SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
_____________.
Commission File Number: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1420563
(State of Incorporation) (I.R.S. employer identification no.)
14000 RIVERPORT DR., MARYLAND HEIGHTS, MISSOURI 63043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 770-1666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Common stock outstanding as of October 31, 1997: 9,205,895 Shares Class A
7,510,000 Shares Class B
<PAGE>
EXPRESS SCRIPTS, INC.
INDEX
PAGE NUMBER
Part I Financial Information 3
Item 1. Financial Statements
a) Consolidated Balance Sheet 3
b) Consolidated Statement of Operations 4
c) Consolidated Statement of Changes
in Stockholders' Equity 5
d) Consolidated Statement of Cash Flows 6
e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risks - (Not Applicable)
Part II Other Information
Item 1. Legal Proceedings - (Not Applicable)
Item 2. Changes in Securities - (Not Applicable)
Item 3. Defaults Upon Senior Securities - (Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders
(Not Applicable)
Item 5. Other Materially Important Events - (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Index to Exhibits 18
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EXPRESS SCRIPTS, INC.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996
<S> <C> <C>
- --------------------------------- ---------------- ---------------
Assets
Current assets:
Cash and cash equivalents $45,742 $25,211
Short term investments 57,172 54,388
Receivables, less allowance for doubtful
accounts of $2,604 and $2,335 respectively
Unrelated parties 188,882 144,963
Related parties 13,742 18,842
Inventories 20,758 17,491
Deferred taxes and prepaid expenses 3,066 2,254
----------------- ---------------
Total current assets 329,362 263,149
Property and equipment, less accumulated depreciation and amortization 26,797 21,447
Other assets 12,275 15,829
----------------- ---------------
Total assets $368,434 $300,425
================= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Claims payable $132,492 $98,865
Accounts payable 20,267 16,347
Accrued expenses 21,554 19,678
----------------- ---------------
Total current liabilities 174,313 134,890
----------------- ---------------
Deferred rents and taxes 1,180 1,445
----------------- ---------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, and
no shares issued and outstanding
Class A Common Stock, $.01 par value, 30,000,000 shares authorized,
9,200,000 and 8,974,000 shares issued and outstanding, respectively 92 90
Class B Common Stock, $.01 par value, 22,000,000 shares authorized,
7,510,000 and 7,510,000 shares issued and outstanding, respectively 75 75
Additional paid-in capital 105,159 98,958
Foreign currency translation adjustments (2)
-
Retained earnings 94,604 70,219
----------------- ---------------
199,930 169,340
Class A Common Stock in treasury at cost,
237,500 and 182,500 shares respectively (6,989) (5,250)
----------------- ---------------
Total stockholders' equity 192,941 164,090
----------------- ---------------
Total liabilities and stockholders' equity $368,434 $300,425
================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
EXPRESS SCRIPTS, INC.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
----------- ------------ ---------- ---------
Net revenues $319,937 $194,324 $882,442 $547,437
----------- ------------ ---------- ---------
Cost and expenses:
Cost of revenues 291,590 172,316 803,794 484,098
Selling, general & administrative 15,758 11,668 42,789 34,310
----------- ------------ ---------- ---------
307,348 183,984 846,583 518,408
----------- ------------ ---------- ---------
Operating income 12,589 10,340 35,859 29,029
----------- ------------ ---------- ---------
Other income (expense):
Interest income 1,609 1,117 4,171 2,256
Interest expense (29) (13) (65) (38)
----------- ------------ ---------- ---------
1,580 1,104 4,106 2,218
----------- ------------ ---------- ---------
Income before income taxes 14,169 11,444 39,965 31,247
Provision for income taxes 5,556 4,430 15,580 12,250
----------- ------------ ---------- ---------
Net income $8,613 $7,014 $24,385 $18,997
=========== ============ ========== =========
Primary earnings per share $0.52 $0.42 $1.48 $1.17
=========== ============ ========== =========
Weighted average number of common
shares outstanding during the period 16,593 16,739 16,503 16,263
=========== ============ ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
EXPRESS SCRIPTS, INC.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNT
-------------------- -------------------------------------------------------------------
Foreign
Class A Class B Class A Class B Additional currency
Common Common Common Common paid-in translation Retained Treasury
(IN THOUSANDS) Stock Stock Stock Stock capital adjustments Earnings Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------- --------- --------- --------- ---------- ----------- ----------- ---------- ----------
Balance at December 31, 1996 8,974 7,510 $90 $75 $98,958 ($2) $70,219 ($5,250)
Net income for nine months ended
September 30, 1997 24,385
Foreign currency translation adjustments 2
Purchase of treasury stock (1,739)
Tax benefit relating to employee stock options 2,855
Exercise of stock options 226 2 3,346
--------- --------- --------- ---------- ----------- ------------- ---------- -----------
Balance at September 30, 1997 9,200 7,510 $92 $75 $105,159 $0 $94,604 ($6,989)
========= ========= ========= ========== =========== ============= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
EXPRESS SCRIPTS, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------- ---------
(IN THOUSANDS) 1997 1996
<S> <C> <C>
- --------------- ---------- ---------
Cash flows from operating activities:
Net income $24,385 $18,997
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Depreciation and amortization 6,924 4,744
Tax benefit relating to employee stock options 2,855 510
Changes in operating assets and liabilities:
Receivables (38,819) (41,394)
Inventories (3,267) (8,098)
Prepaids expenses and other assets 1,290 (706)
Claims payable 33,627 22,643
Accounts payable and accrued expenses 5,531 7,341
---------- ---------
Net cash provided by operating activities 32,526 4,037
---------- ---------
Cash flows from investing activities:
Purchases of property and equipment (10,822) (7,844)
Short term investment (2,784) (53,831)
---------- ---------
Net cash (used in) investing activities (13,606) (61,675)
---------- ---------
Cash flows from financing activities:
Acquisition of treasury stock (1,739)
Proceeds from stock offerings 52,592
Exercise of stock options 3,348 1,137
---------- ---------
Net cash provided by financing activities 1,609 53,729
---------- ---------
Effect of foreign currency translation adjustments 2 4
---------- ---------
Net increase (decrease) in cash and cash equivalents 20,531 (3,905)
Cash and cash equivalents at beginning of period 25,211 11,506
---------- ---------
Cash and cash equivalents at end of period $45,742 $7,601
========== =========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE>
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted in this Form 10-Q pursuant to the Rules and Regulations of the
Securities and Exchange Commission. However, in the opinion of the Company, the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the notes to consolidated
financial statements as included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, as filed with the Securities and Exchange
Commission on March 26, 1997.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the Consolidated Balance
Sheet at September 30, 1997, the Consolidated Statement of Operations for the
three months ended September 30, 1997, and 1996, and for the nine months ended
September 30, 1997, and 1996, the Consolidated Statement of Changes in
Stockholders' Equity for the nine months ended September 30, 1997, and the
Consolidated Statement of Cash Flows for the nine months ended September 30,
1997, and 1996.
