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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ADVANCEPCS
(Exact name of registrant as specified in its charter)
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DELAWARE 8099 75-2493381
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ADDITIONAL SUBSIDIARY GUARANTOR REGISTRANTS
LISTED ON FOLLOWING PAGE
5215 NORTH O'CONNOR BOULEVARD, SUITE 1600
IRVING, TEXAS 75039
(469) 420-6000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
DAVID D. HALBERT
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
5215 NORTH O'CONNOR BOULEVARD, SUITE 1600
IRVING, TEXAS 75039
(469) 420-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
J. KENNETH MENGES, JR., P.C.
ALAN M. UTAY
AKIN, GUMP, STRAUSS,
HAUER & FELD, L.L.P.
1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201-4675
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the registration statement becomes effective.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________________
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CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE(1)
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8 1/2% Senior Notes due 2008.......... $200,000,000 100% $200,000,000 $50,000(2)
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Guarantees of Senior Notes............ -- -- -- None(3)
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(1) Calculated pursuant to Rule 457 under the Securities Act of 1933.
(2) Pursuant to Rule 457(p) of the Securities Act of 1933, the registration fee
in the amount of $56,920 previously paid in connection with registration
statement number 333-52010 filed by the registrant, AdvancePCS, on December
15, 2000 is offset against the currently due registration fee of $50,000. As
a result of this registration fee offset, all of the securities registered
under registration statement number 333-52010 are deemed to be
de-registered.
(3) Pursuant to Rule 457(n) of the Securities Act of 1933, no separate fee for
the guarantees is payable.
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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ADDITIONAL SUBSIDIARY GUARANTOR REGISTRANTS
STATE OR OTHER
JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR IDENTIFICATION
NAME ORGANIZATION NUMBER
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AdvancePCS, L.P............................................. Delaware 75-2882129
AdvancePCS Research, L.L.C.................................. Delaware 06-1610413
AdvanceRx.com, L.P.......................................... Delaware 75-2882135
ADVP Consolidation, L.L.C................................... Delaware 75-2882133
ADVP Management, L.P........................................ Delaware 75-2882131
Ambulatory Care Review Services, Inc. ...................... Ohio 34-1754130
Baumel-Eisner Neuromedical Institute, Inc. ................. Florida 59-1931184
FFI RX Managed Care, Inc. .................................. Florida 59-3236503
First Florida International Holdings, Inc. ................. Florida 59-3308648
HMN Health Services, Inc. .................................. Ohio 34-1885276
PCS Health Systems, Inc. ................................... Delaware 86-0217882
PCS Holding Corporation..................................... Delaware 94-3040479
PCS Mail Services, Inc. .................................... Arizona 86-0946910
PCS Mail Services of Birmingham, Inc. ...................... Alabama 63-1222539
PCS Mail Services of Ft. Worth, Inc. ....................... Delaware 75-2653427
PCS Mail Services of Scottsdale, Inc. ...................... Arizona 86-0945941
PCS Services, Inc. ......................................... Delaware 94-3075526
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE AMENDED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 18, 2001
PROSPECTUS
[ADVANCEPCS LOGO]
OFFER TO EXCHANGE
ALL OUTSTANDING 8 1/2% SENIOR NOTES DUE 2008
($200,000,000 PRINCIPAL AMOUNT)
FOR
8 1/2% SENIOR NOTES DUE 2008
($200,000,000 PRINCIPAL AMOUNT),
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 2001, UNLESS WE EXTEND THE OFFER.
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- We will exchange all outstanding notes that are validly tendered and not
validly withdrawn prior to the closing of the exchange offer for an equal
principal amount of new notes that have been registered.
- You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
- The terms of the new notes to be issued are substantially identical to
the outstanding notes, except for being registered under the Securities
Act of 1933 and not having any transfer restrictions, registration rights
or rights to liquidated damages.
- The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes.
- We will not receive any proceeds from the exchange offer.
- No public market exists for the outstanding notes. We do not intend to
list the new notes on any securities exchange and, therefore, no active
public market is anticipated.
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF FACTORS THAT
YOU SHOULD CONSIDER BEFORE TENDERING YOUR OLD NOTES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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The date of this prospectus is , 2001
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TABLE OF CONTENTS
PAGE
----
Special Note Regarding Forward-Looking Statements........... iii
Where You Can Find More Information......................... iv
Prospectus Summary.......................................... 1
Risk Factors................................................ 13
The Exchange Offer.......................................... 24
Use of Proceeds............................................. 33
Capitalization.............................................. 34
Selected Historical Financial and Operating Data............ 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations Business........................ 39
Management.................................................. 73
Certain Transactions........................................ 76
Description of Certain Other Indebtedness................... 77
Description of Exchange Notes............................... 78
U.S. Federal Income Tax Considerations...................... 124
Plan of Distribution........................................ 127
Legal Matters............................................... 127
Independent Auditors........................................ 127
Index to Consolidated Financial Statements.................. F-1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Statements that are predictive in nature, that depend upon or
refer to future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," "thinks," and
similar expressions are forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results and performance to be materially different from any future
results or performance expressed or implied by these forward-looking statements.
These factors include, among other things, those matters discussed under the
caption "Risk Factors," as well as the following:
- general economic and business conditions;
- demographic changes;
- new governmental regulations and changes in, or the failure to comply
with existing, governmental regulations;
- legislative proposals that impact our industry or the way we do business;
- changes in our industry;
- changes in Medicare and Medicaid payment levels;
- liability and other claims asserted against us;
- integration of PCS and realization of synergies;
- competition; and
- our ability to attract and retain qualified personnel.
Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this prospectus. We assume no obligation to update or
revise them or provide reasons why actual results may differ.
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WHERE YOU CAN FIND MORE INFORMATION
Government filings. We file proxy statements and annual, quarterly and
special reports with the Securities and Exchange Commission. You may read and
copy any document that we file at the Securities and Exchange Commission's
public reference rooms in Washington, D.C., New York, New York, and Chicago,
Illinois. The Securities and Exchange Commission's Washington, D.C. public
reference room is located at 450 Fifth Street N.W., Washington, D.C. 20549. You
may also call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Securities and Exchange
Commission filings are also available to you free of charge at the Securities
and Exchange Commission's web site at www.sec.gov or our web site at
www.AdvancePCSrx.com.
Information incorporated by reference. We filed a registration statement
on Form S-4 to register with the Securities and Exchange Commission the
securities to be offered hereby. As allowed by the rules of the Securities and
Exchange Commission, this prospectus does not contain all of the information you
can find in a registration statement or the exhibits to the registration
statement. The Securities and Exchange Commission allows us to "incorporate by
reference" the information we file with it, which means that we can disclose
important information to you by referring you to those documents. This
prospectus incorporates important business and financial information about us
that is not included in or delivered with this document. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file later with the Securities and Exchange Commission will
automatically update and supersede previously filed information, including
information contained in this document.
We are incorporating by reference the documents listed below, all filings
we make with the Securities and Exchange Commission under Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 after the date we file with
the Securities and Exchange Commission the Registration Statement on Form S-4 of
which this prospectus is a part, which such date was April 18, 2001, and before
the date such registration statement is declared effective by the Securities and
Exchange Commission, and any future filings we will make with the Securities and
Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 after the date and time the Securities and Exchange
Commission declares such registration statement effective until this offering
has been completed:
- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on February 28, 2001;
- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on February 23, 2001;
- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on February 16, 2001;
- our Quarterly Report on Form 10-Q for the quarter ended December 31, 2000
as filed with the Securities and Exchange Commission on February 14,
2001;
- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on December 14, 2000 and as amended February 16, 2001;
- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on December 11, 2000;
- our Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 as filed with the Securities and Exchange Commission on November 14,
2000;
- our Definitive Proxy Statement on Schedule 14A as filed with the
Securities and Exchange Commission on November 6, 2000;
- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on October 16, 2000 and as amended on October 26, 2000,
December 15, 2000 and February 16, 2001;
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- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on July 19, 2000 and as amended on September 18, 2000 and
October 26, 2000;
- our Current Report on Form 8-K as filed with the Securities and Exchange
Commission on July 31, 2000;
- our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 as
filed with the Securities and Exchange Commission on August 14, 2000;
- our Annual Report on Form 10-K for the fiscal year ended March 31, 2000
as filed with the Securities and Exchange Commission on June 29, 2000 and
as amended on July 28, 2000; and
- the description of our Class A common stock, which is contained in our
Registration Statement on Form 8-A/A as filed with the Securities and
Exchange Commission on December 14, 2000.
You may request free copies of these filings by writing or telephoning us
at the following address:
AdvancePCS
Attn.: Legal Department
5215 North O'Connor Boulevard
Suite 1600
Irving, Texas 75039
(469) 420-6000
To obtain timely delivery of any of our filings, agreements or other
documents, you must make your request to us no later than five business days
before the expiration date of the exchange offer. The exchange offer will expire
at 5:00 p.m., New York City time on , 2001. The exchange offer can
be extended by us in our sole discretion. See the caption "The Exchange Offer"
for more detailed information.
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PROSPECTUS SUMMARY
We acquired PCS Holding Corporation, or PCS, on October 2, 2000 and changed
our name from Advance Paradigm, Inc. to AdvancePCS on December 8, 2000.
Therefore, references to "AdvancePCS," "we," "our" or "us" refer to AdvancePCS
as the combined company unless the context is referring to historical
information prior to October 2, 2000, in which case such references refer to
Advance Paradigm, Inc. prior to our acquisition of PCS.
We report our financial results on a fiscal year rather than a calendar
year basis. When we refer to a particular fiscal year in this prospectus, we
mean the twelve months ended March 31 of that year. For example, fiscal year
2000 refers to the twelve months ended March 31, 2000.
Unless the context otherwise requires, the term "old notes" refers to the
8 1/2% senior notes due 2008 issued on March 13, 2001, the term "exchange notes"
refers to the 8 1/2% senior notes due 2008 issued pursuant to the registration
statement of which this prospectus is a part and the term "notes" refers to the
old notes and the exchange notes, collectively.
ABOUT OUR COMPANY
WHO WE ARE
We are a leading provider of health improvement services in the United
States. As the largest pharmacy benefit management company, or PBM, based on
number of lives covered, we currently serve more than 75 million health plan
members and manage more than $20 billion in prescription drug spending on behalf
of our health plan sponsors on an annualized basis. In addition, we offer a wide
range of other health improvement products and services, such as prescription
discount cards for the uninsured and under-insured, web-based programs, disease
management, clinical trials and outcomes studies. Our mission is to improve the
quality of care delivered to health plan members while helping health plan
sponsors reduce overall costs.
We generate revenues by providing our health improvement services to two
primary customer groups: health plan sponsors and pharmaceutical manufacturers.
We serve a broad range of health plan sponsors, including BlueCross BlueShield
plans and other managed care organizations, employer groups, third party
administrators of health plans, insurance companies, government agencies and
labor union-based trusts. We work closely with pharmaceutical manufacturers to
negotiate lower drug costs for our health plan sponsors. We also provide
pharmaceutical manufacturers with clinical trial, research and information
management services.
In October 2000, we became the largest PBM through the acquisition of PCS.
As the industry leader based on number of lives covered, we intend to position
ourselves as the first choice of health plan sponsors who need a PBM with scale
and scope to help effectively manage their growing prescription drug costs. We
have generated and anticipate being able to generate additional synergies as a
result of the PCS acquisition by:
- consolidating and renegotiating existing contracts with pharmaceutical
manufacturers;
- re-contracting with our retail pharmacy network;
- rationalizing and gaining economies of scale in our mail service
operations;
- generating corporate overhead and information technology efficiencies;
and
- pursuing cross-selling opportunities with pharmaceutical manufacturers
and health plan sponsors.
In addition, in July 2000, we acquired First Florida International
Holdings, Inc. and its affiliated companies, collectively known as FFI, which
provide prescription discount programs, or consumer cards, to the uninsured and
under-insured. We believe our acquisitions of PCS and FFI significantly enhance
our
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competitive position in the industry and provide substantial opportunities to
generate operational efficiencies and continued growth.
In the third quarter ended December 31, 2000, we reported revenues of $2.9
billion and EBITDA of $58.6 million. On a pro forma basis for the twelve months
ended December 31, 2000, giving effect to our acquisition of PCS as if it had
taken place as of January 1, 2000, we would have recognized revenues of $10.8
billion and EBITDA of $194.3 million.
INDUSTRY BACKGROUND
The U.S. Healthcare Financing Administration, or HCFA, estimates that total
prescription drug spending in the United States was approximately $100 billion
in 1999 and projects this spending to remain the fastest growing component of
health care costs, increasing by between nine and twelve percent annually from
2000 through 2008. We believe factors contributing to this trend include higher
drug utilization, an expected increase in new drug introductions and high costs
for newly-developed, more effective drug therapies.
PBMs were first formed to provide health plan sponsors with a more
efficient and less costly means of managing their members' prescription drug
benefit, particularly the processing of pharmaceutical claims. While PBMs
continue to process hundreds of millions of pharmaceutical claims per year, PBMs
have also developed additional services, including mail-order pharmacies,
point-of-sale claims processing, formulary development and other clinical
services. By designing and implementing effective pharmacy benefit plans and
formularies, PBMs gained the ability to influence the choice of pharmaceuticals
used by a health plan's members. PBMs use their formulary influence and
increased purchasing power to negotiate both rebates from pharmaceutical
manufacturers and discounts from retail pharmacies, in order to generate savings
for health plan sponsors.
Over the past few years, the PBM industry has undergone significant
consolidation. We believe such consolidation has principally been driven by the
significant benefits of size and scale, including:
- cost-saving opportunities to leverage a fixed-cost infrastructure over
greater prescription claim volume, resulting in greater pricing
flexibility; and
- increased negotiating leverage with pharmaceutical manufacturers and
retail pharmacies, resulting in greater ability to obtain lower drug
costs for health plan sponsors.
We believe PBMs that effectively capture these benefits will be better
positioned to strengthen their relationships with plan members, physicians and
health plan sponsors and improve their competitive position.
OUR COMPETITIVE ADVANTAGES
We believe we are well positioned to compete effectively in the PBM
industry due to several key advantages:
- We are the largest PBM in the industry based on number of lives covered.
- We maintain an independent status, as we are not controlled by a
pharmaceutical manufacturer, retail pharmacy or health plan sponsor.
- We offer a wide range of health improvement products and services.
- We have a diverse client base with substantial penetration across all key
client segments.
- We have a focused and experienced management team with an established
track record in growing our business and integrating acquisitions.
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OUR STRATEGY
Our mission is to improve the quality of care delivered to health plan
members while helping health plan sponsors reduce overall costs. In order to
accomplish this mission, we plan to:
CONTINUE TO GAIN EFFICIENCIES FROM OUR ACQUISITION OF PCS. Through the
acquisition of PCS, we have created significant cost savings opportunities and
increased negotiating leverage with pharmaceutical manufacturers and retail
pharmacies. During the two-year period following the acquisition of PCS, we
expect to realize significant synergies from the integration of PCS.
INCREASE SALES PENETRATION TO EXISTING CUSTOMERS. One of our primary
growth strategies is to increase sales penetration of our health management
services within our existing customer base. With the addition of the
complementary product lines and customer groups of PCS, we now offer more
comprehensive product solutions, which we intend to cross-sell into our
respective customer bases. Beyond combining existing services, we also plan to
increase sales to our existing customers by expanding our disease management
services and developing additional clinical research capabilities.
INCREASE OUR MAIL SERVICE PENETRATION. We believe that our mail services
reduce costs to health plan sponsors through volume purchasing, increased
generic dispensing and higher rebates through greater formulary compliance.
Through our combination with PCS, we believe that our mail service pharmacies
are of sufficient scale and capacity to effectively compete. We plan to increase
the percentage of the prescriptions filled by our mail pharmacies by
aggressively promoting our mail services to the members of our health plan
sponsors.
INCREASE OUR CORE HEALTH PLAN SPONSOR CUSTOMER BASE. We plan to continue
to grow our customer base by marketing our scale and comprehensive service
offerings to a broader range of health plan sponsors. We believe that our
increased size and ability to negotiate higher rebates and discounts make us
more attractive to large accounts. As part of our strategy to expand our
customer base, we have reorganized our sales force into teams focused on each
customer segment.
FURTHER DEVELOP WEB-BASED CAPABILITIES AND PURSUE NEW TECHNOLOGY
INITIATIVES. Our health plan sponsor customers are increasingly interested in
the convenience of web-enabled, pharmacy-related products and services for their
members. We provide our clients with comprehensive web-based solutions, which
include web-enabled PBM functions such as online refills and online prescription
drug history, web-based content and web site development services for health
plan sponsors. We plan to expand our current web-based product offerings, as
well as continue to explore and implement new technologies to enable us to more
effectively deliver our products and services.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We plan to continue our
strategy of selectively pursuing acquisitions and alliances that are consistent
with our corporate mission. In particular, we seek opportunities to:
- increase the size of our core PBM business;
- expand our product offerings for pharmaceutical manufacturers and health
plan sponsors; and
- enhance our current health improvement programs.
RECENT DEVELOPMENTS
On February 22, 2001, we announced the signing of an agreement with Express
Scripts, Inc. and Merck-Medco Managed Care, L.L.C. to form a new venture called
RxHub LLC. RxHub LLC plans to develop an electronic exchange to enable
physicians who use electronic prescribing technology to link to participating
retail pharmacies, PBMs and health plan sponsors that their patients use.
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PRINCIPAL EXECUTIVE OFFICES
We are incorporated under the laws of the State of Delaware. Our principal
executive office is located at 5215 North O'Connor Boulevard, Suite 1600,
Irving, Texas 75039. Our telephone number is (469) 420-6000 and our web site can
be found at www.AdvancePCSrx.com.
FAILURE TO EXCHANGE YOUR OLD NOTES
The old notes that you do not tender or that we do not accept will,
following the exchange offer, continue to be restricted securities. Therefore,
you may only transfer or resell them in a transaction registered under or exempt
from the Securities Act of 1933 and applicable state securities laws. We will
issue the exchange notes in exchange for the old notes under the exchange offer
only following the satisfaction of the procedures and conditions discussed under
the caption "The Exchange Offer."
Because we anticipate that most holders of the old notes will elect to
exchange their old notes, we expect that the liquidity of the market, if any,
for any old notes remaining after the completion of the exchange offer will be
substantially limited. Any old notes tendered and exchanged in the exchange
offer will reduce the aggregate principal amount outstanding of the old notes.
THE EXCHANGE OFFER
On March 13, 2001, we completed the private offering of our unregistered
8 1/2% Senior Notes due 2008, which we refer to in this prospectus as the old
notes. In this exchange offer, we are offering to exchange, for your old notes,
exchange notes that are identical in all material respects to the old notes
except that the exchange notes have been registered under the Securities Act of
1933.
Registration Rights Agreement....... We sold the old notes on March 13, 2001
to the initial purchasers -- Banc of
America Securities LLC, Merrill Lynch,
Pierce, Fenner & Smith, Incorporated,
Banc One Capital Markets, Inc., Chase
Securities Inc., CIBC World Markets
Corp. and Scotia Capital (USA) Inc.
Simultaneously with the sale of the old
notes, we entered into a registration
rights agreement that provides for the
exchange offer.
You may exchange your old notes for
exchange notes, which have
substantially identical terms. The
exchange offer satisfies your rights
under the registration rights
agreement. After the exchange offer is
over, you will not be entitled to any
exchange or registration rights with
respect to your old notes, except under
limited circumstances.
The Exchange Offer.................. We are offering to exchange up to
$200.0 million aggregate principal
amount of old notes for up to $200.0
million aggregate principal amount of
exchange notes. You may exchange your
old notes by following the procedures
described under the heading "The
Exchange Offer."
Expiration Date; Withdrawal of
Tender.............................. The exchange offer will expire at 5:00
p.m., New York City time, on
, 2001, unless we extend
it. You may withdraw your tender of old
notes pursuant to the exchange offer at
any time prior to the expiration date
of the exchange offer. See "The
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Exchange Offer" for a more complete
description of the tender and
withdrawal provisions.
Resale.............................. We believe that the exchange notes
issued pursuant to the exchange offer
in exchange for old notes may be
offered for resale, resold and
otherwise transferred by you (unless
you are an "affiliate" of ours within
the meaning of Rule 405 under the
Securities Act) without compliance with
the registration and prospectus
delivery provisions of the Securities
Act of 1933, so long as you are
acquiring the exchange notes in the
ordinary course of your business and
you have not engaged in, do not intend
to engage in, and have no arrangement
or understanding with any person to
participate in, a distribution of the
exchange notes.
Each participating broker-dealer that
receives exchange notes for its own
account under the exchange offer in
exchange for old notes that were
acquired by the broker-dealer as a
result of market-making or other
trading activity must acknowledge that
it will deliver a prospectus in
connection with any resale of the
exchange notes. See the caption "Plan
of Distribution."
Any holder of old notes who:
- is our affiliate;
- does not acquire exchange notes in
the ordinary course of its business;
or
- exchanges old notes in the exchange
offer with the intention to
participate, or for the purpose of
participating, in a distribution of
exchange notes
must, in the absence of an exemption,
comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with the
resale of the exchange notes.
Conditions to the Exchange Offer.... The exchange offer is subject to
customary conditions, which we may
waive. We currently anticipate that
each of the conditions will be
satisfied and that we will not need to
waive any conditions. We reserve the
right to terminate or amend the
exchange offer at any time before the
expiration date if any such condition
occurs. For additional information
regarding the conditions to the
exchange offer, see "The Exchange
Offer."
Procedures for Tendering Old
Notes............................... If you are a holder of old notes who
wishes to accept the exchange offer,
you must:
- complete, sign and date the
accompanying letter of transmittal,
or a facsimile of the letter of
transmittal, and mail or otherwise
deliver the letter of transmittal,
together with your old notes, to the
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exchange agent at the address set
forth under "The Exchange Offer;" or
- arrange for The Depository Trust
Company to transmit certain required
information, including an agent's
message forming part of a book-entry
transfer in which you agree to be
bound by the terms of the letter of
transmittal, to the exchange agent in
connection with a book-entry
transfer.
By tendering your old notes in either
manner, you will be representing among
other things, that:
- the exchange notes you receive
pursuant to the exchange offer are
being acquired in the ordinary course
of your business;
- you are not participating, do not
intend to participate and have no
arrangement or understanding with any
person to participate, in the
distribution of the exchange notes
issued to you in the exchange offer;
and
- you are not an "affiliate" of ours,
or if you are an affiliate of ours
you will comply with the applicable
registration and prospectus delivery
requirements of the Securities Act.
United States Federal Income Tax
Consequences........................ Your exchange of old notes for exchange
notes in the exchange offer will not
result in any gain or loss to you for
U.S. federal income tax purposes. See
"U.S. Federal Income Tax Consequences"
for a more detailed description of the
tax consequences of the exchange offer
associated with the exchange of old
notes for the exchange notes to be
issued in the exchange offer and the
ownership and disposition of those
exchange notes.
Use of Proceeds..................... We will not receive any cash proceeds
from the issuance of exchange notes
pursuant to the exchange offer.
Exchange Agent...................... U.S. Trust Company of Texas, N.A.
Consequences of Failure to Exchange
Your Old Notes...................... Old notes not exchanged in the exchange
offer will continue to be subject to
the restrictions on transfer that are
described in the legend on the old
notes. In general, you may offer or
sell your old notes only if they are
registered under, or offered or sold
under an exemption from, the Securities
Act of 1933 and applicable state
securities laws. We do not currently
intend to register the old notes under
the Securities Act. If your old notes
are not tendered and accepted in the
exchange offer, it may become more
difficult for you to sell or transfer
your old notes.
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THE EXCHANGE NOTES
The terms of the exchange notes are identical in all material respects to
those of the old notes, except for transfer restrictions, registration rights
and rights to additional interest that do not apply to the exchange notes. The
summary below describes the principal terms of the exchange notes. Certain of
the terms and conditions described below are subject to important limitations
and exceptions. The "Description of Exchange Notes" section of this prospectus
contains a more detailed description of the terms and conditions of the exchange
notes.
Issuer.............................. AdvancePCS
Securities.......................... $200.0 million aggregate principal
amount of 8 1/2% senior exchange notes
due 2008 registered under the
Securities Act of 1933.
Maturity............................ April 1, 2008.
Interest............................ In cash semi-annually in arrears on
April 1 and October 1, commencing on
October 1, 2001.
Ranking............................. The exchange notes are senior unsecured
debt. Accordingly, they will rank:
- behind all our existing and future
senior secured debt;
- equally with all our existing and
future senior unsecured debt;
- ahead of any of our existing and
future subordinated debt; and
- structurally behind the liabilities
of our subsidiaries that do not
guarantee the notes, if any.
As of December 31, 2000, after giving
effect to the offering of the old notes
and the application of the proceeds
from the offering of the old notes to
repay our senior subordinated notes due
2011, the exchange notes would have
been effectively subordinated to
approximately $610 million of our
outstanding senior secured debt.
Guarantees.......................... With limited exceptions, the exchange
notes will be unconditionally
guaranteed on a senior basis by each of
our existing and future domestic
subsidiaries, other than subsidiaries
treated as unrestricted subsidiaries.
If we cannot make payments on the
exchange notes when they are due, the
guarantor subsidiaries must make them
instead.
Optional Redemption................. On or after April 1, 2005, we may
redeem some or all of the exchange
notes at any time at the redemption
prices described in the section
"Description of Exchange
Notes -- Optional Redemption."
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We may redeem the exchange notes at any
time prior to maturity, in whole at any
time or in part from time to time, at a
redemption price equal to the greater
of
- 100% of the principal amount of the
exchange notes to be redeemed, or
- the sum of the present values of the
remaining scheduled payments of
principal and interest discounted to
the redemption date, at the Treasury
Rate (as defined herein) plus 50
basis points,
plus, in each case, accrued interest
and liquidated damages, if any, to the
date of redemption.
Prior to April 1, 2004, we may redeem
up to 35% of the exchange notes with
the proceeds of certain qualified sales
of our equity at the price listed in
the section "Description of Exchange
Notes -- Optional Redemption."
Mandatory Offer to Repurchase....... If we sell certain assets or experience
specific kinds of changes of control,
we must offer to repurchase the
exchange notes at the prices listed in
the section "Description of Exchange
Notes -- Repurchase at the Option of
Holders."
Basic Covenants of the Indenture.... We will issue the exchange notes under
an indenture which will, among other
things, restrict our ability to:
- borrow money;
- pay dividends on or redeem or
repurchase our stock;
- make investments;
- create liens;
- sell assets, including stock in our
subsidiaries, or merge with or into
other companies;
- enter into certain transactions with
affiliates; and
- restrict dividends, distributions or
other payments from our subsidiaries
to us.
For more detailed information on
covenants contained in the indenture,
see "Description of Exchange
Notes -- Certain Covenants."
YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION
OF CERTAIN RISKS ASSOCIATED WITH THE EXCHANGE NOTES.
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA
The following tables present summary consolidated statement of operations,
balance sheet and supplemental data of AdvancePCS for the periods and dates
indicated. The summary statement of operations data for each of the years in the
three-year period ended March 31, 2000, and the balance sheet data as of March
31, 1998, 1999 and 2000 presented below are derived from our consolidated
financial statements and accompanying notes, which have been audited by Arthur
Andersen LLP, independent public accountants and are included elsewhere in this
prospectus. The summary statement of operations data and supplemental data of
AdvancePCS for the three- and nine-month periods ended December 31, 1999 and
2000, and the summary balance sheet data as of December 31, 1999 and 2000 are
derived from the unaudited interim consolidated financial statements and
accompanying notes of AdvancePCS, which are included elsewhere in this
prospectus. The unaudited interim consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of our management, are necessary for a fair presentation of our
financial position and results of operations for these periods. Historical
operating results for the three- and nine-month periods ended December 31, 1999
and 2000 are not necessarily indicative of the results that may be expected for
a full fiscal year.
The following tables also present summary historical statement of
operations and supplemental data of PCS for the periods and dates indicated. The
summary statement of operations data of PCS are derived from the consolidated
financial statements and accompanying notes of PCS, which have been audited by
Ernst & Young LLP. Prior to January 23, 1999, PCS was a wholly-owned subsidiary
of Eli Lilly and Company, or Eli Lilly, and its financial results for 1997 and
1998 were consolidated with those of Eli Lilly using a fiscal year ending
December 31. On January 23, 1999, PCS was acquired by Rite Aid Corporation, or
Rite Aid, and its financial results for 1999 were consolidated with those of
Rite Aid using a fiscal year ending February 26, 2000.
The results of operations of PCS for the period commencing October 2, 2000,
the date of our acquisition of PCS, are reflected in the financial statements of
AdvancePCS after that date. The results of operations of PCS for the nine months
ended December 31, 1999 and 2000 are included in the AdvancePCS pro forma
financial data. Historical revenues and cost of revenues for AdvancePCS and PCS
have been reclassified to reflect adoption of consistent revenue recognition
policies. In connection with our recent acquisitions and the issuance of recent
accounting pronouncements, we are evaluating certain aspects of Staff Accounting
Bulletin 101 and Emerging Issues Task Force, or EITF, 99-19 "Reporting Gross
Revenue as a Principal vs. Net as an Agent" as described in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Changes in Revenue Recognition."
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You should read the information set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the historical consolidated financial statements and related notes
of each of AdvancePCS and PCS and the unaudited pro forma condensed consolidated
financial information in this prospectus and in the annual reports and other
information, including five-year selected financial data, that AdvancePCS has
filed with the Securities and Exchange Commission and incorporated into this
prospectus by reference.
ADVANCEPCS
NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
-------------------------------- ----------------------- ---------------------
1998 1999 2000 1999 2000(1) 1999 2000(1)
-------- -------- ---------- ---------- ---------- -------- ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Revenues(2)........................ $473,761 $757,259 $1,833,888 $1,312,881 $4,032,904 $519,858 $2,916,471
Gross profit....................... 29,806 40,959 75,502 55,017 135,074 19,941 91,842
Selling, general, and
administrative expenses.......... 18,955 21,006 38,793 28,593 75,568 10,362 55,072
Operating income(3)................ 10,851 19,953 36,709 26,424 58,826 9,579 36,090
Net income(3)...................... 8,088 14,144 20,876 15,111 19,264 5,484 6,978
BALANCE SHEET DATA (AS OF END OF
PERIOD):
Cash and cash equivalents.......... $ 63,018 $ 45,895 $ 55,243 $ 54,515 $ 141,350 $ 54,515 $ 141,350
Working capital.................... 27,657 201 12,108 8,339 (345,292) 8,339 (345,292)
Total assets....................... 178,639 304,016 406,738 398,357 3,142,595 398,357 3,142,595
Total debt......................... 1,285 50,000 50,000 50,000 810,000 50,000 810,000
Stockholders' equity............... 50,342 68,773 98,044 86,295 393,906 86,295 393,906
SUPPLEMENTAL DATA(4):
EBITDA(5).......................... $ 13,320 $ 23,789 $ 45,819 $ 32,952 $ 87,864 $ 12,204 $ 58,572
Capital expenditures............... 6,795 7,860 22,807 14,601 23,232 6,396 8,963
Ratio of EBITDA to interest
expense.......................... 198.8x --(6) 11.6x 11.5x 3.6x 12.5x 2.6x
Ratio of total debt to annualized
EBITDA........................... 3.5x(7)
Pharmacy network claims
processed........................ 38,319 50,588 81,225 60,022 155,611 22,301 108,155
Mail pharmacy prescriptions
filled........................... 839 1,289 1,674 1,225 3,189 446 2,249
Estimated members (as of end of
period end)...................... 12,500 15,000 27,500 (8) 75,000 (8) 75,000
Ratio of earnings to fixed
charges(9)....................... 20.6x 31.3x 7.7x 6.5x 2.3x 6.9x 1.6x
- ---------------
(1) Includes PCS data since the acquisition on October 2, 2000.
(2) Historical revenues for AdvancePCS have been reclassified to reflect
adoption of consistent revenue recognition policies with PCS.
(3) Excluding merger costs and non-recurring charges, operating income would
have been $36,770 and $59,506, respectively, net income would have been
$7,393 and $20,605, respectively, and diluted net income per share would
have been $0.17 and $0.62, respectively, for the three- and nine-month
periods ended December 31, 2000.
(4) This data has not been audited.
(5) EBITDA consists of operating income plus depreciation and amortization.
EBITDA does not represent funds available for our discretionary use and is
not intended to represent cash flow from operations as measured under
generally accepted accounting principles. EBITDA should not be considered as
an alternative to net income or net cash used in operating activities, but
may be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies. EBITDA excludes merger costs, asset impairment and
other non-recurring charges.
(6) The ratio is not measurable because there was no interest expense in fiscal
year 1999.
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(7) This is a ratio of total debt at December 31, 2000 to four times the EBITDA
for the three months ended December 31, 2000.
(8) Estimated members were not calculated for the three- and nine-month periods
ending December 31, 1999.
(9) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consists of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing interest
(estimated to be one-third of such expenses).
PCS HOLDING CORPORATION
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------ FEBRUARY 26,
1997 1998 2000
----------- ---------- ------------
(IN THOUSANDS, EXCEPT RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Revenues(1)............................................. $ 5,960,131 $7,117,702 $8,126,231
Gross profit............................................ 118,720 180,399 207,281
Selling, general, and administrative Expenses(2)........ 163,982 134,226 154,116
Operating income (loss)................................. (2,390,506)(3) 46,173 53,165
SUPPLEMENTAL DATA(4):
EBITDA(5)............................................... $ 37,432 $ 101,524 $ 125,382
Capital expenditures.................................... 15,490 28,224 28,581
Pharmacy network claims processed....................... 248,800 287,700 315,979
Mail pharmacy prescriptions filled...................... 2,500 4,700 6,768
- ---------------
(1) Historical revenues for PCS have been reclassified to reflect adoption of
consistent revenue recognition policies with AdvancePCS. Prior to giving
effect to this reclassification, PCS's historical revenues were $547,425,
$840,704 and $1,264,694 in the years ended December 31, 1997 and 1998 and
February 26, 2000.
(2) Includes goodwill amortization.
(3) Includes asset impairment charge of $2.3 billion recognized by Eli Lilly and
Company subsequent to its acquisition of PCS.
(4) This data has not been audited.
(5) EBITDA consists of operating income plus depreciation and amortization.
EBITDA does not represent funds available for our discretionary use and is
not intended to represent cash flow from operations as measured under
generally accepted accounting principles. EBITDA should not be considered as
an alternative to net income or net cash used in operating activities, but
may be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies. EBITDA excludes asset impairment and other
non-recurring charges.
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SUMMARY UNAUDITED PRO FORMA FINANCIAL AND OPERATING DATA
The following tables present summary unaudited pro forma consolidated
statement of operations and supplemental data of AdvancePCS for the periods and
dates indicated. The pro forma statement of operations and supplemental data
give effect to our acquisition of PCS as if it had been consummated at the
beginning of the periods presented. The summary unaudited pro forma financial
data set forth below is presented for illustrative purposes only and is not
necessarily indicative of what our actual results of operations would have been
had the acquisition been consummated at the beginning of such periods. The
summary unaudited pro forma financial data does not purport to be indicative of
our results of operations for any future period. Historical revenues and cost of
revenues for AdvancePCS and PCS have been reclassified to reflect adoption of
consistent revenue recognition policies. In connection with our recent
acquisitions and the issuance of recent accounting pronouncements, we are
evaluating certain aspects of Staff Accounting Bulletin 101 and EITF 99-19
"Reporting Gross Revenue as a Principal vs. Net as an Agent" as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Changes in Revenue Recognition."
You should read the information set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in the historical consolidated financial statements and related
notes of each of AdvancePCS and PCS and the unaudited pro forma condensed
consolidated financial information in this prospectus and in the annual reports
and other information, including five-year selected financial data, that
AdvancePCS has filed with the Securities and Exchange Commission and
incorporated into this prospectus by reference.
FISCAL YEAR NINE MONTHS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, DECEMBER 31,
MARCH 31, ----------------------- -----------------------
2000 1999 2000 1999 2000
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues(1)......................... $9,960,119 $7,439,269 $8,320,548 $2,633,168 $2,916,471
Gross profit........................ 282,783 210,663 245,372 68,193 91,842
Selling, general, and administrative
expenses.......................... 191,521 150,550 168,937 53,257 55,072
Non-recurring charges............... -- -- 680 -- 680
Operating income.................... 91,262 60,113 75,755 14,936 36,090
SUPPLEMENTAL DATA:
EBITDA(2)........................... $ 167,001 $ 116,748 $ 144,044 $ 35,507 $ 58,572
Ratio of EBITDA to interest
expense........................... 2.8x(3)
Ratio of total debt to annualized
EBITDA............................ 3.5x(4)
Pharmacy network claims processed... 397,204 295,748 322,586 103,627 108,155
Mail pharmacy prescriptions
filled............................ 8,442 6,318 6,830 2,165 2,249
- ---------------
(1) Historical revenues for AdvancePCS have been reclassified to reflect
adoption of consistent revenue recognition policies.
(2) EBITDA consists of operating income plus depreciation and amortization.
EBITDA does not represent funds available for our discretionary use and is
not intended to represent cash flow from operations as measured under
generally accepted accounting principles. EBITDA should not be considered as
an alternative to net income or net cash used in operating activities, but
may be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies. EBITDA excludes merger costs, asset impairment and
other non-recurring charges.
(3) The interest expense used to calculate this ratio also gives effect to the
offering of the notes and the use of proceeds therefrom as if it had been
consummated at the beginning of the period presented.
(4) This is a ratio of total debt at December 31, 2000 to four times the EBITDA
for the three months ended December 31, 2000 all on a pro forma basis.
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RISK FACTORS
You should carefully consider the following factors, as well as the other
information contained in this prospectus, before deciding to exchange your old
notes for exchange notes. An investment in the notes represents a high degree of
risk. There are a number of factors, including those specified below, which may
adversely affect our ability to make payments on the notes. You could therefore
lose a substantial portion or all of your investment in the notes. Consequently,
an investment in the notes should only be considered by persons who can assume
such risk. The risk factors described below are not necessarily exhaustive and
you are encouraged to perform your own investigation with respect to the notes
and our company. Before making your investment decision, you should also read
the other information included in this prospectus or incorporated herein by
reference, including our financial statements and the related notes.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT REALIZE THE BENEFITS OF INTEGRATING WITH PCS OR BE SUCCESSFUL IN
MANAGING OUR COMBINED COMPANY.
We acquired PCS on October 2, 2000, which dramatically increased the size
of our company. Unless our management is successful in integrating and managing
the employees and assets acquired in the transaction in a cost-efficient manner
we will not be able to realize the operating efficiencies and other benefits
sought from the transaction. If we fail to successfully integrate our operations
with those of PCS and successfully manage the combined company, our business,
profitability and growth prospects will suffer.
WE HAVE SUBSTANTIAL DEBT OBLIGATIONS THAT COULD RESTRICT OUR OPERATIONS.
We have substantial indebtedness. To finance our acquisition of PCS, we
entered into an $825 million senior secured credit facility and issued $200
million of senior subordinated notes to the seller, Rite Aid. We repaid the
senior subordinated notes with the proceeds from our offering of the old notes
and other available funds. As of December 31, 2000, our outstanding debt was
approximately $810 million and our ratio of debt to total stockholders' equity
was approximately 2.1 to 1. We and our subsidiaries may also be able to incur
substantial additional indebtedness in the future.
Our substantial indebtedness could have adverse consequences, including:
- increasing our vulnerability to adverse economic and industry conditions;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
- limiting our ability to borrow additional funds.
In addition, approximately $610 million of our outstanding debt bears
interest at a variable rate. While we have entered into interest rate protection
agreements with respect to $400 million of this debt, we remain exposed to
interest rate risk with respect to the remaining $210 million of this debt.
Economic conditions could result in higher interest rates, which could increase
debt service requirements on variable rate debt.
Our debt service requirements will require the use of a substantial portion
of our operating cash flow to pay interest on our debt instead of other
corporate purposes. If our cash flow and capital resources are insufficient to
fund our debt obligations, we may be forced to sell assets, seek additional
equity or debt capital or restructure our debt. We cannot assure you that our
cash flow and capital resources will be sufficient for payment of interest on
and principal of our debt in the future, or that any such alternative measures
would be successful or would permit us to meet scheduled debt service
obligations. Any failure to meet our debt obligations could harm our business,
profitability and growth prospects.
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ANY FAILURE TO MEET OUR DEBT OBLIGATIONS COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
If our cash flow and capital resources are insufficient to fund our debt
obligations, we may be forced to sell assets, seek additional equity or debt
capital or restructure our debt. In addition, any failure to make scheduled
payments of interest and principal on our outstanding indebtedness would likely
result in a reduction of our credit rating, which could harm our ability to
incur additional indebtedness on acceptable terms. We cannot assure you that our
cash flow and capital resources will be sufficient for payment of interest on
and principal of our debt in the future, including payments on the notes, or
that any such alternative measures would be successful or would permit us to
meet scheduled debt service obligations.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Federal and state statutes allow courts, under specific circumstances, to
void guarantees and require noteholders to return payments received from
guarantors. Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, for
example, the guarantor, at the time it incurred the indebtedness evidenced by
its guarantee:
- received less than reasonably equivalent value or fair compensation for
the guarantee;
- was insolvent or rendered insolvent by making the guarantee;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay them as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could be
voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. The factors for any proceeding will include
whether:
- the sum of the party's debts, including contingent liabilities, was
greater than the fair saleable value of all of its assets;
- the present fair saleable value of the party's assets was less than the
amount that would be required to pay its liability on existing debts,
including contingent liabilities, as they become absolute and mature; or
- the party could not pay its debts as they become due.
A FINANCIAL FAILURE BY US OR ANY SUBSIDIARY GUARANTOR MAY HINDER THE RECEIPT OF
PAYMENT ON THE NOTES, AS WELL AS THE ENFORCEMENT OF REMEDIES UNDER THE
SUBSIDIARY GUARANTEES.
An investment in the notes, as in any type of security, involves insolvency
and bankruptcy considerations that investors should carefully consider. If we or
any of our subsidiary guarantors become a debtor subject to insolvency
proceedings under the bankruptcy code, it is likely to result in delays in the
payment of the notes and may delay enforcement remedies under the notes or the
subsidiary guarantees securing the notes. Provisions under the bankruptcy code
or general principles of equity that could result in the impairment of your
rights include the automatic stay, avoidance of preferential transfers by a
trustee or a debtor-in-possession, substantive consolidation, limitations of
collectability of unmatured interest or attorneys' fees and forced restructuring
of the notes.
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A FINANCIAL FAILURE BY US MAY RESULT IN YOUR HAVING TO RETURN A PAYMENT RECEIVED
ON THE NOTES.
Under the bankruptcy code, a trustee or debtor-in-possession may generally
recover payments or transfers of property of a debtor if such payment or
transfer was:
- to or for the benefit of a creditor;
- in payment of a prior debt owed before the transfer was made;
- made while the debtor was insolvent;
- made within 90 days, or one year if the payment was to an "insider" of
the debtor, before the filing of the bankruptcy case; and
- enabled the creditor to receive more than it would have received in a
liquidation under Chapter 7 of the bankruptcy code if the transfer had
not been made and the creditor had received payment of the debt as
provided in the bankruptcy code.
By way of example, if payments were made on the notes prior to the filing of a
bankruptcy case and a court subsequently determined that the value of the
collateral pledged by the entity making the payment was less than the debt owed,
such payments could be subject to avoidance as a preferential transfer.
A FINANCIAL FAILURE BY US MAY RESULT IN THE ASSETS OF ANY OR ALL SUBSIDIARIES
BECOMING SUBJECT TO THE CLAIMS OF OUR CREDITORS.
A financial failure by us could affect payment of the notes if a bankruptcy
court were to "substantively consolidate" us and our subsidiaries. If a
bankruptcy court substantively consolidated us and our subsidiaries, the assets
of each entity would be subject to the claims of creditors of all entities. This
would expose you not only to the usual impairments arising from bankruptcy, but
also to potential dilution of the amount ultimately recoverable because of the
larger creditor base. Furthermore, forced restructuring of the notes could occur
through the "cram-down" provision of the bankruptcy code. Under this provision,
the notes could be restructured over your objections as to their general terms,
primarily interest rate and maturity.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not fully prohibit us
or our subsidiaries from doing so. Our credit facility permits additional
borrowing of at least $215 million and all of those borrowings would effectively
be senior to the notes and the subsidiary guarantees. If new debt is added to
our and our subsidiaries' current debt levels, the related risks that we and
they now face could intensify.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes. However, it is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of notes or that restrictions in our
credit facility will not allow such repurchases.
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RESTRICTIVE FINANCING COVENANTS LIMIT THE DISCRETION OF OUR MANAGEMENT.
Our credit facility and certain agreements governing our debt contain a
number of covenants that limit the discretion of our management with respect to
certain business matters. Our credit facility covenants, among other things,
restrict our ability to:
- incur additional indebtedness;
- issue preferred stock;
- declare or pay dividends and other distributions;
- create liens;
- make capital expenditures;
- make certain investments or acquisitions;
- enter into mergers or consolidations;
- make sales of assets; and
- engage in certain transactions with affiliates.
The old note indenture contains, and the exchange note indenture will contain,
similar restrictive covenants. In addition, under our credit facility, we are
required to satisfy a minimum fixed charge coverage ratio, a maximum total
leverage ratio and a minimum interest coverage ratio. A breach of any agreements
governing our debt would permit the acceleration of the related debt, which
could harm our business, profitability and growth prospects. These restrictions
may place us at a disadvantage compared to our competitors that have fewer
restrictive covenants and are not required to operate under such restrictions.
COMPETITION IN OUR INDUSTRY IS INTENSE AND COULD REDUCE OR ELIMINATE OUR
PROFITABILITY.
The PBM industry is very competitive. If we do not compete effectively, our
business, profitability and growth prospects could suffer. Our competitors
include profitable and well-established companies that have significant
financial, marketing and other resources. Some of our competitors in the PBM
business are owned by profitable and well-established pharmaceutical
manufacturers or national retail pharmacy chains, which may give them purchasing
power and other advantages over us by virtue of their ownership structure, and
enable them to succeed in taking away some of our customers.
Over the last several years, competitive pressures have caused our margins
to decrease. Our gross margins may continue to decline as we attract larger
customers who typically have greater bargaining power than smaller customers and
may require us to sell our services at decreased prices. We cannot be sure that
we will continue to remain competitive, nor can we be sure that we will be able
to successfully market our PBM services to customers at our current levels of
profitability.
IF WE LOSE KEY HEALTH PLAN SPONSORS, OUR BUSINESS, PROFITABILITY AND GROWTH
PROSPECTS COULD SUFFER.
We depend on a limited number of large health plan sponsors for a
significant portion of our consolidated revenues. Five customers generated
approximately 68% of the claims we processed in fiscal year 2000 and
approximately 14% on a pro forma basis giving effect to our acquisition of PCS.
During this period, Foundation Health Systems, Inc., now known as Healthnet,
generated approximately 31% of the claims we processed and approximately 6% on a
pro forma basis. Our business, profitability and growth prospects could suffer
if we were to lose one or more of our significant health plan sponsors.
Our contracts with health plan sponsors typically provide for multi-year
terms, with automatic 12-month renewals unless either party terminates the
contract by giving written notice before the automatic renewal date. Most of
these contracts are also terminable by either party without cause with 30 to 180
days notice. Many of our health plan sponsors put their contracts out for
competitive bidding prior
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to expiration. We could lose health plan sponsors if they cancel their
agreements with us, if we fail to win a competitive bid at the time of contract
renewal, if the financial condition of any of our health plan sponsors
deteriorates or if our health plan sponsors are acquired by, or acquire,
companies with which we do not have contracts. Over the past several years,
insurance companies, health maintenance organizations, or HMOs, and managed care
companies have experienced significant consolidation. Our health plan sponsors
have been, and may continue to be, subject to consolidation pressures.
IF WE LOSE RELATIONSHIPS WITH ONE OR MORE KEY PHARMACEUTICAL MANUFACTURERS OR IF
THE PAYMENTS WE RECEIVE FROM PHARMACEUTICAL MANUFACTURERS DECLINE, OUR BUSINESS,
PROFITABILITY AND GROWTH PROSPECTS COULD SUFFER.
We have contractual relationships with numerous pharmaceutical
manufacturers that pay us rebate payments based on use of selected drugs by
health plan members, as well as fees for other programs and services. We believe
our business, profitability and growth prospects could suffer if:
- we lose relationships with one or more key pharmaceutical manufacturers;
- rebates decline due to our failure to meet market share or other
thresholds;
- legal restrictions are imposed on the ability of pharmaceutical
manufacturers to offer formulary rebates or purchase our programs or
services; or
- pharmaceutical manufacturers choose not to offer formulary rebates or
purchase our programs or services.
Over the next few years, as patents expire covering many brand name drugs that
currently have substantial market share, generic products will be introduced
that may substantially reduce the market share of the brand name drugs.
Historically, manufacturers of generic drugs have not offered formulary rebates
on their drugs. If the use of newly-approved, brand name drugs added to our
formulary, which is the list of preferred prescription drugs covered by a health
plan, does not offset any decline in use of brand name drugs whose patents
expire, our profitability could be reduced.
IF WE ARE UNABLE TO SUCCESSFULLY CONSOLIDATE OUR MAIL SERVICE PHARMACIES, OUR
MAIL PHARMACY OPERATIONS COULD BE DISRUPTED, WHICH WOULD CAUSE OUR BUSINESS,
PROFITABILITY AND GROWTH PROSPECTS TO SUFFER.
We are in the process of consolidating our Richardson, Texas mail pharmacy
operations into our larger facilities in Fort Worth, Texas and Birmingham,
Alabama. Our failure to successfully consolidate these facilities could disrupt
our mail pharmacy operations and adversely affect our ability to meet the needs
of our customers. If we experience any type of disruption in our mail pharmacy
operations or if we are unable to handle the volume of mail order prescriptions,
our business, profitability and growth prospects would suffer.
IF WE LOSE PHARMACY NETWORK AFFILIATIONS, OUR BUSINESS, PROFITABILITY AND GROWTH
PROSPECTS COULD SUFFER.
Our contracts with retail pharmacies, which are non-exclusive, are
generally terminable by either party on short notice. If one or more of the top
pharmacy chains elects to terminate its relationship with us or if we are only
able to continue our relationship on terms less favorable to us, our members'
access to retail pharmacies and our business could suffer. In addition, some
large retail pharmacy chains either own or have strategic alliances with PBMs or
could attempt to acquire or enter into these kinds of relationships with PBMs in
the future. Ownership of, or alliances with, PBMs by retail pharmacy chains
could have material adverse effects on our relationships with these retail
pharmacy chains and on our business, profitability and growth prospects.
FAILURE TO CONTINUE TO DEVELOP OR ACQUIRE NEW PRODUCTS, SERVICES AND
TECHNOLOGIES COULD ADVERSELY AFFECT OUR BUSINESS, PROFITABILITY AND GROWTH
PROSPECTS.
We and our competitors continually develop new products and services to
assist our customers in managing their pharmacy benefit. If we are unsuccessful
in continuing to develop innovative products and
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services, our ability to attract new customers and retain existing customers may
suffer. If our product development strategies are not successful, our business,
profitability and growth prospects could suffer. Historically, we have
experienced expense increases when developing new products. We anticipate that
we will need to expend significant resources to develop or acquire new products
and services in the future, which may adversely impact our profitability.
IF WE ARE UNABLE TO MANAGE POTENTIAL PROBLEMS AND RISKS RELATED TO FUTURE
ACQUISITIONS AND ALLIANCES, OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS
COULD SUFFER.
Part of our growth strategy includes acquisitions and alliances involving
complementary products, services, technologies and businesses. If we are unable
to overcome the potential problems and inherent risks related to acquisitions
and alliances, our business, profitability and growth prospects could suffer.
Our ability to continue to expand successfully through acquisitions and
alliances depends on many factors, including our ability to identify acquisition
or alliance prospects and negotiate and close transactions. Even if we complete
future acquisitions or alliances:
- we could fail to successfully integrate the operations, services and
products of any acquired company;
- we could fail to select the best alliance partners or fail to effectively
plan and manage any alliance strategy;
- our management's attention could be diverted from other business
concerns; and
- we could lose key employees of the acquired company.
Many companies compete for acquisition and alliance opportunities in the PBM
industry. Some of our competitors are companies that have significantly greater
financial and management resources than we do. This may reduce the likelihood
that we will be successful in completing acquisitions and alliances necessary to
the future success of our business.
IF OUR BUSINESS CONTINUES TO GROW RAPIDLY AND WE ARE UNABLE TO MANAGE THIS
GROWTH, OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS COULD SUFFER.
Our business has grown rapidly in the last five years due to our
acquisitions, with total revenues increasing from approximately $64.4 million in
fiscal year 1995 to $1.8 billion in fiscal year 2000. In the fiscal quarter
ended December 31, 2000, which includes the results of operations of PCS, we
generated $2.9 billion in total revenues. If we continue to grow rapidly, we
will need to hire additional senior and line management, increase our investment
in employee recruitment, training and retention, and expand our information
processing and financing control systems. Our future operating results will
depend in part on the ability of our officers and other key employees to
continue to recruit, train, retain and effectively manage our employees as well
as to improve our operations, customer support and financial control systems.
Our future growth will also depend on our ability to access capital. If we are
unable to finance continued growth, manage future expansion successfully or hire
and retain the personnel needed to manage our business successfully, then our
business, profitability and growth prospects could suffer.
IF WE LOSE KEY EMPLOYEES ON WHOM WE DEPEND, IN PARTICULAR OUR CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, DAVID D. HALBERT, OUR BUSINESS COULD SUFFER.
We believe that our continued success will depend to a significant extent
upon retaining the services of our senior management. Our business could be
materially and adversely affected if we lose the services of Mr. David D.
Halbert, our chairman of the board and chief executive officer, or other persons
in senior management. Any of our senior management could seek other employment
at any time. We do not currently have "key-person" life insurance policies on
any of our employees. If we cannot recruit, train, retain and effectively manage
key employees, our business, profitability and growth prospects could suffer.
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IF WE BECOME SUBJECT TO LIABILITY CLAIMS THAT ARE NOT COVERED BY OUR INSURANCE
POLICIES, WE MAY BE LIABLE FOR DAMAGES AND OTHER EXPENSES THAT COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS.
A successful product or professional liability claim in excess of our
insurance coverage could have a material adverse effect on our business,
profitability and growth prospects. While we intend to maintain professional and
general liability insurance coverage at all times, we cannot assure you that we
will be able to maintain insurance in the future, that insurance will be
available on acceptable terms or that insurance will be adequate to cover any or
all potential product or professional liability claims.
Various aspects of our business may subject us to litigation and liability
for damages, including:
- the dispensing of pharmaceutical products;
- the performance of clinical trials, PBM services and health improvement
services; and
- the operation of our call centers and web sites.
For example, our clinical research services involve the risk of liability for
personal injury or death from unforeseen adverse side effects or improper
administration of a new drug. We could be materially and adversely affected if
we were required to pay damages, incur defense costs or face negative publicity
in connection with a claim that is outside the scope of our contractual
indemnity or insurance coverage.
NEW INVESTORS OWN A SIGNIFICANT AMOUNT OF OUR STOCK, GIVING THEM INFLUENCE OVER
CORPORATE TRANSACTIONS AND OTHER MATTERS.
As a result of our acquisition of PCS, Joseph Littlejohn & Levy Fund III,
L.P. and certain other investors, collectively referred to as JLL, and Rite Aid
received Series A preferred stock. The Series A preferred stock is convertible
into Class B common stock, which is convertible into our Class A common stock on
a one-for-one basis. Rite Aid sold substantially all of its shares of Class A
common stock pursuant to our secondary public offering that was completed in
March 2001. Assuming the conversion of all of the remaining outstanding
preferred stock and Class B common stock into Class A common stock, JLL would
beneficially own approximately 19.0% of our Class A common stock. Accordingly,
JLL may be able to substantially influence the outcome of stockholder votes and
otherwise have influence over our business. In addition, JLL and Rite Aid under
our second amended and restated certificate of incorporation have the right to
designate four of our 11 directors, and we cannot take certain actions without
their consent. The interests of these investors may differ from interests of the
holders of the notes. For example, if we encounter financial difficulties or are
unable to pay our debts as they mature, the interests of JLL and Rite Aid might
conflict with those of the holders of the notes. In addition, JLL may have an
interest in pursuing acquisitions, divestitures, financings or other
transactions that, in its judgment, could enhance its equity investment in us,
even though such transactions might involve risks to the holders of the notes.
RISKS RELATED TO OUR INDUSTRY
PRIOR TO OUR ACQUISITION OF PCS, PCS RECEIVED A SUBPOENA FROM THE DEPARTMENT OF
HEALTH AND HUMAN SERVICES OFFICE OF INSPECTOR GENERAL IN CONNECTION WITH AN
INDUSTRY-WIDE INVESTIGATION, AND ALTHOUGH THERE HAS BEEN NO ALLEGATION OF
WRONGDOING ON OUR PART, WE COULD BE SUBJECT TO SCRUTINY, INVESTIGATION OR
CHALLENGE UNDER FEDERAL OR STATE ANTI-KICKBACK OR OTHER LAWS, WHICH COULD CAUSE
OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS TO SUFFER.
Federal anti-kickback laws generally prohibit the receipt or solicitation
of payment in return for purchasing or ordering, or arranging for or
recommending the purchasing or ordering of, items and services reimbursable by
federal health care programs. Some states have similar laws that apply across
all payors. To date, these laws have not been applied to prohibit the types of
business arrangements we have with pharmaceutical manufacturers, health plan
sponsors or retail pharmacies. However, courts and enforcement authorities that
administer the anti-kickback laws have historically interpreted these laws
broadly.
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In November 1999, PCS received a subpoena by the Department of Health and
Human Services Office of Inspector General, or OIG, requesting PCS to produce
certain documents about its programs and how they operate in connection with an
industry-wide investigation. The investigation was instigated and is being
pursued by the United States Attorney's Office for the Eastern District of
Pennsylvania, which indicated an intention to review PBMs' programs in light of
anti-kickback and other laws and regulations. Specifically, the focus of this
investigation appears to be PBMs' relationships with pharmaceutical
manufacturers and retail pharmacies and PBMs' programs relating to drug
formulary compliance, including rebate and other payments made by pharmaceutical
manufacturers to PBMs and payments made by PBMs to retail pharmacies or others.
The United States Attorney's Office has also contacted some of the
pharmaceutical manufacturers with which we have agreements, and has asked these
manufacturers to provide copies of documents relating to their agreements with
us. There has been no allegation of any wrongdoing on our part. At this time, we
are unable to predict whether the government will commence any action
challenging any of our programs and practices. We believe that our programs, and
those of PCS prior to the acquisition, are in compliance with the requirements
imposed by anti-kickback laws and other applicable laws and regulations.
Nevertheless, we could be subject to scrutiny, investigation or challenge under
these laws and regulations as a result of the OIG investigation or otherwise,
which could have a material adverse effect on our business, profitability and
growth prospects.
IF LEGISLATIVE OR REGULATORY INITIATIVES RESTRICT OUR ABILITY TO USE PATIENT
IDENTIFIABLE MEDICAL INFORMATION, OUR CLINICAL PROGRAMS AND OUR BUSINESS GROWTH
STRATEGY BASED ON THESE SERVICES COULD SUFFER.
Through our health improvement programs, we help our health plan sponsor
customers identify individuals who will most benefit from the programs.
Governmental restrictions on the use of patient identifiable information may
adversely affect our ability to conduct health improvement programs and medical
outcome studies and could adversely affect our growth strategy based on these
programs. Federal and state legislation has been proposed, and some state laws
have been enacted, to restrict the use and disclosure of patient identifiable
medical information. Legislation could be enacted in the future that severely
restricts or prohibits our use of patient identifiable information, which could
harm our business, profitability and growth prospects.
In December 2000, the Department of Health and Human Services, or HHS,
issued final regulations regarding the privacy of individually-identifiable
health information pursuant to the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. This final rule on privacy applies to both
electronic and paper records and imposes extensive requirements on the way in
which health care providers, health plan sponsors and their business associates
use and disclose protected information. The final rule gives patients
significant rights to understand and control how their protected health
information is used and disclosed. Direct providers, such as pharmacies, are
required to obtain patient consents for treatment, payment and health care
operations. For all uses or disclosures of protected information that do not
involve treatment, payment or health care operations, the rule requires that all
covered entities obtain a valid patient authorization. In most cases, use or
disclosure of protected health information must be limited to the minimum amount
necessary to achieve the purpose of the use or disclosure. Organizations subject
to the rule will have approximately two years to comply with its provisions. In
addition, HHS has proposed, but not yet finalized, regulations pursuant to HIPAA
that govern the security of individually-identifiable health information.
