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 March 31, 1998.
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 April 30, 1998: 9,270,820 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 (unaudited)
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 16
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 17
Signatures 18
Index to Exhibits 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
EXPRESS SCRIPTS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
MARCH 31 DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997
<S> <C> <C>
- --------------------------------- ---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $84,556 $64,155
Short term investments 59,272 57,938
Receivables, less allowance for doubtful
accounts of $5,460 and $4,802 respectively
Unrelated parties 180,100 194,061
Related parties 19,859 16,230
Inventories 26,721 28,935
Deferred taxes and prepaid expenses 3,848 2,649
--------------- ----------------
Total current assets 374,356 363,968
Property and equipment, less accumulated depreciation and amortization 27,850 26,821
Other assets 12,538 11,719
--------------- ----------------
Total assets $414,744 $402,508
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Claims payable $139,948 $153,051
Accounts payable 23,849 17,979
Accrued expenses 35,327 26,876
--------------- ----------------
Total current liabilities 199,124 197,906
--------------- ----------------
Deferred rents and taxes 690 901
--------------- ----------------
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,
9,269,000 and 9,238,000 shares issued and outstanding, respectively 93 93
Class B Common Stock, $.01 par value, 22,000,000 shares authorized,
7,510,000 shares issued and outstanding 75 75
Additional paid-in capital 108,246 106,901
Foreign currency translation adjustments (21) (27)
Retained earnings 113,526 103,648
--------------- ----------------
221,919 210,690
Class A Common Stock in treasury at cost,
237,500 shares (6,989) (6,989)
--------------- ----------------
Total stockholders' equity 214,930 203,701
--------------- ----------------
Total liabilities and stockholders' equity $414,744 $402,508
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
<S> <C> <C>
- ------------------------------------- ----------------- ---------------
Net revenues $371,362 $261,990
----------------- -----------------
Cost and expenses:
Cost of revenues 338,492 237,298
Selling, general & administrative 18,826 13,298
----------------- -----------------
357,318 250,596
----------------- -----------------
Operating income 14,044 11,394
----------------- -----------------
Other income (expense):
Interest income 2,138 1,259
Interest expense (14) (18)
----------------- -----------------
2,124 1,241
----------------- -----------------
Income before income taxes 16,168 12,635
Provision for income taxes 6,290 4,994
----------------- -----------------
Net income $9,878 $7,641
================= =================
Basic earnings per share $0.60 $0.47
================= =================
Weighted average number of common shares out-
standing during the period - Basic EPS 16,527 16,267
================= =================
Diluted earnings per share $0.59 $0.46
================= =================
Weighted average number of common shares out-
standing during the period - Diluted EPS 16,790 16,436
================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<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>
- -------------- --------- ---------- ---------- ---------- ----------- -------------------------------------
Balance at December 31, 1997 9,238 7,510 $93 $75 $106,901 ($27) $103,648 ($6,989)
Net income for three months ended
March 31, 1998 9,878
Foreign currency translation
adjustments 6
Tax benefit relating to employee stock
options 662
Exercise of stock options 31 683
--------- --------- ---------- ---------- ----------- ------------- ----------- -----------
Balance at March 31, 1998 9,269 7,510 $93 $75 $108,246 ($21) $113,526 ($6,989)
========= ========= ========== ========== =========== ============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 1998 1997
<S> <C> <C>
- -------------- ----------------- -----------------
Cash flows from operating activities:
Net income $9,878 $7,641
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Depreciation and amortization 2,396 2,087
Tax benefit relating to employee stock options 662 22
Changes in operating assets and liabilities:
Receivables 10,332 (24,087)
Inventories 2,214 (10,167)
Prepaids expenses and other assets (2,267) 1,840
Claims payable (13,103) 15,399
Accounts payable and accrued expenses 14,110 1,293
----------------- -----------------
Net cash provided by (used in) operating
activities 24,222 (5,972)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (3,176) (6,083)
Short term investment (1,334) (450)
----------------- -----------------
Net cash (used in) investing activities (4,510) (6,533)
----------------- -----------------
Cash flows from financing activities:
Acquisition of treasury stock - (1,739)
Exercise of stock options 683 74
----------------- -----------------
Net cash provided by (used in) financing activities 683 (1,665)
----------------- -----------------
Effect of foreign currency translation adjustments 6 (7)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 20,401 (14,177)
Cash and cash equivalents at beginning of period 64,155 25,211
----------------- -----------------
Cash and cash equivalents at end of period $84,556 $11,034
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<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 included in the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1997, as filed with the Securities and Exchange
Commission on March 26, 1998.
