- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 X For the quarterly period ended March 31, 2002.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
_____________.
Commission File Number: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1420563
(State of Incorporation) (I.R.S. employer identification no.)
13900 RIVERPORT DR.
MARYLAND HEIGHTS, MISSOURI 63043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 770-1666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Common stock outstanding as of April 30, 2002: 79,799,041 Shares
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EXPRESS SCRIPTS, INC.
INDEX
PAGE NUMBER
Part I Financial Information 3
Item 1. Financial Statements (unaudited)
a) Consolidated Balance Sheet 3
b) Consolidated Statement of Operations 4
c) Consolidated Statement of Changes
in Stockholders' Equity 5
d) Consolidated Statement of Cash Flows 6
e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 24
Part II Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds
- (Not Applicable)
Item 3. Defaults Upon Senior Securities - (Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders -
(Not Applicable)
Item 5. Other Information - (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Index to Exhibits 30
2
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 2002 2001
---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 158,684 $ 177,715
Receivables, net 858,777 883,827
Inventories 154,072 122,375
Deferred taxes 18,016 16,368
Prepaid expenses and other current assets 12,891 12,918
---------------- ----------------
Total current assets 1,202,440 1,213,203
Property and equipment, net 150,808 165,263
Goodwill, net 967,263 942,280
Other intangible assets, net 169,674 165,349
Other assets 17,327 14,150
---------------- ----------------
Total assets $ 2,507,512 $ 2,500,245
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Claims and rebates payable $ 867,585 $ 910,360
Other current liabilities 350,610 335,257
---------------- ----------------
Total current liabilities 1,218,195 1,245,617
Long-term debt 346,040 346,119
Other liabilities 64,612 76,512
---------------- ----------------
Total liabilities 1,628,847 1,668,248
---------------- ----------------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, and no
shares issued and outstanding - -
Common Stock, $0.01 par value, 181,000,000 shares
authorized, and 79,250,000 and 79,230,000 shares issued and 792 792
outstanding, respectively
Additional paid-in capital 481,203 492,229
Unearned compensation under employee compensation plans (13,018) (15,452)
Accumulated other comprehensive income (4,033) (4,593)
Retained earnings 456,083 412,114
---------------- ----------------
921,027 885,090
Common Stock in treasury at cost, 925,000 and 1,199,000
shares, respectively (42,362) (53,093)
---------------- ----------------
Total stockholders' equity 878,665 831,997
---------------- ----------------
Total liabilities and stockholders' equity $ 2,507,512 $ 2,500,245
================ ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
--------------- ---------------
Revenues $ 2,749,069 $ 2,090,540
Cost of revenues 2,574,412 1,945,641
--------------- ---------------
Gross profit 174,657 144,899
Selling, general and administrative 96,387 89,798
--------------- ---------------
Operating income 78,270 55,101
--------------- ---------------
Other income (expense):
Undistributed loss from joint venture (1,037) -
Interest income 1,060 1,410
Interest expense (8,128) (9,144)
--------------- ---------------
(8,105) (7,734)
--------------- ---------------
Income before income taxes 70,165 47,367
Provision for income taxes 26,196 19,288
--------------- ---------------
Net Income 43,969 28,079
=============== ===============
Basic earnings per share $ 0.57 $ 0.36
=============== ===============
Weighted average number of common shares
outstanding during the period - Basic EPS 77,686 77,540
=============== ===============
Diluted earnings per share $ 0.55 $ 0.35
=============== ===============
Weighted average number of common shares
outstanding during the period - Diluted EPS 79,575 79,634
=============== ===============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Number
of Amount
Shares
--------- -------------------------------------------------------------------------------------
Unearned
Compensation Accumulated
Additional Under Employee Other
Common Common Paid-in Compensation Comprehensive Retained Treasury
(IN THOUSANDS) Stock Stock Capital Plans Income Earnings Stock Total
- ------------------------------------------- -------------------------------------------------------------------------------------
Balance at December 31, 2001 79,230 $ 792 $492,229 $ (15,452) $(4,593) $ 412,114 $ (53,093) $ 831,997
--------- -------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - - - 43,969 - 43,969
Other comprehensive income,
Foreign currency
translation adjustment - - - - (145) - - (145)
Realized and unrealized gains
on derivative financial
instruments, net of taxes - - - - 705 - - 705
--------- -------------------------------------------------------------------------------------
Comprehensive income - - - - 560 43,969 - 44,529
Treasury stock acquired - - - - - - (13,598) (13,598)
Common stock issued under
employee plans 20 - 1,886 - - - - 1,886
Amortization of unearned
compensation under
employee plans - - - 2,434 - - - 2,434
Exercise of stock options - (14,039) - - - 24,329 10,290
Tax benefit relating to
employee stock options - - 5,978 - - - - 5,978
Renegotiation of contractual
agreement - (Note 5) - - (4,851) - - - - (4,851)
--------- -------------------------------------------------------------------------------------
Balance at March 31, 2002 79,250 $ 792 $481,203 $ (13,018) $(4,033) $ 456,083 $ (42,362) $ 878,665
========= =====================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS) 2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income $ 43,969 $ 28,079
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 29,295 19,001
Non-cash adjustments to net income (loss) 16,330 22,963
Net changes in operating assets and liabilities (64,795) (19,980)
---------------- ----------------
Net cash provided by operating activities 24,799 50,063
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (9,262) (10,442)
Acquisition, net of cash acquired,
and investment in joint venture (32,934) (17,733)
Other 5 68
---------------- ----------------
Net cash used in investing activities (42,191) (28,107)
---------------- ----------------
Cash flows from financing activities:
Treasury stock acquired (13,598) -
Proceeds from employee stock plans 12,176 10,560
Other (316) -
---------------- ----------------
Net cash (used in) provided by financing activities (1,738) 10,560
---------------- ----------------
Effect of foreign currency translation adjustment 99 (620)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (19,031) 31,896
Cash and cash equivalents at beginning of period 177,715 53,204
---------------- ----------------
Cash and cash equivalents at end of period $ 158,684 $ 85,100
================ ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted in this Form 10-Q pursuant to the Rules and Regulations of the
Securities and Exchange Commission. However, in our opinion, the disclosures
contained in this Form 10-Q are adequate to make the information presented not
misleading when read in conjunction with the notes to consolidated financial
statements included in our Annual Report on Form 10-K for the Year Ended
December 31, 2001 as filed with the Securities and Exchange Commission on March
8, 2002.
In our opinion, the accompanying unaudited consolidated financial
statements reflect all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Unaudited Consolidated Balance
Sheet at March 31, 2002, the Unaudited Consolidated Statement of Operations for
the three months ended March 31, 2002 and 2001, the Unaudited Consolidated
Statement of Changes in Stockholders' Equity for the three months ended March
31, 2002, and the Unaudited Consolidated Statement of Cash Flows for the three
months ended March 31, 2002 and 2001. Operating results for the three months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002.
NOTE 2 - GOODWILL AND OTHER INTANGIBLES
The company adopted Financial Accounting Standards Board Statement No.
("FAS") 142, "Goodwill and Other Intangible Assets" effective January 1, 2002.
FAS 142 requires that goodwill no longer be amortized. Instead, all goodwill
(including goodwill associated with acquisitions consummated prior to the
adoption of FAS 142) is to be evaluated for impairment annually or when events
or circumstances occur indicating that goodwill might be impaired. In accordance
with the implementation provisions of FAS 142, we expect to complete our first
impairment test under FAS 142 by the end of the second quarter of 2002, and we
do not anticipate incurring an impairment charge. All goodwill impairment losses
are to be presented as a separate line item in the operating section of the
consolidated results of operations (unless the impairment loss is associated
with a discontinued operation or the initial adoption of FAS 142, which would be
recorded as a change in accounting principle).
The following is a summary of our goodwill and other intangible assets
(amounts in thousands).
MARCH 31, 2002 DECEMBER 31, 2001
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- --------------------------------------------------------------------------------------------------------------------------------
Goodwill
PBM $ 1,048,795 $ 106,551 $ 1,048,831 $ 106,551
Non-PBM 25,019 - - -
-------------------------------------- --------------------------------------
$ 1,073,814 $ 106,551 $ 1,048,831 $ 106,551
====================================== ======================================
Other intangible assets
PBM
Customer contracts $ 184,600 $ 48,815 $ 184,612 $ 46,659
Other 61,398 30,472 56,148 28,752
-------------------------------------- --------------------------------------
245,998 79,287 240,760 75,411
Non-PBM
Customer contracts 2,963 - - -
-------------------------------------- --------------------------------------
$ 248,961 $ 79,287 $ 240,760 $ 75,411
====================================== ======================================
The aggregate amount of amortization expense of other intangible assets
was $3,876,000 and $2,946,000 for the three months ended March 31, 2002 and
2001, respectively.
