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, 1997, 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.)
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 Section12(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 6, 1998, was $752,939,788 based on 9,238,525 such
shares held on such date by non-affiliates and the last sale price for the Class
A Common Stock on such date of $81.50 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 9, 1998: 9,269,270 Shares Class A
7,510,000 Shares Class B
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 1998 Annual Meeting of Stockholders, which is
expected to be filed with the Securities and Exchange Commission not later than
120 days after the registrant's fiscal year ended December 31, 1997.
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 ANY 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 BUSINESS; 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; THE IMPACT
OF INCREASES IN HEALTH CARE COSTS AND UTILIZATION PATTERNS; RISKS ASSOCIATED
WITH THE DEVELOPMENT OF NEW PRODUCTS; RISKS ASSOCIATED WITH THE CONSUMMATION OF
ACQUISITIONS, INCLUDING THE ABILITY TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF
ACQUIRED BUSINESSES WITH THE EXISTING OPERATIONS OF THE COMPANY AND RISKS
INHERENT IN THE ACQUIRED ENTITIES OPERATIONS; AND OTHER RISKS DESCRIBED FROM
TIME TO TIME IN THE COMPANY'S FILINGS WITH THE COMMISSION. THE COMPANY DOES NOT
UNDERTAKE ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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
12.3 million health plan members currently enrolled in ESI's PBM programs. In
addition to its PBM services, the Company offers (i) disease management
services, (ii) informed decision counseling services through its Express Health
LineSM division ("Health Line"), (iii) medical information management services,
which include provider profiling, disease management support services and
outcomes assessments, through its Practice Patterns Science, Inc. ("PPS")
subsidiary, (iv) pharmaceuticals for and the provision of infusion therapy
services through its IVTx division ("IVTx"), and (v) managed vision care
programs through its Express Scripts Vision Corporation subsidiary ("Vision").
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. ("NYLIFE
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.
To date, the Company's internal growth has been primarily the result of
sales to new clients, sales of new services to existing clients, and the general
growth of existing clients, as the Company's PBM revenues are driven by
increased network and mail pharmacy claim volume. On February 20, 1998, the
Company announced that it had executed a definitive agreement to purchase
ValueRx, the PBM business of Columbia/HCA Healthcare corporation, for $445
million. When completed, the Company believes that it will be the largest PBM
that is independent of pharmaceutical manufacturer ownership. As more
particularly discussed herein in Item 7, consummation of the transaction is
subject to customary closing conditions and regulatory approval, but is expected
to occur during the second quarter of 1998.
PRODUCTS AND SERVICES
PHARMACY BENEFIT MANAGEMENT SERVICES
The Company's PBM 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 79.6% 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
PBM 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 pharmacies, 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 cost of the prescription;
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 1997, 67.4% of the Company's net revenues were derived from pharmacy
network and claims administration services, compared to 67.0% and 66.2% during
1996 and 1995, respectively. The number of claims processed by the Company
through its pharmacy networks has increased from approximately 18.3 million
claims in 1993 to approximately 73.2 million claims in 1997. During 1996 and
1995, the Company processed 57.8 million and 42.9 million pharmacy network
claims, respectively. During 1997, 28.6% of the Company's net revenues were
derived from mail pharmacy services, compared to 28.7% and 29.7% during 1996 and
1995, respectively. The number of mail prescriptions processed by the Company's
mail pharmacy service has increased from approximately 1.2 million in 1993 to
3.9 million in 1997. During 1996 and 1995, the Company processed 2.8 million and
2.1 million mail pharmacy prescriptions, respectively.
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 incentives exist for the selection of preferred drugs over
their non-preferred counterparts, or closed formularies, in which benefits are
available only for drugs listed on the formulary. Formulary preferences can be
encouraged 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 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 both at
the time the prescription is dispensed and also on a retrospective basis to
analyze utilization trends and prescribing patterns for more intensive
management of the drug benefit.
OTHER SERVICES
In addition to PBM services, the Company also provides disease management
services, informed decision counseling services, medical information management
services, infusion therapy services and vision care services to its clients. Net
revenues to the Company from non-PBM services represented approximately $49.7
million in 1997, $33.1 million in 1996, and $22.2 million in 1995.
DISEASE MANAGEMENT SERVICES
In late 1997, the Company began offering disease management programs to
assist health benefit plans in managing the total healthcare costs associated
with certain diseases, such as asthma, diabetes and cardiovascular. These
programs are based upon the premise that patient and provider behavior can be
positively influenced to improve health and reduce overall medical costs.
Patient identification can be accomplished through claim data analysis or
self-enrollment, and risk stratification surveys are conducted to establish a
plan of care for individual program participants. Patient education is primarily
effected through a series of telephone and written communications from nurses
and pharmacists, and both providers and patients receive progress reports on a
regular basis. Outcome surveys are conducted and results are compiled to analyze
the clinical, humanistic and economic impact of the program.
INFORMED DECISION COUNSELING SERVICES - EXPRESS HEALTH LINESM
The Company began offering healthcare decision counseling services through
its Express Health LineSM division during the second quarter of 1997, and by
year-end was providing service to approximately 1.3 million members.
Specifically, this service allows 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 are maintained on-line for future reference. The
service is available 24 hours per day, 365 days per year. Multilingual
capabilities and service for the hearing impaired are also available. The
counselors 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 are tracked by the use of member surveys, a
quality assurance plan and system reports.
MEDICAL INFORMATION MANAGEMENT - PRACTICE PATTERNS SCIENCE, INC. ("PPS")
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 quality, 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 databases,
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.
OUTPATIENT INFUSION THERAPY SERVICES - IVTX
Infusion therapy services involve the administration of prescription drugs
and other products to a patient by catheter, feeding tube or intravenously.
IVTx's clients, which include managed care organizations, third-party
administrators, insurance companies, case management companies, unions and
self-insured employers, 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 licensed independently of the Company's mail services
pharmacies. 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.
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
information system maintains patient profiles and documents doses and supplies
dispensed, and its DUR component accesses ESI's prescription records for members
receiving both infusion and oral drug therapies from the Company to screen for
drug interactions, incompatibilities and allergies.
VISION CARE SERVICES
The Company offers a managed vision care program through a network of
approximately 9,000 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 8,500 locations in 49 states. The providers have agreed
to provide, at specific rates or discount schedules, 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 lenses from its vision lab located in Earth City, Missouri, near the
Company's headquarters.
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.
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 1997, approximately 66.0% 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 NYLCare Health Plans, Inc. ("NYLCare") and Coventry
Corporation ("Coventry"). As of January 1, 1998, approximately 46.4% 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.
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. In December, 1997, the Company and
Coventry agreed to a two year extension of their agreement (with an additional
one year extension upon the occurrence of certain conditions), in connection
with which the Company issued, as an advance discount, a seven-year warrant to
purchase an additional 25,000 shares of the Company's Class A Common Stock,
exercisable at a price of $52.9088 per share (90% of the per share market value
at the time of renewal). See Note 2 of Notes to Consolidated Financial
Statements in Item 8 herein for additional discussion concerning Coventry.
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 PBM 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 would be 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 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. See Note 2 of Notes to
Consolidated Financial Statements in Item 8 herein for additional discussion
concerning Premier.
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 fair
market value of such shares. The actual number of shares entitled to be
purchased will depend upon claims volume in such years. See Note 2 of Notes to
Consolidated Financial Statements in Item 8 herein for additional discussion
concerning Manulife. In addition, the Company continues to provide PBM services
in Canada to Crown Life Insurance Company.
The assets of Prudential were previously acquired by London Life Insurance
Company ("London Life"), with whom the Company reached an agreement whereby the
Company would be the exclusive provider of PBM services to London Life. In late
1997, London Life was acquired by Great-West Lifeco. Inc. ("Great-West"), who
receives PBM services from one of the Company's competitors in Canada.
Great-West has indicated its intention not to continue to use the Company's
services, and the parties are discussing a transition period and settlement at
this time.
The Company also provides PBM services, informed decision counseling
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,
and provides PBM services to insurance plans underwritten and administered by
NYLCare (these plans were underwritten and administered by New York Life prior
to its internal reorganization pursuant to which it transferred all of its group
life and health insurance business, along with its PBM agreement with the
Company, to NYLCare; the "Indemnity PBM Services"). Of the Company's net
revenues from PBM services in 1997, 15.7% was for services provided to members
of HMOs owned or managed by NYLCare or insurance policies administered by
NYLCare. Of the Company's net revenues for managed vision care, informed
decision counseling and infusion therapy services, 56.6% was for services
provided to members of HMOs owned or managed by NYLCare and insurance policies
administered by NYLCare. See Note 3 of Notes to Consolidated Financial
Statements in Item 8 herein for additional discussion concerning NYLCare. New
York Life recently announced its sale of NYLCare to Aetna U.S. HealthCare, Inc.
