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, 1996, 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)
14000 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 March 7, 1997, was $307,481,520 based on 8,722,880 such
shares held on such date by non-affiliates and the last sale price for the Class
A Common Stock on such date of $35.25 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 and NYLIFE HealthCare
Management, Inc. are affiliates of the Registrant.
Common stock outstanding as of March 7, 1997: 7,510,000 Shares Class B
8,978,180 Shares Class A
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 1996 Annual Meeting of Stockholders, which will
be filed with the Securities and Exchange Commission not later than 120 days
after the registrant's fiscal year ended December 31, 1996.
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PART I
THE COMPANY
ITEM 1 - BUSINESS
INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON
FORM 10-K, AND INFORMATION THAT MAY BE CONTAINED IN OTHER FILINGS BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") AND RELEASES
ISSUED OR STATEMENTS MADE BY THE COMPANY, CONTAIN OR MAY CONTAIN FORWARD-LOOKING
STATEMENTS, INCLUDING BUT NOT LIMITED TO STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS OR INTENTIONS. SUCH FORWARD-LOOKING STATEMENTS
NECESSARILY INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THOSE PROJECTED OR SUGGESTED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE TO OCCUR INCLUDE, BUT ARE
NOT LIMITED TO: HEIGHTENED COMPETITION, INCLUDING INCREASED PRICE COMPETITION IN
THE PHARMACY BENEFIT MANAGEMENT MARKET; THE POSSIBLE TERMINATION OF THE
COMPANY'S CONTRACTS WITH CERTAIN KEY CLIENTS; CHANGES IN PRICING OR DISCOUNT
PRACTICES OF PHARMACEUTICAL MANUFACTURERS; THE ABILITY OF THE COMPANY TO
CONSUMMATE CONTRACT NEGOTIATIONS WITH PROSPECTIVE CLIENTS; COMPETITION IN THE
BIDDING AND PROPOSAL PROCESS; ADVERSE RESULTS IN CERTAIN LITIGATION AND
REGULATORY MATTERS; THE ADOPTION OF ADVERSE LEGISLATION OR REGULATIONS OR A
CHANGE IN THE INTERPRETATION OF EXISTING LEGISLATION OR REGULATIONS, AND OTHER
RISKS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE COMMISSION.
COMPANY OVERVIEW
Express Scripts, Inc. ("ESI" or the "Company") is a leading specialty
managed care company and one of the largest independent pharmacy benefit
managers ("PBMs") in North America, providing a broad range of pharmacy benefit
management ("PBM") services to health benefit plan sponsors, with approximately
10.9 million health plan members currently enrolled in ESI's programs. In
addition to its PBM services, the Company offers (i) infusion therapy services
through its IVTx division ("IVTx"), (ii) managed vision care programs through
its Express Scripts Vision Corporation ("ESVC") and PhyNet, Inc. ("PhyNet")
subsidiaries, and (iii) medical information management services, which include
provider profiling, disease management support services and outcomes
assessments, through its Practice Patterns Science, Inc. ("PPS") subsidiary. The
Company anticipates that it will begin offering informed decision counseling
services under the name "Express Health LineSM" during the second quarter of
1997.
The Company was incorporated in Missouri in September 1986, and was
reincorporated in Delaware in March 1992. The Company has two classes of common
stock, Class A Common Stock and Class B Common Stock. Each share of the Class B
Common Stock is entitled to ten votes, and each share of the Class A Common
Stock is entitled to one vote. All of the issued and outstanding shares of the
Class B Common Stock are owned by NYLIFE HealthCare Management, Inc. ("NYL
HealthCare"), which is an indirect subsidiary of New York Life Insurance
Company, a mutual life insurance company organized and existing under the laws
of the State of New York ("New York Life"). The Company's principal executive
offices are located at 14000 Riverport Drive, Maryland Heights, Missouri 63043,
and its telephone number is (314) 770-1666.
PRODUCTS AND SERVICES
PHARMACY BENEFIT MANAGEMENT SERVICES
The Company's pharmacy benefit management service involves the systematic
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. The Company offers core and
advanced PBM services to its customers in the U.S. and Canada. Core PBM services
consist of retail pharmacy network administration; formulary administration;
electronic point-of-sale claims processing, drug utilization review ("DUR");
mail pharmacy service; and benefit plan design consultation. Approximately 82%
of the members served by the Company have access to prescription drugs both
through one of the Company's retail pharmacy networks and through its mail
pharmacy facilities, reflecting the Company's emphasis on providing fully
integrated pharmacy services. As part of its ongoing commitment to provide cost
containment solutions for its clients, the Company also offers advanced PBM
services. Advanced PBM services include the development of advanced formulary
compliance and therapeutic substitution programs; therapy management services
such as prior authorization, therapy guidelines, step therapy protocols, and
disease management interventions; and sophisticated management information
reporting and analytic services.
CORE PHARMACY BENEFIT MANAGEMENT SERVICES
The Company contracts with retail pharmacies to provide prescription drugs
to members of the pharmacy benefit plans managed by the Company. In the U.S.,
these pharmacies typically discount the price at which they will provide drugs
to members in return for designation as a network pharmacy. The Company manages
three nation-wide networks in the U.S. and one nation-wide network in Canada
that are responsive to client preferences related to cost containment and
convenience of access for members. The Company also manages networks of
pharmacies that are under direct contract with its managed care clients or
networks that ESI has designed to meet the specific needs of some of its larger
clients.
The Company uses on-line electronic claims processing to provide effective
pharmacy benefit management services to its clients. All retail pharmacies in
the Company's pharmacy networks communicate with the Company 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 to the Company which
processes the claim and responds to the pharmacy, typically within one or two
seconds. The electronic processing of the claim involves 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; performing a concurrent DUR analysis and
alerting the pharmacist to possible drug interactions or other indications of
inappropriate prescription drug usage; updating the member's prescription drug
claim record; and, if the claim is accepted, confirming to the pharmacy that it
will receive payment for the drug dispensed.
The Company integrates its pharmacy network benefits with its mail service
pharmacy benefits provided to its clients. It operates two mail service
pharmacies, one located in Missouri and the other in Arizona, that provide
members with convenient access to maintenance medications, and enable the
Company and its clients to control drug costs through operating efficiencies and
economies of scale. In addition, through its mail service pharmacy, the Company
is able to be directly involved with the prescriber and member, and is generally
able to achieve a higher level of generic and therapeutic substitutions than can
be achieved through the retail pharmacy network, which further reduces the
client's costs.
Core PBM services also involve benefit plan design and consultation
services. The Company offers consultation and financial modeling services to
assist the customer in selecting a benefit plan design that meets the customer's
needs for member satisfaction and cost control. The most common benefit design
options offered by the Company are member financial incentives and limitations
on the drugs covered by the plan, including drug formularies; copayments, which
may be a flat dollar amount or a percentage of the ingredient cost of the drug;
deductibles or annual benefit maximum; generic drug substitution incentives;
incentives or requirements to use only network pharmacies or to order certain
drugs only by mail; and limitations on the number of days supply of a drug that
can be obtained. The selected benefit design is entered into the Company's
electronic claims processing system, which enforces the plan design as claims
are submitted and enables the Company and its clients to monitor the financial
performance of the plan.
During 1996, 67.0% of the Company's net revenues were derived from pharmacy
network and claims administration services. During 1995 and 1994, 66.2% and
64.5%, respectively, of the Company's net revenues were derived from pharmacy
network and claims administration services. The number of claims processed by
the Company through its pharmacy networks has increased from approximately 3.9
million claims in 1991 to approximately 57.8 million claims in 1996. During
1996, 28.7% of the Company's net revenues were derived from mail pharmacy
services. During 1995 and 1994, 29.7% and 32.2%, respectively, of the Company's
net revenues were derived from mail pharmacy services. The number of mail
prescriptions processed by the Company's mail pharmacy service has increased
from approximately 0.6 million in 1991, to 2.8 million in 1996.
ADVANCED PHARMACY BENEFIT MANAGEMENT SERVICES
The Company provides advanced PBM services to its clients which involve the
application of clinical expertise and sophisticated management information
systems to manage the pharmacy benefit. An important PBM service provided by the
Company is the enhancement of formulary compliance. Formularies are lists of
drugs for which coverage is provided under the applicable plan; they are widely
used in managed healthcare plans and, increasingly, by other healthcare risk
managers. The Company administers a number of different formularies for its
clients that often identify preferred drugs whose use is encouraged or required
through various benefit design features. Historically, many clients have
selected a plan design which includes an open formulary in which all drugs are
covered by the plan and preferred drugs, if any, are merely recommended. More
advanced formularies consist of restricted formularies, in which various
financial or other disincentives exist to the selection of non-preferred drugs,
or closed formularies, in which benefits are available only for drugs listed on
the formulary. Formulary preferences can be encouraged by restricting the
formulary through plan design features such as tiered copayments, which require
the member to pay a higher amount for a nonpreferred drug; through prescriber
education programs, in which the Company or the managed care client actively
seek to educate the prescribers about the formulary preferences; and through the
Company's ExpressPreferenceSM drug therapy management program, which actively
promotes therapeutic and generic interchanges to reduce drug costs. The Company
also offers ExpressTherapeuticsSM, an innovative proprietary DUR and case
management clinical intervention program, to assist clients in managing
compliance with the prescribed drug therapy and inappropriate prescribing
practices.
ESI's National Pharmacy and Therapeutics Committee (the "Committee"),
composed of physicians and pharmacists, evaluates drugs to determine whether it
is clinically appropriate to give formulary preference to one drug over another.
If clinical appropriateness is established to the Committee's satisfaction, the
Committee also considers the cost-effectiveness of drugs in the same therapy
class. Once a client adopts a formulary, the Company administers the formulary
through the electronic claims processing system, which alerts the pharmacist if
the prescriber has not prescribed the preferred drug. The pharmacist can then
contact the prescriber to attempt to obtain the prescriber's consent to switch
the prescription to the preferred product.
Through the development of increasingly sophisticated management
information and reporting systems, the Company manages the prescription drug
benefit more effectively. The Company has developed an on-line prescription drug
decision support tool called RxWorkbenchTM that enables the Company or the
client 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 identify costly utilization patterns. These systems permit a medically
sophisticated user, such as a clinical pharmacist employed by a health
maintenance organization ("HMO"), to analyze prescription drug data on-line.
The Company's electronic claims processing system also enables it to
implement sophisticated intervention programs to assist in managing prescription
drug utilization. The system can be used to alert the pharmacist to generic and
therapeutic substitution opportunities and formulary compliance issues, or to
administer prior authorization and step-therapy protocol programs at the time a
claim is submitted for processing. The Company's claims processing system also
creates a database of drug utilization information that can be accessed on a
retrospective basis to analyze utilization trends and prescribing patterns for
more intensive management of the drug benefit.
The Company is developing disease management programs to assist health
plans in managing the total healthcare costs associated with certain diseases,
such as diabetes and asthma, for which pharmaceutical therapy is a principal
treatment regimen. These programs may entail offering telephone counseling
services and mailing information about the disease to affected members.
Additionally, the programs may include periodic reminders to encourage
compliance with the therapy. High risk or noncompliant members can be identified
and contacted for individual counseling, and physicians can be encouraged to
follow the health plan's specified therapy protocol for treating the disease.
Programs that promote compliance with the drug regimen can both reduce
complications from the underlying disease and manage the severity of the disease
so that more expensive drugs or medical procedures can be avoided, thus helping
to manage the total healthcare cost of the disease. Additional components of
these programs include member surveys, treatment guidelines for physicians and
educational newsletters.
PRACTICE PATTERNS SCIENCE, INC.
The success of the Company's disease management programs will continue to
depend, in part, on the development of sophisticated information systems that
can identify members for participation in such programs and then measure the
results of the program. PPS, the Company's medical information management
subsidiary, offers provider profiling, disease management support services, and
outcomes assessments, and has developed proprietary software to process and sort
medical claim, prescription drug claim, and clinical laboratory data to produce
comprehensive information about treatment of patients that can be used by
managed care organizations and other companies involved in disease management
programs (including pharmaceutical manufacturers and medical care providers) to
treat a particular disease in a cost effective manner. By linking together all
services provided to a particular member to treat a particular medical condition
and comparing such data to data in PPS's normative data bases, PPS can assess
the effectiveness of treatment and calculate the total costs of that treatment.
Clients of PPS, including the Company, will use the information PPS
develops to monitor the effectiveness of disease management programs and compute
and manage total healthcare costs, including prescription drug costs, for health
plan sponsors. The information can also be used to analyze the practice patterns
of healthcare providers and develop empirically-based "best practice" protocols,
which recommend a treatment regimen for specific diseases.
OTHER SERVICES
In addition to pharmacy benefit management and medical information
management services, the Company also provides infusion therapy services, vision
care services and informed decision counseling services. Net revenues to the
Company from infusion therapy and managed vision care services represented
approximately $30.5 million in 1996, $21.7 million in 1995, and $12.9 million in
1994.
OUTPATIENT INFUSION THERAPY SERVICES
Infusion therapy services involve the administration of prescription drugs
and other products to a patient by catheter, feeding tube or intravenously.
IVTx's clients benefit from outpatient infusion therapy services because the
length of hospital stays can be reduced. Rather than receiving infusion therapy
in a hospital, IVTx can 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. IVTx provides antimicrobial, cardiovascular,
hematologic, nutritional, analgesic, chemotherapeutic, hydration, endocrine,
respiratory and AIDS management treatments to patients. IVTx typically prepares
the treatments in one of its infusion therapy pharmacies, which are usually
licensed independently of the Company's mail services pharmacies, depending on
the applicable state law. The treatments are either administered under the
supervision of IVTx's staff of registered nurses or licensed vocational nurses
who are employed at one of the IVTx sites or, in areas where IVTx does not have
a facility, it contracts for services of registered nurses employed or otherwise
retained by nursing agencies, who administer the treatment. IVTx may also
contract with physicians to provide medical director services to its sites, and
contract for pharmacy services for patients who live in outlying areas. IVTx's
clients consist of managed care organizations, third-party administrators,
insurance companies, case management companies, unions and self-insured
employers.