7
The following table compares our company's net income and per share
amounts for the three months ended March 31, 2002, to net income and per share
amounts for the three months ended March 31, 2001, adjusted for the amortization
of goodwill (in thousands, except per share amounts).
THREE MONTHS ENDED
MARCH 31,
2002 2001
- --------------------------------------------------------------------------------
Reported net income $ 43,969 $ 28,079
Add back: Goodwill amortization, net of tax - 6,511
------------------------------
Adjusted net income $ 43,969 $ 34,590
==============================
Reported basic earnings per share $ 0.57 $ 0.36
Add back: Goodwill amortization, net of tax - 0.09
------------------------------
Adjusted basic earnings per share $ 0.57 $ 0.45
==============================
Reported diluted earnings per share $ 0.55 $ 0.35
Add back: Goodwill amortization, net of tax - 0.08
------------------------------
Adjusted diluted earnings per share $ 0.55 $ 0.43
==============================
NOTE 3 - RECEIVABLES
Included in accounts receivable, net as of March 31, 2002 and December
31, 2001, are allowance for doubtful accounts of $26,920,000 and $24,157,000,
respectfully.
As of March 31, 2002 and December 31, 2001, unbilled receivables were
$403,890,000 and $435,708,000, respectively. Unbilled receivables are billed to
clients typically within 30 days based on the contractual billing schedule
agreed upon with the client.
NOTE 4 - PROPERTY AND EQUIPMENT
During the first quarter of 2002, the estimated useful lives of certain
computer equipment and software associated with our legacy computer systems were
shortened due to the continued progress of our integration to one adjudication
platform. This change in the estimated useful lives increased depreciation and
amortization expense by approximately $14 million during the quarter.
NOTE 5 - CONTRACTUAL AGREEMENTS
In March 2002, we renegotiated certain terms of our relationship with
Manulife and entered into an amended agreement which, among other things,
extended the term of the agreement through March 2009. During 2001, Manulife
earned 101,000 shares to be issued in 2002. In lieu of the issuance of the
101,000 shares, we made a cash payment to Manulife. Therefore, the advance
discount recorded in other intangible assets as of December 31, 2001 was
recorded against revenue during the first quarter of 2002. In addition, the
amendment eliminated the ability for Manulife to earn shares of our common stock
from the achievement of certain pharmacy claims volume or to receive the
warrants contemplated in the original agreement.
NOTE 6 - EARNINGS PER SHARE (REFLECTING THE TWO-FOR-ONE STOCK SPLIT EFFECTIVE
JUNE 22, 2001)
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed in the same manner as basic earnings per share but adds the number of
additional common shares that would have been outstanding for the period if the
dilutive potential common shares had been issued. The following is the
reconciliation between the number of weighted average shares used in the basic
and diluted earnings per share calculation for all periods (amounts in
thousands).
8
THREE MONTHS ENDED
MARCH 31,
2002 2001
- --------------------------------------------------------------------------------
Weighted average number of common shares
outstanding during the period - Basic EPS 77,686 77,540
Outstanding stock options 1,684 1,972
Executive deferred compensation plan 35 12
Restricted stock awards 170 110
----------- -----------
Weighted average number of common shares
outstanding during the period - Diluted EPS 79,575 79,634
=========== ===========
The above shares are all calculated under the "treasury stock" method in
accordance with FAS 128, "Earnings Per Share".
NOTE 7 - CHANGES IN BUSINESS
On April 12, 2002, we completed the acquisition of the businesses
comprising National Prescription Administrators, Inc. ("NPA") for a purchase
price of $450 million. NPA was a privately held full-service pharmacy benefit
manager, and will strengthen our participation in two key market segments, union
and government sponsored plans. The transaction will be accounted for under the
provisions of FAS 141, "Business Combinations" and FAS 142. The purchase price
was funded with a new $325 million Term B loan facility (see Note 6), $75
million of cash on hand, the issuance of 552,000 shares of our common stock, and
$25 million in borrowings under our revolving credit facility. We will file an
Internal Revenue Code ss.338(h)(10) election, making amortization expense of
intangible assets, including goodwill, tax deductible, which will provide a tax
benefit to us of approximately $85 million on a present value basis. In
addition, we borrowed an additional $75 million under our revolving credit
facility to fund working capital requirements of NPA. Pursuant to the Purchase
Agreement, to the extent closing date working capital is less than negative $11
million, the sellers are obligated to reimburse us for the deficit.
On February 25, 2002, we purchased substantially all of the assets
utilized in the operation of Phoenix Marketing Group (Holdings), Inc.
("Phoenix"), a wholly-owned subsidiary of Access Worldwide Communications, Inc.
for $33 million of our own cash plus the assumption of certain liabilities.
Phoenix is one of the largest prescription drug sample fulfillment companies,
shipping approximately 95 million sample units in 2001. The acquisition has been
accounted for under the provisions of FAS 141 and FAS 142. The purchase price
has been preliminarily allocated based upon the estimated fair value of net
assets acquired at the date of the acquisition. The excess of purchase price
over tangible net assets acquired has been preliminarily allocated to intangible
assets consisting of customer contracts in the amount of $2,962,000 which are
being amortized using the straight-line methods over the estimated useful life
of 20 years and are included in other intangible assets, and goodwill in the
amount of $25,019,000, which is not being amortized. The transaction was
structured as a purchase of assets, making amortization expense of intangible
assets, including goodwill, tax deductible. Pro forma information, as if Phoenix
had been acquired as of the beginning of 2002, is not being presented as the
inclusion of Phoenix financial data would not have a material impact to our
consolidated financial statements.
On June 12, 2001, we announced that we entered into an agreement with
Option Care, Inc. to sell our Express Scripts Infusion Services branch offices
for an amount approximating book value of the assets. In addition, we
discontinued all of our remaining acute home infusion services revenue
generating activities. The sale to Option Care, Inc. did not have a material
effect on our financial statements.
On March 1, 2001, our Canadian subsidiary, ESI Canada, Inc., completed
its acquisition of Centre d'autorisation et de paiement des services de sante,
Inc. ("CAPSS"), a leading Quebec-based PBM, for approximately CAN$26.8 million
(approximately US$17.5 million), which includes a purchase price adjustment for
closing working capital. The transaction, which was accounted for under the
purchase method of accounting, was funded with our operating cash flow. The
results of operations of CAPSS have been included in our consolidated financial
statements and PBM segment since March 1, 2001. The purchase price has been
allocated based upon the estimated fair value of net assets acquired at the date
of the acquisition. The excess of purchase price over tangible net assets
acquired was allocated to intangible assets consisting of customer contracts in
9
the amount of US$5,149,000, which are being amortized using the straight-line
method over the estimated useful life of 20 years and are included in other
intangible assets, and goodwill in the amount of US$11,655,000, which effective
January 1, 2002 is no longer being amortized. Pro forma information, as if CAPSS
had been acquired as of the beginning of 2001, is not being presented as the
inclusion of CAPSS financial data would not have a material impact to our
consolidated financial statements.
On February 22, 2001, we announced that we entered into an agreement
with AdvancePCS and Merck-Medco, L.L.C. to form RxHub, LLC ("RxHub"). RxHub will
be an electronic exchange enabling physicians who use electronic prescribing
technology to link to pharmacies, pharmacy benefit management ("PBM") companies
and health plans. The company is designed to operate as a utility for the
conduit of information among all parties engaging in electronic prescribing. We
own one-third of the equity of RxHub (as do each of the other two founders) and
have committed to invest up to $20 million over the next five years with
approximately $6.7 million invested through March 31, 2002. We have recorded our
investment in RxHub under the equity method of accounting, which requires our
percentage interest in RxHub's results to be recorded in our Consolidated
Statement of Operations. Our percentage of RxHub's loss for the three months
ended March 31, 2002 is $1,037,000 ($644,000 net of tax) and has been recorded
in other income (expense) in our Unaudited Consolidated Statement of Operations.
Our investment in RxHub (approximately $3,779,000 at March 31, 2002) is recorded
in other assets on our Consolidated Balance Sheet.
NOTE 8 - FINANCING
In March 2002, we received approval from the lenders of our existing
credit facility to add on a $325 million Term B loan facility. We also received
approval to amend certain covenants of our existing credit facility relating to
restricted junior payments, asset sales and a provision enabling a future
accounts receivable securitization facility. The Term B loans will have a
maturity of six years and will amortize 1% in years one through four, 25% in
year five and 71% in year six. Interest will be payable quarterly on an interest
rate spread of 200 basis points based on several London Interbank Offered Rates
("LIBOR") or base rate options. The Term B loans will be secured on the same
basis as our existing credit facility. The amendments became effective on April
12, 2002.
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, we adopted FAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by FAS 137 and FAS
138 ("FAS 133"). FAS 133 requires all derivative financial instruments, such as
interest rate swaps, to be recognized as either assets or liabilities in the
statement of financial position and measured at fair value.