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 March 31, 1998, the Consolidated Statement of Operations for the three
months ended March 31, 1998, and 1997, the Consolidated Statement of Changes in
Stockholders' Equity for the three months ended March 31, 1998, and the
Consolidated Statement of Cash Flows for the three months ended March 31, 1998,
and 1997.
NOTE 2 - EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("FAS 128") requires a presentation of both "Basic" earnings per share and
"Diluted" earnings per share. "Basic" earnings per share computes per share
earnings using the weighted average number of common shares outstanding during
the period, while "Diluted" earnings per share computes per share earnings in
the same manner as "Basic" earnings per share plus the number of additional
common shares that would have been outstanding for the period if the dilutive
potential common shares had been issued. The only difference between the number
of weighted average shares used in the basic and diluted calculation is stock
options granted by the Company using the "treasury stock" method.
NOTE 3 - SUBSEQUENT EVENTS
On April 1, 1998 the Company announced that it had consummated the
acquisition of ValueRx, the PBM business of Columbia/HCA Healthcare Corporation
("Columbia"). Under the terms of the agreement, the Company acquired the stock
of Value Health, Inc. and Managed Prescription Network, Inc., the sole assets of
which at closing were various subsidiaries each now or formerly conducting
business as a PBM, including ValueRx Pharmacy Program, Inc., for approximately
$445 million in cash, subject to certain post-closing adjustments. The Company
used approximately $100 million of its own cash and financed the remainder of
the purchase price and acquisition related expenses through a credit facility.
The acquisition will be accounted for as a purchase.
On April 1, 1998, in connection with the acquisition, the Company executed
a $440 million credit facility with a bank syndicate agented by Bankers Trust
Company, consisting of a $360 million term loan facility and an $80 million
revolving loan. The agreement is for a period of five years. The provisions of
this loan require quarterly interest payments and, beginning in April 1999,
semi-annual principal payments. The interest rate is based on a spread (the
"Credit Rate Spread") over several LIBOR or base rate options, depending upon
the Company's ratio of EBITDA to debt. However, the initial spread is fixed at
125 basis points for the first two quarters. The credit agreement contains
customary financial covenants. In addition, the Company is required to pay an
annual fee of 30 basis points, payable in quarterly installments, on the unused
portion of the revolving loan. As a result of the new credit agreement, the
Company canceled its $25 million line of credit with Mercantile Bank of St.
Louis on March 31, 1998.
On April 3, 1998 the Company entered into an interest rate swap with the
First National Bank of Chicago agreeing to receive a floating rate of interest
on the amount of the term loan facility based on a three month LIBOR rate in
exchange for payment of a fixed rate of interest of 5.88%. The notional amount
of the swap amortizes in conjunction with the principal balance of the term
loan. As a result, the Company has, in effect, converted its variable rate term
debt to fixed rate debt at 5.88% for the entire term of the term loan, plus the
Credit Rate Spread. On the date the Company entered into the interest rate swap
agreement, the three month LIBOR rate was 5.6875%.