The Company has facilities supporting its infusion therapy operations in
Houston, Texas; Dallas, Texas; Columbia, Maryland; Maryland Heights, Missouri;
Northvale, New Jersey; Tempe, Arizona and West Chester, Pennsylvania. IVTx's DUR
system maintains patient profiles, documents doses and supplies dispensed, and
screens for drug interactions, incompatibilities and allergies for patients
receiving infusion therapy services.
VISION CARE SERVICES
The Company offers a managed vision care program through a network of
approximately 5,500 vision care providers, consisting primarily of optometrists
and a smaller number of ophthalmologists. Several providers offer service at
multiple locations, thereby allowing members to access the Company's vision care
product at approximately 7,500 locations in 49 states. The providers have agreed
to provide, at specific rates, a routine vision examination and eyewear
(including contact lenses), to members of the Company's managed vision care
plans. In addition to administering the network, the Company grinds and edges
lenses and assembles eyeglasses, and distributes eyeglasses and contact lens
from its vision lab located in Earth City, Missouri, near the Company's
headquarters. The Company is continuing to develop, pursuant to an agreement
with Ciba Vision Ophthalmics(R) U.S., ophthalmologic disease management programs
to be offered to plan sponsors.
The Company generally sends its eyeglasses and contact lenses directly to
the local optometrist after fabrication. The quality of eyewear fabricated at
the Company's optical lab meets or exceeds the standard for prescription eyewear
set by the Food and Drug Administration according to the American National
Standards Institute's policy for prescription tolerance. The Company manages
vision care benefits through its management information system which maintains
member eligibility information, verifies covered benefits and charges plan
participants in accordance with the provisions of the applicable vision plan.
Additionally, the system is used to bill clients and provides reports to help
clients manage the optical benefit.
INFORMED DECISION COUNSELING
The Company anticipates that it will begin offering healthcare decision
counseling services through its Express Health LineSM service during the second
quarter of 1997. Specifically, this service will allow a member to call a
toll-free telephone number and discuss a healthcare matter with a care counselor
who utilizes on-line decision support protocols and other guidelines to provide
information to the member to allow the member to make an informed decision in
seeking appropriate treatment. Records of each call will also be maintained
on-line for future reference. The service will be available 24 hours per day,
365 days per year. Multilingual capabilities and service for the hearing
impaired will also be available. The counselors will provide follow-up service
to members to determine if their situation was resolved or if the counselor may
provide additional assistance. Member satisfaction and outcome assessment will
be tracked by the use of member surveys, a quality assurance plan and system
reports.
SUPPLIERS
The Company maintains an extensive inventory in its mail pharmacies of
brand and generic pharmaceuticals. If a pharmaceutical is not in its inventory,
the Company can generally obtain it from a supplier within one to two business
days. The Company purchases its pharmaceuticals either directly from
manufacturers or through wholesalers. During 1996, approximately 79% of the
Company's pharmaceutical purchases were through one wholesaler, most of which
were brand name pharmaceuticals. Generic pharmaceuticals are generally purchased
directly from manufacturers. The Company believes that alternative sources of
supply for both generic and brand name pharmaceuticals are readily available.
CLIENTS
The Company is a major provider of PBM services to the managed care
industry, including several large U.S. HMOs. Some of the Company's largest
managed care clients include FHP, Inc. ("FHP"), NYLCare Health Plans, Inc.
("NYLCare") (formerly Sanus Corp. Health Systems) and Coventry Corporation
("Coventry"). As of January 1, 1997, approximately 51% of the members receiving
ESI's PBM services are members of HMOs. The Company also markets its PBM
services through preferred provider organizations ("PPOs"), group purchasing
organizations ("GPOs"), health insurers, third-party administrators of health
plans ("TPAs"), employers and union-sponsored benefit plans.
The Company has entered into strategic alliances with a number of its
clients. In October 1992 the Company entered into a series of agreements with
FHP, which is an operator of HMOs located principally in the western United
States, and its affiliated HMOs. FHP received 200,000 shares of Class A Common
Stock in the Company as an advance discount at the time it entered into a
contract making the Company the exclusive provider of PBM services to FHP for an
initial term of five years. FHP has the option to renew the agreement for an
additional five years. If FHP renews the agreement for a second five-year term,
the Company will issue as an advance discount a ten-year warrant to purchase an
additional 300,000 shares of Class A Common Stock, exercisable at 90% of market
value at the time of renewal. January, 1997 membership in FHP plans (including
affiliated Take Care plans) exceeds 2.0 million members, making FHP the
Company's largest customer in terms of membership, but its contribution to the
Company's net revenues is less than 2% due to the fact that the Company only
records the fees related to administering FHP's network prescriptions and
dispensing mail pharmacy prescriptions. As previously disclosed, PacifiCare
Health Systems, Inc. ("PacifiCare") publicly announced in August, 1996, that it
had reached an agreement to acquire FHP. The transaction was consummated in
February, 1997, and the Company is continuing to monitor what effect such a
transaction may have on its future relationship with this client.
In 1994 the Company entered into a strategic alliance with Coventry
Corporation ("Coventry"), an operator of HMOs located in Pennsylvania,
Tennessee, Mississippi, and Missouri. Coventry received 25,000 shares of Class A
Common Stock at the time it entered into an exclusive three-year agreement for
PBM services that commenced January 1, 1995. If Coventry renews the agreement
for a second three-year term, the Company will issue as an advance discount a
ten-year warrant to purchase an additional 25,000 shares of the Company's Class
A Common Stock, exercisable at 90% of the market value at the time of renewal.
If the renewal period is for five years, the warrant will be for 58,000 shares.
On December 31, 1995, the Company entered into a series of agreements with
American HealthCare Systems Purchasing Partners, L.P. (now known as Premier
Purchasing Partners, L.P.; the "Partnership"), a healthcare group purchasing
organization affiliated with APS Healthcare, Inc. (now known as Premier, Inc.;
"Premier"). Premier is the largest voluntary healthcare alliance in the U.S.,
formed as a result of the mergers in late 1995 of three predecessor alliances,
American HealthCare Systems, Premier Health Alliance and SunHealth Alliance. The
Premier alliance includes more than 240 integrated healthcare systems that own
or operate approximately 750 hospitals and are affiliated with another 1,080
hospitals. Among other things, the agreements designate the Company as Premier's
exclusive preferred provider of outpatient PBM services to shareholders of
Premier and their affiliated healthcare entities, plans and facilities which
participate in the Partnership's purchasing programs. The term of the agreement
is ten years, subject to early termination by the Partnership at five years,
upon payment of an early termination fee to the Company. Premier is required to
promote the Company as the preferred provider. An individual Premier member or
affiliated managed care plan is not required to enter into an agreement with the
Company, but if it does so, the term of the agreement is for five years.
As a result of the number of Premier plan members that receive PBM services
from the Company and the outcome of certain joint drug purchasing initiatives,
the Company issued 227,273 shares of its Class A Common Stock to the Partnership
in May, 1996. The Partnership could also become entitled to receive up to an
additional 2,250,000 million shares, depending on the number of members in
Premier-affiliated managed care plans that contract for the Company's PBM
services. If the Partnership earns stock totaling over 5% of the Company's total
voting stock, it is entitled to have its designee nominated for election to the
Board. Under the terms of the agreements with the Partnership, the Company now
provides service to a number of Premier affiliates.
In January 1996, the Company acquired the pharmacy claim processing
business of Eclipse Claims Services, Inc., one of the largest processors of
prescription drug claims in Canada. In connection with this acquisition, the
Company entered into five-year exclusive contracts to provide PBM services in
Canada to both Prudential Insurance Company of America's Canadian Operations
("Prudential") and Aetna Life Insurance Company of Canada ("Aetna"). In
addition, the Company also entered into a ten-year strategic alliance with The
Manufacturers Life Insurance Company ("Manulife"), the largest provider of group
health insurance policies in Canada, pursuant to which the Company is the
exclusive provider of PBM services to Manulife. As a result of this alliance,
Manulife can earn up to approximately 237,000 shares of Class A Common Stock,
depending on its achievement of certain pharmacy claim volumes from 1996 to
2000. If Manulife does not terminate the agreement in either year 6 or year 10
of the agreement on each such occasion it will receive a warrant to purchase up
to 118,000 shares of Class A Common Stock exercisable at 85% of the then-market
value of such shares. The actual number of shares entitled to be purchased will
depend upon claims volume in such years.
The Company's pharmacy benefit management business continues to progress in
Canada, with the Company reaching an agreement with London Life Insurance
Company ("London Life") whereby the Company will be the exclusive provider of
PBM services to London Life, who previously acquired the assets of Prudential.
In addition, the Company continues to provide PBM services in Canada to Crown
Life Insurance Company.
The Company also provides pharmacy benefit management services, managed
vision care services and infusion therapy services to HMOs owned or managed by
NYLCare, which is an indirect subsidiary of New York Life. The Company also
provides pharmacy benefit management services to insurance plans administered by
New York Life pursuant to an agreement between the Company and New York Life.
New York Life has recently reorganized and transferred all of its group life and
health insurance business, along with this agreement, to NYLCare. Of the
Company's net revenues from pharmacy benefit management services in 1996, 18.1%
was for services provided to members of HMOs owned or managed by NYLCare or
insurance policies underwritten or administered by New York Life. Of the
Company's net revenues for managed vision care and infusion therapy services,
58.5% was for services provided to members of HMOs owned or managed by NYLCare.
COMPANY OPERATIONS
SALES AND MARKETING; CLIENT SERVICE. The Company markets its pharmacy
benefit management services in the United States through an internal staff of
national marketing representatives and sales personnel and through independent
regional marketing representatives located in certain cities across the United
States. These marketing representatives are supported by a staff of client
service representatives located in the Company's Missouri and Arizona
facilities. The Company's sales and marketing personnel and client service
representatives are organized by type of business served (i.e., managed care
group, commercial client group, etc.). Marketing in Canada is conducted by
marketing representatives located in Mississaugua, Ontario, who are assisted by
Company personnel based in the U.S. Each of the Company's U.S. facilities
contains a mail service pharmacy, client service, member service and pharmacy
help desk capabilities, and full electronic pharmacy claim processing
capabilities, including pharmacy payment capabilities. At its Canadian facility,
the Company has client services and pharmacy help desk capabilities. IVTx, PPS
and ESVC also employ their own sales and marketing and client service personnel
to take advantage of individual market opportunities.
MEMBER SERVICES. The Company believes that client satisfaction is dependent
on member satisfaction. Members can call the Company toll-free, six days a week,
to obtain information about their prescription drug plan. The Company employs
member service representatives who are trained to respond to member inquiries.
PROVIDER RELATIONS. The Company's Provider Relations group is responsible
for contracting and administering the Company's networks of over 48,000 retail
pharmacies. To participate in the Company's pharmacy networks, pharmacists are
periodically required to represent to the Company that their applicable state
licensing requirements are being maintained and that they are in good standing.
Pharmacies can contact the Company's pharmacy help desks toll-free, 24 hours
every day, for information and assistance in filling prescriptions for members.
The Company's Provider Relations group also audits pharmacies in the pharmacy
networks to determine compliance with the terms of the contract with the Company
or its clients.
CLINICAL SUPPORT. The Company's Science Department employs a physician,
clinical pharmacists and financial analysts who provide technical support for
the Company's advanced 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 switching programs. The Science Department also analyzes and
prepares reports on clinical pharmacy data for clients and conducts specific
data analyses to evaluate the cost-effectiveness of certain drug therapies.
MANAGEMENT INFORMATION SYSTEMS. The Company's Management Information
Systems department supports the Company's pharmacy claims processing system and
other management information systems essential to the Company's operations.
Because uninterrupted point-of-sale electronic pharmacy claims processing is a
significant operational requirement for the Company, the claims processing
systems located in the Company's Missouri and Arizona facilities are designed to
be redundant, enabling the Company to do substantially all claims processing in
one facility if the other facility is unable to process claims. The Company has
substantial capacity for growth in its claims processing facilities.
COMPETITION
The Company believes that the primary competitive factors in each of its
businesses are price, quality of service and breadth of available services. The
Company also believes that its larger PBM competitors offer all core and
advanced pharmacy benefit management services, and that most of the Company's
smaller competitors offer only core PBM services and some, but not all, advanced
PBM services. The Company considers its principal competitive advantages to be
independence from drug manufacturer ownership, strong managed care customer base
which supports the development of advanced PBM services, and commitment to
providing flexible and distinctive service to its customers.
There are a large number of companies offering PBM services in the U.S.
Most of these companies are smaller than the Company and offer their services on
a local or regional basis. As a full service, national pharmacy benefit manager,
the Company competes with a number of larger, national companies, including
Merck Medco Managed Care, Inc. (a subsidiary of Merck & Co., Inc.), Caremark
International Inc. (a subsidiary of MedPartners, Inc.), PCS, Inc. (a subsidiary
of Eli Lilly & Company), Value Health, Inc. (which announced in January, 1997
that it would be acquired by Columbia/HCA Healthcare Corporation), and
Diversified Pharmaceutical Services, Inc. (a subsidiary of SmithKline Beecham),
as well as numerous insurance and Blue Cross/Blue Shield plans, certain HMOs and
retail drug chains which have their own pharmacy benefit management
capabilities. Many of these other companies have greater financial and marketing
resources than the Company.
Consolidation is a critical factor in the pharmaceutical industry
generally. Merger and acquisition activity in the manufacturing segment has
resulted in significant movements in market share. Competitors that are owned by
manufacturers may have pricing advantages that are unavailable to the Company
and other independent PBMs.
With respect to its vision care plans, the Company competes primarily
against Vision Service Plan, a California not-for-profit corporation, and
certain other plans that provide optical services on a discounted basis and a
large number of regional and local providers. With respect to infusion therapy
services, the Company competes with a number of large national companies as well
as with local providers.
GOVERNMENT REGULATION
Various aspects of the Company's 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 for the Company.
The Company believes that it is in substantial compliance with all existing
legal requirements material to the operation of its businesses.