("Aetna"), and, in connection therewith, the parties have reached agreement to
extend the HMO PBM and infusion therapy agreements through December 31, 2003,
with new pricing to take effect after December 31, 1999. The vision care and
informed decision counseling agreements will continue through December 31, 1999,
and the Company will also continue to provide PBM services to members of the
NYLCare indemnity programs until such members are converted to Aetna policies.
See Item 7 herein for additional disclosures concerning this matter.
COMPANY OPERATIONS
SALES AND MARKETING; CLIENT SERVICE. The Company markets its PBM 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 Vision
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
upon 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 50,000 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 periodically audits selected
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 Health Management Services Department
employs clinical pharmacists, data analysts and outcomes researchers 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 Health Management
Services 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 which are 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.
The Company's operations rely heavily on information systems technology. In
1995, the Company began addressing the "Year 2000" issue which, in short, refers
to the inability of certain computer systems to recognize calendar dates beyond
December 31, 1999. This arises as a result of systems having been programmed
with two-digits rather than four-digits to define the applicable year in order
to conserve computer storage space, reduce the complexity of calculations and
produce better performance. The two-digit system may cause computers to
interpret the years "00" as "1900" rather than as "2000", which may cause system
failures or produce incorrect results when dealing with date-sensitive
information beyond the year 1999.
The Company has performed a self-assessment and has developed a compliance
plan that addresses (i) internally developed application software, (ii) vendor
developed application software, (iii) operating system software, (iv) utility
software, (v) vendor/trading partner-supplied files, (vi) externally provided
data or transactions, and (vii) adherence to applicable industry standards.
Progress in each area is monitored and management reports are given
periodically. In addition, all new internally developed software is being
created to be Year 2000 compliant. The Company believes that, with appropriate
modifications to existing computer systems, updates by vendors and trading
partners, and conversion to new software in the ordinary course of its business,
the Year 2000 problem will not pose significant operational problems for the
Company. However, if such conversions are not completed in a proper and timely
manner by all affected parties, the Year 2000 issue could have a material
adverse impact on the business and operations of the Company, and there can be
no assurance that the Company's efforts, or those of vendors and trading
partners, to address the Year 2000 issue will be successful. See Item 7 herein
for additional information concerning the Year 2000 issue.
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 PBM 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, a strong managed care customer base which supports the
development of advanced PBM services, and commitment to providing flexible and
distinctive service to its customers. This service commitment led to the Company
being ranked first in overall customer satisfaction for the second consecutive
year, and receiving the highest average overall ranking, in the Pharmacy Benefit
Management Institute Customer Satisfaction Survey, which is an independent
survey of employers and managed care organizations.
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 large, national companies, including Merck
Medco Managed Care, Inc. (a subsidiary of Merck & Co., Inc.), PCS, Inc. (a
subsidiary of Eli Lilly & Company), Diversified Pharmaceutical Services, Inc. (a
subsidiary of SmithKline Beecham), and Caremark International Inc. (a subsidiary
of MedPartners, Inc.), as well as numerous insurance and Blue Cross/Blue Shield
plans, certain HMOs and retail drug chains which have their own PBM
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
and in the pharmacy benefit management segment in particular. Vertical
integration has resulted in significant movements in market share, as
competitors that are owned by manufacturers may have pricing advantages that are
unavailable to the Company and other independent PBMs. However, the Company
believes that independence from drug manufacturer ownership is important to
clients in certain market segments.
The Company announced on February 20, 1998, that it had executed a
definitive agreement to purchase ValueRx, the PBM business of Columbia/HCA
Healthcare corporation, for $445 million. When completed, the Company believes
that it will be the largest PBM that is independent of drug manufacturer
ownership. As more particularly discussed herein in Item 7 consummation of the
transaction is subject to customary closing conditions and regulatory approval,
but is expected to occur during the second quarter of 1998.
The Company's disease management product offerings compete with those being
offered by pharmaceutical manufacturers, other PBMs and specialized disease
management companies. The Company's informed decision counseling service,
Express Health LineSM, competes with several national vendors, such as Access
Health, Inc., CareWise, Inc., Optum and National Health Enhancement. The
Company's medical information management subsidiary, PPS, competes with various
information service providers and software vendors who offer competing
information and software products. 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
PBM business. Among these are the following:
FDA REGULATION. The U.S. Food and Drug Administration ("FDA") generally has
authority to regulate drug promotional materials that are disseminated "by or on
behalf of" a drug manufacturer. In October, 1995, the FDA held hearings to
determine whether and to what extent the activities of PBM companies should be
subject to FDA regulation. At this hearing, FDA officials expressed concern
about the efforts of 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, submitted written comments to the FDA regarding
the basis for FDA regulation of PBM activities. It was 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 did not
publish any proposed rules on the regulation of PBMs at that time.
In January, 1998, the FDA issued a Notice and Draft Guidance regarding its
intent to regulate certain drug promotion and switching activities of pharmacy
benefit managers that are controlled, directly or indirectly, by drug
manufacturers. The position taken by the FDA in the Draft Guidance is that
promotional materials used by an independent PBM may be subject to FDA
regulation depending upon the circumstances, including the nature of the
relationship between the PBM and the manufacturer. Comments to the Draft
Guidance are due April 6, 1998 There can be no assurance that the FDA will not
continue to assert jurisdiction over certain aspects of the Company's PBM
business, and in such event the impact could materially adversely affect the
Company's operations.
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. HHS has recently announced a proposed
safe harbor that would protect certain discount and payment arrangements between
PBMs and HMO risk contractors serving Medicaid and Medicare members. An interim
final rule in anticipated in Spring, 1998, on this matter. Nonetheless, 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 was 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 was advisory in nature, and 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
PBM business. Among these are the following:
COMPREHENSIVE PBM REGULATION. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced on two occasions in California. Such legislation, if enacted in
California or another state in which the Company has a significant concentration
of business, could adversely impact the Company's operations.
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 may provide 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 50,000 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 enacted
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). Other states have enacted legislation purporting to prohibit the
health plan from offering members financial incentives for use of mail order
pharmacies. Legislation has been introduced in some states to prohibit or
restrict 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 generally not subject to financial regulation by the states. However, if the
PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. In those cases in which 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 governmental entities, that are not subject to the
preemption provisions of ERISA. Other state laws may be invalid in whole or in
part as an unconstitutional attempt by a state to regulate interstate commerce,
but the outcome of challenges to these laws on this basis is uncertain.
Accordingly, compliance with state laws and regulations is a significant
operational requirement for the Company.
MAIL PHARMACY REGULATION. The Company's 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 statute is ambiguous in certain respects, but
the Company does not believe its mail order volume exceeds the threshold
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
2.6% 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 affect 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 INFORMED DECISION COUNSELING AND DISEASE MANAGEMENT SERVICES.
The Company's healthcare decision support counseling and disease management
programs are 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 or disease management activities constitute either the
practice of medicine or the practice of nursing. However, there can be no
assurance that a regulatory agency in one or more states may not assert a
contrary position, and there is no controlling legal precedent for services of
this kind.
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 PBM 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. Unless 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. All of the Company's
infusion therapy facilities have received JCAHO accreditation, which allows the
Company to 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.
PRIVACY AND CONFIDENTIALITY LEGISLATION. Most of the Company's activities
involve the receipt or use by the Company of confidential, medical information
concerning individual members, including the transfer of the confidential
information to the member's health benefit plan. In addition, the Company uses
aggregated (anonymized) data for research and analysis purposes. Legislation has
been proposed at the federal level and in several states to restrict the use and
disclosure of confidential medical information. To date, no such legislation has
been enacted that adversely impacts the Company's ability to provide its
services, but there can be no assurance that federal or state governments will
not enact legislation, impose restrictions or adopt interpretations of existing
laws that could have a material adverse effect on the Company's operations.