NOTE 4 - SEGMENT REPORTING
In June 1997 the FASB issued Statement of Financial Accounting Standards
Statement 131 "Disclosures about Segments of an Enterprise and Related
Information ("FAS 131")". The statement requires that the Company report certain
information if specific requirements are met about operating segments of the
Company including information about services, geographic areas of operation and
major customers. FAS 131 is effective for years beginning after December 15,
1997. Initially, the Company believes that the majority of its operations will
be in one reportable segment and is continuing the analysis of FAS 131 on its
annual 1998 and future disclosure requirements.
<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; THE IMPACT OF INCREASES IN HEALTH CARE COSTS AND
UTILIZATION PATTERNS; RISKS ASSOCIATED WITH THE DEVELOPMENT OF NEW PRODUCTS;
RISKS ASSOCIATED WITH THE CONSUMMATION OF ACQUISITIONS, INCLUDING THE ABILITY TO
SUCCESSFULLY INTEGRATE THE OPERATIONS OF ACQUIRED BUSINESSES WITH THE EXISTING
OPERATIONS OF THE COMPANY AND RISKS INHERENT IN THE ACQUIRED ENTITIES
OPERATIONS; AND OTHER RISKS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE COMMISSION. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO RELEASE
PUBLICLY ANY REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
COMPANY OVERVIEW
The Company primarily derives its revenues from the sale of pharmacy
benefit management ("PBM") services in the United States and Canada. The
Company's net revenues include administrative and dispensing fees plus
ingredient cost of pharmaceuticals dispensed to members of health benefit plans
sponsored by the Company's clients from pharmacies participating in one of the
retail pharmacy networks maintained by the Company or by one of the Company's
mail service pharmacies. Where the Company only administers the contracts
between its clients and their own retail pharmacy networks, or where the Company
dispenses pharmaceuticals from its mail service pharmacies that are supplied by
one of the Company's clients, the Company records as net revenue only the
administrative or dispensing fees it receives from its activities. Additionally,
the Company provides a wide range of other services to its customers, which
include (i) the sale of pharmaceuticals for and the provision of infusion
therapy services through its IVTx division ("IVTx"), (ii) the sale of informed
decision counseling services through its Express Health LineSM division, (iii)
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, and (iv) the sale of
eyeglasses and contact lenses and related administrative fees through its
Express Scripts Vision Corporation subsidiary ("ESVC").
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 March
31, 1998 compared to 1997.
<TABLE>
<CAPTION>
Percentage of Net Revenues Percentage Increase
------------------------------------ ------------------------------------
Three Months Ended Three Months Ended
March 31 March 31, 1998
------------------------------------
1998 1997 Over 1997
<S> <C> <C> <C>
-------------------------------------------------------------------------
Net revenues:
Unrelated clients 82.4% 82.7% 41.29%
Related clients (1) 17.6 17.3 43.93
-----------------------------------
Total net revenues 100.0 100.0 41.75
-----------------------------------
Cost and expenses:
Cost of revenues 91.1 90.6 42.64
Selling, general & administrative 5.1 5.1 41.57
-----------------------------------
96.2 95.7 42.59
-----------------------------------
Operating income 3.8 4.3 23.26
Other income, net 0.6 0.5 71.15
-----------------------------------
Income before income taxes 4.4 4.8 27.96
Provision for income taxes 1.7 1.9 25.95
-----------------------------------
Net income 2.7% 2.9% 29.28%
===================================
<FN>
(1) Related clients consist of NYLCare Health Plans, Inc., and its
subsidiaries, which are being sold to Aetna U.S. HealthCare, Inc. (an unrelated
party). See "Other Matters" below.