PHARMACY BENEFIT MANAGEMENT REGULATION GENERALLY. Certain federal and
related state laws and regulations affect or may affect aspects of the Company's
pharmacy benefit management 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 October 1995 the FDA held hearings to
determine whether and to what extent the activities of pharmacy benefit
management companies should be subject to FDA regulation. At this hearing, FDA
officials expressed concern about the efforts of pharmacy benefit managers
(PBMs) that are owned by drug manufacturers to engage in therapeutic switching
programs and about the criteria used by such PBMs that govern the inclusion and
exclusion of particular drugs in formularies. Various parties, including the
Company, have submitted written comments to the FDA regarding the basis for FDA
regulation of PBM activities. It is the Company's position that, while the FDA
may have jurisdiction to regulate PBMs that are owned by drug manufacturers, the
prescription drug benefit programs developed and implemented by independent PBMs
do not constitute the distribution of materials that promote particular drugs
"on behalf of" any pharmaceutical manufacturers, and therefore, these programs
are not subject to FDA regulation. The FDA has not published any proposed rules
to date on the regulation of PBMs, and there can be no assurance that the FDA
will not seek to regulate certain aspects of the Company's pharmacy benefit
management business.
ANTI-REMUNERATION LAWS. Medicare and Medicaid 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 Medicare or Medicaid
beneficiaries 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, or other federally-funded state healthcare programs. Several states
also have similar laws which 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
(HHS), 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, and certain properly disclosed payments made by
vendors to group purchasing organizations. 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 the Company's 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 substitution programs conducted by independent PBMs, or to the
contractual relationships such as those the Company has with certain of its
customers. The Company believes that it is in substantial compliance with the
legal requirements imposed by such laws and regulations, and the Company
believes that there are material differences between drug-switching programs
that have been challenged under these laws and the programs offered by the
Company to its customers. However, there can be no assurance that the Company
will not be subject to scrutiny or challenge under such laws or regulations, or
that any such challenge would not have a material adverse effect upon the
Company.
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 the Company has
agreements to provide PBM services. The Company believes that the conduct of its
business is not subject to the fiduciary obligations of ERISA, but 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 the Company's operations.
PROPOSED CHANGES IN CANADIAN HEALTHCARE SYSTEM. In Canada, the provincial
health plans provide universal coverage for basic healthcare services, but
prescription drug coverage under the government plans is provided only for the
elderly and the indigent. A proposal has recently been made by a Federal
government healthcare task force to include coverage for prescription drugs
under the provincial health insurance plans, which report was endorsed by the
Federal government's Health Minister. This report is advisory in nature, and is
not binding upon the Federal or provincial governments. The Company is unable to
determine the likelihood of adoption of the proposal at this time.
Numerous state laws and regulations also affect aspects of the Company's
pharmacy benefit management business. Among these are the following:
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, Inc. ("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.
The Company believes that its 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 the Company 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 the ability of the Company to limit access to a pharmacy
provider network or from removing network providers. Such legislation may
require the Company or its client to admit any retail pharmacy willing to meet
the plan's price and other terms for network participation ("any willing
provider" legislation); or providing that a provider may not be removed from a
network except in compliance with certain procedures ("due process"
legislation). The Company has not been materially affected by these statutes
because it maintains a large network of over 48,000 retail pharmacies and will
admit any licensed pharmacy that meets the Company's credentialling criteria,
involving such matters as adequate insurance coverage, minimum hours of
operation, and the absence of disciplinary actions by the relevant state
agencies.
LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have legislation
that prohibits the plan sponsor 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 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 ("freedom of choice"
legislation). Legislation has been introduced in some states to prohibit
therapeutic substitution, or to require coverage of all FDA approved drugs.
Other states mandate coverage of certain benefits or conditions. Such
legislation does not generally apply to the Company, but it may apply to certain
of the Company's customers (HMOs and health insurers). If such legislation were
to become widespread and broad in scope, it could have the effect of limiting
the economic benefits achievable through pharmacy benefit management.
LICENSURE LAWS. Many states have licensure or registration laws governing
certain types of ancillary healthcare 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. The Company has
registered under such laws in those states in which the Company has concluded,
after discussion with the appropriate state agency, that such registration is
required.
LEGISLATION AFFECTING DRUG PRICES. Some states have adopted 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 ("most favored nation" legislation). Such legislation may adversely affect
the Company's 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 but
not yet enacted in Missouri and Arizona, where the Company's mail service
pharmacies are located. Such legislation, if enacted in either state, could
adversely affect the Company's ability to negotiate discounts on its purchase of
prescription drugs to be dispensed by its mail service pharmacies.
REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug plans
are not generally 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 the Company has contracts in
which it is materially at risk to provide the pharmacy benefit, the Company
believes that it has complied with all applicable laws.
Many of these state laws 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 in any event the Company provides services to
certain customers, such as union health and welfare funds and government
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 is a significant operational requirement for the Company.
MAIL PHARMACY REGULATION. The Company's principal mail service pharmacies
are located in Missouri and Arizona and the Company is licensed to do business
as a pharmacy in each such state. Many of the states into which the Company
delivers 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 one state also requires that the Company
employ a pharmacist licensed in that state. The Company has registered in every
state in which, to the Company's knowledge, such registration is required.
One state has a statute that purports to prohibit residents from obtaining
prescription drugs by mail if the mail order business of the company dispensing
the drugs represents more than a specified percentage of the company's total
volume of pharmacy business. The Company's mail order volume exceeds that
percentage. The Company is licensed as a pharmacy in that state, no enforcement
action has been taken under the statute against the Company, and to the
Company's knowledge, no such enforcement action is contemplated. Approximately
0.8% of the Company's revenues come from mail delivery of prescription drugs
into that state. If an enforcement action against the Company were commenced
under that statute, the Company would consider all of its alternatives,
including challenging the validity of the statute.
Other statutes and regulations impact the Company's 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 customers 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 the
Company's mail service operations. The U.S. Postal Service has exercised such
statutory authority only with respect to controlled substances. Alternative
means of delivery are available to the Company.
REGULATION OF MANAGED VISION CARE. The Company's managed vision care
program is subject to many of the same or similar state laws and regulations
affecting the Company's pharmacy benefit management business. The Company offers
its vision care program on a fee-for-service and capitated basis. The Company
has determined that it is required to obtain an HMO or equivalent license to
offer its vision care program on a capitated basis in several states. Until it
obtains such licenses, the Company will offer its vision care program to
customers based in such states only on a fee-for-service basis.
REGULATION OF INFUSION THERAPY SERVICES. The Company's infusion therapy
services business is subject to many of the same or similar state laws and
regulations affecting the Company's pharmacy management business. In addition,
some states require that providers of infusion therapy services be licensed. The
Company is 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. The Company is also licensed as a
non-resident pharmacy in various states. The Company believes that it is 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 healthcare organizations and home care services, including standards for
services provided by home infusion therapy companies. The Company's Maryland
Heights, Missouri, Dallas, Texas, Houston, Texas, Columbia, Maryland, Northvale
New Jersey and West Chester, Pennsylvania facilities have received JCAHO
accreditation. For the Tempe, Arizona facility, the Company elected the JCAHO
early survey option and received accreditation, although this accreditation was
provisional because the facility did not have six months of operating data at
the time of the initial survey. The Company expects the final survey for this
facility to be conducted May, 1997. When accredited by JCAHO, the Company can
market infusion therapy services to Medicare and Medicaid programs. If the
Company expands its home infusion therapy services to other states or to
Medicare or Medicaid programs, it may be required to comply with other
applicable laws and regulations.
REGULATION OF INFORMED DECISION COUNSELING SERVICE. The Company's
healthcare decision support counseling service is affected by many of the same
types of state laws and regulations as the Company's other activities. In
addition, all states regulate the practice of medicine and the practice of
nursing. The Company does not believe its informed decision counseling
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 there is no controlling
legal precedent for services of this kind.
FUTURE REGULATION. The Company is unable to predict accurately what
additional Federal or state legislation or regulatory initiatives may be enacted
in the future relating to the businesses of the Company or the healthcare
industry in general, or what effect any such legislation or regulations might
have on the Company. 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 the Company's business or
financial position.
SERVICE MARKS AND TRADEMARKS
The Company and its subsidiaries have registered the service marks "Express
Scripts", "PERx", "ExpressComp", "ExpressReview", "IVTx", "PERxCare" and "PTE"
with the United States Patent and Trademark Office. The Company's rights to
these marks will continue so long as the Company complies with the usage,
renewal filing and other legal requirements relating to the renewal of service
marks. The Company is in the process of applying for registration of several
other trademarks and service marks. If the Company is unable to obtain any
additional registrations, the Company believes there would be no material
adverse effect on the Company.
INSURANCE
The dispensing of pharmaceutical products by the Company's mail service
pharmacies, the fabrication and sale of eyewear by the Company, the products and
services provided in connection with the Company's infusion therapy programs
(including the associated nursing services), and the services rendered in
connection with the Company's disease management and informed decision
counseling service may subject the Company to litigation and liability for
damages. The Company believes that its insurance protection is adequate for its
present business operations, but there can be no assurance that the Company will
be able to maintain its 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 the
Company's insurance coverage could have a material adverse effect upon the
Company.
EMPLOYEES
As of March 1, 1997, the Company and its subsidiaries employed a total of
1,477 employees in the U.S. and 36 employees in Canada.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of the Annual Report on Form 10-K, the
information regarding executive officers of the Company required by Item 401 of
Regulation S-K is hereby included in Part I of this report.
The executive officers of the Company and their ages as of March 1, 1997,
are as follows:
NAME AGE POSITION
Howard L. Waltman 64 Chairman of the Board
Barrett A. Toan 49 President, Chief Executive Officer and Director
Stuart L. Bascomb 55 Executive Vice President
Susan M. Barrow, M.D. 42 Senior Vice President and Chief Science Officer
Thomas M. Boudreau 45 Senior Vice President, General Counsel and
Secretary
Richard A. Calvert 56 Senior Vice President and Chief Information
Systems Officer
David A. Lowenberg 47 Senior Vice President and Director of Site
Operations
Kurt D. Blumenthal 52 Vice President of Finance and Acting Chief
Financial Officer
Joseph W. Plum 49 Vice President and Chief Accounting Officer
Mr. Waltman was elected Chairman of the Board of the Company in March 1992.
Mr. Waltman has been a director of the Company since its inception in September
1986. From 1983 until September 1992, Mr. Waltman was Chairman of the Board and
Chief Executive Officer of Sanus Corp. Health Systems, now known as NYLCare
Health Plans, Inc., and a wholly owned subsidiary of New York Life. From
September 1992 to December 31, 1995, Mr. Waltman served as the Chairman of the
Board of Sanus/NYLCare.
Mr. Toan was elected Chief Executive Officer in March 1992 and President
and a director in October 1990. Mr. Toan has been an executive employee of the
Company since May 1989. From January 1985 to May 1989, Mr. Toan served full-time
as the Executive Director of Sanus of Missouri, Inc., a subsidiary of NYLCare
("SOMI"). From May 1989 until March 1992, Mr. Toan spent approximately one-half
of his time performing services for the Company. He was also Secretary of
GenCare Health Systems, Inc., a St. Louis HMO, from May 1989 to March 1992. In
March 1992, Mr. Toan resigned as Executive Director of SOMI.
Mr. Bascomb was elected Executive Vice President of the Company in March
1989, and also served as Chief Financial Officer and Treasurer from March 1992
until May 1996.
Dr. Barrow was elected Senior Vice President and Chief Science Officer of
the Company in June 1995. From January 1995 to June 1995, Dr. Barrow was
President of Barrow Biosciences, a healthcare business consulting firm. From May
1994 to January 1995, Dr. Barrow was Executive Director of Medical Research for
Syntex Corporation, a pharmaceutical company. From October 1992 to May 1994, Dr.
Barrow was the Medical Director of Alza Corporation, a pharmaceutical company.
From May 1989 to October 1992, Dr. Barrow served as Head of Therapeutics for
SmithKline Beecham, a major pharmaceutical manufacturer.
Mr. Boudreau was elected Senior Vice President, General Counsel and
Secretary of the Company in October 1994. He has served as General Counsel of
the Company since June 1994. From September 1984 until June 1994, Mr. Boudreau
was a partner in the St. Louis law firm of Husch & Eppenberger.
Mr. Calvert was elected Senior Vice President and Chief Information
Services Officer in October 1994 and Vice President of Operations of the Company
in September 1989.
Mr. Lowenberg was elected Senior Vice President and Director of Site
Operations of the Company in October, 1994 and Vice President of the Company in
November 1993. Mr. Lowenberg also served as General Manager of the Tempe
facility from March 1993 until January 1995. From August 1992 to March 1993, Mr.
Lowenberg was President of HealthCare Development Consulting, which provided
managed care organization and financial analysis services to private healthcare
organizations and government healthcare agencies. From 1985 to 1992, Mr.
Lowenberg was Deputy Director of the Arizona Health Care Cost Containment
System, the state agency responsible for ensuring quality service and cost
containment for Medicaid recipients.
Mr. Blumenthal was elected Vice President of Finance in May 1995, and has
served as Acting Chief Financial Officer since July, 1996. From August 1993 to
February 1995, Mr. Blumenthal served as the Chief Financial Officer of President
Baking Co. From November 1981 to December 1992, Mr. Blumenthal held several
positions at Wetterau, Inc., including Senior Vice President and Chief Financial
Officer from and after March 1989.
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.
ITEM 2 - PROPERTIES
The Company operates its U.S. pharmacy benefit management business out of
leased facilities located in Maryland Heights, Missouri, and Tempe, Arizona. In
addition, the Missouri facility houses the Company's corporate offices. The
Canadian PBM business operates out of leased facilities in Mississaugua,
Ontario. The Company's informed decision counseling service and its PPS
subsidiary are also operated out of the Company's Missouri site. The Company's
vision care business operates out of leased facilities located in Earth City,
Missouri, from which it distributes contact lenses, grinds and edges lenses and
assembles eyeglasses. The leased facilities supporting the infusion therapy
operations are located in Maryland Heights, Missouri, Dallas, Texas; Houston,
Texas; Columbia, Maryland; Tempe, Arizona; Northvale, New Jersey and West
Chester, Pennsylvania. IVTx's offices are located at the Company's Maryland
Heights, Missouri site.
The Company believes its facilities have been generally well maintained,
are in good operating condition and are adequate for the Company's current
requirements.
The Company owns computer systems for both the Missouri and Arizona sites.
The Company's software for DUR and other products has been developed internally
by the Company or purchased under perpetual, nonexclusive license agreements
with third parties. The Company's computer systems at each site are extensively
integrated and share common files through a local area network. An
uninterruptable power supply and diesel generator allows the Company's
computers, telephone systems and mail pharmacy at each site to continue to
function during a power outage. To protect against loss of data and extended
downtime, the Company stores software and redundant files at both on-site and
off-site facilities on a regular basis and has contingency operation plans in
place.
