9% 18,874
Percentage of total revenues 1.0% 1.5% 0.7%
Non-recurring expenses - nm 30,221 1,730.5% 1,651
Percentage of total revenues 0.0% 0.7% 0.1%
----------------------------------------------------------------------
Total costs and expenses $ 6,586,652 58.7% $ 4,151,320 51.7% $ 2,735,638
======================================================================
Percentage of total revenues 97.1% 96.8% 96.8%
<FN>
(1) Represents depreciation and amortization expense included in selling,
general and administrative expenses on our Statement of Operations. Cost of
revenues, above, also includes depreciation and amortization expense on property
and equipment of $11,204, $9,216 and $7,575 for the years ended 2000, 1999 and
1998, respectively.
</FN>
nm = not meaningful
Our cost of revenues for PBM services as a percentage of total PBM revenues
has increased during 2000 over 1999 primarily due to converting both historical
Express Scripts and DPS clients from pharmacy networks contracted by the client
to one contracted by us, for which we record the drug ingredient cost in cost of
revenues (see further discussion under "--Overview"), continued margin pressures
due to pricing, and changes in the product mix. These increases in cost of
revenues were partially offset by increases in amounts received from
pharmaceutical manufacturers for our formulary management programs during 2000.
Cost of revenues for PBM services as a percentage of total PBM revenues
decreased in 1999 from 1998 primarily due to the acquisition of DPS, as
discussed above, DPS recorded revenues under the Net Basis. Excluding DPS, the
gross margin percentage for the year ended December 31, 1999 decreased to 7.4%
from 8.1% for the year ended December 31, 1998. The decrease is primarily due to
the conversion of historical Express Scripts clients from pharmacy networks
contracted by the client to one contracted by us, lower drug ingredient margins
resulting from changes in therapeutic mix, lower pricing offered to clients and
increased formulary management revenue sharing partially offset by improving
margins from our HMS business.
Cost of revenues for non-PBM services decreased as a percentage of non-PBM
revenues in 2000 from 1999 primarily due to additional volume of business within
SDS, which represents a larger percentage of non-PBM revenues, where we record
as revenue only our administrative fee for distributing pharmaceutical
manufacturers' products. SDS has also been able to derive operating cost
efficiencies as a result of the increase in volume serviced under the contract
that took effect in the fourth quarter of 1999, as discussed above. Cost of
revenues for non-PBM services increased as a percentage of non-PBM revenues over
1998 primarily due to the continued change in product mix sold, resulting in
additional costs of approximately $2,141,000. In addition, cost of revenues from
SDS increased 88.9% over 1998 as a result of establishing a new facility to
support a larger operation.
Selling, general and administrative expenses, excluding depreciation and
amortization, increased $40,506,000, or 17.5%, in 2000 over 1999 and
$101,427,000, or 78.0%, in 1999 over 1998. The increase in 2000 is primarily due
to expenditures required to expand the operational and administrative support
functions to enhance management of the pharmacy benefit as well as the inclusion
of DPS for a full twelve months during 2000 versus nine months of 1999. The
increase in 1999 is primarily due to our acquisition of DPS, costs incurred
during the integration of DPS and ValueRx, costs incurred in funding our
information technology enhancements, costs required to expand the operational
and administrative support functions to enhance management of the pharmacy
benefit, and the inclusion of ValueRx for a full twelve months. During 2000,
1999 and 1998, we capitalized $36,518,000, $15,997,000 and $10,244,000,
respectively, in new systems development costs. However, as a percentage of
total revenues, selling, general and administrative expenses, excluding
depreciation and amortization, for 2000 decreased to 4.0% from 5.4% in 1999 and
4.6% in 1998 due to converting clients to networks contracted by us.
Depreciation and amortization increased during 2000 over 1999 due to the
expansion of our operations and enhancement of our information systems to better
serve our clients. This increase was slightly offset by the decrease in
amortization of customer contracts as a result of the UHC customer contract
intangible asset being fully amortized during 2000. The remaining increase in
2000 was primarily due to the acquisition of DPS, as 1999 only included
amortization of the DPS goodwill and other intangible assets for nine months.
Depreciation and amortization substantially increased during 1999 over 1998 due
to the acquisitions of DPS and ValueRx. During 2000, we recorded amortization
expense for goodwill and other intangible assets of $53,638,000 compared to
$53,297,000 in 1999 and $12,183,000 in 1998.
During 1999, we recorded the following items in our Consolidated Statement
of Operations in the non-recurring charges line (there were no such items during
2000):
o During the second quarter of 1999, we incurred a
$9,400,000 charge for the consolidation of our
Plymouth, Minnesota facility into our Bloomington,
Minnesota facility. In December 1999 and September
2000, the associated accrual was reduced by $2,301,000
and $44,000, primarily as a result of subleasing a
portion of the unoccupied space. The consolidation plan
included the relocation of all employees at the
Plymouth facility to the Bloomington facility that
began in August 1999, with completion delayed until the
first quarter of 2001. Included in the charge were
anticipated cash expenditures of approximately
$4,779,000 for lease termination fees and rent on
unoccupied space to be paid through April 2001 and
anticipated non-cash charges of approximately
$2,276,000 for the write-down of leasehold improvements
and furniture and fixtures. The charge does not include
any costs associated with the physical relocation of
the employees.
o During December 1999, we recorded a pre-tax
restructuring charge of $2,633,000 associated with the
outsourcing of our computer operations to Electronic
Data Systems Corporation. The principal actions of the
plan included cash expenditures of approximately
$2,148,000 for the transition of 51 employees to the
outsourcer and the elimination of contractual
obligations of ValueRx, which had no future economic
benefit to us, and non-cash charges of approximately
$485,000 due to the reduction in the carrying value of
certain capitalized software to its net realizable
value. This plan was completed during the second
quarter of 2000 when remaining cash payments were made.
o Also in December 1999, we recorded a pre-tax
restructuring charge of $969,000 associated with
restructuring our PPS majority-owned subsidiary and the
purchase of the remaining PPS common stock from
management. The charge consisted of cash expenditures
of $559,000 relating to stock compensation expense and
$410,000 of severance payments to 9 employees. This
plan was completed in January 2000.
o In conjunction with the sale of the assets of
YourPharmacy.com, Inc. to PlanetRx, we recorded a
$19,520,000 stock compensation charge relating to
former YourPharmacy.com employees. The amount of the
charge was determined using the initial public offering
price of $16 per share for PlanetRx common stock.
OTHER INCOME (EXPENSE), NET
Our interest expense, net has decreased $14,775,000 during 2000 compared to
1999. The decrease is a result of utilizing the $299,378,000 proceeds from our
June 1999 common stock offering to repay a portion of our credit facility, as
well as utilizing $344,131,000 of our own cash to pay-down our credit facility
from June 1999 through December 31, 2000. Associated with the prepayment of our
loans during 2000, we recorded an ordinary gain in interest expense of $1.5
million due to the restructuring of our interest rate swap agreements (see
"--Market Risk"). Additionally, we have repurchased $10,115,000 of our Senior
Notes as of December 31, 2000 (see "--Liquidity and Capital Resources").
Interest expense, net increased in 1999 over 1998 primarily due to the debt
incurred to purchase DPS (see "--Liquidity and Capital Resources").
During 2000, we recorded a $165,207,000 ($103,089,000 net of tax) non-cash
impairment charge on our investment in PlanetRx common stock as the loss in
value was deemed to be other than temporary. Any unrealized loss associated with
recording our investment in PlanetRx at current market value previously recorded
in stockholders' equity was written off to the current period earnings, in
addition to any additional charges necessary to write-off our investment in
accordance with Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Additionally, during 2000, we made charitable donations of 200,000 shares of our
PlanetRx common stock (after giving effect to the December 4, 2000 8-for-1
reverse stock split) and realized selling, general and administrative expense
related to the donation of approximately $713,000. Therefore, our ownership of
PlanetRx as of December 31, 2000 consists of approximately 1,096,000 common
shares, or 17.8%, of PlanetRx common shares outstanding (after giving effect to
the December 4, 2000 8-for-1 reverse stock split) which are carried at no value.
During 1999, we recognized a one-time non-cash gain of $182,930,000 related
to the sale of the assets of YourPharmacy.com, Inc. in exchange for a 19.9%
ownership interest in PlanetRx.
PROVISION FOR INCOME TAXES
Our effective tax rate for 2000 is a negative 79.5% compared to a positive
40.7% for 1999. Excluding the tax effect of the marketable securities write-off
and the ordinary gain on the restructuring of our swaps (see "--Liquidity and
Capital Resources") in 2000, and the one-time gain (see "--Other Income
(Expense), Net") and non-recurring items (see "--Cost and Expenses") in 1999,
our effective tax rates would have been 40.9% and 43.7% for 2000 and 1999. Our
effective tax rates also decreased in 1999 to 40.7% from 44.0% in 1998. These
decreases are primarily due to the reduction in the non-deductible goodwill and
customer contract amortization expense associated with the ValueRx acquisition
as a percentage of income before income taxes. The goodwill and customer
contract amortization for the DPS acquisition is deductible for income tax
purposes due to the filing of an Internal Revenue Code ss.338(h)(10) election.
NET INCOME AND EARNINGS PER SHARE
Our net income decreased $159,344,000, or 106.1%, in 2000 from 1999, and
increased $107,544,000, or 252.0%, in 1999 over 1998. Net income was
affected by the following one-time items:
Year Ended December 31, 2000
o A non-cash impairment charge during the second and
fourth quarters of 2000 totaling $165,207,000
($103,089,000 net of tax) relating to our PlanetRx
investment (see "--Other Income (Expense), Net")
o An extraordinary loss on the early retirement of debt
due to the write-off of deferred financing fees during
the third and fourth quarters of 2000 totaling
$1,790,000 ($1,105,000 net of tax) discussed in
"--Liquidity and Capital Resources"
o An ordinary gain in the amount of $1,500,000 ($926,000
net of tax) on the restructuring of our interest rate
swap agreements related to the early retirement of debt
in the third quarter of 2000 (see "--Market Risk") Year
Ended December 31, 1999
o Non-recurring charges discussed in "--Cost and
Expenses" totaling $30,221,000 ($18,188,000 net of tax)
o One-time gain of $182,930,000 ($112,037,000 net of tax)
discussed in "--Other Income (Expense), Net"
o An extraordinary loss on the early retirement of debt
during the second and third quarters of 1999 totaling
$11,642,000 ($7,150,000 net of tax)
Excluding these one-time items and excluding financing costs on the
temporary debt associated with the acquisition of DPS after assuming our equity
and Senior Notes offerings had been completed on April 1, 1999, net income for
2000 would have been $94,142,000, or $2.46 per basic share and $2.41 per diluted
share, compared to $63,519,000, or $1.81 per basic share and $1.77 per diluted
share for 1999, respectively.
Basic and diluted weighted average shares outstanding for 2000 increased
5.8% and 3.1%, respectively, over 1999. The increase for both basic and diluted
shares outstanding is primarily related to the exercise of stock options during
2000.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, net cash provided by operations increased $31,851,000 to
$245,910,000 from $214,059,000 in 1999. This increase is primarily due to
increased profitability, excluding the effect of the non-cash write-off of our
investment in PlanetRx stock (see "--Other Income (Expense), Net"), and bringing
our inventory levels down after increasing our inventory during the fourth
quarter of 1999 for our mail pharmacies' anticipation of potentially higher
demand due to our members' Year 2000 concerns.
Days sales outstanding ("DSO") increased slightly to 31.2 days at
December 31, 2000 from 27.7 days at December 31, 1999, but is still down from
36.9 days at December 31, 1998 due to the acquisition of DPS. Gross revenues
must be used to calculate DSO due to the impact of the Gross Basis versus the
Net Basis of recording revenues, as discussed in "--Overview" and "--Revenues".
The accounts receivable balance includes the cost of the pharmaceutical
dispensed, which may not be included in revenues, as required by generally
accepted accounting principles, based on the contractual terms embedded in
client and pharmacy contracts. The following table presents our DSO for the
years ended:
December 31,
(in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Total revenues $ 6,786,864 $ 4,288,104 $ 2,824,872
Client/pharmacy pass through 2,812,150 3,570,108 726,960
---------------- ---------------- ---------------
Gross revenues $ 9,599,014 $ 7,858,212 $ 3,551,832
================ ================ ===============
Average monthly gross receivables $ 818,551 $ 597,160 $ 359,423
================ ================ ===============
DSO 31.2 27.7 36.9
================ ================ ===============
Our allowance for doubtful accounts has increased $5,396,000, or 31.2%, to
$22,677,000 at December 31, 2000 from $17,281,000 at December 31, 1999 primarily
due to increased reserves for infusion services business. As a percentage of at
risk receivables (which represent receivables for which there is no
corresponding payable obligation), the allowance for doubtful accounts was 3.2%
at December 31, 2000 compared to 2.6% at December 31, 1999 and 3.9% at December
31, 1998. The percentage reduction from December 31, 1998 to December 31, 1999
is attributable to the final adjustment, in accordance with generally accepted
accounting principles, to the ValueRx opening balance sheet allowance for
doubtful accounts and goodwill based upon the actual collection of ValueRx
receivables.
Our investment in net working capital decreased significantly to a
$117,775,000 deficit from a $34,003,000 deficit as of December 31, 1999 and a
$117,611,000 excess as of December 31, 1998. This reduction in 2000 is primarily
due to our reduction in cash through our capital expenditures and debt
prepayments (discussed below) as well as timing of collections and payments.
We previously announced that we anticipated our cash flow from operations
would be temporarily reduced due to the termination of the UHC contract during
the third quarter of 2000. We subsequently negotiated a revision to the
previously announced transition plan with UHC which extended the transition
period and delayed the anticipated temporary cash reduction through the first
quarter of 2001. The transition of UHC members was completed by December 31,
2000. We expect to fund the remaining payables associated with the termination
of the UHC contract in 2001 primarily with operating cash flow. We will continue
to utilize our operating cash flows for future debt prepayments, possible stock
repurchases, integration costs, technology initiatives and other normal
operating cash needs as we deem appropriate.