NOTE 2 - PRIMARY EARNINGS PER SHARE
Primary earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding and common stock
equivalents. Common stock equivalents include shares issuable upon the assumed
exercise of all stock options having an exercise price less than the average
market price of the common stock using the treasury stock method.
NOTE 3 - ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE"
In February 1997, the Financial Accounting Standards Board issued Statement
128 "Earnings Per Share" (FAS 128). The terms of FAS 128 are effective for all
earnings per share disclosures subsequent to December 15, 1997 and requires all
prior period earnings per share disclosures be restated to conform with FAS 128.
FAS 128 requires a presentation of both "Basic" earnings per share and "Diluted"
earnings per share. "Basic" earnings per share computes per share earnings using
the weighted average number of common shares outstanding during the period,
while "Diluted" earnings per share computes per share earnings in the same
manner as "Basic" earnings per share plus the number of additional common shares
that would have been outstanding for the period if the dilutive potential common
shares had been issued. Because early adoption of FAS 128 is not allowed, the
Company expects to adopt the requirements of FAS 128 subsequent to the December
15, 1997 effective date. However, had the Company adopted the provisions of FAS
128 at January 1, 1997, "Basic" earnings per share would have been $.53 and $.44
respectively for the three month period ended September 30, 1997 and September
30, 1996, and $1.49 and $1.19, respectively for the nine months ended September
30, 1997 and September 30, 1996. "Diluted" earnings per share would have been
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<PAGE>
$.52 and $.42, respectively for the three month period ended September 30, 1997
and September 30, 1996, and $1.48 and $1.17, respectively for the nine months
ended September 30, 1997 and September 30, 1996.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q, AND INFORMATION
THAT MAY BE CONTAINED IN OTHER FILINGS BY THE COMPANY WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") AND RELEASES ISSUED OR STATEMENTS MADE BY
THE COMPANY, CONTAIN OR MAY CONTAIN FORWARD-LOOKING STATEMENTS, INCLUDING BUT
NOT LIMITED TO STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS OR
INTENTIONS. SUCH FORWARD-LOOKING STATEMENTS NECESSARILY INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE
PROJECTED OR SUGGESTED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE TO OCCUR INCLUDE, BUT ARE NOT LIMITED TO: HEIGHTENED
COMPETITION, INCLUDING INCREASED PRICE COMPETITION IN THE PHARMACY BENEFIT
MANAGEMENT BUSINESS; THE POSSIBLE TERMINATION OF THE COMPANY'S CONTRACTS WITH
CERTAIN KEY CLIENTS; CHANGES IN PRICING OR DISCOUNT PRACTICES OF PHARMACEUTICAL
MANUFACTURERS; THE ABILITY OF THE COMPANY TO CONSUMMATE CONTRACT NEGOTIATIONS
WITH PROSPECTIVE CLIENTS; COMPETITION IN THE BIDDING AND PROPOSAL PROCESS;
ADVERSE RESULTS IN CERTAIN LITIGATION AND REGULATORY MATTERS; THE ADOPTION OF
ADVERSE LEGISLATION OR REGULATIONS OR A CHANGE IN THE INTERPRETATION OF EXISTING
LEGISLATION OR REGULATIONS; RISKS ASSOCIATED WITH THE DEVELOPMENT OF NEW
PRODUCTS; AND OTHER RISKS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE COMMISSION.
COMPANY OVERVIEW
The Company primarily derives its revenues from the sale of pharmacy
benefit management services in the United States and Canada. The Company's net
revenues include ingredient cost of pharmaceuticals dispensed to members of
health benefit plans sponsored by the Company's clients by pharmacies
participating in one of the networks of retail pharmacies maintained by the
Company or by one of the Company's mail service pharmacies, unless the Company's
mail service pharmacies dispense pharmaceuticals supplied by the Company's
clients. Where the Company only administers the contracts between its clients
and their own retail pharmacy networks, or where the Company dispenses
pharmaceuticals from its mail service pharmacies that are supplied by one of the
Company's clients, the Company records as net revenue only the administrative or
dispensing fees it receives from its activities. The Company also derives
revenue from (i) the sale of pharmaceuticals for and the provision of infusion
therapy services through its IVTx division ("IVTx"), (ii) the sale of eyeglasses
and contact lenses and related administrative fees through its Express Scripts
Vision Corporation and PhyNet, Inc. subsidiaries (collectively, "ESVC"), (iii)
the sale of informed decision counseling services through its Express Health
LineSM division, and (iv) the sale of medical information management services,
which include provider profiling, disease management support services and
outcomes assessments, through its Practice Patterns Science, Inc. ("PPS")
subsidiary.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company for
the periods presented as a percentage of net revenue and the percentage change
in the dollar amounts of such financial data for the three months ended
September 30, 1997 compared to 1996, and the nine months ended September 30,
1997 compared to 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Nine Months
September 30 September 30 Sept. 30, 1997 Sept. 30, 1997
---------------------------------------------
1997 1996 1997 1996 Over 1996 Over 1996
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
Net revenues:
Unrelated clients 82.8 79.6 83.1 79.9 71.2 67.5
Related clients 17.2 20.4 16.9 20.1 39.1 35.9
---------------------------------------------
Total net revenues 100.0 100.0 100.0 100.0 64.6 61.2
Cost and expenses:
Cost of revenues 91.2 88.7 91.1 88.4 69.2 66.0
Selling, general & administrative 4.9 6.0 4.8 6.3 35.1 24.7
----------------------------------------------
96.1 94.7 95.9 94.7 67.1 63.3
----------------------------------------------
Operating income 3.9 5.3 4.1 5.3 21.8 23.5
Other income (net) .5 .6 .4 .4 43.1 85.1
---------------------------------------------
Income before income taxes 4.4 5.9 4.5 5.7 23.8 27.9
Provision for income taxes 1.7 2.3 1.7 2.2 25.4 27.2
---------------------------------------------
Net income 2.7 3.6 2.8 3.5 22.8 28.4
=============================================
</TABLE>
THIRD QUARTER ENDED SEPTEMBER 30, 1997, COMPARED TO 1996
NET REVENUES. Net revenues for the third quarter of 1997 increased
$125,613,000, or 64.6%, compared to the third quarter of 1996. Net revenues from
the Company's claims processing services and mail pharmacy services business
segments increased 65.4% this quarter, compared to the third quarter of 1996.