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",
"PERxComp", "RxWizard" 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 services rendered in connection with the Company's disease
management and informed decision counseling services, the fabrication and sale
of eyewear by the Company, and the products and services provided in connection
with the Company's infusion therapy programs (including the associated nursing
services), 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, 1998, the Company and its subsidiaries employed a total of
1,519 employees in the U.S. and 51 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, 1998,
are as follows:
NAME AGE POSITION
Howard L. Waltman 65 Chairman of the Board
Barrett A. Toan 50 President, Chief Executive
Officer and Director
Stuart L. Bascomb 56 Executive Vice President
Thomas M. Boudreau 46 Senior Vice President of
Administration, General Counsel
and Secretary
Robert W. (Joe) Davis 51 Senior Vice President and Chief
Information Systems Officer
Linda L. Logsdon 50 Senior Vice President of Health
Management Services
David A. Lowenberg 48 Senior Vice President and
Director of Site Operations
George Paz 42 Senior Vice President and Chief
Financial Officer
Kurt D. Blumenthal 53 Vice President of Finance
Joseph W. Plum 50 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.
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.
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. Davis was elected Senior Vice President and Chief Information Systems
Officer of the Company in September 1997. Mr. Davis served as Director of
Technical Services and Computer Operations of the Company from July 1993 until
July 1995, and as Vice President and General Manager of St. Louis Operations of
the Company from July 1995 until September 1997. From March 1992 until joining
the Company, Mr. Davis served as Vice President and General Manager of
Systemhouse, LTD, an international systems integration firm.
Ms. Logsdon was elected Senior Vice President of Health Management Services
in May, 1997, and served as Vice President of Demand and Disease Management from
November 1996 until that time. Prior to joining the Company in November 1996,
Ms. Logsdon served as Vice President of Corporate Services and Chief Operating
Officer of United HealthCare's Midwest Companies-GenCare/Physicians Health
Plan/MetraHealth, a St. Louis-based health maintenance organization, from
February 1995 to October 1996, and as Deputy Director/Vice President of GenCare
Health Systems, Inc., also a St. Louis-based health maintenance organization,
from June 1992 to February 1995.
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. Paz joined the Company and was elected Senior Vice President and Chief
Financial Officer in January 1998. Prior to joining the Company, Mr. Paz was a
partner in the Chicago office of Coopers & Lybrand from December 1995 to
December 1997, and served as Executive Vice President and Chief Financial
Officer of Life Partners Group, Inc., a life insurance company, from October
1993 until December 1995. Mr. Paz was also a partner of Coopers & Lybrand for
the period of February 1988 to October 1993.
Mr. Blumenthal was elected Vice President of Finance in May 1995, and
served as Acting Chief Financial Officer of the Company from July 1996 to
January 1998. 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. PBM 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, Canada. The
Company's Health Line division 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 corporate
offices are located at the Company's Maryland Heights, Missouri site.
The Company believes its facilities have been generally well maintained and
are in good operating condition. The Company is currently evaluating its future
requirements for additional space.
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 local and wide area networks. 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
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.
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. The plaintiffs have also filed claims against
the drug manufacturers and certain drug wholesalers, alleging price fixing of
pharmaceutical drugs in violation of Section 1 of the Sherman Act. Some of
these claims are in the form of a nationwide class action, which will commence
trial in September 1998. Other plaintiffs have opted out of the class and will
try their claims separately. Some of the drug manufacturers have settled both
the price fixing and the Robinson Patman claims. These settlements provide that
the manufacturers will not 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 the Robinson-Patman 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 1997.
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 1997 Fiscal Year 1996
Class A Common Stock High Low High Low
First Quarter $ 38.25 $ 31.25 $ 58.00 $ 44.50
Second Quarter 49.00 32.75 52.00 38.50
Third Quarter 54.50 41.50 45.00 26.50
Fourth Quarter 64.75 50.625 39.25 26.50
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 6, 1997, there were 202 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 8,500 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
EMPLOYEE STOCK OPTIONS. During 1997, the Company issued 141,500 options
(the "Options") to acquire an equivalent number of shares of its Class A Common
Stock (the "Common Stock") to certain of its key employees pursuant to the
Company's Amended and Restated 1992 Stock Option Plan and its Amended and
Restated 1994 Stock Option Plan (collectively, the "Plans"). The Compensation
Committee of the Company's Board of Directors (the "Committee") administers the
Plans. As a condition to receipt of the Options, the Committee required that
each recipient execute and deliver an agreement prohibiting the employee from
competing with the company or soliciting the employment of the Company's
employees for specified periods after most terminations of the employee's
employment with the Company. The exercise prices of the Options were equal to
the market values on their respective dates of grant, as described in the Plans.
The Committee has discretion to determine the vesting schedule for each Option
grant. Generally, the Committee has made grants that become exercisable in equal
amounts over five years, and in most cases the employee must be employed by the
Company at the time of vesting to exercise their Options. Reference is made to
the text of the Plans, which are filed with the Commission, for detailed
information on the terms thereof. The Option issuances were exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof and Rule 506 of Regulation D thereunder, based on, among other
factors, the limited number of the Option acquirers, the type and amount of
information available to the Option acquirers, and the absence of any general
solicitation or advertising in connection with the issuance.
ITEM 6 - SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE, Year Ended December 31,
OPERATING AND NON-FINANCIAL DATA) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 1,230,634 $ 773,615 $ 544,460 $ 384,504 $ 264,868
-----------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 1,119,167 684,882 478,283 338,151 236,398
Selling, general and administrative 62,617 49,103 37,300 25,882 15,591
-----------------------------------------------------------------------------
1,181,784 733,985 515,583 364,033 251,989
-----------------------------------------------------------------------------
Operating income 48,850 39,630 28,877 20,471 12,879
Other income, net 5,856 3,450 757 305 165
-----------------------------------------------------------------------------
Income before income taxes 54,706 43,080 29,634 20,776 13,044
Provision for income taxes 21,277 16,932 11,307 8,053 4,945
-----------------------------------------------------------------------------
Net income $ 33,429 $ 26,148 $ 18,327 $ 12,723 $ 8,099
=============================================================================
Basic earnings per share(1) $ 2.04 $ 1.63 $ 1.23 $ 0.86 $ 0.55
Diluted earnings per share(1) $ 2.02 $ 1.60 $ 1.20 $ 0.84 $ 0.55
- -----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total current assets $ 363,968 $ 263,149 $ 144,415 $ 93,826 $ 64,230
Total assets 402,508 300,425 164,088 108,922 76,144
Total current liabilities 197,906 134,890 85,762 55,744 37,467
Working capital 166,062 128,259 58,653 38,082 26,763
Stockholders' equity 203,701 164,090 77,379 52,485 38,273
- -----------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Analysis of Results:
Gross margin 9.1% 11.5% 12.2% 12.0% 10.8%
Operating margin 4.0% 5.1% 5.3% 5.3% 4.9%
Pretax margin 4.4% 5.6% 5.4% 5.4% 5.0%
Net margin 2.7% 3.4% 3.3% 3.3% 3.1%
Return on assets 11.1% 15.9% 16.8% 16.7% 17.8%
Return on equity 20.4% 33.8% 34.9% 33.2% 27.3%
- -----------------------------------------------------------------------------------------------------------------------
NON-FINANCIAL DATA:
Pharmacy network
claims processed 73,164,000 57,838,000 42,871,000 26,323,000 18,296,000
Mail pharmacy
prescriptions filled 3,899,000 2,770,000 2,129,000 1,594,000 1,233,000
Number of pharmacies in
pharmacy network 50,200 48,300 46,500 36,900 32,900
Pharmacy benefit
covered lives 12,600,000 9,900,000 8,100,000 5,700,000 4,200,000
- -----------------------------------------------------------------------------------------------------------------------
(1)Earnings per share have been restated in accordance with FASB Statement
128, "Earnings Per Share," to provide basic and diluted earnings per share
information.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company primarily derives its revenues from the sale of pharmacy
benefit management ("PBM") services in the United States and Canada. The
Company's net revenues include administrative and dispensing fees plus
ingredient cost of pharmaceuticals dispensed to members of health benefit plans
sponsored by the Company's clients by pharmacies participating in one of the
networks of retail pharmacies maintained by the Company or by one of the
Company's mail service pharmacies. Where the Company only administers the
contracts between its clients and their own retail pharmacy networks, or where
the Company dispenses pharmaceuticals from its mail service pharmacies that are
supplied by one of the Company's clients, the Company records as net revenue
only the administrative or dispensing fees it receives from its activities. The
Company also derives revenue from (i) the sale of pharmaceuticals for and the
provision of infusion therapy services through its IVTx division ("IVTx"), (ii)
the sale of eyeglasses and contact lenses and related administrative fees
through its Express Scripts Vision Corporation subsidiary ("ESVC"), (iii) the
sale of informed decision counseling services through its Express Health LineSM
division, and (iv) the sale of medical information management services, which
include provider profiling, disease management support services and outcomes
assessments, through its Practice Patterns Science, Inc. ("PPS") subsidiary or
Health Management Services division ("HMS").