ITEM 3 - LEGAL PROCEEDINGS
The Company is a party to legal and administrative proceedings arising in
the ordinary course of its business. The proceedings now pending are not, in the
Company's opinion, material either individually or in the aggregate.
Over 100 separate lawsuits have been filed by retail pharmacies against
drug manufacturers and certain pharmacy benefit managers challenging brand drug
pricing practices under various state and federal antitrust laws. The suits
allege, among other things, that the manufacturers have offered, and certain
pharmacy benefit managers have knowingly accepted, discriminatory discounts that
violate the Robinson-Patman Act. Certain price-fixing claims under the Sherman
Act against the manufacturer defendants were settled, with the manufacturers
agreeing not to refuse to pay retrospective discounts to retail pharmacies based
on their status as such. The Company is not a party to any of these proceedings.
However, if these discounts and rebates are determined to have violated the
Robinson-Patman Act, then the availability to the Company of certain discounts,
rebates and fees that it presently receives could be adversely affected. No date
has been set for trial of these claims, and the Company can give no assurance as
to the ultimate outcome.
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 1996.
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. The Company's Class A Common Stock has been traded
on the Nasdaq National Market ("Nasdaq") tier of The Nasdaq Stock Market under
the symbol "ESRX" since June 9, 1992. Prior to that time, there was no public
market for the Company's Common Stock. The high and low prices, as reported by
the Nasdaq, are set forth below for the periods indicated.
Fiscal Year 1996 Fiscal Year 1995
Class A Common Stock High Low High Low
First Quarter $ 58.00 $ 44.50 $ 37.50 $ 28.00
Second Quarter 52.00 38.50 38.25 25.00
Third Quarter 45.00 26.50 44.50 34.00
Fourth Quarter 39.25 26.50 55.00 38.00
The Company's Class B Common Stock has no established public trading
market, but those shares will automatically convert to Class A Common Stock on a
share for share basis upon transfer thereof to any entity other than New York
Life Insurance Company or one of its affiliates.
HOLDERS. As of March 7, 1997, there were 213 stockholders of record of the
Company's Class A Common Stock, and 1 holder of record of the Class B Common
Stock. The Company estimates there are approximately 6,000 beneficial
stockholders of the Class A Common Stock.
DIVIDENDS. The Board of Directors has not declared any cash dividends on
the Company's common stock since the initial public offering. The Board of
Directors does not currently intend to declare any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
COVENTRY CORPORATION. On January 1, 1995, the Company issued 25,000 shares
of its Class A Common Stock to Coventry as an advance discount with respect to
future charges to be assessed against certain health benefit plans owned by
Coventry under the pharmaceutical benefit management agreement between the
parties. The shares were valued at $27.375 per share, resulting in an aggregate
discount of $684,375. No underwriters were involved in the issuance. The
issuance was exempt from registration under the Securities Act of 1933 pursuant
to Rule 506 and Section 4(2) thereof, based on, among other factors, the single
purchaser of the securities, the level of sophistication and financial resources
of the purchaser, the type and amount of information available to the purchaser
and the market generally, and the lack of any general solicitation or
advertising in connection with the sale.
607486 ALBERTA LTD. On April 1, 1996, the Company issued 2,097 shares of
its Class A Common Stock to 607486 Alberta Ltd. ("607486") as partial
consideration for certain services performed by 607486 in connection with the
Company's acquisition of certain assets of Eclipse Claims Services, Inc. The
shares were valued at $47.70 per share, resulting in an aggregate value of
$100,000. No underwriters were involved in the issuance. The issuance was exempt
from registration under the Securities Act of 1933 pursuant to Rule 506 and
Section 4(2) thereof, based on, among other factors, the single purchaser of the
securities, the level of sophistication and financial resources of the
purchaser, the type and amount of information available to the purchaser and the
market generally, and the lack of any general solicitation or advertising in
connection with the sale.
PREMIER PURCHASING PARTNERS, L.P. In May, 1996, the Company issued 227,273
shares of its Class A Common Stock to the Partnership, which is a group
purchasing organization, as an administrative fee to the Partnership in
connection with a long-term agreement between the parties whereby the Company
will provide pharmaceutical benefit management services to third parties that
purchase such services through the Partnership. The number of shares was based
on certain benchmarks, notably the achievement of certain joint purchasing goals
and the Partnership's obligation to obtain a minimum number of members receiving
the Company's pharmaceutical benefit management services under the arrangement
between the parties by a certain future date. The shares were valued at
$11,250,000. No underwriters were involved in the issuance. The issuance was
exempt from registration under the Securities Act of 1933 pursuant to Rule 506
and Section 4(2) thereof, based on, among other factors, the single purchaser of
the securities, the level of sophistication and financial resources of the
purchaser, the type and amount of information available to the purchaser and the
market generally, and the lack of any general solicitation or advertising in
connection with the sale.
ITEM 6 - SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE, Year Ended December 31,
OPERATING AND NON-FINANCIAL DATA) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 773,615 $ 544,460 $ 384,504 $ 264,868 $ 125,322
--------------- --------------- --------------- --------------- -------------
Costs and expenses:
Cost of revenues 684,882 478,283 338,151 236,398 110,366
Selling, general and administrative 49,103 37,300 25,882 15,591 7,926
--------------- --------------- --------------- --------------- -------------
733,985 515,583 364,033 251,989 118,292
--------------- --------------- --------------- --------------- -------------
Operating income 39,630 28,877 20,471 12,879 7,030
Other income, net 3,450 757 305 165 346
--------------- --------------- --------------- --------------- -------------
Income before income taxes 43,080 29,634 20,776 13,044 7,376
Provision for income taxes 16,932 11,307 8,053 4,945 2,753
--------------- --------------- --------------- --------------- -------------
Net income $ 26,148 $ 18,327 $ 12,723 $ 8,099 $ 4,623
=============== =============== =============== =============== =============
Net income per share $ 1.60 $ 1.20 $ 0.84 $ 0.55 $ 0.36
- -----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total current assets $ 263,149 $ 144,415 $ 93,826 $ 64,230 $ 40,555
Total assets 300,425 164,088 108,922 76,144 45,389
Total current liabilities 134,890 85,762 55,744 37,467 15,376
Working capital 128,259 58,653 38,082 26,763 25,179
Stockholders' equity 164,090 77,379 52,485 38,273 29,690
- -----------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Gross margin 11.5% 12.2% 12.0% 10.8% 11.9%
Operating margin 5.1% 5.3% 5.3% 4.9% 5.6%
Pretax margin 5.6% 5.4% 5.4% 5.0% 5.9%
Net margin 3.4% 3.3% 3.3% 3.1% 3.7%
Return on assets 15.9% 16.8% 16.7% 17.8% 22.8%
Return on equity 33.8% 34.9% 33.2% 27.3% 135.2%
- -----------------------------------------------------------------------------------------------------------------------
NON-FINANCIAL DATA:
Pharmacy network
claims processed 57,838,000 42,871,000 26,323,000 18,296,000 5,349,000
Mail pharmacy
prescriptions filled 2,770,000 2,129,000 1,594,000 1,233,000 738,000
Number of pharmacies in
pharmacy network 48,300 46,500 36,900 32,900 28,400
Pharmacy benefit
covered lives 9,900,000 8,100,000 5,700,000 4,200,000 1,900,000
- -----------------------------------------------------------------------------------------------------------------------
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company principally derives its revenues from the sale of network
pharmacy services through its nationwide networks of retail pharmacies and from
the sale of pharmaceuticals by its mail pharmacies and infusion therapy
pharmacies to members of health benefit plans sponsored by the Company's
clients. Net revenue of the Company includes the ingredient cost of
pharmaceuticals dispensed by the mail pharmacies and pharmacies in the networks,
except where the Company's mail service pharmacies dispense pharmaceuticals
supplied by the Company's clients, or where the Company merely administers
contracts for the client's pharmacy network. In these situations the Company
records only dispensing and administrative fees as net revenue.
The Company's vision care program derives its revenue from administrative
fees and from the sale of eyeglasses and contact lenses to members. The Company
also derives revenue from medical information management services, including
disease management support services and provider profiling services.
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company for
the periods presented as a percentage of net revenues and the percentage change
in the dollar amounts of such financial data for 1996 compared to 1995 and 1995
compared to 1994.
Percentage of Net Revenues %Increase
Year Ended December 31, 1996 1995
1996 1995 1994 Over 1995 Over 1994
-----------------------------------------------------------------------------
Net revenues:
Unrelated clients 80.3% 80.2% 78.0% 42.3% 45.7%
Related clients(1) 19.7 19.8 22.0 41.2% 27.2%
----------------------------------------------
Total net revenues 100.0% 100.0% 100.0% 42.1% 41.6%
----------------------------------------------
Costs and expenses:
Cost of revenues 88.5% 87.8% 88.0% 43.2% 41.4%
Selling, general & administrative 6.4 6.9 6.7 31.6% 44.1%
----------------------------------------------
94.9% 94.7% 94.7% 42.4% 41.6%
----------------------------------------------
Operating Income 5.1% 5.3% 5.3% 37.2% 41.1%
Other income, net 0.5% 0.1% 0.1% 355.7% 148.2%
----------------------------------------------
Income before income taxes 5.6% 5.4% 5.4% 45.4% 42.6%
Provision for income taxes 2.2 2.1 2.1 49.7% 40.4%
----------------------------------------------
Net income 3.4% 3.3% 3.3% 42.7% 44.0%
================================================
<FN>
(1)Related clients consist of NYLCare Health Plans, Inc. ("NYLCare") and
New York Life Insurance Company. See note 3 to the December 31, 1996
consolidated financial statements for further discussion.
</FN>
YEAR ENDED DECEMBER 31, 1996, COMPARED TO 1995
NET REVENUES. Net revenues for 1996 increased $229,155,000, or 42.1%,
compared to 1995. Net revenues from the Company's claims processing services and
mail pharmacy services increased 41.8% in 1996, compared to 1995. The primary
reason for this increase was a $157,609,000, or 43.7%, increase in revenues from
pharmacy claims processed reflecting a 34.9% increase in the number of claims
processed, and a 6.5% increase in average revenue per claim compared to 1995.
Revenue from the Company's mail pharmacy services increased $60,628,000, or
37.5%, reflecting a 30.1% increase in the number of prescriptions dispensed, and
a 5.7% increase in the average revenue per prescription dispensed. The increases
in average revenue per claim and per prescription dispensed are primarily due to
increases in the ingredient costs of drugs for customers utilizing the Company's
pharmacy networks and mail pharmacy services, partially offset by lower pricing
offered by the Company in response to continued competitive pressures.
The increase in the number of claims processed and the number of mail
service pharmacy prescriptions dispensed reflects a 22.2% increase in the
average number of members served from approximately 8.1 million members served
at December 31, 1995 to approximately 9.9 million members served at December 31,
1996. The percentage increase in claims processing revenues continues to exceed
the percentage increase in mail service revenues, as the price difference
between mail pharmacy prescriptions and network pharmacy prescriptions
decreases. Management believes this trend will continue in 1997. Net revenues
from the Company's vision and infusion therapy services increased 41.0%,
compared to 1995, as a result of the growth in the number of members who receive
these services. The Company's medical information management subsidiary,
Practice Patterns Science, Inc. ("PPS"), also contributed to the Company's
success in 1996.
COST OF REVENUES. Cost of revenues for 1996 increased $206,599,000, or
43.2%, compared to 1995. The percentage increase in cost of revenues was 1.1
percentage points more than the increase in revenues, thus gross profit margins
decreased slightly. For both claims and mail pharmacy services, gross margin
decreased slightly due to scheduled fee reductions under the Company's amended
contract with NYLCare Health Plans, Inc. ("NYLCare") and as a result of
competitive pressures. These factors were offset by an increase as a percentage
of net revenues in the fees received from drug manufacturers in connection with
the Company's drug purchasing and formulary management programs and economies of
scale in direct processing costs. Management expects the trend towards lower
margins to continue in 1997. The cost of revenue for vision and infusion therapy
services increased 46.2%, which is 5.2 percentage points above the increase in
revenues from these services, compared to 1995. This was principally due to
costs related to the continued expansion of vision and infusion therapy service
operations in order to serve a larger client base.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $11,803,000, or 31.6%, for 1996, compared to 1995. The
primary reason for the increase was the additional expenditures incurred to
expand the Company's marketing capabilities, together with increases in expenses
for information systems, additional clinical programs and added costs for client
and administrative support functions to enhance management of the pharmacy
benefit. The Company is continuing its commitment to expand its capability to
provide for future growth and enhance the level of service for its members.
OTHER INCOME, NET. Other income, net was $3,450,000 for 1996, compared to
$757,000 for 1995, primarily as a result of the investment of the proceeds from
the sale of 1,150,000 shares of Class A Common Stock in April 1996, increased
cash flow from operations and higher interest rates on invested cash balances
compared to 1995.
PROVISION FOR INCOME TAXES. The provision for income taxes for the year
ended December 31, 1996, was $16,932,000 compared to $11,307,000 in the prior
year. The effective tax rate was 39.3% in 1996 compared to 38.2% for 1995.
NET INCOME. As a result of the foregoing, net income for the year ended
December 31, 1996, increased $7,821,000, or 42.7%, compared to 1995.
EARNINGS PER SHARE. The Company reported earnings per share of $1.60 in
1996 compared to $1.20 in 1995, a 33.3% increase. The weighted average number of
shares used in the calculations was 16,350,000 in 1996 and 15,293,000 in 1995,
or an increase of 6.9%. The increase was primarily due to the April 1996 stock
offering of 1,150,000 shares and the April 1996 issuance of 227,273 shares in
connection with the contractual agreement with Premier, Inc.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO 1994
NET REVENUES. Net revenues for 1995 increased $159,956,000, or 41.6%,
compared to 1994. Net revenues from the Company's claims processing services and
mail pharmacy services increased 40.5% in 1995, compared to 1994. The primary
reason for this increase was a $112,758,000, or 45.5%, increase in revenues from
pharmacy claims processed reflecting a 62.9% increase in the number of claims
processed, which was partially offset by a 10.7% decrease in average revenue per
claim compared to 1994. Revenue from the Company's mail pharmacy services
increased $37,879,000, or 30.6%, reflecting a 33.6% increase in the number of
prescriptions dispensed, offset in part by a 2.2% decrease in the average
revenue per prescription dispensed. The reductions in average revenue per claim
and per prescription dispensed are the result of competitive pressures and
continued higher utilization by HMO members at comparatively lower pricing, plus
the impact of a price reduction as a result of amendments to the Company's
agreements with NYLCare and its affiliates, effective January 1, 1995, offset
somewhat by moderate increases in drug costs.
