<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 18, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EXPRESS SCRIPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 43-1420563
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
14000 RIVERPORT DRIVE
MARYLAND HEIGHTS, MISSOURI 63043
(314) 770-1666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
THOMAS M. BOUDREAU, ESQ.
GENERAL COUNSEL AND SECRETARY
EXPRESS SCRIPTS, INC.
14000 RIVERPORT DRIVE
MARYLAND HEIGHTS, MISSOURI 63043
(314) 770-1666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
VINCENT PAGANO, JR., ESQ. JAMES J. CLARK, ESQ.
SIMPSON THACHER & BARTLETT CAHILL GORDON & REINDEL
425 LEXINGTON AVENUE 80 PINE STREET
NEW YORK, NEW YORK 10017-3954 NEW YORK, NEW YORK 10005
(212) 455-2000 (212) 701-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT AGGREGATE PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, par
value $0.01 per share....... 5,175,000 $78.38 $405,616,500 $112,761.39
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act based on the average
high and low reported sale prices on The Nasdaq National Market on March 15,
1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 1999
SHARES
[EXPRESS SCRIPTS LOGO]
CLASS A COMMON STOCK
------------------------
We are selling shares of our Class A Common Stock. We have granted the
underwriters an option to purchase a maximum of additional shares of
our Class A Common Stock to cover over-allotments of shares.
We have two classes of authorized common stock, our Class A and Class B Common
Stock. Our Class B Common Stock has ten votes per share, and our Class A Common
Stock has one vote per share. NYLIFE Healthcare Management, Inc. is the holder
of all of our outstanding Class B Common Stock. After this offering, NYLIFE
Healthcare will have % and the holders of Class A Common Stock will have
% of the combined voting power of our common stock. In addition, after this
offering NYLIFE Healthcare will own % and the holders of Class A Common
Stock will own % of our outstanding shares of common stock.
Our Class A Common Stock is traded on The Nasdaq National Market under the
symbol "ESRX." On , 1999, the last reported sale price for our Class A
Common Stock on The Nasdaq National Market was $ per share.
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS EXPRESS SCRIPTS, INC.
-------- ------------- ---------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total....................................... $ $ $
</TABLE>
Delivery of the shares of Class A Common Stock will be made on or about
, 1999, against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
BT ALEX. BROWN
MORGAN KEEGAN & COMPANY, INC.
Prospectus dated , 1999
<PAGE> 3
NOTES TO READERS OF THIS PROSPECTUS
You should keep in mind the following points as you read this prospectus:
Unless the context otherwise indicates, references in this document to
"we," "us," "our" and "the Company" refer to Express Scripts, Inc. and its
subsidiaries. References to "NYLIFE Healthcare" refer to NYLIFE Healthcare
Management, Inc.
Unless we tell you otherwise, all information in this prospectus has been
adjusted to reflect a two-for-one stock split of our common stock that occurred
on October 30, 1998.
This offering is for shares of our Class A Common Stock;
however, the underwriters have a 30-day option to purchase up to
additional shares of our Class A Common Stock to cover over-allotments. Some of
the disclosures in this prospectus would change if the underwriters exercise the
option. Unless we tell you otherwise, the information in this prospectus assumes
that the underwriters will not exercise the option.
This prospectus contains information and statements regarding our relative
size and market share as well as information regarding the health care industry.
Information and statements regarding our relative size and market share are
based on our estimate of our size and market share relative to other pharmacy
benefit management companies in light of our experience. Such information and
statements are derived from a number of estimates and assumptions and, while we
believe such information and statements are reliable, we can provide no
assurance as to their accuracy. With respect to information regarding the health
care industry, although we have obtained such information from sources we
believe are reliable, we have not independently verified any such information
and can provide no assurance as to its accuracy.
-------------------------
TABLE OF CONTENTS
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PAGE
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<S> <C>
PROSPECTUS SUMMARY.................. 1
RISK FACTORS........................ 8
USE OF PROCEEDS..................... 17
PRICE RANGE OF COMMON STOCK AND
DIVIDEND POLICY................... 18
CAPITALIZATION...................... 19
SELECTED FINANCIAL AND OPERATING
DATA.............................. 20
UNAUDITED CONSOLIDATED CONDENSED PRO
FORMA FINANCIAL DATA.............. 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 27
BUSINESS............................ 38
</TABLE>
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PAGE
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<S> <C>
MANAGEMENT.......................... 53
PRINCIPAL STOCKHOLDERS.............. 56
DESCRIPTION OF CAPITAL STOCK........ 58
DESCRIPTION OF THE NEW CREDIT
FACILITY.......................... 60
UNDERWRITING........................ 62
NOTICE TO CANADIAN RESIDENTS........ 64
FORWARD-LOOKING STATEMENTS.......... 65
WHERE YOU CAN FIND MORE
INFORMATION....................... 67
LEGAL MATTERS....................... 68
EXPERTS............................. 68
INDEX TO FINANCIAL STATEMENTS....... F-1
</TABLE>
-------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
ANY DIFFERENT INFORMATION. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO
SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE AS
OF THE DATE OF THIS DOCUMENT.
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information you
should consider before investing in the shares of Class A Common Stock offered
by this prospectus. You should read this entire prospectus carefully.
THE COMPANY
We are the largest full-service pharmacy benefit management ("PBM") company
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 clients
that include health maintenance organizations ("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 Diversified Pharmaceutical Services and certain
related companies ("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. On a pro forma basis after
giving effect to the acquisitions of ValueRx and DPS and the related financings,
including this offering and the use of the estimated net proceeds therefrom, our
net revenues and net income for 1998 would have been approximately $3.4 billion
and $52.1 million, respectively, excluding a $1.0 million after-tax
restructuring charge.
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. As of the same date, after giving effect to the
DPS acquisition, we would have served approximately 47.0 million members,
including 10.5 million members under DPS's contract with United HealthCare
Corporation which will terminate without renewal on May 24, 2000. Our membership
count excludes members for whom we provide only formulary management services,
whereas the DPS membership count and our combined pro forma membership counts
include approximately 1.0 million members for whom DPS provides only formulary
management services. Including DPS, some of our other large clients include
Aetna U.S. Healthcare, Oxford Health Plans and the State of New York Empire Plan
Prescription Drug Program.
1
<PAGE> 5
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, including ValueRx and DPS on a
pro forma basis, we processed approximately 284 million pharmacy claims with
estimated total drug spending of approximately $10 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 outcomes assessments, through our majority owned subsidiary Practice
Patterns Science
- informed decision counseling services through our Express Health Line(SM)
division
Our non-PBM services include:
- infusion therapy services through our wholly owned subsidiary IVTx
- distribution of pharmaceuticals requiring special handling or packaging
through our Specialty Distribution division
INDUSTRY
Prescription drugs represent the fastest growing component of health care
expenditures in the United States. Since 1990, pharmaceutical sales have grown
at a compound annual growth rate of approximately 9%, and the U.S. Health Care
Financing Administration projects a compound annual growth rate of approximately
10% through 2007. This growth is principally driven by new drug introductions,
increases in drug utilization rates and changes in drug strength, therapeutic
mix and dosage. In response to these trends, 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 better understand
the impact of prescription drug utilization on total health care expenditures.
STRATEGY
Our strategy is to increase our membership base and grow profitably by
focusing on generating sales to new clients and expanding the services we
provide to existing clients, developing new products and services for sale to
existing clients and drug manufacturers and selectively pursuing acquisitions
and alliances to increase our membership base and enhance our product offerings.
- Generation of Sales to New Clients and Growth from Existing Clients. Our
predominant growth strategy is to pursue sales to new clients and
generate growth in the membership base of existing clients. Our compound
annual growth rate in members, excluding our recent acquisitions, is 48%
since our initial public offering in 1992. The managed care market
segment has experienced, and we believe will
2
<PAGE> 6
continue to experience, solid growth. We believe additional opportunities
also exist in the large employer and union market segments. Recent large
new clients under contract with us include Blue Cross and Blue Shield of
Massachusetts and Buyer's Health Care Action Group. Growth within the
membership base of existing clients is also important to our strategy.
When our clients, such as managed care organizations, third-party
administrators and other third-party payors, market their service
offerings to potential clients, they generally market our prescription
drug program as part of their offerings. As their client base grows, our
membership base typically also grows.
- Development and Sale of New Products and Services to Existing Clients and
Drug Manufacturers. We continue to emphasize the development and sale of
new products and services as part of our PBM offerings to our existing
clients, and we have begun marketing certain of our products, such as
research programs, to selected pharmaceutical manufacturers. We believe
these products and services are necessary to compete effectively in the
current business environment and to differentiate us from our competitors
on a measure other than price. Products and services developed by us in
recent years include disease management programs, advanced formulary
compliance programs, drug outcomes research, drug therapy management
programs, medical information management, proprietary clinical services
and sophisticated management reporting capabilities. We believe a
particular growth area in the PBM industry will be medical information
management. We believe our majority owned subsidiary Practice Patterns
Science is an industry leader in this area, having developed proprietary
software to process and sort medical claims, prescription drug claims and
clinical laboratory data for use by managed care organizations and other
health care companies.
- Growth Through Strategic Acquisitions and Alliances. During the past
several years we have begun to supplement our strong internal growth with
selected acquisitions of other PBMs and strategic alliances. Our
objectives in pursuing acquisitions and alliances are to increase the
scale of our business, expand our client base, increase our penetration
of PBM markets and expand our product and service offerings. Our
acquisition of ValueRx and our pending acquisition of DPS substantially
increase our membership base, diversify our client base and increase our
presence in key market segments and enhance our clinical capabilities,
systems and technologies. Our acquisition of ValueRx added approximately
10.0 million members and our pending acquisition of DPS will add
approximately 23.5 million members. We have formulated and are
implementing a detailed plan to integrate ValueRx into our operations and
have formulated a similar plan for integrating DPS. We are also party to
strategic alliances with Premier Purchasing Partners and The
Manufacturers Life Insurance Company.
3
<PAGE> 7
RECENT DEVELOPMENTS
During the second quarter of 1999, we expect to complete our acquisition of
DPS from SmithKline Beecham Corporation and one of its affiliates for $700
million in cash. We will 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. With the addition
of DPS, 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.
On February 1, 1999, we announced a three-and-a-half-year contract with
Blue Cross and Blue Shield of Massachusetts. Beginning in the second half of
1999, we will provide PBM services, including retail network and mail pharmacy
services, claims processing, clinical management support and other related
services to approximately 1.2 million members.
On January 14, 1999, DPS announced a five-year contract with Oxford Health
Plans. Under the contract, DPS will provide retail network, claims processing,
clinical management support and other related services to approximately 1.8
million members.
On April 1, 1998, we completed our acquisition of ValueRx from Columbia/HCA
Healthcare Corporation for approximately $460 million in cash. The acquisition
expanded our client base and increased our penetration of the health insurance
carrier, large employer and union market segments of the PBM market.
-------------------------
We were incorporated in Missouri in 1986 and reincorporated in Delaware in
1992. Our principal executive offices are located at 14000 Riverport Drive,
Maryland Heights, Missouri 63043, and our phone number is (314) 770-1666.
Express Scripts(R) is our registered trademark. Our other trademarks include
"ExpressComp(R)", "ExpressReview(R)", "OptiMedSM", "Express Therapeutics(R)",
"IVTx(R)", "PERx(R)", "PERxCare(R)", "PERxComp(R)", "PTE(R)", "Rx WizardTM",
"ValueRx(R)" and "Value Health, Inc.(R)". We will acquire several additional
trademarks upon completion of our acquisition of DPS.
4
<PAGE> 8
THE OFFERING
Class A Common Stock offered
by us(1)...................... shares
Common Stock to be outstanding
after this offering:
Class A Common Stock(1)(2).... shares
Class B Common Stock.......... shares
-------------
Total Common Stock(1)(2)...... shares
-------------
-------------
Relative rights of holders of
our Class A Common Stock and
Class B Common Stock.......... Our Class B Common Stock has ten votes per
share and our Class A Common Stock has one
vote per share. NYLIFE Healthcare is the
holder of all our outstanding Class B Common
Stock. Our Class B Common Stock
automatically converts to our Class A Common
Stock on a share-for-share basis upon
transfer by NYLIFE Healthcare to any entity
other than an affiliate of NYLIFE Healthcare
and otherwise at the option of NYLIFE
Healthcare. After this offering, NYLIFE
Healthcare will have % and the holders
of Class A Common Stock will have % of the
combined voting power of our common stock.
In addition, after this offering NYLIFE
Healthcare will own % and the holders
of Class A Common Stock will own % of
our outstanding shares of common stock.
Use of Proceeds................. To repay certain of our indebtedness, a
substantial portion of which will be
incurred in connection with our acquisition
of DPS.
The Nasdaq National Market
Symbol: ...................... ESRX
- -------------------------
(1) Assumes the Underwriters' over-allotment option to purchase additional
shares of our Class A Common Stock is not exercised. See "Underwriting."
(2) Does not include as of March 1, 1999: (i) stock options and similar equity
rights granted to employees and independent directors to purchase 2,858,752
shares of our Class A Common Stock, of which 866,700 were exercisable; (ii)
certain reserved shares of our Class A Common Stock for issuance in
connection with certain strategic alliances (see "Business -- Acquisitions
and Strategic Alliances"); and (iii) reserved shares of our Class A Common
Stock for our Employee Stock Purchase Plan and our Executive Deferred
Compensation Plan (see Note 10 in our 1998 Consolidated Financial
Statements).
5
<PAGE> 9
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
UNAUDITED
ACTUAL PRO FORMA
1994 1995 1996 1997 1998(2)(3) 1998(4)(5)
-------- -------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues....................... $384,504 $544,460 $773,615 $1,230,634 $2,824,872 $3,449,649
Gross profit....................... 46,353 66,177 88,733 111,467 239,875 488,809
Operating income................... 20,471 28,877 39,630 48,850 89,234 149,752
Interest income (expense), net..... 305 757 3,450 5,856 (12,994) (59,194)
Net income......................... 12,723 18,327 26,148 33,429 42,674 51,130
Basic earnings per share(1)........ $0.43 $0.62 $0.81 $1.02 $1.29 $1.36
Diluted earnings per share(1)...... $0.42 $0.60 $0.80 $1.01 $1.27 $1.34
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
UNAUDITED ACQUISITION
PRO FORMA AS
UNAUDITED ADJUSTED
ACQUISITION FOR THIS
ACTUAL PRO FORMA(6) OFFERING(6)(7)
---------- ------------ ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash.............................................. $ 122,589 $ 122,589 $ 122,589
Working capital................................... 117,611 (9,966) (8,668)
Total assets...................................... 1,095,461 2,084,343 2,081,099
Short-term debt................................. 54,000 -- --
Long-term debt, less current maturities......... 306,000 1,090,000 754,656
---------- ---------- ----------
Total debt........................................ 360,000 1,090,000 754,656
Stockholders' equity.............................. 249,694 247,622 581,020
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
UNAUDITED
ACTUAL PRO FORMA
1994 1995 1996 1997 1998(2) 1998(4)
-------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED DATA:
Pharmacy benefit covered
lives......................... 5,700 8,100 9,900 12,600 22,900 46,400
Annual drug spending(8)......... $716,000 $1,172,000 $1,636,000 $2,486,000 $4,495,000 $9,913,000
Pharmacy network claims
processed..................... 26,323 42,871 57,838 73,164 113,177 275,534
Mail pharmacy prescriptions
filled........................ 1,594 2,129 2,770 3,899 7,426 8,514
EBITDA(9)....................... $23,795 $33,258 $46,337 $59,320 $117,318 $226,936
</TABLE>
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<PAGE> 10
(1) Earnings per share have been restated to reflect our two-for-one stock split
effective October 30, 1998.
(2) Includes our acquisition of ValueRx effective April 1, 1998.
(3) Includes a corporate restructuring charge 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.
(4) Adjusted to give pro forma effect to our acquisitions of ValueRx and DPS and
the related financings, including this offering and the use of the estimated
net proceeds therefrom, in each case as if it had occurred on January 1,
1998. The unaudited pro forma statement of operations data does not give
effect to the after-tax write-off of $4,018 in deferred financing fees
related to the retirement of our $440,000 credit facility and $185,344 of
the $1,000,000 billion credit facility which would be recognized as an
extraordinary item. In addition, any cost savings we may realize in
connection with the integration of DPS are not reflected in the unaudited
pro forma statement of operations data.
(5) Includes a corporate restructuring charge of $1,651 ($1,002 after tax).
Excluding this restructuring charge, our basic and diluted earnings per
share would have been $1.39 and $1.36, respectively.
(6) Adjusted to give pro forma effect to our acquisition of DPS and the related
financings as if they occurred on December 31, 1998.
(7) Adjusted to give effect to this offering and the use of the estimated net
proceeds therefrom as if they occurred on December 31, 1998.
(8) 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 formulery
programs we administer for our clients.
(9) 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 or an alternative to cash flow as a
measure of liquidity. In addition, our definition of EBITDA may not be
comparable to that reported by other companies.
7
<PAGE> 11
RISK FACTORS
In addition to the other information in this prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Class A Common Stock offered by this prospectus.
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 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 DPS from SmithKline Beecham
Corporation and one of its affiliates for $700 million in cash. 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, customer service 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 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
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<PAGE> 12
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 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 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. Increased price competition could
have a material adverse effect on our results of operations.
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 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 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.
Upon completion of the DPS acquisition, United HealthCare Corporation will
become 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 pharmacy chains representing even higher
concentrations in certain areas of the
9
<PAGE> 13
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, and 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. Changes in
existing laws or regulations, changes in interpretations of existing laws or
regulations or the adoption of new laws or regulations relating to any of these
discounts, rebates and formulary fees and programs, may materially adversely
affect our business.
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 that may substantially reduce the market share of these brand name
drugs. 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, over 100 separate lawsuits have been filed by retail pharmacies
against drug manufacturers, wholesalers and certain PBM's challenging brand name
drug pricing practices under various state and federal antitrust laws. The suits
alleged, among other things, that the manufacturers had offered, and certain
PBM's 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.
10
<PAGE> 14
Neither we nor DPS is a party to any of these proceedings, and 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.
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 the products and
services provided in connection with our infusion therapy programs (including
the associated nursing services) have subjected us and may subject us in the
future to litigation and liability for damages. We believe our insurance
protection is adequate for our present operations, but 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. These laws and regulations include, but are not necessarily limited
to:
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. To our knowledge, these anti-remuneration laws
have not been applied to prohibit PBMs from receiving payments from drug
manufacturers in connection with drug purchasing and formulary management
programs, therapeutic intervention programs conducted by independent PBMs or
contractual relationships such as those we have with certain clients. Although
we believe we are in substantial compliance with the legal requirements imposed
by these laws and regulations, these laws and regulations are often difficult to
interpret and apply to our business. We cannot provide any assurance that we
will not be subject to scrutiny or challenge under these laws and regulations,
or that any such challenge would not have a material adverse effect on our
business.
ERISA REGULATION. The Employee Retirement Income Security Act of 1974, as
amended ("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 the conduct of our business is
not subject to the fiduciary obligations of ERISA, but we cannot provide any
assurance the U.S. Department of Labor, which is the agency that enforces ERISA,
would not assert that the fiduciary obligations imposed by ERISA apply to
certain aspects of our operations. If the U.S. Department of Labor were
successful in imposing the fiduciary obligations of ERISA upon us, our business
could be materially adversely affected. In addition, other provisions of ERISA
can be applied to impose civil or criminal liability even on persons that are
not fiduciaries of a health care plan. Although we believe we are in substantial
compliance
11
<PAGE> 15
with ERISA, like the anti-remuneration laws, ERISA is often difficult to
interpret and apply to certain aspects of our business. We cannot be certain we
will not be subject to challenges under ERISA in the future.
