SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________
TO _____________.
Commission File Number: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1420563
(State or other jurisdiction (I.R.S. employer identification
of incorporation or organization) 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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation of S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by
non-affiliates as of March 1, 1999, was $1,207,562,195 based on 18,158,830 such
shares held on such date by non-affiliates and the last sale price for the Class
A Common Stock on such date of $66.50 as reported on the Nasdaq National Market.
Solely for purposes of this computation, the Registrant has assumed that all
directors and executive officers of the Registrant and NYLIFE HealthCare
Management, Inc. are affiliates of the Registrant.
Common stock outstanding as of March 1, 1999: 18,206,130 Shares Class A
15,020,000 Shares Class B
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive proxy
statement for the Registrant's 1999 Annual Meeting of Stockholders, which is
expected to be filed with the Securities and Exchange Commission not later than
120 days after the registrant's fiscal year ended December 31, 1998.
PART I
THE COMPANY
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
INFORMATION THAT WE HAVE INCLUDED OR INCORPORATED BY REFERENCE IN THIS
ANNUAL REPORT ON FORM 10-K, AND INFORMATION THAT MAY BE CONTAINED IN OUR OTHER
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") AND OUR PRESS
RELEASES OR OTHER PUBLIC STATEMENTS, CONTAIN OR MAY CONTAIN FORWARD-LOOKING
STATEMENTS. THESE FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, STATEMENTS
OF OUR PLANS, OBJECTIVES, EXPECTATIONS OR INTENTIONS, INCLUDING AS TO YEAR 2000
ISSUES.
OUR FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED OR SUGGESTED IN ANY
FORWARD-LOOKING STATEMENTS. WE DO NOT UNDERTAKE ANY OBLIGATION TO RELEASE
PUBLICLY ANY REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE TO OCCUR
INCLUDE, BUT ARE NOT LIMITED TO:
-RISKS ASSOCIATED WITH THE CONSUMMATION OF ACQUISITIONS, INCLUDING THE
ABILITY TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF ACQUIRED BUSINESSES WITH OUR
EXISTING OPERATIONS, CLIENT RETENTION ISSUES, AND RISKS INHERENT IN THE ACQUIRED
ENTITIES OPERATIONS
-RISKS ASSOCIATED WITH OBTAINING FINANCING AND CAPITAL
-RISKS ASSOCIATED WITH OUR ABILITY TO MANAGE GROWTH COMPETITION
-INCLUDING PRICE COMPETITION, COMPETITION IN THE BIDDING AND PROPOSAL
PROCESS AND OUR ABILITY TO CONSUMMATE CONTRACT NEGOTIATIONS WITH PROSPECTIVE
CLIENTS
-THE POSSIBLE TERMINATION OF CONTRACTS WITH CERTAIN KEY CLIENTS OR
PROVIDERS
-THE POSSIBLE TERMINATION OF CONTRACTS WITH CERTAIN KEY MANUFACTURERS, OR
CHANGES IN PRICING, DISCOUNT, REBATE OR OTHER PRACTICES OF PHARMACEUTICAL
MANUFACTURERS
-ADVERSE RESULTS IN LITIGATION
-ADVERSE RESULTS IN REGULATORY MATTERS, THE ADOPTION OF ADVERSE LEGISLATION
OR REGULATIONS, MORE AGGRESSIVE ENFORCEMENT OF EXISTING LEGISLATION OR
REGULATIONS, OR A CHANGE IN THE INTERPRETATION OF EXISTING LEGISLATION OR
REGULATIONS
-DEVELOPMENTS IN THE HEALTH CARE INDUSTRY, INCLUDING THE IMPACT OF
INCREASES IN HEALTH CARE COSTS, CHANGES IN DRUG UTILIZATION PATTERNS AND
INTRODUCTIONS OF NEW DRUGS
-RISKS ASSOCIATED WITH THE "YEAR 2000" ISSUE
-DEPENDENCE ON KEY MEMBERS OF MANAGEMENT
-OUR RELATIONSHIP WITH NEW YORK LIFE INSURANCE COMPANY, WHICH POSSESSES
VOTING CONTROL OF THE COMPANY
-OTHER RISKS DESCRIBED FROM TIME TO TIME IN OUR FILINGS WITH THE SEC
THESE AND OTHER RELEVANT FACTORS, INCLUDING ANY OTHER INFORMATION INCLUDED
OR INCORPORATED BY REFERENCE IN THIS REPORT, AND INFORMATION THAT MAY BE
CONTAINED IN OUR OTHER FILINGS WITH THE SEC, SHOULD BE CAREFULLY CONSIDERED WHEN
REVIEWING ANY FORWARD-LOOKING STATEMENT. THE OCCURRENCE OF ANY OF THE FOLLOWING
RISKS COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
FAILURE TO INTEGRATE VALUERX AND DPS COULD ADVERSELY AFFECT OUR BUSINESS
On April 1, 1998, we completed our first major acquisition by acquiring
ValueRx, the pharmacy benefit management ("PBM") business of Columbia/HCA
Healthcare Corporation, for approximately $460 million in cash. This transaction
significantly increased our membership base and the complexity of our
operations. In the second quarter of 1999, we expect to complete our acquisition
of Diversified Pharmaceutical Services, Inc. and Diversified Pharmaceutical
Services (Puerto Rico), Inc. (collectively, "DPS") from SmithKline Beecham
Corporation and one of its affiliates for $700 million in cash. Consummation of
the transaction is subject to customary closing conditions, and we cannot
provide any assurance that all such conditions will be satisfied such that the
transaction may be consummated. If consummated, the transaction will
approximately double our membership base and further increase the complexity of
our operations. In light of both acquisitions, we have developed and, in the
case of ValueRx, begun to implement, an integration plan to address items such
as:
-retention of key employees
-consolidation of administrative and other duplicative functions
-coordination of sales, marketing, customerservice and clinical functions
-systems integration
-new product and service development
-client retention and other items
While we have achieved many of our integration goals to date with respect
to the acquisition of ValueRx, certain significant integration challenges
remain, including the complete integration of our information technology
systems. We cannot provide any assurance that our integration plan will
successfully address all aspects of our operations, or that we will continue to
achieve our integration goals. In the case of DPS, we cannot provide any
assurance that our integration plan will address all relevant aspects of DPS's
business or that we will be able to implement our integration plan successfully.
In addition, we assumed a certain level of client retention when deciding to
purchase ValueRx and DPS. Many clients have relatively short-term contracts, and
we cannot provide any assurance that we will be able to achieve our client
retention targets. Finally, although we conducted an extensive investigation in
evaluating our acquisitions of ValueRx and DPS, it is possible that we failed to
uncover or appropriately address material problems with ValueRx's or DPS's
operations or financial condition, or failed to discover contingent liabilities.
Any of the foregoing could materially adversely affect our results of operations
or financial condition.
FAILURE TO OBTAIN FINANCING OR CAPITAL COULD ADVERSELY AFFECT OUR BUSINESS
Our ability to consummate the DPS transaction is dependent upon, among
other things, our securing financing of approximately $1.1 billion, consisting
of an $800 million term loan facility and a $300 million revolving credit
facility, for which we have obtained a commitment from Credit Suisse First
Boston ("CSFB"). This new credit facility is intended to replace our existing
$440 million facility with Bankers Trust Company. The commitment for this new
facility is, however, subject to various conditions, which we believe are
customary for transactions of this kind, but we cannot provide any assurance
that all such conditions will be satisfied so that this credit facility can be
funded. We have also obtained a commitment from CSFB for a $150 million bridge
loan which may be needed to facilitate the closing of the acquisition. This
commitment is also subject to various conditions, which we again believe are
customary for transactions of this kind. However, we cannot provide any
assurance that all such conditions will be satisfied so that this bridge loan
facility will be funded.
We have recently filed a registration statement, which has not been
declared effective, with the SEC for a proposed primary offering of
approximately $350 million of Class A Common Stock. The proceeds of this
offering, which will be made only by means of a prospectus, would be used to
retire the bridge loan, if funded, and repay a portion of the debt outstanding
under the new credit facility, assuming it is also funded. Our ability to
complete the stock offering is subject to investors' willingness to purchase the
shares and other typical market risks, which we cannot control, as well as the
success of the Company. We cannot, therefore, provide any assurance that we will
be able to successfully complete this offering, and if we fail to complete the
offering as planned, our financial condition and future operating results could
be materially adversely affected. Again, a registration statement relating to
these securities has been filed with the Securities and Exchange Commission but
has not yet become effective. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement becomes effective.
This Report shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state. Once the
registration statement has been declared effective, a prospectus meeting the
requirements of Section 10 of the Securities Exchange Act of 1933, as amended,
may be obtained by contacting Thomas M. Boudreau, Esq., Express Scripts, Inc.,
14000 Riverport Drive, Maryland Heights, Missouri 63043.
FAILURE TO MANAGE AND MAINTAIN INTERNAL GROWTH COULD ADVERSELY AFFECT OUR
BUSINESS
We have experienced rapid internal growth over the past several years. Our
ability to effectively manage and maintain this internal growth will require
that we continue to improve our financial and management information systems as
well as identify and retain key personnel. We can provide no assurance that we
will successfully meet these requirements or that we will have access to
sufficient capital to do so. Our internal growth is also dependent upon our
ability to attract new clients and achieve growth in the membership base of our
existing clients. If we are unable to continue our client and membership growth,
our results of operations and financial position could be materially adversely
affected.
THE PBM INDUSTRY IS VERY COMPETITIVE
Pharmacy benefit management is a very competitive business. Our competitors
include several large and well-established companies which may have greater
financial, marketing and technological resources than we do. One major
competitor in the PBM business, Merck-Medco Managed Care, L.L.C., is owned by
Merck & Co., Inc., a large pharmaceutical manufacturer. Another major
competitor, PCS, Inc., is owned by Rite-Aid Corporation, a large retail pharmacy
chain. Both of these competitors may possess purchasing or other advantages over
us by virtue of their ownership. Consolidation in the PBM industry may also lead
to increased competition among a smaller number of large PBM companies.
Competition may also come from other sources in the future, including from
Internet-based providers such as Drugstore.com. We cannot predict what effect,
if any, these new competitors may have on the marketplace or on our business.
Over the last several years intense competition in the marketplace has
caused many PBMs, including us, to reduce the prices charged to clients for core
services and share a larger portion of the formulary fees and related revenues
received from drug manufacturers with clients. This combination of lower pricing
and increased revenue sharing has caused our operating margins to decline (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). We expect to continue marketing our services to larger clients,
who typically have greater bargaining power than smaller clients. This might
create continuing pressure on our margins. We can give no assurance that new
services provided to these clients will fully compensate for these reduced
margins.
FAILURE TO RETAIN KEY CLIENTS AND NETWORK PHARMACIES COULD ADVERSELY AFFECT
OUR BUSINESS
We currently provide PBM services to approximately 8,500 clients. Our
acquisitions have diversified our client base and reduced our dependence on any
single client. After giving effect to the pending DPS acquisition, our top 10
clients, measured as of January 1, 1999, but excluding United HealthCare
Corporation, represent approximately 27% of our total membership base, but no
single client would, on a combined pro forma basis, represent more than
approximately 6% of our membership base. Our contracts with clients generally do
not have terms of longer than three years and in some cases are terminable by
either party on relatively short notice. Our larger clients generally distribute
requests for proposals and seek bids from other PBM providers in advance of the
expiration of their contracts. If several of these large clients elect not to
extend their relationship with us, and we are not successful in generating sales
to replace the lost business, our future business and operating results could be
materially adversely affected. In addition, we believe the managed care industry
is undergoing substantial consolidation, and some of our managed care clients
could be acquired by another party that is not our client. In such case, the
likelihood such client would renew its PBM contract with us could be reduced.
Assuming consummation of the pending DPS acquisition, United HealthCare
Corporation will be our largest client, with approximately 10.5 million members.
DPS's contract with United HealthCare will expire on May 24, 2000, and United
HealthCare has indicated it will be moving to another provider at that time. In
our financial analysis of the DPS acquisition, we assumed United HealthCare
would not renew its contract. However, the termination of this contract may
still materially adversely affect our business and results of operations.
Our largest national provider network consists of more than 52,000 retail
pharmacies, which represent more than 99% of the retail pharmacies in the United
States. However, the top 10 retail pharmacy chains represent approximately 41%
of the 52,000 pharmacies, with these pharmacy chains representing even higher
concentrations in certain areas of the United States. Our contracts with retail
pharmacies are generally terminable by either party on relatively short notice.
If one or more of the top pharmacy chains elects to terminate its relationship
with us, our business could be materially adversely affected. In addition,
Rite-Aid Corporation recently acquired one of our major PBM competitors, PCS,
Inc. Other large pharmacy chains either own PBMs today or could attempt to
acquire a PBM in the future. Ownership of PBMs by retail pharmacy chains could
have material adverse effects on our relationships with such pharmacy chains and
on our business and results of operations.
LOSS OF CERTAIN RELATIONSHIPS WITH PHARMACEUTICAL MANUFACTURERS COULD ADVERSELY
AFFECT OUR BUSINESS
We maintain contractual relationships with numerous pharmaceutical
manufacturers which provide us with discounts, rebates or formulary fees. We
also provide various services for, or services which are funded by,
pharmaceutical manufacturers. These services include compliance, therapy
management and market research programs. These arrangements are generally
terminable by either party on relatively short notice. If several of these
arrangements are terminated or materially altered by the pharmaceutical
manufacturers, our business could be materially adversely affected. In addition,
discounts, rebates and formulary programs, as well as some of the services we
provide to the pharmaceutical manufacturers, have been the subject of debate in
federal and state legislatures and various other public forums. We cannot
predict the effect of any changes in existing laws or regulations or in their
interpretations, or the adoption of new laws or regulations, on our
relationships with pharmaceutical manufacturers.
Patents covering many brand name drugs that currently have substantial
market share will expire over the next several years, and generic drugs will be
introduced at prices that may substantially reduce the market share of these
brand name drugs. Unlike brand name drug manufacturers, manufacturers of generic
drugs do not generally offer incentive payments on their drugs to PBMs in the
form of discounts, rebates or formulary fees and programs. Although we expect
new drugs with patent protection to be introduced in the future, we can provide
no assurance such drugs will capture a significant share of the market such that
our incentive payment revenues will not be reduced.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY LITIGATION
Since 1993, retail pharmacies have filed over 100 separate lawsuits against
drug manufacturers, wholesalers and certain PBMs, challenging brand name drug
pricing practices under various state and federal antitrust laws. The plaintiffs
alleged, among other things, that the manufacturers had offered, and certain
PBMs had knowingly accepted, discounts and rebates on purchases of brand name
prescription drugs that violated the federal Sherman Act and the federal
Robinson-Patman Act. Some drug manufacturers settled certain of these actions,
including a Sherman Act case brought on behalf of a nationwide class of retail
pharmacies. The class action settlements generally provided for commitments by
the manufacturers in their discounting practices to retail pharmacies. The class
action was recently dismissed as to drug manufacturers and wholesalers who did
not settle. With respect to the cases filed by plaintiffs who opted out of the
class action, while some drug manufacturers have settled certain of these
actions, such settlements are not part of the public record.
Neither we nor DPS is currently a party to any of these proceedings. To
date, we do not believe any of these settlements have had a material adverse
effect on our business. However, we cannot provide any assurance that the terms
of the settlements will not materially adversely affect us in the future or that
we will not be made a party to any separate lawsuit. In addition, we cannot
predict the outcome or possible ramifications to our business of the cases in
which the plaintiffs are trying their claims separately.
We are also subject to risks relating to litigation and liability for
damages in connection with our PBM operations, including the dispensing of
pharmaceutical products by our mail pharmacies, the services rendered in
connection with our formulary management and informed decision counseling
services, and our non-PBM operations, including the products and services
provided in connection with our infusion therapy programs (and the associated
nursing services). We believe our insurance protection is adequate for our
present operations. However, we cannot provide any assurance that we will be
able to maintain our professional and general liability insurance coverage in
the future or that such insurance coverage will be available on acceptable terms
to cover any or all potential product or professional liability claims. A
successful product or professional liability claim in excess of our insurance
coverage could have a material adverse effect on our business.
STATE AND FEDERAL REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS
Numerous state and federal laws and regulations affect our business and
operations. The categories include, but are not necessarily limited to:
-anti-remuneration laws
-the Employee Retirement Income Security Act and related regulations
-proposed comprehensive state PBM legislation
-consumer protection laws
-network access (i.e.,"any willing provider" and "due process" legislation)
-legislation imposing benefit plan design restrictions
-licensure laws
-drug pricing legislation (i.e., "mostfavored nation" pricing and
"unitary pricing" legislation)
-mail pharmacy regulations
-privacy and confidentiality legislation
-Medicare and Medicaid reimbursement regulations
-potential regulation of the PBM industry by the U.S. Food and Drug
Administration
These and other regulatory matters are discussed in more detail under "Business
- - Government Regulation" below.
We believe we are in substantial compliance with all existing legal
requirements material to the operation of our business. There are, however,
significant uncertainties involving the application of many of these legal
requirements to our business. In addition, there are numerous proposed health
care laws and regulations at the federal and state levels, many of which could
materially adversely affect our business. We are unable to predict what
additional federal or state legislation or regulatory initiatives may be enacted
in the future relating to our business or the health care industry in general.
We also cannot predict what effect any such legislation or regulations might
have on us. We also cannot provide any assurance that federal or state
governments will not impose additional restrictions or adopt interpretations of
existing laws that could have a material adverse effect on our business or
results of operations.
CHANGES IN THE HEALTH CARE INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS
Efforts are being made in the United States to control health care costs,
including prescription drug costs, in response to, among other things, increases
in prescription drug utilization rates and drug prices. If these efforts are
successful or if prescription drug utilization rates were to decrease
significantly, our business and results of operations could be materially
adversely affected.
We have designed our business to compete within the current structure of
the U.S. health care system. Changing political, economic and regulatory
influences may affect health care financing and reimbursement practices. If the
current health care financing and reimbursement system changes significantly,
our business could be materially adversely affected. Congress is currently
considering proposals to reform the U.S. health care system. These proposals may
increase governmental involvement in health care and PBM services, and otherwise
change the way our clients do business. Health care organizations may react to
these proposals and the uncertainty surrounding them by reducing or delaying
purchases of cost control mechanisms and related services that we provide. We
cannot predict what effect, if any, these proposals may have on our business.
Other legislative or market-driven changes in the health care system that we
cannot anticipate could also materially adversely affect our business.
FAILURE TO ADDRESS THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
Our business relies heavily on computers and other information systems
technology. In 1995, we began addressing the "Year 2000" issue, which generally
refers to the inability of certain computer systems to properly recognize
calendar dates beyond December 31, 1999. We developed a Year 2000 compliance
plan to address:
-internally developed application software
-vendor developed applications software
-operating system software
-utility software
-vendor/trading partner-supplied files
-externally provided data or transactions
-non-informationt technology devices
-adherence to applicable industry standards
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations" for additional information on our Year 2000 efforts.
We believe that with appropriate modifications to our existing computer
systems, updates by our vendors and trading partners and conversion to new
software in the ordinary course of our business, the Year 2000 issue will not
pose material operational problems for us. However, if the conversions are not
completed in a proper and timely manner by all affected parties, or if our logic
for communicating with noncompliant systems is ineffective, the Year 2000 issue
could result in material adverse operational and financial consequences to us.
We cannot provide any assurance that our efforts, or those of our vendors and
trading partners (who are beyond our control), will be successful in addressing
the Year 2000 issue. In addition, while DPS has represented to us that it has
implemented a Year 2000 plan for upgrading its computer systems and communicated
with its vendor/trading partners regarding such partners' Year 2000 compliance,
we cannot predict whether such plan will adequately address all of DPS's Year
2000 issues or whether DPS's vendors/trading partners will adequately address
their Year 2000 issues. Failure by DPS and its vendors/trading partners to
adequately address the Year 2000 issue could have a material adverse effect on
our business and results of operations. We also cannot provide any assurance
that our contingency plan, or that of DPS, will be complete and adequately
address all possible contingencies. The failure of our contingency plan, or that
of DPS, could result in material adverse operational and financial consequences
to us.
LOSS OF KEY MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS
Our success is materially dependent upon certain key managers and, in
particular, upon the continued services of Barrett A. Toan, our President and
Chief Executive Officer. Our future operations could be materially adversely
affected if the services of Mr. Toan cease to be available. The Company and Mr.
Toan are parties to an employment agreement which currently extends to April 1,
2000, and which automatically extends for an additional two years on each April
1, unless either party gives notice of termination prior to the April 1 date. As
of the date hereof, neither we nor Mr. Toan has given such notice.
NEW YORK LIFE INSURANCE COMPANY CAN EXERCISE SIGNIFICANT CONTROL OVER OUR
BUSINESS
We have two classes of authorized common stock: Class A Common Stock and
Class B Common Stock. Our Class A Common Stock has been publicly traded on The
Nasdaq National Market since June 9, 1992. Our Class B Common Stock is entirely
owned by NYLIFE HealthCare Management, Inc. ("NYLIFE HealthCare"), an indirect
subsidiary of New York Life Insurance Company ("New York Life"). Each share of
our Class A Common Stock has one vote per share, and each share of our Class B
Common stock has ten votes per share. Consequently, although NYLIFE HealthCare
currently owns approximately 45% of the Company's total outstanding shares of
Common Stock, it possesses approximately 89% of the combined voting power of
both classes of Common Stock. NYLIFE HealthCare could reduce its Class B Common
Stock ownership to represent slightly less than 10% of the total outstanding
shares of our common stock and still control a majority of the voting power of
our common stock. Accordingly, without regard to the votes of our public
stockholders, NYLIFE HealthCare can
-elect or remove all of our directors
-amend our certificate of incorporation, except where the separate
approval of the holders of our Class A Common Stock is required
by law
-accept or reject a merger, sale of assets or other major corporate
transaction
-accept or reject any proposed acquisition of the Company
-determine the amount and timing of dividends paid to itself and holders
of our Class A Common Stock
-except as described below, otherwise control our management and
operations and decide all matters submitted for a stockholder vote
Our by-laws require that any material transaction with a related party be
approved by the Audit Committee of our Board of Directors, which currently
consists of three directors. A by-law provision, which cannot be changed without
the affirmative vote of a majority of the outstanding shares of our Class A
Common Stock, requires that a majority of directors on the Audit Committee be
persons who are not directors of New York Life or its subsidiaries (other than
us) or officers or employees of New York Life or its subsidiaries (other than
us). A material transaction is a transaction that, by itself, would be required
to be disclosed in our proxy statement. The terms of the original contracts
between us and New York Life and its subsidiaries were not negotiated at arm's
length and were not approved by the Audit Committee, but all amendments to these
original contracts with New York Life and its subsidiaries subsequent to our
initial public offering in 1992 have been approved by the Audit Committee. On
July 15, 1998, New York Life sold substantially all of its health care
businesses (other than its interest in us) to Aetna U.S. Healthcare Inc.
Consequently, we do not anticipate entering into any material PBM or other
health care service agreements with New York Life.
New York Life has agreed that so long as it, directly or through one or
more of its majority owned subsidiaries, owns 10% or more of our outstanding
shares of Class B Common Stock, New York Life will not engage, directly or
through any of its majority owned subsidiaries, in a business that derives
substantial revenues from one or more of the following activities within the
United States (the "Protected Business"):
-the providing of PBM services (including dispensing
prescription drugs, monitoring cost and quality of
pharmacy services, establishing a network of retail
pharmacies, processing claims for prescription drugs,
performing drug utilization review and assisting in the
design of prescription drug programs for benefit plans)
-the providing of vision care
-the providing of infusion therapy services
However, New York Life and its majority owned subsidiaries may engage in the
following Protected Business activities:
-portfolio investment activities, without any of the entities in which
they invest being subject to the foregoing restrictions
-claims processing for prescription drugs in connection with processing
medical care claims under insurance policies
-acquisition of entities engaged in all or any aspect of the Protected
Business, unless any such entity derived a majority of its
consolidated revenues from the Protected Business in the fiscal year
preceding such acquisition, and operation of the businesses of such
acquired entities as they may thereafter develop or expand
The above-mentioned restrictions do not apply to any entities in which New
York Life and its subsidiaries own less than a majority equity interest.
We cannot provide any assurance that any business opportunity that comes to
the attention of New York Life or its subsidiaries and affiliates and that falls
within the scope of the Protected Business, or might otherwise be appropriate
for us to consider pursuing, will be directed to us, whether or not such
opportunity would be in our or our stockholders' best interest.
ITEM 1 - BUSINESS
INDUSTRY OVERVIEW
Prescription drug costs are the fastest growing component of health care
costs in the United States. The U.S. Health Care Financing Administration
("HCFA") estimates that pharmaceuticals currently account for approximately 6.5%
of U.S. health care expenditures, and are expected to increase to 8% by 2007.
Estimated U.S. pharmaceutical sales for 1998 were approximately $75 billion, and
HCFA projects continued sales increases at an average annual growth rate of
approximately 10% through 2007, compared to an average annual growth rate of
approximately 7% for total health care costs during this period. Factors
underlying this trend include: (i) increases in research and development
expenditures by drug manufacturers, resulting in many new drug introductions,
(ii) a shorter U.S. Food and Drug Administration approval cycle for new
pharmaceuticals, (iii) high prices for new "blockbuster" drugs, (iv) an aging
population, and (v) increased demand for prescription drugs due to increased
disease awareness by patients, effective direct-to-consumer advertising by drug
manufacturers and a growing reliance on medication in lieu of lifestyle changes.
Health benefit providers have been seeking ways to better understand and
control drug costs. PBMs help health benefit providers to provide a
cost-effective drug benefit and to better understand the impact of prescription
drug utilization on total health care expenditures. PBMs coordinate the
distribution of outpatient pharmaceuticals through a combination of
benefit-management services, including retail drug card programs, mail pharmacy
services and formulary management programs.
PBMs emerged during the late 1980s by combining traditional pharmacy claims
processing and mail pharmacy services to create an integrated product offering
that could help manage the prescription drug benefit for payors. During the
early 1990s, numerous PBMs were created, with some providers offering a
comprehensive, integrated package of services.