</FN>
</TABLE>
FIRST QUARTER ENDED MARCH 31, 1998 COMPARED TO 1997
NET REVENUES. Total net revenues for the first quarter of 1998 increased
$109,372,000, or 41.8%, compared to the first quarter of 1997. PBM revenues
increased $105,100,000, or 41.6%, for the period, primarily as a result of a
41.1% increase in net revenues from the Company's claims processing services and
mail pharmacy services operations, compared to the first quarter of 1997. The
primary reason for this increase was a $71,592,000, or 40.1%, increase in
revenues from retail pharmacy claims processed reflecting an 11.8% increase in
the number of claims processed and a 25.2% increase in average revenue per
retail pharmacy claim, compared to 1997. The increase in average revenue per
retail pharmacy claim processed is due to two factors: (1) a larger number of
customers using pharmacy networks established by the Company (for which the drug
ingredient costs, dispensing fee and administrative fees are included as
revenues), rather than networks established by its customer (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, increases
in product acquisition costs for existing drugs, and new drugs introduced into
the marketplace. Revenue from the Company's mail pharmacy services increased
$31,927,000, or 43.6%, reflecting a 20.6% increase in the number of
prescriptions dispensed, and a 19.1% increase in the average revenue per
prescription dispensed. The increase in average revenue per prescription
dispensed by the Company's mail service pharmacies is primarily the result of:
(1) higher drug ingredient costs attributable to the foregoing factors; and (2)
the termination of "inventory replacement programs" maintained for two large
clients. Pursuant to these programs, the customer would provide drug inventory
to replenish drugs used by the Company to fill mail service prescriptions and
the Company included only its dispensing fee as net revenue. In the first
quarter of 1998, all mail pharmacy clients utilized the Company's standard
program in which the Company purchases the inventory used to fill the
prescriptions, and therefore includes the ingredient cost as well as the
dispensing fee in net revenue. This change had the effect of increasing both the
mail pharmacy services revenue and cost of revenue in the first quarter of 1998
compared to 1997, but there was no effect on the Company's reported net income
for the first quarter of 1998 from the conversion to the standard program.
Increases in revenue from the factors cited herein were partially offset by
lower pricing offered by the Company in response to continued competitive
pressures.
The increase in the number of retail pharmacy claims processed and the
number of mail service pharmacy prescriptions dispensed reflects a 9.2% increase
in the number of members served to approximately 11.9 million members at March
31, 1998 from approximately 10.9 million members at March 31, 1997. The
percentage increase in mail service revenue for the quarter exceeded the
percentage increase in claims processing revenues as had been expected. This was
the result of the discontinuation of the product replenishment program as
mentioned in the previous paragraph, and the mail service benefit being used
more frequently by a larger number of members. Management believes this trend
will continue in 1998. Of the Company's net revenues from PBM services in 1998,
16.6% was attributable to services provided to members of HMOs owned or managed
by NYLCare Health Plans, Inc. ("NYLCare") or insurance policies administered by
NYLCare.
Net revenues from the Company's non-PBM business units increased 46.1%,
compared to 1997, as a result of the growth in the number of members and/or
clients who receive these services. Of the Company's net revenues for non-PBM
services, 46.9% was for services provided to members of HMOs owned or managed by
NYLCare or insurance policies administered by NYLCare.
COST OF REVENUES. Cost of revenues for the first quarter of 1998 increased
$101,194,000, or 42.6%, compared to the first quarter of 1997. The percentage
increase in cost of revenues was 0.8% greater than the increase in revenues,
thus gross profit margins decreased. For retail pharmacy claims processing
services, the product ingredient cost component of cost of revenues, as a
percentage of net revenues, increased by 1.6% primarily due to the increase in
utilization of the Company's retail pharmacy networks, as opposed to those
arranged by its clients, and to lower prices offered in response to competitive
pressures in the marketplace. For mail pharmacy services, the product ingredient
costs, as a percentage of net revenues, increased by 2.6%, primarily due to the
discontinuation of the product replenishment program. The Company also
experienced an overall increase, as a percentage of net revenues, in the fees
received from drug manufacturers in connection with the Company's drug
purchasing and formulary management programs. The cost of revenue for the
non-PBM services increased 57.0%, principally due to costs related to the
continued expansion of these operations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $5,528,000, or 41.6%, for the first quarter of 1998 compared
to 1997, but, as a percentage of net revenues, remained constant at 5.1% for the
first quarter of 1998, as it was for the first quarter of 1997. The primary
reason for the increase was the additional expenditures incurred to expand the
Company's marketing capabilities, together with added costs for site and
administrative support functions to enhance management of the pharmacy benefit.