MAIL PHARMACY REGULATION. Each of our mail pharmacies is licensed to do
business as a pharmacy in the state in which it is located. Many of the states
into which we deliver pharmaceuticals have laws and regulations that require
out-of-state mail pharmacies to register with, or be licensed by, the board of
pharmacy or a similar regulatory body in the state. We have registered in every
state in which, to our knowledge, such registration is required. However, if the
state regulatory schemes were to become more complex or burdensome, our business
could be materially adversely affected. In addition, various federal statutes
and regulations affect our mail pharmacies, such as those that govern the
labeling, packaging, advertising and adulteration of prescription drugs and the
dispensing of controlled substances. From time to time retail pharmacies have
expressed opposition to mail order pharmacies. Retail pharmacies, state pharmacy
associations and state boards of pharmacy have, in some instances, attempted to
secure the enactment or promulgation of statutes or regulations that could have
the effect of hindering or, in some cases, prohibiting the delivery of
prescription drugs into such state by a mail pharmacy service. If these efforts
are successful, our mail pharmacy services business could be materially
adversely affected.
PRIVACY AND CONFIDENTIALITY LEGISLATION. Most of our activities involve
the receipt or use of confidential medical information concerning individual
members. We also 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 we cannot provide any 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 business.
Other laws and regulations affecting our business include, but are not
necessarily limited to:
- proposed comprehensive state PBM regulatory legislation
- consumer protection laws
- pharmacy network access (i.e., "any willing provider" and "due process"
legislation)
- legislation imposing benefit plan design restrictions, which limit how
our clients can design their drug benefit plans
- various licensure laws
- drug pricing legislation (i.e., "most favored nation" pricing and
"unitary pricing" legislation)
- other Medicare and Medicaid reimbursement regulations
- potential regulation of the PBM industry by the U.S. Food and Drug
Administration
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. In addition, there are numerous proposed health care laws and
regulations at the federal and state levels, many
12
<PAGE> 16
of which could materially adversely affect our business or results of
operations. 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 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 application software
- operating system software
- utility software
- vendor/trading partner-supplied files
- externally provided data or transactions
- non-information technology devices
- adherence to applicable industry standards
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,
13
<PAGE> 17
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, 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.
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, 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.
After giving effect to this offering, NYLIFE Healthcare will have approximately
% of the combined voting power and will own approximately % of the
outstanding shares of our 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. 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.
14
<PAGE> 18
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.
FUTURE SALES OR ISSUANCES OF ELIGIBLE SHARES COULD ADVERSELY AFFECT OUR SHARE
PRICE
As of March 1, 1999, in addition to the shares of our Class A
Common Stock offered hereby and shares issuable upon exercise of outstanding
stock options (of
15
<PAGE> 19
which 866,700 are currently exercisable), and shares issuable under our Employee
Stock Purchase Plan (of which 250,000 are authorized) and our Executive Deferred
Compensation Plan (of which 50,000 are authorized), 15,020,000 restricted shares
of our Class B Common Stock (which will automatically convert into a like number
of shares of our Class A Common Stock upon transfer by NYLIFE Healthcare to any
entity other than an affiliate of NYLIFE Healthcare or otherwise at the option
of NYLIFE Healthcare) are eligible for sale pursuant to Rule 144 under the
Securities Act, subject to volume limitations set forth therein. We and certain
of our directors, officers and stockholders (including NYLIFE Healthcare) have
agreed not to offer, sell, contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or indirectly, or, in our case, file
with the SEC a registration statement under the Securities Act relating to any
additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, without the
prior written consent of Credit Suisse First Boston Corporation for a period of
90 days after the date of this prospectus.
We are party to ten-year strategic alliances 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") and
The Manufacturers Life Insurance Company ("Manulife"). 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. 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. 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.
Effective January 1, 1998, we issued warrants to Coventry Corporation to
purchase 50,000 shares of our Class A Common Stock exercisable at 90% of the
market value at the time of issuance.
The issuance of additional shares of our Class A Common Stock, including
those issued in connection with our strategic alliances with Premier and
Manulife, could result in a decrease in the market price of our Class A Common
Stock.
PROVISIONS IN OUR CHARTER AND BYLAWS COULD PREVENT A TAKEOVER ATTEMPT
In addition to the voting rights held by NYLIFE Healthcare, certain
provisions of our certificate of incorporation and our by-laws may have
anti-takeover effects, which may delay, defer or prevent a takeover attempt that
a holder of our Class A Common Stock might consider in its best interest. These
anti-takeover provisions:
- provide that only our Board of Directors or holders of shares entitled to
cast at least 50% of the votes of all outstanding shares entitled to vote
may call special meetings of the stockholders
- eliminate the ability of our stockholders to take any action by written
consent without a meeting
In addition, our by-laws establish certain advance notice procedures for
the nomination of candidates for election as directors and for stockholder
proposals to be considered at stockholders' meetings.
16
<PAGE> 20
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of our Class A
Common Stock offered by this prospectus are estimated to be
$ ($ if the Underwriters exercise their over-allotment option
in full), at an assumed offering price per share of $ and after
deducting estimated underwriting discounts and commissions and offering expenses
payable by us. The net proceeds of this offering will be used to repay our $150
million senior subordinated bridge credit facility and part of the Term B Loan
under our $1.1 billion credit facility. Our $150 million senior subordinated
bridge credit facility and $1.1 billion credit facility will be entered into in
connection with our acquisition of DPS and the refinancing of all of our
existing indebtedness. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
Term B Loan under our $1.1 billion credit facility will mature in eight years
from its closing date and, as of , will have an interest rate of
%. See "Description of the New Credit Facility." Our $150 million senior
subordinated bridge credit facility will mature on and, as of
, will have an interest rate of %.
17
<PAGE> 21
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our Class A Common Stock has been traded on The Nasdaq National Market
under the symbol "ESRX" since June 9, 1992. The high and low prices of our Class
A Common Stock, as reported by The Nasdaq National Market, 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>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997
First Quarter.............................................. $19.125 $15.625
Second Quarter............................................. $24.500 $16.375
Third Quarter.............................................. $27.250 $20.750
Fourth Quarter............................................. $32.375 $25.313
1998
First Quarter.............................................. $42.750 $27.000
Second Quarter............................................. $45.000 $35.500
Third Quarter.............................................. $45.250 $31.625
Fourth Quarter............................................. $69.000 $33.875
1999
First Quarter (through March 15, 1999)..................... $78.375 $61.875
</TABLE>
Our Class B Common Stock has no established public trading market, but such
shares will automatically convert, on a share for share basis, to our Class A
Common Stock upon transfer by NYLIFE Healthcare to any entity other than an
affiliate of NYLIFE Healthcare or otherwise at the option of NYLIFE Healthcare.
Our Board of Directors has not declared any cash dividends since our
initial public offering in 1992. Our Board of Directors does not currently
intend to declare any cash dividends in the foreseeable future. The terms of our
$1.1 billion credit facility will restrict our ability to declare or pay cash
dividends.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
on a pro forma basis to give effect to our acquisition of DPS and the related
financings, and on a pro forma as adjusted basis to reflect the sale of
4,500,000 shares of our Class A Common Stock offered by this prospectus and the
receipt of the estimated $335,344,000 in net proceeds therefrom (assuming an
offering price of $78.375 per share and after deducting estimated underwriting
discounts and commissions and other offering expenses payable by us).
<TABLE>
<CAPTION>
UNAUDITED
ACQUISITION
PRO FORMA
UNAUDITED AS ADJUSTED
ACQUISITION FOR THIS
ACTUAL PRO FORMA OFFERING
---------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND NET DEBT TO
NET CAPITALIZATION DATA)
<S> <C> <C> <C>
Cash................................................... $122,589 $ 122,589 $ 122,589
======== ========== ==========
Short-term debt:
Current maturities of long-term debt................. $ 54,000 $ -- $ --
-------- ---------- ----------
Long-term debt:
Credit facility
Revolving debt..................................... -- 140,000 140,000
Term debt.......................................... 306,000 800,000 614,656
Senior subordinated bridge credit facility........... -- 150,000 --
-------- ---------- ----------
Total long-term debt............................... 306,000 1,090,000 754,656
-------- ---------- ----------
Total debt......................................... $360,000 $1,090,000 $ 754,656
======== ========== ==========
Stockholders' equity:
Preferred stock, $.01 per share, 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 shares issued and
outstanding and 23,110,000 shares issued and
outstanding as adjusted(1)......................... 186 186 231
Class B Common Stock, $.01 par value, 22,000,000
shares authorized, 15,020,000 shares issued and
outstanding........................................ 150 150 150
Additional paid-in-capital........................... 110,099 110,099 445,398
Accumulated other comprehensive income............... (74) (74) (74)
Retained earnings.................................... 146,322 144,250 142,304
-------- ---------- ----------
256,683 254,611 588,009
Class A Common Stock in treasury at cost, 475,000
shares............................................. (6,989) (6,989) (6,989)
-------- ---------- ----------
Total stockholders' equity........................... $249,694 $ 247,622 $ 581,020
======== ========== ==========
Net capitalization..................................... $487,105 $1,215,033 $1,213,087
======== ========== ==========
Net debt to net capitalization(2)...................... 48.7% 79.6% 52.1%
======== ========== ==========
</TABLE>
- -------------------------
(1) Does not include as of March 1, 1999: (i) stock options and similar equity
rights granted to employees and independent directors to purchase 2,858,752
shares of our Class A Common Stock, of which 866,700 were exercisable; (ii)
certain reserved shares of our Class A Common Stock for issuance in
connection with certain strategic alliances (see "Business -- Acquisitions
and Strategic Alliances"); and (iii) reserved shares of our Class A Common
Stock for our Employee Stock Purchase Plan and our Executive Deferred
Compensation Plan (see Note 10 in our 1998 Consolidated Financial
Statements).
(2) Net debt reflects total debt less cash.
19
<PAGE> 23
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for
the Company and its subsidiaries for the five years ended December 31, 1998. The
financial data (excluding the selected data) for the fiscal years ended December
31, 1996, 1997 and 1998 have been derived from the Consolidated Financial
Statements of the Company included herein which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The financial data
(excluding the selected data) for the fiscal years ended December 31, 1994 and
1995 have been derived from Consolidated Financial Statements of the Company not
included herein which have been audited by PricewaterhouseCoopers LLP.
The data set forth below should be read in conjunction with the report of
PricewaterhouseCoopers LLP, the Consolidated Financial Statements and related
notes of the Company and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997 1998(2)
-------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $384,504 $544,460 $773,615 $1,230,634 $2,824,872
Costs and expenses:
Cost of revenues.............................. 338,151 478,283 684,882 1,119,167 2,584,997
Selling, general and administrative........... 25,882 37,300 49,103 62,617 148,990
Corporate restructuring....................... -- -- -- -- 1,651
-------- ---------- ---------- ---------- ----------
364,033 515,583 733,985 1,181,784 2,735,638
-------- ---------- ---------- ---------- ----------
Operating income................................ 20,471 28,877 39,630 48,850 89,234
Interest income (expense), net.................. 305 757 3,450 5,856 (12,994)
-------- ---------- ---------- ---------- ----------
Income before income taxes...................... 20,776 29,634 43,080 54,706 76,240
Provision for income taxes...................... 8,053 11,307 16,932 21,277 33,566
-------- ---------- ---------- ---------- ----------
Net income...................................... $12,723 $18,327 $26,148 $33,429 $42,674
======== ========== ========== ========== ==========
Earnings per share(1):
Basic......................................... $0.43 $0.62 $0.81 $1.02 $1.29
Diluted....................................... $0.42 $0.60 $0.80 $1.01 $1.27
Weighted average shares outstanding(1):
Basic......................................... 29,588 29,560 32,160 32,713 33,105
Diluted....................................... 30,293 30,545 32,700 33,122 33,698
BALANCE SHEET DATA:
Cash............................................ $5,742 $11,506 $25,211 $64,155 $122,589
Working capital................................. 38,082 58,653 128,259 166,062 117,611
Total assets.................................... 108,922 164,088 300,425 402,508 1,095,461
Short-term debt............................... -- -- -- -- 54,000
Long-term debt, less current maturities....... -- -- -- -- 306,000
Total debt...................................... -- -- -- -- 360,000
Stockholders' equity............................ 52,485 77,379 164,090 203,701 249,694
SELECTED DATA:
Pharmacy benefit covered lives.................. 5,700 8,100 9,900 12,600 22,900
Annual drug spending(3)......................... $716,000 $1,172,000 $1,636,000 $2,486,000 $4,495,000
Pharmacy network claims processed............... 26,323 42,871 57,838 73,164 113,177
Mail pharmacy prescriptions filled.............. 1,594 2,129 2,770 3,899 7,426
EBITDA(4)....................................... $23,795 $33,258 $46,337 $59,320 $117,318
</TABLE>
20
<PAGE> 24
(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 our 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 or an alternative to cash flow as a
measure of liquidity. In addition, our definition of EBITDA may not be
comparable to that reported by other companies.
21
<PAGE> 25
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL DATA
The following Unaudited Consolidated Condensed Pro Forma Statement of
Operations combines the historical statement of operations of the Company, Value
Health, Inc. ("VHI"), Managed Prescription Network, Inc. ("MPN") (VHI and MPN
together comprising the business known as "ValueRx") and DPS for the year ended
December 31, 1998. On April 1, 1998, the Company consummated the acquisition of
ValueRx. Therefore, the financial information of ValueRx is included in the
Company's consolidated statement of operations subsequent to April 1, 1998. The
Unaudited Consolidated Condensed Pro Forma Statement of Operations has been
prepared to reflect the acquisitions of ValueRx and DPS and the related
financings, including this offering and the use of the net proceeds therefrom,
as if such events had occurred on January 1, 1998. Any cost savings the Company
may realize in connection with the integration of DPS are not reflected in the
pro forma presentation.
The following Unaudited Consolidated Condensed Pro Forma Balance Sheet
combines the historical consolidated balance sheet of the Company and DPS as of
December 31, 1998. The Unaudited Consolidated Condensed Pro Forma Balance Sheet
has been prepared to reflect the acquisition of DPS and the related financings,
including the offering described in this prospectus and the use of the net
proceeds therefrom, as if such events had occurred on December 31, 1998.
The detailed assumptions used to prepare the unaudited consolidated
condensed pro forma financial data are contained in the notes to the unaudited
consolidated condensed pro forma financial data. The unaudited consolidated
condensed pro forma financial data reflects the use of the purchase method of
accounting for the acquisitions of ValueRx and DPS. Under the purchase method of
accounting, the basis of accounting for the acquired assets and liabilities is
based upon their fair values at the date of acquisition.
The pro forma adjustments represent the Company's preliminary determination
based upon available information and certain assumptions which the Company
considers reasonable under the circumstances. The unaudited consolidated
condensed pro forma data is not necessarily indicative of the future results of
operations of the Company or the results of operations as they might have been
had the acquisitions and the related financings, including this offering and the
use of the net proceeds therefrom, been effective on the first day of the period
presented. The unaudited consolidated condensed pro forma financial data should
be read in conjunction with the separate historical consolidated financial
statements and notes thereto of the Company included in this prospectus, the
separate historical consolidated financial statements and notes thereto of
ValueRx included in the Company's Current Report on Form 8-K/A dated June 12,
1998, the separate unaudited combined condensed financial statements and notes
thereto for ValueRx for the three months ended March 31, 1998 included in this
prospectus and the separate historical financial statements and notes thereto of
DPS included in this prospectus.
When reading the historical consolidated financial statements of the
Company and DPS, a notable difference exists with respect to the revenue
recognition for each of the companies. A substantial portion of the Company's
net revenues include administrative fees, dispensing fees and the drug
ingredient costs as most clients use one of the Company's pharmacy networks.
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 fees it receives from its activities. DPS's net revenues include
its administrative fee from the activity of processing the claim irrespective of
a member utilizing a retail pharmacy included in one of DPS's networks or its
clients' network. The fundamental difference in the revenue recognition is that
DPS does not include the associated drug ingredient costs in its net revenues as
it does not have any liability to reimburse the retail pharmacy included in its
network unless DPS receives payment from its client.
22
<PAGE> 26
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------
VALUERX
EXPRESS PRO FORMA
SCRIPTS, INC. VALUERX(1) ADJUSTMENTS DPS
------------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues............... $2,824,872 $409,928 $ -- $214,849
Cost and expenses:
Cost of revenues......... 2,584,997(2) 375,295 -- 548
Selling, general and
administrative......... 148,990(2) 27,628 (3,606)(3) 234,477
Corporate
restructuring.......... 1,651 -- -- --
Write down of assets..... -- -- -- 1,092,184
---------- -------- ------- -----------
2,735,638 402,923 (3,606) 1,327,209
---------- -------- ------- -----------
Operating income........... 89,234 7,005 3,606 (1,112,360)
Other income (net)......... -- -- -- 1,308
Interest income............ 7,236 56 (1,261)(4) --
Interest expense........... (20,230) -- (7,007)(5) --
---------- -------- ------- -----------
Income (loss) before income
taxes.................... 76,240 7,061 (4,662) (1,111,052)
Provision (benefit) for
income taxes............. 33,566 3,665 (1,288)(6) (388,825)
---------- -------- ------- -----------
Net income................. $42,674 $3,396 $(3,374) $(722,227)
========== ======== ======= ===========
Basic earnings per share... $1.29
==========
Diluted earnings per
share.................... $1.27
==========
Weighted average number of
common shares outstanding
during the
period -- Basic.......... 33,105
==========
-- Diluted......... 33,698
==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------
DPS VALUERX OFFERING
PRO FORMA AND DPS PRO FORMA PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
----------- ---------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues............... $ -- $3,449,649 $ -- $3,449,649
Cost and expenses:
Cost of revenues......... -- 2,960,840 -- 2,960,840(2)
Selling, general and
administrative......... (70,083)(7) 337,406 -- 337,406(2)
Corporate
restructuring.......... -- 1,651 -- 1,651
Write down of assets..... (1,092,184)(8) -- -- --
----------- ---------- ------- ----------
(1,162,267) 3,299,897 -- 3,299,897
----------- ---------- ------- ----------
Operating income........... 1,162,267 149,752 -- 149,752
Other income (net)......... 1,924(9) 3,232 -- 3,232
Interest income............ -- 6,031 -- 6,031
Interest expense........... (70,587)(10) (97,824) 32,599(12) (65,225)
----------- ---------- ------- ----------
Income (loss) before income
taxes.................... 1,093,604 61,191 32,599 93,790
Provision (benefit) for
income taxes............. 382,502(11) 29,620 13,040(13) 42,660
----------- ---------- ------- ----------
Net income................. $711,102 $31,571 $19,559 $51,130
=========== ========== ======= ==========
Basic earnings per share... $1.36
==========
Diluted earnings per
share.................... $1.34
==========
Weighted average number of
common shares outstanding
during the
period -- Basic.......... 4,500(14) 37,605
======= ==========
-- Diluted......... 4,500(14) 38,198
======= ==========
</TABLE>
- -------------------------
(1) These historical amounts represent the unaudited statement of operations of
ValueRx from January 1, 1998 through March 31, 1998.
(2) Cost of revenues and selling, general and administrative expense include
$7,559 and $18,874 of depreciation and amortization, respectively, for the
Company in 1998. The pro forma consolidated cost of revenues and selling,
general and administrative expense include $7,559 and $67,974 of
depreciation and amortization, respectively.
(3) Adjustment reflects the net decrease in depreciation and amortization of
property and equipment and intangible assets, including goodwill resulting
from the Company's allocation of the ValueRx purchase price and conforming
the accounting methods and estimated useful lives. Property and equipment
are being depreciated using the straight-line method over 3 to 20 years.
Goodwill and other intangible assets are being amortized using the
straight-line method over 30 years and 2 to 20 years, respectively.
(4) Adjustment reflects the decrease in interest income resulting from the
Company expending $100,908 of its short-term investments and cash
equivalents to consummate the acquisition of ValueRx.
(5) Adjustment records the additional net interest expense and the amortization
of the deferred financing fees during the first quarter of 1998 associated
with the $440,000 credit facility utilized for the acquisition of
23
<PAGE> 27
ValueRx. The additional interest expense was determined assuming an average
borrowing rate of 7.13% on the $360,000 borrowed under the $440,000 credit
facility incurred to consummate the acquisition.