The services offered by the more sophisticated PBMs have broadened to
include disease management programs, compliance programs, outcomes research,
drug therapy management programs and sophisticated data analysis. These advanced
capabilities require resources that may not be available to all PBMs, so further
industry consolidation may occur. If prescription drug costs continue to
escalate and become an even larger portion of overall health care expenditures,
more advanced capabilities will be needed to manage these costs so that health
benefit providers will be able to continue to offer a quality prescription drug
benefit to their members. The more sophisticated PBMs should be in the best
position to offer these services.
COMPANY OVERVIEW
We are the largest full-service PBM independent of pharmaceutical
manufacturer or drug store ownership in North America. PBMs coordinate the
distribution of outpatient pharmaceuticals through a combination of benefit
management services, including retail drug card programs, mail pharmacy
services, formulary management programs and other clinical management programs.
We provide these types of services for approximately 8,500 clients that include
HMOs, health insurers, third-party administrators, employers and union-sponsored
benefit plans. We believe our independence from pharmaceutical manufacturer
ownership allows us to make unbiased formulary recommendations to our clients,
balancing both clinical efficacy and cost. We also believe our independence from
drug store ownership allows us to construct a variety of convenient and
cost-effective retail pharmacy networks for our clients, without favoring any
particular pharmacy chain.
Before 1998, our growth was driven almost exclusively by our ability to
expand our product offerings and increase our client and membership base through
internally generated growth. From 1992 through 1997, our net revenues and net
income increased at compound annual growth rates of 58% and 49%, respectively.
While our internal growth strategy remains a major focus, we have recently
complemented our internal growth strategy with two substantial acquisitions.
These acquisitions add to the scale of our membership base and broaden our
product offerings. In April 1998, we acquired "ValueRx", the PBM business of
Columbia/HCA Healthcare Corporation. In the second quarter of 1999, we expect to
complete the acquisition of DPS, the PBM business of SmithKline Beecham
Corporation. Upon completion of our acquisition of DPS, we will continue to be
the third largest PBM in North America in terms of total members, and we will
have one of the largest managed care membership bases of any PBM.
As of January 1, 1999, our PBM services were provided to approximately 23.5
million members in the United States and Canada who were enrolled in health
plans sponsored by our clients. This total excludes members for whom we provide
only formulary management services. As of January 1, 1999, some of our largest
clients were Aetna U.S. Healthcare and the State of New York Empire Plan
Prescription Drug Program.
Our PBM services are primarily delivered through networks of retail
pharmacies that are under contract with us and through five mail pharmacy
service centers that we own and operate. Our largest retail pharmacy network
includes more than 52,000 retail pharmacies, representing more than 99% of all
retail pharmacies in the United States. In 1998, we processed approximately
113.2 million network pharmacy claims and 7.4 million mail pharmacy
prescriptions, with an estimated total drug spending of approximately $4.5
billion.
Our PBM services include:
-network claims processing, mail pharmacy services, benefit
design consultation, drug utilization review, formulary
management programs, disease management and medical and drug
data analysis services, and compliance and therapy management
programs for our clients
-market research programs for pharmaceutical manufacturers
-medical information management services, which include provider profiling
and outcome assessments, through our majority owned subsidiary
Practice Patterns Science, Inc. ("PPS")
-informed decision counseling services through our Express Health LineSM
division
Our non-PBM services include:
-infusion therapy services through our wholly owned subsidiary IVTx, Inc.
("IVTx")
-distribution of pharmaceuticals requiring special handling or packaging
through our Specialty Distribution division
Express Scripts, Inc. was incorporated in Missouri in September 1986, and
was reincorporated in Delaware in March 1992. We have two classes of common
stock, Class A Common Stock and Class B Common Stock. Each share of the Class B
Common Stock is entitled to ten votes, and each share of the Class A Common
Stock is entitled to one vote. All of the issued and outstanding shares of the
Class B Common Stock are owned by NYLIFE HealthCare. Our principal executive
offices are located at 14000 Riverport Drive, Maryland Heights, Missouri 63043.
Our telephone number is (314) 770-1666.
PRODUCTS AND SERVICES
PHARMACY BENEFIT MANAGEMENT SERVICES
OVERVIEW. Our PBM services involve the management of outpatient
prescription drug usage to foster high quality, cost-effective pharmaceutical
care through the application of managed care principles and advanced information
technologies. We offer our PBM services to our clients in the United States and
Canada. PBM services consist of retail pharmacy network administration, mail
pharmacy services, benefit plan design consultation, formulary administration,
electronic point-of-sale claims processing and drug utilization review. Our PBM
services also include: (i) the development of advanced formulary compliance and
therapeutic intervention programs; (ii) therapy management services such as
prior authorization, therapy guidelines, step therapy protocols and formulary
management interventions; (iii) sophisticated management information reporting
and analytic services; (iv) provider profiling and outcomes assessments; and (v)
informed decision counseling.
During 1998, 97.9% of our net revenues were derived from PBM services,
compared to 96.8% and 96.1% during 1997 and 1996, respectively. The number of
retail pharmacy network claims processed and mail pharmacy claims processed has
increased to 113.2 million and 7.4 million claims, respectively, in 1998, from
26.3 million and 1.6 million claims, respectively, in 1994. During 1997 and
1996, we processed 73.2 million and 57.8 million retail pharmacy network claims,
respectively, and 3.9 million and 2.8 million mail pharmacy claims,
respectively.
RETAIL PHARMACY NETWORK ADMINISTRATION. We contract with retail pharmacies
to provide prescription drugs to members of the pharmacy benefit plans managed
by us. In the United States, these pharmacies typically discount the price at
which they will provide drugs to members in return for designation as a network
pharmacy. We manage four nationwide networks in the United States and one
nationwide network in Canada that are responsive to client preferences related
to cost containment and convenience of access for members. We also manage
networks of pharmacies that are under direct contract with our managed care
clients or networks that we have designed to meet the specific needs of some of
our larger clients.
All retail pharmacies in our pharmacy networks communicate with us on-line
and in real time to process prescription drug claims. When a member of a plan
presents his or her identification card at a network pharmacy, the network
pharmacist sends the specified claim data in an industry-standard format through
our systems, which process the claim and respond to the pharmacy, typically
within one or two seconds. The electronic processing of the claim involves: (i)
confirming the member's eligibility for benefits under the applicable health
benefit plan and the conditions to or limitations of coverage, such as the
amount of copayments or deductibles the member must pay, (ii) performing a
concurrent drug utilization review ("DUR") analysis and alerting the pharmacist
to possible drug interactions or other indications of inappropriate prescription
drug usage, (iii) updating the member's prescription drug claim record, and (iv)
if the claim is accepted, confirming to the pharmacy that it will receive
payment for the drug dispensed.
MAIL PHARMACY SERVICES. We integrate our retail pharmacy services with our
mail pharmacy services. We operate five mail pharmacies, located in Maryland
Heights, Missouri; Tempe, Arizona; Albuquerque, New Mexico; Bensalem,
Pennsylvania; and Troy, New York. These pharmacies provide members with
convenient access to maintenance medications and enable us and our clients to
control drug costs through operating efficiencies and economies of scale. In
addition, through our mail service pharmacies, we are directly involved with the
prescriber and member, and are generally able to achieve a higher level of
generic substitutions and therapeutic interventions than can be achieved through
the retail pharmacy networks. This further reduces our clients' costs.
BENEFIT PLAN DESIGN AND CONSULTATION SERVICES. We offer consultation and
financial modeling services to assist the client in selecting a benefit plan
design that meets its needs for member satisfaction and cost control. The most
common benefit design options we offer to our clients are: (i) financial
incentives and reimbursement limitations on the drugs covered by the plan,
including drug formularies, flat dollar or percentage of prescription cost
copayments, deductibles or annual benefit maximum, (ii) generic drug
substitution incentives, (iii) incentives or requirements to use only network
pharmacies or to order certain drugs only by mail, and (iv) reimbursement
limitations on the number of days' supply of a drug that can be obtained. The
selected benefit design is entered into our electronic claims processing system,
which applies the plan design parameters as claims are submitted and enables us
and our clients to monitor the financial performance of the plan.
ADVANCED FORMULARY COMPLIANCE AND THERAPY MANAGEMENT SERVICES. We provide
advanced formulary compliance services to our clients. Formularies are lists of
drugs for which coverage is provided under the applicable plan. They are widely
used in managed health care plans and, increasingly, by other health plan
managers. We administer a number of different formularies for our clients that
often identify preferred drugs whose use is encouraged or required through
various benefit design features. Historically, many clients have selected a plan
design which includes an open formulary in which all drugs are covered by the
plan and preferred drugs, if any, are merely recommended. More advanced options
consist of restricted formularies, in which various financial or other
incentives exist for the selection of preferred drugs over their non-preferred
counterparts, or closed formularies, in which benefits are available only for
drugs listed on the formulary. Formulary preferences can be encouraged: (i) by
restricting the formulary through plan design features, such as tiered
copayments, which require the member to pay a higher amount for a non-preferred
drug, (ii) through prescriber education programs, in which we or the managed
care client actively seek to educate the prescribers about the formulary
preferences, and (iii) through our OptiMedSM drug therapy management program,
which actively promotes therapeutic and generic interchanges to reduce drug
costs. We also offer the ExpressTherapeutics(R) program, an innovative
proprietary drug utilization review and clinical intervention program, to assist
clients in managing compliance with the prescribed drug therapy and
inappropriate prescribing practices. Although we derive substantial revenue from
pharmaceutical manufacturers, we recognize our primary responsibility is to the
plan sponsors, and we believe our contracts with the pharmaceutical
manufacturers provide us the flexibility to utilize the most efficacious
products.
Our National Pharmacy and Therapeutics Committee, composed of independent
physicians and pharmacists, evaluates drugs within a therapy class to determine
whether it is clinically appropriate to give formulary preference to one drug
over another. If clinical appropriateness is established to the committee's
satisfaction, it then evaluates the cost-effectiveness of drugs in the therapy
class. Once a client adopts a formulary, we administer the formulary through our
electronic claims processing system, which alerts the pharmacist if the
prescriber has not prescribed the preferred drug. We or the pharmacist can then
contact the prescriber to attempt to obtain the prescriber's consent to switch
the prescription to the preferred product.
INFORMATION REPORTING AND ANALYSIS AND DISEASE MANAGEMENT PROGRAMS. Through
the development of increasingly sophisticated management information and
reporting systems, we believe we manage prescription drug benefits more
effectively. We have developed various services to offer our clients. One
service enables a client to analyze prescription drug data to identify cost
trends and budget for expected drug costs, to assess the financial impact of
plan design changes and to identify costly utilization patterns through an
on-line prescription drug decision support tool called RxWorkbenchTM. This
service permits our clients' medically sophisticated personnel, such as a
clinical pharmacist employed by an HMO, to analyze prescription drug data
on-line.
In addition, our PPS subsidiary offers provider profiling, disease
management support services and outcomes assessments, and has developed
proprietary software to process and sort medical claims, prescription drug
claims and clinical laboratory data. This data is then used to produce
comprehensive information about treatment of patients that can be used by
managed care organizations and other companies involved in formulary management
programs to treat a particular disease in a quality, cost-effective manner. The
patient-specific data generated through all of these services can then be
compared to data in PPS's normative databases, and PPS can determine the
effectiveness of treatment and calculate the total costs of that treatment,
including the prescription drug component. The information can also be used to
analyze the practice patterns of health care providers and develop empirically
based "best practice" protocols, which recommend treatment regimens for specific
diseases.
We offer additional disease management programs to assist health benefit
plans in managing the total health care costs associated with certain diseases,
such as asthma, diabetes and cardiovascular disease. These programs are based
upon the premise that patient and provider behavior can positively influence
medical outcomes and reduce overall medical costs. Patient identification can be
accomplished through claims data analysis or self-enrollment, and risk
stratification surveys are conducted to establish a plan of care for individual
program participants. Patient education is primarily effected through a series
of telephone and written communications with nurses and pharmacists, and both
providers and patients receive progress reports on a regular basis. Outcome
surveys are conducted and results are compiled to analyze the clinical, personal
and economic impact of the program.
ELECTRONIC CLAIMS PROCESSING SYSTEM. Our electronic claims processing
system enables us to implement sophisticated intervention programs to assist in
managing prescription drug utilization. The system can be used to alert the
pharmacist to generic substitution and therapeutic intervention opportunities
and formulary compliance issues, or to administer prior authorization and
step-therapy protocol programs at the time a claim is submitted for processing.
Our claims processing system also creates a database of drug utilization
information that can be accessed both at the time the prescription is dispensed
and also on a retrospective basis to analyze utilization trends and prescribing
patterns for more intensive management of the drug benefit.
INFORMED DECISION COUNSELING SERVICES. We offer health care decision
counseling services through our Express Health LineSM division. This service
allows a member to call a toll-free telephone number and discuss a health care
matter with a care counselor who utilizes on-line decision support protocols and
other guidelines to provide information to assist the member in making an
informed decision in seeking appropriate treatment. Records of each call are
maintained on-line for future reference. The service is available 24 hours a
day. Multilingual capabilities and service for the hearing impaired are also
available. The counselors provide follow-up service to members to determine if
their situation was resolved or if the counselor may provide additional
assistance. Member satisfaction and outcomes assessments are tracked through a
combination of member surveys, a quality assurance plan and system reports.
NON-PBM SERVICES
In addition to PBM services, we also provide non-PBM services including
outpatient infusion therapy, specialty distribution and vision care to our
clients. During 1998, 2.1% of our net revenues were derived from non-PBM
services, compared to 3.2% and 3.9% during 1997 and 1996, respectively. This
decline is partially due to the acquisition of ValueRx, which significantly
increased the Company's PBM service revenues.
OUTPATIENT INFUSION THERAPY SERVICES - IVTX. We provide infusion therapy
services which involve the administration of prescription drugs and other
products to a patient by catheter, feeding tube or intravenously, through our
wholly owned subsidiary IVTx, Inc. IVTx's clients, which include managed care
organizations, third-party administrators, insurance companies, case management
companies, unions and self-insured employers, benefit from outpatient infusion
therapy services because the length of hospital stays can be reduced. Rather
than receiving infusion therapy in a hospital, IVTx provides infusion therapy
services to patients at home, in a physician's office or in a free-standing
center operated by a managed care organization or other entity. IVTx provides
antimicrobial, cardiovascular, hematologic, nutritional, analgesic,
chemotherapeutic, hydration, endocrine, respiratory and AIDS management
treatments to patients. IVTx generally prepares the treatments in one of its
infusion therapy pharmacies, which are licensed independently of our mail
pharmacies. The treatments are either administered under the supervision of
IVTx's staff of registered nurses or licensed vocational nurses who are employed
at one of the IVTx sites or, in areas where IVTx does not have a facility,
through contracted registered nurses employed or otherwise retained by nursing
agencies. IVTx may also contract with physicians to provide consultation
services to its sites and contract for pharmacy services for patients who live
in outlying areas.
We have facilities supporting our infusion therapy operations in Houston,
Texas; Dallas, Texas; Columbia, Maryland; Maryland Heights, Missouri; Columbia,
Missouri; Northvale, New Jersey; Tempe, Arizona; and West Chester, Pennsylvania.
IVTx's information system maintains patient profiles and documents doses and
supplies dispensed, and its drug utilization review component accesses our
prescription records for members receiving both infusion and oral drug therapies
to screen for drug interactions, incompatibilities and allergies.
SPECIALTY DISTRIBUTION SERVICES. We began offering specialty distribution
services during the fourth quarter of 1997 through our Tempe, Arizona facility.
This service assists pharmaceutical manufacturers with the distribution of, and
creation of a database of information for, products requiring special
handling/packaging or products targeted to a specific physician or patient
population.
VISION CARE SERVICES. Until September 1998, we offered a managed vision
care program through a network of approximately 9,000 vision care providers
consisting primarily of optometrists and a smaller number of ophthalmologists.
In addition to administering the network, we ground and edged lenses, assembled
eyeglasses and distributed eyeglasses and contact lenses from our vision lab
formerly located in Earth City, Missouri.
We entered into an agreement, effective September 1, 1998, with Cole
Managed Vision ("Cole"), a subsidiary of Cole National Corporation, pursuant to
which Cole provides certain vision care services for our clients and their
members. The agreement enables us to focus on our PBM business while still
offering a vision care service to our members by transferring certain functions
performed by our Express Scripts Vision Corporation to Cole. The Cole vision
program is offered to substantially all of our PBM clients, and we receive a fee
from Cole based on usage of the vision benefit by members. In conjunction with
the Cole agreement, we also announced plans to close the operations of our
wholly owned subsidiary, PhyNet, Inc., a vision program management service
organization.
SUPPLIERS
We maintain an extensive inventory in our mail pharmacies of brand name and
generic pharmaceuticals. If a drug is not in our inventory, we can generally
obtain it from a supplier within one or two business days. We purchase our
pharmaceuticals either directly from manufacturers or through wholesalers.
During 1998, approximately 56.2% of our pharmaceutical purchases were through
one wholesaler, most of which were brand name pharmaceuticals. Generic
pharmaceuticals are generally purchased directly from manufacturers. We believe
that alternative sources of supply for most generic and brand name
pharmaceuticals are readily available.
CLIENTS
We are a major provider of PBM services to the managed care industry,
including several large HMOs, and the employer industry, both directly and
through third-party administrators. Currently, some of our largest managed care
clients are Aetna U.S. Healthcare, Inc. ("Aetna"; the plans we service are
composed primarily of the plans of the former NYLCare Health Plans, Inc.
("NYLCare") entity, which was a wholly owned subsidiary of New York Life),
Coventry Corporation ("Coventry"), and Blue Cross Blue Shield of Massachusetts
(which should begin service with us during the third quarter of 1999). Some of
our largest employer groups include the State of New York Empire Plan
Prescription Drug Program (through a subcontracting relationship with CIGNA
HealthCare), and the State of Ohio Bureau of Workers' Compensation Fund. We also
market our PBM services through preferred provider organizations, group
purchasing organizations, health insurers, third-party administrators of health
plans and union-sponsored benefit plans.
We provide PBM services, including informed decision counseling, and
non-PBM services, including infusion therapy services, to HMOs owned or managed
by Aetna/NYLCare, and provide PBM services to insurance plans underwritten and
administered by Aetna/NYLCare. Of our net revenues from PBM services in 1998,
4.8% was for services provided to members of HMOs owned or managed by NYLCare or
insurance policies administered by NYLCare while NYLCare was a subsidiary of New
York Life. Of our net revenues for non-PBM services in 1998, 21.5% was for
services provided to members of HMOs owned or managed by NYLCare and insurance
policies administered by NYLCare while NYLCare was a subsidiary of New York
Life. In connection with Aetna's purchase of NYLCare, we and Aetna reached an
agreement to extend our PBM service agreements with HMOs, excluding the informed
decision counseling component, and our infusion therapy agreements through
December 31, 2003, with new pricing to take effect after December 31, 1999. The
informed decision counseling and vision care (through our alliance with Cole)
agreements will continue through December 31, 1999. We also expect to continue
to provide PBM services to members of the NYLCare indemnity programs until such
members are converted to Aetna policies, which is anticipated to occur during
1999. See Item 7 herein and see Note 4 of Notes to Consolidated Financial
Statements in Item 8 herein for additional discussion concerning Aetna/NYLCare.
Upon completion of our pending acquisition of DPS (assuming all conditions
necessary for the consummation are satisfied), United HealthCare Corporation
will become our largest client, with approximately 10.5 million members. DPS's
contract with United HealthCare will expire in May, 2000, and United HealthCare
has indicated it will be moving to another provider at that time. In our
financial analysis of the DPS acquisition, we assumed United HealthCare would
not renew its contract. However, the loss of this contract and related
transition issues may still materially adversely affect our business and results
of operations.
ACQUISITIONS AND STRATEGIC ALLIANCES
On February 9, 1999, we announced that we had executed a definitive
agreement to acquire DPS from SmithKline Beecham Corporation and one of its
affiliates for $700 million in cash. We expect to complete the acquisition
during the second quarter of 1999. We intend to finance the acquisition and
refinance all of our existing indebtedness through a $1.1 billion credit
facility and a $150 million senior subordinated bridge credit facility. Goodwill
and customer contract amortization from the DPS acquisition will be tax
deductible. Upon completion of our acquisition of DPS, we will continue to be
the third largest PBM in North America in terms of total members and we will
have one of the largest managed care membership bases of any PBM. In addition,
the acquisition will provide us with enhanced clinical capabilities, systems and
technologies. Consummation of the transaction is subject to customary closing
conditions, and we cannot provide any assurance that all such conditions will be
satisfied such that the transaction may be consummated as planned.
On April 1, 1998, we acquired the PBM business known as "ValueRx" from
Columbia/HCA Healthcare Corporation for approximately $460 million in cash
(including approximately $15 million in transaction costs and executive
severance costs). Historically, while both we and ValueRx served all segments of
the PBM market, we primarily focused on managed care and smaller self-funded
plan sponsors, and ValueRx concentrated on health insurance carriers and large
employer and union groups. We believe the ValueRx acquisition has provided and
will continue to provide us with additional resources and expertise, which will
allow us to better serve our clients and competitively pursue new business in
all segments of the PBM market.
In January 1996, we acquired the pharmacy claim processing business of
Eclipse Claims Services, Inc., one of the largest processors of prescription
drug claims in Canada. In connection with this acquisition, we entered into
five-year exclusive contracts to provide PBM services in Canada to both
Prudential Insurance Company of America's Canadian Operations ("Prudential") and
Aetna Life Insurance Company of Canada ("Aetna"). The assets of Prudential were
previously acquired by London Life Insurance Company ("London Life"), with whom
we reached an agreement whereby we would be the exclusive provider of PBM
services to London Life. In late 1997, London Life was acquired by Great-West
Lifeco. Inc. ("Great-West"), who receives PBM services from one of our
competitors in Canada. Great-West decided not to continue using our services,
and we have agreed to transition their business to another provider. The
transition should be substantially completed during the second or third quarter
of 1999.
On December 31, 1995, we entered into a series of agreements with American
HealthCare Systems Purchasing Partners, L.P. (now known as Premier Purchasing
Partners, L.P.; the "Premier Partnership"), a health care group purchasing
organization affiliated with APS Healthcare, Inc. (now known as Premier, Inc.;
"Premier"). Premier is the largest voluntary health care alliance in the U.S.,
formed as a result of the mergers in late 1995 of three predecessor alliances,
American HealthCare Systems, Premier Health Alliance and SunHealth Alliance. The
Premier alliance includes approximately 215 integrated health care systems that
own or operate approximately 800 hospitals and are affiliated with another
approximately 900 hospitals. Among other things, the agreements designate us as
Premier's exclusive preferred provider of outpatient PBM services to
shareholders of Premier and their affiliated health care entities, plans and
facilities which participate in the Partnership's purchasing programs. The term
of the agreement is ten years, subject to early termination by the Partnership
at five years, upon payment of an early termination fee to us. Premier is
required to promote us as its preferred PBM provider. An individual Premier
member or affiliated managed care plan is not required to enter into an
agreement with us, but if it does so, the term of the agreement would be for
five years. Under the terms of the agreements with the Partnership, we now
provide service to a number of Premier affiliates. In May 1996, as a result of
the number of Premier plan members receiving our PBM services and the outcome of
certain joint drug purchasing initiatives, we issued 454,546 shares of our Class
A Common Stock to the Premier Partnership. The Premier Partnership could become
entitled to receive up to an additional 4,500,000 shares of our Class A Common
Stock, depending upon the number of members in Premier-affiliated managed care
plans that contract for our PBM services. A calculation is made on April 1 of
each year to determine if a stock issuance will be made. If the Premier
Partnership earns stock totaling over 5% of our total voting stock, it is
entitled to have its designee nominated for election to our Board of Directors.
As of the date hereof, the Premier Partnership has not reached this 5%
threshold. See Note 3 of Notes to Consolidated Financial Statements in Item 8
herein for additional discussion concerning Premier.
In November 1995, we entered into a ten-year strategic alliance with The
Manufacturers Life Insurance Company ("Manulife") one of the largest providers
of group health insurance policies in Canada, pursuant to which we are the
exclusive provider of PBM services to Manulife. As a result of this alliance,
Manulife can earn up to approximately 474,000 shares of our Class A Common
Stock, depending on its achievement of certain pharmacy claim volumes from 1996
to 2000. To date, we have not issued any shares to Manulife. In addition, if
Manulife does not terminate the alliance in either year 6 or year 10 of the
agreement, in each of such years it will receive a warrant to purchase up to
237,000 shares of our Class A Common Stock exercisable at 85% of the then fair
market value of such shares. The actual number of shares will depend upon claims
volume in such years. See Note 3 of Notes to Consolidated Financial Statements
in Item 8 herein for additional discussion concerning Manulife.
In January 1995, we entered into an exclusive three-year agreement to
provide PBM services to Coventry Corporation, pursuant to which Coventry
received 50,000 shares of our Class A Common Stock. In December 1997, Coventry
extended its agreement for an additional two years. In connection with such
extension, we issued, as an advance discount, a seven-year warrant to purchase
an additional 50,000 shares of our Class A Common Stock, exercisable at a price
of $26.4544 per share (90% of the per share market value at the time of
renewal).
COMPANY OPERATIONS
GENERAL. In our various facilities in the United States, we own and operate
five mail pharmacies and five member service/pharmacy help desk call centers
(four of which are linked to create a virtual call center environment).
Electronic pharmacy claims processing is principally directed through our
Maryland Heights, Missouri facility then routed to the appropriate computer
platform at our Maryland Heights, Missouri or Tempe, Arizona facility or at
facilities operated by Perot Systems, which maintains certain of our computer
hardware. At our Canadian facility, we have sales and marketing, client
services, pharmacy help desk, clinical, provider relations and certain
management information systems capabilities.
SALES AND MARKETING; CLIENT SERVICE. We market our PBM services in the
United States primarily through an internal staff of regional marketing
representatives and sales personnel located in various cities throughout the
United States. The marketing representatives are supported by a staff of client
service representatives. Our sales and marketing personnel and client service
representatives are organized by type of business served (i.e., managed care
group, employer group, etc.). Marketing in Canada is conducted by marketing
representatives located in Mississauga, Ontario, who are assisted by our
personnel based in the United States. Although we cross-sell our IVTx services
to our PBM clients, IVTx employs its own sales and marketing and client service
personnel to take advantage of individual market opportunities.