Our capital expenditures in 2000 increased $43,260,000, or 117.1%, over
1999 primarily due to our concerted effort to invest in our information
technology to enhance the services provided to our clients, the continued
renovation of our St. Louis operations facilities and integration related
activities as a result of our acquisitions. We expect to continue investing in
technology that will provide efficiencies in operations, manage growth and
enhance the service provided to our clients. We expect to fund future
anticipated capital expenditures primarily with operating cash flow or, to the
extent necessary, with working capital borrowings under our $300 million
revolving credit facility, discussed below. The $13,105,000 increase in 1999
capital expenditures over 1998 was due to the aforementioned items as well as
the completion of our corporate headquarters.
During September 2000, we sold our Albuquerque, New Mexico property and
building for $7,806,000. These assets were then leased back from the purchaser
over a period of 10 years with the option to extend the terms up to an
additional 10 years. The resulting lease is being accounted for as an operating
lease, and the resulting deferred gain of $4,136,000 is being amortized over the
10 year life of the lease.
During 2000, we utilized our own internally generated cash to repay $100
million on our bank revolving credit facility (described below), to prepay $130
million of our Term A loans (described below), to repurchase $10,115,000 of our
Senior Notes on the open market and to repurchase 790,000 shares of our Class A
Common Stock for $30,247,000. As of December 31, 2000, we have repurchased a
total of 1,265,000 shares of our Class A Common Stock under the stock repurchase
program that we announced on October 25, 1996. Our Board of Directors approved
the repurchase of up to 2,500,000 shares, and placed no limit on the duration of
the program. Additional debt repayments or common stock repurchases, if any,
will be made in such amounts and at such times as we deem appropriate based upon
prevailing market and business conditions, subject to restrictions on stock
repurchases contained in our bank credit facility and the Indenture which
governs our Senior Notes.
We have a credit facility with a commercial bank syndicate consisting of
$155 million of Term A loans and a $300 million revolving credit facility. As a
result of the prepayment of our Term A loans noted above, we recorded an
extraordinary charge during 2000 for the deferred financing fees in the amount
of $1,105,000, net of tax. The prepayments on the Term A loans eliminate the
scheduled principal payments for fiscal years 2001, 2002 and a portion of the
scheduled principal payment for fiscal year 2003. Beginning in March 2003, we
are required to make annual principal payments on the Term A loans of
$26,750,000 in 2003, $62,700,000 in 2004 and $65,550,000 in 2005. The capital
stock of each of our existing and subsequently acquired domestic subsidiaries,
excluding PPS, Great Plains Reinsurance Co., ValueRx of Michigan, Inc.,
Diversified NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico),
Inc., and 65% of the stock of our foreign subsidiaries have been pledged as
collateral for the credit facility.
Our credit facility requires us to pay interest quarterly on an interest
rate spread based on several London Interbank Offered Rates ("LIBOR") or base
rate options. Using a LIBOR spread, the Term A loans had an interest rate of
7.52% on December 31, 2000. During 2000, the LIBOR interest rate spread was
reduced to 1.0% based upon calculations set forth in our credit facility. To
alleviate interest rate volatility, we have entered into two separate 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 ($300 million at December 31, 2000). At December 31, 2000, we
are in compliance with all covenants associated with the credit facility.
In June 1999, we issued $250 million of 9.625% Senior Notes due 2009, which
require interest to be paid semi-annually on June 15 and December 15. The Senior
Notes are callable at specified prepayment premiums beginning in June 2004. The
Senior Notes are unconditionally and jointly and severally guaranteed by our
wholly-owned domestic subsidiaries other than PPS, Great Plains Reinsurance Co.,
ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and Diversified
Pharmaceutical Services (Puerto Rico), Inc. During the second quarter of 2000,
we repurchased $10,115,000 of our Senior Notes on the open market for
$10,150,000, which includes $385,000 of accrued interest.
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 new acquisitions
or affiliations in 2001 or thereafter.
OTHER MATTERS
On February 22, 2001, we announced that we entered into an agreement with
AdvancePCS and Merck-Medco to form RxHub LLC ("RxHub"). RxHub is intended to
develop an electronic exchange enabling physicians who use electronic
prescribing technology to link to pharmacies, PBMs and health plans, which their
patients use. The company is designed to operate as a utility for the conduit of
information among all parties engaging in electronic prescribing. We will own
one-third of the equity of RxHub (as will each of the other two founders), and
have committed to invest up to $20 million over the next five years with
approximately $6 million committed for 2001. We will record our investment in
RxHub under the equity method of accounting, which requires our percentage
interest in RxHub's results to be recorded in our Consolidated Statement of
Operations. RxHub will be operated to cover its expected operating costs and to
return the cost of capital to the founders.
As previously announced the shareholders of Centre d'autorisation et de
paiement des services de sante, a leading Quebec-based PBM commonly referred to
as CAPSS, accepted an offer made by our Canadian subsidiary, ESI Canada, Inc.,
to acquire all of the outstanding shares of CAPSS, subject to satisfaction of
certain conditions, for approximately CAN$25 million (approximately US$16.5
million). The transaction, which will be accounted for under the purchase method
of accounting, will be funded with our operating cash flow. We expect to close
the transaction during March 2001 and it will add approximately 1.5 million
lives to ESI Canada's membership base. The transaction is not expected to be
dilutive to earnings in 2001 and is expected to be slightly accretive in 2002.
Prior to November 7, 2000, NYLife Healthcare Management, Inc., a subsidiary
of New York Life Insurance Company, owned all of our outstanding shares of Class
B Common Stock. On November 7, 2000, NYLife Healthcare Management, Inc.
exchanged each outstanding share of Class B Common Stock for one share of our
Class A Common Stock and then immediately distributed such shares to NYLIFE LLC,
another subsidiary of New York Life. Consequently, on November 7, 2000, we
reacquired all of our outstanding Class B Common Stock and currently hold it as
treasury shares. Immediately following the exchange and distribution to NYLIFE
LLC, NYLIFE LLC completed the sale of 6,900,000 shares of our Class A Common
Stock to the public through a secondary offering. Contemporaneous with this
stock offering, the Express Scripts Automatic Exchange Security Trust, a
closed-end investment company that is not affiliated with us, sold 3,450,000
investment units to the public. Upon maturity of the investment units, the Trust
may deliver up to 3,450,000 shares of our Class A Common Stock owned by NYLIFE
LLC to the holders of the investment units. We did not receive any proceeds from
the secondary offering or the offering by the Trust.
At December 31, 2000, NYLIFE LLC owned shares of our Class A Common Stock
representing approximately 20.8% of the combined voting power of all classes of
our common stock, which includes the right to vote 3,450,000 Class A Common
Stock that the Trust may deliver upon exchange of the Trust issued investment
units. New York Life has agreed on behalf of itself and its subsidiaries, to
vote these 3,450,000 shares of our Class A Common Stock prior to delivery
thereof by the Trust to the holders of the Trust investment units in the same
proportion and to the same effect as the votes cast by our other stockholders at
any meeting of stockholders, subject to the following exceptions: New York Life
has agreed to vote its 8,120,000 shares (which includes the above described
3,450,000 shares) in favor of the slate of nominees for directors recommended by
our Board of Directors for election by stockholders (provided that, so long as
New York Life is entitled to representation on the Board of Directors, such
slate includes New York Life's nominees) and the adoption of the Express
Scripts, Inc.2000 Long-Term Incentive Plan.
In June 1998, Financial Accounting Standards Board Statement 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") was
issued. FAS 133 requires all derivatives to be recognized as either assets or
liabilities in the statement of financial position and measured at fair value.
In addition, FAS 133 specifies the accounting for changes in the fair value of a
derivative based on the intended use of the derivative and the resulting
designation. The effective date for FAS 133 was originally effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. However, the
Financial Accounting Standards Board has deferred the effective date so that it
will begin for all fiscal quarters of fiscal years beginning after June 15,
2000, and will be applicable to our first quarter of fiscal year 2001. Our
present interest rate swaps (see "-Market Risk") will be considered cash flow
hedges. Accordingly, the fair value of the swaps will be reported on the balance
sheet as an asset or liability. The corresponding unrealized gain or loss
representing the effective portion of these hedges will be recognized in
stockholders' equity and other comprehensive income and any changes in
unrealized gains or losses from the initial measurement date related to the
ineffective portion of the hedges will be recognized in earnings concurrent with
the interest expense on our underlying variable rate debt. If we had adopted FAS
133 as of December 31, 2000, we would have recorded the unrealized loss of
$991,000 as a liability and a decrease in stockholders' equity.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). In June 2000, the SEC
issued SAB 101B to defer the effective date for implementation of SAB 101 until
the fourth quarter of fiscal 2000. In addition, Emerging Issues Task Force Issue
99-19, "Recording Revenue Gross as a Principal versus Net as an Agent" ("EITF
99-19") was issued in July 2000 with implementation required no later than the
fourth quarter of fiscal 2000. SAB 101 and EITF 99-19 summarize certain views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The necessary adjustments to our revenue recognition
policies in order to comply with SAB 101 and EITF 99-19 did not have a material
effect on our financial statements.
In December 2000, the Department of Health and Human Services 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 retained a consulting firm to assist us in assessing the steps we will
have to take in complying with these regulations, which provide for a two year
implementation period. While this assessment is not yet complete, we believe
compliance with these regulations will have a significant impact on our business
operations. We have not yet completed an assessment of the costs we will incur
in complying with these regulations, and can give no assurance that such costs
will not be material to us.
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals affect our revenues and cost of revenues. To date, we have been
able to recover substantially all price increases from our clients under the
terms of our agreements, although under selected arrangements in which we have
performance measurements on drug costs with our clients we could be adversely
affected by inflation in drug costs if the result is an overall increase in the
cost of the drug plan to the client. To date, changes in pharmaceutical prices
have not had a significant adverse affect on us.
MARKET RISK
In conjunction with the prepayment of the Term A loans, we restructured our
existing interest rate swap agreements, reducing the notional amounts of the
swaps to a combined $100 million as of December 31, 2000. We received $2,397,000
to restructure our swap agreements, of which $1,500,000 ($926,000 net of tax)
was recognized against interest expense as an ordinary gain related to the
prepayment of debt and the remaining $897,000 has been deferred and will be
amortized over the remaining term of the loans.
Our first interest rate swap agreement became effective during 1998 and has
a notional principal amount of $49 million with a fixed rate of interest of
5.88% per annum, plus the interest rate spread of 1.0% as of December 31, 2000.
Under the restructured agreement, the notional principal amount will reduce to
approximately $47 million in April 2001 until maturing in October 2001.
Our second interest rate swap agreement became effective during 2000 and
has a notional principal amount of $51 million with a fixed rate of interest of
6.25% per annum, plus the interest rate spread of 1.0% as of December 31, 2000.
Under the restructured agreement, the notional principal amount will increase to
approximately $53 million in April 2001, to approximately $98 million in October
2001 and to $100 million in April 2002. Beginning in April 2003, the notional
principal amount will be reduced to $60 million and in April 2004 will be
reduced to $20 million until maturing in April 2005.
As a result, we have, in effect, converted 64.5% of our variable rate debt
to fixed rate debt under our credit facility at December 31, 2000. Beginning in
October 2000, we have converted approximately $100 million of our variable rate
debt to fixed rate debt until April 2003 when the notional amount reduces to $60
million and April 2004 when the notional amount reduces to $20 million.
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 December 31, 2000
would have caused the fair value of the swaps to decrease by $434,000, resulting
in a liability with a fair value of $1,425,000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
Response to this item is included in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Market Risk" above.