As of March 31, 2002, we have one swap agreement to fix the variable
interest payments on approximately $98 million of our debt under our credit
facility. Under this swap agreement, we agree to receive a floating rate of
interest on the notional principal amount of approximately $98 million based
upon a three month LIBOR rate in exchange for payment of a fixed rate of 6.25%
per annum. The notional principal amount will decline to $89 million in April
2002 and will increase to $100 million in October 2002 before reducing to $60
million in April 2003 and to $20 million in April 2004 until maturing in April
2005.
Our present interest rate swap agreement is a cash flow hedge as it
agrees to pay a fixed-rate of interest, which is hedging against changes in the
amount of future cash flows associated with variable interest obligations.
Accordingly, the fair value of our swap agreement is reported on the balance
sheet in other liabilities ($4,687,000 pre-tax at March 31, 2002) and the
related gains or losses on these agreements are deferred in shareholders' equity
as a component of other comprehensive income (a $2,884,000, net of taxes,
reduction at March 31, 2002). These deferred gains or losses are then recognized
as an adjustment to interest expense over the same period in which the related
interest payments being hedged are recorded in income. If any of these
agreements are determined to have hedge ineffectiveness, the gains or losses
associated with the ineffective portion of these agreements are immediately
recognized in income. For the three months ended March 31, 2002 and 2001, the
gains and losses on the ineffective portion of our swap agreement were not
material to our consolidated financial statements.
10
NOTE 10 - COMMON STOCK
In May 2001, we announced a two-for-one stock split of our Common Stock
for stockholders of record on June 8, 2001, effective June 22, 2001. The split
was effected in the form of a dividend by issuance of one share of Common Stock
for each share of Class A Common Stock outstanding. The earnings per share and
the weighted average number of shares outstanding for basic and diluted earnings
per share have been adjusted for the stock split.
As of March 31, 2002, we have repurchased a total of 4,017,000 shares
of our Common Stock under the stock repurchase program that we announced on
October 25, 1996, of which, 260,000 shares were repurchased during the first
quarter of 2002. Approximately 3,092,000 shares have been reissued in connection
with employee compensation plans through March 31, 2002. In February 2002, our
Board of Directors approved an increase in the stock purchase program from
5,000,000 shares to 6,500,000 and placed no limit on the duration of the
program. Additional purchases, if any, will be made in such amounts and at such
times as we deem appropriate based upon prevailing market and business
conditions, subject to restrictions on stock repurchases contained in our bank
credit facility and the Indenture under which our Senior Notes were issued.
NOTE 11 - CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Our Senior Notes are unconditionally and jointly and severally
guaranteed by our wholly-owned domestic subsidiaries other than Great Plains
Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and
Diversified Pharmaceutical Services (Puerto Rico), Inc. The following condensed
consolidating financial information has been prepared in accordance with the
requirements for presentation of such information. We believe that this
information, presented in lieu of complete financial statements for each of the
guarantor subsidiaries, provides sufficient detail to allow investors to
determine the nature of the assets held by, and the operations of, each of the
consolidating groups. During 2001 and 2000, we undertook an internal corporate
reorganization to eliminate various entities whose existence was deemed to be no
longer necessary, including, among others, ValueRx, and to create several new
entities to conduct certain activities, including Express Scripts Specialty
Distribution Services ("SDS"), ESI Mail Pharmacy Service, Inc. ("ESI MPS"),
Express Access Pharmacy, Inc. ("EAP") and ESI Resources, Inc. ("ERI").
Consequently, the assets, liabilities and operations of ValueRx are incorporated
into those of the issuer, Express Scripts, Inc. and the assets, liabilities and
operations of SDS, ESI MPS, EAP and ERI are incorporated into those of the
Guarantors. Effective December 31, 2002, Practice Patterns Science, Inc. ("PPS")
was dissolved. The condensed consolidated non-guarantors financial statements
for 2001 included the assets, liabilities and operations of PPS. In addition, in
2002 we established a new entity, Phoenix Marketing Group LLC, to acquire the
assets of Phoenix which is incorporated into the assets, liabilities and
operations of the Guarantors.
11
CONDENSED CONSOLIDATING BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------------------
EXPRESS NON-
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ --------------- ---------------- ---------------- --------------- ----------------
AS OF MARCH 31, 2002
Current assets $ 980,489 $ 210,416 $ 11,535 $ - $ 1,202,440
Property and equipment, net 130,655 19,281 872 - 150,808
Investments in subsidiaries 1,235,478 771,080 - (2,006,558) -
Intercompany 297,183 (264,698) (32,485) - -
Goodwill, net 241,457 710,911 14,895 - 967,263
Other intangible assets, net 65,358 95,262 9,054 - 169,674
Other assets 17,650 (327) 4 - 17,327
--------------- ---------------- ---------------- --------------- ----------------
Total assets $ 2,968,270 $ 1,541,925 $ 3,875 $ (2,006,558) $ 2,507,512
=============== ================ ================ =============== ================
Current liabilities $ 445,999 $ 772,030 $ 166 $ - $ 1,218,195
Long-term debt 346,040 - - - 346,040
Other liabilities 69,535 (4,554) (369) - 64,612
Stockholders' equity 2,106,696 774,449 4,078 (2,006,558) 878,665
--------------- ---------------- ---------------- --------------- ----------------
Total liabilities and stockholders' equity $ 2,968,270 $ 1,541,925 $ 3,875 $ (2,006,558) $ 2,507,512
=============== ================ ================ =============== ================
AS OF DECEMBER 31, 2001
Current assets $ 972,844 $ 230,303 $ 10,056 $ - $ 1,213,203
Property and equipment, net 131,567 32,500 1,196 - 165,263
Investments in subsidiaries 1,208,931 752,256 - (1,961,187) -
Intercompany 214,531 (185,148) (29,383) - -
Goodwill, net 241,457 685,893 14,930 - 942,280
Other intangible assets, net 62,198 93,787 9,364 - 165,349
Other assets 87,024 (72,492) (382) - 14,150
--------------- ---------------- ---------------- --------------- ----------------
Total assets $ 2,918,552 $ 1,537,099 $ 5,781 $ (1,961,187) $ 2,500,245
=============== ================ ================ =============== ================
Current liabilities $ 482,157 $ 759,969 $ 3,491 $ - $ 1,245,617
Long-term debt 346,119 - - - 346,119
Other liabilities 151,754 (73,173) (2,069) - 76,512
Stockholders' equity 1,938,522 850,303 4,359 (1,961,187) 831,997
--------------- ---------------- ---------------- --------------- ----------------
Total liabilities and stockholders' equity $ 2,918,552 $ 1,537,099 $ 5,781 $ (1,961,187) $ 2,500,245
=============== ================ ================ =============== ================
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
EXPRESS NON-GUARANTORS
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ --------------- ---------------- ---------------- --------------- ----------------
THREE MONTHS ENDED MARCH 31, 2002
Total revenues $ 1,659,251 $ 1,090,073 $ (255)(a) $ - $ 2,749,069
Operating expenses 1,601,950 1,065,485 3,364 - 2,670,799
--------------- ---------------- ---------------- --------------- ----------------
Operating income (loss) 57,301 24,588 (3,619) - 78,270
Undistributed loss from joint venture (1,037) - - - (1,037)
Interest (expense) income, net (7,080) (38) 50 - (7,068)
--------------- ---------------- ---------------- --------------- ----------------
Income (loss) before tax effect 49,184 24,550 (3,569) - 70,165
Income tax provision (benefit) 19,059 8,598 (1,461) - 26,196
--------------- ---------------- ---------------- --------------- ----------------
Net income (loss) $ 30,124 $ 15,952 $ (2,108) $ - $ 43,969
=============== ================ ================ =============== ================
THREE MONTHS ENDED MARCH 31, 2001
Total revenues $ 1,322,229 $ 763,374 $ 4,937 $ - $ 2,090,540
Operating expenses 1,282,520 749,088 3,831 - 2,035,439
--------------- ---------------- ---------------- --------------- ----------------
Operating income 39,709 14,286 1,106 - 55,101
Interest (expense) income, net (7,771) (1) 38 - (7,734)
--------------- ---------------- ---------------- --------------- ----------------
Income before tax effect 31,938 14,285 1,144 - 47,367
Income tax provision 13,396 5,452 440 - 19,288
--------------- ---------------- ---------------- --------------- ----------------
Net income $ 18,542 $ 8,833 $ 704 $ - $ 28,079