The primary reason for this increase was a $82,592,000, or 63.8% increase in
revenues from pharmacy claims processed, reflecting a 28.4% increase in
membership (from approximately 9.5 million members at September 30, 1996 to
approximately 12.2 million members at September 30, 1997). Pharmacy claims
processed increased by 30.0%, and average revenue per claim increased by 26.0%,
compared to 1996. Revenue from the Company's mail pharmacy services increased
$38,995,000, or 69.2%, reflecting the effect of the increased membership noted
above, a 46.6% increase in the number of prescriptions dispensed, and a 15.4%
increase in the average revenue per prescription dispensed. The increase in
average revenue per pharmacy claim processed is due to two factors: (1) a shift
in the mix of customers towards utilizing pharmacy networks established by the
Company (for which the drug ingredient costs, dispensing fee and administrative
fees are included as revenues) and away from networks arranged by its clients
(for which the Company records only its administrative fee as net revenue); and
(2) higher drug ingredient costs resulting from changes in therapeutic mix and
dosage, new drugs introduced into the marketplace, and increased pricing. The
increase in average revenue per prescription dispensed by the mail service
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<PAGE>
pharmacies is primarily the result of the higher drug ingredient costs
attributable to the foregoing factors. During the quarter, the percentage
increase in revenue from the mail pharmacy operations exceeded the percentage
increase in revenue from the claims processing operations due to the addition of
new clients with higher mail utilization during the third quarter of 1997 and
the fact that, during the second quarter of 1997, two of the Company's larger
clients switched from programs in which they would provide drug inventory to
replenish drugs used by the Company to fill mail service prescriptions (for
which the Company only includes its dispensing fee as net revenue) to the
Company's standard program in which it purchases the inventory used to fill the
prescriptions (and therefore includes the ingredient cost as well as the
dispensing fee in net revenue). This switch had the effect of increasing both
the mail pharmacy services revenue and cost of revenue in this quarter compared
to the third quarter of 1996. The overall effect on the Company's reported net
income for this quarter was not material. Increases in revenues from the factors
cited herein were partially offset by lower pricing offered by the Company in
response to continued competitive pressures.
Net revenues from the Company's vision and infusion therapy services and
integrated medical and drug data analysis services increased 34.3%, compared to
1996, primarily as a result of the growth in both the number of and utilization
by members who receive vision and infusion services and a greater number of
clients under contract with PPS.
COST OF REVENUES. Cost of revenues for the third quarter of 1997 increased
$119,274,000, or 69.2%, compared to the third quarter of 1996. The percentage
increase in cost of revenues was 4.6 percentage points greater than the increase
in revenues, resulting in a decrease in gross profit margins. For claims
processing services, the cost of revenue as a percentage of net revenue
increased by 2.6 percentage points due to both the increase in the utilization
of the Company's networks, as opposed to those arranged by its clients, and to
lower prices offered in response to competitive pressures in the marketplace.
The mail pharmacy gross margin decreased by 4.6 percentage points as the result
of the switch by certain clients away from the replenishment program described
above and lower prices being offered by the Company in response to competitive
conditions in the pharmacy benefit management business. The Company also
experienced an overall reduction as a percentage of net revenues in the fees
received from drug manufacturers in connection with the Company's drug
purchasing and formulary management programs. The decrease in gross margin in
both the claims processing and mail pharmacy services was partially offset by
lower direct processing costs as a result of the economies of scale for both
these operations. The cost of revenue for vision and infusion therapy services
increased 36.0% principally due to costs related to the continued expansion of
vision and infusion therapy service operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, measured as a percentage of net revenues, decreased from 6.0% in the
third quarter of 1996 to 4.9% for the third quarter of 1997. This decrease was
the result of overall economies of scale and expense control measures in these
areas of the Company's operations, as well as the impact of comparably higher
revenues from the increased utilization of the Company's pharmacy networks and
the switch in mail pharmacy services from the replenishment programs. Selling,
general and administrative expenses increased in absolute terms by $4,090,000,
or 35.1%, compared to 1996, which reflects the Company's continuing commitment
to enhance its ability to manage the pharmacy benefit by investing in
information systems, additional clinical programs, increased marketing efforts
and operational and administrative support functions.
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<PAGE>
OTHER INCOME, NET. Other income, net was $1,580,000 for the third quarter
of 1997 compared to $1,104,000 for 1996, primarily as a result of increased cash
flow from operations and higher interest rates on invested cash balances.
PROVISION FOR INCOME TAXES. The provision for income taxes for the quarter
ended September 30, 1997, was $5,556,000 compared to $4,430,000 in the prior
year. The effective tax rate was 39.2% in 1997 compared to 38.7% for 1996.
NET INCOME. As a result of the foregoing, net income for the quarter ended
September 30, 1997, increased $1,599,000, or 22.8%, compared to 1996.
EARNINGS PER SHARE. The Company reported earnings per share of $.52, up
23.8% from the third quarter of 1996, for which the Company reported $.42 per
share. The weighted average number of shares used in the calculations was
16,593,000 in 1997 and 16,739,000 in 1996. The decrease was primarily due to the
acquisition of 237,500 shares of Treasury Stock by the Company, which was
partially offset by the effect of stock options included in the weighted average
number of shares outstanding.
NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO 1996
NET REVENUES. Net revenues increased $335,005,000, or 61.2% for the nine
months ended September 30, 1997 compared to the prior period. Net revenues from
the Company's claim processing services and mail pharmacy services increased
61.9% in 1997, compared to 1996. The primary reason for this increase was a
$230,877,000, or 63.7% increase in revenues from pharmacy claims processed,
reflecting the membership gains previously discussed, a 26.6% increase in the
number of claims processed, and a 29.3% increase in average revenue per claim,
compared to 1996. Revenue from the Company's mail pharmacy services increased
$93,357,000, or 57.8% reflecting the membership gains, a 41.8% increase in the
number of prescriptions dispensed, and an 11.3% increase in the average revenue
per prescription dispensed. The increase in average revenue per claim is
primarily due to the increased utilization of the Company's pharmacy networks
and increases in drug ingredient costs (resulting from the factors cited above),
and the increase in average revenue per prescription dispensed is due to the
increased ingredient costs, including the effect of discontinuing the
replenishment program, both of which were partially offset by lower prices
offered in response to competitive pressures in the marketplace. Net revenues
from the Company's vision and infusion therapy services and integrated medical
and drug data analysis services increased 36.3%, compared to 1996, primarily as
a result of the growth in the number of members who receive vision and infusion
services and a greater number of clients under contract with PPS.
COST OF REVENUES. For the nine months ended September 30, 1997, the cost of
revenues increased $319,696,000, or 66.0%, compared to the prior period. The
percentage increase in cost of revenues was 4.8 percentage points greater than
the increase in net revenues, resulting in a decrease in gross profit margins.
As with the third quarter of 1997, the main reasons for the percentage increase
in the year to date cost of revenues were the shift in the mix of business
towards the Company's retail pharmacy networks and the switch in mail service
from the replenishment programs plus lower pricing offered as a result of
competitive pressures. Fees received from drug manufacturers in connection with
the Company's drug purchasing and formulary management programs decreased as a
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<PAGE>
percentage of net revenues for the period, compared to 1996. The cost of
revenue for vision and infusion therapy services increased 35.5%, principally
due to costs related to the continued expansion of vision and infusion therapy
service operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, measured as a percentage of net revenues, decreased from 6.3% for the
first nine months of 1996 to 4.8% for the comparable period of 1997, reflecting
overall economies of scale and expense control measures in these areas as well
as the effect of the increased utilization of the Company's pharmacy networks.