Item 8 - Consolidated Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and
Stockholders of Express Scripts, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 65 present fairly, in all material
respects, the financial position of Express Scripts, Inc. and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) on page 65 present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 5, 2001, except as to the first two
paragraphs of Note 2 which are as
of February 22, 2001
CONSOLIDATED BALANCE SHEET
December 31,
(in thousands, except share data) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 53,204 $ 132,630
Receivables, net 802,790 783,086
Inventories 110,053 113,248
Deferred taxes 22,180 32,248
Prepaid expenses and other current assets 9,942 5,143
--------------------------------------
Total current assets 998,169 1,066,355
--------------------------------------
Investment in marketable securities - 150,365
Property and equipment, net 147,709 97,573
Goodwill, net 967,017 982,496
Other intangible assets, net 157,094 183,420
Other assets 6,655 7,102
--------------------------------------
Total assets $ 2,276,644 $ 2,487,311
======================================
Liabilities and Stockholders' Equity
Current liabilities:
Claims and rebates payable $ 878,622 $ 850,630
Accounts payable 94,407 112,731
Accrued expenses 142,915 136,997
--------------------------------------
Total current liabilities 1,115,944 1,100,358
Long-term debt 396,441 635,873
Other liabilities 59,015 51,598
--------------------------------------
Total liabilities 1,571,400 1,787,829
--------------------------------------
Commitments and Contingencies (Notes 3, 6 and 8)
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, and no shares
issued and outstanding - -
Class A Common Stock, $0.01 par value, 150,000,000 shares authorized,
39,044,000 and 23,981,000 shares issued and outstanding, respectively 390 240
Class B Common Stock, $0.01 par value, 31,000,000 shares authorized,
no shares and 15,020,000 shares issued and outstanding, respectively - 150
Additional paid-in capital 441,387 418,921
Unearned compensation under employee compensation plans (13,676) -
Accumulated other comprehensive income (97) (9,521)
Retained earnings 287,414 296,540
--------------------------------------
715,418 706,330
Class A Common Stock in treasury at cost, 270,000 and 465,000 shares,
respectively (10,174) (6,848)
--------------------------------------
Total stockholders' equity 705,244 699,482
--------------------------------------
Total liabilities and stockholders' equity $ 2,276,644 $ 2,487,311
======================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
(in thousands, except per share data) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Revenues:
Revenues $ 6,776,441 $ 4,285,104 $ 2,824,872
Other revenues 10,423 3,000 -
----------------------------------------------------------
6,786,864 4,288,104 2,824,872
----------------------------------------------------------
Costs and expenses:
Cost of revenues 6,247,192 3,826,905 2,584,997
Selling, general and administrative 339,460 294,194 148,990
Non-recurring - 30,221 1,651
----------------------------------------------------------
6,586,652 4,151,320 2,735,638
----------------------------------------------------------
Operating income 200,212 136,784 89,234
----------------------------------------------------------
Other income (expense):
Interest income 8,430 5,762 7,236
Interest expense (47,903) (60,010) (20,230)
Write-off of marketable securities (165,207) - -
Gain on sale of assets - 182,930 -
----------------------------------------------------------
(204,680) 128,682 (12,994)
----------------------------------------------------------
(Loss) income before income taxes (4,468) 265,466 76,240
Provision for income taxes 3,553 108,098 33,566
----------------------------------------------------------
(Loss) income before extraordinary loss (8,021) 157,368 42,674
Extraordinary loss on early retirement of debt,
net of taxes (1,105) (7,150) -
----------------------------------------------------------
Net (loss) income $ (9,126) $ 150,218 $ 42,674
==========================================================
Basic earnings per share:
Before extraordinary loss $ (0.21) $ 4.36 $ 1.29
Extraordinary loss on early retirement of debt (0.03) (0.20) -
----------------------------------------------------------
Net (loss) income $ (0.24) $ 4.16 $ 1.29
==========================================================
Weighted average number of common shares
outstanding during the period - Basic EPS 38,196 36,095 33,105
==========================================================
Diluted earnings per share:
Before extraordinary loss $ (0.21) $ 4.25 $ 1.27
Extraordinary loss on early retirement of debt (0.03) (0.19) -
----------------------------------------------------------
Net (loss) income $ (0.24) $ 4.06 $ 1.27
==========================================================
Weighted average number of common shares
outstanding during the period - Diluted EPS 38,196 37,033 33,698
==========================================================
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Number of Shares Amount
------------------- -------------------------------------------------------------------------------
Unearned
Compensation Accumulated
Class A Class B Class A Class B Additional Under Other
Common Common Common Common Paid-in Employee Comprehensive Retained Treasury
(in thousands) Stock Stock Stock Stock Capital Compensation Income Earnings Stock Total
Plans
- ------------------------------------------------- --------------------------------------------------------------------------------
Balance at December 31, 1997 9,238 7,510 $ 93 $ 75 $106,901 $ - $ (27) $103,64 $(6,989) $203,701
------------------- ---------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - - - - 42,674 - 42,674
Other comprehensive
income,
Foreign currency
translation
adjustment - - - - - - (47) - - (47)
------------------- --------------------------------------------------------------------------------
Comprehensive income - - - - - - (47) 42,674 - 42,627
Issuance of stock dividend 9,239 7,510 92 75 (167) - - - - -
Exercise of stock options 133 - 1 - 2,020 - - - - 2,021
Tax benefit relating to
employee
stock options - - - - 1,345 - - - - 1,345
-------------------- -------------------------------------------------------------------------------
Balance at December 31, 1998 18,610 15,020 186 150 110,099 - (74) 146,322 (6,989) 249,694
-------------------- -------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - - - - 150,218 - 150,218
Other comprehensive
income,
Foreign currency
translation
adjustment - - - - - - 108 - - 108
Unrealized loss on
investment,
net of taxes - - - - - - (9,555) - - (9,555)
-------------------- -------------------------------------------------------------------------------
Comprehensive income - - - - - - (9,447) 150,218 - 140,771
Issuance of common stock 5,175 - 52 - 299,326 - - - - 299,378
Common stock issued under
employee plans 10 - - - 551 - - - - 551
Exercise of stock options 186 - 2 - 5,744 - - - 141 5,887
Tax benefit relating to
employee
stock options - - - - 3,201 - - - - 3,201
-------------------- -------------------------------------------------------------------------------
Balance at December 31, 1999 23,981 15,020 240 150 418,921 - (9,521) 296,540 (6,848) 699,482
-------------------- -------------------------------------------------------------------------------
Comprehensive income:
Net loss - - - - - - - (9,126) - (9,126)
Other comprehensive
income,
Foreign currency
translation
adjustment - - - - - - (131) - - (131)
Recognition of prior
period
unrealized loss on
investment - - - - - - 9,555 - - 9,555
-------------------- ------------------------------------------------------------------------------
Comprehensive income (loss) - - - - - - 9,424 (9,126) 298
Conversion of Class B
Common Stock
to Class A Common Stock 15,020 (15,020) 150 (150) - - - - -
Treasury stock acquired - - - - - - - - (30,247)(30,247)
Common stock issued under
employee plans 43 - - - 9,031 (15,160) - - 7,607 1,478
Amortization of unearned
compensation
under employee plans - - - - - 1,484 - - - 1,484
Exercise of stock options - - - - (2,021) - - - 19,314 17,293
Tax benefit relating to
employee
stock options - - - - 15,456 - - - - 15,456
---------------------- -----------------------------------------------------------------------------
Balance at December 31, 2000 39,044 - $ 390 $ - $441,387 $(13,676) $ (97) $287,414 $(10,174)$705,244
====================== =============================================================================
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (9,126) $ 150,218 $ 42,674
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 78,615 71,867 26,449
Deferred income taxes (42,092) 76,217 10,068
Bad debt expense 12,843 4,989 4,583
Write-off of marketable securities 165,207 - -
Gain on sale of assets, net of cash paid - (185,650) -
Non-recurring charges, net of cash paid - 22,281 1,467
Tax benefit relating to employee stock options 15,456 3,201 1,345
Extraordinary loss on early retirement of debt 1,790 11,642 -
Other, net 4,521 2,164 609
Changes in operating assets and liabilities, net of
changes resulting from acquisitions:
Receivables (35,286) (217,977) (35,083)
Inventories 3,103 (54,059) (15,417)
Other current and non-current assets 745 (2,177) 756
Claims and rebates payable 29,806 279,714 107,660
Other current and non-current liabilities 20,328 51,629 (18,537)
-----------------------------------------------------------
Net cash provided by operating activities 245,910 214,059 126,574
-----------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (80,218) (36,958) (23,853)
Proceeds from sale of property and equipment 8,831 - -
Acquisitions, net of cash acquired - (722,618) (460,137)
Short-term investments (2,191) - 57,938
-----------------------------------------------------------
Net cash (used in) investing activities (73,578) (759,576) (426,052)
-----------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (240,069) (1,015,000) -
Proceeds from long-term debt - 1,290,950 360,000
Treasury stock acquired (30,247) - -
Net proceeds from issuance of common stock - 299,378 -
Deferred financing fees - (26,316) (4,062)
Cash received from employee stock-based plans 18,689 6,438 2,021
-----------------------------------------------------------
Net cash (used in) provided by financing activities (251,627) 555,450 357,959
-----------------------------------------------------------
Effect of foreign currency translation adjustment (131) 108 (47)
-----------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (79,426) 10,041 58,434
Cash and cash equivalents at beginning of year 132,630 122,589 64,155
------------------------------------------------------------
Cash and cash equivalents at end of year $ 53,204 $ 132,630 $ 122,589
============================================================
Supplemental data:
Cash paid during the year for:
Restructuring charges $ 3,318 $ 4,683 $ 184
Income taxes 30,814 1,080 17,202
Interest 48,172 61,607 13,568
See accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. Summary of significant accounting policies
Organization and operations. We are one of the largest full-service
pharmacy benefit management ("PBM") companies independent of pharmaceutical
manufacturer ownership in North America. We provide health care management and
administration services on behalf of clients that include health maintenance
organizations, health insurers, third-party administrators, employers and
union-sponsored benefit plans. Our fully integrated PBM services include network
claims processing, mail pharmacy services, benefit design consultation, drug
utilization review, formulary management, disease management, medical and drug
data analysis services, medical information management services (which include
the development of data warehouses to combine medical claims and prescription
drug claims), disease management support services and outcome assessments
through our Health Management Services division and Practice Patterns Science,
Inc. ("PPS") subsidiary, 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"), infusion therapy services through our wholly-owned
subsidiary IVTx, Inc., operating as Express Scripts Infusion Services, and,
prior to September 1, 1998, provided managed vision care programs through our
wholly-owned subsidiary Express Scripts Vision Corporation.
Basis of presentation. The consolidated financial statements include our
accounts and those of all our wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The preparation of
the consolidated financial statements conforms to generally accepted accounting
principles in the U.S., and requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual amounts could differ from those estimates and
assumptions.
Cash and cash equivalents. Cash and cash equivalents include cash on hand
and investments with original maturities of three months or less. In 1999, we
changed banking relationships resulting in certain cash disbursement accounts
being maintained by banks not holding our cash concentration accounts. As a
result, cash disbursement accounts carrying negative balances of $83,691,000 and
$113,732,000 have been reclassified to claims and rebates payable at December
31, 2000 and 1999, respectively.
Accounts receivable. As of December 31, 2000 and 1999, unbilled receivables
were $394,205,000 and $354,370,000, respectively. Unbilled receivables are
billed to clients typically within 30 days based on the contractual billing
schedule agreed upon with the client. As of December 31, 2000 and 1999, we have
allowances for doubtful accounts of $22,677,000 and $17,281,000, respectively.
Inventories. Inventories consist of prescription drugs and medical supplies
that are stated at the lower of first-in first-out cost or market.
Property and equipment. Property and equipment is carried at cost and is
depreciated using the straight-line method over estimated useful lives of seven
years for furniture, five years for equipment and purchased computer software
and three years for personal computers. Leasehold improvements are amortized on
a straight-line basis over the term of the lease or the useful life of the
asset, if shorter. Expenditures for repairs, maintenance and renewals are
charged to income as incurred. Expenditures which 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.
Software development costs. Research and development expenditures relating
to the development of software to be marketed to clients, or to be used for
internal purposes, are charged to expense until technological feasibility is
established. Thereafter, the remaining software production costs up to the date
of general release to customers, or to the date placed into production, are
capitalized and included as Property and Equipment. During 2000, 1999 and 1998,
$36,518,000, $15,997,000 and $10,244,000 in software development costs were
capitalized, respectively, primarily due to the integration of our acquisitions
and enhancements to our information systems. Capitalized software development
costs amounted to $81,933,000 and $42,353,000 at December 31, 2000 and 1999,
respectively. Amortization of the capitalized amounts commences on the date of
general release to customers, or the date placed into production, and is
computed on a product-by-product basis using the straight-line method over the
remaining estimated economic life of the product but not more than five years.
Reductions, if any, in the carrying value of capitalized software costs to net
realizable value are expensed. Amortization expense in 2000, 1999 and 1998 was
$6,535,000, $3,810,000 and $1,968,000, respectively.
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." Available-for-sale securities are reported at fair value, which is
based upon quoted market prices, with unrealized gains and losses, net of tax,
reported as a component of other comprehensive income in stockholders' equity
until recognized. Unrealized losses are recognized as expense when a decline in
fair value is determined to be other than temporary.
Goodwill. Goodwill is amortized on a straight-line basis over periods from
10 to 30 years. The amount reported is net of accumulated amortization of
$71,348,000 and $36,317,000 at December 31, 2000 and 1999, respectively.
Amortization expense, included in selling, general and administrative expenses,
was $35,031,000, $28,203,000 and $7,863,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
Other intangible assets. Other intangible assets include, but are not
limited to, customer contracts, non-compete agreements and deferred financing
fees and are amortized on a straight-line basis over periods from 2 to 20 years.
The amount reported is net of accumulated amortization of $55,954,000 and
$34,918,000 at December 31, 2000 and 1999, respectively. Amortization expense
for customer contracts and non-compete agreements included in selling, general
and administrative expenses was $18,607,000, $25,094,000 and $4,320,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. Amortization expense
for deferred financing fees included in interest expense was $2,391,000,
$2,241,000, and $609,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Contractual agreements. We have entered into corporate alliances with
certain of our clients whereby shares of our Class A Common Stock were awarded
as advance discounts to the clients. We account for these agreements as follows:
Between December 15, 1995 and November 20, 1997 - For agreements
entered into between these dates, we utilize the provisions of FAS 123,
"Accounting for Stock-Based Compensation," which requires that all
stock issued to nonemployees be accounted for based on the fair value
of the consideration received or the fair value of the equity
instruments issued. We have adopted FAS 123 as it relates to stock
issued or to be issued under client alliances based on fair value at
the date the agreement was consummated.
Subsequent to November 20, 1997 - In November 1997, the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board
("FASB") reached a consensus that the value of equity instruments
issued for consideration other than employee services should be
initially determined on the date on which a "firm commitment" for
performance first exists by the provider of goods or services. Firm
commitment is defined as a commitment pursuant to which performance by
a provider of goods or services is probable because of sufficiently
large disincentives for nonperformance. The consensus must be applied
for all new arrangements and modifications of existing arrangements
entered into from November 20, 1997. The consensus only addresses the
date upon which fair value is determined and does not change the
accounting based upon fair value as prescribed by FAS 123. We have not
entered into any such arrangements subsequent to November 20, 1997.
Shares issued on the effective date of the contractual agreement are
considered outstanding and included in basic and diluted earnings per share
computations when issued. Shares issuable upon the satisfaction of certain
conditions are considered outstanding and included in basic and dilutive
earnings per share computation when all necessary conditions have been satisfied
by the end of the period. If all necessary conditions have not been satisfied by
the end of the period, the number of shares included in the dilutive earnings
per share computation is based on the number of shares, if any, that would be
issuable if the end of the reporting period were the end of the contingency
period and if the result would be dilutive. The value of the shares of stock
awarded as advance discounts is recorded as a deferred cost and included in
other intangible assets. The deferred cost is recognized in selling, general and
administrative expenses over the period of the contract.
Impairment of long lived assets. We evaluate whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long lived assets, including goodwill, may warrant revision or that the
remaining balance of an asset may not be recoverable. The measurement of
possible impairment is based on the ability to recover the balance of assets
from expected future operating cash flows on an undiscounted basis. Impairment
losses, if any, would be determined based on the present value of the cash flows
using discount rates that reflect the inherent risk of the underlying business.
In our opinion, other than the write-down of long-lived assets associated with
our facilities consolidation and computer operations outsourcing, no such
impairment existed as of December 31, 2000 or 1999 (see Note 6).