Sanctions for failing to comply with standards issued pursuant to HIPAA include
criminal penalties and civil sanctions. Due to the complex and controversial
nature of the privacy regulations, they may be subject to court challenge, as
well as further legislative and regulatory actions that could alter their
effect. We cannot at this time predict with specificity what impact the recently
adopted final rule on the privacy of individually-identifiable health
information, or the proposed rule on security of individually-identifiable
health information may have on us. However, they will likely increase our burden
of regulatory compliance with respect to our health improvement programs and
other information-based products, and may reduce the amount of information we
may use if patients do not consent to such use. There can be no assurance that
the restrictions and duties imposed by the recently adopted final rule on the
privacy of individually-identifiable health information, or the proposed rule on
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security of individually-identifiable health information, will not have a
material adverse effect on our business, profitability and growth prospects.
Even without new legislation and beyond the final federal regulations,
individual health plan sponsor customers could prohibit us from including their
patients' medical information in our various databases of medical data. They
could also prohibit us from offering services that involve the compilation of
such information.
IF WE ARE EVER DEEMED TO BE A FIDUCIARY OF A HEALTH BENEFIT PLAN GOVERNED BY
ERISA, WE COULD BE SUBJECT TO CLAIMS FOR BENEFIT DENIALS.
We have agreements to provide PBM services to a number of self-funded
corporate health plans. These plans are subject to the Employee Retirement
Income Security Act of 1974, or ERISA, which regulates employee pension and
health benefit plans. We believe that our activities are sufficiently limited
that we do not assume any of the plan fiduciary responsibilities that would
subject us to regulation under ERISA. Our agreements with our self-funded
corporate plan customers state that we are not the fiduciary of the plan.
However, the U.S. Department of Labor, which is the agency that enforces ERISA,
could assert that the fiduciary obligations imposed by the statute apply to
certain aspects of our operations. If we were deemed to be a fiduciary, we could
potentially be subject to claims relating to benefit denials. In addition, we
could also be subject to claims for breaching fiduciary duties in connection
with the services we provide to the plan.
In March 1998, Mulder v. PCS Health Systems, Inc. was filed as an alleged
class action lawsuit in the United States District Court for the District of New
Jersey. The plaintiff alleges that we are an ERISA fiduciary and that we have
breached our fiduciary obligations under ERISA in connection with our
development and implementation of formularies, preferred drug listings and
intervention programs. The class of plaintiffs has not yet been certified, and
we intend to oppose such certification. We have denied all allegations of
wrongdoing and are vigorously defending this lawsuit. Although the ultimate
outcome is uncertain, an adverse determination could materially harm our
business, profitability and growth prospects.
ERISA also prohibits a "party in interest" to a plan from engaging in
certain types of transactions with the plan, including purchases, sales and
loans. Violations are subject to civil and criminal liability. By providing
services to these plans, we are subject to the restrictions on a party in
interest. We believe that we are in compliance with these provisions of ERISA.
However, there is no guarantee that the government would not challenge our
practices.
IF THERE ARE CHANGES IN FEDERAL OR STATE FINANCING AND REGULATION OF THE HEALTH
CARE INDUSTRY, OUR CUSTOMERS MAY DELAY OR REDUCE THE PURCHASE OF OUR SERVICES.
During the past several years, the United States health care industry has
been subject to an increase in governmental regulation, on both the federal and
state level. We cannot predict what effect, if any, these proposals might have
on our business, profitability and growth prospects. Congress is expected to
consider proposals to change Medicare drug coverage and reimbursement policies,
and many states are considering proposals to provide or expand drug assistance
programs. Both Congress and the states are expected to consider legislation to
increase governmental regulation of managed care plans. Some of these
initiatives would, among other things, require that health plan members have
greater access to drugs not included on a plan's formulary and give health plan
members the right to sue their health plans for malpractice when they have been
denied care. The scope of the managed care reform proposals under consideration
by Congress and state legislatures and enacted by states to date vary greatly,
and the extent to which future legislation may be enacted is uncertain. However,
these initiatives could greatly impact the managed care and pharmaceutical
industries and, therefore, could have a material adverse impact on our business,
profitability and growth prospects.
In addition, several legislative proposals are under consideration in
Congress to provide Medicare recipients with outpatient drug benefits through
the use of PBMs. While we believe that a Medicare
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prescription drug benefit could provide us with new business opportunities, the
structure of such a program could have a material adverse impact on our
business, profitability and growth prospects.
Several states, including California, New Jersey and New York, have
introduced legislation that would directly regulate PBMs, but to our knowledge,
no state has passed such legislation. Several regulatory and quasi-regulatory
bodies, such as the National Association of Insurance Commissioners, the
National Association of Boards of Pharmacy and the National Committee on Quality
Assurance, are also considering proposals to regulate PBMs and proposals to
increase the regulation of certain PBM activities, such as formulary and
utilization management, and downstream risk assumption. While the outcome of
these initiatives is uncertain, any resulting legislation could materially harm
our business, both directly as a PBM, and indirectly through the impact on the
pharmacy benefit services we are able to deliver on behalf of our health plan
sponsors.
There is great attention being paid to the pricing of prescription drug
products and how they are reimbursed by government programs. Changes have been
put forward that would alter the calculation of drug prices for Federal programs
and likely reduce expenditures. These proposals may increase governmental
involvement in health care and health benefit management services and otherwise
change the way our customers do business. Health care organizations may react to
these proposals and the uncertainty surrounding them by cutting back or delaying
the purchase of our health benefit management services, and manufacturers may
react by reducing rebates or reducing supplies of certain products, which would
materially harm our business, profitability and growth prospects.
IF GOVERNMENT LAWS OR REGULATIONS RELATING TO THE FINANCIAL RELATIONSHIPS
BETWEEN PBMS AND PHARMACEUTICAL MANUFACTURERS ARE INTERPRETED AND ENFORCED IN A
MANNER ADVERSE TO OUR PBM AND HEALTH IMPROVEMENT PROGRAMS, WE MAY BE SUBJECT TO
ENFORCEMENT ACTIONS AND OUR BUSINESS OPERATIONS COULD BE MATERIALLY LIMITED.
In January 1998, the United States Food and Drug Administration, or FDA,
issued a Draft Guidance for Industry regarding the regulation of activities of
PBMs that are directly or indirectly controlled by pharmaceutical manufacturers.
To date, the FDA has not taken any further action. Although it appears that the
FDA has changed its position regarding regulation of communications by PBMs,
there is no assurance that it will not re-examine the issue and seek to assert
the authority to regulate the communications of such PBMs.
Since 1993, retail pharmacies have filed numerous separate lawsuits against
pharmaceutical manufacturers, wholesalers and other PBMs. These lawsuits
challenge brand name drug pricing practices under various state and federal
anti-trust laws. These suits also allege in part that the pharmaceutical
manufacturers offered, and some PBMs accepted, rebates and discounts on brand
name prescription drugs that violate the federal Robinson-Patman Act and the
federal Sherman Antitrust Act. Some pharmaceutical manufacturers have settled
certain of these actions. We are not a party to any of these proceedings.
However, at this time we cannot assess whether we will be made a party to this
type of lawsuit. Court decisions or terms of any settlements relating to these
lawsuits could materially and adversely affect us in the future.
IF GOVERNMENT LAWS OR REGULATIONS ARE ENACTED, INTERPRETED OR ENFORCED IN A
MANNER ADVERSE TO OUR CLINICAL RESEARCH PROGRAMS, WE MAY BE SUBJECT TO
ADMINISTRATIVE ENFORCEMENT ACTIONS, AS WELL AS CIVIL AND CRIMINAL LIABILITY.
We assist pharmaceutical manufacturers in conducting clinical trials for
new drugs, or new uses for existing drugs. The conduct of clinical trials is
regulated by the FDA under the authority of the Federal Food, Drug and Cosmetic
Act and the related regulations. If government laws or regulations are
interpreted and enforced in a manner adverse to our clinical research programs,
we may be subject to administrative enforcement actions, as well as civil and
criminal liability. In general, the sponsor of the drug product that is being
studied, or the manufacturer that will have the right to market the drug product
if it is approved by the FDA, has the responsibility to comply with the laws and
regulations that apply to
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the conduct of the clinical trials. However, in providing services related to
the conduct of clinical trials, we may assume some or all of the sponsor's or
clinical investigator's obligations related to the study of the drug. In October
1998, the FDA announced that the agency would give Institutional Review Boards,
which are independent bodies that oversee the conduct of clinical
investigations, increased access to information pointing to violative or
potentially violative conduct on the part of clinical investigators, for example
the physicians who conduct the clinical trials.
Because the interpretation and enforcement of these laws and regulations
relating to the conduct of clinical trials is uncertain, the FDA may consider
our compliance efforts to be inadequate and initiate administrative enforcement
actions against us. If we fail to successfully defend against an administrative
enforcement action, it could result in an administrative order suspending,
restricting or eliminating our ability to participate in the clinical trial
process, which would materially limit our business operations. Moreover, some
violations of the Federal Food, Drug and Cosmetic Act are punishable by civil
and criminal penalties against both the violating company and responsible
individuals. If warranted by the facts, we and our employees involved in the
trials could face civil and criminal penalties, which include fines and
imprisonment.
As a consequence of the severe penalties we and our employees potentially
could face, we must devote significant operational and managerial resources to
comply with these laws and regulations. Although we believe that we
substantially comply with all existing statutes and regulations material to the
operation of our business, regulatory authorities may disagree and initiate
enforcement or other actions against us. In addition, we cannot predict the
impact of future legislation and regulatory changes on our business or assure
you that we will be able to obtain or maintain the regulatory approvals required
to operate our business.
RISKS RELATED TO THE EXCHANGE OFFER
THERE IS NO ESTABLISHED TRADING MARKET FOR THE EXCHANGE NOTES, THE VALUE OF THE
EXCHANGE NOTES MAY FLUCTUATE SIGNIFICANTLY AND ANY MARKET FOR THE EXCHANGE NOTES
MAY BE ILLIQUID.
The exchange notes are a new issue of securities with no established
trading market. We cannot assure you that a liquid market will develop for the
exchange notes, that you will be able to sell your exchange notes at a
particular time or that the prices you will receive when you sell will be
favorable. Moreover, we do not intend to apply for the exchange notes to be
listed on any securities exchange or to arrange for quotation on any automated
dealer quotation system. The trading prices of the exchange notes could be
subject to significant fluctuations in response to government regulations,
variations in quarterly operating results, demand for our products and services,
our success in expanding our products and services, general economic conditions
and various other factors. In addition, the liquidity of the trading market in
these exchange notes and the market price quoted for the exchange notes may be
adversely affected by changes in the overall market for high yield securities
and by changes in our financial performance or prospects or in the prospects for
companies in our industry generally. As a result, you cannot be sure that an
active trading market will develop for the exchange notes. If no active trading
market develops, you may not be able to resell your exchange notes at their fair
market value or at all. This offer to exchange the exchange notes for the old
notes does not depend on any minimum amount of old notes being tendered for
exchange.
IF YOU DO NOT EXCHANGE YOUR OLD NOTES, THEY MAY BE DIFFICULT TO RESELL.
It may be difficult for you to sell old notes that are not exchanged in the
exchange offer, since any old notes not exchanged will remain subject to the
restrictions on transfer provided for in Rule 144 under the Securities Act.
These restrictions on transfer of your old notes exist because we issued the old
notes pursuant to an exemption from the registration requirements of the
Securities Act and applicable state
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securities laws. Generally, the old notes that are not exchanged for exchange
notes pursuant to the exchange offer will remain restricted securities.
Accordingly, such old notes may be resold only
- to us (upon redemption of the exchange notes or otherwise),
- pursuant to an effective registration statement under the Securities Act,
- so long as the old notes are eligible for resale pursuant to Rule 144A
under the Securities Act to a qualified institutional buyer within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A,
- outside the United States to a foreign person pursuant to the exemption
from the registration requirements of the Securities Act provided by
Regulation S under the Securities Act,
- pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available), or
- pursuant to another available exemption from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States. Other than
in this exchange offer, we do not intend to register the old notes under
the Securities Act.
To the extent any old notes are tendered and accepted in the exchange
offer, the trading market, if any, for the old notes that remain outstanding
after the exchange offer would be adversely affected due to a reduction in
market liquidity.
Each of the risks described in this section with respect to the exchange
notes are equally applicable to the old notes.
THE EXCHANGE OFFER
This section of the prospectus describes the proposed exchange offer. While
we believe that the description covers the material terms of the exchange offer,
this summary may not contain all of the information that is important to you.
You should carefully read this entire document and the other documents we refer
to for a more complete understanding of the exchange offer.
GENERAL
In connection with the issuance of the old notes we entered into a
registration rights agreement, which provides for the exchange offer. A copy of
the registration rights agreement is filed as an exhibit to the registration
statement of which this prospectus is a part.
Under the registration rights agreement, we agreed to use our reasonable
best efforts to:
- file and cause to become effective within 150 days after the initial
issuance of the old notes, a registration statement with respect to an
offer to exchange the old notes for the exchange notes; or
- in certain circumstances, file and cause to become effective a shelf
registration statement with respect to the resale of the old notes.
The exchange offer being made hereby, if completed within 30 days of the
effective date of the registration statement, will satisfy those requirements
under the registration rights agreements. If the exchange offer is not completed
within 30 days of the effective date of the registration statement and a shelf
registration statement has not been declared effective, then the interest rates
on the old notes will increase by 0.5% per annum during the 90-day period
immediately following the expiration of the 30-day period and will increase by
0.25% per annum at the end of each subsequent 90-day period until the exchange
offer is completed or a shelf registration statement is declared effective. In
no event shall the additional interest exceed 2.00% per annum.
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BACKGROUND OF THE EXCHANGE OFFER
An aggregate of $200,000,000 principal amount of 8 1/2% senior notes due
2008 are currently issued and outstanding. The maximum principal amount of
exchange notes that will be issued in exchange for old notes is $200,000,000.
The terms of the exchange notes and the old notes are substantially the same in
all material respects, except that the exchange notes will be registered under
the Securities Act and not have any transfer restrictions, registration rights
or rights to additional interest.
The exchange notes will bear interest at a rate of 8 1/2% per year, payable
semiannually on April 1 and October 1 of each year, beginning on October 1,
2001. Holders of exchange notes will receive interest from the date of the
original issuance of the old notes or from the date of the last payment of
interest on the old notes, whichever is later. Holders of exchange notes will
not receive any interest on old notes tendered and accepted for exchange. In
order to exchange your old notes for transferable exchange notes in the exchange
offer, you will be required to make the following representations:
- the exchange notes will be acquired in the ordinary course of your
business;
- you have no arrangements with any person to participate in the
distribution of the exchange notes; and
- you are not an "affiliate" as defined in Rule 405 of the Securities Act,
or if you are an affiliate of ours, you will comply with the applicable
registration and prospectus delivery requirements of the Securities Act.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered in the exchange offer, and the exchange agent will deliver the
exchange notes promptly after the expiration date of the exchange offer. We
expressly reserve the right to delay acceptance of any of the tendered old notes
or terminate the exchange offer and not accept for exchange any tendered old
notes not already accepted if any conditions set forth under "-- Conditions of
the Exchange Offer" have not been satisfied or waived by us or do not comply, in
whole or in part, with any applicable law.
If you tender your old notes, you will not be required to pay brokerage
commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the old notes. We
will pay all charges, expenses and transfer taxes in connection with the
exchange offer, other than certain taxes described below under "-- Transfer
Taxes."
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
, 2001, unless we extend it. We expressly reserve the right to
extend the exchange offer on a daily basis or for such period or periods as we
may determine in our sole discretion from time to time by giving oral, confirmed
in writing, or written notice to the exchange agent and by making a public
announcement by press release to the Dow Jones News Service prior to 9:00 a.m.,
New York City time, on the first business day following the previously scheduled
expiration date. During any extension of the exchange offer, all old notes
previously tendered, not validly withdrawn and not accepted for exchange will
remain subject to the exchange offer and may be accepted for exchange by us.
To the extent we are legally permitted to do so, we expressly reserve the
absolute right, in our sole discretion, to:
- waive any condition of the exchange offer; and
- amend any terms of the exchange offer.
Any waiver or amendment to the exchange offer will apply to all old notes
tendered, regardless of when or in what order the old notes were tendered. If we
make a material change in the terms of the
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exchange offer or if we waive a material condition of the exchange offer, we
will disseminate additional exchange offer materials, and we will extend the
exchange offer to the extent required by law.
We expressly reserve the right, in our sole discretion, to terminate the
exchange offer if any of the conditions set forth under the caption
"-- Conditions of the Exchange Offer" exist. Any such termination will be
followed promptly by a public announcement. In the event we terminate the
exchange offer, we will give immediate notice to the exchange agent, and all old
notes previously tendered and not accepted for payment will be returned promptly
to the tendering holders.
In the event that the exchange offer is withdrawn or otherwise not
completed, exchange notes will not be given to holders of old notes who have
validly tendered their old notes.
RESALE OF EXCHANGE NOTES
Based on interpretations of the Securities and Exchange Commission set
forth in no-action letters issued to third parties, we believe that exchange
notes issued under the exchange offer in exchange for old notes may be offered
for resale, resold and otherwise transferred by you without compliance with the
registration and prospectus delivery provisions of the Securities Act, if:
- you are not an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act;
- you are acquiring exchange notes in the ordinary course of your business;
and
- you do not intend to participate in the distribution of the exchange
notes.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
- you cannot rely on those interpretations of the Securities and Exchange
Commission; and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, and the secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
under the Securities Act.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute exchange notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K. This prospectus may
be used for an offer to resell, a resale or other re-transfer of exchange notes
only as specifically set forth in this prospectus. Only broker-dealers that
acquired the old notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives old notes for its own account in exchange for exchange notes, where
such old notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. Please read the
section captioned "Plan of Distribution" for more details regarding the transfer
of exchange notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE
We will accept for exchange old notes validly tendered pursuant to the
exchange offer, or defectively tendered, if such defect has been waived by us,
after the later of:
- the expiration date of the exchange offer; and
- the satisfaction or waiver of the conditions specified below under
"-- Conditions of the Exchange Offer."
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We will not accept old notes for exchange subsequent to the expiration date of
the exchange offer. Tenders of old notes will be accepted only in principal
amounts equal to $1,000 or integral multiples thereof.
We expressly reserve the right, in our sole discretion, to:
- delay acceptance for exchange of old notes tendered under the exchange
offer, subject to Rule 14e-1 under the Securities Exchange Act of 1934,
which requires that an offeror pay the consideration offered or return
the securities deposited by or on behalf of the holders promptly after
the termination or withdrawal of a tender offer; or
- terminate the exchange offer and not accept for exchange any old notes
not accepted for exchange, if any of the conditions set forth below under
"-- Conditions of the Exchange Offer" have not been satisfied or waived
by us or in order to comply in whole or in part with any applicable law.
In all cases, exchange notes will be issued only after timely receipt by
the exchange agent of certificates representing old notes, or confirmation of
book-entry transfer, a properly completed and duly executed letter of
transmittal, or a manually signed facsimile thereof, and any other required
documents. For purposes of the exchange offer, we will be deemed to have
accepted for exchange validly tendered old notes, or defectively tendered old
notes with respect to which we have waived such defect, if, as and when we give
oral, confirmed in writing, or written notice to the exchange agent. Promptly
after the expiration date, we will deposit the exchange notes with the exchange
agent, who will act as agent for the tendering holders for the purpose of
receiving the exchange notes and transmitting them to the holders. The exchange
agent will deliver the exchange notes to holders of old notes accepted for
exchange after the exchange agent receives the exchange notes.
If, for any reason, we delay acceptance for exchange of validly tendered
old notes or we are unable to accept for exchange validly tendered old notes,
then the exchange agent may, nevertheless, on its behalf, retain tendered old
notes, without prejudice to our rights described in this prospectus under the
captions "-- Expiration Date; Extensions; Termination; Amendments,"
"-- Conditions of the Exchange Offer" and "-- Withdrawal of Tenders," subject to
Rule 14e-1 under the Securities Exchange Act of 1934, which requires that an
offeror pay the consideration offered or return the securities deposited by or
on behalf of the holders thereof promptly after the termination or withdrawal of
a tender offer.
If any tendered old notes are not accepted for exchange for any reason, or
if certificates are submitted evidencing more old notes than those that are
tendered, certificates evidencing old notes that are not exchanged will be
returned, without expense, to the tendering holder, or, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at a
book-entry transfer facility under the procedure set forth under "-- Procedures
for Tendering Old Notes-Book-Entry Transfer," such old notes will be credited to
the account maintained at such book-entry transfer facility from which such old
notes were delivered, unless otherwise requested by such holder under
"-- Special Delivery Instructions" in the letter of transmittal, promptly
following the exchange date or the termination of the exchange offer.
Tendering holders of old notes exchanged in the exchange offer will not be
obligated to pay brokerage commissions or transfer taxes with respect to the
exchange of their old notes other than as described under the caption
"-- Transfer Taxes" or as set forth in the letter of transmittal. We will pay
all other charges and expenses in connection with the exchange offer.
PROCEDURES FOR TENDERING OLD NOTES
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee or held through
a book-entry transfer facility and who wishes to tender old notes should contact
such registered holder promptly and instruct such registered holder to tender
old notes on such beneficial owner's behalf.
Tender of Old Notes Held Through The Depository Trust Company. The
exchange agent and The Depository Trust Company, or DTC, have confirmed that the
exchange offer is eligible for the DTC automated tender offer program.
Accordingly, DTC participants may electronically transmit their
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acceptance of the exchange offer by causing DTC to transfer old notes to the
exchange agent in accordance with DTC's automated tender offer program
procedures for transfer. DTC will then send an agent's message to the exchange
agent.
The term "agent's message" means a message transmitted by DTC and received
by the exchange agent that forms part of the book-entry confirmation. The
agent's message states that DTC has received an express acknowledgment from the
participant in DTC tendering old notes that are the subject of that book-entry
confirmation, that the participant has received and agrees to be bound by the
terms of the letter of transmittal, and that we may enforce such agreement
against such participant. In the case of an agent's message relating to
guaranteed delivery, the term means a message transmitted by DTC and received by
the exchange agent, which states that DTC has received an express acknowledgment
from the participant in DTC tendering old notes that they have received and
agree to be bound by the notice of guaranteed delivery.
Tender of Old Notes Held in Physical Form. For a holder to validly tender
old notes held in physical form:
- the exchange agent must receive at its address set forth in this
prospectus a properly completed and validly executed letter of
transmittal, or a manually signed facsimile thereof, together with any
signature guarantees and any other documents required by the instructions
to the letter of transmittal; and
- the exchange agent must receive certificates for tendered old notes at
such address, or such old notes must be transferred pursuant to the
procedures for book-entry transfer described above. A confirmation of
such book-entry transfer must be received by the exchange agent prior to
the expiration date of the exchange offer. A holder who desires to tender
old notes and who cannot comply with the procedures set forth herein for
tender on a timely basis or whose old notes are not immediately available
must comply with the procedures for guaranteed delivery set forth below.
LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD BE SENT ONLY TO THE EXCHANGE
AGENT, AND NOT TO ADVANCEPCS OR TO ANY BOOK-ENTRY TRANSFER FACILITY.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER TENDERING OLD NOTES. DELIVERY OF SUCH DOCUMENTS WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, WE
SUGGEST THAT THE HOLDER USE PROPERLY INSURED, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE OF THE EXCHANGE OFFER TO PERMIT DELIVERY TO THE EXCHANGE AGENT
PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD
NOTES WILL BE ACCEPTED.
Signature Guarantees. A signature on a letter of transmittal or a notice
of withdrawal must be guaranteed by an eligible institution. Eligible
institutions include banks, brokers, dealers, municipal securities dealers,
municipal securities brokers, government securities dealers, government
securities brokers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. The
signature need not be guaranteed by an eligible institution if the old notes are
tendered:
- by a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
- for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, the old notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by
the registered holder as the registered holder's name appears on the old notes
and an eligible institution must guarantee the signature on the bond power.
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If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, these
persons should so indicate when signing. Unless we waive this requirement, they
should also submit evidence satisfactory to us of their authority to deliver the
letter of transmittal.
Book-Entry Transfer. The exchange agent will seek to establish a new
account or utilize an existing account with respect to the old notes at DTC
promptly after the date of this prospectus. Any financial institution that is a
participant in the book-entry transfer facility system and whose name appears on
a security position listing it as the owner of the old notes may make book-entry
delivery of old notes by causing the book-entry transfer facility to transfer
such old notes into the exchange agent's account. HOWEVER, ALTHOUGH DELIVERY OF
OLD NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY TRANSFER INTO THE EXCHANGE AGENT'S
ACCOUNT AT A BOOK-ENTRY TRANSFER FACILITY, A PROPERLY COMPLETED AND VALIDLY
EXECUTED LETTER OF TRANSMITTAL, OR A MANUALLY SIGNED FACSIMILE THEREOF, MUST BE
RECEIVED BY THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH IN THIS PROSPECTUS ON OR
PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER, OR ELSE THE GUARANTEED
DELIVERY PROCEDURES DESCRIBED BELOW MUST BE COMPLIED WITH. The confirmation of a
book-entry transfer of old notes into the exchange agent's account at a
book-entry transfer facility is referred to in this prospectus as a "book-entry
confirmation." Delivery of documents to the book-entry transfer facility in
accordance with that book-entry transfer facility's procedures does not
constitute delivery to the exchange agent.
Guaranteed Delivery. If you wish to tender your old notes and:
- certificates representing your old notes are not lost but are not
immediately available;
- time will not permit your letter of transmittal, certificates
representing your old notes and all other required documents to reach the
exchange agent on or prior to the expiration date of the exchange offer;
or
- the procedures for book-entry transfer cannot be completed on or prior to
the expiration date of the exchange offer;
you may tender your old notes if:
- your tender is made by or through an eligible institution; and
- on or prior to the expiration date of the exchange offer, the exchange
agent has received from the eligible institution a properly completed and
validly executed notice of guaranteed delivery, by manually signed
facsimile transmission, mail or hand delivery, in substantially the form
provided with this prospectus:
- setting forth your name and address, the registered number(s) of your
old notes and the principal amount of old notes tendered;
- stating that the tender is being made by guaranteed delivery; and
- guaranteeing that, within three New York Stock Exchange trading days
after the date of the notice of guaranteed delivery, the letter of
transmittal or facsimile thereof, properly completed and validly
executed, together with certificates representing the old notes, or a
book-entry confirmation, and any other documents required by the letter
of transmittal and the instructions thereto, will be deposited by the
eligible institution with the exchange agent; and
- the exchange agent receives the properly completed and validly executed
letter of transmittal or facsimile thereof with any required signature
guarantees, together with certificates for all old notes in proper form
for transfer, or a book-entry confirmation, and any other required
documents, within three New York Stock Exchange trading days after the
date of the notice of guaranteed delivery.
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Other Matters. Exchange notes will be issued in exchange for old notes
accepted for exchange only after timely receipt by the exchange agent of:
- certificates for, or a timely book-entry confirmation with respect to,
your old notes;
- a properly completed and duly executed letter of transmittal or facsimile
thereof with any required signature guarantees, or, in the case of a
book-entry transfer, an agent's message; and
- any other documents required by the letter of transmittal.
All questions as to the form of all documents and the validity, including
time of receipt, and acceptance of all tenders of old notes will be determined
by us, in our sole discretion, the determination of which shall be final and
binding. ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF OLD NOTES WILL NOT BE
CONSIDERED VALID. We reserve the absolute right to reject any or all tenders of
old notes that are not in proper form or the acceptance of which, in our
opinion, would be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
Unless waived by us, any defect or irregularity in connection with tenders
of old notes must be cured within the time that we determine. Tenders of old
notes will not be deemed to have been made until all defects and irregularities
have been waived by us or cured. Neither us, the exchange agent, or any other
person will be under any duty to give notice of any defects or irregularities in
tenders of old notes, or will incur any liability to holders for failure to give
any such notice.
By signing or agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
- any exchange notes that you receive will be acquired in the ordinary
course of your business;
- you have no arrangement or understanding with any person or entity to
participate in the distribution of the exchange notes;
- if you are not a broker-dealer, that you are not engaged in and do not
intend to engage in the distribution of the exchange notes;
- if you are a broker-dealer that will receive exchange notes for your own
account in exchange for old notes that were acquired as a result of
market-making activities or other trading activities, that you will
deliver a prospectus, as required by law, in connection with any resale
of those exchange notes; and
- you are not an "affiliate" of ours, as defined in Rule 405 of the
Securities Act, or, if you are an affiliate, you will comply with any
applicable registration and prospectus delivery requirements of the
Securities Act.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender of old notes at any time prior to the expiration date of the exchange
offer.
For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at the
address set forth below under "-- Exchange Agent"; or
- you must comply with the appropriate procedures of DTC's automated tender
offer program system.
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Any notice of withdrawal must:
- specify the name of the person who tendered the old notes to be
withdrawn; and
- identify the old notes to be withdrawn, including the principal amount of
the old notes to be withdrawn.
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of those certificates, the
withdrawing holder must also submit:
- the serial numbers of the particular certificates to be withdrawn; and
- a signed notice of withdrawal with signatures guaranteed by an eligible
institution, unless the withdrawing holder is an eligible institution.
If old notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn old notes and
otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal, and our determination shall
be final and binding on all parties. We will deem any old notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
We will return any old notes that have been tendered for exchange but that
are not exchanged for any reason to their holder without cost to the holder. In
the case of old notes tendered by book-entry transfer into the exchange agent's
account at DTC, according to the procedures described above, those old notes
will be credited to an account maintained with DTC for the old notes. This
return or crediting will take place as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. You may re-tender
properly withdrawn old notes by following one of the procedures described under
"-- Procedures for Tendering Old Notes" at any time on or prior to the
expiration date of the exchange offer.
CONDITIONS OF THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes and we may terminate or amend the exchange
offer as provided in this prospectus before accepting any old notes for exchange
if in our reasonable judgment:
- the exchange notes to be received will not be tradable by the holder
without restriction under the Securities Act and the Exchange Act and
without material restrictions under the blue sky or securities laws of
substantially all of the states of the United States;
- the exchange offer, or the making of any exchange by a holder of old
notes, would violate applicable law or any applicable interpretation of
the staff of the Securities and Exchange Commission; or
- any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that would reasonably be expected to impair our ability to proceed
with the exchange offer.
We will not be obligated to accept for exchange the old notes of any holder
that has not made to us:
- the representations described under the captions "-- Procedures for
Tendering" and "Plan of Distribution"; and
- any other representations that may be reasonably necessary under
applicable Securities and Exchange Commission rules, regulations or
interpretations to make available to us an appropriate form for
registration of the exchange notes under the Securities Act.
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We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any old notes by giving oral or written notice of an
extension to their holders. During an extension, all old notes previously
tendered will remain subject to the exchange offer, and we may accept them for
exchange. We will return any old notes that we do not accept for exchange for
any reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer and
to reject for exchange any old notes not previously accepted for exchange, upon
the occurrence of any of the conditions of the exchange offer specified above.
By public announcement we will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the old notes as
promptly as practicable. If we amend the exchange offer in a manner that we
consider material, we will disclose the amendment in the manner required by
applicable law.
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. If we
fail at any time to exercise any of the foregoing rights, this failure will not
constitute a waiver of that right. Each of these rights will be deemed an
ongoing right that we may assert at any time or at various times.
We will not accept for exchange any old notes tendered, and will not issue
exchange notes in exchange for any old notes, if at any time a stop order is
threatened or in effect with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the indentures under the
Trust Indenture Act of 1939.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the transfer and
exchange of old notes pursuant to the exchange offer. The tendering holder,
however, will be required to pay any transfer taxes, whether imposed on the
record holder or any other person, if:
- delivery of the exchange notes, or certificates for old notes for
principal amounts not exchanged, are to be made to any person other than
the record holder of the old notes tendered;
- tendered certificates for old notes are recorded in the name of any
person other than the person signing any letter of transmittal; or
- a transfer tax is imposed for any reason other than the transfer and
exchange of old notes under the exchange offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your old notes for exchange notes in the exchange
offer, you will remain subject to restrictions on transfer of the old notes:
- as set forth in the legend printed on the old notes as a consequence of
the issuance of the exchange notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
- otherwise set forth in the offering memorandum distributed in connection
with the private offering of the old notes.
In general, you may not offer or sell the old notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the old notes under the Securities Act. Based on
interpretations of the Securities and Exchange Commission,
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you may offer for resale, resell or otherwise transfer exchange notes issued in
the exchange offer without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that:
- you are not an "affiliate" within the meaning of Rule 405 under the
Securities Act;
- you acquired the exchange notes in the ordinary course of your business;
and
- you have no arrangement or understanding with respect to the distribution
of the exchange notes to be acquired in the exchange offer.
If you tender old notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes:
- you cannot rely on the applicable interpretations of the Securities and
Exchange Commission; and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered
by an effective registration statement containing the selling security
holder information required by Item 507 or 508, as applicable, of
Regulation S-K under the Securities Act.
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A. has been appointed as exchange agent for
the exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus, the letter of transmittal or
any other documents to the exchange agent. You should send certificates for old
notes, letters of transmittal and any other required documents to the exchange
agent addressed as follows:
BY HAND BY MAIL
U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A.
30 Broad Street, B-Level P.O. Box 84
New York, New York 10004-2304 Bowling Green Station
(800) 548-6565 (customer service number) New York, New York 10274-0112
(646) 458-8111 (facsimile)
Delivery of the letter of transmittal to an address other than as shown
above or transmission via facsimile other than as set forth above does not
constitute a valid delivery of the letter of transmittal.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. We urge you to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered old notes in open market or
privately negotiated transactions, through subsequent exchange offers or
otherwise, on terms that may differ from the terms of the exchange offer. We
have no present plans to acquire any old notes that are not tendered in the
exchange offer or to file a registration statement to permit resales or any
untendered old notes.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes under the exchange offer. In consideration for issuing the exchange notes
as contemplated by this prospectus, we will receive the old notes in like
principal amount, the terms of which are identical in all material respects to
the exchange notes. The old notes surrendered in exchange for the exchange notes
will be retired and cancelled and cannot be reissued. Accordingly, the issuance
of the exchange notes will not result in any increase in our indebtedness or
capital stock.
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CAPITALIZATION
The following table sets forth as of December 31, 2000:
- the unaudited capitalization of our company;
- the unaudited capitalization of our company as adjusted to reflect the
sale of 6,249,900 shares of Class A common stock by Rite Aid in a
registered offering completed on March 14, 2001 and the exercise of the
over-allotment option in connection with the offering completed on March
19, 2001 and the offering of $200.0 million of the old notes and the
application of the proceeds therefrom on March 13, 2001.
To better understand this table, you should review "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements, including the accompanying notes, included in
this offering memorandum.
AS OF DECEMBER 31, 2000
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 141,350 $ 124,350(1)
========== ==========
Long-term debt:
Revolving credit line..................................... $ 60,000 $ 60,000
Term debt, including current portion...................... 550,000 550,000
Senior notes.............................................. -- 200,000
Senior subordinated notes................................. 200,000 --
---------- ----------
Total long-term debt.............................. 810,000 810,000
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized:
Series A-1 convertible preferred stock, $.01 par
value; authorized: 65,854 shares actual and as
adjusted; issued and outstanding: 65,854 shares
actual and as adjusted(2)......................... 1 1
Series A-2 convertible preferred stock, $.01 par
value; authorized: 125,000 shares actual and as
adjusted; issued and outstanding: 125,000 shares
actual and none as adjusted(3).................... 1 --
Common stock, $.01 par value; 100,000,000 shares
authorized, actual and as adjusted
Class A common stock, $.01 par value; authorized:
86,250,000 shares actual and as adjusted; issued and
outstanding: 25,705,723 shares actual and 31,955,623
shares as adjusted................................... 257 320
Class B-1 common stock, $.01 par value; authorized:
7,500,000 shares actual and as adjusted; issued and
outstanding: 4,207,300 shares actual and as
adjusted(4).......................................... 42 42
Class B-2 common stock, $.01 par value; authorized:
6,250,000 shares actual and as adjusted; issued and
outstanding: none actual and 100 as adjusted(4)(5)... -- --
Additional paid-in capital.................................. 339,444 339,382
Accumulated earnings........................................ 54,161 53,481(6)
---------- ----------
Total stockholders' equity........................ 393,906 393,226
---------- ----------
Total capitalization (excluding cash)............. $1,203,906 $1,203,226
========== ==========
- ---------------
(1) Reflects payment of accrued interest on the senior subordinated notes,
estimated fees and expenses associated with the offering of the old notes
and the initial purchasers' commissions.
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(2) Shares of Series A-1 preferred stock are convertible into an aggregate of
3,292,700 shares of Class B-1 common stock, which shares are convertible
into an aggregate of 3,292,700 shares of Class A common stock.
(3) Shares of Series A-2 preferred stock are convertible into an aggregate of
6,250,000 shares of Class B-2 common stock, which shares are convertible
into an aggregate of 6,250,000 shares of Class A common stock. In connection
with the sale of Class A common stock by Rite Aid, all of the Series A-2
preferred stock was converted into Class B-2 common stock.
(4) Shares of Class B-1 and Class B-2 common stock are convertible into Class A
common stock on a one-for-one basis.
(5) In connection with the sale of Class A common stock by Rite Aid, 6,249,900
shares of Class B-2 common stock were converted into 6,249,900 shares of
Class A common stock.
(6) The expenses in connection with the issuance and distribution of the shares
offered in our equity offering, other than underwriting discounts and
commissions, were paid by us.
The table above excludes:
- 8,233,878 shares of Class A common stock issuable upon exercise of
options outstanding as of December 31, 2000 at a weighted average
exercise price of $17.18 per share, of which 2,578,850 are fully vested
at a weighted average exercise price of $7.50 per share;
- 1,076,610 shares of Class A common stock issuable upon exercise of
warrants outstanding as of December 31, 2000 at a weighted average
exercise price of $20.40 per share, including 780,000 shares of Class A
common stock issuable upon exercise of warrants issued to Rite Aid in
connection with our acquisition of PCS; the warrants issued to Rite Aid
were terminated upon redemption of the senior subordinated notes in full;
and
- 527,966 shares of Class A common stock reserved as of December 31, 2000
for issuance under our equity-based compensation plans.
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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following tables present selected consolidated statement of operations,
balance sheet and supplemental data of AdvancePCS for the periods and dates
indicated. The selected statement of operations for each of the years in the
three-year period ended March 31, 2000, and the balance sheet data as of March
31, 1998, 1999 and 2000 presented below are derived from our consolidated
financial statements and accompanying notes, which have been audited by Arthur
Andersen LLP, independent public accountants and the selected statement of
operations data and supplemental data of AdvancePCS for the three- and
nine-month periods ended December 31, 1999 and 2000, and the selected balance
sheet data at December 31, 1999 and 2000 are derived from the unaudited interim
consolidated financial statements and accompanying notes of AdvancePCS, which
are included elsewhere in this prospectus. The unaudited interim consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of our management, are necessary
for a fair presentation of our financial position and results of operations for
these periods. Historical operating results for the three-and nine-month periods
ended December 31, 1999 and 2000 are not necessarily indicative of the results
that may be expected for a full fiscal year.
The following tables also present selected historical statement of
operations and supplemental data of PCS for the periods and dates indicated. The
selected statement of operations data of PCS are derived from the consolidated
financial statements and accompanying notes of PCS, which have been audited by
Ernst & Young LLP. Prior to January 23, 1999, PCS was a wholly-owned subsidiary
of Eli Lilly and its financial results for 1997 and 1998 were consolidated with
those of Eli Lilly using a fiscal year ending December 31. On January 23, 1999,
PCS was acquired by Rite Aid and its financial results for 1999 were
consolidated with those of Rite Aid using a fiscal year ending February 26,
2000.
The results of operations of PCS for the period commencing October 2, 2000,
the date of our acquisition of PCS, are reflected in the financial statements of
AdvancePCS after that date. The results of operations of PCS for the nine months
ended December 31, 1999 and 2000 are included in the AdvancePCS pro forma
financial data. Historical revenues and cost of revenues for AdvancePCS and PCS
have been reclassified to reflect adoption of consistent revenue recognition
policies. In connection with our recent acquisitions and the issuance of recent
accounting pronouncements, we are evaluating certain aspects of Staff Accounting
Bulletin 101 and EITF 99-19 "Reporting Gross Revenue as a Principal vs. Net as
an Agent" as described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Changes in Revenue Recognition."
You should read the information contained in this section in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the historical consolidated financial statements and related
notes of each of AdvancePCS and PCS, and the unaudited pro forma condensed
consolidated financial information in this prospectus and in the annual reports
and other information, including five-year selected financial data, that
AdvancePCS has filed with the Securities and Exchange Commission and
incorporated into this prospectus by reference.
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ADVANCEPCS
NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
-------------------------------- ----------------------- ---------------------
1998 1999 2000 1999 2000(1) 1999 2000(1)
-------- -------- ---------- ---------- ---------- -------- ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Revenues(2)......................... $473,761 $757,259 $1,833,888 $1,312,881 $4,032,904 $519,858 $2,916,471
Gross profit........................ 29,806 40,959 75,502 55,017 135,074 19,941 91,842
Selling, general, and administrative
expenses.......................... 18,955 21,006 38,793 28,593 75,568 10,362 55,072
Non-recurring charges............... -- -- -- -- 680 -- 680
-------- -------- ---------- ---------- ---------- -------- ----------
Operating income.................... 10,851 19,953 36,709 26,424 58,826 9,579 36,090
Interest income..................... 2,950 2,860 1,064 801 2,297 240 1,587
Interest expense.................... (67) -- (3,943) (2,853) (24,250) (974) (22,114)
Merger costs and asset disposal..... (689) -- (160) -- (1,200) -- --
-------- -------- ---------- ---------- ---------- -------- ----------
Income before income taxes.......... 13,045 22,813 33,670 24,372 35,673 8,845 15,563
Provision for income taxes.......... (4,957) (8,669) (12,794) (9,261) (16,409) (3,361) (8,585)
-------- -------- ---------- ---------- ---------- -------- ----------
Net income.......................... $ 8,088 $ 14,144 $ 20,876 $ 15,111 $ 19,264 $ 5,484 $ 6,978
======== ======== ========== ========== ========== ======== ==========
Basic:
Net income per share.............. $ 0.38 $ 0.59 $ 0.84 $ 0.61 $ 0.72 $ 0.22 $ 0.23
Weighted average shares
outstanding..................... 21,011 24,004 24,760 24,674 26,697 24,714 29,913
Diluted:
Net income (loss) per share....... $ 0.31 $ 0.53 $ 0.75 $ 0.54 $ 0.58 $ 0.20 $ 0.16
Weighted average shares
outstanding..................... 26,202 26,876 27,737 27,868 33,305 27,657 44,507
BALANCE SHEET DATA (AS OF END OF
PERIOD):
Cash and cash equivalents........... $ 63,018 $ 45,895 $ 55,243 $ 54,515 $ 141,350 $ 54,515 $ 141,350
Working capital..................... 27,657 201 12,108 8,339 (345,292) 8,339 (345,292)
Total assets........................ 178,639 304,016 406,738 398,357 3,142,595 398,357 3,142,595
Total debt.......................... 1,285 50,000 50,000 50,000 810,000 50,000 810,000
Stockholders' equity................ 50,342 68,773 98,044 86,295 393,906 86,295 393,906
SUPPLEMENTAL DATA(3):
EBITDA(4)........................... $ 13,320 $ 23,789 $ 45,819 $ 32,952 $ 87,864 $ 12,204 $ 58,572
Capital expenditures................ 6,795 7,860 22,807 14,601 23,232 6,396 8,963
Depreciation and amortization....... 2,469 3,836 9,110 6,528 28,358 2,625 21,802
Goodwill amortization(5)............ 347 588 3,354 2,514 11,892 838 10,215
Pharmacy network claims processed... 38,319 50,588 81,225 60,022 155,611 22,301 108,155
Mail pharmacy prescriptions
filled............................ 839 1,289 1,674 1,225 3,189 446 2,249
Estimated members (as of end of
period end)....................... 12,500 15,000 27,500 (6) 75,000 (6) 75,000
Ratio of earnings to fixed
charges(7)........................ 20.6x 31.3x 7.7x 6.5x 2.3x 6.9x 1.6x
- ---------------
(1) Includes PCS data since the acquisition on October 2, 2000.
(2) Historical revenues for AdvancePCS have been reclassified to reflect
adoption of consistent revenue recognition policies with PCS.
(3) This data has not been audited.
(4) EBITDA consists of operating income plus depreciation and amortization.
EBITDA does not represent funds available for our discretionary use and is
not intended to represent cash flow from operations as measured under
generally accepted accounting principles. EBITDA should not be considered as
an alternative to net income or net cash used in operating activities, but
may be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies. EBITDA excludes merger costs, asset impairment and
other non-recurring charges.
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(5) Represents amortization of goodwill recorded in connection with our
acquisition of PCS. Such goodwill represents the excess of the purchase
price we paid in the acquisition over the net identifiable assets and
liabilities we acquired less amounts allocated to intangible assets. The
purchase price allocated to such assets and liabilities, and thus the amount
of goodwill, is preliminary and is subject to revision following the results
of an appraisal and further identification of intangible assets. We expect
that this revision will be reflected in our financial results for the
quarter ended March 31, 2000.
(6) Estimated members were not calculated for the three- and nine-month periods
ending December 31, 1999.
(7) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consists of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing interest
(estimated to be one-third of such expenses).
PCS HOLDING CORPORATION
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------ FEBRUARY 26,
1997 1998 2000
----------- ---------- ------------
(IN THOUSANDS, EXCEPT RATIO DATA)
STATEMENT OF OPERATIONS DATA:
Revenues(1)..................................... $ 5,960,131 $7,117,702 $8,126,231
Gross profit.................................... 118,720 180,399 207,281
Selling, general and administrative
expenses(2)................................... 163,982 134,226 154,116
Asset impairment(3)............................. (2,345,244) -- --
----------- ---------- ----------
Operating income (loss)......................... (2,390,506) 46,173 53,165
Interest (expense) income, net.................. 1,202 2,417 5,867
----------- ---------- ----------
Income (loss) before income taxes............... (2,389,304) 48,590 59,032
Provision for income taxes...................... (6,264) (31,956) (37,536)
----------- ---------- ----------
Net income (loss)............................... $(2,395,568) $ 16,634 $ 21,496
=========== ========== ==========
SUPPLEMENTAL DATA(4):
EBITDA(5)....................................... $ 37,432 $ 101,524 $ 125,382
Pharmacy network claims processed............... 248,800 287,700 315,979
Mail pharmacy prescriptions filled.............. 2,500 4,700 6,768
Ratio of earnings to fixed charges(6)........... 0.6x 8.7x 9.1x
- ---------------
(1) Historical revenues for PCS have been reclassified to reflect adoption of
consistent revenue recognition policies with AdvancePCS. Prior to giving
effect to this reclassification, PCS's historical revenues were $547,425,
$840,704 and $1,264,694 in the years ended December 31, 1997 and 1998 and
February 26, 2000.
(2) Includes goodwill amortization.
(3) Includes asset impairment charge of $2.3 billion recognized by Eli Lilly and
Company subsequent to its acquisition of PCS.
(4) This data has not been audited.
(5) EBITDA consists of operating income plus depreciation and amortization.
EBITDA does not represent funds available for our discretionary use and is
not intended to represent cash flow from operations as measured under
generally accepted accounting principles. EBITDA should not be considered as
an alternative to net income or net cash used in operating activities, but
may be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies. EBITDA excludes asset impairment and other
non-recurring charges.
(6) Earnings consist of income before income taxes, plus fixed charges. Fixed
charges consist of interest charges and amortization of debt issuance costs
and the portion of rent expense under operating leases representing interest
(estimated to be one-third of such expenses).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of health improvement services in the United
States. As the largest PBM based on number of lives covered, we currently serve
more than 75 million health plan members and manage more than $20 billion in
prescription drug spending on behalf of our health plan sponsors on an
annualized basis. In addition, we offer a wide range of other health improvement
products and services, such as prescription discount cards for the uninsured and
under-insured, web-based programs, disease management, clinical trials and
outcomes studies. Our mission is to improve the quality of care delivered to
health plan members while helping health plan sponsors reduce overall costs.
Over the past few years, the PBM industry has undergone significant
consolidation. We believe such consolidation has principally been driven by the
significant benefits of size and scale, including:
- cost-saving opportunities to leverage a fixed-cost infrastructure over
greater prescription claim volume, resulting in greater pricing
flexibility; and
- increased negotiating leverage with pharmaceutical manufacturers and
retail pharmacies, resulting in greater ability to obtain lower drug
costs for health plan sponsors.
We believe PBMs that effectively capture these benefits will be positioned to
strengthen their relationships with plan members, physicians and health plan
sponsors and improve their competitive position.
ACQUISITIONS
Effective October 2, 2000, we completed the acquisition of PCS for an
aggregate purchase price of $1.0 billion, of which we paid Rite Aid, the seller,
$675 million in cash, and issued to Rite Aid $200 million in senior subordinated
notes and $125 million in our convertible preferred stock. The cash portion of
the purchase price was financed with the proceeds of an $825 million senior
secured credit facility and $150 million in equity financing committed by JLL.
In connection with the equity financing, we issued to JLL 65,854 shares of
Series A-1 preferred stock for an aggregate purchase price of $65,854,000 and
six shares of Series B preferred stock and 4,207,000 shares of our Class A
common stock for an aggregate purchase price of $84,146,000. On December 8,
2000, the six shares of Series B preferred stock and the 4,207,000 shares of
Class A common stock automatically converted into 4,207,300 shares of Class B-1
common stock. In connection with the senior subordinated notes, we issued to
Rite Aid warrants to purchase 780,000 shares of Class A common stock. The
warrants are not exercisable until October 2, 2002 and will terminate if we
repay the senior subordinated notes prior to October 2, 2002. The acquisition of
PCS was accounted for using the purchase method of accounting. The excess of the
purchase price paid over the net identifiable assets and liabilities of PCS was
recorded as goodwill.
Effective July 5, 2000, we completed the acquisition of FFI. We issued 3.5
million shares of our Class A common stock in exchange for all of the
outstanding shares of FFI. The merger constituted a tax-free reorganization and
has been accounted for as a pooling of interests under APB No. 16.
Effective March 31, 1999, we completed the acquisition of Foundation Health
Pharmaceutical Services for $70 million in cash and warrants to purchase 400,000
shares of our Class A common stock. We valued such warrants at fair market value
based upon the Black-Scholes valuation model. The acquisition of Foundation
Health Pharmaceutical Services was accounted for using the purchase method of
accounting. The purchase price was allocated to goodwill, certain customer
contracts and other intangible assets.
Effective December 1, 1998, we completed the acquisition of Baumel-Eisner
Neuromedical Institute, Inc., a privately-held clinical trial firm, for $25
million in cash. The acquisition was accounted for using the purchase method of
accounting.
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47
Effective February 9, 1998, we completed a merger with Innovative Medical
Research, Inc., a privately-held clinical trial and survey research firm based
in Towson, Maryland. We issued 1,752,156 shares and options to purchase 47,844
shares of our common stock in exchange for all the outstanding shares and
options of Innovative Medical Research, Inc. The merger constituted a tax-free
reorganization and has been accounted for as a pooling of interests under APB
No. 16.
ANTICIPATED SYNERGIES RELATED TO PCS ACQUISITION
We anticipate being able to generate synergies as a result of the PCS
acquisition by:
- Consolidating and renegotiating existing contracts with pharmaceutical
manufacturers. A significant portion of our and PCS's contracts with
manufacturers allow for increasingly favorable terms as volume increases.
We have reviewed overlapping contracts and plan to migrate combined
volume to the contract with the best terms. PBM contracts with
manufacturers are generally not long-term in nature, and we expect to be
able to negotiate more favorable terms that reflect our increased
purchasing power.
- Re-contracting with our retail pharmacy network. Historically, PCS had
not aggressively negotiated its contracts with retail pharmacies due to
its ownership history, as discussed in "Results of Operations -- PCS." We
believe we can increase profitability by renegotiating our contract terms
with retailers in our network that reflect the independence, as well as
the increased scale of our combined company.
- Rationalizing and gaining economies of scale in our mail service
operations. Volume is an important component of profitability in the
mail service business from both a fixed cost and purchasing power
perspective. We plan to consolidate the operations of our Richardson,
Texas mail service pharmacy into our larger facilities in Fort Worth,
Texas and Birmingham, Alabama. Through this consolidation and resulting
increased capacity utilization, we expect to realize significant cost
savings. In addition, we recently entered into a new contract with a
wholesale pharmaceutical supplier for our mail facilities with more
favorable terms that reflect our increased purchasing power.
- Generating corporate overhead and information technology
efficiencies. Our combination with PCS puts us in a position to realize
significant cost savings by generating corporate overhead and information
technology efficiencies. We expect cost savings to result from
consolidation of corporate fixed costs and the utilization of best
practices from both companies. For example, we intend to relocate
selected information systems to PCS's facilities in an effort to
consolidate overhead and maximize efficiencies in this area.
- Pursuing cross-selling opportunities with pharmaceutical manufacturers
and health plan sponsors. Our acquisition of PCS provides us with a wider
range of complementary products and services to sell to a larger customer
base. For example, we have historically offered outcomes research to our
customers, which we will now be able to cross-sell to traditional PCS
customers. Likewise, PCS offers certain clinical programs and services
that we have not previously provided to our customers.
INTEGRATION RELATED TO PCS ACQUISITION
We have successfully completed most of the steps in integrating PCS that
are necessary for us to operate as a single, combined company. Our combined
organizational and management reporting structure has been rolled out and
implemented at all levels of the organization. We have completed the integration
of the operational components of the call centers and mail pharmacies. We have
successfully completed an interface to all of our call centers and our mail
service pharmacies so clients can be supported by any combination of these
facilities. In addition, we have completed the evaluation of vendor contracts
and are reviewing and finalizing improved terms with our pharmaceutical
wholesalers, technology vendors and others. By the end of the quarter ending
September 30, 2001, we expect to have completed the remaining steps in
integrating PCS's operations, including the consolidation of our mail service
operations, the
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48
relocation of selected information systems to PCS facilities, the rollout of an
interface between our data processing platforms, and a combination of other
technology systems.
SOURCES OF REVENUE
We group the revenues from all of our health improvement service offerings
into three categories: data, clinical and mail services.
Data services
Through our data services operations we process prescription claims on
behalf of our health plan sponsor customers. When a member of one of our health
plan sponsors presents a prescription or health plan identification card to a
retail pharmacist in our network, the pharmacist accesses our online system to
receive information regarding eligibility, patient history, health plan
formulary listings, and negotiated price. The member generally pays a co-pay to
the retail pharmacy and the pharmacist fills the prescription. On behalf of our
health plan sponsors, during each billing cycle, our systems electronically
aggregate pharmacy benefit claims, which include prescription costs plus our
claims processing fees. Once we receive payments from health plan sponsors, we
remit the amounts owed by those health plan sponsors to the retail pharmacies
and keep the claims processing fees.
We have established a nationwide network of over 56,000 retail pharmacies,
each of which pay an access fee to be included in our network. Our contracts
with most of our health plan sponsors provide for member access to our retail
pharmacy network. Under these contracts, we have an independent obligation to
pay network retail pharmacies for the drugs dispensed, meaning we have assumed
this risk. In addition, we are a principal in the transaction; therefore, we
record the aggregate pharmacy benefit claim payments from our health plan
sponsors as revenues, and include prescription costs to be paid to retail
pharmacies in cost of revenues.
Some of our other customers have established their own pharmacy networks.
Under contracts with these customers, we are not at risk for retail pharmacy
payment obligations. Thus, we record only our claims processing fees as revenues
and do not include prescription costs in revenues or cost of revenues.
As a result, customers that use our network will generate higher revenues
than customers that use their own networks. Similarly, while a customer who uses
our network may contribute the same gross profit in terms of dollars as a
customer that uses its own network, gross profit as a percentage of revenue will
be significantly lower for the customer using our network because of the higher
level of revenue and cost of revenue we recognize.
Mail services
We derive mail services revenues from the sale of pharmaceuticals to
members of our customers' health plans. These revenues include the cost of the
pharmaceuticals plus a dispensing fee. Our cost of revenues includes product
costs and other direct costs associated with the dispensing of prescription
drugs.
Clinical and other services
We have historically derived our clinical revenues primarily from formulary
rebates and volume discounts from pharmaceutical manufacturers relating to the
administration of our PBM and consumer card operations. We record revenues in
the amount of the administration fees we charge for our services and include the
cost of such services in cost of revenues. Some of these revenues are based on
estimates of rebates generated for our clients that are subject to final
settlement with the manufacturer. In addition, we generate clinical revenues on
a fee-for-service basis on the sale of our comprehensive health improvement
products and services, including disease management, clinical trials and
outcomes studies.
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CHANGES IN REVENUE RECOGNITION
We purchased PCS on October 2, 2000 and have included this business in our
consolidated results of operations since that time. We made changes in our
revenue recognition policies to conform the different policies used by us and
PCS and we have revised historical revenues to be comparable in all periods
presented in this prospectus, with the exception of the audited consolidated
financial statements of PCS beginning on page F-1 of this offering memorandum.
The historical PCS amounts have been reclassified to reflect the change in
presentation of data services revenues. In cases in which we have an independent
obligation to pay our network pharmacy providers, we include payments from our
plan sponsors for these benefits as revenues and payments to our pharmacy
providers as cost of revenues. Historically, PCS recorded only claims processing
fees as revenues. The change results in higher revenues and an equal increase in
cost of revenues. This change had no effect on gross profit or operating income.
The table below illustrates the effects of the reclassification on PCS's
unaudited financial statement data.
HISTORICAL
-------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
----------------------------- FEBRUARY 26, SEPTEMBER 23,
1997 1998 2000 2000
------------- ------------- ------------- -------------
(IN THOUSANDS)
Total revenues.................... $547,425 $840,704 $1,264,694 $651,205
Cost of revenues.................. 428,705 660,305 1,057,413 540,907
Gross profit...................... 118,720 180,399 207,281 110,298
RECLASSIFIED
-------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
----------------------------- FEBRUARY 26, SEPTEMBER 23,
1997 1998 2000 2000
------------- ------------- ------------- -------------
(IN THOUSANDS)
Total revenues.................... $5,960,131 $7,117,702 $8,126,231 $4,287,644
Cost of revenues.................. 5,841,411 6,937,303 7,918,950 4,177,346
Gross profit...................... 118,720 180,399 207,281 110,298
In addition, the historical financial statements of AdvancePCS have been
revised to reflect a change in recognition of clinical and other services
revenues. We receive funds from pharmaceutical manufacturers for formulary
rebate programs that we administer on behalf of our health plan sponsors. We
record revenues in the amount of the administration fees we charge for our
services and include the cost of such services in cost of revenues. Previously,
we recognized the entire amount of the rebate, including our administration fee,
in revenues and the portion paid to our client in cost of revenues. The revision
resulted in lower revenues and an equal decrease in cost of revenues. This
change had no effect on gross profit or operating income.
In December 1999, the Commission staff issued SAB 101 "Revenue Recognition
in Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. In addition, the EITF issued a consensus in EITF 99-19 "Reporting
Gross Revenue as a Principal vs. Net as an Agent." SAB 101 and the EITF are
effective in our fourth fiscal quarter of 2001. In connection with our recent
acquisitions and the issuance of these pronouncements, we are evaluating certain
aspects of SAB 101 and the EITF, including gross versus net reporting of data
and clinical revenues. We can provide no assurance that we may not need to
report on a net basis in future periods. Net reporting of these revenues would
have no effect on gross profit or operating income. If we had reported our data
services revenue using net reporting, revenues and cost of revenues would have
decreased by $304,876,000, $503,247,000 and $1,516,621,000, respectively, for
the years ended March 31, 1998, 1999 and 2000.
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The EITF also has issued EITF 00-22 "Accounting for . . . Other Volume
Based Sales Incentive Offers." This pronouncement provides accounting guidance
for certain volume rebate programs. We are currently evaluating the impact, if
any, of this EITF. This pronouncement is expected to be effective in our fourth
quarter of 2001.
RESULTS OF OPERATIONS -- ADVANCEPCS
The following table sets forth certain consolidated historical financial
data of AdvancePCS. Historical revenues for AdvancePCS and PCS have been revised
to reflect adoption of consistent revenue recognition policies as described
above.
NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------------------ ----------------------- -----------------------
1998 1999 2000 1999 2000(1) 1999 2000(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Data services................. $338,720 $554,716 $1,558,113 $1,120,040 $3,462,486 $446,235 $2,520,225
Mail services................. 78,528 127,297 184,103 132,666 397,013 49,087 285,244
Clinical and other services... 56,513 75,246 91,672 60,175 173,405 24,536 111,002
-------- -------- ---------- ---------- ---------- -------- ----------
Total revenues.......... 473,761 757,259 1,833,888 1,312,881 4,032,904 519,858 2,916,471
Gross profit.................... 29,806 40,959 75,502 55,017 135,074 19,941 91,842
Selling, general, and
administrative expenses....... 18,955 21,006 38,793 28,593 75,568 10,362 55,072
Operating income................ 10,851 19,953 36,709 26,424 58,826 9,579 36,090
Net income...................... 8,088 14,144 20,876 15,111 19,264 5,484 6,978
Basic net income per share...... $ 0.38 $ 0.59 $ 0.84 $ 0.61 $ 0.72 $ 0.22 $ 0.23
Diluted net income per share.... $ 0.31 $ 0.53 $ 0.75 $ 0.54 $ 0.58 $ 0.20 $ 0.16
- ---------------
(1) Includes PCS data since the acquisition on October 2, 2000.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS FOR PCS ACQUISITION
The following table sets forth certain unaudited pro forma financial data
for the PCS acquisition. Historical revenues for AdvancePCS and PCS have been
revised to reflect adoption of consistent revenue recognition policies as
described in "-- Changes in Revenue Recognition."