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 1997 compared to 1996 and 1996
compared to 1995.
Percentage of Net Revenues % Increase
Year Ended December 31, 1997 1996
1997 1996 1995 Over 1996 Over 1995
---------------------------------------------------------------------------------------
Net revenues:
Unrelated clients 83.1% 80.3% 80.2% 64.6% 42.3%
Related clients(1) 16.9% 19.7% 19.8% 36.6% 41.2%
-------------------------------------------------------
Total net revenues 100.0% 100.0% 100.0% 59.1% 42.1%
-------------------------------------------------------
Costs and expenses:
Cost of revenues 90.9% 88.5% 87.8% 63.4% 43.2%
Selling, general & administrative 5.1% 6.4% 6.9% 27.5% 31.6%
-------------------------------------------------------
96.0% 94.9% 94.7% 61.0% 42.4%
-------------------------------------------------------
Operating Income 4.0% 5.1% 5.3% 23.3% 37.2%
Other income, net 0.5% 0.5% 0.1% 69.7% 355.7%
-------------------------------------------------------
Income before income taxes 4.5% 5.6% 5.4% 27.0% 45.4%
Provision for income taxes 1.8% 2.2% 2.1% 25.7% 49.7%
-------------------------------------------------------
Net income 2.7% 3.4% 3.3% 27.9% 42.7%
=======================================================
(1)Related clients consist of NYLCare Health Plans, Inc. ("NYLCare") and
New York Life Insurance Company. See note 3 to the December 31, 1997
consolidated financial statements for further discussion.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO 1996
NET REVENUES. Net revenues for 1997 increased $457,019,000, or 59.1%,
compared to 1996. Net revenues from the Company's claims processing services and
mail pharmacy services increased 59.5% in 1997, compared to 1996. The primary
reason for this increase was a $311,195,000, or a 60.0% increase in revenues
from pharmacy claims processed reflecting a 26.5% increase in the number of
claims processed, and a 26.6% increase in average revenue per claim compared to
1996. Revenue from the Company's mail pharmacy services increased $129,273,000,
or 58.2%, reflecting a 40.8% increase in the number of prescriptions dispensed,
and a 12.4% increase in the average revenue per prescription dispensed. The
increase in average revenue per pharmacy claim processed is due to two factors:
(1) a shift in the mix of customers towards utilizing pharmacy networks
established by the Company (for which the drug ingredient costs, dispensing fee
and administrative fees are included as revenues), rather than networks arranged
by its clients (for which the Company records only its administrative fee as net
revenue); and (2) higher drug ingredient costs resulting from changes in
therapeutic mix and dosage, new drugs introduced into the marketplace, and
increased pricing. The increase in average revenue per prescription dispensed by
the mail service pharmacies is primarily the result of: (1) the higher drug
ingredient costs attributable to the foregoing factors; and (2) the fact that
two of the Company's larger clients switched from programs in which they would
provide drug inventory to replace drugs used by the Company to fill mail service
prescriptions (for which the Company only includes its dispensing fee as net
revenue) to the Company's standard program in which the Company purchases the
inventory used to fill the prescriptions (and therefore includes the ingredient
cost as well as the dispensing fee in net revenue). This switch had the effect
of increasing both the mail pharmacy services revenue and cost of revenue
compared to 1996, but the overall effect on the Company's reported net income
for the year was not material. Increases in revenue from the factors cited
herein were 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 27.3% increase in the
average number of members served from approximately 9.9 million members served
at December 31, 1996 to approximately 12.6 million members served at December
31, 1997. 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. Management expects this trend to potentially reverse by the end of
1998 as a result of the loss of the FHP business as discussed in the "Other
Matters" section and as the mail service benefit is used more frequently by a
larger number of members. Of the Company's net revenues from PBM services in
1997, 15.7% was for services provided to members of HMOs owned or managed by
NYLCare or insurance policies administered by NYLCare.
Net revenues from the Company's other business units, IVTx, ESVC, Express
Health Line, PPS and HMS, increased 50.0%, compared to 1996, as a result of the
growth in the number of members and/or clients who receive these services. Of
the Company's net revenues for IVTx, ESVC and Express Health Line, 56.6% was for
services provided to members of HMOs owned or managed by NYLCare and insurance
policies administered by NYLCare
COST OF REVENUES. Cost of revenues for 1997 increased $434,285,000, or
63.4%, compared to 1996. The percentage increase in cost of revenues was 4.3%
greater than the increase in revenues, resulting in a decrease in gross profit
margins. For claims processing services, the cost of revenue as a percentage of
net claims revenue increased by 2.7% due to both the increase in the utilization
of the Company's networks, as opposed to those arranged by its clients, and to
lower prices offered in response to competitive pressures in the marketplace.
The mail pharmacy gross margin decreased by 2.5% as a result of the switch by
certain clients away from the replenishment program described above and lower
prices being offered by the Company in response to competitive conditions in the
pharmacy benefit management business. The Company also experienced an overall
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 decrease in gross margin in both the claims processing
and mail pharmacy services was partially offset by lower direct processing costs
due to the economies of scale for both these operations. The cost of revenue for
vision and infusion therapy services increased 39.6% 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, measured as a percentage of net revenues, decreased from 6.4% in 1996
to 5.1% for 1997, reflecting overall economies of scale and expense control
measures in these areas of the Company's operations. In addition increased
utilization of the Company's pharmacy networks, rather than networks arranged by
its clients, resulted in higher reported net revenues, which had the affect of
lowering the selling, general and administrative expenses as a percentage of net
revenues. Selling, general and administrative expenses increased in absolute
terms by $13,514,000, or 27.5%, compared to 1996, which reflects the Company's
increased revenues and its continuing commitment to enhance its ability to
manage the pharmacy benefit by investing in information systems, additional
clinical programs, increased marketing effort and operational and administrative
support functions, and provide for future growth and enhanced service levels.
OTHER INCOME, NET. Other income, net was $5,856,000 for 1997, compared to
$3,450,000 for 1996, primarily as a result of higher interest rates on larger
invested cash balances.
PROVISION FOR INCOME TAXES. The provision for income taxes for the year
ended December 31, 1997 was $21,277,000, compared to $16,932,000 in the prior
year. The effective tax rate was 38.9% in 1997 compared to 39.3% for 1996.
NET INCOME. As a result of the foregoing, net income for the year ended
December 31, 1997, increased $7,281,000, or 27.9%, compared to 1996.
EARNINGS PER SHARE("EPS"). The Company reported basic EPS of $2.04 in 1997
compared to $1.63 in 1996, a 25.2% increase. The weighted average number of
shares used in the calculations was 16,356,000 in 1997 and 16,080,000 in 1996.
Diluted EPS was $2.02 in 1997 compared to $1.60 for 1996, a 26.3% increase. The
weighted average number of shares used in the diluted EPS calculation was
16,561,000 in 1997 and 16,350,000 in 1996.
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 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 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., also contributed to the Company's
progress 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%
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 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. The cost
of revenue for vision and infusion therapy services increased 46.2%, which is
5.2% 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 basic EPS of $1.63 in 1996
compared to $1.23 in 1995, a 32.5% increase. The weighted average number of
shares used in the calculations was 16,080,000 in 1996 and 14,871,000 in 1995,
or an increase of 8.1%. 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. Diluted EPS was
$1.60 in 1996 compared to $1.20 in 1995, a 33.3% increase. The weighted average
number of shares used in the diluted EPS calculation was 16,350,000 in 1996 and
15,293,000 in 1995.
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
operations totaled $52.5 million, $29.9 million, and $11.5 million in 1997,
1996, and 1995, respectively. Management expects to continue to fund a
substantial portion of its future anticipated capital expenditures and other
normal operating cash needs 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 and the interest received to date are
currently 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 the Mercantile Bank
National Association, which was renewed for one year on May 29, 1997. The
Company has allowed a second line of credit in the amount of $25 million to
lapse while it negotiates new terms for a larger credit line (see Post Year-End
Events). Upon consummation of such larger credit facility, the Company will also
terminate the Mercantile Bank facility. At December 31, 1997 and 1996, there
were no borrowings outstanding.