Selling, general and administrative expenses did, however, increase in absolute
terms by $8,479,000, or 24.7%, for the first nine months of 1997 compared to
1996, primarily due to additional expenditures incurred to market the Company's
products and services, together with increased expenses for information systems,
additional clinical programs and added costs for marketing and operational and
administrative support functions to enhance management of the pharmacy benefit,
all of which reflect the Company's commitment to continue to expand its
capability to provide for future growth and enhance the level of service for its
members.
OTHER INCOME, NET. Other income, net was $4,106,000 for the first nine
months of 1997 compared to $2,218,000 for 1996, partially due to higher interest
rates but primarily due to higher invested cash balances in 1997, resulting from
the proceeds of the stock offering completed in April 1996, and increased cash
flow from operations.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine
months ended September 30, 1997, was $15,580,000 compared to $12,250,000 in the
prior year. The effective tax rate was 39.0% in 1997 compared to 39.2% for 1996.
NET INCOME. As a result of the foregoing, net income for the nine months
ended September 30, 1997, increased $5,388,000, or 28.4%, compared to 1996.
EARNINGS PER SHARE. The Company reported earnings per share of $1.48 for
the first nine months of 1997 compared to $1.17 for the comparable period of
1996, a 26.5% increase. The weighted average number of shares used in the
calculations were 16,503,000 and 16,263,000, respectively. The increase was due
to the shares from the April 1996 stock offering being outstanding for the full
nine month period of 1997 compared to only a portion of the comparable nine
month period for 1996. The additional shares issued in the 1996 offering were
partially offset by treasury stock acquired in late 1996 and early 1997 pursuant
to the Company's stock repurchase program.
LIQUIDITY AND CAPITAL RESOURCES. The Company added approximately 2.1
million lives during the first nine months of 1997, reaching a total of 12.2
million members utilizing the Company's services at September 30, 1997, and
subsequently added approximately 100,000 additional members on October 1, 1997,
bringing the total membership to approximately 12.3 million. As in the past, the
sizable growth in new members served and related revenues during the first nine
months resulted in a growth in receivables. In the first nine months of 1997,
receivables increased $38,819,000. This increase was financed by an increase in
current liabilities of $39,423,000. Management expects to continue to fund a
substantial portion of its future anticipated capital expenditures and net
increases in non-cash working capital with operating cash flow, and if
necessary, short-term investments resulting from the proceeds of the public
offering.
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<PAGE>
The Company maintains a $25 million line of credit with the Mercantile Bank
National Association, which was renewed for one year on May 29, 1997. The
Company has allowed a second line of credit in the amount of $25 million to
lapse while it negotiates new terms. At September 30, 1997, there were no
borrowings outstanding.
As of September 30, 1997, the Company had repurchased a total of 237,500
shares of its Class A Common Stock under the open-market stock repurchase
program announced by the Company on October 25, 1996. The Company's Board of
Directors approved the repurchase of up to 850,000 shares, and placed no limit
on the duration of the program. Purchases will be in such amounts and at such
times as the Company deems appropriate based upon prevailing market and business
conditions. Management believes the Company's capital resources are sufficient
to fund this program.
The Company has reviewed and currently intends to review potential
acquisitions and affiliation opportunities. The Company believes that available
cash resources including the proceeds of the offering of the Company's common
stock referred to above, bank financings and the issuance of additional common
stock would be used to finance such acquisitions or affiliations. There can be
no assurance the Company will make an acquisition or affiliation in 1997.
OTHER MATTERS. In February 1997, the Financial Accounting Standards Board
issued Statement 128, "Earnings Per Share" (FAS 128). The terms of FAS 128 are
effective for all earnings per share disclosures subsequent to December 15, 1997
and requires all prior period earnings per share disclosures to be restated to
conform with FAS 128. FAS 128 requires a presentation of both "Basic" earnings
per share and "Diluted" earnings per share. "Basic" earnings per share computes
per share earnings using the weighted average number of common shares
outstanding during the period, while "Diluted" earnings per share computes per
share earnings in the same manner as "Basic" earnings per share plus the number
of additional common shares that would have been outstanding for the period if
the dilutive potential common shares had been issued. Because early adoption of
FAS 128 is not allowed, the Company expects to adopt the requirements of FAS 128
subsequent to the December 15, 1997 effective date. However, had the Company
adopted the provision of FAS 128 at January 1, 1997, "Basic" earnings per share
would have been $.53 and $.44, respectively for the three month period ended
September 30, 1997 and September 30, 1996, and $1.49 and $1.19, respectively for
the nine months ended September 30, 1997 and September 30, 1996. "Diluted"
earnings per share would have been $.52 and $.42, respectively for the three
month period ended September 30, 1997 and September 30, 1996, and $1.48 and
$1.17, respectively for the nine months ended September 30, 1997 and September
30, 1996.
On March 13, 1997, the Company announced that it had reached an agreement
with RightCHOICE Managed Care, Inc. ("RightCHOICE"), a publicly held subsidiary
of Blue Cross and Blue Shield of Missouri whereby the Company will provide
pharmaceutical benefit management service to RightCHOICE. The three year
agreement became effective March 17, 1997, and initially covers approximately
500,000 members. The agreement also offers the Company the opportunity to
provide service to an additional 1.4 million members enrolled in plans sponsored
or administered by organizations affiliated with RightCHOICE.
PacifiCare Health Systems, Inc. ("PacifiCare") recently completed its
acquisition of FHP International, Inc. ("FHP"). The Company has a contract to
-14-
<PAGE>
provide pharmacy benefit services to FHP's members (currently about 1.7 million)
through December 31, 1997. While FHP is the Company's largest single client in
terms of membership, its contribution to the net revenues is less than 2% (due
to the fact that the Company only records the fees related to administering
FHP's network prescriptions and, prior to May 1, 1997, dispensing mail pharmacy
prescriptions), and its contribution to the Company's earnings is substantially
less than the relationship of FHP membership to total membership. PacifiCare has
indicated to the Company that it will not enter into a long-term extension of
the agreement and has reached an agreement with the Company to phase-out the
membership starting in July 1997 and continuing through April 1998, with
approximately 10% of the members leaving by December 31, 1997. The Company will
amortize the remaining discount on the Class A Common Stock previously issued to
FHP over the remaining period of service to the applicable members.
During the quarter, the Company announced that ESI Canada, Inc., the
Company's Canadian subsidiary, will provide PBM services to First Canadian
Health Management Corporation, Inc., a subsidiary of Aetna Life Insurance
Company of Canada. The program for which services will be provided covers
640,000 registered Indians and Inuit in Canada, and will commence on July 1,
1998 and run through June 30, 2003.
On November 12, 1997, the Company entered into an agreement with Wal-Mart
Stores, Inc. whereby the Company will provide pharmacy benefit management
services for pharmacy programs managed by Wal-Mart. The two year agreement will
be implemented over the next several months.
IMPACT OF INFLATION. Changes in prices charged by manufacturers and
wholesalers for pharmaceuticals affect the Company's net revenues and cost of
revenues. To date the Company has been able to recover price increases from its
clients under the terms of its agreements. As a result, changes in
pharmaceutical prices have not adversely affected the Company.
