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 June 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 of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Common stock outstanding as of July 31, 1997: 9,016,895 Shares Class A
7,510,000 Shares Class B
1
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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 5
in Stockholders' Equity
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 8
Item 3 Quantitative and Qualitative Disclosures
About Market Risks - (Not Applicable)
Part II Other Information 15
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 15
Holders
Item 5 Other Information - (Not Applicable)
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
Index to Exhibits 17
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EXPRESS SCRIPTS, INC.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
<S> <C> <C>
----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Assets
Current assets:
Cash and cash equivalents $27,128 $25,211
Short term investments 56,581 54,388
Receivables, less allowance for doubtful
accounts of $2,604 and $2,335 respectively
Unrelated Parties 168,803 144,963
Related Parties 15,762 18,842
Inventories 26,332 17,491
Deferred taxes and prepaid expenses 3,499 2,254
----------- ----------
Total current assets 298,105 263,149
Property and equipment, less accumulated depreciation and amortization 26,717 21,447
Other assets 12,560 15,829
----------- ----------
Total assets $337,382 $300,425
=========== ==========
Liabilities and Stockholders' Equity Current liabilities:
Claims payable $120,669 $98,865
Accounts payable 18,137 16,347
Accrued expenses 18,161 19,678
----------- ----------
Total current liabilities 156,967 134,890
----------- ----------
Deferred rents and taxes 1,572 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,
8,999,000 and 8,974,000 shares issued and outstanding, respectively 90 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 99,681 98,958
Foreign currency translation adjustments (5) (2)
Retained earnings 85,991 70,219
----------- ----------
185,832 169,340
Class A Common Stock in treasury at cost,
237,500 and 182,500 shares respectively (6,989) (5,250)
----------- ----------
Total stockholders' equity 178,843 164,090
=========== ==========
Total liabilities and stockholders' equity $337,382 $300,425
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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EXPRESS SCRIPTS, INC.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
----------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues $300,515 $184,724 $562,505 $353,113
---------- --------- ---------- ---------
Cost and expenses:
Cost of revenues 274,906 162,797 512,204 311,782
Selling, general & administrative 13,733 12,255 27,031 22,642
---------- --------- --------- ---------
288,639 175,052 539,235 334,424
---------- --------- ---------- ---------
Operating income 11,876 9,672 23,270 18,689
---------- --------- ---------- ---------
Other income (expense):
Interest income 1,303 905 2,562 1,140
Interest expense (18) (13) (36) (26)
---------- --------- ---------- ---------
1,285 892 2,526 1,114
---------- --------- ---------- ---------
Income before income taxes 13,161 10,564 25,796 19,803
Provision for income taxes 5,030 4,161 10,024 7,820
---------- --------- ---------- ---------
Net income $8,131 $6,403 $15,772 $11,983
========== ========= ========== =========
Primary earnings per share $0.50 $0.39 $0.96 $0.75
========== ========= ========== =========
Weighted average number of common
shares outstanding during the period 16,476 16,569 16,456 16,026
========== ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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EXPRESS SCRIPTS, INC.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Numbers of Shares Amount
-------------------------------------------------------------------------------------------------------------
Foreign
Class A Class B Class A Class B Additional currency
Common Common Common Common paid-in translation Retained Treasury
Stock Stock Stock Stock capital adjustments Earnings Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------- --------- ---------- --------- ---------- ----------- -------- ----------