As of December 31, 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. Future purchases, if any, 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.
The Company has reviewed and currently intends to review potential
acquisitions and affiliation opportunities (see Other Matters). 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 could be used to finance such acquisitions or
affiliations. Although the Company entered into a definitive agreement to
acquire Value Health, Inc. on February 20, 1998 (see Post Year-End Events),
there can be no assurance the Company will make other acquisitions or
affiliations in 1998.
OTHER MATTERS
The Company typically reports membership both at January 1 and December 31
of each year. As many of the Company's clients start or terminate their service
arrangements with the Company on January 1, measurement of members on this date
is important. As of January 1, 1998 the Company reported membership of 12.3
million members, a reduction of approximately 300,000 members from the 12.6
million members reported on December 31, 1997. The net reduction takes into
account the loss of approximately 900,000 lives from FHP International, Inc.
("FHP"), offset in part by new members from clients whose service began on
January 1, 1998.
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 became effective March 17, 1997, and 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.
PacifiCare Health Systems, Inc. ("PacifiCare") completed its acquisition of
FHP during 1997. The Company's contract to provide pharmacy benefit services to
FHP's members expired December 31, 1997. By agreement the Company will process
pharmacy claims for FHP through April 1, 1998 as FHP transitions the business to
a PBM owned by PacifiCare. As of January 1, 1998, approximately 900,000 lives
were transferred to PacifiCare's PBM. It is anticipated another 900,000 lives
will be transferred out by April 1, 1998. While FHP was the Company's largest
single client in terms of membership, its contribution to the net revenues in
1997 was less than 2.25% (due to the fact that the Company only recorded the
fees related to administering FHP's network prescriptions and, prior to May 1,
1997, dispensing mail pharmacy prescriptions), and its contribution to the
Company's earnings is substantially less than the relationship of FHP membership
to total membership. The Company amortized the remaining amount of the advance
discount on the Class A Common Stock previously issued to FHP during 1997.
During the third quarter of 1997, the Company announced that ESI Canada,
Inc., the Company's Canadian subsidiary, will provide PBM services to First
Canadian Health Management Corporation, Inc., a subsidiary of Aetna Life
Insurance Company of Canada. The program for which services will be provided
covers 640,000 registered Indians and Inuit in Canada, and will commence on July
1, 1998 and run through June 30, 2003.
The Company also announced it had renewed its contract with Coventry
Corporation for a period of two years through 1999.
In June 1997 the FASB issued Statement of Financial Accounting Standards
Statement 131 "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). The statement requires that the Company report certain
information if specific requirements are met about operating segments of the
Company including information about services, geographic areas of operation and
major customers. FAS 131 is effective for years beginning after December 15,
1997. The Company is reviewing the applicability of FAS 131 on its future
reporting requirements.
POST YEAR-END EVENTS
On February 20, 1998 the Company announced that it had executed a
definitive agreement to purchase ValueRx, the PBM business of Columbia/HCA
Healthcare Corporation ("Columbia"). Under terms of the agreement, the Company
will pay cash in the amount of $445 million for the stock of Value Health, Inc.
and Managed Prescription Network, Inc., the sole assets of which at closing
shall be various subsidiaries each now or formerly conducting business as a PBM,
including ValueRx Pharmacy Program, Inc. The Company expects to use
approximately $100 million of its own cash and finance the remainder of the
purchase price through a five year bank facility. In 1997, the unaudited
combined revenue of the two companies was in excess of $2.7 billion. The
acquisition will be accounted for as a purchase and is subject to customary
closing conditions including required governmental approvals and consummation
and funding of the bank credit facility. The Company anticipates the transaction
will close in the second quarter of 1998.
On March 16, 1998, the Company announced that, in connection with New York
Life's sale of NYLCare to Aetna U.S. HealthCare, Inc. ("Aetna"), Aetna and the
Company reached an agreement to extend the Company's HMO PBM and infusion
therapy agreements through December 31, 2003. The existing contract pricing is
effective through December 31, 1999, and thereafter certain pricing adjustments
(which the Company believes reflect an appropriate market price) will be
instituted for the year 2000 and subsequent periods. The Company will provide
PBM services to 1.4 million HMO members after the acquisition is consummated,
which is approximately equal to the NYLCare HMO membership base currently served
by the Company. The infusion therapy agreements are extended under their current
terms until December 31, 2000, and thereafter limited price adjustments may take
effect under certain circumstances. The existing agreements for managed vision
care and informed decision counseling will continue through December 31, 1999.
The Company will also continue to provide PBM services to members of the NYLCare
indemnity programs until such members are converted to new health insurance
policies. The impact of this arrangement on earnings per share is not expected
to be material in 1998 or 1999.
YEAR 2000 INFORMATION SYSTEMS ISSUES
As discussed in Item 1 herein, the Company has developed a plan to address
the Year 2000 issue and, in doing so, will incur internal staff costs as well as
external consulting and other expenses related to infrastructure enhancements
necessary to prepare its systems for the new century. Although the Company is
still evaluating the overall costs associated with the Year 2000 issue, which
are being expensed as incurred, the Company does not believe the costs
associated therewith are or will be material to the Company's results of
operations or financial condition. However, there can be no assurance that the
Company's efforts to address the Year 2000 problem will be entirely successful,
and the failure to fully address associated issues could result in material
adverse financial consequences to the Company. In addition, there can be no
assurance that the systems of other companies on which the Company's systems and
other operations rely will become Year 2000 compliant in a timely manner, and
any such failure could have a material adverse effect on the Company's systems
and operations.
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals affect the Company's net revenues and 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
had a significant adverse affect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Express Scripts, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 42 present fairly, in all material
respects the financial position of Express Scripts, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, 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 6, 1998, except for Note 13,
which is as of February 20, 1998
CONSOLIDATED BALANCE SHEET
December 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 64,155 $ 25,211
Short-term investments 57,938 54,388
Receivables, less allowance for doubtful
accounts of $4,802 and $2,335, respectively
Unrelated parties 194,061 144,963
Related parties 16,230 18,842
Inventories 28,935 17,491
Deferred taxes and prepaid expenses 2,649 2,254
--------------------------------------
Total current assets 363,968 263,149
Property and equipment, less accumulated depreciation and amortization 26,821 21,447
Other assets 11,719 15,829
-------------------------------------
Total assets $ 402,508 $ 300,425
=====================================
Liabilities and Stockholders' Equity Current liabilities:
Claims payable $ 153,051 $ 98,865
Accounts payable 17,979 16,347
Accrued expenses 26,876 19,678
-------------------------------------
Total current liabilities 197,906 134,890
-------------------------------------
Deferred rents and taxes 901 1,445
-------------------------------------
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,
9,238,000 and 8,974,000 shares issued and outstanding, respectively 93 90
Class B Common Stock, $.01 par value, 22,000,000 shares authorized,
7,510,000 shares issued and outstanding 75 75
Additional paid-in capital 106,901 98,958
Foreign currency translation adjustments (27) (2)
Retained earnings 103,648 70,219
-------------------------------------
210,690 169,340
Class A Common Stock in treasury at cost,
237,500 shares and 182,500 shares, respectively (6,989) (5,250)
-------------------------------------
Total stockholders' equity 203,701 164,090
-------------------------------------
Total liabilities and stockholders' equity $ 402,508 $ 300,425
=====================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Net revenues (INCLUDING $208,118, $152,311 AND
$107,838, RESPECTIVELY FROM RELATED PARTIES) $ 1,230,634 $ 773,615 $ 544,460
---------------------------------------------------------
Cost and expenses:
Cost of revenues 1,119,167 684,882 478,283
Selling, general and administrative 62,617 49,103 37,300
---------------------------------------------------------
1,181,784 733,985 515,583
---------------------------------------------------------
Operating income 48,850 39,630 28,877
---------------------------------------------------------
Other income (expense):
Interest income 6,081 3,509 843
Interest expense (225) (59) (86)
---------------------------------------------------------
5,856 3,450 757
---------------------------------------------------------
Income before income taxes 54,706 43,080 29,634
Provision for income taxes 21,277 16,932 11,307
---------------------------------------------------------
Net income $ 33,429 $ 26,148 $ 18,327
=========================================================
Basic earnings per share $ 2.04 $ 1.63 $ 1.23
=========================================================
Weighted average number of common shares
outstanding during the period - Basic EPS 16,356 16,080 14,871