(6) Adjustment reflects the amount required to result in a pro forma effective
tax rate of 40%, inclusive of the impact of non-tax deductible goodwill and
customer contract amortization.
(7) Adjustment reflects the elimination of management fees paid to United
HealthCare Corporation of $33,837, which under the DPS purchase agreement
is to be reimbursed to the Company by SmithKline Beecham Corporation ("SB
Corp"). It also reflects the net decrease in the 1998 depreciation and
amortization expense to $4,695 from $6,383 recorded by DPS resulting from
the allocation of the purchase price to the assets acquired at their fair
market value and to conform accounting methods and useful lives. Furniture,
equipment and internal use software are being depreciated by the Company
using the straight-line method over estimated useful lives of 5 to 8 years.
Additionally, it reflects the net decrease in the 1998 amortization expense
for goodwill and other intangible assets. DPS's goodwill and other
intangible assets amortization expense of $73,758 has been reversed, and
the Company's goodwill and other intangible assets (consisting of customer
contracts) amortization of $39,200 has been included. Goodwill is being
amortized using the straight-line method over the estimated useful life of
30 years. The Company has preliminarily assigned an estimated fair value to
other intangible assets and is amortizing them using the straight-line
method over the estimated useful lives of 1 to 20 years. The Company
anticipates spending an estimated $10 million to $20 million in
non-recurring costs during the first twelve months subsequent to the
Company's acquisition of DPS relating to the integration of DPS's
operations into the Company. These non-recurring costs have not been
reflected in the Unaudited Consolidated Condensed Pro Forma Statement of
Operations.
(8) Adjustment reflects the reversal of a one-time, pre-acquisition write down
of assets by DPS based on an assessment of impairment by DPS management.
See Note 11 in the historical financial statements of DPS included in this
prospectus. The Company has assessed the recoverability of assets resulting
from its acquisition of DPS and does not believe any impairment exists at
this time.
(9) Adjustment reflects the elimination of DPS's $1,924 equity loss in its
joint venture. SB Corp. retained the equity interest in the joint venture.
(10) Adjustment reflects the following: (i) the elimination of $26,413 in
interest expense under the Company's $440,000 credit facility, which is
being replaced with the $1,100,000 credit facility; (ii) the addition of
$94,304 in interest expense from borrowings of $940,000 under the
$1,100,000 credit facility and $150,000 under the senior subordinated
bridge credit facility, assuming the interest rates on the $1,100,000
credit facility and the $150,000 senior subordinated bridge credit facility
range from 7.81% to 8.435% and 10.56% to 12.06%, respectively (based on the
1998 monthly average 90-day London Interbank Offered Rate of 5.56%); and
(iii) the addition of $2,521 in deferred financing fees amortization and
$175 in annual administrative fees; such deferred financing fees are being
amortized using the straight-line method over 6 to 8 years, which
represents the maturity of the term loans under the $1,100,000 credit
facility.
(11) Adjustment reflects the amount required to result in a pro forma effective
tax rate of 40%. The goodwill and customer contracts amortization from the
DPS acquisition is tax deductible due to the Company filing an Internal
Revenue Code sec. 338(h)(10) election.
(12) Adjustment reflects the elimination of the interest expense impact from the
retirement of the $150,000 senior subordinated bridge credit facility (at
interest rates ranging from 10.56% to 12.06%) and retirement of $185,344 of
the term loan borrowings under the $1,100,000 credit facility (at an
interest rate of 8.435%) using the net proceeds of this offering.
(13) Adjustment reflects the amount required to result in a pro forma effective
tax rate of 40%.
(14) Adjustment reflects the addition for a full year of the 4,500 shares of
Class A Common Stock offered hereby assuming an offering price of $78.375
per share.
24
<PAGE> 28
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
ACQUISITION OFFERING
EXPRESS SCRIPTS, PRO FORMA ACQUISITION PRO FORMA PRO FORMA
INC. DPS ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
---------------- ---------- ----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash............................ $122,589 $1,686 $(1,686)(1) $122,589 $-- $122,589
Accounts receivable............. 433,006 82,746 (5,338)(1) 510,414 -- 510,414
Intercompany receivable......... -- 371,827 (371,827)(1) -- -- --
Other current assets............ 101,312 3,849 (1,880)(2) 103,281 -- 103,281
---------- ---------- ----------- ---------- --------- ----------
Total current assets.......... 656,907 460,108 (380,731) 736,284 -- 736,284
Property and equipment, net....... 77,499 27,393 -- 104,892 -- 104,892
Goodwill, net..................... 282,163 546,040 187,186(3) 1,015,389 -- 1,015,389
Deferred income taxes............. -- 430,374 (430,374)(2) -- -- --
Other assets...................... 78,892 293,580 (144,694)(4) 227,778 (3,244)(8) 224,534
---------- ---------- ----------- ---------- --------- ----------
Total assets.................. $1,095,461 $1,757,495 $(768,613) $2,084,343 $(3,244) $2,081,099
========== ========== =========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term
debt.......................... $54,000 $ -- $(54,000)(5) $ -- $ -- $ --
Claims and rebates payable...... 338,251 191,727 -- 529,978 -- 529,978
Accounts payable and accrued
expenses...................... 147,045 53,154 16,073(6) 216,272 (1,298)(9) 214,974
---------- ---------- ----------- ---------- --------- ----------
Total current liabilities..... 539,296 244,881 (37,927) 746,250 (1,298) 744,952
Revolving debt.................... -- -- 140,000(5) 140,000 -- 140,000
Long-term debt.................... 306,000 -- 494,000(5) 800,000 (185,344)(10) 614,656
Senior subordinated bridge credit
facility........................ -- -- 150,000(5) 150,000 (150,000)(10) --
Other long-term liabilities....... 471 -- -- 471 -- 471
---------- ---------- ----------- ---------- --------- ----------
Total liabilities............. 845,767 244,881 746,073 1,836,721 (336,642) 1,500,079
Stockholders' equity.............. 249,694 1,512,614 (1,514,686)(7) 247,622 333,398(10) 581,020
---------- ---------- ----------- ---------- --------- ----------
Total liabilities and
stockholders' equity........ $1,095,461 $1,757,495 $(768,613) $2,084,343 $(3,244) $2,081,099
========== ========== =========== ========== ========= ==========
</TABLE>
- -------------------------
(1) Adjustment reflects the elimination of DPS assets retained by SB Corp.
(2) Adjustment reflects the elimination of the historical deferred tax assets
of DPS. As part of its acquisition, the Company will file an Internal
Revenue Code sec. 338(h)(10) election. Accordingly, at December 31, 1998,
the tax basis balance sheet and the book basis balance sheet are estimated
to be the same, and therefore no deferred taxes are recognized with respect
to DPS.
(3) Adjustment reflects the excess of the purchase price over fair market value
of the identified assets acquired. The Company has preliminarily allocated
$733,226 to goodwill and will adjust goodwill accordingly when the
establishment of fair values for all identifiable assets is complete.
25
<PAGE> 29
(4) Adjustment reflects the following: (i) elimination of the DPS investment in
the Diversified Prescription Delivery, L.L.C. ("DPD") joint venture of
$6,610 which is being retained by SB Corp.; (ii) elimination of a note
receivable due from DPD in the amount of $512; (iii) elimination of the
Company's unamortized deferred financing fees in the amount of $3,453
related to the extinguishment of the Company's $440,000 credit facility;
and (iv) elimination of other intangible assets of DPS in the amount of
$286,458. These eliminations were offset by $20,029 paid in deferred
financing fees related to the $1,100,000 credit facility used to finance
the DPS acquisition and the preliminary allocation of fair value to
customer contracts in the amount of $132,310. The Company is in the process
of establishing fair values for all identifiable assets and will adjust the
fair value allocated to customer contracts accordingly when complete.
(5) Adjustment reflects borrowings of $940,000 under the Company's $1,100,000
credit facility and $150,000 under the senior subordinated bridge credit
facility to finance the acquisition of DPS and to refinance its existing
outstanding debt of $360,000 under the Company's existing $440,000 credit
facility. The $1,100,000 credit facility consists of a $300,000 revolving
credit facility, of which $140,000 will be borrowed, and an $800,000 term
facility.
(6) Adjustment reflects the elimination of a payable to DPD from DPS in the
amount of $2,046 offset by accruals of $18,119 for transaction costs and
other liabilities associated with the purchase of DPS.
(7) Adjustment reflects the elimination of the DPS pre-acquisition equity
balances and the write-off of the Company's unamortized deferred financing
fees of $2,072, net of tax, from the Company's $440,000 credit facility as
an extraordinary item.
(8) Adjustment reflects the elimination of the Company's unamortized deferred
financing fees related to the extinguishment of $185,344 borrowed under the
$1,100,000 credit facility.
(9) Adjustment reflects the reduction in taxes payable as a result of the
write-off of deferred financing fees related to the extinguishment of
$185,344 borrowed under the $1,100,000 credit facility.
(10) Adjustment reflects the net proceeds received from the Company's sale of
4,500 shares of Class A Common Stock offered pursuant to this prospectus at
an assumed offering price of $78.375 per share. The proceeds from this
offering will be used to repay the $150,000 senior subordinated bridge
credit facility and $185,344 of the term loans under the $1,100,000 credit
facility. The proceeds are offset by the write-off of $1,946, net of tax,
of the deferred financing fees from the $1,100,000 credit facility as an
extraordinary item.
26
<PAGE> 30
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 includes
transaction costs and executive management 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 is being 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 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. The Company then 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 fees 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, formulary management support services and outcomes assessments,
through its Practice Patterns Science, Inc. subsidiary. Non-PBM net revenues are
derived from: (1) the sale of pharmaceuticals for and the provision of infusion
therapy services through the Company's IVTx, Inc. subsidiary, (2) administrative
fees received for members using the Company's vision program through its
alliance with Cole Managed Vision ("Cole"), a subsidiary of Cole National
Corporation, and (3) administrative fees received from drug manufacturers for
the dispensing of pharmaceuticals through its Specialty Distribution division.
27
<PAGE> 31
RESULTS OF OPERATIONS
NET REVENUES.
<TABLE>
<CAPTION>
% INCREASE
YEAR ENDED DECEMBER 31, ---------------------
---------------------------------- 1997 1998
1996 1997 1998 OVER 1996 OVER 1997
-------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PBM................................. $743,077 $1,191,173 $2,765,111 60.3% 132.1%
Non-PBM............................. 30,538 39,461 59,761 29.2% 51.4%
-------- ---------- ---------- ---- -----
Net revenues........................ $773,615 $1,230,634 $2,824,872 59.1% 129.5%
======== ========== ========== ==== =====
</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: (1) 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 (2) 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: (1) the termination of inventory
replacement programs maintained for two large clients during 1997 and (2) 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
28
<PAGE> 32
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>
<CAPTION>
% OF NET REVENUES
------------------
YEAR ENDED YEAR ENDED % INCREASE
DECEMBER 31, DECEMBER 31, ---------------------
---------------------------------- ------------------ 1997 1998
1996 1997 1998 1996 1997 1998 OVER 1996 OVER 1997
-------- ---------- ---------- ---- ---- ---- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PBM(1).................... $661,946 $1,088,225 $2,540,360 89.1% 91.4% 91.9% 64.4% 133.4%
Non-PBM(2)................ 22,936 30,942 44,637 75.1% 78.4% 74.7% 34.9% 44.3%
-------- ---------- ---------- ---- ---- ---- ---- -----
Cost of revenues(3)......... 684,882 1,119,167 2,584,997 88.5% 90.9% 91.5% 63.4% 131.0%
Selling, general and
administrative............ 46,267 57,257 130,116 6.0% 4.7% 4.6% 23.8% 127.2%
Depreciation and
amortization(3)........... 2,836 5,360 18,874 0.4% 0.4% 0.7% 89.0% 252.1%
Corporate restructuring..... -- -- 1,651 0.0% 0.0% 0.0% NM NM
-------- ---------- ---------- ---- ---- ---- ---- -----
Total cost and expenses..... $733,985 $1,181,784 $2,735,638 94.9% 96.0% 96.8% 61.0% 131.5%
======== ========== ========== ==== ==== ==== ==== =====
</TABLE>
- -------------------------
(1) % of net revenues data is percentage against PBM net revenues.
(2) % of net revenues data is percentage against non-PBM net revenues.
(3) Represents depreciation and amortization expense included in selling,
general and administrative expenses on the Company's Statement of
Operations. Cost of revenues includes depreciation and amortization expense
on property and equipment.
NM = not meaningful.
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% during 1998 over 1997 and 2.3% 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 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.
29
<PAGE> 33
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% 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 in "-- 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 service
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
30
<PAGE> 34
completing the remainder of the restructuring transactions by the end of the
third quarter of 1999.
INTEREST INCOME (EXPENSE), NET.
<TABLE>
<CAPTION>
% OF NET REVENUES
-------------------
YEAR ENDED YEAR ENDED % INCREASE
DECEMBER 31, DECEMBER 31, ---------------------
-------------------------- ------------------- 1997 1998
1996 1997 1998 1996 1997 1998 OVER 1996 OVER 1997
------ ------ -------- ---- ---- ----- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense....... $ (59) $ (225) $(20,230) NM NM (0.7)% NM NM
Interest income........ 3,509 6,081 7,236 0.5% 0.5% 0.2% 73.3% 19.0%
------ ------ -------- -- -- ----- ---- ------
Interest income
(expense), net....... $3,450 $5,856 $(12,994) 0.5% 0.5% (0.5)% 69.7% NM
====== ====== ======== == == ===== ==== ======
</TABLE>
- -------------------------
NM = not meaningful.
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>
<CAPTION>
EFFECTIVE TAX RATE
--------------------
YEAR ENDED % INCREASE YEAR ENDED
DECEMBER 31, ---------------------- DECEMBER 31,
----------------------------- 1997 1998 --------------------
1996 1997 1998 OVER 1996 OVER 1997 1996 1997 1998
------- ------- ------- --------- --------- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Provision for income
taxes................... $16,932 $21,277 $33,566 2.2% 1.7% 1.2% 25.7% 57.8%
</TABLE>
The Company's effective tax rate increased in 1998 over 1997 due to the
non-deductible goodwill and customer contract amortization expense resulting
from the ValueRx acquisition. It is expected that the effective tax rate will
gradually decline toward the statutory rate as the Company's operating growth
continues.
NET INCOME AND EARNINGS PER SHARE.
<TABLE>
<CAPTION>
% OF NET REVENUES
------------------
YEAR ENDED YEAR ENDED % INCREASE
DECEMBER 31, DECEMBER 31, ---------------------
--------------------------- ------------------ 1997 1998
1996 1997 1998 1996 1997 1998 OVER 1996 OVER 1997
------- ------- ------- ---- ---- ---- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income.................... $26,148 $33,429 $42,674 3.4% 2.7% 1.5% 27.8% 27.7%
Basic earnings per share...... $ 0.81 $ 1.02 $ 1.29 25.9% 26.5%
Diluted earnings per share.... $ 0.80 $ 1.01 $ 1.27 26.3% 25.7%
Weighted average shares
outstanding -- Basic........ 32,160 32,713 33,105 1.7% 1.2%
Weighted average shares
outstanding -- Diluted...... 32,700 33,122 33,698 1.3% 1.7%
</TABLE>
31
<PAGE> 35
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>
<CAPTION>
% INCREASE
YEAR ENDED DECEMBER 31, ---------------------
---------------------------- 1997 1998
1996 1997 1998 OVER 1996 OVER 1997
------- ------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by operations.................. $29,863 $52,503 $126,574 75.8% 141.1%
</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 its $1.1 billion credit facility.
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 its $1.1
billion credit facility.
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.
32
<PAGE> 36
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: (1) the
indebtedness the Company may incur, and (2) the amount of the Company's annual
capital expenditures. The covenants also establish: (1) a minimum interest
coverage ratio, (2) a maximum leverage ratio, and (3) 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 will 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
will also provide a revolving line of credit to meet working capital needs.
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 its $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 $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.
33
<PAGE> 37
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).
34
<PAGE> 38
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 record 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. 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 members.
On February 9, 1999, the Company announced its definitive agreement to
acquire DPS for $700 million in cash. The Company will 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.
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, which has
performed a self-assessment and developed a compliance plan that addresses: (1)
internally developed application software, (2) vendor developed application
software, (3) operating system software, (4) utility software, (5)
vendor/trading partner-supplied files, (6) externally provided data or
transactions, (7) non-information technology devices that are material to the
Company's business, and (8) adherence to applicable industry standards. Progress
in each area is monitored and management reports are given periodically.
35
<PAGE> 39
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
tested during the remainder 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 for approximately 30% of the
letters sent, 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. In addition, 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. 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 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 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 will incur internal staff
costs as well as external consulting and other expenses related to
infrastructure enhancements necessary to prepare its systems for the new
century. Since 1995, 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.
36
<PAGE> 40
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 will not
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 risks, including risks of vendor/trading partner
noncompliance, as well as noncompliance of any of the Company's material
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. In addition, 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
The Company is exposed to market risk from changes in interest rates. As
part of its overall risk management policy, the Company has entered into an
interest rate swap (see "-- Liquidity and Capital Resources") in order to manage
exposure to interest rate risk. The Company does not enter into swap agreements
for trading purposes. Interest rate risk is monitored on the basis of changes in
fair value, and a sensitivity analysis is used to determine the impact interest
rate risk will have on the fair value of the interest rate swap, measuring the
change in the net present value arising from changes in interest rates. A 10%
decline in interest rates at December 31, 1998, would increase the unrealized
loss of the Company's interest rate swap by $3,812,000.
37
<PAGE> 41
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: (1) increases in research and development
expenditures by drug manufacturers, resulting in many new drug introductions,
(2) a shorter U.S. Food and Drug Administration approval cycle for new
pharmaceuticals, (3) high prices for new "blockbuster" drugs, (4) an aging
population, and (5) 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.
THE COMPANY
We are the largest full-service PBM company 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 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
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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. On a pro forma
basis after giving effect to the acquisitions of ValueRx and DPS and the related
financings, including this offering and the use of the estimated net proceeds
therefrom, our net revenues and net income for 1998 would have been
approximately $3.4 billion and $52.1 million, respectively, excluding a $1.0
million after-tax restructuring charge.
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. As of the same date, after giving effect to the
DPS acquisition, we would have served approximately 47.0 million members,
including 10.5 million members under DPS's contract with United HealthCare
Corporation which will terminate without renewal on May 24, 2000. Our membership
count excludes members for whom we provide only formulary management services,
whereas the DPS membership counts and our combined pro forma membership counts
include approximately 1.0 million members for whom DPS provides only formulary
management services. Including DPS, some of our other large clients will include
Aetna U.S. Healthcare, Oxford Health Plans 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, including ValueRx and DPS on a
pro forma basis, we processed approximately 284 million pharmacy claims with
estimated total drug spending of approximately $10 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
- informed decision counseling services through our Express Health Line(SM)
division
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Our non-PBM services include:
- infusion therapy services through our wholly owned subsidiary IVTx
- distribution of pharmaceuticals requiring special handling or packaging
through our Specialty Distribution division
STRATEGY
Our strategy is to increase our membership base and grow profitably by
focusing on generating sales to new clients and expanding the services we
provide to existing clients, developing new products and services for sale to
existing clients and drug manufacturers and selectively pursuing acquisitions
and alliances to increase our membership base and enhance our product offerings.
- Generation of Sales to New Clients and Growth from Existing Clients. Our
predominant growth strategy is to pursue sales to new clients and
generate growth in the membership base of existing clients. Our compound
annual growth rate in members, excluding our recent acquisitions, is 48%
since our initial public offering in 1992. The managed care market
segment has experienced, and we believe will continue to experience,
solid growth. We believe additional opportunities also exist in the
employer and union market segments. Recent large new clients under
contract with us include Blue Cross and Blue Shield of Massachusetts and
Buyer's Health Care Action Group. Growth within the membership base of
existing clients is also important to our strategy. When our clients,
such as managed care organizations, third-party administrators and other
third-party payors, market their service offerings to potential clients,
they generally market our prescription drug program as part of their
offerings. As their client base grows, our membership base typically also
grows.