=============== ================ ================ =============== ================
(a) Revenues include the recording of the Manulife cash payment made in lieu of
the issuance of our common shares earned in 2001 by Manulife (See Note 5). 13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
- ------------------------------------------------ --------------- ---------------- ---------------- --------------- ----------------
EXPRESS NON-
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ --------------- ---------------- ---------------- --------------- ----------------
THREE MONTHS ENDED MARCH 31, 2002
Net cash provided by (used in)
operating activities $ 14,793 $ 19,259 $ (9,253) $ - $ 24,799
--------------- ---------------- ---------------- --------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (5,520) (3,647) (95) - (9,262)
Acquisitions and joint venture 86 (33,020) - - (32,934)
Other 5 - - - 5
--------------- ---------------- ---------------- --------------- ----------------
Net cash (used in) provided by
investing activities (5,429) (36,667) (95) - (42,191)
--------------- ---------------- ---------------- --------------- ----------------
Cash flows from financing activities:
Treasury stock acquired (13,598) - - - (13,598)
Proceeds from employee stock plans 12,176 - - - 12,176
Net transactions with parent 9,352 (14,783) 5,431 - -
Other (316) - - - (316)
--------------- ---------------- ---------------- --------------- ----------------
Net cash provided by (used in)
financing activities 7,614 (14,783) 5,431 - (1,738)
--------------- ---------------- ---------------- --------------- ----------------
Effect of foreign currency
translation adjustment (4,825) - 4,924 - 99
--------------- ---------------- ---------------- --------------- ----------------
Net increase (decrease) in cash and 12,153 (32,191) 1,007 - (19,031)
cash equivalents
Cash and cash equivalents at beginning
of the period 272,891 (102,163) 6,987 - 177,715
Cash and cash equivalents at end
--------------- ---------------- ---------------- --------------- ----------------
of the period $ 285,044 $ (134,354) $ 7,994 $ - $ 158,684
=============== ================ ================ =============== ================
14
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
- ------------------------------------------------ --------------- ---------------- ---------------- --------------- ----------------
EXPRESS NON-
(IN THOUSANDS) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
- ------------------------------------------------ --------------- ---------------- ---------------- --------------- ----------------
THREE MONTHS ENDED MARCH 31, 2001
Net cash (used in) provided by
operating activities $ (20,017) $ 55,893 $ 14,187 $ - $ 50,063
--------------- ---------------- ---------------- --------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (8,252) (2,282) 92 - (10,442)
Acquisitions and joint venture (1,425) - (16,308) - (17,733)
Other 68 - - - 68
--------------- ---------------- ---------------- --------------- ----------------
Net cash (used in) investing activities (9,609) (2,282) (16,216) - (28,107)
--------------- ---------------- ---------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from employee stock plans 10,560 - - - 10,560
Net transactions with parent 40,220 (43,961) 3,741 - -
--------------- ---------------- ---------------- --------------- ----------------
Net cash provided by (used in)
financing activities 50,780 (43,961) 3,741 - 10,560
--------------- ---------------- ---------------- --------------- ----------------
Effect of foreign currency
translation adjustment - - (620) - (620)
--------------- ---------------- ---------------- --------------- ----------------
Net increase (decrease) in cash and
cash equivalents 21,154 9,650 1,092 - 31,896
Cash and cash equivalents at beginning
of the period 148,311 (98,519) 3,412 - 53,204
Cash and cash equivalents at end
--------------- ---------------- ---------------- --------------- ----------------
of the period $ 169,465 $ (88,869) $ 4,504 $ - $ 85,100
=============== ================ ================ =============== ================
15
NOTE 12 - SEGMENT REPORTING
We are organized on the basis of services offered and have determined
that we have two reportable segments: PBM services and non-PBM services. We
manage the pharmacy benefit within an operating segment that encompasses a fully
integrated PBM service. The remaining three operating service lines (SDS,
Phoenix and Express Scripts Infusion Services) have been aggregated into a
non-PBM reporting segment.
The following table presents information about the reportable segments
for the:
(IN THOUSANDS) PBM NON-PBM TOTAL
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2002
Total revenues $ 2,720,200 $ 28,869 $ 2,749,069
Income before income taxes 64,521 5,644 70,165
THREE MONTHS ENDED MARCH 31, 2001
Total revenues $ 2,068,128 $ 22,412 $ 2,090,540
Income before income taxes 44,428 2,939 47,367
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IN THIS ITEM 2, "WE," "US," "OUR" AND THE "COMPANY" REFER TO EXPRESS
SCRIPTS, INC. AND ITS SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE.
INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q, AND INFORMATION THAT
MAY BE CONTAINED IN OTHER FILINGS BY US WITH THE SECURITIES AND EXCHANGE
COMMISSION ("SEC") AND RELEASES ISSUED OR STATEMENTS MADE BY US, CONTAIN OR MAY
CONTAIN FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED TO STATEMENTS OF
OUR PLANS, OBJECTIVES, EXPECTATIONS OR INTENTIONS. SUCH FORWARD-LOOKING
STATEMENTS NECESSARILY INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THOSE PROJECTED OR SUGGESTED IN ANY FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE TO OCCUR INCLUDE, BUT ARE
NOT LIMITED TO:
o RISKS ASSOCIATED WITH OUR ACQUISITIONS OF PHOENIX AND NPA, INCLUDING
INTEGRATION RISKS AND COSTS, RISKS OF CLIENT RETENTION, AND RISKS
ASSOCIATED WITH THE OPERATIONS OF ACQUIRED BUSINESSES
o RISKS ASSOCIATED WITH OUR ABILITY TO MAINTAIN INTERNAL GROWTH RATES, OR TO
CONTROL OPERATING OR CAPITAL COSTS
o CONTINUED PRESSURE ON MARGINS RESULTING FROM CLIENT DEMANDS FOR ENHANCED
SERVICE OFFERINGS AND HIGHER SERVICE LEVELS, AND THE POSSIBLE TERMINATION
OF, OR UNFAVORABLE MODIFICATION TO, CONTRACTS WITH KEY CLIENTS OR PROVIDERS
o COMPETITION, INCLUDING PRICE COMPETITION, AND OUR ABILITY TO CONSUMMATE
CONTRACT NEGOTIATIONS WITH PROSPECTIVE CLIENTS, AS WELL AS COMPETITION FROM
NEW COMPETITORS OFFERING SERVICES THAT MAY IN WHOLE OR IN PART REPLACE
SERVICES THAT WE NOW PROVIDE TO OUR CUSTOMERS
o ADVERSE RESULTS IN REGULATORY MATTERS, THE ADOPTION OF NEW LEGISLATION OR
REGULATIONS (INCLUDING INCREASED COSTS ASSOCIATED WITH COMPLIANCE WITH NEW
LAWS AND REGULATIONS, SUCH AS PRIVACY REGULATIONS UNDER THE HEALTH
INSURANCE PORTABILITY AND ACCOUNTABILITY ACT (HIPAA)), MORE AGGRESSIVE
ENFORCEMENT OF EXISTING LEGISLATION OR REGULATIONS, OR A CHANGE IN THE
INTERPRETATION OF EXISTING LEGISLATION OR REGULATIONS
o THE POSSIBLE LOSS OF RELATIONSHIPS WITH PHARMACEUTICAL MANUFACTURERS, OR
CHANGES IN PRICING, DISCOUNT OR OTHER PRACTICES OF PHARMACEUTICAL
MANUFACTURERS
o ADVERSE RESULTS IN LITIGATION, INCLUDING A PENDING CASE CHALLENGING EXPRESS
SCRIPTS' BUSINESS PRACTICES UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY
ACT (ERISA)
o RISKS ASSOCIATED WITH OUR LEVERAGE AND DEBT SERVICE OBLIGATIONS, INCLUDING
THE EFFECT OF CERTAIN COVENANTS IN OUR BORROWING AGREEMENTS
o RISKS ASSOCIATED WITH OUR ABILITY TO CONTINUE TO DEVELOP NEW PRODUCTS,
SERVICES AND DELIVERY CHANNELS
o GENERAL DEVELOPMENTS IN THE HEALTH CARE INDUSTRY, INCLUDING THE IMPACT OF
INCREASES IN HEALTH CARE COSTS, CHANGES IN DRUG UTILIZATION AND COST
PATTERNS AND INTRODUCTIONS OF NEW DRUGS
o UNCERTAINTIES REGARDING THE IMPLEMENTATION AND THE ULTIMATE TERMS OF
PROPOSED GOVERNMENT INITIATIVES, INCLUDING A MEDICARE PRESCRIPTION DRUG
BENEFIT
o INCREASE IN CREDIT RISK RELATIVE TO OUR CLIENTS DUE TO ADVERSE ECONOMIC
TRENDS
o OTHER RISKS DESCRIBED FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION
WE DO NOT UNDERTAKE ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO
SUCH FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
17
OVERVIEW
We derive our revenues primarily from the sale of PBM services in the
United States and Canada. Revenues from dispensing prescriptions from our mail
pharmacies are recorded when the prescription is shipped. Revenue from the sales
of prescription drugs by retail pharmacies in our nationwide network is
recognized when the claim is processed. When we independently have a contractual
obligation to pay our network pharmacy providers for benefits provided to our
clients' members, we include the total payments from these clients as revenue,
and payments to the network pharmacy provider as cost of revenue (the "Gross
Basis"). These transactions require us to assume credit risk. If we merely
administer clients' network pharmacy contracts in which we do not assume credit
risks, we record only our administrative or dispensing fees as revenue (the "Net
Basis").