The Company is continuing its commitment to expand its capability to provide for
future growth and enhance the level of service for its members.
OTHER INCOME, NET. Other income, net was $2,124,000 for the first quarter
of 1998 compared to $1,241,000 for 1997, primarily as a result of higher
interest earned on larger invested cash balances as compared to the first
quarter of 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes for the quarter
ended March 31, 1998, was $6,290,000 compared to $4,994,000 in the prior year.
The effective tax rate was 38.9% in 1998 compared to 39.5% for 1997.
NET INCOME. As a result of the foregoing, net income for the quarter ended
March 31, 1998, increased $2,237,000, or 29.3%, compared to 1997.
EARNINGS PER SHARE ("EPS"). The Company reported basic EPS of $0.60 in the
first quarter of 1998 compared to $0.47 in 1997, a 27.7% increase. The weighted
average number of shares used in the calculation was 16,527,000 in 1998 and
16,267,000 in 1997. Diluted EPS was $0.59 in the first quarter of 1998 compared
to $0.46 for 1997, a 28.3% increase. The weighted average number of shares used
in the diluted EPS calculation was 16,790,000 in 1998 and 16,436,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's growth resulted in a continued increase in the level of cash
flow from operations. Cash flow from operations totaled $24.2 million in the
first quarter of 1998 compared to a negative $6.0 million in the first quarter
of 1997. This is a direct result of greater emphasis on collection of accounts
receivable balances and management of inventories and payables to vendors and
retail pharmacy providers. Management expects to primarily fund its future
anticipated capital expenditures and other normal operating cash needs with
operating cash flow. Excess funds are currently invested in overnight or
short-term investments and are available for general corporate purposes and for
strategic acquisitions or affiliations as discussed below.
During the quarter, the Company negotiated a $440 million credit facility
with a bank syndicate agented by Bankers Trust Company. The five-year agreement
became effective April 1, 1998, and includes a $360 million term loan facility
and an $80 million revolving loan facility; the term loan proceeds were utilized
to consummate the acquisition of Value Health, Inc. and Managed Prescription
Network, Inc. (collectively, "ValueRx") from Columbia/HCA Healthcare Corporation
("Columbia"; see Other Matters below) on April 1, 1998. The provisions of this
credit facility require quarterly interest payments and, beginning in April
1999, semi-annual principal payments. The interest rate is based on a spread
(the "Credit Rate Spread") over several LIBOR or base rate options, depending
upon the Company's ratio of EBITDA to debt. However, the initial spread is fixed
at 125 basis points for the first two quarters. The credit agreement also
contains customary financial covenants. In addition, the Company is required to
pay an annual fee of 30 basis points, payable in quarterly installments, on the
unused portion of the revolving loan. As a result of the new credit agreement,
the Company canceled its $25 million line of credit with Mercantile Bank of St.
Louis on March 31, 1998.
To alleviate interest rate volatility in connection with the
above-described credit facility, the Company entered into an interest rate swap
arrangement, effective April 3, 1998, with the First National Bank of Chicago
agreeing to receive a floating rate of interest on the amount of the term loan
facility based on a three month LIBOR rate in exchange for payment of a fixed
rate of interest of 5.88%. The notional amount of the swap amortizes in
conjunction with the principal balance of the term loan. As a result, the
Company has, in effect, converted its variable rate term debt to fixed rate debt
at 5.88% for the entire term of the term loan, plus the Credit Rate Spread.
As of March 31, 1998, 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, although no repurchases occurred
during the first quarter of 1998. The Company's Board of Directors approved the
repurchase of up to 850,000 shares, and placed no limit on the duration of the
program. Future purchases, if any, will be in such amounts and at such times as
the Company deems appropriate based upon prevailing market and business
conditions, subject to certain restrictions in the credit agreement described
above.