=========================================================
Diluted earnings per share $ 2.02 $ 1.60 $ 1.20
=========================================================
Weighted average number of common shares outstanding
during the period - Diluted EPS 16,561 16,350 15,293
=========================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY
Number of Shares Amount
------------------- ------------------------------------------------------------------------
Foreign
Class A Class B Class A Class B Additional Currency
Common Common Common Common paid-in Translation Retained Treasury
(IN THOUSANDS) Stock Stock Stock Stock capital Adjustment Earnings Stock
- -------------------------------------------------- ------------------------------------------------------------------------
Balance at December 31, 1994 4,242 10,500 $42 $105 $26,594 - $25,744 -
Net income - - - - - - 18,327 -
Issuance of Class A
Common Stock 25 - - - 684 - - -
Exercise of stock options 272 - 3 - 2,308 - - -
Tax benefit relating to
employee stock options - - - - 3,572 - - -
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 4,539 10,500 45 105 33,158 - 44,071 -
Net income - - - - - - 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 - 11,250 - - -
Public offering 1,150 - 12 - 52,580 - - -
Exercise of stock options 68 - 1 - 1,309 - - -
Tax benefit relating to
employee stock options - - - - 661 - - -
Treasury Stock acquired - - - - - - - $(5,250)
Foreign currency transalation
adjustment - - - - - $(2) - -
-------------------------------------------------------------------------------------------------
Balance at December 31, 1996 8,974 7,510 90 75 98,958 (2) 70,219 (5,250)
Net income - - - - - - 33,429 -
Exercise of stock options 264 - 3 - 4,769 - - -
Tax benefit relating to
employee stock options - - - - 3,174 - - -
Treasury Stock acquired - - - - - - - (1,739)
Foreign currency translation - - - - - - -
adjustment (25)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1997 9,238 7,510 $93 $75 $106,901 $(27) $103,648 $(6,989)
=================================================================================================
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 33,429 $ 26,148 $ 18,327
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,470 6,707 4,381
Tax benefit relating to employee stock options 3,174 661 3,572
Changes in operating assets and liabilities:
Receivables (46,486) (46,693) (39,304)
Inventories (11,444) (3,638) (4,904)
Prepaid expenses and other assets 888 (2,787) (844)
Claims payable 54,186 37,950 22,206
Accounts payable and accrued expenses 8,286 11,515 8,066
---------------------------------------------------------
Net cash provided by operating activities 52,503 29,863 11,500
---------------------------------------------------------
Cash flows from investing activities:
Acquisition of new business - (940) -
Short-term investments (3,550) (54,388) -
Purchases of property and equipment (13,017) (9,480) (8,047)
---------------------------------------------------------
Net cash (used in) investing activities (16,567) (64,808) (8,047)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock offering - 52,592 -
Acquisition of Treasury Stock (1,739) (5,250) -
Exercise of stock options 4,772 1,310 2,311
---------------------------------------------------------
Net cash provided by financing activities 3,033 48,652 2,311
---------------------------------------------------------
Effect of foreign currency translation adjustment (25) (2) -
---------------------------------------------------------
Net increase in cash and cash equivalents 38,944 13,705 5,764
Cash and cash equivalents at beginning of year 25,211 11,506 5,742
---------------------------------------------------------
Cash and cash equivalents at end of year $ 64,155 $ 25,211 $ 11,506
=========================================================
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, Inc. 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
inter-company 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 networks. Effective in January 1996, the Company began processing
claims for clients of its wholly-owned Canadian subsidiary, ESI Canada, Inc.
("ESI Canada"). The Company also derives revenues from (i) informed decision
counseling services through its Express Health LineSM division, (ii) the sale of
pharmaceuticals for and the provision of infusion therapy services through its
IVTx division, (iii) medical information management services, which include
provider profiling, disease management support services and outcomes assessments
through its Practice Patterns Science, Inc. subsidiary, and (iv) sales of
eyeglasses and contact lenses and associated administrative fees to participants
in the Company's managed vision programs operated by Express Scripts Vision
Corporation.
In March 1992, the Company, which was 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 clients. The Company accounts for these
agreements as follows:
PRIOR TO DECEMBER 15, 1995 - 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.
BETWEEN DECEMBER 15, 1995 AND NOVEMBER 20, 1997 - For agreements entered
into between these dates, the Company utilizes the provisions of Financial
Accounting Standards Board Statement 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which requires that all stock issued to nonemployees
be accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued 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 or to be issued under the Premier and Manulife alliances based on
fair value at the date the agreement was consummated.
SUBSEQUENT TO NOVEMBER 20, 1997 - In November 1997, the Emerging Issues
Task Force reached a consensus that the value of equity instruments issued for
consideration other than employee services should be initially determined on the
date on which a "firm commitment" for performance first exists by the provider
of goods or services. Firm commitment is defined as a commitment pursuant to
which performance by a provider of goods or services is probable because of
sufficiently large disincentives for nonperformance. The consensus must be
applied for all new arrangements and modifications of existing arrangements
entered into from November 20, 1997. The consensus only addresses the date upon
which fair value is determined and does not change the accounting based upon
fair value as prescribed by FAS 123. No such arrangements have been entered into
by the Company subsequent to November 20, 1997.
Shares issued on the effective date of the contractual agreement are
considered outstanding and included in basic and diluted earnings per share
computations when issued. Shares issuable upon the satisfaction of certain
conditions are considered outstanding and included in the earnings per share
computation as discussed in the "Earnings per share" note. 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 consists 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, or to be used for
internal purposes, are charged to expense until technological feasibility is
established. Thereafter, the remaining software production costs up to the date
of general release to customers, or to the date placed into production, are
capitalized and included as Property and Equipment. During 1997, 1996 and 1995,
$1,982,000, $1,898,000, and $1,084,000 in software development costs were
capitalized, respectively. Capitalized software development costs amounted to
$5,269,000 and $3,377,000 at December 31, 1997 and 1996, respectively.
Amortization of the capitalized amounts commences on the date of general release
to customers, or the date placed into production, and is computed on a
product-by-product basis using the straight-line method over the remaining
estimated economic life of the product but not more than five years. Reductions,
if any, in the carrying value of capitalized software costs to net realizable
value are also included in amortization expense. Amortization expense was
$622,000 in 1997 and $136,000 in 1996. No amortization expense was recorded in
1995.
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, 1997, 1996 and 1995.
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, 1997 or 1996.
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 dispenses
pharmaceuticals to members of health benefit plans sponsored by the Company's
clients or 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 ingredient costs or payments to these pharmacy providers in cost
of revenues. If the Company is only administering the plan sponsors' network
pharmacy contracts, or where the Company dispenses pharmaceuticals supplied by
one of the Company's clients, the Company records only the administrative or
dispensing 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.
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board issued Statement 128 "Earnings Per Share" ("FAS 128"). The terms of FAS
128 are effective for all earnings per share disclosures subsequent to December
15, 1997 and requires all prior period earnings per share disclosures be
restated to conform with FAS 128. FAS 128 requires a presentation of both
"Basic" earnings per share and "Diluted" earnings per share. "Basic" earnings
per share computes per share earnings using the weighted average number of
common shares outstanding during the period, while "Diluted" earnings per share
computes per share earnings in the same manner as "Basic" earnings per share
plus the number of additional common shares that would have been outstanding for
the period if the dilutive potential common shares had been issued. The only
difference between the number of weighted average shares used in the basic and
diluted calculation for all years is stock options granted by the Company using
the "treasury stock" method, amounting to 205,000, 270,000 and 422,000 in 1997,
1996 and 1995, respectively. The Company has adopted FAS 128 listing both
"Basic" earnings per share and "Diluted" earnings per share for all years
presented in the financial statements.
Shares issuable upon the satisfaction of conditions are considered
outstanding and included in the computation of - BASIC EARNINGS PER SHARE as of
the date that all necessary conditions have been satisfied - DILUTED EARNINGS
PER SHARE - if all necessary conditions have been satisfied by the end of the
period - if all necessary conditions have not been satisfied by the end of the
period, the number of shares included are based on the number of shares, if any,
that would be issuable if the end of the reporting period were the end of the
contingency period and if the result would be dilutive.