- Development and Sale of New Products and Services to Existing Clients and
Drug Manufacturers. We continue to emphasize the development and sale of
new products and services as part of our PBM offerings to our existing
clients, and we have begun marketing certain of our products to selected
pharmaceutical manufacturers. We believe these products and services are
necessary to compete effectively in the current business environment and
to differentiate us from our competitors on a measure other than price.
We intend to continue to invest in these capabilities in the future.
Products and services developed by us in recent years include disease
management programs, advanced formulary compliance programs, drug
outcomes research, drug therapy management programs, medical information
management, proprietary clinical services and sophisticated management
reporting capabilities. We believe a particular growth area in the PBM
industry will be medical information management. We believe our majority
owned subsidiary Practice Patterns Science is an industry leader in this
area, having developed proprietary software to process and sort medical
claims, prescription drug claims and clinical laboratory data for use by
managed care organizations and other health care companies. The clients
most interested in these advanced capabilities are managed care
organizations, but we believe third-party administrators and large
employers present opportunities for the sale of these advanced
capabilities as well. We also intend to continue to expand our product
and service offerings to pharmaceutical manufacturers. Recent
developments in our business include the implementation of compliance,
therapy management and market research programs.
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We intend to continue to invest in capabilities that will strengthen our
relationship with manufacturers.
- Growth Through Strategic Acquisitions and Alliances. During the past
several years we have begun to supplement our strong internal growth with
selected acquisitions of other PBMs and strategic alliances. Our
objectives in pursuing acquisitions and alliances are to increase the
scale of our business, expand our client base, increase our penetration
of PBM markets and expand our product and service offerings. Our
acquisition of ValueRx and our pending acquisition of DPS substantially
increase our membership base, diversify our client base and increase our
presence in key market segments and enhance our clinical capabilities,
systems and technologies. Our acquisition of ValueRx added approximately
10.0 million members and our pending acquisition of DPS will add
approximately 23.5 million members. We have formulated and are
implementing a detailed plan to integrate ValueRx into our operations and
have formulated a similar plan for integrating DPS. We are also party to
strategic alliances with Premier Purchasing Partners and The
Manufacturers Life Insurance Company. We intend to continue to seek
alliances with other organizations and to selectively identify potential
acquisition targets in the future.
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: (1) the development of advanced formulary compliance and
therapeutic intervention programs; (2) therapy management services such as prior
authorization, therapy guidelines, step therapy protocols and formulary
management interventions; (3) sophisticated management information reporting and
analytic services; (4) provider profiling and outcomes assessments; and (5)
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
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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: (1)
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, (2) performing a
concurrent drug utilization review analysis and alerting the pharmacist to
possible drug interactions or other indications of inappropriate prescription
drug usage, (3) updating the member's prescription drug claim record, and (4) 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: (1) financial
incentives and limitations on the drugs covered by the plan, including drug
formularies, flat dollar or percentage of prescription cost copayments,
deductibles or annual benefit maximum, (2) generic drug substitution incentives,
(3) incentives or requirements to use only network pharmacies or to order
certain drugs only by mail, and (4) 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: (1) 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, (2) through prescriber education programs, in which we
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or the managed care client actively seek to educate the prescribers about the
formulary preferences, and (3) through our OptiMed(SM) drug therapy management
program, which actively promotes therapeutic and generic interchanges to reduce
drug costs. We also offer the ExpressTherapeutics(SM) 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.
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 manage prescription drug benefits more
effectively. We have developed various services to offer our clients. The first
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 RxWorkbench(TM). 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 majority owned subsidiary Practice Patterns Science, Inc.
("PPS") 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.
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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 Line(SM) 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.
OUTPATIENT INFUSION THERAPY SERVICES. 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
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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). Including DPS, and excluding United
HealthCare Corporation, some of our largest managed care clients include 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 Insurance Company ("New York Life")),
and Oxford Health Plans. 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.
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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. In connection with Aetna's purchase of NYLCare, the parties have
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. 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.
Upon completion of the DPS acquisition, United HealthCare Corporation will
become 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 loss of this contract may still
materially adversely our business and results of operations.
In February 1999, we announced a three-and-a-half-year contract with Blue
Cross and Blue Shield of Massachusetts. Beginning in the second half of 1999, we
will provide PBM services, including retail network and mail pharmacy services,
claims processing, clinical management support and other related services to
approximately 1.2 million members.
In January 1999, DPS announced a five-year contract with Oxford Health
Plans. Under the contract, DPS will provide retail network, claims processing,
clinical management support and other related services to approximately 1.8
million members.
ACQUISITIONS AND STRATEGIC ALLIANCES
During the second quarter of 1999, we expect to complete our acquisition of
DPS from SmithKline Beecham Corporation and one of its affiliates for $700
million in cash. We will 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.
In April 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.
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In January 1996, 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"). In May 1996, 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. Premier
designates us as its exclusive preferred PBM provider, but an individual Premier
member is not required to enter into an agreement with us.
In November 1995, we entered into a ten-year strategic alliance with The
Manufacturers Life Insurance Company ("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. 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.
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
Perot Systems' facility, 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
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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.
MANAGEMENT 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 Perot Systems' facility (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. We believe a particular growth area in the PBM industry will be medical
information management. We believe PPS is an industry leader in this area,
having developed proprietary software to process and sort medical
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<PAGE> 52
claims, prescription drug claims and clinical laboratory data for use by managed
care organizations and other health care companies.
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) and
Caremark International Inc. (a subsidiary of MedPartners, 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.
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.
SERVICE MARKS AND TRADEMARKS
We and our subsidiaries have registered the service marks "Express
Scripts(R)", "ExpressComp(R)", "ExpressReview(R)", "OptiMed(SM)", "Express
Therapeutics(R)", "IVTx(R)", "PERx(R)", "PERxCare(R)", "PERxComp(R)", "PTE(R)",
"Rx Wizard(TM)", "ValueRx(R)" and "Value Health, Inc.(R)" with the United States
Patent and Trademark Office. We will acquire several additional trademarks upon
completion of our acquisition of DPS. Our rights to these marks will continue as
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, the services rendered in connection with our
disease management and informed decision counseling services and the products
and services provided in connection with our infusion therapy programs
(including the associated nursing services), have subjected us and may subject
us in the future to litigation and liability for damages. We believe 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 could have a
material adverse effect upon our business.
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<PAGE> 53
FACILITIES AND EMPLOYEES
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
Maryland Heights, Missouri
Earth City, Missouri
Tempe, Arizona
Plymouth, Minnesota
Bensalem, Pennsylvania
Troy, New York
Farmington Hills, Michigan
Albuquerque, New Mexico
Mississauga, Ontario
Non-PBM Facilities
Maryland Heights, Missouri
Columbia, Missouri
Dallas, Texas
Houston, Texas
Columbia, Maryland
Tempe, Arizona
Northvale, New Jersey
West Chester, Pennsylvania
Our Maryland Heights, Missouri facility houses our corporate offices.
IVTx's corporate offices are also located at the Maryland Heights, Missouri
site. The non-PBM specialty distribution services are operated out of our
facility in Tempe, Arizona. We believe our facilities are generally
well-maintained and are in good operating condition.
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. 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.
As of March 1, 1999, we employed a total of 3,283 employees in the United
States and 71 employees in Canada. We have approximately 375 employees who 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 at our
Albuquerque, New Mexico facility. We believe our relationships with our
employees are good.
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<PAGE> 54
LEGAL PROCEEDINGS
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 as part of our acquisition of ValueRx. VHI, MPN
and/or their subsidiaries were party to various legal proceedings,
investigations or claims at the time of the ValueRx 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 will not materially
affect our consolidated financial position, results of operations or cash flows.
ValueRx and several of its subsidiaries are party to two securities
litigation matters. 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 February 18, 1999, the
court granted plaintiffs' motions for class certification and certified a class
consisting of: (1) 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 issued in connection with the Diagnostek
merger and (2) all persons who purchased or otherwise acquired shares of
Diagostek 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 ValueRx 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 ValueRx 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, over 100 separate lawsuits have been filed by retail pharmacies
against drug manufacturers, wholesalers and certain PBMs challenging brand name
drug pricing practices under various state and federal antitrust laws. The suits
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 manufacturers have settled certain of these actions,
such settlements are not part of the public record.
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In August 1997, the U.S. Department of Labor (the "DOL") requested certain
information from DPS concerning its contractual relationships with employer
group health plans governed by the Employee Retirement Income Security Act of
1974, as amended. DPS provided the requested information to the DOL, and
exchanged correspondence with the DOL on this matter until August 1998. Since
that time, no additional information requests or other correspondence has been
received. However, the DOL has given no indication as to its disposition of this
matter, and we cannot provide any assurance as to the ultimate outcome of this
matter or what effect, if any, it may have on our business after consummation of
the DPS acquisition.
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<PAGE> 56
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Howard L. Waltman.................... 66 Chairman of the Board and Director
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
Howard Atkins........................ 48 Director
Judith E. Campbell................... 51 Director
Richard M. Kernan, Jr................ 58 Director
Richard A. Norling................... 53 Director*
Frederick J. Sievert................. 51 Director
Stephen N. Steinig................... 53 Director*
Seymour Sternberg.................... 55 Director
Norman Zachary....................... 72 Director*
</TABLE>
- -------------------------
* Audit Committee member.
Mr. Waltman was elected Chairman of our Board of Directors in March 1992.
Mr. Waltman has been a director of the Company since its inception in September
1986. From 1983 until September 1992, Mr. Waltman was Chairman of the Board and
Chief Executive Officer of Sanus Corp. Health Systems, formerly a wholly owned
subsidiary of New York Life Insurance Company, and which is now known as NYLCare
Health Plans, Inc. From September 1992 to December 31, 1995, Mr. Waltman served
as Chairman of the Board of NYLCare.
Mr. Toan was elected our Chief Executive Officer in March 1992 and our
President and a director in October 1990. Mr. Toan has been an executive
employee of the Company since May 1989. From January 1985 to May 1989, Mr. Toan
served full-time as the Executive Director of Sanus of Missouri, Inc., a St.
Louis-based HMO. From May 1989 until March 1992, Mr. Toan spent approximately
one-half of his time performing services for the Company, and the remainder of
his time serving Sanus.
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<PAGE> 57
Mr. Bascomb was elected our Executive Vice President in March 1989, and
also served as our Chief Financial Officer and Treasurer from March 1992 until
May 1996.
Mr. Boudreau was elected our Senior Vice President, General Counsel and
Secretary in October 1994. He has served as our General Counsel 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 our 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 our Senior Vice President and Chief Information
Systems Officer in September 1997. Mr. Davis served as our Director of Technical
Services and Computer Operations from July 1993 until July 1995, and as our Vice
President and General Manager of St. Louis Operations from July 1995 until
September 1997.
Ms. Logsdon was elected our Senior Vice President of Health Management
Services in May 1997, and served as our 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 HMO,
from February 1995 to October 1996, and as Deputy Director/Vice President of
GenCare Health Systems, Inc., also a St. Louis-based HMO, from June 1992 to
February 1995.
Mr. Lowenberg was elected our Senior Vice President and Director of Site
Operations in October 1994 and our Vice President in November 1993. Mr.
Lowenberg also served as General Manager of our Tempe, Arizona facility from
March 1993 until January 1995.
Mr. Paz joined the Company and was elected our 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 LLP 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 our 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 for the period September 1991 to April
1996.
Mr. Blumenthal was elected our Vice President of Finance in May 1995, and
served as our Acting Chief Financial Officer 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 our Vice President in October 1994, and has served as
our Chief Accounting Officer since March 1992 and our Corporate Controller since
March 1989.
Mr. Atkins was elected a director of the Company in January 1997. He has
been an Executive Vice President and the Chief Financial Officer of New York
Life since April 1996. From September 1991 until joining New York Life, Mr.
Atkins was the
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<PAGE> 58
Executive Vice President and Chief Financial Officer of Midlantic Bank
Corporation. Mr. Atkins is also a director of certain subsidiaries of New York
Life.
Ms. Campbell was elected a director of the Company in November 1997. Ms.
Campbell has been a Senior Vice President and the Chief Information Officer of
New York Life since June 1997. From October 1995 until joining New York Life,
Ms. Campbell was Senior Vice President of Consumer Banking, Manager of Deposit
Products, Consumer Payments and Direct Banking of PNCBank. Ms. Campbell served
as a Senior Vice President of Midlantic Bank Corporation from May 1992 until
October 1995, when Midlantic Bank was acquired by PNCBank. Ms. Campbell is also
a director of certain subsidiaries of New York Life.
Mr. Kernan was elected a director of the Company in March 1992. Mr. Kernan
has been an Executive Vice President since March 1991 and the Chief Investment
Officer of New York Life since October 1995. Mr. Kernan is also Chairman of the
Board of Trustees of The Mainstay Funds Limited and the Chairman and CEO of
Mainstay VP Series Fund, Inc., both subsidiaries of New York Life, and a
director of NYLIFE Healthcare and certain other subsidiaries of New York Life.
Mr. Norling was elected a director of the Company in March 1992. Mr.
Norling has been the Chief Executive Officer of Premier, Inc., the largest
voluntary health care alliance in the United States, since September 1998. From
September 1997 until September 1998, Mr. Norling was the Chief Operating Officer
of Premier. From July 1989 until joining Premier, Mr. Norling was the President
and Chief Executive Officer of Fairview Hospital and HealthCare Services, a
regional integrated network of hospitals, ambulatory care services and health
care management enterprises.
Mr. Sievert was elected a director of the Company in July 1995. Since
January 1997, Mr. Sievert has been the Vice Chairman of New York Life. From
February 1995 to December 1996, Mr. Sievert was an Executive Vice President of
New York Life. From January 1992 to January 1995, Mr. Sievert was Senior Vice
President of New York Life in charge of financial management and policyholder
services for Individual Operations. Mr. Sievert is also a director of certain
subsidiaries of New York Life.
Mr. Steinig was elected a director of the Company in January 1994. Since
February 1994, Mr. Steinig has been Senior Vice President and Chief Actuary of
New York Life. From February 1992 to February 1994, Mr. Steinig was Chief
Actuary and Controller of New York Life.
Mr. Sternberg was elected a director of the Company in March 1992. Mr.
Sternberg is the Chairman, President and Chief Executive Officer of New York
Life. Mr. Sternberg has been with New York Life since February 1989, serving as
the President and Chief Operating Officer from October 1995 to April 1997, the
Vice Chairman from February 1995 to September 1995 and as an Executive Vice
President from March 1992 to February 1995. Mr. Sternberg is also Chairman,
Chief Executive Officer and President of NYLIFE Healthcare and a director or an
officer of certain subsidiaries of New York Life.
Mr. Zachary was elected a director of the Company in March 1992. From June
1967 to November 1991, Mr. Zachary held various positions at Logica Data
Architects, Inc. (formerly known as Data Architects, Inc.), a consulting and
software development company, including serving as President and a director
until November 1990. Logica has provided consulting services to New York Life
from time to time.
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<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A Common Stock and Class B Common Stock as of
March 1, 1999 (unless otherwise noted) by: (1) each person known by the Company
to own beneficially more than five percent of the outstanding shares of Class A
Common Stock or Class B Common Stock, (2) each of the five most highly
compensated executive officers and each director of the Company, and (3) all
executive officers and directors of the Company as a group. Included are amounts
of shares which may be acquired on March 1, 1999 or within 60 days of March 1,
1999 pursuant to the exercise of stock options by executive officers or outside
directors. Unless otherwise indicated, each of the persons or entities listed
below exercise sole voting and investment power over the shares that each of
them beneficially owns. All beneficial stockholders other than New York Life,
the parent of NYLIFE Healthcare, own shares of Class A Common Stock. NYLIFE
Healthcare owns all of the outstanding shares of Class B Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF CLASS
NATURE OF ----------------------
BENEFICIAL PRIOR TO AFTER
NAME AND ADDRESS OWNERSHIP OFFERING OFFERING
- ---------------- ---------- -------- --------
<S> <C> <C> <C>
Class A Common Stock:
Howard Atkins......................................... 0 *
Judith E. Campbell.................................... 0 *
Richard M. Kernan, Jr................................. 0 *
Richard A. Norling.................................... 48,000(1) *
Frederick J. Sievert.................................. 0 *
Stephen N. Steinig.................................... 0 *
Seymour Sternberg..................................... 6,000(2) *
Barrett A. Toan....................................... 372,592(3) 2.0%
Howard L. Waltman..................................... 19,200(4) *
Norman Zachary........................................ 34,000(5) *
Stuart L. Bascomb..................................... 63,493(6) *
Patrick J. Byrne...................................... 20(7) *
David A. Lowenberg.................................... 68,602(8) *
George Paz............................................ 21,039(9) *
Directors and Executive Officers as a Group
(18 persons)........................................ 752,145(10) 4.0%
Pilgrim Baxter & Associates, Ltd...................... 2,481,100(11) 13.3%
825 Duportail Road
Wayne, Pennsylvania 19087
AMVESCAP PLC.......................................... 2,229,600(12) 11.9%
1 Devonshire Square
London, England EC2M4YR
Class B Common Stock:
NYLIFE Healthcare Management, Inc..................... 15,020,000(13)(14)(15) 100.0% 100%
51 Madison Avenue
New York, New York 10010
</TABLE>
- -------------------------
* Indicates less than 1%.
(1) Consists of options for 48,000 shares granted under the Amended and
Restated 1992 Stock Option Plan for Outside Directors (the "Outside
Directors Plan").
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<PAGE> 60
(2) Excludes 360 shares held by Mr. Sternberg's son, as to which shares Mr.
Sternberg disclaims beneficial ownership.
(3) Includes options for 348,000 shares granted under the Company's Amended and
Restated 1992 Employee Stock Option Plan (the "1992 Plan") and the
Company's Amended and Restated 1994 Employee Stock Option Plan (the "1994
Plan"; together with the 1992 Plan, the "Employee Plans"). The shares
subject to the options are restricted from transfer with the transfer
restriction lapsing as to 20% of such shares on each anniversary date of
the date of grant. The transfer restriction is subject to complete lapse in
the event of a "change in control" of the Company (as defined in the
Employee Plans) or termination of Mr. Toan's employment by reason of death,
disability or retirement or by the Company without cause. Upon termination
of Mr. Toan's employment, the Company will purchase any shares issued upon
the exercise of the options that remain subject to the transfer
restriction, at the lesser of the option exercise price or the then-current
market value of the Class A Common Stock. Also included are 592
hypothetical share equivalents invested in the Company Stock Fund under the
Express Scripts, Inc. Executive Deferred Compensation Plan (the "Deferred
Compensation Plan"), calculated as of March 1, 1999, using the February 26,
1999 per share closing price as reported on The Nasdaq National Market.
(4) Consists of options for 19,200 shares granted under the Outside Directors
Plan.
(5) Consists of options for 34,000 shares granted under the Outside Directors
Plan.
(6) Includes options for 51,680 shares granted under the Employee Plans, 10,300
shares owned by Mr. Bascomb, of which 3,300 shares are held as co-trustee
(with shared voting and dispositive power) of a trust for the benefit of
his mother, and 1,513 hypothetical share equivalents invested in the
Company Stock Fund under the Deferred Compensation Plan, calculated as of
March 1, 1999, using the February 26, 1999 per share closing price as
reported on The Nasdaq National Market.
(7) Consists of 20 hypothetical share equivalents invested in the Company Stock
Fund under the Deferred Compensation Plan, calculated as of March 1, 1999,
using the February 26, 1999 per share closing price as reported on The
Nasdaq National Market.
(8) Consists of options for 68,440 shares granted under the Employee Plans, and
162 hypothetical share equivalents invested in the Company Stock Fund under
the Deferred Compensation Plan, calculated as of March 1, 1999, using the
February 26, 1999 per share closing price as reported on The Nasdaq
National Market.