The increase in the number of claims processed and the number of mail
service pharmacy prescriptions dispensed reflects a 42.1% increase in the
average number of members served from approximately 5.7 million members served
at December 31, 1994 to almost 8.1 million members served at December 31, 1995.
The percentage increase in claims processing revenue continues to exceed the
percentage increase in mail service revenues, as the price difference between
mail pharmacy prescriptions and network pharmacy prescriptions decreases. Net
revenues from the Company's vision and infusion therapy services increased
68.1%, compared to 1994, as a result of the growth in the number of members who
receive these services.
COST OF REVENUES. Cost of revenues for 1995 increased $140,132,000, or
41.4%, compared to 1994. The percentage increase in cost of revenues was 0.2
percentage points less than the increase in revenues, thus gross profit margins
increased slightly. For both claims and mail pharmacy services, gross margin
increased slightly due to significant economies of scale, which were partially
offset by several factors. First, the amended contract with NYLCare and
comparatively greater sales to HMOs reduced the average revenue per claims and
per prescription, compared to 1994. Also, the Company experienced a reduction as
a percentage of net revenues in the fees received from drug manufacturers in
connection with the Company's drug purchasing and formulary management programs.
The cost of revenue for vision and infusion therapy services increased 77.8%,
which is 9.7 percentage points above the increase in revenues from these
services, compared to 1994. This was principally due to costs related to the
continued expansion of vision and infusion therapy service operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $11,418,000, or 44.1%, for 1995 compared to 1994. The primary
reason for the increase was the additional expenditures incurred to expand the
Company's marketing capabilities, together with increases in expenses for
information systems and additional clinical programs to enhance management of
the pharmacy benefit.
OTHER INCOME, NET. Other income, net was $757,000 for 1995 compared to
$305,000 for 1994, primarily as a result of higher interest rates on invested
cash balances in 1995.
PROVISION FOR INCOME TAXES. The provision for income taxes for the year
ended December 31, 1995 was $11,307,000 compared to $8,053,000 in the prior
year. The effective tax rate was 38.2% in 1995 compared to 38.8% for 1994.
NET INCOME. As a result of the foregoing, net income for the year ended
December 31, 1995 increased $5,604,000, or 44.0%, compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continued growth has resulted in an increase in the level of
cash flow during each of the last three years of operations. Cash flow from net
income before charges for depreciation and amortization (or operating cash flow)
totaled $32.9 million, $22.7 million, and $16.0 million in 1996, 1995, and 1994,
respectively. Operating cash flow fully funded net increases in non-cash working
capital and capital expenditures in 1996, 1995, and 1994, respectively.
Management expects to continue to fund a substantial portion of its future
anticipated capital expenditures and net increase in non-cash working capital
with operating cash flow. The Company also sold 1,150,000 shares of Class A
Common Stock in April 1996, the net proceeds of which were $52,592,000. These
funds have been invested in short-term investments and are available for general
corporate purposes and for strategic acquisitions or affiliations as discussed
below.
The Company maintains a $25 million line of credit with Mercantile Bank of
St. Louis, N.A. which expires on May 28, 1997. The Company also maintains a $25
million line of credit with The First National Bank of Chicago expiring October
30, 1997. The terms and conditions of the lines of credit are similar in nature.
At December 31, 1996 and 1995, there were no borrowings outstanding on either of
these lines of credit. However, during a brief period during the first and
second quarters of 1995, the Company had borrowings outstanding of $3 million.
As of March 1, 1997, the Company had repurchased a total of 237,500 shares
of its Class A Common Stock under the open-market stock repurchase program
announced by the Company on October 25, 1996. The Company's Board of Directors
approved the repurchase of up to 850,000 shares, and placed no limit on the
duration of the program. Purchases will be in such amounts and at such times as
the Company deems appropriate based upon prevailing market and business
conditions. Management believes the Company's capital resources are sufficient
to fund this program.
In January 1996, the Company, through ESI Canada, Inc., a wholly-owned
subsidiary, purchased certain assets, software licenses and the claims
processing business of Eclipse Claims Services, Inc. for $940,000. Eclipse was a
processor of Canadian pharmacy claims.
The Company has reviewed and currently intends to continue to review
potential acquisition and affiliation opportunities. The Company believes that
available cash resources, including the proceeds of the offering of the
Company's common stock referred to above, bank financings and the issuance of
additional common stock would be used to finance such acquisitions or
affiliations. There can be no assurance the Company will make an acquisition or
affiliation in 1997.
OTHER MATTERS AND SUBSEQUENT EVENTS
As discussed in Note 2 to the financial statements, in February, 1997,
PacifiCare Health Systems, Inc. ("PacifiCare") announced that it had completed
the acquisition of FHP International, Inc. ("FHP"). The Company has a contract
to provide pharmacy benefit services to FHP's members (currently about 2.0
million) through December 31, 1997. While FHP is the Company's largest single
client in terms of membership, its contribution to the company's net revenues is
less than 2% due to the fact that the Company only records the fees related to
administering FHP's network prescriptions and dispensing mail pharmacy
prescriptions. While the earnings attributable to the Company's contract with
FHP presently are material to reported financial results, its contribution to
earnings is substantially less than the relationship of FHP membership to total
membership. The Company does not currently provide pharmacy benefit management
services to PacifiCare. The Company has not received notice that its contract
with FHP will not be extended.
As previously disclosed, the Company received notice from New York Life
Insurance Company ("New York Life") that New York Life would exercise its option
to renegotiate pricing under its agreement with the Company pursuant to which
the Company provides non-exclusive pharmacy benefit management services to
certain group indemnity policyholders of New York Life and certain contract
holders whose health benefit plans provide indemnity-style benefits for which
New York Life provides administrative services only. The parties have amended
the agreement, effective January 1, 1997. The principal provisions of the
amendment are: (i) an assignment of the agreement by New York Life to its
subsidiary, NYLCare, (ii) a reduction of rates consistent with current pricing
trends and a waiver by both parties of their respective right to renegotiate
pricing prior to January 1, 1999, and (iii) the adoption of the Company's
ExpressPreferenceSM drug therapy management program as a condition to certain
price concessions. The amendment does not affect the Company's agreement with
NYLCare relating to health maintenance organizations and other managed care
organizations owned or managed by NYLCare.
On March 13, 1997, the Company announced that it had reached an agreement
with RightCHOICE Managed Care, Inc. ("RightCHOICE"), a publicly held subsidiary
of Blue Cross and Blue Shield of Missouri, whereby the Company will provide
pharmaceutical benefit management services to RightCHOICE. The three year
agreement is effective March 17, 1997, and initially covers approximately
500,000 members. The agreement also offers the Company the opportunity to
provide service to an additional 1.4 million members enrolled in plans sponsored
or administered by organizations affiliated with RightCHOICE.
IMPACT OF INFLATION
Changes in the prices charged by manufacturers and wholesalers for
pharmaceuticals affect the Company's cost of revenues. To date the Company has
been able to recover price increases from its clients under the terms of its
agreements. As a result, changes in pharmaceutical prices have not adversely
affected the Company.
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 accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects the financial position of
Express Scripts, Inc. and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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 the opinion expressed above.
/s/ Price Waterhouse LLP
St. Louis, Missouri
February 7, 1997
CONSOLIDATED BALANCE SHEET
December 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 25,211 $ 11,506
Short-term investments 54,388
Receivables, less allowance for doubtful
accounts of $2,335 and $2,274, respectively
Unrelated parties 144,963 108,525
Related parties 18,842 8,447
Inventories 17,491 13,853
Deferred taxes and prepaid expenses 2,254 2,084
-------------------------------------
Total current assets 263,149 144,415
Property and equipment, less accumulated
depreciation and amortization 21,447 16,912
Other assets 15,829 2,761
-------------------------------------
Total assets $ 300,425 $ 164,088
=====================================
Liabilities and Stockholders' Equity Current liabilities:
Claims payable $ 98,865 $ 60,915
Accounts payable 16,347 12,963
Accrued expenses and other current liabilities 19,678 11,884
-------------------------------------
Total current liabilities 134,890 85,762
-------------------------------------
Deferred income taxes 1,445 947
-------------------------------------
Commitments and Contingencies (Notes 2 and 6)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, and no shares issued and outstanding
Class A Common Stock, $.01 par value, 30,000,000 shares authorized,
8,974,000 and 4,539,000 shares issued and outstanding, respectively 90 45
Class B Common Stock, $.01 par value, 22,000,000 shares authorized,
7,510,000 and 10,500,000 shares issued and outstanding, respectively 75 105
Additional paid-in capital 98,958 33,158
Foreign currency translation adjustments (2)
Retained earnings 70,219 44,071
-------------------------------------
169,340 77,379
Class A Common Stock in treasury at cost,
182,500 shares in 1996 (5,250) -
-------------------------------------
Total stockholders' equity 164,090 77,379
-------------------------------------
Total liabilities and stockholders' equity $ 300,425 $ 164,088
=====================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Net revenues (INCLUDING $152,311, $107,838 AND $84,762,
RESPECTIVELY FROM RELATED PARTIES) $ 773,615 $ 544,460 $ 384,504
---------------------------------------------------------
Cost and expenses:
Cost of revenues 684,882 478,283 338,151
Selling, general and administrative 49,103 37,300 25,882
---------------------------------------------------------
733,985 515,583 364,033
---------------------------------------------------------
Operating income 39,630 28,877 20,471
---------------------------------------------------------
Other income (expense):
Interest income 3,509 843 373
Interest expense (59) (86) (68)
---------------------------------------------------------
3,450 757 305
---------------------------------------------------------
Income before income taxes 43,080 29,634 20,776
Provision for income taxes 16,932 11,307 8,053
---------------------------------------------------------
Net income $ 26,148 $ 18,327 $ 12,723
=========================================================
Primary earnings per share $ 1.60 $ 1.20 $ 0.84
=========================================================
Weighted average number of common shares
outstanding during the period 16,350 15,293 15,178
=========================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
Number of Shares Amount
-------------------- ---------------------------------------------------------------------------
Class A Class B Class A Class B Additional Foreign
Common Common Common Common paid-in Retained Treasury Currency
(IN THOUSANDS) Stock Stock Stock Stock capital Earnings Stock Translation
Adjustment
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 2,101 5,250 $21 $53 $25,941 $12,258
Net income for the year 12,723
Reversal of Redeemable
Common Stock 412 763
Effect of 2-for-1 stock 2,101 5,250 21 52 (73)
split
Exercise of stock 40 314
options -------------------------------------------------------------------------------------------------
Balance at December 31, 1994 4,242 10,500 42 105 26,594 25,744
Net income for the year 18,327
Issuance of Class A
Common Stock 25 684
Exercise of stock 272 3 2,308
options
Tax benefit relating to
employee stock 3,572
options -------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,539 10,500 45 105 33,158 44,071
Net income for the year 26,148
Conversion of Class B
Common Stock to
Class A Common Stock 2,990 (2,990) 30 (30)
Issuance of Class A
Common Stock
Contractual agreement 227 2 11,248
Public offering 1,150 12 52,582
Exercise of stock options 68 1 1,309
Tax benefit relating to
employee stock options 661
Treasury Stock acquired $(5,250)
Foreign currency translation
adjustment $(2)
----------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,974 7,510 $90 $75 $98,958 $70,219 $(5,250) $(2)
==============================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 26,148 $ 18,327 $ 12,723
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,707 4,381 3,324
Tax benefit relating to employee stock options 661 3,572
Changes in operating assets and liabilities:
Receivables (46,693) (39,304) (25,393)
Inventories (3,638) (4,904) (659)
Prepaid expenses and other assets (2,787) (844) 5
Claims payable 37,950 22,206 15,904
Accounts payable and accrued expenses 11,515 8,066 3,837
---------------------------------------------------------
Net cash provided by operating activities 29,863 11,500 9,741
---------------------------------------------------------
Cash flows from investing activities:
Acquisition of new business (940)
Short-term investments (54,388)
Purchases of property and equipment (9,480) (8,047) (6,348)
---------------------------------------------------------
Net cash (used in) investing activities (64,808) (8,047) (6,348)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock offering 52,592
Acquisition of Treasury Stock (5,250)
Exercise of stock options 1,310 2,311 314
---------------------------------------------------------
Net cash provided by financing activities 48,652 2,311 314
---------------------------------------------------------
Effect of foreign currency translation adjustment (2)
---------------------------------------------------------
Net increase in cash and cash equivalents 13,705 5,764 3,707
Cash and cash equivalents at beginning of year 11,506 5,742 2,035
---------------------------------------------------------
Cash and cash equivalents at end of year $ 25,211 $ 11,506 $ 5,742
=========================================================
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Express Scripts are
described below. The policies utilized by the Company in the preparation of the
financial statements conform to generally accepted accounting principles, and
require management 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.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION. Adjustments resulting from the translation of
financial statements are reflected as a separate component of stockholders'
equity.
ORGANIZATION AND OPERATIONS. The Company currently derives the majority of
its revenues, including claims processing fees, principally from domestic sales
of prescription drugs by its mail pharmacies and pharmacies in the Company's
nationwide network. Effective in January 1996, the Company began processing
claims for clients of its wholly-owned Canadian subsidiary, ESI Canada, Inc.
("ESI Canada"). Express Scripts' IVTx division applies managed care principles
to infusion therapy management. Through its Practice Patterns Science, Inc.
subsidiary, the Company offers provider profiling and disease state management
support services. The Company receives revenues from sales of eyeglasses and
contact lenses and associated administrative fees to participants in the
Company's managed vision programs operated by ESI Vision Care.