FISCAL YEAR NINE MONTHS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, DECEMBER 31,
MARCH 31, ------------------------- -------------------------
2000 1999 2000(1) 1999 2000(1)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Revenues
Data services.................. $8,619,596 $6,450,867 $7,162,903 $2,287,556 $2,520,225
Mail services.................. 937,228 695,395 825,799 244,127 285,244
Clinical and other services.... 403,295 293,007 331,846 101,485 111,002
---------- ---------- ---------- ---------- ----------
Total revenues......... 9,960,119 7,439,269 8,320,548 2,633,168 2,916,471
Gross profit..................... 282,783 210,663 245,372 68,193 91,842
Selling, general, and
administrative expenses........ 191,521 150,550 168,937 53,257 55,072
Operating income................. 91,262 60,113 75,755 14,936 36,090
- ---------------
(1) Includes PCS data since the acquisition on October 2, 2000.
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HISTORICAL ADVANCEPCS:
Three Months Ended December 31, 2000 Compared to Three Months Ended December
31, 1999
Revenues. Our revenues for the three months ended December 31, 2000
increased by $2.4 billion, or 461%, compared to revenues for the three months
ended December 31, 1999. The increase in revenues was primarily the result of
our acquisition of PCS on October 2, 2000. Approximately $2.1 billion, or 87%,
of the increase in revenues was attributable to data services and a 385%
increase in the number of pharmacy claims processed during the period. Claims
processed increased from 22 million in the three months ended December 31, 1999
to 108 million for the three months ended December 31, 2000. The addition of PCS
added approximately 81 million claims for the quarter. Approximately 10% of the
increase was attributable to additional sales of our mail pharmacy services,
resulting from a 404% increase in the number of mail prescriptions dispensed.
Mail pharmacy prescriptions dispensed increased from 446,000 in the three months
ended December 31, 1999 to 2.2 million for the three months ended December 31,
2000. The addition of PCS's two mail pharmacies added approximately 97% of the
increase of the mail prescriptions dispensed. The remaining 3% of the increase
in revenues resulted from an increase in clinical and other services revenues
derived from formulary and disease management services, as well as clinical
trials.
Gross profit. Our gross profit for the three months ended December 31,
2000 increased by $71.9 million, or 361%, compared to the same period in 1999.
This increase was attributable primarily to the additional revenue and gross
profit associated with the PCS acquisition. As a percentage of revenues, gross
profit was approximately 3.1% in the three months ended December 31, 2000 and
3.8% in the same period in 1999. The decrease was primarily due to an increase
in data services revenues from the PCS acquisition, which have lower percentage
margins than other services.
Selling, general and administrative expenses. Our selling, general and
administrative expenses for the three months ended December 31, 2000 increased
by $44.7 million, or 431% compared to the same period in 1999. This increase is
due largely to the acquisition of PCS. In addition, approximately $14.5 million
of the increase is due to additional goodwill and other intangibles
amortization. Selling, general and administrative expenses as a percentage of
revenues decreased from 2.0% for the three months ended December 31, 1999 to
1.9% in the same period in 2000.
Non-recurring charges. The non-recurring charge of $680,000 ($415,000
after taxes, or $0.01 per share) represents severance costs for certain
management employees that were terminated or resigned following and as a result
of the acquisition with PCS. All of these severance costs were paid prior to
December 31, 2000. We expect to consolidate certain operations in connection
with the integration of PCS, which will result in additional non-recurring
charges consisting primarily of facility closure costs and severance costs in
the three months ended March 31, 2001.
Interest income and interest expense. Interest expense, net of interest
income, for the three months ended December 31, 2000 increased $19.8 million
compared to the same period in 1999. The increase resulted from the acquisition
of PCS, which was partially funded by approximately $800 million in debt.
Income taxes. For the three months ended December 31, 2000 our effective
tax rate was approximately 55%. For the three months ended December 31, 1999 our
recorded income tax expense approximated an effective tax rate of 38%. The
effective rate for the three months ended December 31, 2000 was higher due to
the non-deductible nature of the goodwill acquired in the PCS acquisition.
Diluted net income per share. We reported diluted net income per share of
$0.16 per share for the three months ended December 31, 2000 compared to $0.20
per share for the same period in 1999. The weighted average shares outstanding
were 27.7 million and 44.5 million for the three months ended December 31, 1999
and 2000, respectively. The decrease in diluted net income per share resulted
from additional interest expense and goodwill and other intangibles amortization
in connection with the PCS acquisition. In addition, we issued securities
convertible into common stock in connection with the PCS acquisition, resulting
in an increase in weighted average shares outstanding.
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PRO FORMA ADVANCEPCS:
Actual Three Months Ended December 31, 2000 Compared to Pro Forma Three Months
Ended December 31, 1999
Revenues. Our revenues for the three months ended December 31, 2000
increased by $283.3 million, or 11%, compared to the pro forma revenues for the
three months ended December 31, 1999. Approximately $232.7 million or 82% of the
increase in revenues was attributable to data services and a 4.4% increase in
the number of pharmacy claims processed during the period. Claims processed
increased from 104 million in the pro forma three months ended December 31, 1999
to 108 million for the three months ended December 31, 2000. Approximately 15%
of the increase was attributable to additional sales of our mail pharmacy
services, resulting from a 4% increase in the number of mail prescriptions
dispensed. The remaining 3% of the increase in revenues resulted from an
increase in clinical and other services revenues derived from formulary and
disease management services.
Gross profit. Our gross profit for the three months ended December 31,
2000 increased by $23.6 million, or 35%, compared to the same period in 1999 on
a pro forma basis. This increase was attributable primarily to the additional
revenue and gross profit generated by the improvement in operations at the two
PCS mail facilities. The improvement resulted from an overall decrease in
headcount in the mail facilities and the call centers despite a 4% growth in
prescriptions filled. As a percentage of revenues, gross profit was
approximately 3.1% in the three months ended December 31, 2000, compared to 2.6%
in the same period in 1999 on a pro forma basis.
Selling, general and administrative expenses. Our selling, general and
administrative expenses for the three months ended December 31, 2000 increased
by $1.8 million, or 3%, compared to the same period in 1999 on a pro forma
basis. Selling, general and administrative expenses as a percentage of revenues
decreased from 2.0% for the three months ended December 31, 1999 on a pro forma
basis to 1.9% in the same period in 2000.
Non-recurring charges. The non-recurring charge of $680,000 ($415,000
after taxes, or $0.01 per share) represents severance costs for certain
management employees that were terminated or resigned following and as a result
of the acquisition with PCS. All of these severance costs were paid prior to
December 31, 2000. We expect to consolidate certain operations in connection
with the integration of PCS, which will result in additional non-recurring
charges consisting primarily of facility closure costs and severance costs in
the three months ended March 31, 2001.
Operating income. Our operating income increased by $21.2 million, or 142%
for the three months ended December 31, 2000 compared to the same period in 1999
on a pro forma basis. The increase resulted from the factors mentioned above as
revenues improved and PCS's headcount and costs as a percentage of revenues
declined.
HISTORICAL ADVANCEPCS:
Nine Months Ended December 31, 2000 Compared to Nine Months Ended December 31,
1999
Revenues. Our revenues for the nine months ended December 31, 2000
increased by $2.7 billion, or 207%, compared to revenues for the nine months
ended December 31, 1999. The increase in revenues was primarily the result of
our acquisition of PCS on October 2, 2000. Approximately $2.3 billion, or 86%,
of the increase in revenues was attributable to data services and a 159%
increase in the number of pharmacy claims processed during the period. Claims
processed increased from 60 million in the nine months ended December 31, 1999
to 156 million for the nine months ended December 31, 2000. The addition of PCS
added approximately 81 million claims for the period. Approximately 10% of the
increase was attributable to additional sales of our mail pharmacy services,
resulting from a 160% increase in the number of mail prescriptions dispensed.
Mail pharmacy prescriptions dispensed increased from 1.2 million in the nine
months ended December 31, 1999 to 3.2 million for the nine months ended December
31, 2000. The addition of PCS's two mail pharmacies added approximately 89% of
the increase. The remaining 4% of the
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increase in revenues resulted from an increase in clinical and other services
revenues derived from formulary and disease management services as well as
clinical trials.
Gross profit. Our gross profit for the nine months ended December 31, 2000
increased by $80.1 million, or 145%, compared to the same period in 1999. This
increase was attributable primarily to the additional revenue and gross profit
associated with the PCS acquisition. As a percentage of revenues, gross profit
was approximately 3.3% in the nine months ended December 31, 2000 compared to
4.2% in the same period in 1999. The decrease was primarily due to an increase
in data services revenues from the PCS acquisition, which have lower margins
than other services.
Selling, general and administrative expenses. Our selling, general and
administrative expenses for the nine months ended December 31, 2000 increased by
$47.0 million, or 164%, compared to the same period in 1999. This increase is
due to the acquisition of PCS. In addition, approximately $15 million of the
increase is due to additional goodwill and other intangibles amortization.
Selling, general and administrative expenses as a percentage of revenues was
approximately 1.9% in the nine months ended December 31, 2000 compared to 2.2%
in the same period in 1999.
Non-recurring charges. The non-recurring charge of $680,000 ($415,000
after taxes, or $0.01 per share) represents severance costs for certain
management employees that were terminated or resigned following and as a result
of the acquisition with PCS. All of these severance costs were paid prior to
December 31, 2000. We expect to consolidate certain operations in connection
with the integration of PCS, which will result in additional non-recurring
charges consisting primarily of facility closure costs and severance costs in
the three months ended March 31, 2001.
Interest income and interest expense. Interest expense, net of interest
income, for the nine months ended December 31, 2000 increased $19.9 million
compared to the same period in 1999. The increase resulted from the acquisition
of PCS which was partially funded by approximately $800 million in debt.
Merger costs. Net income for the nine months ended December 31, 2000
reflected a pre-tax charge of $1.2 million ($926,000 after taxes, or $0.03 per
share) relating to merger costs incurred in connection with FFI.
Income taxes. For the nine months ended December 31, 2000 our effective
tax rate was approximately 46%. For the nine months ended December 31, 1999 our
recorded income tax expense approximated an effective tax rate of 38%. The
effective rate for the nine months ended December 31, 2000 was higher due to the
non-deductible nature of the goodwill and other intangible assets acquired in
the PCS acquisition.
Diluted net income per share. We reported diluted net income per share of
$0.58 per share for the nine months ended December 31, 2000 compared to $0.54
per share for the same period in 1999. The weighted average shares outstanding
were 27.9 million and 33.3 million for the nine months ended December 31, 1999
and 2000, respectively. The decrease in diluted net income per share resulted
from additional interest expense and goodwill and other intangibles amortization
in connection with the PCS acquisition. In addition, securities convertible into
common stock were issued in connection with the PCS acquisition resulting in an
increase in weighted average shares outstanding.
PRO FORMA ADVANCEPCS:
Pro Forma Nine Months Ended December 31, 2000 Compared to Pro Forma Nine
Months Ended December 31, 1999
Revenues. Our pro forma revenues for the nine months ended December 31,
2000 increased by $881 million, or 12%, compared to the pro forma revenues for
the nine months ended December 31, 1999. Approximately $712.0 million, or 81%,
of the increase in revenues was attributable to data services and a 9.1%
increase in the number of pharmacy claims processed during the period. Pro forma
claims processed increased from 295.7 million in the nine months ended December
31, 1999 to 322.6 million for the nine months ended December 31, 2000.
Approximately 15% of the increase was attributable to additional sales
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of our mail pharmacy services, resulting from an 8% increase in the number of
mail prescriptions dispensed. The remaining 4% of the increase in revenues
resulted from an increase in clinical and other services revenues derived from
formulary and disease management services.
Gross profit. Our gross profit for the nine months ended December 31, 2000
increased by $34.7 million, or 16%, compared to the same period in 1999 on a pro
forma basis. This increase was attributable primarily to the additional revenue
and gross profit generated by the improvement in operations at the two PCS mail
facilities. The improvement resulted from an overall decrease in headcount in
the mail facilities and the call centers despite an 8% growth in prescriptions
filled. As a percentage of revenues, gross profit was approximately 2.9% in the
nine months ended December 31, 2000, compared to 2.8% in the same period in
1999.
Selling, general and administrative expenses. Our selling, general and
administrative expenses for the pro forma nine months ended December 31, 2000
increased by $18.4 million, or 12%, compared to the same period in 1999 on a pro
forma basis. This increase resulted from losses of approximately $7 million
incurred in connection with performance-based contracts in the nine months ended
December 31, 2000. In addition, we incurred expenses for severance and retention
costs related to executive employment agreements in the nine months ended
December 31, 2000.
Non-recurring charges. The non-recurring charge of $680,000 ($415,000
after taxes, or $0.01 per share) represents severance costs for certain
management employees that were terminated or resigned following and as a result
of the acquisition with PCS. All of these severance costs were paid prior to
December 31, 2000. We expect to consolidate certain operations in connection
with the integration of PCS, which will result in additional non-recurring
charges consisting primarily of facility closure costs and severance costs in
the three months ended March 31, 2001.
Operating income. Our operating income increased by $15.6 million, or 26%,
for the pro forma nine months ended December 31, 2000 compared to the same
period in 1999 on a pro forma basis. The increase resulted from the factors
mentioned above as revenues improved and PCS's headcount and costs declined.
HISTORICAL ADVANCEPCS:
Fiscal Year 2000 Compared To Fiscal Year 1999
Revenues. Our revenues for fiscal year 2000 increased by $1.1 billion, or
142.2%, compared to revenues for fiscal year 1999. The number of individuals we
managed continued to increase in fiscal year 2000 as we obtained new customers
including our largest customer at that time, Foundation Health Systems, Inc., or
FHS, whose service agreement began April 1, 1999. In addition, our current
customers continued to increase their membership and utilization levels. New
customer contracts resulted from increased marketing efforts and the expansion
of our sales and marketing department. Contracts with new customers in fiscal
year 2000 generally included all pharmacy benefit management products we offer,
including claims processing, mail and clinical and other services.
Our revenues from data services increased $1.0 billion, or 180.9%, compared
to the prior year. The increase resulted from the addition of new contracts
including the service agreement with FHS and an increase in the use of our
services by existing customers. The increase in new members resulted in an
increase in pharmacy claims processed from 50.6 million in fiscal year 1999 to
81.2 million in fiscal year 2000, a 60.5% increase. Virtually all of the new
fiscal year 2000 customer contracts, including FHS, use our pharmacy network,
which has shifted a larger percentage of our total revenues to data services.
Revenues from mail services increased $56.8 million, or 44.6%, compared to the
prior year. This increase resulted primarily from the new members added during
fiscal year 2000. The increase in new members resulted in an increase in mail
prescriptions dispensed from 1.3 million in fiscal year 1999 to 1.7 million in
fiscal year 2000, a 29.9% increase. Revenues from clinical and other services
increased $16.4 million, or 21.8%, compared to the prior year. The increase
resulted primarily from the new members added and the additional claims
processed during fiscal year 2000 compared to the prior year.
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Gross profit. Our gross profit for fiscal year 2000 increased by $34.5
million, or 84.3%, compared to the prior fiscal year. This increase primarily
resulted from the additional costs associated with our claims processing growth
and the new customers, including FHS, that are using our retail pharmacy
network. As a percentage of revenues, gross profit was 4.1% in fiscal year 2000
compared to 5.4% in fiscal year 1999.
Selling, general, and administrative expenses. Our selling, general, and
administrative expense for fiscal year 2000 increased by $17.8 million, or
84.7%, compared to fiscal year 1999. This increase was primarily the result of
our acquisition of Foundation Health Pharmaceutical Services, Inc. in March 1999
and the related amortization expense associated with the intangible assets
acquired. In addition, further expansion in management, sales and marketing
contributed to the increase. In spite of the increase, selling, general and
administrative expenses as a percentage of revenues decreased from 2.8% in
fiscal year 1999 to 2.1% in fiscal year 2000 as the result of greater economies
of scale and due to the increase in revenues associated with our claims
processing services. Additional revenues generated by customers using our
network pharmacy providers typically do not result in an increase in selling,
general, and administrative expenses.
Fiscal Year 1999 Compared To Fiscal Year 1998
Revenues. Our revenues for fiscal year 1999 increased by $283.5 million,
or 59.8%, compared to revenues for fiscal year 1998. The number of individuals
we managed continued to increase in fiscal year 1999 as we obtained new
customers and our current customers continued to increase their membership and
utilization levels. New customer contracts resulted from increased marketing
efforts and the expansion of our sales and marketing department. Contracts with
new customers in fiscal year 1999 generally included all pharmacy benefit
management products we offer, including claims processing, mail and clinical and
other services.
Our revenues from data services increased $216.0 million, or 63.8%,
compared to the prior year. The increase resulted from the addition of new
members and an increase in use of our services by existing customers. The
increase in new members resulted in an increase in pharmacy claims processed
from 38.3 million in fiscal year 1998 to 50.6 million in fiscal year 1999, a
32.0% increase. Virtually all of the new fiscal year 1999 customer contracts use
our pharmacy network, which has shifted a larger percentage of our total
revenues to claims processing. Revenues from mail services increased $48.8
million, or 62.1%, compared to the prior year. The increase resulted primarily
from the new members added during fiscal year 1999. The increase in new members
resulted in an increase in mail prescriptions dispensed from 839,000 in fiscal
year 1998 to 1.3 million in fiscal year 1999, a 53.6% increase. Revenues from
clinical and other services increased $18.7 million, or 33.1%, compared to the
prior year. The increase resulted primarily from the new members added and the
additional claims processed during fiscal year 1999 compared to the prior year.
Gross profit. Our gross profit for fiscal year 1999 increased by $11.2
million, or 37.4%, compared to the prior fiscal year. This increase primarily
resulted from the additional costs associated with our claims processing growth
and the new customers that are using our retail pharmacy network. As a
percentage of revenues, gross profit was 5.4% in fiscal year 1999 compared to
6.3% in fiscal year 1998.
Selling, general and administrative expenses. Our selling, general and
administrative expense for fiscal year 1999 increased by $2.1 million, or 10.8%,
compared to fiscal year 1998. This increase was the result of our expansion of
our sales and marketing activities, as well as increases in administrative and
support staff levels and salaries and benefits in response to volume growth in
all programs. In spite of the increase, selling, general and administrative
expenses as a percentage of revenues decreased from 4.0% in fiscal year 1998 to
2.8% in fiscal year 1999 as the result of greater economies of scale and due to
the increase in revenues associated with our claims processing services.
Additional revenues generated by customers using our network pharmacy providers
typically do not result in an increase in selling, general and administrative
expenses.
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RESULTS OF OPERATIONS -- PCS
The following table sets forth certain consolidated financial data of PCS.
Historical revenues for AdvancePCS and PCS have been revised to reflect adoption
of consistent revenue recognition policies as described in "-- Changes in
Revenue Recognition." A discussion of PCS's results of operations for the
periods after February 26, 2000 is included in "-- Pro Forma AdvancePCS -- Pro
Forma Nine Months Ended December 31, 2000 Compared to Pro Forma Nine Months
Ended December 31, 1999."
YEAR ENDED DECEMBER 31, YEAR ENDED
-------------------------- FEBRUARY 26,
1997 1998 2000
----------- ---------- ------------
(IN THOUSANDS)
Revenues
Data services......................................... $ 5,584,077 $6,418,094 $7,061,483
Mail services......................................... 224,094 467,202 753,125
Clinical and other services........................... 151,960 232,406 311,623
----------- ---------- ----------
Total revenues................................ 5,960,131 7,117,702 8,126,231
Gross Profit............................................ 118,720 180,399 207,281
Selling, general, and administrative expenses........... 163,982 134,226 154,116
Operating income (loss)................................. (2,390,506)(1) 46,173 53,165
- ---------------
(1) Includes asset impairment charges of $2.3 billion recognized by Eli Lilly
and Company subsequent to its acquisition of PCS.
PCS was originally founded in 1969 as Pharmaceutical Card System Inc., the
nation's first pharmacy benefit management company, with McKesson Corporation,
now known as McKesson HBOC, as its major investor owning 49%. In 1972, McKesson
purchased the remaining 51 percent of PCS. In 1986, McKesson spun off
approximately 14% of PCS in a public offering and operated PCS that way until
1990 when it reacquired all the shares. In 1994, PCS was sold to Eli Lilly and
Company and was subsequently acquired by Rite Aid in 1999. On October 2, 2000,
we acquired PCS.
Year Ended February 26, 2000 as Compared to Year Ended December 31, 1998
Revenues. Revenues for the year ended February 26, 2000, increased by $1.0
billion, or 14%, compared to revenues for the year ended December 31, 1998. Data
services revenues increased as a result of an increase in pharmacy claims
processed from 287.7 million in calendar year 1998 to 316.0 million in fiscal
year 2000, a 9.8% increase. Revenues from mail services the year ended February
26, 2000, increased by $285.9 million, or 61%, compared to the year ended
December 31, 1998. This increase resulted primarily from new members added
during the year ended February 26, 2000, and increased utilization. In addition,
mail order program growth was facilitated by the opening of a mail order
pharmacy in Birmingham, Alabama in fiscal year 2000. The increase in new members
and overall utilization resulted in an increase in mail prescriptions dispensed
to 6.8 million for the year ended February 26, 2000, from 4.7 million for the
year ended December 31, 1998, a 44% increase. Revenue per claim increased 11%
for the same period. Revenues from clinical and other services for the year
ended February 26, 2000, increased by $79 million, or 34%, compared to the year
ended December 31, 1998. The increase was due primarily to growth in formulary
service fees.
Gross profit. Gross profit for the year ended February 26, 2000, increased
by $26.9 million, or 14.9%, compared to the year ended December 31, 1998. Cost
of drugs from mail order programs for the year ended February 26, 2000,
increased by $263.6 million, or 61%, compared to the year ended December 31,
1998, consistent with the increased revenues of mail order programs. Increased
mail utilization also resulted in increased operating costs, both at the
facility and the mail call centers. During the year ended February 26, 2000, PCS
experienced a service interruption in its mail facility resulting in
non-recurring incremental charges of $6 million. However, as a percentage of
revenues, gross profit was 2.6% in the year ended February 26, 2000 and 2.5% for
the year ended December 31, 1998.
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Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended February 26, 2000, increased by $19.9
million, or 15%, compared to the year ended December 31, 1998, attributable
primarily to PCS's continued expansion of programs and services. This increase
was largely related to growth in revenue, including growth in mail order
programs. Further, PCS incurred a non-recurring charge in fiscal year 2000 for
the transition from Eli Lilly to Rite Aid of $2.3 million and a non-recurring
charge for Year 2000 readiness of $2.8 million. As a percentage of revenues,
selling, general and administrative expenses was 2% for the year ended February
26, 2000 and the year ended December 31, 1998.
Year Ended December 31, 1998 as Compared to Year Ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998, increased by $1.2
billion, or 19%, compared to revenues for the year ended December 31, 1997.
Revenues from data services increased by $834 million, or 15%, compared to
the prior year due to an increase in claims from 249 million to 288 million, or
16%. Revenues from mail services increased by $243.1 million, or 108%, compared
to the prior year. Mail members increased to over 14 million in 1998 from under
7 million in 1997. The increase in new members and overall utilization resulted
in an increase in mail prescriptions dispensed to 4.7 million for 1998 from 2.5
million for 1997, an 88% increase. Revenue per claim increased 10% for the same
period. Revenues from clinical and other services increased by $80.4 million, or
53%, compared to the prior year due to an increase in formulary service fees as
well as growth in other programs targeted specifically to doctors.
Gross profit. Gross profit for the year ended December 31, 1998, increased
by $61.7 million, or 52%, compared to the same period in 1997. Cost of revenues
from mail order programs for the year ended December 31, 1998, increased by
$212.4 million, or 99%, compared to the year ended December 31, 1997. This
increase is consistent with the increased revenues of mail order programs. As a
percentage of revenues, gross profit was 2.5% in the 1998, and 2.0% in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1998, decreased by $29.8
million, or 18%, compared to the same period in 1997. As a percentage of
revenues, selling, general and administrative expenses decreased to 2% for the
year ended December 31, 1998, from 3% for the same period in 1997. This decrease
is attributable primarily to a reduction in goodwill amortization. Goodwill
amortization decreased $26 million in 1998 compared to 1997, due to a reduction
in carrying value of goodwill in connection with an impairment recognized in
1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had a working capital deficit of $345.3
million. The majority of our current obligations are not due until cash is
collected from our customers. We use our excess cash balances to reduce debt
under our revolving credit facility, which results in a net deficit in working
capital. Our net cash provided by operating activities was $119.8 million for
the nine months ended December 31, 2000 resulting primarily from net income and
also due to the timing of receivables and payables resulting from our continued
growth. During the nine months ended December 31, 2000, we used cash of $23.2
million, or $26.5 million on a pro forma basis, for purchases of property, plant
and equipment associated with the growth and expansion of our systems and
facilities.
Historically, we have been able to fund our operations and continued growth
through cash flow from operations. In fiscal years 1998, 1999 and 2000, and for
the nine months ended December 31, 1999 and 2000, our operating cash flow funded
our capital expenditures and our short-term excess cash was used to reduce our
debt or invested in money market funds.
In conjunction with our acquisition of PCS, we obtained an $825 million
senior secured credit facility that includes a $175.0 million revolving credit
facility, $100 million interim revolving credit facility and two term notes
totaling $550.0 million. Our $150 million Term A note accrues interest at LIBOR
plus 3%,
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with escalating quarterly principal payments, and is due on September 30, 2005.
Our $400 million Term B note accrues interest at LIBOR plus 3.5%, with quarterly
principal payments of $1 million until December 31, 2006 and payments of $94.5
million thereafter on each of December 31, 2006, March 31, 2007, June 30, 2007
and September 30, 2007. Our $175 million revolving credit facility accrues
interest at LIBOR plus 3%. These percentages may be lower based upon our total
leverage. The revolving credit facility expires on October 2, 2005. As of
December 31, 2000, $60 million was outstanding under this facility. We intend to
refinance the $100 million interim revolving credit facility with a
collateralized accounts receivable facility by June 2001. The senior secured
credit facility contains covenants that are typical for this type of document.
In addition, we issued to Rite Aid $200 million in senior subordinated notes
that accrue interest at 11% until April 2002, 12% from April 2002 to October
2002 and 13% thereafter. The senior secured credit facility and the senior
subordinated notes have been unconditionally guaranteed, jointly or severally,
by all of our subsidiaries. In addition, the senior secured credit facility is
secured by a first priority lien on the stock of our subsidiaries and
substantially all of our assets and the assets of our subsidiaries. Each
subsidiary is 100% owned. There are no restrictions on the ability of the
subsidiary guarantors to pay dividends or make loans or advances to the parent.
In connection with the senior subordinated notes, we issued to Rite Aid warrants
to purchase 780,000 shares of our Class A common stock. The warrants are not
exercisable until October 2, 2002 and will terminate if we repay the senior
subordinated notes prior to October 2, 2002. We intend to repay all of the
outstanding senior subordinated notes with the proceeds from this offering,
together with available funds. We also issued to Rite Aid $125 million in
convertible preferred stock that is convertible into Class B common stock. In
addition, we issued $150 million in common stock and preferred stock to JLL. For
further description of the securities issued, see "-- Acquisitions."
We anticipate that cash flow from operations, combined with our current
cash balances and amounts available under our credit facility, will be
sufficient to meet our internal operating requirements and expansion programs,
including capital expenditures, for at least the next 18 months. However, if we
successfully continue our expansion, acquisition and alliance plans, we may be
required to seek additional debt or equity financing in order to achieve these
plans.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Financial Accounting Standards, or SFAS, 131,
"Disclosure about Segments of an Enterprise and Related Information," effective
April 1, 1998. This pronouncement changes the requirements under which public
businesses must report segment information. The objective of the pronouncement
is to provide information about a company's different types of business
activities and different economic environments. SFAS 131 requires companies to
select segments based on their internal reporting system. We provide integrated
health benefit management services to our customers, and these services account
for substantially all of our net revenues. Such services are typically
negotiated under one contract with the customer. Therefore, our operations will
continue to be reported in one segment.
In June 1998, Financial Accounting Standards Board Statement 133
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
133 requires all derivatives to be recognized as either assets or liabilities in
the statement of financial position and measured at fair value. In addition,
SFAS 133 specifies the accounting for changes in the fair value of a derivative
based on the intended use of the derivative and the resulting designation. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective beginning in fiscal year
March 31, 2002. We have entered into interest rate protection agreements that
have fixed the LIBOR rate as of November 7, 2000 at 6.60% for $400 million of
our variable rate debt under our credit facility. The notional amount drops to
$300 million in October 2001 and to $200 million in October 2002. We will
declare these agreements hedges in accordance with SFAS 133, as amended, and
will recognize the fair value of these financial instruments on the balance
sheet effective April 1, 2001 upon adoption of SFAS 133. These instruments will
be marked to market at each reporting date with the adjustment recognized as a
component of other comprehensive income (loss) in stockholders' equity.
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In December 1999, the Securities and Exchange Commission staff issued SAB
101 "Revenue Recognition in Financial Statements." SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. In addition, the EITF issued a consensus in EITF 99-19
"Reporting Gross Revenue as a Principal vs. Net as an Agent." SAB 101 and the
EITF are effective in our fourth fiscal quarter of 2001. In connection with our
recent acquisitions and the issuance of these pronouncements, we are evaluating
certain aspects of SAB 101 and the EITF, including gross versus net reporting of
data and clinical revenues. Net reporting of these revenues would have no effect
on gross profit or operating income. For additional information please see
"-- Changes in Revenue Recognition."
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals we dispense affect our cost of revenues. Historically, we have
been able to pass the effect of such price changes to our customers under the
terms of our agreements. As a result, changes in pharmaceutical prices due to
inflation have not adversely affected us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk is that of interest rate risk. A change in LIBOR or
the Prime Rate as set by Bank of America, N.A. would affect the rate at which we
could borrow funds under our credit facilities.
We have entered into interest rate protection agreements that have fixed
the interest rate as of November 7, 2000 at 6.60% for $400 million of our
variable rate debt under our credit facility. The notional amount drops to $300
million in October 2001 and to $200 million in October 2002.
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BUSINESS
The following description of our business should be read in conjunction
with the information included elsewhere in this prospectus. This description
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ significantly from the results discussed in the
forward-looking statements as a result of the factors set forth in "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
We are a leading provider of health improvement services in the United
States. As the largest PBM based on number of lives covered, we currently serve
more than 75 million health plan members and manage more than $20 billion in
prescription drug spending on behalf of our health plan sponsors on an
annualized basis. In addition, we offer a wide range of other health improvement
products and services, such as prescription discount cards for the uninsured and
under-insured, web-based programs, disease management, clinical trials and
outcomes studies. Our mission is to improve the quality of care delivered to
health plan members while helping health plan sponsors reduce overall costs.
We generate revenues by providing our health improvement services to two
primary customer groups: health plan sponsors and pharmaceutical manufacturers.
We serve a broad range of health plan sponsors, including BlueCross BlueShield
plans and other managed care organizations, employer groups, third-party
administrators of health plans, insurance companies, government agencies and
labor union-based trusts. We work closely with pharmaceutical manufacturers to
negotiate lower drug costs for our health plan sponsors. We also provide
pharmaceutical manufacturers with clinical trial, research and information
management services.
In October 2000, we became the largest PBM through our acquisition of PCS.
In addition, in July 2000, we acquired FFI, which provides prescription discount
programs, or consumer cards, to the uninsured and under-insured. We believe
these acquisitions significantly enhance our competitive position in the
industry and provide substantial opportunities to generate operational
efficiencies and continued growth.
INDUSTRY BACKGROUND
HCFA estimates that total U.S. health care expenditures were $1.2 trillion
in 1999 and projects this spending to grow by 6.5 percent annually from 2000
through 2008, or an average of 1.6 percentage points above the growth rate of
gross domestic product during the same period. Based on these projections, HCFA
estimates that U.S. health care expenditures will total $2.2 trillion and reach
16.2 percent of gross domestic product by 2008.
HCFA estimates that total prescription drug spending in the United States
was approximately $100 billion in 1999 and projects this spending to remain the
fastest growing component of health care costs, increasing by between nine and
twelve percent annually from 2000 through 2008. We believe factors contributing
to this trend include:
- higher drug utilization due to the growing use of pharmaceuticals as a
first line of attack in disease treatment, increasing availability of
pharmacy benefits to health plan members, an aging population and
increasing direct-to-consumer advertising by pharmaceutical
manufacturers;
- an expected increase in new drug introductions, primarily due to
increases in research and development spending by pharmaceutical
companies, as well as more rapid drug approval by the FDA; and
- high costs for newly-developed, more effective drug therapies.
PBMs were first formed during the 1970s to provide health plan sponsors
with a more efficient and less costly means of managing their members'
prescription drug benefit, particularly the processing of pharmaceutical claims.
In recent years, managed care has evolved from a short-term, cost-driven model
to
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a long-term, medical outcomes-based model, where the overall cost and quality of
patient care are both key considerations of the health plan sponsor. While PBMs
continue to process hundreds of millions of pharmaceutical claims per year, PBMs
have also developed additional services, including mail-order pharmacies in the
1980s and point-of-sale claims processing, formulary development and other
clinical services in the 1990s. By designing and implementing effective pharmacy
benefit plans and formularies, PBMs gained the ability to influence the choice
of pharmaceuticals used by a health plan's members. PBMs use their formulary
influence and increased purchasing power to negotiate both rebates from
pharmaceutical manufacturers and discounts from retail pharmacies in order to
generate savings for health plan sponsors.
Over the past few years, the PBM industry has undergone significant
consolidation. We believe such consolidation has principally been driven by the
significant benefits of size and scale, including:
- cost-saving opportunities to leverage a fixed-cost infrastructure over
greater prescription claim volume, resulting in greater pricing
flexibility; and
- increased negotiating leverage with pharmaceutical manufacturers and
retail pharmacies, resulting in greater ability to obtain lower drug
costs for health plan sponsors.
We believe PBMs that effectively capture these benefits will be better
positioned to strengthen their relationships with plan members, physicians and
health plan sponsors and improve their competitive position.
Several legislative proposals are under consideration in Congress to
provide Medicare recipients with outpatient drug benefits through the use of
PBMs. Medicare, the primary health insurer for more than 35 million Americans
over the age of 65, does not currently offer an outpatient prescription drug
benefit. The terms of the current proposals vary, and there can be no assurance
of actual implementation of such a benefit. Depending on the approval and final
design of a Medicare drug benefit, PBMs could play a significant role in its
administration.
OUR COMPETITIVE ADVANTAGES
WE ARE THE LARGEST PBM IN THE INDUSTRY
As the largest PBM based on number of lives covered, we currently serve
more than 75 million members enrolled with our health plan sponsors. We operate
through a network of approximately 56,000 retail pharmacies and, on an
annualized basis, we estimate that we manage more than 500 million pharmacy
claims representing more than $20 billion in prescription drug spending. Our
large member base gives us significant leverage when negotiating rebates and
discounts from pharmaceutical companies and retail pharmacies. In addition, we
believe that our mail service pharmacies are of sufficient scale and capacity to
effectively compete on large contracts. As the industry leader based on number
of lives covered, we intend to position ourselves as the first choice of health
plan sponsors who need a PBM with scale and scope to help effectively manage
their growing prescription drug costs.
WE MAINTAIN AN INDEPENDENT STATUS
We also benefit from our independent status, as we are not controlled by a
pharmaceutical manufacturer, retail pharmacy or health plan sponsor. We believe
this independence is valued by health plan sponsors for the inherent choice and
impartiality we are able to provide.
WE OFFER A WIDE RANGE OF HEALTH IMPROVEMENT PRODUCTS AND SERVICES
We believe we have one of the widest ranges of health improvement products
and services in the industry. We provide a broad range of PBM products and
services complemented by consumer and information products and technology
solutions. Our PBM products and services include data, clinical and mail order
services. Our data service operations process prescription claims through our
retail pharmacy network. Our clinical services perform formulary design and
compliance services as well as provide
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proprietary decision support tools, and our mail order services process
prescription orders through our mail pharmacies.
We also offer consumer cards for uninsured and under-insured consumers, as
well as web-based products and services such as online pharmacy services and web
site development services for health plan sponsors. In addition, we offer a wide
range of other health improvement products and services that utilize our data
management and predictive modeling capabilities, such as disease management,
clinical trials and outcomes studies. Our acquisition of PCS has given us the
opportunity to combine these products and services with our PBM services for a
comprehensive health improvement product offering.
WE HAVE A DIVERSE CLIENT BASE WITH SUBSTANTIAL PENETRATION ACROSS ALL KEY
CLIENT SEGMENTS
Historically, we have had strong client relationships with BlueCross
BlueShield companies and other managed care organizations. While PCS has served
managed care plans, it has traditionally focused on and developed expertise in
serving self-insured employers, insurance carriers and government plans. As a
result of our combination, we now have a diverse client base and substantial
market penetration among each of these major target client groups.
WE HAVE A FOCUSED AND EXPERIENCED MANAGEMENT TEAM WITH AN ESTABLISHED TRACK
RECORD IN GROWING OUR BUSINESS AND INTEGRATING ACQUISITIONS
Our management team, including our founder and chief executive officer,
David D. Halbert, has consistently delivered strong operating and financial
results through internal growth and the acquisition and successful integration
of several companies. During the last five fiscal years, we have grown
significantly, with total revenues increasing from approximately $64.4 million
in fiscal year 1995 to approximately $1.8 billion in fiscal year 2000 and EBITDA
increasing from approximately $1.8 million in fiscal year 1995 to approximately
$45.8 million in fiscal year 2000.
With the addition of the PCS management, our combined senior management
team of 11 officers has an aggregate of 161 years of experience in the health
care industry. We have successfully completed most of the steps in integrating
PCS that are necessary for us to operate as a single, combined company. In
addition, we have successfully integrated the following four acquisitions in the
past three years:
- Innovative Medical Research, Inc., which conducts clinical trials and
survey research for the pharmaceutical and managed care industries, in
1998;
- Baumel-Eisner Neuromedical Institute, Inc., which conducts neurological
and psychiatric clinical trials of investigational new drugs on behalf of
the pharmaceutical industry, in 1998;
- Foundation Health Pharmaceutical Services, the pharmacy benefit
operations of Foundation Health Systems, Inc., now known as Healthnet, in
1999; and
- FFI in 2000.
In connection with our acquisition of Foundation Health Pharmaceutical Services,
we added more than 12 million covered lives to our base of 15 million covered
lives.
STRATEGY
Our mission is to improve the quality of care delivered to health plan
members while helping health plan sponsors reduce overall costs. In order to
accomplish this mission, we plan to:
CONTINUE TO GAIN EFFICIENCIES FROM OUR ACQUISITION OF PCS
Through the acquisition of PCS, we have created significant cost saving
opportunities and increased negotiating leverage with pharmaceutical
manufacturers and retail pharmacies. During the two-year period following the
acquisition of PCS, we expect to realize significant synergies from the
integration of PCS. This integration involves the renegotiation of existing
contracts with pharmaceutical manufacturers and
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retail pharmacy chains and the consolidation of some operations to maximize the
efficiency of our combined infrastructure. In particular, we plan to consolidate
our Richardson, Texas mail pharmacy, call center operations, internet/e-business
efforts, enterprise infrastructure, data warehouse efforts and duplicative
information systems.
INCREASE SALES PENETRATION TO EXISTING CUSTOMERS
One of our primary growth strategies is to increase sales penetration of
our health improvement services within our existing customer base. While we and
PCS have each historically offered traditional PBM services, we developed a
different array of disease management, clinical and research products. With the
addition of the complementary product lines and customer groups of PCS, we now
offer more comprehensive product solutions, which we intend to cross-sell into
our respective customer bases. For example, the customers in the employer group
segment, where PCS has traditionally had a strong presence, are increasingly
interested in our disease management programs. Similarly, PCS offered certain
clinical programs and services that we had not previously provided to our
customers.
Beyond combining existing services, we also plan to increase sales to our
existing customers by expanding our disease management services and developing
additional clinical research capabilities. For example, we currently offer six
disease management programs, and during the past 12 months have performed 50
outcomes research programs covering a broad range of disease states. We are also
developing a physician education program for osteoporosis. We expect to develop
additional disease management, outcomes research and physician education
programs tailored to our customers' requests.
INCREASE OUR MAIL SERVICE PENETRATION
We believe that our mail services reduce costs to health plan sponsors
through volume purchasing, increased generic dispensing and higher rebates
through greater formulary compliance. Historically, neither we nor PCS promoted
our mail pharmacies aggressively. We did not have the scale to operate mail
pharmacy services efficiently. PCS did not begin offering mail service until
late 1996, and, due to a change in ownership, PCS was not able to expand its
capacity to meet demand. However, with our combination, we see a significant
opportunity to profitably expand penetration of our mail order business, which
provides lower costs for our health plan sponsors.
We plan to increase the percentage of the prescriptions filled by our mail
pharmacies by aggressively promoting our mail services to the members of our
health plan sponsors. We estimate that we manage more than 500 million pharmacy
claims on an annualized basis, and of these less than 10% of the prescriptions
for these claims are filled by our mail pharmacies. We believe that our primary
competitors are filling a significantly greater proportion of their members'
prescriptions through mail service.
INCREASE OUR CORE HEALTH PLAN SPONSOR CUSTOMER BASE
The number of members served by our programs has increased from an
estimated 5.2 million at March 31, 1995 to more than 75 million at December 31,
2000. We plan to continue to grow our customer base by marketing our scale and
comprehensive service offerings to a broader range of health plan sponsors. We
believe that our increased size and ability to negotiate higher rebates and
discounts make us more attractive to large accounts. Since the announcement of
the PCS transaction, we have entered into multi-year contracts with three new
large accounts representing an aggregate of approximately two million members
and have signed multi-year contract renewals with several existing customers,
including Humana, Inc. and Tufts Health Plan, which together represent
approximately 5.8 million members.
As part of our strategy to expand our customer base, we have reorganized
our sales force into teams focused on each customer segment. Through this
reorganization, our sales force will be able to focus on the specific
characteristics and needs of our current and prospective customers in each
segment.
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FURTHER DEVELOP WEB-BASED CAPABILITIES AND PURSUE NEW TECHNOLOGY INITIATIVES
Our health plan sponsors are increasingly interested in the convenience of
technology-enabled, pharmacy-related products and services for their members. We
provide our clients with comprehensive web-based solutions, which include
web-enabled PBM functions, such as online refills and online prescription drug
history, web-based content, and web site development services for health plan
sponsors. We plan to expand our current web-based product offerings, which would
include developing new initiatives to offer broader medical content to health
plan sponsors and to empower consumers by involving them more directly in their
medical care. We are also currently working with health plan sponsors to develop
web-enabled pharmacy services on their respective web sites for members.
In addition, we intend to continue to explore and implement new
technologies to enable us to more effectively deliver our products and services.
For example, we are currently participating in pilot programs that support the
development of emerging technology solutions using handheld devices that provide
enhanced point-of-care prescribing capabilities to physicians. These devices
provide timely information, such as patient histories, formulary checks and drug
utilization reviews, to physicians at the point-of-care to allow for electronic
transmittal of prescriptions. Further, we recently entered into a new venture
that will develop an electronic exchange to enable physicians who use electronic
prescribing technology to link to pharmacies, PBMs and health plan sponsors that
their patients use. As a result, we expect improved formulary compliance, better
outcomes and lower costs for us and our health plan sponsors.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
We plan to continue our strategy of selectively pursuing acquisitions and
alliances that are consistent with our corporate mission. In particular, we seek
opportunities to:
- increase the size of our core PBM business;
- expand our product offerings for health plan sponsors and pharmaceutical
manufacturers; and
- enhance our current health improvement programs.
HEALTH IMPROVEMENT PRODUCTS AND SERVICES
PBM SERVICES
We offer a broad range of data, clinical and mail services to our customers
through our PBM operations. We provide value by improving the level of care and
lowering the costs associated with a pharmacy benefit plan.
Data Services. Through our data services operations, we processed more
than 424 million prescription claims for health plan sponsors on a pro forma
basis in the last 12 months. We administer a network of more than 56,000 retail
pharmacies that have agreed to provide prescription drugs to individual members
of our health plan sponsors at pre-negotiated prices. The retail pharmacies in
our network are linked to us through our online, real-time claims processing
systems that are designed to significantly reduce the cost of processing
prescriptions for those pharmacies linked to these systems. When a member of one
of our health plan sponsors presents a prescription or health plan
identification card to a retail pharmacist in our network, our online system
provides the pharmacist with the following information:
- verification of whether the individual is eligible for benefits;
- the prescription benefits the individual's health plan has selected,
including whether the drug to be dispensed is included on the health
plan's formulary, and the individual's co-payment obligation;
- the amount the pharmacy can expect to receive as payment for its
services; and
- an alert message to warn the pharmacist of possible interactions,
including drug-drug, drug-food, drug-age and drug-pregnancy interactions.
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On behalf of health plan sponsors, we aggregate all pharmacy benefit claims on a
system-wide basis and facilitate payments to retail pharmacies.
Mail Services. We believe that our mail pharmacies reduce costs to health
plan sponsors through volume purchasing, increased generic dispensing and higher
rebates through greater formulary compliance. Mail service is ideal for
maintenance medications because of the convenience of home delivery and improved
patient compliance through methods such as refill reminders. Our mail pharmacies
currently dispense more than nine million prescriptions on an annualized basis,
typically in the form of a three-month supply of medications for chronic
conditions. Our mail service operations are highly automated, featuring bar code
and scanning technology to route and track orders, computerized dispensing of
many medications and computer-generated mailing labels and invoices. To enhance
accurate dispensing of prescriptions, our mail service system is equipped with
automated quality control features, and each prescription is inspected by a
registered pharmacist.
Our mail pharmacy operations are located in Richardson and Fort Worth,
Texas and Birmingham, Alabama. We are in the process of consolidating our
Richardson, Texas mail pharmacy operations into our larger facilities in Fort
Worth, Texas and Birmingham, Alabama. We believe that this consolidation will
enhance the operating efficiencies of our mail pharmacy business.
While the vast majority of our prescriptions are currently submitted
through the mail, we will continue to promote our web-based capabilities to
further reduce the costs associated with prescription refills. For additional
information on our web-based capabilities, see "-- Web-based Health Improvement
Products and Services" below.
Clinical and Other Services. Our clinical services professionals work
closely with health plan sponsors to design and administer pharmacy benefit
plans that, through the use of formularies and other techniques, promote
clinically appropriate drug usage while reducing drug costs. Our formulary
development process begins with a panel of independent physicians and
pharmacists who perform a clinical review of available drugs for inclusion in
the formulary based on safety and efficacy. After the clinical review has been
performed, we negotiate rebates and discounts with pharmaceutical manufacturers
to obtain the most cost effective formulary for our health plan sponsors.
We encourage formulary compliance through programs that operate at the
patient, prescribing physician and pharmacist levels. We help design tiered
co-payment plans, which require a health plan member to pay higher amounts for
non-preferred drugs. We attempt to influence physician prescribing patterns by
analyzing physicians' prescribing behavior relative to physician peer groups and
notifying them when their practices differ from peer group norms and medical
best practices. We provide face-to-face consultations between our clinical
pharmacists and high-prescribing physicians in an effort to align prescribing
practices in targeted categories and diseases that are in the best interests of
health plan sponsors and members. We also provide our own educational materials
to physicians, pharmacists and health plan sponsors. Through the retail
pharmacies, we offer a voluntary therapeutic interchange program that encourages
pharmacists to consult with patients and physicians regarding therapeutically
equivalent, cost-effective drug alternatives. Our programs support cost
effective, clinically appropriate drug management and help to ensure that
members receive appropriate drug therapies.
In addition, we have developed consulting products and services to assist
health plan sponsors in designing programs that manage prescription drug costs
effectively while maintaining high physician and member satisfaction. Such
programs include restrictive formularies, three-tiered co-payments and prior
authorization features. We have developed a proprietary decision support system
that offers virtually unlimited querying capability of pharmacy, medical and
laboratory data, sophisticated outcomes analyses, detailed physician and
pharmacy provider profiling, utilization trending and formulary and rebate
analysis. This system allows health plan sponsors to study the effectiveness of
specific drugs, identify and address areas for improvement and develop new
programs.
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CONSUMER CARD SERVICES
According to the U.S. Census Bureau, in 1999 approximately 43 million
Americans had no health insurance coverage. We estimate that approximately 17
million additional Americans do not have outpatient prescription drug coverage
included with their health insurance. We provide services to make prescription
drugs more affordable for groups and individuals who have limited or no
prescription drug insurance coverage. Through our consumer card services,
participants receive a discount on covered prescription drugs at the point of
sale, thereby reducing their prescription drug costs. We are able to achieve our
goal of providing prescription drugs to consumers at reduced prices by
negotiating rebates on prescription drugs from pharmaceutical manufacturers and
discounts from retail pharmacies based on our size and ability to influence
market share. In order to maximize the cost savings to participants, we also
provide messages to pharmacies participating in the programs to inform them of
clinically appropriate alternative drugs that may have a lower, out-of-pocket
cost for the patient. We also intend to expand a patient letter program
informing participants of preferred drugs available at discounts through the
program and encouraging them to bring the preferred drug to the attention of
their physician to determine whether or not they are a candidate for the more
cost effective treatment option. In addition to cost savings, patients benefit
by participating in our drug program by allowing us to capture the patients'
drug history and to identify and alert the dispensing pharmacist to any
potential drug interactions.
We currently have five consumer card programs and have more than 40,000
retail pharmacies participating in these programs nationwide. Four of our
programs include a mail service option to provide additional savings to
participants. Currently, we market our programs under MatureRx(R), MatureRx
Plus(TM), femScript(R) and AvidaRx(TM), which we acquired through our
acquisition of FFI, as well as provide private label consumer card programs for
customers like the American Association of Retired Persons, or AARP. MatureRx
and MatureRx Plus are designed to meet the needs of senior citizens who are
beneficiaries of Medicare, which does not currently cover the cost of
prescription drugs, by reducing their costs for prescription drugs. femScript is
designed to help women obtain prescription coverage for oral contraceptives and
estrogen replacement therapies. AvidaRx and the AdvancePCS private label
consumer card program are broad based programs offering savings on preferred
products to participants.
WEB-BASED HEALTH IMPROVEMENT PRODUCTS AND SERVICES
We believe that our web-based offerings are the most comprehensive in the
industry. Through these offerings we intend to both increase member satisfaction
with our PBM services and enhance our operating efficiency. We also aim to
facilitate the member retention and growth goals of our health plan sponsors by
providing such plans with leading e-health web site development services and
access to our e-health portals.
PBM Services. Our online pharmacy services allow us to both reduce costs
and improve service. When visiting our web sites, members of our health plan
sponsors can place orders for prescriptions, check order status, locate network
pharmacies, review formulary information and save processing and customer
service costs. We believe a key differentiating characteristic of our online PBM
services is the ability of patients to access online a confidential and complete
history of all prescriptions dispensed to them. In addition, we continue to work
with our health plan sponsors to develop interfaces that enable them to
seamlessly link into our PBM services through their own web sites.
Client Services. In response to client demand for their own e-health
solutions, we provide web development services for health plan sponsors, an
e-health portal and an online drugstore. We develop e-health web portals for our
clients by either co-branding our own e-health portal or creating a completely
customized, private-label web site on their behalf. Our web development services
are provided in conjunction with Consumer Health Interactive, Inc., or CHI, of
which we currently own approximately 19 percent. CHI assisted us in the
development of our own e-health portal, BuildingBetterHealth.com, which provides
consumers a comprehensive source of health, wellness and medical information,
including access to medical and drug encyclopedias, an extensive medical
library, medication guides, diet and nutritional resources, information about
diseases, pregnancy, child and elder care, current news articles
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about health care developments, and related content. In addition, our online
drugstore, AdvanceRx.com offers consumers the further convenience of shopping
for other drugstore products while filling their prescriptions online or
visiting BuildingBetterHealth.com or one of the other web sites that we
developed for health plan sponsors. AdvanceRx.com offers over-the-counter
products, health and beauty products, vitamins and nutritional supplements,
medical supplies and similar products, covering over 11,000 different SKUs.
DISEASE MANAGEMENT AND OTHER HEALTH IMPROVEMENT PROGRAMS
Disease Management. We help health plan sponsors manage the cost and
treatment of specific chronic diseases by improving medical outcomes and
lowering the cost of health care delivery. Our programs are designed to support
the quality initiatives and third-party accreditation requirements, such as
those of the National Committee on Quality Assurance, of our health plan
sponsors. These programs monitor the contracted population and intervene when
individuals demonstrate symptoms of a specific disease or high risk indications.
Our disease management programs are executed by a dedicated team of
clinicians and managed care professionals and typically have five principal
elements:
- Data integration. We compile and analyze medical, laboratory, pharmacy
and other relevant data for a particular group of health plan members.
- Case finding. We identify patients from the group who have the specific
disease and stratify them for targeted interventions.
- Treatment assessment. We compare treatment received by identified
patients with nationally accepted treatment guidelines. We also assess
physician knowledge of clinical guidelines for targeted interventions.
- Targeted interventions. We intervene with identified patients by
educating them about their disease and providing self-management tools.
We also provide physicians with treatment guidelines, patient profiles
and patient management tools.
- Outcomes analysis. We measure the results of the intervention by
tracking the identified patients' medical outcomes and monitoring ongoing
compliance with their treatment programs.
We have designed disease management programs for cardiovascular secondary
risk reduction, asthma, diabetes, heart failure, depression and hypertension. We
have approximately 15 million eligible members who are enrolled in health plans
currently under contract for one or more of our programs. We believe our disease
management programs are supported by our ability to assess quality of life,
quality of care and overall satisfaction with the disease management programs.
We also assess the economic benefit of the programs to our health plan sponsors.
The Center for Work and Health. In June 2000, we developed the Center for
Work and Health to focus specifically on employer group clients and the impact
that illnesses have on losses in productive hours of work. In this regard, the
Center for Work and Health views health care dollars as an investment in human
capital that needs to be effectively managed to improve the quality of life of
employees and to reduce lost productive hours and absenteeism due to illness.
The Center for Work and Health focuses on health problems that both have a
substantial impact on productivity and can be improved, such as arthritis pain,
back pain, musculoskeletal pain, depression, diabetes, gastrointestinal
disorders, allergic rhinitis, migraines and numerous other conditions. Many of
these conditions are common in working populations and are under-diagnosed, not
adequately managed and under-treated. Strategies that facilitate effective care
are likely to improve outcomes and, as a result, reduce lost hours of
productivity. We believe these results are particularly valuable to our employer
group clients, who are responsible for the cost of medical care and benefit
economically from a reduction in lost productivity.
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The Center for Healthier Aging and Patient Safety. In the third quarter of
fiscal year 2000, we developed the Center for Healthier Aging and Patient Safety
to encourage better health for elderly and the chronically ill through
preventative and interventional programs designed to promote the appropriate use
of pharmacy therapy and reduce overall health care costs for these patients.
Through focused data analysis, we work to assure that medications provide their
intended advantages with minimal unintended adverse effects. We also work with
pharmaceutical manufacturers to evaluate appropriate medications and medication
information for elderly patients and their physicians. As a result, we believe
that our emphasis on effective care for the elderly will increase our visibility
in the marketplace and position us to take advantage of any future Medicare drug
benefit opportunities.
CLINICAL TRIALS
Through our clinical research operations, we assist pharmaceutical
manufacturers in conducting clinical trials for both new drugs and new uses for
existing drugs. Our current clinical trial initiatives are focused on
Alzheimer's disease and other neurological disorders, psychological conditions
and pain relief. We provide key functions in the clinical trials process,
including:
- recruiting patients and physicians to participate in trials;
- administering the trials as designed by the pharmaceutical manufacturers;
and
- measuring the patients' results.
The large size and breadth of our PBM population enhances our clinical
trial recruitment and execution capabilities. Our patient enrollment methods are
designed to reduce drug development time, which permits sponsors of clinical
trials to introduce their products into the market faster and to maximize the
economic return for such products. We use a call center and medically
appropriate surveys to identify patients eligible to participate in our clinical
trials. We believe that the combination of our clinical trials expertise with
the largest PBM membership base allows us to more thoroughly and accurately
evaluate the clinical benefits and predict the impact of new pharmaceutical
products and services on health care expenditures and patient care management.
OUTCOMES STUDIES
We provide pharmaceutical manufacturers an established vehicle for
conducting studies that can document a drug's economic and clinical benefits in
a real world environment. In addition, our surveying capabilities permit us to
evaluate the effectiveness of disease management strategies. We perform outcomes
studies on a broad range of conditions including chronic pain, dementia, asthma
and diabetes.
Our outcomes studies services include conducting studies to further the
understanding of the characteristics of diseases and to develop simple-to-use
tools, such as questionnaires and decision trees, for diagnosing diseases. In
addition, we develop measurements for monitoring patient medical outcomes and
determine how to best influence the health status of individuals. We also
evaluate the direct and indirect costs of health care, as well as conduct
surveys to evaluate physician knowledge and behavior in order to develop
individualized educational materials for each physician.
CLIENTS
We generate a significant portion of our revenues from contracts with
health plan sponsors. One of our clients, Foundation Health Systems, Inc., now
known as Healthnet, accounted for approximately 41 percent of our revenues in
fiscal year 2000. However, on a pro forma basis giving effect to our acquisition
of PCS, Foundation Health Systems accounted for approximately eight percent of
revenues in fiscal year 2000. On a pro forma basis giving effect to our
acquisition of PCS, government contracts, including state and federal, represent
approximately 12 percent of our client base. These arrangements are typically
acquired through a competitive bidding process and may be terminated on short
notice by the government. No other client accounted for more than 10 percent of
our revenues in this period.
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Historically, we have had strong client relationships with BlueCross
BlueShield companies and other managed care organizations. While PCS has served
managed care plans, it has traditionally focused on and developed expertise in
serving self-insured employers, insurance carriers and government plans. As a
result of our combination, we now have a diverse client base and substantial
market penetration among all major target client groups.
SALES, MARKETING AND SERVICE
As of December 31, 2000, we had a staff of more than 450 sales and support
people. Our sales force is supplemented by client service representatives in
more than 30 offices throughout the United States. As part of our strategy to
expand our client base, we have reorganized our sales force into teams focused
on each client segment. Through this reorganization, our sales force will be
able to focus on the specific characteristics and needs of our current and
prospective clients in each segment.
The sales process for health plan sponsors usually lasts a minimum of six
to nine months and sometimes can extend for a year or longer. We initiate the
sales process with large health plan sponsors at our most senior levels. A staff
of sales representatives uses a team approach to work with a number of senior
level individuals within a health plan sponsor. In this manner, we are able to
work with health plan sponsors at multiple levels within their organizations,
and our health plan sponsors have multiple contacts within our organization.
Once we have contracted with a health plan sponsor for our services, we
commit to provide it with the highest level of support. For example, our
benefits design group works with our health plan sponsors to design the pharmacy
benefits that they will provide to the individuals in their plans. Each client
is supported by a multi-functional team led by a senior-level account manager
who coordinates with designated resources across our company. The account
management teams are organized by market segment to enhance their understanding
of the needs and complexities of our clients.
In addition, we commit to our health plan sponsors that the individuals
enrolled in their plans will receive high quality member service. To fulfill
this promise, we manage three advanced call centers staffed with almost 1,000
member service representatives who are available to answer incoming calls 24
hours a day, seven days a week. For the 12 month-period ended December 31, 2000,
our call centers received approximately 275,000 calls per week.
SUPPLIERS
We currently purchase products for our mail pharmacies from two primary
wholesale distributors. In an effort to continue to gain efficiencies from our
acquisition of PCS we recently entered into a three-year agreement with a
wholesale distributor to be our primary supplier of pharmaceuticals to our mail
pharmacies. We believe our supplier arrangements are more than adequate, and we
maintain strong relationships with back-up wholesalers and suppliers. In
addition, we believe alternative suppliers can be utilized without any
disruptions. We believe it would be relatively easy to switch from one supplier
to another. Other than with respect to our mail pharmacies, we do not purchase
products for retail pharmacies or otherwise supply products to them. Retail
pharmacies typically have their own arrangements with wholesale distributors or
pharmaceutical manufacturers.