-15-
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Index to Exhibits on page 18.
(b) REPORTS ON FORM 8-K. On November 4, 1997, the Company filed a
current Report on Form 8-K regarding a press release issued on
behalf of the Company.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
(Registrant)
Date: November 13, 1997 By: /s/ Barrett A. Toan
Barrett A. Toan, President and
Chief Executive Officer
Date: November 13, 1997 By: /s/ Kurt D. Blumenthal
Kurt D. Blumenthal, Vice President and
Acting Chief Financial Officer
-17-
<PAGE>
INDEX TO EXHIBITS
Exhibit
NUMBER EXHIBIT
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit No. 3.1 to the Company's Registration Statement on
Form S-1 filed June 9, 1992 (No. 33-46974) (the "Registration
Statement").
3.2 Certificate of Amendment of the Certificate of Incorporation
of the Company, incorporated by reference to Exhibit No. 10.6
to the Company's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1994.
3.3* Second Amended and Restated Bylaws
4.1 Form of Certificate for Class A Common Stock, incorporated by
reference to Exhibit No. 4.1 to the Registration Statement.
27.1* Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange Commission only).
- -------------------
*Filed herein
-18-
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 45,742
<SECURITIES> 57,172
<RECEIVABLES> 205,602
<ALLOWANCES> 2,978
<INVENTORY> 20,758
<CURRENT-ASSETS> 329,362
<PP&E> 47,216
<DEPRECIATION> 20,419
<TOTAL-ASSETS> 368,434
<CURRENT-LIABILITIES> 174,313
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 199,763
<TOTAL-LIABILITY-AND-EQUITY> 368,434
<SALES> 319,937
<TOTAL-REVENUES> 319,937
<CGS> 291,590
<TOTAL-COSTS> 291,590
<OTHER-EXPENSES> 15,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> 14,169
<INCOME-TAX> 5,556
<INCOME-CONTINUING> 8,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,613
<EPS-PRIMARY> .52
<EPS-DILUTED> .0
</TABLE>
EXHIBIT 3.3
SECOND AMENDED AND RESTATED
BYLAWS
of
EXPRESS SCRIPTS, INC.
Adopted September 24, 1997
1. MEETINGS OF STOCKHOLDERS.
1.1 ANNUAL MEETING. The annual meeting of stockholders shall be held on the
date and at the time fixed from time to time by the board of directors (the
"Board"), provided, that each successive annual meeting shall be held on the
fourth Wednesday in May of each year if not a legal holiday, and if a legal
holiday then on the next succeeding day not a legal holiday, or on such other
date or time and at such place in May, June, July, August or September as may be
determined from time to time by resolutions adopted by the Board of Directors.
1.2 SPECIAL MEETINGS. Special meetings of the stockholders may be called by
resolution of the Board and shall be called by the president or secretary upon
the written request of holders of shares entitled to cast at least 50% of the
votes of all outstanding shares entitled to vote. Only business related to the
purposes set forth in the notice of the meeting may be transacted at a special
meeting.
1.3 PLACE AND TIME OF MEETINGS. Meetings of the stockholders may be held in
or outside Delaware at the place and time specified by the Board.
1.4 NOTICE OF MEETING; WAIVER OF NOTICE. Written notice of each meeting of
stockholders shall be given to each stockholder entitled to vote at the meeting,
except that (a) it shall not be necessary to give notice to any stockholder who
submits a signed waiver of notice before or after the meeting, and (b) no notice
of an adjourned meeting need be given except when required under Section 1.5 of
these Bylaws or by law. Each notice of a meeting shall be given, personally or
by mail, not less than 10 nor more than 60 days before the meeting and shall
state the time and place of the meeting, and unless it is the annual meeting,
shall state at whose direction or request the meeting is called and the purposes
for which it is called. If mailed, notice shall be considered given when
deposited in the United States mail with postage prepaid addressed to a
stockholder at his address on the corporation's records. The attendance of any
stockholder at a meeting, without protesting at the beginning of the meeting
that the meeting is not lawfully called or convened, shall constitute a waiver
of notice by him.
1.5 QUORUM. At any meeting of stockholders, the presence in person or by
proxy of the holders of shares entitled to cast a majority of the votes of all
outstanding shares entitled to vote shall constitute a quorum for the
transaction of any business. In the absence of a quorum a majority in voting
interest of those present or, if no stockholders are present, any officer
entitled to preside at or to act as secretary of the meeting, may adjourn the
meeting until a quorum is present. At any adjourned meeting at which a quorum is
present any action may be taken which might have been taken at the meeting as
originally called. No notice of an adjourned meeting need be given if the time
and place are announced at the meeting at which the adjournment is taken except
that, if adjournment is for more than thirty days or if, after the adjournment,
a new record date is fixed for the meeting, notice of the adjourned meeting
shall be given pursuant to Section 1.4.
1.6 VOTING; PROXIES. Corporate action to be taken by stockholder vote,
other than the election of directors, shall be authorized by a majority of the
votes of shares present in person or represented by proxy and entitled to vote
at a meeting of stockholders, except as otherwise provided by law. Directors
shall be elected in the manner provided in Section 2.1 of these Bylaws. Voting
need not be by ballot unless requested by a stockholder at the meeting or
ordered by the chairman of the meeting; however, all elections of directors
shall be by written ballot, unless otherwise provided in the certificate of
incorporation. Each stockholder entitled to vote at any meeting of stockholders
or to express consent to or dissent from corporate action in writing without a
meeting may authorize another person to act for such stockholder by proxy. Every
proxy must be signed by the stockholder or his attorney-in-fact. No proxy shall
be valid after three years from its date unless it provides otherwise.
1.7 LIST OF STOCKHOLDERS. Not less than 10 days prior to the date of any
meeting of stockholders, the secretary of the corporation shall prepare a
complete list of stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of such stockholder. For a period of not less than
10 days prior to the meeting, the list shall be available during ordinary
business hours for inspection by any stockholder for any purpose germane to the
meeting. During this period, the list shall be kept either (a) at a place within
the city where the meeting is to be held, if that place shall have been
specified in the notice of the meeting, or (b) if not so specified, at the place
where the meeting is to be held. The list shall also be available for inspection
by stockholders at the time and place of the meeting.