Management services provided to drug manufacturers include various
services relating to administration of manufacturer rebate programs. Revenues
relating to these services are recognized as earned based upon detailed drug
utilization data. Rebates payable to customers in accordance with the applicable
contracts are excluded from revenues. We estimate fees receivable from
pharmaceutical manufacturers on a quarterly basis converting total prescriptions
dispensed to estimated rebatable scripts (i.e. those prescriptions with respect
to which we are contractually entitled to submit claims for rebates) multiplied
by the contractually agreed manufacturer rebate amount. Estimated fees
receivable from pharmaceutical manufacturers are recorded when we determine them
to be realizable, and realization is not dependent upon future pharmaceutical
sales. Estimates are revised once the actual rebatable scripts are calculated
and rebates are billed to the manufacturer.
Non-PBM revenues are derived from the following sources:
o Administrative fees received from drug manufacturers for the dispensing or
distribution of pharmaceuticals requiring special handling or packaging. We
also administer sample card programs for certain manufacturers and include
the ingredient costs of pharmaceuticals dispensed from retail pharmacies in
our Specialty Distribution Services subsidiary ("SDS") revenues.
Additionally, the associated costs for this sample card program are
recorded in cost of revenues.
o Operations of our Phoenix Marketing Group subsidiary, which acquired the
assets and business operations of Phoenix Marketing Group (Holdings), Inc.
("Phoenix") on February 25, 2002. Phoenix is one of the largest
prescription drug sample fulfillment companies, shipping approximately 95
million sample units in 2001. Phoenix records an administrative fee for
distributing samples to doctors based on orders received from
pharmaceutical sales representatives.
o Infusion therapy services through our Express Scripts Infusion Services
subsidiary ("Infusion Services"). On June 12, 2001, we announced that we
entered into an agreement with Option Care, Inc. to sell substantially all
of the assets of our Infusion Services business, and we discontinued our
acute home infusion services.
Earnings per share and weighted average shares outstanding included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been restated to reflect the two-for-one stock split effective
June 22, 2001.
RESULTS OF OPERATIONS
PBM GROSS PROFIT
THREE MONTHS ENDED MARCH 31,
INCREASE/
(IN THOUSANDS) 2002 DECREASE 2001
- ----------------------------------------------------------------------------
PBM Gross Basis revenues $ 2,717,599 32.5% $ 2,050,318
PBM Net Basis revenues 2,601 (85.4)% 17,810
-------------------------------------------
Total PBM revenues 2,720,200 31.5% 2,068,128
Cost of PBM revenues 2,553,338 32.2% 1,931,122
-------------------------------------------
PBM Gross Profit $ 166,862 21.8% $ 137,006
===========================================
18
Revenues for network pharmacy claims increased $420,429,000, or 28.1%,
during the three months ended March 31, 2002 over 2001. These increases are due
to a higher mix of clients utilizing retail pharmacy networks contracted by us,
increased membership and member utilization, and higher drug ingredient costs.
The increase in drug ingredient costs is partially attributable to increases in
the average wholesale price index that is used to calculate payments due to
pharmacies and payments due from clients. We anticipate that these increases
will continue to benefit gross profit in future quarters. Network pharmacy
claims processed increased 10.7% to 80,112,000 during the first quarter of 2002
over 2001. The average revenue per network pharmacy claim increased 17.5% to
$23.95 over the three months ended March 31, 2001 due to a higher mix of clients
utilizing retail pharmacy networks contracted by us versus retail pharmacy
networks contracted by the client, and higher drug ingredient costs. As
previously discussed under "--Overview", we record the associated revenues for
clients utilizing our retail pharmacy networks on the Gross Basis, therefore
this shift to our retail pharmacy networks results in increased Gross Basis
revenues (and corresponding cost of revenues) and revenue per claim. As
expected, we are seeing a higher mix of clients on the gross basis in 2002 due
to the loss of a large Net Basis client at the beginning of 2002.
Revenues for mail pharmacy services and mail pharmacy claims processed
increased $230,170,000, or 41.1% and 1,543,000, or 34.3%, respectively, for the
first quarter of 2002 over 2001. These increases are primarily due to increased
membership and utilization by existing members. For the three months ended March
31, 2002, the average revenue per mail pharmacy claim increased 5.0% over 2001
primarily due to higher drug ingredient costs.
Our cost of revenues for PBM services increased 32.2% in the first
quarter of 2002 over 2001 primarily as a result of the increase in PBM revenues.
This increase was partially offset by the renegotiation of a contract with a
large client, in which we eliminated a contract pricing reserve, resulting in a
non-recurring, non-cash decrease in cost of revenues of approximately $15
million. The PBM cost of revenues grew slightly faster than revenues in the
first quarter of 2002 as a result of a larger percentage of our clients being
recorded on the Gross Basis, for which we record the drug ingredient cost in
cost of revenues (see further discussion under "--Overview").
We have been successful in offsetting margin pressure due to lower
pricing on administrative fees and other clinical programs with higher profits
from increased mail penetration, improved formulary compliance and other
value-added clinical programs. Our PBM gross profit increased $29,856,000, or
21.8% over the first quarter of 2001. A portion of this increase was due to the
renegotiation of a contract with a large client and the increase in the average
wholesale price index discussed above.
NON-PBM GROSS PROFIT
THREE MONTHS ENDED MARCH 31,
INCREASE/
(IN THOUSANDS) 2002 DECREASE 2001
- --------------------------------------------------------------------------------
Non-PBM revenue $ 28,869 28.8% $ 22,412
Non-PBM cost of revenues 21,074 45.1% 14,519
----------------------------------------
Non-PBM Gross profit $ 7,795 (1.2)% $7,893
========================================
The increase in revenue for non-PBM services in the first quarter of
2002 from 2001 is primarily due to the additional volume in SDS, including the
sample card programs we administer for certain manufacturers, where we include
the ingredient costs of pharmaceuticals dispensed from retail pharmacies in our
SDS revenues. We also began recording revenues from Phoenix after the
acquisition was completed on February 25, 2002. These increases were partially
offset by our sale of our Infusion Services subsidiary on June 12, 2001.
Cost of revenues for non-PBM services increased 45.1% for the three
months ended March 31, 2002 from 2001, reflecting the increased volume in SDS.
The cost of non-PBM revenues grew faster than non-PBM revenues due to the new
sample card programs we administer for certain manufacturers, where we include
the ingredient costs of pharmaceuticals dispensed from retail pharmacies in our
SDS revenues and cost of revenues. This increase was partially offset by the
addition of Phoenix. Phoenix does not purchase samples from the manufacturers,
but records an administrative fee for distributing samples to doctors based on
orders received from pharmaceutical sales representatives.
19
The 1.2% decrease in Non-PBM gross profit for the first quarter of 2002
reflects the sale of our Infusion Services subsidiary on June 12, 2001, mostly
offset by the additional volume in SDS and the addition of Phoenix.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $6,589,000, or
7.3%, in the first quarter of 2002 over 2001 primarily due to an increase in
depreciation and amortization of $6,329,000. During the first quarter, the
estimated useful lives on certain assets associated with our legacy information
systems were shortened due to the continued progress of our integration to one
adjudication platform. The change in estimate increased depreciation and
amortization by approximately $14 million. This increase was partially offset by
the adoption of Financial Accounting Standards Board Statement No. ("FAS") 142,
"Goodwill and Other Intangible Assets", which pertains to the elimination of
goodwill amortization. A total of $8.9 million ($6.5 million after tax) of
goodwill was amortized in the first quarter of 2001. Excluding depreciation and
amortization, selling, general and administrative expenses slightly increased;
however as a percentage of total revenue, selling, general and administrative
expenses, excluding depreciation and amortization, have decreased to 2.7% for
the three months ended March 31, 2002 from 3.5% last year.
OTHER INCOME (EXPENSE)
On February 22, 2001, we announced that we entered into an agreement
with AdvancePCS and Merck-Medco, L.L.C. to form RxHub, LLC ("RxHub"). RxHub will
be an electronic exchange enabling physicians who use electronic prescribing
technology to link to pharmacies, PBM companies and health plans. The company is
designed to operate as a utility for the conduit of information among all
parties engaging in electronic prescribing. We own one-third of the equity of
RxHub (as do each of the other two founders) and have committed to invest up to
$20 million over the next five years with $6.7 million invested to date through
March 2002. We have recorded our investment in RxHub under the equity method of
accounting, which requires our percentage interest in RxHub's results to be
recorded in our Unaudited Consolidated Statement of Operations. Our percentage
of RxHub's loss for the three months ended March 31, 2002 was $1,037,000
($644,000 net of tax) and has been recorded in other income (expense) in our
Unaudited Consolidated Statement of Operations.