In March of 1992, the Company, originally incorporated in Missouri in 1986,
was reincorporated in Delaware and issued an aggregate of 10,500,000 shares of
Class B Common Stock to Sanus Corp. Health Systems ("Sanus") in exchange for the
outstanding shares of its common stock. Sanus at that time was an indirect
subsidiary of New York Life. In April 1992, as a result of a reorganization,
both the Company and Sanus became direct subsidiaries of NYLIFE HealthCare
Management, Inc. ("NYLIFE"). Sanus has since changed its name to NYLCare Health
Plans, Inc. ("NYLCare). In April 1996, NYLIFE converted 2,990,000 Class B shares
to Class A Common Stock and sold those shares in a public offering. NYLIFE
continues to own all the remaining outstanding Class B Common Stock of the
Company (see Note 9).
CONTRACTUAL AGREEMENTS. The Company enters into corporate alliances with
certain of its clients whereby shares of the Company's Class A Common Stock are
awarded as advance discounts to the client. For agreements consummated prior to
December 15, 1995, the stock is valued utilizing the quoted market value at the
date the agreement is consummated if the number of shares to be issued is known.
If the number of shares to be issued is contingent upon the occurrence of future
events, the stock is valued utilizing the quoted market value at the date the
contingency is satisfied and the number of shares is determinable.
In October 1995, the Financial Accounting Standards Board Statement 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), was issued, the terms of
which are effective for all stock issued to nonemployees subsequent to December
15, 1995. FAS 123 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 instead of the intrinsic value method utilized for
stock issued or to be issued under alliances entered into prior to December 15,
1995. The Company has adopted FAS 123 as it relates to stock issued under
alliances consummated subsequent to December 15, 1995, based on fair value at
the date the agreement is consummated.
Shares issued on the effective date of the contractual agreement are
considered outstanding and included in the earnings per share computation when
issued. Shares issuable upon the satisfaction of certain conditions are
considered outstanding and included in the earnings per share computation when
the conditions are met. The value of the shares of stock awarded as advance
discounts is recorded as a deferred cost and included in Other Assets. The
deferred cost is recognized in Selling, General and Administrative expenses over
the period of the contract.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand
and temporary investments in money market funds. Due to the nature of these
instruments, the carrying amount approximates fair value.
SHORT-TERM INVESTMENTS. Short-term investments consist of debt securities
with a maturity of less than one year that the Company has the positive intent
and ability to hold to maturity and are reported at amortized cost, which
approximates fair market value.
INVENTORIES. Inventories consist of prescription drugs, vision supplies 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 are charged to expense
until technological feasibility is established. Thereafter, the remaining
software production costs up to the date of general release to customers are
capitalized and included as Property and Equipment. During 1996, 1995 and 1994,
$1,898,000, $1,084,000 and $395,000 in software development costs were
capitalized, respectively. Capitalized software development costs amounted to
$3,377,000 and $1,479,000 at December 31, 1996 and 1995, respectively.
Amortization of the capitalized amounts commences on the date of general release
to customers 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 also included in
amortization expense. Amortization expense was $136,000 in 1996. No amortization
expense was recorded in 1995 or 1994.
GOODWILL. Goodwill is amortized on a straight-line basis over a fifteen
year period. Amortization expense was $42,000 for each of the three years ended
December 31, 1996, 1995 and 1994.
IMPAIRMENT OF LONG LIVED ASSETS. The Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long lived assets may warrant revision or that the remaining balance of an asset
may not be recoverable. The measurement of possible impairment is based on the
ability to recover the balance of assets from expected future operating cash
flows on an undiscounted basis. In the opinion of management, no such impairment
existed as of December 31, 1996 or 1995.
REVENUE RECOGNITION. Revenues from dispensing prescription and
non-prescription medical products from the Company's mail service pharmacies are
recorded upon shipment. Revenue from sales of prescription drugs by pharmacies
in the Company's nationwide network and pharmacy claims processing revenues are
recognized when the claims are processed. When the Company has an independent
contractual obligation to pay its network pharmacy providers for benefits
provided to members of its clients' pharmacy benefit plans, the Company includes
payments from plan sponsors for these benefits as net revenue and payments to
these pharmacy providers in cost of revenues. If the Company is only
administering the plan sponsors' network pharmacy contracts, the Company records
fees derived from the Company's contracts with the plan sponsors as net revenue.
COST OF REVENUES. Cost of revenues includes product costs, pharmacy claims
payments and other direct costs associated with dispensing prescriptions and
non-prescription medical products and claims processing operations, offset by
fees received from pharmaceutical manufacturers in connection with the Company's
drug purchasing and formulary management programs.
INCOME TAXES. The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109"). Under FAS 109, the deferred tax provision is
determined under the liability method. Under this method, deferred 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.
PRIMARY EARNINGS PER SHARE. Primary earnings per share are computed by
dividing net income by the weighted average number of shares of common stock
outstanding, including common stock equivalents. Common stock equivalents
include shares issuable upon the assumed exercise of all stock options having an
exercise price less than the average market price of the common stock using the
treasury stock method.
EMPLOYEE STOCK-BASED COMPENSATION. The Company accounts for employee stock
options in accordance with Accounting Principles Board No. 25 (APB 25),
"Accounting for Stock Issued to Employees." Under APB 25, the Company applies
the intrinsic value method of accounting and, therefore, does not recognize
compensation expense for options granted, because options are only granted at a
price equal to market value at the time of grant. During 1996, Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock Based
Compensation," became effective for the Company. 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. The Company
has, 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).
2. CONTRACTUAL AGREEMENTS
On December 31, 1995, the Company entered into a ten-year corporate
alliance with Premier Purchasing Partners, L.P. (formerly, American Healthcare
Systems Purchasing Partners, L.P., the "Partnership"), an affiliate of Premier,
Inc. ("Premier"). Premier is the alliance of healthcare systems resulting from
the merger in 1995 of American Healthcare Systems, Premier Health Alliance and
SunHealth Alliance. Under the terms of the transaction, the Company is Premier's
preferred vendor of pharmacy benefit management services to Premier's
shareholder systems and their managed care affiliates and will issue shares of
its Class A Common Stock as an administrative fee to the Partnership based on
the attainment of certain benchmarks, principally related to the number of
members receiving the Company's pharmacy benefit management services under the
arrangement, and to the achievement of certain joint purchasing goals. The
Company may be required to issue up to 2,500,000 shares to the Partnership over
a period up to the first five years of the agreement if the Partnership exceeds
all benchmarks. Except for certain exemptions from registration under the
Securities Act of 1933 (the "1933 Act"), any shares issued to the Partnership
cannot be traded until they have been registered under the 1933 Act and any
applicable state securities laws.
Pursuant to the agreement, the Company issued 227,273 shares of Class A
Common Stock to Premier in May, 1996. The shares were valued at $11,250,000 and
are being amortized over the then remaining term of the agreement. Amortization
expense amounted to $776,000 in 1996.
Effective January 1, 1996, the Company executed a multi-year contract with
The Manufacturers Life Insurance Company ("Manulife"), to introduce pharmacy
benefit management services in Canada. Manulife's Group Benefits Division
continues to work with ESI Canada to provide these services. Under the terms of
the agreement, following a transitional period, the Company will be the
exclusive third-party provider of pharmacy benefit management services to
Manulife's Canadian clients. The Company also will issue shares of its Class A
Common Stock as an advance discount to Manulife based upon achievement of
certain volumes of Manulife pharmacy claims processed by the Company. No shares
will be issued until after the fourth year of the agreement based on volumes
reached in years two through four. The Company anticipates issuing no more than
237,000 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 was issued in 1996.
If Manulife has not exercised an early termination option at the end of the
sixth or tenth year of the agreement, the Company will issue at each of those
times a ten-year warrant as an advance discount to purchase up to approximately
118,000 additional shares of the Company's 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
processed by the Company 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, the Company issued 25,000 shares of Class A Common Stock as an
advance discount to Coventry in a private placement. These shares were valued at
$27.38 per share, the per share market value of the Company's 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 are being amortized over a six-year
period. Amortization expense was $114,000 in 1996 and 1995. 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.
If Coventry renews the agreement for a second three-year term, the Company
will issue a ten-year warrant as an advance discount to purchase an additional
25,000 shares of the Company's Class A Common Stock, exercisable at 90% of the
market value at the time of renewal. If the renewal period is for five years,
the warrant is for 58,000 shares.
On October 13, 1992, the Company entered into a five-year arrangement with
FHP, Inc. ("FHP") pursuant to which the Company agreed to provide pharmacy
benefit services to FHP and its members. FHP is an operator of health
maintenance organizations, principally in the western United States. In
accordance with the agreement, the Company commenced providing pharmacy benefit
services to FHP and its members on January 4, 1993.
On the commencement date and pursuant to the agreement, the Company issued
200,000 shares of its Class A Common Stock as advance discounts to FHP in a
private placement. These shares were valued at $8.25 per share, the per share
market value of the Company's Class A shares on October 13, 1992, which was the
date the agreement was consummated and the obligations of the parties became
unconditional. No revision of the consideration for the transaction occurred
between October 13, 1992 and January 4, 1993. The cost of the shares issued to
FHP is being amortized over a ten-year period. Amortization expense was $165,000
in 1996, 1995 and 1994.
FHP has the option to renew the agreement for an additional five years. If
FHP renews the agreement for a second five-year term, the Company will issue a
ten-year warrant as an advance discount to purchase an additional 300,000 shares
of the Company's Class A Common Stock, exercisable at 90% of market value at the
time of renewal.
In February, 1997 PacifiCare Health Systems, Inc. ("PacifiCare") completed
the acquisition of FHP. At this time, the Company has not been informed whether
or not PacifiCare/FHP will renew the agreement. The Company has assessed the
impairment of the unamortized portion of the advance discount in accordance with
its policy on Impairment of Long Lived Assets. In the opinion of management, no
such impairment existed at December 31, 1996.
3. RELATED PARTY TRANSACTIONS
The Company has agreements to provide claims processing services and mail
pharmacy prescription services for NYLCare, in return for which it receives
processing fees and reimbursement for the contracted cost of the claims. Cost of
revenues from related parties were $122,157,000, $82,903,000 and $62,839,000 in
1996, 1995 and 1994, respectively.
The amount receivable from or (due to) related parties comprised the following:
December 31,
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------
Receivable from NYLCare $23,083 $14,025
Due to NYLCare (4,241) (5,578)
--------------------------------------------
Total related party receivable $18,842 $ 8,447
=============================================
Changes in amounts due to NYLCare are summarized as follows:
(IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Beginning balance, January 1 $ 5,578 $ 4,328 $ 4,921
Compensation and employee benefits
paid on behalf of the Company - - 18,258
Administrative services - - 422
Formulary fees 7,636 5,895 4,320
Other, net - 968 238
Payments (8,973) (5,613) (23,831)
---------------------------------------------------------------------
Ending balance, December 31 $ 4,241 $ 5,578 $ 4,328
=====================================================================
Prior to October 1, 1994, NYLCare administered the Company's payroll.
Effective October 1, 1994, the Company provides for its own payroll services
independent of NYLCare. Prior to January 1, 1995, consideration to NYLCare
consisted of an annual fee for such services. Effective January 1, 1995, the
agreement with NYLCare was amended such that NYLCare is no longer obligated to
provide certain administrative services, and the Company is no longer obligated
to pay an annual fee.
The Company is the exclusive provider of pharmacy benefit management
services to NYLCare's managed healthcare subsidiaries, subject to certain
exceptions. Currently, the Company's agreement with NYLCare also provides that
fees from drug manufacturers whose products are used in the Company's
formularies related to NYLCare subsidiaries will be allocated 100% to the
Company up to $400,000 after January 1, 1995, and the amount of the annual fee
prior to January 1, 1995, and 75% to NYLCare and 25% to the Company thereafter.
The Company is a non-exclusive provider of pharmacy benefit management services
to New York Life Insurance Company's indemnity insurance business, which has
been transferred to NYLCare. In years prior to 1997 fees from drug manufacturers
with respect to this indemnity business were allocated 100% to the Company. In
1997 and later, the Company will share such fees with NYLCare on a fixed per
script amount, conditional upon NYLCare adopting the Company's
ExpressPreferenceSM drug therapy management program.
Such fees allocated to NYLCare were $7,636,000, $5,895,000 and $4,320,000
in 1996, 1995 and 1994, respectively, and $3,064,000 in 1996, $2,553,000 in 1995
and $1,874,000 in 1994, were allocated to the Company and have been classified
in the accompanying consolidated statement of operations as a reduction of cost
of revenues.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
December 31,
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------
Furniture $ 3,203 $ 2,492
Equipment 21,837 16,386
Computer software 8,656 5,855
Leasehold improvements 2,699 1,635
----------------------------------------
36,395 26,368
Less accumulated depreciation
and amortization 14,948 9,456
----------------------------------------
$21,447 $16,912
========================================
5. INCOME TAXES
The income tax provision consists of the following:
Year Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------
Current provision:
Federal $ 13,945 $ 9,951 $ 6,795
State 2,480 1,656 1,130
Foreign 190
-------------------------------------------------
Total current provision $ 16,615 $ 11,607 $7,925
Deferred:
Federal 267 (259) 110
State 50 (41) 18
-------------------------------------------------
$ 16,932 $ 11,307 $ 8,053
=================================================
Effective tax rate 39.3 38.2% 38.8%
The effective tax rate is comprised of a federal rate of 35.0% in 1996,
1995 and 1994, state taxes net of federal benefit of 4.3%, 3.5% and 3.6% in
1996, 1995 and 1994, respectively; and all other items comprising (0.0%), (0.3%)
and 0.2% in 1996, 1995 and 1994, respectively. The effect of foreign taxes on
the effective tax rate for 1996 is immaterial.
The deferred tax assets and deferred tax liabilities recorded in the
consolidated balance sheet are as follows:
December 31,
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------
Deferred Tax Assets:
Inventory costing capitalization
and reserves $ 624 $ 704
Allowance for bad debts 969 921
Other 34 5
---------------------------------------
Gross deferred tax assets 1,627 1,630
---------------------------------------
Deferred Tax Liabilities:
Depreciation and property
differences (1,169) (950)
Other (217) (82)
---------------------------------------
Gross deferred tax liabilities (1,386) (1,032)
---------------------------------------
Net deferred tax assets $ 241 $ 598
=======================================
The Company made cash payments for federal and state income taxes of
$14,540,000, $7,548,000 and $7,393,000 in 1996, 1995 and 1994, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company leases office and distribution facility space under operating
leases. The primary leases are for office and distribution facilities in St.