1.8 NOTICE OF STOCKHOLDER NOMINEE. Only persons who are nominated in
accordance with the procedures set forth in this paragraph shall be eligible for
election by the stockholders as directors of the corporation. Nominations of
persons for election to the Board may be made at a meeting of stockholders (a)
by or at the direction of the Board, (b) by the holders of shares entitled to
cast at least 50% of the votes of all outstanding shares entitled to vote, or
(c) by any stockholder of the corporation entitled to vote for the election of
directors at such meeting who complies with the procedures set forth in this
paragraph. All nominations by stockholders shall be made pursuant to timely
notice in proper written form to the secretary of the corporation. To be timely,
a stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation (i) in the case of an annual
meeting that is called for a date that is within 30 days before or after the
anniversary date of the immediately preceding annual meeting of stockholders,
not less than 60 days nor more than 90 days prior to such anniversary date, and
(ii) in the case of an annual meeting that is called for a date that is not
within 30 days before or after the anniversary date of the immediately preceding
annual meeting, or in the case of a special meeting of stockholders called for
the purpose of electing directors, not later than the close of business on the
tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure of the date of the meeting was made, whichever
occurs first. To be in proper written form, such stockholders' notice to the
secretary shall set forth in writing (a) as to each person whom such stockholder
proposes to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as
director if elected; and (b) as to such stockholder (i) the name and address, as
they appear on the corporation's books, of such stockholder, and (ii) the class
and number of shares of the corporation which are beneficially owned by such
stockholder. At the request of the Board, any person nominated by the Board for
election as a director shall furnish to the secretary of the corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election by the
stockholders as a director unless nominated in accordance with the procedures
set forth in the Bylaws of the corporation. The chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination as
not made in accordance with the procedures prescribed by the Bylaws of the
corporation, and if he or she shall so determine, he or she shall so declare to
the meeting and the defective nomination shall be disregarded.
1.9 STOCKHOLDER PROPOSALS. At any special meeting of the stockholders, only
such business shall be conducted as shall have been brought before the meeting
by or at the direction of the Board. At any annual meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting (a) by or at the direction of the Board, (b) by the holders of shares
entitled to cast at least 50% of the votes of all outstanding shares entitled to
vote, or (c) by any stockholder who complies with the procedures set forth in
this paragraph. For business properly to be brought before an annual meeting by
a stockholder, the stockholder must have given timely notice thereof in proper
written form to the secretary of the corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation (i) in the case of an annual meeting that is called
for a date that is within 30 days before or after the anniversary date of the
immediately preceding annual meeting of stockholders, not less than 60 days nor
more than 90 days prior to such anniversary date, and (ii) in the case of an
annual meeting that is called for a date that is not within 30 days before or
after the anniversary date of the immediately preceding annual meeting, not
later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. To be in proper written form, such
stockholder's notice to the secretary shall set forth in writing as to each
matter such stockholder proposed to bring before the annual meeting (a) the
reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the corporation's books, of such stockholder, (c) the
class and number of shares of the corporation which are beneficially owned by
such stockholder, and (d) any material interest of such stockholder in such
business. Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this paragraph. The chairman of an annual meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
paragraph, and, if he or she should so determine, he or she shall so declare to
the meeting and any such business not properly brought before the meeting shall
not be transacted.
1.10 PUBLIC DISCLOSURE. For purposes of Sections 1.8 and 1.9 hereof,
"public disclosure" shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press, Reuters or Corporate News Service or in a
document publicly filed by the corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
1.11 MEETING REQUIRED. Whenever the vote of stockholders at a meeting
thereof is required or permitted to be taken for or in connection with any
corporate action, such vote may only be taken at an annual or special meeting
with prior notice, except as provided in the Restated Certificate of
Incorporation, as amended.
1.12 ELECTION OUT OF SECTION 203. Pursuant to the corporation's original
Certificate of Incorporation, the corporation has expressly elected not to be
governed by Section 203 of the General Corporation Law of the State of Delaware.
2. BOARD OF DIRECTORS.
2.1 NUMBER, QUALIFICATION, ELECTION AND TERM OF DIRECTORS. The business and
affairs of the corporation shall be managed by or under the direction of the
Board. The number of directors may be fixed or changed from time to time by
resolution of a majority of the entire Board or by the stockholders, or, if the
number is not fixed, the number shall be ten, but no decrease may shorten the
term of any incumbent director. Directors shall be elected at each annual
meeting of stockholders by a plurality of the votes of shares present in person
or represented by proxy and entitled to vote on the election of directors and
shall hold office until the next annual meeting of stockholders and until the
election and qualification of their respective successors, subject to the
provisions of Section 2.9. As used in these Bylaws, the term "entire Board"
means the total number of directors which the corporation would have if there
were no vacancies on the Board.
2.2 QUORUM AND MANNER OF ACTING. A majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting, except as
provided in Section 2.10 of these Bylaws. In the absence of a quorum a majority
of the directors present may adjourn any meeting from time to time until a
quorum is present. Unless otherwise provided by law or these Bylaws, the
affirmative vote of a majority of the directors comprising the entire Board
shall be required to take action in respect of any matter presented to or
requiring the approval of the Board, including, but not limited to, the
following actions by the corporation:
(a) declaring or paying any dividends or any distributions upon any of the
stock of the corporation;
(b) authorizing, issuing or executing any agreement providing for the
issuance (contingent or otherwise)of any equity securities (or any securities
convertible into or exchangeable for any equity securities);
(c) merging or consolidating the corporation with any entity or any other
business combination, acquisition, liquidation, reorganization, recapitalization
or dissolution or entering into any agreement providing for any of the
foregoing;
(d) selling, leasing or otherwise disposing of any material portion of the
corporation's assets outside of the ordinary course of business in any
transaction or series of related transactions;
(e) entering into or amending any employment or consultant agreement with
any individual to provide for compensation in excess of $250,000 per annum or
paying any bonus in excess of $100,000 to any employee;
(f) selecting and engaging the corporation's principal accountants,
corporate counsel and investment bankers;
(g) approving the corporation's annual budget;
(h) making any capital expenditure not specifically approved in the
corporation's annual budget in excess of $500,000 for any expenditure or
$1,000,000 in the aggregate per year;
(i) subject to Section 3.3 hereof, adopting, amending, modifying or
terminating any stock option, employee stock ownership, pension, profit-sharing
or other employee benefit or welfare plan or granting any options or rights to
acquire shares of capital stock of the corporation;
(j) creating, incurring or assuming any indebtedness for borrowed money in
excess of $500,000 in the aggregate at any one time outstanding or making any
loans or advances to, guarantees for the benefit of, or investments in, any
entity in excess of $500,000 in the aggregate for all loans or advances at any
one time outstanding,$500,000 in the aggregate for all guarantees at any one
time outstanding, and $500,000 in the aggregate for all investments at any one
time outstanding, except for (1) short- term investments having a stated
maturity no greater than one year from the date the corporation makes such
investment in (A) obligations of the United States government or any agency
thereof or obligations guaranteed by the United States government, (B)
certificates of deposit of commercial banks having combined capital and surplus
of at least $250,000,000, or (C) commercial paper with a rating of at least
"Prime-1" by Moody's Investors Service, Inc., and (2) investments approved in
the corporation's annual budget;
(k) changing the nature, purpose or strategic direction of the corporation;
or
(l) entering into any contract, lease or other commitment that is not in
the ordinary course of business, and pursuant to which the corporation is
obligated to make payments in excess of $1,000,000. For purposes of the
preceding sentence, "ordinary course of business" means any lease or any
contract with customers or suppliers, which is repetitive in nature, which does
not vary in substantial terms and conditions from similar leases or contracts of
the Company, and which is customary in the business.
2.3 PLACE OF MEETINGS. Meetings of the Board may be held in or outside
Delaware.