The $666,000, or 8.6%, decrease in net interest expense for the first
quarter of 2002 over 2001 is primarily due to the reduction in debt of $50
million in the third quarter of 2001.
PROVISION FOR INCOME TAXES
Our effective tax rate decreased to 37.3% for the first quarter of 2002
from 40.7% in 2001. This decrease is due primarily to the adoption of FAS 142 in
which we no longer amortize goodwill, a portion of which was non-deductible.
NET INCOME AND EARNINGS PER SHARE
Our net income increased $15,890,000, or 56.6% for the three months
ended March 31, 2002 over 2001. Basic and diluted earnings per share increased
58.3% and 57.1%, respectively for the first quarter of 2002 over 2001.
Reflecting the application of FAS 142 in 2001, our net income increased
$9,379,000, or 27% for the first quarter of 2002 over 2001, while basic and
diluted earnings per share increased 26.6% and 27.9%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 2002, net cash provided by operations
decreased $25,264,000 to $24,799,000 from $50,063,000 in 2001. This decrease is
primarily due to strategic purchasing opportunities associated with inventory.
As a result, inventory increased $31,697,000 from December 31, 2001.
20
As a percent of accounts receivables, our allowance for doubtful
accounts was 3.1% and 2.8% at March 31, 2002 and December 31, 2001,
respectively. This increase is due to the current economic conditions.
Our capital expenditures for the three months ended March 31, 2002
decreased $1,180,000, or 11.3%, from 2001. We will continue to invest in
technology that will provide efficiencies in operations, manage growth and
enhance the service provided to our clients. Any future anticipated capital
expenditures will be funded primarily with operating cash flow or, to the extent
necessary, with working capital borrowings under our revolving credit facility,
discussed below. We believe our capital expenditures for 2002 will approximate
the level in 2001, excluding the impact of the NPA acquisition.
As of March 31, 2002, we have repurchased a total of 4,017,000 shares
of our Common Stock under the stock repurchase program that we announced on
October 25, 1996. As of March 31, 2002, approximately 3,092,000 shares have been
reissued in connection with employee compensation plans. In February 2002, our
Board of Directors authorized an increase in our stock repurchase program from
5,000,000 shares to 6,500,000 and placed no limit on the duration of the
program. Additional common stock repurchases, if any, will be made in such
amounts and at such times as we deem appropriate based upon prevailing market
and business conditions, subject to restrictions on stock repurchases contained
in our bank credit facility and the Indenture under which our Senior Notes were
issued.
On April 12, 2002, we completed the acquisition of the businesses
comprising National Prescription Administrators, Inc. ("NPA") for a purchase
price of $450 million. NPA was a privately held full-service pharmacy benefit
manager, and will strengthen our participation in two key market segments, union
and government sponsored plans. The transaction will be accounted for under the
provisions of FAS 141, "Business Combinations" and FAS 142. The purchase price
was funded with a new $325 million Term B loan facility, $75 million of cash on
hand, the issuance of 552,000 shares of our common stock, and $25 million in
borrowings under our revolving credit facility. We will file an Internal Revenue
Code ss.338(h)(10) election, making amortization expense of intangible assets,
including goodwill, tax deductible, which will provide a tax benefit to us of
approximately $85 million on a present value basis. In addition, shortly after
the closing of the transaction, we borrowed an additional $75 million under our
revolving credit facility to fund working capital requirements of NPA. Pursuant
to the Purchase Agreement, to the extent closing date working capital is less
than negative $11 million, the sellers are obligated to reimburse us for the
deficit.
On February 25, 2002, we purchased substantially all of the assets
utilized in the operation of Phoenix, a wholly-owned subsidiary of Access
Worldwide Communications, Inc. for $33 million of our own cash plus the
assumption of certain liabilities. Phoenix is one of the largest prescription
drug sample fulfillment companies, shipping approximately 95 million sample
units in 2001. The acquisition has been accounted for under the provisions of
FAS 141 and FAS 142. The purchase price has been preliminarily allocated based
upon the estimated fair value of net assets acquired at the date of the
acquisition. The excess of purchase price over tangible net assets acquired has
been preliminarily allocated to intangible assets consisting of customer
contracts in the amount of $2,962,000, which are being amortized using the
straight-line methods over the estimated useful life of 20 years and are
included in other intangible assets, and goodwill in the amount of $25,019,000,
which is not being amortized. The transaction was structured as a purchase of
assets, making amortization expense of intangible assets, including goodwill,
tax deductible.
On March 1, 2001, our Canadian subsidiary, ESI Canada, Inc., completed
its acquisition of Centre d'autorisation et de paiement des services de sante,
Inc. ("CAPSS"), a leading Quebec-based PBM, for approximately CAN$26.8 million
(approximately US$17.5 million), which includes a purchase price adjustment for
closing working capital. The transaction, which was accounted for under the
purchase method of accounting, was funded with our operating cash flow. The
results of operations of CAPSS have been included in our consolidated financial
statements and PBM segment since March 1, 2001. The purchase price has been
allocated based upon the estimated fair value of net assets acquired at the date
of the acquisition. The excess of purchase price over tangible net assets
acquired was allocated to intangible assets consisting of customer contracts in
the amount of US$5,149,000, which are being amortized using the straight-line
method over the estimated useful life of 20 years and are included in other
intangible assets, and goodwill in the amount of US$11,655,000, which effective
January 1, 2002 is no longer being amortized.
21
In December 2000, the Department of Health and Human Services ("HHS")
issued final privacy regulations, pursuant to the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"), which impose extensive restrictions on
the use and disclosure of individually identifiable health information by
certain entities. We will be required to comply with certain aspects of the
regulations. We have established a plan and a process for implementing all
necessary changes to our business operations by the statutory compliance date of
April 2003. We believe compliance with these regulations will have a significant
impact on our business operations. We have completed an assessment of the costs
we will incur in complying with these regulations and do not believe they will
be material to our results of operations, financial position and/or cash flow
from operations. However, HHS plans to issue additional regulations in 2002 and
we can give no assurance that our implementation costs will not be material to
us as a result of such changes.
We have a credit facility with a commercial bank syndicate consisting
of $105 million of Term A loans and a $150 million revolving credit facility.
The Term A loans and the revolving credit facility mature on March 31, 2005. The
capital stock of each of our existing and subsequently acquired domestic
subsidiaries, excluding ValueRx of Michigan, Inc., Diversified NY IPA, Inc. and
Diversified Pharmaceutical Services (Puerto Rico), Inc. have been pledged as
collateral for the credit facility.
Our credit facility requires us to pay interest quarterly on an
interest rate spread based on several London Interbank Offered Rates ("LIBOR")
or base rate options. Using a LIBOR spread, the Term A loans had an interest
rate of 2.95% on March 31, 2002. To alleviate interest rate volatility, we have
entered into interest rate swap arrangements, which are discussed in "--Market
Risk" below. The credit facility contains covenants that limit the indebtedness
we may incur, dividends paid and the amount of annual capital expenditures. The
covenants also establish a minimum interest coverage ratio, a maximum leverage
ratio, and a minimum fixed charge coverage ratio. In addition, we are required
to pay an annual fee of 0.25%, payable in quarterly installments, on the unused
portion of the revolving credit facility ($150 million at March 31, 2002). At
March 31, 2002, we are in compliance with all covenants associated with the
credit facility.
As previously mentioned, to fund the acquisition of NPA we amended our
existing credit facility to add a $325 million Term B loan. The Term B loan will
have a maturity of six years and will amortize 1% in years one through four, 25%
in year five and 71% in year six. Interest will be payable quarterly on an
interest rate spread of 200 basis points based on several LIBOR or base rate
options. The Term B loan will be secured on the same basis as our existing
credit facility. In addition, the lenders approved the amendment of certain
covenants, relating to restricted junior payments and asset sales, and a
provision enabling a future accounts receivable securitization facility.
In June 1999, we issued $250 million of 9 5/8 Senior Notes due 2009,
which require interest to be paid semi-annually on June 15 and December 15. As
of March 31, 2002, $239,885,000 of Senior Notes remain outstanding. The Senior
Notes are callable at specified rates beginning in June 2004. The Senior Notes
are unconditionally and jointly and severally guaranteed by our wholly-owned
domestic subsidiaries other than PPS, Great Plains Reinsurance Co., ValueRx of
Michigan, Inc., Diversified NY IPA, Inc., and Diversified Pharmaceutical
Services (Puerto Rico), Inc.
We regularly review potential acquisitions and affiliation
opportunities. We believe that available cash resources, bank financing or the
issuance of additional common stock could be used to finance future acquisitions
or affiliations. However, there can be no assurance we will make acquisitions or
affiliations in 2002 or thereafter, other than our previously announced
acquisitions of Phoenix and NPA.