INFORMATION SYSTEMS
Information technology systems are a critical part of our business. We
maintain a number of separate, proprietary systems that are designed to
efficiently support our specific departments, yet are compatible for electronic
data interchange. Our information technology systems are highly scalable and run
on a variety of platforms. We have an experienced systems staff of more than 800
employees. We maintain extensive preventative measures to protect against
disaster, including redundancy in all aspects of processing, telecommunications
and power sources.
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As part of our integration efforts with PCS, we are moving our Richardson,
Texas data center into our Scottsdale, Arizona data center. Although we are
combining physical locations, we will maintain our separate data processing
platforms in order to avoid client disruptions associated with conversion. The
Scottsdale, Arizona data center has received ISO 9002 certification from the
International Organization for Standardization, the world's foremost quality
standards organization, and has also received an exceptional audit grade from
registrars with the professional services firm, Deloitte & Touche LLP.
We are continuing to make significant progress in efforts to integrate
other technology that we acquired in connection with the PCS acquisition. We
have successfully integrated many of our administrative technologies such as
voice-mail, e-mail and telephony systems. We are making significant progress in
our efforts to integrate our accounting and payroll/benefit systems. We have
successfully created an interface to all of our call centers and our mail
service pharmacies so clients can be supported by any combination of these
facilities. By combining our technologies, we expect to achieve significant
synergies in our various operations to eliminate many redundant systems and to
redeploy key personnel to focus on our most critical needs.
COMPETITION
We compete with a number of national companies, including Merck-Medco
Managed Care, LLC, a subsidiary of Merck & Co., Inc., a pharmaceutical
manufacturer, Express Scripts, Inc. and Caremark Rx, Inc. In addition, we
compete with a number of local and regional PBMs, some of which may be owned by
health plans or retail pharmacy chains. These competitors may possess purchasing
and other advantages over us that could allow them to price competing services
more aggressively than we can because of their market position, affiliations and
other aspects of their businesses.
We believe that the primary competitive factors in the PBM industry
include:
- the size and financial strength of the company;
- independence from pharmaceutical manufacturers, retail pharmacies and
health plan sponsors;
- the ability to reduce health plan sponsor costs by negotiating favorable
rebates and volume discounts from pharmaceutical manufacturers;
- the quality, scope and costs of programs offered; and
- the ability to use clinical strategies to improve patient outcomes and
reduce costs.
GOVERNMENT REGULATION
Various aspects of our business are governed by federal and state laws and
regulations and compliance is a significant operational requirement for us. We
believe that we are in substantial compliance with all existing legal
requirements material to the operation of our business. However, the application
of complex standards to the detailed operation of our business always creates
areas of uncertainty. Moreover, regulation of the field is in a state of flux.
Numerous health care laws and regulations have been proposed at the state and
federal level, many of which could affect our business. We cannot predict what
additional federal or state legislation or regulatory initiatives may be enacted
in the future regarding health care or the business of PBMs, or how existing
laws may be interpreted. It is possible that federal or state governments might
impose additional restrictions or adopt interpretations of existing laws that
could have a material adverse affect on our business, profitability or growth
prospects.
Among the federal and state laws and regulations that affect aspects of the
PBM business are the following:
FDA Regulation. The U.S. Food and Drug Administration, or FDA, generally
has authority under the Federal Food, Drug and Cosmetic Act, or FDCA, to
regulate drug promotional materials that are disseminated "by or on behalf" of a
pharmaceutical manufacturer. In January 1998, the FDA issued a Draft Guidance
for Industry regarding the regulation of activities of pharmacy benefit managers
that are
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directly or indirectly controlled by pharmaceutical manufacturers. In that draft
guidance, the FDA purported to have the authority to hold pharmaceutical
manufacturers responsible for the promotional activities of PBMs, depending upon
the nature and extent of the relationship between the pharmaceutical
manufacturer and the PBM. We and many other companies and associations commented
to the FDA in writing regarding its authority to regulate the communications of
PBMs that are not owned by pharmaceutical manufacturers. In the fall of 1998,
the FDA withdrew the guidance and stated that it would reconsider the basis for
its issuance. To date, the FDA has not taken any further action on the issue.
Although it appears that the FDA has changed its position regarding regulation
of communications by PBMs, there is no assurance that it will not re-examine the
issue and seek to assert the authority to regulate the communications of such
PBMs.
The FDA also regulates the conduct of clinical trials for drugs. In
general, the sponsor of the drug product that is being studied, or the
manufacturer that will have the right to market the drug product if it is
approved by the FDA, has the responsibility to comply with the laws and
regulations that apply to the conduct of the clinical trials. However, in
providing services related to the conduct of clinical trials, we may assume some
or all of the sponsor's or clinical investigator's obligations related to the
study of the drug. In October 1998, the FDA announced that the agency would give
Institutional Review Boards, the independent bodies that oversee the conduct of
clinical investigations, increased access to information pointing to violative
or potentially violative conduct on the part of the physicians conducting the
clinical trials, or clinical investigators.
We believe that we meet all of our regulatory responsibilities with regard
to our involvement in clinical trials. However, the interpretation of the laws
and regulations relating to the conduct of clinical trials is complex and
sometimes subjective. We cannot assure you that the FDA will not at some point
consider our compliance efforts to be inadequate and initiate administrative
enforcement actions against us. If we fail to successfully defend against an
administrative enforcement action, it could result in an administrative order
suspending, restricting or eliminating our ability to participate in the
clinical trial process, which would materially limit our business operations.
Moreover, some violations of the FDCA are punishable by civil and criminal
penalties against both the violating company and responsible individuals. If
warranted by the facts, we and our employees involved in the trials could face
civil and criminal penalties, which include fines and imprisonment.
Regulation of Confidentiality of Patient Identifiable
Information. Government regulation of the use of patient identifiable
information has grown substantially over the past several years, and is likely
to increase further in the future. Many states have recently passed laws dealing
with the use and disclosure of health information, and this is expected to be an
area of significant activity in many states this year again. The proposals vary
widely, some relating to only certain types of information, others to only
certain uses, and yet others to only certain types of entities. Texas,
California and New York are some of the larger states expected to focus on
several proposals dealing with health information privacy this year. Numerous
proposals have been circulated at the state and federal level and there is no
assurance that these proposals, if adopted, will not have a material adverse
effect on our business, profitability and growth prospects. The programs that we
offer our health plan customers are information-based, utilizing aggregated and
anonymous data, as well as patient-specific information, depending upon the
needs of the customer. Government restrictions on the use of patient
identifiable information could adversely affect our ability to promote formulary
compliance and to conduct health improvement programs and outcomes studies, as
well as our business growth strategy based on these programs.
In the absence of comprehensive federal privacy legislation, in December
2000, the Department of Health and Human Services, or HHS, issued final
regulations regarding the privacy of individually identifiable health
information pursuant to the Health Insurance Portability and Accountability Act
of 1996, or HIPAA. This final privacy rule applies to both electronic and paper
records and imposes extensive requirements on the way in which health care
providers, health plans and their business associates use and disclose protected
information. This final rule gives patients significant rights to understand and
control how their protected health information is used and disclosed. Direct
providers, such as pharmacies, are required to obtain patient consents for
treatment, payment and health care operations.
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For all uses or disclosures of protected information that do not involve
treatment, payment or health care operations, the rule requires that all covered
entities obtain a valid patient authorization. In most cases, use or disclosure
of protected health information must be limited to the minimum amount necessary
to achieve the purpose of the use or disclosure. Organizations subject to the
rule will have approximately two years to comply with these provisions.
Sanctions for failing to comply with standards issued pursuant to HIPAA include
criminal penalties and civil sanctions.
In addition, in August 1998, HHS issued proposed regulations pursuant to
HIPAA that govern the security of individually-identifiable health information.
A final security rule has not yet been published but, once issued, it is likely
to impose additional administrative burdens on health care providers, health
plans and their business associates, relating to the storage, utilization and
transmission of health information.
Due to the complex and controversial nature of the HIPAA regulations, they
may be subject to court challenge, as well as further legislative and regulatory
actions that could alter their effect. We cannot at this time predict with
specificity what impact the recently adopted final rule on the privacy of
individually-identifiable health information, or the proposed rule on security
of individually-identifiable health information may have on us. However, they
will likely increase our burden of regulatory compliance with respect to our
health improvement programs and other information-based products, and may reduce
the amount of information we may use if patients do not consent to its use.
There can be no assurance that the restrictions and duties imposed will not have
a material adverse effect on our business, profitability or growth prospects.
Even without new legislation and beyond the final federal regulations,
individual health plan sponsors could prohibit us from including their patients'
medical information in our various databases of medical data. They could also
prohibit us from offering services that involve the compilation of such
information.
Anti-Kickback Laws. Subject to certain exceptions, federal law prohibits
the payment, offer, receipt or solicitation of any remuneration that is
knowingly and willfully intended to induce the referral of Medicare, Medicaid or
other federal health care program beneficiaries for the purchase, lease,
ordering or recommendation of the purchase, lease or ordering of items or
services reimbursable under federal health care programs. Several states also
have similar laws, known as "all payor" statutes, which apply anti-kickback
prohibitions beyond services for which federal health care program payments may
be made. Sanctions for violating these federal and state anti-kickback laws may
include criminal and civil sanctions and exclusion from participation in federal
health care programs. State anti-kickback laws vary, and have rarely been
interpreted by courts. However, in several cases, courts have ruled that
contracts that violate anti-kickback laws are void as a matter of public policy.
The federal anti-kickback statute has been interpreted broadly by courts,
by the Office of Inspector General, or OIG, and within administrative tribunals.
Courts have ruled that a violation of the statute may occur even if only one of
the purposes 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 "product conversion programs" in
which benefits are given by pharmaceutical manufacturers to pharmacists or
physicians for changing a prescription, or recommending or requesting such a
change, from one drug to another. These laws have been cited as a partial basis,
along with the state consumer protection laws discussed below, for
investigations and multi-state settlements relating to financial incentives
provided by pharmaceutical manufacturers to physicians or pharmacists in
connection with such programs.
Because of the federal statute's broad scope, federal regulations establish
some "safe harbors" from liability. Safe harbors exist for, among other things,
certain properly reported discounts received from vendors, certain investment
interests, certain properly disclosed payments made by vendors to group
purchasing organizations and certain managed care risk-sharing arrangements. A
practice that does not fall within a safe harbor is not necessarily unlawful,
but may be subject to scrutiny and challenge.
We believe that we are in compliance with the legal requirements imposed by
these laws and regulations, and we believe that there are material differences
between the drug-switching programs about
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which the OIG has raised concerns and the programs we offer to our customers. To
date, the government has not commenced enforcement actions under the
anti-kickback statutes against PBMs with regard to their negotiation of
discounts, rebates and administrative fees from drug manufacturers in connection
with drug purchasing and formulary management programs, or their contractual
agreements with pharmacies that participate in their networks, or their
relationships with their health plan customers. However, in June 1998, the
United States Attorney's Office for the Eastern District of Pennsylvania began
an investigation into whether rebates and other payments made by pharmaceutical
manufacturers to PBMs, or payments made by PBMs to retail pharmacies or others,
may violate the anti-kickback laws or other federal laws. To date, no specific
prosecutions or settlements have been made public, but we believe subpoenas have
been issued to another PBM and a pharmaceutical manufacturer. As part of this
investigation, prior to our acquisition of PCS, PCS received a subpoena from the
OIG requesting general information about PCS's programs. The United States
Attorney's Office has also contacted some of the pharmaceutical manufacturers
with which we have agreements, and has asked these manufacturers to provide
copies of documents relating to their agreements with us. At this time, we are
unable to predict whether the government will commence any action challenging
any of our programs and practices. We believe that our programs, and those
programs of PCS prior to the acquisition are in compliance with the requirements
imposed by the anti-kickback laws and other applicable laws and regulations.
Nevertheless, we could be subject to scrutiny, investigation or challenge under
these laws and regulations as a result of the OIG investigation or otherwise,
which could have a material adverse effect on our business, profitability and
growth prospects. For more information regarding the OIG investigation, see
"-- Legal Proceedings and Government Investigations" below.
OIG Study. The OIG Office of Evaluation and Inspections, which seeks to
improve the effectiveness and efficiency of the HHS's programs, issued a report
on PBM arrangements on April 15, 1997. The report was based primarily on a
nationwide survey of HMOs that use PBMs, and examined the benefits of, and
concerns raised by, the HMOs' relationships with PBMs.
The report identified concerns about the potential for bias resulting from
alliances of PBMs and pharmaceutical manufacturers and the lack of oversight by
HMOs regarding the performance of PBMs in delivering quality services to health
plan members. The report recommended that HCFA and state Medicaid programs
should include stronger oversight provisions in their risk contracts with HMOs
by requiring HMOs to review the performance of the PBMs with which they
contract. The report also recommended that HCFA, the FDA and the Health
Resources and Services Administration, working with outside organizations,
should develop quality measures for pharmacy practices that can be used in
managed care settings. We intend to closely monitor these agency actions and
whether these actions would have any impact on our business.
Managed Care Reform. Legislation is being debated on both the federal and
state level, and has been enacted in several states, aimed primarily at
improving the quality of care provided to individuals enrolled in managed care
plans. Some of these initiatives would, among other things, require that health
plan members have greater access to drugs not included on a plan's formulary and
give health plan members the right to sue their health plans for malpractice
when they have been denied care, and mandate the content of the appeals or
grievance process when a health plan member is denied coverage. The scope of the
managed care reform proposals under consideration by Congress and state
legislatures, and enacted by states, to date vary greatly, and the extent to
which future legislation may be enacted is uncertain. However, these initiatives
could greatly impact the managed care and pharmaceutical industries and,
therefore, could have a material impact on our business.
Direct Regulation of PBMs. Several states, including California, New
Jersey and New York, have introduced legislation that would directly regulate
PBMs, but to our knowledge, no state has passed such legislation. Several
regulatory and quasi-regulatory bodies, such as the National Association of
Insurance Commissioners, the National Association of Boards of Pharmacy and the
National Committee on Quality Assurance, are also considering proposals to
regulate PBMs and proposals to increase the regulation of certain PBM
activities, such as formulary and utilization management, and downstream risk
assumption. As discussed below under "-- Licensure Laws," state licensure of
certain activities, such as utilization
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review and third party administration, also may adversely impact our business
and operations. While the outcome of these initiatives is uncertain, any
resulting legislation could significantly impact our business, both directly as
a PBM, and indirectly through the impact on the pharmacy benefit services we are
able to deliver on behalf of our health plan sponsors.
ERISA Regulation. We have agreements to provide PBM services to a number
of self-funded corporate health plans. These plans are subject to the Employee
Retirement Income Security Act of 1974, or ERISA, which regulates employee
pension and health benefit plans. We believe that our activities are
sufficiently limited that we do not assume any of the plan fiduciary
responsibilities that would subject us to regulation under ERISA. Our agreements
with our self-funded corporate plan customers state that we are not the
fiduciary of the plan. However, the U.S. Department of Labor, which is the
agency that enforces ERISA, could assert that the fiduciary obligations imposed
by the statute apply to certain aspects of our operations. In recent decisions,
the United States Supreme Court and other federal courts have declined to extend
fiduciary status to managed care organizations that contract with ERISA plans.
However, future cases involving PBMs could be decided differently, and if we
were deemed to be a fiduciary, we could potentially be subject to claims over
benefit denials. In addition, we could also be subject to claims for breaching
fiduciary duties in connection with the services we provide to the plan.
In March 1998, Mulder v. PCS Health Systems, Inc. was filed as an alleged
class action lawsuit, contending that we are an ERISA fiduciary and that we have
breached our fiduciary obligations under ERISA in connection with our
development and implementation of formularies, preferred drug listings and
intervention programs. We have denied all allegations of wrongdoing and are
vigorously defending this lawsuit. For information regarding this action, see
"-- Legal Proceedings and Government Investigations" below.
ERISA prohibits a "party in interest" to a plan from engaging in certain
types of transactions with the plan, including purchases, sales, and loans.
Violations are subject to civil and criminal liability. By providing services to
these plans, we are subject to the restrictions on a party in interest. We
believe that we are in compliance with these provisions of ERISA. However, we
can provide no assurance that the government would not challenge our practices.
Consumer Protection Laws. Most states have consumer protection laws, which
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by pharmaceutical manufacturers to retail
pharmacies in connection with drug switching programs. In addition, under a
settlement agreement entered into with 17 states on October 25, 1995,
Merck-Medco Managed Care, the PBM subsidiary of pharmaceutical manufacturer
Merck & Co., agreed to require pharmacists affiliated with Merck-Medco Managed
Care mail service pharmacies to disclose to physicians and patients the
financial relationships between Merck & Co., Merck-Medco Managed Care and the
mail service pharmacy when such pharmacists contact physicians seeking to change
a prescription from one drug to another. We believe that our contractual
relationships with pharmaceutical manufacturers and retail pharmacies do not
include the features that were viewed by enforcement authorities as problematic
in these settlement agreements, and that our business practices are otherwise
compliant with consumer protection laws. However, we could be subject to
scrutiny or challenge under one or more of these laws. Additionally, most states
have enacted consumer protection laws relating to a wide range of managed health
care activities, including provider contracting, member appeals, and access to
services and supplies.
Network Access Legislation. A significant number of states have adopted
some form of legislation affecting our ability to limit access to retail
pharmacy provider networks or from removing retail pharmacies from a network.
Such legislation may require us, directly or through our health plan customers,
to admit any retail pharmacy willing to meet the plan's price and other terms
for network participation; this legislation is sometimes referred to as "any
willing provider" legislation. To date, we have not been materially affected by
these statutes because we administer a large network of over 56,000 retail
pharmacies and will admit any licensed pharmacy that meets our credentialing
criteria, involving such matters as adequate insurance coverage, minimum hours
of operation, and the absence of disciplinary actions by the relevant state
agencies.
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Formulary Restrictions. A number of states have begun to actively regulate
the management of prescription drug benefits. Texas, California, New York and
New Jersey have taken the lead proposing legislation on a wide range of issues
affecting the delivery of pharmacy benefits. Many smaller states have followed,
although often focusing on particular aspects, such as formularies or pharmacy
network issues. For example, some states have passed laws mandating coverage for
certain categories of drug products, such as off-label uses of chemotherapeutic
agents where those uses are recognized in peer-reviewed medical journals or
reference compendia. Other states have begun to enact laws that regulate the
establishment of formularies by insurers, HMOs and other third party payors.
These laws have included requirements on the development, review and update of
formularies, the role and composition of pharmacy and therapeutics committees,
availability of formulary listings, and disclosure of formulary information to
health plan members; and a process for allowing members to obtain non-preferred
drugs without additional cost-sharing where they are medically necessary and the
formulary drugs are determined to be inappropriate. Additionally, the National
Association of Insurance Commissioners is developing a model drug formulary
statute, known as the Health Carrier Prescription Benefit Management Model Act,
that, if ultimately enacted throughout the country, may provide more uniformity
for health plans and PBMs. Among other things, the model act would address the
disclosure of formulary information to health plan members, members' access to
non-preferred drugs, and the appeals process available to members when coverage
of a non-preferred drug is denied by the health plan or pharmacy benefit
manager. Increasing regulation of formularies by states could significantly
affect our ability to develop and administer formularies on behalf of our
insurer, HMO and other health plan customers.
Legislation Imposing Plan Design Restrictions. Some states have
legislation that prohibits a health plan sponsor from implementing certain
restrictive design features. For example, some states provide that members of
the plan may not be required to use network providers, but must also be provided
with benefits even if they choose to use non-network providers. This legislation
is sometimes referred to as "freedom of choice" legislation, and some states are
implementing rules restricting the ability to make formulary changes. Among the
most aggressive in this regard are Texas and New Jersey, both of which have
recently issued far-reaching regulations limiting formulary flexibility. In
Texas, the new regulations prevent plans from changing their formularies during
the plan year, and in New Jersey, the regulations mandate coverage of at least
two drugs per therapeutic class and limit the difference in co-payments to 30%
for different tiers on a formulary. Other states mandate coverage of certain
benefits or conditions. This legislation does not generally apply to us, but it
may apply to some of our customers such as HMOs and insurers. If similar
legislation were to become widespread and broad in scope, it could have the
effect of limiting the ability of PBMs to achieve economic benefits through
health benefit management services.
Licensure Laws. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including preferred
provider organizations, third party administrators, and companies that provide
utilization review and related services. The scope of these laws differs
significantly from state to state, and the application of these laws to the
activities of pharmacy benefit managers is often unclear. We have registered
under these laws in those states in which we have concluded, after discussion
with the appropriate state agency, that such registration is required. As noted
above under "-- Direct Regulation of PBMs," some states have introduced
legislation that, if enacted, would subject PBMs to comprehensive regulation.
Such enactments could adversely affect our business and operations.
Legislation and Regulation Affecting Drug Prices. Some states have adopted
legislation or regulations providing that a pharmacy participating in the
state's Medicaid program must give program patients the best price that the
pharmacy makes available to any third party plan. These requirements are
sometimes referred to as "most favored nation" payment systems. 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. Any such legislation, if enacted in any state, may adversely affect
our ability to negotiate discounts from network pharmacies or manufacturers.
Some manufacturers may view these Medicaid rebate provisions as a disincentive
to provide discounts, which could adversely affect our ability to control costs.
A number of states have also recently introduced broad drug price control bills
that would extend price controls beyond the Medicaid program. Many of these
bills impose maximum drug
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prices based on the Federal Supply Schedule and require that manufacturers
and/or pharmacies extend this pricing to one or more segments of the state's
population, such as to all Medicare beneficiaries. If enacted, these bills could
adversely affect our mail-order pharmacy's reimbursement rates, or otherwise
discourage the use of the full range of our services by current or future
clients.
In 2000, Congress passed the Medicine Equity and Drug Safety Act of 2000,
directing the FDA to promulgate regulations allowing pharmacists and drug
wholesalers to reimport approved drugs, originally manufactured in the United
States, back into the United States from other countries where the drugs were
sold at a lower price. The purpose of the law was to enable United States
citizens to purchase drugs at prices comparable to lower prices charged for such
medicines in other countries. In December 2000, the Secretary of HHS notified
President Clinton that HHS would not seek the necessary funding to implement the
law, since she believed it was too flawed as written to be effective. The
Secretary of HHS in the Bush Administration has not indicated whether he will
reverse this decision. Thus, whether and how the law will actually be
implemented through regulations is unclear. It may offer PBMs opportunities to
reduce costs, but faces substantial opposition from the prescription drug
industry. The ultimate effect of the legislation on our business is not known at
this point.
Recently, the government has increased its attention to how drug
manufacturers develop pricing information, which in turn is used in setting
payments under the Medicare and Medicaid programs. One element common to many
payment formulas, Average Wholesale Price, or AWP, has come under criticism as
not accurately reflecting prices actually charged and paid at the wholesale or
retail level. The Department of Justice is currently conducting, and the House
Commerce Committee has conducted, an investigation into the use of AWP for
federal program reimbursement, and whether it has inflated drug expenditures by
the Medicare and Medicaid programs. In addition, the Clinton administration,
along with many states, proposed changing the basis for calculating
reimbursement of certain drugs by the Medicare and Medicaid programs. Instead of
AWP as historically reported by First DataBank, a company that specializes in
the compilation of drug pricing information, the federal and state governments
proposed to use a different set of pricing data, also compiled by First
DataBank, which generally yielded lower prices for certain drugs. As part of the
2000 Consolidated Appropriations Act, P.L. 106-554, however, Congress enjoined
reductions in Medicare drugs reimbursed based on the revised data pending a
study by the General Accounting Office, and the U.S. Healthcare Financing
Administration has suspended the implementation of this data with respect to
Medicare pending this study. These changes and other legislative or regulatory
adjustments that may be made to the program for reimbursement of drugs by
Medicare and Medicaid, if implemented, could affect our ability to negotiate
discounts with pharmaceutical manufacturers. In addition, it may affect our
relations with pharmacies and health plans. In some circumstances, they might
also impact the reimbursement that our mail-order pharmacy receives from managed
care organizations that contract with government health programs to provide
prescription drug benefits or otherwise elect to rely on the revised First
DataBank pricing information. Furthermore, private payors may choose to follow
the government's example, and adopt different drug pricing bases. This could
affect our ability to negotiate with plans, manufacturers and pharmacies
regarding discounts.
Medicare Prescription Drug Benefit. Medicare reimbursement and coverage of
prescription drugs may change significantly in the near future. Medicare does
not currently offer an outpatient prescription drug benefit. Proposals have been
made to reduce Medicare drug reimbursement amounts, although the prospects for
legislation are uncertain. Several legislative proposals are under consideration
in Congress to provide Medicare recipients with outpatient drug benefits through
the use of PBMs. Many states are also considering establishing or expanding
state drug assistance programs which would increase access to drugs by those
currently without coverage. We cannot assess at this stage whether such
proposals will be enacted or how they would address drug costs.
Regulation of Financial Risk Plans. The administration of fee-for-service
prescription drug plans by PBMs generally is not subject to insurance regulation
by the states. However, if a pharmacy benefit manager offers to provide
prescription drug coverage on a capitated basis or otherwise accepts financial
or insurance type risk in providing the benefit, laws in various states may
regulate the plan. These laws may require that the party at risk establish
reserves or otherwise demonstrate financial responsibility. Laws that
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may apply in such cases include laws governing the business of insurance, HMOs,
limited prepaid health service plans, preferred provider organizations and
organized delivery systems. 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. 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. This issue has received a great deal of attention recently. For
example, the National Community Pharmacists Association has asked the National
Association of Insurance Commissioners to examine whether PBMs should be subject
to state insurance laws. Accordingly, compliance with state laws and regulations
is a significant operational requirement for us, and could limit our flexibility
to adopt alternative and novel fee arrangements with our customers.
Mail Pharmacy Regulation. Our mail pharmacy operation distributes drugs
throughout the United States. Our fulfillment centers are presently located in
Richardson and Fort Worth, Texas and Birmingham, Alabama. We are in the process
of consolidating our Richardson, Texas mail pharmacy operations into our larger
facilities in Fort Worth, Texas and Birmingham, Alabama. We are licensed by
United States, Texas and Alabama authorities to do business as a pharmacy and to
deliver controlled substances. Many of the states into which we deliver
pharmaceuticals and controlled substances have laws and regulations that require
out-of-state mail service pharmacies to register with that state's board of
pharmacy, or similar regulatory body, in order to mail drugs into the state. We
have registered in every state that, to our knowledge, requires such
registration. In addition, some states require out-of-state mail service
pharmacies to have a pharmacist at the mail order location who is licensed in
the state to which the drugs are shipped, as well as meeting other standards. To
the extent that such laws or regulations are applicable to us, we believe that
we are in compliance with them.
Other Statutes and Regulations Affecting our Mail Pharmacy
Operations. HCFA requires mail order pharmacies to provide toll-free numbers
for patient counseling of Medicaid recipients residing out of state. However, we
do not currently receive reimbursement from any state Medicaid programs.
Congressional directives to provide useful information on prescription drugs to
consumers may involve participation by mail order pharmacies in disseminating
such information. 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 our
mail service operations. The United States Postal Service historically has
exercised this statutory authority only with respect to controlled substances.
Alternative means of delivery are available to us.
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FACILITIES
Our existing facilities consist of approximately 1,100,000 square feet, of
which we own 150,400 square feet and lease the remainder. The following table
sets forth information with respect to our principal facilities.
APPROXIMATE
SQUARE
FACILITY LOCATION FOOTAGE LEASE/OWN
- -------- -------- ----------- ---------
Corporate Headquarters Irving, Texas...................... 24,500 Lease
Corporate Office Scottsdale, Arizona................ 375,300 Lease
Call Center Scottsdale, Arizona................ 53,800 Lease
Call Center Richardson, Texas.................. 52,000 Lease
Call Center Gold River, California............. 20,700 Lease
Clinical Services Bloomington, Minnesota............. 45,300 Lease
Clinical Services Hunt Valley, Maryland.............. 23,200 Lease
Mail Service Pharmacy Birmingham, Alabama................ 112,000 Own
Mail Service Pharmacy Fort Worth, Texas.................. 93,800 Lease
Mail Service Pharmacy Richardson, Texas.................. 38,400 Own
e-Solutions Richardson, Texas.................. 38,300 Lease
In addition, we have several other facilities throughout the United States that
we use for sales offices, clinics, data services and other corporate purposes.
We believe our facilities are adequate to meet our requirements for the
foreseeable future.
EMPLOYEES
On December 31, 2000, we had 4,378 employees, including 16 medical doctors
and 459 pharmacists. None of our employees is represented by a labor union. In
the opinion of management, we have good relationships with our employees.
INSURANCE
Our PBM operations, including the dispensing of pharmaceutical products by
our mail service pharmacies, and the services rendered in connection with our
health improvement services, and our non-PBM operations, such as the products
and services provided in connection with our clinical trial services, may
subject us to litigation and liability for damages. We believe that our
insurance protection is adequate for our present business operations, but there
can be no assurance that we will be able to maintain our professional and
general liability insurance coverage in the future or that such insurance
coverage will be available on acceptable terms or be adequate to cover any or
all potential product or professional liability claims. A successful product or
professional liability claim in excess of our insurance coverage, or one for
which an exclusion from coverage applies, could have a material adverse effect
upon our financial position or results of operations.
LEGAL PROCEEDINGS AND GOVERNMENT INVESTIGATIONS
In November 1999, PCS received a subpoena by the Department of Health and
Human Services Office of Inspector General, or OIG, requesting PCS to produce
certain documents about its programs and how they operate in connection with an
industry-wide investigation. The investigation was instigated and is being
pursued by the United States Attorney's Office for the Eastern District of
Pennsylvania, which indicated an intention to review PBMs' programs in light of
anti-kickback and other laws and regulations. Specifically, the focus of this
investigation appears to be PBMs' relationships with pharmaceutical
manufacturers and retail pharmacies and PBMs' programs relating to drug
formulary compliance, including rebate and other payments made by pharmaceutical
manufacturers to PBMs and payments made by PBMs to retail pharmacies or others.
The United States Attorney's Office has also contacted some of the
pharmaceutical manufacturers with which we have agreements, and has asked these
manufacturers to
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provide copies of documents relating to their agreements with us. There has been
no allegation of any wrongdoing on our part. At this time, we are unable to
predict whether the government will commence any action challenging any of our
programs and practices. AdvancePCS believes that its programs, and those of PCS
prior to the acquisition, are in compliance with the requirements imposed by
anti-kickback laws and other applicable laws and regulations. AdvancePCS plans
to continue to cooperate with the OIG with respect to this investigation.
Nevertheless, we could be subject to scrutiny, investigation or challenge under
these laws and regulations as a result of the OIG investigation or otherwise,
which could have a material adverse effect on our business, profitability and
growth prospects.
In March 1998, a class action lawsuit captioned Mulder v. PCS Health
Systems, Inc., case number 98-1003, was filed in the United States District
Court of the District of New Jersey. This action alleges that AdvancePCS is an
ERISA fiduciary and that we have breached our fiduciary obligations under ERISA
in connection with our development and implementation of formularies, preferred
drug listings and intervention programs for our sponsors of ERISA health plans.
In particular, plaintiffs allege that our therapeutic interchange programs and
negotiation of formulary rebates and discounts from pharmaceutical manufacturers
violate fiduciary obligations. AdvancePCS believes that it does not assume any
of the plan fiduciary responsibilities that would subject it to regulations
under ERISA. Although the ultimate outcome is uncertain, an adverse
determination could materially harm our business, profitability and growth
prospects. A class of plaintiffs has not yet been certified, and we intend to
oppose such certification. AdvancePCS has denied all allegations of wrongdoing
and is vigorously defending this suit.
In addition, we are a defendant in lawsuits from time to time arising in
the ordinary course of business, the outcome of which we believe will not have a
material adverse effect on our business, profitability and growth prospects.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and positions of our executive
officers and directors as of April 1, 2001:
NAME AGE POSITION
- ---- --- --------
David D. Halbert...................... 45 Chairman of the Board and Chief
Executive Officer
Jon S. Halbert........................ 41 Vice Chairman, e-Business and
Technology and Director
David A. George....................... 45 President and Director
T. Danny Phillips..................... 41 Chief Financial Officer and Executive
Vice President
Joseph J. Filipek, Jr., P.D........... 45 Executive Vice President, Client
Management
Susan S. de Mars...................... 40 Senior Vice President and General
Counsel
Jeffrey G. Sanders.................... 42 Senior Vice President, Strategic
Initiatives
Laura I. Johansen..................... 35 Senior Vice President, Corporate
Affairs and Secretary
Andrew C. Garling, M.D................ 55 Senior Vice President, Clinical
Operations
Rudy Mladenovic....................... 42 Senior Vice President, Pharma
Relations
John H. Sattler, R.Ph................. 48 Senior Vice President, Sales
Ramsey A. Frank....................... 40 Director
Stephen L. Green...................... 50 Director
David R. Jessick...................... 47 Director
Paul S. Levy.......................... 53 Director
Robert G. Miller...................... 56 Director
Jean-Pierre Millon.................... 50 Director
Michael D. Ware....................... 55 Director
David D. Halbert founded AdvancePCS in 1986 and has continuously served as
our Chairman of the Board and Chief Executive Officer. Prior to founding
AdvancePCS, Mr. Halbert served as an executive officer for several organizations
engaged in various health care, as well as non-health care, related industries.
David D. Halbert is the brother of Jon S. Halbert.
Jon S. Halbert joined AdvancePCS in January 1988 and has continuously
served as a director and as an executive officer of AdvancePCS since that date.
Mr. Halbert currently serves as our Vice Chairman, e-Business and Technology.
Before joining AdvancePCS, Mr. Halbert served as an executive officer and/or
director for several organizations engaged in various health care, as well as
non-health care, related industries. Mr. Halbert also worked as a registered
representative of the National Association of Securities Dealers for Bear,
Stearns & Co. Jon S. Halbert is the brother of David D. Halbert.
David A. George has served as a director of AdvancePCS since November 1998
and has served as an executive officer of AdvancePCS since March 1999. Mr.
George currently serves as our President. From October 1995 to November 1998,
Mr. George served as Executive Vice President of United HealthCare Corporation.
Before United HealthCare, Mr. George was Executive Vice President of MetraHealth
Corporation, also known as MetraHealth, from December 1994 to October 1995.
MetraHealth merged with United HealthCare Corporation in October 1995. Prior to
joining MetraHealth, Mr. George was president of Southern Group Operations for
The Prudential Healthcare System.
T. Danny Phillips joined AdvancePCS in February 1992 and currently serves
as our Chief Financial Officer and Executive Vice President. Prior to joining
AdvancePCS, Mr. Phillips served as chief financial officer of Aloha Petroleum,
Ltd., a retail gasoline company, from April 1991 to February 1992.
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Joseph J. Filipek, Jr., P.D. joined AdvancePCS in December 1993 and
currently serves as our Executive Vice President, Client Management. Prior to
joining AdvancePCS, Dr. Filipek founded Advance Paradigm Clinical Services,
Inc., which was acquired by us in 1993 from BlueCross BlueShield of Maryland,
Inc.
Susan S. de Mars joined AdvancePCS in October 2000 upon our acquisition of
PCS and currently serves as our Senior Vice President and General Counsel. Ms.
de Mars joined PCS in 1995 as assistant general counsel and served as its
general counsel from January 1999 to October 2000.
Jeffrey G. Sanders joined AdvancePCS in October 2000 upon our acquisition
of PCS and currently serves as our Senior Vice President, Strategic Initiatives.
Before joining PCS in 1993, Mr. Sanders served three years as director of the
Office of Legislation and Policy of the Health Care Financing Administration in
Washington, D.C. Mr. Sanders also held positions with the United States Budget
Committee and the Office of Management and Budget.
Laura I. Johansen joined AdvancePCS in February 1995 and currently serves
as our Senior Vice President, Corporate Affairs and Secretary. Ms. Johansen
served as our Senior Vice President, General Counsel from February 1995 until
August 1999 and as our Senior Vice President, Office of the CEO from August 1999
until October 2000. Prior to joining AdvancePCS, Ms. Johansen served as an
attorney in the corporate/securities section of Akin, Gump, Strauss, Hauer &
Feld, L.L.P.
Andrew C. Garling, M.D. joined AdvancePCS in August 1999 and currently
serves as our Senior Vice President, Clinical Operations. Prior to joining
AdvancePCS, from 1997 to 1999, Dr. Garling served as chief medical officer and
senior vice president of the Payor Solutions Group at McKesson HBOC. From 1995
to 1997, Dr. Garling served as vice president and chief medical officer of
Advanced Health Inc., a physician practice management company. Prior to 1995,
Dr. Garling served as chief information officer of the Southern Group Operations
of Prudential Healthcare Systems Inc.
Rudy Mladenovic joined AdvancePCS in December 1999 and currently serves as
our Senior Vice President, Pharma Relations. Prior to joining AdvancePCS, Mr.
Mladenovic served as the executive director of Anthem BlueCross BlueShield
Midwest, a four million member division of Anthem, Inc. Prior to joining Anthem
BlueCross BlueShield Midwest, he was the vice president and executive director
of Anthem Prescription Management, Inc., a wholly owned subsidiary of Anthem,
Inc. From 1993 to 1995, he served as vice president, sales for Athena of North
America, Inc., and Acordia Health Industry Services, Inc., each a wholly-owned
subsidiary of Anthem, Inc.
John H. Sattler, R.Ph. joined AdvancePCS in 1994 and currently serves as
our Senior Vice President, Sales. Prior to joining AdvancePCS, Mr. Sattler
served as vice president, sales and marketing for Health Care Pharmacy
Providers, Inc. from September 1992 to November 1994. Prior to 1992, he served
as manager of Third Party Marketing for American Drug Stores, Inc.
Ramsey A. Frank has served as a director of AdvancePCS since October 2000.
Mr. Frank is a senior managing director of Joseph Littlejohn & Levy, Inc., which
he joined in 1999. From 1993 to 1999, Mr. Frank was a managing director of
Donaldson, Lufkin & Jenrette, where he headed the restructuring group and was a
senior member of the leveraged finance group. Mr. Frank also serves as a
director of IASIS Healthcare Corporation.
Stephen L. Green has served as a director of AdvancePCS since August 1993.
Mr. Green currently serves as a general partner of Canaan Partners, a venture
capital firm. Prior to joining Canaan Partners in November 1991, Mr. Green
served as managing director in General Electric Capital's Corporate Finance
Group for more than five years. Mr. Green currently serves on the board of
directors of Suiza Foods Corporation.
David R. Jessick has served as a director of AdvancePCS since October 2000.
Mr. Jessick has been senior executive vice president and chief administrative
officer of Rite Aid since December 5, 1999. From 1997 to July 1999, Mr. Jessick
served as executive vice president of finance and investor relations of Fred
Meyer, Inc. From 1979 to 1997, Mr. Jessick held several senior management
positions at Thrifty PayLess
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Holdings, Inc., a west coast-based drugstore chain which had annual sales of
$5.0 billion before being acquired by Rite Aid in 1996. Mr. Jessick was
executive vice president and chief financial officer of Thrifty PayLess
Holdings, Inc. before Thrifty PayLess was acquired by Rite Aid.
Paul S. Levy has served as a director of AdvancePCS since October 2000. Mr.
Levy is a senior managing director of Joseph Littlejohn & Levy, Inc., which he
founded in 1988. Mr. Levy serves as a director of several companies, including
IASIS Healthcare Corporation, Motor Coach Industries International Inc., Hayes
Lemmerz International Inc., Builders FirstSource, Inc., Fairfield Manufacturing
Company, Inc. and New World Pasta Company.
Robert G. Miller has served as a director of AdvancePCS since October 2000.
Mr. Miller has been chairman and chief executive officer and a director of Rite
Aid since December 5, 1999. Previously, Mr. Miller served as vice chairman and
chief operating officer of The Kroger Company, a retail food company. Mr. Miller
joined Kroger in May 1999. From 1991 until May 1999, he served as chief
executive officer of Fred Meyer, Inc. Mr. Miller is a director of Pathmark
Stores, Inc., Scottish Power plc and Harrah's Entertainment, Inc.
Jean-Pierre Millon has served as a director of AdvancePCS since October
2000. Since October 2, 2000, Mr. Millon has served as a consultant to
AdvancePCS. Mr. Millon joined PCS Health Systems Inc. in 1995, where he served
as its president and chief executive officer from June 1996 to September 2000.
Prior to joining PCS Health Systems, Mr. Millon served as an executive and held
several leadership positions with Eli Lilly and Company, the former parent
company of PCS Health Systems, Inc.
Michael D. Ware has served as a director of AdvancePCS since July 1993. Mr.
Ware is a co-founder of Advance Capital Markets, Inc., a private investment
firm, and has served as its managing director since January 1989. Prior to
founding Advance Capital Markets, Inc., Mr. Ware was the president of Reliance
Energy Services, Inc.
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CERTAIN TRANSACTIONS
AGREEMENTS IN CONNECTION WITH OUR ACQUISITION OF PCS
Consulting Agreement. In connection with our acquisition of PCS and in
consideration for the commitment of Jean-Pierre Millon to assist us during the
transitional period, we entered into a consulting agreement with Mr. Millon
effective October 2, 2000. The consulting agreement is for a six-month term and
entitles Mr. Millon to compensation in the amount of $490,000 in addition to
benefits received by our other non-employee directors. In addition, we paid Mr.
Millon an amount of $7,155,894 in order to fulfill the requirements under his
former employment agreement with PCS. Mr. Millon and his family are entitled to
benefits under our employee benefit plans through January 22, 2002. The
consulting agreement contains non-competition provisions effective for the term
of the consulting agreement and for a period of one year thereafter.
Retention Payments. In connection with our acquisition of PCS we also paid
a retention and change in control payment of $1,488,094 to Tom J. Garrity, our
executive vice president, financial operations, a retention payment of
$1,280,034 to Jeffrey G. Sanders, our senior vice president, strategic
initiatives, and a retention payment of $256,007 to Ken Zadoorian, our senior
vice president, chief human resources, under their employment agreements with
PCS.
Stockholders' Agreement. On October 2, 2000, we entered into a
Stockholders' Agreement with Rite Aid and JLL, which, among other things,
contains certain registration rights, "standstill" provisions and agreements
relating to our corporate governance. Under this agreement, Rite Aid and JLL
have piggyback registration rights with respect to the Class A common stock
issuable upon conversion of the Class B-1 and Class B-2 common stock they own.
In addition to piggyback rights, each of the holders of the Class B-1 and Class
B-2 common stock have two demand registration rights that may only be used after
April 2, 2001.
Registration Rights Agreement. On October 2, 2000, we entered into a
registration rights agreement with Rite Aid in connection with the senior
subordinated notes and warrants issued to Rite Aid. The registration rights
agreement provides for piggyback rights and requires us to use our reasonable
best efforts to file a shelf registration statement. Pursuant to this agreement,
we filed a registration statement registering the resale of the senior
subordinated notes, warrants and shares of Class A common stock issuable upon
exercise of the warrants. Upon completion of the offering of the old notes, we
repaid all of our outstanding senior subordinated notes and the warrants issued
to Rite Aid were cancelled. Upon the filing of the registration statement of
which this prospectus is a part, we deregistered the senior subordinated notes,
warrants and shares of Class A common stock issuable upon exercise of the
warrants.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
SENIOR SECURED CREDIT FACILITY
The following summary of the provisions of our senior secured credit
facility does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the credit facility, a copy of which can be
obtained from us upon request. Defined terms that are used but not defined in
this section have the meanings given to such terms in our credit facility.
In conjunction with our acquisition of PCS, we obtained an $825 million
senior secured credit facility that includes a $175.0 million revolving credit
facility, $100 million interim revolving credit facility and two term notes
totaling $550.0 million. Our $150 million Term A note accrues interest at LIBOR
plus 3%, with escalating quarterly principal payments, and is due on September
30, 2005. Our $400 million Term B note accrues interest at LIBOR plus 3.5%, with
quarterly principal payments of $1 million until December 31, 2006 and payments
of $94.5 million thereafter on each of December 31, 2006, March 31, 2007, June
30, 2007 and September 30, 2007. Our $175 million revolving credit facility
accrues interest at LIBOR plus 3%. These percentages may be lower based upon our
total leverage. The revolving credit facility expires on October 2, 2005. As of
December 31, 2000, $60 million was outstanding under this facility. We intend to
refinance the $100 million interim revolving credit facility with a
collateralized accounts receivable facility by June 2001. The senior secured
credit facility has been unconditionally guaranteed, jointly or severally, by
all of our subsidiaries and secured by a first priority lien on the stock of our
subsidiaries and substantially all of our assets and the assets of our
subsidiaries. Each subsidiary is 100% owned. There are no restrictions on the
ability of the subsidiary guarantors to pay dividends or make loans or advances
to the parent.
Our credit facility covenants, among other things, restrict our ability to:
- incur additional indebtedness;
- issue preferred stock;
- declare or pay dividends and other distributions;
- create liens;
- make capital expenditures;
- make certain investments or acquisitions;
- enter into mergers or consolidations;
- make sales of assets; and
- engage in certain transactions with affiliates.
In addition, under our credit facilities, we are required to satisfy a minimum
fixed charge coverage ratio, a maximum total leverage ratio and a minimum
interest coverage ratio.
Failure to satisfy any of the covenants would constitute an event of
default under our senior secured credit facility, notwithstanding our ability to
meet our debt service obligations. The senior secured credit facility also
includes other customary events of default, including, without limitation, a
cross-default to other indebtedness, undischarged judgments, bankruptcy and a
change of control.
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DESCRIPTION OF EXCHANGE NOTES
You can find the definitions of some of the terms used in this description
under the subheading "Certain Definitions." Certain other terms are used in this
description as defined in the indenture referred to below. For purposes of this
section, references to "AdvancePCS," "we," "us," "our" or "ours" refers only to
AdvancePCS and not to any of its Subsidiaries.
The old notes were, and the exchange notes will be, issued under the
indenture dated March 13, 2001, among AdvancePCS, U.S. Trust Company of Texas,
N.A., as trustee, and the Guarantors. The terms of the exchange notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939, as amended. The following summary of the
principal terms and provisions of the indenture and the exchange notes does not
purport to be complete and is subject in all respects to, and qualified in its
entirety by reference to, the indenture and the exchange notes, copies of which
are available from us upon request. The indenture has been filed as an exhibit
to the registration statement of which this prospectus is a part and is
incorporated by reference in this prospectus. In this description we refer to
the old notes and the exchange notes collectively as the notes.
BRIEF DESCRIPTION OF THE EXCHANGE NOTES AND THE SUBSIDIARY GUARANTEES
The Exchange Notes
The exchange notes:
- will be general unsecured obligations of AdvancePCS;
- will rank behind all our existing and future senior secured debt;
- will rank equally with all our existing and future senior unsecured debt;
- will rank ahead of any of our existing and future subordinated debt;
- will rank structurally behind the liabilities of any of our Subsidiaries
that do not guarantee the notes; and
- will be unconditionally guaranteed by the Guarantors.
The Subsidiary Guarantees
The exchange notes will be unconditionally guaranteed on a senior basis by
each of our existing and future domestic Subsidiaries, with certain exceptions
specified below.
The guarantees of the exchange notes:
- will be general unsecured obligations of each Guarantor;
- will rank behind existing and future senior secured debt of each
Guarantor;
- will rank equally with all existing and future senior unsecured debt of
each Guarantor; and
- will rank ahead of any existing and future subordinated debt of each
Guarantor.
PRINCIPAL, MATURITY AND INTEREST
We will issue up to $200 million of the exchange notes under the indenture
in this exchange offer. The indenture provides for the issuance of up to an
additional $100 million of notes (the "Additional Notes"). The exchange notes,
together with any old notes not exchanged in the exchange offer, and any
Additional Notes, will be treated as a single class for all purposes under the
indenture. The notes will mature on April 1, 2008.
Interest on the notes will accrue at the rate of 8 1/2% per annum. The
interest on the notes will be payable semiannually in arrears on each April 1
and October 1, commencing October 1, 2001. We will
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make each interest payment to the holders of record on the immediately preceding
March 15 and September 15.
Interest on the notes accrues from the date of issuance for the first
interest payment and from the most recent interest payment date thereafter.
Interest will be computed on the basis of a 360-day year, comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder of at least $1 million in aggregate principal amount of notes
has given wire transfer instructions to us prior to the record date for such
payment, we will make all payments of principal, interest and Liquidated
Damages, if any, on that holder's notes in accordance with those instructions.
All other payments on the notes will be made at the office or agency of the
paying agent and registrar for the notes within the City and State of New York
unless we elect to make interest and Liquidated Damages payments by check mailed
to the holders at their address set forth in the register of holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. We may change
the paying agent or registrar without prior notice to the holders of the notes,
and we or any of our Subsidiaries may act as paying agent or registrar.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes due on transfer. We are not required
to transfer or exchange any note selected for redemption. Also, we are not
required to transfer or exchange any note for a period of 15 days before a
selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes, including receiving notices of, and rights to, registration or
exchange as described under "-- Registration Rights; Liquidated Damages."
SUBSIDIARY GUARANTEES
Each Guarantor will unconditionally guarantee, jointly and severally, all
of our obligations and each other Guarantor under the notes. The indenture does
not require all of our Subsidiaries to be Guarantors. The obligation of each
Guarantor under its Subsidiary Guarantee will be limited as necessary to prevent
that Subsidiary Guarantee from constituting a fraudulent transfer or conveyance
under applicable law. See "Risk Factors -- Federal and state statutes allow
courts, under specific circumstances, to void guarantees and require noteholders
to return payments received from guarantors."
In the event of a sale or any other disposition of all or substantially all
of the assets of any Guarantor or all of the Capital Stock of any Guarantor,
then that Guarantor, along with any Person acquiring the assets of that
Guarantor, will be released as a Guarantor under the indenture, provided that
the Net Proceeds of the sale or disposition are applied in accordance with
applicable provisions of the indenture. At our option, we may use the Net
Proceeds of any such sale to:
- repay Indebtedness (other than Subordinated Indebtedness) of ours or of
any Guarantor or Indebtedness of a Restricted Subsidiary that is not a
Guarantor and, if the Indebtedness repaid is revolving credit
Indebtedness, with a corresponding permanent reduction in commitments
with respect to that Indebtedness;
- acquire all or substantially all of the assets of, or the Voting Stock
of, any Person or any division of any Person that is engaged in any
Permitted Business;
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- make capital expenditures; or
- acquire other assets that are used or useful in a Permitted Business.
OPTIONAL REDEMPTION
On or after April 1, 2005, we may redeem the notes, in whole or in part, at
the redemption prices set forth below, plus accrued and unpaid interest and
Liquidated Damages, if any, to the applicable date of redemption. If we elect to
redeem all or part of the notes, we will give at least 30, but no more than 60
days' notice, to the holders. The redemption price, expressed as a percentage of
principal amount, is as follows for the twelve-month periods beginning on April
1 of the following years:
YEAR REDEMPTION PRICE
- ---- ----------------
2005................................................. 104.250%
2006................................................. 102.125%
2007 and thereafter.................................. 100.000%
Furthermore, at any time prior to April 1, 2004, we may use the net cash
proceeds of one or more Equity Offerings to redeem up to 35% of the aggregate
principal amount of the notes at 108 1/2% of the principal amount thereof,
together with accrued and unpaid interest and Liquidated Damages, if any, on the
redeemed notes to the date of redemption, if, after any such redemption at least
65% of the aggregate principal amount of the notes remains outstanding and the
redemption is made within 90 days of the closing of the Equity Offering.
The notes will also be redeemable, at our option, in whole at any time or
in part from time to time, on at least 30 days, but not more than 60 days, prior
notice mailed to the registered address of each holder of notes, at a redemption
price equal to the greater of (i) 100% of the principal amount of the notes to
be redeemed or (ii) the sum of the present values of the Remaining Scheduled
Payments (as defined below) discounted, on a semiannual basis (assuming a
360-day year consisting of twelve 30 day months), at the Treasury Rate (as
defined below) plus 50 basis points, plus, in the case of each of clause (i) and
(ii) above, accrued interest and Liquidated Damages, if any, to the date of
redemption. For purposes of this provision, the following definitions apply:
"Treasury Rate" means, with respect to any redemption date, the rate
per annum equal to the semiannual equivalent yield to maturity (computed as
of the second business day immediately preceding such redemption date) of
the Comparable Treasury Issue, assuming a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such redemption date.
"Comparable Treasury Issue" means the fixed rate United States
Treasury security selected by an Independent Investment Banker as having a
maturity most comparable to the remaining term of the notes (and which are
not callable prior to maturity) to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practices,
in pricing new issues of corporate debt securities of comparable maturity
to the remaining term of the notes. "Independent Investment Banker" means
one of the Reference Treasury Dealers appointed by us.
"Comparable Treasury Price" means, with respect to any redemption
date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) on the third business day preceding such redemption date, as set
forth in the daily statistical release (or any successor release) published
by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations for U.S. Government Securities" or (ii) if such release (or any
successor release) is not published or does not contain such prices on such
business day, (A) the average of the Reference Treasury Dealer Quotations
for such redemption date, after excluding the highest and lowest of such
Reference Treasury Dealer Quotations, or (B) if the trustee obtains fewer
than four such Reference Treasury Dealer Quotations, the average of all
such quotations. "Reference Treasury Dealer Quotations" means, with respect
to each Reference Treasury
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Dealer and any redemption date, the average, as determined by the trustee,
of the bid and asked prices for the Comparable Treasury Issue (expressed in
each case as a percentage of its principal amount) quoted in writing to the
trustee by such Reference Treasury Dealer at 3:30 p.m., New York City time
on the third business day preceding such redemption date.
"Reference Treasury Dealer" means each of Banc of America Securities
LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated and their
respective successors; provided, however, that if any of the foregoing
shall cease (either directly or through an affiliate) to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury
Dealer"), we may substitute therefor another nationally recognized
investment banking firm that is a Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to each note to be
redeemed, the remaining scheduled payments of the principal thereof and
interest thereon that would be due after the related redemption date but
for such redemption; provided, however, that, if such redemption date is
not an interest payment date with respect to such note, the amount of the
next succeeding scheduled interest payment thereon will be reduced by the
amount of interest accrued thereon to such redemption date.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption in compliance with the requirements of the
principal national securities exchange, if any, on which the notes are listed,
or, if the notes are not so listed, on a pro rata basis, by lot or in accordance
with such other method the trustee considers fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes at its registered address. Notices
of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
MANDATORY REDEMPTION
We will not be required to make mandatory redemption or sinking fund
payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, we will be required to make an offer to
repurchase all or any part (equal to $1,000 or an integral multiple of $1,000)
of each holder's notes at a purchase price in cash equal to 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid interest
and Liquidated Damages, if any, on the notes repurchased to the date of
purchase. Within 30 days following any Change of Control, we will mail a notice
to each holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase the notes on the date specified in
the notice, pursuant to the procedures required by the indenture and described
in such notice. We will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934 and any other securities laws and regulations
thereunder to the extent those laws and regulations are applicable in connection
with the repurchase of the notes as a result of a Change of Control.
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On the Change of Control repurchase date, we will, to the extent lawful:
- accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control offer;
- deposit with the paying agent the amount specified above in respect of
all notes or portions of notes properly tendered; and
- deliver or cause to be delivered to the trustee the notes so accepted
together with an officers' certificate stating the aggregate principal
amount of notes or portions of notes we are purchasing.
The paying agent will promptly mail to each holder of notes tendered the
specified payment for those notes, and the trustee will promptly authenticate
and mail (or instruct the registrar to transfer by book entry) to each holder a
new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each new note will be in a principal amount
of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of the "Change of Control"
covenant, but in any event within 90 days following a Change of Control, we
either will obtain the requisite consents, if any, under all agreements
governing outstanding Indebtedness to permit the repurchase of notes required by
the "Change of Control" covenant, or will repay such Indebtedness. We will
publicly announce the results of the Change of Control offer on or as soon as
practicable after the Change of Control repurchase date. We will first comply
with the covenant described in the first sentence of this paragraph before we
will be required to repurchase notes pursuant to the provisions described above.
Our failure to comply with such covenant may constitute an Event of Default.
The provisions described above that require us to make a Change of Control
offer following a Change of Control will be applicable whether or not any other
provisions of the indenture are applicable. Except as described above with
respect to a Change of Control, the indenture does not contain provisions that
permit the holders of the notes to require that we repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
We will not be required to make a Change of Control offer upon a Change of
Control if a third party makes the Change of Control offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control offer made by us and purchases all
notes validly tendered and not withdrawn under such Change of Control offer.
The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of us and our Restricted
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require us to repurchase the notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of us and our Restricted Subsidiaries taken as a whole to another Person or
group may be uncertain.
Asset Sales
Generally, we may not and may not permit any of our Restricted Subsidiaries
to consummate an Asset Sale unless:
- we, or the Restricted Subsidiary, as the case may be, receive
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets or Equity Interests sold;
- if the fair market value of the assets or Equity Interests is more than
$5 million, the value is determined by our board of directors and
evidenced by a resolution from our board of directors; and
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- at least 75% of the consideration received is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following shall
be deemed to be cash:
- any liabilities (as shown on our or such Restricted Subsidiary's most
recent balance sheet), of ours or any Restricted Subsidiary that are
assumed by the transferee of any such assets or that otherwise cease to
be liabilities of ours or any Restricted Subsidiary pursuant to a
novation or other agreement that releases us or such Restricted
Subsidiary from further liability or such agreement discharges or
satisfies such liability; and
- any securities, notes or other obligations received by us or any
Restricted Subsidiary in connection with such disposition that are
converted by us or such Restricted Subsidiary into cash or Cash
Equivalents within 180 days of the applicable Asset Sale.
The aforementioned 75% limitation does not apply to any Asset Sale in which the
cash or Cash Equivalent portion of the consideration received is equal to or
greater than what the after-tax proceeds would have been had such Asset Sale
complied with the 75% limitation.
Within 365 days after we receive the Net Proceeds from an Asset Sale, we
have the option to apply the Net Proceeds to:
(1) repay Indebtedness (other than Subordinated Indebtedness) of ours
or of any Guarantor or Indebtedness of a Restricted Subsidiary that is not
a Guarantor and, if the Indebtedness repaid is revolving credit
Indebtedness, with a corresponding permanent reduction in commitments with
respect to that Indebtedness;
(2) acquire all or substantially all of the assets of, or the Voting
Stock of, any Person or any division of any Person that is engaged in any
Permitted Business;
(3) make capital expenditures; or
(4) acquire other assets that are used or useful in a Permitted
Business.
The requirements set forth in provisions (2) through (4) shall be deemed to be
satisfied if an agreement committing to make the acquisitions or expenditures
referred to therein is entered into by us or our Restricted Subsidiary within
365 days after the receipt of such Net Proceeds and such Net Proceeds are
subsequently applied in accordance with such agreement.
If we, or any Restricted Subsidiary, are only entitled to a pro rata share of
any Asset Sale proceeds, then we, or the selling Restricted Subsidiary, need
only apply such party's pro rata share of the sale proceeds. Pending the final
application of the Net Proceeds of any sale, we, and the Restricted
Subsidiaries, may use the funds in any manner not prohibited by the indenture,
including the temporary reduction of revolving credit borrowings.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided above will constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $15 million, we must, within 365 days after receipt of
the net proceeds giving rise to such Excess Proceeds, make an Asset Sale offer
to all holders of the notes and all holders of other Indebtedness that ranks
pari passu with the notes containing similar provisions to those set forth in
the indenture with respect to offers to purchase or required redemptions with
the proceeds of sales of assets to purchase the maximum principal amount of
notes and such other pari passu Indebtedness that may be purchased out of the
Excess Proceeds; provided, that we may, at our option, make such Asset Sale
offer prior to such 365th day. The offer price in any Asset Sale offer will be
equal to 100% of the principal amount of notes plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of purchase, and will be payable in
cash. If any Excess Proceeds remain after consummation of an Asset Sale offer,
we may use those Excess Proceeds for any purpose not otherwise prohibited by the
indenture. If the aggregate principal amount of notes and such other pari passu
Indebtedness tendered into such Asset Sale offer exceeds the amount of Excess
Proceeds, the trustee will select the notes and such other pari passu
Indebtedness to be purchased on a pro rata
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basis based on the principal amount of notes and such other pari passu
Indebtedness tendered. Upon completion of each Asset Sale offer, the amount of
Excess Proceeds will be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Securities
Exchange Act of 1934 and any other securities laws and regulations thereunder to
the extent such laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale offer. To the extent the
provisions of any securities laws or regulations conflict with the Asset Sale
provisions of the indenture, we will comply with the applicable securities laws
and regulations and shall not be deemed to have breached our obligations under
the Asset Sale provisions of the indenture by virtue of such conflict.