(9) Consists of options for 21,000 shares granted under the Employee Plans, and
39 hypothetical share equivalents invested in the Company Stock Fund under
the Deferred Compensation Plan, calculated as of March 1, 1999, using the
February 26, 1999 per share closing price as reported on The Nasdaq
National Market.
(10) Includes options for 749,450 shares granted under the Outside Directors
Plan and the Employee Plans, and 2,645 hypothetical share equivalents
invested in the Company Stock Fund under the Deferred Compensation Plan,
calculated as of March 1, 1999, using the February 26, 1999 per share
closing price as reported on The Nasdaq National Market.
(11) The information with respect to the beneficial ownership of these shares is
as of December 31, 1998 and has been obtained from Amendment No. 10 to
Schedule 13G dated February 10, 1999. Such filing reports that the
beneficial owner is a registered investment advisor and it shares voting
power with respect to all of the shares reported but has sole dispositive
power as to all of the shares reported.
(12) The information with respect to the beneficial ownership of these shares is
as of December 31, 1998 and has been obtained from Amendment No. 2 to
Schedule 13G dated February 10, 1999. Such filing reports that the
beneficial owner is a parent holding company and shares voting power and
dispositive power as to all of the shares reported.
(13) Messrs. Atkins, Kernan, Sievert, Steinig and Sternberg, and Ms. Campbell,
directors of the Company, are also directors and/or hold various executive
positions with New York Life and/or NYLIFE Healthcare. All of the foregoing
directors disclaim beneficial ownership of the Company's Class B Common
Stock owned by NYLIFE Healthcare.
(14) NYLIFE Healthcare holds 15,020,000 shares of Class B Common Stock, which
automatically convert upon transfer by NYLIFE Healthcare to any entity
other than an affiliate of NYLIFE Healthcare or otherwise at the option of
NYLIFE Healthcare.
(15) If converted to Class A Common Stock, the Class B Common Stock would
represent approximately % of the outstanding Class A Common Stock.
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<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 75,000,000 shares of Class A
Common Stock, par value $.01 per share, 22,000,000 shares of Class B Common
Stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share. The following summary description of certain provisions
of our Amended and Restated Certificate of Incorporation and by-laws does not
purport to be complete and is qualified in its entirety by reference to said
provisions.
COMMON STOCK
As of March 1, 1999, 18,681,130 shares of Class A Common Stock were issued
and 18,206,130 shares were outstanding, and 15,020,000 shares of Class B Common
Stock were issued and outstanding. The outstanding Class A Common Stock is, and
the Class A Common Stock offered hereby when issued and paid for will be, fully
paid and non-assessable.
DIVIDENDS. Dividends on the common stock will be paid if, when and as
determined by our Board of Directors out of funds legally available for this
purpose. Holders of Class A Common Stock and Class B Common Stock have the same
rights regarding dividends.
VOTING RIGHTS. Holders of Class A Common Stock are entitled to one vote
for each share held by them on all matters presented to stockholders. Pursuant
to our certificate of incorporation, the holders of Class B Common Stock have
ten votes per share. As a result of the disproportionate voting rights given to
holders of Class B Common Stock, NYLIFE Healthcare could reduce its investment
to slightly less than 10% of our common stock and still control the Company with
a majority of the combined voting power of our common stock. The affirmative
vote of the holders of a majority of the outstanding Class A Common Stock is
required for an amendment of the by-laws that would alter the requirement that a
majority of the 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). Our stockholders
do not have cumulative voting rights with respect to the election of directors.
Our by-laws provide for certain notice requirements for stockholder nominations
and proposals at annual meetings and preclude stockholders holding less than 50%
of all outstanding voting shares from bringing business before any special
meeting. No action required or permitted to be taken at an annual or special
meeting of the stockholders of the Company may be taken by written consent
without a meeting. We have elected not to be subject to Section 203 of the
General Corporation Law of the State of Delaware, which prohibits certain
publicly held Delaware corporations from engaging in a business combination with
an interested stockholder (any person or entity who, together with affiliates
and associates, owns (or within the three immediately preceding years did own)
15% or more of the corporation's voting stock).
LIQUIDATION RIGHTS. After satisfaction of the preferential liquidation
rights of any preferred stock, the holders of the Class A and Class B Common
Stock are entitled to share, ratably, in the distribution of all remaining net
assets.
PREEMPTIVE AND OTHER RIGHTS. Other than Premier, Inc., the holders of
common stock do not have preemptive rights as to additional issues of common
stock or, other than the Class B Common Stock, conversion rights. Premier has
preemptive rights for certain underwritten issuances of our Class A Common
Stock, which have been waived in
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<PAGE> 62
connection with the offering described herein. The shares of common stock are
not subject to redemption or to any further calls or assessments and are not
entitled to the benefit of any sinking fund provisions.
PREFERRED STOCK
Our certificate of incorporation authorizes our Board of Directors to issue
from time to time, in one or more series, shares of preferred stock with such
designations and preferences, relative voting rights (except that voting rights,
if any, in respect of the election of directors shall be limited to voting with
the holders of Class A Common Stock and Class B Common Stock, as a single class,
with no more than one vote per share of preferred stock), redemption,
conversion, participation and other rights and qualifications, limitations and
restrictions as permitted by law. No shares of preferred stock have been issued.
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<PAGE> 63
DESCRIPTION OF THE NEW CREDIT FACILITY
GENERAL
In connection with the DPS acquisition, we expect to enter into a new
credit facility with a group of lenders, including Credit Suisse First Boston
(an affiliate of Credit Suisse First Boston Corporation) as lead arranger,
administrative agent and collateral agent and Bankers Trust Company (an
affiliate of BT Alex. Brown Incorporated) as syndication agent (the "New Credit
Facility"). We received a commitment letter dated February 8, 1999 from Credit
Suisse First Boston setting forth the terms of the New Credit Facility. The
commitment is subject to customary conditions to closing.
The lenders under the New Credit Facility will provide us $1.1 billion in
senior secured loans, consisting of $800 million in term loans ($300 million of
Tranche A loans and $500 million of Tranche B loans) and a $300 million
revolving credit facility. The Tranche A loans will mature on March 31, 2005 and
the Tranche B loans will mature on March 31, 2007. The revolving credit facility
will be available on a revolving basis until March 31, 2005.
Approximately $940 million in borrowings from the New Credit Facility will
be used to consummate the DPS acquisition, refinance our $440 million credit
facility and certain other indebtedness and pay related fees and expenses.
GUARANTEES AND SECURITY
The New Credit Facility will be guaranteed by each of our existing and
subsequently acquired domestic subsidiaries, excluding Practice Patterns
Science, Inc., Great Plains Reinsurance Company and ValueRx of Michigan, Inc.
(the "Excluded Subsidiaries"). The New Credit Facility will be secured by a
first priority pledge of all the capital stock of each of our existing and
subsequently acquired domestic subsidiaries (other than the Excluded
Subsidiaries) and 65% of the stock of each of our foreign subsidiaries. In
addition, in the event that within six months of the New Credit Facility's
closing date we have not attained a ratio of Consolidated Total Debt to
Consolidated EBITDA (as defined in the New Credit Facility) of less than 3.5 to
1.0, or the indebtedness under the New Credit Facility has not received an
investment grade rating, the lenders under the New Credit Facility will have the
right to request that we grant a first priority security interest in, and
mortgages on, substantially all of our and our subsidiaries' tangible and
intangible assets.
INTEREST RATES
Interest on the loans under the New Credit Facility will accrue at a
specified margin above either the London Interbank Offered Rate ("LIBOR") or an
alternate base rate (the higher of Credit Suisse First Boston's prime rate or
the federal funds rate plus 0.5% (the "Alternate Base Rate")). For LIBOR-based
loans the applicable margin for the Tranche A loans and revolving loans will
initially be 2.25% per annum and for the Tranche B loans the applicable margin
will initially be 2.875% per annum. During the continuance of any event of
default, interest will accrue at the applicable interest rate plus 2.0% per
annum.
60
<PAGE> 64
COVENANTS
The New Credit Facility will contain customary affirmative and negative
covenants, including limitations on indebtedness, liens, investments, dividends,
stock repurchases and other specified transactions and payments. Such covenants
will also include a specified minimum interest coverage ratio, a maximum ratio
of total debt to EBITDA and a minimum fixed charge coverage ratio.
EVENTS OF DEFAULT
The New Credit Facility will specify certain customary events of default
including nonpayment of principal, interest or fees, violation of covenants,
incorrectness of representations and warranties and events such as a change of
control or bankruptcy.
This description of the New Credit Facility is qualified in its entirety by
the complete text of the documents entered into in connection therewith.
61
<PAGE> 65
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom Credit
Suisse First Boston Corporation, BT Alex. Brown Incorporated and Morgan Keegan &
Company, Inc. are acting as representatives, have severally, but not jointly,
agreed to purchase from Express Scripts, Inc. the following respective numbers
of shares of our Class A Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............
BT Alex. Brown Incorporated........................
Morgan Keegan & Company, Inc. .....................
--------
Total.........................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, and that the
underwriters will be obligated to purchase all of the shares of our Class A
Common Stock offered hereby (other than those shares covered by the
over-allotment option described below) if any are purchased. The underwriting
agreement provides that, in the event of a default by an underwriter, in certain
circumstances the purchase commitments of non-defaulting underwriters may be
increased or the underwriting agreement may be terminated.
We have granted to the underwriters an option exercisable by Credit Suisse
First Boston Corporation, expiring at the close of business on the 30th day
after the date of this prospectus, to purchase up to additional shares of
our Class A Common Stock at the offering price, less underwriting discounts and
commissions, all as set forth on the cover page of this prospectus. Such option
may be exercised only to cover over-allotments in the sale of the shares of our
Class A Common Stock. To the extent that the option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of our Class A
Common Stock as it was obligated to purchase pursuant to the underwriting
agreement.
We have been advised by the representatives that the underwriters propose
to offer the shares of our Class A Common Stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to selling group members at such price less a
concession of $ per share, and the underwriters and such selling group
members may allow a discount of $ per share on sales to certain other
broker/dealers. After the offering, the public offering price and concession and
discount to dealers may be changed by the representatives.
62
<PAGE> 66
The following table summarizes the compensation to be paid to the
underwriters by us and the expenses payable by us.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and
Commissions paid by Express
Scripts, Inc................ $ $ $
Expenses payable by Express
Scripts, Inc................ $ $ $
</TABLE>
We and certain of our directors, officers and shareholders (including
NYLIFE Healthcare) have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or,
in our case, file with the SEC a registration statement under the Securities Act
relating to any additional shares of our common stock or securities convertible
into or exchangeable or exercisable for any shares of our common stock, without
the prior written consent of Credit Suisse First Boston Corporation for a period
of 90 days after the date of this prospectus.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or contribute to payments
that the underwriters may be required to make in respect thereof.
Our Class A Common Stock is listed on The Nasdaq National Market under the
symbol "ESRX."
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the shares of our Class A Common Stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when the shares of our Class A Common
Stock originally sold by such syndicate member are purchased in a syndicate
covering transaction to cover syndicate short positions. In "passive" market
making, market makers in our Class A Common Stock who are underwriters or
prospective underwriters may, subject to certain limitations, make bids for or
purchases of our Class A Common Stock until the time, if any, at which a
stabilizing bid is made. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of our Class A Common Stock to
be higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on The Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
Credit Suisse First Boston, an affiliate of Credit Suisse First Boston
Corporation, is an agent and a lender, BT Alex. Brown Incorporated is an agent
and Bankers Trust Company, an affiliate of BT Alex. Brown Incorporated, is a
lender, under our $150 million senior subordinated bridge credit facility.
Credit Suisse First Boston and Bankers Trust Company are also agents and lenders
under our $1.1 billion credit facility. In addition, Credit Suisse First Boston
Corporation acted as financial advisor to us in connection with our acquisition
of DPS. In each case, Credit Suisse First Boston Corporation, Credit Suisse
First Boston, BT Alex. Brown Incorporated and Bankers Trust Company will receive
fees in connection
63
<PAGE> 67
with such services. The Company has also agreed to pay Credit Suisse First
Boston Corporation and BT Alex. Brown Incorporated, a financial advisory fee of
approximately $3.4 million if this offering is consummated on or before August
1, 1999. In addition, the Company has agreed to pay Credit Suisse First Boston
and Bankers Trust Company a fee of approximately $3.4 million if the $150
million senior subordinated bridge credit facility is not repaid in full on or
prior to August 1, 1999. Certain of the underwriters have provided other
advisory and investment banking services to us in the past, for which customary
compensation has been received.
The provisions of Rule 2710(c)(8) of the NASD Conduct Rules apply to this
offering. As described under "Use of Proceeds," the net proceeds of this
offering, after deducting underwriting discounts and commissions and offering
expenses, will be applied to repay our $150 million senior subordinated bridge
credit facility and a portion of the indebtedness under our $1.1 billion credit
facility. Under Rule 2710(c)(8), when an NASD member such as Credit Suisse First
Boston Corporation and BT Alex. Brown Incorporated participate in a distribution
of equity securities and more than 10% of the net proceeds of such distribution
is to be paid to such member or its affiliates, one of the following two
criteria must be met: (1) the price of such equity securities can be no higher
than that recommended by a "qualified independent underwriter" or (2) the
offering must be for a class of equity securities for which a "bona fide
independent market" exists. Because a "bona fide independent market" for our
Class A Common Stock exists, the public offering price of our Class A Common
Stock offered hereby will not be passed upon by a "qualified independent
underwriter."
We are currently in compliance in all material respects with the terms of
our $150 million senior subordinated bridge credit facility and our $1.1 billion
credit facility. The decision of Credit Suisse First Boston Corporation and BT
Alex. Brown Incorporated to distribute our Class A Common Stock offered hereby
was made independently of Credit Suisse First Boston and Bankers Trust Company,
which lenders had no involvement in determining whether or when to distribute
our Class A Common Stock under the terms of this offering. Credit Suisse First
Boston Corporation and BT Alex. Brown Incorporated will not receive any benefit
from this offering other than their respective portions of the underwriting
discounts and commissions paid by us.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Class A Common Stock in Canada is being made only
on a private placement basis exempt from the requirement that the Company
prepare and file a prospectus with the securities regulatory authorities in each
province where trades of the Class A Common Stock are effected. Accordingly, any
resale of the Class A Common Stock in Canada must be made in accordance with
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Class A Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Class A Common Stock in Canada who receives a
purchase confirmation will be deemed to represent to the Company and the dealer
from whom such
64
<PAGE> 68
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such Class A Common Stock
without the benefit of a prospectus qualified under such securities laws, (2)
where required by law, that such purchaser is purchasing as principal and not an
agent and (3) such purchaser has reviewed the text under "-- Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities laws. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the United States federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Class A Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Class A Common Stock acquired by such purchaser pursuant to this offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from the
Company. Only one such report must be filed in respect of Class A Common Stock
acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Class A Common Stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Class A Common Stock in their particular circumstances and with respect to the
eligibility of the Class A Common Stock for investment by the purchaser under
relevant Canadian legislation.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated herein by reference include
forward-looking statements under the Securities Act. In addition, from time to
time, we or our representatives have made or may make forward-looking statements
orally or in writing. The words "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan," "intend" and similar expressions have been used
in this prospectus and the documents incorporated herein by reference to
identify forward-looking statements. We have based these forward-looking
statements on our current views with respect to future events and financial
performance. Actual results could differ materially from those projected in the
forward-
65
<PAGE> 69
looking statements. These forward-looking statements are subject to risks,
uncertainties and assumptions about the Company, including, among other things:
- risks associated with the consummation and financing of our acquisitions
of ValueRx and DPS, including the ability to successfully integrate the
operations of such acquired businesses with our existing operations,
client retention issues and risks inherent in the acquired entities
operations
- risks associated with managing and maintaining internal 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 loss of certain relationships with pharmaceutical
manufacturers
- changes in pricing or discount practices of pharmaceutical manufacturers
- adverse results in litigation and 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
- 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, including our ability to
successfully convert our and DPS's information systems and our and DPS's
non-information systems, and the ability of our and DPS's vendors/trading
partners to successfully convert their systems to be Year 2000 compliant
- dependence on key members of management
- our relationship with New York Life, which possesses voting control of
the Company
- other risks described from time to time in our filings with the SEC
We are not obligated to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained throughout this prospectus and the documents
incorporated herein by reference. Because of these risks, uncertainties and
assumptions, you should not place undue reliance on these forward-looking
statements.
66
<PAGE> 70
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. The Exchange Act file number for our SEC
filings is 000-20199. You may read and copy any document we file at the
following SEC public reference rooms:
<TABLE>
<S> <C> <C>
Judiciary Plaza 500 West Madison Street 7 World Trade Center
450 Fifth Street, N.W. 14th Floor Suite 1300
Room 1024 Chicago, Illinois 60661 New York, New York 10048
Washington, D.C. 20549
</TABLE>
You may obtain information on the operation of the public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330.
We file information electronically with the SEC. Our SEC filings also are
available from the SEC's Internet site at http://www.sec.gov, which contains
reports, proxy and information statements and other information regarding
issuers that file electronically. Our Class A Common Stock is listed on The
Nasdaq National Market.
You may also read and copy our SEC filings and other information at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement we filed with the SEC.
The SEC allows us to "incorporate by reference" certain documents we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information in the documents incorporated by
reference is considered to be part of this prospectus, and information in
documents that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Section 13(a),
13(c), 14 or 15(d) of the Exchange Act:
- Annual Report on Form 10-K for the fiscal year ended December 31, 1997
- Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
1998, June 30, 1998 and September 30, 1998
- Current Reports on Form 8-K dated February 24, 1998, March 2, 1998, March
26, 1998, April 14, 1998, May 5, 1998, July 20, 1998, August 5, 1998,
October 27, 1998, October 29, 1998, November 20, 1998, February 18, 1999
and February 24, 1999, and Form 8-K/A dated June 12, 1998
- Description of Common Stock contained in Registration Statement on Form
8-A dated May 12, 1992
We will provide a copy of the documents we incorporate by reference, at no
cost, to any person who receives this prospectus, including any beneficial owner
of our common stock. To request a copy of any or all of these documents, you
should write or telephone us at the following address and telephone number:
General Counsel
Express Scripts, Inc.
14000 Riverport Drive
Maryland Heights, Missouri 63043
Telephone: (314) 770-1666
67
<PAGE> 71
LEGAL MATTERS
Certain legal matters related to the Class A Common Stock being offered
hereby are being passed upon for the Company by Thomas M. Boudreau, Senior Vice
President, General Counsel and Secretary of the Company, and by Simpson Thacher
& Bartlett, New York, New York, and for the Underwriters by Cahill Gordon &
Reindel (a partnership including a professional corporation), New York, New
York.
EXPERTS
The Express Scripts, Inc. and Diversified Pharmaceutical Services, Inc. and
Subsidiary Financial Statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus and the Value Health Pharmacy Benefit Management Financial Statements
as of December 31, 1996 and for each of the two years in the period ended
December 31, 1996 incorporated by reference in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The Value Health Pharmacy Benefit Management Financial Statements as of
December 31, 1997 and for the five-month period ended December 31, 1997 and for
the seven-month period ended July 31, 1997 and the Managed Prescription Network,
Inc. Financial Statements as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997 incorporated by reference in
this prospectus have been so included from the Company's current report on Form
8-K/A dated June 12, 1998 in reliance on the reports of Ernst & Young LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
68
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
EXPRESS SCRIPTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants... F-3
Consolidated Balance Sheet.......... F-4
Consolidated Statement of
Operations........................ F-5
Consolidated Statement of Changes in
Stockholders' Equity.............. F-6
Consolidated Statement of Cash
Flows............................. F-7
Notes to Consolidated Financial
Statements........................ F-8
</TABLE>
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants... F-30
Balance Sheets...................... F-31
Statements of Operations............ F-32
Statements of Stockholder's
Equity............................ F-33
Statements of Cash Flows............ F-34
Notes to Financial Statements....... F-35
</TABLE>
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT AND
MANAGED PRESCRIPTION NETWORK, INC. D/B/A COLUMBIA PHARMACY SOLUTIONS
UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Combined Condensed Balance Sheet.... F-46
Combined Condensed Statement of
Operations........................ F-47
Combined Condensed Statement of Cash
Flows............................. F-48
Notes to Combined Condensed
Financial Statements.............. F-49
</TABLE>
F-1
<PAGE> 73
EXPRESS SCRIPTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
F-2
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Express Scripts, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present 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. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits 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.
PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
February 12, 1999
F-3
<PAGE> 75
EXPRESS SCRIPTS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
---- ----
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 64,155 $ 122,589
Short-term investments.................................... 57,938
Receivables, less allowance for doubtful accounts of
$4,802 and $17,806, respectively
Unrelated parties......................................... 194,061 433,006
Related parties........................................... 16,230
Inventories............................................... 28,935 55,634
Deferred taxes............................................ 2,303 41,011
Prepaid expenses.......................................... 346 4,667
-------- ----------
Total current assets.................................... 363,968 656,907
-------- ----------
Property and equipment, less accumulated depreciation and
amortization.............................................. 26,821 77,499
Goodwill, less accumulated amortization..................... 251 282,163
Other assets................................................ 11,468 78,892
-------- ----------
Total assets............................................ $402,508 $1,095,461
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ -- $ 54,000
Claims and rebates payable................................ 164,920 338,251
Accounts payable.......................................... 17,979 60,247
Accrued expenses.......................................... 15,007 86,798
-------- ----------
Total current liabilities............................... 197,906 539,296
Long-term debt.............................................. 306,000
Other liabilities........................................... 901 471
-------- ----------
Total liabilities....................................... 198,807 845,767
-------- ----------
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, 9,238,000 and 18,610,000 shares issued and
outstanding, respectively............................... 93 186
Class B Common Stock, $.01 par value, 22,000,000 shares
authorized, 7,510,000 and 15,020,000 shares issued and
outstanding, respectively............................... 75 150
Additional paid-in capital................................ 106,901 110,099
Accumulated other comprehensive income.................... (27) (74)
Retained earnings......................................... 103,648 146,322
-------- ----------
210,690 256,683
Class A Common Stock in treasury at cost, 475,000
shares.................................................. (6,989) (6,989)
-------- ----------
Total stockholders' equity.............................. 203,701 249,694
-------- ----------
Total liabilities and stockholders' equity.............. $402,508 $1,095,461
======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 76
EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
--------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues (including $152,311, $208,118
and $145,758, respectively from related
parties)................................. $773,615 $1,230,634 $2,824,872
-------- ---------- ----------
Cost and expenses:
Cost of revenues......................... 684,882 1,119,167 2,584,997
Selling, general and administrative...... 49,103 62,617 148,990
Corporate restructuring.................. -- -- 1,651
-------- ---------- ----------
733,985 1,181,784 2,735,638
-------- ---------- ----------
Operating income........................... 39,630 48,850 89,234
-------- ---------- ----------
Interest income (expense):
Interest income.......................... 3,509 6,081 7,236
Interest expense......................... (59) (225) (20,230)
-------- ---------- ----------
3,450 5,856 (12,994)
-------- ---------- ----------
Income before income taxes................. 43,080 54,706 76,240
Provision for income taxes................. 16,932 21,277 33,566
-------- ---------- ----------
Net income................................. $ 26,148 $ 33,429 $ 42,674
======== ========== ==========
Basic earnings per share................... $ 0.81 $ 1.02 $ 1.29
======== ========== ==========
Weighted average number of common shares
outstanding during the period -- Basic
EPS...................................... 32,160 32,713 33,105
======== ========== ==========
Diluted earnings per share................. $ 0.80 $ 1.01 $ 1.27
======== ========== ==========
Weighted average number of common shares
outstanding during the period -- Diluted
EPS...................................... 32,700 33,122 33,698
======== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 77
EXPRESS SCRIPTS, INC.
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
STOCK STOCK STOCK STOCK CAPITAL INCOME EARNINGS STOCK TOTAL
------- ------- ------- ------- ---------- ------------- -------- -------- --------
(IN THOUSANDS)
<S> <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
adjustment......... -- -- -- -- -- (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
F-6
<PAGE> 78
EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 26,148 $ 33,429 $ 42,674
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 6,707 10,470 27,042
Deferred income taxes................... 317 (834) 10,068
Bad debt expense........................ 1,456 3,680 4,583
Corporate restructuring, less cash
payments of $184...................... 1,467
Tax benefit relating to employee stock
options............................... 661 3,174 1,345
Changes in operating assets and
liabilities, net of changes resulting
from acquisition:
Receivables........................... (48,149) (50,166) (35,083)
Inventories........................... (3,638) (11,444) (15,417)
Prepaid expenses and other assets..... (3,104) 1,722 756
Claims and rebates payable............ 41,055 57,968 107,660
Accounts payable and accrued
expenses........................... 8,410 4,504 (18,521)
-------- -------- ---------
Net cash provided by operating activities.... 29,863 52,503 126,574
-------- -------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired......... (940) (460,137)
Short-term investments..................... (54,388) (3,550) 57,938
Purchases of property and equipment........ (9,480) (13,017) (23,853)
-------- -------- ---------
Net cash (used in) investing activities...... (64,808) (16,567) (426,052)
-------- -------- ---------
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.............. (5,250) (1,739)
Exercise of stock options.................. 1,310 4,772 2,021
-------- -------- ---------
Net cash provided by financing activities.... 48,652 3,033 357,959
-------- -------- ---------
Effect of foreign currency translation
adjustment................................. (2) (25) (47)
-------- -------- ---------
Net increase in cash and cash equivalents.... 13,705 38,944 58,434
Cash and cash equivalents at beginning of
year....................................... 11,506 25,211 64,155
-------- -------- ---------
Cash and cash equivalents at end of year..... $ 25,211 $ 64,155 $ 122,589
======== ======== =========
Supplemental data:
Cash paid during the year for:
Income taxes............................... $ 14,544 $ 20,691 $ 17,202
Interest................................... $ 59 $ 225 $ 13,568
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-7
<PAGE> 79
EXPRESS SCRIPTS, INC.
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 healthcare 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 includes
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.
F-8
<PAGE> 80
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, 1997 and 1998,
$1,898,000, $1,982,000 and $10,244,000 in software development costs were
capitalized, respectively. Capitalized software development costs amounted to
$5,269,000 and $27,516,000 at December 31, 1997 and 1998, 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 1996,
1997 and 1998 was $136,000, $622,000 and $1,968,000, 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
$251,000 and $8,114,000 at December 31, 1997 and 1998, 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, 1997 or
1998. Amortization expense, included in selling, general and administrative
expenses, was $42,000, $42,000 and $7,863,000 for the years ended December 31,
1996, 1997 and 1998, 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
F-9
<PAGE> 81
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
F-10
<PAGE> 82
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 or 1998.
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
F-11
<PAGE> 83
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 540,000, 409,000 and
593,000 in 1996, 1997 and 1998, 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
F-12
<PAGE> 84
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $15 million),
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
F-13
<PAGE> 85
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
------------------------
1997 1998
---------- ----------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenues.................................. $2,877,906 $3,234,800
Net income.................................... 33,687 42,696
Basic earnings per share...................... 1.03 1.29
Diluted earnings per share.................... 1.02 1.27
</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 healthcare 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 1996, 1997 and 1998 was $776,000, $1,164,000
and $1,164,000, 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
F-14
<PAGE> 86
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$114,000, $114,000 and $171,000 for each of the years ended December 31, 1996,
1997 and 1998, 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.
F-15
<PAGE> 87
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $165,000 in 1996 and
$990,000 in 1997.
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 $122,157,000, $176,761,000 and $127,255,000 in 1996, 1997
and 1998, respectively.
The amount receivable from or (due to) related parties comprised the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<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 healthcare 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 $7,636,000, $11,690,000 and
$7,257,000 in 1996, 1997 and 1998, respectively, and $3,064,000 in 1996,
$5,803,000 in 1997 and $2,307,000 in 1998 were allocated to the Company and have
been classified in the accompanying consolidated statement of operations as a
reduction of cost of revenues.
F-16
<PAGE> 88
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
healthcare 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 healthcare 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,
-------------------
1997 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Land............................................. $ -- $ 2,051
Building......................................... 3,076
Furniture........................................ 4,362 8,336
Equipment........................................ 28,924 52,758
Computer software................................ 12,011 37,412
Leasehold improvements........................... 3,934 8,275
------- --------
49,231 111,908
Less accumulated depreciation and amortization... 22,410 34,409
------- --------
$26,821 $ 77,499
======= ========
</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
F-17
<PAGE> 89
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
F-18
<PAGE> 90
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were charged at 10 basis points 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>
UTILIZED BALANCE AT
1998 --------------- DECEMBER 31,
CHARGE CASH NONCASH 1998
------ ---- ------- ------------
(AMOUNTS IN THOUSANDS)
<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.
8. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current provision:
Federal........................................ $13,945 $19,048 $20,171
State.......................................... 2,480 2,779 3,049
Foreign........................................ 190 284 278
------- ------- -------
Total current provision..................... 16,615 22,111 23,498
------- ------- -------
Deferred provision:
Federal........................................ 267 (714) 8,694
State.......................................... 50 (120) 1,374
------- ------- -------
Total deferred provision.................... 317 (834) 10,068
------- ------- -------
Total current and deferred provision............. $16,932 $21,277 $33,566
======= ======= =======
</TABLE>
F-19
<PAGE> 91
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
1996, 1997 and 1998 is immaterial):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 35.0% 35.0% 35.0%
State taxes net of federal benefit...................... 4.3 3.8 3.8
Non-deductible amortization of goodwill and customer
contracts............................................. 4.9
Other, net.............................................. -- 0.1 0.3
---- ---- ----
Effective tax rate...................................... 39.3% 38.9% 44.0%
==== ==== ====
</TABLE>
The deferred tax assets and deferred tax liabilities recorded in the
consolidated balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts................................... $1,578 $ 8,013
Inventory costing capitalization and reserves............. 675 684
Accrued expenses.......................................... 512 34,170
Depreciation and property differences..................... 6,808
Non-compete agreements.................................... 933
Other..................................................... 79 17
------ -------
Gross deferred tax assets.............................. 2,844 50,625
Deferred tax liabilities:
Depreciation and property differences..................... (1,166)
Other..................................................... (91) (462)
------ -------
Gross deferred tax liabilities......................... (1,257) (462)
------ -------
Net deferred tax assets..................................... $1,587 $50,163
====== =======
</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
1996, 1997 and 1998 was $2,099,000,
F-20
<PAGE> 92
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2,272,000 and $3,876,000, respectively. The future minimum lease payments due
under noncancellable operating leases is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <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 1996, 1997 and
1998, the Company made contributions of approximately $639,000, $909,000 and,
$1,751,000 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.
F-21
<PAGE> 93
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-22
<PAGE> 94
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, 1997 and 1998. Because future options may be granted
and vesting typically occurs over a five year period, the pro forma impact shown
for 1996, 1997 and 1998 is not necessarily representative of the impact in
future years.
F-23
<PAGE> 95
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income
As reported.................................... $26,148 $33,429 $42,674
Pro forma...................................... 25,235 32,034 38,585
Basic earnings per share
As reported.................................... $ 0.81 $ 1.02 $ 1.29
Pro forma...................................... 0.78 0.98 1.16
Diluted earnings per share
As reported.................................... $ 0.80 $ 1.01 $ 1.27
Pro forma...................................... 0.77 0.97 1.14
</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>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life of option...................... 1-6 years 2-7 years 2-7 years
Risk-free interest rate...................... 5.0-6.5% 5.7-6.6% 4.1-5.9%
Expected volatility of stock................. 30-50% 40% 44%
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, 1996, 1997 and 1998, and changes during the years ending on
those dates is presented below.
F-24
<PAGE> 96
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
(SHARE DATA IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 1,446 $10.30 1,677 $12.56 1,702 $17.21
Granted..................... 642 19.85 602 22.78 1,866 40.65
Exercised................... (131) 9.98 (529) 8.80 (133) 14.71
Forfeited/cancelled......... (280) 18.80 (48) 17.56 (655) 38.82
----- ----- ------
Outstanding at end of
year...................... 1,677 12.56 1,702 17.21 2,780 28.02
===== ===== ======
Options exercisable at year
end....................... 756 641 800
Weighted-average fair value
of options granted during
the year.................. $6.57 $9.91 $18.22
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------------
RANGE OF WEIGHTED- WEIGHTED- WEIGHTED-
EXERCISE PRICES NUMBER AVERAGE AVERAGE NUMBER AVERAGE
(SHARE DATA IN OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
THOUSANDS) AT 12/31/98 CONTRACTUAL LIFE PRICE AT 12/31/98 PRICE
- --------------- ----------- ---------------- --------- ------------ --------------
<S> <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.
F-25
<PAGE> 97
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information about the reportable segments for
the years ended December 31
<TABLE>
<CAPTION>
PBM NON-PBM TOTAL
---------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
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
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
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
</TABLE>
- -------------------------
(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.
F-26
<PAGE> 98
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
EARNINGS
SELLING, PER SHARE
NET COST OF GENERAL & OPERATING NET ---------------
REVENUES REVENUES ADMINISTRATIVE INCOME INCOME BASIC DILUTED
-------- -------- -------------- --------- ------- ----- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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
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
</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 Plc. 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 $360 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 $360
million bank credit facility, the remaining unamortized deferred financing fees
will be expensed and no material gain or loss for early extinguishment of debt
is anticipated. The Company anticipates maintaining its existing interest rate
swap in place to hedge the future variable interest rate payments on $360
million of the new $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
F-27
<PAGE> 99
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Net revenues................................ $3,449,649
Net income.................................. 51,130
Basic earnings per share.................... 1.36
Diluted earnings per share.................. 1.34
</TABLE>
F-28
<PAGE> 100
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF SMITHKLINE BEECHAM CORPORATION)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
F-29
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Diversified Pharmaceutical Services, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholder's equity and cash flows, after the restatements
described in Notes 2 and 12, with which we concur, present fairly, in all
material respects, the financial position of Diversified Pharmaceutical
Services, Inc. and subsidiary (the "Company"), wholly owned by SmithKline
Beecham Corporation, at December 31, 1997 and 1998, 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.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits 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.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 26, 1999, except
Note 12 for which the date
is March 1, 1999
F-30
<PAGE> 102
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash........................................... $ 618,859 $ 1,685,600
Receivables:
SmithKline Beecham Corporation............... 343,589,242 371,827,141
Accounts receivable, net..................... 81,452,718 82,746,292
-------------- --------------
Total receivables......................... 425,041,960 454,573,433
Deferred tax asset............................. 1,400,000 1,880,237
Other current assets........................... 2,510,254 1,968,869
-------------- --------------
Total current assets...................... 429,571,073 460,108,139
Investment in joint venture.................... 8,534,000 6,610,471
Furniture and equipment, net................... 13,505,083 14,910,412
Internal use software, net..................... -- 12,482,501
Goodwill and intangible assets, net............ 1,998,439,000 832,497,469
Notes receivable............................... 511,597 511,597
Deferred tax asset............................. 42,029,677 430,374,187
-------------- --------------
Total assets.............................. $2,492,590,430 $1,757,494,776
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Rebates and pharmacy claims payable.......... 206,053,314 191,726,763
Accrued expenses............................. 52,876,383 51,779,710
Deferred revenues............................ 1,384,873 1,374,076
-------------- --------------
Total current liabilities................. 260,314,570 244,880,549
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized, 100 shares issued and
outstanding............................... 1 1
Additional paid-in capital................... 2,108,416,415 2,110,981,415
Retained earnings (Accumulated deficit)...... 123,859,444 (598,367,189)
-------------- --------------
Total stockholder's equity................ 2,232,275,860 1,512,614,227
-------------- --------------
Total liabilities and stockholder's
equity.................................. $2,492,590,430 $1,757,494,776
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE> 103
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Net revenues......................... $692,046,016 $228,616,730 $ 214,848,958
------------ ------------ ---------------
Operating expenses:
Pharmacy claims, net............... 490,370,203 58,685,047 548,258
Other selling, general and
administrative.................. 155,947,282 146,839,849 154,335,922
Depreciation and amortization...... 78,791,400 79,149,287 80,141,066
Cost of pharmaceutical
distribution.................... 48,466,917 -- --
Write down of assets............... -- -- 1,092,183,531
------------ ------------ ---------------
Total operating expenses........ 773,575,802 284,674,183 1,327,208,777
------------ ------------ ---------------
Operating loss....................... (81,529,786) (56,057,453) (1,112,359,819)
Gain on transfer of subsidiary net
assets to joint venture............ 19,849,000 -- --
Equity in loss of joint venture...... (631,480) (4,200,231) (1,923,529)
Royalty income (Note 2).............. 695,054 4,010,792 3,231,968
Other income......................... 432,087 -- --
------------ ------------ ---------------
Loss before income taxes........... (61,185,125) (56,246,892) (1,111,051,380)
Benefit for income taxes............. 21,047,574 20,960,217 388,824,747
------------ ------------ ---------------
Net loss............................. $(40,137,551) $(35,286,675) $ (722,226,633)
============ ============ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE> 104
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
--------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995...... 100 $1 $2,105,981,415 $ 199,283,670 $2,305,265,086
Net loss......................... -- -- (40,137,551) (40,137,551)
Allocation of expenses paid by SB
Corp (Note 12)................. -- 1,286,000 -- 1,286,000
--- -- -------------- ------------- --------------
Balances, December 31, 1996...... 100 1 2,107,267,415 159,146,119 2,266,413,535
Net loss......................... -- -- (35,286,675) (35,286,675)
Allocation of expenses paid by SB
Corp (Note 12)................. -- 1,149,000 -- 1,149,000
--- -- -------------- ------------- --------------
Balances, December 31, 1997...... 100 1 2,108,416,415 123,859,444 2,232,275,860
Net loss......................... -- -- (722,226,633) (722,226,633)
Allocation of expenses paid by SB
Corp (Note 12)................. -- 2,565,000 -- 2,565,000
--- -- -------------- ------------- --------------
Balances, December 31, 1998...... 100 $1 $2,110,981,415 $(598,367,189) $1,512,614,227
=== == ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE> 105
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------ --------------
<S> <C> <C> <C>
Operating activities:
Net loss.................................... $ (40,137,551) $(35,286,675) $ (722,226,633)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Deferred income taxes.................... (21,047,574) (20,960,217) (388,824,747)
Allocation of expenses paid by SB Corp... 1,286,000 1,149,000 2,565,000
Depreciation and amortization............ 78,791,400 79,149,287 80,141,066
Provision for bad debts.................. 1,157,416 150,679 1,891,782
Loss on disposal of furniture and
equipment.............................. 269,150 -- 1,355,731
Write down of assets..................... -- -- 1,092,183,531
Net gain on transfer of subsidiary net
assets to joint venture................ (19,849,000) -- --
Equity in loss of joint venture.......... 631,480 4,200,231 1,923,529
Changes in assets and liabilities, net of
effects of assets transferred to joint
venture:
Accounts receivable...................... (17,410,844) 134,433,011 (3,185,356)
Other current assets..................... (3,675,967) 1,441,311 541,385
Pharmacy claims and rebates payable...... 128,821,042 (82,869,288) (14,326,551)
Accrued expenses......................... 2,858,448 13,575,278 (1,096,673)
Deferred revenues........................ (23,085,416) (2,504,104) (10,797)
------------- ------------ --------------
Net cash provided by operating
activities............................. 88,608,584 92,478,513 50,931,267
------------- ------------ --------------
Investing activities:
Increase in receivable from SmithKline
Beecham Corporation...................... (103,708,181) (88,017,729) (28,237,899)
Purchase of furniture and equipment, net of
effects of assets transferred to joint
venture.................................. (12,081,717) (1,390,225) (7,801,578)
Proceeds received in connection with
establishing joint venture............... 29,214,000 -- --
Contribution to joint venture............... (1,500,000) (2,500,000) --
Issuance of notes receivable................ -- (511,597) --
Internal use software costs................. -- -- (14,130,045)
Proceeds received on disposal of furniture
and equipment............................ -- -- 304,996
------------- ------------ --------------
Net cash used in investing activities.... (88,075,898) (92,419,551) (49,864,526)
------------- ------------ --------------
Net increase in cash.......................... 532,686 58,962 1,066,741
Cash, as of beginning of year................. 27,211 559,897 618,859
------------- ------------ --------------
Cash, as of end of year....................... $ 559,897 $ 618,859 $ 1,685,600
============= ============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE> 106
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BACKGROUND:
Diversified Pharmaceutical Services, Inc. (Diversified) is a wholly owned
subsidiary of SmithKline Beecham Corporation (SB Corp). SB Corp is a wholly
owned subsidiary of SmithKline Beecham plc (SB plc). Diversified's services
,which are all in a single operating segment, include the establishment of a
pharmacy provider network, installation and operation of a pharmacy claims
processing system, establishment and administration of a manufacturer rebate
program with respect to brand-name prescription drug products, and maintenance
of a prescription information database. In addition, Diversified provides drug
formulary development and maintenance along with maximum allowable costs (MAC)
lists for generic drugs. Diversified also assists its clients in utilization
management. From March 6, 1995 to October 28, 1996, Diversified's services also
included dispensing (through a wholly owned subsidiary, Diversified Prescription
Delivery, a mail service pharmacy subsidiary) medications and products to
patients for outpatient usage. On February 9, 1999, SB Corp entered into an
agreement to sell Diversified (see note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
Financial Statements:
On May 27, 1994, SB Corp acquired the common stock of Diversified from
United Healthcare Corporation (UHC) for $2.3 billion in cash (the Acquisition).