MEMBER SERVICES. We believe client satisfaction is dependent upon member
satisfaction. Members can call us toll-free, 24 hours a day, to obtain
information about their prescription drug plan. We employ member service
representatives who are trained to respond to member inquiries.
PROVIDER RELATIONS. Our Provider Relations group is responsible for
contracting and administering our pharmacy networks. To participate in our
retail pharmacy networks, pharmacists must meet certain qualifications and are
periodically required to represent to us that their applicable state licensing
requirements are being maintained and that they are in good standing. Pharmacies
can contact our various pharmacy help desks toll-free, 24 hours a day, for
information and assistance in filling prescriptions for members. In addition,
our Provider Relations group audits selected pharmacies in the retail pharmacy
networks to determine compliance with the terms of the contract with us or our
clients.
CLINICAL SUPPORT. Our Health Management Services Department employs
clinical pharmacists, data analysts and outcomes researchers who provide
technical support for our PBM services. These staff members assist in providing
high level clinical pharmacy services such as formulary development, drug
information programs, clinical interventions with physicians, development of
drug therapy guidelines and the evaluation of drugs for inclusion in clinically
sound therapeutic intervention programs. The Health Management Services
Department also analyzes and prepares reports on clinical pharmacy data for our
clients and conducts specific data analyses to evaluate the cost-effectiveness
of certain drug therapies.
INFORMATION SYSTEMS. Our Information Systems department supports our
pharmacy claims processing systems and other management information systems
which are essential to our operations. Uninterrupted point-of-sale electronic
retail pharmacy claims processing is a significant operational requirement for
us, and we are in the process of integrating the systems acquired with the
ValueRx acquisition with our historical systems located at our Maryland Heights,
Missouri and Tempe, Arizona facilities. Substantially all claims are presently
directed through our Maryland Heights, Missouri facility then routed to the
appropriate computer platform at our Maryland Heights, Missouri or Tempe,
Arizona facility, or at facilities operated by Perot Systems (Perot Systems
maintains the computer hardware for the ValueRx systems at its facility in
Richardson, Texas). Our historical claims processing systems located in our
Maryland Heights, Missouri and Tempe, Arizona facilities are designed to be
redundant, which enables us to do substantially all claims processing in one
facility if the other facility is unable to process claims. Disaster recovery
services for the ValueRx systems are provided by a third party. We have
substantial capacity for growth in our claims processing facilities.
COMPETITION
We believe the primary competitive factors in each of our businesses are
price, quality of service and breadth of available services. We believe our
principal competitive advantages are our size, our independence from
pharmaceutical manufacturer and drug store ownership, our strong managed care
and employer group customer base which supports the development of advanced PBM
services and our commitment to provide flexible and distinctive service to our
clients.
There are a large number of companies offering PBM services in the United
States. Most of these companies are smaller than us and offer their services on
a local or regional basis. We do, however, compete with a number of large,
national companies, including Merck-Medco Managed Care, L.L.C. (a subsidiary of
Merck & Co., Inc.), PCS, Inc. (a subsidiary of Rite-Aid Corporation), Caremark
International Inc. (a subsidiary of MedPartners, Inc.), and Advance ParadigM,
Inc., as well as numerous insurance and Blue Cross and Blue Shield plans and
certain HMOs which have their own PBM capabilities. Several of these other
companies may have greater financial, marketing and technological resources than
us.
In general, consolidation is a critical factor in the pharmaceutical
industry, and particularly so in the PBM segment. Competitors that are owned by
pharmaceutical manufacturers or drug store chains may have pricing advantages
that are unavailable to us and other independent PBMs. However, we believe
independence from pharmaceutical manufacturer and drug store ownership is
important to certain clients, and we believe this independence provides us an
advantage in marketing to those clients.
On February 9, 1999, we announced that we had executed a definitive
agreement to purchase DPS for $700 million. As more particularly discussed above
and in Item 7, consummation of the transaction is subject to customary closing
conditions, but is expected to occur during the second quarter of 1999.
Some of our PBM services, such as disease management services, informed
decision counseling services and medical information management services,
compete with those being offered by pharmaceutical manufacturers, other PBMs,
large national companies, specialized disease management companies and
information service providers. Our non-PBM services compete with a number of
large national companies as well as with local providers.
GOVERNMENT REGULATION
Various aspects of our businesses are governed by federal and state laws
and regulations. Since sanctions may be imposed for violations of these laws,
compliance is a significant operational requirement. We believe we are in
substantial compliance with all existing legal requirements material to the
operation of our businesses. There are, however, significant uncertainties
involving the application of many of these legal requirements to our business.
In addition, there are numerous proposed health care laws and regulations at the
federal and state levels, many of which could adversely affect our business. We
are unable to predict what additional federal or state legislation or regulatory
initiatives may be enacted in the future relating to our business or the health
care industry in general, or what effect any such legislation or regulations
might have on us. We cannot provide any assurance that federal or state
governments will not impose additional restrictions or adopt interpretations of
existing laws that could have a material adverse affect on our business or
financial position.
PHARMACY BENEFIT MANAGEMENT REGULATION GENERALLY. Certain federal and
related state laws and regulations affect or may affect aspects of our PBM
business. Among these are the following:
FDA REGULATION. The U.S. Food and Drug Administration ("FDA") generally has
authority to regulate drug promotional materials that are disseminated "by or on
behalf of" a drug manufacturer. In January, 1998, the FDA issued a Notice and
Draft Guidance regarding its intent to regulate certain drug promotion and
switching activities of pharmacy benefit managers that are controlled, directly
or indirectly, by drug manufacturers. The position taken by the FDA in the Draft
Guidance was that promotional materials used by an independent PBM may be
subject to FDA regulation depending upon the circumstances, including the nature
of the relationship between the PBM and the manufacturer. We, along with various
other parties, submitted written comments to the FDA regarding the basis for FDA
regulation of PBM activities. It was our position that, while the FDA may have
jurisdiction to regulate drug manufacturers, the Draft Guidance went beyond the
FDA's jurisdiction. After extending the comment period due to numerous
objections to the proposed Draft, the FDA essentially withdrew the Draft
Guidance in the fall of 1998, stating that it would reconsider the basis for
such a Guidance. The FDA has not addressed the issue since the withdrawal and
has not indicated when or even if it will continue to address the issue.
However, there can be no assurance that the FDA will not again attempt to assert
jurisdiction over certain aspects of our PBM business in the future and, in such
event, the impact could materially adversely affect our operations.
ANTI-REMUNERATION LAWS. Medicare and Medicaid law prohibits, among other
things, an entity from paying or receiving, subject to certain exceptions and
"safe harbors," any remuneration to induce the referral of Medicare or Medicaid
beneficiaries or the purchase (or the arranging for or recommending of the
purchase) of items or services for which payment may be made under Medicare,
Medicaid, or other federally-funded state health care programs. Several states
also have similar laws that are not limited to services for which Medicare or
Medicaid payment may be made. State laws vary and have been infrequently
interpreted by courts or regulatory agencies. Sanctions for violating these
federal and state anti-remuneration laws may include imprisonment, criminal and
civil fines, and exclusion from participation in the Medicare and Medicaid
programs.
The federal statute has been interpreted broadly by courts, the Office of
Inspector General (OIG) within the Department of Health and Human Services
(HHS), and administrative bodies. Because of the federal statute's broad scope,
federal regulations establish certain "safe harbors" from liability. Safe
harbors exist for certain properly reported discounts received from vendors,
certain investment interests, and certain properly disclosed payments made by
vendors to group purchasing organizations. HHS has previously announced a
proposed safe harbor that would protect certain discount and payment
arrangements between PBMs and HMO risk contractors serving Medicaid and Medicare
members, and an interim final rule is currently being developed by HHS. A
practice that does not fall within a safe harbor is not necessarily unlawful,
but may be subject to scrutiny and challenge. In the absence of an applicable
exception or safe harbor, a violation of the statute may occur even if only one
purpose of a payment arrangement is to induce patient referrals or purchases.
Among the practices that have been identified by the OIG as potentially improper
under the statute are certain "product conversion programs" in which benefits
are given by drug manufacturers to pharmacists or physicians for changing a
prescription (or recommending or requesting such a change) from one drug to
another. Such laws have been cited as a partial basis, along with state consumer
protection laws discussed below, for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail
pharmacies in connection with such programs.
To our knowledge, these anti-remuneration laws have not been applied to
prohibit PBMs from receiving amounts from drug manufacturers in connection with
drug purchasing and formulary management programs, to therapeutic intervention
programs conducted by independent PBMs, or to the contractual relationships such
as those we have with certain of our clients. We believe that we are in
substantial compliance with the legal requirements imposed by such laws and
regulations, and we believe that there are material differences between
drug-switching programs that have been challenged under these laws and the
programs we offer to our clients. However, there can be no assurance that we
will not be subject to scrutiny or challenge under such laws or regulations. Any
such challenge could have a material adverse effect on us.
ERISA REGULATION. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which we have
agreements to provide PBM services. We believe that the conduct of our business
is not subject to the fiduciary obligations of ERISA, but there can be no
assurance that the U.S. Department of Labor, which is the agency that enforces
ERISA, would not assert that the fiduciary obligations imposed by the statute
apply to certain aspects of our operations.
In addition to its fiduciary provisions, ERISA imposes civil and criminal
liability on service providers to health plans and certain other persons if
certain forms of illegal remuneration are made or received. These provisions of
ERISA are similar, but not identical, to the health care anti-remuneration
statutes discussed in the immediately preceding section; in particular, ERISA
lacks the statutory and regulatory "safe harbor" exceptions incorporated into
the health care statute. Like the health care anti-remuneration laws, the
corresponding provisions of ERISA are broadly written and their application to
particular cases is often uncertain. We have implemented policies, which include
disclosure to health plan sponsors with respect to any commissions paid by us
that might fall within the scope of such provisions, and accordingly believe we
are in substantial compliance with these provisions of ERISA. However, we can
provide no assurance that our policies in this regard would be found by the
appropriate enforcement authorities to meet the requirements of the statute.
PROPOSED CHANGES IN CANADIAN HEALTHCARE SYSTEM. In Canada, the provincial
health plans provide universal coverage for basic health care services, but
prescription drug coverage under the government plans is provided only for the
elderly and the indigent. In late 1997, a proposal was made by a federal
government health care task force to include coverage for prescription drugs
under the provincial health insurance plans, which report was endorsed by the
federal government's Health Minister. This report was advisory in nature, and
not binding upon the federal or provincial governments. We believe this
initiative is dormant at the present time, and we are unable to determine the
likelihood of adoption of the proposal in the future.
Numerous state laws and regulations also affect aspects of our PBM
business. Among these are the following:
COMPREHENSIVE PBM REGULATION. Although no state has passed legislation
regulating PBM activities in a comprehensive manner, such legislation has been
introduced in the past in California and Virginia, and bills were recently
proposed in Texas and Colorado. Such legislation, if enacted in a state in which
we have a significant concentration of business, could adversely impact our
operations.
CONSUMER PROTECTION LAWS. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with seventeen states on October 25, 1995, Merck-Medco
Managed Care, LLC ("Medco"), the PBM subsidiary of pharmaceutical manufacturer
Merck & Co., agreed to have pharmacists affiliated with Medco mail service
pharmacies disclose to physicians and patients the financial relationships
between Merck, Medco, and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another. We
believe that our contractual relationships with drug manufacturers and retail
pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no assurance
can be given that we will not be subject to scrutiny or challenge under one or
more of these laws.
NETWORK ACCESS LEGISLATION. A majority of states now have some form of
legislation affecting our ability to limit access to a pharmacy provider network
or from removing network providers. Such legislation may require us or our
client to admit any retail pharmacy willing to meet the plan's price and other
terms for network participation ("any willing provider" legislation); or may
provide that a provider may not be removed from a network except in compliance
with certain procedures ("due process" legislation). We have not been materially
affected by these statutes because we maintain a large network of over 52,000
retail pharmacies and will admit any licensed pharmacy that meets our
credentialling criteria, involving such matters as adequate insurance coverage,
minimum hours of operation, and the absence of disciplinary actions by the
relevant state agencies.
LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have enacted
legislation that prohibits the plan sponsor from implementing certain
restrictive design features, and many states have introduced legislation to
regulate various aspects of managed care plans, including provisions relating to
the pharmacy benefit. For example, some states, under so-called "freedom of
choice" legislation, provide that members of the plan may not be required to use
network providers, but must instead be provided with benefits even if they
choose to use non-network providers. Other states have enacted legislation
purporting to prohibit health plans from offering members financial incentives
for use of mail service pharmacies. Legislation has been introduced in some
states to prohibit or restrict therapeutic intervention, or to require coverage
of all FDA approved drugs. Other states mandate coverage of certain benefits or
conditions. Such legislation does not generally apply to us, but it may apply to
certain of our clients (HMOs and health insurers). If such legislation were to
become widely adopted and broad in scope, it could have the effect of limiting
the economic benefits achievable through pharmacy benefit management. This could
have a material adverse effect on our business.
LICENSURE LAWS. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including PPOs, TPAs, and
companies that provide utilization review services. The scope of these laws
differs significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers often is unclear. We have registered
under such laws in those states in which we have concluded, after discussion
with the appropriate state agency, that such registration is required.
LEGISLATION AFFECTING DRUG PRICES. Some states have adopted so-called "most
favored nation" legislation providing that a pharmacy participating in the state
Medicaid program must give the state the best price that the pharmacy makes
available to any third party plan. Such legislation may adversely affect our
ability to negotiate discounts in the future from network pharmacies. Other
states have enacted "unitary pricing" legislation, which mandates that all
wholesale purchasers of drugs within the state be given access to the same
discounts and incentives. Such legislation has been introduced in the past but
not enacted in Missouri, Arizona, Pennsylvania, and New York, and is presently
being considered in New Mexico, all states where the Company operates mail
service pharmacies. Such legislation, if enacted in a state where one of our
mail service pharmacies is located, could adversely affect our ability to
negotiate discounts on our purchase of prescription drugs to be dispensed by our
mail service pharmacies.
REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug plans
are generally not subject to financial regulation by the states. However, if the
PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. In those cases in which we have contracts in which we
are materially at risk to provide the pharmacy benefit, we believe we have
complied with all applicable laws.
Many of these state laws may be preempted in whole or in part by ERISA,
which provides for comprehensive federal regulation of employee benefit plans.
However, the scope of ERISA preemption is uncertain and is subject to
conflicting court rulings, and in any event we provide services to certain
clients, such as governmental entities, that are not subject to the preemption
provisions of ERISA. Other state laws may be invalid in whole or in part as an
unconstitutional attempt by a state to regulate interstate commerce, but the
outcome of challenges to these laws on this basis is uncertain. Accordingly,
compliance with state laws and regulations is a significant operational
requirement for us.
MAIL PHARMACY REGULATION. Our mail service pharmacies are located in
Arizona, Missouri, New Mexico, New York and Pennsylvania, and we are licensed to
do business as a pharmacy in each such state. Many of the states into which we
deliver pharmaceuticals have laws and regulations that require out-of-state mail
service pharmacies to register with, or be licensed by, the board of pharmacy or
similar regulatory body in the state. These states generally permit the mail
service pharmacy to follow the laws of the state within which the mail service
pharmacy is located, although one state also requires that we employ a
pharmacist licensed in that state. Another state has proposed a similar
requirement. We have registered in every state in which, to our knowledge, such
registration is required.
One state has a statute that purports to prohibit residents from obtaining
prescription drugs by mail if the mail order business of the company dispensing
the drugs represents more than a specified percentage of the company's total
volume of pharmacy business. The statute is ambiguous in certain respects, but
we do not believe our mail order volume exceeds the threshold percentage. We are
licensed as a pharmacy in that state. No enforcement action has been taken under
the statute against us, and to our knowledge, no such enforcement action is
contemplated. Approximately 2.5% of our revenues come from mail delivery of
prescription drugs into that state. If an enforcement action were commenced
against us under that statute, we would consider all of our alternatives,
including challenging the validity of the statute.
Other statutes and regulations affect our mail service operations. Federal
statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide clients with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the transmission of drugs and medicines through the mail
to a degree that could have an adverse effect on our mail service operations.
REGULATION OF INFORMED DECISION COUNSELING AND DISEASE MANAGEMENT SERVICES.
Our health care decision support counseling and disease management programs are
affected by many of the same types of state laws and regulations as our other
activities. In addition, all states regulate the practice of medicine and the
practice of nursing. We do not believe our informed decision counseling or
disease management activities constitute either the practice of medicine or the
practice of nursing. However, there can be no assurance that a regulatory agency
in one or more states may not assert a contrary position, and we are not aware
of any controlling legal precedent for services of this kind.
PRIVACY AND CONFIDENTIALITY LEGISLATION. Most of our activities involve the
receipt or use of confidential, medical information concerning individual
members. In addition, we use aggregated and anonymized data for research and
analysis purposes. Legislation has been proposed at the federal level and in
several states to restrict the use and disclosure of confidential medical
information. To date, no such legislation has been enacted that adversely
impacts our ability to provide our services, but there can be no assurance that
federal or state governments will not enact legislation, impose restrictions or
adopt interpretations of existing laws that could have a material adverse effect
on our operations.
NON-PBM REGULATORY ENVIRONMENT. Our non-PBM activities operate in a
regulatory environment that is quite similar to that of our PBM activities.
REGULATION OF INFUSION THERAPY SERVICES. Our infusion therapy services
business is subject to many of the same or similar state laws and regulations
affecting our pharmacy benefit management business. In addition, some states
require that providers of infusion therapy services be licensed. We are licensed
as a home health agency and pharmacy in Texas, as a residential service agency
and pharmacy in Maryland, and as a pharmacy in New Jersey, Missouri, Arizona and
Pennsylvania. We are also licensed as a non-resident pharmacy in various states.
We believe that we are in substantial compliance with such licensing
requirements.
The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), a non-profit, private organization, has established written standards
for health care organizations and home care services, including standards for
services provided by home infusion therapy companies. All of our infusion
therapy facilities have received JCAHO accreditation, which allows us to market
infusion therapy services to Medicare and Medicaid programs. If we expand our
home infusion therapy services to other states or to Medicare or Medicaid
programs, we may be required to comply with other applicable laws and
regulations.
FUTURE REGULATION. We are unable to predict accurately what additional
federal or state legislation or regulatory initiatives may be enacted in the
future relating to our businesses or the health care industry in general, or
what effect any such legislation or regulations might have on us. There can be
no assurance that federal or state governments will not impose additional
restrictions or adopt interpretations of existing laws that could have a
material adverse effect on our business or financial position.
SERVICE MARKS AND TRADEMARKS
We have registered the service marks "Express Scripts", "PERx",
"ExpressComp", "ExpressReview", "ExpressTherapeutics", "IVTx", "PERxCare",
"PERxComp", "RxWizard", "PTE", "ValueRx" and "Value Health, Inc.", with the
United States Patent and Trademark Office. Our rights to these marks will
continue so long as we comply with the usage, renewal filing and other legal
requirements relating to the renewal of service marks. We are in the process of
applying for registration of several other trademarks and service marks. If we
are unable to obtain any additional registrations, we believe there would be no
material adverse effect on our business.
INSURANCE
Our PBM operations, including the dispensing of pharmaceutical products by
our mail service pharmacies, and the services rendered in connection with our
disease management and informed decision counseling services, and our non-PBM
operations, such as the products and services provided in connection with our
infusion therapy programs (including the associated nursing services), may
subject us to litigation and liability for damages. We believe that our
insurance protection is adequate for our present business operations, but there
can be no assurance that we will be able to maintain our professional and
general liability insurance coverage in the future or that such insurance
coverage will be available on acceptable terms or adequate to cover any or all
potential product or professional liability claims. A successful product or
professional liability claim in excess of our insurance coverage, or one for
which an exclusion from coverage applies, could have a material adverse effect
upon our financial position or results of operations.
EMPLOYEES
As of March 1, 1999, we employed a total of 3,283 employees in the U.S. and
71 employees in Canada. Approximately 375 of the U.S. employees are members of
collective bargaining units. Specifically, we employ members of the Service
Employees International Union at our Bensalem, Pennsylvania facility, members of
the United Auto Workers Union at our Farmington Hills, Michigan facility, and
members of the United Food and Commercial Workers Union ("UFCW") at our
Albuquerque, New Mexico facility. One of our collective bargaining agreements
with the UFCW expires on July 1, 1999. We have not begun negotiations with the
UFCW for this contract at this time.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of the Annual Report on Form 10-K, the
information regarding executive officers of the Company required by Item 401 of
Regulation S-K is hereby included in Part I of this report.
The executive officers of the Company and their ages as of March 1, 1999,
are as follows:
NAME AGE POSITION
Howard L. Waltman 66 Chairman of the Board
Barrett A. Toan 51 President, Chief Executive
Officer and Director
Stuart L. Bascomb 57 Executive Vice President
Thomas M. Boudreau 47 Senior Vice President of
Administration, General Counsel
and Secretary
Patrick J. Byrne 43 Senior Vice President Plymouth
Site Operations
Robert W. (Joe) Davis 52 Senior Vice President and Chief
Information Systems Officer
Linda L. Logsdon 51 Senior Vice President of Health
Management Services
David A. Lowenberg 49 Senior Vice President and
Director of Site Operations
George Paz 43 Senior Vice President and Chief
Financial Officer
Jean-Marc Quach 40 Senior Vice President and Chief
of Staff
Kurt D. Blumenthal 54 Vice President of Finance
Joseph W. Plum 51 Vice President and Chief
Accounting Officer
Mr. Waltman was elected Chairman of the Board of the Company in March 1992.
Mr. Waltman has been a director of the Company since its inception in September
1986. From September 1992 to December 31, 1995, Mr. Waltman served as the
Chairman of the Board of NYLCare Health Plans, Inc., which was an indirect
wholly-owned subsidiary of New York Life Insurance Company at the time.
Mr. Toan was elected Chief Executive Officer in March 1992 and President
and a director in October 1990. Mr. Toan has been an executive employee of the
Company since May 1989.
Mr. Bascomb was elected Executive Vice President of the Company in March
1989, and also served as Chief Financial Officer and Treasurer from March 1992
until May 1996.
Mr. Boudreau was elected Senior Vice President, General Counsel and
Secretary of the Company in October 1994. He has served as General Counsel of
the Company since June 1994. From September 1984 until June 1994, Mr. Boudreau
was a partner in the St. Louis law firm of Husch & Eppenberger.
Mr. Byrne was elected Senior Vice President Plymouth Site Operations in
May, 1998. From April 1996 until October 1997, Mr. Byrne served as Vice
President of Underwriting for ValueRx, and then served as Vice President and
General Manager for the National Employer Business Unit of ValueRx for the
period November 1997 until May 1998. From 1991 until March 1996, Mr. Byrne was a
Director of Finance for United Healthcare Corporation.
Mr. Davis was elected Senior Vice President and Chief Information Systems
Officer of the Company in September 1997. Mr. Davis served as Director of
Technical Services and Computer Operations of the Company from July 1993 until
July 1995, and as Vice President and General Manager of St. Louis Operations of
the Company from July 1995 until September 1997.
Ms. Logsdon was elected Senior Vice President of Health Management Services
in May, 1997, and served as Vice President of Demand and Disease Management from
November 1996 until that time. Prior to joining the Company in November 1996,
Ms. Logsdon served as Vice President of Corporate Services and Chief Operating
Officer of United HealthCare's Midwest Companies-GenCare/Physicians Health
Plan/MetraHealth, a St. Louis-based health maintenance organization, from
February 1995 to October 1996, and as Deputy Director/Vice President of GenCare
Health Systems, Inc., also a St. Louis-based health maintenance organization,
from June 1992 to February 1995.
Mr. Lowenberg was elected Senior Vice President and Director of Site
Operations of the Company in October, 1994 and Vice President of the Company in
November 1993. Mr. Lowenberg also served as General Manager of the Tempe
facility from March 1993 until January 1995.
Mr. Paz joined the Company and was elected Senior Vice President and Chief
Financial Officer in January 1998. Prior to joining the Company, Mr. Paz was a
partner in the Chicago office of Coopers & Lybrand from December 1995 to
December 1997, and served as Executive Vice President and Chief Financial
Officer of Life Partners Group, Inc., a life insurance company, from October
1993 until December 1995.
Mr. Quach was elected Senior Vice President and Chief of Staff in May 1998.
Prior to joining the Company, Mr. Quach was the Director of Marketing for Roche
Diagnostics during the period April 1996 to May 1998. Mr. Quach served as the
Director of Pharmacy for NYLCare Health Plans, Inc. for the period September
1991 to April 1996, which was an indirect wholly-owned subsidiary of New York
Life Insurance Company at the time.
Mr. Blumenthal was elected Vice President of Finance in May 1995, and
served as Acting Chief Financial Officer of the Company from July 1996 to
January 1998. From August 1993 to February 1995, Mr. Blumenthal served as the
Chief Financial Officer of President Baking Co.
Mr. Plum was elected Vice President in October 1994 and has served as Chief
Accounting Officer since March 1992 and Corporate Controller since March 1989.
ITEM 2 - PROPERTIES
We operate our United States and Canadian PBM and non-PBM businesses
out of leased and owned facilities throughout the United States and Canada. All
of our facilities are leased except for our Albuquerque, New Mexico facility,
which we own.
PBM FACILITIES NON-PBM FACILITIES
Maryland Heights, Missouri Maryland Heights, Missouri
Earth City, Missouri Columbia, Missouri
Tempe, Arizona Dallas, Texas
Plymouth, Minnesota Houston, Texas
Bensalem, Pennsylvania Columbia, Maryland
Troy, New York Tempe, Arizona
Farmington Hills, Michigan Northvale, New Jersey
Albuquerque, New Mexico West Chester, Pennsylvania
Mississauga, Ontario
Our Maryland Heights, Missouri facility houses our corporate offices.
IVTx's corporate offices are also located at our Maryland Heights, Missouri
facility. The non-PBM specialty distribution services are operated out of our
facility in Tempe, Arizona. We believe our facilities have been generally well
maintained and are in good operating condition. Our existing facilities contain
approximately 600,000 square feet in area, in the aggregate.