CERTAIN COVENANTS
Restricted Payments
We and our Restricted Subsidiaries will not be permitted to take the
following actions, which are classified as "Restricted Payments" under the
indenture:
- declare or pay any dividend or make any other payment or distribution on
account of our or any of our Restricted Subsidiaries' Equity Interests
(including any payment in connection with any merger or consolidation
involving us or any of our Restricted Subsidiaries), or to the direct or
indirect holders of our Equity Interests or our Restricted Subsidiaries'
Equity Interests (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of us or payable to us or a
Restricted Subsidiary of ours);
- purchase, redeem or otherwise acquire or retire for value (including in
connection with any merger or consolidation involving us) any of our
Equity Interests or any direct or indirect parent of ours other than
Equity Interests owned by us or a Restricted Subsidiary of ours;
- make any payment on or with respect to the purchase, redemption,
defeasance or other acquisition or retirement for value, except a payment
of interest or principal at or after the Stated Maturity thereof, of any
Subordinated Indebtedness; or
- make any Restricted Investment,
unless at the time of and after giving effect to the Restricted Payment:
- no Default or Event of Default has occurred or would occur as a
consequence of the Restricted Payment;
- we would, at the time of the Restricted Payment and after giving pro
forma effect to the Restricted Payment as if the Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test described below in the
summary of the covenant regarding "-- Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
- the Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by us and our Restricted Subsidiaries after the
Issue Date (other than the Permitted Restricted Payments referred to
below) is less than the sum of:
- 50% of our Consolidated Net Income for the period from the beginning of
our first fiscal quarter ending after October 2, 2000 to the end of our
most recently ended fiscal quarter for which internal financial
statements are available at the time of the Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
the deficit), plus
- 100% of the aggregate net cash proceeds received by us since the Issue
Date as a contribution to our equity capital or from the issue or sale
of our Equity Interests other than Disqualified Stock and Designated
Preferred Stock, or from the issue or sale of convertible or
exchangeable Disqualified Stock or our convertible or exchangeable debt
securities that have been converted
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into or exchanged for such Equity Interests (other than Equity Interests
(or Disqualified Stock or debt securities) sold to a Subsidiary), plus
- the lesser of (a) all cash returns (including dividends, interest,
distributions, returns of principal and profits on sale) on Restricted
Investments that were made after the Issue Date (less the cost of
dispositions, if any) (provided that the amount of cash returns on the
Restricted Investment shall be excluded from Consolidated Net Income for
purposes of this calculation), and (b) the initial amount of the
Restricted Investment, plus
- upon the redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary not in violation of the indenture, the fair market value of
the net assets of such Subsidiary.
Notwithstanding the above provisions, the preceding provisions do not prohibit
the following payments (all of which, other than payments pursuant to the first
subparagraph below, being called "Permitted Restricted Payments"):
- the payment of any dividend within 60 days after the date of declaration,
if on the date of declaration, the payment would have complied with the
provisions of the indenture;
- any principal payment on or with respect to the redemption, purchase,
retirement, defeasance or other acquisition or retirement of any
Subordinated Indebtedness, any purchase, redemption or other acquisition
or retirement for value of any of our Equity Interests or any direct or
indirect parent of ours or to the direct or indirect holders of our or
any Restricted Subsidiary's Equity Interests, in their capacity as such,
by conversion into or by exchange for, or out of the net cash proceeds of
the substantially concurrent sale (other than to a Subsidiary of ours) of
our Equity Interests (other than Disqualified Stock); provided, that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from the calculation of 100% of the aggregate net cash
proceeds discussed above;
- any payment on or with respect to or the defeasance, redemption, purchase
or other acquisition or retirement of Subordinated Indebtedness with the
net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness;
- the declaration and payment of any dividend or distribution by a
Restricted Subsidiary of ours to the holders of any class of its Equity
Interests on a pro rata basis;
- the declaration and payment of dividends and distributions to holders of
any class or series of our Disqualified Stock issued after the Issue Date
in accordance with the covenant described below under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock";
- the declaration and payment of regularly accruing dividends to holders of
any class or series of our Designated Preferred Stock issued on or after
the Issue Date; provided that at the time of the designation of such
Preferred Stock as Designated Preferred Stock, and after giving effect to
such designation on a pro forma basis (for purposes of making
determinations on a pro forma basis pursuant to this clause, treating all
dividends which will accrue on such Designated Preferred Stock during the
four full fiscal quarters immediately following such issuance, as well as
all other Designated Preferred Stock then outstanding, as if the same
will in fact be, or have in fact been, paid in cash), we would have been
able to incur at least $1.00 of additional Indebtedness (other than
Permitted Debt) in accordance with the covenant described below under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock";
- the purchase, redemption or other acquisition or retirement of any shares
of our Disqualified Stock by conversion into, or by exchange for, shares
of our Refinancing Disqualified Stock, or out of the Net Proceeds of the
substantially concurrent sale (other than to a Subsidiary of ours) of our
Refinancing Disqualified Stock;
- the purchase, redemption or other acquisition or retirement for value of
any Equity Interests of ours or of any Restricted Subsidiary of ours held
by any then current or former member of our (or any
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of our Restricted Subsidiaries') management or board of directors (or the
estate, heirs or legatees of any such individual) pursuant to any
management or directors' equity subscription agreement or stock option
agreement; provided that the aggregate price paid (excluding the
cancellation of debt owing by such management member or other individual)
for all such purchased, redeemed, acquired or retired Equity Interests,
net of proceeds received from or as a capital contribution from the
issuance or sale to management investors of our Capital Stock (including
any options, warrants or other rights in respect thereof), shall not
exceed $2.0 million in any twelve-month period or $15.0 million in the
aggregate;
- payment or performance under the terms of our Series A Preferred Stock or
our Series B Preferred Stock or any agreement or instrument related
thereto;
- the purchase, redemption or other acquisition or retirement for value of
the Old Notes out of the proceeds of, and substantially concurrently with
the consummation of, the offering of the notes, and the cancellation of
Warrants in connection therewith;
- payment to any Principal or its Related Party under any tax sharing or
tax indemnification arrangement;
- any payment, purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness if:
- such payment or other action is required by an indenture or other
agreement or instrument pursuant to which such Subordinated Indebtedness
was issued as the result of a Change of Control or similar event;
- such Change of Control or similar event requires us to make a Change of
Control offer under the indenture or we have voluntarily made an offer
to purchase all notes then outstanding on terms at least as favorable to
the holders as would be required for a Change of Control offer to
purchase notes in connection with a Change of Control; and
- we have purchased all notes, if any, properly tendered pursuant to any
Change of Control offer that resulted from such event or any such offer;
- any Restricted Investment made with the net cash proceeds from a
substantially concurrent sale of our Equity Interests (other than
Disqualified Stock), provided, that the amount of any such net cash
proceeds shall be excluded from the calculation of 100% of the aggregate
net cash proceeds discussed above;
- payments to JLL or any of its Related Parties, to the extent considered a
Restricted Payment, in an annual amount not to exceed $500,000 to pay or
reimburse its administrative expenses;
- payments to Rite Aid or any of its Affiliates in the ordinary course of
business;
- payments to JLL, to the extent considered a Restricted Payment, in an
annual amount not to exceed $1,000,000, for payment of management
consulting or financial advisory services provided to us or any of our
Subsidiaries; and
- other Restricted Payments not to exceed $5.0 million at any one time
outstanding.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the assets or securities
proposed to be transferred or issued to or by us or such Restricted Subsidiary,
as the case may be, in accordance with the Restricted Payment. If the fair
market value of any assets or securities that are required to be valued by this
covenant is in excess of $5.0 million, such value shall be determined by our
board of directors.
For purposes of determining compliance with this "Restricted Payments"
covenant, in the event that a Restricted Payment meets the criteria of more than
one of the types of Restricted Payments described in the above clauses, we, in
our sole discretion, may order and classify, and from time to time may reorder
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and reclassify, a Restricted Payment if it would have been permitted at the time
the Restricted Payment was made and at the time of the reclassification.
Incurrence of Indebtedness and Issuance of Preferred Stock
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, Guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and we will
not issue any Disqualified Stock and will not permit any of our Restricted
Subsidiaries to issue any shares of Preferred Stock; provided, however, that we
may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock,
and any Guarantor may incur Indebtedness or issue Preferred Stock, if the Fixed
Charge Coverage Ratio for its most recently ended four full fiscal quarters for
which financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such Disqualified Stock or Preferred
Stock is issued would have been at least 2.0 to 1, determined on a pro forma
basis (including a pro forma application of the Net Proceeds therefrom), as if
the additional Indebtedness had been incurred or the Preferred Stock or
Disqualified Stock had been issued, as the case may be, and the proceeds
therefrom had been applied, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit any of the following
(collectively, "Permitted Debt"):
(1) the incurrence by us and any Guarantor of additional Indebtedness
and letters of credit under Credit Facilities in an aggregate principal
amount at any one time outstanding under this clause (with letters of
credit being deemed to have a principal amount equal to the face amount
thereof) not to exceed $875.0 million;
(2) the Existing Indebtedness;
(3) the notes and the exchange notes (excluding any Additional Notes);
(4) the incurrence by us or any of our Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations or the issuance of Preferred Stock or
Disqualified Stock, in each case, incurred or issued for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant, equipment, inventory or other tangible
assets used in our business and our Restricted Subsidiaries and related
financing costs, in an aggregate principal amount, including all Permitted
Refinancing Indebtedness incurred to refinance any Indebtedness incurred
pursuant to this clause, not to exceed the greater of $65.0 million and 6%
of Tangible Assets;
(5) the incurrence by us or any of our Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the Net Proceeds of
which are used to refinance, Indebtedness (other than intercompany
Indebtedness) that was permitted by the indenture to be incurred under the
first paragraph of this covenant or clauses (2), (3), (4), (5), (14), (15),
(17) or (19) of this "Permitted Debt" definition;
(6) the incurrence by us or any of our Restricted Subsidiaries of
intercompany Indebtedness between or among us and any of our Restricted
Subsidiaries; provided, however, that:
- if we or any Guarantor is the obligor on such Indebtedness, unless
such Indebtedness is owing to us or another Guarantor, such
Indebtedness must be expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes, in the case
of us, or the Subsidiary Guarantee of such Guarantor, in the case of
such Guarantor; and
- any subsequent issuance or transfer of Equity Interests that results
in any such Indebtedness being held by a Person other than us or a
Restricted Subsidiary thereof and (b) any sale or other transfer of
any such Indebtedness to a Person that is not either us or a
Restricted Subsidiary thereof, shall be deemed, in each case, to
constitute an incurrence of such
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Indebtedness by us or such Restricted Subsidiary, as the case may be,
that was not permitted by this clause;
(7) the issuance by any Restricted Subsidiary of Preferred Stock to us
or any of our Restricted Subsidiaries; provided, however, that:
- any subsequent issuance or transfer of Equity Interests that results
in any such Preferred Stock being held by a Person other than us or a
Restricted Subsidiary thereof; and
- any sale or other transfer of any such Preferred Stock to a Person
that is not either AdvancePCS or a Restricted Subsidiary thereof,
shall be deemed, in each case, to constitute an issuance of such Preferred
Stock by such Restricted Subsidiary that was not permitted by this clause;
(8) the issuance of Refinancing Disqualified Stock and Refinancing
Subsidiary Preferred Stock;
(9) the incurrence by us or any of our Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging:
- interest rate risk with respect to any floating or fixed rate
obligation that is permitted by the terms of the indenture to be
outstanding; or
- fluctuations in foreign currency exchange rates or commodity prices,
with respect to currencies or commodities used by us or our Restricted
Subsidiaries in the ordinary course of business;
(10) the Guarantee by us or any of the Guarantors of Indebtedness of
us or any of our Restricted Subsidiaries that was permitted to be incurred
by another provision of this covenant;
(11) the accrual of interest, the accretion or amortization of
original issue discount, the payment of interest on any Indebtedness in the
form of additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock or Preferred Stock of Restricted
Subsidiaries in the form of additional shares of the same class of
Disqualified Stock or Preferred Stock of Restricted Subsidiaries shall not
be deemed to be an incurrence of Indebtedness or an issuance of
Disqualified Stock or Preferred Stock of Restricted Subsidiaries for
purposes of this covenant; provided, that the amount of Disqualified Stock
is included in our Fixed Charges as accrued;
(12) Indebtedness of us or any Restricted Subsidiary arising from the
honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of
business; provided, that such Indebtedness is extinguished within five
business days of incurrence;
(13) Indebtedness of us or any Restricted Subsidiary represented by
letters of credit for our account or the account of such Restricted
Subsidiary, as the case may be, in order to provide security for workers'
compensation claims or payment obligations in connection with
self-insurance and other Indebtedness with respect to workers' compensation
claims, self-insurance and similar obligations of ours or any Restricted
Subsidiary;
(14) the incurrence by us or any Restricted Subsidiary of additional
Indebtedness, or the issuance of Disqualified Stock or, in the case of a
Restricted Subsidiary, Preferred Stock, in an aggregate principal amount
(or accreted value, redemption price or liquidation preference, as
applicable) (which amount may, but need not be, incurred in whole or in
part under the Credit Facilities) at any time outstanding, including all
Permitted Refinancing Indebtedness and Refinancing Disqualified Stock
incurred to refinance any Indebtedness or Disqualified Stock or Preferred
Stock incurred pursuant to this clause, not to exceed $65.0 million,
provided, that no more than $30.0 million of which may be incurred or
issued by Restricted Subsidiaries that are not Guarantors;
(15) Indebtedness arising from any agreement entered into by us or any
of our Restricted Subsidiaries providing for indemnification, purchase
price adjustment, holdback, contingency payment obligations based on the
performance of the acquired or disposed assets or similar obligations
(other
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than Guarantees of Indebtedness) incurred by any Person in connection with
the acquisition or disposition of assets permitted by the indenture;
(16) trade letters of credit, performance and surety bonds, completion
guarantees or similar arrangements of ours or any of our Restricted
Subsidiaries in the ordinary course of business;
(17) Acquired Debt acquired or assumed by us or any of our Restricted
Subsidiaries, or resulting from the merger or consolidation of one or more
Persons into or with AdvancePCS or one or more of its Restricted
Subsidiaries; provided, that:
- such Acquired Debt is not incurred in contemplation of the respective
acquisition, merger or consolidation; and
- after giving effect to any acquisition related to the Acquired Debt
acquired or assumed pursuant to this clause, either (a) we would be
permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of this covenant, or (b) the Fixed Charge Coverage Ratio is
greater than it was immediately prior to giving effect to such
acquisition;
(18) the incurrence by a Receivables Subsidiary of Indebtedness in a
Qualified Receivables Transaction; and
(19) Indebtedness not to exceed $50.0 million for the last event
listed on Schedule 4.01(f) to the Credit Agreement, as in effect on the
Issue Date (net of amounts covered by insurance or indemnity agreements
provided by a reputable and credit worthy insurance company or other
Person).
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness or stock meets the criteria of more than one of
the categories of Permitted Debt described in clauses (1) through (19) above, or
is entitled to be incurred or issued pursuant to the first paragraph of this
covenant, we are permitted to classify that item of Indebtedness or stock on the
date of its incurrence, or from time to time reclassify all or a portion of such
item of Indebtedness or stock, in any manner that complies with this covenant.
Liens
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or suffer or permit to exist any Lien (other
than Permitted Liens) on any of such Person's property or assets (including
Capital Stock of any other Person), whether owned on the Issue Date or
thereafter acquired, securing any Indebtedness or trade payables (the "Initial
Lien"), unless contemporaneously therewith effective provision is made to secure
the Indebtedness due under the indenture and the notes or, in respect of Liens
on any Restricted Subsidiary's property or assets, any guarantee of the notes by
such Restricted Subsidiary, equally and ratably with such obligation (or, if
such obligation is subordinated in right of payment to the notes or any
Subsidiary Guarantee, prior to such obligation) for so long as such obligation
is so secured by such Initial Lien. Any such Lien thereby created in favor of
the notes or any such guarantee will be automatically and unconditionally
released and discharged upon (a) the release and discharge of the Initial Lien
to which it relates, or (b) any sale, exchange or transfer to any Person not an
Affiliate of ours of the property or assets secured by such Initial Lien, or of
all of the Capital Stock held by us or any Restricted Subsidiary in, or all or
substantially all the assets of, any Restricted Subsidiary creating such Lien.
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Dividend and Other Payment Restrictions Affecting Subsidiaries
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
- pay dividends or make any other distributions on its Capital Stock to us
or any of our Restricted Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to us or any of our Restricted Subsidiaries;
- make loans or advances to us or any of our Restricted Subsidiaries; or
- transfer any of its properties or assets to us or any of our Restricted
Subsidiaries.
However, the preceding restrictions shall not apply to encumbrances or
restrictions existing under or by reason of:
- existing Indebtedness, Equity Interests or other agreements or
instruments as in effect on the Issue Date and any one or more
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements, extensions or refinancings
thereof, from time to time, in whole or in part, provided that any such
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement, extension or refinancing is not materially more
restrictive, taken as a whole, with respect to such encumbrances and
restrictions than those contained in such Existing Indebtedness, Equity
Interest or other agreement or instrument as in effect on the Issue Date;
- the indenture, the notes and the Subsidiary Guarantees;
- applicable law;
- any contract or Equity Interest of a Person acquired (whether by merger
or otherwise) by us or any of our Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such contract was
entered into in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any such Person, or
the properties or assets of any Person, other than such Person and its
Subsidiaries, or the property or assets of such Person and its
Subsidiaries, so acquired, provided that, in the case of any such
contract evidencing Indebtedness, such Indebtedness was permitted by the
terms of the indenture to be incurred;
- customary non-assignment provisions in leases, licenses and other
agreements entered into in the ordinary course of business and consistent
with past practices;
- customary restrictions in agreements governing Liens securing our
obligations or a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such Liens;
- any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition;
- Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are not materially more restrictive, taken as a whole, than
those contained in the agreements governing the Indebtedness being
refinanced (regardless of whether any Indebtedness remains outstanding
and un-refinanced under such agreements);
- Liens securing Indebtedness that limit the right of the debtor to dispose
of the assets subject to such Lien;
- customary supermajority voting provisions and customary provisions with
respect to the disposition or distribution of assets or property, each
contained in corporate charters, bylaws, stockholders' agreements,
limited liability company agreements, partnership agreements, joint
venture agreements,
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asset sale agreements, stock sale agreements and other similar agreements
entered into in the ordinary course of business;
- restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business;
- contracts entered into in the ordinary course of business, not relating
to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of our property or assets or the property or
assets of any Restricted Subsidiary in any manner material to us or any
Restricted Subsidiary;
- customary provisions restricting dispositions of real property interests
set forth in any of our reciprocal easement agreements or the reciprocal
easement agreements of any Restricted Subsidiary;
- Equity Interests, Indebtedness or other contractual requirements of a
Receivables Subsidiary in connection with a Qualified Receivables
Transaction, provided that such restrictions apply only to such
Receivables Subsidiary;
- restrictions on the transfer of property or assets required by any
regulatory authority having jurisdiction over us or any Restricted
Subsidiary or any of their businesses;
- restrictions on the transfer of assets contained in any contract assumed
by us or any of our Restricted Subsidiaries as in effect at the time of
the acquisition of such assets (except to the extent such contract was
entered into in connection with or in contemplation of such acquisition),
which restrictions are not applicable to any assets other than the assets
so acquired;
- agreements or instruments governing Indebtedness, Disqualified Stock or
Preferred Stock incurred or issued in compliance with the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock" if such encumbrances or restrictions are not
materially more restrictive, taken as a whole, than those contained in
the indenture; and
- any agreement, instrument or Equity Interest that amends, modifies,
restates, renews, increases, supplements, refunds, replaces, extends or
refinances any of the items described in the preceding clauses of this
provision, provided that the encumbrances or restrictions set forth
therein are not materially more restrictive, taken as a whole, than those
contained in the predecessor agreement, instrument or Equity Interest.
Transactions with Affiliates
We may not, and may not permit any of our Restricted Subsidiaries to, make
any payment to, sell, lease, transfer or otherwise dispose of any of our
properties or assets to, purchase any property or assets from, or enter into or
make or amend any transaction, contract, agreement, understanding, loan, advance
or Guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate
Transaction"), unless:
- the Affiliate Transaction is on terms no less favorable to us or the
relevant Restricted Subsidiary than those terms that would have been
obtained in a comparable transaction by us or such Restricted Subsidiary
with an unrelated entity; and
- We deliver to the trustee:
- with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0
million, a resolution of the board of directors set forth in an
officers' certificate certifying that the Affiliate Transaction complies
with this covenant, and that the Affiliate Transaction has been approved
by a majority of the Disinterested Directors, which shall have
determined that the Affiliate Transaction is fair to us or our
Restricted Subsidiary, as the case may be, from a financial point of
view; and
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- with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0
million, an opinion as to the fairness to us of the Affiliate
Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and
will not be subject to the provisions of the prior paragraph:
- reasonable fees and compensation paid to, and indemnity and similar
arrangements provided on behalf of, officers, directors or employees of
us or any of our Restricted Subsidiaries as determined in good faith by
our board of directors or senior management;
- transactions between or among us or our Restricted Subsidiaries or both;
- the payment of management fees to any Affiliate of ours not to exceed in
the aggregate to all Affiliates, in any twelve-month period, the greater
of (a) $1.0 million and (b) an amount equal to 1% of Consolidated Cash
Flow and the reimbursement of expenses incurred by Affiliates from time
to time in the course of providing management, investment banking,
commercial banking, or financial advisory services to, or monitoring
their investments in, us;
- a Restricted Payment or Permitted Investment that is permitted by the
provisions of the covenant described above under the caption
"-- Restricted Payments" and any transaction that is specifically
excluded from the definition of "Restricted Payment";
- loans and advances to the officers, directors, and employees of ours or
our Restricted Subsidiaries for bona fide business purposes in the
ordinary course of business;
- transactions between us and any of our Affiliates involving investment
banking, commercial banking, financial advisory and related activities;
- issuances of securities or payments or distributions in connection with
employment incentive plans, employee stock plans, employee stock option
plans and similar plans and arrangements approved by our board of
directors;
- sales and issuances of our Equity Interests (other than Disqualified
Stock);
- transactions between us or any Restricted Subsidiary (including PCS, or
any successor thereto) and Rite Aid or its affiliates with respect to
services provided by Rite Aid to us or any Restricted Subsidiary or by us
or any Restricted Subsidiary to Rite Aid, in each case, in the ordinary
course of business;
- transactions between us or any Restricted Subsidiary and JLL or any
Affiliate of JLL entered into in the ordinary course of business and in
compliance with the provisions of the prior paragraph of this covenant
(other than the final subclause relating to a fairness opinion);
- any agreements or arrangements in effect on, or entered into on or prior
to, the Issue Date, or any amendment, modification, or supplement thereto
or any replacement thereof, so long as that amendment, modification,
supplement or replacement agreement is not materially more
disadvantageous to the holders of the notes than the original agreements
as in effect on the Issue Date, and any transactions contemplated by any
of the foregoing agreements or arrangements;
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- the existence of, or the performance by us or any of our Restricted
Subsidiaries of its obligations under the terms of, any stockholders
agreement, partnership agreement or limited liability company members
agreement (including any registration rights agreement or purchase
agreement related thereto) to which it is a party as of the Issue Date
and any similar agreements which it may enter into thereafter, in each
case subject to compliance with the other provisions of the indenture;
provided, however, that the existence of, or the performance by us or any
of our Restricted Subsidiaries of obligations under the terms of any
future amendment to any such existing agreement or under any similar
agreement entered into after the Issue Date shall only be permitted by
this clause to the extent that the terms (taken as a whole) of any such
amendment or new agreement are not otherwise materially more
disadvantageous to the holders of the notes than those agreements that
were in effect on the Issue Date; and
- transactions in connection with a Qualified Receivables Transaction
between a Receivables Subsidiary and any Person in which the Receivables
Subsidiary has an Investment.
Additional Subsidiary Guarantees
If we or any of our Restricted Subsidiaries acquire or create another
Domestic Subsidiary or if any Restricted Subsidiary becomes a Domestic
Subsidiary of ours after the Issue Date, or if any Restricted Subsidiary becomes
a guarantor under the Credit Agreement, then that newly acquired or created
Domestic Subsidiary or that Restricted Subsidiary must become a Guarantor and
execute a supplemental indenture and deliver an opinion of counsel to the
trustee; provided that Subsidiaries that are (a) obligors with respect to less
than $5.0 million of Indebtedness and Preferred Stock, individually, and $30.0
million in the aggregate and (b) Receivables Subsidiaries, will not be required
to guarantee the notes.
Any Subsidiary that is not required to be or remain a Guarantor under this
covenant shall be entitled to be released from its obligations under the
indenture. Upon delivery by us to the trustee of an officers' certificate
setting forth the basis for such release and that such release is in compliance
with the requirements of this covenant, the trustee will execute any documents
reasonably required in order to evidence the release of such Guarantor from its
obligations under the indenture, including without limitation, its Subsidiary
Guarantee.
A Guarantor may also be released in the event of a sale or other
disposition (other than to us or any Subsidiary) of all or substantially all of
its assets, or of all of its Capital Stock that is owned by us and our
Restricted Subsidiaries, if the Net Proceeds of the sale are applied in
accordance with the applicable provisions described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales".
Designation of Restricted and Unrestricted Subsidiaries
Our board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if at the time of and after giving effect to such
designation, no Default or Event of Default shall have occurred or be
continuing. If a Restricted Subsidiary is designated as an Unrestricted
Subsidiary, the aggregate fair market value of all outstanding Investments of
ours and our Restricted Subsidiaries in the Subsidiary so designated will be
deemed to be an Investment made as of the time of such designation and will
either:
- reduce the amount available for Restricted Payments under the first
paragraph of the covenant described above under the caption
"-- Restricted Payments";
- reduce the amount available for future Investments under one or more
clauses of the definition of Permitted Investments, as we determine; or
- a combination of the foregoing.
That designation will only be permitted if the Investment would be permitted at
that time under the first paragraph of the covenant described above under the
caption "-- Restricted Payments" and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
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Subject to the last paragraph of the definition of "Unrestricted
Subsidiaries," the board of directors may redesignate any Unrestricted
Subsidiary to be a Restricted Subsidiary if at the time of and after giving
effect to such redesignation, no Default or Event of Default shall have occurred
or be continuing.
Business Activities
We will not, and will not permit any of our Restricted Subsidiaries to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to us and our Restricted Subsidiaries taken as a whole.
Any Receivables Subsidiary and any Subsidiary of a Receivables Subsidiary may
engage in a business related or ancillary to a Qualified Receivables
Transaction.
Additional Covenants
The indenture also contains covenants with respect to the following
matters: (i) payment of principal, premium and interest and Liquidated Damages;
(ii) maintenance of an office or agency in the City of New York; (iii) payment
of taxes and other claims; and (iv) waiver of stay, extension and usury laws.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
We will not, directly or indirectly: (a) consolidate or merge with or into
another Person (whether or not we are the surviving corporation); or (b) sell,
assign, lease, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of ours and of our Restricted Subsidiaries taken as
a whole, in one or more related transactions, to another Person; unless:
(1) either we are the surviving corporation, or the Person formed by
or surviving any such consolidation or merger (if other than AdvancePCS) or
to which such sale, assignment, lease, transfer, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than AdvancePCS) or the Person to which such sale, assignment,
lease, transfer, conveyance or other disposition shall have been made
assumes all of our obligations under the notes, the indenture and the
registration rights agreement pursuant to a supplemental indenture and any
other required agreements reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of Default
has occurred and is continuing; and
(4) either (a) we or the Person formed by or surviving any such
consolidation or merger (if other than AdvancePCS), or to which such sale,
assignment, lease, transfer, conveyance or other disposition shall have
been made, will, on the date of such transaction after giving pro forma
effect thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test described above in the summary of the
covenant regarding "Incurrence of Indebtedness and Issuance of Preferred
Stock"; or (b) the Fixed Charge Coverage Ratio of such surviving Person is
not less than the Fixed Charge Coverage Ratio immediately prior to such
transaction.
This covenant shall not apply to a merger, consolidation, sale, assignment,
lease, transfer, conveyance or other disposition of assets between or among us
and any of our Restricted Subsidiaries, or to transfers of accounts receivable
and related assets of the type specified in the definition of "Qualified
Receivables Transaction" (or a fractional undivided interest therein) by a
Receivables Subsidiary in a Qualified Receivables Transaction.
Notwithstanding the foregoing clause (4), we may merge with an Affiliate
incorporated or organized either for the purpose of reincorporating or
reorganizing AdvancePCS in another jurisdiction or to realize
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tax benefits without complying with the foregoing clause (4) provided, that, at
the time of and after giving effect to such transaction, no Default or Event of
Default shall have occurred or be continuing or would result from such merger.
Upon any consolidation or merger, or any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of our assets in
accordance with this covenant, the successor company formed by such
consolidation or into or with which we are merged or to which such sale,
assignment, transfer, lease, conveyance or other disposition is made shall
succeed to, and be substituted for, and may exercise every right and power of,
AdvancePCS under the indenture; provided, however, that we will not be relieved
from the obligation to pay the principal of and interest on the notes except in
the case of a sale, assignment, transfer, conveyance or other disposition (other
than a lease) of all of our assets that meets the requirements of this covenant.
REPORTS
Whether or not required by the Securities and Exchange Commission, or SEC,
so long as any notes are outstanding, we will furnish to the trustee (for
provision to the holders of notes) within the time periods specified in the
SEC's rules and regulations:
- all quarterly and annual financial and other information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K
if we were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
financial statements by our certified independent accountants; and
- all current reports that would be required to be filed with the SEC on
Form 8-K if we were required to file such reports.
In addition, whether or not required by the SEC, we will file a copy of all
the information and reports referred to in the preceding paragraph with the SEC
for public availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, we and the Guarantors (for so long as any notes remain
outstanding) will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The following are Events of Default under the indenture with respect to any
series of notes that we may issue:
- default for 30 days in the payment when due of interest on, or Liquidated
Damages with respect to, the notes;
- default in payment when due of the principal of or premium, if any, on
the notes;
- failure by us or any of our Subsidiaries to comply with the provisions
set forth in the indenture described above under the captions
"-- Repurchase at the Option of Holders -- Asset Sales," "-- Repurchase
at the Option of Holders -- Change of Control" or "-- Merger,
Consolidation, or Sale of Assets";
- failure by us or any of our Subsidiaries for 45 days after notice by the
trustee or the holders of at least 25% in principal amount of the notes
then outstanding to comply with any of the other covenants in the
indenture;
- default under any mortgage, indenture or instrument under which there is
issued and outstanding any Indebtedness for money borrowed by us or any
of our Restricted Subsidiaries (or Indebtedness of an Unrestricted
Subsidiary that is Guaranteed by us or any of our Restricted
Subsidiaries)
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whether such Indebtedness or Guarantee now exists, or is created after
the Issue Date, if that default:
- is caused by a Payment Default; or
- results in the acceleration of such Indebtedness prior to its Stated
Maturity, but only if the principal amount of any such Indebtedness,
together with the principal amount of any other Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more;
- failure by us or any of our Subsidiaries to pay final judgments
aggregating in excess of $10.0 million, or any judgments aggregating in
excess of $20.0 million for the last event listed on Schedule 4.01(f) to
the Credit Agreement, as in effect on the Issue Date (net of any amounts
covered by insurance or indemnity arrangements provided by a reputable
and creditworthy insurance company or other Person), which judgments are
not paid, discharged or stayed for a period of 60 consecutive days after
the judgments become final and non-appealable;
- certain events of bankruptcy or insolvency described in the indenture
with respect to us or any of our Significant Subsidiaries which is a
Restricted Subsidiary ("Material Subsidiary") or any Restricted
Subsidiaries that, if taken together, would constitute a Material
Subsidiary; and
- any Subsidiary Guarantee by a Guarantor that is a Material Subsidiary or
Restricted Subsidiaries that if taken together would constitute a
Material Subsidiary shall be held in any judicial proceeding to be
unenforceable or invalid, or after the expiration of any applicable
notice period under the indenture, shall cease for any reason to be in
full force and effect, or any Guarantor that is a Significant Subsidiary,
or any Person acting on behalf of any Guarantor that is a Significant
Subsidiary, shall deny or disaffirm its obligations under its Subsidiary
Guarantee.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to us, any Material Subsidiary or any
group of Restricted Subsidiaries that, taken together, would constitute a
Material Subsidiary, all outstanding notes will become due and payable
immediately including accrued and unpaid interest and Liquidated Damages thereon
without further action or notice. If any other Event of Default occurs and is
continuing, the trustee, or the holders of at least 25% in principal amount of
the then outstanding notes, may declare all the notes to be due and payable
including accrued and unpaid interest and Liquidated Damages thereon by written
notice in accordance with the indenture and the notes will (a) become
immediately due and payable or (b) if there are any amounts outstanding under
the Credit Agreement, become immediately due and payable upon the first to occur
of an acceleration under the Credit Agreement or five business days after that
notice is received by us and the Representative under the Credit Agreement, but
only if that Event of Default is then continuing.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notice is in their interest, except a Default or Event of Default
relating to the payment of principal, interest, or premium, or Liquidated
Damages, if any.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of or premium on, or Liquidated Damages on, the
notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, we are required to deliver to the trustee a statement specifying that
Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of ours or any
Guarantor, as such, shall have any liability for any obligations of ours or the
Guarantors under the notes, the indenture, the Subsidiary Guarantees or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of notes by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. The waiver may not be effective to waive liabilities under the
federal securities laws.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has theretofore been deposited in trust and thereafter
repaid to us) have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the making of a
notice of redemption or otherwise or will become due and payable within
one year and we or any Guarantor has irrevocably deposited or caused to
be deposited with the trustee as trust funds in trust solely for the
benefit of the holders, cash in U.S. dollars, non-callable government
securities, or a combination thereof, in such amounts as will be
sufficient without consideration of any reinvestment of interest, to pay
and discharge the entire indebtedness on the notes not delivered to the
trustee for cancellation for principal, premium and Liquidated Damages,
if any, and accrued interest to the date of maturity or redemption;
(2) as to clause (1)(b) above, no Default or Event of Default shall
have occurred and be continuing on the date of such deposit, or shall occur
as a result of such deposit (other than Defaults and Events of Default
related to or arising out of incurrences of Indebtedness and Liens and
customary documentation related thereto) and such deposit will not result
in a breach or violation of, or constitute a default under, any other
instrument to which we or any Guarantor is a party or by which we or any
Guarantor is bound;
(3) we or any Guarantor has paid or caused to be paid all sums payable
by it under the indenture; and
(4) we have delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money toward the payment of the notes
at maturity or the redemption date, as the case may be.
In addition, we must deliver an officers' certificate and an opinion of counsel
to the trustee together stating that all conditions precedent to satisfaction
and discharge have been satisfied.
DEFEASANCE
We may, at our option and at any time, elect to have all of our Obligations
discharged with respect to the outstanding notes and all Obligations of the
Guarantors discharged with respect to their Subsidiary Guarantees ("Legal
Defeasance") except for:
- the rights of holders of outstanding notes to receive solely from the
trust fund described below, and as more fully described below, payments
in respect of the principal of and premium, interest and Liquidated
Damages, if any, on such notes when such payments are due;
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- our obligations concerning issuing temporary notes, registration of
notes, mutilated, lost or stolen notes and the maintenance of an office
or agency for payment and money for security payments held in trust;
- the rights, powers, trusts, duties and immunities of the trustee and our
obligations in connection therewith; and
- the Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations and the Guarantors released with respect to certain covenants that
are described in the indenture ("Covenant Defeasance") and thereafter any
omission to comply with those covenants will not constitute a Default or Event
of Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "-- Events of Default"
will no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
- we must irrevocably deposit or cause to be deposited, with the trustee,
in trust, for the benefit of the holders, cash in U.S. dollars,
non-callable government securities, or a combination thereof, in amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, interest and
premium and Liquidated Damages, if any, on the outstanding notes on the
Stated Maturity thereof or on the applicable redemption date, as the case
may be, and we must specify whether the notes are being defeased to
maturity or to a particular redemption date;
- in the case of Legal Defeasance, we must deliver to the trustee an
opinion of counsel in the United States reasonably acceptable to the
trustee confirming that (a) we have received from, or there has been
published by, the Internal Revenue Service a ruling, or (b) since the
date of the indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based on that
change the opinion of counsel shall confirm that, the holders of the
outstanding notes will not recognize income, gain or loss for federal
income tax purposes as a result of the Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance
had not occurred;
- in the case of Covenant Defeasance, we must deliver to the trustee an
opinion of counsel in the United States reasonably acceptable to the
trustee confirming that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
- no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit (other than Defaults or Events of
Default resulting from the borrowing of funds to be applied to such
deposit); or (b) insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
- any Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under, any material agreement or
instrument (other than the indenture) to which we or any of our
Subsidiaries is a party or by which we or any of our Subsidiaries is
bound;
- we must deliver to the trustee an opinion of counsel to the effect that,
assuming no intervening bankruptcy of us or any Guarantor between the
date of deposit and the 91st day following the deposit and assuming that
no holder is an "insider" of ours under applicable bankruptcy law, after
the 91st day following the deposit, the trust funds will not be subject
to the effect of any applicable
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bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights and remedies generally;
- we must deliver to the trustee an officers' certificate stating that the
deposit was not made by us with the intent of preferring the holders over
other creditors of ours, or with the intent of defeating, hindering,
delaying or defrauding our creditors or others; and
- we must deliver to the trustee an officers' certificate and an opinion of
counsel, stating that all conditions precedent provided for or relating
to the Legal Defeasance or the Covenant Defeasance have been complied
with.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The following summary of the material provisions of the registration rights
agreement does not purport to be complete and is subject in all respects to, and
qualified in its entirety by reference to, the registration rights agreement,
copies of which are available from us upon request. The registration rights
agreement has been filed as an exhibit to the registration statement of which
this prospectus is a part and is incorporated by reference into this prospectus.
We and the Guarantors entered into a registration rights agreement with the
initial purchasers upon the closing of the offering of the old notes. Pursuant
to the registration rights agreement, we and the Guarantors agreed to file with
the Securities and Exchange Commission this exchange offer registration
statement. Upon the effectiveness of this exchange offer registration statement,
we and the Guarantors will offer to holders of old notes who are able to make
certain representations the opportunity to exchange their old notes for exchange
notes pursuant to an exchange offer.
If:
(1) we and the Guarantors are not permitted to consummate this
exchange offer because the exchange offer is not permitted by applicable
law or Securities and Exchange Commission policy; or
(2) any holder of notes notifies us prior to the 20th day following
the consummation of the exchange offer that:
(a) it is prohibited by law or Securities and Exchange Commission
policy from participating in the exchange offer;
(b) it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is not
appropriate or available for such resales; or
(c) it is a broker-dealer and owns notes acquired directly from us
or our Affiliate,
we and the Guarantors will file with the Securities and Exchange Commission a
shelf registration statement to cover resales of the old notes by the holders
thereof who satisfy certain conditions relating to the provision of information
in connection with the shelf registration statement.
We and the Guarantors will use our reasonable best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Securities and Exchange Commission.
The registration rights agreement provides:
(1) we and the Guarantors will use our reasonable best efforts to file
an exchange offer registration statement with the Securities and Exchange
Commission on or prior to 90 days after the closing of this offering;
(2) we and the Guarantors will use our reasonable best efforts to have
the exchange offer registration statement declared effective by the
Securities and Exchange Commission on or prior to 150 days after the
closing of this offering;
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(3) unless the exchange offer would not be permitted by applicable law
or Securities and Exchange Commission policy, we and the Guarantors will
(a) commence the exchange offer; and
(b) issue on or prior to 30 days, or longer, if required by the
federal securities laws, after the date on which the exchange offer
registration statement was declared effective by the Securities and
Exchange Commission, exchange notes in exchange for all notes tendered
prior thereto in the exchange offer; and
(4) if obligated to file the shelf registration statement, we and the
Guarantors will use our reasonable best efforts to file the shelf
registration statement with the Securities and Exchange Commission on or
prior to 60 days after such filing obligation arises and to cause the shelf
registration to be declared effective by the Securities and Exchange
Commission on or prior to 120 days after such obligation arises.
If:
(1) we and the Guarantors fail to file any of the registration
statements required by the registration rights agreement on or before the
date specified for such filing; or
(2) any of such registration statements is not declared effective by
the Securities and Exchange Commission on or prior to the date specified
for such effectiveness (the "Effectiveness Target Date"); or
(3) we and the Guarantors fail to consummate the Exchange Offer within
30 days of the Effectiveness Target Date with respect to the exchange offer
registration statement; or
(4) the shelf registration statement or the exchange offer
registration statement is declared effective but thereafter ceases to be
effective or usable in connection with resales or exchanges of notes during
the periods specified in the registration rights agreement,
then we and the Guarantors will pay Liquidated Damages to each holder of notes,
equal to one-half of one percent (0.50%) per annum of Liquidated Damages on the
principal amounts of the notes for the first 90 day period immediately following
any event listed above, and such Liquidated Damages will increase by one-quarter
of one percent (0.25%) per annum for each subsequent 90 day period, up to a
maximum aggregate amount of Liquidated Damages of two percent (2.00%) per annum.
The accrual of Liquidated Damages will cease following the cure of all
events requiring the payment of such damages.
Holders of old notes will be required to make certain representations to us
(as described in the registration rights agreement) in order to participate in
the exchange offer and will be required to deliver certain information to be
used in connection with the shelf registration statement and to provide comments
on the shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their old notes included in the
shelf registration statement and benefit from the provisions regarding
Liquidated Damages set forth above. By acquiring the old notes, a holder will be
deemed to have agreed to indemnify us and the Guarantors against certain losses
arising out of information furnished by such holder in writing for inclusion in
any shelf registration statement. Holders of old notes will also be required to
suspend their use of the prospectus included in the shelf registration statement
under certain circumstances upon receipt of written notice to that effect from
us.
CORPORATE EXISTENCE
Subject to the provisions of the indenture described under the caption
"-- Merger, Consolidation, or Sale of Assets" above, we will do or cause to be
done all things necessary to preserve and keep in full force and effect (a) our
corporate existence, and the corporate, partnership or other existence of each
of our Subsidiaries, in accordance with the respective organizational documents
(as the same may be
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amended from time to time) of ours or any such Subsidiary and (b) our rights
(charter and statutory), licenses and franchises and that of our Subsidiaries;
provided, however, that we will not be required to preserve any such right,
license or franchise, or the corporate, partnership or other existence of any of
our Subsidiaries, if the board of directors shall determine that the
preservation thereof is no longer desirable in the conduct of our business and
the business of our Subsidiaries, taken as a whole, and that the loss thereof is
not adverse in any material respect to the holders of the notes.
MODIFICATION OF INDENTURE; WAIVER
Except as provided in the next two succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the written consent of the holders
of at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a tender
offer or exchange offer for, or purchase of, the notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting holder):
- reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
- reduce the principal of or change the fixed maturity of any note or alter
or waive the provisions with respect to the redemption of the notes
(other than provisions described under "-- Repurchase at the Option of
Holders -- Asset Sales" and "-- Repurchase at the Option of
Holders -- Change of Control" above);
- reduce the rate of or change the time for payment of interest on any
note;
- waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Liquidated Damages, if any, on the notes (except
a rescission of acceleration of the notes by the holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
- make any note payable in money other than that stated in the notes;
- make any change in the provisions of the indenture relating to waivers of
past Defaults or the rights of holders of notes to receive payments of
principal of or premium, interest or Liquidated Damages, if any, on the
notes;
- waive a redemption payment with respect to any note (other than a payment
required as described under "-- Repurchase at the Option of
Holders -- Asset Sales" and "-- Repurchase at the Option of
Holders -- Change of Control" above);
- make any change in the foregoing amendment and waiver provisions; or
- release any Guarantor from any of its obligations under its Subsidiary
Guarantee or the indenture, except in accordance with the terms of the
indenture.
Notwithstanding the foregoing, together with the trustee, we may change the
indenture or notes without the consent of any holders with respect to certain
matters, including:
- to cure any ambiguity, defect, error or inconsistency;
- to provide for uncertificated notes in addition to or in place of
certificated notes;
- to provide for the assumption by certain authorized successors of ours or
the Guarantor's obligations to the holders; or
- to comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act of 1939.
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CONCERNING THE TRUSTEE
U.S. Trust Company of Texas, N.A., is the trustee under the indenture. The
indenture and the provisions of the Trust Indenture Act of 1939 incorporated by
reference into the indenture will contain limitations on the rights of the
trustee, should it become a creditor of ours, to obtain payment of claims or to
realize on certain property received by it in respect of any such claims, as
security or otherwise. The indenture will permit the trustee to engage in other
transactions. If the trustee acquires any conflicting interest as defined in the
Trust Indenture Act of 1939, the trustee must eliminate the conflict or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the same degree of care and skill in its exercise as a prudent
person in the conduct of such person's own affairs. Subject to such provisions,
the trustee will be under no obligation to exercise any of its rights or powers
under the indenture at the request of any holder of notes, unless such holder
shall have offered to the trustee security and indemnity satisfactory to it
against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to AdvancePCS, Attn:
Legal Department, 5215 North O'Connor Boulevard, Suite 1600, Irving, Texas
75039.
GOVERNING LAW
The indenture, notes and Subsidiary Guarantees are governed by the laws of
the State of New York.
BOOK-ENTRY, DELIVERY AND FORM
The exchange notes will be issued in the form of one or more notes in
registered, global form without interest coupons (the "Global Exchange Notes").
The Global Exchange Notes will be deposited upon consummation of the exchange
offer with the trustee as custodian for The Depository Trust Company ("DTC"), in
New York, New York, and registered in the name of DTC or its nominee, in each
case for credit to an account of a direct or indirect participant in DTC as
described below.
Except as set forth below, the Global Exchange Notes may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global Exchange Notes may not be
exchanged for notes in certificated form except in the limited circumstances
described below under the caption "Exchange of Global Exchange Notes for
Certificated Notes." Except in the limited circumstances described below, owners
of beneficial interests in the Global Exchange Notes will not be entitled to
receive physical delivery of notes in certificated form. In addition, transfers
of beneficial interests in the Global Notes will be subject to the applicable
rules and procedures of DTC and its direct or indirect participants (including,
if applicable, those of Euroclear System ("Euroclear") and Clearstream Banking,
S.A. ("Clearstream"), which may change from time to time.
Except as set forth below, exchange notes will be issued in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. We take no responsibility
for these operations and procedures and urge investors to contact the system or
their participants directly to discuss these matters.
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DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers (including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the Global Exchange Notes, DTC will credit the
portions of the principal amount of the exchange notes represented by the
Global Exchange Notes to the accounts of Participants; and
(2) ownership of these interests in the Global Exchange Notes will be
shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the Global Exchange Notes).
Investors in the Global Exchange Notes who are Participants in DTC's system
may hold their interests therein directly through DTC. Investors in the Global
Exchange Notes who are not Participants may hold their interests therein
indirectly through organizations (including Euroclear and Clearstream) which are
Participants in such system. Investors in exchange notes issued in exchange for
old notes offered and sold in reliance on Regulation S of the Securities Act
(the "Global Offshore Exchange Notes") may also hold interests in the Global
Offshore Exchange Notes through Participants in the DTC system other than
Euroclear and Clearstream. Euroclear and Clearstream will hold interests in the
Global Offshore Exchange Notes on behalf of their participants through
customers' securities accounts in their respective names on the books of their
respective depositories, which are Morgan Guaranty Trust Company of New York,
Brussels office, as operator of Euroclear, and Citibank, N.A., its operator of
Clearstream. All interests in a Global Exchange Note, including those held
through Euroclear or Clearstream, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Clearstream may
also be subject to the procedures and requirements of such systems. The laws of
some states require that certain Persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Exchange Note to such Persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants, the ability of a Person having
beneficial interests in a Global Exchange Note to pledge such interests to
Persons that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL EXCHANGE NOTES
WILL NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium, if any,
on a Global Exchange Note registered in the name of DTC or its nominee will be
payable to DTC in its capacity as the registered holder under the indenture.
Under the terms of the indenture, we and the trustee will treat the Persons in
whose names the notes, including the Global Exchange Notes, are registered as
the owners thereof for the
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purpose of receiving payments and for all other purposes. Consequently, neither
we, the trustee nor any agent of us or the trustee has or will have any
responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Exchange Notes or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or
Indirect Participant's records relating to the beneficial ownership
interests in the Global Exchange Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the notes (including principal and interest),
is to credit the accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe it will not receive payment on
such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal amount
of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustee or us. Neither we nor the trustee will
be liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the notes, and we and the trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee for all
purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes described herein, cross-market transfers between the Participants in DTC,
on the one hand, and Euroclear or Clearstream participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Clearstream, as the case may be, by its respective depositary;
however, such cross-market transactions will require delivery of instructions to
Euroclear or Clearstream, as the case may be, by the counterparty in such system
in accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Exchange Note
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Exchange Notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the notes, DTC reserves the right
to exchange the Global Exchange Notes for notes in certificated form, and to
distribute such notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Exchange Notes
among participants in DTC, Euroclear and Clearstream, they are under no
obligation to perform or to continue to perform such procedures, and may
discontinue such procedures at any time. Neither we nor the trustee nor any of
their respective agents will have any responsibility for the performance by DTC,
Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
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EXCHANGE OF GLOBAL EXCHANGE NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the Global Exchange Notes and we fail to appoint a successor
depositary or (b) has ceased to be a clearing agency registered under the
Exchange Act;
(2) we, at our option, notify the trustee in writing that we elect to
cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the notes.
In addition, beneficial interests in a Global Exchange Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes
delivered in exchange for any Global Exchange Note or beneficial interests in
Global Exchange Notes will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL EXCHANGE NOTES
Certificated Notes may not be exchanged for beneficial interests in any
Global Exchange Note unless the transferor first delivers to the trustee a
written certificate (in the form provided in the Indenture) to the effect that
such transfer will comply with the appropriate transfer restrictions applicable
to such notes.
SAME DAY SETTLEMENT AND PAYMENT
We will make payments in respect of the notes represented by the Global
Exchange Notes (including principal, premium, if any, and interest) by wire
transfer of immediately available funds to the accounts specified by the Global
Exchange Note holder. We will make all payments of principal, interest and
premium, if any, with respect to Certificated Notes by wire transfer of
immediately available funds to the accounts specified by the holders thereof if
the holder of at least $1.0 million in aggregate principal amount of notes has
given wire transfer instructions to us prior to the record date for such
payment, and otherwise at the office or agency of the paying agent and registrar
for the notes within the City and State of New York or by mailing a check to
each holder's registered address. The notes represented by the Global Exchange
Notes are expected to be eligible to trade in the PORTAL market and to trade in
DTC's Same-Day Funds Settlement System, and any permitted secondary market
trading activity in such notes will, therefore, be required by DTC to be settled
in immediately available funds. We expect that secondary trading in any
Certificated Notes will also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Exchange Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
us that cash received in Euroclear or Clearstream as a result of sales of
interests in a Global Exchange Note by or through a Euroclear or Clearstream
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
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CERTAIN DEFINITIONS
"Acquired Debt" means, with respect to any specified Person:
(i) Indebtedness of any other Person existing at the time such other
Person is merged or consolidated with or into or became a Subsidiary of
such specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging with or
into, or becoming a Subsidiary of, such specified Person; and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings. No Person (other than us or any
Subsidiary of ours) in whom a Receivables Subsidiary makes an Investment in
connection with a Qualified Receivables Transaction will be deemed to be an
Affiliate of ours or any of its Subsidiaries solely by reason of such
Investment.
"Asset Sale" means:
(i) the sale, lease, conveyance or other disposition (together with
any issuance or sale pursuant to clause (ii) below, a "disposition") of any
assets or rights; provided that the disposition of all or substantially all
assets of ours and our Restricted Subsidiaries taken as a whole shall be
governed by the provisions of the indenture described above under the
caption "-- Offer to Repurchase Upon Change of Control" and/or the
provisions described above under the caption "-- Merger, Consolidation or
Sale of Assets" and not by the provision of the Asset Sale covenant; and
(ii) the issuance of Equity Interests by any of our Restricted
Subsidiaries or the sale of Equity Interests in any of our Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(a) any single transaction or series of related transactions that
involves assets, rights or Equity Interests having a fair market value of
less than the greater of (x) $1.5 million and (y) 1% of Consolidated Cash
Flow;
(b) a disposition of assets, rights or Equity Interests between or
among us and any Restricted Subsidiary;
(c) an issuance of Equity Interests by a Restricted Subsidiary to us
or to another Restricted Subsidiary;
(d) the disposition of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(e) the disposition of cash or Cash Equivalents;
(f) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "-- Restricted Payments" or
any transaction that is specifically excluded from the definition of
"Restricted Payment" set forth in the first three bullet points listed in
the first paragraph of the covenant described above under the caption
"-- Restricted Payments";
(g) the disposition of (a) the Capital Stock of or any Investment in
any Unrestricted Subsidiary or (b) Permitted Investments made pursuant to
clause (xiii) of the definition of Permitted Investment;
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(h) surrender or waiver of contract rights or the settlement, release
or surrender of contract, tort or other claims of any kind;
(i) the licensing of intellectual property in the ordinary course of
business;
(j) granting of Liens not otherwise prohibited by the indenture and
exercises of rights thereunder and transfers in lieu of foreclosures in
connection therewith;
(k) leases or subleases to third Persons in the ordinary course of
business that do not interfere in any material respect with our business or
any of our Restricted Subsidiaries;
(l) dispositions of accounts receivable and related assets of the type
specified in the definition of Qualified Receivables Transaction to a
Receivables Subsidiary for the fair market value of those accounts
receivable and related assets, less amounts required to be established as
reserves and customary discounts pursuant to contractual agreements with
entities that are not our Affiliates entered into as part of a Qualified
Receivables Transaction;
(m) dispositions of accounts receivable and related assets of the type
specified in the definition of Qualified Receivables Transaction (or a
fractional undivided interest therein) by a Receivables Subsidiary in a
Qualified Receivables Transaction;
(n) the substantially contemporaneous sale and leaseback of an asset
acquired after the Issue Date; provided that the sale and leaseback occurs
within 180 days after the date of the acquisition of the asset by us and
our Restricted Subsidiaries;
(o) the disposition of our headquarters and related real estate
acquired as part of our acquisition of PCS;
(p) the disposition of the Richardson, Texas mail service facility;
(q) leases and subleases (and licenses and sublicenses) of assets in
the ordinary course of business that are not treated as capitalized leases
on our books and records and those of our Restricted Subsidiaries;
(r) any disposition of defaulted receivables that arose in the
ordinary course of business for collection; and
(s) the disposition of assets received in settlement of obligations
(including, without limitation, under any bankruptcy or similar proceeding)
owing to us or any Restricted Subsidiary, which obligations were incurred
in the ordinary course of business.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Securities Exchange Act of 1934, except that, in the case
of Principals or any of their Related Parties, in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Securities Exchange Act of 1934), such "person" shall be deemed to have
beneficial ownership of all securities that such "person" has the right to
acquire by conversion or exercise of other securities, whether such right is
currently exercisable or is exercisable only upon the occurrence of a subsequent
condition, and the term Beneficial Owner shall not include any Person acting in
the capacity of an underwriter or a placement agent in connection with any
offering of our Capital Stock. For purposes of this definition, the terms
"Beneficially Owns," "Beneficially Owned" and "Beneficial Ownership" shall have
corresponding meanings.
"Business Guarantee" means any manufacturer rebate or reimbursement or
similar agreement, any managed pharmaceutical benefit agreement, any retail
pharmacy network contract or any customer contract under which we or any of our
Subsidiaries assumes a portion of the risk associated with claims experience or
guarantees a specific savings level, or any similar or related agreement, in the
case of each of the foregoing, entered into the ordinary course of business.
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"Capital Lease Obligation" means, at the time any determination of Capital
Lease Obligations is to be made, the amount of the liability in respect of a
capital lease that would at that time be required to be capitalized on a balance
sheet in accordance with GAAP.
"Capital Stock" means:
(i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents of corporate
stock;
(iii) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(i) United States dollars;
(ii) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged in
support of the securities) having maturities of not more than one year from
the date of acquisition;
(iii) certificates of deposit, demand and time deposits (or with
respect to foreign banks, similar instruments), eurodollar time deposits,
bankers' acceptances with maturities not exceeding one year and overnight
bank deposits, in each case, with any lender party to the Credit Agreement
or with any domestic commercial bank or any U.S. branch of a foreign bank
having capital and surplus in excess of $500.0 million or any commercial
bank organized under the laws of any other country having total assets in
excess of $500.0 million with a maturity date not more than two years from
the date of acquisition;
(iv) repurchase obligations with a term of not more than one year for
underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the
qualifications specified in clause (iii) above;
(v) commercial paper having one of the two highest ratings obtainable
from Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
Rating Services ("S&P") and in each case maturing within one year after the
date of acquisition;
(vi) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof having one of the two highest ratings
obtainable from Moody's and S&P and maturing within one year from the date
of acquisition thereof; and
(vii) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (i) through
(vi) of this definition.
"Change of Control" means the occurrence of any of the following:
(i) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of ours and our Restricted Subsidiaries taken as a
whole to any "person" or "group" (as such terms are used in Section
13(d)(3) and 14(d) of the Securities Exchange Act of 1934) other than to a
Principal or a Related Party of a Principal;
(ii) the adoption of a plan relating to our liquidation or
dissolution;
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(iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" or "group" (as defined above), other than the Principals and their
Related Parties, becomes the Beneficial Owner, directly or indirectly, of
more than 40% of our Capital Stock or Voting Stock, measured by voting
power rather than number of shares; or
(iv) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Non-Class B Directors
(together with any new Non-Class B Directors whose election by the board of
directors or whose nomination for election by our stockholders was approved
by a vote of a majority of the Non-Class B Directors then still in office
who were either Non-Class B Directors at the beginning of such period or
whose election or nomination for election was previously approved) cease to
constitute a majority of the Non-Class B Directors then in office.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(i) an amount equal to any extraordinary gain or loss and any net gain
or loss realized by such Person or any of its Restricted Subsidiaries in
connection with an Asset Sale, to the extent that such gains or losses were
utilized in computing such Consolidated Net Income; plus
(ii) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that provision
for taxes was deducted in computing such Consolidated Net Income; plus
(iii) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment Obligations, the interest component of
all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance or Receivables financings and net of the
effect of all payments made or received pursuant to Hedging Obligations),
to the extent that any such expense was deducted in computing such
Consolidated Net Income; plus
(iv) fees, costs, charges and expenses incurred in connection with our
acquisition of PCS, to the extent deducted in computing such Consolidated
Net Income; plus
(v) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses and items
(excluding any such non-cash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Restricted Subsidiaries for such period to the extent
that such depreciation, amortization and other non-cash expenses and items
were deducted in computing such Consolidated Net Income; minus
(vi) non-cash items increasing the Consolidated Net Income for the
period, other than the accrual of revenue in the ordinary course of
business;
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, the interest expense of, and the depreciation and amortization
and other non-cash items of, a Restricted Subsidiary of a Person shall be added
to Consolidated Net Income to compute Consolidated Cash Flow only to the extent
and in the same proportion that Net Income of that Restricted Subsidiary was
included in calculating the Consolidated Net Income of that Person.
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"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for the period, on a consolidated basis, determined in accordance
with GAAP (before dividends on Preferred Stock); provided that:
(i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends
or distributions that were paid in cash to the specified Person or a
Restricted Subsidiary thereof;
(ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders;
(iii) solely for purposes of determining the aggregate amount
available for Restricted Payments under the covenant described above under
the caption "-- Restricted Payments," the Net Income of any Person acquired
in a pooling of interests transaction for any period prior to the date of
such acquisition shall be excluded;
(iv) the cumulative effect of a change in accounting principles shall
be excluded;
(v) the fees, costs and expenses of our acquisition of PCS, the other
Transactions, this offering of the notes, and the registered secondary
offering by Rite Aid of shares of our Class A common stock shall be
excluded;
(vi) income or losses attributable to discontinued operations
(including, without limitation, operations disposed of during such period
whether or not such operations were classified as discontinued) shall be
excluded;
(vii) all extraordinary gains and losses and, without duplication,
non-recurring or unusual gains and losses and all restructuring charges
shall be excluded;
(viii) any non-cash charges attributable to applying the purchase
method of accounting in accordance with GAAP shall be excluded;
(ix) non-cash charges relating to employee benefit or other management
compensation plans of ours or a Restricted Subsidiary (excluding any
non-cash charge to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a prepaid cash
expense incurred in a prior period) to the extent that such non-cash
charges are deducted in computing such Consolidated Net Income shall be
excluded; provided, further that if we or any Restricted Subsidiary of ours
make a cash payment in respect of such non-cash charge in any period, such
cash payment shall (without duplication) be deducted from our Consolidated
Net Income for that period;
(x) all deferred financing costs written off and premiums paid in
connection with any early extinguishment of Indebtedness shall be excluded;
(xi) any unrealized gains or losses in respect of Hedging Obligations
shall be excluded;
(xii) any unrealized foreign currency transaction gains or losses in
respect of Indebtedness of any Person denominated in a currency other than
the functional currency of such Person shall be excluded; and
(xiii) any non-cash compensation charge arising from any grant of
stock, stock options or other equity-based awards shall be excluded.