Derivative financial instruments. We have entered into interest rate swap
agreements in order to manage exposure to interest rate risk. We do not hold or
issue derivative financial instruments for trading purposes. The interest rate
swaps are designated as a hedge of our variable interest rate payments. Amounts
received or paid are accrued as interest receivable or payable and as interest
income or expense. The fair values of interest rate swap agreements are based on
market prices. The fair values represent the estimated amount we would
receive/pay to terminate the agreements taking into consideration current
interest rates.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities". FAS 133 requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. In addition, FAS 133
specifies the accounting for changes in the fair value of a derivative based on
the intended use of the derivative and the resulting designation. The effective
date for FAS 133 was originally effective for all fiscal quarters of fiscal
years beginning after June 1, 1999. However, the FASB has deferred the effective
date so that it will begin for all fiscal quarters of fiscal years beginning
after June 15, 2000, and will be applicable to our first quarter of fiscal year
2001. Our present interest rate swaps (see Note 5) will be considered cash flow
hedges. Accordingly, the change in the fair values of the swaps will be reported
on the balance sheet as an asset or liability. The corresponding unrealized gain
or loss representing the effective portion of these hedges will be recognized in
stockholders' equity and other comprehensive income and any changes in
unrealized gain or loss from the initial measurement date related to the
ineffective portion of the hedges will be recognized in earnings concurrent with
the interest expense on our underlying variable rate debt. If we had adopted FAS
133 as of December 31, 2000, we would have recorded an unrealized loss of
$991,000 as a liability and a decrease in stockholders' equity during 2000.
Fair value of financial instruments. The carrying value of cash and cash
equivalents, accounts receivable and accounts payable approximated fair values
due to the short-term maturities of these instruments. The fair value, which
approximates the carrying value, of our Credit Facility was estimated using
either quoted market prices or the current rates offered to us for debt with
similar maturity. The fair value of the swaps (a liability of $991,000 and an
asset of $6,867,000 at December 31, 2000 and 1999, respectively) was based on
quoted market prices, which reflect the present values of the difference between
estimated future fixed rate payments and future variable rate receipts. The fair
value of our senior note facility ($245,882,000 and $255,000,000 at December 31,
2000 and 1999, respectively) was estimated based on quoted market prices.
Revenue recognition. Revenues from dispensing prescription and
non-prescription medical products from our mail pharmacies are recorded upon
shipment. Revenue from sales of prescription drugs by pharmacies in our
nationwide network and pharmacy claims processing revenues are recognized when
the claims are processed. When we dispense pharmaceuticals from our mail service
pharmacies to members of health benefit plans sponsored by our clients or when
we have an independent contractual obligation to pay our network pharmacy
providers for benefits provided to members of our clients' pharmacy benefit
plans, we include payments from plan sponsors for these benefits as revenue and
ingredient costs or payments to these pharmacy providers in cost of revenues
(the "Gross Basis"). If we are merely administering the plan sponsors' network
pharmacy contracts we record only the administrative or dispensing fees derived
from our contracts with the plan sponsors as revenue (the "Net Basis").
Management services provided to drug manufacturers include various services
relating to administration of manufacturer rebate programs. Revenues relating to
these services are recognized as earned based upon detailed drug utilization
data. Rebates payable to customers in accordance with the applicable contracts
are excluded from revenues and expenses.
Retail pharmacy and mail pharmacy revenues are recognized based upon actual
scripts adjudicated and therefore require no estimation.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). In June 2000, the SEC issued SAB 101B to defer the effective date
for implementation of SAB 101 until the fourth quarter of fiscal 2000. In
addition, EITF Issue 99-19, "Recording Revenue Gross as a Principal versus Net
as an Agent" ("EITF 99-19") was issued in July 2000 with implementation required
no later than the fourth quarter of fiscal 2000. SAB 101 and EITF 99-19
summarize certain views in applying generally accepted accounting principles to
revenue recognition in financial statements. The necessary adjustments to our
revenue recognition policies in order to comply with SAB 101 and EITF 99-19 did
not have a material effect on our financial statements.
Cost of revenues. Cost of revenues includes product costs, pharmacy claims
payments and other direct costs associated with dispensing prescriptions,
including shipping and handling and non-prescription medical products and claims
processing operations, offset by fees received from pharmaceutical manufacturers
in connection with our drug purchasing and formulary management programs. We
estimate fees receivable from pharmaceutical manufacturers on a quarterly basis
converting total prescriptions dispensed to estimated rebatable scripts (i.e.,
those prescriptions with respect to which we are contractually entitled to
submit claims for rebates) multiplied by the contractually agreed manufacturer
rebate amount. Estimated fees receivable from pharmaceutical manufacturers are
recorded when we determine them to be realizable, and realization is not
dependent upon future pharmaceutical sales. Estimates are revised once the
actual rebatable scripts are calculated and rebates are billed to the
manufacturer.
Income taxes. Deferred tax assets and liabilities are recognized based on
temporary differences between financial statement basis and tax basis of assets
and liabilities using presently enacted tax rates.
Earnings per share. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed in the same manner as basic earnings per share but adds
the number of additional common shares that would have been outstanding for the
period if the potential dilutive common shares had been issued. The difference
between the number of weighted average shares used in the basic and diluted
calculation for all years are outstanding stock options and stock warrants
(833,000, 938,000 and 593,000 in 2000, 1999 and 1998, respectively), any
unvested shares and shares issuable pursuant to employee elected deferral under
the executive deferred compensation plan (3,000 in 2000) and restricted stock we
have issued (1,000 in 2000), all calculated under the "treasury stock" method in
accordance with FAS 128, "Earnings Per Share". Due to the net loss in 2000, all
potentially dilutive common shares have been excluded due to anti-dilution.
Foreign currency translation. The financial statements of ESI Canada, Inc.
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, Inc. is the local currency and cumulative translation adjustments are
recorded within the other comprehensive income component of stockholders'
equity.
Employee stock-based compensation. We account for employee stock options in
accordance with Accounting Principles Board No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees." Under APB 25, we apply the intrinsic value method of
accounting and, therefore, have not recognized compensation expense for options
granted, because options have only been granted at a price equal to market value
at the time of grant. During 1996, FAS 123 became effective for us. FAS 123
prescribes the recognition of compensation expense based on the fair value of
options determined on the grant date. However, FAS 123 grants an exception that
allows companies currently applying APB 25 to continue using that method. We
have, therefore, elected to continue applying the intrinsic value method under
APB 25. For companies that choose to continue applying the intrinsic value
method, FAS 123 mandates certain pro forma disclosures as if the fair value
method had been utilized (see Note 10).
Comprehensive income. Other than net income, our two components of
comprehensive income are changes in the foreign currency translation adjustments
and unrealized losses on available-for-sale securities. We have displayed
comprehensive income within the Statement of Changes in Stockholders' Equity.
Segment reporting. The relative segment information is derived from the
management approach which designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of our reportable segments (see Note 12).
2. Changes in business
Joint venture. On February 22, 2001, we announced that we entered into an
agreement with AdvancePCS and Merck-Medco to form RxHub LLC ("RxHub"). RxHub is
intended to develop an electronic exchange enabling physicians who use
electronic prescribing technology to link to pharmacies, PBMs and health plans,
which their patients use. The company is designed to operate as a utility for
the conduit of information among all parties engaging in electronic prescribing.
We will own one-third of the equity of RxHub (as will each of the other two
founders), and have committed to invest up to $20 million over the next five
years with approximately $6 million committed for 2001. We will record our
investment in RxHub under the equity method of accounting, which requires our
percentage interest in RxHub's results to be recorded in our Consolidated
Statement of Operations. RxHub will be operated to cover its expected operating
costs and to return the cost of capital to the founders.
Acquisitions. As previously announced the shareholders of Centre
d'autorisation et de paiement des services de sante, a leading Quebec-based PBM
commonly referred to as CAPSS, accepted an offer made by our Canadian
subsidiary, ESI Canada, Inc., to acquire all of the outstanding shares of CAPSS,
subject to satisfaction of certain conditions, for approximately CAN$25 million
(approximately US$16.5 million). The transaction, which will be accounted for
under the purchase method of accounting, will be funded with our operating cash
flow. We expect to close the transaction during March 2001 and it will add
approximately 1.5 million lives to ESI Canada's membership base. The transaction
is not expected to be dilutive to earnings in 2001 and is expected to be
slightly accretive in 2002.
On April 1, 1999, we completed our acquisition of Diversified
Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto
Rico) Inc. (collectively, "DPS"), from SmithKline Beecham Corporation and
SmithKline Beecham InterCredit BV (collectively, "SB") for approximately $715
million, which includes a purchase price adjustment for closing working capital
and transaction costs. We filed an Internal Revenue Code ss.338(h)(10) election,
making amortization expense of intangible assets, including goodwill, tax
deductible. We used approximately $48 million of our own cash and financed the
remainder of the purchase price and related acquisition costs.
The acquisition has been accounted for using the purchase method of
accounting. The results of operations of DPS have been included in the
consolidated financial statements and PBM segment since April 1, 1999. The
purchase price has been allocated based on the estimated fair values of net
assets acquired at the date of the acquisition. The excess of purchase price
over tangible net assets acquired has been allocated to other intangible assets
consisting of customer contracts in the amount of $129,500,000 which began
amortizing in 1999 using the straight-line method over the estimated useful
lives of 2 to 20 years and goodwill in the amount of $754,236,000 which is being
amortized using the straight-line method over the estimated useful life of 30
years. In conjunction with the acquisition, DPS retained the following
liabilities:
(in thousands)
- -----------------------------------------------------------------
Fair value of assets acquired $ 1,028,848
Cash paid for the capital stock (714,678)
-----------------------
Liabilities retained $ 314,170
=======================
The following unaudited pro forma information presents a summary of our
combined results of operations and those of DPS as if the acquisition had
occurred at the beginning of the period presented, along with certain pro forma
adjustments to give effect to amortization of goodwill, other intangible assets,
interest expense on acquisition debt and other adjustments. The pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transaction been effected on the assumed date,
nor is it an indication of trends in future results.
Year Ended December
31,
(in thousands, except per share data) 1999
- ------------------------------------------------------------------
Total revenues $ 4,353,470
Income before extraordinary loss 158,423
Extraordinary loss (7,150)
----------------------
Net income $ 151,273
======================
Basic earnings per share
Before extraordinary loss $ 4.39
Extraordinary loss (0.20)
----------------------
Net income $ 4.19
======================
Diluted earnings per share
Before extraordinary loss $ 4.28
Extraordinary loss (0.19)
----------------------
Net income $ 4.09
======================
As previously disclosed, on April 1, 1998, we acquired all of the
outstanding capital stock of Value Health, Inc. Managed Prescriptions Network,
Inc. (collectively known as "ValueRx") from HCA-The Healthcare Corporation
(formerly, "Columbia/HCA Healthcare Corporation ") for approximately $460
million. Consequently, our operating results include those of ValueRx from April
1, 1998. The net assets acquired from ValueRx have been recorded at their
estimated fair value, resulting in $278,113,000 of goodwill that is being
amortized over 30 years and $57,653,000 of other intangible assets which are
being amortized over 2 to 20 years. This acquisition has been accounted for
under the purchase method of accounting.
Sale of assets. On August 31, 1999, we, along with YourPharmacy.com, Inc.
("YPC"), our wholly-owned subsidiary, entered into an Asset Contribution and
Reorganization Agreement (the "Contribution Agreement") with PlanetRx, PRX
Holdings, Inc. ("Holdings"), and PRX Acquisition Corp. ("Acquisition Sub").
Pursuant to the Contribution Agreement, YPC agreed to contribute certain
operating assets constituting its e-commerce business in prescription and
non-prescription drugs and health and beauty aids to Holdings in exchange for
19.9% of the post-initial public offering common equity of Holdings (the "IPO"),
and PlanetRx was also to assume certain obligations of YPC. Simultaneously with
this transaction, Acquisition Sub was to merge into PlanetRx and PlanetRx
shareholders would receive stock in Holdings, which would change its name to
"PlanetRx.com, Inc." As a result of the transactions, YPC would be a 19.9%
shareholder in the new PlanetRx (formerly Holdings), which would conduct
business as an Internet pharmacy.
On October 13, 1999, the transactions described in the Contribution
Agreement were consummated, YPC received 10,369,990 unregistered shares, or
19.9%, of the common equity of PlanetRx, and PlanetRx assumed options granted to
YPC employees which converted into options to purchase approximately 1.8 million
shares of PlanetRx common stock. In connection with the IPO, we also executed a
180 day lock-up agreement that prevented us from selling our shares until April
10, 2000. The consummation of the transaction occurred immediately preceding the
closing of PlanetRx's IPO of common stock. Based on the IPO price of $16 per
share, YPC received consideration valued at $165,920,000. We recorded a one-time
gain during 1999 (in other income) of $182,930,000 on the transaction, and a
one-time stock compensation expense during 1999 (included in non-recurring
expenses) of $19,520,000 relating to the YPC employee stock options. We
accounted for this investment in PlanetRx on the cost method and reported our
investment on the balance sheet under the caption "investment in marketable
securities" at fair value in accordance with FAS 115 (see Note 1).
As part of our agreement, PlanetRx was to pay us an annual fee of
$11,650,000 and reimbursement for certain expenses of $3,000,000 over a 5 year
term, which could be extended to 10 years if we meet certain performance
measures. Additionally, we were eligible to receive an incremental fee based
upon the number of our members who placed their first order for prescription
drug or non-prescription merchandise with PlanetRx. We recorded $10,423,000 and
$3,000,000 of revenue during 2000 and 1999, respectively. We also reduced
selling and general administrative expenses by $1,500,000 and $750,000 for
reimbursement of certain expenses relating to our Internet initiative during
2000 and 1999, respectively.
Effective July 5, 2000, we restructured our agreement with PlanetRx in
exchange for a one-time cash payment of $8 million. Approximately $3.7 million
of the payment represents amounts earned through the second quarter of 2000, the
remaining $4.3 million represents a fee for the termination of the prior
contract. No additional cash payments will be paid to us under the restructured
agreement.
During 2000, we recorded a non-cash impairment charge to write-off our
investment in PlanetRx common stock as the loss in value was deemed to be other
than temporary. Therefore, any unrealized losses associated with recording our
investment in PlanetRx at current market value that we had recorded in
stockholders' equity were written off to the current period earnings, in
addition to any additional charges necessary to write-off our investment.
Additionally, during 2000 we donated approximately 200,000 shares (after giving
effect to the 8-for-1 reverse stock split on December 4, 2000) of PlanetRx
common stock and realized expenses related to the donation of approximately
$713,000. At December 31, 2000 we own approximately 1,096,000 shares (after
giving effect to the 8-for-1 reverse stock split on December 4, 2000) of
PlanetRx which are carried at no value.