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, FAS 123 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. In
accordance with the terms of the agreement, the Company issued 227,273 shares of
Class A Stock to Premier in May, 1996, and may be required to issue up to an
additional 2,250,000 shares to the Partnership over a period up to the first
five years of the agreement if the Partnership exceeds all benchmarks. The
shares issued were valued at $11,250,000 and are being amortized over the
remaining term of the agreement. Amortization expense amounted to $1,164,000 in
1997 and $776,000 in 1996. Except for certain exemptions from registration under
the 1933 Act, any shares issued to the Partnership cannot be traded until they
have been registered under the Securities Act of 1933, as amended (the "1933
Act") and any applicable state securities laws. No stock was issued in 1997.
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, 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 1997 or 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 for each of the three years ended
December 31, 1997, 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.
Effective January 1, 1998, Coventry renewed the agreement for a two-year term
through December 31, 1999. As part of the agreement, the Company issued warrants
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.
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. In February 1997, PacifiCare Health Systems, Inc.
("PacifiCare") completed the acquisition of FHP. As a result of the acquisition,
PacifiCare informed the Company that it would not enter into a long-term
extension of the agreement and has reached an agreement with the Company to
phase-out membership beginning July 1997 and continuing until April 1998. The
cost of the shares issued to FHP was amortized over a five-year period. Due to
the termination of the agreement, the unamortized balance of $990,000 was
written off in 1997. Amortization expense was $165,000 in 1996 and 1995.
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 $176,761,000, $122,157,000 and $82,903,000 in
1997, 1996 and 1995, respectively.
The amount receivable from or (due to) related parties comprised the
following:
December 31,
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------------
Receivable from NYLCare $ 23,709 $ 23,083
Due to NYLCare (7,479) (4,241)
----------------------------------------------
Total related party receivable $ 16,230 $ 18,842
==============================================
Changes in amounts due to NYLCare are summarized as follows:
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Beginning balance, January 1 $ 4,241 $ 5,578 $ 4,328
Formulary fees 11,690 7,636 5,895
Other, net - - 968
Payments (8,452) (8,973) (5,613)
---------------------------------------------------------------------
Ending balance, December 31 $ 7,479 $ 4,241 $ 5,578
=====================================================================
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 and 75% to NYLCare and 25% to the Company thereafter. The
Company is also the non-exclusive provider of pharmacy benefit management
services for insurance plans underwritten and administered by NYLCare (these
plans were underwritten and administered by New York Life prior to its internal
reorganization pursuant to which it transferred all of its group life and health
insurance business, along with its PBM agreement with the Company, to NYLCare).
In 1996 fees from drug manufacturers with respect to this business were
allocated 100% to the Company. Effective January 1, 1997, the Company shared
such fees with NYLCare on a fixed per script amount which approximates 40% of
the total of such fees.
Such fees allocated to NYLCare were $11,690,000, $7,636,000 and $5,895,000
in 1997, 1996 and 1995, respectively. The Company's portion of such fees were
$5,803,000, $3,064,000 and $2,553,000 in 1997, 1996 and 1995, respectively. The
portion of the fees retained by the Company has 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) 1997 1996
- ------------------------------------------------------------------------------------------------
Furniture $ 4,362 $ 3,203
Equipment 28,924 21,837
Computer software 12,011 8,656
Leasehold improvements 3,934 2,699
----------------------------------------------
49,231 36,395
Less accumulated depreciation and
amortization 22,410 14,948
----------------------------------------------
$ 26,821 $ 21,447
==============================================
5. INCOME TAXES
The income tax provision consists of the following:
Year Ended December 31,
(IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Current provision:
Federal $ 19,048 $ 13,945 $ 9,951
State 2,779 2,480 1,656
Foreign 284 190 -
---------------------------------------------------------------------
Total current provision 22,111 16,615 11,607
Deferred:
Federal (714) 267 (259)
State (120) 50 (41)
---------------------------------------------------------------------
$ 21,277 $ 16,932 $ 11,307
=====================================================================
Effective tax rate 38.9% 39.3% 38.2%
The effective tax rate is comprised of a federal rate of 35.0% in 1997,
1996 and 1995, state taxes net of federal benefit of 3.8%, 4.3%, and 3.5% in
1997, 1996 and 1995, respectively; and all other items comprising 0.1%, 0.0%,
and (0.3%) in 1997, 1996 and 1995, respectively. The effect of foreign taxes on
the effective tax rate for 1997 and 1996 is immaterial.
The deferred tax assets and deferred tax liabilities recorded in the
consolidated balance sheet are as follows:
December 31,
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Inventory costing capitalization and reserves $ 675 $ 624
Allowance for bad debts 1,578 969
Employee compensation 512 -
Other 79 34
----------------------------------------------
Gross deferred tax assets 2,844 1,627
----------------------------------------------
Deferred Tax Liabilities:
Depreciation and property differences (1,166) (1,169)
Other (91) (217)
----------------------------------------------
Gross deferred tax liabilities (1,257) (1,386)
----------------------------------------------
Net deferred tax assets $ 1,587 $ 241
==============================================
The Company made cash payments for federal and state income taxes of
$20,691,000, $14,544,000 and $7,548,000 in 1997, 1996 and 1995, 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 5 years.
The aggregate minimum lease commitment is $1,883,000 in 1998, $1,863,000 in
1999, $1,859,000 in 2000, $1,785,000 in 2001, $1,600,000 in 2002, and
$10,169,000 in years thereafter.
For the year ended December 31, 1997, approximately 66.0% 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 a $25,000,000 unsecured line of credit with the
Mercantile Bank National Association which was renewed for one year on May 29,
1997. The Company has allowed a second line of credit in the amount of $25
million to lapse as of October 31, 1997. Terms of the Mercantile Bank credit
agreement 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 this agreement on any unused portion are charged at ten
one-hundredths of one percent per year. At December 31, 1997 and 1996, the
Company had no outstanding borrowings under this agreement, nor did it borrow
any amounts under these agreements during 1997.
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 1997, 1996 and 1995, the
Company made contributions of approximately $909,000, $639,000 and $332,000,
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, 1997, NYLIFE and the holders of Class A Common Stock
have control over approximately 89.1% and 10.9%, respectively, of the combined
voting power of all classes of Common Stock.
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, 1997, 2,754,000 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, 1997, 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, to a maximum of 1,190,000 shares. In June 1994, the
Board of Directors adopted the Express Scripts, Inc. 1994 Stock Option Plan,
also amended in 1995 and 1997. The plan was approved by the stockholders in June
1995. A total of 460,000 shares of the Company's Class A Common Stock has been
reserved for issuance under this plan. In January 1998, the Board of Directors
of the Company approved an amendment to such stock option plan providing that
the total number of shares reserved for issuance under the plan be increased to
960,000, subject to approval by the Company's shareholders at the 1998 Annual
Meeting of Shareholders. 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.
The Committee may establish vesting terms in its discretion, and has typically
provided that options vest over a five year period. The options may be
exercised, subject to a ten-year maximum, over a period determined by the
Committee.
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 vest over a five-year period from the date of grant.
The Company applies APB 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
option 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 1997, 1996 and 1995. Because future options may be granted
and vesting typically occurs over a five year period, the pro forma impact shown
for 1997, 1996 and 1995 is not necessarily representative of the impact in
future years.
1997 1996 1995
---------------------------------------------
Net income
As reported $33,429,000 $26,148,000 $18,327,000
Pro forma 32,034,000 25,235,000 18,220,000
Basic earnings per share
As reported $2.04 $1.63 $1.23
Pro forma 1.96 1.58 1.23
Diluted earnings per share
As reported $2.02 $1.60 $1.20
Pro forma 1.94 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:
1997 1996 1995
---------------------------------------------
Expected life of option 2-7 years 1-6 years 1-6 years
Risk-free interest rate 5.7-6.6% 5-6.5% 5.5-6.9%
Expected volatility of stock 40% 30-50% 30-50%
Expected dividend yield None None None
The actual value of the options will depend on the excess of the market
price of the shares over the exercise price on the date the options are
exercised, and may vary significantly from the theoretical values estimated by
the Black-Scholes model.
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1997, 1996 and 1995, and changes during the years ending on
those dates is presented below.