The Company has reviewed and currently intends to continue to review
potential acquisitions and affiliation opportunities (see Other Matters). The
Company believes that available cash resources, bank financings or the issuance
of additional common stock could be used to finance such acquisitions or
affiliations. The Company consummated the acquisition of ValueRx on April 1,
1998; however, there can be no assurance the Company will make other
acquisitions or affiliations in 1998.
OTHER MATTERS
PacifiCare Health Systems, Inc. ("PacifiCare") completed its acquisition of
FHP, Inc. during 1997. The Company's contract to provide pharmacy benefit
services to FHP's members expired December 31, 1997, but the Company continued
processing retail pharmacy claims for FHP on a month-to-month basis through
April 1, 1998 as PacifiCare transitioned the business to its wholly-owned PBM.
As of January 1, 1998, approximately 900,000 lives were transferred to
PacifiCare's PBM. Another 900,000 lives were transferred by April 1, 1998. While
FHP was the Company's largest single client in terms of membership, its
contribution to the 1997 net revenues was less than 2.25% (due to the fact that
the Company only recorded the fees related to administering FHP's network
prescriptions and, prior to May 1, 1997, dispensing mail pharmacy
prescriptions), and its contribution to the Company's earnings was substantially
less than the relationship of FHP membership to total membership. As of April 1,
1998 the Company reported membership of 12.1 million members, a reduction of
approximately 200,000 members from the 12.3 million members reported on January
1, 1998. The net reduction takes into account the loss of the FHP lives, offset
in part by new members from clients whose service began after January 1, 1998.
The Company previously 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, for 640,000 registered Indians and Inuit in Canada. These services are
now expected to commence on October 1, 1998 and run through September 30, 2003.
In June 1997 the FASB issued Statement of Financial Accounting Standards
Statement 131 "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). The statement requires that the Company report certain
information if specific requirements are met about operating segments of the
Company including information about services, geographic areas of operation and
major customers. FAS 131 is effective for years beginning after December 15,
1997. Initially, the Company believes that the majority of its operations will
be in one reportable segment and is continuing to analyze the impact of FAS 131
on its annual 1998 and future disclosure requirements.
On March 16, 1998 the Company announced that, in connection with the sale
by New York Life Insurance Company ("NYL") of NYLCare to Aetna U.S. HealthCare,
Inc. ("Aetna"), Aetna and the Company reached an agreement to extend the
Company's HMO PBM and infusion therapy agreements through December 31, 2003. The
existing contract pricing is effective through December 31, 1999, and thereafter
certain pricing adjustments (which the Company believes reflect an appropriate
market price) will be instituted for the year 2000 and subsequent periods. The
Company will continue providing PBM services to 1.4 million HMO members after
the acquisition is consummated, which is comparable to the NYLCare HMO
membership base currently served by the Company. The infusion therapy agreements
are extended under their current terms until December 31, 2000, and thereafter
limited price adjustments may take effect under certain circumstances. The
existing agreements for managed vision care and informed decision counseling
will continue through December 31, 1999. The Company will also continue to
provide PBM services to members of the NYLCare indemnity programs until such
members are converted to new health insurance policies. In connection with the
Aetna arrangement, the Company and NYL have reached an agreement in principle
whereby NYL may make certain transition-related payments to the Company in
1999. This agreement is subject to the approval of the Audit Committee of the
Company's Board of Directors. The overall impact of this arrangement on earnings
per share is not expected to be material in 1998 or 1999.