3. Contractual agreements
Effective January 1, 1996, we executed a multi-year contract with The
Manufacturers Life Insurance Company ("Manulife"), to provide PBM services in
Canada. Under the terms of the agreement, we are the exclusive third-party
provider of PBM services to Manulife's Canadian clients. We will also issue
shares of our Class A Common Stock as an advance discount to Manulife based upon
achievement of certain volumes of Manulife pharmacy claims we process. No shares
will be issued until after the fourth year of the agreement. The shares will be
issued based on volumes reached in years four through six. We anticipate issuing
no more than 474,000 shares to Manulife over a period up to the first six years
of the agreement. Except for certain exemptions from registration under the 1933
Act, any shares issued to Manulife cannot be traded until they have been
registered under the 1933 Act and any applicable state securities laws. In
accordance with the terms of the agreement, no stock has been issued since
inception.
If Manulife has not exercised an early termination option at the end of the
sixth or tenth year of the agreement, we will issue at each of those times a
ten-year warrant as an advance discount to purchase up to approximately 237,000
additional shares of our Class A Common Stock exercisable at 85% of the market
price at those times. The actual number of shares for which such warrant is to
be issued is based on the volume of Manulife pharmacy claims we process in year
six and year ten, respectively.
Pursuant to an agreement with Coventry Corporation, an operator of health
maintenance organizations located principally in Pennsylvania and Missouri, on
January 3, 1995, we issued 50,000 shares of Class A Common Stock as an advance
discount to Coventry in a private placement. These shares were valued at $13.69
per share, the split-adjusted per share market value of our Class A Common Stock
on November 22, 1994, which was the date the agreement was consummated and the
obligation of the parties became unconditional. No revision of the consideration
for the transaction occurred between November 22, 1994 and January 3, 1995. The
shares issued to Coventry were being amortized over a six-year period. However,
due to Coventry extending the agreement for only two years instead of three
years, as discussed below, the estimated useful life of the shares issued has
been reduced to five years and ended in 1999. Amortization expense was $171,000
for each of the years ended December 31, 1999 and 1998, respectively. Except for
certain exemptions from registration under the 1933 Act, these shares cannot be
traded until they have been registered under the 1933 Act and any applicable
state securities laws.
Effective January 1, 1998, Coventry renewed the agreement for a two-year
term through December 31, 1999. As part of the agreement, we issued warrants as
an advance discount to purchase an additional 50,000 shares of our Class A
Common Stock, exercisable at 90% of the market value at the time of renewal.
During 1998, we expensed the advance discount, which represented 10% of the
market value.
4. Property and equipment
Property and equipment, at cost, consists of the following:
December 31,
(in thousands) 2000 1999
- ----------------------------------------------------------------------------
Land $ 400 $ 2,051
Building - 3,076
Furniture 18,210 12,873
Equipment 87,515 64,204
Computer software 101,075 55,054
Leasehold improvements 14,594 9,922
-----------------------------------
221,794 147,180
Less accumulated depreciation and
amortization 74,085 49,607
-----------------------------------
$ 147,709 $ 97,573
===================================
5. Financing
Long-term debt consists of:
December 31,
(in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------
Revolving credit facility due March 31, 2005 with an
interest rate of 7.94% at December 31, 1999 $ - $ 100,000
Term A loans due March 31, 2005 with an interest rate of
7.52% and 7.94% at December 31, 2000 and 1999, and a
deferred interest rate swap gain of $847 at December 31,
2000 155,847 285,000
9.625% Senior Notes due June 15, 2009, net of an
unamortized discount of $1,024 and $1,146, and an
unamortized interest rate lock of $1,733 and $2,019 240,594 250,873
-----------------------------------------
Total long-term debt $ 396,441 $ 635,873
=========================================
We have a credit facility with a commercial bank syndicate which consists
of $155 million of Term A loans and a $300 million revolving credit facility.
During 2000, we utilized $130 million of our own internally generated cash to
prepay a portion of our Term A loans. As a result of the prepayment, we recorded
an extraordinary charge during 2000 for the deferred financing fees in the
amount of $1,790,000 ($1,105,000 net of tax). The prepayment on the Term A loans
eliminated the scheduled principal payments for fiscal years 2001, 2002 and a
portion of the scheduled principal payment for fiscal year 2003. Beginning in
March 2003, we are required to make annual principal payments on the Term A
loans of $26,750,000 in 2003, $62,700,000 in 2004 and $65,550,000 in 2005. The
capital stock of each of our existing and subsequently acquired domestic
subsidiaries, excluding PPS, Great Plains Reinsurance Co., ValueRx of Michigan,
Inc., Diversified NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto
Rico), Inc., and 65% of the stock of our foreign subsidiaries have been pledged
as collateral for the credit facility.
The credit facility requires us to pay interest quarterly on an interest
rate spread based on several London Interbank Offered Rates ("LIBOR") or base
rate options. To alleviate interest rate volatility, we have entered into two
separate swap arrangements, which are discussed below. The credit facility
contains covenants that limit the indebtedness we may incur, dividends paid and
the amount of annual capital expenditures. The covenants also establish a
minimum interest coverage ratio, a maximum leverage ratio, and a minimum fixed
charge coverage ratio. In addition, we are required to pay an annual fee of
0.25%, payable in quarterly installments, on the unused portion of the revolving
credit facility ($300 million at December 31, 2000). At December 31, 2000, we
are in compliance with all covenants associated with the credit facility.
In June 1999, we issued $250 million of 9.625% Senior Notes due 2009, which
require interest to be paid semi-annually on June 15 and December 15. The Senior
Notes are callable at specified prepayment premiums beginning in June 2004. The
Senior Notes are unconditionally and jointly and severally guaranteed by our
wholly-owned domestic subsidiaries other than PPS, Great Plains Reinsurance Co.,
ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and Diversified
Pharmaceutical Services (Puerto Rico), Inc. During the second quarter of 2000,
we repurchased $10,115,000 of our Senior Notes on the open market for
$10,150,000, which includes $385,000 of accrued interest.
The following represents the schedule of current maturities for our
long-term debt (in thousands):
Year Ended December 31,
- --------------------------------------------------------
2001 $ -
2002 -
2003 26,750
2004 62,700
2005 65,550
-----------------------
$ 155,000
=======================
In conjunction with the prepayment of the Term A loans, we restructured our
existing interest rate swap agreements, reducing the notional amounts of the
swaps to a combined $100 million as of December 31, 2000. We received $2,397,000
to restructure our swap agreements, of which $1,500,000 ($926,000 net of tax)
was recognized against interest expense as an ordinary gain related to the
prepayment of debt and the remaining $897,000 has been deferred and is being
amortized over the remaining term of the loans. Under the restructured swap
agreements, we have, in effect, converted approximately $100 million of our
variable rate debt to fixed rate debt until April 2003 when the notional amount
reduces to $60 million and April 2004 when the notional amount reduces to $20
million.
During 1999, we entered into an interest rate lock with Bankers' Trust
Company related to our offering of $250 million Senior Notes. Upon issuance of
the Senior Notes, we received $2,135,000, which is being amortized against
interest expense over the term of the Senior Notes. Interest expense was reduced
by $286,000 and $116,000 during 2000 and 1999, respectively.
6. Corporate restructuring
During the second quarter of 1999, we recorded a pre-tax restructuring
charge of $9,400,000 associated with the consolidation of our Plymouth,
Minnesota facility into our Bloomington, Minnesota facility. In December 1999
and September 2000, the associated accrual was reduced by $2,301,000 and
$44,000, primarily as a result of subleasing a portion of the unoccupied space.
The consolidation plan includes the relocation of all employees at the Plymouth
facility to the Bloomington facility that began in August 1999, with completion
delayed until the first quarter of 2001 from the previously disclosed third
quarter of 2000. Included in the restructuring charge are anticipated cash
expenditures of approximately $4,779,000 for lease termination fees and rent on
unoccupied space (which payments will continue through April 2001, when the
lease expires) and anticipated non-cash charges of approximately $2,276,000 for
the write-down of leasehold improvements and furniture and fixtures. The
restructuring charge does not include any costs associated with the physical
relocation of the employees.
During December 1999, we recorded a pre-tax restructuring charge of
$2,633,000 associated with the outsourcing of our computer operations to
Electronic Data Systems Corporation. The principal actions of the plan included
cash expenditures of approximately $2,148,000 for the transition of 51 employees
to the outsourcer and the elimination of contractual obligations of ValueRx
which had no future economic benefit to us, and non-cash charges of
approximately $485,000 due to the reduction in the carrying value of certain
capitalized software to its net realizable value. The plan was completed during
the second quarter of 2000 when all cash payments were made.
Also in December 1999, we recorded a pre-tax restructuring charge of
$969,000 associated with restructuring our PPS majority-owned subsidiary and the
purchase of the remaining PPS common stock from management. The charge consists
of cash expenditures of $559,000 relating to stock compensation expense and
$410,000 of severance payments to 9 employees (of which $133,000 was paid during
December 1999). This plan was completed in January 2000.
Balance at Balance at Balance at
December 31, 1999 1999 December 31, 2000 2000 December 31,
(in thousands) 1998 Charges Usage 1999 Reversals Usage 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Non-cash
Write-down of long-lived
assets $ 531 $ 2,761 $ 3,264 $ 28 $ - $ - $ 28
Cash
Employee transition costs
232 1,725 365 1,592 - 1,592 -
Stock compensation - 559 - 559 - 559 -
Lease termination fees and
rent - 5,656 4,318 1,338 44 1,167 127
------------------------------------------------------------------------------------------------------
$ 763 $ 10,701 $ 7,947 $ 3,517 $ 44 $ 3,318 $ 155
======================================================================================================
All of the restructuring charges which include tangible assets to be
disposed of are written down to their net realizable value, less cost of
disposal. We expect recovery to approximate its cost of disposal. Considerable
management judgment is necessary to estimate fair value; accordingly, actual
results could vary from such estimates.
7. Income taxes
The income tax provision consists of the following:
Year Ended December 31,
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Current provision:
Federal $ 40,515 $ 26,933 $ 20,171
State 5,668 4,190 3,049
Foreign (538) 758 278
---------------------------------------------------------------------
Total current provision 45,645 31,881 23,498
---------------------------------------------------------------------
Deferred provision:
Federal (37,757) 68,627 8,694
State (4,335) 7,590 1,374
---------------------------------------------------------------------
Total deferred provision (42,092) 76,217 10,068
---------------------------------------------------------------------
Total current and deferred provision $ 3,553 $ 108,098 $ 33,566
=====================================================================
Income taxes included in the Consolidated Statement of Operations are:
Year Ended December 31,
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Continuing operations $ 3,553 $ 108,098 $ 33,566
Extraordinary loss on early retirement of debt (685) (4,492) -
---------------------------------------------------------------------
$ 2,868 $ 103,606 $ 33,566
=====================================================================
A reconciliation of the statutory federal income tax rate and the
effective tax rate follows (the effect of foreign taxes on the effective tax
rate for 2000, 1999 and 1998 is immaterial):
Year Ended December 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.3 3.6 3.8
Non-deductible amortization of goodwill and
customer contracts (103.6) 1.8 4.9
Other, net (14.2) 0.3 0.3
---------------------------------------------------------------------
Effective tax rate (79.5)% 40.7% 44.0%
=====================================================================
The deferred tax assets and deferred tax liabilities recorded in the
consolidated balance sheet are as follows:
December 31,
(in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 9,087 $ 5,744
Accrued expenses 16,203 23,864
Depreciation and property differences - 7,112
Non-compete agreements 2,292 2,008
Net operating loss carryforward 2,975 7,829
Unrealized loss on investments - 6,000
Other 2,366 693
----------------------------------------------
Gross deferred tax assets 32,923 53,250
----------------------------------------------
Deferred tax liabilities:
Gain on sale of assets - (62,987)
Depreciation and property differences (17,799) -
Goodwill and customer contract amortization
(15,026) (7,942)
Other (2,341) (985)
----------------------------------------------
Gross deferred tax liabilities (35,166) (71,914)
----------------------------------------------
Net deferred tax liabilities $ (2,243) $ (18,664)
==============================================
8. Commitments and contingencies
During September 2000, we sold our Albuquerque, New Mexico property and
building for $7,806,000. These assets were then leased back from the purchaser
over a period of 10 years with the option to extend the terms up to an
additional 10 years. The resulting lease is being accounted for as an operating
lease, and the resulting deferred gain of $4,136,000 is being amortized over the
10 year life of the lease.
We have entered into noncancellable agreements to lease certain office and
distribution facilities with remaining terms from one to ten years. Rental
expense under the office and distribution facilities leases in 2000, 1999 and
1998 was $12,041,000, $11,147,000 and $3,876,000, respectively. The future
minimum lease payments due under noncancellable operating leases are as follows
(in thousands):
Year Ended December 31,
- --------------------------------------------------------
2001 $ 13,702
2002 13,140
2003 12,980
2004 13,007
2005 12,722
Thereafter 34,333
--------------------
$ 99,884
====================
For the year ended December 31, 2000, approximately 60.0% of our
pharmaceutical purchases were through one wholesaler. We believe other
alternative sources are readily available and that no other concentration risks
exist at December 31, 2000.
In the ordinary course of business (which includes the business conducted
by DPS and ValueRx prior to acquiring them on April 1, 1999 and April 1, 1998,
respectively), various legal proceedings, investigations or claims pending have
arisen against us and our subsidiaries (ValueRx and DPS continue to be a party
to proceedings that arose prior to their April 1, 1998 and April 1, 1999
respective acquisition dates). The effect of these actions on future financial
results is not subject to reasonable estimation because considerable uncertainty
exists about the outcomes. Nevertheless, in our opinion, the ultimate
liabilities resulting from any such lawsuits, investigations or claims now
pending are not expected to materially affect our consolidated financial
position, results of operations or cash flows.