OTHER MATTERS
In 2002, we adopted FAS 141, and FAS 142. FAS 141 requires all business
combinations be accounted for using the purchase method of accounting. FAS 141
also defines acquired intangible assets and requires a reassessment of a
company's preexisting acquired intangible assets and goodwill be evaluated and
adjusted to conform with that definition. The adoption of FAS 141 did not have a
significant impact on our consolidated financial position, consolidated results
of operations and/or our consolidated cash flows.
22
FAS 142 requires goodwill no longer be amortized under any
circumstances. Instead, all goodwill (including goodwill associated with
acquisitions consummated prior to the adoption of FAS 142) is to be evaluated
for impairment annually or when events or circumstances occur indicating that
goodwill might be impaired. In accordance with the implementation provisions of
FAS 142, we expect to complete our first impairment test under FAS 142 by the
end of the second quarter of 2002, and we do not anticipate incurring an
impairment charge. All goodwill impairment losses are to be presented as a
separate line item in the operating section of the consolidated results of
operations (unless the impairment loss is associated with a discontinued
operation or the initial adoption of FAS 142, which would be recorded as a
change in accounting principle).
Effective January 1, 2002, we adopted FAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." FAS 144 requires that long -lived
assets to be disposed of by sale be measured at the lower of book value or fair
value less cost to sell. Additionally, FAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The implementation
of FAS 144 did not have an impact on our consolidated financial position,
consolidated results of operations and/or our consolidated cash flows.
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals affect our revenues and cost of revenues. To date, we have been
able to recover price increases from our clients under the terms of our
agreements.
MARKET RISK
Effective January 1, 2001, we adopted FAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by FAS 137 and 138
("FAS 133"). FAS 133 requires all derivative financial instruments, such as
interest rate swaps, to be recognized as either assets or liabilities in the
statement of financial position and measured at fair value. The adoption of FAS
133 did not have a material effect on our financial statements, but did reduce
other comprehensive income during 2001 by $612,000, net of taxes due to a
cumulative effect of change in accounting principle.
As of March 31, 2002, we have one swap agreement to fix the variable
interest payments on approximately $98 million of our debt under our credit
facility. Under this swap agreement, we agree to receive a floating rate of
interest on the notional principal amount of approximately $98 million based
upon a three month LIBOR rate in exchange for payment of a fixed rate of 6.25%
per annum. The notional principal amount will decline to $89 million in April
2002 and will increase to $100 million in October 2002 before reducing to $60
million in April 2003 and to $20 million in April 2004 until maturing in April
2005.
Our present interest rate swap agreement is a cash flow hedge as it
agrees to pay a fixed-rate of interest, which is hedging against changes in the
amount of future cash flows associated with variable interest obligations.
Accordingly, the fair value of our swap agreement is reported on the balance
sheet in other liabilities ($4,687,000 pre-tax at March 31, 2002) and the
related gains or losses on these agreements are deferred in shareholders' equity
as a component of other comprehensive income (a $2,884,000, net of taxes,
reduction at March 31, 2002). These deferred gains or losses are then recognized
as an adjustment to interest expense over the same period in which the related
interest payments being hedged are recorded in income. If any of these
agreements are determined to have hedge ineffectiveness, the gains or losses
associated with the ineffective portion of these agreements are immediately
recognized in income. For the three months ended March 31, 2002 and 2001, the
gains and losses on the ineffective portion of our swap agreement were not
material to our consolidated financial statements.
Interest rate risk is monitored on the basis of changes in the fair
value and a sensitivity analysis is used to determine the impact interest rate
changes will have on the fair value of the interest rate swaps, measuring the
change in the net present value arising from the change in the interest rate.
The fair value of the swaps are then determined by calculating the present value
of all cash flows expected to arise thereunder, with future interest rate levels
implied from prevailing mid-market yields for money-market instruments, interest
rate futures and/or prevailing mid-market swap rates. Anticipated cash flows are
then discounted on the assumption of a continuously compounding zero-coupon
23
yield curve. A 10 basis point decline in interest rates at March 31, 2002 would
have caused the fair value of the swaps to change by $173,000, resulting in a
liability with a fair value of $4,860,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Response to this item is included in Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Market Risk"
above.
24
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PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in MINSHEW V. EXPRESS SCRIPTS, No. Civ. 01 -
2412 PHX MHM (D.AZ.). On December 12, 2001, this purported class action lawsuit
was filed by Gerald R. Minshew in the United States District Court for the
District of Arizona. The MINSHEW complaint asserts that certain of our business
practices, including those relating to our contracts with pharmaceutical
manufacturers for retrospective discounts on pharmaceuticals and those related
to our retail pharmacy network contracts, violate certain fiduciary duties that
we allegedly owe to a class consisting of some of our clients. The purported
class consists of health benefit plans that are self-funded by an employer
client. The complaint seeks money damages on behalf of this class of health
plans, and injunctive relief. We believe the complaint is without merit, and
will vigorously defend the matter. Although the ultimate outcome is uncertain, a
determination adverse to us could result in changes in our business practices
with respect to our formulary and rebate programs and our retail pharmacy
network contracting, and/or an award of money damages, either of which could
have a material adverse effect on our results of operations, financial position
and/or cash flow from operations.
The Company is also a defendant in DUBRIN V. EXPRESS SCRIPTS, No.
CO200128, Superior Court of the State of California, County of Contra Costa. On
January 31, 2002, this purported class action lawsuit was filed against us by
Beverly Dubrin. The DUBRIN complaint asserts that the plaintiff was improperly
charged brand drug copayments for the cancer drug Tamoxifen in violation of
certain statutes in California regulating trade practices and consumer
protection, as well as a common law claim for unjust enrichment. The complaint
asserts that Tamoxifen is a generic drug for which a lower copayment should have
been charged. We believe that the complaint is without merit, and will
vigorously defend this matter. We have not yet made any estimate of our
potential financial exposure in the event of an adverse outcome in this matter.
As discussed in detail in our Quarterly Report on Form 10-Q for the
period ended June 30, 1998, filed with the Securities and Exchange Commission on
August 13, 1998 (the "Second Quarter, 1998 10-Q"), we acquired all of the
outstanding capital stock of Value Health, Inc., a Delaware corporation ("Value
Health"), and Managed Prescription Network, Inc., a Delaware corporation ("MPN")
from HCA-The Healthcare Corporation (formerly, "Columbia HCA/HealthCare
Corporation") ("HCA") and its affiliates on April 1, 1998 (the "Acquisition").
Value Health, MPN and/or their subsidiaries (collectively, the "Acquired
Entities"), were party to various legal proceedings, investigations or claims at
the time of the Acquisition. The effect of these actions on our future financial
results is not subject to reasonable estimation because considerable uncertainty
exists about the outcomes. Nevertheless, in the opinion of management, the
ultimate liabilities resulting from any such lawsuits, investigations or claims
now pending should not materially affect our consolidated financial position,
results of operations and/or cash flows. A brief description of the most notable
of the proceedings follows:
BASH, ET AL. V. VALUE HEALTH, INC., ET AL., No. 3:97cv2711
(JCH)(D.Conn.) ("Bash"). On December 15, 1995, a purported shareholder class
action lawsuit was filed in the United States District Court for the District of
New Mexico against Diagnostek, Inc. ("Diagnostek"), certain former Diagnostek
officers, Value Health, Inc. ("Value Health"), and certain of Value Health's
former officers. The BASH Complaint asserts that Value Health and certain other
defendants made false or misleading statements to the public in connection with
Value Health's acquisition of Diagnostek in 1995, and that Diagnostek and
certain of its former officers and directors made false or misleading statements
concerning its financial condition prior to the acquisition by Value Health. The
BASH Complaint asserts claims under the Securities Act of 1933 and the
Securities Exchange Act of 1934, as well as common law claims, and seeks
certification of a class consisting of all persons (with certain exclusions) who
purchased or otherwise acquired either Value Health or Diagnostek common stock
during certain specific time periods, and does not specify the amount of damages
sought. On November 28, 1997, the New Mexico court entered an order transferring
the action to the District of Connecticut, where the earlier-filed FREEDMAN
action (discussed below) was pending. On March 17, 1998, the defendants filed a
motion to consolidate the Bash lawsuit with the FREEDMAN lawsuit discussed
below, and the court granted the motion on April 24, 1998.
FREEDMAN, ET AL. V. VALUE HEALTH, INC., ET AL., No. 3:95 CV 2038
(JCH)(D.Conn). On September 22 and 25, 1995, two related lawsuits were filed
against Value Health and certain other defendants in the United States District
25
Court for the District of Connecticut. On February 16, 1996, a single,
consolidated class action complaint was filed covering both suits (the "FREEDMAN
Complaint"), naming as defendants Value Health, Robert E. Patricelli, William J.
McBride, Steven J. Shulman, David M. Wurzer, David J. McDonnell, Walter J.