During 1998, we entered into an operating lease for a new corporate
headquarters facility to be located adjacent to our existing Maryland Heights,
Missouri facility, which will contain approximately 140,000 square feet in area.
The new building is presently under construction and we anticipate taking
possession during the second quarter of 1999. We are continuing to evaluate our
future requirements for additional space.
We own computer systems for both the Maryland Heights, Missouri and Tempe,
Arizona sites. Computer systems to process the traditional ValueRx business are
located at Perot Systems' facility in Richardson, Texas. Perot Systems maintains
the computer hardware on our behalf. Our software for drug utilization review
and other products has been developed internally by us or purchased under
perpetual, nonexclusive license agreements with third parties. Our computer
systems at each site are extensively integrated and share common files through
local and wide area networks. An uninterruptable power supply and diesel
generator allow our computers, telephone systems and mail pharmacy at each site
to continue to function during a power outage. To protect against loss of data
and extended downtime, we store software and redundant files at both on-site and
off-site facilities on a regular basis and have contingency operation plans in
place. We cannot, however, provide any assurance that our contingency or
disaster recovery plans would adequately address all relevant issues.
ITEM 3 - LEGAL PROCEEDINGS
As discussed in detail in our Quarterly Report on Form 10-Q for the period
ended June 30, 1998, filed with the Securities and Exchange Commission on August
13, 1998 (the "Second Quarter 10-Q"), we acquired all of the outstanding capital
stock of Value Health, Inc., a Delaware corporation ("VHI"), and Managed
Prescription Network, Inc., a Delaware corporation ("MPN") from Columbia
HCA/HealthCare Corporation ("Columbia") and its affiliates on April 1, 1998 (the
"Acquisition"). VHI, MPN and/or their subsidiaries (collectively, the "Acquired
Entities"), were party to various legal proceedings, investigations or claims at
the time of the Acquisition. The effect of these actions on our future financial
results is not subject to reasonable estimation because considerable uncertainty
exists about the outcomes. Nevertheless, in the opinion of management, the
ultimate liabilities resulting from any such lawsuits, investigations or claims
now pending should not materially affect our consolidated financial position,
results of operations or cash flows. A brief update of the most notable of the
proceedings follows:
VHI and several of its subsidiaries are party to two securities litigation
matters, BASH, ET AL. V. VALUE HEALTH, INC., ET AL., No. 3:97cv2711 (JCH)
(D.Conn.), and FREEDMAN, ET AL. V. VALUE HEALTH, INC., ET AL., No. 3:95 CV 2038
(JCH) (D.Conn). The two lawsuits, filed in 1995, allege that VHI and certain
other defendants made false or misleading statements to the public in connection
with VHI's acquisition of Diagnostek, Inc. in 1995. On April 24, 1998, the two
lawsuits were consolidated. On February 18, 1999, the court granted plaintiffs'
motions for class certification and certified a class consisting of (i) all
persons who purchased or otherwise acquired shares of VHI during the period from
April 3, 1995, through and including November 7, 1995, including those who
acquired shares in connection with the Diagnostek merger; and (ii) all persons
who purchased or otherwise acquired shares of Diagnostek during the period from
March 27, 1995, through and including July 28, 1995. Expert discovery is to be
completed by June 17, 1999, and any dispositive motions must be filed within 30
days thereafter.
In connection with the Acquisition, Columbia has agreed to defend and hold
us and our affiliates (including VHI) harmless from and against any liability
that may arise in connection with either of the foregoing proceedings.
Consequently, we do not believe we will incur any material liability in
connection with these matters.
In addition, in the ordinary course of our business, there have arisen
various legal proceedings, investigations or claims now pending against us and
our subsidiaries unrelated to the Acquisition. The effect of these actions on
future financial results is not subject to reasonable estimation because
considerable uncertainty exists about the outcomes. Nevertheless, in the opinion
of management, the ultimate liabilities resulting from any such lawsuits,
investigations or claims now pending will not materially affect our consolidated
financial position, results of operations or cash flows.
Since 1993, retail pharmacies have filed over 100 separate lawsuits against
drug manufacturers, wholesalers and certain PBMs, challenging brand name drug
pricing practices under various state and federal antitrust laws. The plaintiffs
alleged, among other things, that the manufacturers had offered, and certain
PBMs had knowingly accepted, discounts and rebates on purchases of brand name
prescription drugs that violated the federal Robinson-Patman Act. Some
plaintiffs also filed claims against the drug manufacturers and drug wholesalers
alleging price fixing of pharmaceutical drugs in violation of Section 1 of the
Sherman Act, and these claims were certified as a class action. Some of the drug
manufacturers settled both the Sherman Act and the Robinson Patman claims
against them. The class action Sherman Act settlements generally provide that
the manufacturers will not refuse to pay discounts or rebates to retail
pharmacies based on their status as such. Settlements with plaintiffs who opted
out of the class are not part of the public record. The drug manufacturer and
wholesaler defendants in the class action who did not settle were recently
dismissed by the court on a motion for directed verdict. Plaintiffs who opted
out of the class action will still have the opportunity to try their Sherman Act
claims in separate lawsuits. The class action did not involve the
Robinson-Patman claims, so many of those matters are still pending. We are not a
party to any of these proceedings. To date, we do not believe any settlements
have had a material adverse effect on our business. However, we cannot provide
any assurance that the terms of the settlements will not materially adversely
affect us in the future. In addition, we cannot predict the outcome or possible
ramifications to our business of the cases in which the plaintiffs are trying
their claims separately, and we cannot provide any assurance that we will not be
made a party to any such separate lawsuits in the future.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION. Our Class A Common Stock has been traded on the Nasdaq
National Market ("Nasdaq") tier of The Nasdaq Stock Market under the symbol
"ESRX" since June 9, 1992. Prior to that time, there was no public market for
our Class A Common Stock. The high and low prices, as reported by the Nasdaq,
are set forth below for the periods indicated. These prices reflect the
two-for-one split on October 30, 1998, in the form of a 100% stock dividend to
holders of record on October 20, 1998.
<TABLE>
Fiscal Year 1998 Fiscal Year 1997
<CAPTION>
Class A Common Stock High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 42.750 $ 27.000 $ 19.125 $ 15.625
Second Quarter 45.000 35.500 24.500 16.375
Third Quarter 45.250 31.625 27.250 20.750
Fourth Quarter 69.000 33.875 32.375 25.313
</TABLE>
Our Class B Common Stock has no established public trading market, but
those shares will automatically convert to Class A Common Stock on a share for
share basis upon transfer thereof to any entity other than New York Life
Insurance Company or one of its affiliates.
HOLDERS. As of March 1, 1999, there were 209 stockholders of record of our
Class A Common Stock, and 1 holder of record of our Class B Common Stock. We
estimate there are approximately 9,000 beneficial owners of the Class A Common
Stock.
DIVIDENDS. The Board of Directors has not declared any cash dividends on
our common stock since the initial public offering. The Board of Directors does
not currently intend to declare any cash dividends in the foreseeable future.
The terms of our existing credit facility contains, and the terms of the credit
facility we intend to consummate in connection with the pending DPS acquisition
will contain, certain restrictions on our ability to declare or pay cash
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998(2) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 2,824,872 $ 1,230,634 $ 773,615 $ 544,460 $ 384,504
-----------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 2,584,997 1,119,167 684,882 478,283 338,151
Selling, general and administrative 148,990 62,617 49,103 37,300 25,882
Corporate restructuring 1,651 - - - -
-----------------------------------------------------------------------------
2,735,638 1,181,784 733,985 515,583 364,033
-----------------------------------------------------------------------------
Operating income 89,234 48,850 39,630 28,877 20,471
Interest income (expense), net (12,994) 5,856 3,450 757 305
-----------------------------------------------------------------------------
Income before income taxes 76,240 54,706 43,080 29,634 20,776
Provision for income taxes 33,566 21,277 16,932 11,307 8,053
-----------------------------------------------------------------------------
Net income $ 42,674 $ 33,429 $ 26,148 $ 18,327 $ 12,723
=============================================================================
Earnings per share(3)
Basic $ 1.29 $ 1.02 $ 0.81 $ 0.62 $ 0.43
Diluted $ 1.27 $ 1.01 $ 0.80 $ 0.60 $ 0.42
Weighted average shares outstanding(3)
Basic 33,105 32,713 32,160 29,560 29,588
Diluted 33,698 33,122 32,700 30,545 30,293
- -----------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Cash $ 122,589 $ 64,155 $ 25,211 $ 11,506 $ 5,742
Working capital 117,611 166,062 128,259 58,653 38,082
Total assets 1,095,461 402,508 300,425 164,088 108,922
Debt:
Short-term debt 54,000
Long-term debt 306,000
Stockholders' equity 249,694 203,701 164,090 77,379 52,485
- -----------------------------------------------------------------------------------------------------------------------
Selected Data:
Pharmacy benefit covered lives 22,900 12,600 9,900 8,100 5,700
Annual drug spending(3) $ 4,495,000 $ 2,486,000 $ 1,636,000 $ 1,172,000 $ 716,000
Pharmacy network claims processed 113,177 73,164 57,838 42,871 26,323
Mail pharmacy prescriptions filled 7,426 3,899 2,770 2,129 1,594
EBITDA(4) $ 117,318 $ 59,320 $ 46,337 $ 33,258 $ 23,795
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(1)Earnings per share and weighted average shares outstanding have been
restated to reflect the two-for-one stock split effective October 30, 1998.
(2)Includes the acquisition of ValueRx effective April 1, 1998. Also
includes a corporate restructuring charge in 1998 of $1,651 ($1,002 after tax).
Excluding this restructuring charge, our basic and diluted earnings per share
would have been $1.32 and $1.30, respectively.
(3)Annual drug spending represents the aggregate drug expenditure managed
by us whether or not we dispensed the drugs through our pharmacy networks, our
mail pharmacy service operations, or through pharmacy networks and formulary
programs we administer for our clients.
(4)EBITDA is earnings before interest, taxes, depreciation and
amortization, and corporate restructuring (operating income plus depreciation
and amortization and corporate restructuring). EBITDA is presented because it is
a widely accepted indicator of a company's ability to incur and service
indebtedness. EBITDA, however, should not be considered as an alternative to net
income, as a measure of operating performance, as an alternative to cash flow or
as a measure of liquidity. In addition, our definition of EBITDA may not be
comparable to similar measures reported by other companies.
</FN>
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
During 1998, the Company continued executing its growth strategy of
generating sales to new clients, expanding the services provided to existing
clients, developing new products and services for sale to existing clients and
pharmaceutical manufacturers and selectively pursuing strategic acquisitions and
alliances. On April 1, 1998, the Company consummated its first major acquisition
by acquiring "ValueRx", the PBM operations of Columbia/HCA Healthcare
Corporation ("Columbia"), for approximately $460 million in cash, which included
transaction costs and executive severance costs of approximately $6.7 million
and $8.3 million, respectively. Specifically, the Company acquired various
subsidiaries of Columbia each now or formerly conducting business as a PBM,
including ValueRx Pharmacy Program, Inc. The acquisition was accounted for under
the purchase method of accounting. Consequently, the Company's operating results
include those of ValueRx from April 1, 1998. The net assets acquired have been
preliminarily recorded at their estimated fair value, resulting in $289,863,000
of goodwill which is being amortized over 30 years.
The acquisition of ValueRx enabled the Company to increase membership to
approximately 22.9 million lives as of December 31, 1998 from approximately 12.6
million lives as of December 31, 1997, representing an 81.7% increase. In 1997,
the Company increased membership by approximately 2.7 million lives from 9.9
million lives as of December 31, 1996, representing a 27.3% increase. The
increase in membership in 1997 was primarily due to internal growth. Reflecting
the addition of new clients implemented at January 1, 1999, the Company's net
membership increased approximately 600,000 to approximately 23.5 million lives.
The Company primarily derives its revenues from the sale of PBM services in
the United States and Canada. The Company's PBM net revenues generally include
administrative fees, dispensing fees and ingredient costs of pharmaceuticals
dispensed from retail pharmacies included in one of the Company's networks or
from one of the Company's mail pharmacies and records the associated costs in
cost of revenues. Where the Company only administers the contracts between its
clients and the clients' retail pharmacy networks, the Company records as net
revenues only the administrative fee it receives from its activities. The
Company also derives PBM net revenues from the sale of informed decision
counseling services through its Express Health LineSM division, and the sale of
medical information management services, which include provider profiling,
disease management support services and outcomes assessments through its PPS
subsidiary. Non-PBM net revenues are derived from (i) the sale of
pharmaceuticals for and the provision of infusion therapy services through its
IVTx subsidiary, (ii) an administrative fee received for members using the
Company's vision program through its alliance with Cole Managed Vision ("Cole"),
a subsidiary of Cole National Corporation, and (iii) administrative fees
received from drug manufacturers for the dispensing of pharmaceuticals through
its Specialty Distribution division.
RESULTS OF OPERATIONS
NET REVENUES
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
(IN THOUSANDS) 1998 INCREASE 1997 INCREASE 1996
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
PBM $ 2,765,111 132.1% $ 1,191,173 60.3% $ 743,077
Non-PBM 59,761 51.4% 39,461 29.2% 30,538
---------------------------------------------------------------
Net revenues $ 2,824,872 129.5% $ 1,230,634 59.1% $ 773,615
===============================================================
</TABLE>
The Company experienced significant growth in its net revenues during 1998
over 1997 primarily due to the acquisition of ValueRx and, to a lesser extent,
the Company's continuing ability to attract new clients as well as additional
members from existing clients. Net revenues for the network pharmacy claims
services increased $1,175,659,000, or 141.7%, in 1998 over 1997 and increased
$311,195,000, or 60.0%, in 1997 over 1996. These increases are the result of
growth in the number of network pharmacy claims processed of 54.7% in 1998 over
1997 and of 26.5% in 1997 over 1996, and an increase in the average net revenue
per network pharmacy claim of 56.3% in 1998 over 1997 and an increase of 26.6%
in 1997 over 1996. The increase in average net revenue per network pharmacy
claim for both periods is primarily due to the following factors: (i) a larger
number of clients using retail pharmacy networks established by the Company
rather than retail pharmacy networks established by our clients, which results
in the Company recording dispensing fees and ingredient costs in net revenues
and cost of revenues, and (ii) higher drug ingredient costs resulting from price
increases for existing drugs, new drugs introduced into the marketplace and
changes in therapeutic mix and dosage. These increases were partially offset by
lower pricing offered by the Company in response to continued competitive
pressures.
The number of clients using retail pharmacy networks established by the
Company increased significantly beginning in the second quarter of 1998 due to
the acquisition of ValueRx, as substantially all ValueRx clients used the retail
pharmacy networks established by ValueRx. As a result of this shift, gross
margin percentages are reduced but the dollar amount of the gross profit is not
significantly affected.
Net revenues for mail pharmacy services increased $385,149,000, or 109.6%,
in 1998 over 1997 and $129,273,000, or 58.2%, in 1997 over 1996. These increases
are the result of the growth in mail pharmacy claims processed of 90.5% in 1998
over 1997 and 40.8% in 1997 over 1996, and an increase in the average net
revenue per mail pharmacy claim of 10.0% in 1998 over 1997 and 12.4% in 1997
over 1996. The increase in the average net revenue per mail pharmacy claim for
both periods is primarily due to the following factors: (i) the termination of
inventory replacement programs maintained for two large clients during 1997; and
(ii) higher drug ingredient costs. These increases were partially offset by
lower pricing offered by the Company in response to continued competitive
pressures.
Under the inventory replacement programs offered in 1996 and the first four
months of 1997, the client provided drug inventory on consignment to fill mail
service prescriptions for members of the client's plan, and the Company included
only its dispensing fee as net revenue. For 1998 and most of 1997, all mail
pharmacy clients utilized the Company's standard program in which the Company
purchases and takes title to the inventory used to fill the prescriptions and,
therefore, includes the ingredient costs as well as the dispensing fees in net
revenues. This change had the effect of increasing both net revenues and cost of
revenues during 1998 and 1997 compared to 1997 and 1996, respectively, but there
was no significant effect on the Company's reported gross margin during 1998 and
1997 from the conversion to the standard program. In addition, the Company's
inventory levels increased substantially during 1997 over 1996 as a result of
the termination of the inventory replacement program.
Net revenues for the Company's non-PBM services increased 51.4% in 1998
over 1997 and 29.2% in 1997 over 1996. The increases are primarily attributable
to the continued growth in the number of members and/or clients who receive
these services, higher drug ingredient costs and the Company's ability to
develop new products and services.
COST AND EXPENSES
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
(IN THOUSANDS) 1998 INCREASE 1997 INCREASE 1996
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PBM $ 2,540,360 133.4% $1,088,225 64.4% $661,946
Percentage of pbm net revenues 91.9% 91.4% 89.1%
Non-PBM 44,637 44.3% 30,942 34.9% $ 22,936
Percentage of non-pbm net 74.7% 78.4% 75.1%
revenues
-------------------------------------------------------------
Cost of revenues 2,584,997 131.0% 1,119,167 63.4% $684,882
Percentage of net revenues 91.5% 90.9% 88.5%
Selling, general and administrative 130,116 127.2% 57,257 23.8% 46,267
Percentage of net revenues 4.6% 4.7% 6.0%
Depreciation and amortization (1) 18,874 252.1% 5,360 89.0% 2,836
Percentage of net revenues 0.7% 0.4% 0.4%
Corporate restructuring expense 1,651 NM - NM -
Percentage of net revenue 0.0% 0.0% 0.0%
=============================================================
Total cost and expenses $ 2,735,638 131.5% $ 1,181,784 61.0% $733,985
=============================================================
Percentage of net revenues 96.8% 96.0% 94.9%
<FN>
(1) Represents depreciation and amortization expense included in selling,
general and administrative expenses on the Company's Statement of Operations.
Cost of revenues, above, includes depreciation and amortization expense on
property, plant and equipment. nm = not meaningful
</FN>
</TABLE>
The Company's cost of revenues for PBM services as a percentage of PBM net
revenues continued to increase in 1998 and 1997 over 1997 and 1996,
respectively. Cost of revenues for the Company's pharmacy network claims and
mail pharmacy claims increased 145.5% and 106.7% during 1998 and 65.7% and 60.2%
during 1997, respectively. The PBM gross margin as a percentage of PBM net
revenues declined 0.5 percentage points during 1998 over 1997 and 2.3 percentage
points during 1997 over 1996. The decrease in gross margin percentage in 1997 is
due to the shift towards pharmacy networks established by the Company, as
opposed to those established by its clients, higher drug ingredient costs and
the termination of the inventory replacement programs, as discussed above in
"--Net Revenues." The decrease in gross margin percentage in 1998 is primarily
due to the shift towards pharmacy networks established by the Company. The
pharmacy network shift continued due to the acquisition of ValueRx, as the
ValueRx clients primarily used retail pharmacy networks established by ValueRx.
This decrease was partially offset by operating efficiencies achieved in the
Company's mail pharmacies during 1998 and revenues generated from integrated PBM
services, such as medical and drug data analysis, that provide higher gross
margins.
Cost of revenues for non-PBM services decreased as a percentage of non-PBM
net revenues from 1997 primarily due to the Company developing new business that
generates higher gross margins. These higher gross margins were partially offset
by increasing costs associated with continued expansion of certain operations
and continued change in the product mix sold in 1998 compared to 1997. Cost of
revenues for non-PBM services increased as a percentage of non-PBM net revenues
in 1997 over 1996 primarily due to increasing costs associated with continued
expansion of certain operations.
Selling, general and administrative expenses increased $72,859,000, or
127.2%, in 1998 over 1997 and $10,990,000, or 23.8%, in 1997 over 1996. The
increase during 1998 was the result of the Company's acquisition of ValueRx,
costs incurred during the integration of ValueRx and costs required to expand
the operational and administrative support functions to enhance management of
the pharmacy benefit. The increase during 1997 was primarily due to the
expansion of the operational and administrative support functions to enhance
management of the pharmacy benefit. As a percentage of net revenues, selling,
general and administrative expenses for 1998 decreased slightly to 4.6% from
4.7% in 1997. In 1997, selling, general and administrative expenses, as a
percentage of net revenues, decreased 1.3 percentage points from 6.0% in 1996.
Selling, general and administrative expenses, as a percentage of net revenues,
in both periods were affected by the Company recording higher net revenues due
to the shift towards pharmacy networks established by the Company, as opposed to
those established by its clients and the termination of the inventory
replacement programs, as discussed above for "Net Revenues."
As part of its overall plan to achieve operating economies, the Company has
been integrating ValueRx into its historical business. During 1998, the Company
substantially met its integration goals by combining existing contracts and
contracting procedures related to both suppliers and providers; integrating
financial reporting systems, reducing the ValueRx computer systems from five to
three, consolidating financial operations, consolidating organizational
structure and employee benefits, and implementing a new sales and marketing
program for enhanced PBM services. The Company expects to reduce the ValueRx
computer systems to one by October, 1999. Except for certain new systems
development costs, the Company is expensing integration costs as incurred.
Depreciation and amortization substantially increased during 1998 over 1997
due to the acquisition of ValueRx. During 1998, the Company recorded
amortization expense for goodwill and other intangible assets of $12,183,000.
The remaining increases in 1998 and 1997 are primarily due to the Company
expanding its operations and enhancing its information systems to better manage
the pharmacy benefit.
On June 17, 1998, the Company announced that it had reached an agreement
with Cole, pursuant to which Cole will provide certain vision care services for
the Company's clients and their members. The agreement enables the Company to
focus on its PBM business while still offering vision care services to its
members by transferring certain functions performed by its Express Scripts
Vision Corporation to Cole, effective September 1, 1998. In conjunction with the
agreement, the Company also announced plans to close the operations of its
wholly-owned subsidiary, PhyNet, Inc., a vision program management services
organization As a result, the Company recorded a one-time restructuring charge
of $1,651,000 in 1998 comprised of asset write-downs of $1,235,000 and expected
employee transition cash payments of $416,000 for 61 employees. During 1998, the
Company incurred cash payments of $184,000 for employee transition and non cash
adjustments of $704,000 for the write-down of assets. The Company anticipates
completing the remainder of the restructuring transactions by the end of the
third quarter of 1999.
INTEREST INCOME (EXPENSE), NET
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
(IN THOUSANDS) 1998 INCREASE 1997 INCREASE 1996
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Interest expense $ (20,230) nm $ (225) nm $ (59)
Percentage of net revenues -0.7% 0.0% 0.0%
Interest income 7,236 19.0% 6,081 73.3% 3,509
Percentage of net revenues 0.2% 0.5% 0.5%
-------------------------------------------------------------
Interest income (expense), net $ (12,994) nm $ 5,856 69.7% $ 3,450
=============================================================
Percentage of net revenues -0.5% 0.5% 0.5%
nm = not meaningful
</TABLE>
During 1998, the Company recorded significant interest expense resulting
from the financing of the ValueRx acquisition with $360 million in borrowings
(see "Liquidity and Capital Resources"). Interest income increased $1,155,000,
or 19.0%, in 1998 over 1997 and $2,572,000, or 73.3% in 1997 over 1996. The
increases in 1998 and 1997 are due to the Company investing larger cash
balances. In addition, in 1997 the larger cash balances were invested at higher
interest rates than those in 1996.
PROVISION FOR INCOME TAXES
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
(IN THOUSANDS) 1998 INCREASE 1997 INCREASE 1996
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Provision for income taxes $33,566 57.8% $21,277 25.7% $16,932
Effective tax rate 44.0% 38.9% 39.3%
</TABLE>
The Company's effective tax rate increased in 1998 over 1997 due to the
non-deductible goodwill and client contract amortization expense resulting from
the ValueRx acquisition. It is expected that the effective tax rate will
gradually decline towards the statutory rate as the Company's operating growth
continues.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
(IN THOUSANDS) 1998 INCREASE 1997 INCREASE 1996
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net income $ 42,674 27.7% $ 33,429 27.8% $ 26,148
Percentage of net revenue 1.5% 2.7% 3.4%
Basic earnings per share $ 1.29 26.5% $ 1.02 25.9% $ 0.81
Weighted average shares outstanding 33,105 1.2% 32,713 1.7% 32,160
Diluted earnings per share $ 1.27 25.7% $ 1.01 26.3% 0.80
Weighted average share outstanding 33,698 1.7% 33,122 1.3% 32,700
</TABLE>
The Company's net income increased $9,245,000 or 27.7% in 1998 over 1997,
and $7,281,000 or 27.8% in 1997 over 1996. Excluding the after-tax one-time
corporate restructuring charge for the managed vision business of $1,002,000,
basic earnings per share and diluted earnings per share for 1998 would have been
$1.32 and $1.30, respectively.
On October 12, 1998, the Company announced a two-for-one stock split of its
Class A and Class B Common Stock for stockholders of record on October 20, 1998,
effective October 30, 1998. The split was effected in the form of a dividend by
issuance of one additional share of Class A Common Stock for each share of Class
A Common Stock outstanding and one additional share of Class B Common Stock for
each share of Class B Common Stock outstanding. The earnings per share and the
weighted average number of shares outstanding for basic and diluted earnings per
share for each period have been adjusted for the stock split.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
(IN THOUSANDS) 1998 INCREASE 1997 INCREASE 1996
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operations $126,574 141.1% $ 52,503 75.8% $29,863
</TABLE>
The increase in operating cash flow generated in 1998 by the Company is
primarily due to the increase in net income and its continued focus on improving
working capital management. The increase in operating cash flow generated in
1997 is primarily due to the increase in net income and the Company beginning
its working capital management focus. The operating cash flow generated in 1996
is primarily due to the increase in net income. Management expects to fund its
future debt service, integration costs, Year 2000 costs and other normal
operating cash needs primarily with operating cash flow or with working capital
borrowings under the $1.1 billion credit facility the Company intends to obtain
in connection with the DPS acquisition (see below).
The Company's capital expenditures in 1998 increased $10,836,000 or 83.2%
over 1997 primarily due to the Company's concerted effort to invest in its
information technology to enhance the services provided to its clients. In
addition, the Company invested in equipment to improve efficiency at its mail
pharmacy facilities and to manage the growth encountered at these facilities. In
1997, capital expenditures increased $3,537,000 or 37.3% primarily due to the
investments required for the Company to manage its growth. Management expects to
continue investing in technology that will provide efficiencies in its
operations, manage its growth and enhance the service provided to its clients.