On April 1, 1998, the Company announced that it had consummated the
acquisition of ValueRx from Columbia, in accordance with the terms of the Stock
Purchase Agreement by and among Columbia, VH Holdings, Inc., Galen Holdings,
Inc. and the Company, dated as of February 19, 1998 (see Exhibit 2.1 and 2.2
hereto). Specifically, the Company acquired the stock of Value Health, Inc. and
Managed Prescription Network, Inc., the sole assets of which at closing were
various subsidiaries each now or formerly conducting business as a PBM,
including ValueRx Pharmacy Program, Inc., for approximately $445 million in
cash, subject to certain post-closing adjustments. The Company used
approximately $100 million of its own cash and financed the remainder of the
purchase price and certain acquisition related expenses through the five year
credit facility discussed above. In 1997, the unaudited combined revenue of the
two companies was in excess of $2.7 billion. The acquisition will be accounted
for as a purchase.
YEAR 2000 INFORMATION SYSTEMS ISSUES
The Company's operations rely heavily on information systems technology. In
1995, the Company began addressing the "Year 2000" issue which, in short, refers
to the inability of certain computer systems to properly recognize calendar
dates beyond December 31, 1999. This arises as a result of systems having been
programmed with two-digits rather than four-digits to define the applicable year
in order to conserve computer storage space, reduce the complexity of
calculations and produce better performance. The two-digit system may cause
computers to interpret the years "00" as "1900" rather than as "2000", which may
cause system failures or produce incorrect results when dealing with
date-sensitive information beyond the year 1999.
The Company has performed a self-assessment and has developed a compliance
plan that addresses (i) internally developed application software, (ii) vendor
developed application software, (iii) operating system software, (iv) utility
software, (v) vendor/trading partner-supplied files, (vi) externally provided
data or transactions, and (vii) adherence to applicable industry standards.
Progress in each area is monitored and management reports are given
periodically. In addition, all new internally developed software is being
created to be Year 2000 compliant. Management expects all critical "Express
Scripts" systems to be Year 2000 compliant by mid-1999, and is still evaluating
the "ValueRx" systems which the Company recently acquired.
In addressing the Year 2000 issue, the Company will incur internal staff
costs as well as external consulting and other expenses related to
infrastructure enhancements necessary to prepare its systems for the new
century. Although the Company is still evaluating the overall costs associated
with the Year 2000 issue, which are being expensed as incurred, the Company does
not believe the costs associated therewith are or will be material to the
Company's results of operations or financial condition. In addition, the Company
believes that, with appropriate modifications to existing computer systems,
updates by vendors and trading partners, and conversion to new software in the
ordinary course of its business, the Year 2000 problem will not pose significant
operational problems for the Company. However, if such conversions are not
completed in a proper and timely manner by all affected parties, the Year 2000
issue could result in material adverse operational and financial consequences to
the Company, and there can be no assurance that the Company's efforts, or those
of vendors and trading partners, to address the Year 2000 issue will be
successful.
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals affect the Company's net revenues and cost of revenues. To date
the Company has been able to recover price increases from its clients under the
terms of its agreements. As a result, changes in pharmaceutical prices have not
had a significant adverse affect on the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
RECENT SALES OF UNREGISTERED SECURITIES
COVENTRY CORPORATION. On January 1, 1998, the Company issued a seven-year
Warrant to Coventry for the purchase of an additional 25,000 shares of the
Company's Class A Common Stock, exercisable at a price of $52.9088 per share
(90% of the fair market value of a share at the time the extension was entered
into by the parties), as an advance discount with respect to future charges to
be assessed against certain health benefit plans owned by Coventry under the
extension of the pharmaceutical benefit management agreement between the
parties. The aggregate discount is $146,968. The Warrant may be exercised in
whole or in part at any time prior to its expiration on January 1, 2005. No
underwriters were involved in the issuance. The issuance was exempt from
registration under the Securities Act of 1933 pursuant to Rule 506 and Section
4(2) thereof, based on, among other factors, the single purchaser of the
securities, the level of sophistication and financial resources of the
purchaser, the type and amount of information available to the purchaser and the
market generally, and the lack of any general solicitation or advertising in
connection with the sale.