(IN THOUSANDS)
Balance at 8,974 7,510 $90 $75 $98,958 ($2) $70,219 ($5,250)
December 31, 1996
Net income for six ---- ---- ---- ---- ---- ---- 15,772
months ended June
30, 1997
Foreign currency ---- ---- ---- ---- ---- (3) ---- ----
translation
adjustments
Purchase of ---- ---- ---- ---- ---- ---- ---- (1,739)
treasury stock
Tax benefit ---- ---- ---- ---- 211 ---- ---- ----
relating to
employee stock
options
Exercise of stock
options 25 ---- ---- ---- 512 ---- ---- ----
---------- --------- ---------- --------- ---------- -------- ----------- ---------
Balance at June 30,
1997 8,999 7,510 $90 $75 $99,681 ($5) $85,991 ($6,989)
========== ========= ========== ========= ========== ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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EXPRESS SCRIPTS, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------
1997 1996
<S> <C> <C>
------------ ----------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $15,772 $11,983
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,496 2,974
Tax benefit relating to employee stock options 211 496
Changes in operating assets and liabilities:
Receivables (20,760) (24,658)
Inventories (8,841) (5,628)
Prepaid expenses and other assets 1,174 (344)
Claims payable 21,804 14,416
Accounts payable and accrued expenses 400 3,781
------------ ----------
Net cash provided by operating activities 14,256 3,020
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment (8,916) (5,287)
Short term investments (2,193) (53,441)
------------ ----------
Net cash (used in) investing activities (11,109) (58,728)
------------ ----------
Cash flows from financing activities:
Acquisition of treasury stock (1,739)
Proceeds from stock offerings 52,595
Exercise of stock options 512 1,129
------------ ----------
Net cash provided by (used in) financing activities (1,227) 53,724
------------ ----------
Effect of foreign currency translation adjustments (3) (32)
------------ ----------
Net increase (decrease) in cash and cash equivalents 1,917 (2,016)
Cash and cash equivalents at beginning of period 25,211 11,506
------------ ----------
Cash and cash equivalents at end of period $27,128 $9,490
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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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 June 30, 1997, the Consolidated Statement of Operations for the three
months ended June 30, 1997, and 1996, and for the six months ended June 30,
1997, and 1996, the Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1997, and the Consolidated Statement of Cash
Flows for the six months ended June 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 $.50 and
$.40, respectively for the three month period ended June 30, 1997 and June 30,
1996, and $.97 and $.77, respectively for the six months ended June 30, 1997 and
June 30, 1996. "Diluted" earnings per share would have been $.50 and $.39,
respectively for the three month period ended June 30, 1997 and June 30, 1996,
and $.96 and $.75, respectively for the six months ended June 30, 1997 and June
30, 1996.
7
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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 MARKET; THE POSSIBLE TERMINATION OF THE COMPANY'S CONTRACTS WITH
CERTAIN KEY CLIENTS; CHANGES IN PRICING OR DISCOUNT PRACTICES OF PHARMACEUTICAL
MANUFACTURERS; THE ABILITY OF THE COMPANY TO CONSUMMATE CONTRACT NEGOTIATIONS
WITH PROSPECTIVE CLIENTS; COMPETITION IN THE BIDDING AND PROPOSAL PROCESS;
ADVERSE RESULTS IN CERTAIN LITIGATION AND REGULATORY MATTERS; THE ADOPTION OF
ADVERSE LEGISLATION OR REGULATIONS OR A CHANGE IN THE INTERPRETATION OF EXISTING
LEGISLATION OR REGULATIONS; AND OTHER RISKS DESCRIBED FROM TIME TO TIME IN THE
COMPANY'S FILINGS WITH THE COMMISSION.
COMPANY OVERVIEW
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 the 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.
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company for
the periods presented as a percentage of net revenues and the percentage change
in the dollar amounts of such financial data for the three months ended June 30,
1997 compared to 1996, and the six months ended June 30, 1997 compared to 1996.