Management expects to fund its future anticipated capital expenditures primarily
with operating cash flow or with working capital borrowings under the $1.1
billion credit facility the Company intends to obtain in connection with the DPS
acquisition (see below).
During the first quarter of 1998, the Company negotiated a $440 million
credit facility with a bank syndicate led by Bankers Trust Company. The
five-year agreement became effective April 1, 1998, and included a $360 million
term loan facility and an $80 million revolving loan facility. The term loan
proceeds were utilized to consummate the acquisition of ValueRx. The agreement
is guaranteed by the Company's domestic subsidiaries other than Practice
Patterns Science, Inc. ("PPS") and Great Plains Reinsurance Company ("Great
Plains") and secured by pledges of 100% (or, in the case of foreign
subsidiaries, 65%) of the capital stock of the Company's subsidiaries other than
PPS and Great Plains. The provisions of this credit facility require quarterly
interest payments and, beginning in April 1999, semi-annual principal payments
of $27 million, increasing to $36 million in April 2000, to $45 million in April
2001 and to $48 million in April 2002. The interest rate is based on a spread
(the "Credit Rate Spread") over several London Interbank Offered Rates ("LIBOR")
or base rate options, depending upon the Company's ratio of earnings before
interest, taxes, depreciation and amortization to debt. At December 31, 1998,
the interest rate was 6.0625%, representing a Credit Rate Spread of 0.75% over
the three-month LIBOR rate. This credit facility contains covenants that limit:
(i) the indebtedness the Company may incur, and (ii) the amount of the Company's
annual capital expenditures. The covenants also establish: (i) a minimum
interest coverage ratio, (ii) a maximum leverage ratio, and (iii) a minimum
consolidated net worth. At December 31, 1998, the Company was in compliance with
all covenants. In addition, the Company is required to pay an annual fee,
depending on the leverage ratio, payable in quarterly installments, on the
unused portion of the revolving loan. The commitment fee was 0.225% at December
31, 1998. As a result of this credit facility, the Company canceled its $25
million line of credit with Mercantile Bank of St. Louis on March 31, 1998.
In connection with its acquisition of DPS, the Company intends to obtain a
$1.1 billion credit facility from a bank syndicate led by Credit Suisse First
Boston and Bankers Trust Company and a $150 million senior subordinated bridge
credit facility from Credit Suisse First Boston and Bankers Trust Company. The
proceeds of the facilities will be used to purchase DPS and retire the $440
million credit facility with Bankers Trust Company. The $1.1 billion credit
facility would also provide a revolving line of credit to meet working capital
needs. In addition, the Company expects to issue $350 million in Class A Common
Stock through an offering. The proceeds from the offering will be used to repay
the $150 million subordinated bridge credit facility and a portion of the
intended $1.1 billion credit facility.
To alleviate interest rate volatility in connection with its $440 million
credit facility, the Company entered into an interest rate swap arrangement for
a notional principal amount of $360 million effective April 3, 1998, with First
National Bank of Chicago, a subsidiary of Bank One Corporation. Under the terms
of the swap, the Company agreed to receive a floating rate of interest on the
amount of the term loan portion of the facility based on a three-month LIBOR
rate in exchange for payment of a fixed rate of interest of 5.88% per annum. The
notional amount of the swap is amortized in equal amounts with the principal
balance of the term loan. As a result, the Company had, in effect, converted its
variable rate term debt to fixed rate debt at 5.88% per annum for the entire
term of the term loan, plus the Credit Rate Spread. The Company anticipates
maintaining its interest rate swap in place to hedge the future variable
interest rate payments on $360 million of the intended $1.1 billion credit
facility.
As of December 31, 1998, the Company had repurchased a total of 475,000
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 1998. The Company's Board of Directors approved the repurchase
of up to 1,700,000 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 Company's intended $1.1 billion credit
facility.
The Company has reviewed and intends to continue to review potential
acquisitions and affiliation opportunities. The Company believes that available
cash resources, bank financing or the issuance of additional common stock could
be used to finance such acquisitions or affiliations. There can be no assurance
the Company will make other acquisitions or affiliations in 1999 or thereafter.
OTHER MATTERS
On March 16, 1998, the Company announced that, in connection with the
consummation of the sale by New York Life Insurance Company ("New York Life") of
NYLCare Health Plans, Inc. ("NYLCare") to Aetna U.S. Healthcare Inc. ("Aetna")
(which occurred on July 15, 1998), the Company and Aetna had reached an
agreement to extend the Company's PBM services and infusion therapy services
agreements to HMO members through December 31, 2003. The existing PBM 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 agreement
between Aetna and the Company provides that the Company will continue providing
PBM services, excluding informed decision counseling services, to 1.4 million
HMO members through 2003, which is comparable to the NYLCare HMO membership base
served by the Company prior to the Aetna acquisition. 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 until December 31, 1999. The Company expects
to continue providing PBM services to members of the NYLCare indemnity programs
until such members are converted to new health insurance policies, which is
anticipated to occur primarily during 1999. In connection with the Aetna
arrangement, the Company and New York Life have reached an agreement in
principle whereby New York Life 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 1999.
During 1998 and 1997, 4.8% and 15.7%, respectively, of the Company's PBM
net revenues were from services provided to members of HMOs owned or managed by
NYLCare or insurance policies administered by NYLCare while it was a wholly
owned subsidiary of New York Life. Of the Company's net revenues for non-PBM
services, 21.5% and 54.8% in 1998 and 1997, respectively, were for services
provided to members of HMOs owned or managed by NYLCare or insurance policies
administered by NYLCare while it was a wholly owned subsidiary of New York Life.
Effective with the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards Statement 130, Reporting Comprehensive Income
("FAS 130"). FAS 130 requires noncash changes in stockholders' equity to be
combined with net income and reported in a new financial statement category
entitled comprehensive income. Other than net income, the only component of
comprehensive income for the Company is the change in the foreign currency
translation account.
Effective with fiscal year end 1998, the Company adopted Statement of
Financial Accounting Standards Statement 131, Disclosures About Segments of an
Enterprise and Related Information ("FAS 131"). FAS 131 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. The information is to be
derived from the management approach, which designates the internal organization
that is used by management for making operating decisions and assessing
performance as the source of the Company's operating segments. Adoption of FAS
131 did not affect the Company's results of operations or its financial position
but did affect the disclosure of segment information (see Note 13 in our 1998
Consolidated Financial Statements).
In June 1998, Statement of Financial Accounting Standards Statement 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133") was
issued. FAS 133 requires all derivatives to be recognized as either assets or
liabilities in the statement of financial position and measured at fair value.
In addition, FAS 133 specifies the accounting for changes in the fair value of a
derivative based on the intended use of the derivative and the resulting
designation. FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, and will be applicable to the Company's first
quarter of fiscal year 2000. The Company's present interest rate swap (see
"--Liquidity and Capital Resources") would be considered a cash flow hedge.
Accordingly, the change in the fair value of the swap would be reported on the
balance sheet as an asset or liability. The corresponding unrealized gain or
loss representing the effective portion of the hedge will be initially
recognized in stockholders' equity and other comprehensive income and
subsequently any changes in unrealized gain or loss from the initial measurement
date will be recognized in earnings concurrent with the interest expense on the
Company's underlying variable rate debt. If the Company had adopted FAS 133 as
of December 31, 1998, the Company would have recorded the unrealized loss of
$7,209,000 as a liability and reduction in stockholders' equity and other
comprehensive income.
POST YEAR-END EVENTS
On February 1, 1999, the Company announced a three-and-a-half-year contract
with Blue Cross and Blue Shield of Massachusetts ("BCBSMA"). Beginning in the
second half of 1999, the Company will provide retail network and mail pharmacy
services, claims processing, clinical management support and other related
services to approximately 1.2 million BCBSMA members.
On February 9, 1999, the Company announced its definitive agreement to
acquire DPS for $700 million in cash. The Company intends to finance the
acquisition through its $1.1 billion credit facility and its $150 million senior
subordinated bridge credit facility (see "--Liquidity and Capital Resources").
The acquisition will be accounted for under the purchase method of accounting
and is subject to customary closing conditions and consummation and funding of
the committed bank credit facility and senior subordinated bridge credit
facility. The Company anticipates the transaction will close in the second
quarter of 1999 and expects to issue $350 million in Class A Common Stock
through a public offering. The net proceeds of the offering will be used to
repay the senior subordinated bridge credit facility and a portion of the credit
facility.
YEAR 2000
The Company's operations rely heavily on computers and other information
systems technologies. In 1995, the Company began addressing the "Year 2000"
issue, which 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 year "00" as "1900" rather than as "2000",
which may cause system failures or produce incorrect results when dealing with
date-sensitive information beyond 1999.
The Company formed a Year 2000 task force to address this issue. The task
force has performed a self-assessment and developed a compliance plan that
addresses, in light of applicable industry standards, the testing and
modification of: (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) non-information technology devices that are
material to the Company's business. Progress in each area is monitored and
management reports are given periodically.
The Company has various applications and operating systems that are
considered critical to its operations. Approximately 75% of these systems have
been tested in an integrated environment by the Company for Year 2000
compliance. The remaining systems will either be tested and, if necessary,
modified to be compliant by the end of the second quarter of 1999, or
information residing on such systems will be integrated into a Year 2000
compliant operating system. Testing of the applications and operating systems
includes the adjudication process, the eligibility process, the billing and
remittance process, the communication process and the reporting process,
including financial reporting. In addition, since 1995, all new internally
developed software has been developed to be Year 2000 compliant and will be
fully tested during the remainder of 1999.
The Company is participating in a joint effort with other PBMs, retail
pharmacy chains, transaction routing companies and adjudication software vendors
to test Year 2000 compliance. The joint effort is called the "Y2K Provider &
Vendor Testing Coalition" and is being facilitated by The National Health
Information Network. The coalition has the support of major U.S. retail
pharmacies, including American Stores, CVS, Eckerd, Rite-Aid, Wal-Mart and
Walgreens. The inclusion of transaction routing vendors and software companies
could permit up to 95% of the Company's pharmacy network to be tested (although
there can be no assurance that all parties who are invited to participate will
actually participate). The program will allocate the retail pharmacy chains and
software vendors among the various PBMs who will be required to test the
vendors' and pharmacy chains' Year 2000 compliance. The testing is expected to
be completed during the third quarter of 1999.
The Company has sent out approximately 1,500 letters to critical
vendor/trading partners requesting a status report regarding their Year 2000
compliance. The Company has received responses from approximately 30% of these
third parties, with the majority of the vendor/trading partners responding that
they are currently addressing the Year 2000 issue and expect to be compliant.
The Company is formulating a list of vendor/trading partners that have not
responded in order to send second requests.
The Company has also contacted several hundred clients and several thousand
pharmacies whose computer systems appear to the Company not to be Year 2000
compliant in an effort to increase awareness of the problem and minimize or
eliminate any disruption in data transfer activity between such parties and the
Company. The Company has developed date windowing logic which it believes will
address many issues concerning retail pharmacies and clients with noncompliant
systems. Due to the Company's contracts typically extending over several years
and the Company receiving member eligibility information from clients that
reflect dates beyond the Year 2000, the Company has been receiving information
that would identify certain Year 2000 issues for several years. Any problems the
Company has encountered to date have been rectified by the client or, if
necessary, by the Company using the Company's windowing logic. There can be no
assurance, however, that all such problems that may be encountered in the future
can be rectified with the windowing logic.
In addressing the Year 2000 issue, the Company has and will continue to
incur internal staff costs as well as external consulting and other expenses
related to infrastructure enhancements. To date, the Company has incurred
approximately $3,500,000 addressing the Year 2000 issue. The Company anticipates
spending an additional $750,000 to $1,000,000 during 1999 addressing the Year
2000 issue. All expenditures are being expensed as incurred. To date, these
costs have not had a material adverse effect on the Company's results of
operations or financial condition, and are not expected to have a material
adverse effect on the Company's future results of operations or financial
condition.
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 issue is not
likely to pose significant operational problems for the Company. However, if the
above-described conversions are not completed in a proper and timely manner by
all affected parties, or if the Company's logic for communicating with
noncompliant systems is ineffective, the Year 2000 issue could result in
material adverse operational and financial consequences to the Company. There
can be no assurance that the Company's efforts, or those of vendors and trading
partners (who are beyond the Company's control) will be successful in addressing
the Year 2000 issue.
The Company is in the process of formalizing its contingency plans to
address potential Year 2000-related risks, including risks of vendor/trading
partner noncompliance, as well as noncompliance of any of the Company's critical
operations, and is expected to be substantially completed by the end of the
second quarter of 1999. However, the formalization of the contingency plans is
an ongoing process as the Company completes its testing and receives updates
from vendor/trading partners. There can be no assurance that the Company's
contingency plans will successfully address all potential circumstances or
consequences.
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.
MARKET RISK
To alleviate interest rate volatility in connection with its existing $440
million credit facility, the Company entered into an interest rate swap
arrangement for a notional principal amount of $360 million effective April 3,
1998, with First National Bank of Chicago. Under the swap arrangement, the
Company agreed to receive a floating rate of interest on an amount equal to the
outstanding principal balance of the term loan portion of the credit facility
based on a three-month LIBOR rate in exchange for payment of a fixed rate of
interest of 5.88% per annum on such amount. The weighted average variable rate
received by the Company for the period April 3, 1998 to December 31, 1998, was
5.5729%. The notional amount of the swap amortizes in equal amounts with the
principal balance of the term loan. The swap expires on April 3, 2003. At
December 31, 1998, the fair value of the swap was ($7,209,000).
Interest rate risk is monitored on the basis of changes in the fair value
and a sensitivity analysis is used to determine the impact interest rate changes
will have on the fair value of the interest rate swap, measuring the change in
the net present value arising from the change in the interest rate. The fair
value of the swap is then determined by calculating the present value of all
cash-flows expected to arise thereunder, with future interest rate levels
implied from prevailing mid-market yields for money-market instruments, interest
rate futures and/or prevailing mid-market swap rates. Anticipated cash-flows are
then discounted on the assumption of a continuously compounding zero-coupon
yield curve. A 10% decline in interest rates at December 31, 1998, would have
caused the fair value of the swap to decrease by an additional $3,812,000,
resulting in a fair value of ($11,021,000).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Response to this item is included in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Market Risk" above.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Express Scripts, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 60 resent fairly, in all material
respects, the financial position of Express Scripts, Inc. and its subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 60 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 12, 1999
<PAGE>
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 122,589 $ 64,155
Short-term investments 57,938
Receivables, less allowance for doubtful
accounts of $17,806 and $4,802, respectively
Unrelated parties 433,006 194,061
Related parties 16,230
Inventories 55,634 28,935
Deferred taxes 41,011 2,303
Prepaid expenses 4,667 346
--------------------------------------
Total current assets 656,907 363,968
--------------------------------------
Property and equipment, less accumulated depreciation and amortization 77,499 26,821
Goodwill, less accumulated amortization 282,163 251
Other assets 78,892 11,468
-------------------------------------
Total assets $ 1,095,461 $ 402,508
=====================================
Liabilities and Stockholders' Equity Current liabilities:
Current maturities of long-term debt $ 54,000 $ -
Claims and rebates payable 338,251 164,920
Accounts payable 60,247 17,979
Accrued expenses 86,798 15,007
-------------------------------------
Total current liabilities 539,296 197,906
Long-term debt 306,000
Other liabilities 471 901
--------------------------------------
Total liabilities 845,767 198,807
--------------------------------------
Commitments and Contingencies (Notes 3, 9 and 15)
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, 75,000,000 shares authorized,
18,610,000 and 9,238,000 shares issued and outstanding, respectively 186 93
Class B Common Stock, $.01 par value, 22,000,000 shares authorized,
15,020,000 and 7,510,000 shares issued and outstanding, respectively 150 75
Additional paid-in capital 110,099 106,901
Accumulated other comprehensive income (74) (27)
Retained earnings 146,322 103,648
-------------------------------------
256,683 210,690
Class A Common Stock in treasury at cost, 475,000 shares (6,989) (6,989)
-------------------------------------
Total stockholders' equity 249,694 203,701
-------------------------------------
Total liabilities and stockholders' equity $ 1,095,461 $ 402,508
=====================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Net revenues (including $145,758, $208,118 AND
$152,311, respectively from related parties) $ 2,824,872 $ 1,230,634 $ 773,615
----------------------------------------------------------
Cost and expenses:
Cost of revenues 2,584,997 1,119,167 684,882
Selling, general and administrative 148,990 62,617 49,103
Corporate restructuring 1,651 - -
----------------------------------------------------------
2,735,638 1,181,784 733,985
----------------------------------------------------------
Operating income 89,234 48,850 39,630
----------------------------------------------------------
Interest income (expense):
Interest income 7,236 6,081 3,509
Interest expense (20,230) (225) (59)
----------------------------------------------------------
(12,994) 5,856 3,450
----------------------------------------------------------
Income before income taxes 76,240 54,706 43,080
Provision for income taxes 33,566 21,277 16,932
----------------------------------------------------------
Net income $ 42,674 $ 33,429 $ 26,148
==========================================================
Basic earnings per share $ 1.29 $ 1.02 $ 0.81
==========================================================
Weighted average number of common shares
outstanding during the period - Basic EPS 33,105 32,713 32,160
==========================================================
Diluted earnings per share $ 1.27 $ 1.01 $ 0.80
==========================================================
Weighted average number of common shares outstanding
during the period - Diluted EPS 33,698 33,122 32,700
==========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Shares Amount
------------------- ----------------------------------------------------------------------------------
Accumulated
Class A Class B Class A Class B Additional Other
Common Common Common Common Paid-in Comprehensive Retained Treasury
(IN THOUSANDS) Stock Stock Stock Stock Capital Income Earnings Stock Total
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------- ---------------------------------------------------------------------------------
Balance at December 31,
1995 4,539 10,500 $ 45 $ 105 $33,158 $ - $ 44,071 - $ 77,379
-------------------- ---------------------------------------------------------------------------------
Comprehensive income:
Net income 26,148 26,148
Other comprehensive
income,
Foreign currency
translation
adjustment - - - - - (2) - - (2)
-------------------- ---------------------------------------------------------------------------------
Comprehensive income - - - - - (2) 26,148 - 26,146
Conversion of Class B
Common Stock to
Class A Common Stock 2,990 (2,990) 30 (30)
Issuance of Class A
Common Stock
Contractual agreement 227 2 11,250 11,252
Public offering 1,150 12 52,580 52,592
Exercise of stock options 68 1 1,309 1,310
Tax benefit relating to
employee stock options 661 661
Treasury Stock acquired - - - - - - - (5,250) (5,250)
------------------- ---------------------------------------------------------------------------------
Balance at December 31,
1996 8,974 7,510 90 75 98,958 (2) 70,219 (5,250) 164,090
------------------- ---------------------------------------------------------------------------------
Comprehensive income:
Net income 33,429 33,429
Other comprehensive
income,
Foreign currency
translation
adjustment - - - - - (25) - - (25)
------------------- ---------------------------------------------------------------------------------
Comprehensive income - - - - - (25) 33,429 - 33,404
Exercise of stock
options 264 3 4,769 4,772
Tax benefit relating
to employee stock
options 3,174 3,174
Treasury Stock acquired - - - - - - - (1,739) (1,739)
-------------------- ---------------------------------------------------------------------------------
Balance at December 31,
1997 9,238 7,510 93 75 106,901 (27) 103,648 (6,989) 203,701
-------------------- ---------------------------------------------------------------------------------
Comprehensive income:
Net income 42,674 42,674
Other comprehensive
income,
Foreign currency
translation
adjustmenty - - - - - (47) - - (47)
-------------------- ---------------------------------------------------------------------------------
Comprehensive income - - - - - (47) 42,674 - 42,627
Issuance of stock
dividend 9,239 7,510 92 75 (167)
Exercise of stock
options 133 1 2,020 2,021
Tax benefit relating to
employee stock options - - - - 1,345 - - - 1,345
-------------------- ---------------------------------------------------------------------------------
Balance at December 31,
1998 18,610 15,020 $ 186 $ 150 $110,099 (74) 146,322 (6,989) 249,694
==================== ================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 42,674 $ 33,429 $ 26,148
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,042 10,470 6,707
Deferred income taxes 10,068 (834) 317
Bad debt expense 4,583 3,680 1,456
Corporate restructuring, less cash payments of $184 1,467
Tax benefit relating to employee stock options 1,345 3,174 661
Changes in operating assets and liabilities, net of
changes resulting from acquisition:
Receivables (35,083) (50,166) (48,149)
Inventories (15,417) (11,444) (3,638)
Prepaid expenses and other assets 756 1,722 (3,104)
Claims and rebates payable 107,660 57,968 41,055
Accounts payable and accrued expenses (18,521) 4,504 8,410
---------------------------------------------------------
Net cash provided by operating activities 126,574 52,503 29,863
---------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (460,137) (940)
Short-term investments 57,938 (3,550) (54,388)
Purchases of property and equipment (23,853) (13,017) (9,480)
---------------------------------------------------------
Net cash (used in) investing activities (426,052) (16,567) (64,808)
---------------------------------------------------------
Cash flows from financing activities:
Proceeds on long-term debt 360,000 - -
Proceeds from stock offering 52,592
Deferred financing fees (4,062)
Acquisition of treasury stock (1,739) (5,250)
Exercise of stock options 2,021 4,772 1,310
---------------------------------------------------------
Net cash provided by financing activities 357,959 3,033 48,652
---------------------------------------------------------
Effect of foreign currency translation adjustment (47) (25) (2)
---------------------------------------------------------
Net increase in cash and cash equivalents 58,434 38,944 13,705
Cash and cash equivalents at beginning of year 64,155 25,211 11,506
=========================================================
Cash and cash equivalents at end of year $ 122,589 $ 64,155 $ 25,211
=========================================================
Supplemental data:
Cash paid during the year for:
Income taxes $ 17,202 $ 20,691 $ 14,544
Interest $ 13,568 $ 225 $ 59
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS. Express Scripts, Inc. (the "Company") is the
largest full-service pharmacy benefit management ("PBM") company independent of
pharmaceutical manufacturer ownership and drug store ownership in North America.
The Company provides health care management and administration services on
behalf of thousands of clients that include health maintenance organizations,
health insurers, third-party administrators, employers and union-sponsored
benefit plans. The Company's fully-integrated PBM services include network
claims processing, mail-order pharmacy services, benefit design consultation,
drug utilization review, formulary management, disease management, medical and
drug data analysis services, medical information management services, which
include provider profiling and outcome assessments through its majority-owned
Practice Patterns Science, Inc. ("PPS") subsidiary, and informed decision
counseling services through its Express Health LineSM division. The Company also
provides non-PBM services which include infusion therapy services through its
wholly-owned subsidiary IVTx, Inc. ("IVTx"), distribution services through its
Specialty Distribution division, and, prior to September 1, 1998, provided
managed vision care programs through its wholly-owned subsidiary Express Scripts
Vision Corporation ("Vision").
In March 1992, the Company, originally incorporated in Missouri in 1986,
was reincorporated in Delaware and issued an aggregate of 21,000,000 shares of
Class B Common Stock to Sanus Corp. Health Systems ("Sanus") in exchange for the
outstanding shares of its common stock. Sanus at that time was an indirect
subsidiary of New York Life Insurance Company ("NYL"). In April 1992, as a
result of a reorganization, both the Company and Sanus became direct
subsidiaries of NYLIFE HealthCare Management, Inc. ("NYLIFE"). Sanus has since
changed its name to NYLCare Health Plans, Inc. ("NYLCare"). In April 1996,
NYLIFE converted 5,980,000 Class B shares to Class A Common Stock and sold those
shares in a public offering. NYLIFE continues to own all the remaining
outstanding Class B Common Stock of the Company (see Note 11).
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and all wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Certain amounts in prior years have been reclassified to conform with 1998
classifications. The preparation of the consolidated financial statements
conform to generally accepted accounting principles, and require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts could differ
from those estimates and assumptions.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand
and temporary investments in money market funds.
SHORT-TERM INVESTMENTS. Short-term investments consisted of debt securities
with a maturity of less than one year that the Company had the positive intent
and ability to hold to maturity and are reported at amortized cost.
INVENTORIES. Inventories consist of prescription drugs, vision supplies and
medical supplies that are stated at the lower of first-in first-out cost or
market.
PROPERTY AND EQUIPMENT. Property and equipment is carried at cost and is
depreciated using the straight-line method over estimated useful lives of seven
years for furniture, five years for equipment and purchased computer software
and three years for personal computers. Leasehold improvements are amortized on
a straight-line basis over the term of the lease or the useful life of the
asset, if shorter. Expenditures for repairs, maintenance and renewals are
charged to income as incurred. Expenditures which improve an asset or extend its
estimated useful life are capitalized. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.
SOFTWARE DEVELOPMENT COSTS. Research and development expenditures relating
to the development of software to be marketed to clients, or to be used for
internal purposes, are charged to expense until technological feasibility is
established. Thereafter, the remaining software production costs up to the date
of general release to customers, or to the date placed into production, are
capitalized and included as Property and Equipment. During 1998, 1997 and 1996,
$10,244,000, $1,982,000 and $1,898,000 in software development costs were
capitalized, respectively. Capitalized software development costs amounted to
$27,516,000 and $5,269,000 at December 31, 1998 and 1997, respectively.
Amortization of the capitalized amounts commences on the date of general release
to customers, or the date placed into production, and is computed on a
product-by-product basis using the straight-line method over the remaining
estimated economic life of the product but not more than five years. Reductions,
if any, in the carrying value of capitalized software costs to net realizable
value are also included in amortization expense. Amortization expense in 1998,
1997 and 1996 was $1,968,000, $622,000 and $136,000, respectively.
GOODWILL. Goodwill is amortized on a straight-line basis over periods from
15 to 30 years. The amount reported is net of accumulated amortization of
$8,114,000 and $251,000 at December 31, 1998 and 1997, respectively. The Company
periodically evaluates the carrying value of goodwill for impairment. The
evaluation of impairment is based on expected future operating cash flows on an
undiscounted basis for the operations to which goodwill relates. Impairment
losses, if any, would be determined based on the present value of the cash flows
using discount rates that reflect the inherent risk of the underlying business.