EMPLOYEE STOCK OPTIONS. During the period January 1, 1998 to March 31,
1998, the Company issued 91,000 options (the "Options") to acquire an equivalent
number of shares of its Class A Common Stock (the "Common Stock") to certain of
its key employees pursuant to the Company's Amended and Restated 1992 Stock
Option Plan and its Amended and Restated 1994 Stock Option Plan (collectively,
the "Plans"; these Options were included in the number disclosed by the Company
in its Annual Report of Form 10-K filed with the Commission on March 27, 1998).
The Compensation Committee of the Company's Board of Directors (the "Committee")
administers the Plans. As a condition to receipt of the Options, the Committee
required that each recipient execute and deliver an agreement prohibiting the
employee from competing with the company or soliciting the employment of the
Company's employees for specified periods after most terminations of the
employee's employment with the Company. The exercise prices of the Options were
equal to the market values on their respective dates of grant, as described in
the Plans. The Committee has discretion to determine the vesting schedule for
each Option grant. Generally, the Committee has made grants that become
exercisable in equal amounts over five years, and in most cases the employee
must be employed by the Company at the time of vesting to exercise their
Options. Reference is made to the text of the Plans, which are filed with the
Commission, for detailed information on the terms thereof. The Option issuances
were exempt from registration under the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof and Rule 506 of Regulation D thereunder, based
on, among other factors, the limited number of the Option acquirers, the type
and amount of information available to the Option acquirers, and the absence of
any general solicitation or advertising in connection with the issuance.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. See Index to Exhibits on page 18.
(b) REPORTS ON FORM 8-K.
(i) On February 24, 1998, the Company filed a
current Report on Form 8-K regarding a press
release issued on behalf of the Company.
(ii) On March 2, 1998, the Company filed a
current Report on Form 8-K regarding its
execution of a Stock Purchase Agreement with
Columbia/HCA Healthcare Corporation
("Columbia"), VH Holdings, Inc. and Galen
Holdings, Inc., pursuant to which the
Company would acquire ValueRx, the pharmacy
benefit management business of Columbia.
(iii) On March 26, 1998, the Company filed a
current Report on Form 8-K regarding a press
release issued on behalf of the Company.
<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: May 14, 1998 By: /s/ Barrett A. Toan
Barrett A. Toan, President and
Chief Executive Officer
Date: May 14, 1998 By: /s/ George Paz
George Paz, Senior Vice
President and Chief
Financial Officer
<PAGE>
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
EXHIBIT
NUMBER EXHIBIT
2.1 Stock Purchase Agreement by and among Columbia/HCA Healthcare
Corporation, VH Holdings, Inc., Galen Holdings, Inc. and Express
Scripts, Inc., dated as of February 19, 1998, and certain related
Schedules, incorporated by reference to Exhibit No. 2.1 to the
Company's Current Report on Form 8-K filed March 2, 1998.
2.2 First Amendment to Stock Purchase Agreement by and among Columbia/HCA
Healthcare Corporation, VH Holdings, Inc., Galen Holdings, Inc. and
Express Scripts, Inc., dated as of March 31, 1998, and related
Exhibits incorporated by reference to Exhibit No. 2.1 to the
Company's Current Report on Form 8-K filed April 14, 1998.
3.1 Certificate of Incorporation, incorporated by reference to Exhibit
No. 3.1 to the Company's Registration Statement on Form S-1 filed
June 9, 1992 (No. 33-46974) (the "Registration
Statement").
3.2 Certificate of Amendment of the Certificate of Incorporation of the
Company, incorporated by reference to Exhibit No.10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30, 1994.
3.3 Second Amended and Restated Bylaws, incorporated by reference to
Exhibit No. 3.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1997.
4.1 Form of Certificate for Class A Common Stock,incorporated by reference
to Exhibit No. 4.1 to the Registration Statement.
27.1* Financial Data Schedule (provided for the information of the U.S.
Securities and Exchange Commission only).
- ------------------------
* Filed herein.
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