Louis, Missouri, and Tempe, Arizona. The St. Louis facility is under a 16-year
lease which commenced November 1992, and the facility in Tempe is under a
15-year lease which commenced November 1993. The Company also leases satellite
offices for certain other Company operations for varying periods up to 6 years.
The aggregate minimum lease commitment is $1,787,000 in 1997, $1,829,000 in
1998, $1,809,000 in 1999, $1,805,000 in 2000, $1,731,000 in 2001, and
$11,724,000 in years thereafter.
For the year ended December 31, 1996, approximately 79% of the Company's
pharmaceutical purchases were through one wholesaler. The Company believes that
other alternative sources are readily available.
In the ordinary course of business, there have arisen various legal
proceedings, investigations or claims pending against the Company and its
subsidiaries. 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 the consolidated financial position, results
of operations or cash flows of the Company.
7. CREDIT AGREEMENT
The Company maintains two $25,000,000 unsecured lines of credit with two
separate financial institutions. One agreement will expire on May 28, 1997 and
the other on October 30, 1997. Terms of both lines are essentially the same and
are as follows: interest is charged on the principal amount outstanding at a
rate equal to any of the following options which the Company, at its option,
shall select: (i) the bank's "prime rate", (ii) a floating rate equal to the
Bank's cost of funds rate plus 50 basis points, or (iii) a fixed rate for
periods of 30, 60, 90 or 180 days equal to the LIBOR rate plus 50 basis points.
Fees under these agreements on any unused portion are charged at ten hundredths
of one percent per year. At December 31, 1996 and 1995, the Company had no
outstanding borrowings under these agreements, nor did it borrow any amounts
under these agreements during 1996.
8. RETIREMENT PLAN
The Company offers all of its full-time employees a retirement savings plan
under Section 401(k) of the Internal Revenue Code. Employees may elect to enter
into a written salary deferral agreement under which a maximum of 10% of their
salary, subject to aggregate limits required under the Internal Revenue Code,
may be contributed to the plan. In 1994, the Company began matching the first
$1,000 of the employee's contribution for the year. Effective January 1, 1996,
the Company's match was increased to the first $2,000 of the employee's
contribution for the year. For the year ended December 1996, 1995 and 1994, the
Company made contributions of approximately $639,000, $332,000 and $116,000,
respectively.
9. COMMON STOCK
The holders of Class A Common Stock have one vote per share, and the
holders of Class B Common Stock have ten votes per share. NYLIFE is the sole
holder of Class B Common Stock. Class B Common Stock converts into Class A
Common Stock on a share-for-share basis upon transfer (other than to New York
Life or its affiliates) and is convertible at any time in the discretion of the
holder. At December 31, 1996, NYLIFE and the holders of Class A Common Stock
have control over approximately 89.3% and 10.7%, respectively, of the combined
voting power of all classes of Common Stock.
On May 25, 1994, the stockholders approved an increase in the number of
authorized shares of Class A Common Stock by 10,000,000 shares and the number of
authorized shares of Class B Common Stock by 12,000,000 shares. This permitted
the two-for-one split of common stock declared by the Board of Directors on
March 23, 1994. The stock split was effected by the distribution on June 24,
1994 of one new share of common stock for each share outstanding to holders of
record on June 9, 1994. The par value remained at $0.01 per share following the
split. This split has been reflected in the December 31, 1994 financial
statements by transferring an amount equal to $73,000 from additional paid-in
capital to common stock. All references in the financial statements and in these
notes to the number of common shares issued, the weighted average number of
common shares outstanding, primary earnings per share amounts and stock option
plan data have been restated to reflect the split.
In April, 1996 NYLIFE converted 2,990,000 shares of Class B Common Stock to
Class A Common Stock and sold the Class A shares in a public offering. The
Company did not receive any proceeds from the sale of these shares. The Company
sold an additional 1,150,000 Class A shares in the same stock offering and
received net proceeds of $52,592,000 after deducting expenses incurred in
connection with the offering.
As of December 31, 1996, 3,637,000 shares of the Company's Class A Common
Stock have been reserved for issuance to organizations with which the Company
has signed contractual agreements (see Note 2).
10. STOCK OPTION PLANS
At December 31, 1996, the Company has three fixed stock-based compensation
plans, which are described below.
In April 1992, the Company adopted a stock option plan amended in 1995,
which provides for the grant of nonqualified stock options and incentive stock
options to officers and key employees of the Company selected by the
Compensation Committee of the Board of Directors. Initially, a maximum of
700,000 shares of Class A Common Stock could be issued under the plan. That
amount increases annually each January 1, from January 1, 1993 to and including
January 1, 1999 by 70,000 shares, to a maximum of 1,190,000 shares. By unanimous
written consent dated June 6, 1994, the Board of Directors adopted the Express
Scripts, Inc. 1994 Stock Option Plan, also amended in 1995. The plan was
approved by the stockholders in June 1995. Initially, a total of 210,000 shares
of the Company's Class A Common Stock was reserved for issuance under this plan.
In January 1997, the Board of Directors adopted amendments to this plan to
increase the total number of shares subject to the plan to 460,000. This
amendment to the 1994 Plan will be put before the Company's stockholders for
approval at the 1997 annual meeting. Under either plan, the exercise price of
the options may not be less than the fair market value of the shares at the time
of grant. Options vest, and may be exercised, at such times as the Committee may
determine, subject to a maximum period of ten years.
In April 1992, the Company also adopted a stock option plan which was
amended in 1995 and 1996 and provides for the grant of nonqualified stock
options to purchase 24,000 shares to each director who is not an employee of the
Company or its affiliates. A maximum of 192,000 shares of Class A Common Stock
may be issued under this plan at a price equal to fair market value at the date
of grant. Options granted after the 1996 amendment vest over a five-year period
from the date of grant.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock options plans. Had compensation cost for the Company's stock 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,
the Company's 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 1996 and 1995. Because future options
may be granted and vesting occurs over a five year period, the pro forma impact
shown for 1996 and 1995 is not necessarily representative of the impact in
future years.
1996 1995
-----------------------------------
Net income As reported $ 26,148,000 $ 18,327,000
Pro forma 25,235,000 18,220,000
Primary earnings per share As reported $ 1.60 $ 1.20
Pro forma 1.56 1.20
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:
1996 1995
-------------------------------------------
Expected life of option 1-6 years 1-6 years
Risk-free interest rate 5-6.5% 5.5-6.9%
Expected volatility of stock 30-50% 30-50%
Expected dividend yield None None
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1996, 1995 and 1994, and changes during the years ending on
those dates is presented below.
1996 1995 1994
--------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
FIXED OPTIONS Shares Price Shares Price Shares Price
------------- ------------- ------------- ------------- ------------- ----------------
Outstanding at beginning of year 723,240 $ 20.60 931,960 $ 15.95 717,800 $ 10.17
Granted (1) 320,825 39.70 77,000 34.37 261,000 34.47
Exercised (65,700) 19.95 (272,080) 8.48 (40,120) 7.84
Forfeited (140,050) 37.59 (13,640) 22.57 (6,720) 10.95
============= ============= =============
Outstanding at end of year 838,315 25.12 723,240 20.60 931,960 15.95
============= ============= =============
Options exercisable at year end 377,760 282,980 418,888
Weighted-average fair value of
options granted during the year $13.14 $13.39 N/A
<FN>
(1) On January 29, 1997, the Company granted 118,000 stock options at an
exercise price of $34.00 per share.
</FN>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- -------------------------------------------------------------------------------- ---------------------------------------
$ 6.50 - 6.50 176,980 5.5 $ 6.50 132,660 $ 6.50
12.69 - 21.50 189,660 6.4 17.19 138,800 17.09
26.75 - 31.50 183,600 8.8 29.18 15,500 28.35
33.13 - 45.75 210,700 8.4 36.15 80,800 35.32
47.00 - 49.00 77,375 9.3 47.52 10,000 49.00
------- -------
6.50 - 49.00 838,315 7.5 25.12 377,760 18.58
======= =======
11. ACQUISITION
Effective January 1, 1996, the Company and its wholly-owned subsidiary, ESI
Canada, Inc., acquired certain assets, software licenses and the claims
processing business of Eclipse Claims Services, Inc. ("Eclipse") for $940,000.
Eclipse was a processor of Canadian pharmacy claims and was owned by Manulife,
the Prudential Insurance Company of America Canadian Operations
("Prudential-Canada"), Aetna Life Insurance Company of Canada ("Aetna-Canada")
and Metropolitan Life Insurance Company. The acquisition has been accounted for
under the purchase method of accounting. The purchase price has been allocated
to the assets acquired, based on their estimated fair values at the date of
acquisition. Effective January 1, 1996, and in connection with the acquisition
of certain assets and software licenses of Eclipse described above, and in
addition to the agreement between the Company and Manulife, ESI Canada signed an
agreement with each of Aetna-Canada and Prudential-Canada, since acquired by
London Life Insurance Company, pursuant to which ESI Canada will provide
electronic drug claim processing and other pharmacy benefit management services
in Canada for a period of five years. In addition, ESI Canada is providing
services to Crown Life Insurance Company.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for the years ended
December 31, 1996 and 1995:
Selling, Net
Net Cost of General & Operating Net Income
(IN THOUSANDS) Revenues Revenues Administrative Income Income Per Share
- -----------------------------------------------------------------------------------------------------------------------
1996
March 31, 1996 $168,389 $148,985 $10,387 $9,017 $5,580 $0.36
June 30, 1996 184,724 162,797 12,255 9,672 6,403 0.39
September 30, 1996 194,324 172,316 11,668 10,340 7,014 0.42
December 31, 1996 226,178 200,784 14,793 10,601 7,151 0.43
- -----------------------------------------------------------------------------------------------------------------------
1995
March 31, 1995 $118,030 $102,220 $8,983 $6,827 $4,265 $0.28
June 30, 1995 135,154 118,540 9,386 7,228 4,526 0.30
September 30, 1995 138,518 121,955 9,199 7,364 4,832 0.31
December 31, 1995 152,758 135,568 9,732 7,458 4,704 0.31
The fourth quarter of 1995 reflects certain nonrecurring adjustments that
increased cost of revenues to reflect lower gross margins than previously
estimated. Such adjustments were not material in relation to the respective
prior quarter to which any adjustment relates.
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 the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A (the "Proxy Statement")
under the heading "I. Election of Directors," except that the information
regarding the Company's 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 the consolidated
financial statements of the Company are contained in this Report on the page
indicated
Page No. In
FORM 10-K
Report of Independent Accountants 24
Consolidated Balance Sheet as of
December 31, 1996 and 1995 25
Consolidated Statement of Operations
for the years ended December 31, 1996,
1995 and 1994 26
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 27
Consolidated Statement of Cash Flows for
the years ended December 31, 1996,
1995 and 1994 28
Notes to Consolidated Financial Statements 29
(2) The following financial statement schedule is contained in this Report
on the page indicated.
Page No. In
Financial Statement Schedule: FORM 10-K
Report of Independent Accountants on
Financial Statement Schedule 44
VIII.Valuation and Qualifying Accounts
and Reserves for the years ended
December 31, 1996, 1995 and 1994 45
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 46 - 56.
(b) Reports on Form 8-K
On October 30, 1996, the Company filed a Current Report on Form 8-K
regarding a press releases issued on behalf of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
March 20, 1997 By /s/ Barrett A. Toan
Barrett A. Toan, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Barrett A. Toan President, March 20, 1997
Barrett A. Toan Chief Executive
Officer and Director
/s/ Kurt D. Blumenthal Vice President and March 25, 1997
Kurt D. Blumenthal Acting Chief Financial Officer
/s/ Joseph W. Plum Vice President and March 25, 1997
Joseph W. Plum Chief Accounting Officer
/s/ Howard I. Atkins Director March 17, 1997
Howard I. Atkins
/s/ Bernard N. Del Bello Director March 18, 1997
Bernard N. Del Bello
/s/ Richard M. Kernan, Jr. Director March 20, 1997
Richard M. Kernan, Jr.
/s/ Richard A. Norling Director March 24, 1997
Richard A. Norling
/s/ Frederick J. Sievert Director March 19, 1997
Frederick J. Sievert
/s/ Stephen N. Steinig Director March 18, 1997
Stephen N. Steinig
/s/ Seymour Sternberg Director March 19, 1997
Seymour Sternberg
/s/ Howard L. Waltman Director March 17, 1997
Howard L. Waltman
/s/ Norman Zachary Director March 21, 1997
Norman Zachary
REPORT OF INDEPENDENT ACCOUNTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Express Scripts, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 7, 1997, appearing in the 1996 Annual Report to
Stockholders of Express Scripts, Inc. also included an audit of the Financial
Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this Financial Statement Schedule presents fairly, in all materials respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
St. Louis, Missouri
February 7, 1997
EXPRESS SCRIPTS, INC.
Schedule VIII - Valuation and Qualifying
Accounts and Reserves Years Ended
December 31, 1994, 1995 and 1996
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 12/31/94 $1,027,101 $1,052,288 $ 878,228 $1,201,161
Year Ended 12/31/95 $1,201,161 $1,688,453 $ 615,677 $2,273,937
Year Ended 12/31/96 $2,273,937 $1,456,130 $ 1,394,922 $2,335,145
INDEX TO EXHIBITS
Exhibit
NUMBER EXHIBIT
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit No. 3.1 to the Company's Registration Statement on
Form S-1 filed June 9, 1992 (No. 33-46974) (the "Registration
Statement").
3.2 Certificate of Amendment of the Certificate of Incorporation of
the Company, incorporated by reference to Exhibit No. 10.6 to
the Company's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1994.
3.3 Second Amended and Restated By-Laws, incorporated by reference
to Exhibit No. 3.2 to the Company's Annual Report on Form 10-K
for the year ending 1993.
4.1 Form of Certificate for Class A Common Stock, incorporated by
reference to Exhibit No. 4.1 to the Registration Statement.
10.1** Stock Agreement (Initial Shares) entered into as of December 31,
1995, between the Company and American Healthcare Purchasing
Partners, L.P., incorporated by reference to Exhibit No. 10.61 to
the Company's Annual Report on Form 10-K for the year ending
1995.