In the opinion of management, no such impairment existed at December 31, 1998 or
1997. Amortization expense, included in selling, general and administrative
expenses, was $7,863,000, $42,000 and $42,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
OTHER INTANGIBLE ASSETS. Other intangible assets (included in other assets)
consist of customer contracts, non-compete agreements and deferred financing
fees and are amortized on a straight-line basis over periods from 2 to 20 years.
Amortization expense for customer contracts and non-compete agreements, included
in selling, general and administrative expenses, and for deferred financing
fees, included in interest expense, was $4,320,000 and $609,000, respectively,
for the year ended December 31, 1998.
CONTRACTUAL AGREEMENTS. The Company has entered into corporate alliances
with certain of its clients whereby shares of the Company's Class A Common Stock
were awarded as advance discounts to the clients. The Company accounts for these
agreements as follows:
PRIOR TO DECEMBER 15, 1995 - For agreements consummated prior to December
15, 1995, the stock is valued utilizing the quoted market value at the date the
agreement is consummated if the number of shares to be issued is known. If the
number of shares to be issued is contingent upon the occurrence of future
events, the stock is valued utilizing the quoted market value at the date the
contingency is satisfied and the number of shares is determinable.
BETWEEN DECEMBER 15, 1995 AND NOVEMBER 20, 1997 - For agreements entered
into between these dates, the Company utilizes the provisions of Financial
Accounting Standards Board Statement 123 "Accounting for Stock-Based
Compensations" ("FAS 123") which requires that all stock issued to nonemployees
be accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued instead of the intrinsic value
method utilized for stock issued or to be issued under alliances entered into
prior to December 15, 1995. The Company has adopted FAS 123 as it relates to
stock issued or to be issued under the Premier and Manulife alliances based on
fair value at the date the agreement was consummated.
SUBSEQUENT TO NOVEMBER 20, 1997 - In November 1997, the Emerging Issues
Task Force reached a consensus that the value of equity instruments issued for
consideration other than employee services should be initially determined on the
date on which a "firm commitment" for performance first exists by the provider
of goods or services. Firm commitment is defined as a commitment pursuant to
which performance by a provider of goods or services is probable because of
sufficiently large disincentives for nonperformance. The consensus must be
applied for all new arrangements and modifications of existing arrangements
entered into from November 20, 1997. The consensus only addresses the date upon
which fair value is determined and does not change the accounting based upon
fair value as prescribed by FAS 123. No such arrangements have been entered into
by the Company subsequent to November 20, 1997.
Shares issued on the effective date of the contractual agreement are
considered outstanding and included in basic and diluted earnings per share
computations when issued. Shares issuable upon the satisfaction of certain
conditions are considered outstanding and included in basic and dilutive
earnings per share computation when all necessary conditions have been satisfied
by the end of the period. If all necessary conditions have not been satisfied by
the end of the period, the number of shares included in the dilutive earnings
per share computation is based on the number of shares, if any, that would be
issuable if the end of the reporting period were the end of the contingency
period and if the result would be dilutive. The value of the shares of stock
awarded as advance discounts is recorded as a deferred cost and included in
other assets. The deferred cost is recognized in selling, general and
administrative expenses over the period of the contract.
IMPAIRMENT OF LONG LIVED ASSETS. The Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long lived assets may warrant revision or that the remaining balance of an asset
may not be recoverable. The measurement of possible impairment is based on the
ability to recover the balance of assets from expected future operating cash
flows on an undiscounted basis. Impairment losses, if any, would be determined
based on the present value of the cash flows using discount rates that reflect
the inherent risk of the underlying business. In the opinion of management, no
such impairment existed as of December 31, 1998 or 1997.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company has entered into an interest
rate swap agreement in order to manage exposure to interest rate risk. The
Company does not hold or issue derivative financial instruments for trading
purposes. The interest rate swap is designated as a hedge of the Company's
variable interest rate payments. Amounts received or paid are accrued as
interest receivable or payable and as interest income or expense. The fair value
of interest rate swap agreements is based on market prices. The fair value
represents the estimated amount the Company would receive/pay to terminate the
agreements taking into consideration current interest rates.
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). The Statement requires all
derivatives be recognized as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In addition, the
Statement specifies the accounting for changes in the fair value of a derivative
based on the intended use of the derivative and the resulting designation. FAS
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999 and will be applicable to the Company's first quarter of fiscal year
2000. The Company's present interest rate swap (see Note 6) would be considered
a cash flow hedge. Accordingly, the change in the fair value of the swap would
be reported on the balance sheet as an asset or liability. The corresponding
unrealized gain or loss representing the effective portion of the hedge will be
initially recognized in stockholders' equity and other comprehensive income, and
subsequently any changes in unrealized gain or loss from the initial measurement
date will be recognized in earnings concurrent with the interest expense on the
Company's underlying variable rate debt. If the Company had adopted FAS 133 as
of December 31, 1998, the Company would record the unrealized loss of $7,209,000
as a liability and reduction in stockholder's equity and other comprehensive
income.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents, short-term investments, accounts receivable and accounts payable
approximated fair values due to the short-term maturities of these instruments.
The fair value, which approximates the carrying value, of the Company's term
loan facility was estimated using either quoted market prices or the current
rates offered to the Company for debt with similar maturity. The fair value of
the swap ($7,209,000 liability at December 31, 1998) was based on quoted market
price, which reflects the present value of the difference between estimated
future fixed rate payments and future variable rate receipts.
REVENUE RECOGNITION. Revenues from dispensing prescription and
non-prescription medical products from the Company's mail service pharmacies are
recorded upon shipment. Revenue from sales of prescription drugs by pharmacies
in the Company's nationwide network and pharmacy claims processing revenues are
recognized when the claims are processed. When the Company dispenses
pharmaceuticals to members of health benefit plans sponsored by the Company's
clients or has an independent contractual obligation to pay its network pharmacy
providers for benefits provided to members of its clients' pharmacy benefit
plans, the Company includes payments from plan sponsors for these benefits as
net revenue and ingredient costs or payments to these pharmacy providers in cost
of revenues. If the Company is only administering the plan sponsors' network
pharmacy contracts, or where the Company dispenses pharmaceuticals supplied by
one of the Company's clients, the Company records only the administrative or
dispensing fees derived from the Company's contracts with the plan sponsors as
net revenue.
COST OF REVENUES. Cost of revenues includes product costs, pharmacy claims
payments and other direct costs associated with dispensing prescriptions and
non-prescription medical products and claims processing operations, offset by
fees received from pharmaceutical manufacturers in connection with the Company's
drug purchasing and formulary management programs.
INCOME TAXES. Deferred tax assets and liabilities are recognized based on
temporary differences between financial statement basis and tax basis of assets
and liabilities using presently enacted tax rates.
EARNINGS PER SHARE. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed in the same manner as basic earnings per share but adds
the number of additional common shares that would have been outstanding for the
period if the dilutive potential common shares had been issued. The only
difference between the number of weighted average shares used in the basic and
diluted calculation for all years is stock options and stock warrants granted by
the Company using the "treasury stock" method, amounting to 593,000, 409,000 and
540,000 in 1998, 1997 and 1996, respectively.
FOREIGN CURRENCY TRANSLATION. The financial statements of ESI Canada, Inc.
are translated into U.S. Dollars using the exchange rate at each balance sheet
date for assets and liabilities and a weighted average exchange rate for each
period for revenues, expenses, gains and losses. The functional currency for ESI
Canada, Inc. is the local currency and translation adjustments are recorded
within the other comprehensive income component of stockholders' equity.
EMPLOYEE STOCK-BASED COMPENSATION. The Company accounts for employee stock
options in accordance with Accounting Principles Board No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Under APB 25, the Company applies
the intrinsic value method of accounting and, therefore, does not recognize
compensation expense for options granted, because options are only granted at a
price equal to market value at the time of grant. During 1996, FAS 123 became
effective for the Company. FAS 123 prescribes the recognition of compensation
expense based on the fair value of options determined on the grant date.
However, FAS 123 grants an exception that allows companies currently applying
APB 25 to continue using that method. The Company has, therefore, elected to
continue applying the intrinsic value method under APB 25. For companies that
choose to continue applying the intrinsic value method, FAS 123 mandates certain
pro forma disclosures as if the fair value method had been utilized (see Note
12).
COMPREHENSIVE INCOME. During 1998, Statement of Financial Accounting
Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," became
effective for the Company. FAS 130 requires noncash changes in stockholders'
equity be combined with net income and reported in a new financial statement
category entitled "comprehensive income." Other than net income, the only
component of comprehensive income for the Company is the change in the foreign
currency translation adjustment. The Company has displayed comprehensive income
within the Statement of Changes in Stockholders' Equity.
SEGMENT REPORTING. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). FAS 131 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. The information is to be derived from the
management approach which designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. Adoption of FAS 131 did not affect
the Company's results of operations or its financial position but did affect the
disclosure of segment information (see Note 13).
2. ACQUISITION
On April 1, 1998 the Company acquired all of the outstanding capital stock
of Value Health, Inc. and Managed Prescriptions Network, Inc. (collectively, the
"Acquired Entities") from Columbia/HCA Healthcare Corporation ("Columbia") for
approximately $460 million in cash (which includes transactions costs and
executive management severance costs of approximately $6.7 million and $8.3
million, respectively), approximately $360 million of which was obtained through
a five-year bank credit facility (see Note 6) and the remainder from the
Company's cash balances and short term investments. At closing, the Acquired
Entities owned various subsidiaries that now or formerly conducted a PBM
business, commonly known as "ValueRx".
The acquisition has been accounted for using the purchase method of
accounting and the results of operations of the Acquired Entities have been
included in the consolidated financial statements and PBM segment since April 1,
1998. The purchase price has been preliminarily allocated based on the estimated
fair values of net assets acquired at the date of the acquisition. The excess of
purchase price over tangible net assets acquired was originally allocated to
other intangible assets consisting of customer contracts and non-compete
agreements in the amount of $57,653,000 which are being amortized using the
straight-line method over the estimated useful lives of 2 to 20 years and are
included in other assets, and goodwill in the amount of $289,863,000 which is
being amortized using the straight-line method over the estimated useful life of
30 years. In conjunction with the acquisition, the Acquired Entities and their
subsidiaries retained the following liabilities:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
- ----------------------------------------------------------------
Fair value of assets acquired $ 656,488
Cash paid for the capital stock (460,137)
=======================
Liabilities retained $ 196,351
=======================
</TABLE>
The following unaudited pro forma information presents a summary of
combined results of operations of the Company and the Acquired Entities as if
the acquisition had occurred at the beginning of the period presented, along
with certain pro forma adjustments to give effect to amortization of goodwill,
other intangible assets, interest expense on acquisition debt and other
adjustments. The pro forma financial information is not necessarily indicative
of the results of operations as they would have been had the transaction been
effected on the assumed dates. Included in the pro forma information are
integration costs incurred by the Company that are being reported within
selling, general and administrative expenses in the statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------------
Net revenues $ 3,234,800 $ 2,877,906
Net income 42,696 33,687
Basic earnings per share 1.29 1.03
Diluted earnings per share 1.27 1.02
</TABLE>
3. CONTRACTUAL AGREEMENTS
On December 31, 1995, the Company entered into a ten-year corporate
alliance with Premier Purchasing Partners, L.P. (formerly, American Healthcare
Systems Purchasing Partners, L.P., the "Partnership"), an affiliate of Premier,
Inc. ("Premier"). Premier is an alliance of health care systems resulting from
the merger in 1995 of American Healthcare Systems, Premier Health Alliance and
SunHealth Alliance. Under the terms of the transaction, the Company is Premier's
preferred vendor of pharmacy benefit management services to Premier's
shareholder systems and their managed care affiliates and will issue shares of
its Class A Common Stock as an administrative fee to the Partnership based on
the attainment of certain benchmarks, principally related to the number of
members receiving the Company's pharmacy benefit management services under the
arrangement, and to the achievement of certain joint purchasing goals. The
Company may be required to issue up to 4,500,000 shares to the Partnership over
a period up to the first five years of the agreement if the Partnership exceeds
all benchmarks. Except for certain exemptions from registration under the 1933
Act, any shares issued to the Partnership cannot be traded until they have been
registered under the 1933 Act and any applicable state securities laws.
In accordance with the terms of the agreement, the Company issued 454,546
shares of Class A Stock to Premier in May, 1996. The shares were valued at
$11,250,000 and are being amortized over the then remaining term of the
agreement. Amortization expense in 1998, 1997 and 1996 was $1,164,000,
$1,164,000 and $776,000, respectively. No additional shares have been earned by
Premier through December 31, 1998.
Effective January 1, 1996, the Company executed a multi-year contract with
The Manufacturers Life Insurance Company ("Manulife"), to introduce pharmacy
benefit management services in Canada. Manulife's Group Benefits Division
continues to work with ESI Canada to provide these services. Under the terms of
the agreement, the Company is the exclusive third-party provider of pharmacy
benefit management services to Manulife's Canadian clients. The Company also
will issue shares of its Class A Common Stock as an advance discount to Manulife
based upon achievement of certain volumes of Manulife pharmacy claims processed
by the Company. No shares will be issued until after the fourth year of the
agreement based on volumes reached in years two through four. The Company
anticipates issuing no more than 474,000 shares to Manulife over a period up to
the first six years of the agreement. Except for certain exemptions from
registration under the 1933 Act, any shares issued to Manulife cannot be traded
until they have been registered under the 1933 Act and any applicable state
securities laws. In accordance with the terms of the agreement, no stock has
been issued since inception.
If Manulife has not exercised an early termination option at the end of the
sixth or tenth year of the agreement, the Company will issue at each of those
times a ten-year warrant as an advance discount to purchase up to approximately
237,000 additional shares of the Company's Class A Common Stock exercisable at
85% of the market price at those times. The actual number of shares for which
such warrant is to be issued is based on the volume of Manulife pharmacy claims
processed by the Company in year six and year ten, respectively.
Pursuant to an agreement with Coventry Corporation, an operator of health
maintenance organizations located principally in Pennsylvania and Missouri, on
January 3, 1995, the Company issued 50,000 shares of Class A Common Stock as an
advance discount to Coventry in a private placement. These shares were valued at
$13.69 per share, the split-adjusted per share market value of the Company's
Class A Common Stock on November 22, 1994, which was the date the agreement was
consummated and the obligation of the parties became unconditional. No revision
of the consideration for the transaction occurred between November 22, 1994 and
January 3, 1995. The shares issued to Coventry were being amortized over a
six-year period. However, due to Coventry extending the agreement for only two
years, as discussed below, instead of three years, the estimated useful life of
the shares issued has been reduced to five years. Amortization expense was
$171,000, $114,000 and $114,000 for each of the years ended December 31, 1998,
1997 and 1996, respectively. Except for certain exemptions from registration
under the Securities Act of 1933 ("the 1993 Act"), these shares cannot be traded
until they have been registered under the 1933 Act and any applicable state
securities laws.
Effective January 1, 1998, Coventry renewed the agreement for a two-year
term through December 31, 1999. As part of the agreement, the Company issued
warrants as an advance discount to purchase an additional 50,000 shares of the
Company's Class A Common Stock, exercisable at 90% of the market value at the
time of renewal. During 1998, the Company expensed the advance discount which
represented 10% of the market value.
On October 13, 1992, the Company entered into a five-year arrangement with
FHP, Inc. ("FHP") pursuant to which the Company agreed to provide pharmacy
benefit services to FHP and its members. FHP is an operator of health
maintenance organizations, principally in the western United States. In February
1997, PacifiCare Health Systems, Inc. ("PacifiCare") completed the acquisition
of FHP. As a result of the merger, PacifiCare informed the Company that it would
not enter into a long-term extension of the agreement and reached an agreement
with the Company to phase-out membership starting in July 1997 and continued
through March 1998.
In accordance with the agreement, the Company commenced providing pharmacy
benefit services to FHP and its members on January 4, 1993. On the commencement
date and pursuant to the agreement, the Company issued 400,000 shares of its
Class A Common Stock as advance discounts to FHP in a private placement. These
shares were valued at $4.13 per share, the split-adjusted per share market value
of the Company's Class A shares on October 13, 1992, which was the date the
agreement was consummated and the obligations of the parties became
unconditional. No revision of the consideration for the transaction occurred
between October 13, 1992 and January 4, 1993. The cost of the shares issued to
FHP was amortized over a five-year period ending in 1997. No amortization
expense was recorded in 1998. Amortization expense was $990,000 in 1997 and
$165,000 in 1996.
4. RELATED PARTY TRANSACTIONS
The Company had agreements to provide claims processing services and mail
pharmacy prescription services for NYLCare, in return for which it receives
processing fees and reimbursement for the contracted cost of the claims.
Effective July 15, 1998, NYL consummated the sale of NYLCare to Aetna U.S.
Healthcare, Inc., an unrelated party. Therefore, related party amounts for 1998
represent only the period in which NYL owned NYLCare. Transactions subsequent to
July 15, 1998 have been included in unrelated parties. Cost of revenues from
related parties were $127,255,000, $176,761,000 and $122,157,000 in 1998, 1997
and 1996, respectively.
The amount receivable from or (due to) related parties comprised the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1997
<S> <C>
- ----------------------------------------------------------------
Receivable from NYLCare $ 23,709
Due to NYLCare (7,479)
=======================
Total related party receivable $ 16,230
=======================
</TABLE>
Prior to July 15, 1998, the Company was the exclusive provider of
pharmacy benefit management services to NYLCare's managed health care
subsidiaries, subject to certain exceptions. The Company's agreement with
NYLCare provided that fees from drug manufacturers whose products are used in
the Company's formularies related to NYLCare subsidiaries was allocated 100% to
the Company up to $400,000 and 75% to NYLCare and 25% to the Company thereafter.
The Company was also the non-exclusive provider of pharmacy benefit management
services to New York Life and Health Insurance Company ("NYLHIC"), a subsidiary
of NYLCare. In 1996 fees from drug manufacturers with respect to this business
were allocated 100% to the Company. Effective January 1, 1997, the Company
shared such fees with NYLHIC on a fixed per script amount which approximates 40%
of the total of such fees.
Such fees allocated to NYLCare and NYLHIC were $7,257,000, $11,690,000
and $7,636,000 in 1998, 1997 and 1996, respectively, and $2,307,000 in 1998,
$5,803,000 in 1997 and $3,064,000 in 1996 were allocated to the Company and have
been classified in the accompanying consolidated statement of operations as a
reduction of cost of revenues.
As discussed in Note 3, the Company has entered into a ten year
corporate alliance with Premier. Richard Norling is the Chief Operating Officer
of Premier and a member of the Company's Board of Directors. No consideration,
monetary or otherwise, has been exchanged between the Company and Premier
between the period September 1997 and December 1998 (the period during which
Premier and the Company are related parties). The Company may be required to
issue additional shares of its Class A Common Stock to Premier as discussed in
Note 3.
Premier is required to promote the Company as the preferred PBM
provider to health care entities, plans and facilities which participate in
Premier's purchasing programs. However, all contractual arrangements to provide
services are made directly between the Company and these entities, at varying
terms and independent of any Premier involvement. Therefore, the associated
revenues earned and expenses incurred by the Company are not deemed to be
related party transactions. During 1998, the net revenues that the Company
derived from services provided to the health care entities participating in
Premier's purchasing programs was $78,539,000.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------
Land $ 2,051 $ -
Building 3,076
Furniture 8,336 4,362
Equipment 52,758 28,924
Computer software 37,412 12,011
Leasehold improvements 8,275 3,934
-------------------------------------
111,908 49,231
Less accumulated depreciation and
amortization 34,409 22,410
-------------------------------------
$ 77,499 $ 26,821
=====================================
</TABLE>
6. FINANCING
On April 1, 1998, the Company executed a $440 million credit facility with
a bank syndicate led by Bankers Trust Company, consisting of a $360 million term
loan facility and an $80 million revolving loan facility. The credit facility
expires on April 15, 2003 and is guaranteed by the Company's domestic
subsidiaries other than Practice Patterns Science, Inc. ("PPS"), and Great
Plains Reinsurance Company ("Great Plains") and secured by pledges of 100% (or,
in the case of foreign subsidiaries, 65%) of the capital stock of the Company's
subsidiaries other than PPS and Great Plains. 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 ("Credit Rate
Spread") over several London Interbank Offered Rates ("LIBOR") or base rate
options, depending upon the Company's ratio of earnings before interest, taxes,
depreciation and amortization to debt ("Leverage Ratio"). At December 31, 1998,
the interest rate was 6.0625%, representing a credit rate spread of 0.75% over
the three month LIBOR rate. The credit facility contains covenants that limit
the indebtedness the Company may incur and the amount of annual capital
expenditures. The covenants also establish a minimum interest coverage ratio, a
maximum leverage ratio, and a minimum consolidated net worth. At December 31,
1998, the Company was in compliance with all covenants. In addition, the Company
is required to pay an annual fee depending on the leverage ratio, payable in
quarterly installments, on the unused portion of the revolving loan. The
commitment fee was 22.5 basis points at December 31, 1998. There were no
borrowings at December 31, 1998 under the revolving loan facility. The carrying
amount of the Company's term loan facility approximates fair value.
In conjunction with the credit facility and as part of the Company's policy
to manage interest rate risk, the Company entered into an interest rate swap
agreement ("swap") with The First National Bank of Chicago, a subsidiary of Bank
One Corporation, on April 3, 1998. At December 31, 1998, the swap had a notional
principal amount of $360 million. Under the terms of the swap, the Company
agrees 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% per annum. The notional principal amount of the swap
amortizes in equal amounts with the principal balance of the term loan facility.
As a result, the Company has, in effect, converted its variable rate term debt
to fixed rate debt at 5.88% per annum for the entire term of the term loan
facility, plus the Credit Rate Spread.
The following represents the schedule of current maturities for the term
loan facility (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C>
- ---------------------------------------------------------------
1999 $ 54,000
2000 72,000
2001 90,000
2002 96,000
2003 48,000
=======================
$ 360,000
=======================
</TABLE>
Prior to April 1, 1998, the Company maintained a $25,000,000 unsecured line
of credit with the Mercantile Bank National Association which was terminated
upon the consummation of the Bankers' Trust credit facility. Additionally, the
Company allowed another line of credit in the amount of $25 million to lapse on
October 31, 1997. Terms of the agreements were as follows: interest was charged
on the principal amount outstanding at a rate equal to any of the following
options which the Company, at its option shall select: (i) the bank's "prime
rate", (ii) a floating rate equal to the Bank's cost of funds rate plus 50 basis
points, or (iii) a fixed rate for periods of 30, 60, 90 or 180 days equal to the
LIBOR rate plus 50 basis points. Fees under the agreements on any unused portion
were charged at ten hundredths of one percent per year. At December 31, 1997,
the Company had no outstanding borrowings under this agreement, nor did it
borrow any amounts under these agreements during 1997.
7. CORPORATE RESTRUCTURING
During 1998, the Company recorded a pre-tax restructuring charge of
$1,651,000 ($1,002,000 after taxes or $0.03 per basic earnings per share and
$0.03 per dilutive earnings per share) associated with the Company closing the
non-PBM service operations of its wholly-owned subsidiary, PhyNet, Inc., and
transferring certain functions of its Express Scripts Vision Corporation to
another vision care provider.
<TABLE>
<CAPTION>
BALANCE AT
1998 UTILIZED DECEMBER 31,
(AMOUNTS IN THOUSANDS) CHARGE CASH NONCASH 1998
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Write-down of long-lived assets $1,235 $ - $ 704 $ 531
Employee transition costs for 61 employees 416 184 - 232
============= ================ ================= =================
$1,651 $ 184 $ 704 $ 763
============= ================ ================= =================
</TABLE>
The restructuring charge includes tangible assets to be disposed of being
written down to their net realizable value, less cost of disposal. Considerable
management judgment is necessary to estimate fair value, accordingly, actual
results could vary from such estimates. The Company anticipates completing the
remainder of the restructuring actions by the end of the third quarter of 1999.
<PAGE>
8. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Current provision:
Federal $ 20,171 $ 19,048 $ 13,945
State 3,049 2,779 2,480
Foreign 278 284 190
--------------------------------------------
Total current provision 23,498 22,111 16,615
--------------------------------------------
Deferred provision:
Federal 8,694 (714) 267
State 1,374 (120) 50
--------------------------------------------
Total deferred provision 10,068 (834) 317
--------------------------------------------
Total current and deferred provision $ 33,566 $ 21,277 $ 16,932
============================================
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate follows (The effect of foreign taxes on the effective tax rate for
1998, 1997 and 1996 is immaterial):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State taxes net of federal benefit 3.8 3.8 4.3
Non-deductible amortization of goodwill and
customer contracts 4.9
Other, net 0.3 0.1 -
-----------------------------------------
Effective tax rate 44.0% 38.9% 39.3%
==========================================
</TABLE>
The deferred tax assets and deferred tax liabilities recorded in the
consolidated balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for bad debts $ 8,013 $ 1,578
Inventory costing capitalization and reserves 684 675
Accrued expenses 34,170 512
Depreciation and property differences 6,808
Non-compete agreements 933
Other 17 79
----------------------------------------------
Gross deferred tax assets 50,625 2,844
Deferred tax liabilities:
Depreciation and property differences (1,166)
Other (462) (91)
----------------------------------------------
Gross deferred tax liabilities (462) (1,257)
----------------------------------------------
Net deferred tax assets $ 50,163 $ 1,587
==============================================
</TABLE>
The Company believes it is probable that the net deferred tax assets,
reflected above, will be realized in future tax returns primarily from the
generation of future taxable income.
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into noncancellable agreements to lease certain
office and distribution facilities with remaining terms from one to eleven
years. Rental expense under the office and distribution facilities leases in
1998, 1997 and 1996 was $3,876,000, $2,272,000 and $2,099,000, respectively. The
future minimum lease payments due under noncancellable operating leases is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C>
- --------------------------------------------------------------------
1999 $ 5,555,000
2000 5,960,000
2001 5,873,000
2002 5,758,000
2003 5,667,000
Thereafter 28,648,000
=======================
$ 57,462,000
=======================
</TABLE>
For the year ended December 31, 1998, approximately 56.2% of the Company's
pharmaceutical purchases were through one wholesaler. The Company believes other
alternative sources are readily available and that no other concentration risks
exist at December 31, 1998.