"Credit Agreement" means the $825 million Credit Agreement, dated as of
October 2, 2000, as amended, among us, as borrower thereunder, the Guarantors
from time to time parties thereto, and Bank
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of America, N.A., as administrative agent on behalf of itself and the other
agents and lenders named therein, and any one or more deferrals, renewals,
extensions, replacements, refinancings or refundings thereof from time to time,
in whole or in part, or amendments, modifications or supplements thereto or
replacements thereof from time to time, in whole or in part (including, without
limitation, any amendments increasing the amount that may be borrowed
thereunder), and any agreements providing therefor whether by or with the same
or any other agents, lenders, creditors, or group of creditors (or any
combination thereof) and including related notes, guarantee agreements, security
agreements and other instruments and agreements executed in connection
therewith.
"Credit Facilities" means one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced, or refinanced in whole or in
part from time to time.
"Debt Securities" means any debt securities issued in a public offering or
in a private placement to institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act) or pursuant to Rule
144A or Regulation S under the Securities Act.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Preferred Stock" means our Preferred Stock (not constituting
Disqualified Stock) (excluding any Preferred Stock issued prior to the Issue
Date and any Preferred Stock issued in exchange or substitution therefor) that
is designated as Designated Preferred Stock on or after the date of issuance
thereof pursuant to an officers' certificate delivered to the trustee on the
designation thereof, the cash proceeds of which are excluded from the
calculation for authorized Restricted Payments set forth in the second section
of the covenant described above under the caption "-- Restricted Payments."
"Disinterested Director" means, with respect to any Affiliate Transaction,
a member of our Board of Directors having no material direct or indirect
financial interest in or with respect to such Affiliate Transaction. A member of
the Board of Directors shall not be deemed to have such a financial interest
solely by reason of any member's holding our Capital Stock or any options,
warrants or other rights in respect of such Capital Stock.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the notes mature (other than for Capital Stock which is not
Disqualified Stock). Notwithstanding the preceding sentence, (a) any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require us to repurchase such Capital Stock upon the
occurrence of a change of control or an Asset Sale shall not constitute
Disqualified Stock if the terms of that Capital Stock provide that we may not
repurchase or redeem any Capital Stock pursuant to such provisions unless such
repurchase or redemption complies with the covenant described above under the
caption "Restricted Payments," and (b) any Capital Stock that would constitute
Disqualified Stock solely because such Capital Stock is issued pursuant to any
plan for the benefit of employees of us or our Subsidiaries or by any such plan
to such employees and may be required to be repurchased by us in order to
satisfy applicable statutory or regulatory Obligations shall not constitute
Disqualified Stock. The amount of Disqualified Stock shall be its mandatory
maximum redemption price or liquidation preference, as applicable, plus accrued
dividends.
"Domestic Subsidiary" means any Restricted Subsidiary that was formed under
the laws of the United States or any state thereof or the District of Columbia
or that Guarantees or otherwise provides direct credit support for any
Indebtedness of ours or any Guarantor.
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"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means a sale by us of shares of our Capital Stock
(however designated and whether voting or non-voting) (other than Disqualified
Stock) and any and all rights, warrants or options to acquire such Capital
Stock.
"Existing Indebtedness" means Indebtedness of ours and our Subsidiaries
(other than Indebtedness under the Credit Agreement) in existence on the Issue
Date.
"Existing Registration Rights Agreement" means the registration rights
agreement, dated as of October 2, 2000, by and among us, the guarantors party
thereto and Rite Aid.
"Fixed Charges" means, with respect to any specified Person for any period,
the sum, without duplication, of:
(i) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, original issue discount, non-cash interest
payments, the interest component of any deferred payment Obligations, the
interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings and net of
interest income and of the effect of all payments made or received pursuant
to Hedging Obligations and excluding amortization of deferred financing
costs; plus
(ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(iii) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of that Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon, provided, that such
interest expense has been paid or accrued in accordance with GAAP; plus
(iv) all dividends paid (whether or not in cash), on any series of
Disqualified Stock or Designated Preferred Stock of such Person or any of
its Restricted Subsidiaries, other than dividends on Equity Interests
payable solely in our Equity Interests (other than Disqualified Stock) or
to us or a Restricted Subsidiary of ours,
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the specified
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees,
repays, repurchases or redeems any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems Preferred Stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio is
being calculated and on or prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment, repurchase or redemption
of Indebtedness, or such issuance, repurchase or redemption of Preferred Stock,
and the use of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(i) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date shall be given pro forma effect as if they had
occurred on the first day
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of the four-quarter reference period and Consolidated Cash Flow for such
reference period shall be calculated on a pro forma basis in accordance
with Regulation S-X under the Securities Act, but without giving effect to
clause (iii) of the proviso set forth in the definition of Consolidated Net
Income;
(ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded;
and
(iii) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the extent
that the Obligations giving rise to such Fixed Charges will not be
Obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness. The term "Guarantee" used as a
verb shall have a corresponding meaning.
"Guarantors" means each Restricted Subsidiary that makes a Subsidiary
Guarantee in accordance with the provisions of the indenture and their
respective successors and assigns; provided that upon the release of such
Subsidiary Guarantee pursuant to the indenture, such Person shall cease to be a
Guarantor.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of that Person under:
(i) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(ii) other agreements or arrangements designed to protect that Person
against fluctuations in interest rates, currency exchange rates or
commodity prices.
"Indebtedness" means, without duplication with respect to any specified
Person, any indebtedness of that Person, whether or not contingent:
(i) in respect of borrowed money;
(ii) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect of letters of
credit or banker's acceptances), provided that, solely with respect to us
or any of our Subsidiaries, any obligations, the sole obligees of which are
the United States or any state government, or any agency or instrumentality
thereof in settlement of, or fines or other obligations imposed under, any
governmental proceedings existing on the Issue Date or arising therefrom or
related thereto, shall not be deemed Indebtedness for so long as the United
States or any state government, or any agency or instrumentality thereof
are the sole obligees with respect to such obligations. If any such
obligation is sold, disposed or otherwise transferred to any Person that is
not the United States or any state government, or any agency or
instrumentality thereof, then such obligation shall be deemed in each case,
to constitute an incurrence of Indebtedness by us or the Restricted
Subsidiary, as the case may be to the extent such obligation would
otherwise constitute Indebtedness under the indenture;
(iii) representing Capital Lease Obligations;
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(iv) representing the balance deferred and unpaid of the purchase
price of any property (which purchase price is due more than one year after
the date of placing such property in final service or taking final delivery
and title thereto), except any balance that constitutes an accrued expense
or trade payable; or
(v) representing the net obligations under any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP.
In addition, the term "Indebtedness" includes (a) all Indebtedness of
others secured by a Lien on any asset of the specified Person (whether or not
such Indebtedness is assumed by the specified Person) (provided, that the amount
of Indebtedness of that Person shall be the lesser of (1) the fair market value
of such asset at such date of determination, and if the fair market value is in
excess of $5.0 million, such value shall be determined by the board of directors
and (2) the amount of such Indebtedness of such other Person) and (b) to the
extent not otherwise included, the Guarantee by the specified Person of any
Indebtedness of any other Person, but excluding any Business Guarantee.
The amount of any Indebtedness outstanding as of any date shall be:
(i) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; or
(ii) the principal amount thereof in the case of all other
Indebtedness.
"Insurance Subsidiary" means any Subsidiary established by us or any of our
Subsidiaries, the sole function and purpose of which is to provide insurance or
reinsurance to us and/or any of our Subsidiaries or assume insurance related
risk of us or any of our Subsidiaries.
"Investments" means, with respect to any Person, all direct or indirect
investments by a Person in other Persons (including Affiliates) in the forms of
loans, including Guarantees or other obligations, advances or capital
contributions (but excluding commission, travel, relocation, payroll,
entertainment and similar advances to directors, officers and employees made in
the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP, but excluding any Business Guarantee.
If we or any Subsidiary of ours directly or indirectly sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of ours so that, after giving effect to such sale or disposition, that Person is
no longer a Restricted Subsidiary of ours, we shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Person not sold or disposed of in an
amount determined as provided in the last paragraph of the covenant described
above under the caption "Restricted Payments." The outstanding amount of any
Investment shall be the original cost of the Investment, reduced by all returns
on the Investment (including dividends, interest, distributions, returns of
principal and profits on sale).
"Issue Date" means the date on which the notes are initially issued to the
initial purchasers.
"JLL" means Joseph Littlejohn & Levy, Inc., investment funds managed,
sponsored or advised by Joseph Littlejohn & Levy, Inc., general and limited
partners of Joseph Littlejohn & Levy, Inc. and co-investors with Joseph
Littlejohn & Levy, Inc. in us.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease,
any option or other agreement to sell or give a security interest in and, except
in connection with any Qualified
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Receivables Transaction, any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction.
"Liquidated Damages" means, at any time of determination, all liquidated
damages then owing pursuant to the registration rights agreement.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of Preferred Stock dividends, excluding, however:
(i) any gain or loss, together with any related provision for taxes on
such gain or loss, realized in connection with: (a) any Asset Sale or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or
any of its Restricted Subsidiaries; and
(ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by us or any
Restricted Subsidiary of ours in respect of any Asset Sale, including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale, net of (without duplication) (a) the
direct costs relating to such Asset Sale, including, without limitation, legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof, (b) taxes paid or payable as a
result thereof, in each case, after taking into account any available tax
credits or deductions and any tax sharing arrangements, (c) amounts required to
be applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that were the subject of such Asset Sale, and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP and any reserve in accordance with GAAP against any liabilities
associated with the assets disposed of in such Asset Sale and (d) provision for
amounts required to be paid to minority interest holders in any Restricted
Subsidiary or in any asset subject to such Asset Sale as a result of such Asset
Sale.
"Non-Class B Director" means any director who is not designated or elected
solely by the holders of our Class B-1 common stock, Class B-2 common stock,
Series A-2 Preferred Stock or Series B Preferred Stock.
"Non-Recourse Debt" means Indebtedness:
(i) as to which neither we nor any of our Restricted Subsidiaries (A)
provides credit support of any kind (including any undertaking, agreement
or instrument that would constitute Indebtedness) (other than the pledge of
stock of an Unrestricted Subsidiary; provided that such pledge otherwise
constitutes Non-Recourse Debt), (B) is directly or indirectly liable as a
guarantor or otherwise, or (C) constitutes the lender;
(ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness (other than the notes) of us or any of our
Restricted Subsidiaries to declare a default on other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated
maturity; and
(iii) as to which the lenders of such Indebtedness have been notified
in writing or have agreed in writing (in the agreement relating to the
Indebtedness or otherwise) that they will not have any recourse to the
stock or assets of us or any of our Restricted Subsidiaries (other than as
permitted by clause (i)(A) above).
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"Old Notes" means our $200 million aggregate principal amount of senior
subordinated notes due 2010, issued pursuant to the indenture, dated as of
October 2, 2000, entered into among us, U.S. Trust Company of Texas, N.A., as
trustee, and the guarantors party thereto.
"Payment Default" means any failure to pay principal on the final Stated
Maturity of such Indebtedness.
"Permitted Business" means any line of business (a) which is the same or
similar, ancillary or related to any of the businesses that we and our
Restricted Subsidiaries are engaged in on the Issue Date, including, without
limitation, the providing of health benefit management services; (b) in the
healthcare industry; or (c) constituting a logical extension of any of the
foregoing, including without limitation, lines of business utilizing our
marketing, distribution, delivery, customer information and information systems
infrastructure.
"Permitted Investments" means:
(i) any Investment in (including Guarantees of the obligations of) us
or a Restricted Subsidiary of ours;
(ii) any Investment in Cash Equivalents;
(iii) any Investment by us or any Restricted Subsidiary of ours in a
Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary of ours or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, us or a Restricted Subsidiary of ours;
(iv) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
(v) any acquisition of assets (including Equity Interests) solely in
exchange for Equity Interests (other than our Disqualified Stock);
(vi) Hedging Obligations;
(vii) loans and advances made to and Guarantees provided for the
benefit of officers, directors and employees of ours and our Restricted
Subsidiaries in the ordinary course of business not to exceed $5.0 million
in the aggregate at any one time outstanding;
(viii) Investments in prepaid expenses, negotiable instruments held
for collection and lease, utility and workers compensation, performance and
similar deposits entered into as a result of the operations of the business
in the ordinary course of business;
(ix) Investments in securities of trade debtors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade debtors or customers or in good
faith settlement of delinquent obligations of such trade debtors or
customers and securities or other Investments received in settlement of
delinquent obligations or other disputes with respect to debts created in
the ordinary course of business, or as a result of foreclosure, perfection
or enforcement of any Lien or in satisfaction of judgments (including in
connection with any bankruptcy proceedings);
(x) monetary obligations of one or more officers or other employees of
ours or any of our Restricted Subsidiaries owing to us in consideration of
such officer's or employee's acquisition of shares of our common stock so
long as no cash or other assets are paid by us or any of our Restricted
Subsidiaries to such officers or employees in connection with the
acquisition of any such obligations;
(xi) Investments in any of the notes or exchange notes;
(xii) Receivables owing to us or any Restricted Subsidiary created in
the ordinary course of business;
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(xiii) the acquisition by a Receivables Subsidiary in connection with
a Qualified Receivables Transaction of Equity Interests of a trust or other
Person established by such Receivables Subsidiary to effect such Qualified
Receivables Transaction; and any other Investment by us or a Subsidiary of
ours in a Receivables Subsidiary or any Investment by a Receivables
Subsidiary in any other Person in connection with a Qualified Receivables
Transaction customary for the transactions;
(xiv) any Investment in an Insurance Subsidiary;
(xv) any Investment in existence, or made pursuant to legally binding
written commitments in existence, on the Issue Date;
(xvi) any Investment in a joint venture or similar entity that is not
a Restricted Subsidiary and that is engaged in a Permitted Business, in an
aggregate amount not to exceed $50.0 million; and
(xvii) other Investments in any Person having an aggregate fair market
value (as measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (xvii) that are at the time
outstanding not to exceed an amount equal to $50.0 million, which amount
will increase to $62.5 million 12 months after the October 2, 2000, which
amount will increase to $75.0 million 24 months after the October 2, 2000,
which amount will increase to $87.5 million 36 months after the October 2,
2000, which amount will increase to $100.0 million 48 months after the
October 2, 2000, and which amount will increase to $112.5 million 60 months
after the October 2, 2000.
"Permitted Liens" means:
(i) Liens to secure Indebtedness permitted under Credit Facilities,
provided that such Indebtedness shall not be construed to include any
Indebtedness incurred pursuant to an offering or issuance of Debt
Securities;
(ii) Liens in favor of us or any Restricted Subsidiary;
(iii) Liens on property or Equity Interests of a Person existing at
the time such Person is merged with or into or consolidated with, or is
acquired by, us or any of our Subsidiaries or such Person is designated to
be a Restricted Subsidiary; provided that such Liens were in existence
prior to the contemplation of such merger, consolidation, acquisition or
designation and do not extend to any assets other than those of the Person
merged into, consolidated with or acquired by us or the Subsidiary or so
designated;
(iv) Liens on property existing at the time of acquisition of such
property by us or any of our Subsidiaries, provided that such Liens were in
existence prior to the contemplation of such acquisition;
(v) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(vi) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause 4 of the second paragraph of the covenant
described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired, constructed
or improved with such Indebtedness;
(vii) Liens existing on the Issue Date;
(viii) Liens for taxes, assessments or governmental charges or claims
that (a) are not yet delinquent or (b) are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted,
provided that in the case of clause (b) any reserve or other appropriate
provision as shall be required in conformity with GAAP shall have been
made;
(ix) Liens incurred in the ordinary course of business of us or any of
our Subsidiaries with respect to obligations that do not exceed $5.0
million at any one time outstanding;
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(x) security for the payment of workers' compensation, unemployment
insurance, other social security benefits or other insurance-related
obligations (including, but not limited to, in respect of deductibles,
self-insured retention amounts and premiums and adjustments to those
amounts) entered into in the ordinary course of business;
(xi) deposits or pledges in connection with bids, tenders, leases and
contracts (other than contracts for the payment of money) entered into in
the ordinary course of business;
(xii) zoning restrictions, easements, licenses, reservations,
provisions, covenants, conditions, waivers, restrictions on the use of
property or minor irregularities of title (and with respect to leasehold
interests, mortgages, obligations, liens and other encumbrances incurred,
created, assumed or permitted to exist and arising by, through or under a
landlord or owner of the leased property, with or without consent of the
lessee), none of which interferes in any material respect with the ordinary
conduct of the business of us or any of our Subsidiaries or materially
impairs the use of any parcel of property;
(xiii) deposits or pledges to secure public or statutory obligations,
progress payments, surety and appeal bonds or other obligations of like
nature incurred in the ordinary course of business;
(xiv) survey title exceptions, title defects, encumbrances, easements,
reservations of, or rights of others for, rights of way, sewers, electric
lines, telegraph or telephone lines and other similar purposes or zoning or
other restrictions as to the use of real property not materially
interfering with the ordinary conduct of the business of us and our
Subsidiaries taken as a whole;
(xv) Liens arising by operation of law or reasonable and customary
Liens arising by contract in favor of landlords, mechanics, carriers,
warehousemen, materialmen, laborers, employees, suppliers or the like,
incurred in the ordinary course of business for sums which are not yet
delinquent or are being contested in good faith by negotiations or by
appropriate proceedings which suspend the collection thereof;
(xvi) leases, subleases, licenses or sublicenses to third parties
entered into in the ordinary course of business;
(xvii) Liens securing any Permitted Refinancing Indebtedness so long
as the Lien securing such Permitted Refinancing Indebtedness is limited to
all or part of the same property or assets that secured (or under such
written arrangements could secure) the original Indebtedness; or incurred
in respect of any Indebtedness secured by, or securing any refinancing,
refunding, extension, renewal or replacement (in whole or in part) and
related costs of any other obligation secured by, any other Permitted
Liens, provided that any new Lien of this type is limited to all or part of
the same property or assets that secured (or, under the written
arrangements under which the original Lien arose could secure) the
obligations to which such Liens of this type relate;
(xviii) Liens securing Hedging Obligations;
(xix) Liens arising out of judgments, decrees, orders or awards not
constituting an Event of Default;
(xx) Liens on Equity Interests of an Unrestricted Subsidiary that
secure Indebtedness or other obligations of such Unrestricted Subsidiary;
(xxi) Liens incurred in connection with a Qualified Receivables
Transaction (which in the case of us and our Restricted Subsidiaries (other
than Receivables Subsidiaries) shall be limited to Receivables and related
assets referred to in the definition of Qualified Receivables Transaction);
(xxii) Liens securing reimbursement obligations under commercial
letters of credit, but only in or upon the goods the purchase of which was
financed by such letters of credit;
(xxiii) Liens arising under the indenture in favor of the trustee for
its own benefit and similar Liens in favor of other trustees, agents and
representatives arising under instruments governing
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Indebtedness permitted to be incurred under the indenture, provided, that
such Liens are solely for the benefit of the trustees, agents, or
representatives, in their capacities as such and not for the benefit of the
holders of such Indebtedness;
(xxiv) set-off, chargeback and other rights of depositary and
collection banks and other regulated financial institutions with respect to
money or instruments of ours or our Restricted Subsidiaries on deposit with
or in the possession of such institutions; and
(xxv) Liens arising from the deposit of funds or securities in trust
for the purpose of decreasing or defeasing Indebtedness so long as such
deposit of funds or securities and such decreasing or defeasing of
Indebtedness are permitted under the provisions of the covenant described
above under the caption "-- Restricted Payments."
In each case set forth above, notwithstanding any stated limitation on the
properties or assets that may be subject to such Lien, a Permitted Lien on a
specified property or asset or group or type of properties or assets may include
Liens on all improvements, additions and accessions thereto and all products,
proceeds, dividends, distributions and increases in respect thereof.
"Permitted Refinancing Indebtedness" means any Indebtedness of ours or any
of our Restricted Subsidiaries issued in exchange for, or the Net Proceeds of
which are used to refinance other Indebtedness of ours or any of our Restricted
Subsidiaries (other than intercompany Indebtedness); provided that:
(i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so refinanced (plus all
accrued interest thereon and the amount of all fees, commissions,
discounts, costs, expenses and premiums incurred in connection with such
Indebtedness);
(ii) if such Indebtedness is Subordinated Indebtedness, either (a)
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being refinanced or (b) all scheduled payments on or in
respect of such Permitted Refinancing Indebtedness (other than interest
payments) shall be on or after the date that is 91 days after the date on
which the notes mature; and if such Indebtedness is not Subordinated
Indebtedness and has a final Stated Maturity later than the final Stated
Maturity of the notes, such Permitted Refinancing Indebtedness has a final
Stated Maturity later than the final Stated Maturity of the notes;
(iii) if such Indebtedness being refinanced is subordinated in right
of payment to the notes or any Subsidiary Guarantee, such Permitted
Refinancing Indebtedness is subordinated in right of payment to, the notes
or such Subsidiary Guarantee, as applicable, on terms at least as favorable
to the holders of notes as those contained in the documentation governing
the Indebtedness being refinanced; and
(iv) such Indebtedness is incurred either by us or any Guarantor or by
the Restricted Subsidiary who is the obligor on the Indebtedness being
refinanced.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Preferred Stock" means any Equity Interests of a Person, however
designated, which entitles the holder thereof to a preference with respect to
dividends, distributions, or liquidation proceeds of such Person over the
holders of any other Equity Interests of such Person.
"Principals" means JLL, any entity controlled by JLL and/or by a trust of
the type described in the next subclause, and/or a trust for the benefit of any
of the foregoing, and (solely for purposes of clause (iii) of the "Change of
Control" definition and so long as it does not increase its Beneficial Ownership
of our Capital Stock or Voting Stock over that Beneficially Owned as of October
2, 2000, measured by voting power rather than number of shares), Rite Aid.
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"Qualified Receivables Transaction" means any transaction or series of
transactions entered into by us or any of our Subsidiaries under which we or any
of our Subsidiaries sell, convey or otherwise transfer to (a) a Receivables
Subsidiary (in the case of a transfer by us or any of our Subsidiaries, which
transfer may be effected through us or one or more Subsidiaries) and (b) any
other Person (in the case of a transfer by a Receivables Subsidiary), or grants
a security interest in, any accounts receivable, instruments, chattel paper,
general intangibles and similar assets (whether now existing or arising in the
future, the "Receivables") of ours or any of our Subsidiaries, and any assets
related thereto including, without limitation, all collateral securing such
Receivables, all contracts, contract rights and all guarantees or other
obligations in respect of the Receivables, proceeds of the Receivables and any
other assets which are customarily transferred or in respect of which security
interests are customarily granted in connection with asset securitization
transactions of this type; provided that a Receivables Subsidiary participating
in a Qualified Receivables Transaction shall meet the requirements set forth in
the definition of "Receivables Subsidiary."
"Receivables Subsidiary" means a Subsidiary of ours which engages in no
activities other than in connection with the financing of accounts receivable
and that is designated by our board of directors (as provided below) as a
Receivables Subsidiary, no portion of the Indebtedness or any other Obligations
(contingent or otherwise) of which:
(i) is guaranteed by us or any Subsidiary of ours (excluding
guarantees of Obligations (other than the principal of, and interest on,
Indebtedness) pursuant to representations, warranties, covenants and
indemnities entered into in the ordinary course of business in connection
with a Qualified Receivables Transaction);
(ii) is recourse to or obligates us or any Subsidiary of ours in any
way other than pursuant to representations, warranties, covenants and
indemnities customarily entered into in connection with a Qualified
Receivables Transaction;
(iii) subjects any property or asset of ours or any Subsidiary of ours
(other than accounts receivable and related assets as provided in the
definition of "Qualified Receivables Transaction"), directly or indirectly,
contingently or otherwise, to the satisfaction of such Indebtedness, other
than pursuant to the representations, warranties, covenants and indemnities
customarily entered into in connection with a Qualified Receivables
Transaction; or
(iv) with which neither we nor any Subsidiary of ours have any
material contract, agreement, arrangement or understanding other than on
terms no less favorable to us or such Subsidiary than those that might be
obtained at the time from Persons who are not our Affiliates, other than as
may be customary in a Qualified Receivables Transaction including for fees
payable in the ordinary course of business in connection with servicing
accounts receivable; and with which neither we nor any Subsidiary of ours
have any obligation to maintain or preserve such Subsidiary's financial
condition or cause such Subsidiary to achieve certain levels of operating
results.
"refinance" means extend, refinance, renew, replace, defease or refund,
pay, purchase, redeem or otherwise acquire or retire for value.
"Refinancing Disqualified Stock" means any of our Disqualified Stock issued
in exchange for, upon conversion of, or the Net Proceeds of which are used to,
refinance, our other Disqualified Stock; provided that:
(i) the amount of such Refinancing Disqualified Stock does not exceed
the amount of the Disqualified Stock so refinanced (plus all accrued
dividends thereon and the amount of all fees, commissions, discounts,
costs, expenses and premiums incurred in connection therewith); and
(ii) either (a) such Refinancing Disqualified Stock by its terms, or
upon the happening of any event, does not mature and is not mandatorily
redeemable pursuant to a sinking fund obligation or otherwise at the option
of the holder thereof, in whole or in part, prior to the corresponding
maturity or redemption date, of the Disqualified Stock being refinanced or
(b) all scheduled payments on or in
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respect of such Refinancing Disqualified Stock (other than dividend
payments) shall be on or after the date that is 91 days after the date on
which the notes mature.
"Refinancing Subsidiary Preferred Stock" means any Preferred Stock of any
Restricted Subsidiary of ours issued in exchange for, upon conversion of, or the
Net Proceeds of which are used to refinance other Preferred Stock of the
Restricted Subsidiary; provided that:
(i) the amount of such Refinancing Subsidiary Preferred Stock does not
exceed the amount of the Preferred Stock so refinanced (plus all accrued
dividends thereon and the amount of all fees, commissions, discounts,
costs, expenses and premiums incurred in connection therewith); and
(ii) such Refinancing Subsidiary Preferred Stock is not Disqualified
Stock.
"Related Party" means:
(i) any controlling stockholder, 80% (or more) owned Subsidiary or
immediate family member (in the case of an individual) of any Principal; or
(ii) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of any one or
more Principals and/or such other Persons referred to in the immediately
preceding clause (i).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the Person
referred to that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act of 1933, as such regulation is in effect on the
Issue Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment of principal or interest.
"Subordinated Indebtedness" means any Indebtedness of ours or a Guarantor
that is subordinated to the notes or the Subsidiary Guarantee of such Guarantor,
as applicable.
"Subsidiary" means, with respect to any specified Person:
(i) any corporation, association, partnership, or other business
entity of which more than 50% of the total voting power of shares of
Capital Stock or other Equity Interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
of the other Subsidiaries of that Person (or a combination thereof); and
(ii) without in any way limiting clause (i) of this definition, any
partnership (a) the sole general partner or the managing general partner of
which is that Person or a Subsidiary of that Person or (b) the only general
partners of which is that Person or one or more Subsidiaries of that Person
(or any combination thereof).
"Subsidiary Guarantee" means the guarantee of the notes by a Guarantor.
"Tangible Assets" means the total amount of assets (less applicable
reserves and other properly deductible items), which under GAAP would be
included on a consolidated balance sheet of AdvancePCS and our Restricted
Subsidiaries after deducting therefrom (a) copyrights, patents, trademarks,
trade names, licenses, computer programs, (b) goodwill, (c) capitalized
advertising costs, research and
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development costs, amortization of capital assets, organization costs, leases,
franchises, exploration permits or import and export permits, and (d) any other
assets deemed intangible on our balance sheet.
"Transactions" means our acquisition of PCS Holding Corporation, or PCS,
any merger effected in connection therewith, the initial equity investment by
the Principals, the exchange of common stock issued to the Principals for Series
B Preferred Stock and the subsequent conversion thereof into Class B common
stock, the issuance of the Old Notes and the Warrants and the performance of the
obligations set forth therein, and the execution and performance of the Existing
Registration Rights Agreement, and all other transactions relating to our
acquisition of PCS or the financing thereof.
"Unrestricted Subsidiary" means any Subsidiary of ours that is designated
by the board of directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(i) has no Indebtedness other than Non-Recourse Debt;
(ii) is not party to any agreement, contract, arrangement or
understanding with us or any Restricted Subsidiary of ours unless the terms
of any such agreement, contract, arrangement or understanding are no less
favorable to us or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of ours;
(iii) is a Person with respect to which neither we nor any of our
Restricted Subsidiaries have any direct or indirect obligation (a) to
subscribe for additional Equity Interests; (b) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any
specified levels of operating results; or (c) on any guarantee of any
obligation of such Person; and
(iv) has not Guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of ours or any of our Restricted
Subsidiaries;
except in the case of clause (i), (iii) or (iv), to the extent
(A) that we or such Restricted Subsidiary could otherwise provide such
guarantee or incur such Indebtedness pursuant to the provisions of the
covenant described above under the caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock," and
(B) the provision of such guarantee, the incurrence of such
Indebtedness, the making of such loan or the acquisition of additional
Equity Interests and any other Investment would otherwise would be
permitted under the provisions of the covenant described above under the
caption "-- Restricted Payments" and the other provisions contained herein.
Any designation of a Subsidiary of ours as an Unrestricted Subsidiary shall
be evidenced to the trustee by filing with the trustee a certified copy of the
board resolution giving effect to the designation and an officers' certificate
certifying that the designation complied with the preceding conditions and was
permitted under the provisions of the covenant described above under the caption
"-- Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the
preceding requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by our Restricted
Subsidiary as of such date and, if such Indebtedness is not permitted to be
incurred as of such date under the provisions of the covenant described above
under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock"
(calculated on a pro forma basis as if such Unrestricted Subsidiary had been
designated a Restricted Subsidiary as of the first day of the applicable
four-quarter reference period), we shall be in default of such covenant.
Our board of directors may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by our Restricted Subsidiary of
any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (a) such Indebtedness is permitted under
the provisions of the
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covenant described above under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro formabasis as if such
designation had occurred at the beginning of the four-quarter reference period
and (b) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any Person as of any date means the Capital Stock of the
Person that is at the time entitled to vote in the election of the board of
directors of the Person.
"Warrants" means the warrants to purchase shares of our Class A Common
Stock issued in connection with the offering of the Old Notes.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(i) the sum of the products obtained by multiplying (A) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, by (B)
the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of the payment; by
(ii) the then outstanding principal amount of the Indebtedness.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material U.S. federal income tax consequences
generally applicable to the initial beneficial owners of the exchange notes
offered by this prospectus. The U.S. federal income tax considerations discussed
below are based upon currently existing provisions of the Internal Revenue Code
of 1986, applicable Treasury Regulations, judicial authority and current
administrative rulings and pronouncements of the IRS. We can give you no
assurance that the IRS will not take a contrary view, and we have not asked, and
do not intend to ask, for a ruling from the IRS on these issues. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conclusions made below. Any changes or
interpretations may or may not be retroactive and could affect the tax
consequences discussed below.
As used in this summary, the term "U.S. holder" means the beneficial owner
of a note that is for U.S. federal income tax purposes (1) an individual citizen
or resident of the United States, (2) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any state
or political subdivision of a state, unless, in the case of a partnership,
Treasury Regulations provide otherwise, (3) an estate the income of which may be
taxable under U.S. federal income tax laws regardless of its source, (4) a trust
whose administration is under the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust or (5) specified electing trusts
that were in existence on August 20, 1996 and treated as domestic trusts on that
date. As used in this summary, the term "non-U.S. holder" means the beneficial
owner of a note that is, for U.S. federal income tax purposes, not a U.S.
holder.
This summary is not a complete analysis or description of all potential
U.S. federal tax considerations that may be relevant to, or of the actual tax
effect that any of the matters described in this prospectus will have on,
particular U.S. holders and non-U.S. holders and does not address foreign,
state, local or other tax consequences. This summary does not address the U.S.
federal income tax consequences to (1) special classes of taxpayers, such as S
corporations, mutual funds, insurance companies, financial institutions, small
business investment companies, regulated investment companies, real estate
investment trusts, dealers in securities or currencies, broker-dealers and
tax-exempt organizations, who are treated differently under U.S. federal income
tax laws, (2) holders that hold notes as part of a position in a "straddle," or
as part of a "hedging," "conversion," or other integrated investment transaction
for U.S. federal income tax purposes, (3) holders that do not hold the notes as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
or (4) holders whose functional currency is not the U.S. dollar. Furthermore,
estate and gift tax consequences generally are not discussed in this prospectus.
This discussion applies only to those holders of notes who receive the exchange
notes pursuant to the exchange offer.
Because individual circumstances may differ, we strongly urge each
prospective holder of the exchange notes to consult his or her own tax advisor
with respect to his or her particular tax situation and as to any federal,
foreign, state, local or other tax considerations, including any possible
changes in tax law, affecting the purchase, holding and disposition of the
notes.
U.S. FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
Interest. Generally, interest paid on the notes will be taxable to a U.S.
holder as ordinary income at the time it accrues or is received as determined by
the U.S. holder's method of accounting for U.S. federal income tax purposes. If
additional interest is paid as a result of a failure to consummate the exchange
offer, although not free from doubt, such payment should be treated as
additional ordinary income taxable in the manner set forth in the preceding
sentence.
We do not intend to treat the possibility of an optional redemption or
repurchase of the notes as giving rise to any accrual of original issue discount
or recognition of ordinary income upon the redemption, sale or exchange of a
note, except as provided below.
Exchange Offer. The exchange of old notes for the exchange notes in the
exchange offer will not be a taxable event for U.S. federal income tax purposes.
As a result, there will be no U.S. federal income tax
124
132
consequences to U.S. holders exchanging the old notes for the exchange notes in
the exchange offer, and a U.S. holder will continue to include interest in gross
income as described above and will have the same tax basis and holding period in
the exchange notes as in the old notes.
Disposition of the Notes. Upon the sale, exchange or retirement of a note,
a U.S. holder will recognize capital gain or loss equal to the difference
between the amount realized on the sale, exchange or retirement (except to the
extent attributable to accrued interest that has not been included in income,
which will be taxable as ordinary income) and the U.S. holder's adjusted tax
basis in the note. Prospective investors should consult their tax advisors
regarding the treatment of capital gains and losses.
Backup Withholding. A non-corporate U.S. holder of the notes may be
required to comply with backup withholding rules with respect to reportable
payments, which include interest paid on or the proceeds of a sale, exchange or
redemption of, the notes. We will be required to deduct and withhold 31% of
payments made to a non-corporate or otherwise exempt U.S. holder if (1) the
payee fails to furnish a taxpayer identification number to us in the manner
required, (2) the IRS notifies us that the taxpayer identification number
furnished by the payee is incorrect, (3) there has been a "notified payee
underreporting" described in Section 3406(c) of the Internal Revenue Code or (4)
there has been a failure of the payee to certify under penalty of perjury that
the payee is not required to comply with the withholding provisions of Section
3406(a)(1)(C) of the Internal Revenue Code. Amounts paid as backup withholding
do not constitute an additional tax and will be credited against the U.S.
holder's federal income tax liability, so long as the required information is
provided to the IRS. We generally will report to the U.S. holders of the notes
and to the IRS the amount of any reportable payments for each calendar year and
the amount of tax withheld, if any, with respect to payments on the notes.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Interest paid by us to a non-U.S. holder will not be subject to U.S.
federal income or withholding tax if the interest is not effectively connected
with the conduct of a trade or business within the United States (or a permanent
establishment in the United States, if certain tax treaty provisions apply) by
the non-U.S. holder and the non-U.S. holder (1) does not actually or
constructively own 10% or more of the total combined voting power of all of our
classes of stock; (2) is not a controlled foreign corporation, as defined in
Section 957 of the Internal Revenue Code, with respect to which we are a
"related person;" (3) is not a bank receiving the interest on an extension of
credit made under a loan agreement entered into in the ordinary course of its
trade or business; and (4) certifies, under penalties of perjury, on a Form W-8
BEN that the holder is not a United States person and provides us or any other
person who otherwise would be required to withhold tax with the holder's name
and address, or a securities clearing organization, bank, or other financial
institution that holds customers' securities in the ordinary course of its trade
or business and that holds a note on behalf of the owner of a note certifies,
under penalties of perjury, that the certification and information has been
received by it or a qualifying intermediary from the non-U.S. holder, furnishes
us with a copy of the certification and information, and otherwise complies with
the applicable Internal Revenue Service Requirements. In the case of interest on
a note that does not satisfy requirements of (1) through (4) above, the non-U.S.
holder's interest on the note would generally be taxed at the United States
withholding tax rate of 30% (or a lower applicable treaty rate).
If a non-U.S. holder of a note is engaged in a trade or business in the
United States, and if interest on the note (or gain realized on its sale,
exchange or other disposition) is effectively connected with the conduct of the
trade or business (or attributable to a permanent establishment in the United
States, if certain treaty provisions apply), the non-U.S. holder, although
exempt from the withholding tax discussed in the preceding paragraph, will
generally be required to pay regular U.S. federal income tax on the effectively
connected income in the same manner as if it were a U.S. holder. See "-- U.S.
Federal Income Tax Consequences to U.S. Holders" above. These holders will be
required to provide to the withholding agent a properly executed IRS Form W-8ECI
to claim an exemption from withholding tax. In addition, if a non-U.S. holder is
a corporation, it may be required to pay a 30% branch profits tax (unless
reduced or eliminated by an applicable treaty) on its effectively connected
earnings and profits for the taxable year, although the taxable amount may be
adjusted.
125
133
Gain on Disposition. A non-U.S. holder will generally not pay U.S. federal
income tax on gain recognized on a sale, redemption or other disposition of a
note unless (1) the gain is effectively connected with the conduct of a trade or
business within the United States (or attributable to a permanent establishment
in the United States, if certain tax treaty provisions apply) by the non-U.S.
holder, (2) in the case of a non-U.S. holder who is an individual, the holder is
present in the United States for 183 or more days in the taxable year and other
specified requirements are met or (3) the holder is liable for tax under the
provisions of the Internal Revenue Code applicable to specified United States
expatriates.
Federal Estate Taxes. A note held by an individual who is a non-U.S.
holder at the time of death will not be includable in the decedent's gross
estate for U.S. federal estate tax purposes, provided that the holder did not at
the time of death actually or constructively own 10% or more of the total
combined voting power of all of our classes of stock, and provided that, at the
time of death, payments with respect to the note would not have been effectively
connected with the conduct by the non-U.S. holder of a trade or business within
the United States. For U.S. federal estate tax purposes, a "non-U.S. holder" is
an individual who is neither a citizen nor a domiciliary of the United States.
Whether an individual is considered a "domiciliary" of the United States for
estate tax purposes is generally determined on the basis of all of the facts and
circumstances.
Information Reporting and Backup Withholding. We will, when required,
report to the non-U.S. holders of notes and the IRS the amount of any interest
paid on the notes in each calendar year and the amounts of tax withheld, if any,
with respect to the payments.
In the case of payments of interest to non-U.S. holders, Treasury
Regulations provide that the 31% backup withholding tax and information
reporting requirements will not apply to payments with respect to which either
the requisite certification, as described above, has been received or an
exemption has otherwise been established, provided that neither we nor our
payment agent has actual knowledge that the non-U.S. holder is a U.S. person or
that the conditions of any other exemption are not in fact satisfied. Under
Treasury Regulations, these information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a non-U.S.
holder on the disposition of the notes by or through a United States office of a
United States or foreign broker, unless the holder certifies to the broker under
penalties of perjury as to its name, address and status as a foreign person or
the holder otherwise establishes an exemption. Information reporting
requirements will apply to a payment of the proceeds of a disposition of the
notes by or through a foreign office of a United States or foreign broker with
specified types of relationships to the United States unless the broker has
documentary evidence in its file that the non-U.S. holder of the notes is not a
United States person, and the broker has no actual knowledge to the contrary, or
the non-U.S. holder otherwise establishes an exemption. Backup withholding may
also apply if the broker has actual knowledge that the payee is a United States
person. Neither information reporting nor backup withholding generally will
apply to a payment of the proceeds of a disposition of the notes by or through a
foreign office of a foreign broker not described in the preceding two sentences.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the non-U.S.
holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
126
134
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. This prospectus,
as it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of exchange notes received in exchange for old
notes where the old notes were acquired as a result of market-making activities
or other trading activities. We have agreed that, for a period of 180 days after
the exchange offer is completed, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
resale of exchange notes. In addition, until 90 days after the date of this
prospectus, all dealers effecting transactions in the exchange notes may be
required to deliver a prospectus.
We will not receive any proceeds from any sales of the exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of methods of
resale, at market prices prevailing at the time of resale, at prices related to
those prevailing market prices or at negotiated prices. Any resale may be made
directly to the purchaser or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from the broker-dealer
and/or the purchasers of the exchange notes. Any broker-dealer that resells the
exchange notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
the exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any resale of exchange notes and any
commissions or concessions received by any of those persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the exchange offer is completed we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay the expenses incident to the
exchange offer, other than commissions or concessions of any brokers or dealers
and the fees of any advisors or experts retained by the holders of old notes,
and will indemnify the holders of the old notes (including any broker-dealers)
against related liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the exchange notes being offered hereby will be passed upon
for AdvancePCS by Akin, Gump, Strauss, Hauer & Feld, L.L.P.
INDEPENDENT AUDITORS
The financial statements and schedules (included or incorporated by
reference) of AdvancePCS in this prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of PCS and subsidiaries included in our Form 8-K/A dated
October 26, 2000, as set forth in their report, which is incorporated by
reference in this prospectus. Such financial statements are incorporated by
reference in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
127
135
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ADVANCEPCS AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 2000 (Unaudited)......................... F-2
Condensed Consolidated Statements of Operations for the
three and nine months ended December 31, 1999 and 2000
(Unaudited)............................................... F-3
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 1999 and 2000 (Unaudited)....... F-4
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-5
Report of Independent Public Accountants.................... F-10
Consolidated Balance Sheets as of March 31, 1999 and 2000... F-11
Consolidated Statements of Operations for the years ended
March 31, 1998, 1999 and 2000............................. F-12
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1998, 1999 and 2000................. F-13
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1999 and 2000............................. F-14
Notes to Consolidated Financial Statements.................. F-15
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-29
PCS HOLDING CORPORATION AND SUBSIDIARIES
Report of Independent Auditors.............................. F-34
Consolidated Balance Sheets as of February 27, 1999 and
February 26, 2000......................................... F-35
Consolidated Statements of Operations for the thirty-six
days ended February 27, 1999 and the year ended February
26, 2000.................................................. F-36
Consolidated Statements of Shareholder's Equity for the
thirty-six days ended February 27, 1999 and the year ended
February 26, 2000......................................... F-37
Consolidated Statements of Cash Flows for the thirty-six
days ended February 27, 1999 and the year ended February
26, 2000.................................................. F-38
Notes to Consolidated Financial Statements.................. F-39
Report of Independent Auditors.............................. F-49
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-50
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-51
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-52
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-53
Notes to Consolidated Financial Statements.................. F-54
F-1
136
ADVANCEPCS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 2000
------------ --------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 55,243,000 $ 141,350,000
Accounts receivable, net of allowance for doubtful
accounts of $1,248,000 and $12,564,000, respectively... 200,288,000 1,023,963,000
Inventories............................................... 5,965,000 29,980,000
Prepaid expenses and other................................ 3,241,000 7,919,000
------------ --------------
Total current assets.............................. 264,737,000 1,203,212,000
Property and Equipment, net of accumulated depreciation and
amortization of $14,311,000 and $18,275,000,
respectively.............................................. 33,107,000 92,714,000
Intangible Assets, net of accumulated amortization of
$6,078,000 and $23,499,000, respectively.................. 101,154,000 1,824,395,000
Other Assets................................................ 7,740,000 22,274,000
------------ --------------
Total assets...................................... $406,738,000 $3,142,595,000
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ -- $ 11,438,000
Accounts payable.......................................... 242,440,000 1,381,670,000
Accrued salaries and benefits............................. 5,386,000 25,069,000
Other accrued expenses.................................... 4,803,000 130,327,000
------------ --------------
Total current liabilities......................... 252,629,000 1,548,504,000
Noncurrent Liabilities:
Long-term debt............................................ 50,000,000 798,562,000
Deferred income taxes..................................... 3,904,000 380,195,000
Other noncurrent liabilities.............................. 2,161,000 21,428,000
------------ --------------
Total liabilities................................. 308,694,000 2,748,689,000
------------ --------------
Commitments and Contingencies Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized:
Series A-1 convertible preferred stock, $.01 par value;
0 and 65,854 shares issued and outstanding........... -- 1,000
Series A-2 convertible preferred stock, $.01 par value;
0 and 125,000 shares issued and outstanding,......... -- 1,000
Common stock, $.01 par value; 100,000,000 shares
authorized:
Class A common stock, $.01 par value; 25,017,154 and
25,705,723 issued and outstanding.................... 250,000 257,000
Class B-1 common stock, $.01 par value; 0 and 4,207,300
issued and outstanding............................... -- 42,000
Additional paid-in capital................................ 58,927,000 339,444,000
Retained earnings......................................... 38,867,000 54,161,000
------------ --------------
Total stockholders' equity........................ 98,044,000 393,906,000
------------ --------------
Total liabilities and stockholders' equity........ $406,738,000 $3,142,595,000
============ ==============
See accompanying notes to financial statements.
F-2
137
ADVANCEPCS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -------------------------------
1999 2000 1999 2000
------------ -------------- -------------- --------------
Revenues........................ $519,858,000 $2,916,471,000 $1,312,881,000 $4,032,904,000
------------ -------------- -------------- --------------
Cost of operations:
Cost of revenues.............. 499,917,000 2,824,629,000 1,257,864,000 3,897,830,000
Selling, general and
administrative expenses.... 10,362,000 55,072,000 28,593,000 75,568,000
Non-recurring charges......... -- 680,000 -- 680,000
------------ -------------- -------------- --------------
Total cost of
operations.......... 510,279,000 2,880,381,000 1,286,457,000 3,974,078,000
------------ -------------- -------------- --------------
Operating income................ 9,579,000 36,090,000 26,424,000 58,826,000
Interest income................. 240,000 1,587,000 801,000 2,297,000
Interest expense................ (974,000) (22,114,000) (2,853,000) (24,250,000)
Merger costs.................... -- -- -- (1,200,000)
------------ -------------- -------------- --------------
Income before income taxes...... 8,845,000 15,563,000 24,372,000 35,673,000
Provision for income taxes...... (3,361,000) (8,585,000) (9,261,000) (16,409,000)
------------ -------------- -------------- --------------
Net income............ $ 5,484,000 $ 6,978,000 $ 15,111,000 $ 19,264,000
============ ============== ============== ==============
Basic
Net income per share.......... $ 0.22 $ 0.23 $ 0.61 $ 0.72
============ ============== ============== ==============
Weighted average shares
outstanding................ 24,714,000 29,913,000 24,674,000 26,697,000
============ ============== ============== ==============
Diluted
Net income per share.......... $ 0.20 $ 0.16 $ 0.54 $ 0.58
============ ============== ============== ==============
Weighted average shares
outstanding................ 27,657,000 44,507,000 27,868,000 33,305,000
============ ============== ============== ==============
See accompanying notes to financial statements.
F-3
138
ADVANCEPCS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1999 2000
------------ ---------------
(UNAUDITED)
Cash flows from operating activities:
Net income................................................ $ 15,111,000 $ 19,264,000
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 6,528,000 28,358,000
Provision for doubtful accounts........................ 18,000 2,912,000
Change in certain assets and liabilities --
Accounts receivable.................................... (70,064,000) (240,301,000)
Inventories............................................ (2,782,000) 2,765,000
Prepaid expenses and other assets...................... (2,662,000) (404,693,000)
Accounts payable, accrued expenses and other noncurrent
liabilities.......................................... 76,236,000 711,482,000
------------ ---------------
Net cash provided by operating activities......... 22,385,000 119,787,000
------------ ---------------
Cash flows from investing activities:
Purchase of property and equipment........................ (14,601,000) (23,232,000)
Purchase of subsidiaries, net of cash acquired............ -- (1,047,045,000)
------------ ---------------
Net cash used in investing activities............. (14,601,000) (1,070,277,000)
------------ ---------------
Cash flows from financing activities:
Distribution to FFI owners................................ -- (3,970,000)
Net proceeds from issuance of common stock................ 836,000 5,567,000
Stock issued to fund acquisition.......................... -- 275,000,000
Debt issued to fund acquisition........................... -- 820,000,000
Proceeds from long-term obligations....................... 18,000,000 87,000,000
Payments on long-term obligations......................... (18,000,000) (147,000,000)
------------ ---------------
Net cash provided by financing activities......... 836,000 1,036,597,000
------------ ---------------
Increase in cash............................................ 8,620,000 86,107,000
Cash and cash equivalents, beginning of period.............. 45,895,000 55,243,000
------------ ---------------
Cash and cash equivalents, end of period.................... $ 54,515,000 $ 141,350,000
============ ===============
See accompanying notes to financial statements.
F-4
139
ADVANCEPCS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared by AdvancePCS in accordance with generally accepted accounting
principles for interim financial information in the form prescribed by the
Securities and Exchange Commission, or Commission, in instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of AdvancePCS's management,
the December 31, 2000 and 1999 unaudited interim financial statements include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of results for this interim period. In the opinion of
AdvancePCS's management, the disclosures contained in this prospectus are
adequate to make the information presented not misleading when read in
conjunction with the Notes to Consolidated Financial Statements included in Form
10-K of AdvancePCS for the year ended March 31, 2000 and the Form 8-K
subsequently filed December 14, 2000. The results of operations for the three
month and nine month periods ended December 31, 2000 are not necessarily
indicative of the results to be expected for the full year or for any future
period.
The accompanying condensed consolidated financial statements have been
restated, in accordance with APB Opinion No. 16, to give retroactive effect, for
all periods presented, to the combination of AdvancePCS and First Florida
International Holdings, Inc. and its affiliated companies on July 5, 2000, which
has been accounted for as a pooling of interests. See Note 3.
In June 1998, Financial Accounting Standards Board Statement 133
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
133 requires all derivatives to be recognized as either assets or liabilities in
the statement of financial position and measured at fair value. In addition,
SFAS 133 specifies the accounting for changes in the fair value of a derivative
based on the intended use of the derivative and the resulting designation. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective beginning in fiscal year
March 31, 2002. We have entered into interest rate protection agreements that
have fixed the LIBOR rate as of November 7, 2000 at 6.60% for $400 million of
our variable rate debt under our credit facility. The notional amount drops to
$300 million in October 2001 and to $200 million in October 2002. We will
declare these agreements hedges in accordance with SFAS 133, as amended, and
will recognize the fair value of these financial instruments on the balance
sheet effective April 1, 2001 upon adoption of SFAS 133. These instruments will
be marked to market at each reporting date with the adjustment recognized as a
component of other comprehensive income (loss) in stockholders' equity.
Changes in Revenue Recognition
We purchased PCS Holding Corporation, or PCS, on October 2, 2000 and have
included this business in our consolidated results of operations since that
time. We made changes in our revenue recognition presentation to conform the
different policies used by us and PCS. These changes are reflected in all
periods presented. These changes are as follows.
The historical PCS amounts have been reclassified to reflect the change in
presentation of data services revenues. In cases in which we have assumed an
independent obligation to pay our network pharmacy providers, we include
payments from our plan sponsors for these benefits as revenues and payments to
our pharmacy providers as cost of revenues (i.e. gross reporting). Historically,
PCS recorded only claims processing fees as revenues (i.e. net reporting). The
change results in higher revenues and an equal increase in cost of revenues.
This change had no effect on gross profit or operating income.
In addition, the historical financial statements of AdvancePCS have been
revised to reflect a change in recognition of clinical and other services
revenues. We receive funds from pharmaceutical manufacturers for formulary
rebate programs that we administer on behalf of our health plan sponsors. We
record
F-5
140
ADVANCEPCS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues in the amount of the administration fees we charge for our services
(i.e. net reporting) and include the cost of such services in cost of revenues.
Previously, we recognized the entire amount of the rebate, including our
administration fee, in revenues and the portion of the rebate paid to our client
in cost of revenues (i.e. gross reporting). This revision resulted in lower
revenues and an equal decrease in cost of revenues. This change had no effect on
gross profit or operating income.
In December 1999, the Commission staff issued SAB 101 "Revenue Recognition
in Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. In addition, the Emerging Issues Task Force ("EITF") issued a
consensus in EITF 99-19 "Reporting Gross Revenue as a Principal vs. Net as an
agent. SAB 101 and the EITF are effective in our fourth fiscal quarter of 2001.
In connection with our recent acquisitions and the issuance of these
pronouncements, we are evaluating certain aspects of SAB 101 and the EITF,
including gross versus net reporting of data and clinical revenues. We can
provide no assurance that we may not need to report on a net basis in future
periods. Net reporting of these revenues would have no effect on gross profit or
operating income. If we had reported our data services revenues using net
reporting, revenues and cost of revenues would have decreased by $435 million
and $2.5 billion, respectively, for the three months ended December 31, 1999 and
2000 and $1.1 billion and $3.4 billion, respectively, for the nine months ended
December 31, 1999 and 2000.
The EITF also has issued EITF 00-22 "Accounting for Other Volume Based
Sales Incentive Offers." This pronouncement provides accounting guidance for
certain volume rebate programs. We are currently evaluating the impact, if any,
of this EITF. This pronouncement is expected to be effective in our fourth
quarter of 2001.
Use of Estimates
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. As of December 31, 2000 and the three month and nine
month periods then ended the Company had made significant estimates of the
purchase price, fair market value of the assets acquired and liabilities assumed
in the PCS acquisition and the value of its senior subordinated notes. The
Company continually evaluates the appropriateness of the amounts recorded and
revises these estimates regularly. Actual results could differ from those
estimates.
2. PCS ACQUISITION
Effective October 2, 2000, we acquired all of the equity of PCS. The
aggregate purchase price paid by us was approximately $1.0 billion, of which we
paid Rite Aid Corporation, or Rite Aid, the seller, $675 million in cash, and
issued to Rite Aid $200 million in senior subordinated notes and $125 million in
our convertible preferred stock. The cash portion of the purchase price was
financed with the proceeds of an $825 million senior secured credit facility and
$150 million in equity financing committed by Joseph Littlejohn & Levy Fund III,
L.P. and certain other investors, collectively referred to as JLL. The
acquisition of PCS has been accounted for using the purchase method of
accounting.
F-6
141
ADVANCEPCS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The preliminary allocation of the net purchase price is as follows (in
thousands):
Assets................................................. $ 667,274
Goodwill and intangibles............................... 1,740,661
Liabilities assumed.................................... (1,030,935)
Deferred income tax liability.......................... (377,000)
-----------
Net purchase price........................... $ 1,000,000
===========
The excess of the purchase price paid over the net identifiable assets and
liabilities of PCS has been recorded as goodwill in intangible assets. The
purchase price allocated to the assets and liabilities assumed is preliminary
and subject to revision following the results of an appraisal and further
identification of intangible assets. This revision is expected to be reflected
in our financial results for the quarter ended March 31, 2001. Total
identifiable intangible assets and goodwill are being amortized over
approximately 30 years.
The following unaudited pro forma information presents our results of
operations as if the PCS acquisition had taken place at the beginning of the
periods presented:
NINE MONTHS ENDED
THREE MONTHS ENDED DECEMBER 31,
DECEMBER 31, -------------------------------
1999 1999 2000
------------------ -------------- --------------
Revenues............................ $2,633,168,000 $7,439,269,000 $8,320,548,000
Net income (loss)................... (9,116,000) (19,808,000) (2,910,000)
Net income (loss) per share:
Basic............................. $ (0.32) $ (0.69) $ (0.10)
Diluted........................... (1) (1) (1)
- ---------------
(1) Potential dilutive securities were not included in the computation of fully
diluted earnings per share. Inclusion of such securities would have been
anti-dilutive, therefore, fully diluted earnings per share is equal to basic
earnings per share.
In the three months ended December 31, 2000 we recorded a pre-tax,
non-recurring charge of $680,000 ($415,000 after taxes or $0.01 per share) for
severance of certain management employees that were terminated or resigned, in
connection with the PCS acquisition. All of these severance costs were paid
prior to December 31, 2000. We expect to consolidate certain operations in
connection with the integration of PCS, which will result in additional
non-recurring charges consisting primarily of facility closure costs and
severance costs in the three months ended March 31, 2001.
3. MERGER WITH FIRST FLORIDA INTERNATIONAL HOLDINGS, INC.
On July 5, 2000, we completed a merger with First Florida International
Holdings, Inc., which is a privately-held health benefit management and
direct-to-consumer pharmaceutical marketing services company. First Florida
International Holdings, Inc. includes the operations of its affiliated
companies, Phoenix Communications International, Inc., Innovative Pharmaceutical
Strategies, Inc., HMN Health Services, Inc. and Mature Rx Plus of Nevada, Inc.,
collectively referred to as FFI. FFI, based in Cleveland, Ohio, offers several
pharmacy-related product lines marketed under the names AvidaRx(TM),
femScript(R), MatureRx(R) and MatureRx Plus(TM) to under-insured or uninsured
individuals, women, and senior citizens. In addition, FFI provides prescription
benefit management services to employees and third party administrators. We
issued 3.5 million shares of our common stock in exchange for all the
outstanding shares of FFI.
F-7
142
ADVANCEPCS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests under APB No.16. Total combination related costs and
provisions are estimated to be approximately $1,200,000 and are reflected as an
expense in the post-combination accounting period, the three-month period ended
September 30, 2000.
The table below presents a reconciliation of revenues and net income, as
reported in the consolidated statements of operations, with those previously
reported by us. The references to AdvancePCS in this table are to our historical
operating results prior to the merger with FFI.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1999
------------------ -----------------
Revenues:
AdvancePCS...................................... $491,539,000 $1,256,202,000
FFI............................................. 28,319,000 56,679,000
------------ --------------
Total supplemental consolidated
revenues.............................. $519,858,000 $1,312,881,000
============ ==============
Net income:
AdvancePCS...................................... $ 5,317,000 $ 14,944,000
FFI............................................. 167,000 167,000
------------ --------------
Total supplemental consolidated net
income................................ $ 5,484,000 $ 15,111,000
============ ==============
4. NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of
common shares (including both Class A common stock and Class B common stock)
outstanding during the periods presented. Diluted net income per share is
computed in the same manner as basic net income per share but includes the
number of additional common shares that would have been outstanding for the
period if the other dilutive securities had been issued. The difference between
the number of weighted average shares used in the basic and diluted calculation
for all periods are outstanding stock options and stock warrants, all calculated
under the "treasury stock" method in accordance with Financial Accounting
Standards Board Statement No. 128 "Earnings Per Share." In addition, in the
quarter ended December 31, 2000, our preferred stock is convertible at the
discretion of the holders into 9,543,000 shares of Class A common stock and are
included in the diluted weighted average share calculation.
5. INCOME TAXES
In the three months and nine months ended December 31, 1999, we recorded
income tax expense approximated an effective tax rate of 38%. In the three
months and nine months ended December 31, 2000, our effective tax rate was 55%
and 46%. The higher rate in 2000 resulted from non-deductible amortization
relating to our acquisition of PCS. In connection with the acquisition of PCS we
recognized a significant deferred tax liability representing the future tax
deductions attributable to the identifiable intangible assets. The realization
of this deferred tax liability was recognized, in goodwill, as a cost of the
acquisition.
6. DEBT
In conjunction with our acquisition of PCS, we obtained an $825 million
senior secured credit facility that includes a $175.0 million revolving credit
facility, $100 million interim revolving credit facility, and two term notes
totaling $550.0 million. The revolving credit facility expires on October 2,
2005. The term notes are due on October 2, 2005 and October 2, 2007. The $175
million revolving credit facility accrues interest at LIBOR plus 3%. As of
December 31, 2000, $60 million was outstanding under this facility. The
F-8
143
ADVANCEPCS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
term notes accrue interest at LIBOR plus 3% and LIBOR plus 3.5%. We have entered
into interest rate protection agreements that have fixed the LIBOR rate as of
November 7, 2000 at 6.60% for $400 million of our variable rate debt under our
credit facility. The notional amount drops to $300 million in October 2001 and
to $200 million in October 2002.
We intend to refinance the $100 million interim revolving credit facility
with a collateralized accounts receivable facility prior to April 1, 2001. The
secured credit facility replaced the $75.0 million, three year revolving credit
facility. The senior secured credit facility contains covenants that are typical
for this type of document. The senior subordinated notes have been
unconditionally guaranteed, jointly or severally, by all of our subsidiaries,
which are all 100% owned. There are no restrictions on the ability of the
guarantors to pay dividends, make loans or advances to the parent. In addition,
we issued to Rite Aid $200 million in senior subordinated notes that accrue
interest at 11% through April 2002, 12% from April 2002 to October 2002 and 13%
thereafter.