9. Common stock
Prior to November 7, 2000, NYLife Healthcare Management, Inc., a subsidiary
of New York Life Insurance Company, owned all of our outstanding shares of Class
B Common Stock. On November 7, 2000, NYLife Healthcare Management, Inc.
exchanged each outstanding share of Class B Common Stock for one share of our
Class A Common Stock and then immediately distributed such shares to NYLIFE LLC,
another subsidiary of New York Life. Consequently, on November 7, 2000, we
reacquired all of our outstanding Class B Common Stock and currently hold it as
treasury shares. Immediately following the exchange and distribution to NYLIFE
LLC, NYLIFE LLC completed the sale of 6,900,000 shares of our Class A Common
Stock to the public through a secondary offering. Contemporaneous with this
stock offering, the Express Scripts Automatic Exchange Security Trust, a
closed-end investment company that is not affiliated with us, sold 3,450,000
investment units to the public. Upon maturity of the investment units, the Trust
may deliver up to 3,450,000 shares of our Class A Common Stock owned by NYLIFE
LLC to the holders of the investment units. We did not receive any proceeds from
the secondary offering or the offering by the Trust.
At December 31, 2000, NYLIFE LLC owned shares of our Class A Common Stock
representing approximately 20.8% of the combined voting power of all classes of
our common stock, which includes the right to vote 3,450,000 Class A Common
Stock that the Trust may deliver upon exchange of the Trust issued investment
units. New York Life has agreed on behalf of itself and its subsidiaries, to
vote these 3,450,000 shares of our Class A Common Stock prior to delivery
thereof by the Trust to the holders of the Trust investment units in the same
proportion and to the same effect as the votes cast by our other stockholders at
any meeting of stockholders, subject to the following exceptions: New York Life
has agreed to vote its 8,120,000 shares (which includes the above described
3,450,000 shares) in favor of the slate of nominees for directors recommended by
our Board of Directors for election by stockholders (provided that, so long as
New York Life is entitled to representation on the Board of Directors, such
slate includes New York Life's nominees) and the adoption of the Express
Scripts, Inc. 2000 Long-Term Incentive Plan.
As of December 31, 2000, we have repurchased a total of 1,265,000 shares of
our Class A Common Stock under the open-market stock repurchase
program we announced on October 25, 1996, of which, 790,000 shares were
repurchased during 2000. Approximately 766,000 shares have been utilized for
stock option exercises and 219,000 shares have been utilized for restricted
stock awards during 2000. Our Board of Directors approved the repurchase of up
to 2,500,000 shares, and placed no limit on the duration of the program.
Additional purchases, if any, will be in such amounts and at such times as we
deem appropriate based upon prevailing market and business conditions, subject
to certain restrictions on stock repurchases contained in our bank credit
facility and the Indenture covering our Senior Notes.
As of December 31, 2000, approximately 4,659,000 shares of our Class A
Common Stock have been reserved for issuance to organizations with which we have
signed contractual agreements (see Note 3) and for employee benefit plans (see
Note 10).
In June 1999, we consummated our offering of 5,175,000 shares of our Class
A Common Stock at a price of $61 per share. The net proceeds of $299,378,000
were used to retire the $150 million senior subordinated bridge credit facility
and a portion of the Term B loans under the $1.05 billion credit facility.
In October 1998, we announced a two-for-one stock split of our Class A and
Class B Common Stock for stockholders of record on October 20, 1998, effective
October 30, 1998. The split was effected in the form of a dividend by issuance
of one additional share of Class A Common Stock for each share of Class A Common
Stock outstanding and one additional share of Class B Common Stock for each
share of Class B 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 except on the Consolidated
Statement of Changes in Stockholders' Equity.
10. Employee benefit plans and stock-based compensation plans
Retirement savings plan. We offer all of our full-time employees a
retirement savings plan under Section 401(k) of the Internal Revenue Code.
Employees may elect to enter a written salary deferral agreement under which a
maximum of 15% of their salary, subject to aggregate limits required under the
Internal Revenue Code, may be contributed to the plan. We match 100% of the
first 4% of the employees' compensation contributed to the Plan. For the years
ended December 31, 2000, 1999 and 1998, we had contribution expense of
approximately $4,718,000, $3,604,000 and $1,751,000, respectively.
Employee stock purchase plan. In December 1998, our Board of Directors
approved an employee stock purchase plan, effective March 1, 1999, that
qualifies under Section 423 of the Internal Revenue Code and permits all
employees, excluding certain management level employees, to purchase shares of
our Class A Common Stock. Participating employees may elect to contribute up to
10% of their salary to purchase common stock at the end of each six month
participation period at a purchase price equal to 85% of the fair market value
of our Class A Common Stock at the end of the participation period. During 2000
and 1999, approximately 32,000 and 10,000 shares of our Class A Common Stock
were issued under the plan, respectively. Class A Common Stock reserved for
future employee purchases under the plan is 209,000 at December 31, 2000.
Deferred compensation plan. In December 1998, the Compensation Committee of
the Board of Directors approved a non-qualified deferred compensation plan (the
"Executive Deferred Compensation Plan"), effective January 1, 1999, that
provides benefits payable to eligible key employees at retirement, termination
or death. Benefit payments are funded by a combination of contributions from
participants and us. Participants become fully vested in our contributions on
the third anniversary of the end of the plan year for which the contribution is
credited to their account. For 2000, our contribution was equal to 6% of each
qualified participant's total annual compensation, with 25% being invested in
our Class A Common Stock and the remaining being allocated to a variety of
investment options. We incurred approximately $89,000 and $224,000 of
compensation expense in 2000 and 1999, respectively. In addition, we recorded
$797,000 of compensation expense in 1998 as a past service contribution which
was equal to 8% of each participant's total annual cash compensation for the
period of the participant's past service with us in a senior executive capacity.
At December 31, 2000, 50,000 shares of Class A Common Stock have been reserved
for future issuance under the plan.
Stock-based compensation plans. In August 2000, the Board of Directors
adopted the Express Scripts, Inc. 2000 Long-Term Incentive Plan which was
subsequently amended in February 2001 (as amended, the "2000 LTIP"), which
provides for the grant of various equity awards to our officers, Board of
Directors and key employees selected by the Compensation Committee of the Board
of Directors. The 2000 LTIP is subject to approval of our stockholders. As of
December 31, 2000, 271,000 shares of Class A Common Stock have been reserved for
issuance under this plan. During 2000, we granted approximately 219,000
restricted shares of Class A Common Stock, issued from shares held in treasury,
under the 2000 LTIP to certain of our officers and employees. These shares are
subject to various cliff-vesting periods from three to ten years with provisions
allowing for accelerated vesting based upon specific performance criteria. Prior
to vesting, these restricted shares are subject to forfeiture to us without
consideration upon termination of employment under certain circumstances.
Approximately 6,600 shares have been forfeited as of February 28, 2001. Unearned
compensation of $14,841,000 relating to the restricted shares has been recorded
as a separate component of stockholders' equity and is being amortized to
non-cash compensation expense over the estimated vesting periods.
As a result of the Board's adoption of the 2000 LTIP, and subject to
stockholder approval of the 2000 LTIP, no additional awards will be granted
under either of our 1992 amended and restated stock option plans (discussed
below) or under our 1994 amended and restated Stock Option Plan (discussed
below). However, these plans are still in existence as there are outstanding
grants under these plans.
In April 1992, we adopted a stock option plan that we amended and restated
in 1995 and amended in 1999, which provided for the grant of nonqualified stock
options and incentive stock options to our officers and key employees selected
by the Compensation Committee of the Board of Directors. In June 1994, the Board
of Directors adopted the Express Scripts, Inc. 1994 Stock Option Plan, also
amended and restated in 1995 and amended in 1997, 1998 and 1999. Under either
plan, the exercise price of the options was not less than the fair market value
of the shares at the time of grant, and the options typically vest over a
five-year period from the date of grant.
In April 1992, we also adopted a stock option plan that was amended and
restated in 1995 and amended in 1996 and 1999 that provided for the grant of
nonqualified stock options to purchase 48,000 shares to each director who is not
an employee of ours or our affiliates. In addition, the second amendment to the
plan gave each non-employee director who was serving in such capacity as of the
date of the second amendment the option to purchase 2,500 additional shares. The
second amendment options will vest over three years. The plan provides that the
options vest over a two-, three- or five-year period from the date of grant
depending upon the circumstances of the grant.
We apply APB 25 and related interpretations in accounting for our plans.
Accordingly, compensation cost has been recorded based upon the intrinsic value
method of accounting for restricted stock and no compensation cost has been
recognized for our stock options plans. Had compensation cost for our stock
option based compensation plans been determined based on the fair value at the
grant dates for awards under those plans 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. Note that due to the adoption of the
methodology prescribed by FAS 123, the pro forma results shown below only
reflect the impact of options granted in 2000, 1999 and 1998. Because future
options may be granted and vesting typically occurs over a five year period, the
pro forma impact shown for 2000, 1999 and 1998 is not necessarily representative
of the impact in future years.
(in thousands, except per share data) 2000 1999 1998
- -----------------------------------------------------------------------------
Net income
As reported $ (9,126) $ 150,218 $ 42,674
Pro forma (19,796) 142,753 38,585
Basic earnings per share
As reported $ (0.24) $ 4.16 $ 1.29
Pro forma (0.52) 3.95 1.16
Diluted earnings per share
As reported $ (0.24) $ 4.06 $ 1.27
Pro forma (0.52) 3.86 1.14
The fair value of options granted (which is amortized to expense over
the option vesting period in determining the pro forma impact), is estimated on
the date of grant using the Black-Scholes multiple option-pricing model with the
following weighted average assumptions:
2000 1999 1998
- ---------------------------------------------------------------------------
Expected life of option 1-6 years 2-7 years 2-7 years
Risk-free interest rate 6.0%-6.7% 4.6%-6.3% 4.1%-5.9%
Expected volatility of stock 56%-60% 59% 44%
Expected dividend yield None None None
A summary of the status of our fixed stock option plans as of December
31, 2000, 1999 and 1998, and changes during the years ending on those dates is
presented below.
2000 1999 1998
---------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Price Exercise
Price Price
(share data in thousands) Shares Shares Shares
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 3,286 $ 35.24 2,780 $ 28.02 1,702 $ 17.21
Granted 891 48.06 843 60.43 1,866 40.65
Exercised (777) 22.32 (196) 30.28 (133) 14.71
Forfeited/Cancelled (176) 48.55 (141) 50.35 (655) 38.82
------------- ------------- ------------
Outstanding at end of year 3,224 41.16 3,286 35.24 2,780 28.02
============= ============= ============
Options exercisable at year end 1,262 1,391 800
============= ============= ============
Weighted-average fair value of
options granted during the year $ 21.69 $ 32.40 $ 18.07
============= ============= ============
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------------ ----------------------------------
Range of
Exercise Prices Number Weighted-Average Number Weighted-Average
(share data in Outstanding at Remaining Weighted-Average Exercisable Exercise Price
thousands) 12/31/00 Contractual Life Exercise Price at 12/31/00
- ---------------------- ------------------- ------------------- -------------------- ----------------- ----------------
$ 3.25 - 17.00 515 5.84 $ 13.89 433 $ 13.44
20.81 - 35.63 789 6.71 28.88 412 27.81
38.31 - 51.63 1,005 7.70 44.59 152 48.17
54.88 - 67.38 721 8.54 58.66 237 58.99
70.16 - 88.56 194 7.83 80.63 28 80.82
------------------- -----------------
$ 3.25 - 88.56 3,224 7.26 $ 41.16 1,262 $ 32.35
=================== =================
11. Condensed consolidating financial statements
Our 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. Separate financial
statements of the Guarantors are not presented as we have determined them not to
be material to investors. Therefore, the following condensed consolidating
financial information has been prepared using the equity method of accounting 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. As of January 1, 2000, we
undertook an internal corporate reorganization to eliminate various entities
whose existence was deemed to be no longer necessary, including, among others,
ValueRx, and to create several new entities to conduct certain activities,
including SDS and ESI Mail Pharmacy Service, Inc. ("ESI MPS"). 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
and ESI MPS are incorporated into those of the Guarantors for 2000.