8
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<TABLE>
<CAPTION>
Percentage of Net Revenues Percentage Increase
Three Months Ended Six Months Ended Three Months Six Months
June 30 June 30 June 30, 1997 June 30, 1997
OVER 1996 OVER 1996
----------------------- --------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
--------- --------- -------- --------
Net revenues:
Unrelated clients 83.7% 80.0% 83.2% 80.1% 70.3% 65.6%
Related clients 16.3% 20.0% 16.8% 19.9% 32.3% 34.1%
--------- --------- -------- --------
Total net revenues 100.0% 100.0% 100.0% 100.0% 62.7% 59.3%
========= ========= ======== ========
Cost and expenses:
Cost of revenues 91.4% 88.1% 91.1% 88.3% 68.9% 64.3%
Selling, general & administrative 4.6% 6.6% 4.8% 6.4% 12.1% 19.4%
-------- --------- -------- -------
96.0% 94.7% 95.9% 94.7% 64.9% 61.2%
--------- --------- -------- --------
Operating income 4.0% 5.3% 4.1% 5.3% 22.8% 24.5%
Other income (net) 0.4% 0.5% 0.5% 0.3% 44.1% 126.8%
Income before income taxes 4.4% 5.8% 4.6% 5.6% 24.6% 30.3%
Provision for income taxes 1.7% 2.3% 1.8% 2.2% 20.9% 28.2%
--------- --------- -------- --------
Net income 2.7% 3.5% 2.8% 3.4% 27.0% 31.6%
========= ========= ======== ========
</TABLE>
9
<PAGE>
SECOND QUARTER ENDED JUNE 30, 1997, COMPARED TO 1996
NET REVENUES. Net revenues for the second quarter of 1997 increased
$115,791,000, or 62.7% compared to the second quarter of 1996. Net revenues from
the Company's claims processing services and mail pharmacy services business
segments increased by 63.4% this quarter, compared to the second quarter of
1996. The primary reason for this increase was a $79,464,000 or 64.7% increase
in revenues from pharmacy claims processed reflecting a 26.1% increase in
membership (from approximately 9.2 million members at June 30, 1996 to
approximately 11.6 million members at June 30, 1997). Pharmacy claims processed
increased by 27.2%, and average revenue per claim increased by 29.5%, compared
to 1996. Revenue from the Company's mail pharmacy services increased $32,494,000
or 60.4%, reflecting the effect of the increased membership noted above, a 43.1%
increase in the number of prescriptions dispensed, and a 12.1% increase in the
average revenue per prescription dispensed. The increase in average revenue per
pharmacy claim processed is due to both a shift in the mix of customers towards
utilizing pharmacy networks established by the Company (for which the drug
ingredient costs, dispensing fee and administrative fees are included as
revenues), rather than networks arranged by its clients (for which the Company
records only its administrative fee as net revenue), and higher drug ingredient
costs resulting from changes in therapeutic mix and dosage, new drugs introduced
into the marketplace, and increased pricing. The increase in average revenue per
prescription dispensed by the mail service pharmacies is primarily the result of
the higher drug ingredient costs attributable to the foregoing factors. The
percentage increase in claims processing revenues continues to exceed the
percentage increase in mail service revenues, due mainly to the shift towards
utilization of the Company's retail pharmacy networks, a trend that management
believes will continue in 1997. Increases in revenues from the factors cited
herein were partially offset by lower pricing offered by the Company in response
to continued competitive pressures.
During the quarter, two of the Company's larger clients switched from
programs wherein they would provide drug inventory to replace drugs used by the
Company to fill mail order prescriptions (for which the Company only includes
its dispensing fee as net revenue) to the Company's standard program whereby 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 the quarter compared to the second quarter of 1996, but the overall
effect on the Company's reported net income was not material.
Net revenues from the Company's vision and infusion therapy services and
integrated medical and drug data analysis services increased 38.2%, 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 second quarter of 1997 increased
$112,109,000, or 68.9%, compared to the second quarter of 1996. The percentage
increase in cost of revenues was 6.2 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 revenues
increased by 2.9 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 lower mail pharmacy gross margin is 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 cost of revenue for vision and infusion therapy
services increased 41.6%, principally due to costs related to the continued
expansion of vision and infusion therapy service operations.
10
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, measured as a percentage of net revenues, decreased from 6.6% in the
second quarter of 1996 to 4.6% for the second quarter of 1997, reflecting
overall economies of scale and expense control measures in these areas of the
Company's operations, as well as the effects of the increased utilization of the
Company's pharmacy networks, rather than networks arranged by its clients.