2.4 ANNUAL AND REGULAR MEETINGS. Annual meetings of the Board for the
election of officers and consideration of other matters shall be held either
(a)without notice immediately after the annual meeting of stockholders and at
the same place, or (b) as soon as practicable after the annual meeting of
stockholders, on notice as provided in Section 2.6 of these Bylaws. Regular
meetings of the Board may be held without notice and, unless otherwise specified
by the Board, shall be held once during every other calendar month at such times
and places as the Board determines. If the day fixed for a regular meeting is a
legal holiday, the meeting shall be held on the next business day.
2.5 SPECIAL MEETINGS. Special meetings of the Board may be called by the
chairman of the board, the president or by a majority of the directors in
office.
2.6 NOTICE OF MEETINGS; WAIVER OF NOTICE. Notice of the time and place of
each special meeting of the Board, and of each annual meeting not held
immediately after the annual meeting of stockholders and at the same place,
shall be given to each director in advance of the time set for such meeting as
provided herein. Notice of a special meeting need not state the purpose or
purposes for which the meeting is called. Notice need not be given to any
director who submits a signed waiver of notice before or after the meeting or
who attends the meeting without protesting at the beginning of the meeting the
transaction of any business because the meeting was not lawfully called or
convened. Notice of any adjourned meeting need not be given, other than by
announcement at the meeting at which the adjournment is taken. Notice of a
special meeting may be given by any one or more of the following methods and the
method used need not be the same for each director being notified:
(a) Written notice sent by mail at least three days prior to the meeting;
(b) Personal service at least twenty-four (24) hours prior to the time of
the meeting;
(c) Telegraphic notice at least twenty-four (24) hours prior to the time of
the meeting, said notice to be sent as a straight full-rate telegram;
(d) Telephonic notice at least twenty-four (24) hours prior to the time of
the meeting; or
(e) Facsimile transmission at least twenty-four (24) hours prior to the
time of the meeting.
2.7 BOARD OR COMMITTEE ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Board or by any committee of the Board may be taken
without a meeting if all of the members of the Board or of the committee consent
in writing to the adoption of a resolution authorizing the action. The
resolution and the written consents by the members of the Board or the committee
shall be filed with the minutes of the proceeding of the Board or of the
committee.
2.8 PARTICIPATION IN BOARD OR COMMITTEE MEETINGS BY CONFERENCE TELEPHONE.
Any or all members of the Board or of any committee of the Board may participate
in a meeting of the Board or of the committee by means of a conference telephone
or similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation by such means shall
constitute presence in person at the meeting.
2.9 RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign at any
time by delivering his or her resignation in writing to the president or
secretary of the corporation, to take effect at the time specified in the
resignation; the acceptance of a resignation, unless required by its terms,
shall not be necessary to make it effective. Any or all of the directors may be
removed at any time, either with or without cause, by vote of the stockholders.
2.10 VACANCIES. Any vacancy in the Board, including one created by an
increase in the number of directors, may be filled for the unexpired term by a
majority vote of the remaining directors, though less than a quorum.
2.11 COMPENSATION. Directors shall receive such compensation as the Board
determines, together with reimbursement of their reasonable expenses in
connection with the performance of their duties. A director may also be paid for
serving the corporation, its affiliates or subsidiaries in other capacities.
2.12 NOTICE TO MEMBERS OF THE BOARD OF DIRECTORS. Each member of the Board
of Directors shall file with the Secretary of the corporation an address to
which mail or telegraphic notices shall be sent and a telephone number to which
a telephonic or facsimile notice may be transmitted. A notice mailed,
telegraphed, telephoned or transmitted by facsimile in accordance with the
instructions provided by the director shall be deemed sufficient notice. Such
address or telephone number may be changed at any time and from time to time by
a director by giving written notice of such change to the Secretary. Failure on
the part of any director to keep an address and telephone number on file with
the Secretary shall automatically constitute a waiver of notice of any regular
or special meeting of the Board which might be held during the period of time
that such address and telephone number are not on file with the Secretary. A
notice shall be deemed to be mailed when deposited in the United States mail,
postage prepaid. A notice shall be deemed to be telegraphed when the notice is
delivered to the transmitter of the telegram and either payment or provision for
payment is made by the corporation. Notice shall be deemed to be given by
telephone if the notice is transmitted over the telephone to some person
(whether or not such person is the director) or message recording device
answering the telephone at the number which the director has placed on file with
the Secretary. Notice shall be deemed to be given by facsimile transmission when
sent to the telephone number which the director has placed on file with the
Secretary.
3. COMMITTEES.
3.1 EXECUTIVE COMMITTEE. The Board, by resolution adopted by a majority of
the entire Board, may designate an Executive Committee consisting of five
directors or such other number as may be specified by the Board; the Executive
Committee shall be vested with the powers of the Board of Directors, including,
without limitation, the power to approve any matter set forth in section 2.2,
when the Board is not in session, except as otherwise provided in the
resolution, by these Bylaws, section 141(c) of the General Corporation Law of
the State of Delaware, or any other applicable law. The members of the Executive
Committee shall serve at the pleasure of the Board. All action of the Executive
Committee shall be reported to the Board at its next meeting. Unless otherwise
specified by the Board or the Executive Committee, meetings of the Executive
Committee shall be held once during every calendar month in which a meeting of
the Board is not scheduled.
3.2 AUDIT COMMITTEE.
(a) The Board, by resolution adopted by a majority of the entire Board, may
designate an Audit Committee consisting of three directors or such other number
as may be specified by the Board, which shall review the internal controls of
the corporation, any transactions with related parties of the corporation of a
magnitude such that it would be required to be disclosed in the corporation's
proxy statement under the Securities and Exchange Commission's rules and
regulations as in effect at the time of the transaction, and the objectivity of
its financial reporting, and have such other powers and duties as the Board
determines. The members of the Audit Committee shall serve at the pleasure of
the Board. All action of the Audit Committee shall be reported to the Board at
its next meeting.
(b) A majority of the directors on the Audit Committee shall be persons who
are not directors of New York Life Insurance Company or its subsidiaries (other
than the corporation), or officers or employees of New York Life or its
subsidiaries. The Audit Committee shall not act at any time that the
requirements of the preceding sentence are not met.
3.3 COMPENSATION COMMITTEE. The Board, by resolution adopted by a majority
of the entire Board, may designate a Compensation Committee consisting of three
directors or such other number as may be specified by the Board, which shall
administer the corporation's compensation plans and have such other powers and
duties as the Board determines. The members of the Compensation Committee shall
serve at the pleasure of the Board. All action of the Compensation Committee
shall be reported to the Board at its next meeting.
3.4 OTHER COMMITTEES. The Board, by resolution adopted by a majority of the
entire Board, may designate other committees of directors of one or more
directors, which shall serve at the Board's pleasure and have such powers and
duties as the Board determines.