Condensed Consolidating Balance Sheet
- --------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2000
Current assets $ 755,995 $ 236,311 $ 5,863 $ - $ 998,169
Property and equipment, net 120,754 24,724 2,231 - 147,709
Investments in subsidiaries 866,561 - 2,261 (868,822) -
Intercompany (216,039) 223,144 (7,105) - -
Goodwill, net 251,139 711,062 4,816 - 967,017
Other intangible assets, net 55,175 101,640 279 - 157,094
Other assets 77,505 (73,162) 2,312 - 6,655
--------------- ---------------- ---------------- --------------- ----------------
Total assets $ 1,911,091 $ 1,223,719 $ 10,657 $ (868,822) $ 2,276,644
=============== ================ ================ =============== ================
Current liabilities $ 630,888 $ 478,583 $ 6,473 $ - $ 1,115,944
Long-term debt 396,441 - - - 396,441
Other liabilities 125,264 (64,514) (1,735) - 59,015
Stockholders' equity 758,497 809,650 5,919 (868,822) 705,244
--------------- ---------------- ---------------- --------------- ----------------
Total liabilities and stockholders' equity $ 1,911,091 $ 1,223,719 $ 10,657 $ (868,822) $ 2,276,644
=============== ================ ================ =============== ================
As of December 31, 1999
Current assets $ 549,374 $ 509,702 $ 7,279 $ - $ 1,066,355
Property and equipment, net 39,036 55,776 2,761 - 97,573
Investments in subsidiaries 725,468 - 2,261 (727,729) -
Investments in marketable securities - 150,365 - - 150,365
Intercompany 463,438 (463,241) (197) - -
Goodwill, net 168 976,759 5,569 - 982,496
Other intangible assets, net 22,458 160,901 61 - 183,420
Other assets 13,179 (6,493) 563 (147) 7,102
--------------- ---------------- ---------------- --------------- ----------------
Total assets $ 1,813,121 $ 1,383,769 $ 18,297 $ (727,876) $ 2,487,311
=============== ================ ================ =============== ================
Current liabilities $ 527,312 $ 563,457 $ 9,589 $ - $ 1,100,358
Long-term debt 635,873 - - - 635,873
Other liabilities 83,365 (33,018) 1,251 - 51,598
Stockholders' equity 566,571 853,330 7,457 (727,876) 699,482
--------------- ---------------- ---------------- --------------- ----------------
Total liabilities and stockholders' equity $ 1,813,121 $ 1,383,769 $ 18,297 $ (727,876) $ 2,487,311
=============== ================ ================ =============== ================
Condensed Consolidating Statement of Operations
- -------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Total revenues $ 4,262,854 $ 2,512,197 $ 11,813 $ - $ 6,786,864
Operating expenses 4,159,946 2,411,737 14,969 - 6,586,652
----------------------------------------------------------------------------------
Operating income (loss) 102,908 100,460 (3,156) - 200,212
Write-off of marketable securities - (165,207) - - (165,207)
Interest (expense) income (39,506) (12) 45 - (39,473)
----------------------------------------------------------------------------------
Income (loss) before tax effect 63,402 (64,759) (3,111) - (4,468)
Income tax provision (benefit) 25,935 (21,079) (1,303) - 3,553
----------------------------------------------------------------------------------
Income (loss) before extraordinary loss 37,467 (43,680) (1,808) - (8,021)
Extraordinary loss on early
retirement of debt (1,105) - - - (1,105)
----------------------------------------------------------------------------------
Net income (loss) $ 36,362 $ (43,680) $ (1,808) $ - $ (9,126)
==================================================================================
Year ended December 31, 1999
Total revenues $ 2,257,952 $ 1,989,237 $ 40,915 $ - $ 4,288,104
Operating expenses 2,140,144 1,971,696 39,480 - 4,151,320
----------------------------------------------------------------------------------
Operating income 117,808 17,541 1,435 - 136,784
Gain on sale of assets - 182,930 - - 182,930
Interest (expense) income (54,700) 292 160 - (54,248)
----------------------------------------------------------------------------------
Income before tax provision 63,108 200,763 1,595 - 265,466
Income tax provision 34,799 72,031 1,268 - 108,098
----------------------------------------------------------------------------------
Income before extraordinary loss 28,309 128,732 327 - 157,368
Extraordinary loss on early
retirement of debt (7,150) - - - (7,150)
----------------------------------------------------------------------------------
Net income $ 21,159 $ 128,732 $ 327 $ - $ 150,218
==================================================================================
Year ended December 31, 1998
Total revenues $ 1,646,807 $ 1,167,387 $ 10,678 $ - $ 2,824,872
Operating expenses 1,584,731 1,139,387 11,520 - 2,735,638
----------------------------------------------------------------------------------
Operating income (loss) 62,076 28,000 (842) - 89,234
Interest (expense) income (13,943) 846 103 - (12,994)
----------------------------------------------------------------------------------
Income (loss) before tax provision 48,133 28,846 (739) - 76,240
Income tax provision 17,903 15,377 286 - 33,566
----------------------------------------------------------------------------------
Net income (loss) $ 30,230 $ 13,469 $ (1,025) $ - $ 42,674
==================================================================================
Condensed Consolidating Statement of Cash Flows
- -------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Net cash (used in) provided by
operating activities $ (313,023) $ 567,294 $ (8,214) $ (147) $ 245,910
----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (107,171) 27,215 (262) - (80,218)
Proceeds from sales of property
and equipment 8,831 - - - 8,831
Other (2,191) - - - (2,191)
----------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (100,531) 27,215 (262) - (73,578)
----------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (240,069) - - - (240,069)
Treasury stock acquired (30,247) - - - (30,247)
Other 18,689 - - - 18,689
Net transactions with parent 689,901 (697,226) 7,178 147 -
----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 438,274 (697,226) 7,178 147 (251,627)
----------------------------------------------------------------------------------
Effect of foreign currency
translation adjustment (131) - - - (131)
----------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 24,589 (102,717) (1,298) - (79,426)
Cash and cash equivalents at beginning
of year 123,722 4,198 4,710 - 132,630
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 148,311 $ (98,519) $ 3,412 $ - $ 53,204
==================================================================================
Year ended December 31, 1999
Net cash provided by (used in)
operating activities $ 229,381 $ (24,216) $ 8,747 $ 147 $ 214,059
----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (23,656) (12,652) (650) - (36,958)
Acquisitions, net of cash acquired - (716,735) (5,883) - (722,618)
----------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (23,656) (729,387) (6,533) - (759,576)
----------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (1,015,000) - - - (1,015,000)
Proceeds from long-term debt 1,290,950 - - - 1,290,950
Net proceeds from issuance of
common stock 299,378 - - - 299,378
Deferred financing fees (26,316) - - - (26,316)
Other 6,438 - - - 6,438
Net transactions with parent (755,474) 754,976 645 (147) -
----------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (200,024) 754,976 645 (147) 555,450
----------------------------------------------------------------------------------
Effect of foreign currency
translation adjustment 108 - - - 108
----------------------------------------------------------------------------------
Net increase in cash and
cash equivalents 5,809 1,373 2,859 - 10,041
Cash and cash equivalents at beginning
of year 117,913 2,825 1,851 - 122,589
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 123,722 $ 4,198 $ 4,710 $ - $ 132,630
==================================================================================
12. Segment information
We are organized on the basis of services offered and have determined we
have two reportable segments: PBM services and non-PBM services (defined in Note
1 "organization and operations"). We manage the pharmacy benefit within an
operating segment that encompasses a fully-integrated PBM service. The remaining
three operating service lines (IVTx, SDS and Vision) have been aggregated into a
non-PBM reporting segment.
The following table presents information about the reportable segments for
the years ended December 31:
(in thousands) PBM Non-PBM Total
- ------------------------------------------------------------------------------------------
2000
Total revenues $ 6,698,820 $ 88,044 $ 6,786,864
Depreciation and amortization expense 77,830 785 78,615
Interest income 8,430 - 8,430
Interest expense 47,898 5 47,903
Income before income taxes (19,666) 15,198 (4,468)
Total assets 2,227,348 49,296 2,276,644
Capital expenditures 78,065 2,153 80,218
- ------------------------------------------------------------------------------------------
1999
Total revenues $ 4,222,294 $ 65,810 $ 4,288,104
Depreciation and amortization expense 71,156 711 71,867
Interest income 5,761 1 5,762
Interest expense 60,001 9 60,010
Income before income taxes 259,182 6,284 265,466
Total assets 2,479,746 7,565 2,487,311
Capital expenditures 35,895 1,063 36,958
- ------------------------------------------------------------------------------------------
1998
Total revenues $ 2,765,111 $ 59,761 $ 2,824,872
Depreciation and amortization expense 25,466 983 26,449
Interest income 7,235 1 7,236
Interest expense 20,218 12 20,230
Income before income taxes 70,107 6,133 76,240
Total assets 1,068,715 26,746 1,095,461
Capital expenditures 23,432 421 23,853
- ------------------------------------------------------------------------------------------
13. Quarterly financial data (unaudited)
- --------------------------------------------------------------------------------
Quarters
-------------------------------------------------------------------------
(in thousands, except per share data) First Second(1) Third(2) Fourth(3)
- ------------------------------------------------------------------------------------------------------------------------
Fiscal 2000
Total revenues $ 1,475,509 $ 1,653,367 $ 1,736,489 $ 1,921,499
Cost of revenues 1,343,063 1,515,964 1,603,650 1,784,515
Selling, general and administrative 83,371 87,421 82,687 85,981
Operating income 49,075 49,982 50,152 51,003
Extraordinary loss on early retirement
of debt - - (898) (207)
-------------------------------------------------------------------------
Net income (loss) $ 21,432 $ (74,177) $ 23,875 $ 19,744
=========================================================================
Basic earnings per share:
Before extraordinary loss $ 0.56 $ (1.96) $ 0.64 $ 0.52
Extraordinary loss on early retirement
of debt - - (0.02) (0.01)
-------------------------------------------------------------------------
Net income (loss) $ 0.56 $ (1.96) $ 0.62 $ 0.51
=========================================================================
Diluted earnings per share:(4)
Before extraordinary loss $ 0.55 $ (1.96) $ 0.63 $ 0.51
Extraordinary loss on early retirement
of debt - - (0.02) (0.01)
-------------------------------------------------------------------------
Net income (loss) $ 0.55 $ (1.96) $ 0.61 $ 0.50
=========================================================================
<FN>
(1) Includes a non-cash write-off of $155,500 ($97,032 net of tax) on our
investment in PlanetRx. Excluding this amount, our basic and diluted
earnings per share would have been $0.60 and $0.59, respectively.
(2) Includes an ordinary gain of $1,500 ($926 net of tax) on the restructuring
of our interest rate swap agreements. Excluding this amount, our basic and
diluted earnings per share before extraordinary items would have been $0.62
and $0.61, respectively.
(3) Includes a non-cash write-off of $9,707 ($6,057 net of tax) on our
investment in PlanetRx. Excluding this amount, our basic and diluted
earnings per share would have been $0.68 and $0.66, respectively.
(4) In accordance with FAS 128, basic weighted average shares were used to
calculate second quarter 2000 diluted EPS as the net loss and the actual
diluted weighted average shares (38,507 as of June 30, 2000) cause diluted
EPS to be anti-dilutive.
</FN>
- ------------------------------------------------------------------------------------------------------------------------
Quarters
-------------------------------------------------------------------------
(in thousands, except per share data) First Second(1) Third Fourth(2)
- ------------------------------------------------------------------------------------------------------------------------
Fiscal 1999
Total revenues $ 899,087 $ 996,749 $ 1,083,496 $ 1,308,772
Cost of revenues 823,647 869,989 958,987 1,174,282
Selling, general and administrative 46,440 81,897 78,761 87,096
Operating income 29,000 35,463 45,748 26,573
Extraordinary loss on early retirement
of debt - (6,597) (553) -
-------------------------------------------------------------------------
Net income $ 13,543 $ 421 $ 16,995 $ 119,259
=========================================================================
Basic earnings per share:
Before extraordinary loss $ 0.41 $ 0.20 $ 0.46 $ 3.10
Extraordinary loss on early retirement
of debt - (0.19) (0.02) -
-------------------------------------------------------------------------
Net income $ 0.41 $ 0.01 $ 0.44 $ 3.10
=========================================================================
Diluted earnings per share:
Before extraordinary loss $ 0.40 $ 0.20 $ 0.45 $ 3.03
Extraordinary loss on early retirement
of debt - (0.19) (0.02) -
-------------------------------------------------------------------------
Net income $ 0.40 $ 0.01 $ 0.43 $ 3.03
=========================================================================
<FN>
(1) Includes the acquisition of DPS effective April 1, 1999. Also includes a
non-recurring operating charge of $9,400 ($5,773 net of tax). Excluding this
amount, our basic and diluted earnings per share before extraordinary items
would have been $0.38 and $0.37, respectively.
(2) Includes non-recurring operating charges and a one-time non-operating gain
of $20,821 ($12,415 net of tax) and $182,903 ($112,037 net of tax),
respectively. Excluding these amounts, our basic and diluted earnings per
share before extraordinary items would have been $0.51 and $0.50,
respectively.
</FN>
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10 - Directors and Executive Officers of the Registrant
The information required by this item will be incorporated by reference
from our definitive Proxy Statement for our 2001 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A (the "Proxy Statement") under the heading
"I. Election of Directors"; provided that the Compensation Committee Report on
Executive Compensation, the Audit Committee Report and the performance graph
contained in the Proxy Statement shall not be deemed to be incorporated herein;
and further provided that some of the information regarding our executive
officers required by Item 401 of Regulation S-K has been included in Part I of
this report.
Item 11 - Executive Compensation
The information required by this item will be incorporated by reference
from the Proxy Statement under the headings "Directors' Compensation,"
"Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation."
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be incorporated by reference
from the Proxy Statement under the headings "Security Ownership of Certain
Beneficial Owners and Management."
Item 13 - Certain Relationships and Related Transactions
The information required by this item will be incorporated by reference
from the Proxy Statement under the heading "Certain Relationships and Related
Transactions."
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
(1) Financial Statements
The following report of independent accountants and our
consolidated financial statements are contained in this Report on the
page indicated
Page No. In
Form 10-K
---------------
Report of Independent Accountants 38
Consolidated Balance Sheet as of
December 31, 2000 and 1999 39
Consolidated Statement of Operations
for the years ended December 31, 2000,
1999 and 1998 40
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998 41
Consolidated Statement of Cash Flows for
the years ended December 31, 2000,
1999 and 1998 42
Notes to Consolidated Financial Statements 43
(2) The following financial statement schedule is contained in this Report
on the page indicated.
Page No. In
Financial Statement Schedule: Form 10-K
--------------
VIII. Valuation and Qualifying Accounts
and Reserves for the years ended
December 31, 2000, 1999 and 1998 69
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or the notes thereto.
(3) List of Exhibits
See Index to Exhibits on pages 70 - 75
(b) Reports on Form 8-K
(i) On October 17, 2000, we filed a Current
Report on Form 8-K, dated October 17, 2000
under Items 5 and 7, regarding a press
release we issued concerning our third
quarter 2000 financial performance.
(ii) On October 18, 2000, we filed a Current
Report on Form 8-K, dated October 17, 2000
under Items 5 and 7, regarding an amendment
to the employment agreement between the
Company and Mr. Toan, our President and
Chief Executive Officer.
(iii) On October 31, 2000, we filed a Current
Report on Form 8-K, dated October 31, 2000
under Item 5, regarding our 1999 Drug Trend
Report dated June 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
February 26, 2001 By: /s/ Barrett A. Toan
Barrett A. Toan, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Barrett A. Toan President, February 26, 2001
Barrett A. Toan Chief Executive
Officer and
Chairman of the Board
Of Directors
/s/ George Paz Senior Vice President and February 26, 2001
George Paz Chief Financial Officer
/s/ Joseph W. Plum Vice President and February 26, 2001
Joseph W. Plum Chief Accounting Officer
/s/ Stuart L. Bascomb Director February 26, 2001
Stuart L. Bascomb
/s/ Gary G. Benanav Director February 26, 2001
Gary G. Benanav
/s/ Frank J. Borelli Director February 27, 2001
Frank J. Borelli
/s/ Barbara B. Hill Director February 23, 2001
Barbara B. Hill
Director
Richard A. Norling
/s/ Seymour Sternberg Director February 28, 2001
Seymour Sternberg
/s/ Howard L. Waltman Director February 27, 2001
Howard L. Waltman
/s/ Norman Zachary Director February 26, 2001
Norman Zachary
EXPRESS SCRIPTS, INC.