Selling, general and administrative expenses did, however, increase in absolute
terms by $1,478,000, or 12.1%, 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 and operational
and administrative support functions.
OTHER INCOME, NET. Other income, net was $1,285,000 for the second quarter
of 1997 compared to $892,000 for 1996, primarily as a result of the investment
of the proceeds from the sale of 1,150,000 shares of the Company's Class A
Common Stock in April 1996 for the entire second quarter of 1997 as compared to
only a portion of the second quarter of 1996, 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 June 30, 1997, was $5,030,000 compared to $4,161,000 in the prior year.
The effective tax rate was 38.2% in 1997 compared to 39.4% for 1996.
NET INCOME. As a result of the foregoing, net income for the quarter ended
June 30, 1997, increased $1,728,000 or 27.0% compared to 1996.
EARNINGS PER SHARE. The Company reported earnings per share of $.50, up
28.2% from the second quarter of 1996, for which the Company reported $.39 per
share. The weighted average number of shares used in the calculations was
16,476,000 in 1997 and 16,569,000 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.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO 1996
NET REVENUES. Net revenues increased $209,392,000, or 59.3%, for the six
months ended June 30, 1997 compared to the prior period. Net revenues from the
Company's claims processing services and mail pharmacy services increased 60.0%
in 1997, compared to 1996. The primary reason for this increase was a
$148,285,000, or 63.7%, increase in revenues from pharmacy claims processed,
reflecting the membership gains previously discussed, a 24.8% increase in the
number of claims processed, and a 31.1% increase in average revenue per claim,
compared to 1996. Revenue from the Company's mail pharmacy services increased
$54,362,000, or 51.7%, reflecting the membership gains, a 39.3% increase in the
number of prescriptions dispensed, and an 8.9% 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, 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 37.4%, 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 six months ended June 30, 1997, the cost of
revenues increased $200,422,000 or 64.3%, compared to the prior period. The
percentage increase in cost of revenues was 5.0 percentage points greater than
the increase in net revenues, resulting in a decrease in gross profit margins.
As with the second 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 away from networks arranged
by its clients, and lower pricing offered as a result of competitive pressures.
Fees received from drug manufactures in connection with the Company's drug
purchasing and formulary management programs decreased as a percentage of net
revenues for the period, compared to 1996. The cost of revenue for vision and
infusion therapy services increased 35.2%, principally due to costs related to
the continued expansion of vision and infusion therapy service operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, measured as a percentage of net revenues, decreased from 6.4% for the
first six 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 $4,389,000, or 19.4%, for the first six 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 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.
12
<PAGE>
OTHER INCOME, NET. Other income, net was $2,526,000 for the first six
months of 1997 compared to $1,114,000 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 six
months ended June 30, 1997, was $10,024,000 compared to $7,820,000 in the prior
year. The effective tax rate was 38.9% in 1997 compared to 39.5% for 1996.
NET INCOME. As a result of the foregoing, net income for the six months
ended June 30, 1997, increased $3,789,000, or 31.6%, compared to 1996.
EARNINGS PER SHARE. The Company reported earnings per share of $.96 for the
first six months of 1997 compared to $.75 for the comparable period of 1996, a
28.0% increase. The weighted average number of shares used in the calculations
were 16,456,000 and 16,026,000, respectively. The increase was due to the shares
from the April 1996 stock offering being outstanding for the full six month
period in 1997 compared to only a portion of the comparable six 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 1.7
million lives during the first six months of 1997, reaching a total of
approximately 11.6 million members utilizing the Company's services at June 30,
1997, and subsequently added approximately 400,000 additional members on July 1,
1997, bringing the total membership to approximately 12.0 million. As in the
past, the sizable growth in new members served and related revenues during the
first six months resulted in a growth in receivables. In the first six months of
1997, receivables increased $20,760,000. This increase was financed by an
increase in current liabilities of $22,077,000. 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, the short-term investments resulting from the proceeds of the public
offering.