1997 1996 1995
--------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
FIXED OPTIONS Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------
Outstanding at beginning of year 838,315 $25.12 723,240 $ 20.60 931,960 $ 15.95
Granted 301,150 45.56 320,825 39.70 77,000 34.37
Exercised (264,795) 17.60 (65,700) 19.95 (272,080) 8.48
Forfeited/canceled (23,825) 35.12 (140,050) 37.59 (13,640) 22.57
------------- ------------- -------------
Outstanding at end of year 850,845 34.42 838,315 25.12 723,240 20.60
============= ============= =============
Options exercisable at year end 320,645 377,760 282,980
Weighted-average fair value of
options granted during the year $19.82 $13.14 $13.39
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------------------- ---------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
$ 6.50 - 21.50 190,900 5.2 $ 14.24 173,400 $ 13.76
26.75 - 31.50 182,670 7.6 29.58 47,970 29.90
32.50 - 34.00 171,500 8.4 33.66 45,400 33.11
41.625 - 50.50 235,275 8.9 48.34 53,875 46.98
57.00 70,500 9.9 57.00
=============== ==============
6.50 - 57.00 850,845 7.8 34.42 320,645 24.50
=============== ==============
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 and Prudential-Canada, 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. Subsequently,
Prudential-Canada was acquired by London Life Insurance Company ("London"), and
London in turn was acquired by Great-West Lifeco. Inc. 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, 1997 and 1996:
Selling,
Net Cost of General & Operating Net Earnings Per Share
(IN THOUSANDS) Revenues Revenues Administrative Income Income Basic Diluted
- -------------------------------------------------------------------------------------------------------------------------
1997
March 31, 1997 $261,990 $237,298 $13,298 $11,394 $7,641 $0.47 $0.46
June 30, 1997 300,515 274,906 13,733 11,876 8,131 0.50 0.50
September 30, 1997 319,937 291,590 15,758 12,589 8,613 0.52 0.52
December 31, 1997 348,192 315,373 19,828 12,991 9,044 0.55 0.54
- -------------------------------------------------------------------------------------------------------------------------
1996
March 31, 1996 $168,389 $148,985 $10,387 $ 9,017 $5,580 $0.37 $0.36
June 30, 1996 184,724 162,797 12,255 9,672 6,403 0.40 0.39
September 30, 1996 194,324 172,316 11,668 10,340 7,014 0.42 0.42
December 31, 1996 226,178 200,784 14,793 10,601 7,151 0.44 0.43
13. SUBSEQUENT EVENT - POTENTIAL ACQUISITION
On February 20, 1998 the Company announced that it had executed a
definitive agreement to purchase ValueRx, the PBM business of Columbia/HCA
Healthcare Corporation ("Columbia"). Under terms of the agreement, the Company
will pay cash in the amount of $445 million for the stock of Value Health, Inc.
and Managed Prescription Network, Inc., the sole assets of which at closing
shall be various subsidiaries each now or formerly conducting business as a PBM,
including ValueRx Pharmacy Program, Inc. The Company expects to use
approximately $100 million of its own cash and finance the remainder of the
purchase price through a five year bank facility. In 1997 the unaudited combined
revenue of the two companies was in excess of $2.7 billion. The acquisition will
be accounted for as a purchase and is subject to customary closing conditions
including required governmental approvals and consummation and funding of the
bank credit facility. The Company anticipates the transaction will close in the
second quarter of 1998.
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 1998 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A (the "Proxy Statement")
under the heading "I. Election of Directors"; provided that the Compensation
Committee Report on Executive Compensation and the performance graph contained
therein shall not be deemed to be incorporated herein; and further provided 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 25
Consolidated Balance Sheet as of
December 31, 1997 and 1996 26
Consolidated Statement of Operations
for the years ended December 31, 1997,
1996 and 1995 27
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 28
Consolidated Statement of Cash Flows for
the years ended December 31, 1997,
1996 and 1995 29
Notes to Consolidated Financial Statements 30
(2) The following financial statement schedule is contained in this Report
on the page indicated.
Page No. In
Financial Statement Schedule: Form 10-K
VIII. Valuation and Qualifying Accounts
and Reserves for the years ended
December 31, 1997, 1996 and 1995 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 - 53.
(b) Reports on Form 8-K
On November 4, 1997, the Company filed a Current Report on Form 8-K
regarding a press release 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 26, 1998 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 26, 1998
Barrett A. Toan Chief Executive
Officer and Director
/s/ George Paz Senior Vice President and March 25, 1998
George Paz Chief Financial Officer
/s/ Joseph W. Plum Vice President and March 25, 1998
Joseph W. Plum Chief Accounting Officer
/s/ Howard I. Atkins Director March 18, 1998
Howard I. Atkins
/s/ Judith E. Campbell Director March 25, 1998
Judith E. Campbell
/s/ Richard M. Kernan, Jr. Director March 25, 1998
Richard M. Kernan, Jr.
/s/ Richard A. Norling Director March 25, 1998
Richard A. Norling
/s/ Frederick J. Sievert Director March 25, 1998
Frederick J. Sievert
/s/ Stephen N. Steinig Director March 25, 1998
Stephen N. Steinig
/s/ Seymour Sternberg Director March 25, 1998
Seymour Sternberg
/s/ Howard L. Waltman Director March 25, 1998
Howard L. Waltman
/s/ Norman Zachary Director March 25, 1998
Norman Zachary
EXPRESS SCRIPTS, INC.
Schedule VIII - Valuation and Qualifying Accounts and
Reserves Years Ended December 31, 1995, 1996
and 1997
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 12/31/95 $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
Year Ended 12/31/97 $2,335,145 $3,680,409 $1,213,991 $4,801,563
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
Exhibit
Number Exhibit
2.1 Stock Purchase Agreement by and among Columbia/HCA Healthcare
Corporation, VH Holdings, Inc., Galen Holdings, Inc. and Express
Scripts, Inc., dated as of February 19, 1998, and certain related
Schedules, incorporated by reference to Exhibit No. 2.1 to the
Company's Current Report on Form 8-K filed March 2, 1998.
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 Bylaws, incorporated by reference to
Exhibit No. 3.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ending September 30, 1997.
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+ Managed Prescription Drug Program Agreement dated as of May 1,
1996 by and between the Company and NYLCare Health Plans of
Maine, Inc., incorporated by reference to Exhibit No. 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ending
March 31, 1997.
10.6+ Managed Prescription Drug Program Agreement dated as of December
31, 1995 by and between the Company and WellPath Community Health
Plan, Inc., incorporated by reference to Exhibit No. 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ending
March 31, 1997.
10.7+ 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.
10.8+ 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.
10.9+ 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15+ First Amendment to Amended and Restated Managed Prescription
Drug Program Agreement and Consent to Assignment dated as of
January 1, 1997, by and between the Company, New York Life
Insurance Company and NYLCare Health Plans, Inc., incorporated by
reference to Exhibit No. 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ending March 31, 1997.
10.16 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.
10.17 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.
10.18 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.
10.19 Amendment Number 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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
10.31 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.
10.32 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.
10.33 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.
10.34 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.
10.35 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.
10.36 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.
10.37 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.
10.38 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.
10.39 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.
10.40 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.
10.41 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.
10.42 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.
10.43 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.
10.44 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.
10.45 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.
10.46 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.
10.47 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.
10.48 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.
10.49 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.
10.50 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.
10.51 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.
10.52 Fourth Amendment to Revolving Loan Agreement made as of May 29,
1997, by and between the Company and Mercantile Bank National
Association, formerly known as 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, 1997.
10.53+ 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.
10.54 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.
10.55 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.
10.56 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.
10.57 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.
10.58 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.
10.59 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.
10.60# Express Scripts, Inc. 1992 Stock Option Plan, incorporated by
reference to Exhibit No.10.23 to the Registration Statement.
10.61# Express Scripts, Inc. Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit No. 10.24 to the
Registration Statement.
10.62# 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.
10.63# Amended and Restated Express Scripts, Inc. 1992 Employee Stock
Option Plan, incorporated byreference to Exhibit No. 10.78 to
the Company's Annual Report on Form 10-K for the year
ending 1994.
10.64# 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.
10.65# First Amendment to Express Scripts, Inc. Amended and Restated
1992 Stock Option Plan for Outside Directors incorporated by
reference to Exhibit A to the Company's Proxy Statement
dated April 9, 1996.
10.66# 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.
10.67# First Amendment to Express Scripts, Inc. Amended and Restated
1994 Stock Option Plan incorporated by reference to Exhibit A to
the Company's Proxy Statement dated April 16, 1997.
10.68# 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.
10.69# 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.
10.70#* Form of Severance Agreement dated as of January 27, 1998,
between the Company and each of the following individuals: Stuart
L. Bascomb, Thomas M. Boudreau, Robert W. Davis, Linda L.
Logsdon, David A. Lowenberg, and George Paz.
21.1* List of Subsidiaries.
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 for certain portions of these exhibits.
# Management contract or compensatory plan or arrangement.