7. EQUITY
In connection with our acquisition of PCS we issued Rite Aid 125,000 shares
of Series A-2 convertible preferred stock that is convertible into Class B-2
common stock for $125 million. In addition, we issued JLL 4,207,300 shares of
Class B-1 common stock and 65,854 shares of Series A-1 preferred convertible
stock for $150 million. In connection with the issuance of the senior
subordinated notes described in Note 6 above, we issued Rite Aid warrants to
purchase 780,000 shares of our Class A common stock. The warrants are not
exercisable until October 2, 2002 and will terminate if we repay the senior
subordinated notes.
The Series A-1 and Series A-2 convertible preferred stock is convertible
into Class B-1 and Class B-2 common stock, respectively, at a conversion ratio
of 1:50. The Class B common stock carries certain voting rights to vote as a
separate class. The Class B common stock is convertible into Class A common
stock at a conversion ratio of 1:1.
On October 12, 1999, we announced a two-for-one stock split, effected in
the form of a stock dividend of our common stock. The record date was November
11, 1999 and the date of payment was November 30, 1999. Financial information
and stock prices contained throughout the Form 10-Q have been retroactively
adjusted to reflect the impact of the stock split in all periods presented.
F-9
144
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Advance Paradigm, Inc.:
We have audited the accompanying consolidated balance sheets of Advance
Paradigm, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advance Paradigm, Inc. and
subsidiaries as of March 31, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 19, 2000
F-10
145
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
---------------------------
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,895,000 $ 55,243,000
Accounts receivable, net of allowance for doubtful
accounts of $371,000 and $1,248,000, respectively...... 130,642,000 200,288,000
Inventories............................................... 4,015,000 5,965,000
Prepaid expenses and other................................ 1,701,000 3,241,000
------------ ------------
Total current assets.............................. 182,253,000 264,737,000
Property and equipment, net of accumulated depreciation and
amortization of $8,942,000 and $14,311,000,
respectively.............................................. 15,794,000 33,107,000
Intangible assets, net of accumulated amortization of
$2,191,000 and $6,078,000, respectively................... 105,041,000 101,154,000
Other assets................................................ 928,000 7,740,000
------------ ------------
Total assets...................................... $304,016,000 $406,738,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $174,332,000 $242,440,000
Accrued salaries and benefits............................. 3,780,000 5,386,000
Other accrued expenses.................................... 3,940,000 4,803,000
------------ ------------
Total current liabilities......................... 182,052,000 252,629,000
Noncurrent liabilities:
Long-term debt............................................ 50,000,000 50,000,000
Deferred income taxes..................................... 2,597,000 3,904,000
Other noncurrent liabilities.............................. 594,000 2,161,000
------------ ------------
Total liabilities................................. 235,243,000 308,694,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 4,995,000 shares
authorized, none issued and outstanding................ -- --
Series B convertible preferred stock, $.01 par value;
5,000 shares authorized, no shares issued and
outstanding............................................ -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 24,556,898 and 25,017,154, shares issued
and outstanding at March 31, 1999 and 2000,
respectively........................................... 246,000 250,000
Additional paid-in capital................................ 48,795,000 58,927,000
Treasury stock............................................ -- --
Accumulated earnings...................................... 19,732,000 38,867,000
------------ ------------
Total stockholders' equity........................ 68,773,000 98,044,000
------------ ------------
Total liabilities and stockholders' equity........ $304,016,000 $406,738,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
146
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
--------------------------------------------
1998 1999 2000
------------ ------------ --------------
Revenues......................................... $473,761,000 $757,259,000 $1,833,888,000
------------ ------------ --------------
Cost of operations:
Cost of revenues............................... 443,955,000 716,300,000 1,758,386,000
Selling, general, and administrative
expenses.................................... 18,955,000 21,006,000 38,793,000
------------ ------------ --------------
Total cost of operations............... 462,910,000 737,306,000 1,797,179,000
------------ ------------ --------------
Operating income............................... 10,851,000 19,953,000 36,709,000
Interest income.................................. 2,950,000 2,860,000 1,064,000
Loss on disposal of asset........................ -- -- (160,000)
Interest expense................................. (67,000) -- (3,943,000)
Merger costs..................................... (689,000) -- --
------------ ------------ --------------
Income before income taxes....................... 13,045,000 22,813,000 33,670,000
Provision for income taxes....................... 4,957,000 8,669,000 12,794,000
------------ ------------ --------------
Net income....................................... $ 8,088,000 $ 14,144,000 $ 20,876,000
============ ============ ==============
Basic:
Net income available to common stockholders.... $ 7,888,000 $ 14,144,000 $ 20,876,000
Net income per share........................... $ 0.38 $ 0.59 $ 0.84
Weighted average shares outstanding............ 21,011,508 24,004,290 24,760,163
Diluted:
Net income available to common stockholders.... $ 8,088,000 $ 14,144,000 $ 20,876,000
Net income per share........................... $ 0.31 $ 0.53 $ 0.75
Weighted average shares outstanding............ 26,201,838 26,876,202 27,737,216
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
147
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1999, AND 2000
SERIES B
COMMON STOCK PREFERRED STOCK
--------------------- ---------------
NUMBER NUMBER ADDITIONAL ACCUMULATED
OF OF PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- -------- ------ ------ ----------- ----------- -----------
Balance, March 31, 1997
Giving Effect to the merger
with FFI................... 20,853,790 $209,000 4,444 $-- $42,788,000 $ (743,000) $42,254,000
Comprehensive income and Net
income..................... -- -- -- -- -- 8,088,000 8,088,000
Distributions to owners...... -- -- -- -- -- (56,000) (56,000)
Issuance of Common Stock in
connection with the
exercise of stock options
and
warrants................... 455,154 5,000 -- -- 251,000 -- 256,000
Dividends on Series B
Preferred Stock............ -- -- -- -- -- (200,000) (200,000)
---------- -------- ------ --- ----------- ----------- -----------
Balance, March 31, 1998........ 21,308,944 214,000 4,444 -- 43,039,000 7,089,000 50,342,000
Comprehensive income and Net
income..................... -- -- -- -- -- 14,144,000 14,144,000
Distributions to owners...... -- -- -- -- -- (1,266,000) (1,266,000)
Issuance of Common Stock in
connection with the
conversion of Series B
Preferred Stock............ 2,222,222 22,000 (4,444) -- (22,000) -- --
Issuance of Common Stock in
connection with the
exercise of stock options
and
warrants................... 1,025,732 10,000 -- -- 2,415,000 -- 2,425,000
Purchase of treasury stock... -- -- -- -- (14,000) (236,000) (250,000)
Tax benefit relating to
exercise of employee stock
options and other.......... -- -- -- -- 877,000 1,000 878,000
Issuance of warrants......... -- -- -- -- 2,500,000 -- 2,500,000
---------- -------- ------ --- ----------- ----------- -----------
Balance, March 31, 1999........ 24,556,898 246,000 -- -- 48,795,000 19,732,000 68,773,000
FFI activity during the
unreported period (see Note
2)--
Comprehensive income and Net
income..................... -- -- -- -- -- 509,000 509,000
Distributions to owners...... -- -- -- -- -- (300,000) (300,000)
---------- -------- ------ --- ----------- ----------- -----------
Adjusted balance, March 31,
1999......................... 24,556,898 246,000 -- -- 48,795,000 19,941,000 68,982,000
Comprehensive income and Net
income..................... -- -- -- -- -- 20,876,000 20,876,000
Distributions to owners...... -- -- -- -- -- (1,950,000) (1,950,000)
Issuance of Common Stock in
connection with the
exercise of stock options
and
warrants................... 228,372 2,000 -- -- 1,567,000 -- 1,569,000
Tax benefit relating to
exercise of employee stock
options and other.......... -- -- -- -- 3,323,000 -- 3,323,000
Investment in CHI............ 231,884 2,000 -- -- 4,998,000 -- 5,000,000
Issuance of common stock in
connection with the
creation of Mature Rx and
HMN........................ -- -- -- -- 244,000 -- 244,000
---------- -------- ------ --- ----------- ----------- -----------
Balance, March 31, 2000........ 25,017,154 $250,000 -- $-- $58,927,000 $38,867,000 $98,044,000
========== ======== ====== === =========== =========== ===========
F-13
148
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income....................................... $ 8,088,000 $ 14,144,000 $ 20,876,000
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization................. 2,469,000 3,836,000 9,110,000
Loss on disposal of assets.................... -- -- 160,000
Provision for doubtful accounts............... 74,000 24,000 484,000
Deferred income taxes......................... 441,000 1,312,000 1,307,000
Change in certain assets and liabilities --
Accounts receivable......................... (38,106,000) (42,973,000) (75,611,000)
Inventories................................. (1,028,000) (1,128,000) (1,950,000)
Prepaid expenses and other assets........... (1,606,000) (953,000) (588,000)
Accounts payable, accrued expenses and other
noncurrent liabilities................... 46,930,000 55,298,000 77,401,000
------------ ------------ ------------
Net cash provided by operating
activities............................. 17,262,000 29,560,000 31,189,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment.............. (6,795,000) (7,860,000) (22,807,000)
Purchase of subsidiaries, net of cash acquired... -- (89,701,000) --
------------ ------------ ------------
Net cash used in investing activities.... (6,795,000) (97,561,000) (22,807,000)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of Common Stock....... 256,000 2,425,000 1,811,000
Proceeds from borrowings......................... 709,000 50,000,000 37,000,000
Payments on long-term obligations................ (1,608,000) (10,000) (37,000,000)
Capital lease obligations........................ 36,000 (21,000) 22,000
Distributions to owners.......................... (56,000) (1,266,000) (1,950,000)
Purchase of treasury shares...................... -- (250,000) --
Payment of preferred stock dividend.............. (200,000) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities............................. (863,000) 50,878,000 (117,000)
------------ ------------ ------------
Net increase in cash during unreported period (see
Note 2).......................................... -- -- 1,083,000
Net increase (decrease) in cash and cash
equivalents...................................... 9,604,000 (17,123,000) 9,348,000
Cash and cash equivalents, beginning of year....... 53,414,000 63,018,000 45,895,000
------------ ------------ ------------
Cash and cash equivalents, end of year............. $ 63,018,000 $ 45,895,000 $ 55,243,000
============ ============ ============
Supplementary information:
Cash paid for interest........................... $ 67,000 $ -- $ 3,943,000
Cash paid for income taxes....................... $ 5,100,000 $ 5,900,000 $ 7,000,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
149
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Advance Paradigm, Inc. and Subsidiaries (the "Company" or "API"), a
Delaware corporation, is a leading independent provider of health benefit
management services, providing integrated pharmacy benefit management, disease
management, clinical trials and research and web-based marketing support and
other health related programs. The Company markets its services to managed care
organizations, third-party health plan administrators, insurance companies,
government agencies, employer groups and labor union-based trusts. In addition,
the Company transacts business with pharmaceutical manufacturers as both
suppliers and customers. During the year ended March 31, 1999, the Company
purchased two companies for cash. Foundation Health Pharmaceutical Services,
Inc. ("FHPS") was acquired on March 31, 1999, for $70 million. FHPS was the
pharmacy benefit management business of Foundation Health Systems, Inc. ("FHS").
On December 1, 1998, Baumel-Eisner Neuromedical Institute ("Baumel-Eisner") was
acquired for $25 million. Baumel-Eisner was a privately held clinical trials
company based in South Florida. (See Note 3)
FFI Health Services, acquired on July 5, 2000, is a privately held health
benefit management and direct-to-consumer pharmaceutical marketing services
company. FFI Health Services includes the operations of the affiliated
companies, First Florida International Holdings, Inc., Phoenix Communications
International, Inc., Innovative Pharmaceutical Strategies, Inc., HMN Health
Services, and Mature Rx Plus of Nevada, Inc. (collectively "FFI"). FFI, based in
Cleveland, Ohio, offers several pharmacy-related product lines marketed under
the names AvidaRx(TM), femScript(R), MatureRx(R) and MatureRx Plus(TM) to
under-insured or uninsured individuals, women, and senior citizens. In addition,
FFI provides prescription benefit management services to employees and third
party administrators.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements give retroactive effect,
for all periods presented, to the combination of API and FFI on July 5, 2000,
which has been accounted for as a pooling of interests.
The consolidated balance sheets include API's historical balance sheets as
of March 31, 1999 and 2000, and the corresponding FFI balance sheets at December
31, 1998 and March 31, 2000.
The consolidated statements of operations, stockholders' equity and cash
flows include API's historical statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended March 31, 2000,
and the corresponding historical statements of operations, stockholders' equity,
and cash flows of FFI for each of the two years in the period ended December 31,
1998 and the historical statements for the fiscal year ended March 31, 2000. The
three month period from January 1, 1999 through March 31, 1999, (the "unreported
period"), including $13,330,000 and $509,000 in revenues and net income of FFI,
respectively, is not reported in the consolidated financial statements. In
accordance with APB Opinion No. 16, "Accounting for Business Combinations," the
unreported period is included in the beginning retained earnings of the
consolidated balance sheet as of March 31, 2000, to conform the year ends of API
and FFI. The consolidated statements of stockholders' equity reflect the
exchange of all outstanding FFI common shares for the 3.5 million shares of API
Common Stock as if such exchange happened at April 1, 1998. (see Note 3).
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
F-15
150
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include overnight investments, money market
accounts, and high-grade commercial paper with original maturities of three
months or less.
Inventories
Inventories consist of purchased pharmaceuticals stated at the lower of
cost or market under the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over
estimated useful lives ranging from three to twenty years. Amortization of
leasehold improvements is computed over the lives of the assets or the lease
terms, whichever is shorter. Major renewals and betterments are added to the
property and equipment accounts while costs of repairs and maintenance are
charged to operating expenses in the period incurred. The cost of assets
retired, sold, or otherwise disposed of and the applicable accumulated
depreciation are removed from the accounts, and the resultant gain or loss, if
any, is reflected in the statement of operations.
Intangible Assets
Intangible assets consist of goodwill, customer contracts acquired, and
noncompete agreements. Goodwill represents the excess of cost over the estimated
fair value of tangible net assets acquired. Goodwill is amortized on a
straight-line basis over periods from 25 to 40 years with a weighted average of
29 years. Customer contracts and noncompete agreements are amortized over 10 to
15 years. Amortization expense was approximately $346,000, $691,000 and
$3,887,000 in the years ended March 31, 1998, 1999, and 2000, respectively, and
is included in selling, general and administrative expenses.
Other Assets
In the year ended March 31, 2000, the Company issued 231,884 shares of its
Common Stock to acquire a 19 percent interest in Consumer Health Interactive,
Inc. ("CHI"). The $5,000,000 investment is reflected in other assets.
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, including
goodwill, may warrant revision or that the remaining balance of an asset may not
be recoverable. The assessment of possible impairment is based on the ability to
recover the carrying amount of the asset from expected future cash flows on an
undiscounted basis. If the assessment indicates that the carrying amount of the
asset exceeds the undiscounted cash flows, an impairment has occurred. The
impairment is calculated as the total by which the carrying amount of the asset
exceeds its fair value. The fair value of long-lived assets and goodwill is
estimated based on quoted market prices, if available, or the expected total
value of the cash flows on a discounted basis. The Company recorded no
impairment charges in fiscal 1998, 1999, or 2000.
F-16
151
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying values of cash, receivables, payables, and accrued liabilities
approximate the fair values of these instruments because of their short-term
maturities. The fair value of the Company's bank debt, which approximates the
carrying value, was estimated at current rates for similar debt with similar
maturity.
Other Noncurrent Liabilities
Other liabilities is comprised of deposits from certain customers in
connection with pharmacy benefit contracts.
Revenue Recognition
Revenues from the dispensing of pharmaceuticals from the Company's mail
service pharmacy are recognized when each prescription is shipped. Revenues from
sales of prescription drugs by pharmacies in the Company's nationwide network
and claims processing fees are recognized when the claims are adjudicated. At
the point-of-sale, the pharmacy claims are adjudicated using the Company's
on-line claims processing system. When the Company has an independent obligation
to pay its network pharmacy providers, the Company includes payments from plan
sponsors for these benefits as revenues and payments to its pharmacy providers
(i.e., assumes risk and acts as a principal) as cost of revenues. If the Company
is only administering plan sponsors' network pharmacy contracts, the Company
records the claims processing service fees as revenues. Rebate revenues are
recognized as they are earned in accordance with contractual agreements. Certain
of these revenues are based on estimates which are subject to final settlement
with the contract party. These estimates are reviewed and revised as settled.
Revenues from certain disease management and health benefit management products
are reimbursed at predetermined contractual rates based on the achievement of
certain milestones.
The historical financial statements of the Company have been revised to
reflect a change in recognition of clinical and other services revenues. We
receive funds from pharmaceutical manufacturers for formulary rebate programs
that we administer on behalf of our health plan sponsors. We record revenues in
the amount of the administration fees we charge for our services (i.e. net
reporting) and include the cost of such services in cost of revenues.
Previously, we recognized the entire amount of the rebate, including our
administration fee, in revenues and the portion of the rebate paid to our client
in cost of revenues (i.e. gross reporting). This revision resulted in lower
revenues and an equal decrease in cost of revenues. This change had no effect on
gross profit or operating income.
Cost of Revenues
Cost of revenues includes product costs, pharmacy claims payments, and
other direct costs associated with the sale and dispensing of prescriptions.
Certain of these expenses are recognized based on estimates which are subject to
final settlement with the contract party. These estimates are reviewed and
revised as settled.
Stock Split
On October 12, 1999, the Company announced a two-for-one stock split,
effected in the form of a stock dividend of the Company's common stock. The
record date was November 11, 1999, and the date of payment was November 30,
1999. Financial information and stock prices contained throughout the Form 10-K
have been retroactively adjusted to reflect the impact of the stock split in all
periods presented.
F-17
152
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive shares outstanding during the period. A reconciliation of
the numerators and denominators of the basic and diluted per-share computations
follows:
YEAR ENDED MARCH 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Basic
Numerator:
Net income............................... $ 8,088,000 $14,144,000 $20,876,000
Preferred stock dividends................ 200,000 -- --
----------- ----------- -----------
$ 7,888,000 $14,144,000 $20,876,000
=========== =========== ===========
Denominator:
Weighted average common stock
outstanding............................ 21,011,508 24,004,290 24,760,163
=========== =========== ===========
Net income per share................ $ 0.38 $ 0.59 $ 0.84
=========== =========== ===========
Diluted
Numerator:
Net income............................... $ 8,088,000 $14,144,000 $20,876,000
=========== =========== ===========
Denominator:
Weighted average common stock
outstanding............................ 21,011,508 24,004,290 24,760,163
Other Dilutive Securities:
Series B preferred stock................. 2,222,222 73,260 --
Options and warrants using the treasury
stock method........................... 2,968,108 2,798,652 2,977,053
----------- ----------- -----------
Weighted average shares outstanding...... 26,201,838 26,876,202 27,737,216
=========== =========== ===========
Net income per share................ $ 0.31 $ 0.53 $ 0.75
=========== =========== ===========
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
Recent Accounting Pronouncements
The Company has adopted SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information about
a company's different types of business activities and different economic
environments. SFAS 131 requires companies to select segments based on their
internal reporting system. The Company provides integrated health benefit
management services to our customers, and these services account for
substantially all of the Company's revenues. Such services are typically
negotiated under one contract with the customer; therefore, the Company's
operations will continue to be reported in one segment.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 requires all derivatives to be recognized as
either assets or liabilities in the statement of financial position and measured
at fair value. In addition, SFAS 133 specifies the accounting for changes in the
fair value of a derivative based on the intended use of the derivative and the
resulting designation. The Company does not have any derivatives and SFAS 133
does not have a material impact on the
F-18
153
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's financial position or disclosures. SFAS 133, as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
Effective Date -- an Amendment of FASB Statement No. 133," and SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133," is effective beginning in
fiscal year March 31, 2002.
In December 1999, the Commission staff issued SAB 101 "Revenue Recognition
in Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. In addition, the Emerging Issues Task Force ("EITF") issued a
consensus in EITF 99-19 "Reporting Gross Revenue as a Principal vs. Net as an
agent." SAB 101 and the EITF are effective in our fourth fiscal quarter of 2001.
In connection with our recent acquisitions and the issuance of these
pronouncements, we are evaluating certain aspects of SAB 101 and the EITF,
including gross versus net reporting of data and clinical revenues. We can
provide no assurance that we may not need to report on a net basis in future
periods. Net reporting of these revenues would have no effect on gross profit or
operating income. If we had reported our data services revenues using net
reporting, revenues and cost of revenues would have decreased by $304,876,000,
$503,247,000 and $1,516,621,000 respectively, for the years ended March 31,1998,
1999 and 2000.
The EITF also has issued EITF 00-22 "Accounting for ... Other Volume Based
Sales Incentive Offers." This pronouncement provides accounting guidance for
certain volume rebate programs. We are currently evaluating the impact, if any,
of this EITF. This pronouncement is expected to be effective in our fourth
quarter of 2001.
3. ACQUISITIONS
Effective October 1, 2000, Advance Paradigm, Inc. ("API") acquired all of
the equity of PCS Health Systems, Inc. ("PCS"). The aggregate purchase price
paid by API was $1.0 billion, of which API paid Rite Aid Corporation ("Rite
Aid"), the seller, $675 million in cash, and issued to Rite Aid $200 million in
senior subordinated notes and $125 million in API convertible preferred stock.
The senior subordinated notes issued to Rite Aid have been guaranteed by all of
the subsidiaries of API. Each subsidiary guarantor is 100% owned. The guarantees
are full, unconditional, joint and several. There are no restrictions on the
ability of the subsidiary guarantors to pay dividends, make loans or advances to
the parent. The cash portion of the purchase price was financed with the
proceeds of an $825 million senior secured credit facility and $150 million in
equity financing committed by Joseph, Littlejohn & Levy, Inc. ("JLL"). The
acquisition of PCS will be accounted for using the purchase method of
accounting. The excess of the purchase price paid over the net identifiable
assets and liabilities of PCS will be recorded as goodwill. The portion of the
purchase price allocated to the net identifiable assets and goodwill is
preliminary and subject to revision following the results of an appraisal and
further identification of intangible assets.
F-19
154
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information presents the results of
operations of the Company as if the PCS acquisition had taken place at the
beginning of the period presented (in thousands, except per share amounts):
2000
----------
Revenues................................................ $9,960,119
Net income (loss)....................................... (8,060)
Net income (loss) per share:
Basic................................................. $ (0.28)
Diluted............................................... $ (0.28)
Weight average shares outstanding:
Basic................................................. 28,967
Diluted............................................... 28,967
Pro forma information for fiscal years 1998 and 1999 would indicate a
significant loss due to the amortization and interest expense and the size of
API during that year. Management has concluded that such information provides
little relevance to the historical and ongoing operating results of API.
On March 31, 1999, the Company acquired the outstanding stock of FHPS for
$70 million in cash and warrants to purchase 400,000 shares of its $0.01 par
value common stock ("Common Stock"). The Company valued such warrants at fair
market value based upon the Black-Scholes valuation model. Such warrants are
valued at $2.5 million. The acquisition has been accounted for using the
purchase method of accounting. The purchase price was allocated to goodwill,
certain customer contracts, and other intangible assets. Goodwill was valued at
approximately $61.3 million and is being amortized on a straight-line basis over
30 years. Customer contracts were valued at $7.0 million and are being amortized
over 15 years.
The following unaudited pro forma information presents the results of
operations of the Company as if the FHPS acquisition had taken place at the
beginning of the periods presented (in thousands, except net income per share
amounts):
1998 1999
-------- --------
Revenues.................................................... $527,113 $838,247
Net income.................................................. $ 4,210 $ 14,000
Net income per share:
Basic..................................................... $ 0.20 $ 0.58
Diluted................................................... $ 0.16 $ 0.52
Weighted average shares outstanding:
Basic..................................................... 21,011 24,004
Diluted................................................... 26,202 26,876
In December 1998, the Company acquired the outstanding stock of
Baumel-Eisner for $25 million in cash. The acquisition has been accounted for
using the purchase method of accounting. Baumel-Eisner's results have been
included in the Company's consolidated statements of operations since December
1998. The purchase price was allocated to the net assets acquired, primarily
goodwill, based on their estimated fair values. The excess of the purchase price
over the fair value of the net assets acquired (goodwill) was approximately
$24.2 million and is being amortized on a straight-line basis over 25 years.
In February 1998, the Company completed a merger with Innovative Medical
Research, Inc. ("IMR"), a privately held clinical trial and survey research firm
based in Towson, Maryland. The Company issued 1,752,156 shares and options to
purchase 47,844 shares of its Common Stock in exchange for all the outstanding
shares and options of IMR. The merger constituted a tax-free reorganization and
F-20
155
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has been accounted for as a pooling of interests under Accounting Principles
Board Opinion No. 16 ("APB 16"). Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position, and cash flows of IMR as though it
had always been a part of the Company.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow.
YEAR ENDED
MARCH 31, 1998
--------------
Revenues:
API.................................................. $465,384,000
IMR.................................................. 8,377,000
------------
Combined..................................... $473,761,000
============
Net income:
API.................................................. $ 7,322,000
IMR.................................................. 766,000
------------
Combined..................................... $ 8,088,000
============
In connection with the merger, the Company recorded in the fourth quarter
of fiscal 1998 a charge to operating expenses of $689,000 ($427,000 after taxes,
or $.02 per common share on a dilutive basis) for professional fees and other
merger-related costs pertaining to the transaction.
On July 5, 2000, API completed a merger with FFI (the "Combination"). The
Company issued 3.5 million shares of its Common Stock in exchange for all the
outstanding shares of FFI. The merger constituted a tax-free reorganization and
has been accounted for as a pooling of interests under APB 16. Total Combination
related costs and provisions are estimated to be approximately $1,000,000 and
will be reflected as an expense in the first post-combination accounting period.
The table below presents a reconciliation of revenues and net income, as
reported in the consolidated statements of operations with those previously
reported by the Company. The references to API in this table are to the
Company's historical operating results prior to the merger with FFI.
FISCAL YEARS ENDED
--------------------------------------------
1998 1999 2000
------------ ------------ --------------
Revenues:
API.................................... $426,900,000 $692,873,000 $1,773,557,000
FFI.................................... 46,861,000 64,386,000 60,331,000
------------ ------------ --------------
Total consolidated revenues.... $473,761,000 $757,259,000 $1,833,888,000
============ ============ ==============
Net income:
API.................................... $ 7,931,000 $ 12,694,000 $ 20,555,000
FFI.................................... 157,000 1,450,000 321,000
------------ ------------ --------------
Total consolidated net
income....................... $ 8,088,000 $ 14,144,000 $ 20,876,000
============ ============ ==============
F-21
156
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
MARCH 31,
--------------------------
1999 2000
----------- ------------
Machinery and equipment................................... $ 4,208,000 $ 6,332,000
Computer equipment and software........................... 13,391,000 29,468,000
Furniture and equipment................................... 2,676,000 4,915,000
Leasehold improvements.................................... 2,903,000 5,029,000
Land and buildings........................................ 1,558,000 1,674,000
----------- ------------
24,736,000 47,418,000
Less -- Accumulated depreciation and amortization......... (8,942,000) (14,311,000)
----------- ------------
$15,794,000 $ 33,107,000
=========== ============
5. DEBT
On March 31, 1999, the Company entered into a senior credit facility with a
group of lenders. The credit facility consists of a $75 million, 3-year
revolving credit facility. On March 31, 1999, the Company borrowed $50 million
under the credit facility to fund the acquisition of FHPS. As of March 31, 2000,
$50 million is outstanding under the credit facility. Outstanding borrowings
will mature on March 31, 2002. Each of the Company's subsidiaries has guaranteed
the credit facility. The lenders received a first priority security interest in
the subsidiaries' capital stock and negative pledges on accounts receivable and
other assets.
Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or "LIBOR," or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.375% per annum as of March 31,
2000, and the effective interest rate is 7.435%.
The credit facility contains usual and customary affirmative and negative
covenants, including limitations on liens, debts, dividends, capital
expenditures, mergers, acquisitions, and sale of assets. Covenants also include
a specified minimum net worth, maximum leverage ratio, and a minimum interest
coverage ratio. In fiscal 2000, the Company exceeded the limit for capital
expenditures as required by covenant. The Company received a waiver from the
lenders for this covenant violation.
In conjunction with the API acquisition of PCS the Company obtained an $825
million senior secured credit facility which includes a $175.0 million revolving
credit facility, $100 million interim revolving credit facility, and two term
notes totaling $550.0 million. The term notes are due on October 2, 2005 and
October 2, 2007. The $175 million revolving credit facility accrues interest at
LIBOR plus 3%. The term notes accrue interest at LIBOR plus 3% and LIBOR plus
3.5%. The Company intends to refinance the $100 million interim revolving credit
facility with a collateralized accounts receivable facility by January 2001. The
secured credit facility replaced the $75.0 million, three year revolving credit
facility. The senior secured credit facility contains covenants which are
typical for this type of document. In addition, API issued to Rite Aid $200
million in senior subordinated notes that accrue interest at 11% through April
2002, 12% from April 2002 to October 2002 and 13% thereafter. The senior
subordinated notes issued to Rite Aid have been guaranteed by all of the
subsidiaries of API. Each subsidiary guarantor is 100% owned. The guarantees are
full, unconditional, joint and several. There are no restrictions on the ability
of the subsidiary guarantors to pay dividends, make loans or advances to the
parent. API also issued Rite Aid $125 million in convertible preferred stock,
convertible into a class B common stock. In addition, API issued $150 million in
common stock and preferred convertible stock to JLL.
F-22
157
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES
The Company leases office and dispensing facility space, equipment, and
automobiles under various operating leases. The Company was obligated to make
future minimum payments under noncancelable operating lease agreements as of
March 31, 2000, as follows:
Years Ending March 31,
2001.................................................. $ 7,541,000
2002.................................................. 7,106,000
2003.................................................. 5,645,000
2004.................................................. 4,558,000
2005.................................................. 3,831,000
-----------
Total minimum lease payments.................. $28,681,000
===========
Total rent expense incurred in the years ended March 31, 1998, 1999, and
2000 was approximately $3,518,000, $4,435,000, and $6,302,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company is a party to routine legal and administrative proceedings
arising in the ordinary course of its business. The proceedings currently
pending are not, in management's opinion, material either individually or in the
aggregate.
The Company has entered into long-term employment and noncompete agreements
with certain management employees. These employment agreements provide for
certain minimum payments should the agreements be terminated.
Various aspects of the Company's businesses are governed by federal and
state laws and regulations and compliance is a significant operational
requirement for the Company. Management believes that the Company is in
substantial compliance with all existing legal requirements material to the
operation of its business; however, the application of complex standards to the
detailed operation of the business always creates areas of uncertainty.
Moreover, regulation of the field is in a state of flux. Numerous health care
laws and regulations have been proposed at the state and federal level, many of
which could affect the Company's business. Management cannot predict what
additional federal or state legislation or regulatory initiatives may be enacted
in the future regarding health care, or the business of pharmacy benefit
management. It is possible that federal or state governments might impose
additional restrictions or adopt interpretations of existing laws that could
have a material adverse affect on the Company's business or financial position.
8. CONCENTRATION OF BUSINESS:
A significant portion of the Company's revenues result from contracts with
customers. These contracts normally have terms from one to ten years with
renewal options.
Effective April 1, 1999, the Company entered into a Pharmacy Benefit
Services Agreement with FHS. Under the terms of this ten-year Service Agreement
the Company provides pharmacy services to FHS' affiliated health plans. FHS
accounted for 41% of the Company's revenues for the year ended March 31, 2000.
Another customer of the Company accounted for approximately 21%, 18%, and 8% of
the Company's revenues for the years ended March 31, 1998, 1999, and 2000,
respectively. Another customer accounted for approximately 15% of the Company's
revenues for the year ended March 31, 1998, but revenues from this customer did
not exceed 10% of the Company's revenues for the year ended March 31,
F-23
158
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999, or 2000. No other customer accounted for over 10% of the Company's
revenues in fiscal years 1998, 1999, or 2000.
9. STOCK TRANSACTIONS
Series B Preferred Stock
On June 25, 1996, the Company issued a total of 4,444 shares of $.01 par
value, Series B convertible preferred stock ("Series B Preferred Stock") to a
customer at a price of $2,250 per share. Shares of the Series B Preferred Stock
could be converted by the holder into 500 fully paid and non-assessable shares
of Common Stock. On April 13, 1998, the holder of the Series B Preferred Stock
converted all of the shares into 2,222,222 shares of Common Stock.
Common Stock
On October 7, 1996, the Company amended and restated its Certificate of
Incorporation to, among other things, increase the number of authorized shares
of its $.01 par value Common Stock to 25,000,000 and the number of shares of its
preferred stock to 5,000,000, of which 5,000 shares are designated as Series B
Preferred Stock. On October 8, 1996, the Company effected a 250-for-one stock
split of the Company's Common Stock. Accordingly, all share and per share
amounts have been adjusted to reflect the stock split as though it had occurred
at the beginning of the initial period presented.
At the 1999 Annual Meeting of Stockholders, the Company amended and
restated the Certificate of Incorporation to increase the number of authorized
shares of its Common Stock to 50,000,000.
On October 12, 1999, the Company announced a two-for-one stock split,
effected in the form of a stock dividend of our Common Stock. The record date
was November 11, 1999, and the date of payment was November 30, 1999. Financial
information and stock prices contained throughout the financial statements have
been adjusted to retroactively reflect the impact of the stock split.
On October 8, 1996, the Company completed the offering ("Offering") of its
Common Stock. The Company sold 4,794,134 shares of its Common Stock at a price
of $4.50 per share, prior to underwriting discount and other offering expenses.
In connection with the Offering, the Company's redeemable Series A cumulative
convertible preferred stock ("Series A Preferred Stock") automatically converted
into 5,000,000 shares of Common Stock.
In connection with the IMR merger, the Company issued 1,752,156 shares of
its Common Stock in exchange for all the outstanding shares of IMR. Under the
provisions of APB 16, the shares are reflected as outstanding as though IMR had
always been a part of the Company.
On December 8, 1999 the Company issued 231,884 shares of its Common Stock
to acquire a 19 percent interest in CHI.
In connection with the FFI merger, the Company issued 3,500,000 shares of
its Common Stock in exchange for all the outstanding shares of FFI. Under the
provisions of APB 16, the shares are reflected as outstanding as though FFI had
always been a part of the Company.
Warrants to Purchase Common Stock
The Company has issued warrants to four of our key health plan sponsor
customers representing the right to purchase up to a total of 691,610 shares of
our Common Stock at prices per share ranging from $16.31 to $21.13. The right to
exercise each warrant vests in equal installments on the first five
anniversaries of the date of grant so long as the customer's service agreement
remains in effect. In addition, during the year ended March 31, 1997, the
Company agreed to issue warrants to purchase
F-24
159
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
562,500 shares of its Common Stock to one customer contingent upon future
expansion of member lives. As of March 31, 2000, none of these warrants have
been earned or issued.
Prior to November of 1997, the Company accounted for these warrant
agreements under the provisions of SFAS 123 and the related Emerging Issues Task
Force ("EITF") 96-3. These pronouncements require that all stock issued to
nonemployees be accounted for based on the fair value of the consideration
received or the fair value of equity instruments issued. In addition, they
require that the fair value be measured on the date the parties come to a
"mutual understanding of the terms of the arrangement and agree to a binding
contract" (i.e. the grant date). If the number of equity instruments is
contingent upon the outcome of future events, the number of instruments that
should be accounted for when determining the fair value of the transaction
should be based on the best available estimate of the number of instruments
expected to be issued. In management's opinion, the fair value of the warrants
at the date of the agreements was not material.
Subsequent to November 20, 1997, the Company follows the guidance of EITF
96-18, under which the measurement date is the earlier of the performance
commitment date or completed performance date. The Company chose not to
retroactively apply EITF 96-18 to the eligible warrants, but chose to apply this
EITF prospectively to new arrangements and any modifications of existing
arrangements.
The Company has reserved shares of Common Stock at March 31, 2000, for the
following:
Exercise of stock options................................. 6,164,658
Exercise of warrants...................................... 1,254,110
---------
7,418,768
=========
10. STOCK OPTION PLAN
At March 31, 2000, the Company has three stock-based compensation plans:
Incentive Stock Option Plan, Amended and Restated Incentive Stock Option Plan,
and the 1997 Nonstatutory Stock Option Plan (the "Plans"). The Plans provide for
the granting of qualified stock options and incentive options to officers,
directors, advisors and employees of the Company. The options must be granted
with exercise prices which equal or exceed the market value of the Common Stock
at the date of grant. As of March 31, 2000, the number of shares of Common Stock
issuable under the Plans may not exceed 7,675,500 shares. The Plans are
administered by a compensation committee appointed by the Board of Directors of
the Company.
The stock options generally vest over 5-year periods. In the event of the
sale or merger with an outside corporation gaining 50% or greater ownership,
options granted to certain employees become 100% vested. The options are
exercisable for a period not to exceed 10 years from the date of grant. As of
March 31, 2000, 2,488,092 options were vested at exercise prices of $0.49 to
$20.68 per share.
F-25
160
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 123 establishes a fair value-based method of accounting for
stock-based compensation. The Company has elected to adopt SFAS 123 through
disclosure with respect to employee stock-based compensation. The following
table summarizes the Company's stock option activity.
1998 1999 2000
--------------------------- --------------------------- ---------------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
--------------- --------- --------------- --------- --------------- ---------
Outstanding at beginning of
year.......................... 2,887,500 $ 3.01 4,123,490 $ 5.27 4,553,276 $ 8.61
Granted....................... 1,304,750 10.63 1,392,300 15.71 1,418,200 20.98
Transferred from IMR.......... 47,844 0.59 -- -- -- --
Exercised..................... (86,104) 2.63 (726,644) 3.40 (177,734) 6.23
Canceled...................... (30,500) 4.89 (235,870) 14.51 (233,990) 14.82
--------------- ------ --------------- ------ --------------- ------
Outstanding at end of year...... 4,123,490 $ 5.27 4,553,276 $ 8.61 5,559,752 $11.58
=============== ====== =============== ====== =============== ======
Exercisable at end of year...... 1,758,764 $ 2.20 1,815,200 $ 3.34 2,488,092 $ 5.42
Price range..................... $0.33 to $16.57 $0.33 to $20.69 $0.49 to $29.08
Weighted average fair value of
options granted............... $ 3.97 $ 7.32 $ 10.58
The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
5,559,752 options outstanding as of March 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED WTD. AVG. WEIGHTED
AVG. EXERCISE CONTRACTUAL AVG. EXERCISE
EXERCISE PRICE RANGE SHARES PRICE LIFE (YRS.) SHARES PRICE
- -------------------- --------- ------------- ----------- --------- -------------
$ 0.49 to $ 4.50................... 1,631,272 $ 2.16 3.9 1,437,272 $ 1.84
$ 5.40 to $ 9.38................... 846,100 6.17 6.4 593,500 6.10
$10.38 to $14.69................... 804,800 14.29 8.2 178,000 14.20
$15.44 to $19.50................... 1,630,880 17.63 9.1 266,320 16.63
$20.16 to $24.25................... 375,000 22.43 9.1 13,000 20.68
$25.38 to $29.08................... 271,700 25.70 9.4 -- --
- ------ ------ --------- ------ --- --------- ------
$ 0.49 to $29.08 5,559,752 $11.58 7.0 2,488,092 $ 5.42
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
ranges of assumptions for the years ended March 31, 1998, 1999, and 2000,
respectively: risk-free interest rates of 4.8% to 6.3%; expected lives of three
to five years; expected volatility of 30% to 60%. The Company continues to
account for stock based compensation under APB 25, "Accounting for Stock Issued
to Employees," as allowed by SFAS 123. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net income and net
income per share would have been reduced to the following pro forma amounts:
1998 1999 2000
---------- ----------- -----------
Net income:
As reported.................................. $8,088,000 $14,144,000 $20,876,000
Pro forma.................................... $7,539,000 $12,571,000 $17,349,000
Basic net income per share:
As reported.................................. $ 0.38 $ 0.59 $ 0.84
Pro forma.................................... $ 0.36 $ 0.52 $ 0.70
Diluted net income per share:
As reported.................................. $ 0.31 $ 0.53 $ 0.75
Pro forma.................................... $ 0.29 $ 0.47 $ 0.63
F-26
161
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because SFAS 123 method of accounting has not been applied to options granted
prior to April 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
On July 5, 2000, API granted 180,000 options to purchase shares of the
Company's common stock to certain individuals who became employees of the
Company in connection with the merger with FFI.
11. RELATED PARTY TRANSACTIONS
In fiscal 1998, the Company entered into an agreement with Advance Capital
Markets ("ACM") pursuant to which ACM agreed to act as financial advisor for the
Company. In exchange for these professional services, the Company paid ACM a fee
of $150,000 in 1998 in connection with the IMR transaction and $85,000 in
connection with the Baumel-Eisner transaction. The fees paid are equivalent to
or less than similar fees incurred in arm's-length transactions. The Managing
Director of ACM is also a Director of the Company. Also in fiscal 1998, the
Company paid approximately $671,000 in consulting fees to FFMC. In fiscal 1999,
the Company made rebate payments of approximately $1,529,000 to Health Horizons.
12. RETIREMENT PLAN BENEFITS
The Company sponsors a retirement plan for all eligible employees, as
defined in the plan document. The plan is qualified under Section 401(k) of the
Internal Revenue Code. The Company is required to contribute at least 50% of the
first 6% of salary deferral contributed by each participant. The Company's
contributions to the plan amounted to approximately $177,000, $268,000, and
$623,000 for the years ended March 31, 1998, 1999, and 2000, respectively.
13. INCOME TAXES
The provision for income taxes for the years ended March 31, 1998, 1999,
and 2000, differed from the amounts computed by applying the U.S. federal tax
rate of 34 percent in 1998 and 1999 and 35 percent in 2000 to pretax earnings as
a result of the following:
1998 1999 2000
---------- ---------- -----------
Tax at U.S. federal income tax rate............. $4,445,000 $7,756,000 $11,800,000
State taxes..................................... 457,000 666,000 540,000
Other, net...................................... 55,000 247,000 454,000
---------- ---------- -----------
Provision for income taxes...................... $4,957,000 $8,669,000 $12,794,000
========== ========== ===========
1998 1999 2000
---------- ---------- -----------
Current......................................... $4,516,000 $7,357,000 $11,487,000
Deferred........................................ 441,000 1,312,000 1,307,000
---------- ---------- -----------
$4,957,000 $8,669,000 $12,794,000
========== ========== ===========
F-27
162
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax bases of assets and liabilities and their
financial reporting bases and the potential benefits of certain tax
carryforwards. The significant deferred tax assets and liabilities and the
changes in those assets and liabilities are as follows:
MARCH 31, MARCH 31,
1999 CHANGES 2000
----------- ----------- -----------
Gross deferred tax assets:
Accruals.................................... $ 153,000 $ 168,000 $ 321,000
Other....................................... 126,000 14,000 140,000
----------- ----------- -----------
279,000 182,000 461,000
----------- ----------- -----------
Gross deferred tax liabilities:
Amortization of goodwill.................... (1,047,000) (1,118,000) (2,165,000)
Depreciation................................ (700,000) (773,000) (1,473,000)
Conversion from cash basis of acquired
entities................................. (1,129,000) 402,000 (727,000)
----------- ----------- -----------
(2,876,000) (1,489,000) (4,365,000)
----------- ----------- -----------
Net deferred tax liability.......... $(2,597,000) $(1,307,000) $(3,904,000)
=========== =========== ===========
F-28
163
ADVANCEPCS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
Effective October 2, 2000, Advance Paradigm, Inc. ("API") acquired all of
the equity of PCS Health Systems, Inc. ("PCS"). The aggregate purchase price
paid by API was $1.0 billion, of which API paid Rite Aid Corporation ("Rite
Aid"), the seller, $675 million in cash, and issued to Rite Aid $200 million in
senior subordinated notes and $125 million in API convertible preferred stock.
The cash portion of the purchase price was financed with the proceeds of an $825
million senior secured credit facility and $150 million in equity financing
committed by Joseph, Littlejohn & Levy, Inc. ("JLL"). The acquisition of PCS
will be accounted for using the purchase method of accounting. The excess of the
purchase price paid over the net identifiable assets and liabilities of PCS will
be recorded as goodwill. The portion of the purchase price allocated to the net
identifiable assets and goodwill is preliminary and subject to revision
following the results of an appraisal and further identification of intangible
assets.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended March 31, 2000 and the nine-month period ended December 31, 2000,
give effect to the Combinations as if they occurred on April 1, 1999 and 2000,
respectively. The historical financial statements of API are for the year ended
March 31, 2000, giving effect for the merger with First Florida International
Holdings, Inc., and nine months ended December 31, 2000. The historical
financial statements of PCS are for the year ended February 26, 2000, the most
recent fiscal year for PCS and six months ended September 23, 2000. The
accompanying pro forma adjustments include: (i) the acquisition of PCS; (ii) the
establishment by API of a new credit facility; (iii) the payment of certain fees
and expenses associated with the PCS acquisitions; (iv) the issuance of equity
to JLL; and (v) the reduction of assets to reflect PCS assets not acquired by
API.
API usually implements significant changes to the operations of the
entities that it acquires to enhance profitability. In addition, API will
consolidate certain operations of PCS and API which is expected to result in
costs to exit activities during the fourth quarter of the fiscal year ended
March 31, 2001. The expected benefits and cost reductions anticipated by API
have not been reflected in the following Unaudited Pro forma Condensed
Consolidated Financial Statements because their realization cannot be assured.
Accordingly, these Unaudited Condensed Consolidated Pro Forma Financial
Statements are not necessarily indicative of the operating results that would
have been achieved had the Combinations occurred on April 1, 1999 and 2000,
respectively.
The Unaudited Condensed Consolidated Pro Forma Financial information is
based on the historical financial statements of API and the historical financial
statements of PCS. The pro forma adjustments are based upon available
information. While the pro forma adjustments are based upon certain assumptions
that API considers reasonable in the circumstances, final amounts will differ
from those set forth. These adjustments are directly attributable to the
transactions referenced above and are expected to have a continuing impact on
the API business, results of operations, and financial position.
F-29
164
STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 2000 (IN THOUSANDS,
EXCEPT PER SHARE DATA)
The following tables present selected unaudited pro forma consolidated
statement of operations data of AdvancePCS for the periods and dates indicated.
The pro forma statement of operations data gives effect to our acquisition of
PCS as if it had been consummated at the beginning of the periods presented. The
summary unaudited pro forma financial data set forth below is presented for
illustrative purposes only and is not necessary indicative of what our actual
results of operations would have been had the acquisition been consummated at
the beginning of such periods. The summary unaudited pro forma financial data
does not purport to be indicative of our results of operations for any future
period. Historical revenues for AdvancePCS and PCS have been revised to reflect
adoption of consistent revenue recognition policies as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Changes in Revenue Recognition."
Historical revenues for AdvancePCS and PCS have been revised to reflect
adoption of consistent revenue recognition policies as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Changes in Revenue Recognition."
YEAR ENDED YEAR ENDED
MARCH 31, 2000 FEBRUARY 26, 2000 PURCHASE
HISTORICAL HISTORICAL PRO FORMA ADVANCEPCS/PCS
ADVANCEPCS(1) PCS(1) ADJUSTMENTS PRO FORMA
-------------- ----------------- ----------- --------------
Revenues............................. $1,833,888 $1,264,694 $6,861,537(9) $9,960,119
Gross profit......................... 75,502 207,281 -- 282,783
Selling, general and administrative
expenses........................... 38,793 154,116 (1,388)(2) 191,521
Operating income..................... 36,709 53,165 1,388 91,262
Interest income...................... 1,064 7,875 (7,875)(3) 1,064
Interest expense..................... (3,943) (2,008) (81,426)(4) (87,377)
Loss on asset disposal............... (160) -- -- (160)
---------- ---------- ---------- ----------
Income (loss) before income taxes.... 33,670 59,032 (87,913) 4,789
Provision for income taxes........... (12,794) (37,536) 37,481(5) (12,849)
---------- ---------- ---------- ----------
Net income (loss).................... $ 20,876 $ 21,496 $ (50,432) $ (8,060)
========== ========== ========== ==========
P/S dividends........................ -- -- -- --
Net income (loss) available to common
shareholders....................... $ 20,876 (8,060)
Basic:
Net income (loss) per share........ $ 0.84 $ (0.28)
Weighted average shares
outstanding..................... 24,760 4,207(6) 28,967
Diluted:
Net income (loss) per share........ $ 0.75 (7)
Weighted average shares
outstanding..................... 27,737 13,750(6) (7)
EBITDA............................... $ 45,819 $ 125,382 $ (4,200)(8) $ 167,001
F-30
165
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 (IN
THOUSANDS, EXCEPT PER SHARE DATA)
Historical revenues for AdvancePCS and PCS have been revised to reflect
adoption of consistent revenue recognition policies as described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Changes in Revenue Recognition."
NINE MONTHS
ENDED
DECEMBER 31, 2000 SIX MONTHS ENDED PURCHASE
HISTORICAL SEPTEMBER 23, 2000 PRO FORMA ADVANCEPCS/PCS
ADVANCEPCS(1) HISTORICAL PCS(1) ADJUSTMENTS PRO FORMA
----------------- ------------------- ----------- --------------
Revenues....................... $4,032,904 $651,205 $3,636,439(9) $8,320,548
Gross profit................... 135,074 110,298 -- 245,372
Selling, general and
administrative expenses...... 75,568 90,440 2,929(2) 168,937
Non-recurring charges.......... 680 -- -- 680
Operating income............... 58,826 19,858 (2,929) 75,755
Interest income................ 2,297 6,780 (6,780)(3) 2,297
Interest expense............... (24,250) (1,056) (40,497)(4) (65,803)
Other income (expense)......... (1,200) -- -- (1,200)
---------- -------- ---------- ----------
Income before income taxes..... 35,673 25,582 (50,206) 11,049
Provision for income taxes..... (16,409) (16,741) 19,191(5) (13,959)
---------- -------- ---------- ----------
Net income..................... $ 19,264 $ 8,841 $ (31,015) $ (2,910)
========== ======== ========== ==========
P/S dividends.................. -- -- -- --
Net income (loss) available to
common shareholders.......... $ 19,263 $ (2,910)
Basic:
Net income (loss) per
share..................... $ 0.72 $ (0.10)
Weighted average shares
outstanding............... 26,697 2,805(6) 29,502
Diluted:
Net income (loss) per
share..................... $ 0.58 (7)
Weighted average shares
outstanding............... 33,305 9,167(6) (7)
EBITDA......................... $ 87,863 $ 57,231 $ (1,050)(8) $ 144,044
F-31
166
ADVANCEPCS AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DETERMINATION AND ALLOCATION OF PCS PURCHASE PRICE
At the date of the PCS acquisition, all of the equity of PCS was purchased
for $1 billion. The PCS acquisition will be accounted for using the purchase
method of accounting for business combinations. The preliminary allocation of
the pro forma purchase price is as follows:
APRIL 1, 1999 APRIL 1, 2000
-------------- --------------
PCS purchase price.................................... $1,000,000,000 $1,000,000,000
Transaction Costs..................................... 8,700,000 8,700,000
-------------- --------------
Pro forma purchase price.............................. 1,008,700,000 1,008,700,000
Net liabilities assumed (the liabilities assumed
exceeded the net identifiable assets acquired)...... 243,989,000 429,963,000
-------------- --------------
Excess purchase price................................. $1,252,689,000 $1,438,663,000
============== ==============
Allocation of excess purchase price:
Goodwill............................................ $1,091,389,000 $1,251,363,000
Intangible assets................................... 445,000,000 511,000,000
Deferred income tax liabilities..................... (273,000,000) (313,000,000)
Accrued liabilities................................. (10,700,000) (10,700,000)
-------------- --------------
Excess purchase price................................. $1,252,689,000 $1,438,663,000
============== ==============
- ---------------
(1) Reflects the audited historical combined statement of operations of API for
the year ended March 31, 2000, and the unaudited consolidated statement of
operations of API for the nine-month period ended December 31, 2000, which
includes PCS data since the acquisition on October 2, 2000.
The historical PCS column reflects the audited historical consolidated
statement of operations of PCS for the year ended February 26, 2000, and
the unaudited consolidated statement of operations of PCS for the six-month
period ended September 23, 2000.
(2) The pro forma adjustment to increase selling, general and administrative
expenses results from (i) the elimination of historical PCS amortization of
goodwill and intangible assets; (ii) the addition of pro forma goodwill and
intangible asset amortization resulting from the preliminary allocation of
$1,091,389,000 and $1,251,363,000 at March 31, 1999 and 2000, respectively,
to goodwill and $445,000,000 and $511,000,000 at March 31, 1999 and 2000,
respectively, to intangible assets; (iii) the elimination of historical PCS
depreciation expense on the PCS land and building not acquired; and (iv)
the addition of lease expense resulting from the lease of land and
buildings for the PCS operations. Goodwill is expected to be amortized over
30 years and the intangible assets will be amortized over their estimated
useful lives of 5-40 years. These adjustments are as follows:
MARCH 31, 2000 DECEMBER 31, 2000
-------------- -----------------
Elimination of historical PCS goodwill
amortization................................. $(32,064,000) $(16,044,000)
Elimination of historical PCS intangible asset
amortization................................. (29,653,000) (14,826,000)
Pro forma goodwill amortization................ 36,380,000 21,157,000
Pro forma intangible asset amortization........ 21,248,750 11,292,000
Elimination of historical PCS depreciation
expense...................................... (1,500,000) (750,000)
Pro forma lease expense........................ 4,200,000 2,100,000
------------ ------------
Pro forma adjustment........................... $ (1,388,250) $ 2,929,000
============ ============
(3) Reflects the elimination of PCS affiliate interest income earned on a
receivable from Rite Aid.
F-32
167
(4) Reflects pro forma interest expense (at assumed rates of interest) for the
year ended March 31, 2000, and for the nine months ended December 31, 2000,
resulting from pro forma borrowings and the amortization of deferred
financing costs paid to obtain the Senior Secured Credit Facility and the
elimination of historical interest expense of API and PCS. These
adjustments are as follows:
MARCH 31, 2000 DECEMBER 31, 2000
-------------- -----------------
Revolver, $70,000,000 @ 9.8%................... $ 6,860,000 $ 3,430,000
Term Note A, $150,000,000 @ 9.8%............... 14,700,000 7,350,000
Term Note B, $400,000,000 @ 10.3%.............. 41,200,000 20,600,000
Senior Subordinate Notes, $200,000,000 @ 11%... 22,000,000 11,000,000
Deferred financing costs (amortized over 5-7
years)....................................... 2,616,667 1,309,000
Less API historical interest expense........... (3,943,000) (2,136,000)
Less PCS historical interest expense........... (2,008,000)* (1,056,000)**
----------- -----------
Pro forma adjustment........................... $81,425,667 $40,497,000
=========== ===========
* for the year ended February 26, 2000
** for the six months ended September 23, 2000
(5) The tax effects of pro forma adjustments were calculated using statutory
rates in effect during the year ended March 31, 2000, and for the nine
months ended December 31, 2000. The amortization of goodwill and intangible
assets are not deductible for income tax purposes. In addition, a portion
of the acquisition costs are nondeductible.
(6) Reflects the issuance of 4,207,300 shares of common stock and 3,292,700
shares of convertible Preferred Stock to JLL and 6,250,000 of Convertible
Preferred Stock to Rite Aid.
MARCH 31, 2000 DECEMBER 31, 2000
-------------- -----------------
Reflects the issuance of Common Shares of
JLL.......................................... 4,207 2,805
Reflects the issuance of Convertible Preferred
Stock to JLL................................. 3,293 2,195
Reflects the issuance of Convertible Preferred
Stock to Rite Aid............................ 6,250 4,167
(7) Potential dilutive securities were not included in the computation of fully
diluted earnings per share. Inclusion of such securities would have been
anti-dilutive, therefore, fully diluted earnings per share is equal to
basic earnings per share.
(8) Includes pro forma adjustment of $1,050,000 per quarter for additional
lease expense for PCS land and building.
(9) Amount reflects the "gross-up" in PCS data services revenues to reflect
payments from plan sponsors as revenue and payments to their network
pharmacy providers as cost of revenues. The purpose of this adjustment is
to conform the PCS revenue policy to the API policy.
SUPPLEMENTAL INFORMATION
API will consolidate certain operations of PCS and API which is expected to
result in costs to exit activities during the fourth quarter of the fiscal year
ended March 31, 2001. The consolidation is expected to include a facility
closure and other synergistic activities. These events are expected to result in
a pretax charge of approximately $18 million to operations.
F-33
168
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
PCS Holding Corporation
We have audited the accompanying consolidated balance sheets of PCS Holding
Corporation and Subsidiaries (the Company) as of February 27, 1999 and February
26, 2000, and the related consolidated statements of operations, shareholder's
equity, and cash flows for the thirty-six days ended February 27, 1999 and the
year ended February 26, 2000. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PCS Holding Corporation and Subsidiaries at February 27, 1999 and February 26,
2000, and the consolidated results of their operations and their cash flows for
the thirty-six days ended February 27, 1999 and the year ended February 26,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
April 21, 2000, except for Note 12
for which the date is June 15, 2000
F-34
169
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUES)
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,955 $ 3,585
Accounts receivable, less allowances of $9,746 in 1999 and
$5,494 in 2000......................................... 531,017 613,933
Other receivables......................................... 674 1,391
Inventories............................................... 32,464 37,952
Prepaid expenses.......................................... 2,718 4,742
Deferred income taxes..................................... 10,156 46
---------- ----------
Total current assets.............................. 578,984 661,649
Goodwill, net of amortization of $3,171 in 1999 and $35,235
in 2000................................................... 1,282,918 1,250,854
Other intangibles, net...................................... 618,005 607,792
Property and equipment, net................................. 76,882 94,734
---------- ----------
Total assets...................................... $2,556,789 $2,615,029
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Claims and rebates payable................................ $ 469,497 $ 518,246
Checks outstanding in excess of bank balances............. 93,987 367,419
Due to Rite Aid Corporation............................... 97,420 --
Other..................................................... 126,881 185,408
---------- ----------
Total current liabilities......................... 787,785 1,071,073
Noncurrent liabilities:
Deferred income taxes..................................... 238,127 232,525
Other liabilities......................................... 11,978 15,181
Shareholder's equity:
Class A voting common stock, $1 par value; 1,000 shares
authorized; 565 shares outstanding..................... 1 1
Additional paid-in capital.................................. 1,518,472 1,274,327
Retained earnings........................................... 426 21,922
---------- ----------
Total shareholder's equity........................ 1,518,899 1,296,250
---------- ----------
Total liabilities and shareholder's equity........ $2,556,789 $2,615,029
========== ==========
See accompanying notes.
F-35
170
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
THIRTY-SIX
DAYS ENDED YEAR ENDED
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
Revenue
Mail order programs....................................... $ 67,368 $ 753,125
Manufacturer programs..................................... 17,797 235,101
Claims processing......................................... 12,996 199,946
Other..................................................... 6,165 76,522
-------- ----------
104,326 1,264,694
Expenses
Cost of goods and services................................ 86,599 1,057,413
Selling, general and administrative....................... 10,967 122,052
Amortization of goodwill.................................. 3,171 32,064
Interest expense (income), net............................ 262 (5,867)
-------- ----------
100,999 1,205,662
-------- ----------
Income before income taxes.................................. 3,327 59,032
Income tax expense.......................................... 2,901 37,536
-------- ----------
Net income........................................ $ 426 $ 21,496
======== ==========
See accompanying notes.
F-36
171
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
CLASS A STOCK
----------------- ADDITIONAL
NUMBER OF PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
--------- ----- ---------- -------- ----------
Initial capitalization on January 23, 1999
through purchase of Class A shares by
Rite Aid Corporation.................... 565 $ 1 $1,518,472 $ -- $1,518,473
Net income................................ -- -- -- 426 426
--- --- ---------- ------- ----------
Balance at February 27, 1999.............. 565 1 1,518,472 426 1,518,899
Net income.............................. -- -- -- 21,496 21,496
Due from Rite Aid Corporation........... -- -- (244,145) -- (244,145)
--- --- ---------- ------- ----------
Balance at February 26, 2000.............. 565 $ 1 $1,274,327 $21,922 $1,296,250
=== === ========== ======= ==========
See accompanying notes.
F-37
172
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THIRTY-SIX DAYS
ENDED YEAR ENDED
FEBRUARY 27, FEBRUARY 26,
1999 2000
--------------- ------------
Operating activities
Net income................................................ $ 426 $ 21,496
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 7,064 72,217
Loss on asset disposal................................. -- 230
Provision for losses on receivables and other
allowances............................................ 1,591 11,291
Changes in deferred taxes.............................. (4,627) 4,508
Changes in operating assets and liabilities:
Receivables.......................................... (146,518) (84,771)
Inventories.......................................... (5,731) (5,488)
Prepaid expenses..................................... (1,346) (2,024)
Claims and rebates payable........................... 121,333 48,749
Checks outstanding in excess of bank balances........ (208,983) 273,432
Accrued and other liabilities........................ 21,863 51,577
--------- ---------
Net cash (used in) provided by operating
activities...................................... (214,928) 391,217
Investing activities
Additions to property and equipment, net.................. (1,555) (28,581)
Additions to other intangibles............................ (2,650) (19,441)
--------- ---------
Net cash used in investing activities............. (4,205) (48,022)
Financing activities
Change in due to (from) Rite Aid Corporation.............. 217,133 (341,565)
--------- ---------
Net cash provided by (used in) financing
activities...................................... 217,133 (341,565)
--------- ---------
Net (decrease) increase in cash............................. (2,000) 1,630
Cash at beginning of period................................. 3,955 1,955
--------- ---------
Cash at end of period....................................... $ 1,955 $ 3,585
========= =========
Supplemental cash flow information
Cash paid for interest.................................... $ 370 $ 1,612
========= =========
Cash paid for income taxes................................ $ -- $ 2,272
========= =========
See accompanying notes.