3.5 RULES APPLICABLE TO COMMITTEES. The Board may designate one or more
directors as alternate members of any committee (other than the Audit
Committee), who may replace any absent or disqualified member at any meeting of
the committee. All action of a committee shall be reported to the Board at its
next meeting. Each committee shall adopt rules of procedure and shall meet as
provided by those rules or by resolutions of the Board. A majority of the
members of a committee shall constitute a quorum for the transaction of business
at any meeting. The affirmative vote of a majority of the members of a committee
shall be required to take action in respect of any matter presented to or
requiring the approval of the committee.
3.6 ELECTION PURSUANT TO SECTION 141(C)(2). By resolution of the Board of
Directors, the corporation has elected pursuant to Section 141(c) of the
Delaware General Corporation Law to be governed by paragraph (2) of Section
141(c) in respect of committees of the Board of Directors.
4. OFFICERS.
4.1 NUMBER; SECURITY. The executive officers of the corporation shall be
the chairman of the board, the president, one or more vice presidents (including
executive vice president(s) and senior vice president(s) if the Board so
determines), a secretary and a treasurer. Any two or more offices may be held by
the same person. The Board may require any officer, agent or employee to give
security for the faithful performance of his duties.
4.2 ELECTION; TERM OF OFFICE. The executive officers of the corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his
successor, subject to the provisions of Section 4.4.
4.3 SUBORDINATE OFFICERS. The Board may appoint subordinate officers
(including assistant secretaries and assistant treasurers), agents or employees,
each of whom shall hold office for such period and have such powers and duties
as the Board determines. The Board may delegate to any executive officer or to
any committee the power to appoint and define the powers and duties of any
subordinate officers, agents or employees.
4.4 RESIGNATION AND REMOVAL OF OFFICERS. Any officer may resign at any time
by delivering his resignation in writing to the president or secretary of the
corporation, to take effect at the time specified in the resignation; the
acceptance of a resignation, unless required by its terms, shall not be
necessary to make it effective. Any officer elected or appointed by the Board or
appointed by an executive officer or by a committee may be removed by the Board
either with or without cause, and in the case of an officer appointed by an
executive officer or by a committee, by the officer or committee who appointed
him or her or by the president.
4.5 VACANCIES. A vacancy in any office may be filled for the unexpired term
in the manner prescribed in Sections 4.2 and 4.3 of these Bylaws for election or
appointment to the office.
4.6 CHAIRMAN OF THE BOARD. The chairman of the board shall preside at all
meetings of the Board and of the stockholders and shall have such powers and
duties as the Board assigns to him.
4.7 PRESIDENT. The president shall be the chief executive officer of the
corporation. Subject to the control of the Board, he or she shall have general
supervision over the business of the corporation and shall have such other
powers and duties as chief executives of corporations usually have or as the
Board assigns to him or her.
4.8 VICE PRESIDENT. Each vice president shall have such powers and duties
as the Board or the president assigns to him or her.
4.9 TREASURER. The treasurer shall be the chief financial officer of the
corporation and shall be in charge of the corporation's books and accounts.
Subject to the control of the Board, he or she shall have such other powers and
duties as the Board or the president assigns to him or her.
4.10 SECRETARY. The secretary shall be the secretary of, and keep the
minutes of, all meetings of the Board and of the stockholders, shall be
responsible for giving notice of all meetings of stockholders and of the Board,
and shall keep the seal and, when authorized by the Board, apply it to any
instrument requiring it. Subject to the control of the Board, he or she shall
have such powers and duties as the Board or the president assigns to him or her.
In the absence of the secretary from any meeting, the minutes shall be kept by
the person appointed for that purpose by the presiding officer.
4.11 SALARIES. The Board may fix the officers' salaries, if any, or it may
authorize the president to fix the salary of any other officer.
5. SHARES.
5.1 SHARES OF THE CORPORATION. The shares of the corporation shall be
represented by certificates, provided that the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the Chairman or Vice Chairman of
the Board of Directors or by the President or a Vice-President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
representing the number of shares registered in certificate form. The signatures
of any such officers thereon may be facsimiles. The seal of the corporation
shall be impressed, by original or by facsimile, printed or engraved, on all
such certificates. The certificate shall also be signed by the transfer agent
and a registrar and the signature of either the transfer agent or the registrar
may also be facsimile, engraved or printed. In case any officer, transfer agent,
or registrar who has signed or whose facsimile signature has been placed upon
any such certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate may nevertheless
be issued by the corporation with the same effect as if such officer, transfer
agent, or registrar had not ceased to be such officer, transfer agent, or
registrar at the date of its issue.
5.2 STOCK RECORDS. The corporation or a transfer agent shall keep stock
books in which shall be recorded the number of shares issued, the names of the
owners of the shares, the number owned by them respectively, whether such shares
are represented by certificates or are uncertificated, and the transfer of such
shares with the date of transfer.
5.3 TRANSFERS. Transfers of stock shall be made only on the stock transfer
record of the corporation upon surrender of the certificate or certificates
being transferred which certificate shall be properly endorsed for transfer or
accompanied by a duly executed stock power, except in the case of uncertificated
shares, for which the transfer shall be made only upon receipt of transfer
documentation reasonably acceptable to the corporation. Whenever a certificate
is endorsed by or accompanied by a stock power executed by someone other than
the person or persons named in the certificate, or the transfer documentation
for the uncertificated shares is executed by someone other than the holder of
record thereof, evidence of authority to transfer same shall also be submitted
with the certificate or transfer documentation. All certificates surrendered to
the corporation for transfer shall be canceled.
5.4 REGULATIONS GOVERNING ISSUANCE AND TRANSFERS OF SHARES. The Board of
Directors shall have the power and authority to make all such rules and
regulations as it shall deem expedient concerning the issue, transfer and
registration of shares of stock of the corporation. The Board may require
satisfactory surety before issuing a new certificate to replace a certificate
claimed to have been lost or destroyed.
5.5 TRANSFER AGENTS AND REGISTRARS. The Board may appoint, or authorize one
or more officers to appoint, one or more transfer agents and one or more
registrars.
5.6 DETERMINATION OF STOCKHOLDERS OF RECORD. The Board may fix, in advance,
a date as the record date for the determination of stockholders entitled to
notice of or to vote at any meeting of the stockholders, or to express consent
to or dissent from any proposal without a meeting, or to receive payment of any
dividend or the allotment of any rights, or for the purpose of any other action.
The record date may not be more than 60 or less than 10 days before the date of
the meeting or more than 60 days before any other action.
6. MISCELLANEOUS.
6.1 SEAL. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the corporation's name and the year and state in
which is was incorporated.
6.2 FISCAL YEAR. The Board may determine the corporation's fiscal year.
Until changed by the Board, the corporation's fiscal year shall be the calendar
year.
6.3 VOTING OF SHARES IN OTHER CORPORATIONS. Shares in other corporations
which are held by the corporation may be represented and voted by the president
or a vice president of this corporation or by proxy or proxies appointed by one
of them. The Board may, however, appoint some other person to vote the shares.
6.4 AMENDMENTS. Bylaws may be amended, repealed or adopted by the
stockholders or by a majority of the entire Board, but any bylaw adopted by the
Board may be amended or repealed by the stockholders.