In the ordinary course of business (which includes the business conducted
by ValueRx prior to the Company's acquisition on April 1, 1998), various legal
proceedings, investigations or claims pending have arisen against the Company
and its subsidiaries (ValueRx continues to be a party to several proceedings
that arose prior to April 1, 1998). The effect of these actions on future
financial results is not subject to reasonable estimation because considerable
uncertainty exists about the outcomes. Nevertheless, in the opinion of
management, the ultimate liabilities resulting from any such lawsuits,
investigations or claims now pending will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.
10. EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN. The Company offers all of its full-time employees
a retirement savings plan under Section 401(k) of the Internal Revenue Code.
Employees may elect to enter a written salary deferral agreement under which a
maximum of 10% of their salary (effective January 1, 1999 maximum deferral is
12%), subject to aggregate limits required under the Internal Revenue Code, may
be contributed to the plan. The Company matches the first $2,000 of the
employee's contribution for the year. For the year ended December 1998, 1997 and
1996, the Company made contributions of approximately $1,751,000, $909,000 and
$639,000, respectively.
EMPLOYEE STOCK PURCHASE PLAN. In December, 1998, the Company's Board of
Directors approved an employee stock purchase plan, effective March 1, 1999,
that qualifies under Section 423 of the Internal Revenue Code and permits all
employees, excluding certain management level employees, to purchase shares of
the Company's Class A Common Stock. Participating employees may elect to
contribute up to 10% of their salary to purchase common stock at the end of each
six month participation period at a purchase price equal to 85% of the fair
market value of the common stock at the end of the participation period. Class A
Common Stock reserved for future employee purchases under the plan was 250,000
at December 31, 1998.
DEFERRED COMPENSATION PLAN. In December, 1998, the Compensation Committee
of the Board of Directors approved a non-qualified deferred compensation plan
(the "Executive Deferred Compensation Plan"), effective January 1, 1999, that
provides benefits payable to eligible key employees at retirement, termination
or death. Benefit payments are funded by a combination of contributions from
participants and the Company. Participants become fully vested in Company
contributions on the third anniversary of the end of the plan year for which the
contribution is credited to their account. For 1999, the annual Company
contribution will be equal to 6% of each participant's total annual
compensation, with 25% being invested in the Company's Class A common stock and
the remaining being allocated to a variety of investment options. As a result,
of the implementation, the Company accrued as compensation expense $797,000 in
1998 as a past service contribution which is equal to 8% of each participant's
total annual cash compensation for the period of the participant's past service
with the Company in a senior executive capacity.
11. COMMON STOCK
The holders of Class A Common Stock have one vote per share, and the
holders of Class B Common Stock have ten votes per share. NYLIFE is the sole
holder of Class B Common Stock. Class B Common Stock converts into Class A
Common Stock on a share-for-share basis upon transfer (other than to New York
Life or its affiliates) and is convertible at any time at the discretion of the
holder. At December 31, 1998, NYLIFE and the holders of Class A Common Stock
have control over approximately 89.0% and 11.0%, respectively, of the combined
voting power of all classes of Common Stock.
In April 1996, NYLIFE converted 5,980,000 shares of Class B Common Stock to
Class A Common Stock and sold the Class A shares in a public offering. The
Company did not receive any proceeds from the sale of these shares. The Company
sold an additional 2,300,000 Class A shares in the same stock offering and
received net proceeds of $52,592,000 after deducting expenses incurred in
connection with the offering.
In October 1998, the Company announced a two-for-one stock split of its
Class A and Class B common stock for stockholders of record on October 20, 1998,
effective October 30, 1998. The split was effected in the form of a dividend by
issuance of one additional share of Class A common stock for each share of Class
A common stock outstanding and one additional share of Class B common stock for
each share of Class B common stock outstanding. The earnings per share and the
weighted average number of shares outstanding for basic and diluted earnings per
share have been adjusted for the stock split except on the Consolidated Balance
Sheet and the Consolidated Statement of Changes in Stockholder's Equity.
As of December 31, 1998, the Company had repurchased a total of 475,000
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 1998. The Company's Board of Directors approved the repurchase
of up to 1,700,000 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.
As of December 31, 1998, 5,807,000 shares of the Company's Class A Common
Stock have been reserved for issuance to organizations with which the Company
has signed contractual agreements (see Note 3).
12. STOCK-BASED COMPENSATION PLANS
At December 31, 1998, the Company has three fixed stock-based compensation
plans, which are described below.
In April 1992, the Company adopted a stock option plan which it amended in
1995, which provides for the grant of nonqualified stock options and incentive
stock options to officers and key employees of the Company selected by the
Compensation Committee of the Board of Directors. Initially, a maximum of
1,400,000 shares of Class A Common Stock could be issued under the plan. That
amount increases annually each January 1, from January 1, 1993 to and including
January 1, 1999 by 140,000, to a maximum of 2,380,000 shares. By unanimous
written consent dated June 6, 1994, the Board of Directors adopted the Express
Scripts, Inc. 1994 Stock Option Plan, also amended in 1995, 1997 and 1998. A
total of 1,920,000 shares of the Company's Class A Common Stock has been
reserved for issuance under this plan. Under either plan, the exercise price of
the options may not be less than the fair market value of the shares at the time
of grant. The Compensation Committee has the authority to establish vesting
terms, and typically provides that the options vest over a five-year period from
the date of grant. The options may be exercised, subject to a ten-year maximum,
over a period determined by the Committee.
In April 1992, the Company also adopted a stock option plan which was
amended in 1995 and 1996 and provides for the grant of nonqualified stock
options to purchase 48,000 shares to each director who is not an employee of the
Company or its affiliates. A maximum of 384,000 shares of Class A Common Stock
may be issued under this plan at a price equal to fair market value at the date
of grant. The plan provides that the options vest over a three- or five-year
period from the date of grant.
The Company applies APB 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
options plans. Had compensation cost for the Company's stock based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method prescribed by FAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below. Note that due to the adoption of the methodology
prescribed by FAS 123, the pro forma results shown below only reflect the impact
of options granted in 1998, 1997 and 1996. Because future options may be granted
and vesting typically occurs over a five year period, the pro forma impact shown
for 1998, 1997 and 1996 is not necessarily representative of the impact in
future years.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
Net income
As reported $42,674 $33,429 $26,148
Pro forma 38,585 32,034 25,235
Basic earnings per share
As reported $ 1.29 $ 1.02 $ 0.81
Pro forma 1.16 0.98 0.78
Diluted earnings per share
As reported $ 1.27 $ 1.01 $ 0.80
Pro forma 1.14 0.97 0.77
</TABLE>
The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact), is estimated on the
date of grant using the Black-Scholes multiple option-pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------
Expected life of option 2-7 years 2-7 years 1-6 years
Risk-free interest rate 4.1-5.9% 5.7-6.6% 5.0-6.5%
Expected volatility of stock 44% 40% 30-50%
Expected dividend yield None None None
</TABLE>
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1998, 1997 and 1996, and changes during the years ending on
those dates is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Price Price Price
(share data in thousands) Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,702 $17.21 1,677 $12.56 1,446 $ 10.30
Granted 1,866 40.65 602 22.78 642 19.85
Exercised (133) 14.71 (529) 8.80 (131) 9.98
Forfeited/cancelled (655) 38.82 (48) 17.56 (280) 18.80
============= ============= =============
Outstanding at end of year 2,780 28.02 1,702 17.21 1,677 12.56
============= ============= =============
Options exercisable at year end 800 641 756
Weighted-average fair value of
options granted during the year $18.07 $ 9.91 $ 6.57
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -----------------------------------
Range of
Exercise Prices Number Weighted-Average Number Weighted-Average
(SHARE DATA IN Outstanding at Remaining Weighted-Average Exercisable Exercise Price
THOUSANDS) 12/31/98 Contractual Life Exercise Price at 12/31/98
<S> <C> <C> <C> <C> <C> <C>
- -------------------- ----------------------------------------------------------- -----------------------------------
$ 3.25 - 15.25 561 5.33 $10.09 426 $ 8.71
15.50 - 23.50 618 7.15 18.64 278 18.47
24.50 - 35.63 1,013 8.99 31.22 96 26.02
37.44 - 42.39 218 9.44 39.89
55.13 370 9.96 55.13 -
=================== =================
$ 3.25 - 55.13 2,780 8.01 28.02 800 14.17
=================== =================
</TABLE>
13. SEGMENT INFORMATION
The Company is organized on the basis of services offered and has
determined that it has two reportable segments: PBM services and non-PBM
services (defined in Note 1 "organization and operations"). The Company manages
the pharmacy benefit within an operating segment which encompasses a
fully-integrated PBM service. The remaining three operating service lines (IVTx,
Specialty Distribution and Vision) have been aggregated into a non-PBM reporting
segment.
The following table presents information about the reportable segments for
the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) PBM NON-PBM TOTAL
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
1998
Net revenues $ 2,765,111 $ 59,761 $ 2,824,872
Depreciation and amortization expense (1) 25,540 983 26,433
Interest income 7,235 1 7,236
Interest expense (1) 20,218 12 20,230
Income before income taxes 70,107 6,133 76,240
Total assets 1,068,715 26,746 1,095,461
Capital expenditures 23,432 421 23,853
- -----------------------------------------------------------------------------------------------------------------------
1997
Net revenues $ 1,191,173 $ 39,461 $ 1,230,634
Depreciation and amortization expense 9,704 766 10,470
Interest income 6,080 1 6,081
Interest expense 209 16 225
Income before income taxes 52,529 2,177 54,706
Total assets 385,330 17,178 402,508
Capital expenditures 10,782 2,235 13,017
- -----------------------------------------------------------------------------------------------------------------------
1996
Net revenues $ 743,077 $ 30,538 $ 773,615
Depreciation and amortization expense 6,273 434 6,707
Interest income 3,509 3,509
Interest expense 51 8 59
Income before income taxes 39,938 3,142 43,080
Total assets 286,433 13,992 300,425
Capital expenditures 8,306 1,174 9,480
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(1) The amortization expense for deferred financing fees ($609 in 1998) is
included in interest expense on the Consolidated Statement of Operations and in
depreciation and amortization on the Consolidated Statement of Cash Flows.
</FN>
</TABLE>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Earnings Per Share
Selling, ---------------------
(in thousands, except per Net Cost of General & Operating Net
share data Revenues Revenues Administrative Income Income Basic Diluted
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
1998
March 31, 1998 $371,362 $338,492 $18,826 $14,044 $9,878 $0.30 $0.29
June 30, 1998 807,406 743,557 39,266 22,932 9,568 0.29 0.28
September 30, 1998 807,319 738,544 43,153 25,622 11,303 0.34 0.34
December 31, 1998 838,784 764,403 47,745 26,636 11,924 0.36 0.35
- -----------------------------------------------------------------------------------------------------------------------
1997
March 31, 1997 $261,990 $237,298 $13,298 $11,394 $7,641 $0.23 $0.23
June 30, 1997 300,515 274,906 13,733 11,876 8,131 0.25 0.25
September 30, 1997 319,937 291,590 15,758 12,589 8,613 0.26 0.26
December 31, 1997 348,192 315,373 19,828 12,991 9,044 0.27 0.27
</TABLE>
15. SUBSEQUENT EVENT - POTENTIAL ACQUISITION
On February 9, 1999, the Company announced that it had executed a
definitive agreement to purchase Diversified Pharmaceutical Services, Inc.
("DPS"), a wholly-owned subsidiary of SmithKline Beecham Corporation. Under the
terms of the agreement, the Company will pay cash in the amount of $700 million
for the stock of DPS. The Company expects to finance the purchase through a $1.1
billion bank credit facility consisting of an $800 million term facility and a
$300 million revolving credit facility. In addition, the Company has secured
bridge financing in the amount of $150 million to facilitate closing. The loan
proceeds will be used towards the $700 million purchase price and acquisition
related costs, and will also be used to refinance the Company's existing $440
million bank credit facility (see Note 6) and provide for working capital needs,
if any. The Company expects to issue $350 million in Class A Common Stock
through an offering. Net proceeds from the offering will be used to retire the
$150 million bridge facility and a portion of the $800 million term facility.
The acquisition will be accounted for under the purchase method of accounting
and is subject to customary closing conditions including required governmental
approvals and consummation and funding of the bank credit facility. The Company
anticipates the transaction will close in the second quarter of 1999.
Should the transaction close and the Company refinance its existing $440
million bank credit facility, the remaining unamortized deferred financing fees
will be expensed as an extraordinary item. The Company anticipates maintaining
its existing interest rate swap in place to hedge the future variable interest
rate payments on $360 million of the proposed $1.1 billion bank credit facility.
The following unaudited pro forma information presents a summary of
combined results of operations of the Company, the Acquired Entities and DPS as
if the acquisitions and relative financings, including the equity offering had
occurred at the beginning of the period presented, along with certain pro forma
adjustments to give effect to amortization of goodwill, other intangible assets,
interest expense on acquisition debt and other adjustments. The pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transaction been effected on the assumed dates.
Included in the pro forma information are integration costs incurred by the
Company for the Acquired Entities that are being reported within selling,
general and administrative expenses in the statement of operations.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1998
<S> <C>
- ------------------------------------------------------------------------
Net revenues $ 3,449,649
Net income 51,130
Basic earnings per share 1.36
Diluted earnings per share 1.34
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be incorporated by reference
from the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A (the "Proxy Statement")
under the heading "I. Election of Directors"; provided that the Compensation
Committee Report on Executive Compensation and the performance graph contained
in the Proxy Statement shall not be deemed to be incorporated herein; and
further provided that the information regarding the Company's executive officers
required by Item 401 of Regulation S-K has been included in Part I of this
report.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be incorporated by reference
from the Proxy Statement under the headings "Directors' Compensation,"
"Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation."
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be incorporated by reference
from the Proxy Statement under the headings "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be incorporated by reference
from the Proxy Statement under the heading "Certain Relationships and Related
Transactions."
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements
The following report of independent accountants and the consolidated
financial statements of the Company are contained in this Report on the page
indicated
Page No. In
FORM 10-K
Report of Independent Accountants 38
Consolidated Balance Sheet as of
December 31, 1998 and 1997 39
Consolidated Statement of Operations
for the years ended December 31, 1998,
1997 and 1996 40
Consolidated Statement of Changes in
Stockholders' Equity for the years ended
December 31, 1998 and 1997 41
Consolidated Statement of Cash Flows for
the years ended December 31, 1998,
1997 and 1996 42
Notes to Consolidated Financial Statements 43
(2) The following financial statement schedule is contained in this Report
on the page indicated.
Page No. In
Financial Statement Schedule: FORM 10-K
VIII. Valuation and Qualifying Accounts
and Reserves for the years ended
December 31, 1998, 1997 and 1996 64
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or the
notes thereto.
(3) List of Exhibits
See Index to Exhibits on pages 65 - 71.
(b) Reports on Form 8-K
(i) On October 27, 1998, the Company filed a
Current Report on Form 8-K, dated October
12, 1998 under Items 5 and 7, regarding a
press release issued on behalf of the
Company announcing a 2-for-1 stock split of
its common stock, to be effected in the form
of a 100% stock dividend.
(ii) On October 29, 1998, the Company filed a
Current Report on Form 8-K, dated October
21, 1998 under Items 5 and 7, regarding a
press release issued on behalf of the
Company concerning its third quarter 1998
financial performance.
(iii) On November 20, 1998, the Company filed a
Current Report on Form 8-K, dated November
1, 1998 under Items 5 and 7, regarding a
press release issued on behalf of the
Company announcing that the 2-for-1 split of
its common stock had been effected.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
March 24, 1999 By: /s/ Barrett A. Toan
Barrett A. Toan, President
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq., (with full power to each of
them to act alone) his or her true and lawful attorneys-in-fact and agents, for
him or her and on his or her behalf and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits and any and all other documents
filed with respect thereto, with the Securities and Exchange Commission (or any
other governmental or regulatory authority), granting unto said attorneys, and
each of them, full power and authority to do and to perform each and every act
and thing requisite and necessary to be done in and about the premises in order
to effectuate the same as fully to all intents and purposes as he or she might
or could do if personally present, hereby ratifying and confirming all that said
attorneys in fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Barrett A. Toan President, March 24, 1999
Barrett A. Toan Chief Executive
Officer and Director
/s/ George Paz Senior Vice President and March 24, 1999
George Paz Chief Financial Officer
/s/ Joseph W. Plum Vice President and March 24, 1999
Joseph W. Plum Chief Accounting Officer
Director March __, 1999
Howard I. Atkins
/s/ Judith E. Campbell Director March 24, 1999
Judith E. Campbell
Director March __, 1999
Richard M. Kernan, Jr.
/s/ Richard A. Norling Director March 24, 1999
Richard A. Norling
Director March __, 1999
Frederick J. Sievert
/s/ Stephen N. Steinig Director March 24, 1999
Stephen N. Steinig
/s/ Seymour Sternberg Director March 24, 1999
Seymour Sternberg
/s/ Howard L. Waltman Director March 24, 1999
Howard L. Waltman
/s/ Norman Zachary Director March 24, 1999
Norman Zachary
EXPRESS SCRIPTS, INC.
Schedule VIII - Valuation and Qualifying Accounts and
Reserves Years Ended December 31, 1996, 1997
and 1998
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL.D COL. E
Additions
Balance Charges Charges Balance
at to Costs to Other at End
Beginning and and of
Description Of period Expenses Accounts (Deductions) Period
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Allowance for
Doubtful Accounts
Receivable
Year Ended 12/31/96 $2,273,937 $1,456,130 $ 1,394,922 $ 2,335,145
Year Ended 12/31/97 $2,335,145 $3,680,409 $ 1,213,991 $ 4,801,563
Year Ended 12/31/98 $4,801,563 $4,583,008 $9,570,069(1) $ 1,148,356 $ 17,806,284
<FN>
1 Represents the opening balance sheet for the Company's April 1, 1998
acquisition of ValueRx.
</FN>
</TABLE>
<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.
2.3 Stock Purchase Agreement by and among SmithKline Beecham
Corporation, SmithKline Beecham InterCredit BV and Express
Scripts, Inc., dated as of February 9, 1999, and certain related
Schedules, incorporated by reference to Exhibit No. 2.1 to the
Company's Current Report on Form 8-K filed February 18, 1999.
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* Certificate of Amendment of the Certificate of Incorporation of
the Company.
3.4 Second Amended and Restated Bylaws, incorporated by reference to
Exhibit No. 3.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ending September 30, 1997.
4.1 Form of Certificate for Class A Common Stock, incorporated by
reference to Exhibit No. 4.1 to the Registration Statement.
10.1** Stock Agreement (Initial Shares) entered into as of December 31,
1995, between the Company and American Healthcare Purchasing
Partners, L.P., incorporated by reference to Exhibit No. 10.61 to
the Company's Annual Report on Form 10-K for the year ending
1995.
10.2** Stock Agreement (Membership Shares) entered into as of December
31, 1995, between the Company and American Healthcare Purchasing
Partners, L.P., incorporated by reference to Exhibit No. 10.62 to
the Company's Annual Report on Form 10-K for the year ending
1995.
10.3** Amended and Restated Agreement entered into as of March 29, 1995,
between the Company and Sanus Corp. Health Systems, incorporated
by reference to Exhibit No. 10.1 to the Company's Annual Report
on Form 10-K for the year ending 1995.
10.4** Form of Amended and Restated Managed Prescription Drug Program
Agreement entered into as of March 29, 1995, between the Company
and each of the following parties: Health Plus, Inc., Sanus
Health Plan of New Jersey, Inc., Sanus Texas Health Plan, Inc.,
Sanus/New York Life Health Plan, Inc., Sanus Health Plan of
Illinois, Inc. and Sanus Health Plan of Greater New York, Inc.,
incorporated by reference to Exhibit No. 10.2 to the Company's
Annual Report on Form 10-K for the year ending 1995.
10.5** Managed Prescription Drug Program Agreement dated as of May 1,
1996 by and between the Company and NYLCare Health Plans of
Maine, Inc., incorporated by reference to Exhibit No. 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ending
March 31, 1997.
10.6** Managed Prescription Drug Program Agreement dated as of December
31, 1995 by and between the Company and WellPath Community Health
Plan, Inc., incorporated by reference to Exhibit No. 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ending
March 31, 1997.
10.7** Form of Amended and Restated Vision Program Sponsor Agreement
entered into as of March 29, 1995, between the Company and each
of the following parties: Health Plus, Inc., Sanus Health Plan of
New Jersey, Inc., Sanus Texas Health Plan, Inc., Sanus/New York
Life Health Plan, Inc., Sanus Health Plan of Illinois, Inc. and
Sanus Health Plan of Greater New York, Inc., incorporated by
reference to Exhibit No. 10.3 to the Company's Annual Report on
Form 10-K for the year ending 1995.
10.8** Form of Amended and Restated Infusion Therapy Agreement entered
into as of March 29, 1995, between the Company and each of the
following parties: Health Plus, Inc., Sanus Texas Health Plan,
Inc., Sanus/New York Life Health Plan, Inc., and Sanus Health
Plan of Illinois, Inc., incorporated by reference to Exhibit No.
10.4 to the Company's Annual Report on Form 10-K for the year
ending 1995.
10.9** Form of Infusion Therapy Agreement entered into as of March 29,
1995, between the Company and each of the following parties:
Sanus Health Plan of New Jersey, Inc. and Sanus Health
Plan of Greater New York, Inc., incorporated by reference to
Exhibit No. 10.5 to the Company's Annual Report on Form 10-K for
the year ending 1995.
10.10 First Amendment to Vision Program Sponsor Agreement entered into
as of September 1, 1995, between the Company and Sanus Health
Plan of New Jersey, Inc., incorporated by reference to Exhibit
No. 10.6 to the Company's Annual Report on Form 10-K for the year
ending 1995.
10.11 First Amendment to the Amended and Restated Vision Program
Sponsor Agreement entered into as of November 1, 1995, between
the Company and Sanus Texas Health Plan, Inc., incorporated
by reference to Exhibit No. 10.7 to the Company's Annual Report
on Form 10-K for the year ending 1995.
10.12 Agreement dated January 1, 1989, as amended May 31, 1989, and
January 1, 1991, between the Company and New York Life Insurance
Company, incorporated by reference to Exhibit No. 10.20
to the Registration Statement.
10.13 Third Amendment dated as of July 30, 1993, to the Agreement dated
as of January 1, 1989, by and between the Company and New York
Life Insurance Company, incorporated by reference to Exhibit No.
10.16 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1993.
10.14 Amended and Restated Managed Prescription Drug Program Agreement
entered into as of September 1, 1995, between the Company and
New York Life Insurance Company, incorporated by
reference to Exhibit No. 10.24 to the Company's Annual Report on
Form 10-K for the year ending 1995.
10.15** First Amendment to Amended and Restated Managed Prescription Drug
Program Agreement and Consent to Assignment dated as of January
1, 1997, by and between the Company, New York Life Insurance
Company and NYLCare Health Plans, Inc., incorporated by reference
to Exhibit No. 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ending March 31, 1997.
10.16 Quota-Share Reinsurance Agreement executed as of August 15, 1994,
between New York Life Insurance Company and Great Plains
Reinsurance Company, incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1994.
10.17 Amendment No. 1 to Quota-Share Reinsurance Agreement dated as of
September 13, 1994, between New York Life Insurance Company and
Great Plains Reinsurance Company, incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ending September 30, 1994.
10.18 Joint Research Agreement dated June 28, 1994, by and between the
Company, Sanus Corp.Health Systems and Schering Corporation,
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ending
September 30, 1994.
10.19 Agreement dated May 7, 1992, between the Company and New York
Life Insurance Company, incorporated by reference to Exhibit
No. 10.26 to the Registration Statement.
10.20 Lease Agreement dated March 3, 1992, between Riverport, Inc. and
Douglas Development Company--Irvine Partnership in commendam and
the Company, incorporated by reference to Exhibit No. 10.21 to
the Registration Statement.
10.21 First Amendment to Lease dated as of December 29, 1992, between
Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.13 to the Company's Quarterly
Report on Form 10-Q for the quarter ending June 30, 1993.
10.22 Second Amendment to Lease dated as of May 28, 1993, between
Sverdrup/MDRC Joint Venture and the Company, incorporated by
reference to Exhibit No. 10.14 to the Company's Quarterly
Report on Form 10-Q for the quarter ending June 30, 1993.
10.23 Third Amendment to Lease entered into as of October 15, 1993, by
and between Sverdrup/MDRC Joint Venture and the Company,
incorporated by reference to Exhibit No. 10.69 to the Company's
Annual Report on Form 10-K for the year ending 1993.
10.24 Fourth Amendment to Lease dated as of March 24, 1994, by and
between Sverdrup/MDRC Joint Venture and the Company,
incorporated by reference to Exhibit No. 10.70 to the Company's
Annual Report on Form 10-K for the year ending 1993.
10.25 Fifth Amendment to Lease made and entered into June 30, 1994,
between Sverdrup/MDRC Joint Venture and the Company,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1994.
10.26 Sixth Amendment to Lease made and entered into January 31, 1995,
between Sverdrup/MDRC Joint Venture and the Company, incorporated
by reference to Exhibit No. 10.70 to the Company's Annual Report
on Form 10-K for the year ending 1994.
10.27 Seventh Amendment to Lease dated as of August 14, 1998, by and
between Duke Realty Limited Partnership, by and through its
general partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ending September
30, 1998.
10.28 Eighth Amendment to Lease dated as of August 14, 1998, by and
between Duke Realty Limited Partnership, by and through its
general partner, Duke Realty Investments, Inc., and the Company,
incorporated by reference to Exhibit No. 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ending September
30, 1998.
10.29* Ninth Amendment to Lease dated as of February 19, 1999, by and
between Duke Realty Limited Partnership, by and through its
general partner, Duke Realty Investments, Inc., and the Company.
10.30 Single-Tenant Lease-Net entered into as of June 30, 1993,
between James M. Chamberlain, Trustee of Chamberlain Family
Trust dated September 21, 1979, and the Company, incorporated
by reference to Exhibit No. 10.16 to the Company's Form 10-Q for
the quarter ending June 30, 1993.