McNerny, Rodman W. Moorhead, III, Constance P. Newman, and John L. Vogelstein,
all former Value Health directors and officers, and Nunzio P. DeSantis, the
former president of Diagnostek. The FREEDMAN Complaint alleges that Value Health
and certain other defendants made false or misleading statements to the public
in connection with Value Health's acquisition of Diagnostek in 1995. The
FREEDMAN Complaint asserts claims under the Securities Act of 1933 and the
Securities Exchange Act of 1934, and seeks certification of a class consisting
of all persons (with certain exceptions) who purchased shares of Value Health
common stock during the period March 27, 1995 (the date certain adverse
developments were disclosed by Value Health). The FREEDMAN Complaint does not
specify the amount of damages sought. On March 17, 1998, the defendants filed a
motion to consolidate this lawsuit with the BASH lawsuit, discussed above, and
the motion was granted on April 24, 1998.
In the consolidated BASH and FREEDMAN action, the court granted
plaintiffs' motions for class certification and certified a class consisting of
(i) all persons who purchased or otherwise acquired shares of Value Health
during the period from April 3, 1995, through and including November 7, 1995,
including those who acquired shares in connection with the Diagnostek merger;
and (ii) all persons who purchased or otherwise acquired shares of Diagnostek
during the period from March 27, 1995, through and including July 28, 1995. On
March 20, 2001, the court granted defendant's motion for summary judgement on
all claims. At the same time, the court devised a motion for partial summary
judgement on all claims under Sections 11 and 12(2) of the Securities Act of
1933. Plaintiffs had filed a Notice of Appeal of several orders by the court,
including the order with respect to the motions for summary judgement and the
April 24, 1998 order regarding consolidation of the lawsuits. The parties have
filed briefs with the United States Court of Appeals for the Second Circuit.
Oral arguments with respect to the appeal were held on April 10, 2002 and, on
May 1, 2002, the Court of Appeals affirmed the District Court's ruling.
In connection with the Acquisition, HCA has agreed to defend and hold
the Company and its affiliates (including Value Health) harmless from and
against any liability that may arise in connection with either of the foregoing
proceedings. Consequently, the Company does not believe it will incur any
material liability in connection with the foregoing matters.
On April 22, 2002, Express Scripts received an administrative subpoena
duces tecum issued by the U.S. Attorney's Office in Boston, Massachusetts. On
April 26, 2002, a substantially identical subpoena was issued to Express
Scripts' wholly-owned subsidiary Diversified Pharmaceutical Services, Inc.
("DPS"). The U.S. Attorney's Office has informed the Company's counsel that
neither the Company nor DPS is currently a target of the investigation. The
subpoenas state that they are issued in connection with an investigation of
various health care offenses and other federal crimes. The subpoenas ask for
information pertaining to Express Scripts' and DPS' relationship with TAP
Pharmaceuticals, and specifically with respect to TAP's two principal drugs,
Lupron and Prevacid. The Company believes that its services and business
practices are in compliance with all applicable laws, rules and regulations in
all material respects, and it will cooperate in the investigation. The Company
cannot predict the outcome of the investigation at this time; however, if
Express Scripts were to become a target of the investigation, an unfavorable
outcome could result in the imposition of monetary fines or penalties, or
injunctive or administrative remedies.
In addition, in the ordinary course of our business, there have arisen
various legal proceedings, investigations or claims now pending against our
subsidiaries unrelated to the Acquisition and us. The effect of these actions on
future financial results is not subject to reasonable estimation because
considerable uncertainty exists about the outcomes. Nevertheless, in the opinion
of management, the ultimate liabilities resulting from any such lawsuits,
investigations or claims now pending will not materially affect our consolidated
financial position, results of operations and/or cash flows.
Since 1993, retail pharmacies have filed over 100 separate lawsuits
against drug manufacturers, wholesalers and certain PBMs, challenging brand name
drug pricing practices under various state and federal antitrust laws. The
plaintiffs alleged, among other things, that the manufacturers had offered, and
certain PBMs had knowingly accepted, discounts and rebates on purchases of brand
name prescription drugs that violated the federal Robinson-Patman Act. Some
plaintiffs also filed claims against the drug manufacturers and drug wholesalers
alleging a conspiracy not to discount pharmaceutical drugs in violation of
Section 1 of the Sherman Act, and these claims were certified as a class action.
26
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.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. See Index to Exhibits on page 20.
--------
(b) REPORTS ON FORM 8-K.
-------------------
(i) On February 6, 2002, we filed a Current Report on
Form 8-K, dated February 6, 2002, under Item 9,
regarding a press release we issued announcing our
definitive agreement to acquire National Prescription
Administrators, Inc.
(ii) On February 12, 2002, we filed a Current Report on Form
8-K, dated February 11, 2002, under Items 5, 7 and 9,
regarding a press release we issued concerning our year
end 2001 financial performance.
(iii) On March 4, 2002, we filed a Current Report on Form
8-K, dated March 4, 2002, under Items 5 and 7,
regarding a press release issued announcing the
completion of the acquisition of the assets of Phoenix
Marketing Group (Holdings), Inc.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
(Registrant)
Date: May 03, 2002 By: /s/ Barrett A. Toan
---------------------------
Barrett A. Toan, Chairman of the Board,
and Chief Executive Officer
Date: May 03, 2002 By: /s/ George Paz
---------------------------
George Paz, Senior Vice President and
Chief Financial Officer
29
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
Exhibit
NUMBER EXHIBIT
2.1(a) Stock Purchase Agreement by and among SmithKline Beecham Corporation,
SmithKline Beecham InterCredit BV and Express Scripts, Inc., dated as of
February 9, 1999, and certain related Schedules, incorporated by
reference to Exhibit No. 2.1 to the Company's Current Report on Form 8-K
filed February 18, 1999.
2.2 Asset Contribution and Reorganization Agreement dated August 31, 1999 by
and among PlanetRx.com, Inc., PRX Holdings, Inc., PRX Acquisition,
Corp., YourPharmacy.com, Inc., and Express Scripts, Inc. (incorporated
by reference to the Exhibit No. 2.1 to PlanetRx's Registration Statement
on Form S-1, as amended (Registration Number 333-82485)).
2.3 Asset Purchase Agreement, dated as of December 19, 2001, by and among
the Company, Phoenix Marketing Group (Holdings), Inc., and Access
Worldwide Communications, Inc.("Access"), incorporated by reference to
Appendix A to Access' Definitive Proxy Statement on Schedule 14A, filed
January 15, 2002.
2.4a Stock and Asset Purchase Agreement dated February 5, 2002 by and among
the Company, Richard O. Ullman and the other Shareholders of National
Prescription Administrators, Inc., Central Fill, Inc., CFI of New
Jersey, Inc., and NPA of New York, IPA, Inc., Richard O. Ullman as agent
for such Shareholders, The Ullman Family Partnership, LP, and Airport
Properties, LLC, incorporated by reference to Exhibit No. 2.1 to the
Company's Current Report on Form 8-K filed April 26, 2002.
2.5(a) Amendment No. 1 to Stock and Asset Purchase Agreement dated April 12,
2002 by and among the Company, Richard O. Ullman and the other
Shareholders of National Prescription Administrators, Inc., Central
Fill, Inc., CFI of New Jersey, Inc., and NPA of New York, IPA, Inc.,
Richard O. Ullman as agent for such Shareholders, The Ullman Family
Partnership, LP, and Airport Properties, LLC, incorporated by reference
to Exhibit No. 2.2 to the Company's Current Report on Form 8-K filed
April 26, 2002.
3.1 Amended and Restated Certificate of Incorporation of the Company,
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ending December 31, 2001.
3.2 Third Amended and Restated Bylaws, incorporated by reference to Exhibit
No. 3.2 to the Company's Annual Report on Form 10-K for the year ending
December 31, 2000.
4.1 Form of Certificate for Common Stock, incorporated by reference to
Exhibit No. 4.1 to the Company's Registration Statement on Form S-1
filed June 9, 1992 (No. 33-46974) (the "Registration Statement").
4.2 Indenture, dated as of June 16, 1999, among the Company, Bankers Trust
Company, as trustee, and Guarantors named therein, incorporated by
reference to Exhibit No. 4.4 to the Company's Registration Statement on
Form S-4 filed August 4, 1999 (No. 333-83133) (the "S-4 Registration
Statement").
4.3 Supplemental Indenture, dated as of October 6, 1999, to Indenture dated
as of June 16, 1999, among the Company, Bankers Trust Company, as
trustee, and Guarantors named therein, incorporated by reference to
Exhibit No. 4.3 to the Company's Annual Report on Form 10-K for the year
ending December 31, 1999.
4.4 Second Supplemental Indenture, dated as of July 19, 2000, to Indenture
dated as of June 16, 1999, among the Company, Bankers Trust Company, as
trustee, and Guarantors named therein, incorporated by reference to
Exhibit No. 4.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(a) The Company agrees to furnish supplementally a copy of any omitted
schedule to this agreement to the Commission upon request.
30