Identifiable intangible assets, primarily existing customer relationships, of
approximately $0.4 billion recorded in connection with the Acquisition are being
amortized over their estimated useful lives ranging from 5 to 16 years. Goodwill
of approximately $1.8 billion recorded in connection with the Acquisition is
being amortized over 40 years.
The financial statements as of December 31, 1997 and for the years ended
December 31, 1997 and 1996, have been restated to reflect the historical cost
basis of SB Corp and give effect to the impact of purchase accounting as a
result of the Acquisition. Previously issued financial statements do not give
effect to the Acquisition. The restatement resulted in an increase in total
equity of $2,147,376,886, $2,094,216,360 and $2,039,416,427 at December 31,
1995, 1996 and 1997, respectively, and a decrease in net income of $46,682,933
in both 1997 and 1996.
In connection with the Acquisition, Diversified and SB Corp entered into a
six-year cooperation agreement with UHC, under which UHC will provide certain
data and provide support for outcomes research and other services. UHC will
receive a fixed percentage of Diversified's total annual formulary-managed drug
expenditures as a fee under this agreement. Such fees, included in other
selling, general and administrative expenses, were approximately $27.0 million,
$28.0 million and $33.8 million in 1996, 1997 and 1998, respectively. In
addition, UHC agreed to use Diversified as the pharmacy benefit manager for all
of UHC's health plans for the term of the aforementioned cooperation agreement.
Acquisition of DPD:
On March 6, 1995, Diversified acquired all the common stock of Prescription
Delivery Services, a mail service pharmacy provider for approximately $15.0
million in cash. In connection with this acquisition, SB Corp made a capital
contribution of $15.0 million to
F-35
<PAGE> 107
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Diversified to fund the purchase of the net assets of Prescription Delivery
Services. The acquired entity was subsequently named Diversified Prescription
Delivery (DPD), and was reported as a wholly owned subsidiary of Diversified.
DPD Joint Venture:
On October 28, 1996, Diversified entered into an agreement (the Agreement)
with another entity (the joint owner) to form and to jointly own and operate a
limited liability company to engage in the mail service pharmacy business. The
name of the new company is Diversified Prescription Delivery L.L.C. (the Joint
Venture). Concurrent with the execution of the Agreement, Diversified
transferred all the assets and liabilities of DPD plus $1.5 million of cash to
the Joint Venture. Simultaneously, the joint owner transferred certain
contracts, bids and liabilities plus $30.7 million of cash to the Joint Venture.
In accordance with the terms of the Limited Liability Company Agreement, the
Joint Venture then paid $29.2 million of cash to Diversified. Diversified and
the joint owner share management control and profits or losses equally. In
substance, Diversified sold half of its interest in the net assets of DPD to the
joint owner for $29.2 million and, accordingly, recorded a gain on the transfer
of subsidiary net assets to the Joint Venture of $19.8 million.
The Diversified investment in this Joint Venture is being accounted for
using the equity method of accounting. Diversified's 50% share of the net losses
of the Joint Venture for the period from October 28, 1996 through December 31,
1996 and for the years ended December 31, 1997 and 1998, have been included in
equity in loss of joint venture on the statements of operations.
On October 28, 1996, Diversified also entered into a Trademark License
Agreement and a Royalty Agreement with the Joint Venture to allow it to use
certain trademarks owned by Diversified. Pursuant to this Trademark License
Agreement, the Joint Venture has agreed to pay Diversified between 2 and 4
percent of certain revenues, as defined.
Unaudited condensed financial information of the Joint Venture as of
December 31, 1997 and 1998 and for the years then ended is summarized below (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Current assets..................................... $12,081 $15,587
Noncurrent assets.................................. 16,043 11,270
Current liabilities................................ 10,033 5,901
Members' equity.................................... 17,068 13,221
DPD net loss....................................... 8,400 3,847
</TABLE>
DPD's net loss for the period from October 28, 1996 through December 31,
1996 was approximately $1,263,000.
FURNITURE AND EQUIPMENT:
Furniture, fixtures and computer equipment are recorded at cost. The cost
of additions and improvements are capitalized, while maintenance and repairs are
expensed as incurred.
F-36
<PAGE> 108
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided for using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures............................ 5 - 10 years
Computer equipment................................ 3 years
</TABLE>
Leasehold improvements are stated at cost. These amounts are amortized over
the estimated useful life of leasehold improvements or the remaining term of the
lease, whichever is shorter.
INTERNAL USE SOFTWARE:
Software development costs are costs incurred in connection with the
development of computer software applications to support management services
provided by Diversified. Such costs, which include dedicated staff costs and
third party costs pursuant to the development of computer software applications,
are amortized over their estimated useful lives of four years, beginning when
the related application has been implemented.
Effective January 1, 1998, Diversified has adopted the provisions of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires the
capitalization of certain costs incurred in connection with developing or
obtaining internal use software and provides guidance for determining whether
computer software is for internal use. All software development costs incurred
in 1996 and 1997 totaling approximately $16.0 million and $13.9 million,
respectively, were expensed. During 1998, approximately $14.1 million of
internal use software development costs were capitalized pursuant to SOP 98-1.
REBATES PAYABLE:
Rebates payable represent amounts due to customers who participate in
Diversified's drug manufacturer rebate programs. These amounts are distributed
to customers periodically according to contracts and allocation schedules
established by Diversified. The estimates of the resulting liability is
continually reviewed and updated, and any adjustments resulting therefrom are
reflected in current operations.
REVENUE AND EXPENSE RECOGNITION:
Diversified provides pharmacy benefit management services as described in
Note 1 to numerous customers throughout the United States.
Pharmacy Services -- Pharmacy service revenues are received from customers
for providing pharmacy benefits on a guaranteed total cost (capitated) basis.
These revenues are recognized either on a per claim basis or per member, per
month basis over the life of the contract period. Revenues from certain pharmacy
services billed one month prior to service delivery are deferred until the next
month. As of December 31, 1998, there were no capitated contracts outstanding.
Management Services -- Management services revenues include administrative
fees for services provided to customers and drug manufacturers.
F-37
<PAGE> 109
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management services to customers include pharmacy claims processing and
other administrative services provided on a fee for service basis. Revenues
relating to these services are recognized according to the terms of the
applicable contracts, either on a per claim basis or per member, per month
basis. Amounts received from customers and paid out by Diversified for pharmacy
claims reimbursements, other than those under capitated arrangements, are
excluded from revenues and expenses.
Management services provided to drug manufacturers include various services
relating to administration of the manufacturer rebate program. Revenues relating
to these services are recognized as earned based on detailed drug utilization
data. Rebates payable to customers in accordance with the applicable contracts
are excluded from revenues and expenses.
Pharmaceutical Distribution -- Pharmaceutical distribution revenues
represent mail service pharmacy revenues earned prior to October 28, 1996 that
were recognized when medication and products were shipped.
Pharmacy Claims Expense -- Pharmacy claims expense includes claims paid,
claims in process and pending, and estimated unreported claims and charges by
pharmacies for services rendered to enrolled members under capitation
arrangements during the period.
Cost of Pharmaceutical Distribution -- Cost of pharmaceutical distribution
includes the costs of medication and products distributed through the mail
service pharmacy operations prior to October 28, 1996. Such costs were
recognized when medication and products were shipped.
RECEIVABLE FROM SB CORP:
Diversified participates in SB Corp's consolidated cash pool whereby SB
Corp sweeps Diversified's cash accounts on a daily basis in accordance with SB
Corp cash management practices.
ACCOUNTS RECEIVABLE:
Accounts receivable, including unbilled amounts, represent amounts due from
manufacturers for administrative fees and rebates payable under Diversified's
rebate program and customer fee for service receivables.
INCOME TAXES:
Diversified's operating results are included in the consolidated federal
income tax return of SB Corp. However, for financial reporting purposes,
Diversified's provision (benefit) for income taxes are computed on a separate
entity basis. Income tax expense (benefit) represents the taxes that would have
been payable (receivable) for the year and the change in deferred tax assets and
liabilities during the year.
Deferred income taxes are recorded to reflect the tax consequences in
future years of differences between tax basis of assets and liabilities and
their financial reporting amounts at year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
F-38
<PAGE> 110
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The most
significant areas which require the use of management estimates relate to
manufacturer agreements and related accounts receivable. Recognition of such
revenues requires the use of estimated pharmaceutical and fulfillment volumes
and mix data, until actual volume and mix data becomes available. Changes in
estimated 1995 pharmacy and management service revenues recorded in 1996
resulted in a $24.5 million reduction in 1996 net revenues. Other significant
areas which require the use of management estimates include the allowance for
uncollectible accounts receivable and the estimated useful life of identifiable
intangibles, internal use software and goodwill.
3. SELECTED BALANCE SHEET INFORMATION:
Accounts receivable, net consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Accounts receivable......................... $82,879,783 $84,892,951
Allowance for doubtful accounts............. (1,427,065) (2,146,659)
----------- -----------
Accounts receivable, net.................. $81,452,718 $82,746,292
=========== ===========
</TABLE>
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Furniture and fixtures..................... $ 10,893,684 $13,189,431
Computer equipment and purchased
software................................. 10,059,836 6,695,083
Leasehold improvements..................... 5,213,657 2,914,698
Construction in progress................... -- 638,026
------------ -----------
26,167,177 23,437,238
Less accumulated depreciation and
amortization............................. (12,662,094) (8,526,826)
------------ -----------
Furniture and equipment, net............. $ 13,505,083 $14,910,412
============ ===========
</TABLE>
Internal use software, net consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Internal use software....................... $ -- $14,130,045
Less accumulated amortization............... -- (1,647,544)
----------- -----------
Internal use software, net................ $ -- $12,482,501
=========== ===========
</TABLE>
F-39
<PAGE> 111
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and intangibles, net consisted of the following:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Customer List.......................... $ 400,000,000 $ 400,000,000
Acquired internally developed
software............................. 12,500,000 12,500,000
Databank software...................... 4,000,000 4,000,000
Goodwill............................... 1,850,230,000 758,046,469
-------------- --------------
2,266,730,000 1,174,546,469
Accumulated amortization............... (268,291,000) (342,049,000)
-------------- --------------
Net balance............................ $1,998,439,000 $ 832,497,469
============== ==============
</TABLE>
Amortization related to these intangibles and goodwill, excluding the
$1,092,183,531 write-down of goodwill discussed in Note 11, was $73,758,000 for
each of the three years in the period ended December 31, 1998.
4. RELATED PARTY TRANSACTIONS:
Diversified provided SB Corp with pharmacy benefit management services in
connection with its self-funded health plan in 1996, 1997 and 1998. Related
revenues for these services were $305,855, $234,923 and $269,017 in 1996, 1997
and 1998, respectively. SB Corp participates in Diversified's drug manufacturers
rebate program on terms similar to other participating manufacturers. Amounts
paid or payable by SB Corp under the program totaled approximately $10,400,000,
$7,900,000 and $7,200,000 in 1996, 1997 and 1998, respectively. In addition, SB
participates in utilization management programs on terms similar to other
participating manufacturers offered to Diversified's customers. Total revenue
from SB Corp related to the utilization management programs was $77,250 and
$810,000 in 1997 and 1998 respectively. No such revenues were generated by
Diversified in 1996. SB also purchases certain drug information products from
Diversified. These products provide manufacturers timely information about drug
utilization. Revenue from SB Corp for these information products was $5,000 and
$1,203,369 in 1997 and 1998, respectively. No such revenues were generated by
Diversified in 1996. Included in accounts receivable is $4,267,454 and
$1,910,694 from SB Corp as of December 31, 1997 and 1998, respectively.
Corporate services, overhead and other expenses are charged to Diversified
by SB Corp and to SB Corp by Diversified wherever possible on a direct basis,
such as resource usage or dedicated support percentage. The net expense from
these charges was approximately $5,100,000, $600,000 and $1,300,000 in 1996,
1997 and 1998, respectively, and are included in selling, general and
administrative expenses in the accompanying statements of operations.
Diversified incurred pharmacy claims expense of $5,198,749 in 1996 related
to Diversified Prescription Delivery L.L.C. for services performed for one of
Diversified's customers. Diversified paid on behalf of Diversified Prescription
Delivery L.L.C. disbursements of $1,326,249, $1,720,911 and $1,231,005 in 1996,
1997 and 1998, respectively, consisting of salaries, benefits, and other
services. Such amounts are billed to
F-40
<PAGE> 112
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Diversified Prescription Delivery L.L.C. in the year incurred. In addition, in
1996, 1997 and 1998, Diversified earned royalties from Diversified Prescription
Delivery L.L.C. (Note 2) totaling $695,054, $4,010,792 and $3,231,968,
respectively. Included in accounts receivable are amounts receivable from
Diversified Prescription Delivery L.L.C. of $2,903,750 and $5,468,694 as of
December 31, 1997 and 1998, respectively.
At December 31, 1997 and 1998, Diversified has a total of $511,597
noninterest bearing notes receivable from Diversified Prescription Delivery
L.L.C. Although these notes are payable on demand, Diversified does not expect
to require repayment of them in 1999 and has therefore classified them as
long-term assets.
5. SIGNIFICANT CUSTOMERS:
Diversified recognized revenues for providing UHC with pharmacy benefit
management services of $389,502,444, $75,574,757 and $116,045,072 in 1996, 1997
and 1998, respectively. These revenues totaled approximately 56.3 percent, 33.1
percent and 54.0 percent of total revenues for the years ended December 31,
1996, 1997 and 1998, respectively.
In 1996, the agreement with UHC was structured on a capitated risk-sharing
basis. Adjustments to the amount payable to Diversified for services provided
were to be made based upon UHC's actual pharmacy claims experience. The
structure of the pharmacy benefit management agreement between Diversified and
UHC changed as of January 1, 1997 and contains a cost-based fee arrangement.
This agreement provides for UHC to pay all pharmacy claims and pharmacy benefit
management costs as incurred.
Total amounts receivable, from UHC including the provisions disclosed
above, were $10,988,971 and $4,970,219 as of December 31, 1997 and 1998,
respectively.
Corporate charges for services from UHC totaled $4,996,148, $1,366,498 and
$998,544 in 1996, 1997 and 1998, respectively. These charges are for services
provided by UHC to Diversified.
Receivables from two customers represented 13.5 percent and 13.2 percent of
accounts receivable as of December 31, 1997. Receivables from two customers
represented 19.1 percent and 17.3 percent of the accounts receivable as of
December 31, 1998.
F-41
<PAGE> 113
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
Diversified is obligated under various noncancelable operating leases for
office facilities and equipment. These operating leases expire at various dates
through 2008. Rent expense was $6,121,964, $6,843,070 and $7,671,347 for 1996,
1997 and 1998, respectively. Future minimum rental payments required under
noncancelable operating leases with initial or remaining lease terms in excess
of one year as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 6,311,202
2000...................................................... 6,287,416
2001...................................................... 6,070,773
2002...................................................... 5,118,824
2003...................................................... 5,148,122
Thereafter................................................ 23,682,366
-----------
$52,618,703
===========
</TABLE>
Diversified is party to certain disputes that arise in the normal course of
business. While the outcome of these matters cannot be predicted with certainty,
management presently believes that resulting adjustments, if any, would not have
a material effect on the financial position, results of operations or liquidity
of Diversified.
7. RETIREMENT PLANS:
MULTIEMPLOYER PENSION PLAN:
Diversified employees are eligible to participate in the SmithKline Beecham
Pension Plan, a multiemployer pension plan (the Pension Plan). Contributions to
the Pension Plan are determined in accordance with actuarial determinations made
by SB Corp. Diversified contributed $545,100, $900,000 and $1,152,000 to the
Pension Plan in 1996, 1997 and 1998, respectively.
OTHER EMPLOYEE BENEFIT PLANS:
Diversified participates in the SB Corp 401(k) Savings Plan (the Plan). All
employees of Diversified who have worked at least 900 hours in a year and have
met certain employment period requirements, as defined by the Plan, are eligible
to participate. Participants may contribute up to 15% of their eligible
compensation. Diversified matches a percentage of employees' contributions to
the Plan. Diversified contributed $2,247,695, $973,197 and $1,285,817 to the
Plan in 1996, 1997 and 1998, respectively.
Effective January 1, 1999, SB Corp redesigned the pension plans and 401(k)
savings plans which resulted in the addition of an SB Corp. stock investment
option and modification of certain eligibility and vesting terms.
8. STOCK OPTION PLAN:
SB plc offers a stock option incentive program for certain employees. The
options are granted annually at exercise prices equal to the market value of the
stock as of the date of grant. Stock options vest after three years from the
date of grant and must be exercised
F-42
<PAGE> 114
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
within 10 years from the date of grant. Diversified and SB plc follows the
method of accounting for employee stock compensation plans prescribed by APB No.
25, which is permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123). In accordance with APB
No 25, the Company has not recognized compensation expense for stock options
because the exercise price of the options equal the market price of the
underlying stock on the date of the grant, which is the measurement date.
Certain management personnel of Diversified received SB plc stock options. If
Diversified had followed the fair value method for stock option plans in
accordance with SFAS No. 123 in 1996, 1997 and 1998, the net loss would have
increased by approximately $300,000, $1,000,000 and $2,300,000, respectively,
for each of the years then ended.
The fair value of the options granted are estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 1.6.%
(1996 -- 2.6%), volatility of 32% (1996 -- 22%), risk free investment rate of
6.5% (1996 -- 7.5%), assumed forfeiture rate of 1% and an expected life of seven
years.
9. INCOME TAXES:
Income tax benefit consisted of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Current tax (benefit)..... $ -- $ -- $ --
Deferred tax expense
(benefit)............... (21,047,574) (20,960,217) (388,824,747)
------------ ------------ -------------
Benefit for income
taxes................ $(21,047,574) $(20,960,217) $(388,824,747)
============ ============ =============
</TABLE>
The taxable income of Diversified is included in the consolidated federal
income tax return of SB Corp. Diversified's income taxes are based on the
approximate amount that would have been computed on a separate company basis
utilizing the statutory federal and state tax rates on Diversified's earnings.
In 1996, 1997 and 1998, the difference between the federal statutory income
tax rate and the effective rate was primarily due to state income taxes.
Due to certain elections made by SB Corp at the date of acquisition, to
achieve a step-up in the tax basis of Diversified's assets, Diversified would
not (on a separate tax return basis) be required to pay federal income taxes for
the foreseeable future due to the deductibility of the amortization of goodwill
and intangibles relating to SB Corp's acquisition of Diversified. Such
amortization would offset Diversified's separate company taxable income. The
deferred tax asset and related tax benefit is also reflected in Diversified's
financial statements as if Diversified filed on a separate tax return basis.