10.31 First Amendment to Single-Tenant Lease-Net entered into as of
November 12, 1993, by and between James M. Chamberlain, Trustee
of Chamberlain Family Trust, and the Company, incorporated by
reference to Exhibit No. 10.74 to the Company's Annual Report on
Form 10-K for the year ending 1993.
10.32 Earth City Industrial Office/Warehouse Lease Agreement dated as
of August 19, 1996, by and between the Company and Louis
Siegfried Corporation, incorporated by reference to Exhibit
No. 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 1996.
10.33 Lease Agreement dated as of June 12, 1989, between Michael D.
Brockelman and James S. Gratton, as Trustees under agreement
dated April 17, 1980, and Health Care Services, Inc., an indirect
subsidiary of the Company, incorporated by reference to Exhibit
No. 10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ending June 30, 1998.
10.34 Lease Agreement dated as of March 22, 1996, between Ryan
Construction Company of Minnesota, Inc., and ValueRx Pharmacy
Program, Inc., an indirect subsidiary of the Company,
incorporated by reference to Exhibit No. 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1998.
10.35 Lease Extension and Amendment Agreement dated as of July 24,
1998, between Faith A. Griefen and ValueRX Pharmacy Program,
Inc., an indirect subsidiary of the Company, incorporated by
reference to Exhibit No. 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1998.
10.36 Office Lease dated as of August 14, 1998 by and between Duke
Realty Limited Partnership, by and through its general partner,
Duke Realty Investments, Inc., and the Company, incorporated by
reference to Exhibit No. 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ending September 30, 1998.
10.37* Second Lease Amendment dated as of December 31, 1998 by and
between Duke Realty Limited Partnership, by and through its
general partner, Duke Realty Investments, Inc., and the Company.
10.38*** Express Scripts, Inc. 1992 Stock Option Plan, incorporated by
reference to Exhibit No.10.23 to the Registration Statement.
10.39*** Express Scripts, Inc. Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit No. 10.24 to the
Registration Statement.
10.40*** Express Scripts, Inc. 1994 Stock Option Plan, incorporated by
reference to Exhibit No. 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ending June 30, 1994.
10.41*** Amended and Restated Express Scripts, Inc. 1992 Employee Stock
Option Plan, incorporated by reference to Exhibit No. 10.78 to
the Company's Annual Report on Form 10-K for the year
ending 1994.
10.42*** Amended and Restated Express Scripts, Inc. Stock Option Plan for
Outside Directors, incorporated by reference to Exhibit No.
10.79 to the Company's Annual Report on Form 10-K for the year
ending 1994.
10.43*** First Amendment to Express Scripts, Inc. Amended and Restated
1992 Stock Option Plan for Outside Directors incorporated by
reference to Exhibit A to the Company's Proxy Statement
dated April 9, 1996.
10.44*** Amended and Restated Express Scripts, Inc. 1994 Stock Option
Plan incorporated by reference to Exhibit No. 10.80 to the
Company's Annual Report on Form 10-K for the year
ending 1994.
10.45*** First Amendment to Express Scripts, Inc. Amended and Restated
1994 Stock Option Plan incorporated by reference to Exhibit A to
the Company's Proxy Statement dated April 16, 1997.
10.46*** Second 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 21, 1998.
10.47*** Employment Agreement dated April 30, 1992, between the Company
and Barrett A. Toan (including form of Non-Qualified Stock
Option Agreement), incorporated by reference to
Exhibit No. 10.25 to the Registration Statement.
10.48*** Letter Agreement amending Employment Agreement dated
February 28, 1996, from the Company to
Barrett A. Toan, incorporated by reference to Exhibit No. 10.51
to the Company's Annual Report on Form 10-K for the year ending
1995.
10.49*** Form of Severance Agreement dated as of January 27, 1998,
between the Company and each of the following individuals:
Stuart L. Bascomb, Thomas M. Boudreau, Robert W. Davis, Linda L.
Logsdon, David A. Lowenberg, and George Paz, and Patrick J.
Byrne (agreement dated as of May 29, 1998), Michael S. Flagstad
(agreement dated as of April 1, 1998), and Jean-Marc
Quach (agreement dated as of May 18, 1998); incorporated by
reference to Exhibit No. 10.70 to the Company's Annual Report
on Form 10-K for the year ending December 31, 1997.
10.50 Credit Agreement dated as of April 1, 1998 among the Company,
the Lenders listed therein and Bankers Trust Company, as Agent
(the "Credit Agreement"), incorporated by reference to
Exhibit No. 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1998.
10.51 Company Pledge Agreement dated as of April 1, 1998 by the
Company in favor of the Lenders listed in the Credit Agreement
and Bankers Trust Company, as Agent incorporated by reference to
Exhibit No. 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1998.
10.52 Form of Subsidiary Guaranty dated as of April 1, 1998 in favor
of the Lenders listed in the Credit Agreement and Bankers Trust
Company, as Agent, by the following parties: Express Scripts
Vision Corporation, PhyNet, Inc., IVTx, Inc., IVTx of Dallas,
Inc., IVTx of Houston, Inc., ESI Canada Holdings, Inc., ESI
Canada, Inc., Value Health, Inc., Managed Prescription Network,
Inc., Prescription Drug Service, Inc., RxNet, Inc. of California,
Denali Associates, Inc., ValueRx Northeast, Inc., MedCounter,
Inc., Health Care Services, Inc., ValueRx, Inc., Cost Containment
Corp. of America, Diagnostek, Inc., MedIntell Systems
Corporation, ValueRx Pharmacy Program, Inc., ValueRx of Michigan,
Inc., Diagnostek Pharmacy Services, Inc., Diagnostek Pharmacy,
Inc., Diagnostek of Springfield, Inc., IPH, Inc., and MHI, Inc.,
incorporated by reference to Exhibit No. 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ending June 30,
1998.
10.53 Form of Subsidiary Pledge Agreement dated as of April 1, 1998 in
favor of the Lenders listed in the Credit Agreement and Bankers
Trust Company, as Agent, by the following parties: ESI Canada
Holdings, Inc., Value Health, Inc., ValueRx, Inc., Diagnostek,
Inc., ValueRx Pharmacy Program, Inc., Diagnostek Pharmacy
Services, Inc., and IPH, Inc., incorporated by reference to
Exhibit No. 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1998.
10.54 First Amendment to Company Pledge Agreement dated as of April 24,
1998, by the Company by the Company in favor of the Lenders
listed in the Credit Agreement and Bankers Trust Company, as
Agent, incorporated by reference to Exhibit No. 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ending
June 30, 1998.
10.55 International Swap Dealers Association, Inc. Master Agreement
dated as of April 3, 1998, between the Company and The First
National Bank of Chicago, incorporated by reference to
Exhibit No. 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ending June 30, 1998.
10.56*** Express Scripts, Inc. Employee Stock Purchase Plan incorporated
by reference to Exhibit No. 4.1 to the Company's Registration
Statement on Form S-8 filed December 29, 1998.
10.57*** Express Scripts, Inc. Executive Deferred Compensation Plan
incorporated by reference to Exhibit No. 4.1 to the Company's
Registration Statement on Form S-8 filed February 16, 1999.
21.1* List of Subsidiaries.
23.1* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney (included in Signature Page).
27.1* Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange Commission only).
* Filed herein.
** Confidential treatment granted for certain portions of these exhibits.
*** Management contract or compensatory plan or arrangement.
**** Confidential treatment requested for certain portions of these exhibits.
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
EXPRESS SCRIPTS, INC.
Express Scripts, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY
FIRST: That the Board of Directors of the Corporation at a meeting duly
called and held adopted resolutions proposing and declaring advisable an
amendment to the Certificate of Incorporation of the Corporation, as follows:
RESOLVED, that the Board of Directors hereby proposes and declares it
advisable that the first paragraph of Article Four of the Certificate of
Incorporation of the Corporation be amended to read in its entirety as follows:
4. The total number of shares of stock which the Corporation has authority
to issue is 102,000,000 shares, of which (i) 5,000,000 shares are preferred
stock, par value $0.01 per share (the "Preferred Stock"), and (ii) 97,000,000
shares are common stock, consisting of 75,000,000 shares of Class A Common
Stock, par value $0.01 per share (the "Class A Common Stock"), and 22,000,000
shares of Class B Common Stock, par value $0.01 per share (the "Class B Common
Stock").
SECOND: That thereafter at a meeting of stockholders duly called and held,
a majority of the votes of the outstanding Class A Common Stock and Class B
Common Stock of the Corporation entitled to vote thereon voting together as a
single class, and a majority of the votes of the outstanding Class A Common
Stock and Class B Common Stock entitled to vote thereon voting as separate
classes, were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, Express Scripts, Inc. has caused its corporate seal to
be hereunto affixed and this Certificate to be signed by Barrett A. Toan, its
President and Chief Executive Officer, and attested by Thomas M. Boudreau, its
Secretary, this 3rd day of June, 1998.
Express Scripts, Inc.
By: /s/ Barrett A. Toan
Barrett A. Toan, President and
Chief Executive Officer
ATTEST:
[Corporate Seal]
/s/ Thomas M. Boudreau
Thomas M. Boudreau, Secretary
EXHIBIT 10.29
NINTH LEASE AMENDMENT
THIS NINTH LEASE AMENDMENT (the "Ninth Amendment") is executed this 19th
day of February, 1999 by and between DUKE REALTY LIMITED PARTNERSHIP, an Indiana
limited partnership, ("Landlord"), and EXPRESS SCRIPTS, INC., a Delaware
corporation, ("Tenant")
W I T N E S S E T H :
WHEREAS, Riverport, Inc. and Douglas Development Company - Irvine
Partnership in Commendam (collectively, the "Original Landlord") and Tenant
entered into a lease dated March 3, 1992 (including all Exhibits, Addenda and
Amendments thereto, the "Lease") for a certain 64,000 square foot
office/warehouse building located at 14042 Riverport Drive, St. Louis, Missouri
63043 (the "Building");
WHEREAS, in November, 1992, Original Landlord transferred all its right,
title, and interest in the Building to Sverdrup/MDRC Joint Venture ("Successor
Landlord") and said Successor Landlord assumed all of Original Landlord's duties
and obligations under the Lease;
WHEREAS, Successor Landlord and Tenant entered into a First Amendment to
Lease dated December 29, 1992 (the "First Amendment"), a Second Amendment to
Lease dated May 28, 1993 (the "Second Amendment"), a Third Amendment to Lease
dated October 15, 1993 (the "Third Amendment"), a Fourth Amendment to Lease
dated March 24, 1994 (the "Fourth Amendment"), a Fifth Amendment to Lease dated
June 30, 1994 (the "Fifth Amendment"), a Sixth Amendment to Lease dated January
31, 1995 (the "Sixth Amendment"), a Seventh Amendment to Lease dated August 14,
1998 (the "Seventh Amendment"), and an Eighth Amendment to Lease dated August
14, 1998 (the "Eight Amendment");
WHEREAS, pursuant to the Third Amendment, Landlord agreed to rent to Tenant
and Tenant agreed to lease from Landlord an additional 12,365 square feet (the
"Additional Space");
WHEREAS, pursuant to the Fifth Amendment, Landlord and Tenant agreed that
the Additional Space was no longer a part of the Premises, and that the Third
Amendment would constitute a lease of and by itself (the "Additional Space
Lease") standing on its own terms and consisting of all the same terms and
conditions as were contained in the Lease (except to the extent that such terms
and conditions relate solely and expressly to the Premises) and in the Third
Amendment;
WHEREAS, on or about September 26, 1997, Successor Landlord transferred all
of its right, title and interest under the Lease and in and to the Premises and
in and to the Additional Space Lease to Landlord;
WHEREAS, pursuant to the Seventh Amendment, the termination date of the
Additional Space Lease was extended from December 1, 1998 to the later of (i)
August 1, 1999 or (ii) the date which is sixty (60) days following the
Commencement Date (as defined in the Office Lease referenced and identified in
the Seventh Amendment) of the Office Lease;
WHEREAS, Tenant desires to extend the term of the Additional Space Lease
until December 31, 2000; and
WHEREAS, Landlord and Tenant desire to amend certain provisions of the
Additional Space Lease to reflect such extension;
NOW THEREFORE, in consideration of the foregoing premises, the mutual
covenants herein contained and each act performed hereunder by the parties,
Landlord and Tenant hereby enter into this Ninth Amendment and agree as follows:
1. TERMINATION DATE. The termination date of the Additional Space Lease
(but said lease only) is hereby extended to December 31, 2000.
2. ADDITIONAL SPACE RENT. Commencing on January 1, 2000, and on the first
day of each calendar month thereafter during the course of the tenancy with
respect to the Additional Space, Tenant shall pay to Landlord as Base Rent an
amount equal to $5,873.38 instead of $4,585.35.
3. CONDITION OF PREMISES. Upon the expiration or earlier termination of the
Additional Space Lease, Tenant shall return the Additional Space in broom clean
condition, normal wear and tear, Tenant's improvements (as defined in the Third
Amendment), other non-structural improvements and modifications, and loss by
fire or other casualty excepted.
4. OPTION TO EXTEND.
A. GRANT AND EXERCISE OF OPTION. This Option to Extend applies to the
Additional Space Lease only. Provided that (i) Tenant has not been in default
hereunder at any time during the Term of the Additional Space Lease (the
"Original Additional Space Term"), (ii) Tenant originally named herein remains
in possession of and has been continuously operating in the Additional Space
throughout the Original Additional Space Term and (iii) Tenant's use of the
Additional Space remains the same as designated in Section XI of the Lease,
Tenant shall have one (1) option to extend the Original Additional Space Term
for one (1) additional period of three (3) years (the "Additional Space
Extension Term"). The Additional Space Extension Term shall be upon the same
terms and conditions contained in the Additional Space Lease for the Original
Additional Space Term except (i) Tenant shall not have any further option to
extend and (ii) the Minimum Annual Base Rent shall be adjusted as set forth
herein ("Rent Adjustment"). Tenant shall exercise such option by delivering to
Landlord, no later than April 1, 2000, written notice of Tenant's desire to
extend the Original Additional Space Term. Tenant's failure to properly exercise
such option shall waive it. If Tenant properly exercises its option to extend,
Landlord shall notify Tenant in writing, within twenty (20) days of receipt by
Landlord of Tenant's said notice, of Landlord's proposed Effective Market Base
Rent Rate (as hereinafter defined) and Landlord's proposed Minimum Annual Base
Rent for the Additional Space Extension Term. The Minimum Monthly Base Rent
shall be an amount equal to one-twelfth (1/12) of the Minimum Annual Base Rent
for the Additional Space Extension Term and shall be paid at the same time and
in the same manner as provided in the Additional Space Lease. If Tenant properly
exercises its option to extend, Landlord and Tenant shall execute an amendment
to the Lease (or, at Landlord's option, a new lease on the form then in use for
the Building) reflecting the terms and conditions of the Additional Space
Extension Term.
B. RENT ADJUSTMENT. The Minimum Annual Base Rent for the Additional Space
Extension Term shall be an amount equal to ninety-five percent (95%) of the
projected Effective Market Base Rent Rate, as at the commencement date of the
Additional Space Extension Term which said Effective Market Base Rent Rate shall
be the rate charged to tenants for space of comparable size, location, and
conditions in comparable property within a five (5) mile radius of the Building.
Said Effective Market Base Rent Rate shall take into consideration the
following: location, quality, age, common area factors, finish allowances,
rental abatement, parking charges, lease assumptions, moving allowances, space
planning allowances, refurbishment allowances, and any other concession or
inducement. In addition, other consideration such as credit standing of Tenant,
lease term, and any other issues that would be relevant in making a market rate
determination should be considered. If Landlord and Tenant should be unable to
agree as to the Effective Market Base Rent Rate for the Additional Space
Extension Term within twenty (20) days of receipt by Tenant of Landlord's said
notice, then Landlord and Tenant shall each select a qualified real estate
appraiser (as hereinafter defined) to determine the Effective Market Base Rent
Rate. Said appraisers shall render their written decision within twenty (20)
days after the date of their selection. If the difference between the high
appraisal and the low appraisal is ten percent (10%) or less of the low
appraisal, then the Effective Market Base Rent Rate shall be the average between
the low appraisal and the high appraisal and the Minimum Annual Base Rent for
the Additional Space Extension Term shall be ninety-five percent (95%) thereof.
In the event said difference is in excess of ten percent (10%), then the
appraisers shall mutually select a third appraiser who shall render a written
decision of the Effective Market Base Rent Rate within twenty (20) days of
his/her selection. The Minimum Annual Base Rent during the Additional Space
Extension Term shall be ninety-five percent (95%) of the Effective Market Base
Rent Rate as established by the third appraiser; provided, however, that said
Effective Market Base Rent Rate shall not be greater than the initial high
appraisal or be less than the initial low appraisal nor shall the Minimum Annual
Base Rent for the Additional Space Extension Term be less than the Minimum
Annual Base Rent payable by Tenant to Landlord as of the Termination Date of the
immediately preceding Original Additional Space Term. In the event that the two
appraisers fail or refuse to select a third appraiser, either party may make
application, upon written notice to the other, to the Chief Judge of the United
States District Court for the Eastern District of Missouri, Eastern Division,
who shall select the third appraiser. Either party may, within three (3)
business days of the making of application to the Chief Judge, submit a list of
not more than five (5) qualified (as herein specified) real estate appraisers
for the guidance of the Chief Judge. Each party shall pay the appraiser selected
by it and the costs of the third appraiser, if any, shall be borne equally by
Landlord and Tenant. If it shall become necessary to select appraisers in
accordance with the terms of this Section 4.B, said appraisers shall be either
(i) a disinterested commercial real estate broker with at least ten (10) years
professional experience in the St. Louis, Missouri metropolitan industrial
market or (ii) a disinterested person with at least ten (10) years professional
experience in commercial real estate appraisal in the St. Louis, Missouri
metropolitan area, and a member in good standing in at least one of the
following professional organizations: The Society of Real Estate Appraisers
(holding the SREA designation), or the American Institute of Real Estate
Appraisers (holding the MAI designation).
5. EXAMINATION OF AMENDMENT. Submission of this instrument for examination
or signature to Tenant does not constitute a reservation or option, and it is
not effective until execution by and delivery to both Landlord and Tenant.
6. DEFINITIONS. Except as otherwise provided herein, the capitalized terms
used in this Ninth Amendment shall have the definitions set forth in the Lease.
7. INCORPORATION. This Ninth Amendment shall be incorporated into and made
a part of the Additional Space Lease, and all provisions of the Additional Space
Lease not expressly modified or amended hereby shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Ninth Amendment to be
executed on the day and year first above written.
LANDLORD:
DUKE REALTY LIMITED PARTNERSHIP,
an Indiana limited partnership
By: Duke Realty Investments, Inc.,
its General Partner
ATTEST:
/s/ James D. Echoff By: /s/ Ramsey F. Maune
Corporate Attorney Ramsey F. Maune
and Vice President Vice President and General Manager
St. Louis Industrial Group
TENANT:
EXPRESS SCRIPTS, INC., a Delaware
corporation
ATTEST: By: /s/ Thomas M. Boudreau
Thomas M. Boudreau
/s/ Keith J. Ebling Senior Vice President and General Counsel
Secretary
STATE OF MISSOURI )
) SS:
COUNTY OF ST. LOUIS )
Before me, a Notary Public in and for said County and State, personally
appeared Thomas M. Boudreau, by me known and by me known to be the Sr. Vice
President of Express Scripts, Inc., a Delaware corporation who acknowledged the
execution of the foregoing Ninth Amendment on behalf of said corporation.
WITNESS my hand and Notarial Seal this 9th day of February, 1999.
/s/ Kathleen M. Dolan
Notary Public
Kathleen M. Dolan
(Printed Signature)
My Commission Expires: 4/14/2001
My County of Residence: St. Louis County
STATE OF MISSOURI )
) SS:
COUNTY OF ST. LOUIS )
Before me, a Notary Public in and for said County and State, personally
appeared Ramsey F. Maune, by me known and by me known to be the Vice President
and General Manager-St. Louis Industrial Group of Duke Realty Limited
Partnership, an Indiana limited partnership who acknowledged the execution of
the foregoing Ninth Amendment on behalf of said corporation.
WITNESS my hand and Notarial Seal this 19th day of February, 1999.
/s/ Kathleen M. Wade
Notary Public
Kathleen M. Wade
(Printed Signature)
My Commission Expires:5/4/2002
My County of Residence: St. Louis County
EXHIBIT 10.37
SECOND LEASE AMENDMENT
This SECOND LEASE AMENDMENT (the "Second Amendment") is executed as of this
31st day of December, 1998, by and between DUKE REALTY LIMITED PARTNERSHIP, an
Indiana limited partnership, by and through its general partner, Duke Realty
Investments, Inc., an Indiana corporation, authorized to do and doing business
in the State of Missouri, as Landlord (hereinafter "Landlord") and EXPRESS
SCRIPTS, INC., a Delaware corporation, authorized to do and doing business in
the State of Missouri, as Tenant (hereinafter "Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a certain Office Lease dated as
of August 14, 1998 for all of the space in that certain Building (as defined in
said Office Lease) which Landlord is in the process of causing to be
constructed, which said Office Lease was heretofore amended by that certain
First Lease Amendment dated as of November 5, 1998 (the "First Amendment") (the
said Office Lease and the First Amendment being hereinafter referred to
collectively as the "Lease"); and
WHEREAS, Landlord and Tenant desire to further amend the Lease in the
limited respects hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
herein contained and each act performed hereunder by the parties, Landlord and
Tenant hereby agree as follows:
1. Except as otherwise herein specifically provided, terms used in this
Second Lease Amendment shall have the meaning set forth in the Lease.
2. At the beginning of the second and third paragraphs of Section 3.11,
INSURANCE, the word "Landlord" shall be substituted for the word "Tenant". In
the tenth (10th) line of the second paragraph of Section 3.11, INSURANCE, the
word "Landlord" shall be substituted for the word "Tenant". The last sentence of
the second paragraph of Section 3.11, INSURANCE, shall be deleted in its
entirety. At the end of the fourth paragraph of Section 3.11, INSURANCE, before
the period the words "and Tenant" shall be added. At the end of the fifth
paragraph of Section 3.11, INSURANCE, the word "Tenant" shall be substituted for
the word "Landlord". At the beginning of the first and third lines of the sixth
paragraph of Section 3.11, INSURANCE, the word "Landlord" shall be substituted
for the word "Tenant". At the end of Section 3.11, INSURANCE shall be added the
following: "The reasonable cost of insurance required by the provisions of this
Section 3.11, INSURANCE to be provided by Landlord shall be paid by Tenant to
Landlord within thirty (30) days of receipt by Tenant of a statement, in
reasonable detail, as Additional Rent."
3. This Second Amendment shall be incorporated into and made apart of the
Lease. All provisions of the Lease not expressly modified or amended hereby
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Second Lease Amendment to
be executed as of the day and year first written above.
LANDLORD: DUKE REALTY LIMITED PARTNERSHIP,
an Indiana limited partnership
By: DUKE REALTY INVESTMENTS, INC.
an Indiana corporation,
(SEAL) its general partner
By: /s/ Gregory Thurman
ATTEST: W. Gregory Thurman
Vice President and General Manager,
/s/ James D. Echkoff St. Louis Office Group
James D. Eckhoff
Vice President
and Corporate Attorney
TENANT: EXPRESS SCRIPTS, INC.,
a Delaware corporation
(SEAL) By: /s/ Barrett Toan
Barrett Toan, President
ATTEST:
/s/ Thomas M. Boudreau
Thomas M. Boudreau
Secretary
STATE OF MISSOURI )
) SS.
COUNTY OF ST. LOUIS )
On this 12th day of February 1999, before me personally appeared W. GREGORY
THURMAN, to me personally known, who, being by me duly sworn, did say that he is
Vice President and General Manager, St. Louis Office Group of DUKE REALTY
LIMITED PARTNERSHIP, an Indiana limited partnership, and general partner in DUKE
REALTY INVESTMENTS, INC., an Indiana corporation, and that the seal affixed to
the foregoing SECOND LEASE AMENDMENT is the corporate seal of said corporation,
and that said SECOND LEASE AMENDMENT was signed and sealed on behalf of said
limited partnership and said corporation, by authority of its Board of
Directors, and said W. GREGORY Thurman acknowledged said SECOND LEASE AMENDMENT
to be the free act and deed of the said limited partnership and said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the County and State aforesaid, the day and year first above written.
/s/ Kathleen M. Wade
Notary Public
STATE OF MISSOURI )
) SS.
COUNTY OF ST. LOUIS )
On this 25th day of January 1999, before me appeared BARRETT TOAN, to me
personally known, who, being by my duly sworn, did say that he is the President
of EXPRESS SCRIPTS, INC., a corporation of the State of Delaware, and that the
seal affixed to the foregoing instrument is the corporate seal of said
corporation, and that said instrument was signed and sealed on behalf of said
corporation by authority of its Board of Directors; and said BARRETT TOAN
acknowledged said instrument to be the free act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the County and State aforesaid, the day and year first above written.
/s/ Kathleen M. Dolan
Notary Public
Exhibit 21.1
SUBSIDIARY STATE OF INCORPORATION D/B/A
- ---------- ---------------------- -----
ESI Canada, Inc. New Brunswick, Canada None
ESI Canada Holdings, Inc. New Brunswick, Canada None
Express Scripts Vision
Corporation Delaware ESI Vision Care
IVTx, Inc. Delaware None
ESI/VRx Sales Development Co. Delaware None
Great Plains Reinsurance Company Arizona None
Practice Patterns Science, Inc. Delaware None
Managed Prescription
Network, Inc. Delaware Columbia Pharmacy
Solutions
Value Health, Inc. Delaware None
Health Care Services, Inc. Pennsylvania None
MHI, Inc. Nevada None
ValueRx, Inc. Delaware None
ValueRx of Michigan, Inc. Michigan None
ValueRx Pharmacy Program, Inc. Michigan None
ESI OnLine, Inc. Delaware None
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-72441, 333-69855, 333-48779, 333-48767,
333-48765, 333-27983, 333-04291, 33-64094, 33-64278, 33-93106) of Express
Scripts, Inc. of our report dated February 12, 1999, appearing on page 38 of
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 25, 1999
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