Schedule VIII - Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2000, 1999 and 1998
Col. A Col. B Col. C Col. D Col. E
- ---------------------- ------------ ------------------------------- -------------- -------------
Additions
-------------------------------
Balance Charges Charges Balance
at to Costs to Other at End
Beginning and and of
Description of Period Expenses Accounts (Deductions) Period
- ---------------------- ------------ ------------- -------------- -------------- -------------
Allowance for Doubtful
Accounts Receivable
Year Ended 12/31/98 $ 4,801,563 $ 4,583,008 $ 9,570,069(1) $ 1,148,356 $ 17,806,284
Year Ended 12/31/99 $ 17,806,284 $ 4,989,041 $ (937,616)(2) $ 4,576,997 $ 17,280,712
Year Ended 12/31/00 $ 17,280,712 $ 12,843,253 $ (1,370,986)(3) $ 6,075,618 $ 22,677,361
<FN>
(1) Represents the opening balance sheet for our April 1, 1998 acquisition of
ValueRx.
(2) Represents the opening balance sheet adjustment for ValueRx and the opening
balance sheet for our April 1, 1999 acquisition of DPS.
(3) Represents the opening balance sheet adjustment for DPS.
</FN>
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
Exhibit
Number Exhibit
2.1(2) 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)).
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit No. 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1999.
3.2(1) Third Amended and Restated Bylaws, as amended.
4.1 Form of Certificate for Class A Common Stock, incorporated by
reference to Exhibit No. 4.1 to the Company's Registration
Statement on Form S-1 filed June 9, 1992 (Registration Number
33-46974).
4.2 Indenture, dated as of June 16, 1999, among the Company,
Bankers Trust Company, as trustee, and Guarantors named therein,
incorporated by reference to Exhibit No. 4.4 to the Company's
Registration Statement on Form S-4 filed August 4, 1999
(Registration Number 333-83133).
4.3 Supplemental Indenture, dated as of October 6, 1999, to
Indenture dated as of June 16, 1999, among the Company, Bankers
Trust Company, as trustee, and Guarantors named therein,
incorporated by reference to Exhibit No. 4.3 to the Company's
Annual Report on Form 10-K for the year ending December 31, 1999.
4.4 Second Supplemental Indenture, dated as of July 19, 2000, to
Indenture dated as of June 16, 1999, among the Company, Bankers
Trust Company, as trustee, and Guarantors named therein,
incorporated by reference to Exhibit No. 4.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
4.5 Stockholder and Registration Rights Agreement dated as of
October 6, 2000 between the Company and New York Life Insurance
Company, incorporated by reference to Exhibit No. 4.2 to the
Company's Amendment No. 1 to Registration Statement on Form S-3
filed October 17, 2000 (Registration Number 333-47572).
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).
10.1 Lease Agreement dated March 3, 1992, between Riverport, Inc.
and Douglas Development Company--Irvine Partnership in commendam
and the Company, incorporated by reference to Exhibit No. 10.21
to the Registration Statement on Form S-1 filed June 9, 1992
(Registration Number 33-46974).
10.2 First Amendment to Lease dated as of December 29, 1992,
between Sverdrup/MDRC Joint Venture and the Company, incorporated
by reference to Exhibit No. 10.13 to the Company's Quarterly
Report on Form 10-Q for the quarter ending June 30, 1993.
10.3 Second Amendment to Lease dated as of May 28, 1993, between
Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.14 to the Company's Quarterly Report
on Form 10-Q for the quarter ending June 30, 1993.
10.4 Third Amendment to Lease entered into as of October 15,
1993, by and between Sverdrup/MDRC Joint Venture and the Company,
incorporated by reference to Exhibit No. 10.69 to the Company's
Annual Report on Form 10-K for the year ending 1993.
10.5 Fourth Amendment to Lease dated as of March 24, 1994, by and
between Sverdrup/MDRC Joint Venture and the Company, incorporated
by reference to Exhibit No. 10.70 to the Company's Annual Report
on Form 10-K for the year ending 1993.
10.6 Fifth Amendment to Lease made and entered into June 30,
1994, between Sverdrup/MDRC Joint Venture and the Company,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1994.
10.7 Sixth Amendment to Lease made and entered into January 31,
1995, between Sverdrup/MDRC Joint Venture and the Company,
incorporated by reference to Exhibit No. 10.70 to the Company's
Annual Report on Form 10-K for the year ending 1994.
10.8 Seventh Amendment to Lease dated as of August 14, 1998, by
and between Duke Realty Limited Partnership, by and through its
general partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ending September
30, 1998.
10.9 Eighth Amendment to Lease dated as of August 14, 1998, by
and between Duke Realty Limited Partnership, by and through its
general partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ending September
30, 1998.
10.10 Ninth Amendment to Lease dated as of February 19, 1999, by
and between Duke Realty Limited Partnership, by and through its
general partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.29 to the Company's
Annual Report on Form 10-K/A for the year ending 1998.
10.11(3) Express Scripts, Inc. 1992 Stock Option Plan, incorporated
by reference to Exhibit No. 10.23 to the Registration Statement
on Form S-1 filed June 9, 1992 (Registration Number 33-46974).
10.12(3) Express Scripts, Inc. Stock Option Plan for Outside
Directors, incorporated by reference to Exhibit No. 10.24 to the
Registration Statement on Form S-1 filed June 9, 1992
(Registration Number 33-46974).
10.13(3) Express Scripts, Inc. 1994 Stock Option Plan, incorporated
by reference to Exhibit No. 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ending June 30, 1994.
10.14(3) Amended and Restated Express Scripts, Inc. 1992 Employee
Stock Option Plan, incorporated by reference to Exhibit No. 10.78
to the Company's Annual Report on Form 10-K for the year ending
1994.
10.15(3) First Amendment to Express Scripts, Inc. Amended and
Restated 1992 Stock Option Plan incorporated by reference to
Exhibit D to the Company's Proxy Statement dated April 22, 1999.
10.16(3) Second Amendment to Express Scripts, Inc. Amended and
Restated 1992 Stock Option Plan incorporated by reference to
Exhibit F to the Company's Proxy Statement dated April 22, 1999.
10.17(3) Amended and Restated Express Scripts, Inc. Stock Option
Plan for Outside Directors, incorporated by reference to Exhibit
No. 10.79 to the Company's Annual Report on Form 10-K for the
year ending 1994.
10.18(3) First Amendment to Express Scripts, Inc. Amended and
Restated 1992 Stock Option Plan for Outside Directors
incorporated by reference to Exhibit A to the Company's Proxy
Statement dated April 9, 1996.
10.19(3) Second Amendment to Express Scripts, Inc. Amended and
Restated 1992 Stock Option Plan for Outside Directors
incorporated by reference to Exhibit G to the Company's Proxy
Statement dated April 22, 1999.
10.20(3) Amended and Restated Express Scripts, Inc. 1994 Stock
Option Plan incorporated by reference to Exhibit No. 10.80 to the
Company's Annual Report on Form 10-K for the year ending 1994.
10.21(3) First Amendment to Express Scripts, Inc. Amended and
Restated 1994 Stock Option Plan incorporated by reference to
Exhibit A to the Company's Proxy Statement dated April 16, 1997.
10.22(3) Second Amendment to Express Scripts, Inc. Amended and
Restated 1994 Stock Option Plan incorporated by reference to
Exhibit A to the Company's Proxy Statement dated April 21, 1998.
10.23(3) Third Amendment to Express Scripts, Inc. Amended and
Restated 1994 Stock Option Plan, incorporated by reference to
Exhibit C to the Company's Proxy Statement dated April 22, 1999.
10.24(3) Fourth Amendment to Express Scripts, Inc. Amended and
Restated 1994 Stock Option Plan, incorporated by reference to
Exhibit E to the Company's Proxy Statement dated April 22, 1999.
10.25(3) Express Scripts, Inc. 2000 Long Term Incentive Plan,
incorporated by reference to Exhibit No. 4.3 to the Company's
Registration Statement on Form S-8, filed with the Securities and
Exchange Commission on August 9, 2000 (Registration Number
333-43336).
10.26(3) Express Scripts, Inc. Employee Stock Purchase Plan
incorporated by reference to Exhibit No. 4.1 to the Company's
Registration Statement on Form S-8 filed December 29, 1998
(Registration Number 333-69855).
10.27(3) Express Scripts, Inc. Executive Deferred Compensation
Plan, as amended, incorporated by reference to Exhibit No 10.1 to
the Company's Quarterly Report on From 10-Q for the quarter
ending June 30, 2000.
10.28(3) Employment Agreement effective as of April 1, 1999,
between Barrett A. Toan and the Company, incorporated by
reference to Exhibit No. 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ending March 31, 1999.
10.29(3) Amendment to the Employment Agreement between the Company
and Barrett A. Toan, incorporated by reference to Exhibit No.
10.1 to the Company's Current Report on Form 8-K dated October
17, 2000 and filed October 18, 2000.
10.30(3) Form of Severance Agreement dated as of January 27, 1998,
between the Company and each of the following individuals: Stuart
L. Bascomb, Thomas M. Boudreau, Linda L. Logsdon, David A.
Lowenberg, George Paz, Terrence D. Arndt (agreement dated as of
May 26, 1999), Mabel Chen (agreement dated as of Novemebr 23,
1999), Mark O. Johnson (agreement dated as of May 26, 1999) and
Edward J. Tenholder (dated December 4, 2000) incorporated by
reference to Exhibit No. 10.70 to the Company's Annual Report on
Form 10-K for the year ending December 31, 1997.
10.31 Credit Agreement dated as of April 1, 1999 among the
Company, the Lenders listed therein, Credit Suisse First Boston
as lead Arranger, Administrative Agent and Collateral Agent,
Bankers Trust Company as Syndication Agent, BT Alex. Brown
Incorporated as Co-Arranger, The First National Bank of Chicago
as Co-Documentation Agent, and Mercantile Bank, N.A. as
co-Documentation Agent, incorporated by reference to Exhibit No.
10.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1999.
10.32 Amendment No.1 to Credit Agreement dated as of April 1,
1999 among the Company, the Lenders listed therein, Credit Suisse
First Boston as Lead Arranger, Administrative Agent and BT Alex.
Brown Incorporated as Co-Arranger, The First National Bank of
Chicago as Co-Documentation Agent, and Mercantile Bank, N.A. as
Co-Documentation Agent, incorporated by reference to Exhibit No.
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1999.
10.33 Amendment No. 2 to Credit Agreement dated as of April 1,
1999 among the Company, the Lenders listed therein, Credit Suisse
First Boston as Lead Arranger, Administrative Agent and
Collateral Agent, Bankers Trust Company as Syndication Agent, BT
Alex. Brown Incorporated as Co-Arranger, The First National Bank
of Chicago as Co-Documentation Agent, and Mercantile Bank, N.A.
as Co-Documentation Agent, incorporated by reference to Exhibit
No. 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1999.
10.34 Amendment No. 3 and Waiver to Credit Agreement dated as of
April 1, 1999 among the Company, the Lenders listed therein,
Credit Suisse First Boston as Lead Arranger, Administrative Agent
and Collateral Agent, Bankers Trust Company as Syndication Agent,
BT Alex. Brown Incorporated as Co-Arranger, The First National
Bank of Chicago as Co-Documentation Agent, and Mercantile Bank,
N.A. as Co-Documentation Agent, incorporated by reference to
Exhibit No. 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ending September 30, 1999.
10.35 Subsidiary Guaranty dated as of April 1, 1999, in favor of
Credit Suisse First Boston as Collateral Agent and the Lenders
listed in the Credit Agreement, by the following parties: Managed
Prescription Network, Inc., Value Health, Inc., IVTx, Inc.,
Express Scripts Vision Corp., ESI/VRx Sales Development Co.,
HealthCare Services, Inc., MHI, Inc., ValueRx, Inc., ValueRx
Pharmacy Program, Inc., Diversified Pharmaceutical Services,
Inc., ESI OnLine, Inc., incorporated by reference to Exhibit No.
10.9 to the Company's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1999.
10.36 Company Pledge Agreement dated as of April 1, 1999, by the
Company in favor of Credit Suisse First Boston as Collateral
Agent and the Lenders listed in the Credit Agreement,
incorporated by reference to Exhibit No. 10.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1999.
10.37 Subsidiary Pledge Agreement dated as of April 1, 1999, in
favor of Credit Suisse First Boston as Collateral Agent and the
Lenders listed in the Credit Agreement, by the following parties:
ESI Canada Holdings, Inc., Value Health, Inc., ValueRx, Inc.,
incorporated by reference to Exhibit No. 10.11 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1999.
10.38 International Swap Dealers Association, Inc. Master
Agreement dated as of April 3, 1998, between the Company and The
First National Bank of Chicago, incorporated by reference to
Exhibit No. 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1998.
10.39 Swap Transaction Confirmation Agreement between the Company
and Bankers Trust Company dated June 17, 1999, incorporated by
reference to Exhibit No. 10.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1999.
10.40(4) Agreement dated June 19, 2000 by and among the Company and
PlanetRx.com, Inc., incorporated by reference to Exhibit No. 7 to
Schedule 13D dated June 19, 2000 (filed June 29, 2000), filed by
the Company with respect to PlanetRx.com, Inc.
10.41 Amended and Restated Investor's Rights Agreement dated as
of June 3, 1999, incorporated by reference to the Exhibit No. 4.2
to PlanetRx's Registration Statement on Form S-1, as amended
(Registration Number 333-82485).
10.42 Amendment of Amended and Restated Investor's Rights
Agreement dated as of October 13, 1999 by and between
PlanetRx.com, Inc. and YourPharmacy.com, Inc. (incorporated by
reference to Exhibit 4 to Schedule 13D dated October 21, 1999
filed October 22, 1999) filed by Express Scripts, Inc. with
respect to PlanetRx.com, Inc. (File No. 000-27437).
12.1(1) Computation of Ratios of Earnings to Fixed Charges.
21.1(1) List of Subsidiaries.
23.1(1) Consent of PricewaterhouseCoopers LLP.
[FN]
1 Filed herein.
2 The Company agrees to furnish supplementally a copy of any omitted schedule
to this agreement to the Commission upon request.
3 Management contract or compensatory plan or arrangement.
4 Confidential treatment was granted for certain portions of this exhibit.
</FN>