Diversified's net deferred tax assets and liabilities as of December 31,
1997 and 1998 relate primarily to goodwill and intangibles.
F-43
<PAGE> 115
DIVERSIFIED PHARMACEUTICAL SERVICES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the balance sheet for cash, receivables
and notes receivable approximate fair value due to the short maturity of these
instruments.
There are no quoted market prices for Diversified's investment in joint
venture. Therefore, Diversified believes it is not practical to estimate a fair
market value different from the investment in joint venture carrying value.
11. SUBSEQUENT EVENT:
On February 9, 1999, SB Corp entered into an agreement to sell all of the
outstanding stock of Diversified in exchange for $700,000,000 of cash and the
unconditional termination of the SB Corp. receivables owed to Diversified.
Completion of the transaction, subject to regulatory review, is expected during
the second quarter of 1999. The Company and SB Corp have also agreed that, prior
to the closing of the sale, the assets and liabilities related to Diversified's
investment in Diversified Prescription Delivery L.L.C. will be transferred to SB
Corp.
As a result of the pending sale, management evaluated the recoverability of
the Company's long-lived assets, including goodwill and intangibles pursuant to
Statement of Financial Accounting Standards (SFAS) No. 121. In accordance with
SFAS No. 121, the Company recorded a provision of approximately $1.1 billion to
reduce the carrying value of certain long-lived assets. The tax benefit arising
from this charge has been recorded as a deferred tax asset in 1998. Also, as a
result of the above pending sale, the realizability of certain tax assets and
liabilities may be impacted.
12. CORPORATE COST ALLOCATION:
The financial statements of Diversified for the years ended December 31,
1996 and 1997, as previously prepared included direct costs incurred or
allocated to Diversified by SB Corp. Additional corporate overhead costs have
been included in these financial statements based on the relative percentage of
operating income of Diversified to the consolidated operating income of SB Corp
(excluding the effects of amortization of goodwill and intangible assets related
to SB Corp's acquisition of Diversified) which management believes is a
reasonable basis for such cost allocation. The following additional costs have
been included in Other selling, general and administrative on the statement of
operations.
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ---------------
<S> <C> <C> <C>
Loss before income taxes, as
previously reported................ $(59,899,125) $(55,097,892) $(1,108,486,380)
Adjustments for expenses not
previously allocated............... (1,286,000) (1,149,000) (2,565,000)
------------ ------------ ---------------
Loss before income taxes, after
allocated costs.................... $(61,185,125) $(56,246,892) $(1,111,051,380)
============ ============ ===============
</TABLE>
F-44
<PAGE> 116
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT AND
MANAGED PRESCRIPTION NETWORK, INC. D/B/A
COLUMBIA PHARMACY SOLUTIONS
UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
F-45
<PAGE> 117
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT AND
MANAGED PRESCRIPTION NETWORK, INC. D/B/A COLUMBIA PHARMACY SOLUTIONS
UNAUDITED COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
(IN THOUSANDS)
<S> <C>
ASSETS:
Current assets:
Cash and Cash equivalents................................. $ 26,863
Receivables, less allowance for doubtful accounts of
$25,310................................................ 185,506
Inventories............................................... 10,881
Prepaid expenses and other current assets................. 3,320
Deferred income taxes..................................... 41,737
--------
Total current assets................................... 268,307
Property and equipment, net................................. 100,769
Goodwill and other intangibles, net......................... 250,707
Other assets................................................ 2,794
--------
Total assets........................................... $622,577
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Payable to providers...................................... $162,853
Accounts payable and accrued expenses..................... 57,501
--------
Total current liabilities.............................. 220,354
Other liabilities........................................... 1,367
Stockholder's equity........................................ 400,856
--------
Total liabilities and stockholder's equity............. $622,577
========
</TABLE>
See notes to the unaudited combined condensed statements
F-46
<PAGE> 118
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT AND
MANAGED PRESCRIPTION NETWORK, INC. D/B/A COLUMBIA PHARMACY SOLUTIONS
UNAUDITED COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net revenues............................................... $409,928 $407,297
-------- --------
Cost and expenses:
Cost of revenues......................................... 375,295 366,913
Selling, general and administrative...................... 27,628 18,552
-------- --------
402,923 385,465
-------- --------
Operating income........................................... 7,005 21,832
-------- --------
Other income (expense):
Interest income.......................................... 56 103
Interest expense......................................... -- (24)
-------- --------
56 79
-------- --------
Income before income taxes................................. 7,061 21,911
Provision for income taxes................................. 3,665 10,832
-------- --------
Net income................................................. $ 3,396 $ 11,079
======== ========
</TABLE>
See notes to the unaudited combined condensed statements
F-47
<PAGE> 119
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT AND
MANAGED PRESCRIPTION NETWORK, INC. D/B/A COLUMBIA PHARMACY SOLUTIONS
UNAUDITED COMBINED CONDENSED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,396 $ 11,079
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 8,811 4,537
Provision for doubtful accounts........................ 478 1,679
Gain on disposal of assets............................. (106) (1,230)
Deferred income taxes.................................. -- 1,877
Net changes in operating assets and liabilities........ (11,355) (17,809)
-------- --------
Net cash provided by operating activities................... 1,224 133
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (5,216) (14,236)
Sale of investment........................................ 6,000 --
-------- --------
Net cash provided by (used in) investing activities......... 784 (14,236)
-------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net (payments) receipts to/from parent................. (7,220) 46,791
-------- --------
Net (decrease) increase in cash and cash equivalent......... (5,212) 32,688
Cash and cash equivalent at beginning of period............. 32,075 9,370
-------- --------
Cash and cash equivalent at end of period................... $ 26,863 $ 42,058
======== ========
</TABLE>
See notes to the unaudited combined condensed statements
F-48
<PAGE> 120
VALUE HEALTH PHARMACY BENEFIT MANAGEMENT AND
MANAGED PRESCRIPTION NETWORK, INC. D/B/A COLUMBIA PHARMACY SOLUTIONS
NOTES TO UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted in these combined condensed financial statements pursuant to
the Form 10-Q rules and Regulations of the Securities and Exchange Commission.
However, in the opinion of the Company, the disclosure contained herein are
adequate to make the information presented not misleading when read in
conjunction with the notes to combined financial statements of Value Health
Pharmacy Benefit Management ("Value Health, Inc.") for the Year Ended December
31, 1997 and the notes to financial statements of Managed Prescription Network,
Inc. d/b/a Columbia Pharmacy Solutions ("MPN") for the Year Ended December 31,
1997 included in the Company's Current Report on Form 8-K/A, as filed with the
Securities and Exchange Commission on June 12, 1998.
In the opinion of the Company, the accompanying unaudited combined
condensed financial statements, including, Value Health, Inc. and MPN, reflect
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the Combined Condensed Balance Sheet at March 31, 1998, the
Combined Condensed Statement of Operations for the three months ended March 31,
1998, and 1997, and the Condensed Combined Statement of Cash Flows for the three
months ended March 31, 1998, and 1997.
NOTE 2 - STOCKHOLDER'S EQUITY
The combined changes in stockholder's equity is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1997.............................. $406,746
Net income........................................... 3,396
Net distributions to parent.......................... (9,286)
--------
Balance at March 31, 1998................................. $400,856
========
</TABLE>
NOTE 3 - SUBSEQUENT EVENTS
On April 1, 1998, Express Scripts, Inc. announced that it had consummated
the acquisition of the outstanding common stock of VHI and MPN, the sole assets
of which are various subsidiaries each now or formerly conducting business as a
pharmacy benefit management company, from Columbia/HCA Healthcare Corporation
for approximately $460 million in cash.
F-49
<PAGE> 121
[EXPRESS SCRIPTS LOGO]
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions
(which are described in the prospectus), are estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration
fee............................................. $112,761.39
Legal fees and expenses........................... *
Accounting fees and expenses...................... *
Printing and engraving expenses................... *
Blue Sky filing fees and expenses................. *
NASD filing fee................................... $30,500.00
The Nasdaq National Market listing fee............ *
Miscellaneous expenses............................ *
Total........................................ $
===========
</TABLE>
- -------------------------
* To be included by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the General Corporation Law of the State of Delaware
(the "Delaware Law") enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director to a corporation or its stockholders for violations of
the director's fiduciary duty, except (1) for any breach of a director's duty of
loyalty to the corporation or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) pursuant to Section 174 of the Delaware Law (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (4) for any transaction from which a director derived an
improper personal benefit. Our Amended and Restated Certificate of Incorporation
provides for the elimination of the liability of our directors to the extent
permitted by Section 102(b)(7) of the Delaware Law.
Section 145 of the Delaware Law provides, in summary, that directors and
officers of Delaware corporations are entitled, under certain circumstances, to
be indemnified against all expenses and liabilities (including attorney's fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, if they had no reasonable cause to
believe their conduct was unlawful; provided, that no indemnification may be
made against expenses in respect of any claim, issue or matter as to which they
shall have been adjudged to be liable to us, unless and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, they are fairly and reasonably entitled to indemnity
for such expenses which the court shall deem proper. Any such indemnification
may be made by us only as authorized in each specific case upon a determination
by our stockholders or disinterested directors that indemnification is proper
II-1
<PAGE> 123
because the indemnitee has met the applicable standard of conduct. Article Seven
of our certificate of incorporation entitles our officers and directors to
indemnification to the fullest extent permitted by Section 145 of the Delaware
Law, as the same may be supplemented from time to time.
Article Eight of our certificate of incorporation provides that no director
shall have any personal liability to us or our stockholders for any monetary
damages for breach of fiduciary duty as a director, provided that such provision
does not limit or eliminate the liability of any director (1) for breach of such
director's duty of loyalty to us or our stockholders, (2) for acts or omissions
not in good faith or which involve international misconduct or knowing violation
of the law, (3) under Section 174 of the Delaware Law (involving certain
unlawful dividends or stock repurchases) or (4) for any transaction from which
such director derived an improper personal benefit.
ITEM 16. EXHIBITS
<TABLE>
<S> <C> <C>
1.1 -- Form of Underwriting Agreement+
4.0 -- Certificate of Class A Common Stock*
5.1 -- Opinion of Simpson Thacher & Bartlett+
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Ernst & Young LLP, Minneapolis, Minnesota
23.3 -- Consent of Ernst & Young LLP, Pittsburgh, Pennsylvania
Consent of Simpson Thacher & Bartlett (included in Exhibit
23.4 -- 5.1)+
24.1 -- Powers of attorney
</TABLE>
- -------------------------
* Incorporated by reference in our Registration Statement on Form 8-A dated May
12, 1992.
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS
We hereby undertake that, for purposes of determining any liability under
the Securities Act, each filing of our annual report pursuant to Section 13(a)
or Section 15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in this registration statement will be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time will be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by our director, officer, or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such
II-2
<PAGE> 124
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act, we certify that we have
reasonable grounds to believe that we meet all of the requirements for filing on
Form S-3 and have duly caused this registration statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in the City of Maryland
Heights, State of Missouri on March 17, 1999.
EXPRESS SCRIPTS, INC.
BY: *
------------------------------------
Barrett A. Toan, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following persons in the capacities
indicated on March 17, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
(1) Principal Executive Officer:
President, Chief Executive
* Officer and Director March 17, 1999
- ---------------------------------------------------
Barrett A. Toan
(2) Principal Financial Officer:
Senior Vice President and
* Chief Financial Officer March 17, 1999
- ---------------------------------------------------
George Paz
(3) Principal Accounting Officer: Vice President, Chief Accounting
March 17, 1999
*
- --------------------------------------------------- Officer and Assistant Secretary
Joseph W. Plum
(4) Directors:
*
- --------------------------------------------------- Director March 17, 1999
Howard Atkins
*
- --------------------------------------------------- Director March 17, 1999
Judith E. Campbell
*
- --------------------------------------------------- Director March 17, 1999
Richard M. Kernan, Jr.
*
- --------------------------------------------------- Director March 17, 1999
Richard A. Norling
*
- --------------------------------------------------- Director March 17, 1999
Frederick J. Sievert
</TABLE>
II-5
<PAGE> 126
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
- --------------------------------------------------- Director March 17, 1999
Stephen N. Steinig
*
- --------------------------------------------------- Director March 17, 1999
Seymour Sternberg
*
- --------------------------------------------------- Chairman, Director March 17, 1999
Howard L. Waltman
*
- --------------------------------------------------- Director March 17, 1999
Norman Zachary
*By: /s/ KEITH J. EBLING
---------------------------------------------
As attorney-in-fact for the
person indicated
</TABLE>
II-6
<PAGE> 127
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to:
- the use in the Prospectus constituting part of this Registration
Statement on Form S-3 of our report dated February 12, 1999 relating to
the financial statements of Express Scripts, Inc. and our report dated
February 26, 1999, except for Note 12, which is as of March 1, 1999,
relating to the financial statements of Diversified Pharmaceutical
Services, Inc. and subsidiary, which are included in such Prospectus;
- the incorporation by reference in the Prospectus constituting part of
this Registration Statement on Form S-3 of our report dated April 30,
1998, on our audits of the combined financial statements of Value Health
Pharmacy Benefit Management as of December 31, 1996, and for the years
ended December 31, 1996 and 1995, appearing on page 24 of Express
Scripts, Inc.'s Form 8-K/A Amendment No. 1 dated June 12, 1998; and
- the references to us under the headings "Experts" and "Selected Financial
and Operating Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial and Operating Data."
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 17, 1999
II-6
<PAGE> 128
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption"Experts" and to
the use
of our reports dated June 4, 1998, with respect to the financial statements of
Value Health Pharmacy Benefit Management included in Express Scripts, Inc.'s
Current Report on Form 8-K/A dated June 12, 1998, and incorporated by reference
in this Registration Statement on Form S-3 and related Prospectus of Express
Scripts, Inc.
Minneapolis, Minnesota
March 17, 1999
II-7
<PAGE> 129
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP
We consent to the reference of our firm under the caption "Experts" and to
the
use of our reports dated June 1, 1998, with respect to the financial statements
of Managed Prescription Network, Inc. included in Express Scripts, Inc.'s
Current Report on Form
8-K/A dated June 12, 1998, and incorporated by reference in this Registration
Statement on Form S-3 and related Prospectus of Express Scripts, Inc.
Pittsburgh, Pennsylvania
March 17, 1999
II-8
<PAGE> 130
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESCRIPTION PAGE
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement+.............................
4.0 -- Certificate of Class A Common Stock*........................
5.1 -- Opinion of Simpson Thacher & Bartlett+......................
23.1 -- Consent of PricewaterhouseCoopers LLP.......................
23.2 -- Consent of Ernst & Young LLP, Minneapolis, Minnesota........
23.3 -- Consent of Ernst & Young LLP, Pittsburgh, Pennsylvania......
Consent of Simpson Thacher & Bartlett (included in Exhibit
23.4 -- 5.1)+.......................................................
24.1 -- Powers of attorney..........................................
</TABLE>
- -------------------------
* Incorporated by reference in our Registration Statement on Form 8-A dated May
12, 1992.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to:
- the use in the Prospectus constituting part of this Registration
Statement on Form S-3 of our report dated February 12, 1999 relating to
the financial statements of Express Scripts, Inc. and our report dated
February 26, 1999, except for Note 12, which is as of March 1, 1999,
relating to the financial statements of Diversified Pharmaceutical
Services, Inc. and subsidiary, which are included in such Prospectus;
- the incorporation by reference in the Prospectus constituting part of
this Registration Statement on Form S-3 of our report dated April 30,
1998, on our audits of the combined financial statements of Value Health
Pharmacy Benefit Management as of December 31, 1996, and for the years
ended December 31, 1996 and 1995, appearing on page 24 of Express
Scripts, Inc.'s Form 8-K/A Amendment No. 1 dated June 12, 1998; and
- the references to us under the headings "Experts" and "Selected Financial
and Operating Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial and Operating Data."
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 17, 1999
II-6
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption"Experts" and to
the use
of our reports dated June 4, 1998, with respect to the financial statements of
Value Health Pharmacy Benefit Management included in Express Scripts, Inc.'s
Current Report on Form 8-K/A dated June 12, 1998, and incorporated by reference
in this Registration Statement on Form S-3 and related Prospectus of Express
Scripts, Inc.
Minneapolis, Minnesota
March 17, 1999
II-7
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP
We consent to the reference of our firm under the caption "Experts" and to
the
use of our reports dated June 1, 1998, with respect to the financial statements
of Managed Prescription Network, Inc. included in Express Scripts, Inc.'s
Current Report on Form
8-K/A dated June 12, 1998, and incorporated by reference in this Registration
Statement on Form S-3 and related Prospectus of Express Scripts, Inc.
Pittsburgh, Pennsylvania
March 17, 1999
II-8
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15 of
March, 1999.
/s/ HOWARD I. ATKINS
--------------------------------------
Howard I. Atkins
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15 of
March, 1999.
/s/ Judith E. Campbell
----------------------------------
Judith E. Campbell
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities Exchange Commission,
granting unto such attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing that such attorneys-in-fact and agents
deem advisable or necessary to enable the Company to effectuate the intents and
purposes hereof, and the undersigned hereby fully ratifies and confirms all such
attorneys-in-fact and agents, or his or her substitute or substitutes, shall do
or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this
15 of March, 1999.
/s/ RICHARD M. KERNAN, JR.
--------------------------------------
Richard M. Kernan, Jr.
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15th of
March, 1999.
/s/ RICHARD A. NORLING
--------------------------------------
Richard A. Norling
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being an officer of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 12 of
March, 1999.
/s/ GEORGE PAZ
--------------------------------------
George Paz
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being an officer of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 12 of
March, 1999.
/s/ JOSEPH W. PLUM
--------------------------------------
Joseph W. Plum
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15 of
March, 1999.
/s/ FREDERICK J. SIEVERT
--------------------------------------
Frederick J. Sievert
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15 of
March, 1999.
/s/ STEPHEN N. STEINIG
--------------------------------------
Stephen N. Steinig
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15 of
March, 1999.
/s/ Seymour Sternberg
----------------------------------
Seymour Sternberg
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director and
officer of EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does
hereby make, constitute and appoint Thomas M. Boudreau, Esq. and Keith J.
Ebling, Esq., attorneys-in-fact and agents of the undersigned with full power
and authority of substitution and resubstitution, in any and all capacities, to
execute for and on behalf of the undersigned the Registration Statement on Form
S-3 relating to the shares of Class A Common Stock of the Company to be offered
for sale, and any and all amendments (including post-effective amendments) to
the Registration Statement and any other documents and instruments incidental
thereto, and to deliver and file the same, with all exhibits thereto, and all
documents and instruments in connection therewith, with the Securities and
Exchange Commission, granting unto such attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing that such
attorneys-in-fact and agents deem advisable or necessary to enable the Company
to effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 12th of
March, 1999.
/s/ BARRETT A. TOAN
----------------------------------
Barrett A. Toan
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15 of
March, 1999.
/s/ HOWARD L. WALTMAN
----------------------------------
Howard L. Waltman
<PAGE> 12
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a director of
EXPRESS SCRIPTS, INC., a Delaware corporation (the "Company"), does hereby make,
constitute and appoint Thomas M. Boudreau, Esq. and Keith J. Ebling, Esq.,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned the Registration Statement on Form S-3 relating to
the shares of Class A Common Stock of the Company to be offered for sale, and
any and all amendments (including post-effective amendments) to the Registration
Statement and any other documents and instruments incidental thereto, and to
deliver and file the same, with all exhibits thereto, and all documents and
instruments in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing that such attorneys-
in-fact and agents deem advisable or necessary to enable the Company to
effectuate the intents and purposes hereof, and the undersigned hereby fully
ratifies and confirms all such attorneys-in-fact and agents, or his or her
substitute or substitutes, shall do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has subscribed his name this 15th of
March, 1999.
/s/ Norman Zachary
----------------------------------
Norman Zachary