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, and a $25
million line of credit with the First National Bank of Chicago, which will
expire on October 30, 1997. Both credit facilities have substantially the same
terms and conditions. At June 30, 1997, there were no borrowings outstanding on
either of these lines of credit.
As of June 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.
13
<PAGE>
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 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 $.50 and $.40, respectively for the three month period ended
June 30, 1997 and June 30, 1996, and $.97 and $.77, respectively for the six
months ended June 30, 1997 and June 30, 1996. "Diluted" earnings per share would
have been $.50 and $.39, respectively for the three month period ended June 30,
1997 and June 30, 1996, and $.96 and $.75, respectively for the six months ended
June 30, 1997 and June 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 services 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") completed its acquisition of
FHP International, Inc. ("FHP"). The Company has a contract to 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.
IMPACT OF INFLATION. Changes in prices charged by manufacturers and
wholesalers for pharmaceuticals affect the Company's net revenue 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.
14
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on May 28, 1997.
(b) The following persons were elected directors of the Company to
serve until the next Annual Meeting of Stockholders and until
their respective successors are elected and qualified:
Howard Atkins
Bernard N. Del Bello
Richard M. Kernan, Jr.
Richard A. Norling
Frederick J. Sievert
Stephen N. Steinig
Seymour Sternberg
Barrett A. Toan
Howard L. Waltman
Norman Zachary
(c) The stockholder vote for each director was as follows:
Votes Votes
Cast For Withheld
------------ ---------
Howard Atkins 83,570,115 71,121
Bernard N. Del Bello 83,571,653 69,583
Richard M. Kernan, Jr. 83,571,055 70,181
Richard A. Norling 83,571,153 70,083
Frederick J. Sievert 83,571,055 70,181
Stephen N. Steinig 83,571,155 70,081
Seymour Sternberg 83,571.653 69,583
Barrett A. Toan 83,571,653 69,583
Howard L. Waltman 83,571,055 70,181
Norman Zachary 83,571.153 70,083
The stockholders also voted to:
(1) Ratify the appointment of Price Waterhouse as the
Company's independent accountants for the Company's
current fiscal year (83,593,732 affirmative votes;
6,605 negative votes; 40,899 abstention votes);
(2) Approve the First Amendment to the Company's Amended
and Restated 1994 Stock Option Plan for (83,392,611
affirmative votes; 166,054 negative votes; 57,314
abstention votes).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Index to Exhibits on page 17.
(b) REPORTS ON FORM 8-K. On May 1, 1997, the Company
filed a Current Report on Form 8-K regarding a press
release issued on behalf of the Company.
15
<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: August 12, 1997 By: /S/ BARRETT A. TOAN
------------------------------
Barrett A. Toan, President and
Chief Executive Officer
Date: August 12, 1997 By: /S/ KURT D. BLUMENTHAL
------------------------------
Kurt D. Blumenthal, Vice
President and Acting Chief
Financial Officer
16
<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, incorporated by
reference to Exhibit No. 3.2 to the Company's Annual Report
on Form 10-K for the year ending 1993.
4.1 Form of Certificate for Class A Common Stock, incorporated
by reference to Exhibit No. 4.1 to the Registration
Statement.
10.1* Fourth Amendment to Revolving Loan Agreement made as of May
29, 1997, by and between the Company and Mercantile Bank
National Association, formerly known as Mercantile Bank of
St. Louis National Association.
10.2** First Amendment to Express Scripts, Inc. Amended and Restated
1994 Stock Option Plan incorporated by reference to Exhibit A
to the Company's Proxy Statement dated April 16, 1997 (File
No. 0-20199).
27.1* Financial Data Schedule (provided for the information of
the U.S. Securities and Exchange Commission only)
* Filed herein.