F-38
173
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
PCS Holding Corporation and Subsidiaries (the "Company") is an
information-driven health solutions company operating in the United States. The
Company provides managed pharmaceutical-related programs and services that can
directly and positively improve the health of patients, and help reduce health
care costs.
Prior to January 23, 1999, the Company was a wholly owned subsidiary of Eli
Lilly and Company ("Lilly"). On January 23, 1999, Rite Aid Corporation ("Rite
Aid") purchased all outstanding shares of the Company's stock for $1.5 billion
(accounted for under the purchase method), and at February 26, 2000 continues to
own all outstanding shares of the Company's stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company include
PCS Holding Corporation and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Rite Aid's purchase of the Company has been accounted for under the
purchase method of accounting, with the purchase price and related fees of the
acquisition allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of the acquisition. The excess of cost
over the fair value of net assets acquired of approximately $1,868,589 was first
allocated to identifiable intangible assets, and then to goodwill.
Management believes that the consolidated statements of operations include
an appropriate allocation of all material costs incurred by Rite Aid on the
Company's behalf. These consolidated financial statements, however, may not be
indicative of the Company's financial position and operations if it were a stand
alone company.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosures at the date of the consolidated
financial statements and during the reporting period. Actual results could
differ from those estimates.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist
principally of (i) claims reimbursement receivables and claim fees receivable
and (ii) the Company's portion of manufacturer program receivables. The Company
monitors the credit worthiness of the customers to which it grants credit terms
in the normal course of business and takes deposits from customers when
considered necessary to collateralize its position. Concentrations of credit
risk associated with these receivables are considered minimal due to a diverse,
geographically dispersed customer base, contracts with whom are subject to
periodic renewal.
Manufacturer program receivables (included in accounts receivable) are
concentrated in the drug manufacturing industry and had a net balance of $82,717
at February 27, 1999 and $99,356 at February 26, 2000.
F-39
174
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid financial instruments
purchased with a maturity of three months or less, and the carrying value
approximates fair value.
Accounts Receivable and Claims and Rebates Payable
Accounts receivable consists primarily of claims reimbursement receivables,
claims processing fees receivable and manufacturer program receivables. Because
these items are short-term in nature, their carrying amounts approximate fair
value.
Claims reimbursement receivables and claims payables arise from the
adjudication of pharmacy claims. These amounts, along with the related claim
fees receivable, are recorded when a reimbursement request is received by the
Company. Reimbursements for claim payments are not included in revenue, and
payments to member pharmacies are not included in expenses, unless they are part
of a capitated program for which the Company takes the risk for the
pharmaceutical cost. Checks outstanding are classified as liabilities because
they are drawn on zero balance accounts.
Manufacturers' rebates receivable and rebates payable arise from
manufacturers' rebate programs and are recorded when a claim eligible for rebate
is adjudicated by the Company. Rebates are paid to customers upon collection
from manufacturers, and are either contractually limited to actual collections
from manufacturers or are, in certain limited circumstances, guaranteed for a
certain rebate per claim. The Company generally is paid a portion of rebates
collected as a rebate processing fee. The customer portion of rebates collected
is not included in revenue, and correspondingly payments of rebates to customers
are not included in expenses.
The Company participates in Rite Aid's accounts receivable securitization
program, whereby Rite Aid and certain of its subsidiaries sell, on an ongoing
basis, a pool of receivables to a wholly owned bankruptcy-remote special purpose
funding subsidiary of Rite Aid. Under the securitization program, new
receivables are sold as collections reduce previously sold accounts receivable.
The Company services, administers and collects the receivables on behalf of the
purchaser. The Company had accounts receivable of approximately $0 at February
27, 1999 and $1,534 at February 26, 2000 which it was servicing but which had
been sold under the securitization program (and the proceeds from the sale are
included in the balance due from Rite Aid Corporation).
Due from Rite Aid Corporation
The Company participates in the daily cash management program of Rite Aid,
through which it invests excess cash and has access to short-term borrowings.
Under the program, the Company pays or receives interest on its balances in the
program at approximately 5.5 percent.
The due from Rite Aid Corporation balance at February 26, 2000 is reflected
as a reduction of additional paid-in capital as it is Rite Aid's intention not
to repay the balance to the Company, except to the extent funds are needed for
the Company's current operations. The balance due to Rite Aid at February 27,
1999, however, is included in current liabilities as it was repaid to Rite Aid.
Inventories
Inventories consist primarily of pharmaceutical products for mail order
programs. Inventories are recorded at the lower of cost or market. Cost is
determined using the first-in, first-out method.
F-40
175
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Income Taxes
Deferred income taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting based on
enacted tax laws and rates.
Goodwill
Goodwill represents the amount of the purchase price of the Company's stock
paid by Rite Aid in excess of the identifiable net assets acquired, and is
amortized on a straight-line basis over 40 years.
On a periodic basis, the Company estimates the future undiscounted cash
flows of its business to which goodwill relates to assure that the carrying
value of goodwill has not been impaired.
Other Intangibles
Other intangibles consist of those intangible assets identified at the time
of Rite Aid's purchase of the Company's stock. Provisions for amortization are
computed by the straight-line method based on the estimated useful lives of the
underlying assets as follows:
Trade name.............................................. 40 years
Customer base........................................... 30 years
Pharmacy network........................................ 30 years
Assembled work force.................................... 6 years
Internally developed software........................... 5 years
Capitalized software costs.............................. 2 to 8 years
On a periodic basis, the Company estimates the future undiscounted cash
flows of its business to which the other intangibles relate to assure that the
carrying value of the other intangibles has not been impaired.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Provisions for depreciation are generally computed by the straight-line method
based on the estimated useful lives of the underlying assets as follows:
Buildings and improvements............................. 8 to 30 years
Equipment.............................................. 3 to 5 years
Furniture and fixtures................................. 10 years
When property or equipment is retired or sold, its cost and related
accumulated depreciation are written off and the resulting gain or loss is
included in net income.
Revenue
Revenue includes claims processing fees which are accrued when the related
claim is adjudicated and approved for payment. Certain of the Company's
agreements require its customers to pay a fee per covered member rather than a
fee per claim. The Company records these fees monthly based upon member counts
provided by its customers. Revenue from manufacturer programs is recognized when
services are performed. Mail order program revenue is recognized when
prescriptions are shipped. Other revenue is generally recognized as the related
services are performed.
F-41
176
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. OTHER INTANGIBLES
Other intangibles consist of the following:
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
Customer base............................................... $357,400 $357,400
Trade name.................................................. 113,100 113,100
Capitalized software costs.................................. 38,299 57,739
Internally developed software............................... 21,900 21,900
Pharmacy network............................................ 76,700 76,700
Assembled work force........................................ 13,400 13,400
-------- --------
620,799 640,239
Accumulated amortization.................................... (2,794) (32,447)
-------- --------
$618,005 $607,792
======== ========
In connection with Rite Aid's acquisition of the Company, intangible assets
were identified with an estimated fair value of $582,500. Capitalized software
costs represent cash expenditures by the Company.
Accumulated amortization on the capitalized software costs portion of other
intangibles was $436 at February 27, 1999 and $6,244 at February 26, 2000.
Amortization expense for other intangibles was $2,794 during the thirty-six days
ended February 27, 1999 and $29,653 during the year ended February 26, 2000
(which includes $436 during the thirty-six days ended February 27, 1999 and
$5,808 during the year ended February 26, 2000 for capitalized software costs).
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
Land........................................................ $36,220 $ 36,444
Buildings and improvements.................................. 20,094 31,557
Equipment................................................... 10,230 18,777
Furniture and fixtures...................................... 6,780 15,135
Construction in progress.................................... 4,657 4,419
------- --------
77,981 106,332
Accumulated depreciation.................................... (1,099) (11,598)
------- --------
$76,882 $ 94,734
======= ========
Depreciation expense was $1,099 during the thirty-six days ended February
27, 1999 and $10,499 during the year ended February 26, 2000.
5. INCOME TAXES
The Company is included in Rite Aid's consolidated federal income tax
filings, and participates in Rite Aid's tax sharing arrangement. Rite Aid's tax
sharing arrangement contemplates each subsidiary computing its federal income
tax payable or receivable as if it were filing its own separate federal tax
return, and then the subsidiary either owes or is owed the computed amount by
Rite Aid (included in the net due to/from Rite Aid Corporation balance). Under
Rite Aid's tax sharing arrangement, a subsidiary
F-42
177
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will only receive a benefit for a net operating loss carryforward to the extent
it can be utilized in Rite Aid's consolidated tax filing.
The Company's income tax expense has been computed as if the Company filed
separate income tax returns for all periods. However, due to the tax sharing
arrangement with Rite Aid, the Company is unable to use any of its net operating
loss carryforwards for the year ending February 26, 2000. Instead, the Company
is utilizing current year losses generated by Rite Aid and, therefore, must
compensate Rite Aid for the use of these losses.
Following is the composition of income tax expense:
THIRTY-SIX
DAYS ENDED YEAR ENDED
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
Current:
Federal................................................... $ 9,993 $25,922
State..................................................... -- 7,102
------- -------
9,993 33,024
Deferred:
Federal................................................... (7,814) 3,538
State..................................................... 722 974
------- -------
(7,092) 4,512
------- -------
$ 2,901 $37,536
======= =======
Income tax expense differs from the amount computed by applying the federal
statutory rate to the income before income taxes as follows:
THIRTY-SIX
DAYS ENDED YEAR ENDED
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
Income tax expense computed at federal statutory rate....... $1,164 $20,661
State income taxes, net of federal benefit.................. 469 5,249
Amortization of goodwill.................................... 1,110 11,223
Other, net.................................................. 158 403
------ -------
$2,901 $37,536
====== =======
F-43
178
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities are as follows:
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
Current deferred income tax assets (liabilities):
Risk reserves............................................. $ 7,134 $ 5,804
Allowances................................................ 7,283 5,980
Deferred revenue.......................................... (6,722) (12,852)
Deferred compensation..................................... 908 1,073
Other..................................................... 1,553 41
--------- ---------
Net current deferred income tax assets............ $ 10,156 $ 46
========= =========
Long-term deferred income tax assets (liabilities):
Postemployment plan....................................... $ 1,991 $ 2,956
Deferred compensation..................................... 4,483 4,572
Net operating loss carryforwards.......................... 19,540 19,540
Other intangible assets................................... (236,045) (226,343)
Capitalized software...................................... (11,174) (16,935)
Accelerated depreciation.................................. (6,148) (6,843)
Other..................................................... 280 1,582
Valuation allowance....................................... (11,054) (11,054)
--------- ---------
Net long-term deferred income tax liabilities..... $(238,127) $(232,525)
========= =========
At February 26, 2000, the Company has federal net operating loss
carryforwards of approximately $51,779 which begin to expire in the year 2018.
The utilization of these net operating losses could be limited by specific
sections of the Internal Revenue Code related to stock ownership changes. The
Company has a valuation allowance at February 27, 1999 and February 26, 2000 as
it is uncertain, at present, that it will realize the full benefit of the net
operating loss carryforwards under Rite Aid's tax sharing arrangement. A
valuation allowance has not been established for a portion of the net operating
loss carryforwards as it relates to a liability associated with a tax benefit
due to Lilly upon being recognized.
6. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
FEBRUARY 27, FEBRUARY 26,
1999 2000
------------ ------------
Accounts payable and accrued expenses....................... $ 52,452 $ 95,764
Employee compensation....................................... 12,635 23,407
Deposits.................................................... 14,713 12,894
Unearned revenue............................................ 6,118 22,612
Other....................................................... 40,963 30,731
-------- --------
$126,881 $185,408
======== ========
F-44
179
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASES
Future minimum operating lease payments for facilities and equipment at
February 26, 2000 are as follows:
Fiscal years ended:
2001.................................................... $11,672
2002.................................................... 9,184
2003.................................................... 5,363
2004.................................................... 1,334
2005.................................................... 555
Thereafter.............................................. 593
-------
$28,701
=======
Rent expense was $1,343 during the thirty-six days ended February 27, 1999
and $17,045 during the year ended February 26, 2000.
8. COMMITMENTS AND CONTINGENCIES
The Company enters into risk contracts with certain customers in the
ordinary course of business. These contracts provide that the Company assume
varying percentages of the risk associated with claims experience differing from
fixed fee arrangements under managed care programs. In addition, the Company, in
certain limited circumstances, guarantees a specific amount of savings for
certain customers. Included in other current liabilities in the accompanying
consolidated balance sheets are management's estimates of the amounts required
to cover losses incurred under such contracts.
The Company is subject to various claims, including possible legal actions
brought by plan sponsors for alleged errors or omissions arising out of the
ordinary course of business. Management believes that it has a combination of
adequate insurance coverage and reserves against potential losses and that the
outcome of such claims will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-45
180
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RETIREMENT BENEFITS
The funded status and amounts recognized in the consolidated balance sheets
at February 27, 1999 and February 26, 2000 for the Company's defined benefit
pension and retiree health benefit plans, as well as changes in the benefit
obligation and plan assets during fiscal 2000, were as follows:
DEFINED BENEFIT RETIREE
PENSION PLAN HEALTH BENEFITS
--------------- ---------------
Change in benefit obligation:
Benefit obligation at February 27, 1999................ $23,271 $ 3,756
Service cost........................................... 3,740 693
Interest cost.......................................... 1,567 252
Actuarial gain......................................... (4,158) (706)
Benefits paid.......................................... (187) (66)
------- -------
Benefit obligation at February 26, 2000........ 24,233 3,929
Change in plan assets:
Fair value of plan assets at February 27, 1999......... 21,680 --
Actual return on plan assets........................... 3,595 --
Employer contribution.................................. 2,380 66
Benefits paid.......................................... (187) (66)
------- -------
Fair value of plan assets at February 26,
2000......................................... 27,468 --
Funded status............................................ 3,235 (3,929)
Unrecognized net actuarial gain.......................... (5,509) (383)
------- -------
Net amount recognized.......................... $(2,274) $(4,312)
======= =======
Amounts recognized in consolidated balance sheet
consisted of:
Accrued benefit liability.............................. $ 2,274 $ 4,312
------- -------
Net amount recognized.................................... $ 2,274 $ 4,312
======= =======
Weighted-average assumptions as of February 26, 2000:
Discount rate.......................................... 7.8% 7.8%
Expected return on plan assets......................... 9.0 --
Rate of compensation increase.......................... 5.9 --
Health care cost trend rates were assumed to increase at an annual rate of
6.5 percent in 2001 for participants under age 65, and decrease one-half percent
per year to 5.5 percent in 2002 and thereafter. For participants over age 65,
the annual rate was assumed to be 5.5 percent.
Net pension and retiree health benefit expense were not computed for the
thirty-six days ended February 27, 1999. The amounts for the year ended February
26, 2000 included the following components:
DEFINED BENEFIT RETIREE
PENSION PLAN HEALTH BENEFITS
--------------- ---------------
Components of net periodic benefit cost:
Service cost........................................... $ 3,740 $693
Interest cost.......................................... 1,567 252
Expected return on plan assets......................... (1,873) --
------- ----
Net periodic benefit cost...................... $ 3,434 $945
======= ====
The assumed health care cost trend rates have a significant effect on the
retiree health benefits amounts reported. If these trend rates were to be
increased by one percentage point each future year, the
F-46
181
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 26, 2000 accumulated postretirement benefit obligation would increase
by 13.4 percent, and the aggregate of the service cost and interest cost
components of 2000 annual expense would increase by 17.6 percent. A one
percentage point decrease in these rates would decrease the February 26, 2000
accumulated postretirement benefit obligation by 11.7 percent, and the aggregate
of the 1999 service cost and interest cost by 14.9 percent.
The Company also has a defined contribution savings plan that covers its
eligible employees. The purpose of the defined contribution plan is generally to
provide additional financial security during retirement by providing employees
with an incentive to make regular savings. Company contributions to the plan are
based on employee contributions and the level of Company match. Expenses under
the plan totaled $439 during the thirty-six days ended February 27, 1999 and
$5,440 during the year ended February 26, 2000.
The Company provides certain other postemployment benefits, primarily
related to disability benefits, and accrues for the related cost over the
service lives of the employees. Expenses associated with these benefit plans
during the years ended February 27, 1999 and February 26, 2000 were not
significant.
10. RELATED PARTY TRANSACTIONS
Officer Retention Bonuses
At the time Rite Aid purchased the Company, certain of the Company's
officers were provided with a financial incentive to remain at the Company.
Under this retention incentive program, and by remaining at the Company, the
participating officers vest annually in the financial benefits through January
22, 2002. The value of the benefits is determined based upon the Rite Aid stock
price during the vesting period, but is not to be less than an established floor
value. The Company recognized compensation expense under this program of $706
during the thirty-six days ended February 27, 1999 and $7,137 during the year
ended February 26, 2000.
In the event of a change in control of the Company, the participating
officers immediately become fully vested in the program's benefits. The
occurrence of such an event at February 26, 2000 would have caused approximately
$5,178 of additional compensation costs to be recognized during the year ended
February 26, 2000.
Other
Certain expenses, principally employee benefits and general liability and
workers' compensation insurance premiums, are paid on behalf of and charged to
the Company by Rite Aid. In addition, the Company has used certain resources and
administrative staff of Rite Aid, including financial, legal, tax, internal
audit, accounting advice, and other personnel and employee benefit services.
Management believes that the consolidated statements of operations include an
appropriate allocation of all material costs incurred by Rite Aid during
thirty-six days ended February 27, 1999 and the year ended February 26, 2000 on
the Company's behalf.
The Company has not recognized any revenue in connection with transactions
with Rite Aid during the thirty-six days ended February 27, 1999 or the year
ended February 26, 2000.
Rite Aid employees have received health insurance coverage from some of the
Company's health plan customers. The impact of this on the Company's revenue is
not material to the consolidated financial statements.
The Company recognized net interest income under its cash management
programs with Rite Aid of $0 during the thirty-six days ended February 27, 1999
and $7,875 during the year ended February 26, 2000.
F-47
182
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. YEAR 2000 (UNAUDITED)
The Company was required to modify or replace certain portions of its
software, hardware and equipment so that its systems and equipment would
function properly with respect to dates in the year 2000 and thereafter. The
Company utilized both internal and external resources to reprogram or replace,
and test the software and equipment for year 2000 readiness. The majority of the
Company's business is performed with third parties via interfaced systems. As a
result, the Company's Year 2000 project included a review of the third parties
to determine the extent the Company would be affected by third party failures to
mitigate their own Year 2000 issues.
For its assessment and efforts on its Year 2000 project, the Company
incurred approximately $10.4 million ($10.1 million expensed and $.3 million
capitalized for new systems and equipment) through February 27, 1999, and $12.9
million ($12.6 million expensed and $.3 million capitalized for new systems and
equipment) through February 26, 2000.
12. SUBSEQUENT EVENTS
Rite Aid has entered into an agreement with an outside party to sell
certain of the Company's real property assets with a book value at February 26,
2000 of approximately $17,995 (primarily including 53.4 acres of land located in
Scottsdale, Arizona). It is planned that, subsequent to February 26, 2000, the
Company will transfer these real property assets to Rite Aid.
In June 2000, Rite Aid entered into a new senior credit facility agreement
with an outside lender under which all of the assets of the Company are pledged
as security.
F-48
183
REPORT OF INDEPENDENT AUDITORS
Shareholders
PCS Holding Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of PCS Holding
Corporation and Subsidiaries (the Company) as of December 31, 1997 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PCS Holding Corporation and Subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
January 14, 1999
F-49
184
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUES)
DECEMBER 31
-------------------------
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,157 $ 2,956
Accounts receivable, less allowances of $12,995 in 1997
and $10,174
in 1998................................................ 374,853 492,416
Due from Parent........................................... 158,948 256,446
Other receivables......................................... 1,225 650
Inventories............................................... 12,146 16,673
Prepaid expenses.......................................... 1,948 2,050
Deferred income taxes..................................... 16,570 13,965
----------- -----------
Total current assets.............................. 567,847 785,156
Goodwill, net of amortization of $279,170 in 1997 and
$318,102 in 1998.......................................... 1,436,289 1,397,357
Property and equipment, net................................. 96,200 105,038
Deferred income taxes....................................... 2,896 --
----------- -----------
Total assets...................................... $ 2,103,232 $ 2,287,551
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Claims and rebates payable................................ $ 354,341 $ 435,196
Checks outstanding in excess of bank balances............. 234,131 317,851
Deposits.................................................. 22,713 20,125
Other..................................................... 103,550 113,118
----------- -----------
Total current liabilities......................... 714,735 886,290
Noncurrent liabilities:
Deferred income taxes..................................... -- 5,863
Other liabilities......................................... 14,163 13,061
Shareholders' equity:
Class A voting common stock, $1 par value; 1,000 shares
authorized; 565 shares outstanding at December 31, 1997
and 1998............................................... 1 1
Class B voting convertible preferred stock, $1 par value;
160 and 0 shares authorized and outstanding at December
31, 1997 and 1998,
respectively........................................... -- --
----------- -----------
Additional paid-in capital.................................. 3,953,036 3,957,368
Accumulated deficit......................................... (2,578,703) (2,575,032)
----------- -----------
Total shareholders' equity........................ 1,374,334 1,382,337
----------- -----------
Total liabilities and shareholders' equity........ $ 2,103,232 $ 2,287,551
=========== ===========
See accompanying notes.
F-50
185
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31
----------------------------------
1996 1997 1998
--------- ----------- --------
Revenue
Claims processing....................................... $ 146,929 $ 171,371 $141,096
Manufacturer programs................................... 63,666 119,289 183,758
Mail order programs..................................... 111,090 224,094 467,202
Other................................................... 32,814 32,671 48,648
--------- ----------- --------
354,499 547,425 840,704
Expenses
Cost of goods and services.............................. 248,015 428,705 660,305
Selling, general and administrative..................... 103,822 98,972 95,293
Goodwill amortization................................... 101,518 65,010 38,933
Asset impairment........................................ -- 2,345,244 --
Interest, net........................................... 1,164 (1,202) (2,417)
--------- ----------- --------
454,519 2,936,729 792,114
--------- ----------- --------
(Loss) income before income taxes......................... (100,020) (2,389,304) 48,590
Income tax expense........................................ 6,213 6,264 31,956
--------- ----------- --------
Net (loss) income............................... $(106,233) $(2,395,568) $ 16,634
========= =========== ========
See accompanying notes.
F-51
186
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
CLASS A STOCK CLASS B STOCK
COMMON STOCK -------------- --------------
----------------- NUMBER NUMBER ADDITIONAL
NUMBER OF PAR OF PAR OF PAR PAID-IN ACCUMULATED
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL DEFICIT TOTAL
--------- ----- ------ ----- ------ ----- ---------- ----------- -----------
Balance at January 1,
1996................ 100 $-- -- $-- -- $-- $3,953,037 $ (74,847) $ 3,878,190
Net loss.............. -- -- -- -- -- -- -- (106,233) (106,233)
---- --- --- --- ---- --- ---------- ----------- -----------
Balance at December
31, 1996............ 100 -- -- -- -- -- 3,953,037 (181,080) 3,771,957
Net loss.............. -- -- -- -- -- -- -- (2,395,568) (2,395,568)
Recapitalization, on
October 7, 1997..... (100) -- 565 1 160 -- (1) -- --
Dividends to Class B
shareholder......... -- -- -- -- -- -- -- (2,055) (2,055)
---- --- --- --- ---- --- ---------- ----------- -----------
Balance at December
31, 1997............ -- -- 565 1 160 -- 3,953,036 (2,578,703) 1,374,334
Net income............ -- -- -- -- -- -- -- 16,634 16,634
Capital contribution
from Parent......... -- -- -- -- -- -- 177,120 -- 177,120
Dividends to Class B
shareholder......... -- -- -- -- -- -- -- (12,963) (12,963)
Repurchase of Class B
shares.............. -- -- -- -- (160) -- (172,660) -- (172,660)
Other equity
transfers........... -- -- -- -- -- -- (128) -- (128)
---- --- --- --- ---- --- ---------- ----------- -----------
Balance at December
31, 1998............ -- $-- 565 $ 1 -- $-- $3,957,368 $(2,575,032) $ 1,382,337
==== === === === ==== === ========== =========== ===========
See accompanying notes.
F-52
187
PCS HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31
-----------------------------------
1996 1997 1998
--------- ----------- ---------
Operating Activities
Net (loss) income........................................ $(106,233) $(2,395,568) $ 16,634
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization....................... 118,163 82,694 55,351
Loss on asset disposal.............................. -- -- 2,967
Asset impairment.................................... -- 2,345,244 --
Provision for losses on receivables and other
allowances........................................ 13,525 12,091 1,265
Deferred income tax expense......................... 8,558 5,703 11,364
Changes in operating assets and liabilities:
Receivables....................................... 117,619 (9,236) (110,800)
Inventories....................................... (3,649) (7,468) (4,527)
Prepaid expenses.................................. 410 353 (102)
Claims and rebates payable........................ (56,002) 12,789 80,855
Checks outstanding in excess of bank balances..... (93,356) 60,712 83,720
Accrued and other liabilities..................... (4,946) 14,840 (1,575)
--------- ----------- ---------
Net cash (used in) provided by operating
activities................................... (5,911) 122,154 135,152
Investing Activities
Additions to property and equipment.................... (30,599) (15,490) (28,224)
--------- ----------- ---------
Net cash used in investing activities.......... (30,599) (15,490) (28,224)
Financing Activities
Change in due from Parent.............................. 36,061 (104,477) (97,498)
Dividends to Class B shareholder....................... -- (2,055) (12,963)
Capital contribution from Parent....................... -- -- 177,120
Repurchase of Class B shares........................... -- -- (172,660)
Other equity transfers................................. -- -- (128)
--------- ----------- ---------
Net cash provided by (used in) financing
activities................................... 36,061 (106,532) (106,129)
--------- ----------- ---------
Net (decrease) increase in cash.......................... (449) 132 799
Cash at beginning of year................................ 2,474 2,025 2,157
--------- ----------- ---------
Cash at end of year...................................... $ 2,025 $ 2,157 $ 2,956
========= =========== =========
Supplemental Cash Flow Information
Cash paid for interest................................. $ 363 $ 566 $ 622
========= =========== =========
Cash paid for income taxes............................. $ 645 $ 1,706 $ 19,366
========= =========== =========
See accompanying notes.
F-53
188
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
PCS Holding Corporation and Subsidiaries (the "Company") is an
information-driven health solutions company operating in the United States. The
Company provides managed pharmaceutical-related programs and services that can
directly and positively improve the health of patients, and help reduce health
care costs.
On November 21, 1994, the Company was acquired by Eli Lilly and Company
(the "Parent") for approximately $4.1 billion. The acquisition was accounted for
as a purchase by its Parent, and the resulting goodwill was pushed down to the
Company's consolidated balance sheet (see Asset Impairment note). In November
1998, the Parent entered into an agreement with Rite Aid Corporation (Rite Aid)
whereby Rite Aid will purchase all outstanding shares of the Company's stock
(see Sale of the Company note).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company include
PCS Holding Corporation and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
Management believes that the consolidated statements of operations include
an appropriate allocation of all material costs incurred by the Parent on the
Company's behalf.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform with the classifications of the 1998
consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures at the date of the consolidated
financial statements and during the reporting period. Actual results could
differ from those estimates.
New Financial Accounting Standard
In December 1997, Statement of Financial Accounting Standard (SFAS) No.
132, Employers' Disclosures about Pensions and Other Postretirement Benefits,
was issued and, as required, was adopted by the Company in 1998. The statement
revises current disclosure requirements for employers' pensions and other
retiree benefits. Implementation of this disclosure standard did not affect the
Company's consolidated financial position or results of operations.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist
principally of (i) claims reimbursement receivables and claim fees receivable
and (ii) the Company's portion of manufacturer program receivables. The Company
monitors the credit worthiness of the customers to which it grants credit terms
in the normal course of business and takes deposits from customers when
considered necessary to collateralize its position. Concentrations of credit
risk associated with these trade receivables are considered minimal due to a
diverse, geographically dispersed customer base.
F-54
189
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Manufacturer program receivables (included in accounts receivable) are
concentrated in the drug manufacturing industry and had a net balance of $55,053
in 1997 and $78,455 in 1998.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid financial instruments
purchased with a maturity of three months or less, and the carrying value
approximates fair value.
Accounts Receivable and Claims and Rebates Payable
Accounts receivable consists primarily of claims reimbursement receivables,
claims processing fees receivable and manufacturer program receivables. Because
these items are short-term in nature, their carrying amounts approximate fair
value.
Claims reimbursement receivables and claims payables arise from the
adjudication of pharmacy claims. These amounts, along with the related claims
processing fees receivable, are recorded when a reimbursement request is
received by the Company. Reimbursements for claim payments are not included in
revenues, and payments to member pharmacies are not included in expenses. Checks
outstanding are classified as liabilities because they are drawn on zero balance
accounts.
Manufacturers' rebates receivable and rebates payable arise from
manufacturers' rebate programs and are recorded when a claim eligible for rebate
is processed by the Company. Rebates are paid to customers upon collection from
manufacturers and are either contractually limited to actual collections from
manufacturers or are guaranteed for a certain rebate per claim. Liabilities
associated with the guarantees per claim are included in other liabilities. The
Company generally retains a portion of rebates collected as a processing fee.
The remainder of rebates collected is not included in revenues, and payments of
rebates to customers are not included in expenses.
Due from Parent
The Company participates in the daily cash management program of its Parent
through which it invests excess cash and has access to short-term borrowings.
The Company pays or receives interest on its balances in the program at the per
annum interest rate of 90-day dealer placed commercial paper.
Inventories
Inventories consist primarily of pharmaceutical products for mail order
programs. Inventories are recorded at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Deferred Income Taxes
Deferred income taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting based on
enacted tax laws and rates.
Goodwill
Goodwill represents the amount of the purchase price paid in excess of the
net tangible assets acquired and is being amortized on a straight-line basis
over 40 years. On a periodic basis, the Company estimates the future
undiscounted cash flows of its business to which goodwill relates to assure that
the carrying value of goodwill has not been impaired (see Asset Impairment
note).
F-55
190
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Provisions for depreciation are generally computed by the straight-line method
at rates based on the estimated useful lives of the underlying assets as
follows:
Buildings and improvements............................. 5 to 20 years
Equipment.............................................. 3 to 5 years
Furniture and fixtures................................. 10 years
Capitalized software................................... 2 to 8 years
When property or equipment is retired or sold, its cost and related
accumulated depreciation are written off and the resulting gain or loss is
included in net earnings.
Revenues
Revenues include claims processing fees which are accrued when the related
claim is processed and approved for payment. Certain of the Company's agreements
require its customers to pay a fee per covered member rather than a fee per
claim processed. The Company records these fees monthly based upon member counts
provided by its customers. Revenues from manufacturer programs are recognized
when services are performed. Mail order program revenue is recognized when
prescriptions are shipped. Other revenues are generally recognized as the
related services are performed.
Total revenue from unaffiliated customers, all of which are generated in
the United States, were approximately $347,000 in 1996, $527,000 in 1997 and
$810,000 in 1998.
3. SALE OF THE COMPANY
In November 1998, the Parent entered into an agreement with Rite Aid
whereby Rite Aid will purchase from the Parent all shares of the Company's Class
A stock for approximately $1.5 billion, with the Parent retaining $100 million
of additional cash. In connection with this transaction, the Company bought back
all outstanding Class B shares for $172,660. In addition to dividends paid for
first three quarters of 1998 of $7,292, Class B dividends of $5,671 were paid at
the time of the buy back of the Class B shares. The buy back of the Class B
shares and the payment of the dividends were primarily funded by a $177,120
capital contribution from the Parent.
The terms of the sale agreement support the future benefit of the Company's
carrying value of goodwill and net deferred tax assets. The Company is not aware
of any plans or intentions, in connection with the proposed sale, to terminate
any of the Company's pension or other postretirement employee benefit plans.
4. ASSET IMPAIRMENT
The Parent purchased the Company for approximately $4.1 billion in November
1994. Substantially all of the purchase price was allocated to goodwill.
During 1997, pursuant to SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Parent
evaluated the recoverability of long-lived assets, including intangibles, of the
Company's health-care-management businesses. While revenues and profits had
grown since acquisition and new capabilities were being developed at the
Company, the rapidly changing, competitive and highly regulated environment in
which the Company operates had prevented the Company from significantly
increasing its operating profits from levels that existed prior to the
acquisition. In addition, since the acquisition, the healthcare-industry trend
toward increased managed care had been
F-56
191
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
slower than originally expected and the possibility of selling a portion of the
Company's equity to a strategic partner had not been realized. In the second
quarter of 1997, concurrent with the Company's annual planning process, the
Parent determined that the Company's estimated future undiscounted cash flows
were below the carrying value of the Company's long-lived assets. Accordingly,
the carrying value of the Company's long-lived assets, primarily goodwill, was
adjusted to their estimated fair value of approximately $1.5 billion, resulting
in a noncash impairment loss of approximately $2.3 billion during 1997. The
estimated fair value was based on anticipated future cash flows discounted at a
rate commensurate with the risk involved.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1997 1998
-------- ---------
Land........................................................ $ 29,329 $ 29,329
Buildings and improvements.................................. 31,905 37,592
Equipment................................................... 86,362 79,036
Furniture and fixtures...................................... 14,689 15,219
Capitalized software........................................ 21,391 43,901
Construction in progress.................................... 4,077 4,248
-------- ---------
187,753 209,325
Accumulated depreciation.................................... (91,553) (104,287)
-------- ---------
$ 96,200 $ 105,038
======== =========
Depreciation expense during was $16,645 in 1996, $17,692 in 1997 and
$16,414 in 1998.
6. INCOME TAXES
The Company was included in its Parent's consolidated federal income tax
returns for periods from January 1, 1995 through October 15, 1997. For the
period from October 16, 1997 through December 31, 1997, and for the twelve month
period ended December 31, 1998, the Company filed its own separate federal tax
returns (see Stockholders' Equity note). The Company's income tax expense has
been computed as if the Company filed separate income tax returns for all years.
Following is the composition of income tax expense for the years ended
December 31:
1996 1997 1998
------- ------ -------
Current:
Federal................................................ $(3,498) $ (400) $20,101
State.................................................. 1,153 961 491
------- ------ -------
(2,345) 561 20,592
Deferred:
Federal................................................ 1,523 5,440 11,944
State.................................................. 7,035 263 (580)
------- ------ -------
8,558 5,703 11,364
------- ------ -------
$ 6,213 $6,264 $31,956
======= ====== =======
F-57
192
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense differs from the amount computed by applying the federal
statutory rate to the (loss) income before income taxes for the years ended
December 31 as follows:
1996 1997 1998
-------- --------- -------
Income tax benefit computed at federal statutory
rate............................................... $(35,007) $(836,975) $12,469
State income taxes, net of federal benefit........... 5,342 385 319
Amortization of goodwill............................. 35,531 22,754 13,626
Asset impairment..................................... -- 820,835 --
Dividends paid to minority owner..................... -- -- 4,537
Other, net........................................... 347 (735) 1,005
-------- --------- -------
$ 6,213 $ 6,264 $31,956
======== ========= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities at December 31 are as
follows:
1997 1998
------- -------
Current deferred income tax assets:
Risk reserves............................................. $12,614 $ 8,823
Allowances................................................ 3,634 4,831
Deferred compensation..................................... 136 --
Other..................................................... 186 311
------- -------
Net current deferred income tax assets............ $16,570 $13,965
======= =======
Long-term deferred income tax assets (liabilities):
Risk reserves............................................. $ 206 $ --
Postretirement plan....................................... 1,894 1,484
Deferred compensation..................................... 2,747 3,845
Net operating loss carryforward........................... 1,360 --
Capitalized software...................................... (1,136) (8,532)
Accelerated depreciation.................................. (4,324) (3,129)
Other..................................................... 2,149 469
------- -------
Net long-term deferred income tax assets
(liabilities).................................. $ 2,896 $(5,863)
======= =======
The benefit of the Company's federal net operating loss carryforward for
the period ended December 31, 1997 is expected to be realized in connection with
the filing of the 1998 federal tax return.
7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following at December 31:
1997 1998
-------- --------
Accounts payable............................................ $ 31,778 $ 29,763
Employee compensation....................................... 24,905 39,500
Other....................................................... 46,867 43,855
-------- --------
$103,550 $113,118
======== ========
F-58
193
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES
Future minimum operating lease payments for facilities and equipment at
December 31, 1998 are as follows:
1999...................................................... $ 8,264
2000...................................................... 4,203
2001...................................................... 3,545
2002...................................................... 2,922
2003...................................................... 1,236
Thereafter................................................ 635
-------
$20,805
=======
Rent expense was $12,556 in 1996, $14,287 in 1997 and $17,059 in 1998,
respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company enters into risk contracts with certain customers in the
ordinary course of business. These contracts provide that the Company assume
varying percentages of the risk associated with claims experience differing from
fixed fee arrangements under managed care programs. In addition, the Company
guarantees a specific amount of savings for certain customers. Included in other
liabilities in the accompanying consolidated balance sheets are management's
estimates of the amounts required to cover losses incurred under such contracts.
The Company is subject to various claims, including possible legal actions
brought by plan sponsors for alleged errors or omissions arising out of the
ordinary course of business. Management believes that it has a combination of
adequate insurance coverage and reserves against potential losses and that the
outcome of such claims will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
10. SHAREHOLDERS' EQUITY
At January 1, 1996, the Company's capital structure included one cent par
value preferred stock; 10,000,000 shares authorized; no shares outstanding, and
one cent par value common stock; 1,000 shares authorized; 100 shares
outstanding.
On October 7, 1997, the Certificate of Incorporation for PCS Holding
Corporation was restated. Upon filing the Restated Certificate of Incorporation,
the shares of Common Stock of PCS Holding Corporation then outstanding were
recapitalized into the aggregate of 565 shares of Class A voting common stock
and 160 shares of Class B voting convertible preferred stock of PCS Holding
Corporation. Under the Restated Certificate of Incorporation, the Company has
authority to issue 1,000 shares of Class A stock, 160 shares of Class B Stock,
and 1,000 shares of Class C Stock, par value of one dollar per share, issuable
in series.
In connection with the recapitalization in 1997, the Company issued the 565
shares of Class A stock and 160 shares of Class B stock to the Parent, who then
sold the Class B stock to an institutional investor. During 1998, the Company
bought back all outstanding Class B shares (see sale of the Company note). The
Class B stock was convertible preferred stock and paid dividends on a quarterly
basis at 25 basis points above the three-month LIBOR rate. The Class B stock was
convertible on a one-to-one basis into the Company's Class A stock at the option
of the holder at any time.
No shares of Class C stock have been issued or are outstanding.
F-59
194
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RETIREMENT BENEFITS
The funded status and amounts recognized in the consolidated balance sheets
at December 31, 1997 and 1998 for the Company's defined benefit pension and
retiree health benefit plans, as well as changes in the benefit obligation and
plan assets during those years, were as follows:
1997 1998
--------------------------------- ---------------------------------
DEFINED BENEFIT RETIREE DEFINED BENEFIT RETIREE
PENSION PLAN HEALTH BENEFITS PENSION PLAN HEALTH BENEFITS
--------------- --------------- --------------- ---------------
Change in benefit obligation:
Benefit obligation at
beginning of year......... $ 12,397 $ 1,411 $21,969 $ 2,018
Service cost................. 2,843 344 2,623 519
Interest cost................ 991 113 1,647 150
Actuarial loss (gain)........ 5,760 150 (5,039) 538
Benefits paid................ (22) -- (79) (51)
--------- ------- ------- -------
Benefit obligation at end of
year......................... 21,969 2,018 21,121 3,174
Change in plan assets:
Fair value of plan assets at
beginning of year......... 8,861 -- 13,978 --
Actual return on plan
assets.................... 1,452 -- 1,365 --
Employer contribution........ 3,687 -- 5,154 51
Benefits paid................ (22) -- (79) (51)
--------- ------- ------- -------
Fair value of plan assets at
end of year.................. 13,978 -- 20,418 --
Funded status.................. (7,991) (2,018) (703) (3,174)
Unrecognized net actuarial
loss......................... 4,886 53 3 591
Unrecognized prior service
cost......................... -- 139 -- 93
--------- ------- ------- -------
Net amount recognized.......... $ (3,105) $(1,826) $ 700 $ 2,490
========= ======= ======= =======
Amounts recognized in
consolidated balance sheet
consisted of:
Prepaid benefit cost......... $ -- $ -- $ -- $ --
Accrued benefit liability.... (3,105) (1,826) (700) (2,490)
Accumulated other
comprehensive income,
before income taxes....... -- -- -- --
--------- ------- ------- -------
Net amount recognized.......... $ (3,105) $(1,826) $ (700) $(2,490)
========= ======= ======= =======
Weighted-average assumptions as
of December 31:
Discount rate................ 7.5% -- 7.5% --
Expected return on plan
assets.................... 10.5 -- 10.5 --
Rate of compensation
increase.................. 4.0 to 8.0 -- 5.9 --
Health care cost trend rates were assumed to increase at an annual rate of
6.5 percent in 1999 for participants under age 65, and decrease one-half percent
per year to 5.0 percent in 2002 and thereafter. For participants over age 65,
the rate was assumed to increase 5.0 percent in 1999 and thereafter.
F-60
195
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension and retiree health benefit expense for the years ended December
31, 1996, 1997 and 1998 included the following components:
DEFINED BENEFIT PENSION PLAN RETIREE HEALTH BENEFITS
---------------------------- ------------------------
1996 1997 1998 1996 1997 1998
------- ------- -------- ------ ------ ------
Components of net periodic benefit cost:
Service cost............................... $2,497 $2,843 $ 2,623 $292 $344 $519
Interest cost.............................. 837 991 1,647 85 113 150
Expected return on plan assets............. (577) (971) (1,700) -- -- --
Amortization of prior service cost and net
obligation at January 1, 1986........... -- -- -- 46 46 46
Recognized actuarial loss.................. 58 -- 179 -- -- --
------ ------ ------- ---- ---- ----
Net periodic benefit cost.......... $2,815 $2,863 $ 2,749 $423 $503 $715
====== ====== ======= ==== ==== ====
The assumed health care cost trend rates have a significant effect on the
retiree health benefits amounts reported. If these trend rates were to be
increased by one percentage point each future year, the December 31, 1998
accumulated postretirement benefit obligation would increase by 15 percent, and
the aggregate of the service cost and interest cost components of 1998 annual
expense would increase by 18 percent. A one percentage point decrease in these
rates would decrease the December 31, 1998, accumulated postretirement benefit
obligation by 13 percent, and the aggregate of the 1998 service cost and
interest cost by 15 percent.
The Company also has a defined contribution savings plan that covers its
eligible employees. The purpose of the defined contribution plan is generally to
provide additional financial security during retirement by providing employees
with an incentive to make regular savings. Company contributions to the plan are
based on employee contributions and the level of Company match. Expenses under
the plan totaled $3,019 in 1996, $3,352 in 1997 and $4,483 in 1998.
The Company provides certain other postemployment benefits, primarily
related to disability benefits, and accrues for the related cost over the
service lives of the employees. Expenses associated with these benefit plans
during the years ended December 31, 1996, 1997 and 1998 were not significant.
12. RELATED PARTY TRANSACTIONS
Certain expenses, principally employee benefits and general liability and
workers' compensation insurance premiums, are paid on behalf of and charged to
the Company by the Parent. In addition, the Company uses certain resources and
administrative staff of its Parent, including financial, legal, tax, internal
audit, accounting advice, and other personnel and employee benefit services.
Management believes that the consolidated statements of operations include an
appropriate allocation of all material costs incurred by the Parent on the
Company's behalf.
Certain of the Company's employees are periodically granted options by the
Parent to purchase the Parent's stock. The exercise price of these options is
equal to the market value of the stock at the date of grant.
F-61
196
PCS HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company additionally recognized the following transactions with the
Parent in its consolidated statements of operations:
1996 1997 1998
------ ------- -------
Revenue:
Administration fee revenue............................. $ 825 $ 3,147 $ 4,296
Outcomes research revenue.............................. 3,500 3,720 3,500
RxReview revenue....................................... 2,700 8,100 7,052
Clinical consulting.................................... -- 1,760 14,152
Other.................................................. -- 3,900 1,500
------ ------- -------
Total revenue.................................. $7,025 $20,627 $30,500
====== ======= =======
13. IMPACT OF YEAR 2000 (UNAUDITED)
The Company has determined that it will be required to modify or replace
certain portions of its software, hardware and equipment so that its systems and
equipment will function properly with respect to dates in the year 2000 and
thereafter. The Company is utilizing both internal and external resources to
reprogram, or replace, and test the software and equipment for year 2000
readiness. The majority of the Company's business is performed with third
parties via interfaced systems. As a result, the Company's Year 2000 project
includes a review of the third parties to determine the extent the company will
be affected by third party failures to mitigate their own Year 2000 issues.
The Company anticipates substantially completing the Year 2000 project by
June 1999. The total cost of the Year 2000 project is estimated to be
approximately $11.3 million, which includes approximately $.3 million for the
purchase of new software and equipment that will be capitalized and $11 million
that will be expensed as incurred, and is not expected to have a material effect
on the results of operations. The Company has incurred approximately $3.4
million ($3.1 million expensed and $.3 million capitalized for new systems and
equipment) through December 31, 1997) and $10.1 million ($9.8 million expensed
and $.3 million capitalized for new systems and equipment) through December 31,
1998, related to the assessment of, and preliminary efforts on, its Year 2000
project and the development of a modification plan, purchase of new systems and
equipment, and systems modifications.
The costs for the year 2000 project and the date on which the Company
believes it will complete the year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources. In the event
that the remediation plans are unsuccessful, the Company is developing a
contingency plan for continuing operations. The Company's operating results
could be materially impacted if actual costs of the Year 2000 project are
significantly higher than management estimates or if the systems and equipment
of the Company or those of other companies on which it relies are not compliant
in a timely manner.
F-62
197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$200,000,000
OFFER TO EXCHANGE
[ADVANCEPCS LOGO]
8 1/2% SENIOR NOTES DUE 2008
-------------------------
PROSPECTUS
-------------------------
, 2001
- --------------------------------------------------------------------------------
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198
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
AdvancePCS, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law, or DGCL, subject to the procedures and
limitations stated therein, to indemnify certain parties. Section 145 of the
DGCL provides in part that a corporation shall have the power to indemnify any
Person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that such
Person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Similar indemnity is authorized for such Persons against
expenses (including attorneys' fees) actually and reasonably incurred in defense
or settlement of any threatened, pending or completed action or suit by or in
the right of the corporation, if such Person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent jurisdiction
otherwise provides) such Person shall not have been adjudged liable to the
corporation. Where an officer or a director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses that such officer or director actually and
reasonably incurred. Section 145 further provides that any indemnification,
unless ordered by a court, shall be made by the corporation only as authorized
in each specific case upon a determination that indemnification of such Person
is proper because he has met the applicable standard of conduct. Such
determination shall be made, with respect to a Person who is a director or
officer at the time of such determination, by: (i) the stockholders; (ii) by a
majority vote of the directors who are not parties to such action, suit or
proceeding even if less than a quorum; (iii) a committee of directors who are
not parties to such action, suit or proceeding designated by majority vote by
such disinterested directors even if less than a quorum; or (iv) an independent
legal counsel in a written opinion, if there are no such disinterested
directors, or if such disinterested directors so direct.
Section 145 provides further that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to which a Person
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Article IX of the Second Amended and Restated Certificate of Incorporation
of AdvancePCS, or certificate, eliminates the personal liability of AdvancePCS's
directors to the fullest extent permitted by the DGCL, as amended. The DGCL
permits a company's certificate of incorporation to eliminate or limit personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the DGCL (which addresses
director liability for unlawful payment of a dividend or unlawful stock purchase
or redemption) or (iv) for any transaction from which the director derived an
improper personal benefit.
Article X of the certificate provides that AdvancePCS shall indemnify any
and all Persons whom it has the power to indemnify under Section 145 of the DGCL
to the fullest extent permitted under such section, and such indemnity shall
continue as to a Person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a Person.
II-1
199
The right to indemnification under Article X of the certificate is a
contract right which includes, with respect to directors and officers, the right
to be paid by AdvancePCS the expenses incurred in defending any such proceeding
in advance of its disposition; provided, however, that, if the DGCL requires,
the payment of such expenses incurred by a director or officer in advance of the
final disposition of a proceeding shall be made only upon delivery to AdvancePCS
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under Article X or otherwise.
Article VIII of the Second Amended and Restated Bylaws of AdvancePCS, or
bylaws, provides that AdvancePCS shall indemnify any Person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of AdvancePCS) by reason
of the fact that he is or was a director, officer, employee or agent of
AdvancePCS, or is or was serving at the request of AdvancePCS as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of AdvancePCS, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, to the
fullest extent permitted by the DGCL.
Article VIII of the bylaws further provides AdvancePCS with authority to
purchase and maintain insurance with respect to indemnification on behalf of any
Person who is or was a director, officer, employee or agent of AdvancePCS or is
or was serving at the request of AdvancePCS as director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. AdvancePCS maintains directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NO. EXHIBIT
------- -------
1* -- Purchase Agreement dated as of March 13, 2001 by and
among AdvancePCS, various guarantors named therein and
Banc of America Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Banc One Capital Markets,
Inc., Chase Securities, Inc., CIBC World Markets Corp.
and Scotia Capital "USA," Inc.
3.1 -- Second Amended and Restated Certificate of Incorporation
of AdvancePCS (incorporated by reference to Exhibit 99.1
of AdvancePCS's Current Report on Form 8-K as filed with
the Securities and Exchange Commission on December 11,
2000).
3.2 -- Second Amended and Restated Bylaws of AdvancePCS
(incorporated by reference to Exhibit 3.1 of AdvancePCS's
Current Report on Form 8-K as filed with the Securities
and Exchange Commission on October 16, 2000).
4.1 -- Form of Stock Certificate of Class A Common Stock of
AdvancePCS (incorporated by reference to Exhibit 4.1 of
AdvancePCS's Registration Statement on Form 8-A/A as
filed with the Securities and Exchange Commission on
December 14, 2000).
4.2* -- Indenture dated as of March 13, 2001 by and among
AdvancePCS, various guarantors and U.S. Trust Company of
Texas, N.A.
II-2
200
EXHIBIT
NO. EXHIBIT
------- -------
4.3* -- Registration Rights Agreement dated as of March 13, 2001
by and among AdvancePCS, various guarantors named therein
and Banc of America Securities LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc One Capital
Markets, Inc., Chase Securities, Inc., CIBC World Markets
Corp. and Scotia Capital "USA," Inc.
5* -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
12* -- Statement regarding Computation of Ratios.
21* -- Subsidiaries of AdvancePCS.
23.1* -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5).
23.2* -- Consent of Arthur Andersen LLP.
23.3* -- Consent of Ernst & Young, LLP.
24* -- Power of Attorney (included on the signature pages of
this registration statement).
25* -- Statement of Eligibility of Trustee.
99* -- Form of Letter of Transmittal and Related Documents.
- ---------------
* Filed herewith.
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
II-3
201
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The registrants hereby undertake that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrants'
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof;
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(d) The undersigned registrants hereby undertake to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(e) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
202
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrants
have duly caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Irving, State of Texas,
on April 18, 2001.
ADVANCEPCS
ADVANCEPCS RESEARCH, L.L.C.
AMBULATORY CARE REVIEW SERVICES,
INC.
FFI RX MANAGED CARE, INC.
FIRST FLORIDA INTERNATIONAL
HOLDINGS, INC.
HMN HEALTH SERVICES, INC.
By: /s/ DAVID D. HALBERT
----------------------------------
Name: David D. Halbert
Title: Chairman of the Board and
Chief
Executive Officer
ADVANCEPCS, L.P.
ADVP MANAGEMENT, L.P.
ADVANCERX.COM, L.P.
By: AdvancePCS, its general partner
By: /s/ DAVID D. HALBERT
----------------------------------
Name: David D. Halbert
Title: Chairman of the Board and
Chief
Executive Officer
BAUMEL-EISNER NEUROMEDICAL
INSTITUTE, INC.
By: /s/ DAVID D. HALBERT
----------------------------------
Name: David D. Halbert
Title: Chairman of the Board and
President
II-5
203
PCS HOLDING CORPORATION
PCS HEALTH SYSTEMS, INC.
By: /s/ T. DANNY PHILLIPS
----------------------------------
Name: T. Danny Phillips
Title: Vice President and
Treasurer
PCS MAIL SERVICES, INC.
PCS SERVICES, INC.
PCS MAIL SERVICES OF BIRMINGHAM,
INC.
PCS MAIL SERVICES OF FT. WORTH, INC.
PCS MAIL SERVICES OF SCOTTSDALE,
INC.
By: /s/ T. DANNY PHILLIPS
----------------------------------
Name: T. Danny Phillips
Title: Vice President
II-6
204
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints David D.
Halbert and T. Danny Phillips, and each of them, with the power to act without
the other, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign on his behalf individually and in each capacity
stated below any or all amendments or post-effective amendments to this
registration statement, and to file the same, with all exhibits and other
documents relating thereto, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities indicated on April 18, 2001.
SIGNATURE TITLE
--------- -----
/s/ DAVID D. HALBERT Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer) of
David D. Halbert AdvancePCS, AdvancePCS, L.P., AdvanceRX.com,
L.P., ADVP Management, L.P., AdvancePCS
Research, L.L.C., Ambulatory Care Review
Services, Inc., FFI Rx Managed Care, Inc.,
First Florida International Holdings, Inc.
and HMN Health Services, Inc., Chairman of
the Board and President (Principal Executive
Officer) of Baumel-Eisner Neuromedical
Institute, Inc., Director of PCS Health
Systems, Inc. and PCS Holding Corporation
/s/ JON S. HALBERT Vice Chairman, e-Business and Technology and
- ----------------------------------------------------- Director of AdvancePCS, Director of Baumel-
Jon S. Halbert Eisner Neuromedical Institute, Inc.
II-7
205
SIGNATURE TITLE
--------- -----
/s/ T. DANNY PHILLIPS Chief Financial Officer and Executive Vice
- ----------------------------------------------------- President (Principal Financial and
T. Danny Phillips Accounting Officer) of AdvancePCS,
AdvancePCS, L.P., AdvanceRx.com, L.P. and
ADVP Management, L.P., Vice President,
Secretary, Treasurer and Director (Principal
Financial and Accounting Officer) of
Ambulatory Care Review Services, Inc., First
Florida International Holdings, Inc. and HMN
Health Services, Inc., Vice President,
Treasurer and Director (Principal Financial
and Accounting Officer) of AdvancePCS
Research, L.L.C., Senior Vice President,
Chief Financial Officer, Secretary,
Treasurer and Director (Principal Financial
and Accounting Officer) of Baumel-Eisner
Neuromedical Institute, Inc., Vice President
and Director (Principal Financial and
Accounting Officer) of FFI Rx Managed Care,
Inc., Vice President and Treasurer
(Principal Financial and Accounting Officer)
of PCS Health Systems, Inc. and PCS Holding
Corporation, Vice President and Director of
PCS Services, Inc., Vice President
(Principal Financial and Accounting Officer)
of PCS Mail Services of Birmingham, Inc.,
PCS Mail Services of Ft. Worth, Inc., PCS
Mail Services of Scottsdale, Inc. and PCS
Mail Services, Inc.
/s/ DAVID A. GEORGE President and Director of AdvancePCS,
- ----------------------------------------------------- President and Director (Principal Executive
David A. George Officer) of PCS Health Systems, Inc., PCS
Holding Corporation, PCS Services, Inc., and
PCS Mail Services, Inc., Director of PCS
Mail Services of Scottsdale, Inc., PCS Mail
Services of Ft. Worth, Inc. and PCS Mail
Services of Birmingham, Inc.
/s/ RAMSEY A. FRANK Director of AdvancePCS
- -----------------------------------------------------
Ramsey A. Frank
/s/ STEPHEN L. GREEN Director of AdvancePCS
- -----------------------------------------------------
Stephen L. Green
/s/ DAVID R. JESSICK Director of AdvancePCS
- -----------------------------------------------------
David R. Jessick
/s/ PAUL S. LEVY Director of AdvancePCS
- -----------------------------------------------------
Paul S. Levy
/s/ ROBERT G. MILLER Director of AdvancePCS
- -----------------------------------------------------
Robert G. Miller
II-8
206
SIGNATURE TITLE
--------- -----
/s/ JEAN-PIERRE MILLON Director of AdvancePCS
- -----------------------------------------------------
Jean-Pierre Millon
/s/ MICHAEL D. WARE Director of AdvancePCS
- -----------------------------------------------------
Michael D. Ware
/s/ LAURA I. JOHANSEN Vice President, Secretary and Director of
- ----------------------------------------------------- AdvancePCS Research, L.L.C.
Laura I. Johansen
/s/ PHIL PEARCE President and Director (Principal Executive
- ----------------------------------------------------- Officer) of PCS Mail Services of Birmingham,
Phil Pearce Inc., PCS Mail Services of Ft. Worth, Inc.
and PCS Mail Services of Scottsdale, Inc.,
Vice President and Director of PCS Mail
Services, Inc.
II-9
207
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrants
have duly caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Scottsdale, State of
Arizona, on April 18, 2001.
ADVP CONSOLIDATION, L.L.C.
By: /s/ DAVID A. GEORGE
----------------------------------
Name: David A. George
Title: President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints David A.
George and Susan S. de Mars, and each of them, with the power to act without the
other, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign on his behalf individually and in each capacity
stated below any or all amendments or post-effective amendments to this
registration statement, and to file the same, with all exhibits and other
documents relating thereto, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities indicated on April 18, 2001.
SIGNATURE TITLE
--------- -----
/s/ DAVID A. GEORGE President and Director (Principal Executive
- ----------------------------------------------------- Officer) of ADVP Consolidation, L.L.C.
David A. George
/s/ JOSEPH J. FILIPEK, JR., P.D. Vice President, Treasurer and Director
- ----------------------------------------------------- (Principal Financial and Accounting
Joseph J. Filipek, Jr., P.D. Officer) of ADVP Consolidation, L.L.C.
/s/ HAROLD F. KALBACH, JR. Director of ADVP Consolidation, L.L.C.
- -----------------------------------------------------
Harold F. Kalbach, Jr.
II-10
208
EXHIBIT INDEX
EXHIBIT
NO. EXHIBIT
------- -------
1* -- Purchase Agreement dated as of March 13, 2001 by and
among AdvancePCS, various guarantors named therein and
Banc of America Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Banc One Capital Markets,
Inc., Chase Securities, Inc., CIBC World Markets Corp.
and Scotia Capital "USA," Inc.
3.1 -- Second Amended and Restated Certificate of Incorporation
of AdvancePCS (incorporated by reference to Exhibit 99.1
of AdvancePCS's Current Report on Form 8-K as filed with
the Securities and Exchange Commission on December 11,
2000).
3.2 -- Second Amended and Restated Bylaws of AdvancePCS
(incorporated by reference to Exhibit 3.1 of AdvancePCS's
Current Report on Form 8-K as filed with the Securities
and Exchange Commission on October 16, 2000).
4.1 -- Form of Stock Certificate of Class A Common Stock of
AdvancePCS (incorporated by reference to Exhibit 4.1 of
AdvancePCS's Registration Statement on Form 8-A/A as
filed with the Securities and Exchange Commission on
December 14, 2000).
4.2* -- Indenture dated as of March 13, 2001 by and among
AdvancePCS, various guarantors and U.S. Trust Company of
Texas, N.A.
4.3* -- Registration Rights Agreement dated as of March 13, 2001
by and among AdvancePCS, various guarantors named therein
and Banc of America Securities LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc One Capital
Markets, Inc., Chase Securities, Inc., CIBC World Markets
Corp. and Scotia Capital "USA," Inc.
5* -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
12* -- Statement regarding Computation of Ratios.
21* -- Subsidiaries of AdvancePCS.
23.1* -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5).
23.2* -- Consent of Arthur Andersen LLP.
23.3* -- Consent of Ernst & Young, LLP.
24* -- Power of Attorney (included on the signature pages of
this registration statement).
25* -- Statement of Eligibility of Trustee.
99* -- Form of Letter of Transmittal and Related Documents.
- ---------------
* Filed herewith.