10.2** Stock Agreement(Membership Shares) entered into as of
December 31, 1995, between the Company and American Healthcare
Purchasing Partners, L.P., incorporated by reference to
Exhibit No. 10.62 to the Company's Annual Report on Form 10-K
for the year ending 1995.
10.3** Amended and Restated Agreement entered into as of March 29, 1995,
between the Company and Sanus Corp. Health Systems, incorporated
by reference to Exhibit No. 10.1 to the Company's Annual Report
on Form 10-K for the year ending 1995.
10.4** Form of Amended and Restated Managed Prescription Drug Program
Agreement entered into as of March 29, 1995, between the Company
and each of the following parties: Health Plus, Inc., Sanus
Health Plan of New Jersey, Inc., Sanus Texas Health Plan, Inc.,
Sanus/New York Life Health Plan, Inc., Sanus Health Plan of
Illinois, Inc. and Sanus Health Plan of Greater New York, Inc.,
incorporated by reference to Exhibit No. 10.2 to the Company's
Annual Report on Form 10-K for the year ending 1995.
10.5** Form of Amended and Restated Vision Program Sponsor Agreement
entered into as of March 29, 1995, between the Company and each
of the following parties: Health Plus, Inc., Sanus Health Plan of
New Jersey, Inc., Sanus Texas Health Plan, Inc., Sanus/New York
Life Health Plan, Inc., Sanus Health Plan of Illinois, Inc. and
Sanus Health Plan of Greater New York, Inc., incorporated by
reference to Exhibit No. 10.3 to the Company's Annual Report on
Form 10-K for the year ending 1995.
10.6** Form of Amended and Restated Infusion Therapy Agreement entered
into as of March 29, 1995, between the Company and each of the
following parties: Health Plus, Inc., Sanus Texas Health Plan,
Inc., Sanus/New York Life Health Plan, Inc., and Sanus Health
Plan of Illinois, Inc., incorporated by reference to Exhibit No.
10.4 to the Company's Annual Report on Form 10-K for the year
ending 1995.
10.7** Form of Infusion Therapy Agreement entered into as of
March 29, 1995, between the Company and each of the following
parties: Sanus Health Plan of New Jersey, Inc. and Sanus Health
Plan of Greater New York, Inc., incorporated by reference to
Exhibit No. 10.5 to the Company's Annual Report on Form 10-K
for the year ending 1995.
10.8 First Amendment to Vision Program Sponsor Agreement entered
into as of September 1, 1995, between the Company and Sanus
Health Plan of New Jersey, Inc., incorporated by reference to
Exhibit No. 10.6 to the Company's Annual Report on Form 10-K
for the year ending 1995.
10.9 First Amendment to the Amended and Restated Vision Program
Sponsor Agreement entered into as of November 1, 1995, between
the Company and Sanus Texas Health Plan, Inc., incorporated
by reference to Exhibit No. 10.7 to the Company's Annual Report
on Form 10-K for the year ending 1995.
10.10 Agreement dated January 1, 1989, as amended May 31, 1989,
and January 1, 1991, between the Company and New York Life
Insurance Company, incorporated by reference to Exhibit No. 10.20
to the Registration Statement.
10.11 Third Amendment dated as of July 30, 1993, to the Agreement dated
as of January 1, 1989, by and between the Company and New York
Life Insurance Company, incorporated by reference to Exhibit No.
10.16 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1993.
10.12 Amended and Restated Managed Prescription Drug Program Agreement
entered into as of September 1, 1995, between the Company and
New York Life Insurance Company, incorporated by reference to
Exhibit No. 10.24 to the Company's Annual Report on Form 10-K
for the year ending 1995.
10.13 Quota-Share Reinsurance Agreement executed as of August 15, 1994,
between New York Life Insurance Company and Great Plains
Reinsurance Company, incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1994.
10.14 Amendment No. 1 to Quota-Share Reinsurance Agreement dated as of
September 13, 1994, between New York Life Insurance Company and
Great Plains Reinsurance Company, incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ending September 30, 1994.
10.15 Joint Research Agreement dated June 28, 1994, by and between the
Company, Sanus Corp. Health Systems and Schering Corporation,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ending
September 30, 1994.
10.16 Addendum Four to the Home Infusion Therapy Services Agreement
made and entered into as of November 15, 1993, by and between
IVTx of Houston, Inc. and Sanus Preferred Physicians, Inc.,
incorporated by reference to Exhibit No. 10.36 to the Company's
Form 10-K for the year ending 1993.
10.17 Letter Agreement dated April 1, 1992, between IVTx of Houston,
Inc. and Sanus Preferred Physicians, Inc., incorporated by
reference to Exhibit No. 10.13 to the Registration Statement.
10.18 Affiliate Provider Participation Agreement dated April 1, 1992,
as amended November 25, 1992, between IVTx of Dallas, Inc. and
Sanus Preferred Physicians, Inc., incorporated by reference
to Exhibit No. 10.28 to the Company's Annual Report on Form 10-K
for the year ending 1992.
10.19 Amendment Two to the Sanus Preferred Physicians, Inc. Home
Infusion Therapy Services Agreement entered into as of
May 1, 1993, between IVTx of Dallas, Inc. and Sanus Preferred
Physicians, Inc., incorporated by reference to Exhibit No. 10.2
to the Company's Form 10-Q for the quarter ending June 30, 1993.
10.20 Amendment Three to the Home Infusion Therapy Services Agreement
entered into as of June 1, 1993, between IVTx of Dallas, Inc.
and Sanus Preferred Physicians, Inc., incorporated by
reference to Exhibit No. 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ending June 30, 1993.
10.21 Amendment Four to the Home Infusion Therapy Services Agreement
entered into as of July 1, 1993, by and between IVTx of Dallas,
Inc. and Sanus Preferred Physicians, Inc., incorporated by
reference to Exhibit No. 10.9 to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1993.
10.22 Home Infusion Therapy Services Agreement dated May 1, 1991,
between Sanus/Passport Preferred Services, Inc. and the Company,
incorporated by reference to Exhibit No. 10.19 to the
Registration Statement.
10.23 Amendment One to the Home Infusion Therapy Services Agreement
entered into as of July 1, 1993, by and between the Company and
Sanus/Passport Preferred Services, Inc., incorporated by
reference to Exhibit No. 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1993.
10.24 Amendment Two to the Home Infusion Therapy Services Agreement
entered into as of July 1, 1993, by and between the Company and
Sanus/Passport Preferred Services, Inc., incorporated by
reference to Exhibit No. 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1993.
10.25 Amendment Four to the Home Infusion Therapy Services Agreement
entered into as of July 1, 1993, by and between the Company and
Sanus/Passport Preferred Services, Inc., incorporated by
reference to Exhibit No. 10.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1993.
10.26 Agreement dated May 7, 1992, between the Company and New York
Life Insurance Company, incorporated by reference to Exhibit
No. 10.26 to the Registration Statement.
10.27 Affiliate Provider Participation Agreement dated
September 1, 1991, between IVTx, Inc. and Sanus Preferred
Physicians, Inc., incorporated by reference to Exhibit No. 10.12
to the Registration Statement
10.28 Amendment dated January 1993, to the Affiliate Provider
Participation Agreement dated September 1, 1991, between
IVTx and Sanus Preferred Physicians, Inc. incorporated by
reference to Exhibit No. 10.22 to the Company's Annual Report
on Form 10-K for the year ending 1992.
10.29 Amendment Three to the Sanus Preferred Physicians, Inc. Home
Infusion Therapy Services Agreement entered into as of
May 1, 1993, between IVTx of Dallas, Inc. and Sanus Preferred
Physicians, Inc., incorporated by reference to Exhibit No. 10.8
to the Company's Quarterly Report on Form 10-Q for the quarter
ending June 30, 1993.
10.30 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.
10.31 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.
10.32 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.
10.33 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.
10.34 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.
10.35 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.
10.36 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.
10.37 Guaranty Agreement dated March 3, 1992, between Sanus Corp.
Health Systems, Inc. and Riverport, Inc. and Douglas Development
Company--Irvine Partnership in commendam,incorporated by
reference to Exhibit No. 10.22 to the Registration Statement.
10.38 Confirmation of Guaranty entered into as of June 17, 1993,
between Sverdrup/MDRC Joint Venture and NYLIFE HealthCare
Management, Inc., incorporated by reference to Exhibit No. 10.15
to the Company's Quarterly Report on Form 10-Q for the quarter
ending June 30, 1993.
10.39 Release of Guaranty of NYLIFE HealthCare Management, Inc.,
Guarantor of the Company's Obligations under its Lease with
Riverport, Inc. and Douglas Development Company, dated May 8,
1996, incorporated by reference to Exhibit No. 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ending
June 30, 1996.
10.40 Single-Tenant Lease-Net entered into as of June 30, 1993, between
James M. Chamberlain,Trustee of Chamberlain Family Trust dated
September 21, 1979, and the Company, incorporated by reference
to Exhibit No. 10.16 to the Company's Form 10-Q for the quarter
ending June 30, 1993.
10.41 First Amendment to Single-Tenant Lease-Net entered into as of
November 12, 1993, by and between James M. Chamberlain, Trustee
of Chamberlain Family Trust, and the Company, incorporated by
reference to Exhibit No. 10.74 to the Company's Annual Report on
Form 10-K for the year ending 1993.
10.42 Guaranty Agreement entered into as of June 30, 1993, between
NYLIFE HealthCare Management, Inc. and James M. Chamberlain,
Trustee of Chamberlain Family Trust dated September 21, 1979,
incorporated by reference to Exhibit No. 10.17 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1993.
10.43 Release of Guaranty of NYLIFE HealthCare Management, Inc.,
Guarantor of the Company's Obligations under its Lease with
Kenneth H. Dart , Trustee of Trust B of Dart Family
Revocable Estate Trust, dated June 21, 1996, incorporated by
reference to Exhibit No. 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ending June 30, 1996.
10.44 Earth City Industrial Office/Warehouse Lease Agreement dated as
of August 19, 1996, by and between the Company and Louis
Siegfried Corporation, incorporated by reference to Exhibit
No. 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1996.
10.45 Revolving Loan Agreement dated as of May 21, 1993, between
Mercantile Bank of St. Louis N.A. 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 June 30, 1993.
10.46 Amendment to Revolving Loan Agreement made as of May 31, 1994,
between the Company and Mercantile Bank of St. Louis N.A.,
incorporated by reference to Exhibit No. 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1994.
10.47 Second Amendment to Revolving Loan Agreement made as of
May 30, 1995, between the Company and Mercantile Bank of
St. Louis N.A., incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ending
June 30, 1995.
10.48 Third Amendment to Revolving Loan Agreement made as of May 29,
1996, by and between the Company and Mercantile Bank of
St. Louis National Association, incorporated by reference to
Exhibit No. 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1996.
10.49 Revolving Loan Agreement dated November 1, 1995, between the
Company and The First National Bank of Chicago,
incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1995.
10.50 Amendment No. 1 to Revolving Loan Agreement dated as of
October 31, 1996, by and between the Company and The First
National Bank of Chicago, incorporated by reference to Exhibit
No. 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1996.
10.51** Agreement dated October 9, 1992, among the Company, FHP, Inc.,
FHP of Utah, Inc., FHP of New Mexico, Inc. and Employees Choice
Health Option, incorporated by reference to Exhibit No. 10.42 to
the Company's Annual Report on Form 10-K for the year ending
1992.
10.52 Joinder Agreement entered into as of December 31, 1994, by and
between the Company and FHP of Colorado, Inc., incorporated
by reference to Exhibit No. 10.84 to the Company's Annual
Report on Form 10-K for the year ending 1994.
10.53 Joinder Agreement entered into as of December 31, 1994, by and
between the Company and TakeCare Health Plan, Inc., incorporated
by reference to Exhibit No. 10.86 to the Company's Annual Report
on Form 10-K for the year ending 1994.
10.54 Joinder Agreement entered into as of December 31, 1994, by and
between the Company and TakeCare of California, Inc.,
incorporated by reference to Exhibit No. 10.86 to the
Company's Annual Report on Form 10-K for the year ending 1994.
10.55 Joinder Agreement entered into as of December 31, 1994, by and
between the Company and TakeCare Health Plan of Illinois, Inc.,
incorporated by reference to Exhibit No. 10.87 to the Company's
Annual Report on Form 10-K for the year ending 1994.
10.56 Joinder Agreement entered into as of December 31, 1994, by and
between the Company and TakeCare Health Plan of Ohio, Inc.,
incorporated by reference to Exhibit No. 10.88 to the
Company's Annual Report on Form 10-K for the year ending 1994.
10.57 Joinder Agreement and Amendment (Great States Workers'
Compensation Plans) entered into as of December 1, 1995, among
the Company, Great States Insurance Company, and Great States
Administrators, Inc., incorporated by reference to Exhibit No.
10.59 to the Company's Annual Report on Form 10-K for the year
ending 1995.
10.58 Wholesale Supply Letter Agreement dated November 1, 1994, among
certain affiliated operating companies of Cardinal Health, Inc.
and any other subsidiary as designated by Cardinal Health, Inc.
and the Company, incorporated by reference to Exhibit No. 10.89
to the Company's Annual Report on Form 10-K for the year ending
1994.
10.59*** Express Scripts, Inc. 1992 Stock Option Plan, incorporated by
reference to Exhibit No.10.23 to the Registration Statement.
10.60*** Express Scripts, Inc. Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit No. 10.24 to the
Registration Statement.
10.61*** 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.
10.62*** 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.
10.63*** 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.
10.64*** 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 (File No. 0-20199).
10.65*** 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.
10.66*** Employment Agreement dated April 30, 1992, between the Company
and Barrett A. Toan (including form of Non-Qualified Stock Option
Agreement), incorporated by reference to Exhibit No. 10.25
to the Registration Statement.
10.67*** Letter Agreement amending Employment Agreement dated February 28,
1996, from the Company to Barrett A. Toan, incorporated by
reference to Exhibit No. 10.51 to the Company's Annual
Report on Form 10-K for the year ending 1995.
23.1* Consent of Price Waterhouse LLP
27.1* Financial Data Schedule (provided for the information of the U.S.
Securities and Exchange Commission only)
- ---------------------
* Filed herein.
** Confidential treatment granted.
*** Management contract or compensatory plan or arrangement.
**** Confidential treatment requested.