** Management contract or compensatory plan or arrangement.
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 27,128
<SECURITIES> 56,581
<RECEIVABLES> 187,169
<ALLOWANCES> 2,604
<INVENTORY> 26,332
<CURRENT-ASSETS> 298,105
<PP&E> 45,311
<DEPRECIATION> 18,594
<TOTAL-ASSETS> 337,382
<CURRENT-LIABILITIES> 156,967
<BONDS> 0
0
0
<COMMON> 165
<OTHER-SE> 185,667
<TOTAL-LIABILITY-AND-EQUITY> 337,382
<SALES> 300,515
<TOTAL-REVENUES> 300,515
<CGS> 274,906
<TOTAL-COSTS> 274,906
<OTHER-EXPENSES> 13,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 13,161
<INCOME-TAX> 5,030
<INCOME-CONTINUING> 8,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,131
<EPS-PRIMARY> .50
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.1
FOURTH AMENDMENT TO REVOLVING LOAN AGREEMENT
THIS FOURTH AMENDMENT TO REVOLVING LOAN AGREEMENT (this "Amendment") is
made as of May 29, 1997, by and between EXPRESS SCRIPTS, INC., a Delaware
corporation ("Borrower"), and MERCANTILE BANK NATIONAL ASSOCIATION, formerly
known as Mercantile Bank of St. Louis National Association ("Bank").
W I T N E S S E T H:
WHEREAS, pursuant to a certain Revolving Loan Agreement executed by
Borrower in favor of Bank on May 21, 1993, as amended by the certain Amendment
to Revolving Loan Agreement dated as of May 31, 1994, by the certain Second
Amendment to Revolving Loan Agreement dated as of May 30, 1995 and by the
certain Third Amendment to Revolving Loan Agreement dated as of May 29, 1996 (as
amended, the "Loan Agreement"), Borrower executed a certain Promissory Note
payable to Bank dated May 29, 1996, in the original principal amount of
$25,000,000.00 (the "Note"); and
WHEREAS, Borrower desires to further amend the terms of the Loan Agreement
in the manner set forth herein and Bank is willing to agree to said amendment on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Bank hereby agree as follows:
1. The definition of "Note" in Section 1.1(L) of the Loan Agreement is
deleted in its entirety and substituted with the following:
"(L) "NOTE": the Promissory Note dated May 29, 1997, in the principal
amount of $25,000,000.00, executed and delivered by Borrower to Bank in
evidence of the Credit (as defined in Section 2.1)."
Borrower shall execute a Promissory Note dated May 29, 1997, which shall have a
maturity date of May 28, 1998, and which shall be subject to the payment terms
described therein.
2. The definition of "Termination Date" in Section 1.1(N) of the Loan
Agreement is deleted in its entirety and substituted with the following:
"(N) "TERMINATION DATE": May 28, 1998, or such later date to which it
may be extended pursuant to Section 7.12."
3. The Loan Agreement is, and shall remain, the binding obligation of
Borrower, and all of the provisions, terms, stipulations, conditions, covenants
and powers contained therein shall stand and remain in full force and effect,
except only as the same are herein and hereby expressly and specifically varied
or amended, and the same are hereby ratified and confirmed, and Bank reserves
unto itself all rights and privileges granted thereunder.
4. Borrower hereby reaffirms all representations, warranties, covenants and
agreements recited in the Loan Agreement as of the date hereof, and the same are
hereby adopted as representations, warranties, covenants and agreements of
Borrower herein. Borrower further represents and warrants that it is not in
default under any of its obligations under the Loan Agreement and that it has
full power and authority to execute and deliver this Amendment, and that the
execution and delivery hereof has been duly authorized, and that all necessary
and proper acts have been performed or taken.
5. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW
SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT BORROWER AND BANK FROM
MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS BORROWER AND BANK REACH
COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND
EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN BORROWER AND BANK, EXCEPT AS
BORROWER AND BANK MAY LATER AGREE IN WRITING TO MODIFY IT.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
BORROWER:
EXPRESS SCRIPTS, INC.
By: /S/ KURT D. BLUMENTHAL
Title: Vice President of Finance
BANK:
MERCANTILE BANK
NATIONAL ASSOCIATION
By: /S/ MARILYN LEMONDS
Title: Vice President
